Examination of Witnesses (Questions 180-199)
MR MARK
CLARE AND
MR JAKE
ULRICH
20 JUNE 2006
Q180 Chairman: But that is not the
EU, that is Member States fighting the corner for their own national
companies. It is not an EU policy.
Mr Ulrich: Yes.
Chairman: I am sorry, Peter, I rather
interrupted you.
Q181 Mr Bone: That was the point
we were trying to get. Actually we are probably talking at cross-purposes,
you were more referring to EU member countries standing up for
their own interests, which is fine, and that is what I would certainly
argue for, but it came across as though you were implying that
there should be a European Union worldwide super-negotiator.
Mr Ulrich: No.
Q182 Roger Berry: Is there any evidence
that having a Chancellor or a President or a Prime Minister standing
in the background makes any difference?
Mr Ulrich: I have not seen it
yet.
Q183 Roger Berry: That is very interesting,
thank you.
Mr Ulrich: But they are there.
Q184 Roger Berry: But if it does
not make any difference they are wasting their time, are they
not?
Mr Ulrich: If you look at the
recent developments in Germany—this is speculation—the
Germans have been very successful in getting access to upstream
supplies in Russia. As you well know, Mr Schroder has taken
a position on the North European Pipeline Board;not that there
is anything wrong about that, but there does seem to be a very
close tie with the Soviets.
Q185 Chairman: An earlier witness
said that Gazprom was not actually a profit-maximising company,
it quite liked profit but it did not always seek to maximise its
profit on every occasion. It is susceptible to political pressure
as well as strictly commercial pressure, is that your view?
Mr Ulrich: It is probably very
much influenced by politics, yes. I am not suggesting that they
act outside profit optimisation or rational behaviour, but clearly
there does seem to be more political influence.
Q186 Chairman: I do not want to leave
Gazprom quite alone just yet, but I am trying to get the picture.
You are saying, like earlier witnesses told us, that there is
actually plenty of gas out there in the world and although we
have short term problems in the UK and in the long term obviously
all carbon supplies dry up, in the medium term there is not a
gas supply problem.
Mr Ulrich: Not molecules, no.
Q187 Chairman: You told us earlier
that Russia has been a very stable supplier of gas to international
markets; even at the height of the Cold War they never broke a
contract, and in your memorandum you spend quite a lot of time
telling us what we should do to ensure that Russia remains a stable
supplier of gas: diplomatic objectives with Russia, transportation
on reasonable terms, you talk about European companies taking
part in Russian exploration, promoting maximum diversity. Is Russia
a stable supplier of gas to the British market?
Mr Ulrich: Actually, there is
very little Russian gas flowing to the UK market as we speak.
Q188 Chairman: It has not yet, but
in future.
Mr Ulrich: It is a future issue
and there is no reason to believe that they would not supply the
gas. We have not seen any evidence.
Q189 Chairman: The best way to secure
it is to sell them a major gas company in the UK.
Mr Ulrich: That could be one view.
Chairman: That would be one view. As
much as I would like to press that, the Stock Exchange would be
very cross with me if I did so I will not. Mick Clapham.
Q190 Mr Clapham: Mr Ulrich, on the
point that you just raised there, the Russians have been supplying
gas into Europe for many years and one sees that they do sell
and provide security, but could that security be undermined by
competitive forces? For example, we see great demand from China?
Is the future likely to be that the Russians could easily put
their gas east rather than west?
Mr Ulrich: I do not think it is
easily done, but they could do it, yes, they could do it, they
could put more of it east, yes.
Q191 Chairman: It is not easily done
because there is a heavy investment requirement in pipelines.
Mr Ulrich: Heavy investment in
pipelines, rough terrain, yes.
Q192 Mr Clapham: We already know
that there is a gas pipeline of course from Kazakhstan into China
and that could be a way of developing further, which would impact
on gas supplies into Europe.
