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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 981-v House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE
REDUCING CARBON EMISSIONS FROM TRANSPORT
Wednesday 10 May 2006 MR NICK VANDERVELL and MR MALCOLM WATSON Evidence heard in Public Questions 371 - 463
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Environmental Audit Committee on Wednesday 10 May 2006 Members present Mr Tim Yeo, in the Chair Ms Celia Barlow Mr Martin Caton Colin Challen Mr David Chaytor David Howarth Mr Graham Stuart Emily Thornberry Dr Desmond Turner Mr Edward Vaizey ________________ Memorandum submitted by UK Petroleum Industry Association
Examination of Witnesses
Witnesses: Mr Nick Vandervell, Communications Director, and Mr Malcolm Watson, Technical Director, the UK Petroleum Industry Association, gave evidence. Q371 Chairman: Good afternoon and welcome. Thank you for coming along. We have had a memorandum from the Association earlier on for which we are grateful. We think there may be a division in the House at about half past three so we will try to get through this session with you in the next 47 minutes if we can. I do not want you to feel rushed but it might be a natural break otherwise you will be hanging around for some time while we go and vote. Can I kick off by asking what the Association's view is about the debate over peak oil and whether you buy into the argument that this is now approaching relatively soon? When do you think we will reach the peak in conventional oil production? Mr Vandervell: If I could just kick off on that first. Thank you very much for the opportunity to come and talk to you and present our submission. As you know, we represent largely the downstream part of the industry which is concentrated on the refining and marketing of fuels. The peak oil part of the equation is very much linked into the availability of crude oil supply both now and in the future. Malcolm, you may have a few views on that. Mr Watson: Could I just say that we are not the experts in this. We can get someone with more expertise to give you a note if you want. In general terms, what the industry says is that there are about three trillion barrels of oil that can be recovered in the world. We have used about one trillion of those already. We know where 1.2 trillion barrels are. That is in what are called the proven reserves, published in things like the BP Statistical Review, and then there is the balance which is in unproven reserves, where they have discovered it but have not proved it to the required standards to move it into the proven category, and there is 'yet to find'. So we have something like two trillion barrels of oil left. That can be supplemented with unconventional oil. By that I mean things like Alberta's tar sands, which have already been exploited, and the heavy oils in Venezuela, and that could add perhaps another trillion barrels. Then there is gas which can be converted into transport fuels which can extend that further. We as an industry are seeing something like 40 to 100 years of oil supply left. If we look at the production profiles that are produced by our industry, when they look ahead they do not show a peak in oil production up to 2030, the limit of the forecasts. In some provinces - the North Sea - they will peak but overall globally they show no peak before 2030. In other words, we have a curve that goes up steadily; it does not fall over. If you look at the IEA's forecast it shows a similar trend. As a non-expert I would say that globally the industry does not see a peak coming before 2030. Q372 Chairman: You may not be the experts but as downstream businesses you have an interest obviously in this matter and some of your planning presumably is predicated on exactly those presumptions you have just described. Looking at what the Swedish Government have said about trying to make Sweden as oil-free as possible within about 15 years, how would you feel about Britain announcing a similar aim? Mr Watson: What I understand the Swedish Government have done is appointed a commission to look at the possibility. I do not believe they have yet come to the conclusion that that can be done. On a personal view, if you look at the demand for oil in the future, you see that oil is the largest source of energy in the world today. If you look at the forecasts by groups like the IEA or the UK Government or the European Commission, that is still true in 2030. Oil is a major source with gas following behind. I do not believe that we can replace all that energy in such a short period. You may be able to do it for a small country like Sweden but I do not believe you can do it for a large country like the UK or globally. I do not believe it is feasible, without a dramatic change in living standards of course. Q373 Mr Stuart: If market forces were left to themselves, how much more oil would we burn globally before running out or switching to alternatives, insofar as you have not answered that already, and what size of carbon emissions would that result in? Mr Watson: What I said earlier was that we have something like two trillion barrels of oil left. If that could be supplemented that would be three trillion plus barrels that we could still burn. I have to apologise, I cannot convert that into carbon dioxide quickly. I can give you a note if you wish once I have had a chance to do the sums. As a rough guide, if you divide the three trillion by eight you will get the number of tonnes and then you drop it. So if you divide it by (?) you will get roughly the amount of CO2 that is emitted as carbon from that. So that is something like 300 billion tonnes of carbon as carbon dioxide. Q374 Mr Chaytor: All these projections of the rate at which oil reserves will decline must be based on assumptions about rates of economic growth? Mr Watson: Yes. Q375 Mr Chaytor: Are they based on assumptions about historic rates of economic growth or do they make assumptions about the likely rates of economic growth in China, India, Pakistan, Brazil over the next 50 years, because that is the key issue, is it not? Mr Watson: Yes. Globally they assume about a one and a half per cent per annum growth rate for the world but that varies obviously around the world. Q376 Mr Chaytor: What assumptions are made about China? Mr Watson: I cannot quote you that figure offhand. Q377 Mr Chaytor: It would be very informative to the Committee if we could find out. In terms of the figures you quoted of reserves and the point at which the peak of oil production would be reached, it would be very helpful if we knew exactly what assumptions were made about China. Our worry is - and it may crop up later - that future projections are always very, very difficult and our own DTI has made some fairly conservative projections about the price of oil in the future which seem to be way off the mark. In terms of the transport sector within the UK now, 98 per cent of UK transport depends on oil. Is that going to change or do you think that that is a given with which we