This Bill is necessary to ensure that the interconnector pipeline being constructed by Bord Gáis Éireann to link the Irish and British gas grids is completed on schedule. I am sure by now Senators will be aware of this very important project, approved by our Government in December 1991.
The project will link the high pressure gas grids of this country and Britain by a sub-sea pipeline, from Loughshinny in north County Dublin, to Moffat in Scotland, at a cost of approximately £290 million.
The pipeline must be financed, constructed, operated and maintained in a manner that helps to sustain and develop the role of natural gas in Ireland and the provisions of this Bill will ensure this can be done. Accordingly, it provides for BGÉ's borrowing requirement and for the application of conditions to be laid down by the Minister for Transport, Energy and Communications relating to the construction and operation of the pipeline during its lifetime. As I will explain later, it is essential these provisions are put in place as soon as possible. The statutory limit on BGÉs borrowing for capital purposes was last amended in the Gas (Amendment) Act, 1987, when it was increased to £170 million. Expenditure in 1993, on the interconnector project, when added to the board's existing debt, and the cost of capital expenditure, which it must undertake, in the course of its other activities, means that the limit must be raised substantially. We propose to increase it to £350 million in this Bill.
The Gas (Amendment) Act of 1982 increased the limit on that portion of BGE's borrowings that may be covered by a state guarantee, to £80 million. At the end of 1992, £55 million of BGÉ's borrowings were guaranteed. One element of the financial package which BGÉ has developed for the project involves borrowings from the European Investment Bank. These borrowings are available to BGÉ board at comparatively favourable rates provided they have a State guarantee. In order to cater for this, we propose in this Bill to increase the limit on that part of the board's borrowings which may be guaranteed by the State to £190 million.
In addition to the borrowing requirements, the question of BGÉ's statutory power to construct pipelines is addressed in the Bill. Under Section 8 (7) of the Gas Act, 1976 (as amended), the consent of the Minister for Transport, Energy and Communications, given with the concurrence of the Minister for Finance, is required by Bord Gáis Éireann for the construction of pipelines. Conditions may be attached to any such consent. These conditions normally relate to safety standards in construction, maintenance and operation. The power to impose new conditions appropriate to the operation of major infrastructure like this pipeline is being provided for, as is the power to revoke any existing consent, if necessary. The proposed amendment to section 8 of the Gas Act, 1976, contained in this Bill at Section 2, will remove any doubt about BGÉ's powers, to operate and carry out its functions outside the State.
References to the Minister for Industry and Commerce in Section 8 of the Gas Act, 1976, are being deleted in this Bill. This is a technical amendment to tidy up the text of the Act, as the powers, which were vested in the Minister for Industry and Commerce, under the 1976 Act were, in fact, transferred to the Minister with responsibility for Energy in 1980, by means of a transfer of powers order, which was approved at the time. These functions now reside in the Minister for Transport, Energy and Communications.
The pipeline is designed to last for at least 50 years. In that time, there is the possibility that interests in all or part of the pipeline could pass to another party or parties.
Because of the vital strategic nature of this pipeline, as a main energy link to Ireland, the Government will wish to retain control over its operation. It is proposed in this Bill to amend section 8 (8) of the Gas Act, 1976 to allow the Minister for Transport, Energy and Communications to impose a condition on Bord Gáis Éireann, that any transfer of an interest in this or any other pipeline, would be subject to the consent of the Minister for Transport, Energy and Communications and that any conditions, which have been laid down for Bord Gáis Éireann, in regard to construction, operation, maintenance or the transfer of an interest in a pipeline, would also apply to the transferee and to any subsequent transferee.
As I have said, the main reason for introducing this Bill at this time, is to ensure that Bord Gáis Éireann is in a position to proceed with the Ireland-UK natural gas interconnector project. There are four main elements to the project. These are: a 30 inch pipeline, which will run from Moffat in Scotland, for 79 kilometres to Brighouse Bay, on the Scottish coast; a compressor station to be located on the Scottish coast, which will compress the gas for onward transmission to Ireland; a 24 inch subsea pipeline, 200 kilometres in length, which will run from the Scottish coast, across the Irish Sea to the landfall at Loughshinny, near Skerries in north County Dublin and a shore station to be constructed at Loughshinny, from where a 30 inch pipeline will run to Ballough on the Dublin-Dundalk pipeline, to connect with the existing Irish grid.
