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New challenges add to European refinery woes

By Elza Turner in London

June 10, 2013 - The threat of more plant closures continues to loom over the European refining sector as new challenges add to those already hitting an industry struggling to survive in the face of international competition and falling demand.

The competitiveness of European refineries was already affected by subsidized national companies, new capacity coming on stream in the Middle East and big superscale refineries.

And now new to the game is rising competition from across the Atlantic where US refineries are benefiting from access to cheaper unconventional oil.

Antoine Halff, head of the IEA's oil industry division, said at a recent industry event in Barcelona that while European refineries continue to face the threat of closure, "in the US East Coast some refineries have come back to life and are thriving."

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The emergence of new shale oil and gas supplies in North America has not only reduced the local refineries' energy costs but has also enabled them to increase light product yield and reduce dependency on imports.

Traditionally, European gasoline surplus has been directed toward the US, but this market is disappearing.

"There is no clear idea where the excess gasoline will go," Nick Vandervell, director of the UK's downstream oil industry association UKPIA said at the Barcelona event.

European product exports to other markets are dwindling too -- Latin American demand, some of which used to be met from Europe, is increasingly covered by the US.

In addition, Brazil is looking to upgrade its own refining capacity to cover rising domestic demand and for export.

Nigeria, which is currently a significant outlet for Europe's gasoline and middle distillate production, is also looking to upgrade and expand its own capacity.

The country is planning to speed up maintenance at its four refineries.

The Port Harcourt refinery should be the first to start maintenance before the end of 2013, Tony Ogbuigwe, NNPC executive director for refineries and petrochemicals, said in Barcelona.

"A team is evaluating bids from the maintenance contractors," he said.

As if this wasn't bad enough, European refineries are also having to deal with falling supplies of vacuum gasoil (VGO) an important feedstock. (See related chart: Gasoil .1%S (1000ppm) FOB ARA Barge: June 2012 - June 2013).

Flows from Russia are expected to dwindle as Russian refiners upgrade their plants.

As a result, VGO prices are expected to soar, Halff said.

"The availability soon enough may become problematic," he added.

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