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Wednesday, August 10, 2022

Refinery: From a declining business to a gold mine for oil companies

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View of the Pemex refinery in Tula de Allende (Mexico).Henry Romero (REUTERS)

When the price of fuel shoots up, the first impulse is to look at the development of crude oil. It is logical: it is its main raw material, essential for gasoline and diesel to reach the gas stations. However, in times like these, to fully understand the escalation, one needs to look at other aspects of the production process that allows the pumps to be powered. the barrel of Brent it is still far from its all-time high – €100, 50% below the level it reached in the summer of 2008 – and yet hydrocarbons have been breaking records in recent weeks. The reason for this seeming paradox must lie in refining, the least visible phase of the production process – which consists of the chemical conversion of crude oil into fuel for cars, trucks or planes – and in which a funnel has formed, giving way to many large ones Good news for industry companies as bad news for consumers already battered by inflation and showing no signs of abating.

Oil companies are experiencing one of the sweetest moments in years. With Russia – one of the major hydrocarbon-exporting powers – out of the picture and the closure of a large number of processing plants in recent years, the big names in crude are making significant profits from refining, an activity that has lost supporters in recent times and in which the bolts had won the game for new openings.

The reasons for this dynamic were both short-term – the pandemic plunged fuel consumption and destroyed global refining capacity by around three million barrels a day, a real outrage – and medium and long-term – the next combustion vehicle sell-by date has forced many investment plans into new refineries to reconsider—.

However, the tide has turned in record time: the rapid recovery in consumption and the large number of refinery closures in Europe (less than a dozen in the last decade) have given an unexpected boost to companies that have kept theirs. Repsol is a good example of this trend: the refinery profit margin tripled between April and June compared to the previous three months and increased tenfold compared to the same period last year.

“Supply constraints to meet demand for diesel, gasoline and kerosene have significantly increased refining margins worldwide, especially after the war in Ukraine disrupted supply chains,” argued the Antonio Brufau-led company. However, his case is by no means unique. In the Iberian peninsula itself, Portuguese company Galp – which reports results this Monday – has already reported a similar increase in refining margin: from less than $7 a barrel to over $13 in just three months.

Anglo-Dutch Shell has also seen its refining margin in Europe multiplied by 2.8 in the second trimester compared to the immediately preceding three months with a “positive impact of $800 million to $1.2 billion” on the income statement. British BP also more than doubled its earnings per barrel. And no one in the industry doubts that the rest of the industry giants will release similar numbers in the coming days when they report their earnings results.

Across the Atlantic, giant Exxon Mobil — the largest refiner in the United States — reported a profit from this activity to $4.4 billion in the second quarter of the year. That’s more than five times the performance recorded in the pre-pandemic era. These extraordinary gains — out of the blue, to use the industry-fashionable phrase — are “largely the result of underinvestment by many players in the energy industry over the past several years,” the company said in a statement.

If its own projections come true, Exxon will have made $18,000 million between April and June. With prices and green numbers through the roof, the Texas oil major has become a major target of Joe Biden’s rant, who has publicly accused it of “making more money than God” at the expense of consumers. As Bloomberg recently recalled, no US president with a gallon of gas over $4 has been re-elected; today he is at 4.5, having reached five.

This reality is far from being reversed in the short term: Refining margins “are going to stay high for quite a while,” according to Alastair Syme of US bank Citigroup in a recent customer report. “In the last few months, margins have been significantly higher than in the golden age of the industry between 2004 and 2007,” Alan Gelder, analyst at the energy consultancy, told EL PAÍS Wood Mackenzie. “And it is difficult to imagine that these profits will return to normal levels in the medium term,” the consultant’s technicians note Facts Global Energy (FGE) in a study on the subject.

Although the sector’s sudden revival will increase investment, with a large number of new refineries coming online – particularly in Asia and Africa – these new plants will have little power to reconcile the forces of supply and demand, according to calculations the International Energy Agency (IEA, the energy arm of the OECD). The decompensation is – and will be – particularly pronounced in the case of the so-called middle distillates: diesel and aviation kerosene.

We will have to wait until the second half of this decade for the electrification of transport, especially private use, to have a “significant” impact on fuel demand. “As the number of internal combustion engine cars decreases, refineries have to adapt or close their production facilities. Margins are getting weaker, especially in the Atlantic Basin,” concludes Gelder. There is no future, let alone far away; in the meantime, however, the box will continue to function at full capacity.

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Source elpais.com

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