ODAC Newsletter - 2 May 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.
The first quarter results of the major oil companies were announced this week. The headlines predictably concentrated mostly on their huge profits; however the more significant story here was the drop in oil production reported by Exxon. Shell's oil output continued to decline, while their natural gas production increased. Exxon has concentrated its efforts on oil and gas rather than alternatives and this week drew criticism from its founding family for this approach. Both Shell and Exxon continued to suffer disruptions this week in Nigeria, and this together with the industrial action at Grangemouth demonstrated how localized issues have a significant impact on the global picture in a tight market.
The results from the oil majors along with reminders of the 2000 UK fuel crisis this week, resulted in a large number of leader and commentary articles offering opinions on the future of the oil price. There are those who cling to the idea that prices are investor driven and tell you that the oil price spike may nearly be over, and those who see this as only the beginning of $100 plus oil (Khelil of OPEC predicted $200/barrel as has the EU Energy Commissioner). What the latter opinions take into account is the impact of flat production and increasing demand, along with the geopolitical changes in the supply dynamics. This demand is illustrated by news from China that its oil consumption hit record levels in Q1, and also by the UAE planning to meet its anticipated tripling of electricity demand in the next 12 years by betting on nuclear power rather than oil and gas.
With such high profits to be made in the hydrocarbon sector, Renewables are facing a battle for investment which was demonstrated by Shell’s decision to pull out of the flagship London Array project.
A lack of progress on Renewables is not good news for CO2 targets. The surprise sponsor for fighting climate change this week was the US Air Force who called for a programme to investigate greener fuels. A spokesperson also commented that the air force felt that it had much to learn from commercial airlines and their focus on reducing weight to save fuel. The commercial sector however continued to struggle with the collapse of Eos, a rescue deal for Silverjet and profit warnings from BA who are trying again to revive their fortunes through partnership talks with AA and Continental.
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Eleven billion dollars is not enough.
That, at first blush, seemed to explain how Exxon Mobil Corp. could earn that much money in three months and still see its stock fall 4 percent.
Wall Street expected more, and so did Exxon Mobil investors. At a time of record oil prices, America's biggest oil company reported an earnings increase that was the smallest among its peers.
The profit is what captures everyone's attention, but there's a bigger concern hidden amid the numbers of Exxon Mobil's earnings.
The company's worldwide oil production fell 10 percent, to just under 2.5 million barrels a day.
Some of the decline came from Exxon Mobil's dispute over the seizure of assets by the Venezuelan government, but even excluding those assets, the company's production declined. Overall production, including natural gas, fell 3 percent.
While Exxon Mobil boosted production from fields in West Africa and the North Sea, the gains weren't enough to offset declines from aging oil fields, the company said.
The company blamed the decline in part on its contracts with oil-producing countries, which allow those countries to claim a larger share of oil volumes as prices rise. In other words, the higher prices go, the less oil Exxon Mobil gets.
As those countries benefit from higher prices, living standards rise and, as I mentioned last week, their own demand for oil increases. That, in turn, means less oil for companies such as Exxon Mobil over the long term.
The problem isn't unique to Exxon Mobil.
Other major oil companies also offered a stark production picture. BP's was unchanged from a year earlier. Shell reported a gain only because it boosted natural gas production, which offset lower oil output. ConocoPhillips reported an increase but attributed it to its 20 percent stake in Russia's Lukoil.
With national oil companies now holding most of the world's reserves, companies like Exxon Mobil are left with few places to look for new production.
The public, though, has little concern for Exxon Mobil's travails. We only care about what we see from our side of the pump, and that means the price and the profits of the company whose name is atop the sign.
Exxon Mobil has reported earnings between $9 billion and $11 billion in almost every quarter since late 2005, and every time it does, the public outcry grows.
Capitalizing on outrage
Politicians are quick to capitalize on that outrage.
