Examination of Witnesses (Questions 80-99)
MS ROBERTA
LUXBACHER AND
MR NICK
THOMAS
13 JUNE 2006
Q80 Mark Hunter: So we can enjoy
the same security of supply without necessarily having the long-term
contracts?
Ms Luxbacher: Yes.
Q81 Mr Bone: I was encouraged by
your answer but basically the problem lies in the fact that we
have a number of our EU partners who have refused to liberalise
their markets. We have got this year where the price has been
much higher in this country but we did not see supplies coming
over to this country from Europe to reduce it because they were
tied into state-owned monopoly contracts. Really our concentration
as a Government should be on the EU doing what it says it is going
to do.
Ms Luxbacher: I would agree in
terms of focusing on where the EU is trying to get to. Commissioner
Piebalgs came out with a statement on their intent to continue
to move forward and getting the two Gas Directives fully in force.
Q82 Mr Wright: This question follows
on and is connected with that. It is touching on the infrastructure
and looking at the project that you have got at Milford Haven
with Qatar Petroleum in terms of the $13 billion as part of that
particular project.
Ms Luxbacher: The fully integrated
project.
Q83 Mr Wright: We have heard from
other witnesses as well about the case that there is enough infrastructure
for the future to cover our needs for the UK capacity, but what
we did find last year in particular was the Interconnector, although
it was built up to be for the importation of gas that we particularly
need, was the reverse, that in actual fact it was not being used
as importation, it was used for export as well, so it was not
covering our need. What guarantees have you got that the infrastructure
that you are investing in, and the others as well, the Langeled
pipeline and yourself, which probably account for 40% of the UK's
capacity, will be fully used?
Ms Luxbacher: Langeled is another
good example. When the Ormen Lange field comes up, it is targeted
into the UK market. It is another good example where because of
the UK market's liquidity, and being an open and competitive market,
that pipeline and that development was targeted into the UK versus
into continental Europe. Again, it is another good example of
how well the market is working. Once the pipeline has been invested
in, for the suppliers of a project like that to decide to divert
they also have the same investment hurdle to get over before they
do a diversion and then there are probably capacity restrictions
on a lot of the pipeline systems. It all goes back to if the market
is sending out the proper signals and if the continental market
opens up, and it is liquid, all of that should be sending out
price signals so that gas is moving and the prices really equilibrate
throughout those markets. As more and more LNG moves around the
world you should see world gas prices equilibrating too where
LNG is moving to the closer transport markets and rarely diverting
off of that unless there is some major change in the supply and
demand balance.
Q84 Mr Wright: Going on from that,
would the price of the raw commodity of gas affect the infrastructure
investment for the future? If it was to drop, and I doubt that
it will drop, I see it stabilising and probably increasing gradually
over the years, would that have a significant effect on the infrastructure
needs? We have always been told that storage capacity in the UK
is at its lowest, presumably because we had our own gas on tap,
and obviously that did create a problem in the last year, or we
were told it was going to create a problem which never appeared,
and perhaps to a lesser extent this year. Do you see that the
price of gas could forestall some of the infrastructure projects?
Ms Luxbacher: I think there are
two kinds of infrastructure projects. There are infrastructure
projects that are part of integrated production development, such
as our Qatar Gas project, where the terminal, which is infrastructure,
and the ships, which you could argue are infrastructure, are part
of a fully integrated project, so they would go with the same
project investment decision. The Langeled pipeline was part of
an integrated field development. To develop the field we needed
to make sure that it could come to a market and the gas could
be sold. Then there are storage investments that may not be part
of the production but may be based on helping support the swing
in gas demand between summer and winter and an investor would
be looking at that and making their decision.
Q85 Mr Wright: I think, Mr Thomas,
you said the gas reserves in Qatar could keep us in supply for
250 years. Bearing in mind your project at Milford Haven is going
to give 20%, why do you not invest in another plan to give us
another 20%. Is it that you have saturated the development within
the UK?
Mr Thomas: I was just trying to
give you an idea of the size of the reserve that there is in Qatar.
Obviously we are very cognisant of all of the other developments
which are happening here in the UK: Langeled has been mentioned,
Statfjord Late Life, there is another LNG terminal half the size
of our project in Milford Haven as well, BP's Isle of Grain as
well as extensions to the Interconnector which increase capacity.
A lot of additional capacity is coming to the UK.
Q86 Mr Wright: Do you foresee that
it will be up to 100% capacity or do you think it will be above
the 100% capacity eventually?
Ms Luxbacher: It all depends on
where demand growth really goes. On current demand projections
there is sufficient capacity being built to satisfy that demand.
Q87 Chairman: Talking about storage,
this morning we heard from Dieter Helm that one of the things
we needed in the energy market was strategic gas stocks, much
as you have strategic oil stocks. What is your view of strategic
gas stocks as a legislative requirement?
Ms Luxbacher: We think the market
should decide. Storage in the marketplace should be a marketplace
decision. When you have strategic gas stocks it interferes with
investment decisions that the investors might be making in the
marketplace. We do not think that should be necessary. If the
market is working appropriately and if the permitting and planning
process is sufficient—
Q88 Chairman: If.
Ms Luxbacher: If, yes. Those are
the things where we say Government should really be focusing.
