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8/10/2019 Future of European Refining Industry
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KPMG GLOBAL ENERGY INSTITUTE
The Future of theEuropean Refining
Industry
June 2012
kpmg.com
http://www.kpmg.com/http://www.kpmg.com/8/10/2019 Future of European Refining Industry
2/23
Executive Summary 01
Michiel Soeting
This time its bad and it could stay that way 02
Jeremy Kay
Acting differently:What this means 06
for refinery owners
Gerard Shore
Acting differently:
What this means 16
for investors
Anthony LoboWhy KPMG? 18
2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
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The Future of the European Refining Industry | 1
EXECUT
IVESUMMARY-
MICHIELSOETING
THEFU
TUREISUNC
ERTAINSO
ACTDIFFERE
NTLY
Michiel Soeting
Global and European Head of Energy
and Natural Resources
T: +44 20 7694 3052
E: michiel.soeting@kpmg.co.uk
European refiners are on a different path to the one
they have been used to for the past 50 years.
The European refining industry has gone through
numerous cycles, but this time many of the changes
are likely to prove permanent and we expect the
current trends of falling demand, rising imports,
increasing European legislation, growing
competition from emerging markets and eroding
margins to continue.
However, it is not all negative:
The worlds appetite for hydrocarbons will keepgrowing, especially in India, China and across the
wider Asia Pacific region;
Positioning refinery assets and operations properly
now - when asset purchases are cheap, and the
costs of improvements are not as expensive as
they were in the boom years - provides a good
opportunity for high quality European refineries
to compete profitably in the future; and;
Europe remains one of the largest economic
regions in the world, and will be for the
foreseeable future.
Significant recovery, though may take some time:
cost pressures will continue; over-supply and
competition will remain fierce; and the European
carbon tax will continue to tilt the playing field in
favour of overseas refiners that are subject to less
regulation. The industry has seen a number of plant
closures in recent years and more may well follow
as demonstrated recently by the announced closure
of the Coryton refinery in the UK. The survivors will
have to be leaner, more efficient and more able to
adapt to changing market needs. A strong focus now
on building and maintaining their relative competitive
advantages is vital to help ensure their survival today
and profitability in the future
THE SURVIVORS
WILL BE LEANER,
MORE EFFICIENT AND
MORE ADAPTABLETO CHANGING
CUSTOMER NEEDS... 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
mailto:michiel.soeting@kpmg.co.ukmailto:michiel.soeting@kpmg.co.uk8/10/2019 Future of European Refining Industry
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2 | The Future of the European Refining Industry
JEREMYKAY
THIS
TIMEITSBADANDITCOU
LDSTAYTHA
TWAY Jeremy Kay
Partner, KPMG in the UK
T: +44 20 7694 4540
E: jeremy.kay@kpmg.co.uk
The profitability of the European refining industry
has long been cyclical, with repeated fluctuations
in demand, price and production levels. However,
this time things are different, and many of the
challenges the industry faces today may prove to
be permanent.
For example:
Many European refineries built 30 to 40 years
ago using less sophisticated technology are
now at a disadvantage. Built to a smaller scale to
process lighter, sweeter crude oils, producing an
excess of gasoline, and with strong labour lawsand high wages; many European refineries have
experienced a structural erosion of their margins;
The size of the Middle East, Indian subcontinent
and Chinese refinery building program has
fundamentally shifted the scale and location
of the new, high quality, price setting plant.
Operators from these regions enjoy a number
of key advantages, including new equipment,
cheap labour, large reserves of capital and rapidly
growing local demand;
Many companies in Asia now consider Europe
a key market for both exports and acquisitions.
For example, Essar Energys acquisition of the
Stanlow Refinery in the UK and PetroChinas
acquisition of shares in trading and refining
joint ventures with Ineos, including Scotlands
Grangemouth refinery and the Lavra refinery
in France1.
With the transfer of some European refinery
ownership to non-European companies, their
new owners are less likely to be influenced
by local politics when considering maintainingunprofitable plant; and
European refiners are likely to continue to be
disadvantaged by the disparities in environmental
legislative requirements across the globe.
Furthermore, with continuing pressure on margins
the short to medium outlook remains bleak and not
surprisingly divestments are on the rise. But what
is interesting is less the origin of those who have
bought assets, but more the fact that European
refiners are increasingly focusing on investing
in tighter portfolios of quality survivor sites to
maintain both quality and competitive advantage.
AGING EUROPEAN REFINERIES GENERALLY HAVE
HIGHER MAINTENANCE AND OPERATING COSTS THAN
PLANTS BUILT MORE RECENTLY IN ASIA AND THE MIDDLE
EAST. THIS, COMBINED WITH CURRENT ECONOMIC
CHALLENGES, IS CAUSING THE LESS ADVANTAGED
REFINERIES TO HAVE TO FIGHT FOR THEIR SURVIVALFergus Woodward.Director, KPMG in the UK
1Europes refiners fall on hard times, Financial Times, January 30, 2012.
See also Foreign investment: Indian companies blaze trail across the country, Financial Times, September 15, 2011
2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
mailto:jeremy.kay@kpmg.co.ukmailto:jeremy.kay@kpmg.co.uk8/10/2019 Future of European Refining Industry
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The Future of the European Refining Industry | 3
Overcapacity - the challenge of supply
versus demand
Once again European refining is suffering from
over-capacity versus demand.
