Examination of Witnesses (Questions 42-59)
MS ROBERTA
LUXBACHER AND
MR NICK
THOMAS
13 JUNE 2006
Q42 Chairman: Welcome both to this, our
second evidence session of the Committee's inquiry into issues
relating to gas in terms of the energy review. I always begin
by asking our witnesses to introduce themselves so we know who
we are talking to.
Ms Luxbacher: I am Roberta Luxbacher.
I am the Director of Europe Gas and Power Marketing for ExxonMobil
International.
Mr Thomas: I am Nick Thomas. I
am Director of Corporate Affairs for the ExxonMobil companies
here in the UK. Suffice to say I have over 35 years' experience
in the oil industry covering a whole range of areas and I have
been in this current position for five years.
Q43 Chairman: Can I say how grateful
we are to you for coming, how grateful we are for your written
memorandum, and also for the opportunity of a briefing session
yesterday that we were not able to take advantage of, I am afraid,
because of diary constraints but we are grateful for the thought.
You are responsible for a very significant percentage of UK gas
production so you are pretty well-placed to tell us about gas
issues. I imagine that you sell your gas on a similar pattern
to other gas suppliers in the UK market. Roughly what proportion
of the gas that you sell do you think goes to electricity generation,
how much for heating homes and offices, and how much for other
uses, such as chemical industry uses?
Ms Luxbacher: I am sorry, I am
having a little bit of trouble hearing.
Q44 Chairman: I apologise, I will
talk up. Roughly how much of your gas is used for electricity
generation, roughly how much for heating purposes, domestic and
commercial, and roughly how much is used for chemical industries,
for example?
Ms Luxbacher: When we are selling
our gas as a producer we are primarily selling into the liquid
UK market at the national balancing point. I would generally say
if you go down to the end user our gas is being used in proportion
to the gas-energy mix in the UK today. We are not selling directly
to residential. We sell to some industrial, some power, most of
our gas is on-sold.
Q45 Chairman: Do you know what that
proportion would be?
Ms Luxbacher: For our gas?
Q46 Chairman: For the gas market in general.
Ms Luxbacher: In terms of the
current gas market. Residential demand for gas right now is about
42%, power about 34% and industrial about 24%, in that range.
Q47 Chairman: And used as feedstock
in industries is very small?
Ms Luxbacher: That would be part
of the industrial demand. I do not know if we have that broken
down, how much is used as feedstock
Mr Thomas: Those figures are publicly
available.
Q48 Mr Weir: We have heard a lot
about the fact that UK gas is running out faster than expected.
Can you tell us if you think that the UK's home supply really
will run out within 30 years, or are there likely to be further
reserves to be discovered and exploited if the price is right?
Ms Luxbacher: If you are looking
over the long-haul, 30 years, clearly the UK fields are in decline
but at the same time there is quite a bit of exploration going
on in the North Sea currently. The question really is there are
still development opportunities out there, will the fiscal and
regulatory regime stay stable such as it continues to attract
investment for that development, and whatever happens with price
over the long-haul will also be a clear indicator. The important
thing is less than that gas running out, more important the UK
is well-positioned for global gas resources. About 70% of global
gas resources are within economic transport distance of the UK.
The UK is very well-positioned from a gas perspective.
Q49 Mr Weir: What is your view on
the price of gas and oil in the foreseeable future? Obviously
it has gone up significantly over the last couple of years where
it is probably double what it might have been expected to be.
Do you see that continuing or do you see prices falling? At what
level do you think it will have a serious impact on further exploration
of the UK's oil and gas reserves?
Ms Luxbacher: I do not think I
can give you a projected price into the future. What I can say
is when you look at both oil and gas reserves there is sufficient
oil and gas reserves to satisfy growing world demand. If you look
at gas reserves, the Oil and Gas Journal published 60 years'
worth of gas reserves and what that tells you is oil and gas prices
will continue to cycle up and down, as they have historically.
We would estimate with both oil and gas prices we are probably
at the top of the cycle right now, but how long that will last
and when it will cycle, I would not want to project that.
