(In fifth and 12th paragraphs removes reference to Varo Energyproducing oil; also in 11th paragraph corrects year of refineryacquisition)
* Varo Energy's refining-storage-retail model mimics oilmajors
* Sees itself as more efficient "mini-major"
* Top oil companies are retreating from European business
* Varo Energy seeking to expand its northern Europe turf
By Ron Bousso
LONDON, June 16 (Reuters) - A fast-growing European oilventure between the world's top energy trader Vitol and privateequity firm Carlyle Group is attempting to cash in wherethe industry's biggest companies have struggled for years.
European oil companies, or "majors", such as Total, BP and Royal Dutch Shell havesignificantly downsized their European refining and distributionbusinesses in recent years due to shrinking demand and anageing, oversized refining industry.
But for Swiss-based venture Varo Energy, combining refiningand other downstream assets with its central oil tradingbusiness makes sense: by offering products and services acrossthe value chain on a smaller scale, it says it can reduceinefficiencies that have weighed on the big oil companies.
"The key is to build more downstream presence and tocomplement that with trading around the assets," said veteranDutch oil entrepreneur Marcel van Poecke, 55, who is managingdirector of Carlyle International Energy Partners (CIEP) and thedriver behind the Varo model.
Founded in 2012, Varo Energy merged last month withDutch-based storage and trading company Argos. The mergedcompany has access to crude oil through Vitol and controlsbusinesses from refineries to storage terminals and petrolstations, creating what van Poecke says is a "mini-major"focused on a strip of western Europe.
"You will see more coordinated trading around those assetsbecause now it becomes one company from Rotterdam up toSwitzerland," he said.
Trading houses like Vitol say that refineries and otherbusinesses can become inefficient after decades under theownership of big oil companies. By taking them over, traders canmake them leaner and lift profit margins, they say.
As oil majors seek to get rid of refineries and focus ontheir more profitable upstream businesses, Varo Energy says itis scooping up downstream assets at cheap prices.
"Major oil companies have been selling refineries to free upcapital for upstream ventures where they can make better margins... (Traders) tend to get those refinery assets very cheap sothey don't weigh heavily on their books as working capital,"said Steve Sawyer, downstream consultant at FGE.
"For a trader, having a refinery gives a physical outlet forhis oil to reduce his exposure in the market. It also gives himinformation he might not have access to so, all in all, he hasbetter information that can help him make better decisions onwhat crude to buy."
Varo originated when Vitol acquired the Cressier refinery inSwitzerland in 2012 from bankrupt refiner Petroplus. In 2014Varo and Carlyle bought a 45 percent stake in the BayernOilrefinery in Bavaria, Germany, from Austrian oil company OMV.
Varo Energy now focuses on inland markets in Europe that itknows well and that have less exposure to competition. InSwitzerland, for example, it owns the only operating refinery inthe country.
TRADING GAME
Shell, Total and BP have sold refineries in Britain,Germany, France, Norway and the Czech Republic and have divestedlarge chunks of their retail systems in Norway and Britain.Shell is still trying to sell assets in Denmark, while Total isin the midst of restructuring its refining system.
The sharp drop in the oil price in the past year andcompetition from trading houses such as Vitol, Trafigura and Mercuria, has also prompted majors such as Totaland Shell to bring their refining and trading operations closertogether in order to drive profits.
Varo Energy bought Total's heating oil and diesel storageand distribution business in Switzerland last year, and lastmonth it acquired German wholesale distributor Gekol.
Still, developing the company's "mini-major" concept willnot be without challenges. Europe's refining sector is expectedto come under increasing strain in the coming years as hugerefineries in the Middle East and Asia export bigger and biggervolumes of products such as diesel and gasoline.
Varo Energy will not disclose its earnings or give abreakdown of its business. Sawyer of FGE, however, says thecompany's expertise in trading allows it to source products atgood prices, not necessarily from its own business, and maximiseprofit.
"Having control over the full value chain gives them a lotof optionality to choose where to source to meet their demand atthe pump," said Sawyer.
"Trading is their game and they are likely to operate verywell in that field."
Van Poecke, whose previous ventures include co-foundingPetroplus in 1993, says Varo Energy aims to keep expanding itsfootprint in northern Europe.
"The ambition is to do bolt-on acquisitions from here andbuild a stronger presence in the markets where we are present.Now we have a good footprint in Germany, in Switzerland, inHolland, in Belgium, in northern France so I think that is agood footprint with enough room to grow," he said. (Editing by Susan Fenton)
