Select Committee on Environmental Audit Minutes of Evidence

Examination of Witnesses (Questions 420 - 439)



  Q420  Dr Turner: One of the technical problems of hydrogen is its bulk and there is obviously a desperate need to find denser ways of storing hydrogen to make it a practical transport fuel. Is the industry working on that?

  Mr Watson: The industry is working on all aspects of it, with the motor manufacturers, I have to say. We are looking at supplying the motor car with liquid hydrogen which, from memory will give you about 20% of the capacity of a petrol or a diesel tank, or supplying it with compressed hydrogen, which will give you about 16% at 700 bar, both of them will significantly reduce the range of the vehicle, so it is a key question. There is also work being done on storing hydrogen in various compounds to see if we can store it in a better form, but that is still at the research stage. It is one of the major problems that has to be overcome with the hydrogen vehicle.

  Q421  Dr Turner: Which leads then on to the very knotty subject of aviation because replacing fossil fuels in cars is clearly technically achievable at the moment but doing it for aviation is a much greater challenge. Has the industry started on that one?

  Mr Watson: There is only one alternative fuel for jet fuel that is used today in aviation. I mentioned the coal to synthetic oil process in South Africa that produces a synthetic jet fuel kerosene which is used in aircraft today. That may be one of the options in the future.

  Q422  Dr Turner: Again hydrogen is another option but we have already covered that one.

  Mr Watson: We are not working on hydrogen in aeroplanes to the best of my knowledge.

  Q423  Chairman: On air quality, one of the consequences of trying to address air quality issues and reduce emissions in particulates has been to increase NOx substantially. Is it possible to deal with the air quality problem without having adverse impacts on greenhouse gas emissions overall?

  Mr Watson: Air quality is being dealt with by the European Vehicle Emissions Standards. Emissions of NOx, particulates, et cetera, have all fallen since the 1990s. They have fallen by 40-50% as a minimum. They are introducing tighter vehicle emissions standards in the future. There will be Euro Five standards for cars. They have been published and are currently being debated. They will tackle PM and to a lesser extent NOx. There will be a later set that will tackle NOx as well. So I believe you can tackle NOx and PM, the two pollutants of most concern, by vehicle emissions standards. That may result in a small fuel penalty depending on the technology that is used, but it is possible to reduce them further.

  Q424  Chairman: Are you clear about what the Government's priority is as between greenhouse gas emissions and air quality?

  Mr Watson: No. It has programmes in place to tackle air quality. Air quality is improving and it has improved significantly. It has also got programmes in place to tackle CO2. However, I do not see where the balance between those two lies.

  Mr Stuart: One is working and one is not.

  Q425  Mr Caton: The Society of Motor Manufacturers and Traders told this Committee that increasing the conversion of cars from petrol to diesel was important in order to bring down carbon emissions but that a shortage of European refining capacity was threatening to raise the price of that diesel. Do you agree with that? If so, what can be done?

  Mr Watson: If we look at Europe, it is true that we do not produce as much diesel as we consume. If you take a country like France, which has got a very high diesel penetration, it produces 20 million tonnes of diesel per year and uses 30, so it is way out of balance. In the UK we are still roughly in balance because we are at a lower level of diesel penetration, but directionally we see diesel sales growing. Diesel sales will be much higher than petrol sales in future years, if the current trends continue. The way to resolve that is to invest in refining in a process called hydrocracking. This is a process that converts heavy molecules into diesel and jet fuel, which are the fuels we want. We currently use a process called cat cracking to do the same job, except the end product at the moment is petrol. That was the process chosen in the 1980s when the oil industry looked ahead and saw petrol as being the fuel of the future (whereas in fact petrol sales have dropped by one-fifth since 1990). We can produce more diesel, but it requires more investment, which brings us back to where we were a few minutes ago; to get investment we need to make a profit. Refining has traditionally made very little profit in the UK. We are talking less than 5% on average since 1990. That is not a very good return when you think what you could have got by putting your money into a building society. It is reflected by the fact that we have had two refineries closures since then in the UK, so it is not as though companies are not willing to walk away from the market. If we look to the future, we can produce more diesel from crude oil, yes, but to do so requires investment. If you want the investment in the UK you have to have an investment climate in the UK that makes it an attractive place to invest. Oil companies are global players. They can invest where they want in the UK or other countries. They can import the products into the UK. Does that give you a flavour?

  Q426  Mr Caton: It gives a flavour, yes, but are you expecting that investment to happen in Britain and Europe?

  Mr Watson: What we will do is propose to the Government that they should set up a task force with the oil industry and the Government and decide what they want. We would explain to them what is required for investment and they will then be able to decide whether that is something they wish to be proceed with. That is something we plan to do in the near future.

  Q427  Mr Caton: What would you expect from the Government?

  Mr Watson: We are not looking for subsidies. We want a clear long-term policy. We want a stable fiscal regime. If you are making investment in refining you are investing for the long term; you are not investing for the short term. Prices go up—and you mentioned high profits a few minutes ago but you did not mention the low profits we were making 10 years ago. We have to invest over a long period. We have to be sure when we are making that investment that it is a sensible place to invest in the UK. We want to explain this to the Government and make them understand that this is a requirement if they want investment to take place.

