November
2016
HYDROCARBON
ENGINEERING
20
ranks among the top three most innovative sectors in the EU,
and it is widely acknowledged as having the highest
proportion of skilled jobs within the EU manufacturing
industries. Furthermore, the industry supplies important
feedstocks for other industrial sectors and processes, such as
petrochemicals, road and construction, lubricants and
greases, heating fuels, paints and solvents, and carbon
electrodes for the aluminium sector. The multiplier impact
of the sector is, thus, much greater.
Emissions
UK oil refineries are also, on average, less emission intensive
(0.21 t CO
2
/t of product) than non‑EU refineries
(0.29 t CO
2
/t of product) and carbon leakage, in the event of
a refinery closure in the UK, has been estimated at about
135%.
5
This figure translates as every 100 units of CO
2
emissions that are reduced in the EU are replaced by 135 units
outside it, resulting in a net increase in global emissions.
Supply and demand
With the UK downstream oil sector sourcing over 86% of
national fuel demand, and supplying more than one third of
the UK’s primary energy demand needs, what happens in the
industry not only impacts the security of energy supply and
resilience, but reverberates throughout the entire economy.
However, this is only part of a larger energy story. Looking to
tomorrow, global energy demand is projected to increase by
a further 32% to 45%
6
through to 2040, mainly driven by
economic expansion and population growth. Whilst all
primary energy sources will need to rise to meet demand, oil
is expected to remain the dominant source of energy supply.
With transport being the largest consumer of oil, it is also
important to note that oil products are expected to
continue meeting 85%
7
of the world’s primary energy
demand for transportation, which is in turn projected to rise
by about 30%
8
from current levels. Although in the UK
primary energy demand to 2035 is projected to remain
virtually level, oil products will continue to meet about 40%
9
of final energy consumption and 92%
10
of total
transportation needs. Accordingly, sustaining and maximising
domestic production of oil products will be crucial to
meeting future energy needs and fuelling economic growth
and prosperity in decades to come. However, UK oil
refineries face challenges aplenty. Three refineries have
closed since 2009, despite UK refineries being some of the
most efficient and competitive facilities globally, assuming a
level playing field in policy terms with EU and non‑EU
competitors. This has resulted in overall UK crude oil
processing capacity declining by nearly a third, more than
twice the UK’s inland market demand over the same period.
Against this background, the UK is already classed as a
high energy security and resilience risk
11
for diesel and
jet fuel, importing 60% of total jet fuel demand and 50% of
diesel demand, primarily from the Middle East and Russia,
respectively. Based on International Energy Agency (IEA)
measures developed to evaluate national energy security
risks and resilience capacities, more refinery closures would
leave the UK further exposed to the international product
market for those products already classed at high risk. The
pressures facing the UK refining sector are manifold and
include strong international competition from countries with
markedly lower industrial energy costs and, most crucially, a
legislative background that severely disadvantages them
against EU and global competitors.
The future
An independent report by the Information Handling Services
(IHS)
12
to assess the role and future of the oil refining sector
in the UK places the cost impact of legislation on UK
refineries in the region of £11.03 billion by 2030. The report
concludes that no industry would bear such mandatory
investment cost for no return and, as a result, more refineries
could be forced to close in the UK. At EU level, as part of the
European Commission’s Better Regulation policy, a
programme for Regulatory Fitness and Performance (REFIT), a
fitness check
13
of the oil refining sector was initiated in 2012.
Fitness checks are comprehensive policy evaluations aimed
at assessing whether the regulatory framework for a
particular policy sector is fit for purpose. A fitness check into
the oil refining sector, assessing the regulatory framework for
the refining industry and evaluating its impact on the sector’s
competitiveness, was published in December 2015.
The final report provides evidence of the significant
impact of the cost of EU legislation on the global
competitive position of the European refining industry. The
study concludes that the average cumulative cost of the
different pieces of legislation analysed (2010 ‑ 2012) accounts
for up to 25% of the total net loss of competitiveness of the
sector versus global competitors. The study also points out
to the additional costs from legislation coming into effect
post‑2012, whilst highlighting the considerable effect of
increasing energy prices on industry competitiveness.
Conclusion
Now, the critical question is whether or not the necessary
steps will be taken to ensure that the industry’s
competitiveness is maintained. As the UK engages in
important discussions about the future, the refining industry’s
strong connection to economic growth and security of supply
cannot be overstated. A strong energy tomorrow can only be
realised with the right regulatory framework today, one which
recognises the essential role of the industry and the need to
preserve its long term success.
References
1. IHS, The Role and Future of the UK Refining Sector in the Supply of
Petroleum Products and its Value to the UK Economy, 2013.
2. Idem.
3. UKPIA.
4. IHS, 2013.
5. Vivid Economics, Carbon Leakage Prospects Under Phase III of the
EU and Beyond, Refining Case Study, 2014.
6. IEA, World Energy Outlook, 2015 (New Policies Scenario and Current
Policies Scenario).
7. Idem.
8. ExxonMobil, The Outlook for Energy: A View to 2040, 2016.
9. Department of Energy and Climate Change, Updated Energy and
Emissions Projections, 2015.
10. Idem.
11. International Energy Agency’s Model of Short Term Energy Security
(MOSES) – 'net import' indicator – 45% import dependence
benchmark = high risk.
12. IHS, The Role and Future of the UK Refining Sector in the Supply of
Petroleum Products and its Value to the UK Economy, 2013.
13. EU Commission, EU Petroleum Refining Fitness Check: Impact of
Legislation on Sectoral Economic Performance, 2015.
