John Kemp is a Reuters market analyst. The views expressed are his own)
By John Kemp
LONDON, Feb 12 (Reuters) – French oil main Total (Swiss: FP.SW – news) has introduced plans to halve capacity at its Lindsey refinery on Britain’s North Sea coast as part of an overhaul of downstream activities intended to address overcapacity in the European refining sector.
Total’s choice comes as no surprise. Of the six refineries still working in Britain, Lindsey was most prone to closure or capability discount, as shown in a report prepared by consultants Purvin & Gertz for the UK Petroleum Industry Association in 2013.
Purvin & Gertz was commissioned by the refiners themselves to report on competitive challenges faced by their industry as a result of government regulations and explain the sector’s value to the UK financial system, so the report tries to be optimistic about the longer term.
However Purvin & Gertz thought-about various eventualities and concluded the most probable final result was the closure of 1 or two refineries to get rid of the country’s excess manufacturing of gasoline and improve revenue margins for the refineries that stay open.
When the report was published, Britain had seven operational refineries.
Since then, the smallest and least technically refined refinery, at Milford Haven in Wales, has closed and there are plans to turn it right into a tank farm to handle imported fuel.
And in 2014, the house owners of Stanlow refinery mothballed certainly one of its crude items and cut throughput capability by round one-third, blaming overcapacity in the European refining sector.
But this doesn’t appear to have been enough to save Lindsey. It is way bigger than Milford Haven however among the many six remaining refineries it is the least sophisticated so it was all the time going to be next on the record for closure or capacity reduction.
An excessive amount of GASOLINE
Lindsey’s problems are a microcosm of the difficulties besetting the UK refining sector. Britain’s refineries are old, too small, want major funding, and have fallen victim to authorities coverage encouraging motorists to purchase diesel automobiles. The U.S. shale revolution has now dealt them the final blow.
Most of Britain’s refineries were constructed between the 1950s and 1970s once they were designed to supply plenty of gasoline to meet booming demand from motorists.
They’re optimised to process the light low sulphur crudes produced from the North Sea and comparable areas with a relatively small quantity of medium crudes blended in. The issue is that those crudes are among essentially the most costly in the world exactly as a result of they are so easy to refine.
U.S. refineries have invested heavily to course of poorer quality and subsequently cheaper crude oils. And the new mega refineries inbuilt India in the Middle East over the last decade are additionally designed to process poorer and cheaper crudes. In the meantime, Britain’s refineries are stuck processing the most costly feedstock out there.
At the same time, the demand for fuel has shifted. Vehicles and trucks have develop into much more efficient and government coverage has encouraged a shift from utilizing gasoline to diesel.
The result’s that Britain’s refineries produce far an excessive amount of gasoline however not sufficient diesel or jet gas to provide the nation’s massive hub airports at Heathrow and Gatwick.
Britain is forced to export gasoline whereas importing diesel and jet. Britain imports nearly half of its diesel and jet gas, based on Purvin & Gertz, but exports as much as a quarter of its gasoline.
The technique of exporting gasoline and importing diesel was viable when the United States was importing large quantities of gasoline in the nineties and early 2000s. But the shale revolution has minimize U.S. demand for imported gasoline close to zero.
U.S. gasoline imports from Britain’s refineries fell to less than 25,000 barrels per day in November 2014 from around one hundred,000 barrels per day in 2010.
Britain’s refiners have struggled to find profitable alternative markets.
But if Whole reduces Lindsey’s capability by around half, it would move the UK domestic gasoline market again to steadiness or even right into a deficit.
In flip, that will allow British refiners to boost their prices because the marginal gallon in the home market would come from an overseas refinery and need to pay freight prices.
Britain’s motorists will have to pay a bit extra on the pump but it will put what’s left of the UK refining trade on a sustainable foundation.
In a bitter irony, just because the trade is finally dealing with its gasoline surplus, authorities coverage appears to be poised to alter again.
Diesel engines are now blamed for critical air pollution in London and different cities.
After three many years of encouraging motorists to buy diesel vehicles as a result of they are more efficient and contribute less to global warming, government coverage is about to switch to encouraging them to purchase gasoline powered vehicles to chop pollution.
However the attainable reversal of dieselisation policy has come too late to save Lindsey.
The complete Purvin & Gertz report on “The Position and Future (Different OTC: FRNWF – information) of the UK Refining Sector in the provision of Petroleum Products and its Worth to the UK Financial system” is offered on the UK Petroleum Industry Association’s webpage and the related evaluation is contained on web page 112 (http://www.ukpia.com/docs/default-source/publication-files/therolefutureoftheukrefiningsector.pdf).
The most important factors affecting refinery profitability are capability and complexity.
Measurement matters because there are substantial economies of scale in petroleum refining so bigger refineries are typically more profitable than smaller ones offered they can run near full capacity.
Complexity, on the other hand, is essential because it determines how far a refinery can improve poor quality and subsequently low-cost crude into high quality fuels and earn a giant margin for doing so.
The business uses the Nelson Complexity Index as a rough indicator of a refinery’s upgrading functionality. Totally different items in a refinery are every assigned a lot of index points for his or her price and contribution to upgrading crude into high quality fuels and then weighted for his or her share of refinery throughput.
Lindsey has a weighted average Nelson Complexity of simply over 6, which is low for a trendy oil refinery, and about the identical as the closed refinery at Milford Haven.
Lindsey is way much less sophisticated than Grangemouth in Scotland (which has an index of round 8), Pembroke in Wales (9), Stanlow in Cheshire (10), Fawley on the south coast (12) and South Killingholme (12), which is also on the North Sea subsequent to Lindsey.
For context, the two massive trendy refineries operated by Reliance Industries (BSE: RELIANCE.BO – news) at Jamnagar in India can process a mixed 1.25 million barrels per day of crude and have Nelson Complexity Indices of eleven.3 and 14.Zero respectively, in keeping with the corporate.
Milford Haven’s closure was inevitable provided that it was processing less than 150,000 barrels per day and had a Nelson Index of simply over 6 (http://link.reuters.com/tuv93w).
However because the refinery was so small, its closure was not sufficient to rebalance the UK gas market. It was always the case that yet another refinery would want to shut, or have its capability diminished.
Stanlow diminished capability by one third final year. But Lindsey was at all times particularly susceptible as a result of it was barely extra sophisticated than Milford Haven (http://hyperlink.reuters.com/wuv93w).