Sheila McNulty The majors scaling back refining globally; not in hotspots for growth

The US oil majors have not just decided that refining is not going to be profitable in the US, it seems, but in other parts of the world as well. ConocoPhillips said on Wednesday it has informed Saudi Aramco it will end participation in the new refinery project being built in Yanbu Industrial City.

From the press statement by Willie Chiang, senior vice president, refining, marketing and transportation:

The quality of Saudi Aramco as a partner and significantly reduced capital costs from the recent re-bidding process made it a very difficult decision for us. We ultimately decided this project was not consistent with our current strategy to reduce our downstream footprint. We value and look forward to continuing our relationship with Saudi Aramco.

ConocoPhillips, along with Chevron and other major integrated oil companies, have decided in recent months to scale down their refining activities. The division has been hit by a drop in demand from the economic downturn, as well as a move to ethanol and other biofuels, and energy efficiency efforts. That carbon legislation is expected to eventually hit the carbon-intensive sector hard is another reason to get out.

On top of that, PFC Energy noted in a recent report that the refining capacity of the international oil companies is primarily stuck in declining mature markets, while the state-owned national oil companies are positioned well to meet changing global demand dynamics.

In other words, the majors are largely scaling back their refining is because they are in markets with declining demand. Had they been located in the high growth markets of China and India, for example, they might not be pulling back.

Nonetheless, John Watson, Chevron’s chief executive, told the FT that the US’ second biggest oil company will remain an integrated company, doing both exploration and production, as well as refining and marketing for years to come. In some cases it is beneficial to have a refining operation to put to use what comes out of the ground. And he believes the company can still earn a fair return from refining.

Nonetheless, Chevron is moving forward with plans announced in March to cut a further 2,000 positions in its refining and marketing division as it reduces its global downstream workforce by 3,900 employees or about 20 per cent over two years. The cutbacks, which follow 1,900 announced last year, will come as the company sells refining and marketing assets in Europe, including its Pembroke refinery; the Caribbean; and parts of Central America to reduce exposure to this poorly performing segment.

Watson says it is too early to say if any bids have come in on the Pembroke refinery, but noted, “We’re not desperate to sell.”

Related links:

Will a product squeeze see oil prices keep rising? – FT Energy Source
A continuing refining headache - FT Energy Source