Future European Refining Industry June2012 PDF

KPMG GLOBAL ENERGY INSTITUTE
The Future of the

European Rening
Industry
June 2012
kpmg.com
Executive Summary 01
Michiel Soeting
This time its bad and it could stay that way 02

Jeremy Kay
Acting differently: What this means 06

for renery owners
Gerard Shore
Acting differently: What this means 16

for investors
Anthony Lobo
Why KPMG? 18
2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network of independent
member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
The Future of the European Rening Industr y | 1
EXECUTIVE SUMMARY - MICHIEL SOETING

THE FUTURE IS UNCERTAIN SO ACT DIFFERENTLY
Michiel Soeting
Global and European Head of Energy
and Natural Resources
T: +44 20 7694 3052
E: michiel.soeting@kpmg.co.uk
European reners are on a different path to the one

they have been used to for the past 50 years.
The European rening industr y has gone through

numerous cycles, but this time many of the changes
are likely to prove permanent and we expect the
current trends of falling demand, rising imports,
increasing European legislation, growing
competition from emerging markets and eroding
margins to continue.
However, it is not all negative:
The worlds appetite for hydrocarbons will keep

growing, especially in India, China and across the
wider Asia Pacic region;
Positioning renery assets and operations properly
now - when asset purchases are cheap, and the
costs of improvements are not as expensive as
they were in the boom years - provides a good
opportunity for high quality European reneries
to compete protably in the future; and;
Europe remains one of the largest economic

regions in the world, and will be for the
foreseeable future.
Signicant recovery, though may take some time:

cost pressures will continue; over-supply and
competition will remain erce; and the European
carbon tax will continue to tilt the playing eld in
favour of overseas reners that are subject to less
regulation. The industry has seen a number of plant
closures in recent years and more may well follow
as demonstrated recently by the announced closure
of the Coryton renery in the UK. The survivors will
have to be leaner, more efcient and more able to
adapt to changing market needs. A strong focus now
on building and maintaining their relative competitive
advantages is vital to help ensure their survival today
and protability in the future
THE SURVIVORS
WILL BE LEANER,
MORE EFFICIENT AND
MORE ADAPTABLE
TO CHANGING
CUSTOMER NEEDS...
2 | The Future of the European Rening Industry
THIS TIME ITS BAD AND IT COULD STAY THAT WAY
JEREMY KAY
Jeremy Kay
Partner, KPMG in the UK
T: +44 20 7694 4540
E: jeremy.kay@kpmg.co.uk
The protability of the European rening industry Many companies in Asia now consider Europe
has long been cyclical, with repeated uctuations a key market for both exports and acquisitions.
in demand, price and production levels. However, For example, Essar Energys acquisition of the
this time things are different, and many of the Stanlow Rener y in the UK and PetroChinas
challenges the industry faces today may prove to acquisition of shares in trading and rening
be permanent. joint ventures with Ineos, including Scotlands
Grangemouth renery and the Lavra renery
For example:
in France1.
Many European reneries built 30 to 40 years
With the transfer of some European renery
ago using less sophisticated technology are
ownership to non-European companies, their
now at a disadvantage. Built to a smaller scale to
new owners are less likely to be inuenced
process lighter, sweeter crude oils, producing an
by local politics when considering maintaining
excess of gasoline, and with strong labour laws
unprotable plant; and
and high wages; many European reneries have
experienced a structural erosion of their margins; European reners are likely to continue to be
disadvantaged by the disparities in environmental
The size of the Middle East, Indian subcontinent
legislative requirements across the globe.
and Chinese rener y building program has
fundamentally shifted the scale and location Furthermore, with continuing pressure on margins
of the new, high quality, price setting plant. the short to medium outlook remains bleak and not
Operators from these regions enjoy a number surprisingly divestments are on the rise. But what
of key advantages, including new equipment, is interesting is less the origin of those who have
cheap labour, large reserves of capital and rapidly bought assets, but more the fact that European
growing local demand; reners are increasingly focusing on investing
in tighter portfolios of quality survivor sites to
maintain both quality and competitive advantage.
AGING EUROPEAN REFINERIES GENERALLY HAVE

HIGHER MAINTENANCE AND OPERATING COSTS THAN
PLANTS BUILT MORE RECENTLY IN ASIA AND THE MIDDLE
EAST. THIS, COMBINED WITH CURRENT ECONOMIC
CHALLENGES, IS CAUSING THE LESS ADVANTAGED
REFINERIES TO HAVE TO FIGHT FOR THEIR SURVIVAL
Fergus Woodward.
Director, KPMG in the UK
1
Europes reners fall on hard times, Financial Times, January 30, 2012.
See also Foreign investment: Indian companies blaze trail across the country, Financial Times, September 15, 2011
Overcapacity - the challenge of supply At the same time there has been some modest
versus demand reduction in rening capacity. A few small
reneries have closed, and some older units -
Once again European rening is suffering from
particularly distillers - have either been put on hold
over-capacity versus demand.
or decommissioned. But investments in plant
Demand for fuel is heavily dependent on economic improvements have also continued, and the net
activity, which has dropped dramatically in Europe reduction in rening capacity has fallen well short of
since the start of the global economic downturn the reduction in demand for fuel.
in 2008. Compounding this effect is the impact of
As a result, utilisation of Europes reneries has
continuing improvements in fuel efciency and the
fallen dramatically since 2008, and are likely
substitution of renery hydrocarbon fuels by bio-fuels.
to remain low for many years. Furthermore,
with rening margins closely aligned with plant
utilisation, the outlook for margins is likely to remain
depressed for some time to come.
REFINING CAPACITY AND UTILISATION - EUROPEAN UNION
16000 90%
Refinery capapcity (Thousand barrels per day)
15900 89%
15800 88% Refinery utilisation (%)
15700 87%
15600 86%
15500 85%
15400 84%
15300 83%
15200 82%
15100 81%
15000 80%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Refinery capapcity Refinery utilisation
Source: BP Statistical Review of World Energy June 2011: KPMG analysis
The Skewed Barrel Exporters of diesel to Europe have to absorb their

