Future of European Refining Industry

KPMG GLOBAL ENERGY INSTITUTE
The Future of the

European Rening
Industry
June 2012
kpmg.com
Executive Summary
Michiel Soeting
01
This time its bad and it could stay that way

Jeremy Kay
02
Acting differently: What this means

for renery owners
Gerard Shore
06
Acting differently: What this means

for investors
Anthony Lobo
16
Why KPMG?
18
2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network of independent
member rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
The Future of the European Rening Industr y | 1
European reners are on a different path to the one

they have been used to for the past 50 years.
The European rening industr y has gone through
numerous cycles, but this time many of the changes
are likely to prove permanent and we expect the
current trends of falling demand, rising imports,
increasing European legislation, growing
competition from emerging markets and eroding
margins to continue.
However, it is not all negative:
The worlds appetite for hydrocarbons will keep
growing, especially in India, China and across the
wider Asia Pacic region;
Positioning renery assets and operations properly
now - when asset purchases are cheap, and the
costs of improvements are not as expensive as
they were in the boom years - provides a good
opportunity for high quality European reneries
to compete protably in the future; and;
Europe remains one of the largest economic
regions in the world, and will be for the
foreseeable future.
Signicant recovery, though may take some time:
cost pressures will continue; over-supply and
competition will remain erce; and the European
carbon tax will continue to tilt the playing eld in
favour of overseas reners that are subject to less
regulation. The industry has seen a number of plant
closures in recent years and more may well follow
as demonstrated recently by the announced closure
of the Coryton renery in the UK. The survivors will
have to be leaner, more efcient and more able to
adapt to changing market needs. A strong focus now
on building and maintaining their relative competitive
advantages is vital to help ensure their survival today
and protability in the future
THE FUTURE IS UNCERTAIN SO ACT DIFFERENTLY
EXECUTIVE SUMMARY - MICHIEL SOETING
Michiel Soeting
Global and European Head of Energy
and Natural Resources
T: +44 20 7694 3052
E: michiel.soeting@kpmg.co.uk
THE SURVIVORS
WILL BE LEANER,
MORE EFFICIENT AND
MORE ADAPTABLE
TO CHANGING
CUSTOMER NEEDS...
JEREMY KAY
THIS TIME ITS BAD AND IT COULD STAY THAT WAY
2 | The Future of the European Rening Industry
Jeremy Kay
Partner, KPMG in the UK
T: +44 20 7694 4540
E: jeremy.kay@kpmg.co.uk
The protability of the European rening industry

has long been cyclical, with repeated uctuations
in demand, price and production levels. However,
this time things are different, and many of the
challenges the industry faces today may prove to
be permanent.
For example:
Many European reneries built 30 to 40 years
ago using less sophisticated technology are
now at a disadvantage. Built to a smaller scale to
process lighter, sweeter crude oils, producing an
excess of gasoline, and with strong labour laws
and high wages; many European reneries have
experienced a structural erosion of their margins;
The size of the Middle East, Indian subcontinent
and Chinese rener y building program has
fundamentally shifted the scale and location
of the new, high quality, price setting plant.
Operators from these regions enjoy a number
of key advantages, including new equipment,
cheap labour, large reserves of capital and rapidly
growing local demand;
Many companies in Asia now consider Europe

a key market for both exports and acquisitions.
For example, Essar Energys acquisition of the
Stanlow Rener y in the UK and PetroChinas
acquisition of shares in trading and rening
joint ventures with Ineos, including Scotlands
Grangemouth renery and the Lavra renery
in France1.
With the transfer of some European renery
ownership to non-European companies, their
new owners are less likely to be inuenced
by local politics when considering maintaining
unprotable plant; and
European reners are likely to continue to be
disadvantaged by the disparities in environmental
legislative requirements across the globe.
Furthermore, with continuing pressure on margins
the short to medium outlook remains bleak and not
surprisingly divestments are on the rise. But what
is interesting is less the origin of those who have
bought assets, but more the fact that European
reners are increasingly focusing on investing
in tighter portfolios of quality survivor sites to
maintain both quality and competitive advantage.
AGING EUROPEAN REFINERIES GENERALLY HAVE

HIGHER MAINTENANCE AND OPERATING COSTS THAN
PLANTS BUILT MORE RECENTLY IN ASIA AND THE MIDDLE
EAST. THIS, COMBINED WITH CURRENT ECONOMIC
CHALLENGES, IS CAUSING THE LESS ADVANTAGED
REFINERIES TO HAVE TO FIGHT FOR THEIR SURVIVAL
Fergus Woodward.
Director, KPMG in the UK
1
Europes reners fall on hard times, Financial Times, January 30, 2012.
See also Foreign investment: Indian companies blaze trail across the country, Financial Times, September 15, 2011
Overcapacity - the challenge of supply

versus demand
Once again European rening is suffering from
over-capacity versus demand.
Demand for fuel is heavily dependent on economic
activity, which has dropped dramatically in Europe
since the start of the global economic downturn
in 2008. Compounding this effect is the impact of
continuing improvements in fuel efciency and the
substitution of renery hydrocarbon fuels by bio-fuels.
At the same time there has been some modest

