Seanad Éireann - Volume 98 - 15 July, 1982
Fuels (Control of Supplies) Bill, 1982: Second and Subsequent Stages.
Question proposed: “That the Bill be now read a Second Time.”
Minister for Industry and Energy (Mr. A. Reynolds) Albert Reynolds
Minister for Industry and Energy (Mr. A. Reynolds): The purpose of this Bill is to amend the Fuels (Control of Supplies) Act, 1971 to ensure that a mandatory regime for disposal of the production of the Whitegate refinery can be established under the Act, as amended. The Bill also includes an amendment removing a legal doubt as to the applicability of the Act to stocks of oil in retailers' premises.
The Fuels (Control of Supplies) Act, 1971 enables the Minister for Industry and Energy to control the supply and distribution of fuels whenever the Government declare by order under section 2 that the exigencies of the common good so require. When an order under section 2 is in force the Minister may be order under section 3 provide for the regulation and control of the supply and distribution of fuels and for the control, regulation, restriction or prohibition of the import or export of fuels. An order made by the Minister may empower him  to issue such authorisations, licences or directions as he considers necessary for giving full effect to any provisions of the order.
At the time the Act was introduced energy demand in Ireland and in the western world generally was steadily increasing and then, as now, political developments threatened the flow of oil supplies. It therefore became imperative for oil importing countries to prepare to deal with any supply disruptions or other developments in the energy situation. Later events, including the Middle East conflict in 1973-74 and the Iran revolution in 1979 showed the wisdom of such preparations. The Fuels (Control of Supplies) Act, 1971 was invoked by the Government to control the supply and distribution of oil during the shortages in Ireland's oil supply which followed these events.
Today, oil still accounts for the major proportion of Ireland's energy requirements although the impact of Kinsale gas and increased use of coal reduced this proportion from 75 per cent in 1978 to 63 per cent in 1981. A major element of the Government's energy policy is further to reduce this considerable dependence on imported fuel to a reasonable level. As this reduction must take place in a manner which will least disturb the economy of the country, it is a medium term goal. Until that goal is achieved oil will continue to be the major energy source.
Given the constant risk that oil supplies may be seriously disrupted it is important that our requirements are made as secure as possible. There are three main elements to a proper policy on oil supply security. These are (1) diversification of sources and channels of supply; (2) maintenance of adequate stocks of oil; and (3) availability of oil refining capacity.
Until 1979, Ireland's oil requirements were supplied by the Irish subsidiaries of the international oil companies and by small home-based independent importers. These supplies originated from the international companies' procurement systems, from supply contracts with other  oil companies or from the product spot markets. In 1979, the Government set up the Irish National Petroleum Corporation to take advantage of the growing preference on the part of oil producing states to by-pass the international oil companies and trade directly with the oil consuming countries. In this way our sources and channels of supply are supplemented and diversified. The corporation have concluded supply contracts with oil producers and disposal of the products refined from this oil is carried out through Ireland's existing distribution system. I intend to introduce legislation in the near future to provide a statutory basis for the capital structure, organisation and functions of the corporation.
Ireland, as a member of the EEC and of the International Energy Agency, maintains, as required, a minimum of 90 days' stocks of oil. Ten days' supply is held at the Whiddy oil terminal on behalf of the Government and the remainder is held at Whitegate refinery and at the terminals and depots of the oil companies and of large oil consumers. I am concerned that about a quarter of these stocks is held abroad even though it is held under completed or pending agreements with EEC member states. However, I have this matter under examination.
The third element of a policy on oil supply security is the availability of operating oil refining capacity. A country with such capacity has greater freedom to negotiate supplies of crude oil from whatever source than if it had none. Furthermore, it reduces dependence on foreign refineries and provides an alternative channel of supply. In the absence of refining capacity an alternative is to have storage capacity for oil products capable of maintaining at the very minimum, 90 days' stocks of oil in the national territory. The capital cost of building storage facilities and filling them with oil to meet our national requirements would, it is estimated, be of the order of £2.5 million per day. Therefore, if we wished to have an extra 25 days' stocks on Irish soil it would cost at least £80 million. The companies are understandably reluctant to  incur such costs and retention of operating refining capacity partly reduces the scale of such stocks and the urgency of providing them in full.
Ireland's only oil refinery, at Whitegate, County Cork, commenced operations in 1959 under the joint ownership of Esso, Shell, Texaco and BP. It operated for several years from start up under an element of protective duty. Total refining capacity is 2.77 million tonnes per annum which, at current consumption rates, represents over 50 per cent of the Irish oil market. Last year the four companies advised the Minister for Industry and Energy of a decision by their principals to close the refinery permanently. Their decision was on the grounds that the operation of the refinery was resulting in substantial costs as compared with a situation where they would be free to import all their requirements. Processing at Whitegate ceased in June 1981. The owners envisaged retaining the tank farm at the refinery as a storage depot to meet stock obligations and as an operating terminal for the south and west of the country. This would require the retention of a relatively small number of personnel. There were about 155 direct employees of the refining company and an additional 150 employed in ancillary services such as tug-boats, fire watching, pilotage and a coastal shipping company which was substantially dependent on the refinery.