"I believe we should impose a windfall profits tax on big oil companies and use that money to suspend the gas tax and give families relief at the pump," Hillary Clinton said in a statement addressing Exxon Mobil's earnings. A typical family, she claims, would save $70. John McCain already has called for a "gas tax holiday."
A closer reading of Exxon Mobil's earnings statement, though, shows Clinton is missing the point.
Her plan, and McCain's, would essentially lower gasoline prices at the pump. And how will we respond? We'll drive more. We're talking about summer, after all. Time to load up the kids in the land yacht and cruise to Destin at 12 miles to the gallon.
As demand rises, it depletes supply even further, and that, in turn, drives prices up in the world market. Shortages aren't solved by using more.
Barack Obama, by the way, has proposed a broader windfall profits tax on the industry based on crude prices, which the companies don't control. He'd tax oil over $80 a barrel, Bloomberg News reported, even though futures markets are indicating oil will stay above $100 through 2016.
Using this logic, we should tax pizza places because of soaring cheese prices.
They don't like it either
As I've said before, oil companies don't welcome the numbers we're now seeing at the pump. Not only do they cut into refining margins — another reason Exxon Mobil's profit didn't grow as much as expected — they make us start buying Priuses in spite of their bean-pod appearance.
So the public and politicians decry Exxon Mobil's profit while the market frets over a mere 17 percent increase. Both miss the more disturbing numbers, the ones that portend greater problems, not just for the oil companies but for all of us who use their products.
It's not a question of whether $11 billion is too much or not enough. It's a question of whether 2.5 million barrels is.
Royal Dutch Shell and BP, Europe's two largest oil companies, both saw first quarter profits jump thanks to record crude prices and higher natural gas prices.
Shell's first quarter profits rose 25pc to $9bn, while BP's profit soared to $7.6bn from $4.6bn in the same period.
Oil touched $100 for the first time in early January and reached $111.80 a barrel in March as a falling dollar spurred investors to buy commodities, while natural gas increased 22 percent on average in the first quarter.
The rising oil price squeezed refining profits as it outpaced gains for processed fuels such as gasoline and diesel. Crude touched a record $119.93 yesterday.
Shell chief executive officer Jeroen van der Veer is betting on Canadian oil sands and a gas-to-liquids fuel venture in Qatar to counter falling production from conventional oil projects..
At BP, chief executive officer Tony Hayward, who replaced Lord Browne a year ago, is bringing new production and refining capacity online to improve earnings.
The results from the oil majors come after the president of Opec has warned that the price of oil could hit $200 (£100) a barrel, spelling more pain for the major crude-consuming economies.
Chakib Khelil said there was nothing that the oil producers' cartel could do to bring down the high price, which he blamed on geopolitical tensions and market speculators.
His comments, coming as oil touched a record $120 a barrel on Nymex at one stage yesterday, are seen as rejecting pleas from America and Europe for Opec to turn on the taps and help rein in the price. Mr Khelil, Algeria's energy minister, said there is no evidence of a shortage of oil on world markets.
The president of Opec has warned that the price of oil could hit $200 (£100) a barrel, spelling more pain for the major crude-consuming economies.
Chakib Khelil said there was nothing that the oil producers' cartel could do to bring down the high price, which he blamed on geopolitical tensions and market speculators.
His comments, coming as oil touched a record $120 a barrel on Nymex at one stage yesterday, are seen as rejecting pleas from America and Europe for Opec to turn on the taps and help rein in the price. Mr Khelil, Algeria's energy minister, said there is no evidence of a shortage of oil on world markets.
He told El Moudjahid, Algeria's state-owned newspaper, that oil stocks in the US were at a five-year high.
The price is being pushed up by the weak dollar, investment funds speculating on a higher price, and fears over supply shortages created by events such as the Grangemouth strike in Scotland and another at ExxonMobil's operations in Nigeria.
In such circumstances, Mr Khelil said he could not rule out oil going to $200 a barrel.
While the power of Opec, which supplies about 35pc of the world's needs, is no longer as great as in the 1980s and 1990s, critics within the US government argue that its members could do more to increase supply.
