ODAC Newsletter – 21 Mar 2008
Welcome to the ODAC Newsletter, a weekly roundup from the Oil Depletion Analysis Centre, the UK registered charity dedicated to raising awareness of peak oil.
This week the oil price struck yet another all time high - $111.80 on Monday – but then underwent a major correction through the rest of the week, sinking to around $100, and settlling at just under $103 as ODAC went to print. The depth of America’s economic troubles were being offered as the main explanation and the exit of hot money.
However, the avid oil market observer will know that these explanations flip-flop almost by the day, one minute the American economy is beling wheeled into the morgue, the next it has bounced back and is ready for the next bubble.
The slump came against the backdrop of wild swings in commodity and equity markets, the collapse of Bear Stearns, another aggressive rate cut from the Fed, and as the Bank of England pumped an extra £5 billion into the London money markets. Only in days like these could the halving of profits at major investment banks Goldman Sachs and Lehman Brothers be a cause of ecstatic relief.
Shell’s delayed announcement of its 2007 reserve replacement received a generally positive press, but the underlying numbers are hardly reassuring. Shell claimed to have replaced its oil and gas production by 124%, but that number is only valid if you exclude the impact of Russia’s expropriation of the Sakhalin II project.
Otherwise Shell’s 20-F filing shows that its oil replacement was just 37% and its gas replacement a paltry 8% - despite a major upward revision in its Qatari gas reserves. On a barrels-of-oil-equivalent basis, Shell replaced just 17% of its oil and gas production overall.
We’ve said it before, but no wonder Shell and their peers are jockeying for position in Iraq, especially as Russia appears to be limbering up for another round of expropriation of oil and gas assets, and as Dick Cheney acknowledges that the world has essentially no spare oil production capacity.
If oil was the reason for invading Iraq, as many suspect, the strategy has had minimal success at an exorbitant price. On its fifth anniversary, the war is estimated to have killed hundreds of thousands of people, cost trillions of dollars, while Iraqi oil production is not much higher than before the invasion. Yet having made such a fine job of Iraq, Tony Blair now apparently thinks he can solve climate change single handed. Happy Easter!
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Crude prices extended their overnight slide by another dollar today as fears that global energy consumption could contract if the US slips into a recession gathered pace.
US crude fell $1.01 cents to $101.53 a barrel at 0212 GMT, about 9% off the record $111.80 hit on Monday. London Brent crude fell $1.07 to $99.65, Reuters reported.
"I suspect that it was a reassessment and a rationalisation of ongoing concerns over the US economy that's triggered some selling," said David Moore, an analyst at Commonwealth Bank of Australia in Sydney.
The heavy losses came during a week which saw equity and commodity markets swing wildly as traders balanced out aggressive interest rate cuts by the US Federal Reserve against signs of a recession in the world's largest energy consumer.
US demand for gasoline over the past four weeks was 0.1% below last year, while demand for distillate fuels like diesel, jet fuel and heating oil fell by about 5.4%, data from the US Energy Information Adminstration (EIA) showed yesterday.
US distillate inventories dipped to their lowest level since June 2005 while gasoline stocks eased slightly below their 15-year high, according to the EIA report. Crude inventories, meanwhile, rose a modest 200,000 barrels, leaving them 3.7% below last year.
The bigger-than-expected decline in refined fuel inventories last week and a smaller-than-expected build in crude stockpiles overshadowed the soft demand figures.
"In terms of commodities, we are still consuming and using daily...it's still a bullish undertone," said fund manager Justin Wilks of Global Commodities.
Recent price strength across the commodities complex has been boosted by a slumping US dollar, which briefly rebounded yesterday, and interest rate cuts by the Federal Reserve.
But investors who had viewed dollar-denominated commodities as the best place to put their cash are growing worried that recession could erode demand for raw materials, analysts said.
Shell is gearing up for a huge expansion of its carbon-intensive tar sands operation in Canada at a time when it has been struggling to replace conventional reserves.
In an annual strategy update yesterday, Jeroen van der Veer, chief executive, said the Canadian business was at the centre of its wider ambitions to meet growing energy demand - with the high cost of developing Athabasca and other projects easily accommodated by crude prices that hit new highs yesterday of $112 a barrel.
"Canadian heavy oil, where we have 20bn barrels of resources, is a classical new technology and integration play that Shell can do well. Alberta has the potential to become a major production heartland for Shell for decades to come," said Van der Veer, who admitted the conventional reserves replacement ratio had slumped from 158% in 2006 to 17% last year.
The Anglo-Dutch oil group is producing 155,000 barrels a day from tar sands, had plans to raise this to 500,000 barrels and has just formally applied for a licence to enable it to raise that figure to 770,000.
The exploitation of tar sands is controversial because the methods used can be highly water and power intensive as well as being far more carbon intensive, but Shell said it had halved the energy intensity of its tar sands operation in four years.
The Canadian venture is not only opposed by green groups but also not recognised by the Wall Street financial watchdog, the US securities & exchange commission, as genuine reserves. Van der Veer repeatedly talked yesterday about Shell's "resources" rather than "reserves".
Fears that the company's overall oil and gas reserves would be shown to have fallen heavily over the past year proved unfounded, with Shell saying its net reserves were 11.9bn barrels of oil equivalent at the end of 2007, roughly the same as they were the year before.
The reserves issue is sensitive for Shell, which shocked investors and sacked its chairman, Sir Philip Watts, in 2004 after it had been found by the SEC to have exaggerated its reserves by about a third.
The reserves replacement ratio of 17% at Shell compared with a figure of more than 100% at BP for 2007 and was largely attributed to the forced transfer of part of its Sakhalin-2 scheme by the Kremlin. Meanwhile, future reserves and production figures could be hit by problems in Nigeria, where violence flared up again yesterday when Shell attempted to secure some damaged wells.
The group said its overall "resource" base held the potential of 2% to 3% output growth annually but admitted this was "geared toward growth after 2010".
Richard Griffith, energy analyst at Evolution Securities, said in a research note: "Much of the update is a restatement of the strategy that has been in place since 2004 and therefore the issue going forward is really about delivering this growth - an area in the past where Shell (and BP) have disappointed."
Shell's chief executive, whose annual salary, bonus and cash benefits rose to £3.2m last year from £2.5m in 2006, said yesterday there was no major problem with world oil supply and no particular reason why prices had hit an all-time peak. "From the physical point of view there is no high alarm," he said. "It's difficult to understand why the oil price is where it is. No tankers are waiting in the Middle East. There are no queues for the retail stations here."
Van der Veer had no soothing words for motorists and other oil users, saying prices could be expected to remain relatively volatile for a "sustained period" without any change in the underlying market.
The oil company admitted yesterday that it had been contacted about potential violations of the US Foreign Corrupt Practices Act, which could lead to fines. The issue surrounds the use of a freight-forwarding firm, Panalpina, and involves suspected bribery in Nigeria, Kazakhstan and Saudi Arabia.
Shell’s Canadian oil sands business is suffering a profitability squeeze because of the soaring cost of energy needed to extract bitumen from sand.
The oil company’s annual report, published yesterday, reveals that operating expenses at the Athabasca Oil Sands Project in Alberta have soared by almost 50 per cent in the two years since 2005, while output at the bitumen mining project has either remained static or declined.
Shell’s oil sands profits dipped sharply last year when a fire temporarily reduced the output of its upgrader, a refinery that converts bitumen into a synthetic crude oil. Earnings from oil sands fell from $651 million in 2006 to $582 million (£291 million), which the company attributes to lost output from the shutdown. The net production of the oil sands business, after deducting royalty payments, fell from 95,000 barrels per day (bpd) in 2005 to 81,000 bpd in 2007.
However, Shell’s filing to the US Securities and Exchange Commission (SEC), published yesterday, also shows a massive surge in the operating cost of the Athabasca project. It rose from $664 million in 2005 to $722 million 2006 and $967 million in 2007.
The burgeoning overheads in Canada emerged as Shell revealed that it had fully replaced its oil and gas output in 2007 with additional reserves. Shell’s total proven reserves were unchanged at 11.9 billion barrels of oil and gas, Jeroen van der Veer, Shell’s chief executive, said.
Excluding the effect of purchases and sales of oil-producing assets, such as the sale of part of its Sakhalin gas project to Gazprom and the buy-in of Shell Canada’s minority interest, Shell added 1.5 billion barrels of oil to its reserves last year. According to Shell, that equates to a reserve replacement ratio of 124 per cent, compared with an average for the top five oil companies of 108 per cent.
A big proportion of the extra barrels relate to gas reserves, notably in Qatar, where Shell has agreed sales contracts for liquefied natural gas, which enables Shell to book reserves. Other reserve additions include gas in Australia’s North West Shelf and the Ormen Lange gasfield in Norway.
Peter Voser, Shell’s finance director, said that overall internal cost inflation was running at 10 per cent per annum. He estimated that the operating cost of an oil sands barrel was in the range of $20 to $25 per barrel.
Shell will not reveal the development cost of its oil sands projects, including an expansion that will add 100,000 barrels per day of output, but it is likely to be close to $20 per barrel, well above the average of between $6 and $7 per barrel for the company as a whole.
Oil sands represent about 10 per cent of Shell’s proven reserves of 11.9 billion barrels and are assessed separately by the SEC, which considers oil sands to be a mining business. However, the potential resource in the ground in Shell’s acreage is 20 billion - which is not in dispute, since the reserves are close to the surface.
Separately, Shell disclosed yesterday that the US Department of Justice is investigating Shell’s use of Panal-pina, a Swiss freight forwarding company, in connection with alleged corruption in relation to customs officials in Nigeria. The Justice Department began a criminal investigation last year into illegal payments to customs agents in Nigeria and sent letters to 11 oil and oil-service firms. Shell said that it had started an internal investigation and would cooperate with the Justice Department.
Oil giant Royal Dutch Shell has reassured the market that it can replace reserves faster than they are being depleted, but warned that there is no clear reason why the oil price remains so high.
Chief executive Jeroen van der Veer said that last year Shell replaced more than 100pc of its reserves and that net proved oil and gas reserves amounted to 11.9bn barrels of oil equivalent (boe) - the industry measure. This is the same as at the end of 2006.
The company managed to increase reserves despite having to dispose of half of its 55pc stake in Sakhalin-2, the controversial Russian gas project, estimated to cost $20bn (£10bn).
Mr van der Veer dismissed concerns that the company's relationships in Russia continued to be difficult. He said: "We feel good about our prospects in Russia and talk regularly with Gazprom and Rosneft."
In Nigeria, the company has made progress in combating security and funding problems at its onshore facilities, he said. However, some operations remain suspended to ensure the safety of Shell staff.
Asked if the oil price would continue to remain high, Mr van der Veer said: "Physical flows are continuing around the world and there are no major bottlenecks, which makes it difficult to understand why the price is so high." However, he pointed to little spare capacity and a flight to commodities as possible factors.
Shell expects energy demand to grow by 50pc by 2025 thanks to emerging economies such as India and China.
Excluding acquisitions and disposals, the company increased reserves last year by 1.5bn boe, set against production of 1.2bn barrels and amounting to a replacement rate of 124pc. However, under Securities and Exchange Commission rules, the company achieved an oil and gas replacement rate of just 17pc in 2007, down from 158pc the year before due to the withdrawal from Sakhalin-2.
The company plans to sell more refinery assets and re-invest the cash in exploration and production to counter investor concerns that it is short of reserves after being forced to re-state them in 2004. Last year, it sold a refinery near Los Angeles and has three French operations up for sale. It is also looking at its African and Caribbean businesses.
As well as increasing production from new sources such as oil sands, Shell plans to spend some of the proceeds on alternative energy such as wind farms in the US, liquid natural gas and biofuel technology. It has 50 large projects under way which should produce 10bn boe.
LONDON - Oil and gas reserves don't much matter any more. You arrive at that conclusion after listening to Royal Dutch Shell's strategy presentation in which the company this week finally allowed investors to have a look at the gauge on its fuel tank.
