Energy and Climate Change - Minutes of EvidenceHC 785

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Oral Evidence

Taken before the Energy and Climate Change Committee

on Wednesday 16 January 2013

Members present:

Mr Tim Yeo (Chair)

Dan Byles

Barry Gardiner

Ian Lavery

Dr Phillip Lee

Mr Peter Lilley

Albert Owen

Christopher Pincher

Sir Robert Smith

Dr Alan Whitehead


Examination of Witnesses

Witnesses: Paul Spence, Director of Strategy and Corporate Affairs, EDF Energy, Tom Crotty, Chief Executive Officer, INEOS Olefins & Polymers Europe, Martin Pibworth, Deputy Managing Director for Energy Portfolio Management, SSE, and Peter Parsons, Forecasting Manager, National Grid, gave evidence.

Q219 Chair: Good afternoon, and welcome-welcome back in the case of some of you-to the Committee. Thank you for making the time to come in. We are in the middle of this further inquiry into shale gas on which we expressed strong views a couple of years ago. To begin with, perhaps you could tell us how you think that shale gas might affect how gas is traded, either globally or regionally.

Martin Pibworth: Can I take that question?

Chair: By all means.

Martin Pibworth: We do not necessarily see a big impact or change in trading in the UK specifically, and I accept you asked the question globally. The UK markets and European markets are liquid and increasingly liquid. There is clearly opportunity for different trading hubs to develop as time goes on, and may be a better international connection between markets. But in our opinion, certainly, the UK and the European markets are liquid and relatively deep.

Tom Crotty: Just to add to that, I think from our end we are obviously energy-intensive users. It is very difficult to know the degree of impact. Our view is there must be an improvement in liquidity. We would hope that improvement in liquidity would improve energy prices, but there is no guarantee of that. I suspect it will not be anything like as dramatic as we have seen in the US, because that is very much a liquids-driven issue. That is chasing oil with associated gas. But I think it will improve liquidity and, therefore, it should improve the market for large users like us.

Paul Spence: To echo those points, we would see it as being a contributor to liquidity in the market, but it is not going to be a game-changer. It is not going to be something that fundamentally changes either the global position or the European or UK position.

Q220 Chair: Do you think it might restrict the extent to which prices might otherwise rise in the European market?

Tom Crotty: My personal view is, yes. That is our biggest worry. But if you look at what is happening in the European market today, prices are rising inexorably. For producers of chemicals or steel, we find ourselves in an increasingly uncompetitive position as a result of those prices. Something needs to happen to address that. We would hope that, at a minimum, it would stop that further rise. I should say, from a chemicals point of view, we must not forget the other aspect of shale gas, which is potentially a key raw material for the chemicals industry, not from its energy content but from its chemical content. That has probably been the most transformational impact of it on the US chemical industry.

Q221 Chair: I should draw attention to my entry in the Register of Members’ Interests in the energy industry.

As far as Britain is concerned, do you think that we are well placed to connect to and take advantage of an increasingly liquid market? Is that something that would particularly affect us?

Martin Pibworth: My opinion is more or less the same. The UK is already in a global gas market. I accept that US prices seem to imply that is not the case, but US gas is currently islanded and, therefore, I think if you go back pre-the shale gas revolution you saw quite a strong correlation between US and UK prices. Therefore, for us, UK and European prices reflect global fundamentals. Shale gas production in the UK would not necessarily change prices in perhaps the way that has been described. We are a little bit more neutral on that, and that is partly because the UK imports significant amounts of gas anyway. For the UK to end up in a similar situation to the States we would have to displace all of those imports first, and it seems unlikely to us that the UK shale prospects are that vast.

Tom Crotty: Answering your specific question, I think the UK is extremely well placed. We have a long history, clearly through the North Sea, of developing a very suitable infrastructure. We have an infrastructure that links us through to continental Europe through the interconnector. Up until 1997 the interconnector was a means of exporting excess gas. Since 1997 that flow obviously reversed, but it does mean we have that capability. We have no idea what the quantities of shale gas might be but, regardless of where they are, we have the infrastructure that can allow us to continue to be an importer or-in a wonderful scenario-become an exporter again.

Q222 Dan Byles: I want to explore a little bit more the difference between what is happening in the US and the UK. Mr Crotty, your evidence has pointed out the massive advantage that a lot of American companies are now getting because of the structurally lower energy costs. What is it precisely that is going to prevent the UK from potentially being in the same position? Is it simply the quantity of shale gas available that makes you-and perhaps Mr Pibworth-believe that is not going to have the same effect here, or are there other factors?

Tom Crotty: I will let some of the experts in.

Peter Parsons: From a national perspective, it is a case of looking at the volumes. The US has a massive indigenous conventional gas production, and the additional shale gas that has been produced here has tipped the balance. In the UK, we currently import about 60% of our gas needs. Therefore, the volumes required would be considerable.

Q223 Dan Byles: Is that the cost of the margins? We are not able to shift the cost of the margins. Is that the point?

Peter Parsons: It is a case of how much additional gas would have to be developed from shale to make an impact, in terms of the levels of imports we currently experience.

Q224 Dan Byles: Is it a sheer quantity issue that you are saying is likely to stop it having the same dramatic impact on energy prices?

Paul Spence: I think there are three or four important differences between the US and our situation. The first is the relative quantities and import dependence. The second is the difference we have seen in the US in the exploitation of gas that is associated with liquids. Therefore, there is a support effect that the gas is a relatively cheap by-product of the liquids production. There is a very mature gas exploration and production industry in the US, there are different land ownership and land access rights, different environmental considerations, different environment rules and different population densities.

Dan Byles: That still comes down to a quantity issue, about the quantity of extractable gas rather than-

Paul Spence: It is not just what is technically available. It is what is economically recoverable, and what is environmentally acceptably recoverable. All of those factors are different and, therefore, have a different effect on the quantity that might end up being produced and producible here in the UK.

Q225 Dan Byles: The Policy Exchange has said that if the UK is going to position ourselves to potentially benefit from cheaper gas prices, which may come about under a low gas pricing scenario in the future, as a result of shale gas development at home or abroad, we need to remain-in their words-adaptable to a range of possibilities. Do you think the Government’s current energy policy will allow the UK to take advantage of cheap gas, should that become available as a result of a shale gas boom, but also allow us to develop alternative sources of energy should it not?

Paul Spence: Given that my company is very heavily involved in all of the different sorts of energy generation-gas-fired, we are just finishing building a gas CCGT; we build renewables and we build and operate nuclear power stations-it is clear that an energy policy founded on having a diverse mix then gives you flexibility to respond to the changing circumstances.

Q226 Dan Byles: The question is about current UK energy policy. Are you satisfied that the current direction of the UK’s energy policy will enable us to maintain that-

Paul Spence: I think the broad direction is the right direction. Clearly, we need to get there as quickly as we possibly can. The Energy Bill that is going through at the moment is at the heart of trying to make that happen. We need to get that right, and get that right quickly to have the policy in place. I think making that policy real is the issue.

Q227 Dan Byles: We have already agreed with that. Should there be a great shale gas bonanza and cheap energy, we are not cutting ourselves off from that through current policy?

Peter Parsons: I would say that there is very much a future for gas, and we see that that is not necessarily impeded by the current policies.

Tom Crotty: I would say the same. Gas has a very important role to play in the future energy mix. Shale gas will improve the liquidity and potentially localise the supply of that gas so that, rather than imported gas, it is UK gas with the benefits flowing to the UK economy and UK revenues coming in. As part of the future mix it is critical. This week the International Renewable Energy Agency was publicly saying that low-cost shale gas can help create a hybrid system. Solar or wind can complement gas-fired generation by running when available. I think it works very well.

Q228 Dan Byles: WWF have said that any shale gas extracted in the UK will simply go to partially offset declining North Sea oil, rather than perhaps increasing the total amount of gas that we are digging out. Do you think that is a fair assessment? Are some people overstating the benefits, in terms of energy security and import dependency of shale?

Martin Pibworth: We do not know the answer to that, but we are concerned to see that there is a feeling that shale gas will provide the cure. We believe that it is possible that it might displace other marginal sources of gas, not only in the North Sea but more conventionally around the world, so more marginal projects, which perhaps would get the green light in a non-shale world, may possibly get pushed out and deferred. For us, we see a state where it might be effectively a gas-on-gas competition, where the best projects come forward and others are deferred.

Tom Crotty: It would not surprise you that, as a user, that is of less concern for me. Gas-to-gas competition will happen anyway, regardless of what the UK does on shale gas, because the world is developing shale gas and US shale gas will become increasingly tradable. As a company, we are already starting to set up mechanisms for bringing US gas into Europe.

Q229 Dan Byles: Even with the liquefaction and re-gasification costs, is that still looking attractive?

Tom Crotty: For the chemical raw-material use, where it is the ethane we are after, the import of ethane from US shale gas extraction is more than economic. After all the liquefaction and re-gasification costs, we can land it far cheaper than we can buy it locally.

Dan Byles: That is very interesting.

Peter Parsons: From our perspective, shale gas production in the UK will enhance security of supply and also enhance diversity of supply. That is an important factor.

Q230 Christopher Pincher: You seem to all agree that there is no policy impediment to the exportation of shale gas, and indeed conventional hydrocarbons. Do you think that the lack of a recent licensing round is an impediment to more players coming into the market to explore for shale gas, and to explore what opportunities there might be?

Peter Parsons: I am personally not in a position to answer that in terms of exploration licences.

Martin Pibworth: Unfortunately, I am in a similar position. I do not have any colour I can add to that.

Paul Spence: I am not qualified, I am afraid.

Tom Crotty: The same for me. It is not our area.

Christopher Pincher: Benign ignorance.

Tom Crotty: Clearly there is an argument for saying that the licences that are there at the moment will, over the next couple of years, prove or disprove whether this is a viable technology for the UK to develop. Whether you have a series of more going out now I suspect is a moot point. Let us see how this develops over the next year or so.

Q231 Dr Whitehead: The Wood Mackenzie consultancy recently produced a report putting question marks against the likely production costs of shale gas in the UK, as opposed to the costs of the very best players in the US. The report suggested that it may not be commercial to produce in the UK, unless the reserves in the UK were found to be comparable to those of the best players in the US. Is that your view, or do you think that is excessively alarming?

Peter Parsons: I think you have to identify that the US has a much more mature gas market in terms of developing their own resources than we have in the UK, particularly for onshore. It needs to be identified that shale gas is not necessarily cheap gas. Shale gas tends to cost more than conventional sources. It is the abundance of gas in the US, from all sources, that gives the US these low prices at the moment.

Martin Pibworth: I completely agree with that. I would also add to that-to pick up on a previous point-one of the features of the US shale gas boom, and the cheap prices they have seen, is the speed at which the US shale revolution occurred. Suddenly vast quantities of gas came on to the American market, with them having no way to export that gas. Obviously over the next four years we may see a change in that. For me, the situation in the US is extraordinary. I would not necessarily base any assumption on shale gas elsewhere in the world on what happened in the US. In terms of the specific question about the costs of shale gas, we would not be surprised if the Wood Mackenzie report was proved to be true, but we do not have an expert view on that.

Q232 Dr Whitehead: In general, the cost of gas in the US is because of the plentiful nature of supply in the US now, so I understand that the number of rigs that are presently being deployed in US shale gas has halved over the recent period. Does that suggest that shale gas in the US is finding it difficult to compete on price on what else is coming up in the US? Certainly, in terms of UK production in the future, that will be exacerbated by the nature of what we have in the UK as opposed to what there is in the US. Do you think that is an inherent feature in the likely landscape of shale gas production in the UK in the future?

