Coal Liquefaction

Petition – in the House of Commons at 9:38 am on 22 May 1981.

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Motion made, and Question proposed, That this House do now adjourn.—[Mr. Wakeham.]

Photo of Sir Anthony Meyer Sir Anthony Meyer , Flint West 9:40, 22 May 1981

I am grateful to you, Mr. Speaker, for giving me the opportunity to raise the question of the programme for extracting oil from coal. The programme is one for erecting two pilot plants at Point of Ayr colliery, in my constituency, each processing 25 tonnes of coal a day, one by the method known as the liquid solvent process, which dissolves coal in a liquid solvent at 400 degrees—the solvent being itself a product of the process—and the other by a process that is unique, where the solvent is a gas in a so-called super-critical condition. Once again the gas is itself a product of the process.

The pilot plants will be applying a process that has been developed at the National Coal Board's research establishment at Stoke Orchard. The cost of the programme, which will be about £60 million, will be borne only partly by Her Majesty's Government. The Coal Board will provide some of the funding from its own resources and some money will come from the European Coal and Steel Community. I am convinced that it will be possible to get much more than the £3 million or so that has been promised from the latter source. It is the type of project in which the European Community traditionally takes an active part and provides the very mechanism that we want for getting a larger contribution to our budgetary requirements, and interest is also being shown by BP and perhaps by other oil companies. The Government's contribution is important as much because of the encouragement and reassurance that it will give to the other potential investors as it is in itself.

I raised this matter on 24 November 1980 and I make no apology for raising it again so soon. It is of great importance to my constituency and to the nation's future. It is because the matter is so crucial, and because it is vital that the project should be right from the start, that I felt unable to sign the early-day motion in the names of the right hon. Member for Barnsley (Mr. Mason) and others, which seeks to censure the Government for their so-called vacillation in not pressing ahead with the coal liquefaction project. Of course I am keen to get an early answer, and I agree that the delay is harmful, but I am much more concerned to get the right answer. Delay will be a lot less harmful than a negative decision. I hope, therefore, that my hon. Friend the Under-Secretary of State will not feel that he has to give me a definitive answer today unless he can give me the one for which I am hoping.

The importance of the project to my constituency lies not only in the number of jobs that it will create. More than 300 will be created during the three-year construction phase and 130 during the subsequent three-year operating phase. Unemployment in the Rhyll area is now an appalling 21 per cent. and is still on the way up. Clearly, the need for jobs is desperate. It is every bit as desperate as it is in some regions of the United Kingdom that scream more loudly about their unemployment problems. We have had the largest single closure in Western Europe with the shut down at Shotton, and we have had massive layoffs due to Courtaulds streamlining its operations.

Even more important than the number of jobs that will be created is the fact that during the operating phase there will be the availability of high technology jobs. In the coastal area of North Wales there is a famine of such jobs, which alone can provide a worthwhile goal for the brightest of our school leavers, in the absence of which they tend to drift away from the area, thus perpetuating the vicious circle of a lack of skilled manpower leading to a lack of job opportunities. I see the pilot plants at Point of Ayr providing a focus of revival that will spread throughout North Wales. The 130 jobs will have an impact on the area's level of economic activity that will be out of all proportion to the number employed on the project.

The devotion of my hon. Friend the Under-Secretary of State to the coal industry has won him admiration and respect from both sides of the House and throughout both sides of the industry. I know that he has been fighting a gallant battle for the project; a battle not merely to get it, but to get it right. To some extent he has had to do battle with the Treasury.

It is rather too easy to blame the Treasury for making false economies, for cutting public expenditure in such a way as to increase the need for public expenditure a few years hence, quite apart from the damage done to the industrial strength of the nation and its ability to provide jobs and a decent standard of living as a result of cuts in industrial development. On this issue I find myself very much at one with the recent speeches of my right hon. and learned Friend the Member for Hexham (Mr. Rippon) and my right hon. Friend the Member for Taunton (Mr. duCann).

