COMMISSION STAFF WORKING PAPER on refining and the supply of petroleum products in the EU   Accompanying document to the   COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS   Energy infrastructure priorities for 2020 and beyond -  A Blueprint for an integrated European energy network   {COM(2010) 677 final}
Date: 2010-11-17
Institutions: European Commission
Subjects: energy policy, energy supply, environmental protection, security of supply, trans-European network

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EUROPEAN COMMISSION 

Brussels, 17.11.2010 
SEC(2010) 1398 final 

COMMISSION STAFF WORKING PAPER 

ON REFINING AND THE SUPPLY OF PETROLEUM PRODUCTS IN THE EU 

Accompanying document to the 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE AND THE COMMITTEE OF THE REGIONS 

Energy infrastructure priorities for 2020 and beyond -  
A Blueprint for an integrated European energy network 

{COM(2010) 677 final} 

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TABLE OF CONTENTS 

1. 

2. 

3. 

3.1. 

3.2. 

Executive summary...................................................................................................... 4 

Introduction .................................................................................................................. 5 

Overview of refining and the supply of petroleum products in the EU ....................... 6 

Key facts on EU refining and trade in petroleum products.......................................... 6 

Current and future key challenges of the EU refining sector....................................... 7 

3.2.1.  The evolution of demand ............................................................................................. 7 

3.2.2.  Demand & supply imbalance and dependence on trade .............................................. 9 

3.2.2.1.  EU refining supply out of step with evolving demand ................................................ 9 

3.2.2.2.  Growing trade deficits................................................................................................ 10 

3.2.3.  Supply challenges....................................................................................................... 12 

3.2.3.1.  Falling productions of North Sea Crude and variations in crude quality................... 12 

3.2.3.2.  Adapting supply to regulation.................................................................................... 13 

3.2.4.  The profitability of the EU refining industry ............................................................. 14 

3.2.5.  Global competition coming to the EU ....................................................................... 15 

3.2.6. 

Investments in upgrading the EU refining sector: increasing middle distillates 
capacity ...................................................................................................................... 16 

3.2.7. 

Impacts of restructuring of the sector: reducing gasoline capacity............................ 18 

3.2.8.  Long-term – 2050 and beyond: Preparing for a “decarbonisation era” in the EU..... 20 

4. 

4.1. 

4.2. 

Impacts of future demand developments on the refining industry by 2030............... 21 

Demand projections according to implemented and adopted policies....................... 21 

The impact of demand projections on the EU refining industry................................ 24 

4.2.1. 

Impacts in terms of refining investments ................................................................... 24 

4.2.2.  Utilisation of refining units ........................................................................................ 26 

4.2.3.  CO2 emissions ........................................................................................................... 27 

4.2.4.  Summary: impact of demand projections on the EU refining industry ..................... 28 

1. 

1.1. 

1.2. 

1.3. 

Annex 1: Refining and applications of refining products .......................................... 29 

Introduction to refining .............................................................................................. 29 

Refined products ........................................................................................................ 29 

Refinery processes ..................................................................................................... 29 

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1.3.1.  Separation................................................................................................................... 30 

1.3.2.  Treating ...................................................................................................................... 30 

1.3.3.  Conversion ................................................................................................................. 30 

1.4. 

1.5. 

2. 

Types of refinery units ............................................................................................... 30 

Refinery yield............................................................................................................. 32 

Annex 2: Characteristics and evolution of the EU refining sector............................. 33 

2.1. 

Description of the EU refining sector ........................................................................ 33 

2.1.1.  Capacity...................................................................................................................... 33 

2.1.2.  The players in the EU refining mark.......................................................................... 33 

2.1.3.  Refining margins........................................................................................................ 36 

2.2. 

Role of the EU refining sector in the supply of petroleum products ......................... 39 

2.2.1.  Output of the EU refining sector................................................................................ 39 

2.2.2.  Utilisation rates .......................................................................................................... 40 

2.2.3.  EU demand for petroleum products ........................................................................... 42 

2.2.4. 

Imports and exports of petroleum products to/from the EU ...................................... 45 

3. 

Annex 3: Description of scenario analysis and model assumptions .......................... 48 

3.1. 

PRIMES demand projections..................................................................................... 48 

3.1.1.  Description of main assumptions in the PRIMES 2009 Baseline and the Reference 

scenario ...................................................................................................................... 48 

3.1.2.  PRIMES petroleum products demand projections..................................................... 50 

3.2. 

Description of OURSE refining module of the POLES energy model...................... 52 

4. 

5. 

Annex 4: Summary of key projects & planned/actual divestments in the EU refining 
sector .......................................................................................................................... 54 

Annex 5: Non-EU refining capacity developments & divestments ........................... 56 

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1. 

1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

EXECUTIVE SUMMARY 

Falling  demand  in  petroleum  products  in  the  EU  in  the  last  few  years  at  a  time  of 
stable levels of refining capacity has in turn affected refining margins, which in 2009 
were at their lowest levels in the last 15 years. 

The EU petroleum product market is a mature market. On top of long-lasting effects 
of  the  global  financial  and  economic  crisis,  EU  regulations  to  tighten  fuel 
specifications,  reduce  emissions  from  refineries  and  cars  as  well  as  to  provide 
support for the development of non-fossil fuels point towards a future of diminishing 
demand for petroleum-based products. 

The  demand  for  certain  products,  in  particular  middle  distillates  such  as  jet  fuel, 
kerosene  and  gasoil,  including  marine  gasoil,  is  however  expected  to  continue  to 
grow for a few more years. On the other hand, gasoline demand in the EU is widely 
expected to fall further. 

In  2008,  net  imports  of  gasoil/diesel  amounted  to  20  million  tonnes,  equivalent  to 
6.9%  of  EU  gasoil/diesel  consumption  while  net  exports  of  gasoline  amount  to  43 
million  tonnes,  equivalent  to  31%  of  EU  gasoline  production.  If  net  imports  of 
kerosene  and  jet  fuels  are  taken  into  account,  the  EU  shortfall  in  middle  distillates 
amounts to upwards of 35 million tonnes of net imports per year. 

In  order  to  contain  or  reduce  these  trade  deficits,  the  EU  refining  industry  would 
have  to  invest  significantly  in  additional  refinery  conversion  capacity  to  produce 
more  middle  distillates,  and  it  would  have  to  reduce  gasoline-focussed  refinery 
capacity. 

The additional units needed to produce increasing amounts of middle distillates are 
more  energy  intensive,  and  emit  more  CO2  than  other  types  of  units.  The  EU 
refining  sector,  which  is  included  in  the  EU  Emissions  Trading  Scheme,  will 
therefore  have  to  pay  more  for  the  CO2  emissions  from  (more  complex)  refineries 
producing more of the products which the EU requires (i.e.: middle distillates) 

Overall, known planned/actual divestments and shutdowns in EU refining capacities 
since  the  start  of  the  crisis  in  2008  extend  to  18  out  of  104  refineries  in  the  EU, 
representing some 134 million tonnes per year/2.7 million bbl/day of crude capacity, 
equivalent  to  17%  of  total  EU  refining  capacity.  Only  two  of  these  facilities  have 
been sold, others have been put up for sale for some time but have found no buyers, 
others  yet  have  been  shutdown  for  extended  maintenance  until  market  conditions 
recover. It is not known how many employees these 'vulnerable' refineries represent. 

While the industry employs directly some 100,000 people in the EU, it is estimated 
that perhaps as much as 400,000 to 600,000 Europeans in total are directly dependent 
on  the  EU  refining  industry  for  their  livelihood.  This  does  not  include  other 
dependent  industries,  the  largest  of  which,  the  petrochemical  industry,  employs 
778,000 staff in the EU. 

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9. 

10. 

11. 

12. 

13. 

14. 

EU refining capacity upgrading is expected to lead to quite significant reductions in 
exports of (excess supply of) gasoline by 2030, while it is expected that the import 
dependence of the EU in gasoil/diesel will continue to increase by 2030.  

Even under a scenario of increasing EU dependence in gasoil/diesel, the industry will 
be faced with necessary investments in European refining capacity upgrades in order 
to cope with further growth in demand for middle distillates (including as a result of 
changing sulphur fuel specifications for ships).  

Depending on assumptions on the development of the crude diet in Europe between 
2005  and  2030  and  taking  into  account  adopted  and  implemented  EU  policies, 
investments  required  to  upgrade  European  refining  capacities  in  that  period  could 
amount  to  between  17.8  and  29.3  billion  Euros,  of  which  between  3.3  and  11.7 
billion Euros alone will account for future marine sulphur fuel specification changes 
to be transposed into EU regulation by the end of 2010.  

It is estimated that the amount of investments that the refining industry in Europe has 
already  committed  to  spending  (in  what  it  calls  firm  projects)  between  2010  and 
2020 is of the order of 13.3 billion Euros.  

In  spite  of  projections  of  declining  demand  for  fossil  fuels,  processing  intensity  in 
refining  will  increase  as  a  result  of  more  stringent  product  specifications,  in 
particular as a result of new IMO changes. One possible consequence is that refinery 
CO2 emissions will increase between 2005 and 2030, by around 6% (and increasing 
by 12% between 2005 and 2020), mainly as a direct result of the needs for hydrogen 
in refinery units geared towards producing higher proportions of new IMO compliant 
fuel. 

Significant  falls  in  the  projected  EU  demand  for  transport  gasoline  by  2030 
according  to  PRIMES  (20.7%  in  the  Reference  scenario)  point  to  the  need  for 
gasoline-focussed  refinery  plant  restructuring,  with  up  to  a  third  of  necessary 
capacity reductions, depending on the type of unit.  

2. 

INTRODUCTION 

In  November  2008,  the  Commission  announced  in  the  Second  Strategic  Energy  Review1 
(SER2) that a Communication on Refining Capacity and EU Oil Demand would be prepared 
in 2010. SER 2 focussed on energy security and, given the EU's dependence on oil imports 
and  also  on  the  exports  and  imports  of  petroleum  products,  highlighted  both  the  need  to 
improve the level of transparency of the demand-supply balance for refining capacity as well 
as concerns regarding the potential availability of diesel fuel in the future. 

Since November 2008, the concern has shifted from being mainly one of security of supply to 
considering  also  how  the  EU  refining  industry's  adaptation  to  a  changing  business 
environment  is  likely  to  impact  the  EU  and  on  how  EU  policies  to  decrease  the  EU's 
dependence on fossil fuels will further add pressure on the EU refining sector. In light of these 
developments, it was decided that a factual study, in the form of a Staff Working Document, 
would be prepared instead of the Communication announced in SER2. 

1 

COM(2008) 781. 

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This  Document  accompanies  the  Communication  on  the  energy  infrastructure  priorities  for 
2020  and  2030  in  which  the  continued  contribution  of  oil  to  the  EU  energy  mix  and  to  the 
transport sector up to 2030 is underlined and where it is highlighted that the future shape of 
crude  oil  and  petroleum  product  transport  infrastructure  will  also  be  determined  by 
developments in the European refining sector. In that context, the focus of this document is to 
provide some light specifically on the refining activity and the supply of petroleum products 
in the EU, and as such to highlight and explain key current and future challenges of the EU 
refining  industry  as  well  as  to  report  some  initial  quantification  of  a  number  of  those 
challenges  in  terms  of  the  impacts  by  2030  of  PRIMES  EU  petroleum  product  demand 
projections. It also contains a detailed, factual account of the characteristics of the EU refining 
industry and some comparisons to other parts of the world in order to provide the necessary 
background and context for these challenges and impacts. 

3. 

OVERVIEW OF REFINING AND THE SUPPLY OF PETROLEUM PRODUCTS IN THE EU 

3.1. 

Key facts on EU refining and trade in petroleum products 

•  In May 2010 there were 104 refineries operating in the European Union. The EU's crude 
refining capacity currently represents 778 million tonnes per year (or 15.5 million barrels 
per day), equivalent to 18% of total global capacity; 

•  The EU is the second largest producer of petroleum products in the world after the United 

States;  

•  There are refineries in 21 Member States with the exceptions of Cyprus, Estonia, Latvia, 

Luxembourg, Malta, and Slovenia; 

•  The  global  financial  and  economic  crisis  that  began  in  2008  has  impacted  margins  in  all 
regions  of  the  world.  If  average  annual  margins  are  compared,  North-West  Europe  has 
however fared rather better than other regions in comparison in the last three years; 

•  The average utilisation rate2 in OECD Europe in 2009 amounted to 79%, compared to 85% 
the  previous  year.  So  far  in  2010,  utilisation  rates  averaged  76%,  showing  a  continuing 
downward trend. This needs to be put in the context of previous utilisation rates for the EU 
close to 90% as recently as 2005; 

•  Looking at the evolution of the petroleum product demand mix in the EU, the share of jet 
fuel and kerosene has increased between 1990 and 2008 from representing 5.5% to 9.4%; 
the share of gasoil (including diesel but not heating oil) from 17.7% to 31%; the share of 
gasoline from 22.7% to 16.1% and the share of heavy fuel oil from 16.3% to 6.4%; 

•  The  two  key  trade  petroleum  products  in  the EU  in  terms  of  volume  have  been  gasoline 
and  gasoil/diesel  (include  heating  oil),  gasoil/diesel  being  the  main  petroleum  product 
imported into the EU while gasoline is the main product exported from the EU. The EU is 
also very import-dependent on jet fuel and kerosene; 

•  Russia  is  the  biggest  supplier  of  gasoil/diesel  to  the  EU,  followed  by  the  United  States, 
while  the  United  States  is  the  largest  recipient  of  gasoline  from  the  EU.  In  the  case  of 
kerosene/  jet  fuels  imports,  the  third  largest  traded  product,  the  EU  mainly  relies  on  a 
number of Middle Eastern countries. 

2 

Based on crude throughput as a proportion of operable refining capacity. 

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3.2. 

Current and future key challenges of the EU refining sector 

3.2.1.  The evolution of demand 

It is widely considered that the EU petroleum product market is a mature market which has 
more  than  likely  already  hit  its  peak.  Between  1990  and  2008,  EU  demand  for  petroleum 
products  grew  by  an  average  of  only  0.2%  a  year,  recording  its  highest  level  in  2005  after 
which it fell every year, registering a 3% fall between 2005 and 2008.  

EU 27 Petroleum product demand evolution, 1990-2008 

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1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

LPG

Naphta

Gasoline

Jet fuel & kerosene

Heating oil

Gas oil

Heavy fuel oil

Other

Maritime bunker

Source: EUROSTAT/PRIMES 

Analysing the progression of demand in individual petroleum products reveals very different 
trends.  Between  1990  and  2008,  jet  fuel  and  kerosene  consumption  almost  doubled; 
consumption  in  gasoil3  registered  a  steady  and  sustained  growth;  demand  for  naphta 
registered  an  initial  increase  and  then  a  fall;  demand  for  gasoline  and  heating  oil  fell  quite 
sharply, while demand for heavy fuel oil4 fell significantly. 

Projecting forward towards the short-to-medium term, what is relatively certain is that the fall 
in heavy fuel oil will continue, given the gradual eradication of the use of such products due 
to regulation on the specification of petroleum fuels towards cleaner, less polluting fuels.  
With  regard  to  the  evolution  of  middle  distillates5,  it  is  expected  that  heating  oil  should 
continue  to  fall  as  more  efficient  and  environmentally  friendly  district  heating  systems 
continue  to  replace  traditional  oil  burners.  Gasoil  evolution  will  depend  on  a  number  of 
variables,  such  as  whether  EU  support  to  promote  the  wider  use  of  non-fossil  fuels  is 
successful; whether tighter marine fuel specifications will lead to a broad switch from residual 

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5 

Unless  otherwise  specified,  gasoil  refers  to  transport  diesel  fuel,  of  which  over  90%  is  used  in  road 
transport. 
Heavy fuel oils other than bunker fuels are used in medium to large industrial plants and power stations 
in combustion equipment such as boilers and furnaces.  
Middle distillates include heating oil, diesel, kerosene and aviation/ jet fuel. Heating oil is mainly used 
in domestic heating, while diesel is used as a motor fuel and also as a fuel in agricultural vehicles, small 
boats and trains. Jet fuel and kerosene are used to power airplanes and kerosene is also sometimes used 
in domestic heating. 

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fuel to marine gasoil rather than desulphurised residual oil; and, to a lesser extent, whether the 
EU-wide tax differential between road diesel and gasoline6 is maintained7. Kerosene/ jet fuel 
demand is however expected to continue to grow until large scale use of suitable renewable 
fuels in airplanes. 

Equally,  the  direction  of  growth  of  the  demand  for  light  distillates  (LPG,  gasoline  and 
naphta), will depend on a number of considerations. In particular, the development of demand 
for  gasoline  will  depend  on  the  growth  and  success  of  alternative  fuel  vehicles  and  energy 
taxation (as for gasoil), as well as developments in the penetration of sustainable, renewable 
fuels in the US (see section 3.2.2.) and gasoline engine efficiency. 

Other than economic developments, the two factors most likely to impact future demand for 
petroleum products in the EU are the forthcoming revision of the Sulphur Content in Liquid 
Fuels Directive (SCLFD) to integrate tighter international regulations on the sulphur content 
of  marine  fuel8  as  well  as  recent  legislation  to  reduce  CO2  emissions  from  new  cars  and 
transport fuels9. 

The requirement to supply future marine fuel with a maximum sulphur content of 0.1% in the 
Baltic Sea and the North Sea & English Channel could amount to an increase in demand for 
middle distillates of around 15 million tonnes per year from 2015 (which represents close to 
8% of EU gasoil demand in 2008).  

This very much depends on how the new changes are dealt with. There is the possibility that 
ships will widely opt to continue using high sulphur fuel oil after having  installed  on-board 
scrubbers to remove sulphur from fuel oil.  