Tom Crotty: It is very difficult to draw comparisons. We have already mentioned that a lot of the drivers of shale gas development in the UK are liquids. It is oil, and $100 oil is paying for a lot of exploration and production. The gas is an associate and, therefore, you are almost getting gas as the by-product. So you are less concerned about the costs, but that will not be the case with the UK. Counterbalancing that, a lot of the recent information coming out on the geology in the UK suggests, for example, that UK deposits are significantly thicker than US deposits. For one access point on the surface you probably have five times the volume of gas to access, which will have a significant cost impact. There are swings and roundabouts, and I am certainly not expert enough to take a view on that, but clearly the people who are looking at it-companies like Cuadrilla and IGAS-believe that it is going to be economically viable.

Paul Spence: One of the consistent themes that certainly I am hearing is that there is a lot that we do not know at this stage. Given there is so much that we do not know here in the UK, doing the work to understand what the reality of the costs are going to be here seems to us a very sensible thing to do, and a very sensible thing for the country.

Going back to your question about the US, certainly we have seen a lot of reports that suggest that the extraordinary set of conditions we see in the US at the moment are not what the long-term position will be in the US. The costs of gas in the US could be expected to rise as export becomes available and as the easier sources of gas are depleted, as it is more about production of gas for the sake of gas. As we see those three factors start to come into play, that would look like it would change pricing in the States as well.

Q233 Mr Lilley: Wouldn’t you agree that, if there are substantial amounts of shale gas that can be produced in this country, it must be immensely beneficial to the British economy? Either it will reduce the cost of gas or, if prices do not come down, it will increase Government revenues from that source, reducing the need for revenues elsewhere in the economy. First, do you not think it will be beneficial? We have been talking in a terribly drab way, in the English way. Any great bonanza on our doorstep is something we should shout about. Secondly, wouldn’t you say it is absolutely irresponsible, at a time when the British economy is in as dire straits as in the 1930s, that we have sat on this for nearly two years, since this Committee-which I was not on at the time-said we should go ahead, doing absolutely nothing about it? We should be moving ahead with all due speed, and should now do so with even greater speed, to realise this bonanza if it is there. We will not know if it is there until we drill the holes.

Tom Crotty: I agree with you 100%. I wish I could have put it as eloquently as you have. Regardless of the quantity, the fact that potentially we have hydrocarbon resources on our doorstep, which could displace imported gas, seems to me to be a no-brainer from a UK economic point of view.

Q234 Sir Robert Smith: I should remind the Committee of my entry in the Register of Members’ Interests to do with oil and gas and, in particular, a shareholding in Shell. One of the points put to us that could be a barrier-as it is with so many other projects in this country-is the perception of the community that will be involved in this event of going ahead with it. You are all involved in large infrastructure projects. Do you have any advice or suggestions as to how that community fear could be engaged?

Peter Parsons: It is not my specialist area. But National Grid are very proactive, in engaging with local communities and special interest groups, to try to take their information on board all the way through the life cycle of a project. We are very active in our engagement with various parties to try to bring everything together.

Paul Spence: Certainly, from my company’s perspective, we have been very heavily involved in a major consultation exercise as you know. I think that the lessons are that the combination of early consultation, and getting the facts out there about what the impacts are, what the proposals are, and what it might mean for the community-a developer who is willing to listen, make changes and respond to concern. Then I think the third component is the one that says that, if you are hosting infrastructure, there should be a benefit for the community. Beyond the requirement to mitigate within the planning system that there is already, there should be some benefit in the standard of living of the people who are affected by any form of infrastructure. We believe that should apply to shale gas as much as it does to nuclear power stations or to wind farms.

Martin Pibworth: I totally agree. SSE is obviously involved in onshore wind development, and has a history of positive engagement with local communities. In our experience, the earlier that is done, the more feedback you get from local communities, and the fact that you can get them to share in the benefit of it, of course, is very positive for the project.

Q235 Sir Robert Smith: It was put to us, by Mr Yeager of BHP Billiton that of course, in America landowners are partners who share in the profits of what is going on on their doorstep. Do you think that is something we should be looking at?

Tom Crotty: I think that is why we do need to do exactly as everyone else has suggested. The US situation is quite different because they have mineral rights that would not exist in the UK. They are in a position where the law would simply protect them from the disturbance and would compensate them for that. Therefore, I think there is a need to try to go the extra mile. You need people to understand the economic benefits, locally as well as nationally. We need people in those areas to be as welcoming of shale gas as the residents of Aberdeen are for the North Sea development because they can see there is a strong economic imperative, locally as well as nationally.

Sir Robert Smith: Yes. That is shared by the rest of the panel?

Tom Crotty: Yes.

Q236 Sir Robert Smith: The industry talk is the availability of the specialist rigs that would suit production in the UK, and whether that is going to be a barrier to take on for this industry.

Paul Spence: Again, the lesson of the States is it has taken quite a long time, 20 to 30 years, for the States to build up the capability, the capacity and the supply chain. We are not in the same position here in the UK. It should not take us long, but it will take time for us to build up enough rigs available to take advantage of any exploration and production we want to do here.

Tom Crotty: Clearly, there are a lot of countries around the world that are having exactly the same discussions that are occurring here and they are looking strongly at shale gas. I think we do have a benefit in the UK, in that it looks like the technical problems with extraction are probably much simpler for us than they are in many other countries. I was in China last year. It is quite clear that there are serious concerns that the deposits there are in mountainous areas and areas with too little water, so that will restrict their development. I believe there are technical problems in the Ukraine. I think the issue you raise is a real one, but, in terms of international competition for the rigs that are available, we should be very well placed.

Q237 Dr Lee: You might not be able to answer this. A lot of the challenges in exploring shale gas and exploiting reserves are going to be similar politically with regards to onshore wind. I think I am right in saying that the geology indicates that significant shale gas reserves are under the North Sea. I am told that, technically, at the moment that is not accessible. Should we be incentivising developing that technique instead of incentivising offshore wind, in view of the fact that reserves could be significant and you would not have the same landowner issues, community issues and the like?

Peter Parsons: Putting on an engineering hat, it would obviously be achievable but it would be done at far greater cost. Shale wells are not like conventional gas wells, whereby the productivity from them declines quite quickly. Therefore, you would have to drill an awful lot of wells, and offshore wells cost an awful lot more than onshore wells. So it is just a question of economics.

Q238 Dr Lee: Is it so significantly expensive? We are paying £165 per MWh for wind farms. That is a significant subsidy. Are we saying that it is significantly more than that?

Peter Parsons: All I am pointing out is that all offshore operations come at a far greater cost than their onshore equivalent. The production profiles from shale wells falls off quite quickly, so you would have to have a continuous drilling operation to sustain that level of production offshore.

Martin Pibworth: I will pick up on that point if I may. The first point I would make is I would reiterate that our belief is that we are in a quasi-global market. For me, there are probably cheaper alternatives globally, in terms of supply, than there would be going for offshore shale in the North Sea. In terms of the point about a comparison with renewables, I think there should be a real march in the UK to have a diverse suite of generation options and energy options, and clearly the offshore example you gave is helpful in the UK achieving its eventual decarbonisation targets. For me, I would probably try not to link the two as a comparator.

Q239 Dr Lee: It is helpful but it is costly, is my point. It also needs to be underwritten by gas, by definition, because it is intermittent. I am not suggesting it is cheap, but, in view of the quasi-global market you talk about, that depends upon the global market being stable in the areas that produce the gas, retaining stability in terms of their Governments. I would suggest that is a big question for most of the conventional gas reserves we know of. I just wonder how expensive it is. There is no shortage of water, obviously, so you do not have the same challenges in that regard, but it would be politically a darn sight easier to bring about than the onshore. Looking at the map of where shale gas is, I do not think the people of Sussex are going to be particularly enthusiastic about shale gas drilling. However much I share Peter’s view that it is a resource that we should tap if we can, the politics of it are going to be quite challenging.

Tom Crotty: Speaking as a resident of Cheshire, which is sitting on a shale gas deposit, I would be very welcoming. There is a reality that says you need to access what is economically viable. Onshore shale gas is potentially economically viable. I suspect offshore at this stage is not. There are other onshore options as we move forward, things like coal bed methane. We have a huge amount of coal deposits in the north-east of England that are now not exploited. That could offer options for coal bed methane. That whole unconventional gas economy onshore is probably going to be a much more economically viable option for the country.

There is unquestionably a trade-off. The politics are difficult because onshore is causing disruption for people. It goes back to the question we raised earlier: how do you get people to share in that benefit?

Q240 Sir Robert Smith: While we are still in the declining stage, there is still a long tail in the North Sea and west of Shetland. We must not lose the incentive to get the last drops out.

Tom Crotty: That is absolutely right. Clearly, speaking as the company that sits on the end of the Fortis pipeline system and takes the associated gas, we will continue to do that, because that is going to be the lowest-cost gas that we can access and will continue to be the lowest-cost gas.

Q241 Albert Owen: To pursue this line of questioning a little longer, one or two of you said earlier on, "We could put the rigs there pretty quickly", but the rigs are offshore. My understanding is-and I am certainly no engineer or technical expert-they have actually gone through the shale to get at some of the conventional oil and gas, so they know where it is. Perhaps they did not collate the data at the time; they did not think it was important. But it could save some significant costs. Here we are decommissioning some of these rigs. They are already available there. Surely, that is something we could look at, and perhaps we could be world leaders in it, because America and others will go on their resources on land and we can become specialists and experts in it. Do you have a view on that?

Peter Parsons: I think you need to talk to companies who are experts in exploration, because it is a very technical area.

Q242 Albert Owen: It is finding these people. I will be honest with you. This is our second inquiry, as somebody commented. Perhaps if they had listened to us the first time around, we would have been well advanced on this.

I will move on particularly to the Grid. Mr Parsons, do you see the development of shale gas affecting investment in the development of the gas networks?

Peter Parsons: Not necessarily, no. It is in a good location on the network and National Grid has a well defined policy for entry for new sources of gas. To us, gas is gas. It does not really matter whether it is unconventional from shale, whether it is coal bed methane, or gas that you get out of the North Sea. As it stands, the area that we are talking about is close to large areas of consumption. The north-west is one of our biggest areas of consumption. We used to have gas coming on to the network from Morecambe Bay at considerable rates, and so it-

Q243 Albert Owen: What about the rest of the country? Although I accept fully that that is likely to be the first area.

Peter Parsons: Like I say, we have a well-recognised policy for handling gas at any location. You only have to look at the storage sites that have made inquiries to have entry on to our network. They are from Dorset right across to the east coast. So many areas of the country have already been covered for storage sites, and there is no real difference between a storage site and a shale site. We have recognised procedures for entry, so it should not be a barrier.

Q244 Albert Owen: What about the quality of the gas?

Peter Parsons: It has to meet our specifications. That is, again, the same for all types of gas.

Q245 Albert Owen: Can you just develop that? What does that mean? The North Sea gas was a specific type of gas. I remember the meters being changed, and that went on. Would we have to be changing meters? Would we have to change our gas supply in the house because there is going to be-

Peter Parsons: That would be highly unlikely. We had a debate recently about whether the gas quality specs need changing or meters need changing. DECC themselves identified that there would not be any change to the gas quality parameters through to 2020. Most of the imports that we currently receive in the UK are modified to some extent. The LNG has a small amount of nitrogen added to it for ballasting purposes. Some of the richer gas that comes into Scotland on occasion has a little bit of CO2 removal. It is nothing new, and it should not be identified that shale gas is materially different in terms of its composition from conventional gas.

Tom Crotty: I would add on the quality issue, from a chemicals point of view, clearly, we like to see gas that is not just pure methane. It is the non-methane elements that are of value to us: it is the ethane and the propane. For example, in the US those elements are fractionated out and we can use them as raw materials to build chemicals with. We are hopeful that the UK shale deposits would allow us to do the same. As an industry in the UK, the problem we have at the moment is that the quantity of ethane coming out of the North Sea supply has declined dramatically in the last 10 to 15 years to the point where it is almost non-existent now. Therefore, getting a new localised supply would be a massive potential benefit.

