1998 a boom year for European downstream

Most of the petroleum industry was hit hard by low oil prices last year, but for the European downstream industry, 1998 will be remembered as a record year.

This is the view of Petroleum Finance Co. (Petrofinance), Paris, which said the average downstream return on assets was about 9.3% last year, the highest level in Europe since 1991, when the Persian Gulf war artificially boosted profits.

"Most European downstream players saw their profits rise by more than 30%," said Petrofinance, "with an average profits rise of more than 45%, as strong gains downstream helped offset part of the heavy declines recorded in the upstream sector."

Demand, profits up

The analyst said Europe's refiners benefited from buoyant product demand in 1998, with total oil products demand rising by an average of 1.3% over the year in the five biggest European markets: Germany, France, Italy, U.K., and Spain.

In terms of refining profitability, Petrofinance said margins increased by just 10¢/bbl, or less than 5%, yet refiners were able to increase profits in

much greater proportion, thanks to a relative decline in total operating costs.

"While some of this decline can be attributed to the slight strengthening of the U.S. dollar," said Petrofinance, "it is above all due to a strong rise in processing volumes, which increased by an average of more than 4%, bringing the utilization rate in Europe's top seven refining countries to an historical high of more than 92.5%, or 96%, if Italy is excluded.

"In an environment of high topping margins, refiners maximized crude throughputs and thus reduced costs per barrel processed. Low inflation also had a positive impact on European refinery operating costs."

Retail margins increased by an average of 4% in 1998, said the analyst, while the volume of retail sales increased by an average of 2.5%, with the largest growth being recorded in Portugal, Spain, France, and Italy.

Year of restructuring

"Nineteen ninety-eight will also be remembered for the dramatic acceleration of industry restructuring," said Petrofinance, "with the announcements of the Exxon-Mobil and Total- Fina deals having the most direct bearing

on Europe's downstream oil industry.

"Recent indications are that the mergers announced in 1998 are likely to lead to further adjustments of downstream asset portfolios, with ensuing ramifications for a number of players, notably the BP-Mobil downstream joint venture. Preliminary figures suggest that changes in overall market share position were limited in 1998."

BP Amoco plc saw its share of European retail gasoline sales fall to 9.1% from 9.2% in 1997, said the analyst, as the company exited the Belgian, Hungarian, Czech, and Slovak markets.

Petrofinance reckons that, if Exxon Mobil Corp. retains Mobil's share of the BP-Mobil joint venture, BP Amoco's share of the European retail market would fall sharply.

In that case, Exxon Mobil would be market leader with 13.5%, and Royal Dutch/Shell would be second with 12%, while Agip SpA would have 6.9%, BP Amoco 6.4%, and Total Fina 5.5%.

"The top five groups," said Petrofinance, would thus have a combined market share of just less than 45%-a concentration level well below that of the U.S., a much larger market-leaving room for further mergers in the future."