UK Oil Refining Industry

Julian Lewis Excerpts

Tuesday 26th April 2011 Westminster Hall

[Michael Connarty (Linlithgow and East Falkirk) (Lab)]

It is good to serve under your chairmanship again, Mrs Brooke.

May I start by thanking a number of people who have helped me over the 18 years that I have represented Scotland’s only refinery? Believe it or not, I worked there in 1967 and in the winter of ’68, when I was a student, and I have ended up as the Member of Parliament. My thanks go to the staff and the management. Although there have been a few differences of opinion, particularly over pensions, the one thing about Grangemouth is that the industry comes first, because it is a vital part of the lives of the people of central Scotland. It is also important to the Scottish economy and, of course, the UK Exchequer.

I thank Gordon Grant, the present site manager, and his colleagues, Colin Pritchard and Gary Haywood, who have been active, both in writing to the Select Committee on Energy and Climate Change during its inquiry and in speaking to me about their concerns about the future of the industry. I also thank Stephen Deans and Mark Lyon, who are the joint shop steward secretaries for the industry in the area, and the national organisation for refineries which represents both the management and the work force in the UK, and which works closely with the United Kingdom Petroleum Industry Association and other organisations.

If we look at the report produced by the Energy and Climate Change Committee in June 2009 about the oil and gas industry in general, we will see that the odd thing about the situation was that the industry faced

“a quadruple whammy of high costs, low prices, lack of affordable credit and a global recession.”

At that time, we did not know that it would also have to deal with a predatory Chancellor of the Exchequer, who would take £2 million per annum out of the upstream. When taxes and the structure of taxes are changed as quickly as that, it frightens investors, and the question in relation to UK refining at the moment is about investment—is there an investment future for UK refining?

My questions to the Minister require serious replies. Do the Government realise what the impact will be of the forthcoming proposals to change climate change levies, the European Union emissions trading scheme and the so-called carbon reduction commitment energy efficiency scheme? UKPIA has said that that is no longer based on climate change methodology, but that it is a tax, because the revenue will go not to the Department of Energy and Climate Change or to anything to do with climate change, which was the original decision on climate change levies, but to Her Majesty’s Treasury. It is a tax-raising power and will do no good in terms of climate change and energy reduction. It will just boost the Chancellor’s coffers.

It is as if the DECC document is living in a fantasy world when it says that

“the downstream oil sector has demonstrated its resilience to various supply disruptions”,

although it goes on to say that

“there is always scope to improve”.

There has, however, been a blindness on the part of Government to the real purpose of high taxes on a very important manufacturing industry, and to the impact of those taxes on that industry’s ability to survive in the world. That is why this debate is about competitiveness. It is not about the environment and the other things that the Minister has to carry in his brief. It is about something that should be answered by the Department for Business, Innovation and Skills. It should be a BIS Minister present, but BIS refused to take this debate because it has shifted the issue. The debate was secured before the recess and with that Department in mind, but a BIS Minister said that he could not handle it, because the issue is not seen as part of its remit. It is tagged on to the work of the hard-working Minister of State, Department of Energy and Climate Change.

What has been happening recently in the refining industry is interesting. At one time, refining was the downstream part of a multinational commitment to exploration and production. British Petroleum was in the North sea and other parts of the world, and refining in Grangemouth in my constituency. Royal Dutch Shell was all over the world and refining in Stanlow, which is in the constituency of my hon. Friend the Member for Ellesmere Port and Neston (Andrew Miller), and French-owned Total was in Lindsey. They were all part of world exploration and production, but what is the situation now? INEOS has bought more than 26 of BP’s refining and olefin and derivative sites, including the refineries in Grangemouth and in Lavera in France. It is, essentially, a stand-alone commodity producer and it treats refining as another stand-alone commodity. Owing to heavy indebtedness in terms of purchase and the world downturn, INEOS has sold 50% of the refineries in Lavera and Grangemouth to PetroChina for £1 billion, thereby reducing its debt burden. That may or may not be a good thing, and I will talk about it specifically later.

My hon. Friend will talk more about this, but Shell in Stanlow has been 100% bought by Essar, whose declared intention is to bring in, from its own refinery in India, high-quality diesel for the European market basically to use the UK as a pipeline to sell its product in Europe. There is talk of some upgrading and I am sure that my hon. Friend will talk about that, but that is the strategy. I have been shown a clip from a website that was viewable before the deal was done. The company said that it was going to buy Stanlow, shut it and use the pipeline. That, thank goodness, has been fought off by both Shell and the work force, but that is the situation.

