Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 240-259)

PROFESSOR JOHN GITTUS

27 JUNE 2006

  Q240  Mr Hoyle: So you have calculated just enough resources.

  Professor Gittus: I very much doubt whether the lives of the existing stations will be extended. One or perhaps two might.

  Chairman: We have heard conflicting evidence on that point. We will move on to the mainstream subject that we intended to discuss today, first of all the question of risk which you have already touched on in your initial answer. Peter Bone.

  Q241  Mr Bone: These are a series of questions about your calculations of business risk, but just before I go to that, you are coming from a nuclear background.

  Professor Gittus: Yes.

  Q242  Mr Bone: And an insurance background. You discussed insurance premiums for overseas contracts, but of course you could always use a letter of credit and then you would not need any insurance premium, could you not?

  Professor Gittus: The risk does not disappear if you use a letter of credit, it is being shouldered.

  Q243  Mr Bone: We will disagree.

  Professor Gittus: You cannot possibly disagree with that.

  Q244  Mr Bone: I can. I will go from my basis of chartered accountancy, you go from your basis of insurance.

  Professor Gittus: I have done both.

  Q245  Mr Bone: Then you have a great advantage over me; I have only run a plc and only been a chartered accountant. Could you explain to me how your journey from the nuclear and the insurance industries enable you to calculate energy risks? How did that journey all come together?

  Professor Gittus: Really almost by accident. The underwriter for nuclear risks was asked to set up another syndicate to insure political risks and, more or less at the same time, the DTI announced a one day conference on energy—this was in 2001—and asked me if I would give the first paper of the day summarising energy forecasts globally. So I did this and I encountered statements that had come to be made—verbal statements—that this country was going to rely on Russian gas—I am quoting now from five years ago—and that any fool could see that that was a mistake because you would not rely on it. I am paraphrasing, but that is what people were saying. I said to my colleague, you are now insuring political risk, how does it differ between Russia, for example, and the Middle East from which we get our oil and this country, and Canada from which we get uranium and whatnot? He was able to answer it immediately because of course he had had to read it up in order to found a profitable syndicate, so that is how I got into it. I then discovered that there are big databases, and I referred to them in talking to Judy Mallaber, and that there are also comparable databases on business risk, nothing to do with insurance, but the kind of things which you must have used actually, running a plc, to decide just how risky it was to trade with different overseas countries. Out of interest I compared these databases which you can do very easily now, and I found that they correlated; the difference was that the business risk database used arbitrary numbers and I put some of them in that Platts article, and they were numbers between nought and a hundred for risk, whereas of course the insurance premiums were an actual measure of financial risk, increased by a factor to make sure that the insurers would make a profit. That is how I got into it; that is how I got steeped in it.

  Q246  Mr Bone: Talking about the business risk and the insurance parameters and their calculation, you say there are these databases but how are they calculated in the first place?

  Professor Gittus: The insurance risk is easy: all that has happened there is that people look at their accounts at the end of the year and they say things like for insuring your financial risk when trading between, I do not know, France and Portugal we chose 0.73% premium and we have made a loss, had we charged one and a half% we would have made the 18% profit that we like to make, so next year that is what we are going to charge. That is how the insurance database works, it is just pragmatic. The business risk databases again are based on inputs from businesses around the world which are served by firms like RBC, for example, which is a risk-based capital advisory consultancy. They apply this, many, many companies around the world on business risk and, in part exchange for giving them advice—they inevitably charge them of course—part of what they get for it is the actual business experience of their clients, fed back to the centre—it is like a mutual society—and that is how that works.

  Q247  Mr Bone: If I am following correctly, these business risk and insurance parameters are based really on all trade, it is not specific to the energy sector.

  Professor Gittus: No.

  Q248  Mr Bone: That is correct, is it?

  Professor Gittus: Absolutely correct.

  Mr Bone: Thank you.

  Q249  Mr Binley: I have been a senior manager in publishing and database building, but do be gentle with me. I want to move on to the comparison you make in terms of risk between Russia and other suppliers of gas because that is an important area of knowledge. Can I ask if you have done a similar analysis for the other countries from which the UK may source gas in the future—just to name a few, Norway, Netherlands, Algeria, Qatar, Egypt, Malaysia, perhaps even west Africa. If so, what does your analysis show in relation to those?

