Home' Trinidad and Tobago Guardian : November 7th 2013 Contents BG8 | ENERGY
BUSINESS GUARDIAN www.guardian.co.tt NOVEMBER 2013 • WEEK ONE
Squeezed refinery margins at
Petrotrin are likely to cause the
state-owned, integrated oil
company to report a loss for
its 2013 financial year.
Deputy chairman of the company Aleem
Hosein told the Business Guardian that low
refinery margins contributed significantly to
the company's poor performance.
He said: "In the last three months of the
fiscal year, the refinery margins have been par-
ticularly low and, as a result, the refining and
marketing aspect of the company has been a
drain on its finances and has resulted in a loss
being registered in the last fiscal year."
Hosein said he was not in a position to say
the exact extent of the loss because the figures
he had were unaudited, but sources in Petrotrin
said the loss is likely to be close to $100 million,
compared with a profit of $1.009 billion in
Hosein said several refineries in the Caribbean
region have been forced to cease operations in
part due to low margins, referring to last year's
closure of Valero Energy's Corp 235,000 bar-
rel-per-day (bpd) Aruba refinery and the
350,000 bpd St. Croix refinery.
Hosein said Petrotrin was fortunate it was
an integrated company.
"In some ways, we are saved by the fact that
we are an integrated company" Hosein tod BG,
"That 50,000 barrels of indigenous crude that
passes through the refinery on a daily basis is
a tremendous help to us because in some ways
it means that our crude prices are not as high
as the international market price."
Speaking last month, Petrotrin president
Khalid Hassanali said the company's profits
were likely to be significantly lower this year
as a result of industrial unrest in March, the
nationwide blackout on Good Friday and over-
due refinery maintenance works.
Hassanali said industrial action taken against
the company by the Oilfield Workers Trade
Union (OWTU) earlier this year cost more than
the $700 million---$100 million for each of the
seven days of the strike. He said returning the
refinery to optimum levels of productivity took
an additional 14 days, adding to the losses.
Hassanali said: "What we did say at that
time was that our gross earning at the refinery
was about $100 million per day. The refinery
is a large complex organisation. It doesn't have
an on-off switch, so when its goes down it
takes about two weeks to restart. So you can
imagine the impact.
"It must impact us and it has impacted us
for last year. What has compounded it---you
will recall we had a Good Friday shutdown of
the country because of a power failure---that
also took some time to restart," Hassanali said.
Last month Hassanali also said while there
had been problems on the refinery and mar-
keting (R&M) side of the business over the last
few months, the exploration and production
(E&P) arm has been reasonably profitable due
to higher world prices for crude oil.
"But because prices have risen and the prod-
uct prices remain the same, we have a squeezed
margin and that margin is such that the eco-
nomics of refining these days is unfavourable.
This changes all of the time. It does not mean
that we are in a bad state. It just means that
right now, E&P is profitable. R&M is not prof-
"That's the beauty of having an integrated
company. Sometimes one carries the other,
sometimes both do very well, but because of
the situation in the Middle East this is how
the economics is running. So to answer your
question, Yes! The losses last year were sig-
nificant and they were compounded by these
Petrotrin is not alone with many of the
world's largest oil companies reporting lower-
than-expected profits because of low refinery
Only last month Royal Dutch Shell Plc,
Europe's biggest oil company, reported third-
quarter earnings that missed analyst estimates
as production and refinery margins dropped.
The company's earnings from refining and
marketing almost halved to $892 million in
the third quarter from 2012.
Refining margins, or the profit from turning
a barrel of crude into fuels have been materially
below expectations across the globe.
BP Plc's refining marker margin, a generic
measure of profitability, dropped to US$13.62
a barrel in the quarter from US$23.15 a year
Petrotrin's Pointe-a-Pierre refinery has a
capacity of 165,000 barrels of oil per day (bo/d)
however the company's crude production is
just over 35,000 bo/d. It also buys an additional
10,000 bo/d from lease out, farm out producers
and another 5000,bo/d from other local pro-
This means it imports more than
110,000bo/d of high prices crude on the inter-
national market. For the past calendar year,
crude prices have averaged more than US$100
a barrel while the prices for products like gaso-
line have remained fairly constant. Sources say
the margins were so low recently it was less
than US$1 a barrel.
