HazardEx interview: Chris Hunt, Director General, UK Petroleum Industry Association
04 June 2013
UK refining faces a threat to its survival through a combination of factors, including low margins on refining of crude oil and cost impacts of meeting EU and UK legislation. HazardEx spoke to Chris Hunt, Director General of UKPIA, the UK Petroleum Industry Association, to find out what the industry is doing to redress the situation.
UKPIA has nine members: seven companies with refineries (Essar Energy, ExxonMobil, Murco, Petroineos, Phillips, Total and Valero), and two former UK refiners, BP and Shell. The refining and distribution sector is currently worth over 10bn to the UK economy with 8,500 refining sector jobs supporting 54,000 in the extended supply chain and a further 25,000 in the wider economy.
“Our principal task is the representation of members with regard to UK and EU regulation, legislation and policy”, says Hunt. “And since Buncefield, a significant part of our work is concerned with process safety and safety generally.”
A main area of focus at the moment is the wave of regulation and legislation that will soon hit UK refining.
“Refineries will be impacted by multiple UK and EU legislation which will impose additional costs that are likely to severely disadvantage them against global competitors,” says Hunt.
“Adding to a burdensome legislative background, we are also faced with tough market conditions, cost pressures, supply versus demand challenges and growing competition from the USA and new players in the Middle East and Asia.”
The UK dimension
Hunt points out that UKPIA members supply over 85% of the petroleum products used in the UK and some 33% of total energy consumed. The International Energy Agency (IEA) forecasts that oil products will account for over 80% of UK transport fuels to 2030 and beyond, making the downstream oil industry a key part of the energy mix into the future.
“We are extremely pleased that, in July 2011, the then Energy Minister agreed to a review of the refining industry in the UK,” says Hunt. “A Department of Energy and Climate Change (DECC) refining strategy is due for completion in the autumn of 2013 and we hope that this will inform a future policy framework for the industry.”
The first steps of that process included UKPIA commissioning a third-party independent study through IHS Purvin and Gertz to look at the value of refining to the UK economy, both in monetary terms and in relation to robustness and resilience of supply.
The study is also looking at a number of ‘what ifs’: what will happen if refining continues as it is now, if it makes minor investments, if it makes major investments, or if there are further refinery closures. Also, it will assess the impact of all the new legislation and regulations on these different scenarios.
This will go to DECC, Hunt says, which will then decide on the steps that need to be taken, and what needs changing to secure the future of the industry. UKPIA will put in suggestions as to how best to mitigate the effects of the legislation, but it is up to Government to come up with the fundamental plan.
Another key area is process safety, where UKPIA is very active. The Association was heavily involved in setting up the Process Safety Leadership network and it has also developed a number of tools looking at such areas as management of change, corrosion under insulation and other safety issues.
“Our aim is to deliver excellence in process safety within our membership,” says Hunt.
“Our relationship with the Health and Safety Executive (HSE) is very good - they’ve certainly seen the benefit of this side of our activities - and we’ve shared our process safety tools with anyone who has expressed interest.
“We’re also working on the Better Regulation Review, which is about where we go with the regulation of major accident hazard sites. UKPIA would like to see a single regulator for COMAH.
“From an HSE perspective, you would be checking the kit, safety method statements, control systems and so-on, whilst the Environment Agency would focus on containment policy and emissions permitting. It will require discussion, but it’s not a task that can’t be achieved,” he adds.
In Europe
Whilst the UK is working on a framework for refining, at a EU level discussions are going forward as well. Following the insolvency of the Petroplus Group, a EU Refining Forum was established to foster discussion within the EU commission, joint council, representatives from all the main Directorate-Generals, including Climate, Energy and Industry, and representatives from industry.
“The second meeting of the Forum was held on April 12, where discussion involved the establishment of a ‘Fitness Check’ for the industry to address the cumulative effects of the new legislation. Each piece of regulation may have had an impact assessment, but, as we point out in our document A Perfect Storm (see below), cumulatively, the effects are quite significant,” says Hunt.
“Our document sets out costs of refining and the amount of margin in pence per litre after factors like energy costs, wages, carbon reduction from the UK and the extra burden from EU regulation, which tips you over into negative territory.
“We’re working closely on this with EuroPIA, which is the lead organisation on the Forum, but UKPIA is also contributing strongly, as is the Italian industry association. Indeed, the challenges facing our industry in the UK are mirrored across Europe.”
At EU level, there are a number of other issues that will have a serious effect on the sector.
The Industrial Emissions Directive (IED), for instance, will be implemented through a number of sectoral Best Available Techniques (BAT) Reference Documents (BREFs). The Refinery BREFs essentially set legally-binding emission limit values to be adhered to in the issuing of permits for sites across the EU. The UKPIA Director General says it is imperative that these values are realistic and encourage cost-effective improvements. Currently, the Refinery BREF is undergoing a revision by the European IPPC Bureau. Also, permit conditions must be updated by the regulator within four years of publication of revised BAT conclusions, along with compliance.
“This timescale is unmanageable where investment in new abatement technology is required to meet the revised emissions limits,” he says.
Of all the proposed EU measures, the most onerous will be Article 7a of the Fuel Quality Directive. This requires that crude feedstocks be differentiated on a life cycle basis, which will impose serious costs on EU refining. For example, if full details of extraction and transport are required for every crude, this will have a significant effect - around 7$ a tonne.
“We are lobbying hard to ensure our voice is heard, advocating a simple and linear approach, before the Directive is concluded and enacted.”