It is all too easy to charge the Treasury with making false economies when it has to make real economies if inflation is to be held and interest rates kept down. As real economies are every bit as unpopular as false ones, those of us who believe in controlling inflation and keeping down interest rates have a duty to give general support to the Treasury in its determination to contain public expenditure. However, having said all that, it would be a profound mistake to withhold Government participation in this project, participation that is essential if it is to attract the other outside financing that it needs, on the ground that the whole thing could be done more cheaply elsewhere. I am sure that it could, but there are other considerations that should weigh equally heavily.

I regret the manner in which the correspondence between the Department of Energy's chief scientist and the chairman of the National Coal Board was communicated to the press. I understand that Ministers feel that that sort of thing makes it much more difficult to have sensible discussions with the NCB that will lead to the best possible outcome. Now that the correspondence is public I cannot but refer to it. I think that the NCB has had the best of this argument.

A good deal turns on the assessment of the date by which the United Kingdom will cease to be self-sufficient in oil from conventional sources. I find it hard to believe that Dr. Challis is right when he puts this as late as after the year 2000. On a number of occasions the Secretary of State has spoken of 1990 as being the date by which our self-sufficiency will begin to wilt. If that is nearer the probability, surely we must take steps now so as not to be at risk of having to buy this technology, or its products, from abroad. If any revival from the world recession is in prospect, and surely it must be, it seems that the Secretary of State's assessment is much closer to reality than that of Dr. Challis.

There has been much discussion in the press of the phrase in Dr. Challis's letter about political considerations having played their part in selecting a green field site next to a Welsh colliery. It is a political consideration that, for a process so vital to Britain's industrial future, and perhaps to its very security, Britain should not be entirely dependent upon buying the technology from abroad, even if it can be bought more cheaply than we can provide it for ourselves. It is a more narrowly based and more accurate political consideration, and one which I suspect Dr. Challis had in mind, to site the project in an area where, over a long period, the work force has shown its steadiness and sense of responsibility. One of the great merits of siting the scheme at Point of Ayr is that it emphasises the importance of the North Wales coalfield, despite the comparatively small numbers employed there. The determination of the miners of North Wales not to allow the Scottish miners to push them into the eager embraces of the South Wales coal miners is part of their sturdy independence of mind and their refusal to participate in sudden ill-advised outbursts of industrial protest.

It would not be much good siting so sensitive and so key a process as this in an area where the workers have the habit of striking first and negotiating afterwards. I hope that the Government will allow themselves to be influenced by political considerations of that sort. After all, that is what Ministers are for. It does not require the skills of elective high office merely to calculate whether it will cost less in pounds and pence to develop our own technology or to buy it from abroad. The trouble is that for decades not nearly enough political consideration has been given to such decisions. Time and again we have pioneered inventions ahead of the whole world, only to let others develop and carry them through to profitable production. Each time we have recoiled before the immediate costs of proceeding from invention to development.

The catalogue is a long and sad one—namely, the Brabazon, Blue Streak, TSR2, Maplin airport, the European Airbus as far as the Government were concerned, for it was only Hawker Siddeley's determination to go it alone that kept Britain in that now immensely successful project, and, above all, the melancholy story of Britain's once unassailable lead in the nuclear generation of electricity.

Time and again we have failed to proceed from research to development or from development to commercial production. The story begins further back still, with the failure to exploit the discovery of penicillin. I am not sure whether the lesson has sunk in even yet. With any new invention or discovery, there are always sound arguments against going on with it, in favour of leaving it to others who have more natural advantages, who can exploit the invention more cheaply and who have more immediate need of it. However, at the end of this road lies the total loss of industrial independence—Britain as a sort of giant labour-only sub contractor. The risk is that Britain will become the land of the hewers of wood and the drawers of water in the twenty-first century.

