I move:
That a sum not exceeding £9,242,000 be granted to defray the charge which will come in course of payment during the year ending on the 31st day of December, 1986, for the salaries and expenses of the Office of the Minister for Energy, including certain services administered by that Office, and for payment of certain loans, subsidies, grants and grants-in-aid.
The Estimate for my Department is relatively small. Even with the addition of the Supplementary Estimate which I am also moving to-day, it amounts to only a small fraction of one per cent of the total Estimates for the Public Service. However, the relative importance of the role of my Department bears no relationship to its quite small demands on the public purse — demands which, I should say, are offset many times over by the contributions which, together with its agencies, it makes to the revenues of the State.
I should like, therefore, first to comment briefly on the Estimate itself and then go on to outline, in more detail, the role which I see for my Department in the existing energy supply situation and its principal activities in fulfilling this role. Finally, I propose to comment on the circumstances which gave rise to the specific provision which is made in the Supplementary Estimate.
Deputies will note that the original Estimate for the year is just short of £9.25 million and shows an increase of £101,000 in net expenditure over the outturn for 1985. An important factor in keeping the net increase so low is the estimated increase of £547,000 in the Appropriations-in-Aid, mainly because of increased receipts for hydrocarbon exploration licences.
The current Estimate shows an increase of £428,000 in gross current expenditure, with increases in 12 subheads totalling £597,000 being offset by decreases in subheads totalling £169,000. Apart from the increase of £151,000 in the provision for salaries and wages, subhead A1, the increases are fairly evenly divided among the current provisions. The three capital services show an overall total increase of £220,000 with increases in subheads P — FEOGA, Western Aid Electrification, £421,000 and N — New and Renewable Sources of Energy, £71,000 being offset by a decrease of £272,000 in subhead M — Bord na Móna — Grants for Private Bog Development.
I should like to address the question of energy policy. When this House debated the Energy Estimates almost a year ago it took place in a reasonably stable international environment for energy, which had prevailed for some time.
Energy policy, however, has to cope with the unexpected and maintain continuity over a long time frame. This is because of the key role of energy in our economic and social lives and the large investments needed to supply and deliver energy as well as the long time span needed to bring about fundamental change in the structure of energy supply and consumption.
The last 12 months have been dramatic in the energy markets. The decline in crude oil prices and in the price of oil products since last December is of major significance to the economy. Unlike the upsets in energy markets in 1973 and 1979, the immediate impact of these changes is likely to be beneficial to the economy. It will be useful also to reconsider the thrust of energy objectives and energy policies in the light of the lower oil prices now prevailing.
The most striking aspect of that fall in oil prices has been its magnitude. Quotations for spot delivery of crude oil have been fluctuating between $10 and $15 per barrel, depending on the basis taken, and this represents a fall in dollar terms of the order of 60 per cent with respect to the beginning of 1986. The price of netback crude, however, is somewhat higher, reflecting rather firmer prices for oil products than would be indicated by spot crude quotations. The impact of lower crude prices has impacted differentially on different products. The decreases have been greatest for heavy fuel oil which is available to bulk purchasers at less than half the price payable only six months ago.
The fall in oil prices has been accentuated by the rise in the value of the Irish pound against the dollar. As oil is traded internationally in dollars, this strengthening of the Irish currency against the dollar has compounded the price fall in Irish currency terms. Indeed, it is noteworthy that there has been weakness in the dollar price of oil over the last few years. The reduction in the value of the dollar alone would have reduced the cost of oil by about 25 per cent even if the price of oil remained unchanged.
This reverses the position of previous years when most of the non-dollar currency countries, including Ireland, experienced increasing energy prices. While this fall in oil prices is mostly beneficial and is to be wholeheartedly welcomed, it has nevertheless within it the seeds of major problems in the long run which have to be recognised and provided for.
Just as the repeated sharp increases in oil prices in the seventies had profound negative effects on world economies, there are now expectations that the current fall in price will stimulate an increase in economic growth, a reduction in inflation and in interest rates and possibly a period of more stable exchange rates, all of which could lead to a recovery of international trade and a containment of the growth of unemployment.
A recent OECD report estimates that growth will improve by 1 per cent in 1987 as a result of the price fall and this, together with lower inflation, provides Governments with an opportunity to tackle the persistent growth in unemployment as the major macro-economic problem of our time.
A key question relates to how long the oil price will remain low. Opinions vary substantially on this matter. Those who believe that oil prices will rise to the $18 — $20 region by autumn or year end point to the fall in production in the non-OPEC zone. They also point to a growth of demand, particularly in gasoline consumption in the US as the summer approaches, and they also appeal to seasonal rebuilding of stocks increasing the demand for OPEC oil. These factors, it is argued, could lead to progressive firming of prices.
