Official Report 770KB pdf
Our next item of business is a follow-up evidence session with Petroineos following the announcement that refinery operations will cease at Grangemouth from next year. In November last year, it was reported that the refinery would transition to a finished fuels import terminal and distribution hub. In September, it was confirmed that the transition would take place during the second quarter of 2025. As part of the committee’s inquiry into a just transition for the Grangemouth area, we visited the Ineos site. However, at that time, we were not made aware of the intentions for the refinery.
Following the announcement, we took evidence from Petroineos, Ineos and both the United Kingdom and Scottish Governments. Today’s meeting is an opportunity for the committee to discuss developments since then. I welcome Iain Hardie, head of legal and external affairs for Petroineos Manufacturing Scotland Ltd; and Colin Pritchard, sustainability and external relations director for Ineos Olefins & Polymers UK. I invite Iain Hardie to make a short opening statement.
Thank you, convener. I will be brief.
I thought that it would be useful to remind members of some important context for the evidence session. Grangemouth is the UK’s oldest refinery, and we find ourselves increasingly unable to compete with bigger, more modern and more efficient sites in a highly competitive global market. Simultaneously, demand for the key fuels that we produce at Grangemouth has already started to decline. With a ban on new petrol and diesel cars to come into force in the next decade, we foresee that the market for the fuels that we produce will shrink further. Due to its age, size and configuration, Grangemouth also requires high levels of capital expenditure each year to maintain its licence to operate. The annual outlay on essential planned maintenance and repairs has been consistently higher than company earnings over the past decade.
By way of illustration, since the Petroineos joint venture was formed 13 years ago, our shareholders have invested nearly £1 billion in the refinery, only to absorb cash losses of more than £600 million. Last week, the refinery lost £385,000 on average each day, and we expect to lose more than £150 million during the course of the year.
That is the backdrop against which, last November, our shareholders outlined plans to close the refinery and create in its place a modern import and distribution terminal that is capable of receiving finished fuels for onward distribution to customers through our existing road terminal. That action, as well as the associated £30 million investment that we are making in additional storage capacity and associated infrastructure, will safeguard Scotland’s supply of fuel when we switch to import and distribution mode during the second quarter of next year. Our proposals have been scrutinised and validated by external experts, and we have liaised closely with the Department for Energy Security and Net Zero on the detail of our plans to demonstrate how the measures that we are putting in place will ensure that there is continuity of supply for Scotland.
As you know, unfortunately, the import terminal will require significantly fewer people to operate than a refinery. In September, we launched a formal consultation process with the site’s 475 employees and their representatives to discuss how we will achieve a net reduction of approximately 400 roles in the next two years. We are committed to running an open, honest and robust consultation process with our employee forum and union representatives. The dialogue has been highly constructive and remains on-going. We are doing everything that we can to reduce the impact on our colleagues and to minimise compulsory redundancies as far as possible. We have also continued to communicate transparently and directly with Government ministers and officials at Holyrood and in Westminster, sharing the relevant financial and operational details to ensure that the context and rationale for our actions are well understood.
Finally, and I hope, more positively, we welcome the financial contribution from the Scottish and UK Governments towards project willow, which is a feasibility study that is assessing the potential for low-carbon manufacturing opportunities that may be pursued at Grangemouth in the future. The research is well advanced and, by spring next year, we hope to have identified commercially viable opportunities to develop low-carbon fuels that would underpin Government commitments to the net zero transition, maximise economic growth across Scotland, support local employment and contribute to long-term sustainable fuel security in Scotland and the UK. I look forward to discussing those matters further with the committee.
You have highlighted the 400 direct jobs that will be lost as a result of the decision. I mentioned the committee’s work on a just transition for Grangemouth, and the Government has published its draft plan for a just transition. From the company’s point of view, where is the just transition for the 400 workers who will lose their jobs in a short period of time?
For a number of years, we have clearly articulated the challenges that our business has been facing to the Governments in Holyrood and at Westminster. Those challenges have been driven, in part, by policies that have been set by the Government to ban new-build petrol and diesel cars post 2030. In that context, it is hardly surprising that, as a manufacturer of petrol and diesel fuel, we would have to transition away from that at a point. In parallel, we have launched project willow, which is a study that will look at low-carbon manufacturing options for the Grangemouth site.
Let us be clear, however, that the purpose of the study is not to enable a smooth transition, as I think that you are alluding to, from a fossil-based economy to a non-fossil-based economy—the study will not do that. If that was to have been put into effect, that piece of work would have had to have been done five years ago. To be very clear, we approached the Scottish and UK Governments five years ago with that proposition, but we did not move on. We are where we are today. We are committed to running an open, fair and robust consultation, in parallel with ensuring that there is continuity of supply. Those are our two drivers.
You referred to the 400 direct jobs. What is your estimate of the supply chain jobs that will also be lost as a result of the decision?
That is set out in the PwC report that we fed into and that was prepared for the Scottish Government. We are working with the Scottish manufacturing advisory service—SMAS—to put support in place for the supply chain.