The rising price of crude is not hurting the oil companies, however. Royal Dutch Shell is today expected to report record first-quarter profits, while BP should turn in one of its best quarterly performances for two years.
During the quarter being reported, oil reached $100 for the first time. Shell's Q3 profits are forecast to rise 5pc to around $6.88bn, with BP's rising about 32pc to $5.26bn. Profits from refinery operations will fall, however, as the cost of crude oil rises.
In February, BP estimated that output will rise 13pc during the next five years to about 4.3m barrels a day. Tony Hayward, the chief executive, said BP will sustain production of at least 4m barrels a day until 2020 even without new finds.
Oil prices came off their day highs, with Brent trading just 30 cents higher in late trading at $116.64, and Nymex 36 cents higher at $118.88.
Polishing the portholes on the Titanic hardly does it justice. This week saw ministers giving an uncanny impersonation of Corporal Jones urging calm over the Grangemouth refinery strike; lorry drivers protesting in Park Lane over a two pence rise in fuel duty; and much righteous indignation over the level of profits reported by Shell and BP. All of which entirely misses the point. These issues are trifling compared to global oil depletion, where there have been several distinct turns for the worse in the last month.
The idea that oil companies are somehow 'to blame' for record oil prices and rising fuel costs is seductive but absurd. For all their power and profits, the international oil companies are in fact in trouble. They may still be swimming in cash, but no longer in oil. Despite vast investment in exploration and production, these days they generally fail to replace the oil they produce each year with fresh discoveries, or even to maintain current levels of output. Shell's oil production has been falling for six years, BP's seems to have peaked 2005, and this week even the mighty Exxon was forced to admit its output dropped 10% in the first quarter of the year.
None of this should come as a surprise since all the evidence now suggests the world is rapidly approaching "peak oil", the point when global oil production goes into terminal decline for fundamental geological reasons. Annual discovery of oil has been falling for over forty years, and now for every barrel we find we consume three. Oil production is already shrinking in 60 of the world's 98 oil producing countries – including Britain, where output peaked in 1999 and has already plunged by more than half. When an individual country peaks it only matters for that country – Britain became a net importer of oil in 2006 – but when global supply starts to shrink the effects could be ruinous for everybody.
Analysts divide the oil producing world into two halves: OPEC and the rest. There is broad agreement that non-OPEC oil production will peak or at least plateau by about 2010. ExxonMobil chief executive Rex Tillerson said last year that non-OPEC production growth would be all over in "two to three years". That judgment now seems even more certain.
Since the turn of the century non-OPEC oil production has been sustained only by big increases in Russia, the world's largest producer, as the oligarchs that control the industry invested billions refurbishing fields that had been allowed to deteriorate after the collapse of communism. But now the easy gains have gone and growth rates have slumped. This month Leonid Fedun, a senior executive with Lukoil, Russia's second largest oil company, said the country's output had peaked and would never exceed current levels "in his lifetime".
So we now depend on OPEC as never before, and this explains the increasingly shrill pleas from Western officials for the cartel to raise production. But many suspect OPEC could not increase output even if it wanted to – at least not by much – and may also peak soon. There have long been doubts about the true size of OPEC's claimed reserves, which seem to have been falsely – and massively - inflated during the 1980s when members were vying for larger shares in the new quota system. And now there are growing concerns about some of OPEC's most significant producers.
Just last week Saudi Arabia, the world's largest oil exporter, announced that all plans to expand oil production capacity beyond 2009 had been shelved. The oil minister justified the decision by claiming that, given the economic outlook, there would be no demand for the additional oil – which is arguable but unlikely. Even the mildly skeptical will suspect the move was not entirely voluntary.
In Nigeria, Africa's biggest oil producer, output has already fallen 20% because of repeated attacks by militants in the Niger delta. But now a recent report by the government's energy advisers has concluded that even if investment is maintained at current levels "total oil and gas production will decline by 30 per cent from its current level by 2015".
