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UK Petroleum Industry Association Summary of issues & challenges facing UK oil refining

UK Petroleum Industry Association Summary of issues & challenges facing UK oil refining. UKPIA members: a vital part of the UK economy keeping the wheels turning… and more. Summary

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UK Petroleum Industry Association Summary of issues & challenges facing UK oil refining

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  1. UK Petroleum Industry Association Summary of issues & challenges facing UK oil refining

  2. UKPIA members:a vital part of the UK economykeeping the wheels turning… and more

  3. Summary • Oil will continue to meet most transport energy needs to 2035 and beyond, alongside a range of alternatives (Source: IEA Alternative Policy Scenario) • UK refining supports business & society giving benefits of: • added resilience/security of supply • significant economic contribution nationally & regionally • vital employment, knowledge and skills base • Huge impact on refining from both EU & UK legislation as we move to lower carbon era eg: • Renewable Heat Incentive & CRC (UK only legislation) • EU Emissions Trading, Renewable Energy Directive, Fuels Quality Directive, Industrial Emissions Directive • Increased environment and process safety compliance costs Result is risk of slow expiry of the industry & diminished benefits - currently 8 refineries operating in a challenging commercial climate and 4 are for sale ..... Government & MPs need to be mindful of legislative impact; they can influence EU thinking & way in which Directives are transposed into UK law

  4. Refineries and some of the production issues.....

  5. UK refineries – crude capacity ~1.8 mbbl/d INEOS Petroplus (closed) ConocoPhillips Shell Total Petroplus Murco Chevron ExxonMobil 8 operational refineries ~ 1.8 mb/d, ~ 12.5% of EU

  6. UK supply and demand has changed dramatically – refineries built originally for petrol demand.....note dramatic decline in Fuel Oil as power generation switches to gas

  7. Collapse in fuel oil sales – options deployed: close refineries; build cat crackers; select crude....note how diesel/jet form major part of barrel

  8. UK petrol sales long term decline; diesel sales continued to rise until.... 2008/9. Trend now continues upwards Petrol Diesel Since 2000 petrol sales  0.55 mte/a & diesel  0.80 mte/a ....but since 2008/9 recession small recovery in diesel in 2010

  9. UK & EU Gasoline & Diesel balances – note major import of diesel and export of petrol to USA GASOLINE TRADE FLOWS FROM/TO EUROPE 2009 NET FLOWS IN MILLION TONNES DIESEL/GASOIL TRADE FLOWS FROM/TO EUROPE 2009 NET FLOWS IN MILLION TONNES EU demand 102 EU demand 295 of which UK Gasoline export ~4.5mteand Gasoil import ~1.5mte Source PFC energy (UK data ex DECC)

  10. But the US is moving towards gasoline balance...its dash to ethanol production from wheat will choke off EU export market US GASOLINE BALANCE – IMPACT OF ETHANOL?

  11. Refining competition is global....... Competition from subsidized national companies refineries e.g. Russia Unequal environmental policies New Export refining capacity e.g. India Exposure to demand changes i.e. the US gasoline market Source: Europia

  12. Cost and quality issues......

  13. CAFE Clean Air For Europe PRTR Pollutants Release and Transfert Register Air Emissions Transparency Declaration CARE Package & EU ETS Directive NEC National Emission Ceilings Directive LCP Large Combustion Plant IPPC Integrated Pollution and Control CO2 CO2Quotas BREF/BAT Air Quality Legislation Renewables Directive Climate Legislation Soil, Water and Waste Legislation Fuel Products Legislation Waste Directive Fuels Quality Directive Soil Directive Product Specifications Water Framework Directive REACH Protection of groundwater against pollution Directive Environmental Liability Directive Marine Fuel changes, IMO Substances Directive Suppression/reduction of the emissions of priority dangerous substances Reduction/ Suppression of dangerous substances UK Refining is unique in being affected by multiple legislation on all aspects of its business: from manufacturing to the products themselves… A cumulative impact! 13 EUROPIA Platts, Brussels 14 September 2009 Source: Europia

