The refining industry

Chapter 1 : Refining capacity trends

Chapter 2 : Refining margins
2.1 Definition
2.2 Margins per refinery
2.3 Margins per unit
Chapter 3 : Refining costs
3.1 Capital investment
3.2 Refining costs
3.3 Factors influencing refining costs
Chapter 4 : Margins and costs
4.1 Historical review of margins
4.2 Present situation
4.3 Margins by region
4.4 The outlook for margins and costs
Chapter 5 : Trends in product demand – Structure of the refining industry
Chapter 6 : Inter-regional trade in petroleum products
6.1 Product flows
6.2 The “integration” of producing countries
Chapter 7 : Refinery challenges
7.1 Environmental constraints
7.2 The changing structure of demand

© IFP Training - ENSPM FI – February 2006 1

 Chapter 1 : Refining capacity trends

Refining capacity, expressed as atmospheric distillation capacity, increased from just over 1
billion tons per year in 1950 to around 4 billion tons per year in 1980. It dropped to under 3.6
billion tons per year in 1985 after the second oil shock. Now capacity again increases. It is
currently just close to 4.3 billion tons per year, a tenfold increase over the capacity at the
beginning of the Second World War.

North America (USA, Canada, Mexico), with a capacity of 1041 million tons, is the world's
largest refining region, with 80% of its capacity in the United States.

Western Europe, with a capacity of 745 million tons, is a major refining area in spite of the
sharps cuts in capacity that were effected in the early 1980s.

The capacity of Eastern Europe stands at 512 million tons, of which 396 million are located in
the CIS. Russia alone has a capacity of about 267 million tons. However this overstates useful
capacity because plant and equipment in the CIS, and in Russia in particular, tends to be old,
unsophisticated and currently greatly under-employed.

In Asia (from Pakistan to Japan, including Australia and New Zealand), capacity is in the region
of 1110 million tons per year. Japan has the largest capacity with 234 million tons. This area
has become the predominant refining zone because of its very high rate of economic growth
which involves substantial consumption of petroleum products. Petroleum products are
particularly widely used because of the limited distribution of other energy sources.

South (and Central) America has a refining capacity of 331 million tons, with a high
concentration in the Caribbean and Venezuela, often used for export. The United States is a
major outlet for the refineries in this area.

Middle Eastern capacity stands at 352 million tons, and distillation capacity has increased in
spite of the destruction of facilities (now restored) during the Iran-Iraq and Iraq-Kuwait
hostilities.

Africa, with the exception of North Africa, has only limited capacity (162 million tons), designed
chiefly to meet local demand (except in Algeria and Libya, which export fair amounts of finished
products).

Overall, there are just over 660 refineries throughout the world. The average throughput of a
refinery is therefore around 100,000 bbl/d or 5 Mt/y. The largest refineries (in Venezuela,
Singapore, the Virgin Islands, South Korea, Taiwan and the former USSR) have capacities of
more than 940,000 bbl/d or 47 Mt/y.

On the other hand there are still a large number of small refineries (< 1 Mt/y) in the producing
countries located near the oil fields - over 40 refineries of this type exist in the United States -
and also in countries where the level of consumption is low.

© IFP Training - ENSPM FI – February 2006 1

Oil consumption is expected to remain more or less stable in the industrialised world,
particularly in the United States, in Western Europe and in Japan. It is unlikely that new
refineries will be built in these areas, especially since stringent environmental constraints
constitute a major obstacle

Most projects are now in Asia and in the Middle East.

© IFP Training - ENSPM FI – February 2006 2

 Chapter 2 : Refining margins

2.1 Definition of refining margins

The (gross) refining margin is the difference between the value of the products from a ton of
processed crude when they leave the refinery and the cost of the crude entering the refinery.

The value of a product is calculated by multiplying the sales price (price on international
markets) by the yield of each product (which depends on the refinery under consideration).

The net margin is equal to the gross margin minus variable costs (chemicals, catalysts, the
financial cost of crude backlog and stored products). In order to achieve a balance, a refinery's
net margin should cover all of the fixed costs: manpower, maintenance, taxes, insurance,
overheads as well as paying off the principal and interest involved in building new facilities.

