Our function today is the scrutiny of EU legislation. At the joint committee meeting of 11 December it was decided that EU document COM 2002/488, a proposal for a directive of the European Parliament and the Council concerning the alignment of measures with regard to the security of supply for petroleum products, should be given further scrutiny by the joint committee. I welcome representatives from the Department of Communications, Marine and Natural Resources - Mr. Denis Murphy and Mr. Kevin Broderick who will deal with the petroleum element and Mr. Peter O'Neill and Ms Miriam Finnegan who will deal with the gas element - who are here to assist members scrutinise this legislative proposal. The proposed directive will impact on both gas and petroleum supplies. I call, first, on Mr. O'Neill.
Department of Communications, Marine and Natural Resources: Presentation.
Mr. Peter O’Neill
I thank you for the opportunity to speak about these two directives. I will use two slides to set the scene and show the significance of gas and electricity to energy policy. There are three elements to energy policy: concern for the environment, competitiveness and security of supply. The challenge for policy makers is to try to strike a balance between these three elements in order that none of them is compromised to an unacceptable extent.
The graph I am displaying projects forwards from this year. In terms of energy, there are a number of pressures at all times. In terms of the environment, there is Ireland's commitment to the Kyoto Protocol which limits us to a 13% increase in emissions over the 1990 level. This, in turn, exerts upward pressure on the price of energy products. In terms of competitiveness, the focus of the European Union is to liberalise the market by introducing competition. That will exert a downward pressure on price and we are well advanced on that in the context of gas. Security of supply is absolutely critical for the energy sector and consumers in particular. The big issue with regard to the security of the supply of gas is that we are facing an increasing dependence on sources outside the EU.
I want to put the fuel mix in Ireland in context. Oil is by far the dominant fuel, accounting for 55% of fuel use in Ireland. Natural gas is the next largest at 24% and that gives the committee a sense of where they fit in. Mr. Murphy will now deal with the Commission directive on oil and I will deal with gas. We will then take questions.
For the oil sector, unlike gas, there is a long history - for good reason - of emergency stocks and emergency arrangements. All member states of the EU have concerns about oil security and nobody can go it alone. Ours is a small market of less than 1% of total European consumption. We have no clout if push comes to shove and, as we are stuck at the end of the regional supply chain, we are vulnerable to anything that happens along that chain. We have no indigenous production and the industry here is focused on moving products quickly into the market and selling them. Apart from Whiddy, there is no natural terminalling or entrepôt set-up where stocks are held without going into the market immediately, or are available to give a cushion against supply spikes or price spikes. Many other member states have that facility.
There are infrastructure problems. We have no fixed interconnectors and we are dependent on seaborne traffic. When oil reaches Ireland, it must be moved by truck as there are no internal pipelines. There are marked pinch points in our import arrangements. Most imports come through Dublin or Cork and, whether by accident or design, it is easy to foresee those supplies - including some of our emergency reserve supplies - being locked in. A major point is that we have no spare tanks. All of the companies are geared towards storing only what they need for just in time deliveries to the market. They do not like having spare tanks and there is no independent sector to go to apart from Whiddy. In many cases, therefore, we must resort to storage sites abroad.
The response and policy elements in place in the various member states vary according to local circumstances, as the slide shows. There is an indigenous terminalling and refining capacity at Whiddy and Whitegate, which has been maintained by successive Governments because nobody else would do it. There is also a series of legislative and administrative arrangements that we can put in place if the balloon goes up. It is important to remember that these would not be launched in isolation. In a major emergency, we would be acting in concert with the EU and IEA members, which have systems in place to deal with this. The IEA is particularly useful because it operates a system in which we would be entitled to a share of available oil, provided we meet certain requirements to do with demand restrictions and keeping emergency supplies.
The Fuels (Control of Supplies) Acts 1971 and 1982 provide a strong basis for the Minister, if the Government declared an emergency, to take control of fuel stocks held by companies, distribution systems and to introduce demand restrictions aimed at cutting down on non-essential use. That would be backed up by administrative arrangements which would involve liaison with the oil companies and also with interest and consumer groups. That arrangement would come to a peak during a crisis but things like that go on in the background all the time. We are currently engaged with the oil companies in trying to get as many arrangements fixed up so that there is maximum flexibility. The oil companies are particularly co-operative and proactive in this area and we find them very helpful.
The most visible area is that of emergency oil stocks. Both the IEA and the EU require us to maintain a 90 day supply. In the case of the EU, that is based on the consumption for the previous year and, in the case of the IEA, it is based on imports. We sometimes struggle to do that, but it is a binding obligation.
The precise arrangements for dealing with this vary between member states. Ireland takes into account the operational stocks maintained by the oil companies and certain large consumers such as the ESB. At any given time, as we know from our study of historical data, the importing companies will have stocks held in their depots that have not gone into the distribution system. In the event of an emergency, the Minister could commandeer those stocks, so we take that into account. More particularly, we look at the strategic stocks maintained by the National Oil Reserves Agency, NORA. These stocks are held for one purpose only, namely, for use in the event of an emergency. They have no commercial significance. NORA was established in 1995 because it was found that such an agency was needed to ensure that we could consistently meet the 90 day target. It is a very small body, acting on behalf of the Minister in maintaining these stocks.
The next slide gives a snapshot from 1 October 2002. Members may find it familiar because the information appeared in reply to a parliamentary question in December. It can be seen that the overall total stock was for 118 days. That was broken down roughly into thirds, between company stocks, stocks held in Ireland by NORA and stocks held abroad. The stocks held by NORA are either owned by the agency or are rented stocks, mostly held at Whiddy, on which NORA takes out a formal renting contract. They would be available in an emergency. The stocks held abroad by NORA are wholly owned stocks, held in the UK and Sweden, as are stock tickets - the famous rented stocks - which are subject to similar arrangements as rented stocks in Ireland.