Shell caused an uproar in late January when it failed to publish its reserve numbers at the same time as its 2007 earnings, and said it would follow Exxon Mobil's example and delay publication until it filed its 20-F statement to the U.S. Securities and Exchange Commission. Some feared that the delay masked a problem (another case of disappearing barrels, whispered the doubters) but there was no problem. Shell topped up its tank and added a little bit more.
Reserves on their own don't matter. What matters is the cost of getting the reserves. Shell's investment per barrel of oil and gas has increased fourfold in just three years, a period during which the oil multinational's output has not increased. The company displayed another chart showing the average spending of the big oil companies. Per barrel of hydrocarbons, spending rates were pretty static during the 1990s at between $5 (U.S.) and $6 a barrel. In 2003, the rate of investment began to escalate and is now shooting higher, rising at an alarming pace. Last year, the average investment per barrel was just shy of $15.
On top of that, you must load the daily cost of operating wells and pipelines and the colossal overhead of running a big oil company. Moreover, we know that the $14-to-$15-a-barrel average investment is just an average and it is rising. Every new barrel is a more expensive barrel because in order to get the oil, Western oil companies must push the technology envelope even further, into deeper water and more heavy oil, such as Alberta's oil sands. The only giant discovery of the past decade has been Tupi, the eight-billion-barrel oil field discovered offshore of Brazil in water depths of two kilometres.
Technology is expensive, but it is the materials, manpower and energy cost that hurts. Shell estimates that the operating cost per barrel of the Athabasca project is between $20 and $25, of which a third is energy - the cost of natural gas used to heat water to extract bitumen from sand. Shell won't reveal the capital cost of an Alberta oil sands barrel, but it is certainly a lot higher than its average of $7 and likely near the top rate of $15 to $20.
The point of all this is that it helps to explain the current $105-a-barrel oil price and its extraordinary resilience to weakening demand signals. Oil price speculators know that the U.S. is heading into recession and they can see the signs of weakening gasoline consumption, but they are maintaining long positions in West Texas Intermediate and Brent, the benchmark futures contracts. If they remain bullish, it is not because they believe oil is running out but because they believe the cost of producing the marginal barrel will remain high and will continue to rise, regardless of a U.S. recession.
That doesn't mean the oil price won't dip or suffer a short-term plunge. There will be temporary gluts of gasoline as America works through its credit crunch, but it is the cost of producing extra barrels and the price of alternatives such as biofuels that will determine what we pay for oil in 2012. According to the New York Mercantile Exchange, that price is currently around $100 a barrel and most of the long-dated WTI futures reflect a belief that the world will still be paying close to a three-digit oil price in five years time.
The high oil price is sucking cash into the pockets of national and multinational oil companies and the cash is needed. At the time of Big Oil's investment nadir at the turn of the millennium, Shell spent a net $1.5-billion on its business after deducting cash inflows from disposals. At that time, the oil industry was in survival mode, coping with $12 oil prices, but the investment famine was unsustainable and today, we are paying for it. The question is whether we will run into another bust cycle.
That can happen only if the West's big oil companies repeat their achievements of the 1970s and 1980s with a series of exploration successes, such as Brent and Forties in the North Sea and Prudhoe Bay. The worry is that today's spending is not delivering many more barrels, just more expensive barrels. The cheap barrels are out of reach in Iraq, Iran and Russia. It's not peak oil we have to worry about but oil inflation.
Crude oil prices in excess of $100 a barrel reflect the reality in the market place, U.S. Vice President Dick Cheney said on Monday.
Cheney, on a trip to the Middle East that started in Iraq, said he did not see a lot of excess production capacity worldwide.
Cheney this week will visit Saudi Arabia, where President George W. Bush in January called on OPEC to increase production.
Asked about the prospects for increased oil production in the region, Cheney told reporters in Baghdad traveling with him: "One of the problems we've got now obviously is that there is not a lot of excess capacity worldwide."
He said statistics from a Washington energy consulting group had shown that "there's just not a lot out there, and some of that excess capacity represents high sulphur crude for example, it's not very attractive and not easily marketed."
Cheney said there had also been a "dramatic increase" in demand from countries like China and India, and also a lot of countries that used to produce oil primarily for export were now consuming a larger part of what they produce as their economies develop like some of the Gulf states.
"You look at all of that and you look at the much closer balance if you will between supply and demand, as well as the declining value of the dollar, you've got a situation in which we've seen the price of oil rise fairly dramatically in recent months," Cheney said.
"But it reflects primarily the realities in the marketplace," Cheney said.
Well, here it is from the horse's mouth. What many have already realised or suspected for quite some time now, has been spelt out by US Vice President Dick Cheney.
The most fundamental problem with the high oil price is not commodity speculation, or even the falling value of the dollar, but eroded spare capacity. Dick Cheney had already seen this coming back in 1999 when he addressed an oil industry meeting in London.
Cheney (who, along with former Defense Secretary Donald Rumsfeld, was the principal architect of the Iraq war which 'enjoys' its fifth anniversary today) has now confirmed that OPEC has little spare capacity left to speak of (apart from difficult to process high sulphur heavy crude). This is clearly the real reason why OPEC is not offering to raise output despite the threat of recession and pleading (literally) from the US, despite whatever else OPEC may claim. In other words they won't up production, because they can't.
This situation is corroborated by Lawrence Eagles, head of the International Energy Agency's Oil Industry and Markets division. He recently told TIME magazine that "Most OPEC members are working close to flat-out. There is little spare capacity outside of the United Arab Emirates and Saudi Arabia, and some of that is relatively poor quality crude."
Cheney himself has just been out to the Middle East to negotiate an uplift in production and has essentially come back empty handed. Even the Saudis don't seem able to help.
The only real hope has been Iraq (no other Middle East country has similar untapped geological potential to increase production), but the chaos of the failed occupation has kicked that aspiration into touch, despite an eventual cost estimated at $3 trillion or more according to a new forecast from Nobel prize winner and former chief economist at the World Bank, Joseph Stiglitz.
Increased energy use efficiency/economic recession are therefore now the most likely responses as we close in on the de facto 'sans
Let's hope that the first of those two response options predominates, but with growing energy demand in India and China continuing to exert heavy pressure we are clearly in uncharted territory now. Some current speculation is centred on whether the recent resignation of Admiral Fallon, the top US commander in the Middle East who has taken a more moderate stance in relation to Iran than the White House, will now result in tougher US measures against Tehran as the oil situation deteriorates. Cheney claimed last year that quite apart from its nuclear program Iran was a threat to oil supplies because of its geographic position in relation to Gulf shipping through the strait of Hormuz, and the results of last week's Iranian parliamentary elections are unlikely to have softened his attitude.
Meanwhile one of the most notable developments in the last week or so is that CERA has suddenly dropped its forecast for the global oil production ceiling from 130 million barrels per day to 105 mb/d. Although CERA are doing this claiming investment constraints as opposed to geological ones (the distinction is of no practical relevance as far as markets are concerned, as the net result for consumers is the same - i.e. a ceiling on supply), it means even they are now nearly in line with everyone else who says production can't go above 100 mb/d.
So it seems that in effect there is little material dissent left in opposition to the now prevalent 100 mb/d (or less) ceiling prognosis. Cheney's return empty handed from the Gulf would seem to be just one more sign of the global oil train getting uncomfortably close to hitting the supply buffers.
The battle lines over the future of Mexico's oil industry hardened Tuesday — the 70th anniversary of its nationalization.
At a ceremony in the oil state of Tabasco celebrating the takeover, President Felipe Calderon issued a call for more private investment in the national oil company, Pemex. He proclaimed the fate of the company the defining issue of his generation.
Several hours later his leftist rival, Andres Manuel Lopez Obrador, led a huge protest march in the capital against any form of privatization.
At stake is the viability of Mexico's oil company, which provides nearly 40 percent of the government's budget and sends 1.4 million barrels a day to the United States through the Houston area.
After nearly two decades of free-market policies that have seen most government-owned industries privatized, communal farms dismantled and labor unions weakened, nationalized oil remains as one of the few economic touchstones of the Mexican Revolution.
In 1938, President Lazaro Cardenas expropriated the oil fields, following months of turmoil involving strikes by Mexican workers.
"The oil is ours!" became a rallying cry for generations of Mexicans. Oil revenue fueled decades of development and other sources of revenue were left untapped.
High world oil prices have assured huge profits for Pemex. But the country's proven reserves and production have declined as the offshore Cantarell field plays out. The field has accounted for two-thirds of Pemex's production over the past three decades.
"To transform Pemex is to strengthen Mexico," Calderon said Tuesday.
Without new proven reserves and increased production, he said, Mexico would cease being an oil exporter in nine years, and cash-strapped Pemex would not rebound without foreign investment and technology.
Calderon and others argue that private participation is necessary to develop the ultradeep-water fields in the northern Gulf of Mexico that will anchor Pemex's future.
But those opposed to private investment insist that Pemex can develop the new fields on its own. They shrug off predictions of Pemex's impending collapse as scare tactics meant to pressure a sale to the Americans and other foreigners.
"This is very sensitive for the Mexicans," said political analyst Alfonso Zarate.
"People in general have a lot of fear about private participation in the oil industry."
Though public unease about Pemex's future has been widespread, opposition to private involvement is spearheaded by Lopez Obrador, the politician who narrowly lost to Calderon in 2006.
Lopez Obrador's campaign against the "privatization" of Pemex — which Calderon and other government officials insist is not on the table — has bolstered the former Mexico City mayor's political fortunes. His prospects were strengthened by last Sunday's internal elections in the Democratic Revolution Party, in which his allies won most leadership posts.
At the same time, Calderon's ability to push his agenda for Pemex in Congress has been weakened by a scandal surrounding Interior Minister Juan Camilo Mouriño, who is accused of influence peddling.
Mouriño has been seen as Calderon's chief negotiator in the ongoing Pemex debate.
"Lopez Obrador demonstrated his astuteness and his capacity to hit hard at the right moment," Zarate said.
"There is a very important political base that supports his arguments."
The most promising replacements for Cantarell lie in the ultradeep seas of the northern Gulf, close to U.S. and Cuban territorial waters. Pemex doesn't have the technological capacity to drill the deepwater wells.
Foreign companies are developing deep-water wells in Cuban and U.S. fields.
Mexican proponents of partnering with private companies argue that if Pemex doesn't begin drilling soon, it will lose control of the internationally shared deep-water fields.
President George W. Bush on Wednesday said he would only order further troop reductions in Iraq if it would not “jeopardise” the improvement in security that has occurred since the military “surge” took effect last year.
Speaking at the Pentagon on the fifth anniversary of the Iraq invasion, Mr Bush said the war had been “longer and harder and more costly than we anticipated”. He also warned that the security gains in Iraq were “fragile and reversible”.
“We have learned through hard experience what happens when we pull our forces back too fast,” said Mr Bush. “The terrorists and extremists step in, they fill vacuums, establish safe havens and use them to spread chaos and carnage. Any further drawdown must not jeopardize the hard-fought gains.”
Mr Bush last year sent a “surge” force of 30,000 combat troops to Iraq to counter the spiralling sectarian violence that threatened to propel the country into civil war. While almost 4,000 US troops have died in Iraq, the number of successful attacks on US forces has declined dramatically since the surge took full effect last June. The level of Iraqi deaths has also seen a large drop.
Mr Bush was speaking three weeks before General David Petraeus, the top US commander in Iraq, is scheduled to report to Congress on the situation in Iraq. Gen Petraeus is expected to recommend that the US pause any further troop reductions to reassess conditions this summer following the withdrawal of the five surge combat brigades, which would leave at least 130,000 troops in the country.
While Gen Petraeus wants to delay further troop reductions, Admiral Mike Mullen, the chairman of the joint chiefs, General George Casey, the army chief of staff, and other senior military officials, are concerned about the impact long, repeated deployments are having on the military.
