Oil refiners in Europe will shut 10 percent of their plants this decade as fuel demand falls to a 19-year low.
Of the region’s 104 facilities, 10 will shut permanently by 2020 from France to Italy to the Czech Republic, a Bloomberg survey of six European refinery executives showed. Oil consumption is headed for a fifth year of declines to the lowest level since 1994, the International Energy Agency estimates. Two-thirds of European refineries lost money in 2011, according to Essar Energy Plc, owner of the U.K.’s second-largest plant.
“Purely from the falling European demand point of view, one bigger refinery or two smaller plants would have to shut in Europe every year,” David Wech, who helps advise oil companies and governments as managing director at researcher JBC Energy GmbH, said in a phone interview from Vienna. “And it’s not even assuming any negative impact from more competitive refining markets in other regions.”
A 50 percent jump in three years in U.S. diesel exports coupled with waning demand for imports of European fuels, as well as two recessions in five years in the euro region, have curbed profit from oil products at companies from Italy’s Eni SpA to Royal Dutch Shell Plc. Refining margins dropped to $7 this month, from a peak of about $20 a barrel in 2008, according to data compiled by Bloomberg.
The losses are being compounded by the configuration of Europe’s refineries. Most of the plants, more than 50 percent of which were constructed in the wake of World War II, are geared toward gasoline production, though diesel now accounts for 75 percent of the region’s motor fuel needs.
At the same time, newer facilities in the Middle East and Asia are refining cheaper crude grades into high-value fuels. Saudi Arabia, the world’s biggest oil producer, is building three refineries each the size of Shell’s Pernis plant in the Netherlands, Europe’s largest facility with a capacity of 400,000 barrels a day.
“Brand new Middle Eastern and Indian refineries are just shiny, beautiful, latest technology,” said Volker Schultz, chief executive officer of Essar Oil U.K., the British unit of Essar Energy that runs the Stanlow plant near Liverpool, England. They are “world class, world scale, you name it,” he said.
Refiners in Europe are also falling behind because U.S. competitors have access to cheaper crudes and natural gas, while Russian companies benefit from a more favorable export-tax regime, according to Schultz. European fuel demand is on course to drop to 13.6 million barrels a day this year, from 15.4 million in 2008, according to the IEA. Brent crude was trading today at $104.90 a barrel on the ICE Futures Europe exchange and is poised for a 4.7 percent drop this week.
“Not many companies have money to invest as the refining market has collapsed,” said Tomasz Kasowicz, a Warsaw-based analyst at Bank Zachodni Wbk SA who has sell recommendations on Polish refiners Polski Koncern Naftowy Orlen SA and Grupa Lotos SA. “I don’t think current owners of European refineries will make decisions to invest in this circumstance, and they would probably rather exit” if their business can’t make profit.
Greece’s Hellenic Petroleum SA, Portugal’s Galp Energia SGPS SA and Grupa Lotos are among the few European refiners that invested more than 1 billion euros ($1.28 billion) each in boosting plant profitability. A three-year project that cost Grupa Lotos 1.5 billion euros turned its Gdansk facility into a “pro-diesel refinery,” according to Marek Herra, a Gdansk-based production director
Hellenic Petroleum spent 1.4 billion euros upgrading its Elefsina refinery, a multi-year project started before the recession.
Without that investment “we would be in trouble now, with only one refinery generating cash for the entire group,” Harry Panitsidis, a project director at Hellenic, said in an interview in Amsterdam on March 5. “And it’s a big question if people would start today” on a similar project, he said. “You need to be very big and very robust to do that now.”
Since 2008, refining capacity in northwest Europe has fallen in line with shrinking fuel demand, while a decline in consumption in the Mediterranean region outpaced a slide in capacity by 1.1 million barrels a day, according to Facts Global Energy’s Annual World Refining Outlook for 2013. This is five times the size of the Coryton refinery in the U.K., which closed last year after its Swiss-based owner, Petroplus Holdings AG, filed for bankruptcy.
Petroplus was among independent refiners that bought plants from major international oil companies including BP and Shell that were reducing their exposure to Europe’s refining industry.
The Organization of Petroleum Exporting Countries, which controls about 40 percent of the world’s oil supply, also acknowledges the continent’s weakness.
“There’s no demand, Europe has been flat since 2005,” OPEC Secretary-General Abdalla el-Badri said yesterday at a conference in Paris. “The growth is minus 0.2 percent, so the European economy is the only risk we have in our forecast.”
Italy, where diesel demand dropped in February to the lowest level in almost 10 years, will probably see refinery closures, according to analysts and refiners surveyed by Bloomberg. There are no signs of recovery this year in the country’s fuel consumption, which may still decline by a further 10 percent, said Marco Schiavetti, director of supply and trading at oil-refiner Saras SpA. “This is a very depressing situation,” he said.
The Mantova refinery in Italy, owned by MOL Hungarian Oil and Gas Plc, is among those at risk of closure, according to Kasowicz of Bank Zachodni. Domokos Szollar, head of international communications at MOL, said in an e-mail the company doesn’t plan to close any of its refineries and has initiated “a wide efficiency measure project.”
Petroplus’s Petit Couronne facility in France is struggling to find a buyer and remains closed for now. Other French refineries face a high risk of shutting permanently, according to the poll of refinery executives and analysts including Gemma Parker at Facts Global Energy.
Total SA’s Feyzin and La Mede plants, Exxon Mobil Corp.’s Fos facility or the Lavera refinery part-owned by Ineos Group Holdings SA are all potentially at risk since they compete in the same market amid low demand for gasoline, Parker said.
An Exxon media official, who declined to be identified citing company policy, said the company had no comment. An Ineos official in Lavera didn’t return a phone call seeking comment.
Total will honor its pledge, made when it decided to shut the Dunkirk plant in 2010, not to close any other refineries until 2015, Victoria Chanial, a Paris-based spokeswoman, said in an e-mail. “In the European market, our strategy is to adapt capacities to demand evolution and optimize the industrial system by focusing investments to position the best performing sites among the leaders and maximizing synergies,” she said.
Eastern Europe also has a substantial surplus of refining capacity, with several plants there already operating at low utilization rates, according to JBC Energy’s Wech. Ceska Rafinerska AS’s Litvinov plant in the Czech Republic is among those at risk of closure, Kasowicz said.
“This refinery should change the production mix, and a major shareholder may not do it this year,” Kasowicz said.
A Ceska Rafinerska official said the company isn’t authorized to comment on the refinery itself, saying questions should be posed to shareholders. Unipetrol AS is the majority shareholder. Mikulas Duda, Unipetrol’s press department manager in Prague, said in an e-mail that “despite the challenges, we believe that our refineries, including the Litvinov plant, will continue operations in the foreseeable future.”
Essar Energy’s Schultz said he was struck by the differing fortunes of cash-strapped European refiners versus their competitors elsewhere when he attended a conference in New York earlier this year. At that event, small U.S. refineries discussed multi-billion-dollar cash reserves and how they should invest, “and you just sit back and think ‘this is not real’,” Schultz said.