Grangemouth – understanding the problems and their possible consequences

Professor Alex Kemp
Professor Alex Kemp
Opinion by Energy Voice

The current problems at the Grangemouth refinery and petrochemical complex are deep-seated, and developments in the international oil and gas markets have exacerbated these problems.

Oil refining in the UK and Western Europe more widely has been personified by low (and sometimes negative) margins, and overcapacity in some final products and inadequate capacity in others.

Over the last few years several refineries in the UK have been closed, and most have been put up for sale by the major oil companies who have historically been their owners.

There are now only 7 refineries operating in the UK compared to over 20 in 1973.

This was the peak year for refining capacity at over 140 million tonnes compared to around 80 million now. But this capacity is currently substantially underused.

The pattern of the petroleum products produced by UK refineries has not adapted very well to the changing demands of final consumers.

For many years petrol demand in the UK has been falling, while demand for diesel fuel has been increasing (until very recently).

The result is that around 47% of demand for diesel fuel is met from imports. Perhaps 50% of aviation fuel needs are also met by imports. Petrol is exported on a significant scale.

The current problems have been exacerbated as a consequence of the shale gas/oil revolution in the United States.

This has led to a sharp increase in US oil production. Further, US refineries are able to acquire crude oil at a substantial discount over their competitors in Western Europe. Currently this is as much as $10 per barrel.

The result is that petroleum product exports from the USA have grown substantially in recent years and have been able to compete very effectively with refineries such as Grangemouth.

The question of whether this competitive advantage for US refineries will be long-lasting is a key one for the future prospects for Grangemouth.

Increasing US production is likely to last for a considerable number of years but the oil price differential may not remain at today‘s high level.

If the transport bottlenecks in the US can be removed the price differential could be substantially reduced, but for the near term the trading difficulties of UK refiners will remain.

A shutdown of the Grangemouth refinery could obviously affect consumers of final products such as petrol and diesel.

The refinery produces around 70%-80% of the needs of the Scottish market, but, given the current state of the international market, extra imports of petrol and diesel should be readily available.

But there may be some logistical problems in distributing these from import terminals to retail outlets.

It should be noted that when the Coryton and Teesside refineries in England were closed recently no significant problems of supplies to consumers resulted.

But the picture changes dramatically if there is substantial panic buying by motorists and other final consumers. This could rapidly result in queues at petrol stations and increased prices.

The key issues at the petrochemical plant are to some extent similar but with some obvious differences.

An important element in the economics of the petrochemical plant is the availability and price of the main feedstock.

This is ethane which is currently derived from gas and gas liquids from the UKCS. In recent years the volumes have been falling.

It should be recalled that, some years ago, long term availability of ethane was an issue with the Mossmorran petrochemical plant. In that case extra supplies have been obtained from the Norwegian sector of the North Sea.

The recent proposal made by Ineos to invest in a new plant to receive ethane from the USA has some clear merits.

Currently, there are plentiful supplies available in the USA as a consequence of the shale gas revolution and gas prices are far below European levels.

Current predictions are that, given the size of the reserves, the long term gas supply position in the USA will remain very favourable. On the surface it is rather surprising that this scheme has apparently been dropped.

Currently, North Sea oil production is continuing normally.

There are 84 fields which feed into the Forties Pipeline System.

Altogether these fields constitute around 40% of oil production from the UKCS and around 25% of UK gas production.

With the Grangemouth refinery being closed all the production is exported.

This can continue, but problems may arise as a consequence of the need for power and steam to separate out the gas liquids and permit stabilised crude oil to be exported.

Currently Grangemouth supplies the steam and power.

If this were no longer available alternative sources would have to be found. Similarly, the gases removed from the oil currently go to Grangemouth and alternative outlets for these would also have to be found.

For the medium and long term the closure of the Grangemouth complex produces security of supply issues for Scotland and the UK.

While the current international market is well-supplied with petroleum products there is no guarantee that imports will always be generally available.

The international oil market can be expected to continue to be volatile and subject to interruptions.

It is arguable that a minimum refining capability along with substantial storage are ingredients of a sensible security of supply policy.

This may justify government intervention.

The extremely adverse consequences of closure for the regional economy in the Grangemouth area are very obvious, and on both national and regional grounds, it is to be hoped that a scheme can be devised to make the complex competitive.

Alex Kemp is a Professor of Petroleum Economics, University of Aberdeen.