UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1123-iv
House of COMMONS
MINUTES OF EVIDENCE
TAKEN BEFORE
TRADE AND INDUSTRY COMMITTEE
UK dependency on gas imports
Tuesday 27 June 2006
PROFESSOR JOHN GITTUS
Evidence heard in Public Questions 221 - 314
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Oral Evidence
Taken before the Trade and Industry Committee
on Tuesday 27 June 2006
Members present
Peter Luff, in the Chair
Roger Berry
Mr Brian Binley
Mr Peter Bone
Mr Michael Clapham
Mr Lindsay Hoyle
Mark Hunter
Miss Julie Kirkbride
Judy Mallaber
Mr Mike Weir
Mr Anthony Wright
________________
Witness: Professor
John Gittus, gave evidence
Q221 Chairman: Professor, welcome to this evidence session on the security of gas
supply in the UK. We are very grateful
to you for agreeing to come and give us evidence and looking forward to hearing
what you have to say, particularly as I see I regard you almost as a
parliamentary neighbour as it were at Alstone (?) which is hardly a long way
from Worcestershire. Can I begin, as I
always do, by asking you to introduce yourself and say a little of your role in
the energy debate?
Professor Gittus: I am a
consultant and I have been for 12 years.
My main clients are in the Lloyd's insurance market, where I give advice
primarily on the insurance of nuclear risks in every country. I advise a syndicate which is the biggest
commercial nuclear insurer in the world and has been the most profitable
syndicate at Lloyd's for the last three or four years. I have other clients as well: GE Healthcare,
who I advise on the management of liabilities and, intermittently, other
clients. You have mentioned one, the
Australian Nuclear Science and Technology Organisation, which I am advising at
the moment.
Q222 Chairman:
That is very helpful. I have not given
you notice of this question, but if I might throw an off-piste question at you
first - it was cricket yesterday, it is skiing today - and just ask you one
question about the insurance of nuclear risks.
The third party liability on nuclear companies has been increased now;
do you think the increased limit is sufficiently high to meet the foreseeable
risks from a nuclear incident at a nuclear power station?
Professor Gittus: Yes. If you asked me if it was sufficiently high
to meet the risks from the Chernobyl-style reactors, some of which are still
operating, then I would be more cautious, but nobody insures those. As far as the ordinary nuclear power
stations are concerned and other nuclear installations, many of them in countries
of the former Soviet Union and of course in western countries, the answer to your
question is yes, that is adequate.
Q223 Chairman:
I am trying to remember, the current figure is £140 million going up to €600-€700
million.
Professor Gittus: Yes.
Q224 Chairman:
Beyond that the risk is picked up by whom?
Professor Gittus: The risk
beyond that is picked up by governments and one of the things I do is to work
out what these risks are statistically, and I can tell you that the actual risk
taken by governments is negligible. The
amount of premium that you would have to collect, supposing the government were
a commercial insurer and insisted on being paid for that high layer, which is
going to be, as you say, above €700 million, would be measured in perhaps
hundreds or, at the most, perhaps €1,000 per reactor, the risk is so low. It is not that the consequences of such an
accident would not be great, and by definition it would cost more than €700
million because up to that it will be commercially insured, but the probability
of it occurring is negligible.
Q225 Chairman:
Can I just, for the record, ask you about your academic background, which is in
engineering rather than statistics and finance?
Professor Gittus: I am a Fellow
of the Institute of Statisticians, and that is as a result of some research I
did on a new class of statistical distribution, density distributions. I am a Fellow of the Royal Academy of
Engineering, but I have also got two doctorates, doctor of science degrees, one
in theoretical physics and the other in metallurgy. I have been around a long time and that has given me plenty of
opportunity to gather qualifications.
Chairman: I am sorry for asking
you those questions, but they are very much in my mind at present and, having
you there, it seemed too good an opportunity to miss. We will move to the questions actually back on the green
run. Judy Mallaber.
Q226 Judy Mallaber:
Professor Gittus, you said that you were working for the Australian Nuclear
Science and Technology Organisation, and in your report you concluded that
nuclear power would be economically and environmentally preferable to gas or
coal in Australia and would offer better security of supply than gas imported
from overseas. Do you think the same
conclusions apply to the UK?
