Industry results underline grim future for refining

Weakness in the refining sector hit oil company earnings in 2009, with Valero, the US’ biggest refiner, widening its full-year net loss to $1.98bn, from a net loss of $1.13bn in 2008. ConocoPhillips, the US’ third biggest oil company, reported  its worldwide refining crude oil capacity utilization rate was 76 per cent in the fourth quarter, and it had deferred a planned upgrade project at its Wilhelmshaven, Germany, refinery.

Its refining and marketing division reported a fourth-quarter loss of $215m, swinging from a profit of $289m in the 2008 quarter, and a full-year profit of $37m, plunging from $2.3bn in profit in full-year 2008. Nonetheless, Conoco also has an exploration and production division, which offset the drop in demand for refined goods brought on by the economic downturn and a move toward energy efficiency and renewables. And a year spent restructuring, when the downturn exposed weaknesses in its portfolio, resulted in full-year 2009 earnings of $4.9bn, compared with a loss of $17bn in 2008.

For the fourth quarter of 2009, Conoco reported earnings of $1.2bn, or 81 cents per share, compared with a loss of $31.8bn, or $21.37 per share, from the same period in 2008. The company cut costs by 12 per cent, exceeding its original target of $1.4bn or 10 per cent in reductions. Market factors, such as foreign currency and lower energy costs contributed about 60 per cent of the reductions. Renegotiation of service and supply contracts, staff reductions and a focus on costs also helped. Conoco plans to spend $11.2bn in 2010, with 86 per cent of that supporting its exploration and production segment, while the refining and marketing division will get about 12 per cent.

That limited spending on refining underlines the grim future many are outlining for the sector. In addition to scaling back refining activity across its portfolio, Valero closed its Delaware City refinery in 2009, responding to a 58 per cent drop in margins per barrel. It suffered a net loss of $1.41bn, or $2.51 a share in the fourth quarter of 2009, compared with a prior-year quarterly loss of $3.28bn, or $6.36 a share. Here is what Bill Klesse, Valero’s chairman and chief executive, had to say about the sector:

Weak demand, narrow margins and low discounts in the fourth quarter exemplified how difficult refining conditions were in 2009. While 2009 may have been the bottom for refining profitability, there’s too much inventory and spare refining capacity in the industry right now for margins to rebound quickly. Economic growth will help demand recover in 2010, but we also expect new refining capacity to come online in the US and around the world. Therefore 2010 is expected to be another challenging year for the industry while refiners close marginal capacity and wait for demand growth to work down spare capacity.

Not exactly a vote of confidence in the future of the industry on which Valero is based. Indeed, Chevron has signaled its intention to cut exposure to refining, saying it will restructure its refining and marketing division with layoffs planned. More datails on that could come Friday, when Chevron releases its 2009 results and opens the telephone lines to analysts.

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