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UKPIA says competitiveness of UK oil refining and other energy intensive industries under threat

20 April 2016

On April 20, the UK Petroleum Industry Association published a report entitled Crisis – What Crisis? which explores the shared challenges facing oil refining and other energy intensive industries in the UK. In light of the wider crisis facing UK manufacturing, the report provides an overview of why industry matters and explains the pressures

The Milford Haven refinery closed at the end of 2014
The Milford Haven refinery closed at the end of 2014

UK oil refineries make a substantial contribution to the country's economy, supporting an estimated 88,100 jobs, many with highly specialist skills and technological expertise. The annual contribution to the economy is some £2.3 billion and each large refinery is estimated to inject £60 million locally. If the activities of the UK oil production sector are included, an additional £9 billion can be added to the annual contribution to the UK economy. As refineries, somewhere, are required to process UK production, the two sectors cannot be entirely segregated.

With UK refineries sourcing over 85% of national fuel demand, and supplying more than one-third of primary energy demand needs, what happens in the industry reverberates throughout the entire economy. Furthermore, this vital manufacturing sector 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.

UK and EU refineries are also, on average, less emission-intensive (0.21 tCO2 per tonne of product) than non-EU refineries (0.29 tCO2 per tonne of product) and carbon leakage, in the event of a refinery closure in the UK, has been estimated at about 135%. That is, every 100 units of CO2 emissions reduced in the EU are replaced by 135 units outside it, resulting in a net increase in global emissions.

Global primary energy demand is expected to increase by 45% through to 2040, with oil representing an essential part of the world’s energy supply mix. During the same period, transportation is expected to continue being largely fuelled by petroleum products.

Estimates indicate that petroleum products will continue to provide over 85% of the world’s total demand for transportation fuels; 90% in the UK’s case. For this reason, sustaining and maximising domestic production will be crucial to ensure a reliable and secure source of energy supply.

However, UK refining is not without challenges to remain competitive and three refineries have closed since 2009. UK refineries operate on a global basis and face, amongst other pressures, 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. An independent study by IHS puts the cost impact of legislation on UK refineries at around £11.03bn by 2030.

The study concludes that no industry would bear such a mandatory investment burden for no return and a consequence could be the closure of more UK refineries. 

At EU level, a Fitness Check was initiated in 2012 in order to assess the regulatory framework for the refining industry and evaluate its impact on the sector’s competitiveness. The final report, published in 2015, provides evidence of the significant impact of the cost of EU legislation on the competitiveness of the refining industry.

The study says that the average cumulative cost of the different pieces of legislation (2010-2012) accounts for up to 25% of the total net loss of competitiveness of the sector. The study also points out to the additional costs from legislation coming into effect post -2012 and highlights the considerable effect of increasing energy prices on industry competitiveness. 

The report concludes that the critical question is whether or not the necessary steps will be taken to ensure that industry’s competitiveness is maintained. Policy choices that recognise the essential role of industry will be key in preserving its long-term success and the energy resilience of the UK. 

Chris Hunt, Director General of UKPIA, said in the report: “The UK manufacturing sector is now at a critical stage and faces a number of challenges, the response to which will have profound impacts on long-term economic growth and our national resilience. At a point when industry competitiveness is being eroded by the unilateral cost burden of regulation, urgent action is needed to ensure a regulatory level playing field.”

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