Europe's oil refining set to shrink

By Chris Baldwin and David Sheppard - Analysis

LONDON (Reuters) - Vanishing gasoline demand from the United States and a long-term fall in local oil use mean Europe's refiners are shutting down capacity -- for good.

Already Total (TOTF.PA), Europe's largest refiner, has said it will shut a quarter of its Gonfreville plant, the biggest in France.

Old refineries are particularly vulnerable. Swiss-based Petroplus (PPHN.VX) will turn its UK Teesside plant into a depot if it cannot find a buyer and Italy's ENI (ENI.MI) wants to sell its Livorno plant.

Morgan Stanley said in a research note this month that margins, the measure for refinery profitability, would average about $4.00 a barrel in Northwest Europe this year, less than half of the bank's estimate of an average $8.47 last year.

Europe's oil industry has for long relied on supplying the U.S. market with gasoline, but a source at Total's Gonfreville said profit margins have collapsed as gasoline exports had shrunk.

With European oil consumption itself in long-term decline, refiners may now shift from simply reducing gasoline output to permanently cutting the capacity of crude distillation units (CDUs), or even closing a refinery.

European refineries can process 16 million barrels per day of crude. Of this about 1 million bpd is accounted for by older, less sophisticated, or simple, plants.

"The trend is clearly to try to reduce gasoline," said Olivier Abadie, at Cambridge Energy Research Associates (CERA) in Paris.