Energy and Climate Change Committee - Minutes of EvidenceHC 340

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Oral Evidence

Taken before the Energy and Climate Change Committee

on Tuesday 25 June 2013

Members present:

Sir Robert Smith (Chair)

Barry Gardiner

Ian Lavery

Mr Peter Lilley

Dr Phillip Lee

Albert Owen

John Robertson

Dr Alan Whitehead


Examination of Witnesses

Witnesses: Ed Mitchell, Director of Environment and Business, The Environment Agency, and Neil Davies, Head of Site-based Regulation, The Environment Agency, gave evidence.

Q108 Chair: Thank you for coming to give evidence to the Committee’s inquiry. Please introduce yourselves for the record.

Ed Mitchell: My name is Ed Mitchell. I am Director of Environment and Business at the Environment Agency.

Neil Davies: My name is Neil Davies. I am Head of Site-based Regulation at the Environment Agency.

Q109 Chair: I should enter on to the record my entries in the Register of Members’ Interests relevant to this inquiry, in particular a shareholding in Shell.

In your written evidence you say, "Where costs are significant, such as at refineries, we have spent several years working with operators to ensure risks, costs and benefits are properly assessed so only essential investment is required". Are the costs associated with IED and COMAH similar for both importers and refineries or do they hit one or the other sector more?

Ed Mitchell: They are different in that COMAH applies to both refineries and storage facilities. Refineries are a listed activity under the UK implementation of IED, which is the Environmental Permitting Regulations. Depending on what activity you are carrying out, different bits of law apply.

Q110 Chair: When it comes to safety, is there a different scale of risk with refineries to importers?

Ed Mitchell: I think that is more a matter for the Health and Safety Executive. We deal with the environmental risks, primarily.

Q111 Chair: On the environmental risk, would you see one or other of them being more of a challenge?

Ed Mitchell: The storage facilities that you get at a refinery are very similar on the whole to the storage facilities you get at a storage facility. Obviously the refinery has the additional component of the refining activity, so the risks are slightly different. The risks associated with risks around spillage or leakage or rupture of tanks are the same on both but you have significant emissions of, for instance, sulphur dioxide from a refinery that you would not have from just a storage facility.

Q112 Chair: In one of our sessions Greenergy said, "It is very clear that we have been put under a regulatory ‘must do’ environment that is not applied to refineries". Similarly Okios said they had spent £250,000 on overflows for their tanks despite installing the very highest standard of safety overflow devices on their tanks and they say that refineries were not subject to the same stringent requirements. Do you recognise that?

Ed Mitchell: No, to be honest. The Okios comment I think is about a Health and Safety Executive requirement about overfilling of tanks. We apply environmental legislation based on the risks to the environment equally, but we also take into account the financial circumstances and so on that the companies are in and that the sector is in. I think the comments from Greenergy were in relation to Coryton. It would be interesting to ask the previous owners of Coryton about the investment programme that they undertook or did not undertake prior to it being sold on to Greenergy. The way that we regulate is that we agree the environmental outcomes, based on the legislation, with the companies and we agree a transition plan to delivering those environmental outcomes, usually over a period of four to six years, and then we monitor the companies to make sure that they are delivering those environmental improvement programmes. So at any one time you can find a particular facility that has slightly different requirements than another, but it is just as they are working their way through their improvement programme.

Q113 Chair: How would you respond to the idea of whether the regulatory regime is risk-based or prescriptive?

Ed Mitchell: It is primarily risk-based, but different bits of legislation are slightly different. If you take the England implementation of the Industrial Emissions Directive, that directive requires us to have regard to something called Best Available Techniques. That is a sort of fundamental principle that means you have to apply those techniques to each site. They are set out at a European level in something called a Best Available Techniques reference document. The last one of those was produced in 2006 or 2007 and there is a new one coming out next year. So that determines what the Best Available Techniques are for a particular production process right across Europe and we then implement that through issuing a permit with the requirements to meet those Best Available Techniques. There is a degree of variation around that, based on the risk of the individual site, but the basic requirements are set at a European level.

COMAH stands for Control of Major Accident Hazards and is about the prevention of a Buncefield-type incident around the storage facilities. There we have something we agreed with industry back in I think it was about 2005 called the containment policy, which gave companies a 20-year time horizon for upgrading storage tanks to modern standards. The timing within that 20 years is very much based on risk, with the higher risk upgrades happening earlier in that process and the lower risk upgrades happening later.

Q114 Chair: Do you think there is any rationalisation that could be done of the legislation that confronts the industry?

Ed Mitchell: The legislation that we implement is almost all integrated into a single set of rules called the Environmental Permitting Regulations. COMAH, because it is operated jointly between ourselves, the Health and Safety Executive in England and the Health and Safety Executive and our equivalents in Scotland and Wales, sits outside of the Environmental Permitting Regulations and is on a slightly different basis in that the Environmental Permitting Regulations require a permit, but COMAH does not work on a permit basis. I think we have done as much consolidation as we could, or the Government has, on the environmental side into the Environmental Permitting Regulations. I can’t easily see how you could go that step further and integrate COMAH into it because it is not permit-based.

Q115 Dr Whitehead: In your evidence you state that the European Commission is expected to publish next year its revised conclusions on Best Available Techniques, BAT, for the refineries sector and you then say that this will drive the standards within the Industrial Emissions Directive that the refineries will be required to meet beyond 2016. Could you provide any insight on what the potential implications are for the UK refining sector?

Ed Mitchell: I will give you a very brief overview and then I will hand over to Neil for a bit more detail. What happens is when these standards are agreed through the BAT reference document across Europe we then have four years to incorporate those standards in the permits of the refineries and for the refineries to make the necessary changes, subject to a provision that you can apply for an extension to that timescale, but the ability to have an extension is significantly tightened up under IED compared with its predecessor IPPC. That is the generality and then I think we have some information on the areas it is most likely to hit.

Neil Davies: The main focus for investment for the refineries across Europe coming out of that document will be more around controlling some of the acid gases, like sulphur dioxide and nitrogen oxides, and there will be some investment needed on control of discharges to water as well. Those are the three main areas and we attend, on behalf of the UK, a meeting with the rest of the other member states and the Commission to discuss and negotiate what these standards are going to be and we take a refinery representative with us as well to make sure that we have a balanced discussion. The latest version of that certainly focuses on those three areas. The things they will be looking to do is improve some of their technology associated with the combustion plant that they have on site as well as looking at maybe putting some sulphur dioxide controls on some of their refining work as well. What we are trying to do is identify what the costs would look like for the refineries across England in order to try to take a view about the appropriateness of those for the UK and England.

Q116 Dr Whitehead: Is that implementation fairly flexible?

Neil Davies: The process that the commission has set out for implementation in the Industrial Emissions Directive is that once they produce the Best Available Techniques reference document then member states or companies are given four years to upgrade to those standards. We anticipate that that document for the refining sector will be adopted next year some time so that will give them until about 2018 to meet those standards. If companies are going to find that timescale challenging they can work with the regulators in each member state to apply for what they call a derogation, so can they extend the timescale in which they implement those new standards. That is a conversation we would have to have with the refining sector once we are clear on exactly what the standards will be and that reference document is adopted.

Ed Mitchell: When we went round this cycle in 2007, the last time we did a wholesale review of permits, we agreed improvement programmes with the refineries that ran from 2008 to 2016, clearly more than the four years. The underpinning European legislation does tighten up the ability to offer those derogations and to be flexible, but there is a degree of flexibility still within the legislation.

Q117 Dr Whitehead: You said in your evidence that you think the costs overall for sulphur dioxide reduction are reasonable compared with other industries.

Ed Mitchell: I note in most of the evidence that you have received that the focus is entirely on the costs rather than the costs and the benefits. There are well established benefit figures for, for instance, reductions in sulphur dioxide emissions and when you put the costs against those benefits the cost benefit looks positive. That is some of the maths that we have to work through on an individual basis as we review these permits following the issuance of the European reference document.

Q118 Dr Whitehead: I suspect some of the emphasis on costs related to the fact that, among other things, witnesses in the first oral session said that refinery profitability is still averaging negative. Have you identified improvements to that 0.2% of gross margins? If there are no margins presumably there are still reasonable costs and benefits, or would you like to qualify what you have to say in the light of that?

Ed Mitchell: Those were the figures that applied when we did the last wholesale review in 2007, so the analysis we did in 2007 was that the total cost of the improvements was of the order of 0.2% of gross margin. Clearly the economics change all the time and we have not yet done that work because we do not know what the new standards are going to be. We are in the middle of the negotiations, which are then agreed across Europe. Once we have those new standards we can start to do a similar sort of assessment going forward.

Q119 Dr Whitehead: You are going to have further costs on the Industrial Emissions Directive post-2016 I would imagine.

Ed Mitchell: Yes.

Q120 Dr Whitehead: What might they look like? What are the implications of that?

Ed Mitchell: As I say, we have not done that analysis yet because it all depends on the standards that are agreed across Europe as being the Best Available Techniques. You get a very big range of possible numbers because of that uncertainty so, depending on where those standards are set, some refineries may or may not have to invest in significant new plant and equipment. It is quite difficult to work out exactly what the costs are likely to be until you have certainty about what those figures are. We have done a broad analysis. Neil, do you recall the figures?

Neil Davies: We, and I think industry, have quoted a range of potentially up to £900 million. We don’t think that is wrong but what that does assume is that every refinery will have to install every piece of abatement kit on their site. We don’t think that will be necessarily the case and if we look at where the performance of the refineries is currently against what the possible standards will be, we think the costs will be a third to half that. We are some way off that, but if they don’t fit all of that kit they do have to go through this application for derogation that we would look at, based on whether or not it looks justified.

