Downturn catches up with France's refiners

Pulled along by the appreciation of the U.S. dollar and the time lag between falling crude oil prices and their effect on refined product prices, France's refining industry posted exceptional profits in first half 1998. But margins took a dive in the third quarter, to below the breakeven point.

The reversal

At 4.2 billion francs in the first half, French refining profits were more than double the 2 billion francs earned in first half 1997. And gross refining margins soared to 113 francs/metric ton, compared with 109 francs/ton the previous year.

But the upturn-comparable to the one set off by the war in the Persian Gulf early this decade-was short-lived.

Philippe Tr?pant, president of the trade group Union Français des Industries Pétrole's, said that margins had fallen to 60 francs/ton in September and to 50 francs/ton in October. This is well below the breakeven point.

Meanwhile, increased refinery runs, instigated by the euphoria the country's refineries experienced because of rising demand and firm prices, have boosted stocks of refined products.

As a result, French refiners should post noticeably lower profits in the second half. Profits will be depressed even more, as competition in the retail network from supermarkets is worsening. Supermarkets now account for 52% of refined products sales.

Rationalization needed

Amid falling margins and rising stocks, companies have less money to invest in the upgrades needed to help them meet stricter environmental requirements (OGJ, Oct. 26, 1998, p. 48). The industry's restructuring is therefore expected to accelerate, says Tr?pant, who sees the problem on a Europe-wide scale.

He pointed to the shutdown of Shell U.K. Ltd.'s Shell Haven refinery and believes Shell's Cressier unit in Switzerland, as well as its Reichstett refinery in France (owned 65% by Shell, 17% by Elf Aquitaine, and 8% by Total), are also at risk.

Meanwhile, Elf's new Leuna refinery has boosted supplies in Bavaria, causing problems for the Esso AG and Ervin GmbH plants there.

In France, Elf's small refinery at Grandpuits, fed by the firm's declining production in the Paris basin, has been pinpointed as being at risk, as has its Feyzin refinery in the Rhône area.

Trépant calculates that, with world oil stocks estimated at about 5 billion bbl, 250 days will be required to run them down.As a result, he be lieves low prices will prevail for at least another year.

He pointed out, however, that, if low prices lead to large budget cuts by the oil industry-especially in exploration and production-"there will not be sufficient capacities when demand picks up."

Trépant quoted a study by Institut Français du Pétrole's Olivier Appert, who recalled that, in 1985, oil stocks were building up at a rate of 11 million b/d before the countershock. The current buildup is far below that, however, at 3.5 million b/d.

Other worries

Trépant is also worried about the European Union's greenhouse gas reduction commitments at the Buenos Aires conference. These commitments go far beyond what the U.S. and developing countries are prepared to do.

Trépant does not want these EU commitments to be ratified at Buenos Aires-not before a common strategy for the 15 countries can be worked out, he said.