Looking to possible improvements, we would prefer to see less ticketed stocks and more secure, wholly owned stocks, and more stocks held in Ireland. We do not have them here for cost reasons and that is an important consideration when the EU requirements are looked at. The issue of opportunity cost arises in that regard.
The Commission looked at the current legislation, which was put in place in 1968 and revised in 1998. Instead of making incremental changes, the Commission has more or less wiped the legislation out and has decided to start again. The main argument put forward, if the man in the street asks why emergency stocks are held, is that they are to ensure the business of the country can continue as far as is possible in an emergency. It is a practical matter. However, the Commission's new proposals are very much in the context of concerns about the internal market and competition. This has slightly bemused people in the business.
The Commission also mentions the growing EU dependency on imported oil, a position with which we readily agree. Most of this oil comes from currently unstable regions or from new areas, such as the Caspian Sea, which are not particularly secure. That is a genuine worry.
The Commission talks of the need for more harmonised, effective action in the use of the stocks, not only to address shortages, which is the traditional accepted method, but also to fight spikes in price. When the Commission talks of increased harmonisation, diversity and homogenisation, it is suggesting that it is the only body that can achieve this. Member states agree that change of an incremental nature is necessary with regard to a situation which has obtained for 30 years. However, they believe that no case has been made for the radical changes the Commission has set out and that most of the changes have been argued on the basis of assertions rather than analysis and readily appreciable arguments. Member states are also concerned about the effectiveness of individual proposals, because some could be harmful and they give rise to problems of subsidiarity. In other words, the Commission is moving into areas in which it does not have competence.
I will look now at the various detailed elements of the proposal. The first is the mandatory increase of these stocks from 90 days to 120 days by 1 January 2007. That is a large hike and it is hard to tell from reading the documentation and listening to the Commission if it is based on genuine grounds of securing the supply to meet shortages in the market or if the aim is to provide a fund with which the Commission can play the market to bring prices down. Member states are saying that other than the price fighting strategy, which they regard as misconceived, there is no justification in the documentation for this costly exercise.
I referred earlier to opportunity cost. If we have the kind of money necessary to do this, we would prefer if it were spent on improving what exists and making it more responsive rather than renting a lot of stocks to meet the 120 day requirement. Member states point out that the Commission has made the argument that there is no real cost involved because the Union already has about 115 days worth of stocks. Members states say that is an average figure and averages mean nothing. In some member states there might be over 200 days' stock because of the nature of the business there, while in others there may be only 90 days. Ireland is more often in the latter category than at the top and a huge cost, which might be unsustainable, would be involved in increasing stocks. Not only are we discussing the cost of buying the new stocks, but somewhere must be found to keep them when storage is at a premium. This would create massive new demands on space.
Another argument is for Commission control. The commissioner proposes that in an oil disruption of 7%, the Commission would tell member states to release stocks. However, member states are saying there is no justification for barging into their competences in this area. On practical grounds, member states require flexibility to deal with their particular market circumstances and to decide how much they will release and when.
Mechanisms exist to provide the necessary co-ordination which everybody agrees is a terrific idea. People have said that the Commission has a raft of legislation dating back many years which is meant to provide for co-ordination. However, nobody understands what it means. We understood the Commission was intent on resolving this problem, but that seems to have been forgotten. All EU states are members of the IEA, which has certain requirements in place and 7% is a very important figure in that context. There is a grave risk of conflict with the IEA if we proceed with this approach.
The Commission is talking about a perception of risk. The formula I have quoted means that if it thinks there are going to be price rises, the Commission wants to direct member states to play the market with the stocks, which is, I presume, where the extra 30 day stock comes into effect. Member states say this does not make sense. The quantities involved represent a drop in the ocean for a global industry during what would be a global emergency. Those stocks would very soon dissipate while, probably, no effect would be achieved in price terms. When the physical crisis arose, one would find that one would have used up all one's stocks with nothing to show for it. These are grave and fundamental concerns on the part of member states, many of which have long experience with circumstances of this sort.
The commissioner says that all member states shall have a mandatory stock holding agency - a national oil reserves agency or NORA - which must own a third of stocks by 2007. Some member states see merit in this, but it is a matter of horses for courses. The UK has informed us that it had such an agency, found it did not work and now places a direct obligation on the industry. Responsibility for overseeing compliance with the latter lies with the Government Department concerned. That works well. Ireland's position is that it is happy with its NORA but is reluctant to force that obligation on other member states who find it does not suit their particular circumstances.
There is another provision dealing with foreign stock-holding arrangements. At present, all member states may hold some of their stocks abroad under cover of a government to government agreement whereby administrations declare they will maintain and refrain from interfering with those stocks in the event of an emergency. The commissioner says that provision will be done away with and each member state will be obliged to control and look after the stocks of other states which are held on their territory. Delegations say they will not go to the wall on this and that there is plenty of room for discussion. However, some also say that bilateral agreements provide important safeguards. If these agreements are removed, those safeguards will be lost. It is clear, therefore, that further elaboration on and discussion of this matter are required.
A European observation system is proposed to monitor and study everything that is out there and to examine possible developments in oil and gas. The response of member states is to say that this is empire building. Arrangements are already in place through the IEA and the EU which could be drawn on by the Commission if it really wished to do this kind of work. There is no requirement for a new and elaborate organisation. There is a great deal of negativity about what is going to happen. The standard procedure in these cases is that the energy working group at the Council examines the matter step by step, it is then discussed by COREPER and, finally, is placed before the Council, which makes the political decision. The Greeks have said they wish the matter to be discussed at an informal meeting of Ministers in February to provide political steering and they hope there will be an agreement, though not necessarily a detailed one, at a formal Council in May. This issue has been put at the centre of Greece's work programme for the Presidency.
The process has begun and there was an initial reading on 7 January at the Council's working group. There was an extremely negative reaction from the member states which, while admitting there was plenty of room for improvement, said the document before them was not the way forward. The Germans were more brutal about the matter than everybody else and demanded that the document be withdrawn and the process restarted, this time with the assistance of experts and member states. Most states were a little less direct about the matter, but one could see that, to a large extent, the German line reflected their thinking. The President said a further discussion, building on the positive elements, would take place. Some delegations were bemused, given the debate, as to what might be those positive elements.
