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COM(81)534
Vol.1981/0161

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COMMISSION OFTHEEUROPEAN COMMUNITIES
COM(81)534 final
Brussels -30thSeptember 1981
PROBLEMS AFFECTING THEOILREFINING INDUSTRY INTHECOMMUNITY
(Communication fromtheCommission totheCouncil )
P:
ru■-Ll"1c--.
\y
,
COM(81)534final-

Communication bytheCommission totheCouncil
ontheproblems affecting theoilrefining
industry intheCommunity
Introduction
Thiscommunication describes theproblems oftheoilrefining industry in
thecommunity ,theprocessofadaptation whichitmustundergo,and'suggests
way'sinwhichnational governments andtheCommission couldassist.
\
Apartfromtwoperiodsofsupplyconstraint following theIranianrevolution
latein1978andtheoutbreak oftheIran/Iraqwar,theindustry'sdownstream
activities intheCommunity ,i.e.refining,distribution andmarketing ,have,
since1974earned agenerally unsatisfactory ,andoftennegative,returnon
capital employed .
Therefining industry hasbeenconcerned forsomeyearswiththeproblems of
excesscapacity .todistilcrudeoilandofpotentially insufficient capacity
toconvert unwanted residuetolighterproducts inrelatively strongdemand.
Thefirstresulted fromtheunforeseen declineinconsumption andrisein
productimportsafter1973,whenconsiderable newcapacity wasunderconstruct
ion;thesecondfromthedisproportionate andcontinuing fallindemandfor
residual fueloil.
/
Theseimbalances tendtopreventtheestablishment ofproductsellingprices
whichbothreflecttheoptimumuseofthetypesofcrudeoilavailable -and
permittheindustryfully .torecoveritscosts.
TheCommission responded toindustry'sconcernin1977/78byarranging
aseriesofmeetings withindividual companies andbyproposing in
communications totheCouncil anumberofmeasures designed toalleviate
*Communications bytheCommission totheCouncil on ,
"ACommunity ApproachtotheRefining ProblemsoftheCommunity"COM(77)71
Finalof17March1977. .
"Problems connected withtheprofitablity oftherefiningindustryinthe
Community andonwaysofresolving them:"C0M(78)71 Finalof22February 1978.
"Developments intheRefiningSectoroftheCommunityOilIndustry",COM(78)
697Fof7December 1978.

thesituation ,including astandstill ontheconstruction ofnew
distillation plant,theencouragement ofclosures oflessefficient
plants,andtheclosermonitoring ofimportsoffinished products . -
Formalagreement wasnotobtained totheseproposals ,butthecompanies
didcooperate withtheCommission 'ssuggestion thatcruderunsshould
beclosely monitored bytheCommission .
Theproblems whichwereaddressed in1977/78stillremainandsubsequent
eventshavegiventheindustry newcauseforconcern asregardsthe
surplusofdistillation capacity .Inparticular thesharpfallin
consumption in1980/81,andthecompanies' beliefthatnosignificant
recovery ofdemandistobeexpected fromcurrentdepressed levels,have
ledcompanies tolookforpermanent ratherthantemporary solutions to
over-capacity .*
Asecondnewelementinthesituation isthereducedabilityofintegrated
companies ,whichhavesince1973losttitletomostoftheoilformerly
ownedbythem,tofinance downstream lossesoutofprofitoncrudeoil
production .Thediscrepancy incrudeoilcostsbetween companies
importing thecheaper Saudicrudesandthosedependent onothersources
hasimposed afurthertradingdisadvantage uponcertain companies .
TheCommission heldafreshroundofconsultations withoilcompanies
inMay/June1981inordertoobtainanindustry viewuponthecurrent
oilsituation andprospects andthedevelopments tobeexpected inthe
refining sector.Account hasbeentakenoftheinformation soobtained
inthediscussion ofproblems andremedies whichfollows.Estimates
ofcapacity havebeenbaseduponthereportcompiled bytheCommission
fromcompanyreturnsincompliance withCouncilRegulation 1056/72.

