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French refining feels the squeeze

Tougher economics could spark another rationalisation in the sector

The impact of the Covid-19 pandemic has seen European refining margins turn negative for the first time since the IEA began tracking them in 2006. After milder conditions in the second half of the 2010s, France’s refining sector could again see casualties such as it experienced in the 2009-12 period.

Back then, a third of the country’s 12 existing facilities stopped refining, although infrastructure was mostly repurposed as product storage. Closure of the Mardyck, Reichstett, Berre L’Etang and Petit Couronne plants removed a combined capacity of almost 400,000bl/d.

European refineries, including those in France, have since benefitted from sustained lower crude prices post-2014, robust global demand growth and significant downturns in Atlantic Basin  product supply due to reduced run-rates at facilities in Mexico and Latin America, says Kristine Petrosyan, an oil market analyst at the IEA’s Paris headquarters.

Just one refinery has since ceased conventional operations, with Total agreeing with the French government in 2015 to convert its 153,000bl/d La Mede plant into a bio-refinery. Given increasing national mandates in Europe and even beyond for ethanol and biodiesel in the fuel mix, that could remain, in Petrosyan’s view, an option for other plants.

Under pressure

Both the short-to-medium and longer-term pictures are challenging for France’s remaining seven refineries, she continues. Continued build-up of refinery capacity in Asia and the Middle East may end up pushing a growing excess product supply towards Europe. And the comeback of Mexican and Latin American refining, as well as new refineries in Africa, will take away significant export outlets for European and US Gulf Coast refineries, especially for gasoline.

Longer-term, there will be continued demand decline in France, and Europe more generally, due to fuel replacement, further efficiency measures and a modal switch in transport—moving from a primary reliance on individual cars and planes to alternatives such as greater rail, electric mobility, bikes and scooters, and a more sharing-economy approach.

But demand, at least domestically, is not really the problem—France’s refined products output is equivalent to only around two-thirds of its requirements. The competitiveness of this domestic production against imports is key, which is why it is worth remembering that France’s refining sector is not homogenous

Price dynamics

Its northern facilities—Total’s Gonfreville, Donges and Grandpuits refineries and ExxonMobil’s Port Jerome, with a combined capacity of just over 810,000bl/d—compete in the Atlantic Basin market. Its southern plants—Total’s Feyzin, ExxonMobil’s Fos-sur-Mer and the Lavera refinery operated by independent Petroineos, comprising the remaining 455,000bl/d of French capacity—are tied more to the price dynamics of the Mediterranean.

The Atlantic refineries could be more vulnerable than their Mediterranean counterparts as they are more exposed to international competition, with easier seaborne trade logistics, argues Petrosyan. But she also cautions the complexity of facilities and their links to petrochemicals are other factors beyond simple geography that impact the economics of individual refineries.

“We have seen in the past that specific corporate circumstances resulted in shutdowns of refineries that did not seem particularly vulnerable compared to others and, vice versa, simpler refineries continuing to operate” Petrosyan, IEA

A 2016 report by Dutch thinktank the Clingendael Institute into the future of northwest European refining identified Gonfreville in the north as having advantages due to its steam cracker and aromatics capacities being critical to the base chemicals supply of the Seine Valley cluster, the largest and likely longest-lasting petrochemicals cluster in France. Similarly, it predicted the “highly integrated” Lavera refinery on the Mediterranean coast would be the last remaining refinery in the south of France.

On the other hand, “we have seen in the past that specific corporate circumstances resulted in shutdowns of refineries that did not seem particularly vulnerable compared to others and, vice versa, simpler refineries continuing to operate”, cautions Petrosyan.

And the ownership of France’s refineries could pose another challenge. The country resembles its neighbour Spain in that capacity is largely controlled by two dominant players, these being Repsol and Cepsa in the latter case.

Economic case

But, although Repsol has some upstream activity, the Spanish firms are much more downstream-focused than Total and ExxonMobil, and their domestic refining footprints make up a much larger proportion of their overall businesses. In contrast, French refineries must make an economic case within the two majors’ much bigger, fullstream portfolios, which may be more challenging for as long as the European refining downturn lasts.

Total’s position is obviously slightly different to ExxonMobil’s, as a French national champion. It has faced strong political and trade union pressure during previous plans to rationalise its domestic refining portfolio. But it has likely learned lessons from its Mardyck and La Mede experiences. Should the economics dictate that one or more of its remaining four plants need to be closed or converted, it is likely to be a fight it is comfortable to have, and to expect to win.

If more French refineries shut in, it will widen the supply-demand gap and make France more import-dependent, even if its long-term demand trend may be lower. The attractiveness of converting any closing facilities into storage depots is “probably bound to grow due to need to store increased imports”, predicts Petrosyan—particularly as Covid-19 lockdowns put global supply chain integrity higher in stakeholders’ consciousness, at least in the short-term.

French independent Rubis has built a dominant position in French Atlantic Coast product storage, with a capacity of almost 1.4mn m³ (including non-energy storage) across three facilities in Dunkerque, Rouen and Brest. At the end of April, it was able to take advantage of the bright prospects for storage by completing a deal to sell a 45pc stake in its Rubis Terminal business to I Squared Capital, a global infrastructure private equity fund.

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