Q246 Albert Owen: So could you use some of the by-products and the shale gas would come to us purified?

Tom Crotty: That’s right. As things stand at the moment-as Peter has already said-a lot of gas is processed to remove some of those by-products now. The Norwegian gas supplies that come through the Europipe system are at source in Kårstø. They have the ethane extracted. That is actually where we buy quite a lot of our ethane today.

Q247 Albert Owen: Back to Mr Parsons; you said the availability to connecting that is pretty easy. You believe you can overcome the quality issue, but the developers need to give you timescales for when it is likely to come on, once they have their licence. Are you concerned about that lack of information at the moment?

Peter Parsons: We are having some dialogue with Cuadrilla regarding entry for-shall we say-modest volumes to start with, potentially for their exploratory wells. The issue we have would be getting planning through, if it were to be massive volumes, to actually accommodate large infrastructure projects. It is a question of planning. Over recent years, we have had difficulty in obtaining planning permission for the various pipelines that we have put in. People can book entry capacity on our network for approximately four to five years ahead, and we then have a commitment to provide that entry capacity. We have great difficulty building something large over that sort of timescale. If it was massive volumes, we could have difficulty in accommodating that. We would probably need more like six or seven years.

Q248 Albert Owen: A final point to you, with regard to the Government’s role. What role does the Government have? We heard an announcement in the autumn statement. You are saying it could be seven years hence before we expand to the large-

Peter Parsons: That was for a massive volume.

Q249 Albert Owen: Yes, but if we are going to benefit from it, we have to assume that there are going to be larger quantities. So what role does Government have in the planning of giving incentives? Are you sitting down closely and working with DECC on this?

Peter Parsons: Again, some of my colleagues are involved.

Albert Owen: Yes, not you personally.

Peter Parsons: We raise it as an issue. To deliver large infrastructure projects for the benefit of the UK is not easy and can take time, even for gas pipelines. Once they are completed they are largely unobtrusive.

Q250 Albert Owen: Specifically on the Government announcement, are they backing it up with dialogue with you to make this happen, or are they just talking the talk?

Peter Parsons: I would not like to be specifically drawn on that. You would have to refer it to my colleagues who deal with the planning side.

Q251 Albert Owen: They do have a proactive role, and they should live up to it.

Peter Parsons: As I said, I am sure my colleagues are involved in that area.

Albert Owen: Thank you.

Q252 Sir Robert Smith: Back to the quality issue and the different products that are coming out, obviously your pipeline takes away the pure methane that is going to heat people’s homes and industries. You want the other products. How does it get from the well-head to your processing plant?

Peter Parsons: Shall I answer that?

Tom Crotty: Yes. I will just say that we actually want both because we are energy consumers as well; but please, Peter.

Peter Parsons: My background is chemical engineering with gas processing. With gas reservoirs, it very much depends on what is down in the ground. You can get anything from essentially dry gas, which essentially has a very high methane content, right through to reservoirs at the other end. You have bitumen, and then you have heavy oil. Then you have this bit in between that is a sort of mixture. It is like fizzy pop, where you have liquids plus gas. It depends on the type of reservoir you access. You will have all different types, as a contribution of predominantly methane and the liquids associated with that.

In the US, initially, a lot of the shale gas was predominantly gas. However, all the shale in there that has been targeted has a higher liquid content associated with it. People have already said that much of the shale produced in the US now is a by-product, with liquids as the primary production.

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Q253 Sir Robert Smith: Does that mean the footprint of the well-head development being larger, in the sense of the process and the export? How do all these other products-

Peter Parsons: You are right: if there were an increased level of liquids-shall we say-there would be slightly more onshore facilities to handle that level of liquids.

Q254 Sir Robert Smith: Also, how does it get from there to the market?

Peter Parsons: Obviously the gas is piped out, and the liquid would depend on the volumes. For instance, not many people realise that we have the largest onshore oilfield in the UK at Wytch Farm. That goes out by rail. In Lincolnshire, there are quite a few places where oil is produced. Some of that goes out by road tanker, so it all depends on the volume.

Tom Crotty: Again, just building on that, in terms of a mixed gas or a wet gas-as we would describe it-where you have more ethane and propane in there, as well as the methane, in the US there is a very well-established system of fractionators, which take those fractions away. In our US business, we own our own fractionator and we take the gas from the gas markets, do the fractionation, return the methane, and take the ethane and propane away.

Q255 Sir Robert Smith: That is a pipeline of wet gas rather than the National Grid pipeline?

Tom Crotty: There are lots of ways to do it. For example, I am not suggesting this is an investment strategy that we have, but our major site in the north-west is in Runcorn, which is not a million miles away from where a lot of development is going on. You could conceivably see us running a fractionator on that site, as an example. Those are the sorts of things that you could think about doing.

Q256 Christopher Pincher: We have heard from other witnesses-David Kennedy from the CCC and the Tyndall Centre-about their concern at the effect that the long-term use of gas, including shale gas, will have on obligations to meet our 2013 decarbonisation targets. Given their concerns, do you have concerns that there is a future for gas in a low-carbon energy market?

Paul Spence: If I can start on that, I think that we see that there is a clear and continuing need for gas generation as part of the market as we look forward, some of that to generate in its own right, some of that to provide support when the wind is not blowing and the renewables are not generating. Looking forward, DECC themselves have set out a strategy that involves having extra gas generation capacity on the system, having that run on average at about 27% of the time. That is a very clear role for gas, as part of a balanced and diverse mix alongside the low-carbon sources. That does help us to get towards the very low-carbon intensity targets that we need to meet. If we are going to get to the very lowest level, then we need to be capturing and storing the CO2 that is coming out of that.

<?oasys [pc10p0] ?>Martin Pibworth: For our part, clearly, we would agree with that. The Committee will be aware of the current position we are in, in terms of the competition with DECC on that. We see gas as absolutely part of the future. It is essential in providing back-up generation but also flexibility to the system, and we see a clear role for abated gas going forward in that, which is why we are pursuing our current projects.

Q257 Christopher Pincher: Mr Spence, you mentioned the need to use gas for peaking capacity going forward, dealing with the vagaries of wind, as wind becomes a larger part of our energy mix. If we apply CCS technology-and let us keep away from whether it is technically and commercially viable at the moment; we will get back to that-to gas stations to abate their carbon emissions, does that not then make it very difficult for them to be dialled up and dialled down, in order to provide that peaking capacity when the wind is not blowing? Do we have a problem then?

Paul Spence: As I understand it, it is still technically possible to capture and store. What it is not possible to do is to take advantage of things like enhanced recovery, so using the gas or the carbon that you are capturing to then do something for you as well as just putting it into the hole. Clearly, there is a penalty associated with the energy involved and the transportation of the gas, and that penalty makes it less attractive to be running CCS plant as very flexible. That is all part of the modelling of the mix.

If I may, it is all part of what we have to do and what I think is the Government’s responsibility, which is to think about a complete system and the carbon intensity of that complete system under these different circumstances. Clearly, my company believes that, with the right amount of very low-carbon base load from nuclear, we can hit the targets. We can do that with gas as part of that mix.

Tom Crotty: I am surrounded by generators. I will not comment. I will just say that, clearly in the medium term, there is a significant benefit. We have seen the major impact in the US has been a significant reduction in CO2 emissions due to the displacement of coal. I think we would see displacement of coal if there was more abundant gas; plus the fact, if you are using domestically produced gas rather than gas that has come halfway across the world, there has to be a CO2 saving in that.

Q258 Christopher Pincher: We would still not get down to the 50 grams per kWh, which I think is the 2030 target. We would be building in that higher level of carbon emission into our energy mix without abated gas.

Let us talk a little bit then about the viability of CCS. Do you think it is going to be commercially viable within the foreseeable future, so that we can abate gas stations and so that we can meet our 2030 targets, or is that not going to be a sustainable proposition?

Martin Pibworth: Currently, CCS technology has not been proven at scale and, in our view, it needs capital support to bring it to commercial viability. We anticipate that, once that is achieved, and CCS as a concept is proven at scale, then the commercial costs of running that technology come down with the experience and the expertise that is gathered. We will also probably see other advantages in pursuing CCS, in terms of strengthening the academic knowledge base, potentially exporting that technology going forward, and also taking advantage of the current very good standard of offshore gas engineering that we have in this country.

Q259 Christopher Pincher: Do you think we can do it in the timescales that require us to bridge the energy gap and meet out 2030 targets, or do you think we will be running with unabated gas for a period of time, which means we are not going to hit those targets?

Martin Pibworth: I believe we can, but we need to get moving on that process. There is obviously a role. CCS is not going to cure all ills in the next five to six years. Clearly, it is going to take much longer than that. We are hopeful that CCS will be a very good addition to the current suite of energy generation options that the UK has.

Q260 Christopher Pincher: I am assuming that-not to put words into your mouth-they are going to fall out quite happily and readily by themselves, but do you think that, if we are unable to prove CCS technology at scale in a reasonable timeframe, then the only alternative that we have to reducing carbon footprints is to restrict the exploitation of shale gas?

Martin Pibworth: No, I think there are other options. There are other low-carbon technologies and, clearly, we would also see nuclear as part of that mix, if it came at the right price and was in customer interest. Personally, I would probably try to avoid a direct comparison between each different technology. All of them have a role to play in achieving the targets going through in the next 20 years.

Peter Parsons: I would like to add, going forward, it is very difficult to have a world without the use of gas, as part of the important role it has in terms of heat, both domestic and in other areas. If you look at the amount of gas used, it is about four times that of electricity on a cold day. Of that, the vast majority, about two thirds, is used for domestic heat. It is very, very difficult, even with increased electrification and the use of heat pumps in houses, to have a position whereby gas would not have an enduring role to play in our networks.

Tom Crotty: We should not forget there is a significant heavy industrial use of gas that will continue as well.

Paul Spence: If I may, I suppose I don’t think I would be doing my job if I didn’t point out that the most material thing we can do to get ourselves towards our longer-term targets for carbon emissions is to make sure we take the shovel-ready projects, like Hinkley Point, forward as quickly as we possibly can.

Q261 Christopher Pincher: That seems to find popular support around the table. Just one last question if I may: you were talking about the importance of cheaper gas earlier. The Policy Exchange think tank has suggested that gas is a good transition fuel to keep costs low as we move through a period of time into a low-carbon energy economy. Is there not a risk that cheap and plentiful gas means that investment will be diverted from those very renewable energy sources that we hope will help us decarbonise and stay decarbonised? I think the Tyndall Centre says that there may be a diversion of anywhere between £19 billion and £31 billion. Do they have a point, or are they just telling a tall tale?

Peter Parsons: I am happy to leave the figures to other members, because I am not too familiar with them, but I think we can identify that gas has a role to play going forward. Whether it is to support renewables through intermittent generation, we see it as having a role to play, including providing heat.

Tom Crotty: Personally, I think it is a slightly dangerous argument, because it can lead you to make some very poor decisions that could, in the medium term, increase emissions in this country rather than reduce them. As we go forward, we will have an increasing need for new capacity, and that has to come from somewhere. It would be great if Paul goes out and builds 10 nuclear power stations in the next five years, but I do not think it is going to happen. What we do not want is to end up burning a lot more coal, as an example, which will increase emissions rather than reduce them.

Dan Byles: Like Germany do.

Tom Crotty: Yes.

Q262 Chair: Mr Spence, in the interests of making sure the shovel-ready projects are brought to a swift conclusion, does that mean you are about to agree with DECC a strike price of £80?

