Downstream – Production

The Strategy for 2014−2017 envisages further optimisation of logistics processes at PKN ORLEN.

Market environment

The oversupply of the capacities, the economic slowdown and the climate policy in European Union as well as development of a new production capacities in the USA, Middle East and Asia and the shale gas revolution in the USA are the biggest challenge for downstream sector in Europe.

A primary source of pressure on the European downstream industry is the excess refining capacity on the continent, estimated to exceed the demand for fuels by more than 10%. In Europe, capacity utilisation remained low in 2014, with further cuts expected in the coming years. A total of 21 refineries, with an aggregate capacity of approximately 2 mbd, were closed down between 2010 and 2014. Although the macroeconomic climate improved in the second half of 2014, the structural shifts in the fuel market, induced by the lost ability to sell surplus gasoline on the US market and growing competition from fuel producers in Russia and the Middle East, may lead to shutdowns of further refineries which process Brent crude, focus on gasoline production, have no integrated petrochemical or retail operations, and lack advantage in logistics.

Evolution of the European refining sector

Evolution of the European refining sector

Source: Wood Mackenzie.

Processing capacity utilisation rates in Europe are affected by the competition from exports-oriented Middle Eastern refineries and US refineries, whose position has improved in the wake of the shale revolution.

Projected change in available refining capacities by region in 2013−2020 [million bbl/day]

 

Projected change in available refining capacities by region in 2013−2020 [million bbl/day]

Source: IHS CERA, Wood Mackenzie.

Oil producers, including Russia, are increasingly shifting towards a policy of manufacturing higher value-added products rather than selling crude. 

Refining complexity – FCC equivalent 1) in 2013–2020 [% of refining capacity]

FCC equivalent

1) FCC equivalent – combined capacity of all conversion units.
Source: IHS CERA, Wood Mackenzie.

Processing capacities in Russia in 2012–2020 [million bbl/day]

Wykres: Moce przerobowe w Rosji w latach 2012-2020 [mln bbl/d].

Source: In-house analysis based on IEA, JBC Energy and IHS CERA data.

As a result of an increase in refining capacities in Russia, the country’s fuel exports are on the rise. It is estimated that Russia’s processing capacities will grow by some 15m tonnes annually by 2020 relative to 2012. Furthermore, a significant portion of the capacities already available on the market will be upgraded through modernisation projects involving enhancement of desulfurization units and construction of new conversion facilities. Five new desulfurisation units with a capacity of 140,000 bbl/day were commissioned in Russia in 2013. In 2014, an additional 100,000 bbl/day in conversion capacities were added, including 70,000 bbl/day from diesel oil manufacturing units.

As a result, Russian net gasoline and diesel oil exports will grow by 16% by 2020, which will translate into an increase in annual exports of approximately 7 million tonnes for diesel oil and 4 million tonnes for gasolines.

Russian fuel exports in 2012–2020 [million bbl/day]

Wykres: Eksport paliw z Rosji w latach 2012-2020 [mln bbl/d].

Source: In-house analysis based on IEA, JBC Energy and IHS CERA data.

Following the increase in hydrocarbon production from unconventional deposits in the US, Europe has practically lost the ability to sell its surplus gasoline on the American market.

Oil production and imports in the US in 1998–2014 [million bbl/day].

Wykres: Produkcja i import ropy w USA w latach 1998-2014 mln [bbl/d].

Source: In-house analysis based on Natixis data.

US fuel exports in 2002 - 2014 [‘000 bbl/day]

US fuel exports in 2002 - 2014 [‘000 bbl/day]

Source: In-house analysis based on Natixis data.

The rise in US fuel production and exports is eroding European refining margins. Europe’s overproduction of gasolines is becoming increasingly problematic given the limited ability to sell the output on the traditional export markets due to growing surplus in North America and Russia, as well as the shrinking deficit in the Middle East.

Changes in petrochemical production are global in nature. The European downstream sector’s largest challenge is posed by the expansion of new production capacities in the US, Middle East and Asia. As a result of record-low natural gas prices and the North American gas revolution, the cost of petrochemical products has fallen close to their production cost in the Middle East. Given their robust economic growth, Asian markets are the largest markets for petrochemical products. It is in these regions that the strongest increase in production capacities is expected to occur in the coming years.

Average annual increase in production capacities by region in 2012–2017 [%] .

Wykres: Średnia roczna wzrostu mocy produkcyjnych w podziale na regiony w latach 2012-2017 [%].

Source: In-house analysis based on Roland Berger data.

Low gas prices in North America over the last eight years have translated into higher supply of ethylene, which can be manufactured there at a lower cost than in Europe, where its production is based on crude oil. An olefin production complex was last built in Europe in mid-1990s, and European units are typically much smaller than the new ones being commissioned in the Middle East. More than 30% of the European units, out of the existing 43, will soon become unprofitable, with the European producers’ costs under pressure from increasingly more stringent environmental protection standards, also regarding CO2 emissions.