Notwithstanding the fact that ship owners switching to gasoil will likely have to pay more for 
their fuel than if they continued to use fuel oil10, a key advantage for ships from scrubbing is 

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10 

According  to  June  2010  figures  from  the  Commission  Oil  Bulletin,  while  pre-tax  consumer  prices  of 
premium unleaded gasoline are lower than for diesel in all but 1 of the EU 27 Member States (Malta), 
higher taxes and duties on gasoline means that the price of diesel is cheaper at the pump in 26 of the 27 
EU Member States (with the exception of the United Kingdom). See more details in annex. 
A future revision of the Energy Taxation Directive may address this differential, but even if it proposed 
changes which would lead to the disappearance of this differential across the EU, it would take a while 
to have an impact given 10 to 15 year replacement cycles for cars and given that most diesel is still used 
by commercial vehicles where the possibility to switch to gasoline is more limited.  
The  2008  revised  International  Maritime  Organisation  MARPOL  Annex  VI  regulation  on  sulphur 
restrictions in marine fuels provides for a shift to low sulphur fuel for maritime transport first within the 
European Emission Controlled Areas (the current fuel sulphur limit of marine fuels would be reduced 
from  1.5%  to  1.0%  by  2010  and  then  to  0.1%  by  2015)  and  in  a  second  phase,  globally  where  the 
maximum permitted sulphur level would be reduced from 4.5% to 3.5% by 2012 and then to 0.5% by 
2020  (with  an  alternative  date  of  2025  if  suitable  fuel  is  not  available,  to  be  decided  by  2018).  The 
European Emission Controlled Areas are the Baltic Sea and the North Sea & English Channel. 
Adopted in April 2009 along with the climate and energy package, it requires reductions in the average 
fuel consumption of new cars, with binding targets of 130g/km (from 140g/km) by 2010 and 115g/km 
by 2020. The Fuel Quality Directive amended at the same time further tightens fuel specifications and 
introduces a requirement to lower life cycle GHG intensity of transport fuels by 6% by 2020. 
The key deciding factor will probably be the eventual price of low sulphur marine fuels. According to 
Purvin  &  Gertz,  bunker  fuel  for  use  in  the  emissions  control  areas  would  be  expected  to  cost  in  the 
range  of  $250  to  $300  per  tonne  more  for  the  0.1%  maximum  sulphur  content  quality  than  the  1.5% 
maximum sulphur content quality. This represents an increase in the cost of the fuel of 60% to 75%. 
They estimate that 0.5% maximum sulphur content bunker fuel is expected to cost in the range of $120 
to $170 per tonne more than the current high sulphur quality. This represents an increase in the cost of 
bunker fuel in the range of 30% to 50%. Purvin & Gertz conclude that stack scrubbing is economically 
attractive for fuel cost price differentials well below $100 per tonne, and that stack scrubbing is likely to 
be very attractive economically compared to the price differentials above.  

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that it would allow them to meet sulphur cap requirements wherever the ship trades. There is 
however some scepticism on this option given that many ships have held back from making 
the necessary investments to prepare for compliance with the existing EU requirement in the 
SCLFD of the use of marine fuels used by ships on inland waterways and at berth in any EU 
ports containing no more than 0.1% of sulphur by January 201011.  

While sulphur fuel specifications could represent a source of increasing demand for (marine) 
transport fuel from EU refiners, it is expected that CO2 emissions legislation will contribute 
to improved efficiency of vehicles such as through increased penetration of hybrid vehicles, 
thereby  reducing  the  demand  for  transport  fossil-fuels  such  as  gasoil  and  gasoline.  It  is 
expected that this regulation will lead to a penetration of conventional hybrids equivalent to 
27% of the total passenger fleet by 203012. 

3.2.2.  Demand & supply imbalance and dependence on trade  

3.2.2.1.  EU refining supply out of step with evolving demand 

Two trends which have characterised the growth in demand for petroleum products in the EU 
since 1990 have been the continued, strong growth in middle distillates such as jet fuel and 
kerosene and gasoil on the one hand and the parallel strong falls in demand for gasoline on the 
other.  

Between 1990 and 2008, demand for middle distillates (including heating oil) grew by 35% 
(and demand for jet fuel/kerosene and diesel increased by 82%), while demand for gasoline 
fell during that same period by 26%. In parallel, EU supply of middle distillates between 1990 
and 2008 grew by 28%, while gasoline supply only fell by 4%. 

These  developments  resulted  in  a  supply/demand  imbalance  in  the  EU  with  regard  to  such 
products which has led it to be dependent on trade in order to balance out demand and supply. 

11 

12 

This led to a Recommendation by the Commission to Member States to request from ships that have 
failed  compliance  by  that  date  to  provide  detailed  evidence  of  the  steps  they  are  taking  to  ensure 
compliance, including a contract with a manufacturer and an approved retrofit plan to be completed by 
no later than 1st of September 2010.  
As contained in the PRIMES Reference scenario. 

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Evolution of EU net imports in key petroleum products, 2000-2008  

kt

30,000

25,000

20,000

15,000

10,000

5,000

0

-5,000

-10,000

-15,000

-20,000

-25,000

-30,000

-35,000

-40,000

-45,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

Gasoline

Gasoil and diesel

Kerosene & jet fuels

Naphta

Residual fuel oil

Source: EUROSTAT 

By 2008, gasoil/diesel (including heating oil) was the main petroleum product imported into 
the  EU,  reaching  20  million  tonnes  of  net  imports,  equivalent  to  6.9%  of  EU  gasoil/diesel 
consumption.  In  contrast,  the  main  product  exported  from  the  EU  was  gasoline,  with  net 
exports of 43 million tonnes in 2008, equivalent to 31% of EU gasoline production. 

With regard to gasoil/diesel imports, Russia is by far the largest supplier of the product into 
the EU, having exported 13.7 million tonnes of gasoil/diesel in 2008 to the EU. Though this 
amount  only  represents  4.8%  of  total  EU  demand  of  288  million  tonnes  of  gasoil/diesel  for 
that  year,  it  amounts  to  35%  of  total  gasoil/diesel  imports.  With  regard  to  gasoline,  the  EU 
exported  18.7  million  tonnes  of  excess  gasoline  to  the  US  that  same  year,  which  was 
equivalent to 13.6% of EU gasoline production (of 137 million tonnes) and 37% of total EU 
gasoline exports in 2008.  

If  net  imports  of  kerosene  and  jet  fuels  are  taken  into  account,  the  EU  shortfall  in  middle 
distillates  amounts  to  upwards  of  35  million  tonnes  of  net  imports  per  year,  imports  of 
kerosene and jet fuel coming mainly from several Middle Eastern countries.  

3.2.2.2.  Growing trade deficits 

Should EU demand for middle distillates continue to grow (which is generally expected), and 
should the current structure of EU refining remain unchanged, it will mean processing more 
crude  and  obtaining  more  middle  distillates  but  also  more  gasoline,  thereby  leading  to  a 
widening of the EU supply/demand imbalance for diesel and gasoline.  

So  far  the  US  has  served  as  a  convenient  outlet  for  excess  EU  gasoline  but  it  is  widely 
predicted  to  reduce  its  consumption  of  gasoline  going  forward.  While  the  US  vehicle  stock 
will  continue  to  be  dominated  by  gasoline  in  the  foreseeable  future,  it  is  suspected  that  the 
demand  for  it  has  already  peaked  as  more  efficient  vehicles  are  produced  and  as  the 
proportion of biofuels (mainly ethanol) progressively grows to represent a greater proportion 
of US vehicle fuel use13.  

13 

In its Annual Energy Outlook 2009 reference case, the US Energy Information Administration projects 
falls  in  the  growth  of  motor  gasoline  consumption  in  the  US  equivalent  to  -8.4%  between  2010  and 

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But should there be other potential markets to which the EU could export its surplus gasoline 
production, keeping the status quo (in terms of refining capacity) could be an option for the 
industry. The most obvious markets are Africa and the Middle East as these are the closest to 
Europe  and  both  are  expected  to  experience  growing  demand  in  gasoline  going  forward. 
However  future  gasoline  trade  deficits  in  both  these  regions  are  likely  to  be  well  short  of 
current EU gasoline export levels. 

In  terms  of  increasing  imports  of  gasoil/diesel,  while  Russia  has  been  a  reliable  source  of 
supply to date, it could prove difficult for it to meet any substantial increases in EU demand 
for diesel imports given that Russian refinery capacity today remains at the same level as it 
was in the late 90's14 and also taking into account relatively modest developments in capacity 
expected in the near future.  

On  the  other  hand,  it  can  be  expected  that  the  situation  which  currently  prevails  in  Russia 
which leads its refiners to process more crude than is required for domestic consumption in 
order to export the excess will remain in the foreseeable future. This situation is largely the 
result of the current tax regime which taxes crude exports more highly than product exports. 
Russian oil export tariffs on light oil products are typically 70% of export tariffs on crude oil, 
and export tariffs on heavy oil products represent only around 40% of crude export tariffs15. 
Thus  it  can  be  expected  that  Russia  will  continue  to  run  a  trade  surplus  in  diesel  in  the 
forthcoming years. 

Other  countries  like  China,  India  or  Saudi  Arabia  have  greatly  expanded  diesel  capacity  in 
recent years and could be relied upon to supply the EU market (with the farthest locations still 
being  open  to  debate,  as  mentioned  in  the  global  competition  section).  This  being  said, 
demand  for  diesel  is  expected  to  grow  significantly  across  the  globe,  with  the  Asia  Pacific 
region  in  particular  foreseen  to  be  running  a  large  diesel  deficit  going  forward  as  diesel 
experiences  the  fastest  growing  demand  of  refined  products  in  the  region.  And  while  North 
America  is  currently  the  second  biggest  supplier  of  diesel  to  the  EU,  running  a  surplus  in 
diesel  capacity  of  upwards  of  30  million  tonnes,  it  is  expected  that  it  will  run  only  a  slight 
diesel surplus from 2015 as it becomes the fastest growing refined product in demand there, 
reflecting increasing volumes of road freight and some dieselisation of the private car fleet16. 

In  conclusion,  should  the  refining  industry  opt  for  the  status  quo  in  an  environment  of 
growing demand for middle distillates, the EU's import deficit in middle distillates will extend 
further. This is not only a problem for the EU in terms of growing import dependence for such 
products,  it  is  also  a  problem  for  the  EU  refining  industry  in  terms  of  growing  pressures  to 

2020  and  -5.2%  between  2020  and  2030  (equivalent  to  a  fall  of  -13.1%  between  2010  and  2030). 
Upcoming emission standards as well as the passing of the 2007 US Energy Independence and Security 
Act which promotes the use of biogasoline represent key influences on future US demand for gasoline. 
In  addition,  the  Obama  administration  has  brought  forward  a  requirement  for  better  vehicle  fuel 
consumption.  By  2011,  the  Corporate  Average  Fuel  Economy  requirement  on  car-manufacturers  will 
shift from an average consumption of 27.3 miles per gallon from the current requirement of 35.5 miles 
per gallon. 
According  to  Russian  oil  refining  capacities  contained  in  the  BP  Statistical  Review  of  World  Energy 
2009.  Note  however  that  in  his  report  to  the  State  Duma  on  the  2nd  of  December  2009,  the  Russian 
Energy  Minister  announced  that  between  1.2  to  1.4  trillion  roubles  (32  billions  Euros)  would  be 
invested into upgraded refinery capacity in Russia. 
The Russian Ministry of Economic Development has recently prepared amendments to customs tariffs 
which provides for more equal export tariffs for light and heavy products. 
Projections  by  Wood  Mackenzie,  as  part  of  its  work  evaluating  the  impact  of  biofuels  on  the  EU 
refining industry for the European Commission. 

11 

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14 

15 

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export  excess  gasoline  supply  to  other  markets,  which  is  not  evident  given  expected  future 
developments in world demand for gasoline and diesel.  

3.2.3. 

Supply challenges 

3.2.3.1.  Falling productions of North Sea Crude and variations in crude quality 

North-Sea crude production (from Norway, UK, Denmark) fell from 6.4 to 4.3 million barrels 
per  day  between  2000  and  2008.  Over  the  same  period,  the  supplies  to  Europe  of  heavier, 
sourer/more  sulphurous,  crudes  from  Russia  and  Africa  have  been  growing.  The  result  has 
been an increase in the proportion of heavy and sulphurous crudes coming into EU refineries, 
as  well  as  a  higher  dependence  on  oil  imports  from  third-party  countries  which  represented 
80% of EU crude refinery intake in 2008 against 75% in 2000. 

The impact on the EU refining industry of lighter crude being replaced by heavier crude has 
varied according to region, with North-Western European (NWE) refineries being especially 
concerned17.  Conversely,  in  Central  Europe,  refineries  are  often  located  on  the  Druzhba 
pipeline, and the great majority of their intake is Urals crude. In the Mediterranean area, the 
larger proportion is Arabian Gulf, which is again heavier than Urals crude, with similar API18 
but higher sulphur content, followed by Urals crude.  

Falling  productions  of  North-Sea  crude  in  an  environment  of  growing  demand  for  lighter 
distillates represents a major concern for the NWE refining industry. Lighter crude oils such 
as  North-Sea  crude  produce  a  higher  share  of  more  valuable,  light  products  that  can  be 
recovered with simple distillation, while heavier crude oils produce a greater share of lower-
valued  products  (such  as  fuel  oil)  with  simple  distillation  and  therefore  require  additional 
processing to produce higher value products.  

North-Sea  crudes  have  an  additional  attractive  property,  in  having  low  sulphur  content. 
Higher  sulphur  crudes  are  naturally  less  valuable  in  an  environment  of  lower  sulphur  fuel 
specifications,  such  as  in  the  EU.  In  addition,  the  impurities  in  heavy,  high  sulphur  crudes, 
such  as  nitrogen  and  metal,  generally  increase  as  the  crude  becomes  heavier  and  further 
increase the processing severity required to convert the heavy crudes to light products.  

The quality of crude oil thus dictates the level of processing and re-processing to achieve the 
optimal  mix  of  product  output,  with  a  trend  towards  heavier  and  more  sulphurous  crudes 
leading  to  a  more  complex,  and  costlier,  refining  process,  such  as  via  the  use  of  deep 
conversion and/or desulphurization units, also leading to higher CO2 emissions. 

Going forward, it isn't clear how Europe will be affected by the changing global crude diet. In 
the  short  term,  according  to  the  IEA,  the  average  crude  density  may  slightly  lighten  with  a 
marginal  decrease  in  the  sulphur  content  until  2014  mainly  due  to  the  impact  of  growing 
condensate19 volumes produced by OPEC countries. Lighter supplies from Russia, Africa and 
the Middle East are also expected to increase according to the IEA, partly offset by expected 
Canadian crude mix, where new production from heavy oil sands is mostly sour. 

In the longer run, it is expected that NWE crude intake from the Urals, the Caspian region and 
the  Middle  East  will  gradually  come  to  represent  growing  proportions.  This  trend  may 

17 

18 
19 

Nearly 100% of the crude refinery intake in Ireland and Denmark is North-Sea originated, followed by 
the  UK  (80%),  Sweden  (57%),  Germany  (27%),  France  (21%),  Finland  (17%),  the  Netherlands  and 
Belgium (14%).  
API expresses a crude's relative density, with the higher the API gravity, the lighter the crude. 
Condensate is a very light, liquid hydrocarbon stream that is recovered from the processing of gas and 
the gas from oil reservoirs and can be regarded as almost identical to a light sweet crude. 

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become a key challenge for refiners in that region, pushing them towards investments for the 
adaptation of their plants in order to refine the changing flow of crude. 

3.2.3.2.  Adapting supply to regulation  

The impact of biofuels20 

In the EU, it is expected that much or all of the growth in motor-fuel supply, which represents 
the biggest use of processed crude oil, will be in biofuels in the next twenty years. 

A  key  driver  of  the  supply  of  biofuels  in  the  EU  will  be  the  Renewable  Energy  Directive 
which  sets  a  10%  target  for  the  use  of  renewable  energy  in  the  transport  sector  by  2020,  the 
majority  of  which  is  expected  to  be  contributed  from  biofuels,  which  have  to  meet  certain 
specific sustainability criteria.  

The increasing use of biofuels will have an impact on EU refiners in terms of a reduced need 
for  the  supply  of  conventional  fossil  transport  fuels.  In  the  case  of  biodiesel,  it  has  the 
potential to reduce the growing pressure on the need for diesel..  

On  the  other  hand,  increasing  the  share  of  biogasoline  blendstocks  such  as  ethanol  in  the 
European gasoline pool could reduce further the market for refinery-produced gasoline, which 
would be problematic to refiners given that there is already an excess of gasoline-producing 
refinery capacity in Europe, as noted earlier.  

Tightening marine sulphur fuel restrictions & increasing supply of middle distillates 

The future marine sulphur fuel specification requirements mentioned above are likely to pose 
difficulties  to  the  industry  in  supplying  the  resulting  demand.  While  supplying  1%  sulphur 
fuel  should  not  pose  significant  problems  for  refiners  –  blends  can  simply  be  modified  to 
redistribute  the  higher  sulphur  components  -  the  real  challenge  will  be  the  changes  to  0.1% 
sulphur content and 0.5% respectively for the ECAs and the rest of the world, as these will 
likely  require  the  conversion  of  bunker  fuels  to  diesel21.  This  will  require  investment  in 
desulphurisation or conversion capacities. 

However,  the  production  of  additional  gasoil,  whether  for  the  marine  sector  or  in  order  to 
meet current EU demand, poses an additional problem for the EU refining sector as it implies 
further cracking/breaking up of the heavier remaining products. Complex refineries are more 
energy  intensive,  and  emit  more  CO2  than  simple  refineries.  Every  additional  cracking 
process  and  every  additional  desulphurisation  step  needs  energy  and  thus  increases  CO2 
emissions.  Thus,  increasing  gasoil  production  in  the  context  of  ever  tighter  sulphur 
specifications will lead to an increase in CO2 emissions by the EU refining sector22.  