reduction in rening capacity. A few small
reneries have closed, and some older units particularly distillers - have either been put on hold
or decommissioned. But investments in plant
improvements have also continued, and the net
reduction in rening capacity has fallen well short of
the reduction in demand for fuel.
As a result, utilisation of Europes reneries has
fallen dramatically since 2008, and are likely
to remain low for many years. Furthermore,
with rening margins closely aligned with plant
utilisation, the outlook for margins is likely to remain
depressed for some time to come.
16000
90%
15900
89%
15800
88%
15700
87%
15600
86%
15500
85%
15400
84%
15300
83%
15200
82%
15100
81%
15000
2000
2001
2002
Refinery capapcity
2003
2004
2005
2006
2007
2008
2009
2010
Refinery utilisation (%)
Refinery capapcity (Thousand barrels per day)
REFINING CAPACITY AND UTILISATION - EUROPEAN UNION
80%
Refinery utilisation
Source: BP Statistical Review of World Energy June 2011: KPMG analysis
The Skewed Barrel

Europe has long experienced a gasoline middle
distillate imbalance, as the industry produces a
surplus of gasoline for export and has to import
diesel and heating oil. Rening margins therefore
reward diesel production over gasoline, and those
reneries with hydrocrackers (which make more
diesel) benet from this skew, whilst reneries with
only FCC crackers (which make more gasoline) are
penalised by it.
For many years Europe has imported middle
distillates from Russia and the US, whilst exporting
gasoline to the US and Africa. These ows are likely
to continue. In addition some Middle Eastern and
Asian diesel exports may make their way into Europe.
Exporters of diesel to Europe have to absorb their

transport costs, and this provides an economic
cushion for good European reners, though
marginal plants may suffer. However, the real
Achilles heel for less competitive reneries remains
the surplus of gasoline. Any rener having to export
signicant surplus gasoline from Europe to the US
is likely to face increasingly erce price competition,
and downward pressure on prots especially
given the fact that US demand for imported
gasoline has fallen considerably since 2006. This key
weakness is likely to determine the fate of many
imbalanced reneries and thus large investments
in hydrocrackers and cokers may be their only
strategy for survival, which unfortunately may be
too expensive to justify for a long time to come.
Thousands barrels per day
US GASOLINE IMPORTS FROM EUROPE

450
90%
400
80%
350
70%
300
60%
250
50%
200
40%
150
30%
100
20%
50
10%
0
US gasoline imports from Europe
Jan 2011
Jan 2010
Jan 2009
Jan 2008
Jan 2007
Jan 2006
Jan 2005
Jan 2004
Jan 2003
Jan 2002
Jan 2001
Jan 2000
% of total US gasoline imports
Source: US Energy Information Administration 2011: KPMG analysis
GERARD SHORE
ACTING DIFFERENTLY: WHAT THIS MEANS FOR REFINERY OWNERS
Gerard Shore
T: +44 20 7311 3268
E: gerard.shore@kpmg.co.uk
In the face of tough market conditions, cost

pressures and the emergence of new players from
Asia and the Middle East, European renery owners
should act differently now if they are to be protable
in the future. The main options available to them are:
Invest in their rener y plant to increase
production, improve yields, and reduce costs
Improve operations, procedures and
management to reduce costs and improve yields;
Divest unprotable assets to maximise return on
investments made; or
Close unprotable assets, and possibly convert
some, or all, of the site to other uses, such as
storage.
Invest
Technology improves, existing plant wears out,
energy costs grow, and the advantages of scale
grow ever larger. These truths have been with the
rening industry since its beginnings, and continue
to mean that over the long term all reneries will
require new investment if they are to remain
competitive and protable.
But timing is everything. Investing too early devours
the cash ows of previous investments, and
waiting too long can tip the renery from a survivor
site, where reinvestment will pay, into a closure
candidate, where it is impossible to justify the costs
of upgrading investments on what is fundamentally
an uncompetitive plant.
Given the emerging dominance of high quality new
reneries East of Suez, it is critical that owners of
European-based reneries understand and clearly
acknowledge which category their site ts into.
Sites without competitive advantage are becoming
increasingly poor reinvestment candidates, and
should be placed on a path to harvesting cash and
either divestment or closure.
On the other hand, where a renery retains inherent
advantages from its location and existing plant,
then reinvesting in existing or new plant can prove
protable. To reap the full rewards from owning these
survivor sites it is critical to invest steadily through
the life of the site, as maintaining competitive
advantage is likely to generate signicant prots
and cash ows over the cycle. For these sites, it is
essential to have a clear investment strategy.
The following are some investment options

