I move: "That the Bill be now read a Second time."
The purpose of this Bill is to amend the Fuels (Control of Supplies) Act, 1971 to ensure that a mandatory regime for disposal of the production of the Whitegate refinery can be established under the Act, as amended. The Bill also includes an amendment removing a legal doubt as to the applicability of the Act to stocks of oil in retailers' premises.
The Fuels (Control of Supplies) Act, 1971, is a measure enabling the Minister for Industry and Energy to control the supply and distribution of fuels. Whenever the Government declare by order under section 2 that the exigencies of the common good so require, the Minister may by order under section 3 provide for the regulation and control of the supply and distribution of fuels and for the control, regulation, restriction or prohibition of the import or export of fuels. An order made by the Minister may empower him to issue such authorisations, licences or directions as he considers necessary for giving full effect to any provisions of the order.
The Act was introduced at a time when energy demand in Ireland and in the Western world generally was steadily increasing. With this increase in oil demand and the potential upheavals which were apparent in the world, particularly in the Middle East, at that time, it became imperative for oil importing countries to prepare to deal with any supply disruptions or other developments in the energy situation. This proved to be a prudent preparation as later events including the Middle East conflict in 1973-74 and the Iran revolution in 1979 showed. The Fuels (Control of Supplies) Act, 1971 was invoked by the Government to control the supply and distribution of oil during the shortage in Ireland's oil supply which followed these events.
Today, oil still accounts for the major proportion of Ireland's energy requirements, although the impact of Kinsale gas and increased use of coal have reduced this proportion from 75 per cent in 1978 to 63 per cent in 1981. A major element of the Government's energy policy is to further reduce this considerable dependence on imported fuel to a reasonable level. As this reduction must take place in a manner which will least disturb the economy of the country, it is a medium term goal. Until that goal is achieved oil will continue to be the major energy source.
Given the constant risk that oil supplies may be seriously disrupted it is important that our requirements are made as secure as possible. There are three main elements to a proper policy on oil supply security. These are (1) diversification of sources and channels of supply; (2) maintenance of adequate stocks of oil; and (3) availability of oil refining capacity.
Until 1979, Ireland's oil requirements were supplied by the Irish subsidiaries of the international oil companies and by small home-based independent importers. These supplies originated from the international companies' procurement systems, from supply contracts with other oil companies or from the product spot markets. In 1979, the Government set up the Irish National Petroleum Corporation to take advantage of the growing preference on the part of oil producing states to by-pass the international oil companies and trade directly with the oil consuming countries. In this way our sources and channels of supply are supplemented and diversified. The corporation have concluded supply contracts with oil producers, and disposal of the products refined from this oil is carried out through the country's existing distribution system. I intend to introduce legislation in the near future to provide a statutory basis for the capital structure, organisation and functions of the corporation.
Ireland, as a member of the EEC and of the International Energy Agency, maintains, as required, a minimum of 90 days' stocks of oil. Ten days' supply is held at the Whiddy oil terminal on behalf of the government and the remainder is held at Whitegate refinery and at the terminals and depots of the oil companies and or large oil consumers. I am concerned, however, that about a quarter of these stocks are held abroad even though they are held under completed or pending agreements with the four states concerned, all of whom are member states of the EEC. As I stated in the Dáil recently, I have this matter under examination.
The third element of a policy on oil supply security is the availability of operating oil refining capacity. A country with such capacity has greater freedom to negotiate supplies of crude oil from whatever source than if it had none. Furthermore, it reduces dependence on foreign refineries and provides an alternative channel of supply. In the absence of refining capacity an alternative is to have storage capacity for oil products capable of maintaining at the very minimum 90 days' stocks of oil in the national territory. The capital cost of building storage facilities and filling them with oil to meet our national requirements would, it is estimated, be of the order of £2.5 million per day. Therefore, if we wished to have an extra 25 days' stocks on Irish soil it would cost at least £60 million. The companies are understandably reluctant to incur such costs, and retention of operating refining capacity partly reduces the scale of such stocks and the urgency of providing them in full.
Ireland's only oil refinery is at Whitegate, County Cork. It commenced operations in 1959 under the joint ownership of Esso, Shell, Texaco and BP. It operated for several years from start-up under an element of protective duty. Total refining capacity is 2.77 million tonnes per annum which, at current consumption rates, represents more than 50 per cent of the Irish oil market. In May 1981 the four companies advised the Minister for Industry and Energy of a decision by their principals to suspend refining at Whitegate. Their decision was on the ground that the operation of the refinery was resulting in substantial costs as compared with a situation where they would be free to import all of their requirements. Processing at Whitegate ceased in June 1981. The owners confirmed in August 1981 that their decision was to close the refinery permanently and that the bulk of the workforce would be laid off in due course. They envisaged retaining the tank farm at the refinery as a storage depot to meet stock obligations and as an operating terminal for the south and west of the country. This would require the retention of a relatively small number of personnel. There were about 155 direct employees of the refining company and an additional 150 employed in ancillary services such as tug-boats, fire watching, pilotage and a coastal shipping company which was substantially dependent on the refinery.