will just have to live? Mr Watson: We are obviously going to have a major change by 2010 when we have the Renewable Transport Fuels Obligation coming into place which the oil industry is working towards meeting. The target set for that is five per cent of diesel should be replaced by biofuels. As I said, we are working towards meeting that target and we expect to meet it. That will obviously take five per cent off the load. Q378 Mr Chaytor: That will not apply to aviation. Mr Watson: That will not apply to aviation. Q379 Mr Chaytor: Given that aviation is the most rapidly growing area of transport and the most rapidly growing area of emissions, the five per cent Renewable Transport Fuels Obligation --- Mr Watson: --- will not apply. Q380 Mr Chaytor: --- will not result in a five per cent total reduction in emissions. What by 2010 do you estimate the transport sector as a whole to have achieved in total emission reductions? Mr Watson: If you take the forecast that UK PIRO (?) produce, we would expect by 2010 our emissions from the road transport sector alone to be lower than they are today. Q381 Mr Chaytor: Lower than they are today? Mr Watson: Yes. Q382 Mr Chaytor: But in terms of transport as a whole? Mr Watson: In terms of transport as a whole, it depends how you define aviation. The UK Government tends to define domestic aviation only and only include that in the numbers. What we are doing is selling something like 30 million tonnes of jet fuel in the UK every year. That is obviously being converted into carbon dioxide and that is growing significantly. Q383 Mr Chaytor: If we are talking purely now to 2010, all being well and all things being equal in road transport, we will see a five per cent reduction in emissions as a result of the Renewable Transport Fuels Obligation but we will see a growth in aviation emissions so there will be no net reduction and possibly a net increase in the transport sector as a whole? Mr Watson: If you take the transport sector including just domestic aviation there will be a slight decline, in our view. If you include international aviation, which is the largest user of fuel, there will probably be a net increase. Q384 Mr Chaytor: Why do you expect a reduction in domestic aviation? Mr Watson: I am saying with the road transport effect domestic aviation is relatively small. If you look at the figures published by the Government, we are producing something like 32 to 33 million tonnes of carbon from road transport, but we do not normally increase that by a few million tonnes when we add in aviation. Q385 Mr Chaytor: Okay. By 2020 the transport sector has targets to meet in terms of CO2 emissions which is between a five and ten per cent reduction? Mr Watson: Yes. Q386 Mr Chaytor: On the current projections, are you confident that those will be met? Mr Watson: We may achieve a five per cent reduction by 2020. I would not anticipate a ten per cent reduction being achieved. Q387 Mr Chaytor: What will the biggest contributory factors be? Renewable fuels partly? Mr Watson: If you wish to reduce emissions from road transport, you have three choices: you make your vehicles more efficient; you change your fuel; or your consumer buys more fuel-efficient vehicles. The SMMT do a calculation where they divide the market up into nine categories - and you may have come across this - and they have got minis up to luxury cars. If everybody bought the most fuel-efficient car in that sector, ie, the most fuel-efficient luxury car and the most fuel-efficient mini, you would reduce CO2 emissions from road transport by 30 per cent. So you have got consumer choice as the other variable which you have to take into account. If you look at the contributions we can make, vehicle efficiency currently in the UK is about 170 grams of carbon dioxide per kilometre. The EU have a target of 140 which they would like to see achieved on average across the whole of the EU and movement towards 130 as a long-term aspirational target. So there is a lot of stretch yet in vehicle technology. If you take the fuels contribution, if we put our five per cent biofuels into a car that is doing 140 grams of CO2 per kilometre, the EU target for 2008 will reduce it to something like 136. It is a three per cent effect. It is not a big effect. We are working with the European standards organisation, CEN to see if we can increase the percentage of biofuels we can put into our cars. We have got to do it through CEN to make sure that it is safe and that we do not invalidate people's warranties. That work is ongoing and it probably allows for up to ten in the future. I do not know exactly when because the work is not complete. So we can increase the contributions from biofuels but the key things in getting it right are more fuel-efficient vehicles and consumers choosing more fuel-efficient vehicles. Q388 Mr Chaytor: Finally, just returning to the bigger picture of transport as a whole, do you anticipate that transport will still be 98 per cent dependent on oil as we move through the earlier decades of the century? Mr Watson: It will still be a high percentage. Q389 Mr Chaytor: Would you expect that 98 per cent figure to come down by 2030? Mr Watson: Yes, I expect it to come down because I expect biofuels --- Q390 Mr Chaytor: By what order? Mr Watson: A few per cent, I am afraid. We are starting from a very low base and although the growth rate will be high it will take a long time to reach the volumes. Q391 Chairman: On the point you have just made about the fuel-efficiency of vehicles being capable of delivering quite a big cut in carbon emissions, would you support much stronger fiscal incentives so that consumers could be encouraged to choose much more fuel-efficient vehicles? The Government moved only in a very, very small way in relation to the Budget, a very small step, but given the potential that people are likely to go on driving their cars as much as they do today and simply cutting emissions by more fuel-efficient vehicles, would you be in favour of seeing much bigger tax incentives? Mr Watson: As an Association, I am sorry to say this, we do not lobby on tax. Our members do not wish us to lobby on tax so can I decline to answer that question. Q392 Ms Barlow: What do you think would be the impact on energy returns for energy invested if, for example, we have a shift to more unconventional oil sources such as tar sands or oil shales, and how would that affect climate change? Mr Watson: It would have a net increase in the amount of energy that we use. If we take the example you have just given of converting gas to liquids, I believe of the order of something like ten per cent more energy will be required to deliver the fuel. That is a rough guess because it depends very much on the location and various other specific factors but directionally it would increase it. If you take tar sands, again we have to put more energy in because we are beginning with heavier molecules and to convert them into lighter transport molecules we require energy and again there would be an increase in energy, so