Energy and Climate Change CommitteeWritten evidence submitted by INEOS ChlorVinyls (ISG 31)

1. Executive Summary

1.1 INEOS is a global manufacturer of refined oil products, petrochemicals and plastics. We employ almost 5,000 people in the UK, at sites including our chlorine plant in Runcorn and our refinery and petrochemicals plants in Grangemouth.

1.2 INEOS ChlorVinyls is a leading manufacturer of chlorine and PVC operating nine production facilities in the UK, France, Germany, the Netherlands, Belgium, Norway and Sweden and employs around 3,300 people. The production of chlorine and PVC is highly energy intensive.

1.3 UK Energy Intensive industry needs secure supplies of competitively priced energy to survive and prosper in international markets. Similarly, the UK petrochemicals sector requires secure and competitively priced feedstocks. If these cannot be found in the UK, both sectors face decline. The development of shale gas reserves in the UK affords a unique opportunity to address these key competitiveness issues, and with the existing gas and feedstock infrastructure, the prospects for manufacturing to build and grow would be significantly enhanced.

1.4 Wholesale gas and energy prices in the UK are already uncompetitive. The tax and policy frameworks recently established mean that this is set to worsen—a situation acknowledged in a report on global energy price comparisons recently published by BIS.

1.5 The Government recognises that natural gas will play a vital part in the UK’s energy mix in the medium term (for both power generation and heat) ahead of the wider development of new nuclear and renewables.

1.6 For many years the UK has had access to supplies of natural gas from the North Sea which has provided consumers with competitively priced energy. As conventional reserves have declined, the UK has increasingly depended upon imports with ever-greater volumes of gas being sourced from Norway and through LNG. As a result UK natural gas prices have recently increased significantly harming the competitiveness of energy intensive industry.

1.7 In sharp contrast to the situation in the UK, the USA has seen energy and feedstock prices fall. Anticipated imports of LNG have failed to materialise, and recently built import facilities lie idle. Its’ petrochemicals industry is experiencing a renaissance, and CO₂ emissions have fallen sharply as gas-fired generators replace coal in the US power market. All this is a result of the development of shale gas resources.

1.8 Based on the results of surveys to date it is clear that the UK may have very significant reserves of shale gas. It is also highly likely that the UK’s shale deposits contain higher weight hydrocarbons—essential feedstocks for the petrochemicals industry—underpinning this key UK sector and its downstream industries.

1.9 UK shale gas reserves have the potential to provide the UK with a secure, indigenous and highly competitive source of energy and hydrocarbon feedstocks—in essence providing a replacement for declining output from conventional North Sea reserves. Rather than requiring support and subsidy (like renewables), UK shale could provide a vital source of income to UK plc and favourably impact the balance of payments.

1.10 The UK has a proven track record of technological development in oil and gas exploration and production. Recent reports show that hydraulic fracturing (fracking) is no riskier than current fuel extraction technologies and can be managed safely.

1.11 The potential benefits and importance of shale gas are becoming increasingly recognised. We note, for example, recent supportive comments by Energy Commissioner Oettinger and the report from the UK’s Institute of Directors, Britain’s Shale Gas Potential published in September 2012.

1.12 It is vital that UK government supports and encourages the responsible development of shale gas.

2. The Importance of Natural Gas and Hydrocarbon Feedstocks

2.1 For many years natural gas has been a key part of the UK’s primary fuel mix. Large indigenous reserves in the North Sea have provided the UK with a competitive source of energy for domestic and industrial use and power generation.

2.2 The so-called “dash for gas” saw a transformation of the power generation industry with the widespread displacement of coal resulting in a significant fall in UK carbon emissions.

2.3 In the medium term the Government recognises that natural gas will continue to play a vital role in power generation, both as a back-up for interruptible renewables and ahead of the deployment of a new generation of nuclear stations (as noted in the Gas Generation Strategy consultation paper).

2.4 As a critical “bridging fuel” it is essential that natural gas prices remain competitive in the UK. Gas prices play a significant role in determining wholesale electricity prices and are critically important to the competitiveness of the energy intensive sector.

2.5 In addition to natural gas, the North Sea provides other hydrocarbons such as ethane and propane which are vital feedstocks for the petrochemicals and plastics industry. The availability of these feedstocks has resulted in the UK having a highly successful petrochemicals sector.