3.
Demand onCommunity Refineries
Thevolume ofcrude processed inCommunity refineries hasdeclined since
1973 asinternal demand hasstagnated andtheexternal balance ,inrefined
products trade hasdeteriorated .-This trend ,andindustry expectations for
thefuture ,aresummarised inthetable below :
EEC -10 : Crude Processed Millions oftonnes
1973 1979 1980 1985 v ^ ,1990
Consumption 597 564 517 5T0-535 (1), 500-525 (1)
Net Exports (+)/
Imports (-) +25 , - .-17 -30 -30^
(3)Total 622 564 500 480-505 * 470-490
Distillation 787 830 808
Capaci ty
(1)These forecasts compare with the totals ofthe 1980 Member States forecasts
of560and 535m.t .for1985 pnd1990 respectively . . ■
(2)'Assuming onethird ofincremental OPEC exports gototheEEC
(3)Differs from reported figures bystock changes
Over theperiod 1973-90 there isexpected tooccur amajor change intheprop­
ortions ofthevarious products consumed ,asthepercentage ofmotor gasoline /
naphtha rises relative tothat oftheheavier products .This change will partiall ;
offset the loss ofrevenue astotal demand declines ,but will significantly raise
the industry 'scapital and operating costs .Itsdimensions may beillustrated by
the following estimates •: ' - ■ ,
' EEC :Product Composition ofDemand (Percent byweight )
1973 - 1979 1980 •1985 1990
Mogas /Naphtha 17.5% 20.5% _ 22.1% 23.2% 25.0%
Kerosine /Gasoi I 34.2 35.9 35.2 34.5 34.0
Disti liâtes 51.7 56.4 57.3 57.7 59.0
Residual fuel oiI 38.Ù _29.5 28.4 25.5 22.5
Other (incl .Refinery Fuel ) 10.3 14.1 14.3 16.8 18.5
100.0 100.0 100.0 100.0 100.0

III .Primary Distillation Capacity
10.Toprocess this quantity ofabout 500million tons ofcrude oilannually
there isavailable intheCommunity primary disti Ilation capacity (including
units out ofservice )oftheorder of800 .mitl.ion tons peryear (m.t/y).
Thecurrent andforecast average utilisation ratio istherefore 60%compared
^ with over 80% in1973 .Ifonetakes 80% asafigure which could be
■/considered normal , andasgiving sufficient cover fordemand fluctuations ,
' unforeseen shutdowns andother contingencies ,thecapacity requirement for
theCommunity would beintheregion of600m.t/y,leaving apresent margin of
excess capacity of200 m.t/y. /
11.Solarge adegree ofexcess capacity inacontracting market means that capital
andoperating expenses aremuch higher than justified bythevolume processed ,
andthat market prices areeroded bythepressure upon agreat many companies to
try toprevent throughput falling even lower .The situation ofindividual
refiners varies greatly ;particularly hard hitarethose refineries (mostly
located inItaly and intheNetherlands )that areorientated towards exporting
andthird party processing ,forwhich demand hasfallen most sharply .The larger ,
more complex refineries ,able toshut cbwn one ofseveral distillation units ,and
byvirtue ofconversion plants ,able tovary product yield tomatch changing
' market requirements ,have generally fared better than smaller less sophisticated
refineries equipped with asingle disti Ilation column and little ornoconversion
,capacity . f
12.Over theperiod 1974-80 measures taken byindividual companies toreduce
capacity fell short inaggregate ofthecapacity ofnewplant which wasunder
construction in1973 and has since come onstream .Installed capacity thus rose
f
slightly inspite ofclosures amounting to80m.t/y.This total includes only
four complete refineries amounting to16m.t/y,theremaining 64m.t/yof
capacity reductions having taken theform oftheshutting down ,forscrapping or
conversion toother uses ,ofone ormore distillation units atla.rge refineries
where several columns are installed .Capacity reduction bythis means is
irelatively painless ,causing nodisruption ofdistribution patterns andhaving
mihimal effects upon employment .

