Shell's refining business looks for strength in chemicals

By Ron Bousso and Dmitry Zhdannikov

LONDON, Sept 9 (Reuters) - Royal Dutch Shell (Xetra: R6C1.DE - news) is betting on chemicals, lubricants and retail fuel sales to help it boost the performance of its downstream division where oil refining will remain a drag on earnings in many regions for years to come.

Downstream, which combines oil refining, trading distribution and chemicals, generated income of $2.9 billion for Shell (LSE: RDSB.L - news) in the first half of 2014, compared to $10.4 billion in oil production or upstream.

John Abbott, the head of Shell's downstream business, said the company is targeting a return on average capital employed (ROACE) of 10-12 percent in downstream and cash flows from operations of over $10 billion a year compared to $3.4 billion in the first half of 2014.

"The areas where we see particular opportunity in growth are firstly in chemicals ... we see opportunities in ethylene crackers and other derivatives in certain parts of the world," Abbott said.

Ethylene crackers are used for the petrochemical industry.

"The other area where we see growth is in our lubricants and retail business."

China is a particularly attractive area for Shell, where it has over 1,000 retail sites through joint ventures.

Abbott said the ROACE in the oil products business was around 5 percent over the past 12 months, compared with a 15 percent return in chemicals business.

The "tough and competitive" global refining environment, due to weaker-than-expected demand in key markets in Asia and Latin America, are unlikely to change soon, Abbot told reporters.

Like many of its peers, Shell embarked on asset sales under pressure from shareholders to improve return on capital invested and pay out more in the form of dividend.

It has so far this year divested $3 billion worth of downstream assets, including the sale of refineries and retail businesses in Italy and Australia.

"There is no doubt that there are certain parts of our portfolio which are challenged, not least, we have quite a tough refining challenge at the moment in the industry because of European and Asian margins," Abbott said.

"This is a multi-year story, it is not something that gets fixed in a few quarters."

"If you have assets in Europe you have to decide: am I fixing it or am I divesting. There is not much in between," he added.

Shell is focusing its review on its four largest refineries - the 325,000 bpd Motiva Port Arthur refinery in Texas, a joint venture with Saudi Aramco, the 400,000 Pernis refinery in the Netherlands and the 195,000 bpd Godorf-Rhineland plants in neighbouring Germany and the 500,000 bpd Pulau Bukom refinery in Singapore.

Abbott said Motiva has improved performance recently thanks to processing all types of feedstock instead of focusing mainly on importing Saudi crude.

He said the Pernis and Godorf-Rhineland refineries were some of the most modern in Europe and should benefit from tighter marine fuel regulation which will boost demand for diesel: "We will survive in a tough environment."

He said the company was determined to fix the problems of the Bukom refinery, not to divest it, as it was important for the group's chemicals division and was also providing good opportunities as a trading hub. (Reporting by Ron Bousso and Dmitry Zhdannikov)