Europe has long experienced a gasoline middle transport costs, and this provides an economic
distillate imbalance, as the industry produces a cushion for good European reners, though
surplus of gasoline for export and has to import marginal plants may suffer. However, the real
diesel and heating oil. Rening margins therefore Achilles heel for less competitive reneries remains
reward diesel production over gasoline, and those the surplus of gasoline. Any rener having to export
reneries with hydrocrackers (which make more signicant surplus gasoline from Europe to the US
diesel) benet from this skew, whilst reneries with is likely to face increasingly erce price competition,
only FCC crackers (which make more gasoline) are and downward pressure on prots especially
penalised by it. given the fact that US demand for imported
gasoline has fallen considerably since 2006. This key
For many years Europe has imported middle weakness is likely to determine the fate of many
distillates from Russia and the US, whilst exporting imbalanced reneries and thus large investments
gasoline to the US and Africa. These ows are likely in hydrocrackers and cokers may be their only
to continue. In addition some Middle Eastern and strategy for survival, which unfortunately may be
Asian diesel exports may make their way into Europe. too expensive to justify for a long time to come.
US GASOLINE IMPORTS FROM EUROPE
450 90%
400 80%
350 70%
Thousands barrels per day
300 60%
250 50%
200 40%
150 30%
100 20%
50 10%
0 0
Jan 2001
Jan 2011
Jan 2000
Jan 2002
Jan 2003
Jan 2004
Jan 2005
Jan 2006
Jan 2007
Jan 2008
Jan 2009
Jan 2010
US gasoline imports from Europe % of total US gasoline imports
Source: US Energy Information Administration 2011: KPMG analysis
ACTING DIFFERENTLY: WHAT THIS MEANS FOR REFINERY OWNERS
GERARD SHORE Gerard Shore

