You go away on holiday, and when you come back, the world has moved on. In the world of LNG, a whole lot has happened.
In Indonesia, two projects have been given permits to proceed, both the Tangguh Expansion, and the Abadi Greenfield Project were given environmental clearance. Some of the LNG will be used domestically, but Indonesia is suffering a decline in its production volumes and needs investment.
Canada, which now has more than 10 LNG projects, [archive-lng-ltd-to-acquire-bear-head-lng-project-in-canada saw a deal where] a defunct LNG gasification project, was sold with the intention of turning it into an export terminal.
ENI is one of the largest oil companies in Europe and by far the biggest refiner in Italy. Outside of Italy, they own shares in Galp, which has two refineries in Portugal, and small shares in 3 German refineries. Recently they announced a deal to dispose of their shares in 2 Czech refineries.
State-controlled Eni, which has five wholly owned refineries in Italy and one half-owned plant, posted an adjusted net loss of 232 million euros last year in its refining and marketing division. Italian consumption of refined products fell from 72 million tons a year in 2006 to 53 million tons a year in 2013.
They have the dominant position in a market that has shrunk drastically. No wonder they are losing money.
The Gela Refinery and the Leghorn Livorno Refinery are in a similar quandary. The 84,000 bpd Livorno Refinery was put up for sale back in 2009 and completely failed to find a buyer, whilst the 100,000 bpd Gela Refinery, is reportedly not currently working.
Which brings me to my recommendation, to ENI and others in similar positions. You need to split the company into upstream and downstream. With projects in places like Mozambique and Angola that look far more exciting than substandard downstream, its just a waste of management time.
Restructuring would be much easier as an independent downstream firm, there is no need to prolong the pain. Marathon made the plunge, and they haven't looked back since.
There is no longer any logic in vertical integration, and its time the sector realised this.
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.
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.