Examination of Witnesses (Questions 120-139)
MALCOLM WEBB,
MALCOLM WATSON,
STEVEN BROWN
AND STEPHEN
THOMASON
10 SEPTEMBER 2003
Q120 Mrs Shephard: Is that why these
people are investing all this money in this product?
Mr Thomason: They are not, at
the present time, as far as I know, and also they are looking
at other sources of feedstock, other than rapeseed oil, they are
looking at palm oil, soya, they are looking at sourcing the material
from a whole variety of places, and not necessarily the UK. As
I say, it is not a Petroplus project and I cannot justify the
economics of it, but if you want my view I would say that it is
touch and go.
Mrs Shephard: It is extremely helpful
and I wonder if the Committee perhaps could have a note on the
plant, not, obviously, from these witnesses, but some further
information for the Committee. It is not close to my constituency,
I do not know enough facts about it.
Chairman: We will make sure that we get
that.
Q121 Mr Jack: I would like Mr Steven
Brown, particularly, if he would, to respond to the line of argument
I am going to put to our witnesses, and everybody else can chime
in if they want to. In the field of electricity, where it is recognised
that there is a need to encourage renewables, you have an obligation
on electricity generators to buy up so much renewable energy,
and the cost for that is diluted within the total cost of electricity
to the consumer. So far, the argument has been, to the Government,
how much is the Government prepared to lose from its revenue stream
in terms of duty on hydrocarbons in order to balance the books,
to respond to Mr Thomason's point, of making biodiesel competitive
with a conventional oil product. Have you given any thought to
a system where all other users of non-biodiesel, for a fraction
of a penny per litre, would pay for the difference, in other words,
that the cost of the Government reducing to a competitive level
biodiesel, spreading the cost of that over all other diesel? Is
that a model which you have evaluated, and, particularly from
the Shell standpoint, is it an approach which Shell would feel
comfortable with, or do you think it is plainly wrong?
Mr Brown: Certainly, we are aware
of discussions on such approaches, as an option for enabling the
industry. I think the key point we would address is that there
are limited supplies of biofuels, and would there be an opportunity
for a level playing-field in a highly-competitive market. In terms
of the option to deliver a price-competitive product to our customers,
which is what they demand of us, we do not believe that mechanism
would work in the short term, in terms of starting up the industry.
Q122 Mr Jack: Shell is a company
which makes much in its Annual Report and other documents of its
environmental credentials, and am I right in thinking also that
the Shell company is involved in renewable energy sources? So
is there not a dichotomy between the statement that you have just
made, where the Shell company wants to nail its colours to the
mast of environmental fuels, but when it is a question of encouraging
it with a minor change in the price of hydrocarbon somehow it
is ruled out of court?
Mr Brown: To get the clarity on
what Shell do, we offer a number of alternative fuels to our customers,
and already we are the largest marketer of biofuels in the world,
at over one million tonnes per annum. We do offer biofuels to
customers where it makes economic sense and where we believe we
can compete in the market. So those decisions are taken and, along
with other alternative fuels, we provide those offerings to customers.
Q123 Mr Jack: I can understand that,
but I am interested from the point of view of the commercial aspect,
because I do not accept the argument which you have just put forward.
If we are trying to encourage biofuel as an alternative, I do
not see biofuel being in any way different from wind-based energy.
If it is deemed to be a good public policy objective to encourage
a diversity of supply, through a pricing mechanism which spreads
the burden out overall, why not in this area? Why can you subscribe
to one line of argument and not another?
Mr Brown: I do not think the two
are entirely similar, in the fact that it is very difficult for
customers to differentiate between a green electron and, shall
we say, a brown electron. In terms of fuels, there are different
properties in handling those fuels and there are different aspects
of their use in vehicles which need to be taken into account.
Although biofuels can be used and are used successfully in countries,
the economic criteria for competing in the market are different,
in terms of there is a free market of hydrocarbons moving around
the world.
Q124 Mr Jack: To sum up, you believe
that the Government of the day, on behalf of the people it represents,
has to be, effectively, the subsidiser of the biofuel?
Mr Brown: That is one model. It
is the model that we believe is working in Europe and in other
countries, and that is where the consumer prefers to see the action
taken by Government, on global issues which do not benefit them
directly in their vehicles.
Mr Webb: First, I would say, we
are not here asking for a subsidy, that is not what we are here
doing. We are saying there is an economic problem. There are ways
to get over that problem and subsidy is not the only way to get
over it. Your question is very interesting, and, if I understand
it, what you were saying was why does not a company like Shell
put into the market 100% biofuel at a price which is competitive
with—
Q125 Mr Jack: No. Let me explain
it. If I have not explained it, I apologise. What I am saying
is that if you take the total amount of duty reduction in relation
to the proposal that, for example, the UK should have 5% of its
fuel from biosources, you take the cost of making it a competitive
product and spread the cost out over every litre of all the alternatives,
in this case, diesel fuel, and it works out at a fraction of a
penny, point something, like .00 something, per litre?