In the present project the balance of argument is much more strongly in favour of going ahead than it usually is in such cases. The objections raised by Dr. Challis in his closely argued letter are valid, but against that we have the two distinct processes that have been fully tested in laboratory conditions by the National Coal Board at its Stoke Orchard research station. Those processes are for producing oil of a grade suitable to meet the needs of our petrochemical industry as well as the needs of the transport industries, which would allow us to have a source of those supplies ready at about the time when our natural sources are beginning to run out. What is more, those processes produce oil from a raw material that we have in abundance, with 200 years of proven reserves.

The process will be saleable abroad. It offers advantages in many respects over the rival processes, of which there are few, which are being developed in the United States, Germany and South Africa. I stress that, on top of that, it offers continuity of employment to the group of workers who, in the long run, are the group most essential to this country's continued economic survival. Those highly skilled and devoted men are the coal miners.

Set against that is the fact that the process could be carried through more cheaply in, for example, Australia, alongside huge deposits of opencast coal. None the less, the balance must swing heavily in favour of going ahead with the Point of Ayr twin pilot plants, unless the shortest of short-term accountancy principles are to be paramount. That is not to say that Dr. Challis is wrong, but that Ministers must take a wider, longer and deeper view. It is that view which I confidently hope my hon. Friend will now set out.

Photo of Mr John Moore Mr John Moore , Croydon Central 9:54, 22 May 1981

I welcome the remarks of my hon. Friend the Member for Flint, West (Sir A. Meyer). I am sure that the House is grateful to him for raising this question, which is of keen interest to his constituents, of course, but, as the early-day motion signed by over 100 hon. Members confirms, it is also a matter of great importance to the whole House.

The House will recognise that the matter is important because of the presence on the Opposition Front Bench of the right hon. Member for Leeds, South (Mr. Rees), and the presence of the hon. Member for Rother Valley (Mr. Hardy), who has taken a consistent and diligent interest in the future of the coal industry. I am sorry that the illness of his wife has prevented the attendance of the hon. Member for Midlothian (Mr. Eadie), who has been at the back of this project from its beginning.

I also express my gratitude to my hon. Friend the Member for Flint, West for the appreciation that he has shown of the complexity of the issue and the difficulties for the Government in reaching an early decision. He has pursued the issue with the diligence that I would expect of one who serves so well his constituents and the interests of the country. In replying to my hon. Friend, I propose to cover the various issues drawn to the House's attention and to put the Point of Ayr proposal into the context of work on this exciting technology, which is going on around the world.

The world is using up its oil reserves faster than we are discovering new ones. For every three barrels of oil that we use, we discover only two to replace them. Yet the industrialised world is still heavily dependent on liquid fuels, and, despite our best efforts to reduce that dependence, I think we can all see the long-term need, for example, in transport uses, for liquid fuels. That may be much more difficult to curtail. Hence the enormous interest world-wide in the conversion of coal to liquid fuel.

The main impetus behind the major development programmes on oil from coal in the United States of America, West Germany and Japan is to find ways to reduce dependence upon imported oil. In Germany and Japan, those programmes go beyond the mere development of a technology and into exploring the possibilities of investment in politically stable countries where coal can be produced cheaply. No one would disagree that that is a sensible strategy, but I stress to the House that both West Germany and Japan face a different energy situation from our own. Unlike us, they do not have the breathing space afforded by North Sea oil. They are both totally dependent on imported oil supplies. So their need to develop oil from coal technologies is far more urgent than ours.

The Government believe that it is precisely at times like these, when we have adequate indigenous energy supplies, that we should provide for tomorrow by doing the necessary work to establish prospects for our energy supplies in the future.

The Government have honoured the last Administration's agreement with the National Coal Board to provide support for the design phase of Point of Ayr. Indeed, we have agreed to two modest extensions. The first data from this work became available in mid-1980 and the Department began its evaluation immediately. Hon. Members will know from discussion in the press that the data are complex. The decision is crucial. I can certainly understand the anxiety of hon. Members to see a decision at the earliest possible moment, and I sympathise with their impatience. But this is a matter which could not be rushed. Naturally, I am as sorry as my hon. Friend that those serious matters have been portrayed in some press reports in terms of a dispute between the Government and the board. I was particularly sorry that there had been any allegation of delay on the part of the Government in dealing with this important matter.

