European refining capacity is likely to be trimmed permanently in the wake of the Covid-19 pandemic's impact on margins and inventories.
At least two refineries in northwest Europe are already being considered for closure. Trading firm Gunvor intends to mothball its 115,000 b/d Antwerp refinery and is in negotiations with workers' representatives. "There is no scenario in which the refinery does not continue to carry significant losses into the near future," the company says. And Total may convert its 93,000 b/d Grandpuits refinery near Paris into a biorefinery if it proves unviable to repair the crude pipeline that serves the site.
Refining margins are still a long way from where they were a year ago, despite the easing of lockdown measures. Products inventories are high enough that even rising demand cannot absorb the supply. Gasoline margins have averaged little more than $1/bl in northwest Europe in the third quarter, compared with more typical levels of around $12/bl for the time of year (see graph).
The current desolation in refining economics is reminiscent of the aftermath of the financial crisis of 2008-09. That led to the shutdown of nearly 1.4mn b/d of crude capacity in Europe in 2009-12. Several US refiners, including Phillips 66 and Marathon Petroleum, are already indicating that they will convert crude processing to renewable fuel production or are considering doing so.
In Europe, Total is making the clearest moves to adjust its refining portfolio. It has agreed to sell its 110,000 b/d Lindsey refinery in the UK to trading firm Prax Group. Total says the sale is part of a longer-term focus on integrated refining and petrochemical plants, and Lindsey is not one of these. But the plant's lower profitability in the current market contributed to the timing. BP agreed in June to sell almost all of its global petrochemical assets to UK firm Ineos.
Independent refiners are the most endangered. Covid-19 has depressed European utilisation rates and sustained negative refining margins, Gunvor says. And large global product stockpiles will remain when demand recovers, it says. Even Russian integrated firm Lukoil's 320,000 b/d Priolo refinery in Sicily may also be at risk, as it has been running well below capacity for some years.
Under pressure
Antwerp is a simple hydroskimming refinery with no cracking capacity. This type of plant is especially at risk given its low yield of higher-value gasoline and diesel. Another is Gunvor's 80,000 b/d Europoort plant in Rotterdam, which has not restarted since shutting for maintenance five months ago. A third is Galp's 110,000 b/d Porto refinery in Portugal. The firm reopened the plant on 20 July after poor economics forced its closure in April.
The safest refiners include those that serve niche inland markets, since they can generally earn premiums on the products they deliver domestically. A prime example is Spanish integrated firm Repsol, whose coastal refineries serve most of inland Spain by way of overwhelmingly dominant pipeline operator CLH. Others could be protected by state aid. Italian firm Saras' 300,000 b/d Sarroch refinery in Sardinia is the sole power provider to the island. Its power generation is closely integrated with its crude processing, and Italy may find it difficult not to protect the refinery from financial trouble.
Even those that cannot be rescued could continue operating for years to come. Decommissioning is a costly process, in some cases counterbalancing the losses a company is making from running in a low-margin climate in the short term. This means that any closures are likely to be postponed and staggered across the coming two to five years.