3. UK and the US—Contrasting Recent History of Natural Gas

3.1 The discovery of natural gas in the North Sea, gave the UK the benefits of plentiful gas supplies. This in turn resulted in competitive gas prices for UK consumers, industry and power generators. The construction of the UK-to-Belgium interconnector subsequently enabled large volumes of gas to be sold and exported to the wider European market.

3.2 During the mid 2000s UK indigenous production was seen to decline notably as field depletion exceeded new discoveries. The result has been that the UK has moved from being a gas exporter to a net gas importer. This has resulted in prices being on average higher and exposed to external global factors.

3.3 In particular the UK is now increasingly dependent upon imports of Liquefied Natural Gas (LNG). While there is no recognised global market for LNG (as there is for oil for example) it is very clear that the price and availability of LNG is affected by the global supply and demand balance and other risk factors. For example following the global financial collapse of 2008, high LNG availability kept UK prices relatively low and competitive whereas after Fukushima, increased demand for LNG has seen a significant tightening of the LNG market.

3.4 This tightening of the LNG supply/demand balance has caused UK prices to rise significantly. (Price evolution is shown in Addendum 1.)

3.5 Natural gas prices have now risen above the equivalent cost of coal for the generation of power resulting in increased power generation in coal-fired power stations and reduced generation of gas-fired power stations. With coal stations emitting approximately double the amount of carbon dioxide per unit of power generated, this has resulted in UK emissions increasing significantly (compared to 2010, when the costs of gas and coal generation were at very similar prices, we estimate that the UK is likely to emit 25 million tonnes more CO₂ this year as a result of the switch from gas to coal for power generation).

3.6 The gas price is critical in determining the price of wholesale electricity. Increasing wholesale gas prices have caused wholesale electricity prices to increase. With the UK generation mix being more dependent on gas than most other European markets, this has resulted in UK wholesale prices rising to highly uncompetitive levels. When tax policy is taken into account the situation in the UK is even worse. (Electricity price comparisons are shown in Addendum 2.)

3.7 The situation In the United States is very different. In the late 2000s it was expected that the USA would need to import large quantities of LNG and as a result a number of import terminals were built. At the same time, advances were made in the recovery of shale gas. Development was so rapid that by the time LNG terminals had been constructed, US shale gas production had grown such that imports were not required and the new terminals remained very largely unused.

3.8 The growth of shale gas also pushed down prices very significantly—far more than many had predicted. The contrast is now stark, with the US enjoying natural gas prices which are around 30% of the levels we see in the UK. (See Addendum 1.)

3.9 In addition to natural gas (methane), large quantities of larger hydrocarbon molecules are also being extracted (ethane and propane, particularly in wet gas plays and oil shales).

4. Impact of Shale in the US

4.1 The growth of shale gas in the US has had a profound impact.

4.2 Natural gas prices have fallen dramatically and are now among the lowest in the world—certainly of the transparent liquidly traded gas markets.

4.3 Rather than being a net importer, the US is now expected to be a net gas exporter, with a number of major liquefaction projects announced (in part using the terminals that were constructed to import gas). Thus, rather than exporting money to buy gas, the US will have a large new revenue stream.

4.4 Lower gas prices have resulted in lower electricity prices, giving a massive competitive advantage to US electro-intensive industries (see Addendum 2—power price comparisons).

4.5 Natural gas is now far more competitive than coal for power generation in the US. In direct contrast to the situation in the UK and Europe gas has displaced coal in the power generation sector and the US has seen a significant reduction in CO₂ emissions. This is directly a result of shale gas.

4.6 The increased availability of chemical feedstocks has seen investment increase significantly in ethane crackers. For example on 1 June 2012 ICIS Heren reported that “US-based ExxonMobil Chemical’s announcement of a new 1.5m tonne/year cracker in Texas by 2016 brings the tally of new US ethylene capacity announcements to 33% of existing capacity”. A list of announced ethylene expansions is shown in Addendum 3.

4.7 There are a number of other reports that show the impact shale gas is having on the US chemicals manufacturing sector, which is now clearly growing. A selection of these is referenced in Addendum 4.

5. Shale Gas Potential in the UK

5.1 Shale gas in the UK has the ability to be transformational in delivering secure and competitive energy and feedstock supplies which are vital for the energy intensive and petrochemicals sectors.

5.2 It is apparent, albeit on limited surveys that the UK has significant and world-class shale deposits. The Bowland shale for example is reported to be five times the thickness of the Marcellus shale in the US, and recent discoveries by IGas in Cheshire show that this play has useful production further south than previously believed.