There is however another school of thought. These experts believe that oil prices have been at an artifically high level over the last ten years. They believe that the precarious cartel that is OPEC has been broken apart by the inexorable economic laws, and that prices of the order of ten to 15 dollars in real terms will be with us to the end of the century.
I do not propose to arbitrate between these two views. A clear lesson of developments in oil and currency markets is how volatile and unpredictable they are. This underlines the logic that informed the energy policies and strategies that have been pursued by the Government over the past three years. Those strategies have designed an energy supply system that is robust in relation to changes in the supply and availability of a particular form of imported energy — oil. It has developed the supply system for gas, electricity, coal and turf with a view to increasing the options for consumers and introducing more competition into energy markets. This system also enables substantial switching to be made from one fuel to another as temporary shortages and supply crises take place and, on the other hand, enables advantage to be taken of over-supply situations and attractive prices in particular fuel markets, without having an excessive dependence on any particular fuel as was the case with oil in the past.
Since the energy crises of 1979-80 our dependence on oil has been reduced from over 70 per cent to under 50 per cent, domestic energy production has more than doubled — from under 20 per cent to over 40 per cent and the efficiency with which we use energy has improved by 17 per cent — that is, we consume less energy now than in 1979 to produce a gross domestic product that has increased by 14 per cent over the years.
This change has been brought about by a sustained capital investment and diversification and conservation programmes. Now that oil prices have fallen to well below the levels ruling in 1979 the question must be addressed as to whether this considerable effort was needed and is still worthwhile. The same question is at present being studied in most other countries and in the EC and the International Energy Agency. Undoubtedly, the drop in prices will, in the short term, reduce the return on investments in energy saving and diversification but this could be expected to be offset by the benefits of lower overall costs and increased economic activity.
The energy market developments have proved a very significant factor in encouraging economic activity in neighbouring developed countries, and in Ireland. When the oil price falls there is major benefit to oil importing countries such as our own and those of our major trading partners. There is a major loss to net oil exporters. It was recently estimated by the OECD that a $15 per barrel price decline would benefit net oil importers, something of the order of £100 billion. In Ireland depending on the length and duration of the price decline, and the speed at which it trickles through to the economy, a benefit of £300 million to £400 million might be anticipated.
These benefits will accrue in a variety of ways but, in particular, through a lower inflation rate and thus a higher value of real disposable income in the hands of consumers. The rate of inflation may be reduced by 1 per cent and 2 per cent below what it would otherwise have been in Ireland due to the fall in oil prices. There will, of course, be a substantial reduction in the cost of oil imports. This may be counterbalanced by a tendency to buy more heavy fuel oil given its attractive price in bulk use at this time. Lower oil prices will, of course, have a negative impact on indigenous energy producers such as Bord na Móna and Bord Gáis Éireann. If these bodies are to compete in the market place their profits will, of necessity, be reduced.
What are the implications of all this on energy policy objectives and strategy? In the final analysis energy policy has two key objectives—first, ensuring availability of supplies of fuel and, second, securing those supplies at the minimum cost consistent with security of supply considerations. All the other policy objectives are really derived from these.
Over the past three years this Government have consistently pursued policies which make us well placed not only to take advantage of the current position in energy markets, but also to adjust more smoothly to any reversal of existing favourable trends in the energy markets. There have been major investments in the energy supply system. Large sums have been invested in diversifying and expending the electricity generating network.
The first stage of Moneypoint coal fired generating station has been commissioned and the second and third stages are reaching the final phase of construction. Bord na Móna's third development programme has been almost completed and further money has been made available to the private bog development grant scheme, the natural gas network has been expanded, new and renewable energy programmes have been pursued and energy conservation programmes have been continued. These policies will continue to be pursued.
The major long term concerns in the present situation of low energy prices are that the effort at energy saving and diversification by consumers and industry would taper off and that exploration and development by oil companies, which has been cut back sharply, would result in fewer discoveries in the higher cost prospects in non-OPEC countries.
As regards oil price levels, it is appropriate that I make mention of the performance of the Whitegate oil refinery. The continued operation of the refinery is periodically the subject of public criticism, sometimes of a rather selective kind. It will interest Deputies, therefore, to know that for all but four months of 1985 the prices of ex-Whitegate products were below those of imported petroleum products and that, taking 1985 as a whole and making allowance for the cost of stockholding at Whitegate — stocks which would in any event have to be held and paid for in this country regardless of whether we operate Whitegate or not — the operation of the refinery made a small but significant positive contribution to the economy. In other words it saved rather than cost us money in 1985. More recently savings to INPC in crude oil purchases have been passed on to the consumer and have contributed very significantly to the recent sizeable reductions in the consumer prices of both petrol and gas oil.
