Solving the European Refining Sector Problems

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abarrelfull wrote on 22 Jan 2014 22:28
Tags: cosmo europe refinery total

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Whilst we can all hope that some of the stupidity, and a little of the sectoral changes that have hit us so hard will change, there is little that we can do about most of the issues that face us. Rather than just grumbling about how unfair things are, we do need to find something useful to do about our problems though.

Lobbying: The single biggest cost in the refining sector is energy. Whilst our US competitors are enjoying cheap energy bills, in Europe we are at the mercy of Gazprom, and its oil indexed prices. The solution is obviously alternative sources of gas. Unfortunately our lords and masters are doing their best to stop shale gas developments. Europe’s refiners need to lobby along side the E&P guys to try and speed this whole process up.

Supporting Pipeline Infrastructure: The centre of Europe is the backyard of the Russians when it comes to crude supply. Anything that offers an alternative will reduce their bargaining power, improving terms for all of the sector. The Odessa Brody Plock Oil Pipeline is a great example of a project that would enable refiners to blend a second source into their feed and thereby reduce dependence on Urals Crude Oil. Unfortunately, it is going nowhere.

Mothballing: As long as the refining margins remain low, periodically mothballing a plant, for those with more than one, will help reduce the over supply.

Partial Closure: The Japanese have been struggling to deal with a situation similar to that in Europe. Like their European peers, they face political and environmental hurdles to closing old and uncompetitive plants. The solution they have used quite effectively, is partial closure. Where a refinery has more than one crude unit, they close the oldest and smallest, marginally reducing the capacity. Cosmo Oil in particular has reduced Chiba Refinery by 20,000 bpd, Yokkaichi Refinery by 50,000 bpd and Sakaide Refinery by 30,000 bpd.

Normally this means actually closing your worst performing unit. Overall it has added up to a significant total volume. Workers can be reduced by naturally wastage, making this easier to sell to stakeholders.
In a business where scale is regarded as a good thing, reducing your size could be a winner. You are able to sell more of your volumes in your local market, you get to sell some carbon credits, your working capital gets a little less and perhaps you can reconfigure some of your redundant equipment or find an alternative use for the land.

So far the only example I know of partial closure in Europe is the Gonfreville L Orcher Refinery in France, which reduced capacity by 80,000 bpd in 2009. We need more examples, because the alternative is complete closures, which will be much more painful for all involved.