The project is being undertaken in the interests of the future development of the natural gas industry in Ireland. The reasons for it are twofold: first, to afford additional supply security to the main gas markets during the remaining life of the Kinsale Head and the associated Ballycotton gas fields, which to date are our only indigenous supply sources; and secondly, to provide for secure long term supplies of gas into the future when those fields have been depleted.
Construction of this pipeline is a major undertaking and I am happy to be able to say that progress to date has been excellent. The project is on target for its completion date in October next and is within budget. Up to the end of 1992, approximately £85 million had been spent on the project and while the total cost of the project, at about £290 million, may seem high, it is relatively insignificant, when one considers that, over the lifetime of the pipeline, the value of the gas shipped through it will be many times that figure.
A comprehensive feasibility study of the economic and technical aspects of this project was undertaken by our Department, taking into account cost estimates provided by internationally respected consultants. The EC Commission and their consultants, also professed themselves satisfied and agreed to grant aid the project. The Government is very pleased that the bids received from the contractors on this project have borne out the estimates used in the feasibility study, and also the crucial decision to build in 1993.
One element of the feasibility study into the project involved sea surveys of a number of possible routes. These were carried out during 1990 and 1991. The criteria adopted for route selection were technical and economic feasibility. The route from Loughshinny to Moffat proved to be the best option, on both of these criteria. In addition, it also offered a landfall north of Dublin city which will be strategically important, in as much as it will afford a supply from the northern end of the grid to the critical Dublin Market in the event of any disruption to the Cork/Dublin pipeline.
The capacity of the pipeline and compressor will mean that we can import sufficient gas for our needs after the Kindale Head and Ballycotton fields are depleted. We currently consume about 2 billion cubic metres of gas per year. Assuming market projections are realised, we expect our import requirements to rise to about 5 billion cubic metres over the next 20 years.
The design of the compressor station allows for additional capacity, to be added later to meet these projected requirements. Most of the anticipated growth will be in the electricity generation sector. We are satisfied that natural gas is an ideal fuel for electricity generation and, with new combined cycle technologies conversion efficiencies of over 50 per cent are possible. The EC also has recognised this and has recently revoked an earlier directive which restricted the use of gas for this purpose.
The construction phase of the pipeline project is underway. However, to get to this stage extensive planning and preparatory work had to be undertaken. A large amount of surveying and engineering design has been carried out. In addition, negotiations were undertaken with the local and central authorities involved on both sides of the Irish Sea and with fishermen's organisations, landowners' representatives and other interested groups. This work was co-ordinated by a small task force comprising officials of our Department together with people from Bord Gáis Éireann itself and its project management office.
Contracts have been awarded for the manufacture and coating of the pipe, for the laying of the subsea section and for the onshore Scotland section. The contract for the Irish on shore leg will be awarded shortly.
Concern has been expressed at the level of involvement of Irish firms in the project. I should mention in that regard that Bord Gáis Éireann has been careful to comply fully with European Community rules on public procurement by advertising contracts Community wide. It is not permissible to give preference to tenders from a particular country or to otherwise discriminate on the grounds of nationality. In any event Irish firms would not have been in a position to tender for the bulk of these contracts because of the highly specialised nature of the work. It is carried out world-wide by a small number of firms. A good example would be the pipelaying onshore which requires very large pipelaying vessels.
Despite this, a number of Irish firms have been successful in tendering for the less specialised areas and it is expected that in the region of £20 million will be spent in 1993 on Irish goods and services. In fact, about 180 Irish jobs have resulted from the contracts awarded to date.
The project necessitated an agreement with the United Kingdom Government on the delimitation of the continental shelf in the area through which the pipeline will pass. An agreement was concluded in 1992, which extended the previous delimitation line between the two jurisdictions agreed in 1988 further northwards. Both Governments have now approved the agreement and we expect the necessary order to be laid before the Oireachtas shortly.
A more detailed pipeline agreement with the United Kingdom Government concerning all aspects of the laying and operation of the pipeline between the two countries was initiated by Irish and British officials in 1992. I expect this to be approved by Government shortly, and when it has been signed, it will be laid before the Dáil for its approval. The agreement deals with the routing of the line through Irish and UK waters including those of the Isle of Man, construction standards, the issue of authorisations to the operators, joint inspections, safety and pollution control, emergencies, abandonment procedures and consultations between the two Governments. There will be a four man commission comprising representatives of each Government to oversee the smooth operation of the pipeline.