Paul Spence: It would not be appropriate for me to comment on the ongoing discussions with DECC. We are making good progress with them on the review of our project, the review of the costs of the project and the other aspects of what will be the contract for difference, making as quick progress as we can. We made fantastic progress on the other aspects of having the project shovel-ready before the new year. We are down to a very small number of things that now need to be in place to allow us to take the investment decision and to take the project forward.

Q263 Chair: This Committee does not claim any particular insights into these matters, but it appears to us possible that one of the small number of issues remaining is the negotiation of the strike price. Were you ready to agree a price of £80, it is my impression that DECC might be able to bring the matter to a swift conclusion themselves.

Paul Spence: It needs to be a price that is fair for all-and that means fair.

Q264 Chair: You mean more than £80.

Paul Spence: I cannot comment on the price. What I can say is that it needs to work for consumers. It needs to work for the Government and it needs to work for investors in the project as well.

Q265 Mr Lilley: Can you confirm it will be a multiple of the cost if we were using gas?

Paul Spence: I have been in the energy industry 30 years, and one of the things I have learned is not to predict the price of any of the fossil fuels.

Q266 Barry Gardiner: The Climate Change Committee has told us that extensive use-I think was their word-of unabated gas would mean that we bust our carbon targets apart. Is that your view, Mr Crotty?

Tom Crotty: I suppose it depends on what you define as that type of use. As I said before, having gas as a key part of the mix is essential.

Q267 Barry Gardiner: What about 26 GW?

Tom Crotty: I could not comment.

Q268 Barry Gardiner: That is DECC’s figure, is it not?

Tom Crotty: I have no idea.

Q269 Barry Gardiner: That is extensive, is it not?

Paul Spence: It depends how it is used.

Q270 Barry Gardiner: It depends how it is used; you mean if it is balancing capacity and kept there as a strategic reserve simply to balance the system after all the renewables that we are going to have?

Paul Spence: In our scenario that meets Government targets, we have a similar level of CCGTs-however they are used-in a much more intermittent role than what you have described in your first comments.

Q271 Barry Gardiner: No, they were not my comments; they were the Climate Change Committee’s. They talked about the extensive use. Let me probe that a bit further. You would see a role for gas as a balancing fuel to compensate for the intermittency of renewables. Certainly, I would share that view. Then let us talk about prioritising in the merit order and supply, then, Mr Parsons, because the Climate Change Committee has also told us that we could reduce the carbon intensity at the moment without any new plant coming on stream by 200 grams per kWh, if we simply gave priority to renewables coming through on to the grid. Is that right? Would you share that view?

Paul Spence: First, I would say it is not National Grid’s role to identify any merit order of generation. That is for the market to determine. Generally speaking, nuclear and new-

Q272 Barry Gardiner: No, but the Climate Change Committee would have said, if you did determine a merit order, you would reduce the intensity of emissions by 200 grams per kWh. I asked you if that was correct.

Paul Spence: I do not know if it is specifically correct, but what I can say is the general merit order is that nuclear and renewables take priority over other forms of generation.

Barry Gardiner: And that is why?

Paul Spence: The cost is lower than any of the others.

Q273 Barry Gardiner: Yes, but the key here is you have gas no longer coming before coal, have you? At the moment, coal is so cheap that it is the other way around.

<?oasys [pc10p0] ?>Peter Parsons: That is primarily as a consequence of shale gas developments in the US, which is exporting coal to Europe.

Q274 Barry Gardiner: Yes. Mr Pibworth, SSE has said that, if there is significant development of shale gas in the UK, then the importance of developing gas CCS increases. We do not even have one coal-fired CCS. Everybody thought we were going to have one. It was top 10 in Europe, was it not, and it did not go ahead? Was that £1 billion ever there, do you think?

Martin Pibworth: In terms of the economics of gas generation and the picture of gas generation going forward, there is clearly a requirement for gas generation going forward to meet the needs of the system, as you have clearly observed. In our view, to hit the 2030 targets, that gas will need to be abated. Clearly, this has not been proved on any large scale yet, and that is why we are in the current process we are in.

Q275 Barry Gardiner: There seems to be confusion here about whether our energy policy is a policy, in and of itself, or whether it is about the wider economy. If it is about the wider economy, if it is about producing something that we can export all around the world, then all around the world coal is going to drive energy for the next 30 or 40 years, and it makes sense to be developing not gas CCS but coal CCS, to ensure that we have something, a technology, that we can export that is actually going to do something about climate change, does it not? That is about the UK economy. Yet the Government seems fixated at the moment. The reason they gave for not doing the coal-fired CCS was, "We see this role for gas and perhaps we ought to have a gas-fired CCS". That is what you are backing them up on. That is what I am saying is the short-term, limited view, which does not look at the wider needs of the economy but only at the phlebotomy-the flow of blood, of energy, around the system. You are a phlebotomist not a GP, Mr Pibworth. That is what I am accusing you of.

Martin Pibworth: I am certainly not a GP, Mr Gardiner. Estimates of global gas reserves are increasing all the time. While we are unsure about shale gas in the UK and the effect on price, clearly we think a global shale boom would exert downwards pressure, which would make the economics of CCS more attractive. I would also say that, because it is an unproven, large technology at this stage, we would hope that, as it becomes proven as it operates, the costs of running CCS would come down over time.

Q276 Barry Gardiner: So if CCS is not developed-and let’s face it, we do not seem to be seeing a great deal of the progress that we thought might be taking place by now-quickly enough to allow it to play that meaningful role in helping the UK to meet its climate change obligations, which you just outlined, should the extraction of shale gas be restricted?

Martin Pibworth: In my opinion, there is no reason why shale gas should be restricted.

Q277 Barry Gardiner: What about the fact that we will not meet our climate change obligations?

Martin Pibworth: I guess, I am making an assumption that there is going to be a role for gas generation going forward. It includes all the diverse range of generation options we have. If we get through an abatement, and can prove it, that would be very good for all the priorities we are looking to achieve as a country at the moment. [Interruption.]

Chair: We are going to have to end this session. Thank you very much indeed for coming in. The Committee is adjourned until 4.15pm, but please come back promptly after the Division. Thank you.

Examination of Witnesses

Witnesses: John Hayes MP, Minister of State, Department of Energy and Climate Change, Simon Toole, Director of Oil and Gas Licensing, Exploration and Development, Department of Energy and Climate Change, DECC, and Chris Barton, Head of International Energy Security, gave evidence.

Q278 Chair: Welcome back, and apologies for the unavoidable interruption. Thank you very much for coming in. As you know, there is a lot of interest in this subject. I know you have a busy agenda on the Bill as well at the moment, so we are grateful to you for fitting us in.

Can I start with a question about the Gas Generation Strategy that is obviously directly relevant to this inquiry? What is the actual level of new gas-fired generation the Government is now intending? Is it 20 GW, 26 GW or 37 GW?

John Hayes: As you know, Chairman, the Gas Generation Strategy sets out a plan for additional gas generation, a great deal of which is to replace ageing stock, some of which is to provide new gas, as an important part of an energy mix that we think is sustainable because it provides resilience. I would say up to 26 GW is the figure that we would want you to be aware of. Of course that depends-as you implied in your opening remarks-on the success of our reforms to the market, which are embedded in the Energy Bill to encourage sufficient investment to get that new capacity.

Q279 Chair: There is, among commentators, the academic world and the NGOs, some concern that this Gas Generation Strategy rests uneasily with some of the commitments that have been made to a drive to more investment in low-carbon electricity generation, and it is even characterised sometimes as the Treasury saying, "Let’s have lots of nice cheap gas", and DECC, perhaps with a slightly greener approach, saying, "We are committed to substantial greenhouse gas reductions in the long term, and if we bill lots of gas now, post-2030 that will leave us with some difficulties".

John Hayes: There are three points in answer to that. First is the assumption implicit in that analysis that gas will be cheap. That is not certain. Gas prices have been volatile and may continue to be so. The second point to be made is that much of this gas will replace coal generation. As you know, currently coal is providing a very substantial amount of our energy needs, and new gas, which is of course-although a carbon fuel-in emission terms much preferable to coal, will replace that coal-fired power. Thirdly, because of the intermittence of renewables, the flexibility that gas offers is an important part of the mix I mentioned earlier. You might even argue the renewable part of our plans could not be successful without the flexibility provided by gas. Indeed, I think the renewable industry themselves acknowledge that mix is of value.

Q280 Chair: You will know-because I know that when you took this job on, you were kind enough to take a close interest in some of the reports that this Committee had written in the past-that when we expressed our support for exploiting Britain’s shale gas reserves in our report in 2011, we did make a number of points about the need for a robust regulatory regime so we avoided some of the mistakes that may have been made in the US. The combination of roles in the Office for Unconventional Gas and Oil, which appears to be acting as a cheerleader for the industry as well as a regulator: is that one in which they are going to find it easy to reconcile those different functions?

John Hayes: The principal role of the new office is to act as a co-ordinator: so, to co-ordinate, give coherence to the strategy, bringing together both the necessary safety and security measures that you recommended in your report-which I have with me-and also, of course, to ensure that across Government there is consistency in our approach to the potential of shale. Your report, which you mentioned earlier, Chairman, says, "We conclude that shale gas resources in the UK could be considerable". It does go on to make very clear they need to be exploited in a sensible, reasonable, safe, secure way, and the Government entirely concurs.

Q281 Chair: That view expressed in that conclusion that you have just referred to-I think we would feel that even more strongly today, in the light of what has happened. From whatever standpoint you start this, if we want to see these shale gas reserves exploited to the full, it is going to be crucial to carry the confidence of local communities, particularly in more densely populated areas. Therefore, if the regulator does have in some respects-as a sort of co-ordinator-at least part of their function appearing to be to promote the industry, that seems to many people an uneasy fit if they are also looking at the regulatory side as well.

John Hayes: Regulation in the energy sector has always been about engagement with providers, both in primary-source terms-and one thinks of the North Sea-and in terms of power generators because, of course, in order to get a regulatory regime that works, that is deliverable, there has to be a proper level of engagement. So, I would not be apologetic about the level of engagement. Indeed, I have met Cuadrilla, who have been drilling in Fylde, and, as a result of that, have pressed on them the need for their approach to be a responsible, safe and secure one. I am very happy to say that they acknowledged the need for the tightest possible regulation in respect of safety. So I think there has to be an engagement and the office should play its part in that engagement; and if it is to co-ordinate in the way I describe, part of that co-ordination is-as well being across Government, between Government and the other agents involved-to co-ordinate, of course, private businesses.

Q282 Chair: You are confident that any possibility of any conflict between these different aspects of what their job will be can be avoided all right?

John Hayes: Yes, I am confident of that. Although I will just say this: it is an interesting point you make, and one might argue the very fact that we set up the office is an acknowledgement the Government sees this as an important, exciting potential. So, there is a sense in which the concentration of effort, in terms of public policy, is indicative of Government’s belief that this is something that we need to explore. In terms of the executive function, I am confident the office will be about co-ordination and coherence rather than, as you describe-I am inferring from what you said-playing a sales and marketing role.

Q283 Sir Robert Smith: It would still be an independent HSC that would be looking after safety, and when it comes to onshore, it would be the Environment Agency dealing with policing environmental emissions?

John Hayes: Absolutely, yes. For example, the licences that are necessary for various parts of the process involved in extraction will be granted in the way they have been. The Environment Agency will continue to play the role that it has, as you know, the legal responsibility to do, so that is unchanged. The office does not change any of the things you described, Robert, but I believe it does give a better chance of a coherent, consistent, well-organised approach.

Q284 Dan Byles: John, very interestingly, in the context of the Office of Unconventional Gas and Oil, I am a bit uncertain as to where that sits in terms of ministerial responsibility and Department responsibility. Is this going to be Defra body, a DECC body? Is there going to be an individual Minister with overall political responsibility?

