PROTECT – POLICY & COMMERCIAL Lead official: David Fielder OCCS Area 4C, WP Tel: 0300 068 5489 Date: 7 October 2010 Alternative Ben McKie contact: To: PS/ MOIRA WALLACE CC: See below VISIT TO LONGANNET POWER STATION AND GRANGEMOUTH REFINERY: FRIDAY 8 OCTOBER I attach briefing for your visit to Longannet power station and Grangemouth refinery on Friday 8 October. The morning will be devoted to the visit to Longannet, where you will be given presentations on Scottish Power‟s operations, followed by the opportunity for you to see the CCS demonstration test facility and then tour the turbine hall. This will be followed by discussions with company officials. The visit will be hosted by Rupert Steele, Director of Regulation, Scottish Power, who is aware that you will not be able to discuss the CCS demonstration competition in detail. A general brief on CCS is included. The afternoon will consist of a visit to Grangemouth refinery, which will be hosted by Gordon Grant, Director - INEOS Manufacturing Scotland Ltd (and the Site General Manager). This will begin with a presentation about Ineos, a presentation on Grangemouth operations and its links into the North Sea, a visit to the exhibition hall, and discussions with company officials. You will be accompanied by John Overton, Deputy Head of Strategy and Policy Coordination, OCCS. Briefing comprises: Visit Programme page 3 Contact details page 5 Scottish Power – company background page 6 Carbon capture and storage brief page 8 Transmission Charging – Project TransmiT page 11 PROTECT – POLICY & COMMERCIAL Grangemouth background page 13 Ineos – company background page 14 Grangemouth refinery – physical security page 18 Biographies of key personnel page 26 Cc Adam Dawson Martin Deutz Jonathan Holyoak John Overton Ben McKie Claire Eastabrook PROTECT – POLICY & COMMERCIAL PROGRAMME Friday 8 October Collect John Overton from Jury‟s Hotel in Edinburgh 0750 hours 0810 Collect Moira Wallace and Joe Cranston-Turner from Edinburgh Waverley Station 0830 hours Collect Rupert Steele from Edinburgh Airport (flight BA1432) 0930 hours Arrive at Longannet Power Station LONGANNET 9.30 Start of visit/welcome (Exact timings of individual sessions to be determined by Scottish Power) Presentation: overview of Scottish Power‟s activities (20 minutes) Discussion of issues (30 minutes) Tour of test facility (30 minutes) Tour of turbine hall following) 12.30 (30 minutes to I hour depending on areas seen and questions Lunch 13. 00 Depart Longannet and drop group at Ineos, Grangemouth, then onwards to Edinburgh Airport (for Rupert Steele only). GRANGEMOUTH 1.30 Start of visit/welcome 1.45 Introductory presentation - INEOS 2.00 Presentation on Grangemouth, including links to North Sea operations 2.30 Visit to exhibition centre to see model of site operations and /or drive around to see part of site 3.30 Return to conference room for meetings/discussion John Overton to depart to catch 5.00 pm train from Edinburgh Waverly Moira Wallace and Joe Cranston-Turner to depart, returning by car to Glasgow by 6.00 pm 3 PROTECT POLICY COMMERCIAL PROTECT – POLICY & COMMERCIAL CONTACT DETAILS Longannet (Scottish Power) Rupert Steele: Mobile: 07986 890547 Lesley Cunningham: Office: 01698 396134 (Mobile: 07753 621723) Andy Archibald: 0141 568 3953 Grangemouth: (Ineos) Gordon Grant: Office: 01324 476271 (Mobile: 07770 265179) Diane Kane: 01324 476271 Joe Cranston-Turner: Mobile: 07920 278726 John Overton: Mobile: 07950 348629 Tim Cullen: Office: 0300 068 6454 (Mobile: 07710 600 779) Vanessa Nichols: Office: 0300 068 2825 Michael Rutter: Office: 0300 068 5769 5 PROTECT – POLICY & COMMERCIAL SCOTTISH POWER 1. Scottish Power is owned by Iberdrola, Spain's largest energy company and the world's biggest producer of renewable energy. Scottish Power is focused on three main areas: Transmission & Distribution through Energy Networks; Generation & Supply through Energy Wholesale & Retail; and Canadian gas storage through PPM Canada. Scottish Power is the UK's leading supplier of green energy products to domestic and business customers and aim to increase their renewable energy capacity in the UK to 1,000 MW by 2010. Their publicly stated vision is to be the UK‟s best integrated energy supplier and a world leader in renewables. Scottish Power part owns the West of Duddon Sands offshore wind farm whose connection to the onshore grid is due, on current plans, to be included in the next tender round on offshore connections to be run by Ofgem later this year. 2. Scottish Power has no nuclear presence in the UK, but its parent company Iberdrola has an interest in developing new nuclear in the UK and elsewhere in Europe. Iberdrola/Scottish Power and Scottish and Southern Energy have formed a consortium to participate in the UK‟s new nuclear build. 3. Scottish Power is leading a consortium that have submitted a bid to the CCS demonstration competition for the Longannet Power Station in Fife. 4. Scottish Power owns the transmission network in south and central Scotland. Ofgem has authorised Scottish Power to undertake £16m of new investment on 3 projects to 2012. Scottish Power has further investment proposals of £40m for this period which Ofgem will consider when more information is available. 5. Scottish Power was unsuccessful in its application to develop its CCS programme under the European Energy Programme for Recovery (EEPR), with Powerfuel Power‟s Hatfield project selected as the preferred UK option. Nick Horler, Chief Executive of Scottish Power, wrote to Charles Hendry to seek clarity on the standing of this award to the Hatfield project, in particular whether it has satisfied the conditions of the award (failure to do so would result in the forfeiture of any uncommitted EEPR support), as they are keen to revisit their own application if this might be an option. The decision to make the award to Hatfield was made by the Commission with no influence from the previous Government. It will be for the Commission to redirect funding if they feel Hatfield cannot meet the delivery criteria. 6. Scottish Power are currently undertaking a number of renewable energy projects across the UK, including the development of the 500MW West of Duddon offshore wind farm as well continuing the expansion of Europe‟s largest onshore windfarm at Whitelee near Glasgow. 7. A consortium of GDF SUEZ SA, Iberdrola SA/Scottish Power and Scottish and Southern Energy Plc has set out plans to build up to 3.6 GW of new nuclear capacity at Sellafield. The consortium, known at the moment as Site NNB, is currently establishing itself and developing detailed project plans. The Department meets with a team from the joint venture on a regular basis to discuss progress. The reactor choice has still to be decided. 