Threats and opportunities for the European refining industry.

Implications: In the last twenty years European refining capacity has been strongly reduced due to poor margins, and this should automatically generate additional investments for modernization and upgrading of units. However, demand for gasoline is decreasing in Europe and slowing in North America. The main threats for the European refiners are: 1. USA market shrinking 2. Improved vehicles fuel economy 3. Reduced driving distance per vehicle 4. Increase in production of biofuels 5. Increased transportation costs for inland refinery exports.   These threats make new investments indispensable and have increased the attention of capital, authorities and the general public and create new investments opportunities that have not been there for over ten years.

Analysis: An interesting analysis by Purvin & Gertz (P&G) originated a very interesting article of Wendy Weirauch, Managing Editor of Hydrocarbon Processing in the Jan. 08 issue of the magazine. P&G in April 07 made a presentation to the European Refinery Technology Conference in Barcelona, Spain, in which they observed that in the last twenty years the European refining capacity has been strongly reduced due to poor margins, and this should automatically generate additional investments for modernization and upgrading of units. However, demand for gasoline is decreasing in Europe and slowing in North America due to improved vehicles fuel economy and also to the diminishing distance driven per car due to the increasing fuel’s cost at the pump. European refiners have been counting on the USA gasoline market, but the US demand is supposed to slow down to the point that P&G forecast that by 2010 this export market will be drastically reduced. Another threat to refiners’ gasoline markets is the current rush to increase biofuel production on both sides of the Atlantic, as well as the growth of gas-to-liquid technology and production. The alternative for European refiners is to increase naphtha/petrochemical production while hydrocracking profit margins will continue to be better than fluid catalytic cracking ones, as they have been now for several years due to higher margins of diesel over gasoline. Most of the capacity changes are expected in the southern Europe refineries that will start increasing exports to North Europe. For European inland refineries transportation costs will become life threatening and studies are currently been done on the economics of dismantling inland refineries and relocating them in other more profitable markets like India or East Asia. This will contribute to the rationalization of European capacity, but the increasing construction costs make conversion and modernization projects of refinery units economically very challenging.   In summary the main threats for the European refiners are: USA market shrinking improved vehicles fuel economy reduced driving distance per vehicle increase in production of biofuels increased transportation costs for inland refinery exports These threats make new investments indispensable and have increased the attention of capital, authorities and the general public and create new investments opportunities that have not been there for over ten years.