As the absence of operating oil refining capacity is considered unacceptable on strategic and other grounds, discussions with the refining companies pursued the possibilities that some mechanism be found to meet the dis-economies which they saw in continuing to operate Whitegate. It became quite clear that the companies' decision to abandon refining at Whitegate was irrevocable and that, if the Government's objective of retaining a minimum strategic refining capability were to be preserved, the State would have to acquire and operate the refinery. The subsequent events in this matter have been widely publicised and I do not think it is necessary for me to say more than that the previous Government shortly before going out of office, took a decision in principle to purchase the  refinery. Final negotiations were concluded with the owners of the refinery and the present Government, on assuming office, confirmed the decision to purchase.
On 1 April last the Dáil approved a Supplementary Estimate for the sum of £10 million to cover the purchase price, refurbishing costs and other costs arising up to the start-up date. The planned date for resumption of production is early next month and, as is known, the refinery is being owned and operated on behalf of the Government by the Irish National Petroleum Corporation.
When it became clear that the four oil companies which jointly owned Whitegate were not prepared, and could not be persuaded or induced, to continue operating the refinery, and that the only basis for continuing operations would be under the aegis of the State, consideration was given to the manner in which off-take of products from a State-owned refinery could be disposed of. This matter was discussed at considerable length with the companies marketing oil in Ireland with a view to finding out whether a system of voluntary off-take of products would command general support.
It was, of course, recognised by the industry that it would be unacceptable, both in operating and economic terms, to envisage a system whereby the State would operate the refinery but would have no assurances that the products would be taken into the Irish market. If that extremely risky course were adopted, products from Whitegate would have to be offered for sale at prices which would be competitive with the lowest prices prevailing on the international spot market. Notwithstanding that the marketing companies themselves, for the security of their own supplies, would have to rely on term contracts rather than the spot market for the larger share of their suppliers, no assurance emerged in the discussions that the companies would off-take from Whitegate other than on a marginal basis; indeed bearing in mind the relationship between the Irish marketing companies and their UK supply companies, there could be no guarantee of off-take from INPC ex-White-gate  at any price. In times of glut, such as we experienced recently, spot prices for products could be lower than the official price of crude oil being put through the refinery. Such a situation would be totally incompatible with an operation designed to provide the Irish economy with a minimum level of refining capacity in the interests of national security.
While there was some recognition of this position by the oil marketing companies, they expressed strong concern that any off-take arrangements introduced should operate equitably across the board so that there would be no question of some companies having freedom to opt out while others might be disposed to co-operate. It was clear that the criteria of general application of off-take obligations and equitable operation of the arrangements involved could not be achieved unless there was a statutory backing to the arrangements. The companies which formerly owned the refinery and the other oil marketers were, therefore, aware that a decision by the Government to purchase the refinery would entail a system of equitable off-take of Whitegate products, backed by legislation.
The mandatory off-take concept has been considered at length by the Attorney General both in relation to Irish law and EEC obligations. There have been also a number of detailed discussions with various divisions of the EEC Commission. The best advice available to the Government is that, taking due account of the position in domestic legislation and of our obligations in the EEC context, the Government are entitled, in the interests of national security, to take steps provided for in the Bill now before the House. In relation to the Treaty of Rome, Article 36 clearly entitles a member Government to take exceptional measures to protect essential aspects of national security. The House will be well aware that, in the decision of both the previous and present Governments to acquire the refinery, this criterion of national security was very much in mind. International events of recent occurrence have, I need hardly say, strongly underlined  the importance of having within our jurisdiction refining facilities to meet at least our basic national oil requirements in an acute emergency.
Senators will naturally be concerned about the legal basis of the Bill and they may be asking me to provide categoric assurances that this cannot be challenged. The Bill and, indeed, the 1971 Act, are largely enabling measures. The provisions of the Act have been invoked a number of times over the years and the changes proposed in the Bill do not alter the essential nature of the legislation. In the circumstances, there appear to me to be no grounds whatever for reservations about the Bill in relation to domestic law or EEC requirements. If any substantive legal issue arises it would appear to relate to the action proposed to be taken under the Bill.
In this regard, since both national and supra-national courts have jurisdiction, nobody can provide cast-iron guarantees. However, I repeat that the best advice available to me and to the Government is that the measures proposed are in accord with relevant law and EEC obligations. An off-take regime is an essential element of the totally legitimate objective of maintaining an operation refinery to cater for our minimum emergency oil needs.
The purchase and operation of the refinery and a satisfactory system of equitable off-take of products are not separate concepts but are interdependent elements of one strategy. The Bill is, therefore, a necessary extension of the decision to purchase the refinery on grounds of national security, a decision on which there is a large measure of consensus.