As the absence of operating oil-refining capacity is considered unacceptable on strategic and other grounds, discussions with the refining companies pursued the possibilities that some mechanism be found to meet the dis-economies whichh they saw in continuing to operate Whitegate. It became quite clear that the companies' decision to abandon refining at Whitegate was irrevocable and that, if the Government's objective of retaining a minimum strategic refining capability were to be preserved, the State would have to acquire and operate the refinery. The subsequent events in this matter have been widely publicised and I do not think it is necessary for me to say more than that the previous Government, shortly before going out of office, took a decision in principle to purchase the refinery. Final negotiations were concluded with the owners of the refinery and the present Government, on assuming office, confirmed the decision to purchase.
On 1 April last the House approved a Supplementary Estimate for the sum of £10 million to cover the purchase price, refurbishing costs and other costs arising up to the start-up date. The planned date for resumption of production is early August and, as is known, the refinery is being owned and operated on behalf of the Government by the Irish National Petroleum Corporation.
When it became clear that the four oil companies which jointly owned Whitegate were not prepared, and could not be persuaded or induced, to continue operating the refinery, and that the only basis for continuing operations would be under the aegis of the State, consideration was given to the manner in which off-take of products from a State-owned refinery could be disposed of. This matter was discussed at considerable length with the companies marketing oil in Ireland with a view to finding out whether a system of voluntary off-take of products would command general support.
It was, of course, recognised by the industry that it would be unacceptable, both in operating and economic terms, to envisage a system whereby the State would operate the refinery but would have no assurances that the products would be taken into the Irish market. If that extremely risky course were adopted, products from Whitegate would have to be offered for sale at prices which would be competitive with the lowest prices prevailing on the international spot market. Notwithstanding that the marketing companies themselves, for the security of their own supplies, would have to rely on term contracts rather than the spot market for the larger share of their supplies, no assurance emerged in the discussions that the companies would off-take from Whitegate on a basis other than as marginal supplies; indeed, bearing in mind the relationship between the Irish marketing companies and their UK supply companies, there could be no guarantee of off-take from INPC ex Whitegate at any price. In times of glut, such as we experienced recently, spot prices for products could be lower than the official price of crude oil being put through the refinery. Such a situation would be totally incompatible with an operation designed to provide the Irish economy with a minimum level of refining capacity in the interests of national security.
While there was some recognition of this position by the oil marketing companies, they expressed strong concern that any off-take arrangements introduced should operate equitably across the board so that there would be no question of some companies having freedom to opt out while others might be disposed to co-operate. It was clear that the criteria of general application of off-take obligations and equitable operation of the arrangements involved, could not be achieved unless there was a statutory backing to the arrangements. The companies which formerly owned the refinery and the other oil marketers were, therefore, aware that a decision by the Government to purchase the refinery would entail a system of equitable off-take of Whitegate products, backed by legislation.
The mandatory off-take concept has been considered at length by the Attorney General both in relation to Irish law and EEC obligations. There have been also a number of detailed discussions with various divisions of the EEC Commission. The best advice available to the Government is that, taking due account of the position in domestic legislation and of our obligations in the EEC context, the Government are entitled, in the interests of national security, to take steps provided for in the Bill now before the House. In relation to the Treaty of Rome, Article 36 clearly entitles a member Government to take exceptional measures to protect essential aspects of national security. The House will be well aware that, in the decision of both the previous and present Governments to acquire the refinery, this criterion of national security was very much in mind. International events of recent occurrence have, I need hardly say, strongly underlined the importance of having within our jurisdiction refining facilities to meet at least our basic national oil requirements in an acute emergency.
Deputies will naturally be concerned about the legal basis of the Bill, and they may be asking me to provide categoric assurances that this cannot be challenged. The Bill and, indeed, the 1971 Act are largely enabling measures. The provisions of the Act have been invoked a number of times over the years and the changes proposed in the Bill do not alter the essential nature of the legislation. In the circumstances, there appear to me to be no grounds whatever for reservations about the Bill in relation to domestic law or EEC requirements. If any substantive legal issue arises it would appear to relate to the action proposed to be taken under the Bill. In this regard since both national and supra-national Courts have jurisdiction, nobody can provide castiron guarantees. However, I repeat that the best advice available to me and to the Government is that the measures proposed are in accord with relevant law and EEC obligations. An off-take regime is an essential element of the totally legitimate objective of maintaining an operating refinery to cater for our minimum emergency oil needs. The purchase and operation of the refinery and a satisfactory system of equitable off-take of products are not separate concepts but are interdependent elements of one strategy. It would be inconsistent for Deputies on either side of the House to say that they support the purchase of the refinery on grounds of national security but object to the arrangements for which the Bill provides.