directionally in both cases we would be using more energy to produce our transport fuels, with obviously reduced CO2 emissions involved. Q393 Ms Barlow: What about the emissions from the fuel? Mr Watson: Emissions from the fuel could be lower in the case of gas to liquids. What you are producing there mainly is a diesel fuel. It is a diesel fuel unlike the one you buy today in that it has a very high CT number. This is a measure of the quality of the fuel. Today you buy a fuel of just over 50. If you use a gas-to-liquids derived fuel it will be over 70 and give you more miles per gallon when you have vehicle engines designed to exploit that, which is not true of today's engines, but you could design better engines to run on that fuel in the future. Q394 Ms Barlow: There is also research going on into making synthetic oil from coal. What would be the effect on carbon emissions of that? Mr Watson: Again coal is converted in South Africa into transport fuels by a company called Sasol today. It is something they started doing when they had embargos on oil coming in during the apartheid era. That technology is the same one I talked about a few moments ago for converting natural gas into liquids. It is the same type of technology. Once again it requires a lot of energy because you have to break the molecules down to gas and then rebuild them. Q395 Ms Barlow: If you look at the net gains of all the processes and the net losses in terms of energy use, am I right in saying that you feel we would be using more energy, in effect? It would have a negative effect on carbon emissions? Mr Watson: We would be increasing our carbon emissions per kilometre travelled, if I can put it that way. Q396 Colin Challen: The Chief Economist at the IEA has said quite recently that it would be very surprising if oil prices were to drop significantly in the future from the current levels. Do you agree with that statement? Mr Watson: Again can I say we do not predict oil prices. I would have to ask one of my members and perhaps Lord Brown gave an answer to that a few days ago when he said oil prices around $40 a barrel were more justified, but I do not have the information to answer your question, I am sorry. Q397 Colin Challen: When he said it would be more justified at $40 a barrel when currently it is $70, what do you think is sustaining the high price of oil at the present time? Mr Watson: Once again he talked about speculators, but this is not an area of our expertise. Q398 Colin Challen: Would you be able to comment on the impact of the current level of prices on transport usage, for example? Do you notice any drift away or reduction in usage? Mr Watson: In the past what we have seen in transport is that the price is fairly inelastic in the short term. In the longer term it starts influencing people's choices. So someone may move from a petrol car to a diesel car because that is more fuel efficient. It is that sort of choice rather than the fact he needs a car to get to work and it almost does not matter what the price is, he would still use his car to get to work. Q399 Colin Challen: Bearing in mind what you have said in response to my previous question about your unwillingness to predict prices, would you nevertheless be able to comment on way that the Government projects oil prices? They have a current projection, I think, which is their high price scenario which is $50 a barrel. Are you aware of their methodology and would you be able to comment on that? Mr Watson: I believe that Government forecasts should cover the range of crude oil prices, gas prices, et cetera, that we are likely to encounter, so I would have thought they should have used a larger range than the current range. 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 per cent or figures of that order on their existing oil/fossil fuel interests? Mr Watson: The oil industry as a whole spends something like 70 per cent of its investment on finding and producing more oil. There is another 15 per cent that goes into refining and marketing. The remaining 15 per cent 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 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 until oil reaches a certain price. When it reaches that price, we suddenly find that the energy content of all the things required in farms - the fertilisers, the tractors - 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, which is set-aside which could be converted to growing energy crops. That one-third would easily enable the five per cent RTFO target to be met. It would enable the ten per cent 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 say 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 per cent but lots of different processes and lots of different options, and you would need a lot 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 seven per cent or a saving of 77 per cent. The difference here is that if you use electricity and gas directly to supply your processed energy, you will get a saving of about seven per cent. If you use combined heat and power you will increase that saving to about 50 per cent. 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 per cent. If you take biodiesel, it is around a 60 per cent 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 CONCARWE, which is our research arm, the motor manufacturers' research arm UCAR, 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 five per cent bioethanol or five per cent biodiesel, what we are talking about, you will get something like a three per cent saving. At current levels that is something five grams per kilometre of CO2. If you go to the best option you will get an 85 per cent 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 per cent. So all these are options and the different proportions would give you the different amounts that you get. 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 gas filling station in Berlin. All the 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 modelling at the time of not the current Energy Review but the previous one, there was some work done by a group called MARCAL which was to help guide it and to look at the most cost-effective way. If you look at their models 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 in the model of a 60 per cent reduction by 2050. 