Demand for fuel is heavily dependent on economic
activity, which has dropped dramatically in Europe
since the start of the global economic downturn
in 2008. Compounding this effect is the impact of
continuing improvements in fuel efficiency and the
substitution of refinery hydrocarbon fuels by bio-fuels.
At the same time there has been some modest
reduction in refining capacity. A few small
refineries have closed, and some older units -
particularly distillers - have either been put on hold
or decommissioned. But investments in plant
improvements have also continued, and the net
reduction in refining capacity has fallen well short of
the reduction in demand for fuel.
As a result, utilisation of Europes refineries has
fallen dramatically since 2008, and are likely
to remain low for many years. Furthermore,
with refining margins closely aligned with plantutilisation, the outlook for margins is likely to remain
depressed for some time to come.
REFINING CAPACITY AND UTILISATION - EUROPEAN UNION
90%16000
89%15900
88%15800
87%15700
86%15600
85%15500
84%15400
83%15300
82%15200
81%15100
15000 80%2000 2001 2002 2003 2004 2005 2008 2009 20102006 2007
Refinery capapcity Refinery utilisation
Refinery
capapcity
(Thousandbarrelsperday)
Refineryutilisation(%)
Source: BP Statistical Review of World Energy June 2011: KPMG analysis
2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
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4 | The Future of the European Refining Industry
The Skewed Barrel
Europe has long experienced a gasoline middle
distillate imbalance, as the industry produces a
surplus of gasoline for export and has to import
diesel and heating oil. Refining margins therefore
reward diesel production over gasoline, and those
refineries with hydrocrackers (which make more
diesel) benefit from this skew, whilst refineries with
only FCC crackers (which make more gasoline) are
penalised by it.
For many years Europe has imported middle
distillates from Russia and the US, whilst exporting
gasoline to the US and Africa. These flows are likely
to continue. In addition some Middle Eastern and
Asian diesel exports may make their way into Europe.
US GASOLINE IMPORTS FROM EUROPE
Exporters of diesel to Europe have to absorb their
transport costs, and this provides an economic
cushion for good European refiners, though
marginal plants may suffer. However, the real
Achilles heel for less competitive refineries remains
the surplus of gasoline. Any refiner having to export
significant surplus gasoline from Europe to the US
is likely to face increasingly fierce price competition,
and downward pressure on profits especially
given the fact that US demand for imported
gasoline has fallen considerably since 2006. This key
weakness is likely to determine the fate of many
imbalanced refineries and thus large investments
in hydrocrackers and cokers may be their only
strategy for survival, which unfortunately may be
too expensive to justify for a long time to come.
450
400
Thousandsbarrelsperday 350
300
250
200
150
100
50
0
90%
80%
70%
60%
50%
40%
30%
20%
10%
Jan2
000
Jan2
001
Jan2
002
Jan2
003
Jan2
004
Jan2
005
Jan2
006
Jan2
007
Jan2
008
Jan2
009
Jan2
010
Jan2
011
US gasoline imports from Europe % of total US gasoline imports
0
Source: US Energy Information Administration 2011: KPMG analysis
2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
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The Future of the European Refining Industry | 5
2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
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6 | The Future of the European Refining Industry
ACTINGDIFFERENTLY:WHATTHISMEANSFOR
REFINERYOW
NERS
GERAR
DSHORE Gerard Shore
Director, KPMG in the UK
T: +44 20 7311 3268
E: gerard.shore@kpmg.co.uk
In the face of tough market conditions, cost
pressures and the emergence of new players from
Asia and the Middle East, European refinery owners
should act differently now if they are to be profitable
in the future. The main options available to them are:
Investin their refinery plant to increase
production, improve yields, and reduce costs
Improveoperations, procedures and
management to reduce costs and improve yields;
Divestunprofitable assets to maximise return on
investments made; or Closeunprofitable assets, and possibly convert
some, or all, of the site to other uses, such as
storage.
Invest
Technology improves, existing plant wears out,
energy costs grow, and the advantages of scale
grow ever larger. These truths have been with the
refining industry since its beginnings, and continue
to mean that over the long term all refineries will
require new investment if they are to remain
competitive and profitable.
But timing is everything. Investing too early devours
the cash flows of previous investments, and
waiting too long can tip the refinery from a survivor
site, where reinvestment will pay, into a closure
candidate, where it is impossible to justify the costs
of upgrading investments on what is fundamentally
an uncompetitive plant.
Given the emerging dominance of high quality new
refineries East of Suez, it is critical that owners of
European-based refineries understand and clearly
acknowledge which category their site fits into.
Sites without competitive advantage are becoming
increasingly poor reinvestment candidates, and
should be placed on a path to harvesting cash and
either divestment or closure.
On the other hand, where a refinery retains inherent
advantages from its location and existing plant,
then reinvesting in existing or new plant can prove
profitable. To reap the full rewards from owning these
survivor sites it is critical to invest steadily through
the life of the site, as maintaining competitive
advantage is likely to generate significant profits
and cash flows over the cycle. For these sites, it isessential to have a clear investment strategy.
The following are some investment options
to consider.
Upgrading capacity
Investment in coking, deep cracking, expanding
existing crackers and other plant upgrades are all
expensive options, not to be considered lightly. But,
the reality is that straight-run capacity is unlikely
to be cash positive again, and even traditional FCC
investment margins are being steadily eroded
over time. Therefore, as East of Suez products and
economics enter the European market, the existing
upgrading plant will increasingly become themarginal operated plant and therefore the margin-
setting capacity.