I would now like to review the proposals for oil and gas exploration. I am sure the House will agree with me that 1985 proved to be an important year in the area of hydrocarbon exploration. While actual drilling activity was maintained as in earlier years, the results from two of the 1985 wells were very encouraging. Early in the year, BP drilled a well on Block 48/18 in the Celtic Sea which, on test, flowed gas at a rate of 13.2 million cubic feet of gas per day. Later in the year, Gulf drilled on Block 50/6, also in the Celtic Sea, and testing operations on that well in January of this year produced oil flows of 2,074 barrels of oil per day and gas flows of 1.3 million cubic feet per day.
Technical data arising from both of these discoveries are being examined by my Department, in consultation with the companies involved, in order to establish what further work is required in relation to those discoveries. It is of interest in relation to 1985 that the Britoil well in Block 35/19 in the Porcupine Basin was the deepest well ever drilled in the Irish offshore. Unfortunately, it was dry as were other wells drilled by Arco and ESSO in the Celtic Sea basin.
I believe that 1986 will also make an important contribution to our on-going exploration programme. We expect that up to ten wells will be drilled this year — more than has been the case for a considerable number of years. Already, Hydrocarbons Ireland have completed a well off the coast of Wexford; at present, Charterhouse are drilling in the Kish Bank basin offshore Dublin, while Marathon are working on the first of a number of wells to be drilled in their leased acreage in the Celtic Sea this year. Other companies are also in the final stages of preparation for drilling operations during the year. This continuing interest in the hydrocarbon potential in our offshore is extremely encouraging.
Not surprisingly, wells drilled in the present oil price climate reflect obligations already entered into by the various oil companies, obligations which must be honoured by them, even though some might wish to defer some of their commitments. However, the companies concerned have the offsetting benefit this year of steeply reduced drilling costs — brought about by the fall-off in exploration world wide — and they know that now is an appropriate time to explore, as commercial discoveries this year or next would be coming on stream at a time in which significant rises in price might reasonably be expected.
The recent dramatic fall in oil prices creates difficulties for exploration. In simple terms it means that cash flows in 1986 are less than half of what had earlier been calculated, and a number of oil companies have in consequence announced significant budget cuts. The industry can be expected to become even more selective than hitherto in taking on exploration commitments but an area such as the Celtic Sea — where deposits have been proven to exist and the environment is less harsh than in other areas — should retain its attraction. Any discoveries made there can be produced by using conventional and low-cost technology. Furthermore, the fall in drilling costs to which I have referred above has manifested itself quite dramatically in areas such as the Celtic Sea; wells can now be completed at less than 50 per cent of what they would have cost a year ago. The existing work commitments offshore Ireland, including those arising out of the Third Licensing Round ought to ensure a resonable level of exploration activity offshore Ireland during the next few years.
However, we must now start to look beyond work arising out of existing commitments and if a prolonged period of low oil prices has a continuing adverse effect on the willingness of oil companies to explore I believe that it is in the Irish interest and in the interest of the oil companies and the western world in general, that exploration should continue throughout this period of lower prices.
The prospect of increased long term reliance on OPEC supplies is a problem that all oil consuming countries must view with some considerable apprehension. While a continuing high oil price is of course the best incentive to exploration, other ways must be found to keep up the momentum so that discoveries will be in place to ensure continuity of supplies and avoid an excessive and possibly damaging rebound of prices in the future when existing producing fields begin to reach exhaustion.
In April last year I introduced changes to indicate how reliefs for marginal discoveries would operate. In the light of the effect of current prices on exploration activity, I am considering what further steps can be taken in present circumstances to encourage exploration in the years ahead without unnecessary impairment of the overall national interest.
Bord na Móna had a bad year in 1985 due to the very wet weather. They lost production valued at about £50 million and had to ration supplies of briquettes and sod peat during the winter. Fortunately, their high stocks policy for milled peat enabled them to maintain supplies to the ESB and to manufacture record quantities of briquettes. The shortage of briquettes in winter was due mainly to increased demand in the cold wet summer of 1985.
The board managed to avoid laying-off permanent workers but in doing so had to make a major "act of faith" that the workers would in turn help them to offset the financial consequences of 1985 during 1986 and subsequent years, given suitable weather.