20  

21 

22 

A  detailed  analysis  of  the  impact  of  the  use  of  biofuels  on  EU  oil  refining  will  be  published  by  the 
European Commission in the Autumn of 2010. 
Current technology cannot achieve reductions in the sulphur content of residues to 0.1% unless a very 
low sulphur feed is used. If it was possible, it is questionable whether refiners would not rather prefer to 
focus  instead  on  converting  residual  fuel  to  other  lighter,  more  valuable  fuels,  and  decide  to  stop 
supplying the bunker market altogether. 
2009 estimates of the costs of changes in marine sulphur fuel specifications by Purvin & Gertz for the 
European  Commission,  are  for  7  million  tonnes  per  year  of  extra  carbon  dioxide  emissions  by  2015 
(due  to  changes  to  0.1%  sulphur  content),  representing  an  increase  of  5%  versus  Baseline  carbon 
dioxide emissions of 142 million tonnes in 2015. Including the change to 0.5% globally, total increases 
in CO2 emissions by 2020 could reach 11.8 million tonnes per year. 

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The EU refining sector, which will be required either to purchase permits to emit CO2 or to 
improve the CO2 emission efficiency of its plants23, will therefore have to pay more for the 
CO2 emissions from (more complex) refineries producing the products which the EU requires 
(i.e: middle distillates). For the same reason, careful consideration of the impact on refineries 
needs  to  be  given  when  designing  the  implementation  measures  to  reduce  fuel  life  cycle 
Green House Gas (GHG) emissions (contained in the Fuel Quality Directive). 

This leaves the EU with the dilemma of on the one hand becoming more heavily reliant on 
imports of petroleum products into the EU or on the other hand, hoping that the EU industry 
will  produce  more  of  the  required  products,  even if  (all  else  being  equal)  it  means  emitting 
more CO2, and therefore having to pay for it.  

The future price of carbon in the ETS scheme is therefore a crucial issue to the industry and to 
the EU, as the higher it is, the more the risk that it exceeds the freight costs that an importer of 
refined products such as diesel would incur from shipping the product from abroad, with no 
overall benefit in terms of CO2 emissions. 

According  to  the  refining  industry,  it  would  have  to  buy  about  25%  of  its  allowances  to 
maintain  activity  which,  inclusive  of  the  additional  costs  of  CO2  in  purchased  electricity, 
should cost the sector over 1 billion Euros a year based on a price of 30 Euros per ton24. 

3.2.4.  The profitability of the EU refining industry 

Falling  demand  for  petroleum  products  at  a  time  of  stable  levels  of  capacity  have  in  turn 
significantly affected refining margins25. The impact of the recent crisis on refining margins 
has been particularly significant, as the chart below shows, with both simple (hydroskimming) 
and complex (cracking) margins hitting 15 year lows in 2009. 

23 

24 

25 

As the EU refining industry is included in the EU Emissions Trading Scheme (the ETS). Note that the 
EU refinery industry has been recognised as being at risk of carbon leakage, on the grounds that crude 
oil and derived products are moved around the world in a very open market in which there is complete 
exposure to worldwide competition, which will allow the industry to obtain free permits for the first two 
years  of  the  third  phase  of  the  EU  emissions  trading  scheme  (2013-2014).  Free  allowances  will  in 
principle  be  allocated  based  on  product-specific  benchmarks  for  each  relevant  product.  The  starting 
point for the benchmarks is the average of the 10% most efficient installations, in terms of greenhouse 
gases, in a sector or sub-sector in the Community in the years 2007-2008. The use of such benchmarks 
is to ensure that the allocation takes place in a manner that gives incentives for reductions in greenhouse 
gas emissions and energy efficiency efficient techniques. Furthermore, given that the benchmarks will 
be stringent, only the most efficient installations will have any chance of receiving all of their needed 
allowances for free.  
It is however worth noting that the carbon price in the EU Emissions Trading Scheme has been trading 
at prices much below 30 Euros per ton, a combination of the crisis, higher than expected energy prices 
and the build up of considerable buffer of unused freely allocated allowances, which can be carried over 
into phase three (2013-2020) of the ETS. The ETS carbon price in the PRIMES Reference scenario in 
2030  is 19  Euros  per  tonne of  CO2,  much lower  than  the  PRIMES  Baseline  (of 39  Euros)  due  to  the 
achievement  of  the  renewables  targets  and  additional  efficiency  measures,  which  decrease  electricity 
demand and emissions.  
The refinery margin is the profitability that results from processing a barrel of crude oil. It reflects the 
difference between the market value of the combination of products produced by the refinery and the 
cost of buying the crude at market price as well as the operating costs incurred in the refining process. 

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Refining margins for simple and complex refiners Jan 1995 – Feb 2010 

US $/bbl

15

10

5

0

-5

-10

janv-95

juil-95

janv-96

juil-96

janv-97

juil-97

janv-98

juil-98

janv-99

juil-99

janv-00

juil-00

janv-01

juil-01

janv-02

juil-02

janv-03

juil-03

janv-04

juil-04

janv-05

juil-05

janv-06

juil-06

janv-07

juil-07

janv-08

juil-08

janv-09

juil-09

janv-10

NWE Brent Cracking

MED ES sider cracking

MED Urals cracking

NWE Urals cracking

NWE Brent hydroskimming

MED ES sider hydroskimming

MED Urals hydroskimming

NWE Urals hydroskimming

Source: IEA 

Going  forward,  there  are  divergent  views  on  when  the  sector  will  experience  a  recovery  in 
margins, and to what extent. While acknowledging a recovery in margins at the start of 2010 
due to a drawdown in oil product inventories and recovering demand, the IEA26 predicts that 
the construction of refineries globally over the past two years and a massive contraction in oil 
consumption  during  the  recession  have  led  to  a  glut  of  capacity  at  the  global  level.  It  thus 
maintains a bearish short-term outlook for the industry globally.  

Looking  further  ahead,  the  combination  of  the  prospect  of  increasing  demand  for  middle 
distillates – including widespread global dieselisation (as mentioned above) – with consequent 
increases  in  low-sulphur  fuel/middle  distillates27  prices  as  well  as  rising  crude  prices28  lend 
support for a recovery in complex margins in the coming years in the EU29.  

3.2.5.  Global competition coming to the EU 

Asia and the Middle East have been building new, larger, more cost effective and generally 
more complex refining units in recent years, such that they are becoming key players in global 
refining markets.  

In spite of the crisis, Asia and the Middle East have added 1.6 million bbl/day of new crude 
distillation capacity in 2009, and at least a further 600,000 b/day is expected in 2010. In terms 
of expected refining projects in the next five years, the two regions combined will add nearly 
three quarters of all additional capacity in the world (see annex 5 for more details). 

26 
27 

28 

29 

January 2010 Oil Market Report. 
According  to  Purvin  &  Gertz,  tightening  sulphur  marine  fuel  sulphur  specifications  would  lead  to 
increases in the prices of bunker fuels of between 30% and 75% in the Emission Controlled Areas by 
2015. 
Hydrocracking  margins  tend  to  be  highest  when  crude  prices  are  high  and  there  is  a  wide  price 
difference between light and heavy crudes, as hydrocrackers can take lowest-cost heavy crude and sell 
products into a high price market. 
As  part  of  its  work  evaluating  the  impact  of  biofuels  on  the  EU  refining  industry  for  the  European 
Commission, Wood Mackenzie presented projected NWE Urals cracking margins (more relevant going 
forward  than  Brent  cracking  margins)  to  reach  $3.45/bbl  in  2010  compared  to  $2.62/bbl  2009  and 
$4.62/bbl in 2008. According to the consultant, margins should continue to rise slowly, reaching levels 
of $5.13/bbl in real (2010) terms by 2015. 

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Given the closeness of the region to Europe, expectations are that the Middle East will likely 
become  a  key  provider  of  refined  products,  especially  of  middle  distillates,  to  Europe. 
European  imports  of  kerosene  and  jet  fuels  already  mainly  originate  from  that  region.  The 
region is currently planning some 1.7 million bbl/day of additional capacity which is expected 
to  come  on  stream  by  or  around  2015.  New  projects  include  several  large  export-focussed 
refineries which are being co-financed by European-based oil majors such as Shell and Total.  

For some, the idea of even importing refined products from places as far from Europe as Asia 
is  not  far-fetched,  with  the  view  that  operators  of  large  refineries  there  could  prove  able  to 
deliver products to the EU at prices competitive with home production30. While this may be 
true,  the  extra  freight  and  logistics  costs  of  importing  from  such  distant  places  could  mean 
that the price of end-products will rise, to the disadvantage of end-users. Admittedly, freight 
and logistics costs could also go down going forward, should the size of vessels employed to 
import refined products increase31.  

In  practice,  Asian  oil  firms  are  already  eyeing  the  EU  market.  India's  Essar  has  been 
expanding  its  home  refinery  at  Vadinar  with  the  aim  to  export  to  Europe,  and  it  has  been 
negotiating with Shell for a number of months on the acquisition of three of its Europe-based 
refineries  (Stanlow  in  the  UK  and  Heide  and  Hamburg-Harburg  in  Germany)  with  the 
intention  to  close  these  refineries  and  turn  them  into  import  terminals.  PetroChina  has  also 
been in talks with Ineos over an investment in its Grangemouth refinery in Scotland. 

Additionally,  state  subsidies  are  supporting  some  refineries  in  such  countries,  with  the 
example of Chinese refiners which have been running record high throughputs in 2009 due in 
part to guaranteed margins. For instance Sinopec, a state-controlled refiner, is subsidising its 
refineries to export products, thereby encouraging them to maintain high throughputs32. 

The  industry  believes  that  with  limited  domestic  demand  for  high-quality  fuels,  Indian  and 
Middle  Eastern  refiners  will  seek  to  use  the  EU  market  as  a  temporary  outlet  for  excess 
production until local markets grow sufficiently to absorb production. It warns that over time, 
the combination of domestic market growth and tightening product specifications could then 
see  such  players  refocus  on  their  domestic  markets,  with  consequences  for  a  more  import-
dependent Europe33. 

3.2.6. 

Investments  in  upgrading  the  EU  refining  sector:  increasing  middle  distillates 
capacity 

As  mentioned  previously,  a  growing  trade  gap  is  avoidable  should  EU  refiners  decide  to 
invest heavily in upgrading existing capacities to make them more complex and thus able to 
skew the production mix towards more diesel and less gasoline.  

According  to  the  industry,  in  order  to  fill  an  annual  gap  in  demand  of  30  million  tonnes  of 
gasoil and jet fuel (in 2008, EU net imports of gasoil/diesel and kerosene/jet fuel amounted to 
36.7 million tonnes), the EU refining sector would need to build about 20 large hydrocrackers 
at a cost of more than 8.5 billion Euros34.  

30 
31 

32 
33 
34 

View expressed in April 2010 article of the Petroleum Economist "Downstream depression". 
Until now, logistics have favoured transporting crude rather than refined products as the transportation 
of crude is less costly, due to larger vessels being employed to transport crude, than refined products. 
Oil Market Report, March 12 2010. 
White Paper on EU refining, Europia, May 2010 
Ibid, 33. 

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As  was  already  highlighted,  an  additional  15  million  tonnes  per  year  of  low  sulphur  gas 
oil/diesel is expected from marine sulphur fuel restrictions being lowered from 1% to 0.1% by 
2015. Producing an additional 15 million tonnes of gasoil a year would require investment of 
more or less 4.5 billion Euros, representing 10 upgrading projects, according to the industry35. 
This would come on top of the 20 projects cited previously. 

Taking also into account the further costs that would need to be incurred to meet the proposed 
MARPOL global specification changes from 3.5% currently to 0.5% sulphur content globally 
by  202036,  additional  costs  associated  with  the  full  changes  in  sulphur  fuel  specifications 
could run into as much as 23 billion Euros by 2020 in the EU37.  

According to the industry, capital expenditure associated with previously announced projects 
to be built in the EU within the next six to eight years was in the order of 34 billion Euros. 
However,  in  a  context  of  low  refining  margins,  many  of  these  projects  may  not  be 
implemented and the latest estimate is that only some 14 billion Euros of investments might 
be  spent  improving  the  European  refining  system  in  the  next  six  to  eight  years,  again 
depending on economic conditions38. 

Good and stable economic conditions – ensuring high and stable margins - are important for 
investment in new refining and conversion capacity to occur, as a number of years can come 
to pass between the decision to build a refinery and the start of production. Yet as has been 
said before, though margins are trending upwards again, they are still low and there is some 
uncertainty as to how they will develop. 

Even  if  prospects  were  more  positive  however,  there  would  be  no  guarantee  that  the  EU 
refining industry would make the necessary investments to meet the shortfall in the supply of 
middle distillates. Tightening fuel specifications as well as the demand focus on diesel are not 
new phenomena in Europe, and yet the industry has been slow to adapt. This is because until 
now,  there  has  been  a  market  for  the  excess  gasoline  produced  by  refining  units  in  the  EU, 
such  that  the  industry  could  opt  not  to  carry  out  all  of  the  investments  required  for  more 
hydrocracking  units39  to  produce  more  middle  distillates  and  deep  conversion  units  such  as 
cokers and residue cracking installations to produce low sulphur marine fuel. 

Also,  while  the  European  refining  industry  has  been  faced  with  dramatic  reductions  in 
demand  for  fuel  oil  since  the  1980's,  at  the  same  time  the  rapid  development  in  North  Sea 

35 
36 

37 

38 

39 

Ibid, 33. 
Which would require an additional 100 hydrocracking projects globally in the next decade at a cost of 
46 billion Euros (White Paper on EU refining, Europia, May 2010). 
Estimates by Purvin & Gertz for the European Commission, 2009. These assume that 20 million tonnes 
of  marine  bunker  fuel  would  need  to  be  produced  to  a  maximum  of  0.1%  sulphur  content  by  2015, 
rising  to  24  million  tonnes  per  year  by  2020.  Investments  in  delayed  coking  and  hydrocracking  are 
assumed  to  be  needed  to  meet  the  new  SECA  specifications.  In  addition,  middle  distillate  streams 
produced  from  delayed  coking  require  additional  hydrotreating  before  they  can  be  used  for  the 
production of diesel or gasoil. Additional hydrogen plant capacity is also needed to produce hydrogen 
for  the  hydrocracking  and  hydrotreating  units  and  sulphur  recovery  units  are  needed  to  handle  the 
additional sulphur removed.  
Historically,  according  to  Europia  (White  Paper  on  Refining),  European  refiners  have  invested  an 
average  of  around  5  billion  Euros  each  year  over  the  past  20  years  in  desulphurisation  capacity  of 
distillates  and  gasoline,  the  upgrading  of  production  facilities  and  processes  and  the  installation  of 
emission abatement equipment and energy savings. 
One alternative approach to dealing with increasing demand for diesel and falling demand for gasoline 
would be to implement changes to the catalytic-cracking process (rather than develop hydrocrackers), 
such that these units could process heavy residues into diesel. One example of a specialist heavy residue 
cat-cracker in existence is a unit at Shell's Pervis, Netherlands, refinery.  

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crude  production,  along  with  increasing  demand  for  bunker  fuel,  allowed  especially  coast-
based North Western EU refiners to avoid fuel oil conversion investments. 

Last but not least, while the EU refining industry has suffered on a number of occasions in the 
past as a result of economic downturns and oil shocks, there have always been prospects of 
recovery and continued growth in demand which eventually did take place. In this instance, 
future EU demand prospects are bleak, especially if put in the context of growth prospects in 
other regions of the globe such as the Asia Pacific and the Middle East.  

In conclusion, while there is a considerable need for further investments by the EU refining 
industry,  and  in  the  case  of  falling  gasoline  exports,  a  real  incentive  for  the  EU  industry  to 
invest, there are many developments which put together make such investments unlikely, not 
least  the  growing  costs  of  refining  in  the  EU,  the  falling  supply  of  North-Sea  crude  and 
uncertain prospects in terms of refining margins. 

3.2.7. 

Impacts of restructuring of the sector: reducing gasoline capacity 

Summary of EU refineries planned/actual divestments and shutdowns since 2008  

y
a
d

/
l

b
b
n

i
y
t
i
c
a
p
a
C

1,000,000
900,000

800,000
700,000

600,000
500,000
400,000

300,000
200,000

100,000
0

Sold since
crisis

On sale since
crisis

Sale
w ithdraw n -
future
uncertain

Expected to
be put on sale

Extended
maintenance

Shutdow n &
conversion
planned

Source: European Commission. Note: This information has not been confirmed by the EU refining industry and 
is contained here for illustrative purposes. 

Overall, known planned/actual divestments and shutdowns in EU refining capacities since the 
start of the crisis in 2008 extend to 18 out of 104 refineries in the EU, representing some 134 
million tonnes per year/2.7 million bbl/day of crude capacity, equivalent to 17% of total EU 
refining capacity. Only two of these units have been sold, others have been put up for sale for 
some  time  but  have  found  no  buyers,  others  yet  have  been  shutdown  for  extended 
maintenance until market conditions recover. 

The most vulnerable types of units are either small to medium-size and/or gasoline-oriented 
refineries,  which  are  less  adapted  to  current  demand  patterns.  The  industry  however  warns 
that  restructuring  of  gasoline  capacity  could  also  affect  diesel  production  if,  instead  of 
divesting  only  of  gasoline  units  such  as  Fluid  Catalytic  Converters  (FCCs)  or  catalytic 
reformers, EU refiners opt to shut down entire refineries altogether40.  

40 

White Paper on EU refining, Europia, May 2010. 

