Examination of Witnesses (Questions 60-79)
MS ROBERTA
LUXBACHER AND
MR NICK
THOMAS
13 JUNE 2006
Q60 Mr Wright: Just very briefly
and quickly, in terms of your ability to look to the future for
investment, how does the Government's view on, for instance, the
energy needs about gas-fired power stations I know there are a
number of them in the pipeline at the moment impact on your policy
for extraction of gas?
Ms Luxbacher: It depends not so
much on the Government's view. What we would consistently argue
for is in any country's energy mix there should be a diversity
of supply, the fuel mix should be diversified and the fuel sources
should be diversified to provide the greatest security. At the
same time we would argue for a level playing field for those fuels
to compete against each other as the best economic choice. If
the Government is simply stating a preference, we are investing
based on our outlook for the environment, the regulatory structure,
the legal structure, the fiscal structure that exists and the
investment opportunities that are available to us.
Q61 Mr Wright: Obviously what we
were always worried about was another dash for gas, but if after
the energy review the decision was that we were going to build
nuclear reactors all over the place and all the plans for gas-fired
power stations were cancelled that would impact on your ability
to—
Ms Luxbacher: It would impact
on our outlook but we would argue against the Government incentivising
one fuel versus the other, that would result in a non-optimum
energy mix. We would rather a level playing field. If the Government
had that policy while at the same time saying it was improving
permitting processes, which we would certainly be in agreement
with, planning and permitting while allowing due process but at
the same time making those processes more efficient for all fuels,
that would be very sensible.
Q62 Mr Weir: Earlier you gave a figure
of something like 70% of the world's oil and gas being within
transportable distance of the UK.
Ms Luxbacher: Gas reserves, yes.
Mr Weir: Presumably that comes from a
range of other countries and regulatory regimes. I wonder how
the UK's regulatory regime and taxation regime compares with other
similar nations in Western democracies as opposed to anywhere
else.
Chairman: That was a question on my mind
and it builds on a question that Peter Bone is going to ask now.
Take Mike's question as the first half and perhaps Peter's as
the second half. Is that sensible?
Q63 Mr Bone: You are joking a bit
when you say you are worried about Gordon Brown and a change in
the tax regulation. You are going to invest in Iran, Venezuela
and Russia and surely those are the countries that will give you
bigger problems. If that is so does that not benefit countries
like the UK, which is stable, and we will be more likely to get
our fields developed rather than Russia, Venezuela and Iran?
Ms Luxbacher: When we are evaluating
an investment decision we are taking into account all of the risks
and part of that is reservoir risks, the opportunity that is there,
how likely you are to be successful, what the economics are. Again,
the issue that the UK has, as Nick has said very well, is it is
a mature basin, the discoveries are not large, they are technically
challenged, so you need a stable democratic country but at the
same time—
Q64 Mr Bone: Can I just interrupt
at that point. How would you weigh up what you have said there
against the risk of investing in Russia, say?
Ms Luxbacher: We are investing
in Russia. We are a very large investor in Russia and have just
brought on, in fact, our large project, our Sakhalin-I project
that started up last year in Russia. Again, you are looking at
the reserves, the size of the prospect, the fiscal terms you can
negotiate, and evaluating that against how you see the regulatory
and legal regime that you are operating in. It is all part of
the risk equation in terms of making an investment decision. That
is what we are in the business of doing, developing oil and gas
reserves around the world to serve energy demand. It is a risk
decision.
Q65 Mr Weir: What weight do you give
to these factors? We have Bolivia which has recently nationalised
its gas and Venezuela has some tensions between the government
and the United States, and Iran where there are obvious tensions.
I would have thought anyone looking at extracting gas and oil
in these countries would give much higher weight to being able
to extract gas and oil in a stable democracy even in marginal
fields than in a very risky situation in some of these countries.
I just wonder how you weight that.
Ms Luxbacher: There is not a weighting,
it is not a formula. It is looking at all of the factors that
are involved and weighing them, and in some countries you can
make the assessment.
Q66 Mr Weir: From that point of view,
if you look at security of supply for the UK surely you must look
at security of supply for your company being able to supply its
customers from various places.
Ms Luxbacher: We do, and for our
shareholders we look at the investments around the world where
we are investing. Part of what we have is a diversity of investment,
a very large portfolio, a lot of investment opportunities we are
looking at at any one time, some of which, because of conditions
in a country, or the technology has not advanced, or any other
reason, mean we may not be developing at any point in time but
still are working with the expectation of developing at some point.
Chairman: Can we bring up another risk
regulatory issue which Peter Bone wants to explore on this. This
is a very key area.