Director, KPMG in the UK
T: +44 20 7311 3268
E: gerard.shore@kpmg.co.uk
In the face of tough market conditions, cost The following are some investment options
pressures and the emergence of new players from to consider.
Asia and the Middle East, European renery owners
Upgrading capacity
should act differently now if they are to be protable
Investment in coking, deep cracking, expanding
in the future. The main options available to them are:
existing crackers and other plant upgrades are all
Invest in their rener y plant to increase expensive options, not to be considered lightly. But,
production, improve yields, and reduce costs the reality is that straight-run capacity is unlikely
to be cash positive again, and even traditional FCC
Improve operations, procedures and
investment margins are being steadily eroded
management to reduce costs and improve yields;
over time. Therefore, as East of Suez products and
Divest unprotable assets to maximise return on economics enter the European market, the existing
investments made; or upgrading plant will increasingly become the
marginal operated plant and therefore the margin-
Close unprotable assets, and possibly convert
setting capacity.
some, or all, of the site to other uses, such as
storage. All survivor sites must maintain a clear strategy for
steady investment in upgrading capacity. And, for
Invest those prepared to invest strategically, now is a good
Technology improves, existing plant wears out, time to seize the opportunities presented by weaker
energy costs grow, and the advantages of scale investment costs during the economic down-turn
grow ever larger. These truths have been with the while capturing the high cash ows that should ow
rening industry since its beginnings, and continue from plant that commission ahead of the next margin
to mean that over the long term all reneries will peak. This peak may be some way off, given the
require new investment if they are to remain depth of this down-turn and the economic problems
competitive and protable. in the region, but it will come, and will remunerate
carefully considered but bold investment decisions
But timing is everything. Investing too early devours which are made in sufcient time.
the cash ows of previous investments, and
waiting too long can tip the renery from a survivor Capability to process poorer quality crude oils
site, where reinvestment will pay, into a closure For many years, most coastal reneries in North
candidate, where it is impossible to justify the costs West Europe have been congured to run a wide
of upgrading investments on what is fundamentally variety of crudes, taking advantage of the liquidity
an uncompetitive plant. in the traded crude oil markets to provide them with
cost competitive crude oil on the day. Operating
Given the emerging dominance of high quality new exibility, plenty of storage capacity, and an
reneries East of Suez, it is critical that owners of entrepreneurial approach have paid off handsomely.
European-based reneries understand and clearly
acknowledge which category their site ts into. Investments to run poorer quality crude oils are
Sites without competitive advantage are becoming likely to continue to pay off, as available crude oils
increasingly poor reinvestment candidates, and become ever heavier, increasingly sour and more
should be placed on a path to harvesting cash and contaminated with heavy metals and the like.
either divestment or closure. Product Quality, Energy Cost Savings and
On the other hand, where a renery retains inherent CO2 Emissions
advantages from its location and existing plant, Most European reneries have now made the
then reinvesting in existing or new plant can prove investments needed in desulphurisation capacity
protable. To reap the full rewards from owning these to meet gasoline and diesel specications imposed
survivor sites it is critical to invest steadily through by the last wave of environmental legislation. The
the life of the site, as maintaining competitive next major threat is on the quality of bunker fuels.
advantage is likely to generate signicant prots This is likely to be a signicant issue for coastal
and cash ows over the cycle. For these sites, it is reneries, and could hasten and complement the
essential to have a clear investment strategy. drive towards deeper upgrading.
2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network of independent member
rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
TO IMPROVE PERFORMANCE, REFINERS WILL CONTINUALLY
NEED TO CHALLENGE ALL ASPECTS OF THEIR BUSINESS.
INVESTMENT OPPORTUNITIES MUST BE SCRUTINISED
AND IMPROVEMENTS PURSUED RELENTLESSLY IN ALL
COMMERCIAL AND OPERATIONAL AREAS
And with CO2 emission prices likely to rise, energy The second key principle is that good operators
saving investments are now rmly back on the inspect and maintain their plant properly, from the
agenda. It is even possible that in the next decade start, and without fail throughout its operating life.
some reneries will consider investment options They have consistent, clear and fully funded plans
for carbon capture and storage of CO2 as a way of and strategies for maintenance, conducted within a
mitigating the cost of CO2 emissions. quality Maintenance Management System, which
is executed through both good times and bad.
Improve Reliability Centred Maintenance (RCM) dominates
Whether margins are good or bad, one thing with high proportions of preventative and predictive
remains true - in absolute terms they are small. maintenance on production critical equipment,
The protability of a rener y is highly leveraged limiting the need for reactive maintenance which
and small yield and cost improvements can make results from plant failure. This proactive approach to
a large impact on the bottom line. maintenance has been proven repeatedly to deliver
Once the investment is made the key is continuous the lowest operating costs.
improvement if this does not happen the renery Production optimization and crude acquisition
will, inevitably, drop back. A well operated plant, Feedstock typically accounts for 90 percent of the cost
getting the best yield from the best available crude base of the renery. Small improvements in yield and
oil, and paying continuous and steady attention to costs drop straight through to the bottom line, and can
costs is essential to get the desired return on the make a huge difference to prot and cash ow.
investments made.
Intellectually, all reners understand the
Operations and Maintenance - running the plant importance of making the products and buying
reliably and safely the crude oil that maximises their margin on the
Poor reliability and plant availability can be day. However understanding market demand,
devastating to a renerys prot and cash ows. optimising renery production, and buying and
The pace-setters operate their plants safely, running the right crude at the right time at the right
maintain them properly and often have the lowest price remains a crucial activity, and is sometimes
operating costs in the business with a signicant almost a dark art, understood and available only to a
difference in performance and approach versus few technical experts.
average performers.
Commercial optimisation, as it is often called, draws
So how do these pace-setters create and heavily on the need to bring together commercial,
maintain this circle of safe, highly reliable and low trading, technical and operating skills. It is heavily
cost operations? dependent on the knowledge and skill of the people
The rst key principle is doing everything right, involved, and can make an enormous difference to
the rst time. Good operators have - and follow - a the actual margin captured at any time.
good Operating Management System. This spells
out - in a practical way - procedures to be followed,
and provides the information needed to make good
decisions from the top to the bottom of the
organisation. At the same time, it helps build an
organisation and culture of competence and
compliance, based on continuous improvement, in
which well-trained people gets things done
properly, the rst time.
Given the value at stake, we would recommend made against the original design performance of
frequently revisiting this area and investing the equipment, or other suitable benchmarks. The
signicant time and cash in a number of areas: resulting improvement opportunities are usually best
delivered using cross functional project teams of
Examining, improving and periodically rebuilding
Technical and Operations personnel.
the economic planning, plant optimisation and
feedstock procurement processes; Fixed cash costs
Upgrading the optimisation models used. INDICATIVE REFINERY FIXED CASH COST
However, it is even more important to regularly
review whether: they are being used properly; BREAKDOWN BY FUNCTIONAL AREA
the data fed into them is soundly based; the
processes for making decisions from them are HR Admin
Commercial
robust and valid; and the human judgement that 5%
2% 2%
must overlay any model-based process is based Technical

6%
on good experience and skill; and
HSSE
6%
Understanding the way in which the interface
between traders, commercial teams and reners
is managed. This can be a huge source of value, Projects 9%
but the tension between traders and reners

