Decarbonisation Technology - November 2021

technologies. Despite this, Wood Mackenzie expects most of the 2021 recovery in gross refining margins has not made its way to the bottom line. The EU provides free allowances to mitigate the risk of carbon leakage. These are established by best-in-class technologies for the various refinery process units, reflecting the emissions of the top decile of facilities. The net result is that European refiners are exposed to significant additional carbon costs, which we anticipate to largely eradicate the positive margins of third and fourth quartile European sites for the next few years. An analogous situation exists for Asia, by which a carbon price of, say US$100/tonne in 2027, results in the carbon liability taking over 60% of cumulative refinery earnings, as shown in Figure 1 . The EU has considered, but not adopted, a carbon border adjustment mechanism for refining. The concept appears supportive of the European refining sector, as charging a tariff on imported middle distillates based only on the emissions of the export refinery and the transport delivery to Europe would lift the effective import parity price. Wood Mackenzie’s integrated analysis along the entire oil value chain suggests a more holistic perspective might offer no such protection, as shown in Figure 2 . When emissions are evaluated on a refinery gate forwards basis, European emissions for middle distillate production are below those of barrels delivered from Saudi Arabia, so a carbon border adjustment would raise the costs of Middle East volumes imported to Europe. However, if

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Carbon liabilty

% of renery earnings

Figure 1 Asian refinery carbon liability

the Scope 1 and 2 emissions associated with the crude production and delivery are included, the low upstream emissions for Russian and Saudi crude results in the emissions being broadly comparable. In such a framework, the carbon border adjustment would offer no protection to European refiners. Given this uncertainty, refiners need to establish a robust, commercially viable conversion platform that can adapt to the energy transition and not rely upon potential regulatory support. Significant investment is required to achieve site sustainability Wood Mackenzie believes refining’s role as a conversion business provides a long-term future, as decarbonising the world requires large volumes of low carbon liquid energy carriers as electrification is not a silver bullet across all

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EU domestic production

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Figure 2 Emissions for middle distillate imports to EU from major exporters