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DOCUMENTS "COM"
COM(82)360
Vol.1982/0127

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COMMISSION OFTHEEUROPEAN COMMUNITIES
COM(82)360 final
Brussels-15thJune1982
V,
PROBLEMSOFTHEOILREFININGINDUSTRY^PROGRESSREPORTM
/'S/
(Communication fromtheCommissiontotheCouncil)
COM(82)360final

COMMUNICATION BYTHECOMMISSION TOTHECOUNCIL
PROBLEMS OFTHEOILREFINING INDUSTRY :PROGRESS REPORT
Introduction
1.InitsCommunication adoptedbytheCouncilofOctober1981(COM(81)534of
30.9.81)theCommission describedtheproblemsoftheoilrefiningindustryin
theCommunity,stressingtheneedtoreducebasicrefiningcapacityandto
concentrate operations atfewermorecomplexrefineries .TheCommission
suggestedthatthisprocessofadaptation atCommunitylevelcouldandshould
belefttothecompaniesthemselves,providedneitherregionalsecurityof
supplynorfreedomofcompetition wasaffected,andthattheroleof
governments wastoprovideappropriate conditionsforittobecarriedout
efficiently andatthelowestsocialcost.TheCommission,foritspart,
undertooktokeepthesituationundercontinualreviewinconsultations with
industryandgovernments,toprepareforecastsoftherespective trendsin
capacityanddemand,andtoreporttotheCouncilasnecessary.
2.SincetheOctoberCounciltheCommission hasaccordingly examinedrecent
developments andreviewedprospectsintherefiningsector,andtriedto
assesstheprogresssofarmadetowardsbringingcapacityintolinewith
futuredemandforthevariouspetroleumproducts.Anewroundofconsultations
withcompaniesrepresenting over80%oftherefiningactivityintheCommunity,
andwiththeEuropeanTradeUnionConfederation ,hasbeencompleted.Account
hasbeentakenoftheinformation soobtainedintheanalysisandrecommenda­
tionswhichfollow.
TheGeneralSituation andOutlook
3.During1981andtheearlymonthsof1982therehasbeenaprogressive
deterioration intheprofitability ofthedownstreamactivities (refiningand
distribution )oftheindustryintheCommunity.Withoutdoubtthemainreason
forthistrendhasbeentheexcessofcrudeoilandfinishedproductsonoffer
inamarketcharacterised byasharpandcontinuingfallinconsumption (by
8.5%in1981).Otherfactorshavecontributed tothedownwardpressureon

-2-
productpricesandontradingmargins.ForexampletheLowercrudeoil
acquisitioncostsofthosecompaniesproducingdomesticoilatatax-paid
costbelowthatofimports,and/orwithaccesstothe(then)cheaperSaudi
crudes,tendedtobringaboutalevelofproductpricesunsatisfactory tomany
operators.Moreoveraveragesupplycostsdeclinedlessthanproductprices
becauseofficialcrudeoilsellingpriceswereslowtorespondtomarket
realities,whilstprocessingatCommunityrefineries byOPECcountriesanxious
toincreasecrudeoilexportsaddedtothequantitiesofproductofferedon
Communitymarketsandbroughtproductpriceslower.Delaysintherevisionof
maximumpricesinthosememberstateswherecontrolsexistwerealsoan
importantfactorinreducingcompanyearnings.
4.Althoughafurtherfallinconsumptionisexpectedin1982,manycompanies
believethatdemandwillriseandmarginsincreasetowardstheendofthe
yearaseconomicrecoverygetsunderway,stocklevelsfall,andtheworld
surplusincrudeoilsupplydiminishesfollowingthereductioninOPECexports.
5.Therewillremain,however,thestructuralproblemsofexcesscapacityin
refininganddistribution andofchangesintherelativedemandforthevarious
petroleumproducts.Itisessentialthatoverthenextfewyearstheseproblems
-shouldbeovercomethroughtheclosureofredundantprimarycapacityandthe
construction ofconversionunits.Thisprocessofadaptation,byreducing
costsandincreasingtradingmargins,shouldenableefficientcompaniesto
earnasatisfactory returnontheirinvestmentintheCommunitymarket,and
tobefullycompetitive withrefinersoverseas.
BasicRefiningCapacityversusDemand
6.Thelatestprojections ofdemand,madeinthelightoftherecentfurther
fallsinconsumption,comparewithindustryrefiningcapacityasfollows:

