Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 20 - 39)

TUESDAY 31 OCTOBER 2000

MR JOHN MUMFORD, MR MALCOLM BRINDED, MR DAVID CODD, MR GARY JONES AND MR STEVE POLKEY

  20. Would it be fair to say then that if the Chancellor did not take any action that would be your worst case scenario?
  (Mr Brinded) I think there are a lot of issues that might have an impact on that, to be frank. I think it is really up to the protesters and those who put up the blockades to make their own decisions. I think we found what happened obviously a very difficult situation. It was a very difficult situation for the country and it was a regrettable situation that we all experienced.

  21. Can you give us an example of what you would like to see the Chancellor actually do that could help that situation?
  (Mr Polkey) I think, as I said when I spoke earlier, the Chancellor has got a very complex decision to go through. There are a lot of competing considerations obviously that he has to take. In the area of road fuel tax, I do think there are some policy alternatives he could consider to try and get a bit better targeting of what he is trying to achieve. I think road tolls, congestion charges, vehicle excise duty, all provide potentially a more attractive way of raising the revenue which I recognise governments have got to do but without some of the adverse effects which go with a very broad and high fuel tax. One of the issues with a broad and high fuel tax is it does impact on some people a lot worse than others. It tends to impact the less well off. There is a concern about the rural folk and the poorer people in the rural areas which a blunt taxation has an impact on. I think there are some options that I would like to see the Chancellor look at.

  Mr Cunningham: This would be road tolls and that sort of thing.

Chairman

  22. On that issue, there is another way we could do it. One has the impression that the oil companies have gone through rather a rough period in the recent past with North Sea crude at 34 dollars a barrel—is it—or thereabouts at the moment.
  (Mr Jones) Yes.

  23. What price having a go at increasing PRT—petrol revenue tax—in order to fund the cuts in duty that the Chancellor might want to introduce? How would you as downstream men view that? Do you say you are not downstream men, you are like Colossus—
  (Mr Brinded) I will take it in the sense that my main job is in the upstream.

  24. I knew there would be somebody.
  (Mr Brinded) I think you have to look at that in the context of the UK's upstream competitiveness with other parts of the globe. Between 1990 and 1999 we doubled our investment in the UK, doubled our capital employed and invested another £7 billion in the UK. In 1998 that looked a pretty bad call to have made.

  25. This is the UK CS?
  (Mr Brinded) In the UK sector we have invested £7 billion in Shell over that ten year period. By 1998 with the oil price at 10 dollars a barrel it looked a pretty bad call to have made. This is a very cyclical industry. When oil prices were ten dollars a barrel just 21 months ago we were obviously highly concerned. I think the point is you need to look at the upstream industry in the long run and look at how it compares with other sectors globally. At the moment it is doing well but it is a very mature province. We have lost 100,000 jobs in the upstream industry in the UK over the past three years. We have something like just over a quarter of a million jobs left in the UK upstream sector. In the last few months we have seen some really encouraging signs of increased investment next year. Investment plans for the industry as a whole are up by a billion pounds next year, up by a third. Those are the green shoots of recovery, as we have been calling them in the industry, and they are still fragile and need to be nurtured and that is our main concern.

Mr Butterfill

  26. Would it be fair to say on that, the rather more mature fields that we have got in the North Sea probably would not suffer too badly but further exploration in the more difficult areas offshore—and we have only got the rather more difficult fields to exploit—would be inhibited if PRT changes were to be made?
  (Mr Brinded) I think it would potentially hit both fronts. Our average discovery size is now about 20 million barrels. To put that into perspective, it is less than 100th of the big fields we found 20 years ago. We are dealing with a very, very different industry. Indeed, the exploration for small and new fields would be impacted but on many of the mature fields we are already paying 70 per cent. Our marginal rates of tax, on about a quarter of our production we pay a 70 per cent marginal rate of tax which obviously has an impact.

