UK oil refining - Energy and Climate Change Contents

3  Security of supply

34. DECC notes in its call for evidence that, there is currently a high reliance on oil products in the UK.[70] It is anticipated that oil will be a major source of energy to 2030 and beyond, particularly to provide fuel for transport.[71] The Minister told us that he sees "oil playing a very big part in our transport fuel market right into the 2030s.'[72] DECC has recently published figures outlining domestic production and import figures of different fuels into the UK market. In 2012 they were as follows:

Table 1: Existing downstream oil industry infrastructure and its contribution

Source: DECC, Call for Evidence on the role of the UK refining and fuel import sectors in the supply of refined oil products into the UK market, 20 May 2013, page 10

Table 1 shows that the majority of petroleum products used in the UK are still produced in the UK. The table does not seem to concur with other evidence we have heard about the product mix produced in the UK. It would be helpful if DECC could provide further explanation of the figures in Table 1, including their source. Domestic production since the middle of the last decade has decreased while imports have increased.[73]

35. Phillips 66 Limited argued that the high reliance on imports for some products presented a risk to the UK energy security:

      The International Energy Authority model for Short Term Energy Security (MOSES) and the guidance issued by the IEA [suggests] that import dependence greater than or equal to 45% of market demand is high risk to a country's energy security. The UK dependence on imports is currently at a level of 56% for jet kerosene, 48% for diesel and 44% for heating kerosene.[74]

Mr Gardner, Petronineos, was concerned about the implications of further refinery closures:

      "If refineries go and you have this longer supply chain and then you have resilience problems, you will have a third-party nation at some point potentially dictating what price they are going to give the UK fuel at. Now, at the moment, in the international market there is plenty of fuel around, the supply and demand balance, but for all the reasons we have talked about this morning, as refineries start to fall off the end that supply and demand balance will tighten.".[75]

36. Shell did not share these concerns:

      Recent refinery closures reflect the changing supply and demand balance, and do not indicate a concern for energy security. If there were further refinery closures in the UK this would affect the economics of those which remain as over capacity is reduced, making it less likely there would be multiple further closures.[76]

The DFA highlighted the role of importers in ensuring security of supply:

      Product importers have ensured short term resilience and long term UK energy robustness by supplying diesel and jet fuel according to demand. They have the logistical infrastructure and the ability to do so in an efficient, cost effective and resilient manner. Importers source refined products and components for blending through global, sophisticated and deep markets which allocate resources efficiently.[77]

It went on to say that disruptions in UK supply had been caused by domestic issues:

      The disruptions in the supply of liquid fuels that have affected the UK in the last 10 years have been overwhelmingly driven by domestic issues and would have become materially worse problems without the ability of importers to effectively respond in times of crisis.[78]

Oikos Storage Limited suggested that the, 'current global economics of oil product supply favours the use of storage terminals in the UK over refineries, and it is difficult to see that situation changing in the near future'.'[79] It also stressed the importance of having a diversity of options.[80]

37. Overall there was agreement between our witnesses that a mix of domestically refined and imported products was essential for security of supply in the UK.[81] Some witnesses were not convinced that short term energy security should be defined by figure for an ideal amount of domestic capacity and suggested the right mix of capacity would be best determined by the market[82]Mr Hunter, Shell, stated:

    The UK needs a healthy mix of refining and importing. That is what will provide resilience with respect to supply and jobs. Jobs come from both import infrastructure and companies as well as refiners, and the UK needs a healthy mix of both. One thing I would say is, I don't think there is any kind of magic number in terms of how many refineries one needs or how many import terminals one needs. I think the market needs to decide that, given the underlying declining demand for light oil products in a country like the UK. But both play an important role in resilience and jobs.[83]

Mr Owens, Greenenergy International, suggested that energy security was best served by understanding the integrated nature of the refining and importing industries:

    In terms of looking at supply security, we may be in an environment where it looks like there are two industries, but we are very integrated. The refinery industry in the UK is a big supplier to us. We are a big supplier to the refinery industry. We do a lot of common logistics and so on. It is really about a more integrated overview when one is looking towards the optimum structure for the industry's investments and its long term health. It is not one or the other; it is both.[84]

38. The Minister said his aim was to make sure supply was resilient:

    As well as getting the balance right between importers and refiners, what we really want to look at is the way in which the environmental regulation imposes costs on our refineries and how we can be sure in future that we have sufficient resilience. I don't think it is simply a matter of what is the right capacity. It is, is the capacity we have resilient enough.[85]

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Prepared 26 July 2013