All survivor sites must maintain a clear strategy for
steady investment in upgrading capacity. And, for
those prepared to invest strategically, now is a good
time to seize the opportunities presented by weaker
investment costs during the economic down-turn
while capturing the high cash flows that should flow
from plant that commission ahead of the next margin
peak. This peak may be some way off, given the
depth of this down-turn and the economic problems
in the region, but it will come, and will remuneratecarefully considered but bold investment decisions
which are made in sufficient time.
Capability to process poorer quality crude oils
For many years, most coastal refineries in North
West Europe have been configured to run a wide
variety of crudes, taking advantage of the liquidity
in the traded crude oil markets to provide them with
cost competitive crude oil on the day. Operating
flexibility, plenty of storage capacity, and an
entrepreneurial approach have paid off handsomely.
Investments to run poorer quality crude oils are
likely to continue to pay off, as available crude oils
become ever heavier, increasingly sour and more
contaminated with heavy metals and the like.
Product Quality, Energy Cost Savings and
CO2 Emissions
Most European refineries have now made the
investments needed in desulphurisation capacity
to meet gasoline and diesel specifications imposed
by the last wave of environmental legislation. The
next major threat is on the quality of bunker fuels.
This is likely to be a significant issue for coastal
refineries, and could hasten and complement the
drive towards deeper upgrading.
2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
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The Future of the European Refining Industry | 7
TO IMPROVE PERFORMANCE, REFINERS WILL CONTINUALLY
NEED TO CHALLENGE ALL ASPECTS OF THEIR BUSINESS.
INVESTMENT OPPORTUNITIES MUST BE SCRUTINISED
AND IMPROVEMENTS PURSUED RELENTLESSLY IN ALL
COMMERCIAL AND OPERATIONAL AREAS
2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
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8 | The Future of the European Refining Industry
And with CO2 emission prices likely to rise, energy
saving investments are now firmly back on the
agenda. It is even possible that in the next decade
some refineries will consider investment options
for carbon capture and storage of CO2 as a way of
mitigating the cost of CO2 emissions.
ImproveWhether margins are good or bad, one thing
remains true - in absolute terms they are small.
The profitability of a refinery is highly leveraged
and small yield and cost improvements can make
a large impact on the bottom line.
Once the investment is made the key is continuous
improvement if this does not happen the refinery
will, inevitably, drop back. A well operated plant,
getting the best yield from the best available crude
oil, and paying continuous and steady attention to
costs is essential to get the desired return on the
investments made.
Operations and Maintenance - running the plant
reliably and safely
Poor reliability and plant availability can be
devastating to a refinerys profit and cash flows.
The pace-setters operate their plants safely,
maintain them properly and often have the lowest
operating costs in the business with a significant
difference in performance and approach versus
average performers.
So how do these pace-setters create and
maintain this circle of safe, highly reliable and lowcost operations?
The first key principle is doing everything right,
the first time. Good operators have - and follow - a
good Operating Management System. This spells
out - in a practical way - procedures to be followed,
and provides the information needed to make good
decisions from the top to the bottom of the
organisation. At the same time, it helps build an
organisation and culture of competence and
compliance, based on continuous improvement, in
which well-trained people gets things done
properly, the first time.
The second key principle is that good operators
inspect and maintain their plant properly, from the
start, and without fail throughout its operating life.
They have consistent, clear and fully funded plans
and strategies for maintenance, conducted within a
quality Maintenance Management System, which
is executed through both good times and bad.
Reliability Centred Maintenance (RCM) dominateswith high proportions of preventative and predictive
maintenance on production critical equipment,
limiting the need for reactive maintenance which
results from plant failure. This proactive approach to
maintenance has been proven repeatedly to deliver
the lowest operating costs.
Production optimization and crude acquisition
Feedstock typically accounts for 90 percent of the cost
base of the refinery. Small improvements in yield and
costs drop straight through to the bottom line, and can
make a huge difference to profit and cash flow.
Intellectually, all refiners understand the
importance of making the products and buying
the crude oil that maximises their margin on the
day. However understanding market demand,
optimising refinery production, and buying and
running the right crude at the right time at the right
price remains a crucial activity, and is sometimes
almost a dark art, understood and available only to a
few technical experts.
Commercial optimisation, as it is often called, draws
heavily on the need to bring together commercial,
trading, technical and operating skills. It is heavilydependent on the knowledge and skill of the people
involved, and can make an enormous difference to
the actual margin captured at any time.
2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
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The Future of the European Refining Industry | 9
2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
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10 | The Future of the European Refining Industry
Given the value at stake, we would recommend
frequently revisiting this area and investing
significant time and cash in a number of areas:
Examining, improving and periodically rebuilding
the economic planning, plant optimisation and
feedstock procurement processes;
Upgrading the optimisation models used.
However, it is even more important to regularly
review whether: they are being used properly;
the data fed into them is soundly based; the
processes for making decisions from them are
robust and valid; and the human judgement that
must overlay any model-based process is based
on good experience and skill; and
Understanding the way in which the interface
between traders, commercial teams and refiners
is managed. This can be a huge source of value,
but the tension between traders and refiners
can quickly become counterproductive if left
uncontrolled and unmanaged.
