‘Gravitational forces’ to pull down European refining – IEA

LONDON (ICIS)–The struggling European refining sector’s future “is never bright” as the industry faces major changes in coming years due to “gravitational forces” of structural demand decline and competition, the International Energy Agency (IEA) said on Thursday.

Citing a bleak report by the Dutch think-tank Clingendael International Energy Programme (CIEP), the IEA said half of the northwest Europe’s (NWE) 7m bbl/day of production capacity stands as a candidate for restructuring or straightforward closures.

Out of 34 refineries in the regional hub of NWE – Germany, France, the UK, The Netherlands and Belgium – only 12 would qualify for the so-called must-run status. The remaining 22 could face extinction. 

“If a refinery did not fall into one of the four ‘must-run’ categories (captive demand, petrochemical integration, downstream integration and surplus coking capacity), it was identified as exposed,” said the IEA.

“Thus, the paper concludes that half of the close to 7m bbl/day of capacity in the region is a candidate for restructuring in the long term. The differences by country are even more striking.”

Germany’s refining industry, for instance, would be the most protected and only a third of capacity would be in the “danger zone” but all refineries in France and the UK could be exposed to darker prospects.

However, the report’s authors also analysed how a strategic sector like refining would also face political, economic and environmental barriers to exit the markets, adding nine refineries with a total of 1.5m bbl/day could make it to the must-run list, which would reduce the hypothesised capacity closures to about 35% of the total.

“The stellar year of 2015, when European refiners contributed a third of the global throughput increase, has not swayed many observers from the view that in the long-run, European refining will be pulled down by strong gravitational forces of structural demand decline and competition from refiners in other regions,” said the IEA.

“In March this year, the CEO of Spanish refiner CEPSA proposed at a public forum that the EU should follow the example of Japan’s Ministry of Economy, Trade and Industry, and set specific targets for refinery closures. There will be refinery shutdowns, either in a planned manner, or, more spontaneously.”

The IEA went on to say CEPSA’s CEO idea would be more achievable though direct, specific intervention from the EU. However, the 28-country union’s rules distance its executive bodies from mandating or coordinating refining industry reorganisation so “it will be up to the invisible hand of the market” to conduct the process.

“In the business of refinery closures, the first mover is at a disadvantage. Margins, even if temporarily, tend to improve, but it is the companies that did not part with their unwanted capacity that benefit most,” said the IEA.

“This variation of the prisoners’ dilemma adds further complication to refinery industry rationalisation in the free markets.”

NWE: Northwest Europe. RHS: right hand side. Source: CIEP, IEA.