to consider.
Upgrading capacity
Investment in coking, deep cracking, expanding
existing crackers and other plant upgrades are all
expensive options, not to be considered lightly. But,
the reality is that straight-run capacity is unlikely
to be cash positive again, and even traditional FCC
investment margins are being steadily eroded
over time. Therefore, as East of Suez products and
economics enter the European market, the existing
upgrading plant will increasingly become the
marginal operated plant and therefore the marginsetting capacity.
All survivor sites must maintain a clear strategy for
steady investment in upgrading capacity. And, for
those prepared to invest strategically, now is a good
time to seize the opportunities presented by weaker
investment costs during the economic down-turn
while capturing the high cash ows that should ow
from plant that commission ahead of the next margin
peak. This peak may be some way off, given the
depth of this down-turn and the economic problems
in the region, but it will come, and will remunerate
carefully considered but bold investment decisions
which are made in sufcient time.
Capability to process poorer quality crude oils
For many years, most coastal reneries in North
West Europe have been congured to run a wide
variety of crudes, taking advantage of the liquidity
in the traded crude oil markets to provide them with
cost competitive crude oil on the day. Operating
exibility, plenty of storage capacity, and an
entrepreneurial approach have paid off handsomely.
Investments to run poorer quality crude oils are
likely to continue to pay off, as available crude oils
become ever heavier, increasingly sour and more
contaminated with heavy metals and the like.
Product Quality, Energy Cost Savings and
CO2 Emissions
Most European reneries have now made the
investments needed in desulphurisation capacity
to meet gasoline and diesel specications imposed
by the last wave of environmental legislation. The
next major threat is on the quality of bunker fuels.
This is likely to be a signicant issue for coastal
reneries, and could hasten and complement the
drive towards deeper upgrading.
2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member rm of the KPMG network of independent member
rms afliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
TO IMPROVE PERFORMANCE, REFINERS WILL CONTINUALLY
NEED TO CHALLENGE ALL ASPECTS OF THEIR BUSINESS.
INVESTMENT OPPORTUNITIES MUST BE SCRUTINISED
AND IMPROVEMENTS PURSUED RELENTLESSLY IN ALL
COMMERCIAL AND OPERATIONAL AREAS
And with CO2 emission prices likely to rise, energy

saving investments are now rmly back on the
agenda. It is even possible that in the next decade
some reneries will consider investment options
for carbon capture and storage of CO2 as a way of
mitigating the cost of CO2 emissions.
Improve
Whether margins are good or bad, one thing
remains true - in absolute terms they are small.
The protability of a rener y is highly leveraged
and small yield and cost improvements can make
a large impact on the bottom line.
Once the investment is made the key is continuous
improvement if this does not happen the renery
will, inevitably, drop back. A well operated plant,
getting the best yield from the best available crude
oil, and paying continuous and steady attention to
costs is essential to get the desired return on the
investments made.
Operations and Maintenance - running the plant
reliably and safely
Poor reliability and plant availability can be
devastating to a renerys prot and cash ows.
The pace-setters operate their plants safely,
maintain them properly and often have the lowest
operating costs in the business with a signicant
difference in performance and approach versus
average performers.
So how do these pace-setters create and
maintain this circle of safe, highly reliable and low
cost operations?
The rst key principle is doing everything right,
the rst time. Good operators have - and follow - a
good Operating Management System. This spells
out - in a practical way - procedures to be followed,
and provides the information needed to make good
decisions from the top to the bottom of the
organisation. At the same time, it helps build an
organisation and culture of competence and
compliance, based on continuous improvement, in
which well-trained people gets things done
properly, the rst time.
The second key principle is that good operators

inspect and maintain their plant properly, from the
start, and without fail throughout its operating life.
They have consistent, clear and fully funded plans
and strategies for maintenance, conducted within a
quality Maintenance Management System, which
is executed through both good times and bad.
Reliability Centred Maintenance (RCM) dominates
with high proportions of preventative and predictive
maintenance on production critical equipment,
limiting the need for reactive maintenance which
results from plant failure. This proactive approach to
maintenance has been proven repeatedly to deliver
the lowest operating costs.
Production optimization and crude acquisition
Feedstock typically accounts for 90 percent of the cost
base of the renery. Small improvements in yield and
costs drop straight through to the bottom line, and can
make a huge difference to prot and cash ow.
Intellectually, all reners understand the
importance of making the products and buying
the crude oil that maximises their margin on the
day. However understanding market demand,
optimising renery production, and buying and
running the right crude at the right time at the right
price remains a crucial activity, and is sometimes
almost a dark art, understood and available only to a
few technical experts.
Commercial optimisation, as it is often called, draws
heavily on the need to bring together commercial,
trading, technical and operating skills. It is heavily
dependent on the knowledge and skill of the people
involved, and can make an enormous difference to
the actual margin captured at any time.
Given the value at stake, we would recommend

frequently revisiting this area and investing
signicant time and cash in a number of areas:
Examining, improving and periodically rebuilding
the economic planning, plant optimisation and
feedstock procurement processes;
Upgrading the optimisation models used.
However, it is even more important to regularly
review whether: they are being used properly;
the data fed into them is soundly based; the
processes for making decisions from them are
robust and valid; and the human judgement that
must overlay any model-based process is based
on good experience and skill; and
made against the original design performance of

the equipment, or other suitable benchmarks. The
resulting improvement opportunities are usually best
delivered using cross functional project teams of
Technical and Operations personnel.
Fixed cash costs
INDICATIVE REFINERY FIXED CASH COST