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18 

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Assets  which  have  been  put  on  sale  since  the  crisis  and  are  still  awaiting  buyers  amount  to 
close  to  900,000  bbl/day.  It  is  expected  that  at  least  another  400,000  bbl/day  of  capacity  is 
likely to be formally put on sale in the foreseeable future as a result of the crisis. 

In addition, refining capacity that is known to have been temporarily shutdown as a result of 
the  crisis  amounts  to  some  900,000  bbl/day.  These  units  could  either  be  restarted  or 
eventually also be put on sale, depending on market conditions. 

Note that no complete shutdowns have been announced by EU refiners. Since the beginning 
of the crisis, uneconomic assets that have not been put on sale have generally been subject to 
extended maintenance/temporary shutdowns, while assets that have been formally 'shut down' 
are in fact being converted to depots/storage facilities (equivalent to 258,000 bbl/day, to date). 

Opinions  on  the  amount  of  capacity  that  needs  to  be  shut-down  in  the  EU  abound.  These 
range from between 640,000 to upwards of 2 million bbl/day, equivalent to between 4% and 
15%  of  total  EU  capacity,  with  the  view  that  such  decreases  are  necessary  for  a  return  to 
acceptable  margins  and  in  order  to  prevent  further  increases  in  the  volumes  of  gasoline 
supplies going forward. 

If 2009 utilisation rates for OECD Europe (calculated as a proportion of product consumption 
to  total  capacity)  of  79%  is  a  good  guide  of  the  likely  long  run  utilisation  rate  for  the  EU 
industry,  then  it  could  be  argued  that  there  is  21%  excess  capacity.  This  exceeds  the  total 
capacity of the 18 refineries in question.  

It is not known how many employees these 'vulnerable' refineries represent, and estimates are 
imperfect  as  indicators  such  as  capacity,  utilisation  and  complexity  cannot  by  themselves 
provide  an  accurate  guide.  In  addition,  while  the  number  of  direct  employees  is  known  for 
some  refineries,  there  are  a  number  of  additional  indirect  employments  which  depend  on  a 
refinery  for  their  livelihood,  whether  as  sub-contractors  working  on-site  or  as  providers  of 
products/  services  either  to  the  refinery  or  to  employees  of  the  refinery.  The  number  of 
dependent indirect employments as a multiple of direct employments for a refinery can be of 
the order of 3 to 5, according to representatives of the industry. 

Thus  while  the  industry  itself  employs  directly  only  100,000  people  in  the  EU,  it  can  be 
considered that as much as 400,000 to 600,000 jobs are directly dependent on the EU refining 
industry41. 

The gradual disappearance of the refining activity in the EU would also have consequences 
for  the  industries  for  which  a  local  refining  presence  is  important.  The  EU  petrochemical 
sector, which employs 778,000, is perhaps the best example of such an industry. 
There are 58 steam crackers42 in the EU, 53 of which are currently in operation, while 77% of 
the  feedstock  of  those  53  crackers  in  operation  comes  from  refineries.  Of  the  58  steam 
crackers in existence, 41 are directly integrated refinery/steam crackers. 

According to the petrochemical industry, having refinery and interdependent industry on the 
same site brings a number of synergies in terms not only of the supply of energy but also in 
terms  of  support  services  and  product  exchanges43.  The  relationship  is  therefore  mutually 

41 
42 

43 

Not included in this number are the further 600,000 jobs in logistics and marketing.  
Which crack naphta/LPG feedstock into lighter olefins such as ethylene - one of the most important raw 
materials of the organic chemical industry - and propylene - used in the manufacture of resins, fibres 
and plastics. 
Over  5.3  M/tons  of  products  from  crackers  are  sent  back  to  refineries,  equivalent  to  12.5%  of  total 
refinery  transfers  to  steam  crackers.  This  includes  hydrogen,  which  is  produced  in  excess  by  the 
crackers and which refineries are normally short of and which is used by refineries in hydrocrackers in 

EN 

19 

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beneficial, though integrating refineries and steam crackers is not the strategy employed by all 
the  oil  majors,  and  while  Total  as  well  as  ExxonMobil  are  highly  integrated  (upwards  of 
74%), BP and Shell have relatively lower levels of integration (24% and 39% respectively). 

The degree of integration with the petrochemicals industry is also only one of several factors 
that will influence how vulnerable a refinery is to being closed down. Other key aspects will 
likely include how clean and efficient (in terms of CO2 emissions and pollutants) the refinery 
is and its flexibility and fit in terms of meeting market demand. The cost of access to crude oil 
is another factor. 

3.2.8.  Long-term – 2050 and beyond: Preparing for a “decarbonisation era” in the EU 

Looking beyond the next twenty years, up to and as far as 2050, the key challenge for the EU 
refining  industry  on  the  basis  of  current  EU  ambitions  with  regard  to  the  environment  and 
climate  change  is  less  one  of  partial  restructuring  and  adaptation/upgrading  of  refining 
capacity and more of a paradigm shift with a radical departure from oil being used as the main 
transport fuel or as a key source of energy. 

The energy and transport sectors are the targets of the vision to a move towards a low carbon, 
resource efficient and climate resilient economy by 2050, and as an energy-intensive industry 
supplying  mainly  fossil-based  fuels  to  the  transport  sector,  the  EU  refining  industry  will  be 
concerned by developments to implement such a vision. 

Transport in particular has been the sector most resilient to efforts to reduce CO2 emissions 
due to its strong dependence on fossil energy sources. Currently, the sector is responsible for 
about a quarter of EU CO2 emissions and also contributes significantly to reduced air quality 
and related health problems, particularly in urban areas. While energy and transport efficiency 
as well as effective  transport  demand  management can all contribute to reducing emissions, 
the  ultimate  solution  to  near  full  decarbonisation  of  transport  is  the  substitution  of  fossil 
sources by CO2-free alternative fuels for transport. 

Such a vision is guided less by idealistic ambition than practical as well as moral imperatives: 

(1) 

(2) 

Oil,  the  main  energy  source  for  transport  overall,  supplying  nearly  100%  of  road 
transport  fuels,  is  expected,  with  present  knowledge,  to  reach  depletion  by  2050. 
Substitution of oil therefore needs to start as soon as possible and increase rapidly to 
compensate for declining oil production, expected to reach its peak within this decade. 
Climate  protection  and  security  of  energy  supply  objectives  would  therefore  both 
benefit from building up CO2-free and largely oil-free energy supply to transport with 
a time horizon of 205044. 

By  2030,  the  global  car  fleet  is  predicted  to  grow  from  800  million  to  1.6  billion 
vehicles and to 2.5 billion by 2050. This will be accompanied by an increasing scarcity 
and cost of energy resources. These trends will have to be addressed by a step change 
in technology to ensure the sustainability of mobility in the long-term45.  

As  the  EU  progressively  decarbonises  the  transport  sector,  it  is  inevitable  the  sector  must 
directly  consume  less  fossil  energy  since  it  is  unlikely  ever  to  be  viable  to  capture  CO2 
emissions on vehicles.  

order  to  upgrade  heavier  fractions  into  lighter  products,  such  as  diesel,  naphta  and  kerosene.  It  also 
includes butanes and gasoline. 
Report of the European Commission Expert Group on Future Transport Fuels, forthcoming. 
Communication on a European strategy on clean and energy efficient vehicles. 

44 
45 

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20 

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While  the  oil  industry  does  not  foresee  the  end  of  oil  as  a  major  energy  source  by  2050,  a 
number  of  its  companies  have  already  made  significant  investments  to  move  away  from 
dependence  on  oil  and  offer  some  examples  of  how  some  of  the  actors  present  in  the  EU 
refining market are looking at the longer-term. 

4. 

IMPACTS OF FUTURE DEMAND DEVELOPMENTS ON THE REFINING INDUSTRY BY 2030 

4.1. 

Demand projections according to implemented and adopted policies 

This  chapter  provides  a  quantitative  assessment  of  the  medium-term  impacts  of  expected 
demand developments in EU petroleum products on the EU refining industry. 

It presents the results of running the PRIMES 2009 Baseline [business as usual] and PRIMES 
2009  Reference  [policy]  scenario  petroleum  product  demand  projections  on  the  OURSE 
refining  module  of  the  POLES  energy  model46  in  order  to  estimate  the  impacts  of  evolving 
demand in terms of: 

1. Capacity requirements and capital investment requirements for additional process 
capacity or upgrade of existing capacity; 

2. Production levels; 

3. Levels of CO2 emissions; 

4. EU import and export levels of petroleum products. 

PRIMES projections were also run separately in the CONCAWE refining model47, and results 
have also been reported below, for comparison with OURSE outputs.  

The  PRIMES  2009  Baseline  demand  projections  result  from  developments  in  the  assumed 
absence of new policies beyond those implemented by April 2009. It is not a forecast of likely 
developments, given that policies will need to develop. Therefore, there is no assumption in 
the Baseline that national/overall green-house gas (GHG) or renewable energy sources (RES) 
targets are achieved, nor of non-ETS (EU Emission Trading System) targets; CO2 emissions 
and RES shares are modelling results. 

In contrast, the PRIMES Reference scenario reveals the effects of agreed policies, including 
the achievement of legally binding targets on 20% RES and 20% GHG reduction for 2020. 

More  details  on  both  the  PRIMES  2009  Baseline  and  Reference  scenarios  can  be  found  in 
annex 3. 

The  impacts  of  the  PRIMES  demand  projections  are  reported  with  a  variation  on  the 
assumptions  of  the  refining  model  with  regard  to  future  marine  sulphur  fuel  specifications 
which  are  expected  to  be  transposed  into  EU  regulation.  The  impacts  of  such  changes  are 
reported separately due to the important investments that they will require by the EU refining 

46 

The  POLES  (Prospective  Outlook  for  the  Long-term  Energy  System)  model  simulates  the  energy 
demand  and  supply  for  32  countries  and  18  world  regions.  Further  details  on  the  OURSE  refining 
module of POLES can be found in annex. 

47           CONCAWE is the oil companies' European association for environment, health and safety in refining 
and distribution. The CONCAWE EU refining model simulates the EU (incl. Switzerland and Norway) 
refining  system.  More  information  on  the  model  can  be  found  on  the  internet  site  of  the  association 
(www.concawe.be).  

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21 

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industry if it decides to produce shipping fuel that meets the new specifications. Specifically, 
the variations in fuel specification changes that are modelled here are as follows: 

Case A: assumes a change in maximum permitted sulphur content in marine fuel for Emission 
Controlled  Areas  (ECAs)  in  the  EU  (the  Baltic  Sea  and  the  North  Sea  &  English  Channel) 
from 1.5% to 1% by 2010 and then down to 0.1% by 2015; and for the rest of the world: from 
4.5% to 3.5% in 2012 and then down to 0.5% from 202048. 

Case  B:  assumes  no  changes  in  maximum  permitted  sulphur  content  in  marine  fuel  beyond 
2012, i.e: ECAs remain at 1% and the rest of the world remains at 3.5%. 

Note  that  in  comparing  a  case  including  future  IMO  changes  to  one  excluding  them,  in  the 
latter case the changes to 1% and 3.5% respectively for the ECAs and the rest of the world 
have been taken for granted. As was explained previously in this document, this is because it 
is  generally  regarded  that  such  changes  will  not  pose  significant  problems  for  refiners  – 
blends can simply be modified to redistribute the higher sulphur components - while the real 
challenge  will  be  the  changes  to  0.1%  sulphur  content  and  0.5%  respectively  for  the  ECAs 
and the rest of the world, as these will likely require the conversion of bunker fuels to diesel49. 
This will require investment in desulphurisation or conversion capacities. 

The context for the impacts on the EU refining industry which are reported below in terms of 
key additional outputs from the OURSE model, is as follows:  

Production  of  petroleum  products:  the  production  levels  of  EU  refineries  during  the 
period 2005 to 2030 is projected to fall by 14%, similar to the projected fall in demand 
in the PRIMES Reference scenario over that period50; 

Trade  flows:  it  is  expected  that  Russia  will  have  sufficient  refinery  capacities  in 
middle  distillates  during  the  projection  period  to  continue  to  supply  the  EU,  while 
North-America will not continue to absorb the excess gasoline that the EU is projected 
to  produce,  such  that  new  markets  will  have  to  be  found.  According  to  the  OURSE 
model, by 2030, the EU net exports of gasoline will total 19.4 mtoe, equivalent to 18% 
of EU gasoline production for that year while EU net imports of gasoil/diesel will be 
37.7  mtoe,  equivalent  to  15%  of  EU  diesel/gasoil  demand  in  2030.  In  comparison, 
OURSE numbers for 2005 show that the EU net exports of gasoline amounted to 32.4 
mtoe,  equivalent  to  21.5%  of  its  gasoline  production  in  2005,  and  gasoil/diesel  net 
imports were equivalent to 28.2 mtoe, amounting to 9.7% of EU gasoil/diesel demand 
in that year51. In short therefore, the OURSE model projects resultant trade flows for 
the economically optimal capacity required to satisfy the PRIMES reference demand 
which amount to falling gasoline exports and increasing gasoil/diesel imports by 2030 
compared to 2005. 

The CONCAWE EU refining model makes the same assumptions as OURSE with regard to the timing 
and nature of the fuel specification changes in the ECAS, while for the rest of the world it assumes that 
the change from 4.5% to 3.5% already occurs in 2010.   
Current technology cannot achieve reductions in the sulphur content of residues to 0.1% unless a very 
low sulphur feed is used. If it was possible, it is questionable whether refiners would not rather prefer to 
focus instead on converting residual fuel to lighter, more valuable fuels, and decide to stop supplying 
the bunker market altogether. 

50         The CONCAWE model supply growth projections reveal an 11% drop in the 2005-2030 period.  
51  

The CONCAWE European refining model is run with fixed imports and exports outside the EU, and 
therefore keeps the trade situation constant over time. The sensitivity of the model to trade flows was 
however tested by changing the assumptions made with respect to the volumes of exports and imports 
to reflect the trade situation projected by the OURSE model as described above. 

(1) 

(2) 

48  

49 

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A key assumption of the OURSE model is with regard to the evolution of the EU crude diet. 
Globally, it assumes that by 2030, the API degree of conventional crude oil will have slowly 
decreased while sulphur content should increase slightly. However, it is expected that this will 
be  balanced  by  an  increasing  share  of  condensates  used  in  refinery  production  and  the 
availability  of  upgraded  crude  oil  from  extra-heavy  oil.  In  the  case  of  the  EU,  the  OURSE 
model assumes relative stability between 2005 and 2030, both in terms of the API degree and 
sulphur  content  of  refineries  supply,  as  along  with  an  increasing  share  of  condensates,  the 
assumption  is  included  of  an  expected  doubling  of  the  share  of  high  medium  distillate 
yielding crudes52 . 

Note  in  addition  that  the  OURSE  model  treats  the  EU27,  Switzerland,  Norway  and  Turkey 
together as forming the region of Europe, broken down into two zones: Z3 (Northern Europe) 
and  Z4  (Southern  Europe).  Impacts  are  therefore  reported  for  the  EU27  +  these  three 
countries.  While  it  cannot  be  easily  estimated  what  amount  of  the  investments  and  CO2 
emissions  are  EU27  specific,  it  is  useful  to  note  that  IFP  simulate  EU27  demand  into  the 
OURSE  model  by  using  topping  unit53  capacity  proportions.  By  that  measure,  Norway  and 
Switzerland represent 4% of Z3 capacity and Turkey, 12.5% of Z4 capacity. 

EU  petroleum  products  demand  projections,  PRIMES  2009  Baseline  and  Reference 
scenarios compared 

105

100

95

90

85

80

75

70

Light distillates REF

Light distillates BL

Middle distillates REF

Middle distillates BL

Heavy distillates REF

Heavy distillates BL

Total demand REF

Total demand BL

2005

2010

2015

2020

2025

2030

As the chart above reveals, whether business as usual or policy targets beyond April 2009 are 
assumed makes little differences in terms of the demand projections in petroleum products for 
the EU. The general trends in both cases can be summarised as follows: 

(1) 

(2) 

A general fall in the level of consumption of petroleum products; 

The  continued  gradual  erosion  of  demand  for  high  sulphur  residual  inland  fuel  and 
marine bunkers (which make up heavy distillates); 

52          The CONCAWE model assumes no change in crude mix over time. 
53 

Topping refining is the simplest configuration of refining, and a part of the distillation process. It thus 
involves no treating or conversion.  

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23 

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(3) 

(4) 

An  initial  increase  in  demand  for  middle  distillates  (including  gasoil,  heating  oil, 
kerosene and jet fuel) followed by an eventual and overall fall, mainly resulting from a 
decrease in road diesel demand due to regulation to restrict CO2 emissions from cars 
becoming effective54 as the car parc is gradually renewed and due also to the spill over 
effects  from  more  efficient  car  engines  to  those  of  trucks  (truck  diesel  consumption 
stabilises between 2020 and 2030);  

A  continued  fall  in  the  demand  for  gasoline  (included  in  light  distillates,  along  with 
naphta).  Note  that  the  PRIMES  demand  projections  do  not  assume  a  change  in  the 
current taxation regime in the EU, which differentiates between diesel and gasoline in 
favour of the former. 

It  is  important  to  note  that  in  both  scenarios,  the  proportion  of  middle  distillates  in  total 
demand  increases  quite  significantly  between  2005  and  2010,  after  which  it  remains  fairly 
stable.  

PRIMES Reference scenario EU demand projections split by type of product 

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

19%

52%

16%

16%

15%

16%

16%

55%

56%

57%

57%

56%

29%

29%

28%

28%

28%

28%

2005

2010

2015

2020

2025

2030

Light distillates

Middle distillates

Heavy distillates 

4.2. 

The impact of demand projections on the EU refining industry 

4.2.1. 

Impacts in terms of refining investments 

According  to  the  OURSE  model,  the  impacts  of  the  Reference  scenario  in  terms  of  the 
investments  required  to  upgrade  EU+3  refining  capacities  amount  to  17.8  billion  Euros 
between 2005 and 2030, of which 3.3 billion Euros account for IMO changes55.   

