Examination of Witnesses (Questions 120-141)|
MR I LATIF,
MR S LADLE
TUESDAY 13 NOVEMBER 2001
120. Would it be easy to blow up six pipes in
(Mr Latif) They are in different locations.
(Mr Ladle) There is security at all terminals. I am
sure they take security very, very, very seriously. There are
six or seven points where gas comes in. The profile of gas co-ordination
is changing. Some of those points are losing their significance,
some are potentially increasing. There is very big growth in the
Zeebrugge pipeline. There is discussion at the moment about Norwegian
gas and how much of that will come into the UK. There are government
discussions on that topic at the moment. Is the pipe big enough?
We do need more investment in pipes, particularly in the north,
to bring that gas into the north and bring it down to the south.
That is a point I alluded to earlier. The third point?
121. Reserves and contractual responsibility.
(Mr Latif) Storage. Again, the way we operate in the
UK we have managed to get gas on a "just in time" type
of process. There is quite a lot of storage available across into
Europe. If we had free access or easy access to this storage we
would be able to utilise that.
122. We rely on Europe for our own security?
(Mr Latif) Well, you will have lots of different points
where you can actually put the storage in. What I am saying is
that the price signals could be such that if it becomes very expensive,
we then get internal storage which then becomes economically more
123. How many days' supply do we have?
(Mr Ladle) On the full, physicalif that was
the only source it is very low; it is about 10 to 15.
124. This is, really, almost a paradigm of your
industry, that following the 1989 decision of the EU to allow
the use of non-served gas for the purposes of generation you kind
of woke up and found you had died and gone to heaven; you have
made the money and damn the consequences. We have had people in
this morning who have been talking about building power stations
and the process takes 10 years, they are going to run them for
50 years and then have to handle the waste for the next five centuries.
You build a power station in 18 months, you employ two men and
a dog and run it like the hammers, and then as soon as the price
of gas goes too high you say "We will switch to something
else". That does not really inspire a great deal of confidence
in people who, at the end of the day, will not get the blame if
the lights go out, it will be politicians. How do we balance out
(Mr Thorne) I think we have got to recogniseand
that comes on to your third pointcontractual responsibility
to alternative sources. It is not in the suppliers' interest,
at the end of the day, for the lights to go out or for the gas
to stop flowing. The way the trading market works is that if you
are not in balanceie if you are not putting enough gas
in that you are taking outyou get a significant financial
penalty. It is in the interests of the suppliers to get that right,
because if you do not you will actually suffer quite hard.
125. When someone suffers who else suffers as
(Mr Thorne) I think the market can bear that. The
market can cope and has coped with new players coming in and old
players going out. I think the market can handle that. I do not
know what the alternative is. We cannot guarantee that a commercial
company will stay here for 18, 20 years or whatever. The market
can handle that, and it has done.
126. If we were to have a dependency on gas,
regardless of where it comes from, of the order of 70 per cent
(which I think the DTI have suggested could be the case if coal
became environmentally difficult and nuclear stations were not
replaced and there is a limit to the number of wind farms offshore
and onshore) it would be on a market which is, essentially, short-term.
(Mr Latif) I am not a generator so I do not know the
full story but I presume they would not invest in a significant
amount of generation if they did not believe that they could actually
source gas and actually be able to generate electricity for a
reasonable length of time. The signals are there for the market
to take and the market believes that there is sufficient resources
out there to allow this generation to take place. One of the things
that, I suppose, has been beneficial for the government is that
it has been able to allow these generators to come on line and
be able to help with the reduction of carbon dioxide emissions.
I am not saying that you can carry on with this but the other
option is to reduce demand. One of the things that we would encourage,
partly on the supply side, is all this money being collected from
our customers (Energy Efficiency Standards of Performance and
Energy Efficiency Commitment) to invest in energy conservation.
(Mr Ladle) Can I come in on this short-term issue?
