Falling profits to stress-test Europe’s green refining plans

As European refiners bid farewell to record profits and face up to a changing market landscape, the year ahead will test convictions on decarbonization projects.

For years, refiners have prepared their energy transition survival plans, banking on hydrogen, biofuels and petrochemicals, or government rollbacks on environmental policies.

Backed by bumper profits in 2022-23, companies had the capital to fund numerous multibillion-dollar renewables investments, while many projects have yet to pass the proposal phase. As Europe braces for a refining downcycle, only the most competitive producers will survive, low-carbon projects are facing new scrutiny.

According to S&P Global Commodity Insights estimates, sweet hydrocracking margins in Northwest Europe slumped from $8.62/b in 2023 to $3.80/b in 2024, with levels expected to reach 70 cents/b in 2025 and tip negative by 2026.

Structural shifts will come from electrification eroding fossil fuel demand, while more immediately, new low-cost competitors promise to drive down margins.

Two new refineries, Nigeria’s Dangote and Mexico’s Olmeca, will add around 1 million b/d of capacity by 2026, triggering preemptive a downsizing of 500,000 b/d in Europe announced for 2025. In November, Gunvor announced plans to mothball its 75,000 b/d Rotterdam site, in a further sign of economic strain.

With an additional 1 million b/d of closures expected by 2030, according to Commodity Insights forecasts, refiners are now fighting to secure limited spots in Europe’s future energy mix. Yet as budgets have tightened, large-scale projects have already teetered.

Hydrogen rollbacks
Costly green hydrogen projects, a popular insurance strategy to reduce carbon tax exposure, have been among the first abandoned as refiners reassess their balance sheets.

Refiners can steeply curb emissions by substituting green, renewably-derived hydrogen for natural gas in the refining process, though high infrastructure and production costs have dimmed investment interest.

In October, Finnish refiner Neste dropped plans to begin green hydrogen production by 2026, announcing that an electrolyzer project at its Porvoo refinery had been deprioritized after a “critical assessment” of its investments. The same month, Uniper scrapped its SkyFuelH2 project in Sweden, while BP appeared to quietly downsize a planned electrolyzer in Castellon from 200-MW to 25-MW.

Speaking to Commodity Insights earlier this year, Viral Gathani, strategy director at UK refiner EET Fuels, suggested that high costs have forced many European countries to relax priorities for green hydrogen projects over fossil-derived blue hydrogen, which relies on carbon capture and storage to abate emissions.

“Europe has gone through a change now and is much more open to a discussion about blue,” he said, vouching for the blue hydrogen alternative as a “low-hanging fruit” that can be more cheaply implemented with existing infrastructure.

Platts, part of Commodity Insights, assessed renewable PPA-derived hydrogen costs in the Netherlands at Eur213/MWh on Dec. 17, more than double the Eur90/MWh equivalent for blue hydrogen. Nonetheless, both prices remained well above the comparative Eur39.75/MWh for Europe’s TTF day-ahead gas prices.

With proposed projects set to operate on thin margins, surviving projects remain exposed. In the UK, EET is relying on the government to subsidize blue hydrogen costs at its Stanlow refinery, while Spain’s Repsol recently threatened to drop three green hydrogen plans in response to a proposed tax on windfall earnings.

For now, both projects are moving ahead, though producers remain highly sensitive to policy changes.

Biofuel uncertainty
Confidence in the biofuels segment was also impacted by slumping margins in 2024, which left most producers loss-making and saw prominent projects paused.

An influx of cheap supply from Asia contributed to substantial overcapacity in the biodiesel market, taking margins to a low of minus Eur68/mt in August and shrinking European biodiesel consumption by 16% in 2024, according to Commodity Insights estimates.

BP was among the first to pull investments, dropping plans for a biorefinery in Lingen, Germany, and reassessing projects in Rotterdam and Castellon. In July, Shell also paused engineering work on its SAF plant in Rotterdam to “examine market conditions,” temporarily leaving one of Europe’s largest projects in limbo.

Looking to 2025, producers have expressed hope that stronger policy measures can restore investor confidence. New European antidumping duties on Chinese biodiesel have supported prices, while Sweden, a key demand hub, has fortified its blending mandates.

According to Commodity Insights figures, biodiesel production margins rebounded to Eur52/mt in November 2024, while demand is set to grow 10% in 2025 thanks to stronger regulations.

While Preem, Neste and Eni have stayed the course with large-capacity biorefining projects, the shock downswing has seen more producers revert to flexible, low-volume coprocessing projects, while new offshore production facilities have captured growing attention.

Policy needs
Refiners’ motivation to advance low-carbon projects will rely on robust policy support at a time when Europe looks increasingly isolated in its decarbonization agenda.

As the Continent prepares to absorb higher carbon costs for its fuel, lobbyists say a carbon border adjustment mechanism taxing high-emission imports will be imperative to avoid deindustrialization.

Regulators are expected to discuss new CBAM protections in 2026, with new provisions likely to also subsidize export costs, according to Commodity Insights analyst Jean-Francois Sirenelli.

“We assume an agreement is reached and legislation published in 2028, starting to take effect in 2031 with nine years phase-in to 2040,” he said.

For many refiners, those protections could arrive too late, with consumers unlikely to pay green premiums for their fuel. While many producers will already be preparing to leave the European sector, those willing to stick with transformation plans will nervously await the outcome of whether green investments pay off.
Source: Platts