Petrol: the biggest headache for Shell and BP
It’s an easy shot at oil majors to point out they are making billions in profits as petrol prices hit a 15-month high a few weeks ago.
But ironically for the companies, it’s gasoline and diesel products that are causing them the biggest headache, as they try to balance the demands of paying their dividend at historically high levels and maintaining the pace of their production.
Refining – where crude oil is converted into the substance that powers vehicles – is sharply depressing overall earnings. Royal Dutch Shell, which on Thursday revealed the worst results in the energy reporting season, with a $427m loss in its refining arm, is far from alone. BP, ExxonMobil and Chevron have all been unveiling losses or severely depleted profits in their refining divisions.
So what exactly is the problem in global refining industry and how can it be fixed?
Overcapacity is the term most often used to describe the basic fact that there are too many refineries in the world at a time when demand for petrol is still lower owing to the recession. This means that many of them are only running at about 75pc of their maximum possible rate. BP estimates that the world’s refineries have the ability to process a surplus of 3-4m barrels oil per day above the level of current demand. Around 1m barrels per day of capacity is closing and 500m barrels of capacity has been mothballed.
Although petrol prices are at a 15-month high, oenergy companies are making less money turning oil into petrol
But at the same time, China and India are still building more refineries, with an extra 2m barrels per day of capacity popping up last year. In China, where costs are low, this is partly due to the fact that the government is supporting massive construction programmes with economic stimulus.
The European Union Chamber of Commerce in China lists refining as one major casualty of the country’s industrial overcapacity, with the state spending its cash on “increasingly questionable projects”.
Problems in refining are not new to this economic crisis. The industry has struggled to adapt to the fast-moving changes in supply and demand for oil over more than three decades. It is very capital intensive and hampered by high fixed costs plus low variable costs.
For most of this time, poor profitability has meant that creaking old plants have not been upgraded, meaning not enough petrol was being produced. This helped push up oil prices. But it can easily swing the other way. Oil companies earn roughly 20pc on capital employed in exploration and production, but more like 10pc on their refining activities – in a good year.
The oil refinery on Canvey Island, off the east coast of England, is owned by Swiss company Petroplus
Shell’s solution is to start selling off refineries, including its Stanlow plant in the UK – targeting a 15pc reduction by the end of the year. Total has mothballed a number of plants in France, and is battling industrial action as a result. Meanwhile, BP is clinging on to its recently upgraded plants, hoping that weaker companies will be forced to let theirs go instead.
The most effective cure will be higher demand for petrol products. Goldman Sachs said in a note today that there is some evidence that floating gasoline inventories are reducing, easing the supply glut. But Tony Hayward, chief executive of BP, believes that demand will never return to 2008 levels in developed countries, as the environmental mood shifts towards greater biofuel mixes and electric cars.
In developing countries, there is huge potential for more car ownership and plane travel – but it might be the national oil companies of China and India who are best place to become the leading refiners of the future.
-
Petrol: the biggest headache for Shell and BP
February 4th, 2010 18:2412 Comments
-
Crude fails to get to the bottom of Chevron-Texaco's conduct in Ecuador
February 1st, 2010 17:51
-
Rolling Stone's list of 'climate killers' misses the dilemma facing corporate America
January 20th, 2010 14:45
-
Britain puts off its gas crisis – for now
January 12th, 2010 16:42
-
Copenhagen: why gas is rising victoriously after two weeks of talk
December 18th, 2009 17:33
COMMENTS
-
The oil companies have conned us for too long. They split their business and set their own prices for supplying within their own divisions – making huge profits up to refining – then pretend that refining and retailing doesn’t pay.
Stop treating the public as fools. -
I’m half inclined to believe BP redefined itself as Blatant Profiteers, judging by the antics of those petrol station in the surrounding areas. They’re at least 2p a litre more expensive than anywhere else and I can’t believe there are still cars on their forecourts still filling up. The British people certainly deserve all they get sometimes.
-
It is the growing custom to narrow control, concentrate power, disregard and disfranchise the public; and assuming that certain powers by divine right of money-raising or by sheer assumption, have the power to do as they think best without consulting the wisdom of mankind.
