Energy and Climate Change CommitteeWritten evidence submitted by the UK Petroleum Industry Association

The UK Petroleum Industry Association (UKPIA) represents the oil refining and marketing interests of the nine main downstream oil companies in the UK that supply around 85% of the oil derived energy and products used in the UK. We welcome the opportunity to respond to the Committee’s inquiry on the major challenges facing the refining sector, which have potential significant implications for the UK’s future energy security of supply and resilience.

Summary Views

UKPIA’s views can be summarised as follows:

1.Oil products will continue to be an important part of the future fuel mix. The International Energy Agency forecasts that oil will be a major source of energy to 2030 and beyond, accounting for over 80% of EU transport fuels. The potential loss of UK refineries will increase our import dependency, as refined oil products will still be required and the exporting of UK refining emissions resulting from closures will likely increase overall global emissions as products are sourced from installations not subject to UK/EU environmental controls.

2.Energy security and diversity of supply should be part of overall policy, consistently applied. Meeting the UK’s future energy needs in a secure, diverse and sustainable way that also meets environmental and air quality objectives, is a huge challenge. It requires policy that is closely aligned and balanced across these key areas (see UKPIA’s paper “A Question of Balance”). UKPIA believes that energy and environmental policy should continue to be based on maintaining a reliable UK energy system meeting all three pillars of sustainability—economic, environmental and social.

3.Oil refining sector and its contribution to security of supply. UK refining plays a vital role in maintaining the country’s fuel supplies. but the UK’s level of imports for middle distillates such as diesel and jet fuel, is already at a high risk level and close to high risk for kerosene heating oil (based on the International Energy Agency’s “MOSES” methodology). Crude oil needs to be processed in a refinery, whether in the UK or overseas. Greater reliance on imported refined products is an option, but carries the risk of reduced supply resilience associated with a longer supply chain. Further UK refinery closures could increase this exposure.


4.UK refining faces challenging conditions and huge legislative compliance costs, but can be competitive given a level playing field. UK refining faces a serious threat to its survival as outlined in an independent report by IHS Purvin & Gertz published 10 May 2013, sponsored by UKPIA to inform the Department for Energy & Climate Change (DECC) review into the Refining Sector in the UK. The report indicated that although long-term net refining margins are projected to average around $2.5 per barrel of oil, this masks the huge potential cash impact of additional required capital and operating expenditure of £11.4 billion in the period 2013–30 just to meet UK and EU legislative measures. Most of this would generate no return and would unlikely to be recoverable from consumers. This is illustrated in the diagram below.


In addition, there are other legislative costs such as the Fuels Quality Directive, which are not yet fully defined and are thus uncosted, the impact of which were not included in the study. Furthermore, IHS Purvin & Gertz estimate that to keep pace with changing product demand trends, refineries would also need to invest some £1.5 to £2.3 billion over the same time frame, which is unlikely in view of these legislative compliance costs and low investment returns. However, given a legislative level playing field with other refineries across the EU and globally, the report observed that UK refineries would be considered internationally competitive.

The report concluded that: “… no industry would bear such a mandatory investment burden for no return and a consequence could be the closure of more UK refineries and greater import dependence for middle distillate products such as jet fuel and diesel.”

5.Time is not on our side—legislators at the UK and EU level have been slow to realise the value of refining and the threats to its survival. There is a growing realisation of the value of the refining industry. The industry is not asking for special treatment or protection but seeks a legislative level playing field. UKPIA and its members are working with DECC towards developing a policy framework for UK refining, informed by the comprehensive report from IHS Purvin & Gertz, which sets out the value of UK refining, the challenges it faces and the potential impacts on UK energy resilience. The European Commission facilitated a Refining Round Table in 2012 to examine the issues of refining sustainability and the impact of legislation. This led to the establishment of a permanent Refining Forum—whose major output was determined to be refining industry “Fitness Checks” designed originally to examine the cumulative impact of EU regulation on the sector and consider mitigating measures. Regrettably, at the first Refining Forum meeting on 12 April 2013 no Terms of Reference for the Fitness Checks were produced. A verbal update by DG Enterprise stated that the Fitness Checks would be retrospective. ie not examining legislation currently under discussion and not yet fully implemented or subject to further regulation (which precludes consideration of Fuels Quality Directive Article 7a and the Refinery BREF linked to the Industrial Emissions Directive). Furthermore, the DG Enterprise stated that the Fitness Checks would not be concluded until the end of 2014, by which time the crucial legislation currently under discussion will have been largely implemented. The industry has always assumed the Fitness Checks would include existing and planned legislation and called for a moratorium on any further legislative pressure until the outcome of the Fitness Check was known.