In the interest of North-South co-operation we have at all times considered the needs of Northern Ireland in planning for this project and, following consultation with the Northern Ireland authorities, the onshore leg of the pipeline in Scotland will be able to cater for the transmission of gas from the British high pressure system to the offtake point for the proposed Northern Ireland pipeline from Scotland to Islandmagee in County Antrim.
There have been some suggestions that a single line to Ireland would have made more sense. I would point out, however, that our project is considerably ahead of the Northern Ireland project in time and progress, and that the provision of gas, and the best means of getting it to Northern Ireland are primarily matters for the Northern Ireland authorities. As I said there is a good measure of co-operation between us. Furthermore, I look forward to the time when it may be practical and feasible to forge a link between the two systems — closing the loop, so to speak, and enhancing security of supply for both Northern Ireland and ourselves.
When natural gas was discovered in the Kinsale Head field in the early 1970s, it was a time of great volatility in the energy market. The advent of gas to our energy mix was timely and has helped to reduce our exposure to the uncertainties of that market, particularly the oil market.
Bord Gáis Éireann was set up with the responsibility to extract the maximum benefit to Ireland from this indigenous resource and I believe Senators will agree that it has fulfilled its role. We now have a safe, efficient and profitable transmission system, bringing gas to the ESB for electricity generation, to industrial and commercial customers from Cork to Cavan and, of course, to domestic consumers in many of our cities and suburbs.
In 1991 Bord Gáis Éireann returned a profit of £54.9 million on a turnover of £165.6 million and surrendered £28 million in dividends to the Exchequer. I understand that 1992 was another successful year for Bord Gáis Éireann, although its annual report and accounts for that year are not yet available and I cannot go into detail. The Exchequer did receive a dividend of £25 million in 1992 however.
The achievements of Bord Gáis Éireann since 1975 have been impressive. In that relatively short time, we have witnessed a dramatic level of development of the transmission and distribution infrastructure. A sizeable customer base has been built up with over 195,000 gas customers now connected.
Natural gas, as a late entrant into the energy scene here compared to other European countries, now accounts for about 17 per cent of our primary energy demand. It is the first choice for industry within reach of the gas network, as it is for new housing.
The domestic sector is the premium market and the most desirable primary use for gas. The volume of sales to domestic customers increased by 16 per cent in 1992 and almost 22,500 new central heating customers were connected in that year. Bord Gáis Éireann launched a major programme to connect up viable non-gas housing estates in 1991 and this programme is now well under way and has been accelerated.
We can see, therefore, that the role of natural gas has been greatly expanded over the years. Initially, the only customers were NET and the ESB and thanks to those contracts it was an economic prospect to develop the reserves in the first place. We have moved on since then, however, and the penetration into the other sectors has been rapid. Natural gas has come to be appreciated as a clean and versatile fuel, transported by pipeline, available on tap and requiring no storage arrangements. Its existence in the market place has introduced a welcome additional element of competition.
High levels of efficiency have been attained in modern gas fired plants and improvements are taking place all the time in gas turbine powered electricity generation technology. The importance of combined heat and power units in industry, in commercial units, in hospitals and other institutions was recognised in the Programme for a Partnership Government. This is a relatively new area and we are anxious that developments in this technology should be exploited also.
Questions are raised from time to time about the wisdom of selling gas to the ESB and NET. The practical situation is that Bord Gáis is contractually bound to take or pay for certain quantities of gas every year. Even if Bord Gáis does not sell that gas, it must still pay for it. That is how gas fields are developed everywhere.
Almost 70 per cent of all gas sales by BGÉ go to the ESB and NET. If Bord Gáis chose not to sell this gas, while at the same time under an obligation to pay the producer for it, it would be rightly criticised for lack of economic sense. The consequent shortfall in revenue would have to be made up by borrowings. I am sure Members can imagine the effect which this would have on the company's finances.
The kinds of combustion efficiencies I mentioned earlier mean that the use of gas for electricity generation is a very practical and cost effective use of gas. With regard to the use of gas for fertiliser manufacture, it must be borne in mind that BGÉ is bound, by commercial contracts dating from 1976 to 1987, to sell gas to NET which then sells it for fertiliser manufacture. To disrupt these contracts could result in significant cost. The signals that such action would send to prospective customers should not be underestimated either. Added to that is the negative effect on employment that could result from a decision to curtail supplies of natural gas.
The recommendations of the task force on the implementation of the Culliton report are currently under consideration. It would, however, seem to make no sense to discontinue sales into fertiliser production unless a more beneficial use for the gas in the national interest is identified.
