Examination of Witnesses (Questions 99-119)
MALCOLM WEBB,
MALCOLM WATSON,
STEVEN BROWN
AND STEPHEN
THOMASON
10 SEPTEMBER 2003
Q99 Chairman: Gentlemen, welcome
to the Committee. Malcolm Webb, you are the Director General of
the UK Petroleum Industry Association. Malcolm Watson, you are
the Technical Director. Mr Steven Brown is the European Fuels
Quality Manager for Shell Europe Oil Products, and Mr Stephen
Thomason is the Marketing Director of Petroplus UK. Thank you
very much for coming. You know what the inquiry is about. You
maintain that petrol and diesel will remain the road transport
fuels of choice for decades. What economic assumptions are you
making about oil prices or about political interventions in pursuit
of internationally-agreed environmental goals which lead you to
make that statement?
Mr Webb: Our assumptions on price
are just that the price of crude oil will remain free in the market
today and that there is a plentiful supply of that product and
it will continue to be the most economically-competitive source
for transport fuels for the future.
Q100 Chairman: How do you estimate
the demand for biofuels at the moment in the UK?
Mr Webb: The demand for biofuels
at the moment in the UK is very small. One would have to describe
biofuels in the UK at the moment as a niche product. It is really
very small, in comparison to the other road transport fuels that
are available. If that is to be overcome and the normal consumer
is to be persuaded to buy these fuels in any volume, we think
three criteria really are going to have to be met. First, the
quality and performance of the fuel is going to have to be assured.
Second, the fuel needs to be able to be used interchangeably with
other fuels and without any modification to the customer's vehicle.
Third, it needs to be offered at competitive prices. Thanks to
the work which my industry has done, with others, including the
biofuels industry and the motor manufacturers, the first two of
those can be achieved through the use of a 5% by volume blend
of biofuels into conventional fuels. The third, however, the price
competitiveness, presents a more serious problem, and today biofuels
are simply not price-competitive in the market. To overcome that
problem, I cannot give you a precise, fixed, magic number, because
I do not think there is one. Its lack of competitivity relates,
of course, to the fact that the two essential products here, crude
oil, on the one hand, and the biocrops, on the other, are subject
to quite wide price fluctuation. So any answer today is not necessarily
going to be the right answer tomorrow, and certainly probably
is going to be the wrong answer next year. However, if that price
disadvantage can be overcome on a sustainable basis, and, by the
way, I would say that the price disadvantage for ethanol is slightly
higher than it is for biodiesel, then these biofuels could be
taken up in the UK in significant quantities.
Q101 Chairman: Are you aware of marketplaces,
for example, on the Continent, which share characteristics with
the United Kingdom, where you would not wish to make the same
formulation, where you would want to choose a slightly different
formulation?
Mr Webb: No. Looking into Europe,
I think the position we see is that these fuels have made some
penetration in those countries where the host government has done
something in a meaningful way to overcome that economic barrier.
Other than that, I think it is true in all of the markets of Europe,
the same rules apply.
Q102 Chairman: So when you encounter
the lobby which is seeking to get the Treasury, for example, to
make the fiscal regime more favourable to biofuels, what is your
reaction to that, what are you saying to the Treasury?
Mr Webb: To date, my organisation
has not said an awful lot to the Treasury, but if I were talking
to the Treasury I think I would go back to our basic position
on the use of biomass in the energy mix in the UK. Our Association's
view is that the use of biomass in the UK energy mix is a very
good idea. As we said in our submission to you, however, we happen
to believe that it is used most effectively in the production
of primary energy, i.e. heat and electricity, and in that way
we believe that it can achieve, in terms of CO2 abated per hectare,
between four and eight times the savings that can be achieved
if it is used as a road transport fuel. Of course, that is not
a decision for us to make, that is for others in Government to
make, and they can decide whether they want to go the primary
energy route, the motor fuels route or some mixture of those two.
What we can say is, if they do choose to go the biofuels route
then, as I have explained before, provided that this economic
hindrance can be overcome, it is possible that they could be taken
up in significant volumes in the UK.
Q103 Mr Wiggin: As I understand it,
Petroplus produces 240,000 tonnes of biodiesel already each year,
mainly from palm and soya oil, and that Petroplus has got plans
to produce a plant which will provide 250,000 tonnes at Teesside.
We have just heard from Mr Webb that it is not viable, so what
led Petroplus to begin this production of biodiesel?
Mr Thomason: First of all, I would
like to correct an error there. The plant on Teesside which is
being proposed, the 250,000-tonne biodiesel plant, is a consortium
which does not involve Petroplus, it is not a Petroplus project.