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. If we are looking at supplying the motor car with liquid hydrogen which, from memory will give you about 20 per cent of the capacity of a petrol or a diesel tank, or supplying it with compressed gas, which will give you about 16 per cent 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 compacts 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: The only alternative fuel that is used today in aviation is jet fuel kerosene. You mentioned the coal to synthetic oil process in South Africa and that produces a 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 per cent as a minimum. They are introducing tighter vehicle emissions standards in the future. There will be Euro Five standards for cars which have been published and are currently being debated and 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 and 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 and 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 cap 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 five per cent 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 it. If we look to the future, we can produce more diesel through 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 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 ten 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 as 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 three per cent 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 cars than petrol cars 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 per cent and fuel consumption has gone up by less than ten per cent, 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 ten 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 you have the ability not just to drill straight down but to drill horizontally. Both of these have enabled you to exploit more oil than you originally thought. I am sure if you ask your next witness to take some of the fields in the North Sea, if he knows the initial estimate of the oil recovery 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 UKOA, 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 per cent of our oil in 2020. If we do not invest, it will be 20 per cent. 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 one and a half per cent global. Mr Watson: The 40 is based on a growth rate of one and a half per cent 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 we will not be following. 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. Q440 Mr Chaytor: If it was 60 years or even longer it must be in the interests of your industry and your members that the more there is concern now through fiscal measures or more stringent requirements of engine design, it gives your industry a longer life-span because otherwise there is the possibility of people leaving school and joining the industry now and there will be no industry there by the time they are approaching retirement. Mr Watson: If the lower estimate was correct, yes. Q441 Mr Chaytor: What I am saying is I cannot understand why you are so relaxed about issues of government fiscal policy? Mr Watson: I did not see we are relaxed about them. Q442 Mr Chaytor: But you are not actively lobbying for something that in the long run would preserve the life of your industry. Mr Watson: What we are saying is that we will be proposing to the Government in the near future a joint task force. We should go away and discuss all these issues properly as a contribution towards the UK setting a sensible long-term energy policy, for exactly the reasons you say. We are not complacent about it. We have to engage with government to make it happen, and ultimately it is their choice. Chairman: Thank you very much. We are grateful to you for coming. There are one or two points of clarification which you are going to let us know about too. Witness: Mr Chris Skrebowski, Editor, Petroleum Review, and member of the Association of the Study of Peak Oil (ASPO), gave evidence. Q443 Chairman: Thank you for coming back. We were engaged in a discussion which was not quite concluded yesterday but obviously we have been dealing with this subject again this afternoon. Do you want to say what peak oil means in your view and when you think the world is going to get there? Mr Skrebowski: Peak oil is essentially a simple concept. It is simply the point at which rate at which oil is declining, which all the fields do after a period, exceeds the rate at which new production is expanding. Therefore, what we are looking at is the flow. There is great confusion between the stock, which is the amount of reserves in the world, which only become of interest when they are converted into a flow because what society requires, what business requires, what you and I require is a flow of oil, whichever product it is. What I have a look at is the flow of new projects and I take these down to quite a small size. In fact, I was talking to someone by e-mail this morning and he was confirming that I have now got as much new capacity as CERA, which gave that very optimistic report in the States earlier last year, has got. Where we differ is simply that I recognise a much greater degree of slippage which is the experience at the moment with oil field inflation and lack of equipment and lack of people. That is tending to get worse. I also recognise the rate at which capacity is eroding, which is not quite the same as depletion, but I do not want to get into a long, convoluted discussion on that. Essentially the capacity to produce in somewhere like the UK is going down so the capacity that is lost from there is being sold to someone and those people have to go off and buy it from someone else. In effect, as more countries start depleting you have displaced buyers who are going to those who are left that are still expanding their production and they are progressively getting more and more loaded, and clearly there will come a point at which they cannot support the demands that are likely to be made of them because they will also be depleting their resources ever faster. This in some senses is already visible. If you look at the OPEC production statistics over the last 18 months, OPEC output has barely increased. It is wobbling around. One or two countries are going up, one or two are going down, the rest are just struggling. They have got more money than ever before. They have all of the best contractors, by and large, although some of it is closed. Saudi Arabia has never had so many rigs operating, it has never had so many workovers going on, it has never had so much money being spent, and yet it is struggling to hold production. That is the contemporary reality. When you add all these together and do the calculation, my answer comes out that somewhere in 2010-11 the numbers cease to add up and you start getting less oil at the end of the year than you had at the beginning on a global scale. That is when peak oil occurs. In my view, it is really quite imminent. The oil companies themselves are struggling. From 2000 they have all been grandly announcing to their shareholders that they will produce five per cent more each year. They have consistently failed and by 2005 there was very little growth at all. I have got a tabulation that shows the 21 largest commercial companies (accounting for a quarter of the world's oil production) produced half a per cent more last year. There was a hurricane impact but then people are telling us - and there is a report this morning - that this level of hurricanes is likely to continue, that there has been a change, and maybe it is global warming that has produced that change, maybe it is not, but the expectation is that that sort of phenomenon is going to continue, Q444 Colin Challen: You have heard the evidence this afternoon from our previous witnesses that