Examination of Witnesses (Questions 180
- 197)
WEDNESDAY 7 DECEMBER 2005
MR COLIN
SCOINS, MR
RODNEY ALLAM,
MR NICK
OTTER AND
MR GARDINER
HILL
Q180 Adam Afriyie: So 20/30 years,
being able to see that far is helpful, so what carbon price or
carbon emission price would be necessary to fuel the investment
needed in these products—50 euros, 20 euros? What sort of
figure across that time-frame would make you leap tomorrow morning
and make the investment?
Mr Scoins: I think, as I said
before, it depends on both the gas price and the carbon price.
Q181 Adam Afriyie: Well, assuming
all things being equal.
Mr Scoins: All things are not
equal, but against the range of gas prices, we would say that
the carbon dioxide price has got to be between of the order of
£20 per tonne and £40 per tonne, that sort of order.
Mr Otter: I would agree with that.
Those are the sort of numbers that get kicked around, £20
to £40 per tonne, maybe slightly less than the £20.
I tend to think in euros, I am afraid, but certainly that sort
of level and having some, not certainty, but some visibility about
longer-term value. I think if you were operating between those
regimes somewhere, then you would have a little bit more confidence.
These guys are very capable of handling the risks, they are used
to that, but they need a bit of help really.
Mr Hill: I would actually put
it a little bit higher than that. I think if you actually want
to make sizeable investments and make material reductions in CO2
emissions, I suspect it is probably nearer the top end of that
range to do both, to make sizeable investments and material reductions
in emissions. Most of the data I have seen and in fact the numbers
that we are calculating on fully built-up projects do require
about $70 to $100 per tonne realistically in the commercial environment.
These are oil field units and we need to convert these to pounds,
so I apologise for that. I think that would put it at the higher
end of your range.[1]
Q182 Mr Newmark: I will not ask you
what that payback is or what the RoR is, but—
Mr Hill: Well, that is looking
at utility. That is break-even-type costs. These are not 20% rate
of return projects; these are just the break-even costs.
Q183 Mr Newmark: Average returns,
break even?
Mr Hill: Yes, $70-100 per tonne
is the sort of number.
Q184 Mr Newmark: I do not believe
that, but I will not go down that track. I am curious actually
because looking at how the Government could be helpful, what would
be the most effective measure that the Government could introduce
to stimulate developments in the deployment of carbon capture
technologies on a scale and in a time-frame required?
Mr Otter: The first thing is that
the Emissions Trading Scheme is here and will continue to operate.
To have these technologies in the Emissions Trading Scheme would
be a starter for 10 certainly. That raises a whole series of issues
about monitoring and verification issues, having the surety of
the CO2 being stored, et cetera, but nevertheless that would be
quite a significant signal. That is okay. It does not give you
the visibility, but actually it is a starter. If we can get some
visibility of that past 2012, then that would be quite encouraging
and some sort of, I do not know, minimum and maximum on the price
of CO2 around the sorts of numbers that we have been talking about
to give the assurance for the way forward in that scheme.
Adam Afriyie: I must say, I think you
have been so clear on this price range that it actually obviates
probably the next one or two questions I was going to ask.
Q185 Mr Newmark: The next question
is to BP. Why do you favour decarbonised electricity certificates
rather than a mechanism that rewards all forms of carbon-free
or low-carbon energy generation, and does this not add unnecessary
complexity to the market?
Mr Hill: I think what we are doing
at the moment is we are exploring a number of options and at this
point in time when we are exploring these options, we want to
look at the pros and cons of each. The one you mentioned, the
decarbonised electricity certificates, is one we are particularly
interested in right now as part of the process of exploring those
options. What seems to be appealing about that is that it is based
on the ROCs which are currently in place and seem to be delivering
what is required, delivering the target to hit the renewable obligations,
so a mechanism that might apply for decarbonisation of fuels is
a similar mechanism, which you could call "DECs", which
is the Government determining what proportion of electricity is
appropriate to be decarbonised and having certificates which companies
can trade to deliver that decarbonised energy. That would not
be picking any winners in technology, but that would mean that
any company could deploy any technology that delivered that decarbonised
fuel.
Q186 Mr Newmark: You do not think
that is going to distort the market in the way you, as a producer,
are incentivised to go down one particular track as opposed to
another? Is that what you are saying?
Mr Hill: I am not sure what the
other option might be. I think if you want to produce energy with
low carbon, then you have renewables and we have targets in place
for that. We clearly have CCS and this is an option that could
promote CCS, and the other one clearly is nuclear, and nuclear
already has some incentives in place to support it, so the thing
that is actually missing is something for CCS. It is up to the
Government then to decide what is needed, and the decarbonised
fossil fuel energy required.
Q187 Mr Newmark: So it is not going
to be purely market driven. What is really going to be driving
decision-making is the incentives you ultimately get from the
Government to go down one track or another? Correct?
Mr Hill: Clearly if the technology
today is not commercial, then the type of incentives which are
put in place will drive the way that business responds.
Mr Scoins: Can I say that you
should not be trying to incentivise technology, but you should
be trying to incentivise the reduction in carbon emissions and
keep it as generalised as possible and let technologies compete
on as level a playing field as possible.
Q188 Chairman: So you do not support
this idea of the decarbonised electricity certificates?
