UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1123-ii
House of COMMONS
MINUTES OF EVIDENCE
TAKEN BEFORE
TRADE AND INDUSTRY COMMITTEE
UK DEPENDENCE ON GAS IMPORTS
Tuesday 13 June 2006
DR ROBERTA LUXBACHER and MR NICK THOMAS
Evidence heard in Public Questions 42 - 106
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Oral Evidence
Taken before the Trade and Industry Committee
on Tuesday 13 June 2006
Members present
Peter Luff, in the Chair
Roger Berry
Mr Peter Bone
Mark Hunter
Mr Mike Weir
Mr Anthony Wright
________________
Memorandum submitted by ExxonMobil
Examination of Witnesses
Witnesses: Dr Roberta Luxbacher, Director of Gas
and Power Marketing for Europe, and Mr
Nick Thomas, Director of Corporate Affairs, ExxonMobil, gave evidence.
Q42 Chairman: Welcome both to this, our second evidence
session of the Committee's inquiry into issues relating to gas in terms of the
energy review. I always begin by asking
our witnesses to introduce themselves so we know who we are talking to.
Dr Luxbacher: I am Roberta Luxbacher. I am the Director of Europe Gas and Power
Marketing for ExxonMobil International.
Mr Thomas: I am Nick Thomas. I am Director of Corporate Affairs for the ExxonMobil companies
here in the UK. Suffice to say I have
over 35 years' experience in the oil industry covering a whole range of areas
and I have been in this current position for five years.
Q43 Chairman: Can I say how grateful we are to you for
coming, how grateful we are for your written memorandum, and also for the opportunity
of a briefing session yesterday that we were not able to take advantage of, I
am afraid, because of diary constraints but we are grateful for the
thought. You are responsible for a very
significant percentage of UK gas production so you are pretty well-placed to
tell us about gas issues. I imagine
that you sell your gas on a similar pattern to other gas suppliers in the UK
market. Roughly what proportion of the
gas that you sell do you think goes to electricity generation, how much for
heating homes and offices, and how much for other uses, such as chemical
industry uses?
Dr Luxbacher: I am sorry, I am having a little bit of
trouble.
Q44 Chairman: I apologise, I will talk up. Roughly how much of your gas is used for
electricity generation, roughly how much for heating purposes, domestic and
commercial, and roughly how much is used for chemical industries, for example?
Dr Luxbacher: When we are selling our gas as a producer we
are primarily selling into the liquid UK market at the national balancing
point. I would generally say if you go
down to the end user our gas is being used in proportion to the gas-energy mix
in the UK today. We are not selling
directly to residential. We sell to
some industrial, some power, most of our gas is on-sold.
Q45 Chairman: Do you
know what that proportion would be?
Dr Luxbacher: For our gas?
Q46 Chairman: For the gas market in general.
Dr Luxbacher: In terms of the current gas market. Residential demand for gas right now is
about 42 per cent, power about 36 per cent and industrial about 32 per cent, in
that range.
Q47 Chairman: And used as feedstock in industries is very
small?
Dr Luxbacher: That would be part of the industrial
demand. I do not know if we have that
broken down, how much is used as feedstock
Mr Thomas: Those figures are publicly available.
Q48 Mr Weir: We have heard a lot about the fact that UK
gas is running out faster than expected.
Can you tell us if you think that the UK's home supply really will run
out within 30 years, or are there likely to be further reserves to be
discovered and exploited if the price is right?
Dr Luxbacher: If you are looking over the long-haul, 30
years, clearly the UK fields are in decline but at the same time there is quite
a bit of exploration going on in the North Sea currently. The question really is there are still
development opportunities out there, will the fiscal and regulatory regime stay
stable such as it continues to attract investment for that investment, and
whatever happens with price over the long-haul will also be a clear
indicator. The important thing is less
than that gas running out, more important the UK is well-positioned for global
gas resources. About 70 per cent of
global gas resources are within economic transport distance of the UK. The UK is very well-positioned from a gas
perspective.
Q49 Mr Weir: What is your view on the price of gas and oil
in the foreseeable future? Obviously it
has gone up significantly over the last couple of years where it is probably
double what it might have been expected to be.
Do you see that continuing or do you see prices falling? At what level do you think it will have a
serious impact on further exploration of the UK's oil and gas reserves?