Professor Gittus: Broadly,
yes. I have not done a study in that
kind of detail for the UK. The work I
did for Australia was commissioned by ANSTO, the Australian Government nuclear
body, and that gave me an opportunity to go into some depth. I believe, from what I know of the position
in the UK, that the same conclusions would broadly be applicable - exactly what
you said, in fact.
Q227 Judy Mallaber:
Why do you reach those conclusions?
Professor Gittus: The study of
the economics, that is to say the actual cost of electricity from power
stations, which I did for Australia, was generic, that is to say it would apply
to any country. I set up a mathematical
model, by means of which I can calculate a forecast of what would be the cost
of electricity from different kinds of power stations, given different input
assumptions, so the price of gas in the UK versus what it is in Australia or
another country, the price of uranium here against what it is in Australia and
so on. I have therefore been quite
easily able to use that model out of general interest to make calculations for
the UK as well as Australia. I have not
published those, but I can tell you that they show the same kind of thing. The basis of it is that although the capital
cost of a nuclear power station is very high, the actual cost of the fuel is
low. The opposite is true of gas, it is
really quite easy to generate electricity by burning gas as a way of raising
steam, as you might suspect, so the capital cost of a combined cycle gas-fired
power station is relatively low, perhaps a third of that of a nuclear power
station, but the cost of the gas is much higher than the cost of the amount of
uranium which you need to generate a similar amount of electricity. It is a balance, and when you compare the
nuclear case, with its high capital and low fuel cost, with the gas case which
is the opposite way round - low capital and high gas prices - you find for
Australia and also for the UK that nuclear is cheaper.
Q228 Judy Mallaber:
What are your conclusions if we do not have a new generation of nuclear power
stations?
Professor Gittus: That is
something that I did study in some detail.
At the time of the last Energy Review I had a contract from British
Nuclear Fuels to look at that question, and they included some of my
conclusions in their written submissions to that review, and that was four
years ago that that work was done. What
I discovered then was that although at the moment we have very high security of
supply in this country - and that is because we have enough uranium to keep our
existing nuclear power stations going until the end of life, enough nuclear
fuel that is, we have still got most of our own gas, we have coal supplies
which, if we mined them, would last us 200 or 300 years, we have still got
North Sea oil, so we are really quite uniquely independent of external supply
in the world; certainly amongst the G8 countries we are the most independent at
the moment, so we do not have to rely on people selling us gas or uranium
because, as I say, we have got our own.
I could see that as time went by going on the DTI predictions of the
amount of gas that we will use in future - not mine but those of a government
department four years ago - and the way in which our supplies of has were
beginning to diminish and were forecast to diminish further, we were going to
have to rely on non-European countries for gas. As a man working in the insurance sector I am involved to some extent
with just the issue of how reliable is your supplier going to be? Supposing you are in the business of
importing anything - cars, gas, what have you - from any country overseas, you
can insure yourself against the possibility that you will not receive the
supplies that you paid for. The
premiums that are charged are just a measure of the risk that the insurers run
of having to pay a claim; if the risk is high they charge a high premium. They charge high premiums for trading
between people in the UK and the countries from which we get gas and oil. I am not now referring to the premium that
you might pay if you wanted to insure against somebody stopping sending you
gas, but for trade in general - I mentioned motor cars. If you were a Russian car supplier and I was
a British car merchant, I could do a deal with you to buy a million pounds
worth of cars. I might send you the
money before I got the cars to insure myself against the possibility that you
would not deliver, so I would lose my money.
I have to pay four per cent of that money to an insurer, which is
£40,000. Alternatively, you might send
me the cars first and wait for the money, in which case you, as a Russian
supplier, could insure yourself with the same company against the possibility
that I would not send you the money.
The insurance premium for that would not be four per cent or even one
per cent, but 0.1 per cent. You would
be able to enter into that insurance for 0.1 per cent of the sum insured. These are facts, they do not rely in some
harebrained academic figures, they are on the basis of profitability in the
insurance trade. These premiums are
based on past experience and they are amended monthly as that experience
accumulates. What I did was originally
and have continued to do intermittently since - Australia for example - was simply
to use the risks implied by those premiums to work out how frequently we might
expect to be deprived of imported gas or imported uranium or imported
coal. The results that I obtained
convinced me that we ought to try and maintain the present balance between
nuclear power and gas - admittedly we would have to import it from outside
Europe - coal and the Government's targets for renewables as we go forward into
the future. In a more recent paper,
which I think you may have seen, that which has been published by Platts
Journal earlier this year, I show that in fact when it comes to security of
supply and also environmental impact, a good plan - not the only one of course
for this country - would be to stick to the proportions of electricity that we
generate from nuclear power, from gas, from coal and, as I say, the plan for
the renewables over the next 20 years.