BREAKDOWN BY FUNCTIONAL AREA
HR
Commercial
5%
Technical
HSSE
Understanding the way in which the interface

between traders, commercial teams and reners
is managed. This can be a huge source of value,
but the tension between traders and reners
can quickly become counterproductive if left
uncontrolled and unmanaged.
A renewed focus on optimising individual process
unit performance can also provide signicant
improvement opportunities. Opportunities to
increase product yields by processing alternative
product streams and optimising operating
parameters are too often overlooked in favour
of the larger improvements from major capital
investments. These smaller opportunities can
deliver signicant value rapidly and often with very
modest investment.
Finally, member rms experience indicates that
unstructured and outdated monitoring, control and
optimisation processes frequently contribute to
sub-optimal unit performance. These processes
can often be improved by clearly redening the
accountabilities of Operations and Technical
personnel and by installing robust cross-functional
governance mechanisms.
Variable energy and utility costs
Although variable cash costs account for a smaller
proportion of the total cost than feedstock, they can
cost tens of millions of Euros and must therefore be
a key area of focus for reners.
Energy and utilities are by far the most signicant
items. Member rms experience is that even
in modern sites improvement opportunities
exist to reduce these costs, particularly around
key equipment such as furnaces and turbines.
The pursuit of these opportunities is also helped
substantially by the application of on-line energy
monitoring and energy management systems.
An efcient way of reducing variable costs is through a
plant-wide energy and utility assessment. This involves
mapping production unit energy consumption against
product stream throughputs, with comparisons
Projects
Admin
2% 2%
6%
6%
9%
28%
Operations
42%
Maintenance
Source: Analysis based on KPMG rms engagements
Managing, and where possible reducing, xed cash

costs is one of the most difcult areas for reners to
deal with. Five to eight percent of the total cost base
relates to employees, contractors and various goods
and services procured. However, our experience is
that these costs are often not fully optimised.
Reasons for this are:
Management lacking the right tools and
approaches, with cost reduction programs
often focussed on short terms actions (e.g.
discretionary budget cuts across the board, or
freezing / cutting discretionary spend);
Lack of visibility of the true cost base and
headcount of the organisation at a sufcient level
of detail to enable a clear line of sight between
improvement projects and bottom line impacts;
Adopting cost optimisation activities in the
absence of robust hard economic facts and
comparator insights that dispel myths and
challenge the status quo;
Lack of external challenge to maximise potential
value without compromising on operational
integrity; and
Employment legislation and weaknesses in the
quality of Industrial relations.
However, as with all costs in rening, if handled

properly a small improvement can often have a
signicant impact on the bottom line. Albeit the
reverse is also true, and if allowed to run out of control
it can be extremely difcult to recover protability.
The key is to have long term focus, underpinned with
clear plans, that keep the plant well maintained and
operated, as well as a steely determination to control
and challenge all xed cash costs.
KPMG analysis indicates that over 60 percent of
functional xed cash costs are usually peoplerelated (including payroll, contractors and
outsourced personnel). These xed cash costs
can almost always be reduced by optimising work
processes, both within individual functional areas
and at points of high complexity where teams
interface with each other. Examples of areas of
potential opportunity include:
Maintenance inefcient permit to work
execution caused by:
o equipment not ready to be removed from
service
o risk assessment paperwork not completed

o scheduling/timing disagreement between
Operations and Maintenance;
Laboratory embedded inefciencies in product

testing due to:
o laboratory staff conducting routine low
complexity testing which could have been
absorbed by Operations personnel
Operations overstafng resulting from:

o Sub-optimal shift structures with excessive
cover and overtime in place
o Control rooms not consolidated resulting in low
levels of staff utilisation
o Excessive management oversight in place as
demonstrated by lower spans of control ratios
than similar organisations.
Outsourcing services is a long-established
practice in European reneries. Many reneries
run a combination of in-house and outsourced
maintenance, much engineering is now contracted
out, and outsourcing back-ofce functions such
as IT, accounting, and transactional HR activities
are common. However it is essential to maintain
control of the core activities of the business, such
as operations, while retaining the capability to
maximise value through effective performance
management of outsourced service providers.
Procurement - of both goods and services is an area
in which xed cash cost reduction opportunities are
likely to exist. Many businesses believe they excel in
procurement - in reality however, this is only true in the
initial supplier negotiations. Often, once agreements
are in place, less importance is placed on delivering
ongoing rigorous performance management, which
results in value leakage. In this situation, a prioritised
review of contracts and suppliers is important to
ensure that performance and productivity goals are
achieved by third-party suppliers.
o missed opportunities to conduct in-line testing

o excessive testing conducted beyond required
service levels; and
EUROPEAN REFINERIES - DEAL HISTORY
Year
Asset name /
location
Bidder
Total renery
capacity - bpd
Seller
2011
Stanlow Renery, UK
Essar Energy
296,000
Royal Dutch Shell
2011
Pembroke Renery,
UK
Grangemouth, UK
Lavra, France
Gothenburg Renery,
Sweden
Ruhr Oel, Germany
Valero Energy
220,000
Chevron
PetroChina
420,000
Ineos
Keele Oy
87,000
Royal Dutch Shell
2011
2010
2010
Rosneft
>1,000,000
PDVSA
Klesch & Co.
90,000
Royal Dutch Shell
2009
Heide Renery,
Germany
TRN, Netherlands
Lukoil
158,000
Total
2008
ISAB Renery, Italy
Lukoil
320,000
ERG
2008
Petit Couronne and

Reichstett Reneries,
France
Berre L'Etang, France
Petroplus
239,000
Royal Dutch Shell
LyondellBasell
105,000
Royal Dutch Shell
Milford Haven
Renery, UK
Mantova Renery,
Italy
Coryton Renery, UK
Murco Petroleum 108,000
Total
MOL
52,000
IES
Petroplus
172,000
BP
Kralupy and Litvinov