The one OPEC member which undoubtedly has large untapped oil resources is Iraq, but here the continuing butchery and failure to agree a new law governing oil and gas production makes any early increase highly unlikely.
In these circumstances it is no surprise that the oil price has soared to record levels – almost $120 earlier this week – nor that many now predict a further pole-vault to $200, including the EU's Energy Commissioner, the President of OPEC, and city analysts Goldman Sachs. What is surprising is the number of apparently intelligent people who cleave to fanciful explanations for the oil price rise, such as speculation and the weakness of the dollar.
No doubt these factors play a part, but the simple fact is that global oil production – including non-conventional sources, biofuels and the kitchen sink - has remained essentially flat since early 2005. For three years the oil supply has been a zero sum game in which if one country consumes more, another has to consume less. Since so much of the demand growth comes from the developing world or OPEC members themselves, oil demand will probably continue to grow despite the gathering recession in the West. It is shortage that makes oil futures so attractive to investors.
And yet the British government's central forecast is that oil will cost $57 per barrel in 2010 and fall to $53 by 2020. This absurd prediction is incomprehensible until you consider the political realities: even more than climate change, peak oil demands that governments confront voters with uncomfortable truths that will impact living standards. In Whitehall, legs will remain crossed and buttocks clenched as politicians and officials pray it doesn't happen in their term of office, or before they draw their inflation-linked pension.
So Gordon Brown's website blithely proclaims "…the world's oil and gas resources are sufficient to sustain economic growth for the foreseeable future", despite all evidence to the contrary. Still, perhaps he can say this with some confidence; the way things are going, his foreseeable future is not all that long.
"A whole load of stuff could come apart here," warned Art Cashin last week on CNBC - the US business channel. "This oil thing - it's gettin' crazy".
Cashin was talking from the floor of a nervous New York Stock Exchange.
After 46 years "in the pit", the gnarled trader is rightly seen as the man with the clearest idea of what "the market" is really thinking.
And he's right. The oil price is now "kinda' crazy". On Tuesday, crude hit $119.90 a barrel - 87 per cent up on a year ago. The spike was widely attributed to rebel attacks on Shell's Nigerian oil facilities, which threaten to undermine global supplies.
On Friday, prices climbed again, skimming $120 once more. The given reason this time was problems at Exxon's Nigerian plant - along with the threatened strike at the UK's Grangemouth refinery, potentially affecting 70 North Sea drilling platforms.
But while events in Scotland, and the Niger Delta are unfortunate, they don't explain why the crude price is so high.
These localised issues may have added a few dollars to oil in recent days, but for several years now, the fundamentals have been pushing fuel costs relentlessly up. And my view, however frightening, is that oil prices will now average more than $100 a barrel for many years to come.
In January last year, oil was down at $55 - less than half the current cost. And as prices have risen, it was assumed that when the US stalled, global oil demand would abate, so bringing prices down.
That view has now been trashed. The US recession is here and global demand keeps growing. Anyone who thought otherwise should have recalled the 2001 US recession - when oil use barely moved.
And, anyway, America no longer makes the world economic weather.
I accept the recent fuel cost surge is partly explained by the weakening dollar - which translates into a higher dollar-denominated oil price. Last week's oil-spike coincided with the European single currency crossing $1.60 for the first time.
And with the US Federal Reserve likely to cut interest rates further (perhaps this week) and the European Central Bank on hold, the dollar could weaken even more, with the euro reaching $1.70.
So - yes - the ailing greenback is one reason the crude price is so high, and likely to rise some more.
I accept, also, that in this climate of financial angst, commodity markets are to some extent "speculative safe havens".
What these two reasons have in common is that they will one day be reversed. The dollar will at some stage recover. And investors' fears will lessen once the credit crunch has eased.
But while such developments would lower medium-term oil prices, they are utterly dwarfed by the irreversible reality that the world population is growing like Topsy and - even more importantly - when poor people get rich they each use an awful lot more oil.