Ed Mitchell: Of course, we get our cost information from industry. We don’t make it up, so I think on the cost basis for the various different estimates the only difference is what you think will or will not apply, depending on what standards are finally settled on.

Q121 Dr Whitehead: We are talking here worst case scenario as against-

Ed Mitchell: I think our range is sort of £350 million to £950 million, depending on what comes in over the period to 2018.

Q122 Chair: When would that figure become certain?

Ed Mitchell: First of all, we need to know what the standards are that the refineries are going to have to operate against, which is when the BAT reference document is published, which we expect to be next year, and that is a political process around Europe in agreeing and publishing that document. Then we have to discuss with the individual companies exactly what the implications are of those new standards: can they meet them already; can they meet them by relatively cost effective tweaks to their process; do they have to invest in major capital expenditure for abatement equipment? We are a way away from having a very firm figure.

Q123 Chair: Obviously that makes planning to invest a challenge if you don’t know the environment.

Ed Mitchell: Yes, although all the refineries have a current investment plan, an upgrade plan agreed with us that runs to 2016. They have certainty up to 2016 already and have had since 2007.

Q124 Barry Gardiner: I didn’t quite get your response to the question that the Chair asked originally. This was the one where he was talking about how Okios had had to spend £250,000 on these tank overflows, which you then decided perhaps were not needed after all.

Ed Mitchell: I think that was the Health and Safety Executive, as I tried to explain, not the Environment Agency. When you are talking about tank storage, there are three levels of containment. You have the integrity of the tank itself and whether it overflows. You then have a bund around the tank in case the tank ruptures and then you have some sort of protection around the site as a whole. That is called primary, secondary and tertiary containment. Primary containment is primarily on health and safety grounds. There is a relationship with the environment, but the main environmental controls are the secondary and tertiary containment. Overflow alarms are a factor of that primary containment, so the Health and Safety Executive are the lead agency on that.

Q125 Barry Gardiner: But it was the overflows that ultimately were deemed not to be necessary, wasn’t it?

Ed Mitchell: Apparently, yes.

Q126 Barry Gardiner: Is that not you?

Ed Mitchell: No, that is the Health and Safety Executive. I have only read what you have read. I don’t know the ins and outs of that or the truth of that statement.

Q127 Barry Gardiner: Sorry, I just wanted to be clear. So we should speak to them about that, should we? All right.

I wanted to focus on your role with the ETS, the European Emissions Trading Scheme, and basically the business of stopping carbon leakage. It has been suggested that the system allows for the different levels of complexity found in EU refineries. Given that those different levels of complexity could perhaps result in carbon leakage, do you agree with that and what do you see as the implications for UK refineries?

Ed Mitchell: I just need to explain our role in the various carbon trading schemes. Whether it is the domestic CRC energy efficiency commitment or whether it is the EU Emissions Trading Scheme, our role is simply an administrative role. We carry out the mechanics of the scheme. These are cap and trade schemes. We don’t set the cap or the trading rules. All we do is facilitate them, so I am afraid our-

Q128 Barry Gardiner: I am not asking you to set policy. What I am asking you to do is to advise the Committee whether, as you are operating the scheme, you believe that the mechanics of the scheme allow for carbon leakage. I accept that you are the operator of it but perhaps the operator of it has the best view as to whether carbon leakage is being facilitated.

Ed Mitchell: I am afraid in this case I don’t think we do have a good view of that. You will know that the idea of a degree of free allowances is to deal with the issue of carbon leakage, but the amount of free allowances and all of that is a DECC Government decision. All we literally do is turn the handle, so I am afraid I am not in a position to offer you any sensible advice on that.

Q129 Barry Gardiner: The UKPIA says they will need £53 million of free allowances and DECC’s assumptions are for £103 million of allowances. Doesn’t that suggest that somewhere there is a big gap?

Ed Mitchell: Yes. I am not familiar with those figures but that suggests that the industry is asking for fewer free allowances than the Government is offering.

Q130 Barry Gardiner: Which is dumb, isn’t it, if you are trying to operate a tight carbon emissions trading scheme?

Ed Mitchell: It sounds counterintuitive. I think that is all I can say.

Q131 Barry Gardiner: Let’s move on to COMAH and containment policy, which applies to the bulk storage of petroleum products. Bluntly, Okios are suggesting that older storage tanks are not subject to the same degree of regulatory upgrade as new facilities. Is that right? Is it something that one should be concerned about or are they just absolutely wrong?

Ed Mitchell: I think they are mistaken in that case. The containment policy applies across all petroleum product storage facilities whether they are associated with a refinery or are standalone. As I say, it offers a 20-year window to make the necessary upgrades with a risk-based phasing of the investment within that 20-year window, so some of the investment we asked to see earlier because it is high risk versus some that is lower risk that can wait within that window. Depending on the individual risk on the site, the nature of the tanks, the nature of the products, there will be variations in where they are on that journey through the containment policy, but it is consistent in that it is risk-based in how we apply it.

Q132 Barry Gardiner: Are you confident that an older facility, which may be approaching the end of its life, is not being treated any more leniently by you, that you are not saying, "You can’t really expect that of it because it is that technology"? Are you confident that the level of risk around any of them is the same?

Ed Mitchell: The very old storage tanks are often metal tanks on bare earth and so the risk of leakage is relatively high because you can’t obviously see what is happening underneath. You don’t necessarily have monitoring embedded underneath the tank so that you can tell what is going on. The only way to deal with those is literally to lift the tank, lay an impermeable membrane underneath it, put the tank back down again and have an impermeable bund around the tank. We are requiring on a risk basis equally across both refineries and storage terminals in line with the containment policy.

Q133 Barry Gardiner: Is it correct that older tanks do at the moment carry a greater risk than newer tanks that would have that fitted as standard from the beginning?

Ed Mitchell: I can’t talk specifics but there must be examples of where we and industry together should have dealt with the higher risk tanks as part of the containment policy process but nonetheless, because it is a risk-based system and because there is this window in which to make the improvements, you will have some minor variations in the residual risk, as the Europeans put it.

Q134 Barry Gardiner: You will have a ranking order of which are the riskier and which are the safer stations and you will therefore have a profile of the work that you believe needs to be carried out to bring them all up to standard. Is that correct?

Ed Mitchell: Yes.

Q135 Barry Gardiner: Could you make that available to the Committee?

Ed Mitchell: It is done on a facility-by-facility basis and it is embedded in their improvement programme. Neil, are you able to-

Neil Davies: That is right, and it is the company’s risk assessment. That is an important thing to bear in mind here. The company has to undertake the risk assessment because they are carrying the risk around this and we have to make sure that they have covered that adequately. They will go through that. At the moment, as Ed has said, we are working with each of the companies for them to develop their improvement programme that we based on the risk assessment of all their tank storage on site and they will then have a programme to implement whatever improvements are necessary.

Q136 Barry Gardiner: But, Mr Davies, the company does not say in its own risk assessment, "And by the way, we are riskier than these ones but we are not as risky as those". That is your job, isn’t it?

Ed Mitchell: We enforce the baseline, if I can put it like that. It is interesting that some companies, particularly in the bulk storage sector, have made their own judgments about the level of risk that they wish to sustain and have made improvements earlier than we would require. That is probably related to the margins in that sector, their ability to do it, but I am aware of a particular site where, because they had a leak of a tank that caused them a significant clean-up cost, they have accelerated their programme of tank refurbishment and lifting and bunding and so on beyond the level that we would mandate. Companies have choices in this as well as our regulatory role, which is to set the baseline.

Q137 Barry Gardiner: But are you able to make your ranking order list available to the Committee?

Ed Mitchell: I will have to revert to you on that. I think it is already in the public domain in the form of the improvement programmes for the individual facilities but I will just need to check that.

Q138 Barry Gardiner: I do want to be clear that the individual programmes are not the same as your assessment of where they all stand in relation to each other. What I am asking you for is the latter not the individual.

Ed Mitchell: I understand. One of the improvements we have made to the way that we regulate in the last three or four years is that we have put a much stronger emphasis on how we ensure consistency across a sector. This does not just apply to refineries but it does include refineries. We now have sector groups where all of the relevant officers who are doing the regulation meet and discuss the relative risk across the different sites. Prior to that, some of these decisions were made by individual site inspectors on an individual basis. We now benchmark that between the different sites through a sector group so that we have a very high level of assurance that we are applying a level playing field.

Q139 Barry Gardiner: Thank you. Greenergy suggests that, "Fundamentally, storing onshore product for strategic purposes builds security". If the Government wish to increase oil product security that means we are going to have large volumes of petroleum products stored ashore. Should the public have any concern about that from either an environmental or health and safety perspective?

Ed Mitchell: No, I don’t think so because we have the regulatory regimes and the regulators to ensure that those risks are minimised to appropriate levels. There will be a difference between what is achievable with a brand new tank storage facility or a brand new refinery. One of the things I didn’t explain but should have done is that that four-year window that is allowable under the Industrial Emissions Directive for upgrading facilities only applies to existing plant. If you build a new plant you have to meet the standards from the word go. New facilities inevitably have higher standards in the first instance and it takes a little while, because of the investment programmes and allowing for capital and so, for the others to catch up but there is only a relatively short time difference between the two.