Of course, Petroplus are talking to the consortium that are considering
doing that, because being the oil major on Teeside we have a direct
interest in it, but it is entirely separate from the project which
is going on. Certainly, we launched a biodiesel product in March
this year, it is a 95% ULSD, 5% blend, which complies with the
standard European specification for EN590. Basically, we launched
that product because of a niche customer demand that we have.
We are very much a company which supplies materials to the commercial
market, business to business, rather than to the retail side of
the business, and a lot of those companies themselves have, or
are working on, environmental policies, so they would come to
us really to see whether we could supply biofuels for them to
be part of that policy. It is really a niche market. These are
the sorts of people who are prepared to pay a premium for the
material, because of their green credentials, and for that reason
it is a fairly limited exercise that we are doing. We use around
about 300 or 400 tonnes of pure biodiesel every month in the blends
that we make up to supply that market, but it is a premium market,
it is very much a niche market.
Q104 Mr Wiggin: Can you tell us who
it is that is part of this consortium then?
Mr Thomason: The one on Teesside,
basically it is a group of Australian entrepreneurs which started
this off, it has been going on probably for a couple of years.
I understand there is a press release out today where they are
talking about the developments that they have made on this. It
is mainly that consortium trying to raise finance on the open
market to build that plant. Obviously we are involved with them,
inasmuch as we are virtually next-door to where they are proposing
to build that.
Q105 Mr Wiggin: Are you recommending
that they use locally-produced crops, such as rape and other things?
Mr Thomason: We do not get involved
with that directly. Obviously, the sources of their materials
clearly are their business. Any supply contract we will have with
them will be to produce material which meets a British standard,
and that may be done by producing from a single-sourced oil or
a mixture of vegetable oils.
Chairman: There is not a lot of palm
oil produced on Teesside, I believe.
Q106 Paddy Tipping: Just on a product
with which you are involved presently, the 95%, 5%, from where
is the 5% sourced?
Mr Thomason: It is all sourced
from outside the UK, basically, from South America and the US.
Q107 Paddy Tipping: You called it
a "premium" product. What is the price differential?
Mr Thomason: In terms of sales
to the end customer, it can be upwards of one or two pence a litre.
Obviously, there are businesses which are very, very keen to acquire
such products.
Q108 Paddy Tipping: You will have
to remind me, because I work in gallons still, some of us cannot
remember what the price of a litre of normal petrol is; come on,
remind me what it is, 73.9?
Mr Thomason: It is about 75, something
like that.
Q109 Paddy Tipping: So this premium
product is selling at 75?
Mr Thomason: Yes. We all know
that the motorist or the sorts of people we are selling product
to, who are commercial hauliers, are not interested, in general,
in paying a penny more for their product than they have to. They
might have all the green credentials in the world, until you tell
them the product is going to cost them more and then they are
not interested. What Malcolm was saying really was that, to make
this a mainstream product, basically it is not going to happen
with the subsidies which are there at the moment. That is the
same as has happened throughout the rest of Europe, it does not
happen without a subsidy.
Q110 Mr Lepper: Could you tell us
just a bit more about the customers for Petroplus? You talked
about the niche market and you said that companies pride themselves
on their green credentials. I am wondering if they are in a particular
sector of work, or a particular part of the country?
Mr Thomason: They tend to be a
whole variety; it is countrywide. The sorts of players that are
interested in them may be a haulier that is bidding for contracts
with supermarket groups, for example, where that supermarket group
might say to them, "We want to see what you're doing for
the environment." Therefore, if they can say "All our
delivery vehicles are running on biodiesel," that is a good
selling point. People like local authorities, bus and coach companies,
are in the forefront of this sort of thing and they are prepared
to pay a premium, within reason.
Q111 Mr Mitchell: I was a bit depressed
by your document because it displays all the enthusiasm of the
Labour Party National Executive welcoming an application to rejoin
from Ken Livingstone, it is as if some monstrous competitor is
about to emerge. You have focused on knocking down straw men.
At the bottom of the first page, Section 1 "Summary",
"We believe that replacing conventional diesel and petrol
with biofuels:- is a very expensive way . . ." etc., etc.,
but nobody is suggesting that. It is not going to replace fuel.
The real question is should there be a mixture of biofuels with
ordinary petrol, and, if so, what proportion should go in. What
are your views on that?
