UK Oil Refining Industry

Huw Irranca-Davies Excerpts

Tuesday 26th April 2011 Westminster Hall

[Huw Irranca-Davies (Ogmore) (Lab)]

It is a pleasure to serve under your chairmanship, Mrs Brooke, and I congratulate my hon. Friend the Member for Linlithgow and East Falkirk (Michael Connarty) on securing the debate, which gives us a timely opportunity to discuss an important downstream industry in the UK. My hon. Friend reminded us of his background representing his refinery constituency for a decade and a half and more, and his work there as a student. When I was teaching archery in the United States, he was getting his hands dirty at the forefront of British industry. He spoke with authority as an MP who understands the industry intimately, as did other hon. Members, including my hon. Friend the Member for Ellesmere Port and Neston (Andrew Miller).

As of summer 2010, the UK had the fourth largest refining capacity in western Europe. According to the UK Petroleum Industry Association, the UK’s eight major operational oil refineries supply about 33% of the energy used in the UK, and approximately 90% of the petroleum products sold in the country. As hon. Members said, all that is done as a result of a significant investment in 150,000-plus jobs. As has also been said, the industry itself has invested significantly. While creating those jobs, it has invested an average of £350 million a year over the past five years in reducing the environmental impacts of its products and operations, and we have heard constituency examples of how that has been made real. As the Minister’s colleagues in the Treasury will be aware, the industry also contributes to Treasury coffers about £30 billion a year in fuel duty and VAT.

Trying to maintain and build the competitiveness of the vital oil refining industry at the moment can be described, at best, as extremely challenging. UK refineries, in common with those in the rest of the EU, are under enormous pressure due to: a very difficult operational climate; fluctuating demand for oil products; increased competition from export refineries, particularly in Asia; structural imbalances in supply and demand; and a challenging and complex legislative background.

In 2007, a Wood Mackenzie report for the old Department of Trade and Industry said that relative to other EU refineries, for a range of reasons, UK refineries were mid to low performers on competitiveness. It remarked that the UK oil refining industry consequently failed to secure discretionary investment and was hampered by a shrinking pool of work force talent, which we know can be followed by a spiral of downward decline. At that time the UK ranked 17 out of 26 countries, which was behind many in central and eastern Europe, but ahead of France, Norway and Ireland. The report noted that countries such as Hungary, the Slovak Republic and Poland were

“highly competitive, partially as a result of large investments which were carried out, frequently with assistance from the European Bank for Reconstruction and Development, in order for each country to satisfy EU accession requirements.”—

in effect, they had a leg-up. The report said that the UK’s position reflected our specific national characteristics of high-cost crude and significant exports.

It is worth noting that the average net refining margins in the UK industry fell from the equivalent of $2.79 a barrel in 2008 to just $1.11 in 2009, which was the lowest recorded figure for 13 years. The effect of that was that the 2009 UK refinery output was the lowest recorded, but that is not a new trend—the key point is that it goes back decades to the 1970s. If clearer indications are needed of the challenges facing the industry today, we need look no further than decisions taken by major refining companies in recent years to withdraw from the UK. BP has sold its two refineries in the last four years, Petroplus has closed its Teesside refinery, and Shell, Chevron, Total and Murco have sought buyers.

Given those challenges, what can be done to improve the UK oil refining industry’s long-term competitiveness and secure the jobs that rely on it? I shall pose a series of questions to the Minister on the competitiveness of oil refining industry and future investment in the sector. I hope that he will answer them as fully as possible. If not, perhaps he will write to me and to other hon. Members who are taking part in the debate.

First, the UK oil refining industry recommended a single benchmarking system under phase 3 of the post-2012 EU emissions trading scheme for all 98 EU refineries, based on the complexity-weighted tonne. That system was supported by the European Commission and has now been adopted. However, even with a proportion of free allowances allocated under the benchmarking system, early estimates of the cost of purchased allowances to UK refineries are around €70 million a year at current prices. Given the nature of international competition and recognising that qualifying for free allowances under the EU ETS is paramount, the risk remains, as hon. Members have said, that the UK may be disadvantaged compared with refineries in non-EU countries that can export to the UK. Do the Government plan to support the industry’s ongoing eligibility for free allowances under the benchmarking system, and do they intend fully to address the risks of carbon leakage?