As regards the use of the Fuels (Control of Supplies) Act, 1971 as a basis for the mandatory off-take regime, the Attorney General has advised that it is an appropropriate instrument on which to base the regime, subject to certain amendments of that Act. The Bill now before the House incorporates these amendments.
I had considered that, if it became necessary, an alternative approach to the mandatory off-take obligation would be  to make a wider order under section 3(2) of the Act, as amended, under which companies would be required to submit a supply plan for their supply proposals to the Irish market for each period of 12 months ahead. Part of this supply plan would embrace the requirement that the proportionate level of product, as proposed above, would be drawn from the Irish refinery; secondly that broad information would be given on the sourcing of the remainder of their supplies being imported, on the balance between term contract and spot supply in the latter, on the guarantees lying behind any over-dependencies on supply from one country or one company in one country, on the acceptability of any restrictive agreements compelling supplies to be drawn from particular foreign companies and on the arrangements for stock holding. It could be a feature of such a plan, under statutory order, that a marketing licence would be required and that the grant of such marketing licence would be conditional on observance of the requirements of the approved supply plan.
I am aware that at least one other European country has felt it necessary to adopt meaures of this kind in the interests of ensuring central control over security of supply. The approach has merits and I would not rule it out as something we may wish to consider in certain circumstances. However, my present view is that in prevailing conditions such measures might be considered as going beyond what was essential. I have, therefore, opted for the more limited approach which I have outlined because it is my opinion, and I am sure the oil industry would agree, that intervention in the operation of the market should be confined to the minimum necessary to achieve the limited objectives which State acquisition of the refinery is intended to safeguard.
Measures introduced by Governments in various parts of the world to cushion their populations against the ever-present risk of a serious disruption of supplies on the international oil market frequently go beyond what would be considered normal commercial criteria. Perhaps the most widely-known measures are obligatory  oil storage conditions to which I referred earlier which operate in almost all oil-importing countries including those in the EEC and the more widely representative International Energy Agency. Under these storage regulations, oil trading companies are required to make arrangements, which involve costs of various kinds, to maintain stocks of oil to meet at least 90 days' requirements and these measures need not take account of whether or not the stocking levels and locations of the stocks would be considered by the companies to be necessary or desirable on strictly commercial grounds. Both the previous and present Governments have concluded that, like strategic stocks, a minimum capacity for domestic refining is important on grounds of national security.
I have no doubt that most Governments in Europe, or indeed elsewhere, if faced with closure of 100 per cent of their national refining capacity, would take a similar view even though continental countries would not have the additional risk factor which applies in our case as an island economy. I would emphasise, however, that I am committed to ensuring that the entire off-take regime, both as regards quantities and applicable prices, will be operated with the greatest degree of fairness and equity that will be humanly possible in administrative terms. It there is a limited burden, in terms of dis-economies of refining at Whitegate or of inconvenience, to be borne by the oil industry to maintain a minimum limited strategic refining capacity, I will make every effort to ensure that this is fairly shared by all concerned.
The dis-economies of operating at Whitegate, as compared with importation of oil products on the most favourable terms available on the open market, arise for a number of reasons. First, there are physical limitations. The maximum size of ships which can gain entrance to Cork harbour, and therefore Whitegate, is such that transfer of oil from larger crude carriers at sea to smaller vessels is necessary. In addition, Whitegate is further from the main markets in the Dublin area than are certain refineries owned independently by the major oil companies  at Pembroke and Milford Haven. The major factor which contributes to the dis-economies of Whitegate is the technical nature of the refinery which yields between 45 per cent and 55 per cent of its output in heavy fuel oil, compared with less than 30 per cent in refineries with more modern technology. Fuel oil is a relatively low-value product and the present market for it is vulnerable as a result of the switch to coal for electricity generation and heavy industry and the effects of conservation measures.
There are certain investments which can be considered to up-grade the facilities at Whitegate so as to produce a better yield of the higher value refined products. There are certain stages of up-grading which can be considered and which vary substantially in cost and there are technical options within some of these stages. At the moment, the efforts of the INPC are being concentrated on getting the refinery back into efficient operation on the basis of its present technical capability. I can assure this House that, in association with the INPC, I will be examining urgently and critically the technical advantages and economic feasibility of all the options available for up-grading. While I am not at this time putting forward specific proposals for up-grading I can say that arrangements are being made to reduce the lead content of petrol produced at Whitegate without having to continue to depend upon our derogation from the EEC directive in that regard.
Given that there are dis-economies associated with operation of the refinery, the question arises as to how they should be treated. The decision of the previous Government in this regard has been confirmed by the present Government, that is, to have the refinery operated on a cost-recovery basis. This approach of cost-carrying by oil users is seen as more appropriate than one involving a direct subsidy. The prices proposed to be charged by the INPC to its customers will therefore recover capital, crude oil acquisition, shipment and storage costs and, of course, the operating costs of the refinery. At first, the cost disadvantages as compared with the present 100 per cent  importation of products may be of the order of one to two pence per gallon on all oil products sold in the country. I am not in a position, at this time, to suggest what effect this may have on the price of particular products such as petrol or diesel. It will be appreciated by Senators that this will depend on a number of factors some of which are related to ongoing discussions with the trade on the offtake arrangements and, of course, the inter-play of competition in particular market sectors will affect the issue. I must, indeed, emphasise that any calculation of the dis-economies is only valid at the time it is made because of the volatility of conditions in the oil market. There is a reasonable expectation that, in time, the dis-economy can be reduced.