Mr Webb: I am afraid I disagree
with you on that, I do not think it is that small a fraction.
You are talking about a total fuel market, if you put petrol and
diesel together, of about 48 billion litres. Even if you are speaking
about a small sum of money, such as, let us pick just two pence,
or one and a half pence, you end up with a very, very considerable
number that you are expecting commercial oil companies then to
subsidise the consumer on.
Q126 Mr Jack: It is not commercial
oil companies, and, I can assure you, because I have done the
calculation, it is not two pence, but I wish I had my file here
so that I could tell you what it is. The point is, it is not the
oil companies, it is other users who are being invited to pay
a higher price, exactly as all electricity users currently are
having to do in buying their renewable electricity, because the
cost is spread out over the cost of all electricity?
Mr Webb: You are suggesting that
this extra cost, of bringing in this product, should be spread
across all of the diesel users. That is the sort of mandatory
route really, that is saying, "You will put this blend into
the product and you will charge the end consumer." Our experience
is that the end consumer is not going to like that at all. We
will go back and look at the numbers, and maybe we will look at
our members, and come back to you. I do not think you are talking
about fractions of a penny, I think you are talking about more
than that.
Q127 Mr Lepper: In your written submission
to us, you refer to a European Commission report of 2001 and you
quote from that report "The use of biofuels at this moment
cannot yet be justified by the benefits alone of CO2 avoidance."
It is "at this moment" as well as "cannot yet be
justified" in which I am interested. Have things changed
since that report was produced in 2001, in your estimation?
Mr Webb: I do not think things
have changed dramatically. It is a very good point you make, that
we are not talking here about a static position, the position
is always changing, including, dare I say it, the efficiency of
conventional engines and the CO2 emissions which come from them.
As we see things at the moment, in terms of road transport, CO2
emissions are static, they have not increased for some time now,
and our projections show that they will not increase in the future,
in fact, we believe that they will decline. It is a very good
point, you need to update the science on this and make sure that
one is staying up to date on the latest position.
Q128 Mr Lepper: Can you tell us a
little more about the point that you have just made, that CO2
emissions from road transport sources are likely to decline; can
you expand on that?
Mr Webb: They have been static
for some time now and there is a lot of work going on within the
motor manufacturing industry and in my industry. We are improving
the quality of the fuels, for example we will be bringing in sulphur-free
petrol and diesel, with less than ten parts per million sulphur
in the not too distant future, those allow more efficient engines
in the vehicles, and so fuel efficiency is improving. CO2 is pegged
at the moment, and we believe, for road transport, that situation
will not change and there is every likelihood that it could decline.
Q129 Mr Lepper: What sort of timescale
are you talking about in your projections?
Mr Webb: We see them declining
over the course of the next couple of decades, really it is a
gradual process continuing on through that.
Q130 Mr Lepper: So we are talking
about a 20-year process, and that happening without necessarily
any significant increase in the use of biofuels. Are you saying
that is happening for other reasons, other than the use of biofuels?
Mr Webb: Yes. It is true, the
use of biofuels in a 5% blend would make a small reduction in
the CO2 as well, it would help, but I am saying there are other
things going on which also are affecting that.
Q131 Mr Lepper: Am I right in thinking
that you would not argue that there is any justification for greater
Government support for the development of biofuels, the situation
in relation to road transport is going to improve anyway?
Mr Webb: Yes; but I go back to
the point that this is a question of where the Government is going
to put taxpayers' money, I think, or maybe the motorists' money.
Our basic position is that you get more for your money if you
put it into primary energy production than you do if you put it
through road transport fuels.
Mr Lepper: Yes, you argue that case very
forcibly in your submission. Thank you.
Q132 Diana Organ: When we went to
Brazil, we were told that bioethanol is distributed from the producers,
taken to the oil refineries where it is blended and mixed and
then goes out through the normal distribution network that they
have. Could we do the same here in the United Kingdom, or would
we need to have some changes to the infrastructure of fuel distribution?
Mr Webb: It is not quite as simple
as that. Ethanol has got some particular properties about it which
mean that you do have to make some investment in the distribution
infrastructure, it has got a tendency to pick up water and it
needs some special investment in that. Malcolm can tell you more
about that.
Q133 Diana Organ: How much of and
how large would the infrastructure alterations have to be?
