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Refining: from a shrinking business to a gold mine for oil companies

2022-07-25T10:38:49.657Z


The exit of Russia from the market and the closure of refineries boosts the profitability of this branch of business, and triggers the income statements in Europe and the United States. The consumers of gasoline and diesel, who are having to pay higher prices, are the main affected


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 evolution of crude oil.

It is logical: it is its main raw material, essential for gasoline and diesel to reach service stations.

At times like this, however, to fully understand the escalation, you have to look at other angles of the production process that allows the pumps to be supplied.

Brent

's barrel

it is still far from its historical peak —100 euros, 50% below the level it reached in the summer of 2008— and, nevertheless, hydrocarbons have broken records in recent weeks.

The reason for this apparent paradox must be found in refining, the least visible phase of the production process —which consists of the chemical transformation of crude oil into fuel for cars, trucks or airplanes— and in which a funnel has formed that is giving so many great joys for companies in the sector as bad news for consumers, already battered by inflation that does not let up.

Oil companies are going through one of their sweetest moments in years.

With Russia — one of the great hydrocarbon exporting powers — out of the game and after the closure of a good number of processing facilities in recent years, the big names in crude oil are making significant profits from refining, an activity that had lost followers in recent times and in which the bolts had won the game over the new openings.

The reasons for this dynamic were both short-term – the pandemic plunged fuel consumption and destroyed world refining capacity by around three million barrels per day, a real outrage – but also medium and long-term, since the proximity of the expiration date of combustion vehicles has forced to rethink many investment plans in new refineries.

The tables, however, have turned in record time: the rapid recovery in consumption and the trickle of closures of refineries in Europe (a score less in the last decade) has given an unexpected boost to the companies that have kept theirs.

Repsol is a good example of this trend: its refining profit margin tripled between April and June compared to the previous three months, multiplying by 15 compared to the same period last year.

More information

Diesel and kerosene: the last Gordian knot of the energy crisis

"Supply limitations to cover the demand for diesel, gasoline and kerosene have significantly raised refining margins around the world, particularly after the disruption caused in supply chains by the war in Ukraine," argued the company chaired by Antonio Brufau.

His case, however, is by no means unique.

In the Iberian Peninsula itself, the Portuguese company Galp – which presents results this Monday – has already reported a similar increase in the refining margin: from less than seven dollars per barrel to more than 13, in just three months.

Also in Europe, the Anglo-Dutch Shell has seen its refining margin multiply by 2.8 in the second quarter compared to the immediately previous three months, with a "positive impact of between 800 and 1,200 million dollars" in your income statement.

Also British BP has seen more than double its profit per barrel.

And nobody in the sector harbors any doubt that the rest of the giants of the sector will publish similar figures in the coming days, when they present their quarterly results.

On the other side of the Atlantic, the giant Exxon Mobil - the largest refining firm in the United States - saw its profit from this activity grow to 4.4 billion dollars in the second quarter of the year.

That is more than five times the benefits that used to be recorded in that period before the pandemic hit.

These extraordinary profits -fallen from the sky, to use the fashionable expression in the sector- are "largely the result of underinvestment by many agents in the energy industry in recent years", as justified by the company in a statement.

If its own projections are fulfilled, Exxon will have earned 18,000 million dollars between April and June.

With prices and green numbers through the roof, the Texas oil company has become one of the great targets of Joe Biden's invective, who has publicly accused it of "making more money than God" at the expense of consumers.

As Bloomberg recently recalled, no US president has been re-elected with a gallon of gasoline above four dollars;

today it is at 4.5, after having reached five.

More information

Repsol triples the profit margin of its refineries in Spain between April and June

This reality is far from being reversed in the short term: refining margins “will remain high for quite some time”, according to Alastair Syme, of the US bank Citigroup, in a recent report for clients.

"In recent months, the margins have been notably higher than those achieved in the golden age of the sector, between 2004 and 2007," Alan Gelder, an analyst at the Wood Mackenzie energy consultancy, explains to EL PAÍS.

"And it is difficult to imagine a medium-term future in which these profits will return to normal levels," settle the technicians of the consulting firm Facts Global Energy (FGE) in a study on the subject.

Although the sudden return to life of the sector will increase investment, with the entry into operation of a good number of new refineries —especially in Asia and Africa—, these new facilities will hardly be able to bring the forces of supply and demand back into balance. , according to calculations by the International Energy Agency (IEA, the energy arm of the OECD).

The decompensation is —and will be— especially pronounced in the so-called middle distillates: diesel and aviation kerosene.

For the electrification of transport, especially vehicles for private use, to begin to have a "material impact" on fuel demand, we will have to wait until the second half of this decade.

“As the number of internal combustion cars declines, refiners will have to adapt or close their production sites.

The margins will weaken, especially in the Atlantic basin”, closes Gelder.

It is not a far from distant future;

meanwhile, however, the box will continue to function at full capacity.

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Source: elparis

All business articles on 2022-07-25

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