The current oil market surplus, with depressed market prices, which has caused losses even on the part of modern refineries, is beginning to diminish, and already market prices have begun to rise. In these circumstances the gap between the Whitegate prices and the prices of imported refined products is reduced. Another factor which may help to reduce the dis-economy is price of the crude oil being processed at the refinery. The Irish National Petroleum Corporation will have at least three separate sources of crude oil. Two of these sources have already been arranged, namely Saudi Arabia and British North Sea oil. At first there will be a high proportion of Saudi Arabia crude oil processed at the refinery. In the current oil market situation this crude oil is relatively expensive but in time the Corporation will be expecting to achieve some economies in their crude oil procurement, having reasonable regard to the objective of supply security.
The proposed offtake regime will operate on the following lines. All oil importers, including undertakings which import directly for their own consumption, will be obliged to purchase a proportion of their oil product requirements from the refinery. For two major reasons an upper limit on this obligatory proportion will be set. This upper limit, roughly matching the minimum operating level of the refinery and representing about 35 per cent of the Irish market, will minimise  the burden on the economy generally and on the oil companies, while any dis-economy exists. Secondly, in discussions with representatives of the EEC on the compatibility of the proposed regime with the Treaty of Rome, it was suggested that such a limit was desirable as indicative of the minimum strategic national requirements in an acute emergency situation. There may be scope for operating the refinery with improved economy at higher levels of throughput without adversely impinging on the mandatory offtake arrangements, and this will be fully explored by the INPC.
The INPC are currently engaged in discussions with the oil industry on the methodology of implementing the off-take arrangements. In general, it is intended that the amounts of Whitegate oil products to be taken for each quarter will be based upon data provided by the companies in respect of their sales or requirements in the preceding twelve months. I have emphasised to the INPC that the arrangements should be agreed as far as possible and should be as flexible as possible, consistent with an equitable operation of the scheme. It should be possible to agree arrangements to cover such situations as where the allocated quantity of a product might be unrepresentative of the importers' anticipated requirements or where the lifting of an entire allocation of any product in a particular quarter might create special difficulties.
Apart from the trading companies, there are certain major oil users who import their requirements directly and in bulk, mainly supplies of heavy fuel oil. There may be about a dozen of these large oil consumers, and it would be necessary to make appropriate arrangements for these within the general scheme. Because of the effects of oil prices on the costs and competitiveness of Irish industry, the price to be charged for the Whitegate proportion of their heavy fuel oil requirements will be an important consideration. Although final prices will not be known until the arrangements are further advanced, I will be concerned to ensure that the heavy fuel oil price will be pitched at a level which would not give  rise to significant difficulties for Irish industry, both those who have direct import facilities and those supplied through the national distribution network.
I would now like to deal with the major provisions in the text of the Bill. The 1971 Act enables the Minister for Industry and Energy to control the supply and distribution of fuels whenever the Government are of the opinion and declare that the exigencies of the common good so require. The legal opinion is that the words “supply and distribution” must be read together. This description therefore is unsuitable for the offtake regime as it is not proposed to control the actual distribution of oil. The Bill therefore provides for the amendment of that description where it appears in the Act to read “acquisition, supply, distribution or marketing”. The word “acquisition” is inserted in order to make certain that the purchase obligation is comprehended in the Minister's powers. The word “marketing” is also inserted since it is a relevant aspect of the operations involved in getting Whitegate products into distribution. With the inclusion of these amendments the Minister will, while a Government order under section 2 is in force, be in a position to make an order under section 3 applying the Whitegate purchase obligation to oil importers. Such a Government order, made in 1979, has been kept in force by continuance orders in view of the instability of the oil market since then.
Included in the amendment of section 2 of the Act is an extension of the maximum periods of operation of Government orders and of continuance orders from six to twelve months in each case. A period of six months is considered inadequate for oil supply planning, particularly in relation to the disposal of products from Whitegate refinery. The Bill also includes new provisions which may be of assistance in administering the offtake regime. One such provision may enable the Minister to require a person to furnish relevant information to him in order to enable him to implement an order. There is also provision for the authorisation of officers to inspect premises,  obtain information, examine and take copies of documents and so on. The other provisions of the Bill are the updating of the construction of the penalty provisions and an amendment of the definition of petroleum oils in order to ensure that stocks of oil in retailers' premises are included. There has been a legal doubt as to whether such stocks are covered in the existing definition.
I now commend this Bill to the House. I emphasise again that it is an essential consequence of the decision to retain refinery operations at Whitegate. I believe that Senators will concur in the view of successive Governments that every prudent step must be taken to maintain and improve our ability to safeguard the public and the economy against the worst effects of an acute oil supply emergency.
