European Refining--Part III, Alternatives to M&A and the Rise of the Asset-backed Trading Model

There is money to be made in European refining after all, but it is not really about the refinery, is it?     


Market conditions confront European refiners with a complex set of challenges, and not all of them are well-equipped to survive. Opportune LLP (“Opportune”), a leading international energy consulting firm, examines the complex dynamics of the European market and the long-term outlook for the refining industry in Europe. In the third of a 3-article series, Opportune investigates alternatives to M&A and the rise of asset-backed trading models.

In general, refining operators are assessing their options for each of their plants including:

  • Outright sale, but the number of buyers are limited to trading houses and selected private equity firms;
  • Reconfigurations to increase plant flexibility, take advantage of market opportunities, and produce low sulphur fuels compliant with European regulations;
  • Conversion into storage terminals;
  • Conversion into biofuel plants;
  • Permanent closures.
In a context of increasing oil product flows, the logistical assets of refineries became more valuable than the processing units, and a new asset-backed trading model has emerged to capture market dislocations and arbitrage opportunities. Current trends in the crude oil and product markets are challenging the traditional model of the European refineries while they are creating opportunities for sophisticated traders that “cracked the code”, showing how oil flows and coordinated logistics are the keys to profitability in European refining.

Even so, not all refineries will be seen as an attractive asset-backed trading platform. If it is all about the ability to exploit market disconnects, investors will only benefit from refining assets that offer size and economies of scale, complexity, flexibility of supply, marketing flexibility, integration with the supply chain, good logistics, and access to captive market for refined products.

Opportune believes astute investors have the opportunity to “bargain hunt” and cherry-pick the best refining assets for their midstream and trading portfolios, offering the potential to build profitable asset-backed trading platforms.

However, this is not an opportunity for the faint of heart, as deal closures and success will depend on several conditions related to valuation, limited capex, good configuration and location, potential uplift in profits, favourable labour regulations, and sustainable environmental liabilities.

Alternative options to an outright sale 

In a challenging M&A market for refining assets, owners have been considering other alternative options:

1.     Plant reconfiguration

Plant reconfiguration aims at increasing plant flexibility to run a broad variety of crude grades and produce the fuels that are more in demand. This means adding hydrocracker units to convert residual oils in lighter products, but also moving to other processing options to meet the requirements of regional markets for specialty products.

A reconfiguration project can be expensive and the investment decision largely driven by the size of the market opportunity, access to relevant feedstocks, and compliance with regulations in relation to permitting and environment. Click below to read the full article...

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