Examination of Witnesses (Questions 340
- 359)
TUESDAY 1 JULY 2008
Ms Vivienne Cox and Mr James Smith
Q340 Baroness Hamwee:
Coming back to renewables can you tell us about your investments
in renewable energy and which technologies you see as the most
promising and also your role in developing them or using other
people's developments?
Ms Cox: We have an alternative energy
business. We brought together all the activities that could be
called alternative energies into one organisation and we did that
as a low-carbon power organisation in 2005 and then extended the
remit into biofuels and beyond at the beginning of this year.
We made a commitment in 2005 that we would spend $8 billion over
ten years in this area. In 2008 we are spending just short of
$1.5 billion (per annum) on alternative energies and that is at
the current time primarily in wind, in solar, in the development
of sugar cane ethanol, and what are commonly called second-generation
biofuels, so those are our current investments. We are looking
at carbon sequestration and storage, and although we do not have
capital investment, we do have projects being developed in carbon
sequestration and storage, and we believe that to be an extremely
important technology for the medium and long term, for the reasons
that James was talking about, which is that it is clear that hydrocarbons
are going to be an important part of the energy mix. If there
are concerns about climate and a desire to mitigate CO2 emissions
then carbon capture and storage is an essential technology to
do so. In the medium to long term we have carbon capture and storage
technology and we are also looking at technologies such as concentrated
solar thermal technology and biomass. Our current portfolio is
wind, solar and biofuels and then a number of technologies which
we are not investing in today but where we are intending to grow
our business for the longer term. In terms of whether it is our
technology or other people's, it is both, so we have a significant
investment in research and development but we also invest small
equity stakes in start-up companies, venture capital companies,
venture capital funds, in order to access intellectual property
which is being developed by others. There are many people doing
great research and development but what we have found we can bring
to this industry is our capability to operate at scale, to develop
at scale the project management skills that we have from the oil
and gas industry, which are highly relevant if you wish to develop
a material alternative for the renewables business going forward.
Q341 Lord Lawson of Blaby:
May I ask a follow-up question. I am sorry, I did not catch the
figure you said you were investing in alternatives and renewables
and so on?
Ms Cox: It is $1.5 billion.
Q342 Lord Lawson of Blaby:
What proportion is that of BP's total investment?
Ms Cox: From memory, this year BP's total
investment is around $20 billion so it is 1.5 out of 20.
Q343 Lord Lawson of Blaby:
So over 90 per cent you are investing in oil and gas?
Ms Cox: Correct.
Q344 Lord Lawson of Blaby:
Is it the same proportion for Shell?
Mr Smith: It is not dissimilar. We are
investing something like $25 billion this year in total.
Q345 Lord Lawson of Blaby:
It is well under ten per cent of your total investment?
Mr Smith: Our renewables would be under
ten per cent of our total investment, that is right.
Q346 Lord Moonie:
What have been the main obstacles to investing in renewable energy
in the UK? Is it the amount of funding available? Is it the problem
with planning permission or the difficulties in getting connection
to the network?
Mr Smith: Vivienne is looking at me because
we have been involved in a wind farm in the Outer Thames Estuary
so perhaps I should try to respond. Maybe just a brief preamble.
My answer to the general question on renewables would have been
quite similar to Vivienne's but if we look at what we are doing
in the UK it has been principally wind, and offshore wind in particular,
again for the reasons Vivienne was saying because we understand
big, long-term engineering projects offshore. The project I am
thinking about is one in the Outer Thames Estuary called the London
Array which is one gigawatt of capacity where earlier this year
we decided not to continue with that project. You ask the question
about impediments or incentives. If we think about planning—and
I think the Government well knows that planning has been an issue
in so far as getting the energy infrastructure that is required
with the new legislation there—and we did experience a delay
of something like 15 months there for the onshore substation in
Kent. An application was made and then turned down and we went
to appeal and the appeal was eventually found. I am hopeful that
the changes in the planning legislation will improve things there.