A renewed focus on optimising individual process
unit performance can also provide significant
improvement opportunities. Opportunities to
increase product yields by processing alternative
product streams and optimising operating
parameters are too often overlooked in favour
of the larger improvements from major capital
investments. These smaller opportunities can
deliver significant value rapidly and often with very
modest investment.
Finally, member firms experience indicates that
unstructured and outdated monitoring, control and
optimisation processes frequently contribute to
sub-optimal unit performance. These processes
can often be improved by clearly redefining the
accountabilities of Operations and Technical
personnel and by installing robust cross-functional
governance mechanisms.
Variable energy and utility costs
Although variable cash costs account for a smaller
proportion of the total cost than feedstock, they can
cost tens of millions of Euros and must therefore bea key area of focus for refiners.
Energy and utilities are by far the most significant
items. Member firms experience is that even
in modern sites improvement opportunities
exist to reduce these costs, particularly around
key equipment such as furnaces and turbines.
The pursuit of these opportunities is also helped
substantially by the application of on-line energy
monitoring and energy management systems.
An efficient way of reducing variable costs is through a
plant-wide energy and utility assessment. This involvesmapping production unit energy consumption against
product stream throughputs, with comparisons
made against the original design performance of
the equipment, or other suitable benchmarks. The
resulting improvement opportunities are usually best
delivered using cross functional project teams of
Technical and Operations personnel.
Fixed cash costs
INDICATIVE REFINERY FIXED CASH COST
BREAKDOWN BY FUNCTIONAL AREA
HR Admin
Commercial
Technical
HSSE
Projects
Operations
Maintenance
42%
28%
9%
6%
6%
5%2% 2%
Source: Analysis based on KPMG firms engagements
Managing, and where possible reducing, fixed cash
costs is one of the most difficult areas for refiners to
deal with. Five to eight percent of the total cost baserelates to employees, contractors and various goods
and services procured. However, our experience is
that these costs are often not fully optimised.
Reasons for this are:
Management lacking the right tools and
approaches, with cost reduction programs
often focussed on short terms actions (e.g.
discretionary budget cuts across the board, or
freezing / cutting discretionary spend);
Lack of visibility of the true cost base and
headcount of the organisation at a sufficient levelof detail to enable a clear line of sight between
improvement projects and bottom line impacts;
Adopting cost optimisation activities in the
absence of robust hard economic facts and
comparator insights that dispel myths and
challenge the status quo;
Lack of external challenge to maximise potential
value without compromising on operational
integrity; and
Employment legislation and weaknesses in the
quality of Industrial relations.
2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
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The Future of the European Refining Industry | 11
However, as with all costs in refining, if handled
properly a small improvement can often have a
significant impact on the bottom line. Albeit the
reverse is also true, and if allowed to run out of control
it can be extremely difficult to recover profitability.
The key is to have long term focus, underpinned with
clear plans, that keep the plant well maintained and
operated, as well as a steely determination to control
and challenge all fixed cash costs.
KPMG analysis indicates that over 60 percent of
functional fixed cash costs are usually people-
related (including payroll, contractors and
outsourced personnel). These fixed cash costs
can almost always be reduced by optimising work
processes, both within individual functional areas
and at points of high complexity where teams
interface with each other. Examples of areas of
potential opportunity include:
Maintenance inefficient permit to workexecution caused by:
o equipment not ready to be removed from
service
o risk assessment paperwork not completed
o scheduling/timing disagreement between
Operations and Maintenance;
Laboratory embedded inefficiencies in product
testing due to:
o laboratory staff conducting routine low
complexity testing which could have beenabsorbed by Operations personnel
o missed opportunities to conduct in-line testing
o excessive testing conducted beyond required
service levels; and
Operations overstaffing resulting from:
o Sub-optimal shift structures with excessive
cover and overtime in place
o Control rooms not consolidated resulting in low
levels of staff utilisation
o Excessive management oversight in place asdemonstrated by lower spans of control ratios
than similar organisations.
Outsourcing services is a long-established
practice in European refineries. Many refineries
run a combination of in-house and outsourced
maintenance, much engineering is now contracted
out, and outsourcing back-office functions such
as IT, accounting, and transactional HR activities
are common. However it is essential to maintain
control of the core activities of the business, such
as operations, while retaining the capability to
maximise value through effective performancemanagement of outsourced service providers.
Procurement - of both goods and services is an area
in which fixed cash cost reduction opportunities are
likely to exist. Many businesses believe they excel in
procurement - in reality however, this is only true in the
initial supplier negotiations. Often, once agreements
are in place, less importance is placed on delivering
ongoing rigorous performance management, which
results in value leakage. In this situation, a prioritised
review of contracts and suppliers is important to
ensure that performance and productivity goals are
achieved by third-party suppliers.
