Memorandum by Shell International Ltd
Shell welcomes the opportunity to contribute
to the Trade and Industry Select Committee Inquiry into Energy
PolicySecurity of Supply.
As a major developer of UK primary energy sources
and actor in the wider energy scene, Shell companies have expertise
relevant to this inquiry. Our activities in the UK include Shell
U.K. Exploration and Production which from its North Sea activities
accounts for around 19 per cent of the UK's oil and 23 per cent
of its gas production; Shell U.K. Oil Products Limited, which
is responsible for 15 per cent of the UK's refined oil and petrochemicals
products and operates a major UK refinery; Shell Gas Direct, an
industrial and commercial gas supplier and Shell Gas Ltd. which
provides Liquid Petroleum Gas (LPG) to industrial, commercial
and domestic customers and to motorists. Shell International Renewables,
a global business, with a focus on offshore wind in the UK, and
Shell Hydrogen are investing in future technologies for applications
globally and in the UK. Shell Global Solutions is a network of
technology companies located around the world, including Cheshire
Innovation Park, which not only supports Shell's global oil and
gas businesses but whose unique skills and experience are also
available to others.
Fifty years is a very long time scale and there
is inevitably uncertainty over technological innovation, resource
scarcity and social and personal priorities, which will drive
the mix of fossil and other fuels over such a period. As far as
technology is concerned, reliable, convenient and cost competitive
substitutes for oil products for transportation and the development
of future means of power generation are key. Globally resource
scarcity for oil need not be an issue for most of this period,
if already known vehicle efficiency technology were applied. On
gas, where total reserve estimates globally are less certain (ranging
from 2025 to beyond 2050), the crucial factor is likely to be
effective investment signals for the development and transportation
of gas economically. From an environmental and social perspective,
fuel efficiency and other technologies, combined with an emerging
role for non-fossil fuel alternatives make it quite possible,
given appropriate policies, for an energy system to emerge which
results in atmospheric CO2 concentrations below the level widely
viewed as prudent (550ppmv) until the end of the century, and
Given the imminent dependence of the UK on energy
imports, how can the UK maintain a secure energy supply? What
mix of fuels would maximise security?
It is quite understandable given the changing
position in relation to the UK's energy self-sufficiency, that
we should be clear about security of supply in a shorter timescale
and on a more localised basis. Concerns about the end of the UK's
oil and gas self-sufficiency should however not be overstated:
most countries in Europe rely heavily on imports for their energy.
Provided security is ensured, trade in energy, as in other products,
can offer benefits to both exporting and importing countries.
What is important is the way in which the transition to imports
takes place, and what measures are taken to address both supply
and demand, and this is addressed in more detail below.
A key issue is to maximise indigenous production
of oil and gas, so that the UK continues to derive the various
benefits that accrue from oil and gas investment, which has totalled
£190 billion since exploration began. We believe that the
Committee's assumptions about indigenous supplies
are overly pessimistic and that production from the United Kingdom
Continental Shelf (UKCS) can continue to make a significant contribution
to the UK's energy needs with effective Government-industry co-operation
(see Annex 1 and 2 which show how indigenous oil and gas production
is likely to develop). Although some gas is currently imported,
the UK is not a net importer of gas, and will not be until 2004/5
at the earliest.
Gas offers a secure, environmentally (40 per
cent less CO2 per unit power output than coal) and an economically
attractive bridge towards a future where renewable sources of
energy play a major role in energy supply.
As indigenous reserves are depleted, energy
supply security will be best achieved by continuing participation
in the global system of energy trade and investment.
The UK will require sizeable imports of gas
in the future, and Government has a role to play in helping to
facilitate these imports through a variety of routes into the
UK, with the capacity to cope with the summer/winter swings in
demand. Two-thirds of the world's gas reserves are within economic
reach of Europe, most significantly from the UK perspective, from
Norway and Russia. A shared understanding of mutual benefit between
the UK and exporting countries will be crucial.
Oil will remain crucial for transportation needs
in particular, until convenient and reliable alternatives are
developed, eg hydrogen. Notwithstanding current concerns over
supply security, all major exporting countries rely very heavily
on oil revenues for the development of their countries. Oil security
of supply concerns, pending non-oil transport alternatives, should
not therefore be overstated.
There is no optimum mix of fuels: the mix depends
on the balance of social, environmental and economic factors,
and technical feasibility. For example, longer-term renewables
may offer an emissions-free alternative to gas for power generation
and as a substitute for nuclear, but would require enormous new
investment if a short-term replacement for existing plant were
desired, with additional significant consequences for fuel poverty
and industrial competitiveness. The key issue is to allow different
fuels to compete for different purposes, which will encourage
innovation in, for example, environmental features. Diversity
of sources of a particular fuel source can be as effective in
promoting security as a forced diversity in fuel types themselves.
Is there a conflict between achieving security
of supply and environmental policy? What is the role for renewables,
and Combined Heat and Power schemes?
