Refinery sales to re-shape UK business
Four of the UK's remaining eight oil refineries are up for sale as the major companies rush for the exit, Martin Quinlan writes
IN APRIL, Total said it will sell its Lindsey oil refinery, on Humberside. In March, Chevron invited offers for its Pembroke refinery in Wales. Since November, Shell has been negotiating to sell its Stanlow refinery, on Merseyside, to India's Essar. Since last summer, Ineos has been negotiating to sell its Grangemouth refinery, Scotland, to PetroChina.
The sales will re-shape the UK's refining business. Until a few years ago, most of the country's capacity was owned by the majors, but soon the business will be fragmented with a likely presence of ambitious Indian and Chinese companies, together with smaller specialist refining operators. Some of the new foreign operators want to import products from their home refineries, so UK throughput capacity might decline – as it already has, with the closure of Petroplus' Teesside refinery last year and, in the late-1990s, Shell's Shellhaven and former-Gulf's Milford Haven plants.
If the four facilities are sold, the only majors retaining a refining presence in the UK will be ExxonMobil, with its large Fawley complex on the south coast, and ConocoPhillips with its own Humberside facility (see Table 1). But in the industry there is speculation that ConocoPhillips might be another seller – the company is implementing a plan to sell assets worth $10bn worldwide this year and next, and in April cancelled its plan to build a new refinery at Yanbu, Saudi Arabia, in a joint-venture with Saudi Aramco (see p10).
The departure of the majors started in late 2005, when BP, with a strategy to become a "deficit refiner", sold its Grangemouth refinery to Ineos, the fast-expanding chemicals group – which now needs to sell to reduce its debt burden. In May 2007, BP sold its other UK refinery, Coryton, on the Thames, to Petroplus, the Switzerland-based refining specialist. In December 2007, Total sold its 70% interest in the Milford Haven refinery to its 30% partner, US firm Murphy Oil, which took over as operator.
But the departures are accelerating and, although a number of refineries are for sale elsewhere in Europe, nowhere comes close to the UK's 51% of capacity carrying for-sale signs. The UK Petroleum Industry Association (UKPIA), which represents the country's nine leading operators in refining and marketing, says the sale decisions follow from the operators' individual commercial perspectives. Nick Vandervell, communications director, says declining production of North Sea crudes is requiring refiners to buy more from elsewhere – including higher-sulphur grades, which might call for additional investment – but "there is nothing special in the UK, over and above the issues facing other refiners in Europe".
UKPIA analyses its members' returns on capital employed in refining and marketing each year in its Statistical Review, the most recent issue (to be published this month) showing that returns averaged 11.6% over the 10 years to 2008. The figure is lifted by higher profitability in the four-year boom of 2004-07, when escalating demand for products worldwide had lead to high utilisation rates (PE 9/09 p22). Earlier UKPIA analyses show returns as low as 5%. The latest figure is in line with returns for other manufacturing, UKPIA says, although service industries do much better.
The sellers have not commented on profitability, but admit to drastic restructuring plans. Total wants to reduce its worldwide refining capacity by 0.5m barrels a day (b/d) by the end of next year, while in March Shell said it will exit from 15% of its refining capacity – equivalent to just over 0.5m b/d – and 35% of its retail markets. Chevron said it will concentrate its downstream activities in North America and Asia-Pacific.
In March, when Total announced the permanent closure of its Dunkirk, France, refinery, the firm said it was responding to the "collapse in petroleum products demand in France, Europe and the US", which it views as "structural and permanent". Because it had to give French labour unions an undertaking not to close or sell any of its other five refineries in the country for five years, its sale focus moved to the UK.
The Lindsey refinery is viewed as well invested, with a recently completed distillate hydrodesulphurisation unit allowing the facility to process a high proportion of high-sulphur crudes. One logistical disadvantage is that, since the disastrous fire at the Total-operated Buncefield storage terminal (PE 5/09 p31), north of London, at end-2005, it has not been possible to send the full range of transport fuels south through Lindsey's Finaline pipeline – only jet-fuel, which is moved from Buncefield to London's Heathrow and Gatwick airports through the West London Pipeline.
But Total might already have found a buyer: Petroplus has made an offer for the facility. Last month, Petroplus' chairman, Thomas O'Malley, forecast that "the trend to better margins we saw in the first quarter will continue as the world economy recovers from the deep recession".
The private-equity backed company, set up in 1993 with a plan to acquire refining assets from the majors, is upgrading its portfolio. Last year, it tried to sell its Teesside refinery, which it bought in 2000 from ConocoPhillips and ICI, and then closed the facility when a buyer could not be found. It is now considering selling its Reichstett Vendenheim refinery, in eastern France, which it acquired from Shell in 2008. In April, Petroplus agreed to buy the non-operating Delaware City, US, refinery from Valero, and plans to re-start the 190,000 b/d facility in spring next year.
