Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 120-141)



  120. Would it be easy to blow up six pipes in an afternoon?
  (Mr Latif) They are in different locations.
  (Mr Ladle) There is security at all terminals. I am sure they take security very, very, very seriously. There are six or seven points where gas comes in. The profile of gas co-ordination is changing. Some of those points are losing their significance, some are potentially increasing. There is very big growth in the Zeebrugge pipeline. There is discussion at the moment about Norwegian gas and how much of that will come into the UK. There are government discussions on that topic at the moment. Is the pipe big enough? We do need more investment in pipes, particularly in the north, to bring that gas into the north and bring it down to the south. That is a point I alluded to earlier. The third point?

  121. Reserves and contractual responsibility.
  (Mr Latif) Storage. Again, the way we operate in the UK we have managed to get gas on a "just in time" type of process. There is quite a lot of storage available across into Europe. If we had free access or easy access to this storage we would be able to utilise that.

  122. We rely on Europe for our own security?
  (Mr Latif) Well, you will have lots of different points where you can actually put the storage in. What I am saying is that the price signals could be such that if it becomes very expensive, we then get internal storage which then becomes economically more viable.


  123. How many days' supply do we have?
  (Mr Ladle) On the full, physical—if that was the only source it is very low; it is about 10 to 15.

  124. This is, really, almost a paradigm of your industry, that following the 1989 decision of the EU to allow the use of non-served gas for the purposes of generation you kind of woke up and found you had died and gone to heaven; you have made the money and damn the consequences. We have had people in this morning who have been talking about building power stations and the process takes 10 years, they are going to run them for 50 years and then have to handle the waste for the next five centuries. You build a power station in 18 months, you employ two men and a dog and run it like the hammers, and then as soon as the price of gas goes too high you say "We will switch to something else". That does not really inspire a great deal of confidence in people who, at the end of the day, will not get the blame if the lights go out, it will be politicians. How do we balance out these problems?
  (Mr Thorne) I think we have got to recognise—and that comes on to your third point—contractual responsibility to alternative sources. It is not in the suppliers' interest, at the end of the day, for the lights to go out or for the gas to stop flowing. The way the trading market works is that if you are not in balance—ie if you are not putting enough gas in that you are taking out—you get a significant financial penalty. It is in the interests of the suppliers to get that right, because if you do not you will actually suffer quite hard.

  125. When someone suffers who else suffers as a consequence?
  (Mr Thorne) I think the market can bear that. The market can cope and has coped with new players coming in and old players going out. I think the market can handle that. I do not know what the alternative is. We cannot guarantee that a commercial company will stay here for 18, 20 years or whatever. The market can handle that, and it has done.

  126. If we were to have a dependency on gas, regardless of where it comes from, of the order of 70 per cent (which I think the DTI have suggested could be the case if coal became environmentally difficult and nuclear stations were not replaced and there is a limit to the number of wind farms offshore and onshore) it would be on a market which is, essentially, short-term.
  (Mr Latif) I am not a generator so I do not know the full story but I presume they would not invest in a significant amount of generation if they did not believe that they could actually source gas and actually be able to generate electricity for a reasonable length of time. The signals are there for the market to take and the market believes that there is sufficient resources out there to allow this generation to take place. One of the things that, I suppose, has been beneficial for the government is that it has been able to allow these generators to come on line and be able to help with the reduction of carbon dioxide emissions. I am not saying that you can carry on with this but the other option is to reduce demand. One of the things that we would encourage, partly on the supply side, is all this money being collected from our customers (Energy Efficiency Standards of Performance and Energy Efficiency Commitment) to invest in energy conservation.
  (Mr Ladle) Can I come in on this short-term issue? We are the suppliers and we also have other associations. Offshore, they are not making investments for just two years, they are making investments for 10, 20 years in offshore construction. From a shipping supply business, we are looking at the moment in terms of capacity access to do deals for 5 years or 10 years' access to capacity, so that we can get that certainty and we can make our planning. In terms of power stations, from my own company's perspective we have an interest in power stations. There would be a few people sacked if the report was that we were just going to run it up for a couple of years and then run away from it; the lifetime payback on that station is, again, 20 to 25 years. So we intend to be running that station for a long time.

  127. The only thing I am trying to establish is that your perception of the medium and long term is different from people who are generating from other sources who think in a rather longer term, sort of 35 to 50 years rather than 15 to 25.
  (Mr Latif) Even with the new market, the NETA market, that has been created, the way the generator has to operate is actually physically reducing the lifespan of that particular generation unit. I think the way it has been switched on and switched off to meet the balancing requirements is physically reducing the life of generating assets. So even the market that has been created by Ofgem is physically reducing the actual ability for that market to deliver for as long as it is intended to.

