Royal Dutch Shell Plc  .com Rotating Header Image

Refining Squeezes Oil Profits


January 14, 2010 6:01 P.M. ET

Depressed Demand for Fuel Causes Headaches Even as Crude Prices Firm


The global refining industry is turning into a major headache for big Western oil companies, putting a drag on earnings even as rising oil prices improve the prospects for other parts of the oil business.

Refining has been hit as the global recession depressed demand for industrial and transportation fuels, especially in Europe, just as additional capacity is coming onstream in China, India and the Middle East.

Meanwhile, prices for oil products like gasoline and diesel have failed to keep pace with the rising price of crude, putting intense pressure on profit margins for refining—the difference in value between the products a refinery makes and the crude oil used to produce them.

The result is a paradox for the oil majors. As oil prices rise, they are earning big bucks from their upstream operations—the business of finding and pumping crude. But they’re seeing profits plummet in downstream operations, which consist of refining and marketing.

That disconnect is becoming problematic for the largest oil companies, says Olivier Abadie, a Paris-based refining analyst at Cambridge Energy Research Associates. “To resolve this situation I wouldn’t be surprised if they’re thinking about splitting off their downstream divisions, as they did with petrochemicals,” he says.

Analysts have focused on Royal Dutch Shell PLC, because it is more exposed to refining than some peers. On Wednesday, a clutch of analysts cut their fourth-quarter earnings forecasts for Shell to reflect the impact of weak refining margins.

Shell declined to comment for this article.

RBS cut its estimate for Shell’s fourth-quarter earnings by 19% to $2.9 billion and said it expects its refining and marketing divisions to post a loss of $0.2 billion. Brokerage Evolution Securities also cut its earnings forecast for Shell. Shell will release results early next month.

Shell isn’t the only major to suffer. In an update released Monday, Chevron Corp said fourth-quarter downstream results are expected to be sharply lower, because refining margins had declined to the “lowest levels of the year.”

Chevron said the sharpest drops took place in Singapore, where margins slid 46% from the third quarter to just $2.46 a barrel. U.S. West Coast margins fell 27% to $11.83 a barrel.

Exxon Mobil Corp. hasn’t issued a fourth-quarter update, but its downstream earnings fell 90% in the third quarter from a year earlier, a much sharper decline than its overall earnings slide of 68%.

Demand for oil products has declined by 2.1 million barrels a day over the last two years, or 2.4%, according to Cambridge Energy’s Mr. Abadie. Yet the world keeps building more oil refineries. Nearly nine million barrels a day of new capacity will have been added between 2008 and 2014, according to the International Energy Agency, mostly in China and the Mideast.

Western companies have responded by cutting their operations. Shell plans to sell off about 600,000 barrels a day of its global refining capacity, about 15%, over the next three years. It is in discussions with Essar Oil Ltd. of India to sell assets in the U.K. and Germany. Earlier this month it said it will turn its Montreal East refinery in Canada into a fuel terminal, after failing to find a buyer.

Yet the sales aren’t happening fast enough to restore balance. According to Bernstein Research estimates, only five refineries were permanently closed last year, representing some 200,000 barrels a day of upgrading capacity. Yet one million barrels a day of new capacity came onstream last year.

Total SA’s efforts to rationalize its downstream division has hit resistance from its work force. Total workers protested Thursday at two of its French refineries—Flanders, in the north, and La Mede, in the south—over fears the company is planning to shutter Flanders. The plant has been closed since September due to “poor market conditions.” Total has also reduced capacity at its Normandy refinery.

Mr. Abadie says he doesn’t expect refining margins to recover any time soon. “In the normal course of events, they won’t get back to the comfort zone for several years,” he says.

WSJ Article

This website and sisters,,,, and, are owned by John Donovan. There is also a Wikipedia segment.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Comment Rules

  • Please show respect to the opinions of others no matter how seemingly far-fetched.
  • Abusive, foul language, and/or divisive comments may be deleted without notice.
  • Each blog member is allowed limited comments, as displayed above the comment box.
  • Comments must be limited to the number of words displayed above the comment box.
  • Please limit one comment after any comment posted per post.