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European refiners hit by diesel deficit, gasoline glut

03.20.2014  | 

Many of Europe’s refineries were built decades ago to produce gasoline, the main fuel at the time. Diesel demand has since surged and some plants can’t adapt, creating a gasoline glut.

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By RUPERT ROWLING
Bloomberg

Europe’s biggest wave of refinery shutdowns since the 1980s will probably last through the end of the decade, deepening nations’ dependence on imports, according to the UK’s biggest buyer of automotive fuels.

The UK will import 70% of its diesel by 2020, from about 40% now, with similar trends likely across the region, Andrew Owens, CEO of Greenergy Fuels, said in an interview in London.

Many of Europe’s refineries were built decades ago to produce gasoline, the main fuel at the time. Diesel demand has since surged and some plants can’t adapt, creating a gasoline glut and diminishing profits. 

About 15% ceased all or some production since 2008, the International Energy Agency in Paris estimates. Some converted into fuel stores, something Greenergy is seeking partners for at two or three sites.

“As we look at increasingly dark times on refining, the case for converting, not all but some, to terminals is increasing,” Owens said March 12. “It’s kind of the opposite of a virtuous cycle.”

Gasoline’s crack, a measure of the profit from producing the fuel from crude oil, averaged about $8/bbl in the past year, according to data from brokerage PVM Oil Associates. The crack for gasoil, a price benchmark for diesel, averaged $14.28/bbl, according to data compiled by Bloomberg.

While Europe made more gasoline than it consumed last year, the continent imported 13% of its diesel, jet fuel and gasoil, mostly from Russia, India and the US, according to Wood Mackenzie, a consultant to the industry.

‘Major Product’

“Europe’s major product was gasoline as recently as 2000 and most refineries were built before then,” said Jonathan Leitch, a London-based senior analyst at Wood Mackenzie. Gasoline demand has since weakened as more of Europe’s cars switched to diesel, he said.

In order to produce more diesel, European refiners also need to make more gasoline, compounding the glut, Owens said.

“In the UK we have seven refineries, but probably by 2020 three refineries will be enough to make enough gasoline,” he said. “Based on UK yields, you probably will need about 14 refineries to make the diesel.”

Demand for gasoline in developed European economies was 1.93 million bpd last year, while refiners in the region produced 2.73 million bpd, according to Wood Mackenzie. Consumption of diesel and gasoil was 5.98 million bpd, with output totaling 5.31 million bpd.

’O.K. Corral’

Europe has the capacity to import more oil products and less crude, according to Royal Vopak, the world’s largest independent storage provider. “Key hubs and secondary distribution locations” will need some additional investment to adapt to the changes, Frits Eulderink, Vopak’s chief operating officer, said March 18 in response to e-mailed questions.

The economies will import a total of 25% of their diesel, jet fuel and gasoil by 2020, Wood Mackenzie estimates.

“The whole situation for refineries now is like the gunfight at the O.K. Corral,” Chris Hunt, director general of the UK Petroleum Industry Association, said at a conference in Dusseldorf, Germany on March 18. “Everyone is looking at everyone else and thinking, if you guys die, that means my life gets better. The UK is no different from the rest of Europe, we have a supply-demand imbalance.”



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