Mrs Lawrence

  128. Following up Jonathan's question about storage, there is a statutory obligation on the oil industry in this country to hold 90 days' supply of oil, either crude or refined. Would it not be sensible to have a similar requirement on the gas industry in terms of security of supply?
  (Mr Ladle) My immediate reaction is no. If there was it would mean gas is not fully utilised and the cost of that would have to be borne and eventually passed on to the end consumer. We have an amount of storage, but we achieve flexibility in the UK through the use of that storage but through lots of other mechanisms. We have things called "virtual storage" where we use demand side management and ask power station customers to turn off, and we get through it that way. We have managed to keep costs down very substantially over the last decade by not just digging big holes in the ground or using very expensive North Sea gas fields and filling them up with gas just in case; we actively use gas all the time to its maximum potential. I think as we import we will lose some of that offshore flexibility we have, and we will need to get more storage, but I think prices will come out of the market and there are a number of people at the moment looking at storage, building new storage, and I think the industry will provide that.

  129. Are you saying it is a question of security of supply or price?
  (Mr Ladle) What I am saying is I think the market will provide the security because it has its obligations anyway to continue to deliver, but if you impose it by saying "You have got to keep this amount of gas in storage" then you will put the price up as a result.


  130. You would put the price up anyway, surely. The cost of providing storage is going to have to be met, regardless of who imposes it, it is just that you want to do it and not let the government, but at the end of the day our view would probably be, across the parties, that if the lights go out it is us that gets the blame and not you. I think, with respect, the idea that we can trust you to get it right—we would rather have the consolation of, maybe, exaggerating it a wee bit and getting it right beyond peradventure. I think we do not share your touching faith in the precision with which the market will operate.
  (Mr Latif) That is the Government's prerogative. You can dictate to us that this is what you require. Fine. We will have to cooperate.

  131. We will have to pay for it.
  (Mr Latif) Basically. At the end, the customer will pay for it and if that is the case then that is the case. But that is a decision that the Government has to make.
  (Mr Ladle) I would just suggest that if you leave it to us we will deliver it cheaper than imposing it.
  (Mr Latif) We would go out of business if the lights go out.

Mr Hoyle

  132. You did say 15 days' storage?
  (Mr Ladle) I would have to take that away to give an accurate figure, but it is a very low figure.

  Mr Hoyle: If you could let us know because I suggest that figure is not correct. Obviously, as demand has gone up it has reduced the actual amount of time storage available. If you will let us have that information.

Mr Lansley

  133. In what you have said you have made it perfectly clear that liberalisation of European energy markets is probably the single most important thing the government can do to help, from your point of view, to maximise security of supply by competing access to sources of gas. By implication, in what you say, competition regime is also very important to enable the market to have the beneficial impact you describe. In your note you go on to say that government should have a role in providing clear guidance to ensure the changes proposed for the energy market are consistent with wider goals and objectives. I can, in my own mind, identify environmental obligations. Is that what you had in mind?
  (Mr Latif) That is what we meant.

  134. Would you go beyond that? Is there anything else? Would you see the government having a wider objective which it would be proper for the government to seek to pursue that way?
  (Mr Latif) There is energy efficiency as well.
  (Mr Thorne) That is connected to the environment. There are a lot of things going on on energy efficiency, and we have heard about the CCL earlier on today. There is the Energy Savings Trust, we have got DEFRA actually doing things and Ofgem doing things. The concern we have, as a Forum, is that we are not quite sure whether there is actually coherence in all those policies. We will be spending, as energy suppliers, I think it is something like £150 million a year between 2002 and 2005, and it is estimated that will give savings equivalent to a very large power station running 24/7, 365 days a year—which they do not anyway. So there is a considerable benefit and considerable support for that sort of approach. However, I think if we are going to meet Kyoto and actually have a real effect on demand, we have got to take a more radical approach. Perhaps we need other things such as energy audits on houses, so that when you get your survey on your house it tells you how energy efficient that house is, and maybe you could reduce stamp duty on energy efficient houses or have stronger building controls on houses to improve energy efficiency. So one thing is getting gas in but there is also another element of it which is making sure that once it is in the system customers can use that efficiently. On your original question of wider guidance, I think social guidance as well is important. One thing we have not touched on this morning is about fuel poverty, which is of great concern to all our members, and how we address that. If you are pushing the price up to pay for security of supply—and that may be a decision that you feel is appropriate—we must not forget how that could impact on those customers in fuel poverty. I think that rather than trying to artificially change or distort the market to give support to that we would need the government to support fuel poverty customers.

  135. Certainly there is a contribution which conservation can make overall to reducing what might otherwise be insecurities through lack of capacity in relation to demand. Can I just go back to the relationship between security and diversity. Let us say, for the sake of argument, that you can see, from your point of view, sufficient liberalisation in energy markets and access to sources that you felt confident about security of gas supply to meet consumer demand. Would you, nonetheless, from your own point of view, see any desirability of government having a wider objective of maintaining diversity?
  (Mr Thorne) I am not sure we would.
  (Mr Latif) We would not have a problem.
  (Mr Thorne) I do not think that government should actually dictate what the actual mix should be, which is what you are suggesting.
  (Mr Latif) I think you can create the environment but not dictate the mix. You let the market sort out the mix. If you are saying "We will allow coal generation planning permissions to be easily obtainable", that is your prerogative.
  (Mr Thorne) You are concerned with the results, are you not, or the outputs, and not necessarily how it is achieved. Provided that you do not have problems because the lights do not go out—because the finger will apparently be pointing at some of you—and provided that is achieved, would you have a particular problem if the market helped you deliver that? I do not think you would. It is the outputs you want, the results.