It would mean either extending the life of our existing nuclear power
stations, or replacing them as they come to the end of life with new ones,
because otherwise in 20 years time we shall only have one nuclear power station
operating, Sizewell B. Therefore, in
order to reach what I think is a desirable end-point, based on my calculations,
of keeping the present proportions of those different sources of energy, we would
have to do two things: replace the aging nuclear power stations as they come to
the end of life, which maintains the diversity that you get from nuclear power,
and make sure that we had a sufficient surplus of electricity generation
capacity, over and above the maximum that we expect to have to use. Then if in the event one of our sources of
imported fuel were to dry up, for whatever reason - because we did not pay for
it or because they decided to stop sending it to us - then we would have some
surplus of generating capacity from other types of power station to help make
up for that loss. Those are the two
things; it is a very simple recipe which I concluded and put in this Platts
paper which the chairman has got there that we should do.
Chairman: That must rate as one
of the most interesting and comprehensive answers the Committee has heard, but
if we could make progress I wonder if I could just encourage you to encapsulate
your thoughts in slightly briefer responses, otherwise we are at risk of going
through lunchtime. Thank you very much
for a very interesting answer.
Professor Gittus: I am sorry.
Q229 Judy Mallaber: Just one further question,
how far are your pro-nuclear views - you have come to the conclusion that we
need to continue - the same just because you think we have to have as high a
proportion as possible of our power determined and provided domestically, or
would you be less pro-nuclear if you felt that we had more secure sources of our
imports of fuel from elsewhere, if they were not coming from areas where you
are saying there is a high potential risk?
Professor Gittus: You are
correct. If I felt that our imports
were going to be as secure as our domestic supplies of fossil fuel, then I
would not so strongly urge replacement of our aging nuclear power stations.
Chairman: We want to look at
that question in more detail later, but can I just bring in Roger and Lindsay
who have a supplementary each and then we will move on to have a look at the
issues of risk you have been exploring.
Roger.
Q230 Roger Berry:
You argue that you are convinced in the case of the UK that nuclear power is
economically preferable, am I right?
Professor Gittus: That is
correct.
Q231 Roger Berry:
That raises the obvious question that you will have heard many times, why then
is it that the private sector does not wish to invest in nuclear? We have heard the answer from the industry
and I would be very interested to know what your answer to that question is.
Professor Gittus: My answer to
that is that in Japan, for example - I am coming at this obliquely for a start.
Q232 Roger Berry:
How about directly? If it is clearly
economically advantageous, if it is cost-efficient, why has the private sector
not, for many, many years, contemplated investing in nuclear, and why as of today
are they saying that at present they have got no such intentions?
Professor Gittus: I do not know
why they are saying that today, but my belief is that they will invest in
nuclear power in this country.
Chairman: They are actually saying
they would like to invest given certain conditions, so what conditions do you
think are necessary?
Roger Berry: It cannot be that economically
obvious that it is the preferable option if the private sector is not
investing, can it?
Q233 Chairman:
I am trying not to lead you.
Professor Gittus: In my paper
for the Australian nuclear people I covered that and I am clear that the
recommendation that I made would apply equally in the UK, and it is that there
are two possibilities. One, which I
think is not necessary, is that we should follow the lead of the USA and
introduce effectively a Government subsidy for the first new nuclear power
stations that we build. Let me say at
once, I do not believe that is necessary, but that is the way in which,
following the Energy Bill of August 6 2005, the USA has gone.
Q234 Roger Berry:
Professor, why can you not answer my question directly?
Professor Gittus: I am going
to. Please, let me answer; I do not
want to go on too long but I want to set the scene. In my paper for Australia I considered the American system and I
also considered a scheme which is very much like the one they are using in
Finland, although when I wrote the paper I did not realise that, it was only
subsequently that I have discovered that the Finns are more or less doing what
I recommended. What I recommended was
that the risk of an overspend in the construction of the power station should
be taken not just by the vendor, say in a turnkey contract - that would be the
firm that was selling it - or by the purchaser who was actually buying it, but
that it should be shared between the government and the stakeholders. I put forward a plan for the way in which
this risk might be shared, and this plan is based on insurance principles
because we are talking about risk, financial risk, something I was talking
about a moment ago. I believe that that
scheme would work in this country as well.