Mr Watson: We believe that by
blending at the terminal, not the refinery, we can get it into
the UK market with appropriate measures to make sure we do not
have a problem with water pick-up. The reason we are saying currently
not at the refinery is because in the UK a lot of product is moved
by multiproduct pipelines, i.e. the pipeline carries jet fuel
one day, diesel the next, petrol the next. We do not want to put
water into jet fuel, in any way, shape or form. There is a coalescer
to check that we do not do this, but if we put ethanol in there
it would defeat the coalescer and we could get water into jet
fuel, which is something we do not want to happen under any circumstances.
Q134 Diana Organ: The Brazilians
take theirs to the oil refinery. Are you saying that I should
not ever fly in a Brazilian aeroplane because I should be a little
suspect about what is happening to their jet fuel? How come they
can do it but you are concerned about us?
Mr Watson: I am not aware of how
they distribute from the refinery in Brazil. I am aware that in
the UK we do use multiproduct pipeline. We have discussed this
in UKPIA to try to see if there is an industry position, and at
the moment the advice from every company, based on their experience
in the US and elsewhere, is that we should blend at the terminal.
That is a clear, technical piece of advice we have received, based
on experience.
Q135 Diana Organ: Would there be
much cost to doing that, additional to what we have got now, and,
if there are costs, who should pick them up, if we are going to
go down this route?
Mr Watson: There are additional
costs at the terminal. We have got to put in tankage to handle
it, we have got to put in product quality checks to make sure
that the motorist still gets a good-quality fuel and his car starts
when he wants it to. There are a number of costs involved. New
fire-fighting techniques are required. These are hurdles we know
about and which can be overcome.
Q136 Diana Organ: So the bioethanol
companies would have to pick up the costs of this extra investment
at the terminal?
Mr Watson: Somewhere down the
line, we have to enable us to sell the product in a competitive
market, so if there are extra costs they have to be covered by
someone, somewhere.
Q137 Mrs Shephard: You have spoken
already of the Government's obligations under the Biofuels Directive.
Do you think that the Government can meet its own targets without
introducing a subsidy?
Mr Webb: Without doing something
about the economics of the product, I think the answer is no,
and I think we can look to Europe for evidence of that. The only
countries in Europe where there has been any take-up of biofuels
are those countries which have offered something in the way of
a tax incentive. Those tax incentives range from, for biodiesel,
the high 20 pence into the early 30 pence per litre today, for
bioethanol the range is somewhat higher, and, as you may know,
in Germany, of course, there is a full duty rebate, which is worth
about 45 pence per litre. So I think the evidence is there and,
as Steven has said, at 20 pence a litre it is not working, so
it needs to be something more than that.
Q138 Mrs Shephard: Is it your impression
that the Government is aware of this?
Mr Webb: I think, just looking
at the facts, they must be aware of it.
Mrs Shephard: Thank you very much, that
is most helpful.
Q139 Alan Simpson: Chairman, I was
interested in coming back on some of the points which have been
raised initially by Michael Jack and then Diana Organ and Gillian
Shephard. It is this issue about who picks up the costs. I have
noticed that the way in which you answered those questions was
a recognition that there are costs but with no acknowledgement
that the picking up of those costs might fall on you. There was
a suggestion that you were not asking for a subsidy. It seems
to me that, as a Parliament, we are being asked constantly to
address the issue of the environmental damage done currently by
the consumption of diesel and petrol for which we are responsible.
So rather than talking about not asking for a subsidy, I think
we are coming from a different point and just asking, if we were
to be asking you to pick up the forecasts of the damage the industry
does, what is the best way of doing it? Can I take you right back
to Michael Jack's question, which is that if, as a Government,
we came up with proposals which were tax-neutral, as far as the
Exchequer was concerned, but said simply we were going to go for
an insignificant increase in the overall duties in order to ask
the industry to pay for the shift to biofuels, which environmentally
we may have to do on a much bigger scale than we have countenanced
over the past, would you be comfortable with that? Does it go
beyond the awareness of discussions which are mentioned, with
reference to their own supply of biofuel? If we said to you, "This
is the direction in which we want to go and we expect the industry
to pay for that shift and it will be reflected in Exchequer tax-neutral
terms," you would be comfortable with that, would you?
Mr Webb: I will have to leave
the companies to speak specifically for that, but from my perspective,
and I may not be understanding this question, I think the answer
would have to be, no, we could not be comfortable about that.
The UK oil refining and marketing industry is not a very profitable
business, and I think the number that you are asking us to take
on, as an industry, is in the hundreds of millions of pounds.
I think the answer has to be, no, the industry could not stand
self-subsidising that sort of initiative.
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