5.3 Technical reports confirm that shale gas extraction can be achieved with no greater risk than current extractive technologies. Indeed, the UK has well-established arrangements in a wide variety of industries for responsibly managing environmental and other risks. The US has demonstrated the technology which should be readily transferable. Indeed, shale gas extraction has been undertaken in Germany for many years (in vertical wells) without technical or environmental issues.

5.4 The UK has a very strong track record when it comes to putting new infrastructure in place. The development of a massive oil and gas production and transmission infrastructure was achieved in a relatively short period in arguably a much more challenging environment (the North Sea). There is no reason that this could not be replicated for shale gas production.

5.5 The UK should be looking to achieve “first mover” advantage. With an established gas and petrochemicals infrastructure already in place, we only require a competitive source of supply to replace dwindling indigenous North Sea reserves to sustain our remaining energy intensive and petrochemicals sectors. Alongside this opportunity comes risk. The mounting evidence is that shale gas resources are widespread. If the UK (and Europe) fails to embrace the opportunities afforded by shale gas, it risks being left behind as others will develop their resources.

5.6 The benefits to industry are only part of the story with many wider spin-off benefits, which seem certain to enhance the prospects of the UK manufacturing and wider economy.

6. Conclusions

6.1 UK energy prices are already uncompetitive. The UK’s energy tax and policy framework indicate that the competiveness gap is only set to increase.

6.2 For energy intensive manufacturers, such as chlor-alkali producers, energy is a major component of production costs: accessing competitively priced energy is simply business critical.

6.3 Shale gas offers an opportunity that must not be rejected if the UK is to remain a competitive location for energy intensive industries.

6.4 INEOS strongly supports the responsible development of shale gas in the UK. We consider it vital to the long-term success of our manufacturing operations in the UK.

6.5 We encourage UK Government to support the development of shale gas. Unlike renewables and new nuclear, this support will not need to be financial. Rather the need will be in areas such as licensing and planning. Indeed, UK plc will reap massive financial benefit from a successful shale gas industry.

7. Responses to Questions

What are the estimates for the amount of shale gas in place in the UK, Europe, and the rest of the world, and what proportion is recoverable?

We are not experts in this area and only have access to information that has been made publicly available.

In the UK it is apparent that information on reserves is evolving as test drilling is required to gather concrete information on shale quality. It is apparent that views are changing rapidly but, generally, new information is leading to ever more optimistic forecasts.

The proportion of recoverable reserves is also uncertain. However, assuming conservatively that just 10% of reserves are recoverable, we estimate that the Bowland Shale has the capacity to produce 30% of the volume of gas that has been extracted from UK conventional fields since 1970. In view of this we think it is reasonable to say that extracting shale gas could be comparable to rediscovering the North Sea.

Globally, new information is published on a near daily basis indicating that massive shale deposits lie across the planet. China, for example has the largest reserves, and with a gas market of similar size to the UK, reserves to demand ratios are around 250 years.

Germany also has significant reserves and with shale extraction having been undertaken for many years, we anticipate that shale development will see further growth.

Why are the estimates for shale gas so changeable?

We are not experts but exploration to date has been limited. As exploration continues it is apparent that shale deposits are large, tend to surpass expectations, and are globally diverse.

It is clear that other countries are likely to pursue shale development (as the US has done) and we see it as essential that the UK, with a strong track record on gas production and good existing infrastructure, seizes early mover advantage.

What are the prospects for offshore shale gas in the UK Continental Shelf?

We have no particular view on the relative merits of off-shore versus on-shore shale gas extraction. However, in either case we think it essential that UK Government supports the development of the industry particularly through the granting of exploration and development licences.

Should the UK consider setting up a wealth fund with the tax revenue from shale gas?

We have no strong view on the merits of setting up a wealth fund. However, it is apparent that the UK economy will be boosted significantly if we continue to produce (and potentially export) indigenous gas rather than import supplies from other parts of the globe at higher and uncompetitive prices.

What have been the effects of shale gas on the LNG industry?

As already discussed, the US will become a gas exporter of natural gas. Others will follow. Better that the UK is an early mover.

Could shale gas lead to the emergence of a single, global gas market?

Potentially shale could improve the prospects of a global gas market developing. However, if we do not embrace indigenous shale gas extraction, we will remain a large importer, forced to accept global prices, and exposed to inevitable geo-political risk. We expect the development of shale gas reserves to lessen the likelihood of the formation of a “gas OPEC”, and remove the reliance of European energy supplies on Russia. This of itself will lead to true competition within gas markets.

