Challenges for European Refining:The dash for diesel...

... and biofuels

Dr Panos E. CavoulacosPresident, EUROPIA

The 2nd South East Europe Energy DialogueThessaloniki, 21 May 2008

2

EUROPIA represents the interests of the downstream oil industry in Europe

BP

Cepsa

Chevron

ConocoPhilips

Eni

ExxonMobil

Hellenic Petroleum

MOL

Neste Oil

OMV

Galp Energia

PKN Orlen

RepsolYPF

Saras

Shell

Statoil

TotalIts 17 members cover 80% of the EU-27 refining capacity

3

Challenges for European Refining

Demand/trade trends to 2020- Strong growth of diesel and decline of gasoline in Europe- Trade flows continue to grow – diesel into Europe, gasoline to USA

Significant refining investment underway- $30 billion globally since 1995 (P&G)- New “balanced” refining capacity in Middle East, India and China- Emphasis on upgrading – hydrocrackers in EU, cokers in USA- European supply security requires us to invest for the future

New Middle East & India capacity could exceed demand in 2012- Competing with Europe for gasoline exports to USA- More jet fuel and diesel into Europe

Refining ownership starting to shift in Europe- Emergence of independent, Russian major and petchem players

Despite European Refining’s ongoing efficiency gains, CO2emissions will likely increaseEU policies impact heavily our industry and our profitability

4

Cleaner fuels help engine technologies to improve air quality, but their production emits more CO2

Source: European Commission

1995 20051990 2000 20100

20

40

60

80

100

120

140E

mis

sion

s, %

of 1

995

leve

l

CONOx

PM-dieselVOC

BenzeneSO2

CO

2em

issi

ons

5

The dash for diesel...

6

European legislation adds significant pressures on diesel fuel, both from the demand and supply side

Diesel

CO2 in Cars

EU-ETSAir QualityIPPC, NECD

Marine Fuels

Growing diesel demand

Additional pressure on EU refining

Dem

and

EU S

uppl

y

Mobility GrowthLight/Heavy Duty

7

Current EU legislation and taxation schemes will continue to generate growth in diesel demand

2020

Gasoline

Diesel

80

90

100

110

120

130

140

150

160

170

180

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Mill

ion

tonn

es p

er y

ear

Source: Eurostat Source: Purvin &Gertz

80

389

Die

sel D

eman

d

Additionally, ~60 million tonnes per year of diesel would be needed in the EU (300-350 million tonnes globally ), if the marine sector switched to diesel fuel.

8

The EU supply/demand imbalance for both diesel and gasoline will continue to grow

-60

-40

-20

0

20

40

60

80

LPG Naphtha Gasoline Jet/Kero Diesel/Gasoil Fuel Oil

Bala

nces

, Milli

on to

nnes

.

2006 2010 2015 2020

Surplus

Deficit

Die

sel S

uppl

y/D

eman

d

Source: Wood Mackenzie, 2006 (whole Europe)

9

0

25

50

75

100

125

150

175

200

225

Base case 2005 Product quality2005-2020

Demand changes2005-2020

Assumed efficiencyimprovements

2005-2020

Potential productquality changes

Source: CONCAWE

.. which cannot be offset by future energy efficiency improvements.

CO

2em

issi

ons

(mill

ion

tonn

es p

er y

ear)

EU refinery CO2 emissions will grow due to specification and diesel demand changes…

EU D

iese

l Sup

ply

10

Proposed EU legislation would add cost to the EU refining sector, potentially leading to more imports

EU-ETS: Imposing a cost of CO2 on EU refineries would give a comparative advantage to non-EU refiners. At above 20 €/t CO2, many non-EU producing locations would have a “CIF EU” cost advantage.

Air QualityThe proposed IPPC Directive (Integrated Pollution Prevention and Control) would mean a significant increase in cost burden to the EU Industrial Sectors, including refining. This cost element does not apply for non-EU suppliers of fuels.

EU D

iese

l Sup

ply

1111

EU CO2 costs are likely to exceed typical transport costs to the EU, creating a “CIF EU” cost advantage

EU D

iese

l Sup

ply

12

IPPC Directive: higher-cost industrial operations with negligible additional human health benefits

Optimal Air Quality Policy (Thematic Strategy for Air Pollution)vs

Prescriptive (proposed IPPC Directive)

0

2

4

6

8

10

12

14

16

18

TSAP IPPC

Cos

t (bi

llion

€/y

ear)

0

10

20

30

40

50

60

Cost

Improvement inHuman Health (%)

% Y

OLL

impr

ovem

ent

13

Recent price signals reflect the changing dynamics of diesel supply/demand relative to gasoline

