the situation of the refining activities in europe. john cooper

John Cooper, Director General

Downstream Oil & EU Climate PolicyHow do we balance environmental and competitiveness objectives for the longer term?

• Introduction to FuelsEurope• Our Policy Position on Energy & Climate Change• Competitiveness

• Fitness Check & EU Refining Competitiveness in a Global Context

• Addressing Climate Change• Energy & Policy Costs

• The Future role of Petroleum in Transport• Transport Decarbonisation as part of the global climate

challenge

• Observations & Conclusions

FuelsEurope represents 41 Member Companies ≈ 100% of EU Refining

Refining Transport MarketingTransportCrude production

Crude exploration

Upstream Downstream

The competitiveness of European refining: facing the challenges

• FuelsEurope Recognises Climate Change as a Global Challenge requiring Global Action

• We have supported the COP21 Paris agreement• We support global pricing of carbon

• We also believe that the climate objective needs to be balanced with EU objectives to maintain industrial competitiveness, investment, jobs and growth

FuelsEurope Policy Position on Energy & Climate Change

• Introduction to FuelsEurope• Our Policy Position• Competitiveness




challenge



Every 100 units of CO₂ emissions

reduced in the EU are replaced

by 135 units outside the EU*

Source: Vivid Economics for UK DECC – Case study on Refining - Carbon leakage prospects under Phase III of the EU ETS and beyond

1. EU ECONOMY

3. SECURITY OF SUPPLY

Significance of a competitive domestic Refining in Europe2. ENVIRONMENT


The challenges faced by EU refineries

15 European Refineries closed in 2008-2014

(1) source: Commission Refining Fitness Check, 2015

Reduction in oil products demand

Aggressive competition from non-EU

High energy prices Cumulative impact of regulation

(25% of the total loss of competitiveness of the EU refineries

2000 – 2012 (1))

Diesel gasoline imbalance

Prepared by the EU Commission, recognizes and quantifies cost of legislation on EU refining sector.

Refining Fitness Check: main outcomes (1)

0,47€/bbl

Gross margin estimated by WoodMacKenzie for a NWE Brent treating refinery = 0 to 4€/bbl between 2008 and 2014

First time that COM admits that cost of legislation reduced by up to 25% the competitiveness of EU refining sector.

A section dedicated to the importance of EU refinery for economy & security of supply, among whose conclusions:

0.9% of EU GDP 1.3 million jobs

Refining Fitness Check: main outcomes (2)

Source of the chart: Concawe

Recognition that significant additional regulatory costs are coming post 2012 (ETS, REF BREF,…), albeit with no quantification


Jamnagar refinery, IndiaExpansion - for Export - underway from 1.3 Mbpd to 1.8 Mbpd (=13% of EU refining capacity)

EU’s import trend

2008 2009 2010 2011 2012 20130

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

Gasoil/diesel import to EU 28 - [th tons/y]

TOT import of which Russia USA India Middle East

Source: OPEC, World Oil Outlook 2014

Investments in global refining industry: jobs and growth are going elsewhere

Middle East China Other Asia Latin America Africa US & Canada Russia & Caspian Europe0

10

20

30

40

50

60

0

0.5

1

1.5

2

2.52.3

2.1

1.31.1

0.60.4

0.30.2

5550

3540

21

12

18

12

Global, announced capacity additions & investment cost 2014-2019

Investment Distillation capacity additions

Inve

stm

ent c

ost

in b

ln $

Capa

city

add

ition

s (m

b/d)

Cost build-up for EU refineries vs non-EU export oriented refineries

Source: Solomon Associates, Concawe 2014

NOTE:*Indicative numbers for product freight to EU from an average refinery - $/bbl of product delivered to the EU**Energy costs for purchased energy only- Assumed identical crude cost

• Introduction to FuelsEurope• Our Policy Position• Competitiveness




challenge


“GLOBAL AND EU ENERGY CHALLENGES & TRANSPORT ISSUES”

BEV (EU-mix) B70

20

40

60

80

100

120

57

101

GHG emissions(gCO2eq/

km)

44g CO₂/km saving

Source: JEC

Current vehicle regulation can drive solutions that have extreme societal cost

CO₂ savings 44g x 200k Km = 8800 Kg

* Manufacturer cross-subsidy, government purchase grant, loss of fuel excise taxes – adjusted for fuel savings

