Energy and Climate Change CommitteeWritten evidence submitted by Oikos Storage Limited

Executive Summary

The UK fuel distribution chain is an interconnected and interdependent market involving refineries, storage terminals and distribution channels. It is necessary to consider the UK fuel distribution market holistically to understand the factors involved and not take one element—oil refineries—in isolation.

Two factors have had a significant impact on the role of UK refineries:

Firstly, more modern and efficient overseas refineries provide a more cost-effective option for suppliers, and

Secondly, the rise of supermarkets and independent wholesalers has changed the market for refined oil products. These actors have emerged as a dominant force in recent years and as they are not tied to refineries are able to extract more value from importing, storing and distributing products through independent storage terminals. These factors have influenced the decisions by owners to convert refineries into terminals.

In this modern market, security of supply depends on a diverse mix of ownership and assets in the fuel distribution chain. This helps guard against concentrated ownership that, in turn, can weaken the UK’s resilience in times of national emergency or other unexpected shocks.

As the role of domestic refineries declines, storage terminals will also play a larger part in meeting environmental policy objectives and providing the competitive pressures that benefit consumers at the petrol pump.

A healthy UK market, in which refineries and storage terminals play their respective roles, requires a level playing field to ensure independent owners can operate successfully alongside large-scale wholesalers and supermarket chains.

About Oikos Storage Limited

Oikos Storage Limited (Oikos) is located 38 miles east of London on the north side of the Thames River estuary. It is the only independently owned bulk liquid storage terminal able to deliver products safely and securely into two of the United Kingdom’s key pipeline networks: Government Pipeline and Storage System (GPSS); and United Kingdom Oil Pipeline (UKOP), as well as the capability of delivering product by road tankers into the South East of England.

The site currently has a bulk storage capacity of 300,000 cubic metres (cbm) with individual tank capacities of between 500 cbm to 20,500 cbm and has recently refurbished its deep water jetty to be capable of receiving 50,000 DWT vessels from North West Europe, Middle East, the Baltic, and the Gulf Coast.

The facility is able to import, store, blend, and redeliver a range of petroleum products to meet UK demand, including various grades of gasoline, diesel and middle distillates, jet fuel, gas oil, and heavy fuel oil.

Oikos is recognised by the Department for Energy and Climate Change as part of the UK’s critical national infrastructure.

The facility has been extensively refitted and refurbished to ensure it is compliant with all post-Buncefield recommendations. The facility has a recently renewed Hazardous Substances Consent, bonded warehouse approval status from HMRC, and a Local Authority Pollution, Prevention and Control Permit.

Following the closure of all the refineries in the South East of England, Oikos (with other Thames-side terminals) meets the petroleum requirements of the South East—the largest market in North West Europe—through ship-borne imports.

Oikos has been operating on Canvey Island for over 70 years.

Petroleum Sector Overview

The Committee should not consider refineries in isolation from other parts of the UK road fuel distribution chain when reflecting on questions of security of supply and baseline levels of capacity.

The South East of England has the highest demand for concentrated road fuel products in North West Europe yet Coryton, the last remaining refinery in the area, closed in 2012 with no disruption to energy security because of the presence of modern storage terminals on the Thames.

Storage and distribution terminals play an intrinsic part in the market for petroleum products and should be factored in to the committee’s deliberations. With this in mind, Oikos has responded to the posted questions from a storage and distribution facility perspective.

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

1.1 A key driver that has led to the closure of UK oil refineries is the increasing market share of the supermarkets in the retail fuels sector that has ultimately led to an increase in market share by the independent fuel importers/wholesalers such as Greenergy and Harvest. Unlike the major oil companies who have typically owned and controlled the fuels logistics infrastructure from refinery to the pump, these new entrants are not beholden to refinery economics and are able to extract more value from importing cargoes from cheaper global alternatives, storing at independent storage terminals, then distributing the product by road tanker, for example, to the retail fuel forecourts.

1.2 It is typically more cost-effective for wholesalers to source refined petroleum products from the newer and more efficient overseas refineries than UK oil refineries that are no longer optimised for current product demand, especially diesel production.

1.3 Similarly, it is potentially advantageous for wholesalers to blend the components of diesel and gasoline locally in a storage terminal rather than buying it already blended from a refinery.

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

2.1 We understand that a key decision for owners of UK refineries is the large capital investment required to modernise dated facilities and to comply with current health, safety and environmental standards. This is in addition to the major capital investment required to produce more diesel from each crude barrel.

2.2 Whereas Oikos—as a storage terminal—was required to undertake significant investment to comply with extensive post-Buncefield measures, the same requirements are not currently imposed on refinery operations despite the similar, if not higher, risk profile. Therefore storage terminals have a higher regulatory burden than converted refineries.

2.3 Oikos was the first petroleum storage terminal in the UK to become compliant with the post-Buncefield requirements. It is expected that all the storage terminals in the UK will need to put in place measures to comply with these rigorous standards. Oikos currently operates at a higher health, safety and environmental standard than many, if not all, of the UK refineries and other bulk storage facilities as a result of its recent and significant capital investment program.

3. 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?

3.1 Refined oil products will continue to form a significant part of the UK’s energy requirements, with diesel and gasoline providing separate and distinct elements of the supply. There is a difference between the diesel (distillate) and gasoline supply requirements for the UK, which are increasingly being met from imports rather than current UK refining capacity.