Secondly, on biofuels, the EU renewable energy directive requires, by 2020, 10% by energy renewable content in fuels, and the EU fuels quality directive requires 6% greenhouse gas emissions by 2020. The renewable transport fuel obligation in the UK sets a requirement of 5% biodiesel from April 2013. Stakeholder consultation is ongoing on how to transpose those directives into UK law while at the same time maintaining competitiveness in the downstream industry. Will the RED, FQD and RTFO targets be set so that all suppliers can comply on a stand-alone basis, recognising that they operate in different markets? Will a carry-over of energy and carbon certificates, trading and buy-out options be included to provide flexibility for refinery shutdowns and supply chain issues?

Does the Minister accept that the delay until the autumn in announcing the carbon and sustainability criteria, which are required for biofuels to meet the RED, will leave little time for suppliers to make arrangements for the new criteria to be implemented in December 2011? If so, what can he do to help the industry to prepare for that on a vastly condensed time scale?

Achieving the 2020 biofuel targets may require four grades of fuel on larger petrol station forecourts after 2015, with two high bioblends at least for petrol E10+ and diesel B10+. Smaller sites might be disadvantaged as they can accommodate only protection grades for older cars that are unable to take the higher grades E5 and B7. That disadvantage could risk the closure of rural and small sites, so does the Minister intend to take any action to help smaller and rural petrol station sites to adjust to the new biofuel regulations and to ensure the future of their businesses?

On the compulsory stocking obligation, the Government have been reviewing the arrangements under which the UK meets its EU and International Energy Authority obligations for compulsory stocks of oil products. The requirement currently stands at 67.5 days and will rise to 90 days post 2014. With the slow decline of UK oil production, there will come a point towards the end of the decade when the UK’s derogation will cease and we will be faced with an increased oil stock obligation. I understand that the downstream industry strongly favours a move to an independent and industry-funded oil stocking agency with the aim of providing greater transparency and certainty in the way we meet our obligations in future, as well as of improving resilience of the current supply infrastructure. With that in mind, will the Minister tell us whether he is considering any of those proposals and, if so, when they will be published?

I am aware that DECC’s downstream oil and industry forum task group recently undertook a number of reviews of the UK’s oil market, including on supply and demand balances, safety, planning and regulations, supply infrastructure, and the refining market. I understand that officials will shortly submit advice to Ministers on areas of public policy that could be addressed to ensure that we have resilience and security of supply. Will the Minister give an update on this matter with particular regard to the future competitiveness of the UK oil refining industry?

[Michael Connarty]

My hon. Friend referred to supplies to petrol stations in remote areas. Is he aware that there is deep concern that the infrastructure of terminals where stocks are held is being threatened? I am told that one reason why that happens is that if a UK refinery wants to ship to a UK destination, it is taxed on the volume in the tanker when it leaves the terminal, but anyone coming from abroad to the UK is taxed on what they offload. That can add £2 to £3 a tonne to the cost of shipping within the UK, so terminals do not do that. To secure terminals, surely the Government should allow those who ship out of refineries such as Grangemouth to a terminal in the north of Scotland to be taxed only on what is offloaded at the terminal in the north.

[Huw Irranca-Davies]

I was going to come on to that pertinent point, and I hope that the Minister will address it. If he does not have the details, because they require dialogue with Treasury colleagues, perhaps he will write to me and other hon. Members in the Chamber. The matter is important, and involves trying to achieve a level playing field so that the UK industry can compete effectively.

Does the Minister intend—his officials might be doing so already—to consider providing a long-term policy platform that will provide a level playing field for UK refineries to compete with both EU and non-EU competitors, while ensuring security of supply of petroleum and other products at competitive and affordable prices? Is there any consideration of a coherent policy platform for the industry?