54 

55  

The  CO2  from  cars  regulations  included  in  the  PRIMES  Baseline  and  Reference  scenarios  require 
strong reductions in the average fuel consumption of new cars. Binding targets are 130g/km by 2010 
and 115g/km by 2020. (it should be noted that the Regulation contains a provisional goal of 95g/km for 
2020) 
Note  that  the  differences  between  demand  projections  under  the  Baseline  scenario  and  the  Reference 
scenario are not significant enough to make any notable difference in terms of investments according to 
the OURSE model outputs. 

EN 

24 

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This results primarily from investments in extra gasoil hydrodesulfurisation units which will 
be in short supply on the basis of both the Baseline and Reference Scenarios projections. The 
chart below shows the volumes that will be needed to meet demand in the Reference scenario, 
though  there  is  little  difference  between  the  two  scenarios  (Baseline  demand  will  require 
slightly more investments in all of the same types of units, excepting cokers56). Note that the 
new IMO regulations will require 14.3 million/t year of extra capacity by 2030 (the difference 
between case A and case B in the chart below), mainly in terms of extra hydrocraking57 units 
(amounting  to  6.6  million  t/year),  hydrodesulphurisation  of  residuals  (amounting  to  5.4 
million t/year) and hydrotreating of vacuum gasoil58 (4.2 million t/year). 

Thus, the levels of investments required in order to supply initially rising (but over the whole 
period,  falling)  levels  of  middle  distillates  is  quite  considerable,  and  even  with  such 
investments, imports are projected to rise further. 

One variation that has been undertaken on the OURSE model runs of the PRIMES Reference 
demand projections is with regard to crude oil supply projections. As was highlighted above, 
the  OURSE  model  projections  assume  a  balanced  crude  diet  between  2005  and  2030  in 
Europe, which along with an increasing share of condensates relies on a doubling of the share 
of high medium distillate yielding crudes. Simply keeping the share of such crudes constant 
during  that  period  (with  the  consequence  of  an  important  increase  in  the  overall  sulphur 
content) in the OURSE model however results in total investments between 2005 and 2030 of 
29.7 billion Euros of which 9.3 billion Euros alone account for IMO changes.  

Running the PRIMES Reference scenario projections on the Concawe model  while keeping 
trade levels between 2005 and 2030 constant would require 29.2 billion Euros of investments 
in  that  period,  of  which  13.3  billion  Euros  would  have  to  be  spent  due  to  the  new  IMO 
changes. The same demand projections combined with an augmentation in the importation of 
gasoil/diesel between 2005 and 2020 from 20 Mt/year to 40 Mt/year (and staying at that level 
every  year  thereafter  to  2030)  will  however  require  total  investments  of  25.8  billion  Euros 
between 2005 and 2030, of which IMO changes alone amount to 11.7 billion Euros.  

Concawe  estimates  that  the  amount  of  investments  that  the  refining  industry  in  Europe  has 
already committed to spending (or what it calls firm projects) between 2010 and 2020 is of 
the order of 13.3 billion Euros.  

Note  in  addition  that  according  to  the  Concawe  model  results,  cumulative  refining 
investments between 2005-2020 are higher than for 2005-2030, a reflection of falling demand 
in  petroleum  products  according  to  the  PRIMES  demand  projections.  This  highlights  a 
particular dilemma faced by refiners of investing early in capacity that will only be partially 
utilised at a later point in time in the non too-distant future.  

56 

57 

58 

Delayed coking units are a type of deep conversion unit, which are the most sophisticated refining units. 
Cokers crack residual oil hydrocarbon molecules into coker gas oil and petroleum coke.  
The process whereby hydrocarbon molecules of petroleum are mainly broken into jet fuel and diesel oil 
components by the addition of hydrogen under high pressure in the presence of a catalyst 
Hydrotreating  of  vacuum  gasoil  is  a  process  that  removes  sulfur  and  nitrogen  from  vacuum  gasoil, 
which is the product recovered from vacuum distillation.  

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OURSE model investments in refining capacity in EU+3, 2005-2030, on the basis of the 
Reference demand projections, split by type of unit 

r
a
e
y
/
t
n
o

i
l
l
i

M

140

120

100

80

60

40

20

0

3.7
4.2
5.3
5.4
6.6

83.6

1.5

5.1

87.9

Other

HDT vacuum gas oil

Reforming unit and Isom.

HDS residuals

Hydrocraking

HDS gas oil

Coker (CKR)

11.6

Case A

11.6

Case B

4.2.2.  Utilisation of refining units 

According to OURSE model results, in terms of changes in refining capacity from 2005 levels 
by 2030, whether new IMO regulations are assumed or not, similar reductions in the use of 
simple refining capacity can be expected to occur, while similar increases in the use of cokers 
and  hydrodesulphurisation  units  should  result.  In  addition,  assuming  IMO  changes  will 
require  significant  increase  in  the  use  of  residual  hydrodesulphurisation  and  some  22% 
increase  in  the  use  of  hydrocracking  units.  Note  again  that  there  is  very  little  difference 
between  the  PRIMES  Baseline  and  Reference  cases  in  terms  of  the  demand  projections  in 
petroleum  products  for  the  EU  as  there  is  little  difference  between  the  two  in  terms  of  the 
demand projections in petroleum products for the EU. 

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26 

   EN 

 
 
 
Necessary  changes  in  refining  capacity  use  in  EU+3,  2005-2030,  on  the  basis  of  the 
reference demand projections 

80%

60%

40%

20%

0%

-20%

-40%

53%

53%

48%

51%

22%

-16%

-32%

-13%

-14%

-8%

-32%

Topping

Cat. Reformer

FCC

Coker

HDS gas oil

HCK 78% conv

HDS residuals

85%

-24%

Case A Case B

4.2.3.  CO2 emissions  

Whether  IMO  changes  are  assumed  or  not  in  the  OURSE  model  makes  little  difference  in 
terms of CO2 emissions from EU+3 refineries by 2030, which are projected to emit around 
100 million tonnes of CO2. This compares to 118.5 million tonnes of CO2 in 200559, the fall 
in  emissions  resulting  from  falling  production  of  petroleum  products.  Note  however  that  in 
both  cases,  a  growing  proportion  of  the  CO2  emissions  will  come  from  the  needs  for 
hydrogen  in  refineries  (hydrocracking  units  uses  hydrogen  to  upgrade  heavier  fractions  into 
lighter  products  while  hydrodesulphurisation  units  use  hydrogen  to  chemically  remove  the 
sulphur),  such  that  by  2030,  20%  of  all  CO2  emissions  from  EU  refineries  will  come  from 
hydrogen production, compared to only 14% in 2005. Specifically, CO2 emissions due to the 
IMO  changes  amount  to  3.3  million  tonnes  of  CO2  in  the  reference  case,  essentially  as  a 
result of the extra emissions from hydrogen use. 

Changing the crude supply assumptions towards an increase in the sulphur content of the EU 
crude diet (by keeping the proportion of high middle distillate yielding crudes, as explained 
above) would however result in a level of CO2 emissions of 110.3 million tonnes in 2030, 5.6 
million tonnes as a direct result of new IMO changes. 

In  contrast,  the  Concawe  refining  model  results  reveal  that  in  spite  of  declining  market 
demand for fossil fuels, processing intensity in refining increases as a result of more stringent 
product specifications, particularly in the case including IMO changes, and consequently that 
refinery CO2 emissions will increase somewhat between 2005 and 2030, by around 6% (and 
increasing by 12% between 2005 and 2020).   

59 

IFP estimations of EU refineries CO2 emissions. In comparison to 118.5 million tonnes of CO2 emitted 
in 2005. Note that this does not include emissions related to petrochemical activities. 

EN 

27 

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OURSE  model  CO2  emissions  of  EU  refineries  by  2030  in  EU+3,  on  the  basis  of  the 
Reference demand projections 

s
n
o
t

f
o
s
n
o

i
l
l
i

M

120

100

80

60

40

20

0

23.4

77.3

19.8

78.0

Case A

Case B

Processing units Hydrogen production

4.2.4. 

Summary: impact of demand projections on the EU refining industry 

EU  refining  capacity  upgrading  is  expected  to  lead  to  significant  reductions  in  exports  of 
(excess supply  of) gasoline by 2030, while it is expected that the import dependence of the 
EU in gasoil/diesel will continue to increase by 2030.  

Depending on assumptions on the development of the crude diet in Europe between 2005 and 
2030 and taking into account adopted and implemented EU policies, investments required to 
upgrade European refining capacities in that period could amount to between 17.8 and 29.3 
billion  Euros,  of  which  between  3.3  and  11.7  billion  Euros  alone  will  account  for  future 
marine sulphur fuel specification changes to be transposed into EU regulation by the end of 
2010. These figures result from a scenario of increasing import dependence in gasoil/diesel.  

It is estimated that the amount of investments that the refining industry in Europe has already 
committed to spending (in what it calls firm projects) between 2010 and 2020 is of the order 
of 13.3 billion Euros.  

In  spite  of  projections  of  declining  demand  for  fossil  fuels,  processing  intensity  in  refining 
will  increase  as  a  result  of  more  stringent  product  specifications,  in  particular  as  a  result  of 
new  IMO  changes.  One  possible  consequence  is  that  refinery  CO2  emissions  will  increase 
between  2005  and  2030,  by  around  6%  (and  increasing  by  12%  between  2005  and  2020), 
mainly as a direct result of the needs for hydrogen in refinery units geared towards producing 
higher proportions of new IMO compliant fuel. 

Significant  falls  in  the  projected  EU  demand  for  transport  gasoline  by  2030  according  to 
PRIMES (of 20.7% in the Reference scenario) point to the need for gasoline-focussed refinery 
plant  restructuration,  with  necessary  capacity  reductions  by  up  to  a  third,  depending  on  the 
type of unit.  

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1. 

ANNEX 1: REFINING AND APPLICATIONS OF REFINING PRODUCTS 

1.1 

Introduction to refining 

An  oil  refinery  represents  one  link  in  the  chain  of  an  integrated  business  that  provides  oil 
products  to  Europe’s  consumers.  From  exploration  and  production  through  to  crude  oil 
trading and refining to distribution, finished products trading and sales to end-consumers. 

The  role  of  refineries  in  the  supply  chain  of  the  petroleum  industry  is  to  process  crude  oils 
into  the  finished  products  that  are  needed  by  the  market.  Refineries  can  use  a  variety  of 
processes and can have very different configurations. 

Essentially,  refining  breaks  crude  oil  down  into  its  various  components,  which  are  then 
selectively reconfigured into  new products such  as  fuels and lubricants  for automotive, ship 
and  aircraft  engines.  Refining  by-products  can  then  be  used  in  petrochemical  processes  to 
form materials such as plastics and foams. 

Crude oil can be used in many different ways because it contains a broad mix of hydrocarbons 
(i.e.  molecules  made  of  hydrogen  and  carbon  atoms  which  range  from  very  light  to  very 
heavy)  of  varying  molecular  complexity:  different  masses,  forms  and  lengths.  Such  various 
structures mean differing properties and thereby uses. These hydrocarbons must be separated 
and refined prior to commercial use. 

1.2. 

Refined products 

Refined  products  are  commonly  split  into  light,  middle  and  heavy  distillates  and  specialty 
products. 

Light  distillates  include  gasoline,  which  is  mainly  used  as  a  motor  fuel,  LPG  (liquid 
petroleum  gas)  which  is  commonly  used  as  a  fuel  in  heating  appliances  and  vehicles,  and 
naphta, used as feedstock in the production of petrochemicals such as plastics and fibres. 

Middle distillates include gasoil, diesel, kerosene and aviation/ jet fuel. Gasoil is mainly used 
in  domestic  heating,  while  diesel  is  used  as  a  motor  fuel  and  also  as  a  fuel  in  agricultural 
vehicles,  small  boats  and  trains.  Jet  fuel  and  kerosene  are  used  to  power  airplanes  and 
kerosene is also sometimes used in domestic heating. 

Heavy distillates are composed of bunker fuels for large ship engines and heavy fuel oil for 
industrial installations such as power stations and boilers. 

Specialty products include bitumen (used to make road asphalt and roofing materials), waxes 
(including polishes, candles, food paper), lubricants and greases for automotive and industrial 
applications,  coke  for  specialty  applications  like  electrodes  and  hydrocarbon  solvents, 
primarily used in specialty industrial applications. 

Most refineries are known as 'fuels refineries' and usually produce a mix of the main products, 
which  are  diesel,  gasoline,  heating  gasoil,  jet  fuel  and  heavy  gasoil  as  well  as  LPG.  Other 
refineries, known as 'specialty refineries', specialise in one or a combination of the specialty 
products above. 

1.3. 

Refinery processes 

The  processes  used  by  refineries  can  be  classified  into  three  categories:  separation,  treating 
and conversion. 

EN 

29 

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1.3.1. 

Separation 

The  first  process  of  any  refinery  is  the  separation  or  fractionation  of  crude  into  different 
fractions by distillation, known as atmospheric distillation. 

Separation  is  achieved  by  raising  temperature  of  the  input  crude  to  circa  360°C.  This 
vaporises  individual  fractions  of  the  crude  feed  which  then  condense  and  separate  out 
according to the varying boiling points and densities of petroleum products. Lighter fractions 
such as LPG, naphta and kerosene have lower boiling points, lower carbon content and higher 
hydrogen content than heavier factions such as vacuum gasoil and vacuum residues.  

This  process  is  known  as  simple  distillation,  also  referred  to  as  topping  or  hydroskimming 
when done in the presence of hydrogen. The use of a vacuum enables the products to vaporise 
at lower temperatures, which is known as vacuum distillation.  

1.3.2.  Treating 

Treating  improves  the  quality  of  petroleum  fractions  distilled  in  order  to  meet  the 
specifications of finished products. Hydrotreating processes use hydrogen (a by-product of the 
reforming  process)  and  catalysts  to  remove  sulphur  and  other  contaminants  such  as  salts, 
nickel,  vanadium  and  nitrogen  oxides.  Examples  of  hydrotreating  processes  include 
hydrogenating, hydrofining and hydrodesulphurisation.  

1.3.3.  Conversion 

Cracking,  visbreaking  and  coking  processes  break  down  (convert)  large,  less  valuable, 
hydrocarbon molecules into smaller, more valuable, lighter ones.  

In  a  cracking  refinery,  atmospheric  residue  (an  output  from  distillation)  is  further  distilled 
under  vacuum  conditions  to  recover  vacuum  gasoil  (VGO).  A  vacuum  residue  also  results 
from vacuum distillation. VGO is then fed into a cracking unit that converts part of it into a 
mix  of  hydrocarbons  that  boil  in  the  atmospheric  distillation  range.  The  most  common 
crackers are fluid catalytic crackers (FCCs) and hydrocrackers. 

Conversion refineries such as FCCs and hydrocrackers usually contain all the processing units 
of  a  hydroskimming  refinery  to  which  a  number  of  conversion  units  are  added.  Conversion 
refineries  would  typically  require  more  energy  per  unit  of  crude  intake  compared  to 
hydroskimming  refineries.  They  would  therefore  also  generate  more  Green  House  Gases 
(GHG) per unit of crude oil intake. 

Deep  conversion  units  are  the  most  sophisticated  types  of  refineries.  They  convert  vacuum 
residue into lighter products. Such refineries are becoming more and more the norm, with the 
increasing  demand  for  lighter,  cleaner  products  and  the  rapidly  declining  use  of  heavy 
residual  fuels.  Deep  conversion  refineries  are  even  more  energy  intensive  than  conversion 
units and as a consequence generate more GHG emissions per unit of crude oil intake. 

1.4. 

Types of refinery units 

The  topping  unit  is  the  simplest  configuration,  with  no  conversion  or  treating.  It  is  able  to 
produce a number of products suitable for direct use in the end-market such as LPG, kerosene 
(which  can  be  used  directly  as  a  heating  fuel  or  can  be  upgraded  to  jet  fuel)  and  heating 
gasoil, if produced from very low sulphur crudes. However, no crude oil can produce gasoil 
that meets current EU diesel quality specifications without desulphurisation, therefore topping 
refineries  cannot  produce  diesel  for  the  EU  market.  Topping  also  produces  naphta,  fuel  gas 

EN 

30 

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(which  is  used  as  a  fuel  for  the  refinery)  and  residue.  The  atmospheric  residue  is  a  fuel  oil 
with a quality that varies according to the quality of the crude processed. 

Hydroskimming units upgrade naphta to gasoline and gasoil to diesel and heating oil. Such 
refineries  are  equipped  with  astmospheric  distillation,  naphta  reforming  and  the  necessary 
treating processes. Note that hydroskimming refineries must normally produce some gasoline 
in  order  to  have  the  hydrogen  needed  to  produce  diesel,  which  limits  the  possibilities  to 
optimise gasoline and diesel production independently. These units generally do not contain 
catalytic  conversion  processes  and  therefore  their  product  distribution  reflects  closely  the 
composition of the crude oil processed. 

Hydrotreating  units  use  hydrogen  (a  by-product  of  the  reforming  process)  and  catalysts  to 
remove sulphur and other contaminants such as salts, nickel, vanadium and nitrogen oxides. 
and 
Examples  of  hydrotreating  processes 
hydrodesulphurisation.  

include  hydrogenating,  hydrofining 

Isomerisation  and  reforming  units  are  used  to  rearrange  the  structure  of  petroleum 
molecules  to  produce  higher-value  molecules  of  a  similar  size.  These  new  molecules  could 
have a higher octane number than the original ones and are therefore a more valuable gasoline 
blending  component60.  For  example,  catalytic  reforming  units  are  used  to  convert  low 
octane  petroleum  refinery  naphtha  into  high-octane  liquid  products  called  reformates  which 
are components of high-octane gasoline.  