6 PROTECT – POLICY & COMMERCIAL 8. As one of the Scottish Generators, like SSE, SP have concerns over the issue of transmission charging, believing it would have a negative impact on their CCS and renewables investment decisions. If raised you may wish to take the line that you are keen to find out more and willing to listen to the arguments. 7 PROTECT – POLICY & COMMERCIAL CARBON CAPTURE AND STORAGE Lines to take UK CCS demonstration programme Very keen to see rapid investment in CCS to keep UK at the forefront of global activity. Should not underestimate the challenge we face. Demonstration of CCS is achievable but difficult. Government is committed to public investment in the demo programme but industry must do more to address the delivery issues the technical, financial and commercial challenges - if we are to get projects built on time. We have engaged with industry on the development of the selection process for future CCS demonstration projects with the intention of launching a formal call by the end of the year. On 8 July we announced a market sounding exercise for CCS project developers. This closed on 15 July. This is intended to help DECC to explore options for the selection of future CCS demonstration projects, and learn about potential projects being developed by industry. CCS on Gas We welcome the Committee on Climate Change‟s input. Gas CCS will be part of the energy mix in the future and it is therefore right that we take time to consider carefully the recommendation that gas CCS should be part of the demo programme. We will respond to the CCC later this year. We are considering how the CCC‟s recommendation fits within our climate change and energy security objectives, what additional benefits a gas project could bring, and the overall public expenditure context. Emissions Performance Standard There are a number of options on how an EPS could be implemented. We aim to consult on our plans as a key element of the Electricity Market Reform consultation in the autumn, and to include the outcome in the spring 2011 White Paper. This work will include consideration of the CCC‟s advice to expand the EPS to include gas-fired plant. Important to take the time to get this right, interested to hear your views on an EPS, including types of plant to which it should apply, timing of introduction and the level it could be set at. 1st demo competition [ONLY IF PRESSED]: The competition is proceeding as planned with both bidders in the FEED (Front End Engineering and Design) study stage. This process will help refine the bidders‟ projects, including their cost, and allow us to gain greater confidence in the proposed bids. Recognise the need for urgency in getting the demonstration projects operational, 8 PROTECT – POLICY & COMMERCIAL However bringing the competition to a premature close to award the project to either of the bidders will create an unacceptable risk that the project may not deliver the government objectives Key facts The International Energy Agency (IEA) has estimated that CCS could contribute up to 20% of the global greenhouse gas mitigation effort by 2050. According to the IEA, without CCS the cost of emissions reduction needed to meet IPCC targets would increase by more than 70%. The UK is ranked 2nd (after US) as a leading developer of CCS in the 2009 Ernst & Young index of most attractive countries for CCS. In the UK, around a third of our emissions are from electricity generation. We need to more-or-less decarbonise our electricity supplies if we are to meet our long term climate change goals and CCS will play an important part. Essential Background UK CCS demonstration programme The Coalition Agreement committed to public sector support for CCS technology on four coal-fired power stations; this cements our position as a world leader on efforts to develop CCS. The Energy Act 2010 includes powers to enable these projects to be funded by a levy on electricity suppliers. The levy is estimated to cost almost £10 billion (equivalent to up to 2-3% on electricity bills by 2020). The first demonstration project is at the Front End Engineering and Design(FEED) stage. The FEED process, signed in March 2010, will run for approximately 12 months and will be followed by an evaluation process. We are therefore not planning for the first demonstration project to be completed by February 2011 as the CBI have called for. OCCS is developing detailed proposals for a process to select and fund demonstration projects 2 to 4 with the aim of launching the selection process by end 2010. A formal market sounding exercise was launched in July this year aimed at potential project developers to get an indication of their level of interest in the programme and more information on their individual projects. The first project will be post-combustion capture on coal. Subsequent projects will seek to demonstrate a range of technologies and consider options for encouraging the „clustering‟ of capture projects with a view to sharing pipelines and/or storage capacity. Storage will be offshore. CCS on Gas The CCC wrote to the Secretary of State on 17 June recommending that the Government should give serious consideration to: funding at least one gas CCS demonstration project as part of the four CCS demonstration projects committed to in the Coalition Agreement; an Emissions Performance Standard that would effectively require any new gas plant beyond 2020 to be fitted with CCS. 9 PROTECT – POLICY & COMMERCIAL The CCC‟s analysis suggests that there is also likely to be a very important role for natural gas CCS, which could be competitive with coal CCS on a £/MWh generated basis, particularly when operating flexibly and in a low gas price world. Emissions Performance Standard The Government‟s coalition agreement commits to the establishment of an emissions performance standard (EPS) that will prevent coal-fired power stations being built unless they are equipped with sufficient CCS to meet the EPS. There are a number of options on how an EPS could be implemented. This work is being taken forward in parallel to the wider work on review and reform of the electricity market. The Annual Energy Statement said that we aim to consult on the EPS as part of the wider electricity market reform consultation in the Autumn, with the outcome in the Spring 2011 White Paper. 