can quickly become counterproductive if left
uncontrolled and unmanaged. 28%
Operations
A renewed focus on optimising individual process
unit performance can also provide signicant 42%
improvement opportunities. Opportunities to Maintenance
increase product yields by processing alternative
product streams and optimising operating
parameters are too often overlooked in favour Source: Analysis based on KPMG rms engagements
of the larger improvements from major capital
investments. These smaller opportunities can
Managing, and where possible reducing, xed cash
deliver signicant value rapidly and often with very
costs is one of the most difcult areas for reners to
modest investment.
deal with. Five to eight percent of the total cost base
Finally, member rms experience indicates that relates to employees, contractors and various goods
unstructured and outdated monitoring, control and and services procured. However, our experience is
optimisation processes frequently contribute to that these costs are often not fully optimised.
sub-optimal unit performance. These processes
Reasons for this are:
can often be improved by clearly redening the
accountabilities of Operations and Technical Management lacking the right tools and
personnel and by installing robust cross-functional approaches, with cost reduction programs
governance mechanisms. often focussed on short terms actions (e.g.
discretionary budget cuts across the board, or
Variable energy and utility costs
freezing / cutting discretionary spend);
Although variable cash costs account for a smaller
proportion of the total cost than feedstock, they can Lack of visibility of the true cost base and
cost tens of millions of Euros and must therefore be headcount of the organisation at a sufcient level
a key area of focus for reners. of detail to enable a clear line of sight between
improvement projects and bottom line impacts;
Energy and utilities are by far the most signicant
items. Member rms experience is that even Adopting cost optimisation activities in the
in modern sites improvement opportunities absence of robust hard economic facts and
exist to reduce these costs, particularly around comparator insights that dispel myths and
key equipment such as furnaces and turbines. challenge the status quo;
The pursuit of these opportunities is also helped
Lack of external challenge to maximise potential
substantially by the application of on-line energy
value without compromising on operational
monitoring and energy management systems.
integrity; and
An efcient way of reducing variable costs is through a
Employment legislation and weaknesses in the
plant-wide energy and utility assessment. This involves
quality of Industrial relations.
mapping production unit energy consumption against
product stream throughputs, with comparisons
However, as with all costs in rening, if handled Operations overstafng resulting from:
properly a small improvement can often have a
o Sub-optimal shift structures with excessive
signicant impact on the bottom line. Albeit the
cover and overtime in place
reverse is also true, and if allowed to run out of control
it can be extremely difcult to recover protability. o Control rooms not consolidated resulting in low
The key is to have long term focus, underpinned with levels of staff utilisation
clear plans, that keep the plant well maintained and
o Excessive management oversight in place as
operated, as well as a steely determination to control
demonstrated by lower spans of control ratios
and challenge all xed cash costs.
than similar organisations.
KPMG analysis indicates that over 60 percent of
Outsourcing services is a long-established
functional xed cash costs are usually people-
practice in European reneries. Many reneries
related (including payroll, contractors and
run a combination of in-house and outsourced
outsourced personnel). These xed cash costs
maintenance, much engineering is now contracted
can almost always be reduced by optimising work
out, and outsourcing back-ofce functions such
processes, both within individual functional areas
as IT, accounting, and transactional HR activities
and at points of high complexity where teams
are common. However it is essential to maintain
interface with each other. Examples of areas of
control of the core activities of the business, such
potential opportunity include:
as operations, while retaining the capability to
Maintenance inefcient permit to work maximise value through effective performance
execution caused by: management of outsourced service providers.
o equipment not ready to be removed from

Procurement - of both goods and services is an area
service
in which xed cash cost reduction opportunities are
likely to exist. Many businesses believe they excel in
o risk assessment paperwork not completed
procurement - in reality however, this is only true in the
o scheduling/timing disagreement between
initial supplier negotiations. Often, once agreements
Operations and Maintenance;
are in place, less importance is placed on delivering
ongoing rigorous performance management, which
Laboratory embedded inefciencies in product
results in value leakage. In this situation, a prioritised
testing due to:
review of contracts and suppliers is important to
o laboratory staff conducting routine low
ensure that performance and productivity goals are
complexity testing which could have been
achieved by third-party suppliers.
absorbed by Operations personnel
o missed opportunities to conduct in-line testing
o excessive testing conducted beyond required

service levels; and
EUROPEAN REFINERIES - DEAL HISTORY
Year Asset name / Bidder Total renery Seller

location capacity - bpd
2011 Stanlow Renery, UK Essar Energy 296,000 Royal Dutch Shell

2011 Pembroke Renery, Valero Energy 220,000 Chevron
UK
2011 Grangemouth, UK PetroChina 420,000 Ineos
Lavra, France
2010 Gothenburg Renery, Keele Oy 87,000 Royal Dutch Shell
Sweden
2010 Ruhr Oel, Germany Rosneft >1,000,000 PDVSA
2010 Heide Renery, Klesch & Co. 90,000 Royal Dutch Shell
Germany
2009 TRN, Netherlands Lukoil 158,000 Total
2008 ISAB Renery, Italy Lukoil 320,000 ERG
2008 Petit Couronne and Petroplus 239,000 Royal Dutch Shell
Reichstett Reneries,
France
2008 Berre L'Etang, France LyondellBasell 105,000 Royal Dutch Shell
2007 Milford Haven Murco Petroleum 108,000 Total
Renery, UK
2007 Mantova Renery, MOL 52,000 IES
Italy
2007 Coryton Renery, UK Petroplus 172,000 BP
2007 Kralupy and Litvinov Eni 165,000 ConocoPhillips
Reneries, Czech
Republic
2007 Ingolstadt Renery, Petroplus 110,000 ExxonMobil
Germany
2007 Rotterdam Renery, BP 400,000 Chevron
Netherlands
2006 Mazeikiu Nafta, PKN Orlen 260,000 Yukos-Lithuanian State

Lithuania
2006 BRC Renery, Belgium Petroplus 115,000 European Petroleum Holdings
2006 Wilhelmshaven ConocoPhillips 275,000 Louis Dreyfus Energy Holdings

