Energy and Climate Change CommitteeSupplementary evidence written by Chris Hunt, UK Petroleum Industry Association

I am writing to follow up on questions asked at the oral evidence session on 11 June, on the following topics which we undertook to answer, together with observations on evidence given at that session. We will be writing separately about the Environment Agency’s submission, published after the first evidence session.

DECC’s Electric Vehicle Target 2050

The likely pathway to lower carbon passenger vehicles in the period to 2030 is fairly clear, with much of the reduction expected to come from a combination of improved vehicle efficiency (engines & drivetrains, weight reduction etc) and alternative fuels. Beyond 2030, likely pathways are difficult to predict since so much depends upon the speed of technical developments in battery technology for EVs, performance/cost of ownership of EVs, developments in low carbon power generation and policy direction.

The industry through its own research and review of published work from a wide variety of sources, endeavours to assess the likely future impact of developments in fuel and vehicle technologies. This year UKPIA jointly commissioned with the RAC Foundation an independent report from Ricardo-AEA Technology examining the likely passenger car fuel/technology developments (see summary below).

The study concluded that conventional petrol and diesel will dominate in this sector until at least 2030, with about 60% of passenger vehicles in 2030 likely to be powered, either in part or in full, by internal combustion engines. This excludes the HGV/LGV sector where substitution of fossil derived fuels is likely to be technically more difficult. IEA forecasts in World Energy Outlook 2012 point towards fossil fuels still meeting ~80% of transport needs in the EU in 2030.

“Powering Ahead: The future of low-carbon cars and fuels” (http://www.ukpia.com/files/pdf/poweringahead.pdf), published on 22 April by UKPIA and the RAC Foundation, examines how the challenge of achieving the UK’s legally binding commitment of an 80% reduction in greenhouse gas (GHG) emissions by 2050, relative to a baseline of 1990, is likely to affect the passenger cars and fuels we will use over the next 20 years.

The key conclusions of the publication are:

Conventional petrol and diesel passenger cars are expected to remain the dominant technology in the overall vehicle fleet until at least 2030.

Advances in fuel economy will be achieved by means of continuing improvements in existing engine technology and greater focus on vehicle efficiency through reduced weight and drag.

In the longer term, the likely mix of technologies is extremely difficult to predict: the speed with which plug-in hybrid electric vehicles (PHEVs) and pure hybrid electric vehicles (EVs, both battery and fuel cell) will achieve significant market share is highly dependent on technology development and their total cost of ownership in comparison to that of more conventional alternatives.

Government policies should be technology neutral.

Global Vehicle Fleet and Predicted Future Market Share of Fuels

At present, the global passenger vehicle fleet is about 1 billion. The International Energy Agency’s (IEA) World Energy Outlook 2012 estimates that the number will rise to almost 1.7 billion by 2035. The International Monetary Fund (IMF) has estimated that three billion cars will be on the world’s roads by 2050 (IMF, 2008). The report suggests that while the strongest growth in future car sales is likely to be outside Europe—BRIC countries are expected to account for 83% of future market growth—many consider it unlikely that markets such as China and India will see the strongest take-up of future low-carbon car technologies and fuels. Instead, the growth in these markets is expected to be primarily in low-cost conventional technologies.

Indeed, whilst the study suggests that, in the years to come, there will be a multitude of options for consumers to choose from and among—both in terms of fuels and powertrains—the most important finding is that conventionally powered petrol and diesel cars will remain with us for a long time yet.

In addition, emissions reductions, in the short to medium term, will come from vehicles improvement through, for example, engine downsizing with turbocharging.

Predicted Future Market Share of Fuels

The expected changes in terms of the fuels which are likely to be used in future vehicles are shown below. These figures show Ricardo-AEA’s assessment of the most likely scenario for meeting EU 2050 carbon reduction targets, based on known measures identified in the European Commission’s 2011 Transport White Paper.

PETROL AND DIESEL CARS WILL CONTINUE TO BE THE DOMINANT FORM OF POWERTRAIN UNTIL AT LEAST 2030

Source: Ricardo-AEA 2012. Assessment of the most likely scenario for meeting EU 2050 carbon reduction targets, based on known measures identified in the European Commission’s 2011 Transport White Paper and recent concerns about the availability and sustainability of biofuels.

The graphs shows that petrol and diesel vehicles are expected to remain the dominant technology in the overall vehicle fleet until at least 2030. In terms of total energy use by carrier, continuing improvements in internal-combustion engines (ICE) vehicle efficiency will result in a reduction of actual quantities of petrol and diesel used.

In Summary

In the near future, the expectation is that conventional petrol and diesel vehicles will continue to dominate the personal transport scene. According to the average market projections, about 60% of passenger vehicles in 2030 are likely to be powered, either in part or in full, by internal combustion engines. Even in the 2050 scenarios the report anticipates that a high percentage of cars will still feature an internal-combustion engine.

The World Energy Council has also published scenarios for the make-up of the overall vehicle fleet in 2050, on the basis of two alternative policy options: the “Freeway” and the “Tallway” scenarios. In the “Freeway” scenario pure free market forces are allowed to prevail and, in Western Europe, as much as 61% of the light duty vehicle fleet remains conventional petrol and diesel vehicles. In the alternative “Tollway” scenario—a more regulated world where governments decide to intervene in markets to promote technology solutions and infrastructure development that puts common interests at the forefront—this figure is estimated at 19%, but with a further 44% still featuring an ICE, albeit 22% being plug-in hybrids (World Energy Council, 2011).

