Select Committee on Trade and Industry Appendices to the Minutes of Evidence


Memorandum by Shell International Ltd


  Shell welcomes the opportunity to contribute to the Trade and Industry Select Committee Inquiry into Energy Policy—Security of Supply.

  As a major developer of UK primary energy sources and actor in the wider energy scene, Shell companies have expertise relevant to this inquiry. Our activities in the UK include Shell U.K. Exploration and Production which from its North Sea activities accounts for around 19 per cent of the UK's oil and 23 per cent of its gas production; Shell U.K. Oil Products Limited, which is responsible for 15 per cent of the UK's refined oil and petrochemicals products and operates a major UK refinery; Shell Gas Direct, an industrial and commercial gas supplier and Shell Gas Ltd. which provides Liquid Petroleum Gas (LPG) to industrial, commercial and domestic customers and to motorists. Shell International Renewables, a global business, with a focus on offshore wind in the UK, and Shell Hydrogen are investing in future technologies for applications globally and in the UK. Shell Global Solutions is a network of technology companies located around the world, including Cheshire Innovation Park, which not only supports Shell's global oil and gas businesses but whose unique skills and experience are also available to others.


  Fifty years is a very long time scale and there is inevitably uncertainty over technological innovation, resource scarcity and social and personal priorities, which will drive the mix of fossil and other fuels over such a period. As far as technology is concerned, reliable, convenient and cost competitive substitutes for oil products for transportation and the development of future means of power generation are key. Globally resource scarcity for oil need not be an issue for most of this period, if already known vehicle efficiency technology were applied. On gas, where total reserve estimates globally are less certain (ranging from 2025 to beyond 2050), the crucial factor is likely to be effective investment signals for the development and transportation of gas economically. From an environmental and social perspective, fuel efficiency and other technologies, combined with an emerging role for non-fossil fuel alternatives make it quite possible, given appropriate policies, for an energy system to emerge which results in atmospheric CO2 concentrations below the level widely viewed as prudent (550ppmv) until the end of the century, and stabilising beyond.

Given the imminent dependence of the UK on energy imports, how can the UK maintain a secure energy supply? What mix of fuels would maximise security?

  It is quite understandable given the changing position in relation to the UK's energy self-sufficiency, that we should be clear about security of supply in a shorter timescale and on a more localised basis. Concerns about the end of the UK's oil and gas self-sufficiency should however not be overstated: most countries in Europe rely heavily on imports for their energy. Provided security is ensured, trade in energy, as in other products, can offer benefits to both exporting and importing countries. What is important is the way in which the transition to imports takes place, and what measures are taken to address both supply and demand, and this is addressed in more detail below.

  A key issue is to maximise indigenous production of oil and gas, so that the UK continues to derive the various benefits that accrue from oil and gas investment, which has totalled £190 billion since exploration began. We believe that the Committee's assumptions about indigenous supplies[34] are overly pessimistic and that production from the United Kingdom Continental Shelf (UKCS) can continue to make a significant contribution to the UK's energy needs with effective Government-industry co-operation (see Annex 1 and 2 which show how indigenous oil and gas production is likely to develop). Although some gas is currently imported, the UK is not a net importer of gas, and will not be until 2004/5 at the earliest.

  Gas offers a secure, environmentally (40 per cent less CO2 per unit power output than coal) and an economically attractive bridge towards a future where renewable sources of energy play a major role in energy supply.

  As indigenous reserves are depleted, energy supply security will be best achieved by continuing participation in the global system of energy trade and investment.

  The UK will require sizeable imports of gas in the future, and Government has a role to play in helping to facilitate these imports through a variety of routes into the UK, with the capacity to cope with the summer/winter swings in demand. Two-thirds of the world's gas reserves are within economic reach of Europe, most significantly from the UK perspective, from Norway and Russia. A shared understanding of mutual benefit between the UK and exporting countries will be crucial.

  Oil will remain crucial for transportation needs in particular, until convenient and reliable alternatives are developed, eg hydrogen. Notwithstanding current concerns over supply security, all major exporting countries rely very heavily on oil revenues for the development of their countries. Oil security of supply concerns, pending non-oil transport alternatives, should not therefore be overstated.

  There is no optimum mix of fuels: the mix depends on the balance of social, environmental and economic factors, and technical feasibility. For example, longer-term renewables may offer an emissions-free alternative to gas for power generation and as a substitute for nuclear, but would require enormous new investment if a short-term replacement for existing plant were desired, with additional significant consequences for fuel poverty and industrial competitiveness. The key issue is to allow different fuels to compete for different purposes, which will encourage innovation in, for example, environmental features. Diversity of sources of a particular fuel source can be as effective in promoting security as a forced diversity in fuel types themselves.

