* Shell, Total restructure to combat falling oil prices
* Refinery profits also under pressure from competition
* Oil firms fighting off challenge from trading houses
By Dmitry Zhdannikov and Ron Bousso
LONDON, May 1 (Reuters) - Top oil firms Royal Dutch Shell and Total are bringing their refining andtrading operations closer together, seeking alternative ways todrive profits as oil prices fall and independent trading housesexpand into their territory.
The restructuring will enable the Anglo-Dutch and Frenchcompanies' in-house traders to capture profits faster from thefluctuating prices of the different crude oil sources andproducts coming through their refineries.
Snapping at their heels are energy brokerages Vitol andGunvor, which have bought refining plants in Europe in the lasttwo years in order to do the same.
"As traders grew assets in downstream, majors realised therewas a lot of money to be made on optimisation. So to a certainextent, trading houses encouraged us to change," said a highlevel source from one of the oil firms, speaking on condition ofanonymity because he was not authorised to speak publicly on thematter.
Shell and Total have already started work on aligning theirrefining and trading operations and as a result both reported much better than expected first quarter profits
Now both are stepping up the restructuring.
Shell plans to move dozens of traders from London, Dubai andSingapore to Rotterdam, where it is beefing up a trading hubjust miles from its flagship Pernis refinery, Europe's largest,according to company and trading sources. It also plans to layoff dozens more traders as part of the move to a cheapercost-base.
"We are completing staff consultation and finalising thedesign of the proposed change," a Shell spokesman said.
Meanwhile Total is beefing up its Geneva trading hub so thata bigger team of dealers can optimise profits from thevolatility of crude prices, company sources told Reuters.
It is simultaneously restructuring its refining businessesto expand its product line, by converting its unprofitable LaMede plant in southern France to a biodiesel plant and upgradingits Donges refinery on the Atlantic coast to capture growingdemand for low-sulphur marine gasoil following changes in EUrules. [ID: nL5N0XD14O]
Total is being more tight lipped about the reforms and onlysaid this week that "downstream again generated excellentresults due to its ongoing restructuring efforts".
A refinery closely linked to trading operations can modifyits output to respond to swift changes in global demand forproducts - such as a boost for diesel or gasoline afterunplanned outages or bad weather - and lock in high profits.
Refineries that process several kinds of crude oil canleverage profits from the different prices of, say, RussianUrals or Nigerian Bonny Light, by linking trading teams intotheir operations.
FAST RESULTS
Shell's chief financial officer Simon Henry said Shell madean extra $1 billion last year thanks to its restructuring, andadded that profits would likely increase this year.
The action took return on capital in downstream at Shell to13.4 percent last year, 5 percentage points higher than for theoverall group and up from below 10 percent several years ago.
"It is not often in this industry that the downstream hashad a higher return on capital than the upstream," said Henry.
Oil companies' refining operations have become increasinglyunprofitable in recent years as the Middle East and Asia havebuilt their own refineries to meet their own demand.
Total's chief executive Patrick Pouyanne was praised lastyear for merging refining and petrochemical businesses after thegroup reached its target of return on capital earlier thanforecast - 15 percent in 2014, up from 9 percent in 2013.
Not all oil majors have followed Shell and Total's steps.While BP has a large global trading division, the world'sbiggest listed oil company ExxonMobil - which has a muchsmall global refining business - uses its trading divisionmostly to buy in supply for its own refineries. (Additional reporting by Michel Rose; Editing by Sophie Walker)