We must recognise that those in our supply chain are not passive bystanders in the energy transition. They can, should and, I hope, will play an active role in that transition, particularly as we progress through project willow. We see a really meaningful and viable new economy coming from low-carbon manufacturing at Grangemouth and our supply chain has a deep and meaningful part to play in that.
Does the company believe that the figure of more than 2,000 that is given in that report is accurate?
We provided raw data to PwC, which was advising the Scottish Government. It put that data through modelling, applying a factor of a multiple of seven, and brought in other information to formulate that number. I do not have a direct view of how many indirect jobs are at risk, but that is the data that the Scottish Government’s advisers have put out.
Okay, thanks. I will bring in the deputy convener.
I thank the witnesses for joining us this morning—I really appreciate it. I want to start with geopolitics. What assessment have you made of the impact of a Trump presidency, Trump’s closeness to Vladimir Putin and the implications of that for your future plans in Scotland and the UK? Have you had any discussions with the Scottish or UK Governments?
Trading is at the heart of our business, so we have always been exposed to the geopolitics of world markets. As a refiner, we have had to procure 50 per cent of our crude product internationally. We will import finished fuels in future and it is likely that 100 per cent of those will be manufactured internationally.
We were cognisant of the potential for geopolitical events—including a Trump presidency—and have ameliorated that risk in the planning phase by establishing what we see as a virtual pipeline of fuel that will come directly into the heart of the Grangemouth hub. We have taken control of all aspects of the supply chain to ensure continuity of supply and to address the risks to which I think you are alluding.
We have long-term product offtake agreements in place and have long-term storage contracts in place in the Amsterdam-Rotterdam-Antwerp—ARA—European trading hub. We have long-term shipping contracts in place for the specific size of vessels that are required to get into the Grangemouth jetties and are investing £30 million in our tank farm to ensure that we have sufficient ullage to cover a number of unforeseen and unforeseeable events and that there is no impact on continuity of supply at the pump. To the extent that we can, we have tried to create a robust and Trump-proof supply chain.
You said in your opening statement that you are making a loss, so I will pick up on some of the internal mechanisms in the plant. Why is the hydrocracker not fully operational and what would be the impact on your margins if it were?
We discussed that in November last year. It is, without a doubt, material that the hydrocracker is offline. It has been offline since April last year and that has exacerbated the financial losses incurred by our business.
We have addressed the issue a number of times. We were seeing a direction of travel about the company not putting every resource into restarting the hydrocracker. I said last November and say again now that we were absolutely committed to getting the unit back online. We drew in external resource from third-party consultants and expert resource from our sister refinery in Lavéra and from our PetroChina network. We tried to restart the unit three times, but failed.
With that operational information in hand, the board took a rational decision that it would not be safe to try for a fourth time. That was the right decision to take, but it absolutely had an impact on margins. We must be very clear that having the hydrocracker online would never have taken us from that $200 million loss into profit. Our forecasting showed that all that it would have done would have been to ameliorate $100 million of losses, so that the business would have had to absorb $100 million of loss instead of $200 million.
Have you conducted an internal assessment of the hydrocracker and the hydrogen unit that feeds it? Are you able to share that with the committee at all?
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Reports were prepared internally, but I think that those are internal engineering documents. I will have a think about it offline. We could certainly take you through the findings of those reports—we would be more than happy to do that. On whether we could hand over detailed engineering documents, I would have to take that under advice, but we would be absolutely delighted to talk you through the root cause analysis that we conducted.
Yes, I appreciate the commercial sensitivity; I am fully mindful of that. However, I think that having more public information as to the specific implications with regard to the hydrocracker, and why we are in the current position, would be helpful for the public record.
In addition, I have not seen a public impact assessment of an import terminal. I do not know whether you have undertaken such an assessment, but it would be useful to understand the top-line impacts on environmental security and, in particular, the societal impacts. I draw your attention to the recent commentary from John Bell of Gulfsands, which you will probably have seen. He believes that the impact is significant, and that has been backed up by the PwC report.
Have you undertaken an impact assessment? What can you put in the public domain regarding the implications of the import terminal?
Just to be clear, are we talking about an environmental baseline assessment or an assessment of continuity of supply?
Yes, and yes, and also an assessment of the impact on society—those three elements.
I will take each of those in turn. On continuity of supply, we have shared details through our virtual pipeline approach with the Scottish Government and with the DESNZ team that is responsible for fuel security in the Westminster Government, and we have had an independent consultant validate those findings. That is there—we have taken each of the key stakeholders through that; they have had sight of our proposal and, I think, are comfortable with it.
As regards the environmental baseline assessment, the closure of the refinery will result in approximately 800,000 tonnes of CO2 not being omitted from the site; that is the current CO2 output from the refinery. However, this is not a story about CO2, because, as we all know, CO2 does not respect international borders. The fuel that we procure for Grangemouth will be produced elsewhere, and that CO2 will be emitted there. In addition, there will be shipping miles to consider. Our analysis is that there will be a net balancing with regard to the global CO2 impact.
