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 advantage.
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 towards diesel).
The traditional export markets for Europe’s excess gasoline production in North America have dried up as a result of the shale boom.
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 close.
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.