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ORLEN Group 2016 Integrated Report

II nagroda specjalna w kategorii Raport Zintegrowany | Najlepszy raport on-line

Market environment

Capitals:  

I. Market trends in the Downstream sector

CRUDE OIL PRICE

At the beginning of 2016 a Brent crude oil barrel cost USD 30. In June 2016 its price rose to more than USD 48, then grew in magnitude and at the end of the year amounted to USD 55. The increase in prices in 2016 is a result of i.a. an unexpected OPEC agreement signed on 30 November 2016. It will lead to a reduction in crude oil extraction in the countries of the cartel. The agreement is to be joined by i.a. Russia, Mexico and Kazakhstan.

Changes in crude oil production in OPEC – December 2016 – January 2017 [million bbl/d]:

Source: IHS Markit

a. Demand and supply of raw material

High crude oil supply, compared with the level of demand over the horizon of a single year, will affect the level of prices - according to the forecasts of the International Energy Agency (IEA), a balance between demand and production of the raw material will be reached in 2018.

Crude oil market in 2015-2021 [million bbl/d]:

ITEM 2015 2016 2017 2018 2019 2020 2021
World Demand 94.4 95.6 96.9 98.2 99.3 100.5 101.6
Total World Supply, including: 96.4 96.7 97.0 97.8 98.7 99.5 100.5
- Non-OPEC Supply 57.7 57.1 57.0 57.6 58.3 58.9 59.7
- OPEC 38.7 39.6 40.0 40.2 40.4 40.6 40.8
Implied Stock Change 2.0 1.1 0.1 -0.4 -0.6 -1.0 -1.1

Source: Data according to International Energy Agency (IEA)

In 2016 oil demand in the world increased by 1.2 million bbl/d and it is predicted that this average rate of growth will be maintained until 2021. The supply increased by only 0.3 million bbl/d. Teh disproportion between the growth of supply and demand will contribute to the depletion of the global oil supply beginning in 2018.

b. Potential directions of changes in crude oil prices

In the medium-term perspective until 2020, the majority of publicly available analyses and forecasts assume an increase in crude oil prices. Here are the main aspects which will be influencing prices in the next two years:

The above mentioned factors imply a slow rise in oil prices from quarter to quarter from about USD 49/bbl in Q4 2016 to around USD 60/bbl in the fourth quarter of 2018 (IHS Markit).

Change in prices of crude oil [USD/bbl]:

Source: IHS Markit

Downstream - Sale and Production

A significant increase in margins in 2015 and their stabilisation in 2016 were supported by lower oil prices in the preceding years and by growing demand for products of crude oil throughput.

Despite the predicted decline of the Concern’s Downstream margin in comparison to high margins in 2015-2016, it will still remain at a favourable level in 2017.

Refining margins in Europe [USD/bbl]:

Source: IHS Markit

In the short- and medium-term perspective, refinery margins in Europe will be shaped by competitive pressure. The main factors influencing margins are the following: the advantage of US and Middle Eastern refineries due to low energy cost vs. relatively high energy costs in Europe, modernisation of European refineries contributing to the extension of processing, as well as the growing competitiveness of exports from the Middle East, supplying fuel not only to Asia, but now also to Europe.

In the longer-term perspective, the refinery margins will depend on the demand for products made from processed crude oil. The reasons for the changes in those margins should be sought in the more extensive structural changes in the market for fuel, diesel oil and petrochemical products. While stagnation or a slight decrease in demand for petroleum products in the transport sector are expected, major analytical institutions predict an increase in the significance of petrochemicals.

The increase in the demand for gasoline in Europe in the years 2015–2016 was driven mainly by decreasing crude oil prices – lower fuel prices translate into an increase in their consumption. In the medium-term, the forecasts related to the demand for refinery products assume stabilisation due to the unchanging demand for gasoline, the flat and uncertain demand for diesel oil, and the growing demand for jet fuel and petrochemical products.

The stabilisation of demand for gasoline results mainly from efforts to reduce the emission intensity of the European economies, and the increased use of biofuels.

In the context of demand for diesel oil, a series of new factors emerged in the fuel market in 2016, making it less likely to grow in the coming years. These factors include:

Change in the forecast for the demand for diesel oil in Europe in 2015-2025 (2015=100%):

Source: JBC Energy, IHS Markit

One needs to bear in mind, however, that the fuel market in Europe has one of the lowest growth prospects in the world. The total global consumption of diesel and petrol is going to grow at a relatively low rate of 0.3% annually. However, the international increase in consumption is to a large extent polarised – the European and North American markets remain stable, while real growth takes place in emerging markets.

In the short- and medium-term perspective, electric cars will not have a significant impact on the fuel market – in Europe, electric cars will have accounted for only 4% of the car fleet by 2030, while traditional internal combustion engines will account for over 60%. The number of electric cars is going to grow from 0.9 million in 2015 to 12.5 million in 2030. Hybrid cars may have a significant share in the structure of EU fleets: according to forecasts by JBC, 74 million of them may appear by 2030 (82 million together with diesel hybrids), representing an annual average growth of 28% vs. 1.8 million in 2015.