Note : in many US papers net margin is the difference between products value and crude oil
cost minus all cash costs (chemicals, catalysts, manpower, maintenance, taxes, insurance,
overheads….)

2.2 Margins per refinery

The gross margin of a refinery depends largely on its degree of complexity. A refinery
equipped with cracking units and units for producing high octane gasoline blending components
will produce a larger quantity of high quality light products that have a higher market value.

Obviously, a higher margin does not necessarily mean greater profitability because the costs of
a complex refinery are higher than those of a simple refinery, as we shall see later.

9.3 Margins per unit

It is possible to calculate a margin for each refinery unit (atmospheric distillation, reforming,
cracking, etc.) by subtracting the value of the unit feedstock from the value of the unit's
products. However, unlike finished products, intermediate products of refinery units do not
often have an equivalent market value. The value of an intermediate product will be derived
from its opportunity cost (possible use of the intermediate product).

Nevertheless, unit margins are very important for the refiner because they indicate which units
are making money and the units for which throughput should be reduced. This exercise has its
limits, however, because it is technically impossible to reduce the throughput of some units.
The most pertinent example is the reformer, which often has low margins but is the only unit in
the refinery that produces hydrogen, and hydrogen is essential for desulphurizing jet fuel and
gas oil.

© IFP Training - ENSPM FI – February 2006 3

 Chapter 3 : Refining costs

3.1 Capital investment

The capital investment required for a completely new refinery depends on its size, its
complexity and its location. The present cost of a refinery with a throughput of 160,000 bbl/day,
equipped with a catalytic cracker, visbreaker and gasoline upgrading units and built in Europe,
can be estimated in the region of $1.5 billion. The cost could be significantly higher given
stringent anti-pollution regulations with respect to both refinery liquid and gaseous effluents and
product quality.

A simple refinery with an atmospheric distillation column, a catalytic reformer and distillate
hydrodesulphurization facilities, and a slightly smaller throughput (100 000 bbl/d or 5 million
tons per annum), would cost less than half of the above mentioned sum. On the other hand, a
refinery equipped with deep conversion facilities such as a Flexicoker or a residue
hydrocracker, would cost at least $1 billion more than a refinery with only conventional
conversion facilities such as FCC. From the economic point of view, a refinery of this type
should have a minimum throughput of 160 000 b/d in order to produce 1.5 to 2 million tons per
year of feedstock for deep conversion.

An analysis of capital expenditure shows that offsites (utilities, storage, delivery and expediting
facilities) account for a very large share of the investment. This may amount to over half the
cost of a simple refinery. Of course, all other things being equal, there are several other
important parameters that enter into the total expenditure, such as the electric power supply
(whether the refinery is self-sufficient or has to purchase from outside), and the size of the tank
farm and the delivery and expediting facilities.

In addition to complexity, the two major factors that determine the amount of capital expenditure
are:

³ Size. The amount of steel required to build a reactor is not proportional to the volume of
product processed. If the volume doubles, the amount of steel required will be multiplied by
a factor of 2/3 (ratio of area to volume). There are therefore considerable economies of
scale. These economies are limited by the maximum size of some units. For example, the
maximum size for an atmospheric unit is some 12 M tpa and a refinery with a capacity
greater than that will have at least 2 CDU columns.

³ Location. The cost of transporting equipment and its erection are two major items of
construction costs. A refinery built far from the area where the main equipment items such
as columns and reactors are manufactured will be more expensive than the same refinery
located near suppliers (i.e. in North America, Europe or Southeast Asia). If labor is not
available locally and specialized teams have to be brought in from outside, this will have a
significant impact on investment costs. In addition, specific climatic conditions can affect the
price of equipment.

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3.2 Refining costs
Once the amount of capital expenditure has been calculated, the operating costs have to be
determined. They usually include:

Variable costs, i.e. costs directly proportional to the amounts of crude oil processed, involve
chemicals, catalysts and financial charges related to the immobilzation of crude and products
during the production process (and storage).

Fixed costs, i.e. manpower, maintenance, insurance, tax, overheads, etc. are virtually
unaffected by the amount of crude processed. For instance, manpower costs are identical
whether the refinery operates at full capacity or at 60% of its capacity,

Capital costs are the costs related to the capital invested in a new refinery or new units in an
existing refinery. The sum invested has to be "repaid", and in addition there has to be a return
on the capital. If we assume that the entire sum has been provided by a loan, the capital costs
concerned will involve the repayment annuities and the interest on the loan. If the investment
has been completely self-financed, the refiner still has to repay his capital and try to obtain a
return on it. Otherwise he might as well put it in the bank !