Reneries, Czech
Republic
Ingolstadt Renery,
Germany
Eni
165,000
ConocoPhillips
Petroplus
110,000
ExxonMobil
2007
Rotterdam Renery,
Netherlands
BP
400,000
Chevron
2006
Mazeikiu Nafta,
Lithuania
PKN Orlen
260,000
Yukos-Lithuanian State
2006
BRC Renery, Belgium Petroplus
115,000
European Petroleum Holdings
2006
Wilhelmshaven
Renery, Germany
Bayernoil renery,
Germany
ConocoPhillips
275,000
Louis Dreyfus Energy Holdings
OMV
260,000
BP
2010
2008
2007
2007
2007
2007
2007
2003
This table summarises a number of signicant European renery transactions from 2003-2011. Information relates to total renery capacity quoted publically at time of
transaction which may differ to the JV partner agreement share
Source: Transaction information obtained from bidder / seller press releases and websites (multiple publically available sources)
Divest
Investment groups and oil companies from Asia,
Russia and the US are being selective and targeting
only the most advantaged European rening assets.
Even so, divestment remains a viable strategy for
renery owners if the asset is properly prepared
and the sale closely managed - indeed well over
one million bpd of European rening capacity has
changed ownership since the start of 2010.
Preparing for the divestment
Detailed planning and execution is needed for
an efcient transaction that maximises value.
This sounds logical, but in reality the activity is
very complex, involving many stakeholders, and
thus a properly structured process is crucial. Key
considerations include:
Timing - one of the rst key decisions is when
to initiate the divestment process. Value can
be easily destroyed if timing is poor and an
early strategic review of options is essential.
Considerations should include how reliably
the rener y is operating and the current safety
performance as poor performance in either will
deter potential buyers;
Packaging the asset - equally important is how to
package the asset for an efcient sale. Potential
buyers usually want to buy a standalone asset,
but there are instances where infrastructure and
resources need to be shared with the vendors
retained business. Consequently carving out an
asset as a standalone entity, together with a set of
nancial statements that represent the business
being sold, can be a highly complex challenge, and,
vendors should be prepared for signicant effort
before, during and after the transaction;
Employees - transactions may or may not be

conducted as an entity deal in which the assets
and employee contracts are bought together.
However, whatever the structure of the potential
deal, employee contracts should be thoroughly
reviewed by the seller early in the divestment
process, as vendors will need to be prepared to
discuss terms and conditions in detail with the
potential buyers. This is particularly important for
European reneries where complex employment
legislation needs to be navigated successfully,
and specialist advice is often required; and
Communications - maintaining an engaged and
motivated workforce throughout the deal is a key
challenge. The divestment process often takes
several months (or longer) and the economic
impact of reduced productivity or resignations
of key personnel can be signicant. It is therefore
important to clearly dene the communications
strategy to be adopted from the outset of the
divestment, and include regular ongoing dialogue
with employees from the start to the nish of
the process.
Following the completion of the divestment the
vendor will need to switch attention to a disciplined
attack on the stranded costs remaining within their
business, for example in support functions. It is also
prudent to monitor how the new owners operations
are performing, as situations can arise where
the vendor is pulled back into operational issues
involving the assets they have divested.
Valuation - in the current economic environment

where buyers are cautious and extremely price
sensitive, the valuation approach adopted can
determine whether the divestment process stalls
or proceeds at speed. Over pricing assets often
leads to difculties later on when the buyer makes
an offer. Also having a clear data based view of
the upside potential within the business and how
this value can be accessed should be a key part of
this process;
DIVESTMENT REMAINS A VIABLE STRATEGY FOR REFINERY

OWNERS IF THE ASSET IS PROPERLY PREPARED AND THE
SALE CLOSELY MANAGED INDEED WELL OVER ONE MILLION
BPD OF EUROPEAN REFINING CAPACITY HAS CHANGED
OWNERSHIP SINCE THE BEGINNING OF 2010.
Close or convert
If a buyer cannot be found and operating the
renery is not economically viable, owners are
faced with two options: closing the renery (either
permanently or temporarily) or converting some or
all of the site to other uses, such as storage.
Closing a renery
Closing a renery is a complex and costly procedure.
Environmental costs, demolition work and other
costs can be very high.
The environmental costs of cleaning up the site will
be a major expense. Substantial regulation requires
removal of the accumulated pollution resulting from
decades of past use where requirements were
often less demanding than those today.
Employment law, including pensions and severance
benets, is another key issue to be managed, with
the costs of severing employee contracts often
unexpectedly high.
In addition, problems may also arise from the
conicting interests of multiple stakeholders,
including the rener, local government, regulators
and employees, which ultimately can lead to
protracted disputes and signicant legal costs.
Limiting the damage to the public image of the
rener throughout the closure process, needs
careful management.
CLOSING A
REFINERY IS
A COMPLEX
AND COSTLY
PROCEDURE.
IN ADDITION,
PROBLEMS MAY
ALSO ARISE FROM
THE CONFLICTING
INTERESTS
OF MULTIPLE
STAKEHOLDERS
Converting a renery
Alternatively, converting reneries to terminals can
mitigate many closure costs, extend the assets useful
life, reduce the plant costs and release working capital.
If well located, and if the tank farm and logistics
assets are in good condition, this can be an attractive
alternative to closing the renery completely.
But not all reneries are suitable for conversion to
terminals. Key constraining factors include:
On-site storage capacity - whether this is
sufcient for the site to operate as an effective
import/export terminal;
Transportation links - the connectivity of the site to
major ports as well as to other forms of transport
such as pipeline, road, rail and barge; and
Access to surplus capacity - whether the site
can access third party terminal services to
supplement available in-house capacity on a
exible basis.
ANTHONY LOBO
ACTING DIFFERENTLY: WHAT THIS MEANS FOR INVESTORS
Anthony Lobo
T: +44 20 7311 8482
E: anthony.lobo@kpmg.co.uk
With a variety of European rening opportunities

