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Europe was at the forefront of the "second wave" of the
SARS-CoV-2 pandemic and is still the hardest hit region in terms of
deaths per capita. Partly because of the severity with which
coronavirus (COVID-19) struck, European governments have instituted
relatively restrictive lockdown measures. As a result, jet fuel
demand has all but collapsed with gasoline consumption down around
70% last month. Tellingly, diesel is a bright spot in that demand
for the product declined "only" 50% in April. The demand recovery
is also expected to be slower in Europe due to more cautious
government "reopening" plans. Correspondingly, European refinery
runs have also fallen more steeply from their pre-pandemic baseline
than in any region.
Of course, lagging product demand <span/>and a beleaguered refining industry is
hardly a new story for Europe. For many years, Europe has had the
slowest refined product consumption growth - and weakest demand
outlook - of any region. And its refining industry has typically
borne the brunt of global rationalization for that reason.
Specifically, more than 20 European refineries with a collective
distillation capacity of 2.1 million b/d have closed over the past
decade. This accounts for nearly a third of all closures during
this time and Europe was expected to be the epicenter of global
refinery rationalization going forward too.
<span/>COVID-19, thus, has
not created a new problem for European refiners, but it has
certainly made things worse. The collapse in demand, in Europe and
elsewhere, has created a massive refined product surplus, one which
will weigh on profitability for some time. Specifically, IHS Markit
has lowered its outlook for benchmark net refining margins in
Europe by a dollar per barrel (or more) over the next three years.
The company now estimates that refineries accounting for 35% to 40%
of European capacity will be operating in the red in terms of
fuels-only net cash margin by 2025.
Figure 1: Northwest Europe gross refining margin (change vs
pre-COVID outlook)
So while an industry overhaul was certainly inevitable, the
COVID-19 pandemic has compressed the timeline. Rationalization that
might have been spread out over the next decade will now occur much
sooner. Specifically, IHS Markit estimates that some 2 million b/d
of European capacity could now close by 2025, of which 1.1 million
b/d is attributable to fallout from the current crisis.
Figure 2: European refinery capacity and complexity by
enclave
Which refineries are the most vulnerable? Certainly, those that
are smaller and less complex are the likeliest candidates. To be
sure, most of the refineries that were shut over the past decade
were small and/or lacking in conversion capacity. However,
refineries that may look bad on paper often benefit from factors
that are difficult to quantify: captive inland market with its
associated premium, strong retail or petrochemicals integration,
access to "stranded" local crude, and even political support due to
government desire to avoid job losses.
Still, there is no denying that a reckoning is coming for the
European refining industry, and that this reckoning will now arrive
sooner than expected thanks to COVID-19.
Eleanor Budds is a Principal Research Analyst for
Downstream Energy at IHS Markit. Hedi Grati is a Consulting Director of Oil, Midstream,
Downstream, and Chemical at IHS Markit.
