Energy and Climate Change CommitteeWritten evidence submitted by Unite the Union

UNITE SUBMISSION TO THE HOUSE OF COMMONS ENERGY AND CLIMATE CHANGE COMMITTEE: NEW INQUIRY: UK OIL REFINING

1. Introduction

1.1 This response is submitted by Unite the Union, the UK’s largest trade union with 1.5 million members across the private and public sectors. The union’s members work in a range of industries including manufacturing, financial services, print, media, construction, energy generation, chemicals, process, transport, local government, education, health and not for profit sectors.

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

2.1 The UK refining industry has faced years of continuing fragmentation. The more profitable areas, such as oil exploration, have been bought or maintained by the major oil companies, while deregulation and privatisation has led to the separation and isolation of the refining sector from the wider industry. By 2012 all major oil companies had left the UK with the oil refineries themselves now owned by smaller companies. The number of major oil refineries in the UK has fallen from a high of 18 in 1975 to the seven that are still in operation today.

2.2 In addition to competition from Russian refineries, new refineries are coming on stream in India and the Middle East that have been designed to meet EU specifications. These refineries are more modern and have been purpose built rather than converted to their current functions. They are, therefore, more efficient and are not subject to the same regulatory regimes as the EU. Although imports into the EU and UK are currently relatively small, the production advantages of these new sites and the ability of Rotterdam and Antwerp to act as import terminals means the proportion of imported fuel could increase sharply. The transportation costs of refined products are also relatively low compared to their value so will not act as a barrier to an increase in imports.

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

3.1 Environmental legislation is increasingly complex and rigorous, including soil, water and waste, air quality, climate change and fuel products legislation, all of which put pressure on the running of plants as well as on the products they produce. Of particular relevance to the refining sector is the European and UK legislation aimed at reducing Carbon Dioxide emissions in order to move towards an environmentally friendly, low carbon and sustainable economy.

3.2 EU climate and environment policies, such as the raising of the EU carbon price; tougher best available technology requirements under the Industrial Emissions Directive (IED); and the EU plans to go beyond internationally agreed restrictions to limit marine sulphur emissions (IMO); are collectively increasing pressure on EU refineries.

3.3 In addition to the EUETS that covers all EU Member States and therefore all of the EU’s 98 refineries, the seven remaining UK refineries face an additional environmental legislative challenge that refiners in other EU countries do not—namely the “Carbon Price Floor” for the power generation sector as revealed by Chancellor George Osborne in the Government’s 2011 budget.

3.4 What this effectively means is that the UK is taking unilateral action to embed the price of carbon, and in the process is putting the UK far out in front of EU counterparts and other countries. Without more government assistance the economic pressure on UK based companies due to the carbon floor tax could well result in these companies relocating away from the UK and even the EU to locations where there are less strict controls. Tragically, although such developments would have no impact whatsoever on the overall level of global carbon emissions, they could potentially cost thousands of UK jobs and move the UK one step closer to losing its entire refining capacity.

3.5 Given the lack of concrete research into the effect these costs might have on pay and conditions and levels of employment, UNITE is calling for the UK Government and the EU to commission much more comprehensive studies as to the likely impact on employment in the refining sector of carbon leakage.

4. 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?

4.1 The issue of security of energy supply is critical to the future of the UK refining sector and cannot be overstated. Although North Sea Oil is running low and is predicted to run out in the coming decades, there is still a serious need to maintain a refining capacity in the UK—not only in order to refine and finish products for export, but to maintain a secure supply.

4.2 Crude oil is often located in highly volatile and politically unstable areas of the globe, such as the Middle East, North Africa and Russia. If the UK should lose its ability to refine and become over reliant on a very restricted set of suppliers the entire UK economy and society would be extremely vulnerable to sudden political changes or out breaks of conflicts. It is therefore extremely important that the UK not only avoids becoming reliant on too restricted a selection of countries for its supply, but also that it maintains its own capacity to refine in case geopolitical changes suddenly render the country vulnerable.