Gen Casey, who reportedly wants to reduce the number of combat brigades below the level of 15 that will remain after the surge, has warned about the risk of crossing an invisible red line beyond which the military would take a generation to repair.
Mr Bush on Wednesday credited the surge with having “opened the door to a major strategic victory in the broader war on terror”. While the military is concerned about insurgent groups in Iraq affiliated with Al-Qaeda, however, they are more concerned about areas along the border between Afghanistan and Pakistan where al-Qaeda has been regrouping.
At a time when the US public has become more focused on the state of the domestic economy than the “war on terror”, Mr Bush warned about the possible economic consequences of allowing “enemies to prevail” in Iraq.
“The violence that is now declining would accelerate and Iraq would descend into chaos,” Mr Bush said. “Al Qaeda would regain its lost sanctuaries and establish new ones - fomenting violence and terror that could spread beyond Iraq’s borders, with serious consequences to the world economy.’’
Senator Barack Obama, one of the two contenders for the Democratic presidential nominee, on Wednesday acknowledged that violence had declined in Iraq, but repeated his vow to end the war should be become president.
“We need to finish the fight against al-Qaeda. That is what I will do,” said Mr Obama. “Fighting a war without end [in Iraq] will not force the Iraqis to take responsibility for their new future … I will end this war.”
Royal Dutch Shell has been quietly working with Iraq’s oil ministry over the past two years, advising it on how to increase the production of two oilfields. Under an agreement struck after the 2003 invasion, no one from the company, Europe’s largest oil group, has set foot in the troubled country; instead, monthly face-to-face meetings with the oil ministry have been held in Amman, the Jordanian capital, and weekly contact has been maintained by video-link.
The Shell-financed project – and the attention showered on Baghdad – appears to be paying off: Shell is now negotiating a technical support agreement in which it will be compensated for helping upgrade production of producing fields. The oil company will again set up a team outside Iraq, helping, among other things, to bring new equipment into the country and training Iraqis in its use.
Shell is one of several international oil companies – including BP and the US groups ExxonMobil and Chevron – that have been tapping into Iraq’s oil industry by remote control.
But now, five years after the invasion, the oil groups are hoping to take their involvement in the country to a new level. Baghdad, desperate to increase oil production yet starved of investment, is starting to dangle what the companies have been after all along: a chance to develop and later explore what may be the world’s most promising untapped oil reserves. Indeed, as the companies gear up for technical support agreements, they are also registering to pre-qualify for the first bidding round of oil development contracts that are to be offered by Baghdad.
“The [initial projects] were done to work with the Iraqis, get a feeling for fields and build relationships and knowledge,” says one oil executive, speaking of the assistance projects provided so far.
With parts of the global oil industry threatened with nationalisation and much of the Middle East still closed to foreign ownership of reserves, access to Iraq, with the world’s third-largest oil reserves, has long been viewed as a huge prize. Although no decision has yet been made in Baghdad over the nature of the development or the eventual exploration contracts that will be on offer, Iraq could prove one of the rare countries in the region where companies will be allowed to claim reserves as their own. “This is the big frontier,” says Raad Alkadiri, a senior director at Washington-based PFC Energy.
According to the oil ministry, only 27 out of 80 discovered fields are producing in Iraq, the result of decades of under-investment. A report by Wood Mackenzie, the consultancy, meanwhile says the scale of Iraq’s remaining oil resources surpasses allother countries in the Middle East, including Saudi Arabia, and its high-quality reservoirs ensure that production costs would be very low.
But Iraq is also a dangerous frontier. Companies invited to invest in its oil industry – and satisfy Baghdad’s plans at least to double oil production from the current 2.5m barrels a day – will be walking into a political, security and legislative minefield. Their involvement threatens to exacerbate the sectarian tensions that have torn the country apart since the US-led invasion.
International oil companies acknowledge that security, although better over the past year, will still need to improve significantly before workers are dispatched to Iraq. The weakness of the central government and its patchy control over the southern part of the country, home to 80 per cent of proved oil reserves, will also be taken into account. Perhaps most important, however, is that they could be entering a country with deep political fissures and lingering anger at foreign intervention, without clear legislation allowing for foreign participation.
Despite American pressure and government desperation, a law to regulate foreign access to the oil industry has languished in the Iraqi parliament, a victim of sectarian disputes, particularly between the Kurds and Arabs. Frustrated by the delays, and virtually giving up on a successful outcome, the oil ministry has now invited oil companies to pre-qualify for development of existing fields and says a cabinet decision will be enough to legitimise foreign participation.
Later bidding rounds are envisaged for exploration contracts.
Officially, companies say they will insist on having new legislation in place before investing the billions of dollars that would be needed for development and exploration. Yet the absence of a law is not preventing them from embarking on negotiations.
“The companies are positioning themselves; they’re playing the game and the oil ministry is trying to create a game for them to play,” says Mr Alkadiri. “Of course you can hit a whole set of problems and the companies are aware of that and they will factor it in. But [outside Iraq] there are no such reserves in an unexplored territory.”
Adding to the complications is uncertainty over who has the rights to sign contracts in Iraq. The Kurdish regional government, based in Irbil, claims that the constitution gives it power over its own resources within the borders of Kurdistan, while the government in Baghdad rejects this claim completely. It insists it has the sole constitutional authority to dispose of Iraq’s oil resources.
A further difficulty is that oil is unevenly distributed throughout the ethnic regions of Iraq, with resources concentrated in the Shia south of the country and the Kurdish north. The minority Sunni Arabs, who formerly controlled the levers of power under Saddam Hussein, can boast few oil reserves in their ethnic areas. Their priority in negotiating in the new Iraq has been to ensure they receive their fair share of oil revenues.
But the competing expectations of Iraq’s communities have never been confronted head on, and were sidestepped by the framers of the constitution, agreed in 2005, by means of ambiguous language.
Specifically, the constitution’s article 112 says the “federal government, with the producing governorates and regional governments” should manage oil and gas, but only from “present” fields.
The document’s Article 115, meanwhile, declares that “all powers not stipulated in the exclusive powers of the federal government” belong to local or regional authorities.
The KRG has taken this to mean that the federal government has the conditional right to manage fields currently producing, but that a regional government such as itself has the power to manage exploration and the production from newly discovered fields. To exploit this loophole, the KRG has passed its own oil law, which allows it to sign contracts with foreign oil companies. It has signed such agreements with several (smaller) groups from Norway, Turkey, Austria, South Korea and other countries in the face of Baghdad’s objections.
“In the Kurdistan region, there is a constitution and there is a law. We have two instruments that we can rely upon: the law and the constitution are a pair, and they’re consistent and in harmony with each other in our case,” says Ashti Hawrami, KRG oil minister.
Baghdad, however, has declared the KRG contracts illegal, blacklisting companies that deal with the Kurdistan region and, more recently, cancelling export deals with South Korean and Austrian groups that signed exploration deals with the KRG. This has kept bigger companies away from the north.
The Kurds’ assertive attitude has heightened the Sunni Arabs’ attachment to strong central control over the country’s regions and their inclination towards economic nationalism. Their political leaders have pressed for the constitution to be rewritten to strengthen the federal government and reduce the powers of the KRG.
With no agreement on the constitution, the hydrocarbons legislation – which would set terms for foreign oil companies along with an agreement on the sharing of oil revenues locally – was controversial from the start. After months of wrangling, the Iraqi cabinet in February 2007 came to an agreement on a draft framework that did not include revenue-sharing legislation. Even that has not been passed by parliament.
Moreover, as talks over the oil law have dragged on, opposition to the production-sharing agreements (PSAs) favoured by western oil companies, once relatively muted, has grown among the majority Shia as well – underlining a resurgence in nationalism as much as a reaction to Kurdish unilateralism.
According to Hussein Shahristani, the oil minister, the cabinet’s approval of a draft hydrocarbons law last year made no reference to PSAs, and what his ministry will offer companies are “model contracts” that would attempt to balance investors’ expectations of financial return against domestic political concerns, not least the determination of Iraqis to maintain ownership and control of oil wealth. Kurdish officials, however, say the contracts envisaged by Baghdad are PSAs in all but name.
“What’s happening is that various parties are jostling for position now rather than reaching agreement on the oil legislation,” says Yahia Said, Iraq expert and Middle East director at Revenue Watch, a project at the London School of Economics. “The KRG is trying to move with as many facts on the ground as possible and the federal government is trying to show that it’s in control.”
Apotential flashpoint for the oil dispute between Kurds and Arabs is in the oil field of Kirkuk, the city that Kurds claim as part of their region but whose status is to be settled by a long-delayed referendum.
It is to minimise the risk of such confrontation that the US has put enormous pressure on Iraq’s politicians to agree the hydrocarbons legislation. Judging it a crucial element for Iraqi stability, the Bush administration listed the oil law as one of the benchmarks the Baghdad government was expected to achieve as the US military surge helped to reduce violence over the past year. Even with the likelihood of an oil law approval fading, US officials continue to insist that it is essential for signing oil contracts with foreign groups.
For international oil companies, the hope is that as the negotiations proceed over the next year, Iraq’s political and legislative landscape will gain more clarity. Iraqi experts, however, warn that the oil law may be dead and Baghdad’s only choice, ironically, will be to fall back on legislation from the Saddam Hussein era. Although meant to protect the nationalised status of the industry, the legislation did not stop the previous regime from negotiating specific contracts with foreign companies, which were then agreed by the rubber-stamp parliament.
“The ministry might be able to get away with [contracts] by leaning on Saddam-era regulations.
Saddam negotiated contracts that were not PSAs [the oil companies’ preferred arrangement] but with Iraq the only remaining major resource in the world, companies will have to have some investment there,” says Tariq Shafiq, a former director of Iraq’s national oil company.
Shut out elsewhere, executives await the end of a long exile
Just months before US tanks rolled into Baghdad and Saddam Hussein was toppled, US government officials met allies from Iraq’s opposition and decided it was in the country’s interest for a new government to open its oil industry to foreign participation as quickly as possible, writes Dino Mahtani
The so called “Oil and Energy” working group of the US state department, which met four times in 2002 and 2003 and included influential Iraqi exiles, had put forward the idea as a crucial plank in Iraq’s postwar reconstruction plans. Increased foreign participation in Iraq’s oil industry, members argued, would help revitalise its most important economic lifeline – ravaged by years of neglect and underinvestment under Saddam’s regime.
But it would also get US oil companies close to Iraq’s reserves, which remain significantly under-exploited compared with those of other big producers and, according to some geologists, could hold the world’s largest deposits, surpassing even those of Saudi Arabia.
The Middle East has largely been off-limits to international oil companies ever since a wave of oil industry nationalisation swept the region, starting in the 1950s. In Iraq’s case, the military coup that forced out the British- and US-backed royal family in 1958 was followed by the gradual takeover over the next 14 years of the Iraq Petroleum Company, previously a concession that gave ownership of Iraq’s oil reserves to a consortium dominated by US, British and French interests.
Access to Iraqi oil today would give western oil companies an important foothold in the Middle East, home to about 60 per cent of global oil reserves, at a time when resource nationalism is on the rise and companies are having trouble finding new oil reserves to replace those they exhaust.
The reserves they claim are a main determinant of their stock prices.
Western oil executives had long been impatient with the reluctance of Middle Eastern countries to open up to foreign participation. This was summed up in 1999 by the US vice- president Dick Cheney (below), then a director at the oil fields services company Halliburton. “Even though companies are anxious for greater access there, progress continues to be slow,” he said in a speech to the oil industry.
After the US invasion, American officials collaborated closely with their Iraqi political allies and oil industry executives. Many members of the Oil and Energy working group had pushed for production-sharing agreements to be introduced in Iraq after the invasion. These arrangements would allow companies to claim a share of the reserves produced as their own, at least for accounting purposes. In effect, such contracts would amount to a significant step in reversing Iraq’s nationalisation process.