Further scopeforsuchplantclosures undoubtedly existsbutisdifficult to
quantify .Largerrefineries ofover150,000 b/d,or7,5m.t/y,andtypically
equipped withmorethanonedistillation unit>accountfor300m.t/yofCommunity ,
capacity,ornearly40%.Inmanycases,inspiteofclosures alreadycarriedout,
distillation capacity remainsgreatlyinexcessofthatneededt£>supplyfeedstocks
toconversion plant(whichrepresents only9%ofEECdistillation capacity compared
withover40%intheUSA)locatedattherefinery,andmanyunitsareknowntobe
f
outofservicecrinonlyoccasional use.
Furtherclosures attheselargerefineries will,certainly ,however,provideonly .
apartofthe200m.t/yreduction required andthegreaterpartofthenecessary
adjustment ,perhaps asmuch .as150m.t/ywillhavetotaketheformofclosing
entirerefineries ."Alreadyin1981theBurmah,BPandExxoncompanies have
announced suchintentions .Smaller companies operating onlyoneortwosimple
refineries willbeespecially vulnerable ,butthemaiorgroupswillalsobefaced .
\
withdifficult decisions .Forthemtheproblemwillbetominimise therisein
distribution costswhenarefinery isshutand,tothisendtheywillseekexchange
arrangements withcompetitors ,providing hospitality atonerefining centreand
receivingitatanother.Plantelosures intheareaswherethereisaconcentration
ofrefiningactivity (e.g.Rotterdam ,Fos,Milford Haven)willbelessdamaging
fromtheemployment pointofview,totheextentthatredundant personnel canfind
workatotherrefineries intheneighbourhood ,whichareinstalling newconversion
plant
Sucharrangements willneedtohaveregardtotheCompetition rulesoftheTreaty,
particularly Articles 8band86butalso,whereapplicable ,37and90,inorderto
avoidtradebetween MemberStatesbeingaffected andlimitsorcontrol ?beingplaced
uponproduction ormarkets .
Conversion Capacity
Iftheindustry istoadaptftsproduction tothecontinuing changeinthe
composition ofthedemandbarreldiscussed inparagraph 9,itwillhaveto
undertake furthersubstantial investments inprocesses which,directly or,
indirectly ,reducetheyieldofresidualfueloilandraisethatofthelighter
products .
Atpresent astrongcommercial incentive toinvestment isprovided bythe ^
largedifference betweenthesellingpricesoflightdistillates ,particularly
motorgasoline,andthoseofresidualfueloils..Theincreasein
thisdifferential from8125pertonneatend1978to2225

6.
pertonne inmid-1981 hasgreatly exceeded that inthecapital andoperating
/
costs ofconversion over the same period .
17. Itisnotaxiomatic ,however ,that up-grading capacity will inconsequence
beexpanded atthenecessary rate ,forthere isamong thecompanies
widespread concern both about thegenerally lowprofitability ofrefining .
intheCommunity ,,andabout thepossibility that over-investment bytheindustry
(overseas aswell asinthe EEC)maynarrow product differentials and _
..undermine theprofitability ofnew plant .
•■■■■• ,■r
18.Current investment plans notified bythecompanies early in1981 would ,if"
implemented completely ,result inthe following expansion ofconversion
capacity intheCommunity .
EEC 10 :Conversion Plant
Type ofplant
Catalytic Crackers
Thermal Crackers
Visbreakers
Hydrocrackers
Cokers
Total
Total interms of
catalytic crackersIntake capacity inmillions oftonnes (Year end )
1973
43.0
10.7
10.1
1.6
65.4
55.0
7.0 %1980
45.1
17.9
23.5
4.3
1.4
92.2
70.0
8.7 %1985 /6
61.2
21.1
47.8
6.3
3.3
139.7
101.0 .
17.0% * As%ofDistillation 7.0 % 8.7 % 17.0 **
' Capacity installed
19.Thepotential output ofthemain product groups would then compare with the
expected demand pattern in1985 asfollows ,assuming crude oil .quality unchanged
from 1980 and conversion plant fully used inboth years :
*Assuming installed capacity reduced to600 m.t/y.

