Europe's Refiners Seek Partners As Euro Zone Credit Woes Bite

Europe's struggling independent oil refiners risk following in the footsteps of Petroplus Holdings AG (PPHN.EB) unless they team up with oil companies, traders or investment banks to guarantee crude supplies as the euro zone crisis has made it more expensive to buy crude and further reduced already dwindling profits, traders and analysts said.

Shares in Switzerland-based Petroplus fell 26% Thursday after it said access to all the credit lines under its revolving credit facility has been suspended. The company, which is now on the verge of bankruptcy, said it is temporarily shutting down three of its five refineries as it doesn't have enough crude oil to maintain output.

To add to refiners' nervousness, Fitch Ratings said in a note earlier this week that European banks, already suffering from the euro zone sovereign debt crisis, are likely to limit the amount of credit they provide to refiners this year. Any withdrawal of credit will have the biggest impact on independent refiners.

The higher cost in financing crude purchases comes at a bad time for European refiners that are already suffering from weak profit margins amid high crude oil prices, weak products demand and competition from more advanced refineries in Asia and the Middle East.

Although Europe's independent refiners represent only around a third of the region's refining capacity, the loss of these companies could tighten products markets and lead to higher prices for consumers.

"The euro zone crisis makes the situation for independent refiners very difficult--I wouldn't say it's the last nail in the coffin, but it's definitely one more," said Roy Jordan, downstream consultant at Facts Global Energy.

Unlike refineries owned by integrated oil companies, such as BP (BP) or Lukoil Holding (LKOH.RS), independents don't have the luxury of guaranteed crude supplies as lending conditions worsen, or the easy access to cheaper spot supplies when demand picks up.

Some independent refiners have longer-term credit limits already agreed with banks to finance oil purchasing. But as crude prices go up, many of these credit limits are proving too low for refineries to buy the crude they require. Increasing the limits in the current credit strapped environment has become more difficult and costly, traders and analysts said.

"Risk costs money and independent refiners are seen as a risky gang," said a crude trader with an independent refiner.

Companies that don't have financing agreements in place and are instead seeking spot credit limits are also looking at much higher financing costs given the current tougher credit environment due to the sovereign debt crisis.

Petroplus is among refiners that have been seeking a way forward by partnering with trading houses and oil companies along the lines of Morgan Stanley's (MS) 2007 deal with INEOS Refining under which the trader supplies the crude and then markets the products overseas.

Teaming up can be mutually beneficial: the refiner gets to push the cost of buying crude off its balance sheets while the oil company or trader gains access to the products market but without the high costs and risks of running a refinery.

Petroplus said in early December it was seeking such a partner. But the company's share price is now down around 85% since early August due to weaker refining margins and a deal is looking highly unlikely.

Petroplus was looking to market the oil products itself, but other refiners have different models of cooperation.

German refinery Bayernoil only processes crude, while its shareholders--BP, Ruhr Oel, Austria's OMV (OMV.VI) and Italy's Agip SpA (AGI.YY)--are responsible for purchasing the crude and marketing the products. Ruhr Oel is jointly owned by BP and Russian state oil company Rosneft (ROSN.RS).

"We have a number of [refining] joint ventures, we do it for commercial and cost effective reasons," a BP spokeswoman said.

Rosneft President Eduard Khudainatov said last year the joint venture gives the Russian oil producer access to Western Europe's refined product and petrochemical markets and to the latest refining know-how.

Commodities trading giant Glencore International PLC (GLEN.LN) is also reported to be considering some form of partnership with Spanish refiner Compania Espanola de Petroleos SA (CEP.MC), or Cepsa.

Cepsa was unavailable to comment.

Glencore declined to comment, but last year said in a presentation they want to expand their involvement in the oil products market.

-By Konstantin Rozhnov, Dow Jones Newswires; +44 207 842 9956; konstantin.rozhnov@dowjones.com

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