LONDON ExxonMobil is pouring $1 billion into modernising a European refinery just as others are fleeing the sector, making life even more difficult for older plants struggling to stay afloat.
Exxon (XOM.N) said it would install a new coking unit at the 300,000 barrel per day (bpd) Antwerp plant to turn high sulphur oils created as a by-product of the refining process into various types of higher-profit diesel, including shipping fuels that will meet new environmental laws.
"This project demonstrates ExxonMobil's long-term view," said Remko Kruithof, Exxon's public and government affairs manager for the region. "It is the first of several (investments) we are evaluating to further strengthen our strategic refineries in Europe to more successfully face the challenging industry environment."
Exxon is considering refinery investments in the United States, where plants there run close to full capacity, but it is the sums in Europe that have surprised some observers as where market conditions are far more challenging.
Analysts said Exxon's reasoning for making this move now are particular to its own refining economics, with the plant able to process heavy fuels that its other refineries in the region such as Fawley in England, are not able to deal with.
Exxon is also swimming against the tide in Europe.
Although France's Total (TOTF.PA), Europe's biggest refiner, promised in 2010 not to close any plants in its domestic market for five years after it shut the Dunkirk refinery, union sources and analysts think Total could shut plants next year, after the promised period expires.
Exxon's move spells more pain for competitors in the region that will have to compete with a plant that is more efficient and better equipped to deal with current European fuel needs.
"It will enable it to have higher utilisation rates, which would mean lower rates at other plants," said Alan Gelder, senior vice president at Wood Mackenzie.
"It could challenge smaller refineries and accelerate the process of forcing closures."
BP (BP.L) and Shell (RDSa.L) have already sold plants to smaller independent players, which in some cases subsequently closed them, while others are struggling to keep them operating.
REFINERS IN TROUBLE
The feeble state of the refining industry in Europe was highlighted by the latest data from Euroilstock, which showed that European refineries processed 11 percent less crude oil in June from a year earlier, as weak profits forced plants to cut back.
In Italy, Eni (ENI.MI) is threatened with a credit downgrade if it fails to turn around its refining business while being hit by strikes next week to prevent closures.
Other European refiners are also in trouble. Czech Unipetrol (UNPE.PR) took an unexpected 4.72 billion crown ($231.5 million) impairment charge on its refining assets in the second quarter, pushing its results into the red.
Poland's refiner PKN Orlen PKN.WA wants to sell its Orlen Lietuva unit, but its chief executive said it would be "hard to imagine" to find a buyer.
"Northwest Europe specifically is high on our consolidation pressure list, as the steadily growing outflows from Russia are hitting primarily this region," said David Wech, analyst at JBC energy in Vienna, adding that some 500,000 bpd of diesel from Russia would hit the region by 2016.
When plants do close, analysts say it will benefit those like Exxon's which have invested in modern refineries.
"There will be closures as utilisation rates have come down, but those with complex integrated systems like Exxon's Antwerp plant can benefit from closures elsewhere," said Blake Fernandez, senior analyst at Howard Weil brokers in New Orleans.
Around 2 million bpd or roughly 15 percent of Europe's refining capacity will need to be shut by 2018 in order to balance the market, according to consultancy JBC Energy.
The pressure is a result of competition from the Middle East and Russia, where refineries are more efficient, and because European oil demand is falling due to rising energy efficiency.
(Reporting by Simon Falush additional reporting by Ron Bousso and Dmitry Zhdannikov in London, Michel Rose in Paris, Vera Eckert in Germany and Jose Elías Rodríguez in Madrid; Editing by Henning Gloystein and David Evans)