Examination of Witnesses (Questions 100-119)|
MR I LATIF,
MR S LADLE
TUESDAY 13 NOVEMBER 2001
100. Mr Thorne appeared to suggest that you
were making a clear distinction in your own mind between security
of supply and diversity. Security of supply was not necessarily
dependent upon diversity; yet, in the note you sent to us, you
have said more competitive markets over the last decade have not
reduced security of supply. Indeed, the market is now more diverse.
You appear to be equating security with diversity and at the same
time thinking it is not necessary. Which is it?
(Mr Thorne) It was reacting to the fact that there
is an assumption that extra diversity means extra security of
supply and perhaps it does but unless you have the fuel source
with regard to those diverse elements of that fuel mix it means
nothing. There is no point having 30 per cent gas and 30 per cent
coal if you cannot get the coal to the station and you cannot
get the gas to the station. Diversity in its own right does not
provide security of supply. It is the access to the fuel source.
Diversity is not just about the fuel mix but about the source
of the fuelie, Norway, Russia, North Africa and the UKCS.
101. Have you contemplated that where one moves
from a highly regulated market, one that is liberalised, by its
very nature one tends as a consequence to get competitive responses
and a highly competitive market, but it is in the nature of competitive,
free markets to have a tendency towards a monopoly unless they
are constrained. Do you see no risks associated with this monopolistic
activity by suppliers of gas if gas were to be a dominant source
(Mr Thorne) I do not think I do. I am not sure I agree
that the United Kingdom is going towards a monopoly. We have a
large number of suppliers out there at the moment and some very
large ones: Powergen and Scottish Power are very strong suppliers.
I do not see that that market structure will cause the customers
to suffer at the end of the day. I am not quite sure what you
102. I suppose I am suggestingit slightly
follows from evidence we were hearing earlier which suggested
itin circumstances where dependence on gas is greater,
the costs of gas generation we might find were higher. Consequently,
the conclusion one draws from that is that, where one has a greater
dependence on one energy source, even if they do not engage in
a monopoly or oligopoly, they might nonetheless be subject to
less competition and hence be able to extract greater prices.
(Mr Thorne) One of the issues there is that there
is no shortage of capacity at the moment. The latest National
Grid suggestion is there is excess electricity generation capacity
of 20 per cent. There are a number of stations which are mothballed
at this moment which could be brought back in. If people thought
that more dependence on gas would mean that gas prices would rise
or gas generation prices would rise, there are other means that
would be brought on by the market to counter that.
(Mr Latif) There is a number of suppliers of gas so
there should be gas and gas competition. I presume that the regulators
such as Ofgem, DTI and OFT, would be watching and making sure
that this does not happen.
103. The problem with the regulator is that
his powers start on the beach. The difficulty is that he cannot
get beyond that. Surely the point is that in the last year there
has been a volatility. What you have been talking about is getting
the gas through at a price. Part of the role of the market is
that the market can provide anything, provided the price is right.
The price of supplying it might be unacceptable to us as a nation.
We might be able to get it. It is a bit like saying we could have
champagne on draft but it would be rather expensive. It might
be preferable to some of the water we get, but the point is, okay,
you can have a secure supply but if it is so unreasonably priced
it is no longer an option.
(Mr Latif) There is a lot of investigation going onI
think the DTI is involved in this respectin trying to figure
out what the causes of these price hikes are. It has been said
that arbitrage has been taking place because gas is linked to
oil on the continent and we have gas on gas competition here and
they have taken the advantage of this connectivity through the
Zeebrugge pipeline. If the prices did increase significantly higher,
I presume people would be making the calculation whether it was
worth generating electricity by using gas.
104. They have already made it this year, have
they not? In the first six months, there has been a six or seven
per cent decline in the consumption of gas by generators.
(Mr Latif) If the market signals that it is no longer
economic, we move off that particular product and move on to something
105. My question relates to the practicalities
away from the beach, if you like, outside our control. Obviously,
you refer to the pipeline, the distances, the availability of
gas. I noticed there was an article in The Economist this
week which referred to the fact that in 20 years' time Russia
will have control of 50 per cent of Europe's gas supply which,
in practical terms, means presumably our supply may have to come
from Russia. This poses two questions in relation to security.
The first is in terms of comparison with oil, where pipelines
are going through Nigeria, say, and the problems there have been
there. What is the industry doing as a whole to ensure security
and no leeching of supply from that pipeline as happens with oil
in Nigeria? Secondly, what discussions and what security will
the gas industry be putting in place post 11 September, because
clearly gas is an explosive element and must by its very nature
cause problems in that respect which may push the cost up. That
again would have a knock-on impact on gas security of supply in
this country for future generators.
(Mr Ladle) The Gas Forum represents the United Kingdom
gas users and suppliers. I would have to pass on exactly what
is being done in Nigeria and Russia etc. to ensure transmission
security. It is not a field that I can claim to have any expertise
in but within the United Kingdom, referring to 11 September, the
gas industry has for a long time recognised the nature of its
product and the risk of its product and has an excellent safety
record. Congratulations to Transco for that. It is also very closely
reviewed by the Health and Safety Executive in terms of safety
standards. As an industry, The Gas Forum is a member of an organisation
called The Gas Industry Emergency Committee that is looking at
emergency situations. At the end of this month there is a scenario
being run which is taking a situation where the St Fergus terminal
is out of action as a result of terrorist action and we are looking
at what would happen in the United Kingdom should that occur.
