Feature Report: Refining, a Sector Undergoing Profound Changes

3 items of content in this feature report

Going in depth


Refining, Background and Issues

In Europe, the refining industry is encountering a slew of difficulties, including declining petroleum product consumption and eroding margins. And on the export side, the American market is saturated. In contrast, demand in emerging economies, particularly in Asia and the Middle East, is growing strongly.

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Service station in Safi, Morocco. Demand in emerging economies is growing strongly. © SORDOILLET PATRICK / TOTAL

A Contrasting Global Situation

On a global scale, oil consumption continues to rise. However, situations differ from region to region.

+5%: the average annual growth in oil consumption in China

In emerging economies, especially China, India, and the Middle East, oil consumption is rising sharply; for instance, it grew up 5% in China in 20121. In Europe on the other hand, demand is steadily falling. European public authorities have been encouraging energy savings for a number of years, promoting public transportation and renewable resources to combat global warmingGlobal warming, also called planetary warming or climate change... . Motor vehicles are becoming more and more efficient and using less and less fuelFuel is any solid, liquid or gaseous substance or material that can be combined with an oxidant... .

The refining sector reflects these trends. So in emerging economies, refining capacity continues to increase and projects for new refineries are proliferating, with Brazil being particularly dynamic. In Europe , however, production overcapacity is a growing concern.

Mismatch Between Capacity and Demand in Europe

In Europe, the refining industry also faces another difficulty: the "dieselization" of the vehicle fleet, which remains strong despite an emerging downward trend. In 2012, dieselDiesel is the name of an internal combustion engine that works by compression-ignition... engines accounted for 55% of European registrations, versus 60% in 2011. They represented just 40% of car registrations in 1985. In France, the proportion surpassed 72% in 2012, and despite a 5-point drop in 2013, it remains higher than the European average2.

At the pump, diesel is about 20 euro cents cheaper per liter than gasoline, even though the price before tax is almost identical. Businesses can also benefit from tax incentives. The original aim of public authorities was to encourage French automakers, who are leading the way in diesel technology.

The problem is that European refineries are now producing too much gasoline and not enough diesel. The result is that Europe has to import diesel. The surplus gasoline had up until now been exported to the United States, where the number of diesel-powered passenger cars remains low. However, in recent years the American market has been becoming more self-sufficient.  Not only is the United States consuming less oil — like most industrialized countries — but it is also stepping up its production of shale oilRefers to liquid hydrocarbons extracted from oil shale (see definition) by heating, pyrolysis or hydrogenation. , a light, low-cost oil contained in clay sedimentary rock.

Highly Volatile Refining Margins

The refining marginThe gross refining margin is the difference between the value of petroleum products, such as gasoline and diesel... is the difference between the value of refined products in the market and the value of crude oilOil that has not been refined. . It depends on many factors, such as the geopolitical situation, supply and demand trends, inventory levels and investments.

European refineries are now producing too much gasoline and not enough diesel.

Refining margins have been declining since 2009 because of the global slowdown in demand and overcapacity. In 2011, they averaged just €14 per ton for BrentBrent is the name given to a relatively light crude oil made from a blend of crudes from 19 oil fields in the North Sea... crude — a decrease of 32% from 2010. This has not changed much for consumers, since the refining margin accounts for only a tiny percentage of fuel prices. In 2012, margins recovered substantially, to €34 per ton, before tumbling again to €18 per ton in 2013 and €17 per ton in the first five months of 20143.

A Sector Undergoing Restructuring

According to the French Ministry of the Economy and Finance, the breakeven point in refining is about €25 euros per ton of crude oil4.  As a result refineries are shutting down, particularly in Western Europe. To avoid further closures, refiners are now speeding upgrades of their facilities (See Close-Up: "Refining, a Production Base Undergoing Profound Change"). Much is at stake: in France alone, refining accounts for 13,000 direct jobs and around 40,000 indirect jobs5.



(1) BP

(2) ACEA

(3) General Directorate for Energy and the Climate (French only)

(4) French Ministry of Economy and Finance

(5) UFIP