Storing up trouble

Author Toby Shelley

Total’s long-expected announcement that it will stop crude processing at its 160,000 b/d La Mede refinery means the company is on track to hit its target of reducing its European refining and chemicals capacity by 20pc in 2012-17.

Total’s long-expected announcement that it will stop crude processing at its 160,000 b/d La Mede refinery means the company is on track to hit its target of reducing its European refining and chemicals capacity by 20pc in 2012-17.

The company’s refining capacity in Europe was 1.79mn b/d at the end of 2011. It had fallen to 1.74mn b/d by the end of last year. In addition to shutting down crude refining at La Mede by the end of next year, Total is halving the capacity of its Lindsey refinery in the UK, and is selling its stake in the Schwedt plant in Germany. This will leave it with around 1.43mn b/d in Europe. That's exactly 20pc lower than in 2011.

All well and good. But the Paris bourse was underwhelmed this morning, not only because the La Mede closure was the worst kept secret in the industry. Investment in the four Total French refineries that survive will better adapt them to changes in product demand, but Europe’s overcapacity will scarcely be dented by the loss of La Mede and Lindsey processing. By one estimate — Opec’s — as much as 2.4mn b/d needs to close by 2019. French industry association Ufip expects more French capacity cuts.

Italy’s Eni said last year that it wants to cut 50pc of its refining capacity. But because the product demand mix in Europe is changing at the same time that it is structurally declining, refiners are not just looking to reduce their refining footprint but to alter it. As Argus noted in a refinery outlook at the beginning of this year, ExxonMobil has announced a $1bn upgrade at its 310,000 b/d Antwerp refinery to address “an industry shortfall in capacity to convert fuel oil into products such as diesel”, while BP seeks to be the “last man standing” in Europe, with a strong focus on diesel. And the motivation to cut capacity quickly has been eroded by the strong rise in margins in the wake of the crude price fall.

If the closure of La Mede for crude refining is only a small step towards addressing the wider problems for the industry of Europe’s oil demand slowdown, its changing product mix and more competition from the Middle East and Asia-Pacific, it is actively worsening another problem. The La Mede site will not close. A 500,000 t/yr biofuels plant will be built there. That is a leap of faith. The fall in crude prices has all but ended discretionary blending of biofuels in the EU. Capacity is lying idle and being shut in. Indeed, Total’s own conversion of its Dunkirk site to biofuels output has slipped.

After a wave of labour strikes across French refining in 2010, Total pledged not to shut capacity in France until this year. Now it looks like it is suing for industrial peace by providing as many alternative jobs as it can. In so doing, it is storing up problems elsewhere.

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