-3-
EEC-10DemandversusPrimaryCapacity
Consumption
.NetExports(+)/
Imports(-)
StockChange
DemandonRefineries
Capacity(yearend)
%UtiLisation1973
603
+25
+8(Millionsoftonnes/year)
(1)
636
787
811980
519
-18
+12
513
810
631981
477
-19
-4
454
784
581982
460
-20
-10
430
754
571985(2)
-450-
-30(2)
-420-
600(3)
-70-
(1)Provisional figures
(2)Figuresbetweendashesaremid-pointsofrangeofprojections
(3)Capacityrequirements asestimatedinCOM(81)534ofSept.1981.
Thefigureof450milliontonsforconsumption in1985isinnosensea
forecastforthatyearbutmerelythecentralfigurearoundwhichdifferent
projections bycompaniesandotherorganisations varybymorethan+/-10%.
MemberStates'projections ofsomemonthsagoadduptoover500m.t.Itseems
likelythatcurrentassessments offutureconsumption areundulyinfluenced by
thesharpfallinoiluseinthepastfewyears(18,5%between1979and1982).
NetimportsoffinishedproductsintotheCommunityarecurrentlyrunningat
about20m.t/y,ornearly5%ofCommunityconsumption,comparedwithanexport
surplusof25m.t.in1973.Followingthecompletioninthenextfewyearsof
newexportrefineriesoverseas,particularly inproducingcountries,intei–
nationaltradeinpetroleumproductsisexpectedtoriseby1985/6byabout
30m.t/y.Onpresentevidencethisexpansioninworldtradeisnotexpected
toleadtoaverylargeincreaseinCommunityimports,whichare,however,
assumedtoriseby10m.t/yby1985.Greatuncertaintyclearlyattachesto
estimatesofthiskindanditwillbenecessarytoreviewthesituationfrom
yeartoyear.
./.

-4-
9.Consumptionintherangeof400-500m.t.combinedwithnetimportsof30m.t.,
wouldmeanademandonCommunityrefineriesintherangeof370-470m.t.
Inviewofthedegreeofuncertainty inherentinthesefigures,theCommission
believesitprudenttoestimatecapacityrequirements byreferencetotheupper
figureof470m.twhich,combinedwithcapacityof600m.t/y,wouldgivea
utilisationratioapproaching 80%insteadof70%forthemedianfigureof
420m.t/yappearinginthetableofpara6.
Distillation Capacity
10.Virtuallyallthemajorcompaniesarereviewingtheirrefineryoperations,
withaviewtoreducingcapacityandcostsbytakingoutofserviceredundant
distillation unitsatlargerefineries and/orbyclosingrefinerysitesand
supplyingfromelsewhere.Thestateofadvancement ofplans,however,varies
greatlyfromonecompanytoanother.Mostcompanieshavedecideduponbroad
objectivesregardingcapacityintheCommunityandsomehaveidentified oneor
moreofthelocationswherereductionswillbemade.Othercompanieshavemade
morelimitedprogressandhavenotyetdecidedbyhowmuchandwherecapacity
willhavetobereduced.
Isolatedrefineriesposeaspecialproblembecausethereisnoalternative
supplysourcenearathand,insuchcasesthesavingstoberealisedbyclosing
theplantsmaynotcompensateforthecostsoftransporting productsover
considerable distances,anditmaybepreferabletokeeptherefineryinpartial
use.Theclosureofrefineries whicharejointlyownedbyseveralcompanies
isalsoplainlylikelytobecomplicated anddelayedbytheneedtoreach
agreementamongthepartnersandforeachtomakeothersupplyarrangements .
Againitisnotuncommonforrefineriestobelinkedtoadjacentpetrochemical
orotherplantstowhichtheysupplyfeedstock,andinthosecasestooclosure
presentsproblemsrequiringtimefortheirsolution.
11.Preliminary andincompleteindications givenbythecompaniessuggestatotal
reduction,ifalltheintendedpartialandcompleteclosuresarecarriedout,
ofabout150m.t/ycomparedwithJanuary1981.Thisfigurecompareswithanet
./.