Dr Luxbacher: I do not think I can give you a projected
price into the future. What I can say
is when you look at both oil and gas reserves there is sufficient oil and gas
reserves to satisfy growing world demand.
If you look at gas reserves, the Oil
and Gas Journal published 60 years' worth of gas reserves and what that
tells you is oil and gas prices will continue to cycle up and down, as they
have historically. We would estimate
with both oil and gas prices we are probably at the top of the cycle right now,
but how long that will last and when it will cycle, I would not want to project
that.
Mr Thomas: If what you are getting at is that high
prices could have some positive impact or lower prices some negative impact on
investment, the point I would make is we are in a long-term business and our
projects can take five to ten years, be on the drawing board from when we first
discover something and then we have a tail of production which could be 25
years with very, very long-term projects.
The price of oil today really has very little relevance to whether we go
ahead with a project. Back in the late
1990s when prices were just above $10 a barrel we were still investing quite
aggressively, particularly in West Africa where we have a number of fields
which are coming on-stream today, despite those relatively low prices at the
time.
Q50 Mr Weir: Surely as a major oil company you must be
looking at the future and saying, "These fields are getting low or being used,
whatever, what exploration are we looking at, what is economic for us to look
at west of Shetland, for example", which is often quoted as there being a
marginal field in that area. The
current price is, what, $60-odd a barrel from $30-odd. I am trying to get some indication of what
level you would consider it to be economic to look at fields like that?
Dr Luxbacher: I think the biggest contributor to what will
be economic in the future is really technology development. As Nick just explained, all of these
projects have to be looked at over the long-term. With a lot of these fields, and we find that happening
constantly, what was not economic at any reasonable projection of future price
will be economic because of the development in technology and we will go back
to existing fields, which we are doing today. The Beryl field and the
announcement we recently put out is a good example of how we are drilling more
wells there than we ever thought we would and extending the life of that field
because of new technology developments in fast drilling and extended drilling
which have changed the economics. We
would say it is technology and we anticipate continued technology progression -
we are a technology company - that will enable these reserves to be developed.
Q51 Mr Weir: You mentioned earlier the tax regime as being
a factor in this. I notice you say in
your submission: "The most recent increase in the supplemental charge to
Corporation Tax comes at a time when crude prices are at high levels. At more historical price levels, this level
of taxation is likely to render many resource development projects in the UK
North Sea uneconomic, shorten the economic life of existing fields and reduce
the prospects for optimising resource recovery." Do I take it from that that the current level of the tax regime
is not having a detrimental impact?
Dr Luxbacher: I think, as a general statement, when we are
looking at a project we are looking at it over a long-term life cycle. Every company that is investing has a
different view of how they look at their investments and how long they feel
certain environments will be sustained or changed. Our point was we would not expect current price levels to be
maintained out into the future, we expect there to be a cycle and without
further technology development, at the same technology, some of these marginal
fields would not be developed.
Q52 Mr Weir: Tell me if I am reading this wrong but it
does seem to me that what you are saying here is at the current level of oil
price the Corporation Tax is not a significant factor, you can live with
that. What I am trying to get at is if
the price of oil starts to fall does it become a detrimental factor to
continuing exploration in the North Sea?
Dr Luxbacher: Yes, it does. Drilling the next well even on a current prospect could be ----
Q53 Mr Weir: To what sort of level would it have to go
down before it became an uneconomic prospect in your view?
Dr Luxbacher: I do not think I could speculate on what it
might be because it is too complicated.
It depends on the prospect, on the technology, on reserves there. There are just so many factors that it would
be very difficult to say. We would
evaluate each one individually and make an investment decision based on that
particular investment and the risks involved.
Q54 Mr Weir: In the last two or three Budgets the
Chancellor made several changes to the tax regime. Is continual change in the tax regime something that causes you
concern? Are you looking for a more
stable tax regime in the long-term and, if so, what do you consider to be the
long-term in tax terms?
Dr Luxbacher: Yes, we would very much like a stable tax
regime, one that did not change. As we
have said in our statement, if prices go down we think fields would be
marginal. If anything, the tax regime
may need to reverse itself in order to optimise recovery of the UK's gas
reserves. Again, we look over a long project
life for our fields when we are making an investment decision and look at the
current tax regime and whether we anticipate that it will change. Nick, would you add anything to that?
