Energy and Climate Change CommitteeWritten evidence submitted by Valero Energy Ltd


Valero Energy owns and operates the 220,000 barrel-per-day Pembroke refinery in south west Wales. We also own and operate six terminals in the UK, as well as the Mainline Pipeline which links Pembroke refinery with Manchester and Kingsbury terminals. Valero markets fuel in the UK and Ireland under the Texaco brand. There are around 800 independently owned and operated Texaco-branded service stations in the UK. We employ approximately 820 people in the UK and support several thousand other jobs at the refinery, terminals and service stations.

Valero Energy welcomes the opportunity to respond to this call for evidence.

General Comments

Our industry faces huge challenges in meeting the UK’s energy needs in a sustainable and secure way. Ultimately this can only be achieved by a better alignment between energy and environment policy. Our industry is working with DECC to develop a policy framework for UK refining and this is a positive step.

While these are very difficult times for our business, we should stress that, given a level legislative playing field with EU and global refineries, we believe we can remain competitive. We are not advocating government hand-outs or subsidies.

The European Commission has now established a permanent Refining Forum, and this is recognition of the value of the refining industry and the significant challenges it faces. One of the key outputs of this forum has been the decision to conduct “fitness checks” to examine the cumulative effect of EU legislation on our sector. While this is a positive step, we were extremely concerned to hear at the Refining Forum meeting on 12 April 2013, that this fitness check would only be retrospective and would not include current legislation, notably Fuel Quality Directive Article 7a and the Refinery BREF (linked to the Industrial Emissions Directive), both of which could have a significant impact on the

refining sector. Furthermore the fitness check is not scheduled to be completed until the end of 2014, by which time these two pieces of legislation will have been implemented. It has always been our understanding that the fitness check would look at all EU legislation, and therefore we are calling for the planned pieces of legislation to be temporarily held-up pending the outcome of the fitness check.

Throughout our response we refer to the IHS Pervin & Gertz 2013 report “The role and future of the UK refining sector in the supply of petroleum products and its value to the UK economy”, published on 10 May 2013. We will refer to this as the “IHS Pervin & Gertz report”.

Responses to Questions

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

The past few years have been characterised by weak refining margins and by the substantial levels of investment required to comply with legislation. Demand for transport fuel continues to decline, predominantly as a result of legislation aimed at reducing greenhouse gas emissions from the transport sector, as well as improvements in vehicle energy efficiency and technology.

Meanwhile we are facing increasing competition from overseas refineries, notably in Asia and the Middle East, where their proximity to developing markets makes investment more attractive. These large new refineries have the flexibility to better balance their product slates to meet current demands, while operating in a less challenging legislative environment.

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

UK and EU legislation continues to have a significant impact on our industry, currently these include:


Fuel Quality Directive.

Industrial Emissions Directive.

EU Emissions Trading Scheme.

Renewable Energy Directive.

Energy Efficiency Directive.


Containment policy.

CRC Energy Efficiency Scheme.

Compulsory Stock Obligations.

The IHS Purvin & Gertz report into the refining industry has estimated that the required 2012–13 capital and operating expenditure required just to meet existing EU/UK legislation is approximately £11.4 billion, and this excludes the potentially huge impact of the Fuel Quality Directive and Industrial Emissions Directive, which have yet to be defined.

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?

The International Energy Agency forecasts that oil will continue to be a major source of energy until 2030 and beyond, accounting for over 80% of EU transportation fuel. While the IHS Purvin & Gertz report suggests that oil product demand will increase from 74.3 million tonnes in 2010 to 75.2 million tonnes by 2030.

Within the transport sector DECC/DUKES data shows that gasoline demand has decreased from a market share of 73% in 1990 to 41% in 2012, while diesel demand has increased from 27% in 1990 to 59% in the same period.

We expect the output/demand imbalance between diesel and gasoline to increase. UK refineries, and for that matter EU refineries as well, have historically produced more gasoline than diesel/jet fuel. However, a combination of fiscal incentives and energy efficiency measures, have seen an increase in diesel powered cars. This growing disparity is being met by increasing levels of middle distillate imports. In addition, this imbalance is set to increase because of fuel specification changes linked to the Renewable Transport Fuel Obligation (RTFO) and MARPOL marine fuel sulphur reduction, which 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?

