Toril Bosoni (IEA) - Clingendael

© OECD/IEA 2012
IEA Refinery Rationalisation
Implications for Security of Supply
Clingendael International Energy Programme
The h Hague 4 April l 20 20122
Toril Bosoni, International Energy Agency

© OECD/IEA 2012
Background g
• Since the economic recession of 2008/2009, more
than 3.0 mb/d of crude distillation capacity has
closed or is scheduled to close in the OECD OECD, with
more at risk
• OECD demand is contracting contracting, while growth is still
strong in non-OECD countries
• Significant refinery expansions are taking place in
the non-OECD, outpacing expected demand growth
• Pressure on OECD refiners refiners, particularly European
operators, will therefore continue, with margins
remaining weak and further closures likely
• As a result, trade flows of crude and products will
shift in favour of product imports, with implications
for stocks holdings g and securityy of supply pp y

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The Refinery Business is Still a Challenging One
$/bbl
15
Refinery Cracking Margins
$/bbl
6
4
European H'skimming Margins
10
2
0
5
-2
-4
0
-6
-8 Source: Purvin & Gertz Inc.
Source: Purvin & Gertz Inc.
-5
2002 2005
Med Urals
NWE Brent
Singapore Dubai
2008 2011
NWE Urals
USGC Mars
-10
2002 2005
Urals H'sk NWE
Es Sider H'sk MED
2008 2011
Brent H'sk NWE
Urals H'sk MED
• Refinery margins have deteriorated sharply since 2008
• Simple margins in Europe remain firmly negative negative, forcing
several plants to close or reduce runs due to weak
economics
• I In 2011/2012, 2011/2012 product d t prices i failed f il d to t k keep up with ith rising i i
crude prices
• Surplus p global g refinery y capacity p y persists, p as refinery y
shutdowns not enough to offset new-built capacity and
weak demand

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Demand Growth and Refinery Rebound Slows
But two distinct trends emerge g in the OECD and the non-OECD
mb/d
35 3.5
2.5
1.5
0.5
-0 -0.5 5
Global Throughputs vs. Demand
Annual growth
mb/d
42 42.0 0
40.0
38.0
36.0
OECD vs. Non-OECD Crude Runs
-1.5
34.0
-2.5
-3.5
32.0
1Q08 1Q09 1Q10 1Q11 1Q12 30.0
Crude Runs Oil Product Demand
1Q2004 1Q2006 1Q2008 1Q2010
OECD Non-OECD
1Q2012
• Two distinct trends emerging however however, with non-OECD posting
robust growth and mature OECD markets continue to contract
• Non-OECD overtakes OECD in terms of refinery throughputs in
4Q09 4Q09, and d there th to t stay t

© OECD/IEA 2012
kb/d
1,500
1,250
1,000
750
500
250
0
OECD Consolidation is Picking up Speed
OECD Refinery Closures
2008 2009 2010 2011 2012 2013 2014 2015 2016
North America Europe Pacific Petroplus Hovensa
Petroplus and Hovensa not included in Dec 2011 Update
kb/d Cumulative OECD Refinery Closures
3,500
3,000
2500 2,500
2,000
1,500
1,000
500
0
2008 2010 2012 2014 2016
North America Europe
Pacific OECD
• Total refinery capacity reductions in the OECD now amount to
more than 3.0 mb/d since 2008
• North America and Europe shut 11.3 3 mb/d and 1.1 1 1 mb/d, mb/d
respectively. Pacific 0.6 mb/d scheduled so far
• This does not include recently bankrupt Petroplus’ 5 European
refineries, as future is still uncertain, nor Valero’s Aruba plant
which is being idled due to poor economics, but currently idle
and for sale US East Coast plants (Trainer and Marcus Hook)
• Europe is the focus, since refiners here have missed out on
favorable feedstock economics (N. America) and stronger
demand (Asia) evident elsewhere in the OECD

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European Downstream Changes Gain Pace
• 1.1 mb/d of capacity already shed
• Including all five Petroplus plants (665 kb/d), closures could
amount to 1.7 mb/d since 2008
• In addition, lot of ownership changes, with Russian, Chinese,
Indian players entering the market

© OECD/IEA 2012
European Refinery Runs Decline Primarily on
Falling Demand
mb/d
16
14
12
10
8
6
4
2
0
European Oil Demand
1984 1989 1994 1999 2004 2009 2014
LPG and Ethane Naphtha
Motor Gasoline Jet and Kerosene
Gas/Diesel Oil Residual Fuels
kb/d
100
50
-
(50) ( )
(100)
(150)
OECD Europe: Oil Demand Growth by
Product
Gasoline Other Distillates
LPG & Naphtha Fuel Oil
Other Diesel
2011 2012 2013 2014 2015 2016
• European p oil demand declined from 15.7 mb/d / in 2006 to 14.3
mb/d in 2011 (1.4 mb/d, or 280 kb/d per annum)
• Forecast to shed another 0.7 mb/d by 2016 to reach 13.6
mb/d
• In contrast, diesel continues to grow. 0.2 mb/d diesel growth
expected from 2011-2016 (c.f. 0.5 mb/d 2006-2016)