4.3 Maintaining and developing the UK’s refining capacity not only offers protection during political/supply crisis, it also means the UK can maintain its place as a net exporter of refined products on a commercial and industrial basis during periods of stability.

4.4 The main consumer demand in the UK has changed over time and moved away from gasoline towards diesel and jet fuel, and the overall outlook in demand for road transport fuels is flat with a possibility of further decline and competition from other areas such as the development of bio-fuels.

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

5.1 In a report published in June 2012 the KPMG Global Energy Institute identified a number of major challenges that the EU refining industry faces, these challenges included:

falling demand;

rising imports;

increasing European legislation;

competition from emerging markets; and

eroding margins and a growing imbalance between gasoline and diesel.1

5.2 The UK sector faces all of these challenges and a number of additional ones as well, most notably the introduction of the UK’s Carbon Floor regulations and the historical fragmentation of ownership structures in the sector during the last few decades.

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 long term management and development of the Oil Refining Sector is of national strategic importance, both in terms of its relationship to the wider chemicals and manufacturing sectors and the UK economy as a whole. It is also vitally important in terms of protecting and maintaining the security of the UK’s energy supply.

6.2 It is clear that the impact of environmental transition on employment will vary between sectors, with energy-intensive, and heavier, more traditional, industries being hardest hit. It is in these high energy companies—such as oil refineries—that the solutions for a sustainable future must be found, and it is crucial that solutions are found that not only make a difference to the environment but also benefit workers and society through the creation of sustainable jobs. If this transition is not handled correctly it risks being used as an excuse for cost and job cutting or becomes nothing more than a vehicle for exporting jobs abroad. The concept of a “just transition” is one in which the costs and benefits of decisions made in the public interest—including those necessary to protect the environment—should be shared fairly and progressively.

7. Executive summary

7.1 UK oil refining sector is a critical sector and contributes some £60 billion to the UK economy with the downstream sector accounting for some £37 billion of tax and VAT revenues. There are currently seven Oil Refineries in the UK employing some 150,000 workers directly and indirectly, many of whom are highly skilled workers.

7.2 The long term management and development of the Oil Refining Sector is of national strategic importance, both in terms of its relationship to the wider chemicals and manufacturing sectors and the UK economy as a whole. It is also vitally important in terms of protecting and maintaining the security of the UK’s energy supply. Given its critical strategic importance, UNITE is calling for a government review of the refining sector with a view to identifying the country’s requirements for the coming 20 years.

7.3 Despite the fact that EU competition legislation is often cited as a reason why the UK Government cannot take a strategic approach to the sector, other EU governments manage to do just this in order to protect and develop their oil refining sectors. A thorough review of the ability of governments to act in order to safeguard national interests needs to be conducted.

7.4 The overwhelming body of evidence demonstrates that the increasing fragmentation of the sector over the last 3 decades has made the refineries much more vulnerable, while changing patterns of demand for different fuels has posed other challenges.

7.5 New more modern refineries are being built in developing countries, such as India, and this presents more long term challenges for the UK and European oil refinery industry as these countries change from being refined product importers only to being potential exporters.

7.6 Environmental legislation and the need to reduce CO₂ emissions is also having a significant impact on the sector. Although the EU legislation is the same for all refineries in the EU, it does put EU refineries at a disadvantage relative to those outside the EU where environmental legislation is not so stringent. In addition to the fear of job losses through “carbon leakage”, UK refineries have the additional pressure of the exclusively UK “Carbon Floor” legislation. An urgent study into the likely impact of the legislation is needed.

7.7 Given the challenges that the refining sector currently faces in the UK, and the very real existential danger that the sector finds itself in, UNITE insists that the current UK government—and any future governments—must have a serious policy aimed at the maintenance of a viable, competitive and efficient refining sector. That policy must be build around a number of key factors, namely:

Commitment to UK energy security.

Recognition of the added value the sector brings to the UK economy.

Critical place of the sector in a broader UK and EU Industrial Strategy.

Government with a strategic approach.

May 2013