Chair: Thank you very much for your evidence. If you can clarify the issues that Mr Gardiner wanted in writing later, or if there is anything else you think you should have said but didn’t please get in touch, and similarly we may have some follow-up questions.

Examination of Witnesses

Witnesses: Roger Hunter, Supply Contracts and Negotiations Manager, Shell, and Stephen George, Principal Consultant, KBC Process Technology Ltd, gave evidence.

Q140 Chair: Thank you very much for agreeing to give evidence to us. Could you introduce yourselves, please?

Roger Hunter: Roger Hunter from Shell.

Stephen George: I am Stephen George, Principal Consultant with KBC Process Technology Ltd.

Chair: I remind the Committee that I declared my interests as a shareholder in Shell so I will not be leading on any questions in this session.

Q141 Ian Lavery: I will begin by asking a number of questions on domestic refining and importing and perhaps focus a little bit on the written evidence. The DECC call for evidence suggested that there was a huge risk of further refinery closures in the UK and they suggested also that there was a combination of factors that conspired to mean that even those refineries in the UK that have a clear competitive advantage in the market are also at great risk. Could you tell the Committee your views of what combination of factors you understand DECC would be referring to?

Roger Hunter: I think there is a risk of further closures for UK refiners, but that applies to European refiners as well. The fundamentals behind that are more global around the light-heavy product differential that determines the overall margins that a refiner makes. There are many factors that contribute to what the overall refinery margins are on a global level, for instance the overall demand and supply of light oil products. As I say, there is a risk of further closures but that is not just a UK phenomenon. It is something that applies across the industry and we have seen that over the last few years with closures both in the UK and in Europe.

Q142 Ian Lavery: DECC have suggested that the risk is basically in the UK. Are you saying that the factors of risk of refinery closures in the UK are the same factors that face the global refinery business?

Roger Hunter: In terms of the material factors, indeed. The margins that refineries make in the UK, in Europe and in the world are determined by global things around light-heavy product demand and supply. At the moment what we see is an overhang in terms of the amount of supply of light-heavy products in the world.

Q143 Ian Lavery: There are not any specific reasons for the UK to be any different?

Roger Hunter: I don’t see anything. The primary factors are more global-based, based on the overall refining margin rather than any specifics around the UK.

Stephen George: I would largely agree with that and say that in some regards the UK has already borne the brunt of this by losing the Teesside refinery and the Coryton refinery. Other European countries still probably have some pain to face. The Italian refiners are saying maybe four refineries have yet to close in Italy. Total has recently said that they expect another French refinery to close. In that regard we are facing a global burden of over-capacity that has concentrated up and is hurting refineries in the developed world worse than those in the developing world where demand is growing faster.

Roger Hunter: There is no reason why well run, complex, large scale refineries in the UK won’t continue to prosper.

Q144 Ian Lavery: Mr Hunter, you stated in your written evidence that there are regions of the UK where a refinery closure would have a larger impact on resilience due to high demand and limited alternative supply options. Why is this the case and which regions are particularly vulnerable?

Roger Hunter: Given the commercial nature of my job, it is difficult for me to comment to this Committee on region-specific, but one thing I would suggest is that DECC’s call for evidence specifically asks that question and gains more information on a region-by-region basis. Generally speaking, some regions have more options than others. Some regions have more import capability, some regions have more refineries. I think it is a good thing for DECC to look at going forward but, as I say, given the commercial nature of my role I don’t want to comment on a specific regional level of resilience.

Stephen George: My general view is that where a refinery could close, if a refinery were to close, you have a potential import terminal location. They are all pretty much sea-based and are currently capable of bringing in crude oil, so could bring in products in lieu of crude oil. So there is some resilience in the supply of the product markets. That doesn’t necessarily mean that the refineries are safe in those locations.

Q145 Ian Lavery: Do you agree with DECC’s assessment when they have suggested that the UK’s import capability plays an important role in maintaining resilient product supplies to the UK and supports jobs and contributes to economic development?

Roger Hunter: The UK needs a healthy mix of refining and importing. That is what will provide resilience with respect to supply and jobs. Jobs come from both import infrastructure and companies as well as refiners, and the UK needs a healthy mix of both. One thing I would say is, I don’t think there is any kind of magic number in terms of how many refineries one needs or how many import terminals one needs. I think the market needs to decide that, given the underlying declining demand for light oil products in a country like the UK. But both play an important role in resilience and jobs.

Q146 Ian Lavery: Is security of supply an issue?

Roger Hunter: Currently I don’t think security of supply is an issue. As I say, you need this healthy mix of both refiners and importers to provide that security of supply for a country like the UK. The country is an island with good roads, with good infrastructure to move hydrocarbons around, and as a result I don’t think there is an issue currently with security of supply.

Stephen George: We also have a pretty good supply outside the UK coming into the ARA market-Amsterdam, Rotterdam, Antwerp-products coming out of Russia in increasing volumes. There is quite a lot of import infrastructure into northwest Europe that will be available to supply the UK market if there were less refining capacity.

Q147 Ian Lavery: In your view would that be a secure supply?

Stephen George: Reasonably so. I think there is an increasing interest on the part of traders and refiners outside the northwest European market to bring product into this market. You have expansion of terminal capacity in the ARA basin, for example.

Roger Hunter: Shell, as a company, has a lot of retail sites in the UK and we are very concerned about it. Security of supply is the kind of thing that we think about, such that we can provide robust supply to our customers. So we look at this landscape carefully and we feel that there is an adequate mix of supply sources at the moment from both importing and refining in order to provide that robustness.

Q148 Ian Lavery: Mr Hunter, getting back to your written evidence where you suggest that UK refineries all have different international operators and the change in ownership that was seen in recent years from the integrated IOCs to specialist refining companies reflects a trend that we are seeing across Europe and the US. What are the broad implications of this?

Roger Hunter: I think it is healthy. It is good that things change and that new buyers come in and different buyers buy refineries for different reasons. You have new market entrants and it shows that there is good competition and it keeps competition high as you have new entrants coming into the market. Generally speaking, I have no concern about this change from the IOC world to more of an independent-based world. I think it is a natural market evolution.

Q149 Albert Owen: Gentlemen, there are two things that you have raised in responding to questions from my colleague. You don’t think having to rely on imports is a big issue because it is a global market, but to our constituents it is quite a big issue if they are paying more for the product at the end of the day. Previous witnesses have said that the fact that diesel has gone up considerably and is higher than petrol is because we don’t have the capacity in this country to refine. That is a big issue not just to car owners but to lorry transportation and goods in shops, so it does have an impact on the economy of the United Kingdom in a negative way.

Roger Hunter: I don’t agree with that. Having that healthy mix of importers and refiners keeps a high level of competition in the UK market, which is good for the consumer.

Q150 Albert Owen: They have specifically said that the reason that the cost of diesel is higher and has gone up faster than petrol and overtaken petrol in the <?oasys [pc10p0] ?>last 10 years is because we have a lack of capacity in this country so we rely on imports. It is obviously more expensive to import something into this country.

Roger Hunter: We have a competitive marketplace in this country. We have the ability for the refiner’s diesel barrel to compete with the importer’s diesel barrel and that level of competition is nothing but good for the consumer.

Q151 Albert Owen: It is interesting to hear that because that is directly opposite to what other witnesses have said.

Another point I would like to make is about labour costs in different countries. Are they higher in Europe and Britain than they are in some other parts of the world and is that a big factor? Labour is a high percentage of most companies’ costs.

Stephen George: I think it is certainly the case that some countries would have a higher cost but it would be more in the cost structure. They may be less efficient operations than you have in a UK refinery. There will also be some that are much cheaper. I have spent a lot of time looking at eastern European refining and their per capita labour costs are very low but their headcounts are massive. Some of these refineries will have 10 or 15 times as many employees as a well managed northwest European refinery.

Q152 Albert Owen: What would the overall labour costs be?

Stephen George: It depends but I would say an efficient refinery running-you are basically talking about the operating costs per barrel and looking at a $3 to $3.50 range for a north-west European refinery. Some of the southern European refineries can be $6 or $7 per barrel because their costs are high and have higher bureaucratic structures. They are just not that efficient. It is going to depend site to site for every site, depending on your scale and your complexity. It is not that straight forward a question.

Q153 Albert Owen: It may not be straight forward but in many other high quality jobs there is a big issue. Many companies relocate abroad specifically because of labour costs. That is not the case in the oil industry and refining in particular?

Stephen George: Not so specifically. They are not just picking up and moving a shop offshore, for instance. It is not that straightforward. You can look at, say, the Indian market or the south-east Asian market and see very low per barrel opex but that doesn’t necessarily mean it is directly competing with refineries here. There is an advantage to being located close to market as well. You can refine for cheap in India or in Korea and that product has to come all the way to Europe and that may not be as competitive as refining locally.

Q154 Albert Owen: We have also heard that shipment within the United Kingdom is more costly than shipment from abroad in many cases because duties are added, so perhaps if a British company were to relocate in India where labour costs are cheap, the transportation would not be that expensive because of duties.

Stephen George: Quite possibly. It is all on a case-by-case basis. Going back to the diesel question, there is a question of the import parity pricing. Yes, this country is short of distillates and has to import them from ARA or from further afield but that cost is not necessarily giving a huge disadvantage in the local market. Other countries in north-west Europe are short of distillates as well. It is a structural feature of the whole market that we have dieselised far faster than refiners have been able to invest to keep pace with that dieselisation and the whole market is short of distillates and long on gasoline.

