Q&A: Varo Germany on refining margins, strategy
London, 1 December (Argus) — Varo Energy, composed of shareholders trading firm Vitol, private equity group Carlyle and investment firm Reggeborgh, was created with the purchase of the 68,000 b/d Cressier refinery in Switzerland from Petroplus in 2012. It holds a 45pc stake in the 210,000 b/d Bayernoil refinery in Germany, and owns around 3m m³ of external storage, with additional business in the Netherlands, Belgium and France. In this interview, edited for length and clarity, Varo Energy Germany managing director Norbert Kamp discusses his views on the European refining sector and Varo's strategy for the German market in the coming years.
Are refiners on a more solid footing than a couple of years ago, and what is your view on the short- and long-term future of European refining margins?
For the medium term — let us say 2025 — despite more refining capacity coming on, in India or China for example, the market is going to be, specifically with Europe and Germany, in balance and potentially going slightly short. If you look at the fundamentals, the market is definitely going to go into that space. For the foreseeable future, the strong [refinery runs we have seen recently] will continue and therefore will make imports even more difficult. So, from a Varo perspective, it is a helpful dynamic and that is why we think that, at least in the medium term the margins are staying good. And then in the long term you can guess as well as I can if it is going to go up or go down.
Where do you particularly see competition coming from in the future?
There has always been import pressure [in Germany]. The [Mideast] Gulf has always been there, and there is more capacity coming on in India and other places. Ultimately, because of some of the landlocked refineries, parts of Germany are more immune to imports than others, and therefore because of the regional balances in Germany — because some areas are short and some of them are long — the imports are always working at certain circumstances.
But if the inland refiners have good margins and run at 100pc capacity — which is pretty much the case at the moment — then it is actually really difficult to make money for importers.
I think competition from Russia has also been there always. [But] the issue for Russia is: can they actually produce the quality specs that you need in Europe? When you think about Euro 4, 5, 6, 7, 10… that is always a challenge for some of the Russian refiners. So, fundamentally, the flows are not going to shift all that much.
And then the other aspect is that the market growth you see especially in Asia-Pacific across many, many products, a lot of the extra capacity will be consumed in that space, where the market is actually stronger from a growth position than it is in Europe. So therefore, that will take some of the flows away. Overall, the shift on the product import side is probably quite traditional from our perspective.
In this global market that is liquid — where you can take anything on a big boat and you can ship it anywhere almost at no cost — I do not think anybody is protected. But as a local refiner in the south of Germany [and Switzerland], we are pleased with how we see the foreseeable future with refinery margins. Not that it is easy — it takes constant optimisation, crude selection, making sure the refineries run efficiently. But we are well positioned, especially with Bayernoil.
Some refiners, for example Shell in Wesseling, are looking to upgrade their capacity in the run-up to the approaching IMO 2020 regulations, which will mandate lower sulphur content in bunker fuels. What impact do you think the change will have on Varo's refinery operations?
We have, for a while, been working on effectively reducing fuel oil in our refineries. Especially in Bayernoil, we have made a lot of progress. From that perspective we are already quite well-positioned to deal with the changes. And the remaining fuel oil that we have, we can optimise in our existing, regular business that we do, for example here in Hamburg. So we are not really in a frenzy about it. In other words: we will continue to sell our existing high sulfur spec fuel oil, but we are also ready when, let us say, more diesel comes into the mix or more distillates get sold directly to shipowners.
So you are not currently looking to change the product slate at either Cressier or Bayernoil, or upgrade your capacity to produce lighter products like some other refiners?
Not at this stage. We are still waiting for the final outcome of [our own impact] study. But at this stage, considering that we have already reduced fuel oil output significantly, we are quite well positioned. And we do not envisage a huge amount of upgrades in the refineries, either in Cressier or in Bayernoil. We already have a huge amount of flexibility that we can use.
Of course we are always looking at how we can make our refineries better. But it is not really that Varo is going into overdrive and thinking that 2020 is going to come and we need to invest x-million dollars. I would not really say that we are putting in a different CDU or anything like that.
The German downstream sector in the last few years has been marked by increasing consolidation. How do you think this trend will affect the German market in the long run?
It is a really interesting time in the German market. If you think about the majors — the international oil companies — a lot of them are really keen to decapitalise business in their existing, mature markets. And the reason for that is relatively simple. Some of them do not get the returns anymore that they want. Others actually use existing businesses and existing markets as cash cows, so that they can invest in growing economies — that you also see in Asia-Pacific and South America. On the other hand, if you think about small and medium enterprises, a lot of the people who have been in the [German] oil business for a long time are reaching a generational end.
So this dynamic of the big guys trying to get out and sell basically everything that does not move, and the small/medium enterprises not having succession plans, opens a real window for us to step into the vacuum.
We are in the process of strategically building an integrated business, an integrated fuels value chain. And we can now cherry-pick. We are one of the few who are really trying to build an end-to-end, from crude to customer, value chain. So this consolidation is one of the reasons why Varo has been very successful over the last five years. Because we have been able to grow aggressively through acquisitions.
For the market overall, we are not actually talking about massive shifting flows as such. Because ultimately the demand stays the same. In fact, the German market grew about 1-2pc [last year]. If a petrol station, for example, changes hands, it will still have the same customer base that probably drives in a circle of perhaps 50km. So I would not really predict that there is a massive shift. There are certainly shifts in terms of ownership, so who owns the demand or who owns the customer.
Which areas are you looking to grow particularly over the coming years?
Our clear preference is for retail stations and for refineries. There are three strategic pillars that we want to use in the German business. One is that we want to integrate the business, that means what we have already. We want to make it work as one value chain that swings on the same wavelength. The other one is, we want to continue to grow organically and get the best out of our business. And the third one is the inorganic growth. Here, the targets are indeed refinery shares, and the other one is retail, because I think we need to have retail to complement our fuels value-chain to serve our customers better and also to have actually a natural hedge in our value chain so that we become more weather-resistant. Then, for example if there is margin pressure in the wholesale space, we actually have a steady income and a steady security of sales through our own retail channel.
Talks with Shell over the sale of its PCK Schwedt refinery share officially ended in September. Is Varo still interested in that refinery? Why didn't the transfer work out in the end?
I cannot really comment on the specifics. When it comes to our strategy, we are definitely interested in refinery share across the board, especially in Germany, and the story of Varo refinery growth is not finished. Whether that will be in Schwedt, or with any other refinery in Germany, remains to be seen, but we are certainly definitely committed to continuing to grow. It needs to make sense for our strategy.
Varo is currently scaling back its storage facility in Regensburg. Other companies, for example Total, are closing storage facilities in Germany in order to focus on core locations. Do you see a trend here, and is Varo planning to further consolidate in that sector?
Terminals are really important nodes in our web and therefore we continue to invest more in terminals than we close down. It is a business decision that is driven by how important a certain location is in our network. There is no strategy of saying we have to decapitalise, or we have to close terminals — absolutely not.
The question is: how important is this particular terminal or set of terminals in that location? And that might actually mean we invest in terminals. We invest in our existing terminals anyway, but I mean invest and buy more terminals. We want to see where the white spots are in our map, and where we need to be to actually serve the customer.