Isra-Mart srl : Carbon Costs in Europe May Reduce Margins on Oil-Refining: Energy Markets

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The European Union’s refusal to delay phasing-out of free carbon-emission allowances may drive up costs for refiners already struggling with a slide in crude- processing profits.

Operating expenses may be about 13 percent higher for refiners by 2013, when polluters will be forced to pay for more carbon permits under the EU’s cap-and-trade system, according to the European Petroleum Industry Association, or Europia. The profit from turning crude into fuels such as gasoline and diesel in northwest Europe sank to a seven-year low in the three months through Sept. 23, according to data compiled by BP Plc, Europe’s second-largest oil company.

Having to buy more allowances will “add to the concerns of the industry at a very difficult time,” said Konrad Hanschmidt, a London-based analyst at Bloomberg New Energy Finance, a provider of data and research on carbon markets. Industry emissions will rise by 2.4 percent in 2011 to 148 million tons, according to New Energy Finance.

The EU is seeking to balance the goal of reducing the number of allowances in its carbon-trading market, the world’s largest, with limiting cost increases for energy-intensive industries. At the same time, refiners and other companies that face higher costs are trying to persuade the EU to put off plans until later this decade to scale back free allowances for inefficient plants.

“That would give us time to adapt, in line with the gradual reducing of the EU cap,” Chris Beddoes, deputy general secretary of Europia in Brussels. The European Commission, the bloc’s regulator, “isn’t terribly receptive,” he said.

Top 10 Percentile

Only those European emitters ranked in the top 10 percentile for carbon efficiency will continue to get all their allowances for free, under so-called benchmarking in the EU trading program’s third phase, which starts in 2013 and runs through 2020. While allocations are still being decided in Brussels, Europia expects refiners to get 25 percent fewer free permits than emissions.

Profits in northwest Europe from processing crude fell to $2.48 a barrel in the three months through Sept. 23, according to BP, the lowest level since the fourth quarter of 2003. That compares with $3.84 in the second quarter and $2.60 in the third quarter of 2009.

The European Commission, the Brussels-based regulator for the EU, said it will present a draft in coming weeks setting the allocation of about 6 billion free allowances for phase three, Hans Bergman, a specialist in the commission’s climate department, told reporters last month. The 27 EU nations approved plans in 2008 to auction rather than give away most EU allowances in phase three. The commission didn’t immediately respond to requests for comment.

$1.4 Billion a Year

Even if refiners get about 105 million free allowances in 2013, the cost of permits could be 1 billion euros ($1.4 billion) a year starting in 2013, based on a carbon price of about 30 euros a ton and higher power costs, Beddoes said.

Carbon futures for December 2013 closed yesterday at 17.46 a ton on the European Climate Exchange in London, up 16 percent this year. EU carbon prices will exceed 30 euros by 2016, according to New Energy Finance estimates.

Most European utilities supplying power to EU manufacturers will get no more free allowances after 2012. While utilities can pass on higher pollution costs to customers, refiners can’t because they compete globally, Europia said.

Purchasing permits will be a burden “if the benchmark is applied abruptly in 2013,” Jean-Yves Touboulic, a strategy and development executive in the refining and marketing unit of Paris-based Total SA, Europe’s biggest refiner, said in March.

‘Strong Supporter’

Royal Dutch Shell Plc, Europe’s biggest oil company, declined to comment on the EU proposals other than to say it’s a “strong supporter” of the program, according to Kim Blomley, a London-based spokeswoman, in an e-mail.

“We will be reviewing allocation decisions but cannot comment further at this time,” she said.

The European Commission said it aims to minimize the migration of operators to nations without emissions caps, so- called “carbon leakage.” Europe has excess refining capacity because India and China are building more of their own plants, Harry Tchilinguirian, the London-based head of commodity-markets strategy at BNP Paribas SA, said in August.

“Refining is exposed to a significant risk of leakage,” Beddoes said Sept. 28 at a Platts refiners meeting in Brussels.

Cornerstone

The EU cap-and-trade system is the cornerstone of a plan to reduce emissions this decade by 20 percent from 1990 levels. It covers about 12,000 installations including power plants, oil refineries and producers of steel, paper, pulp, glass, lime, brick, ceramics and cement. Companies must have an allowance for each ton of carbon dioxide emitted. Those producing more than their allowances must buy more. Those emitting less can sell any surplus.

The EU plans to sell about 60 percent of all emission allowances in 2013 and increase the proportion of auctioned versus free permits through 2020, according to European Commission estimates. It will give away about 97 percent in the five-year phase ending in 2012, according to figures from Deutsche Bank AG.

Refiners face “a hugely challenging target,” Beddoes said. The industry has been curbing emissions since before 1990, so “the easy things have been done,” he said.