Mr. Durkan Mr. Durkan
Mr. Durkan: I welcome the Bill. I thank the Minister for his very comprehensive address. That is something very often lacking in relation to Bills before this House and I thank the Minister for going to the trouble of covering the Bill so adequately in his address.
It was necessary to take the steps which are now being taken because otherwise the Whitegate oil refinery would become obsolete. We are all aware of the necessity to ensure that we can process as many products as possible at home and thus give employment to our people and be able to have some control over the supply in this case of very essential fuel. We have over a number of years had unfortunate experience of what can happen when problems arise whether it be difficulties in distribution or otherwise, and the community has suffered as a result. In most cases it has been as a result of difficulties which exist outside the bounds of this State but at least in this case the State is taking action which should result in ensuring that once the crude supplies arrive here we will be in a position to refine them and make them available to the Irish market.
I hope that as a result of this Bill and as a result of the trading difficulties experienced by Whitegate in the past  there will not be an increase in the cost of fuel supplies to the Irish consumer. If that were the net result the Bill would be counter-productive. The Minister has already covered this in his speech and he has set aside sufficient contingency plans should such a situation arise. At the same time it is no harm to point out this possibility at this stage. In the Minister's speech there is information which is very heartening. He says:
Today, oil still accounts for the major proportion of Ireland's energy requirements although the impact of Kinsale gas and increased use of coal have reduced this proportion from 75 per cent in 1978 to 63 per cent in 1981.
It is a relief to the economy and to the people of the country generally that this information is available. It will cause industry generally to be more at ease knowing that we are not as dependent as we were on one source of supply. Refining difficulties were experienced by Whitegate and there were difficulties with regard to the economic running of the refinery. I would agree with the decision of this Government and the previous Government in relation to the acquisition of the refinery, but I would emphasise that if it were found at a later stage that these difficulties were to arise again and that as a result, the cost to the consumer would be increased, then further attention would have to be given to ascertaining by what means we could circumnavigate that problem.
It is essential that we have control of the distribution of supplies once we get the crude supply into the country as opposed to waiting for an end to some kind of strike or international shipping difficulties. We could arrive at a situation when supplies would not be available and that might be outside our control to a great extent even at this stage. Even the best-founded plans can come up against unforeseen difficulties. While we will have 90 days' stock at all times we will still have a situation to some extent outside our control when if large tankers found that it was not possible for them to deposit their crude supplies with us, we would still be in the same position as at  present. That is unfortunate. I am sure the Minister and everybody else will endeavour to resolve matters of that nature.
I have already referred to the employment content. It is important, particularly at this time when we have a recession, that the Government is taking a decision showing that it has a certain amount of belief that a sector of an industry has the power to survive. By introducing this Bill the Government is showing that it has confidence that that sector can survive. It is most important at the moment to be able to indicate that we have confidence in industry and in society in general as regards survival. It is most important because there is a grave danger in times of depression and recession that the impression might go abroad that we are not capable of surviving.
This Bill serves to underline that we are capable and that the Government are putting their money where their mouth is and are attempting to give good example. I wonder if the time has come to try to ensure that we can provide stock which will last somewhat longer than at present. I know there are all kinds of difficulties inherent in such a proposal. One would have to have more sophisticated refining techniques and perhaps greater investment. Despite what was said in the Minister's speech, modern requirements should serve to indicate the need for greater stock-piling of such products here and would also serve to cushion the consumer against sudden price rises. We do not want a repeat of the situation we had a number of years ago when supplies that were already in storage tanks in the country, for which lower prices had been paid by the oil companies, enabled them to gain a fairly substantial windfall. We would not have a repeat of this if we could ensure that supplies on hand for some considerable time were sold off at the same price at which they were acquired, or at least on a sliding scale to a new price when an increase takes place or, alternatively, when a decrease takes place.
The Minister mentioned two sources of crude oil supplies, one from the Middle  East and one from Britain, the North Sea. I wonder, in relation to the third source, what that source of supply will be and when it will be named. Perhaps the Minister might go a bit further on that. The Minister said:
Therefore, if we wished to have an extra 25 days' stocks on Irish soil it would cost at least £60 million.
On my copy of the speech it is £60 million, I thought the Minister said £80 million.
Mr. A. Reynolds Mr. A. Reynolds
Mr. A. Reynolds: It is £60 million.
Mr. Durkan Mr. Durkan
Mr. Durkan: The last point I will make is in relation to safety standards. It is something which needs to be heavily underlined in relation to refining and the collection and distribution of anything even remotely associated with oil or gas. We have had unfortunate instances in the past where a very high price in terms of human life was paid purely because the standard procedures in relation to safety were not observed. It is absolutely essential that the Minister insists on the highest possible safety standards in relation to the conveyance of crude supplies, the refining and the eventual distribution of all oil supplies whether they be refined or crude. Again I would like to thank the Minister for his very detailed introductory speech. Such introductions do not always accompany Bills in this House. As a result my job is much easier and I hope that ultimately his job will be much easier.