Chairman

  27. Is that a consensual view?
  (Mr Mumford) Yes.
  (Mr Polkey) Yes.

  28. It is true to say that, for example, the chemical part of your operations has been doing rather well out of the fact that the feed stock has been fairly cheap in recent years. If the price per barrel goes up then it becomes more expensive to use that. It does seem that in some areas you win when you are losing and in others you win when you are winning and overall you do not do too badly.
  (Mr Polkey) To me the important piece of this is each sector of business—and you are right we do have an upstream sector, a chemicals sector, a downstream sector—is run as a separate business. I think it is important that we are able to compete in each of those separate businesses in its own right. In each of those sectors there are players there who only operate in that sector. If you look at the upstream side there are people who only explore and produce crude oil, they do not have anything after that. On the chemical side there are people who are clearly only on the chemical side. If you get down to the retail end there are competitors in the market like the supermarkets who retail petroleum, they do not have any of the other parts. From our perspective it is very important we have a level playing field and that each of those businesses competes in its own right off a flat base. You are right, there is an element of portfolio in terms of being integrated and there are good bits and bad bits but we are trying to drive to have all of those bits operating profitably. As you would if you had a share portfolio you want to try and upgrade the other worst performing ones to better performing ones but cross-subsidising between the two is very dangerous and is not particularly in the interests of the consumer in the long run.

  29. In some of the other areas of energy that we look at from time to time there is a presumption that is developing against vertical integration in some areas. There are arguments being advanced where you might have what you call "unbundling". It seems that people are prepared to concentrate on one and do rather well out of it, people who do all three in your industry have good years and bad years. There is always the anxiety that there could be cross-subsidy because the Chinese walls are not that well established in the sense that they are not really regulated by anyone other than the tax man and the accountant, one of whom you pay and the other one gets rather a lot from you anyway and may not be too fussy provided he gets a reasonable share of what you are operating on.
  (Mr Polkey) I would argue that there are some very transparent transfer mechanisms between the different sectors. On the upstream side there is a very transparent international crude oil price and as we move on to the marketing side there is a very transparent international Rotterdam market for Europe in terms of where you can go and buy a ship of petrol or a ship of diesel. Those are the bases that the various sectors of industry work off. I think it is very transparent.
  (Mr Jones) Clearly in our company we have been moving towards an unbundling operation more and more. It is because we do have these international references. There are references at the retail sector, there are references upstream at the refining sector and all the way back to the crude oil sector.

Helen Southworth

  30. On 29 September all the oil companies signed a Memorandum of Understanding. Are you confident that you will be able to maintain continuity of supply if the protesters put their blockades back up again?
  (Mr Brinded) I think we would be foolish to be over confident. We learned a lot from last time. It took everybody by surprise. It was very unexpected. Us, the police, central government, local government, the distribution companies, we all learned a lot. I think over the last six weeks we have been putting in intensive preparations to try and make sure we are much more prepared. I would say that if blockades start again within maybe six to 12 hours we would probably be at a situation that took six days last time. We have worked intensively on improved co-ordination and crisis management arrangements, particularly on working with police locally and centrally to discuss what sort of security arrangements will be necessary and how they will be implemented. We have talked about the building of stock levels so we will be much better prepared both in advance and to respond to the problem. I think it would be wrong to imply also that if we have significant levels of blockades at all terminals and high levels of intimidation, even with the best efforts of the police to ensure the safety of drivers carrying out 38 tonnes of explosive fuel, we will have business as usual. There will be a restriction on the amount of supplies that can be got to the customer and it will have an impact on national life just as it was beginning to have last time. We expect to do considerably better in terms of maintaining continuity of supply but it will not be business as usual.

  31. Any other comments on that?
  (Mr Codd) I think the exact level of supply that we are able to maintain in a crisis clearly depends upon the exact nature of what is happening on the ground. You can postulate what we may or may not be able to do if exactly the same situation occurs as occurred last time but one thing you can be reasonably certain of is it will be different.

  32. Can I ask you about something I find incredibly curious about last time. Vehicles were not going out of terminals, drivers were saying that they were intimidated and yet no action was taken about that. I find that incredibly curious because I find it very surprising a business would be prevented from operating because of intimidation.
  (Mr Codd) When you say no action, by our companies?

  33. Well, this was my perception of it, maybe you can describe what your perception of it was?
  (Mr Brinded) I would certainly like to. Right from the beginning for a start we had 24 hour crisis management teams on from the beginning. The issue that was paramount in our minds was that of safety, drivers' safety, safety of the public and safety of the protesters. In the first 24 hours or so we were also very much concerned about the escalation. Right from the beginning we were talking about what level of police protection would be required to be able to ensure the safety of our drivers. We are an industry where safety is absolutely paramount both in the upstream and the downstream. It is a sector where any individual can stop any job at any time for safety reasons. We have been driving that safety culture for decades but particularly in the last ten years it has become absolutely dominant in our industry. It is very hard for people outside of the industry to understand the way in which that culture penetrates every part of the business we undertake. Right from the beginning when the drivers were concerned about their safety we stopped, listened and discussed what measures we could take to be assured of their safety. Then we discussed with the police locally what it would take to put in place the measures which would be required. We discussed it also with the Home Secretary right from the beginning, from the Monday of the event, as to the level of policing which would be required. By the time that was put in place there was no problem at all in terms of drivers' driving.