China's crude demand is expanding at 11 per cent a year - the country will soon replace the US as the world's biggest oil importer. The growth of India's oil demand isn't far behind. These two nations account for a third of humanity. And as their breakneck development continues, the energy needs of their factories and construction firms - along with those in Brazil, Mexico and other populous emerging markets - can only escalate.
Specifically, as these countries get richer, and their citizens can afford more, the number of cars in the world, now around 625m, is set to double in less than 20 years. Think of the impact of that on global oil demand - seeing as around 70 per cent of current crude output is used to fuel cars.
At times like this, it's fashionable to say oil "no longer matters" - because the Western economies now rely on services. Really? So why has America's oil use risen from 16m barrels a day in the early 1970s, to 22m today - and Europe's by the same proportion.
As global oil use balloons from 84m barrels daily now, to 125m by 2030, prices will surely crank up. Between 1999 and 2006, oil rose from $10 to $60. Since then, it has doubled again. Can we really keep pretending oil doesn't matter? Our politicians may exclude "fuel costs" from headline inflation measures. But we all know inflation is now rising sharply - and threatening to reappear as a serious problem.
Last week, the UK demonstrated that in spades. Producer output inflation hit 6.2 per cent in March - a 17-year high. Producer input prices are now a record 20.4 per cent up on a year ago. And given the extent to which crude prices drive company costs - from energy, heat and transport, through to plastics and chemicals - that's hardly surprising.
To limit the damage from expensive oil, it is imperative central banks control inflationary expectations. So we should be deeply concerned that the latest index tracked by the Bank of England suggests the public expects the Consumer Price Index to soar to 3.8 per cent over the next year - way, way beyond the 2 per cent target.
And yet still, City economists keep screaming for more rate cuts - with much of the media parroting their cause. But more cuts would be madness. At a time of escalating fuel costs, and pressing inflationary dangers, they would serious harm the Bank's long-term credibility.
"Don't worry, oil will soon come down," said one of the gelled-haired stock-boosters in the CNBC studio, responding to Art Cashin's concerns. "Crude is about to drop by 40 bucks and share prices will rally 20 per cent".
Soaring oil prices have not slowed China's consumption of oil as statistics show that China's apparent consumption of crude oil and refined oil products both hit record highs in the first quarter of the year.
According to statistics released Tuesday by the China Petroleum and Chemical Industry Association (CPCIA), China's apparent consumption of oil products composed of gasoline, diesel and kerosene rose by 16.5 percent year on year to 52.73 million tonnes in the first three months, and crude oil, rose by eight percent to91.8 million tonnes.
The "apparent consumption" represents the sum of net imports and output and could be taken as an index for the real oil consumption excluding inventory.
The growth of oil products consumption was a record high and much higher than the same period of last year, which was only 3.6 percent, said Shu Zhaoxia, professor of the Economics and Development Research Institute of China Petrochemical Corporation (Sinopec Group). Sinopec Group is China's top oil refiner.
The growth of crude oil consumption was 2.5 percentage points higher than a year ago.
State ceilings on prices of domestic oil products was the major reason contributing to China's surging oil consumption in the first quarter.
Below-cost fuel prices did not restrain China's demand for oil but rather boosted it, said Shu.
China's gross domestic product (GDP) rose by 10.6 percent in the first quarter, 1.1 percentage points down from a year ago but still at a high level.
Deng Yusong, a researcher with the Development Research Center of the State Council, said that abnormal needs boosted by below-cost prices of refined oil products controlled by the central government over concerns of the country's rising CPI is another major reason contributing to the country's surging oil consumption.
State ceiling on domestic oil products prices has led to both smuggling and cornering of oil products, said Shu.
According to Shu, reconstruction of the country's snow-hit south also increased the real demand for oil products.
China's crude oil output rose by 2.2 percent to 46.85 million tonnes in the first quarter.
The output of gasoline went up 7.0 percent from a year ago to 15.7 million tonnes, diesel, up 11.2 percent to 32.4 million tonnes, and kerosene, up 17.5 percent to 3.03 million tonnes, according to the National Bureau of Statistics.
