Assessing Geopolitical Risks in the Energy Sector: Implications for Oil Refinery Operators in Europe

Image: A European oil refinery complex transitioning to green energy infrastructure, with solar panels, wind turbines, and hydrogen production facilities integrated alongside traditional refining units. The image highlights the coexistence of legacy systems and next-generation technologies amid geopolitical uncertainty.

The European oil refining sector is navigating a complex landscape of geopolitical risks, operational challenges, and strategic repositioning. From the Russia-Ukraine war to the Israel-Hamas conflict, regional tensions have amplified uncertainties in global oil markets, forcing refiners to adopt resilience-driven strategies. As refining margins stagnate and emissions regulations tighten, operators are redefining their approaches to supply chain diversification, technological innovation, and risk mitigation. This analysis explores how geopolitical dynamics are reshaping the sector and the steps European refiners are taking to future-proof their operations.

Geopolitical Shocks and Market Volatility

Geopolitical events between 2023 and 2025 have significantly disrupted energy flows and market stability. The Russia-Ukraine war initially drove refining margins upward due to supply chain bottlenecks but led to a normalization of prices as markets adapted, according to an ECB bulletin. Meanwhile, the Israel-Hamas conflict and broader Middle East tensions have introduced new layers of uncertainty, with the International Energy Agency (IEA) warning that up to 1–1.5 million barrels per day of European refining capacity could close by 2030, as noted in an S&P Global analysis. These closures are accelerating as refiners grapple with declining demand for fossil fuels, rising carbon costs, and competition from low-cost producers in Asia and the Middle East, according to a Reuters report.

The European Central Bank (ECB) has highlighted that geopolitical risks influence oil prices through two primary channels: the economic activity channel, which dampens demand due to global uncertainty, and the risk channel, which inflates prices through perceived supply disruptions, as the ECB has noted. For example, conflicts in oil-producing regions like Russia and Venezuela have historically caused immediate price spikes, while U.S. or Saudi-led geopolitical shifts tend to align more closely with global market trends, the ECB observed. Such volatility underscores the need for refiners to decouple from traditional supply chains and adopt diversified strategies.

Strategic Resilience: From Closures to Green Transitions

European refiners are responding to these pressures by downsizing legacy assets and pivoting toward cleaner energy. Major players like Shell and BP have announced capacity reductions at facilities in Germany, Italy, and the UK, with some sites repurposed for biofuels or petrochemicals, as S&P Global reported. For instance, Shell's Wesseling refinery and BP's Gelsenkirchen plant are being phased out, reflecting a broader industry trend of rationalization.

Simultaneously, companies are investing in green technologies to align with regulatory frameworks such as the EU's RefuelEU Aviation and FuelEU Maritime policies. Essar Energy and PKN Orlen are leading the charge, with Essar securing government support for a sustainable aviation fuel (SAF) plant in the UK and PKN Orlen expanding co-processing capabilities to boost SAF output, Reuters reported. These projects are part of a larger shift toward blue hydrogen, carbon capture, and low-carbon petrochemicals, as refiners seek to balance profitability with decarbonization goals, according to KPMG insights.

However, the biofuels sector has faced headwinds. High feedstock costs, policy uncertainty, and competition from low-priced imports-particularly from China-have led to scaled-back ambitions. Shell's cancellation of its Rotterdam biofuels project in September 2025 and BP's retreat from standalone biofuels plants exemplify this trend, Reuters reported. Both companies are now prioritizing lower-risk strategies, such as co-processing and hydrogen investments, to align with profitability and emissions targets, as noted by industry coverage.

Operational Diversification and Supply Chain Adjustments

To mitigate geopolitical risks, European refiners are reengineering supply chains through localized sourcing, friendshoring, and technology partnerships. KPMG's 2025 insights emphasize that energy companies are increasingly prioritizing regional suppliers and strategic alliances to reduce exposure to global disruptions. For example, refineries are diversifying crude oil sources away from politically volatile regions and integrating advanced analytics to optimize inventory management, as S&P Global documented.

Technology partnerships are also critical. Collaborations with firms like Topsoe are enabling refineries to adopt hydrogen production and catalytic processes for SAF, enhancing their adaptability to regulatory and market shifts, according to KPMG's analysis. Meanwhile, industry events such as the Petrochemical and Refining Congress 2025 highlight the growing emphasis on collaborative innovation to address energy transition challenges, a trend covered by sector reporting.

Risk Assessment Frameworks: Beyond Traditional Models

European refiners are leveraging advanced analytical tools to evaluate geopolitical risks. A 2025 study introduced a multi-level nested copula model to assess crude oil security, incorporating supply, economic, and transportation dimensions. This framework captures nonlinear dependencies and heterogeneous impacts of geopolitical events, offering a more nuanced understanding of risks compared to traditional linear models. For instance, disruptions in shipping routes due to conflicts or piracy-often overlooked in conventional analyses-are now being integrated into risk assessments, the study notes.

The ECB's dual-channel model (economic activity and risk channels) further aids in forecasting price volatility, enabling refiners to hedge against short-term shocks while planning long-term transitions. These frameworks are particularly valuable in scenarios involving extreme geopolitical events, such as Middle East conflicts or global sanctions, which can trigger cascading effects on oil supply and demand, and they complement the copula-based approaches introduced in recent literature.

Conclusion: Navigating Uncertainty Through Adaptability

The European refining sector's response to geopolitical risks underscores a strategic pivot toward resilience and diversification. While closures and margin pressures persist, the industry's embrace of green technologies, supply chain reconfiguration, and advanced risk models positions it to navigate an uncertain future. For investors, the key takeaway is clear: refiners that successfully balance decarbonization, profitability, and geopolitical agility will emerge as leaders in the energy transition.