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Hammer could fall on Europe's vulnerable refineries from 2018

Fri, 03rd Feb 2017 14:31

By Libby George

ANTWERP, Feb 3 (Reuters) - Strong residual demand for oilproducts and the emergence of only a handful of new refinerieswill protect the profits of Europe's long struggling operationsthis year, but experts expect the hammer to fall on the weakestfrom 2018.

State-of-the art new refineries in Asia and the Middle Easthave sharply increased the amount of oil products flowing intoglobal markets and threaten the existence of Europe's ageing andless sophisticated units.

However, meteoric fuel demand, driven by low oil prices, hasgiven many a reprieve over the past two years, protectingthousands of workers in Mediterranean countries such as France,Greece and Italy.

A mixture of maintenance in Asia and only a limited amountof new refineries coming online could give vulnerable refineriesanother stay of execution, speakers at the Platts MiddleDistillates conference in Antwerp said.

"We think the market can absorb it," said Adam Ritchie,founder of AR Oil Consulting and a director at Petro-Logistics,referring to new capacity coming up in 2017.

He noted that underlying economic growth could give dieseldemand in particular a kick, and would be sufficient to absorbthe refining additions this year -- mostly condensate splittersin Iran, Oman and Qatar.

Gunvor chief economist David Fyfe said "robust" oilconsumption this year could yield demand growth of as much as1.4-1.5 million barrels per day (bpd), a level that wouldactually limit so-called "spare" refining capacity that producesabove what the world will consume.

But from next year, the picture turns darker for Europeanrefineries, which are run by either the oil majors or smallerniche players.

Consultants Baker & O'Brien estimate that there is a further1.3 million bpd globally of new refining capacity scheduled tostart up in 2018. Energy Aspects put the figure even higher at1.57 million bpd.

Either level is likely to squeeze oil product margins andshorten the lifespan of the simplest refineries, particularlythose in areas of limited oil demand growth such as theMediterranean.

"Our view is that this new capacity will outstrip theunderlying demand, nudging refinery utilization back towardsrecent historical lows," said Peter Bartlett, a director forBaker & O'Brien's London office. It would turn up the heat in a"pressure cooker" environment that could force some units toshut their doors forever, he added. (Reporting By Libby George; Editing by Keith Weir)

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