Finally, as regards the societal piece, that feeds into our work in supporting PwC and the economic impact assessment. The product of that work has been an engagement with SMAS to put in place guard rails for our supply chain.
The next step, in which we will really advance the discussion, is project willow. One of the key lenses through which to assess any viable low-carbon option in a post-refinery environment is the community impact. That is a key lens through which we will assess the commercial attractiveness—which includes the societal attractiveness—of various low-carbon pathways. The committee will, we hope, see the outworking of that in quarter 1 of next year.
I know that other members are going to come in with more detail on a lot of these questions. On Grangemouth in particular, the community has a multitude of issues. The committee’s general sense, as we brought out in our earlier report, was that the community had gained no material benefit from the carbon revolution, and that it has concerns about a just transition.
I understand what you are saying about profit margins and the future direction of travel, but what would need to happen in order for both Ineos and Petroineos, and PetroChina, to pause the plans for the refinery to allow more substantive steps to be taken to enable a just transition?
I fully understand the direction of travel, but what would need to happen for there to be a pause? I think that that is what most people are looking for.
I completely understand the question, Ms Thomson. I need to be clear with the committee that we have shared the necessary financial and operational data with Government in Westminster and at Holyrood for well over a year. We refreshed that data prior to making our decision to commence consultation.
But you brought forward the date from what was originally planned, which is on the public record. It was a shock to find out that we are now in this position. The date was brought forward from what the data was telling you that it should be and what you were telling both the UK Government and the Scottish Government about that.
That is incorrect. We paused. We provided the UK Government with a six-week period to conduct an operational and financial due diligence process in relation to the Grangemouth refinery, with a view to making an intervention. That same information had previously been shared with the Scottish Government.
At no time in the past five years of the currency of the discussions around Grangemouth writ large or in the past 18 months, when we have really drilled down in discussions with ministers and officials, has a package of financial intervention support been offered to the shareholders with a view to continuing refinery operations. The Scottish Government and the UK Government have conducted their due diligence, and they have drawn the same conclusions that we have drawn—that it is not commercially viable to continue operations.
The question that you are asking is, I think, a political one about a transitional measure. There has been chatter about nationalisation. That is a matter for the committee to consider and to come to shareholders on. I presume that, for the committee to do that, it would have to be comfortable with absorbing $200 million of losses per year and investing more than $100 million in fixed costs as well.
There is also the timing point. As a business, we cannot wait for Government to address the what-ifs. A number of times, we have heard politicians talk about leaving no stone unturned so that refinery operations can continue, but that has come to naught. If we had waited for that, we would have grown roots. We have to make informed decisions with the information that we have in front of us. We owe it to our shareholders, our employees and our customers to have a robust plan of action to ensure that we can smoothly transition from a refinery to a terminal. That is what we are doing. Our focus at the moment is on making sure that we are doing our best by our employees as we go through the consultation, and making sure that we are doing the best by our customers as we go through the transition from refinery to import terminal.
With all due respect, I was not asking a political question; I was simply asking what would need to happen for you to pause the process. I think that you are alluding to only one element—incidentally, I do not have the cheque book of either the UK Government or the Scottish Government; I am simply floating this.
In your answer, you alluded to some kind of financial benefit, which you highlighted would need to be considerable. Am I correct in saying that you were suggesting that that could be a consideration?
I think that we have moved past that stage. From an operational perspective, the refinery units—all of them—will be out of endorsement come June next year. That goes to the point that we had to make decisions based on the facts in front of us. The facts in front of us were that there was no offer of or discussion around Government investment to continue refinery operations. As a result, we have had to focus our activities on the transition. Therefore, elements such as the licence to operate and the turnarounds, which we have discussed separately before, have been put on pause as we focus our engineering resource on terminal transition.
If the Government wished to make an intervention, in one sense that intervention should have been made many months ago. There is a financial hurdle, but now we are also in the realms of having an operational hurdle. The third hurdle is with our workforce. We need to present a clear message to members of our workforce on what will go forward. The vacillations around whether there will be an investor or a purchaser have caused significant disruption to our staff. We are really keen to manage that.
We still have a top-tier control of major accident hazards—COMAH—site to run, and that will be the case right up until we stop refining. The focus of staff needs to be kept on managing the refinery, not on the perpetual discussion about the what-ifs.
The convener mentioned the economic impact—I think that the figure is 2,822 jobs. Given that many services are shared, there are also concerns about job losses at the chemical plant as a result of the move to an import facility. Do you anticipate any job losses at the chemical plant? If so, how many?
I should probably address that question, deputy convener. No, there will be no job losses at the chemical plant, but you are right to point out that the chemicals business supplies shared services to the refinery. They include things such as security, emergency response and lab functions—we are still in the process of assessing exactly what they are. Iain Hardie has described the refinery as going through a process of transition and scoping up its requirements for the future; once those are clear, we will be in a position to work out exactly what the implications are for those shared services.