Passenger cars fleet structure in the European Union in 2010-2030 [millions of vehicles]:

Source: JBC Energy

In the long-term perspective, the petrochemical industry may support demand for products made from processed crude oil, thus building refinery margins – the growing implementation of modern plastic materials in the global economy.

Central and Eastern Europe is one of the fastest-growing markets in terms of demand for petrochemical products, produced by the ORLEN Group (polypropylene, ethylene, butadiene, paraxylene, PTA and PVC).

Change in consumption of selected petrochemical products in Central-Eastern Europe [thousand tonnes/year]:

 

Source: Nexant

As the demand for petrochemical products grows, so does the competitive pressure – visible in particular in Europe:

Downstream - Power Industry

According to the main scenario (New Policies) of the World Energy Outlook 2016 report created by the International Energy Agency, global demand for electricity will grow at a rate of 2% per year and will increase by two-thirds by 2040. The world economy will keep growing during this period at a rate of 3.4% per year. These trends represent a substantive change compared with the period of 1990-2014, in which both parameters grew at an almost identical pace. In today's conditions the cheapest and also the most common source of electricity generation in the world is coal. However, in the long run it will be replaced by natural gas, hydropower and renewable energy sources. This change will be dictated by the necessity of decarbonisation of industry and fuel prices. In the coming decades significant changes will occur to the sources of power generation. Between 2008 and 2014 the share of wind energy increased by 4 percentage points and solar energy by 3 percentage points. By 2040 the share of these sources in electricity generation is expected to triple. Coal power will continue its structural decline, whereas gas power will grow gradually until 2030, after which it will begin to slightly reduce its share in the global energy mix.

Demand and sources of electric energy in Europe:

Source: International Energy Agency

In the power engineering area of the Downstream segment of the ORLEN Group, the key market is Poland – it provides a favourable growth outlook due to lower energy consumption compared to most European countries. Energy consumption per capita in Poland is much lower than the EU average and amounted to approx. 4.3 MWh/person in 2016, vs. the EU average of 5.5 MWh/person. In the years 2010–2016, energy demand grew at an average rate of around 1.5% annually. Until 2020, the rate of growth is expected to be at a level of around 1.8% (CAGR by CERA), and this increase will be above all correlated with the country’s economic development.

A significant part of the existing generation capacities in Poland require modernization or replacement due to their age and high emission intensity. It is estimated that, in the absence of appropriate economic signals, around 10 GW of generation capacities will have been decommissioned by 2025, which is the main reason why the power engineering segment is being developed within the ORLEN Group and why two power units are being erected with a total capacity of over 1 GW.

II. Market trends in the Retail sector

Almost the whole of 2016 was a period of continuously low fuel prices at the stations, which limited the attractiveness of the economic networks. Premium stations began to acquire more recognitionfrom customers. Customers were more eager to buy premium fuel and paid more attention to available non-fuel products and the gastronomic menu. In 2016 work related to new concepts of shops in the stations was implemented. The operators of fuel stations established a cooperation with large gastronomic networks and began to work on their own formats and brands. Large oil companies focused on the launch of new solutions and functionalities, based on new technologies, tools and IT systems, mainly in the area of new forms of payment, ordering, communicating with customers and improving the operational management of the network.

On the Polish market, the effects of the legislative amendments aimed at limiting the so-called "shadow economy" were evident. To a great extent, they had an influence on the level of wholesale; however, in the retail segment, they resulted in an increase in the number of independent fuel stations operating in the market.

In the first half of 2016 Lukoil, which has a network of 230 stations in Poland, Lithuania and Latvia, decided to withdraw from the market and sell its retail assets to an Austrian company Amic Energy Management. In recent years Lukoil has sold its stations in Ukraine, Hungary, Slovakia, the Czech Republic and Estonia. Austrian investor plan to develop their retail business in the markets of Central and Eastern Europe in the upcoming years.

In 2016, there was another year of growth in the number of fuel stations operating in the Polish market - nearly 200 new facilities were launched. More than 75% of these are independently operated stations.
The number of petrol stations in the networks of foreign concerns remained at a level similar to 2015. In 2017 the rebranding process of Statoil stations (acquired several years ago by the Canadian company Alimentation Couche-Tard) will begin. All of the stations are to operate under the Circle-K brand.

On the Czech market, the number of fuel stations in 2016 remained at the same level as the previous year. However, the structure of the market has changed, a portion of the small non-public stations transformed into generally available facilities, thereby increasing competition in the marketplace. An important change in the retail fuel market in the Czech Republic was that most networks introduced refined fuels, which replaced standard fuels.

On the German market, there were no major structural changes. The foregoing leaders Aral and Shell maintained their leading position, despite a decrease in the number of stations over the last few years in their networks. The biggest premium station networks in the German market also started to operate in the economy segment, this increased market competition. The main competitors of the Star network, managed by ORLEN Deutschland, invested significant resources to modernize their stations, thus significantly improving their visualization and technical standard and expanding their range of non-fuel products. Today, more and more economy segment stations exceed the standard of premium stations.