Q155 Barry Gardiner: To be clear, Mr George, you are directly contradicting what Mr Hunter just told Mr Owen earlier. Mr Hunter said that there was a competitive market-and in fairness Mr Hunter just gave us the theology rather than the evidence-and therefore there should not be a problem. What you said is in fact the domestic market, as Mr Owen was suggesting, could not produce enough diesel to supply the whole market and therefore we have to rely on imports and in that sense it is not a competitive level playing field because no one of them can supply the entire market and we are subject to whatever the higher import price is. Is that correct?

Stephen George: I think it is exactly suggestive of a competitive market, some imports and some domestic production. For some UK producers it is cost effective to produce more distillate and to run at higher utilisation. If it were an advantage to the domestic production, the utilisation rates in UK refining would be higher. As it stands, to supply some of the markets, let’s say the southeast England market, it is probably more cost effective just to bring it in rather than to refine it at distance and then move it to the southeast England market by pipeline.

Q156 Barry Gardiner: The benefit here is to the refiner and not to the customer. What you have told us is that they can make a greater margin elsewhere but not that there is adequate diesel supply from the domestic market. I understand that the benefit is to the refiner and that they believe that by not producing diesel but by producing other things they can make more margin on that, but from the customer’s point of view, as Mr Owen was suggesting, on the forecourt the domestic supply of diesel is inadequate and therefore the customer is left at the mercy of the slightly higher imported diesel price.

Stephen George: Possibly slightly higher, but I wouldn’t necessarily say that benefit accrues solely to the refiner. It is going to accrue through market forces to whomever-

Q157 Barry Gardiner: The benefit there does not accrue to the refiner, I understand that, but the point is that what you were saying was that the domestic refiner is making greater margin elsewhere and therefore is not producing enough diesel to make Mr Hunter’s theology correct, that in fact there is adequate supply of diesel to supply the domestic <?oasys [pc10p0] ?>market from the domestic refiners and therefore they can compete with the adequate market from abroad to supply domestic demand for diesel as well.

Stephen George: There isn’t sufficient capacity here to supply the market without causing uneconomic distortions in the refining barrel. If UK refiners were to produce more distillates locally it would also mean they were producing more surplus gasoline and fuel oil products that have to be exported at relatively low value in order to produce on the margin. They are obviously making an economic decision to produce what is the most economic for the company, I am sure.

Q158 Barry Gardiner: I think what Mr Owen and I were simply pointing out was it was the economic decision for the company and may not be in the best interests of the consumer on the forecourt.

Can I try to drive another wedge between you two? Let me start with Mr Hunter. The Purvin & Gertz report has suggested that one of the key problems, if not the key problem, is that refiners here are subject to increased legislative restrictions or constraints and demands and yet the modelling that we have seen shows that production has been decreasing since 2004, demand has been decreasing since 2009 and imports have been increasing since 2005. The gentleman sitting next to you, Mr George, his company has produced a report that is saying new capacity, largely in the Middle East and Asia, India and China in particular, is coming on stream, which is giving you competitive disadvantage. Middle Eastern refineries, particularly Saudi Arabia and Abu Dhabi in the UAE, are aimed at producing products for export, counter to the usual rule of thumb, and China has been adding refining capacity at a rate of around 500,000 barrels per day per annum to keep pace with its own domestic demand. So the whole structure of global refining is changing, isn’t it? They are very often larger refineries that have benefits of economies of scale that some of the refineries in the UK don’t have. They can make different crude qualities and they are more suitable to produce the current demands of different petrol products.

Roger Hunter: And newer.

Barry Gardiner: Absolutely. So the idea that this is all a problem with the regulatory burden of government in Europe is really pretty much nonsense, isn’t it?

Roger Hunter: The regulatory burden that comes from Europe is clearly an issue for the refiners in Europe, including that of the UK. The underlying demand decline in countries like the UK and Europe is also a problem for European and UK refiners. I think we all acknowledge that there is a problem there for the sector and that there needs to be some rationalisation. As you rightly point out, other countries, for different reasons, are investing and keeping more and more supply, more and more infrastructure coming on stream, which has an overall global effect on the general global refining margins. That combination has caused an issue for European, including UK, refiners. I still believe that well run, well invested in refiners within the UK can survive and will continue to be healthy, but there needs to be a shake-out, and there has been a bit of a shake-out over the last few years, in order for things to rebalance. The market will change. There will be fewer refiners in Europe over the next 10 years and that is a product of global changes in infrastructure supply and demand.

Stephen George: I would say the same. The European market, as long as the borders are open-and you talked about carbon leakage earlier-to receiving imports of product that are less regulated than our own we are giving away some of the advantage we might have within Europe, but that doesn’t mean that the markets aren’t going to be flooded with products from some of these new refineries. Looking at the Middle East, it is a complete strategic sea change for these folks to start wanting to refine their own oil and ship the products out rather than to ship the crude oil out. They see it as building up jobs in the domestic economy and reinvesting in their own countries and pushing product out. You can imagine that if you are producing 10 million barrels of oil a day you are going to have no problem making sure your refineries are on full and push product out into the international market.

I think the future reality is we are going to see some of that product coming our way in the medium term. Maybe in the long term it will start moving back into the Asian markets, but while there is a condition of oversupply globally that product is going to seek a market. I hate to say a sort of fortress around Europe but if there is not some kind of level playing field for European refiners they are going to face the brunt of economic forces that are coming from outside of Europe.

Q159 Barry Gardiner: Mr George, I think what your company’s report did was it very clearly set out the whole range of different competitive attacks that the European domestic market and the UK market are faced with. I called them attacks. I simply mean the competitive disadvantages that we would be faced with. What I am trying to get out of both of you is a clear acknowledgement that the idea that the only reason that we are going to see refineries in Europe closing is that of legislative and regulatory disadvantage is nonsense and that there would be refineries closing in any event because of the very points that you have just made and that you set out very clearly in your report.

Stephen George: I think that is right. There is no reason to think that the regulatory burden in the UK or in north-west European or in Europe in general is the ultimate killer blow.

Roger Hunter: The only reason. I think you used the words "only reason". It is not the only reason.

Stephen George: Certainly there are a lot of pressures beyond the regulatory burden.

Q160 Barry Gardiner: It is also possible, is it not, that the regulatory constraints that Europe is putting in place, and has put in place, are going to be ultimately caught up with by other regions putting those same regulatory constraints in place. We are looking to a scenario in 2015 with the UNFCCC COP in Paris where we are hoping for a global agreement on the level of aspiration in tackling climate change. The measures that we have taken and are taking in Europe are ones that are front of edge, aren’t they? But if you are front of edge what you hope is that everybody else is going to catch up with you, and that is certainly what the United Nations is trying to do. Are the people behind the Purvin & Gertz report, who are now citing it so liberally as a means to attack the regulatory burden, not banking on regulatory failure in this? Are they not banking on the fact that maybe we will not get any global agreement on this and that we will continue our march towards busting through our 2 degree target?

Stephen George: I wouldn’t want to comment on their objectives and I kind of doubt that is the case but maybe a slightly different-

Q161 Barry Gardiner: I am not talking about their motives. I agree with you, I don’t want to impute their motives. I am just talking about the assessment that they are making. Are they actually banking on regulatory failure here?

Stephen George: I don’t think so. One of the things that we have to realise is that there is a very long investment cycle in this industry and any statement of intent at 2015 or 2020 may be way too late for the refineries that are at risk in Europe because they just don’t have the time to sit and wait for eight years while these best practices are brought in.

Q162 Barry Gardiner: But they have not been doing anything to invest against the very foreseeable other competitive attacks that they were facing, which you have outlined in your report.

Stephen George: I was going to say I think some of those are very difficult to invest against because the returns on those investments, as I have highlighted in the report, are not high enough to reach the hurdle rates that they need. They are basically faced with a stay in business case here, saying, "We need to spend $1 billion or $2 billion on our refinery. It is just not economic for us to do so". If we already have a conversion refinery that is producing gasoline, nice clean gasoline, it doesn’t make economic sense to then retool that refinery to produce clean distillates. The economic driver is not there, whereas if you have a relatively simple refinery and your first time upgrading investment from residue up to light products, you can make the right market choice in today’s market. But the refineries that have gone before, which tends to be the northwest European refineries, have already tooled themselves in one direction and don’t have the economic driver to retool themselves differently.

Barry Gardiner: We need to move on so I will leave it there. Thank you.

Q163 John Robertson: DECC has recently published a call for evidence looking at the UK refining industry. Are there any aspects that you think are missing from the call for evidence?

Roger Hunter: I don’t think there is anything missing, but when I read the questions that they have put in the call for evidence I would advise against searching for this sort of magic number with respect to how much refining you actually need in the UK versus importing. I would move away from that. I don’t think there is a magic number. The market has to find the right balance.

Q164 John Robertson: If there is no magic number and the market should move away from it, would that equate to companies moving away from the UK?

Roger Hunter: That may well happen. As I say, the only thing that I looked at and thought about when reading the questions in DECC’s request for evidence was that there appeared to be a search, via the questions, for some kind of magic balance in terms of how many refineries do we really need, and I don’t think that is the right question to ask.

Q165 John Robertson: Fortunately the Government asks the questions and you need to supply the answers. You don’t make the questions up so you have to answer the questions they give you, and they are asked for a reason. Government are not here to keep you guys in business. They are here to get the best deal for the country. So, perhaps when they ask the questions you will look at it in a different light.

The UK refining industry, for example Petronineos, have concerns regarding the European Commission refining fitness checks. What could the UK Government do to alleviate these concerns?

