overview of the EU Oil industry

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OVERVIEW OF THE OIL INDUSTRY

Objectives This presentation provides an overview of the petroleum industry, its structure and operations.

Presented by:Mathew Nkem IkediashiMSc Environmental Pollution & Protection


OIL SERVICES INDUSTRY

• Definition :EU oil industry comprises of activities related to the extraction of crude oil, the processing of mineral oil into refined petroleum products, as well as the retail sale of such products.

• The transport and storage of crude oil and of refined petroleum products can also be counted to the oil industry.


EU OIL AND PETROCHEMICAL INDUSTRY STRUCTURE

There are two major sectors within the oil industry, upstream and downstream. •The upstream oil industry finds and produces crude oil and natural gas (exploration, development and production).

• Downstream oil industry includes oil refineries, petrochemical plants, petroleum products distributors, retail and natural gas distribution companies (transporters, including tanker and pipeline transport, refiners, retailers and consumers).


Crude OilExploration &Production

Upstream

Refining

Product Distribution &

Sales

Downstream


OIL SEGMENT CHARACTERISTICS

Upstream Refining Distribution &Sales

Key Characteristic Resource extraction Manufacturing Marketing

Key Drivers • Revenue depends on absolute price• Access to resources• Technical skills

• Revenue depends on margin• Location• Configuration• Technical skills• Economy of scale

• Revenue depends on margin• Competitive supply cost• Location• Marketing skills• Economy of scale

Financial Resourcesto participate

Highly capital intensive Highly capitalintensive

Low capital relative to othersegments


Company operations

• Companies can be involved in either one, two or all three industry segments.• Companies can also own and operate separate brands for retailing.• Activity in more than one segment is sometimes referred to as “vertical

integration”.• True vertical integration is quite uncommon in Europe.• By true vertical integration we mean supplying your own crude to your own

refinery and selling the products through your own distribution channels.

Upstream RefiningProduct

Distribution & Sales


EVOLUTION OF OIL INDUSTRY

• 19th and Early 20th Centuries: The Vertically Integrated Company– Own crude flows mostly to own refineries and products are distributed

through own channels.

• Modern Business Operations: Separate Business Segments– Evolution of petroleum markets has allowed each segment to operate

independently.– Markets provide basis for full industry transparency – essential for

taxation and the business implications of modern cross-border operations and trade.


THE BREAKDOWN OF VERTICAL INTEGRATION GAVE RISE TO THECRUDE OIL AND PRODUCTS MARKETS

Upstream RefiningProduct

Distribution & Sales

Crude Market Products Market


GLOBAL DEMAND

• Global demand for oil is steadily increasing

• Demand is currently increasing particularly rapidly in China

• demand for oil is also increasing in other regions like Latin America and non OECD countries excluding China


DEMAND FACTORS

• Overall, oil demand in the EU-25 is likely to increase

• Oil continues to be the dominating source of energy in the EU-25. In 2002, oil accounted for 38% of the total energy consumption in the EU-25, ahead of gas (23.1%), coal(18.2%), nuclear (15.6%) and renewables (5.8%).

• The projected demand differs between different oil products: for kerosene and diesel, as well as for petrochemicals, demand is expected to grow in the future.


CRUDE MARKETS


EU OIL SUPPLIERS


BUSINESS CYCLE

• The EU-25 depends on imports for 80% of its oil consumption. Of the EU Member States.

• In 2004, the EU-25 imported a total of 562 million tons of oil, of which 180 million tons (32%) from Russia, 109 (19%) from Norway, 64 (11%) from Saudi-Arabia, 50 (9%) from Libya and 36 million tons (6%)from Iran.

• Between 1999 and 2004, crude oil imports to the EU 25 rose by 10 per cent (EC 2006d).


BUSINESS CYCLE

Turnover figures of the EU25 oil industry

For the twelve Member States for which data is publicly available.