Mr Webb: I am sorry if we came
across too negatively there. What we were trying to say was, in
our opinion, the best use of biomass is in primary energy production,
but it can be used in road transport fuels to help reduce CO2
emissions. If you use it in existing road transport fuels up to
a 5% blend then, thanks to the work which has been done in European
standards, and by the EU with their Fuels Quality Directive, that
will work and can go ahead and that is not any particular problem
to us. The problem is with the consumer, who will not be prepared,
in our view, to pay for that product unless it can be very competitively
priced. That is the basic point. If I might follow up on one other
thing. We are talking about a 5% by volume blend here. Of course,
that is not going to get us to the ultimate position which the
EU Directive calls for, that calls for 5.75% by energy content.
Of course—I see you nodding—you appreciate that is
a very different number.
Q112 Mr Mitchell: How different is
it? What would it mean?
Mr Webb: For diesel, it would
mean not 5% but around 7.5% by volume, and for bioethanol it would
mean 9%. The reason being that the energy content of those fuels
is less than the energy content of diesel and petrol, in other
words, potentially, you do not get so many miles per gallon out
of them.
Q113 Mr Mitchell: You are saying
that up to 5% by volume you can cope with, it can be mixed in,
the consumer is not going to notice the difference, provided the
price is maintained; and would it not need an adjustment to engines?
Mr Webb: Yes.
Q114 Mr Mitchell: What about the
proportion, by volume, presumably, to fulfil the European Directive,
does the same apply to that?
Mr Webb: Possibly not, but we
are not the people who can answer that one, really you need to
talk to the motor manufacturers. We have got an agreement from
the motor manufacturers that up to 5% blend will not affect their
vehicle warranties in any way and it is not going to damage their
engines, and that is what the European standard has been set up
on. It is quite possible to imagine that you could have a higher
blend than that, and indeed in parts of the world, I think in
the United States, I think they have got up to 10% blend of ethanol
at the moment. So maybe one could say that we can go higher, but
really that is a question for the motor manufacturers, not for
us. We could produce the product at higher than 5% blend, yes.
Q115 Mr Mitchell: You would be happy
on that basis, provided the manufacturers can cope?
Mr Webb: Yes. I think 5.75% by
energy content is not going to cause a huge problem for my industry.
I repeat though, we need to work out how the motor manufacturers
stand on that.
Q116 Mr Mitchell: To get it, presumably
we will have to have some form of tax reduction for biofuels.
Would you accept the principle of that, and tell us at what point
in the supply chain that tax reduction would have to be given?
Mr Webb: Certainly, this economic
barrier has to be overcome, one way or another. There are various
ways that could be overcome and one of them could be the Government
giving a tax incentive. If it gave that tax incentive, it could
give it at various parts in the chain. It could give, I suppose,
some sort of subsidy to UK farmers, but I am not sure what the
legal situation on that would be. It could give it to the producers,
or it could give it in excise duty rebate, which my industry could
handle through existing channels. Those are three possibilities
there, for the Government to choose, of course, whether it wishes
to give a subsidy.
Q117 Mr Mitchell: You would not object
to that, even though it is a tax subsidy to a competitor?
Mr Webb: No.
Q118 Mr Mitchell: Can I go back to
Petroplus, and I am not sure whether this applies to the plant
on Teesside, which, like my colleague, I thought was Petroplus,
or whether to Petroplus' own efforts, because the question there
is whether that diesel plant will be viable without further Government
support?
Mr Thomason: The 250,000-tonne
plant they are proposing to build, I think it depends very much
on what they are using as a source material. If they are looking
to use rapeseed, the honest answer has got to be no. I cannot
see really how that plant can be viable, and maybe that is why
it has taken such a length of time between the project starting
and where they are now. However, if it decided it wanted to run
on other materials, palm oil, soya, for example, imported material,
it may get to the point of being marginally economic, depending
on all the other factors involved in that plant.
Q119 Mrs Shephard: I want to follow
that line of argument. I wonder if you would like to expound to
the Committee on what evidence you base your statement that the
plant could not be viable if it were based on the use of rapeseed?
Mr Thomason: I can give you an
example. I found out today what a tonne of rapeseed oil, or actually
treated oil, that would be usable for biodiesel, would be, landed
at Teesside as of this morning, and it works out to between 35
and 40 pence per litre. If we add to that the current rebated
duty, which is 20 pence per litre off the ULSD duty 45.82 pence
per litre, you end up with something round about 65 pence per
litre before you have taken into account any costs of blending,
distributing, or whatever. If we look at the current price of
crude oil, which I think we decided was about 27 dollars a barrel
this morning, it would mean that, along the same principle, a
litre of ultra-low sulphur diesel would be about 11 pence per
litre. If you add the duty, the 45 to 46 pence per litre, you
get to 55 pence. You have got a ten-pence discrepancy per litre
before you have started, and that really is why the economics
will not work at 20 pence per litre duty reduction, certainly
not with rapeseed oil,
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