European Refiners Eye Margin Boost from Overseas Rivals

European refiners are to shut 7 percent of their capacity for autumn maintenance, potentially easing a profit-sapping supply glut, but will set their sights on overseas competitors' downtime for a bigger respite from weakened margins.

Until recently, refiners' profit margins had climbed as big chunks of production closed for maintenance. But in the past 18 months, reduced gasoline exports and a flood of diesel from the United States, Asia and Russia have hammered margins even during overhauls, pushing many plants into the red and accelerating a painful restructuring of the sector.

Around 939,000 barrels per day (bpd) of refining capacity in northwest Europe and the Mediterranean are set to go down for turnarounds in September, according to industry monitor IIR Energy.

IIR says maintenance will peak in October with a loss of 1.018 million bpd, around 7 percent of the region's nameplate refining capacity of 14.6 million bpd.

Maintenance this autumn will include Royal Dutch Shell (RYDAF)'s 195,000-bpd Godorf-Rheinland plant in Germany, Total's 153,000-bpd La Mede plant in France and Repsol's 240,000-bpd Cartagena refinery in Spain, according to Reuters data.

Most of the turnaround is to take place in the Mediterranean, which will account for 70 percent of downtime in October.

The upcoming autumn maintenance is significantly less than last year's, when it peaked at 2.06 million bpd in October, according to IIR.

Northwest European refining margins that gauge a plant's profitability averaged $3.11 per barrel over the past year, often dipping into negative territory, according to Reuters calculations. The picture is even worse in the Mediterranean, where margins averaged 61 cents per barrel.

The main cause of the weak refining environment has been a large inflow of diesel from highly competitive refineries in Russia and the U.S. Gulf Coast.

Faced with high crude oil costs and power bills and shrinking profits, European refineries were progressively forced to cut operating rates and at times in recent months to shut plants.

A key contributor to the lower schedule this year has been an unusually high number of refineries that opted to conduct turnarounds during the traditionally peak-demand summer period, a sign of how bad times are. Those refineries include BP's 400,000-bpd Rotterdam plant.

"European refining runs were sustained in the first half of the year by rising gasoline prices, which offset declines in diesel cracks," or refining margins, said Robert Campbell, analyst at London-based consultancy Energy Aspects.

A sharp decline in both gasoline and diesel cracks in mid-summer prompted refineries to reduce runs sharply, Campbell said.

Refining margins in Europe could find some support in September and October, when diesel imports from the United States, Russia and Asia are reduced once refineries there begin their own maintenance.

"October looks to be when Europe may see a degree of support from elsewhere, with both Asian and U.S. turnarounds peaking that month," said David Fyfe, head of market research and analysis at Gunvor Group, which operates the 110,000-bpd Ingolstadt refinery in Germany.

Europe imported nearly 20 percent of its gasoil demand in the first half of 2014, traders said. Europe's average gasoil consumption reached 5.97 million bpd in 2013, according to the International Energy Agency.

Any dip in imports and gain in margins are nevertheless expected to be short-lived once overseas refineries return to their recent high output and new plants in the Middle East start exporting to Europe.

"For margins, probably the most important thing is how strong the inflows are from the outside. From a plain turnaround perspective, it is not such a big deal anymore," said Michael Dei-Michei, analyst at Vienna-based consultancy JBC Energy.

The weak environment is unlikely to change until a substantial number of plants shut down, he added.

"Our current forecast for Q4 Brent cracking margins in northwest Europe stands at $1.53 per barrel. This is a bit higher than last year, but really not substantially," Dei-Michei said.

Reporting by Rowena Caine, Simon Falush and Claire Milhench