Not all refineries will be able to navigate the transition. At the forefront of this is Grangemouth. In late 2023, warnings emerged that the 150,000 barrel per day refinery could close in 2025.

For the moment, this remains the plan. Grangemouth opened in 1924 and is Scotland’s only refinery.

However, a study has been commissioned on Grangemouth’s future. Intervention could be a practical step to save jobs and ensure security of fuel supply. But it could prove costly as UK fuel demand decreases over coming years, competition ramps up and margins fall – especially if extended to more of the UK’s 1.22 million bpd capacity.

Kenny McAskill, speaking in January in the House of Commons, set out three steps for Grangemouth. He called for the government to support industry in restarting the refinery hydrocracker. McAskill followed up by calling for North Sea fields – such as Rosebank – to deliver oil to the facility. And finally he called for a “new future by ensuring a biofuels capacity there”.

The Alba Party MP said it was an “absurdity” that an oil-producing nation lack “refinery capacity, never mind the perversity of the oil it produces being shipped across the seas for refining”.

Downstream challenge

Prospects for refining are not looking bright in northwestern Europe generally, which effectively operates as a single regional market for fuels. Falling demand and rising competition has cut west European refining capacity by 2.9mn bpd since 2007. More closures across the continent are likely.

The International Energy Agency (IEA) has suggested another 1-1.5mn bpd of capacity could be at risk of closure by 2030 – including plants in the UK.

Western Europe’s diesel demand, which is about two thirds of total road fuel demand, peaked in 2017. Gasoline peaked several years earlier.

Both gasoil and gasoline demand are set to fall further over coming years. This will accelerate as new EV requirements tighten.

Earlier this week, BP CEO Murray Auchincloss said oil refineries across Europe will be forced to shut as the West abandons fossil fuels in the race to net zero. He said older and smaller refineries will close or convert to biofuels, as traditional oil refining is rendered unprofitable by a combination of surging fuel taxes and falling demand.

Petroineos has said Grangemouth’s future as a refinery is not viable in the medium term. It has reported “significant losses” since 2011. Grangemouth’s loss, would provide gains for other refineries, such as Stanlow.

Competition crunch

In addition to shrinking fuel demand, UK refiners are likely to be exposed to increased competition from new large and efficient refineries in the Middle East and elsewhere outside Europe. As the UK and EU Emissions Trading Scheme (ETS) prices and other environmental costs rise, EU refiners will to some extent be protected from these cheap fuel imports by the Carbon Border Adjustment Mechanism (CBAM).

The UK is adopting its own CBAM in 2027. In theory, the CBAM will ensure the carbon price of imports is equivalent to the carbon price of domestic production. This should mean tariffs are imposed on imported products to make up for a lack of carbon pricing where they were produced.

Rising carbon prices and other regulations will also put increased pressure on UK and EU refineries to make significant investment in CCS and low carbon hydrogen, in order to continue operating long term. The Grangemouth industrial hub is responsible for around 6% of Scotland’s total emissions and one third of the nation’s industrial pollution. It must change to achieve a net zero economy by 2045.

Import dependency

Despite the expected decline, fuel demand will continue for many years to come, even after internal combustion engine (ICE) cars are no longer sold in 2035. Governments need to ensure customers’ needs are still met – or risk a serious backlash at the polls.

Governments are also concerned about the impact on skilled jobs and the local supply chains around refineries. These are well paying jobs that contribute significant amounts to GDP and nearby communities.

If refineries are not supported, the UK and wider Europe could face greater import dependency for both conventional fuels and biofuels. How long this demand may run for is unclear and will be a function of how consumers shift to EVs. As with the upstream, the UK would be importing when it could be produced domestically, generating jobs and wealth – and lower emissions.

Decisions around what to support – and protect – rather than leave exposed to market forces are complex. Practically, the best way forward would be for government to support the most efficient refineries. However, the political cost of job losses is a bitter pill to swallow.

Under Petroineos’ plans, the site would move from employing around 500 people to around 100. However, there are another 2,000 contractors also reportedly working at the site. As such, the impact of such a closure would be hard felt.

Those contenders best placed to stick around are those that invest to navigate changing demand. Options lie in carbon capture and storage (CCS), low carbon hydrogen and biofuel or sustainable aviation fuel (SAF).

In January, at Grangemouth meetings, the UK government’s position of not providing financial support was repeated.

