UK Oil Refining Industry

Andrew Miller Excerpts

Tuesday 26th April 2011 Westminster Hall

[Andrew Miller (Ellesmere Port and Neston) (Lab)]

I congratulate my hon. Friend the Member for Linlithgow and East Falkirk (Michael Connarty) on securing this important debate. I agree with him that we are in an unusual situation, which in some respects is highly positive. The UK Petroleum Industry Association, the industry’s trade association, is working closely with Unite, the union, in this vital area, and I congratulate the parties on bringing people together to discuss an industry that is hugely important to our country.

Some of the rumours about Essar described by my hon. Friend have, I am pleased to say, now been comfortably put to bed. I am comfortable that we will have a productive relationship with an interesting and developing company which has refining expertise in two other continents, as well as other manufacturing skills elsewhere. I have met people at the highest level of Essar, whom I look forward to introducing to the Minister. He will find them a breath of fresh air in some respects, compared with some of the manufacturing industries he has to deal with. I recognise that the area commands cross-party concern, and we should look at the refining industry carefully.

I agree with my hon. Friend the Member for Linlithgow and East Falkirk that the Department for Business, Innovation and Skills has ducked the debate. The refining industry is a key part of the manufacturing sector and—I will come on to this—fundamental research is also involved, coming under the responsibility of the Minister for Universities and Science.

I will turn specifically to Stanlow, to put on record what is happening. Essar will own and operate all the refinery assets. The crude used is shipped to the Tranmere terminal, in the constituency of my hon. Friend the Member for Wirral South (Alison McGovern), and transported to the refinery by a pipeline, which will also be owned and operated by Essar. The terminal will remain under the ownership of the Mersey Docks and Harbour Company—part of the holdings of the Peel Ports Group—and the intention is to transfer the lease from Shell to Essar.

A number of smaller business operations will be in the Essar perimeter, including the lubricants blending plant, the polymer-modified bitumen plant and the liquefied petroleum gas terminal, where LPG is loaded on to road tankers for delivery. Also in the Wirral South constituency is the Eastham refinery, which will remain operated by Eastham Refinery Ltd and owned by Shell and its partner, Nynas AB.

The chemicals industries on the plant site reinforce the argument that the debate ought to be about manufacturing. There are two processes, manufacturing higher olefins and alcohols from ethylene, which is derived from natural gas from the North sea and delivered by the Shell-owned and operated north-west ethylene pipeline, linking up with Mossmorran in Scotland. Some ethylene is subsequently transported by pipeline to Carrington, Manchester. That business, including the manufacturing units, will remain under Shell ownership but will be operated by Essar.

The point of putting all that on the record is to illustrate what a complex, interrelated series of businesses is involved, covering the key transportation of fuel to Manchester airport and our military air bases, as well as key parts of the supply chain to the major chemical manufacturing operations in the north-west of England, and integrating with other business operations, including those of the Peel Ports Group such as the Manchester Ship Canal. The network is complex, and it is hugely important that the Government understand how such an integrated network impacts severely on the country’s ability to run if things do wrong. The Buncefield disaster, which was mentioned earlier, could have had a profound impact on the supply of fuel to the UK. Fortunately, with some smart management in utilising pipeline networks and road transport, the industry responded and managed to keep the supply chain thriving.

Ten years ago, the fuel protests started, when fuel prices were £1 a gallon or so cheaper—it is extraordinary that there were protests then, when fuel was considerably cheaper. When that happened, the civil contingencies secretariat Cobra was put into operation because of the recognition of how this complex, integrated industry could have a profound impact on the well-being of the nation in every possible respect.

The distribution of products manufactured at the refinery utilises the ship canal and the pipeline, and goes down to the Kingsbury terminal near Birmingham. The main pipeline from Stanlow to Kingsbury will remain under the ownership of Shell, BP and Chevron but will be operated by the British Pipeline Agency, which is a joint venture between Shell and BP. I am not sure how BP comes into things, given how small a share of the business it has in the UK. The issues are enormously complex and interrelated.

