Thursday, April 28, 2011

Europe Diesel Import Dependency: Crisis Ahead

Mediterranean diesel: import dependency crisis ahead?

Mediterranean diesel trends not only depend on domestic demand and refineries but also on the diesel surpluses of its main diesel provider, Russia. Both markets need to be analysed to grasp future limitations.

 Mediterranean diesel demand

Diesel, currently the main oil product consumed in the Mediterranean, is expected to witness the largest increase in demand by 2015. Overall, Mediterranean diesel demand is expected to grow at an average rate of 1.8 per cent per year up to 2015. This growth is expected to be more sustained over the next 5 years (at around 2 per cent). Total Mediterranean diesel demand should increase from the current 180 Mt to nearly 215 Mt in 2015. In 2005, specifications for all diesel demand in the Mediterranean was above 50 parts per million (ppm). However, largely on account of EU policies, by 2010, 90 per cent of total diesel consumed in the region should switch to ultra-light sulphur (no more than 10 ppm). Around 1 per cent of the demand should be accounted for by 50 ppm products,

While only 9 per cent of diesel will remain above 50 ppm (see Fig. 3). At horizon 2015, the products of above 50 ppm are expected to account for less than 5 per cent of the total Mediterranean diesel demand. This slight increase is the consequence of expected fastgrowing transport demand in the south-west Mediterranean, where most countries are not following EU standards.

Most of the shift towards ultra-light sulphur products will occur in the north-west and more specifically, in the EU countries tied to specification targets by their EU policies. As a result, not only is diesel demand set to increase over time, but its specifications will have tightened drastically to meet environmental standards.

 Overall diesel imbalance
Upcoming refinery capacity additions will help sponge some of the increase in demand but will not be sufficient to match the increase in diesel Mediterranean demand by 2015. Mediterranean diesel deficit is expected to increase from –31 Mt in 2005 to –35 Mt in 2015 (see Fig. 4). The 2015 deficit figure includes the new Algerian refinery Tiaret capacity additions of around +6 Mt of diesel. If Tiaret is delayed, the overall Mediterranean deficit would surge to over –40 Mt in 2015.

Furthermore, within the Mediterranean, discrepancies prevail. The north Mediterranean and more specifically, the EU countries will account for most of this deficit with Italy, France and Spain as major diesel importers by 2015. Greece is expected to have comfortable surpluses, making up for some of its neighbours’ deficit. South-east Mediter-ranean is also expected to increase its diesel deficit significantly by 2015, mainly on
account of Turkey’s surging transport demand. Potential additional diesel exports within the Mediterranean will come from the south-west Mediterranean, mainly from Algeria.

Mediterranean diesel import dependency
The increasing diesel deficit at the Mediterranean level calls for increased import dependency of the region at horizon 2015. In 2015, indeed, over 35 Mt will need to be imported from outside the Mediterranean. At world level, Former Soviet Union (FSU) countries are expected to be major importers of middle distillates to the Mediterranean. Northern countries of the EU are also expected to provide the Mediterranean with middle distillates (IEA, 2006; Europia, 2007).

Currently, Russia supplies around 18 Mt of diesel directly to the Mediterranean region and around 6 Mt through northern Europe. Russia is the most important source of diesel for Europe and the Mediterranean. In 2005, Russia accounted for over 80 per cent of the total diesel Euro–Mediterranean imports. Concomitantly, Mediterranean diesel accounted for 70 per cent of the total Russian diesel exports in 2005. While there is no doubt that the Mediterranean will continue to be increasingly dependent on Russian diesel imports, qualms remain onwhether Russian diesel will be sufficient to cover both EU and Mediterranean needs in the coming years. Russia’s diesel prospects are, therefore, just as decisive to appraise Mediterranean future as its domestic trends.

 Russian demand and output prospects
Over the next decade, Russian diesel exports to Europe and the Mediterranean are expected to grow but at a slower pace than Euro–Mediterranean needs.The former Soviet countries, mainly Russia, supply the bulk of diesel fuel to the Euro–Mediterranean region.

Russia exports about 24 Mt. As shown in Table 1, the EU countries account for most of these imports; however, the Mediterranean EU is the largest importer of diesel in the region. Currently, European oil-producing and processing companies, while forecasting a future major shortage of diesel fuel, hope Russia will help them solve the problem. But foreign and Russian experts estimate that Russian oil companies are unlikely to seriously increase the output of diesel fuel (Izvestia, 2007).

Moreover, only 15 per cent of Russian diesel fuel supplied to Europe satisfies the Euro-4 standards. The rest undergoes further conversion at European plants. Russian oil demand is expected to grow at around 2.1 per cent per year on average by 2015 (IEA, 2006). With increasing domestic demand especially for diesel vehicles, Russian diesel demand is expected to outpace that of the total oil demand and increase at
2.4 per cent per year on average up to 2015. Russian diesel output is expected to increase from around 60 Mt in 2005 to reach about 82 Mt in 2015 (IEA, 2005; Koottungal, 2007).9 The concurrence of increase in demand and increasing output should lead to an expected surplus of around 49 Mt in 2015 (see Table 2).
According to Andrei Fyodorov (Izvestia, 2007), Russia can only partly make up for the shortage of diesel fuel in Europe. In his opinion, diesel fuel production is not a priority goal in Russia now, although the consumption of petrol and diesel fuel is expected to grow substantially.

He expects that producers will prefer to supply the domestic market rather than export. Besides, not all Russian refineries produce European-standard fuel. It is not profitable for Russian companies to increase the production of diesel fuel, as their plants are operating under an established scheme geared to a specific quality of oil.An increased production of all types of fuel without large-scale modernisation would result in the marketing of a large amount of fuel oil, which is not in demand. Furthermore, Nietvelt (2007) expects Russian companies will have no motivation for increasing the level of conversion, because the export duty on fuel oil is 22 per cent, and on diesel fuel, 42 per cent .Concomitantly, while Mediterranean diesel import needs are expected to increase from 31 Mt in 2005 to reach over 35 Mt in 2015, diesel import requirement of remaining EU is expected to reach 25 Mt in 2005. Overall, the Euro–Mediterranean diesel deficit is expected to reach about 60 Mt, while Russia’s diesel export potential should barely reach 49 Mt.

As a result, diesel trends are expected to lead to more than 10 Mt mismatch between the import requirement of the Euro–Mediterranean region and Russia’s export potential (see Fig. 5). Import dependency for diesel is, therefore, expected to be exacerbated in the region with no clear other import source to tap in the medium term.


To further this expected tightness, it is to be noted that while currently, 70 per cent of Russian diesel surpluses go to the Euro–Mediterranean zone, in the future, the growing demand from other regions with looser product specifications, and more specifically, Asia’s giant China, might attract some of this surplus, leaving less to fill in the Euro–Mediterranean deficit.

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