The challenge is to find something worthwhile, which would actually make a difference, to put before the Council. It is doubtful that can be done by May in terms of oil, but I understand there is a more positive outlook in terms of gas.
Mr. O’Neill
The demand for gas in the EU and in Ireland, in particular, is growing rapidly. It is being driven primarily by the demands of new power generation because gas is the fuel of choice for new power stations. It is more efficient than oil and coal as well as being environmentally cleaner. Ireland imports more than 80% of its gas, though there was a time that the gas provide by Kinsale was sufficient to meet demand. Kinsale is declining and the field is almost at the end of its life, which means that the bulk of our gas comes from the North Sea via Scotland. Up to now it has come through a single interconnector, but demand is such that Bord Gáis has completed the building of a second. In addition, we have seen the Corrib find off the west coast and the Seven Heads find off the south coast and these are due to come onshore making us more self-reliant.
There are a number of aspects to the pipeline system, the original line of which connected Kinsale in Cork to Dublin and Shannon. Bord Gáis has just completed the second interconnector and has almost completed the pipeline to the west. This is significant in terms of security of supply because it means we will now have two separate pipes coming from Scotland with a ring-main in the south supplying Cork from two sources. Planned pipelines in the west include a line from Mayo to Galway to bring Corrib gas into the system. The line is on hold pending the outcome of the planning appeal regarding the Corrib terminal. Two pipelines are planned for the north and the east, one from Gormanstown to Belfast and another from Belfast to Derry. They are being constructed by Bord Gáis as part of the Northern Ireland Administration's plans to meet gas demands there. Potential pipelines include a line from the Galway-Mayo pipe to Sligo. They also include a line from Derry to Letterkenny.
Mr. Murphy mentioned that Ireland was a very small oil consumer by international comparison. It is also a very small gas consumer. The largest gas consumer in the European Union, the United Kingdom, consumes almost 100 billion cubic metres of gas, whereas Ireland is pretty much at the bottom of the scale, consuming 4 billion cubic metres of gas.
Just over half the gas consumed in the European Union is produced within the Union. It is primarily North Sea gas in regard to which the United Kingdom and the Netherlands are the big players. The rest comes from Russia, Norway and Algeria. Looking to 2030 it is estimated that only about 11% of the gas being consumed by the European Union will be produced domestically. The Union will be very much reliant on imports, of which it is anticipated that the bulk will come from Russia which has huge untapped gas reserves.
With regard to Ireland and the security of supply measures in place, the most recent gas Act, the Gas (Interim)(Regulation) Act, 2002, which set up the Commission for Energy Regulation or at least extended its remit to include regulation of the gas industry, imposes responsibility for security of supply on both the Minister for Communications, Marine and Natural Resources and the Commission for Energy Regulation. The Minister also appoints a gas installation inspector whose duty is to inspect periodically all gas installations, including pipelines, to ensure their safety and security. Security is also looked after through the licensing requirements the Commission for Energy Regulation imposes in terms of the construction of gas pipelines and installations and in terms of their operation and supply. Specific security of supply regulations are imposed by the commission.
The EU internal market directive is under review, but it contains some security of supply provisions in respect of coping with emergencies or difficult days which would be fed through the Commission for Energy Regulation's licensing system onto operators. EU internal market arrangements place a requirement on member states to forecast gas demand. Through the gas Acts, there is a requirement on the Commission for Energy Regulation to produce gas capacity statements that will anticipate, on a seven year basis, what demand is likely to be in order to ensure the necessary infrastructure will be in place in time in order that gas supplies can be made available to consumers.
There are steps in place to cater for emergencies in the gas system. These are covered under the code of operations, essentially the rules of the road for the gas transmission system which are agreed between operators and Bord Gáis as the transmission system operator and overseen by the Commission for Energy Regulation. They are designed, among other matters, to ensure the safety of the system and security of supply.
In the event of an emergency the code of operations will kick in, but not before Bord Gáis seeks voluntary reductions in demand. If these voluntary reductions are not forthcoming, or if they are forthcoming but insufficient, there is a hierarchy by which users are cut off or scaled down. This hierarchy runs from the very large consumers to the very small such as individual householders. The very largest typically include power stations. There is a requirement in the licensing of power stations by the Commission for Energy Regulation that they have a set number of days of backup fuel in the event of their gas supplies being cut. Cutting off individual householders involves taking into account a huge mileage of very small pipes, and that once the gas supply to those pipes is cut off air gets into them. This has safety and, in particular, serious cost implications in terms of trying to extract the air. There has never been a gas emergency in Ireland. BGE has never had to declare one.
The Commission is coming from a perspective designed to introduce competitiveness into the gas market and drive down prices. However, it is concerned that this will have a knock-on effect in that the focus of operators on competitiveness could mean they would take their eyes off security of supply. It is adopting the aforementioned position but has not backed it up with any detailed analysis. It is probably fair to say, however, that it is too early, in terms of the internal market, for any detailed analysis to be done. It will be some time before we realise the exact impact on the internal market. The view of the majority of member states is that it is somewhat premature of the Commission to conclude that liberalisation of the market will have adverse implications for security of supply. Also, the Commission's proposals are likely, if implemented, to have significant cost implications for consumers who, ultimately, will have to pick up every cent of the cost imposed on the system.
As Mr. Murphy mentioned with regard to oil, the issue of subsidiarity arises. Member states believe responsibility for security of supply is something they can look after adequately, as they have done. There is a concern that the Commission is coming a little close to member states in terms of subsidiarity. Its proposals sound eminently sensible, but, as always with such matters, the devil can be in the detail. The purpose of the proposal to have mechanisms that will guarantee co-ordinated action between member states is essentially to try to establish solidarity between member states in the event of an emergency or energy crisis. There are further proposals to manage security of supply by providing suitable mechanisms to deal with physical disruption, and the safety of supplies and infrastructure by having measures ensuring maximum reliability of supplies that flow from producer countries. Other proposals include promoting market stability in consultation with producer countries and planning responses to situations where markets might anticipate a physical disruption of supplies.