On the Lithuanian market the leading position was maintained by Lukoil, which was acquired in the first quarter of 2016 by Amic Energy Management from Austria. However, over the next few years these stations will operate under the current brand.

In Lithuania the company Couche-Tard began to introduce its own brand (Circle-K) in Statoil stations acquired in 2012. All networks operating in the Lithuanian market focused on the development of gastronomy. In 2016 the level of retail prices on the Lithuanian market was strongly influenced by an increase in activity on the wholesale market of the Finnish concern Neste

III. Market trends in the Upstream sector

According to the World Energy Outlook 2016 by the International Energy Agency (IEA), the energy intensity of the Polish economy in 2015 decreased by (1.8)% as a result of a further improvement in energy efficiency and from the increased use of cleaner energy sources, including mainly renewable sources, which are going to record their fastest increase yet until 2040.

The increase in global demand for primary energy by about 30% by 2040 in the International Energy Agency’s (IEA) main scenario (New Policies Scenario) means that the use of all fuels will grow.

Among fossil fuels, natural gas will have recorded the biggest increase in consumption by 2040, by nearly 50%, while the consumption of crude oil will increase by around 12% by 2040.

As the downward trend with regard to energy demand in OECD countries continues to be observed, energy consumption is going to move towards regions where earnings are growing, where access to energy sources is more extensive, and where urban development is booming: India, Southeast Asia, China, as well as parts of Africa, Latin America, and the Middle East. According to the IEA’s main scenario, energy demand in OECD countries in the years 2014–2040 is going to decrease by (0.1)% on average each year, while the economies of non-OECD countries will generate an increase in energy consumption by 1.6% annually.

Global demand for primary energy by fuel type and scenario [million toe1]:

      New PoliciesScenario
Source 2000 2013 2020 2040
Coal 2 316 3 926 4 033 4 414
Oil 3 669 4 266 4 461 4 735
Gas 2 071 2 893 3 178 4 239
Nuclear 676 662 831 1 201
Hydro 225 335 383 531
Bioenergy 1 026 1 421 1 541 1 878
Other renewables 59 181 316 936
Total 10 042 13 684 14 743 17 934

1) toe – ton of oil equivalent
Source: IEA

The biggest increase in total demand for crude oil in the IEA’s main scenario by 2040 will have been recorded by India, which will translate into an average annual growth rate (CAGR) of 3.8%. China, on the other hand, with the second largest rate of growth of total crude oil consumption, will beat the USA already at the start of the 2030–2040 decade, becoming the largest consumer of crude oil in the world. Daily crude oil consumption in China in 2040 will reach 15.1 MMBOE/D, while the USA will use 13.1 MMBOE/D and India: 9.9 MMBOE/D.

Changes in crude oil demand [MMBOE/D] – CAGR1:

1) CAGR - cumulative annual growth rate

In the period 2015–2016, due to the decreasing prices of crude oil and natural gas, as well as to limited access to financing, the vast majority of exploration and production companies worldwide decided to limit the scope of the work carried out and to focus their activity on projects at an advanced stage of development of deposits, as well as on the exploration projects with the brightest prospects.

In the crude oil supply area, a return to active market management by OPEC is predicted, the first symptom of which was the formal meeting of OPEC countries in November 2016. Adecision was made to reduce crude oil production in the first half of 2017 and that producers from outside OPEC would join the agreement, including Russia. In total, 24 leading international crude oil producers undertook to reduce the oil supply by 1.8 MMBOE/D, which was necessary according to OPEC estimates to balance out the oil market which has been struggling with oversupply.

The improvement in the financial standing of companies from the upstream industry was also accompanied by more intense activity on the M&A market which was particularly noticeable in the USA, where the consolidation of license areas took place, with particular rapidity.

According to the basic scenario of the International Energy Agency, natural gas consumption is going to grow until 2040 virtually in each of the leading consumer countries, apart from Japan and Russia. China will account for the biggest increase in demand for natural gas in the IEA’s basic scenario until 2040, with CAGR at the level of 4.6%, but India is going to be the country with the highest growth rate, at an average annual level of 5.2%. The USA will continue to be the largest consumer of natural gas in the world, with natural gas consumption at a level of 840 billion m3 in 2040. At the same time, natural gas consumption in China will amount to 605 billion m3, and in India it will have reached 189 billion m3. In the Middle East, which is the second largest area for natural gas consumption growth, the figure will be around 804 billion m3.

Changes in natural gas consumption – CAGR [bcm1]:

1) bcm – billion cubic meters
Source: IEA

In the global gas market, the increasing share of LNG supply will be visible, the market share is supposed to double by 2040 according to the IEA’s forecasts. The current oversupply of gas and the construction of more LNG terminals which is in progress, mainly in the USA and Australia, where the new processing capacities amounted to nearly 130 billion m3 annually, has lead to uncertainty as to when demand and supply on the gas market will reach an equilibrium. According to the IEA’s forecasts, the USA and Australia will account for 2/3 of the total gas production increase until 2020, but between the start of the 2020–2030 decade and 2040, significant increases in the gas supply will be generated by a larger group of producers, with East Africa and Argentina becoming more important players in the market.


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