What is the outlook for UK refining?

Since the closure of BP’s Belfast plant in 1982, the UK refinery network has undergone continuous shrinkage, from 18 facilities with a total distillation capacity of 132 million tonnes (mt) to 7 plants with a capacity of 77 million mt. The network that remains has an above average level of complexity, with catalytic reforming capacity of 13.6 million mt and cracking/other conversion capacity of 31.4 million mt.
Against a background of continuing change in the downstream sector, DECC has conducted a number of assessments. These have included studies with the Downstream Oil Industry Forum, a Deloitte LLP assessment on resilience to some hypothetical ‘stress test’ scenarios and an assessment of the UK’s refined product supply market, by Purvin and Gertz.
Developing a strategic policy framework
DECC and UKPIA then prepared the scope of a study to develop a strategic policy framework for the UK refining sector. The resulting report, compiled and published in May by Purvin & Gertz, sought to do the following.

  1. Define and quantify the role of UK refining – security of product supply and wider socio-economic benefits.
  2. Define ways to quantify/measure security of supply benefits of retaining a refining base, building upon existing/analogous approaches.
  3. Estimate the role of the UK’s seven operational refineries in product supply and benefits brought to their local communities.
  4. Review the role of refined products as enablers: their key role in transport (road/aviation/marine), as energy products (LPG/kerosene) and specialities (lubricants, bitumen, special fluids & solvents) and as chemical feedstocks.
  5. Consider, under four different scenarios, how the industry may evolve to 2030. Identify areas of current EU/UK policy and analyse its impact on the UK market from a security of supply/wider economic point of view.

The 240-page report provides a comprehensive insight not only into refining activity but also into some salient issues in the wider European downstream sector.
The report offers a sobering assessment of the outlook for the UK refinery network, highlighting some very real challenges, and risks to its longer term viability, presenting government with some serious dilemmas. The precedent of Coryton’s closure last year suggests that the report’s main findings are particularly timely and serve notice that ‘the law of unintended consequences’ could come to bear on the longer term continuity and security of supply of certain, critical refined oil products. A cautionary tale!
Key challenges
• UK refining makes a substantial contribution to the UK economy. Annual contribution is some £2.3 billion, supporting an estimated 26,400 jobs. When activities in the UK crude oil production sector are added, there is an additional £9 billion.
• Refining plays a vital role in maintaining the country’s fuel supplies. Based on the IEA’s Model for Short Term Energy Security approach, comparing imports to demand, the UK is already at high risk level for diesel and Jet A-1 supply and close to high risk for domestic/heating kerosene. Projected future demand trends and further closure of UK refineries would substantially increase risk.
• The UK has substantial differences in supply robustness. The south is particularly at risk with low levels of own supply cover for all fuels, and no spare capacity in import logistics to meet any further shortfalls, if existing refinery production should be interrupted.
• Assuming a level playing field with EU/world refiners in respect of compliance investment, UK refineries would be considered to be competitive. Long term projections for average net cash margins are around $2.60 per barrel; a level to be expected for large, efficient cat-cracking refineries. With annualised turnaround costs/depreciation around $0.86 per barrel, this gives an operating result of around $1.64 per barrel. Refineries of this type form part of core refining capacity i.e. needed globally for refined product supply and demand to balance. In the long term, however, investment in additional diesel production capability is required, with an investment of some £1.5 to £2.3 billion needed over the next 20 years. Projected margins allow some level of reinvestment, if there are no other cost burdens.
• Proposed UK, EU and, in some cases, global legislation mean significant increases in capital expenditure and operating costs for UK refiners. From 2015 to 2020 the total cost is projected to be around $2.50 per barrel, of which only an estimated $1.30 per barrel is deemed recoverable due, primarily, to competition from non EU refiners. Required capital expenditure is estimated at £5.5 billion, most of which would not generate any return on investment. Legislative cost impact is likely to increase further once the impact from currently not fully defined, and hence not costed, legislation, such as the Fuels Quality Directive (FQD) and Energy Efficiency Directive (EED), are factored in.
• Capital expenditure and costs related to legislation would largely eliminate the UK’s projected refining margin in the period to 2025. The figure compares the projected costs of legislation against the projected average UK refinery net cash margin and the projected average UK refinery net cash margin minus current sustaining capital requirements ($0.84 per barrel).
• No industry would (or could!) bear such an investment burden for no return. A large mandatory capital expenditure requirement that provides no return on investment would force some UK refineries to close. Even refiners fortunate to have access to adequate finance may still decide that operating in the UK/EU would not provide adequate returns on investment compared to other regions.
• From now until 2030, an average undiscounted return on investment of around 4.1% is expected before factoring in any cost for FQD and EED. At a discount rate of 3.5% this ROACE falls to 3.2% and, at a 10% discount rate, it reduces to 2.2%. This scarcely provides an incentive for continued refining operations in the UK/Europe.
•Less UK refining capacity would leave the UK even more exposed to the international refined product market for high risk diesel, JetA-1 and domestic/heating kerosene.