Tuesday, January 24, 2012

A permanent loss?

Much excitement and doom-mongering attends the closure of the Coryton refinery in Essex, as its Zurich-based owner Petroplus files for insolvency, after lenders put the company on notice to pay off its debts triggering a default on $1.75 billion of senior notes and convertible bonds.

In an interesting piece, Man in a Shed takes a pessimistic view, arguing that "the UK must not lose another refinery". However, in complete contrast, Christophe de Margerie, the CEO of Total says that he believes the current financial woes of Petroplus confirm the view that there is considerable overcapacity in Europe's refining sector. Far from being a disaster, Petroplus' demise could ease supply conditions and help boost margins.

Equally, competitors will be keen to jump into any gaps. "Essar's (ESSR.L) Stanlow refinery is operating as normal and if there are opportunities to fill gaps in the market caused by the absence of Coryton we would obviously look to do so," said a spokesman for the Indian energy group.

And indeed it is the case that there is refinery overcapacity - on a global scale. According to this source, this can be attributed to opposing trends: demand continues to fall while refining capacity is steadily increasing, despite generally unfavourable conditions. In 2008, surplus capacity stood at 2 MMbpd, while today it has risen to 7 MMbpd.

But what is fascinating is that the distribution of capacity (and changes in provisions) are by no means uniform. In the Asia-Pacific region, refining capacity has been largely unaffected by the slowing world economy. After a period when capacity rose only moderately, new capacity was created at a rapid pace in 2009 (+6.4%). At the same time, growth in demand for oil slowed to 1.3%, resulting in mild overcapacity (0.8 MMbpd).

In Europe and the developed world, however, we have seen the adoption of increasingly stringent emissions standards and product specifications, burdensome regulatory requirements for refineries (for combating local pollution and reducing greenhouse gas emissions), and stiffer competition from new fuels.

All of these structural factors are weakening the sector, making it more attractive to import the finished product from Asian refineries, where costs are lower and regulatory demands are less severe (and can be mitigated still further by well-placed bribes).

Thus, while we may see temporary and very localised shortages, mainly London and the Southeast, no great perturbations are expected from the demise of Petroplus – other than the loss of over 1,000 jobs at the Essex refinery.

Linda McCulloch, national officer at the Unite union, wants "joint action by the owners and government", to help secure the business, but one suspects this is not going to happen. The shutdown at the former BP-owned refinery - with a total capacity of 175,000 barrels of crude oil per day – looks as if it might be permanent.

And although it will never be said – especially by the likes of the BBC - the fingerprints of the EU are all over this. But the murder weapon has many different hands upon it, so the case will never go to court.