Europe Faces a Glut of Oil Refineries

The global surplus of crude-distillation capacity could grow to as much as 3.4 million barrels a day by the fourth quarter, or the equivalent of 3.9% of global capacity in the first quarter of 2008, before many new plants came online, assuming refinery throughput stays at a typical 84%, according to the Paris-based International Energy Agency. In Asia and the Middle East, where most of the new plants are located, a further 630,000 barrels a day of crude distillation capacity is expected to come onstream this year, on top of the 1.6 million barrels a day added last year, the IEA says.

The capacity glut has already forced some companies to close or convert plants to stem their losses. Last year, Europe’s largest independent refiner, Petroplus Holdings AG, idled its Teesside refinery in the U.K., while French oil major Total SA halted refining operations at its Dunkirk plant in response to the slump in Europe’s demand for oil. More than 25% of refineries in the Atlantic Basin, or Europe and North America, lost money in 2009, according to Wood Mackenzie estimates.

“The biggest problem for [refiners in] Europe right now is that demand has collapsed; it’s imploded,” says Stephen George, senior refining analyst at U.K.-based consultancy KBC Energy Economics.

But Mr. George expects ailing European refineries, rather than shut down entirely, to limp along with narrow, and in some cases, negative margins in the coming years.

Alan Gelder, head of downstream consulting at Wood Mackenzie, says, “Europeans do not obey strict commercial logic” when deciding whether to shut down refineries.

WSJ