Furthermore, at Stanlow is the fundamentally important Thornton research centre, which has a significant number of graduate scientists on site. It has been working on fuel and fuel efficiency for a whole range of vehicles for many years. Putting on my other hat, as Chair of the Select Committee on Science and Technology, I am the first to recognise that the nature of research in such a centre will change and move away from the physical testing on banks of engines to more computer-based modelling of what happens inside an internal combustion engine.

I am relaxed about the nature of the research changing, but I am anxious to ensure that Thornton, which in a sense will be isolated—still part of the Shell empire, but located on land inside the Essar perimeter—remains protected. I ask the Minister to seek assurances urgently from Shell that it will continue to invest in research and development. I ask him to raise the issue with his colleague, the Science Minister, because it is hugely important to research effort in the north-west.

Overall changes will emerge in detail in June or July, as it will take until then for all the final dots and commas to be inserted into the various contractual relationships, and we will see Essar people on the site driving the managerial effort. I hope that before then we can deal with some details to ensure that the existing work force are protected in terms and conditions of employment; that commitments have been given; that we work on agreements to introduce further apprenticeships on to the site—to which Essar is committed—and that those aspects of the site that are within the Essar perimeter but remain under Shell’s control are properly protected.

Turning to the broader issues raised by my hon. Friend the Member for Linlithgow and East Falkirk, I agree that the Chancellor needs to wake up to this hugely important challenge. If we do not get this right we will lose to other countries a hugely important manufacturing industry that directly and indirectly employs thousands of people.

I listened carefully to the comments of the hon. Member for South Basildon and East Thurrock (Stephen Metcalfe) about health and safety. Colleagues may be aware that I have been asked to serve on the independent review of the health and safety legislation, and I am collecting anecdotes about the myths and facts of health and safety. If colleagues have any real examples of abuse of health and safety regulations, I would welcome them. My experience of dealing with the Health and Safety Executive is of a highly professional team that operates on common standards across the UK, working closely with UKPIA, the operating companies and the trade unions.

As for inconsistencies with other countries, I agree that we ought to have a consistent approach within the EU, but I am sure the Minister would not want us to harmonise down to the lowest common denominator of health and safety standards elsewhere in the world. I recognise that my hon. Friend the Member for Linlithgow and East Falkirk was not saying that. However, we have to ensure that on balance, using fiscal levers and all other available tools, we make the UK an attractive place in which to continue to refine oil for the domestic market, particularly the hugely important area of aero-engines, which are increasingly key to parts of the British economy. An awful lot of fuel flows down the pipeline from Stanlow to Manchester airport every day of the week. The north-west economy is driven by important locations such as that. That does not mean that we duck our responsibility towards environmental issues. We should be working with the industry and research centres to drive forward pollution standards to the highest level. We should also be working on a multi-national basis to ensure that we pull other countries along with us.

An hour and half barely does justice to this huge issue. I know other colleagues wish to speak so I will terminate my remarks. I conclude by saying to the Minister that he has a huge challenge to face. It is a challenge for the coalition Government, and we have to get the balance right between pressures from the Treasury, the Department for Business, Innovation and Skills, the Department of Energy and Climate Change and so on. We have to ensure that we attract the next generation of apprentices and graduates into the industry. It is an industry with a genuine future, but only if we do our bit.

--- Later in debate ---

[Charles Hendry]

I am sorry the hon. Gentleman has chosen to introduce that tone. We had good discussions with the Treasury, based on discussions I had had with UKPIA about its concerns regarding what the renewable heat incentive would do to the industry’s costs and competitiveness. The Treasury listened to those concerns and decided that the RHI should be funded not by a charge on bills, as planned by the previous Government, but out of general taxation. That was an example of DECC, the Treasury and the industry working together co-operatively to deal with issues as they emerged. I am in no doubt that that is the right way for us to deal with these issues as we go forward.