2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
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12 | The Future of the European Refining Industry
EUROPEAN REFINERIES - DEAL HISTORY
Year Asset name / Bidder Total refinery Seller
location capacity - bpd
2011 Stanlow Refinery, UK Essar Energy 296,000 Royal Dutch Shell
2011 Pembroke Refinery, Valero Energy 220,000 Chevron
UK2011 Grangemouth, UK PetroChina 420,000 Ineos
Lavra, France
2010 Gothenburg Refinery, Keele Oy 87,000 Royal Dutch Shell
Sweden
2010 Ruhr Oel, Germany Rosneft >1,000,000 PDVSA
2010 Heide Refinery, Klesch & Co. 90,000 Royal Dutch Shell
Germany
2009 TRN, Netherlands Lukoil 158,000 Total
2008 ISAB Refinery, Italy Lukoil 320,000 ERG
2008 Petit Couronne and Petroplus 239,000 Royal Dutch Shell
Reichstett Refineries,France
2008 Berre L'Etang, France LyondellBasell 105,000 Royal Dutch Shell
2007 Milford Haven Murco Petroleum 108,000 Total
Refinery, UK
2007 Mantova Refinery, MOL 52,000 IES
Italy
2007 Coryton Refinery, UK Petroplus 172,000 BP
2007 Kralupy and Litvinov Eni 165,000 ConocoPhillips
Refineries, Czech
Republic
2007 Ingolstadt Refinery, Petroplus 110,000 ExxonMobil
Germany2007 Rotterdam Refinery, BP 400,000 Chevron
Netherlands
2006 Mazeikiu Nafta, PKN Orlen 260,000 Yukos-Lithuanian State
Lithuania
2006 BRC Refinery, Belgium Petroplus 115,000 European Petroleum Holdings
2006 Wilhelmshaven ConocoPhillips 275,000 Louis Dreyfus Energy Holdings
Refinery, Germany
2003 Bayernoil refinery, OMV 260,000 BP
GermanyThis table summarises a number of significant European refinery transactions from 2003-2011. Information relates to total refinery capacity quoted publically at time of
transaction which may differ to the JV partner agreement share
Source: Transaction information obtained from bidder / seller press releases and websites (multiple publically available sources)
2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
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The Future of the European Refining Industry | 13
Divest
Investment groups and oil companies from Asia,
Russia and the US are being selective and targeting
only the most advantaged European refining assets.
Even so, divestment remains a viable strategy for
refinery owners if the asset is properly prepared
and the sale closely managed - indeed well over
one million bpd of European refining capacity has
changed ownership since the start of 2010.
Preparing for the divestment
Detailed planning and execution is needed for
an efficient transaction that maximises value.
This sounds logical, but in reality the activity is
very complex, involving many stakeholders, and
thus a properly structured process is crucial. Key
considerations include:
Timing- one of the first key decisions is when
to initiate the divestment process. Value can
be easily destroyed if timing is poor and anearly strategic review of options is essential.
Considerations should include how reliably
the refinery is operating and the current safety
performance as poor performance in either will
deter potential buyers;
Packaging the asset- equally important is how to
package the asset for an efficient sale. Potential
buyers usually want to buy a standalone asset,
but there are instances where infrastructure and
resources need to be shared with the vendors
retained business. Consequently carving out an
asset as a standalone entity, together with a set offinancial statements that represent the business
being sold, can be a highly complex challenge, and,
vendors should be prepared for significant effort
before, during and after the transaction;
Valuation- in the current economic environment
where buyers are cautious and extremely price
sensitive, the valuation approach adopted can
determine whether the divestment process stalls
or proceeds at speed. Over pricing assets often
leads to difficulties later on when the buyer makes
an offer. Also having a clear data based view of
the upside potential within the business and how
this value can be accessed should be a key part of
this process;
Employees- transactions may or may not be
conducted as an entity deal in which the assets
and employee contracts are bought together.
However, whatever the structure of the potential
deal, employee contracts should be thoroughly
reviewed by the seller early in the divestment
process, as vendors will need to be prepared to
discuss terms and conditions in detail with thepotential buyers. This is particularly important for
European refineries where complex employment
legislation needs to be navigated successfully,
and specialist advice is often required; and
Communications- maintaining an engaged and
motivated workforce throughout the deal is a key
challenge. The divestment process often takes
several months (or longer) and the economic
impact of reduced productivity or resignations
of key personnel can be significant. It is therefore
important to clearly define the communications
strategy to be adopted from the outset of the
divestment, and include regular ongoing dialogue
with employees from the start to the finish of
the process.
Following the completion of the divestment the
vendor will need to switch attention to a disciplined
attack on the stranded costs remaining within their
business, for example in support functions. It is also
prudent to monitor how the new owners operations
are performing, as situations can arise where
the vendor is pulled back into operational issues
involving the assets they have divested.
DIVESTMENT REMAINS A VIABLE STRATEGY FOR REFINERY
OWNERS IF THE ASSET IS PROPERLY PREPARED AND THE
SALE CLOSELY MANAGED INDEED WELL OVER ONE MILLION
BPD OF EUROPEAN REFINING CAPACITY HAS CHANGED
OWNERSHIP SINCE THE BEGINNING OF 2010. 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
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14 | The Future of the European Refining Industry
Close or convert
If a buyer cannot be found and operating the
refinery is not economically viable, owners are
faced with two options: closing the refinery (either
permanently or temporarily) or converting some or
all of the site to other uses, such as storage.
Closing a refineryClosing a refinery is a complex and costly procedure.
Environmental costs, demolition work and other
costs can be very high.
The environmental costs of cleaning up the site will
be a major expense. Substantial regulation requires
removal of the accumulated pollution resulting from
decades of past use where requirements were
often less demanding than those today.
Employment law, including pensions and severance
benefits, is another key issue to be managed, with
the costs of severing employee contracts oftenunexpectedly high.
In addition, problems may also arise from the
conflicting interests of multiple stakeholders,
including the refiner, local government, regulators
and employees, which ultimately can lead to
protracted disputes and significant legal costs.
