The Changing Landscape of European Refineries

The recently announced Grangemouth refinery closure continues the trend of shrinking refinery capacities in Europe. However, secondary utilisation of closed refinery sites may bring some further opportunities to the tanker market.

Refinery Capacity Additions and Removals

Last week news broke about the closure of the Grangemouth refinery, one of the 6 currently operational refineries across the United Kingdom. The refinery is expected to be closed by spring 2025. The Grangemouth refinery, as one of the biggest and one of the oldest in the UK, seems to be one more refinery closure, continuing the trend of shrinking refinery capacities in European and other OECD countries. Structural demand changes including decarbonisation of economies are shaping this long-term trend, as demand for clean petroleum products is expected to weaken in the long-term, due to expected uptake of EVs for example.

Furthermore, the competition with younger and more efficient refineries from emerging markets seems to be putting some of the older refineries under even more pressure. The Grangemouth refinery would be the 5th refinery expected to be closed in the UK, after 4 refineries have already been closed with a combined capacity of around 432 kb/d*. Similar trends have been noted all around the major European countries, with France and Italy in particular having seen a significant reduction in the refining capacity in the last couple of decades. According to Refinitiv Eikon data, Italy and the UK saw around 20% each of their nominal refining capacity reduced, while France’s refinery capacity shrank by around 30%, as a number of refineries were closed in the period since the 2008 financial crisis. The trend seems to be noticeable in other European countries and is expected to continue, although healthy refinery margins boosted by post-Covid economic recovery and war in Ukraine helped to slow down the process somewhat.

While the electrification of transportation is gathering pace, in the short- to medium-term Europe is still expected to remain very much dependent on CPP imports from further away locations, in particular for diesel / gasoil. Furthermore, as Europe is pivoting away from Russian CPP exports, due to the war in Ukraine, the dependence of imports from further away locations is being even more emphasised. As recently announced, part of the plan in relation to Grangemouth closure is also that the Finnart exporting terminal, which is connected to Grangemouth by a pipeline, will be turned into a diesel import facility, potentially bringing more opportunities for long haul tanker trades. Furthermore, Grangemouth is also expected to become a fuel distribution centre, which is expected to be receiving CPP imports, effectively replacing the refinery’s production targeting UK markets. This may see even stronger intermediate tanker activity, due to the entrance lock vessel size limitation in Grangemouth.

The reduction of refining capacities in Europe is generally expected to support long-haul trades from East to West. However, considering the Grangemouth example, parts of the small and intermediate tanker market may also see some boost in demand as well, at least short- to medium-term, through continued expected demand of conventional fuels throughout the energy transition period. Considering also that long-term European CPP demand is expected to be reduced over time, it can be hard to justify a considerable amount of investment into terminal infrastructure for short term gain, in order to accommodate larger vessels. However, this allows for the smaller tanker and intermediate fleet to play a necessary part within the logistics chain for fuel distribution in Europe.

Refinery closures and decommissioning can also be a costly business, which adds further incentive to refinery operators to provide a secondary utilisation to some closed sites. As the EU council recently adopted amended Red III (Renewable Energy Directive), the need for more transitional fuels such as advanced biofuels produced from non-food related feedstocks is expected to be higher towards 2030. A number of energy companies, including Shell, Neste and Total, announced projects of utilising closed refineries and/or extending active refinery capacity to produce advanced biofuels such as HVO and SAF (Sustainable Aviation Fuel). Petroineos has also announced that it will work on the feasibility of hosting a biorefinery on the site.

Last week a Virgin Atlantic airliner completed its first cross Atlantic journey from London to New York on 100% SAF, as several airlines obtained licences to fly on 100% SAF by U.S. Federal Aviation Administration. Despite high biofuel prices and lack of fuel availability particularly SAF, the airlines industry is expected to significantly up demand for SAF, as the transitional fuel seems to be the only sustainable alternative to traditional fuel within current technology remits in aviation in order to achieve CO2 reduction targets.

As further reduction of inefficient refinery capacity across the Europe is likely going forward, future shaping for those refinery sites may be turned into receiving and storage terminals like Grangemouth or utilised for biofuel production like Provence (La Mede) Refinery recently and few other projects that are currently undertaken across the European continent.

*Data does not include Dundee refinery capacity