Finally, the factors which appear to have the strongest influence over the predictions are, firstly, future government policy, and, secondly, the likely speed with which breakthroughs in technology—particularly with respect to batteries and fuel cells—will be achieved.

IMO MARPOL V1 Cost Pass Through

The independent report from IHS Purvin & Gertz (published 10 May 2013) commissioned by UKPIA and DECC to help inform DECC’s review of UK oil refining and downstream resilience, made the assumption that the cost of MARPOL VI would be passed through to consumers.

PGI’s estimate of the cost to UK refineries in the period 2013–30 was: capital cost £905.9 million and operational cost £1.7 billion, a total of over £2.6 billion (equivalent to $0.42 per barrel impact upon gross refining margin).

Given the large investments needed in an industry with a low return on average capital employed, PGI considered it unlikely that this level of investment would be supported by UK refiners. However, this would be a matter for individual UKPIA members to decide upon based upon commercial judgment.

In terms of compliance, it is possible that most vessels working globally might have on-board treatment technology installed as 0.5% sulphur fuel may not be available at every port. Smaller ships in defined operating areas may use gasoil. The solutions adopted by ship owners’ would be based upon commercial and operational factors.

Sources of Crude Oil and Balance between “Sweet” Crude and Heavier Blends

The Downstream Fuel Association in their written evidence (and repeated in oral evidence) stated that:

“…UK refineries are constrained in their crude intake to sweeter crudes which are more expensive and represent a modest percentage of globally extracted oils… and in times of constrained supply, UK refiners cannot tap into the marginal crude supplier for relief.”

This is a generalisation. Some UK refineries have been moving away from a diet of predominantly sweeter North Sea crudes in recent years in response to market conditions. The changing market for crude oils partly because of the USA’s greater self- sufficiency, means that other sources of sweeter crude oils should still continue to be available to UK refiners.

DECC’s Digest of UK Energy Statistics (DUKES) data for 2010 and 2011 (latest year available) indicates that the proportion of North Sea crudes processed in UK refineries has been declining, down from over 80% in 2010 to 73% in 2011 (most recent data available). This is in response to the widening price gap between sweet North Sea crude blends and alternative medium to heavier crude oils. In the Oral evidence session, Petroineos confirmed that Grangemouth refinery now processes around 40% North Sea blend. Similarly another member company, represented at the Oral evidence session, in publicly available sources has stated that sources of their crude oil have also changed, with North Sea blends accounting for under a third and more being sourced from North and West Africa.

Growing Import Dependence and IEA “Moses” Model

The market in crude oil and refined products is a global one but that for crude is larger with greater resilience and flexibility, and less potential for major disruption to refinery operations and product supply.

Import of refined products, mainly middle distillates such as diesel and jet fuel, will be an important part of the UK’s supply balance but the growing risks need to be analysed. The factors that may lead to further UK refinery closures would also lead to closure of refineries elsewhere in Europe. The size and liquidity of the traded products market in NW Europe would then decline rapidly as the market sought to cover the total lost refinery production, not just the volume traded in the finished products market.

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.

The model’s initial step to assess a country’s resilience level, is based on the number of refineries it has. The model makes the assumption that the more refineries a country has, the better placed it is in terms of resilience. Refinery flexibility is also taken into account as a separate measure of resilience.

DFA in their written submission make a wrong assumption between import infrastructure and resilience of products:

“….the resilience of UK’s oil product import infrastructure is deemed as ‘high’, giving correspondingly high marks to the resilience of the petrol and middle distillates total flows”.

Import infrastructure refers to the number of pipelines and ports a country has. In the UK, oil products pipelines are mainly owned either by refiners or the Government (GPSS) rather than importers. The “high marks” given to the resilience of the petrol and middle distillates are only as a result of low import levels. The following are based on 2010 data used by IEA:

Petrol is classed as having “no” deficit due to UK having a surplus amount and therefore high resilience.

Middle distillates deficit 23.2% and classed as “low” in terms of risk. Middle distillates broken down however tell quite a different story (as PGI report concludes):

Diesel 30% deficit, “medium” risk.

Aviation 51%, “high” risk.

Burning oil 31% “medium” risk.

The UK had “high” overall oil product security resilience in 2010 due its existing refining industry meeting most of the model’s resilience parameters. For example, “number of refineries” HIGH; “flexibility of refining infrastructure” MEDIUM/HIGH; “crude oil security” (based on level of domestic crude) HIGH; “import infrastructure” (based on number of ports and pipelines) HIGH; “average storage levels of products” (majority of which come from the refiners) LOW/MEDIUM.

In fact, it is the level of imports that threatens UK oil products security, and could do so in the future as oil product imports increase (as reiterated in the PGI report). The MOSES model puts emphasis on a country being self-sufficient and with reliance upon imports at a minimal level.

Under PGI’s UK refinery closure scenario (two to three refineries closing), this import dependence would increase to 78% and 77% respectively for jet fuel and diesel by 2030, which would have serious implications for supply robustness , both from the perspective of greater dependence upon specific regions from where these products would most likely be sourced (Russia and the Middle East), the longer supply chain and associated risk of transport disruption, and the fact that most EU countries will be facing a similar scenario with refinery closures across the EU.

We do not support the DFA’s contention that there is no need to worry about the UK’s increased need for these products as they can be met by imports. We feel that a focus of DECC’s Call for Evidence should be upon identifying and mitigation of the risks associated with this greater import dependence.

June 2013