UK Oil Refining Industry

Debate between Eric Joyce and Stephen Metcalfe

Tuesday 26th April 2011 Westminster Hall

[Stephen Metcalfe (South Basildon and East Thurrock) (Con)]

I congratulate the hon. Member for Linlithgow and East Falkirk (Michael Connarty) on securing this important debate. My constituency has a long tradition of refining. Like my hon. Friend the Member for New Forest East (Dr Lewis), I am only too aware of the challenges that the industry is facing in a very uncertain world.

It is important to reiterate that refining companies are not oil companies. They may have been once but, in today’s world, the vast majority of refining companies sit between the oil companies and the resellers. In the UK, 75% of the companies—six of the eight—are margin businesses. They take a raw product—oil—refine it and turn it into fuel, and somewhere between the price of oil and the price of petrol, which are both set by the market, they hope that they can make a margin. At present, however, that is proving increasingly difficult.

Some 20 years ago there were many more refineries. In my constituency, there were two; we are now down to one. In the past 10 years, the number of refineries in the industry has dropped from 12 to eight. The margin—they are margin businesses—is now down to 2%, which I believe is the tightest in the history of refining. The situation is even tougher than it was in 2009, and that was deemed to be a particularly challenging year.

It is also important to understand that refineries offer different capabilities. The hon. Member for Linlithgow and East Falkirk mentioned that our refining capability is designed to produce petroleum, but the reality is that the major demand is for diesel. The individual refineries do not know what they will get out of the crude that they put in at the start, because different crudes yield different saleable products at the end of the process. There are therefore a number of challenges and, as I said, the margin is particularly tight and difficult.

As there have been a number of sales in the industry recently, one could argue that the market overall must be healthy. If people are investing in the UK and buying up refineries, they think either that the industry is healthy, or that it will be healthy in the future. It is important, however, to look at the actual sale price of those refineries. A good example is Stanlow, which was recently sold at approximately 10% of its replacement cost. While there is investment and some movement in the market, that does not represent the true value of the facilities that are being sold. While the headline figures that get bandied around are particularly high, it is important to remember that they will include the stock being held by refineries. As we know, given that oil is at a particularly high price, that stock could make up the majority of the price.

The recent sales are therefore not necessarily an indication that the market is healthy, but the situation gives rise to a number of questions. Is it important that the UK has its own refining capability? Do we value the energy security that our own capability provides, bearing in mind that it provides 33% of all fuel used in the UK and 90% of all petroleum products? Do we want to retain the engineering excellence that is developed through our refineries and the 150,000 jobs that are supported through the industry, either directly or indirectly?

[Eric Joyce (Falkirk) (Lab)]

My hon. Friend the Member for Linlithgow and East Falkirk (Michael Connarty) said that the industry supports many jobs in Falkirk. He talked about its relevance for the engineering sector, as local colleges, particularly in Falkirk, supply people who are trained specifically for the refinery at Grangemouth. Does the hon. Member for South Basildon and East Thurrock (Stephen Metcalfe) agree that the implications of getting the costs right are enormous for the local economies in all our constituencies?

[Stephen Metcalfe]

Yes, I do. It is important that the industry is supported because it supports the sort of jobs that we are trying to create in our economy and creates the impetus for colleges to produce highly-skilled individuals. It is therefore very important that we continue to support the industry.

If we answer yes to the questions that I posed, it falls on us to decide how best to support the industry. UKPIA, the trade association that represents the industry, has made a number of recommendations of which I am sure the Minister is aware. I do not propose to reiterate all of them, but I would like to make three broad points.

First, refining is a global business. We are competing with China, India, Russia and the middle east, all of which can export to the UK and the EU, but are not under the same stringent environmental conditions as the UK industry. While in principle it is right and proper that the industry does what it can to reduce its environmental impact and emissions, we must recognise that it is competing in a global market. If we do not support the industry here, we might just move the environmental impact offshore and into countries that do not have the same extent of regulation.