Comment: What next for European refiners?

Pressure is mounting on European refiners to adapt to new market realities, writes Colin Chapman, president of Euro Petroleum Consultants (EPC)

Colin Chapman, Euro Petroleum Consultants.
Colin Chapman, Euro Petroleum Consultants.
Ekaterina Kalinenko, Euro Petroleum Consultants.
Ekaterina Kalinenko, Euro Petroleum Consultants.

The European refining industry has been trying to regain market position recently aided by the recent revival of downstream activity and low feedstock prices. Downstream businesses were struggling against a low profit landscape with a wide variety of factors affecting financial results, such as: reduced throughputs triggered mainly by decrease in demand for main refined products and petrochemicals, refining schemes not adapted to current market demands, energy costs, etc.

The overall structural weakness and stricter environmental regulations, financial ‘stress’ and increased competition from new complexes coming on stream in the Middle East, India and Russia led to overcapacity and forced evolution of markets.

2016 is considered to be one of the important milestones for European transport policy in terms of its future development and the roadmap to reduce greenhouse gas (GHG) emissions. The decade of 2004-2014 showed that crude oil consumption in this particular region fell by 17% to 12.5mn barrels per day (bpd), according to Roland Berger and BP.

The recent increase in refining margins in Europe has ultimately saved a number of European plants from closure. New investments have also been made. Prompted by a boost in margins, French major Total said it would invest more than $680mn in refinery upgrades. Other European refiners like ENI, Shell and BP as well as smaller refiners such as PKN Orlen in Poland and Neste Oil in Finland, also enjoyed higher margins in 2015. On average, margins rose from $2 per barrel to $7-8 (with the exception of BP which saw margins up to $10 per barrel).

Over the past five years and up until 2014, demand for transportation fuel in the European region has been slowly decreasing showing slight recovery in 2015.

However, market analysts predict that in the coming year or two the downward trend is likely to restart. In 2015, several sources stated that even taking into account closed capacities in Europe – above 2mn bpd – there will remain an issue of overcapacity when factoring in the decreased local demand. Refiners will need to adapt to this reality and reduce gasoline production.

Export of middle distillates to Europe from Russia and the Middle East are threatening to overwhelm the European market creating oversupply pressures. Confronted with weaker distillate markets, European refiners are relying on gasoline to strengthen their margins during 2016.

For bottom of the barrel products like coke and fuel oil, the respective yields are ¬ 11% for European refiners versus 9% for the Organisation for Economic Cooperation and Development (OECD) total.

Nevertheless, a number of companies are moving ahead with their investment plans in Europe by implementing new conversion units that would produce even more diesel fractions. These investments will put increased pressure on some existing plants and increase competition within the region in the nearest future (2018-2020).

Other Companies are looking to see how the situation evolves before deciding on new investments to increase complexity and conversion. There is no straightforward strategy in the present market conditions to guarantee success so companies must analyse their specific market conditions depending upon current assets and location.

The future potential of the European refining sector will depend on a number of factors: improving margins through energy efficiency and operational excellence, increased level of integration (possibly with petrochemicals), crude slate flexibility, and revamping opportunities. Smaller and less efficient refiners will continue to struggle.

European refiners may also benefit from increasing demand in the African region and positive consequences of low-oil prices. In the coming years it will be important for Europe to maintain a strong Refining Sector so as not to find itself in a position of dependence on imports for transportation fuels.

By Colin Chapman and Ekaterina Kalinenko – Euro Petroleum Consultants. Euro Petroleum Consultants [EPC] is a technical oil and gas consultancy with offices in Dubai, London, Moscow, Sofia and Kuala Lumpur. EPC also organises leading conferences including ME-TECH 2017 – Middle East Technology Forum for Refining & Petrochemicals which takes place in Dubai on 22 & 23 February 2017. Visit www.me-tech.biz

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