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

I am writing to comment on the written submission from the Environment Agency (EA) to the Energy and Climate Change Select Committee call for evidence on “UK Oil Refining”, which was published on 13th June.

Reduction in Sulphur Dioxide Emissions

As identified in its written submission, the Environment Agency (EA) regulates refineries in England under the European Union Integrated Pollution Prevention and Control Directive (IPPCD), which is transposed into law in England by the Environmental Permitting (England and Wales) Regulations 2010 (EPR). Similar regulatory regimes are also present in Scotland and Wales. The EA has stated that the conditions “set within permits are based on an assessment of the Best Available Techniques (BAT) available to the operator” and that this assessment is “informed by an EU-wide assessment of what represents BAT for a particular sector”.

Under the current IPPCD regime, this assessment of BAT is documented in the Refinery BREF document published in February 2003, which forms part of a series presenting the results of an exchange of information between EU Member States and industries concerned on BAT, associated monitoring, and developments in these areas. It is published by the European Commission in accordance with Article 16(2) of the Directive, and must therefore be taken into account as required by Annex IV of the Directive when determining BAT and provides reference information for the permitting authority to take into account when determining permit conditions. However, under the IPPCD, the BREF documents are purely advisory, although the EA has also developed sector specific and cross-sector guidance,1 which is more prescriptive.

During the permitting process carried out at the end of 2007, the EA established reduction in sulphur dioxide (SO₂) emissions to air as a priority, requiring a 50% reduction in emissions on 2004 levels (69.2kt for UKPIA member companies). This target was set without reference to BAT and, although UKPIA member companies are on target to achieve the required reduction, very significant investment has been required in SO₂ abatement at a time when refinery profitability has been poor, with two refineries closing during this period (Petroplus Coryton and Petroplus Teesside). Refineries have operated under constraints on crude selection and throughput rates as a result of the emissions limits and increasingly challenging fuel sulphur specifications, compromising refinery economics in comparison to EU and non-EU refineries subject to less challenging requirements.

With the replacement of the IPPCD by the Industrial Emissions Directive (IED) and revision of the Refinery BREF, where publication the Commission Implementing Decision on BAT Conclusions is anticipated in early 2014, the legislative requirements become even more challenging. IED Article 21(3) requires that within four years of publication of the Commission Implementing Decision, emissions permits must be revised by the Competent Authority and operators must meet any revised emissions limits.

This represents a major challenge for the refining sector due to the planned frequency and timing of turnaround cycles (typically four to five years) and the additional investment costs likely to be required outside normal budget planning cycles. Further reductions in SO₂ emissions will be required, along with reductions in nitrogen oxide (NO_x), particulate emissions and other pollutant emissions. The investment cost to meet these requirements have been estimated at around £900 million², with increased operating costs of around £57 million/year; as annualised costs, these represent a significant proportion of net cash margins, which were negative in 2011 (-$490 million, equivalent to around -£320 million) before annualised turnaround costs (ie periodic major maintenance and inspection shutdowns) and depreciation are taken into account. The EA approach to assessment of affordability using gross margin—the EA submission states that the cost of improved SO₂ emissions abatement “were about 0.2% of gross margins at the time”—is invalid and grossly misleading.

COMAH Containment Policy

The EA has referred to the COMAH Competent Authority Policy on Containment of Bulk Hazardous Liquids at COMAH Establishments (CP) in its written submission. This was developed in response to the Buncefield fuel storage depot incident in December 2005 and applies to the bulk storage of hazardous liquids at sites which are subject to the Control of Major Accident Hazard (COMAH) Regulations 1999, including refineries and fuel storage sites. The Policy was introduced following consultation with the industry in February 2008 as a risk-based approach to the general improvement of containment measures.

UKPIA and the Tank Storage Association (TSA) raised a number of concerns over the implementation of CP with the EA in June 2011. By this date, industry had carried out significant improvement works, in particular to primary containment measures for petrol storage tanks, learning from the Buncefield incident. However, during the intervening period, the industry also gained a much better understanding of the issues associated with upgrading secondary containment to the standards set out in the Policy. As a result we identified a number of issues to the EA:

The affordability of implementing the CP in full for all in-scope tanks, particularly where it has been seen that the policy has been interpreted by the CA as a minimum standard, regardless of risk. We stated that affordability should also be considered in the context of significant cost pressures from other legislation and from falling demand.

Our experience of the cost of implementation of secondary containment and the number of in-scope tanks far exceeded that recognised in the original Regulatory Impact Assessment (RIA) completed in 2007. The total estimated number of storage tanks affected by the Policy was underestimated—the RIA assumed 220 category 1 tanks, whereas in practice the number proved to be well in excess of 500. The estimated cost per tank was also underestimated; for example, the original RIA quoted an average figure of £720k per tank for secondary containment improvements, whereas experience shows a figure in the region of £400k to over £6 million depending on the size of the tank, with a significant number of larger tanks present. The total cost has now been estimated at some £687 million,2 although this does not include all tertiary containment costs, as this is highly site specific depending on the topography and geology of the site.

Technical issues relating to the mechanisms by which environmental risk can be robustly assessed, along with the tolerability criteria of those risks. Doubts were also expressed concerning the lack of information available regarding the performance and longevity of materials used to effect improvements in secondary containment. This has required development of new methodologies and test methods for risk and performance assessment, some of which remains on-going.

Issues were also raised concerning a lack of consistency from by the CA when assessing both safety and environmental risks, both in terms of risk assessment and the application of the “As Low As is Reasonably Practicable” (ALARP) principle. The CP (together with its supporting guidance) should not represent the minimum requirements regardless of risk.

The costs of retrospective improvements to secondary and tertiary containment measures at UK refineries and terminals are therefore in some cases disproportionate to the benefits. Although some of the measures included under CP are recognised as best available techniques (BAT) under the BREF documents supporting the IED, the UK policy goes considerably further than IED requirements, exposing UK refineries and terminals to costs which are not being incurred in neighbouring countries in Europe or elsewhere in the world. Whilst the industry remains committed to both high standards of safety and protection of the environment, both UKPIA and TSA believe that it is in the interests of the UK economy to approach implementation of the CP in the manner in which it was intended, that is using a risk-based approach and over the full time frame set out in the policy.

To conclude, we note that the EA response focusses on the Committee’s question: what impact (if any) has UK and EU regulation had on the UK refining industry? It answers this question saying “Our evidence demonstrates that the implementation of the European Union’s Integrated Pollution Prevention and Control Directive (IPPCD) should not have had a detrimental impact on the viability of the sector.” This is clearly misleading, since there is no doubt that the level of investment required to meet improved emissions abatement and UK Containment Policy requirements, along with other operational constraints imposed by challenging SO₂ emissions limits, have severely impacted refinery profitability and cash generation to fund configuration changes to meet changing demand. This is a key issue to maintain adequate levels of supply resilience, especially in the face of refinery closures that have taken place in recent years, with risk of further closures if economic conditions do not improve.

June 2013