Mr Thomas: If what you are getting
at is that high prices could have some positive impact, or lower
prices some negative impact, on investment, the point I would
make is we are in a long-term business and our projects can take
five to ten years, on the drawing board from when we first discover
something and then we have a tail of production which could be
25 years. The price of oil today really has very little relevance
to whether we go ahead with a project. Back in the late 1990s
when prices were just above $10 a barrel we were still investing
quite aggressively, particularly in West Africa where we have
a number of fields which are coming on-stream today, despite the
relatively low prices at the time.
Q50 Mr Weir: Surely as a major oil
company you must be looking at the future and saying, "These
fields are getting low or being used, whatever, what exploration
are we looking at, what is economic for us to look at west of
Shetland, for example", which is often quoted as there being
a marginal field in that area. The current price is, what, $60-odd
a barrel from $30-odd. I am trying to get some indication of what
level you would consider it to be economic to look at fields like
that?
Ms Luxbacher: I think the biggest
contributor to what will be economic in the future is really technology
development. As Nick just explained, all of these projects have
to be looked at over the long-term. With a lot of these fields,
and we find that happening constantly, what was not economic at
any reasonable projection of future price will be economic because
of the development in technology and we will go back to existing
fields, which we are doing today. The Beryl field and the announcement
we recently put out is a good example of how we are drilling more
wells there than we ever thought we would and extending the life
of that field because of new technology developments in fast drilling
and extended drilling which have changed the economics. We would
say it is technology and we anticipate continued technology progression-we
are a technology company-that will enable these reserves to be
developed.
Q51 Mr Weir: You mentioned earlier
the tax regime as being a factor in this. I notice you say in
your submission: "The most recent increase in the supplemental
charge to Corporation Tax comes at a time when crude prices are
at high levels. At more historical price levels, this level of
taxation is likely to render many resource development projects
in the UK North Sea uneconomic, shorten the economic life of existing
fields and reduce the prospects for optimising resource recovery."
Do I take it from that that the current level of the tax regime
is not having a detrimental impact?
Ms Luxbacher: I think, as a general
statement, when we are looking at a project we are looking at
it over a long-term life cycle. Every company that is investing
has a different view of how they look at their investments and
how long they feel certain environments will be sustained or changed.
Our point was we would not expect current price levels to be maintained
out into the future, we expect there to be a cycle and without
further technology development, at the same technology, some of
these marginal fields would not be developed.
Q52 Mr Weir: Tell me if I am reading
this wrong but it does seem to me that what you are saying here
is at the current level of oil price the Corporation Tax is not
a significant factor, you can live with that. What I am trying
to get at is if the price of oil starts to fall does it become
a detrimental factor to continuing exploration in the North Sea?
Ms Luxbacher: Yes, it does. Drilling
the next well even on a current prospect could be—
Q53 Mr Weir: To what sort of level
would it have to go down before it became an uneconomic prospect
in your view?
Ms Luxbacher: I do not think I
could speculate on what it might be because it is too complicated.
It depends on the prospect, on the technology, on reserves there.
There are just so many factors that it would be very difficult
to say. We would evaluate each one individually and make an investment
decision based on that particular investment and the risks involved.
Q54 Mr Weir: In the last two or three
Budgets the Chancellor made several changes to the tax regime.
Is continual change in the tax regime something that causes you
concern? Are you looking for a more stable tax regime in the long-term
and, if so, what do you consider to be the long-term in tax terms?
Ms Luxbacher: Yes, we would very
much like a stable tax regime, one that did not change. As we
have said in our statement, if prices go down we think fields
would be marginal. If anything, the tax regime may need to reverse
itself in order to optimise recovery of the UK's gas reserves.
Again, we look over a long project life for our fields when we
are making an investment decision and look at the current tax
regime and whether we anticipate that it will change. Nick, would
you add anything to that?
Mr Thomas: The only thing I would
add to that is you have got to remember the maturity of the UKCS.
We are 40 years into it now. None of us really anticipate that
the large fields are still there, so we are chasing smaller fields,
additions to existing fields, and they are technically difficult,
relatively expensive, we are dealing with high pressure, high
temperature fields often. That technical environment is very challenging.
