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Commodities 2021: More gloom for European refiners in 2021 on weak margins, new capacity

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Commodities 2021: More gloom for European refiners in 2021 on weak margins, new capacity

Highlights

COVID-19 exacerbates 'structural weakness'

More capacity expected to close in coming years

New refineries, upgrades elsewhere pose challenges

London — More European refinery closures and conversions are on the cards for 2021 after dominating the sector in 2020 when the COVID-19 pandemic led to plunging demand for most oil products, with very weak margins and new capacity weighing on the sector next year.

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"We are barely 10-20% of the way in what will close in the future," according to Jonathan Leitch, Director of EMEARC Consulting at Turner, Mason & Company.

2020 was meant to be so different, with the promise of healthy margins for those refiners in a position to benefit from the introduction of new International Maritime Organization-compliant 0.5% sulfur marine fuel.

"The industry was expecting a banner year for high conversion refinery margins," according to an S&P Global Platts Analytics report. But even before COVID-19 struck, "an extraordinarily warm winter" cut distillate demand "followed by a knockout blow to demand from the COVID-19 lockdowns," Platts Analytics said.

At the end of March, after a few weeks running hard on cheap crude and ignoring tumbling demand, refineries across Europe started cutting runs on a grand scale. In Italy they dropped to around 50-60%, while in France several refineries stopped processing or didn't restart after maintenance. Plants in Spain, Portugal, Germany and the UK followed suit, with partial or full shutdowns and reduced throughput. For some, COVID-19 delayed or brought forward maintenance plans, but for others the consequences were more severe.

Gunvor's Antwerp refinery stopped processing crude in May and was then mothballed indefinitely.After a five year pause since the last refinery closure in Europe, the list started growing, with Finland's Naantali due to close permanently, UK's Grangemouth potentially mothballing two units, and the permanent halt to crude oil processing at France's Grandpuits.

Yet for now this remains only "a small amount compared to other parts of the world," said Jonathan Leitch. "There could be a further 1 million-2 million plus b/d of refinery closures in Europe on top of those already announced."

But while there could be "tougher times ahead," Leitch thinks it likely that refiners "can look forward to healthier margins in the post-COVID world" as demand improves next year amid the rollout of COVID-19 vaccines.

The International Energy Agency expects improved oil products demand next year to result in 500,000 b/d higher throughput at European refiners after a 1.5 million b/d decline in 2020, with runs expected to remain below Q3 2020 levels until Q3 2021.

New capacity

For European refiners, COVID-19 only exacerbated structural weakness due to surplus gasoline production and competition from new capacity elsewhere in the world, according to Leitch. "[But] the redundancies that arise from closures are difficult to accept politically."

However prolonged poor margins could speed up that process.

European margins are expected to remain "very weak" in Q1, according to Platts Analytics, adding that despite potential improvement during the gasoline season, they will "likely remain well below average levels."

Meanwhile, new refineries are starting up. While Europe is unlikely to feel the impact of new plants in Asia which will mostly meet surging local demand, new export-oriented refineries in the Middle East will be "targeting" Europe as an outlet, said Leitch.

Two new refineries in the Middle East, Jazan and Al-Zour, are due to start up at the beginning of next year, while several upgrading projects are nearing completion.

Platts Analytics expects that increasing Middle East refinery runs in 2021 will result in "increasing product exports to Africa and Europe."

Beyond 2021, once it comes online, the long-anticipated Dangote refinery in Nigeria will be a "potential game-changer," according to Platts Analytics.

Following its start-up, West Africa "which is a huge trading outlet for Europe will likely disappear," Leitch said.

Modernization at Russian refineries, albeit continuing at a slower pace, will further boost Russia's significant diesel exports to Europe and could also turn Russia into a gasoline exporter.

Although Russia is not expected to pose significant challenges, Leitch said it "all adds together."

Conversions

In addition to closures, Platts Analytics expects more facilities to "be converted to alternative uses such as making renewable diesel/jet biofuels."

After France's Total confirmed the conversion of its Grandpuits refinery into a "zero crude platform," Italy's Eni, which already has two biofuel plants, said it may speed up the conversion plan for some of its traditional refineries, while Spain's Repsol plans to triple its biofuels production to more than 2 million mt/year by 2030.

Several refineries, including Austria's Schwechat, Sweden's Lysekil and Finland's Porvoo, will be boosting renewable fuels production at the expense of fossil fuels.

While conversions can shift some of the immediate pressure for closures, there "is a limit to how much of this type of facility the market actually needs" and more closures might be needed, Leitch said.

But the longer they are delayed, the more it will hurt. "If you pull a sticking plaster over a cut slowly, it hurts for longer," he said.

European refinery closures/conversions

Refinery
Capacity b/d
Country
Status
Gunvor Antwerp
107,500
Belgium
Indefinite closure
Naantali
58,000
Finland
Closure
Porto
110,000
Portugal
Temporary closure
Donges
220,000
France
Temporary closure
Grandpuits
101,000
France
Conversion
Rijeka
90,000
Croatia
Temporary closure
Coruna
120,000
Spain
Temporary units closure
Bilbao
220,000
Spain
Temporary units closure
La Rabida
220,000
Spain
Temporary units closure
Grangemouth
195,700
UK
Units indefinite closure