3.2.1 Variable costs

Chemicals. A large number of chemicals are used in refining, but the sums involved are
limited. The main item for a long time was lead additives (tetra-ethyl lead) to improve the
gasoline octane number. Since these additives are being phased out, there has been a
reduction in the cost of chemicals. On the other hand, there is an increase in the use of other
additives such as cetane boosters and pour point depressants that improve the cold resistance
of diesel fuel.

Catalysts. All refineries, with the exception of those that consist of only a distillation column,
have catalytic process units for reforming, cracking, isomerization, alkylation, HDS, etc. A great
variety of catalysts is used. The reforming process requires the use of noble metal based
catalysts that cost several hundred dollars per kilo. These catalysts are regenerated,
continuously in some modern units, periodically in older ones. At the end of the cycle the noble
metals are of course recovered and re-used. On the other hand, in catalytic cracking the spent
catalyst is continually removed from the unit and replaced by fresh catalyst. The overall cost of
catalysts is in the region of a few dollars per ton of crude processed.

Funding working capital requirements. Let us take a refinery located in western Europe that
processes a Middle Eastern crude. Transportation takes about 40 days. Before it is
processed the crude is stored for a few days or a few weeks to allow impurities to settle, to
provide a reserve so that there is no failure of supply, and to comply with security stock
regulations. Processing itself does not take long, but after that the finished products are in turn
stored for a few weeks. In all, the period between the purchase of the crude and the sale of the
finished products may last several weeks, or even several months. The cost of buying the
crude (which has not yet been sold) may be covered, for example, by a loan. The cost of
immobilization is around $2- 3 per ton of crude.

3.2.2 Fixed costs

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Manpower. The number of people employed in different refineries varies considerably. The
minimum, for a simple refinery, is of the order of 200 to 250 and it may be much higher for a
complex refinery with several atmospheric distillation columns and a cracking unit. As an
indication, a large refinery, which has two atmospheric distillation columns, two reformers, a
catalytic cracker and a visbreaker, plus hydrodesulphurization units and a lube oil plant,
employs over 1000 people. The number of staff therefore depends much more on the
complexity of the refinery than on its size. Incidentally, some refineries, particularly those in the
former USSR countries, have a workforce several times that of a western European refinery.
The reason for this is the large number of small units in the same refinery, and the number of
staff employed in social welfare - there was actually an agricultural cooperative within some
refineries.

Maintenance. The cost of maintenance is more or less proportional to the initial capital
investment. By rule of thumb, annual maintenance costs are around 3 to 4% of the capital
investment.

Overheads. They include tax, insurance and miscellaneous operating costs.

3.2.3 Capital costs (repayment and return)

Let us assume that we have built an entirely new refinery at a cost (cf. supra) of $1 500 million,
and that the investment capital is provided by a loan, repayable over 10 years with interest at
8%. The average annual cost is as follows:

Capital cost of a new refinery

million dollars

Year Repayment Interest Total

1 150 120 270
2 150 108 258
3 150 96 246
4 150 84 234
5 150 72 222
6 150 60 210
7 150 48 198
8 150 36 186
9 150 24 174
10 150 12 162

The refiner has to pay out an average of $216 million per year to meet his financial
commitments. Assuming that the refinery operates at full capacity (i.e. a throughput of 8 million
tons per year), there is a charge of $27 for every ton of crude processed

3.2.4 Summary of costs

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For the type of refinery described above – 160 000b/d, with FCC-, the variable costs (catalysts,
chemicals, consumables, working capital) are of the order of $3,50 per tonne of crude oil
processed. The fixed costs, are of the order of $60 - 80 million which means, assuming
operation at full capacity, $8 to 10 per tonne. For a completely new refinery, the cost of capital
is $216 million per year so again assuming a 100 % stream factor, $27 per tonne crude run.

The overall cost involved in processing a ton of crude oil (excluding the cost of the crude itself)
would therefore be in the region of $35-40/ton (variable costs, fixed costs, capital costs) for a
new refinery operating at full capacity.

