Diesel Growth, Gasoline Decline Poses Growing Problem For Euro Refiners: New Supplies Needed

Diesel Fuel News, May 28, 2001 by Jack Peckham

Brussels -- Europe's growing demand for distillate fuel at the expense of gasoline means that diesel consumption will be twice that of gasoline in the coming decade, according to TotalFinaElf Refining/Marketing CEO Jean-Paul Vettier.

Even today, 22 million tons/year of gasoline is surplus that must be exported from Europe, with much of that winding up in the U.S., Vettier explained to the Hart World Fuels Conference here. Meantime, 20 million tons/year of middle distillate (diesel, gasoil, jet fuel) must be imported to Europe because member state refiners can't keep up with demand.

Tremendous demand for highly fuel-efficient diesel cars and light truck/sport utility vehicles means that Europe soon will see diesel new-car market share reach 42% by 2005, with further increases possible (see Diesel Fuel News 5/14/2001, p.6)

Euro mid-distillate demand continues to grow at over 2%/year while gasoline demand continues to decline at about 1%/year, at a time when Europe is about to challenge refiners further with 10 ppm ultra-low-sulfur diesel (ULSD) specifications. This could make outside supply of ULSD to Europe even tougher in future years, unless significant new investment in ULSD (including gas-to-liquids diesel) comes on-line by key non-European suppliers eyeing market opportunities in Europe.

European nation fuel and vehicle tax schemes help explain the growing diesel bias, Vettier pointed out. High fuel prices -- especially compared to the U.S., where motor fuels cost about one-quarter that of Europe -- got so bad last year that they sparked widespread riots, especially among Europe's commercial fuel users.

But high taxes and high prices don't benefit refiners. Actually, for the past 10 years, European refiners "have never returned a decent return on capital employed" except for last year. This poor history potentially could dampen prospects for ultra-low-sulfur fuel investments. "The latest estimation of cumulative refining investment between 2000 and 2005 is at $10 billion, basically to stay in business with no return on investment, while further capex is estimated at $6 billion for 10 ppm sulfur specifications and an operating expense increase of $700 million/year," Vettier explained.

Cutting fuel sulfur levels from 50 ppm to 10 ppm as the European Commission now proposes via two-fuel phase-in between 2005-2011 will add more supply challenges for Euro refiners, Vettier showed. This 10 ppm scheme potentially could further increase the diesel deficit from an estimated 30 million tons/year in 2005 to about 63 million tons/year in 2010, he said.

Such demand would require about 100 million tons/year of topping capacity or 20 new hydro-conversion units. "In the meantime, there could be possible price spikes, and more European dependence on foreign sources of supply," with questions about their ability to meet Euro ultra-clean fuels specifications, he said. Aggravating this situation is the possibility (pushed by automakers) of future cuts in diesel distillation (T95), with a 2-6% (3 to 10 million ton/year) supply deficit impact. Cutting diesel density could slash diesel supplies another 10-20%, while boosting refinery [CO.sub.2] emissions. Possible mandatory increases in diesel cetane number also could boost [CO.sub.2] emissions, he showed.

Changes to Europe-wide legislation and tax policies could however help restore a more balanced gasoline-to-diesel supply/demand ratio, he said, making Europe less vulnerable to growing distillate imports.

"Consumer choice of vehicles shouldn't be driven by tax policies," and individual member-state fuel tax schemes also must be reformed to avoid fuel "balkanization," he said.

This phenomenon arises as, for example, when United Kingdom enacted a fat tax subsidy for early introduction of ultra-low-sulfur diesel (ULSD), causing many competitive problems and "unnecessary" import/export/production shifts among Euro refiners scrambling to rebalance supply/demand.

This proliferation of "boutique fuels" can lead to critical shortages that can trigger price spikes and consumer outrage. "We should try to avoid having highways blocked again by dissatisfied consumers," Vettier said. "Uniform fuel taxes in Europe could help to avoid market balkanization."

Fuel supply deficits might be partially offset by "biofuels," but "these are not economically competitive and are all their effects on engines known?" Vettier pointed out.

Likewise, ExxonMobil fuels regulatory affairs official Dave Rickeard pointed out in a speech here that "only 3% of the diesel in Europe could be replaced with biodiesel because of farmland limitations," not to mention the high cost of such fuel, or that most Euro automakers specifically recommend against the use of more than 5% biodiesel in fuel.

An exception to that 5% rule is PSA/Peugeot Citroen, with its latest vehicles capable of tolerating up to 30% fatty-acid methyl ester (FAME). "That's the maximum level we can accept -- we're not recommending 30%," PSA CEO Jean Martin Folz told the Hart conference here. At least in part, biodiesel "maybe be a way to make up for some of the diesel shortage in Europe," Folz said.