As I say, the Finns, because of the structure of their power and finance
industry are actually applying it in building a French-style nuclear power
station at this moment.
Chairman: This session is
primarily about gas and we are spending a bit long on nuclear issues.
Q235 Roger Berry:
I am sorry, but an economic appraisal of energy options I assume takes into
account the risk of overruns et cetera et cetera, that is how one does an
economic appraisal.
Professor Gittus: That is how I
have done mine.
Q236 Roger Berry:
Exactly. The simple answer to my
question, if nuclear power is so obviously economically the better option, why
is the private sector not investing, is what?
Professor Gittus: The answer is
that they are in Finland.
Q237 Roger Berry:
I am talking about the UK.
Professor Gittus: Using a scheme
which I have advocated for the UK. I
cannot answer the question ---
Q238 Roger Berry:
You cannot explain.
Professor Gittus: I cannot
explain.
Chairman: With respect, we have
had answers to that issue from other witnesses and we are, Professor, talking
about gas now. Lindsay Hoyle.
Q239 Mr Hoyle:
In fairness, Professor, it is fair to say that the private companies are
waiting for the energy review and waiting for the Government's statement, that
is the simple answer, because we do know from evidence that there are private
companies who wish to build, subject to the green light, so I think we can all
deal with that, put that behind us.
What I am interested in is that you have actually said there is enough
nuclear fuel for the end of life in existing nuclear power stations; does that
take into account that there may be a review of the life expectancy of all
existing nuclear reactors in the UK, extending their life beyond what is
available at the moment, and therefore how much surplus fuel would there be for
that review, if it takes place, of the extended life?
Professor Gittus: None.
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 what not? 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 per
cent premium and we have made a loss, had we charged one and a half per cent we
would have made the 18 per cent 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 eight per cent per year
until then and in that year, instead of increasing by eight per cent it fell by
one per cent. 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 are not directly related to the gas supply itself.
Professor Gittus: No.
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
Kurchov'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 per cent 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 a 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.
Q280 Mark Hunter:
You have been fairly free, with due respect, in your opinions up to now.
Professor Gittus: I have just
responded to questions.
Mark Hunter: As somebody who
clearly knows a lot about the subject I was interested in what your opinion is.
Chairman: To be fair to the
Professor he has been expressing what he regards as facts up to now; now he is
being asked to make a commercial judgment, is that the difference?
Q281 Mark Hunter:
I am not asking for a commercial judgment, I am interested in a personal
opinion.
Professor Gittus: In regard to
the facts I have given information about premium; of course I have, I have given
it freely, but they are not opinions. I
cannot answer your question, but I could no doubt go away and think about it
and come up with an answer and I would be very willing next week to try and
send you an answer.
Q282 Mark Hunter:
We are just interested in your views about it.
Professor Gittus: Yes, it is a
very valid one because it is in the news and it is very likely to occur, but I
have not analysed it but I will send Elizabeth the answer.
Mark Hunter: I will look forward
to receiving it in due course.
Chairman: We are hoping to be
able to speak to Gazprom at some stage so your views would be very much
welcomed, thank you very much indeed.
Tony Wright.
Q283 Mr Wright:
It is quite clear, and I think it is accepted throughout the industry and the
wider general public, that the gas coming from the UK Continental Shelf is
running out and quite clearly we are going to have a deficit in terms of the
gas that we require, but that would be more than offset by the gas that we are
going to get from Norway and the Netherlands, certainly for the foreseeable
future. Coupled with that, the new
contracts that have been given now with Exxon and with Centrica with regard to
LNG supplies from Qatar and possibly Malaysia ought to add to that and the
greater storage that we will have in terms of the LNG. Are you not painting a scenario that really
is not going to happen in terms of the problems that you related to us with
regard to UK dependence on gas from Russia and Iran? That scenario really is not going to happen, is it?
Professor Gittus: But that is
not the scenario that I have addressed.
In my Platts paper I have summarised what I have done, and in an answer
to a question over here I indicated that I have covered all the gas supply
countries.
Q284 Mr Wright:
You say within the paper itself "The most unreliable source of energy is gas
piped from Russia and from Iran. In
addition to gas piped from Russia and Iran, the UK imports LNG from Algeria and
Qatar." You mention that within the
paper itself so obviously you raise the spectre and also you have said here
today quite clearly and at length about the problems of supply through Russia,
whether through the Ukraine or through other countries.
