LONDON (Dow Jones)
ConocoPhillips (COP) Thursday scrapped plans to upgrade its 260,000 barrel-a-day Wilhelmshaven oil refinery in Germany, which will result in a non-cash impairment charge of $1.1 billion after tax to the company's second-quarter earnings.
ConocoPhillips may also sell the facility or convert it into an oil terminal. It joins other major oil companies looking to shed refining assets in Europe, where refining margins are being squeezed by weak demand and excess global capacity.
"This move is consistent with our stated strategy of maintaining capital discipline and reducing our downstream portfolio over time," Willie Chiang, Conoco's senior vice president of refining, marketing and transportation, said in a statement.
The Wilhelmshaven plant has faced a series of setbacks in the last year. It remains idle following a May 1 fire, and prior to that it was shut down for maintenance amid poor economic conditions for six months between October and April.
The upgrading project was most recently delayed in November--it was originally scheduled for 2008.
The Wilhelmshaven refinery is relatively unsophisticated, so it can't churn out as many high-quality, expensive fuels, like gasoline and diesel, as other European plants.
"It is fairly basic," said Roy Jordan, downstream consultant for EMC, an energy consultancy in London. "It would be a risk (to buy the refinery) because it does need so much updating and investment put in that I think you'd have to be fairly brave to take that challenge on."
Conoco bought the plant from commodities firm Louis Dreyfus in early 2006. Since then, it has undergone several periods of reduced production due to poor economic conditions.
ConocoPhillips owns or has an interest in four refineries in Europe, with a total crude oil processing capacity of 610,000 barrels a day.
In mid-July, the hydroskimming margin for refiners operating unsophisticated refineries in Northwest Europe was at a discount of $1 a barrel versus Brent crude, suggesting simple refineries would make a loss, EMC said.
Vienna-based consultancy JBC Energy forecasts that refineries handling 3.4 million barrels a day, or 19% of Europe's total refining capacity, are under threat of closure by 2020 because they are unprofitable. But companies are reluctant to shut plants, given environmental cleanup costs and the opposition from both governments and labor unions, industry executives and analysts say.
Instead, many companies have opted to sell.
The following refineries have been put up for sale in Europe: Total SA's (TOT) Lindsey refinery in the U.K., Royal Dutch Shell PLC's (RDSB) Heide and Harburg plants in Germany, its Stanlow refinery in the U.K. and its Gothenburg plant in Sweden, Chevron Corp.'s (CVX) Pembroke refinery in the U.K and Ineos PLC's Grangemouth refinery in the U.K.
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