Stephen George: I am not aware of what the fitness checks are.

Roger Hunter: No comment on that.

Q166 John Robertson: That is one for you to look up and perhaps send us something back in writing.

Stephen George: If I were asking DECC to look at things I would say to look at the competitive pressures that are coming from outside the European Union, make sure your terms of references are not drawn so narrowly that you say, "How are we competing against France, Denmark or the Netherlands?" and look at the forces that are coming from outside, because they are the big forces that are putting refineries in Europe out of business.

Q167 John Robertson: There are two ways to look at that. It is also to get companies such as Shell to explain basically why they have moved away from the UK. Quite a few of the oil majors have left and what we would really like to know is, is your exit related to Government actions or price, or is it just cheaper everywhere else to make it, or are the rules governing the refining not as stringent?

Roger Hunter: We didn’t exit the UK because of the Government. We exited the UK, and we have exited a number of refineries across the world over the last few years, because we want to reduce our overall exposure to the global refining margin. It is a strategic decision in terms of how we want to resize our downstream business to be more profitable and more competitive. That meant that we have stepped out and sold refineries in a multitude of different countries, and one of them was Stanlow in the UK.

Q168 John Robertson: So it was purely financial?

Roger Hunter: Indeed.

Q169 John Robertson: Is there anything the UK could have done to help attract these major companies back or from leaving, or is it just the fact that it is cheaper and easier elsewhere?

Stephen George: I think it goes to the healthy churn that was mentioned earlier, that we are seeing new entrants. That doesn’t mean they are weak entrants. They are entering with a new motivation. If Chevron moves out and Valero moves in, Valero are keen, independent refiners who have a vision and say, "We can do something with that Pembroke refinery". If PetroChina want to come in and be refining in the UK, they have a motivation for doing that. If Essar come into Stanlow, they have a motivation for doing that. There is a new class of refiners in the UK but that doesn’t necessarily mean they are any weaker than the majors that are exiting.

Q170 John Robertson: Well, they are weaker because they are smaller. They don’t have the money at the back of them that the large companies have.

Stephen George: They have obviously come in here for sound purposes.

Q171 John Robertson: Yes, but they could leave just as easily as the larger companies do.

Stephen George: That doesn’t make them any different to the majors.

Q172 John Robertson: I have a problem with the larger companies doing that. They are quite happy to sell their product here, they make a lot of money from the British taxpayer, and yet when it comes to giving something back you are not very good at it, are you? Silence is golden. I will take that as a, "Definitely, no, you are not very good at it".

Mr Hunter, Okios suggests that the use of UK Oil Pipeline should be extended as presently only four shareholders have access rights. Is that right?

Roger Hunter: There are four shareholders of UKOP but the UK Pipelines Act is very clear about the fact that anybody can use that pipeline as long as it is not fully utilised.

Q173 John Robertson: Why would they say that then? My follow-up question was why would it be restricted? If they are saying it is restricted, obviously they would like to use it. What is the problem?

Roger Hunter: I think they need to read the UK Pipelines Act, because it is not restricted as long as it is not fully utilised.

Q174 John Robertson: So it will be restricted then. Whatever the UK licence is will be restricted to stop these companies from using it, otherwise they would be using it.

Roger Hunter: As I say, they need to read the Act. It is very clear.

Q175 John Robertson: Okay. We will ask them what they have to say about it. What countries are Shell investing into these days? Whereabouts are you?

Roger Hunter: There are many, many tens of countries around the world where we are investing. We have numbers of investments in both upstream and downstream countries.

Q176 John Robertson: I used to have connections in Nigeria. Are Shell still in Nigeria?

Roger Hunter: Indeed.

Q177 John Robertson: Are they still gas flaring?

Roger Hunter: I am not from the upstream business, I am from the downstream business, so I am not an expert to answer the question.

Q178 John Robertson: It used to be that something like nearly a quarter of the gas flaring in the world was done in Nigeria. You don’t know? Okay. You are not answering many of my questions, but thank you.

Chair: Thank you very much for your evidence. If there is anything you think you wanted to add if you could put it in writing to us and similarly we may come back with further questions in writing. Thank you.

Examination of Witnesses

Witnesses: Rt Hon Michael Fallon MP, Minister of State for Energy, DECC, and Sarah Rhodes, Head of Energy Resilience, DECC, gave evidence.

Q179 Chair: Thank you, Minister, for coming to give evidence. Since this is your first evidence session as the new Energy Minister, welcome to your role and we look forward to hopefully many years of exchanging evidence on the energy sector. Does DECC have a view of the balance of refining and importing as fuel supply to the UK economy?

Michael Fallon: That is one of the issues the cross-departmental review, which has already started and that I hope your own inquiry will be a useful addition to, is looking at to see whether we have the balance right in respect of a number of things-whether the duties paid by importers and refiners are right, whether the oil stocking obligations are fairly balanced between the two. So the broad answer is yes.

Q180 Chair: Are you minded to take action to improve refining capacity?

Michael Fallon: To improve capacity, no. As well as getting the balance right between importers and refiners, what we really want to look at is the way in which the environmental regulation imposes costs on our refineries and how we can be sure in future that we have sufficient resilience. I don’t think it is simply a matter of what is the right capacity. It is, is the capacity we have resilient enough.

Q181 Chair: In your written evidence you talk about transport providing 75% of the final consumption of refined oil products and then go on to talk about 65% of the transport fleet will need to be electrified by 2050. Are you saying in the long run there is not an issue?

Michael Fallon: In the very long run perhaps there will be less of an issue, but that is 2050. Certainly I see oil playing a very big part in our transport fuel market right into the 2030s, so if you are speaking of 2050 perhaps but we have a long way to go until then.

Q182 Chair: In the consultation, are you looking at the integration of refining and importing?

Michael Fallon: Yes, we are looking at all these things. There is quite a lot of integration at the moment, but we need to understand overall how the refining sector is constructed and, as I said, whether it has sufficient resilience for the years ahead. I think that is important in the light of the closures of Teesside and Coryton.

Q183 Barry Gardiner: How does the Department intend to ensure the correct mix of oil products are available in the UK?

Michael Fallon: I am not sure Government can decide the correct mix. I think what we have to be sure of is that we do have, as I said, sufficient resilience, and therefore sufficient capacity, I suppose, is the answer for likely demand. I do not think it is for Government to prescribe what the exact mix should be, I am sorry.

Q184 Barry Gardiner: No, I understand that answer and it is a perfectly reasonable statement of where you believe Government has a role to play. The problem of course is that at the moment our UK refineries are optimised to make more petrol than diesel and we find that demand for diesel is growing by a percentage point per year, but petrol demand is decreasing by between 5% and 7% per year. So when you say you want to ensure that we have resilience, that resilience has to be about producing a product that we want rather than a product that we do not want. I just wondered how you see Government being an active player in that.

Michael Fallon: It is obviously difficult for Government itself to start redesigning refineries. You have analysed it very well. Our refineries are petrol-facing, if you like, and not diesel-facing, and although they compete well at the moment in Europe, the long-term trend therefore puts them at a disadvantage. They are producing too much petrol, not enough high-value diesel or jet and they are less likely to compete with the refineries of the future and therefore the investment case for investing in them probably will get weaker. It is difficult to see in the long term how they are going to continue to compete in the same way that they are competing at the moment.

Q185 Barry Gardiner: We heard in our last panel-and Ms Rhodes was here for some of that-their concerns. You may be aware of the KBC report that has looked at the competitive pressures not simply from within Europe, as you were referring to, but much more widely from the Middle East, from the new capacity coming on in India and China that is changing the face of supply and demand there. It would appear that in effect what we have is an old-fashioned smaller-scale uncompetitive set of kit around Europe, which, it has been pointed out, has a higher regulatory constraint than elsewhere in the world. While we may all hope that the regulatory constraint may be levelised upwards to meet our good standards, those other pressures cannot just be legislated away. Therefore, when you speak of resilience and what Government needs to do to create resilience in the sector, it is difficult to see exactly what levers are available to you, isn’t it?

Michael Fallon: Again, I think you have analysed it very well. There is over-capacity at the moment in the European market. As you have said, there is likely to be, and there is already, new capacity being added in the Middle East and in the Far East and our own refineries have to compete against that. You described them as small scale. Our refining capacity is not wholly out of line; it is not out of line with France or Spain, for example. I accept there is more refining capacity in Germany and in Italy.

Q186 Barry Gardiner: I do not mean within Europe. I am really comparing it with what is happening now in the Middle East, where they have guaranteed supply into their refineries and they are producing the products for export. There they have the economies of scale that we simply cannot match, don’t they?

Michael Fallon: Yes. The issue then comes back to your question as to what Government can do. We are, as I said, reviewing resilience. I think what we need to do is to see what we can do to help UK refineries invest in their own competitiveness, if I can put it like that. One obvious thing Government must not do is to burden them with unnecessary new regulatory costs that increase the capital budget and will not be affordable. That is why we are looking extremely hard at some of the regulatory proposals that are proposed at the moment. In respect of the commission’s intention to hold what they call a sector fitness check, for example, I am concerned that the particular remit is a little too narrow and excludes some of the new regulatory costs. I apologise for a long answer, but I have written this week to Commissioner Tajani to ask him to widen his check to encompass some of the other regulation that affects refineries, not least the Fuel Quality Directive and the Industrial Emissions Directive.

Q187 Barry Gardiner: Is that letter in the public domain and, if not, could you make it available to us?

Michael Fallon: I have only just written it so it is not in the public domain, but I will certainly make it available to the Committee.