Professor Gittus: Yes.
Q285 Mr Wright:
That is an issue that you are addressing, but quite clearly it will not be an
issue as far as the UK supply of gas is concerned. Do you accept that?
Professor Gittus: No, that is
not what I have said in the paper.
Q286 Mr Wright:
What I am saying to you is that the problems with the supply of gas from Russia
are not going to be an issue for the UK.
Professor Gittus: But I have
spelled out in the paper that one would forecast that it would be a problem.
Q287 Mr Wright:
What I am saying to you is that we are going to be more than offset with our
supply that we are missing from the UK Continental Shelf by supplies from
Norway and the Netherlands, so the Russian scenario does not even event into
our equations.
Professor Gittus: So we shall
never import gas from Russia?
Q288 Mr Wright:
I am not saying we should never import gas from Russia, but what I am saying to
you is that quite clearly it should not even be a concern of ours about the
security of supply from Russia because there will be LNG from Qatar and Malaysia,
there will be natural gas coming via Norway through the Langeled pipeline, from
the Netherlands through the interconnector and we will have enough supply for
the foreseeable future.
Professor Gittus: That is your
analysis and it is quite different to mine.
Q289 Mr Wright:
Your analysis is that we will actually have to rely at some time or other on
gas coming through Russia.
Professor Gittus: Not rely on
it, but we shall receive it.
Q290 Mr Wright:
Will it be integral to the security of supply issues to the UK's economy?
Professor Gittus: I forecast that
it will, yes. I may be wrong and I have not seen the data on which you are
basing your statements so I could very well not be correct, but from the
information that I have got I forecast that if we go down the route of
abandoning nuclear and relying, when once our own gas supplies have been run
down, on gas imported from within Europe but also from outside Europe, then I
have given my forecasts on the likelihood that we will have interruptions. I cannot challenge what you say because I
have not seen your numbers, you have seen mine.
Q291 Mr Wright:
For instance, Exxon told us quite clearly that their supply of LNG from Qatar
alone, if that was to supply the UK, they have enough supplies for the whole of
the UK gas requirements for 250 years.
That is quite significant. I am
not suggesting that they are just going to supply the UK, but they are the type
of figures that we are talking about in respect of the gas that is there, and I
accept that perhaps Qatar is not as secure as the supply from Norway through
Langeled or through the Netherlands, but that just indicates the amount of gas
that is out there in the market.
Professor Gittus: Let me tell
you this, Saudi Arabia has got enough oil to supply the UK's requirements for
250 years; admittedly, it is supplying all sorts of other markets so we cannot
just rely on them, but they and the other Arab countries starved them somewhat
in 1974 and reduced their supplies to Japan to such an extent that the country
was almost ruined.
Q292 Chairman:
The consensus of the evidence we have heard until now from academics, regulators,
industry is that there is plenty of gas out there and actually we do not need
to worry, but what we ought to worry about is the way the European gas market
functions and the way the UK gas market rather than availability, but you are
putting up a very strong flag that the past is not necessarily a guide to the
future.
Professor Gittus: What I am
saying actually is that our past experience with oil from risky countries
should be looked at when you are considering taking our supplies of gas from
equally risky sources. You should look at it.
Q293 Chairman:
The argument that the Soviet Union - and I mean the Soviet Union - never broke
a gas supply contract, despite the Cold War, should not concern us; that is
again a misleading guide to the future?
Professor Gittus: It is part of
our guidance, obviously, it is part of our experience, but I would not just go
on that, I would go on the very simple fact that I have raised, which is that
we will be importing gas from risky countries and is it not possible that they
will do for us with gas what the Arab states did for us with oil?
Chairman: Other colleagues want
to come in, but I am going to bring in Mick Clapham who has got a question on
another aspect of carbon and security of supply, and then we will take
supplementaries on the whole thing.
Mick can do his coal one.
Roger Berry: Mine follows yours
though, Chairman.
Chairman: Very quickly then.
Q294 Roger Berry:
Over the years of the Soviet Union and so forth the insurance industry would
have been coming up with figures about risks of doing business with the Soviet
Union. Given that there is no problem
with gas exports, would those numbers have suggested that this was a highly
risky activity or not?
Professor Gittus: I could not
hear exactly what you said, sorry.