You mentioned connections to the Grid and that is an issue. You
have to work out the project timing to ensure that when the National
Grid are ready that you are ready too, but that was planned in
without too much difficulty. I think that will become more of
an issue in future, particularly if there is an acceleration of
the amount of renewable energy that is deployed, particularly
if it is getting back to a question about transportation. If it
is in Scotland (where the resource is) and it has to be brought
to England (where the demand is greater) then the upgrading of
the Grid is going to be quite important. I think you also asked
about financial incentives. You are aware of the ROCs. Offshore
the factor is 0.5 for ROCs. Just to give some public information
by way of background: in 2003 there was some public data that
the capital cost of offshore wind was something like £1.3
million per megawatt installed. There is public information today
that new projects are something like £2.6 million per megawatt
installed so that is a very significant increase. It looks as
if when the Government went to 1.5 for ROCs offshore that the
estimates were something less than £2 million per installed
megawatt. We now seem to be in a higher cost environment so it
may well be that the Government will choose in the work that it
is doing on the Renewables Strategy to look at those incentives.
Q347 Chairman:
You mentioned that you were mainly in offshore in wind in the
UK and you indicated that is partly because of your great expertise
and experience in that area. Is that the main reason or are there
other reasons why you favoured offshore against onshore?
Mr Smith: When you put something in your
portfolio it is because you think you may have something that
can differentiate you, not completely but where you think you
have something that can make you successful. Onshore we did not
think there was anything we had that was particularly different
from many others. I should add though that we have a reasonably
substantial wind business and that the majority of that is in
the United States and there it is onshore. So the land mass and
the availability of wind resources is much more conducive to onshore
wind in the United States.
Ms Cox: We are in a similar position.
We have an onshore wind business in the United States and it is
this issue of scale there that makes it appealing to us. There
is not the consistency of the legislative environment which we
would like but the scale of the resource there makes it attractive,
and that is of course what makes the offshore UK wind opportunities
also attractive, and with 40 per cent of the European wind resource
in UK waters, the UK does appear to be comparatively advantaged
in the issue of offshore wind.
Q348 Lord Lawson of Blaby:
Just finishing off on offshore wind before going back to hydrocarbons,
if offshore wind in these parts is so great, why did Shell withdraw
from the London Array?
Mr Smith: Because it was not meeting
our economic criteria; it is as simple as that. Whatever project
we are doing, whether it is renewables or fossil fuels, we have
economic hurdle rates.
Q349 Lord Lawson of Blaby:
So offshore wind at the present time is seriously uneconomic?
Mr Smith: I would not go that far. For
Shell we had a project, we looked at the economics, we looked
at the response to our hurdle rates, and decided that we could
not proceed. There are two partners in that project as well and
I cannot speak for them of course.
Q350 Lord Lawson of Blaby:
Going on to hydrocarbons, Ms Cox was saying at the beginning that
there is an energy security problem with hydrocarbon and I thought
you were saying there was no absolute shortage, and obviously
there is 40 years and that is likely, to go on past form, to continue
for 40 years, but you did say something about energy security
which I think is, if I may say so, a little implausible because
there is no energy security problem with coal, and coal of course
can be gassified if necessary, and of course there is no energy
security problem with the oil sands in Canada which you were talking
about, so I do not think that stacks up, if I may say so. In fact,
you would not be in this renewables game at all if it were not
for the concern about carbon dioxide emissions. That is what it
really all comes down to. I would like to ask you about that.
Obviously both companies take a long view and always have done
and you continue to take a long view. You are investing over 90
per cent in carbon energy, oil and gas, so you obviously consider
oil and gas to have a great future and indeed you are assuming
that in 2050, I think you said Mr Smith, that you thought that
carbon emissions would be 60 per cent.
Mr Smith: Including coal.
Q351 Lord Lawson of Blaby:
In carbon energy. The only way I can see that this squares with
for example Lord Stern's latest pronouncement in May at the London
School of Economics, and of course this is 60 per cent of a much
higher total—
Mr Smith: Correct, twice as much.
Q352 Lord Lawson of Blaby:
He said that by 2050 global emissions have got to be reduced by
50 per cent below 1990 levels and by 2050 in developing countries
they have got to be reduced by 90 per cent. I would like to know
whether you think that is realistic. Secondly, the only way you
can square that with this huge future for oil and gas and carbon
and the virtual total decarbonisation of the economy as far as
emissions are concerned is if you can bring in carbon capture
and storage quickly and effectively and successfully. I would
like your assessment a) of how realistic you think that prospect
is and b) what it would cost over and above carbon energy without
carbon capture and storage because there must be an add-on, there
must be an extra, and it is a question of how much that extra
is. Also why are you convinced, as the pattern of your investment
policies indicates, when the technology does not even exist at
the present time, that that will be a better bet economically
than renewables?
