Examination of Witnesses (Questions 260-279)
PROFESSOR JOHN
GITTUS
27 JUNE 2006
Q260 Mr Weir: But political risks
within the country and democratic accountability or the lack of
it, corruption and the low quality of bureaucracy. I just wondered,
we are looking ahead and looking at contracts 10 or 15 years ahead
perhaps with Russia, is it wise to use a snapshot of what is happening
just now when we are looking at some long term contracts?
Professor Gittus: In the Platts
paper the next diagram to the one you are referring to gives some
kind of answer to that question because it stretches out to 2025—the
Chairman is probably looking at that in glorious technicolor.
The answer of course is that if we could all forecast the future
we would be so rich we would not need to sit here talking to each
other, but you have to do the best you can. The people who provide
the business risk databases, but not the insurance database, have
set up calculation routines to try and predict the future, in
much the same way as people try and forecast what is going to
happen with the FTSE and usually make a loss out of it.
Q261 Mr Weir: Absolutely.
Professor Gittus: I have used
their calculation routines to make forecasts for the future and
they do not look terribly helpful. The forecasts that I arrived
at are that, if anything, things will get worse in the Ukraine
before they get better and that they are not going to change very
much for Russia.
Q262 Mr Weir: I understood from your
earlier answer that your main concern about Russian gas supply
was the fact that it came through the Ukraine and Belarus rather
than the situation in the Russian Federation.
Professor Gittus: No, that is
not true, but you could be forgiven for thinking that because
I stopped in the middle. No, the risk for Russia and I am talking
about my databases is about the same as it is for the Ukraine
and Belarus, but if you have anything serious there is a chance
that if Russia sends it then the Ukraine might stop it, you can
see how that might arise: "You have doubled the price of
gas for us, we shall stop you supplying other people."
Q263 Mr Weir: In that scenario then
presumably the insurance risk is greater if it is linked to a
third country like the Ukraine rather than coming over the Baltic
pipeline or whatever.
Professor Gittus: You can calculate
the whole risk. I do not want to be boring about this, but I do
not know if you remember something called Kirchoff's laws from
school?
Q264 Mr Weir: Never heard of it.
Professor Gittus: It used to be
part of physics and it may have disappeared now.
Q265 Mr Weir: That is why I have
never heard of it.
Professor Gittus: It is a way
of answering the question that you have just presented, given
that gas flows through pipes with valves in them of course and
pumps, through all the countries between us and the suppliers,
and all these countries present different political risks, supposing
that you make the step of saying these risks apply to gas and
as you pointed out they apply to all sorts of things then you
can calculate the likelihood that our supply will be interrupted
as a result of interruptions in one of the series of countries,
given that it is coming through this network by several different
routes, so that if one country and one pipeline stops it, all
the other countries in another pipeline the Baltic, say may permit
it to come and so in that case you would still get half your supply
from this distant source. Those are the kinds of calculations
that I have made.
Chairman: Thank you. That leads on to
Roger Berry's questions.
Q266 Roger Berry: Professor, you
say that the most unreliable source of energy is gas piped from
Russia and from Iran.
Professor Gittus: Yes.
Q267 Roger Berry: When we took evidence
earlier this year from Professor Jonathan Stern he made an interesting
comment that concerns about security of sources of imported gas
supply were really all about notions of the `nasty untrustworthy
foreigner'. He said that because—
Professor Gittus: Adjectives.
Q268 Roger Berry: Indeed, but this
is the point, he said there is no evidence from Europe or anywhere
else in the world that imported gas supplies have been or are
necessarily likely to be less secure than supplies of domestically
produced gas. Is he wrong in your view?
Professor Gittus: No, he is right,
he is right so far, but we are talking about the future and if
you were asking me to comment on oil then of course the answer
would have to be different—I have just summarised what happened
with oil. What I am saying is this, the political and business
risk associated with the oil supply countries is, broadly speaking,
the same as it is for the gas supply countries. They are not the
`point one per centers' like we are that we were talking about,
they are the `one per centers and one', they are all like that.
I am not being critical, I am being factual, these are the numbers
that come from business experience. What I am saying is that we
run as big a risk in the future of having our gas supplies interrupted
from those gas-supplying countries as we have actually experienced
in the past, every eight years actually, of having oil supplies
interrupted from the oil supply countries. It does not go against
what Professor Stern said, but it is a forecast, not an observation
of what has been happening with gas in the past.
Q269 Roger Berry: You admit it is
a forecast based on risk factors that are not specifically energy
sector related, they are general business and political risk factors.
Professor Gittus: I have related
them to the oil sector. I have shown in the work I did for BNFL,
which is on my website and summarised by them in their proof of
evidence in 2002, that the frequency with which oil has been interrupted
does correlate with the business risk parameters.
