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Refinery restructuring pressures mount

The refining industry’s centre of gravity is moving east, with the most immediate consequences for the owners of Europe’s elderly refining capacity

The Asia-Pacific region is now home to nearly a third of the world’s refining capacity, after the construction of the equivalent of three large new refineries every year for the past 10 years. Over the same period, the region has become the world’s largest consumer of oil products, while North America and Europe have seen their oil use decline.

But Asia-Pacific’s new refiners also have their eyes on export markets. With the world’s newest stock of refining capacity, drawing-board designed to make products to the latest specifications, and capable of running less-costly crudes, they have the edge to take on established refiners elsewhere. Other facilitators of long-distance trade are already in place: refined product tankers have become larger, reducing the costs of transport, while import capacity in independent terminals has been expanding and distribution infrastructure is made available to independent users.

The problem is that refining capacity worldwide is well in excess of demand, and the new construction has made the surplus worse. Because refining profitability is closely linked to utilisation rates, margins – particularly in Europe – have been unattractive for many years. Refineries have high fixed costs, so poor utilisation rates inevitably result in high per-barrel production costs and, accordingly, low margins.

Last year, utilisation of EU refineries declined to 80%, according to data in the BP Statistical Review of World Energy – indicating that 3 million barrels a day (b/d) of distillation capacity was unused. Even North America, with its highly-upgraded refining system, only achieved a utilisation rate of 82.9%. Asia-Pacific capacity showed the highest regional utilisation rate, but of only 85%, while Middle East capacity achieved 81.2%. The lowest figures were recorded for capacity in South and Central America (73%) and Africa (66.9%), with the world average dipping to 81.2%.

Increases in capacity are only part of the problem: in mature markets, use of oil products has declined. In the US, refined products consumption peaked in 2005 at 20.802 million b/d, and last year had fallen 9.5% below-peak to 18.835m b/d. The EU’s peak of 15.044m b/d came in 2006, with consumption having lost 10.4% to 13.478m b/d last year.

Troubled economies are a factor, but some say the decline in mature markets is structural. Vehicle fuel consumptions continue to improve, required levels of bio-components in gasoline and diesel are rising, and gas continues to increase its share of the heating market. Emerging economies are providing growth, although from a low base: over the five-year period to 2011 consumption increased overall by 22.1% in the Middle East, 19.3% in South and Central America and 16.8% in Africa – and by 13.8% in the Asia-Pacific region, a five-year increment of more than 3.4m b/d.

Obstacles to closure

Despite the surplus of capacity, facilities which seemed set for closure are finding new owners – usually, new entrants into refining. Recent buyers include companies with access to Russian crudes, oil traders, private-equity investors, and even an airline (PE 7-8/12 p14).

In consequence, three of the five refineries in Europe previously owned by Petroplus, which went into administration in January, have been re-started under new ownership. Cyprus-registered Gunvor, a large seller of Russian crudes, has acquired the Antwerp, Belgium, and Ingolstadt, Germany, facilities, while a venture between oil trader Vitol and AtlasInvest is buying the Cressier, Switzerland, refinery. A fourth, Petit Couronne in France, has also been restarted under a Shell-backed tolling agreement, and appears to be  moving towards a sale.

Only the Coryton refinery in the UK has closed permanently – surprisingly, because it was the largest and best-equipped of the five. The site, close to London on the Thames estuary, is to be acquired by a venture between Shell, the storage operator, Vopak, and fuels marketer Greenergy, which will develop it as a deep-water import terminal.

The continuing operation of most of the Petroplus refineries illustrates a new feature of refining in Europe: inland refineries, even if small and relatively simple, can be more profitable than large coastal facilities, previously thought of as the industry’s most efficient and profitable units. Niche markets can avoid the extremes of competition faced by operators in the large refining centres, where the ability to process disadvantaged – lower-cost – crudes, such as high-sulphur and acidic streams, is now the key to success.

In the US, the key is access to lower-cost US inland crudes and shale streams. The need to import costly low-sulphur crudes was behind the closure this year of Sunoco’s Marcus Hook refinery, on the Delaware river, Pennsylvania, and the Hovensa (Hess-PDVSA) refinery in the Caribbean – the latter being further disadvantaged by lack of access to competitively-priced gas for process fuel.

But Sunoco’s two other refineries near Marcus Hook, which were also due for closure, continue under new ownership. Trainer, on the Delaware river, was bought by the Delta airline in April while Philadelphia, on the Schuylkill river, is being acquired by Philadelphia Energy Solutions – a venture led by the Carlyle investment group with Sunoco as a minority partner. Carlyle said in July that it plans to construct a rail terminal to allow it to bring in Bakken crude from North Dakota, to reduce reliance on imported crudes. Other plans for the 330,000 b/d facility include an upgrade to its catalytic cracker and the conversion of the existing middle distillate hydrotreater into a mild hydrocracker.

International trade

The decline in US products consumption has brought changes to international trade, a dominant feature of which has been US product imports. Up to five years ago, US imports of gasoline had been increasing sharply year-on-year – and providing good business for Europe’s gasoline-oriented refineries. But since 2007, when the flow ran at 1.166m b/d according to the US Energy Information Administration (EIA), imports have declined each year. In 2011 US imports ran at 812,000 b/d, down 7.2% from the previous year, with the flow made up of 105,000 b/d of finished gasoline and 707,000 b/d of gasoline blending components.

