Emissions Performance Standards

Memorandum submitted by Statoil (EPS 17)

Response to the Parliamentary Inquiry on Emissions Performance Standards

Statoil welcomes the opportunity to comment on the Parliamentary Inquiry on Emissions Performance Standards. The UK energy market is important for Statoil in a number of ways. Statoil is the largest importer of natural gas to the UK and an investor in offshore renewable projects in the UK.

Statoil is also considering, based on our CO2 storage experience from the oil and gas business, to develop a new business as a storage provider for CO2 from 3rd parties. Statoil is also a partner in the CO2 Technology Centre Mongstad (TCM) in Norway, and have entered into an agreement to construct a full-scale carbon capture facility at the Mongstad Refinery.

Statoil acknowledges tha t emission of greenhouse gases is a major challenge, and we believe that coordinated and powerful effort by governments, businesses and individuals is required to combat climate change. Statoil believe s that wide deployment of CCS in the longer term perspective is one necessary measure to reduce greenhouse gas emissions from power production.

Statoil remain s to be convinced that the EPS is the best method for enabling CCS and other low carbon generation technology to develop. Mandating standards before technology is ready could have detrimental effects on the energy mix of the UK and may not lead to the most efficient outcome.

Necessary m easure s to facilitate CCS and reduce CO 2

Statoil sees market based cap-and-trade systems such as the EU Emissions Trading Scheme (EU ETS) as the main instrument for cost efficient reduction of GHG emissions. The EU ETS provides a predictable framework for industry in the long term, rewarding the most carbon efficient solutions. However, Statoil fully recognises the EU ETS does not currently provide sufficient investment incentive in low carbon generation, and that public funding are required to speed up development and implementation of CCS in the short term. The main long term objective of CCS is to become a competitive tool for reducing GHG emissions, i.e. that the cost of CCS meets the carbon price. To do this a reliable market focused regime must be maintained and relied upon to provide investor confidence.

To achieve wide deployment of CCS in the longer term perspective an appropriate regulatory and financial framework is required in the shorter term . Such mechanisms will primarily involve public funding, as CCS technology is currently at an early demonstration phase and not yet commercially viable. Statoil support s the present EU and UK policy on CCS – the single most important issue at present is to get the planned CCS demonstrations built as quickly as possible.

The CO2 Technology Centre Mongstad, which is scheduled to start up in 2012, is an example of fruitful public private partnership, which we believe will be of great importance for wide deployment of CCS. The public private partnership consists of Statoil, Shell, Sasol and Gassnova SF (owned by the Norwegian Government). The goal of the test centre is to further develop and test various technologies relating to carbon capture from exhaust gases from the combined heat and power station, and from emission sources at the refinery. The test centre is scheduled to start up in 2011.

Energy security

Introducing a demanding EPS on all emission from power production would in practical terms make CCS mandatory when investing in new power plants in the UK . Statoil is concerned that commercialisation of CCS technology will be negatively affected by EPS, as industry could be exposed to the full cost and risk of CCS before the technology is commercially available. It is reasonable to expect EPS to have large detrimental effects on investments in new power production, as few investors will be able to take on projects faced with the risks of employing technologies that are not technological and commercially mature. This could hamper the longer term viability of CCS as an efficient tool in emission reductions.

Such impacts on the energy systems in the UK could undermine the investment in gas fired power plants to provide flexible electricity generation to manage intermittent renewable load. The flexibility and ability to respond quickly to demand peaks is one major characteristic of gas-fired power plants. This characteristic is of major importance in electricity markets with a large share of renewable production, such as wind power. The increase in investment costs of CCS are likely to limit the construction of gas-fired power plants. If they were built these costs would require baseload operation which would not fit the supply pattern required with high levels of renewable energy. This would have negative impact on the security of supply in the UK electricity market with a growing share of renewable production and reduced ability to meet peak demand .

Natural gas and renewable energy production

Another important measure to reduce carbon intensity of the power sector is the use of natural gas, which could reduce CO 2 emissions by 70 per cent compared to old coal-fired power plants. Natural gas is a very cost competitive fuel, which is available now and will provide secure supp ly of energy in the long term . Statoil believes that the combination of natural gas, which could reduce CO2 emissions by 70% compared to old coal-fired power plants, and wind power which is emissions free, could quickly deliver large reductions of emissions from power production. However, implementation of EPS would jeopardise future investment decisions both in power generation and consequently further upstream. Gas producers require long term signals that gas demand will continue into the future in order to invest in maintaining supply levels to the UK. In addition new gas fired power station are required to provide the additional capacity that will be called upon to generate when renewable energy cannot.

Statoil’s recommendations

Regulatory stability is crucial to achieve the investments needed to reduce UK carbon emissions both for fossil power producers and renewable energy developers. Statoil appreciates the current Government policy regarding the public funding of up to four demonstration projects. Wider energy policies such as EPS must consider the impacts such legislation would have on the stability of the energy mix within the UK and the supply security issues this will have for the future and we remain unconvinced that this represents the best way to deliver a sustainable reduction in CO2 or deliver CCS technology to the market. Statoil appreciates the opportunity to communicate our opinion in this regard and we remain available for any further discussions on this matter.

September 2010