Q295 Roger Berry:
Given that during the Cold War Russia did not fail to honour gas contracts and
therefore it appears that there were not problems, the insurance industry
presumably in assessing the risks of trade with the Soviet Union, my guess would
be - correct me if I am wrong - that they would have suggested that higher
risks then than today. My question is
was the experience of gas exports from the Soviet Union consistent with the
indicators that the insurance industry were giving in relation to risk
assessment?
Professor Gittus: None of us
received any gas from the Soviet Union at that time.
Q296 Roger Berry:
No, but you have said that the figures you used, as I understand it, do not
relate to gas specifically, they relate to specific business and political risk
factors as indicated in your paper.
Professor Gittus: I do not know,
I do not know what the risk factors were at that time, we are going back 20
years, but I can find out.
Q297 Roger Berry:
That would be interesting.
Professor Gittus: Chairman, I
will undertake to send those numbers.
Chairman: I am trying to think
where the Soviet Union actually exported its gas to; I think it exported it to
Germany, but I am exposing my ignorance which is never a good thing for the
chairman to do. Let us go on with Mick
Clapham's question.
Q298 Mr Clapham:
Professor, I gain from what you said earlier that you perceive that we should
hedge against the risk of interruption in the supply of gas by ensuring a
diversity of energy mix, would that be correct?
Professor Gittus: Absolutely
correct, yes.
Q299 Mr Clapham:
Of course, within that energy mix is coal which at the current time provides
about 33 per cent of our electricity generation.
Professor Gittus: Yes.
Q300 Mr Clapham:
I note from your paper that you are rather sanguine about coal, you say "My
risk analysis shows that the UK's supplies of coal are very unlikely to be
interrupted and Australia and three other friendly countries each export more
coal than the UK imports." The
importation of coal to the UK has to some degree changed; we took quite a
substantial amount from Russia last year, for example.
Professor Gittus: Yes.
Q301 Mr Clapham:
We import roughly 35 million tonnes which goes to coal burn. A good part of that came from Russia and a
little from South Africa, and there are indications that the Australian coal
market has now been dedicated more or less to China. The supply of coal to some degree out there on the international
coal market, is more restricted than would otherwise have been thought, and
certainly I feel that your paper perhaps misses that point.
Professor Gittus: I did not know about this
arrangement between Australia and China.
I know of it now because they have also sold most of their LNG to China
last week. It is a very fluid sort of situation and that is quite concerning.
Q302 Mr
Clapham: That increases your worry that we are now becoming
dependent upon Eastern Europe, particularly Russia, for our coal?
Professor Gittus: Yes.
Q303 Mr
Clapham: Would you be more concerned if you knew, for example, that
when UK Coal, the company that owns the British coalmines, reported to this
Committee a week ago they did not foresee the opening up of new coalmines, they
were, in fact, basically saying that the indigenous coal mining industry in the
UK may only have a life of about 20 years? Does that increase your concerns?
Professor Gittus: It does, I think that is
terrible. We have got enormous reserves of coal and techniques for carbon
sequestration are coming up. They are
not with us yet, but most of my life has been spent doing research and
development, and I can see from my reading that we are going to have that. It will be economic to sequester three
quarters of the carbon from this kind of resource. From looking at other countries,
I can see that the coal industries are beginning to revive, and what had been
thought of as resources that were not worth mining people are beginning to mine
them and open up new mines even. I had
thought that we would go the same way in this country. We have got that resource, and it seems
almost criminal not to proceed with the development of this. As I say, the great advantage that we have
at the moment amongst all our competitors is the high security of supply that
we have. All of the steps which we can
take, like using our coal or making it available, are steps which we should
take, otherwise we run the risk, as I have shown you in an earlier paper, of
going from being the most secure to the most insecure when it comes to security
of supply in the G8 over the next 25 years.
Q304 Mr
Clapham: Given that if a decision is made to build new nuclear power
stations it is going to be well after 2015 when they are likely to be online
producing electricity, bearing in mind that the decommissioning of nuclear
stations and coal stations in between is likely to produce an energy gap well
before nuclear could be producing,
do you feel that we should be concentrating more on, for example, the
super-critical boiler being refitted to coal-fired power stations and perhaps a
greater emphasis by government on the UK coal industry?
Professor Gittus: I cannot comment on the
supra-critical boiler, that lies outside the things I know about at the moment
anyway but, certainly if the market is not able to keep our coal industry going
for more than 13 years, the figure you used, then government intervention
is called for with coal.