Renery, Germany
2003 Bayernoil renery, OMV 260,000 BP
Germany
This table summarises a number of signicant European renery transactions from 2003-2011. Information relates to total renery capacity quoted publically at time of
transaction which may differ to the JV partner agreement share
Source: Transaction information obtained from bidder / seller press releases and websites (multiple publically available sources)
Divest Employees - transactions may or may not be

Investment groups and oil companies from Asia, conducted as an entity deal in which the assets
Russia and the US are being selective and targeting and employee contracts are bought together.
only the most advantaged European rening assets. However, whatever the structure of the potential
Even so, divestment remains a viable strategy for deal, employee contracts should be thoroughly
renery owners if the asset is properly prepared reviewed by the seller early in the divestment
and the sale closely managed - indeed well over process, as vendors will need to be prepared to
one million bpd of European rening capacity has discuss terms and conditions in detail with the
changed ownership since the start of 2010. potential buyers. This is particularly important for
European reneries where complex employment
Preparing for the divestment legislation needs to be navigated successfully,
Detailed planning and execution is needed for and specialist advice is often required; and
an efcient transaction that maximises value.
This sounds logical, but in reality the activity is Communications - maintaining an engaged and
very complex, involving many stakeholders, and motivated workforce throughout the deal is a key
thus a properly structured process is crucial. Key challenge. The divestment process often takes
considerations include: several months (or longer) and the economic
impact of reduced productivity or resignations
Timing - one of the rst key decisions is when of key personnel can be signicant. It is therefore
to initiate the divestment process. Value can important to clearly dene the communications
be easily destroyed if timing is poor and an strategy to be adopted from the outset of the
early strategic review of options is essential. divestment, and include regular ongoing dialogue
Considerations should include how reliably with employees from the start to the nish of
the rener y is operating and the current safety the process.
performance as poor performance in either will
deter potential buyers; Following the completion of the divestment the
vendor will need to switch attention to a disciplined
Packaging the asset - equally important is how to attack on the stranded costs remaining within their
package the asset for an efcient sale. Potential business, for example in support functions. It is also
buyers usually want to buy a standalone asset, prudent to monitor how the new owners operations
but there are instances where infrastructure and are performing, as situations can arise where
resources need to be shared with the vendors the vendor is pulled back into operational issues
retained business. Consequently carving out an involving the assets they have divested.
asset as a standalone entity, together with a set of
nancial statements that represent the business
being sold, can be a highly complex challenge, and,
vendors should be prepared for signicant effort
before, during and after the transaction;
Valuation - in the current economic environment

where buyers are cautious and extremely price
sensitive, the valuation approach adopted can
determine whether the divestment process stalls
or proceeds at speed. Over pricing assets often
leads to difculties later on when the buyer makes
an offer. Also having a clear data based view of
the upside potential within the business and how
this value can be accessed should be a key part of
this process;
DIVESTMENT REMAINS A VIABLE STRATEGY FOR REFINERY

OWNERS IF THE ASSET IS PROPERLY PREPARED AND THE
SALE CLOSELY MANAGED INDEED WELL OVER ONE MILLION
BPD OF EUROPEAN REFINING CAPACITY HAS CHANGED
OWNERSHIP SINCE THE BEGINNING OF 2010.
Close or convert
If a buyer cannot be found and operating the
CLOSING A
renery is not economically viable, owners are

faced with two options: closing the renery (either
REFINERY IS
permanently or temporarily) or converting some or

all of the site to other uses, such as storage.
A COMPLEX
Closing a renery AND COSTLY

Closing a renery is a complex and costly procedure.
Environmental costs, demolition work and other PROCEDURE.
costs can be very high.
The environmental costs of cleaning up the site will

IN ADDITION,
be a major expense. Substantial regulation requires
removal of the accumulated pollution resulting from
PROBLEMS MAY
decades of past use where requirements were

often less demanding than those today.
ALSO ARISE FROM
Employment law, including pensions and severance THE CONFLICTING
benets, is another key issue to be managed, with

the costs of severing employee contracts often INTERESTS
unexpectedly high.
In addition, problems may also arise from the

OF MULTIPLE
conicting interests of multiple stakeholders,
including the rener, local government, regulators
STAKEHOLDERS
and employees, which ultimately can lead to
protracted disputes and signicant legal costs.
Limiting the damage to the public image of the
rener throughout the closure process, needs
careful management.
Converting a renery
Alternatively, converting reneries to terminals can
mitigate many closure costs, extend the assets useful
life, reduce the plant costs and release working capital.
If well located, and if the tank farm and logistics
assets are in good condition, this can be an attractive
alternative to closing the renery completely.
But not all reneries are suitable for conversion to

terminals. Key constraining factors include:
On-site storage capacity - whether this is

sufcient for the site to operate as an effective
import/export terminal;
Transportation links - the connectivity of the site to

major ports as well as to other forms of transport
such as pipeline, road, rail and barge; and
Access to surplus capacity - whether the site

can access third party terminal services to
supplement available in-house capacity on a
exible basis.
ACTING DIFFERENTLY: WHAT THIS MEANS FOR INVESTORS
ANTHONY LOBO Anthony Lobo