> €10k* subsidies

Decarbonisation by electrification is expensive

8800 Kg savings for €10k = €1136 / tonne CO₂

SOCIETAL COSTS ARE:Manufacturing cross subsidy

≈ €4k

Government purchase grant

≈ €5k

Loss of fuel excise duties

≈ €5k

Less fuel savings ≈ -€4k

TOTAL ≈ €10k


Indicative Carbon Costs in Transport & Power Sector

Cost

in $

/Tonn

e Ca

rbon

miti

gate

d or

redu

ced Transpor

tPower

Efficiency

Fuel switching in power

Renewables in power

CCS* 1st Gen AdvancedBiofuels

Transport Electrification

$500+

* Economy-wide carbon price

range

range

Reforestation*

* Carbon sequestration will increase the available carbon budget

Bar width indicates scope of decarbonisation available

$80

$20

Focus of Vehicle efficiency policies

Focus of transport energy GHG policies

Focus of Power Generation GHG policies

A true market in GHG reduction would instead support the next lowest cost technologies

Carbon sequestration

Policy Costs in Energy in the EU passed to Consumers

EU Regulation & Policy increases Energy and Fuel costs• Power Sector: Annual Renewables incentives costs €60B (at

€100/tonne CO₂)• Fuels Sector: Annual Biofuels Renewables incentives €7B¹ (at

€200/tonne CO₂)• Transport Sector: Annual Electrification incentives €1.5B² (at

€1000/tonne CO₂)

Not Transparent Not Technology Neutral Supports some expensive solutions

We call for transparency in costs of carbon imposed by policy We call for value for citizens & business from adopting the most

cost-effective measuresSource:1) FuelsEurope calculation, 25MM tones Biodiesel @ €300 per ton (pre-tax) increment over petroleum diesel2) FuelsEurope calculation based on vehicle purchase grants, fuel tax exemption and manufacturer cross-subsidies

• Introduction to FuelsEurope• Our Policy Positions• Competitiveness




challenge



• Europe’s climate & energy policies are deeply confused about carbon prices and costs, with Europe’s average carbon cost far higher than current ETS cost

• There would be many benefits from greater transparency and consistency of carbon costs, and of price signals in policy

• Many large-scale carbon abatement opportunities are available – often at lower cost – in diverse sectors of the economy and in other regions of the world

• Current flagship policy ETS has a major flaw – domestic producers compete in the EU with imported goods made outside of the ETS, i.e. without ETS or other forms of carbon costs .

• Carbon Leakage Protection will be less and less effective in future (beyond Phase III), with higher emission allowance prices and fewer free allowances.

• Europe’s political leaders should reconsider how its ambition to have global leadership in climate action can be reflected in its positions on International Trade.

Observations


• The EU Commission have a helpful dialogue with industry through the Refining Forum , and also the Refining Fitness Check.

• As requested by several Member States (including Spain) the Refining Fitness Check should be regularly updated and used to assess the cumulative impact of new legislation on the competitiveness of the EU refineries

• Strong competitiveness challenges remain for the sector• Energy costs are expected to continue to be the biggest element of

international competitive disadvantage• ETS costs will rise as a result of Phase IV adding to the competitive

disadvantage, and necessitating full carbon leakage protection.• European energy strategy should recognise the longer term role of

refineries, petroleum fuels and petchem products• We should keep Europe’s fuels and other strategic oil products refined

in the EU• Climate & energy strategies, including those for transport, should take

consideration of cost of carbon abatement and aim to keep a level playing field

Conclusions

FuelsEurope165, Boulevard du Souverain 1160 Brussels - BelgiumT: +32 2 566 91 00

www.fuelseurope.eu

THANK YOU FOR YOUR ATTENTION

This document was presented by FuelsEuropeContact:[email protected]

BACK UP

• Sectoral target o 60% by 2050 vs 80-95% economy wide is recognition of difficulty in transport, but was

chosen a long time ago. We are very short of technologies to get us there.

o (justification: effort sharing/all sectors must contribute/moral/technology strategy)o We must consider flexibility at the limits in meeting the target – alternative compliance

mechanismso We should consider how we achieve longer-term carbon price convergence across the

economy

• Technology strategyo The current collection of policies is a strategy based on picking winners/ flavour of the

month.o We need to support strongly the development of a portfolio of technologies for the

longer term in an equal, transparent and performance-based approach

• Vehicle regulationo Key to determine technology & energy mix, but the current structure will create huge

incentives and imbalanceso We believe reform of the CO2 in Cars regulation is possible to address these concerns

Transport Decarbonisation – rethinking the challenge

• Assume a manufacturer fleet target of 100 g/km• Manufacturer makes & sells 100 cars• Penalty level is €95 per gram in excess of target, per car