We do not believe that Europe needs to be self sufficient in shale gas, for its development to have a significant impact on energy costs for European consumers. The requirement for Russia and Qatar to compete with European (and Chinese, Australian, South African etc) shale gas supplies will of itself lead to lower energy costs. In 2009 Europe remained a very significant importer of gas, yet had competitively priced supplies wholly as a result of competitive pressures amongst suppliers.

What are the effects on investment in lower-carbon energy technologies?

The development of shale gas should be seen as providing the bridge to a lower carbon economy. UK carbon emissions were reduced massively in the period known as “the dash for gas”. We have already noted that with gas prices currently higher than coal, carbon emissions in 2011 were higher than they would otherwise have been.

Further, it is clear that the deployment of significant levels of low carbon generation infrastructure remains many years away. Renewables will inevitably require back-up generation and any new nuclear seems very unlikely before 2020. Gas will be required to provide the bridge in the short to medium term—and shale gas can provide this without the need for expensive economic support mechanisms.

In the long term, whether gas will affect the deployment of new nuclear and renewables will have to be determined by policy and economic views. For example, will cheap gas combined with Carbon Capture and Storage provide a more economic, secure and acceptable source of power generation?

Predicting the future is without question uncertain. However, shale gas can offer another route to secure, competitive and lower carbon energy—and it should not be ruled out of the energy mix at this stage.

What is the potential impact on climate change objectives of greater use of shale gas?

Again the US offers a view of potential benefits. We note two examples.

First, shale gas has lowered prices such that natural gas is now the preferred fuel for power generation. As a result US carbon dioxide emissions have fallen massively. Increased use of shale gas in the UK or ROW has the ability to reduce coal burn provided it is cheaper than coal. The development of shale gas resources, and the potential substitution of shale gas for coal in developing and developed nations holds the potential for far larger CO₂ reductions than previously envisaged.

Secondly, gas is already being used as an alternative to liquid hydrocarbon fuels, offering reductions in emissions.

Thus, greater use of shale gas can provide a route to lower carbon emissions by displacing use of fuels with higher carbon intensity.

Of course shale gas is not carbon free. While Carbon Capture and Storage is still to be proven on a commercial scale, it would be an obvious partner to shale gas in providing a zero carbon but secure energy supply in the longer term.

Addendum 1

WHOLESALE GAS PRICE COMPARISONS

The chart below shows the evolution of UK and US natural gas prices since 2006.

Addendum 2

WHOLESALE ELECTRICITY PRICE COMPARISONS—2015

The chart below shows our view of delivered electricity prices (for a very large user) in 2015.

(Source: INEOS)

Addendum 3

ETHYLENE CRACKER INVESTMENTS

Company	Project	Capacity	Location	Cost	Start-up
ExxonMobil Chemical	New cracker	1.5 tonnes	Baytown, Texas	NA	2016
Chevron Phillips Chemical	New cracker	1.5m tonnes	Cedar Bayou, Texas	NA	Q1 2017
Dow Chemical	New cracker	World-scale	US Gulf Coast	NA	2016–17
Shell	New cracker	World-scale	US Northeast	NA	2016–17
Formosa Plastics	New cracker	800,000 tonnes	Point Comfort, Texas	$1.7bn	2016
Dow Chemical	Restart	390,000 tonnes	St. Charles, Louisiana	NA	end 2012
Westlake Chemical	Expansion	108,863 tonnes	Lake Charles, Louisiana	NA	H2 2012
Williams	Expansion	272,158 tonnes	Geismar, Louisiana	$350m–$400m	Q3 2013
INEOS	Debottleneck	115,000 tonnes	Chocolate Bayou, Texas	NA	end 2013
Westlake Chemical	Expansion	113,399 tonnes	Lake Charles, Louisiana	NA	2014
LyondellBasell	Expansion	386,000 tonnes	La Porte, Texas	NA	2014
Considered expansions
Sasol	New cracker	1.0m–1.4m tonnes	Lake Charles, Louisiana	$3.5bn–$4.5bn	NA
Indorama Ventures	New cracker	1.3m tonnes	NA	NA	2018
LyondellBasell	Expansion	NA	Channelview, Texas	NA	NA
SABIC	New cracker	World-scale	US	NA	NA
Braskem	New cracker	NA	US	NA	NA
Occidental Chemical	New cracker	NA	Ingleside, Texas	NA	NA
Aither Chemicals, Renewable	New cracker	NA	US Northeast	$750m	2016

(Source: ICIS, http://www.icis.com/Articles/2012/06/01/9566472/exxonmobil-brings-total-us-c2-expansions-to-over-33-of.html)

ANNOUNCED ETHYLENE EXPANSIONS BASED SHALE GAS

Addendum 4

US ECONOMIC BENEFITS

The quotes below from recent reports and US media give an indication of the positive effect that shale gas has had on the US economy and petrochemical sector.

