Britain said on Wednesday there was scope for more UK refining capacity to close without undermining energy security but set up a new task force to help the struggling sector fend off overseas competition.
The government's long-awaited review of Britain's refining and fuel imports sector comes a week after Murphy Oil said it could be forced to close its loss-making Milford Haven plant in Wales after talks with a potential buyer collapsed.
In a 44-page report, the Department of Energy and Climate Change said environmental regulation along with the U.S. shale boom and the rise of new refiners in Asia made it harder for Britain's seven refineries to compete.
"Looking to the future, given current overcapacity in product supply there is scope for further rationalisation in the UK without impacting on supply security," the review said.
"Government recognises ... the benefits of ensuring that refining and imports business sectors are able to operate successfully in the UK, whilist also recognising that ultimately market forces will decide what supply configuration prevails..."
It announced the creation of a new joint government and industry Midstream Oil Task Force to look at ways of easing the regulatory burden and market distortions to help refiners meet global challenges that have seen their profits dwindle.
European refiners have struggled with stagnant demand and increased overseas competition which has crushed margins and seen several plants closed or idled in recent years.
Wednesday's review into the sector was held after the Coryton plant in the east of England closed in 2012 following the collapse of its owner Petroplus.
That followed the shuttering of the Teesside refinery in 2009, while last year, Grangemouth refinery in Scotland was brought to the brink of closure during a bitter industrial dispute between workers and its owner PetroIneos.
Another 2 million barrels per day of capacity, more than 10 percent of Europe's total, is expected to shut over the next five years, analysts at Vienna-based JBC Energy have said.
The review said some of that capacity could be British.
"Within the EU itself the UK refineries face particular challenges," it said. "Some indications to government from industry are that UK refiners can face higher operating costs than equivalent refineries elsewhere in the EU, which has the potential to impact on competitiveness."
A Mix of Refining and Imports
The challenges facing British refining are structural.
Older refineries were originally geared to meet gasoline demand. As motorists have shifted to more efficient diesel in recent decades, the sector has been left with a surplus of gasoline and shortage of diesel made up by imports.
The review found this trend was likely to continue, while overall demand for fuel products would fall as Britain moves towards lower carbon sources. Britain's domestic refineries met 61 percent of overall demand for fuel products in 2012, it said.
That level is healthy by the standards of the International Energy Agency (EIA) whose model for short term energy security, sees domestic cover of less than 55 percent as higher risk.
Broken down into individual products, however, Britain imported a much higher 64 percent of its jet fuel in 2012.
"A mix of domestic and global suppliers, brought about by having domestic refining capacity and a strong import infrastructure helps diversify risk and source of supply, helping ensure resilience to supply disruptions and maintaining security of supply," the review said.
The government will also establish an industry-owned and operated entity to manage Britain's emergency oil stocks as it seeks to ensure the UK approach was "efficient and fair for obligated companies in the UK downstream sector".
(By Lin Noueihed; Reporting by Lin Noueihed, editing by David Evans)