CO₂ in Cars: distorting effects of current structure

Case 1: 100 cars all at 100 g/km

• Total 10,000• Average = 10,000/100 = 100 grams: No penalties paid

Case 2: 100 cars all at 101 g/km

• Total 10,100• Average = 10,100/100 = 101 grams: 100 x €95 = €9500 paid in penalties

Case 3: 99 ICE cars all at 101 g/km + 1 BEV or FCEV at 0 g/km

• Total [9999 + 0]*• Average = [9999 + 0]/100 = 99.99 g/km: No penalties paid

• At the margin of compliance, substituting one ZEV for one ICE saves €9500 in penalties• Therefore manufacturers are driven to cross-subsidise EVs by sale of ICE cars = market

intervention• Assuming zero carbon electricity, effective carbon cost is €9500/20 tonnes =€475 per tonne• Supercredits, or state & city level incentives and tax exemptions not included here• *(real total is 9999 + 57 = 10,056)

CO₂ in Cars Penalty Level: Deconstruction an new proposal

• 1g CO₂ over 200K km = 200kg CO₂ or 1/5 t• So carbon cost = 5x carbon price element

Penalty Price Carbon Cost

• 1g extra emission for 3 years at 20k km/year = 60,000g → 60 kg CO₂

• 60 kg CO₂ ≈ 20kg fuel (diesel)• 20kg fuel = 25 liters ≈ €35 taxed

Fuel Savings Correction calculation

• Taking 2020-2030 carbon price at €30/t• 1g over 200k km lifetime of car gives 200k

grams = 200kg or 0.2 tonnes• 0.2x30 = €6

Calculation of carbon price element

PENALTY LEVEL € PER GRAM NON-COMPLIANCE

Carbon price element

€ 95

≈ €475 per tonne C02 equivalent

€95 penalty

€41 penalty

Simplistic interpretation

Rational viewTodays regulation

Proposal

Carbon price element

€60

≈ €300 per tonne GHG

€6 (€30/t GHG)

Fuel savings correction

€35

Could fund decarbonisation

Could fund R&D

Carbon price


€95 penalty


€35

CO₂ in Cars ReformTo achieve technology equality, stronger support of R&D, and cost effectiveness in mainstream measures• Reduced penalty with gradual convergence to economy-wide carbon price• Payment of penalty generates revenue to support R&D portfolio, could also be used

to offset carbon in another sector• Electricity – grid average GHG to be used• Recognise GHG of contribution of biofuels• No supercredits

Technology Strategy• Penalties revenue stream to support portfolio of technologies including electrification,

efficiency and advanced biofuels• Manage the portfolio through stage-gate system to select those most promising for

being cost-effective and scalable

Alternative compliance with Sectoral and EU Economy targets• A portion of penalty funds could pay another sector within EU, or outside EU to

reduce same quantity of GHG at lower cost• COP21 agreement Article 6 provides basis for this.

Preliminary views on a new proposal (2030+)


Carbon Costs in TransportTo

tal s

ocie

tal c

ost c

ar +

en

ergy

*Indicative costs

Carbon price

Cost of CO₂ savings ≈ €1000 per tonne

Efficient ICE liquid/ Petroleum Fuel Car EV / Large Battery Car

Tank-to-wheelsWell-to-tank

* Euro 6 with WLTP + RDE

Carbon price does not make Electrification of personal cars

with large batteries economically attractive

We recognise that electricity will play an increasing role in transport in future.

Electrification technology is evolving, but considering that it is not yet competitive without heavy incentives, electricity will be likely be complementary to the liquid fuel and the ICE for many years, rather than being an outright replacement.

We also recognise that EVS can have urban air quality benefitsBUT these should be compared to Euro 6+* ICE vehicles, as an alternative, not with much older technology vehicles

Expected evolution of ETS cost for EU refineries from phase II to phase IV

Source: Concawe & WoodMackenzie

(1) Source: Concawe, based on Linear Reduction Factor 1.74% per year & impact of CSCF, assuming total EU refining throughput at 650Mt/y(2) Source: Concawe, based on the 15th July 2015 COM proposal for ETS revision Linear Factor 2.2% per year é estimated impact of CSCF, assuming EU refining

throughput at 600 Mt/y, 0.5% yearly improvement in carbon efficiency and cost of ETS certificate at 30€/ton(3) Note that in Phase II surplus allowances to the estimated value of 750 M€ were allocated (source: JRC draft refining fitness check report)

the situation of the refining activities in europe. john cooper

Environment