Europe`s refineries cheaper, buyers want the best

Watch CNBC-TV18 live only on MYTV >>

"For sale" signs have gone up on six European oil refineries, with prices lower than the last wave of sales, but only top of the range properties are likely to find buyers.

The latest is Total's 42-year old Lindsey plant in Britain, on the block after refining margins have struggled around record low levels over the past year. Europe's fuel demand is widely reckoned to have peaked.

Although the values of these refineries have not been disclosed, analysts assess they equate to no more than a quarter of the cost to build a new replacement plant of the same configuration.

That is down from the previous wave of refining asset acquisitions in the seller's market of 2005-07, which was led by private companies such as Swiss-based Petroplus. That was during the years of record high refining margins, reckoned to have gone for good in Europe.

"A number of transactions took place at close to replacement value or at higher values than it had been normal until that point," said Roberto Ulivieri, managing consultant with Purvin & Gertz.

"Now it is a buyer's market. The combination of weaker margins and less buying interests makes the valuations of refineries lower."

Olivier Abadie at Cambridge Energy Research Associates (CERA) said today's sales might be valued at the lower end of the price range of the plants which were sold in the golden age. He assessed that range was between USD 2,000 and USD 8,000 for each barrel per ay of capacity.

Stratigic buyers

Purvin & Gertz's Ulivieri said each refinery tended to be assessed based on its investment needs, forecast future cash flows and competitiveness - rather than purely based on primary crude processing capacity.

The competitiveness element brings together location, crude oil supply, target local and exports markets and complexity (the ability to process cheap, low quality crude into high profit products such as gasoline and diesel).

Plants that scored highly on these criteria would not be bargains, said Roy Jordan with Energy Market Consultants (EMC).

But they could still attract strategic buyers, even in a depressed market. Russia's Lukoil bought Dutch and Italian refining assets from Total in 2009 and ERG SpA in 2008, respectively, in such a play.

The prices paid by Lukoil then put the value of each refinery at roughly USD 10,000-USD 11,000 per barrel of daily throughput, according to Reuters calculations.

At the other end of the market, some refineries may fail to find buyers at all. They could follow the fate of Petroplus' UK Teesside plant, which was closed and converted to a terminal last year.

"As is now apparent, some of these refineries are vulnerable to closure in a declining European oil market, which is experiencing a long-term surplus of capacity," Jordan said.

"The most expensive ones are relatively well configured and located and are continuing to be operated as a refinery."

China's Petrochina has been in talks with Ineos to buy the Grangemouth refinery in Scotland, which is directly connected to the North Sea Forties pipeline system.

Forties is one of the key four North Sea crude oil streams which are used as price benchmark for more than a quarter of global crude oil.

Industry sources said the offer level for Grangemouth was about USD 6-USD 7 billion. This was not confirmed by Ineos.

Ineos paid BP USD 9 billion in 2005 in a combined deal for two refineries, Grangemouth and Lavera in France, as well a petrochemical subsidiary.

India's Essar Oil has been in talks with Royal Dutch Shell over the major's UK Stanlow refinery, along with its two German sites.

In February, Thomas Mueller, vice president of Lukoil's refining, petrochemicals and gas processing, said the company was not immediately considering any other refinery purchases.