Pain for some is gain for others.

Chinese and Indian companies are looking to buy in Europe

Source: ICIS, Money Control , Economist Shedding Downstream By Oil Majors Battered by 15 year-low margins, European oil majors such as BP and Royal Dutch Shell have reported billions of dollars of losses from their oil refining businesses. Many of them have decided to shed some downstream operations and concentrate increasingly on extracting oil and natural gas. Shell, for example, is looking to divest 15% of its global refining business including refineries at Gothenburg in Sweden, Los Angeles in the US and in New Zealand. Chevron, the second-largest US oil company, also plans to put some of its refineries up for sale, including that at Pembroke in the UK. ConocoPhillips is considering either selling its Wilhelmshaven refinery or turning it into a terminal. It cancelled a plan to upgrade the refinery BP plans to sell its 475,000 barrel-a-day Texas City refinery in Texas and its 266,000 barrel-a-day Carson plant in California.

French major Total is looking to sell the 221,000 barrels per day refinery, Britain's third-largest refinery, which began operation in 1968 and employs about 500 people. In May, Total said it had received several bids and would hope to reach a deal after the summer

Yet, one man's pain is another man's gain. The emerging oil giants are ready to expand beyond their borders and are eager to buy in developed markets. "Refinery margins will not recover any time soon," says Alan Gelder, head of downstream consulting with research house Wood Mackenzie. "A lot of existing incumbents want to cut losses and put the money elsewhere, so transaction opportunity arises." Emerging oil players keen to capitalize on Europe s woes "For newcomers, it is a great chance to expand capacity and a shortcut to break into different geographical locations," Gelder adds.

India's Essar Oil has held talks with Shell over its Harburg and Heide refineries in Germany and the Stanlow refinery in the UK and, according to reports

PetroChina has also been negotiating to invest in the Grangemouth refinery in Scotland, formerly BP's flagship refinery in the UK, from debt-laden chemicals group INEOS.

The potential acquisition would be strategic. It looks to provide PetroChina with

access to the North Sea crude oil market; it would also give the Chinese giant a foothold in Europe and a more international profile. The Grangemouth refinery is directly connected to the pipeline system for the Forties Field in the North Sea, which is one of the four key North Sea streams used as a global price benchmark.

Firms coming from the developing economies often have a different

agenda to their western counterparts, who are motivated by profits and shareholder satisfaction.

"It is not strictly for commercial reasons as those firms are often
backed strongly by their governments, some are even state-owned," head of regional energy research at Mirae Asset Securities in Hong Kong, Gordon Kwan said.
"Securing supplies of natural resources and improving competition with other extant oil majors are top of the agenda,"

With the world's largest foreign exchange reserves of $2,400bn, China has been encouraging domestic companies to step up overseas acquisitions at a time when it is seeing an increasing reliance on external oil and gas supplies. But potential geopolitical consequences remain a reason for concern. China National Offshore Oil Corporation's (CNOOC's) $18.5bn bid in 2005 to buy Unocal was seen in the US as a threat to national security. But despite that the company has continued the hunt for outbound acquisitions. Recently, the third-largest national oil company in China inked the first Latin American deal, paying $3.1bn to buy 50% of Argentina's second-largest oil producer, Bridas. With majority shares held by state parents, Chinese oil giants enjoy government backing, political connections and easy access to cheap loans to fund any potential acquisition opportunities abroad. Another Chinese oil giant, PetroChina, in March made a joint bid with Royal Dutch Shell to buy Australia's Arrow Energy for $3.2bn. The ongoing quest to European refineries acquisitions is likely to be driven by China and India as the two nations race to plant their flags in various part of the world, according to analysts.

