Marc Seris, Senior Director › 6thSEEED › articlefiles › sessionI › Seris.pdf · 10 15 20 25...

Marc Seris, Senior Director

European Refining: Why Is It So Bad?

� European demand collapse

– Demand has fallen by over 1 mbd since 2006

� US WTI messup

– US production has been upheldby low crude pricing in MidWest

0

1

2

3

4

5

2006 2007 2008 2009 2010 2011

Net Cash Margin

$/bl

NWE Cracking Refinery

Margins have not

recovered

mbd

Downstream Eastern Med Challenges| © PFC Energy |

78%

80%

82%

84%

86%

88%

90%

0

5,000

10,000

15,000

20,000

2006 2007 2008 2009 2010 e2011

Ref Cap Thruput Utiliz

Europe is hardest hit No significant recovery yet in sight

� Russian export surge

– Russia has seen continued risein gasoil and HFO exports throughout the crisis

EU Utilizationmbd

10,000

15,000

20,000

European Demand Has Lost 1.2 mmb/d Since 2006

European Oil Product Consumptionmbd

16.4 mmbd 15.2

mmbd


0

5,000

10,000

2006 2007 2008 2009 2010 e2011

Light Middle Heavy

US Inland Light-Sweet Discounts Driving US Refining

� US inland crude logistics are bottlenecked…

� …leading to a dramatic surgein WTI discounts to Brent

� US light-sweet discount is keydriver behind US mid-

0

20

40

60

80

100

120

140

160

Jan

-20

06

Jul-

20

06

Jan

-20

07

Jul-

20

07

Jan

-20

08

Jul-

20

08

Jan

-20

09

Jul-

20

09

Jan

-20

10

Jul-

20

10

Jan

-20

11

Jul-

20

11

Jan

-20

12

WTI Brent

$/b Crude Oil Prices


Logistical Bottleneck Likely to Last WTI Discount Drives Crack Spreads

driver behind US mid-continental refining margins…

� …leading to substantialrefining earnings for US exposed IOCs

0

5

10

15

20

25

30

35

40

Jan

-20

06

Jul-

20

06

Jan

-20

07

Jul-

20

07

Jan

-20

08

Jul-

20

08

Jan

-20

09

Jul-

20

09

Jan

-20

10

Jul-

20

10

Jan

-20

11

Jul-

20

11

Jan

-20

12

NWE Crack Spread USGC Crack Spread

$/b Crack Spreads

To WTI

To Brent

16,000

18,000

20,000

US Flips from Importer to Exporter…

US Finished Product Production & Consumption

1.2 mmbd net

imports

1.3 mmbd net

exports


10,000

12,000

14,000

Production Consumption

mbd

US has turned into net exporter since 2009

10,000

12,000

14,000

16,000

18,000

20,000

1Q06 1Q07 1Q08 1Q09 1Q10 1Q11

Operable Capacity Gross Input

…and US Utilization Partly Recovers

US Capacity & Refining Input

mbd

� US operable capacity has continued to increase

– In spite of shutdowns in wake of 2009 crisis


75%

80%

85%

90%

95%

1Q06 1Q07 1Q08 1Q09 1Q10 1Q11

Utilization

Operable Capacity Gross Input

US Refining Utilization� Utilization rates have partly recovered

– Supported by MidWeststrong margins and refineryruns

2,000

2,500

3,000

Other

HFO

Gasoil

Russian Product Exports Growth Puts Pressure on Refiners

Russian Oil Product Exports Grow 600 mbdmbd


-

500

1,000

1,500

2006 2007 2008 2009 2010 e2011

Gasoil

Kerosene/jet

Gasoline

LPG

Source: Downstream Markets Service FSU

New Crude Outlets in Baltic and Far East Adds Export Options Outside of Black Sea-Med & Druzbha

40

60

80

100

120

140

160

Russian Crude Exports by Major Outlet Indexed from 2005

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

mb/d

Crude Pipeline Exports by Russia to Non-CIS Destinations


Trends and strategic priorities suggest Baltic and Far East gains will be off-set by declines in Druzhba and Black Sea exports

