July 23, 2014 / 1:46 PM / in 3 years

Europe's "ghost town" refineries spook oil company results

* Europe has 2 million bpd excess oil refining capacity

* Refining margins low or negative across the region

* Plants must close, oil industry analysts argue

* Shell, BP, Eni results next week

By Christopher Johnson

LONDON, July 23 (Reuters) - Europe is coming under increasing pressure to close oil refineries as chronic over-capacity hits processing margins, dragging down group profits and hitting share prices.

Poland’s PKN Orlen and Czech processor Unipetrol both announced unexpected large losses on Wednesday after impairment charges at processing plants.

Larger oil peers Royal Dutch Shell, BP and Eni will report next week and refining is expected to weight heavily on the results.

Intense competition from other regions with lower costs, faltering domestic demand and plants that produce the wrong type of fuel mean many refineries are surplus to requirements, and industry analysts see little chance of a turnaround.

“Investor sentiment on the industry is about as negative as it’s ever been,” said Bertrand Hodee, research analyst at consultancy Raymond James & Associates in Paris, saying Europe’s refining sector is at risk of becoming a “ghost town”.

Despite the closure of 13 European refineries over the last five years with the loss of 1.8 million barrels per day (bpd), or about 12 percent of capacity, Europe still has far too much processing equipment, undermining margins at even the most sophisticated plants.

Refinery closures have barely kept up with declining demand as Europe’s consumers use more energy-efficient cars and switch to other fuels, and as cheap products such as diesel and gasoline flood in from Russia, the Middle East and the Americas.

Data from France’s Total SA shows average refining margins are running at less than half the levels seen in the first half of last year, despite a small improvement in the second quarter.


“Europe faces excess capacity of around 2 million bpd at a time when the global refining system is also in over-capacity,” Hodee said. “So, are more closures coming? Yes, but don’t hold your breath.”

European refinery closures and the consequent job losses for skilled and unskilled workers, are always constrained by political pressure, with strong labour unions at many plants.

Italy’s unions are threatening to call a general strike at Eni’s refineries in a bid to prevent their conversion and downsizing and say they are prepared to shut off a strategic pipeline feeding gas from Libya.

Analysts are coy on which European refineries are likely to be shut down or mothballed, citing client confidentiality, but they say almost all the region’s plants are vulnerable in one or another.

Murphy Oil has been trying to sell its British refining and downstream assets for over two years, while Phillips 66 has also put its Whitegate refinery in Ireland on the block.

Many other European plants are reported to be for sale.

Stephen George, principal consultant at KBC Advanced Technologies and a specialist in global refining economics, says many European refiners will have to close eventually, no matter how strong the political pressure to save jobs.

“I don’t like to play the grim reaper,” George told Reuters’ Global Oil Forum, “But when you consider the market, there are challenges both to scale and product/market alignment.”

“Some sites will certainly close.” (Additional reporting by Adrian Krajewski in Warsaw, Jan Lopatka in Prague, Michel Rose in Paris and Ron Bousso in London, editing by William Hardy)

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