We live with a very uncertain price environment. As I said, not
many years ago prices were down near $10 and today they are above
$60, so there is uncertainty there. As Robbi has said, and I think
this is what you are getting at, what we need is a stable tax
and business environment in which we can operate with this uncertainty.
. That is really what we are looking for and tax is obviously
a very important part of that. We have an option before we invest
in a field, we look at the tax regime and if we think that is
fair we can either invest or not invest. Where we have taken the
investment decision and somebody changes the rules afterwards,
that is when it gives us difficulty in terms of confidence investing
in the future.
Q55 Mr Weir: I am trying to understand
how this is achieved in the situation we have had in recent years
where the price has risen apparently so dramatically. Should the
tax regime not follow the price to some extent when there has
been such a dramatic fluctuation in price?
Mr Thomas: I think I tried to
cover that point earlier where typically from the inception of
looking at a project to taking the investment decision our projects
can be 25-30 years. Quite genuinely we ignore today's oil price,
it is not relevant in our assessments. The tax regime is very
relevant and we make an assumption that is going to remain at
whatever level it is at when we take the decision. On the technical
aspects of it, we try and understand as much about the field and
the development at the beginning as we can but often we cannot
have absolute certainty about that. Today's oil price really is
not relevant for us.
Ms Luxbacher: I would also say
that we operate in a myriad of different tax regimes around the
world. As Nick said, it is less the tax regime than that you understand
what it is when you make your investment decision. If it is a
difficult tax regime it is likely to attract less investment.
It is less the tax regime than knowing what its structure is and
having some confidence in its stability so when you are making
your investment decision you can make it. That has been the challenge
in the UK, that there has been a series of tax changes which would
indicate less stability and confidence in the future for an investor.
Q56 Mr Bone: I am struggling in this
area, Chairman. I think one of your competitors stated over the
weekend that prices are going to be high for a while, but then
we would expect to see a dramatic fall. You have not been quite
so forthright in that. I find it hard as a businessman to think
you are not really worried about the end price, you are worried
about the tax regime. I find that extraordinary. I would be much
more concerned about what my price is to my cost. You did say
that we are in a cycle of prices, so I assume that if we are at
the top, because it has gone up from ten to 60, the cycle means
it is going to go down over the next few years, which is hopefully
what you are saying.
Ms Luxbacher: We have said that
we would anticipate we are at the top of the cycle and it is likely
to go down but we have not made any predictions about where it
might go or when it might. When you look at the adequacy of both
oil and gas reserves in the world, continued technology development
and competing energy sources over the long-haul, you would say
that it should cycle.
Mr Bone: Go down.
Q57 Chairman: And up.
Ms Luxbacher: Go down and up again,
a cycle. Historically it has cycled.
Q58 Chairman: It is extraordinary
that $10 a barrel and $60 is all the same when you decide to invest,
that seems odd to me. Presumably in the long run as fossil fuel
reserves do start to run out and we start to see an end to the
cycle, a steady escalation, then the price will drive additional
exploration activity?
Ms Luxbacher: The only point we
were making was you do not do an investment that has to pay out
for 20 years based on today's price.
Q59 Chairman: At $60 a barrel.
Ms Luxbacher: Because we do not
expect, whether today's price is $10 or $60 or $2 gas or $6 gas,
that it is going to stay during that whole period. Somehow we
see it cycling and look at a range of scenarios in evaluating
investment decisions.
Mr Thomas: Can I add one thing
to that because I used to be corporate planning manager for Esso
here in the UK. I remember back in the 1980s that we had a view
at that stage that by now, in the early 2000s, oil prices would
be at over $100 in today's money, and we are nowhere near that.
That was a global view we were taking. What we did as a result
of that was we invested in a number of areas that in the end we
have regretted and they have not been good investments. We have
learned from that. As Robbi has said, the only point I was trying
to make was $6 or $60 today does not mean that we shut off or
build up our investment. We have got to have a long-term view,
and we do have a long-term view.
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