Far from vacillating, the Government, on receipt of the pilot plant proposal and cost estimates in April 1980, immediately began detailed technical discussions with the board and BP, which lasted until April of this year. Those discussions led to an agreement to extend the design contract to cover, in particular, a 2,000-hour test with the three-quarter tonne per day LSE plant at Stoke Orchard. This test is to determine the long-term performance of the process in a continuous mode. Together with a critical design review, this is intended to improve the quality of the NCB's technology package. We have thus shown a continuing interest in the board's proposal and have gone beyond the contractual commitments of the previous Government.

I am glad to be able to use this opportunity to announce to the House this morning the conclusion of the Government's very careful study of the proposal to develop coal liquefaction technology at Point of Ayr. But first I think that the House would welcome it if I set out in some detail the economic background to this study and the Government's conclusion.

First, there is the question of United Kingdom self-sufficiency. That point was raised by my hon. Friend the Member for Flint, West. I stress that that self-sufficiency is not in oil itself, but in the premium products of transport fuels—petrol, diesel and aviation fuels—and chemical feedstocks, the raw materials for rubbers, plastics, paints, resins and fibres. Our concentration on the premium uses requires us to make a commitment to oil substitution, leading to a decline of non-premium demand for oil.

As a nation we have already made good progress in those sectors of the economy where there is the greatest potential for oil substitution. In electricity generation, United Kingdom public sector power stations burned only 6·3 million tonnes of oil in 1980—a reduction of nearly 40 per cent. on 1979. In the domestic sector, oil use fell by over 20 per cent. last year to a level of about 2·5 million tonnes. Oil use in industry also fell by over 20 per cent., but consumption here is still running at over 16 million tonnes per year.

There remains, therefore, sizeable potential for further substitution of oil in non-premium industrial uses. The economic pricing of fuels is the primary means of achieving a successful transition out of oil, and is already providing industrialists with a clear incentive to move from oil to coal. However, in order to give industrialists further encouragement to switch, the Government announced recently their decision to make available £50 million, to be committed over the next two years, in the form of capital grants of up to 25 per cent. of the cost of replacing oil-fired boilers by those burning coal. This represents an additional potential coal burn of 2 million tonnes—obviously not immediately, but building up to that level as plant is installed. As I said, the scheme will be administered by the Department of Industry and details will be announced in the very near future.

In addition to the new boiler conversion scheme, the Government have been giving financial support to a number of demonstration projects designed to improve coal combustion techniques. The NCB has, in collaboration with the boiler manufacturers, also achieved considerable progress in this area. The use of coal-oil mixtures, another promising means of promoting substitution, is being actively pursued, notably by BP and Shell. There is then considerable potential for moving the United Kingdom away from the use of oil for bulk heating purposes, and replacing some of it with coal.

However, the speed with which we need to develop alternatives to oil in its transport and chemical uses is uncertain. Experts differ in their views on the question when our oil supplies will no longer be sufficient to meet our needs, although it would seem unjustifiably optimistic to assume that they could do so for more than a few decades.

United Kingdom oil production in 1980 was just over 80 million tonnes, and it is expected to rise to between 90 million and 120 million tonnes in 1984. Thereafter it will peak and then fall away, but the remaining reserves of 2 billion to 4 billion tonnes, including estimates of oil in future discoveries, should enable a contribution to domestic needs to be maintained well into the next century.

The indications are that with a full commitment to energy conservation and oil substitution measures the United Kingdom ought to be able to maintain net self-sufficiency in transport fuels and chemicals feedstocks well into the next century. If oil is to be used increasingly for these premium applications, coal will play an important part in displacing oil from the non-premium markets.

