UK Oil Refining Industry

Michael Connarty 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 ---

[Michael Connarty]

That is a very important point for the Minister to take on board. He will have to argue—and I hope that he pledges to do so today—against the next wave of climate change costs, because they will just shift the burden. Those costs will not get rid of climate damage; they will shift the problem to other countries where climate damage is much greater. It is much more sensible for the UK to realise that it has to have a genuinely level playing field with Europe. We also need incentives for investment and sensible rewards for companies in this country that have a high standard of climate control and health and safety.

I recall when ICI decided to get rid of anthraquinone, which is a wonderful product. Anthraquinone was the green gunge in all UK fabric dyes. I am an honorary member of the anthraquinone club, for which someone gets a tie with a picture of the molecule on it. Anthraquinone was sent to India because it did not meet the health and safety and pollution standards in this country. However, it continues to be made in India. That is the problem. We think we are doing well by tackling our emissions but, in fact, we are just pushing them somewhere else.

I honestly have to say—and this is not because I am in any way a great supporter of the company concerned—that a considerable amount of money has been spent in UK refineries, particularly at Grangemouth, to reduce emissions. For example, it has invested massively in heat and power plants. It did not have to do that; it could have taken power off the grid. However, it has invested in a low-emission method of producing power and electricity. The company at Grangemouth is telling me that DECC’s new consultation contains no clear statement about exemptions, reductions or rewards for those vast investments. That is wrong.

That company has also asked who was at the table when there were talks about the impact of energy and climate change. BP was not at the table and, as far as I know, Shell was not at the table. It has asked other companies if they know who was at the table talking to the Minister. I presume an organisation that sets itself up to represent the industry was present, but where was the industry and where were the people who have to take these investment decisions day to day? They were missing; they were not at the table. How can someone make a decision in such a way about the future of a company that, in my area, employs 1,350? I should add that I am not just talking about my constituency. There are more people employed at Grangemouth who are from the constituency of my hon. Friend the Member for Falkirk (Eric Joyce). People from Redcar and Nantwich are also permanent employees of the Grangemouth refinery. It is important that the industry is treated correctly.

The regulatory impact of the new carbon floor provisions could add 50% in total to the climate change costs of the refinery in Grangemouth. That is not acceptable. That will not incentivise investment and get us into a position whereby we can supply Europe with high-quality diesel and supply the UK and even possibly Europe with aerofuel, which is what we should be doing. Will the Minister say what he intends to do about that? I know that everyone is in thrall to the Treasury and that, at the moment, it collects taxes rather doing anything else.

On the effect of the changes, the Heren forward electricity prices scale shows that, during summer 2012-13, there will be a £3 increase in electricity prices to £56.50, which is a 5% increase. For a high energy using industry such as the oil refinery industry, that is a massive burden that must be carried. The things produced are commodities. From one of the biggest refineries in India, Essar can ship in high-quality diesel. We are not going to get the money back. The elasticity of demand is very low. It is up to the Minister. Does he want an industry that is capable of competing in the world, not just in Europe?

In Europe, Lavera would be advantaged 10% over Grangemouth if the climate reduction levy and the EU emission trading scheme went through. We have to convince the Treasury that this is a vital part of our future. I do not know what other refineries are up for sale. There was a rumour that there were two others, but I do not know if that will turn out to be true. We do not know what the plan is for one of the biggest refineries that has just been sold. We must consider how to incentivise the industry and how to protect it from a predatory Chancellor who just wants taxation.

There is also a port at Grangemouth, which has briefed me in detail. It has pointed out that the new climate reduction scheme was supposed to target offices and large buildings that were not caught by the emissions trading scheme or the climate change levies. However, that is not the case. The new scheme will be a tax and will do nothing to incentivise people to reduce their energy use. Why should we let the Chancellor get away with it? We should take him on and argue that this industry and the future of manufacturing are vital. Oil refineries are at the centre of manufacturing, not just in my constituency and in Scotland, but throughout the UK. I hope that the Minister will respond to that. We will certainly back him up on it, as I think anyone from any party would. This is an industry that we must not sell out to anyone.

--- Later in debate ---

[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?

[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.

[The Minister of State, Department of Energy and Climate Change (Charles Hendry)]

It is a pleasure to serve under your chairmanship, Mr Scott. It has been a constructive and well-informed debate and there has been a considerable amount of agreement from hon. Members from all parts of the country and different political parties on the critical importance of the downstream oil industry, the role it plays in constituencies across the country, and the vibrant and important future we want it to have.