Q188 Barry Gardiner: Thank you very much. I am sure that will be extremely helpful.

Minister, given the sort of problems that we have identified for not only the UK domestic but the European refining market-and you have rightly talked about the regulatory burden but we have also talked about the other much wider competitive pressures that the European refineries are now facing-do you believe that the market has already incorporated those competitive disadvantages going forward into the share price of those companies or do you believe that that has not yet been reflected in the share price of those companies?

Michael Fallon: I am not sure I am qualified to assess the composition or the strength of the share prices of the various operations concerned. All I would say is that some proposed regulation at the moment is going to add to the regulatory burden, and that is where I think we need to be fairly careful, before we are absolutely sure that we have sufficient resilience, about adding fresh regulatory burdens that will apply in a cumulative manner. That is what I am really worried about. There is a cumulative burden of well-intentioned legislation that I fear could put further economic pressure on our refineries.

Q189 Barry Gardiner: Just one final question then. Increasingly, refineries are closely integrated with other petrochemical plants, Fawley, Grangemouth, Stanlow, or they sometimes export the feed stocks to chemical production plants within the UK elsewhere and overseas. In its review is DECC considering the knock-on effects on those ancillary industries if the UK refining industry were to decline yet further? We have heard earlier that there will be, in the view of some of our witnesses, an inevitable rationalisation, that there may be further closures. What is that going to do for the ancillary industries that are based around our refineries?

Michael Fallon: That is something we should look at in the context of the review, yes. This is a cross-departmental review and, as you say, there are these ancillary activities that are associated with the refineries, or indeed partially integrated into them. We should look at that as well and we are.

Barry Gardiner: I think my question was more what, not will you.

Michael Fallon: We have just started this review at the moment, so I think it is a bit premature to tell you how it is going. We don’t know yet, but it is a wide-ranging review, as I have described it.

Q190 Ian Lavery: I want to briefly mention the security of supply. The previous panel seemed to suggest that there were not any problems at all with the security of supply and I wondered what the Minister’s view would be on that. But in saying that, the International Energy Association Model for Short-term Energy Security, that is MOSES, suggests that the UK dependence on imports of jet kerosene and diesel is currently at levels considered high risk for energy security and kerosene is just 1% off from being considered high risk. What are your views on this?

Michael Fallon: The MOSES index that the IEA operates has its uses. I think it has some weaknesses as an index, as it does not track developments over time, so I think it is more of a snapshot. We do not think there is any imminent or short-term issue with security of supply, but obviously when the Coryton closure was raised last year Government looked extremely hard at the likely implications and, as you will know, took the decision not to intervene. I think overall, that has been proved to be the right decision. We have not seen some of the consequences that were predicted at the time of the closure.

Q191 Ian Lavery: What you would think is the optimal level of domestic refining for security of supply?

Michael Fallon: That is what we are looking at. That is the purpose of the review, to establish what the degree of resilience is and whether there are other ways of shoring it up. That is exactly what we are looking at.

Q192 Ian Lavery: The MOSES model suggests import dependency equal to or greater than 45%. Is that the ballpark figure that you are looking at?

Michael Fallon: We are not looking at a specific ballpark figure. Obviously it is a widely-respected index and we pay attention to what the IEA say, but we are not looking at a specific figure.

Q193 Ian Lavery: So you wouldn’t have any figure in mind on where there will be a huge problem in terms of security of supply?

Michael Fallon: I would not want to get pinned down to a particular figure and say that once you drop below or go above a certain percentage then you are in trouble, but we are looking at all this, this whole issue. That is the purpose of the review, so it may be that one of the conclusions we come to is that we should set ourselves some kind of trigger.

Q194 Ian Lavery: Greenergy suggested that storing onshore product for strategic purposes builds security. Does the Government see a lack of stored product as a security of supply issue?

Michael Fallon: We are looking at the stocking obligation and there is a separate piece of work going on with the industry to look at that and the management of the way that oil is stocked and to see whether that can be improved. When that is concluded, we will see what needs to be done in terms of Government action.

Q195 Ian Lavery: Does DECC have any strategy whatsoever for ensuring security of supply or basically are we hedging our bets?

Michael Fallon: We are not hedging our bets. We look at these things extremely carefully. Government looked very carefully at the situation when Coryton closed last year, because it was a very large refinery. We set up the review into resilience this year. These are matters I discuss with the downstream industry and we keep a very close eye on. We will learn a lot more from the review. Indeed, Mr Chairman, I hope we will learn from the evidence that you have been taking and weighing as part of your inquiry. There is no complacency about this issue. It is something we need to weigh very carefully.

Q196 Albert Owen: Good morning, Minister. Can I take you back to some of the responses you gave Mr Gardiner with regard to the impact that legislation has on the industry? You are sending a letter to the Commissioner in Europe and it is very welcome, but in the evidence-and indeed in your consultation, if I can start there-you talk about, "The challenges faced by the UK sector are in common with other European refineries". We have had companies giving evidence to us in earlier sessions saying there is a lot of gold-plating going on, in other words there are issues in the United Kingdom that are over and above what Europe does and it makes the margins tighter and British refineries less competitive. How would you respond to that?

Michael Fallon: Gold-plating is an issue the Government takes extremely seriously. We published what are called the guiding principles on all Government Departments in order to avoid gold-plating and they took effect from 1 July 2011. Under one of my other hats, I am the Minister responsible for ensuring that we do not gold-plate any more.

Albert Owen: I wasn’t going to embarrass you on your dual role on your first outing.

Michael Fallon: But it is one of my jobs to ensure that we do not gold-plate, and we have added very recently a further sixth principle to ensure that, far from gold-plating, Government Departments do the minimum necessary to implement the legislation, rather than adding to it. There has been gold-plating in the past, I am afraid, under previous Governments, and we are looking back through the stock of legislation to see where there was gold-plating that was simply discretionary. There have been examples, not in the energy field, where Government has had the chance-

Q197 Albert Owen: You are being very general, sorry. The evidence we were given was very specific today, it was specific about European legislation that is coming forward that this Government, under this regime-you made it partisan in saying about the differential; I am saying it has been going on for a long time and it is continuing to go on-are looking at this and bringing this legislation in sooner and it is unclear how this EU legislation will develop, so we will end up with more regulation. That is what the industry is telling us. It is not a partisan point about which Government brought it in. It is a fact that we have been given, only a fortnight ago, by oil refineries companies.

Michael Fallon: I am not aware of any example since July 2011 of gold-plating in terms of energy legislation, and if you have one I would be very happy to look at it. I think there has been gold-plating in the past. Let us just say between us, Mr Owen, it probably occurred under all kinds of Governments, but the purpose of the letter to the Commissioner is to ensure that his approach is much more robust, that it does look overall at all these pieces of legislation. I am concerned about the cumulative impact, not so much the gold-plating, the fact that there are so many regulatory proposals that will involve extra cost for our refineries.

Q198 Albert Owen: Would you accept that Britain is too keen to move ahead of other European companies and put British companies at a disadvantage?

Michael Fallon: I think in the past there has been a tendency in this country to conform with the law. We have been good and we have signed treaties-

Q199 Albert Owen: With respect, I am sure if I was asking our European counterparties they would be saying that they would do it within the law as well. What I am saying specifically is if a date is given and you have to bring in a regulation in three or four years’ time, here in Britain we tend to bring it in unduly early, as some companies suggest.

Michael Fallon: We do not do that now and we would only ever do that if industry itself saw some advantage in bringing it forward earlier.

Q200 Albert Owen: With respect, I am sure you read the text of what the oil refineries are saying. I am not saying that it is happening now or last year or the year before, what happened in the previous Government. I am saying they are raising it as recently as a fortnight ago as an issue, which I am sure will come out in the review and consultation. Do you accept that this is a fact, that it is happening and do you believe that you should be doing something immediate about it?

Michael Fallon: I will certainly look at it. You have drawn it to my attention. I will look at that particular evidence. All I am saying is that it is Government policy that that should not happen across the board. If there is a specific example, I will look at it.

If I can add, Chairman, where I said that we are too ready to conform to the full thrust of the law, and you suggested other member states might say the same, that is not quite right. We have come across examples of other member states who are willing in their interpretation of EU legislation to be taken to court and have infraction proceedings against them and they are prepared to take more of the risk of that.

Q201 Albert Owen: But that wasn’t the example, with respect. I know that goes on. The Irish are famous at it. I do a lot with Irish politics, I know, but they go to the wire and they do not actually appear in court.

Michael Fallon: I will look at the evidence that you are drawing my attention to.

Q202 Albert Owen: The point has been made to us that here in the UK it is more difficult because we either have additional regulation burden or we bring in European legislation too early. That is the point I was making and you have said that you will look at that.

But going on to the European-wide level, do you believe that some of the environmental protection legislation that we have puts at risk European business, and in particular UK jobs, and good refineries are facing extra burden for it and it does not do much for the environment? Is that a general view that you would share? Again, it has been given to us in evidence, which is why I am raising it.

Michael Fallon: The industry certainly have drawn our attention to the considerable costs that are likely to be imposed by the regulatory proposals, not by the regulation that is biting at the moment, but the regulation that is coming down the track, and we have no reason to dispute their particular figures. That is why I am concerned about the cumulative impact of European legislation. Some of these commitments of course are much older. Some of these various schemes such as the Carbon Reduction Commitment was, of course, signed by a previous Government.