10 PROTECT – POLICY & COMMERCIAL Transmission Charging – Project TransmiT Lines to take Charging Review Ofgem‟s announcement of an open review of transmission charging through the Project TransmiT call for evidence is a very welcome development. We are encouraging all interested stakeholders to play a full part in Ofgem‟s review process. Transmission charges are a core regulatory issue for Ofgem under EU law – the Third Energy Package makes clear that fixing or approving transmission tariffs or their methodologies is one of the regulatory tasks for the independent regulator. DECC will have an interest in working closely with Ofgem to ensure that the outcome delivers the Government‟s high level objectives on security of supply and low carbon generation. Key facts Energy generators in remote areas (such as renewable energy generators in Scotland) pay higher transmission charges than those nearer large centres of population. Ofgem launched their own independent review of the transmission charging regime – Project TransmiT – on 22 September with a call for evidence. Ofgem has set of deadline of mid-November for responses to their call for evidence and are looking to publish responses to the call for evidence in December. Ofgem will also be commissioning independent analysis to provide further evidence before consulting on options in Spring 2011. This will enable Ofgem to publish their recommendations in Summer 2011. Clearly the implementation timetable for any changes to the charging regime that come out of the review will depend on what those changes are. Background 11 PROTECT – POLICY & COMMERCIAL In launching Project TransmiT, their independent review of the transmission charging regime, Ofgem have explicitly recognised the clarification of their remit in the Energy Act 2010 and set out that the transmission charging arrangements must in future facilitate the timely move to a low carbon energy sector whilst continuing to provide security of supply at value for money for existing and future consumers. 12 PROTECT – POLICY & COMMERCIAL GRANGEMOUTH 1. Grangemouth is an integrated refinery and petrochemical site and is one of eight refineries currently operating in the UK and provides about 11% of the UK‟s refining capacity. The Grangemouth Refinery complex is the only major refinery located in Scotland and is the key source of supply to the Central belt of Scotland, providing the majority of Scotland‟s road fuels via its road loading terminal and rail connections. The refinery supplies approximately 95 percent of the Scottish fuels market by road deliveries (estimates suggest there are some 650 road tanker deliveries a day from the site), but also supplies product via rail to the fuel terminals at Dalston (Cumbria) and Sunderland in the North East of England and by coastal tanker to Northern Ireland via pipeline transfers from Grangemouth to the Finnart Ocean Terminal. The Dalston and Sunderland terminals are important sites as they can be used to supply the lower borders region of Scotland. The Central Scottish Belt is particularly vulnerable to disruption as it is difficult to supply from alternative sources. 2. The Grangemouth refinery and petrochemicals facility is the largest INEOS production centre. It is a deeply integrated site exploiting synergies between the refinery and the petrochemical plants. Located 40 kilometres west of Edinburgh on a 1700-acre site, the petrochemicals facility manufactures over two million tonnes of chemical products per annum and the refinery has an annual capacity of nearly 10 million tonnes. The site is strategically placed as it has direct access to crude oil and natural gas liquids from the North Sea which the company transforms into petrol, fuel products and a range of olefins and polymer products. 3. It is also critical for oil and gas production through the Forties Pipeline System (FPS) due to the supply of utilities from the site, especially steam to the BP Kinneil processing terminal. The FPS was established by BP in 1975, directly linking the Grangemouth refinery to the North Sea oil fields, gathering crude and condensate from over 70 separate fields. The pipeline continues overland to the processing terminal at Kinneil, adjacent to the Grangemouth refinery complex, where the crude is stabilised. Separated gas is recovered for use in the Grangemouth petrochemicals complex or for supply as refrigerated Liquid Petroleum Gas (LPG). 4. The Grangemouth refinery site also includes a power station, owned and operated by INEOS, and a CHP plant which is operated by Grangemouth CHP Ltd. Both steam and electricity generated by the CHP plant service demand from BP Kinneil. The low and high pressure steam supplies are particularly critical for the operation of Kinneil, although separate power and cooling water supply is available for one of the processing trains. 5. Grangemouth traces its origins back to 1924 and up until 2005 was owned by BP. In December 2005 INEOS purchased Grangemouth Refinery from Innovene, BP‟s olefins and derivatives and refining subsidiary, and formed INEOS Refining (a separate business within the INEOS Group). INEOS also acquired the Finnart Ocean terminal and associated pipelines running from Grangemouth to Finnart. Since the acquisition, Morgan Stanley has been employed by INEOS Refining to source crude oil for the refinery. 13 PROTECT – POLICY & COMMERCIAL INEOS 6. INEOS is one of the world‟s biggest chemicals companies with over 70 manufacturing sites and 16,000 employees. INEOS is a highly leveraged company and has borrowed heavily to acquire new businesses. As a result, INEOS‟s net debt stood at €7.4 billion in June this year. The company successfully re-negotiated its debt arrangements with its banking consortium in 2009, under these arrangements it is limited to capex for statutory health, safety and environmental investments only. Other commercially important capex, including up-grading of their Grangemouth cracker (a high energy plant used to convert oil and gas to products used in the chemical industry), has been put on hold pending agreement about a bank loan and grant from the Scottish authorities. Originally INEOS had planned to shut its old, oil-fed cracker (G4) and upgrade the newer gas-fed unit (KG) to more readily accept the changing quality of supplies from the North Sea gas fields. The original cost was estimated at €120m. Due to the capital restrictions, the project has been delayed and the latest information we have is that INEOS may seek to extend the life of G4 until the position on funding can be resolved, and provided they can extend their operating licence. 