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 enables 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. When an order under section 2 is in force the Minister may be 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.
At the time the Act was introduced energy demand in Ireland and in the western world generally was steadily increasing and then, as now, political developments threatened the flow of oil supplies. It therefore became imperative for oil importing countries to prepare to deal with any supply disruptions or other developments in the energy situation. Later events, including the Middle East conflict in 1973-74 and the Iran revolution in 1979 showed the wisdom of such preparations. The Fuels (Control of Supplies) Act, 1971 was invoked by the Government to control the supply and distribution of oil during the shortages 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 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 further to 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 Ireland'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 of large oil consumers. I am concerned that about a quarter of these stocks is held abroad even though it is held under completed or pending agreements with EEC member states. However, 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 £80 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, at Whitegate, County Cork, 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 over 50 per cent of the Irish oil market. Last year the four companies advised the Minister for Industry and Energy of a decision by their principals to close the refinery permanently. Their decision was on the grounds that the operation of the refinery was resulting in substantial costs as compared with a situation where they would be free to import all their requirements. Processing at Whitegate ceased in June 1981. The owners 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 which 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 Dáil 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 next month 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 suppliers, no assurance emerged in the discussions that the companies would off-take from Whitegate other than on a marginal basis; 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-White-gate 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.
Senators 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 cast-iron 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 operation 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. The Bill is, therefore, a necessary extension of the decision to purchase the refinery on grounds of national security, a decision on which there is a large measure of consensus.
As regards the use of the Fuels (Control of Supplies) Act, 1971 as a basis for the mandatory off-take regime, the Attorney General has advised that it is an appropropriate instrument on which to base the regime, subject to certain amendments of that Act. The Bill now before the House incorporates these amendments.
I had considered that, if it became necessary, an alternative approach to the mandatory off-take obligation would be to make a wider order under section 3(2) of the 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 over-dependencies 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 meaures 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 conditions 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. It there is a limited burden, in terms of dis-economies 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 dis-economies 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. First, 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 vessels 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 up-grade the facilities at Whitegate so as to produce a better yield of the higher value refined products. There are certain stages of up-grading 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 this House 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 up-grading. While I am not at this time putting forward specific proposals for up-grading I can say that arrangements are being made to reduce the lead content of petrol produced at Whitegate without having to continue to depend upon our derogation from the EEC directive in that regard.
Given that there are dis-economies 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 to 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 Senators that this will depend on a number of factors some of which are related to ongoing discussions with the trade on the offtake arrangements and, of course, the inter-play of competition in particular market sectors will affect the issue. I must, indeed, emphasise that any calculation of the dis-economies is only valid at the time it is made because of the volatility of conditions in the oil market. There is a reasonable expectation that, in time, the dis-economy can be reduced.
The current oil market surplus, with depressed market prices, which has caused losses even on the part of modern refineries, is beginning to diminish, and already market prices have begun to rise. In these circumstances the gap between the Whitegate prices and the prices of imported refined products is reduced. Another factor which may help to reduce the dis-economy is price of the crude oil being processed at the refinery. The Irish National Petroleum Corporation will have at least three separate sources of crude oil. Two of these sources have already been arranged, namely Saudi Arabia and British North Sea oil. At first there will be a high proportion of Saudi Arabia crude oil processed at the refinery. In the current oil market situation this crude oil is relatively expensive but in time the Corporation will be expecting to achieve some economies in their crude oil procurement, having reasonable regard to the objective of supply security.
The proposed offtake regime will operate on the following lines. All oil importers, including undertakings which import directly for their own consumption, will be obliged to purchase a proportion of their oil product requirements from the refinery. For two major reasons an upper limit on this obligatory proportion will be set. This upper limit, roughly matching the minimum operating level of the refinery and representing about 35 per cent of the Irish market, will minimise the burden on the economy generally and on the oil companies, while any dis-economy exists. Secondly, in discussions with representatives of the EEC on the compatibility of the proposed regime with the Treaty of Rome, it was suggested that such a limit was desirable as indicative of the minimum strategic national requirements in an acute emergency situation. There may be scope for operating the refinery with improved economy at higher levels of throughput without adversely impinging on the mandatory offtake arrangements, and this will be fully explored by the INPC.
The INPC are currently engaged in discussions with the oil industry on the methodology of implementing the off-take arrangements. In general, it is intended that the amounts of Whitegate oil products to be taken for each quarter will be based upon data provided by the companies in respect of their sales or requirements in the preceding twelve months. I have emphasised to the INPC that the arrangements should be agreed as far as possible and should be as flexible as possible, consistent with an equitable operation of the scheme. It should be possible to agree arrangements to cover such situations as where the allocated quantity of a product might be unrepresentative of the importers' anticipated requirements or where the lifting of an entire allocation of any product in a particular quarter might create special difficulties.
Apart from the trading companies, there are certain major oil users who import their requirements directly and in bulk, mainly supplies of heavy fuel oil. There may be about a dozen of these large oil consumers, and it would be necessary to make appropriate arrangements for these within the general scheme. Because of the effects of oil prices on the costs and competitiveness of Irish industry, the price to be charged for the Whitegate proportion of their heavy fuel oil requirements will be an important consideration. Although final prices will not be known until the arrangements are further advanced, I will be concerned to ensure that the heavy fuel oil price will be pitched at a level which would not give rise to significant difficulties for Irish industry, both those who have direct import facilities and those supplied through the national distribution network.
I would now like to deal with the major provisions in the text of the Bill. The 1971 Act enables the Minister for Industry and Energy to control the supply and distribution of fuels whenever the Government are of the opinion and declare that the exigencies of the common good so require. The legal opinion is that the words "supply and distribution" must be read together. This description therefore is unsuitable for the offtake regime as it is not proposed to control the actual distribution of oil. The Bill therefore provides for the amendment of that description where it appears in the Act to read "acquisition, supply, distribution or marketing". The word "acquisition" is inserted in order to make certain that the purchase obligation is comprehended in the Minister's powers. The word "marketing" is also inserted since it is a relevant aspect of the operations involved in getting Whitegate products into distribution. With the inclusion of these amendments the Minister will, while a Government order under section 2 is in force, be in a position to make an order under section 3 applying the Whitegate purchase obligation to oil importers. Such a Government order, made in 1979, has been kept in force by continuance orders in view of the instability of the oil market since then.
Included in the amendment of section 2 of the Act is an extension of the maximum periods of operation of Government orders and of continuance orders from six to twelve months in each case. A period of six months is considered inadequate for oil supply planning, particularly in relation to the disposal of products from Whitegate refinery. The Bill also includes new provisions which may be of assistance in administering the offtake regime. One such provision may enable the Minister to require a person to furnish relevant information to him in order to enable him to implement an order. There is also provision for the authorisation of officers to inspect premises, obtain information, examine and take copies of documents and so on. The other provisions of the Bill are the updating of the construction of the penalty provisions and an amendment of the definition of petroleum oils in order to ensure that stocks of oil in retailers' premises are included. There has been a legal doubt as to whether such stocks are covered in the existing definition.
I now commend this Bill to the House. I emphasise again that it is an essential consequence of the decision to retain refinery operations at Whitegate. I believe that Senators will concur in the view of successive Governments that every prudent step must be taken to maintain and improve our ability to safeguard the public and the economy against the worst effects of an acute oil supply emergency.
