September 25, 2015 / 4:26 PM / 2 years ago

Europe's gasoline-heavy refiners see profit in VW scandal

A lone bird sits atop of the Volkswagen power plant in Wolfsburg September 22, 2015.Axel Schmidt TPX IMAGES OF THE DAY

LONDON (Reuters) - Some of Europe's struggling refineries could get an unexpected boost from Volkswagen's diesel emissions scandal if once-dominant gasoline regains its popularity.

Europe's refineries, many of which were built in the 1950s to support booming petrol demand, have been hit over the past 20 years by shrinking fuel demand and government incentives that skewed car sales toward diesel engines, which were seen as more efficient and emitted less carbon dioxide.

The rise of the diesel car, which accounted for 50 percent of car sales last year, has forced Europe to rely on diesel imports while its refineries struggled to find overseas markets for excess gasoline, which has put heavy pressure on profits and prompted a wave of plant closures in recent years.

Volkswagen's diesel emissions rigging scandal in the United States could reverse the fortunes of refineries with high gasoline output such as Valero's 220,000 barrel per day (bpd) Pembroke refinery in Wales, which has a 49.4 percent gasoline yield, and Exxon Mobil's 273,000 bpd Fawley refinery in southern England, with 41.6 percent gasoline yield, according to consultancy Wood Mackenzie.

"If Europe... became more gasoline-driven it would be very good for us because we would have to export less products," Patrick de la Chevardiere, Chief Financial Officer at Total, Europe's largest refiner, said this week.

Europe's most advanced plants such as Exxon Mobil's 320,000 bpd Antwerp refinery, which is planned for a $1 billion upgrade to boost its diesel yield and Royal Dutch Shell's 404,000 bpd Pernis refinery, stand to benefit less from higher gasoline demand.

"Coastal refineries would get the benefit of being able to sell more of their production into the local market and so achieve higher prices. Their surplus would also get a better value in the export markets," said Jonathan Leitch, Wood Mackenzie's research director.

"Inland refineries would get a benefit from increased local (gasoline) demand and could maintain import parity pricing rather than export parity pricing in some cases."

Already, an unexpected jump in global gasoline demand this year as a result of collapsing oil prices has led many plants around the world to maximize their gasoline yield.

"It's not so easy to increase gasoline output," said Matti Lehmus, vice president of oil products for Finland's Neste, whose 206,000 bpd Porvoo refinery is one of Europe's most advanced plants. "Typically, it means constructing new units... Step changes in gasoline takes significant investment."

WoodMackenzie estimates that most refineries can only shift 3-5 percent of their output from one fuel type to the other.

ECONOMIC SENSE

Ultimately, money could tip the balance for Europe's fuel consumption.

A rollback of the favorable retail tax treatment of diesel across Europe would cost drivers 16 billion euros in the first year, making it economically advantageous for 15 percent of drivers to switch to gasoline cars, according to Wood Mackenzie.

Already, diesel demand in Europe is slowing.

"I do think the 'dieselisation' has plateaued and there will be a little bit of a comeback of gasoline, particularly for small vehicles and hybrids," said Dario Scaffardi, general manager of Italian refiner Saras.

"Today it makes more sense from technical standpoint for small engines to be gasoline."

Despite a spectacular surge in refining profits over the past year as a result of surging global fuel demand, particularly for gasoline, following the oil price collapse, more refinery closures are expected in Europe by the end of the decade, including by Total and Italy's Eni.

Still, Leitch, Scaffardi and others note the nearly three decades of "dieselising" Europe's fleet and an average 12-year lifespan for diesel cars means any switchover would be slow.

"Over the next few years, things are going to get tough for European refiners," Leitch said.

"But this could help some of them."

Additional reporting by Karolin Schaps, editing by David Evans

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