ExxonMobil (BES0032)

ExxonMobil UK interests

ExxonMobil[1] is a long-established inward investor in the UK with substantial interests in both the upstream and downstream oil and gas and petrochemicals sectors. We have a workforce of over 3000 people and are responsible for approximately 3 percent of the UK's total oil and gas production with interests in nearly 40 producing offshore fields and (taking into account LNG from the South Hook Terminal) we supply around 20 percent of physical gas sold through the UK wholesale hub. Our refinery at Fawley is the largest in the UK and can process more than 270,000 barrels of crude oil a day, providing approximately 20 percent of UK refinery capacity. We operate the largest privately-owned underground oil pipeline distribution network in the UK and serve some 800,000 retail customers a day through a network of over 1,000 Esso branded service stations. We are also a significant manufacturer of petrochemicals with integrated production units at the Fawley refinery and an ethylene plant in Fife.

Fawley has improved its energy efficiency by over 20 percent over the last decade through a variety of measures including expanded use of cogeneration, also known as combined heat and power (CHP[2]). Fawley has two CHP power plants, one operating since the mid 1980’s and the other since 1999, which supply the site’s electricity and steam needs and enable the refinery to export efficiently generated power to the grid.

These industries make significant contributions to the UK economy, security and resilience of supply, non-financial sector growth, investment, exports, skills, employment and innovation[3]. The energy and petrochemical products we supply are essential to our modern society and support wider UK manufacturing activities and value chains. Companies in these sectors, including ExxonMobil, face international competition both in serving end markets and, in particular, generating and then allocating investment capital.

Given the terms of reference of the inquiry we have focused the majority of our submission on our gas related interests. However, the UK’s withdrawal from the EU has wider implications for our business interests in the UK and we have referred to these as well.

ExxonMobil and Natural Gas

ExxonMobil is a longstanding participant in the European wholesale gas business with involvement across the supply chain, including upstream production, storage and processing, LNG regasification terminals, and marketing. ExxonMobil has an ownership interest in LNG regasification capacity in Europe at the South Hook Terminal in Wales and the Adriatic LNG Terminal offshore Italy. In addition, ExxonMobil is a key player in the LNG business internationally, with around 50 years of LNG project development experience, interests in currently operating liquefaction capacity in Qatar, Papua New Guinea and Australia, and with further projects under development.

Role of Natural Gas in the United Kingdom

The importance of natural gas to the UK can be most visibly seen in the electricity generation sector.  Over the last 25 years, natural gas has become the most important fuel for the UK’s electricity generation, accounting for 42 percent of all generation in 2016 compared to less than 1 percent back in 1990 (Source: BEIS). The growth in gas has come largely at the expense of using coal as a generation fuel, with coal use declining from 65 percent to just 9 percent of electricity generation over the same period.  

This shift in the generation mix has provided significant environmental benefits to the United

Kingdom given that gas emits up to 60 percent lower CO2 compared to coal. From 1990 to

2015, UK Greenhouse Gas Emissions reduced by 38 percent (Source: Committee for Climate Change) with the power sector being a leading contributor to this performance, driven largely by this switch from gas to coal for electricity production. The high availability of natural gas in the UK and its inherent flexibility to ramp up and down at short notice make it the ideal fuel to accompany intermittent wind and solar electricity generation to allow the government to meet its projections of removing coal completely from the UK generation sector by 2025 (Source: BEIS).

ExxonMobil expects gas to continue to play a critical role in power generation in the UK and Europe to 2050 and beyond in all expert policy scenarios, even those that seek to limit air and GHG emissions. It remains the lowest-cost alternative for significant emissions reductions given lower CO2 emissions compared to coal while also substantially reducing air pollutants including SOx, NOx, mercury and particulates.

Gas will be one of the most important versatile fuels of the future because of its scalability, reliability and efficiency as well as cleaner-burning properties and competitive costs. The market for natural gas supply is global; LNG is simply a method of transporting natural gas, which enables remote gas resources to reach centres of customer demand. The technology also links previously regional markets in Asia, Europe and North and South America with multiple supply options. Both suppliers and customers benefit from these developments, which are providing a wide choice of natural gas sales and supply options ranging from traditional long-term contracts to shorter term and spot arrangements that collectively meet evolving customer and supplier needs, increase market competition and enhance security of energy supply. 