-5-
reductionovertheyears1977-80of44m.t/y.Ofthe150m.t/yreduction now
contemplated,morethanhalfconsistsofclosureseithercarriedoutorfirmly
committed.Oftheremainder/however,onethirdhasnotyetevenbeenspecified
astolocation.Thecompanyplansofearly1982canbesummarised asfollows:
EEC~10;Presentstateofrefineryclosureplans M.t/y
Distillation capacityinstalledat1.1.81 810
Closedin1981:Onerefineryand7Crudedistillation
units(CDUs) 26
Proposedclosures :
Firm :10refineries +1CDU 53
Probable :3refineries +7CDUs 45
124
Additional capacityreductionplannedbutnot
yetspecifiedbylocation * 26 150
660
Capacityrequirement estimated bytheCommission
(COM(81)534) 600
Furtherreductionnecessary :atleast 60
ThisreductionintotalCommunitycapacityisdistributedfairlyevenlyamong
allthelargermemberstates,thepercentage ofclosuresvaryingfrom15to
25.Almostallcompaniesareaffectedalthoughtheproportion oftheircapacity
sofarscheduledforclosurevariesconsiderably accordingtothestagereached
incorporateplansinthisregard.
12.Anumberofcompaniesarediscussing withcompetitors possibleexchangeand
processing arrangements whichwouldenableplantstobeclosedwithoutany
increaseindistribution costs.Severalsuchdealshaveeitheralreadybeen
concluded orareunderdiscussion .
./.

-6-
SocialProblems
3.Thepotentialeffectsuponemploymentofcapacityreductionsareincreasing
asthescopeforshuttingdownredundantdistillation columnsatlarge
refineriesisexhaustedandentirerefineries havetobeclosed.Thenumber
employedatthe14refineriessofaridentifiedforclosurevaries,according
totheirsize,complexity andage,from200to1700,whilsttheaverageis
oftheorderof500-600forarefineryof5m.t/y.Becauseoilrefineries
arecapitalintensiveandemployrelatively fewpeople,thecompaniesshould
inmostcasesbeabletomakesatisfactory arrangements forthosemade
redundantbyclosures.Infactthosecompaniesnowactivelyengagedinclosing
refineriesaregenerallyoptimisticthatinmostcasesredeployment,early
retirement andnaturalwastagewillreducetheproblemtosmalldimensions.
Inafewcases,however,whereplantsaresituatedinareasofhighunemployment ,
unionsareconcernedthatalargepartoftheworkforcemayremainunemployed.
Thesecondaryeffectsofclosuresonlocalfirmssupplyinggoodsandservices
torefineries mayalsoclearlybeofimportance,althoughdifficulttomeasure.
4.Ifcertainclosuresdoprovetohaveseriousstructuralconsequences for
regionsorzonesoftheCommunity,aneedmayariseforassistance bynational
orlocalauthorities withjob-creation schemes.Communityfinancefromthe
RegionalDevelopment Fundmightalsobeprovidedforthispurpose.European
SocialFundAidcouldalsobemadeavailable,ineligiblecasesandto
complementnationalefforts,eitherforretrainingorforrecruitmentsubsidies
tosmall/medium-sized firmstakingonredundantrefinerylabourinassisted
areas.
5.Althoughindividualrefineryclosuresmaythereforehaveseriouslocaleffects
uponemployment,therestructuring oftherefiningindustrywillplainlyalso
bringbenefitstoeconomicactivityandemploymentgenerally.Mostcompanies
areundertaking largeprogrammesofinvestmenttoexpandconversionandup­
gradingcapacitywhichprovideemploymentintheengineering,contracting and
construction industries,aswellasdirectlycreatingjobsintherefining
sector.

-7-
Conversion Capacity
16.Apartfromthedistillation capacitysurplus,thecompanies' mainproblemis
toadapttheproductyieldofrefineriestothechangingpatternofdemand,,
andinparticulartothemuchreducedoutletforresidualfuel.Newconversion
plantbroughtintoservicein1981increasedthecapacityofthemaincategories
ofunitsbyabout15%.Thefurthermajorinvestmentplannedbytheindustry
overthenextfewyearsisshownbythefollowingfigurescompiledfromcompany
returnsofJanuary1982underCouncilRegulation 1056/72.
EEC-10IntakeCapacityofConversionPlant
(millionsoftons/year)
end-year
CatalyticCrackers
ThermalCrackers
(incl.visbreakers andcokers)
Hydrocrackers
Total
Totalintermsofcat.crackers
as%ofdistillation
capacityinstalled1973
43.0
20.8
1.6
65.4
55
7.01980
45.1
42.8
4.3
92.2
75
9.31985/6
60.0
68.0
8.5
136.5
108
18.0*
*)BasedonCommission'sestimateof600m.t/ycapacityrequiredin1985.
Differences intheyieldsofthevarioustypesofplantmakeitdifficultto
comparetotalconversioncapacityfromoneyeartoanother.Ifplantofall
typesisexpressedasequivalentcatalyticcrackercapacity,byreferenceto
distillateyieldonfeedstock,tnereisanestimatedincreaseof45%intotal
conversioncapacitybetween1980and1985-6andtheeffectiveratioof
conversiontodistillation capacitywillhaverisentwoandahalftimesover
theperiod1973-85/6.
./.