Mr Clare: We focus very heavily
on Russia and, as we have already said, the Russian supplies coming
into the UK are still very, very small. The projections are that
they will increase over future years but the challenge certainly
for the UK is to ensure that we have diverse sources of supplies
so that means we are much more reliant of course on LNG as well
as on European countries who have adequate supplies today. If
we were to put all our eggs into one particular basket and rely
on Russia I think that would be the wrong thing, but it would
be the wrong thing to rely on Qatar or Algeria. We must have diversity
of supply of gas as well as, probably, diversity of fuel type
supply as well.
Q193 Mr Clapham: If I can just turn
to how we might improve security of supply, as you know, last
winter for example, businesses here in the UK had great concerns
as to whether they were going to find disruptions. That did not
occur, but I note from your memorandum that you use a concept
"standard of supply security" and you think that all
suppliers should have to adhere to certain standards of supply
regarding security. Could you just tell us what standards you
have in mind and how that would actually work?
Mr Clare: Today, in a commercial
sense, all energy suppliers buy the appropriate amount of storage
and gas that they feel they need to get through a particular winter
period, and we measure that on the basis of how cold it is: one
in twenty, one in fifty. The current obligations on suppliers
are delivered through the licence conditions and the fact that
we sign up to a network code, which then effectively places an
obligation on us to ensure that we meet the requirements to supply
our customers. What we are envisaging here is a situation where,
because we believe all suppliers currently do this for good commercial
reasons, there is actually an obligation placed in the supply
licence to ensure that all suppliers act rationally and as they
should to ensure that they have the gas and the storage to supply
their customers through a certain winter, whether that is a one
in twenty winter, that needs to be defined. We believe there is
a role for Office of Gas and Electricity Markets to ensure that
all suppliers actually meet that obligation—today that does
not exist—and I suspect there should be transparency of
that process as well, as there is transparency in the rest of
the gas and electricity infrastructure and network. Finally, we
believe there is an opportunity to extend this from just domestic
customers to non-domestic but firm customers—here there
is a guaranteed supply contract signed with non-domestic customers—and
we think that that would then create the right environment such
that companies act properly and rationally, that there is transparency
of what they have done and if there are concerns, for example
about demand being there for storage in the future, then as a
result of this it would be very clear what that demand would be
for this winter and winters going forward.
Q194 Mr Clapham: From what you have
said you envisage a situation of transparency where each supplier
would have to indicate to the market the kind of long term contracts
for gas that they have, but would that not at the same time impact,
for example, on the wholesale market, because you could have a
situation where a particular gas company may not have the long
term contracts that it is able to supply its customers from the
wholesale market.
Mr Clare: It would be perfectly
acceptable if companies have a mix of different solutions to a
cold winter and it may well be fuel-switching in their power plants
as we saw last winter, so companies switching from gas to oil.
It may well be interruptible contracts: British Gas has a substantial
number of interruptible contracts that it can interrupt in these
very, very cold periods, but it would have to be on a basis, I
guess, very much as a going concern statement from any plc as
constructed that there are adequate resources there to meet the
requirements. The concern must be that there is not currently
enough visibility or, I believe, the right incentives to ensure
all companies act as they should and therefore I believe that
this would be a step in the right direction to ensuring those
supplies are properly in place, certainly for next winter and
probably beyond, for those firm customers including domestic.
Q195 Mr Clapham: Just turning to
the issue of Europe, for example, if the provisions that you advocate
the `use it or lose it' provision had actually been in play last
winter, do you feel that it would have had a greater impact on
the use of the interconnector and LNG and therefore may well have
provided a supply and a feeling of security to businesses in the
UK?
Mr Clare: In terms of `use it
or lose it' we are in favour of those sorts of provisions, certainly
on the infrastructure where we can apply them, and that probably
focuses on the LNG terminals and the pipelines. The issue we have
with continental Europe is that the bottleneck is not within that
infrastructure, it is onshore in Member States. Today we have
no visibility as to whether there is capacity or whether that
capacity is being hoarded contractually, and without that we obviously
cannot tell whether `use it or lose it' would work. In fact, until
we get transparency of what is happening in continental Europe
with their storage facilities and their major transportation plant
then it is very, very difficult for us to see how that would assist.
