Examination of Witnesses (Questions 420
- 439)
WEDNESDAY 10 MAY 2006
MR NICK
VANDERVELL AND
MR MALCOLM
WATSON
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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