open to investors, selecting the right asset to
purchase is becoming increasingly complex. In
addition, the prevailing economic climate is causing
investors to be increasingly cautious with only the
most advantaged reneries targeted.
The recent acquisition of Chevrons Pembroke plant
by Valero is a good example of this approach. The
deal not only gives the US company a presence in
Europe but also ownership of a highly specialised
renery, with a Nelson complexity rating of 11.8.
The renery has been well maintained and
managed, and it has an estimated cash operating
cost 25 percent below Valeros average2 .
Companies from outside the region can also seek out
European acquisitions with the purpose of converting
the site to storage for use as a trading hub.
Depending on the market position, opportunities may
exist to make more money trading oil through the
site than processing and buying an established site
simplies compliance for environmental regulations.
Buying with a plan

Regardless of the perceived value and intentions of
the deal, investors should always buy with a very
clear plan on how the target asset will be operated
in the short and long term in order to maximise the
value created. Clearly this is a highly involved and
complex process - however initial considerations for
investors should include:
A review of how production will be marketed,

including consideration of the impact of the
renery location;
A detailed understanding of the cost base of
the rener y, and a structured plan for how costs
might be reduced through synergies and greater
operational efciencies;
A review of staff and management capability
and competency to deliver the business plan identifying gaps and establishing mitigation plans;
A review of pension obligations and their impact
on future nancial performance - which can be
very substantial;
The ability to handle working capital and
credit terms associated with third party crude
purchases; and
Legislation and environmental requirements
on the rener y including potential liabilities for
cleanup or new investment required to meet
environment directives.
Approaching the acquisition using a structured
framework will not only help maximise return on
investment, but enable the investor to respond with
agility to new commercial, operational, nancial and
legislative challenges which will undoubtedly be
encountered.
How well the asset matches current and expected

European product demand, in particular for middle
distillates such as diesel;
Valero Energy to Purchase Chevrons Pembroke Renery, Marketing and Logistics Assets in the U.K. and Ireland, press release, Valero, November 3, 2011
Essar and Stanlow: an investor rationale

The 2011 sale of Shells Stanlow renery in the
UK to Essar is an excellent example of how an
overseas investor developed a strong rationale for
acquiring a European renery in todays market.
Essar is a conglomerate based in India with
operations in energy, steel, infrastructure and
other businesses3. The company paid US$350
million for Stanlow, the second largest renery
in the UK. The renery has a production capacity
of 296,000 bpd supplying one sixth of the UKs
gasoline, as well as diesel and aviation fuel4.
Press reports indicated that Shell viewed the
renery as a mature asset with low returns5. The
sale was also part of Shells plan to consolidate
their global manufacturing portfolio on larger
assets, which on completion would reduce
rening exposure through a combination of asset
sales and closures6.
For Essar, however, the acquisition was justied
on a number of levels. Naresh Nayyar, chief
executive of Essar Energy, believes that the
current oversupply in the market will end as
smaller reneries close7. With the acquisition,
Essar can now ship crude oil rened from its
Vadinar renery in Gujarat to the Stanlow renery,
using the Tranmere Oil Terminal on the River
Mersey. Finally, Stanlow can help Essar deal with
cheaper, heavier crudes, which would increase
margins for nished products8.
Commenting on the deal, Nayyar says, It is a
good price. It would cost US$5 billion to build
from scratch. It gives us access to an important
market9.
3
4
5
6
8
9
Moving forward
Despite the apparent discouraging news on many
fronts, rening is still one of the largest industries in
Europe - with a throughput of over 12 million bpd10.
The EU is also one of the largest economic regions
in the world, with a GDP approaching 12 trillion,
and will continue to have a signicant appetite for
renery products.
If the current trend continues, in ve to ten years
European rening will be smaller, and joint venture
partnerships are likely to become increasingly
attractive as existing rening companies look to
mitigate risks and share the high costs of investing
through future cycles. The inexorable process
of change of ownership, renery rationalisation,
upgrading and concentration on fewer sites is
expected to continue as new high complexity
capacity comes on stream in Asia providing low cost
competition to European reneries.
However, European rener y owners can expect to
make a return on their investments if they have:
A clear understanding of whether their sites are
survivor sites or eventual closure candidates;
Appropriate and clear investment strategies for
each site through the cycle;
A determination and ability to operate their sites
as a pace setter; and
A steely focus on costs and performance.
But only the best will make an attractive return
and to do so they will have to face the difculties of
succeeding in a highly mature industry by developing
innovative solutions to meet the changing market and
growing competition from overseas.
www.essar.com/business, accessed March 5, 2012
Foreign investment: Indian companies blaze trail across the country
Financial Times, September 15, 2011

Ibid
Shell sells UK Stanlow renery to Essar Oil, press release,
Shell, March 29, 2011
Op. cit. Foreign investment: Indian companies blaze trail across the
Country, Financial Times, September 15, 2011
Ibid
Ibid
WITH A VARIETY OF EUROPEAN REFINING OPPORTUNITIES