Okay. We look forward to hearing more about that.
My last question is on project willow, which you have referenced. An issue for people on the outside looking in—and one that we raised in this committee when we looked at the just transition—is that the governance of the Grangemouth future industry board was at that point a little uncertain. I know that things have now changed and that there is dual convenership between the UK Government and the Scottish Government, but the board’s operation with regard to its accountabilities and responsibilities is still not clear to me.
It seems to me that, given Ineos’s role at the heart of absolutely everything and in driving project willow, you have been able to adopt a highly successful hedge position. You will win if you win, and you will also win if you do not win, because you are absolutely at the heart of all measures that are driving Falkirk district forward, whether it be the Forth green freeports, what has happened with project willow and so on. How have you personally, or as a company, assessed the risk of a conflict of interests between yourselves being at the heart of all those things and what is best for the wider area, including the community of Grangemouth?
I am not sure how best to approach that question. I can share with you my own personal interaction, now that I am in the 34th year of an eight-month placement up in Grangemouth. I am personally invested in Grangemouth and its success, and, for that very reason, I talk about Grangemouth rather than name any specific business. I have been through different companies and in the process have different badges on my overalls.
When I talked about project willow very recently at a conference, I got asked a very interesting question: what was I trying to achieve by promoting project willow? What would be the outcome? My answer was—and I apologise if this sounds a little bit idealistic—to get as many low-carbon, well-paid, high-quality jobs into Grangemouth as I possibly could, doing whatever they would be doing, working for whatever company they would be working for. It would not matter.
Since we started this process, the phrase that Iain Hardie and I have been using all the way through with project willow is that we are merely the custodians of the question. We are asking, “What does the future look like?” We are not saying that our companies and shareholders will or will not invest, or that other companies will or will not invest. That ownership does not matter.
Surely, the bit that we should all be focusing on, and which we welcome, is this joint approach, with our bringing technical experience and knowledge of the site, PetroChina bringing its trading experience and the UK and Scottish Governments getting involved, given that this goes over reserved and devolved policy areas. We are working with our partners and consultants who are working on the process, and we are reaching out to more than 160 different stakeholders including technology providers, companies that are already operating in the area and other interested parties in innovation and technology. Yes, we are at the heart of it, but only as custodians of the question, not as owners of the solution.
Okay, we will see about that. Thank you very much. I might come in again later, convener, if that is okay.
Absolutely, deputy convener. I will bring Lorna Slater in now.
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I, too, will start with project willow. I think that it is somewhat disingenuous to blame policies that were designed to reduce climate emissions for the current troubles. We are in a climate crisis. Global refinery capacity is going to decline, and older and less efficient refineries are of course going to be at risk. I note that you said in your opening remarks that you knew five years ago that this would need to be looked at.
Petroineos has put £1 billion into the refinery over the past 10 years and has not been able to make it a viable proposition, nor has it been able to start the transition to making it a low-carbon site, even though it identified that idea five years ago. What chance does project willow have of success? The Governments simply do not have the deep pockets that are required, so I have trouble believing that they are the factor that is suddenly going to make this work.
I would take a different view and say that they are, but not on their own, and that industry is, too, but not on its own.
One of the key parts of project willow is the collaboration between industry and Government. We are addressing a challenge in a completely different way from what has been done before. Earlier in my working career, if we could not make something economic because of a regulatory or policy hurdle, we would just give up. We would look at it in our little box, do our technical and economic assessments, decide that it was not viable and walk away from it. We could have been doing that in this world, but what we have said is, “We need to understand why there is not a market and why there is no demand, and the reason could be the regulatory hurdles.” I am afraid that it is the regulatory hurdles that come into play here.
In the energy transition, we are, from a technical perspective, fighting against thermodynamics, and that means that we end up having to put more energy in to get the same energy out. By definition, that means that it will cost more, which, in turn, means that we are fighting against the economic hurdles. That takes us into broader policy, because, in effect, it means that, if we want to decarbonise and remove fossil fuels, doing so will cost more at the moment. It just will, in that process, and that has an impact on all consumers.
An area where we have been successful is electricity, but in that case, we have the advantage that there is no global market for electricity. There are not batteries floating around in the sea. People on this island will pay the cost of the electricity here, and that is part of the reason why our electricity bills are where they are. I accept that a lot of people put it down to global gas markets, but the fact is that a lot of the costs of decarbonising are included in those electricity bills, and people pay them because that is the cost of being in the UK and having those aspirations.
A lot of the materials that we produce, both as a refinery and as a petrochemicals site, are globally traded commodities. If we do not make them, they will come in from somewhere else. After all, there will still be demand for all those chemicals, whether they be used in medical settings or, indeed, for decarbonising, given the role that a lot of polymers have played in lightweighting vehicles. We will still need those chemicals, as was evident during the pandemic.
