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A convalescent continent? Changes and challenges in European refining

Hydrocarbon Engineering,

The full version of this article is available in the November 2011 issue of Hydrocarbon Engineering.

 Not so long ago, oil refining was considered a profitable business in Europe; companies were competing with each other to take ownership of plants or to invest heavily in existing refineries. Today the situation has changed, as the economic recession and resulting fall in demand has put pressure on the European refining sector.

The world is now seeing oil companies redefining their refining strategies by selling refining assets across Europe. In some cases, refiners are even considering closing refineries altogether due to rapidly decreasing profit margins and heavy losses.

These new strategies, coupled with weak margins and surplus capacity, have meant that many European refineries have already been shut down or have been tagged for possible closure in the near future. In addition to these plants, there are also a number of refineries that have been put up for sale due to the difficult climate and shift in company directives.

However, when looking at the figures released by Euroilstocks data for July 2011, refining margins can be perceived as rising slightly due to an increase in gasoline demand, notably from the Middle East and North Africa, as well as continued support from the middle distillates bracket. In Germany, early buying for the winter season has also meant an increase in heating oil demand.

Overall, production in Europe reached 82% of running capacity, but remained considerably lower than the 86% seen during the same period last year. Also present is the worry caused by the faltering demand from the USA, the world’s largest gasoline consumer. Average US gasoline demand fell sharply at the end of July and this has meant an increase in motor fuel inventories at the peak of the northern hemisphere’s summer driving season.

Another contributing factor to the downturn is that the Euro Zone business confidence is currently low, with even Germany, the strongest economy in the Union, experiencing a slowdown in economic activity. Add to that a high oil price having a negative effect on the global economic activity, problems due to the loss of Libya’s light sweet crude (traditionally an important regional provider), and it is clear that Europe is facing an uncertain market and ultimately less optimistic forecasts for the business.

The future

It is important to remember that refined products will continue to be a key part of the European energy makeup for the foreseeable future. This means that having a viable and efficient refining industry will be important to support the European economy and its competitiveness. 

As the European sector comes out of the downturn, some recovery in demand is expected. However, any significant growth will concern primarily jet fuel and diesel only. Difficult times lie ahead due to lower gasoline demand from Europe’s major client, the US. When this factor is combined with new important refinery capacities coming on stream in Asia and the Middle East, improved car efficiency and stringent new EU environmental legislation, significant pressure on the European refining industry is to be expected.

Looking at the positives, refining margins for more complex refineries could be given a helping hand by the changes to marine bunker fuel specifications, which will concern mainly Northern Europe and come into force in 2015. The change in legislation is expected to mean an increase in demand for marine diesel at the expense of heavy fuel oil. The result would mean strengthened prices for middle distillates and refinery profitability.

To conclude, it will be important that the EU commission continues to develop a strategy that takes into account the important role of refining and supports the sector to face the key challenges that lie ahead.

The full version of this article is available in the November 2011 issue of Hydrocarbon Engineering.

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