A recent report by Wood Mackenzie has sounded the alarm regarding the global oil refining landscape. It revealed that 101 out of 410 refineries globally, accounting for 21% of refining capacity, are at risk of closure within the next ten years.

This situation is particularly pronounced in the UK, where carbon taxes are projected to be three times the global average by 2035. Refineries that lag behind in adopting low-carbon innovations such as carbon capture technology and alternative fuels are more vulnerable.

The recent closure of the Grangemouth refinery, which leaves the UK with only five operational refineries, emphasizes this trend. While Asia is increasing its refining capacity by an additional 800,000 barrels per day, the UK is increasingly dependent on imports, which raises concerns about supply disruptions, price fluctuations, and geopolitical risks.

The US Energy Information Administration has also raised concerns about potential fuel shortages following the shutdown of two significant refineries in the US, which has reduced American refining capacity by 1 million barrels per day.

The UK’s stringent carbon pricing exacerbates the challenges for its refineries. Currently, refineries receive free emissions allowances for only 60% of their emissions, which is less favorable than other sectors in the UK that have a lower risk of carbon leakage.

Refiners are not only facing the increasing cost of their emissions but also rising energy costs linked to carbon pricing in the electricity sector—a burden that other energy-intensive industries are compensated for. According to Fuels Industry UK, this exclusion from indirect compensation programs may have cost UK refineries £100 million during peak carbon prices in 2022.

This situation puts UK refineries at a significant disadvantage compared to their European counterparts. In fact, 15 EU member states include refining in their compensation frameworks.

Moreover, the UK’s newly introduced Carbon Border Adjustment Mechanism (CBAM) does not extend to the refining sector, despite identifications from the Department for Energy Security and Net Zero highlighting it as especially vulnerable to carbon leakage.

This regulatory gap threatens to drive UK refineries out of business before they can complete the necessary green transitions that are highlighted in the Wood Mackenzie report.

Government intervention is crucial to create a balanced environment, shielding refineries from excessive CO₂ and energy costs while ensuring energy security, economic stability, and the preservation of skills essential for the energy transition.

Consider the Stanlow Refinery, which processes 9 million tonnes of crude oil annually and provides 16% of the UK’s road transport fuels. Stanlow is committing £2.25 billion over five years to transform into the world’s first low-carbon refinery.

Its £1 billion hydrogen facility, which is set to begin construction this year, will generate low-carbon hydrogen through carbon capture processes. This hydrogen will power a new, hydrogen-ready furnace and Europe’s first hydrogen-ready combined heat and power plant. Additionally, another hydrogen unit will support local industries through the HyNet cluster.

A carbon capture project on Stanlow’s catalytic cracker, also part of the HyNet initiative, will prevent emissions equivalent to removing 400,000 cars from UK roads. These initiatives will allow Stanlow to capture CO₂ for storage under the Celtic Sea, potentially reducing its emissions by 95% by 2030 and avoiding 2 million tonnes of CO₂ annually.

Stanlow’s objectives go beyond mere survival; it aims to address the gaps created by closures like Grangemouth while exploring avenues in sustainable aviation fuels (SAF). However, success hinges on supportive policy measures. While carbon pricing incentivizes decarbonization, it also risks increasing costs for domestic refining.

Incorporating refining into the CBAM would help safeguard against high-carbon imports, which do not contribute to global carbon emission reductions. Additionally, enhancing emissions trading scheme compensation or increasing free allowances could provide essential relief.

The stakes are high for energy sovereignty, not merely employment—though Stanlow supports thousands of jobs. Presently, the UK imports 50% of its diesel and two-thirds of its jet fuel. Further refinery closures could deepen reliance on imports and jeopardize leadership in SAF.

While electrification is on the rise, the demand for fuels, especially diesel, remains robust. The closure of refineries presents a policy-driven risk that could have national ramifications. Stanlow exemplifies how carbon capture, low-carbon hydrogen, and SAF development can coexist, aligning decarbonization with energy resilience—but this can be realized only with the necessary policy support.

Tony Fountain is the managing partner at Essar Energy Transition.