Q203 Albert Owen: Previous Governments and future Governments will be signing up to them as well. I think you are wearing a third hat here as Deputy Chairman of the Conservative Party, to be honest with you, looking at some of the answers that you are giving, but I can live with that and I will respond openly and honestly to it. But honestly, what I am dealing with here is evidence that we have had as recently as a fortnight ago, and I am concerned as anybody across parties on this Committee about some of the issues that they raise. I am not doing a party knock-about; I want to get what is best.

You mentioned-and I will deal specifically with-the up and coming legislation, which I do not think you can even blame on the previous Government, let alone two or three previous Governments. Can I ask you specifically what are you going to be doing about it? What is worrying some of the oil refineries again is that they cannot plan to invest because they are not sure what is happening. What are you doing, as the British Energy Minister, to ensure that British companies know exactly what is coming down the line so they can implement it now and plan for the future to help UK refineries?

Michael Fallon: That suggests you do want them to implement it sooner rather than later.

Q204 Albert Owen: No, I think that it is unclear at the moment, that there is no focus on it, they are not sure what is going to be happening. What we are saying is-their words again not mine-they have concern about timing and focus of the EU fitness checks in particular. They want to know what the UK Government is going to be doing about it. That is what I want to know, because they raised the issue with us.

Michael Fallon: On the fitness check, I have already told you that I want the Commissioner to widen his fitness check to encompass particularly the Fuel Quality Directive and the Industrial Emissions Directive. On the very specific legislation the industry is concerned about, primarily implementation of the Fuel Quality Directive Article 7a, that has not yet been agreed and that is something we are battling in Brussels over. We are absolutely determined to make sure that it is fit for purpose, that it does deliver the progress towards environmental goals but it does so in a way that doesn’t impose an unsustainable burden on the refining industry that will simply lead to more closures. So that is a very good example of a proposal that we are fighting on behalf of industry over in Brussels.

Albert Owen: That is one you will get my 100% backing on if we can get it focused and sorted out very soon.

Michael Fallon: I hope we will. These things are not easy in Brussels, but I can assure you that is one particular proposal we are fighting.

Q205 Albert Owen: That is one we have full agreement on. But I have a few more questions and one of them is specific to Britain, and again an issue that has come up and surprised some of us on the Committee was the fact that products that are made and refined in the UK pay duty to be shipped out or shipped within the UK, whereas coming from the European refineries or anywhere else in the world don’t pay it. Again, UK refineries are at an unfair advantage. How do you respond to that?

Michael Fallon: As I described at the beginning, that is a key part of our review, to look at the balance between refiners and importers as to how the duty is fairly distributed and whether there is a case for rebalancing the duty between the two. That is a very important part of the review and I think you have really put your finger on one aspect of where our refineries may be at quite a significant disadvantage.

Q206 Albert Owen: Do you accept that the UK duty is a disadvantage to UK refineries?

Michael Fallon: What I accept is it is different, and you have drawn our attention to that. It is different for refineries as it is for importers.

Q207 Albert Owen: It is hugely different.

Michael Fallon: It is hugely different, fine.

Albert Owen: One company says $5 a tonne.

Michael Fallon: Yes, it is hugely different and what we need to establish is that huge difference-

Q208 Albert Owen: It is not a difference, it is a disadvantage. Let’s not play with words. It is a huge disadvantage to UK companies. It is not a difference here, it is a disadvantage. It is clear, isn’t it? If you pay extra in the UK for your own product than somebody importing it, it is a huge disadvantage.

Michael Fallon: Yes, but what we need to establish is whether that disadvantage, which has been around for a while, is fair, how it is constructed, whether it is intellectually justified and whether it is coherent and whether it is too large, and that is precisely part of the review.

Q209 Albert Owen: I think we disagree on interpretation here. If something happens in Europe, it is clearly wrong and a disadvantage; if something happens in the UK, there might be a perfectly good reason for it. That is what you are saying.

Michael Fallon: No. I am saying we need to look at the balance between importers and refiners of all these obligations, and indeed the levels of duty. We need to have a good look at it and see whether, as the industry says, that is a huge disadvantage, as you describe it, or not. That is a key part of our review.

Albert Owen: I am describing what they are telling us. I am not making this up.

Michael Fallon: Sure.

Q210 Albert Owen: The final point I have to make is that evidence to this Committee suggests that some companies have to get two licences for the same piece of work on jetties; hazardous substances consent licences are given by local authorities and there are long delays. What scope is there for consolidation and rationalisation of these licences? Is this something that you have identified and that you want to come out of this review?

Michael Fallon: If you are talking about the development of jetties and docks and things like that, we have separately-I am afraid wearing another of my hats-agreed a protocol between the various licensing authorities, the MMO, Natural England, the Environment Agency, the local authority and so on. We have spent a lot of time on this and now have a protocol that they will decide very quickly on any application as to who the lead regulator is, so there is not a whole series of sequential consultations one after the other, you don’t have to go from one to the next. There will be a lead regulator who will take overall charge and liaise with all the others.

Secondly, where a local authority might not have experience of handling that kind of application, they might never have seen it before, they can access advice through the Local Government Association from another council that is used to dealing with it and, if necessary, bring in outside expertise. It has been an issue, not simply for the refining industry but for all kinds of maritime developments.

Q211 Albert Owen: So again it is a question of rationalising the different levels of consents and you are looking at that closely?

Michael Fallon: Yes. It is simplifying it, it is ensuring that these things are handled as efficiently as possible in terms of time and bureaucracy, that companies are not faced with having to go through the same consultation in essence through a number of different agencies.

Q212 Albert Owen: So you, as the DECC Minister, are looking to simplify the consent process?

Michael Fallon: I have been looking to simplify it as DECC Minister and as a BIS Minister.

Q213 Dr Lee: Looking at the role of UK Government, I suspect, Minister, you are well placed for this, as somebody who is across Departments and the sort of alleged silo thinking that can sometimes go on in Government. Phillips 66 were quoted as saying that, "The issue being within Government, whether is UK or EU, is that Government is organised by Department. There is energy, there is transport, there is climate change, and it is about trying to get them to work together across the boundaries to see the whole picture and not just the picture that they see within their remit". I think if that could be worked on as well, that would make the legislation more effective at a holistic level. Are you working across Government to help resolve the cross-department issue of oil refining and storage, the move from refining to storage facilities at the UK and/or at the EU level?

Michael Fallon: Yes. This is a cross-departmental review, so it involves not simply my Department but other Departments with an interest, the Department for Transport, the Treasury and others.

Q214 Dr Lee: DECC has previously commissioned studies on the oil sector in 2009, 2010, 2011 and worked in collaboration with UKPIA to agree terms of reference for an independent study published in May this year. In response to that, Essar Oil stated that the rigour and openness of Government in this recent stage of refining had been excellent. However, UKPIA stated, "At the end of this Department consultation there has to be a refining strategy for the UK that deals with concrete actions". Do you think there are going to be concrete actions?

Michael Fallon: It is possible. That is what the review is there to find out. There may well be actions we can take. Mr Owen opened up one area, which is the balance between importers and refineries and how fair that is in terms of stocking obligations or duties. We do not know, but there may be some very specific actions that we are able to take to improve resilience and I am sure there is more we can do on the legislative and regulatory side to decrease the burden and ensure that, as I said, the cumulative impact is minimised.

Q215 Dr Lee: When do you foresee making the recommendations?

Michael Fallon: We are working towards the end of the year, I think.

Q216 Dr Lee: Shell and other global oil majors have exited the UK refinery industry. Is this of concern? Do the Government think they have a role to try to attract oil majors back to the UK?

Michael Fallon: No, I do not think it is Government’s job necessarily to do that. Obviously when Coryton closed, these were things that the Government looked at across the sector, but I do not really want to be drawn into discussing the strategy of individual companies, or indeed the position of individual refineries. It transpired, I think, after Coryton that the sector could cope, the resilience was there, but I want to be sure that the resilience will continue to be there, given the pressures that we have been talking about.

Q217 Dr Lee: In the light of changing global circumstances, which seem to have changed by the day, particularly in the fossil fuel rich parts of the world, do you think the role of Government in general is going to increase in this market or decrease?

Michael Fallon: There will obviously be a role for Government in responding to the various pressures for more and more environmental legislation. Those pressures are here, those pressures are in Brussels, and indeed there are international commitments, so there is certainly a role for Government in weighing those various demands and the commitments that we are being asked to sign up to and making sure they don’t impose unnecessary costs on our industry. But the oil market, as you have indicated, is changing and the centre of gravity of refining seems to be shifting as well to the east. I don’t think that is a trend Government can halt.

Q218 Dr Lee: Do you foresee a tension that the refining capacity is moving towards autocracies, away from democracies, in the context of security of supply, resilience, our ability to have a functioning economy in the future, which ultimately is dependent upon energy and the cost thereof?

Michael Fallon: That is certainly worth thinking about. It is not something I have considered at the moment as to where exactly future refining capacity is likely to be around the world, but obviously part of our review is to look at resilience and we do that right across the energy sector to make sure we are not over-dependent on single or unstable sources.

Q219 Dr Lee: Finally, the refining capacity in this country is predominantly towards sweeter forms of crude, I think I am right in saying north Africa, west Africa, that type of part of the world outside of our own. Do you think our foreign policy and defence policy should reflect that going forward in terms of building resilience?

Michael Fallon: Yes. We do look at these things all the time when considering gas pipelines, for example, or our dependence on foreign design or finance for our nuclear industry. We do weigh up all time the foreign policy considerations of that across Government.