My hon. Friend the Member for South Basildon and East Thurrock (Stephen Metcalfe) talked about skilled jobs, the nature of these employers and the attractiveness of the work they provide. He rightly reminded us of the importance of striking the right balance between the need to move towards a low-carbon economy and the need to protect industries with tremendous strategic, regional and local significance. I very much welcome his support.

My hon. Friend the Member for Carmarthen West and South Pembrokeshire (Simon Hart) talked about the role of the Health and Safety Executive. I am delighted that the hon. Member for Ellesmere Port and Neston (Andrew Miller) is one of the people who will look into the way in which the HSE works to make sure that the rules and regulations it puts in place and the way they are interpreted are appropriate. I hope that hon. Members will make not only the hon. Gentleman, but myself and ministerial colleagues in the Department for Work and Pensions, which looks after the HSE, aware of concerns should the HSE be seen to be overly heavy-handed. I will come to some of the points made by the hon. Member for Ellesmere Port and Neston, but I would be grateful to meet Essar through him and to have a chance to hear first hand some of its plans.

We have had a good debate, and I should say how pleased I am to see my hon. Friend the Member for Preseli Pembrokeshire (Stephen Crabb) in his place. Although he is bound and gagged and not allowed to speak in such debates, he is an effective and articulate advocate of the industry’s interests, and I was pleased to have the chance to go with him to talk to Murco some while ago so that I could hear first hand the issues that the industry faces.

There is no doubt that we understand the crucial role that petroleum products play in the daily lives of people in this country. DECC’s data show that the total consumption of petroleum products in the UK was about 80 million tonnes in 2009. Our projections for primary energy demand to 2025 show an important, continued role for oil in the energy mix. Indeed, annexe H of DECC’s updated emissions projections for 2010, which I am sure Members have studied, looks at the central price scenario and shows that oil was 36.3% of total primary energy demand in 2010 and is projected to be nearly 38%—a slight increase—by 2025.

As Members have said, the UK operates in an international market for petroleum products. Although imports and exports have fluctuated over the past decade, a significant proportion of the products consumed in the UK are imported, and a similar level of UK production is exported. Overall, the UK has been a net exporter of products almost every year since 1974, although with different balances between products.

As others have said, the UK market is mature. Levels of overall demand are projected to remain flat for the next 15 to 20 years. Equally, the market has been characterised by increased and sustained levels of competition. Perhaps the most visible trend over the past few years has been the entry of supermarkets into the fuel retailing market. The UK’s refining sector has evolved over time. Industry data show a gradual contraction in the number of refineries, from 19 in 1975 to the eight primary operational refineries we have today.

Consumers benefit from a well-developed distribution infrastructure, which comprises more than 50 primary fuel distribution terminals, 3,000 miles of product pipelines and about 8,700 service stations across the country. The sector is a major employer in the UK, with more than 16,000 people directly employed by the major oil companies alone. In addition, more than 150,000 people are employed in other roles, such as service station staff, contractors and road tanker drivers. As has been said, refinery jobs offer a considerable productivity premium over jobs in comparator industries, and work conducted for DECC by Deloitte LLP in 2010 suggests that that could account for as much as £270 million per annum.

Over recent years, however, the refining sector in the UK and internationally has faced considerable challenges. Since the 2008-09 global economic recession, there has been a significant downturn in European and US product demand, with a major impact on European refining margins. DECC data show a reduction in overall petroleum product consumption by consumers of 5% during 2007-09. That constitutes the largest single consumption contraction since 1985 and it appears to be driven largely by the economic slow-down. Industry projections suggest that regional refining margins are unlikely to recover significantly before 2015. In its 2010 medium-term oil market report, the International Energy Agency bears that analysis out.

Over the past 10 to 15 years, the UK’s demand for oil products has changed. That has been driven by the growth in the aviation sector, the increasing number of diesel vehicles and a reduction in the use of oil for power generation. DECC data show that petrol constituted about 30% of total UK petroleum product demand in 1990; by 2009, however, that had reduced to about 22%. Similarly, diesel and jet fuel combined accounted for about 22% of total petroleum product demand in 1990; by 2009, however, that had risen to nearly 44%. Compared with current UK demand, UK refineries produce a surplus of petrol and fuel oil and relatively little in terms of middle distillates, as they are configured to meet historically higher levels of petrol demand.

