April 11, 2008 / 9:25 AM / 11 years ago

Oil refining surplus may bring UK, U.S. plant closure

DUBAI (Reuters) - Older oil refineries in Britain and the United States could soon face the threat of closure as a wave of new plants start up in Asia and the Middle East and flood the market with gasoline.

Flares burn at the Murphy Oil Refinery in Louisiana on October 19, 2005. REUTERS/Lucas Jackson

For over three years, a lack of spare refining capacity has boosted global oil prices and contributed to oil’s bull run to this week’s record of over $112 a barrel. Gasoline has been one of the drivers, but new supply is set to outstrip demand.

“We are heading now for a global surplus,” said Fereidun Fesharaki, chief executive of FACTS Global Energy.

“There is a wall of refining capacity coming onstream in 2008-2009 and another in 2013. It’s changing the structure of the refining industry. Who will be the last man standing? I don’t know.”

Production from new refineries in Asia and the Middle East will cut global refining profit margins and hurt the refiners most susceptible to both market forces and gasoline markets, said Johannes Benigni, managing director of JBC Energy.

“UK plants are the most exposed,” Benigni said. “They are not in good shape. They rely on gasoline exports to the United States. Eventually, they will either have to reduce runs and if they can’t adapt, will have to look at closure. U.S. plants are also exposed.”

Many of the new refineries are coming online in countries such as China and the Middle East where governments are looking to fulfill the strategic objective of meeting domestic demand.

That makes the plants less susceptible to market forces than those in Europe, the United States and Japan, Fesharaki said.

UK refiners have long been major suppliers of gasoline to the United States, which consumes over 40 percent of the world’s gasoline supplies.

Refiners would face stiff competition for U.S. markets from supply from the new refineries such as Indian Reliance’s (RELI.BO) new 580,000 barrels per day Jamnagar plant due online later this year, analysts said.

Reliance will export around 100,000 bpd to the United States into Chevron’s (CVX.N) system, Fesharaki said. Chevron holds a five percent stake in Reliance.

“Obviously, that means other supplies will be displaced,” he said.

U.S. IMPORTS DISAPPEAR?

The U.S. market for refined gasoline imports could disappear by 2020 as mandated use of biofuel such as ethanol takes an increasing share of demand, Benigni said.

The impact of high prices and the effect of rising fuel standards would also hit U.S. demand for gasoline refined from oil, he added.

Rocketing pump prices in the United States and the wider economic malaise were already hitting gasoline demand in the world’s largest energy consumer.

The U.S. Energy Information Administration forecast on Tuesday that U.S. gasoline demand would fall year-on-year during this summer’s driving season for the first time since 1991.

GLOBAL SURPLUS

Benigni forecast that from 2008-2015, global refinery and non refinery supplies of gasoline would increase by 350,000 bpd, while demand would increase by 180,000 bpd.

The 170,000 bpd surplus would hit margins hard and refiners would that could adapt would have to produce less gasoline and more middle distillates, if they could, he said.

Demand growth for middle distillates such as diesel, jet fuel and heating oil was expected to grow more quickly than for gasoline in coming years.

For refineries that can’t adapt, lowering runs could lead to an even tighter market for middle distillates, he said.

“The surplus is theoretical because the industry will adapt to the very strong price signals that this will send out,” he said.

“But if refiners reduce runs they’ll reduce middle distillate output and that’s clearly no good.”

Europe’s politicians may have to reverse their decades-old policy of encouraging burning more diesel in cars and switch back to gasoline to help balance the market, analysts said.

That would be politically difficult for them as one of the arguments behind Europe switching to diesel was that it was more efficient and therefore better for the environment, said Mark Lewis, managing director of Energy Market Consultants.

“That’s a very powerful political argument,” Lewis said. “It would be difficult to switch back if it was detrimental to the environment.”

More than 50 percent of Europe’s new cars run on diesel.

Reporting by Simon Webb; Editing by Margaret Orgill

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