"There

are no signs of stopping oil refining moving from the west to the east, that is where the demand comes from, after all," Gelder added.
A Chinese official told Reuters under condition of anonymity that getting a foothold in Europe would provide his company with an export outlet of diesel from Asia across the Pacific, a basement to export gasoline to the United States across the Atlantic and some access to the North Sea crude oil market

STATE FIRMS "Initiative in the refining sector is moving from the traditional international oil
companies and independent refiners to semi-state and national oil companies (NOC)," Energy Market Consultants Ltd. said. Leading the investment in new refining capacity are upstream giants Saudi Arabia's Aramco and other state run firms in the Middle East Gulf, Brazil's Petrobras, Venezuela's PDVSA and the major Chinese refiners, the consultancy said. When many of new refineries supported by state funds come on stream in the Middle East around 2013-2017, the region will become the main oil product exporter. Until then, Russia will continue to export the largest volume of oil products, it said. The International Energy Agency (IEA) expects the Middle East will account for 17 percent, or 1.5 million barrels per day, of global new crude processing capacity of 8.7 million bpd to be on stream between 2008 and 2014. Most of it will be export-oriented. That is an opportunity that has already attracted the same companies that are slimming their European operations. Total and Aramco are building the Jubail refinery in Saudi Arabia, while the major is considering a shutdown of the Dunkirk plant in its home market France and s more refinery closure would necessary in OECD countries. Much of the exports from these joint ventures will come back to the European diesel market. Europe has chronic shortage of diesel and oversupply of gasoline due to the growing popularity of diesel cars at the expense of gasoline vihchles. WoodMackenzie estimate Europe's diesel imports will rise to 900,000 bpd by the end of 2010 and remain at the same level for next five years, compared with 500,000 bpd in 2008. The refining business has suffered from chronic overcapacity, and thus weak margins, since the 1970s oil shocks, which led to a slump in the use of oil-based fuels for generating electricity and heating homes. A respite came in 2005-07, as a buoyant rich world and increasingly thirsty emerging economies boosted demand. But that was a high point that the rich world may not hit again. Demand for petrol in America has

fallen, and may never regain its previous peak. Refining margins, having touched $4.50 a barrel, are down to one-tenth of that and still falling.

Why Buy?

It makes sense for big Western oil companies to get out of such an unprofitable business and put the capital into exploration and drilling. But refineries weak margins are not deterring oil firms from emerging economies from buying them. One reason is that they are going cheap. This gives the buyers access to declining but still sizeable rich-world markets. Such access is especially useful for those with ambitions to become global oil traders As they buy refineries abroad, emerging-market firms continue to build them back home, where demand is still booming For those firms owned or backed by their home governments, there are other considerations besides commercial ones. China, although it is set to remain a big importer of crude, is desperate to become at least selfsufficient in refining. By 2015 it will boost its domestic capacity by 20%, taking the total to 12m b/d. Middle Eastern oil producers are also building refining capacity to add value to the crude that they pump out of the ground.

European oil industry: latest refinery sales hand the initiative to Chinese and Indian companies (2 March 2011)
In February Royal Dutch Shell agreed to sell its flagship UK refinery at Stanlow to India's Essar for $350m, while TOTAL, Chevron, Conoco-Phillips, and Eni are also looking to shed refining assets in Europe. This is due to the reversal of two major trends. In Europe, it was once the case that refining near the market made more sense than importing refined products, and that owning refineries placed oil majors in the strongest position; now, neither can be said to be true. The three primary drivers behind this reversal are overcapacity, falling demand for oil products, and growing demand for diesel. Refineries work on the basis of economies of scale, and are therefore heavily dependent on high capacity utilization rates. However, oil demand

in Western Europe is now more than 30% below its 1990 peak. Fuel oil has been overtaken in the power generation and heating markets by cheaper, cleaner natural gas; meanwhile, gasoline has given way to the more efficient diesel option as the fuel of choice for automobiles. Consequently, Europe has a massive surplus of gasoline that traditionally finds its way to the US to meet demand during the nation's peak summer driving season. At the same time, Europe cannot produce enough diesels. Rather than pay the huge sums required to convert old refineries - some of them built more than 30 years ago - into modern facilities that can make the products that the market demands, oil majors are instead opting to sell. Those refineries that cannot be sold are either converted into storage facilities or simply idled. Indian and Chinese oil companies are well placed to benefit from this situation. By buying up European refineries on the cheap, companies such as Essar and PetroChina have the chance to gain valuable experience in the region's downstream markets, while also making use of the region's overcapacity, as oil products can be shipped back to domestic markets. Furthermore, surplus products from modern Indian and Chinese refineries that are designed to make higher-spec products can be sold in the European market. It may turn out that what was once a burden to the established energy companies of the West will become a new land of opportunity for the shrewdest of emerging nations.

Source: Data monitor