The oil industry was well-placed to lobby for such an arrangement. After the invasion, former executives of big multinationals acted as consultants to the new Iraqi oil ministry. The US then hand- picked oil ministry officials under the coalition provisional authority, which eventually handed over to the interim government of Iyad Allawi. This in turn advocated partly privatising Iraq’s oil industry. When a transitional government came into place, the US backed Ahmad Chalabi – a man who famously said in 2002 that “US oil companies will have a big shot at Iraqi oil” – to chair Iraq’s Energy Council.
Today, however, the openness of Iraq’s oil industry to foreign participation is still in doubt, not only because of the security situation. Iraq has no national oil law in place. Its constitution is vague about the degree of control regional governments can exert over oil policy.
Iraqi officials know they will have the power to dictate terms to foreign oil companies. “Iraq is definitely in the driver’s seat. They [the government] know they have one of the most prolific resources left in the world,” says Bob Fryklund, vice-president of IHS, the international consultancy.
Energy producers such as Russia, Venezuela and Algeria have typified a new wave of resource nationalism, in effect expropriating foreign ownership of oil projects. In Libya, another country whose oil industry has only just opened up to foreign participation after years of sanctions, the government has now increased its take from all oil projects to an average of 95 per cent, from 81 per cent in 2000. Even in Kurdistan, where the regional authority has signed production-sharing agreements, the government’s take of future oil produced is estimated at 87 per cent, says Mr Fryklund.
Oil industry executives say their companies will not invest if they do not get a significant part of “the upside”, industry jargon for expected increases in production. But Tariq Shafiq, a former director of Iraq’s national oil company, says companies would be prepared to accept variations of service contracts that pay companies fixed returns rather than rewarding them with control over reserves.
“Given how prolific Iraq is, the return to international oil companies [under service contracts] would be just as favourable as under investment [contracts]. And I believe the companies aware of that,” he says.
We have reached the fifth anniversary of the invasion of Iraq. Even though the number of British troops remaining is down to 4,000 – from a peak of 46,000 at the time of the invasion – the economic costs of this debacle are not going away soon.
The British experience in Iraq has uncannily echoed the US experience. In both countries, the war has strained military morale to breaking point, depleted the military equipment arsenal and brought in its wake a national scandal over the country’s failure to care properly for its wounded veterans.
In both countries the budgetary costs have been far higher than originally promised. At the onset of war the Blair government “prudently” set aside £1bn (€1.3bn) to cover the costs. But the UK has already spent over £9bn in Iraq alone. This does not include the huge “tail” in overall war costs, such as the impact of looking after the disabled, replenishing equipment and restoring the forces to pre-war strength.
Veterans are entitled to receive specialised medical care, lump-sum payments for quality-of-life impairments and a disability stipend. The UK has prided itself on its care for its veterans. But the squalid conditions discovered at Selly Oak Hospital in Birmingham have raised questions about whether the NHS has the capacity to care for the severely injured. In our calculations, we have been highly conservative and assumed only £600m for the care of veterans in NHS facilities. If they need private treatment, this figure could easily triple.
The cost of repairing and replacing military equipment destroyed or worn out in Iraq will almost surely exceed £1bn. But the full costs of restoring British forces to their pre-Iraq state of readiness is larger. Sir Richard Dannatt, the army’s chief of general staff, described in a 2007 report how under-funding and an overstretched military had left troops feeling “devalued, angry and suffering from Iraq fatigue”, with many considering leaving the force.
There are, moreover, enormous “hidden” costs, beyond the budget, such as the loss of 387 British soldiers killed or seriously wounded in Iraq and the full social costs of the 2,663 British troops hospitalised in the field and then cared for at home. Factoring in these costs brings the tally to £14bn-£16bn (£21bn, including Afghanistan). Britain is still getting away lightly: the equivalent number for the US (which has deployed 1.6m troops, suffered nearly 4,000 deaths and 70,000 casualties) is a staggering $3,000bn (€1,900bn).
Beyond the economic costs, the Anglo-American fixation on Iraq has had a huge security opportunity cost – shifting the focus from Afghanistan. Nato is now fighting hard to fend off resurgent Taliban forces. Britain is paying a deadly price. In 2003-05, British forces lost nine soldiers in Afghanistan, with eight serious injuries. Since 2006, more than 100 British troops have been killed and more than 1,000 have been injured or contracted a disease.
Britain was a key enabler of the war both politically and militarily. The support for the invasion of Tony Blair, then prime minister, was indispensable at a time when the US faced loud international opposition. Militarily, Britain contributed 10 per cent of the initial force that invaded Iraq and has punched far above its weight in supplying equipment and weapons. Even today, Britain’s presence on the ground dwarfs everyone apart from the US. The remaining “coalition” comprises a handful of countries (including Albania, Bulgaria and Mongolia) with only a token presence. The “coalition of the willing” has become, in effect, a coalition of two, the UK and US.
The House of Commons defence committee was stunned to discover last week that British spending in Iraq had shot up by 72 per cent during the past year, despite lower troop levels. In 2008 the number of British troops on the ground is scheduled to halve – but the bill will be only slightly lower than last year. This is due to the high fixed costs of keeping anyone there – in terms of security, fuel, medical care and repairing equipment. As long as 2,500 British troops remain in Basra, Britain can expect that the costs of Iraq will not drop appreciably and may yet increase.
Unfortunately, Iraq war costs do not stop here. It has helped to weaken the US economy – through higher oil prices and soaring deficits. A weak US economy means a weak global economy. Britain, along with all of America’s trading partners, will end up paying a heavy cost for the Iraq misadventure.
Linda Bilmes of Harvard University and Joseph Stiglitz of Columbia University are co-authors of ‘The Three Trillion Dollar War: The True Cost of the Iraq Conflict’ (Penguin)
Ukraine's government has made changes to a hard-won natural gas agreement with Russia, insisting that a middleman company be removed from the trade, the prime minister said Wednesday.
Yulia Tymoshenko said that, while the Cabinet has given its overall approval to the deal, it has made several changes, such as eliminating trader RosUkrEnergo from the gas dealings beginning next month.
The agreement struck last week appeared to indicate that the company, half-owned by Russia's natural gas giant OAO Gazprom, remains through the year's end.
The deal eased a long-standing dispute with Russia that involved supply reductions to Ukraine and threats to disrupt gas deliveries to Europe, which gets Russian gas in pipelines that cross Ukraine.
But amending that deal is likely to cause new tension with Russia and may hamper further negotiations.
Gazprom officials were not immediately available for comment.
"In general, we support the basis for this agreement, but we still think that the negotiations process must continue," Tymoshenko told reporters. She said RosUkrEnergo should only operate till the end of March.
The other changes include limiting Gazprom's gas sales to Ukraine's industries to a maximum of 7.5 billion cubic meters in the current year — as opposed to a minimum of that amount, as stipulated in the current agreement. Gazprom and Ukraine are battling for access to Ukraine's industrial consumers — the most profitable section of the local market, where payment is more reliable and more solvent than home customers, who are notorious for avoiding bills.
Tymoshenko said the changes still have to be formally endorsed by the Cabinet and be subject to negotiation with Gazprom.
JERUSALEM - Israel lodged a complaint with Switzerland on Wednesday over a Swiss-Iranian natural gas purchase, calling the deal inconsistent with U.S.-led efforts to curb Tehran's nuclear programme through economic isolation.
Swiss Foreign Minister Micheline Calmy-Rey announced the sale during a visit to Tehran on Monday and said her country was ready "to contribute to solutions" to the stand-off over Iranian uranium enrichment and other sensitive nuclear projects.
Israel's Foreign Ministry said in a statement that it summoned Swiss Ambassador Walter Haffner to deplore Calmy-Rey's trip to Iran, calling it "an act that is unfriendly to Israel".
Given recent U.N. Security Council sanctions against Iran, "now is not the proper time to pursue economic deals" with the government of President Mahmoud Ahmadinejad, the statement said.
Ahmadinejad has questioned the Holocaust and called for the Jewish state to be "wiped of the map", stirring war fears. Iran says its nuclear programme is for energy, not military, ends.
The Swiss energy group that signed the 25-year purchase said it could be worth between 10 billion euros ($13.32 billion) and 22 billion euros, depending on factors such as the price of oil.
Calmy-Rey said the contract was "important in a long-term perspective" for both sides and added it did not violate U.N. sanctions resolutions.
"Switzerland and the entire international community are aware of the danger posed by Iran. Israel expects Switzerland to join the international effort in this matter," the Israeli Foreign Ministry statement said.
Israel is assumed to have the region's only atomic arsenal.
Last year, diplomats said Switzerland had proposed a staged plan leading to a simultaneous suspension of Iran's uranium enrichment work and of U.N. sanctions, which would enable talks between Iran and six world powers to begin.
SYDNEY (Reuters) - Australia plans to allow greenhouse gas emissions to be stored in the ocean floor around the island continent, with exploration for suitable sites possibly starting in 2008.
Energy Minister Martin Ferguson said the government would amend the Offshore Petroleum Act this year to allow for seabed storage of carbon emissions from coal-fired power stations.
"Australia has significant geological storage potential, particularly in our offshore sedimentary basins," Ferguson told an energy conference in Sydney late on Tuesday.
"I am hoping that amendments to the Offshore Petroleum Act 2006 will be passed in time for the government to release acreage for exploration in 2008, making Australia one of the first countries in the world to establish a regulated carbon capture and storage regime," Ferguson said.
Green groups are critical of the plan to store carbon emissions in the ocean floor, saying they are concerned about the chances of leakage of emissions into the ocean environment.
"The coal and energy corporations are doubtless lobbying hard for the government to carry all liability for any leakages while they continue to profit from their polluting practices," Greens Senator Christine Milne told local media on Wednesday.
Australia's Labor government, elected in November 2007, ratified the Kyoto Protocol the following month, reversing an 11-year policy by the previous conservative government.
Rudd's government has made climate change a priority and has released a "National Clean Coal Initiative" which will see a regulatory regime for access and tenure to offshore Australia for geological storage.
Australia is the world's largest coal exporter and is reliant on fossil fuel for transport and energy. About 80 percent of electricity is produced by coal-fired power stations.
The country is responsible for about 1.2 percent of global greenhouse gas emissions and is one of the highest polluters per capita.
Its carbon emissions are forecast to continue to grow due to its heavy reliance on coal for electricity, although the government says the country will meet its Kyoto emissions targets by 2012. Emissions will grow by 108 percent of 1990 levels from 2008 to 2012.
"Coal will continue to make a major contribution to Australia's energy needs well into the future and therefore we need to urgently reduce greenhouse gas emissions from coal-fired electricity generation," said Ferguson.
"Clean coal technologies involving carbon capture and storage will play a vital role in meeting future greenhouse constraints. A nationally co-ordinated effort is needed to bring forward the commercial availability of these technologies."
'Coal is so clean and fresh that the prime minister brushes his teeth with it, Downing Street said last night. Mr Brown said advances in coal technology meant it was now one of the cleanest substances on Earth, and an unrivalled remover of stains and scaling." So says the satirical website the Daily Mash. The real claims are scarcely battier.
Ministers are about to decide whether to approve a new coal-burning power station at Kingsnorth in Kent. This would be the first such plant to be built in Britain since the monster at Drax was finished in 1986. As well as coal, it will burn up the government's targets, policies and promises on climate change.
John Hutton, the secretary of state in charge of energy, has started justifying the decision he says he hasn't made. "For critics," he argued last week, "there's a belief that coal-fired power stations undermine the UK's leadership position on climate change. In fact, the opposite is true." Quite so: if we don't burn this stuff the Chinese might get their hands on it. Or could he be a true believer? Does he really think there's such a thing as clean coal?
Clean coal's definition changes according to whom the industry is lobbying. Sometimes it means more efficient power stations - which still produce almost twice as much carbon dioxide as gas plants. Sometimes it means removing sulphur dioxide from the smoke, which boosts the CO2. Sometimes it means carbon capture and storage: stripping the carbon out of the exhaust gases, piping it away and burying it in geological formations. None of these equate to clean coal, as you will see if you visit an opencast mine. But they create a marvellous amount of confusion in the public mind, which gives the government a chance to excuse the inexcusable.