The difficult operating environment of European petrochemical producers has set them back financially compared to their competitors in other regions. There is a high degree of diversity among Europe-based manufacturers in terms of their potential for economic success, with the key factors including the scale of operations, integrated petrochemical and refining assets, access to cheaper feedstocks, location, technologies, and age of process units. Those operating gasoline-fed units are taking steps to modify their production process to accommodate a greater volume of light LPG blends, which will lead to an increased share of ethane and propane in ethylene production feed despite the overall projected decline in ethylene output in Europe. European manufacturers can improve their situation by maximising asset value and restructuring their production plants. Programmes designed to reduce costs and inventories and increase margins can deliver savings of USD 60-150/t. Equally important is the integration between upstream and downstream operations, which can unlock the potential for better operating efficiency by consolidating production streams and increasing production flexibility, with potential efficiencies in the region of USD 20-40/t. Other possible optimisation efforts include improvement of pricing policy and product portfolio, optimised management of sales channels, and strategies aimed at different customer groups and sales regions. Companies operating in the oil sector are also affected by increasingly stricter EU requirements regarding biofuel production and carbon emissions. Bringing production processes into compliance with EU legislation regulating the share of biocomponents and other renewable fuels in the total amount of fuels consumed in the transport sector, high penalties for failing to meet the required levels, and withdrawal of tax incentives for using biocomponents and biofuels in fuel production, all have a significant effect on the cost of operations of European oil companies. Stringent regulations concerning environmental protection and greenhouse gas emissions undermine the competitive power of European refineries compared to their rivals in China, India and the US.

Types of refineries in Europe

Segment assets in 2014

In 2014, the ORLEN Group conducted wholesale of refining products in Poland, the Czech Republic, Germany, Slovakia, Hungary, Lithuania, Latvia, Estonia, Finland and Ukraine, as well as (by sea) to West-European cargo-handling terminals.

The ORLEN Group manages refining and petrochemical assets and is the leading fuel producer in Poland, Lithuania and the Czech Republic. The key commercial refining products of the ORLEN Group include gasoline, diesel oil, light fuel oil, Jet A-1, LPG, and heavy fuel oil.

According to the Wood Mackenzie ranking, the Płock refinery is a Supersite, i.e. a deep conversion refinery of strategic importance, generating high margins and integrated with petrochemical operations. Crude oil is transported to the refinery mainly through the Druzhba pipeline and by sea, through the Gdańsk-Płock pipeline. The maximum capacity of the olefins unit, which is of key importance for ORLEN’s petrochemical operations, is approximately 700 thousand tonnes of ethylene and approximately 380 thousand tonnes of propylene. PKN ORLEN-produced monomers are a feedstock for the polymer units at Basell Orlen Polyolefins (BOP) and the PVC unit at the ANWIL Group. PKN ORLEN also operates a state-of-the-art PX/PTA unit, with a capacity of 400 thousand tonnes of paraxylene, an amount sufficient to produce 600 thousand tonnes of terephthalic acid.

PKN ORLEN’s Polish refineries located in the south of Poland (Trzebinia and Jedlicze) specialise chiefly in fuel storage and distribution services, production of biocomponents, base oils and fuel oils, as well as regeneration of spent oils. In early 2015, these refineries were merged into a single company trading under the name ORLEN Południe.

ORLEN Lietuva’s refinery is the second largest ORLEN Group refinery and the only refinery in the Baltic States (Lithuania, Latvia and Estonia). Its production capacity is substantially higher than the local demand, therefore a part of its output is sold in Europe by sea.

At present, the ORLEN Lietuva Group is implementing efficiency programmes, which focus on increasing the depth of conversion and fuel yields and reducing energy intensity of the production processes.

The Unipetrol Group processes crude oil in the Kralupy and Litvinov refineries. Following the increase in Unipetrol’s equity interest in Česka Rafinérská a.s. under the agreement executed with Shell in 2013, the Unipetrol Group’s annual production capacity rose to 5.9m tonnes as of Q1 2014. The feedstock is received chiefly through the southern section of the Druzhba pipeline (Litvinov) and TAL and IKL pipelines (Kralupy). The Litvinov refinery may also receive supplies from TAL and IKL pipelines. Moving forward with its plan to consolidate the refining assets, in 2014 Unipetrol acquired a 32.4% interest in Česka Rafinerska from ENI of Italy. In March 2015, the company obtained final clearance from the Czech anti-trust authority. Once the transaction is closed, Unipetrol will become the sole shareholder of Česká Rafinérská.

The ANWIL Group, ranking among the largest chemical companies in Central Europe, is the only producer of polyvinyl chloride (PVC) in Poland and the Czech Republic, and one of the leading producers of sodium hydroxide and fertilizers in Poland. The ANWIL Group’s annual production capacity totals 1,160 thousand tonnes of nitrogen fertilizers, approximately 560 thousand tonnes of PVC and granulates, approximately 360 thousand tonnes of sodium hydroxide, and approximately 50 thousand tonnes of caprolactam.

The Basell Orlen Polyolefins Group operates process units with a total annual production capacity of 820 thousand tonnes, including 320 thousand tonnes of high-density polyethylene (HDPE), 100 thousand tonnes of low-density polyethylene (LDPE) and 400 thousand tonnes of polypropylene. BOP products are marketed in Poland and abroad.