7. With the general economic recovery, INEOS‟s overall profitability has improved with (EBITDA) earnings of €972m in H1 ‟10, up 75% on H1 ‟09. The refinery business, in common with other operators, is severely underperforming and made only €6m in H1 ‟10, including a €32m loss in the second quarter. INEOS‟ credit rating has been upgraded recently but remains low with Standard & Poor indicating B-. The overall position is of a company that has very large debts, is capex constrained, and which was badly hit by the downturn. Management has developed a robust response whereby Group profitability is currently back to prerecession levels. The UK downstream market 8. Over the past two years, DECC has undertaken collaborative work with the downstream oil industry in the UK1 to examine broad market trends and their implications for supply resilience. Overall, this work has concluded that the UK has a mature and highly competitive downstream oil market. Wood Mackenzie 2 concluded that the position of UK refineries is poor relative to their European competition. This is due to structural factors (e.g. central European markets are landlocked and hence less open to imports and competition) and the fact that UK refineries process higher quality (and hence higher cost) North Sea crude feedstock than is the case in much of Europe. Intense competition has characterised the retail fuels market for more than a decade with: a. significant inroads into the market from supermarkets with a consequent pressure upon fuel margins; b. a significant rationalisation of the number of sites across the UK; and c. a greater strategic focus upon non-fuel income3. d. Overall, the work identifies a long term trend towards rationalisation in the UK refining industry4, low levels of non-discretionary investment in the 1 via the Downstream Oil Industry Task Group (DOITG) UK Downstream Oil Infrastructure – Final report, June 2009 3 Wood Mackenzie estimate the average, net cash retail fuel margin for 2005-2008 to be under 3 pence per litre, report p. 31 4 there were 19 UK-based refineries in 1975, there are now 8, there were over 37,500 service stations in 1970 there were 8,921 at the end of 2009 (UKPIA Statistical Review 2010 (p. 13 and 27) 2 14 PROTECT – POLICY & COMMERCIAL downstream oil infrastructure (notwithstanding some limited investment particularly in coastal storage facilities by smaller, independent fuel suppliers and specialist storage companies), static total UK oil demand and a decreasing level of demand for petrol/increasing level of demand for diesel and jet fuel (UK refineries are typically configured to produce petrol as a result of historical demand patterns). 9. DECC is currently working with the DOITG to finalise a report for Charles Hendry which provides a more detailed overview of the downstream oil market and related issues; Ineos is represented on the DOITG via its UK Trade Association, the UK Petroleum Industry Association (UKPIA). 10. The fuels market in Scotland has undergone significant changes in recent years in addition to the Grangemouth sale; recently Aberdeen and Inverness fuel terminals were bought by DCC Group (an Ireland-based petroleum product distribution company) from BP; fuel supply arrangements to the Scottish Highlands and Islands have also changed this year as ConocoPhillips have concluded negotiations to take over a long-term fuel supply contract from BP, shipping product from Humber refinery to a number of Highlands and Islands fuels terminals. A 5 year supply contract was agreed between the parties, with effect from 1 June 2010. In previous years, product to supply this contract was sourced from Grangemouth Refinery. 11. Overall, the above trends provide a highly challenging context for INEOS‟s refining business in the UK; DECC and the Scottish Government retain a strong interest in developments that relate to the future of the site. 12. INEOS is reported to be in talks with PetroChina5 to obtain an overall stake or obtain key parts of the Grangemouth Refinery since 2009. Jim Ratcliffe, CEO and major shareholder, met with Lord Davies in early October 2009 and amongst other topics, the issue of attracting a substantial equity injection was discussed. Talks between the parties were also confirmed at a recent industry conference (3 October, by Tom Crotty, a director of the company). If there is any investment by PetroChina, it would appear that the most likely result would be a Joint Venture with the continued operation of refinery by INEOS. Industrial Relations (IR) 13. The main trade union at Grangemouth is Unite. At present there are no reported IR related problems, however Unite union member workers at the site held a 48hour strike from 27-29 April 2008 over a dispute concerning future pension arrangements. The strike forced the temporary closure of the refinery and the Forties pipeline system. 14. The run up to the strike, which was covered in the national media, resulted in a significant surge in fuel demand in Scotland ahead of the strike and a consequent reduction in daily demand during the strike itself; by midday on 29 th April there were only 25 petrol stations with partial stock-outs in Scotland out of a total (in 2008) of 956. As the strike concluded by 07.00 on 29 th April, the replenishment 1. 5 PetroChina is a large oil and gas producer and distributor with a dominant role in China. PetroChina is listed on the New York, Hong Kong and Shanghai stock exchanges. Its listing on the Shanghai stock exchange in May 2009 made PetroChina one of the largest oil companies in the world. China National Petroleum Corporation (CNPC) is the controlling shareholder of PetroChina (possessing 86.29% of shares in 2007). PetroChina has committed itself to becoming an international energy company and aims to be a globally important producer and distributor by 2020. It has made a number of international investments, in Canadian oil sands and has recently set-up a joint venture with Shell to develop LNG in Australia. 15 PROTECT – POLICY & COMMERCIAL of stocks via imports to sea-fed terminals and through the ramping up of production at the site was able to meet the next „wave‟ of local demand. Steam was gradually restored to BP Kinneil starting on 29 th April; full operations were restored to that facility by 5th May. 15. The Government established a joint response team in BERR, instigated daily reporting of stock levels from oil companies and encouraged demand calming measures but did not deploy any of the measures available to it in the NEP-F. Statements were made in the House by Government Ministers6 and Rt. Hon. John Hutton visited Scotland on 29th April and met with local fuels distributors. 