We were once the floating assembly shop for Europe for computers, televisions and white goods, because we had incentives from the European Union. Where have they all gone? Where has Chunghwa gone from Lanarkshire? Where has Motorola gone from Bathgate in my constituency? They have disappeared because we have become a transit route for selling into a large market in Europe. That is my worry.

Lindsey has been sold to the Klesch group, which is owned by a gentleman who makes his money by buying distressed debt from companies that are in trouble. I do not think that Total is in trouble; it just wanted to offload the refinery. We have no idea what its financial plan is, and that is the great problem that we face. Are the conditions there for the UK refinery industry to compete in Europe? When it is introduced, part 3 of the European emissions trading scheme will increase the cost in the UK by 10% against the EU. At the moment, because of climate change costs, the product of EU refineries is 15% more expensive than anywhere else in the world. We will then be disadvantaged by another 10% against Europe, which means that we will be 25% disadvantaged against the world in terms of our product. It is clear that Europe has been targeted, as has Australia, because there is a high price for refined product.

Another problem is that we do not have enough capacity. The UK refining industry, Grangemouth apart, is still geared towards the high petrol demand of the 1970s, when we should have been gearing up for high diesel demand, because high-quality diesel is what Europe is demanding. When Lord John Browne was in charge of BP, he showed me the new investment BP had made in high-quality diesel for Europe, and thank goodness it did that. Frankly, if the timing and the taxes were right, and if the burden were not going to put investors off, it is possible that, with the PetroChina deal, my refinery in Grangemouth—I am possessive of it, in the sense that I have always fought for it and that it is important in my constituency—could upgrade itself to supply all the demand for high-quality diesel in Europe and all the aerofuel required at the moment in the UK. That would be the by-product of decoking the heavy oil that is being taken out of the ground in Africa by PetroChina. There is serious talk about that. However, there can be that investment only if the taxation structure and the incentives are correct. There have been no incentives to help the industry; instead, tax burdens have been put on it.

I ask the Minister to think seriously about trying to convince the Chancellor—who, by the way, should get out more—about that. A man who has spent all his time in Conservative party central office does not know what the real world is like. As my father would say, he has never done a day’s work in the industry. We cannot save manufacturing by burdening it with taxes that mean it cannot carry the load and attract investors.

I want to make the following argument on the emissions trading scheme to this Minister, who is supposed to be responsible for the environment. We could have a situation whereby the UK, which is carrying the burden of such a scheme, does not invest. However, let us consider what happens in relation to other companies, for example, Essar. What kind of conditions does the Minister think exist in its refinery in India? Does he think it is anywhere near as climate friendly as the refineries in our industry, considering the burdens that are put on it? No, it is not. What will happen is that we will ship abroad to more polluting, heavier and probably more dangerous environments with lower health and safety standards.

[Dr Julian Lewis (New Forest East) (Con)]

In cognation of what the hon. Gentleman is saying, can I point out that the Fawley Exxon refinery in my constituency accidentally under-reported its CO₂ emissions by one third of 1%? In accordance with the emissions trading scheme, as soon as it discovered what had happened, it reported it to the Environment Agency whereupon it was fined €1 million, which is more than some of the firms at fault in the Buncefield disaster are being fined. When a firm behaves responsibly and is punished for doing so under schemes that do not apply to other refinery companies in other countries, that does not constitute a level playing field.

--- Later in debate ---

[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.

[Dr Julian Lewis]

To illustrate that point further, may I point out that the Esso refinery at Fawley, in my constituency, has something called the combined heat and power unit that enables it to generate not only the electricity to run the plant, but steam, which is also of great value in the process? That has been exempt from taxation in previous regimes, but under a new proposal, that exemption will go. Once again we have a situation in which an uneven playing field is being made even more uneven.

[Stephen Metcalfe]

My hon. Friend makes an excellent point. That is why we must do everything we can to make the impact of legislation as proportionate as possible. As I have said a number of times on the Floor of the House when referring to business in general, we must not gold-plate regulation. We have to get regulation right and consider the impact that it will have on industries across the whole economy. My hon. Friend highlights a particular piece of regulation that will have a dramatic effect on a vital industry in the UK. It is crucial that we create a level playing field, and that should be not just in the EU—that would help, because our gold-plating is sometimes a disadvantage to ourselves—but, if at all possible, throughout the rest of the world, which I understand is a bigger challenge. We have to balance the cost of regulation against the impact that it will have on our own UK capabilities. The EU legislation that is being brought forward will have a significant impact on costs to an industry that is not making any money.