In principle, carbon capture and storage (CCS) could reduce emissions from power stations by 80% to 90%. While the whole process has not yet been demonstrated, the individual steps are all deployed commercially today: it looks feasible. The government has launched a competition for companies to build the first demonstration plant, which should be burying CO2 by 2014.
Unfortunately, despite Hutton's repeated assurances, this has nothing to do with Kingsnorth or the other new coal plants he wants to approve. If Kingsnorth goes ahead, it will be operating by 2012, two years before the CCS experiment has even begun. The government says that the demonstration project will take "at least 15 years" to assess. It will take many more years for the technology to be retro-fitted to existing power stations, by which time it's all over. On this schedule, carbon capture and storage, if it is deployed at all, will come too late to prevent runaway climate change.
Kingsnorth will produce around 4.5m tonnes of CO2 every year; if all eight of the proposed coal plants are built, they will account for 46% of the emissions Britain can produce by 2050, assuming the government sticks to Brown's new proposed target of an 80% cut. Aviation, using the government's own figures, will account for another 184% (these figures are explained on my website). Even if we stopped breathing, eating, driving and heating our homes, the new runways and coal burners the government envisages would more than double our national greenhouse gas quota.
The government seeks to bamboozle us by arguing that the new power stations will be "CCS ready", meaning that one day, in theory, they could be retrofitted with the necessary equipment. But even this turns out to be untrue. In January, Greenpeace obtained an exchange of emails between E.ON, the company hoping to build the new plant - yes, the same E.ON that broadcasts footage of fluttering sycamore keys, suggesting that its dirty old habits have gone with the wind - and Gary Mohammed, the civil servant drawing up the planning conditions.
Mohammed begins by sending an email of such snivelling obsequiousness that you can almost smell the fear on it. "Drafting the conditions for Kingsnorth. If possible I would like to cover CCS ... I admit this suggested condition could be without justification and premature but no harm in trying to gauge your opinion." (This "suggested condition" was actually government policy. Who's running this country?) E.ON replied by claiming that the secretary of state "has no right to withhold approval for conventional plant" (in fact he has every right). All it would allow the government to specify was that the potential for CCS "will be investigated". Mohammed wrestled with his conscience for all of six minutes before replying. "Thanks. I won't include. Hope to get the set of draft conditions out today or tomorrow."
This exchange took place in mid-January, a few days before the European commission published a proposed directive specifying that all new coal-fired stations must be CCS ready. Mohammed must have known that he was helping E.ON to win approval for the plant before the directive comes into force next year.
You might by now be beginning to derive the impression that carbon capture and storage is not the green panacea ministers have suggested. But you haven't heard the half of it. Even if it does become a viable means of disposing of carbon dioxide, new figures suggest that it's likely to enhance rather than reduce our total emissions.
For the companies bidding for contracts to bury the gas, one technique is more attractive than the others. This is to pump it into declining oil fields. The gas dissolves into the remaining oil, reducing its viscosity and pushing it into the production wells. It's called enhanced oil recovery (EOR). The oil the companies sell offsets some of the costs of carbon storage.
A few weeks ago, the green thinker Jim Bliss roughly calculated the environmental costs of this technique. He used as his case study the scheme BP proposed but abandoned last year for pumping CO2 into the Miller Field off the coast of Scotland. It would have buried 1.3m tonnes of CO2 and extracted 40m barrels of oil. Taking into account only the four major fuel products, Bliss worked out that the total carbon emissions would outweigh the savings by between seven and 15 times.
So has the government ruled out enhanced oil recovery? Not a bit of it. Its memo about the demonstration project says that Hutton's department "will want to ensure that the treatment of EOR and non-EOR projects are dealt with on a level playing-field basis". Another document suggests that it favours this technique: enhanced oil recovery will lead to "increased energy security, domestic revenue and employment". But, the government notes, this will have to happen before the North Sea's oil infrastructure is dismantled. "Now is the perfect opportunity to realise the significant opportunities offered by CCS."
Like biofuels and micro wind turbines, carbon capture and storage turns out to be another great green scam. It will come too late to prevent runaway climate change; the government has no intention of enforcing it; and even if it had, the technique is likely to boost our carbon emissions. This is what John Hutton calls "meeting our international obligations". Heaven knows what breaking them might look like.
British Energy is in talks with a number of rivals, which could lead to a tie-up or a takeover offer that some say would value the country's main nuclear power generator at more than £7bn.
Shares in the British company soared by nearly 20% after it confirmed the discussions but declined to identify any of the potential partners or predators.
EDF of France, E.ON of Germany and Centrica, owner of British Gas, are among the key players known to have been holding partnership talks that have turned into something more substantial.
British Energy is in demand because it generates about a sixth of Britain's electricity but, more importantly ,has the most attractive potential sites to build a new generation of nuclear plants.
"The board announces that the company is in discussions with interested parties in the context of its future and its plans to take a pivotal role in any new nuclear programme," said a formal statement from British Energy, which continues to be 35% owned by the UK government. "There can be no certainty that any offer will be made," it added.
The British company, which operates power stations such as Sizewell in Suffolk, Dungeness in Kent and Bradwell in Essex, said last year that it intended holding talks with potential partners about the use of its sites. The talks have hotted up this year after increasingly bullish statements from ministers about nuclear energy.
John Hutton, the business secretary, said recently that he was looking not only at replacing existing nuclear power capacity in Britain but possibly increasing it in a bid to boost energy security and curb potential carbon emissions at a time of rising energy demand. The government has also made clear to key utilities that it wants to offload its 35% stake to one or more of them.
"The talks on partnering that began last year were low key but the values put on the sites and skills of British Energy have changed since potential partners have heard the ambitious talk from government," said a source close to the talks.
"A range of possibilities including co-investment, equity stakes and full offers are all possible but nothing is going to happen overnight," he added. "There will be no announcement next week; it is likely to take quite a long time."
Neither EDF, E.ON nor Centrica was willing to make any comment on the situation, while Scottish & Southern Energy would only confirm that it remained "interested in new build". RWE also refused to talk about the UK company.
Last month Citigroup equity analysts put out a research note saying that Centrica may bid for British Energy to lessen its dependence on gas-fired power stations. It has always said it was interested in making major commitments to buy electricity from atomic power stations but has been lukewarm about equity stakes in nuclear generators.
British Energy was saved from financial collapse in 2002 by the government after being hit by weak power prices. Its shares were only relisted on the stock exchange in 2005 and ministers have hinted that they want to sell the government stake.
Lakis Athanasiou, utility analyst at Evolution Securities, said it was most likely the government's stake would be split between British Energy's partners in new nuclear reactors. "It is difficult to see government wanting to face the political difficulties of placing the entire UK nuclear industry in the hands of a single foreign company," he said.
The investment bank UBS has been appointed to advise on commercial and financial aspects of new nuclear power stations in Britain. Yesterday, a spokesman for the Department for Business, Enterprise & Regulatory Reform said: "The government is monitoring developments closely and will consider its position in relation to any proposal in the public interest, having regard to its objectives in relation to energy policy and its obligations to the taxpayer. BE is a company whose shares are listed ... and it would be inappropriate to comment further."
First Minister Alex Salmond has officially opened a £90m biomass power station near Lockerbie.
Steven's Croft - owned and operated by E.ON - is the largest wood-fired facility of its kind in the UK.
Mr Salmond toured the site and then switched on a meter which measures megawatts, carbon dioxide and the number of homes receiving energy.
Mr Salmond said the power station would help to put Lockerbie on "Scotland's renewable energy map".
He said the facility would have a major impact nationwide.
"At a stroke, Steven's Croft more than doubles Scotland's biomass electricity generating capacity from 39 to 83 megawatts," he said.
"It is proof that not only can we generate power from materials previously seen as waste, we can create good quality jobs and improve the sustainable management of our forests.
"The power plant will produce enough green energy, from the surrounding forests, to supply up to 70,000 homes - more than 17 times the population of Lockerbie."
Mr Salmond said it could be part of moves to make the country self-sufficient in green energy.
"Scotland's renewable potential is immense - enough to meet our energy requirements many times over," he added.
"Biomass is a growing component of the mix.
"Steven's Croft power station is a great showcase for the role biomass can play in a cleaner, greener Scotland."
E.ON climate and renewables chief executive Frank Mastiaux said he was pleased the first minister had opened the "pioneering project".
"We need a mix of energy sources such as biomass if we're going to succeed in ensuring a secure supply of electricity to keep the lights on while reducing carbon emissions," he said.
"That's why we're taking the lead and building projects like Steven's Croft, which represents part of a billion pound investment that we're making in the development of renewable energy in the UK over the next five years."
The Conservative MP for the area, David Mundell, has also welcomed the official opening.
He said: "It is great to see this area once again leading at the forefront of power technology - just as Chapelcross did 50 years ago.
"With the closure of Chapelcross, I am delighted that we still have energy production in the region and all the expertise that brings with it.
"This site is creating 50 jobs at Steven's Croft and is supporting 250 more and it is great news that the timber is being sourced locally."
Australia's government has set aside A$1 billion ($0.93 billion) for the development, commercialization and deployment of various renewable and low-emission energy technology initiatives, the Minister for Resources and Energy Martin Ferguson said at the Energy State of the Nation Forum in Sydney Tuesday.
Half the sum would be channeled toward renewable energy technologies, and the balance spent on developing clean energy technologies.
As the country's electricity generation is mostly coal-fired, there is pressure on the industry to reduce greenhouse gas emissions. Funds have been established for developing clean coal technologies, including carbon dioxide capture and geological storage.
"The most significant policy challenge facing the energy sector today is climate change. The Australian government is serious about acting responsibly on climate change and has committed to reducing Australia's greenhouse gas emissions by 60% on 2000 levels by 2050," Ferguson said.
"The government is also serious about being economically responsible and we are committed to reducing emissions at least economic cost, whilst maintaining adequate, reliable and affordable energy supplies and the international competitiveness of Australia's industries," he added.
Prime Minister Kevin Rudd ratified the Kyoto Protocol in December 2007, a few weeks after he took office.
Centrica, the owner of British Gas, is in talks with potential investors about funding for its massive £3bn expansion into alternative energy following a sharp rise in project costs.
The head of Centrica's renewables division has warned that the economics of the industry have changed radically and government targets for powering Britain on "green" electricity face being blown off course.
Centrica is already building the world's largest offshore wind farm at a cost of £300m, and is planning another £600m project which, it says, has risen in cost by £100m in just a few months.
News that the country's biggest backer of wind farms is voicing concern about funding will alarm the Government, which sees this energy source as key to meetings its commitments to reduce carbon emissions.
Sarwjit Sambhi, Centrica's director of power generation and renewables, said there are some "strong headwinds - financial, in the supply chain and skill shortages".
He added: "We will have to bring in investment and trade partners on future projects. The balance sheets of the utilities cannot absorb all the increased costs."
His comments will be seen as an open invitation to infrastructure funds and finance houses to come and talk about partnering Centrica on a variety of alternative energy projects. Mr Sambhi would not discuss rumours that Centrica is in discussions with Riverstone, the private equity firm that has employed ex-BP chief Lord Browne to look at alternative energy investments.
Centrica is considering plans for several wind farms, to be built by 2015, at a current estimated cost of £3bn. But it is worried about how it can plan for long-term investments that could spiral out of control.
The Government has laid down targets for energy companies to build 33 gigawatts of offshore wind by 2020. Three years ago, the industry estimated meeting this figure would mean investment of about £40bn.
Mr Sambhi said the cost today is put at £80bn, adding: "If manufacturers cannot meet the product delivery cycle it threatens the Government's wind dream."
Centrica will push ahead with one of the UK's most ambitious offshore wind generation building programmes after it secured a long-term contract on the MV Resolution, the world's largest turbine-installing barge.