16. Overall, given the economic state of the market and INEOS‟s highly leveraged position, staff costs/pensions arrangements and related possible IR unrest are likely to remain an area of potential vulnerability for the company. Site security 17. The FPS, BP Kinneil and INEOS Grangemouth are all Category 4 CNI assets, based upon the impact of their loss. The Joint Terrorism Analysis Centre (JTAC) assess the threat of terrorism at oil and gas sites as „moderate‟, meaning „an attack is possible but not likely‟. As with all CNI assets, INEOS at Grangemouth have received security advice from CPNI (Centre for the Protection of Critical Infrastructure) on proportionate security mitigations. INEOS have, however, declined to take up these recommendations (costing between £4 & £6 Million) because they do not see themselves as the direct beneficiary, cannot afford these measures and are restricted on non-regulated expenditure as part of their debt agreement. In addition to their own risk and that of fuel supplies of Scotland, the site‟s vulnerabilities impact BP Kinneil and UK gas supplies due to the interdependencies mentioned earlier. OGDs are watching closely to see how DECC resolves this issue, due to the potential precedent we may set (this is the first and only example to date of a CNI owner/operator deciding not to act upon CPNI‟s recommendations). A submission will go to Charles Hendry setting out the issue in further detail, which you be cc‟d on. Lines to take (if needed): I understand that you are in discussions with the Scottish Government and DECC regarding the security advice CPNI have proposed for your site. It is important that such critical assets have proportionate counter terrorism protection, but I recognise that this must be proportionate to all parties – including yourselves. I hope that we can all continue to talk these issues through and reach a satisfactory conclusion. Feedstock supply 18. Shell/Exxon (S/E) own a pipeline which links their cracker at Mossmorran to the Ineos complex at Grangemouth. Currently the pipeline is used occasionally to ship ethane (only) to Ineos, particularly when the Mossmorran cracker is down for maintenance. Due to diminishing supplies from the North Sea, Ineos will in future (beyond 2016) be progressively short of material for its cracker operations 7. 6 Rt. Hon John Hutton MP, Hansard, 24 Apr 2008 : Column 1479, Baroness Vadera, Hansard, 24 Apr 2008 : Column 1718 To offset the decline of ethane supplies from the NS, Ineos is upgrading its gas cracker to take a greater proportion of nonethane feed, currently the limit is 20%. To be effective, Ineos must secure additional supplies of propane, hence their discussions with S/E. Importing the additional propane by ship is not feasible given infrastructure limitations at the dock and BP‟s pipeline system. 7 16 PROTECT – POLICY & COMMERCIAL Ineos therefore proposed that the existing pipeline be re-configured to supply propane as well as ethane to Grangemouth – currently the surplus propane from Mossmorran is exported for use as a fuel by S/E via the nearby terminal at Braefoot Bay. The attraction for government is that by processing propane at Grangemouth into chemical derivative products, more of the value added remains within the UK economy. 19. The cost of adapting the pipeline is estimated at £20m. Ineos entered into commercial discussions with Shell as the lead party; Shell indicated that they valued the proposal at £40-80m which Ineos claim was similar to their offer. However, after some deliberation Shell wrote to Ineos rejecting the offer on three grounds – engineering resources were limited and this was a low priority project, safety issues, and operational/commercial complexity (eg, hydrocarbon accounting). [This is consistent with comments made earlier to Chemicals Unit by Shell.] Shell also communicated their position to a number of politicians and officials in Scotland including Jim Mather MSP, Energy Minister and Michael Connarty, MP covering Grangemouth. 20. Subsequently Ineos has made a revised offer which involves propane only. Technically this is a less complex option and would be based on a tiered tolling charge on the volume of propane transported. Ineos has asked for a formal reply by 15th October; the timing has been chosen to allow sufficient time to work up the project to coincide with planned maintenance on the pipeline. Both Shell and Exxon have come back with points of clarification on the new offer and Exxon has implied there may be the prospect of further negotiation around the new deal. 21. Grant indicated that if the latest offer were reject without the prospect of agreement, then Ineos was willing to invoke a Statutory Review under the relevant infrastructure Code of Practice (owned by DECC – Robert White of the Energy Development Unit). Although a straight commercial solution, possibly involving arbitration, is still possible, Ineos believe that a Review is the mostly outcome. Ineos have been in contact with Robert White of DECC on this issue. Lines to take (if needed): We are aware of the infrastructure access issue between Ineos and Shell/ExxonMobil. Government would strongly prefer to see a negotiated settlement between the parties concerned.. I understand, however, that you have established contact with officials in my Department concerning the relevant infrastructure code of practice; this avenue is open to you should you choose to pursue it. 17 PROTECT – POLICY & COMMERCIAL GRANGEMOUTH REFINERY: PHYSICAL SECURITY ISSUE: 1. Ineos‟s Grangemouth refinery has received security advice from CPNI to mitigate against the risk of a terrorist attack. Ineos has informed the Scottish Government that they are not prepared to undertake this work (at a cost or £3.5 to £6 million), explaining it is unaffordable against their budget for capital expenditure and that they are also constrained by the terms of their debt arrangements to only fund non-discretionary expenditure. A terrorist attack on energy assets across the UK is assessed as possible but not likely; nevertheless, the vulnerability of Ineos refinery (which supplies steam and other utilities to the adjacent oil and gas processing plant at BP Kinneil) increases the risk of a successful terrorist attack against BP Kinneil which could impact oil and gas production through the Forties Pipeline System HANDLING: 2. There may be an opportunity for Moira to raise this issue during your visit. However, it should be handled sensitively. If an INEOS Board Member is present, there may an opportunity to note the important of this site to UK energy supplies (especially fuel supply to Scotland), and our desire together with the Scottish Government to work with Ineos to manage the risk of a successful terrorist attack by implementing appropriate protective security. You should be aware, however, that Gordon Grant (Refinery Manager at Ineos Grangemouth) has made his position clear, in that if we (HMG & Scottish Government) consider there is a need to implement