No. 3, 2012


Oil of Russia magazine talks to Isabelle Muller, Secretary General of EUROPIA

IN RECENT YEARS, SOME RUSSIAN VERTICALLY INTEGRATED OIL COMPANIES have been actively engaged in the European downstream sector, purchasing refineries and sales networks in East and West Europe. But what do the traditional players in this market think of the newcomers? Of course, each of the European corporations has its own aims and assignments, as well as, possibly, its own opinion about Russian expansion. But there is an organization in the Old World called upon to find a common vector of interests among the representatives of this business - the European Petroleum Industry Association (EUROPIA) with its headquarters in Brussels.

Q: Ms. Muller, what are your organization's main vectors and forms of activity? How does it interact with enterprises of the refining industry?

A: We only represent the downstream sector (refining, transportation, and sales) and do not work in the upstream sector. Our organization includes large international corporations such as BP, ExxonMobil, Shell, Total, Eni, regional European companies, such as Cepsa and Repsol of Spain, Statoil of Norway, OMV of Austria, PKN Orlen of Poland, Hellenic Petroleum of Greece, as well as independent refining companies such as Petroplus (although it is currently in a difficult situation and may leave our association), and Valero. That is, enterprises from many European countries, both Western and Eastern, are members of our association.

The companies that belong to Europia own 80% of the refining capacities and approximately 75% of the retail petroleum product sales networks in Europe. Unfortunately, there are still no Russian companies in our ranks that have refineries operating in European countries (Rosneft and LUKOIL).

EUROPIA's goal is to build a unified EU strategy and legislation in the refining sector and petroleum product sales. We are essentially the voice in the European downstream sector that protects the interests of the players in this market. We also offer EU institutions qualified expert assistance in addressing issues relating to the oil industry.

Our task basically consists of finding a balance between the development of the refining sector and the sale of petroleum products and improving European legislation. All the companies that belong to our association are very different; each of them has its own views on the market situation and operating methods. How can we coordinate their interests? We analyze the most important trends in the refining industry and European legislation and draw up our own proposals on the most urgent problems. Several working groups have been created in our association: for automobile fuel; energy policy; refining and preserving clean air; industrial products; taxes; legislation; and communications. There are also several special Task Forces. Each of these structures is headed by an expert from one of the association's participating companies. That is, we are working directly on these issues with the participation of business. The heads of specific oil corporations are also on the Board of Directors.

Q: A report appeared in the Russian press in 2011 that, according to a EUROPIA study, refining in Europe would shrink by half by 2050. Do you think this trend is dangerous for the European economy and European energy security?

A: First, I would like to note that EUROPIA does not make its own forecasts, but cooperates with organizations that engage in this on a professional basis, for example, with the International Energy Agency (IEA). As for the report you mentioned, the situation is as follows. It is common knowledge that the European Union is currently trying to implement a so-called competitive low-carbon economy by 2050. By lowering the volumes of mineral fuel used ‒ gas, oil, and coal ‒ the EU countries intend to reduce CO2 emissions by 85‒90% by 2050 compared to 1990. Based on these parameters, on the instructions of the European Commissioner for Energy, we simply estimated whether it is possible to reach this level in reality and how it will affect European refining.

According to the IEA baseline scenario called the New Policies Scenario (NPS) and envisaging the implementation of the stated measures to reduce emissions, oil consumption in Europe will drop from 681 million tonnes of oil equivalent (toes) in 2009 to 605 million toes in 2030, that is, by 11%. EUROPIA extrapolated these data to 2050 and figured that by this time consumption would decrease by another 22%, to 474 million toes. On the other hand, according to the IEA scenario called Blue Map (BM) that envisages a two-fold reduction in CO2 emissions on a global scale by 2050 compared with 2005, consumption on the whole will amount to a little more than 300 million toes. That is, decrease by 55% compared to 2009.

If events develop in this way, refining capacities will outstrip demand for petroleum products by 25% by 2030 and by 40% or 70%, depending on which of the two abovementioned scenarios ‒ NPS or BM ‒ are implemented, by 2050. This means that between 25 and 70 of the approximately 100 European refineries in operation as of 2011 might be closed down.

Of course, the most pessimistic of the scenarios is highly unlikely. But we have no doubt that there will be a drop in oil consumption in Europe, although no one knows by just how much. However, it is worth noting that even according to Blue Map, the most unfavorable scenario of the ones we examined, approximately 55% of the energy for transport will be supplied by oil, which means Europe will still need refineries and gas filling stations. So our task is to continue improving operations of the downstream sector.

Q: Which of the problems (economic and technological) facing the European refining industry do you consider the most urgent today? What are the possible ways to resolve them?

A: The first problem, which we have already mentioned, is the drop in demand for petroleum products. There is nothing we can do about this; we can only reconcile ourselves to the fact.

The second problem is the imbalance between the production of gasoline and diesel fuel. More gasoline is currently being produced than is being used in the EU countries and we have to export a third of this production, mainly to the U.S. But as the estimates show, by 2020, the American market may no longer need our fuel. While, on the contrary, more diesel fuel is used in Europe than what is produced, and we have to import it from the Middle East and Russia, which makes Europe energy-dependent on external suppliers.

The third problem is pressure from European legislation. Tighter environmental standards apply to petroleum product manufacture in the European Union than in other regions of the world. In this respect, the net cost of manufacturing products in our countries is higher than for refineries outside Europe, and, consequently, the mark-up is lower. This makes European refineries less competitive.

Q: To what extent will introducing alternative types of fuel (gas-engine, bio fuel) influence business of the companies belonging to your association?

A: This is not an easy question to answer. On the one hand, the appearance of alternative types of fuel creates problems for traditional refineries, while, on the other, it opens up new opportunities for them. Now it is difficult to say who will develop the alternative fuel market ‒ the companies that already exist and can adjust their business, or entirely new players. But I am sure that the members of our association will adjust to the new realities.

Q: In recent years, Russia has been striving to develop its own refining industry. In so doing, experts talk about the need to make use of European experience. What should Russian companies pay particular attention to in this respect?

A: Of course, I am not a specialist in Russian refining and cannot "interfere" in its development. But I would mention three European achievements in the downstream sector that might also be important for Russia. Firstly, we have raised the quality of fuels, which has reduced the impact on the environment. Although I must admit that too tight environmental legislation, as I have already mentioned, could also hamper the development of refining. Secondly, we have created a common European oil market. And finally, we have increased the energy efficiency of our refineries.

Q: Do you think there have been mistakes in the development of European refining that Russia should avoid?

A: The refining sector should avoid overinvestments when margins are high. When the refining sector demonstrated a high level of profit, significant investments were used to create new assets. But this resulted in surplus capacities and in past decades refineries' loading has been around 90%while in 2008 it dropped for the first time since the end of the 1980s to 80%. So today companies have to be very prudent when making decisions about investing in the establishment of new refineries.

Q: In recent years, Russian oil companies have been actively purchasing capacities in the downstream sector in Europe. What do you think about this trend? Are you worried about competition from Russian companies?

 A: We are willing to support all enterprises interested in developing European refining. It makes no difference to us what country the company comes from. We think that it is extremely important to maintain a high economic and technological level of refining development in order to ensure Europe's energy security. We are actively cooperating with associations of refineries of other regions ‒ North America (the U.S. and Canada), Latin America, and Africa. We do not have any partners in Russia yet, but we will be happy to begin such cooperation. We think that we should take the best from each other and help each other. It goes without saying that we welcome all Russian companies arriving on the European downstream market and invite them to join our association.- Valery Andrianov

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