However, refining margins have never been as high as $40/ton for several months at a time,
even during the most favourable periods. Some oil refining companies are able to announce
positive results, but only because refining costs in Europe are well below this figure. Most of
the refineries in operation were built before the first oil crisis. The most recent refinery in
France dates from the mid 1970s. The initial capital expenditure has therefore been fully
depreciated. Of course new investments are continually being made in refining complexes, but
the costs involved are much less than the cost of building a new refinery.

3.3 Factors influencing refining costs

As demonstrated, the proportion of fixed costs (manpower, maintenance, overheads) and
capital costs is preponderant. Fixed costs account for around 80% of the total cost of
processing a ton of crude. This has a strong impact on refining economics.

3.3.1 Stream factor

This is the most important parameter. It is essential for a refinery to operate at a capacity as
close as possible to maximum. This applies not only to the atmospheric distillation columns but
to all the other units. It may be noted, for example, that a stream factor of 66%, compared to
operation at full capacity, increases fixed processing costs by 50%.

However, when all the refineries in an area where distillation capacity exceeds overall product
demand operate at full capacity, margins may - and generally do - collapse. This is why, in
such cases, refiners sometimes decide to reduce production. These measures are generally
short lived because as soon as margins recover there is an immediate return to full capacity.

3.3.2 Size

For a given stream factor, refining costs per ton of crude decrease with size because:
³ manpower costs and overheads are virtually unaffected by the size of the refinery,
³ maintenance and capital costs do not increase in the same proportions as size.

This is the reason why refineries with a distillation capacity of less than 5 million tons per year
are no longer built, except in very special cases. Only geographical reasons, such as the
proximity of markets or crude supplies justify the existence of small refineries, such as are
found in the United States and in Africa.

3.3.3 Complexity
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The degree of complexity of a refinery obviously increases the cost of processing a ton of
crude, due mainly to the greater cost of capital and maintenance. However, this calls for two
important remarks:
³ a complex refinery will produce a higher margin than a simple refinery, all other things being
equal (size, location, market, etc.),
³ a complex refinery will only produce a higher margin if the crude processed can be exploited
by the conversion facilities. In other words, it is generally more advantageous to process
heavier crudes that enable full use to be made of cracking units.

3.3.4 Location

When a refinery's capital investment is high because it is far from equipment suppliers, local
labor is scarce and climatic conditions are harsh, then obviously operating costs per ton of
crude will increase proportionately.

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 Chapter 4 : Margins and costs

4.1 Historical review of margins

Up to the mid-seventies margins were satisfactory. The growing consumption of petroleum
products meant that margins were able to cover a "long-term marginal cost", which included
repayment of and return on invested capital. The sole concern of oil companies (and
governments) was to meet demand. In the major European countries this amounted to building
one new refinery (or its equivalent) every year.

In the 1970s, margins fluctuated considerably due to strong variations in prices in 1973-74 and
in 1979. During the decade the average for a simple refinery was approximately $2 per barrel.
With inflation taken into account, that comes to over $6/bbl in today’s terms.

However, with the onset of the eighties the situation changed radically. The crude price hikes in
1973 (the end of control by the Majors, the Six-day war) along with the ones in 1979 (OPEC
domination, the Iranian revolution) stabilized and then reduced product consumption. Refineries
began to experience huge overcapacity problems, especially in the United States and in
Europe.

Refining capacity (Mt/y) and stream factor

1973 1980
Capacity at 31/12
707 916
United Refinery
States production 649 676

Stream factor (%) 92 74

Capacity at 31/12 851 1005

Western Refinery 699 603

Europe production

Stream factor (%) 82 60

Overcapacity had a twofold consequence:

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 - Since the "marginal" processing cost of a ton of crude was very low (a few cents),
there was a strong tendency to process ever-increasing amounts of crude, thereby
generating additional product surpluses. The result was a severe deterioration in
margins.

- Since the refinery's costs had to be spread out over amounts of products that were far
from optimum, costs per barrel were drastically increased.

