Scotland's only oil refinery lost around GBP100 million in its most recent year of trading, the Sunday Herald has learned. The Grangemouth facility, which employs around 1400 staffers and is owned by PetroChina and Ineos, is taking a battering from falling petroleum demand due to the recession and improving vehicle fuel efficiency.
Although refineries always suffer during recessions, this combination of factors is exacerbating the industry s problems, and has already brought the Coryton refinery in the Thames Estuary, considered the most important in the UK, to the brink of closure.
Combined with the prospect of Grangemouth costs rising by around GBP70m from the forthcoming European emissions trading directives, the losses raise serious concerns about the future of the plant.
Mark Lyons, a Unite official at Ineos, confirmed the GBP100m loss at the plant, which appears to have been for the year ended December 31 2011. He said that the figure was also being flattered by the fact that the Grangemouth chemicals business was profitable, meaning that refining losses were even higher than GBP100m.
Asked to confirm or deny the GBP100m figure, Ineos's general manager at Grangemouth Gordon Grant said that "I'm not going to confirm numbers" but added that business was tough. Lyons said: "Ineos is having to buy at high prices and sell at low prices. There's 64% tax at the pump, 30% manufacturing costs, plus transport costs. There's nothing left for the refineries."
"There's not a refinery in the country that's making a copper piece. If they are breaking even, they will be doing really well right now."
Ineos executives will be extremely relieved they are experiencing these difficulties with PetroChina on board. The Chinese energy giant bought a 50% stake in Ineos's refineries business, which comprises Grangemouth and the Lavera plant in France, in a deal worth around GBP600m last July.
According to industry sources, the business is performing much more poorly than it would have expected at the time that the deal completed. The economic problems were aggravated last year by operational difficulties at Grangemouth s gas cracker unit.
Ineos reduced its debts from the deal, but net debt still stands at around GBP5 billion, between three and four times last year s total earnings before interest, tax, depreciation and amortisation. The more losses it has to shoulder from refining, the harder its chemicals business will have to work to maintain relations with its lenders.
Lyons said that under the circumstances, the new industrial emissions directive was badly timed. The new rules will require refineries to substantially reduce the output of gases like sulphur dioxide and nitrogen oxides, using the best technology available. Lyons said Ineos/PetroChina was estimating this would cost GBP70m when it comes into effect in 2016 -- a figure recognised by figures within the company.
Lyons said: "When you are losing GBP100m a year and spending GBP70m a year on compliance and talking about another GBP70m a year coming in through new directives, there needs to be a pause. If you can ever have an oil refinery that s environmentally friendly, this is it. It has the tightest standards with emissions, it s the most closely regulated."
"And because of that, the potential punishment is getting shut down when there are refineries that are polluting with impunity in India and China. If we are still going to use hydrocarbon fuels, where do you want your manufacturing to be?"
Grant added that there was no talk of redundancies, but said the fall in the crude price was not helping. "We operate in the bit in the middle. If the price comes down but the price at the pumps comes down in parallel, our margin doesn't get any bigger. That's what we are seeing," he said.
Copyright 2012 Newsquest Media Group. All Rights Reserved.
(Originally published June 24, 2012, in the Sunday Herald.)