CORRECTED-UPDATE 1-Britain's Stanlow refinery to cut capacity by a third

Tue Feb 18, 2014 2:17pm EST

(Corrects date in final paragraph)

* Essar Energy's refinery to mothball crude unit by Oct. 2014

* First European shut down in 2014 in the face of weak margins

By Ron Bousso and Simon Falush

LONDON, Feb 18 (Reuters) - Britain's second-largest oil refinery will shutter one third of its production capacity, its owner said on Tuesday, in further evidence of losses forcing closures across the struggling European industry.

Essar Energy Plc said its Stanlow refinery in northwest England will shrink its output capacity to around 195,000 barrels-per-day (bpd) from 296,000 bpd after it mothballs a crude distillation unit by October.

In a statement, the company said the measure is part of a $100 million revamp in an effort to save the plant, which supplies about 15 percent of Britain's transport fuels, after it posted a loss of $287 million last year.

Stanlow is the first European refinery to see capacity closures this year in the face of sinking regional refining margins in the past six months.

The industry in Europe has been hammered by weak demand, over-capacity and huge flows of diesel from overseas competitors.

Essar said the $287 million loss resulted from planned maintenance, a damaged furnace, and weak refining margins. Each barrel of crude the company processed in the fourth quarter lost an average of $2.61, compared with an average profit of $7.22 a barrel in the same quarter of 2012.

The refinery is now operating at 70 percent of capacity, according to the Essar website, indicating overall runs will not be sharply reduced by the closure of crude unit.

The cutback "will further reduce fuel oil and naphtha production and improve absolute margins whilst delivering cost efficiencies," the Essar statement said.

After the unit is closed Stanlow will produce approximately one third gasoline, 57 percent diesel and kerosene and 3 percent heavy fuel oil for shipping and power generation.

JOB LOSSES

A source at the refinery said that some jobs were expected to go at the plant. "We don't anticipate any compulsory redundancies as there are a lot of workers in their mid 50s to 60s, but rationalisation and cutting costs is definitely behind the changes," said the source at the refinery.

He declined to say how many workers were at the plant or how many posts would be cut. The company declined to comment.

Around 2 million bpd of refining capacity, the equivalent of 10 medium-sized plants, will need to shut in the next four years to balance the European market, according to Vienna-based consultancy JBC Energy.

Essar Energy, which owns a series of power and oil assets in India and is controlled by India's billionaire Ruia brothers, received a 900-million-pound takeover offer from its largest shareholder on Monday.

The Indian oil and gas company's stock was down 2.1 percent to 66.70 pence on the London Stock Exchange by 1315 GMT on Tuesday, compared to a 0.2 percent gain for the UK mid-cap index.

A furnace at the refinery suffered damage in November during start-up of a production unit following maintenance.

The company said it expects to complete repairs of the furnace by September 2014. (Additional reporting by David Sheppard and CLaire Milhench in London and Karen Rebelo in Bangalore; Editing by Mark Heinrich and David Evans)

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