The European Refining Industry - Research Paper
The refining industry all over the world has undergone a number of significant changes over the past years. Different states and refining companies have re-aligned themselves in line with the changing environment. It is true that the refining industry in Europe has gone through many cycles, but the changes taking place right now threaten to last for quite some time (Soeting, et al., 2013). Some of the challenges the refining industry in Europe faces include rise in imports, falling demand, competition from emerging markets and increased legislation and policies that favor the use of alternative sources of energy. Reduced demand from domestic markets and stiff competition in the international market is without any doubt putting the European refining industry under a lot of pressure. Bousso & Zhdannikov point out that the industry faces the risk of extinction especially after undergoing a number of challenges in the past that included protests, bankruptcies and closures. This paper analyses the challenges the industry faces and discusses what the future holds for the refining industry in Europe.
The Challenges the Industry Faces
There are about 120 refining companies in Europe and Western Europe is among the top three regions in the world for crude oil refining (Brelsford, 2013). Despite being one of the leading regions in oil refining, a lot of challenges still exist. These challenges have made a number of companies withdraw from the industry and sell out their refining assets. The major players in the European refining industry include Total and BP. Soeting, et al. state that the European refining industry has always shown fluctuations in levels of product demanded and production. In addition to that, the prices of refined products have always fluctuated over time. The current challenges, however, threaten to have a long lasting impact on the refining industry.
Most refineries in Europe are undergoing the structural erosion of their margins. This is because most of the oil refining infrastructures were laid down 30 to 40 years ago. The technology used when setting up such refineries was less advanced and has now put most of the refineries on the losing end. Most of the refineries were built within 20 years after the World War II and were designed to produce gasoline. A fall in gasoline demand over the past few years means that most refineries in Europe have a surplus of the product which is also hard to sell in the international market. The market today favors diesel over gasoline, and this came as a great challenge to the European refineries that were designed a long time ago. Boncourt states that no European Union (EU) member has been spared by the challenges facing the industry and that the challenges have led to about 11 refineries being shut down in last five years. Boncourt (2013) also mentions the fact that the refineries were designed to refine and process sweet and light crude oil and that most of them have been forced to set up infrastructures that would make it possible to process sour and heavier crude oil.
Another challenge worth mentioning is the falling demand for petroleum products. European refineries are over producing gasoline which is less demanded on the international market. In addition to that, oil products in Europe are on low demand due to a number of reasons that include economic crises and policies oriented towards transport efficiency. There are also other legislation and policies that encourage the use of alternative energy. Economic activities in Europe have also dropped, and this has played a significant role in the low demand for petroleum products. This is mainly as a result of the global economic downturn. Apart from this, the availability of bio-fuels means that the hydrocarbon fuels now have a substitute and most legislation favor the former because they are cheaper and not harmful to the environment. Most consumers now prefer the bio-fuels, and this translates to lower demands of the hydrocarbon fuels.
The refineries in Europe also face stiff competition from emerging markets. The refining industry is being re-defined in terms of the global model. Emerging countries around the world are becoming the important consumers of petroleum products. New producers are coming up, and the traditional consumers are now producing their own petroleum products and even exporting them (World Petroleum Council, 2014). This implies that European refineries have to rethink their strategies since they are losing out on their traditional customers and facing competition from new entrants into the market. The new players in the market come in with new refining technologies meaning that they can produce a number of petroleum products that are on demand at a go. European refineries are losing out on the Unites States (US), which was their key market for gasoline. This is because the US is now producing its own petroleum products and even exporting the surplus. Additionally, players from outside Europe now see Europe as a perfect market for acquisition and export (Soeting, et al., 2013). It would be hard to influence the new non-European owners of the refineries if the issues of profitability set in. The new owners are likely to wind up business in a short notice if the ventures prove less profitable than previously forecasted. Local politics would be effective in influencing them (Soeting, et al., 2013). These challenges promise to have a long term effect on the refining industry in Europe, and it is thus necessary that the remaining players re-look their production and operational strategies.
The Historical Evolution of Refining Assets
The refining industry has undergone a number of changes, but the most significant evolution in the industry was the entry of National Oil Companies (NOCs). The national oil companies emerged as competitors for International Oil Companies (IOCs) and have grown in significance over the past years. NOCs have expanded globally and are increasingly acquiring new assets with reports showing that, in 2012, the acquisitions by NOCs reached $ 112 billion (Deloitte, 2013). NOCs have over the past years determined the success of the oil industry in many countries around the world. The origin of NOCs dates back to 1920, but the 1970s saw their increased number. The increased numbers of NOCs were mainly attributed to the nationalism tide that swept the world during that period and enthusiasm for state ownership and intervention in oil refining and trade (McPherson, 2003). In 1960, the Organization of Petroleum Exporting Countries (OPEC) was formed with the aim of controlling and regulating the international oil market. Its formation proved successful in bundling out the IOCs from the control of international oil prices. NOCs were formed with the aim of operating both in the upstream and downstream. In respect to this, upstream involved oil exploration and production while downstream, refining of crude oil, importing and marketing of oil products.