ExxonMobil views on BREXIT

At a time of uncertainty, both the business community and policy makers should be guided by clear principles governing the kind of economic policy and legislative and regulatory framework that will best serve the UK and the rest of Europe’s long term interests. We believe that a competitive free market, operating on a level playing field within a clear, stable and well-designed legal, fiscal and regulatory frameworks best serve the interests of consumers, suppliers, investors, and local communities with respect to economic prosperity, energy security and environmental protection.

The barrier-free movement of goods, people and capital across borders is important for a business like ours with operations in the UK and across Europe. We believe the priority for the UK Government, devolved administrations and EU institutions should be to retain this barrier-free movement between the UK and the EU, and to minimise this period of uncertainty.

Much of the policy and regulation that currently impacts ExxonMobil’s business in the UK is determined at EU level. This period of change, and the UK government‘s focus on developing a domestic industrial strategy, offers the UK and the EU an opportunity to consider whether the broad direction of policy is consistent with the principles set out above and is helping or hindering businesses in the UK and Europe to be competitive internationally. 

Overall, the regulatory burden on our manufacturing and petroleum product sales’ interests in both the UK and EU is substantial. Examples include policies to address carbon and other emissions from fixed installations (such as the EU Emissions Trading Scheme and implementation of the various Best Available Technique documents under the EU Industrial Emissions Directive), the blending of biofuels via the Renewable Transport Fuels Obligation, and the implementation of EU chemicals safety legislation including REACH[4] and the Classification, Labelling & Packaging (CLP) Regulation[5]. Current initiatives around the EU Circular Economy package (including the anticipated Strategy on Plastics) and the ongoing development of endocrine disruptor criteria may also prove problematic if not designed and implemented in a balanced, pragmatic and scientific manner.

As the UK Government progresses its withdrawal from the EU and develops its own industrial strategy and related domestic policies, we urge it to ensure that:

•          the cumulative cost burden of current and future regulation does not create disincentives to current and potential future investment, and that the UK Government has robust mechanisms in place to consider the impact of cumulative regulation on strategically critical industries ‘in the round’. Assessing cumulative regulatory cost and the competitiveness impact on key industrial sectors such as ours has not always been a feature of domestic policy making in recent years;

•          domestic industrial policy seeks to sustain and support open competition between companies and technologies in a fair and transparent way, rather than ‘picking winners’. For instance long term, stable cross-sectoral carbon pricing vs. the current

‘patchwork’ of carbon controls could help investors make large, long term capital investment decisions between different technologies in a more confident way;

•          the economic importance of established industries as well as new growth sectors is properly understood and reflected in future policy making.

We believe that more needs to be done to reduce the regulatory burden to help address the competitiveness challenge and, in particular focus upon the regulatory challenges facing the manufacturing sector.  We were encouraged by the commitment contained in the European Council agreement from February 2016 to reduce the administrative burden of regulation and to ensure industrial and economic competitiveness. We believe that the UK and Europe can achieve strong, integrated, internationally competitive economies supported by a reliable and cleaner energy supply. We hope that the Brexit process will not undermine this shared objective.

1. What are the implications of the UK's withdrawal from the EU for the UK's energy security?

The UK is currently a major centre for gas and electricity trading activity throughout Europe with a very high degree of liquidity. Many companies conduct EU gas and electricity trading activity using UK affiliates at both UK and Continental hubs. Without clarity and certainty as to the future trading relationship between the UK and EU post-Brexit, and given the lead time necessary to establish appropriate arrangements, market participants will need to plan assuming the worst possible outcome.

In the next few months market participants will need to decide which entities will need to conduct post-Brexit trading activity, and where those entities need to be located. In our view a clear agreement to replicate current trading arrangements, i.e. to sustain the unfettered ability of UK and EU entities to transact business in each other’s jurisdictions, should be reached and communicated to market participants as soon as possible.

As the UK leaves the EU, to allow continued gas and electricity trading between the UK and EU, and to ensure energy security, it will be essential for market participants to have clarity on the future governance framework, including the mechanism(s) for dispute resolution. 