A  fluid  catalytic  cracker  (FCC)  uses  catalysts  and  high  temperature  to  crack/break  down 
vacuum  gasoil  or  residue  into  mainly  gasoline  and  a  small  volume  of  (poor  quality)  gasoil. 
The  proportion  of  gasoline  and  gasoil  produced  by  an  FCC  refinery  is  relatively  fixed.  The 
ability to change yields and reduce gasoline production is limited by a number of constraints. 
FCC  units  were  the  main  choice  of  European  refineries  in  the  1970s  and  1980s  when  there 
was a strong growth in demand for gasoline.  

A  hydrocracker  uses  catalysts,  hydrogen,  high  pressure  and  high  temperature  to  crack 
vacuum gasoil or residue into mainly (good quality) gasoil and jet fuel. Note that hydrogen 
produced from reforming is insufficient to feed a hydrocracker, such that a hydrocracking unit 
needs  an  additional  dedicated  hydrogen  supply.  Hydrocracking  refineries  can  be  designed 
with a greater ability to vary the relative yields of diesel and gasoline, resulting in increased 
refinery flexibility. In the 1990s, when EU demand began to switch from gasoline to diesel, 
gradually more investment went into hydrocracking units, although catalytic crackers are still 
the dominant configuration in Europe. 

A  coker  unit  converts  vacuum  residue  or  residue  into  low  molecular  weight  hydrocarbon 
gases,  naphtha,  light  and  heavy  gas  oils,  and  petroleum  coke.  The  process  thermally  cracks 
the long chain hydrocarbon molecules in the residual oil feed into shorter chain molecules. 

Examples of deep conversion units are residue FCCs, which is an FCC unit designed to crack 
residue  as  well  as  VGO;  residue  hydrocracking,  which  cracks  residue  rather  than  VGO  and 
delayed  coking  which  is  a  very  high-severity  form  of  thermal  cracking.  Deep  conversion 
capacity accounts for less than 3.5% of crude distillation capacity. 

60 

The  octane  rating  of  gasoline  is  an  indicator  of  how  much  the  fuel  can  be  compressed  before  it 
spontaneously ignites. When gas ignites by compression rather than because of the spark from the spark 
plug, it causes 'knocking' in the engine, which can damage an engine. Lower-octane gasoline can handle 
the least amount of compression before igniting.  

EN 

31 

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1.5. 

Refinery yield 

The yield from a refinery will depend on the processes that it has and the type of crude oil that 
it processes. 

Once a refinery has been built with a certain configuration and designed for a certain type of 
crude,  there  is  little  it  can  do  to  change  its  yield  structure  significantly  without  major 
investment in new processes. 

Comparison of average yield of crude distillation and market demand 

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Residue 45%

Diesel/ 
gasoil 24%

Kerosene 7%

Naphta 21%

Fuel oil 18%

Diesel/ 
gasoil 33%

Jet/ Kerosene 11%

Naphta 
& gasoline 38%

Crude oil

Market demand

Source: Purvin & Gertz 

The average yield obtained from crude distillation does not match the proportion of products 
demanded  by  the  market.  To  rectify  this,  refiners  use  different  combinations  of  conversion 
and  treating  processes  to  produce  lighter  products  from  residue.  For  comparison,  a 
hydroskimming refinery designed to process North Sea Crude would achieve a fuel oil yield 
of approximately 33% of total finished products. An FCC refinery processing the same crude 
would  have  a  fuel  oil  yield  of  only  13%  of  finished  products  while  the  fuel  oil  yield  of  a 
hydrocracking  refinery  would  be  similar  to  that  of  an  FCC  refinery  with  the  additional 
advantage that a greater proportion of the yield would be made up of middle distillates and a 
smaller proportion of the yield would be gasoline.  

The  costs  of  building  FCC  and  hydrocracking  refineries  are  comparable  and  much  more 
expensive to build than hydroskimming refineries.  

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2. 

ANNEX 2: CHARACTERISTICS AND EVOLUTION OF THE EU REFINING SECTOR 

2.1. 

Description of the EU refining sector 

2.1.1.  Capacity 

In  May  2010  there  were  around  104  refineries  operating  in  the  European  Union.  The  EU's 
crude  refining  capacity  currently  represents  778  million  tonnes,  equivalent  to  18%  of  total 
global  capacity.  The  EU  is  the  second  largest  producer  of  petroleum  products  in  the  world 
after  the  United  States.  There  are  refineries  in  21  Member  States  with  the  exceptions  of 
Cyprus, Estonia, Latvia, Luxembourg, Malta, and Slovenia.  

Over half of the refining capacity in the EU is in North Western Europe (NWE), slightly more 
than a quarter in the Mediterranean region (MED) and the rest in Central and Eastern Europe 
(CEE)61.  These  regional  groupings  are  based  on  the  state  of  infrastructure  and  geographical 
accessibility to different crude streams and transportation routings. Usually, the crude intake 
in NWE is mainly a mix of North Sea crude, followed by Urals, which has a lower API62 and 
higher  sulphur  content.  Conversely,  in  Central  Europe,  refineries  are  often  located  on  the 
Druzhba pipeline, and the great majority of their intake is Urals crude. In the Mediterranean 
area,  the  larger  proportion  is  Arabian  Gulf,  which  is  again  heavier  than  Urals  crude,  with 
similar API but higher sulphur content, followed by Urals crude.  

EU refineries by region, by number and capacity 

REGION 

NUMBER OF 
REFINERIES 

CAPACITY 
MT/YEAR 

CAPACITY 
MBBL/DAY 

CAPACITY % 

North West Europe (NWE) 

Mediterranean (MED) 

Central and Eastern Europe 
(CEE) 

Total 

56 

31 

17 

104 

465 

212 

101 

778 

9.3 

4.2 

2 

15.5 

Source: European Commission. Note: capacity refers to crude processing capacity.  

60 

27 

13 

100 

61 

62 

NWE:  Austria,  Belgium,  Denmark,  France,  Germany,  Ireland,  Netherlands,  Sweden,  UK.  MED: 
Greece,  Italy,  Portugal,  Spain.  CEE:  Bulgaria,  Czech  Republic,  Finland,  Hungary,  Lithuania,  Poland, 
Romania, Slovakia. 
API expresses a crude's relative density, with the higher the API gravity, the lighter the crude. 

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EU refinery numbers and capacity, in million tonnes per year, by Member State  

Source: European Commission 
EU refinery numbers and capacity, by Member State  

Country 

Number of refineries 

Crude refining capacity 

Austria 

Belgium 

Bulgaria 

Czech Republic 

Denmark 

Finland 

France 

Germany 

Greece 

Hungary 

Ireland 

Italy 

Lithuania 

Netherlands 

Poland 

Portugal 

Romania 

Slovakia 

Spain 

Sweden 

1 

4 

1 

3 

2 

2 

12 

13 

4 

1 

1 

16 

1 

7 

2 

2 

6 

1 

9 

5 

United Kingdom 

11 

kt/Year 

bbl/day 

10,006,852 

200,000 

39,907,326 

797,600 

8,806,030 

176,000 

9,606,577 

192,000 

8,680,944 

173,500 

12,783,752 

255,500 

99,578,190 

1,990,200 

121,743,365 

2,433,200 

21,264,560 

425,000 

8,055,516 

161,000 

3,552,433 

71,000 

111,333,164 

2,225,600 

9,506,510 

190,000 

64,534,191 

1,289,800 

24,666,891 

493,000 

15,210,416 

304,000 

21,388,497 

427,525 

6,004,111 

120,000 

64,315,961 

1,282,500 

21,864,972 

437,000 

94,990,049 

1,898,500 

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34 

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Total EU 

104 

777,800,307 

15,542,925 

Source: European Commission 

EU capacity in the global context 

World crude processing capacity split, 2008 

Other
18%

US
21%

European Union
18%

South Korea
3%

Japan
5%

Indonesia
1%

India
3%

S. & C. America
7%

Middle East
9%

China
9%

Russian Federation
6%

Source: BP Statistical Review of World Energy 2009 

As the chart below providing world trends in crude processing capacity shows, in the last ten 
or so years, the proportions of refining capacity in mature markets such as the EU, the US and 
Japan  have  trended  downwards  while  emerging  economies  such  as  the  Middle  East,  China 
and India have progressively been building up capacity. 

World trends in crude processing capacity, 1998-2008 

35%

30%

25%

20%

15%

10%

5%

0%

US

Middle East

Russia

China

India

Japan

EU

Other

Other

US

EU

Middle East

China
Russia
Japan

India

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: BP Statistical Review of World Energy 2009 

2.1.2.  The players in the EU refining market 

Total  S.A.  has  the  greatest  refining  capacity,  and  together  with  two  other  International  Oil 
Companies (IOCs) (Shell and ExxonMobil), account for around half of total capacity in the 
NWE  region.  In  the  MED  region,  the  company  with  the  greatest  capacity  is  Eni,  while  the 
three companies with the greatest capacity - Eni, Repsol and ExxonMobil - account together 

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35 

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for over a third of capacity in that region. In the CEE region, the biggest player is PKN, with 
about  a  third  of  capacity.  PKN,  MOL  and  Neste  together  account  for  around  two  thirds  of 
total capacity in the CEE region. 

Overview of EU players active in refining crude oil 

Type of player
International Oil 
Companies (IOCs)

National Oil 
Companies (NOCs)

Description
Vertically-integrated with supply chain operations from 
exploration and production through to refining and 
retail marketing. 

Often began as state-owned/controlled companies 
with significant operations within their national 
borders, but some have undergone transformation to 
publicly quoted entities with a wide share ownership.  

Example
Shell, BP, ExxonMobil, Chevron, 
ConocoPhillips and Total 

PKN (Poland), MOL (Hungary), 
Eni (Italy), OMV (Austria), 
Rompetrol (Romania), KPC 
(Kuwait) and PDVSA 
(Venezuela)

Pure-Play Refiners  Specialise in refinery operations alone where they 

Ineos and Petroplus

refine crude oil for other market players.  Their 
business model involves an open market for 
wholesale products.

Refiner and 
Marketers

Niche Refineries

Refinery operations are integrated with retail fuel 
marketing.

Specialist refinery with specific processes such as 
bitumen plants. 

SARAS

Nynas

Source: Econ Pöyry AB 

2.1.3.  Refining margins 

The  refinery  margin  is  the  profitability  that  results  from  processing  a  barrel  of  crude  oil.  It 
reflects the difference between the market value of the combination of products produced by 
the  refinery  and  the  cost  of  buying  the  crude  at  market  price  as  well  as  the  operating  costs 
incurred in the refining process. 

Refining  margins  will  generally  rise  if  there  is  insufficient  capacity  to  cover  the  demand 
needs, and will fall if the reverse is true. In Europe in the 90's, years of underinvestment in 
capacity in combination with high and growing oil demand kept refining margins high.  

The charts below detail the trend in refining margins for simple hydroskimming refineries and 
complex cracking refineries for various crudes in NWE and the MED in recent years.  

Looking  at  refining  margins  displayed  in  the  next  chart  reveals  more  clearly  the  recent 
evolution  of  European  refining  margins.  While  a  depression  in  margins  can  clearly  be 
observed over the course of 2009, a pickup can also be seen at the end of the year, continuing 
into 2010.  

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Refining margins for simple and complex refiners in the EU, Jan 1995 – Feb 2010 

US $/bbl

15

10

5

0

-5

-10

janv-95

juil-95

janv-96

juil-96

janv-97

juil-97

janv-98

juil-98

janv-99

juil-99

janv-00

juil-00

janv-01

juil-01

janv-02

juil-02

janv-03

juil-03

janv-04

juil-04

janv-05

juil-05

janv-06

juil-06

janv-07

juil-07

janv-08

juil-08

janv-09

juil-09

janv-10

NWE Brent Cracking

MED ES sider cracking

MED Urals cracking

NWE Urals cracking

NWE Brent hydroskimming

MED ES sider hydroskimming

MED Urals hydroskimming

NWE Urals hydroskimming

Source: IEA 

Refining margins for simple and complex refiners Jan 2007 – Feb 2010 

US $/bbl

15

10

5

0

-5

-10

janv-07

Source: IEA 

mars-07

mai-07

juil-07

sept-07

nov-07

janv-08

mars-08

mai-08

juil-08

sept-08

nov-08

janv-09

mars-09

mai-09

juil-09

sept-09

nov-09

janv-10

NWE Brent Cracking

MED ES sider cracking

MED Urals cracking

NWE Urals cracking

NWE Brent hydroskimming

MED ES sider hydroskimming

MED Urals hydroskimming

NWE Urals hydroskimming

EN 

37 

   EN 

 
 
 
EU margins in the global context 

Refining  margins  for  complex  refiners  Jan  2007  –  Feb  2010,  comparison  of  world 
regions 

US $/bbl

16

14

12

10

8

6

4

2

0

-2

-4

-6

janv-07

mars-07

mai-07

juil-07

sept-07

nov-07

janv-08

mars-08

mai-08

juil-08

sept-08

nov-08

janv-09

mars-09

mai-09

juil-09

sept-09

nov-09

janv-10

NWE Brent Cracking

LLS cracking USA

Dubai hydrocracking (Singapore)

Dubai hydrocracking (China)

Source: IEA 

The chart above clearly shows that the crisis has impacted margins in all regions of the world. 
If average annual margins are compared, North-West Europe has even fared rather better than 
all other regions in comparison in the last three years (table below).  

Average annual margins (in $/bbl) 

YEAR 

2007 

2008 

2009 

NWE BRENT 

CRACKING 

LLS CRACKING 
USA 

DUBAI 
HYDROCRACKING 
(SINGAPORE) 

DUBAI 
HYDROCRACK
ING (CHINA) 

6.3 

5.2 

1.3 

4.6 

1.9 

-0.2 

3.6 

3.1 

-1.5 

3.1 

2.4 

-1.8 

Source: IEA 

Margins outlook 

In  its  January  Oil  Market  Report  the  IEA  explained  that  while  refining  margins  rebounded 
this  winter  due  to  a  drawdown  in  oil  product  inventories  and  recovering  demand,  the 
construction  of  refineries  over  the  past  two  years  and  a  massive  contraction  in  oil 
consumption  during  the  recession  have  led  to  a  glut  of  capacity  at  the  global  levels.  It  thus 
maintains a bearish short-term outlook for the industry.  

According  to  Wood  Mackenzie  consultancy,  expectations  in  the  EU  are  for  continued 
negative  simple  margins,  but  for  a  recovery  in  complex  margins  to  occur  already  in  2010. 
Wood  Mackenzie  project  NWE  Urals  cracking  margins63  to  reach  $3.45/bbl  in  2010 

63 

Given  the  increasing  relevance  of  Urals  crude  in  Europe  (and  falling  relevance  of  Brent  crude),  it  is 
more useful to look at Urals cracking margins going forward. 

EN 

38 

   EN 

 
 
                                                 
compared  to  $2.62/bbl  2009  and  $4.62/bbl  in  2008.  According  to  the  consultant,  margins 
should continue to rise slowly, reaching levels of $5.13/bbl in real (2010) terms by 2015. 

According  to  the  IFP,  complex  margins  from  $3.4/bbl  are  "perfectly  satisfactory  from  a 
refiner's  perspective"64.  On  this  basis,  should  Wood  Mackenzie  expectations  be  realised, 
complex refining in the EU should return to 'satisfactory' levels of returns before the end of 
the year. 

2.2. 

Role of the EU refining sector in the supply of petroleum products  

2.2.1.  Output of the EU refining sector 

EU refining sector production65 evolution, 1990-2008 

800

700

600

500

Mtoe

400

300

200

100

0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Refinery Gas

LPG

Motor Spirit

Kerosene & Jet fuel

Naphtha

Gas / Diesel Oil

Residual Fuel Oil

Other petroleum products

Source: Eurostat 

64 
65 

Panorama 2009 "A look at refining", IFP. 
EU refining production data shown here is equivalent to net transformation output of refineries, which 
excludes consumption in refineries. 

EN 

39 

   EN 

 
 
                                                 
EU refining sector production split, 1990-2008 

4.6%
2.7%

20.4%

32.0%

5.0%

6.3%

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

4.9%
2.6%

16.9%

5.4%

2.6%

15.7%

5.5%

2.9%

13.8%

34.0%

36.0%

39.4%

5.8%

6.3%

22.7%

23.0%

2.6%
3.6%

1990

2.8%
3.7%

1995

5.5%

6.5%

21.7%

3.0%
3.6%

2000

4.6%

6.8%

20.6%

2.5%
3.9%

2008

Other

Bitumen

Residual Fuel Oil

Gas / Diesel Oil

Naphtha

Kerosenes - Jet Fuels

Motor Spirit

LPG

Refinery Gas

Source: Eurostat 

Since 1990, EU refinery sector production has increased by 0.3% per year. In that time, fuel 
oil production was significantly reduced, while motor spirit (gasoline) production decreased 
by 4.2%. Gas/diesel oil production increased by 30.4% during that period, and it went from 
representing 32% of total production in 1990 to 39% by 2008. 

2.2.2.  Utilisation rates 

Utilisation rates, OECD Europe 

%

90
88
86
84
82
80
78
76
74
72
70
68

 Jan 08

 Mar 08

May 08

Jul 08

 Sep 08

 Nov 08

 Jan 09

 Mar 09

 May 09

 Jul 09

 Sep 09

 Nov 09

 Jan 10

 Mar 10

Source: IEA 

EN 

40 

   EN 

 
 
 
Utilisation rates, OECD Europe 

Year 

Average 
monthly rates 

of 

2008 

85.2 

2009 

78.7 

2010 (3 MONTHS) 

76.2 

Source: IEA 
The average utilisation rate66 in OECD Europe in 2009 amounted to 79%, compared to 85% 
the previous year. In the first three months of 2010, utilisation rates averaged 76%, showing a 
continuing downward trend. This needs to be put in the context of previous utilisation rates 
for the EU close to 90% as recently as 2005. 