The DOIF study outlined the growing imbalance between petrol and diesel demand and supply in the UK. The UK currently imports around 3.5 million tonnes of diesel and around 6 million tonnes of jet fuel, and those imports are forecast roughly to double by 2020, even if refining capacity remains the same. At the very least, new investment will be needed for import facilities or for desulphurisation of fuel as demand grows. Does the Department have any plans to address that growing imbalance, either by incentivising new investment in import facilities, or by improving the uptake of petrol? If so, when will the details be published?

[Mr Lee Scott in the Chair]

On training, the 2007 Wood Mackenzie report for the DTI stated that the UK oil refining industry was hampered by a shrinking pool of work force talent, and similar concerns have been raised in other parts of the energy industry. Will the Minister update us on the current state of play for the availability of a talented work force for the UK oil refining industry? Is he involved in active discussions with the industry about improving and developing skills that are suitable for a competitive UK oil refining industry in the long term? As has been noted, some of those points are highly applicable to BIS Ministers as part of our industrial strategy, but I am sure that the Minister will be more than able to answer questions on skills, training and work force talent.

One interesting aspect of North sea oil and gas concerns the upstream perspective on the competitiveness of the UK oil refining industry. More and more of the world’s remaining crude oils are likely to be heavier than those of today, which are finer and sweeter, and that change in the character of future crude oils will make them more complex to refine. As the Minister knows, the UK continental shelf tends to produce finer and sweeter crudes, although I know that heavier oils are found west of Shetland, and some heavy oils are, we hope, awaiting development in the North sea. Therefore, sustaining investment in the UK continental shelf to maximise the safe recovery of high-grade oil found around the British isles is helpful in providing feedstock for north-west Europe’s refineries, including those in the UK. Does the Minister believe that the Chancellor’s decision to impose an increased tax burden on UK oil and gas production could have unforeseen consequences—I hope they are unforeseen—for the industry and the future viability and competitiveness of UK refineries?

[Eric Joyce]

UKPIA, the union Unite and others have pointed out that the carbon price floor will lead to an additional cost across Europe of about £36 per tonne. In the UK, it will be more like £54 per tonne, which in Grangemouth alone could lead to an initial cost of £10 million. That has enormous implications for a unit of that size.

[Huw Irranca-Davies]

Indeed, and when the Minister responds, it would be helpful if he would consider the implications for the downstream industry, which is the subject of the debate, of the announcements in the recent Budget. A range of implications have been noted by the industry, including direct costs to it, and the potential effect on investment and jobs.

[Michael Connarty]

My hon. Friend will have heard me mention the shock rise in electricity prices of £3, which is equivalent to a 5% increase. ICIS Heren, which analyses the prices of gas and electricity, stated:

“The planned introduction of a carbon tax from 2013 in the UK remained the key driver with all contracts from Summer 2013…climbing at least £2.20/MWh.”

That is the effect of the carbon tax on forward purchasing, which people have to do to guarantee supplies of electricity to the UK refining industry. That is perhaps an unintended consequence, but it affects the cost base of our refining industry.

[Huw Irranca-Davies]

As far as I am aware, this is the Minister’s first opportunity—both personally and on behalf of the Department—to speak about the carbon price floor. In his response, perhaps he will tell us how well or otherwise that is linked to the EU scheme. If it is linked closely, some of the negative effects could be avoided, but if it is disjointed and there is a splitting of ways, there could be a significant impact. This is not only about costs, important as those are, but about carbon leakages. In effect, we export our carbon emissions. My hon. Friend makes his point well, and rather than us waiting for a response from the Treasury, I hope that the Minister will take the opportunity to address it. He is the right person to tell us what thought has been given to the competitiveness of UK industry, including the refining sector, compared with that of other EU nations and their industries.

I have outlined a series of questions for the Minister, but my comments could be summed up in two questions: first, does the Minister have any plans to formulate a coherent future policy framework for the UK oil refining industry that ensures long- term investment in, and the future competitiveness of, the industry; and, secondly, how would any such framework fit in with the UK’s overall energy policy objectives? I do not doubt that the UK oil refining sector can be competitive in the future. For decades, the downstream industry has enhanced the security of the nation’s energy supply through the consistent provision of a range of fuels and industrial feedstock at competitive prices, and it can continue to do that. However, the industry has many questions for the Government at this point in time, so I hope that the Minister has the answers.