Burdened by resiliently poor margins, a number of refiners in Europe have opted to change tack and target significant new investments in deep processing units -- such as hydrocrackers, delayed cokers and vacuum units -- to maintain profitability during these doggedly dark times for the sector.
Analysts believe that falling global demand for fuel oil has forced refiners' hands -- convert your facility to produce higher-value middle distillates or close your refinery.
Announcements of new units have come thick and fast in recent months. In early July, US major ExxonMobil said it planned to invest over $1 billion at its 320,000 b/d refinery in Antwerp, Belgium, to enable the plant to convert heavy, higher sulfur oils into marine gasoil and diesel.
Just two months later, the company surprised the market with another announcement, this time an investment plan to install new processing equipment, including a vacuum unit, at its 6 million mt (120,000 b/d) Slagen refinery in Norway to produce vacuum gasoil and less heavy fuel oil.
Total's Antwerp refinery, meanwhile, is currently undergoing a major upgrade following the French major's decision a year ago to invest Eur1 billion (around $1.3 billion) to boost middle distillates production.
The project, which aims at converting heavy fuel oil into desulfurized diesel and ultra low sulfur heating oil, consists of a solvent de-asphalting unit and a mild hydrocracker and is scheduled to start up in early 2016.
And while those projects are yet to come online, Total and Russian Lukoil's 155,000 b/d Zeeland refinery in Flushing, the Netherlands, this summer completed the upgrade of its hydrocracker.
There is little doubt that refineries need to shift away from fuel oil as stricter environmental regulations come into force on sulfur content in bunker fuels.
"There will be less and less fuel oil -- all forecasts are pointing to the same thing: demand is going to fall quickly," said a trader.
Jonathan Leitch, principal analyst with Wood Mackenzie, added: "The fuel oil crack spread will remain weak and diesel will remain relatively strong."
RUSSIAN UPGRADE IMPACT?
There has been some speculation, though, that the trend toward conversion could leave the market short of fuel oil, but traders and analysts believe the latest string of announcements won't impact the market.
"Globally, [these refinery upgrades will not have] much influence [on the market], as they will not come all at once," a trader said.
"We'll find offers elsewhere if some are short. For now, we are not seeing any stress in the market about this," he said.
Flows of Russian fuel oil, for instance, have been steady and even rising as Russian refineries upgrade their primary processing units, while secondary upgrades only come slowly online.
But other projects could hit fuel oil output.
In the pipeline are Gazprom Neft's plans to build a flexicoker at its (243,000 b/d) Moscow refinery and Tatneft's plan to launch a delayed coker at its (140,000 b/d) Taneco refinery.
Russia has already seen two hydrocrackers launched in the past year -- one at Taneco and another at Surgutneftegaz' 480,000 b/d Kirishi refinery.
EASTERN MEDITERRANEAN PLANTS
Eastern Europe and Turkey are also set to see a number of new conversion projects come online.
Turkey's Tupras is close to completing the installation of a delayed coker and hydrocracker at its 230,000 b/d Izmit refinery, which will process heavy residue oil from Izmit and other Tupras-owned refineries.
The upgraded complex will provide additional output of about 3.5 million mt of light products, primarily diesel and jet, and also gasoline and LPG.
At Lukoil's 196,000 b/d Burgas refinery in Bulgaria, 80% of the construction work on a new hydrocracker had been completed as of early August and 86% of the equipment installed.
This summer, OMV Petrom's 84,000 b/d Petrobrazi refinery in Romania completed its modernization program, focused on a VGO conversion project and maximizing diesel production.
As a result of the project, diesel production has increased to more than 1.5 million mt from 900,000 mt in 2009.
And in Poland, shareholders in the country's second largest refiner, Grupa Lotos, approved recently a Zloty 1 billion ($310 million) share issue to finance a delayed coking unit at its 210,000 b/d Gdansk refinery and upstream investments.
Ultimately, says Robert Campbell, head of oil products research at Energy Aspects, "most refineries have a view that the fuel oil market is in decline and it will be increasingly difficult to make money when you produce large amounts."
