Shell, Total Chase ‘Impossible’ Sales in Race to Curb Refining

By Brian Swint and Brett Foley

March 31 (Bloomberg) — Oil companies may struggle to unload their excess refining capacity in Europe this year as profits from turning crude into fuel stay depressed.

Total SA, Royal Dutch Shell Plc and Chevron Corp. are seeking to sell refineries in Europe after the recession reduced demand. Eni SpA Chief Executive Officer Paolo Scaroni said this month it’s “impossible” to find buyers after refining profit margins slumped to a 15-year low in December.

The desire to cut capacity highlights oil companies’ shift toward China and India for growth as demand for fuel slips in Europe and North America. BP Plc Chief Executive Officer Tony Hayward, whose company sold at least 10 refineries in the past decade, has said that mature markets will never again consume as much gasoline as they did in 2007.

“It will be very difficult to get a decent price, there are just too many sellers,” said Gudmund Halle Isfeldt, an Oslo-based analyst at DnB NOR ASA, Norway’s largest bank. “Both the U.S. and Europe are in structural decline when it comes to these products. The refining market will be difficult for the next three years.”

The International Energy Agency on March 12 raised its forecast for fuel demand growth in developing countries, led by China and India, to 41.2 million barrels a day and cut its prediction for Europe and the U.S. That’s why Shell and BP have considered joining China Petroleum & Chemical Corp., known as Sinopec, in investing in new refineries in the world’s fastest- growing major economy.

Dismantle Dunkirk

Total SA said March 11 it intends sell a European refinery outside of France with a capacity of about 200,000 barrels a day. The company will shut and dismantle a 137,000 barrel-a-day refinery near Dunkirk, France in its effort to trim confining capacity by about 20 percent.

OAO Gazprom Neft, the oil unit of Russia’s natural-gas exporter, said March 28 that it doesn’t plan to buy Total’s U.K. Lindsey refinery after the Sunday Times of London reported that it was up for sale.

If buyers can’t be found, companies can close them, use them for storage or wait to sell until refining becomes more profitable. Shell, which has been negotiating with India’s Essar Oil Ltd. since August to sell three refineries in Europe, said this month it may convert others into terminals. Eni said last month that its Livorno refinery is no longer for sale after it had been on the market for more than a year.

‘Lowball Bid’

“Sellers, especially the majors, aren’t going to panic and hit a lowball bid,” said Ryan Kauppila, a refining analyst at Nomura International Plc. “But there is an opportunity for willing buyers to acquire assets at very attractive prices. We’ll see some transactions by year-end.”

PetroChina Co., the world’s biggest company by market value, may acquire Ineos Group Holdings Plc’s Grangemouth facility in Scotland, Chairman Jang Jiemin said on March 5. The company will spend at least $60 million in the next decade on overseas acquisitions, he said this week.

“The ones that people will want to buy tend to be coastal refineries with lots of storage capacity,” said Lydia Rainforth, an analyst at Barclays Capital in London. “The smaller, less efficient capacity will have to shut and will get moved over toward the Middle East and Asia.”

Valero Energy Corp., the largest U.S. independent refiner, said March 9 it will consider buying the Pembroke refinery in Wales that Chevron Corp. said it plans to sell. At the same time, Valero is selling assets in the U.S.

Delaware City

The company is in “advanced” negotiations to sell its closed refinery in Delaware City, Delaware, to PBF Investments LLC, the investment arm of Petroplus Holdings AG, Valero said Jan. 22. PBF is a partnership with private equity firms Blackstone Group and First Reserve Corp.

“Refinery valuations in the U.S. have fallen further than they have here in Europe, so we may have further to drop here before people start buying,” said David Waring, head of oil and gas banking at Lexicon Partners in London. “Sellers are still not being realistic about expectations on price.”

Sellers may improve their bargaining position if profitability continues to pick up. Margins for turning crude into fuels rose 98 percent to $2.95 per barrel in the quarter to March 25, according to BP’s Global Indicator Margin. That compares with the 15-year low of $1.49 in the fourth quarter and $6.20 in the first quarter of last year.

“Margins can be strong for a period of time, but it’s a very seasonal and very cyclical industry,” said Barclays’s Rainforth. “Companies are taking this decision because they think we’re not going back to the golden age of refining.”

–Editor: Will Kennedy, Stephen Cunningham.

To contact the reporter on this story: Brian Swint in London at [email protected]; Brett Foley in London at [email protected].

To contact the editor responsible for this story: Will Kennedy at [email protected]

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