John Hayes: It is a cross-departmental body, Dan. We have yet to decide which Minister should play a part in the process you describe. If this Committee felt that ought to be me, I would be immensely flattered. I am quite unconventional. There would be a fit there.

Q285 Dan Byles: Excellent. We have spoken with Cuadrilla here in Committee as well, and the CEO, Francis Egan, told us that the tax regime for shale gas must recognise the early stage of the industry so that-in his words-it does not "strangle it at birth". Can you update the Committee on where you are with your discussions with Treasury and where the new tax regime is currently?

John Hayes: Yes. You will know that the Chancellor announced the Treasury were looking at a range of measures to encourage and, indeed, incentivise exploration. I would emphasise that there is a big gap between exploration and production, but the cost associated with exploration will be significant. Of course, when we speak of unconventional gas, in essence, we are not speaking about a different or less conventional drilling process, nor are we talking about different kinds of gas. This is largely methane. It is a natural gas. We are talking about where the gas is stored and, therefore, how it is extracted. As I say, the Treasury have announced they are looking at that. Those details have yet to be finalised but, as you suggest, we are in discussion with Treasury to look at the most appropriate ways forward.

Q286 Dan Byles: Do you know when we might start seeing some details of that?

John Hayes: I am hopeful that in this spring we will know more.

Q287 Dan Byles: Is it specifically a shale gas tax regime, or is it an unconventional gas tax regime? Because I know that some of the cobalt methane companies feel they might be left out in the cold.

John Hayes: I think it would be difficult to distinguish between types of unconventional gas for the purposes of a fiscal instrument, and so-I do not want to be definitive because, as I say, these things are still being discussed-my expectation would be that it will be an unconventional gas measure.

Q288 Dan Byles: That is interesting. Do you know if the Treasury-or whether DECC might even be recommending this-have any specific plans for hypothecating the revenue from this tax? For example, a lot of people have suggested some sort of wealth fund, along the lines of the Norwegian fossil fuel wealth fund. It might be an exciting opportunity to set something like that up. Are you aware of any discussions along those lines?

John Hayes: Not at the very beginning but very early in my career in this House, I learned not to stray too far from one’s purview and certainly not, as a shadow Minister or Minister, to confirm anything that was outside my competence.

Q289 Dan Byles: In other words, ask the Treasury.

John Hayes: I guess, perhaps more courteously, I might say, Chairman, "Watch this space".

Q290 Dan Byles: It has not been ruled out? Would that be a reasonable-

John Hayes: I really would not want to speak on behalf of the Treasury. We are in discussions with the Treasury. Of course, all matters are being debated and considered.

Q291 Sir Robert Smith: When we have sought to speak to Treasury Ministers, they have made the point that DECC speaks for them when it comes to this Committee.

John Hayes: Again, the flattery is endless. I am immensely flattered by that. Let me say, because you know how much how I value this Committee, as a direct result of that inquiry I will meet my colleague, the Economic Secretary, again to discuss precisely these matters, and I will cite your comment, Sir Robert, as the cause, indeed the catalyst, for that meeting.

Q292 Dan Byles: We can probably get a copy of the letter in which they say that the reason they do not need to send us a Minister is that DECC can answer all such questions. Would that be helpful?

John Hayes: That would be wonderful.

Q293 Mr Lilley: On that particular issue, or on the issue of tax, is not one of the great potential benefits of shale-if there is a large amount of it available in this country-that it will either reduce the price of gas, thereby helping the Prime Minister, as he said in his evidence to the Chairman of the Select Committee, helping to rejuvenate British manufacturing; or, if prices come down it will mean significant tax revenue, but only so long as we do tax these companies? I hope there is no suggestion that we are going to give unnecessary tax breaks to an industry that is perfectly capable of operating within a reasonable tax system that generates large tax revenues from a natural resource that is owned by the community.

John Hayes: Your Committee’s fifth report of session 2010-12 on shale gas, to which the Chairman and I have already referred, says, "We conclude that a glut in shale gas production could drive the price of conventional gas down, but there is uncertainty as to the extent of this". As you know, in the United States, over a period of around 12 years, there has been quite a dramatic change there. The price of gas units has fallen very dramatically from $12 to $3, and that has had an effect on, of course, overhead costs for businesses. It has arguably increased American competitiveness. But I think it would be wrong, as your report also concludes, to assume that the pattern in America would be followed exactly here, for three reasons: the geography is different; the geology is different; and the land ownership is different; also, if I might add a suffix, the cost of extraction here may be higher. Nevertheless, if the Government did not think there was potential in this and a significant opportunity, we would not have made the statement my right hon. Friend the Secretary of State made to the House, leading to the possibility of further exploration. Nor would we be taking this matter as seriously, in the terms just described, in respect of incentives and so on. So, this is an improvement opportunity. It could have a profound economic effect. We need to move forward with a degree of caution but not so cautiously that we miss the boat.

Q294 Mr Lilley: On the question of caution, would you agree that, given the potential benefit of this industry, should there be large extractable amounts of shale gas, to the British economy, both in rejuvenating manufacturing and generating tax revenues, at a time when the British economy is in the doldrums as the result of a world economic crisis, it is being hugely irresponsible of the powers that be-we do not blame you, because you were not there-not to have taken the advice of this Committee nearly two years ago and moved straight ahead on developing shale gas? Can you give us an assurance you are going to move forward with all due dispatch on what could be the one new industry that this country has, prospectively, on any scale, up its sleeve?

John Hayes: I cannot speak about my predecessors. You would not expect me to do so. I arrived in the Department in September. By December, there was a statement to the House enlivening this whole subject. What more can be said than that?

Q295 Mr Lilley: You can say that that is not the end of it, we are going to keep pushing forward and they are going to be drilling wells very soon.

John Hayes: Yes. As you will know, Peter, from what is already in the public domain, there is uncertainty about how much of the gas, which has been identified by the studies that have already taken place, can be extracted with commercial viability. Until we have been through the exploratory process, it will not be clear how big the potential is. But certainly we should move ahead with appropriate speed, allowing for a regulatory regime that ensures safety and security, and, by the way-as was mentioned earlier by the Chairman-with the engagement of the local community, which I take very seriously and I know the Government as a whole does too. But you are right; we should not miss the boat.

Q296 Mr Lilley: We heard from BHP Billiton in the States, who are one of the biggest people involved in this, that the first well in any new geological formation is usually disappointing. The second well is not much better. By the time you have drilled 100 wells, you have mastered the geology and you are producing substantial quantities. When are we going to drill two-let alone, 100-wells and test them?

John Hayes: It would not be appropriate for me to make a prediction about timescale. As I mentioned earlier, the pace of change in the United States was remarkable. To be fair, though, that was partly because of the land ownership in the United States, which is rather different from here, partly because the geography of the United States has allowed a great deal of that drilling to take place in areas that are very sparsely populated-a point that the Chairman made, by implication, earlier is that that is not typically the case where shale is found in the United Kingdom-and partly because the cost of extraction in the United States is arguably rather lower. So, one would not want to make direct comparisons with the speed or scale of the exploitation in the United States. Nevertheless, I do agree that we need to move ahead with appropriate alacrity to explore and, if possible, take advantage of this exciting opportunity.

Q297 Christopher Pincher: Minister, in order to meet your objective of exploring the scope of shale gas opportunities-and pursuant to Peter’s point that we are going to start taxing the IGases and the Cuadrillas of this world, as and when they find and extract shale gas-first of all, we need to issue licences to more Cuadrillas and IGases, so we have the scope of operation to do the kind of exploration that you want and get the sort of tax revenues that Peter wants. Are we going to move ahead with another licensing round expeditiously so that we can get those companies into the marketplace?

John Hayes: Yes, absolutely. However, as you know, Chris, there are planning issues too. The local mineral planning authority, which in this case in Lancashire is the local council, will need to consider these matters through the normal planning process. As far as the licensing process is concerned, yes, we are doing the environmental assessment now, and we will move ahead with the speed you describe.

Q298 Albert Owen: Mr Lilley and Mr Pincher have encroached on some of the questions I wanted to ask, but I still want you to answer some of the points that have been raised about estimates and uncertainty. You referred to our report, some 18 months ago, when I think we correctly referred, based on evidence, to these uncertainties. There is a lot of confusion about the figures surrounding how much gas is available. As Government, what can you do to improve people’s understanding for the future because, if we do not have clarity, then there is a vacuum that is going to be filled by those who are pro-gas and those who are anti-gas, and there is going to be a lot of speculation. So, what is your responsible role as a Government Minister and as a Department to improve people’s understanding?

John Hayes: First, to be clear about the process, part of the reason for this new office is to provide that function. It is not about marketing; it is more about co-ordinating, being clear about the process. There is confusion about the difference between exploration and production. We have to be absolutely clear about that. The second thing, while not inhibiting the exploration, is not to exaggerate either the scale or the pace at which we might travel. As I am sure you know, the science on this is fascinating, and I have been fascinated, indeed, to consider issues of porosity and permeability, as I am sure you have too. Trying to make the science more widely available and comprehensible is-

Q299 Albert Owen: Yes. We tried that in our first report. As you know, it is quite an in-depth report. We have had experts in front of us already in this inquiry, and they were not able to give us any exact figures. We understand that, but the estimates vary considerably. The Secretary of State has acknowledged that it is possible to make a meaningful estimate of recoverable resources of shale gas that can be fracked. To what extent are your policies now based on those existing estimates of resources, or are you just holding off to get more accurate figures?

John Hayes: Clearly, we cannot give figures until we test it, until we have explored it. One of your witnesses-one of the people you have just referred to-pointed out that in the United States in 2007 to 2009 the estimates of available resources grew by 40%, so in just two years there was a very different estimate of the likely potential, which is why we are exercising such caution. Until we have tested, I think it would be irresponsible for us to issue any figures. This Committee would not expect anything other than that from a Government that was doing this properly. So, partly, the direct answer to your question is the function I described.

It is very important in explaining the science that we dispel some of the widely publicised myths, misassumptions and misapprehensions about this-widely publicised perhaps by people who have a very particular view about it. So I think clarity about the science is important in engaging the community.

Q300 Albert Owen: The practical steps are what I am really trying to get from you. We took evidence from Cuadrilla in our first session, and they have now had the green light. Things were put on hold because of the geology of the area and the earthquakes. In the meantime, your Department has been developing policies. Do you now envisage, now that Cuadrilla have their green light, that a number of licences that have been applied for will be issued-subject to all the conditions of safety-rather more quickly now that they have had the green light? I do not want exact figures from you, but how many of these licences do you see, and how spread out across the country will those licences be?

John Hayes: Yes. I would expect companies to come forward, subject to the process that you have just described. To be clear about the actions: establishing the new office, which plays the co-ordinating role I have described; clarity about the licensing regime; as a result of the Secretary of State’s announcement that we are issuing licences to restart drilling, analysis of the results of that, which inform further work; being very clear about the science, and the safety and security associated with it; and proper engagement with the community on community benefit. That seems to me to be important too. These are parts of a logical, appropriate process that moves us ahead with the kind of alacrity I described to Peter, but does so in a way that I think we could properly describe as reasonable and responsible.

Q301 Albert Owen: A specific question; we know Cuadrilla was put on hold. Was your Department holding back on these licences for obvious reasons, and were they always thinking about setting up this office for a tax regime? Was that always the case, or is this something new, because I do not remember hearing it from DECC? Or did they wait for you to come along and push all this forward?

John Hayes: No. Of course, the Treasury are interested in this, not least for the reasons that Peter gave earlier. This may have significant economic benefits.

Q302 Albert Owen: But my specific question is: why have we waited until autumn this year to hear this statement? Why was this not developed or this information given to us in previous reports?

John Hayes: Well, I cannot be a Minister in every Department.

Q303 Albert Owen: I am not asking you to be a Minister. I am asking you to be the spokesman of DECC. Was this always a plan that you had?

