By John Kemp
LONDON Oct 24 There is probably no long-term
commercial future for the oil refinery and associated
petrochemicals plant at Grangemouth in Scotland even if the
current owners, Ineos and PetroChina, can resolve their dispute
with workers and the labour union.
Excess capacity in the refining industry, especially in
Europe, and the shale revolution in North America will continue
to pressurise Grangemouth and Britain's other oil refineries.
It is hard to see what strategic advantage Grangemouth
possesses that will enable it to compete with new refineries and
petrochemical facilities planned or under construction in Asia
and North America.
Every plant closure is a tragedy for those whose livelihoods
are destroyed. Britain's politicians are right to push for a
compromise between Grangemouth's owners and workforce if it can
keep the site open a few more years. But they should resist the
temptation to offer financial support to a plant that may
eventually be doomed anyway.
Like their counterparts in continental Europe and the East
Coast of the United States, Britain's refineries are old, small
and relatively unsophisticated.
But soaring output of easy-to-refine crudes from the Bakken
shale has thrown a lifeline to East Coast refineries in the
United States; Britain's and Europe's refineries have no such
British and European refineries are further hamstrung by the
growing mismatch between their product slate (a balance between
gasoline and diesel) and consumer demand (which has been tilted
The traditional export markets for Europe's excess gasoline
production in North America have dried up as a result of the
Now European refiners find themselves competing with U.S.
rivals as well as the new generation of large-scale super-modern
refineries in Asia and the Middle East for limited export
markets in Africa and Latin America.
Grangemouth's product slate - 22 percent gasoline, 24
percent diesel, 13 percent kerosene and jet fuel, 15 percent
fuel oil, and 12 percent petrochemical feedstocks, as well as
some other products, according to the UK Petroleum Industry
Association - is out of kilter with current market demand.
In the short and medium term, smaller, older refineries like
Grangemouth will struggle to earn decent returns making fuels.
Petrochemicals have traditionally offered a route to adding
more value. But Grangemouth and other European refiners face
increasing competition here too.
Once again, the changing competitive landscape stems from
the North American shale boom. Production of natural gas liquids
(NGLs) like ethane and propane is soaring along with oil and gas
output in the United States.
Cheap gas coupled with the plentiful availability of NGLs is
encouraging heavy investment in new petrochemicals plants along
the U.S. Gulf Coast.
In January 2013, the Industrial Energy Consumers of America
(IECA), the trade association for energy intensive industries,
released a list of more than 100 new manufacturing facilities,
totalling $95 billion of investment, which are planned or under
construction as a result of cheap gas prices.
More than 30 of the plants would produce bulk petrochemicals
of the sort Grangemouth makes, according to the letter IECA sent
to the U.S. Department of Energy.
Ineos has said it will invest a further 300 million pounds
($485.03 million) to build terminal facilities at Grangemouth
and enable it to bring in ethane from the United States. But it
is hard to see how that can be a source of sustainable advantage
when rival petrochemical plants on the U.S. Gulf Coast will be
much closer to the source of feedstock.
Britain (and Europe) has too many refineries producing the
wrong mix of products. Some refineries somewhere will have to
If Grangemouth stays open, another European refinery will
have to shut (which is one reason why the European Commission
will be monitoring developments in Scotland closely to ensure
that EU rules on state aid are not broken).
Coryton refinery, on the Thames Estuary near London, has
already ceased production. The tank farms, wharves, pipelines
and associated infrastructure are being converted into terminal
for importing products refined elsewhere.
In the same way, Grangemouth's future as a refinery and
petrochemical plant has to be weighed against the option of
converting it into a terminalling operation.
POLITICAL POWER PLAY
All sides have sought to exploit the current dispute. Labour
organisers appear to have overplayed their hand and are now
offering a deal to avert closure. Ineos is pushing hard to
extract concessions on pensions and compensation, remove
troublesome labour organisers, and reaffirm its right to manage
Britain's Department of Energy and Climate Change, and
politicians in the devolved administration in Scotland, have all
rushed to broker a compromise, as well as seeking an alternative
"strategic buyer" for the plant, in a bid to avert closure.
But there is likely to be little interest. No strictly
commercial buyer wants a small ageing refinery in Western Europe
and an associated petrochemical plant. "Strategic buyer" appears
to be code for one not worried about profitability in the short
Most of those mentioned so far have been state-owned oil
companies from China, or perhaps another petroleum producer from
an emerging market country. But why would they want to buy a
refinery and petrochemicals operation, rather than turn
Grangemouth into a simple import terminal?
Despite its local causes, the showdown at Grangemouth is
symptomatic of a much broader, strategic shift that has put much
of Britain's refining and petrochemicals business under threat.
Some commentators have suggested Grangemouth (and presumably
the other six refineries in Britain) must be kept open to avoid
becoming dependent on imported products, as a matter of national
But Britain already relies on imports for much of its
diesel, jet fuel and natural gas. The concept of self-reliance
in oil refining is a myth that belongs to an earlier era.
Perhaps Grangemouth can survive by charging what are
euphemistically known as "premium prices" to customers in its
captive markets in Scotland and the north of England - but that
just means Scottish motorists will be subsidising the refinery
every time they fill up their cars and trucks with "premium"
petrol when they could use cheaper fuel imported from elsewhere.
The current disputes over disciplinary processes and
compensation are a sideshow. Grangemouth's fate will be decided
by the global forces remaking the refining and petrochemicals
business, and the outlook does not look good.