November 10, 2014 / 3:43 PM / 3 years ago

Wrong place, small size, ailing industry kill Welsh refinery

* Europe's refiners face stiff competition from Asia, U.S.

* Did not have political role of Scotland's Grangemouth

By Simon Falush

LONDON, Nov 10 (Reuters) - U.S. company Murphy Oil tried for more than four years to sell its Milford Haven refinery in Wales. The plant was finally doomed last week when a deal with entrepreneur Gary Klesch fell through because he could not secure financing.

Banks were not convinced Klesch's plans to buy Britain's smallest and least sophisticated plant were viable, sources familiar with the transaction said.

The 135,000 barrel-per-day plant has already been shut and will be dismantled in coming months, putting most of its 450 staff out of work.

"It was at a smaller scale than other UK refineries, in a relatively remote location, and with a product slate skewed to gasoline at a time when Northwest Europe is surplus gasoline," said Stephen George, chief economist at KBC Advanced Technology.

The frail state of the European refining industry also means that all but the strongest plants are vulnerable.

Competition is increasing from the Middle East and United States, and industry executives say around 1 million bpd of capacity needs to close in the next few years to bring the market into balance.

"There's not a lot of reason for hope (of improvement)," said Bryan Kelly, vice president for UK operations at Murphy Oil.

"Everybody thought 2009 was the worst year for refining until 2011. Then for 2013, cash margins were negative for the whole year."

Klesch declined to comment on the closure.

GRANGEMOUTH RESURRECTION

The resurrection of the Grangemouth refinery in Scotland the previous year helped foster a view that ailing British plants could be saved.

Scotland's only refinery, owned jointly by Ineos and PetroChina, received a 285 million euro ($357 million) loan guarantee from the British Treasury and a 9 million pound ($14.3 million) grant from the Scottish government.

The threat to Grangemouth came just months before a referendum on Scottish independence, and both governments were keen to be seen as protecting Scottish jobs and supporting a vital industry.

Grangemouth also has strategic importance because it powers the Kinneil terminal, which processes North Sea crude coming ashore via the Forties Pipeline System, a grade that helps set the Brent benchmark for global oil prices.

By comparison, Milford Haven's significance to British politics was much less.

Its closure creates a headache for the Conservative-led coalition government in the run-up to elections next May. The Welsh government pledged a loan guarantee of 100 million pounds to keep it afloat.

But Milford Haven is the smaller of two refineries in Wales and the smallest of the seven plants in the United Kingdom.

"Grangemouth has a crude cost advantage and is better located from a market perspective," said Colin Birch, a vice president at IHS Global.

(1 US dollar = 0.8004 euro)

1 US dollar = 0.6301 British pound Additional reporting by Claire Milhench and Ron Bousso; editing by Jane Baird

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