Is there a conflict between achieving security of supply and environmental policy? What is the role for renewables, and Combined Heat and Power schemes?

  Gas can continue to help to resolve the potential conflicts between security of supply and environmental policy. Gas offers a secure, environmentally and economically attractive bridge towards a future where renewable sources of energy may play a major role in energy supply. For example, the existing move to gas from coal in the power sector has resulted in a drop in the UK's CO2 emissions equivalent to 15 million fewer cars on the road.

  Renewables and CHP can play a role, however cost and technology are obstacles that can militate against these resolving any potential conflicts, eg the intermittent nature of wind power. We estimate that in order to meet the Government's 10 per cent renewables target by 2010, the UK would require the equivalent of 60 windfarms the size of the proposed 90 turbine wind farm off the Blackpool coast, which Shell and others are evaluating. This level of development and footprint is ambitious under current market conditions and might prove socially and environmentally unacceptable. Nonetheless, it is our view that wind energy provides the most opportunity for development of renewables in the UK at present. Additional support for CHP may need to be considered if it is to be competitive with other sources of electricity generation, and thereby play its full role.

What scope is there for further energy conservation?

  There is still significant scope for energy efficiency gains, not least in the domestic sector, where the UK has a housing stock that could, with sufficient investment, offer considerable savings. The main barrier to improved domestic energy efficiency is the low share of total costs of most household budgets that energy comprises, coupled with the large benefits obtained from energy use. Big wins in energy intensive industries are less obvious without new technological breakthroughs, since industries containing processes where energy is a major input may already have sufficient incentive to reduce input costs.

What impact would any changes have on industrial competitiveness and on efforts to tackle fuel poverty?

  Using the price mechanism alone is likely to have a negative impact on both industrial competitiveness and fuel poverty. We believe energy efficiency should be promoted using market-based mechanisms—especially emissions trading in industry—to produce cost effective savings and avoid conflicts with industrial competitiveness. In the absence of major programmes relating to the housing stock, separate social measures targeted specifically at the fuel poor may be one option for balancing the competing objectives of energy efficiency and addressing fuel poverty, if the principal lever for discouraging energy use were the price mechanism.

Is any change of Government policy necessary? How could/should Government influence commercial decisions in order to achieve a secure and diverse supply of energy?

  The main challenge in ensuring security and diversity of supply is to create a regulatory framework which sends appropriate signals to producers to ensure timely investments here and abroad in major infrastructure and supply projects, taking into account the long lead periods required for such projects and the inherent uncertainty in the longer-term supply/demand balance. A failure of effective investment signals and investor confidence will result in price volatility and price spikes as demand outstrips the ability of supply to quickly come on stream, as happened in California. Long-term contracts will have a significant role to play in providing the right signals to investors.

  Maximising indigenous supply from the UKCS requires fiscal stability and action to stimulate exploration, and recover brownfield reserves and undeveloped discoveries. Fiscal policy is also likely to be a key factor in the extent to which use of the UKCS' infrastructure can support the objective of an open, transparent, non-discriminatory and competitive single European gas market and facilitate multiple import routes for gas into the UK.

  As discussed above, the Government will need to take action to ensure that its own targets for renewable energy are met and an overview on what action is required is set out in Annex 3.

Annex 3



  The Renewables Obligation and a more positive approach to planning will encourage installation of wind energy technology. However, Government will need to ensure that NETA does not disadvantage intermittent renewables like wind. Allocation of further offshore licences is essential with removal of restrictions on the numbers of licences held and a limit on cap on development size, to enable scale economies to be captured. Government should also review the low level at which the penalty has been set (3p/kWh) which makes it difficult for offshore projects to be developed without further financial support after the proposed initial grant programme.

  An obligation on the grid operator to fund or part-fund extending the grid to offshore wind farms should be considered, as this is often a large part of the project development cost and a significant barrier to offshore wind energy deployment.

  Energy companies who offer to install offshore wind energy as part of their exploration and development plans should be given credit. This will be a significant consideration in awarding exploration licences, and will incentivise energy efficiency and emissions reductions offshore.


  On Solar Photovoltaics (PV) we would like to see the Government set a target for installed capacity and encourage R & D in solar electric technologies. The introduction of a scheme that makes it attractive for people to invest in a solar electric system and which demonstrates its advantages, will need to overcome the "capital cost hurdle" by reducing the "out of pocket" expenses for the end consumer and by introducing net metering.


  The Government can give clear signals by using public vehicles to pilot hydrogen technology and by investigating financial and other incentives to encourage the use of hydrogen in its early stages. Codes and standards for hydrogen safety and other regulatory issues should be addressed at an EU level to ensure common standards.

34   "the UK is already a net importer of gas . . . the UK will probably become a net importer of oil (over the five years)". Trade and Industry Select Committee Press Notice 20 September 2001. Back

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