Processing News

Saturday, December 19, 2015

Bye Bye Tamoil Refining

Hmmmm,

It seems that I am writing about nothing but refinery closures and even that in the past tense. Anyway, here's what I think is the real truth about what happened with the Tamoil Switzerland organisation that "required" them to close the Collombey (Valais) Refinery this year (2015).

This is all hearsay, and in any case, is almost too stupid to believe it is real, but here goes.

The story is, that the Tamoil marketing group got super-enthralled with their trading successes in writing spot deals (that means individual sales that are not related in price or conditions to any other sales or purchase committments) in 2012 and 2013. The result was the thinking that "when a little bit is good, more has to be better!" So they went to the extreme in 2014 and decided to sell all their products from the refinery in Collombey on a spot basis. This is probably okay when there is a market stabilising effect from other term sales contracts in the area - like from other refineries. But there are no other operating refineries in Switzerland, and moving product from outside Switzerland to inside or vice versa is difficult and expensive - it requires either rail or barge transport for large volumes and truck transport for smaller volumes plus small imports (only) from southern France on the pipeline that feeds to Geneva. This is not a large enough traffic pattern to stabilise the Swiss market.

What happened then? Well, the Swiss marketers (we are not talking about Tamoil here, let's call them the "Traders") are isolated but they still are not stupid. They started timing their purchases - all spot sales now, so at current prices as negotiated right then - for when the Tamoil refinery tanks were full to over-flowing. What happens then? Well, Tamoil has the choice of (1) selling product to buyers outside Switzerland (at a low net price because of transportation costs) or (2) reducing refinery throughput and make less product (also expensive because the fixed costs of running the refinery are a major factor and the minimum turndown for the refinery is probably around 60-65 percent of full capacity - it is expensive to run a refinery at low throughput rates, but it is even more expensive to shut it down) or (3) reduce the product prices until somebody buys the products. Guess which choice Tamoil made? I don't know, but as far as I can see, probably a combination of options 2 and 3. If this happens once or twice a year, it is not a big deal, but when it happens continuously all year long, it means MAJOR losses for the organisation as a whole. Marketing loses money (big time!), refining loses money because it is forced to run a low rates and even shut down some equipment, and even crude purchasing loses money because they probably made annual contracts for specific volumes of crude oil, and when they cannot absorb all that crude oil, they will either have to sell it (probably at a loss since it is "distress" crude that is not planned for sale) or pay a penalty to the crude supplier.

All of this means that a company that was making money before, now is losing large amounts of money under essentially the same market conditions as it made money in the years before.

What ways does Tamoil have out of this situation? That depends on whether they recognise what the problem was to start with.

My recomendation would have been - at the appropriate time - to fill the product tanks, shut down the refinery for at least two months, DO NOT SELL TO THE TRADERS, and buy excess supplies from outside the country as necessary. That would be painful for Tamoil, but the Swiss Traders will suffer even more than Tamoil because Tamoil will still have the cushion of their own supplies in storage. After 6 weeks or so of having to buy all their product from outside Switzerland, the Swiss Traders will be ready to make a deal that will save their own bacon. To add a little insult to the injury, Tamoil could also make an announcement that the shutdown is being made to reduce the capacity of the refinery to fit the Tamoil captive sales quantities - this announcement to be made at the time of the shutdown.

I think the Traders would have caved in and made arrangements for term deals in the following year, and maybe even starting in advance of the new year. When the first one caves in, the rest will follow quickly.

That's what I think. Now, what did Tamoil do?

Tamoil waited as long as they could, and then shut down the refinery and announced that it was for sale. All the refinery people were laid off and the refinery was (I think) slowly mothballed for long term storage.

Since then, there have been rumours of up to about eight different interested parties to buy the refinery. None of the bidders has been accepted and the Canton is now looking at requiring Tamoil to clean up all the spills and contaminations on the refinery site. THIS is a MAJOR project and there will be some serious negotiating about whether the refinery is still operating if it is being used as a terminal. Tamoil is on weak ground here since the main refinery rail and truck loading takes place on the other side of the Rhone River in Canton Vaud.

Now, if you were in charge of Tamoil, what would you do to the management team that so poorly managed the whole situation? Fire the whole team, right? So would I. What has happened? Not one person has been fired - all the responsible idiots are still pushing their desks!

Like I said at the beginning, "Hmmmm"

"Winning the Oil End-Game" by Amory Lovins in 2005