protective security measures (fences, CCTV and alarms) to mitigate the risk of a terrorist attack, then HMG and Scottish Government should pay. Mr Grant has made it clear that he does not have the budget and we do not believe he will appreciate being pushed hard on this point. Nevertheless, if the opportunity presents itself, Moira might wish to mention that we consider the Grangemouth refinery a critical site for energy supplies to UK, in particular Scotland, that she understands that resources are scarce, and that she hopes that there is a way that we can work with Ineos, the Scottish Government, and other interested parties to resolve this issue. LINES TO TAKE: For Ineos Board Member:  The Grangemouth site is critical to meeting UK‟s energy needs including supply of petrol and diesel into Scotland central‟s belt. CPNI advice and 18 PROTECT – POLICY & COMMERCIAL recommendations to improve security are not made lightly but based on extensive knowledge and experience. Implementation would significantly improve security at Grangemouth and improve protective security, resilience . Urge you to consider funding this work For Gordon Grant:  I understand your situation, and appreciate your continued openness with the Scottish Government and ourselves. We would very much like, together with the Scottish government, to continue to work with you and importantly your Board to explore all avenues for progressing this issue. BACKGROUND: See attached DRAFT submission 19 PROTECT – POLICY & COMMERCIAL To: Charles Hendry From: Tim Cullen Security & Resilience 0300 068 6454 [xx]th October 2010 PHYSICAL SECURITY - GRANGEMOUTH REFINERY ISSUE 1. CPNI has undertaken a vulnerability assessment at the Grangemouth refinery in Scotland, owned and operated by Ineos. It has recommended a number of improvements to physical security at the site to mitigate the risk of a terrorist attack. However, Ineos has claimed that the necessary investment is unaffordable in the wider context of its already high debt burden and the nature of its debt arrangements recently re-negotiated with a banking consortium. To date, other refining companies have invariably acted on CPNI advice and implemented improvements to physical security. This submission discusses what can be done to promote the required investment at Grangemouth. RECOMMENDATION 2. That you: a. Note that this is the first instance where a company has decided not to undertake investments to mitigate security vulnerabilities, so we need to avoid setting a precedent of government support for any future company in similar circumstances; b. Note that we have been working closely with CPNI, the Scottish Government, and Department of Business Innovation and Skills (BIS) to try to resolve this matter; c. Note that the current terrorist threat level for Gas and Oil is assessed as „Moderate‟, meaning an attack is possible but not likely, and; d. Further advice will be provided in Q1 2011 when the actions set out in paragraph 8 have been completed 20 PROTECT – POLICY & COMMERCIAL KEY POINTS 3. DECC works together with the Centre for the Protection of National Infrastructure (CPNI), a branch of the Security Service, to enable the implementation of proportionate physical, electronic and personnel security measures at Critical National Infrastructure (CNI) sites across the gas, electricity and oil sectors. The approach HMG has traditionally taken is that the beneficiary pays for implementing security enhancements passing on the costs, as necessary, to energy users. The way in which the Electricity and Gas networks are regulated by Ofgem has enabled the owners of CNI assets in these sectors to pass through these costs within their regulated charging mechanisms. In contrast, the downstream oil industry is not regulated in this way, is subject to intense international competition, and does not have the same ability to pass on the costs of security mitigations to their customers without compromising their competitive positions. Nonetheless, major refining companies within the downstream oil sector have to date acted upon CPNI advice and have undertaken investments to improve physical security at their sites. 4. Located in central Scotland, the Grangemouth Refinery (owned and operated by Ineos) is a Category 48 CNI site, in part due to its interdependency with significant BP assets (also at Category 4) comprising of the Forties Pipeline System and Kinneil oil and gas processing facility. The Ineos refinery is also critical for supplying oil products, including transport fuel, to Scotland‟s central belt. Like all other CNI sites, Ineos has received a number of recommendations from CPNI to improve its physical protection from a terrorist attack (such as improved perimeter fencing, CCTV and alarms). In response to these recommendations, Ineos has explained that it is not prepared to undertake any of these mitigations because it cannot afford to do so and, even if it could afford this expenditure, it does not see itself as the beneficiary of the enhancements proposed. 5. There is therefore a cluster of CNI sites at Grangemouth, with complex interdependencies, which means that the critical operations of these sites are vulnerable by virtue of the security vulnerabilities of one. Specifically, lack of action to improve security by Ineos could expose BP‟s FPS to greater vulnerability. Forties Pipeline System 6. BP owns and operates the Forties Pipeline System (FPS) and the associated oil and gas processing plant at BP Kinneil. FPS is a 100% BP-owned integrated oil and gas liquid transportation and processing system with a nominal capacity in excess of one 8 Critical National Infrastructure (CNI) sites are grouped into five categories to prioritise resources based upon the impact of their loss, Category 5 being the highest. The loss of a Category 4 would present a „severe‟ impacts to the UK which for energy equates to a loss of electricity supply to >1 million for >18hours, loss of gas to >1million for >28 days, or loss of fuel >20% of national demand of up to one week 21 PROTECT – POLICY & COMMERCIAL million barrels per day serving the central area of the North Sea.. FPS transports crude oil and gas liquids from 70 offshore and onshore entry points, processes the liquids at Kinneil and redelivers to the customer Forties Blend crude oil at Hound Point, and Raw Gas and fractionated Gas Products at Grangemouth. Because much of the UK indigenous gas production now comes from offshore oil fields, the loss of any element of the FPS, including Kinneil, would lead to significant immediate reductions in supply to St.Fergus, Teeside and Bacton. Supply of gas to the national transmission system at St Fergus is also dependent upon the capability to transport associated natural gas liquids (NGLs) to Kinneil for processing, although there is an alternative export route for most of these NGL‟s if the Mossmorran plant is available. 