European Refiners Fear For Their Future In Rotterdam

Fri May 21, 2010 12:01 BST

Looking up the river Maas towards the Pernis refinery in the Netherlands, it is hard to believe that refining in Europe is almost certainly in irreversible decline. Pernis, the largest refinery in Western Europe, is a vast complex of chimneys, storage units and gleaming silver piping, occupying what seems like an entire district of the city. Its near neighbour downriver, Europoort, which runs a close second in the size stakes, looks even more impressive as its array of towers and tanks seems to spread across the entire south bank of the Maas as it merges into a forest of petrochemical works and docks. In the evening the pilot lights from Europoort are clearly visible across the broad slow-flowing river.

The monumental quality of both complexes belies a deep uncertainty among European refiners. At the Global Refining Summit in Rotterdam on May 18-20, the mood was grim, with PKN Orlen’s Dariusz Krawiec promising like Winston Churchill that he could offer the industry nothing but ‘blood, sweat and tears’. At the heart of the problem is the structure of European demand and the inability of European refineries to meet it.

A Time Of Troubles

Put simply, Europe consumes too much diesel and not enough of anything else. Historically, higher demand for gasoline and the use of heavy fuel oil in power generation meant that refiners could make significant profits. As oil power stations were phased out and gasoline was gradually replaced with diesel these profits dried up. Europe gradually became a major exporter of gasoline to the US, where diesel demand is much lower, and it started importing diesel, now mainly from the former Soviet Union. As if this was not enough, overall products demand first stalled and then started falling, leaving the European refiners fighting over a smaller and smaller market.

For some, the global economic crisis was the last straw. The more ruthless operators closed underperforming refineries as soon as it became clear that they would not find buyers. Petroplus, Europe’s largest independent refiner, mothballed its Teesside refinery in north-east England in late 2009, following particularly heavy losses. French major Total followed suit in 2010 as it finally managed to close down its Dunkirk refinery in the face of strenuous resistance from the local unions and the government, playing to the crowd as elections loomed. One conference delegate commented that ‘there will be no more closures in France’, a sentiment unlikely to appeal to Petroplus, which has expressed interest in closing its uncompetitive Reichstett refinery near Strasbourg.

The Problem With Being Green

Government involvement of a different kind has put European refiners under even more pressure. Although climate change legislation is likely to prove unavoidable worldwide, the EU has opted to stay ahead of the curve. What may be a boon to environmentalists, however, is a disaster for refiners, particularly those whose outdated plants are least equipped to deal with the changes. According to an estimate made during the conference, at a carbon price of US$30/tonne, the most polluting European refiners would find themselves an additional US$1/bbl worse off than their most efficient peers. With such refineries having already come under severe pressure during the global economic downturn, increasingly stringent regulation is likely to push the weakest off the edge. This of course will be of benefit to the strongest, which will be faced with less competition. Speaking to BMI in Rotterdam, a representative of Italy’s Saras agreed that the loss of weaker peers would be of benefit to his company’s position in the region. In reality, however, the main beneficiaries are most likely to come from outside Europe.

When Reliance Industries’ Antony Francis was introduced as the man who could destroy any European refiner overnight, like any good joke it contained more than just a grain of truth. Francis himself, sitting unobtrusively towards the back of the hall, had done nothing to court attention, but all heads turned to him as soon has his name was mentioned. Reliance’s Jamnagar refinery was indeed looming in the thoughts of many of those present. With 1.2mn b/d capacity, it is three times the size of Pernis, and is only slightly short of equalling the entire capacity of the Netherlands. Its scale, although well known, did not seem to have sunk in with all of the delegates. When one delegate asked how many ships carrying refined products left the refinery every day, Francis’ answer was disarmingly honest. ‘I don’t know’, he answered, ‘there are so many.’

Sun Setting In The West

This indeed seems to be the way that the wind is blowing. With a declining market, increasing regulations and investment requirements, and a string of huge extra-regional rivals breathing down their necks, there is very little to recommend European refining at the moment. In such an environment, few are assured of survival. Some, such as PKN Orlen and the Czech Republic’s ?eská Rafinérská, see their competition as coming from further inland, from Belarus and Ukraine. Others further to the west will find their position squeezed by refiners from the Middle East, India, and even potentially from Africa in the long term. Finding a strategy to deal with this is much harder than making the diagnosis. Some, such as Saras, place huge faith in their own high technological competency and flexibility. Petroplus has taken a different tack and is seeking to expand aggressively to strengthen its overall position in the market. The majors, though, with the exception of the conservative ExxonMobil, have long since conceded that the writing is on the wall.

This was perhaps the theme that ran most clearly throughout the conference: that the industry has reached a point where not all players will be able to continue. At the very start of the conference, Krawiec stated that PKN Orlen’s underlying market assumption was that there is around 7mn b/d of excess capacity in the industry worldwide, compared with a 3mn b/d surplus during the industry’s golden age from 2004-2007. Placed in context, this means that around 5% of world capacity will need to be cut in the near future. As the presence of a sizeable delegation from Saudi Aramco attested however, emerging markets are not going to sit still and wait for European refiners to arrange a peaceful decline for themselves. While Pernis and Europoort should be better placed than most to survive the coming storm, the bad times for European refiners are about to get much worse.

http://www.riskwatchdog.com/2010/05/21/european-refiners-fear-for-their-future-in-rotterdam/