Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 220-236)



  220. Presumably it cuts both ways which is that if you store it it could be worth more when you take it out than when you put it in.
  (Dr Watkins) It could, but unfortunately the gas business in the UK has been a major success story, not only are we delivering twice the volume we were ten years ago, but in real terms the price of gas today to the producers, what the producer realises, is about half of what it was in the late 1980s.

  221. Do you think that it is about right at the moment but needs to be watched?
  (Dr Watkins) I think that people will go into gas storage at some point. I should not like to predict when and it does come down to economics, unless of course it was felt that this was such an important part of the mix that again you were going to put something in there that underpinned it.

  222. When you talk about there being natural storage under the ground, how long does it take to get it? Just say we were short of gas and we needed it quickly. How long does it take to get it from the ground?
  (Mr Odling) It depends on where the storage is.
  (Dr Watkins) And also what pressure it is under.
  (Mr Odling) There is offshore storage at the moment in the old Rough field and it takes just a few hours. It is not instantaneous. Gas travels relatively slowly down pipes and it trundles along at about 25 miles per hour.

  223. Mr Odling was going to come back on the number of days.
  (Mr Odling) That is a policy decision, is it not, as to just what policymakers believe is the appropriate buffer?

  224. But do you have an actual figure for now.
  (Mr Odling) No, I do not; I am sorry. By international standards we have relatively low storage in this country.

  225. Can you quantify that?
  (Mr Odling) I think most European countries have three to four times what we have. Then they do not have reservoirs just three hours off the coast, that is the difference or even 15 hours off the coast.


  226. Would you think that if our dependence on imported gas increased, it would be prudent for us to increase our storage capacity?
  (Mr Odling) Sounds logical to me, certainly.
  (Dr Watkins) That is where economics come into play and the extent to which the market can actually sustain putting gas into storage and bringing it out and covering the costs. If not, then it becomes a policy decision as to whether some percentage of gas wants to be subsidised to do that.

  227. We do have oil operating in that way at the present moment, do we not? We have storage of oil for 90 days.
  (Mr Odling) If I remember rightly, that came out of the second 1970s oil crisis, did it not? The International Energy Agency was set up after the first one and its modus operandi was pretty much fixed during the second crisis. The 90 days was fixed at that time. The market is a very different place now from what it was 20-plus years ago in terms of its flexibility, the variety of supplies, the different routes by which both oil and gas travel around the world. It is hugely different now.

  Chairman: We shall leave that one there, but it may be something we would want to come back to you about because it is an issue which is going to loom large in the debate.

Linda Perham

  228. How are you involved in the PILOT initiative to maximise energy production from the North Sea?
  (Dr Watkins) I am not directly involved. There are about 10 or 12 executive officers of UKOOA and about half of those sit on PILOT. In terms of going to the meetings, I am not directly involved. In terms of discussing and supporting the initiatives which come out of PILOT, in terms of Logic and the industry technology facilitator, pretty much all the companies support those sorts of initiatives. Ray is involved, as is David, so perhaps I could ask them to say something more.
  (Mr Hall) I do not directly sit on PILOT but I chair the economic advisory group which gives advice and information to PILOT. One could talk to a number of achievements of PILOT. You are probably familiar with the vision which has been established for 2010 for both production and capital expenditure. There is a vision of three million barrels of oil equivalent per day as a target for 2010 compared with production today of about 4.5 million barrels a day. Currently when that target was put in place two years ago there was a gap. It is a challenging target and even two years on we still cannot see how the gap can be closed although we have made some progress. It was a target which was set by a wide body of people involved, company, government, industry, contractors, trade unions; a wide canvass of people involved in the industry who took part in that. Since PILOT has been established there have been various initiatives and work groups which have focused on specific areas each year. There has been a number of those for this year, for example various groups across industry looking at how they can best improve the recovery in existing fields. One of the big prizes in the North Sea is maximising the reserves in existing fields. Typically across the industry, the recovery on average in oil fields is around 40 per cent. There is a huge quantity left in the ground. To the extent that we can share best practice, apply new technology, we can increase that proportion, but there is a ticking clock in the sense that a lot of these fields are not going to last much longer, so we have to deal with these things as soon as we can. The interesting question is: what would have happened had PILOT not been there? That is an impossible question to answer. Generally what PILOT is doing is making things happen faster than might otherwise have been the case. That would be a big win for the industry because it would mean that we can get a number of these smaller fields developed before the infrastructure is taken away. Once the infrastructure is removed, it is much more difficult to develop these small fields. There is a number of areas where PILOT has been and continues to be successful.
  (Mr Odling) The other area it is perhaps worth mentioning is the industry's image and attracting new talent. One thing we are conscious of is the need to renew the talent in the industry. PILOT has helped provide a broader mechanism for achieving some of that. There is a whole series of co-operative activities which have arisen out of its work which in their own modest way are moving the whole thing forward and giving it a bigger impetus than would otherwise have been the case.
  (Dr Watkins) We sometimes tend to talk about PILOT as industry and government, but what it has also created which did not really exist before is a forum where sectors in the industry, the operators, the contractors and service companies, get together and discuss what is going on in the industry, which is clearly beneficial. That did not exist before.

