John Cooper: There’s Space in the Carbon Budget for Liquid & Petroleum Fuels

Recently, I spoke with John Cooper, Director General of FuelsEurope about a range of topics including the state of the refining industry in Europe and the future of fuels in Europe, specifically, diesel, gasoline advanced biofuels and electrification. What follows are highlights from the interview. You can listen or download the podcast below or listen to it in ITunes.

On the Future of Refining in Europe:

“Let me start by saying that the industry that I represent on the industry’s association FuelsEurope has come out very clearly in favor of the Paris Agreement completely recognizing climate change as a global problem requiring global action and we also believe that our industry can be part of the future and part of the solution. That probably doesn’t fit with how some people think around this. What’s the state of the refining industry in Europe? Well, let’s just say that it is a tough time for refining industry particularly in Europe but it’s not catastrophic and we have many companies that continue to do business in Europe.

 

Actually, the association has 40 member companies and that represents around 84 refineries refining in Europe. In terms of the wish to see fossil fuel phased out rapidly, I sometimes remind people that just the companies we have here in Europe have probably at least 50 million customers everyday coming to buy our products and that we provide essential fuels for transport not just road transport but aviation, marine construction, agriculture and then, of course, there’s petrochemicals. If you take all of those together, Europe needs its liquid fuels and products from its refineries and will likely to continue to need those for decades ahead.

 

It’s true there are some emerging alternatives for some parts of the barrel and we will talk about this. But it’s very clear that the demand is there for our products for the long term and while we are seeing strong competition from refiners in other parts of the world we’re currently around 20% of imports of road transport fuels.  Those imports are typically coming from the U.S., the Middle East and Russia and those three regions of the world have a couple of things that are in common.

 

They have a lower regulatory burden on the refineries and lower cost of energy, in particular, the lower cost of natural gas. Thus, a lower cost of refining in those three regions than if it was in Europe and hence imports to Europe remain very competitive. It’s tough times in terms of competing with that, but several of the European refiners have been investing; firstly, to give complexity in their refineries and secondly, on integration.  Many of the companies in Europe have good integration into the logistics and marketing, the downstream right through to the petrol station and integration with petrochemicals manufacturing. Such a strategy of some degree of complexity and integration enables them to be competitive and still have some good business models here in Europe.

 

In terms of the Paris Agreement, we also see that there is a pathway going forward where there could be space in the available carbon budget to accommodate the continued use of liquid fuels and petroleum fuels for transportation. As long as we also get progress towards efficiency as well. We think efficiency is a big part of the story.”

On Whether the Reversal of Dieselization Is Really a Trend:

“Diesel remains a very important technology for the future for a number of different sectors. What we are seeing as I understand it is some rebalancing of the portfolio of cars the carmakers offer. It is true that some of that has been driven by the fallout from the Volkswagen scandal. Some of it was probably due to happen anyway. The cost of emissions abatement technologies for diesel has been going up as we move towards Euro 6 full implementation with real driving emissions…What we’ll see is carmakers make a choice as they look at their engineering strategies there. When they get to the smaller vehicles and I’m thinking a European model like the Volkswagen Polo. They may decide that that technology is expensive to deploy on a car like that, which would mean that the car offered at the dealer would be relatively expensive compared with the petrol version and they therefore may decide not to offer it.

 

A significant portion of the car fleet is split between gasoline and diesel and in many countries more diesel than gasoline. We expect that in future years it will be predominately gasoline. And that means we will see some rebalancing between gasoline and diesel demand… I think it’s worth saying just for clarity we do believe that Euro 6 can and will be implemented robustly. It can meet the required standards. There are already vehicles that can do that and so that will allow it to play a key role in being a relatively low CO2 power train for vehicles and also being able to meet the air quality requirements. And lastly I would suggest thinking of the light commercial vehicles as well.

 

Also, we do see more hybridization coming into the fleet. This is really the competitor for an efficient diesel vehicle. It’s not so much the regular gasoline, but maybe more the hybridized gasoline vehicle. It is a little more competitive, although a little more expensive as a result of the hybrid equipment on there. So basically in comparison with a hybrid gasoline vehicle, you’ve got a competition between those technologies. They may be similar cost.”

On the Push for Electrification:

“I’m struck by the fact that people like Jos Dings, T&E and others in the NGO community increasingly tell us that battery costs are coming down. In fact, that’s the thing that’s commonly reported by Bloomberg New Energy Finance and we understand that they are indeed coming down, but what’s puzzling is that while those costs appear to come down there are continued calls for increase in the number of incentives and the scale of incentives to get electric vehicles on the road. For instance, in the last few months a call in Germany to introduce a plug-in car grant was put in place and we continue to hear calls for further incentives from a number of different industry associations to get more electric cars on the road.

 

If the battery costs were coming down and the performance of the cars were going up you’d think that that trend of incentives was going the other way. In terms of societal cost this could become almost unsustainable. Let’s do the math.  We see at least 10,000 euros per car to get it onto the road. And that trend isn’t currently changing. If you wish to turn over the full European fleet (which takes 15 years) you would spend around 2.5 trillion euros incentivizing the vehicle fleet in Europe to become electrified.

 

We just can’t see how that can happen. That’s I think something like 15 times the European Union budget. There are very, very large numbers involved. What we’re doing at the moment is we’ve got a very small progress towards electrification. We’ve got about .1 or .2% of the European fleet electrified. A very small number of customers choose to go to an electric vehicle. That trend so far has been underpinned by this heavy incentivization. It’s extremely difficult to extrapolate there and say were on the road to a mass electrification.”

On Advanced Biofuels:

“The Commission proposals include this idea of sub-quota for advanced biofuels going from 0.5% up to 3.8% by 2030. Doing the math for those numbers that is a lot of advanced biofuels. It’s the order of 9 million tons by 2030. Nine million tons of advanced biofuels effectively means if people start making preparations now and start building plants in 2020 almost a million tons a year to be divided up between now and 2030. That’s a lot of advanced biofuels plants. That’s probably 20 cellulosic ethanol plants or 10 to 20 Fischer-Tropsch diesel plants making fuels from waste and it’s also some tens of billions of euros of investments.

 

Now given what I just said about a track record and the lack of clarity over some important issues, it’s quite difficult to see how those plants will get built. So we think a number of things need to happen. There needs to be a real conversation about what is practical as a target, and secondly we also need to have a conversation around the reliability of price signals for investors in the market. What will they get paid for their advanced biofuels? That’s something that the regulation is completely or the draft directive is really completely silent on. Anybody that’s contemplating investing in advanced biofuels needs to know something about how valuable they will be in managing terms.

 

And so there’s a great deal of detail to be worked through and some of it will be very difficult to work through because the Commission themselves don’t really have the authority to talk around what are inherently market-type issues like what will these biofuels cost? What will they sell for in the market? I see it’s a starting point but I see some very difficult conversations coming forward with some strong voices in disagreement and I hope we’ll see some leadership from the Commission and also from member states on this issue to be constructive and to work towards putting to bed issues like what does ILUC do to your regulation? Does it keep making a new change every 5 or 10 years? We need to see some resolution to that so that people can make their decisions about investments to meet the future regulations.”