Bukom a casualty as Shell writes off assets

[SINGAPORE] Shell's 500,000-barrel-per-day Bukom refinery, the group's largest globally in crude distillation capacity, has taken a big hit: The Anglo-Dutch group is writing off US$2.3 billion in refining assets, most of it for this Singapore refinery.

The write-off does not, however, include Shell's still-profitable petrochemical operations here, to which it is adding even more plant investments.

Shell's chief executive, Ben van Beurden, said the move reflected the company's updated views on the outlook for refining margins amid substantial pressures on the industry from excess capacity, changing product demand and new supplies from liquid-rich shales.

Shell is undertaking downstream refinery divestments in four countries in Asia and Europe as part of a drive to sharpen its competitive position, he said at the group's Q1 results briefing last week.

A Shell spokesman here said the company's chief financial officer, Simon Henry, had said at the briefing that Shell had revised its outlook aftercomparing its future value against its current book value.

"In the case of Singapore in particular, the future value just did not support the book (value)," Mr Henry had said.

The refining industry has been plagued by excess capacity, partly due to start-up of new mega refineries in the Middle East.

On top of this, new product supplies from US refineries, which make use of the more competitive shale-based feedstock, have hit refiners' bottom lines; as a result, many oil majors have shut their refineries, most recently those in Australia.

Mr Henry said: "Singapore is basically a pure export refinery, competing head-to-head against newer refineries with lower costs and more energy efficiency.

"Singapore is a high-energy-cost location and it is just a difficult market, when so much capacity is chasing so little demand."

The Shell spokesman added that Mr Henry also took pains to de-link the impairment and the portfolio action.

"In the case of Singapore, in particular, the refinery is connected to a profitable chemicals asset, and therefore there is value in the chain overall.

"There are some on-going investments here that will improve the margins, for example the co-generation unit, which will reduce the energy cost and the connection and chemicals opportunity has quite significant value, as does the trading value around the refinery," he added.

Shell, which has so far spent more than US$10 billion in its integrated refinery and petrochemical complex here, had in April last year announced investments in two new world-scale plants for making high-purity ethylene oxide and ethoxylation; these followed an investment to upgrade its polyols project here two months earlier.

The three investments followed Shell's move in November 2012 to boost the capacity of its 800,000-tonne-per-annum petrochemical cracker by more than 20 per cent.

Reacting to the Shell write-down of the Bukom refinery, an industry official said the company is writing off quite a bit from its book value, considering that Bukom is an old plant. But he agreed that refining margins have been volatile and very challenging.

"You will need a complex refinery to compete with the newer, more-efficient refineries," he said.