The big oil firms offloading their refineries in the open market
The twinkling lights of an oil refinery at dusk show the potential for beauty in industrial landscapes. But the dramatic silhouettes, part ocean liner, part fair, disguise the difficulties within. Decades of poor returns from turning crude oil into gasoline, diesel and other fuels have convinced Western oil giants to get out of the business. In their place come mainly state-run oil firms from Asia, the Middle East and Latin America, and private equity.
Essar, an Indian conglomerate, recently paid Shell $ 1.3 bn for the Stanlow refinery in north-west England. In February 2011, state-owned PetroChina paid $ 1 bn for 50 % of Scotland's Grangemouth refinery and in another at Lavéra in the south of France.
Many more refineries are for sale in Europe and the US. Britain's BP, which is raising cash to pay the bill for the Deepwater Horizon oil spill, wants to sell 2 in the US. Valero, a US refiner, may show interest, though it has just bought a plant in Wales from Chevron for $ 1.75 bn.
US private-equity firms may also be taking a look at BP's plants. According to FACTS Global Energy, a consultancy, over the past 2 years private-equity buyers have snapped up refining capacity of around 1 mm barrel of crude per day. State-backed oil companies, such as PetroChina and Russia's Rosneft, have bought nearly the same amount.
The refining business has suffered from chronic overcapacity, and thus weak margins, since the 1970s oil shocks, which led to a slump in the use of oil-based fuels for generating electricity and heating homes. A respite came in 2005-07, as a rich world and increasingly thirsty emerging economies boosted demand. But that was a high point the rich world may not hit again. Demand for gasoline in the US has fallen, and may never regain its previous peak. Refining margins, having touched $ 4.50 a barrel, are down to one-tenth of that and still falling.
It makes sense for big Western oil companies to get out of such an unprofitable business and put the capital into exploration and drilling. But refineries' weak margins are not deterring oil firms in emerging economies from buying them. One reason is that they are going cheap. This gives the buyers access to declining but still sizeable rich-world markets. Such access is especially useful for those with ambitions to become global oil traders.
As they buy refineries abroad, emerging-market firms continue to build them back home, where demand is still booming. For those firms owned or backed by their home governments, there are other considerations besides commercial ones. China, although it is set to remain a big importer of crude, is desperate to become at least self-sufficient in refining. By 2015 it will boost its domestic capacity by 20 %, taking the total to 12 mm barrel of crude per day. Middle Eastern oil producers are also building refining capacity to add value to the crude they pump out of the ground.
All this extra capacity will keep global refining margins under pressure for at least another 5 or 6 years, says Francis Osborne of Wood Mackenzie, a consultancy. This may not bother state oil companies much, but it ought to worry private-equity firms. So why are they buying? First, because prices are so low. Second, because they are looking optimistically to the long term. Martin Brand of Blackstone, a private-equity giant that has bought 3 refineries in the US in recent years, thinks margins will have recovered in 10 years time, and in the interim there will be plenty of efficiency gains to be made.
Others are sceptical. The European and American refineries' new owners will be far less likely to close them than their old ones. In the absence of such a rationalization of capacity, says Gemma Gouldby of FACTS Global Energy, margins will stay poor indefinitely. If so, the Western oil majors will be glad they got rid of them.