0

20

Total crude exports Druzhba

Baltic Black Sea

0

500

1,000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

1Q

12

2012F

2013F

Far East/China Black Sea Baltic Druzhba

Druzhba Refineries Under Pressure as Traditional Discount Evaporates; Secondary Supply to be Key

Exposed Refineries:•Leuna•Schwedt•Plock•Bratislava•Szhazhalombatta•Mozyr*

Potential Reversals / Bypasses:•Odessa-Brody•Gdansk-Plock•Rostock-Schwedt-Leuna•Schwechat-Bratislava


TAL supply zone

Adria supply zone

Significant Refinery Rationalization in the Atlantic Basin Expected

PADD 2 & Midwest.

Canada

PADD 1 & East.

Canada

40%

60%5%

95%

PADD 116%

PADD 23%

PADD 35%

Northwest Europe

47%

Med. Europe

16%

Caribbean13%

At Risk Capacity by Region*


Note: All numbers exclude refineries < 40 mb/d

� Roughly 2/3 of the at risk capacity is located in Europe

� This outlook is through 2016

PADD 3

Caribbean3%

97%48%

52%

Med. Europe

Northwest Europe

27%70%

3%

18%

80%

2%

How Much Relief Can We Expect For EuropeanRefining?

� European demand is expected to continue to decline

– 1% per year on average in benign scenario

– Euro break-up could be « nightmare » scenario

� US situation unlikely to normalize quickly

– Surge in shale oil will entrench US Light Sweet discounts

None

None


� Russian exports will eventually reverse (after 2015)

– Mooted change in 2015 to HFO export tax could lead to reduced capacity and throughputs…

– …but unlikely to affect distillate exports too much

– And Russian crude exports to Med likely to decline

Not before2015

In short to medium run, main relief willcome from refinery closures

Radical Change in European Refining Competitive Landscape Will Therefore Continue In The Medium Term

UK: Essaracquires Shell

Stanlow refinery

Germany: Kleschacquires Shell Heide

refinery

Netherlands: Lukoiltakes stake in

Vlissingen refinery from DOW

Assets for sale:• Czech Rep: Ceska Rafinerska (Shell, Eni

stakes)• France: Berre L’Etang (LyondellBasell)• UK: Humber (COP)• UK: Milford Haven (Murphy)• Petroplus: Cressier (Switzerland), Petit-

Couronne (France), Antwerp (Belgium)• UK: Lindsey (TOTAL) - cancelled

Confirmed permanent closures since 2009:• France: Dunkirk (Total)• France: Reichstett (Petroplus)• Germany: Wilhelmshaven (Hestya)• Italy: Cremona (Tamoil)• Romania: Arpechim (OMV Petrom)• UK: Teeside (Petroplus)

Non-confirmed permanent closures:• Petroplus: Cressier (Switzerland), Petit-

Recent M&A Activity

Germany: Hestyaacquires COP

Wilhemshaven refinery

Germany: Nynas acquires Shell Harburg refinery

Poland: Lotos Gdansk refinery privatization failed. May relaunch.


Sweden: Keele (St1) acquires Shell

refinery

Germany: Rosneftacquires stake in

Ruhr Oel

UK/France: PetroChina

acquires stakes in Ineos

refineries at Granemouthand Lavera

• Petroplus: Cressier (Switzerland), Petit-Couronne (France), Antwerp (Belgium)

• France: Berre L’Etang (LyondellBasell)

Italy: ERG sake to Lukoil

UK: Valero acquires Chevron Pembroke refinery

Italy: ERG Total JV at Pantano

Spain: IPIC acquires Total stake in Cepsa

Lithuania: PKN Orlenshelves sale of Orlen Lietuva

Bosnia: Zarubezhneftacquires Brod/Modrica

refineries

Albania: Taci Oil acquires ARMO refineries

Serbia: Gazprom Neftacquires 51% stake in NIS

Belgium: Vitol acquires Petroplus Antwerp

refinery

Source: Refining

Monitoring

Service

But Retail & Marketing Margins Hold Up in Europe

0.08

0.10

0.12

0.14

EU15 Gross Distribution Margins€ per liter

Source: Global

Retail Service


Lower Refining Runs Provide Support to EU Marketing Margins

0.00

0.02

0.04

0.06

0.08

2006 2007 2008 2009 2010 2011

For European Downstream, Refining Risks Will Remain, Value Likely to be in Fuels Marketing