It has been the policy of successive Governments to implement measures that will ensure we are not overly dependent on any one energy source or on any one fuel. This Government is no exception. The lessons we learned in the fuel crises of the 1970s and 1980s have shown us that we need an even balance of fuels so that we can be in a better and stronger position to respond to such eventualities. As Senators know, most countries have about five primary energy sources — oil, coal, gas, hydro and nuclear. The latter, Senators will agree, is not a suitable option for Ireland. We do, of course, have peat.
About two thirds of our energy supplies are imported. Of those imports, about two thirds are oil, either as crude or product. The introduction of natural gas into Ireland and its subsequent development has greatly reduced our dependence on oil. Oil still supplies nearly half of our energy needs, however.
Of course, we would be foolish not to use these fuels as efficiently as possible. Hence the emphasis in the Programme for a Partnership Government on energy efficiency and also, of course, on alternatives and renewables.
We produce gas and peat, our only indigenous fuels, in about equal amounts and the bulk of the output of each goes into electricity generation. A major feature of policy over the last few years has been to see that the fuels used by the ESB have as wide and diverse a range as possible.
One of the many benefits of the use of natural gas in Ireland has been the consequential savings to date of over £2 billion in our bill for imported fuels. The benefits of gas have also been shared with those who do not have access to a supply. First, there is the payment of dividends to the Exchequer by BGÉ which captures in effect the economic rent for Kinsale gas. To date BGÉ has contributed over £300 million in this way.
Senators will agree, I hope, that gas has therefore become a vital and vibrant part of our energy and industrial policy. The Government is determined to see that its role continues and expands.
Gas is also an important plank of environmental policy and its environmental benefits are, by now, well known and acknowledged. It is the cleanest of all fossil fuels and the increased use of natural gas figures as a prominent feature of our national strategy to minimise emissions of harmful gases such as sulphur dioxide and carbon dioxide. We are, of course, bound by international commitments in that regard, particularly within the European Community.
Air quality used to be a major problem in Dublin. This has improved significantly in the last few years thanks to the ban on the sale and distribution of bituminous coal and the resulting subsitution of gas in many areas of the capital. The increased gas use in other urban centres where BGÉ operates has also had a beneficial effect on those areas.
The Government hopes for all the reasons I have outlined, that natural gas will increase its share of primary energy demand to about 30 per cent over the next 20 years.
We now have a gas industry which has made great strides over the last seventeen years and which has the potential for future development. Our current native resources, however, are finite. We hope that further reserves will be identified in our offshore. Nevertheless, prudence dictates that we should take no chances. It was against this background that the decision to build the Ireland-UK gas interconnector was made.
With an interconnector in place Ireland will no longer be a stand-alone grid, dependent on a single supply pipeline and a single source. An integrated energy market is one of the goals of the European Community and while initially we will be connected only to the UK, giving us access to the North Sea and Norwegian reserves, eventually we hope to connect with the wider European grid. We will, thereby, be able to enjoy the benefits of greater competition and greater security of supply which the single energy market offers.
Bord Gáis Éireann is currently in the marketplace for long term supplies of gas and Senators may well ask why we should have a pipeline in place before such a contract has been concluded. As a matter of fact, the pipeline will earn its keep from day one by providing security against any interruption of our supply line to our indigenous reserves at Kinsale. It has long been a cause of concern that there is only one source of supply but when the pipeline is in place, we will be able to avail of a security gas agreement, the first of its kind in these islands, which was completed last year between Bord Gáis Éireann and National Power, the largest of the fossil fuel burning generating companies in the UK. Under this innovative agreement, Bord Gáis Éireann will have access to supplies at short notice if and when required. The agreement is for a five year period from November of this year. This arrangement will give Bord Gáis time to put in place a longer term supply agreement.
It is not possible to say what the cost of imported gas will be for Bord Gáis Éireann, or the ESB, but it will be related to the market price in the UK, which is, of course, higher than the price of Kinsale gas now. We can be assured that there will be no problem with supplies of gas for generations to come. For example, Norway has over 60 years of reserves at current levels of production and Russia has 40 per cent of the world's known gas reserves, most of which is untapped.
While we have decided to proceed with interconnection, we have also taken steps to encourage exploration for further commercial finds in our offshore. An exploration agreement was signed in 1991, between the previous Minister for Energy and Marathon Petroleum, the company that developed the Kinsale and Ballycotton fields. That agreement provided for seven exploration wells to be drilled over a five-year period commencing last year. While the first of those wells was disappointing, we hope for positive results from the rest of the drilling programme.