Q67 Mr Bone: This is fairly technical
and I suppose we are not asking about generalisations here, but
Ofgem's proposal for gas producers to provide real-time information
about the availability of gas supplies to traders in the wholesale
gas market sounds very good from the competition point of view,
and that is what we have all been banging on about, but then lo
and behold a nice stable country like Norway apparently, from
press reports, is really uptight about this and might decide not
to send us any supplies. What is your view on that? Do we have
to row back on competition to satisfy even Norway?
Ms Luxbacher: I really cannot
address what Norway may or may not choose to do other than to
say Norway as a supply country needs countries to consume its
product, so there is an interdependency there that is helpful.
On the real-time information, one of the most interesting things
about real-time information is it always sounds pro-competitive
to have more information but sometimes the issue the producers
have with it, and I think Norway has with it, is that the information
can be too detailed and cause the market to become more volatile
and producers could be liable for information where normally they
are simply working at a problem, it is too detailed and is not
really pro-competitive and could cause market reactions. UKOOA
came out with a statement expressing the concerns that producers
have. It is one of the interesting dilemmas on information and
it is one place where we do not necessarily think it is helpful
to the market, and we are very much for transparency in reporting.
Q68 Mr Bone: So Ofgem may have got
this one slightly wrong?
Ms Luxbacher: We think they have
gone a bit too far.
Q69 Chairman: This is very interesting.
We take a very chauvinistic view when we assume that we have the
most stable regulatory and fiscal regime in the world and everything
is marvellous here, but what you are telling us is there are risks
in the UK environment just as there are in the other markets.
We see those other risks but we do not see our own risks.
Ms Luxbacher: That is right. At
the same time I would say a strong positive for the UK market
is Alistair Darling pointed out that over the next five years
the UK will have some £10 billion of investment for a new
gas infrastructure in storage, pipelines and receiving terminals.
The reason it is attracting all of that investment into it is
there is a recognition that there is a supply gap so there is
an opportunity for new supplies to come into the market, it has
a very attractive liquid transparent gas market where a supplier
can easily come into the market and buy and sell, and the regulatory
structure enables the purchasing of pipeline capacity and so forth
to be very transparent also. That is a positive in terms of what
the UK market has done, it is a very open and competitive market
that has attracted gas supply to it. I would not want to overstate
the risks on the other side either, there is a balance there.
Q70 Mark Hunter: I would like to
put to you a few questions about the diversity of supply at the
moment. When discussing the need to ensure diverse sources of
supply of LNG to the UK, you have mentioned in your paper as exporters,
Norway, Qatar, Russia and offshore West Africa. Given that we
are already importing gas via pipeline from Norway, and we could
do the same from Russia, how much does LNG really add to the diversity
of supply?
Ms Luxbacher: Significantly. Of
course, we are a major supplier with our Qatar Gas II project
where the terminal will be starting up late 2007 with supplies
coming in in very early 2008 to bring two billion cubic feet a
day over two start-up periods into the UK market. That is coming
from Qatar. What is happening with LNG is it can bring new supply
sources that cannot be pipeline connected, so it very much adds
diversity because it adds a completely different country bringing
gas supply essentially to the UK.
Q71 Mark Hunter: If I can move on
but on the same theme. You are optimistic about access to LNG
reserves, it seems, but a recent news article suggested that with
rising demand for LNG, concerns about stability in the exporting
countries and the desire by exporters to obtain better returns
by converting the gas to higher value products there could well
be a shortage of LNG before long. What would your response be
to that suggestion?
Ms Luxbacher: As I said, there
are sufficient gas reserves, as reported by the Oil and Gas
Journal, to meet rising gas demand on a worldwide basis. In
order to attract those LNG supplies into any market the important
thing is to have a very open, competitive market with a transparent
regime that is competitive, therefore, on a worldwide basis. What
we will see is LNG supplies being enabled, since it is in ships
instead of pipelines, it can move to different markets, so it
is having a market similar to the one the UK has that is competitively
traded and, therefore, can compete on an ongoing basis for LNG
supplies. It sends out price signals that signal when the market
needs additional supply.
Q72 Mark Hunter: Are the concerns
about shortage of supply overstated or just completely misplaced?
Ms Luxbacher: You talk about the
short-term and the long-term. Certainly over the long-term there
is adequate gas supply. These projects are developed over a number
of years, so as projects come on they come on in chunks, steps.
That is part of what contributes to cyclical price movements,
that supply comes on in steps as opposed to smoothly as demand
moves.
Mark Hunter: For the foreseeable future
you are satisfied that there are sufficient reserves.
Q73 Chairman: Can I just ask you
to qualify that. There was a very interesting article in the FT
which drew attention to a series of problems with individual countries
and quoted Frank Harris, Vice-President of Global International
Gas at Wood Mackenzie, who said "If you ask what the three
biggest issues of LNG are, I would say supply, supply, supply".
You do not share that view?