Mr Scoins: A market segmented
by technology, in my view, will produce—
Q189 Chairman: You do not agree with
BP?
Mr Scoins:—produce a sub-optimal
solution.
Q190 Chairman: And you do not either?
Mr Otter: I tend to agree with
what Colin says, that you need incentives for carbon reduction,
not to favour the particular technologies. I agree with that.
Mr Allam: You also need higher
incentives to start with if you are going to allow large demonstration
projects to be set up.
Mr Scoins: That is very true,
we need to get over the development hump.
Q191 Chairman: If our report said
that we wanted to propose decarbonised electricity certificates,
you would write in and say, "Well, we don't support that"?
Mr Allam: Ultimately, but perhaps
not to start with. It has to be extra funding to start with to
get the whole thing going.
Q192 Adam Afriyie: On that point,
let's keep Gardiner in the hot seat! Coming to the DF1 Project,
what are the essential commitments you need to receive from the
Government and by when in order for the DF1 Project to proceed?
Mr Hill: I think 3Q next year
is the key milestone at which point we have to make the decision
of whether we should go ahead with the project or not. Clearly
no company can afford to have a particular project of this type
without some policy mechanism being in place. It just does not
make any money at all, it just costs money to do this type of
technology, so clearly BP and their partners, because we are working
with a number of companies on this, need to be confident that
this necessary and appropriate policy mechanism will be accepted
and forthcoming to provide the justification to actually sanction
the project at 3Q next year, so I think that is really what is
required. We do not think a capital grant is sufficient because
we need some sort of long-term commitment, which the panel has
already pointed to, in place so that these projects will remain
economic over their entire life. I think the key thing is that
we need the necessary and appropriate policy mechanism accepted
and forthcoming so that we can make a decision that partners will
be comfortable with and will be there when the thing is built.
Q193 Adam Afriyie: And by the third
quarter next year?
Mr Hill: By the third quarter,
yes.
Q194 Margaret Moran: What are the
key regulatory barriers to investment in this area and what do
you think the Government should be doing to overcome them?
Mr Hill: I think clearly there
are regulatory barriers around the maritime laws, the conventions,
the London Convention, OSPAR, and there are also some concerns
around the Petroleum Act in connection with liabilities. I think
these are quite well understood now and if the Government can
get into action to modify these in the 2010 time-frame, I think
that would be okay because in the first instance we will be doing
EOR which actually means there are no maritime barriers that I
am currently aware of that would affect that project. When you
then move to straight CO2 storage, you have to solve the OSPAR/London
Convention issues. The Petroleum Act issues are really around
the liability at the end of the project life, so again there is
some time to address these issues. I think what is most important
is a real willingness and commitment to be demonstrated by government
now so that people feel confident that these issues will be addressed
satisfactorily so that we can commit to the investment for the
projects.
Mr Otter: We are seeing encouraging
signs. I chaired the meeting between the Norwegian Minister and
our own Energy Minister and an agreement at least to address some
of these issues and we see evidence of Defra and DTI taking a
strong role in trying to address the OSPAR route. What we say
is: keep at it.
Q195 Chairman: Should we have a UK
Carbon Capture and Storage Authority so that we actually bring
that together into one regulatory body?
Mr Otter: That is a question I
had not really thought about.
Chairman: Would you like to think about
that and let us have a response to that because we might be attracted
by that.
Q196 Mr Flello: In terms of the existing
North Sea infrastructure, the pipes and the platforms, what specific
steps do you feel need to be taken now to make sure that we can
take advantage of that infrastructure rather than it being decommissioned
and perhaps no longer available?
Mr Hill: Again I think it needs
some sort of green light to industry which says that there will
be a mechanism put in place which allows us to use that infrastructure.
I think my concern is that if this all takes too long and then
companies start decommissioning pipelines and facilities, firstly,
you lose perhaps the option to use that and, secondly, it becomes
very much more expensive to re-access those reservoirs. I think
the time-frame for a decision to put in place these policies is
required urgently to signal that companies should retain these
facilities for future use in CCS.
Q197 Mr Flello: In terms of that
timescale, what are we looking at in terms of decommissioning?
Mr Hill: Well, I think there are
already a number of fields that are drawing up decommissioning
plans. Partly decommissioning is a function of oil price, but
for the most part we are seeing an increase in the number of facilities
being planned for decommissioning over the next three to five
years, so again it is quite urgent to make use of these platforms
and the pipelines. I would say certainly in the next two to three
years you need to give them that signal, otherwise, people are
already too far down the decommissioning route.
Chairman: Gentlemen, it has been a fascinating
oral session this morning, and my apologies to you for the speed
at which we have had to go. Thank you very much indeed.
1 Note by the witness: On costs of CCS: It
is inappropriate to characterise the cost of CCS in a narrow range
of £20-40 per tonne. CCS costs have been documented in the
IPCC special report which quotes costs ranging from $40-$270 per
tonne CO2 avoided. There are many variables that result in a wide
range of costs quoted for CCS; the type of fossil fuel feed stock,
gas or coal; do costs include transport and geological storage
or is it simply capture; is it a CO2 capture cost or a net CO2
avoided cost; different technology choices. Work in the CO2 Capture
Project (CCP) and in BP suggests a cost of CO2 avoided that, including
capture, transportation and storage using gas feedstock in the
UK setting, is likely to be in the range of £40-80 per tonne
CO2. Back
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