Q220 Barry Gardiner: Minister, you mentioned the burden of the CRC that has been placed by the previous Government, but of course the previous Government had asked the businesses to make those commitments and then had said it was going to recycle the £1 billion to the businesses themselves. It was your Government, when it came in, that said that £1 billion would be taken away from them and taken into the Treasury. Is your comment to Mr Owen about the CRC an indication that the Government may be looking to repatriate some of that £1 billion back to business?

Michael Fallon: No, that is not what I meant, and I do not want to get drawn into too much of a party political argument about this.

Barry Gardiner: You did start it with that.

Michael Fallon: I started it simply by showing that some of these commitments that turn out to be too burdensome we all happily signed up to, previous Governments, previous Parliaments and I think that is always something we should bear in mind. As I understand it, that particular scheme we have now simplified and there will be very little-minimal-cost to the industry from its implementation. So we have, I think, improved it. But if I may, I will look at your specific point about the missing £1 billion and get back to you.

Q221 John Robertson: I always find it funny that we are all in it together sometimes; it just depends on whose fault it is. Anyway, moving on, the IHS independent report published in May this year suggests the annual contribution of the UK refining industry to the economy is some £2.3 billion and each large refinery is estimated to inject around £60 million plus into the local economy where it is located. They claim the UK oil refinery sector is a crucial sector and contributes some £60 billion to the UK economy, with a downstream sector accounting for some £37 billion worth of tax and VAT revenues. What impact would the closure of this industry have on fuel costs in the UK economy?

Michael Fallon: If the whole industry was to close, it would certainly have an impact. It is an important industry, it is a relatively large industry. According to the UKPIA, refineries support around 26,000 jobs directly and indirectly so if we lost all our refineries, yes, it would certainly have an impact.

Q222 John Robertson: But do you accept we are on a path of decline in this area?

Michael Fallon: We have seen two very recent closures. As I said, our refining capacity seems to be roughly in line with that in France and Spain, so I think it is a bit too early to foretell the end of the industry, but we have earlier discussed some of the challenges it faces. It is a very competitive industry. It is competing well in Europe at the moment, but it does face these challenges in the balance between petrol and diesel and the new regulatory burdens and costs that are going to be imposed and will require extra investment.

Q223 John Robertson: Is there anything Government can really do or are we just in the hands of the market?

Michael Fallon: We are not leaving it entirely to the market. That is why I am talking to the industry and why we have set up this review, which will look thoroughly at the resilience of the industry and the amount of capacity that we really do need. That is why you are having this inquiry and that is why Government will continue to battle, with the industry, where the proposals from Brussels seem to be disproportionate, so we are not sitting back watching an industry decline. On the contrary, we are having a good hard look at it and we are ready to defend the industry where we can.

Q224 John Robertson: Do you think it is fair to say that the UK Government is responsible for the largest component in cost, in excess duty, and so its regulation is also causing them problems, particularly on the domestic front?

Michael Fallon: Clearly duty is a very large component of it and the regulation of course is not simply domestic, it is European regulation. These are commitments that have been signed up to or ambitions that successive Governments have supported in terms of improving the protection of the environment. So to that extent, yes, there is a Government responsibility there.

Q225 John Robertson: In the previous panel, they pretty well said-in some cases by their silence-that cost is the name of the game and that nothing else really matters so going to the cheapest and easiest place to do the refining is where they want to be. How does that meet the security aspects of this country?

Michael Fallon: We touched on this earlier and I think Mr Lavery raised this issue of whether there was a dependency percentage beyond which we would feel insecure in terms of our supplies. But this is a very competitive industry, Mr Robertson, and of course our constituents benefit from that competition if costs are kept down for them, because these refineries are competing against each other and are competing across Europe at the moment. What we are talking about here is the future burden of costs and the continuing over-capacity in the market and the likely increase in capacity further east. These are the challenges the industry faces.

Q226 John Robertson: Yes, but if we continue to rely more on importers and terminals abroad and the infrastructure that is outwith our control, this puts our security in danger, does it not? This Committee originated years ago because of security of supply of energy and yet we seem to have forgotten that that is one of the reasons that we are here. I would say, Minister, the Government maybe has put that through into the background as well.

Michael Fallon: Absolutely not. Security of energy supply is one of our principal policies at the Department of Energy and Climate Change, whether we are talking about gas or whether we are talking storage or whether we are talking about getting the right mix of energy sources so that we are not over-dependent on one particular technology or one particular source. That is why this Government, with support from Parliament very recently through the energy legislation, is taking forward the replacement of our nuclear fleet. That is yet another way of enhancing our security. But you make a fair point, the overall dependence on oil products coming from abroad, and when I say we need to improve resilience, that is something we need to have a look at and see if we can answer Mr Lavery’s question: should there be some kind of default trigger, that we want some dependency percentage we would not want to go over?

Q227 John Robertson: How much effort will be going into electrifying 65% of the transport fleet by the 2015 emissions target, to say the least, and various other technological and infrastructure development? The Government is contributing £25 million to ultra low carbon vehicle demonstrators, £20 million to the Low Carbon Vehicle Public Procurement Programme and the Office for Low Emission Vehicles was set up in 2009 to oversee aspects of electric funding. In 2010, £43 million was confirmed for the consumer purchase subsidy. Does this investment stack up for UK residents? Will transport by electric vehicle be as cost-effective as transport based on oil products? In other words, are we starting to forget about oil and yet we may not be able to deliver electrically?

Michael Fallon: The cost of oil has risen enormously in recent years, and in order to meet our overall carbon reduction targets, of course we have encouraged the automotive industry in its move, which is happening anyway, towards electrical or fuel cell vehicles. I take responsibility for the OLEV budget that you have referred to, in conjunction with Mr Baker at the Department for Transport, and we are spending Government money on research and development in this area, in ensuring that, for example, where electric cars are encouraged, there are the plug-in facilities that you would expect. We are already seeing the development of longer-range electric vehicles by producers here and in Japan. We are fairly close to the development on a more commercial scale of fuel cell vehicles. So these are not things we can ignore and it may well be they do contribute to a reduction in the demand for oil products.

Q228 John Robertson: One of the things that concerns me personally is the aspect of cheap labour and, shall we say, companies working at less reliable safety practices abroad. How much does this Government look into these companies that sell their product in this country, the same way we have done in clothing and aspects of that as well? The same kind of thing can be levelled against some of these companies abroad.

Michael Fallon: I think you are right. Clearly some of these newer refineries further east do not have the same health and safety or environmental standards that we already have and certainly are not considering imposing the new regulation that is coming down the track from Brussels, so they are at a competitive advantage. How much can be done about that, as you suggested, in clothing or textiles, I am not sure. If your Committee would like to recommend or look at that particular action that would certainly be useful, but I am not sure how we can ensure that those costs are more fairly balanced between us and, say, Middle East countries.

Q229 John Robertson: Surely the buying power of this country can put pressure on these companies. Embarrassing them in the media alone would cost them a lot of sales, and that would be spread over quite a lot of the rest of the world, would it not?

Michael Fallon: Possibly. We have seen in the retail sector how responsible retailers are able to secure and protect higher standards from their suppliers and it is maybe something that could be looked at in this sector too.

Q230 John Robertson: You get my point though, that the lead has to come from Government.

Michael Fallon: The lead probably has to be international if there are-

John Robertson: Somebody has to take the lead, Minister. Why don’t you?

Michael Fallon: Somebody has to take a lead. There are international organisations in some of these fields, for example, as to how oil is transported by sea and the standards involved there. It may well be that some of these concerns you have can be addressed internationally.

Q231 Albert Owen: A big concern for my constituents and businesses in my area is the high cost now of diesel as opposed to petrol. As you are well aware, as somebody who has been in Parliament for some time, there used to be incentives for people to switch to diesel motors. Many in my area did so and have still kept them-they don’t change their cars every year-and they are now paying a higher cost for that because of the lack of capacity of oil refineries to diesel in this country. Is that a concern that you have, because of the impact particularly on businesses as well, because the cost of many of the goods in periphery areas reflects the cost of transportation, which is from diesel?

Michael Fallon: We are looking at that. It is a fact that the other European countries levy a lower fuel duty on diesel than petrol and we are the exception. I think there are some areas of company car tax where that is not true, but in general terms we are the exception to that. So we are looking at it. It is part of the review. I think the difficulty would be even if Government tried to change, to realign the duty, it might take years and years before people then moved away from-

Q232 Albert Owen: Sure, but it would have an immediate impact on some of the small businesses, and be an advantage to them. At the moment, most of the goods in periphery areas do come by road and there is high diesel cost, which is the reason I raise this. There is day-to-day concern in my area. But it is linked to this inquiry, Minister, which is why I think it is important, because much of the evidence, which I am sure you will read, suggests that because of tight margins, that is a deterrent in investing in production of diesel. We had a very good earlier session that gave a different view on that but, at the end of the day, the customer is suffering as a consequence of this.

Michael Fallon: Sure. That is something the review is looking at.

Q233 Chair: Thank you very much, Minister, for helping with this inquiry and obviously our report will come into your inquiry as well. If there is anything you think you should have said that you have not said please put it in writing, and similarly, if there is anything we need to follow up, we will write to you as well.

Michael Fallon: Thank you, Chairman. I certainly owe Mr Gardiner a letter, I think, on the cost of the CRC, but if there is anything additional I will certainly add it. May I say again, we very much welcome your inquiry and it is going to be a big part of our review, and Parliament and the Executive seem happily aligned here in terms of timetable? Thank you.

Chair: Thank you very much.

Prepared 25th July 2013