Varo Bets on European Refining Despite Peak Oil Demand Fears

Reuters, March 19, 2018

Electric vehicles and stricter marine fuel regulations are generally not perceived as good news for the oil refining industry. But the head of European downstream firm Varo Energy, Roger Brown, says he believes the complete opposite. At least for the medium-term. Varo, which has refineries and storage assets in Western Europe, announced on Monday that it would list in Amsterdam this year. Its shareholders, which include private equity firm Carlyle and oil trading merchant Vitol, plan to sell a combined 30-40 percent of stock on Euronext. The company could be valued at 2 billion euros ($2.46 billion), according to banking sources.

Brown, a veteran BP trader who was hired as Varo chief executive in 2015, believes some refiners could benefit from forecasts of a peak in oil demand within a generation.

I don’t think many people will build new refineries amid all the talk about peak oil demand. So hence current refiners will have to run at full capacity,” said Brown.

Many commodity traders, oil companies and analysts expect oil consumption to slow in years to come as sales of electric vehicles accelerate, and wind and solar power provide more of the world’s electricity. Some predict oil demand will peak some time after 2030.

Another challenge for the refining industry is upcoming stricter regulations for marine fuel, which will drastically reduce the use of fuel oil for shipping but increase the use of diesel. Brown says that, too, would present an opportunity for the refining industry in Europe as existing refineries would need to fill the additional demand for diesel in the shipping sector.

Varo, which saw underlying earnings rise to $371 million last year from $328 million in 2016, owns two refineries in Switzerland and Germany, and storage, blending and distribution assets in those two countries as well as the Benelux nations and France.


Varo has made nine acquisitions since being set up in 2012 and Brown says more are coming. On Monday, Varo said it intended to pay out a dividend of 30-50 percent of its profit after tax and achieve over the medium term high single-digit growth in underlying earnings. The company wants to invest 30–50 percent of its free cashflow in organic and inorganic growth. The company had revenues of $13.4 billion in 2017, up from $10.5 billion in 2016. 

Varo, run as a standalone business from Vitol, has the trader as its sole crude supplier. Brown says the deal with Vitol was extended until 2022 and the trader is obliged to supply Varo at the lowest available price in the market while Varo will also fully hedge oil price, refining margins and foreign exchange risks. Brown says he sees a lot of scope for growth as several family-run storage businesses in Europe are considering selling out due to a lack of succession planning and the high costs of keeping assets in compliance with stringent regulations in Europe.  

Post-acquisitions, Varo has focused on upgrading refineries, developing biofuel terminals and optimizing value chains. 

A lot of us at Varo remember BP’s integration days under (former CEO) John Browne. We worked on integrating Castrol, Mobil Europe and Veba Oil. What we learnt is that you cannot build bridges. You need full integration,” said Brown.

Margins tend to move up and down from refiner to terminal. So having an integrated business model helps taking a lot of market volatility out of your results,” he added.

($1 = 0.8144 euros)

(Reporting by Dmitry Zhdannikov, Libby George; Editing by Pravin Char)

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