-
It’s as boring to refute the ‘blame the oil giants’ meme as it is to deal with Bush Derangement Syndrome, but here’s the truth:
1. The vast bulk of the retail price is tax, set to exploit the inelastic demand for transport fuels.
2. Apart from tax, retail prices and internal transfer prices almost wholly correlate to the bulk spot price. The refiner’s margin, positive or negative, results from that.
3. If integrated oil companies deviated from spot prices for transfer pricing, the taxman would have to agree.
4. Having scheduled refineries and traded the whole barrel, I know how incredibly efficient the market for transport fuels is, except for the massive inefficiencies induced by taxes and the difficulty of building new refineries in the the West – both the fault of government.Now go back to your delusions.
-
The Govt is owned by the Globalists, they conspire together to fleece us at the forecourt.
I used to regularly fill up with Veg oil bought straightt from the shelves of Tesco at 52p per litre.
That was until Clarckson did a Program on using Veg oil in deisel cars and concluded it worked.
Suddenly, prices go up from 52p per litre to over £1 per litre where they have remained.So Tesco, the Petrochems and Big Govts conspire to keep us chained to the Forecourt where 70% of the cost goes in TAX.
If farmers started growing rape seed oil, crushing it and selling the oil direct to the Public, the Govt would soon intervene.
The beauty of Veg oil is that it is carbon neutral, despite the spin, lies, smoke and mirrors spouted by the Petrochems Lobby and their Bloggers.
The Carbon released by Veg oil is only that which was absorbed by the crop during its growing season.
meaning it is Carbin neutral.
A grear crop for our beleguered farmers that could help secure fuel security for Great Britain, especially as we do have some Nth sea oil and 300yrs worth of coal.
Not so good if you are a Communist determined to enslave your people or a Globalist determined to do the same.Veg Bio diesel.
http://tinyurl.com/yjelqow -
I noted the price of petrol when I was in Sydney Australia last February. I am again in Sydney where the fuel is the same price and in some districts cheaper. Can someone please explain why?
-
@mjsindorset on Feb 5th, 2010 at 1:46 am
Simple. Your question has been answered by Mark Adams. Taxes. Next question. -
Rowena fails to take account the significance of Chemical industry in the downstream demand for refinery products. Whilst this is understandable in terms of the relevance to the general public we are in danger of missing the point here. The oil companies and those that may regulate them fail to see the unavoidable link between the oil price and the general economy. Big oil has exploited the oil price and the downsteam users to the point of distruction. They have separated and where possible disconnected their oil business from downstream activities like chemicals but there comes a point where their prices cannot be afforded and passed on and refineries either shut for lack of demand or close as there is not sufficient margin to maintain them. We are at that point in Europe.
-
Do the maths
Petrol is 66% tax 34% fuel = 37p/litre
Oil is $73/barrel = £46.5 = 29p/litre
8p/litre ‘profit’ including refining, retailing costsI don’t know how they do it either
-
Crap:,
What headache,they just screw us idiots in this country.What is our price today.personally it is hard to keep up,they just put up prices when they feel like,and we the brain dead ,just keep on being screwed. -
Why is it that people always like to blame the oil companies? .. Why not simply buy some oil company shares. That way you can make a profit and blame yourself at the same time! .. Novel concept hey? .. Or perhaps then you will suddenly realise that you dont have to be a lame socialist after all?
-
Whilst I agree that a great profit is being made by the petro-chemical industry, can I pose this dilemma;
As stated in this blog tax on fuel is stated as being 66%
ok so if we reduce this tax to 33% which I am sure we would all like to see, what would you suggest is taxed or which items would you increase the tax on in order to recover the lost revenue.
Of course we could opt for reducing standards on our Police, Military, NHS, Roads, the list goes on.
I am not a bleeding heart liberal but I find it difficult to see what we can afford to loose in order to make fuel cheaper. Those who favour Bio fuels I agree with but alas they would be taxed to death if we all refused to buy carbon fuels in favour of bio products. So you can see this dilemma is not an easy one to resolve by only whining on about disproportion tax quotas. If we all had electric cars that would be great for the environment but Mr. Taxman would be there asking for more money at the charging station plug or if you dared to charge your vehicle at home all your domestic electricity would be taxed at a higher rate….need I say more
ADD A COMMENT
You are required to be logged in or registered to post a comment