France's plan for a one-off tax on oil inventories will further damage the competitiveness of the beleaguered refining industry, discourage investments in unprofitable refineries and lead to more plant closures.
France announced last week it would impose the tax on the oil sector to raise some 550 million euros ($693 million) to help it meet its budget deficit targets as economic growth grinds to a halt.
The new Socialist government said the tax would affect oil majors such as Total, whose margins had swelled with rising oil prices. But it is designed to hit all owners of crude and fuel stocks in mainland France — from refiners to supermarket petrol stations and traders.
French refiners, in particular, have been struggling for years due to poor margins, weak demand and a surplus of gasoline capacity, analysts said, while the traditional market for French gasoline exports, the United States, has dried up. "Refineries in France have lost 2 billion euros over the last three years," Jean-Louis Schilansky, head of France's oil industry body UFIP, said. "This is a globalized system. Petrol can be refined in Africa and sold in Europe or North America," he added. "We're not going to do blackmail or carry out threats. But this is very detrimental," he said.
Roy Jordan, an oil analyst with Facts Global Energy in London, said the tax comes at a bad time for the industry.
"This is against a background of capacity surplus in Europe," Jordan said. "We already had capacity closure in France for this very reason, and if this is something that continues, we could see more closures," he added.
Total, Europe's biggest oil refiner, still owns five refineries in France after it shut its Dunkirk refinery in the north in 2010.
Its chief executive, Christophe de Margerie, said over the weekend the tax would cost Total 140 million to 160 million euros.
"What is bothering us really is that the refining sector ... is a loss-making sector, and it's always a nuisance when you overtax a sector which is not doing well in the first place," he said on the sidelines of a conference in Aix-en-Provence.
ExxonMobil owns two French refineries, one in Normandy and one near Marseille, and Dutch group LyondellBasell and England-based Ineos each own one.
"They (refiners) have no incentives to stay," said an oil service analyst with French brokerage Natixis, who declined to be identified. "When the French government raises taxes on the wealthy, at least the rich have assets. Here (for refiners), the assets aren't even worth anything," he said.
The future of the Petit Couronne plant of now insolvent Petroplus is still uncertain.
Yvon Scornet, head of the CGT union at Petit Couronne, said the one-off tax, which would cost the refinery 8 million euros, was likely to become permanent once accepted by the sector and might scare off potential bidders for the ailing plant. "What we are asking for is a tax on imported fuel products like they are doing in Italy and mulling in Britain," he added.
Italy is readying legislation to limit petrol imports from outside the European Union as it moves to help hard-pressed domestic refiners.
France's petroleum industry body said the new tax added a burden on the competitiveness of the sector. The tax, which will amount to 4 percent of the value of average crude and fuel stocks owned in the last three months of 2011, was devised by the government with Total's hefty 2011 net profit of 12.3 billion euros in mind, analysts said.
The French oil distribution industry, however, had an overall net margin of about 500 million euros in 2011, according to UFIP estimates, equivalent to the amount to be levied by the government this year.
"If they need cash, they should allow more oil exploration. There was an opportunity with Melrose off the coast of Marseille. They refused it, even though these are activities you can tax very heavily," the Natixis analyst said.
UNPROFITABLE BUT ALLURING
Analysts said it would be premature to write off French refining sites, however, especially if the tax remains a one-off.
A sharp fall in oil prices in June provided a brief boost to refiners, whose margins surged to their highest levels since late 2008, even though this is likely to be short-lived, Jordan said, as oil demand remains depressed.
Some refineries in strategic locations on the Mediterranean or the English Channel also could become targets for Asian or Russian oil companies that want access to European markets for their unrefined products, regardless of refining profitability.
Petrochina has formed a joint venture with Ineos to supply crude to its Lavera refinery in southern France and market its products. Russian oil trading house Gunvor, which bought its first refineries in Europe this year, also said it was interested in expanding further abroad.
"They are doing this for strategic reasons because they want to become international players, and they would be satisfied with low return levels that wouldn't satisfy an integrated oil company," Facts Global Energy's Jordan said.