[MUSIC] Welcome back to our interview. Today, we have with us Jean-Pierre Favennec, who is also a faculty in the International Energy master program at SciencesPo. He is a very well-known expert of oil refining, oil products, oil geopolitics, and particularly an expert of oil in energy issues in Africa. So we'll touch with him several of these issues. And to begin with, Jean-Pierre, we have a crisis of refining in Europe. Can you explain to us why is this a case and how this might develop? In fact, the oil-refining industry is quite different. It's a very important part of the oil chain, what we call the oil chain or the value chain, as we say. In fact, we have, of course quickly saying, we have [INAUDIBLE] In addition we have consultation, we have refining. And we have marketing distribution, okay. So oil forms a well to the vamp and to the gasoline as a diesel you put in your car, okay? Most of the money, if you exclude taxes, is at a level of exploration and pollution. Transportation and refining expenses every time to the Sudan is just a small fraction of the value. To take an example, of course, now the prices are a bit lower but can be higher again. Anyways, the cost of oil is in the range of 70, $80, $60 per barrel, what it was sometime ago. While the cost of transportation of one barrel of coal is just $3 on average and no more, whatever the distance all over the world. And the refining cost, more or less, if you exclude some costs is just or so about $3 per barrel. So you have an industry which is with limited added value. So what we call margin, which is a difference between the product's value at refinery gate and [INAUDIBLE] costs added, cause the that was already financed, so to speak. This refining margin is key, of course, for the refiners. Okay, what we need, of course, is simple, is to have a refining margin which is the difference between product prices which are developed by the market and costs which is also depending upon the market. So you can have very valuable, very stable refining margins. And you have, with this you have to cover your costs. What kind of costs? A bit of chemicals and catalysts, of course, you have to pay your manpower, you have some maintenance. But basically, and this is a very important thing regarding refining, you have variable costs or costs excluding the acquisition which are very low. But if you want to build a new refinery it's another story. So if you have a new refinery, a brand new refinery, what you have to pay if you have to borrow everything, which is very often the case if you have borrowed the money. When you have to repay to the bank, for instance, you have to pay something which is in the range of $10 per barrel just to amortize your debt. So you see, this is the difference. This is a big issue in the refining industry. $3 a barrel, okay, you get it very often from the market but you'd never get 3 plus 10, certain is something you'd never see. So that's why when you are in an open market, I mean, which is the case, of course, in the OECD countries, in the US, and in Europe. In fact you from the markets $3. So you cannot afford to build a new one. And so we have now a fair number of new big refineries which are under construction. But just in countries where you have some control over the price, countries where the price of the products, the gasoline, [INAUDIBLE] or countries where the government can afford to give some kind of subsidy to the refining. That's why the situation today is that we have a very weak situation, a very bad situation for the refining industry in Europe. Because okay, the price of the products depends on the market, on the [INAUDIBLE] on prices. While you have the development of huge refineries is what you see in countries in India, in China. And of course you cannot compete. That's why we have, for instance, I take the example of France because that is a more or less the same in Italy, in Germany and the UK, we had 23 refineries about 30, 40 years ago. For long we had only 12, we closed a lot of refineries because of the oil shock. Oil shock is simple. You have an increase in the price of oil so you have an increase in the price of the products. You cannot replace gasoline and diesel which sells a product because there is no easy substitute for this liquid product for the moment for transportation. While of course, shale oil was replaced with coal, with gas, in some countries we built nuclear plants, etc. So as a lot of refinery, most of the refineries at this time, I mean, before the oil shocks were built to produce a lot fuel oil, which was much more convenient than coal. But now you have this huge increase in the price and repeat coal is always replaced. And so you have refineries left with huge excesses of fuel oil. Those that were simply closed, it was okay in France, but in Italy, in Germany, the UK. And so for long we had about 10, 12 refineries. The situation was stable, I would say. So tradition was that most of the countries, even if they don't have oil, they have enough refining capacities in order to meet the policy, man. But now we have another new shock of those orders, the variation in prices. We have very low margin and so we have closed a lot of refineries. And probably in Europe, we had not long ago about 100 refineries, and perhaps some 10 or 20 refineries at risk of being closed in the next years. >> What I have more difficulty in understanding is why some huge refineries have been built in India, for example. >> Good question. >> And they are completely for export, not for serving the Indian market. Can they make a profit importing oil from the Gulf and exporting to, I don't where, China or whatever. >> It's a good, extreme example we have is Reliance. Reliance is a huge company in India. In India, you have some very large companies like Reliance, etc., etc. As they built sometime ago a big refinery and now they built a huge refinery which is 1.2 million barrels a day, which is 60 million tons a year which is close now to the total consumption of Italy or France, not very far, okay. It's a huge complex. In fact, I think that part of the products are for the local market and for the mass export, huge quantities. And in fact, what they do in the first step, they destroy, for instance, we are talking a bit about Africa, they destroy some refineries which are on the east coast of- >> Africa. >> Africa. Because how can you compete when you are small limited refineries with a relatively old, with old facilities, how can you compete with such a brand new refinery? So that was the reason, but feels that we can, why do they build such huge refineries? It's a private company, so probably they are making some money from this. And they sell part of this in the market unprotected and they expect, of course, to develop exposure. But part of the production is for the local market. Yeah, the local market in India, India is one of the countries that has a local market which is characterized by low prices of oil products, because the prices of oil products are kept artificially low. This is very common in many developing countries. Some of them are producing countries. And so okay, they can afford them but countries like India they have to import these oil products, and so this is very expensive for them. >> Absolutely, this is my expertise. It's a very good question. You have probably in the producing countries a total amount of the subsidies for our products, a bit of gas, but many oil products is in the range of 5 and $1 billion, which is something like 20, 25% of the GDP of a typical year in a European country. So it's huge. And in fact, you'll find many, of course, these subsidies in producing countries like Venezuela, like Saudi Arabia, etc.,etc. Just to mention it, you know that in Venezuela the price of gasoline, and I don't make any mistake, is between 2 and $0.03 US per liter. So with what you pay for a litre of gasoline in Europe you get a full tank of gasoline in Venezuela. This is a tradition. So cost of gasoline and diesel in in the Gulf is in the range usually of 20, 30 to $0.40 US. Basically what they say also is that in order to at least if you want to just to balance to break even your system, you should sell your gasoline at least for 80, $0.90 US per liter, close to $1 if you wanted. Because you have small taxes. So basically, you have huge subsidies. And in case of the producing countries, you can understand it or we have to understand that this is a tradition. And very often in these countries, you can have interesting discussion with the people saying but why should we pay for the oil products since oil's in the ground? This is our part. It's like I had a huge discussion with some students sometime, it was very interesting. Regarding some of the countries like Kenya, this is a very good point. Simply the population is poor and so the government tries to sell the products at a low price, which is a huge cost for the country. We have the price of the worst example of, I don't know, a extreme example, is the case of Egypt. In Egypt, there's a lot of subsidies on oil products. And in fact, you have a huge population which is 80, 90 million units. >> They have increased.. >> It's an increase a bit of price. But for the moment, many say they survive because of the help, the aid coming from the Gulf countries. Otherwise, that would be a mess. >> Otherwise, they could not survive. >> Yes, they could not survive.
