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New report reveals threat to UK oil refining

13 May, 2013

A serious threat to the survival of UK oil refining - which has implications for the economy nationally and regionally, and potential impacts upon energy security of supply - has been highlighted in a new report sponsored by UKPIA. 

The independent report by IHS Purvin & Gertz (www.ukpia.com/publications.aspx), was commissioned by UKPIA to assess the role and future of the oil refining industry and its value to the UK economy, as well as to help inform the Department for Energy & Climate Change's (DECC) own review of oil refining and resilience of the downstream oil sector. The key findings of the report are:

• UK refining makes a substantial contribution; 8,500 jobs in refining support 54,000 jobs in the extended supply chain industries; expenditure by these employees supports a further 25,500 jobs in the wider economy, making an overall total of 88,100 jobs (Source: IHS Purvin & Gertz 2013). The monetary input of refining to the UK economy in a normal year is estimated at £2.3 billion (Source: IHS Purvin & Gertz 2013) and each large refinery is estimated to inject £60m+ into the local economy where it is located (UKPIA estimate).

• UK refining plays a vital role in maintaining the country’s fuel supplies but the UK is already at a high risk level for supply of diesel and jet fuel and close to high risk for kerosene heating oil (based on the International Energy Agency’s ‘MOSES’ methodology). Further refinery closures could increase this exposure.

• Although long-term net refining margins are projected to average around $2.6 per barrel of oil, this masks the huge potential cash impact of additional required capital and operating expenditure in the period 2013-2030 of £11.4 billion just to meet UK and EU legislative measures, most of which would generate no return and would not be recoverable from consumers. In addition there are other legislative impacts such as Fuels Quality Directive and Energy Efficiency Directive as yet not fully defined and thus uncosted.

• To keep pace with changing product demand trends, refineries would also need to invest some £1.5 to £2.3 billion over the same time frame which is unlikely in view of the impact of legislative compliance costs. Given a legislative level playing field with other refineries across the EU and globally, UK refineries would be considered competitive.

• The report concluded that no industry would bear such a mandatory investment burden for no return and a consequence could be the closure of more UK refineries and greater reliance upon imports for key products such as diesel and jet fuel.

Chris Hunt, director general of UKPIA, said: “We very much welcome this detailed and valuable report from Purvin & Gertz which backs up what the industry has been saying for some years now on the impact of legislation and the ability of the UK’s oil refining industry to continue delivering security of supply and resilience in transport fuels. Our latest publication ‘A Question of Balance’ (http://www.ukpia.com/publications.aspx) outlines the case for a more even balance between a sustainable environment policy and the need to maintain secure energy supplies, industrial competitiveness, employment and transport mobility.”

He continued: “Legislators must understand that time is not on our side. We look forward to an early response from Government to this study, which should help inform not only the development of a future policy framework for the industry but also an urgent analysis of legislative impacts in 2013 through the legislative ‘Fitness Checks’ being undertaken at the EU level via the Refining Forum established by the European Commission”