Partner, KPMG in the UK
T: +44 20 7311 8482
E: anthony.lobo@kpmg.co.uk
With a variety of European rening opportunities A review of how production will be marketed,
open to investors, selecting the right asset to including consideration of the impact of the
purchase is becoming increasingly complex. In renery location;
addition, the prevailing economic climate is causing
A detailed understanding of the cost base of
investors to be increasingly cautious with only the
the rener y, and a structured plan for how costs
most advantaged reneries targeted.
might be reduced through synergies and greater
The recent acquisition of Chevrons Pembroke plant operational efciencies;
by Valero is a good example of this approach. The
A review of staff and management capability
deal not only gives the US company a presence in
and competency to deliver the business plan -
Europe but also ownership of a highly specialised
identifying gaps and establishing mitigation plans;
renery, with a Nelson complexity rating of 11.8.
The renery has been well maintained and A review of pension obligations and their impact
managed, and it has an estimated cash operating on future nancial performance - which can be
cost 25 percent below Valeros average2 . very substantial;
Companies from outside the region can also seek out The ability to handle working capital and
European acquisitions with the purpose of converting credit terms associated with third party crude
the site to storage for use as a trading hub. purchases; and
Depending on the market position, opportunities may
Legislation and environmental requirements
exist to make more money trading oil through the
on the rener y including potential liabilities for
site than processing and buying an established site
cleanup or new investment required to meet
simplies compliance for environmental regulations.
environment directives.
Buying with a plan Approaching the acquisition using a structured
Regardless of the perceived value and intentions of framework will not only help maximise return on
the deal, investors should always buy with a very investment, but enable the investor to respond with
clear plan on how the target asset will be operated agility to new commercial, operational, nancial and
in the short and long term in order to maximise the legislative challenges which will undoubtedly be
value created. Clearly this is a highly involved and encountered.
complex process - however initial considerations for
investors should include:
How well the asset matches current and expected

European product demand, in particular for middle
distillates such as diesel;
2
Valero Energy to Purchase Chevrons Pembroke Renery, Marketing and Logistics Assets in the U.K. and Ireland, press release, Valero, November 3, 2011
Essar and Stanlow: an investor rationale

Moving forward
The 2011 sale of Shells Stanlow renery in the Despite the apparent discouraging news on many
UK to Essar is an excellent example of how an fronts, rening is still one of the largest industries in
overseas investor developed a strong rationale for Europe - with a throughput of over 12 million bpd10.
acquiring a European renery in todays market. The EU is also one of the largest economic regions
in the world, with a GDP approaching 12 trillion,
Essar is a conglomerate based in India with and will continue to have a signicant appetite for
operations in energy, steel, infrastructure and renery products.
other businesses3. The company paid US$350
million for Stanlow, the second largest renery If the current trend continues, in ve to ten years
in the UK. The renery has a production capacity European rening will be smaller, and joint venture
of 296,000 bpd supplying one sixth of the UKs partnerships are likely to become increasingly
gasoline, as well as diesel and aviation fuel4. attractive as existing rening companies look to
mitigate risks and share the high costs of investing
Press reports indicated that Shell viewed the through future cycles. The inexorable process
renery as a mature asset with low returns5. The of change of ownership, renery rationalisation,
sale was also part of Shells plan to consolidate upgrading and concentration on fewer sites is
their global manufacturing portfolio on larger expected to continue as new high complexity
assets, which on completion would reduce capacity comes on stream in Asia providing low cost
rening exposure through a combination of asset competition to European reneries.
sales and closures6.
However, European rener y owners can expect to
For Essar, however, the acquisition was justied make a return on their investments if they have:
on a number of levels. Naresh Nayyar, chief
executive of Essar Energy, believes that the A clear understanding of whether their sites are
current oversupply in the market will end as survivor sites or eventual closure candidates;
smaller reneries close7. With the acquisition, Appropriate and clear investment strategies for
Essar can now ship crude oil rened from its each site through the cycle;
Vadinar renery in Gujarat to the Stanlow renery,
using the Tranmere Oil Terminal on the River A determination and ability to operate their sites
Mersey. Finally, Stanlow can help Essar deal with as a pace setter; and
cheaper, heavier crudes, which would increase A steely focus on costs and performance.
margins for nished products8.
But only the best will make an attractive return
Commenting on the deal, Nayyar says, It is a and to do so they will have to face the difculties of
good price. It would cost US$5 billion to build succeeding in a highly mature industry by developing
from scratch. It gives us access to an important innovative solutions to meet the changing market and
market9. growing competition from overseas.
3
www.essar.com/business, accessed March 5, 2012
4
Foreign investment: Indian companies blaze trail across the country
Financial Times, September 15, 2011

5
Ibid
6
Shell sells UK Stanlow renery to Essar Oil, press release,
Shell, March 29, 2011
7
Op. cit. Foreign investment: Indian companies blaze trail across the
Country, Financial Times, September 15, 2011
8
Ibid
9
Ibid
WITH A VARIETY OF EUROPEAN REFINING OPPORTUNITIES

