23

Market review

4

Global 24

UK and Ireland 26

Americas 28

Middle East 32

Rhine river drought | Germany

24 Greenergy Annual Report 2018

Strategic report » Market review » Global markets

Global markets

Globally diesel demand growth was not offset by increased refinery production, and product stocks continued to fall from their previous levels.

Global oil demand continued to be strong this year, with growth predominantly in non-OECD countries. This is forecast to continue given China’s increasing demand. The introduction of stricter sulphur standards in 2020 for marine fuel will increase demand for marine gas oil, whilst reducing demand for high sulphur fuel oil.

Continuing from 2017, this period saw global diesel markets generally remaining in a backwardated price structure, with global diesel demand outstripping production and diesel stocks declining. We also chose to destock during this period, selling out remaining product in long-term storage at Thames Oilport and on Teesside.

Diesel costs into Europe increased this period, reducing margins, due to tighter market conditions.

New refining capacity coming on stream in 2019 should help meet increasing global demand. In 2019 alone, an additional 2.6mbpd¹ of processing capacity, the largest increase in four decades, is expected to be commissioned. Our global supply chains provide us with the optionality to benefit from increased product availability to supply low-cost product to our customers.

Following a dry summer in 2018, the Rhine river experienced record low water levels in the fourth quarter of the year. This drove significant inter-commodity price spread and volatility in the European market, with both German oil refineries and German rapeseed oil crushing plants closing as barges could no longer carry full cargoes on the Rhine and distribute products from the plants. Germany was forced to draw down on its compulsory stocks to meet demand, causing additional volatility. Price volatility began to normalise post year end, as Rhine water levels rose and significant supply arrived from other locations outside of Europe to meet demand, and replenish German stocks.

Global context The Rhine river

1 Source: International Energy Agency 2 Source: Reuters

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Global markets ARA distillate stocks2

Fuel supply: Europe p36

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Diesel exportsGasoline exports

Our gasoline blend facilities are unique in Europe, both in terms of their scale and the complexity of components they can handle. We can therefore purchase a range of components and optimise our blending processes.

North America

Expanding US shale oil production in US Gulf Coast refineries has resulted in cheaper processing costs and led to a surplus of gasoline inventory. Exports of gasoline and diesel to Brazil and Latin America from North America continue as refinery runs in Latin America fall.

Middle East

Ongoing refinery expansions has meant that Middle Eastern demand is now being met from within the region. Refiners are also increasing exports to Europe and West Africa.

Europe

Gasoline consumption has remained flat. However strong demand in West Africa has maintained flows out of Europe.

Diesel

Refinery capacity in the Middle East and Asia has expanded significantly, and is forecast to continue as new refinery projects come on stream. These new refineries will produce large quantities of diesel and refiners here are targeting diesel exports to other regions.

Gasoline

Greater processing of lighter crude oil in refineries in North America has increased the production of light distillates such as gasoline, creating a global surplus of supply, and reducing the USA’s reliance on imports. In Europe we are able to access more economical gasoline components such as naphtha, for blending.

Availability of gasoline and diesel products into the European market

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26 Greenergy Annual Report 2018

Market review » Biofuels marketsStrategic report » Market review » UK and Irish markets

UK and Irish markets

The UK and Ireland remain reliant on product imports to meet their fuel requirements. We are well positioned to meet this shortfall through our import terminals.

Road fuel demand in the UK grew in the 2018 calendar year, up 0.4% (2017: down 0.1%).

Growth in diesel demand was up 0.78% (2017: up 0.95%) and gasoline demand fell 0.22% during the year (2017: down 1.84%).

The continued rise in diesel consumption occurred despite Government plans to reduce diesel engine emissions, including higher taxes on new diesel vehicles from 2018 and the introduction of ultra-low emission zones in London from April 2019 with other cities expected to follow suit.

Over the last decade, demand growth has combined with declining domestic refinery production to make the UK and Irish market increasingly reliant on fuel imports.

UK domestic refinery production to September 2018 decreased 5.2% from the equivalent period in 2017, as a result of extended refinery maintenance in early 2018.

UK imports were up 9.6% in 2018, as the UK continues to be a net importer of petroleum products, particularly road diesel and jet fuels.1

Continued growth in UK diesel demand

A growing import market

UK net fuel imports2

1 Source: Energy Aspects 2 Source: JODI, Energy Aspects

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Q&A How have changes to UK biofuel legislation impacted our business?

On 15 April 2018, the percentage of biofuel that UK fuel suppliers are required to blend into their gasoline and diesel increased from 4.75% to 7.25%, as the UK Government amended the Renewable Transport Fuel Obligation. The legislation:

» Significantly increases the amount of waste-based biofuels that can be blended into fuel in the UK

» Introduces maximum levels for the use of crop-based biofuels.

As the largest producer of waste-based biofuel in Europe, these amendments create new supply opportunities for us.

From 1 January 2019, the Renewable Transport Fuel Obligation legislation requires that a growing percentage of biofuel must be derived from development fuels (dRTFC).

We believe dRTFCs are a significant opportunity for Greenergy and we continue to investigate solutions to satisfy this requirement. Our established track record of innovation uniquely positions us to respond to these changes.