106. Outside the United Kingdom you represent
the United Kingdom gas industry but you also must have concerns
that the supply for your members here is secure. Is there no liaison?
Is there no body which operates along the course of the pipeline?
You say there are two interconnectors from the EU. How is that
handled? How is that managed to ensure security of supply to the
end user which is the United Kingdom outside of our boundaries?
(Mr Latif) We are a United Kingdom based organisation
unfortunately and we rely on the government to carry those issues
out for us.
(Mr Thorne) What comes in via the pipelines at the
moment is secured via negotiation, via market forces. We do not
have control over security of supply in the EU. What we are trying
to do is to get access to the markets, to improve that security
of supply, because if we can get access to not just Norway but
to Russia and North Africa to make use of this ring of gas we
can improve the security of supply not just for the United Kingdom
but perhaps for Europe as well, because it can always be used
to pipe from Norway into Europe. We come back to this time and
again but liberalisation of the market, access to the transmission
system, is not just about the United Kingdom; it is about Europe
Sir Robert Smith
107. Following the consequences of liberalising
in the European market, the consequence in this country has been
a complete change in our energy mix. Have you assessed the potential
that there could be a complete change in the energy mix on the
mainland and the capacity of the network would be such that you
would not be able to use the network to get the gas here because
they were so busy using it to meet their own demands in the new
(Mr Latif) That would make the price shoot up in terms
of the price of getting the gas across to us. I presume the indicators
would be to build more pipes or build bigger capacities. If that
cannot be done, if the investment climate is not correct and it
is not done, I presume the generators will be looking at other
fuel sources because they find it too expensive or unrealistic
to move that much gas.
108. You are looking at getting a more transparent
liberalised market so that you can get some fair assessment of
the cost of getting the gas to you, but other people might take
advantage of that and say, "Hang on a minute, it makes sense
to buy the gas before it reaches you" and alter the whole
market of gas in Europe.
(Mr Thorne) It is certainly true. I think it is very
dangerous to try to forecast what the energy mix would be in the
future. I think we have tried to do it in the past and got it
totally wrong. Ten years ago someone suggested there would be
nought per cent generation by gas, so it is very difficult to
do that. Clearly, if you have a market it has got to be good at
competing for that resource. We do not have a problem with that,
the problem we have got at the moment is that the people who have
access to the resource at the moment do have competitive advantage.
109. The follow-up question you touched on earlier
was the historic link between oil and gas in terms of price. Do
you see that there would be an advantage in breaking this link,
and how might that be achieved?
(Mr Latif) For the UK we would see that as being a
beneficial thing. If this is the case then arbitrage has caused
this price hike which many agree with and many do not. The fact
is that gas will then become, again, a very cheap source of energy
for the UK and for generating electricity.
(Mr Ladle) I think the break will come when the end
consumer has true access and choice to suppliers, which the European
Parliament says, at the moment, does not really exist. When that
end consumer can change his supplier and get access to gas through
someone who is not supplying that gas on an oil-indexed contract
basis, that is when that barrier will start to break down. It
will break down, we are seeing trading develop on bringing in
gas from a number of sources and encouraging that gas-on-gas competition.
While the monopoly supply continues in some of the European countries
and their gas is being brought in on long-term, 10 or 20-year
oil-indexed contracts, then that will not happen.
110. We have looked at the consequences for
domestic sourcing in the sense that when the price of oil was
down everyone was very depressed in the UK continental shelf,
but when the price of oil picked up and everyone said "That
is not the whole story, because it is not worth us investing in
oil because we have got all this gas to deal with and it is not
worth anything". Do you think the decoupling of gas from
oil would mean that we would not maximise the exploitation of
our own gas resources?
(Mr Ladle) I think the coupling was at a time when
there was not the gas demand in the UK, so a lot of gas in the
early years was flared.
111. More recently the industry was arguing
that just because the oil price has gone up that does not mean
it is attractive to reinvest in the North Sea because the gas
price is so low still. As the gas prices picks up it makes a lot
of fields attractive. If we then sort out the European market
will that mean we will leave quite a bit of gas in the North Sea
that we will not touch because it will be cheaper to get it from
(Mr Ladle) I think that takes us back to some of the
points that were raised earlier about encouraging that UK continental
shelf production. I would also say that, as a significant shipper
from St Fergus, we must make sure that the environment on the
transportation network actually exists and is a suitable size
to bring that gas in. The fact that we are continuing to increase
gas usage and it is forecast for gas to continue to increase,
if we can get the gas in from the North Sea we will sell that.
Chairman: You will have to watch that you do
not become like farmers: you complain when prices go up and you
complain when they come down. You are never satisfied.
112. I think I have understood your point where
you say, essentially, that security need not necessarily be contradictory
with diversity, as long as with diversity of origin you get transmission.
