Illustration: Simon Letch
Wednesday, April 13, 2011
The news that Royal Dutch Shell has bitten the bullet on its oil refining plant in NSW, Clyde Refinery, should come as no surprise. The economics of refining fuel are not what they used to be.
For Shell in particular its move to pull back from this business is in keeping with a worldwide spring cleaning exercise that has resulted in it selling down its stake in Woodside Petroleum. The sale of the remainder of this 24 per cent stake is inhibited only by its ability to find an appropriate buyer and an attractive price.
On a near weekly basis rumours swell around the market that Shell is in negotiations with BHP to pick up the stake – motivated by the fact that it would represent such a perfect fit. BHP has the money and the Australian pedigree and interests in Woodside’s LNG projects.
The Woodside investment no longer fits well for Shell.
Nor does Shell appreciate the skinny refiner margins that it receives from its Clyde refining plant.
The proposal to transform the Clyde refinery into a storage unit says plenty about where Shell sees these margins heading.
Apart from a few years, between 2005 and 2007, it is generally held that worldwide refinery margins have been in a long-term decline.
Caltex, which is listed in Australia, disagrees and was quick to assure the media yesterday that it saw a gradual recovery in its refiner margins as demand growth outstripped net capacity additions. It retains refining as a key part of an integrated business.
Having one of the competitors pull out will only help Caltex. It has been busy investing in its refining business to keep it competitive.
But Shell does not see it the same way. It takes the view that the Clyde plant was too small to compete with the imports coming in from mega refineries in places like India, Korea, Japan and the Middle East. On the one hand the scale (and technology) makes these new plants lower cost operations. Shell said it would need to undertake large scale investment in Clyde but had decided against it – pending submissions from employees and unions.
Shell’s vice-president Andrew Smith would not elaborate yesterday on what the staff could do to convince the company to keep the refinery open. Probably nothing.
It is happy enough to be at either end of the production chain – extraction and retailing – but in Australia at least does not see the benefit in having the integration that refining allows.
Last year Shell undertook a tidying up exercise in New Zealand, where it sold a 17 per cent stake in a local refiner and 200 petrol stations.
The shrinkage in oil refinery has been a worldwide problem, and at various times Australian operators have tried to merge or rationalise.
ExxonMobil’s attempts to sell its petrol stations to Caltex in 2009 were blocked by the Australian Competition and Consumer Commission. They were ultimately sold to the convenience chain 7-Eleven.
On the world stage there has been a growing trend among the big Western oil companies to ditch their refining assets.
A recent article in The Economist cites several large divestments including Shell’s $1.3 billion sale to the Indian conglomerate Essar of its Stanlow refinery in north-western England. In February the state-owned PetroChina paid $1 billion for a half-share in Grangemouth refinery in Scotland and in another at Lavera in the south of France.
And there are others on the block in the US and Europe.
The buyers are typically state-owned players in emerging Asia and the Middle East with agendas other than just profit. They are attracted by the low prices.
There is a view that 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.
Refining margins, having touched $4.50 a barrel, are down to one-tenth of that and still falling, The Economist says.
The new buyers, who in many cases include private equity players, could also be taking a punt that at some stage the refining margins will recover.
There is certainly evidence that margins move a bit in response to economic cycles, but the longer-term trend is not encouraging.
For the state-owned buyers of these assets such an outcome may not be a particular problem, but for private equity, excess capacity in the market and the potential for margins to fall even further could result in another wave of refinery selling.
Many experts argue that the industry is in need of further consolidation.
But in Australia at least there is no suggestion that this will be allowed. Indeed, refiners have been blamed in part for the high fuel prices at the bowser, and there is little or no political willingness for any part of the production process to become further concentrated.
For the older, less efficient refineries like Clyde there are clearly no buyers. As a result, hundreds of workers face the axe.
The decision was made without so much as contemplation of a carbon tax.
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