7.
EECProduct Balance 1980and1985
(assuming cruderunsof500m.t/y)
Mi11ionsoftonnes - DistiHates' Residual
-
Light Middle Total FuelOil
Production 1980 '100 184 ;284 139
Outputofplant
added1981-85 12 6 18 (22)
Available1985 112190f302 1 .117
Consumption 1985 125 , 185 -310 139
Metimports ." ■13 (5) 8~1
22
Thesefiguressuggestthat1985netimportswouldbefueloilandnaphtha/,
gasoline ,-whilemiddledistillates wouldbeinslightsurplus.' Thedeficit
in-lightendswouldpreclude theuseof^heavier andcheaper averagequalityof
~crudeoilthariatpresent . '' .V_
Lastlyitshouldbenotedthattheexpansion ofconversion capacitywill
reinforce -thetendency discussed abovetowards areduction inthenumberof
■refinery sites.Inordertoachieve economies ofscale,andtointegrate
successive processes ,majorcompanies willtrytoconcentrate up-grading plants
atonlyoneortwooftheirrefineries ,aridtoreduceorclosedownoperations
elsewhere .Implied byth«isprocessisanincrease inthemovement ofproducts
andfeedstocks between locations andbetween countries .-
V.-Product Imports
20.Since1973thebalanceoftheCommunity 'sexternal tradein/finished petroleum
products hasdeteriorated byaboutAOni.t/y(para8),andbyover15m.t.in
1980alone.Thisdeterioration hastherefore beenamajorfactorinthefallin
thedemandonEECrefineries .It.hasresulted bothfromthedeclineinexportsto
.traditional markets.,whoseimportneedshavecontracted ,andfromrisingimports
fromoverseas refineries,particularlyinNorthAfrica,butalsofromCaribbean
refineries origiratly constructed to.supply thenowdwindling USimportmarket ."
Italian andDutchrefiners havebeenparticularly hardhitbythesedevelopments .
Italiannetexportsof24m.t.in1973havebeenreplaced bynetimportsof3m.t.

8.
in1980;Netherlands' netexportshavedeclined by20m.t.overthesameperiod.
21.Somefurtherincreaseinnetimportsistobeexpected asOFECexportcapacity
grows,butthedestruction ofplantsinIranandIraq,thedeferment ofsome
majorprojects,andtherapidgrowthinOPECconsumption ,suggestthatadditional
volumes maynotbeverylarge,atleastinthemediumterm.Greatuncertainty ,
however,attaches toestimates inthisregardanditwillbenecessary towatch
closelytheevolution ofimports fromyeartoyear.
VI.Conclusions -
22.Thepointhasbeenreached wherecompanies engagedinoilrefiningwillbe
obligedtocloseasignificant numberofrefineries inaddition toshutting
downmoreredundant distillation columnsatlargerefineries .
23.Majorinvestments willberequired atrefineries remaining inoperation to
adaptproductoutputtothechanging patternofdemand.Companies' current
programmes ofexpansion .appeartobesufficient ,butprogress shouldbewatched.
24.Netimports,whichhaverisenby40m.t/yor8%ofconsumption since1973,are
expected togrowmoreslowlyhenceforth .Someincrease isinevitable inviewof
theCommunity 'sopentradingpolicyandtheplannedexpansion ofOFEC'sexport
capacity,buttheCommission willmonitor thesituation closely.
25.Theproblems ofexcessdistillation capacity andproduct imbalances shouldbe
.resolved assoonaspossible soas,ontheonehand,toenableconsumers to
benefit frompriceswhichreflecttheoptimum useofthecrudeoilavailable and,
ontheother,topermitthefullrecovery ofitscostsbytheindustry .
26.TheCommission believes thattheprocessofconcentrating operations onfewer
morecomplexrefineries canandshouldbeundertaken bythecompanies themselves ,
responding themarketforces,andactinginconformity withtheCompetition
rulesoftheTreaty.Considerable progress hasalready beenmadeand
recentconsultation withtheindustry makesitplainthat-itwill
continue .Ontheotherhandclosures shouldnotbeallowedtoprejudice the