7. Previously, BP had installed temporary packager boilers at Kinneil to allow it to continue to generate steam to operate one of the three processing trains in the event of loss of steam supplies from the Grangemouth site. Such a volume of steam could also be used to keep critical plant and equipment at Kinneil “warm” to allow a more rapid re-start to operations. However, we understand that these boilers have now been removed, and although they could be re-installed we note that BP have questioned their long term viability and reliability. There are other utilities that need to be provided by Grangemouth (electricity and cooling water), as well as continued export routes into Grangemouth for raw gas and fractionated gas products from Kinneil, in order that FPS can operate. According to BP, to make Kinneil fully independent of Grangemouth would take several hundred million pounds. The loss of the export route into Granegmouth for gas and other product would also mean that BP would have to flare these substances, and they don‟t think their flare tips would last more than a week of continuous flaring . Such a highly visible action is also likely to draw concern from local residence and others on safety and environmental grounds. Physical security at Grangemouth refinery site 8. CPNI has recommended that a number of security enhancements are made at the Grangemouth site costing £3.5 to £6Million. They focus on the need to protect plant and equipment that provide the refinery and BP Kinneil with its utilities (in particular steam supply), and protect the port and road loading facilities for inport and export of oil product.. 9. Ineos has informed the Scottish Government that they can see no commercial justification for it to make this expenditure. In the current economic climate, Ineos claims that such an investment at the refinery could only be funded from its existing capex budget, which is already allocated to ensure they meet their statutory requirements for safety and environmental protection. We understand that these restrictions, to only fund statutory requirements, is also a term of its recently renegotiated debt arrangements. 22 PROTECT – POLICY & COMMERCIAL NEXT STEPS 10. We have explored with Legal whether the Secretary of State could direct Ineos to fund this work. We have not identified any mechanism for doing so. In the circumstances, with your approval, we will take forward the following actions. a. Discuss with the Scottish Government, which is in the process of reviewing a grant application from Ineos to renew critical production equipment at its chemical processing plant at Grangemouth site, the scope to make the implementation of these security mitigations a condition of the grant; b. Discuss with BP the extent to which it might be willing to fund these security mitigations to reduce the vulnerability of its own assets; c. Explore possibilities to engage with Ineos at a more senior level to seek to encourage them to reduce the risk to its own assets and income streams (Moria Wallace is visiting Grangemouth on the 8th October, and depending upon the level of representation from Ineos this could present an opportunity to move this discussion forwards) ); d. Explore with Ofgem the possibility of utilising gas transmission charges as potential funding stream for this security work; and e. Continue, together with the Scottish Government (which is responsible for consequence management in Scotland) and other partners, to assess the longer term implications of the identified vulnerabilities and associated risk exposure DETAIL 11. The Government‟s approach to implementing National Security across all sectors within the CNIhas traditionally been based on the premise that the „beneficiary‟ pays for security enhancements. In almost all cases, across all CNI sectors (wider than Energy), HMG has been able to balance the commercial risks to the owner/operator with national security risks to the UK. When such alignment is realised, leading to a shared „risk appetite‟, the private sector company has funded the security mitigations. Indeed, there are eight operational oil refineries in the UK (all of which are Category 4 and Category 3) owned by a variety of market participants. All have received site specific vulnerability assessments undertaken by CPNI, and most have acted upon this advice and implemented enhancements to their physical, electronic, and personnel security. Although one (Lindsey Refinery owned and operated by Total) has yet to undertake the mitigations CPNI have proposed, we remain in dialogue and anticipate mitigations to be implemented 12. We have discussed this issue at official level within the government‟s Counter Terrorism structures, and received strong steers from all departments that they would be concerned if DECC, notwithstanding other constraints on public expenditure, provided public funding to address this risk. Not only would this potentially antagonise those private sector operators who have already funded such enhancements, it could also discourage operators at those sites which have yet to 23 PROTECT – POLICY & COMMERCIAL fund their own security mitigations, sending them a signal that if they refuse HM Government could provide funding. 13. The threat level to onshore energy assets is currently assessed to be MODERATE (a terrorist attack is possible, but not likely), although the overall terrorist threat to the UK is assessed to be SEVERE (an attack is highly likely). A terrorist attack at the Ineos refinery could disrupt supplies of oil products into Scotland, in particular the Scottish central belt. Such an incident could lead to a total shutdown of the refinery, but unless the port and road loading facilities were also disrupted or damaged, it would still be possible to import oil products via the jetty to serve the Scottish market. In the short term, fuel supplies to Northern Ireland and the north of England could also be disrupted as some product is sourced from Grangemouth to these regions; over time, demand signals are likely to stimulate supply from other sources although this is likely to involve longer journey times and stretch the capacity of existing logistics systems. 