This squeeze effect, compounded by the fact that consumption leveled off between 1980 and
1985, prevented margins from recovering and caused refiners to reduce capacity. Capacity
cuts were rapid and relatively limited in the United States. They occurred later but more
suddenly in western Europe where some 50 refineries (out of 150) were shut down. The
capacity of a number of surviving refineries was seriously curtailed by shutting down the oldest
distillation units (or in some cases by transforming them into visbreaking units).

The capacity-cutting effort came to an end around 1985 and therefore started making itself felt
at the time of the oil price counter-shock (quota policy, netback contracts). The subsequent
drop in crude prices stimulated product consumption because of the lower prices (the decline in
the dollar from 1985 onward reinforced the trend) and also prompted the economic recovery
that occurred at the end of the eighties. With smaller capacity and rising consumption the
situation was the exact opposite of what it had been at the end of the seventies. Refining
margins picked up from 1988 to 1990 and (for the first time in ten years) reached a level that
totally satisfied refiners.

4.2 Present situation

During the 90’s margins remain limited, at a much lower level than the level required to cover
the full costs of a new refinery. Several reasons accounted for that.

First product demand increased slowly (1 or 2% per year).

Second, stream factors, still essential in setting margin trends, were not satisfactory. They had
certainly improved since the beginning of the eighties, but published statistics were not
necessarily reliable. For example:

³ Despite careful data gathering techniques, the capacity figures published by the
specialized press should be taken with a pinch of salt. Some statistics patently
underestimate actual capacity. For example, some countries consider only the
distillation capacity required to supply conversion units (cracking). A stream factor
apparently greater than 100% can be noted, over relatively long periods of time, and
this corresponds in reality to an underestimation of actual capacity.

³ Some capacity that is allegedly shut down can in fact be put back on stream very
quickly.

³ Maintenance shutdowns are less frequent, now every five years compared to every
two years in the past. Furthermore, they do not last as long. A refinery can actually
operate much more than 95% of the time.

© IFP Training - ENSPM FI – February 2006 10

 ³ Each time there is a long maintenance shutdown, refiners' expertise allows them to
boost the capacity of some units with little investment: a number of catalytic crackers
are run at much higher than their original design capacity. This "creeping" type of
capacity boosting is probably nowhere near fully documented in published statistics,
but productivity gains can be estimated at 1% per year or more, which corresponds to
one new 6 million ton capacity refinery per year in Europe !

The situation in 2000 was much better. Margins improved and reached $4 per barrel or more.
The same situation is observed at the beginning of 2001. Several reasons can be put forward :

³ products stocks at the beginning of 2000 were very low. Weak margins in 1999 had led
refineries to minimize throughput

³ the demand for gasoline was very high in the US. The situation was made still more complex
because the specifications changed during spring, due to the enforcement of new Clean Air Act
regulations. The lack of gasoline in the US attracted imports from most other areas and made
for a very high price

³ the lack of gasoline obliged the refineries to maximize gasoline production up to the end of
the driving season, therefore leading to deficits of heating oil in Autumn.

The situation seems to repeat in 2004 and lead at the same time to high refining margins and
high crude oil prices.

4.3 Margins by region

Margins in the United States vary greatly from one region to the other. For several years before
2000, around the Gulf of Mexico, margins for a complex refinery (of the FCC type) have been
fairly low, ranging from $0 to $2/b (for West Texas Intermediate, the American benchmark
crude). In this region, which is wide open to imports, margins are affected by products arriving
from abroad, particularly from Europe. In contrast, margins are much wider in the Middle West
and especially in California, due firstly to a better balance between supply and demand, and
secondly to higher product prices. These prices reflect stricter product quality standards.

The situation in Asia was better up to mid-1997. Refining margins were around $3-4/b on
average for the last few years. Margins in this part of the world were stronger than elsewhere
because of continued growth in demand and because there were some protected markets on
which prices bring in a profit. From June 1997 margins plunged as the region's economic
problems exacerbated an already bearish market. Margins recovered in 2000 and 2004.

A complex European refinery's margins were between 1 and 2 $/bl in the nineties. Rapid
variations in crude oil prices can lead to rapid variations in refineries margins. The collapse of
oil prices in 1998 made for fair margins the same year. The increase in oil prices in 1999
conversely provoked a strong reduction in refining margins. As elsewhere “exceptional”
margins were recorded in 2000 and 2004.

