House of Commons Energy and Climate Change Committee UK oil refining Third Report of Session 2013–14 Volume I Volume I: Report, together with formal minutes, oral and written evidence Ordered by the House of Commons to be printed 16 July 2013 HC 340 Published on 26 July 2013 by authority of the House of Commons London: The Stationery Office Limited £17.50 The Energy and Climate Change Committee The Energy and Climate Change Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department of Energy and Climate Change and associated public bodies. Current membership Mr Tim Yeo MP (Conservative, South Suffolk) (Chair) Dan Byles MP (Conservative, North Warwickshire) Barry Gardiner MP (Labour, Brent North) Ian Lavery MP (Labour, Wansbeck) Dr Phillip Lee MP (Conservative, Bracknell) Rt Hon Peter Lilley MP (Conservative, Hitchin & Harpenden) Albert Owen MP (Labour, Ynys Môn) Christopher Pincher MP (Conservative, Tamworth) John Robertson MP (Labour, Glasgow North West) Sir Robert Smith MP (Liberal Democrat, West Aberdeenshire and Kincardine) Dr Alan Whitehead MP (Labour, Southampton Test) The following members were also members of the committee during the Parliament: Gemma Doyle MP (Labour/Co-operative, West Dunbartonshire) Tom Greatrex MP (Labour, Rutherglen and Hamilton West) Laura Sandys MP (Conservative, South Thanet) Powers The Committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available via www.parliament.uk. Publication The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the internet at www.parliament.uk/ecc. A list of Reports of the Committee in the present Parliament is at the back of this volume. The Report of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in a printed volume. Committee staff The current staff of the Committee are Sarah Hartwell-Naguib (Clerk), Liz Bolton (Second Clerk), Tom Leveridge (Committee Specialist), Dr Alfred Gathorne-Hardy (Committee Specialist), Luanne Middleton (Inquiry Manager), Shane Pathmanathan (Senior Committee Assistant), Jonathan Olivier Wright (Committee Assistant), Joe Strawson (Committee Support Assistant), and Nick Davies (Media Officer). Contacts All correspondence should be addressed to the Clerk of the Energy and Climate Change Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 2569; the Committee’s email address is [email protected] UK oil refining 1 Contents Report Page 1 Introduction 3 Background 3 Domestic refining versus importing 4 An industry in decline 5 DECC’s review and our inquiry 6 2 Pressures on the UK refining industry 7 Increasing global competition 7 Mismatch between supply and demand 8 Legislative burdens 11 EU 11 UK 12 Infrastructure investment 15 UK transportation duty 17 3 Security of supply 18 4 Conclusion 21 Conclusions and Recommendations 22 5 Annex 25 Letter to Commissioner Tanjani, Vice-President of the European Commission 25 Planned fitness check of the petroleum refining sector 25 Formal Minutes 27 Witnesses 28 List of printed written evidence 28 List of Reports from the Committee during the current Parliament 29 UK oil refining 3 1 Introduction Background 1. Refined oil products are a significant source of energy in the UK. In 2012, they provided around a third of the primary energy used.1 The UK is extremely reliant on many of these products such as petrol, diesel and jet fuel – especially in the transport sector. The International Energy Agency, for example, forecasts that oil will be a major source of energy to 2030 and beyond, accounting for over 80% of the EU transport fuel.2 Refining also provides critical by-products or feedstocks for lubricants and for petrochemicals which are the basis for plastics, paints, adhesives, detergents, resins, solvents, synthetic fibres and rubber, and which support much of the UK’s heavy industries. Many of these industries are closely integrated with UK refineries.3 There are seven refineries in the UK (see figure 1), approximately 40 terminals and a network of pipelines for distribution. Distribution also occurs by ship, road and rail. UK operating refinery capacity is ~1.5 million barrels of crude oil per day (the fourth largest in the EU).4 1 DECC, Call for evidence on the role of the UK refining and fuel import sectors in the supply of refined oil products into the UK market, 20 May 2013, page 2 (https://www.gov.uk/government/consultations/call-for-evidence-role-of- uk-refining-and-fuel-import-sectors) 2 Ev 46 3 UK Petroleum Industries Association, Refining and UK refineries, www.ukpia.com 4 Ev 64 4 UK oil refining Figure 1: UK refining and product distribution terminals UK refining & product distribution terminals (indicative summary only - does not show all locations) Refinery T Fuel terminal Aviation T T Pipelines: Government (GPSS) T UK Oil Pipeline West London Pipeline Ineos Pipeline Finaline Ineos Grangemouth T Mainline Pipeline Esso Pipeline T T T TT T Petroplus Teesside (closed 2009) Essar T Total Lindsey Phillips66 Humber Stanlow T T T T T TTT T T T Murco Milford Haven T T Valero T Petroplus Coryton T TTT Pembroke T TT T (closed 2012) T T T T ExxonMobil Fawley TT T Source: UKIPA (indicative summary only – does not show all locations) Domestic refining versus importing 2. The majority of oil products are still refined in the UK. However, domestic production since the middle of the last decade has decreased while imports have increased (see figure 2). UK oil refining 5 Figure 2: Comparison of refinery production, imports and demand of petroleum products production decreasing 100 since 2004 90 80 70 60 Demand decreasing since 2009. 50 Refinery Production Petroleum Imports 40 Million Tonnes Petroleum Demand 30 20 10 Imports increasing since 2005. 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Year Source: DECC, Call for Evidence on the role of the UK refining and fuel import sectors in the supply of refined oil products into the UK market, 20 May 2013, page 2 The main markets for products from refining in the UK are: i. Retail (forecourt service stations): ~28.5 million tonnes per year of petrol and diesel; ii. Aviation: ~11 million tonnes per year jet kerosene; iii. Commercial: ~16.7 million tonnes per year (commercial vehicles, heating fuels and marine); iv. Speciality (bitumen, lubricants, LPG, solvents and petroleum coke etc.): ~5 million tonnes per year; and v. Petrochemicals: ~2 million tonnes per year.5 An industry in decline 3. On 10 May 2013 IHS Pervis and Gurtz published a report that had been commissioned by the UK Petroleum Industry Association (UKPIA): The role and future of the UK refining sector in the supply of petroleum products and its value to the UK economy.6 The report concluded that the UK refining industry makes a substantial contribution to the UK economy and plays a vital role in maintaining the UK’s fuel supplies. The industry, for 5 DECC, Digest of UK Energy Statistics, 2012 6 IHS Purvin & Gertz, The role and future of the UK refining sector in the supply of petroleum products and its value to the UK economy, 10 May 2013 (http://www.ukpia.com/files/pdf/therolefutureoftheukrefiningsector.pdf) 6 UK oil refining example, supports a considerable number of jobs. The Minister of State for Energy, Rt Hon Michael Fallon, said there would be an impact if the industry was to close: If the whole industry was to close, it would certainly have an impact. It is an important industry, it is a relatively large industry. According to the UKPIA, refineries support around 26,000 jobs directly and indirectly so if we lost all our refineries, yes, it would certainly have an impact.7 4. In written evidence to our inquiry DECC stated that, ‘the Government is committed to ensuring that the UK has a downstream oil supply chain that provides security of supply, is resilient to short term disruptions, and supports jobs and economic development.’8 But the industry is in decline. UK oil refining capacity has reduced from 18 refineries in the late 1970s to seven today. Two refineries have closed between 2009 and 2012, the loss of further UK refining capability may pose a risk to security of energy supply as a result of increasing dependence on imports. Any further refinery closures could also have knock-on effects on ancillary industries and the supply of other products within the UK and overseas. Unite the Union argued that environmental policies could, potentially cost thousands of jobs’.9 DECC’s review and our inquiry 5. On 20 May 2013, as part of a cross-Government review, DECC published a call for evidence on the role of the UK refining and fuel import sectors in the supply of refined oil products into the UK market.10 We decided to hold a short inquiry to gather evidence and make recommendations relevant to DECC’s review. In particular we examined the pressures on the industry and the implications for security of supply. DECC said that, ‘it would be very helpful if the Committee published evidence early and shared final (or at least interim) findings with DECC in time for these to be factored into the review, which will publish conclusions towards the end of this year.’11 6. We launched our inquiry on 18 April 2013 and received 15 submissions of evidence. We also held two evidence sessions. A full list of witnesses can be found at the end of this report.