Go low

ExxonMobil recently announced plans to construct a CCS pipeline to decarbonise operations at its 270,000 bpd Fawley refinery, near Southampton. The proposed pipeline will take greenhouse gases from the plant and store them offshore in the English Channel. The Solent CO2 Pipeline project would be a “linchpin for establishing [CCS] technology in southern England”, Exxon said.

The plans follow a $1 billion expansion project at the refinery to increase its ultra-low sulphur diesel (ULSD) output by 40% by 2025. This should help fill the gap left by sanctioned Russian products and strengthen the plant’s position as a key supply hub to the UK market.

The UK relies on imports for 50% of its diesel needs. Exxon has said its upgrade work would cut this by 25%.

Grangemouth could also be connected to a CCS network. The Acorn CCS plan at St Fergus is already connected to Grangemouth through pipelines. This could store CO2 emissions offshore, potentially prolonging the life of the current chemical operations.

Labour has already acknowledged the Acorn project could be linked up to Grangemouth and the benefits it could bring to the cluster.

Stanlow and the Humber refineries also have CCS plans. It is unclear how many refineries will need to make this investment to meet residual demand.

As with CCS, long term refinery use will require low carbon hydrogen to replace grey hydrogen use. German firm RWE plans to develop a hydrogen plant at Grangemouth, with its main customer being the refinery.

The project has a planned start date of 2029 but will need the backing of UK and Scottish governments. There are also plans for green or blue hydrogen at other refineries on the Humber and at Stanlow on Merseyside.

Big on bio

Almost 400,000 bpd of biofuel refinery conversion have been announced in Europe to date. While biofuel conversion is often seen as a prime contender for older or smaller refineries such as Grangemouth, the market is suffering from overcapacity and cheap imports.

A flood of cheap low specification Chinese biofuel products has undermined European biofuel margins. These threaten this early stage industry’s future. As a result, the EU plans to impose a tax of up to 36% on Chinese biodiesel imports to protect domestic producers.

In addition, biofuel blending mandates in some countries have failed to keep up with expectations. The European Commission is encouraging member states to accelerate their plans.

The continent’s biggest biodiesel producer, Neste, has been hit particularly hard by the imports and slower than expected demand growth. A number of announced refinery-to-biofuel conversions around Europe have been cancelled.

The UK may have to resort to similar tariffs and greater efforts to expand the home market if biofuel is to prove a viable option for local refineries. There are already moves to expand biofuel facilities, but some investors may be waiting for government support.

Celtic Renewables is involved with plans for a biofuel hub at Grangemouth, including the production of green chemicals, replacing those that are currently produced from refined products from the refinery.

SAF option

ExxonMobil is already lining the Fawley refinery up for potential renewable fuels production, with its new diesel hydrotreater at the plant capable of processing HVO into renewable diesel. The hydrotreater could eventually be converted into a sustainable aviation fuel (SAF) unit, with the refinery now benefiting from a direct pipeline link to Heathrow Airport completed in March.

Grangemouth could also be suitable for SAF production to replace the jet fuel currently supplied to Scotland’s main airports. The UK wants 10% of air travel to be powered by SAF by 2030.

Petroineos’ Iain Hardie has warned that for Grangemouth to move to biofuels, it would need fiscal and policy support.

One area identified by Hardie was the “cap” on hydrotreated esters and fatty acids (HEFA) for SAF. The UK is capping SAF from the HEFA process at 92% in 2027, falling to 71% in 2030 and 35% in 2040.

The company official has said this cap puts UK production at a disadvantage to competitors in Europe. The Scottish government has co-funded a feasibility study on Grangemouth to assess the options for a HEFA biorefinery.

Forward plans

The refinery operator has so far set out plans for fuel storage at the plant. Other options open to consideration include potential for liquid air energy storage.

Expanding the port, meanwhile, could see it play a part in servicing offshore wind plans.

Grangemouth is already a key port for renewables and part of the Forth freeport zone. It is also a contender for the HQ of new national energy company, GB Energy.

Whatever approach the government decides on, it is important for regulation to back up private investment in green energy. Those taking green risks should have support of policy makers. Too much in the way of losses, as seen with Neste or Orsted, and companies may shy away from taking on these risks and opportunities.

The problem for Grangemouth is that it is political, but also commercial. Calls for the government to save the facility fall short, as they ignore Petroineos’ plans. But for the company to succeed, it will need political support.

GB Energy is often discussed as a potential investor in various parts of the energy sector. If the government was serious about saving jobs and driving the transition, some degree of equity ownership in Grangemouth might provide the certainty required for all involved.

Updated to clarify on the UK’s CBAM plans.

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