The European refinery sector has struggled in recent years amid weak demand and increasing competition. Indeed, between 2007 and 2013, European refiners have cut capacity by 8%. Significant overcapacity remains, and this makes more refinery shutdowns likely. Despite the gloomy outlook for the European refinery sector, oil major ExxonMobil (XOM -2.78%) is investing more than $1 billion in its refinery in Antwerp, Belgium. The big question is why the oil major is making a significant investment in a challenging industry environment.

Exxon's investment in Europe
ExxonMobil announced that its affiliate Esso Belgium, which is a division of ExxonMobil Petroleum & Chemical B.V.B.A., plans to install a new delayed coker unit at its refinery in Antwerp, Belgium. The new delayed coker unit will help convert heavy, high-sulfur residual oils into transportation fuel products that include marine gasoil and diesel fuel.

Exxon will make an investment of more than $1 billion in the refinery. The significant investment, however, comes at a time when the European refinery industry is struggling.

European refiners are in trouble
According to the French Union for Petroleum Industries, or UFIP, European refiners have cut 8% of their capacity between 2007 and 2013 due to weak demand, stricter environmental rules, and increasing competition.

Indeed, while weak demand has been a major concern for European refiners, the industry has also been hit hard by increasing competition, especially from the US. Independent refiners in the US have enjoyed cheaper feedstock thanks to the shale boom in the country. As a result, they have increased their exports to Europe. European refiners are also expected to face increasing competition from the Middle East. According to UFIP, Russian refiners are also likely to increase their exports to Europe.

All of these things mean a gloomy outlook for the European refinery sector. In 2013, French oil major Total SA (TTE 1.10%) saw its refining business lose more than 500 million euros. According to Total's Chairman and CEO, the company may have to cut capacity further in Europe.

Murphy Oil Corporation (MUR 0.02%) has been looking to sell its refinery in Wales for a while. According to a recent report, the company has agreed to sell the refinery to Gary Klesch, an oil entrepreneur.

Given the challenging industry environment, ExxonMobil's investment in an Antwerp refinery comes as a surprise.

The big question
Indeed, the big question is why ExxonMobil is pumping more than a billion dollars into Europe in the present environment. Exxon says that it is investing in its strategic Antwerp refinery for the long term and the investment addresses an industry shortfall in the capability to convert fuel oil to products such as diesel.

Indeed, while weak demand and increasing competition have hurt the European refinery sector, the sector is also struggling due to an incorrect product mix. European refineries were built primarily to produce gasoline. However, in recent years, gasoline demand has weakened. Bloomberg noted that Europe made more gasoline than it consumed in 2013.

Apart from weak demand in Europe, gasoline exports to the U.S. have also slowed. As a result, a gasoline glut has appeared in the region. While gasoline demand has weakened, diesel demand in Europe is increasing as more cars switch to diesel from gasoline. This has led to a diesel deficit. Bloomberg reported that in 2013 Europe imported 13% of its diesel, jet fuel, and gasoil.

The diesel deficit explains why ExxonMobil is investing a significant amount in its Antwerp refinery. Indeed, the oil major is taking a long-term view of the situation on the continent. Stephen Hart, Regional Director of ExxonMobil Refining & Supply Company, said that the investment will add to the company's product slate at its Antwerp refinery and deliver much-needed cleaner diesel to European customers. More importantly, the company might make more investments in Europe as it looks to strengthen strategic refineries on the continent in order to face the challenging industry environment.