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In Contrast, Non-OECD Refinery Expansions Boom
mb/d
2.0
1.0
0.0
-1.0
Crude Distillation Additions
2011 2012 2013 2014 2015 2016
OECD
Other Asia
Latin America
China
Middle East
Other Non Non-OECD OECD
mb/d Cumulative CDU Expansions
8.0
60 6.0
4.0
2.0
0.0
-2.0
2011 2012 2013 2014 2015 2016
OECD China
Other Asia Middle East
LLatin ti America A i Oth Other Non N OECD
• More than 8.3 mb/d of crude distillation capacity is scheduled
to be added globally by 2016
• All of the additions comes from the non-OECD, with OECD
contracting by a net 0.7 mb/d
• Non-OECD Asia accounts for more than half of expansions,
(China 3.0 mb/d Other Asia 1.4 mb/d), while the Middle East
and Latin America also see large g expansions p ( (2.1 mb/d and
1.1 mb/d respectively)

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Capacity Additions Outpace Demand Growth
And Increasing Share Met by Other Supplies
mb/d
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
CDU Additions vs. Oil Product
Demand Growth
2009 2010 2011 2012 2013 2014 2015 2016
World Demand Capacity Additions
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
mb/d
Cumulative Demand Growth and
Sources of Supply
2011 2012 2013 2014 2015 2016
GTL/CTL Biofuels
NGL transfers Refinery Intake
Direct crude burn Processing Gains
• After a tightening of spare refining capacity over 2010-2011,
global capacity expansions are again expected to outpace oil
product demand growth from 2012
• Furthermore, an increasing share of demand met by NGLs
bypassing refinery system, biofuels, crude direct burn,
processing p g ggains and ggas and coal-to-liquids q

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Utilisation Rates and Margins Remain Under Pressure
More Closures to Come –Mostly y in OECD
90%
85%
80%
75%
Refinery Utilisation Rates
mb/d Global Spare Capacity at 83%
Utilsation
7
70%
1Q06 1Q08 1Q10 1Q12 1Q14 1Q16
1
0
-1
OECD NNon-OECD OECD WWorld ld 2006 2008 2010 2012 2014 2016
• OECD utilisation rates fall sharply during the recession and only
pick p up p marginally g y as demand recovers
• Non-OECD rates fall less markedly as refiners in strong demand
growth areas are able to sustain higher runs
• If a global utilisation rate of 83% were to be attained, the
average rate during 2006-2008 when we last saw synchronous
healthy margins, an additional 5.9 mb/d of crude distillation
capacity would ld hhave to bbe closed l d or not bbuilt l as planned l d bby
6
5
4
3
2
2016. The bulk of the capacity reductions would likely come from
mature OECD markets.

© OECD/IEA 2012
As a Result of Refinery Restructuring in Europe
Crude Imports p Fall on Lower Runs, , Despite p Declining g Production
mb/d OECD Europe Oil Production
7.0
6.0
5.0
4.0
3.0
2.0
1.0
10.0
mb/d Europrean Crude Oil Imports
00 0.0
0.0
1994 1998 2002 2006 2010 2014 1Q20061Q20081Q20101Q20121Q20141Q2016
• European net crude imports already fell from more than 10 mb/d
in 2006, 2006 to 9.6 9 6 mb/d in 2010, 2010 despite a 1.1 1 1 mb/d decline in
regional production
• Towards 2016, net crude oil imports could fall towards 8.0 mb/d,
on continued demand declines and increased competition from
non-OECD refiners
• If that was to happen without further closures, utilisation rates
would fall below 70% in 2016, 2016 from 80% in 2010/2011
• For utilisation to be brought back to 83%, 2.3 mb/d additional
capacity would have to be shut
8.0
6.0
4.0
2.0

© OECD/IEA 2012
European Product Imbalances Worsen
• European distillate imports could
reach 1.5 mb/d in 2016, from 1.1
mb/d in 2010
• Additional high quality volumes to
come from Russia, Saudi Arabia,
BBrazil il (after ( ft 2016). 2016) US retain t i
export potential, Asian supplies to
meet regional demand
mb/d European Oil Product Imbalances
1.6
1.4
1.2
1.0
08 0.8
0.6
0.4
0.2
0.0
2008 2010 2012 2014 2016
Gasoline Exports Jet/Gasoil Imports

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European Gasoline Surplus Persist
Export p Markets Diminish
• K Key European E gasoline li outlets tl t
diminish, with increased self
sufficiency in the US and increased
light product output in Middle East East,
with NGL surge
k b/d US 50: Motor Gasoline Demand
9,500
9,000
8,500
8,000
7,500
2000 2004 2008 2012 2016
Gasoline
Ethanol - energy content adjusted

