Tuesday 13 December 2011

Challenges facing the European Refining Industry

Stefan Cahpman, Vice President, Euro Petroleum Consultants for Hydrocarbon Engineering November 2011

Not so long ago, oil refining was considered a profitable business in Europe, companies were competing with each other to take ownership of plants or to invest heavily in existing refineries. Today the situation has changed as the economic recession and resulting fall in demand has put pressure on the European refining sector.

We are now seeing oil companies redefining their refining strategies by selling refining assets across Europe or in some cases, considering closing refineries altogether due to rapidly decreasing profit margins and heavy losses.

These new strategies coupled with weak margins and surplus capacity has meant that the following European refineries have already been shut down or have been tagged for possible closure in the near future:

COUNTRY
COMPANY
REFINERY
CAPACITY (B/D)
UK
Petroplus
Teeside
117 000
Germany
Shell
Hamburg
110 000
Italy
Tamoil
Cremona
80 000
France
Total
Dunkirk
135 000
France
Petroplus
Reichstett
85 000

(SOURCE: REUTERS)

In addition to the plants listed above, there are also a number of refineries that have been put up for sale due to the difficult climate and shift in company directives:


COUNTRY
COMPANY
REFINERY
CAPACITY (B/D)
Romania
OMV
Arpechim
70 000
UK
Total
Lindsey
221 000
UK
Murphy
Milford Haven
105 000
UK
Chevron
Pembroke
220 000
Lithuania
PKN Orlen
Mazeikiu
190 000
(SOURCE: REUTERS)
 

This year’s summer period has seen European refiners leave a fifth of their capacity offline as high oil prices and a general feeling of economic pessimism affected demand. 

However, looking at the released figures by Euroilstocks data for July, we have seen refining margins on the up slightly due to an increase in Gasoline demand notably from Middle East & North Africa as well as continued support from Middle Distillates.

In Germany, early buying for the winter season also meant an increase in Heating Oil demand.


Overall, production in Europe reached 82 percent of running capacity, but remained considerably lower than the 86 percent seen during the same period last year.


There is also the worry caused by the faltering demand from the United States, the world's largest gasoline consumer. Average U.S. gasoline demand fell sharply at the end of July and this has meant an increase in motor fuel inventories at the peak of the northern hemisphere's summer driving season.


Another contributing factor to the downturn is that the Euro Zone business confidence is currently low with even Germany, the strongest economy in the Union, experiencing a slowdown in economic activity.


Add to that, high oil price having a negative effect on the global economic activity, problems due to the loss of Libya’s light sweet crude – traditionally an important regional provider meaning that we are facing an uncertain market and ultimately less optimistic forecasts for the business.



*

The European Refining sector also needs to contend with certain specifics of their market.
These include having to invest to comply with new emissions legislations, with the first mandated reductions in CO2 emissions under the European Union Emissions Trading Scheme due to come into effect from 2013.

Another important point that should not be underestimated is the additional competition – these refineries have been built primarily to meet the forecasted demand of their internal markets, but in the meantime those that are already online in India & China are presently geared to exporting products to other markets. As the cost of freight and transportation are relatively cheap in comparison with additional costs incurred by European refiners then these producers represent serious competition. 


So, in light of the current challenging times what are the options open to the European refining industry?


As mentioned previously, one trend we have seen in recent months is that a number of oil companies have sold European refining assets to Asian, Indian and Russian buyers.


New Strategies by a number of oil majors such as Total SA, Shell and BP PLC have taken the decision to downsize their European refining portfolios and turn their attentions to investing in emerging markets and higher-margin areas.

A combination of factors has led to relatively low prices for these assets and this has attracted interest from a diverse range of buyers, including new emerging-market refinery owners, sovereign wealth funds and fuel-marketing companies.

The primary interest for emerging-market refinery owners is to gain a foothold into the European market.
Recent examples of this strategy include: 
  • US major ConocoPhillips has sold the Wilhelmshaven refinery (260,000 BPD) in Germany to private Dutch company Hestya Energy. 
  • Shell's Stanlow oil refinery, the U.K's second-biggest, was bought for $350 million by Essar Energy, a subsidiary of the giant India-based Essar conglomerate.

    The arrival of Essar into the European market comes at a time when many in the industry feel that the business of refining is unlikely to improve in Europe for the foreseeable future.

    Nevertheless, over the next few years, Essar plans to invest in the region of $100 million a year. This investment is to be used for necessary upgrades to meet environmental regulations but also to increase throughput and flexibility by processing heavier crudes. These modifications aim to increase efficiency, flexibility and result with improving profit margins.

    An added incentive for Essar to purchase Stanlow is the plant’s refinery's storage capacity and market access which can be utilized to good export effect.

    What we can see is that these new owners are from diverse backgrounds and they are looking at available assets which best suit their specific needs and type of business.

    • The International Petroleum Investment Company (IPIC) - Abu Dhabi sovereign wealth fund purchased from Total a controlling stake in Spain's CEPSA. The total cost of the operation is thought to be around €4 billion and includes marketing and some production assets. 
    • PetroChina invested into refineries via a JV (joint-venture) with major chemical producer INEOS (Switzerland) at Grangemouth in Scotland and at Lavera in France, 
    • Lukoil has bought assets in both Italy and the Netherlands 
          Another possible option that is being looked at by some owners is to convert existing refineries into strategically placed storage terminals.

          Earlier this year, Shell announced that they had decided to close their Hamburg refinery in northern Germany and convert it to a storage terminal in 2012. This decision was taken following failure to find a suitable buyer for the plant.

          So what do all these different challenges mean for the future of the European refining industry?
          Firstly, let us not forget that refined products will continue to be a key part of the European energy makeup for the foreseeable future – This means that having a viable and efficient refining industry will be important to support the European economy and its competitiveness. 

          As the European sector comes out of the downturn some recovery in demand is expected –but any significant growth will concern primarily jet fuel and diesel only.


          Difficult times lie ahead due to lower gasoline demand from Europe’s major client; the US – combine this factor with the following;
           
          • new important refinery capacities coming on stream in Asia and the Middle East 
          • improved car efficiency 
          • EU environmental legislation
              Subsequently pressure on the European refining industry is to be expected.

              Looking at the positives, refining margins for more complex refineries could be given a helping hand by the changes to marine bunker fuel specifications – these will concern mainly Northern Europe in 2015.


              The change in legislation is expected to mean an increase in demand for marine diesel and this at the expense of heavy fuel oil – the result would mean strengthened prices for middle distillates and refinery profitability.


              To conclude, it will be important that the EU commission continues to develop a strategy that takes into account the important role of refining and supports the sector to face the key challenges that lie ahead.


              Author:


              Stefan Chapman

              Vice President
              Euro Petroleum Consultants Ltd.

              11 comments:

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              10. Our company PETROLEUM CORP is the most viable and efficient connection between real buyers for all principal energy commodities. We trade in several commodities not limited to AVIATION KEROSENE’S, namely,

                1) JP54
                2) JPA1
                3) MAZUT
                4) AGO
                5) LNG
                6) LPG
                7) D2
                8) D6
                9) REBCO
                10) EN590
                MAZUT etc.

                And also in BONNY LIGHT, OTHER CRUDES AND COALS. We currently serve any world port. If you are a buyer or direct mandate to a performing buyer please feel free to contact us.

                Please contact us via our official email address.

                kuznetsovgavriil.mikhailovich@mail.ru

                Below here is my Whatsapp contact: +79153753185
                Thanks

                ReplyDelete