The downstream oil industry in the UK has undergone considerable changes. Although several global oil companies still operate as vertically integrated businesses, the industry is now structured in a more diverse way. It is a multifaceted sector where the emergence of specialised independents, operating in all segments of the business, reflects the increasingly competitive structure of the market. In addition, the sector has not been immune to the changes affecting the global landscape, not only driven by economic shifts and technological advancements, but ‘game changers’ such as the oil shale and gas revolutions. UK refining is facing rising competition from the USA, where the shale boom has led to lower feedstock and energy costs, providing US refineries with a significant cost advantage compared to UK and EU refineries, and refining capacity additions and investments in the Middle East and Asia Pacific.
The sector is also facing a difficult adjustment to realigning output to changing product demand. Demand of gasoline and heavy fuel oil has been steadily declining, whilst demand for jet fuel and diesel has seen significant increases in recent years. For instance, the increase in demand for diesel, in the EU as a whole, has been chiefly driven by growth in commercial diesel consumption and the dieselisation of the private car fleet. This is creating a substantial imbalance with UK and EU refineries’ output, historically geared towards the production of gasoline. On the other hand, the production surplus of gasoline has been exported mainly to the US, where demand is gradually declining. The increase in bio components in gasoline has also contributed to the reduction in fossil gasoline demand.
Most crucially, refineries are impacted by multiple EU and UK legislation, which is placing incremental cost demands, in terms of operational and other requirements, whilst severely disadvantaging them against EU and global competitors. An independent report by IHS Purvin & Gertz, published in 2013, estimates the cumulative burden of legislation to UK refining, to comply with UK and EU legislation, to be £ 11.4 billion by 2030. The report highlights the serious threat to refining and the resultant severe implications to security of supply and the economy, both nationally and regionally. Indeed, a viable domestic refining industry is critical to the economy and security of supply. The refining industry in the UK supports the employment of 88 100 people and its input to the economy is estimated at £ 2.3 billion1. Each large refinery is estimated to inject approximately £ 60 million into the local economy2. Moreover, with refined products continuing to play a vital role for the foreseeable future, security of supply merits particular attention. The International Energy Agency has developed a model (Model of Short Term Energy Security - MOSES) to evaluate energy security. Amongst other factors, net product import dependency is given particular attention and finished product import levels are considered a key factor affecting a country’s oil product energy security. The benchmark of high risk is set by MOSES at 45%. Based on this model and analysing finished products individually, the UK in 2013 was estimated to have a jet fuel deficit of 55% and a diesel deficit of 48%. More refinery closure would leave the UK more exposed to the international refined product market. It is also important to note that the refining industry is amongst industries at risk of carbon leakage. Since 2009, two refineries have closed in the UK and the Murco Milford Haven refinery ceased operation in November 2014. This has occurred in spite of UK refineries being amongst some of the most efficient and competitive internationally, assuming a level playing field with EU and non-EU competitors.
At EU level, following a EU Refining Roundtable in 2012, Commissioner Oettinger established a Refining Forum to debate issues affecting the sector. The Forum comprises of industry, Member States, MEPs, the Commission and other stakeholders and represents a platform for discussion of policy and regulation impacting refineries and the EU’s security of supply of petroleum products. In parallel, the EU Commission is developing a Fitness Check of the refining sector, to review the cumulative impact of legislation on industry. The Fitness Check is now expected early in 2015.
In the UK, in April 2014, the Department of Energy and Climate Change published a review into the refining and fuel imports sectors. The review commissioned a joint government and industry Midstream Oil Task Force, established in summer 2014, to help address some of the industry’s challenges.
With the debate continuing, further pressures have been added and a range of new regulations have been introduced or are soon to come on stream. For this reason, it is now crucial that urgent and pragmatic action is taken on regulatory burdens in order to enable long term planning security to ensure industry’s competitiveness. Looking ahead, opportunities must be seized. This can be done by promoting a timely, accurate and all encompassing Fitness Check along with a firm commitment for tangible actions and reform of the existing policy environment.
Sources: 1) IHS Purvin & Gertz 2013. 2) UKPIA
Written by Nunzia Florio, UKPIA
Edited by Claira Lloyd
Read the article online at: https://www.oilfieldtechnology.com/special-reports/25112014/uk-oil-sector-ukpia/