Limiting the damage to the public image of the
refiner throughout the closure process, needs
careful management.
Converting a refinery
Alternatively, converting refineries to terminals can
mitigate many closure costs, extend the assets usefullife, reduce the plant costs and release working capital.
If well located, and if the tank farm and logistics
assets are in good condition, this can be an attractive
alternative to closing the refinery completely.
But not all refineries are suitable for conversion to
terminals. Key constraining factors include:
On-site storage capacity - whether this is
sufficient for the site to operate as an effective
import/export terminal;
Transportation links - the connectivity of the site to
major ports as well as to other forms of transport
such as pipeline, road, rail and barge; and
Access to surplus capacity - whether the site
can access third party terminal services to
supplement available in-house capacity on a
flexible basis.
CLOSING A
REFINERY IS
A COMPLEX
AND COSTLYPROCEDURE.
IN ADDITION,
PROBLEMS MAY
ALSO ARISE FROM
THE CONFLICTING
INTERESTSOF MULTIPLE
STAKEHOLDERS
2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
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The Future of the European Refining Industry | 15
2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
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16 | The Future of the European Refining Industry
ACTINGDIFFERENTLY:WHATTHISMEA
NSFORINVE
STORS
ANTHO
NYLOBO Anthony Lobo
Partner, KPMG in the UK
T: +44 20 7311 8482
E: anthony.lobo@kpmg.co.uk
With a variety of European refining opportunities
open to investors, selecting the right asset to
purchase is becoming increasingly complex. In
addition, the prevailing economic climate is causing
investors to be increasingly cautious with only the
most advantaged refineries targeted.
The recent acquisition of Chevrons Pembroke plant
byValero is a good example of this approach. The
deal not only gives the US company a presence in
Europe but also ownership of a highly specialised
refinery, with a Nelson complexity rating of 11.8.
The refinery has been well maintained andmanaged, and it has an estimated cash operating
cost 25 percent below Valeros average2 .
Companies from outside the region can also seek out
European acquisitions with the purpose of converting
the site to storage for use as a trading hub.
Depending on the market position, opportunities may
exist to make more money trading oil through the
site than processing and buying an established site
simplifies compliance for environmental regulations.
Buying with a planRegardless of the perceived value and intentions of
the deal, investors should always buy with a very
clear plan on how the target asset will be operated
in the short and long term in order to maximise the
value created. Clearly this is a highly involved and
complex process - however initial considerations for
investors should include:
How well the asset matches current and expected
European product demand, in particular for middle
distillates such as diesel;
A review of how production will be marketed,
including consideration of the impact of the
refinery location;
A detailed understanding of the cost base of
the refinery, and a structured plan for how costs
might be reduced through synergies and greater
operational efficiencies;
A review of staff and management capability
and competency to deliver the business plan -
identifying gaps and establishing mitigation plans;
A review of pension obligations and their impacton future financial performance - which can be
very substantial;
The ability to handle working capital and
credit terms associated with third party crude
purchases; and
Legislation and environmental requirements
on the refinery including potential liabilities for
cleanup or new investment required to meet
environment directives.
Approaching the acquisition using a structured
framework will not only help maximise return oninvestment, but enable the investor to respond with
agility to new commercial, operational, financial and
legislative challenges which will undoubtedly be
encountered.
2Valero Energy to Purchase Chevrons Pembroke Refinery, Marketing and Logistics A ssets in the U.K. and Ireland, press release, Valero, November 3, 2011
2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
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The Future of the European Refining Industry | 17
Essar and Stanlow: an investor rationale
The 2011 sale of Shells Stanlow refinery in the
UK to Essar is an excellent example of how an
overseas investor developed a strong rationale for
acquiring a European refinery in todays market.
Essar is a conglomerate based in India with
operations in energy, steel, infrastructure and
other businesses3. The company paid US$350
million for Stanlow, the second largest refinery
in the UK. The refinery has a production capacity
of 296,000 bpd supplying one sixth of the UKs
gasoline, as well as diesel and aviation fuel4.
Press reports indicated that Shell viewed the
refinery as a mature asset with low returns5. The
sale was also part of Shells plan to consolidate
their global manufacturing portfolio on larger
assets, which on completion would reduce
refining exposure through a combination of asset
sales and closures6.
For Essar, however, the acquisition was justified
on a number of levels. Naresh Nayyar, chief
executive of Essar Energy, believes that the
current oversupply in the market will end assmaller refineries close7. With the acquisition,
Essar can now ship crude oil refined from its
Vadinar refinery in Gujarat to the Stanlow refinery,
using the Tranmere Oil Terminal on the River
Mersey. Finally, Stanlow can help Essar deal with
cheaper, heavier crudes, which would increase
margins for finished products8.
Commenting on the deal, Nayyar says, It is a
good price. It would cost US$5 billion to build
from scratch. It gives us access to an important
market9.
3 www.essar.com/business, accessed March 5, 20124 Foreign investment: Indian companies blaze trail across the country
Financial Times, September 15, 20115 Ibid6 Shell sells UK Stanlow refinery to Essar Oil, press release,
Shell, March 29, 20117 Op. cit. Foreign investment: Indian companies blaze trail across the
Country, Financial Times, September 15, 20118 Ibid9 Ibid
Moving forward
Despite the apparent discouraging news on many
fronts, refining is still one of the largest industries in
Europe - with a throughput of over 12 million bpd10.
