RPT-Fitch: Weak European Refining Margins Unlikely To Recover Soon
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July 8 (Reuters) - (The following statement was released by the rating agency)
European refining margins are likely to remain weak for at least the next one to two years due to overcapacity, demand and supply imbalances, and competition from overseas, Fitch Ratings says. We do not expect this to result in downgrades for major oil and gas companies - with the possible exception of Eni (A+/Negative) if restructuring efforts are not successful.
In 1H14 the north-west European refining margin averaged USD3.3/bbl, down from USD4/bbl in 2013 and USD6.8/bbl in 2012. This means that many European refineries have been loss-making or only slightly profitable, depending on their complexity, location and efficiency.
The weak margins result from factors including a stagnating economy and the bias of domestic consumption towards diesel due to EU energy regulations. This means that surplus gasoline is exported and the diesel fuel deficit is filled by imports, prompting competition with Middle Eastern, Russian and US refineries, which have access to cheaper feedstock and lower energy costs on average.
Mediterranean refiners are additionally hurt by the interruption of oil supplies from Libya, but this situation may improve with the resumption of eastern port exports.
Overseas competition is likely to remain high, although margins may start to recover in the medium term as economic growth gradually improves and overall refining capacity in Europe decreases. According to the IEA, in 2014 another 110 thousand barrels per day (mbpd) of European refining capacity could be decommissioned, taking total closures to 1,800mbpd since 2008. In 2013 EU refineries had a total capacity of around 15,000mbpd.
Most Fitch-rated major European oil and gas companies, such as Royal Dutch Shell (AA/Stable), Total (AA/Negative) and BP (A/Stable) have exposure to European refineries, although this is not sufficient to prompt a negative rating action.
The only possible exception to this is Eni, whose Italy-focused refinery and marketing division is a more material business segment for the company. One of the factors that may contribute to a downgrade is a lack of consistent improvement in the segment's performance in the next 12 to 18 months. We expect this to happen through a restructuring programme rather than an improved European refining environment.
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