September 30, 2008 / 11:58 AM / 11 years ago

Europe's diesel imports to soar, fuelling pump prices

BRUSSELS (Reuters) - Europe’s reliance on imported diesel will grow over the coming decade due to insufficient investment in refining capacity, bringing higher pump prices while adding to worries about energy security.

Europe imports large volumes of distillates, including diesel and gas oil from Russia, shipments which are expected to balloon in the future and be supplemented by imports from new refineries being built in the Middle East and India.

“We are in a situation of a high likelihood of insufficient refining capacity in Europe in the future,” Jan Panek, head of Unit Coal and Oil for the European Commission Directorate Generale for Energy and Transport, told an industry conference.

“There’s not sufficient investment in Europe to meet that shortfall by 2020 — we will be more reliant than ever on international trade.”

Global demand for diesel is rising, especially in developing countries where diesel has been used for power generation. As a result of the tight supply, diesel prices in Europe will outstrip gasoline for the foreseeable future.

Diesel has historically cost less than gasoline at the pump, but the long-term switch to diesel cars in Europe, without a corresponding rise in refinery production, has seen prices rise sharply in recent years.

European imports of diesel and gas oil distillate fuels are expected to double to a million barrels a day by 2020.

Europe imports around 8 percent of its distillate fuel needs, or 500,000 bpd, most of which comes from the former Soviet Union.

SUPPLY SECURITY WORRIES

Concerns about the long-term security of European supplies and the impact of tight domestic diesel markets on global oil prices have heightened concerns over Europe’s increasing reliance on imported distillates.

While increased exports from the United States are likely to ease some of Europe’s supply tightness, most future imports are expected to come from Russia and the Middle East, heightening fears over the long-term security of European fuel supplies.

Panos Cavoulacos, president of Europia, the European Petroleum Industry Association said that 40 percent of diesel supplies in Europe would be imported by 2020.

European refineries have struggled to make the switch to higher diesel production, which requires more costly investment than increasing gasoline output.

“Refiners should be looking for at least 50 percent of new refining capacity in Europe to be dedicated to middle distillates, but it’s unlikely to be more than 40 percent,” said Matti Laakso, vice president of business development at Finnish refiner Neste Oil NES1V.HE.

“The hydrocrackers and cokers required for diesel are more expensive so it’s unlikely all refiners will be willing to spend the extra,” he said, adding potential competition from refiners geared to exports in the developing world and tightening credit conditions could also restrict European investment.

NEW EXPORT REFINERIES STARTING UP

New export refineries such as the 580,000 bpd Reliance Petroleum Ltd’s RPET.BO Jamnagar refinery in India, due to come online by the end of the year, is expected to help diesel supplies to Europe in the short-term.

However, surging demand for diesel and other distillate fuels in the developing world are expected to mean the benefit to European consumers will be short-lived.

David Martin, a senior analyst at the International Energy Agency, which advises industrialized countries on energy, said: “When more refineries start up in India and the Middle East, there will be an impact on markets but over time export refineries will see more and more going back into domestic markets. If we run the forecasts through to 2013 we see tightness re-emerging.”

Europe’s thirst for diesel could have a prolonged impact on refining activity in the United States, with refining margins for diesel exports encouraging U.S. refiners to aim more of their production toward European markets.

Joanne Shore, senior analyst at the U.S. government’s Energy Information Administration, said that while diesel yields had risen by some 3 percent over the last 10 years for U.S. refiners, gasoline yields had slipped by almost 1 percent.

“We expect diesel prices to remain above gasoline prices - and even more so than they have been in the past,” Shore said.

Editing by Margaret Orgill and James Jukwey

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