The prospects for the production of oil from coal in the United Kingdom must be examined against this background. The economics of oil from coal depend heavily on the difference between coal and oil prices. It takes about 1½ therms of coal to produce 1 therm of synthetic liquids. The high capital and running costs of the plants have to be recovered from this margin between coal and oil prices. The present gap in the United Kingdom, which is about 7p to 9p a therm, is not enough to cover these costs either with existing technologies or with the more advanced technologies under development.

To estimate when liquefaction will become economic requires a projection of how and when the price gap will widen sufficiently, and I need hardly remind the House of the pitfalls associated with making such projections. Estimates put out by Governments here and elsewhere generally suggest that oil prices will continue to rise in real terms as pressure on supplies of natural crude oil increases, but the price of coal on world markets is also likely to rise in real terms, as one would expect. The rise in the price of oil—the energy source on which industrialised nations most depend—is bound to put pressure on the price of any alternatives to it. Coal producers are bound to respond to increased demand for their product. Indeed, this happened in the past, with each successive oil price rise. Therefore, it is not enough for us to look at the trend in oil price increases in isolation.

For a considerable time, the most economic way of using coal will be to substitute it, where possible, directly for oil. It is likely that coal liquefaction will become the most attractive option only when opportunities for direct substitution have been taken up.

The economics of liquefaction will also depend upon the extent to which world coal supplies can be expanded to meet, first, the demand for substitution and then for liquefaction. That, in turn, will depend on political developments and on the resolution of environmental problems in a number of countries. The indications are that the world's major coal producers—Australia and the United States, for example—will be able to expand production to meet not only their own direct needs but demands for exports and, to some extent, demand from coal conversion industries. In these countries, given successful development of the new technologies, commercial liquefaction could become viable at some time in the 1990s, but that is based on relatively optimistic assumptions.

However, the position in Western Europe is not the same. The economics of liquefaction are more doubtful. Indigenous coal supplies will not be sufficient to meet home demand, and all the expert studies that have been conducted agree that Western Europe is likely to be a major steam coal importer towards the end of the century. The logic of this is that, provided that our costs are lower than the European price, the United Kingdom will find a ready market in Western Europe for any surplus coal that we may produce for conventional steam raising. Liquefaction of coal will be economically more attractive in the countries which are major exporters of coal, while European-produced coal will continue to find its best application in the more traditional uses.

One day, of course, when coal substitution for oil is well advanced, and particularly if nuclear power is by then playing a major role in electricity generation, liquefaction may become economic in the United Kingdom, but this situation is not one that we believe will arise here in the 1990s, as it may do in the United States or Australia. It is unlikely, we think, to arise until well into the next century.

The only oil from coal technology in use on a commercial scale today is in South Africa, where a £3,000 million investment is in progress to provide the country with 50 per cent. self-sufficiency in petrol and diesel. the technology involves gasification and synthesis, as used in Germany during the Second World War, and is expensive and energy-inefficient. If applied in the United Kingdom, this process would yield oil products at a cost of around $60 per barrel, which is far higher than current world oil prices. Even in South Africa, with access to cheap coal, a significant subsidy is required to make liquefaction products competitive with those from natural crude oil.

America, Germany and Japan, direct liquefaction technologies are being developed along lines similar to those of the NCB's Coal Research Establishment. In Texas, the Exxon Corporation already has a 200-tonne per day pilot plant operating smoothly. In Kentucky, a plant of the same size is operating using the H-coal process. In Germany, a 200-tonne per day plant is in the advanced stages of construction. I have visited all three, and, in terms of the size of plant available, the United States and Germany have a lead of several years over the work here in the United Kingdom.

These, then, are the many factors that we have had to take into account in arriving at our decision.

There is the question of how long we shall be able to meet our needs for premium liquid fuels and feedstocks from conventional petroleum sources. The indications are that this will be considerably longer than in many other countries.