they consider a 40 years away peak oil situation as being pessimistic and their range is 40 to 100 years. Yours is clearly in that case almost pornographic in its pessimism - 2010. There must be quite a range of other commentators. Is there any real science to this? Are there people who say there could be oil beyond 100 years, for example? What is the range? Mr Skrebowski: It broadly falls into three groupings. There are people who are actively involved in this sort of research like myself who, because they are retired or because they are in a position like mine or because they are doing it part time, have the disadvantage that they do not necessarily get hold of best data. They have the advantage that they have no institutional commitment to a particular outcome. You can do the analysis in various ways. You can do it in a fairly theoretical way on this midpoint of the reserves, which gives you the problem of defining reserves. You can do it the way I do it, which is on a flows basis. Then there are intermediate variants between them. Those groups vary between the ultra-pessimist Professor Deffeyes, who is the linear heir to Hubbard, at Princeton, who had it as last year, through to two or three of us doing it up to the 2010 period, and a couple more doing it to 2012. Then you get a group of consultancies who agree with this sort of analysis but are not prepared to be quite so pessimistic who tend to group around 2015. Then you have the international agencies which still seem to have a sometimes stated and sometimes unstated commitment to business as usual, so you get the EIA and the IEA which are around the 2020 to 2030 mark. Beyond that you get into the professors who do not believe any of this and have rather grand theories on the back of envelopes. I think the realistic range is about 2008-10 through to about 2030. To get to the 2030 you have not only got to assume that the discovery rate picks up enormously but you have also got to assume that the geo-political environment is completely benign and that you will get access to the countries, the countries that are producing will not put constraints on the amount they produce, and that everything works like a Swiss clock. This seems to me a pretty heroic assumption, particularly in the light of the resource nationalism we have been seeing out of Russia and out of South America and also we have seen a straight opportunity to take a tax grab in places like Angola and places like Kazakhstan. There is a next stage which I think has to be seriously considered which is where a nation state says, "Hang on, we are depleting our resource awfully fast. Would it be more appropriate to keep that resource for ourselves, for our own people?" There have been hints of this. The Russians flew a kite a couple of years ago where one of the ministers talked about capping off production and just keeping it at a particular level. I think that is another idea that is waiting in the wings. We could quite easily see that countries which might have the capability to produce more electing to cap it off at a particular level and make it last longer. There is the other, in my view, somewhat unacceptable idea of this miraculous 2030 where every nation on earth produces happily until it goes into decline, so all these nations on earth are going to destitute themselves in order to keep the Western world running nicely, and the international oil companies have a smooth changeover to hydrogen which, equally miraculously, is going to turn up in 2030. I am sorry, I cannot believe it. Q445 Colin Challen: The Shell fiasco revealed the pressures on oil companies to boost their reserves and that is presumably to boost their valuations and so on. Following that, have oil companies been more transparent and more accountable in the way that they calculate the figures? Mr Skrebowski: They have conformed more tightly with the rules. The primary problem is that the Securities and Exchange Commission in the States requires oil companies to quote their reserves according to their rules, which is fair enough, in order to have a quotation on the US market, and as virtually all oil companies wish to be quoted on the US market, they fall in with the SEC definition. There is a whole series of technical reasons to say where the SEC definition is not entirely satisfactory. It is notionally a proven, which is one part of the distribution curve factor. It has no probability ascribed to it and, utterly perversely, two years ago they modified the rules to allow a certain technology to be used for fields in the Gulf of Mexico but nowhere else on earth. This led to the result that companies who had fields in the Gulf of Mexico could, in effect, book more reserves than ones who had similar sized fields but not in the Gulf of Mexico. Thus it is a rather strange animal. The more generally used and more useful number is the proved and probable, which is the statistical one which says this number is the best one in the sense that it is as likely to be too big as too small. The advantage of that is that you can mathematically add the 50s together and get a meaningful result. At the moment it is a bit of an apples and pears situation. Some give both quotations; some have another variant, and there is still a great reluctance to let too many people into the craft mysteries. Q446 Colin Challen: What do you think will be the main effects of reaching peak oil production in a full global sense, but particularly on transport where we are so dependent on oil? Mr Skrebowski: Given that, by and large, people do not drive around the countryside for the fun of it and that the bulk of the consumption has an economic purpose, that cannot really do anything but spike the prices and translate into some form of inflation. Q447 Mr Stuart: I wonder if you could comment on the Government's position which is they have based their projections on the IEA's World Energy Outlook Publications and they say there are sufficient oil reserves for 30 years and possibly, with some technological and other means, stretching that out to 60 years. We know your opinion of those particular conclusions but could you comment on how they got there? Mr Skrebowski: I think because all the major Western nations are members of the IEA and contribute data to it and interact with it, it is philosophically fairly difficult to say that perhaps we should be looking at some other scenarios, but I think there are some very good reasons on this occasion because we have at least a possibility of a quite heroic discontinuity here, in that in addition to examining the benign scenario that life goes on much as before, that other scenarios are at least examined a bit further than just not being taken into account. There is a dreadful analogy, but I think I will make it, which is that throughout the 1930s Mr Hitler did not keep his intentions secret. It was perfectly well-known what his aspirations were. There was lots of information about the rearmament of Germany. There were people writing books about it and people lobbying for it, but the