The British Gas owner is using the ship to finish its 180 megawatt project at Lynn and Inner Dowsing off the Lincolnshire coast, the UK's largest offshore fields currently under construction. Its contract on the vessel, which has six legs that plant it on the sea floor while it installs the massive offshore turbines, was set to expire at the end of the year, but it has now been extended through to 2011, with additional one-year options through 2016.
The contract is crucial if the company hopes to deliver the £3bn worth of wind projects it plans to build in the coming years. Control of the vessel also gives it an advantage over rivals amid a squeeze up and down the wind industry supply chain that has driven construction and material costs dramatically upward.
Centrica could capitalise on these pressures by renting out the ship – the only one of its kind in the world – to the highest bidder. Alan Thompson, head of renewables, said: "While the vessel is important to us, we will not be looking to monopolise it and we're open to other commercial opportunities that may arise during times when it may not be required for our own work."
The Government's plan for the construction of more than 10,000 wind turbines on and off shore by 2020 has increased the strain on the industry already struggling to keep up with demand. Siemens, one of the world's leading turbine manufacturers, has told customers that it won't be able to fulfil new orders until 2012. Centrica said prices for materials and turbines have gone up by 50 per cent in the last three years.
Of the forecast 40 gigwatts of the country's power the Government ultimately hopes to derive from wind, 33gw will be offshore.
The Resolution, a specialised "turbine installation vessel" operated by MPI in Middlesborough, is the only six-legged barge of its kind. Energy companies contract similar ships used by the oil and gas industry to build offshore platforms, but such specialised vessels are in short supply.
The powerful chairman of a key congressional committee is pressing the US federal government to comply with energy legislation that bars the use of fuel from Canada’s oil sands.
The legislation, signed into law Dec 19 last year, prohibits the federal government from procuring fuels with a higher greenhouse gas content than conventional fuels, such as that from Canada’s oil sands or coal-to-liquids.
Henry Waxman, chairman of the House oversight committee, wrote to Robert Gates, US defense secretary, in January requesting he identify all Department of Defense projects that might be impacted by the law and what steps he will take to come into compliance.
The Defense Department is the US government’s biggest single oil consumer. In 2006 its energy supply agency purchased 136m barrels of petroleum, an amount greater than the 360,000 barrels per day consumed by Sweden.
”The federal government is the largest consumer of energy in the United States, so looking at ways to reduce the government’s carbon footprint can have a big impact,” Mr Waxman told the Financial Times. ”When the government spends taxpayer dollars to fuel government operations, it shouldn’t choose fuels that make the problem of global warming worse.”
Canada is the largest supplier of oil to the US, at 2.3m barrels per day. About half of those crude oil exports are derived from oil sands, and the oil sands industry is a major contributor to Canada’s economy.
Mr Waxman included the restriction in the 2007 energy independence and security act when it was being drafted last June, in response to proposals under consideration by the Air Force to develop coal-to-liquids fuels.
The law sits uncomfortably with the policy of the Bush Administration, which has been encouraging development of the oil sands – the biggest proven oil reserve outside Saudi Arabia - to bolster energy security by reducing dependence on the Middle East.
Canadian Ambassador Michael Wilson last month wrote to Mr Gates, Condoleezza Rice, US Secretary of State, and Samuel Bodman, US Energy Secretary, warning that a narrow interpretation of the legislation would have “unintended consequences for both countries”.
A source close to the political wrangling said the government was likely to seek a way away around compliance, such as by claiming carbon from the oil sands projects will be captured and stored once technology is available, or that the provider has offset carbon emissions with carbon credits.
Canada this week revealed new regulations mandating carbon capture and storage for oil sands and coal-fired plants that begin operating from 2012.
Yet the source said it is unclear whether such tactics will work, given the law provides no loopholes and the political climate has turned against greenhouse gases.
In his letter to Mr Gates, a copy of which has been obtained by the Financial Times, Mr Waxman was sceptical of such workarounds. ”The promise that in the future, there might be ways to avoid increases in greenhouse gases would not be sufficient to meet the requirements,” he wrote.
Tom Davis, the highest ranking Republican on the oversight committee, also signed the letter to Mr Gates. “It is important [the Defense Department] come in line with energy policy and the will of Congress not be ignored,” said Mr Davis’ spokesman, Ali Ahmad.
The Department of Defense has missed a Feb 15 deadline set by Mr Waxman for a response to the letter, but has said it is working on its reply.
It referred calls to the Department of Energy, which says it is assessing the implications of the law but offered its supports for oil sands development.
“The US government, including Secretary Bodman, have on many occasions publicly welcomed oil sands expansion, given that this expansion further enhances US and north American energy security,” said Megan Barnett, Energy Department spokeswoman.
The government's Code for Sustainable Homes demands that all new homes in Britain will have to be zero-carbon in emissions terms by 2016, but the new study, carried out by the Empty Homes Agency charity, suggests that developers have overestimated the amount of overall CO2 saved by building energy-efficient homes. Its report, titled 'New Tricks With Old Bricks', says reusing and refurbishing existing and empty properties could actually save more carbon dioxide than constructing new ones.
'The government advocates the building of new homes as a means of creating properties which cut carbon emissions, but the initial construction process alone accounts for a very large proportion of carbon emitted over a building's lifetime,' says Henry Oliver, policy adviser at the Empty Homes Agency. 'We're not suggesting that developers shouldn't build new houses. But we're saying that the refurbishment of existing properties could be a better way of reducing long-term CO2 emissions.'
The Empty Homes Agency compared three new-build homes with three refurbished ones and found very little difference between them in the amount of CO2 given off in normal day-to-day energy use. But while the construction of a newbuild home gives off 50 tonnes of CO2, the refurbishment process of an existing one emits just 15 tonnes of CO2
The agency says it is concerned that some developers and regeneration planners use 'assertions of superior environmental performance' to justify demolishing existing older properties and replacing them with new homes.
The government's Housing Market Renewal Initiative includes a 15-year programme that aims to renew housing stock and improve poor-quality homes in certain areas across the country, such as Lancashire, Yorkshire and Liverpool. In these projects, known as 'Pathfinders', the initiative paves the way for the demolition of existing empty (and in some cases occupied) properties to make way for newer homes intended to draw buyers back into neglected and unpopular neighbourhoods.
According to the Empty Homes Agency, there are 288,000 homes in England that have been empty for more than six months. 'As a country, we ought to be focusing on making full use of refurbishing existing properties, rather than demolishing them to make way for new developments in order to reduce our overall carbon footprint,' says Oliver. 'If we were to make use of these homes, rather than knock them down and build new ones instead, we could seriously dent our CO2 emissions.'
The New Heartlands Pathfinder, which is responsible for renewing residential areas in Liverpool, the Wirral and Sefton, has set up an 'empty homes team' on the Wirral. The team has contacted absentee landlords of empty properties and offered to refurbish them on their behalf, as well as organising repair schemes for older properties. 'Refurbishing properties really gives something back to the community, as they can see that the whole area is benefiting from improvements,' says Peter Flynn of the New Heartlands Pathfinder.
Since new homes are well insulated, they can eventually make up for the large amount of emissions released during their initial construction because of their overall lower energy costs. But it can take several decades - in most cases, more than 50 years - for the figures to eventually balance out. Oliver says that although new-builds can last for more than 50 years, their quality can 'sometimes be poor' and that it is likely that a new-build house will need refurbishing once it gets to that age.
'If you are buying a flat made from chip-foam panelled walls as a low-cost housing solution, then yes, it might not last forever,' says Bill Dunster, architect and director of Zedfactory, the firm that designed the largest carbon-neutral eco-development in the country, BedZed in Surrey. 'We do have to stop this "dash for trash" and stop people building homes which look good but will become unlivable. We have to go back to quality.'
The government's code for sustainable living outlines six different levels of energy efficiency for homes, with number six being zero-carbon. Along with a consortium of other architects, Dunster has designed 'RuralZed', the country's only zero-carbon self-build home to meet level six of the code. The houses come in self-build kits that take professional builders about two weeks to construct.
The rate at which some of the world's glaciers are melting has more than doubled, data from the United Nations Environment Programme has shown.
Average glacial shrinkage has risen from 30 centimetres per year between 1980 and 1999, to 1.5 metres in 2006.
Some of the biggest losses have occurred in the Alps and Pyrenees mountain ranges in Europe.
Experts have called for "immediate action" to reverse the trend, which is seen as a key climate change indicator.
Estimates for 2006 indicate shrinkage of 1.4 metres of 'water equivalent' compared to half a metre in 2005.
Achim Steiner, Under-Secretary General of the UN and executive director of its environment programme (UNEP), said: "Millions if not billions of people depend directly or indirectly on these natural water storage facilities for drinking water, agriculture, industry and power generation during key parts of the year.
"There are many canaries emerging in the climate change coal mine. The glaciers are perhaps among those making the most noise and it is absolutely essential that everyone sits up and takes notice.
He said that action was already being taken and pointed out that the elements of a green economy were emerging from the more the money invested in renewable energies.
Mr Steiner went on: "The litmus test will come in late 2009 at the climate convention meeting in Copenhagen.
"Here governments must agree on a decisive new emissions reduction and adaptation-focused regime. Otherwise, and like the glaciers, our room for manoeuvre and the opportunity to act may simply melt away."
Dr Ian Willis, of the Scott Polar Research Institute, said: "It is not too late to stop the shrinkage of these ice sheets but we need to take action immediately."
The findings were compiled by the World Glacier Monitoring Service which is supported by UNEP. Thickening and thinning is calculated in terms of 'water equivalent'.
Glaciers across nine mountain ranges were analysed.
Dr. Wilfried Haeberli, director of the service, said: "The latest figures are part of what appears to be an accelerating trend with no apparent end in sight.
"This continues the trend in accelerated ice loss during the past two and a half decades and brings the total loss since 1980 to more than 10.5 metres of water equivalent."
During 1980-1999, average loss rates had been 0.3 metres per year. Since the turn of the millennium, this rate had increased to about half a metre per year.
The record annual loss during these two decades - 0.7 metres in 1998 - has now been exceeded by three out of the past six year (2003, 2004 and 2006).
On average, one metre water equivalent corresponds to 1.1 metres in ice thickness. That suggests a further shrinking in 2006 of 1.5 actual metres and since 1980 a total reduction in thickness of ice of just over 11.5 metres or almost 38 feet.
In its entirety, the research includes figures from around 100 glaciers, with data showing significant shrinkage taking place in European countries including Austria, Norway, Sweden, Italy, Spain and Switzerland.
Norway's Breidalblikkbrea glacier thinned by almost 3.1 metres in one of the largest reductions.
European Union leaders, seeking to set the pace for the world, plan to announce on Friday that they will convert their bold promises to fight global warming into law within 12 months.
A confidential internal audit report on EU allowances is still the talk of the town in Strasbourg, writes Andrew Bounds
Leaders of the 27-nation bloc intend to conclude a two-day summit with a pledge to adopt binding national targets for cutting greenhouse gas emissions and raising renewable energy use by March 2009.
According to a draft summit statement, the leaders will also address the financial market crisis by saying “prompt and full disclosure of exposures to distressed assets and off-balance sheet vehicles, and/or of losses by banks and other financial institutions, is essential”.
They will praise sovereign wealth funds for playing “a very useful role as capital and liquidity providers”, but will warn that some new funds have “limited transparency”, raising concerns about whether investments are politically rather than commercially motivated.
The summit opened on Friday with a reaffirmation of the bloc’s faith in economic reforms guided by the so-called Lisbon strategy, adopted in 2000 and now seen as producing useful results after a muddled start.
Leaders then turned to climate change, a subject on which José Manuel Barroso, European Commission president, says the EU will lack credibility unless it fulfils its promises of radical action.
The EU is already committed in principle to a 20 per cent reduction in emissions and a 20 per cent share of renewables in overall energy consumption by 2020. The share of biofuels in vehicle fuel is supposed to rise to 10 per cent by the same date.