Mr. J. Daly Mr. J. Daly
Mr. J. Daly: When fuel oil came from Whitegate previously when it was opened it had a very high sulphur content. The result was that it was very damaging to diesel driven cars. It was very expensive for the owners of diesel cars because they had to change their oil filters at every 5,000 miles and change their lubricating oil at every 2,500 miles whereas they would normally change the lubricating at 5,000 miles and the filters at 10,000 miles. One company, the Jet Oil Company, have complied with the EEC standards. All other companies have the high sulphur content which is very injurious to diesel cars. Diesel cars are now becoming  very popular because of economy. I would like the Minister to ensure that when the diesel starts to flow again from Whitegate the sulphur content will be kept to the EEC levels.
Minister for Industry and Energy (Mr. A. Reynolds) Albert Reynolds
Minister for Industry and Energy (Mr. A. Reynolds): First of all, I would like to thank the Senators who have contributed. Also, I would like to thank them for their very kind and courteous remarks in relation to the handling of this Bill. It is always my intention to supply the maximum amount of information for Senators on any Bill. As Senator Durkan rightly remarked, it leaves the job much easier rather than having to drag the information out of somebody. It is better to have it presented in the first place and it leaves everybody in a better position to appreciate what is involved in any particular Bill. The first question Senator Durkan asked was about the third source of supply. At the moment, as I said in my speech, two major sources of supply representing a third each of the requirements of Whitegate come from an existing contract with Saudi Arabia which, incidentally, in recent times has been one of the most expensive crude sources around because it was set at $34 a barrel. While a glut of supplies has existed from many other sources the Saudi Arabians, as the mainstream of the OPEC regime, kept their prices up high. There will be a fair amount of Saudi Arabian oil in the initial stages at Whitegate because of the existing contract. The second source, representing approximately one third, comes from North Sea Oil.
Part of the third source will be left flexible so that the INPC will be able to take full advantage of any fluctuation in the market. If there is a very low spot price they will be able to get the best possible mix. The aim is to get the best possible mix and at the same time ensure that we have secure sources of supply. That is really where the third source is. It may come from three or four different places, depending on the best and cheapest sources in relation to the quality of the crude that can be supplied.
On safety and maintenance standards,
 I want to take this opportunity of congratulating the staff at Whitegate. I visited Whitegate and the first thing that struck me after entering the premises was that they were European award winners of safety standards. It has been kept at a very high safety standard level. It is a compliment to the management and staff there. The House can be fully assured that those safety standards will be maintained. The maintenance standards too, have been of a very high standard, even more so than when the consultants examined the refinery on behalf of the Government. They put the lifespan, based on their assessment, at something around five or six years. Since the Irish National Petroleum Corporation took it over a full assessment has been made. It is ready to go back into operation in August because of the maintenance and because of the spending of reasonably modest sums on refurbishing and doing certain other jobs. It has been possible to confirm that the lifespan of the Whitegate refinery will exceed ten years and more likely reach about 15 years, provided that the high standard of maintenance continues.
We are bringing lead content down to EEC levels and we do not need to keep the derogation that we have in that respect at the moment. The Senators will be aware that the high lead content coming out of Whitegate was of great concern to environmentalists and many others. We were always led to believe that it would cost a considerable amount of money to reduce it. I am glad to say that the INPC, with the spending of a modest sum of money, can reduce the lead content.
The sulphur content mentioned by Senator Daly is a factor of the source of crude supply. It has little to do with the refining in Whitegate. I would point out that North Sea Oil has a very low sulphur content. There are other sources of crude which have a very high sulphur content, but it is a factor of the sourcing and it is one that we have in mind. The INPC are very conscious that somebody driving a diesel car or diesel truck on the Continent can come over here with a different sulphur level in the vehicle and find that it  does not operate as efficiently as it should. In some cases it does not operate at all. I have personal knowledge of this happening. I know that Senator Daly, who is in the trade, probably had the same in mind when he raised this problem here. It is a factor of the source of supply. INPC are well aware of it. We want to keep it as low as possible, but in regard to the sources that are already supplying Whitegate there is no need for concern.
Basically, these are most of the questions raised. There are a few other items I was looking at while I was listening to the debate. It would be no harm to put them on record if Senators would bear with me for a few moments. Originally, this was an extremely important and difficult decision for any Government to take. If you want to take the pure economic argument on this then it is very doubtful if you would come down on the side of purchasing Whitegate. As we know there are other arguments involved. One has only to cast one's mind back to 1979 when everybody was queueing madly at petrol pumps around the country, and if petrol could be got at any price they were prepared to pay any price for it. We have only to cast our minds back to what the supply situation heretofore was, look at the world today and look at the Middle East. There are two wars going on there and one has to be conscious of it. It is a very important element in the strategic supplies to ensure that the lifeblood of the economy, which is oil, is intact, especially in an acute emergency. That is basically why the decision comes down in favour of buying and operating Whitegate.