The Commission is promoting dialogue on energy supplies between producer and consumer countries. The majority, if not all, of member states see that the real strength of the Commission lies in dealing with third countries, particularly producer countries such as Russia, to ensure the conditions in these countries are such that the investments made are sufficient to identify gas supplies, get them out of the ground, ensure the infrastructure is in place to bring them to market and that it is maintained in a safe and secure way.
As Mr. Murphy mentioned, the Commission is proposing that there will be a European oil and gas observation system. It is also talking about a requirement, in terms of storage, that there be a 60 day supply in each member state. However, it has rolled back somewhat on the first reading of the directive last week by stating it does not have to relate to storage but something that would ensure supplies. The difficulty is that the geological structures in member states are all different. Austria, for example, has storage facilities for supplies of over 100 days because it suited it to allow for this. On the other hand, Ireland has no natural storage facilities; tests were done which failed to reveal any.
Before the second interconnecter was built there was a significant study, the gas 2025 study, carried out jointly by Bord Gáis and the then Department of Public Enterprise. Given the increasing demand for gas, the study tried to ascertain the best way of ensuring we could meet this demand looking forward to 2025. It examined possibilities such as liquefied natural gas storage which involves putting gas into a liquid form and transporting it by ship to a depot where it would then be put it into the system and regasified. The best option identified by the study to meet demand and ensure security of supply for Ireland was to build a second interconnecter. This has been done.
The Commission has also made proposals about long-term contracts for the import of gas from non-EU countries. It proposes that a minimum share of those contracts would entail long-term contracts, this would give some security of supply. There is a question of whether long-term contracts are at odds with the liberalisation of the gas market and allowing gas operators to buy gas in whatever form they like. Spot markets are particularly favoured at present. This does not really affect Ireland because we do not import gas from non-EU countries, nor are we close to doing so.
The International Energy Agency has been involved with security of supply since the oil crisis in the 1970s. It is an OECD body and includes the US, Canada, Japan, Australia, New Zealand and, significantly in terms of gas, Norway. The IEA is beginning to look at the security of gas supply. It recognises that market liberalisation can present challenges for security of supply, it does not believe a fundamental conflict exists between the liberalisation of the markets and the security of supply. It believes it is a matter for governments to decide what the security of supply objectives should be for each state. The IEA sees itself as having an overarching role in monitoring the current state of affairs and what might happen in the case of emergencies.
The first reading of this directive in Brussels only reached the fourth article. We are favourably disposed to working with the Commission on strengthening security of supply. No one can reasonably argue against this. As members of the IEA, we recognise the liberalisation of the market can bring some pressures to bear on the security of supply. These need to be monitored to ensure they do not fester and become problematic. We will continue to comply with Government policy to maintain a balance between the environment, competition and security of supply. This will drive our consideration of the directive. Whatever agreement we reach will be informed by what is best for the consumer.
Does the directive apply to large companies, like the ESB, as part of our national reserves? Will they have to increase their oil and gas holdings? Will it increase the cost of electricity? I note the oil companies and major consumers have 39 days of stocks. If Ireland has its own gas reserves - such as the Corrib field, Kinsale and Seven Heads - can we claim it as part of our 120 days reserves?
Mr. O’Neill
If there was a requirement that Ireland was to hold a certain number of days stock of gas, the question of how that best could be done would have to be considered. The Government could offer to pay for it, but that is somewhat unlikely in current economic circumstances. It is likely gas consumers would ultimately have to pay for that security. To the extent that electricity is generated by gas, the increase in gas prices would ultimately be fed through to electricity consumers. Any requirement for additional storage will impose costs that will eventually find their way to the consumer. I do not think there is any way around that.
Mr. O'Neill mentioned that we do not have any natural storage for gas in caves or tanks. How can 120 days of gas supply be stored? We know oil is held at Whiddy. If we have 20 years supply in the ground, then should not the EU accept that as part of our storage?
Mr. O’Neill
If, for example, the Corrib field was an operating gas field it could not be regarded as storage. If that was to be extended, one could claim that all operating gas fields in the EU are capable of holding 60 days of gas supply. The Commission is seeking storage over and above the output of operating gas fields. The intention of this is to provide an alternative gas supply if there was a problem in a pipeline between a gas field and the customer. I do not think it would allow using a gas field to fulfil storage requirements.
Does it envisage Ireland building new storage tanks?
Mr. O’Neill
There are some pockets in the Kinsale field that Marathon is using for small-scale temporary storage. That is not being used as a security of supply storage, but to manage the load coming into the market. Marathon pumps gas into these fields in the summer when gas demand is low and draws on it when demand is high in winter. The only other form of gas storage requires building a depot, attached to the gas pipeline system, for holding liquefied natural gas. The depot would be supplied by containers of gas brought by ship. The liquefied gas would be gasified and pumped into the system. This could possibly be done on a commercial basis if a company thought a profit could be made on it. However, the holding of gas to ensure security of supply is unlikely to generate a profit.
People are concerned about the threatened war in Iraq. How secure are out oil stocks in an emergency? Much of our 120 days supply is held outside this island in places as far away as Sweden. Whitegate is now in the ownership of a multinational firm. Will this interfere with storage on the island of Ireland? What percentage of oil consumed in Ireland is refined here?
The point was raised that natural gas is imported for the generation of electricity and other purposes. Cork suffered from the closure of IFI arising from the high cost of gas. We were told it is a major cost in the manufacturing of urea. Jobs have been lost with the closure of the plant and fertiliser costs will rise for farmers as a result. Are gas costs exorbitantly high now that we are importing supplies, rather than drawing them from the Kinsale field?
