The pending bankruptcy of refiner Petroplus is only the start of further problems for nearly 40% of the European Union's 104 refineries now in need of refurbishment, according to a new consultancy report.
"Demand for crude oil products is increasingly volatile, and many refineries do not have the flexibility to accommodate this more rapidly changing demand," said energy consultant Enguerran Ripert of Frost & Sullivan.
"Beyond the structural issues, many owners need access to credit lines, which in the case of Petroplus amounted to €2.4 billion, to carry on doing business in the short term," Ripert said.
European refineries' capacity utilization consistently decreased from an average of 90% in 2005 to less than 75% in January 2012. In Ripert's view, this change reflects "the much tougher" competitive environment, but also a trend toward "flexible demand-supply" of crude oil products.
Road transport fuel, and in particular gasoline which Europe has a lot of capacity for, is being replaced by diesel and kerosene.
Meanwhile, heavy oils, bitumen, waxes, and petroleum coke are no longer in such high demand, making way for liquefied petroleum gas, naphtha, and other smaller chain alkanes.
The misalignment between demand and supply capabilities leads Europe to be a net exporter of gasoline to the US, and a net importer of diesel from Russia.
"Although this movement of refined goods is not an issue in itself, it does reflect the inability of refineries to adapt to local demand quickly and profitably in their current state," Ripert said.
"This growing requirement for diesel and kerosene despite the latest economic turmoil cannot be met profitably due to cost and capacity reasons intrinsic to the current fleet of refineries," he said.
Since any investments, such as hydrocracking units to increase diesel production, need bank funding due to the high cost, the ability to make these investments lies with the banks which hold much of the debt.
"But with higher capital ratios imposed on banks, and attractive spreads between ECB lending rates and local government bonds, banks prefer to avoid lending to the refining sector, or any other relatively high risk sector," Ripert said.
Tougher times ahead
Refineries will have tougher times ahead of them due to such banking issues, along with the increasing probability of another European recession, the uncertainty around ETS and carbon taxes, the rigid and costly labor laws, and tightening regulation on sulfur content.
European refineries average less than 140,000 b/d, and more than half are smaller than 100,000 b/d. The majority were built more than 20 years ago when the demand dynamic was more stable and crude oil prices were less than half 2012 levels.
"In a context where demand patterns change more rapidly, a lower number of much larger refineries is needed to offer both flexibility in product output, and lower costs," Ripert said.
In a world where labor flexibility is limited and the relocation of physical assets is extremely difficult, Ripert said that many more refiners will be sure to sell assets at highly discounted prices in the coming years or slowly erode their assets.
More Oil & Gas Journal Current Issue Articles
More Oil & Gas Journal Archives Issue Articles
View Oil and Gas Articles on PennEnergy.com