I congratulate the hon. Member for Linlithgow and East Falkirk (Michael Connarty) on securing the debate. He paid tribute to and thanked some of the people who have helped him, particularly on a local level. I add my thanks to UKPIA for the work it has done, and for its constant engagement with me, my officials, and hon. Members across the House. It makes us aware of the issues faced by the industry in a constructive and thoughtful way.

The hon. Gentleman spoke about the start of his career when he worked in the refinery. I had a similar experience at the other end of the chain because my first job was working as a petrol pump attendant on the outskirts of my constituency. Petrol cost 36p a gallon for five-star—we do not even have that any more. That shows the incredible change that has taken place, although I am not as old as I look. The hon. Gentleman raised a range of important issues, and other hon. Members have taken part constructively in the debate.

The hon. Gentleman asked why the matter has not been taken up by the Department for Business, Innovation and Skills. I see all issues that affect the industry as integral to the work of the Department of Energy and Climate Change. In all aspects of the energy supply chain—upstream through to downstream—it makes sense for a single Minister to have responsibility for what goes on, rather than saying, “I can’t go into that issue too much, because another Department deals with it.”

The other point on which I wish to reassure the hon. Gentleman and other hon. Members concerns the cross-departmental work carried out by the Treasury, BIS and DECC to look at the challenges of potential carbon leakage, and ensure that we fully understand the consequences of measures that are discussed either in this place or in Brussels, and the wider impact they may have on British industry. It would be unfortunate and irresponsible for measures to be implemented that resulted in the sort of changes outlined by the hon. Gentleman, where companies decide to stop working in the UK and go somewhere else, meaning that carbon emissions are greater and we lose jobs and income. That is why we are determined to focus on that issue in our cross-departmental work.

[Michael Connarty]

The Minister complemented UKPIA, and I echo that. How does he divide his focus, commitment and responsibility between the environment and competitiveness? The climate reduction commitment, which was designed by the previous Government after a great deal of discussion with industry, has been described by UKPIA:

“With revenues now going to Her Majesty’s Treasury, the scheme is now looking like a burdensome additional tax that does little to encourage energy efficiency beyond what prudent businesses do already.”

Surely the Minister should be arguing for the abandonment of that tax as called for by UKPIA. It has no effect on climate change.

[Charles Hendry]

The other side of that coin is found in other things that were expected to be charged on people’s bills. For example, the refinery industry was extremely concerned about the renewable heat incentive and its impact on bills, but the Government have now said that there will no longer be a direct charge on bills as the initiative will be funded out of general taxation. If we want such policies to continue and believe it is right for them to be funded out of general taxation, it is equally right for some of the funding to go directly to the Treasury to be divided up and spent on those different projects.

[Michael Connarty]

The Minister is coming dangerously close to saying that he rejects the argument I have set out and that he is not willing to argue with the Treasury that this measure should be scrapped if it does not affect climate change and energy use; he is taking the side of the Treasury against the industry.

[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.

[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.

[Michael Connarty]

The Minister knows that I hold him in high regard, but frankly there has been a lot of bluff and bluster so far and no effort to answer the questions the industry asked. I understand that DECC and BIS together are studying the impact of climate change energy policies, and I have been told that no one from the industry—the companies—has been at the table. Perhaps they are talking to some oil industry forum, but the complaint is that they are not talking to the people who will carry the burden

A long time ago in his speech, the Minister mentioned a level playing field. My hon. Friend the Member for Falkirk made a point about the difference in the carbon price in the UK compared with the EU. The impact of taxation on the industry is a burden, which is already showing in the price of electricity. When will the Minister deal with the main problem? He can write to me if he likes. The industry has been burdened with climate change taxes that are not justifiable and make it uncompetitive with the EU or the rest of the world.

[Charles Hendry]

I may have to write to the hon. Gentleman on some of those issues because he has almost squeezed out the opportunity for me to refer to them now. We continue to talk to industry—not only the refinery industry but all aspects of the energy sector. We see that as a fundamentally important part of our role, and we do it across other Government Departments as well. DOIF does critically important work, and we are looking at how to make it more constructive and how to do even more important work in that area. We are absolutely committed to building strong, close working relations with the industry in order to understand the challenges it faces and to ensure that we keep the UK as a competitive place where people wish to invest.

We are encouraged by the degree of investment that has come forward. We want more investment coming in and to work actively with the new players in the market. We will drive forward that determination, and will do so through consultation with the industry and working in partnership with it, because that is the best way to deliver the long-term stability and security that the hon. Member for Linlithgow and East Falkirk and everyone who spoke in the debate called for.