Mr Thomas: The only thing I would add to that is you
have got to remember the maturity of the UKCS.
We are 40 years into it now.
None of us really anticipate that the large fields are still there, so
we are chasing smaller fields, additions to existing fields, and they are
technically difficult, relatively expensive, we are dealing with high pressure,
high temperature fields often. That
technical environment is very challenging.
Today you will say you do not need to worry about it, we live with a
very uncertain price environment which exists.
As I say, not many years ago we were down near $10 and today we are $60,
so there is an uncertainty there. As
Robbie has said, and I think what you are getting at, what we need is a stable
tax and business environment in which we can operate these uncertain fields and
look at our uncertain investments against a firm investment climate. That is really what we are looking for and
tax is obviously a very, very important part of that. We have an option before we invest in a field, we look at the tax
regime and if we think that is fair we can either invest or not invest. Where we have taken the investment decision
and somebody changes the rules afterwards, that is when it gives us difficulty
in terms of confidence investing in the future.
Q55 Mr Weir: I am trying to understand how this is
achieved in the situation we have had in recent years where the price has risen
apparently so dramatically. Should the
tax regime not follow the price to some extent when there has been such a
dramatic fluctuation in price?
Mr Thomas: I think I tried to cover that point earlier
where typically from the inception of looking at a project to taking the
investment decision our projects can be 25-30 years. Quite genuinely we ignore today's oil price, it is not relevant
in our assessments. The tax regime is
very relevant and we make an assumption that is going to remain at whatever
level it is at when we take the decision.
On the technical aspects of it, we try and understand as much about the
field and the development at the beginning as we can but often we cannot have
absolute certainty about that. Today's
oil price really is not relevant for us.
Dr Luxbacher: I would also say that we operate in a myriad
of different tax regimes around the world.
As Nick said, it is less the tax regime than that you understand what it
is when you make your investment decision.
If it is a difficult tax regime it is likely to attract less
investment. It is less the tax regime
than knowing what its structure is and having some confidence in its stability
so when you are making your investment decision you can make it. That has been the challenge in the UK, that
there has been a series of tax changes which would indicate less stability and
confidence in the future for an investor.
Q56 Mr Bone: I am struggling in this area, Chairman. I think one of your competitors stated over
the weekend that prices are going to be high for a while, but then we would
expect to see a dramatic fall. You have
not been quite so forthright in that. I
find it hard as a businessman to think you are not really worried about the end
price, you are worried about the tax regime.
I find that extraordinary. I
would be much more concerned about what my price is to my cost. You did say that we are in a cycle of
prices, so I assume that if we are at the top, because it has gone up from ten
to 60, the cycle means it is going to go down over the next few years, which is
hopefully what you are saying.
Dr Luxbacher: We have said that we would anticipate we are
at the top of the cycle and it is likely to go down but we have not made any
predictions about where it might go or when it might. When you look at the adequacy of both oil and gas reserves in the
world, continued technology development and competing energy sources over the
long-haul, you would say that it should cycle.
Mr Bone: Go down.
Q57
Chairman: And up.
Dr Luxbacher: Go down and up again, a cycle. Historically it has cycled.
Q58 Chairman: It is extraordinary that $10 a barrel and $60
is all the same when you decide to invest, that seems odd to me. Presumably in the long run as fossil fuel
reserves do start to run out and we start to see an end to the cycle, a steady
escalation, then the price will drive additional exploration activity.
Dr Luxbacher: The only point we were making was you do not
do an investment that has to pay out for 20 years based on today's price.
Q59 Chairman: At $60 a barrel.
Dr Luxbacher: Because we do not expect, whether today's
price is $10 or $60 or $2 gas or $6 gas, that it is going to stay during that
whole period. Somehow we see it cycling
and look at a range of scenarios in evaluating investment decisions.
Mr Thomas: Can I add one thing to that because I used to
be a corporate planning manager for Esso here in the UK. I remember back in the 1980s that we had a
view at that stage that by now, in the early 2000s, oil prices would be at over
$100 in today's money, and we are nowhere near that. This was a global view that we were taking. What we did as a result of that was we
invested in a number of areas that in the end we have regretted and they have
not been good investments to date. We
have learned from that and, therefore, we are very cautious. As Robbie has said, the only point I was trying
to make was $6 or $60 today does not mean that we shut off or we certainly build
up our investment. We have got to have
a long-term view, and we do have a cautious long-term view.