About 30% of the oil products in the Irish market come from Whitegate, the rest is imported. At any time in its history, Whitegate was always a minor player and, in fact, the call was always made by the big companies importing from overseas refineries.
On the question of general security, oil installations are a prime target for anyone who wants to create mischief. In some ways having oil stored abroad is more secure because one is dealing with countries with long traditions of military security in protecting nuclear and military installations as one of the main priorities of their national defence policies. The oil stored at Whiddy Island is as secure as it can be, although security ultimately depends on the vigilance of the people operating the facility.
All kinds of infrastructure are obviously at risk if someone wants to act out of left-field - even the US was unable to protect itself fully against those people - but there is a heightened awareness of the need to protect these facilities. With regard to whether having oil abroad is less secure, we are part of an international arrangement which guarantees that we can repatriate supplies under the IEA system in the event of a major emergency. What stands over that is the word and bond of the member states of the IEA, the OECD and the EU and if people renege on that, we face anarchy. There is a degree of trust underwritten by various treaties.
In the event of a major emergency, the Minister could gain control of any material held by private operators. The Fuels Acts provide draconian powers, so the Minister can do practically anything relating to supply or distribution. No company operating here would try to buck the system and we would not expect anyone to do so. Our fuel supplies are secure in that they are covered legally as well as on the basis of goodwill, ethics and normal trading prudence.
What is the position regarding gas?
Mr. O’Neill
I assume the question relates to whether we pay an exorbitant price for gas because it is being imported rather than coming from Kinsale. There are two elements governing what we pay for gas: the first is the price of the product and the second is the cost of transporting it from source to end user. The price of the product is set by the market. It is a free market driven by market circumstances. The cost of transport is essentially that of building, maintaining and operating the necessary infrastructure. That is regulated by the Commissioner for Energy Regulation, so it is not a free market in this case. The builder and operator of the infrastructure is entitled to obtain a fair return on their investment.
The transport element of the overall price represents about 20%, depending on the market price of the product. I do not think we are paying an exorbitant price for gas. The gas that will come in off the Corrib Field, Seven Heads and Kinsale is not being sold to consumers any cheaper than the North Sea gas that comes in through Scotland. The IFI had a long-term contract with Bord Gáis for a number of years under which it paid for the gas at less than market cost. When that contract expired, IFI had to go to the open market for gas. It came from favourable circumstances to reality and was hit hard.
The UK has a transmission company which is separate from British Gas, whereas in Ireland the transport and supply of gas is in the hands of one organisation - Bord Gáis. Am I correct to suggest that Bord Gáis is getting a higher margin because of its right to transport gas as well as market it?
Mr. O’Neill
No, that is not the case. The British gas market has been liberalised for more than ten years and is the most open in Europe, whereas we are only in the process of full liberalisation. When the British gas market was opened up, British Gas operated all aspects - including supply, transportation and so on - just as Bord Gáis does now. British Gas buys gas in the same market as Bord Gáis and it has to deal with the same market forces and pay the same prices. The difference in price between the companies comes from the transport cost which is driven by the investment required. We are at the end of a chain and we have two interconnectors to support. Prices here are regulated - as in the UK - by an independent regulator under the same rules. Investment drives the transport price under regulated circumstances.
The British have two companies - British Gas, which markets the product, and another that transports it. There are different companies whereas, in Ireland, it is one company.
We will have another opportunity to discuss this. I do not wish to deviate from the directive because that is what we are here to discuss. We will have an opportunity later in the year to receive a presentation from Bord Gáis and the regulator in relation to the area of gas and pricing.
A politician such as the Chairman knows that domestic issues are important.
I ask Deputy Eamon Ryan to focus on the directive.
I thank the Chairman. I have to attend another meeting so I was keen to contribute, if possible.
I disagree entirely with the stance the officials have taken. We are at the end of the chain - a long gas pipeline from Russia - from which we will get 80% of our gas. We have no oil resources and only 2% of our energy comes from hydro-electric power and other sustainable sources. Ireland, more than any other member state, should have done whatever it could to improve supply. Unusually for a Green Party member, I believe that the European Commission is the correct body to decide on strategy for the management of supplies because its control is better than some of the bilateral conditions under which, when push comes to shove, we may lose out. There is a cost involved but we must realise the cost of oil and fossil fuels will increase dramatically due to climatic considerations and because they are running out. We should invest more in security. Indeed, if it costs more, it will lead us to invest more in other fuels which are more environmentally and economically sustainable.
What percentage of gas-powered generation should we have given the scarcity of supply? If it is the new preferred source of supply, what is the maximum percentage we will allocate to gas, given that we will depend on 80% of it from Russia? Do EU officials believe that the use of reserves is now ahead of the discovery of reserves? In other words, are we on a downward curve in terms of the life cycle of oil? How many years, to the nearest decade, have we left before the oil runs out, with current usage patterns? Does the Department have a view on this?
To return to the question of storage, particularly of gas, the directive is the right way to go because we do not, as the officials said, have anywhere to store it. I believe that in Wales and other locations in Europe the geological conditions are conducive to storage. If it is the case that we can access stores in the cheapest manner, we should be supporting the directive to save the Irish customer money. We cannot afford to store it - it would be cheaper to do as the Commission is suggesting. Does this not strengthen the case for the building of an interconnector in order that Irish renewable resources such as wind energy can be developed, allowing us to add to European supplies and improve security? Could this not push the State's policies in that direction in order that we can raise our own usage of renewable energy beyond the 14% the Danes have obtained? Would this not be the cheapest energy policy in the long run?
My three questions can be summed up as follows: what is the maximum level of gas we use? Have we moved beyond the peak in terms of oil reserves and how many years do we have left? Does this not make the case for an interconnector stronger?