OPEN TO INVESTORS, SELECTING THE RIGHT ASSET TO
PURCHASE IS BECOMING INCREASINGLY COMPLEX
10
BP Statistical Review of World Energy June 2011
WHY KPMG?
This is a time of extraordinary global economic Through our global network and our 11 oil & gas
and political turbulence which has led to many Centres of Excellence12, we constantly strive to
challenges for the oil & gas industry. As a result, provide fully integrated and tailored services of the
owners and operators of European reneries highest quality providing clients with the skills and
need forward thinking and practical advice from experience they need to help ensure success.
professionals who understand their businesses.
KPMG member rms provide professional
KPMGs Vision and Commitment services to:
KPMGs oil & gas practice has one clear vision - 84% of the top 50 oil & gas companies listed in
to be the leading provider of professional services to Forbes 100013
the oil & gas industry.
80% of the 76 oil & gas companies listed in
KPMGs global network of independent member Forbes 100014
rms provide audit, tax, and advisory services11; our
methodologies form the foundation of our approach 72% of the 54 oil & gas companies listed in
worldwide. KPMG recognizes that every business Fortune Global 50015
is different, each with its own internal and external 82% of the 50 oil & gas companies listed in
pressures and challenges. Our methodologies Financial Times Global 50016
are therefore exible to enable our people to use
their knowledge and experience to apply them
appropriately for each client.
Crucially, the services member rms offer start

from our clients perspective. We look at industry
challenges from multiple angles, pooling our
knowledge and resources to develop holistic
services that are designed to t our clients ever-
changing challenges and requirements.
11
Advisory services include advice relating to performance & technology; transactions; joint ventures; restructuring; and risk & compliance
12
Beijing, Calgary, Houston, Johannesburg, London, Moscow, Muscat, Paris, Perth, Rio de Janeiro and Rotterdam
13
Forbes 1000, April 2011
14
Forbes 1000, April 2011
15
Fortune Global 500, July 2011
16
Financial Times Global 500, June 2011
BIOGRAPHIES
Jeremy Kay Gerard Shore

Partner, KPMG in the UK Director, KPMG in the UK
Jeremy leads KPMGs European Operations Gerard focuses on providing operational strategy
Strategy Consulting practice. For the last 15 years support to oil & gas clients in Europe and beyond.
he has been working with oil & gas organisations He specialises in the identication and delivery
to identify and deliver cost, cash and margin of business transformation solutions that drive
improvements across all areas of upstream, operational performance improvement and higher
downstream and rening operations. He has returns on capital expenditure.
led programmes in over 18 countries both in a
His experience includes leading oil & gas projects
deal and non-deal environment. Clients include
across Europe, the US, Africa, Asia and Australia and
global integrated majors seeking to drive value
identifying benets across numerous business areas
from operations as well as both institutional and
including rening, petrochemical manufacture, supply,
private equity investors looking to get an improved
distribution and fuels marketing.
return on asset performance. Jeremy frequently
represents KPMG on cost optimisation and Gerards rening experience includes delivering
sustainable value improvement, he has spoken at performance improvement in operations,
several oil & gas conferences on the subject and maintenance, engineering, capital projects and
published numerous articles. support functions.
Anthony Lobo Fergus Woodward

Partner, KPMG in the UK Director, KPMG in the UK
Anthony leads KPMGs European Oil & Gas practice. With over 14 years experience in oil & gas and
He overseas KPMGs oil & gas strategy across related industries, Fergus is an operations strategy
Europe and specialises in the role of National Oil expert across both the upstream and downstream
Companies having published a number of thought oil & gas value chain. His particular interests concern
leadership pieces over the past ve years. value optimisation in rening, petrochemicals and
offshore upstream operations.
In addition, Anthony leads our M&A services and
has worked for the majority of the major players in Fergus typically advises organisations on enterprise-
the industry. In the downstream sector Anthony wide sustainable operational prot improvement
and his team have worked on many of the recent programmes - covering cash, cost and margin. His
transactions across Europe - both rening and retail. reviews have included areas such as maintenance,
turnarounds, logistics, manpower, employee
Anthonys transaction experience covers the US,
benets & remuneration, procurement, research
Europe (including Russia and the Former Soviet
& technology and integrated operating model
Union), Africa and Asia. He has lived and worked in
structures. Clients include numerous major oil & gas
Hong Kong and Africa and is now based in the UK.
companies worldwide.
Anthony has frequently spoken on changes in the
sector across the globe including Houston, Africa, Fergus began his career in the oil and gas industry
the Middle East and Europe. as a Chartered Chemical Engineer. He is the author
of several papers on the subject of optimising value
from operations including a recent article for KPMG
on the petrochemicals sector.
LINKS
The KPMG Global Energy Institute (GEI): launched in

2007, the GEI is a worldwide knowledge-sharing forum
on current and emerging industry issues. This vehicle
for accessing thought leadership, events, webcasts,
and podcasts about key industry topics and trends
provides a way for you to share your perspectives on
the challenges and opportunities facing the energy
industry arming you with new tools to better navigate
the changes in this dynamic arena.
www.kpmgglobalenergyinstitute.com
The KPMG Global Energy Conference: The KPMG

Global Energy Conference (GEC) is KPMGs
premier event for executives in the energy industry.
Presented by the KPMG Global Energy Institute,
the GEC attracts more than 600 professionals each
year and brings together energy nancial executives
from around the world in a series of interactive
discussions with industry luminaries. The goal of
the conference is to provide participants with new
insights, tools, and strategies to help them manage
industry-related issues and challenges.
www.kpmgglobalenergyconference.com
Contact
Europe, Middle East and Africa Americas