The IEA model for Short Term Energy Security (MOSES) suggests that for a country to import more than 45% of its refined product demand would be a high risk. In 2013 the UK is expected to import 47% of its diesel and 55% of its jet fuel demand.

However given that the report estimates that UK refiners would need to invest between £1.5 and £2.3 billion simply to keep pace with current demand trends, it is inevitable that the UK will have to continue to rely on increasing levels of diesel and jet imports.

The IHS Pervin & Gertz report has looked at a number of scenarios for the UK refining sector, including the potential closure of more refineries. It suggests that under the refinery closure scenario, the UK’s dependence on imports could increase to 78% for jet fuel and 77% for diesel by 2030.

At this time the UK does benefit from a robust and diverse logistics infrastructure which is able to efficiently import and distribute fuels within the UK.

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

We believe that a strong and healthy refining sector is important to the UK economy, and that this can only be achieved by a better balance between energy and environmental policies in the UK and EU.

The IHS Pervin & Gertz report suggests that future UK refining net margins will be around $2.50 a barrel. However it goes on to state that the cost of legislation between now and 2030 will be around $1.85 per barrel, of which only a proportion might be passed to consumers because of international competition. It estimates the capital investment required of our industry up to 2030 to be in the region of £5.5 billion, most of which would generate no return on investment. These estimates do not include the cost impact of upcoming legislation such as the Fuel Quality Directive and Industrial Emissions Directive, as these have yet to be finalised. These are unsustainable levels.

Furthermore, the report estimates that a further £1.5 to £2.3 billion of investment is required over the next 20 years, just for UK refineries to keep pace with current demand trends.

Refining in the EU has also suffered from the unintended consequences of free trade agreements with other countries. Notably the recent EU/Korea free trade agreement, has led to large numbers of “duty free” crude cargos, at one point estimated to be a quarter of Forties production, heading to South Korea. The result of this crude leaving the region, in a market that is traditionally short, is that crude prices went up and refiners were forced to look outside the region for more competitively priced crudes. The additional freight costs of shipping products from north or west Africa led to higher prices, while the extra ship movements increased emissions. These consequences should have been properly considered in the impact assessment.

The duty recently imposed on US ethanol imports into the EU is also hurting demand and investment, and increasing the cost of meeting the RTFO targets.

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?

(a)This is already covered in question 4. The Pervin & Gertz report suggests that even under a steady state scenario, diesel and jet fuel imports will increase.

(b)We can provide no specific data to respond to this question; however clearly if more refineries were to close this would reduce the UK’s domestic emissions. The product shortfall would have to be met by increased overseas imports, which in turn would increase global emissions.

(c)UK refineries are long on gasoline and the IHS Pervin & Gertz report suggests that if one or two refineries were to close, the gasoline cover would still be close to 100%. However, the closure of two refineries could move the UK market pricing for gasoline to import parity which, the report suggests, could see gasoline prices increase by $10/tonne. Diesel imports would have to increase and this could lead to market volatility due to shortage of supply and the change in supply/shipping dynamics.

7. What would be an appropriate baseline level of refining capacity in order for the UK to remain broadly self-reliant in an emergency?

This is covered in question 4. The Pervin & Gertz reports suggests that even under a steady state scenario, diesel and jet fuel imports will need to increase to meet demand. It is difficult to comment on specific situations, as it would depend on the nature of the emergency.

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

We believe that a strong and healthy refining sector is important to the UK economy and that this can only be achieved by a better balance between energy and environmental policies in the UK and EU.

We would welcome a comprehensive and joined-up review of the impact of UK legislation affecting our industry. We are aware that DECC is already considering the development of a policy framework for our sector, as a result of the findings of the IHS Pervin & Gertz report.

We believe that the UK government could play a key role on the EU front by supporting calls for Fuel Quality Directive Article 7a and the Industrial Emissions Directive (refinery BREF) to be included in the planned “fitness check” of refining legislation, and for this work to be completed earlier than late 2014, as currently scheduled.

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

It is difficult to comment on this question. Over the past few years there has been a shift of ownership of UK refineries from fully integrated energy companies, with both upstream and downstream interests, to independent refiners. Independent refiners are completely dependent on making a refining margin to stay in business and do not have other business interests to sustain them when refining margins are eroded.

We thank you again for allowing us to contribute to this important inquiry.

May 2013

Prepared 25th July 2013