European oil industry: latest refinery sales hand the initiative to Chinese and Indian companies

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2 March 2011, Oil

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In February Royal Dutch Shell agreed to sell its flagship UK refinery at Stanlow to India's Essar for $350m, while TOTAL, Chevron, Conoco-Phillips, and Eni are also looking to shed refining assets in Europe. This is due to the reversal of two major trends. In Europe, it was once the case that refining near the market made more sense than importing refined products, and that owning refineries placed oil majors in the strongest position; now, neither can be said to be true.

The three primary drivers behind this reversal are overcapacity, falling demand for oil products, and growing demand for diesel. Refineries work on the basis of economies of scale, and are therefore heavily dependent on high capacity utilization rates. However, oil demand in Western Europe is now more than 30% below its 1990 peak. Fuel oil has been overtaken in the power generation and heating markets by cheaper, cleaner natural gas; meanwhile, gasoline has given way to the more efficient diesel option as the fuel of choice for automobiles. Consequently, Europe has a massive surplus of gasoline that traditionally finds its way to the US to meet demand during the nation's peak summer driving season. At the same time, Europe cannot produce enough diesel.

Rather than pay the huge sums required to convert old refineries - some of them built more than 30 years ago - into modern facilities that can make the products that the market demands, oil majors are instead opting to sell. Those refineries that cannot be sold are either converted into storage facilities or simply idled.

Indian and Chinese oil companies are well placed to benefit from this situation. By buying up European refineries on the cheap, companies such as Essar and PetroChina have the chance to gain valuable experience in the region's downstream markets, while also making use of the region's overcapacity, as oil products can be shipped back to domestic markets. Furthermore, surplus products from modern Indian and Chinese refineries that are designed to make higher-spec products can be sold in the European market. It may turn out that what was once a burden to the established energy companies of the West will become a new land of opportunity for the shrewdest of emerging nations.

Source: Datamonitor

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