The oil crises of 1986 had a significant impact on NOCs. The crisis resulted to a fall in the revenues from oil products, and real oil prices continued to fall. It also led the closure of some NOCs while others were privatized in order to increase their efficiency. This led to the emergence of large oil companies which were vertically integrated firms that combine a number of important tasks. These tasks include exploration and production of oil and natural gas, transportation of the products, refining of crude oil and marketing. The industry further evolved with the major oil companies selling off their assets to other companies that emerged. The smaller companies purchased various assets from the major ones and established themselves in various capacities. As a result, different companies explored oil and natural gas while others refined the crude oil. Firms that bought refining assets ended up being oil refining companies. Such companies have no oil or gas exploration and production operations but engage in crude oil refining and marketing. Currently, refinery assets are owned by different players including NOCs, IOCs, major oil companies and the non-integrated refiners. Major oil companies hold most refining assets in the world.
Competition Issues from New-Build Refineries in the Middle East, the Indian Sub-Continent and China
As stated earlier, most refineries in Europe were designed during the period that followed the World War II. Production was mainly focused towards gasoline, and the refineries incorporated less advanced technologies. The emergence of new refineries in India, China and the Middle East has come as a great challenge to the oil refining industry in Europe. These new refineries incorporate the latest technology and can produce diesel products which are now on high demand than in the previous years. The refining building programs of these countries cannot be compared to those ones found in Europe. These new refineries are of high quality and considered as the price setters in the industry (Soeting, et al., 2013). The new refineries have resulted to overcapacity in the European refining industry with a number small refining industries being closed and others that utilize old technology being decommissioned or placed on hold. The emergence of these major competitors has also resulted to a drastic drop in the utilization of refineries in Europe as from 2008.
This rise of new players in Asia has made the demand of petroleum products shift to countries in this region. Consequently, this shift in demand has made the refining assets move in that direction. The domestic market for petroleum product has tremendously grown in these counties and investors have taken up this opportunity and set up refinery plants. Unlike in Europe, the market for the refined products in China, India and the Middle East is readily available. This means that the new refiners can enjoy a number of advantages chief among them being economies of scale. As they expand, the cost of refining crude oil goes down. The Indian subcontinent refining industry has already planned ahead and seeks to give a section of its refining capacity to the international market while China has already pre-planned a refining capacity that would meet the future demands of its population.
Countries in the Middle East are not only increasing their refining capacities, but also getting into joint ventures with other countries such as South Korea. Such kind of agreements will, without any doubt, increase the refining efficiency and ensure that a ready market is always available for the finished products. Most European refineries will find it hard to compete with refineries from these emerging regions for obvious reasons. Unlike the European refineries that are stuck to the traditional markets, the new refineries seek to expand their refining capacities to include other markets. Additionally, Boncourt (2013) argues that countries such as Kuwait, Qatar and Saudi Arabia are now focusing on the domestic market as well as the international market. These countries that were large exporters of crude oil are now shifting their focus to production of refined oil products. The players in the Asian region enjoy a couple of advantages that the refineries in Europe do not have. The advantages include the availability of cheap labor, large capital reserves, new equipment and the domestic demand that is rapidly growing (Soeting, et al., 2013). These new refineries in India, China and the Middle East produce diesel to a greater extent. As a result, the international market now looks at these refineries to meet its demand of diesel and other related products.
Prospects for Future European Refining Profitability
Many analysts in the refining industry wonder what the future holds for the refining industry in Europe. Some analysts are of the opinion that the oil refining industry in Europe is heading towards extinction, but stakes are still high on the future profitability of the industry. Sustainability and profitability of the refining industry in Europe will be made possible if the affected states decide to be proactive in coming up with policies that will encourage the European industry to compete with the emerging players. The European refining industry still plays an important role in the European economy since it is a source of employment to many people and offers many vital products for other industries.
The European refining industry will also benefit from the high prices in crude oil. It is projected that the prices of crude oil will less likely fall below $ 85 a barrel. These high prices are good for oil refineries as it results to wider spreads in heavy and light products price differentials (Vantassel, 2013). Gasoline and distillate price spreads are also projected to take the prices of diesel and gasoline to their old prices (Vantassel, 2013).
Apart from the above mentioned points, the profitability of the European refining industry can still be realized in the future because of the ever growing demand for hydrocarbons in other parts of the world. In addition to that, new entrants into the refining industry in Europe were in a perfect position to re-position the refinery assets and operations. This has seen some foreign players such as the Klesch Group acquiring a number of refining assets in Europe. Similarly, Europe’s economy is one of the largest and promises to remain among the top economies in the world. This implies that the refinery industry can still be profitable in the future.
The European refining industry faces a number of challenges that include the overcapacity, low domestic demand and competition from large and modern refineries in China, India and the Middle East. These challenges threaten to drive the refining industry in Europe to extinction and have forced a number of companies to pull out of operations. Many foreign countries have seized this opportunity and acquired a number of refining assets from Europe. This is a clear indication that the future of the refining industry is not bleak. Government policies are also promising to go a great way in ensuring that the refining companies in Europe can compete with those from Asia. The European economy is one of the biggest in the world, and this coupled with the re-position of the refining assets and strategies, there is a possibility that the region will take the profitability of the industry back to high levels.
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