Mr. O’Neill
In terms of the percentage of electricity generation from gas, currently it is just over 30%. While it will increase gradually with demand, it will not increase by a huge amount. In the process of increasing it, clearly security of supply will always have to be taken into consideration and may put a brake on the increase at some stage. I cannot give a figure for what the maximum percentage should be because there has never been any study done - I do not know whether it would even be possible. A projection by the ESRI, taking into account only the growing demand for electricity from gas-fired generation, is that by 2010 perhaps 80% of electricity will be generated from gas. This clearly raises huge questions about security of supply. One must ask whether that is a sustainable way to move forward. The ESRI is carrying out studies in conjunction with the Department on the issue of security of supply. It is a big question to which I do not have a straight answer for the Deputy. There is no way that the Government, the CER or the Department would allow the reckless increase of power generation from gas in a way that would compromise security of supply.
The Deputy mentioned oil reserves. While I will let Mr. Murphy answer that question, I know that the latest estimates in terms of natural gas reserves are that there is about 100 years left of known reserves. As exploration is ongoing, the likelihood is that this will increase. It will not reduce.
It is clear that if we want to increase the amount of renewable energy supplies in the system, having an interconnector with the United Kingdom would be one way of providing a safety valve, as it were. The CER, before or after Christmas - I cannot recall - launched a study into having an interconnector with the United Kingdom. One of the contexts in which that would be pitched is in terms of its being able to handle an increased amount of renewable energy supplies in the system. I am not sure when that study will be complete, but it should not be too far away. I will leave the question of the oil reserves to Mr. Murphy.
I cannot give a definitive answer. Our focus tends, naturally, to be on the Irish situation. In the long-term, we would be guided by what others say. I have seen articles by people who say it will be two decades before all the oil is gone and others who say it will be 100 years. Others say it is somewhere in between. How long is a piece of string? We do not know. People say that reserves are what we know is there we think we can get at. What we can get at is developing all the time with technology, for example, as deep-sea exploration gets cheaper and more advanced. Areas which were regarded as inaccessible are coming into use. That is the optimistic view. I have also seen papers in which people in the Saudi administration, for example, have said that by 2030 they will not be able to give oil away because of the development of new technologies, particularly in transport, the great driver of oil demand. Somewhere in between the enthusiasts and those with particular views - there are people who have been taking a very pessimistic view of this - lies the truth. I do not know where it is. It is not the immediate concern of those looking at the security of oil supplies in a national context, where we have to live with what we can see ahead.
The Deputy mentioned the approach taken by the Commission and whether we should be supporting it. The first business of changing from 90 to 120 days is cost - a very large cost. If we had all the money in the world, we could have a 120 day supply but we do not. What are we getting for the extra days? If another drop of oil did not arrive in Ireland - if the whole system completely dried up - there would be enough to keep us going at the old rate for 90 days. However, nobody in their wildest dreams could foresee all the oil drying up. The worst percentage fall-off in oil delivery in recent decades, as far as I am aware, was about 12% during the Suez crisis. The International Energy Agency thinks 7% would be a major calamity. Let us say there is a drop of 10% in oil delivery. As that means that the 90 day supply must make up for the 10% lost, we multiply it by ten to get 900 days' coverage - in other words, more than two years. In any situation short of Armageddon what kind of feel good factor do we get from having 1,200 rather than 900 days' cover? In cost-benefit terms, it is purely speculative. It would be better to use the money to build up a 90 day supply and make it a little better.
The idea that the Commission could be the body to control this, in the way it proposes, has not been supported and is really not certain. Systems are already in place which are much more experienced than the Commission in dealing with this, not only at national level but also at international level, through the IEA which has an arrangement in place to share oil among various member states and would control its release. Even the European Union has arrangements for controlling its release. What the Commission is stating is that it is the only organisation which can save the world. That is not something member states could readily accept. Much more homework would have to be done even to begin to convince people that there is a need for a bigger role for the Commission. There is certainly room for more co-ordination and improvement. There is certainly room for more clarity, because at the end of the day clarity is what wins.
To reiterate the point made by Deputy Ryan, it is startling to see that renewable resources only account for 2% of our energy supplies, particularly considering the possibilities in this country for exploitation of wind energy. It is underdeveloped. We have also been teetering around the edges of considering wave energy. There is always a danger, whether ten or 20 years down the road, that due to circumstances outside our control, such as the situation in Iraq, we will need a greater dependency on our natural resources. That question has been partly answered.
To return to the question of oil, do we have the 90 day reserves in situ, primarily in Whiddy, which is close to my area? When I was young Gulf Oil owned the terminal. Tosco bought out from INPC and now apparently ConocoPhillips is the main player. Despite the change of ownership, can I take it the agreement imposed by the Department is still in place?
I know there is considerable interconnection with Europe, which affects gas supply, etc. In the event of an oil crisis, do we have an understanding, perhaps under the Good Friday Agreement, with Northern Ireland? Does Northern Ireland store reserves? That may be a question outside the remit of the delegation. I know the gas connectors link South and North, but is there an oil storage facility in the Six Counties and, if so, in the event of a crisis do we have any agreement to co-operate?
The answer to the question about the 90 days is that we do. The slide showed 118 days as of 1 October. It has probably changed somewhat since then. However, for us that is a terrific performance. We usually have difficulty in maintaining 90 days. We are usually in the lower 90s, but for various reasons - partly due to the storage at Whiddy - we are up there almost with the big boys at present. Some of the storage is in Ireland and some is abroad. Some are rented stocks - the stock tickets to which I referred - and some are physical stocks. The product is there and is available.
Despite the change of ownership at Whiddy, there is no change in the deal that was done when we sold it. This states that whoever owns it has to keep it going for at least 15 years. If it is sold on, part of the deal is that the buyer has to accept that responsibility. This represents the State's strategic interest in that facility, so it is secure in that sense. In the event of a major emergency, any oil going through Whiddy could be commandeered by the State and used for our purposes. Throughout the deal with Tosco, the Government was always concerned about protecting the State's strategic interest. Although we cannot sell something and tell the buyer how to run its business, if there is a strategic interest, we can ensure - as was the case during the period in question - that is protected.