The EU is also one of the largest economic regions
in the world, with a GDP approaching 12 trillion,
and will continue to have a significant appetite for
refinery products.
If the current trend continues, in five to ten years
European refining will be smaller, and joint venture
partnerships are likely to become increasingly
attractive as existing refining companies look tomitigate risks and share the high costs of investing
through future cycles. The inexorable process
of change of ownership, refinery rationalisation,
upgrading and concentration on fewer sites is
expected to continue as new high complexity
capacity comes on stream in Asia providing low cost
competition to European refineries.
However, European refinery owners can expect to
make a return on their investments if they have:
A clear understanding of whether their sites are
survivor sites or eventual closure candidates;
Appropriate and clear investment strategies for
each site through the cycle;
A determination and ability to operate their sites
as a pace setter; and
A steely focus on costs and performance.
But only the best will make an attractive return
and to do so they will have to face the difficulties of
succeeding in a highly mature industry by developing
innovative solutions to meet the changing market and
growing competition from overseas.
WITH A VARIETY OF EUROPEAN REFINING OPPORTUNITIES
OPEN TO INVESTORS, SELECTING THE RIGHT ASSET TOPURCHASE IS BECOMING INCREASINGLY COMPLEX
10 BP Statistical Review of World Energy June 2011
2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
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18 | The Future of the European Refining Industry
WHYKPMG? This is a time of extraordinary global economic
and political turbulence which has led to many
challenges for the oil & gas industry. As a result,
owners and operators of European refineries
need forward thinking and practical advice from
professionals who understand their businesses.
KPMGs Vision and CommitmentKPMGs oil & gas practice has one clear vision -
to be the leading provider of professional services to
the oil & gas industry.
KPMGs global network of independent member
firms provide audit, tax, and advisory services11; our
methodologies form the foundation of our approach
worldwide. KPMG recognizes that every business
is different, each with its own internal and external
pressures and challenges. Our methodologies
are therefore flexible to enable our people to use
their knowledge and experience to apply them
appropriately for each client.
Crucially, the services member firms offer start
from our clients perspective. We look at industry
challenges from multiple angles, pooling our
knowledge and resources to develop holistic
services that are designed to fit our clients ever-
changing challenges and requirements.
Through our global network and our 11 oil & gas
Centres of Excellence12, we constantly strive to
provide fully integrated and tailored services of the
highest quality providing clients with the skills and
experience they need to help ensure success.
KPMG member firms provide professional
services to:
84% of the top 50 oil & gas companies listed in
Forbes 100013
80% of the 76 oil & gas companies listed in
Forbes 100014
72% of the 54 oil & gas companies listed in
Fortune Global 50015
82% of the 50 oil & gas companies listed in
Financial Times Global 50016
11 Advisory services include advice relating to performance & technology; transactions; joint ventures; restructuring; and risk & compliance12Beijing, Calgary, Houston, Johannesburg, London, Moscow, Muscat, Paris, Perth, Rio de Janeiro and Rotterdam13Forbes 1000, April 201114Forbes 1000, April 201115Fortune Global 500, July 201116Financial Times Global 500, June 2011
2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
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The Future of the European Refining Industry | 19
BIOGR
APHIES
2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Jeremy Kay
Partner, KPMG in the UK
Jeremy leads KPMGs European Operations
Strategy Consulting practice. For the last 15 years
he has been working with oil & gas organisations
to identify and deliver cost, cash and margin
improvements across all areas of upstream,downstream and refining operations. He has
led programmes in over 18 countries both in a
deal and non-deal environment. Clients include
global integrated majors seeking to drive value
from operations as well as both institutional and
private equity investors looking to get an improved
return on asset performance. Jeremy frequently
represents KPMG on cost optimisation and
sustainable value improvement, he has spoken at
several oil & gas conferences on the subject and
published numerous articles.
Anthony Lobo
Partner, KPMG in the UK
Anthony leads KPMGs European Oil & Gas practice.
He overseas KPMGs oil & gas strategy across
Europe and specialises in the role of National Oil
Companies having published a number of thought
leadership pieces over the past five years.
In addition, Anthony leads our M&A services and
has worked for the majority of the major players in
the industry. In the downstream sector Anthony
and his team have worked on many of the recent
transactions across Europe - both refining and retail.
Anthonys transaction experience covers the US,
Europe (including Russia and the Former Soviet
Union), Africa and Asia. He has l ived and worked in
Hong Kong and Africa and is now based in the UK.
Anthony has frequently spoken on changes in the
sector across the globe including Houston, Africa,
the Middle East and Europe.
Gerard Shore
Director, KPMG in the UK
Gerard focuses on providing operational strategy
support to oil & gas clients in Europe and beyond.
He specialises in the identification and delivery
of business transformation solutions that drive
operational performance improvement and higherreturns on capital expenditure.
His experience includes leading oil & gas projects
across Europe, the US, Africa, Asia and Australia and
identifying benefits across numerous business areas
including refining, petrochemical manufacture, supply,
distribution and fuels marketing.
Gerards refining experience includes delivering
performance improvement in operations,
maintenance, engineering, capital projects and
support functions.
Fergus Woodward
Director, KPMG in the UK
With over 14 years experience in oil & gas and
related industries, Fergus is an operations strategy
expert across both the upstream and downstream
oil & gas value chain. His particular interests concern
value optimisation in refining, petrochemicals and
offshore upstream operations.