Responses to Questions Posed by the Committee

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

1.1 Refinery closures

The key factors are: weak refining margins and the huge investment demands associated with legislative compliance (as outlined above); flat or reducing demand for transport fuels, as a result of demand destruction in part linked to legislative measures to reduce GHG emissions from transport but also improved energy efficiency of vehicles; and competition from overseas refineries and supply sources, where the same legislation does not apply.

1.2 Increasing overseas production

Production overseas is increasing, for example in the Middle East and Asia, because of the proximity to rapidly growing markets, more attractive investment returns on large new complex refineries having flexibility to better meet current product demand split and a less challenging legislative background.

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

2.1 The key legislation impacting upon the sector includes:


EU Emissions Trading System Phase III.

Fuel Quality Directive Article 7a, plus product quality/vapour pressure specifications.

Industrial Emissions Directive (and associated Refinery BREF).


COMAH containment policy.

Carbon Floor Pricing.

CRC Energy Efficiency Scheme.

International regulation such as MARPOL Annex VI/IMO specifications for low sulphur shipping fuel and the IEA’s rules on Compulsory Oil Stocking obligations also impacts refining and downstream oil.

2.2 IHS Purvin & Gertz estimate the required refinery capital and operating expenditure in the period 2013–30 to be £11.4 billion just to meet UK and EU legislative measures alone. This figure excludes the legislative cost impacts arising from legislation such as the Fuels Quality Directive and Energy Efficiency Directive, which are not yet fully defined and are thus uncosted.

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 The International Energy Agency forecasts that oil will be a major source of energy to 2030 and beyond, accounting for over 80% of EU transport fuel. The projections for UK demand are similar, IHS Purvin & Gertz forecasting that oil product demand will increase from 74.3 million tonnes in 2010 to 75.2 million tonnes in 2030.

3.2 Within the transport sector, however, a combination of fiscal and energy efficiency factors has encouraged a shift towards diesel powered vehicles as a result of which petrol demand has declined from a market share of 73 % in 1990 to around 41% in 2012 (18 billion litres) with diesel now accounting for 59% (26 billion litres). Aviation kerosene demand has been falling during the recession, UK demand amounting to 11 million tonnes in 2012. (Source: DECC, DUKES data.)

3.3 The main fuels required in the future will be petrol, diesel, gas oil and kerosene (mainly for aviation). In addition, other products from refining—LPG, bitumen, lubricants, solvents, petroleum coke and feedstocks for the petrochemical industry—will continue to be important. Future road fuel demand is forecast to remain flat, but diesel demand is likely to continue growing slightly, while petrol will continue to decline but more slowly than in recent years. Demand for aviation fuel is closely linked to future recovery in GDP. (Source: IHS Purvin & Gertz.)

3.4 There is a mismatch between refinery output and demand. UK refineries, in common with those across the EU, produce an excess of petrol and not enough middle distillates like diesel and jet fuel. The shortfall is met by imports. In addition, fuel specification changes such as the MARPOL marine fuel sulphur reduction will increase the demand for middle distillates.

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 The IEA model for Short Term Energy Security (MOSES), comparing oil imports to demand, considers 46% import dependence as high risk. The UK is already at a level of 56% imports of jet kerosene and 48% for diesel.

4.2 Under a future UK refinery closure scenario, this import dependence would increase to 78% and 77% respectively for these products by 2030, which would have serious implications for supply robustness of these products.

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

5.1 Legislators cannot directly influence commercial conditions affecting the refining sector, which in a global market are influenced by a complex number of factors. However, legislative impacts highlighted in 2 above will have a serious impact upon profitability and disadvantage UK refineries against overseas competitors.

5.2 IHS Purvin & Gertz forecast that future UK refining margins are projected to average around $2.5 per barrel of oil. However, over the period 2013 to 2030, the total cost of such legislative items adds up to around $1.85 per barrel, of which only an estimated small proportion might be passed on to the consumer, because of international competition. These legislative requirements would entail capital expenditure of £5.5 billion over the period to 2030, much of which would generate no return on investment.

5.3 This scenario seriously impacts the viability of the refining industry and furthermore, makes it highly unlikely that the estimated £1.5 to £2.3 billion capital expenditure that refineries need to meet changing demand trends would be made.

5.4 IHS Purvin & Gertz commented that “We believe that no industry would bear such an investment burden for no return. It would be highly likely that, when faced with such a large mandatory capital expenditure requirement that provides no return on investment, UK refiners could be forced to close more UK refineries.”

