European refining landscape has evolved amid plant closures and modernizations
European refining has undergone massive changes over the last decade, as local plant closures and increased competition from newer, more modern refineries in the US, India and the Persian Gulf have contributed to the gradual whittling of refinery margins in Europe. Distillates, once the driver of the margin in Europe, have become less profitable overall as imports have jumped, particularly from Russia amid large-scale refinery modernization.
As the environment for product supply and demand has changed, Europe’s refiners have either evolved or closed as a result. While the financial crisis of 2008 and 2009 saw the first dominoes begin to topple, the recovery in crude oil outright prices throughout 2011 and 2012 began to exert even more pressure on Europe’s more vulnerable plants, culminating in the full-scale demise of the region’s largest independent refiner Petroplus in January 2012 and the full-scale closure of three of its plants, including its largest, the 220,000 b/d Coryton refinery on the banks of the Thames.
Petroplus’ demise was only the most high-profile in a spate of changes to hit the European refining sector. A host of refineries were halting and changing into storage or switching to biofuel facilities. Some, like the UK’s Lindsey and Stanlow, reduced their capacity, while others like PKN Orlen’s Lithuanian refinery opted to run at minimum capacity. Many were snapped up by independent traders, breathing a new life in plants threatened by closure or conversion.
Several of Petroplus’ refineries escaped closure as independent traders, who in the past have steered away from refinery ownership, entered in the business. Vitol bought Switzerland’s Cressier, while Gunvor acquired the former IBR Antwerp refinery and the German Ingolstadt. Subsequently, Gunvor also bought KPI’s Europoort refinery in Rotterdam, whose future was threatened by a potential conversion to a terminal.
Northwest European refining and storage
But others were not that fortunate. Some, like Germany’s 260,000 b/d Wilhelmshaven plant and the UK’s Coryton refinery, were converted into storage and import terminals. Others, such as Italy’s 80,000 b/d Porto Marghera and 105,000 b/d Gela plants, were revamped into bio-refineries largely producing diesel from bio-feedstocks. France’s former 153,000 b/d La Mede refinery near Marseille is currently undergoing transformation into a bio-refinery.
Since 2009, Europe has lost some 2.2 million b/d worth of crude oil refining capacity across the continent and, despite efforts to diversify crude slates and maximize margins and flexibility, Europe is expected to see further changes to the refining landscape moving forward.
Refinery margins in Europe closely track outright prices
Improved refining margins since 2015 have significantly slowed down the rate of refinery closures in Europe, driven largely by the heavy drop in outright prices throughout the second-half of 2014. The further decline in outright prices over the tail-end of 2015 saw margins across Europe strengthen further, as product prices remained broadly supported relative to the significantly weaker crude market.
European refinery closures: 2009-2015
In addition to benefiting from lower outright prices, refiners in Europe have been working to take advantage of the wider array of crudes on offer in the European market, particularly as standard refinery feedstocks in Europe have found strong demand outside of the region, particularly in Asia. Many refineries have also been looking how to optimize their crude slate in order to achieve good margins from less costly feedstocks. Many have also ramped up integration, where possible, with nearby petrochemical facilities, also with the aim to optimize feedstock utilization.
In the era of low margins, refineries were moving their slate with the balance shifting to medium and heavy crude, which hit the market in abundance in 2015 and 2016 as producers in the Persian Gulf looked to expand their reach into the European markets. The construction of a new pipeline in Northern Iraq and the semi-autonomous Kurdish region’s push to grow its export capacity independent from Baghdad, saw huge volumes of KBT hit the European market, with flows going as far North as Sweden and Poland and all the way in to the Black Sea, where refiners began running it in lieu of Urals.
In southern Iraq, the development of the new Basrah Heavy stream, helped to stabilize the quality of Basrah Light and, while both Basrah Light and Basrah Heavy remained predominately directed eastwards, as much as a third of the loading program could find its way into the European refining market each month, either on the primary or secondary market.
Furthermore, the lifting of US sanctions against Iran in early 2016 helped to bring Iranian production back into the European refining market after years of absence. Refineries in the Mediterranean were always big buyers of Iranian crude, but upon the lifting of sanctions in early 2016, Iranian crude became an increasingly large portion of the refining diet in Rotterdam.
Modernization of the remaining refineries in Northwest Europe has given many plants the ability to process heavier, sourer and more acidic crudes which typically attract higher discounts than lighter, sweeter, more easily processed barrels.
In Spain and Portugal, refineries that had previously processed 70% medium and heavy crude increased it to more than 80% of the slate. Repsol’s refineries in Spain, for instance, process 70 different types of crude, whereas Italy’s Saras typically processes as many as 40 different types of crude. Greece’s Hellenic has more than doubled the number of crude grades on its slate in the last few years.
The UK’s Stanlow has diversified its crude slate by introducing 37 new grades and Essar Oil UK is planning to increase the capacity of the plant, a mere three years after reducing it, altering its FCC feedstock away from VGO and towards heavy residue.
Improved margins and stronger crude optimization have resulted in a slowdown of the rate of refinery closures in Europe. The last few years have seen no new announcements for closure, and in the most recent move, Croatia’s INA seems to be abandoning to idea of shuttering Sisak by opting to only close the FCC at the site. PKN’s Orlen Lietuva refinery, on the verge of closure just three years ago, achieved a 104% utilization rate in the last quarter of 2017 on what the company called “favorable market conditions.”
Speaking at the ADIPEC conference in Abu Dhabi in November, the head of refining at Austria’s OMV, Manfred Leitner, said his company was processing around 30 different crudes, and there were still growth opportunities for petrochemicals in Europe. But he also argued that the survival skills honed by European refiners in the last decade are marketable in growth markets in the Middle East and Asia. OMV is a quarter-owned by Abu Dhabi state company Mubadala, which itself owns refinery operation in Pakistan.
“The product growth will happen in Asia… in the Middle East, so these are the places where new refineries will be necessary and these are the places where, as well, petrochemical production will be necessary. That can only be the strategy: for companies like OMV to yes, optimize and streamline more the European market in the European business, but growth we will just find elsewhere,” Leitner said.
The outlook could shift for refiners as we move into the first half of 2018, as higher outright prices have once again cast a shadow over the refining sector in Europe. Both Shell’s Fredericia refinery in Denmark and Lukoil’s ISAB refinery have been put up for sale and have struggled to see proposed deals come to fruition. How the sector weathers changing market conditions moving forward could see more of Europe’s refineries come under pressure.
Sour crude margins vs Platts Dubai M1
Sweet crude margins vs Dated Brent
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