Monday, 10 October 2011

German refiners at a crossroads

The following is a market commentary from NewsBase's EurOil monitor, published in May 2010.

The news has rarely been good for Europe’s refiners in recent months and years. The recession has hit industrial demand hard, while the increasing spread of more fuel efficient technology threatens to cut demand for the future. Meanwhile, their competitors in Asia grow stronger, their increasing might best represented by the vast Reliance refinery at Jamnagar in India.

Germany’s refineries epitomise the impact of many of these trends. Shell’s Heide and Harburg plants are up for sale as the company seeks buyers for 15 percent of its global refining assets, with profits from refining down 26 percent worldwide in the first quarter of 2010. BP is mid-way through a wave of redundancies at its Gelsenkirchen refineries that will see one-sixth of the workforce cut.

Germany has also seen its share of headline-grabbing predictions about the future of the industry, with BP Germany CEO Uwe Franke claiming in November that there will be overcapacity of “between 20 and 30 percent by 2020 or 2030”, adding that “refineries will have to close”.

Christophe Barret, global oil analyst at Credit Agricole – CIB, told NewsBase: “It’s a very large gap between the capacity and the utilisation [of European refineries]. If you look at the average for 2002 to 2008, basically the average remains close to 15, 15.5 million barrels per day, and now we are close to 13, so it’s a very big gap. So we have roughly two million barrels per day of excess capacity in Europe...We’ve had that since the middle of 2009.”

He added: “Now we have very moderate economic growth in Europe, particularly with all the problems we’re having now, and we don’t have a rebound in [oil] product demand and we should have this excess of capacity at least through 2012.”

As well as coping with the dead weight of overcapacity and low refinery rates, market players will also face the challenge of reconfiguring refineries, Barret believes, as the recession reshapes the demand profile for various oil products.

“We are having a very sharp drop in industrial activity and in world trade, so we have a strong impact on gasoil demand, but we much less of an impact on gasoline demand. It’s much stronger than gasoil demand and it’s a complete reversal of what we had before...It means that refiners have been put in a difficult situation because they tried to adapt their refining to the structure of demand that we had before, which was mostly oriented toward growth in gasoil demand. There’s the problem of flexibility for a refiner. That will be interesting in the next few months.

“When refiners have to meet gasoline demand, they produce gasoil in excess that has to be put in storage. The result on the market is that we are ending up now with very, very high stocks of gasoil and with gasoline stocks at reasonable levels. It’s interesting for refiners to look at that because it has a strong impact on their investment and the configuration of their refineries, for example they invest much more in hydrocrackers...if they want to produce more diesel than gasoline.”

The German oil product sales figures for March, published by the MWV trade body, show that sales of heating gasoil fell 41.7 percent year-on-year in Germany in March, while gasoline sales rose 0.2 percent. In February, the last month for which refinery output figures are available, production of heating oil was down 34.6 percent, with gasoline dropping 18.3 percent. According to the MWV, capacity utilisation at German refineries stood at 76 percent in February.

While demand is likely to recover, Barret is keen to sound a note of caution about future demand, as the European public move towards greater energy efficiency. “What we have in Europe is a very small increase in oil demand. We are losing gasoline demand at roughly 100,000 barrels per day per year and we are gaining some diesel demand because of the increasing penetration of diesel cars,” he said.

“Kerosene is growing, but we have a very low increase in kerosene demand. Fuel oil is very low, it’s declining because it’s being replaced by natural gas. We have very slow growth in oil demand in Europe anyway, even when we don’t have a recession, but with a recession this drop is amplified, of course.” He added that the same process could be seen in the US, where more efficient cars are cutting demand, with further pressure coming from the increasing use of ethanol.

Another area in which Germany illustrates trends in European refining is that of possible mergers and acquisitions. Shell has been trying to sell its Harburg and Heide sites in Germany for several months, but on-off talks with India’s Essar on the German refineries and Stanlow in the UK will have come under pressure following Essar’s unimpressive initial public offering on the London Stock Exchange on May 3. 

Shell’s chief financial officer Simon Henry had previously said that the company would consider closing one of the refineries or converting it to a depot if a price could not be agreed upon. Another Indian company, Reliance, has previously expressed interest in Europe, although this came in the form of an ultimately unsuccessful takeover bid for bankrupt petrochemicals firm LyondellBasell.

Barret believes, however, that Harburg and Heide remain attractive targets for Asian companies: “If you have a big company that has strategic plans to try to secure an outlet in the European market, that could be a good opportunity. The company would have to have enough capital to support very low margins, but that could be a very good opportunity for a company in India or elsewhere to enter the European market.”

Recent weeks have also seen speculation that Russian oil major Rosneft could be poised to enter European refining in a big way by taking over Petroleras de Venezuela’s half share in the Ruehr-Oel joint venture with BP. Ruehr-Oel is Germany’s largest single refiner, owning the Gelsenkirchen plants and holding a shares in various others, including the largest, Mito, near Karlsruhe. Any deal between the two state-owned companies would be dependent on political factors far beyond European refining, and it is telling that the reports of Rosneft’s purported plans did not develop further following Russian Prime Minister Vladimir Putin’s recent visit to Venezuela.

There have, however, been some clear positive signs recently. One of these came this week as BP completed its consolidation of its continental European operations. The newly-formed BP Europa hinted at possible savings by synergies between the Ruehr-Oel plants and BP’s refineries in the Netherlands, saying that further job cuts were not planned. This will come as a relief to BP’s employees in Germany, where a programme of redundancies at the Gelsenkirchen plants is part of a programme of “optimisation” reportedly worth US$100 million.

As Europe comes out of recession, German and European refiners are playing a waiting game. As they hold on for the promised return to profits in 2012 or 2013, they will have to bear in mind various undercurrents in the industry. Even as demand returns, its nature may change, bringing fresh challenges, while foreign competitors may look to establish a beachhead in Europe. While Germany may illustrate many of the challenges, it has not yet provided the answers.