Energy and Climate Change CommitteeWritten evidence submitted by Total Lindsey Oil Refinery Limited
1. What are the factors that have led to the closure of UK refineries? Why is production increasing overseas?
The key factors that are widely accepted as having led to the closure of UK refineries are: weak refining margins and the huge investment demands associated with legislative compliance; flat or reducing demand for transport fuels; and competition from overseas refineries and supply sources.
Production overseas is increasing, for example in the Middle East and Asia, because of the proximity of refineries in these regions to rapidly growing markets, more attractive investment returns on large new complex refineries with the 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?
For Total Lindsey Oil Refinery, UK and EU regulation has had a significant impact and we have recently completed the following significant investments of approximately £450 million in order to meet legislative requirements: we’ve invested in a new Hydrogen Desulphurisation complex to meet ultra low sulphur specifications and have received approval for our first flare gas recovery project to reduce SOX emissions.
The key UK, EU and international legislation impacting upon the sector is listed by UKPIA in its submission.
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 impacts such as Fuels Quality Directive and Energy Efficiency Directive as yet these are not fully defined and 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?
IHS Purvin & Gertz forecast that oil product demand will increase in the UK from 74.3 million tonnes in 2010 to 75.2 million tonnes in 2030.
Within the transport sector, 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). Diesel now accounts for 59% (26 billion litres).
The main fuels required in the future will be petrol, diesel, gas oil and kerosene mainly for aviation. In addition, other products from refining like LPG, bitumen and feedstock 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. There will be continued market pressure and reducing demand for heavy fuel oil in the UK which will increase pressure to find alternative export markets. Demand for aviation fuel is closely linked to future recovery in GDP.
There is a mismatch between refinery output and demand. UK refineries generally produce an excess of petrol and not enough middle distillates like diesel and jet fuel, even after the investment in new desulphurisation capacity at Total LOR which has increased production of ultra low gas oil (see point 2). This is exacerbated by the disadvantages that a refiner is subject to compared to an importer (see later comments on compulsory stock and duty costs under question 8). In addition, fuel specification changes associated with the UK’s Renewable Transport Fuel Obligation and MARPOL marine fuel sulphur reduction will increase the demand for middle distillates even more.
4. What is considered to be the right balance between oil products refined locally and imports and what are the current and future scenarios?
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.
According to UKPIA, 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.
Total LOR support the UKPIA comment and believe the market for the supply of petrol, diesel and jet kerosene in the south of the UK are already and would be become even more vulnerable.
5. What are the factors, both domestic and international, that will determine the future viability of the UK refining industry?
Refining is a highly complex sector, with a large number of factors impacting on its profitability and future viability in the UK. These include economic factors such as product demand (which has eroded in Europe and the UK in recent years); the cost of a barrel of oil; and UK and European economic growth and inflation. Legislative factors requiring mandatory capital expenditure, which often provides no return on investment, impact negatively and will continue to determine the future viability of the sector.
IHS Purvin & Gertz forecast that future UK refining margins will be significantly eroded over the period 2013 to 2030. 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.
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.
IHS Purvin & Gertz have 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.”
Indeed, the long term future of the refinery could be in jeopardy from 2018 onwards as Best Available Technique Reference Documents (BREF) legislation, more onerous European Union Emission Trading Scheme (EUETS) levies and doubling of taxation such as Carbon Price Support (CPS) will be implemented which require significant capital investment as well as increasing ongoing operating costs. Additional investment and increasing operating costs could be unsustainable for the refinery.
A further example of the changing production balance is firstly, the United States shale oil and gas revolution and the impact that this will have on the UK market when the U.S will begin exporting gasoline this year and secondly, the increasing import of diesel from Russia to N.W Europe.
Concerns around the technical skills available to the industry also pose a threat to the business. During the 1960s and 1970s large organisations such as the CEGB, ICI, GKN and Rolls Royce trained a huge volume of craft apprentices each year. Once qualified, many of these tradesmen moved around the country working for the large contracting organisations as an “itinerant workforce”, supporting the UK power station and refinery construction programme, as well as outages (shutdowns).
In the 1980s and 1990s there was a downturn in UK engineering, and construction industry (ECI) work combined with a general shrinkage of the UK manufacturing base led to many organisations stopping their apprentice schemes. During the late 1990s the loss of effective ECI supervision and increasing age profile of the workforce became apparent. The large skills gap cannot be closed by the apprentice route alone, and Government withdrawal of funding for “programme led” apprenticeships has had a negative impact and remains a concern for the industry.
As a result maintenance intervention costs become more and more expensive compare to the continent.
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??
In the event of the future closure of UK refineries, there would be a serious impact on the security of energy supply. As noted in response to question 4, in this scenario, import dependence for jet kerosene and diesel would increase significantly, which would have serious implications for supply robustness of these products; especially in case of a crisis.
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.
Further refinery closures is likely to lead to higher priced petroleum products, due to higher costs associated with import dependence.
7. What would be an appropriate baseline level of refining capacity in order for the UK to remain broadly self-reliant in an emergency?
IHS Purvin & Gertz concludes that 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 are critical.
Total’s Lindsey Oil Refinery is a well balanced flexible refinery with a capacity for processing 220,000 barrels per day, importing crude oil from a wide variety of regions including North Sea, Russia, Persian Gulf and Africa. The refinery has a product portfolio with a range of over 50 products capable of being distributed throughout the UK via a strong logistics infrastructure including pipeline to the greater London area, road, rail loading facilities as well as access to jetty facilities. The refinery therefore contributes significantly to the UK’s security of supply, compared to pure import facilities.
8. What steps could the UK Government take to maintain an appropriate baseline level of refining capacity?
At Total Lindsey Oil Refinery, we concur with UKPIA’s view 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.
The UK Government should examine the impacts of UK legislation, particularly Carbon Floor Price, Carbon Reduction Commitment (CRC) Energy Efficiency Scheme and containment policy proposals as applied to the storage of fuel products.
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.
At present, there is a pressing need for the UK Government to review before implementing any further environmental legislation and make urgent representations to the European Commission in regard to the Fuels Quality Directive Article 7a and the Refinery BREF linked to the Industrial Emissions Directive.
The current regulations on Compulsory Stock Obligations do not provide for a level playing field between refiners and importers. UK refiners are required to store 67.5 days of “supply” to the market; whereas an importer must store 58 days worth. This difference results in an additional cost to the refiner in the order of $1.2 for every tonne of product supplied to the UK inland market. The government should require refiners and importers to store equal quantities of stock for the market, therefore creating a level playing field to support refining capacity.
Additionally, due to the current duty point (ie duty is paid on product at the refinery or coastal terminal exit); Total Lindsey Oil Refinery is not able to compete to supply product in areas such as the Thames. This is because product is transported from the refinery duty-paid. Product from the refinery has higher transportation costs, higher cost on losses and a higher capital employed due to the transportation and storage of duty-paid product. For a UK refiner, this is a clear disadvantage and represents a penalty of $5 to $8/t compared to product imported from other EU countries. We propose that the government changes the point at which duty applies to allow refiners to supply product competitively throughout the UK.
9. What is the significance and potential future impact of the changing ownership of UK refineries in recent years?
In any mature industry sector like refining there will be changing ownership due to the strategy and policy objectives of individual companies.
I hope that I can count on you to strongly back the UK refining industry at this critical juncture, in order to safeguard a cornerstone sector of the UK economy, to protect jobs and to conserve the UK’s future security of energy supply.
May 2013