� Negative drivers for European refining are likely to remain in place for upcoming years…

� …which will lead to continued closures across NWE and the Med

� Refinery closures will help to support distribution margins and provideadvantages to well integrated players


Refining Risks Remain Very High in Europe – Marketing to Provide Earnings

� For investors, need to be extremely selective in going after refineriesup for sale…

� …and need to privilege downstream integrated positions

Balkans Expected to Partly Buck Decline Trend of Europe

100

120

140

GDP - Balkans vs EuropeBase 100 in 2011

610,000

630,000

650,000

670,000

20,000

21,000

22,000

23,000

Product Demand - Balkans vs EuropekTons per year


European demand to decline Balkan demand expected to rise

60

80

2005 2007 2009 2011 2013 2015 2017

Balkans EU

Source: IMF, PFC Energy

570,000

590,000

610,000

18,000

19,000

20,000

2005 2007 2009 2011 2013 2015 2017

Balkans EU

Source: National Statistics, PFC Energy

Bulgaria: Mild Growth Expected in Medium Run

2,000

2,500

3,000

3,500

4,000

1,000 tonsDemand - Bulgaria

LPG & Gasoil to see main growth


0

500

1,000

1,500

2,000

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

LPG Naphtha Gasoline Jet/kero Gasoil HFO

Croatia: Demand Growth Expected Until Fuel Oil Phase Out

2,0002,5003,0003,5004,0004,500

1,000 tonsDemand - Croatia

Gas + SECA could

lead to dramatic

fall in HFO


0500

1,0001,5002,000

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029


Serbia & Montenegro: Medium Term Growth Expected

2,000

2,500

3,000

3,500

4,000

1,000 tonsDemand - Serbia and Montenegro

Significantgrowth of Gasoil &

LPG


0

500

1,000

1,500

2,000

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029


20,000

25,000

30,000

35,000

1,000 tonsDemand - Turkey

Turkey: Significant Growth Expected

Gasoil willcontinue to

drive demand


0

5,000

10,000

15,000

20,000

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029


Refineries in East Med Are Poorly Equipped for Challenging Environment, Especially in Balkans

63%

69%

80%

81%

81%

Serbia

Bulgaria

Greece

Hungary

EU-27

Croatia

Greece

Bulgaria

Romania

Hungary

Bosnia & Herz.

Turkey

6

8

10

12

Co

mp

lex

ity

Balkan and Black Sea Refining

Area refiners are dealing with their own set of troubles…


25%

34%

39%

44%

52%

53%

54%

57%

0% 50% 100%

Ukraine

Albania

Bosnia & Herz.

FYRO Macedonia

Croatia

B&BS Average

Romania

Turkey Albania

Serbia

Ukraine

AverageFYRO

Macedonia

0

2

4

0 50 100 150 200

Co

mp

lex

ity

Average refinery size (mb/d)

• Inoperable capacity (particularly in Ukraine and the Balkans) skews utilization figures significantly below global averages

• Smaller average size limits benefits of scale and increases exposure for shutdown

HFO Substitution Major Challenge Going Forward

3,000

4,000

5,000

6,000

7,000

8,000

9,000

East MED & Black Sea

HFO Supply/Demand Balance Forecast1,000 tons

20%

22%

23%

29%

38%

44%

Ukraine

Albania

Bulgaria

Greece

FYRO Macedonia

Bosnia & Herz.