U.S. energy supplies have been transformed in less than a decade, driven by advances in technology, and the economic implications are only beginning to be understood. U.S. natural gas production will expand to a record this year and oil output swelled in July to its highest point since 1999. Citigroup estimated in a March report that a “reindustrialization” of America could add as many as 3.6 million jobs by 2020 and increase the gross domestic product by as much as 3%.

Bloomberg

Chemical companies from around the world are flocking to the Houston area to lay down millions, and sometimes billions, in investments to take advantage of vast amounts of cheap natural gas, which is used as a chemical feedstock.

Thousands of jobs have been proposed in the Houston area from recently announced plants and expansions from chemical companies such as Irving-based Celanese Corp. (NYSE: CE) and The Dow Chemical Co. (NYSE: DOW), based in Midland, Mich.

Houston Business Journal

[L]ow and stable gas prices in the U.S. are contributing to a 10% reduction in electricity costs to consumers and a 1.1% increase in the level of 2012 GDP. Perhaps more importantly, it is encouraging manufacturers to expand operations in the U.S., building new production facilities, or reopen plants that were shuttered during the recession.

In its 2012 study, the IHS found that shale gas production alone will contribute $332 billion to U.S. gross domestic product (GDP) by 2035.

CNBC

The increase in US gas production has also led to the rebirth of the domestic chemical and manufacturing sectors, Ken Bromfield, North American commercial director with Dow Chemical, said.

“We have an unprecedented opportunity with shale gas to push the reset button on the US energy economy,” he said.
“Manufacturing is back,” he added, saying industry has announced plans to build about $80 billion of projects in the next five years, as a result of reasonably priced natural gas. Dow alone has announced $4 billion of new manufacturing projects, Bromfield said.

Platts

Access to vast, new supplies of natural gas from previously untapped shale deposits is one of the most exciting domestic energy developments of the past 50 years. After years of high, volatile natural gas prices, the new economics of shale gas are a “game changer,” creating a competitive advantage for U.S. petrochemical manufacturers, leading to greater U.S. investment and industry growth.

America’s chemical companies use ethane, a natural gas liquid derived from shale gas, as a feedstock in numerous applications. Its relatively low price gives U.S. manufacturers an advantage over many competitors around the world that rely on naphtha, a more expensive, oil-based feedstock. Growth in domestic shale gas production is helping to reduce U.S. natural gas prices and create a more stable supply of natural gas and ethane.

American Chemical Council

Unconventional gas activity is having a dramatic impact on employment and economic growth across the US lower 48 states and the District of Columbia, in terms of jobs and its contribution to gross state product (GSP) and, by extension, US gross domestic product (GDP).

In 2010, unconventional gas activity supported 1 million jobs; this will grow to nearly 1.5 million jobs in 2015 and to over 2.4 million in 2035.

By 2015, unconventional gas activities will contribute nearly $50 billion in federal, state and local government tax and federal royalty revenue; between 2010 and 2035, continued development of unconventional gas will generate a cumulative total of nearly $1.5 trillion in federal, state, and local tax and royalty revenue.

IHS

Addendum 5

BACKGROUND TO INEOS

INEOS is a global manufacturer of petrochemicals, specialty chemicals and oil products. The Company has 54 million tonnes of chemicals capacity and 20 million tonnes of refinery products (400,000 bbls/day), comprising 15 businesses each with a major chemical company heritage. Its production network spans 51 manufacturing facilities in 11 countries, with sales in 2011 of $43.5 billion.

INEOS ChlorVinyls is a leading manufacturer of chlorine and PVC. With an annual turnover of €2.6 billion, the Company operates nine production facilities in the UK, France, Germany, the Netherlands, Belgium, Norway and Sweden and employs around 3,300 people. Our well-invested world-scale assets are complemented by an extensive supply chain. For example, we are now the fifth largest producer of PVC globally and are growing our presence in this particular industry.

September 2012