Q270 Roger Berry: But we are talking
about gas.
Professor Gittus: You asked me
the question about energy and I said that in the oil sector of
energy they are correlated.
Q271 Roger Berry: We are talking
about gas; how do you respond to Professor Stern's view that the
problem of security of supply in the UK, the problem that was
observed earlier this year, the big issue was not the Ukraine
it was the fire at the Rough storage facility, and his point was
that it is additional gas storage that is necessary for security
of supply, he is far less concerned about imports of Russian gas.
He also made the observation—and your comment on this would
also be welcomed—that Russia needs income from gas exports
to Western Europe just as much as we need their gas.
Professor Gittus: There are three
answers to that. First of all, we have got a lot of oil storage
and so has Japan but both countries in 1974 were seriously deprived
of oil from importers and neither could make it up out of storage,
so we need to have more storage for gas pro rata than we
have storage for oil. We have got hardly any at the moment and
there seem to be more or less no plans to provide any. Some of
your witnesses—because I have read the proceedings of course—have
actually said that they do not think that any special steps should
be taken to provide additional gas storage. Of course we need
more storage, he is right about that, and we need a lot because
we have not got enough oil storage, that was the problem when
those tanks caught fire. That is the main point, he is right.
Q272 Roger Berry: The history of
gas supply is one thing, but you are talking about future risks
and where future risk is based on more general perceptions of
political and business risks: the criteria in figure 2 for example
in relation to the political risks of the Russian Federation.
These are not specific to the gas industry at all and therefore
I am concerned about the reliability of the numbers, but coming
back to the specific question I wanted to ask finally: given that
these risks are based on insurance company data, the risks as
perceived by people who are engaged in international trade, then
surely the market, some would argue, can simply take these risks
into account; therefore, why do we not just sit back and let the
market do it?
Professor Gittus: That is what
happened in Japan.
Q273 Roger Berry: Is that the right thing
to do?
Professor Gittus: No, because
what they did was to wait until they had been economically disabled
by a lack of oil supplies in 1974 and only then decided to build
nuclear power stations, given that it has taken 30 years to build
enough nuclear power stations, at the rate of about one and a
half a year, to generate 35% of their electricity. That is no
good at all, that is a kind of business cycle response in which
you wait until you have been punished before you start doing the
right thing. What you have got to do is what we are all trying
to do actually—what you are trying to do and what I have
tried to do—make the best forecasts that you can and act
on those. You say you are bothered about the risk parameters but
so am I, they are very uncertain. As a source of prediction they
are very uncertain, but they are better than adjectives.
Q274 Roger Berry: Numbers are not
necessarily better than adjectives if the numbers are not derived
in a robust manner, but my very final question, if I may, Chairman:
as I understand it then your low carbon scenario, your view presumably
is therefore that given the market cannot deliver this solution,
with all the insurance, with Lloyds Bank and all these people,
the market cannot deliver—
Professor Gittus: Not Lloyds Bank,
Lloyd's insurance market.
Q275 Roger Berry: Forgive me, Lloyd's
insurance.
Professor Gittus: They are very,
very different, they are the biggest insurance market in the world.
Q276 Roger Berry: Yes, but they are
clearly just not good enough to be able to send the right signals
to the private sector to give us a private sector solution. Am
I right in understanding that you are saying that because the
markets simply cannot solve this problem, the Government should
pick winners, should go along with your view about the balance
between the various sources of energy supply is based on your
assessment of the risks and it is clearly a Government responsibility
to make that decision, is that right?
Professor Gittus: No.
Q277 Roger Berry: If it is not the
market and not the Government, who is it?
Professor Gittus: What I believe
is that we should do it in the way the Finns are doing it, and
that the Government should take part of the financial risk of
an overspend in the building of a fleet of, say, five nuclear
power stations in this country. The Government should be recompensed
for taking that risk, just as if it was an insurance company,
by the payment of a premium.
Chairman: We might have a chance to come
back to some supplementaries, but let us finish off with the gas
issues and we might have time to explore some of your views. Mark
Hunter's question flows from the Russian issues and we will come
back to that, Roger, at the end.
Q278 Mark Hunter: Can I ask you,
Professor Gittus, in your view would Gazprom be any more reliable
a source of gas if it actually owned gas supply companies in Western
Europe with a need to guarantee regular supplies to both domestic
and industrial markets?
Professor Gittus: If who owned
it, sorry?
Q279 Mark Hunter: Would Gazprom be
more reliable as a source if it actually owned gas supply companies
in Western Europe?
Professor Gittus: I do not know,
I cannot answer that.
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