"Golden age" of oil refining margins to end

LONDON (Reuters) - The global "golden age" of record refining profits is likely to be over by the end of the decade thanks to more capacity from new plants and higher costs due to record crude prices, industry analysts say.

Signs the boom is faltering have already emerged. ConocoPhillips (COP.N) suspended production at its German refinery for a month in August due to low margins, an unusually long shutdown in the peak summer driving season.

Chevron Corp (CVX.N), the second-largest oil major in the United States, said earlier in October it would see its third-quarter net income dropping significantly from the second quarter due to a sharp fall in its refining margins.

Some industry experts say this is the beginning of the end of the refining industry's "golden age" which began in 2004 when margins started rising due to global demand growth and the shortfall in refining production capacity.

"Margins will come down from 2004-2007 record levels by the end of the decade as significantly more capacity additions will occur in 2008-2010 when compared with 2000-2006," Karl Nietvelt, director and senior oil and gas analyst with Standard and Poor's, said at an industry conference in Brussels last week.

Record high crude prices are likely to keep pressuring margins. At the same time, any global economic slowdown caused by the credit crunch could curb fuel consumption.

International benchmark U.S. crude futures hit a new record above $93 barrel on Monday and they are set to advance toward $100.

They remain above $90 to September 2009, and above $78 to the end of 2015.

Martin Tallet with U.S.-based energy consultancy EnSys Energy & Systems also points out that premium of gasoline will fall below that of diesel due to changing demand for transport fuels.

"Gasoline will be no longer the leader," he said.

In general, gasoline is the most profitable petroleum product for refiners. But it is expected to be oversupplied in a next decade due mainly to a fall in demand in Europe, while diesel consumption is seen rising sharply.

Standard and Poor's Nietvelt points out gasoline's premium will fall next year because BP's (BP.L) Indiana and Texas refineries in the United States will increase output and Reliance Industries' (RELI.BO) new plant in India is expected to come online.

BP's Texas plant has been running at half capacity since its closure prior to Hurricane Katrina in 2005 and the Indiana refinery was damaged by a fire in April.

COMPLEX REFINERY, PROJECT DELAYS

Industry officials said Royal Dutch Shell's (RDSa.L) refinery portfolio changes symbolize its bet that the era of the strong margins would not last long.

The Anglo-Dutch major withdrew from the French refining market earlier this year, selling three simple plants, and decided to expand its U.S. plant.

"The move by Shell was a major change," said Jean-Jacques Mosconi, senior vice president, strategy and development with French oil major Total (TOTF.PA).

Europe's complex margins would stay relatively strong, while simple margins might remain at weak levels, he said.

"This is not the time for closing (refineries) but for changing and upgrading. Lots of oil majors focus on investments in upgrades at major complex refineries."

Total has upgraded its Gonfreville plant in Normandy, including systems to make more distillates, such as diesel and gas oil.

Shell is considering investing 1 billion euros ($1.44 billion) in its Dutch Pernis refinery, Europe's biggest and one of the most complex plants, over the next five to seven years.

Complex refiners running Brent crude in the Rotterdam area posted an average profit of $4.75 a barrel over the past week, compared with simple refiners' profit of $1.98.

However, Standard and Poor's Neitvelt said possible project delays due to cost rises and increased turnaround requirements for complex plants might provide support to margins.

In the Middle East, 2 million bpd of complex refinery projects are scheduled for 2012. But Conoco or Total may pull out from projects to build plants in Saudi Arabia, industry officials said.

"This will remain a key uncertainty factor, which we need to monitor when investment decisions will effectively be taken in a next few years," Nietvelt said.