Ms Luxbacher: Not over the long-term
because there are adequate gas reserves.
Q74 Mark Hunter: What is long-term
to you?
Ms Luxbacher: Long enough to develop
a project.
Q75 Mark Hunter: Give me something
to work on. What is long-term in your industry? Do not say it
is the opposite of short-term!
Mr Thomas: Can I come at it from
a different way. If I can give you an example: in the Qatar field
the gas that we have is coming from the largest non-associated
gas field in the world and it could supply the UK demand fully-assuming
we had the projects in place to do it, and that is not the intention-for
250 years. It is a huge gas field. The terminal that we are building
in west Wales, South Hook, to take product in will have the capacity
to provide, at current rates, 20 per cent of UK gas supplies.
This is a substantial new supply source for the UK and it is not
the only project that is going ahead at the moment, as you are
probably aware.
Q76 Mr Weir: I would just like to
ask on LNG. You talk about diversity of supply as part of security
of supply but it is different from piped gas in the sense it can
be easily diverted in many ways, as after Hurricane Katrina hit
the Gulf of Mexico supplies that were destined to the UK were
diverted to the United States, so how much additional security
of supply does LNG give the UK?
Ms Luxbacher: Let me answer that
in two ways. First I will talk in general and then I will talk
about our LNG project. As long as the UK has an open competitive
gas market that is sending out transparent price signals it will
compete effectively on a worldwide basis for any LNG supplies
to come into it. That is really what you would want so it can
be competitive and attract supplies into it. Our project that
we are building, the one Nick and I referenced, is an integrated
project, it has supply behind it, it has liquefaction trains being
built in Qatar, and ships, and the terminal, and is fully integrated
into the UK market. Our intention after doing all that investment,
particularly in the terminal which is close to $1 billion, which
would be about £0.56 billion pounds, would be to fully utilise
that terminal. At the same time the State of Qatar and ourselves
would not be fully utilising or protecting their resource if they
were not also responding to price signals periodically elsewhere.
We would expect over the life of that terminal that the supply
in it might fluctuate some; not much would be our expectation
but it would depend on world conditions at the time. Obviously
if the UK market had more than sufficient supplies coming into
it, its price signals would indicate that and there would be price
signals elsewhere that would indicate another market had greater
need.
Q77 Mr Weir: If the price signal
that you keep referring to coming from the United States is you
can get much more money here for your LNG because of particular
circumstances, the hurricane in that case but it could have been
something else, is there not a natural tendency, whatever investment
there is, to divert that gas to the market where you can get the
highest price for it?
Ms Luxbacher: In addition, cargoes
do not typically divert at short-term notice. We are assuming
with the investment in the terminal that when you make a diversion
decision you have to make a decision to leave capacity un-utilised
and there is a lot of cost in that. There is a hurdle to get over
before a diversion takes place that also goes into all these economics.
You are right, LNG does not guarantee it but neither do pipeline
supplies always, they can be connected to dual markets. The more
important security of supply indicator is how the marketplace
itself works.
Q78 Mark Hunter: This is my final
question for now. Part of the process of the liberalisation of
the UK gas market has been the development of spot and forward
markets, in contrast to elsewhere in Europe, of course, where
long-term supply contracts do dominate. Many of those from whom
we would import gas in the future are state-owned or, in effect,
state-run, and these companies prefer the stability of long-term
contracts. Must we tie ourselves into long-term contracts in order
to guarantee secure gas supplies? If so, what effect, if any,
do you think that would have on the UK's liberalised market?
Ms Luxbacher: If I could back
up and talk a little bit about how the market works. I do not
think your question was whether the government should be entering
into long-term contracts for supply. The players in the market
go out and contract supplies on all different bases: short-term
contracts and long-term contracts. The more important thing when
you look at continental Europe and importers into continental
Europe is whether continental Europe eventually gets to a liberalised,
open, transparent market, as the EC is trying to do with enforcing
Gas Directives and furthering the Gas Directives in continental
Europe. If it gets there, and we believe it will over time, and
certainly support it getting there, the whole market the UK is
connected to is a much larger market being served by a whole range
of different contracted supplies. Does that answer your question?
Q79 Mark Hunter: I am not sure it
does. Let me have another go. The basic point I am making is in
most of the rest of Europe there are long-term contracts in place
which helps guarantee their security of supply. My question to
you is does Britain need necessarily to tie itself into long-term
contracts in order to secure gas supplies?
Ms Luxbacher: The simple answer
to that would be no. For the UK, the important thing is keeping
the market that it has and ensuring that it has an open and competitive
market. If you look at the UK, it is attracting far more investment
than any other market in Europe and it is really the fact that
it does have a market that is open and competitive, where suppliers
have the flexibility depending on the supply demand in the marketplace.
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