OPEN TO INVESTORS, SELECTING THE RIGHT ASSET TO
PURCHASE IS BECOMING INCREASINGLY COMPLEX
10
BP Statistical Review of World Energy June 2011
WHY KPMG?
This is a time of extraordinary global economic

and political turbulence which has led to many
challenges for the oil & gas industry. As a result,
owners and operators of European reneries
need forward thinking and practical advice from
professionals who understand their businesses.
KPMGs Vision and Commitment

KPMGs oil & gas practice has one clear vision to be the leading provider of professional services to
the oil & gas industry.
KPMGs global network of independent member
rms provide audit, tax, and advisory services11; our
methodologies form the foundation of our approach
worldwide. KPMG recognizes that every business
is different, each with its own internal and external
pressures and challenges. Our methodologies
are therefore exible to enable our people to use
their knowledge and experience to apply them
appropriately for each client.
Through our global network and our 11 oil & gas

Centres of Excellence12, we constantly strive to
provide fully integrated and tailored services of the
highest quality providing clients with the skills and
experience they need to help ensure success.
KPMG member rms provide professional
services to:
84% of the top 50 oil & gas companies listed in
Forbes 100013
80% of the 76 oil & gas companies listed in
Forbes 100014
Fortune Global 50015
Financial Times Global 50016
Crucially, the services member rms offer start

from our clients perspective. We look at industry
challenges from multiple angles, pooling our
knowledge and resources to develop holistic
services that are designed to t our clients everchanging challenges and requirements.
11
Advisory services include advice relating to performance & technology; transactions; joint ventures; restructuring; and risk & compliance
Beijing, Calgary, Houston, Johannesburg, London, Moscow, Muscat, Paris, Perth, Rio de Janeiro and Rotterdam
13
Forbes 1000, April 2011
14
Forbes 1000, April 2011
15
Fortune Global 500, July 2011
16
Financial Times Global 500, June 2011
12
Gerard Shore
Jeremy leads KPMGs European Operations

Strategy Consulting practice. For the last 15 years
he has been working with oil & gas organisations
to identify and deliver cost, cash and margin
improvements across all areas of upstream,
downstream and rening operations. He has
led programmes in over 18 countries both in a
deal and non-deal environment. Clients include
global integrated majors seeking to drive value
from operations as well as both institutional and
private equity investors looking to get an improved
return on asset performance. Jeremy frequently
represents KPMG on cost optimisation and
sustainable value improvement, he has spoken at
several oil & gas conferences on the subject and
published numerous articles.
Gerard focuses on providing operational strategy

support to oil & gas clients in Europe and beyond.
He specialises in the identication and delivery
of business transformation solutions that drive
operational performance improvement and higher
returns on capital expenditure.
Anthony Lobo
Fergus Woodward
Anthony leads KPMGs European Oil & Gas practice.

He overseas KPMGs oil & gas strategy across
Europe and specialises in the role of National Oil
Companies having published a number of thought
leadership pieces over the past ve years.
With over 14 years experience in oil & gas and

related industries, Fergus is an operations strategy
expert across both the upstream and downstream
oil & gas value chain. His particular interests concern
value optimisation in rening, petrochemicals and
offshore upstream operations.
In addition, Anthony leads our M&A services and

has worked for the majority of the major players in
the industry. In the downstream sector Anthony
and his team have worked on many of the recent
transactions across Europe - both rening and retail.
Anthonys transaction experience covers the US,
Europe (including Russia and the Former Soviet
Union), Africa and Asia. He has lived and worked in
Hong Kong and Africa and is now based in the UK.
Anthony has frequently spoken on changes in the
sector across the globe including Houston, Africa,
the Middle East and Europe.
His experience includes leading oil & gas projects

across Europe, the US, Africa, Asia and Australia and
identifying benets across numerous business areas
including rening, petrochemical manufacture, supply,
distribution and fuels marketing.
BIOGRAPHIES
Jeremy Kay
Gerards rening experience includes delivering

performance improvement in operations,
maintenance, engineering, capital projects and
support functions.
Fergus typically advises organisations on enterprisewide sustainable operational prot improvement

programmes - covering cash, cost and margin. His
reviews have included areas such as maintenance,
turnarounds, logistics, manpower, employee
benets & remuneration, procurement, research
& technology and integrated operating model
structures. Clients include numerous major oil & gas
companies worldwide.
Fergus began his career in the oil and gas industry
as a Chartered Chemical Engineer. He is the author
of several papers on the subject of optimising value
from operations including a recent article for KPMG
on the petrochemicals sector.
LINKS
The KPMG Global Energy Institute (GEI): launched in

2007, the GEI is a worldwide knowledge-sharing forum
on current and emerging industry issues. This vehicle
for accessing thought leadership, events, webcasts,
and podcasts about key industry topics and trends
provides a way for you to share your perspectives on
the challenges and opportunities facing the energy
industry arming you with new tools to better navigate
the changes in this dynamic arena.
www.kpmgglobalenergyinstitute.com
The KPMG Global Energy Conference: The KPMG
Global Energy Conference (GEC) is KPMGs
premier event for executives in the energy industry.
Presented by the KPMG Global Energy Institute,
the GEC attracts more than 600 professionals each
year and brings together energy nancial executives
from around the world in a series of interactive
discussions with industry luminaries. The goal of
the conference is to provide participants with new
insights, tools, and strategies to help them manage
industry-related issues and challenges.
www.kpmgglobalenergyconference.com
Contact
Americas
Europe, Middle East and Africa