EU utilisation rates in the global context 

Comparison of utilisation rates, different regions, 1998-2008 

95%

90%

85%

80%

75%

70%

65%

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

US

Middle East

China

Japan

European Union 

Source: BP Statistical Review of World Energy 2009 

In  comparison  to  a  selection  of  other  major  refining  nations,  the  chart  above  reveals  that 
utilisation  rates  in  the  EU  since  1998  have  generally  been  high  compared  to  the  rest  of  the 
world. US utilisation rates were more constant than the EU in the first part of the last decade, 
though  have  trended  downwards  in  the  latter  part.  Mature  markets  such  as  the  US,  EU  and 
Japan  have  registered  falls  in  utilisation  rates  in  the  more  recent  years  as  China's  has 
continued to increase, registering the highest utilisation rate in 2008, while in the Middle East, 
crude capacity utilisation has been relatively stable since 2006.  

66 

Crude throughput/production as a proportion of operable refining capacity. 

EN 

41 

   EN 

 
 
                                                 
2.2.3.  EU demand for petroleum products 

EU 27 Petroleum product demand evolution, 1990-2008 

700

600

500

400

Mtoe

300

200

100

0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

LPG

Naphta

Gasoline

Jet fuel & kerosene

Heating oil

Gas oil

Heavy fuel oil

Other

Maritime bunker

Source: Eurostat/Primes 

EU 27 Petroleum product demand mix, 1990-2008 

4.9%
4.5%

16.3%

17.7%

19.3%

5.5%

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

4.4%
4.3%

14.1%

4.7%
5.3%

10.1%

4.7%
6.6%

7.6%

4.6%

7.4%

6.4%

19.8%

23.8%

28.2%

31.0%

18.7%

16.8%

6.3%

8.0%

22.7%

21.9%

20.7%

5.5%
3.7%

1990

6.6%
3.9%

1995

6.7%
3.9%

2000

15.9%

8.5%

17.7%

6.6%
4.1%

2005

14.6%

9.4%

16.1%

6.3%
4.2%

2008

Other

Maritime bunker

Heavy fuel oil

Gas oil

Heating oil

Jet fuel & kerosene

Gasoline

Naphta

LPG

Source: Eurostat/Primes 

EU27  demand  in  petroleum  products  increased  relatively  steadily  until  2005,  after  which  it 
fell every year until 2008. This has been the result of opposing trends in key products, with, at 
one  extreme,  jet  fuel  and  kerosene  consumption  almost  doubling  during  the  period; 
consumption in gasoil registering steady and sustained growth; demand for naphta registering 

EN 

42 

   EN 

 
 
 
an initial increase and then a fall; sustained falls in demand for gasoline and heating oil, and 
quite significant falls in demand for heavy fuel oil. 

This has therefore meant if one looks at the evolution of the petroleum product demand mix in 
the  EU,  that  the  share  of  jet  fuel  and  kerosene  has  increased  between  1990  and  2008  from 
representing 5.5% to 9.4%; the share of gasoil from 17.7% to 31%; the share of gasoline from 
22.7% to 16.1% and the share of heavy fuel oil from 16.3% to 6.4%.  

Note  that  almost  two  thirds  of  the  total  demand  for  petroleum  products  comes  from  the 
transport sector (industry use makes up 25%, while household & services use is only 13%), 
and  therefore  that  the  evolution  of  the  use  of  transport  fuels  is  a  vital  element  for  the  EU 
refining industry.  

Gasoil  (diesel  use  in  the  transport  sector)  demand  represents  by  far  the  largest  single 
component  of  EU  demand  for  petroleum  products.  Gasoil  use  in  the  transport  sector 
(excluding bunkers, which are shown separately in the demand charts above) can be further 
broken  into  three  uses:  road,  rail  and  inland  navigation.  Road  diesel  represents  the  vast 
majority of gasoil demand (96% in 2008). 

Key  to  understanding  the  important  growth  of  gasoil  since  1990,  and  to  appreciating  the 
importance of this product to the EU consumer, is therefore an understanding of the evolution 
of  the  demand  for  road  diesel.  To  complete  the  picture,  the  evolution  of  the  demand  of 
gasoline  as  a  road  fuel  is  plotted  against  the  evolution  of  demand  for  road  diesel  in  the 
diagram below, in order to appreciate the relative evolution of these two key road fuels. 

EU 27 transport diesel and gasoline demand evolution 1990-2008 

Mt

200

180

160

140

120

100

80

2.2

2.0

1.8

1.6

1.4

1.2

1.0

0.8

0.6

o
i
t
a
r

e
n

i
l

o
s
a
G

/
l

e
s
e
D

i

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Gasoline

Diesel

Ratio

Source: Eurostat 

It  can  clearly  be  seen  that  the  evolution  in  diesel  demand  as  a  road  fuel  has  been  at  the 
expense of gasoline. 

EN 

43 

   EN 

 
 
 
One factor which has driven the demand for road diesel in the EU is the higher efficiency of 
diesel engines, which has meant that car consumers in the EU have tended to purchase diesel 
vehicles in increasing proportions, despite their higher initial price.  

Demand for road diesel in the EU has also been growing constantly partly as a result of a tax 
differential between diesel and unleaded gasoline for vehicle use which has long favoured the 
former against the latter.  
As an illustration, June 2010 figures67 show that while pre-tax consumer prices of premium 
unleaded  gasoline  are  lower  than  for  diesel  in  all  but  one  of  the  EU  27  Member  States 
(Malta),  higher taxes and duties on gasoline  means  that  the  price of  diesel  is cheaper  at  the 
pump in 26 of the 27 EU Member States (with the exception of the United Kingdom).  

Vehicle  diesel  and  unleaded  gasoline  tax  differential,  excluding  and  including  taxes, 
prices as at 14/06/2010 

Greece

Finland

Portugal

Italy

Denmark

Czech Republic

Spain

Sw eden

Hungary

Slovakia

Lithuania

Belgium

Cyprus

Poland

France

Ireland

Latvia

Germany

Romania

Luxembourg

Austria

United Kingdom

Netherlands

Slovenia
Bulgaria

Estonia

Malta

s
e
x
a
t

.
l
c
x
e
l
e
s
e
i
d
f
o
e
c
i
r
P

0.65

0.64

0.63

0.62

0.61

0.60

0.59

0.58

0.57

0.56

0.55

0.54

0.53

0.52

0.51

0.50

0.49

0.49

0.50

0.51

0.52

0.53

0.54

0.55

0.56

0.57

0.58

0.59

0.60

0.61

0.62

0.63

0.64

0.65

Price of Euro super 95 excl.taxes

67 

European Commission Oil Bulletin, 14th of June 2010. 

EN 

44 

   EN 

 
 
 
 
 
 
                                                 
s
e
x
a
t

.
l

c
n

i

l

i

e
s
e
d
f
o
e
c
i
r
P

1.50

1.40

1.30

1.20

1.10

1.00

0.90

0.90

United Kingdom

Sw eden

Ireland

Germany

Italy

Greece

Denmark

Czech Republic

Hungary

Slovenia

Austria

Spain

Estonia

Portugal

France

Slovakia

Finland

Belgium

Netherlands

Poland

Romania

Latvia

Bulgaria

Cyprus

Malta

Lithuania

Luxembourg

1.00

1.10

1.20

1.30

1.40

1.50

Price of Euro super 95 incl.taxes

Source: European Commission Oil Bulletin 

2.2.4. 

Imports and exports of petroleum products to/from the EU 

Evolution of EU net imports/ exports in key petroleum products, 2000-2008  

kt

30,000

25,000

20,000

15,000

10,000

5,000

0

-5,000

-10,000

-15,000

-20,000

-25,000

-30,000

-35,000

-40,000

-45,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

Gasoline

Gasoil and diesel

Kerosene & jet fuels

Naphta

Residual fuel oil

Source: Eurostat 

In the last few years, the two key trade petroleum products in the EU in terms of volume have 
been gasoline and gasoil/diesel (include heating oil), gasoil/diesel being the main petroleum 
product  imported  into  the  EU  while  gasoline  is  the  main  product  exported  from  the  EU. 
Looking  back  at  the  chart  showing  the  evolution  of  demand  in  diesel  and  gasoline  in 
transport, it is interesting to note that the general trend in net imports of gasoil/diesel has been 
towards increasing import dependence as the demand for diesel in transport has been growing 
which,  confirming  the  evolution  of  growth  in  demand  and  supply  of  gasoil/diesel  and 
gasoline, shows that the industry has not been able to meet the growing demand for diesel68.  

68 

One important thing to note with regard to the evolution of gasoil/diesel imports: 2007 net imports of 
gasoil/ diesel were significantly below the preceding year and constituted a significant break from the 

EN 

45 

   EN 

 
 
 
 
 
 
 
                                                 
The charts below provide some details of the countries from which the EU imports its middles 
distillates  (gasoil/diesel  and  kerosene/  jet  fuels)  and  to  where  the  EU  exports  gasoline.  The 
import dependence of Russia for gasoil/diesel and the export dependence of the United States 
for  gasoline  can  quite  clearly  be  seen.  In  the  case  of  kerosene/  jet  fuels,  the  import 
dependence  is  more  evenly  spread  out  though  the  reliance  on  Middle  Eastern  countries  is 
high. 

Volume breakdown of gasoil/ diesel imports into the EU, 2008 

Venezuela
2%

Belarus
4%

Russia
35%

Norway

5% Canada

5%

United States
16%

Other
33%

Source: Eurostat 

Volume breakdown of EU gasoline export destinations, 2008 

Lebanon
1%

Norw ay
2%

Ukraine
3%

United States
37%

Canada

3% Sw itzerland

4%
Libya
4%

Mexico
10%

Nigeria
10%

Other
26%

Source: Eurostat 

Volume breakdown of kerosene/jet fuel imports into the EU, 2008 

Other
37%

Bahrain
2%

Russia
3%

Libya
3% Venezuela

6%

Singapore
7%

United Arab 
Emirates
7%

Kuw ait
14%

India
9%

Saudi Arabia
12%

trend of increasing levels of net importation in the last few years. This was a one-off event, resulting 
from  quite  significant  falls  in  the  level  of  total  gasoil/  diesel  imports  into  the  EU  (while  exports 
remained relatively constant) due mainly to much lower gasoil/ diesel imports into Germany in 2007, 
resulting from reduced households consumption of heating oil that year. Germans purchased much of 
their  heating  oil  needs  for  2007  in  2006,  ahead  of  an  anticipated  VAT  increase  on  the  1st  of  January 
2007. 

EN 

46 

   EN 

 
 
 
 
                                                                                                                                                         
Source: Eurostat 

There are other important things to note in observing these figures denoting trade dependence: 

•  The  EU  was  also  quite  significantly  reliant  on  the  US  for  gasoil/diesel  imports  in  2008. 
However,  this  was  not  so  in  2007  (US  only  exported  5.4%  of  gasoil/  diesel),  while  EU 
dependence on Russia in 2007 was much more significant (47%); 

•  Judging from 2007 and 2008 data, the only country to which the EU exports a significant 
proportion of its gasoline supply is the US (In 2007, the EU exported 32% of its gasoline 
production  to  the  US;  the  next  country  was  Mexico,  to  which  it  exported  only  6%  of  its 
gasoline production); 

•  The  'other  'element  is  significant  for  all  products,  revealing  that  the  EU  trades  small 

proportions of petroleum products with a multitude of nations. 

EN 

47 

   EN 

 
3. 

ANNEX 3: DESCRIPTION OF SCENARIO ANALYSIS AND MODEL ASSUMPTIONS 

3.1. 

PRIMES demand projections 

3.1.1.  Description  of  main  assumptions  in  the  PRIMES  2009  Baseline  and  the  Reference 

scenario 

The  PRIMES  2009  Baseline  (BL)  demand  projections  result  from  projections  of 
developments  in  the  assumed  absence  of  new  policies  beyond  those  implemented  by  April 
2009.  It  is  not  a  forecast  of  likely  developments,  given  that  policies  will  need  to  develop. 
Therefore, there is no assumption in the BL that national/overall green-house gas (GHG) or 
renewable energy sources (RES) targets are achieved, nor of non-ETS (EU Emission Trading 
System) targets; CO2 emissions and RES shares are modelling results. 

The PRIMES Reference (REF) scenario reveals the effects of agreed policies, including the 
achievement of legally binding targets on 20% RES and 20% GHG reduction for 2020. 

Macroeconomic  projections  in  the  BL  and  the  REF  reflect  the  recent  economic  downturn, 
followed by sustained economic growth resuming after 2010, but the downturn is expected to 
have long lasting effects leading to a permanent loss in GDP (GDP level in 2030 is assumed 
to  end  up  10%  lower  than  before  the  crisis).  Average  annual  economic  growth  of  1.7%  per 
annum is assumed over the period 2005-2030 in both the BL and REF.  

Oil  prices  are  expected  to  reach  $88/barrel  in  2020  and  $106/barrel  in  2030,  expressed  in 
2008  prices,  in  both  the  BL  and  REF.  In  nominal  terms,  this  amounts  respectively  to 
$112/barrel in 2020 and $164/barrel in 2030, assuming 2% inflation per annum. 

ETS  carbon  prices  are  lower  in  the  REF  than  the  BL  due  to  the  achievement  of  the  RES 
targets and additional efficiency measures, which decrease electricity demand and emissions. 
Thus ETS carbon prices (in real terms, 2008 prices) in 2030 are 39 Euros per tonne of CO2 in 
the BL and 19 Euros per tonne of CO2 in the REF. 

Non-ETS carbon values in the REF are low due to relatively low energy demand (as a result 
of the  crisis), policy  measures (incl. for  cars) and the currently inexpensive opportunities in 
non-CO2 GHG abatement. Non-ETS carbon value in 2008 prices is 0 Euros per tonne of CO2 
in the BL and 5 Euros per tonne of CO2 in the REF in 2030. 

All policies implemented by April 2009 were included in the BL. This includes the effects of 
measures of the current Energy Efficiency Action Plan that have already been implemented, 
e.g.  the  five  Ecodesign  implementing  measures  adopted  by  April  2009.  The  recast  of  the 
Energy  Performance  of  Buildings  Directive  is  not  included  in  the  assumptions,  but 
implemented national measures on e.g. building codes are reflected.  

The BL also includes legislation to reduce CO2 emissions from new cars and transport fuels 
which was adopted in April 2009 along with the climate and energy package. The legislation 
sets  emission  performance  standards  for  new  passenger  cars  as  part  of  the  Community's 
integrated approach to reduce CO2 emissions from light-duty vehicles. It requires significant 
reductions in the average fuel consumption of new cars, with binding targets of 130g/km by 
2010 and 115g/km by 2020. This leads to a penetration of hybrids, equivalent to around 30% 
of  the  passenger  fleet  by  2030,  which  is  a  policy  outcome  in  PRIMES,  as  opposed  to  a 
constraint. 

Policies beyond April 2009 were also included in cases where there was very little uncertainty 
about  how  they  will  evolve.  Thus,  the  ETS  Directive  and  its  full  implementation  were 

EN 

48 

   EN 

 
included in the BL given that clear market conditions were already established in the directive 
and  that  structures  and  caps  for  ETS  were  agreed  before  April  2009;  where  issues  were 
pending (e.g. carbon leakage) a conservative approach was followed excluding auctioning for 
most  branches  for  modelling  purposes.  Similarly,  a  conservative  view  was  taken  on  CDM 
credits and banking (allowing for the maximum possible) as well as regarding future specific 
CO2 emissions for cars (not yet assuming fully the indicative target for 2020).  

Regarding the non-ETS sectors, the BL does not impose the achievement of the agreed targets 
for  2020  as,  similar  to  the  targets  in  the  Renewables  (RES)  directive,  the  achievement 
depends on the forthcoming policies and measures in the individual Member States. Pending 
the  implementation  of  vigourous  policies  in  the  Member  States,  only  a  minimal  decline  of 
non-ETS emission by 2020 result in the BL. 

With regard to the RES directive, it requires Member States to submit a National Renewable 
Energy Action Plan (NREAP) to the European Commission by 30 June 2010. Therefore, only 
the RES measures that had been already implemented at national level have been included in 
the BL, showing that Member States need to step up their efforts to reach their RES targets. 
Similarly to the RES Directive, the Effort Sharing Decision is only reflected through policy 
measures  that  have  already  been  implemented.  Specifically,  the  BL  achieves  15%  of  RES 
share  in  final  energy  demand  in  2020  instead  of  the  20%  target,  with  the  RES  share  in 
transport amounting to only 7% by 2020 instead of the 10% target. 

Specifically, the BL projects a penetration of diesel biofuel as a proportion of final transport 
diesel  demand  of  4.3%,  7.5%  and  9.2%  respectively  for  2010,  2020  and  2030  and  gasoline 
biofuel  penetration  as  a  proportion  of  final  transport  gasoline  demand  of  3.0%,  5.8%  and 
7.6% respectively for 2010, 2020 and 2030.  

In addition, the overall 20% reduction (below the 1990 level) target for GHG is not achieved, 
the BL only achieving an 8% reduction for energy related CO2 (-14% for all GHG). 

The REF mirrors achievement of 20% RES and 20% GHG reduction targets for 2020, as set 
in the energy and climate package, which includes  the  achievement  of  national  RES  targets 
and the RES transport sub-target, as well as the respect of the ETS cap and the achievement of 
non-ETS national targets (GHG Effort Sharing Decision). However, energy demand declines 
significantly in the REF but not enough to reach the indicative 20% energy savings objective. 

