By John Mayes and John Auers
As we start heading toward the second half of June, those of us who are cycling fans start anticipating the beginning of the Super Bowl of bicycle racing, the Tour de France. The 103rd edition of this classic is slated to begin on July 2nd, and the current refinery workers strike in France brought to mind some similarities between the decline in both refining and cycling in that nation. To find the last French rider to win the Tour, you have to go back to 1985, when the great Bernard Hinault (“Le Blaireau”) won his 5th and final title, culminating a “golden age” for France, where French cyclists captured 9 out of 11 races from 1975 to 1985. While France was never as dominant in refining as they were in cycling, the industry was certainly much more robust during that same period than it is today. Total refining capacity has declined by 60% since the mid-1970’s and France’s share of both Western European (20% to 13%) and global (5% to less than 1.5%) capacity has dropped significantly. While French cyclists have some hope that their drought of Tour wins could be ending soon (perhaps by promising young rider Thibaut Pinot, though still unlikely in 2016), the future for Gallic refiners remains bleak. The current refinery strike, which has resulted in temporary shutdowns at most of the remaining refineries is providing further proof of the weakness of the industry. In today’s blog we discuss that strike, its immediate impacts and what the future might hold for refining in France.
In what started as a general strike in France to protest relatively mild reforms in labor legislation quickly became a work stoppage aimed predominantly at the French refining industry. At its peak, as many as six of the eight French refineries were impacted and the industry was crippled for three weeks. Strikes were suspended at some of the plants over the last few days and restarts have begun. Although it appears this episode is gradually winding down, workers at France’s largest refinery, Total’s Gonfreville plant, remain on strike, and the facility continues to remain down.
The effects of the strike are clearly being felt throughout the country. Localized fuel shortages have occurred, accompanied by long lines at retail sites. Just as the situation appeared to be winding down last week, the union decided to continue the strike until at least Friday for the start of the Euro 16 soccer tournament (hosted by France), as a way of pressuring the government. To mitigate the supply constraints and any possible shortages, the government has allowed the drawdown of its strategic reserves. There have also been sporadic strikes at various petroleum terminals around the country. In response to the same legislation, sanitation and rail workers in Paris are also on strike. Garbage has been accumulating in Paris and the union was attempting to embarrass the government which was expecting a large influx of visitors for the Euro 16 games.
Several factors have served to limit the impacts of the strike. Much of the lost distillate production is being sourced from the large Amsterdam-Rotterdam-Antwerp (ARA) refining hub which is resulting in a drawdown of stocks. Also helping is the fact that distillate inventories had also been very high when the strike began, and remain one third higher than the five year average.
France currently has a total refining capacity of 1.4 million BPD, 60% below the peak experienced in the late 1970’s. The 2016 BP Statistical Review reports that operating rates in 2015 were 1,151 MBPD, equating to a relatively anemic utilization rate of 82%.(compared to the U.S. rate of over 91%) Five of the eight refineries are owned by the French major Total with a combined capacity of 829 MBPD. ExxonMobil owns two others, with a total capacity of 369 MBPD, while Petrolneos owns the remaining refinery.
When the strike began, all of the Total refineries and the Petrolneos refinery were impacted. The La Mede refinery quickly restarted, but has been running at reduced rates, as workers remain on strike (potentially ending today). Over the last few days, the Total Donges, Feyzin and Grandpuits refineries have also restarted. The Petrolneos refinery also has been operating at reduced rates, with workers still on strike. The union has indicated that the strike at the Gonfreville refinery will continue at least until Wednesday.
The decline in the French refining industry has resulted in a significant change in their product supply/demand situation. While the indigenous refineries still supply slightly over two-thirds of the country’s petroleum needs, this is a major change from the net product exporter status enjoyed by France back in the 1970’s and early 1980’s. Total current petroleum demand in France is about 1.7 million BPD and is heavily weighted toward middle distillates (mostly diesel but also including jet fuel and kerosene) which comprise 65% of total requirements. While gasoline represents nearly 50% of U.S. product demand, it only comprises 10% of French demand. As a result, French refineries still produce more gasoline than the country consumes and export the surplus, but have a major distillate deficit equal to about 600 MBPD.
The U.S. refining industry has been a major beneficiary of the decline of France’s downstream industry. This is particularly evident when looking at distillate exports over the past several years. As recently as the mid-2000’s, the U.S. exported only nominal amounts of diesel to France (1 MBPD in 2005 and 5 MBPD in 2006). This has rapidly increased, and over the last three years, U.S. diesel exports have averaged about 90 MBPD, with other product exports equal to about 20 MBPD. Essentially all of these exports have come from USGC refineries.
The strike of the French refining workers has certainly created numerous opportunities for refiners in other countries. The most immediate impact was to support European refining margins. Margins in Europe are typically very thin and any upturn, no matter how brief, is a welcome respite for the industry. By early June, ARA distillate spreads had risen to their highest level of the year and gasoline spreads to their highest point in two months. Secondly, the loss of production will reduce bloated product inventories. This will assist future margins. Thirdly, this action presents an excellent opportunity for the U.S. The U.S. has been exporting over one million BPD of distillates (including jet fuel and kerosene) since 2012 and nearly 1.4 million BPD in 2015. These movements have primarily gone to Central and South America. This opportunity allows for greater shipments to Europe and helps to support U.S. refining rates.
The long-term effects of the French refining strike may become more significant than the short uptick in margins. The quick shutdown or reduction of rates of six of the refineries displayed the vulnerability of the French refinery system, particularly in comparison to the U.S. industry. The U.S. had its first extensive strike in years in 2015, but experienced no significant operating problems. Refining companies in the U.S. were able to operate their refineries with management employees, augmented at times by other support staff. Differences in labor laws, however, complicate the operation of French refineries. Issues like these will certainly impact future investment decisions. Combined with the disadvantages the French (and other European facilities) face in regards to crude costs, natural gas costs, and refinery capabilities (as discussed in previous blogs here and here, among others), this points to further declines in the French downstream.
Turner, Mason & Company tracks developments in the refining industry, along with other key dynamics impacting petroleum markets as part of our routine monitoring and analysis of global oil markets. We incorporate this into our biannual Crude & Refining Products Outlook product, a comprehensive forecast of supply, demand, and prices for both crude and products. For more information on this publications or any other specific consulting services that we may be able to provide, please feel free to contact us.
Final Note – Our fearless prediction for the 2016 Tour is continued dominance by the indomitable Chris Froome (barring a major crash or injury), as he easily fights off Nairo Quintana and Alberto Contador for his third victory in the past four years.