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May 27, 2020updated 27 Oct 2021 1:05pm

Impact of Covid-19 on European refinery sector

The market for transportation fuel has been nearly wiped out due to nation-wide lockdowns across Europe since early March. With inventories piling up rapidly, European refiners are faced with challenges such as increased inventory costs as well as deterioration of fuel products such as gasoline and jet fuel over long storage duration.

By GlobalData Energy

The market for transportation fuel has been nearly wiped out due to nation-wide lockdowns across Europe since early March. With inventories piling up rapidly, European refiners are faced with challenges such as increased inventory costs as well as deterioration of fuel products such as gasoline and jet fuel over long storage duration. Sudden demand erosion has restricted refiners from producing higher product volumes by capitalizing on low crude prices. European refinery operators are assessing their business portfolios, slashing capital expenditures, and stalling avoidable projects to conserve cash and tide over the current depressed market scenario. Besides cutting down on investments, many of the European refiners are left with little choice to keep daily operations up and running.

Reducing capex is one of the primary measures that several of the European refiners have resorted to, to tide over the economic slowdown and adverse impacts of COVID-19. ENI SPA has reduced consolidated capital spending by US$2.5 billion, which is 30% lower than initial planned capex, while BP Plc slashed consolidated capital expenditure by US$4 billion in 2020, which includes an expected capex cut of US$1 billion in downstream segment.

Several refineries have also reduced their operating capacity, while a few others have altogether suspended operations to navigate through the current crisis. Plock – a 327.4 thousand barrels per day (mbd) refinery, operated by Polski Koncern Naftowy Orlen SA, has decreased runs by 25% due to a sharp fall in fuel demand amid the COVID-19 outbreak. Izmir refinery, operated by Turkiye Petrol Rafinerileri AS, has nearly halved its 239 mbd production capacity in response to the impact of the pandemic. Few other refineries, such as Sines in Portugal and Coruna in Spain, have suspended operations to tackle the devastating impacts caused by the virus.

The mid-term impact of the current crisis can lead to possible consolidations in the industry along with refiners being compelled to assess their bottom lines in light of crude oil abundance. With demand for jet fuel and gasoline likely to remain depressed in the medium-term, refiners need to work out strategies to remain competitive in the market. This major disruption in fuel demand would likely prompt refiners to lean more towards crude to chemicals/petrochemicals; focus on large integrated refineries to continue for better profitability; and increase demand for cleaner fuel in the long-term.

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