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The crisis in European refining | Chris Cragg

The lesson for the major oil companies – as Petroplus files for bankruptcy – is not to assume independents will take care of their refining

If the sudden filing for bankruptcy of Swiss oil refiner Petroplus came as surprise to politicians, it was no surprise to the industry, or indeed to its own executives. As they themselves pointed out to analysts in a meeting on 8 December last year, some 15 European refineries had either closed, were under threat of closure, or gone on short time in the previous twelve months.

The executives of Europe’s largest independent refiner probably thought that their bankers would see this in a positive light, given that their competitors were falling away. Instead it merely highlighted a wider malaise in the European industry that suggested that Petroplus’s debts of .75bn (£1.1bn) looked unlikely to be paid.

For the facts are that refining is the necessary Cinderella of the oil industry and refineries are extremely complicated and expensive plants to run. The margins on a barrel of petrol or diesel made in Europe have been relentlessly falling, from a high of more than in early 2010 down to .60 at the end of 2011. Squeezed by rising crude prices on the one hand and government taxation, high competition at the pump and stagnant demand on the other, it has been virtually impossible to make the necessary investments in upgrading capacity needed to squeeze greater efficiency out of often elderly plants. As result, the major oil companies have been bailing out to concentrate on the upstream business, cheerfully optimistic that independents, such as Petroplus, would keep on refining their crude for them.

Matters elsewhere are different. Faced by an ever-upward demand curve for oil products, China and India now have some of the best refineries in the world. Export markets for the Europeans have been slowly closing down for decades. From an optimistic figure of 13.8m barrels a day (mbd) of total capacity, as assessed by the EU in 2010, a figure of 1.8 mbd was cited by the Petroplus executives as they were on their way out, and now as they face their own demise, the amount that could be lost is clearer; a grand total of 667,300 barrels a day of capacity in Germany, Belgium, France, Switzerland and last but not least Coryton in the UK.

Coryton, is not the largest or the smallest of the UK’s eight refineries, but it does have a vital strategic position, 30 miles from London and the only refinery in the south east. Not least of its significance is its role in supplying Heathrow and other airports. The nearest alternative, ExxonMobil’s unit at Fawley in Southampton is larger, but services the much of the south. Of the rest, one is in Scotland, two are in south Wales, two are in the north-east and one is near Merseyside.

This need not necessarily mean that the roads will crammed with road tankers, not least because significant quantities of UK jet kerosene, gasoline, diesel and fuel oil goes through a complex pipeline network, which also links in Coryton. Indeed, as reported, it seems likely that the administrators taking over Petroplus assets will continue to supply from existing stocks. There is certainly no need for panic buying, and existing buyers may continue to supply crude for refining in return for product.

However what matters is the future. Coryton supplies roughly 20% of the oil products needed in the south east. If Coryton is to close, with the loss of 1,000 highly skilled jobs in Essex, there will have to be a major reconfiguration of supplies to the London area. Supplying such volumes from abroad is also likely to be affected by the loss of Petroplus’s other four refineries in Belgium and Germany, which have, in turn, marginally increased product prices elsewhere, since in two of those refineries – in France and Belgium – the workforce has seized the existing stock of oil products as a guarantee of being paid.

The chances of finding a buyer are sadly not all that high. Petroplus used the argument that other independent refiners were going bust as a reason why it itself should be saved. Others will now argue that its demise can only strengthen their own viability. The last thing they want is more competition. Yet there may be a message for western Europe; unless the major oil companies stop simply assuming that the independents will take care of refining for them, then western Europe may soon have very little refining capacity at all. Indeed, it was by buying all these refineries from the oil majors in the early part of the decade that Petroplus got so heavily into debt in the first place. And if you believe being reliant on the Middle East for crude oil matters, then being reliant on their refiners for gasoline, diesel and fuel for aeroplanes might matter just a bit more.

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