9.
securityofsupplyofthecountryconcernedand,wherenecessary,companies
shouldprovideguaranteesregardingthecontinuityandpricebasisofsupplies
ofpetroleumproductsfromelsewhereandofstocklevelstobemaintained.
27.Inevitablytheclosureofrefineries,althoughlabourforcesarerelatively
small,willpresenttheproblemofre-employing surplusstaff.Inmanycases
thecompaniesthemselveswillbeabletoprovideworkatotherlocationsfor'
thepersonnelaffected.Wherethisisnotpossible,aneedmayarisefor
assistance bynationalorlocalauthorities withjob-creation schemes,
,supplemented,ifnecessary,bygrantsavailablefromCommunityfundsfor
eligibleprojects.
28.Thedevelopment ofconcertation atCommunitylevel,involvingbothindustry
andgovernments,shouldmakepossiblemorepreciseandcompleteunderstanding
ofthesituation onthebasisofsoundassessments ofthefuturedemandfor
petroleumproducts,andofthechangesinthesizeandstructureoftheindustry
requiredtoadapttoit.Itshouldthusassistprogresstowardsbalancedand
economicsolutionstotheindustry'sproblemsandprovidethebasisforany
specificCommunityinitiatives whichmaybeputbeforetheCouncil. ^
ActionsrequestedoftheCouncil i
29..TheCouncilisrequestedbytheCommission :
(a)totakenoteoftheCommission'sanalysisoftheproblemsaffectingthe
oilrefiningindustryandofthedevelopments tobeexpected,notablythe
trendtowardsfewer,morecomplex,refineriesandaconsequentincreasein
/ ' ''themovementoffinishedproductsbetweenmemberstates.
(b)torecognisethatthecontraction andrestructuring oftheindustryis
necessaryandshouldbecarriedoutbytheindustryitself,providedthat
thesecurityofsupplyoftheregionsconcernedisnotputatrisk.
>Governmentsshouldprovidetheappropriate -fiseal,social.andadministrative
environment fortheiractions.
(c)totakenotethattheCommission :
-willkeepthesituationundercontinualreviewwithindustryand^
,governments .
-willprepareforecastsofrefiningcapacityandoftheshortandmedium-
termbalanceofpetroleumproducts.
-willreporttotheCouncilwithoutdelayifspecificCommunityintervention
inthissectorshouldappearnecessary. v •

BeLgîque
Danmark
Peutschland
France
Hellas
Ireland -
Italia*
Nederland
UnitedKingdom
Total*COMPARISON 'OFPRIMARY DISTILLA ΓrO'-iWITH·CONVERSION CAPACITY Annex
(-Millions oftonnes iitakecapacity acend-year )
1973 1980 1985'
£-.z.%C/0 0 c %C/D 0.£' %C/0
40.7 -3.2 '7-9. 55.3 4.3 7.8 55.3 '5.0 9.0.
10.9 0.3 7.3 10.5 0.9 8.6 10.5 1.3 12.4
141.4 12.9..9,1 146.9 21.0 14.3 :■146.9 ,23.8 .16.2
158.4 9.9...6.3 167.6 12.9 7.7 167.6 '16.2 ?9.7
15.0 1.0 6.7 18.7 1.0 •5.3 18.7 1.0 5.3
2.9 --- 2.9 -- 2.9- -
161.7/187.011.1 6.9/5.9162.3/187.69.5 5.9/5.1172.3/197.6 16.7 9.7/8.5
97.9 4.2 4.3; 89.6 6.3 7.0 91.0 12.6-13.8
133.2 11.7 8.8 '129.2"14.5 11.2 129.2 24.5 19.0
762.1/787.454.8 7.2/7.0783.0/808.370.4 9.0/8.7794.4/819.7101.1 12.7/12.3
*)Alternative figuresexcludeandincludedistillationunitsatpetrochemical plants.
Source DerivedfromcompanyreturnsofJanuary 1981ajnderCouncilRegulation 1056/72
D =PrimaryDistillationCapacity 1 ,
G.=.Conversion capacity expressed in,ter<-'iofcatalytic cracks s,otherunitsbeingweighted according totypicalyield
.ofdistillates onfeedstock .
/

ESTIMATED UTILISATION OFPRIMARY DISTILLATION CAPACITY
(Millions oftonnes)
; .1973-^1
NDistillation Crude % Distillation
Capacity Processed ■Capacity
(yeaiend) .(yeai–end)
Belgique 40.7 1737.2 > 91 55.3
Danmark . 10.9 10.1 ^. 93 10.5
Deutschland 141.4 118.4 84 >146,9
France ' 158.4; .135.0 / .85/''167.6
Hellas(est) 15.0 10.5 •' 70 "18.7
Ireland ., 2.9 2.7 93 2.9~'
Italy* 161.7/187.0 128.9 80/69 162.3/187.6
Netherlands '97.9 ,73.4 75 89.6
UnitedKingdom 133.2 114.3 86 129.2
Total*• 762.1/787.4 630.5 83/80 783.0/808.3
Stockchange (est.) , . +8.5
Crudeprocessed formarket ;622.0 82/79
Y
■/i - '
*Alternative -figuresexcludeandincludedistillation unitsatpetrochemical plants.
Sources : ,- ■
Capacity :Companyfiguresreported underCouncilRegulation 1056/72
CrudeProcessed :Eurostat