In January the Commission proposed carbon reduction and renewables use targets for each member state, on the basis that the EU’s wealthiest, western European countries should bear more of the burden than its new central and eastern European members.
Leaders will pledge to reach a political deal on national targets by December, with the aim of passing the necessary EU-level legislation by March 2009, according to the summit statement.
They will reaffirm their willingness to raise their target for cutting carbon emissions to 30 per cent by 2020, provided that the world’s largest economies reach “a global and comprehensive agreement ... in a balanced, transparent and equitable way”.
Environmentalists have criticised the EU’s plans as conceding too much to Europe’s industrial lobbies but some governments and business leaders take the opposite view, fretting about competitiveness because other countries might not impose standards as tough as those in Europe.
In recognition of this argument, the summit statement says “appropriate measures [should] be implemented in the event that other countries do not commit to taking adequate measures to reduce greenhouse gas emissions in the context of an international agreement”.
The March 2009 deadline is important because that is when the European parliament will hold its final legislative session before it closes before European elections in June 2009. Once the new parliament convenes, it will be busy with procedural tasks as well as hearings for nominees to the next European Commission, due to take office in autumn 2009.
Unless it passes strong climate change legislation by March 2009, the EU is in danger of looking weak when it starts talks with China, the US and other powers at a landmark conference on global emission cuts scheduled for December 2009 in Copenhagen.
The former British prime minister, Tony Blair, has begun a lightning tour of three Asian capitals to try to break the deadlock over climate change.
It would be easy to be cynical about Mr Blair's one-man mission to save the planet.
He's already supposed to be bringing peace to the Middle East, stability to Rwanda, and harmony between Islam and Christianity - as well as earning a small fortune in consultancies.
But now he's meeting Japan's Prime Minister Fukuda to try to clear the path towards the G8's deliberations on climate change in the summer.
He flies straight to Beijing where he wants to nudge Premier Wen into reining in China's emissions.
Then it's off to India on Sunday with the task of hauling reluctant politicians towards the climate negotiating table.
He's hoping to meet Prime Minister Singh.
Can one man make a difference? Well, maybe.
Some of the foot soldiers stuck in the trenches of the endless climate talks are grateful for a smiling knight on a charger bearing messages between their generals - messages he will take to the White House.
Adam Matthews, secretary-general of the world parliamentarians' environment organisation Globe, said: "One thing Blair does have is fantastic contacts and access - way above most other people you could imagine.
"It's really helpful to get climate change into the offices of world leaders. This is where the difference will really be made."
Mr Blair's mission is unlikely to do any harm (except from his unavoidable carbon emissions).
And he's not charging a fee.
Investors scrambled to liquidate risky positions across the board last night in a renewed flight to safety, setting off a biggest one-day fall in gold for a quarter of a century and a slide in currencies and stock markets.
On Wall Street the Dow Jones Industrial Average tumbled 293 points to 12099.7 on fears that the Federal Reserve's dramatic rescue moves over recent days may not be enough to stabilise the financial crisis.
On the New York Mercantile Exchange, crude oil tumbled $6 to $103.42 a barrel - the biggest fall since December 2004 - on mounting fears of a global economic slowdown. Gold crashed $42 to $943.50 an ounce. Wheat futures plunged by 7.7pc in Chicago.
"A major commodities correction is under way," said James Steel, a strategist at HSBC. Stephen Jen, a currency strategist at Morgan Stanley, said the markets were now flashing warnings of "severe risk aversion" comparable to the panic last August.
The move by hedge funds and banks to unwind large speculative trade even triggered a correction in the euro. The currency fell to $1.5580 against the dollar as speculators closed bets after a dizzying rally to record highs this year. The fall in sterling was even more marked, losing almost four cents to slump below $2 to $1.986.
It also dropped to a new 11-year low on its trade-weighted index, which measures its strength against a basket of other currencies, falling from 94.2 to 93.1 points. Investors were abandoning sterling amid growing suspicions that the Bank of England is gearing up for another cut in interest rates next month.
The severity of the moves in a range of markets suggested that funds were closing their most profitable trades in a scramble to raise liquidity. Automatic stop losses were triggered as commodities crashed through support levels, setting off a downward spiral.
Meanwhile, a report on US energy needs showed that the country's total implied fuel demand averaged 20.3m barrels a day in the past four weeks - down 3.2pc from last year.
Phil Flynn, senior trader at Alaron Trading in Chicago, said: "The commodity bubble is bursting. There's a sense that the Fed created this bubble and by cutting rates less than forecast it is deflating it. There is demand destruction occurring and it's going to be hard to prop up oil prices."
The fire sale of Bear Stearns, the US investment bank, brings the credit crisis to a new, more dangerous phase. Many market participants seem to be hoping for a short-term miracle from the Federal Reserve to end the turmoil. They will be disappointed.
Bear Stearns could not borrow because its creditor banks and counterparties use modern risk management systems that require them to hold enough capital to meet potential losses on their portfolios. When the “value at risk” of its portfolio rises, a bank must either raise more capital to support the additional risk or shrink the risk (by selling assets, demanding larger “haircuts” – cash safety margins – from investors or not rolling over loans).
As the credit crisis has continued, banks’ measured risks have rocketed. At the same time, banks have suffered losses that have depleted their capital. This combination of factors has brought the US financial system to its knees. Credit lines are being withdrawn as banks try to ratchet down the risks they face. That Bear Stearns could fetch only $2 per share, when a week earlier it was trading at $70 per share, is the best available proof that banks’ appetite for risk-taking has vanished. This could be the beginning of a massive global credit crunch.
Several conclusions follow. First, since the largest intermediaries do not have enough capital to support their measured risks, they will keep trying to shrink their balance sheets unless they can rebuild their capital (or, magically, their perceived risk falls). This explains why the Fed’s liquidity measures such as the term auction facility, the term securities lending facility and the new primary dealer credit facility are likely to be temporary patches that do not stop the distress.
Banks want to shrink risk exposure, not maintain or expand it. Liquidity support by the Fed is an invitation to borrow from the central bank for on-lending to others – that is, to expand balance sheets. On the contrary, the banks and brokers want to contract their balance sheets.
Second, the Fed is not well-equipped to deal with this problem. To create real capital it would need to make outright purchases of impaired collateral at above-market prices. This would amount to a publicly funded shareholder bail-out. This is not the central bank’s job and the Fed knows it.
Third, recapitalising the banks should be the priority. For a start, the suspension of dividends (even by well-capitalised banks) will free up lending capacity. However, this is unlikely to be enough and will take time. New capital needs to be found soon. Existing shareholders will no doubt resist dilution, but they must not be allowed to stand in the way of a solution. These are the very shareholders who allowed their banks to create the current mess, which now threatens to cripple the financial system.
The quickest solution is to identify some buyers before the next spiral down. One obvious set of buyers are the Middle Eastern sovereign wealth funds. They have stepped up once and were burnt on their first wave of investments. But since the January meeting of the Fed’s open market committee, when the central bank made it abundantly clear that it will try everything possible to stave off collapse, oil prices have risen from roughly $92 a barrel to $109 (as of March 18).
Other commodity prices have also risen over this period. Given the deteriorating prospects for the global economy over this time, a plausible interpretation is that some of the financing that might have gone to the financial institutions has instead been directed towards buying commodities such as oil. This portfolio reallocation represents a pure windfall for the oil producers.
Middle Eastern oil countries produce roughly 25m barrels of oil a day. If they could be persuaded to recycle $4 a barrel of the $17 price run up since the January Federal open market committee meeting, this would represent $4bn of capital that could be deployed; Bear Stearns was sold for $250m. Admittedly, this is a conversation for Condoleezza Rice, secretary of state, and not Hank Paulson, Treasury secretary, to have. But it is worth recalling that the firms that bailed out Long-Term Capital Management in 1998 in fact profited nicely, and relatively quickly. Conversely, if a full-blown credit crunch ensues, the fallout to the world economy is likely to be large enough to pull the price of oil back down sharply.
Finally, in case our proposal sounds unpalatable, it should be compared with the alternative in which the banking system deteriorates to the point where a public recapitalisation becomes inevitable. Direct government ownership should be the last resort but failure to move soon could make it the only option left on the table.
Anil Kashyap is Edward Eagle Brown professor at the University of Chicago Graduate School of Business. Hyun Song Shin is professor of economics at Princeton University. They are co-authors with David Greenlaw and Jan Hatzius of ‘Leveraged Losses: Lessons from the Mortgage Market Meltdown’
Liquidity, rumour-mongering and housing market troubles top the list of subjects for discussion when Britain's top bankers meet senior officials from the Bank of England today.
They run the risk of talking into the Easter holidays such is their full agenda, as Britain's banking industry, already facing its toughest period for over a decade, was rattled yesterday by speculation that a bank was facing liquidity problems.
HBOS, the country's biggest mortgage provider, bore the brunt of the chatter and its shares crashed 17 per cent.
HBOS slammed the rumours and authorities joined in with an unprecedented public reaction. The BoE said no bank was in trouble and the Financial Services Authority warned it will hunt out people spreading "unfounded rumours".
The quick reaction from authorities showed investors remain jittery about UK banks, and also that authorities are more alert to worries than six months ago, when they were criticised for a slow reaction to a crisis at mortgage lender Northern Rock, since nationalised.
Britain's biggest bank sector victim so far is Northern Rock, also hit by a shortage of liquidity in financial markets, that remains at the heart of industry concerns as banks stop lending to each other.
How the BoE can lubricate the system and restore confidence will therefore dominate much of today's meeting.
Chief executives or senior directors from the "Big Five" banks - HSBC, Royal Bank of Scotland, Barclays, Lloyds TSB and HBOS - are expected to meet BoE officials, including Governor Mervyn King, for a "regular exchange of views".
The meeting was only called last week, however, and little in banking at present can be considered routine. Details of the meeting have not been released.
The BoE added an extra £5bn to its normal weekly lending operation today in an effort to boost UK confidence, after offering the same amount in an exceptional operation on Monday.
The interbank cost of borrowing three-month sterling hit a fresh high for the year of 5.98 per cent on Wednesday, after rising for nine straight days as worries about counterparty risks have left banks wary about lending to one another.
That has helped fuel the increased speculation about banks potentially in trouble.
British inflation leapt further above target to a nine-month high in February but the jump was purely due to changes in the way utility bills are calculated, official data showed on Tuesday.
The Office for National Statistics said consumer prices rose 0.7 percent last month, taking the annual rate to 2.5 percent, as forecast by economists and well above the government's 2.0 percent target.
The statistics office announced last month that changes in gas and electricity bills would hit the index immediately rather than being phased in over several months.
Without the change in methodology, CPI inflation would have held steady at 2.2 percent, the ONS said.
Still, the figures highlight the dilemma facing the Bank of England as it confronts a slowing economy and rising price pressures.
Investors are betting the Bank will cut interest rates by 100 basis points before the end of the year to shore up the economy as the global credit crisis deepens.
However, the central bank may be constrained by concerns inflation will rise even higher in the coming months.
"I don't think the Bank of England is going to go in April. A lot will depend on how the markets go between now and the meeting," said George Buckley, chief UK economist at Deutsche Bank. "I think we're going to move in May."
The pound hit session highs versus the dollar and euro, having earlier pared gains, while stocks briefly extended gains after the CPI data came in as expected -- trimming expectations for near-term rate cuts.
Core inflation, which strips out oil and food prices, eased to 1.2 percent in February, its lowest rate since August 2006.
Scottish & Southern Energy (SSE) is to raise its domestic energy prices by an average of 14.2% for electricity, and by 15.8% for gas.
The last of the big six suppliers to announce price rises since the start of the year, SSE said the increases would come into effect from 1 April.
Npower, EDF Energy, British Gas, Scottish Power and E.On have already lifted their own prices.
Like all its rivals, SSE has blamed the sharp rise in wholesale energy prices.