  Professor Gittus: Yes, I have done all those and the databases contain numbers for all the countries; if you set up this kind of thing it is as easy to do it for everybody as for one or two. It shows that Algeria is risky, Norway is not, Qatar is not as risky as Russia, but there is a risk there and it is riskier than Norway. Those are the kinds of comparison.

  Q250  Mr Binley: So they are the sorts of business judgments that you would make when you were talking to any supplier, that is the point I am trying to make.

  Professor Gittus: Yes.

  Q251  Mr Binley: It seems to me that your judgment is that one of the most risky of deals of this kind is with the Russian Federation, is that so?

  Professor Gittus: Yes, but partly because at the time when I did the analysis it did seem that most of the Russian gas supplies would come to us by pipelines that pass either through the Ukraine or through the Ukraine and Belarus.

  Q252  Mr Binley: Now you are looking at the Baltic.

  Professor Gittus: Now of course there is an alternative route. You can see the problem, the Ukraine—

  Chairman: We are going to hear about the Russia/Ukraine in detail in subsequent questions so we will deal with that with other colleagues. On a general broad overall—

  Mr Binley: I would just like to ask about the Baltic because that does—

  Chairman: We will do that later, we will come back to that in other questions.

  Mr Binley: You have been gentle with me, thank you for that.

  Q253  Chairman: What is the risk of all these countries going wrong together?

  Professor Gittus: That is an issue that I address. You might say zero but then you have got to think of OPEC and you have got to look back to 1974. In 1974 Japan was almost ruined by the fact that supplies of oil from OPEC countries had dried up on political grounds; their GDP had been increasing by an average of 8% per year until then and in that year, instead of increasing by 8% it fell by 1%. That was the start of the Japanese nuclear programme, that is when they decided to have a very significant nuclear contribution to generation, and they were receiving oil from many different countries, but their supplies dried up. The question is, is the same kind of thing likely to happen with gas? It is no good answering that question with sweeping gestures and saying no because the future of this country actually depends very largely on the answer to a question like that, so we have to address it very seriously. Of course, we do not know the answer to it, but we do know that gas suppliers do liaise and in papers that I have not published but which are on my website, again work done for BNFL, I have indicated the kinds of liaison that do exist. It is not a kind of gas OPEC but it could be the seeds of it and one can see it could be of interest to gas producers to talk to each other. It is not going to be zero, therefore, you cannot say "well if Russia stops it, Qatar will keep on selling us tanks full of it" because there is always the possibility that they may find it in their interest, for a broad range of reasons, some of them national security, to follow suit. I have made some estimates of the likelihood because I am in the business of producing numbers and not adjectives and those guesses underpin part of my Platts paper.

  Chairman: Thank you, that was a helpful answer. Lindsay Hoyle has a supplementary before I bring in Mike Weir.

  Q254  Mr Hoyle: Obviously, you do a lot of the risk analysis about all these countries and security of supply. What have you given to the gas and oil reserves in the Falklands and that being used by the UK, maybe as an alternative to nuclear?

  Professor Gittus: The gas reserves where, I could not hear?

  Q255  Mr Hoyle: The Falkland Islands.

  Professor Gittus: Yes, that is a possibility.

  Q256  Mr Hoyle: Have you done any risk analysis because it is outside OPEC, there are huge reserves and obviously in a favourable position as an overseas territory of the UK.

  Professor Gittus: How much do they supply?

  Q257  Mr Hoyle: The claims are that there are huge reserves there.

  Professor Gittus: How much are they supplying?

  Q258  Mr Hoyle: None at the moment, that is what I am saying, so the UK is the oyster.

  Professor Gittus: I could ask you the same question about the Alberta oil sands.

  Mr Hoyle: I do not think it is an overseas territory though.

  Mr Wright: It should be.

  Chairman: That is definitely outside the terms of this inquiry. We are now going to look at Russia in a little more detail. Mike Weir.

  Q259  Mr Weir: I was interested, Professor, in what you were saying earlier about political risk and I noticed that much of the argument you include when dealing with the Russian Federation is not directly related to the gas supply itself.

  Professor Gittus: No.


 
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