There is a feeling abroad that this decision, because it was made so close to election date, was a function of an election propaganda on one side or the other. This is far from being the case. I would not like anybody to think that anybody was playing politics with it. It was a decision taken in principle by one Government and it finally fell to me to carry it through. The previous Government had a deadline for a decision by the companies after they decided to close last summer. The first deadline was set by the companies in October 1981, three to four  months before any question of an election was in the air or even a prospect of one. Considerable effort went into persuading the companies to try to extend the deadline for a further period. An absolute guarantee had to be given by the previous Government, including an indemnification by the Government to the selling companies against any further expenses or financial outlay in order to gain this extension of time. The decision was taken and the final date was allowed to the Government. That was the basis on which the decision was taken and no other.
It was an extremely difficult decision. There has been an extensive volume of comment by public representatives and by media analysis and commentators for over 12 months into the pros and cons of this decision. Those opposing the decision to buy take an understandable, though, in my view, an over simple, line of argument. They argue simply that supply security in this country is no longer pressing. Evidently 18 months of sufficient supply in the world markets and some easement in prices are to them sufficient evidence to enable them to reach that conclusion, notwithstanding the enormous volatility of the oil market and the very unsettled state of affairs within OPEC and the uncertain state in the Middle East as well. As the continuing tensions in the Middle East clearly illustrate to us today, we can no longer come down on that side of the argument.
Secondly, those people are prepared to rest content in a situation in which we would have no refining capacity, no early increase — by that I mean within two, three or four years — in stocks of products in this country. They would appear to be content absolutely with a supply line to this country almost totally from one other country with all the risks attendant on such a supply line, not only of labour and shipping difficulties but indeed also of shortage of supply, even temporary in any country, which might cause the withholding or restriction of supplies to this country.
Those holding this simple view think and speak as if the supply to the Irish market was procured and would continue  to be procured by the main Irish marketers, the four large companies, and a number of smaller ones in total independence of the corporate structures to which they belong internationally. They believe that supplies would come at best prevailing prices from best European and other sources. This is not the case. These companies are in the main, if not totally, a part of the UK oil refining and supplying industry and of their parent companies there. There is nothing wrong with that, but it suggests a degree of further dependence concentrated on one single supply source, which increases risk. There have been known delays of up to three or four weeks in procuring the release of restrictions for shipments from these sources in recent years when there were threats of difficulty. It is only a very short time since customs officials in the UK chose to restrict exports to this country in the process of an industrial dispute.
The same commentators seem to leave out altogether the fact that the INPC were brought into existence by a deliberate decision of the Government in 1979 for a particular purpose. That purpose was to meet a situation, not of this Government's choosing, whereby the main oil producing states were showing a strong preference for dealing on a state to state company basis in their crude oil and other oil products.
There were clear signs, perhaps slightly less now but still significant, that these countries would continue pressure to market a growing proportion of their output through their own state companies and would supply, as a matter of preference, to importing state companies such as the INPC. Very many European and other countries have brought into being state oil companies for this and other very often admittedly productive reasons. INPC's role was to set up relationships and contracts with these state producing companies and thereby try to ensure that if cuts were made in supply to the private international marketing oil companies at least such cuts would not be made to state owned oil companies.
There is no reason known to me or to  the Government which would cause us to depart significantly from that line or point of view. It still remains valid. It is a brave commentator who would assert that we can now confidently leave that logic behind. The INPC therefore intend to procure oil supplies by contracts widely placed with several such producing countries and to ensure the lay on of these supplies in the Irish market. Because the marketing companies control the downstream to retail level of the market here the Government and INPC were content to reach an understanding with the marketing companies to put the product into the Irish market from such contracts through the systems of these oil marketing companies here.
Thirdly, in a situation in which the oil companies themselves, through their international corporate structures are in production refining and marketing integrated systems it was not felt necessary to increase the INPC share of procurement which they were endeavouring to put through the oil marketers' own system beyond a modest level. This modest level was set at a level which would give the INPC a reasonable impact on security of supplies on the one hand, a reasonable standing with the companies to whom they were providing it side by side with such companies' own direct integrated imports, and an experience and an ability to extend their activities as skilled people should state to state trading be a growing requirement in the future.
Members of this House, and indeed any commentators who profess a deep interest and concern for the safety of our economy, will accept that these were very reasonable lines of approach and reasonable lines of argument. While supplies were tight and prices tending to rise INPC supplies were welcome in the market. It was the experience over a year-and-a-half ago that the minor companies in particular were pressing for a guarantee of 100 per cent supplies for INPC and even wished to enter into long-term contracts to ensure this 100 per cent. Now that the supply situation and price situation have eased companies naturally wish to return to spot and other types to avail themselves of the temporary advantages which  undoubtedly exists. The Government, however, cannot plan and operate on what is an understandably commercial posture for an oil company or any other company trying to maximise their own self-interest. Not only that, but there have been growing difficulties for the INPC in achieving sales in the Irish market on a voluntary basis. Anything other than marginal supplies are virtually spot prices. All marketing companies naturally prefer to buy along their own integrated channels and some of them may not even have the freedom to do anything else.