Given that we have those demands, how do we address the costs? I cannot put them into my products as commodities, because they will just come in from elsewhere around the globe. I will not have saved carbon—I will just lose jobs and economic activity in the UK, including in Scotland. I am afraid that we have seen that happen across a range of industries.
Therefore, we have said that we cannot do that, but the fact is that we cannot just sit there, either. We need to come up with a reason why the regulatory and policy change is needed, and with project willow, we have said that we need to be clear about the environmental benefits of the changes that we are talking about; clear about the community impacts and what they will mean for jobs—that is about the just transition that we all seek; and clear about the skills impact in terms of need, demand and what is available.
I make no bones about it—even in the basic world in which we are operating today, we have a shortage of skills to complete the work that needs to be done. The premise that we have come up with is that, if we look at the matter through project willow and can articulate the environmental, community and skills benefits in a Government policy sense, we will be able to provide the justification for the required regulatory and policy change.
That is the stage that we are at with project willow: we are trying to articulate what the asks are. To be clear, some of those asks are about changing the regulatory and policy framework that has been put in place to enable things to happen. Some of the regulations seek perfection where we need progress—so let us make some progress.
Some of the asks will be about the role of Government as a market maker. I admit that such matters are reserved, so this is probably an issue for Westminster, but you can see it already in, for example, the agreement on generating low-carbon hydrogen. That will not happen because the cost of producing low-carbon hydrogen for energy use is, depending on the technology that you use, anywhere between 2.5 and 10 times the cost of natural gas.
The key role that Government can play and where it can come in and help us is in de-risking activity. There are nascent industries such as hydrogen and biofuels that will require crops to be grown in the country. However, that will involve creating a new supply chain, and that is probably too great a risk for anybody in the current supply chain to take on. I put it to you that it is the Government’s role to de-risk those supply chains and, in other areas, to de-risk the capital that is deployed, potentially by coming in as an equity holder.
In short, there are three areas that will come out of project willow in which we need Government assistance to be able to deploy our capital and resources: the enabling of change through regulatory and policy change, which should not cost anything; the role of the market maker; and the role of the de-risker.
I am sorry for that long answer.
No, I appreciated it, and your nice summing up at the end.
On the workforce, Petroineos says right on the front of its website that it makes a profit of $30 billion annually and has $6 billion in assets. There is an expectation that, with pockets that deep, the company has the capacity to support workers and the community. How are you meeting those obligations without expecting the public purse to pick up the pieces as the situation falls apart?
We can reflect on the refinery losses, as we have done. We have made more than $1 billion of investment in the past 13 years and simple cash losses of $800 million. That is on the refinery side of the JV; you are talking about the trading business and other arms that are not really part of the discussion now.
The asks of Government through project willow will be financial in one sense, but we will get to make them only if the Government takes the necessary regulatory steps to create an investable platform. The Government has said to us that it would like to create a commercially viable platform for investment at Grangemouth—so would we. It is a no-cost option for Government if it can put in place the correct regulatory and policy framework to support it.
If we do that, we can move on to discuss who will pay for what, when and why. There will be a value for money assessment at that time. We need to have that discussion, in recognition of the fact that, as Colin Pritchard has said, the market for the technology that we are talking about—and for biofuels in particular—might be nascent and sub-economic today, but we want to get to that investable platform. That is the direction of travel.
In your opening question, Ms Slater, you talked about not pointing the finger of blame at the Government for regulations such as the ban on the internal combustion engine post 2030. I absolutely hear you; no finger of blame is being pointed there, other than to point out that such a move has consequences. One consequence of the ban on the internal combustion engine in the next decade is that a manufacturer of that product is going to struggle; the car industry sees that, too. We are just another example of an unintended consequence—or an intended one, as the case may be. As custodians of the question, the important thing is to articulate the new-generational, low-carbon growth that there could be at Grangemouth.
That is where there is strong alignment between the shareholders’ and the Governments’ missions. Indeed, that is the beauty of project willow. For the first time, regulation is not coming as a tell—it is coming from our being in the room together and discussing how we deliver something fit for purpose. The excitement, certainly within the UK Government circles, is that it will act as a benchmark for how regulation can be deployed in new technology sectors such as biofuels.
Thank you.
I call Kevin Stewart for a brief supplementary before I bring in Daniel Johnson.
I will be very brief, convener. I want to give as much of my time as possible to Michelle Thomson, because of her constituency interest.
In your answers to Lorna Slater, you talked a lot about the regulatory regime, and you mentioned various policy changes that have taken place. However, I want to concentrate on the regulatory regime. As a committee, we have previously asked questions on some of these issues; indeed, we asked the former UK Minister Graham Stewart about the time that it was taking to put in regulation around the storage and transportation of hydrogen. Mr Pritchard, you are probably in the best position to give us a flavour of the regulatory change that is required for you to move forward and make progress with the likes of project willow.
There are many areas, and we will probably run out of time before I get through the full list in detail—and I am sure that I will get kicked under the table, too.