EU D

iese

l Sup

ply

Source: MWV ( Mineralölwirtschaftsverband) Source: EIA (Energy Information Administration)

US product prices at pump ($/gallon)

2.5

3

3.5

4

4.5

03/1

2 /

2007

04/0

9 /

2007

05/0

7 /

2007

06/0

4 /

2007

07/0

2 /

2007

07/3

0 /

2007

08/2

7 /

2007

09/2

4 /

2007

10/2

2 /

2007

11/1

9 /

2007

12/1

7 /

2007

01/1

4 /

2008

02/1

1 /

2008

03/1

0 /

2008

04/0

7 /

2008

05/0

5 /

2008

Gasoline Diesel

German product prices without taxes (€cent/liter)

25303540455055606570

Jan-

04A

pr-0

4Ju

li 04

Okt

04

Jan-

05A

pr-0

5Ju

l-05

Okt

05

Jan-

06A

pr-0

6Ju

l-06

Okt

06

Jan-

07A

pr-0

7Ju

l-07

Okt

07

Jan.

08

Apr

-08

Gasoline Diesel

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Continuing growth in EU diesel demand would grow the diesel CO2 footprint and require more imports

Should the observed historic growth of diesel demand in Europe continue, diesel supply / demand dynamics would result in: Higher CO2 emissions from refinery operations and logistics A net increase of total CO2 emissions for diesel compared to gasoline-fuelled vehicles, as refinery CO2 penalty exceeds vehicle benefits Probably a substantially higher share of diesel imports to the EUUpward pressure on diesel supply cost and prices relative to gasoline

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The dash for biofuels...

16

% energy from biofuels

16

10% biofuels (energy-based)

Fuel Quality

Directive

Renewable Energy

Directive

10

10% GHG reduction

10% GHG Reduction

~ 5% GHG Reduction

0

2

4

6

8

10

12

14

16

18

Source: CONCAWE

Currently proposed EU Directives introduce conflicting biofuels targets

17

0%

20%

40%

60%

80%

100%

0 5 10

0.0% 0.0% 0.0%

% volume

0%

2%

4%

6%

8%

10%

% energy

EtOH in gasoline

FAME in diesel

BTL in diesel

% energy biofuels in total pool

FAME imports (Mt/a)

BTL imports (% of diesel)

B7

The 10% Biofuels target cannot be achieved by the envisaged E10 and B7 specifications

10 Mt/adomestic

Source: CONCAWE

E10

B7 = 7% FAME in dieselE10 = 10% Ethanol in gasoline

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Depending on availability of imports, the 10% GHG of Article 7a may require more than 20% biofuels

0%

20%

40%

60%

80%

100%

0 10 20 35

5.0% 5.0% 5.0% 0.0%

% volume

0%

5%

10%

15%

20%

25%% energy

EtOH in gasoline

FAME in diesel

BTL in diesel

% energy biofuels in total pool

FAME imports (Mt/a)

BTL imports (% of diesel)

BrazilianEthanol

B7

B7 = 7% FAME in dieselE10 = 10% Ethanol in gasoline

10 Mt/a domestic

Source: CONCAWE

E10

BrazilianEthanol

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The path towards 10% biofuels is paved with several stumbling blocks that need to be removed

The existing fleet of light duty vehicles poses upper limits to shares of available bio-components in fuels (~B7 in diesel and ~E10 in gasoline ), which is insufficient to meet the 10% target.Advanced biofuels ( oxygen-poor or -free ) could help, but they will probably not be available in sufficient quantities before 2020.The attractiveness of investment in production of advanced or second generation biofuels remains unclear today.Proposed sustainability criteria for biofuels and minimum thresholds for CO2 savings, coupled with competition for biomass from other sectors, will put additional pressure on biofuels volumes accessible for road transport. The emerging proliferation of additional fuel grades threatens the smooth, reliable and secure supply of road transport fuels and, at the same time, may lead to consumer confusion.

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Conclusions

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Well-designed EU energy and environmental policies can help us face these challenges

Policy priorities must remain balanced

• Globally competitive level playing field so European Refining can invest

• Minimise Carbon-leakage and meet environmental objectives

• Maintain security of supply to Europe

Predictable policies that do not introduce unequal cost burdens are essential for investment decisions in European Refining

EU EnergyPolicy

Security of SupplyCompetitiveness

SustainabilityKyoto/Bali

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The European oil industry will continue supporting economic growth and energy security in Europe …

Low cost, efficient supplier of energy

Ensuring security of supply

Developing products which are clean and safe to use, and encouraging responsible and efficient use of these products

Continuously working towards reducing the footprint of our operations

A partner for society in addressing the sustainability challenges

… in an environmentally-responsible way