Expectations that overcapacity will drive a fresh wave of refining closures in Europe in the coming years may be overblown due to the different priorities of the region's new breed of plant owners, according to the chief market analyst at trader Gunvor.
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Most oil market analysts are predicting that 1.5 million-2 million b/d of further European refining closures are needed to balance the impact of weak demand for fuels and growing competition from new plants in the Middle East, Gunvor's David Fyfe told a Platts oil conference Tuesday in London.
The calculation is based on the assumption that average crude runs in European refineries need to recover from current levels of about 75% to a more sustainable 85% for most plants to remain profitable, he said.
With Europe's nameplate refining capacity standing about around 15 million b/d, most forecasters prescribe that 10% of region's capacity needs to shut for refining margins to improve, Fyfe said.
But ownership of many European refiners has shifted in recent years to include traders such as Gunvor and national oil companies, both of which follow a different set of strategic drivers than integrated oil companies.
"I think there will be closures, particularly in southern Europe, but you also have to look at the complexion of who is operating in European refining," Fyfe said.
Gunvor expanded into refinery ownership in 2012 when it bought two European refineries -- in Belgium and Germany -- from bankrupt Swiss firm Petroplus. Rival trader Vitol also bought the 68,000 b/d Cressier refiner in Switzerland, one of five plants left by the failed refiner in 2012.
The trader-refiner model relies on operating efficiencies created by pairing a refinery's storage and logistical advantage with a traditional crude and product trading business.
"We are very happy with the assets we've bought and we think we can operate them more effectively, more efficiently than our predecessors," Fyfe said. "We are also very aggressive in terms of hedging our exposure to crack spreads so we've been able to surf our way through what has undoubtedly been a fairly poor period of profitability for European refining."
Elsewhere, Russian oil companies Rosneft and Lukoil have bought up cheap and distressed European refineries to reconfigure the plants for their own crude in the hope that margins will improve down the road.
"What I'm saying is that the simple calculation that 1.5 [million]-2 million b/d will ultimately close may be a bit simplistic," Fyfe said.
SHORT DIESEL CAPACITY
Downsizing at the world's integrated oil companies and the failure of pure-play refiner Petroplus has seen almost 2 million b/d of plant closures in Europe since 2008.
But despite the closures, crude throughputs in Europe slumped to a 25-year low of about 10 million b/d at the end of last year as refiners struggled to mitigate the impact of anemic refining margins.
Also speaking at the conference, the International Energy Agency's director of markets, Keisuke Sadamori, estimated that nearly 10 million b/d of global refinery capacity is at risk of closure by 2035 as falling demand in Europe and the US continues to swell overcapacity in the sector.
Growing volumes of biofuel and natural gas liquids production, which does not need refining, is also feeding an increasing proportion of liquids fuel demand, he said.
Nevertheless, refiners still need to invest to meet a surge of more than 5 million b/d in global demand for diesel by 2035, almost triple the increase in gasoline use he said.
Looking ahead, the IEA has estimated that new capacity additions in Asia and the Middle East will continue to depress refining margins this year.
A total of 1.7 million b/d of new capacity is scheduled to be added in the non-OECD in 2014, higher than the estimated 1.5 million b/d of new capacity, the IEA said in its latest long-term energy outlook.