London
Moscow
Calgary
Jeremy Kay
Partner
KPMG in the UK
T: +44 20 7694 4540
E: jeremy.kay@kpmg.co.uk
Hilda Mulock Houwer

Partner
KPMG in Russia
T: +7 495 937 4444 ext: 14099
E: hildamulockhouwer@kpmg.com
Wayne Chodzicki
Partner
KPMG in Canada
T: +1 403 691 8004
E: wchodzicki@kpmg.ca
Anthony Lobo
Partner
KPMG in the UK
T: +44 20 7311 8482
E: anthony.lobo@kpmg.co.uk
Muscat
Houston
Michael Armstrong
Partner
KPMG in Oman
T: +968 24 709 181
E: marmstrong@kpmg.com
Regina Mayor
Partner
KPMG in the U.S.A.
T: +1 713 319 3137
E: rmayor@kpmg.com
Paris
Rio de Janeiro
Wilfried Lauriano Do Rego

Partner
KPMG in France
T: +33 1 55 68 68 72
E: wlaurianodorego@kpmg.com
Manuel Fernandes
Partner
KPMG in Brazil
T: +55 21 3515 9412
E: mfernandes@kpmg.com.br
Rotterdam
ASPAC
Ruben Rog
Partner
KPMG in the Netherlands
T: + 31 10 453 41 70
E: rog.ruben@kpmg.nl
Beijing
Gerard Shore
Director
KPMG in the UK
T: +44 20 7311 3268
E: gerard.shore@kpmg.co.uk
Fergus Woodward
Director
KPMG in the UK
T: +44 20 7694 3018
E: fergus.woodward@kpmg.co.uk
Johannesburg
Alwyn van der Lith
Partner
KPMG in South Africa
T: +27 11 647 7395
E: alwyn.vanderlith@kpmg.co.za
Floris van Oranje

Director
KPMG in the Netherlands
T: +31 20 656 84 06
E: vanoranje.oris@kpmg.nl
Peter Fung
Partner
KPMG in China
T: +86 10 8508 7017
E: peter.fung@kpmg.com
Perth
Brent Steedman
Partner
KPMG in Australia
T: +61 8 9263 7184
E: bsteedman@kpmg.com.au
The information contained herein is of a general nature and is not intended to address the circumstances of any particular
individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such
information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on
such information without appropriate professional advice after a thorough examination of the particular situation.
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KPMG GLOBAL ENERGY INSTITUTE

The Future of the

This time its bad and it could stay that way

Acting differently: What this means

Acting differently: What this means

The Future of the European Rening Industr y | 1

European reners are on a different path to the one

THE FUTURE IS UNCERTAIN SO ACT DIFFERENTLY

EXECUTIVE SUMMARY - MICHIEL SOETING

THIS TIME ITS BAD AND IT COULD STAY THAT WAY

2 | The Future of the European Rening Industry

The protability of the European rening industry

Many companies in Asia now consider Europe

AGING EUROPEAN REFINERIES GENERALLY HAVE

The Future of the European Rening Industr y | 3

Overcapacity - the challenge of supply

At the same time there has been some modest

Refinery utilisation (%)

Refinery capapcity (Thousand barrels per day)

REFINING CAPACITY AND UTILISATION - EUROPEAN UNION

Source: BP Statistical Review of World Energy June 2011: KPMG analysis

4 | The Future of the European Rening Industry

The Skewed Barrel

Exporters of diesel to Europe have to absorb their

Thousands barrels per day

US GASOLINE IMPORTS FROM EUROPE

US gasoline imports from Europe

% of total US gasoline imports

Source: US Energy Information Administration 2011: KPMG analysis

The Future of the European Rening Industr y | 5

ACTING DIFFERENTLY: WHAT THIS MEANS FOR REFINERY OWNERS

6 | The Future of the European Rening Industry

In the face of tough market conditions, cost

The following are some investment options

The Future of the European Rening Industr y | 7

TO IMPROVE PERFORMANCE, REFINERS WILL CONTINUALLY

NEED TO CHALLENGE ALL ASPECTS OF THEIR BUSINESS.

INVESTMENT OPPORTUNITIES MUST BE SCRUTINISED

AND IMPROVEMENTS PURSUED RELENTLESSLY IN ALL

COMMERCIAL AND OPERATIONAL AREAS

8 | The Future of the European Rening Industry

And with CO2 emission prices likely to rise, energy

The second key principle is that good operators

The Future of the European Rening Industr y | 9

10 | The Future of the European Rening Industry

Given the value at stake, we would recommend

made against the original design performance of

INDICATIVE REFINERY FIXED CASH COST

Understanding the way in which the interface

Source: Analysis based on KPMG rms engagements

Managing, and where possible reducing, xed cash

The Future of the European Rening Industr y | 11

However, as with all costs in rening, if handled

o risk assessment paperwork not completed

Operations and Maintenance;

Laboratory embedded inefciencies in product

complexity testing which could have been

absorbed by Operations personnel

Operations overstafng resulting from:

o missed opportunities to conduct in-line testing

12 | The Future of the European Rening Industry

EUROPEAN REFINERIES - DEAL HISTORY

Royal Dutch Shell