We are the suppliers and we also have other associations. Offshore,
they are not making investments for just two years, they are making
investments for 10, 20 years in offshore construction. From a
shipping supply business, we are looking at the moment in terms
of capacity access to do deals for 5 years or 10 years' access
to capacity, so that we can get that certainty and we can make
our planning. In terms of power stations, from my own company's
perspective we have an interest in power stations. There would
be a few people sacked if the report was that we were just going
to run it up for a couple of years and then run away from it;
the lifetime payback on that station is, again, 20 to 25 years.
So we intend to be running that station for a long time.
127. The only thing I am trying to establish
is that your perception of the medium and long term is different
from people who are generating from other sources who think in
a rather longer term, sort of 35 to 50 years rather than 15 to
(Mr Latif) Even with the new market, the NETA market,
that has been created, the way the generator has to operate is
actually physically reducing the lifespan of that particular generation
unit. I think the way it has been switched on and switched off
to meet the balancing requirements is physically reducing the
life of generating assets. So even the market that has been created
by Ofgem is physically reducing the actual ability for that market
to deliver for as long as it is intended to.
128. Following up Jonathan's question about
storage, there is a statutory obligation on the oil industry in
this country to hold 90 days' supply of oil, either crude or refined.
Would it not be sensible to have a similar requirement on the
gas industry in terms of security of supply?
(Mr Ladle) My immediate reaction is no. If there was
it would mean gas is not fully utilised and the cost of that would
have to be borne and eventually passed on to the end consumer.
We have an amount of storage, but we achieve flexibility in the
UK through the use of that storage but through lots of other mechanisms.
We have things called "virtual storage" where we use
demand side management and ask power station customers to turn
off, and we get through it that way. We have managed to keep costs
down very substantially over the last decade by not just digging
big holes in the ground or using very expensive North Sea gas
fields and filling them up with gas just in case; we actively
use gas all the time to its maximum potential. I think as we import
we will lose some of that offshore flexibility we have, and we
will need to get more storage, but I think prices will come out
of the market and there are a number of people at the moment looking
at storage, building new storage, and I think the industry will
129. Are you saying it is a question of security
of supply or price?
(Mr Ladle) What I am saying is I think the market
will provide the security because it has its obligations anyway
to continue to deliver, but if you impose it by saying "You
have got to keep this amount of gas in storage" then you
will put the price up as a result.
130. You would put the price up anyway, surely.
The cost of providing storage is going to have to be met, regardless
of who imposes it, it is just that you want to do it and not let
the government, but at the end of the day our view would probably
be, across the parties, that if the lights go out it is us that
gets the blame and not you. I think, with respect, the idea that
we can trust you to get it rightwe would rather have the
consolation of, maybe, exaggerating it a wee bit and getting it
right beyond peradventure. I think we do not share your touching
faith in the precision with which the market will operate.
(Mr Latif) That is the Government's prerogative. You
can dictate to us that this is what you require. Fine. We will
have to cooperate.
131. We will have to pay for it.
(Mr Latif) Basically. At the end, the customer will
pay for it and if that is the case then that is the case. But
that is a decision that the Government has to make.
(Mr Ladle) I would just suggest that if you leave
it to us we will deliver it cheaper than imposing it.
(Mr Latif) We would go out of business if the lights
132. You did say 15 days' storage?
(Mr Ladle) I would have to take that away to give
an accurate figure, but it is a very low figure.
Mr Hoyle: If you could let us know because I
suggest that figure is not correct. Obviously, as demand has gone
up it has reduced the actual amount of time storage available.
If you will let us have that information.
133. In what you have said you have made it
perfectly clear that liberalisation of European energy markets
is probably the single most important thing the government can
do to help, from your point of view, to maximise security of supply
by competing access to sources of gas. By implication, in what
you say, competition regime is also very important to enable the
market to have the beneficial impact you describe. In your note
you go on to say that government should have a role in providing
clear guidance to ensure the changes proposed for the energy market
are consistent with wider goals and objectives. I can, in my own
mind, identify environmental obligations. Is that what you had
(Mr Latif) That is what we meant.
