June 2018

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Refining: German refining industry on the verge of consolidation and production cuts

Germany produces very little domestic oil and natural gas, and relies on imports to meet 95% of its oil consumption.

Gerden, E., Contributing Writer

Germany produces very little domestic oil and natural gas, and relies on imports to meet 95% of its oil consumption. Despite its lack of natural resources, the country is the third-biggest refiner in Europe, after Russia and Italy. However, the German refining industry is on the verge of consolidation and production cuts this year due to ever-tightening environmental requirements in the EU and tougher competition from Indian, Asian and Russian refiners.

German refineries have historically relied on crude oil from Russia/CIS (35%), the North Sea (32%), the Middle East (18%) and North and West Africa (15%). However, recent decreases in North Sea production require many German refineries to source crude supplies from farther afield, incurring logistical challenges and costs.

Refinery throughput in Germany grew by 2% on the year in 2017, to approximately 2 MMbpd. However, it is possible that these figures will significantly decline in 2018 due to the continuing recovery in oil prices and other factors.

Impacts of IMO 2020

The upcoming IMO 2020 regulations limiting sulfur in marine fuels to 0.5% could require German refineries to modernize to produce compliant fuels. Such modernizations would demand heavy investments.

FIG. 1. The integrated Rheinland refinery, one of Germany’s largest.

In response to IMO 2020, Royal Dutch Shell Plc subsidiary Shell Deutschland Oil GmbH is evaluating the potential expansion of residual processing capacity at its 140-Mbpd refinery in Wesseling, Germany. The Wesseling refinery, together with the former Godorf refinery near Cologne, form Shell’s 325-Mbpd integrated Rheinland refinery, which is one of Germany’s largest (Fig. 1). Other leading refiners are expected to follow suit.

However, tightening environmental requirements may prevent the further expansion of production capacities within the German refining industry, and may even lead to a reduction in crude processing. Moreover, the ever-growing popularity of renewable energies in Germany creates additional pressure on the country’s refining sector.

Infrastructure limitations

Germany’s refining situation is aggravated by the fact that the country has very few product pipelines, so most of its oil products are transported via truck, train and barge, with high transportation costs. As a result, capacity overhang is a persistent problem in the German and EU refining sectors.

Some analysts have even forecast refinery closures, but environmental liabilities make the closure of refineries and chemical plants prohibitively expensive in Germany and elsewhere in the EU. Operating at breakeven cash margins is considered a more attractive option over closure.

This perspective is contrary to the position of some leading local refiners. For example, Wolfgang Langhoff, CEO of BP Europa SE, stated in an interview with German media, “German refining has faced considerable overcapacity and a downward trend in sales in recent years. This will create additional pressure on the industry, especially against the background of a medium-term increase in renewable energies in the transport sector.” According to Langhoff, this additional pressure could threaten the closure of some German refineries.

FIG. 2. BP’s 82-Mbpd Lingen refinery in Lingen, Germany.

BP remains a leader in the German refining market and one of the largest product suppliers in the country. The company operates two refineries—the 265-Mbpd Gelsenkirchen complex and the 82-Mbpd Lingen refinery (Fig. 2). BP also operates its own storage terminals, as well as five additional storage locations through the JV TransTank.

Russia in German refining

Competition is expected to further tighten due to the influx of major foreign players in the German refining market in recent years. One of them is Russian leading oil producer Rosneft, which increased its ownership in several leading German refineries as a result of a recent deal with BP.

FIG. 3. The PCK-Raffinerie complex, operated by Rosneft in Schwedt, Germany.

Among the refining assets controlled by Rosneft in Germany are Bayernoil (which provides fuel to Bavaria and northern Austria; Rosneft holds a 25% stake), MiRO in Baden-Württemberg (24%) and PCK-Raffinerie (54.17%) (Fig. 3). As a result of its deal with BP, Rosneft now holds more than 12% of Germany’s refining capacity, making it the third-largest refiner in the country and one of the largest in the EU. Rosneft considers the German refining industry to be a promising area for future growth. The company plans to allocate up to €600 MM ($707 MM) for the development of the sector over the next 5 yr.

Murky future for German refining

The German refining sector has seen rationalization in recent years, partly due to changing market conditions that have resulted in a decline in demand for gasoline and heating oil. This trend has been observed throughout the European refining industry in recent years. The 2008 financial crisis and market stagnation of 2009–2016 accelerated the process of rationalization in the European refining sector, which retired 2.35 MMbpd of capacity.

Over the last few years, German refining investments have focused on increasing diesel production. However, sophisticated refineries in other regions are flooding the market with low-priced middle distillates, making domestic fuel production less lucrative.

Furthermore, rapid growth in distillation and conversion capacity in the Middle East and Asia threaten the German refining sector. The German refining system, with its relatively lower complexity and utilization, faces difficulty in competing against newer, larger, more sophisticated refineries. HP

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