  34. I want to clarify this. The issue as far as you were concerned, the one of safety, was of such consideration that it was necessary to stop for a number of days your normal operation?
  (Mr Brinded) Absolutely. Wherever we felt we could continue operations safely we did so. We were looking for essentially sufficient police to clear the blockades and also, where necessary, police vehicles to escort the tankers to the site and to assist during the unloading. This was not fabricated. As you know there was a log of 180 incidents that we have now gathered across the industry. I just highlight that over ten of those involved objects thrown at tankers, three of them involved broken windscreens of tankers, 20 of those incidents involved tankers having to take evasive action or make emergency stops or being driven to the side of the road whilst trying to make their deliveries. It was in the light of those types of incidents that we were very cautious in terms of the level of protection that we required to be comfortable that we could ensure the safety of the drivers.

  35. You are saying quite clearly these were not peaceful protests?
  (Mr Brinded) No, they were not. For the most part they probably were but there were enough occasions of intimidation right from the outset. Intimidation was very much a question of what people were hearing and seeing on the television and hearing from the colleagues at other sites as well as what they saw outside the terminal at that point. There is no doubt that the blockades and crowds were able to gather quickly and did gather quickly. It was essentially a situation where it would have been irresponsible to take risks with a 38 tonne tanker of fuel.
  (Mr Codd) Some of the intimidation events did not occur at the gate, they occurred en route to the delivery and at delivery. Whom do you attach responsibility to for those events? They were individuals and not affiliated to any organisation. It is very difficult to say. Again it goes back to a criticism levelled against us "Why did we not take legal action". With this amorphous and ever changing body of individuals it was very difficult, very difficult, to take effective legal action by way of injunction.

Mr Butterfill

  36. You have got a problem because you do not really have much storage capacity either at terminals or at service stations. That is presumably historically due to the duty collection point. I think only the motorway service areas are required to carry safety levels for service stations. Is there a case for arguing that if you are going to maintain in the national interest some strategic reserve level at the service stations and terminals the duty collection point ought to be changed, at least for that fuel you are holding in reserve?
  (Mr Mumford) I think it is fair to say that in the last crisis the level of stock in terminals was not actually an issue. We had plenty of stock in the terminals, the issue was being able to move the stock out of the gate. Also I would like to point out that although there may be the perception that all terminals shut down, in fact all terminals did not shut down. There were many terminals which kept running all the way through the dispute and successfully ran trucks through blockades. There were also a large number of instances where tanker fleets from one terminal which was blockaded went to other terminals to fill up. Actually a lot more was going on than may have appeared. The reason we were able to do that was because we had very good stocks in those terminals. In fact, we had many terminals running at 200/300 per cent of normal capacity.

  37. But not at service stations? This is the problem, apart from MSAs?
  (Mr Mumford) At the service station you have a slightly different issue because there you are talking about underground tanks usually in an urban environment and there are all sorts of planning and safety issues. Would you want to hold a lot more fuel in that kind of location?

Chairman

  38. Did you close down the refineries when this was happening? Obviously you would have a build up of your supplies from the refinery?
  (Mr Mumford) This was a very serious issue for us. We came very close. (Mr Jones) We did cut back some of our refineries.

  39. Can I just ask some specific questions. We have had a report from the Transport & General Workers' Union. For example, you said, Mr Mumford, that you got a lot of stuff through, that you did quite a good job. You did not do much good in Cardiff according to the T&G. "Drivers who were contracted to BP were advised by their employer on Monday 10 September to take two or three days off and made no effort either with or without police assistance to make deliveries." That is a specific question. It is about Cardiff but it does not quite settle easily alongside what you have said about your sterling efforts to deliver petrol regardless of the circumstance. Was Cardiff an exception to the rule then?
  (Mr Mumford) Cardiff is not one of our terminals.


 
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