Ms Cox: There are a lot of questions
in there, sir. If I may start by saying I did not say that energy
security was a problem. I said that increasingly around the world
there are political concerns about energy security because I think
you are right that there is a global market and a functioning
global market for hydrocarbons, but nevertheless we observe around
the world that there is increasing political concern and an increasing
desire for a higher percentage to be domestically produced.
Q353 Lord Lawson of Blaby:
Coal is domestically produced of course.
Ms Cox: If I move on to the issue of
carbon capture and storage, first of all, the component pieces
of technology are proven so although no-one has yet done a project
end-to-end which takes hydrocarbon, produces energy and sequesters
CO2, the component pieces have been done in other industries or
in other places. At BP we have experience of the CO2 storage piece
of this in the In Salah project in Algeria which is storing a
million tonnes a year of CO2, which is giving us a lot of understanding
of the concerns and the issues technically raised by storing CO2.
Technically I believe that these projects can now be put together
and that the technology risk is relatively low. In terms of the
cost associated with it, our experience—and we are engineering
a number of these projects (one in Abu Dhabi and one in California
at the moment) is we are seeing significant cost escalations associated
with these projects, largely because of the escalation that we
are seeing across the whole of the industry, but ball-park these
projects are costing about $2 billion for a 500-megawatt project.
Clearly they are significantly more expensive at this stage than
a traditional 500-megawatt power plant. However these are very
early days and these are the very first projects which are being
developed and we would expect that as you get the experience with
the technology that you could drive the costs down that experience
curve that we have seen in many industries, including many other
parts of the renewables industry. Certainly the objective has
to be to get these projects so that they can compete with a price
set for carbon and that has to be the objective. However, at this
point they are more expensive and therefore are going to require
some sort of transitional support if we are going to enable these
projects to happen.
Q354 Lord Lawson of Blaby:
Do you wish to add anything to that?
Mr Smith: I would pretty well agree with
all of that. I think unless we can get carbon capture and storage
working on coal then it will be very difficult effectively to
tackle climate change. I think the technology needs to be capable
of large-scale deployment by about 2020 for all the new coal-fired
power plants in the OECD at that time. Our scenarios have got
CCS on all the coal-fired power plants in the OECD by 2050 and
half the non-OECD. By the way, our scenarios are not quite making
it on climate change so they are realistic scenarios but it is
very difficult to bring emissions to a level that seems to be
appropriate. There is a need for probably 12 large demonstration
projects by 2015. As Vivienne says, the technology is there to
be assembled. You asked about renewables. We have coal gasification
technology that we are already selling licences for, so we have
an interest in seeing that happen, but it is about €1 billion
extra for each of the 12 projects that would be needed in order
to get them launched. We need to see some means of launch aid
on a competitive basis to enable those projects to get launched.
I think the ETS may be a mechanism for doing so. Of course, there
would have to be some fairly strict controls around it.
Q355 Lord Lawson of Blaby:
I am not so concerned about the mechanism used for raising the
price because obviously there are different mechanisms you could
use—emissions trading or tax—what I am more concerned
about is where you actually stand, and you have both helped on
this but I am still not entirely clear. Carbon capture and storage
is obviously very dicey, BP pulled out of Peterhead, and there
are obviously some huge problems and you refer to cost escalations
and so on. Nevertheless, you clearly consider that carbon capture
and storage (because otherwise you would not remain in the oil
and gas business for that long ahead because it would be a thing
of the past, subject to one thing I will come to) is the future
despite the cost escalations and despite the fact that it is still
on any commercial scale a great unknown and despite the problems
so far. It seems to me that one of three things must follow. Either
you think that it will be more economic otherwise you would be
going much more for renewables, because obviously the market is
going to choose between the two different kinds of non-carbon
energy, whichever is the cheaper, whichever is the more economic,
so you are making a statement that you consider renewables less
attractive—this is one possibility—economically than
carbon energy and carbon capture and storage. The other possibility
is that you in fact think that renewables are less uneconomic
than carbon capture and storage but for practical reasons it is
simply not realistic to see them bearing a great deal of the weight
of the world's energy demands. The third possibility is that you
feel that the anxiety as time goes by about carbon dioxide emissions
is going to diminish, in which case clearly being heavily in oil
and gas and coal is the sensible thing to do. Which of those three
reasons is it?
