Oil refineries in Europe and the US have long been in the cross-hairs of government regulators and grassroots pressure groups.
Refiners target countries with lax environmental laws
Oil refineries in Europe and the US have long been in the cross-hairs of government regulators and grassroots pressure groups. Sprawling, polluting and less lucrative than oil and natural gas wells, refineries were seen as a necessary but unsavoury part of the hydrocarbon production chain. As concerns over climate change grow, however, the industry is under fire for its high emissions of greenhouse gases, a new focus that could benefit the Gulf.
Under a law approved by the US House of Representatives, refineries and other types of heavy industry would have to pay for every pound of carbon dioxide they emit into the atmosphere. Across the Atlantic, ministers in the EU have proposed new restrictions on refinery pollution. Even more drastic constraints could result from a new treaty on climate change to be discussed in Copenhagen later this year.
Experts say the new limits on refiners could hasten a shift of the industry from the West to the Middle East and Asia, where mandatory carbon limits are unlikely to be imposed in the near future. The shift could particularly benefit Gulf countries, which are adding millions of barrels of refinery capacity with a view to exporting fuel to Europe and the US, said John Vautrain, a senior vice president and refining expert at the energy consultancy Purvin and Gertz .
Mr Vautrain said of the US bill: "This probably moves those industries out of the US and Europe, because it tends to increase their cost. The idea that carbon-intensive industry moves out of high-cost environments - there's a lot of logic there." The broader shift in the industry is already well under way. The US has not built a new refinery complex in decades, and expansions at existing facilities have been slowed by the economic crisis, according to the International Energy Agency (IEA), which represents the interests of industrialised energy-consuming countries. In addition, up to 2 million barrels per day (bpd) of capacity may be taken offline in Europe in the next five years, the agency said in its annual medium-term market report, released last week.
The picture in Asia is very different: China is the centre of global growth, with 2.4 million bpd in capacity expected by 2014, while India, which opened the world's largest refining complex at the end of last year, said last week it would spend US$13.9 billion (Dh51.05bn) in two years to add capacity and upgrade plants. Many of these projects are aimed at growing local markets, particularly in the heavily populated emerging countries of Asia. New refineries in Abu Dhabi and Qatar, and some in Saudi Arabia, are export-oriented, with the potential to take part of the market forfeited by refiners in the West.
Abu Dhabi, for example, has refining capacity of about 502,000 bpd, while domestic consumption is estimated by PFC Energy, a Washington-based consultancy, at 162,000 bpd. The Abu Dhabi National Oil Company (ADNOC) plans to widen this export margin by increasing the Emirate's capacity to 902,000 bpd in five years. The state-of-the-art facilities ADNOC is building will produce fuels that comply with increasingly stringent environmental standards in western markets, allowing Abu Dhabi-produced fuel to displace fuel produced in refineries in the West, a process that could be accelerated with new limits on carbon emissions in Europe and the US.
While refineries are traditionally viewed as part of the oil supply chain, they are also heavy energy consumers in their own right. An oil refinery uses energy in nearly every step of transforming crude oil into fuels such as petrol and diesel. Crude is distilled at high temperatures, and more energy is required to produce hydrogen, used to remove sulphur from oil, and to convert heavy fuels into lighter, higher-value products.
Carbon emissions from refineries are significant: in 2002, the latest year for which statistics were available, US refineries produced 304 million tonnes of carbon dioxide, equal to almost 20 per cent of total carbon emissions from the manufacturing sector, according to the Energy Information Administration. The bill passed last month by the House of Representatives would set up a market for carbon emissions, in which the total amount of carbon emissions would be limited and polluters would be required to buy credits for each tonne of carbon they release in the atmosphere.
Many of the credits to refiners and others will be initially granted for nothing to give them time to adapt, but gradually the limits will tighten, forcing firms to either reduce emissions or face sharply increased production costs. The bill must still be approved by both the Senate and Barack Obama, the US president, to become law, and the oil industry has already rallied against it. The American Petroleum Institute, an industry trade group, said the bill would add 77 cents to the cost of a gallon of petrol, currently around $2.64, and put American oil refiners at a competitive disadvantage.
In Europe, a separate regulatory challenge to the refining industry emerged a few days after the US vote. European environment ministers meeting in Brussels last week reached agreement to tighten pollution limits on industry, including oil refineries. The new limits would not cover carbon, but would place strict new restrictions on other types of pollution, including sulphur and nitrogen emissions.
The IEA said a wave of new regulation in both the US and Europe would make it harder for refiners, at a time when they were already confronting one of the worst down cycles in the industry's history. "Refining is a brutally competitive, effectively global business," said David Martin, the IEA's lead refining analyst. "In pushing for investment by refiners in lower CO2 emissions, and in making higher-quality fuels, you're pushing refiners pretty hard."
Mr Martin said such pressure from government would effectively penalise western refineries and push them to move to other parts of the world, with little net reduction in global emissions. "What's important is that these refiners have a level playing field," he said. "If it's not a level playing field, you're going to see much lower [processing] runs in areas where refiners have a higher emissions cost."
But a level playing field on climate change is out of the picture for now, negotiators say. Many developing countries, such as the UAE and China, have pledged to reduce greenhouse gas emissions, but few expect them to agree to mandatory carbon cuts, because they need fossil fuels to sustain their economic development. Assuming the US and Europe agree to a new treaty, experts see three possibilities for oil refiners. The industry as a whole could adopt global carbon emissions standards; western governments could enact protectionist measures to discourage imports of fuel from high-emission refineries; or the industry could continue its steady migration to developing countries.
The first option is a real possibility but has had little momentum, while experts, and Mr Obama himself, have been critical of protectionist measures. Mr Vautrain said the best option may be to let the market push refineries to the countries that produce much of the world's oil, in part because it would eliminate emissions from shipping crude to global markets. "These environmental regulations tend to shake out the industry and help get rid of ineffective capacity," he said. "Perhaps the lower carbon option means refining oil in the Middle East and shipping gasoline to the US."