  14. CAFE Clean Air For Europe PRTR Pollutants Release and Transfert Register Air Emissions Transparency Declaration CARE Package & EU ETS Directive NEC National Emission Ceilings Directive LCP Large Combustion Plant IPPC Integrated Pollution and Control CO2 CO2Quotas BREF/BAT Renewables Directive Waste Directive Fuels Quality Directive Soil Directive Product Specifications Water Framework Directive REACH Protection of groundwater against pollution Directive Environmental Liability Directive Marine Fuel changes, IMO Substances Directive Suppression/reduction of the emissions of priority dangerous substances Reduction/ Suppression of dangerous substances Air Quality Legislation Climate Legislation Soil, Water and Waste Legislation Fuel Products Legislation 14 EUROPIA Platts, Brussels 14 September 2009 Source: Europia

  15. Some of the many issues we face.........

  16. Massive capital spend in response to downstream oil incidents.......£450m and rising Texas City Buncefield Esso Longford

  17. CRC Energy Efficiency Scheme - £50m • A mandatory UK scheme designed to encourage energy efficiency by large non-industrial public & private sector energy users through a system of a CO2 emissions cap and allowances with auctioning • The scheme is complex and administratively burdensome • Concerns about the consistency of treatment of refinery CHP plant • Following the Comprehensive Spending Review, proceeds from auctioning will now go to HM Treasury NOT scheme participants With revenues now going to HMT, the scheme is now looking like a burdensome additional tax that does little to encourage energy efficiency beyond what prudent businesses do already. UKPIA would like: • The scheme should either be scrapped or reviewed/re-designed before Phase 2 in 2013-17

  18. Chemical Products Registration • REACH = Regulation 1907/2006 for the Registration, Evaluation and Authorisation of (new and existing) Chemicals • Replaces and expands on several pieces of current legislation on new and existing substances and preparations • “License to operate” • Completed preparation of common parts of registration dossiers (both mandatory and optional) incl. classification under GHS • Managed mandatory data sharing and sharing of common parts of dossiers with non-Member Companies • Prepared guidance and templates for non-common parts of dossiers • Looking forward • Assist member companies with potential issues arising from dossier evaluations • Monitor (and react to) developments related to Restrictions and Authorisation of dossiers Over 150 million Euros to date – not including company time and ongoing costs

  19. UK Obligations (IEA & EU) met by oil reserves kept by commercial companies which supply into the UK market from UK refineries or imported sources. Refiners must hold 67.5 days of stocks and non-refiner importers 58 days. Current system administered by DECC under increasing strain and not fit to meet higher future stock obligations as N.Sea production declines Oil industry has been working with DECC and retained consultant on a range of alternatives. Oil industry favours the establishment of an industry funded, independent Stocking Agency. Aims: Meet obligations cost effectively, professionally and efficiently at no cost to Government Robust mechanisms to cope with the UK’s move to 90+ days stock Improve supply & infrastructure resilience Greater clarity, transparency & equitability with compulsory membership UKPIA would like: Keep pressure on government/DECC for independent Agency solution, with an early decision following report due to the Minister Q1 2011 Compulsory Stocking Obligation - £5b future bill!

  20. Key issues for UK refining remain carbon leakage and allocation of free allowances as a sector that is open to international competition The industry recommended a single benchmarking system for all 98 EU refineries based on the “complexity weighted tonne” (CWT) basis. This has now been included in the draft Commission Decision. Five of the eight UK refineries are in the 4th quartile based on CO2 emissions/CWT. The cost of purchased allowances to the refining sector will be some €60-200M/year at a CO2 cost of €15-50/ton. The margin outlook for the refining sector is very uncertain - phased introduction of the benchmark from 2013 to 2020 would mitigate against further refinery closures and ensure supply resilience and security of supply. Even with a proportion of free allowances allocated under the benchmarking system, cost of purchased allowances to UK refineries will be around €120-200M/year from 2013 onwards in a ‘cliff edge’ introduction – a ‘taper relief’ mechanism must be introduced to prevent serious damage to UK refining! EU Emissions Trading Scheme Phase III

