FEATURE: European refining faces new wave of refinery closures

Paris (Platts)--25Jun2014/525 am EDT/925 GMT


* A dozen European refineries could close in coming years
* France worst hit as capacity shrinks 30%
* Rising US product imports came as surprise
* Additional closures likely in Italy


Pressure for refinery closures in Europe is stepping up as competition from the US, the Middle East and Russia accelerates, with industry players predicting around a dozen closures in the next few years.

But many in the industry fear this will not be enough to save a sector in desperate need of cheaper energy sources to bring back their refineries to profitable levels.

The competitiveness of European refineries has been severely hit in recent years by overcapacity, falling demand, new capacity coming on stream in the Middle East and surging competition from US oil product exports.

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Fourteen refineries have closed in Europe since 2007, bringing the total in 2013 to 87, with the highest number of closures taking place in France, where refining capacity has shrunk since 2008 by 30% to 1.4 million b/d.

"On the global picture there are many things pointing to a worse refining outlook for European refiners," said Jonathan Leitch, senior analyst with Wood Mackenzie. "We knew that new refineries in the Middle East would be coming on so that's not a shock but I don't think we could understand quite how much the increase in US domestic crude production was going to help US refiners."

Since summer 2008, The US has benefited from a boom in shale gas production, which has led to cheaper feedstocks for its refining industry and left the EU struggling to remain profitable globally.

Industry players say that more closures will be inevitable in the coming few years, with refining margins plunging to Eur15/mt ($2.78/b) so far in 2014, down from Eur18/mt in 2013 and Eur36/mt in 2012.

"European refining will not escape a new wave of restructuring," Jean-Louis Schilansky, head of France's oil industry lobby UFIP, told Platts.

"In France, a third of capacity has already closed, which is more than other European regions," he said, adding this did not mean France would necessarily escape more closures.

OVERCAPACITY

While France's refining capacity stands at 1.4 million b/d, demand is currently closer to 1.5 million b/d.

"This situation is related to the gasoline/diesel demand unbalance but it's also because three refineries have closed," Schilansky said. "In France we have switched from an overcapacity issue to one of competitiveness." Despite having some of the most efficient refineries globally, the EU has been struggling to halt a backslide in net profit margins against Asia and the US, as higher energy and personnel costs and smaller-scale plants take away their competitive edge.

Schilansky predicted that 12 refineries would close in the next six years in Europe, slashing the number of refineries on the continent to 75.

"The situation cannot last without operators taking action," he said, adding that the French sector had lost Eur700-800 million in 2013 and that this trend was set to worsen in 2014.

Overcapacity in Europe is pegged by the French oil industry at 1 million b/d, with that figure expected to climb to 1.5 million b/d by 2020, or the equivalent of six average size refineries, according to UFIP data.

Closures are likely to come from Italy, Schilansky said. Capacity there has shrunk by 10% over the past six years compared with 15% in Germany and 22% in the UK.

Leitch said throughputs in Europe needed to fall by 1.9 million b/d between 2012 and 2018.

"The difficulty is that it does not mean that there will be more closures because as we can see refineries continue to operate even at levels that are uneconomical," he said. "If you are a refiner and you close your refinery then you're out of business and if you're a major with exposure to national governments you may be under pressure not to close more refineries."

EXPORT OUTLETS

In the meantime, demand for oil products in Europe has slumped by 14% since 2008. Industry players and analysts say the downward trend will continue with car manufacturers increasingly building more efficient engines.

Another thorn in the side of Europe's refining sector is the loss of its traditional export outlets such as Africa.

The US refining industry is pushing its gasoline supply surplus to Africa at discount prices, they said.

"And this phenomenon is accelerating," Schilansky said.

Total, Europe's largest refiner, aims to continue cutting its exposure to the ailing refining and petrochemical sector in Europe. It cut 23% of its exposure between 2006 and 2011 and aims to cut another 20% between 2011 and 2017.

Total, which has focused its strategy on investing in its larger, integrated petrochemical and refining plants such as Gonfreville in northern France or Antwerp in Belgium, aims for integrated platforms to make up 75% of the branch's net results by 2017.

Meanwhile, the struggling refineries are those with a high yield of gasoline, generally on a coastal location, small and less complex plants, sector specialists say.

"Refineries will close based on their margins," said Leitch. "But I don't think we're going to see refineries closing enough to bring back a good operating margin for the rest of refiners."

--Muriel Boselli, newsdesk@platts.com
--Edited by James Leech, james.leech@platts.com

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