DECC has worked with the industry over the past few years to gain a better understanding of it and the challenges it faces. Work conducted in 2009 and 2010, much of it in conjunction with the downstream oil industry forum, focused on the sector’s resilience. A key contribution to DOIF’s work was made by a report produced by Wood Mackenzie, which looked particularly at the industry’s infrastructure. Together with work produced by UKPIA on the refining sector, that valuable work has allowed us to develop a clearer picture of the sector.

Wood Mackenzie concluded that the position of UK refineries is middle to low relative to their European competition, as the hon. Member for Ogmore (Huw Irranca-Davies), who speaks for the Opposition, said. That is due to structural factors, such as the fact that central European markets are landlocked and hence less open to imports and competition, and the fact that UK refineries process North sea crude feedstock, which is higher quality and therefore higher cost than is the case in much of Europe. Overall, the work identifies a long-term trend towards rationalisation in the UK refining industry, low levels of non-discretionary investment in the downstream oil infrastructure, static total UK oil demand, and supply and demand imbalances. Those are all factors.

Although that work has not focused in detail on regulation, it has noted certain policy areas that may enhance the likelihood of future investment in the sector as a whole. Those include legislation governing refinery emissions, the implementation of biofuels policies and legislation governing compulsory oil stocks, and all those issues have been brought up in the debate. A key finding of the work is the importance of encouraging a level playing field in the EU by avoiding disadvantaging the UK refining base relative to its competition.

In addition, work conducted last year for the Department assessed the UK sector’s capacity to withstand a range of supply constraints. The report considered seven scenarios involving supply interruptions for the UK. Those ranged from crude and refined product import disruptions through to a UK refinery outage and a fuel terminal-related incident. The report found that, in the short term, the UK downstream oil market should be resilient to a range of disruptions, although product prices were likely to increase to balance supply and demand. The work noted that the retention of a UK refining base enhances resilience by reducing dependence on refineries outside the UK, although it is likely in practice that the UK will increasingly rely on imports for diesel and jet fuel.

As many of those who have spoken have said, a number of operators have signalled their intention, are negotiating deals or have concluded deals to sell refining and related assets. As the hon. Member for Linlithgow and East Falkirk said, INEOS recently announced a joint venture agreement with PetroChina regarding the Grangemouth refinery and related assets. Shell has recently reached agreement on the sale of Stanlow refinery to Essar Energy, and, as I said, I would be keen to meet Essar’s representatives in due course. Chevron Texaco has announced an agreement for the sale of the Pembroke refinery and related downstream assets to Valero Energy Corporation, which is extremely good news for the local community, which is so dependent on the energy sector. Last year, Total announced that it was seeking buyers for the Lindsey refinery and, separately, for a number of related downstream assets. As Murco announced last year, it is seeking to sell the Milford Haven refinery and some related UK downstream assets.

We all recognise that these trends can be unsettling; they certainly indicate a significant shift in the ownership profile of the UK’s refining base away from household name, international oil companies. In many ways, that reflects what we see happening offshore as well, where much of the new work developing reserves in the North sea is being done by smaller, more specialist companies rather than the international oil companies. We should welcome how the market is adapting to the challenges. The trend has been under way for the past few years, and PetroPlus and INEOS have both purchased refining assets in the recent past.

We must be open to new investors. Different companies have different strategic priorities and target markets, and will find different synergies between UK assets and those they hold elsewhere. I am encouraged by the initial plans that have been shared with my Department already, and I look forward to learning more as the negotiations under way bear fruit. It is clear from the contributions to the debate this morning that, for those people who have been talking to the inward investors, it is about the ideas and plans. They want to build on the assets and to see the industry become critical to this country.

