Refining lightens price drop gloom for Europe's oil companies

* 2014 European refining margins up 70 pct on year

* Companies face heavy drop in revenue with lower oil prices

* http://link.reuters.com/kak63w

By Ron Bousso and Libby George

LONDON, Dec (Shanghai: 600875.SS - news) 10 (Reuters) - The pain of the drop in crude prices for Europe's oil companies will be partly offset by a 70 percent jump in refining profits - an unexpected move that bucked the trend of the grim refining sector.

That will not be enough to stave off for much longer selling refining assets, but analysts said the exceptional gains will support major oil companies that are grappling with a more than 40 percent plunge in crude oil prices since June.

"Margins have been much higher than we expected," said Wood Mackenzie analyst Jonathan Leitch. "They are on the five-year average - and that average includes some pretty good years. We're talking about a $4-5 margin increases year on year."

Processing crude oil into as gasoline, diesel and jet fuel in recent years has weighed heavily on European oil companies, prompting painful refinery closures and restructures.

Cheaper crude has revitalised those profit margins, even as wider revenues have rapidly shrunk with oil prices that have dropped to around $65 a barrel.

According to oil brokerage Jefferies, Shell (LSE: RDSB.L - news) 's oil products adjusted net income in 2014 is set to rise by 56 percent to $4.18 billion. Profits from BP's 2014 downstream division are expected to rise by 23 percent to $4.73 billion. Total's full year 2014 downstream is expected to post a 35 percent rise from a year earlier at $2.38 billion.

WoodMackenzie's benchmark catalytic cracking margins are running at $3.10 for the fourth quarter, compared with negative $1.10 a barrel during the fourth quarter last year.

The decline in oil prices has also sharply lowered energy bills for European refineries, which typically use 5 to 10 percent of their crude just to power the plants, according to Barclays (LSE: BARC.L - news) analyst Lydia Rainforth.

"There is actually a sustainable improvement in the profitability because of the energy costs It will be felt in Q4 but then through 2015 too," Rainforth said.

The recent boost to refining profit came from unplanned refinery outages in Venezuela, strong demand from Latin America and a colder-than-usual autumn in the United States that increased demand for gasoline and gasoil in the Atlantic (Shanghai: 600558.SS - news) basin.

The gains in refining are set to partially offset heavy losses in the oil exploration and production segments which range from 12 percent for BP to 21.5 percent for Shell and 23 percent for Total, according to Jefferies.

"The strong margins that we're seeing at the moment will reduce pressure on closures," Leitch said.

But refineries are still living on borrowed time. In a note to clients sent earlier this month, KBC noted that "actual margins may be lower than those seen on paper."

Around 2 million barrels per day, or roughly 10 percent of Europe's refining capacity needs to be shut by 2018 in order to balance the market, analysts say.

"The good times that the refineries are having at the moment are borrowing from 2015," Leitch said. "Toward the back end of next year, margins will be a lot weaker, and we'll see a lot more pressure for closures." (Editing by William Hardy)