Another point, the final point, if I may: in response to Dan you mentioned that this tax regime is available for all unconventional gas.

John Hayes: I said it is likely to be. We are in discussion, but I think it will be difficult to distinguish.

Q304 Albert Owen: It has not been developed, that policy? Is there going to be a shale gas tax, or is it going to be for all unconventional gas?

John Hayes: I would anticipate it being for all unconventional gas, because to distinguish between them in an instrument of that kind would be extremely difficult. We have already said that the nature of the definition of unconventional gas is about the location, the reservoir. It is not about the gas itself.

Q305 Albert Owen: Some of that coal bed methane-we know how much is there, we know where it is, and the companies tell us it has been uneconomical to extract it in the past. So this is a financial incentive for that to happen, yes?

John Hayes: That is what the Chancellor suggested, but I think we need to continue those discussions, bring them to a conclusion and hear what the Treasury have to say before I give any definitive commitments as to exactly what that will look like.

Q306 Albert Owen: Well, you have today; that is why I am exploring it with you.

John Hayes: We know that the Chancellor is considering these mechanisms. We know they are designed to incentivise further exploration. I said I think it is likely. I anticipate that being for unconventional gas. The exact nature of the instrument is not something I can be definitive about today, as you know.

Albert Owen: Thank you.

Q307 Sir Robert Smith: Obviously, in achieving the potential that is possibly there for the shale gas, there is the physical constraint of the equipment needed to get it out of the ground, and there are some in the industry that talk about how the US had a long history of onshore drilling rigs available, and also the debate about the kind of drilling rigs, the quality of drilling rigs that will be necessary for operation in the UK. Do you see that as holding back the potential if initial findings look good?

John Hayes: Two things, Robert: first, we need to look at best practice and that includes internationally. Part of what I hope this new office will do is to explore that best practice, in terms of extraction techniques among other things. Secondly, there will be a sense in which this will have its own momentum. Success will bring further rigs and further investment. As the potential opens up, should it open up in the way that this Committee thought it might in its original report, I think there will be further investment in the technology. We have already talked, a moment ago, about the instruments the Government might bring to bear to incentivise that process. In terms of the specific technology, the drilling technology is rather like the drilling technology used for other gas extraction. There is an onshore industry in this country. As you know, Dorset has a significant onshore industry. Inasmuch as there are specific requirements around technology, we want to look at the best available worldwide and see what could be applied here. I feel slightly guilty that my two colleagues have not commented. They may have some blindingly insightful understanding of the technology.

Chris Barton: First of all, in terms of the supply chain, clearly the US supply chain is a lot more developed. That is one of the reasons why, at least in the near term, we would not expect quite the same experience outside the US as we have had elsewhere. Then again, supply chains can develop, and we can learn from experience elsewhere, so if there is sufficient opportunity here or elsewhere internationally, we would expect the supply chain to be a time-limited rather than a "for ever" constraint.

Simon Toole: Rigs do not wait around waiting for someone to drill a well; as the Minister said, if there is success, rigs will arrive and we will be able to drill. Also I think we will find that some of the features of the UK shales, if they are proved to be successful-I think you heard from Cuadrilla that their shale is very thick, much thicker than the shales exploited in the US-will call for new technologies to be developed. That has not been done before. All the components of that technology are probably available, but putting them together in the right way is going to be something that the UK will need to do if we have success. So there will be an evolution of our supply chain and of our technological application, as we find out what we have and what we are dealing with.

Q308 Dr Whitehead: I am a little unclear about how DECC’s overall strategy is going to proceed, in terms of the uncertainties that we know there still are, as far as not just shale gas availability but extractability and-most crucially-the price of that extraction. Therefore: the extent to which people will come and do more than just explore to see what is there, and will start extracting it commercially and placing it on the market. Indeed, a recent report-the Wood Mackenzie report, which I am sure you are aware of-has suggested that, in UK conditions, it appears likely that the cost of shale gas per cubic metre is likely to be substantially higher than the present gas prices would suggest. Therefore, shale gas may be a concomitant of higher gas prices rather than a harbinger of lower gas prices. Is that your view, or how are you planning in DECC to take care of those eventualities? That seems to suggest to me that you may not get the production, even if there is the availability in the immediate future.

John Hayes: Of course in the end it will be a matter for the companies. If companies explore and come to the conclusion that extraction is not commercially viable, they will be unlikely to proceed. That might be affected by scale. We have talked in energy across a whole range of areas about how scale can drag down cost. If the scale is sufficient, it could be that costs can be driven down. We mentioned the technology a few moments ago. As the technology matures, it is likely the cost of some of the initial investment may fall. We have spoken of what Government might do to catalyse that, to stimulate that to offset those costs. You are right, there may be geological reasons for a difference in cost, either related to the ability of the rock to transmit fluid or the character of the spaces where the gas is stored, which are particulars, different geologies. It could be that in the United Kingdom the profile of the geology is such that costs are higher.

There may be other business costs-not least the regulatory regime-that are different. I have already mentioned land ownership, which has implications for cost, and geography. If you can do things in wide open spaces as opposed to populated areas, costs may differ. In the end, all those are matters for the market. While Government can play its part in creating a context in which those things can be considered, viability and commerciality will be features of the market. The specifics that I described, in terms of geology, will be measured by these businesses in terms of flow potential because, as someone said earlier, flow potential will define how much value there is in each well against the cost of opening up that well. These are complex matters but, as the industry begins to unfold, all of the things I have described will become clearer. Chris, I do not know if you want to add to that regarding cost?

Chris Barton: Just more generally, for all the predictions and studies that we do, we all have to recognise that predicting future prices is extremely difficult and almost every prediction turns out to be wrong. I think, from a Government perspective, we need to be in a position that we are not trying to dictate exactly what different outcomes are, that we have an overall framework within which different technologies can compete on the basis of cost, and be flexible to that. It also points to the wisdom of ensuring that we have overall diversity in the energy mix because, even if we think today, for example, that some people think that gas prices are going to go down, perhaps that is right, perhaps it is not. Ultimately we do not know, so we should not be putting all our eggs in any one basket, and we need that mixture of the overall energy mix.

Q309 Dr Whitehead: I think that anticipates my next question, in that we have heard overall that it appears that, even if there is a reasonably substantial extraction of shale gas in the UK, then it will do no more than counteract the decline of gas production from the North Sea, which is a revenue loss to Treasury, so perhaps a revenue gain for shale gas will counterbalance that, and that is the sort of possible scenario that results in the future.

I presume, in terms of the market determining whether shale gas is developed in the way that you described, there could be a fair amount of development or not much, depending on who takes a punt on what price, and what the overall price and the overall long-term scenario is. However, in DECC, you are in the unfortunate position of having to at least make some contingency planning for those various different possible outcomes. Therefore, you require that flexibility that you have mentioned regarding those different outcomes. How will you be able to do that, in terms of having the flexibility of perhaps being able to encourage that exploitation if it turns out that it is cheaper than one thinks, or the other prices of gas go up higher than one might think and, therefore, it becomes marginally economically viable? Alternatively, it might not, and, therefore, other forms of energy need to be fast-tracked to deal with that outcome.

John Hayes: By the way, in terms of a proper consideration of the implications for shale gas, other unconventional gas and gas more generally-and, as you suggest, the wider effect that might have, which is highlighted in your report, and in others’ views on these things and on the energy market more generally. You make the point that a change in the price of gas will not only have a potential displacement effect on other sources of gas-which could be beneficial, by the way; there might be less imported gas, for example-but is likely to have an effect on coal, as it has in America, where we know that coal for power has been quite significantly affected, and a broader effect still. So, the need for scrupulous attention to changing circumstances, which is essentially what you are calling for, is I think a pressing need. Part of the role of this office that has been established, in co-ordinating the process, will be to monitor and, through monitoring, assess the need for the application of the flexibilities that Chris just spoke of. So, my judgment is that, as well as establishing a framework, our job is to establish a public policy infrastructure that allows for exactly the kind of response that you have described, Alan.

Q310 Dr Whitehead: Do you envisage the assistance that may be forthcoming from Treasury-we have discussed the fact that that is by no means finalised in terms of what it looks like and how it might work-for the beginnings of exploitation of shale gas to develop into any sort of underwriting, so that a price can be stabilised over a period for shale gas production, or do you see it as an aid to exploration, finding out what there is and how it might be best established?

John Hayes: The way it is being envisaged currently is as a means of stimulating exploration but, of course, as time goes on, with the diligent monitoring of events of a type that we have just been speaking of, Government as a whole will need to continue to look at these things. It is part of the reason for the need for a cross-departmental approach. The Environment Agency falls within the purview of Defra. It has a vital role to play in the regulatory regime. The things you have been speaking of also have a connection to Treasury, and Peter said there is a significant wider economic interest associated with this. DECC has its role to play in the licensing regime that we enjoy. So, I think a need for co-ordination, as well as a need for the kind of diligence you describe, is critical. As I have said before, the new office will indeed be a cross-departmental body.

Q311 Barry Gardiner: Mr Barton, as I understand, you are responsible for security of supply. Is that right?

Chris Barton: Yes.

Q312 Barry Gardiner: Therefore, you will have seen the figures from a number of people, but Tyndall in particular, that say that the investment in new gas could see between £19 billion and £31 billion-worth of investment knocked off renewables. Given that we are looking for £110 billion in total, that is a sizeable chunk to come out of just renewables, is it not? What does that tell you about the prognosis for security of supply?

John Hayes: Well, I think-

Barry Gardiner: No, I asked Mr Barton.

John Hayes: I will ask my colleagues to comment too, but all of this needs to be considered in terms of DECC and the Government’s energy strategy. You are very familiar with the argument that lies at the heart of the Bill, which you and I are both looking at in some detail currently. That argument is that we need a mixed economy in generating resource, not only because that is important for energy security but because it is vitally important to meet the emissions targets that we have agreed. So, the context in which we debate the matter of shale gas and the Gas Generation Strategy more generally is an unchanged context-the context where we need to meet our targets. We need to do so in a way that is affordable, with an eye to any security. I think you are right: if, for example, gas were to become the only means-I am exaggerating, of course, for the sake of clarity-by which we generated energy, that would lead to a vulnerability. There needs to be-

Q313 Barry Gardiner: Minister, sorry, that was not my question. You have very skilfully shielded Mr Barton from my question, and tried to divert it in a different direction. My question was really quite simple. It was: if there were, as is predicted in the Tyndall Report, a £19 billion to £31 billion reduction in investment going into renewables in particular, what would that do for your role, Mr Barton, as having to look to security of supply?

John Hayes: Barry, contrary to the more colourful stereotypes, civil servants are grown up. I do not need shielding, so Chris will answer.

Chris Barton: Thank you very much. Two things, if I may. First of all, just to address the suggestion that shale gas would, or indeed increased gas use itself will, necessarily spell a reduction in investment in renewables, I do not think that is necessarily the case. Indeed, increased gas use can go hand in hand with increased renewable deployment in that, as was alluded to earlier on, some more gas generation will be needed to facilitate the extra renewable deployment that we need.

Q314 Barry Gardiner: You and I both know that that is in a marginal capacity to make up for intermittency. Are you saying that the Tyndall Report was wrong? Are you saying that their prediction of a £20 billion to £30 billion reduction in investment in renewables has no basis? At least, let us take the argument head-on rather than to say, "Well, there is a different scenario in which it may not be the case".

Chris Barton: I will confess I have not read the Tyndall Report, so I would not want to comment one way or another on its merits. But, okay, even if we accepted that there was a reduction in investment in renewables; what impact would that have on overall energy security? Again, I think you have to see it-and this is not seeking to dodge the question-in the context of the overall energy mix, and, in general, greater diversity is helpful for energy security. On the other hand, you need to look at how the different technologies are-

Q315 Barry Gardiner: What figure do you have pencilled in, Mr Barton? Of the £110 billion of new investment in the electricity infrastructure: what figure do you have currently pencilled in for renewables out of that £110 billion?

