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UK: Oil Refinery Capacity

Volume 737: debated on Thursday 21 June 2012


Asked by

To ask Her Majesty’s Government what assessment they have made of UK oil refinery capacity in the light of the imminent closure of the Coryton oil refinery in Essex.

My Lords, the Government have assessed the impact on the security of fuel supply and energy resilience in the event that Coryton closes. London and the south-east are served by a number of supply points, and suppliers have plans in place to maintain their operations. There is a healthy global market with supplier diversity, and the UK has a further seven operational refineries. Consequently, there are no significant risks to the security of supply or energy resilience.

My Lords, I really worry that the Government are being dangerously complacent on this issue. The Coryton refinery supplies 20% of the fuel to London and the south-east, and its closure will cause a £15 million hole in the local economy and the loss of hundreds of jobs. In a similar position, the French Government invested to protect its national refining capacity, but our Government refused to help and cited European state-aid rules and adequate capacity in Europe. Can the Minister explain why the French Government can support their industry but we cannot? Why are the Government relying on European and world exports at the expense of British industry and British fuel security?

My Lords, no one wants to see any business fail and in such circumstances our first thoughts must be with the workers—the people whose jobs are at risk, even though they have done their best to make Coryton efficient and competitive. Indeed, it is very disappointing that the administrators have not found a buyer for the refinery as a going concern. It is right for me to offer noble Lords some context to explain why that is the case.

Potential bidders are faced with high up-front investments to make the refinery viable for the long term. UK refineries are facing tough competition from others in Europe and Asia. The profit margins are low and there is overcapacity in the sector. Eight European refineries have closed in the past three years, and more are likely to do so. Also, the European refinery industry has become out of balance with changing domestic demands. Noble Lords might like to know that since 2000, petrol demand has fallen by 35% and demand for diesel has risen by 34%. We looked long and hard at whether state aid should be provided for Coryton but came to the conclusion that it would not be sustainable because of the existing overcapacity in the refining industry and declining demand for petrol. As to the long-term future, I would add that the department is working with the UK Petroleum Industry Association on a sector-wide UK refining study and intends in the autumn to set out a strategic policy framework for the UK refining sector.

Is the Minister aware that it would be folly indeed to judge our refining capacity needs on the basis of current consumption, when we are in a double-dip recession? Surely, we all expect the economy to improve and demand to increase? I was not quite sure from her reply whether she referred properly to European state aid. Can she tell us clearly whether the Government have rejected the idea of applying for it? If not, have they applied? If they did apply, what was the effect?

My Lords, on the noble Lord’s first point, I should repeat what I have just said. Over the past 10 years, the consumption of petrol has gone down by 35%, so this is not a recent phenomenon at all. More specifically on state aid, the department looked very carefully at whether state aid should be provided for Coryton but we have come to the conclusion that the existing overcapacity in the refining industry and the declining demand for petrol, as I have just made clear, mean that state aid would not be sustainable, irrespective of whether it is allowable under state-aid law.

My Lords, I declare a sort of interest: I used to drive a petrol-engine car, which averaged 26 miles to the gallon. I have replaced it with a diesel-engine car, which can average more than 50 miles to the gallon, and I am not the only person in the country in that situation. Does my noble friend agree that the normal evolution of business dictates that businesses come into and pass out of cycle, and that the real question we should be discussing in relation to Coryton is not how much we might spend to keep it continuing in an industry that is already oversupplied but how we can evolve the site so that it has a long-term viable future and how quickly we can reopen it?

I agree with my noble friend. As I made clear in an earlier answer, the Government are looking not just at the current and immediate situation of Coryton but at our nation’s long-term refining needs—something that we are taking very seriously. So far as I can see, that did not happen in the years just before we came into government.

My Lords, has the work that was started under the previous Government on the resilience of fuel supplies—liquid natural gas and ordinary gas supplies—continued, bearing in mind that, for example, LNG supplies to the UK now account for 12 per cent of our energy requirements? That demands an LNG carrier delivering the gas about every two days, and we were working out resilience plans to accommodate such a supply being stopped, with other plants being available. Is that work continuing and, if so, where? It used to form part of the NRA but it seems to have disappeared.

I think I will have to write to the noble Lord on his specific question. However, I repeat my earlier point. At the moment, we have more capacity in this country for refined oil than we need. We are exporting more petrol than we are using, and we are importing more diesel than we are producing. Converting a petrol refinery to a diesel refinery would cost around $1 billion.