Mr Clapham:
thank you.
Q305 Chairman:
I expect you have made Mr Clapham very happy with those answers. If the Committee wants to ask some
questions, which I may have interrupted earlier, and you have got the time,
Professor, we might return to some of the nuclear questions if the Committee
wants to?
Professor Gittus: I have got time, yes.
Q306 Chairman: The picture that the industry has painted
for us in evidence is that they do not want the American model. They would
obviously really quite like the Finnish model, but that also involves long-term
contracts with specific high-level users of the baseload electricity supply, in
the paper industry, in particular. What
they have said they want is practical arrangements for pre-licensing of reactor
designs, an improved planning framework to make sure that the inquiries do not
drag on too long with all the national issues which go to the local level, for
example, and above all, in common with every sector of the energy economy, they
want to know how the carbon price is going to be set over a much longer
timescale than the Emission Trading Scheme currently allows. They say if you do those three things and
give us a government commitment which goes beyond the initial path, in other
words a cross-party consensus
is built, but the arrangements in it will not be disturbed, they say at current
levels of energy prices they will build new nuclear power stations. Do you believe that?
Professor Gittus: Yes, I do. I have read that evidence, and it is
consummate with what is being said in other countries as well. I do not want to draw examples from other
countries because I know you tend to feel that is a waste of time, but that is
what is happening in the States, and one can see other countries following the
Finnish example.
Q307 Chairman:
Are they sharing the risk?
Professor Gittus: They are sharing risk out, 24
different bodies are sharing the risk, and clearly that is the way to go. The
other way to go is to parachute nuclear technology in, which is what was done
in South Korea, where they started their nuclear energy programme simply by
having foreign designs built by foreign contractors, accepting the safety cases
and licensing arrangements which had been proposed by the suppliers. Under those circumstances people were able
to build station after station to time and cost. We are not going to permit
ourselves to do that as a country, we have got too much experience in the
nuclear sector and too many people who know about it. Clearly, we are going to have environmental assessment,
licensing, safety analysis, public inquiries perhaps, and our experience with
those in the past, with Sizewell B for example, was that they increased the
capital cost of the thing by about 35 per cent or even more. I was involved
with the inquiries there. Clearly
people are going to say, "We want to know about that, we want a one-step
licensing process like the US NRC
have introduced and we want to have pre-qualified designs of reactor which are
acceptable to the licensing authority. Those things have been done in
America. It has cost a lot of money and
has taken more than ten years to bring that situation about in the USA. I do not see that people are concerned about
the difficulties that we will have in introducing the things you mentioned,
which I have just summarised, in a short timescale here. I do not see how we solve that, it is a
difficult problem. We have left it all
so late when it comes to keeping our nuclear programme going.
Q308 Roger
Berry: You advocate government subsidy of nuclear through
risk-sharing.
Professor Gittus: No, government insurance of the
risk, for which they would be paid a commercial premium.
Q309 Roger
Berry: In your article in relation to Australia you talk about
government subsidy?
Professor Gittus: No, that is the second of two
plans. A summary of my Australian
report is available on the Amsted website. All 400 pages of it have been
published, so there is no restriction there.
Q310 Roger
Berry: You do not regard the sharing of risk by government as being
a form of subsidy?
Professor Gittus: If they are paid for taking the
risk they are like an insurance company which does not subsidise the insurer.
Q311 Roger
Berry: No, but presumably the government is sharing the risk because
the market will not pick up such a risk at a price which makes it competitive?
Professor Gittus: That is because the government
has got the diversity which the market has not got. The Treasury is taking risks in every sector and many of them are
not correlated. If it was an insurance
company it would make an absolute fortune because of that enormous
diversification.
Chairman: You are advertising privatisation of the
Treasury!
Q312 Roger
Berry: Would you argue that government should share the risk in
relation to other energy sources as well in the same way?
Professor Gittus: Yes, of course.
Q313 Chairman:
That has been very interesting, not without its moment of frisson. We are grateful to you, Professor. Thank you very much indeed.
Professor Gittus: I hope my behaviour has not
been offensive to the Committee, I just try to join in with the general
discussion.
Q314 Chairman:
Professor, I think the Committee quite often gives as good as it gets on occasions
as well.
Professor Gittus:
Thank you very much, I have enjoyed it.
Chairman: Thank you.
