Prospects bleak as Petroplus struggles to survive

Switzerland-based Petroplus, Coryton’s owner, has been battling to stay in business since lenders froze a $1bn credit line late last year and it was forced to shut down refineries in France, Belgium and Switzerland. It now says it will sell the French plant – though in the current climate, with several other refineries up for sale in Europe, it will struggle to find a buyer.

Earlier this month, the banks granted it a temporary reprieve, providing enough funds to keep two of its biggest plants going – Coryton and Ingolstadt in Germany – albeit at reduced capacity.

BP, which used to own Coryton and is one of its biggest customers, has also offered a life-line. It is considering a plan to supply crude to the refinery for free and take payment in refined products.

But Petroplus’s future still looks bleak. Standard & Poor’s downgraded its debt this week, saying the likelihood of a near-term payment default has increased. It said there was a risk of bankruptcy if it failed to source alternative funding soon.

Richard Howitt, East of England MEP, says he has been told by Coryton’s management that it only has enough credit to keep going until the end of the month. “There’s a real and genuine concern that Coryton could be forced to close,” he says. “If that happens, petrol in BP garage forecourts throughout London and the South East could dry up.”

Mr Howitt is one of a group of MEPs who have urged the European Commission this week to protect Petropolus’s refineries from closure.

Petroplus is the biggest casualty so far of the chill wind blowing through European refining. Last year was one of the worst on record for the industry. “It’s been a perfect storm, with weak demand, surplus capacity, especially in gasoline, and a high crude price,” says an oil analyst at Citi.

The situation is worrying Petroplus’s customers, including in the UK. Gist, a haulage company based in Basingstoke, says Petroplus has notified it of potential supply disruptions. Gist says it has made arrangements with another fuel supplier.

Other companies, such as DHL and Valero, have also drawn up contingency plans in case Coryton shuts down. “Obviously, you have to consider all scenarios,” says Valero’s Ruth Kent.

The government, too, is keeping a close eye on Petroplus’s travails. With less than 200 days to go until the London Olympics, it cannot afford any hiccups with petrol supplies in the capital and deliveries of jet fuel to Heathrow. “You can’t run an Olympics without fuel, and the government knows that,” says one executive at a European oil company.

The Department of Energy and Climate Change says it is monitoring the situation closely and is in “close touch with Petroplus and its main customers in the UK”.

Petroplus is in a business that has long been under pressure. An analysis by the consultancy Wood Mackenzie in 2010 showed 29 of the 96 refineries in the EU did not generate a positive net cash margin – calculated as the value of their refined products, less cash operating expenses and the cost of the crude oil feedstock. Since then, things have become worse. Europe’s economic downturn has weakened demand for transport fuels, while competition has grown from the new generation of super-refineries in Asia.

Backed by private equity, Petroplus grew fast in the 2000s when the outlook for refining was better, buying Coryton from BP for $1.4bn in 2007 as part of a debt-financed expansion drive. But it was snared by high finance costs. It reported a net loss of $413 million in the first nine months of last year, and was forced to seek a waiver from creditors after the losses forced it to break debt covenants. Then in December, its banks pulled the plug on the uncommitted $1.05bn portion of its $2.01bn revolving credit facility, which is critical to its ability to buy crude oil.

Other operators have fared better. Last year Ineos, a highly-leveraged chemicals producer, created a joint venture with PetroChina to refine and trade oil at two of its refineries. The deal was seen as a crucial way of securing the plants’ future.

Analysts stress that Petroplus’s problems should not lead to fuel shortages in the UK. A mild winter means demand for heating oil is low: and any shortfall from domestic refineries can be made up with imports. That could change, however, in the event of a cold snap – or if Petroplus is forced to the wall and Coryton closes down completely.

Petroplus going into administration “could have a significant impact on the UK fuels market,” says Brian Madderson, chairman of RMI Petrol. “It would be surprising if other domestic refiners could move quickly to bridge the gap without any increase in logistic costs and, therefore, retail prices,” he adds.