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 The impact of further refinery closures on supply security is highlighted in the response to question 4 above.

6.2 The impact upon UK environmental objectives is difficult to measure. Clearly any emissions generated by the closure of a UK refinery would reduce the UK’s domestic emissions. However, demand for the products previously produced would be met by imports from overseas thus increasing overall global emissions, particularly for CO2.

6.3 We have no comment on question 6(c) regarding petroleum product prices as it is outside UKPIA’s remit.

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 Under a number of scenarios IHS Purvin & Gertz conclusions are as follows.

7.2 Under both the steady state scenario (the number of refineries and capacity remains at 2012 level) and the modest investment scenario (investment to upgrade some secondary upgrading processes), the current imbalances in the UK supply demand balance become worse. Under both these scenarios the UK would be in a worse supply position than in 2011 before the closure of Coryton refinery. Exposure to the international refined product markets would remain, with significant imports of diesel and jet fuel required to balance demand (see also response under Question 4).

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

8.1 As stated previously, UKPIA’s firm view is that a strong and healthy indigenous refining sector ensures the nation’s “base load” of transport fuels, chemical feedstocks and other vital products is maintained. This requires a better balance between energy and environmental policies, both in the UK and at the EU level.

8.2 The UK Government should examine the impacts of UK legislation, particularly Carbon Floor Price, CRC Energy Efficiency Scheme and COMAH containment policy as applied to the storage of fuel products.

8.3 Ideally, these issues should be contained in a policy framework for the sector which we hope will be developed by DECC, informed by the findings of the report from IHS Purvin & Gertz.

8.4 However, the most vital and pressing need is for the UK Government to make urgent representations to the European Commission in regard to the “Fitness Check” process outlined in point 5 in our Summary Views above. The Fitness Checks must include consideration of Fuels Quality Directive Article 7a and the Refinery BREF linked to the Industrial Emissions Directive, and be concluded before the end of 2013 NOT 2014, by which time the crucial legislation under discussion will have been largely implemented.

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

9.1 In any mature industry sector like refining there will be changing ownership due to the strategy and policy objectives of individual companies. Given the global nature of the industry there will be competing investment projects, not just in the downstream sector, but also in upstream exploration.

9.2 In the UK, there has been a change in refinery ownership in recent years with some multi-national integrated oil companies exiting refining, to be replaced by non-integrated companies (ie those without involvement in the supply chain from upstream oil exploration through to marketing) with a focus on refining.

9.3 Changing ownership can be a positive factor since it brings in new entrants that may have a different strategy, outlook and investment perspective.

Background Context

UK operating refinery capacity is ~1.5 million barrels of crude oil per day (the fouth largest in the EU). Oil currently accounts for around one-third of all the UK’s energy needs and UKPIA’s members supply around 85% of transport fuels used in the UK. (Source: DECC DUKES.)

Two UK refineries have closed between 2009 and 2012, a further two have changed ownership and one refinery remains for sale.

The main markets for products from refining in the UK are:

Retail (forecourt service stations): ~ 28.5 million tonnes per year of petrol and diesel.

Aviation: ~11 million tonnes per year jet kerosene.

Commercial: ~16.7 million tonnes per year (commercial vehicles, heating fuels and marine).

Speciality (bitumen, lubricants, LPG, solvents and petroleum coke etc): ~5 million tonnes per year.

Petrochemicals: ~2 million tonnes per year (Source: DECC DUKES).

UKPIA members also:

Invested £3 billion in fixed assets over the last five years, much of it to meet tighter fuel and environmental standards and to enhance process safety;

Operate 36 distribution terminals and 1,500 miles of pipeline;

Own around 1,600 out of the 8,700 filling stations in the UK (Source: Energy Institute/Catalist); and

8,500 jobs in refining support 54,000 jobs in the extended supply chain industries; expenditure by these employees supports a further 25,500 jobs in the wider economy, making an overall total of 88,000 jobs (Source: IHS Purvin & Gertz).

The monetary input of refining to the UK economy in a normal year is estimated at £2.3 billion (Source: IHS Purvin & Gertz 2013) and each large refinery is estimated to inject ~£60 million+ into the local economy where it is located (UKPIA publication” Fuelling the UK’s Future”).

The downstream oil sector collected ~£36 billion in duty and VAT on fuels in the last financial year. (Source: DECC DUKES.)

We thank you for the opportunity to contribute to this important debate and would be pleased to elaborate on our views should the Committee so wish.

May 2013

Prepared 25th July 2013