The capital estimate for Bord na Móna for 1986 is £9 million. This is for continuation of the third development programme, which is coming towards its end. I should tell the House that the ESB and Bord na Móna have recently agreed a contract covering prices and quantities of peat supplies for the next three years. This kind of stable relationship is good for both organisations.
The provision at subhead M is for £1.2 million for the private bog development grant scheme under the Turf Development Act, 1981. Up to the end of 1985 a total of £5 million has been approved or spent in this scheme affecting 850 development schemes which are estimated to have produced 2 million tonnes of peat. The scheme was reviewed in detail recently and the results achieved were clearly satisfactory. Employment has been generated in disadvantaged areas and a small industry supplying turf extraction machinery has been established. The additional output created by the scheme has displaced substantial quantities of imported fuel. Consequently, it has been decided to continue the scheme in its present form until 1987.
The Electricity Supply Board's non-voted capital expenditure for 1986 will be of the order of £160 million. This represents a decrease of 25 per cent on the 1985 outturn of £213.6 million and reflects the continuing trend of reduced capital expenditure by the board as the Moneypoint generating station nears completion.
Because of favourable trends in oil prices and interest and exchange rates and because of the savings accruing from increased coal fired generation it was possible to grant reductions in electricity prices of 6.2 per cent on average to industrial consumers and 3.9 per cent on average to commercial consumers from 1 April 1986. The domestic consumer also benefited from these favourable trends with a 5 per cent reduction in electricity bills for all domestic consumers from 1 September 1986. The domestic night rate was reduced by 13 per cent from 1 April 1986. I will, as I have previously indicated, keep the situation under review and can assure the House that any opportunities which may arise for further reductions will be availed of.
The provisions for expenditure on generating capacity in 1986 will be £81 million. The major portion of this expenditure will be on completion of the Moneypoint generating station in County Clare. Approximately £75 million will be spent at this location. The balance of £6 million relates to residual expenditure on the completion of the board's new national control centre. Spending on premises and general equipment is down to £3 million in 1986 from £4.8 million last year and relates mainly to the purchase of computer and other related equipment.
Expenditure by the ESB on transmission and distribution projects will amount to £76 million in 1986. This includes £6 million for the completion of the 400 KV lines from Moneypoint and £14 million for the maintenance and extension of the existing transmission system. Expenditure on distribution projects will account for the remaining £56 million in 1986. This expenditure is required to maintain an acceptable level of service to existing customers and to strengthen the electricity distribution network for the connection of new consumers.
The sum provided in the Vote this year for the western package electrification scheme is £1.43 million. The aim of this scheme is to improve over a ten-year period the viability and competitiveness of farms in the western region through the extension and improvement of electricity supplies.
Eligibility is in accordance with EC Regulation 1820/80. Those who qualify for aid must be principally dependent on agriculture for their income. The State and the EC each contribute 40 per cent of the cost of connection, the remaining 20 per cent being borne by the beneficiaries. To date, 3,046 applications have been approved under the scheme at a total cost of £6,844,485 and it is anticipated that a further 693 farms will benefit under the scheme in 1986. I have recently carried out a review of the scheme and I have put forward for approval by the Commission certain proposals which are aimed at improving and extending it.
These proposals included the extension of the number of new connections, as the maximum number of such connections had been reached. As a result of my direct intervention with the EC Commission, they have now agreed to this proposal in advance of their consideration of the complete review of the scheme.
So far as gas is concerned the major events were those relating to the Dublin Gas utility and the maintenance of supplies to its many thousands of customers. I have already explained in reply to various debates and questions in this House, the reasons which led to the decisions taken by the Government in this matter. I am quite satisfied that I and the Government have properly discharged our responsibilities to all the parties concerned, including the general public. In view of formal threats of legal proceedings which have been received I am somewhat constrained in making further comment in justification of the actions which we felt obliged to take, but I hope that this freedom will not be denied to me for too long.
As Deputies know the remit of the receiver is to place the company on a viable economic footing in anticipation of nationalisation and, until his full report has been received I am unable to give a firm indication as to the future sequence of events. As I indicated in reply to a Private Notice Question recently, it is the intention to ensure payment to all creditors where the claims, whether in respect of work or services carried out are valid. Other measures have also been taken to stabilise the situation and I hope to be able to keep the House informed of significant developments as they unfold.
Moving on now to the position regarding the other existing town gas utilities, I am pleased to state that preparatory work on the gas pipelines to Limerick and Waterford is commencing this month. The work will be completed by late autumn and the pipelines will be fully operational by year-end.
A decision in principle to supply natural gas to Clonmel was taken in July 1984.
