Grangemouth shutdown revives fears in Europe

Another downstream facility taken offline highlights market shift

European refiners are struggling to face new market realities.
European refiners are struggling to face new market realities.

Europe’s downstream industry saw a small window of respite in 2012 when the wave of refinery closures seemed to ease temporarily. But this month, the shutdown at the Grangemouth refinery in Scotland and another possible shutdown of the Mantua refinery in Italy have revived concerns over how stretched the industry has become.

The International Energy Agency has reported that a total of 16 European refineries or 1.7 million bpd of refining capacity has been mothballed since 2008. European refining capacity stood at around 16 million bpd in 2012 the agency says.

With the rise of diesel over gasoline as the world’s choice for transportation, Europe’s aging refineries, many of which were built in the mid-20th century to produce gasoline, are having a tougher time selling their products on local markets. And when it comes to competing on the international field, European refiners have proven to be no match for the Middle East’s easy and cheap access to feedstock; nor North America’s technologically sophisticated facilities.

European refiners have also begun to feel the pressure from their Russian neighbour. Russia has directed more investment towards the downstream sector. The hydrocarbon giant has simultaneously boosted its refining and petrochemicals production capacity, while making it possible to directly supply diesel to European markets (in the past Russian diesel needed to be treated before it could meet European standards). Russia exports almost 500,000 barrels of diesel a day to northwest Europe, a 200,000 bpd increase from last year, says a report by the Wall Street Journal.

“2013 may go down as one of the weakest in recent decades, as refining margins in the third and fourth quarter plummeted due to high crude costs and weak product demand,” said a report by Reuters on the state of Europe’s downstream industry.

GlobalData, a research and consulting firm has also reported that Europe has suffered more than any other region from the reductions in refining margins, due to its over-capacity and sliding demand amid a lingering economic recession, which has destroyed many companies’ hopes of profitability.

The message is clear, European refiners need to devise a new strategy if they hope to survive in the new age where a post-shale gas revolution in North America and massive capacity expansion in the GCC will continue to flood the market.

“Europe faces a new reality. The European chemical industry and various governments need to focus on more resource and cost efficiency manufacturing, targeting incentives for innovation at the development stage and instituting a robust regulatory framework based on good science with clear goals. Governments must proactively support this transition – it cannot be done by industry alone,” said Mohamed Al-Mady, vice chairman and CEO of Saudi Basic Industries Corporation (SABIC).

It appears that very few European companies have been able to heed this advice. Retrofitting a gasoline-producing facility which may be half a century old, to produce diesel that complies with increasingly stringent European standards may be out of the question for many cash-strapped refiners. This is most likely why the region will continue to see more refineries close in the near future. Plus, oil producers, even those based in the US or Europe prefer to build refining facilities in the Middle East as it gives them to two crucial advantages, one, access to cheap feedstock and the other, customers both in the lucrative European market as well as the booming Asian market.

Finland’s Neste Oil is one of the few companies that managed to swim against the tide. Whereas the European refiners that are still standing have been forced to cut processing rates to an average of 75 per cent of production capacity, Neste’s Porvoo refinery is still operating at 100 per cent, according to another report by Reuters. The company has forged ahead with the production of biodiesels and renewable fuels that have been extremely well received in its a variety of markets, 68 per cent of its sales go towards Baltic markets, another 20 percent towards Europe and 12 percent to the USA, Africa and Asia, adds the report.

Whether other refiners in Europe are able to follow Neste’s lead is still unclear, but for the struggling downstream industry, it has become increasingly clear that business-as-usual in Europe could soon mean no business at all.

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