Fergus typically advises organisations on enterprise-
wide sustainable operational profit improvement
programmes - covering cash, cost and margin. His
reviews have included areas such as maintenance,
turnarounds, logistics, manpower, employee
benefits & remuneration, procurement, research
& technology and integrated operating model
structures. Clients include numerous major oil & gas
companies worldwide.
Fergus began his career in the oil and gas industry
as a Chartered Chemical Engineer. He is the author
of several papers on the subject of optimising value
from operations including a recent article for KPMG
on the petrochemicals sector.
8/10/2019 Future of European Refining Industry
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20 | The Future of the European Refining Industry
LINKS The KPMG Global Energy Institute (GEI): launched in2007, the GEI is a worldwide knowledge-sharing forum
on current and emerging industry issues. This vehicle
for accessing thought leadership, events, webcasts,
and podcasts about key industry topics and trends
provides a way for you to share your perspectives on
the challenges and opportunities facing the energy
industry arming you with new tools to better navigate
the changes in this dynamic arena.
www.kpmgglobalenergyinstitute.com
The KPMG Global Energy Conference: The KPMG
Global Energy Conference (GEC) is KPMGs
premier event for executives in the energy industry.
Presented by the KPMG Global Energy Institute,
the GEC attracts more than 600 professionals each
year and brings together energy financial executives
from around the world in a series of interactive
discussions with industry luminaries. The goal ofthe conference is to provide participants with new
insights, tools, and strategies to help them manage
industry-related issues and challenges.
www.kpmgglobalenergyconference.com
2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
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23/23
Contact
Europe, Middle East and Africa
London
Jeremy Kay
PartnerKPMG in the UK
T: +44 20 7694 4540
E: jeremy.kay@kpmg.co.uk
Anthony Lobo
Partner
KPMG in the UK
T: +44 20 7311 8482
E: anthony.lobo@kpmg.co.uk
Gerard Shore
Director
KPMG in the UK
T: +44 20 7311 3268
E: gerard.shore@kpmg.co.uk
Fergus Woodward
Director
KPMG in the UK
T: +44 20 7694 3018
E: fergus.woodward@kpmg.co.uk
Johannesburg
Alwyn van der Lith
Partner
KPMG in South Africa
T: +27 11 647 7395
E: alwyn.vanderlith@kpmg.co.za
Moscow
Hilda Mulock Houwer
PartnerKPMG in Russia
T: +7 495 937 4444 ext: 14099
E: hildamulockhouwer@kpmg.com
Muscat
Michael Armstrong
Partner
KPMG in Oman
T: +968 24 709 181
E: marmstrong@kpmg.com
ParisWilfried Lauriano Do Rego
Partner
KPMG in France
T: +33 1 55 68 68 72
E: wlaurianodorego@kpmg.com
Rotterdam
Ruben Rog
Partner
KPMG in the Netherlands
T: + 31 10 453 41 70
E: rog.ruben@kpmg.nl
Floris van Oranje
Director
KPMG in the Netherlands
T: +31 20 656 84 06
E: vanoranje.floris@kpmg.nl
Americas
Calgary
Wayne Chodzicki
PartnerKPMG in Canada
T: +1 403 691 8004
E: wchodzicki@kpmg.ca
Houston
Regina Mayor
Partner
KPMG in the U.S.A.
T: +1 713 319 3137
E: rmayor@kpmg.com
Rio de JaneiroManuel Fernandes
Partner
KPMG in Brazil
T: +55 21 3515 9412
E: mfernandes@kpmg.com.br
ASPAC
Beijing
Peter Fung
Partner
KPMG in China
T: +86 10 8508 7017
E: peter.fung@kpmg.com
Perth
Brent Steedman
Partner
KPMG in Australia
T: +61 8 9263 7184
E: bsteedman@kpmg.com.au
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individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such
information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act onsuch information without appropriate professional advice after a thorough examination of the particular situation.
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independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm
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mailto:jeremy.kay@kpmg.co.ukmailto:anthony.lobo@kpmg.co.ukmailto:gerard.shore@kpmg.co.ukmailto:fergus.woodward@kpmg.co.ukmailto:alwyn.vanderlith@kpmg.co.zamailto:hildamulockhouwer@kpmg.commailto:marmstrong@kpmg.commailto:wlaurianodorego@kpmg.commailto:rog.ruben@kpmg.nlmailto:vanoranje.floris@kpmg.nlmailto:wchodzicki@kpmg.camailto:rmayor@kpmg.commailto:mfernandes@kpmg.com.brmailto:peter.fung@kpmg.commailto:bsteedman@kpmg.com.aumailto:mfernandes@kpmg.com.brmailto:bsteedman@kpmg.com.aumailto:jeremy.kay@kpmg.co.ukmailto:anthony.lobo@kpmg.co.ukmailto:gerard.shore@kpmg.co.ukmailto:fergus.woodward@kpmg.co.ukmailto:alwyn.vanderlith@kpmg.co.zamailto:hildamulockhouwer@kpmg.commailto:marmstrong@kpmg.commailto:wlaurianodorego@kpmg.commailto:rog.ruben@kpmg.nlmailto:vanoranje.floris@kpmg.nlmailto:wchodzicki@kpmg.camailto:rmayor@kpmg.commailto:peter.fung@kpmg.comRecommended