I had considered an alternative approach if it became necessary of making a wider Order under Section 3 (2) of this Act, as amended, under which companies would be required to submit a supply plan, for their supply proposals to the Irish market, for each period of 12 months, ahead. Part of this supply plan would embrace the requirement that the proportionate level of product, as proposed above, would be drawn from the Irish refinery; secondly, that broad information would be given on the sourcing of the remainder of their supplies being imported, on the balance between term contract and spot supply in the latter, on the guarantees lying behind any overdependencies on supply from one country or one company in one country, on the acceptability of any restrictive agreements compelling supplies to be drawn from particular foreign companies and on the arrangements for stock holding. It could be a feature of such a plan, under statutory order, that a marketing licence would be required and that the grant of such marketing licence would be conditional on observance of the requirements of the approved supply plan.
I am aware that at least one other European country has felt it necessary to adopt measures of this kind in the interests of ensuring central control over security of supply. The approach has merits and I would not rule it out as something we may wish to consider in certain circumstances. However, my present view is that, in prevailing conditions, such measures might be considered as going beyond what was essential. I have, therefore, opted for the more limited approach which I have outlined because it is my opinion, and I am sure the oil industry would agree, that intervention in the operation of the market should be confined to the minimum necessary to achieve the limited objectives which State acquisition of the refinery is intended to safeguard.
Measures introduced by Governments in various parts of the world to cushion their populations against the ever present risk of a serious disruption of supplies on the international oil market, frequently go beyond what would be considered normal commercial criteria. Perhaps the most widely-known measures are obligatory oil storage obligations to which I referred earlier which operate in almost all oil-importing countries, including those in the EEC and the more widely representative International Energy Agency. Under these storage regulations, oil trading companies are required to make arrangements, which involve costs of various kinds, to maintain stocks of oil to meet at least 90 days' requirements and these measures need not take account of whether or not the stocking levels and locations of the stocks would be considered by the companies to be necessary or desirable on strictly commercial grounds. Both the previous and present Governments have concluded that, like strategic stocks, a minimum capacity for domestic refining is important on grounds of national security. I have no doubt that most Governments in Europe, or indeed elsewhere, if faced with closure of 100 per cent of their national refining capacity, would take a similar view even though continental countries would not have the additional risk factor which applies in our case as an island economy. I would emphasise, however, that I am committed to ensuring that the entire off-take regime, both as regards quantities and applicable prices, will be operated with the greatest degree of fairness and equity that will be humanly possible in administrative terms. If there is a limited burden, in terms of diseconomics of refining at Whitegate or of inconvenience, to be borne by the oil industry to maintain a minimum limited strategic refining capacity, I will make every effort to ensure that this is fairly shared by all concerned.
The diseconomics of operating at Whitegate, as compared with importation of oil products on the most favourable terms available on the open market, arise for a number of reasons. Firstly, there are physical limitations. The maximum size of ships which can gain entrance to Cork Harbour, and therefore Whitegate, is such that transfer of oil from larger crude carriers at sea to smaller vessel is necessary. In addition, Whitegate is further from the main markets in the Dublin area than are certain refineries owned independently by the major oil companies at Pembroke and Milford Haven. The major factor which contributes to the dis-economies of Whitegate is the technical nature of the refinery which yields between 45 per cent and 55 per cent of its output in heavy fuel oil, compared with less than 30 per cent in refineries with more modern technology. Fuel oil is a relatively low-value product and the present market for it is vulnerable as a result of the switch to coal for electricity generation and heavy industry and the effects of conservation measures.
There are certain investments which can be considered to upgrade the facilities at Whitegate so as to produce a better yield of the higher-value refined products. There are certain stages of upgrading which can be considered and which vary substantially in cost and there are technical options within some of these stages. At the moment, the efforts of the INPC are being concentrated on getting the refinery back into efficient operation on the basis of its present technical capability. I can assure Deputies that, in association with the INPC, I will be examining urgently and critically the technical advantages and economic feasibility of all the options available for upgrading.
While I am not, at this time, putting forward specific proposals for upgrading, I can say that arrangements are being made to reduce the lead content of petrol produced at Whitegate so that Ireland will be in a position to comply fully with the terms of the EEC Directive on the lead content of petrol without having to continue to depend upon our derogation from that directive.
Given that there are diseconomies associated with operation of the refinery, the question arises as to how they should be treated. The decision of the previous Government in this regard has been confirmed by the present Government, that is, to have the refinery operated on a cost-recovery basis. This approach of cost-carrying by oil users is seen as more appropriate than one involving a direct subsidy. The prices proposed to be charged by the INPC to its customers will therefore recover capital, crude oil acquisition, shipment and storage costs and, of course, the operating costs of the refinery. At first, the cost disadvantages as compared with the present 100 per cent importation of products may be of the order of one or two pence per gallon on all oil products sold in the country. I am not in a position, at this time, to suggest what effect this may have on the price of particular products, such as petrol or diesel. It will be appreciated by Deputies that this will depend on a number of factors some of which are related to on-going discussions with the trade on the off-take regime. One such provision may inter-play of competition in particular market sectors will affect the issue.