European 'Refining Spring' Won't Save Plants from the Axe

Refining is propping up European oil majors hit by a sharp drop in the price of crude, but executives are making it clear -- more refineries will close as a result of overseas competition and weak domestic demand.

 

Profit from processing crude oil into products such as diesel, gasoline and aviation fuel more than doubled on average in the fourth quarter of 2014 as the rapid decline in oil prices since June boosted margins.

 

The results from refining and trading, known as downstream, were critical in offsetting a slump in profits from crude oil production, which suffered along with oil prices in the second half of 2014, according to company results.

 

But despite the "refining spring", as much as 2 million barrels per day in European capacity is destined for the axe. Total, Royal Dutch Shell (RYDAF), BP and Eni plan to sell, close or cut millions of bpd of refining.

 

"Even if we have good results, the fundamentals in Europe are still the same," Total's Chief Executive Patrick Pouyanne said this week after unveiling plans to halve production at its 207,000-bpd Lindsey refinery in Britain.

 

Pouyanne, who until October led Total's refining division, said at least 10 percent of European refining capacity, some 1.5 million bpd, still needed to close. Total would announce a reduction in its French refining capacity in spring, he said.

 

Italy's Eni also plans to slash its refining capacity.

 

Analysts at Vienna-based JBC Energy say that figure could easily swell to 2 million bpd, or roughly 10 European plants, as ultra-modern mega-refineries in the Middle East swamp Europe with refined products.

 

"We are redoubling our efforts on downstream costs," Shell Chief Executive Ben van Beurden said.

 

BP said it planned to sell around $5 billion of assets in 2015, including in downstream, having closed or sold 14 refineries worldwide since 2000.

 

Swiss bank UBS said in a note that nearly 500,000 bpd of closures could come this year, citing Total's 153,000-bpd La Mede as the most vulnerable, along with Eni's Taranto and Livorno, as well as the already planned closure of Tamoil's 55,000-bpd Collombey refinery in Switzerland.

 

Total's refining margins in Europe nearly tripled in the fourth quarter, rising to $27.6 per barrel from $10 per barrel a year earlier.

 

Margins can vary hugely among refineries, but the downstream profits bear testament to the rosy picture.

 

At BP, refining and trading profits shot up in the fourth quarter to $1.21 billion from $70 million a year earlier, while Shell marked a near-tripling in downstream earnings to $1.55 billion. Total's refining and chemicals division profits more than doubled to $956 million.

 

Storage, an unlikely star of the fourth quarter because of a market structure in which future prices are higher than current levels, is also on the block.

 

The no-holds-barred strategy is no surprise in a world awash with refined products, and as oil majors continue to shed assets.

 

"Refineries, downstream: they are a low-margin business," said oil analyst Michael Dei-Michei of JBC Energy. "They will go where they can get a better return ... the view of the future is upstream."