French oil major Total plans to halt crude refining at its loss-making La Mede site near Marseille by the end of next year, unveiling a much-awaited plan to adapt to declining demand for petroleum products in Europe.

Total said it intends to cut 180 out of 430 jobs at the 153,000 barrel-per-day plant, as well as investing 200 million euros ($213 million) there to create France's first biorefinery to meet growing demand for biofuels.

The oil company also said it plans to invest 400 million euros at its 219,000 barrel-per-day Donges refinery on the Atlantic coast "to capture profitable new markets with low-sulfur fuels" that meet new EU rules.

Europe's biggest refiner is the latest oil company to resort to closures in an industry that has struggled with overcapacity, poor gasoline demand, growing competition and low margins for several years.

"There are three possible responses to the crisis in the European refining industry," Total Chief Executive Patrick Pouyanne said. "The first is to throw in the towel. The second is to do nothing and perish. The third is to innovate and adapt to meet shifting demand trends."

Total has been keen to avoid a repeat of costly strikes over the closure of its Dunkirk refinery which lasted for weeks in 2010 and had flagged well in advance that it would cut capacity further at its French refineries.

Total said its La Mede and Donges operations were "struggling" and "structurally loss-making" and that the restructuring was aimed at making them profitable in a volatile environment.

Pouyanne said he expected Donges to turn a 30 million euro annual loss into a 50 million euro profit over time thanks to the investments and the La Mede site to eventually swing to a 20 million euro profit from the current 150 million euro loss.

The group said its three other French refineries - Gonfreville in Normandy, Grandpuits in the Paris region and Feyzin near Lyon - had withstood the deteriorating economic environment over the last two years and were making money.

European demand for petroleum products has declined 15 percent since 2008, Total said, as the EU seeks to reduce its carbon generation by using energy more efficiently and setting stricter limits on vehicle emissions.

Total said its European operations had also been hit by the surge in shale oil and gas production in the United States, as well as competition from refiners in Asia and the Middle East.

ENDURING EUROPEAN OVERCAPACITY

With these announcement, Total will have reached its target of cutting oil refining capacity by 20 percent by 2017, Pouyanne said.

But the CEO, who in his previous job as head of refining gained a reputation as a shrewd cost-cutter, warned that other European refiners were now expected to do their part in reducing overcapacity further.

"As the European leader, Total has now done its part of the job, I expect other players to do the same," he told reporters.

Analysts do not think Total's latest measures, which follow a plan announced in February to halve capacity at its Lindsey site in England, will solve Europe's overcapacity problem.

"For the European refining market, a 150,000 bpd reduction, about 1 percent of capacity, by 2017 isn't going to help much," said Tudor Pickering Holt analysts in a note.

Pouyanne said the new investments will mean all its French sites will now have a breakeven point of less than $20 per ton, enough to be competitive.

But he refused to commit to a new moratorium on capacity cuts, saying the group's 2010 promise not to shut any site for 5 years had had a demoralizing effect on staff.

"The moratorium had a totally negative effect internally, what seemed like a victory then took a perverse turn psychologically on staff, it had become a sword of Damocles," he said, adding nonetheless that the new plan was meant to be sustainable over the next 10 years or more.

Source: www.reuters.com

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