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?
Dr 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 ----
Dr 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
approving 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 per cent of the world's oil and gas being within transportable distance of
the UK.
Dr 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?
Dr 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?
Dr 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.
Dr 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.
Dr 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?
Dr 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?
Dr 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.
Dr 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?
Dr 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 return 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?
Dr 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?
Dr 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 in different 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?
Dr Luxbacher: Not over the long-term because there are
adequate gas reserves.
Q74 Mark Hunter: What is long-term to you?
Dr 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?
Dr 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 half a 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?
Dr 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 market, 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?
Dr 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?
Dr 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.
Q80 Mark Hunter: So we can enjoy the same security of supply
without necessarily having the long-term contracts?
Dr 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.
Dr 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 Oil in terms of the $13 billion as part of that particular project.
Dr 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 per cent of the
UK's capacity, will be fully used?
Dr 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?
Dr 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
per cent, why do you not invest in another plan to give us another 20 per
cent. 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 those 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 per
cent capacity or do you think it will be above the 100 per cent capacity
eventually?
Dr 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?
Dr 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.
Dr 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?
Dr 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?
Dr 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?
Dr 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
HSC 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. That 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?
Dr 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, many meetings in the
Milford Haven area and explained to the local population and the planning
authorities exactly what we were planning 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 LNG Focus 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, that is to do with the
planning authorities. That 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?
Dr Luxbacher: Ofgem are not regulating our direct investment,
they are regulating ----
Q99 Chairman: The market.
Dr Luxbacher: No, actually they are regulating the pipeline
system and then the information in the market.
They are National Grid Transco primarily and making determinations on
National Grid and the return that it ----
Q100 Chairman: You have got a pipeline from Milford Haven,
have you not?
Dr Luxbacher: Yes.
It will connect into the pipeline.
Q101 Chairman: How long is that pipeline? Not long?
Mr Thomas: It is not a pipeline which we are involved
with, it is a pipeline being constructed by National Grid to link up to our
site.
Q102 Chairman:
You have got no problem with that either. What is rather fascinating about this
whole evidence session and written evidence is you almost have no problem about
anything. It is really quite
extraordinary. When I read these
screaming horror headlines even in the Financial Times about how
dreadful everything is, how we have got no security of gas supply and really
Gazprom is something we have to think about very, very carefully indeed, the
view of Exxon is "No, no, there is no problem with the security of gas supply
as long as we retain our open liberal markets full stop".
Dr Luxbacher: Yes.
Q103 Chairman:
If everything is so great, when there is so much gas out there than everyone
thinks there is and there is no problem with supply, why do we bother with
nuclear at all, just have another dash for gas with gas-powered stations
everywhere, why not, there is no problem?
Dr Luxbacher: In building them, again, we would
say there should be a level playing field for all of them. At the same time, we are advocates of
diversity in the supply mix.
Q104 Chairman:
If it is all so wonderful why do you need diversity, it comes at a great
political and economic cost to us?
Dr Luxbacher: That is true. I think there are
concerns about that and every energy source comes with issues associated with
it, and looking at that and balancing that truly is a role of government. Our position is allowing a level playing
field for all these competing fields to compete, create and maintain the
marketplace in which they can.
Q105 Chairman:
I feel from what you have said today that if you maintain that level playing
field it is likely to lead - I am being neutral, I am not making a value
judgment here - to a very significant increase in gas-powered generation.
Dr Luxbacher: It depends how investors in power
generation have their outlooks in terms of the risks that they are assessing,
the planning support they have, their outlooks for cost of fuels and how they
look at that, and they would probably look at a mix as they go on into the
future.
Q106 Chairman:
I am pleased to find you so relaxed and happy about the market in which you
operate. If my colleagues have no
further questions and there is nothing else you want to add?
Dr Luxbacher: I think we have covered most of it.
We have talked about where we see the gas business so, yes, I think we have.
Chairman: Do not panic, Mr Mainwaring! Thank you very
much indeed, we are very grateful.
