UK oil refining - Energy and Climate Change Contents

Conclusions and Recommendations

Pressures on the UK refining industry

1.  The global market is changing, with a rising demand for refined oil products, and an increasing supply from the Middle East and Asia. There is still a place for the UK industry, but it will need to be responsive to the implications of shifts in global, as well as domestic, supply and demand. DECC's review should consider the longer term trends in fuel demand in domestic and export markets. (Paragraph 10)

2.   There is a mismatch between UK refinery supply of petroleum products and demand. The shortfall has so far been made up by the import industry. The trend of rising demand for diesel is likely to continue in the short to medium term. If UK refiners are to meet that demand they will have to invest in additional diesel production capability. It would not be necessary for every refinery to have a hydrocracker. DECC's review should calculate what extra capacity is required and explore how the necessary investment could be financed. (Paragraph 16)

3.  DECC's review and identification of necessary actions should address how Government can facilitate optimisation of the industry and its infrastructure to better suit UK demand and ensure a secure mix of domestic and imported supply. DECC should also take into account the potential implications of any rebalancing action for ancillary industries. (Paragraph 17)

4.  DECC's review must address how the legislative burdens on the industry can be rationalised, and should quantify the extent to which the UK refining industry faces higher legislative and regulatory burdens than its European and global competitors. DECC should also examine whether the burden is evenly spread across the domestic refining and importing parts of the industry. (Paragraph 26)

5.  We support the Minister's appeal to the Commission to ensure that the scope of the EU Fitness Checks includes the cumulative impact of both existing and forthcoming EU legislation. The UK Government should press for the swiftest possible timetable for completion of the checks. (Paragraph 27)

6.  There is considerable investment in the refining industry, although much of it is primarily directed at compliance with legislative and regulatory requirements. DECC should identify appropriate actions to incentivise investment. As part of this it should look at access to finance to ensure that the industry can also invest so that it can supply the optimal balance of products to meet market demands. (Paragraph 31)

7.  If UK refineries are paying Duty for moving oil products around the UK, and Duty is suspended for importers bring products into UK, there is a clear disadvantage for UK refineries. We recommend that DECC examine the case for rebalancing duties between refiners and importers. The matter appears to be straightforward. Developing a wider package of reforms through its strategy should not delay the Department in acting on this issue straight away. (Paragraph 33)

Security of supply

8.  It would be helpful if DECC could provide further explanation of the figures in Table 1, including their source. (Paragraph 34)

9.  DECC should take an approach to this sector that reflects the integrated nature of domestic refiners and importers, as well associated ancillary industries. It might not be helpful to put an exact figure on the mix of domestic and imported products that is required to support energy security and resilience. However, giving some indication of the Government's long term intentions may give industry the confidence to make the infrastructure investments necessary to deliver a product mix to meet demand. (Paragraph 38)

10.  The UK needs to maintain the health of its refining industry. A mix of domestically refined products and imports is an important ingredient of energy security and the UK refining industry is a welcome provider of jobs and tax revenue for the economy. We agree with witnesses who called for Government to set a long term framework for the industry to help secure its future.[87] A clear Government message and policy can provide oil companies with the confidence and incentive to continue operating refineries in the UK, and to continue investing to maintain a viable UK refining industry in the future. Over time the fuel mix supplied by UK refineries adapt to respond to demand. This will require investment in infrastructure, on top of the significant investment the industry will be required to make to meet legislative and regulatory burdens. (Paragraph 39)

11.  As part of its review DECC should:

  Investigate whether the industry has sufficient access to finance to make strategic investments beyond legislative compliance requirements;

  Ensure regulations and taxes are not more onerous in the UK than elsewhere;

  Address elements of taxation and economic policy that impact UK refiners adversely compared with importers; and

  Continue urgent requests to the European Commission in regard to the scope and timing of EU Fitness Checks.(Paragraph 40)

12.  The scale of legislative and regulatory burdens on the industry may undermine long term sustainability. In some cases investment motivated by compliance with such burdens goes beyond doing the bare minimum and this may be beneficial. But while the regulation of the industry for environmental and health and safety reasons is clearly essential, Government has a responsibility to ensure that it is also rational, coordinated, and designed to minimise the cost implications for industry.(Paragraph 41)

13.  DECC's strategic objective should be to level the playing field between domestic refiners and importers, approaching these sectors as an integrated industry of two parts. It must also carefully consider the consequential impact of any structural changes on ancillary industries, which make a valuable contribution to the economy. We hope that this short report, and the evidence we are publishing alongside it, will be useful material for DECC in its review. We look forward to seeing the results of this review before the end of the year.(Paragraph 42)

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© Parliamentary copyright 2013
Prepared 26 July 2013