Oil firms face hard economic choices

The oil industry is facing tough economic challenges to meet global demand for oil, forecast to increase by 40% up to 2030, despite growing concern over climate change.

The outcome will shape future investment decisions at the UK’s nine crude oil refineries, with implications for their ability to meet tightening environmental controls, according to a UK Petroleum Industry Association report.1UK refineries produce too much petrol and fuel oil and not enough jet fuel and diesel. Energy analysts forecast consumer demand will boost demand for diesel and jet fuel.

Imports from Russia and the Middle East make up for the shortfall, while surplus petrol is exported to the US. The ‘war on terror’ has caused concerns over dependency on imports.

Another challenge is declining North Sea production, which is making ‘sweet’ low-sulphur crude more expensive. To adapt, UK refineries will have to switch to higher-sulphur ‘sour’ crude, which requires more processing and desulphurisation.

Such fundamental changes to plant require massive investment. An extra 35 million tonnes per year of plant capacity will be needed to meet EU demand for jet fuel and diesel, at a capital cost of €10 billion. Additional processing would increase refinery CO2 emissions by 18 million tonnes per year.

Over the past 15 years, EU legislation has tightened fuel specifications significantly. By 2009, sulphur content must be cut from 50 to 10 parts per million - almost sulphur-free. UK refineries have already invested £600 million to meet this requirement.

Environmental controls on refineries are also tightening as a result of IPPC. UKPIA claims ‘gold-plating’ of the Directive’s requirements is putting UK refineries at a disadvantage (see main article).

The industry also complains that poor financial returns in the UK make it unattractive to invest in new plant to process different crude oils and correct the UK’s supply imbalance.

The industry suggests the combination of these challenges may cause some UK refineries to close.

In February, BP sold Coryton - its last remaining UK refinery - to Swiss company Petroplus for £900 million. In December 2005, BP sold Grangemouth to chemical company Ineos.

Nevertheless, fears for the future have not stopped record profits. In February, ExxonMobil announced a net income of £20 billion - the largest ever in US history. Shell posted profits of £12.9 billion - a UK record.

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