  Q428  Chairman: Without lobbying in favour or against higher or lower taxes, is it your view that the current package of taxes on motoring is effectively restraining carbon emissions from road transport?

  Mr Watson: Carbon emissions from road transport are not growing very rapidly. They have gone up by about 3% since 1997. You can say that there are various factors involved in that. One of them is obviously the higher penetration of diesel in the market place. We are selling more diesel than petrol and I believe that may be a result of government policy on high prices.

  Q429  Chairman: It is true that they have not gone up by very much but in many other sectors carbon emissions have gone down and the target is to get them reducing. You are saying that it is not too bad.

  Mr Watson: No, no, what I am saying is that you have got to put that in context. Over the same period we have had much higher growth in vehicle kilometres driven than we have in fuel usage. If you look at the figures since 1990, which is the base year for carbon change, vehicle kilometres have gone up by more than 20% and fuel consumption has gone up by less than 10%, which is less than half. We have improved the efficiency of the vehicle fleet. That does not mean to say we should not do more. We are not trying to be complacent but that is the choice of the consumer. It is also the choice of the motor manufacturer in the cars he chooses to sell in the UK.

  Chairman: Has anyone got any other questions? We are probably coming up to the vote.

  Q430  Mr Stuart: I want to go back to the issue of the flow, in view of our next witness. You have said that you do believe that the $3 trillion that is required in investment will be made. There are issues about current capacity. At daily rates rigs are taking double what they were just a couple of years ago and there are real constraints. Would you talk us through the constraints on production and why you believe and how quickly you believe there will be an increase in production?

  Mr Watson: You have to go back 10 years when oil was $10 a barrel and investment was not made. The industry suffered from a lack of investment for quite a few years. What you are seeing is the result of that lack of investment. I think that is the reason why you have this sudden surge, combined with growth in demand through places like China, which has been very rapid.

  Q431  Mr Stuart: And the ability to respond in the timescale?

  Mr Watson: At the moment we have supplied the oil and I believe we will continue to supply the oil. That is my belief because I think the price will go up to make sure it happens.

  Q432  Mr Stuart: Why is it that the discovery of new sources of oil appears to be low? It does not appear to have responded to the price signals yet.

  Mr Watson: Once again it is the same reason. People cut back in investment in exploration.

  Mr Vandervell: I think technically as well finding new sources is becoming more difficult.

  Q433  Mr Stuart: Going back to the argument we are going to hear in a minute, it is getting more technically difficult, the big, easy-to-tap reservoirs have already been found and have been tapped for the most part and everything gets more difficult from now on so why are you sure that the flow will be able to match this globally increasing demand?

  Mr Watson: I gave you my view. I am not an expert in the field. That is not what I spend my time doing.

  Q434  Mr Stuart: But do you have indicators of investment and programmes or any facts as to new plant and new planned bores, to give us some idea?

  Mr Watson: If you look at technology and its impact, you have had two major technology changes recently. You have had the 3-D seismic, which has enabled people to get a better understanding of what the reservoir looks like and will behave, and you have the ability not just to drill straight down but to drill horizontally. Both of these have enabled companies to recover more oil than you originally thought. I am sure if you ask your next witness about the oil fields in the North Sea, if he knows the initial estimate of the recoverable oil and how much they get and how much they have produced, he would probably say that they have produced more than the original estimates because technology has advanced. It is not a static position, but the North Sea is a declining province.

  Q435  Mr Stuart: And they have a long tail but without the very large, very-easy-to-exploit reservoirs coming on, so although they will have produced more than originally estimated, they are doing so at a—

  Mr Watson: If you look at the North Sea—and UKOOA, the trade association for the upstream side, would be better-placed to answer these questions—what they say is that if we invest properly we can still be supplying 65% of our oil in 2020. If we do not invest, it will be 20%. So investment can boost the amount of oil we get and the speed at which it comes out.

  Q436  Mr Chaytor: You started off by saying your estimate of current reserves was that we had anywhere between 40 years and 100 years of accessible reserves.

  Mr Watson: Of oil.

  Q437  Mr Chaytor: That is based on a 1½% global.

  Mr Watson: The 40 is based on a growth rate of 1½% and assumptions about technology and oil recovery rates.

  Q438  Mr Chaytor: If it were only 40 years is it not absolutely in the interests of your industry to be more urgent about increasing the productivity of the oil we have and increasing the energy efficiency of the oil we have? You seem quite relaxed about overall policies towards increasing efficiency either through fiscal measures or the use of alternative fuels?

  Mr Watson: I am saying we are looking at all these measures. The industry view is that we will still be driving petrol and diesel vehicles in 2030 and beyond.

  Q439  Mr Chaytor: What do we do by 2046 if there is none left?

  Mr Watson: I think 40 years is a very pessimistic estimate but it is the range of numbers that we have given.

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