Refiners, especially in Europe, are enjoying margins that haven't been seen since Lehman Brothers was last in business. Nobody is sure how long they can last, but everyone is enjoying them whilst they last.
The long levity of these market conditions are of particular interest to those who need to make tough decisions over their assets. Do they keep refineries running, or do they continue with plans to reduce capacity? If you believe that the margins will last for a while, then postponing refinery closures would make sense.
Total is obviously a company that is not overly optimistic about the sustainability of the current benign environment:
Three of Total’s five refineries in France — Gonfreville in Normandy, Grandpuits in the Paris region and Feyzin near Lyon — demonstrated their ability to withstand the deteriorating economic environment in 2013 and 2014 and generate ongoing income streams. The other two, Donges and La Mède, are struggling and are structurally loss-making.
It seems that Total has a similar view to Wood Mackenzie, who as reported by Bloomberg are expecting a sharp correction by summer.
U.S. plants, ending seasonal maintenance, will push down European prices with rising exports, particularly of diesel and jet fuel, as they eat into a domestic stockpile of almost half a billion barrels of crude. The shipments will help reduce the continent’s third-quarter processing margins by about 42 percent
In the long term, the continued closures are good news for those who remain in business. However, the short term pessimism is based on a belief that the glut of US crude will continue. For this excess to remain, we need two things to be true:
US oil producers must be able to make money at the current price
There will be no developments that ease the export of crude oil
I am personally not sure that we can rely on these two factors. Distortions in the market are keeping production levels in the USA up, but gravity has to kick in at some point. Meanwhile flexibility in crude exports solves a huge number of problems and logic has to push this one to a head.
In the meantime, European refiners will count their money whilst watching rig counts obsessively.
Apache's net proceeds upon closing are expected to be approximately $3.7 billion for the transaction, a major cash infusion. Its a big turn around in strategy though, as these are important projects, at very different stages of development.
For Woodside, it represents a big punt on the LNG sector at a time when they have had to postpone their Browse LNG Terminal Project over cost concerns.
My question is does this herald the start of a trend? With low oil prices, LNG projects begin to look less attractive, especially those with a high investment cost.
The low prices of that period generated renewed interest in LNG usage, and led to a number of import project announcements. This is especially true of China, whose state owned companies have invested heavily in supply projects as well as import terminals. (for more details see LNG Terminals And Trade In China )
Now some of this activity seems a little bubble like.
So what happens next?
I think we will see a number of more projects postponed, or even abandoned. However, for those who go ahead, the costs are going to be lower. Engineering, construction and equipment companies are not going to have the full order books of recent times, and will have to be more competitive. Their costs will also be lower.
So in a few years time, when another bull market is upon us, those companies whose project economics were good enough to go ahead, will gain twice, once from higher prices and secondly from less competition.