Since the economic downturn began in late 2008, the ‘for sale’ sign has gone up on more than 30 oil refineries throughout the Atlantic Basin, attracting numerous new entrants to a market that seasoned veterans seem anxious to leave. Whether or not the ‘Class of 2011’ is investing wisely by perceiving untapped potential that experienced refiners cannot, or naively investing in an industry in decline, is yet to be seen.
Challenges
Since the global economic downturn started, refining margins have collapsed. A market perceived to be tight prior to the financial crisis is suddenly awash in capacity owing both to a decline in oil demand and the recent start up of several million barrels of new refining capacity. Margins touched historic lows in late 2009, only to spring back modestly on the emergence of record demand growth in 2010: a trend that is unlikely to continue in the longer term.
As time goes on, refining margins are likely to face continued pressure from global overcapacity. Yet in the near term, European refiners are facing the greatest pressure due to supply interruptions of light sweet grades of crude oil from Libya. US refiners, by contrast, are currently experiencing support for margins due to strong demand in Latin America.
New competitive threats to refining include biofuels and alternatively fuelled vehicles, both of which will reduce demand for conventional refined fuels. In Europe and the US, the mandatory use of biofuels will directly replace demand for gasoline and diesel, at least to mandatory limits. Alternatively fuelled vehicles are a longer term prospect, but will potentially replace vehicles that today burn gasoline or diesel with those using LPG, natural gas or electricity.
PROSPECTS
New refinery owners are entering the lion’s den of highly competitive transatlantic products markets. Undoubtedly refiners all around the Atlantic Basin face fierce competition from imports, both from within and outside their home market. In spite of their ambitions, the success of these new entrants will be governed by fundamentals in their home markets.
Conclusion
It is clear to see that profound challenges remain for refiners on both sides of the Atlantic. Outside the US Mid Continent, few of the new refinery owners can expect highly profitable operation of their new facilities from the offset. These companies face increased regulation and strong competition from both new and established sources. Time will tell if their calculations about the markets are correct and their business models prove successful. If they succeed, they may show the way forward to the experienced companies who chose to sell the refineries. If not, they may only have delayed inevitable closures, in the process prolonging the low margin environment currently enveloping the downstream sector.
The full article can be found in the September issue of Hydrocarbon Engineering. Part 2 will be published in the November issue. Subscribers can log in here to read Part 1 in full.