Petrotrin's struggles come just as BP's lead
economist and Vice President Christof Ruehl
warned that refining was not a good business
to be in and he expected plants to be shut
down in the Western Hemisphere because of
excess capacity and severe competition from
refineries in Aisia and the Middle East.
Ruehl told BG, "What we have been seeing
for a few years and what we think we will con-
tinue to see is a massive expansion of refining
capacity and the system coming under strain.
We think that for the next few years, every
year the world will still have to close massive
capacity in order to keep utilisation rates above
80 per cent."
Reuhl explained that there had been signif-
icant build up of capacity in the Middle East
and Asia and this was now threatening the
viability of refineries in Europe. He said the
refineries in the Mddle East were as modern
as anything in other parts of the world and
had among other things government support.
"We also see a big movement away from
areas like Europe and to some extent the
Caribbean and throughput moving into these
big Asian refineries. These new refineries are
as technologically advanced and sophisticated
and upgradable as anything we have in Europe,
wage costs are lower than they are in Europe
and when push comes to shove where you are
likely to get more government support?
"In Saudi Arabia, or China or Holland and
Germany? That is why we are seeing tem-
porarily high margins in Europe because of
closures and at the same time temporarily low
margins in Asia because of the big excess capac-
ity," BPs lead economist told BG.
He said refining is perhaps the most pro-
cyclical element in the whole Oil and gas enter-
prise and the days of high margins appear to
Ruehl said, "We have seen a few years of
high margins until 2007-2008 and then we
have seen a lot of investment decisions being
made mostly in non-OECD countries, especially
in India, China and, to some extent, in the
Middle East Saudi Arabia."
He said North America still had good margins
because there was for a long time a big dif-
ference in the price of West Texas Intermediate
and Brent. This meant crude prices in the US
was lower, refineries had access to US domestic
crude at lower prices because US law does not
permit the export of crude, which led to better
margins since the US can and does export
Refinery squeeze dents
Petrotrin's 2013 profits
BP has said its total bill for the Gulf of Mexico disaster
increased to more than US$43 billion, as it reports that low
refining margins have caused profits to slump as much as 37
The costs of the 2010 disaster had already risen to US$42.4
billion when BP last updated the market in July and analysts
believed it may increase that provision by a further US$1 billion
after reporting its third quarter results.
The oil major has been battling to stem compensation pay-
ments under the settlement it agreed last year with businesses
claiming to have lost money in the disaster.
BP argues that the deal -- the cost of which has risen from
US$7.8 billion to US$9.6 billion -- has been hijacked by
unscrupulous lawyers, leading to more than US$1 billion in
payouts for "fictitious" claims to people who actually lost no
money due to the spill.
It warned in July that it had just US$300 million left for
compensation and that that figure was likely to be exceeded
in the third quarter, which would see "additional amounts
charged to the income statement".
Analyst Lucas Herrmann at Deutsche Bank has said BP may
increase its provision by about US$1 billion, while RBC Capital
Markets analyst Peter Hutton has suggested it could be about
US$500 million. At the start of October, BP secured a key
legal victory when an appeal court issued an injunction pre-
venting more compensation being paid until the terms of the
settlement are tightened up.
BP has so far accounted for claims that have either been
paid out, or have been processed by the settlement administrator
with a payment pending. The appeal court ruling could prevent
a portion of these processed claims from ultimately being paid
Hutton said: "BP will increase the provision on anything
that has been agreed to be paid out, but I think the sensitivity
will be lower because what investors disliked was this 'no end
in sight' liability. The October ruling has at least put a line
in the sand."
He said the greater concern was the ongoing trial into multi-
billion-dollar civil penalties. The second phase of the trial has
concluded with BP awaiting rulings on how much oil was
spilled and who was to blame for the disaster. A third phase
of the trial, next year, will decide penalties.
BP's underlying profits, excluding one-off charges for the
Gulf, are expected to be to US$3.17 billion for the third quarter,
from US$5.02 billion a year before. Hutton said earnings from
BP's refining and marketing arm may have fallen by 75 per
cent due to a sharp drop in US refining margins.
Profits from BP's 20 per cent stake in Russia's Rosneft,
which disappointed last quarter, are expected to rebound this
Herrmann wrote in a research note: "We expect this to have
been a challenging quarter for BP with results depressed."
BP's bill for Gulf spill
set to hit US$43bn
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