In Northern Ireland, the 90 day obligation forms part of the overall UK obligation and I understand it depends on UK deliveries for its security. It does not have substantial strategic stocks and this is a matter of concern for some of my opposite numbers there, who would like to see that changed. Obviously, there is a de facto relationship between the two parts of the island for oil. It is not as pronounced as in some other areas - such as those of gas and electricity, in respect of which there is a formal engagement - but it does exist. Much of County Donegal’s oil is supplied from Northern Ireland. For example, if there was a problem in Dublin Port, which meant oil could not be delivered, we would rely on Belfast and deliveries across the Border in a pragmatic, ad hoc way. Those are the kind of arrangements we would see developing.
For example, if strategic storage was built in Northern Ireland, we would be interested in using that. The National Oil Reserves Agency will rent a tank if it believes it can be used reliably to deal with what is essentially a geographical problem of getting oil to people, irrespective of where lines of political demarcation lie. In an emergency, it becomes a question of how much there is on the island. For the formal 90 day requirement, we are disconnected from Northern Ireland and it looks to London for that. Given the fact that many Irish oil companies operate, in terms of their own housekeeping, on an all-island basis, there would be arrangements to move stocks as the need arose.
I am glad the oil stored at Whiddy is well above the minimum 90 day requirement. Does that comprise a mixture of crude and bunker oil or diesel, or is it mixture of fuels? I know it is unrefined, but it is to the credit of the new owner, which spent more than €20 million in restoring tanks and upgrading which is essential. If we have to hold our oil, rusting tanks are not much good. When Gulf Oil built it, it was originally a crude oil depot. However, as a result of modifications, it now stores diesel, bunker oil and possibly other oils. I do not think it stores petrol or the refined product. Does Mr. Murphy have any breakdown of the product stored there at present?
The Deputy is correct. It was originally a break bulk storage facility for crude, but even in INPC days we were not in that business and were more interested in our national requirements so there was development of the tanks, which has been continued today. The purpose is to bring more tanks into use for products, which requires a higher specification of tank.
There are two tranches. There is the oil held and owned by the National Oil Reserves Agency, which is in the form of products. On the other side are the commercial stocks that are used by ConocoPhillips and are passing through. Some of these are for its own use and some may be held on behalf of somebody else who may pay ConocoPhillips. That will vary depending on what business it can get. Mr. Broderick may have a picture of the current situation.
Mr. Kevin Broderick
I have a fairly good picture of the current position. Since Tosco and its successors took over the facility, the crude has varied to up to maybe 200,000 tonnes. Based on the most recent figures I have seen, the crude is down to less than 3,000 tonnes. There is a substantial amount of product at the facility. As Mr. Murphy said, NORA has both petrol and category 2 diesel stored in Whiddy. In addition, Tosco stores a considerable amount of kerosene, including jet kerosene. At present, one could say it is all products. Most of the tanks in Whiddy are operational and the company is constantly upgrading those that are not yet suitable for oil. Ultimately, all tanks will probably be filled.
I thank the delegation for the briefing. I apologise for missing the earlier part of the discussion, as I was at another meeting. In light of the determination of the President of the United States, I presume there will be a war in three or four weeks. If there was to be an incredible price spike, how would that affect our supply? Unlike the Afghanistan war, this one would take place in an oil producing country. Although a lengthy war is not envisaged, if it was to continue for six months, eight months or a year and if problems in Venezuela were to continue, what would be the likely impact? Is there elasticity in the pricing? Do we know what would happen to our supply and not just to consumer prices?
It appears the amount of storage of oil and gas we maintain at present compares favourably with that of other countries. The Norwegians and British have a great advantage in this regard. Is it the case that we compare favourably with other small and medium sized states in the case being made against the EU which appears to be well based in relation to the massive costs it might have to state, in other words that you can support that in relation to stocks vis-à-vis other countries?
To follow up on Deputy Ryan's comments on the overall breakdown of energy, the fact is that we have less than 2% renewables. We have all been reading about the massive programmes on wind energy in countries such as Denmark and Germany. In regard to wind in particular, people always say there are major problems in regard to storage which is impossible. However, Denmark, which is roughly the same size as Ireland, is proceeding full blast with this programme of wind energy, regardless of its effects on the visual environment. Has the Department considered further ways in which the Minister, Deputy Ahern, might ruthlessly encourage expanding hydro energy sources in the coming decades given the picture being painted by the four officials which appears dismal?
On a related point on No. 4 we were struck when a delegation from the RAMCO project came before the committee. They spoke about the way in which the small pockets of development off the coast were becoming increasingly economic and almost seemed to suggest that we are almost Russians. The picture being painted in this document indicates that the Russian economy has a great future. Behind all the palaver, are we in a very strong position? As far as I could see, RAMCO immediately off-loaded the field to a German company, the name of which escapes me. Referring back to Deputy O'Keeffe's point, what was the impact? Obviously the other company beat VG. We were struck by the fact that suddenly it was sold off.
For 30 years in this House my predecessor, Justin Keating, had detailed discussions on this territory about what kind of exploration regimes were in place. I know the Chairman will be coming back to the exploration regimes and some of the officials present may be involved in that area. Are we a soft touch in relation to this matter without going off the storage issue and the basic issue of the directive? In other words, if it is likely that we have massive resources, which new technology will confirm, should we get more stroppy with companies? We must look more and more critically at what would serve us because, as the Chairman said, if it is in the ground off our cost it puts us in a strong economic position.
On the EU observation system, have we made any proposals to agree to, say, a more informal system where the 15 or 25 states would all work closely together without us having to endure a diktat in this key area? In another part of our portfolio in relation to fisheries I learned that when Norway was negotiating its entry to the EU, Ireland was allocated additional fisheries in the Norwegian area. The Norwegians said "no" and "no" again. In the energy field perhaps we need to be as tough as the Norwegians and obviously some of that is being expressed today in looking at the issue in a critical way. Given that we may be in a stronger position than many states, what kind of observation system would you like?
