Faced with growing diesel and declining gasoline demand, European refiners are in a hurry to get new hydrocracker units up and running with the majority set to go on line this and next year. For somewhat different reasons Russian refineries have also joined the hydrocracker race.
"To stay competitive in Europe, it would be beneficial to have a hydrocracker," says Jonathan Leitch from energy consultancy Wood Mackenzie.
Diesel, unlike gasoline, has demonstrated long-run strong performance, on the back of steadily growing European demand since the late 1980s.
Following significant tax incentives, France currently has the highest diesel demand in the EU, with diesel accounting for 80% of the motor fuel consumption.
French refiners are hence eager to ride on the diesel wave. Total's Gonfreville site is on track to launch a scheduled upgrade of the diesel hydrocracker in the autumn of 2012 which aims to increase its diesel production by 500,000 mt/year.
Across OECD Europe, the diesel share of the total product demand is likely to rise from 30% in 2010 to 34.3% by 2016, according to estimates from the International Energy Agency.
France like the rest of Europe historically has been a net importer of diesel and a net exporter of gasoline, especially to the US.
The economic downturn in 2008 however hit hard the trans-Atlantic gasoline arbitrage and made investments in diesel upgrades more pressing.
"The 2008 crisis accelerated the need for investments," said one refinery manager, adding "all products have seen demand drop apart from diesel."
By 2020, 51% of the cars in Europe are expected to drive on diesel, compared to 32% in 2007.
Spain's Repsol, which joined the upgrade wave in 2008, said that after launching new units aimed at increasing the middle distillates output at Cartagena it will contribute to "clearly reducing the deficit of products in Spain."
Traders suggested that the upgrades at Repsol and Spain's other major refiner Cepsa are not only going to cut the level of diesel imports but might make Spain on occasions a diesel exporter.
Portugal's Galp Energia said that after completing upgrades at its Sines and Porto refineries "the country will produce all the diesel fuel it needs."
"Between 2012 and 2013 we'll see distillate hydrocrackers in Greece, Portugal, Spain coming on line," said WoodMac's Rachel Williams.
Greece's Hellenic Petroleum announced last month that it is "on track" with the upgrade at its Elefsis refinery. The project comes on line at a time when the Greek Parliament passed a law lifting a 20-year ban on diesel-run private vehicles in Athens and Thessaloniki.
And Israel's ORL said it expects a hydrocracker at its Haifa refinery to start production by the end of the second quarter next year.
RUSSIAN REFINERIES UPGRADE FOR TAX REASONS
Whereas investments in Europe have been driven by weakening margins, in Russia "there are different reasons", Rachel Williams says.
"Between last and this year there have been more announcements for investments for diesel mostly due to the export tax regime," Williams said.
In October, the Russian government drastically increased the export tax burden on fuel oil by introducing the new "60-66" export tax regime, aimed to speed up investments in higher yield of light products.
The new tax structure reduced the tax on crude exports to 60% of the price of Urals and introduced a single rate of 66% of the Urals duty for diesel and fuel oil. The move made fuel oil exports, which previously have been taxed at 46.7% less attractive as part of measures to encourage refinery modernization.
Following the change, many Russian refineries sped up projects that have already been underway or have announced new investments.
Gazprom Neft is to launch a new hydro complex at its Omsk refinery in early 2012 and TNK-BP said it will completely refurbish the diesel hydrotreater at Saratov within the next two years.
Lukoil announced that a new diesel hydrodesulrization unit will be launched at Volgograd next year.
TNK-BP and Gazprom Neft's Yaroslavl refinery has already installed a hydrotreater following upgrades that started as early as 2002.
Russia's largest oil producer Rosneft, which owns and operates seven large refineries in Russia, is carrying out a large-scale upgrade in all of its refineries, involving the construction of 57 new processing units and upgrading 20 existing ones.
"Upgrading our refineries is one of the key priorities of Rosneft," said Rosneft President Eduard Khudainatov in a statement.
Faced with the growing competition, those European refiners who had already started their investments, are keen to keep the hydrocracker race on track and hope to profit from them.
Others however who had projects in the pipeline are less likely to pursue them, according to market players.
"Given the combination of the current commercial climate, the outlook for refining in the UK and the rest of the EU, and the substantial cost of upgrade projects, it seems unlikely that such investments will be made in the foreseeable future," according to UK petroleum industry association UKpia.
