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July 8 (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
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.