The ’Review of the Refining and Fuel Import Sectors in the UK’ by the Department of Energy & Climate Change (DECC) has come at a crucial time for the sector, but many in the industry feel it has done little to point the way forward.
No one can be in any doubt that the refining sector in the UK is facing intense pressure. In 1975 there were 19 refineries in the UK now there are just seven, including the recent closures of Teesside in 2009 and Coryton in 2012. And of those seven, two have faced battles for survival in the past eight months (see panel). The closure of the Petroineos site in Scotland was announced in October, only for it to be reprieved a few days by a deal that secured funding for its future; and in Milford Haven, South Wales, Murphy Oil is currently consulting on the future of the plant after a deal to sell it fell through.
Security of supply
The DECC Review was commissioned in response to the closure of Coryton, and one of the main concerns it addresses is ensuring security of supply. Referring to the closure of refineries it notes: "If this trend continues, over time the UK market risks a less diverse range of supply sources and a less flexible sector in the face of future supply disruptions."
However, UK refining only met 61% of demand in the UK in 2012 with imports supplying the remaining 39%. And when it comes to road fuels the need for imports is even greater.
Most refineries in the UK were set up when petrol was the dominant fuel and while the UK produces more petrol than it consumes, 44% of its diesel was provided by imports in 2012.
The Review says that downward pressure on refinery margins in the EU is exacerbated by this supply-demand imbalance in the UK, and it also highlights the cost of meeting regulatory requirements which may reduce refiners’ ability to invest in developing their sites.
But the Review says that importers help to provide flexibility in the market and to address any imbalance, and it states: "Market forces will decide what supply configuration and balance prevails in the longer term."
The main recommendation to come from the Review is the formation of a Midstream Oil Task Force, with members from industry and Government, to address the issues facing the sector.
It acknowledges the regulatory burden but says this should be tackled by the Task Force, and through the EU which is currently carrying out a review of the sector.
Responding to the Review, PRA chairman Brian Madderson said: "This smacks of the Government kicking the issue into the long grass. I would like to have seen more specific proposals coming from Government based on the consultation. The Task Force will not meet until the summer and in the fullness of time proposals will emerge. Meanwhile one or two more refineries will have closed. Does this indicate any urgency on the part of Government?"
Madderson said he had written to the energy minister about the composition of the Task Force. He explained: "UKPIA and the Downstream Fuel Association, which both have members with retail activities, have been invited to join the Task Force, therefore PRA should be invited too.
He also suggested the Government was starting in the wrong place when it looked at security of supply. "You need to start at the retail end first. How many forecourts are there, how many tanks are there, and how full are those tanks? We know the number of forecourts is falling and retailers are keeping stocks at the bare minimum because they can’t afford to fill tanks because of the tax regime."
In its response to the Review, UKPIA, which represents the oil refiners, cautioned that it failed to fully address the issues facing the industry. It said that the UK refining sector was facing challenges that threatened the sustainability of the industry, not least of which was the cost of the cumulative regulatory burden imposed on the sector by legislators.
It added that it was therefore unfortunate that the Review did not fully address many of the wider legislative issues affecting the sector in the UK and its ability to compete effectively in today’s global market.
Fundamental policy reform
It said it was critical that the Task Force targeted fundamental policy reform, Chris Hunt, director general of UKPIA, said: "We stand ready to support the Task Force in both addressing the challenges facing our downstream oil industry in the UK and in achieving urgent, identifiable and quantifiable initiatives for our sector."
The Unite union was deeply critical of the Review and accused DECC of being complacent over the country’s energy security. Unite argued that DECC wanted market forces to manage the UK’s energy needs, and pointed out that just before the report was published Murphy Oil announced the consultation on the future of the plant at Milford Haven.
Unite assistant general secretary Tony Burke said: "The Review flies in the face of reality. The Coryton refinery has closed and now the UK faces the threat of the Murco refinery at Milford Haven being closed too. Britain can’t put its head in the sand and risk a total reliance on oil imports for our energy needs. The UK government cannot repeat the mistake of Coryton and allow another of the UK’s oil refineries to close.
"The UK government needs to actively support the refining and fuel import sectors for the sake of Britain’s energy security. We do however welcome the setting up of an Oil Task Force, and we will be ensuring Unite plays its part to safeguard the UK’s energy supply and the jobs and skills of our members."
What many people in the sector ask though is can the Milford Haven refinery wait until the Task Force delivers?
refineries face big challenges
The closure and eventual reprieve of at the Petroineos refinery at Grangemouth in Scotland last October, and talks currently ongoing about the future of Murco’s Milford Haven facility, demonstrate the pressure that the UK sector is under.
Although the dispute between management and the unions grabbed all the headlines at Grangemouth, the underlying issue was about investment needed to update the site to modern requirements, with the owners concerned about the viability of the plant.
While the union’s decision to accept the management’s survival plan helped to secure the plant’s future, concessions by the Scottish and UK governments were just as important.
As part of the deal the Scottish government indicated it would support the company’s application for a £9m grant to help finance the terminal and the UK government gave its prequalification approval for a £125m loan guarantee facility.
Meanwhile the American owner of the Milford Haven refinery, Murphy Oil, has been trying to sell the plant, together with its filling station business in the UK, for several years, and in late March it confirmed that negotiations were at an advanced stage. It is believed the deal would have included finance for ’regular maintenance’ costing $75m.
But the deal fell through triggering the owner’s decision to hold talks about its future, and the Welsh Government to set up a Task Force looking to save it.