PROTECT – POLICY & COMMERCIAL 13 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.
PROTECT – POLICY & COMMERCIAL 14

 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 pre-recession 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 income 3.
d. Overall, the work identifies a long term trend towards rationalisation in the UK refining
industry4, low levels of non-discretionary investment in the
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
1
2

at the end of 2009 (UKPIA Statistical Review 2010 (p. 13 and 27) PROTECT

15

– 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 PetroChina 5 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.
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.

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 48-hour 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 29th April, the replenishment
PROTECT – POLICY & COMMERCIAL 16

 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 29th 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 Ministers 6 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.
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.
6
7

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.
PROTECT – POLICY & COMMERCIAL 17

 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 15 th
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.
PROTECT – POLICY & COMMERCIAL 18

 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
PROTECT – POLICY & COMMERCIAL 19

 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 PROTECT – POLICY & COMMERCIAL 20

 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
PROTECT – POLICY & COMMERCIAL 21

 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.
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

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
PROTECT – POLICY & COMMERCIAL 22

 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 restart 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 re-negotiated debt arrangements.
PROTECT – POLICY & COMMERCIAL 23

 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 CNI has 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
PROTECT – POLICY & COMMERCIAL 24

 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.
PROTECT – POLICY & COMMERCIAL 25

 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