UK Oil Refining Industry

Stephen Metcalfe Excerpts

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.

[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.

[Simon Hart (Carmarthen West and South Pembrokeshire) (Con)]

Does my hon. Friend agree that another particular blight is that of health and safety, which perhaps applies at a different level in the UK from elsewhere? The problem is relevant to the Murco refinery in the constituency of my hon. Friend the Member for Preseli Pembrokeshire (Stephen Crabb) because it could be holding up the sale of that perfectly viable refinery.

[Stephen Metcalfe]

The health and safety issue is a real challenge. In this country we seem to ask who is to blame when something goes wrong, but other countries ask what went wrong. We have to get the balance right. We seem to want to create an environment that makes it almost impossible for businesses to function properly. No one is suggesting that we cut corners on safety, but we should at least try to have the same safety regulations across the whole of Europe so that we are not trying to compete with one hand tied behind our back. I understand that the Health and Safety Executive has been asked to cut costs, but I think that I am right in saying that rather than doing that, it has passed on additional costs to the people with whom it works. In this case, that is refineries, but the refinery industry is not making any money. It is a very tough environment out there, so my hon. Friend highlights an important point.

Secondly, the industry has strategic importance to the UK economy. Our economy relies heavily on oil. Maintaining our own refining capabilities is of great importance to securing our energy supply. It gives us the ability to adapt to our domestic needs, and to the demands of the motorist and the regulatory framework, without us being in the hands of people who are outside our control.

My third point relates to the importance of the industry to the UK economy as a business. Refining is a large manufacturing business. It takes a raw product and makes something. We have said that we want to rebalance our economy and that we want to move away from financial services and encourage manufacturing. This industry employs tens of thousands of people in skilled jobs. We need to do what we can to support those jobs. The skills generated through those jobs—this is the driver for engineering excellence—will not only help to rebalance our economy, but give us expertise that we can export around the world and improve capabilities elsewhere. We have made a commitment to focus on those areas.

I have a good example from my constituency: the Petroplus refinery down at Coryton. I would be delighted if the Minister were to visit—it is the nearest refinery to London—and if he were to do so, I am sure he would receive a warm welcome. He could then hear at first hand about not only the challenges but the good things going on at Coryton: the hundreds of people employed, its apprenticeship schemes and the graduate training programme.

The industry needs our support. I would like to think that the Government recognise that, that they want to do what is right and that they will be able to find a suitable way to balance the regulatory demands coming down the line so that they are not so onerous that they damage a struggling industry even further. We should do what we can to maintain a viable and vibrant refining industry in the UK that supports not only our economy, but the many thousands of people employed in it.