Since 2020, the war in Ukraine combined with the COVID-19 lockdown has dealt a severe blow to the European refining sector. Recent European Union (EU) proposals have also placed additional hurdles in the way of the refining industry, leading to many European plants being mothballed and sky-high fuel prices at the pumps.

A recent paper by the consulting firm McKinsey on the energy transition concludes that both the North American and European refining sectors are at greatest risk of closure relative to the rest of the world. However, while US refiners have some competitive advantage owing to relatively low energy and feedstock costs, European refiners have no such advantage, says the firm. It argues the risk of closures and conversions is greater due to the faster than expected decline in regional demand, higher energy costs and rising CO₂ prices under the EU Emissions Trading System (ETS).

By comparison, the Asian market is expected to grow, largely on the back of strong Chinese oil demand.

European refiners get short-term price support 
Currently, European refiners’ margins are being supported by the EU’s ban on Russian oil product imports that came into effect on 5 February 2023.

Russian imports historically covered about 10% of European diesel demand. In anticipation of the ban, European offtakers had in the previous three months stockpiled large volumes of diesel by sharply increasing their imports from Asia, the Middle East and the US. This should, in the short-term at least according to Fitch Ratings, the US credits ratings agency, cushion the impact for customers.

Fitch expects the tightness in supply in the European fuel market to lead to even higher margins this year, compared to historical levels. Meanwhile, on-off strike action at French, Dutch and UK refineries is providing even more price support. These labour disputes have lingered since the latter part of last year and are exacerbating the tightness in supply of diesel into the European market.

Refinery closures forecast to accelerate  
All of this will simply provide Europe’s refiners with a short-term breathing space. What’s more, only a declining number of Europe’s refiners will be able to take advantage of these stronger margins. Analysts at Wood Mackenzie believe that at least 83 refineries in Europe face the threat of closure. This could take 1.4mn b/d of European refining capacity off the market.

The green industry lobby group Transport & Environment (T&E) estimates that even more European refinery capacity could be lost this decade and into the mid-2030s. This is in addition to the nearly 2mn b/d, or 13%, of the European 16mn b/d refining capacity that was in place in 2010 that has been closed. T&E sees a continued refinery capacity reduction of 4.4% annually to 2025.

From 2030 onwards, refinery closures could accelerate due to the decrease in gasoline and diesel demand that will follow as a result of the electrification of cars and trucks.

T&E forecasts a drop in demand of up to 5%/y from 2030. But this figure could turn out to be conservative. It says if there is an accelerated uptake of electric vehicles (EVs) demand for gasoline and diesel could decrease by 56%. This, says T&E, could result in ‘an estimated 43% refining capacity to close or be converted’.

‘Fit for 55’ regulation to boost e-fuels  
So, just how are Europe’s refineries adjusting to the situation faced with the unexpected windfall in the form of stronger margins? There are claims that the windfall is prompting some refiners to cash-in rather than use the additional revenue to invest in the decarbonisation technologies that are crucial under new European Council regulations.

In late March, the European Council adopted a regulation, dubbed ‘Fit for 55’, that sets out stricter CO₂ emission performance standards for new cars and vans. According to the regulation, every manufacturer must ensure that the average CO₂ emissions from its fleet of newly registered vehicles in a calendar year do not exceed its specific annual emissions target. If they do, the manufacturer must pay a premium of €95/gCO₂/km above the target per vehicle registered.

This regulation will impact Europe’s refining sector as it contains a reference to e-fuels. These are synthetic fuels, which are chemically similar to petrol and diesel. Under this reference, the European Commission will make a proposal for registering vehicles running exclusively on CO₂-neutral fuels after 2035. The Council claims that under the new agreed targets, zero-emission vehicles will eventually become cheaper than vehicles running on fossil fuels.

However, this is disputed by CONCAWE, the Brussels-based scientific division of the European Refining Association. The organisation claims there is ‘only enough e-fuels to power 2% of cars on the road in 2035’. It continues: ‘Claims that an e-fuels exemption from the EU engine ban for new cars would help decarbonise the existing car fleet do not stack up.’

E-fuels push dubbed ‘unrealistic’ 
Analysis by T&E also concludes that e-fuels are merely ‘a Trojan Horse for oil companies and engine-makers to delay the transition to zero emission technologies’.