134. Would you go beyond that? Is there anything
else? Would you see the government having a wider objective which
it would be proper for the government to seek to pursue that way?
(Mr Latif) There is energy efficiency as well.
(Mr Thorne) That is connected to the environment.
There are a lot of things going on on energy efficiency, and we
have heard about the CCL earlier on today. There is the Energy
Savings Trust, we have got DEFRA actually doing things and Ofgem
doing things. The concern we have, as a Forum, is that we are
not quite sure whether there is actually coherence in all those
policies. We will be spending, as energy suppliers, I think it
is something like £150 million a year between 2002 and 2005,
and it is estimated that will give savings equivalent to a very
large power station running 24/7, 365 days a yearwhich
they do not anyway. So there is a considerable benefit and considerable
support for that sort of approach. However, I think if we are
going to meet Kyoto and actually have a real effect on demand,
we have got to take a more radical approach. Perhaps we need other
things such as energy audits on houses, so that when you get your
survey on your house it tells you how energy efficient that house
is, and maybe you could reduce stamp duty on energy efficient
houses or have stronger building controls on houses to improve
energy efficiency. So one thing is getting gas in but there is
also another element of it which is making sure that once it is
in the system customers can use that efficiently. On your original
question of wider guidance, I think social guidance as well is
important. One thing we have not touched on this morning is about
fuel poverty, which is of great concern to all our members, and
how we address that. If you are pushing the price up to pay for
security of supplyand that may be a decision that you feel
is appropriatewe must not forget how that could impact
on those customers in fuel poverty. I think that rather than trying
to artificially change or distort the market to give support to
that we would need the government to support fuel poverty customers.
135. Certainly there is a contribution which
conservation can make overall to reducing what might otherwise
be insecurities through lack of capacity in relation to demand.
Can I just go back to the relationship between security and diversity.
Let us say, for the sake of argument, that you can see, from your
point of view, sufficient liberalisation in energy markets and
access to sources that you felt confident about security of gas
supply to meet consumer demand. Would you, nonetheless, from your
own point of view, see any desirability of government having a
wider objective of maintaining diversity?
(Mr Thorne) I am not sure we would.
(Mr Latif) We would not have a problem.
(Mr Thorne) I do not think that government should
actually dictate what the actual mix should be, which is what
you are suggesting.
(Mr Latif) I think you can create the environment
but not dictate the mix. You let the market sort out the mix.
If you are saying "We will allow coal generation planning
permissions to be easily obtainable", that is your prerogative.
(Mr Thorne) You are concerned with the results, are
you not, or the outputs, and not necessarily how it is achieved.
Provided that you do not have problems because the lights do not
go outbecause the finger will apparently be pointing at
some of youand provided that is achieved, would you have
a particular problem if the market helped you deliver that? I
do not think you would. It is the outputs you want, the results.
136. At the moment, for example, NETA have been
criticised because they are too-short-term in their operations.
The old system was criticised for, amongst other things, the fact
that people could bid in zero and, therefore, you were guaranteed
if you were running a nuclear power station, the market's price.
That was one of the ways it operated. We now have a situation
where we are going to have no dispensation made to the kind of
generator that goes 24/7 and has to go 24/7. You can switch off
and on. You are not quite as simplistic as the gas on the stove,
but it is like that. Coal takes longer to start, it can be interrupted
but it takes quite a while to get fired, although it has been
shown they have been able to get them out of mothballs quite quickly.
The difficulty is that not every energy source is as flexible
(Mr Latif) That is a fair point. The problem is that
that is the market that has been created by Ofgem. That is one
of the reasons why we say that if you have a particular policy
that you wish diversity of supply then that needs to be taken
into consideration when they design that market. Unfortunately,
we are just reacting to the signals that the market sends us,
saying that this is the way we want you to operate.
