Analysis: EU's oil refiners face carbon double-whammy

LONDON (Reuters) - European oil refiners could be doubly disadvantaged by EU plans to make them pay for some of their carbon emissions from January 2013 due to rising competition from cheap foreign imports and non-European-owned refiners inside the EU.

Struggling EU refiners are already worried that moves to make them pay for carbon emission credits from January 1, 2013 will put them at an operational cost disadvantage to refineries outside the EU.

Refiners say the proposals will lead to "carbon leakage" as customers switch to imports of gasoline, diesel and jet from refineries in regions with no carbon emissions restraints, driving EU refiners out of business.

But there are also concerns that foreign-owned refineries in the EU will be able to cut their carbon costs by importing semi-finished products from their refineries overseas that they can then finish off locally.

"U.S., Indian, Chinese and Russian companies have all acquired European refineries over the last few years and it will be difficult to distinguish between products that are locally produced and product that has just been imported via this refinery," said David Wech, an analyst at JBC Energy in Vienna.

"They could say they have produced it locally, based on feedstock imports that are more or less finished products. This will make it difficult to control a scheme which is already politically very difficult to implement."

Foreign refiners denied they were considering this option. A spokesman for Essar, which owns Stanlow refinery in the UK, said it did not import semi-finished product from its Indian refineries at present.

"You would have to weigh up the economics of the transportation costs if you were to look at that," he said. "But it's not on the agenda at present."

Instead, Essar has converted the boilers at Stanlow to run on natural gas rather than fuel oil, making it more carbon efficient. "This should help the margins because natural gas produces lower emissions than fuel oil," he said.

Similarly, Valero said it mostly processed crude oil at its Pembroke refinery in the UK, although it does bring in some intermediates such as vacuum gasoils.

CHEAP IMPORTS

Europe's refiners have been struggling with poor margins, shrinking demand and increasing competition for years, so few were surprised when the threat of rising carbon costs triggered an attempt by Italy to limit cheap imports of refined products such as gasoline and diesel from refiners outside the EU.

According to a draft decree, government authorisation will be required for any imports of finished petrol products from outside the EU from January 1, 2013. [ID:nL5E8HF6ZQ] Authorisation for foreign operators will depend on whether their plants meet EU environmental, health and worker safety standards.

But analysts are sceptical that the measure will succeed, seeing the possibility of a challenge via the World Trade Organization (WTO).

"Considering the circumstances there may be leniency, but the restriction cannot be passed as it's currently worded due to the protectionist issues the EU would face from the WTO," said Enguerran Ripert, a consultant at Frost & Sullivan.

"It may be included in a wider restructuring plan discussed with creditors and stakeholders including the government and the EU, but not purely by decree."

Italy is particularly vulnerable because of its large number of coastal refineries, which make it easier for imported refined products to compete for business.

Smaller, less complex refineries in the UK, Spain and France are also seen as vulnerable, with Ripert citing France's high wage costs and fairly elderly fleet.

Wech said the situation is likely to deteriorate given the level of "unfair" competition from abroad. "The European refining industry is the only major refining sector in the world that is operating on a level playing field," he said.

He pointed out that U.S. refiners had benefited from cheap crude oil and gas generated by the shale boom and a ban on their exportation. Wech believes many of the recent refinery shutdowns in Europe are directly related to the flood of cheap refined products from the U.S. over the past two years.

New refining capacity coming onstream in Asia and the Middle East over the next two years will increase the import pressure on European refiners, and reduce the markets for their own products.

JBC Energy's statistics show some 1,697,000 barrels per day (bpd) of new capacity coming onstream in 2013, of which some 1,160,000 bpd is in Asia. In 2014, the global new capacity figure leaps to 2,389,000 bpd, with 1,077,000 bpd in Asia and 817,000 bpd in the Middle East.

Marek Mikitiuk, a partner at Ernst & Young, highlighted new refineries in Saudi Arabia, Kuwait, Oman and the United Arab Emirates. "These will be targeting the production of middle distillates because that is the most attractive premium-wise for Europe."

One sliver of hope for European refiners is that the cost of carbon may not be as onerous as originally anticipated. Lindsay Sword, a senior analyst at Wood Mackenzie, pointed out the price has fallen to about 6-8 euros per tonne of CO2 equivalent, down from about 29 euros per tonne in mid-2008.

"The reason it has hit that floor is largely because of the recession - there has been less production so there have been lower emissions," she said. "When Europe starts coming out of a recession the carbon price might pick up again and that would impact refineries much more."

(Reporting by Claire Milhench, editing by William Hardy)