Would you accept that there is still an issue of safety of supply,
if I can put it that way, having a strong base of indigenous households,
that that would actually be intrinsically safer for the UK than
if we were to actually reduce our reliance on it?
(Mr Latif) I think it makes sense that if you have
control over your own supplies, inherently, that makes much more
sense than relying on anybody else, because you have facilities
for controlling. I agree with that, but I do not think we have
sufficient supplies to actually go forward with that. There has
got to be a situation where we have to open up these markets.
113. No doubt about that, as far as gas is concerned.
The figures are bad enough now. If there is a good reason for
trying to reduce one's reliance on imports over time, not eliminate
but reduce them, would that not imply that in terms of finding
sources of home-produced powerwhether it be traditional,
renewables or whether it be biomass type power or, indeed, perhaps,
in some situations, nuclearthat would actually involve
government intervening in a way that would not allow the market
to operate in the way that in other contexts you say it should?
(Mr Latif) I think the market can be created in that
way. You do not provide a solution, you create the environment
to work in. If the government has incentives that actually encourage
those kind of diversities to take place then that is fine, as
long as the market delivers the solution and government sends
signals and that this is what the government wishes to happen
for UK plc for security reasons. The market will adapt. As long
as the market is there, if you see what I mean, and government
can give advice or signals then I think the market will adapt
to what the government requires. What we are saying is that we
do not want you to stop us from doing certain things by direct
intervention or you to come up with a solution of fuel choices,
and as long as you create the environment then the market will
adapt to that and provide the solution.
(Mr Thorne) I think it comes back to price as well.
As you said, Chairman, a connection is bound to be made about
security of supply and price. At the end of the day, we have got
to make that choice. I think the market can determine what the
price is, but perhaps the government needs to determine really
what security of supply they are looking for at the end of the
(Mr Latif) One of the things we are conscious of is
the fact that we do not want a failure of supply at all, because
we would rather pay a bit more to keep things working than having
a complete failure of supply. We do not want a California situation
where artificial caps or something like that is being put on,
and the market is being fiddled with and it is not allowed to
actually work and all sorts of weird and wonderful things happen,
114. Can I just explore this issue of safety.
You were expressing concerns about security of supply, and mentioned
Russia and North Africa as two countries in conflict. Suppose,
in that situation, one decides to blow up the pipe of the other.
What would happen then?
(Mr Thorne) Again, I think we have got to make the
point that this could happen here, that the pipe could be blown
up here as much as it could be in any other country. There may
be more risk in other countries but there is still a risk We all
recognise that September 11 indicated that no one is absolutely
totally secure in that respect. Again, it is about diversity in
one sense, but it is not about diversity of fuels, it is about
diversity of access to the resource. Depending, clearly, where
that explosion was, if you have a transmission system which was
flexible, with various nodes and various resources, we could actually
get gas to the end point, hopefully, through a different route.
So the security of supply would be maintained. However, it is
very important, with gas, as you intimate, that you have to keep
the gas flowing, because, with gas, unlike with electricity where
you simply switch it back on and everything is hunky dory, you
actually have to go round to each individual household and purge
and re-light, and it is in everyone's intereststhe public
interest, Transco's interest and the supplier's interestto
115. But the consequences could be quite devastating.
(Mr Latif) The consequences could be devastating.
Any pipeline blowing up is a major incident. You are saying that
with some pipelines your control goes and we lose access to the
gas, which would result in a huge price hike that will come through,
and gas becomes very, very expensive. That is a risk that somebody
has to take into consideration when they are actually operating
in this market. I do not know what else we could do, unless we
secure all gas pipelines by military force. I do not know. I think
that risk is inherent in this industry.
(Mr Ladle) The security of supply for the UK at the
moment is from its trading market. Lots of gas suppliers buy their
gas on that market under a concept called the National Balancing
Point and do not actually know where that gas is coming from.
There are then others that are delivering that gas to that point,
the trading market. To take your circumstance, if there was a
significant accident and a Russian or an Algerian pipeline was
out of commission, then depending on the extent of it there would
be gas brought in from other sources and the price would, I am
sure, go up to reflect that, but what we would see is the trading
market working at its best and bringing in gas from a wide variety
of other sources.
116. My point is, have you, as the Gas Forum,
explored these options or have you not explored them? You have
to bear in mind what happened on September 11.
(Mr Latif) We have not explored the options, as you
say. We have not sat down and said "What would happen?"
117. Why not?
(Mr Ladle) I think because our focus for the security
is to encourage that trading market, because if that exists then
that will address the supply problem.
(Mr Latif) In terms of our control over those areas,
we do not have any control. What we rely on is being able to get
alternatives coming through. That is where we are coming from.
118. On a related point, how many pipes are
there in the UK? Are there enough of them? Should people be building
up reserves? My understanding is that in Europe people do have
reserves but in this country we do not keep reserves. Thirdly,
should there be more of a role forperhaps through government
regulationcontractual responsibilities to have alternative
(Mr Ladle) There are about six or seven entry points
into the UK for offshore gas plus the interconnector between Britain
119. Are they protected?
(Mr Ladle) Protected in what sense?