HFO Yield

NB: Ex. Russia


� As local demand falls and major conversion investments are delayed, HFO overhang will continue to grow– Tightening fuel standards (bunkering, electricity generation)

limit local demand markets

� Does not take into account Russian HFO exports flowing through Black Sea, which are ~15 mmt/y– Cannot compete with Russian refining system

-

1,000

2,000

3,000

2%

6%

8%

10%

17%

17%

20%

0% 20% 40% 60%

Hungary

Romania

Turkey

EU-27

B&BS Average

Croatia

Serbia

Assumes no closures of Balkan refineries

Balkans / East Med Considering Large Number of Refining Investments

� Romania

– Recent stream of HCK at Petromidia

– Thermal cracked & asphalt unit due in 2013 at Petrobrazi

� Bulgaria

– Resid HCK planned for 2015 at Bourgas

� Croatia

– Hydrotreating to meet Euro V almostcompleted at Rijeka

� Greece

– Elefsina refinery has seen major upgrade

• New CDU, flexicoker and hydrogen plant

– Thessaloniki also completed significantupgrade

• Boosts middle distillate yield

� Turkey

– Residuum upgrade project at Izmit,


Numerous mooted Balkan projects SEast Med also actively investing

completed at Rijeka

– Coker under consideration

� Serbia

– Resid upgrading under consideration

� Albania

– Considering upgrade to run more domestic crude

– Residuum upgrade project at Izmit, planned for 2014 streaming

• Will boost production of middle distillates

– STAR greefield refinery planned for 2014 startup

• Located near Izmir

• Socar and Turcas behind project

• Will provide feedstocks to nearby Petkimpetrochemical plant

• Will add 6 mmtons of Euro V diesel

Criteria For Profitable Refining?

� Investors are finding times challenging for downstream investments

1 ScaleRefineries above 200 mb/d usually enjoy unit costadvantages versus smaller sites

2 ComplexityComplex refineries generally produce more high valueproducts and have more flexibility

Criteria for Success in Refining


products and have more flexibility

3Alignment with market

Refinery production should be well aligned with demandin target markets to prevent selling at a loss

4 SupplyUpstream integration with crude can give a supply costadvantage.

5DownstreamIntegration

Downstream integration, for example withpetrochemicals and lubricants, can add value

6 LocationLogistical advantages (crude supply, product offtake,access to market) are all important

East Med Refining Projects Unlikely to All Go Ahead

� European refining environment will remain highly challenging in the next few years

� Balkan refineries lack complexity and scale and produce too muchfuel oil…

� …in a market that will see less and less fuel oil demand


Need to be very selective in choosing upgrade projects

� …in a market that will see less and less fuel oil demand

� Investing to upgrade all East Med refineries is not realistic…

� …only a few projects will be economically viable

ASIA

PFC Energy, Kuala Lumpur

Level 27, UBN Tower #21

10 Jalan P. Ramlee

50250 Kuala Lumpur, Malaysia

Tel +60 3 2172 3400

Fax +60 3 2072 3599

PFC Energy, China

89 Jianguo Road

China Central Place # 4-1602

EUROPE

PFC Energy, France

19 rue du Général Foy

75008 Paris, France

Tel +33 1 4770 2900

Fax +33 1 4770 5905

PFC Energy International, Lausanne1-3, rue Marterey

1003 Lausanne, Switzerland

Tel +41 21 721 1440

NORTH AMERICA

PFC Energy, Washington

1300 Connecticut Avenue, NW

Suite 800

Washington, DC 20036, USA

Tel +1 202 872 1199

Fax +1 202 872 1219

PFC Energy, Houston

2727 Allen Parkway, Suite 1300

Houston, Texas 77019, USA

Tel +1 713 622 4447

PFC Energy Locations and Contact Information


Chaoyang District, Beijing 100025, China

Tel +86 10 6530 7010

Fax +86 10 6530 5093

PFC Energy, Singapore

9 Temasek Boulevard

#09-01 Suntec Tower Two

Singapore 038989

Tel +65 6407 1440

Fax +65 6407 1501

Tel +41 21 721 1440

Fax: +41 21 721 1444

Tel +1 713 622 4447

Fax +1 713 622 4448

www.pfcenergy.com | [email protected]

Marc Seris, Senior Director › 6thSEEED › articlefiles › sessionI › Seris.pdf · 10 15 20 25...

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