  229. You did mention the role of government. I was looking at your answer to the Committee's reference in our call for evidence to the change of Government policy or how Government can influence commercial decisions. You say ". . . we do believe that there is a significant role for Government both in achieving the maximum recovery of UKCS reserves and in ensuring reliable market access to longer-term, international sources of supply". But your very last serious comment is, "Beyond these policy considerations and setting the right framework, Government should be extremely careful. The history of intervention and influence in commercial decisions is fraught with difficulties and disappointments". I just wondered where you saw the Government role in this. It seemed to me those statements were a bit contradictory.
  (Dr Watkins) Yes, I can see that. It goes back to what I was trying to say before around the issue of renewables. An intervention by Government to set a policy target of 10 per cent of renewables in the energy sector is a very legitimate role of Government because otherwise who knows whether that would happen or not. Then leaving it to the market and commercial terms within the market and companies within the market in terms of the choice of how those targets are met, is how I would interpret those two paragraphs. I am not sure they are as well written as they might have been.
  (Mr Odling) Or perhaps look at it in the international context. We talked about getting access to some of those supplies from further east. Government has a role in getting through any political trading barriers which may exist. It is the industry's job to deliver the gas or the oil, to spend the money, to invest and get the stuff to market. That is the distinction we were trying to draw.

  230. That is what you mean by the framework.
  (Mr Odling) Yes.

Sir Robert Smith

  231. Does the Government have a role, or is this something which has come up in PILOT, in sorting out the regulatory regime and the hourly balancing and the offshore metering and the relationship with Ofgem, or is that something you hope you just solve directly with Ofgem?
  (Dr Watkins) That is a very good question. Ofgem is set up as an independent regulator. Therefore it is difficult for Government to intervene, short of changing the role of the regulator. That is a fairly drastic thing to do. Where Government can have a role to play through agencies like the DTI is to help bring the parties together which they do in order to explore the issues, not just what is the issue but what is behind the issue, which is not always that clear.

Mr Lansley

  232. In your memorandum you expressed that there were risks associated with inadequate regulatory signals to support investment in the Transco system.
  (Dr Watkins) Yes.

  233. I would find it helpful if you could say what you think those risks are. What are the downside risks? How do they manifest themselves? Are they commercial risks in the sense of increased costs to consumers resulting from that or are they supply risks and constraints or interruptions of supply or risks to security. What are the risks?
  (Dr Watkins) The risk I would talk to first is the risk to supply. I was saying earlier that the gas industry has been very successful for the UK in terms of delivering greater volumes and for lower price in real terms. Part of the result of that higher gas demand is that the higher gas demand is throughout the year. As a consequence the offshore plant and facilities are now operated on much higher load factors, so there is an operating risk. Where this comes into play onshore is being certain that Transco has sufficient capacity in the NTS system, in the transmission system, to cover not only the maximum possible daily production which is needed by the market, but also a measure of flexibility as to where that is delivered. We have a number of terminals onshore ranging from St Fergus down to Bacton and one over in the west also. If you have a constraint in one of those terminals, particularly in one which is as large as St Fergus, you may not be able to make up the supply from the others. If you look at the rules under which Transco are required to operate, their principal operating factor is that they have to meter for a one-in-20-years cold winter, which is a volume issue rather than a flexibility issue. We put it in our memorandum in the terms that the cost of over-investment to be able to transmit supply onshore is almost certainly less than the cost of not having adequate investment and capacity when you need it.

  234. In order to deal with that how effective are the published proposals on Transco's price control in the next period in trying to address that kind of signal? Is that going to be a substantive benefit in dealing with this?
  (Dr Watkins) We as the offshore producers have a difference of view with Ofgem about how this should be regulated. We agree with Ofgem that we should move from short-term contract periods to longer-term contract periods. Then the issue is on what basis that capacity is allocated. UKOOAs position is that the basis for allocating that capacity would be on nominated volume by the producers or by the shippers, on the basis that they will be having to pay for that volume when it is available. Ofgem are saying they want to stick with bidding for capacity on the basis of price and if everybody bids very high then clearly there is a need for more capacity. Our difficulty with that is that over the last 18 months, the bids at some of those auctions, albeit short term, have been very high. They have been substantially higher than they have ever been in the past, yet that really does not seem to have changed the investment pace within Transco.

  235. Let me see if I am staying with this. By implication what is published in relation to price control between the Government and Transco is not necessarily in your view going then to translate into investment changes, you actually need to change the structure of the way in which Transco is obliged to contract with you?
  (Dr Watkins) Yes, that is our position.

  236. You did mention some of the proposals. I hesitate because it says they are too detailed for inclusion. If they are too detailed for inclusion in the written material to us they are certainly too much for me to comprehend here. Can you give us a flavour? If we were to be discussing with Ofgem later, as perhaps we will, or with others, are they proposals which in your view are moving in the right direction and would therefore offset some of the regulatory problems you would otherwise see in capacity and flexibility?
  (Mr Odling) It would be true to say that they are moving slowly in the right direction. We seem to have got accepted the concept that, call it an auction, call it an allocation system, the volume is going to have to vary if you are looking long term. Investment can take place and it can change what is available. In the short term you cannot because it takes too long to invest. We seem to have got over that concept and just about everybody is now agreed that has to be built into the system somewhere. Exactly how it is built into the system and therefore the method or the way the auction system—I am using those words somewhat guardedly—works is still far from clear and there is an obvious tension in it because the conceptual side of it does seem to be different. If you think of it as an auction, essentially auctions are about what the price is for a limited good: a country mansion, a work of art or what have you. We see it more as an allocation system, albeit with money attached, because the money has to go to fund the new investment. Unfortunately from our perspective there is still conceptually some difference which we have not yet resolved.
  (Dr Watkins) David did a good job there in explaining. I hope what you got out of that was that, in terms of there needing to be change and what the issues are, we are in reasonable agreement with Ofgem. It is just how you do it, the conceptual piece, where there are differences.

  Chairman: Thank you, we are grateful for the evidence today. We shall finish there for the moment. We may come back to you on one or two points regarding your estimates but we shall do that in writing. Thank you very much gentlemen for your time and your trouble.

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