Given the incessant decline in European refinery margins, many U.S. firms are seeking to sell off their European assets. Murphy Oil Corporation (NYSE:MUR) is one of those giants looking to offload its U.K. downstream assets. Its 130,000 bbl per day Milford Haven refinery in Wales may be reduced to a petroleum storage terminal after sell-off.
In the northwest, Phillips 66 (NYSE:PSX) is planning to sell its 71,000 bbl per day refinery in Ireland. However, buyers are often unwilling to pay full price for these refineries as these are often turned into storage facilities and the refining operations are discontinued.
Refinery Margins Disparity
The disparity of refining margins across the globe is tremendous. On average, refineries in the Middle East earned 61 percent more margins than refineries in Europe in 2013. Refineries in the U.S. earned 19 percent more margins per bbl in 2013 than refineries in Europe. The trend in refining margins can be seen in the graph below.
Figure 1: Regional Refinery Margins, 2003-2013
As a result, there has been a loss of 394 MBPD capacity in Europe in 2012 alone. However, during the same period, consumption in Europe shrunk by 430 MBPD thereby reducing the need for firms to locate near markets.
Refining capacity shrinkage is clear in the graph below. While the capacity in Europe and Latin America has been shrinking, capacity in Asia Pacific, Middle East, Africa and North America has been expanding.
Figure 2: Regional Refining Capacity (MPD), 1973-2012
Europe to Cater to Current Consumption
However, the utilization of refinery capacities has improved in Europe to cater to current consumption and to compensate for loss of output from shutdowns. Refinery utilization in Europe was 81.5 percent during 2012, still below the U.S. utilization rate of 85.4 percent, which remains the highest regional refinery utilization rate in the world.
Companies looking to shut down operations in Europe are market leaders and may actually be setting a trend. Phillips 66 (NYSE:PSX), specifically, has the second largest refinery operations of all the North American firms. We already saw a 16 percent cutback in the refinery operations of Phillips 66 in 2011 and it seems that the declining European refinery margins are incentivizing movements from Europe to North America.
The changes in refining capacities of different firms are illustrated below.
Figure 3: Refining Capacities of Different North American Companies, 2008-2012
Many analysts feel that moving out of Europe is a premature decision. Analysts feel that Europe still has much potential in terms of demand and the disposal of refining plants at asset value loses the production potential of the plant.
The U.S. already accounts for 18.8 percent of the worldwide refining and is likely to capture more of this share as refining on site becomes less profitable than selling refined products. However, we are likely to see a change in the geographical distribution of refining operations globally as weakening margins in one region and increasing margins in another region encourage shifts across the globe.