Refiners in Europe and the US are curtailing production

Mar 16, 2009 01:00 AM

by Lananh Nguyen

As demand for oil products slows, some refineries are likely to become a burden that will be hard to shake off. Refining margins -- the difference between the price refiners pay for crude oil and the price they get for their products, such as gasoline -- remain depressed because of weak demand from recession-hit economies and new refinery capacity coming online in Asia.
Mike Wittner, head of global oil research at Societe Generale in London, estimates the European 5-2-2-1 crack spread, a proxy for refining margins, will fall to an average of $ 3.46 a barrel this year from $ 6.53 last year. As a result, refiners in Europe and the US are curtailing production to reduce operating costs and stem losses. Those who want to rid themselves of refining plants altogether are finding themselves in a difficult position. Environmental cleanup costs in some cases can make it less expensive to run a refinery at a loss than to shut it down.

Refineries that are up for sale are expected tobe a tough pitch. ENI's 84,000-bpd Livorno refinery in northern Italy and Petroplus Holdings' 117,000-bpd Teesside plant in northern England were put up for sale in February. Teesside refinery's gross margin fell 95 % in the fourth quarter to an unaudited 60 cents for every barrel of crude oil it processed, compared with $ 11.98 in the previous quarter, Petroplus said.
Refinery valuations have dropped about 40 % since 2007, said Ennio Senese, an executive partner at Accenture in Rome, largely because of the economic downturn. The Teesside refinery is valued at EUR 70 mm to EUR 100 mm, or $ 90 mm to $ 130 mm, he said. The Livorno plant is valued at between EUR 120 mm and EUR 140 mm, he said.

ENI hopes to find a buyer or partner for Livorno in the next few months, an ENI spokesman said, adding that a number of parties had indicated possible interest. Petroplus said in February that it hoped to sell the refinery within six months.
"If they sell low... that would probably release them from huge daily losses," Mr Senese said. Simply closing the refineries may itself be too costly for some refiners.

"The environmental cleanup bill can be horrendous... the costs of closure won't be palatable," said Richard Griffith, director of oil and gas at Evolution Securities in London.
"Somebody needs to pay the bill eventually, and if a refinery is shut down, the last one to hold the key is the one who is expected to pay," Mr Senese said.

There is a third option: Turn the refineries into storage sites. Petroplus has said it would consider transforming facilities into storage terminals. The storage business has become more lucrative as oil producers and trading companies hedge their exposure to future oil prices. Conversion to storage also could help owners eke out some returns from their assets.
"It's not as expensive to shut down when you transform it into a storage area," said Olivier Abadie, Paris-based director of downstream oil for Europe at Cambridge Energy Research Associates.

Difficult times for refiners in the next six years could accelerate some restructuring already taking place, Mr Abadie said, and signs are emerging that more refiners will need to adjust their operations to accommodate their low margins.
French oil major Total said recently it plans to cut 249 jobs at its French refineries by 2013, and a further 306 jobs at its petrochemical operations by 2012. If implemented, Total's restructuring plan would reduce the capacity of its Normandy refinery to 12 mm tpy from 16 mm tons, shifting the plant's yield toward diesel and reducing surplus gasoline production.

Source / The Wall Street Journal
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