Weak margins will continue to threaten simple and uncompetitive refineries in Europe. But niche opportunities still exist for European refiners battling falling local demand, increased competition, high energy costs and legislation.
European refiners continue to wrestle with weak margins, despite short-term increases in levels prompted by maintenance or seasonality, as seen during the second quarter. Gasoline margins in northwest Europe surged to $18/bl in June — the highest since late 2012 — as refinery shutdowns cut output by 120,000 b/d to 2.2mn b/d.
Total's European Refining Margin Indicator (ERMI) rose to $10.90/t in the second quarter of this year from $6.60/t in the previous quarter. But this compares with $24.1/t during April-June last year. European refiners are squeezed by competition from the US and the Mideast Gulf, while uncertainty regarding future demand further endangers profit margins. In August, the IEA reduced its 2014 global oil demand growth forecast by 180,000 b/d to 1mn b/d, following the lowest quarterly consumption increase in more than two years, and on the back of weaker economic growth.
European refiners also said EU and international environmental legislation is denting the industry's competitiveness. According to French industry association Ufip, the EU Emission Trading Scheme impacts refining margins by €2/t.
But ExxonMobil is looking to turn another regulation — the new Marpol requirements — to its benefit. Ships operating in Emission Control Areas (ECA) will have to use bunkers with a sulphur content of 0.1pc or less from 2015, which could reduce fuel oil market prospects for European refiners.
ExxonMobil will invest $1bn in the modernisation of its 320,000 b/d Antwerp refinery in Belgium. The company will add a new coker unit to process high-sulphur residual oils into diesel and marine gasoil, in an attempt to address an industry shortage in conversion capacity.
Technology provides a competitive edge to refiners. The Phillips66 234,000 b/d Killingholme refinery in Humberside — one of the most complex in the UK — retains an advantage over other simpler refineries in the country, such as the 130,000 b/d Milford Haven plant.
European refiners have to innovate to stay profitable and keep their plants open. But investing in a sector plagued by overcapacity can prove difficult.
In July last year, Eni announced a €700mn investment for the renovation and recovery of the 105,000 b/d Gela refinery in Sicily, saying it had "decided to tackle the difficult economic situation without relocating". The refinery was to be equipped with new hydrocracking technology and a catalyst to maximise diesel output.
But, one year later, the refiner withdrew its investment programmes as it took steps to reduce its refinery exposure, according to the refinery's worker unions. Last July Eni said it increased the capacity reduction target to more than 50pc from 35pc previously. The target will be reached by "converting and restructuring most of our plants in Italy," Eni said. The company also said in May that it would sell its 32.45pc stake in Czech refiner Ceska Rafinerska, and has divested in Portugal's Galp. "The least competitive refineries in Italy would be expected to come under pressure to close," the Italian ministry of economic development said earlier in May. Today, the fate of at least three refineries in Italy, including Gela and Eni's 84,000 b/d Livorno and Taranto remains unclear.
Refiners willing to sell or close their plants face lengthy processes and political hurdles. The future of US firm Murphy Oil's 130,000 b/d Milford Haven refinery remained in limbo after months of negotiations to find a buyer before Geneva-based investment group Klesch agreed to buy the plant last month.
Instead of shutting down their plants, some refiners choose to operate opportunistically, cutting runs or idling the refineries when margins are weak.
Greece's Hellenic restarted its idled 83,000 b/d Thessaloniki refinery when gasoline margins rose sharply in April. Spanish oil group Cepsa reopened its 85,000 b/d Tenerife to process two crude shipments, before closing it again at the end of June. Tenerife is Spain's oldest refinery and is seen as the most likely to be closed down permanently. Small and simpler refineries struggle, while large-scale refineries, such as Shell's 385,000 b/d Pernis plant in the Netherlands, benefit from economies of scale.
But not all small refineries are at risk of closing. Plants with a meaningful competitive advantage — such as a location near a strong customer base — are not necessarily in danger. Klesch — which bought Shell's 100,000 b/d Heide refinery, Germany, in 2010 — is reputed to have made a success of the deal. The refinery benefits from its proximity to Germany's biggest oil field at Mittelplate and has a relatively captive customer base. And Heide is one of the most modern refineries in Germany.
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