Sector News

Cheap Oil Can’t Crack European Refiners’ Woes

February 23, 2015
News
Europe’s refining sector is getting a break from its misery. But this spell of relief might not be good for its well-being in the long run.
 
Lower crude-oil prices have given a fillip to those companies that process it into products like gasoline. European refining margins more than quadrupled from the first to the last quarter in 2014, according to French oil major Total , hitting their highest levels in two years.
 
Product prices haven’t declined as rapidly as those of crude oil, and the latter also can ease another disadvantage faced by Europe’s refineries: namely, the cost of energy used to run them, versus U.S. and Middle Eastern rivals.
 
This doesn’t look sustainable. Globally, surplus refining capacity is rising, according to the International Energy Agency, and could hit 5.4 million barrels a day in 2017, up from 3.2 million last year.
 
Even though Europe has seen about two million barrels a day of capacity taken offline since 2008, Total thinks another 1.5 million to two million barrels a day, or more than 10% of current capacity, needs to go. That is especially the case as more modern, export-oriented refineries get up and running in Asia.
 
If anything, refining’s new lease on life may hurt rather than help this process. Better profitability can induce refiners to crank up facilities, given utilization rates of less than 80%, notes Barclays. Italy’s Eni said recently that its volumes would be higher this year than last, as it seeks to “capture short-term opportunities.”
 
Higher margins also may ease the pain for struggling refiners or bit players who bought unwanted or bankrupt assets in recent years and might otherwise have considered exiting.
 
Meanwhile, as Total gears up to attempt further restructuring of its downstream business in France this spring, higher margins won’t help in negotiations with politicians concerned more with energy security and protecting jobs.
 
Refining’s reprieve could last longer if cheaper oil meaningfully stimulates demand. But while lower oil prices tend to mean more driving in the U.S., Europe’s higher taxes on every gallon of fuel blunt the impact there, notes Sammy Six at the Clingendael International Energy Programme.
 
In any case, vehicle efficiency gains, which pull the other way on demand, look set to accelerate. BP sees fuel economy improving by 2.1% a year through 2035, compared with an annual rate of just 1.5% over the past decade. In the emerging world, huge projected increases in vehicle numbers portend rising consumption. But BP sees transport demand for oil in the industrialized world declining through 2035, thanks in part to tighter policy and rising competition from hybrid or electric cars.
 
As Europe’s refiners battle to restructure or close capacity, they are in all likelihood chasing regional demand that is in long-term structural decline. If temporarily improved fortunes obscure this reality, it will only delay the actions necessary to deal with it.
 
By Helen Thomas
 

Related News

August 23, 2019

The higher purpose of being a CEO

Borderless Leadership

When I left my second large company experience to become President of a small manufacturing company I did so driven by ego; I fancied the title. Soon enough I realized […]

August 23, 2019

As Brexit nears, Britain’s drugs, devices and pricing regulators seek the exit

Life sciences

Firm details on exactly how the U.K. will regulate new medicines is still to be decided after it leaves the EU later this year (caveats on timing abound), but we […]

August 23, 2019

The Simply Good Foods Company acquires Quest Nutrition for $1bn

Food & Drink

The Simply Good Foods Company, the owner of Atkins-branded food products, has secured a deal to acquire protein snack maker Quest Nutrition for $1 billion. Quest, which sells a range […]