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News : International Last Updated: Apr 24, 2009 - 5:31:05 PM


Global oil refining industry to face big investment challenges to adjust to climate change agenda; EU Finance Ministers stop short of threatening import carbon tax
By Finfacts Team
Feb 13, 2008 - 5:35:06 AM

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Slovenian Finance Minister Andrej Bajuk, the EU Monetary affairs Commissioner Joaquin Almunia and the Vice President Commissioner for Administrative Affairs, Audit and Anti-Fraud Siim Kallas at the press coference after the ECOFIN Council meeting in Brussels on Feb 12, 2008.

The global oil refining industry will face significant new reconfiguration and investment challenges over the coming dozen years in order to avoid shortfalls in diesel, heating oil and jet fuel supplies, as well as to minimize the risk of a decline in refining capacity utilization, Cambridge Energy Research Associates (CERA) Downstream Director Olivier Abadie told a briefing at the firm’s CERAWeek 2008 energy conference in Houston, Texas, on Tuesday. On Tuesday in Brussels, European Union finance ministers said that they would consider “any necessary measures” to support European companies threatened by rivals in countries with lower environmental standards.

New oil refineries cost several billion dollars to build and are not particularly profitable. In the US, environmentalists fight planning and construction every step of the way and government red-tape is said to makes the task all but impossible. The last refinery built in the US was in Garyville, Louisiana and it started up in 1976.  

Iran, the world's fourth biggest oil producer, regularly rations petrol because it has insufficient refining capacity.

European Union Finance Ministers' Meeting

European Union finance ministers on Tuesday avoided threatening carbon tariffs to defend domestic companies that may be vulnerable to rivals in countries with lower environmental standards.

French President Nicolas Sarkozy has supported a "carbon tax" on fossil fuels and other pollutants, as well as a possible levy on imports from countries outside the Kyoto Protocol.
  
"Green taxation has to be more than just a compilation of little taxes," Sarkozy said in October 2007. "We need to profoundly revise all of our taxes and charges. The aim is to tax pollution more, including fossil fuels, and to tax labour less."

Sarkozy pledged to study the creation of a "climate-energy tax", "in exchange for an alleviation of labour taxes", ruling out any increase in overall taxation.

On Tuesday in Brussels, following a a discussion of the financial and economic impact of the EU’s climate change policies, ministers said they would consider “any necessary measures” to assist European industry, but did not specifically refer to special import taxes or quotas.

The vague language was seen as a compromise between a French-led supporters of tougher measures and the UK and others that are wary of a a move towards protectionism.

Houston Energy Conference

The International Energy Agency is expected to lower its forecast for global oil demand partly because of a slowing US economy, Executive Director Nobuo Tanaka said at the Houston conference.

The agency will release its demand forecast today, Tanaka said. In January, the Paris-based IEA, which is the the energy adviser to 27 developed countries, cut its forecast for global oil demand in the first quarter of 2008 by 100,000 barrels a day because of mild US weather.


The CERA report on refining investment says:

Lighter Feedstock – Contrary to conventional wisdom, new supplies of heavy and sour crudes appearing from the Middle East, Latin America and Canadian oil sands will be balanced by many components: light crude streams from Eurasia and Africa, medium-to-light deepwater oil, a good portion of Canadian heavy oil upgraded and marketed as light syncrudes. In addition, as condensates separated from wet gas at the wellhead rise to 12 percent of total liquids capacity volume by 2020, and are partly spiked into the crude, CERA expects a the overall feedstock density should not decrease.

Slow Feedstock Supply Growth – At best, total refinery feedstock would grow by only 0.6 percent/year between 2010 and 2020, much lower than the expected overall demand growth of 1.6 percent/year. Therefore, if refiners continue to build crude processing capacity on the 1.6 percent rate, refining utilization rates and margins would fall. 

Potential Conversion Overcapacity – Rising demand for gasoline and diesel in recent years has led refiners to plan additions of as much as 11 million barrels per day (mbd) of capacity to convert residual fuel oil into light products. However, CERA estimates there may be only 6 mbd of residual fuel oil available for that new conversion capacity.

Product Yields vs Demand Mismatches – Middle distillate products (diesel, heating oil, jet fuel and kerosene) are projected to account for more than half of world oil demand growth between 2007 and 2020. However, light liquids – the largest additional component of liquids supply – yields only an average of 20 percent middle distillates, resulting in a middle distillates deficit of about 3 mbd, and gasoline supply 3 mbd higher than demand. The global refining system has the challenge to adapt its configuration to cope with this significant mismatch.

“As we move beyond 2010, the key challenge for the refining industry will be adding the appropriate type of conversion capacity – particularly hydrocracking – and not necessarily adding more volumes of simple crude distillation capacity,” Abadie said. “In the dynamic oil industry, investment responds to market signals. The degree to which refiners invest in adequate conversion capacity will be critical in successfully addressing this significant change in the composition of global liquids supply.”

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