As of 1 January 2019, new Greenhouse Gas (GHG) legislation in the UK came into effect. This requires fuel suppliers to reduce the GHG emissions from the fuel they supply in the UK by 4% in 2019 and 6% in 2020.

To comply with the new legislation, suppliers need to obtain a certain number of GHG credits, which are awarded according to the carbon intensity of the fuel they supply. This is different to the existing RTFO scheme which awards certificates based on a volume of biofuel blended.

If the supplier does not have enough credits to meet its obligation, it will need to acquire credits generated by other suppliers or pay a Buy-Out price to the Government.

The introduction resulted in a change to our biofuel blending strategy in the latter part of the year which had a one-off adverse effect.

Rising biofuel obligations

Introduction of development fuels

Greenhouse Gas legislation

Global biofuels p58

Note 24: Adjusted EBITDA p157

Legislated increases in Renewable Transport Fuel Obligations (RTFO) and development fuels1

RTFO Development fuels

Percentage biofuel inclusion rates required under the Renewable Transport Fuel Obligation 1 Source: Department for Transport

28 Greenergy Annual Report 2018

Rail-to-road facility | Toronto, Canada

29

Strategic report » Market review » Americas

Multi-competitor supply disruptions challenged the Canadian fuels market in 2018. By sourcing the lowest-cost product from across the world for our Canadian fuel supply business, we benefitted from these disruptions. We were able to provide resilience to our customers during these periods.

Supply disruptionSupply into the market from Canadian refineries was significantly disrupted this year by both planned and unplanned maintenance. This reduced output and increased pressure on supply across the country.

Ontario remains an import market, reliant on pipelines for its fuel supply. In 2018, downtime and capacity constraints on these pipelines further impacted the cost and reliability of fuel supply to the region. In response, the market needed to import fuel supplies to satisfy demand.

With our unique marine and rail-fed logistics capability and our supply chain flexibility, we were able to switch our sourcing to other markets such as the USA and Europe to ensure continued supply resilience for our customers.

With significant refinery turnarounds scheduled again for 2019 and subsequent years, our supply chain optionality will once more provide additional opportunities, benefitting our customers.

Change to regulationsDuring the year, the recently elected Ontario government revoked Ontario’s cap-and-trade programme, a policy designed to reduce greenhouse gas emissions. The removal of this scheme had limited impact on us as we had maintained a balanced position given uncertainty around the programme.

Americas

Canada

Fuel supply: Americas p48

Risk register p86

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30 Greenergy Annual Report 2018

Brazil remains reliant on fuel imports to meet domestic demand. This year, the Brazilian market was affected by the implementation of a temporary price-cap on diesel.

Following changes to its pricing structure in 2017, Brazil started 2018 as a growing import market. However, a national truck strike over fuel prices in May 2018 shut down large portions of the country. With truck drivers on strike, products could not be moved across the country and we were unable to import product during the strike.

After 10 days, the strike was resolved when the Brazilian government agreed to price regulate the market, including the adoption of a subsidy model for the diesel pricing.

Under this subsidy programme, the sale price to customers was set by the Government for a month at a time. If we, as a fuel supplier, sold diesel at or below the price set by Government, we were able to claim a subsidy which was determined by a formula that considered the difference between the world market price and the actual sale price to the customer.

The aim of the subsidy programme was to compensate suppliers for selling below the world price.

The subsidy calculation was not complete and did not include sufficient margin to cover costs such as shipping or storage for fuel importers. Thus we were unable to sell the volume of product required to cover our running costs, and the profits achieved in recent years became losses for the period.

By year end, the subsidy programme had ceased, and Brazil is returning to a pricing structure more aligned to world markets.

Brazil

Americas – continued

Strategic report » Market review » Americas

Fuel supply: Americas p52

1 Source: ANP, Energy Aspects

Brazil gasoline and diesel import fluctuation1

31

Following the truck drivers’ strike in May 2018, the Government introduced a regulated pricing structure, including the implementation of a subsidy system.

This move away from free market pricing to a regulated structure adversely affected supply opportunities for us, as it became only economical to supply some of the time.

This had a significant effect on our business in Brazil, with sales volumes fluctuating throughout the year, and a significant decline of 65% in sales against 2017.

The subsidy system ceased as at 31 December 2018, and early indicators are that Brazil is returning to world market pricing, creating future opportunities for us as a fuel importer.

Case study

Effect of the subsidy scheme

Truck strike | São Paulo, Brazil

32 Greenergy Annual Report 2018

Strategic report » Market review » Middle East

Middle East

Our gasoline blending joint venture aims to supply its Bahraini home market, and export product to meet growing gasoline demand in other GCC countries and Asia.

The Middle East continues to see a significant expansion in refinery production, with 1.3 million barrels/day of capacity due to come on stream by 2022, and a further 1.48 mb/d by 20301. With these new refineries geared towards diesel exports, there are significant regional imbalances in gasoline components, creating import, blending and supply opportunities for our gasoline joint venture in Bahrain.

Fuel supply: Middle East p54

1 Source: OPEC

1.3mb/dcapacity by 2022