-8-
17.Thecompletionoftheseprogrammesofinvestment maynotofcoursebetaken
forgranted.Itdependsonthecontinuedexistenceofasufficientdiffer­
entialbetweendistillate andresiduepricesandonindustryconfidenceinthe
longtermprospectsfortheCommunitymarket.
18.Thefollowingtableillustrates howcutputofthevariousproductsin1985
mightcomparewithdemandassumingthattheproductionofthelightfractions
(motorgasolineandnaphtha)weremaximised.
EEC-10:Estimated1985ProductsBalanceassuming420milliontonsofcrude
processedandlightendsmaximised.
LP6Mogas/
NaphthaKero/
GasoiIResidual
FuelOilRef.fuel
OthersTotal
Estimatedproduction from
1980refiningstructure 9.588.0161.0115.0 46.5420
Estimatedoutputofplant
tobeadded80-5 0.511.0 7.0(22.0)3.5-
Estimatedproduction 198510.099.0168.093.050.0420
Estimatedconsumption 198512.0111.0 164.0113.0 50.0450
NetImports 2.012.0 (4.0)20.0-30
Thisprojectionsuggeststhattheconversioncapacityinplaceinthemid1980's
willbesufficienttoavoidexcessfueloilproduction .Thebalanceshows
deficitsinfueloilandnaphthawhichareexpectedtobeavailableonworld
markets.
19.Conclusions
1.Theanalysisandrecommendations oftheCommission'sCommunication tothe
OctoberCouncil(COM(81)534)arestillgenerallyvalid,althoughthefurther
fallinconsumption,andreducedforecasts,havereinforcedtheneedtoreduce
Communitycapacitybyatleast200milliontons/year,from810m.t/yinstalled
atJanuary1981.
./.

-9-
2.Althoughthereareotherimportantfactorsadverselyaffectingtheindustry's
earnings,particularlyintheshort-term,thelargesurplusofcapacityin
refiningisaprincipalandremediablecauseofthegenerallyunsatisfactory
returnoncapitalemployedinrecentyears.
3.Partialandcompleteclosuresofrefineriescarriedoutin1981,orplanned
for1982andsubsequentyears,amountintotaltoabout150m.t/yofthe
200m.t/yjudgedbytheCommissiontobeappropriate .Ofthisplanned
reductionof150m.t/y,however,onethirdisonlytentativeandthe
ι
efforttowardsrationalisation willhavetobesustainedbytheindustry
andfacilitated bygovernments .
4.Thedirectandindirecteffectsofclosuresonemploymentareincreasingas
morecompleterefineries,asopposedtoredundantdistiIlationunitsat
largerefineries,aretakenoutofservice.Although,inmanycases,
companiesexpectthatmostworkerswillbere-employed orpensioned,
closuresinareasofhighunemployment ofrefinerieswithrelativelylarge
labourforcesmayleadtoseriousproblems.
5.Theprocessofadaptingtherefiningstructuretothechangingpatternof
productdemand,throughinvestmentinconversionplant,appearstobein
linewithrequirements .Providedalltheprojectsnotifiedarecompleted,
capacityshouldbeadequateforthemid-1980's.
20.FurtheractionbytheCommission
Subjecttotheoutcomeofdiscussions inCouncil,theCommissionintendsto:
-keepunderreviewwithgovernments,companiesandunionstheprogressmade
bytheindustryinreducingprimarycapacityandinstallingconversion
facilitiesatCommunityrefineries.
-monitortrendsinthequantitiesandpricesofpetroleumproductsimported
fromthirdcountries.
-reporttotheCouncilifspecificCommunityintervention inthissector
appearstobenecessary.