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Consequences of Refinery Rationalisation on
Stock Holding
Industry Stock Levels
• Refinery shutdowns reduce level of commercially held
stocks
– Crude oil and unfinished product stocks will be reduced in
proportion to refinery closures
– Reduction of finished product stocks is minimal
• However, location of refinery plays a very important role
Composition
• Share of commercial crude oil stocks down and share of
commercial product stocks up
– The higher the share of crude before refinery closure, the
larger the shift in composition
– If lowered input fuel stocks are compensated by higher
stocks of finished products, the shift is even larger

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Impact on Stocks in Different Stockholding
Systems
• Lower commercial inventories of crude oil and unfinished
products result in reduction of f overall stock levels
• Reduction of total stocks is less pronounced p
in countries
with public stocks, and more pronounced in countries
relying solely on an industry obligation

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Impact on Stocks in Different Stockholding
Systems
Impact of a 20% Reduction in Refining Capacity
Reduction in Reduction in Total Change in Oil Stock
Country
Commercial Stocks Stocks Levels in Days of Net
Imports
Countries with public stocks
Belgium 6.0% 2.2% ‐2.8
Czech Republic 4.1% 1.0% ‐1.5
France 10 10.7% 7% 33.7% 7% ‐4.0 4 0
Germany 3.6% 1.0% ‐1.4
Netherlands 10.8% 9.2% ‐16.2
Poland 11.2% 9.8% ‐13.4
Spain 8.0% 4.9% ‐5.5
Countries reliant on industry stocks only
Greece 6.2% 6.2% ‐6.9
Italy 4.8% 4.8% ‐6.4
Sweden 6.0% 6.0% ‐7.4
Turkey 11.6% 11.6% ‐13.0
United Kingdom 9.4% 9.4% ‐44.5

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Change of Stockholding Regulations?
Should stockholding regulations change to remain compliant
with IEA and EU obligations?
IEA obligation
• Countries with 90 days of public stocks remain compliant
• Rules for obligated industry stocks prevent most countries
from becoming non-compliant
– Rebalancing: new or remaining operators have to fulfil a
higher stockholding obligation
• Countries without stockholding regime in danger zone
EU obligation
• New rules on accessibility and availability of emergency
stocks
• Stockholding laws might not suffice to compensate for the
reduction in emergency stocks
• Stockholding laws might have to be changed obliging
companies to hold more stocks

© OECD/IEA 2012
Impact of Refinery Restructuring on Security
of Supply
• How to define and measure security of supply?
• IEA is in process of developing a comprehensive approach to
energy security of supply, and has constructed a Model of
Short-term Energy Security (MOSES)
• MOSES looks at crude and oil products separately using a set of
quantitative indicators of import and domestic risks as well for
resilience capacities to deal with different disruptions.
• To look at impact of refinery closures, both crude and product
security situation has to be evaluated
• Difficulty is to determine overall security or relative importance
of the diverging trends

© OECD/IEA 2012
Impact on Security of Supply (2)
While more work is needed to fully measure vulnerability, a
preliminary conclusion of applying MOSES to the situation of
refinery rationalisation in Europe would be that:
• The reduction of the number of refineries would likely
result in an increase of product deficits, deficits pointing to a
worsening of the security of supply of oil products.
• While crude oil imports will decrease, the import
dependency of crude oil will likely remain high and
product stock levels and other indicators are not likely to
change.
• Th Therefore, f by b becoming b i more and d more dependent d d t on
product imports, the region’s security of supply worsens
and Europe becomes more vulnerable to future supply
crises affecting major product export hubs hubs.

© OECD/IEA 2012
Conclusions
• With or without further refinery closures in Europe, runs are likely to
fall in line with regional demand and as new capacity is starting up in
the non-OECD
• Based on this crude allocation scenario, without further closures,
utilisation rates in Europe could fall below 70% in 2016
• T To bring b i rates t back b k t to 83% as we had h d over 2006-2008 2006 2008 (the (th last l t time ti
we saw healthy margins) 2.3 mb/d of additional capacity would have
to be shut in Europe, 5.9 mb/d globally.
• While the additional shutdowns would improve margins, this
scenario already assumes that European refiners will not be able to
compete with new refineries, and thus lower runs.
• Import requirements of crude could fall below 8 mb/d, from 9.8
mb/d in 2011
• At the e same sa e time, e, distillate d s a e shortages s o ages would ou d increase, c ease, potentially po e a y to o
more than 1.5 mb/d, from 1.1 mb/d in 2010
• Stockholding laws might have to change to prevent non-compliance
of IEA and EU obligations
• Security of supply situation of Europe will worsen with continued
refinery rationalisation

© OECD/IEA 2012
Toril Bosoni,
Senior Oil Market Analyst, Refining
Oil Industry & Markets Division
International Energy Agency
toril.bosoni@iea.org
Thank you