Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 100-119)



Mr Lansley

  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 fuel—ie, 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 of supply?
  (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 were suggesting.

  102. I suppose I am suggesting—it slightly follows from evidence we were hearing earlier which suggested it—in 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 on—I think the DTI is involved in this respect—in 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 else.

Mrs Lawrence

  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 as well.

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 liberalised market?
  (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 abroad?
  (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.

Richard Burden

  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 power—whether it be traditional, renewables or whether it be biomass type power or, indeed, perhaps, in some situations, nuclear—that 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 day.
  (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, unpredictably.

Dr Kumar

  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 interests—the public interest, Transco's interest and the supplier's interest—to avoid that.

  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.

Jonathan Djanogly

  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 for—perhaps through government regulation—contractual responsibilities to have alternative access?
  (Mr Ladle) There are about six or seven entry points into the UK for offshore gas plus the interconnector between Britain and Zeebrugge.

  119. Are they protected?
  (Mr Ladle) Protected in what sense?

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