Exxon Invests in Refining Even as Margins hit Unprecedented Lows

abarrelfullabarrelfull wrote on 03 Jul 2014 08:55
Tags: belgium exxon refinery

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Everyone knows that refining is in a terrible state, at least it is in Europe.

Economic problems have led to declines in demand in what were already stagnant markets, WTI / Brent differentials and low Henry Hub gas prices mean that US refiners are able to produce more and sell into the European Market. The Jubail Refinery Project, the first of many Projects in the Middle East has come onstream and is selling diesel to Europe.

In the midst of this doom and gloom, Exxon announces that it is to invest $2 Billion in a project to upgrade its Antwerp Refinery in Belgium.

So what are we to make of this?

First of all, we need to remember that all refineries are not created equal, and that some are hurt worse than others by the current situation. The more complex you are, the better you can cope with the poor environment. This investment increases their complexity.

Secondly, the refining sector is a classic cyclical one, where the best investments are made counter cyclically. Only those with deep pockets (and they don't come much deeper than Exxon's) can afford to take such an approach. It is generally cheaper to do this and the investment finishes at a better time.

Thirdly, if you are going to survive, you need to produced the right products. Global demand for Residual Fuel Oil is on the wane, Natural Gas Liquids are eating directly and indirectly into the Gasoline market. The future is in Middle Distillates, Diesel & Jet Fuel.

Fourthly, Greenfield Refinery investments make money on the refining margin, that is the weighted average price of the products produced, minus the weighted average cost of the crude oil processed. Upgrading projects however, make money on the price differential between the products that you will be able to produce, minus the products being produced now. For a Delayed Coker, this means the differential between diesel and fuel oil, which is pretty large, even today.

So Exxon's investment makes a lot of sense, because it will align the refinery with future demand, reduce low value products and invest whilst it others are not. It also sends a signal to the market that this is one refinery that is here to stay. Many others will not be so lucky.

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