There is the question of when the margin between coal and oil prices will become enough to cover the capital and fuel charges of an oil from coal conversion process.

There is the fact that other countries are ahead of us in building large-scale pilot plants.

There are questions over whether the potential advantages of the NCB process can be realised, and the technology advanced to successful commercial operation.

We have weighed all these issues very carefully. The Government have decided that, subject to substantial financial participation by private industry, they will back the Point of Ayr proposal. The Government are prepared to make £5 million available from the Department of Energy's research and development budget to aid pilot plant construction and commissioning. As I have said, this is subject to the National Coal Board demonstrating that it has secured the whole of the balance of the funding required to complete these phases of the work. I have told Sir Derek Ezra of this decision and I expect that officials will meet shortly to discuss the details.

Photo of Mr Merlyn Rees Mr Merlyn Rees , Leeds South

I have one question, which I precede by a word of thanks for the informative way in which the announcement has been made and the courteous way in which the Minister has mentioned all those involved. If my hon. Friend the Member for Midlothian (Mr. Eadie), the previous Under-Secretary of State, is not here, it is because I felt that it would be better if he got away earlier at the end of this part of the Session.

My question relates to financing. There will, of course, be other opportunities to debate this. The Minister mentioned the money from the Department of Energy. He also mentioned the NCB and, earlier, the EEC. Clearly, money can be raised from the money market for this project. But why can it be raised in that way for this project when there seem to be problems about money from the money market for other projects that might arise for the NCB?

Photo of Mr John Moore Mr John Moore , Croydon Central

I know that the right hon. Gentleman would like me to go into the financing of nationalised industries. It has been made clear—I am delighted that he acknowledges this—that the ultimate success of this process must rely on participation by the private commercial as well as the public sector. It is clearly an important positive. I acknowledge that, and I assume that the NCB, being involved in the overall construction and the consortium to fund such a project, will naturally pursue the route that the right hon. Gentleman clearly endorses. I do not think that it would be wise for me to develop the discussion into other areas of nationalised industries' finance at this stage.

I remind the House—this is the point that I have just tried to make—that this technology can be successful only if it is developed commercially, and therefore, as the right hon. Member for Leeds, South mentioned, the early support of private industry is essential. I know that the NCB's technology has already attracted strong interest in the private sector, and I know that the board will show vigour in explaining to private investors the potential advantages of joining the board in this project. As both management and unions made clear at the recent tripartite discussions, the approval of the Government in principle was crucial and can serve as an encouragement to others. Today, as I said, we have done more than give our approval in principle. We have backed that decision with money from my Department's research and development budget.

Photo of Mr Martin O'Neill Mr Martin O'Neill , Stirlingshire East and Clackmannan

I think that we all welcome the decision that has been made. I wish simply at this stage to draw the Minister's attention to the fact that the Scottish NCB and the Scottish miners are very anxious that the claims of the Grangemouth area should not be forgotten in any subsequent plans. We have, around what is literally the greatest concentration of petrochemical technology in the United Kingdom, a massive coalfield just waiting for exploitation along the lines of future projects after Point of Ayr.

Photo of Mr John Moore Mr John Moore , Croydon Central

I am tempted to pursue that point, but we have also present the right hon. Member for Leeds, South and hon. Members from other parts of the great NCB industry. We are here discussing the pilot plant proposals rather than the subsequent developments. Nevertheless, I recognise the nature of the petrochemical complex around the Scottish coalfield and I understand the point that the hon. Gentleman legitimately makes.

I hope that this announcement will help to clear the way for the NCB and prospective co-sponsors to move to the next stage. The Point of Ayr project will, as my hon. Friend pointed out, create employment opportunities in an area where much of traditional industry is in decline. I know, too, that it will be welcomed by the engineering industry in the present recession. I look forward to the successful operation of this plant and hope that the promise shown by the board's technology can be realised to the future economic and industrial benefit of the United Kingdom.