  136. At the moment, for example, NETA have been criticised because they are too-short-term in their operations. The old system was criticised for, amongst other things, the fact that people could bid in zero and, therefore, you were guaranteed if you were running a nuclear power station, the market's price. That was one of the ways it operated. We now have a situation where we are going to have no dispensation made to the kind of generator that goes 24/7 and has to go 24/7. You can switch off and on. You are not quite as simplistic as the gas on the stove, but it is like that. Coal takes longer to start, it can be interrupted but it takes quite a while to get fired, although it has been shown they have been able to get them out of mothballs quite quickly. The difficulty is that not every energy source is as flexible as gas.
  (Mr Latif) That is a fair point. The problem is that that is the market that has been created by Ofgem. That is one of the reasons why we say that if you have a particular policy that you wish diversity of supply then that needs to be taken into consideration when they design that market. Unfortunately, we are just reacting to the signals that the market sends us, saying that this is the way we want you to operate.

  137. There are two things I would like to ask you. One, perhaps, if you could provide us with some statistics as to what you perceive as the UK supply of gas and what you would consider to be a realistic assumption of the likely demand for gas in the whole of the next 15 to 20 years. If you could give us some figures of that character. Your note was helpful but it was deficient in that area. The other point I wanted to ask you to give us a wee bit more guidance on. Both Mr Ladle and Mr Thorne have referred to the need for an incentivisation of the exploitation of what can be regarded as marginal gas fields. I think you have both referred to the fact that there are some pockets of gas that you could tap into, you could extract, if the circumstances were right. Am I correct?
  (Mr Thorne) I am sure Steve will expand on this, but what we were referring to is that the tax regime at the moment is not constructed in such a way that you actually take all the gas out of the field, particularly in mature fields. It is just not economic because of the tax regime to actually get that gas out of the ground. As I understand it, there are other countries where that has been recognised, and I think all we are asking is that if we are talking about security of supply and talking about diversity of sources, we need to look to home to look at maximising our resources. If it is an issue of amending the tax regime to be able to exploit those resources rather than spending, say, on storage, that balance needs to be looked at.
  (Mr Ladle) My recollection was more to the onshore infrastructure, just to make sure that the infrastructure exists so that all gas can be brought in. We have seen, over the last year, year-and-a-half, these capacity auctions that the regulator has introduced which, particularly at St Fergus Terminal, where there is a perception of scarcity of transportation, we have seen some extremely high prices paid by shippers to book capacity in that system.

  138. It has begun to fall as the market has become more mature.
  (Mr Ladle) It has only fallen because we are now at a winter period and, generally, there is more capacity available in the transportation system in winter as opposed to summer, and that is a physical one with a gas transportation network. I think there is a view that they will be high again in the summer unless investment is actually implemented by Transco. The short term contract exists and people have to bring that gas in, and therefore have to pay those prices. If they can look ahead and they can think that those prices are going to continue to be paid then they will not develop that gas and they will not bring that gas in, particularly if it is a marginal field.

  Chairman: Do you think you could send us notes on both these points—on the market and on the fiscal incentives—because I think it would be helpful?

  Mr Hoyle: Would it also be possible to have the amount of reserves that will be affected under that?

Sir Robert Smith

  139. If the price is not there, where does the investment come for the long-term flexibility of the main networks, so that you can have the diversity of supplies? Where is the investment going to come from to make sure of the networks?
  (Mr Latif) This is one of the roles that, I think, Ofgem should be playing, making sure that they listen to policy and actually provide sufficient investment climate for Transco to actually develop that pipework, so that it has some flexibility built in there. At the moment the RPI-X formula has actually—"sweating the assets" is the term. We are going down to a situation where we are coming to near capacity. I think in that respect there should be a recognition that there needs to be some kind of signal for Ofgem to give to Transco and allow it to give it some lee-way.


  140. We will be getting Transco in to talk to us, but my understanding is that they have cut a deal with the regulator on prices and the cap arrangements. I think this was yesterday's problem. It has still to be solved but they seem to think that they have got as good a deal as they could get. They will not necessarily admit that here.
  (Mr Ladle) I think if you ask Transco to come in, there is a deal, the price control has been accepted and there is a certain amount of investment filtering down, but even Transco have concerns that there is a need for more investment and more flexibility. This comes back to the argument that it is maybe better to pay a little bit more to give that infrastructure security rather than running it as tight as you absolutely can and running the risk that a break at any point will result in significant outage.

  141. Thank you very much. That is very helpful. I am sorry we took a little longer but your answers were very helpful to us.
  (Mr Thorne) Thank you very much.

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