You can write to the committee if you want to give us a comprehensive list.
If you could give us some of the top regulatory impediments at this moment, and then write to us with the lower-level stuff—which I imagine is probably equally important—that would be very useful for us all.
Again, you will see all that through project willow—that is exactly what project willow will deliver to you. There will be a decision-based road map that will articulate what the enabling actions are in respect of different low-carbon pathways. It might involve private sector investment, it might be an improvement to the technology readiness level and/or it might be a change to regulation. That will be very clearly articulated, so you will have it objectively laid out for you. However, we can give you a few headlines now.
I am not saying that these are necessarily the only or the biggest ones, but I will give you a flavour of some of the issues that we have. If we look at low-carbon hydrogen, for example, the progress that has happened within DESNZ and the work with industry to develop the low-carbon hydrogen agreement is welcome, but we have written to DESNZ to explain some of the issues and barriers that we see, including things such as the capital investment risk. No matter which technology we pick, the projects are expensive, and the capital risk is put firmly into the supplier-consumer relationship.
Through the contract for difference, you will, in effect, get your capital repaid only when you are producing hydrogen. From the perspective of value for money, I can understand that the Government would want to pay only when decarbonisation is taking place—when hydrogen is substituting for fuel—but the impact of that is to put an intolerable risk into that relationship, because of the quantity of capital that we are talking about. The consumer is making a 15-year take-or-pay agreement whereby it will commit to taking a certain quantity of fuel. That is one of the three areas that I discussed where the Government needs to take a bigger role, de-risking that investment and making it work in a way that means that the investment can go ahead and the opportunity is there.
We can also see it within a low-carbon hydrogen agreement, to pick something that is less high level but go right down into the detail, when you are talking about taking hydrogen and potentially using it in eSAF, which is synthetic sustainable aviation fuel made with low-carbon, green hydrogen. We are in a world where that can go through, but you have to have temporal correlation. By that, I mean that the wind has to be blowing at the time—in the half-hour period in which you produce the hydrogen that goes to make the fuel. If you cannot show that, it does not qualify. I could be wrong, but we do not seem to be awash with low-carbon hydrogen. Enforcing that level of perfection is preventing any progress. We could be achieving substantial decarbonisation, particularly in Scotland, where we have a wealth of wind resource that we can use to generate electricity and produce green hydrogen.
11:30It is another high-level issue, but I would suggest that our approach to developing a hydrogen economy has been driven by the promotion of production without consideration of how that production will work its way through the full value chain, including in transporting the hydrogen to places where we can use it. I have certainly highlighted that in conversations at the Scottish Government’s hydrogen industry forum. We need to focus on creating a value chain for the demand. Creating the demand is exactly what project willow is about.
I look forward to receiving the correspondence, as will the committee, but that gives us a good flavour of the challenges. I have many more questions, but I will defer to Ms Thomson.
I am sure that you have more questions. I will bring in Daniel Johnson next.
We have all been looking at Grangemouth in a renewed level of detail. It occurs to me that some quite broad-brush assumptions are made, not all of which are correct. We think, “The oil comes out of the North Sea, it all goes to Grangemouth and we get our petrol—job done.” I read that, although the Forties pipeline terminates at Grangemouth, only 40 per cent of your feedstock comes from the North Sea. Our briefing notes also indicate that you are the main supplier of aviation fuel to Scottish airports and that you supply some 70 per cent of Scotland’s petrol stations.
Will you provide a bit of detail as to what proportion of your feedstock is coming from the North Sea? Critically, as refining stops, will that introduce additional costs to customers who are downstream? In other words, will aviation fuel cost more or less than previously? Will there be any consequences for consumers at the fuel pumps in Scotland as refining at Grangemouth ceases?
Thank you for your questions, Mr Johnson. [Laughter.] Let me unpack each of them.
I will start with North Sea crude. Currently, 50 per cent of the refinery’s crude diet comes from the North Sea. You are absolutely right to point out that very little of that comes through the Forties pipeline system, as it is the wrong specification for the configuration of our refinery. We import crude on the west coast at Finnart on Loch Long, where there is a deep ocean port and very large crude carriers are able to discharge crude, which is pumped through a cross-country pipeline to Grangemouth for processing. That touches on Ms Thomson’s point about managing international supply chains and the risk of what will happen next. We are well able and suited to manage those in refinery or terminal mode—that is our business and it is what we do day in, day out, be it for crude or product.
Product wise, we are the only landing point for jet fuel in Scotland, and we supply airports from Inverness to Newcastle. As you will appreciate, there is a special custody chain for managing jet fuel, which gives Grangemouth one of its unique selling points. We have spoken about project willow, and in that project we are stressing how we identify Grangemouth’s advantages. Colin Pritchard spoke about the excess of green electrons and how those could be moved into viable products, subject to UK Government support. As I mentioned, we have a strong position in the SAF market and we would like to see Grangemouth playing in that market going forward. When we were in front of the committee last November, we spoke about the possible regulatory hurdles to SAF deployment. You can expect to hear more about SAF as project willow proceeds.