Ms Cox: I do not think it is a binary
answer.
Q356 Lord Lawson of Blaby:
There were three!
Ms Cox: It is not a tertiary answer in
the sense that we are going to need renewables; I think there
is an opportunity for renewables; I think renewables will increasingly
be competitive. There are practical limitations on the rate at
which those industries can grow. You have two per cent of the
energy demand being satisfied through renewables at the moment.
Even at extraordinary rates of growth, there is a limit to the
rate at which you can grow those industries. I think renewables
will be part of the equation, carbon sequestration and storage
will be part of the equation, and I think oil and gas will be
part of the equation, so I think we are looking at a changing
energy mix which has an increasing percentage of renewables and
where concerns over climate change require you to do carbon capture
and storage at scale. In terms of the cost, I do not think that
carbon capture and storage will get to a point where it is cheaper
than renewables but I do think we can get the costs down. The
issue of course with carbon capture and storage is that you are
not producing energy, it is there simply to store CO2, so when
we say cheaper we are really talking about at what price of carbon
do these things equate, but they are there for different purposes.
Mr Smith: I would certainly say that
we at least have no sense that the cost of carbon or the concerns
about carbon will go away and therefore that carbon costs will
diminish. We advocate for action on carbon. We believe in our
scenarios that it is a better world where that is dealt with and
we have clearer rules earlier so that we can see what to do. The
other answer is we just do not know in answer to your question
because we have pots on the fire on clean coal technology, pots
on the fire on sustainable later-generation biofuels, on solar,
and on wind, and on hydrogen. Part of the reason our costs, relatively
speaking, are low is because we are doing the research and we
are trying to gear up and trying to understand which may work
in the hope that some day we will be able to build a very substantial
business on one or more of those, on the S-curve where you are
keeping the costs low until you are clearer, and then we may find
ourselves able to invest more in the future. It is not that we
have a firm view that we can see that CCS and coal is likely to
be necessary. We can see that renewables are likely to have to
play a role. We are trying to invest and create options for ourselves
in all those areas, ultimately recognising that we will have to
focus .
Q357 Lord Lawson of Blaby:
I understand. I think it is just very telling that you are spending
more than 90 per cent on carbon energy and less than ten per cent
on renewables. I am sure you are right, for various reasons, but
that makes it clear where you are coming from.
Mr Smith: It is not unusual in a nascent
industry of course, if renewables is regarded as a nascent industry,
to be doing research and development work.
Q358 Lord Lawson of Blaby:
If the Stern thing is not realistic—and perhaps you can
say if you think it is—that we reduce our emissions by 90
per cent, or maybe more, by 2050 with a halfway target by 2020;
is that realistic? That is an enormous change, a dramatic change.
Mr Smith: The changes for the world and
for the UK would be enormous. The UK would have an economy double
the size with no more energy, or perhaps less energy, so the energy
intensity of the economy would have gone up. We would probably
have carbon capture and storage on all the coal, we would have
doubled vehicle efficiency, we would be using later-generation
biofuels and we would be deploying the renewable energy that is
here so virtually everything you can think of that could be done
would need to be done in order to achieve that.
Q359 Lord Moonie:
Just looking at carbon capture, is this only viable for carbon
dioxide as opposed to sulphur dioxide? Is there a possibility
of doing both, because it would change the economics of some of
the plants that would have to be written off because of the Directives,
would it not?
Mr Smith: You can use sulphur in other
ways. The sulphur does need to be scrubbed out of the system and
the regulations on sulphur have preceded those on carbon so there
are already technologies for doing so and you tend to create elemental
sulphur. As it happens we have a fairly large business on elemental
sulphur for precisely those reasons and we are using sulphur to
make strong concretes for example.
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