European refineries suffer from under-investment

European refiners are shutting capacity again, but tight diesel supply could give them a last hurrah, writes Benedict George

Falling demand for fuels has been dissuading many European refiners from investing in their plants, with the result that assets are deteriorating and some closing altogether. But extraordinary margins are still achievable in the short term for those that can stay on line.

Argus reported 14 separate incidents in which a European refining unit had to close because of a fire, leak, power outage or other accident in 2023 — up from 12 in 2022. Under-investment has been exacerbated by circumstances. European costs are uncompetitive against those in the Middle East or Asia. European oil demand is declining, but growing in those other regions. Ageing units have been undermaintained since 2020 because of the pandemic and then a reluctance to miss out on resurgent margins by halting units for upkeep. A prolonged heatwave last summer added further mechanical stress. The EU ban on Russian crude has pushed some units to run lighter slates than they were designed for.

The inevitable result of long-term under-investment and underperformance is permanent closure. This trend has been evident for decades and came to the fore again late last year, after extraordinary margins for most of 2022 and 2023 led to a pause. UK-Chinese joint venture Petroineos announced in November that it is beginning the process of converting the 150,000 b/d Grangemouth refinery in Scotland into an import terminal — work it expects to complete in 2025.

"Refinery margins are forecast to normalise over the medium term, resulting in a reversion to loss-making for our business," Petroineos told Argus. Six European refineries have closed since 2020. Grangemouth will bring that to seven and Shell's 147,000 b/d Wesseling refinery in western Germany will make it eight if they both close in 2025. These closures will bring a 935,000 b/d capacity loss.

Italian refineries look most vulnerable. Eni told workers as long ago as 2021 that its 84,000 b/d Livorno facility would stop refining crude by 2022, to focus on base oils and biofuels. This has not happened yet, perhaps because conventional refining margins have been so high. Oil traders said the Eni-KPC 241,000 b/d Milazzo refinery in Sicily is comparatively unprofitable too.

Major retreat

The majors also keep edging away from European refining through divestments. TotalEnergies, Shell and ExxonMobil have exited eight European refining assets between them since 2020. Most recently, ExxonMobil sold its 25pc stake in southern Germany's Miro refinery in October 2023, and Shell its 37.5pc stake in Germany's Schwedt to UK-based Prax.

In the shorter term, European refiners are likely to keep reaping profits that are extraordinary by historical standards. Falling regional capacity and frequent outages are buoying the margins of those that manage to stay on line. Without political rapprochement with Russia, diesel supply lines will remain long and unreliable, keeping margins high in Europe. The forecast recovery of European economic growth in 2024 could add demand and push margins still higher.

TotalEnergies chief executive Patrick Pouyanne noted that the firm's refineries are already "running to make diesel" because the loss of Russian supply has kept diesel margins elevated despite weak demand. If production cannot rise to match a demand recovery, margins respond more strongly.

But if planned refining capacity opens in other regions, European plants might face stiffer competition. Oman's 230,000 b/d Duqm and Nigeria's 650,000 b/d Dangote refinery could start up fully in 2024, while Kuwait's 615,000 b/d al-Zour refinery could begin shipping diesel west too. But the only seemingly reliable thing about new refinery start-ups is that they do not happen on schedule.