idea of another major war at so short an interval from the previous one was so horrendous that people would rather not contemplate. We went all the way through the 1930s and the British Embassy in Berlin was sending constant messages to London which were piled up and ignored. If we had even taken notice of it a couple of years earlier the outcome would have been significantly different. If there had been a greater preparedness to say that, "Yes, we certainly hope there will not be a war but it cannot be ruled out," then the outcome would have been more benign, and similarly here. Oddly enough, I passionately believe it, and all the analysis I have done suggests that what I am saying is right, but of course I have to consider the possibility that I might be wrong but, equally, I do not think it is reasonable any longer looking round the world and looking at what is happening in the oil field just to blindly assume that you can go on much as before, and that is what we are doing. Q448 Colin Challen: So we know what the Government's official view is. Committees like this rely on expert evidence from people like yourself and also from people within government. Are you finding that there are any individuals within government who are beginning to take your ideas more seriously? Mr Skrebowski: I think there always have been. It is a paradox, is it not, that halfway down most organisations there are people who are prepared to think further out of the acceptable box than you get higher up. As you get closer to the top, it is not always clear whether you are providing analysis or reassurance, and I think certainly in the energy field that is very much what we are seeing. That is a subjective, personal opinion and must be treated in that light. What else is there to say? Q449 Colin Challen: You will recognise that our difficulty while looking at this is that we have just had evidence from the industry which is quite clear about the fact that there is at least 40 years' worth and more like 100 available, and that contrary to your argument in fact production is going to be able to brought on-stream, and again they are telling us that. The Government's official view is that, the IEA's view is that. Why should we believe you and not all these authorities? Mr Skrebowski: I think my answer to that would be to check what I am saying, ask other people whether what I am saying makes sense, and if you find (which I am sure you will) that they start to squirm a bit, then recognise that there is this very real possibility that this is happening. If we look at some of the other governments, the EIA, the American one, puts out happy nonsense numbers and actually at the beginning of their reports they have in very, very tiny letters the statement "this is what is required for business as usual", which no-one ever reads and moves swiftly on. They in fact commissioned indirectly the Hirsh Report. The Hirsh Report last year was a report which basically wanted to examine the impact of peak oil and what you could do to mitigate its effects. To do a one-line summary of it, the answer was if you had 20 years you would get through; if you had ten years, it would be pretty rough; if it was any quicker than that, forget it. There is now a follow-on to that report, the executive summary of which is just about to be issued, which is looking at the primary mitigation proposals which are, broadly, conservation, coal to liquids, shale oil (which frankly is romance), and I forget what the fourth one is. I can dig that out for you, if you wish, and send it to someone. We had a very strange story in the New York Times on Sunday claiming that Mr Bush knew all about peak oil, that he had been briefed by Mr Simmons and Mr Cheney and that was the real reason for his rather strange remarks in the State of the Union Address. So there are all sorts of conflicting counter-currents going on and there certainly does seem to be some evidence that there are at least some people taking it seriously and having a look, while at one and the same time there is a very strong "don't frighten the horses" attitude. Q450 Colin Challen: Thank you for that. That is a very full answer and an interesting one. The Government currently uses three different projections of future oil prices in 2020. $50 is the high one, they have a central price of $35, and a low price of $20, all at 2004 prices. Would you comment on what you think of those estimates? Are you able to shed any light on how you think the DTI might possibly have come up with them? Mr Skrebowski: I do not think I can shed any light on how they might have come up with them other than they probably went back to the IEA projections and there was an interaction that way. If - as I am - you are projecting a huge discontinuity and a shortfall in oil supplies then logically oil prices have got to go very high because what you are trying to do or what the market is trying to do is drive them into the highest return uses, and then you are going to try and fill up the remaining bit with other sources of energy in some shape or form. So if you accept the discontinuity, and remember if you are going out to 2025 you are 15 years after when I think it will occur and you are ten years after when many people think it will occur, I would anticipate very high prices because, apart from anything else, you have got to have an incentive to draw forth either a conservation measure or alternative energy source in order to try and fill a gap which is in danger of opening up each year. Q451 Mr Caton: We have touched on transparency earlier. The Government says it has been working with the IEA and various governments to promote greater transparency in oil markets and to improve the investment climate in oil-producing countries. What do you understand them meaning by this and why is transparency of oil data so important? Mr Skrebowski: The oil industry, as I hinted, rather likes to keep its secrets and rather likes to keep its mysteries. This has been an historic pattern, which is not surprising. It is no different from any other industry in that sense. Producing countries very often declare their reserves to be state secrets and their actual production figures to be state secrets and all the rest of it. They do not want people calculating out things like declining curves. Just out of interest, if you have data on a field and you know something about its characteristics, it is relatively simple to know where it is going which is why production data tends to become state secrets, otherwise you can tell what is going to happen to them. If you go back, some of this is actually still in the public domain so we can catch up with some of it. Matt Simmons, who is fairly apocalyptic and is a New York banker and close to the Bush administration and close to Bush personally, has been going round the world talking about peak oil and the likely impact of that. One of the things that came out of that was that we really needed much, much better data from both the oil companies and the producing countries because then