This is the sixth in a series of researched articles on the oil and gas industry, the situation in the North Sea and the relation of this overall picture to a potentially independent Scotland.
We are publishing these as a series because oil is one of the most important, complex, contentious – and fascinating – matters of wide interest, given its role in the ongoing campaigns for independence from the United Kingdom and for the retention and revisioning of that union.
Articles – some short, some longer – will cover, in this order:
- The Industry Today
- Europe and Shale Oil
- The North Sea
- The Wood Report
- North Sea Investment
- The UK refineries
- Grangemouth – the game changer
The purpose of the series is to inform, not to promote any political stance, although there are political indicators in the facts of the matter.
The previous five articles in this series have been essentially concerned with extraction. This one moves to look at the refining sector, the link between production and the end user.
Today’s oil industry is delivering a bit of a dilemma to refineries. With sour heavy crudes much of the long term future but the gush of American sweet light shale oil – or tight oil – having bowled a googly at the market, refineries are having a strategic choice to make.
Do they gear up to refine crudes, which are cheaper to buy, with Canada’s Alberta oil sands output the cheapest of the lot, offering the highest profit margins? But crudes are slower and more complex to refine – with a greater number of processes involved to extract sellable product from it at every stage. For example, the second stage in refining is ‘cracking’ – applying extreme heat to break up the crude into the different hydrocarbons. The ‘bottoms’ – the thick residues from heavy crudes left at the bottom of the various refining towers – are sometimes taken out of the process early and sent out as asphalt. Crudes also create significantly greater carbon emissions in the refining process. All of these factors create higher production costs.
Do they pay more for the sweet light crudes pouring out of the USA but see a quicker throughput to market at the refining end – as these crudes yield their products more easily, with fewer stages of processing.
There are increasing volumes of cheap heavy crudes available – principally from Canada. The UK will see EnQuest’s new Kraken Field heavy crude asset into production in a couple of years; and much of the North Sea’s remaining assets are in heavy and ultra heavy crudes, with the newer assets in production on the Clair Ridge, west of Shetland, also heavy crudes.
Refiners processing Canadian heavy crudes make higher profits on all their products – partly because they can make more diesel from dilbit [diluted bitumen] due to the physical properties of the crude. Diesel gets higher prices than gasoline in export markets because demand is high. Light sweet oil grades, including the discounted types now flooding America’s Gulf Coast from the Bakken and Eagle Ford shales, produce a higher volume of gasoline.
This situation is relevant to the European refining industry – with small, out of date plants unable to process dilbit – and closing in numbers; and with the most frequent criticism of both European and UK refineries being that their ‘product slate’ is unresponsive to market demand.
This centres on over-production of gasoline and kerosene from light crudes; and under-production of diesel from the heavy crudes they’re not geared up to refine. With the market clearly and for some time having turned away from petrol and towards diesel, this product slate is not good business.
An EU Round Table on refining in May 2012, found: ‘the need to assess and monitor the EU’s petroleum products security of supply situation as well as monitor current and future EU legislative proposals for potential negative impacts on the competitiveness of the EU refining sector’.
A month ago, in October 2013, Hungary’s MOL Group took the decision to close Italy’s 52,000 barrels per day (bpd) Mantua refinery on New Year’s Eve and to convert it into a product storage terminal.
David Wech, managing director of Vienna-based JBC Energy consultancy. said that around 330,000 bpd of European refining capacity – or six Mantua refineries – ‘need to be shut down every year by 2020 in order to meet declining demand and rising competitive pressures’.
The second problem for the remaining European refineries and the UK plants is born of the way the energy demands of the developing countries is shaping the industry. America’s indigenous shale oil production has recently seen it hand over to China as the world’s biggest importer.
The pressure on European and UK refineries will be accelerated by the expected growth of refineries in Asia Pacific and China. OPEC predict that consequently, world wide, by 2018 there will be over capacity in refining – with ‘an overhang’ of 4 million barrels a day.
With the American east coast refineries and their petrochemical plants gearing up in large measure to deal with the burgeoning output from the shales and with exports booming, the more remote-from-source European and UK refineries are looking at an increasingly tough price-competitive market, which will see more closures in UK refineries and, for the time being, continuing restricted production from the North Sea.
There is wide acceptance that the contraction of the European refining industry is permanent, with KPMG saying in June 2012: ‘The European refining industry has gone through numerous cycles, but this time many of the changes are likely to prove permanent and we expect the current trends of falling demand, rising imports, increasing European legislation, growing competition from emerging markets and eroding margins to continue.’
Note: The map above, of the Pan European Pipeline, is by Olahus and is reproduced here under the Creative Commons licence.