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The demise of European refineries?

May 6th, 2012 by Maxime Lambert, Mines ParisTech

Over the last years, European refining has been in the spotlight for several closures among its refineries. It is now the case of Petroplus to be at stake. Petroplus was the largest independent oil refiner in Europe, but the company is shutting out 3 of its refineries because of financial problems. In particular, in France, its Petit-Couronne refinery is now the symbol of deindustrialization in Europe and politicians have taken on the subject to rescue employments. Is it really the end of refining like other industries in Europe?

Refining: A non-profitable activity?

Refining is attending profound changes due to several phenomena. Whereas refineries are closing in Europe, new projects are under construction in developing countries and petroleum exporting countries. This is obviously due to economic perspectives: petroleum consumption increases where economic growth takes place. But the place of refining in petroleum process and economy has to be considered: it is sandwiched between crude oil market and petroleum oil products market. They are not directly correlated each other and refiners’ leeway is strongly restricted by the variations of both markets. In 2012, the context for European refiners is characterized by high crude prices and fierce competition from developing or petroleum exporting countries. That is why such traditional refiners in Europe, as the supermajors, prefer today to focus their investments on E&P activities, known as more profitable. This is the story of the Petroplus’s refineries, acquired from Shell.

European refining margins have been very small over the last years, even negative in several cases after the financial meltdown and the economic wealth of European refineries is actually threatened:

Refining in Europe: a regional imbalance

The low margins are also due to the differences between supply and demand in Europe. On the one hand, the demand for petroleum products is structurally decreasing in Europe, due to the economic slowing down and environmental policies. So much so that European countries have had a refining overcapacity from 1 to 2 MMbpd for the last 10 years, (3). We also consume in Europe more and more gasoil at the expense of unleaded fuels. For instance the ratio between diesel and gasoline for road fuel demand in the EU has risen from 0.7 to 2.10 for the last 20 years. The following figure shows both phenomena: a decrease in petroleum products consumption and the increasing part of gasoil.

On the other hand, the production based on old refineries is not sized for the demand and produces gasoline in overcapacity. In particular, from 1 barrel of crude oil, it is impossible to reduce to 0 the part of gasoline at the profit of gasoil among the finite products. For instance, in France, where diesel use is largely spread among the fleet of vehicles, the imbalance between supply and demand requires the importation of 40% of the gasoil national consumption and the exportation of 30% of the gasoline national production (5). This disequilibrium can be found at a European level. Europe imported 24*106 t of gasoil and exported 40*106 t of gasoline in 2011(6).

Refining in Europe: global trends

European demand and supply imbalance is also strongly influenced by global parameters. European refining competitiveness is linked to possibilities of exporting gasoline overproduction, in particular to the US. Indeed the USA is the first destination for EU gasoline exports. For instance in 2008, it reached 37%, (7). However this market is decreasing, since US consumers pay more and more attention to their gasoline consumptions and diesel vehicles start to be competitive in the USA. Moreover European refiners have to cope with competition from new refineries, in developing countries, which are bigger, newer and less affected by environmental policies. It allows them to produce high value products. Petroleum exporting countries (e.g., Brazil, Middle East) are also eager to develop facilities to own the entire petroleum process: from exploration to finite products.

Not a surprise for politicians

Petroplus’s demise also illustrates the role of European governments: they try to rescue refineries for political reasons whereas they encourage the imbalance between offer and supply. Firstly, road transport fuels are much more taxed in Europe than in the USA, which encourages people to buy diesel engine cars, well known as less fuel consumers. Moreover the taxation is different: diesel is less taxed than gasoline. For instance, if we compare prices before and after taxation, at the exception of the United Kingdom for 2010 figures, unleaded gasoline is cheaper than diesel before taxation, but more expensive after taxes in all the EU countries, (7). Finally, even if diesel cars are more expensive than unleaded gasoline cars, they consume less and their fuel is less expensive. Furthermore, European strong environmental policies add costs and call for new investments for European refiners. They must pay attention to gas emissions of their facilities (ETS allowances…).

What does the future hold for European refining?

Because of all these parameters, Petroplus’s difficulties should be seen more as the answer of supply to demand than as relocation. We could think it is not bad news for European remaining refiners: a competitor is dying. But it will only give a momentary boost for the other refiners, since it does not change the situation and European refining will remain in overproduction for unleaded gases. To maintain refining industry in Europe, cooperation and less competition between actors could be a good point. For instance a common closing policy for less competitive and non-profitable refineries and investment plans on a limited number of facilities, could lead to have competitive and adapted supplies. Since the supply and demand balance in Europe will inevitably lead to the end of several refiners, we could boost this phenomenon for weaker facilities in order to encourage the growth and the investments of our best refiners. These investments are necessary to adapt refining facilities to the European market and only the most effective refineries will be able to compete.

Of course some parameters could help European refining: the end of differential taxations among fuels in Europe, economic growth in Europe and in the world, better relations between petroleum products market and crude oil market, more favorable environmental policies for refining… But recent closings may not be the last ones in the years ahead to equilibrate supply and demand.

Maxime Lambert, MInes ParisTech

References :
(1) EUROPIA, “Annual Reports” from 2005 to 2010
(2) EUROPIA, “Annual Report”, 2010, from Oil Market Report IEA 2011
(3) C. SILVA, IFP, “Refining: varying conditions by region”, 2011
(4) EUROPIA, “Annual Report”, 2010, from Wood Mackenzie, 2011
(5) UFIP, “les mutations du raffinage français”, 2010
(6) EUROPIA, “Annual Report”, 2010, from Eurostat 2011
(7) European Commission, “Commission staff working paper on refining and the supply of petroleum products in the EU”, 2010, from Eurostat

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One Response to “The demise of European refineries?”

  1. Andrew MCKILLOP Says:

    Further rationalization (that is deindustrialization or closure) of refineries is almost inevitable in Europe for several other reasons, than those discussed in this useful article. We can note the continuing growth of refining capacity in China and India and GCC countries.

    Another important factor for the future of European refining is energy transition, Energiewende in Germany. Major effort and policy support to reducing petroleum consumption is likely or certain, the road transport fuel segment (gasoil, gasoline) will vertainly be a major target for reducing EU petro-fuel demand

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