The UK Government has published its response to a consultation on the future management of the compulsory stocking obligation in the UK (Response to Consultation). This document provides welcome reading to those companies affected by compulsory stock obligations.
Compulsory Stock Obligations
Numerous countries hold emergency stocks of oil and refined products capable of being released to the international market in the event of a supply disruption that requires a market intervention. The UK’s obligations to hold such stocks derive from its membership of the International Energy Agency (IEA) and EU Directive 2009/119/EC (the EU Directive). Whilst the IEA and EU stock obligations are calculated differently, the obligations can be met with the same stock.
The EU Directive obliges member states to hold the higher of 61 days of daily inland consumption or 90 days of imports. As the UK produces oil from the North Sea, the relevant benchmark for the UK is 61 days of daily inland consumption. In line with the EU Directive, one third of the UK’s obligation must be held as petrol, diesel and aviation fuel (being the three most consumed petroleum products in the UK). These stock requirements are known as the Compulsory Stock Obligation (CSO).
The UK Government discharges the CSO by exercising its power under Section 6 of the Energy Act 1976, which allows the Secretary of State for Energy and Climate Change to give directions to businesses producing, supplying or using petroleum products within the UK market, requiring them to hold minimum levels of oil stocks. Currently, companies supplying over 50,000 tonnes of oil products to the UK market in a calendar year must hold stocks towards the CSO.
As mentioned in our previous article, in April 2013, the UK Government launched a consultation in relation to the UK’s CSO. Views were sought as to whether the current obligation which requires individual suppliers to hold stocks is the most efficient model, or whether an alternative model, involving a centralised stocking entity (CSE) (used in several other member states) would be more appropriate. The consultation also sought industry’s view on broader changes to UK CSO policy, including proposals to increase the proportion of finished product (such as petrol, diesel and aviation fuel) held as stock and to increase the proportion of stocks held in the UK.
Government Response to Consultation
The vast majority of industry respondents agreed that the UK should establish a mandatory industry-owned, industry-operated CSE. Respondents identified that the establishment of a CSE could result in several desirable outcomes, including:
- Allowing the CSO to be managed more strategically by allowing companies to plan and co-ordinate their obligations (which would still fall upon the individual companies rather than the CSE) more effectively.
- Helping to incentivise the development of UK storage capacity (which will become increasingly important as production from the North Sea continues to diminish over time) through economies of scale and better access to finance at more favourable rates than individual companies could achieve.
- Allowing for “buffer stocks” to be reduced. (Many individual companies currently hold significant extra stock to ensure CSO compliance at all times. The establishment of a co-ordinated body such as the CSE should reduce the need for this practice).
- Improving the transparency of CSO costs.
The Government agreed that the establishment of a CSE was the best policy option and requested that industry prepares a roadmap for a mandatory industry-owned, industry-operated CSE. This roadmap should detail how the CSE will be established and how it will be managed. Once the roadmap is approved, the Government has committed to pass the necessary legislation to establish the CSE.
General changes to UK compulsory stock holding policy
The level of consensus achieved between Government and industry in relation to the establishment of a CSE was not matched in relation the second part of the consultation, which dealt with general changes to UK compulsory stock holding policy. The Government’s position is that the UK would benefit from holding a greater proportion of emergency stocks in storage sites in the UK (currently stocks can be held across the EU) and that these stocks should reflect the domestic consumption of oil products (i.e. finished product such as petrol, diesel and aviation fuel as opposed to unrefined crude oil).
However, respondents expressed concerns about holding more of their obligation as finished product (beyond the one third already required under the EU Directive) or limiting what could be held outside of the UK. Respondents noted that the lack of storage capacity in the UK, particularly for products such as aviation fuel, means that it would be difficult to store significant amounts of finished product in the UK and that such a requirement would significantly increase the cost of compliance with the CSO, a cost which would be passed through to the final consumer. It was also argued that limiting the amount of stock held outside the UK could mean that multi-national companies would not be able to efficiently use their own networks.
In response to these objections, the Government stated that as the EU Directive has only recently been implemented and as the CSE is the process of being established, the market is in a period of transition. Therefore, whilst reserving its position, the Government has decided not to make any specific changes in relation to general compulsory stock holding policy at this time.
The Response to Consultation represents welcome news for the industry. First, the CSE offers the potential to more efficiently co-ordinate the CSO obligation and thereby reduce wasteful and costly practices, such as storage duplication. Secondly, the industry has, for the time being at least, resisted the imposition of requirements concerning the location and composition of oil stocks, which could have had a detrimental impact on both costs and operational flexibility.