On fuel security, we have spoken about the virtual pipeline from Europe into Grangemouth, and our expectation is that that should not have a material impact on the forecourt price of fuel, nor should it have any impact on fuel security. Things should continue as normal. That is our operating inbound hypothesis.
Have I missed anything on your list?
No. I like to make sure that my questions are energy dense.
They are.
This is possibly a similarly energy-dense question. One thing that I am always struck by when we talk about refining and oil is that the products are not all energy. I understand that, globally, around 30 per cent of every barrel of oil is used for non-energy products such as pharmaceuticals, dyes, plastics and so on. I understand that, for North Sea oil, that percentage is higher, although I stand to be corrected. Given that position, we will have an on-going need for hydrocarbons, which is presumably where biorefining comes in. That is what project willow seeks to address.
We are at the nascent, early stages, but what is the potential size of the requirement for that global biorefining capacity? What share of that market could and should Scotland and the wider UK be seeking to target?
That is another energy-dense question. You are absolutely right that biofuels development is nascent and at an early stage, which is why, post-refinery cessation, we are not migrating straight into a biorefinery. We looked at that and drew the same conclusion as many other operators in the UK have: it makes no economic sense to invest in biofuels today, hence the necessity for project willow to articulate what needs to change in order to get to that investment decision.
I know that we are repeating this, but it is important that people understand why project willow is so important. There is a desire for Grangemouth to be a low-carbon manufacturing hub, but there are big externalities that have to be addressed in order for that to happen. For the past 100 years, Grangemouth has been a refining hub. It would have inherent advantages as a biorefining hub. We are in no way ready to move to pure electrification. There will be a significant period when we need to migrate from fossil-based fuels to low-carbon fuels before we get to the purely electric solution. That comes back to Grangemouth’s USP. What can we do to unlock the investment at Grangemouth that is necessary to fill that shortage?
Let me ask what is, I hope, a simpler question, albeit that it is still about a complicated issue. I recognise your point in relation to the nascent opportunities. It is the state’s role to de-risk and to look at the macro-level risks, particularly around energy security, but there are also much lower-level policy decisions that enable those things. Refining is not just about the pure investment or the product input and output. There is also the supporting infrastructure of roads, electricity networks and so on. We are talking about developing complex supply chains in and out of a biorefinery.
What policy areas need to be looked at to, at the very least, make that possible? In particular, what should we be looking at and thinking about in the Scottish Parliament, in devolved areas, so that we at least make biorefining opportunities possible, if not seek to drive towards them?
That is a great question. It is really clear and it is where this discussion should be going. To play the question back to you, I think that it is, “What can the Scottish Parliament do within our purview to advance the case for investment?” Have I articulated the question correctly?
Yes—and what policy decisions could we make now, either proactively or unwittingly, that might make biorefining easier or harder, whether they are about refuse collection, road infrastructure or other supporting policies?
There is definitely a potential Scottish Government play around agriculture and forestry. There are two potentially viable pathways to create new economic growth—new gross domestic product, new gross value added and new jobs—in agriculture and forestry in providing a cornerstone of biofeedstocks for a biorefinery. We are carrying out assessments and doing agricultural economic studies through project willow to identify the correct biofeedstock pathways from Scottish agriculture—I am thinking of the use of, say, sugar beet and cover crops—that can be fed into the refinery.
We have a very strong forestry industry in Scotland, but there are large inefficiencies in how we deploy our forestry resource. We think that we could provide a viable long-term pathway that incentivises foresters to access hard-to-reach areas, extract the whole tree, chip it and bring it to Grangemouth. That is a new biofeedstock pathway that simply does not exist today, and those are the sorts of things that we are looking to explore through project willow.
I am having to keep myself in check, because I could start drawing pictures and flowcharts that go all over the place.
Agriculture and forestry are great. The area that excites me in our work on project willow is the ability to have an additional benefit in the supply chain. We are facing the challenge of creating new supply chains, but if we are talking about the biocomponent or the forestry element, we could be looking at growth in that sector, too.
I add that it is about more than a biorefinery. I go back to my first answer to the deputy convener about what I want to see—that is, high-quality, high-paying, low-carbon jobs—and I highlight the manufacturing side of things and how we can change the chemicals that we have. There is potential to have, in effect, negative carbon production of polymers but, going back to the point about policy, I make it clear that, if we were to capture a tonne of carbon in a tree, ferment it and produce a polymer from it—in other words, turn it into a physical thing instead of something that is released into the environment—it would still get no credit under the emissions trading scheme. The ironic thing is that, if I grow the tree, burn it, create electricity, capture the carbon and bury it underground—that is the reverse of our waste hierarchy—I will get an ETS credit for it. That is just another example of the things that could be changed in these policy areas.
I have to be careful, though. There is a lot that I want to get excited about, but then someone kicks me and tells me that we need to wait until project willow is ready to report its next stage.
