June 17, 2015 / 7:41 AM / 2 years ago

European oil 'mini-major' challenges industry's old model

5 Min Read

LONDON (Reuters) - A fast-growing European oil venture between the world's top energy trader Vitol and private equity firm Carlyle Group is attempting to cash in where the industry's biggest companies have struggled for years.

European oil companies, or "majors", such as Total , BP and Royal Dutch Shell have significantly downsized their European refining and distribution businesses in recent years due to shrinking demand and an ageing, oversized refining industry.

But for Swiss-based venture Varo Energy, combining refining and other downstream assets with its central oil trading business makes sense: by offering products and services across the value chain on a smaller scale, it says it can reduce inefficiencies that have weighed on the big oil companies.

"The key is to build more downstream presence and to complement that with trading around the assets," said veteran Dutch oil entrepreneur Marcel van Poecke, 55, who is managing director of Carlyle International Energy Partners (CIEP) and the driver behind the Varo model.

Founded in 2012, Varo Energy merged last month with Dutch-based storage and trading company Argos. The merged company has access to crude oil through Vitol and controls businesses from refineries to storage terminals and petrol stations, creating what van Poecke says is a "mini-major" focused on a strip of western Europe.

"You will see more coordinated trading around those assets because now it becomes one company from Rotterdam up to Switzerland," he said.

Trading houses like Vitol say that refineries and other businesses can become inefficient after decades under the ownership of big oil companies. By taking them over, traders can make them leaner and lift profit margins, they say.

As oil majors seek to get rid of refineries and focus on their more profitable upstream businesses, Varo Energy says it is scooping up downstream assets at cheap prices.

"Major oil companies have been selling refineries to free up capital for upstream ventures where they can make better margins ... (Traders) tend to get those refinery assets very cheap so they don't weigh heavily on their books as working capital," said Steve Sawyer, downstream consultant at FGE.

"For a trader, having a refinery gives a physical outlet for his oil to reduce his exposure in the market. It also gives him information he might not have access to so, all in all, he has better information that can help him make better decisions on what crude to buy."

Varo originated when Vitol acquired the Cressier refinery in Switzerland in 2012 from bankrupt refiner Petroplus. In 2014 Varo and Carlyle bought a 45 percent stake in the BayernOil refinery in Bavaria, Germany, from Austrian oil company OMV.

Varo Energy now focuses on inland markets in Europe that it knows well and that have less exposure to competition. In Switzerland, for example, it owns the only operating refinery in the country.

Trading Game

Shell, Total and BP have sold refineries in Britain, Germany, France, Norway and the Czech Republic and have divested large chunks of their retail systems in Norway and Britain. Shell is still trying to sell assets in Denmark, while Total is in the midst of restructuring its refining system.

The sharp drop in the oil price in the past year and competition from trading houses such as Vitol, Trafigura and Mercuria, has also prompted majors such as Total and Shell to bring their refining and trading operations closer together in order to drive profits.

Varo Energy bought Total's heating oil and diesel storage and distribution business in Switzerland last year, and last month it acquired German wholesale distributor Gekol.

Still, developing the company's "mini-major" concept will not be without challenges. Europe's refining sector is expected to come under increasing strain in the coming years as huge refineries in the Middle East and Asia export bigger and bigger volumes of products such as diesel and gasoline.

Varo Energy will not disclose its earnings or give a breakdown of its business. Sawyer of FGE, however, says the company's expertise in trading allows it to source products at good prices, not necessarily from its own business, and maximise profit.

"Having control over the full value chain gives them a lot of optionality to choose where to source to meet their demand at the pump," said Sawyer.

"Trading is their game and they are likely to operate very well in that field."

Van Poecke, whose previous ventures include co-founding Petroplus in 1993, says Varo Energy aims to keep expanding its footprint in northern Europe.

"The ambition is to do bolt-on acquisitions from here and build a stronger presence in the markets where we are present. Now we have a good footprint in Germany, in Switzerland, in Holland, in Belgium, in northern France so I think that is a good footprint with enough room to grow," he said.

Editing by Susan Fenton

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