14. There is, also a risk of disruption to gas supplies, as a loss of BP Kinneil could result in loss of up to 65mcm/d of gas. In winter, this could be around 14% of demand (NB record gas demand on 8/1/10 was 465 mcm). Such a loss is likely to be manageable unless there were coincident disruptive events. For example, last winter, high gas demand due to very cold weather and loss of gas supplies from Norwegian gas fields in excess of 50 mcm was managed through flowing gas from storage, LNG and additional imports through IUK (continental interconnector). 15. We must also, however, recognise the financial position of Ineos. To achieve its current position as one of the top five chemical companies in the world, it has borrowed heavily to acquire new businesses, the most significant being the purchase of BP‟s chemicals in 2005. As a result, Ineos‟s net debt stood at €7.4 billion in June this year. The company successfully re-negotiated its debt arrangements with its banking consortium last year, and (as noted above) under those arrangements is limited to capex for statutory health, safety and environmental investments only. Other commercially important capex, including up-grading of their Grangemouth cracker (a high energy plant used to convert oil and gas to products used in the chemical industry), has been put on hold pending agreement about a bank loan and grant from the Scottish authorities. With the general economic recovery, Ineos‟ overall profitability has improved with (EBITDA) earnings of €972m in H1 ‟10, up 75% on H1 ‟09. The refinery business, in common with other operators, is severely underperforming and made only €6m in H1 ‟10, including a €32m loss in the second quarter. Ineos‟ credit rating has been upgraded recently but remains low with Standard & Poor indicating B-. The overall position, is of a company that has very large debts, is capex constrained, has been badly hit by the recession, but is now gradually improving. A requirement that Ineos invest £3.5 to 6m on additional security measures is therefore very problematic for them at this time especially for their refinery business. 24 PROTECT – POLICY & COMMERCIAL cc PS SoS Moria Wallace Simon Virley Vanessa Nicholls Scott Muligan (Legal) Michael Rutter Simon Toole Richard Westlake (Director OCST, Home Office) Liz S (Director CPNI) Patrick Walsh (BIS) Pat Sellers (BIS) Bobby Ronnie (Scottish Government) Gervase Hood (Scottish Office) Special Advisors 25 PROTECT – POLICY & COMMERCIAL BIOGRAPHIES RUPERT STEELE, Director of Regulation, Scottish Power Rupert is responsible for working with Government and regulatory stakeholders to help find solutions which meet both the needs of the company and the public interest. He reports directly to the Chief Executive and is a member of the Executive Team. Rupert was appointed to this position on joining ScottishPower in April 2007. Prior to this, he ran a consultancy business (Energy Strategies Limited) that advised utility, City and Government clients on energy policy issues. His earlier career included 16 years working on energy issues in the Department of Trade and Industry and three years at TXU Europe. He was appointed OBE in 1992. 26 PROTECT – POLICY & COMMERCIAL STEVEN MARSHALL, Head of CCS Development, Scottish Power Steven Marshall is Head of CCS Development at ScottishPower Energy Wholesale. In this role he is responsible for (1) managing ScottishPower's programme of activities in carbon capture and storage (CCS) development and (2) leading the ScottishPower's bid to the UK Government in connection with its Competition for the UK's first commercial scale CCS scheme. On joining ScottishPower in 1995, Steven established the Process Design Group at ScottishPower Technology and became heavily involved in the technical and economic assessment of coal and gas power plant, energy from waste and waste water treatment projects. He moved to ScottishPower Generation in 2000, assuming the role of Strategy Manager and then Asset Investment Manager before being seconded to DEFRA for a year in 2004 to working on an international sustainable energy initiative and also on energy efficiency aspects of the Energy Review. Since early in 2006, Steven has been working on clean coal development projects within ScottishPower and is now responsible for the company's activities in CCS. Prior to joining ScottishPower in 1995, Steven was employed as a Senior Combustion R&D Engineer at Mitsui Babcock in Renfrew working predominantly on clean coal technology development. He was responsible for the design, construction, commissioning and operation of a pilot plant test facility that was used to develop low NOx technologies such as gas reburn, over-fire air and SCR. The final project he was responsible for before leaving Mitsui Babcock was the conversion of this test facility to Oxyfuel firing and the subsequent testing of this carbon capture technology for this first time in the UK in 1995. Steven holds a First Class Honours Degree in Energy Engineering from Napier University and a Master of Business Administration with Distinction from Heriot Watt University. He is also a Board Member of the Carbon Capture and Storage Association and chair of its Health and Safety Working Group. You will also meet: Sandy Rae, Energy Management Director, Energy Wholesale Responsible for running Scottish Power‟s energy trading function – i.e. everything between the physical generation and retail. Brian Galloway, Commercial and Regulation Manager, Energy Wholesale Part of Sandy Rae‟s team, Brian is Head of Regulation for Energy Wholesale and also responsible for most of the company' analytical work 27 PROTECT – POLICY & COMMERCIAL GORDON GRANT, Director of INEOS Manufacturing, Scotland Ltd Gordon Grant was educated at Bo'ness Academy and went on to Heriot Watt University where he was awarded an honours degree in Mechanical Engineering. He is a Chartered Engineer and Member of the Institute of Mechanical Engineers. His early career was spent as a Maintenance Engineer with BP Chemicals at Grangemouth. He has subsequently held posts in HR, Operations and Business Units for BP Chemicals and BP Exploration and now INEOS, including Site Manager roles at Wilton, Sullom Voe and Grangemouth. Gordon is a Director of INEOS Manufacturing Scotland Ltd and is currently Works General Manager for the Grangemouth Site. He is also a Council Member of the Chemicals Industry Association and a member of the Chemical Sciences Scotland Leadership team. He is currently Chairman of the Scottish Sector of the CIA and Chairman of the Grangemouth Development Group. He has also held Directorships in UK and European businesses and has been a Trustee of Lerwick Port Authority and Shetland Education Trust. Gordon is married with 3 boys. His main interests outside of work are sport and keeping fit. You will also meet: Richard Longden , Group Communications Manager Andrew Gardner, Refinery Commercial Manager 28