Iran Embargo May Speed Refinery Closures
“Asian countries not applying the embargo could buy the Iranian oil at a discount and sell cheap refined products back to us,” Piero De Simone, general manager of Unione Petrolifera, said in an interview in Rome yesterday. “Italy already risks the closure of five refineries and at a European level we’re talking about 70 possible shut downs.”
The European Union this week agreed to ban oil imports from Iran starting in July as part of measures to target financing for the country’s nuclear program. The policy comes as refiners fight overcapacity and falling fuel demand. Petroplus Holdings AG, which has five plants across Europe, yesterday declared insolvency after banks called in loans.
While refiners will replace Iranian imports with Saudi Arabian and Russian oil from the Urals, De Simone says he is concerned Asian refiners will use cheap Iranian crude to undercut competitors.
“The Iranians will have to unload their production somewhere and I’m sure they’ll find buyers,” he said. “The last thing we need is more unfair competition. Either we do something at a European level or we risk a precipitous end similar to Petroplus’s for many European refineries.”
Refining margins from processing Brent into gasoline, diesel and other fuels in northwest Europe fell to loss of 26 cents a barrel in December from a profit of 51 cents a month earlier, according to a Jan. 18 report by the International Energy Agency.
“With crude oil prices high and likely to remain high, margins are set to remain under pressure,” Barclays Plc analyst Amrita Sen said in a note yesterday. “We would expect further closure of simple, non-profitable refineries in both the U.S. and Europe.”
While the EU imported 450,000 barrels a day from Iran in the first half of 2011, China bought 543,000 barrels in the same period and India, South Korea and Japan purchased a total 913,000 barrels, according to data from the U.S. Energy department.
Italy, Spain and Greece combined accounted for about 68 percent of EU imports from Iran in 2010, European Commission data show, with Italy getting about 13 percent of its oil from Iran, according to Unione Petrolifera statistics.
De Simone said smaller and older plants which specialize in the heavy kind of oil Iran provides will be the hardest hit. Italy currently has production capacity of about 103 million tons of fuel a year, while internal demand is around 74 million tons, he said, a gap equal to about four or five small refineries. Europe, including Russia, has 175 oil refineries, according to Bloomberg data.
“What we’ll likely see over time is that only the large refineries, particularly the ones able to make diesel which is increasingly in demand will survive, and it still won’t be easy,” he said.
Excess capacity in the industry makes the outlook for oil refining in the next few decades “dire”, BP Chief Economist Christof Ruehl said on Jan. 18.
Swedish refiner Preem AB said yesterday it plans to cut 10 percent of its workforce at plants in Gothenburg and Lysekil.
De Simone’s association would favor import duties of some sort for countries that offer lower prices because they don’t operate with the same level of environmental, safety and labor guarantees as European refiners.
“Asian and Far Eastern refiners benefit from unfair advantages that need to be balanced somehow,” De Simone said.
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