Examination of Witnesses (Questions 400
- 419)
WEDNESDAY 10 MAY 2006
MR NICK
VANDERVELL AND
MR MALCOLM
WATSON
Q400 Colin Challen: But they do not
consult you on it?
Mr Watson: They do consult us
on that and that is the comment I made to them at the time.
Q401 Colin Challen: What would you
say to them then when they consult you on this matter?
Mr Watson: They put their suggested
crude oil prices that they were going to model down, and I suggested
they used a higher price which was more consistent with the market
prices because I did not think it was credible to have a $50 upper
price when the market had been over $60 and now over $70.
Q402 Colin Challen: That is purely
a historical comment to them rather than a prediction. I am trying
to clear the current contradiction.
Mr Watson: I am trying to make
it clear that I do not predict oil prices. We do not have the
expertise; we do not do it.
Q403 Colin Challen: But the industry
nevertheless plans its possible exploration and so on where it
can make a buck.
Mr Watson: Yes, each company has
a figure which it uses in its capital justifications. I believe
that they are all well under $70 a barrel and also under $50 a
barrel.
Q404 Colin Challen: Does the industry
welcome higher prices?
Mr Watson: The industry does not
have control of prices.
Q405 Colin Challen: But does it welcome
them?
Mr Watson: No.
Q406 Colin Challen: A lot of people
would say that oil companies make vast profits and they have all
reported great increases in profits recently on the back of these
high prices, so one might assume that they are very happy to see
these high prices continuing.
Mr Watson: The oil industry is
faced with huge investment over the next few years. We talked
at the start of oil demand increasing up to 2030. The IEA estimates
it will require three trillion dollars investment in oil to make
the oil available, so there are huge investments required, and
you need profit to make investment. I would remind you perhaps
that in 1997 oil was $10 a barrel. At that stage there was a lot
less investment and it is one of the reasons why capacity has
not grown. As an industry and as a world we need to invest and
that requires profit.
Q407 Colin Challen: Is that a spur
to more investment in alternative sources of energy or is it what
some people would describe as "greenwash". It seems
that most oil companies spend 97% or figures of that order on
their existing oil/fossil fuel interests?
Mr Watson: The oil industry as
a whole spends something like 70% of its investment on finding
and producing more oil. There is another 15% that goes into refining
and marketing. The remaining 15% goes into a variety of other
investments, some of which are green, some of which are on the
petrochemical side, but they do invest serious money in a number
of alternatives. Remember, these are all very small businesses
which they are trying to grow. You will see oil companies like
BP investing in solar energy. You will see investment in carbon
capture and storage, investment in alternative ways of reducing
carbon dioxide emissions, investment in wind farms, investment
in the new biofuels production processes to convert straw into
ethanol. There is a whole range of investment which goes on which
admittedly at this moment in time is small, but, remember, these
are start-up businesses. They are investing in hydrogen. They
are trying to work out how to build the infrastructure, how to
make it safe, and how you could use hydrogen with the general
public in a safe manner. There is a lot of investment going on.
I would not describe it as greenwash.
Q408 Chairman: Just trying to interpret
what you were saying, you have drawn attention to the need for
very heavy investment in the mainstream oil industry itself. That
would seem to imply that you think high oil prices are a good
thing because it will facilitate that investment.
Mr Watson: I refuse to answer
that question.
Q409 Chairman: I believe you have
given evidence to the Defra Committee as well. Am I right in saying
that you said to them that in your view fossil fuel prices will
always be lower than biofuels, that it will always be cheaper
to use fossil fuels than biofuels?
Mr Watson: I do not know exactly
what was said. What we find out is that if we look at alternative
energies they look attractive when oil reaches a certain price.
When it reaches that price, we suddenly find that the energy content
of all the things required eg for biofuels—the fertilisers,
the tractor's fuel—have an impact and their costs go up.
As an example of this can I quote some evidence that was given
to the EFRA Committee about 18 months ago by the biofuels producers
who said they wanted an incentive, a subsidy, whatever word you
want to use, of 28 pence per litre to make bioethanol and biodiesel
attractive. Since then oil prices have risen and when they came
to make similar comments for the RTFO they said that 35 pence
was totally inadequate; they wanted 40 to 50 pence. So I think
what you find out is there is a relationship between alternative
fuel prices and petrol and diesel prices and when one goes up
the other tends to follow it.
Q410 Dr Turner: You obviously accept
the IEA's estimate of the investment needed?
Mr Watson: I was quoting that
as an example.
Q411 Dr Turner: Do you agree with
that estimate?
Mr Watson: It is of the right
order of magnitude.
Q412 Dr Turner: Do you think that
of itself will have an effect on driving up oil prices?
Mr Watson: The investment will
not take place if oil prices are too low.
Dr Turner: So the relationship is slightly
different. Fair enough.
Q413 Mr Stuart: You do not predict
prices but what price do you think would be required in order
to see the industry make the $3 trillion investment that is required
in order to develop the flow of oil to meet need?
Mr Watson: I am sorry, I cannot
answer that question. That is a commercial decision for each company.
That is their commercial judgment as to what they will make their
profit at and will depend on what they are developing.
