Restructuring ahead for crisis-ridden oil industry

Date: 28/03/1996

By Tim Jones

THE oil refining industry in Europe is in a state of crisis.

A long-awaited report from the European Commission due for publication next week will confirm the industry's opinion of the situation, but offer no solutions to its problems.

The report, expected to be adopted by the Commission on 3 April, will acknowledge that a major restructuring of the sector is on the cards, but rule out suggestions of a coordinated shut-down of capacity.

The industry is in a state of structural surplus. Refining margins - the difference between the cost of refining crude and the profit from its products - have narrowed to insupportable levels.

More than ten major European refineries are expected to close during the next few years as developing countries increasingly build their own refineries closer to the origin of the crude oil, taking advantage of low labour and environmental costs.

The report acknowledges that some of these refineries are making profits but, with margins so low, regular and high cost upgradings are starting to look uneconomical.

The list of firms reducing their refining capacity is long. Total has pulled out of projects to build refineries in Portugal and the Czech Republic and Elf-Aquitaine, which only just broke even on refining operations last year, has scaled down its investment in the east German Leuna refinery.

British Petroleum is leading the field in refinery restructuring. In November, it sold its Pennsylvania refinery, Marcus Hook, to Tosco. This will be followed by the sale or closure of its refinery in Lima, Ohio, its Lavera plant in southern France and the Pernis section of the Nerefco joint venture with Texaco in the Netherlands.

In a thorough restructuring of its operations, BP aims to bring its remaining 11 refineries' levels of profitability close to those of competitors in the relevant regions. At the end of the programme, BP's global refining capacity will be reduced by 30&percent; to 1.4 million barrels a day.

The Commission report will also take into account the possibility that BP and Mobil will set a trend with their plans to combine their refining and marketing operations in Europe in a 15-billion-ecu joint venture. This, the firms hope, will allow them to reduce costs by eliminating duplicated activities and through economies of scale.

The next big step will be at Royal Dutch/Shell, which is due to complete a major review of its European refining operations in May. The company's Berre L'Etang refinery in France and Shell Haven in the UK are believed to be high on the list of restructuring targets.

The Commission report acknowledges that firms are going their own ways in cutting back on capacity and any hope of coordinating a shut-down - as the Commission tried and failed to do in the petrochemicals and steel industries in 1993 - would be doomed. “There is no question of coordinated shut-downs,” a Commission official said. “If there is any restructuring, it will depend on the companies themselves.”

All the Commission will do is underline again the “strategic” importance of maintaining oil supplies in the EU. “Nobody could argue with that,” acknowledged an oil industry official. “The advantage a comment like that has is that it can be used later to justify measures to keep sufficient refining in the EU.”

Industry lobbyists have been waiting for the report for months, but it was delayed when the director-general of DGXVII, responsible for energy, was replaced.

Pleased that it is finally being published, the European Petroleum Federation is nevertheless disappointed at the contents. “It gives a reasonably accurate picture of the state of the industry but does not put forward any solutions,” said a spokesman.