Refining overcapacity hits oil majors

Squeezed margins in the global refining industry are hurting the world’s largest oil companies, as Royal Dutch Shell, Total and ExxonMobil all blamed poor quarterly earnings on a decline in their downstream businesses. Results from Shell were the most disappointing last Thursday, as its profit dropped almost a third to $4.5bn. ExxonMobil’s profit fell 18 per cent to $7.87bn, while Total’s declined almost a fifth to €2.72bn.

All the majors have been hit by refinery overcapacity and weak demand for petrol and diesel in slowing western economies, which has hit earnings in their downstream – refining and marketing – divisions. The problem is most striking in Europe, despite refinery closures that have taken some 1.7m barrels a day of capacity out of the system since 2008. Figures from the International Energy Agency show European demand for refined products will average 13.5m b/d, almost 2m b/d less than in 2008. This weakening demand has coincided with the construction of a new wave of giant refineries in Asia and the Middle East that are putting pressure on older and less sophisticated plants in more mature markets.

The IEA says global crude oil distillation capacity is set to rise from 86m b/d in 2005 to 101m b/d by 2017 once all the planned new capacity comes on stream. In 2013 alone, the world is adding a net 1.26m b/d of refining capacity, the IEA has said, including 730,000 b/d more in China and 531,000 b/d in the Middle East, more than offsetting the decline in Europe. Some majors have responded by selling their European refineries, though in some cases they have struggled to find buyers. Others are shifting their focus to areas of higher demand growth and lower costs. Total, for example, has built a big new refinery in Jubail, Saudi Arabia, in a joint venture with the country, which shipped its first cargo last month. The excess capacity in the system has sharply depressed refining margins – the profit earned from processing oil into refined products. Total said recently that it earned $10.60 a tonne from refining in the third quarter, compared with $51 a tonne a year earlier. Exxon blamed its poor downstream earnings on “significantly weaker refining margins” as a result of “increased industry capacity”.

Exxon said earnings in its downstream were $592m, down 81 per cent, or $2.6bn, from a year ago. Shell also saw its downstream earnings fall 49 per cent to $892m. Total said net income in its refining and chemicals unit fell 42 per cent from €567m to €330m. Exxon last year cut its exposure to the refining industry by selling out of its business in Japan. David Rosenthal, the company’s vice-president for investor relations said on a call with analysts that Exxon was “always looking at all of our assets, we’re always talking to people, people are approaching us and so we’ll see how that goes.” Shell said its downstream earnings in North America were affected by the narrowing price differential between West Texas Intermediate, the main American crude oil marker, and Brent, the global benchmark. It also cited the effect of maintenance activities at its refineries.

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