Finally, I have what is almost a comment—it is certainly a very closed question. The prospect of growing sugar beet or trees to provide feedstock for biorefining has been raised, but we would need to take a very close look at that if it was how we were proposing to use the land. If we were to use it for that purpose, we would not be using it for other purposes—say, for food. Indeed, if we were using it to grow trees as feedstock, it would mean that we would not be using it for wood product, and I would argue that, with wood products, the carbon would be locked away without any refining being needed.
I guess that the implication of that is that the Government needs to make a very clear and hard-nosed assessment about land use and whether that sort of thing constitutes appropriate use of the land. Would that summary be correct?
You are absolutely right, and those are the things that we are wrestling with in project willow. We cannot take land out of food-growing use. We understand that. Indeed, it is part of the legislation on hydrotreated esters and fatty acids, and on SAF. However, going back to what Iain Hardie said, I note that there are a lot of potential efficiency gains to be made in the forestry sector at the moment. When we forest timber, we leave behind the roots, the brash and the branches, and those are bioresources that could be used.
We need to understand the impacts and opportunities. That is why I have talked about the multiplier effect; you can return land to tree growing quicker than you can at the moment, because you are not waiting for material to decompose. There are ins and outs in that respect that need to be gone through, too.
I have been talking about the cover crop side of things exactly for that reason: we have to ensure that we are not in any way having a detrimental impact on the food-growing potential of the land that we have. It is another precious resource that needs to be looked after.
Thank you very much.
You touched on SAF, Mr Pritchard. I think that Murdo Fraser has a question on that.
Good morning, gentlemen. I want to follow up on the question of sustainable aviation fuel, or SAF. You have mentioned project willow, which this also references, but opportunities to develop SAF at Grangemouth have been discussed for quite a long time now. From your perspective, how realistic are the prospects of our being able to develop SAF at Grangemouth?
11:45
One of the USPs for Grangemouth is, as we have discussed, the fact that it is the only landing point for jet fuel in Scotland. A cornerstone of our willow configuration is, I think, the concept of sustainable aviation fuel with, ultimately, a move to eSAF. It is a migratory platform, and that is what we want to see. I genuinely believe that SAF could be a cornerstone for Grangemouth.
What barriers need to be overcome to make that happen?
That takes us back to the questions that Daniel Johnson asked and Colin Pritchard answered. There are a number of regulatory, fiscal and investment hurdles, and those will be the outworkings of project willow. It also comes back to Mr Stewart’s question and having early sight of the regulatory changes that will be coming.
All right. Thank you.
I will bring the deputy convener back in at this point.
I have a final question that brings me back to some of the themes that I followed up earlier. When I asked you what needs to happen for there to be a pause, my recollection—you can correct me if I am wrong—is that, during our exchange, you said that financial incentives might have been a consideration, but you suggested that we were nearly at the point of no return. I think that that is what you said.
It was a theoretical discussion about what-ifs. We have gone down that path with a number of First Ministers, Prime Ministers, cabinet secretaries and secretaries of state, and nothing has been forthcoming. Off the back of that, we have had to make informed decisions that, in turn, drive our business decisions, and I have said that at the centre of that are our employees and our customers and ensuring continuity of supply.
Would we foreclose the door to anyone coming and having a discussion? Absolutely not, but our expectations in that regard are very clear. There is no intervention to be made by the Scottish and UK Governments, and we have set out our plans off the back of that.
Thank you for being very clear about that. My final question is whether you have specifically asked the UK Government for financial support or, indeed, whether the need for it has been discussed at any point up to today. In other words, could there be any doubt in its mind that that could still have been an incentive to bring about a pause, as I have discussed?
There can be no doubt in the minds of the Scottish or UK Governments that we were open to any discussion about the continuity of the Grangemouth refinery. Indeed, we paused our supervisory board meeting for a period of six weeks to allow the UK Government to conduct financial and operational due diligence.
Thank you.
I have a final question. You talked earlier about clarity for the workforce. There has been some speculation about the possibility of a buyer for the refinery. Can you tell us for the record whether there have been any notes of interest or discussions about a possible sale of the refinery?
There have been discussions, but we have received no credible bids from any third parties.
Finally, what input have your companies had into the development of the Government’s just transition for Grangemouth plan?
We saw the draft just before it was published for consultation, and we welcomed the Scottish Government’s decision to delay its formal publication until after the output of project willow could be considered. It is absolutely essential that the just transition plan and project willow work hand in glove to deliver on project willow’s recommendations in an actionable way, recognising that the Scottish and UK Governments are in the room for project willow and that the just transition plan is how we let the rubber hit the road and drive the outcomes.
But you had no direct input to the production of the draft.
No, convener.
Okay. Thank you very much.
That brings us to the end of the evidence-taking session. I thank Iain Hardie and Colin Pritchard for joining us today.
We now move into private session.
11:49 Meeting continued in private until 12:21.Air ais
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