4.4 The outlook for margins and costs

Refining costs vary widely from one refinery to another of course, depending on how large it is,
how well equipped it is, how much it spends on salaries and perhaps mainly on where it is

© IFP Training - ENSPM FI – February 2006 11

located. The average crude processing cost, in extremely simplified terms, in a good sized, well
equipped European refinery is approximately $2 – 2.5 per barrel. The cost can be broken down
into approximately $1.5 – 2.0 for "out of the pocket" expenses (chemicals, catalysts, manpower,
maintenance, overheads), and $0.5 to cover recent investments (e.g. to produce unleaded
gasoline) that have not yet been paid off.

However, considerable progress has been made in costs. A large French company recently
stated that since 1992 it had lowered its refining break-even point* by $1.5 per ton of processed
crude (i.e. approximately $0.2/b) per year. It added that it believed it could keep going on the
same track to the tune of $1 per ton ($0.15/b) per year. An improved stream factor, efforts
made on a number of budget items, reduced storage and strict selection of investments are
among the explanations for such savings.

Reversely margins, as published in the newspapers are probably on the low side for the
following reasons :

³ They take only the major products into consideration (gasolines, jet fuel, diesel fuel,
fuel oils). Speciality products (lube oils, bitumens, LPG, even petrochemicals) are not
included, but they often make a profit and help offset refining losses.

³ In a certain number of countries, refiners compensate for low refining margins in the
marketing sector. This is not the case in France, but it can apply in Italy or Germany.

³ In order to put themselves in a stronger position with respect to competition and the
slack market, some companies have formed partnerships. The Ultramar /Diamond
Shamrock or the Shell / Aramco ventures in the United States are good examples. Of
course the mergers BP/Amoco/Arco, Exxon/Mobil and Total/Fina/Elf also lead to cost
reductions.

* The break-even point is the margin level which allows to cover costs
© IFP Training - ENSPM FI – February 2006 12
 Chapter 5 : Trends in product demand .
Structure of the refining industry

The consumption of the different petroleum products has evolved in a very varied manner over
the last 20 years. The sharp rise in the price of oil in 1973 and in 1979-1980 caused a fall in
the demand for heavy fuel oil in the industrialised countries. Heavy fuel oil was replaced by
coal and gas in a number of industries as well as for electricity generation. Nuclear power also
covered a high proportion of electricity needs. In France, 15 million tons of fuel oil were burned
in electric power plants in 1973, whereas this figure is now less than 1 million tonne per year.
Nuclear power now represents over 80% of electricity production in France. The same trend
developed, to a lesser degree, in other industrialised countries.

Heating oil has also been largely replaced by gas and electricity for space heating purposes.

On the other hand, the consumption of other petroleum products, i.e. motor gasoline, diesel fuel
and jet fuel, and non-energy-generating products such as lubricating oils, bitumen and
petrochemical feedstocks, has increased over the last 20 years. Furthermore, it is estimated
that in the coming years the proportion of petroleum products for which there is no alternative
energy source will continue to increase. The figure was around 60% in 1990, 70% in 2000 and
could exceed 80% by 2030.

Of the total demand for oil products world-wide, gasoline today amounts to 30%, distillates (jet
fuel, diesel fuel and heating oil) 35%, and heavy fuel oil only 19%. The proportion of heavy fuel
oil is even lower in North America and Western Europe.

The increased demand for light products and middle distillates rather than heavy fuel oil led in
the 1980s to the construction of a number of units capable of converting heavy straight run
fractions into lighter cuts suitable for use as gasoline or distillate fuel components. Most of the
units built were of the FCC type (fluid bed catalytic cracking). They have a twofold advantage
in that they produce a high gasoline yield, at a relatively moderate cost compared with that of a
hydrocracker. The rate of conversion, expressed as the weighted sum of the conversion
capacities of a refinery divided by atmospheric distillation capacity, has increased in all parts of
the world.

The development of conversion plant was particularly marked in Western Europe. The rate of
conversion increased from 6% in 1975 to 36% in 2006. In 1977 there were 143 refineries in
western Europe, but only one third of them possessed FCC. Now 80 % of the remaining
refineries (94) are equipped with FCC units. Similar developments took place in other areas in
the world.