we could start doing what in effect we want to do which is plug the right numbers in and see exactly where things are going because then we can see how big a problem we have got. So far where has this got to? OPEC has certainly started publishing its future investment plans in much greater detail than we have ever seen. We know that is in response to the pressure. The companies after the Shell debacle have definitely been more scrupulous in their presentation of reserves and definitions and one thing and another, so that has tightened up. We have some countries that are exemplars, and I am proud to say the UK is one, where you have very detailed production data and an excellent web site where you can look it all up. The Norwegians are the other ones, they have very comprehensive details. The Danes are not so bad (but they are not quite as good as the Norwegians) and some of the states in Canada are not too bad. So the Anglo-Saxon world, loosely defined, is not too bad on data release and allowing you to calculate whatever. Most of the rest of the world is still not very good, but possibly getting a bit better. Q452 Dr Turner: How seriously do you think the Government is acting in anticipating and addressing the problems that would undoubtedly be caused by the problem of reaching peak oil? Mr Skrebowski: The short answer is I honestly do not know. I have not heard even unofficially anything that would suggest that they are doing very much. It was quite interesting that a friend of mine who is writing a book on the subject challenged Malcolm Wicks openly about peak oil and got some denial. He also challenged Sir David King at a luncheon who said, "Oh yes," and essentially confirmed it but put it about ten years out, so that is five years beyond, so it sounds as though he is talking about 2015. The short answer is I think there is some awareness of it but a great reluctance to talk about it or take any obvious, overt steps to do anything about it. Q453 Dr Turner: If the Government were to do anything about it, it would clearly face some quite significant challenges. Can I ask you what you personally would do? If you were the Secretary of State for Transport, what would you do in terms of government transport policy to start replacing oil in transport in the United Kingdom? Mr Skrebowski: I think my answer to that would be that the first thing one would try and do in a fairly controlled manner is indicate that, for all manner of reasons, future oil supplies are going to be tight and we are going to be at the behest of regimes that we might not have much in common with. Once the population in a general sense has even a limited perception that many of the things that it is doing are both silly and extravagant, then there is a reasonable possibility they will react. At the moment we have this slightly perverse thing where we have all sorts of noble initiatives on saving or conservation or insulation, but the problem is that no-one out there sees any immediate position to do anything about it. They have got to have a reason to do something. Once they have a reason to do something, humanity is really quite clever and ingenious and will start doing things. I can see that for financial reasons, for the stock markets, for political reasons of not creating panic, people might be very reluctant to attempt this because they are worried that it might run out of control, but I think if they do not do anything about it the public is necessarily going to catch up, the reality is going to catch up, and then the government is going to be heftily blamed. Just ducking slightly sideways Chevron, the oil company, has got this strange web site called "Will you join us?" which is basically admitting to peak oil and talking about all the good things you need to do to mitigate it. What, in effect, Chevron is really saying is: "Don't blame us. We told you. It was all there. You only had to look", and governments almost by definition always do get blamed. That is what the population does. It may be grossly unfair but that is the reality, so I think the Government is taking a great risk by not even starting to bleed out the idea because there is no real downside. If you bleed out the idea that fuel is valuable and is likely to remain expensive, then you encourage conservation, and if you encourage conservation then you mitigate carbon emissions. Then you have a whole series of not necessarily dramatic but small wins from a controlled admission that there is a problem. Then if the problem deteriorates, as I anticipate it will, the population is not howling and screaming; it is something it is starting to understand has got worse. Q454 Dr Turner: The Government is sort of dipping its toe into the water into this field fairly gingerly in terms of biofuels obligations, et cetera. Do you think it could do more and do more effectively and do you think it has got the right fiscal instruments to encourage action? Mr Skrebowski: Again entirely a personal opinion, I think it could be a little bolder. The Germans have just made the biofuels obligation there mandatory. There is no real reason why we should not make it mandatory in this country. The Americans quite successfully a few years ago improved air quality by offering scrapping premiums for elderly vehicles. If you want to start changing the perception about SUVs you could offer scrapping premiums for SUVs. No-one is going to take it up because they are new vehicles but it just starts to change the perception of that sort of action. I think there are quite a lot of little things that could be done and probably should be done. Q455 Dr Turner: What do you think are the practically attainable limits, if those things were done, in terms of the amount of fossil fuel we could replace? Mr Skrebowski: What you are really asking is, what is the immediate fat in the system. I would think somewhere between 15 or 20 per cent, if pushed. Obviously the first five per cent would be quite easy even if things got a bit higher still. That is simply a good guess. Dr Turner: Fair enough. Q456 Colin Challen: We heard from our previous witnesses that they thought the reason why oil was currently around $70 a barrel was because of speculation. If you agree with that assessment, is that speculation based on the approaching peak oil problem or is it based on Chinese demand or uncertainty in the Middle East or all three? Mr Skrebowski: The first point is speculation is not necessarily unreasonable. In other words, if you pay over the odds because you think there is a lot of insecurity at the moment, that is not an irrational act. It may come to seem an irrational act if it subsequently proves it was not really a problem, but it is not necessarily an irrational act at the time. Then there are hedge funds and speculators and that popular part, people who want to say why prices have suddenly got so high. I think you need to be a bit cautious. After all, they have staked real money and if they get it wrong, they will lose real money in quite large volumes. I will not cry one way or the