STEADY REBOUND SEEN AHEAD FOR EUROPEAN REFINERS

Europe's downstream petroleum sector is becoming cautiously optimistic about its future. However, rationalization and cost cutting will figure strongly in refining and marketing for the next several years, sifting the weak from the strong. Those are the views of Jeremy Hudson, analyst at Lehman Bros., London. Hudson believes depressed refining margins are at a turning point and likely to make steady-if unspectacular-upward progress.

Nov. 15, 1993

2 min read

Europe's downstream petroleum sector is becoming cautiously optimistic about its future.

However, rationalization and cost cutting will figure strongly in refining and marketing for the next several years, sifting the weak from the strong. Those are the views of Jeremy Hudson, analyst at Lehman Bros., London.

Hudson believes depressed refining margins are at a turning point and likely to make steady-if unspectacular-upward progress.

Phil Hunt, director of Chem Systems Ltd., London, told a Lehman Bros. conference a major shakeout in the 1980s and early 1990s saw European refiners lead the world in rationalization.

From about 160 plants in 1980, western Europe's refiners census has declined to about 100. The work force has fallen from 1,500/plant to 600/plant during the same period. And 65% plant utilization in 1980 has risen to 88% today.

Hunt said integration in a processing chain is no longer a good enough reason to own and operate refineries. Shareholders increasingly insist on adequate returns on investments. "Strategic" investments are not acceptable.

Hudson said a large volume of European refining capacity is poorly positioned to meet environmental compliance and investment challenges. Most of Europe's mothballed capacity was closed more than 8 years ago, making it unlikely it could perform to today's standards, particularly because crude oil supplies today are of lower quality.

Angelo Ferrari, chairman of Agip Petroli, reported that Agip has closed six Italian refineries with capacity totaling 470,000 b/d since 1976.

Ferrari warned that Italian refineries with limited conversion capacity will become obsolete because new environmental rules require upgrades. He sees no need to close any more Agip refineries.

One threat to European refiners identified by Agip is increased supply of products from the Middle East. However, Ferrari believes added refining capacity in the Middle East will target the Far East market, where the shortage of refining capacity is becoming acute.