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Oil majors hit by overcapacity in refining

Oil Refinery at DuskGloom in the global refining industry is hurting the world’s largest oil companies, with Royal Dutch Shell, Total and ExxonMobil all blaming poor third-quarter earnings on a slump in their refining business.
Shell’s results were the most disappointing, with profit falling 32 per cent to $4.5bn. Total saw a 19 per cent decline to €2.72bn, while Exxon’s fell 18 per cent to $7.87bn.
All the majors have been hit by overcapacity in the refining industry and weak demand for petrol and diesel in slowing western economies. Many have been trying to sell their European refineries, but have in some cases struggled to find buyers.
Others have been trying to shift to areas with lower costs and higher local demand for petrol, such as the Middle East and Asia. Total, for example, is building a huge new refinery in Saudi Arabia.
At issue is a sharp fall in refining margins – the profit earned from processing oil into refined products like gasoline. Total said recently that it earned $10.60 a tonne from refining in the third quarter, compared with $51/tonne a year earlier. Exxon blamed its poor downstream earnings on “significantly weaker refining margins” as a result of “increased industry capacity”.
Shell’s overall results – which were described as “very disappointing” by analysts at Deutsche Bank – came in well below market expectations. Its shares fell nearly 5 per cent or 99p on Thursday to £20.85.
As well as the problems in refining, Shell also blamed increased operating and exploration expenses and lower production, partly due to the “challenging operating environment” in Nigeria, where it is being hit by rampant oil theft and sabotage.
The company surprised analysts by increasing its guidance for net capital spending this year from $40bn to $45bn, but pledged that spending would decrease next year as it increases the pace of asset sales.
Exxon said earnings in its downstream – or refining and marketing division – were $592m, down 81 per cent or $2.6bn from a year ago. Shell also saw its downstream earnings fall 49 per cent to $892m. Total said net income in its refining and chemicals unit fell 42 per cent from €567m to €330m.
Exxon said the main factor was the slide in refining margins, which decreased downstream earnings by $2.4bn. It said lower gains on asset sales and foreign exchange impacts had a negative impact of $380m.
It said its production of oil and gas increased year-on-year as new projects were brought on line and maintenance-related downtime decreased.
Peter Voser, Shell’s chief executive, who is stepping down at the end of the year, acknowledged the company was facing “headwinds” and said the security situation in Nigeria was continuing “to erode the near-term outlook”.
But he said Shell had started up a series of new oil and gasfields in the past few months, in deep water, in its gas business and in places such as Iraq, which will “drive Shell’s cash flow in 2014 and beyond”.
Mr Voser, who will be replaced on January 1 by Ben van Beurden, the company’s former head of downstream, said Shell was “rich with new investment opportunities” and in the next few quarters would have to make “hard choices” between the best potential projects in its portfolio – reported