With  regard  to  RES  transport  targets,  the  REF  projects  a  penetration  of  diesel  biofuel  as  a 
proportion of final transport diesel demand of 4.3%, 10.1% and 12.6% respectively for 2010, 
2020  and  2030  and  gasoline  biofuel  penetration  as  a  proportion  of  final  transport  gasoline 
demand of 3.0%, 8.0% and 10.2% respectively for 2010, 2020 and 203069.  

The penetration of hybrids as a proportion of total passenger car fleet in the REF is equivalent 
to 27% of the passenger fleet by 2030. 

Other policies which the REF takes into account includes legislation adopted between April 
and  December  2009,  i.e:  the  four  Eco-design  measures,  the  recast  of  the  building  Directive 
and the labelling of tyres. 

69 

Note that the total renewables target of 10% in the transport sector by 2020 is met in the reference case, 
with the breakdown of the 10% being split as follows: diesel biofuel 6.6%, gasoline biofuel 2.6% and 
green electricity accounting for 0.8%. 

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3.1.2.  PRIMES petroleum products demand projections 

EU  petroleum  products  demand  projections,  PRIMES  2009  Baseline  and  Reference 
scenarios compared 

105

100

95

90

85

80

75

70

Light distillates REF

Light distillates BL

Middle distillates REF

Middle distillates BL

Heavy distillates REF

Heavy distillates BL

Total demand REF

Total demand BL

2005

2010

2015

2020

2025

2030

Source: European Commission 

Overall petroleum product demand is projected to decline by 13.8% in the REF compared to 
11.3%  in  the  BL  between  2005-2030.  Both  the  BL  and  the  REF  project  a  continuation  in 
observed historical trends in a number of products, including the continued significant falls in 
demand for heavy fuel oil; continued sustained falls in demand for gasoline and heating oil; a 
continued slow decrease in the demand for naphta. Both the BL and the REF project a break 
from recent trends in the growth for other petroleum products including continued but slower 
growth  in  demand  for  jet  fuel  and  kerosene;  and  an  initial  but  small  increase  in  diesel, 
followed by a slow decline, leading to an overall fall. 

As  noted  already  in  this  document,  one  of  the  main  challenges  faced  by  the  EU  refining 
industry  going  forward  would  be  in  terms  of  continued  growth  in  demand  for  middle 
distillates  parallel  to  a  fall  in  demand  for  gasoline,  which  poses  a  problem  to  EU  refiners 
given  the  current  EU  refining  configuration  which  cannot  produce  more  middle  distillates 
without also increasing the supply of gasoline. 

If  a  comparison  of  the  BL  demand  projections  for  middle  distillates  for  different  years  is 
made, it reveals that while 2010 volumes end up slightly below 2005 levels, by 2015 demand 
for  middle  distillates  is  projected  to  grow  by  2.3%  from  2005  levels,  after  which  it  will 
gradually  fall  to  a  level  in  2030  below  that  of  2005  (-4.7%).  Note  that  2015  is  the  turning 
point for the demand of gasoil, while the demand for jet fuel/kerosene is expected to continue 
growing to 2030. In the REF case, the trends are exactly the same, with the key differences 
that by 2015, demand for middle distillates will grow by less than the BL (only 1.2%), and the 
fall thereafter will be greater, (by 8.5% from 2005-2030). 

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50 

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The trend for transport diesel in the BL is for an overall fall by 2030 from 2005 levels of 1.7% 
compared to 5% in the REF case. In comparison, the BL projects gasoline demand to fall by 
19.6% in comparison to a projected fall of 20.7% in the REF case. 

PRIMES Baseline and Reference transport diesel and gasoline projections comparison 

110

105

100

95

90

85

80

75

2005

2010

2015

2020

Gasoline BL
Gas oil BL

2025

Gasoline REF
Gas oil REF

2030

Source: European Commission 

Key differences between the BL and the REF cases are in terms of the assumed penetration of 
renewables and the use of alternative fuel vehicles in the transport sector70.  

The Baseline projects a penetration of diesel biofuel as a proportion of final transport diesel 
demand of 4.3%, 7.5% and 9.2% respectively for 2010, 2020 and 2030 and gasoline biofuel 
penetration  as  a  proportion  of  final  transport  gasoline  demand  of  3.0%,  5.8%  and  7.6% 
respectively for 2010, 2020 and 2030.  

In contrast, the Reference scenario projects a penetration of diesel biofuel as a proportion of 
final  transport  diesel  demand  of  4.3%,  10.1%  and  12.6%  respectively  for  2010,  2020  and 
2030  and  gasoline  biofuel  penetration  as  a  proportion  of  final  transport  gasoline  demand  of 
3.0%, 8.0% and 10.2% respectively for 2010, 2020 and 203071.  

Note  in  addition  that  the  penetration  of  hybrids  as  a  proportion  of  total  passenger  car  fleet 
(assumed to be equivalent to 30% of the passenger fleet by 2030 in the Baseline and 27% of 
the  passenger  fleet  by  2030  in  the  Reference  Scenario)  contributes  significantly  towards 
meeting the requirements of the CO2 from cars regulation.  

The  penetration  of  electric  vehicles  is  insignificant  in  both  the  Baseline  and  Reference 
scenarios.  

70 

71 

Note  that  the  demand  projections  shown  above  and  used  in  the  OURSE  model  are  net  of  biofuel 
demand. 
Note that the total renewables target of 10% in the transport sector by 2020 is met in the reference case, 
with the breakdown of the 10% being split as follows: diesel biofuel 6.6%, gasoline biofuel 2.6% and 
green electricity accounting for 0.8%. 

EN 

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3.2. 

Description of OURSE refining module of the POLES energy model 

The objective of the OURSE model is to represent the refining activity at a world scale level. 
It is included in the POLES (Prospective Outlook for the Long-term Energy System) model.  

Because the model designed to represent the world-wide refining industry must have a limited 
number  of  equations,  a  representative  refinery  has  been  defined  for  a  restricted  number  of 
regions  in  the  world  (corresponding  to  the  POLES  nomenclature).  Moreover  the  crude  oil 
supply has been aggregated (the size of the model is directly linked to the number of crude oil 
which  are  introduced  in  the  model).  Finally,  as  the  model  has  to  represent  the  oil  product 
exchanges between the main regions in the world, a multi-refinery approach is considered.  

The main inputs of the model are (i) the oil product demand (in terms of both quantities and 
specifications),  (ii)  the  crude  oil  availability,  (iii)  the  CO2  emissions  restrictions  and  taxes. 
The  main  output  are  (i)  the  refineries  throughput  (activity  level),  (ii)  the  products  blending, 
(iii) the products trade, (iv) the investments (technology dynamic of the refining processes), 
(v) the marginal costs of oil products (supply prices), and (vi) the pollutant emissions. 

All  the  relevant  techno-economic  characteristics  of  the  oil  refining  industry  (technical 
processes,  investment  and  operating  costs,  pollutant  emission  factors...)  are  included  in  the 
model. 

The refining model of POLES is able to simulate the consequences of: 

–  changes of oil product demand such as a modification of the share of the automotive fuels 

(gasoline and diesel) 

–  changes of specification of oil products (sulphur content of oil products for instance) 

–  carbon emissions regulation (bounds and taxes) 

–  adoption of alternative type of policies. 

As  the  model  permits  exchanges  of  petroleum  products  between  the  main  regions  in  the 
world,  the  refining  industry  has  been  split  into  several  geographical  areas.  In  each  refining 
area,  it  is  assumed  that  the  crude  oils  are  processed  together  and  that  there  is  only  one 
investment variable for each unit. Moreover the model implicitly allows intermediate product 
exchanges inside each area. 

The  geographical  considerations  upon  crude  oil  supply  and  petroleum  product  demand,  and 
the technical analysis of the refineries lead to nine refining areas being defined in the world:  

Area 1 - Z1 

North and Central America : Canada, USA, Mexico 

Area 2 - Z2 

Latin America, 

Area 3 - Z3 

North Europe : all Europe except South Europe 

Area 4 - Z4 

South Europe : Italy, Greece, Portugal, Spain, Turkey, Croatia, Slovenia, Former 
Yugoslavia 

Area 5 - Z5 

Former Soviet Union (CIS) 

Area 6 - Z6 

Africa 

Area 7 - Z7 

Middle East 

Area 8 - Z8 

China 

Area 9 - Z9 

Other Asia 

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52 

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The general denominations "Latin America", "Former Soviet Union", "Africa", "Middle East" 
are those which are used by the International Energy Agency (IEA) in its statistical yearbooks 
(energy balances).  

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53 

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4. 

ANNEX 4: SUMMARY OF KEY PROJECTS & PLANNED/ACTUAL DIVESTMENTS IN THE 
EU REFINING SECTOR 

Summary of EU refineries planned/actual divestments and shutdowns since 2008  

y
a
d

/
l

b
b
n

i
y
t
i
c
a
p
a
C

1,000,000
900,000

800,000
700,000

600,000
500,000
400,000

300,000
200,000

100,000
0

Sold since
crisis

On sale since
crisis

Sale
w ithdraw n -
future
uncertain

Expected to
be put on sale

Extended
maintenance

Shutdow n &
conversion
planned

Source: European Commission. Note: This information has not been confirmed by the EU refining industry and is contained 
here for illustrative purposes.  

•  Known planned/actual divestments and shutdowns in EU refining capacities since the start 
of the crisis  in 2008 extend to 18  out  of  104 refineries in the EU, representing some 2.7 
million bbl/day/134 million tonnes per year of crude capacity, equivalent to 17% of total 
EU refining capacity.  

•  Actual  deals  have  been  few  and  far  between,  with  the  exception  of  the  sale  of  a  small 

processing facility in Belgium by Petroplus and part of a Dutch plant by Total. 

•  In  general,  both  planned  and  actual  divestments  have  been  of  simple  refining  plants  of 

mainly small capacity. 

•  Assets which have been put on sale since the crisis and are still awaiting buyers amount to 
close to 900,000 bbl/day. It is expected that at least another 400,000 bbl/day of capacity is 
likely to be formally put on sale in the foreseeable future as a result of the crisis. 

•  All of the known potential/actual buyers of assets on sale are non-Europeans. Other than 
the  Russian  Lukoil,  willing  acquirers  of  EU  refining  assets  include  India's  Essar  and 
Reliance  and  China's  PetroChina  though  no  deals  have  been  concluded  yet.  Swiss  oil 
trading firm Vitol bought Petroplus's processing unit in Antwerp last year (21,000 bbl/day) 
while  American  refiner  Valero  has  expressed  interest  in  purchasing  Chevron's  Pembroke 
refinery (202,000 bbl/day). 

•  While  interest  in  acquiring  stakes  in  the  EU  refining  market  by  oil  companies  located  in 
neighbouring  countries  such  as  Lukoil  is  to  secure  outlets  for  their  crude  production,  the 
interest of PetroChina stems from the wish to grow their global presence in refining, and 
they see the current environment of low margins, and therefore low prices, as opportune. 
Though not from a neighbouring country, India's Essar sees the acquisition of EU assets as 
an  opportunity  to  turn  them  into  import,  storage  and  distribution  centres  for  its  refined 
products produced at its home refinery in Vadinar. 

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54 

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•  Refining capacity that is known to have been temporarily shutdown as a result of the crisis 
amounts to over 900,000 bbl/day. These units could either be restarted or eventually also 
be put on sale, depending on market conditions. 

•  The numbers employed in the refineries represented by these capacities are not known and 

are not formally communicated by refiners.  

•  Note  that  no  complete  shutdowns  have  been  announced  by  EU  refiners.  Since  the 
beginning  of  the  crisis,  uneconomic  assets  that  have  not  been  put  on  sale  have  generally 
been  subject  to  extended  maintenance/temporary  shutdowns,  while  assets  that  have  been 
formally 'shut down' are in fact being converted to depots/storage facilities (equivalent to 
258,000 bbl/day, to date). 

•  There  have  also  been  reports  of  planned  investments  in  extra  diesel  capacity/ 
hydrodesulphurisation/coker capacity at medium to large, more complex plants, as follows:  

ExxonMobil 

•  The  company  announced  plans  in  December  2008  to  invest  $1  billion  in  extra  diesel 
capacity  expansion  (by  143,000  bbl/day)  in  three  of  its  refineries  (two  in  the  US,  one  in 
Belgium: Antwerp). The Antwerp refinery has a capacity of 305,000 bbl/day. 

Repsol 

•  Repsol was granted a Euro 400 million loan from the European Investment Bank for the 
construction of a coker unit at its 220,000 bbl/day Petronor refinery in Bilbao, Spain. The 
project consists of a 2 million tonne/year coker unit and related treatment units. The coker 
plant,  which  will  cost  a  total  Euro  780  million,  will  convert  heavy  fuel  oils  into  diesel, 
gasoline, propane and butane; 

Royal Dutch Shell 
•  Shell  is  planning  on  continuing  to  invest  in  larger  integrated  refining  and  chemical  sites, 
including  a  $500  million  investment  in  a  new  hydrodesulphurisation  unit  at  the  firm's 
406,000 bbl/day Pernis plant.  

Total 

•  Earlier in the year, Total announced its intention to restructure its refining output to reduce 
its  production  of  gasoline  and  increase  its  production  of  diesel.  This  would  include 
investing  800  million  of  Euros  in  adapting  its  French  Gonfreville  (338,000  bbl/day) 
refinery to change its output in favour of diesel. 

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55 

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5. 

ANNEX 5: NON-EU REFINING CAPACITY DEVELOPMENTS & DIVESTMENTS  

The IEA reported in May 200972 that the impact of the financial and economic crisis on the 
global refining sector amounted to 1.6 million barrels/day of postponement or cancellation of 
new  refining  capacity  (by  April  2009).  In  addition,  according  to  the  IEA  some  800,000 
bbl/day of refining projects have been delayed for 18 months or more. 

The crisis has certainly hit all parts of the globe, with falling refining margins and utilisation 
rates recorded in many regions (more details in annex 2).  

Future  prospects  in  terms  of  additional  refinery  capacity  are  however  for  some  9  million 
bbl/day between 2008 and 2015, according to Wood Mackenzie, equivalent to a 10% increase 
in total world refinery capacity. 

Expected additional refinery capacity by region, 2008-2015 

6,000

5,000

4,000

3,000

2,000

1,000

0

.

d
b
k

,
y
t
i
c
a
p
a
C
U
D
C

l

a
n
o
i
t
i
d
d
A

Asia
Pacific

Middle
East

North
America

Latin
America

Greater
Europe

FSU

Sub-
Saharan
Africa

New

Expansion

Source: Wood Mackenzie 

According  to  the  above  data,  59%  of  world  new  refinery  capacity  between  2008  and  2015 
(amounting  to  3  million  bbl/day)  will  be  in  the  Asia  Pacific  region,  while  50%  of  world 
capacity  expansion  will  come  from  that  region  (2  million  bbl/day).  The  Middle  East  will 
contribute 26% of world new refinery capacity during that period, and 10% of world capacity 
expansion.  In  comparison,  Europe  is  expected  to  contribute  2%  of  world  new  refinery 
capacity  during  that  period,  and  5.6%  of  world  capacity  expansion,  amounting  in  total  to 
322,000 bbl/day of additional capacity. 

North-America 

North-America, which includes the US, Canada and Mexico, has total refinery capacity of 21 
million bbl/day, equivalent to 24% of total world refining capacity. 

In spite of the challenging climate and its impact on the industry in that region, it is expected 
that  close  to  800,000  bbl/day  of  additional  capacity  will  come  on  stream  between  now  and 
2015 in North-America. 

72 

Impact of the Financial and Economic Crisis on Global Energy investment, IEA, May 2009. 

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56 

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Middle East 

The Middle East consisting of Iran, Iraq, Jordan, Kuwait, Oman, Qatar, Saudi Arabia, UAE 
and  Yemen  has  7.6  million  bbl/day  of  refining  capacity,  equivalent  to  9%  of  world  refining 
capacity.  

By 2015, the region is expected to add 1.7 million bbl/day of refinery capacity, amounting to 
almost a quarter of current capacity in the region. 

Asia-Pacific 

The  Asia  Pacific  region  consists  of  China,  Asia,  South  Korea,  Indonesia  and  Japan  along 
with  many  other  smaller  refining  countries.  The  region  has  capacity  of  25  million  bbl/day, 
amounting to 28% of world refining capacity.  

As highlighted above, the biggest expectations for additional refinery capacity in the world in 
the next five years are in the Asia Pacific region. It is expected to add five million bbl/day of 
additional  capacity  by  that  date,  amounting  to  56%  of  total  additional  world  capacity  and 
amounting to increasing existing capacity in that region by 20%. 

A number of EU oil majors are attempting to establish a refining presence in China, such as 
BP, which is in talks with state company Sinopec on a new refining joint venture there, while 
Total  is  known  to  be  in  talks  with  Sinochem  and  China  Petroleum  &  Chemical  about  a 
number of refining projects also in China. 

Other regions 

•  South  and  Central  America  which  includes  Brazil,  Argentina  and  Venezuela  as  well  as 
other  small  refining  countries  has  6.6  million  bbl/day  of  refining  capacity,  equivalent  to 
7%  of  total  world  refining  capacity.  Around  500,000  bbl/day  of  new  refining  capacity  is 
expected  in  that  region  between  2008  and  2015,  and  some  200,000  bbl/day  of  capacity 
upgrades of mainly coking and hydrocracking, mainly in Brazil and Venezuela. 

•  The former Soviet Union region, which includes Russia, Ukraine, Belarus, Georgia among 
others, has 8 million tonnes of refining capacity, equivalent to 9% of total world refining 
capacity. An additional 500,000 bbl/day of new and expanded capacity is expected to come 
on stream in that region by 2015.  

•  Africa  has  3  million  bbl/day  of  refining  capacity,  amounting  to  3.6%  of  world  refining 
capacity. Only very small capacity additions are expected in the next ten years, amounting 
to less than 100,000 bbl/day. 

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57 

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