U.S. Shale May Force More European Refinery Closures

21.02.2013 -

Europe's hard-pressed refining industry faces more closures as its competition in the United States enjoys the double bonus of growing domestic shale oil supply and cheaper electricity bills from shale gas. Traditionally, Europe's refiners have exported surplus gasoline to the United States and emerging markets and served their home markets with as much diesel as they can produce. But the U.S. shale boom is changing the dynamic, with American refiners now enjoying profitable advantages.

The United States is now a net refined product exporter of more than one million barrels per day (bpd), with U.S. Gulf Coast refiners competing with European refiners for markets in Latin America. "Given the poor state of refinery margins in Europe where the industry is disadvantaged by high feedstock costs relative to the U.S. and structurally declining fuel demand, we would not be surprised to see further closures," said Soozhana Choi, an energy analyst at Deutsche Bank.

Last year European refineries benefited from better-than-expected gasoline, gasoil and fuel oil profit margins due to unexpected outages such as Venezuela's Amuay, closures like the UK's Coryton and prolonged maintenance.

In September 2012 overall margins hit $12.43 a barrel with gasoline margins at five-year highs of $22 a barrel and gasoil cracks at a one-year high of $21.50 a barrel.

But margins are fading as some of last year's lost capacity in Europe returns under new ownership and extra capacity comes onstream at Motiva's Port Arthur, Texas refinery and Total's Jubail plant in Saudi Arabia. "European refineries will see another wave of pressure as they will be squeezed between the increased U.S. product export capacity and the growing refining capacity East of the Suez," said Olivier Jakob, an oil analyst at Petromatrix. "Especially vulnerable will be the older, less sophisticated capacity," said Choi. European coastal gasoline-oriented refineries are also expected to feel the pressure as competition in export markets ramps up.

While the outlook for refineries like France's Petit Couronne and the UK's Milford Haven is uncertain, closing refineries outright is politically difficult.

As a result, Jonathan Leitch, a senior analyst at Wood Mackenzie, sees more refineries being converted to alternative uses such as storage terminals or base oil plants -- as has happened at Shell's German Harburg, the UK's Coryton and ENI's Venice plant which will produce biofuels from 2014.

Since 2009, some 1.8 million bpd of European capacity has been mothballed, according to Deutsche Bank data, with some 600,000 bpd of closures in 2012, leaving only 10.7 million bpd of operating capacity in the European Union plus Norway.

As well as Petroplus's Coryton, refineries closed include LyondellBasell's Berre, Wilhelmshaven in Germany, and several plants in Italy which have been idled or are converting to alternative uses such as Total-ERG's Rome refinery and ENI's Gela.

US shale double advantage
Meanwhile, U.S. refiners cracking domestic crudes have rapidly outpaced European refiners in profitability. Last year U.S. Gulf Coast refineries using West Texas Intermediate (WTI) made over $40 a barrel at the height of global product tightness in September. "The U.S. Gulf Coast refiners are effectively getting discounted crudes against international markets, and that helps their margins," said Leitch.

U.S. refineries also benefit from the abundance of shale gas, which has provided cheaper fuel for power generation and feedstock for other processes. This "double advantage" gives them a key structural gain over their European rivals, said Ed Morse, Citi's head of global commodities research. U.S. Gulf Coast refiners currently make some $30.50 a barrel overall compared with European refiners' $4.70 a barrel. U.S. refiners such as Valero, Marathon and Phillips 66 no longer need to import West African crudes, but rather can rely on a steady supply of domestic oil.

Citi analysts believe the expansion of the Seaway pipeline, which takes WTI from Cushing, Oklahoma to the Gulf Coast, and other pipeline start-ups, mean West African crude flows to the U.S. could fall to zero by end-2013. Even the U.S. East Coast, which has seen some refinery shutdowns of its own such as Hess's Port Reading, New Jersey plant, will soon benefit from the shale boom with more oil arriving by barge or rail from the mid-continent.

The completion of the Colonial Pipeline expansion will also mean more oil products moving from the Gulf Coast to the East Coast. All this will further erode European refiners' traditional U.S. East Coast gasoline market. The start up of new capacity in the Middle East and Asia may add to the pressure by directing surplus production to Europe. "There's a potential for more diesel imports into Europe, which should undermine diesel margins," said Leitch. "It's not a strong outlook. There is room for more closures."