If those were happening then the market would be building the
appropriate storage that was needed.
Q89 Chairman: Let us look at something
in a bit more detail, South Hook. I was intrigued that in your
memorandum you say: "The project has become competitive through
access to a large gas resource in Qatar, technological advances.."
Can you just explain in detail why it has become more competitive
now?
Ms Luxbacher: Yes. It goes with
something I said earlier about technology. When we first proposed
this project and announced that we were doing this project much
of the market was very surprised because it was the first project
coming from the Middle East all the way to the UK, which in the
past had not been viewed as something that could be economic.
The reason it is economic is because when this project is built
we will be building the largest liquefaction train, so you get
economies of scale there and that reduces your cost. The ships
are proprietary technology that we have developed and they are
the largest ships ever built, one and a half times the size of
the conventional ships that have been built. The terminal is also
larger. What we have got along every step is economies of scale
that have dramatically reduced the cost and made supply cost competitive
into the UK when looking at other sources of supply. That is one
of the key criteria for us, looking at other sources of supply
and saying can it be cost competitive.
Q90 Chairman: Those are things that
apply to any location in the rest of the world. Is there anything
specific to the UK that has made investment more competitive?
Ms Luxbacher: Again, it was looking
at the marketplace, recognising that the indigenous supply was
declining and there was a supply-demand gap opening up, so new
supplies were needed into this market. Secondly, looking at the
UK market itself, this is a liquid gas market, transparent pricing,
and recognising that the gas could be readily sold into the marketplace.
In some markets that do not have a readily available gas market,
the time it takes just to contract—before you do the project
you have to develop a long-term contract—can take a number
of years and delay project development. This market enabled really
very rapid project development.
Q91 Chairman: That is helpful, but
I thought you had got a lot of planning difficulties, was that
not the case, local authority planning permission?
Ms Luxbacher: The support of the
local authorities has been excellent.
Mr Thomas: The short answer is
no, we have not had any planning difficulties. There are two planning
authorities concerned, which complicates it. We do have full consent
from both planning authorities and the Health & Safety Commission
consent as well, which is very important from the safety point
of view. At the moment we are about 40 per cent of the way on
in terms of the development of the project.
Q92 Chairman: There are no outstanding
planning issues causing any concerns?
Mr Thomas: There are no planning
issues outstanding.
Q93 Chairman: I ask this because
it is important.
Mr Thomas: I am sorry, let me
correct that. We have gone back for a variation to the original
planning permission on some points of detail. Currently we have
clearance from one of the planning authorities, the Pembrokeshire
Coastal National Park Authority, and we are waiting on planning
permission from Pembrokeshire County Council but we cannot see
any reason why we should not get that. It is just a detailed planning
change that we have made.
Q94 Chairman: The reason I ask is
one of the recurring themes of this Committee's investigation
into the energy sector is difficulties with planning and for gas
storage that is proving to be a problem, is it not, but with your
investment in import infrastructure that has not been an issue?
Ms Luxbacher: Right. We are not
doing anything on storage currently.
Q95 Chairman: I was just wondering
whether you had encountered any problems with the gas storage
applications. Wind farm developments and nuclear power stations
all attract considerable planning issues around them, but that
has not been the case with this.
Mr Thomas: I would like to say
these things do not happen by accident. We spent a lot of time
consulting with local interested groups, held many meetings in
the Milford Haven area and explained to the local population and
the planning authorities exactly what we were proposing and I
think we were able to address most, if not all, of the concerns
the majority of people had.
Q96 Chairman: For example, there
was a report which we had on the LNG Focus website which said:
"companies behind the projects, as well as local authorities
like Pembrokeshire County Council and Pembrokeshire Coastal National
Park Authority still have a nervous wait. They are waiting to
hear whether the UK's Court of Appeal will allow two members of
Safe Haven, a local pressure group, to challenge the legality
of the authorities granting the projects planning permission and
Hazardous Substance Consents."
Mr Thomas: Let me deal with that.
It was a level of detail that I thought I would spare you.
Q97 Chairman: With planning the devil
is in the detail.
Mr Thomas: As I said, we have
planning and we are tweaking part of that in terms of the detail.
A judicial review was sought by some complainants in the area
that the planning authorities and the Health and Safety Executive
had not acquitted themselves fully as part of the consent process.
That is not anything to do with us, it is to do with the planning
authorities. It has been to court twice and the judge has dismissed
it twice. However, there was a technicality in terms of the evidence
of the Health and Safety Executive which means that the court
is going to look at it again. We have always been fully confident
that this is not going to be an issue for us and we are continuing
to invest fully in the site.
Q98 Chairman: That is helpful. I
just want to ask a more philosophical question about Ofgem. They
have got a very difficult job to do in balancing the need to ensure
competition through open access to markets and the information
issues you were discussing with Peter Bone earlier, and allowing
a decent return on your investments. You are looking at a decent
return on your investments as well so there is a limit to open
competition. Do they get the balance right between these two competing
objectives?
Ms Luxbacher: Ofgem are not regulating
our direct investment, they are regulating—
Q99 Chairman: The market.
Ms Luxbacher: No, actually they
are regulating the pipeline system and then the information in
the market. They are National Grid Gas primarily and making determinations
on National Grid and the return that it—
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