Chris Barton: I do not know exactly how much is on renewables, but we do know for up to 2020, we have a clear target for 15% of our energy to come from renewables by then, so it would be-

Q316 Barry Gardiner: No. I was asking for a percentage of the £110 billion that is required, because it seems to me that if you are taking £20 billion to £30 billion out, and that is just from renewables, that is a sizeable chunk of your investment as a whole, and I would have suspected it means the death of investment in renewables.

Chris Barton: I do not have a figure for the split of that £110 billion between different technologies, but I would say-

Q317 Barry Gardiner: Could you send it to the Committee?

Chris Barton: I can see if we have one, yes. Although I would say that the fundamental driver of our renewable deployment, to 2020 and beyond, is going to be our overall renewable energy policies. If we hypothesise a situation where there is a massive reduction in investment in renewables, then, sure, there will be less renewables than we expected, which comes back to my first point, really, that I would not take it as a given-

Q318 Barry Gardiner: The point, rather, is that we take the right fork in the road at the right time.

Chris Barton: Yes, exactly, but also I do not think we should take it as a given that there is going to be a reduction in investment in renewables. Indeed, we have a whole suite of policies to ensure that we maintain that investment in renewables. Indeed, under the levy control framework we have a tripling of support between now and 2020 for low carbon. We are not anticipating a slowdown in renewables. We are anticipating a very significant increase in renewables, and that will stand whether shale gas is exploited at the upper or lower limit of expectations. So I think it does come back to that first point: do we think there is going to be that very significant reduction in renewable investment? Our position is, no.

Q319 Ian Lavery: Looking at the gas markets and the trading, the gas trading and the prices, there have been many predictions with regards to each one of those. DECC have suggested that large-scale unconventional gas production-in the main, I believe they mean shale gas-could impact heavily on inter-regional trade. This is basically because of the reduction in the need for imports. Listening to the evidence today, this is likely to happen. Have DECC made an assessment of the security of supply indications if cheap gas prices reduce inter-regional gas trading?

John Hayes: If you look at America, Ian, what has happened because of shale is, first, it decreased or de-placed supply of gas from other sources. Shale gas has become the dominant source of gas. You are right that that pattern might be repeated. It would depend on scale, and we have already said that scale is something we cannot make a definitive assessment of until we know a bit more about the relationship between what is there and what is commercially viable to extract. You are right that the pattern in America might be repeated here.

The other effect then, Barry, is on other means of generating energy, but I would argue-rather contrary to your assertion-that it would provide a more secure source of supply. This is domestic supply of gas, and surely we would not want to turn our back on the possibility of a significant source of domestic energy. I see it as potentially advantageous, in terms of energy security, rather than disadvantageous.

Q320 Ian Lavery: I am certainly not suggesting that anybody turns their back on this. That really was not the question. The question basically is: have DECC made an assessment of security of supply if indeed cheap gas prices do reduce inter-regional gas trading? I do not think anybody is suggesting that anybody turns their back on this issue.

John Hayes: No, I think you are right. It is something one needs to look at closely. In answer to Alan’s question, I have already talked about the need to monitor the situation closely and regularly, because things could change quite rapidly once we move from exploration to production. You are right that part of that monitoring must be an assessment of the likely effect on other sources of gas. I will commit to that as a direct result of your question-that, as this moves on, I will make sure that the Office for Unconventional Gas, as part of its work, makes an assessment of those effects. We will only be able to do that down the line when we know more, but it seems to me that it would be less than responsible not to do it.

Chris Barton: This is something the IEA has looked at in its Golden Rules for a Golden Age of Gas-considering what the impact would be on inter-regional trade. One of the prime reasons why it envisages a reduction in inter-regional trade, compared to what would otherwise have been the case, is the widespread nature of unconventional gas in their golden-age scenario. So, if there is unconventional gas in all sorts of places around the world, the need for inter-regional trade is slightly reduced. But first, the overall level of inter-regional trade then would be greater than it is today; and secondly, if we were in that world, the overall security of gas would be in a healthier position because there would be a lot more gas and at lower prices, so the net effect would be a positive one on energy security at the international level.

Q321 Ian Lavery: Evidence has shown that shale gas might increase liquidity. As a country, is the UK in a good position to connect to an increasingly liquid market and, therefore, benefit from potentially cheaper gas prices?

John Hayes: I think that is true. It is quite possible that a number of companies may enter the market, creating more plurality and more liquidity. That is a very healthy thing. Typically, that sort of competitive pressure would drive prices down. Chris has mentioned that extra supply may do that, both locally and more widely internationally. So, I think you are right. I think you are spot-on, actually. There is a possible positive implication for greater competitive pressure within the market, and I think that is something that we would welcome.

Q322 Ian Lavery: Looking at the basis on which the Government makes its predictions-we have discussed predictions a lot today, and I think it was Mr Barton who said that most of them are wrong-and at the price predictions, DECC have said that their future projections are that gas prices will increase, and the Office of Budgetary Responsibility are sure that gas prices will reduce. I wonder-and I am sure the Committee would welcome your comments-on what basis you make your policy decisions in relation to the future of gas prices, and why.

John Hayes: Predicting gas prices is an inexact science. If you look at some of the predictions for gas prices, historically, they have not been followed by the events they anticipated. Nevertheless, notwithstanding the different scenarios, the likely impact from widespread exploitation of shale needs to be measured against the consensus of forecasts, which suggest that the gas price will continue to be tight. That is not least because demand for energy is growing rapidly in emerging economies and elsewhere. I do not want to get into the realms of fiction, still less fantasy, but it may be that China or another large, growing, emerging economy starts to invest in unconventional gas. That is not something that we could anticipate in our considerations here with any certainty or confidence. The consensus view is that the gas price is going to be tight, although you are absolutely right that shale locally could have significant impact.

Q323 Sir Robert Smith: Mr Williams has emphasised the benefits, in our domestic gas production, of balance of trade and of tax revenue in getting value out of the commodity in the ground in this country. Do you agree with what previous witnesses said this afternoon: that there may be over-excitement and misunderstanding in looking at the US effect? In an island without the export potential for gas and a lot of associated gas coming out with liquids production, the collapse in the gas price in the US is unlikely to read across as a consequence of shale gas taking off in this country?

John Hayes: Yes, I think a measured approach is necessary. It is easy to look at the United States and assume, without taking into account the important differences I have tried to highlight today, that the effect there could be replicated here, both in terms of speed and volume. There is significant potential here. It is what this Committee has said, it is what the Government has repeatedly said and, indeed, I hope that has become clear today: it would be unwise to assume that what has happened in the States, in very short order, will happen here. The Government is moving ahead with enthusiasm but with appropriate caution. It is the desire to preserve with the willingness to improve, which I think Burke said was the mark of a statesman, by the way, Mr Chairman.

Q324 Sir Robert Smith: On that difference with the States, which you have alluded to already, you mentioned population density and the acceptability of developments for the local community. Do you think there is anything the industry should be doing to make sure that communities will be less hostile to this kind of development on their doorstep?

John Hayes: Yes, absolutely. I would expect businesses to play a full role in that kind of community engagement, and I made that very clear to Cuadrilla when they came to meet me. By the way, I think it is true across the whole range of different energy infrastructure investment, not just gas or shale gas in particular. We would expect good practice to be identified and shared. We would expect good businesses to engage in the communities of which they are a part.

Q325 Sir Robert Smith: In the US mineral rights are with the landowner, so they obviously get a share in what is going on on their doorstep. Do you see anything that the Government could do to make a community benefit greater than just compensation for disruption-one where they can actually see on their doorstep the economic benefit of what is going on?

John Hayes: It is something we are looking at in respect of nuclear new-builds, nuclear waste disposal and, as you know, onshore wind, where we will be responding to the call for evidence in due course. In a whole range of areas we are looking at the association between infrastructure investment and community benefit. It would be inconsistent if we did not do so in respect of shale gas. Sectors of the industry are looking closely at this too. The planning regime gives us some help here. As you know, it provides for community benefits from section106 agreements.

Q326 Sir Robert Smith: That is more on mitigating disruption.

John Hayes: You anticipated my next sentence. I was about to say that that is not entirely fitted to this kind of work, so, yes, it is something that we are considering closely and where further progress needs to be made.

Q327 Sir Robert Smith: Do you think there is scope for changing the mineral rights on a temporary basis at the start of production?

John Hayes: I am not sure I would go that far. I mentioned earlier that one of the differences between here and the United States is exactly as you described it. I described it as land ownership; you have described it as mineral rights. It would be an extremely radical change. I think there are other ways of achieving our ambitions.

Q328 Mr Lilley: Clearly, the speed with which we can go ahead with development does depend on the planning regime. It is necessary to get planning permission for these things. In the States the landowner owns the resource and therefore has an incentive to allow his land to be used, and to persuade the local planning authority to give all the planning permissions locally for pipelines and access and that sort of thing. In this country the community, through the Crown, owns the resource. Surely therefore we, the community, have an incentive to encourage the planning authorities to give approval and not to give any locality the right of vetoing the go-ahead. Can you confirm that they will not have the right of veto-that it will be normal planning procedures; that a local planning authority will only be to able to object if there are valid planning reasons to object to an industry like this being developed; and that they will not be able to concoct spurious safety fears that are dealt with at a national level?

John Hayes: Yes, the normal planning process will apply, but I do not think that that is inconsistent with the proper engagement with the community.

Q329 Mr Lilley: It is not, and we clearly need to. But in the States, at least some members of the community cream off the economic rent of ownership, and they have an incentive to persuade all their neighbours to let them do this, whereas here the whole community is going to get the benefit of ownership, or it should do if we have our structure, tax system and royalties right, and so on. We have an incentive to push ahead with it, not to say, "Let the people of Hitchin prevent it if they do not particularly want it to go ahead". As far as I know, there is no shale gas under Hitchin, but I hope there is. That is important. Secondly, is it not the duty of the Government, as the custodian and steward of all this resource, not to allow unwarranted fears and concerns to be propagated? Hasn’t the moratorium of two years given a spurious credibility to the idea that there is something peculiarly dangerous about hydraulic fracking, when it is one of the most widely tested forms? Some 100,000 wells were drilled in the States, and not a single person has lost their life or been poisoned by poisoned water courses, or has seen gas come out of their taps as a result. Shouldn’t the Government be putting forward the truth, rather than giving spurious credibility to fears generated by people who are just against development?

John Hayes: There are two distinct points there, Peter, and I will try to deal with them both. You are right, of course, that one of the disadvantages with the American model, in terms of mineral rights-to which Robert made reference a moment ago-is that only a few benefit. The mineral rights are owned by the landowner, and that is a very different arrangement to the arrangement that prevails in the United Kingdom where the mineral rights are in the ownership of the Crown. You are right, too, that it is important that communities do benefit more widely from this opportunity. By the way, we have not spoken about it today, and perhaps we will have a chance to do so another time, but of course there is a benefit in terms of jobs and skills too, which should not be underestimated. That is one of the reasons that I think I suggested, in answer to the previous question, that I do not see a need to change the core assumptions about minerals rights that prevail here.

One of the points I made earlier, about the role of the new Office for Unconventional Gas, was that it was important that it played a role in dispelling some of the myths you describe, in countering misassumptions and misinformation. I think you are right. That will become more straightforward as this process is normalised. It is by its nature currently exceptional, and exceptional circumstances can alarm people. In terms of what you described as the peculiarities of some of the responses, peculiarity is a feature of the human condition, is it not, and without peculiarity humankind would be altogether more bland and rather boring.