"Energy supply in the UK is changing dramatically, with companies having to operate in volatile markets, which reflect depletion of North Sea oil and gas fields, soaring global demand for all types of energy and over $100 a barrel for oil," said SSE's energy supply director Alistair Phillips-Davies.
"These pressures are compounded by the rising transmission, distribution and environmental costs which suppliers have to meet.
"You cannot resist indefinitely the impact of these issues and I am sorry that all of this has culminated in the price rises we are announcing today."
SSE said in January that it would not lift its prices until at least April.
An annual SSE electricity bill will rise by an average of £50 and a gas bill by £85, according to price comparison website Uswitch.com.
A dual fuel bill will increase by £131, it said, taking the average annual fuel bill for a SSE customer to £1,006 as of 1 April.
"As the last of the big six energy suppliers to increase its prices, SSE should be applauded for ensuring its customers were not impacted by price increases over the winter months," said Tim Wolfenden, head of home services at Uswitch.com.
"Unfortunately, it should come as no surprise to their customers that bills are increasing as where others lead, it was sure to follow."
Since the start of the year, Npower has put prices up for its electricity customers by 12.7% and gas prices rose by 17.2%. EDF put up electricity tariffs by 7.9% and gas prices by 12.9%.
British Gas increased gas and electricity prices by 15%. Scottish Power increased gas bills by 15% and electricity bills by 14%, and E.On put up gas bills by 15% and electricity tariffs by 9.7%.
Middle-class families are facing some of the highest inflation rates in Britain, new research has suggested.
The Daily Telegraph/Capital Economics Real Cost of Living report shows that while the official Consumer Price Index is at 2.5pc, many middle-class families face inflation of some 5.8pc. Higher energy costs and shopping bills were among the key reasons for the increase in living costs.
Jonathan Loynes, of Capital Economics, said middle-class families had been particularly hard hit by recent rises in food prices and education costs.
He added: "Pensioners' inflation also rose sharply in February in response to the rise in gas and electricity bills, though the winter fuel allowance announced in the Budget should help to soften the blow."
Police investigators on Wednesday searched the Moscow offices of TNK-BP, BP’s 50 per cent-owned Russian joint venture, as part of a criminal probe, in what industry experts saw as a possible increase of state pressure on the company.
Russia’s interior ministry said police were seizing documents in relation to a criminal investigation into the Sidanco oil firm, a predecessor company that now forms part of TNK-BP.
BP declined to confirm or deny the searches.
The company, which is also 50 per cent-owned by a group of Russian billionaires, has been the target of constant speculation that it could be the next takeover target of Gazprom, the state-controlled gas company. TNK-BP’s Russian owners have denied they are looking to sell.
Gazprom has been tightening its grip over the energy sector, winning control of Royal Dutch Shell’s Sakhalin-2 project in 2006 following state allegations that the oil and gas venture in Russia’s far east was in breach of environmental regulations.
TNK-BP last year agreed to sell its vast east Siberian Kovykta gas field to Gazprom following claims by the government that it had violated licence terms. But the deal has been delayed amid wrangling over the price of TNK-BP’s 62.9 per cent stake, and the terms of a broader deal in which TNK-BP could re-enter the project with a 25 per cent stake via assets swaps.
Speaking before news of the searches broke, Alexander Medvedev, Gazprom’s deputy chief executive, said in an interview that he expected the Kovykta deal to be closed by the end of April.
“With respect to Kovykta, there are still some details that should be finalised but the principal questions are solved.
“We anticipate that very soon we will finalise the deal: hopefully not later than the end of April,” he said.
Mr Medvedev did not deny that Gazprom could seek a broader partnership with BP via a stake in TNK-BP. “We still did not hear from them whether they would like to sell,” he said.
Viktor Vekselberg, one of the owners of TNK-BP, said in January he would only sell his share if his valuation of $60bn for the company was met.
TNK-BP’s market capitalisation hit a low of $25bn this year.
Commenting on the price tag set by Mr Vekselberg, Mr Medvedev said: “The question of greediness should not be part of this discussion.”
The following Guest Commentary is taken from Citigroup's Oil & Gas Daily, issued on 20th March
The Russian Ministry of Internal Affairs yesterday searched the offices of TNKBP and BP in Moscow. A representative of the Ministry's economic security department said that investigators took out a number of documents relating to a criminal case against Sidanco oil company. Later, the official said that nothing was taken out and that investigators "invited two employees to our office so that they could provide us with explanations. We have no claims against TNK-BP". Some time later it was reported that investigators also visited the offices of BP Moscow as well. No further comments were provided.
The news comes in the middle of negotiations between TNK-BP and Gazprom (GAZP.RTS - US$12.55; 1L) over the giant Kovykta gas field (2,000 bcm of C1+C2 reserves). In mid-2007 it was announced that TNK-BP would sell 62.9% of Rusia Petroleum, operating Kovykta, to Gazprom with an option right to repurchase 25% stake. As a part of that deal BP, Gazprom and TNK-BP were supposed to form a consortium for joint development of gas projects.Soon after the announcement, another TNK-BP gas producing unit Rospan International, after four years of negotiations, finally got approval from Gazprom to connect two of its fields to the Gazprom's pipeline system, thus allowing it to increase production from 1.2 to 3.4 bcm in 2008 and to 17.4 bcm by 2017. It is believed that Rospan International may become a part of the future consortium. Completion of the deal has been postponed several times as the sides have not been able to agree on the final terms.
It would appear that the Russian authorities are making tactical moves designed on the one hand to force TNK-BP to finally complete the Kovykta transfer to Gazprom, and on the other hand to wrestle part of AAR's interest in TNK-BP to bring it under state control.
Two prominent members of the British Council’s alumni club in Russia have been charged by the Russian security service with spying for foreign companies.
Brothers Alexander and Ilya Zaslavsky have been accused of collecting commercial secrets from a Russian oil company on behalf of foreign rivals in the energy market.
Alexander is president of the British Alumni Club in Russia, a networking group under the patronage of the British Council that brings together thousands of Russians who have studied in Britain. The British Ambassador, Sir Anthony Brenton, is the club’s honorary president.
Ilya, who graduated from Oxford University in 2004, is in charge of the club’s energy committee, made up of members involved in this field. He has also been employed by TNK-BP, the Anglo-Russian oil business, since last September in the gas regulation department.
Members of the alumni club told The Times that Alexander described himself as an “energy consultant”, while Ilya had also been involved in gas consultancy before joining TNK-BP.
Russia’s Federal Security Service (FSB) said that the two men, who also have US citizenship, were arrested on March 12 while allegedly attempting to obtain classified information from a Russian “employed with a national hydrocarbon institution”.
An FSB spokesman said: “The brothers were illegally collecting classified commercial information for a number of foreign hydrocarbon companies, which wished to have advantages over their Russian rivals, including those in the [Commonwealth of Independent States] markets.”
The two were charged with industrial espionage on Wednesday. The announcement came just a day after police seized documents during raids on the Moscow headquarters of TNK-BP and BP, which holds a 50 per cent stake in TNK-BP.
The FSB said that the search produced “material evidence of industrial espionage . . . and business cards of representatives of foreign defence departments and the Central Intelligence Agency”.
The arrests are certain to reignite tensions between Britain and the Kremlin, which has repeatedly accused the British Council of being a front for espionage.
Alexander, who also graduated from Oxford University, was elected president of the alumni club in December, only a month before Russia’s Foreign Ministry began a campaign to close the British Council’s regional offices in St Petersburg and Yekaterinburg.
The British Council initially defied the demand, but was forced to close the offices after the FSB summoned its Russian employees for interrogation and Russia’s tax police paid late-night visits to their homes.
More than 160 members of the British Alumni Club, which has branches in Moscow and five Russian regions, sent a letter of protest to the then President Putin against the forced closure of the offices. Neither Ilya nor Alexander were among the signatories. Organisers of the protest said at the time that many members had wanted to sign the letter but had feared retribution from the authorities.
Delta Air Lines on Tuesday said it had offered early retirement to 30,000 employees, made steep cuts to its domestic flight schedule and parked as many as 45 aircraft.
The airline industry has been beset by a surge in fuel costs and the weakening US economy, with oil’s march above $100 a barrel set to add more than $2bn to Delta’s fuel bill this year.
While “it’s not out of the question we’ll be profitable this year”, said Ed Bastian, Delta president, the US carrier needed to “act quickly and decisively”.
United Airlines, one of Delta’s largest rivals, also unveiled plans to pull as many as 20 of the less efficient planes from its fleet by the end of the year.
“It’s not a good time for the industry,” Mr Bastian said on Tuesday. “We’re in uncharted territory.”
Delta expects about 2,000 employees, including 1,300 frontline workers, will accept the voluntary severance. No pilots were offered the deal. If fewer than 700 administrative employees take the package, Delta will close the gap through involuntary cuts.
Delta now plans to trim its domestic capacity by 10 per cent this year by reducing the frequency of busier routes and cutting some point-to-point flights. It also reiterated its quarterly forecasts, noting the demand for international travel and advanced fuel purchases would help to offset the US slowdown.
The carrier’s announcements came a day after its pilots’ top labour leader told his members he had failed to find common ground with his counterparts at Northwest Airlines on a combined seniority list, casting doubt on prospects that the two companies will merge.
The stalemate leaves Delta and Northwest executives and their boards with a difficult decision: press ahead with a deal without pilot support or break off talks, risking the ire of shareholders. At Tuesday’s meeting, Mr Bastian declined to tip Delta’s hand.
Complicating Delta’s choice is its executives’ public assurances that they won’t proceed with any deal that would sacrifice job security and seniority benefits, or abandon the company’s corporate headquarters in Atlanta. Seeking to pre-empt the acrimony and protracted negotiations that have followed past airline mergers and mindful that their unions’ support could help their deal win a friendlier reception from regulators, Delta and Northwest tried to reach agreements on both a new labour contract and a combined seniority list, which determines pilots’ pay, rank and the aircraft they fly.
Delta’s peers have privately questioned the company’s strategy, noting that meshing two seniority lists is difficult under any circumstances, let alone before a merger is officially announced . United, which has held talks with both Delta and Continental Airlines, has told its pilots that they won’t be given the chance to negotiate anything before a merger agreement is reached, people familiar with the matter said.
While Delta and Northwest inched closer to an accord last month, their pilots’ seniority list stood as the final hurdle. By late February, the two labour groups had broken off negotiations in New York without agreement. Representatives from each union met again earlier this month to no avail.
In a letter to his members, Lee Moak, Delta master executive council chairman, said he received an invitation from his counterpart at Northwest to meet a third time, but learned “they were unable to address our last proposal”.
He wrote: “I declined and informed the MEC and Delta’s senior executives that the two MECs were unable to reach an agreement on an acceptable seniority list integration.”
But he did not rule out the possibility his union would revisit discussions to advance the merger efforts.
“So what happens next?” Mr Moak wrote. “Quite frankly, the answer to that question is unclear. We work in an industry filled with uncertainty.”
EasyJet said that if oil prices stay at their current levels its fuel bill for the second half of the year will increase by £45m. "It is unlikely that such a large and immediate fuel increase could be mitigated in the short term by revenue improvements and cost actions, therefore pre-tax profits for the full year would be below previous guidance," the company said.
UBS analyst Tim Marshall downgraded his forecast for this year by 25%, next year by 41% and the following year by 40%.
"First-half results will be in line with our expectations, however it is pretty obvious that if the recent significant rise in the fuel price is maintained then our second-half profits will be lower than we had previously expected," said easyJet chief executive Andy Harrison. "Of course the price of fuel will hit all airlines and we remain convinced ... that we shall emerge as winners in a high oil price environment."
Oil prices have surged to hit fresh record highs in recent months amid turmoil in world stock markets. The cost of crude breached $110 a barrel last week.
The forward price for jet fuel this summer has ballooned to $1,000 a tonne from $840 a tonne at the beginning of last month, easyJet said.
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