China's landmark purchase of European oil refineries this week could sound the death knell for poorer plants in the declining European sector.
Petrochina, the world's second-most valuable oil firm after Exxon Mobil, bought into the refineries of British firm INEOS -- highlighting Beijing's quest to diversify its wealth away from forex reserves in U.S. Treasuries.
After years amassing production assets, Petrochina has targetted refining in a bid to control oil from drill head to petrol pump as a fully integrated major.
The purchase into the Lavera refinery in France and Grangemouth in Scotland, the UK's last fully British-owned refinery, comes as Europe's refining sector struggles with excess capacity, high taxes and competition with cheap gas.
It has thrown a life-line to the two plants by injecting capital and saving jobs, but Petrochina may drive the last nail into the coffin of competing refiners, analysts said.
"It could mean more competition for other European refiners. These refineries, which otherwise might be closed and become non-existent in a couple of years, could get some support from this unusual deal," said Eugen Weinberg at Commerzbank.
David Wech from JBC Energy also said the life line deal was parallel to injection of capital from Russian co-ownership in other European refiners.
"As (excess refining) capacity is not taken out of the system, the pressure will rise for those players who lack such relatively margin-insensitive and powerful partners," he said.
Apart from Ineos, companies such as Shell, Petroplus, Total and Conoco are trying to sell their refineries
MORE DEALS COMING
PetroChina, Asia's top oil producer, has been flexing its muscles expanding global trading network
"Probably their interest in European refining is near the bottom of relevant factors. In its endeavours to become a global energy company, product trading is high on the list," said David Wech from JBC Energy.
The political networking might also have played a role.
The deal was signed during a visit to Britain by China's vice premier, Li Keqiang.
The plants of INEOS, which had a debt over $6 billion, are modern, with a high yield of more valuable oil products such as gasoline, while their port and storage facilities are well-located in trading hubs.
John Kuzmik, partner at legal major Baker Botts, said the acquisition fitted perfectly with China's strategy and marked a shift downstream.
"China's buying spree could at some point reach saturation point in terms of how many pure resource plays it has in its international portfolio," he said. "I would not be surprised to see them doing more in Europe."
Oil major Shell has said it was cutting refining in the North America and Europe and would like to grow in China.
On Tuesday, a Chinese newspaper report said Shell was in talks with Chinese oil company CNOOC on a 30 percent stake in a $7.5 billion refining project.
INEOS has said it wanted to move into the lucrative Chinese petrochemical business as part of the broader venture deal.
MORGAN ROLE IN DOUBT
"There are no signs yet of waning Chinese appetite for assets with Petrochina alone aiming to spend $60 billion on foreign acquisitions over the next ten years," said Alastair Lowe, director at Lloyds Corporate Markets Oil and Gas.
As Beijing has a tight grip over local fuel prices, allowing refiners only a narrow margin, Chinese firms may also soon emerge as buyers of U.S. plants to escape controls and integrate their global product trading operations.
That might be bad news for Morgan Stanley, which has a deal with INEOS for products marketing and oil purchasing.
INEOS did not say what will happen to the Morgan deal. Industry sources said it could survive until 2012-13.
"I see no reason for Morgan to be on the physical market in Europe without INEOS. And something tells me that the arrival of the Chinese is not a good news for them as Petrochina will want to control everything," said a trader with an oil major.
Morgan Stanley declined to comment. A second trader said he expected Morgan to ultimately sell out entirely.
"The fact that Morgan is not injecting any more cash and is sharing control with the Chinese shows that they had enough of these European refining games and want to pull out".