Gas can continue to help to resolve the potential
conflicts between security of supply and environmental policy.
Gas offers a secure, environmentally and economically attractive
bridge towards a future where renewable sources of energy may
play a major role in energy supply. For example, the existing
move to gas from coal in the power sector has resulted in a drop
in the UK's CO2 emissions equivalent to 15 million fewer cars
on the road.
Renewables and CHP can play a role, however
cost and technology are obstacles that can militate against these
resolving any potential conflicts, eg the intermittent nature
of wind power. We estimate that in order to meet the Government's
10 per cent renewables target by 2010, the UK would require the
equivalent of 60 windfarms the size of the proposed 90 turbine
wind farm off the Blackpool coast, which Shell and others are
evaluating. This level of development and footprint is ambitious
under current market conditions and might prove socially and environmentally
unacceptable. Nonetheless, it is our view that wind energy provides
the most opportunity for development of renewables in the UK at
present. Additional support for CHP may need to be considered
if it is to be competitive with other sources of electricity generation,
and thereby play its full role.
What scope is there for further energy conservation?
There is still significant scope for energy
efficiency gains, not least in the domestic sector, where the
UK has a housing stock that could, with sufficient investment,
offer considerable savings. The main barrier to improved domestic
energy efficiency is the low share of total costs of most household
budgets that energy comprises, coupled with the large benefits
obtained from energy use. Big wins in energy intensive industries
are less obvious without new technological breakthroughs, since
industries containing processes where energy is a major input
may already have sufficient incentive to reduce input costs.
What impact would any changes have on industrial
competitiveness and on efforts to tackle fuel poverty?
Using the price mechanism alone is likely to
have a negative impact on both industrial competitiveness and
fuel poverty. We believe energy efficiency should be promoted
using market-based mechanismsespecially emissions trading
in industryto produce cost effective savings and avoid
conflicts with industrial competitiveness. In the absence of major
programmes relating to the housing stock, separate social measures
targeted specifically at the fuel poor may be one option for balancing
the competing objectives of energy efficiency and addressing fuel
poverty, if the principal lever for discouraging energy use were
the price mechanism.
Is any change of Government policy necessary?
How could/should Government influence commercial decisions in
order to achieve a secure and diverse supply of energy?
The main challenge in ensuring security and
diversity of supply is to create a regulatory framework which
sends appropriate signals to producers to ensure timely investments
here and abroad in major infrastructure and supply projects, taking
into account the long lead periods required for such projects
and the inherent uncertainty in the longer-term supply/demand
balance. A failure of effective investment signals and investor
confidence will result in price volatility and price spikes as
demand outstrips the ability of supply to quickly come on stream,
as happened in California. Long-term contracts will have a significant
role to play in providing the right signals to investors.
Maximising indigenous supply from the UKCS requires
fiscal stability and action to stimulate exploration, and recover
brownfield reserves and undeveloped discoveries. Fiscal policy
is also likely to be a key factor in the extent to which use of
the UKCS' infrastructure can support the objective of an open,
transparent, non-discriminatory and competitive single European
gas market and facilitate multiple import routes for gas into
As discussed above, the Government will need
to take action to ensure that its own targets for renewable energy
are met and an overview on what action is required is set out
in Annex 3.
GOVERNMENT ACTION ON RENEWABLES
The Renewables Obligation and a more positive
approach to planning will encourage installation of wind energy
technology. However, Government will need to ensure that NETA
does not disadvantage intermittent renewables like wind. Allocation
of further offshore licences is essential with removal of restrictions
on the numbers of licences held and a limit on cap on development
size, to enable scale economies to be captured. Government should
also review the low level at which the penalty has been set (3p/kWh)
which makes it difficult for offshore projects to be developed
without further financial support after the proposed initial grant
An obligation on the grid operator to fund or
part-fund extending the grid to offshore wind farms should be
considered, as this is often a large part of the project development
cost and a significant barrier to offshore wind energy deployment.
Energy companies who offer to install offshore
wind energy as part of their exploration and development plans
should be given credit. This will be a significant consideration
in awarding exploration licences, and will incentivise energy
efficiency and emissions reductions offshore.
On Solar Photovoltaics (PV) we would like to
see the Government set a target for installed capacity and encourage
R & D in solar electric technologies. The introduction of
a scheme that makes it attractive for people to invest in a solar
electric system and which demonstrates its advantages, will need
to overcome the "capital cost hurdle" by reducing the
"out of pocket" expenses for the end consumer and by
introducing net metering.
The Government can give clear signals by using
public vehicles to pilot hydrogen technology and by investigating
financial and other incentives to encourage the use of hydrogen
in its early stages. Codes and standards for hydrogen safety and
other regulatory issues should be addressed at an EU level to
ensure common standards.
34 "the UK is already a net importer of gas .
. . the UK will probably become a net importer of oil (over the
five years)". Trade and Industry Select Committee Press Notice
20 September 2001. Back