Q414 Dr Turner: Is it the expectation
of your group that of the order of £3 trillion will actually
happen, because one of the issues of the peak oil sceptics is
there may be the reserves but there is not going to be the flow
and without the investment in production capacity then the demand
is going to continue to grow at a greater rate than the flow of
oil to meet it. Is it your expectation that the jaws of the crocodile
are going to be closed? Is that your current expectation?
Mr Watson: My expectation is that
there will be a demand for energy and it will be met by the necessary
investment.
Q415 Mr Caton: You have already touched
on renewable transport fuels and said in the coming years you
expect biofuels basically to make a small percentage contribution,
but what is the maximum proportion of transport fuels that could
be supplied by biofuels?
Mr Watson: Are we talking of the
UK only or are we talking globally?
Q416 Mr Caton: If you have got a
view on both I would be interested.
Mr Watson: Let me begin with the
UK. In the UK we have something like 6.5 million hectares of arable
land, the sort of land you need to grow wheat on to produce your
bioethanol or rape seed to produce your diesel. We currently use
4.5 million hectares to grow food; in other words about two-thirds
of it. So there is one-third of it which is fallow, including
set-aside which could be converted to growing energy crops. That
one-third would easily enable the 5% RTFO target to be met. It
would enable the 10% target to be met, but after that you start
running out of land, so we cannot in the UK with current biofuels
produce all the transport fuels that we use. So we start addressing
other sources. I mentioned converting straw. You can consider
it a waste product although the farmers would tell you off if
you said so. That can be converted into bioethanol. Then you consider
food waste. That could be converted into transport fuels. If you
go down the list you will probably get to about 40% of demand
met with lots of different processes and lots of different options,
and you would need a great deal of effort to get there.
Q417 Mr Caton: What sort of level
of savings in terms of carbon emissions are we talking about at
that higher level?
Mr Watson: It depends very much
on your sources. What we are seeing with current biofuels technology,
if we take bioethanol as an example, depending on how you produce
it, you can have a saving of 7% or a saving of 77%. The difference
here is that if you use electricity and gas directly to supply
your process energy, you will get a saving of about 7%. If you
use combined heat and power you will increase that saving to about
50%. If you then use waste products to generate the heat you need
and the electricity you need, you will get up to about 77. If
you take Brazilian ethanol, you can get around 85%. If you take
biodiesel, it is around a 60% saving, I believe, today. These
are all numbers that are in the public domain.
Q418 Mr Caton: Recognising the clear
differences there are in those different biofuels, can you tell
us how well-to-wheel emissions of biofuels compare generally with
the well-to-wheel emissions both of conventional and non-conventional
oil, as has already been mentioned, such as from tar sands?
Mr Watson: If you take a study
which was done by the oil industry, by a group called CONCAWE,
which is our research arm, the motor manufacturers' research arm
EUCAR, and the Joint Research Centre of the Commission, we have
carried out well-to-wheel studies on roughly 100 different pathways
to try and guide policy. I cannot summarise all 100 but if I begin
by saying that if you take petrol and diesel and you put in 5%
bioethanol or 5% biodiesel, what we are talking about,[2]
you will get something like a 3% saving. At current levels that
is something like five grams per kilometre of CO2.
If you go to the best option and use pure ethanol you will get
an 85% saving. That would currently be Brazilian ethanol and you
would be down to about 30-40 grams CO2 per kilometre.
So there is a big potential there. If you go to what is called
biogas, this is anaerobic digestion of waste, sewage sludge, food,
you can produce a product that looks like natural gas. Normally
this product is allowed to rot and it emits methane as it rots.
If you instead capture that methane and effectively put it into
electricity generation or into making a transport fuel, you would
be well over 100%. So all these are options and the different
proportions would give you the different amounts of carbon saving.
If you want more information we can get you that.
Q419 Dr Turner: That is a very interesting
set of answers. Can I now take you further and ask you what the
industry's view is on making up the rest of the difference in
terms of replacing the direct use of oil, or gas for that matter,
with hydrogen?
Mr Watson: We see hydrogen coming
in in bulk post-2030. That does not mean to say we should not
be working on it today because there are a large number of technical
challenges on the vehicles side and on the supply side to ensure
that happens. The industry is working all round the world on gathering
information, and helping to develop this. You will have seen the
example of three buses in London which was part of a nine-city
study. BP was involved in that in the UK. Elsewhere Shell was
involved in the same study. Other major companies are involved.
Total for example, have got a hydrogen filling station in Berlin.
All the major oil companies if you go around them will be able
to point to their work in this area. It is on-going work but it
is mainly in other countries and not in the UK. If you look at
the work that was done at the time of the previous Energy Review,
there was some modelling work done by a group called MARKAL which
was to help guide it and to look at the most cost-effective ways
of saving carbon. If you look at their results they have petrol
and diesel remaining up to 2030 and then petrol fading and diesel
fading as we move towards 2050 to meet the Government's target
of a 60% reduction by 2050.
2 Footnote inserted by witness 22.05.06: the levels
in the Renewable Transport Fuels Obligation Back
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