Azernews.Az

LONDON – In the European oil refining capacity cull smaller plants may live on while bigger sites which are for sale may face greater risk of permanent closure.

A dozen of oil refineries have been offered for sale, mostly by oil majors, since last year as a sharp fall in consumption in Europe and import demand from the United States have slashed profitability and created more surplus capacity in the region.

Despite the initial industry-wide expectation that only medium-to-large, complex refineries would be sold and survive, Royal Dutch Shell's two small, local-market oriented refineries have found buyers since late August, becoming the first to be sold among the dozen.

The German Heide refinery has been purchased by billionaire Gary Klesch. The Swedish Gothenburg site is expected to sold to Finnish fuel distributor St1.

"It seems to be more difficult to sell the larger refineries," Roy Jordan with Energy Market Consultants (EMC) said.

"We think that more big refineries will be closed. Prospective larger companies do not want to over-pay for refining capacity."

Reuters calculations show roughly 700,000 barrels per day of refining capacity has been idled in Europe since 2009, including Petroplus' Teesside site in the UK and ConocoPhillips' German Wilhelmshaven plant, which is also looking for a buyer.

Wilhelmshaven is the largest refinery put up for sale in Europe but it is less complex than most others.

"In our view, location and refining complexity are major selling points but the price has to be right," EMC's Jordan said.

Ineos' Grangemouth refinery in Scotland and Shell's Stanlow in northwest England have been widely seen by analysts as the most valuable refining assets available on the market.

China's Petrochina and India's Essar Oil have been interested in Grangemouth and Stanlow, respectably, although potential sales have been delayed from earlier this year.

"Large, complex and integrated refineries, if they come available for sale, tend to be more attractive for strategic buyers and/or people with deeper pockets," Roberto Ulivieri with Purvin & Gertz.

"Refineries like Stanlow and Grangemouth are quite integrated with petrochemicals. Petrochemicals and niche products introduce a degree of complication that may deter buyers like investment funds."

In general, complex refineries can convert cheap, poorer quality crude oil into profitable gasoline, diesel and a range of petrochemical products.

In addition to its complexity, the Grangemouth refinery is directly connected to the pipeline system of Forties, one of the four benchmarks of North Sea crude, making it one of the most valuable refining assets in Europe.

Industry sources said earlier this year the offer level for Grangemouth was about $6 -$7 billion. This was not confirmed by Ineos.

In 2005 it paid BP $9 billion in a combined deal for two refineries, Grangemouth and Lavera in France, as well a petrochemical subsidiary.

Stable customer base
An industry official, who asked not to be named, said the Heide and Gothenburg refineries could survive because of their much smaller price tags and they are indispensable for the local markets. The value of these assets has not been specified.

"If they (Klesch and St1) can make break even for about 5 years, they can live because Heide and Gothenburg have a fixed local customer base," the official said.

"They do not have to rely on trading or spot exports to overseas."

In August, Klesch said that he would focus on supplying the local market in Germany and that the country would lead Europe's economic recovery.

St1 has not specified why it intends to buy the Gothenburg refinery. The plant makes special diesel, which does not freeze in the Scandinavian winter.