Back from the brink: Europe's oil economy

Europe has long been assumed to play a declining role in the world of oil, a reflection of political and economic stagnation, dwindling North Sea production and efforts to banish fossil fuels.

But a run of strong oil consumption statistics together with stable North Sea production suggest a more buoyant picture for the region's hydrocarbon industry.

In terms of European oil demand, the International Energy Agency has revised upward its assessments several times in recent months, putting in doubt its best-guess scenario in March of a half-million b/d drop in consumption in European OECD countries between 2018 and 2022.

For all its efforts to reduce oil consumption and promote electric vehicles, Europe remains a bigger oil consumer than China, with demand approaching 15 million b/d.

One interpretation is that this strong demand reflects the lower oil price environment in place since 2014. IEA senior analyst Christophe Barret says lower prices pushed up European oil demand by 150,000 b/d in 2014-16, but that the recent growth won't last.

But upward revisions to Europe's economic outlook by the International Monetary Fund suggest a sustained recovery, including in the energy-intensive industrial sector. The IMF now foresees economic growth in the eurozone of 2.1% this year and 1.9% next year, contrasting with economic shrinkage in 2012-13.

The oil industry's attitude has also changed since the days when Shell's then-chief financial officer Simon Henry resembled a Brexiteer in his scorn for Europe, remarking in 2011 that "most moves" by the European Commission tended to damage European competitiveness.

With as much as 3 million b/d of European refining capacity shut between 2008-13, forecasting further closures was de rigueur among industry leaders in the first half of the decade.

But now, reports from Central and Southeast Europe suggest particularly strong oil demand there, with the polluting effects of diesel apparently seen as a less urgent concern. The IMF's latest projection is for Poland's economy to grow by 3.8% this year, as it gradually catches up with western Europe.

In the Mediterranean markets, Italy's Eni also sounds optimistic; it highlighted a "stable consumption environment" in Italy in its second-quarter financial results; a contrast with frequent grumblings about "structural headwinds" and "increasing competitive pressure" under previous CEO Paolo Scaroni. Eni's indicative refining margin was up 15% on the year at $5.30/b.

Europe's largest refiner, Total, exemplifies the new mood. It slashed its European refining capacity by about a fifth in 2011-16, to just short of 1.5 million b/d. But the French major reported a 17% increase in its indicative refining margin in the second quarter compared with a year earlier, to $41/mt.

For sure, there are factors that could upend the refining sector's recovery. From competition from Russian oil products, to the Catalonia independence movement, risks abound.

But then there are always challenges in the highly competitive oil markets, and European energy companies have shown an ability to adapt, for example raising the quality of fuels in response to regulatory standards that tend to be copied around the world.

A little weather luck also helps, as the recent hurricanes in the Americas showed, spurring arbitrage shipments across the Atlantic.

No doubt European refiners are also relieved that low oil prices have hampered planned investments in refineries in South America and West Africa, bolstering European oil product exports to those regions; refinery throughput in Latin America is set to fall by 300,000 b/d this year according to the IEA.

UPSTREAM CONFIDENCE

The signs of recovery are also matched in the upstream. The North Sea industry, though dwarfed by OPEC, Russia, or US shale, has weathered the oil price slump, with production in Norway and the UK set to remain stable to the end of the decade.

OPEC's production cuts have supported prices of European crude, opening up periodic arbitrage to East Asia. At home, European refiners continue to prefer North Sea, or increasingly Caspian crude over Russia's Urals. If anything, North Sea crude faces growing competition not from Urals, but from an influx of US crude.

And while the UK North Sea industry's long term prospects remain uncertain, European oil majors can still claim to be doing industry-defining deals around the world, from Iran to Brazil to Mexico.

Commercial success -- sometimes dependent on a readiness to deal with governments subject to international sanctions -- is also a product of intellectual and technological leadership, engendered in industry centers such as Aberdeen, and universities around the region.

Even on Brexit, the industry offers a somewhat reassuring perspective with UK-based companies seeing pluses and minuses; the repatriation of regulatory powers is seen by some as helpful. Indeed the North Sea industry could be portrayed as an object lesson in reaching out to new markets; China's teapot refineries have developed a taste for North Sea crude oil.

Inevitably a "hard" Brexit, with minimal accord with Brussels, would create complications. The need for "frictionless" access to technology from the continent is a concern for North Sea producers. Brexit's opponents will be quick to point out that North Sea crude exports to Asia were kick-started by an EU-South Korea trade deal.

However the chips fall, Europe's oil industry is looking, if not in rude health, more resilient than it has for some time, and better able to fight for its global role.