Continued unfettered ability to trade gas and electricity on a tariff-free basis between the UK and the EU will remain critical to ensuring, for example, the future liquidity of the UK National Balancing Point (NBP), and to attracting gas supplies from non-EU supply sources, (e.g. pipeline gas from Norway and LNG from Qatar) as well as from EU sources. Competitively priced wholesale supplies of gas are vital for continued UK energy security and bring wider economic benefits to the UK:

•          gas supply from Continental Europe during the UK winter, and the ability to export excess supply from the UK to Continental Europe will continue to be essential for both effective gas market functioning and security of gas supply post-Brexit;

•          the future attractiveness of the UK gas market and the ability to trade easily with EU markets is essential to maintain liquidity at the NBP.

The treatment of other non-energy sector specific legislation and regulations, such as financial market regulation, could also significantly impact gas trading. Interaction with financial markets increases the number of players trading on gas markets and on gas market liquidity – the freest possible trade in financial services between the UK and EU Member States will continue to be required to sustain this wider trading activity. Maintenance of a common financial regulatory framework would offer benefits for sustaining gas market liquidity. Furthermore, a considerable volume of energy traded in the EU is undertaken on UK based broker platforms with products traded not qualifying as financial instruments based on a ‘carve out’ for physically settled gas transactions under the applicable EU financial regulation (MiFID). If, after Brexit, the UK is deemed as a third country then continued UK based trading of gas may not benefit from this carve out and this would incentivise the movement of broker platforms out of UK jurisdiction to locations inside the EU. Where a company has operations in both the UK and the EU it would be required to comply with these multiple financial regulatory regimes, adding complexity, cost and potential conflict to transacting business.

2.      Could, or should, the UK stay in the Internal Energy Market (IEM) post-Brexit? If not, what should the priorities be for continued co-operation with the EU?

We believe that the UK’s interests would be best served by remaining part of the IEM. If the UK is not part of the IEM, we believe a regulatory framework must be established which:

•          confirms continued, tariff-free gas and electricity trading between the UK and EU gas and electricity markets;

•          defines a transitionary period, how these transition arrangements will work and what arrangements will apply to transactions that straddle pre- and post-Brexit dates;

•          clearly lays out how regulation will be established / amended and how disputes will be resolved;

•          minimises differences in regulatory frameworks to support continued unfettered trade and avoid businesses having to monitor and manage alternative regulatory frameworks;

•          ensures the continued ability to trade both physical and financial commodity gas products to ensure continued market liquidity;

•          defines how future regulatory reporting requirements will be handled, e.g. REMIT[6] trade reporting which is currently dealt with via ACER[7].

In addition, work should be conducted jointly with industry to establish whether there is the potential to reform certain regulatory requirements post-Brexit without impacting the core function of the IEM.

3.      What will be the effect of Brexit on UK-EU energy interconnection?

Both the UK and the EU strongly benefit from the interconnection of UK and North West Europe gas markets to help balance supply and demand. In future non-EU suppliers may seek to supply EU markets directly rather than via the UK. Over time this would result in a less liquid UK wholesale gas market with fewer market participants thus reducing long term national security of supply.

4.      What is EU funding used for in relation to energy infrastructure and research? Can it be effectively replaced by existing UK schemes

Whilst we do not directly participate in such funding schemes, we believe that the capacity to conduct research and development across national borders and between a wide variety of academic, government and business organisations is important and mutually beneficial to all the parties concerned.

5.      What measures would allow the continuation of the Integrated Single Energy Market on the island of Ireland after Brexit?

As we observed in answer to question 4, we believe that mutual interests would be best served by the UK remaining part of the IEM, this would address any associated concerns for the energy market on the island of Ireland. In the event that this is not feasible the principles outlined under our response to question 4 would provide a robust framework.

6.      What are the implications of the UK's withdrawal from Euratom? Will it affect the UK’s security of supply?

Whilst we do not have any interests in nuclear power generation, shared technical standard setting and compliance frameworks, as evidenced by Euratom, allow industry sectors to efficiently and effectively establish and maintain standards and operational equivalence and are of significant value to participants. In addition we believe the benefits of cross border, collaborative R&D as elaborated under question 6 above are likely to be relevant here. 

7.      What can the UK learn from other non-EU countries' experience of trading energy with the EU?

It is important for non-EU countries to maintain positive and constructive relationships with the EU countries with which they trade, or plan to trade, and with the EU institutions that determine the framework of that market. Whilst the capacity to influence how EU regulation develops is diminished, it is vital that non-EU countries understand what is being proposed and the potential impacts of that regulation on future energy trading, and identify appropriate means to ensure interests and challenges are understood.

25 August 2017

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