Business which refuses to obey rules of economics

Date: 10/09/1998

By Chris Johnstone

THE European Commission is keeping a watching brief on the oil refining sector after recurrent warnings from firms that margins are low and some plants will have to be closed.

A survey conducted for the Commission's Directorate-General for energy (DGXVII) at the end of last year warned that capacity will exceed demand for at least the next decade.

“There is a refining surplus of between 70 and 100 million tonnes per annum, equivalent to nine to 13 refineries in the EU,” it concluded.

One miscalculation by the industry in the Eighties has meant an oversupply of refinery capacity for petrol at a time when more and more car owners have switched to cheaper diesel. The resulting petrol surplus and diesel shortage is not likely to disappear even if tax incentives for the latter are scrapped.

Oil companies are only earning an annual average of four ecu per every 100 invested; almost half the required return for normal business. “This level is too low to sustain long-term viability,” added the study.

One of its suggestions was for the industry to get together and create a fund to finance refinery closures, but this has met with little favour from the oil companies.

The study concluded that the Commission could play a large part in paving the way for the overdue shake-out in the refinery sector and preventing national governments from standing in the way with a parochial knee-jerk response.

In spite of the companies' warnings, officials have been surprised by their reluctance to cut capacity. “They do not appear to be following the rules of classical economics,” said one. “Refining margins are low, but companies have consistently refused to cut capacity.”

The high cost of closures, estimated at between 50 and 200 million ecu per plant with 60&percent; of this cost linked to environmental cleaning up, is preventing a correction of overcapacity and poor profitability, claimed the study.

Shell announced earlier this year that it planned to close its terminal on the South Wales coast at Milford Haven.

However, BP has reversed past threats to shut its major plant at Lavera, southern France, and instead it has, until recently, been operated at near capacity.

The study highlighted refinery clusters in south east France, Bavaria and Ireland as leading candidates for restructuring.