Pressure mounts on Europe’s oil refiners

Date: 07/12/1995

By Tim Jones

EUROPE'S oil refiners are being squeezed from all sides.

Developing countries are opting to open their own plants to refine crude oil into petroleum and other products. Often based closer to the origin of the crude, boasting cheaper labour and lower environmental standards, these refineries are making life difficult for their European competitors.

At the same time, even European companies' retail operations are facing a challenge from supermarkets as roadside petrol filling-stations.

So strong are the challenges they face that the question market watchers are asking is simply: who will close first?

Refining margins - the difference between the cost of refining crude and the final profit from the products made - have shrunk to levels which will be impossible to support at many European plants.

As the Gulf War got under way, loss-making refineries were able to survive by working flat out to meet an anticipated increase in demand and rising prices. But as the sales opportunities dried up, the whole sector ran into problems.

“The refining industry in Europe is in a state of structural surplus and this can only be dealt with by closure of existing plants,” admits François Cornélis, the head of Belgian company Petrofina and newly-installed president of the European Petroleum Federation (Europia).

In a recent study, US investment bank Salomon Brothers pinpointed 11 refineries with a capacity of 800,000 barrels a day as running a “high risk” of closure in the coming years.

While some of them may be profitable, they have to be regularly upgraded at very high cost. Since refining margins are so narrow, industry has started to ask whether they should stay open.

Companies have begun to retrench. French firm Total pulled out of refinery building projects in Portugal and the Czech Republic and proposals for a plant in Vietnam, while British Petroleum sold its US refinery Marcus Hook in October.

During the last round of company results, the chief executives of all the major firms warned of the need to close capacity. Talk has even begun about the possibility of the kind of coordinated shutdowns attempted in the steel and petrochemicals industries in 1993.

But Cornélis, who represents the interests of 32 oil companies operating in Europe, cautioned against expecting an agreement even to approach the European Commission with a coordinated shut-down plan.

“At this stage, there is no consensus among the members of the oil industry to visit the Commission on that subject,” he said. “That would obviously be the first thing to do, since it's illegal for us to discuss it. But there is no consensus at all.”

This is despite the fact that many companies consider a unilateral closure of plants to be to the advantage of their rivals, many of which are state-owned and supported firms.

Cornélis intends to approach the Commission to gauge its view on the problem, but he does not expect to be able to construct a joint capacity shut-down programme within the industry for the moment.

“I don't want to set myself impossible targets,” he says. “It's extremely difficult to get unanimity on these subjects and, in this case, there are a couple of large companies which are opposed.”

What the industry can do, says Cornélis, is ensure extra unnecessary costs are not piled on to companies already threatened with plant closures. One recent estimate found the investment cost of existing legislation will be as high as 23 billion ecu.

Nevertheless, he is keen to show that they are ready and willing to meet demands for genuine environmental protection. The industry's lobbies have always insisted that the Commission should begin any environmental legislation with a target and then work out the best way of meeting it. Europia, in particular, took exception to the idea of 'best available technology' to achieve the highest levels of environmental protection without judging whether such a target was excessively high.

“It always comes back to the point of knowing whether it is useful to reduce emissions to the lowest technically possible level; whether it is wise for us Europeans to invest in technologies or new equipment with no obvious benefits at the level of the environment,” says Cornélis.

Similarly, the Commission's proposal for a CO2 tax - aimed at stabilising carbon emissions at 1990 levels in the year 2000 - fails to meet favour within the refining industry.

After the idea of a harmonised tax was abandoned, the Commission came up with a new plan allowing member states flexibility in determining how soon they applied tax rates on different products for a transitional period.

“I believe the CO2 tax would be extremely detrimental to European industry and I don't know how we could compensate for that. We have to remain competitive in our export markets and obviously we will caution everyone on the potential consequences of a CO2 tax,” says Cornélis.

In his view, allowing flexibility for member states could make the proposal even more detrimental to the industry.

“It would be even worse to have a fragmented market in the European Union.”

On the other hand, Europia is more than satisfied with the work being carried out jointly between the Commission and the oil and car industries on developing a European auto-oil programme.

“Our most recent experience about the future of automotive fuels is relatively positive,” says Cornélis. “It was correct that we started from the right premise, which is: what kind of air quality do we want in Europe and when? By taking this kind of approach, we can avoid mistakes and we can put together a programme.”

The programme, started in 1993, aims to address growing public concerns over car exhaust emissions and their possible effects on health. The Commission intends to draw up harmonised legislation for fuels and vehicles in time for the beginning of the new century.

Apart from the health implications of this programme, variations in standards and specifications undermine the prospects for a genuine single market in these auto-fuel products.

“At this stage, it's difficult to talk about a single market for automotive fuels and products. The level of taxation is too disparate, as is the quality of products,” says Cornélis.

“The advantages of a single market are obviously cost reduction, in the sense that it is the best way to optimise logistics and make conditions work. We all know that specifications can sometimes be used as market protection.”

But this will be a long-run programme. “We will see whether we have the will and the confidence to achieve a programme that satisfies everyone. That will not be easy. Even the United States does not have a single market in automotive fuel. The automotive fuels programme is only part of a much larger effort which is to try and define an energy policy for Europe and the place of oil in it.”

While the Commission and Parliament need to be convinced of this, the industry is keen to win over an increasingly environmentalist public. “Our main task,” says Cornélis, “is to convince the population if we want to have sensible solutions to problems in the future.”