137. There are two things I would like to ask
you. One, perhaps, if you could provide us with some statistics
as to what you perceive as the UK supply of gas and what you would
consider to be a realistic assumption of the likely demand for
gas in the whole of the next 15 to 20 years. If you could give
us some figures of that character. Your note was helpful but it
was deficient in that area. The other point I wanted to ask you
to give us a wee bit more guidance on. Both Mr Ladle and Mr Thorne
have referred to the need for an incentivisation of the exploitation
of what can be regarded as marginal gas fields. I think you have
both referred to the fact that there are some pockets of gas that
you could tap into, you could extract, if the circumstances were
right. Am I correct?
(Mr Thorne) I am sure Steve will expand on this, but
what we were referring to is that the tax regime at the moment
is not constructed in such a way that you actually take all the
gas out of the field, particularly in mature fields. It is just
not economic because of the tax regime to actually get that gas
out of the ground. As I understand it, there are other countries
where that has been recognised, and I think all we are asking
is that if we are talking about security of supply and talking
about diversity of sources, we need to look to home to look at
maximising our resources. If it is an issue of amending the tax
regime to be able to exploit those resources rather than spending,
say, on storage, that balance needs to be looked at.
(Mr Ladle) My recollection was more to the onshore
infrastructure, just to make sure that the infrastructure exists
so that all gas can be brought in. We have seen, over the last
year, year-and-a-half, these capacity auctions that the regulator
has introduced which, particularly at St Fergus Terminal, where
there is a perception of scarcity of transportation, we have seen
some extremely high prices paid by shippers to book capacity in
138. It has begun to fall as the market has
become more mature.
(Mr Ladle) It has only fallen because we are now at
a winter period and, generally, there is more capacity available
in the transportation system in winter as opposed to summer, and
that is a physical one with a gas transportation network. I think
there is a view that they will be high again in the summer unless
investment is actually implemented by Transco. The short term
contract exists and people have to bring that gas in, and therefore
have to pay those prices. If they can look ahead and they can
think that those prices are going to continue to be paid then
they will not develop that gas and they will not bring that gas
in, particularly if it is a marginal field.
Chairman: Do you think you could send us notes
on both these pointson the market and on the fiscal incentivesbecause
I think it would be helpful?
Mr Hoyle: Would it also be possible to have
the amount of reserves that will be affected under that?
Sir Robert Smith
139. If the price is not there, where does the
investment come for the long-term flexibility of the main networks,
so that you can have the diversity of supplies? Where is the investment
going to come from to make sure of the networks?
(Mr Latif) This is one of the roles that, I think,
Ofgem should be playing, making sure that they listen to policy
and actually provide sufficient investment climate for Transco
to actually develop that pipework, so that it has some flexibility
built in there. At the moment the RPI-X formula has actually"sweating
the assets" is the term. We are going down to a situation
where we are coming to near capacity. I think in that respect
there should be a recognition that there needs to be some kind
of signal for Ofgem to give to Transco and allow it to give it
140. We will be getting Transco in to talk to
us, but my understanding is that they have cut a deal with the
regulator on prices and the cap arrangements. I think this was
yesterday's problem. It has still to be solved but they seem to
think that they have got as good a deal as they could get. They
will not necessarily admit that here.
(Mr Ladle) I think if you ask Transco to come in,
there is a deal, the price control has been accepted and there
is a certain amount of investment filtering down, but even Transco
have concerns that there is a need for more investment and more
flexibility. This comes back to the argument that it is maybe
better to pay a little bit more to give that infrastructure security
rather than running it as tight as you absolutely can and running
the risk that a break at any point will result in significant
141. Thank you very much. That is very helpful.
I am sorry we took a little longer but your answers were very
helpful to us.
(Mr Thorne) Thank you very much.