COLUMN-Excess optimism threatens oil refining margins-Campbell

Thu Mar 29, 2012 11:49am EDT

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By Robert Campbell

NEW YORK, March 29 (Reuters) - Three months of decent oil refining margins in the Atlantic basin may be enough to save as many as seven of the 10 plants threatened with closure, which in turn ought to be enough to crush margins once again.

Only a few months ago, gasoline futures were mired in a deep depression as shrinking demand for the fuel in North America and Europe and costly crude combined to wipe out the profitability of many of the least efficient regional refineries.

Fast forward to today and margins are much healthier, buoyed not by improved demand or tighter inventories but mainly by optimism that the supply picture will be much tighter than before with many refineries poised to shut down.

Except there is one problem. A lot of these refineries may not close and some that are shut down could even restart. If they do not close, is it really realistic to expect the good margins to persist?

Already bids are coming in for all five refineries belonging to insolvent independent European refiner Petroplus. When the company ran into financial troubles, analysts expected only its two best plants in Germany and Britain to survive.

ConocoPhillips extended the bidding for its shuttered 187,000 barrels per day Trainer, Pennsylvania refinery earlier this week. Shut down since September, it will likely require millions of dollars of work just to restart.

The plant has reportedly received "multiple bids" according to local media reports.

Optimism is even brewing up that Sunoco's 335,000 bpd refinery in Philadelphia may be bought before its July shutdown deadline.

So instead of some 2 million bpd or more in refining capacity being taken out of the system this summer, the decline could be as less than 1 million barrels.

If only the 350,000 bpd Hovensa and 235,000 bpd Aruba refineries in the Caribbean are shut, along with Sunoco's 178,000 bpd Marcus Hook refinery on the U.S. East Coast, then gasoline bulls could be in for a nasty surprise.

After all, Marcus Hook has been closed for months now and the impact of the Hovensa and Aruba shutdowns is now being felt in the market. And let's not forget that Aruba made little in the way of finished refined products.

That means the current supply situation may be as good as it gets in terms of gasoline in the Atlantic basin. And of course this is before we get out of the spring turnaround season which should see operating rates rise at the surper-efficient U.S. Gulf Coast refineries.

GREAT MINDS THINK ALIKE

If only one or two plants came back from the dead, it would not be a big problem. With plenty of capital looking for better returns and lots of cheap refineries on the block, a contrarian bet on refining could well be a winner.

Even if the plants on offer are mostly dogs, with limited capacity to process cheaper crude oil, high energy costs and so on, they can turn a profit if bought cheaply enough.

The problem here is too many people are having the great idea of snapping up refineries on the cheap in the hope of a quick profit.

The more likely result is a vicious downturn in margins and yet another fight to the death as the more efficient refineries in the Atlantic basin wait for their competitors to once again go out of business.

Nor does it seem likely that a deep-pocketed investor is going to step in and absorb millions of dollars of losses while hugely expensive upgrades are funded.

After all, the Atlantic basin is not likely to become a growth market again and none of the plants up for sale is a really suitable export refinery.

So why is anyone getting involved here? In part, it may be a hope to repeat the success that some investors had in the late 1990s and early 2000s.

A more likely result is a rerun of the Petroplus saga: an under capitalized, and ultimately futile attempt, to catch a brief wave.

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