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News Extra: Europe faces new wave of refinery closures

03 March 2014

Europe's oil refining industry is once again facing serious pressure from global competition and shrinking domestic demand. Total, Europe's biggest refiner, said refining margins in the region had dropped to a near four-year low of $10.6 per tonne in the third quarter of 2013.

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Italy's 52,000 barrels per day (bpd) Mantua refinery halted operations on New Year's Eve and was converted into a product storage terminal, its owner Hungary's MOL Group said at the end of lat year.

The closure was "a consequence of the unfavourable economic environment that the refining business faces in Italy," said Ferenc Horváth, downstream vice president for MOL. Demand for refined fuels in Italy dropped from 116 million tonnes in 2000 to 80 million tonnes in 2012, he said.

Experts expect pressure on the sector to build, particularly in East European countries where there is the most overcapacity. Around 330,000 bpd of European refining capacity - or six Mantua refineries - need to be shut down every year by 2020 in order to meet declining demand and rising competition.

Another factor is clean-up costs. Many refineries have been put up for sale, but complete closure of refineries is rare because of the costly site remediation costs which owners would have to incur.

"We expect that the difficult economic environment, combined with the outlook for further legislation changes ... will result in further capacity reductions in the next five years," refinery consultants Purvin and Gertz said in a report for the UK Petroleum Industry Association, published in May 2013.

A total of 16 European refineries, or 1.7 million bpd of refining capacity has been mothballed since 2008, according to the International Energy Agency, which estimated Europe's refining capacity at around 16 million bpd in 2012. Capacity utilisation has dropped to 80% or below, down from 90% as recently as 2005.

Many of Europe's refineries, numbering around 120, were built in the two decades following the Second World War and are heavily geared towards petrol production, demand for which has declined in recent years in favour of diesel. Refineries today face a huge surplus of gasoline which is increasingly hard to sell overseas as demand from the United States weakens.

At the same time, massive state-of-the-art refineries in the United States, Asia and the Middle East are sending ever-growing volumes of diesel, aviation fuel and other refined products to Europe. Diesel imports from Russia, Asia and the U.S. Gulf Coast reached a record 4 million tonnes in September, according to Reuters.

Because refiners outside Europe often benefit from cheaper feedstock and lower energy costs, they can easily out-compete Europe's refiners.

Last year, TotalErg, a joint venture between France's Total and Italian refiner ERG, converted its 90,000 bpd refinery outside Rome to a storage hub. The Fiumicino terminal receives around 100,000 tonnes of diesel per month from India's Reliance Industries, which operates the world's largest refining complex.

The December International Energy Agency monthly report also predicts a hard year ahead for European refining. “2013 has seen simple margins plummet, and another round of refinery consolidation looks to be in the cards," it says.

The agency said a raft of new refineries being built in China in 2013 would be completed towards the end of the year, and the impact would be felt in 2014.

In response, the European refining industry is calling for the EU to take practical steps to assist the sector.

EUROPIA, which represents almost 100% of Europe’s downstream oil industry, has published an action plan calling for impact assessments on refining for all EU legislation, addressing high EU energy costs and mitigation of the risks of carbon leakage caused by EU policies, amongst much else.

But some experts believe Europia’s insistence on European refineries being treated as strategic assets is at the heart of the sector’s problems.

Reuters commentator John Kemp, for example, says that in too many instances, ‘strategic’ is a synonym for’ not very profitable’, and if the refining industry is to keep a toehold in Europe, there must be fewer, larger refineries, and the ones that remain will need substantial investment.

If politicians are allowed to protect their local refinery, the necessary rationalisation of refining across the European Union as a whole will be blocked, he says. The European Commission should get tough in applying restrictions on state aid.

The one silver lining for the European refining sector is the possibility of cheaper energy and feedstock as a result of the latest round of trade negotiations with the USA, the Transatlantic Trade and Investment Partnership.

The United States has benefited hugely from its shale gas revolution and for Europe, US imports are likely to be a faster way to lower prices than overcoming the many barriers to developing the continent's own reserves.

Even the prospect of limited supplies from the US would strengthen the EU's hand in contract negotiations with Russia, whose dominance in supplying gas to the continent has locked customers into high prices.

The European refining industry could also benefit because the higher political and economic goals of the negotiations could ensure costly rules they dislike are swept away once and for all.

For example draft EU legislation requiring a certificate of origin for every barrel of oil, aimed at North American tar sands but likely to impose excess costs on all EU-refined oil, would likely have to be shelved given the importance of these trade talks.

The industry has fiercely opposed this for years, and sees the talks bringing in lighter touch regulation, to the dismay of the environmental lobby.

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