OTHER PLAYERS WHO BUY AND SELL CRUDE AND PRODUCTS

• The emergence of separate markets for crude oil and refined products presented an opportunity for companies to participate solely in trading

• Volumes handled by the major traders are now a significant part of the market • The traders fulfil a valuable role by quickly identifying arbitrage opportunities

between markets and correcting imbalances• Some are also investors in infrastructure to support their activities, mainly storage,

terminals and shipping, but in some cases also refineries and oil fields• In addition to physical traders there are companies that just trade oil contracts or

“paper” in the futures markets


ESSENTIAL LINK TO CONSUMERS

• Crude oil needs to be refined in order to provide the products consumers need

• Refining separates crude into various products• Refineries also convert low value products into more valuable

products• They treat the raw products to remove impurities• As markets have evolved and quality requirements tightened,

refining has become more complex


CHANNELSRefineryRetail

Wholesale

IndependentWholesale/Resellers

Own wholesalers/Affiliates

BulkCargo salesLarge consumers

Retail(own Brand)

Retail (third party)

GasolineDieselLubricants, etc

Commercial fuelsAviation fuelsDomestic heatingIndustrial fuelsMarine bunker fuels


DISTRIBUTION

v

v

RefineryPipelinesystem Terminal Truck Distribution

RetailTruck Distribution

Rail

Domestic/Industrial

AviationRegional or global import/export

Waterborne


THE INDUSTRY COMPANIES

Upstream-only Operators

Active in all BusinessSegments

Downstream only;Refining + Distribution

Independent Refiners(No or limited distributionactivities)Retail-only Operators

1: Has Downstream activities in USA, but not in Europe2: Owned by Libyan National Oil Company, and processes Libyan crude oil3: Have upstream operations, but outside Europe4: Integrated with petrochemicals, but not with other petroleum activities


ENVIRONMENTAL POLICIES

• Environmental impacts of the oil industry occur on multiple levels, and in different ways Consequently, the effects of environmental policies on the oil industry take different forms


LEGAL ASPECTS• Environmental regulation affecting the operation of refineries

– Integrated Pollution Prevention and Control (IPPC)– Large Combustion Plant Directive (LCPD– Control of Major Accident and Hazards (COMAH) regulations– Air pollution regulation– Waste management regulations– SEA, EIA– Thematic strategy on air pollution– Revision of the Ambient air quality Directive– REACH Registration, Evaluation and Authorisation of Chemicals– Auto Oil I programme– Sulphur Content of Liquid Fuels Directive (1999/32/EC– OSPAR


REACH

• The next phase is to identify the petroleum substances under REACH

• Which processes can be regarded as manufacturing of substances under REACH and therefore oblige the operator to register the manufactured substance(s).

• Registration requires submission of a dossier with information on the registrant, substance identity, uses, physico-chemical, toxicological and eco-toxicological properties, assessment of risk and risk management measures

• Who in the supply chain is the importer under REACH and is therefore obliged to register an imported substance?


CONCLUSION

• The oil industry is composed of three main segments, crude oil exploration and production, refining and distribution and sales. Exploration and production of crude oil is commonly referred to as “Upstream” and “Downstream” is a term used to cover refining of crude oil into finished products and the distribution/sale of refined products.

• The industry is very fragmented. The majority of large players are active in more than one segment. However, each segment has also a large number of “independents” i.e. Companies that are active mainly in one segment only.

• There are many more distribution and marketing companies than refiners. The large investment needed in the upstream and the refining sector is a barrier to entry.

• The largest and best known oil companies have significant presence in all the main segments of the industry. However this does not mean that they are vertically integrated in the traditional meaning of the term.

• The amount of refining capacity owned by the “Majors” peaked in 2002 with the acquisition of some German regional players by BP and Shell. These companies have more recently divested capacity in other locations.


References• European Commission (2006b), An EU Strategy for Biofuels. Communication from the

Commission, COM 2006, 34 final, Brussels 8.02.2006, Commission of the EuropeanCommunities.Available at: http://ec.europa.eu/agriculture/biomass/biofuel/com2006_34_en.pdf

• European Commission (2006c), Energy, Transport and Environment Indicators. Pocketbook: Data 1990-2004, 2006 Edition. Office for Official Publications of thenEuropean Communities, Luxembourg. Available at: http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-DK-05- 001/EN/KS-DK-05-001-EN.PDF

• European Commission (2006d), European Energy and Transport. Trends to 2030 update 2005, Office for Official Publications of the European Communities Available at: http://ec.europa.eu/dgs/energy_transport/figures/trends_2030_update_2005/ energy_transport_trends_2030_update_2005_en.pdf

• European Environment Agency (2005), The European environment. State and outlook 2005, EEA, Copenhagen. Available at: http://reports.eea.europa.eu/state_of_environment_report_2005_1/en

• Eurostat (2006a), European business - Facts and figures, 2006 edition. Available at http://epp.eurostat.cec.eu.int/