At the same time BGE completed an agreement with Marathon for the installation of additional compression on the production platforms which will enable the parties to recover and bring forward in time an additional four billion cubic metres of gas. This gas, which is equivalent to two years supply under the existing Kinsale Head contract, will be used in the period to the end of 1996. This gas might not otherwise have been recovered and as a result Bord Gáis Éireann does not now require imports of large quantities of gas before 1996.
The Finance Act 1992 included provisions for the enactment of special petroleum taxation legislation, which, for the first time, clarified the tax "take" from a field development, and set it at a level designed to attract exploration investment to Ireland, while still ensuring that Ireland would share in the benefits which would arise in the event of another find.
In addition to these measures, a review of the licensing terms for exploration and production activities, carried out last year, resulted in new modern and progressive licensing terms appropriate for the conditions of today and of the coming years. These new terms were launched recently.
All of these measures should have the effect of bringing about further activity in the Irish offshore by making this country a worthwhile location for international exploration investment. I am hopeful that an increased level of exploration activity as a result of this package, and indeed as a result of this pipeline, will lead to further commercial finds.
We must, nevertheless, be pragmatic. It would not be prudent simply to take for granted that we will have sufficient discoveries of indigenous reserves on steam in time to cater for increased demand and to replace our current supplies as they begin to taper off. We must make adequate arrangements to assure supplies long into the future and if this means imports then so be it. Even if we do find significant reserves in the near future, and if some of that gas is in excess of our own needs, the interconnector will allow us to export that surplus. That facility is in itself an incentive to exploration as prospective producers will be reassured that they will not be restricted to the relatively small Irish market.
I have explained the importance of the project to Ireland. However, it should be noted that the interconnector is also of significance to the European Community. As I have already explained, the EC is anxious to see the completion of the internal market in energy. The commission sees our pipeline as an important link in this strategy and as a consequence we have been able to secure EC funding for the project at a rate of 35 per cent of approved cost, from the Commission's REGEN initiative.
In its strategy to open up the markets for gas and electricity, the Commission has identified the following as key objectives: price transparency; rights of transit for large utility companies, and third party access. The first two of these have already been put in place by means of Council Directives.
The issue of third party access to the transmission network is sill under discussion and we will, of course, comply with whatever proposals emerge. It is our intention that the needs of the Irish gas and electricity markets will be taken into account fully in the development of such proposals. In any event, it would be our intention that, subject to considerations of security of supply, access to available capacity should be afforded to large users such as the ESB, and to producers either for their large customers or for export.
As the ESB will be, at least initially, the largest customer for gas through the pipeline, it was put to both boards that the ESB might take an equity share in the pipeline. This did not come to pass, however, as Bord Gáis and the ESB were unable to agree terms for such participation. Bord Gáis Éireann also had dicussions with other potential joint venture partners but no firm offer has emerged.
This means that Bord Gáis must now undertake the financing of the project itself. In the absence of a suitable equity partner as of now, this means borrowing. I want to stress at this juncture that there will be no Exchequer funding for this project.
In its passage through the Dáil, the Bill elicited a full and frank debate on the substance of the Bill itself and on related gas and energy issues. I would like to take this opportunity to compliment the Deputies for their contributions. Concern was expressed over a number of issues, some of which I have addressed here today.
A further concern raised was in the area of safety and security. I can give this house the same assurance I gave in the Dáil that there is no extra risk to the people of Loughshinny, or of north County Dublin arising from the existence or the interconnector in the area. The pipeline has been designed and is being constructed to the highest international standards, and cannot be operated until it has been certified as fit for the purpose for which it was intended. When the pipeline is in operation a system of regular inspections will be put in place. Adequate precautions are being taken to avoid the risk of accidents and a sophisticated system of isolation valves will be installed at both shore stations.
We are very aware of the security issues relating to the pipeline, both here and in Scotland. There will be liaison between the Garda Síochána and the police force in the UK throughout the lifeline of the pipeline.
In conclusion, I would like to restate the importance of the gas industry to Ireland and the vital nature of the interconnector project to the future of that industry. As the proposed legislation before us today is necessary for the completion of that project, I therefore, commend the Bill to the House.
I look forward to the Second Stage debate and to completing all stages so that we can proceed with this major project which is of vital national and international importance to Irish economic activity in the years ahead.