Refinery closures threaten Europe's energy security

Some of Europe’s largest economies face a growing risk of fuel-supply disruptions, as commercial problems that have already driven a number of the region’s oil refineries out of business look set to intensify.
“If this trend continues, probably the European Commission will have to take it into account,” said Pedro Miras, chairman of Spain’s emergency oil stockholding agency, Cores, and chair of the International Energy Agency’s (IEA) standing committee on oil emergency questions. The closures, “could affect security of supply, not today, but in the long term,” he said.
Europe’s aging refineries have struggled to adjust to the lower demand and weaker profit margins that accompanied the economic slowdown. They have also been hit by increased competition from newer refineries in the Middle East and Asia, which benefit from lower operating costs.
Fifteen European refineries have shut down since 2008, idling 8% of the region’s fuel-processing capacity, while many others are running at reduced capacity. The result is, even as Europe’s total oil consumption has fallen, the proportion of its refined oil products that are imported has risen to 28% in the first quarter of 2013, up from 20% in 2007, according to data from the IEA.
Now, the IEA is warning that a flood of fuel production from new plants in Asia and the Middle East could push global crude-oil processing to an all-time high of 77 million barrels a day in the third quarter, squeezing profit margins tighter and potentially leading to more closures.
European product exports to other markets are dwindling, too. Latin American demand, some of which used to be met by Europe, is increasingly being supplied by the U.S. In addition, Brazil is looking to upgrade its own refining capacity to cover rising domestic demand and for export.
“This could be particularly dangerous, if Europe would become entirely reliant on imports, and no longer able to support its own consumption needs,” said Massimo Vacca, a spokesman for Saras SpA, which runs a 300,000-barrel-a-day refinery in Sardinia.
Italy’s refiners face a “dire” situation, said Alessandro Gilotti, the president of the country’s oil association, Unione Petrolifera, at its annual meeting in Rome held in June. “A couple of [Italian] refiners could be closed in the next year or two with the possibility of one shutting down already in 2013.”
The problem has taken on particular urgency in the U.K. since the sudden closure in 2012 of the 220,000-barrel-a-day Coryton refinery near London, following the bankruptcy of its owner, Petroplus. Coryton was one of the largest and most modern facilities in Europe and supplied 10% of the U.K.’s fuel.
The U.K. has seen its tally of refineries fall to seven from 18 in the late 1970’s. In the wake of the Coryton shutdown, the country’s Department of Energy and Climate Change is reviewing the role of the refining industry in energy security and the way the country’s emergency oil stocks are held. The UK currently imports 56% of its jet fuel and 48% of its diesel. With just a few more refinery closures, imports could rise to 78% for jet fuel and 77% for diesel fuel by 2030.
Other countries have had similar experiences. According to data provided by BP PLC, the biggest loss in refining capacity between 2008 and 2012 was suffered by France, which lost 25%. Germany’s capacity has declined 12% in the same period, compared with 11% in the U.K. and 8% in Italy.
Further refinery closures would make Europe even more vulnerable to disruption if, “foreign producers will privilege their internal consumption needs, versus the continuity of exports, especially at times when they have spikes of internal demand,” said Vacca.
As if this wasn’t bad enough, European refineries are also having to deal with falling supplies of vacuum gasoil (VGO), an important feedstock. Flows from Russia are expected to dwindle as Russian refiners upgrade their plants. As a result, VGO prices are expected to soar according to Antoine Halff, head of the IEA’s oil industry division.
Higher imports could also cause prices to rise at the pump due to increased transportation and storage costs, the IEA said.
But government intervention to save Europe’s refining industry is a tough sell in a region suffering both a stagnant economy and sharp public spending cuts. An additional investment of US$21 billion on improvements and upgrades is needed by 2020 just to keep refiners in business, according to a report published by the European Commission in May.
This is complicated by rising competition from across the Atlantic where U.S. refineries are benefiting from access to cheaper unconventional oil.
Halff said at a recent industry event in Barcelona that while European refineries continue to face the threat of closure, “in the U.S. east coast some refineries have come back to life and are thriving.”
The shale oil revolution is also helping the U.S. achieve lower CO2 emissions, something that Europe has long had on its own agenda.
(June 7, 27, 2013)