UK Milford Haven refinery sale fails; plant shuttered

(Updates with Prime Minister's comments, context)

By Simon Falush and Ron Bousso

LONDON, Nov 4 (Reuters) - A deal to rescue the UK's Milford Haven oil refinery has collapsed, forcing operator Murphy Oil to shut the plant with the loss of hundreds of jobs, the latest victim of a slump in the European refining industry.

Emphasising the political cost of jobs being axed in the run up to a UK general election next year, British Prime Minister David Cameron called the decision "very disappointing".

"We will continue to work with the company concerned and try to find employment opportunities for all those who work there," Cameron told lawmakers.

Sources said a significant majority of the 450 staff would lose their jobs.

Klesch Refining Ltd, run by billionaire investor Gary Klesch, had agreed to buy the idled plant in July, but the deal was contingent on a combination of government support and private financing from banks, a source familiar with the sales process said.

Murco Petroleum, a subsidiary of the U.S.-based Murphy Oil Corp, announced late on Tuesday that the sale of the 135,000 barrels per day refinery, Britain's smallest, and related terminal assets has been cancelled.

Brian Kelly, vice president for UK operations at Murphy Oil, said on Wednesday that the refinery is shut down and that the firm will start removing several units to clean the site and turn it into a storage terminal, which Murphy will put up for sale.

Murphy has been trying for more than two years to sell the plant, which had been singled out as a candidate for closure as its location on the far west of the British Isles places it far from large demand centres.

"Some conditions that both Murphy and Klesch agreed must be completed unfortunately were not satisfied," Kelly said.

Europe's ageing refining industry has been caught between declining demand and increased competition from state-of-the-art overseas operations and U.S. plants fed with cheap shale oil, forcing a wave of closures.

"With the excess refining capacity in the UK and EU, we are victims of forces larger than ourselves. Increased exports of refined product from the United States and Saudi Arabia and stagnant demand make it very hard for European refining," said Kelly.

More than 10 medium-sized refineries may need to shut by 2018 in order to balance the market, according to analysts.

Klesch, who bought a small refinery in Germany in 2010, surprised the industry by betting that his austere, tightly run Geneva-based group can turn around once loss-making plants.

Klesch declined to comment.

Milford Haven's closure follows that of the Coryton refinery in the east of England in 2012 after the collapse of its owner, Switzerland-based Petroplus.

A bitter industrial dispute between the Unite union and Ineos last year brought the Grangemouth refinery in Scotland to the brink of closure.

It was saved after the union accepted altered terms and the Scottish and UK governments provided financial support. (Additional reporting by Kylie MacLellan and Anupam Chatterjee; Editing by Jane Baird, Alan Crosby, Ken Wills and Michael Urquhart)