Q330 Chair: Just directly arising from Peter’s question, supposing we were concerned about a lack of enthusiasm for exploiting shale gas, and this Committee believes that it can be safely done, would there be an advantage, perhaps for a temporary period-a decade, say-to giving the landowner a direct interest in the profits to be generated from exploiting shale gas? That might be a way of kick-starting the whole process. I can imagine it would transform the views of some landowners if they thought that, instead of having some disagreeable development over their garden, they might be profiting very substantially from allowing it.

John Hayes: The difference between the United States and the United Kingdom, in those terms, is not only the difference around mineral rights; it is also around land ownership, which is why I described it thus earlier. Very often landowners own larger parcels of land, and if you look at the patterns of ownership in the United States around shale gas exploitation, people have often owned land that has contained a large number of wells. Given the topography of the United Kingdom, that would be less likely to be true here; not entirely unlikely, but less likely to be true. That would have a consequent effect on the advantages, the benefits that you just described, Chairman. Nevertheless, I think the issue of benefit and incentive is one that needs to be considered closely. There must be a sense in which the benefit from this is shared as widely as possible, as part of the normalisation that I spoke of when I answered Peter’s earlier question.

In addition, one might say more information and more understanding-clearly the Royal Society of Engineers’ report has been helpful, the Durham University study has been helpful, and, as things move on, I suspect provision of more information will lead to a greater degree of engagement. That engagement will lead to the kind of benefits you describe.

Q331 Chair: Nevertheless, one of the difficulties about planning and development in this country, generally, is that the costs are sometimes borne disproportionately by local communities. We have an active debate in my constituency about pylons going across beautiful parts of the countryside. The main beneficiaries of those pylons are electricity consumers in London, who are not really bearing much of the cost. In the same way we might see applications for shale gas development, where the cost was perceived to be borne mainly by the local community but the benefits, if it was owned by the whole community, are rather more dispersed.

John Hayes: Yes. I see all of life really through an aesthetic prism, and so I care about the beauty of the countryside, not least because I think beauty is the expression of truth by the way, but let us not get too philosophical. You are right: that balancing effectuates value perceived as an actual cost against result is critically important in these considerations. For example, that is why I mentioned jobs and skills a moment ago. People’s engagement, as I described it earlier, is going to be about the wider benefit that they enjoy and the term of that benefit. This may go on for a considerable time, and so they have to see this as a long-term opportunity too.

Focusing on the specific point you made, though, there is an interesting issue here around landowners and the wider community. It would not be reasonable to see the community as the landowner. We have to take a rather more permissive view of benefit than that, I think. We are considering, as I mentioned a moment ago-I do not want to be too repetitive; I do not want to be repetitive at all, actually-a whole range of areas, new build nuclear, nuclear disposal, obviously renewables, so getting this right requires a consistent approach across a whole range of areas. I talked to you earlier about cross-departmental engagement. One area of cross-departmental engagement of course is planning. The Planning Minister would have an interest in these matters, as he made clear recently.

Q332 Chair: I know that aesthetic considerations have been important in helping shape your views about, for example, onshore wind turbines. If there were any eccentrics in Britain who felt as strongly against the aesthetic impact of shale gas exploration rigs-unlikely, but perhaps it is just possible they might-would they be given the same degree of protection against these developments by your public statements and by the planning system?

John Hayes: There are considerable differences between different kinds of infrastructure, not least how permanent or temporary that infrastructure is. One of the arguments that is often made about shale is that, because of the nature of extraction, you drill a well and you exhaust that well much more quickly than we are used to. North Sea oil and gas is a good example. So these things do have to be considered on a case-by-case, type-by-type basis, for that sort of reason and in many other instances too. Certainly it is true that the debate across Government, around the character of landscape and townscape and around aesthetics, needs to be one that we have more confidently.

Q333 Dan Byles: There are a couple of points on this, but I find this fascinating. I find the similarities with some of the arguments about onshore wind very interesting. Minister, would you agree that the evidence, through our experience of onshore wind, is that the landowner benefiting does not necessarily lead to wider community acceptance? In fact, quite often, the farmer who is perceived to be making the money from the wind turbine, for example-you do not see neighbours thinking, "Good old Jack, he is making money, so I will not oppose this". On the contrary, it often leads to greater resentment and greater community splits. It is not as simple as just saying that if the landowner benefits, the community will be more appreciative.

John Hayes: To say anything about onshore wind specifically, ahead of our response to the call for evidence, would be unwise and premature.

Dan Byles: I will not tempt you, then.

John Hayes: You are right that the debate about community benefit has to be a debate not only about utility but also about aesthetics. I make no apology for the advocacy of the proper and proud consideration of beauty in all we do. Why would we apologise for that? The Chairman has put it rather more practically. He spoke about the calibre and quality of the landscape and the countryside. Many people make that argument. You have heard it made to this Committee. It is important that the Government is conscious of that and sensitive to it.

Q334 Dan Byles: Just sticking there with the point about the difference in land ownership between the US and the UK, it is often highlighted as a reason why perhaps it might be harder to exploit shale in the UK. Do you not think, Minister, that there is an argument that it might be the other way round: that if you look at an aerial photograph of Pennsylvania, there is a shale pad every half mile, and the reason is that every farmer has sold his bit of shale to a different company? Whereas, because in the UK we do not have the same land rights, a single shale pad can hoover up a much larger radius of shale, so that in some ways, particularly given the thickness of the shale in the UK, we might see much larger extraction rates per individual pad in the UK than we have been seeing in the States.

John Hayes: That is an interesting argument, so I will let Simon answer. Before he does so, I will add to it if I might. There is also an argument that the character of the geology might be beneficial in the United Kingdom. It could be, for example, that thicker shale leads to a greater flow. It may be that the permeability here is different and, indeed, that that might-as you have described it-make some of what is done here even more productive. That is speculative. It is early days, but I would not want to assume that all the circumstances in Britain are disadvantageous in terms of the exploitation of this resource.

Simon Toole: I would agree that in the States sometimes the density of pads is the result that very few wells are drilled from each of those pads, and that is the way the economics works in the States. You can afford to do that. Here in the UK it is much more likely that there will be fewer pads per area developed, but many more wells sitting on each pad. Your point about the thickness of the shale is also true. It is very unfortunate that some of the aerial photos from the States, showing almost a bomb pattern of well sites, is what is assumed will happen here in the UK. I feel pretty sure that will not happen. It will be focused on fewer pads, with higher densities of wells within the area of a football pitch.

Q335 Chair: If we succeed in developing the shale gas industry, is there a risk that that might encourage a faster dash for gas in the next few years and that in the long term, after 2030, that might leave us with some stranded assets and we face possibly even decommissioning costs for gas-fired power stations?

John Hayes: I have heard that argument put. I think it is possible that the exploitation of shale, with the consequent effect on price, might change investor assumptions about energy production. I have already made it clear that I think the first effect of that would be likely to be on other gas. I think there would be a parallel effect on coal. We have seen that in the United States, and of course, in a sense-if I might put it that way-already it is going with the flow to some degree. Sorry for the use of words. I think it would be premature to suggest much more than that. The nature of the gas generation strategy makes it clear that we need further gas investment, not only to fill the gap in meeting our energy security needs in the medium term, but also to replace existing infrastructure. I would not take the view that stranded assets, as you put it, would be the likely effect of this. I think it would be more likely that we would achieve our ambitions through additional means, and those additional means would be the provision of a domestic supply of gas in the form of shale gas.

Q336 Chair: An air of uncertainty about shale gas concerns methane emissions. I understand that DECC is planning to carry out some research on that. Can you tell us when that may be completed?

John Hayes: Yes; I will ask Simon to talk about that. I am sure you will come to it in a moment, but the two principal arguments that have been put by the sceptics are around methane and the effect on the water supply. Of course we consider those matters very seriously. Our further work will come to a conclusion in the spring, in April or May. We are more than happy to make that available to the Committee as soon as we have it, in advance of publication. The evidence from America is that some of the claims made about methane are exaggerated, but let us wait to see what our own study reveals.

Q337 Chair: One means of unlocking the full potential of our gas reserves-and hopefully those will turn out to be substantial-would be if we successfully developed carbon capture and storage of gas. Given that that would bestow such an enormous advantage, do you feel that we are putting enough emphasis on CCS in our overall strategy?

John Hayes: We have a £1 billion competition, which you are familiar with, Chairman. In that competition, we are pursuing projects that are gas-based and coal-based. If the success of those projects is such that we can move to commercial viability quickly, you are right that it will be a saviour in the strategy. I am a great enthusiast for carbon capture and storage. Getting the technology right, of course, is the first step, but then ensuring that the scale is sufficient to build a commercially viable industry is the second. It would allow us not only to satisfy our ambitions in respect of emissions, while maintaining our investment in gas-directly related to this inquiry, and what I understand is going to be your further inquiry on gas, which I heard about today-but it would also allow us to maintain an interest in coal. We should not ignore the potential of clean coal in those terms. I would be delighted if, as a result of the success of carbon capture and storage, I could be the Minister that brought coal to the Coalition.

Q338 Chair: You mentioned the £1 billion. Could you give us an update on whether that money might be awarded to one of the projects currently shortlisted? It has been going a long time, this whole process, and there has been some frustration about the enthusiasm of the industry.

John Hayes: The outcome is likely to be that we support one or more of the projects, but it would be very inappropriate for me to comment on specifics, given that the competition is ongoing. You will know that we have reduced the number we shortlisted, and, as I have already mentioned, those shortlisted projects include both coal and gas projects. My officials are talking to people involved in the projects, to ensure that we have worked to the best effect, but until that comes to a conclusion I think it would be inappropriate for me to say much more. Except this, actually: that I have had discussions in Europe to ensure that any support that the EU offers-and there is a chance of further EU support this year-is mindful of what we are doing. We would like to take advantage of any further funding opportunity from the EU, and I have initiated discussions to that effect.

Q339 Chair: We have come to the end of our questions about shale gas. Could we just trespass very briefly on your good will? Robert would like to ask a question about the Brent pipeline.

Sir Robert Smith: Yes. Obviously, there is a commonality with the oil leak that, fortunately, has not involved any life-threatening situation and has not impacted on the environment because it is contained in the line. It has led to the shutdown of the Brent pipeline. I wonder if the Department had any observations on that.

John Hayes: Yes. You will know the details. They have been widely publicised, Robert, in the media and elsewhere. We are pleased the incident was discovered quickly, of course, and it has been dealt with robustly. You will know that non-essential personnel have been removed from the Cormorant Alpha installation, where there has been no release of oil or chemicals into the sea, as far as we are aware, so there seems to be no pollution impact. In terms of the overall impact, we would expect the temporary closure to affect something between 5% and 7% of oil production and 2% or 3% of gas production. That gives you some idea of the scale. It is too soon to say when the pipeline will reopen, but we are pleased that the operator has taken swift action to investigate the cause of the leak, and, as I say, these things have been dealt with promptly and efficiently.

Would it be helpful, Chairman, if, as soon as I do know more, I inform this Committee? I am more than happy to do that if you feel that that would be helpful.

Chair: That would be much appreciated.

John Hayes: I would be delighted to do that. I firmly commit to advise the Committee with appropriate speed as soon as we know more.

Q340 Sir Robert Smith: I suppose it is an important reminder of just how dependent we are on old infrastructure for the hubs and export potential for future developments, and how crucial it is to make sure investment in integrity is maintained.

John Hayes: Yes. I understand that the reason why 25 different pipes are affected is that the interconnections are around the pumping capacity, which, as a result of the closure, has been taken out of the system. As I say, in percentage terms it is significant, but a small part of production. I do not know if Simon wants to add to that?

Simon Toole: No. You have covered all the points.

Chair: Thank you very much. As ever, you have been very generous with your time. It has been very interesting for us, and we look forward to seeing you again soon.

Prepared 25th April 2013