There is much debate going on in the Commission and Parliament about these issues, and Hunt points to the one of the possible effects of over-regulation.
“In the last 18 months there has been an awakening across Europe to the fact that manufacturing is very important, and that excessive regulation simply results in the closure of EU plants. This could lead to the import of products from refineries elsewhere that are not subject to all these controls, or indeed any of the regulations that we currently have in Europe. The net global effect is that emissions go up.
“Our refineries support the employment of about 87,500 in the UK, many in areas where good, well-paid jobs are few and far between. And the industry invests large amounts in high-level training, from apprenticeships to degree level, in a range of science and engineering disciplines.
“As an example, UKPIA works closely with the Welsh Assembly Government. In Wales we have two refineries in Pembrokeshire and each one injects about £60m into the local economy, with thousands of jobs depending on them. Losing a refinery would have a crucial effect on the local economy”.
Finally, the European market is facing the challenge of structural imbalances in supply and demand. Particularly significant is the shift in product demand from petrol to Diesel in the EU due to a combination of factors such as fiscal policy, which usually favours Diesel, and the resulting growth in the Diesel-powered vehicle fleet. In France, for example, 70% of new vehicles bought are Diesel.
UKPIA Director General Chris Hunt
European refineries were built between 30 and 50 years ago and were geared to mostly manufacture petrol, sales of which have been declining as those of Diesel have risen.
UK refineries can only supply 50% of domestic Diesel and 37% of aviation fuel requirements, so the country imports from the former Soviet Union and the Middle East to fill those gaps.
In terms of the domestic market, the petrol oversupply from UK refineries is currently exported to the US, but that will not continue for much longer as the US will soon be self-sufficient in energy.
“There might be some market for the excess petrol in Latin America, but eventually refineries will have to close, either on this or the other side of the Atlantic," Hunt says.
Levelling the playing field
CONCAWE, the technical group working for refiners in Europe, estimates that the attrition rate among European refineries between now and 2030 will be equivalent to the nine biggest or 40 smallest, out of a total of 97 refineries in the EU.
Hunt elucidates: “The IHS report indicates that, on a level playing field with other refiners across the EU and around the world, UK refineries would be competitive. They represent what is termed core refining capacity - the capacity needed to keep the UK and European market adequately supplied into the future. Nonetheless, their survival will depend on the Government and the EU’s policies towards the sector.”
He thinks it unlikely any company will ever build a refinery in Europe again. A new plant is about $5bn, and the margins and return on investment in Europe are very low compared to China, India or the Middle East.
Following the closure of Coryton last year, UK energy security and resilience was brought into sharp focus.
“The IHS report uses the IEA MOSES (Model of Short Term Energy Security) indicating ‘46% import dependence as serious’. If one more refinery were to close in the UK, imports would rise to 69% for jet fuel and 65% for Diesel, so it is crucial that there is a refining strategy to inform a future policy framework,” says Hunt.
“There are initiatives that can be taken to improve energy security with equipment upgrades and so on, but these are unlikely at this particular juncture.”
New equipment would only be part of the answer: another is to change fiscal policy across Europe. Levies on Diesel are lower than those on petrol, which was driven originally to reduce tailpipe emissions of CO2, despite the fact that Diesel is responsible for other types of pollution, including particulates. This is another area where UKPIA is lobbying hard in Europe.
For the refining industry, these issues are rapidly coming to a head. At European level, the Refining Forum is working on Fitness Checks for the sector to address EU refining’s international competitiveness. But the timeline for those checks is now mid-2014 and key regulations, such as Article 7a, will be decided this year.
“At our Forum meeting on April 12 we asked for the Fitness Checks to address the effects on industry of past and current legislation, including the Fuel Quality Directive (FQD) and Industrial Emission Directive (IED). It is crucial that these are taken into account. We asked for a moratorium until the results of the Fitness Checks are known,” Hunt says.
The UKPIA Director General thinks that the concerns of manufacturing are finally at the forefront of the agenda, but decisions taken now and in the past will continue to impact refining.
“It’s going to be a tough fight,” he concludes. “Let’s hope we make it.”
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A Perfect Storm
The UKPIA document 'A Perfect Storm' was published in October 2012 to bring attention to planned legislative and regulatory threats to the UK refining sector.
The first three changes apply to EU, and the last two only to UK refineries, making them competitively disadvantaged compared with overseas refineries that do not have to meet the same standards.
The EU Fuel Quality Directive Article 7a requires a reduction in life cycle greenhouse gas emissions per unit of energy of 2 % by end-2014, 4 % by 2017 and 6 % by 2020. This will cost EU refiners one penny per litre, according to a study by Wood Mackenzie.
The revised EU Emission Trading System Phase III will introduce a single EU-wide cap on emission allowances from 2013. Based on draft UK allocations, UKPIA has calculated the total additional costs for UK refineries of up to £75M (€89M) a year.
The EU Industrial Emissions Directive regulates industrial installations requiring a permit covering emissions to air, water and soil, along with waste management and energy efficiency. UKPIA estimates investment will cost around £100M (€119M) a year from 2015 onwards, with corresponding increases in operating costs.
The UK CRC Energy Efficiency Scheme was introduced in 2008 to improve energy efficiency and cut emissions in large public and private sector organisations. UKPIA estimates costs of over £20M (€24M) a year during Phase 1, despite planned exemptions.
Changes to the UK Climate Change Levy and Carbon Floor Pricing will have a cost impact of over £20M (€24M) a year for UK refineries, according to UKPIA estimates.
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