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Finnish oil refiner Neste thrives as European rivals struggle
September 16, 2013 / 3:36 PM / 4 years ago

Finnish oil refiner Neste thrives as European rivals struggle

* Small, non-complex Atlantic basin refiners most at risk

* Sees no risk in lower Russian supplies, plant modernisation

* Says new Asian, Middle East plants unlikely to target Baltic

By Ron Bousso and Dmitry Zhdannikov

LONDON, Sept 16 (Reuters) - Finland’s Neste Oil expects more plant closures by refiners in Europe as many have failed to copy its model focused on serving local markets, ultra-modern technology and biofuels.

A rare success story in European refining, the company last week upgraded its full-year profit guidance citing better-than-expected demand for renewable fuels.

European refiners, including BP, Royal Dutch Shell and Total, were expected to slash crude processing rates by around 750,000 barrels in September and October in the face of weak profits, traders said.

“In Europe, there is too much refining capacity that is also outdated,” Chief Executive Matti Lievonen said in an interview.

As Europe’s refining industry continues to shrink due to weaker domestic demand, less complex refineries that rely on the U.S. market are the most vulnerable, Lievonen said.

”The United States will become self-sufficient in gasoline production in around 2020, so that puts extra pressure on small refineries in the Atlantic basin.

“Those are probably the most pressured. Refineries that have strong positions and enough complexity and strong home markets will survive,” he said.

Some 1.8 million barrels per day of European capacity have been mothballed since 2009, according to Deutsche Bank. That leaves 10.7 million bpd of operating capacity in the European Union plus Norway.

Demand for refined product in Europe is set to decline by 170,000 bpd per year over the next five years, leading to the closure of two small or one large refinery, according to JBC Energy consultancy.

The higher share of middle distillates and lower gasoline production at Neste’s Porvoo refinery, among Europe’s most modern, shelters it from declining U.S. gasoline imports.

“This company has always been very innovative and we have been able to develop new products. We were first in Europe in unleaded gasoline and sulphur-free diesel,” says Lievonen.

SUPPLY RISKS

While many northwest European refineries cut crude oil processing rates to an average of 75 percent in the face of weak profit margins in recent weeks, Porvoo has kept operating at 100 percent of capacity, according to Lievonen.

Refining margins at Neste’s 210,000 barrels per day (bpd) Porvoo refinery so far in 2013 have been around $6 per barrel, nearly three times the average European Brent cracking margin.

This is due in part to Porvoo’s position in the centre of the Baltic, where demand for diesel has been on the rise.

Lievonen says the refiner has a humble strategy of continuing to target mostly the Baltic markets, where it generates 68 percent of its sales, with another 20 percent generated in Europe and 12 percent in the United States, Africa and Asia.

Challenges are abundant, including Russia, Porvoo’s main crude supplier, re-routing oil to Asia and modernising its refineries, Europe’s struggling economy, and the building of huge, modern refineries in Asia and the Middle East.

Porvoo’s proximity to the port of Primorsk in Russia gives it a stable flow of Urals crude, which accounted for 68 percent of intake versus 18 percent of Brent in the first half of 2013.

Although Russia is in the process of increasing supplies to Asia at the expense of Europe, Lievonen believes the Baltic will remain well supplied by the world’s largest oil producer.

“We do not see any supply risks to Europe,” he said.

He expects Urals to trade at an average discount of $1-$1.50 per barrel to dated Brent in the long-term despite recent spikes in value due to a rise in Russian domestic runs.

He also said he was not very concerned by a large refinery modernisation programme in Russia, which should result in much higher output of diesel and lower output of fuel oil.

“Russian local demand is increasing too,” he said.

New massive refineries in the Middle East and Asia would mostly target customers in Asia and Europe’s Mediterranean markets rather than the Baltic, Lievonen said.

Neste’s heavy focus on biofuels made from palm oil and animal fats only turned profitable in the first quarter of this year.

The company now plans to increase annual renewables output by 15 percent to 2.3 million tonnes by 2015.

Demand for biofuels in Europe is expected to rise as the European Union wants to see biofuels meeting 10 percent of transportation fuel demand, up from 6 percent currently.

Neste Oil has two fossil fuel refineries, in Porvoo and Naantali in Finland, and three renewable diesel refineries, in Porvoo, Singapore and Rotterdam. In the United States, which buys 35 percent of Neste renewables, biofuels consumption is set to double by 2020, according to Neste. (Editing by Jason Neely)

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