  21. Renewable Energy & Fuels Quality Directives • Two major EU Directives passed at the start of 2009 to encourage the move to lower carbon energy • Dept for Transport is lead department consulting on implementation into UK law by end 2011 • RED requires 10% by energy renewable content in fuels by 2020 and FQD 6% GHG saving by 2020 • Major issues around biofuel sustainability & GHG emissions for range of crude oils used in refineries Achieving the 2020 targets may require 4 grades of fuel on larger forecourts (from 2015>) with 2 high bio blends of a least for petrol E10+ and diesel B10+. Smaller sites disadvantaged as they can only accommodate ‘protection grades’ E5 and B7; risk of further closures of rural/small sites UKPIA would like : • Agreed default values used for crude oils; Government/DECC needs to maintain pressure at EU level.

  22. Future changes in Fuels Quality (indicative) – all have a significant price tag!

  23. Renewable Heat Incentive This is a new proposal from the UK Government to help incentivise the use of renewables funded by a levy on fossil fuel suppliers As originally proposed, the RHI levy was to be applied to fossil fuels used in heating, including those for refinery processes and COGEN plants Had the potential to wipe out the entire refining margin unless refinery fuel burn was excluded cost Following extensive lobbying by UKPIA, the Comprehensive Spending Review announcement October 2010 confirmed levy had been shelved and the RHI will be funded from general taxation RHI had the potential for major financial impact upon UK refining-~£350million pa- but for the best part of a year the exact impact was unknown, despite the scheme being due to commence in April 2011

  24. Government Proposals for Reform of the Climate Change Levy – potential for multi-million £ bill! • UKPIA has responded to HM Treasury consultation on carbon price support on proposed changes to the climate change levy (CCL) and fuel duty to help increase incentives for investment in low-carbon electricity generation. Includes the following proposals: • In most cases, fossil fuels currently used to generate electricity are exempt from CCL. The Government proposes to remove these exemptions and to tax these fuels according to their average carbon content. • Duty applied to oil products at the duty point can be reclaimed in full by electricity generators but, as part of the carbon price support mechanism, the Government proposes to reduce the amount of fuel duty that can be reclaimed, in effect creating ‘oils carbon price support rates’. • All fossil fuels burnt in CHP stations will be subject to CCL or fuel duty (at the relevant carbon price support rates) regardless of their rating through the CHP Quality Assurance (CHPQA) programme. • Supplies of fossil fuels to auto-generators will continue to be liable to CCL and fuel duty but at the relevant carbon price support rate. Auto-generators will no longer be able to reclaim CCL or fuel duty charged on the fossil fuel they use to produce electricity, which is subsequently supplied to the electricity transmission and distribution networks. • The Government intends to introduce proposals in the Finance Bill 2011, to be effective from 1 April 2013. • UKPIA are seeking to engage with HM Treasury and DECC on the issues identified in the consultation response, but also on the broader overlap between energy efficiency and climate change measures.

  25. Current Business Rates revaluation at 5 yearly intervals to ensure basis of rating assessment remains in line with market values System is complex- for example different transitional arrangements apply in Scotland vs England & Wales Current 2010 revaluation has occurred based on values at April 2008 at top of the market cycle Significant impact on proposed new valuations- average RV increases for filling stations(+60%), refineries (+44%), storage facilities (+50%) and pipelines (+30%) UKPIA would like: Revaluation cycle changed to 3yrs intervals from current 5yrs Realism in RVs for filling stations eg level of margins on fuel, shop turnover proportion, car wash capital costs, level playing field with high volume supermarket sites Review of the Plant and Machinery for de-rating of Environmental plant, security assets installed for National Security purposes and de-rating of post Buncefield compliance investment and assets Rating relief for cross-country pipelines Rating Revaluation

  26. Ineos Petroplus ConocoPhillips Shell Total Petroplus Murco Chevron ExxonMobil The net result?........... Closed Sold? For Sale For Sale Sold

  27. What do we want?...... That UK Government recognises the importance of the UK refining industry as a provider of good quality jobs in economically challenged areas, as vital to the nations everyday activity and the bedrock of UK energy supply resilience and security. That recognition should translate to policy action that does not disadvantage UK refining versus EU and global competition and actively incentivises refinery investment and continued health.

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