As we have seen, the sector is going through a particularly difficult period, both in the UK and internationally. It is an internationally structured sector and is subject to competitive forces. The market is international, and the UK will continue to rely on a mixture of indigenously refined and imported products. I absolutely believe that the retention of a refining sector in the UK enhances security of supply, as it balances product reliance between the market for crude oil and refined products. However, I do not believe that the precise balance between the two can be centrally defined. Operators and investors in the market are ultimately best placed to determine how best to meet evolving product demand.

Earlier this year, my officials launched additional work with consultants to examine in more detail the evolution of the UK’s downstream oil market over the next 20 years and, in particular, to evaluate more closely the relative levels of competitiveness between UK and competitor refineries, and the likely evolution of the international market for petroleum products and its implications for the UK. That takes us in the direction in which hon. Members want policy to evolve. The work will build on the conclusions of the earlier studies mentioned and will evaluate some of the longer-term security of supply implications in the models. Once complete and evaluated, I will be happy to share the work with the House and industry representatives.

I very much recognise the concerns the industry has raised about legislation and regulation. There are many relevant areas of policy, some of which are owned by DECC and others are owned elsewhere in Whitehall. Some areas are EU-led and some are the preserve of the UK Government. I want to pick up on those areas that have been referred to in the debate.

The hon. Member for Ogmore mentioned biofuels. Biofuels policy raises challenges and opportunities for companies in the sector. The Government are progressing implementation of legislation in this area in a balanced way. We have ambitious climate change and renewable energy targets to meet, but equally we recognise that there are still questions to answer on the best way to deploy biofuels across the different transport sectors. The consultation on proposals to implement the transport element of the renewable energy directive and the greenhouse gas savings requirements of the fuel quality directive was launched on 10 March 2011, and the consultation period will run until 2 June. Consultation documents are on the Department for Transport website and elsewhere.

We need to think about where biofuels will be best deployed across the transport sector. It may be best for the limited supplies of biofuels that can be sourced sustainably to be focused on the transport modes for which no other low carbon energy sources are viable, such as aviation and heavy goods vehicles. It is undoubtedly an area in which we have more work to do and more to learn.

We are also aware of the need to address questions regarding accounting for life-cycle greenhouse gas emissions from transport fuels under the fuel quality directive. The European Commission is assessing options for a methodology, but we have made it clear that, in our view, any approach should be based on robust and objective data and should treat all crude sources equally. The Department for Transport is conducting a consultation, and I hope that people will take part in the debate.

[Andrew Miller]

The Minister has covered a series of areas fundamental to the research and development of the industry, so will he now respond to the point I raised about Thornton research centre?

[Charles Hendry]

That is one point on which I will write to the hon. Gentleman, if that is all right. As he is aware, we need to discuss the matter directly with Shell and be aware of what its plans are, rather than speculate over what they might be. I hope he understands if I write to him and other hon. Members on the exact position of the centre.

Compulsory stock obligations were also mentioned. DECC is reviewing our future approach to meeting our international obligations on compulsory oil stocks. As has been said, EU member states have different approaches to implementing the obligations. The UK is one of the five member states that meet their obligations via an industry-based obligation, and I acknowledge the industry’s preference for some form of agency-based system as the desired way forward. Industry work on the costs and issues associated with different options is being assessed by DECC, and although we retain an open mind on the different policy options, we must ensure that our stock-holding obligations are met and that any public finance implications are understood. We will announce our conclusions in due course.

Concerns have been raised over the funding of other schemes—for example, there has been coverage of the EU emissions trading scheme. We recognise that the refining sector is one of a small number of sectors at serious risk of carbon leakage. As such, for the next phase of the ETS, the sector will still receive a level of freely allocated emissions allowances up to the level of a sector-specific benchmark, rather than having to buy increasing numbers of allowances by auction. We have worked closely with the industry to develop the allocation methodologies necessary to bring that approach into effect. We recognise the challenges it might pose for individual installations, but overall we believe that it is an acceptable approach to take across the EU.