INPC mainly dealt in crude oil contracts, refined it, admittedly at foreign refineries and put it into Irish market or systems here on a voluntary basis hitherto. The foreign refining was caused by the fact that neither the quotation nor the yield offered by the then owners of the Whitegate refinery was satisfactory to INPC. As I said yesterday, the processing cost expected at Whitgate in the future is confidently believed to be lower per barrel than the processing quotation which had to be got at any other European refinery at the time INPC were trading as a trading company only. That is not to say that there is not a dis-economy.
The dis-economy will be in the additional cost of processing itself which, as I have said, is expected to be lower but in the divide of the barrel of crude into a higher proportion of heavy fuel oil than a more upgraded refinery would give. It is there the main dis-economy of Whitegate is and will be until such upgrading can be made as will abate that significantly or until the relativity of heavy fuel oil price to crude and to other lighter products in the barrel improves. The present situation is a totally abnormal one which may, indeed, persist for some time.
Because questions continue to be asked as to what extra security Whitegate confers I have to say that the extra security exists in a couple of principal strands. First of all, INPC can continue to buy crude, bring it directly to Cork and refine it there. They can store it there also and refine it later. They will have the crude contracts which it is hoped will survive  any cuts or any other changes. It will avoid the risk of doing what the INPC could otherwise do, that is, procure the crude, ship it to European refineries, store it and refine it there and then ship the refined product to this country where and when it is required.
This broken chain of supply and the difficulty of integrating the crude through the system of other refiners, and doubling of the shipping difficulties and the delays, is not an attractive route. Two, three or four weeks disruption, even of 10 per cent of supply, within a modern economy could totally ruin us. Commentators who take a different view must have already forgotten the miles of queues, loss of work hours and risk of civil disturbance in the streets which touched us within the last few years on two occasions.
Lastly, there is a point that in procuring crude and being able to import it directly and refine it up to a modest ceiling within which I am pledging to act on a mandatory basis there are undoubted additional safeguards against a further aspect of disruption, that is the risk and fear of a shortage of supply. It can cause prices to rise inordinately, and these price hikes are enormously damaging to any economy. Both the EEC and the IEA have seen stock and security of supply as having a significant role to play in avoiding unwarranted price increases and disruption of economies.
That brings me to stocks, which are worth mentioning at this point. Again, comments made yesterday assert that the alternative to operating Whitegate is simply an increase of stocks on Irish soil. I am prepared to admit and recognise that if there was a significant increase in stocks we would have a great cushion against several months of shortage. The real situation, however, is that we do not have, even as of now, on Irish soil the 90-day mandatory requirement of the International Energy Agency or of the EEC, that 20 to 25 days of this is and has always been stored at depots abroad under agreement with the companies by certain foreign Governments. That, of itself, while good, is not a perfect situation. It is a long-term objective to have these repatriated. Indeed, I as Minister would  be happier if they were already repatriated, but even that repatriation would not be enough. A further ten days or thereabouts would probably be essential. The cost of such extra stock on Irish soil would be enormous and would outweigh the cost of operating Whitegate with the potential procurement of crude from different sources even at lower stock levels which that operation at Whitegate would make possible.
Every aspect of this entire question was explored with them over the past 15 months and no company were willing to increase stocks on Irish soil. In fact, their commercial instincts prompted them, as they have said, to reduce stocks further. Secondly, the cost of the construction of tanks would be around £40 million. No company expressed agreement to do this. They wanted a State central storage pool and this would require three to four years to build at the cost I have already said. These facts are worth putting on the record. A loss of Whitegate would be premature until we know if we have an Irish oil find. I think there are reasons to be cautiously optimistic. That is another valid reason for having held Whitegate apart from the cost. When one compares the economic costs of buying and keeping Whitegate against what it would cost to replace the storage we would need on Irish soil there are many valid reasons for having taken the decisions we have taken.
It strengthens the hands of INPC. It gives them a stronger hand in the market place in negotiating contracts. If they can be successful in balancing the two-thirds of security of supply with one-third at right prices there is no reason to believe that, as the consultants put it, in a period ahead the dis-economies of Whitegate cannot be reduced. There are investment options to be looked at. The first one will be in the region of 17 million dollars which will give us a higher output of lighter fuel and less heavy fuel costing approximately 17 million dollars which would have a pay-back period of about two years which, in economic terms, is worthwhile. The next stage could be a coking plant which would give us an even  higher output of higher grade product and involving a pay-back period of approximately three years. Those are the options that are there. I feel the right decision has been made and I think this House agrees with it.
Question put and agreed to.
Agreed to take remaining Stages today.
Bill put through Committee, reported without amendment, received for final consideration and passed.
Seanad Éireann 98 Fuels (Control of Supplies) Bill, 1982: Second and Subsequent Stages.