The European refining industry will undergo restructuring with closure or sale of refining capacity predicted for the short term.
In the longer term, Europe's cash starved refiners may take their money to areas outside the European Union (EU) such as the Far East, where margins are greater.
Those are among the findings of a European Commission (EC) report on the status of EU's oil supply, refining, and marketing operations.
There is growing evidence that a shakeout of Europe's overcrowded refining sector is gathering speed (OGJ, Mar. 25, p. 21).
EC's report said, "It is not possible to predict exactly where or when or even how much capacity will be involved because of the wide range of factors involved across the community."
Effect of suplus capacity
EC said refiners' margins on initial distillation are virtually nil, while margins on upgrading processes such as catalytic reforming and cracking are too low.
It said, "Individual refineries may be able to cover operating costs, but to sustain industrial development in the sector it is not sufficient merely to cover cash costs."
The commission reported that the overcapacity could be even worse than available data suggest because "capacity creep" occurs as refiners work to increase plant production above nominal capacity.
"The excess of crude oil distillation capacity is long-standing," EC said. "And while the industry has made strenuous efforts over the last 15 years to reduce it, an excess, albeit diminishing, persists."
The situation is made worse by surplus conversion capacity, caused in part by overestimation of increased gasoline demand and underestimation of rising demand for diesel fuel.
Refiners also expected available crude oils to become increasingly heavier. Instead, supplies became lighter as Saudi Arabia lightened its crudes basket to increase revenues and the North Sea yielded more crude than predicted.
Finally, EC said, there has been the major effect of regulation. Increased costs of environmental measures could not be recovered in products prices in Europe's tight retail market.
"Refiners are reluctant to close refineries, given high clean-up and social costs," EC said. "Closures are seen as assisting competitors, which would benefit from increased margins that may result.
"Instead, refiners are tempted to adopt a 'wait and see' approach as long as operations are cash positive or to try to sell refineries, even at very low prices, rather than close them."
EC added that plant closures, while likely, are no guarantee that margins will rise because the reduction in capacity may then be matched by increased imports.
"In the long run, refiners, who are currently capital-rationed, may be more likely to invest outside the community in areas where margins are more attractive such as the Far East, thus allowing the EC refining industry to decline."
Auto-oil issue
Meanwhile, European refiners and automakers disagree over which industry should do most to cut air pollution from vehicles.
A Reuters dispatch quoted an EC official as saying European carmakers have been lobbying EC to water down requirements for lean burn engines, due to be introduced under forthcoming EC legislation.
EC, auto makers, and the European Petroleum Industry Association (Europia) collaborated on the auto-oil program of air pollution measures, expected to require a $24-96 billion investment during 15 years (OGJ, Mar. 25, p. 22).
Europia Secretary General Hubert Knoche, addressing members in an association newsletter, said, "The commission has almost completed the auto-oil program, and it is expected that the three directorates concerned (energy, environment, and industry) will bring forward their proposals on motor vehicle emissions and fuel quality at the end of April or beginning of May."
Knoche said the three parties are working on "additional refining" of the auto-oil report conclusions so scientific approaches to curbing air pollution can be chosen according to cost effectiveness.
"Europia's main concern," Knoche said, "is to avoid any deviation from or abandonment of the agreed basis of the program. It is extremely dangerous to allow widespread revisionism at such a late stage."
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