Meanwhile, US exports of middle distillates have been increasing strongly. EIA statistics say that exports of distillate fuel oil – a category made up of diesel fuel and heating oil – started to rise in 2005, since when the flow has increased six-fold to reach 854,000 b/d last year, with a rise of 30.2% over 2010. By April this year the flow had increased to 1.078m b/d, or 980,000 b/d net of some imports.

The EIA attributes the increase in distillate fuel oil exports to growth in worldwide demand, particularly in developing countries, which has raised prices and made it attractive for US refiners to increase production. Principle destinations are South and Central America including Mexico, which together accounted for 60% of exports in the first four months of this year.

A large volume of US diesel also flows to Europe, providing a useful countertrade for the tankers taking gasoline westward – but most of Europe’s diesel imports come from Russia, where recent refinery upgrades have increased the capacity to produce EU-specification material. International Energy Agency statistics say Europe’s imports of gasoil and diesel from outside the region ran at 1.014m b/d in 2011, down by 3.3% from the previous year’s peak of 1.049m b/d. Underlining Europe’s deficit of middle distillates, there are also large imports of jet-fuel and kerosene – 398,000 b/d last year.

While having too much distillation capacity, Europe’s refineries also have an excess of gasoline-making capacity and too little diesel-making capacity – a reflection of the predominant demand for gasoline at the time most of them were constructed. Since the 1980s, there has been a strong swing towards diesel engines, while consumption of jet-fuel – made from a similar stream to diesel – has also increased.

The answer is the construction of a large volume of hydrocracking capacity, to produce diesel from the heavy streams which at present are sent to the refinery’s catalytic cracker – a gasoline-making unit. But, with margins having been unattractive for decades, few refiners have had the enthusiasm for large new investments. One that has is Repsol, which started-up its extensively-reconstructed refinery at Cartagena, Spain, late last year. Diesel now makes up nearly 60% of the refinery’s output.

Margins strong in US

Refining margins achieved by operators along the US Gulf of Mexico coast – home to the highest concentration of high-conversion refineries in the world – have been strong this year, as they were for much of last year. Data supplied to Petroleum Economist by Jacobs Consultancy of Houston, US, show margins of substantially over $10.00/b for most of the past 18 months – a figure which operators elsewhere can only envy.

The data show that a US Gulf coast refinery with a catalytic cracker, running a typical mix of crudes for the area, showed margins rising from just over $11.00/b in January to nearly $15.00/b in July (see Figure 4). The fall in crude prices since March, over the months in which gasoline stocks are being built, evidently helped.

However, the margin figures do not show a direct correlation with crude prices over the period – instead, they provide evidence of strong product prices. Refiners elsewhere in the US face more difficult conditions, but the Gulf coast operators benefit from particularly smooth logistics, as well as from their conversion capacity – crude is delivered from nearby sources and products are moved rapidly to markets through pipelines to the east coast and central areas.

For US Gulf coast refiners with delayed coking units, margins were even better (see Figure 3). The coking margin topped $17/b in April, as it did in May last year – gasoline prices usually spike in the spring, on marketers’ concerns that stocks need to be topped-up in readiness for summer demand. Coking refineries produce more gasoline and less fuel oil than cracking refineries, while running on heavier grades of crude.
Refiners in northwest Europe, where surplus capacity and competition from imports combine to put a brake on product prices, operate in a completely different environment. Data for the 10 largest refiners in northwest Europe point to margins of under $2.00/b for much of the period, with negative figures being recorded for three winter months (see Figure 1).
The two unusually high margins of $4.83/b in April and $6.56/b in June might be explained by the shut-down of the Petroplus refineries, which trimmed Europe’s capacity surplus at a time when stocks of transport fuels were being built-up. But, with three of the five having now been re-started by new owners, and a fourth likely to re-start, any effect will be only temporary. Also contributing to the two months’ higher margins could have been the spring rise in US gasoline prices, although volumes flowing across the Atlantic are now much lower than a few years ago. (See PE 3/12 p9 for analysis of the problems facing European refiners.)

For the Singapore refiners, margin figures so far this year give hope of a recovery from the low figures of the previous two years – attributed to worldwide economic problems and their effect on manufacturing activity in Asia (see Figure 2). The improvement has been remarkable: over the first seven months of this year the Singapore margin has averaged $4.89/b, up from averages of $2.15/b in 2011 and $1.85/b in 2010.

Construction survey

Despite the world surplus of refining capacity and low utilisation rates, 10.585m b/d of distillation capacity is under construction or reasonably-firmly planned worldwide, according to Petroleum Economist’s 2012 construction survey (see Tables 1, 2, 3 and 4). Capacity identified is down slightly from the 10.860m b/d of the 2011 survey, mainly as the result of the completion of several large projects.

Projects under construction or planned are made up of 32 new refineries, providing 8.630m b/d of distillation capacity, and 16 expansions providing 1.955m b/d. The total represents an increase on existing capacity worldwide of more than 11% – but, inevitably, many projects will not proceed because plans will change, backers will not be found, or because two or more projects are competing to be built at the same location.

There is no doubt about the two focuses for refinery investment now: Asia-Pacific accounts for 31.5% of the project capacity identified in the survey and the Middle East for 29.3%. Both regions are attracting over 3.0m b/d of project capacity – but, starting from its lower base of existing capacity, Middle East growth is set to be more vigorous. Middle East projects identified point to an increase on existing regional capacity of 39%, while Asia-Pacific projects represent a regional increase of 11%.

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