Last Fall I chaired a panel discussion on refining capacity and capabilities at Platts' conference, European Refining Market: The diesel demand/supply crunch. The meeting, held in Brussels, is where I learned about the impending shortage of European diesel refining capacity.
It seems there are no intentions to build new refineries or significantly increase capacity in existing ones in Europe. Several speakers described the trend of transportation fuel further towards diesel from reformulated gasoline. European industry's perspective is that Russia will continue to improve its diesel quality and maintain exports to meet Europe's needs. One hopes that Russia holds the same perspective.
About the same time, the Energy Studies Department of the OPEC Secretariat in Vienna released a background paper titled "Oil outlook and investment challenges," which takes a detailed look at the upstream and downstream through 2030. The paper concurs with conference speakers and describes the difficulty in increasing capacity or utilization in Western Europe. OPEC's assessment of the former Soviet Union region was that no additional distillation capacity is required to meet domestic demand, as better utilization of existing capacity will be sufficient and that any investments should be geared towards improving product quality.
I tend to be a skeptic until actions support expectations, so after attending the conference and reading the OPEC paper, I had become troubled about the future of European transportation fuel supplies over the next decade.
Last week, I spoke at IP Week 2008 in London and attended a session on Russian energy. I learned from presentations that Russia's refining infrastructure is indeed due for modernization and suffers from low utilization compared to U.S. and western European refining assets. I also learned that Russia's domestic fuel choices are also evolving toward diesel, but more slowly than Europe's, reflecting a smaller population base and longer vehicle fleet life. Taken alone, these facts did not decrease my skepticism around Europe's hope for increasing Russian diesel imports near term or for them to meet existing and increasingly stringent quality requirements.
I was pleased, though, to hear in a subsequent presentation that Europe's market signaling has been heard by Russian refiners. The speaker described, albeit with little detail, Russian industry's intent to move up the hydrocarbon value chain by reducing crude oil sales and increasing exports of refined products.
My skepticism and concern over European diesel import expectations is somewhat diminished. Intent is a good first step. De-bottlenecking existing refineries and sustained evidence of incremental diesel export capacity is a critical second step. However, only significant investment directed at expanding capacity will make European economic planners sleep better at night knowing supply is rising to meet their needs.
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