PetroChina talks to Total over French refinery fleet, sources say

24 Apr 14 – Total [EPA:FP] is having discussions with PetroChina [HKG:0857] about options for its French refinery fleet, said a source familiar with the situation and a source close to Total.

The two companies’ management teams recently talked about various forms of potential cooperation, the source familiar said. “In the overseas markets, PetroChina wants a tie-up regarding exploration and refinery and has always been interested in Total’s refinery assets,” the source added.

Meanwhile, the source close said Total is considering an alliance centred on its La Mede refinery with PetroIneos, the joint venture between PetroChina and UK-Swiss Ineos. “The alliance could take several forms either through putting together fixed costs, for example to buy supertankers, or [the creation of] a JV, a new entity that would operate the whole refinery. So what Total is willing to do is work on a tie-up with PetroChina,” he said.

Ineos Refining, whose operations included both the Grangemouth refinery in Scotland and Lavera in France, entered into a 50-50 joint venture with PetroChina to form PetroIneos in 2011.

Ineos declined to comment on its potential interest in Total’s French refineries.

Total has been considering options for its French refineries for some time now, a French lawyer and a sector banker said. Refinery margins in Europe are at an all-time low, the lawyer noted. Consumption is down due to the economic climate, and many of these refineries are old and require heavy investments, according to both the lawyer and the banker.

The five refineries in France — La Mede, Gonfreville, Donges, Feyzin, and Grandpuits — are completely uneconomical due to their heavy wage bills, the lawyer added. Total announced in January that its French refinery business had lost EUR 500m in 2013.

Despite their low face value, the refineries could be of strategic significance, according to an analyst. PetroChina is a net importer, so it has no current need to establish a downstream presence in other markets. It also has a mandate to develop Chinese capacity.

“China has a good historical relationship with French energy,” the analyst said. “Total knows it has a problem with its French refineries. If they are closed, there will be worker strikes. If China comes in, the exchange of gaining access to upstream assets in other markets in which Total is operating could be an incentive to buy the refineries.”

La Mede and Gonfreville are considered the most valuable of the five refineries, as they are of a higher complexity and refine products of greater value, the analyst said. Gonfreville was seen by the sources as the most sellable as Total has invested significantly in this refinery — EUR 2bn in renovations — in an attempt to make it profitable.

Between 2006 and 2011, Total reduced its refining capacity in Europe by 23%, and it has targeted a further 20% reduction by 2017, said a company spokesperson. Its current refining capacity in France stands at approximately 800,000 bbl/d, said the analyst. The refineries operate at about 80% efficiency, which is 640,000 bbl/d.

The value of the refineries would mainly derive from their oil inventories. In France, each refinery is required by law to hold 30 days of crude.

“The oil inventory amounts to about USD 2bn. Something would be paid for the actual refineries. In all, Total’s French refineries are worth about USD 2.5bn,” the analyst said. “Pipelines would be extra and sell for 15x EBITDA. Service stations, if they are also for sale, are where the money is, firms will pay USD 0.5m per station. ”

The industry source added that the financial pressures the French refinery fleet is encountering are an EU-wide issue. Prompted by diminishing demand and increasing competition from the US, Asia and the Middle East, most majors have already sold their EU refineries.

Another Total refinery up for disposal is Lindsey in the UK. Total’s other European refineries are in Antwerp, Belgium, Buna SOW Leuna and Mitteldeutschland Spergau in Germany, and Vlissingen in the Netherlands, which it co-owns with Lukoil [LSE:LKOD]. Total’s refinery in Rome, Italy, closed in 2012.

by Katie McQue and Beranger Guille in London and Jennifer Zhang in Chongqing