London Moscow Calgary
Jeremy Kay Hilda Mulock Houwer Wayne Chodzicki
Partner Partner Partner
KPMG in the UK KPMG in Russia KPMG in Canada
T: +44 20 7694 4540 T: +7 495 937 4444 ext: 14099 T: +1 403 691 8004
E: jeremy.kay@kpmg.co.uk E: hildamulockhouwer@kpmg.com E: wchodzicki@kpmg.ca
Anthony Lobo Muscat Houston

Partner Michael Armstrong Regina Mayor
KPMG in the UK Partner Partner
T: +44 20 7311 8482 KPMG in Oman KPMG in the U.S.A.
E: anthony.lobo@kpmg.co.uk T: +968 24 709 181 T: +1 713 319 3137
E: marmstrong@kpmg.com E: rmayor@kpmg.com
Gerard Shore
Director Paris Rio de Janeiro
KPMG in the UK
T: +44 20 7311 3268 Wilfried Lauriano Do Rego Manuel Fernandes
E: gerard.shore@kpmg.co.uk Partner Partner
KPMG in France KPMG in Brazil
Fergus Woodward T: +33 1 55 68 68 72 T: +55 21 3515 9412
Director E: wlaurianodorego@kpmg.com E: mfernandes@kpmg.com.br
KPMG in the UK
T: +44 20 7694 3018 Rotterdam ASPAC
E: fergus.woodward@kpmg.co.uk Ruben Rog Beijing
Partner
Peter Fung
Johannesburg KPMG in the Netherlands
Partner
Alwyn van der Lith T: + 31 10 453 41 70
KPMG in China
Partner E: rog.ruben@kpmg.nl
T: +86 10 8508 7017
KPMG in South Africa E: peter.fung@kpmg.com
T: +27 11 647 7395 Floris van Oranje
E: alwyn.vanderlith@kpmg.co.za Director
Perth
KPMG in the Netherlands
T: +31 20 656 84 06 Brent Steedman
E: vanoranje.oris@kpmg.nl Partner
KPMG in Australia
T: +61 8 9263 7184
E: bsteedman@kpmg.com.au
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KPMG GLOBAL ENERGY INSTITUTE

The Future of the

This time its bad and it could stay that way 02

Acting differently: What this means 06

Acting differently: What this means 16

EXECUTIVE SUMMARY - MICHIEL SOETING

European reners are on a different path to the one

The European rening industr y has gone through

However, it is not all negative:

The worlds appetite for hydrocarbons will keep

Europe remains one of the largest economic

Signicant recovery, though may take some time:

THIS TIME ITS BAD AND IT COULD STAY THAT WAY

AGING EUROPEAN REFINERIES GENERALLY HAVE

REFINING CAPACITY AND UTILISATION - EUROPEAN UNION

15800 88% Refinery utilisation (%)

Refinery capapcity Refinery utilisation

Source: BP Statistical Review of World Energy June 2011: KPMG analysis

The Skewed Barrel Exporters of diesel to Europe have to absorb their

US GASOLINE IMPORTS FROM EUROPE

US gasoline imports from Europe % of total US gasoline imports

Source: US Energy Information Administration 2011: KPMG analysis

ACTING DIFFERENTLY: WHAT THIS MEANS FOR REFINERY OWNERS

GERARD SHORE Gerard Shore

TO IMPROVE PERFORMANCE, REFINERS WILL CONTINUALLY

NEED TO CHALLENGE ALL ASPECTS OF THEIR BUSINESS.

INVESTMENT OPPORTUNITIES MUST BE SCRUTINISED

AND IMPROVEMENTS PURSUED RELENTLESSLY IN ALL

COMMERCIAL AND OPERATIONAL AREAS

must overlay any model-based process is based Technical

but the tension between traders and reners

o equipment not ready to be removed from

o missed opportunities to conduct in-line testing

o excessive testing conducted beyond required

EUROPEAN REFINERIES - DEAL HISTORY

Year Asset name / Bidder Total renery Seller

2011 Stanlow Renery, UK Essar Energy 296,000 Royal Dutch Shell

2006 Mazeikiu Nafta, PKN Orlen 260,000 Yukos-Lithuanian State

2006 Wilhelmshaven ConocoPhillips 275,000 Louis Dreyfus Energy Holdings

Divest Employees - transactions may or may not be

Valuation - in the current economic environment

DIVESTMENT REMAINS A VIABLE STRATEGY FOR REFINERY

renery is not economically viable, owners are

permanently or temporarily) or converting some or

Closing a renery AND COSTLY

The environmental costs of cleaning up the site will

decades of past use where requirements were

Employment law, including pensions and severance THE CONFLICTING

benets, is another key issue to be managed, with

In addition, problems may also arise from the

But not all reneries are suitable for conversion to

On-site storage capacity - whether this is

Transportation links - the connectivity of the site to

Access to surplus capacity - whether the site

ACTING DIFFERENTLY: WHAT THIS MEANS FOR INVESTORS

ANTHONY LOBO Anthony Lobo

How well the asset matches current and expected

Essar and Stanlow: an investor rationale

Financial Times, September 15, 2011

WITH A VARIETY OF EUROPEAN REFINING OPPORTUNITIES

Crucially, the services member rms offer start

Jeremy Kay Gerard Shore

Anthony Lobo Fergus Woodward