Select Committee on Environmental Audit Minutes of Evidence

Examination of Witnesses (Questions 400 - 419)



  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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