LONDON (DowJones)Some of Europe's crude oil refineries could be forced to slow production or shut down completely as a result of waning gasoline demand, rising supply and tighter regulation, according to people in the industry.
The region's refining profitability faces pressure from a drop in U.S.gasoline consumption, huge refinery expansions in the Middle East and Asia and stricter European Union environmental laws.
"Demand keeps going down and down," said a gasoline trader based in Europe.
Simple refineries, or plants with relatively unsophisticated equipment, could be forced to close if they can't sustain their current narrow profit margins, warned Panos Cavoulacos, president of Brussels-based lobbying group Europia, whose members account for approximately 80% of the E.U.'s refining capacity.
Europe's refineries are configured to produce high volumes of gasoline for export to the U.S. market, and refiners worry their revenues could shrink as gasoline demand in the U.S. dries up.
U.S. oil demand in July averaged 19.412 million barrels a day, the lowest for any month since May 2003, and 1.335 million barrels a day below the level of a year ago, revised data from the U.S. Department of Energy showed Tuesday.
Gasoline crack spreads - the difference between what oil refiners pay for crude and the price of the products they sell - took a beating this summer after several years of hefty gains.
In the third quarter, Northwest Europe gasoline crack spreads uncharacteristically fell into negative territory to a discount of 43 cents a barrel against ICE Brent crude oil futures, compared to a premium of $8.58 a barrel a year earlier, according to Mike Wittner, global head of oil research at Societe Generale in London. The typical surge of gasoline demand in the summer -accompanied by a spike in prices - wasn't evident this year.
"European refiners will need to find alternative outlets for their surplus gasoline production, or compete more aggressively for North American market share," the International Energy Agency in Paris said in its medium-term oil market report published in July. "Refiners on both sides of the Atlantic may be forced to reapply the voluntary run cuts that were evident over the first half of 2008."
By the end of the decade, European refinery utilization is likely to slow to around 80%, said Johannes Benigni, managing director of Vienna-based consultancy JBC Energy, at a conference in Brussels this week.
"Now that's really painful because it means several refiners with FCC (gasoline-making fluid catalytic cracker) units will have to close down" to avoid making losses, he said.
European refinery utilization has averaged around 85% this year up to July, the latest month for which data is available, according to the IEA. Utilization averaged 87.2% in the period between 2003 and 2007.
New plants such as Reliance Industries Ltd.'s (500325.BY) massive 580,000-barrel-a-day Jamnagar refinery in India, set to come on stream in December, could also add pressure to margins by flooding the market with more refined products. Other large refinery projects such as Al Zour in Kuwait and Ras Tanura in Saudi Arabia and continued expansions by CNPC and Sinopec in China could also plump up gasoline supplies.
Global refining capacity will grow by around 1.5 million barrels a year until 2013, with the bulk of the increases coming from Asia and the Middle East, the IEA said.
"(Gasoline) is a product that is structurally under attack ... Demand for petroleum-based gasoline (as opposed to biofuels) is going to go down," Benignisaid. "This is a one-way street."
Meanwhile, the E.U.'s carbon emissions trading scheme, or ETS, and other policies meant to combat climate change would impose a "carbon penalty" on refiners, significantly raising costs and potentially leading to the loss of market share to other companies in the global trade of refined products, Europia said.
The E.U. also wants refiners to produce cleaner transport fuels by reducing their carbon dioxide content by 10% by 2020, another measure that will force refiners in the region to pay up to ensure their plants can produce fuels to the correct environmental standards.
Europe's refiners have invested $6 billion a year in the past 12 years, according to a study by consultancy Purvin & Gertz in 2007. But current and future projects may be stalled or canceled due to massive rises in raw material costs, shortages of skilled staff and tight financing.
Despite the gloomy outlook for gasoline exports, refiners could yet find respite in still-strong margins for middle distillate products - diesel, gasoil and jet fuel - which could keep plants profitable.
Refineries are configured in a way that requires them to churn out a mix of products - so while European companies have recently maximized their distillate production to capture strong margins, they have also needed to produce other fuels with lower, or even negative, margins such as gasoline and fuel oil.
(David Bird in New York contributed to this report.)
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