The refining industry in the United States is characterised by a particularly high conversion ratio
(71% in 2006). The American refining industry traditionally has to meet a very high demand for
motor gasoline. Demand is more than 340 million tons per year, i.e. about 40% of total demand
for petroleum products in the United States and also about 40% of the total world demand for
motor gasoline. This high demand can be explained by the size of the car population, by high

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vehicle unit consumption and by the fact that part of the commercial vehicle fleet is equipped
with gasoline engines. Conversely, the plentiful resources of coal and gas have considerably
reduced the market for heating oil and heavy fuel oil. Consequently, American refineries - or at
least the largest ones - are equipped with both FCC units and coking units. 80% of the world's
coking units are located in the United States.

© IFP Training - ENSPM FI – February 2006 14

Chapter 6 : Inter-regional trade in petroleum
products

6.1 Product flows

The volume of international trade in petroleum products is less than that of crude oil but it
nevertheless plays a fundamental part in the balance between finished product resources and
needs.

The three major oil consuming areas i.e. the United States, Western Europe and Asia, are large
importers of products.

Conversely, the major oil-producing areas are also exporters of products:

³ In the Middle East, the nine Gulf countries have a refining capacity of 352 million tons per
year and an export capacity (difference between nominal capacity and product demand) of
around 100 million tons per year. The production of several refineries in this area, such as
those in Kuwait and Abu Dhabi, and those at Yanbu, Jubail and Rabigh in Saudi Arabia, is
largely intended for export.

³ In North Africa, Algeria and Libya have a marked surplus in products which is exported to
Europe and the United States. Moreover, part of this surplus consists of atmospheric
residue which is reprocessed in foreign refineries.

³ Refineries in Venezuela and the neighbouring Caribbean (Dutch East Indies, the Virgin
Islands, Trinidad and Tobago) mainly export their products to the United States.

³ Lastly, the former Soviet Union, with its huge refining capacity, can and does export
substantial amounts of products. Its low conversion capacity explains why the products
involved are often straight-run, i.e. naphtha, gas oil and atmospheric residue. Exports could
potentially be much higher than at present because refining capacity is greatly under-
employed.

An analysis of product movements shows that Asia is supplied chiefly from the Middle East and
that the United States imports its products from Venezuela; whereas Western Europe is an
outlet for the former USSR, North Africa and a secondary outlet for the Middle East.

The development of export refineries, particularly in the OPEC countries, is a problem that is
much debated in oil and gas industry circles. The increased financial resources of the oil
producing countries following the first oil shock made them decide to convert more crude oil
into products in situ before exporting it. Hence the construction of export refineries in the 1970s
and early 1980s. However it soon transpired that the profitability of these units was limited in
the sense that construction costs in, for example, the Arabian peninsula are higher than in the

© IFP Training - ENSPM FI – February 2006 15

importing countries, and the cost of transporting products is higher than that of transporting
crude oil. In other words, from the economic point of view, exporting crude oil is more attractive
than exporting products.

6.2 The “integration” of producing countries

This is why export refinery projects have become very rare. On the other hand, some
producing countries have developed a strategy of acquiring stakes in the refining sector in the
consumer countries.

³ Aramco in association with US companies owns four refineries in the United States. It also
has shareholdings in Korea and China, has acquired 40% of the capital of Petron in the
Philippines and Motor Oil Hellas in Greece. The foreign refineries in which Aramco holds
stakes represent a total capacity of around 1 million bbl/d (excluding the private Saudi
interests in refineries in Europe and North Africa).

³ PDVSA has participations in several refinieries in the United States. In Europe PDVSA, in
association 50/50 with VEBA, has interests in 4 refineries (one is fully controlled by Ruhroel,
the joint venture). Venezuela has stakes in a total of 18 foreign refineries with a capacity of
around 2 million bbl/d, including 50% of Nynas, a specialist naphthene, bitumen and
lubricants company.

Three other producing countries have entered the European refining industry: Kuwait which
controls one refinery in the Netherlands and 50% of the Milazzo refinery in Italy, Libya which
has share holdings in the Cremona, Harburg and Collombey refineries, and Abu Dhabi which
holds part of the capital of CEPSA in Spain and which acquired part of the Austrian company
OMV, owner of the Schwechat and Burghausen refineries.