Chevron's Pembroke refinery is also regarded as a desirable asset, its large catalytic cracker allowing the facility to make nearly 50% of its output as gasoline. Chevron operates Pembroke – its only refinery in Europe – as a part of its North American network, sending large volumes of gasoline across the Atlantic. Pembroke can run acidic, heavy crudes, produced in Chad and Angola, which are priced at a discount to normal grades.
Shell has been in long-running negotiations to sell Stanlow to Essar, as part of a package that includes its Hamburg-Harburg and Heide refineries in Germany, with a combined capacity of 100,000 b/d. Essar is known to want to close at least the German refineries, converting them into import terminals to bring in products from its Vadinar refinery in India – it started up the facility in 2008 with a capacity of 210,000 b/d and plans to expand it to 0.72m b/d. As well as becoming one of the largest refineries worldwide, Essar says Vadinar is due to be one of the most complex, with the capability to produce fuels meeting the latest EU specifications from poorer quality crudes.
Ineos' Grangemouth refinery comes with a secure supply of North Sea crudes, landed direct to the refinery through the Forties pipeline. State-owned PetroChina has confirmed that it has completed preliminary work towards a bid, for at least an interest in the facility.
According to available company information, utilisation of some UK refineries is relatively high – but others are not doing so well, so overall utilisation is only slightly higher than the European average. The government's Department of Energy and Climate Change (Decc) says throughputs in 2009 ran at 1.5m b/d, indicating a utilisation rate for the country's 1.7m b/d of distillation capacity of 89% (see Figure 1).
UK refined-products consumption last year was just under 1.5m b/d, but there is a substantial international trade in products. Imports flow in through a large number of independent storage terminals, particularly on the Thames estuary, Humberside and Teesside, while large volumes of gasoline are exported to the US and elsewhere.
Europe-wide, refining capacity is in considerable surplus. According to the BP Statistical Review of World Energy, EU refinery throughputs in 2008 ran at 13.5m b/d while capacity stood at 15.8m b/d (see Figure 2), giving a utilisation rate of only 85%. The rate is likely to have declined further in 2009. In view of the high fixed costs of running a refinery – of capital, fuel, maintenance and staff – low utilisation rates depress margins.
Some agree with Total that the declining demand for transport fuels is structural, with vehicle fuel consumptions continuing to improve while hybrid and electric vehicles are becoming more capable. UK statistics show that total consumption of road fuels increased steadily over the 30 years to 1990, but growth since that year has been slow – and there were sharp declines in 2008 and 2009. The significance is that diesel engines, with better fuel consumption than gasoline engines, have become increasingly popular since about 1990, putting a brake on growth in fuels demand.
Meanwhile, increasing volumes of non-petroleum components are included in transport fuels, reducing the call on refinery streams. Under the UK government's renewable transport-fuels obligation (RTFO), now in its third year, the volume of biofuels required to be included in gasoline and diesel increased to 3.5% in April – although suppliers can choose to pay a "buy-out option" instead. Scheduled annual increases will take the RTFO to 5.0% in April 2013. The expectation is that the RTFO will continue to rise, with 10.0% targeted for 2020.
A fundamental problem for refiners in the UK, and Europe generally, is the increasing focus of demand on the middle distillates band of products – particularly diesel and jet fuel. The trend away from gasoline towards diesel has been strong: UK gasoline sales peaked in 1990 and by 2008 had declined to only 68% of their peak, according to UKPIA, while diesel sales had nearly doubled over the same period. UK deliveries of jet fuel have more than doubled since 1990.
Much of the growth in diesel and jet fuel use has been met by imports, however, because UK refineries were designed to maximise production of light distillates – gasoline is historically the most profitable product. Gasoline was still the priority in the 1970s and early 1980s, when refiners needed to invest in conversion units to break down surplus fuel oil into transport fuels. Accordingly, the conversion unit most refiners opted for was the catalytic cracker – a gasoline-producing unit. Every UK refinery has one, giving the country a large gasoline-making capacity (see Table 1).
Swinging the UK's output away from gasoline and towards diesel will involve closing catalytic crackers and building hydrocrackers instead – but, Europe-wide, not many operators have been willing to make the investment (PE 9/08 p16). UKPIA argues that the generally low level of refining margins is not supportive of such large investments, which start at $250m for a small unit and run to three times as much. Meanwhile, imports from Russia have become the UK's marginal source of supply for diesel, while large volumes of jet fuel are imported from the Middle East.
There are also imports of gasoline, despite the UK's large surplus of the product. Refiners contrast the UK's accessibility to imports – through the large number of coastal storage terminals and comprehensive distribution infrastructure – with the inland markets of continental Europe, where unfavourable logistics can make competition less fierce. With competition from imports and the country's large volume of gasoline-making capacity, industry surveys usually find that UK gasoline prices are the lowest in Europe on ex-refinery basis – but among the highest at the pumps, when taxes are included.