Energy and Climate Change CommitteeWritten evidence submitted by the Department of Energy and Climate Change


1. DECC welcomes the opportunity to provide evidence to the Select Committee’s inquiry announced on 18 April 2013.

2. DECC is leading cross-Government review of the role of the UK refining and fuel import sectors in the supply of refined oil products into the UK market. The review will consider the UK’s need for petroleum products over the next decades as we transition to a low carbon economy in 2050. In meeting this demand, it will assess the contribution of the refining and import sectors to the resilience of UK downstream oil supply, to our economy, environment and wider society, and the growth capacity of the import sector.

3. A key focus for the review will be the impacts of the existing and, particularly, the proposed regulatory and policy framework on the refining sector. It will also consider the balance of regulatory obligations between refiners and importers, and the risk of undermining policy goals (eg in environmental protection) by importing from less regulated countries.

4. The review will identify any appropriate actions to incentivise investment and improve competitiveness to ensure UK supply resilience.

5. The Government is committed to ensuring that the UK has a downstream oil supply chain that provides security of supply, is resilient to short term disruptions, and supports jobs and economic development. Building a clear and robust evidence base is critical, and will enable us to address the challenging questions posed by this review. As such it would be very helpful if the Committee published evidence early and shared final (or at least interim) findings with DECC in time for these to be factored into the review, which will publish conclusions towards the end of this year.

6. The review will be informed by a DECC Call for Evidence to be published during May, a series of focus groups, and input from a wide range of stakeholders who have both a direct and indirect interest in the downstream oil sector.

7. DECC has worked in collaboration with the UK Petroleum Industry Association (UKPIA) to agree terms of reference for a study (undertaken by independent consultants PGI) to assess the role and future of the UK refining sector in the supply of petroleum products and its value to the UK economy. This study was published on 10 May 2013 (

8. As the Committee will be aware, the European Commission announced in 2012 the intention to undertake a Fitness Check for the petroleum refining sector. This will look at the implementation and interaction of those policies that are most important for the competitiveness of the sector. The Commission recently published the draft mandate for the Fitness Checks for consultation, and intend to complete the Fitness Checks by September 2014. This will involve a quantitative assessment of the impact of European regulation on the costs and expected revenues of the EU petroleum refining industry, and its capacity to invest, to innovate and to be competitive internationally as well as the environmental and social impact such as in the case of relocation of production facilities outside the EU that could increase emissions in third countries where industry would not be subject to comparable regulation and lead to a loss of employment in the EU.

9. The Commission will also undertake a qualitative assessment considering how coherently and consistently EU legislation work together and to look for excessive burdens, overlaps, gaps, inconsistencies and obsolete measures. Underpinning this work, the Commission has also established the EU Refining Forum. This is a permanent body for discussions of relevant proposals and initiatives with potentially significant impacts on the industry and on security of supply. DECC attends this forum which has representation from Member States, MEPs and stakeholders. DECC also intends to input the findings of the review into the Commission’s Fitness Check.

DECC Response to Committee Questions

What are the factors that have led to closures of UK refineries? Why is production increasing overseas?

10. The UK’s oil refineries compete in a difficult international and competitive market for both crude oil and refined product. High global oil prices have squeezed downstream margins and reduced the profitability of the sector, and global refining overcapacity adds further pressures. In addition, the UK’s refineries were built in the 1960’s and 70’s, and were configured to meet a high market demand for gasoline. Since then, demand has shifted towards middle distillates such as diesel, and although overall demand for refined products in the OECD is declining, this trend is continuing and the UK is ever more reliant on imports of diesel and aviation fuels and exports petrol. Put simply, UK refinery output is out of balance with market demand and profit margins are thin. Cheaper competition from the US, based on shale oil, is expected to exacerbate this situation.

11. These problems are shared across Europe and both European and UK refining capacity has sharply reduced. The UK has seen two recent closures, at the Coryton and Teeside refineries, as PetroPlus went into administration in late 2012.

12. There remains a risk of further refinery closures in the UK, as a combination of the above factors continues to put pressure on the sector. Global refining capacity is projected to increase by 7% between 2011 and 2017, with most of this coming from China and the Middle East. These refineries are able to compete very successfully in the global market due to a number of factors that includes less regulation, in particular environmental regulation; more government support and investment, modern infrastructure that matches current demand/supply mix, and more favourable tax/duty regimes that mean that exporting their products remains competitive, despite additional transportation costs.

What impact (if any) has UK and EU regulation had on the UK refining industry?

13. The sector is heavily regulated notably for environmental protection and safety reasons, which has significantly increased costs compared with some global competitors.

What part will refined oil products play in the UK’s energy requirements and transport in particular to 2030 and beyond? What mix of products is likely to be required and how well does this match with current UK refining capacity?

14. Oil is likely to continue to play an important role in meeting our transport needs well into the 2030s. Overall demand for oil is expected to remain relatively constant in the short term, but low carbon futures estimate at least 65% of our transport fleet will need to be electrified by 2050 to meet carbon targets. Our exact levels of oil use in the future will be dependent on innovations in the transport sector. Diesel consumption in volume terms is expected to plateau from 2020 onwards owing much to more fuel efficient vehicles whilst demand for jet fuel is likely to continue to steadily increase.

15. Scope for consumer preferences to change and manifest in the fleet mix is likely to be gradual. Thus, the preference for increasing consumption of diesel over petrol is expected to continue at least in the short to medium term, exacerbating the mismatch of UK supply and demand of refined product. Given current market conditions and trends the UK is likely to grow increasingly short of domestically refined middle distillates such as diesel and jet fuel.

What is considered to be the right balance between oil products refined locally and imports and what are the current and future scenarios?

16. This question is at the heart of the DECC review, as our refining capacity has declined and imports have increased in recent years. It will be considered from the point of view of supply resilience, and contribution to economic, social and environmental goals.

What are the factors, both domestic and international, that will determine the future viability of the UK refining industry?

17. Key factors include legislative costs, crude oil costs, operating margins, access to capital, and relative production costs and profitability compared to competitors.

What impact would the closure of UK refineries have on (a) energy supply security (b)environmental objectives and (c) the price of petroleum products in the UK?

18. The DECC review of the role of UK refining and import sectors in the supply of refined oil products into the UK market will consider this question.

What would be an appropriate baseline level of refining capacity in order for the UK to remain broadly self-reliant in an emergency?

19. The DECC review of the role of the UK refining and import sectors in the supply of refined oil products into the UK market will consider this question.

What steps could the UK Government take to maintain an appropriate baseline level of refining capacity?

20. The DECC review of the role of the UK refining and import sectors in the supply of refined oil products into the UK market will consider this question.

What is the significance and potential future impact of the changing ownership of UK refineries in recent years?

Most UK refineries have undergone a change of ownership over the last decade and one is currently for sale. Perhaps the most significant result of this change is that the downstream oil sector as a whole is much less vertically integrated. UK refined product is increasingly sold on a “merchant” basis, to distributors, suppliers and retailers who will move and sell it under a different brand. This fragmentation of the supply chain impacts on resilience as each link in the chain needs to operate soundly to ensure supplies to consumers. Additionally, some new market entrants may be more leveraged than the oil majors, and may not have the same robust balance sheets, access to capital, and other advantages to aid investment and withstand low margins.

The sector has attracted new investment and there can be benefits too from changing ownership, in that costs are squeezed throughout the supply chain leading to lower prices for consumers. Supply fragmentation can add to resilience where there are multiple different routes to market and ways to circumvent problems.

May 2013

Prepared 25th July 2013