Europe's refining complex braces for summer heat wave

As heat waves sweep Europe and wildfires blaze across Greece and Spain, refiners have prepared for another year of heat disruptions becoming increasingly prevalent for the sector.

On July 29, TotalEnergies reported a heat-related disruption at its Gonfreville refinery in Normandy, and analysts have warned that up to 1 million b/d of European refining capacity could be at-risk in a peak outage scenario.

According to the Copernicus climate change service, the three warmest years on record for Europe have all occurred since 2020 and temperatures are already forecast to top 40 degrees Celsius across parts of the Mediterranean and Balkans in August.

Rising temperatures have increasingly tested refining infrastructure built to withstand the cold rather than heat waves, making heat-related outages a growing swing factor for Europe's downstream oil industry.

In 2023, refiners cut crude runs by around 10% due to heat waves across Europe, with higher levels in the Mediterranean, according to Aldo Spanjer, Senior Commodities Desk Strategist at BNP Paribas, suggesting similar volumes could be at risk if August temperatures near similar levels.

"Last year loads of stuff went down," said one European refiner, who said that heat-related run cuts remain a real risk but aren't expected to reach 2023 levels. This year, analysts are modelling a maximum of 15% run cuts in the Mediterranean, while Northwest Europe could avoid major disruption, he said.

Yet with the end of the 'platinum age of refining' now firmly in sight as margins recede, refiners have proved reluctant to make sweeping investments in heat-proofing their operations, leaving markets exposed to capacity reductions.

Operational challenge

Warmer temperatures pose complications for the crude distillation process, which relies on cooling vapors to separate fractions.

More ambient temperatures reduce the efficiency of using air for cooling, causing cooling systems to be overworked and sometimes necessitating run cuts as temperatures veer above the mid-thirties.

According to Hungarian refiner MOL, its Danube refinery near Budapest is designed to operate reliably at average daily temperatures between -20 and +35 degrees Celsuis, while Poland's Orlen has said Plock and Gdansk were built to operate in -25 to +36 degrees.

MOL has so far avoided run cut territory, a spokesperson said Aug. 2, however, analysts flagged that Eastern Europe could represent a significant chunk of capacity-at-risk as temperatures tick higher.

Preem, a Swedish refiner, said that hot weather can also cause operational limitations across its sites, despite benefitting from cooler temperatures in the Nordics, though it has never had to halt operations entirely due to high temperatures.

Refiners typically seek to cut runs in high-heat scenarios, sometimes for as little as a 24-hour window, though protracted heat waves can force entire units to be taken offline.

The problem is particularly acute for plants running lighter crude slates, which require more cooling in the separation process. Refiners processing WTI Midland and other light sweet crude oil could therefore face higher outage risk, in a double blow to producers that opted for the US grade as a substitute for heavier Russian Urals supply.

According to S&P Global Commodities at Sea data, Spain, Italy and France have been the largest Mediterranean consumers of WTI Midland crude in 2024 to date, potentially making their refiners on the Mediterranean basin more likely to have to curb runs.

Traders expect that run cut impacts will be uniformly felt across all oil products, though higher exposure for refineries with higher light-end yields could produce greater upside for products such as gasoline and naphtha in the event of shut-ins.

Risk management

Despite growing signs that extreme temperatures could become a persistent challenge for European refiners, investments in more heat-resilient infrastructure has been meager.

While plants can install additional cooling capacity, upgrade costs, refinery downtime and potentially higher operating costs all look unattractive as refiners face a declining margin environment after post-2022 highs.

With S&P Global Commodity Insights analysts forecasting economic run cuts in Europe by as early as late 2024 and an imminent wave of downsizing, producers could stay reluctant to invest in heat contingency plans.

"If you're a refinery in Europe, you probably see margin downside further down the line. So you're probably not going to do these investments right now. You're going to maximize your run time wherever you can because looking at outlooks over the next 2 to 3 years, it's probably going to get worse," said BNP Paribas' Aldo Spanjer.