Refinery closures threat as costs rise

12 October 2012
By Sofia Mitra-Thakur
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The Coryton oil refinery in Essex

The Coryton oil refinery in Essex

Refiners in the UK face a further squeeze on their profitability if a raft of new environmentally-friendly legislation is applied from 2013, threatening more plant closures, an industry lobby group said.

The UK Petroleum Industry Association (UKPIA) said the impact of upcoming UK and European Union legislation associated with carbon reduction and air quality will add substantially to the industry's costs.

"The refining sector works on a very narrow differential between cost of crude oil and the value of products produced," said Chris Hunt, director general of UKPIA.

In favourable conditions this is equivalent to about 1.65 pence per litre, which after energy and other operating costs falls to 0.6 pence per litre, according to calculations by consultants Wood Mackenzie and the UKPIA.

Hunt said legislative impacts could add a further 0.35 pence per litre of costs, leaving a return on capital employed of "close to zero".

The squeeze on the industry has already been highlighted by the closure this summer of the Coryton refinery in Essex, after its owner Petroplus went bankrupt.

The UKPIA warned that the loss of further UK refining capacity posed a serious risk to the UK's security of energy supply.

"It could also jeopardise other industrial sectors dependent upon feedstocks (such as naptha, which supplies the petrochemical industry) from refineries and make the UK highly dependent upon imported fuels such as diesel and aviation kerosene," Hunt said.

European refineries have been enjoying strong margins through the second and third quarters of this year, but the industry is not convinced those margins will last, and not all have been able to take full advantage of them.

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