Yoann Gimbert, an e-mobility analyst at T&E, says: ‘E-fuels are presented as a carbon-neutral way to prolong the life of combustion engine technology. But the industry’s own data shows there will only be enough for a tiny fraction of cars on the road.’ T&E adds: ‘Industry plans to import climate neutral e-fuels on a huge scale are unrealistic as the production plants and global standards to certify synthetic fuels do not exist.’

Gimbert also suggests that burning e-fuels in cars ‘will also not alleviate toxic emissions from one of the largest sources of air pollution’. Lab tests commissioned by the group in 2021 showed that a car burning synthetic fuels pumped out as many toxic nitrous oxides (NO_x) emissions as burning fossil fuels would. ‘Synthetic fuels will also remain expensive to produce for some time, and running a car on e-fuel will cost the average driver €10,000 more over five years than running a battery electric car,’ T&E claims.

Nevertheless, industry association FuelsEurope, which represents 38 companies that manufacture and distribute liquid fuels and products, insists that e-fuels must be part of a suite of critical technologies to be deployed across Europe to deliver low-carbon liquid fuels (LCLF) at scale. As well as e-fuels, these critical technologies include first generation biofuels; advanced biofuels; biomass-to-liquid; hydrogenation of vegetable oils/waste and residues; and e-fuels; as well as carbon capture, storage (CCS) and clean hydrogen applied in refineries, to reduce the carbon footprint of fuels manufacturing.

‘E-fuels are presented as a carbon-neutral way to prolong the life of combustion engine technology. But the industry’s own data shows there will only be enough for a tiny fraction of cars on the road.’ – Yoann Gimbert, an e-mobility analyst at Transport & Environment

Refineries require €650bn investment  
The EU refining industry is already engaged in a low-carbon transition. However, the success of the journey will depend to a large extent on investor confidence, political vision and engagement. FuelsEurope says the total investment needed to deliver LCLF at scale by 2050 ‘is between €400bn and €650bn’. It says that with this scale of investment, ‘and the right policy framework’, 150mn toe of LCLF could be available by 2050.

The pathway developed by Europe’s fuel manufacturers, says FuelsEurope, will require an estimated €30–40bn investment between 2020 and 2030. This will include the creation of advanced biofuels and e-fuel plants and increasing the production of LCLF up to 30mn toe/y in 2030. FuelsEurope envisages the first-of-a-kind biomass-to-liquid and e-fuel plants ‘coming into operation at industrial scale no later than 2025’.

The future of the refining sector lies in boosting production of renewable hydrogen in the long-term, and other products like synfuels and biofuels in the medium term
Photo: Shell

Electric truck policy conflicts with biofuels push  
But the EU’s recent proposals on EVs also risk placing unwanted obstacles in the way of Europe’s refining sector switching to the production of clean fuels. In February, the European Commission proposed a pathway for heavy duty vehicles (HDVs) that will force manufacturers to move almost entirely to battery and fuel cell vehicles from 2040.

FuelsEurope claims this will have a detrimental effect on the refining industry and will be almost impossible to achieve. The Association says: ‘Today, only a tiny fraction of 1% of electric or fuel cell trucks are in operation worldwide.’ Moreover, these are in pilot programmes. This is far less than the 7% of all road fuels which is already made up of sustainable biofuels.

‘By closing the road transport market to renewable liquid fuels, the [European] Commission is giving up on massive investments in Europe,’ FuelsEurope claims. A joint statement by the EU industry also reminded the Commission: ‘Sustainable and renewable fuels can speed up the process and contribute to achievement of the Fit for 55 and the full decarbonisation targets in road transport. Transport operators and vehicle manufacturers must be encouraged to consider cleaner fuel alternatives to fossil fuels, immediately available today, including liquid and gaseous renewable and synthetic fuels.’

Looking ahead 
Over the medium to long-term, an increasing share of EVs in Europe will reduce the demand for diesel and gasoline. This will have significant implications for the future of refining in Europe. Refiners have already started to respond to this new reality, as well as to the policy push to increase the share of renewables in transport.

Several oil refineries have already been turned into bio-refineries and oil companies are anticipating these trends with additional new investments. They are planning to invest €25bn in production capacity to process biomass feedstocks, which will increase biofuels production capacity by 4mn toe. But significant challenges remain. Europe’s mainly ageing fleet of refineries is already buckling under pressure from numerous fronts.

The real risk, however, is that the unintended consequence of new EU proposals and regulation could yet decimate a sizeable proportion of the industry, leaving the remainder struggling to survive and unable to attract the sort of investment necessary to adjust to the new regulatory dispensation.

*See also our article on the future of heavy vehicles in this issue of New Energy World.