24 July 2014 11:23 [Source: ICB]
Regional demand is expected to continue falling whilst export markets, especially to the US, are less able to absorb excess gasoline
The European refining industry is in slow but seemingly inexorable decline, beset by falling oil demand, excess capacity, increasing low-cost competition, a bad product mix and crippling environmental rules.
That is the conclusion of energy analysts at Raymond James who argue that the refining sector in Europe in time could become an industrial ghost town of shuttered and abandoned plants overtaken by weeds and regulations.
EU oil refining capacity is under increasing pressure
“Put simply, European refiners face a slew of structural challenges,” the analysts contend.
First, they argue, while long-term decline in oil demand is occurring in both Europe and North America, “Europe’s declines are certainly steeper”.
“From 1980 to 2006, demand from the 28 countries that comprise the current European Union grew by a mere 0.1% per year on average - ie, basically flat,” Hodee and Molchanov note.
“Declines have averaged close to 2% since 2006, and while some levelling off is to be expected, we still project European demand down by around 0.5% in both 2014 and 2015,” the authors said.
Second, European refiners face excess capacity of around 2m barrels per day (MMbpd), the study notes, “at a time when the global refining system also is in overcapacity”.
That excess refining capacity continues, even though the industry has seen significant reductions in recent years.
“From 2009 to date, 13 European refineries have stopped producing,” the Raymond James analysis reports, either because of permanent shutdowns or by being converted into storage terminals.
Three other EU refiners have seen their capacity reduced, according to the study.
Those closures and output cutbacks “effectively took out 1.8 MMbpd of refining capacity, but the demand decline over the same period was 1.9 MMbpd – so it’s essentially a wash”, the authors said.
Hodee and Molchanov contend that but for political pressure there might have been more EU refinery shutdowns, and that more may be coming, although additional closures likely will occur in drawn-out sequences.
“Due to the associated job losses, European refining closures are always constrained by political pressure and powerful labour unions - much more so than the US,” the report said.
“For example, when Total shut down its 150 Mbpd Dunkirk refinery in 2010, the company officially committed to the French government not to close any more domestic sites for five years, regardless of economic circumstances,” the authors say. “So further closures are off limits until 2015 at the earliest.”
“That said, one refinery that seems highly likely to close in 2014 (barring a last-minute sale) is Murphy Oil’s 108 MMbpd plant in Milford Haven, UK,” they said.
“Third, even more important than the ‘headline’ excess capacity, Europe has large product imbalances, producing too much gasoline but not enough diesel,” the report contends.
“In the past, Europe has been able to manage its excess gasoline via exports to the US, but that is increasingly difficult given the cost advantages of US refiners,” they point out.
US refiners are awash in relatively cheap crude, thanks to burgeoning production from shale deposits. Those shale plays also are generating record volumes of low-cost natural gas, which gives US refiners a further cost advantage in cheap energy fuel.
EU gasoline exports to the US have been reduced by nearly half over the last four years, Raymond James notes, down from 550 MMbpd to 300 MMbpd, as US gasoline consumption has declined while US refinery utilisation is on the rise.
“Consequently, European refiners are being forced to reduce their crude throughputs to curtail the oversupply of gasoline,” Hodee and Molchanov explain.
“This trend of lower crude runs exacerbates the European diesel deficit, but it doesn’t help push European diesel margins higher given that US refiners (and, increasingly, Mid-East refiners as well) are sending their own excess diesel to Europe.”
They note that Europe has been a major gasoline producer, close to 3 MMbpd, “even though it consumes twice as much diesel as gasoline (4.3 MMbpd vs. 1.9 MMbpd)”.
“This diesel-centric fuel market is a legacy of long-standing policies (e.g., lower fuel taxes on diesel) to incentivise consumers to switch to diesel cars,” they relate.
The fourth reason for the EU’s refinery sector journey to Boot Hill, said the analysts, is increasing international competition.
“Europe is facing increasing competition from the US, Mid-East and Russia, which could further erode already slim refining margins,” they argue, noting that in 2011 the US became a net exporter of products to Europe.
Lastly, Hodee and Molchanov contend that the EU refining industry is hobbled by environmental red tape and related cost factors.
“European refiners also must contend with an ongoing cost burden that their US and emerging market competitors simply do not face: the cost of complying with EU carbon regulations, ie, cap-and-trade,” they said.
“While European carbon credit pricing has been relatively weak in recent years, it’s still a factor that adds to pressure on profitability,” the analysis says.
CRUDE SUPPLY ADEQUATE, IN SOME CASES LONG DESPITE GEOPOLITICS: OPEC
by Cuckoo James, London
The Organisation of the Petroleum Exporting Countries (OPEC) said on 10 July that physical oil markets were “adequately supplied” and in some cases “oversupplied” despite recent geopolitical unrest in Ukraine, Libya and Iraq which raised concerns over global oil supply.
“This is despite the fact that crude oil markets were adequately supplied during the month. In fact, some markets were over supplied amid poor refining economics, which caused physical crude oil markets in many regions to weaken significantly,” the organisation said.
The differentials of physical crudes to their respective benchmarks were at their lowest in over a year in most markets, OPEC said. “These supply-related headlines and geopolitical tension in Iraq and Ukraine kept the speculators on the long side of the market, supporting a rise in prices.”
The oil cartel added that while its projections for 2014 non-OPEC oil supply growth now stands 1.47m bbl/day higher, global oil demand remains “broadly unchanged” from its previous month’s forecast at an increase of 1.13m bbl/day.
In its July monthly report, OPEC - which has an estimated 81% share of the world’s known oil reserves - attributed an upward revision of around 30,000 bbl/day in 2014 to updated production data as well as historical revisions, with various upward and downward data revisions to supplies from individual countries.
“Upward revisions affected supply forecasts for the OECD countries, Latin America and China on an annual basis, while oil supply projections for Russia, Kazakhstan, Africa and Other Asia were revised down,” OPEC said.
In 2015, non-OPEC oil supply is projected to grow at a slower pace of 1.31m bbl/day to average 56.96m bbl/day.
Meanwhile, OPEC crude is estimated to have a 32.8% share of global supply, unchanged from the previous month.
In terms of oil products and refining operations, the organisation reiterated the role of strong summer gasoline demand in the US in supporting products markets in the Atlantic Basin.
“This has outweighed the considerable decline seen in the middle and bottom of the barrel, preventing refinery margins from falling in the US and Europe,” OPEC said.
In Asia, the market continued to lose ground in June as supply increased with a return of refineries from maintenance, while demand is weak.
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