other about that, but it is a real bet. It is quite interesting that there is a divergence between the oil company view going forward and the financial community view going forward. The financial community, generally, is much more open to the idea that there could be serious difficulties in this area, serious constraints, because they have seen the failure of the oil companies to deliver volume and the way oil companies, to keep their share prices up, are having to buy enormous quantities of shares, so the financial community is literally at odds with the oil community. The oil community sees forward prices dropping down, the financial community, in effect, is betting they will go on at high levels. Place your own bets who historically has done better, the bankers or the oil companies; they have both done pretty well. Q457 Colin Challen: I notice that the new Chief Executive of Exxon predicts that prices will drift down again but probably not as far as to $25 a barrel, which is what the Government's Aviation White Paper of airport expansion is based on. Mr Skrebowski: Can I interject at that point. If the price fell to $25 a barrel, it would be a catastrophe. The reason it would be a catastrophe is that is the sort of production cost you are now getting in the Canadian tyre sales. If it dropped anywhere near $25, all sorts of projects would start getting cancelled. Some of the marginal projects, the extensions that these lands are depending on to give them their bananas in a hurry, are totally predicated on high prices continuing; $25 would be a catastrophe. Q458 Colin Challen: In that case, somebody needs to write to the Secretary of State for Transport asking that the Aviation White Paper be redrafted because that is based on $25 a barrel for aviation fuel, and that price level is predicted to continue until 2020. What do you make of that kind of government assessment which just seems so awry? Mr Skrebowski: Can I tell you a story. Many years ago, I worked as a long-term planner for BP and every year the demand went up by seven per cent. I went to my boss and said, "I really cannot believe that demand is going to go on up at seven per cent a year." He said, "Well, you may be right, but it has gone up at seven per cent for the last eight years. I cannot do anything other than include that assumption in next year's plan because, to change it, I would have to have an unbelievably good reason", so we got out the ruler and drew the line on. That I think is what is happening, that people are just sitting there with a ruler and extrapolating a formula, because they cannot think or are not prepared to believe there is a reason good enough to take them away from this straight line they have been living with. It is a sort of oil industry idée fixe, that the long-term price of oil is that and for the best part of 100 years that was correct. Q459 Colin Challen: Are we blinded by the history of our growth? I am thinking particularly of aviation where recently the huge growth has been spurred on by cheap airlines. Are we going to have to start looking at a situation where we will be rationed by price in the not too distant future in commercial aviation? Mr Skrebowski: Naturally enough, I do not know. What I do know is that making an aeroplane that flies 500 or 600 miles an hour consumes enormous volumes of fuel. If you make an aeroplane that flies at 200 miles an hour, because it goes up by the square, it will use a small fraction, so one possibility is that you will get a segmentation of air travel where there will be a high-priced, fast air travel and a lower-priced, slower air travel. That, at least, would start the mitigated constraint. I was surprised to hear that there is only sasol jet kerosene. The Russians have been extending jet kerosene with ethanol; you can do this. Ethanol has a lower calorific value so you have a penalty in terms of carrying the sasol, but you can extend jet fuel with ethanol. There is a lot of experience out of Russia; I am sure if you ask them nicely, they will probably tell you. I think you can say that the present growth in air travel is unlikely to continue on its current trajectory, but that does not necessarily mean it will fall off completely catastrophically because of the high rise. I think it will work hard to get around it and sort of package itself in various ways. Q460 Colin Challen: Finally from me, I wonder whether or not any government department has approached the Association for the Study of Peak Oil to discuss your predictions and to explore them with you? Mr Skrebowski: Not that I am aware of. Q461 Chairman: The IEA are predicting an increase in demand for oil in China and India of almost three per cent a year for 25 years. Given the impact that has on global demand, does that make anything that happens in the UK just irrelevant? Mr Skrebowski: Possibly. Q462 Chairman: On another tack, what do you think about Sweden's exploration of whether they can become as oil‑free as possible by 2020? Mr Skrebowski: I think it is a very useful trial and very helpful for the rest of us. Ireland is also getting rather more interested in biofuels. When you have got a small population and a relatively large area, it becomes a realistic option. The UK is land-constrained. Now, in fact, the best place to grow biofuels is the Tropics. We should be praying it grows well in the Tropics and does not really grow outside them. Maybe that is a whole new business area that is going to grow up. Tesco, which is busily selling you a premium fuel with ethanol in it already, is able to do that because it secured a very good contract from the Brazilians for several cargos of fairly cheap ethanol before the price really went up. Q463 Mr Stuart: Do you have any assessments of the contribution that biofuels, hybrid engines and hydrogen could have on replacing oil in transport? Mr Skrebowski: I think Malcolm suggested five to ten per cent. That is five to ten per cent self-supplied, but if you say that it is no more insecure to bring in ethanol from the Tropics than to bring in oil from the Middle East, then you can go almost as high as you like. There are these E85 mixes, the Americans are already selling cars and the Brazilians have these flex-fuel cars which are quite bizarre in a way; you just put in whatever you want and the car works out what is in there and adjusts it to work. Apparently, this technology is really quite satisfactory and that gives a lot of flexibility, because in the States if you are in areas where there is a lot of alcohol available, you put that in and if you are in areas where only gas is available, you put that in. This is happening in Brazil. Then you can go up to 80 per cent or 85 per cent. You cannot go all the way, well, you can actually go all the way, but it tends to be more satisfactory not to go above 85 per cent for some technical reason I am not desperately aware of; I think it is starting properties. Chairman: Thank you very much. We are grateful for you coming in here today.
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