We do feel very strongly that if there is one thing that we could
do to help improve the flows of gas from continental Europe, it
is to bring to the market information which almost certainly exists,
controlled by the companies that own the storage or Member States
where they are state-owned companies. That would help quite substantially,
and then perhaps the next step is to say there is physical infrastructure,
companies are able to book that infrastructure on an open market
basis and if there is hoarding then `use it or lose it' provisions
would ensure that those contractual bottlenecks are removed.
Q196 Mr Clapham: What has the European
Commission's response been to your `use it or lose it' concept?
Have you had any connection at all with the Commission?
Mr Clare: I do not think this
has been our prime area of focus with the Commission, to be honest,
and I am sure you will know that we have been very, very vocal
about the European market and how it has not worked until now.
Our focus has very much been on trying to ensure that the directives
that should have been implemented in 2004 are implemented fast
so that we do get third party access to the transportation networks,
so we have the same rights to book capacity as every other user
of those networks and that we do get independent regulation because
we think that independent regulation with teeth, as we have had
in the UK, will enable those networks to be opened up much more
substantially than they have been. Of course, more recently, the
Commission should ensure that we do not see mergers occurring
between large companies in continental Europe that could effectively
work against the opening of the markets and competition. Those
are the areas we have really focused attention on.
Mr Ulrich: The EU is sympathetic
to `use it or lose it' on new pipe that transits Member States,
they have been fairly open in support of that, and also for infrastructures
such as LNG terminals. They have turned that over to the Member
States under their jurisdiction, but the EU is supportive.
Q197 Mr Clapham: You are satisfied
that the European Commission is now determined to open up the
European gas market?
Mr Clare: There are a number of
signals, which we are very pleased have now occurred, and these
are the investigations that are going on, specifically the dawn
raids. Our assumption is that they would not have occurred unless
there were real questions that needed to be answered. Of course,
the timing is the issue for us; from a UK perspective what we
need is action taken very, very quickly to help us through the
next winter. The reality is that other than providing transparency
of information there is probably very little that the European
Commission can do that will necessarily help us this winter, but
as a result of the actions being taken there is very much, for
us, a focus on ensuring that we deliver those directives and that
we deliver against the unbundling push and momentum that is now
building. As I say, we focus on ensuring that we do not see companies
merging and blocking the market.
Q198 Chairman: Before I bring in
Lindsay Hoyle, can I just press you a bit more on this? Your memorandum
is very helpful on this point, very helpful indeed; twice you
emphasise the need to fully liberalise the European gas market
and you put a cost this year—it is a bit lower because you
say you have absorbed some of the costs—of £186 per
household as the estimated cost of non-liberalisation of the European
gas market. I think everyone on this committee agrees that we
need to achieve liberalisation of the European gas market, but
is it realistic in any short or medium timescale? Is it going
to be achieved? You talk about dawn raids and we were impressed
when we went to Brussels a month ago at the determination of the
Commission to take action, but it is a very, very difficult nettle
to grasp, is it not, and actually achieve something positive?
Mr Clare: I agree, and clearly
we should have full competition to the domestic customer in 2007.
Our honest view is that that is unlikely to be achieved as a target,
but I think our resolve should be to deliver the original directives
as fast as is possible. We are seeing some action being taken
and while you could argue that we could clearly have preferred
that action to have been taken some time ago, because a lot of
these issues would have occurred—
Q199 Chairman: How long ago?
Mr Clare: If we were trying to
get the directive in 2004 opening the business markets then it
probably should have been happening five years ago, but I guess
we have to recognise that there is a real drive in the Commission
to now tackle these issues with vigour and we have to be very
pleased about that, and think the UK government has also engaged,
largely as a result of the issues last winter and escalating prices.
As much pressure as we can continue to put through the UK Government
and as individual companies will only help in resolving this issue.
I fully agree; it is going to take longer than was ever envisaged.
Chairman: Thank you, that is helpful.
Lindsay Hoyle.
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