3.2 Diesel. The level of diesel production in North West Europe is not sufficient to meet demand. Imports are sourced from Russia, the US Gulf, and the Arabian Gulf with Asia increasingly expected to also supply the market in the foreseeable future. These imports will be supplemented by the local addition of biodiesel to meet the renewable fuel obligations imposed by the UK Government on fuel suppliers as part of their commitment towards compliance with the EU Renewable Energy Directive. Oikos currently undertakes the blending of FAME (biodiesel) with mineral diesel to achieve the B5 diesel grade.

3.3 Gasoline. The level of gasoline production in North West Europe is sufficient to meet local demand with excess production available for exports. In the South East of England, UK importers can either purchase finished gasoline or blend gasoline locally on the Thames using imported components. Subject to the pricing of the components, it is potentially advantageous to blend gasoline from its components rather than buying it already blended from a refinery, thereby reducing costs and increasing diversity of supply.

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

4.1 Determining the right balance between domestic refinery capacity and imports is a strategic policy decision for the UK Government. In making that decision the Government should be aware 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.

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

5.1 The South East of England provides a good insight into the future viability of the UK refining industry. With the closure of all the refineries in this area, including the recent sale of the former Coryton Refinery for conversion into a storage terminal, it is evident that oil refining is no longer considered by the major oil companies, retail fuel operators, or wholesalers as critical to the industry for the reasons outlined above.

5.2 The presence of quality, safety focused sites such as Oikos that have the capability to receive, handle, and redeliver finished grade product in volumes and using the same distribution infrastructure (ie pipelines, road, barge, and rail) as refineries has further reduced the reliance on oil refining in the UK.

5.3 Given the expected market trend for refineries to be converted into terminals on change of ownership, a key focus should be ensuring the storage terminal industry remains competitive. This requires a level playing field to be maintained across all operators from a health, safety and environmental perspective. Additionally, to ensure security of supply and optimal pricing outcome for retail fuel supplies it is important that concentrated ownership of terminal assets does not lead to market distortion.

6. 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?

6.1 There is a fundamental shift taking place in how the UK meets its fuel demand needs. Increasingly storage terminals being fed by imports refined abroad are replacing UK-based refineries as the primary source of oil product by major oil companies and fuel wholesalers. An example of this is the exit by both BP and Shell of their ownership interests in UK refining over six years and two years ago, respectively, yet they both remain significant wholesalers and retailers by having access to imported product via bulk liquid storage terminals. Therefore security of supply, environmental policy and pricing are now less oil refinery issues and should include the oil storage terminal operators.

6.2 With the significant capital investment made in recent years, Oikos is now a strategic oil storage facility that operates at a health, safety and environmental standard higher than most, if not all the remaining UK refineries and bulk storage facilities.

6.3 There is also the prospect of storage terminals that have the potential to accommodate deep water vessels and larger tanks to act as another means of securing energy supply. As the only independent storage terminal in the UK that is connected to both the UKOP and GPSS pipelines, as well as having the ability to access road connections and redelivery to ships, Oikos is strategically positioned to play a key role in securing UK’s energy supply now and in the future.

6.4 It is important to have diversity of storage terminals and refineries supported by transport channels with a broad portfolio of owners to ensure UK petroleum security of supply in the long run. Independent terminals offer diversity and help minimise the UK’s dependence on a small group of large, vertically integrated owners or consortiums. With the closure of UK’s oil refineries, it is important that concentrated ownership of terminal assets on the Thames, for instance, does not lead to market distortion and ultimately less transparency on pricing that can affect the price consumers pay at the pump.

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

7.1 The recent closure of the Coryton Refinery in the South East illustrated that the UK’s baseline level of refining capacity is not solely affected by refinery closure, due to the capacity of storage terminals in the UK. In this example, the South East was able to maintain supplies through increased imports into the Thames-side storage facilities to meet the shortfall from the closure of the Coryton Refinery.

7.2 As an alternative to maintaining a baseline level of refining capacity, the UK may consider maintaining strategic reserves at storage terminal locations with national pipeline connections. For example, the Oikos facility is well placed to hold strategic reserves for the UK due to its connections to the UKOP and GPSS which connects the terminal to the key inland distribution hubs for road fuels as well as Stansted, Gatwick, and Heathrow airports and certain ministry of defence airfields for jet fuel.

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

8.1 The UKOP pipeline system is currently owned by four major oil companies with access largely limited to their use. To further maintain an appropriate level of access to oil products and competitive pricing across the UK, a step that could be taken by the Government is to seek a more open access environment on the UKOP. This will provide greater efficiencies across industry and will reduce the impact of further refinery closures in the UK.

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

9.1 Changing ownership has seen a growing trend of the new owners transforming refineries into storage terminals.

9.2 The closure and sale of Coryton to a consortium of Vopak, Greenergy and Shell has significant impact on the nature of competition of deep water ports in the Thames Estuary. Alongside Vopak’s existing Thurrock terminal this means that a single owner will have access to 80% of the distribution capacity for the South East of England.

9.3 Tesco owns a 35% share in Greenergy which also has the potential to become an unfairly dominant force both as a supplier to and owner of petrol station forecourts; with the danger of full vertical integration into the petrol supply chain.

9.4 Given the strategic significance of storage terminals, particularly the demanding South East of England petroleum market, the Thames Estuary needs independent refining and storage facilities to provide effective economic competition. This helps avoid an oligopolistic market forming which could have deleterious effects on end consumers.

May 2013

Prepared 25th July 2013