Overall, the OPEC countries own a net refining capacity of more than 100 million tons on
foreign territory. This is accompanied by agreements to supply over 150 million tons per year
of crude oil. The countries that have opted for this strategy of downstream integration are
ensuring increasing outlets for their crudes.

© IFP Training - ENSPM FI – February 2006 16

 Chapter 7 : Refinery challenges

7.1 Environmental constraints

Very large investments are required to meet environmental constraints that affect both refinery
emissions and product quality.

Refineries emit pollutants, i.e. SO2, Nox and particulate, into the atmosphere, but significant
progress has been made in reducing them. SO2 emissions in particular have been subject to
stricter and stricter controls. Some authorities impose “SO2 quotas” and, in certain conditions,
refineries can be required to use low sulphur, and therefore much more costly, fuel. Refineries
also emit liquid effluent, i.e. cooling water, which contains pollutants although it has been
treated before emission into the environment.

The most spectacular aspect is product quality. High octane unleaded gasoline, reformulated
gasoline, very low sulphur diesel fuel have required refineries to invest large sums and increase
their production costs.

Most of the motor gasoline sold in the world is now unleaded. Sales of leaded gasoline in the
United States, Japan and Western Europe (except a few countries) are virtually non-existent.
When the use of lead was prohibited refiners had to increase the clear octane number of their
gasoline by several points. Several means were used, i.e.

³ operating catalytic reformers at greater severity,

³ building isomerisation and alkylation units which produce high octane number gasoline
blending components,

³ the use of very high octane components such as MTBE or ETBE. However, in the United
States, there is now a trend to ban MTBE since, even at very low concentration, it pollutes
the water table.

In the United States, because of the problem of ozone and smog in the large cities, a very
ambitious programme for the introduction of “reformated gasoline” has been launched. A
reformated gasoline is an unleaded gasoline with very strict limitations on benzene content, on
olefins (very reactive in the production of ozone) and aromatics (supposed to be carcinogenic).
Stringent constraints on distillation characteristics, oxygen content, etc.. also exist.

Similar restrictions are being imposed in more and more countries, in particular in the European
Union. The problems that result from them are as follows :

³ Motor gasoline components are derived principally from FCC and catalytic
reforming units. However, cracked gasoline form FCCs has high content of very
reactive olefins, which give rise to the formation of smog; and reformate contains a
high proportion of benzene and other aromatics recognised as being carcinogenic.
Nevertheless, aromatics are the main source of high octane material. The ideal
would be to manufacture motor gasoline from branched chain paraffin’s, but these

© IFP Training - ENSPM FI – February 2006 17

 iso-paraffins are only produced in low quantities in relation to the requirements.

³ For automotive gas oil, as for motor gasoline, restrictions relate mainly to sulphur
content. However it is probable that the relative density at AGO will be reduced, so
as to reduce the emission of heavy components and other polluants.

³ Finally, limits on the use of high sulphur fuel oil will become more and more
restrictive for refineries.

There is a final constraint that will be mentioned only briefly, despite its significance, that is the
requirement to restore and clean-up refinery sites in the event of their closure. This, together
with the social costs of refinery closure, constitutes an important barrier to exit, curbing the
closure of refineries because of the substantial expenditure involved in cleaning polluted sites
and is a significant factor in keeping refinery margins low.

7.2 The changing structure of demand

World-wide, growth in product demand will be mainly in motor fuels. Most refineries, whether
new or old, will have to be equipped with conversion units.

The fact that no new refineries are being built in the United States, in Western Europe and
Japan does not mean that petroleum companies in these areas will not need to invest. But the
situation is complex.

In Europe, at the end of the 1980s, the need to build deep conversion units capable of directly
transforming a large proportion of atmospheric or vacuum residue into light products appeared
inevitable, due to the continuing decrease in demand for fuel oil and also to the assumption that
crude supplies would become heavier and heavier with higher and higher sulphur contents.

As we have see, coking units, to reduce fuel oil make, are very numerous in the United States.
Currently, there are few such units under construction; they are extremely expensive and can
only be justified economically by a substantial difference between the prices of heavy fuel oil
and light products. The use of residues for the production of electricity for sale to external
customers appears more promising.

© IFP Training - ENSPM FI – February 2006 18