Two of those questions are oil related. Iraq has dominated oil markets for a long time and the shadow over Iraq and possible action in Iraq has been affecting oil prices. The conventional way of describing it is to say that the oil prices had a war premium built into them. Speculators have been taking positions on future deliveries and have been saying there will be a war in Iraq which will affect certain kinds of demand. They say oil will be more scarce and, therefore, are charging more for the forward positions. This "war premium" has been exacerbated by Venezuela which is still outstanding. Nobody knows what will happen. Without being facetious, I read a summary of a report from a commercial body in London which stated that oil prices in 2003 would be governed by uncertainty and that either oil would be plentiful and cheap, or scarce and expensive. It stated that Iraq was the wild card. What most people are expecting about the conventional wisdom on Iraq is that there will be a war which will be shortlived.
The Machiavellian view of all this is more serious, namely that the real target of American power is Saudi Arabia given that it was that country which inflicted this horrendous damage on the American people.
We are entering the realm of speculation.
This will be a serious problem in the long-term.
If we consider Afghanistan or even the Gulf War mark I scenario, one could expect a price hike because war fever puts prices up. If peace is restored, the price drops. The view in that scenario is that the market will be flooded with oil because the Iraqi oil reserves would be opened up. Under the sanctions and restrictions they are only producing two million barrels a day at present but there is a good deal in the ground which conventionally could be described as the second reserve, second to Saudi Arabia. In that situation the price will fall and OPEC is worried and is cautious about interfering with its quotas.
The Deputy asked about a prolonged and protracted situation. Let us say, for argument's sake, that something like that did happen or that the war spread in some way, either politically or economically to some other states and that there was a drop, Iraq itself will not cause a drop because everybody is used to the fact that two million barrels a day will not be available. If one of the neighbouring producers was affected and there was a drop in world supplies, even a small drop in supplies could have an affect. We all accept that.
In such a scenario, international oil emergency arrangements would spring into action. The International Energy Agency system which has been in this business since 1974 has a two level response to an emergency. Under 7%, it has arrangements whereby it co-ordinates a response by member states which, most likely, would take the effect of a release of some of these emergency stocks into the market, not a reckless release but one which is partly meant to reassure the commercial markets but also to fill the gap. If one reaches 7% or more, the oil sharing system kicks in and this is something to which we are all signed up. According to this, member states would restrict consumption in their own countries. We have the means in place to do that as have all others. As a result of doing that we participate in an arrangement for sharing the spare oil available in the system which will always be available.
Nationally, one would be monitoring the situation and asking whether our restrictions are tough enough or do we need to go further? One would eventually end up with rationing, which nobody really wants to contemplate. It is now seen very much as a measure of last resort, but it is there. Before that, one would see all kinds of things such as restrictions on Sunday motoring and speeding. That is fairly standard. Rationing has never been tried and there has never been a necessity to try it so far, so it is an unproven quantity. It means, however, that it is not headless chicken time if this thing moves because there is a plan B.
If one goes beyond that and starts talking about major geopolitical changes, the fact remains that the Saudis are the key producers and what they say goes. So far, they have been saying the right things for consumers. OPEC has also been saying the right things. It has been saying: "Look, we'll try to meet any reasonable drops in demand. We'll review our position." While nobody wants to be complacent about this there is no need to panic yet, either. There is a strategy for dealing with what is foreseeable. Ultimately, Western oil depends on the fact that there are people who have reserves of oil who are prepared to let other people come along and take it for a price. They do that because they want to have shops, cars, education and social services. For as long as people want to do that then there is some security for the rest of us. If there are certain social changes where people say they despise western ways, are prepared to live in caves and do not want to sell any oil, that is the worst case scenario. I do not think anybody is prepared to deal with that, but that is very speculative. The IAEA is probably still talking about a fairly manageable crisis which would have more to do with price than supply. That is what people are working on at the moment.
What about gas?
I beg your pardon, Chairman, I was to answer another question too. The Deputy mentioned the 90 days and so forth.
And other countries.
At the moment, average holdings in the Community as a whole are for about 115 days, or thereabouts. So, most countries are okay, although some are having difficulties. We normally work down towards the lower 90s. At the moment, because of developments at Whiddy we are up at 118 or thereabouts. We have possibly dropped a little since those figures were put together. In general, the stocks in the Community, large and small, are in fairly good shape. Certainly, ours are in better shape than they have been for a long time.
Just a brief point on gas.
Mr. O’Neill
I will come back quickly on gas. The Deputy mentioned RAMCO and wondered if we were a new Norway. RAMCO has found a small pocket of gas and it is economic and productive. It has not sold the field to Energy, which is a German company. It has forward sold some of the gas supplies to Energy which will, in turn, feed it into the market. Ireland has a poor record in offshore exploration. When a company is exploring offshore it essentially looks at three risks: geological, political and financial. Historically, the geological risk in Ireland has been high, and it continues to be so. If one looks at success rates around the world, generally, in terms of exploration the success rate is about one in five. In EU waters it is about one in seven. In Norway, it is one in three, while in Ireland it is one in 70, so we are at the opposite end of the scale to Norway.
The Deputy raised the question as to whether we should be getting more stroppy with prospective developers. The strategy the Department employs is really to do it on a drip basis. There is a certain amount of acreage for which we have responsibility. It is being let out on a drip basis, rather than putting the whole lot out together. When the Kinsale field was discovered we were pretty bolshy at that stage. We imported the Norwegian model which served well for Kinsale. However, because there was no success going onwards, that model was essentially a deterrent. So the terms were eased to try to encourage people in and a set number of fields have been let out. If those fields prove to be successful the terms will be ramped up systematically as the success ramps up. If they are not successful we will have to continue on with the same terms. That is essentially the strategy we are employing.
One only gets one shot at each field.
Mr. O’Neill
That is correct.
Did not RAMCO come in behind Marathon or some other company?
Mr. O’Neill
Yes.
I thank the officials from the Department for attending and for assisting the committee. Given the exchange of views, I know the Department will take note of quite a number of proposals that have been made by members.