China processed 84.6 million tonnes of crude oil in the first quarter, up 7.6 percent from a year ago. The growth rate was two percentage points higher than the first three months of last year.
China's net imports of crude oil was 44.95 million tonnes in the first quarter, up 14.9 percent, and net imports of oil products rose by 31.8 percent from a year ago to 5.47 million tonnes, according to General Administration of Customs.
China's imports of diesel in the first quarter surged over 600 percent to 1.66 million tonnes and the imports of gasoline, rose by nearly twice to 76,654 tonnes.
ABUJA - Striking oil workers who have shut down Exxon Mobil's production in Nigeria pledged to carry on their seven-day strike after failing to reach a deal with the U.S. oil major at talks on Wednesday.
A spokesman for state-run Nigerian National Petroleum Corp. (NNPC), which is mediating the talks, said earlier that leaders of the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) had agreed to suspend the strike while talks continued.
But union leaders said the stoppage, which has shut down virtually all Exxon's 800,000 barrels per day of production in the West African country, would continue and the two sides would reconvene for negotiations at 1100 GMT on Thursday.
"We could not reach an agreement. Meanwhile, the strike continues," said Olusola George-Olumoriti, chairman of PENGASSAN's Mobil Producing Nigeria branch.
The strike and attacks by Niger Delta rebels have slashed production in Nigeria, the world's No. 8 oil exporter, by more than half, helping drive prices to a record high around $120 a barrel on Monday. Oil has fallen back more than $5 a barrel.
The dispute forced the U.S. oil major on Monday to declare force majeure on Nigerian shipments, meaning it could not fulfill contractural obligations to clients.
The first day of government-mediated negotiations broke up on Tuesday without agreement after union representatives called for a 25 percent salary increase and improvements to pensions and working conditions.
Delegates to the talks, who asked not to be identified, said that by Wednesday there was agreement on all points except the size of the salary increase.
"The mediators have asked both sides to return to the negotiating table. Hopefully we will be able to reach a solution," Exxon Mobil spokeswoman Gloria Essien-Danner had told Reuters earlier.
Exxon produces in a joint venture with the Nigerian state and its equity share is around 427,000 bpd.
The disruption came after a wave of attacks by the rebel Movement for the Emancipation of the Niger Delta, which says it wants President Umaru Yar'Adua's government to give a greater share of oil revenues to the impoverished and polluted Delta region, which produces most of Nigeria's petroleum.
Royal Dutch Shell, the company hardest hit by the militants, said on Tuesday that attacks had forced it to shut in 164,000 bpd of production.
The cumulative oil production outage for Africa's most populous nation amounts to around 1.36 million bpd from its installed capacity of around 3 million bpd, temporarily making Angola sub-Saharan Africa's largest crude producer on around 1.9 million bpd.
Analysts say the upsurge in militant attacks appears linked to an acrimonious re-run of gubernatorial elections in oil-rich Bayelsa state and the trial of MEND factional leader Henry Okah, due to resume on May 2.
Additional reporting by Daniel Flynn in Lagos; Editing by David Gregorio
Fears were mounting last night that workers at the Grangemouth oil refinery could go back on strike within days, raising the prospect of further disruption to motorists and a prolonged period of uncertainty for the economy.
As the 1,200 striking workers prepared to end their industrial action yesterday, oil prices surged to a record high on world markets of just under $120 (£60) a barrel, driven by growing anxieties over threats to supply, including the strike in Scotland and problems in Nigeria.
The workers at Grangemouth, Britain's third largest oil refinery, were expected to return to work this morning after their 48-hour walkout over a pensions row with Ineos, the site's owners, amid growing speculation that another strike may be staged next week after the seven-day legal notice period elapses.
Alex Salmond, the Scottish First Minister, and Gordon Brown were hoping to meet in London last night to discuss the dispute. Aides blamed “scheduling difficulties” for the uncertainty over whether the meeting would take place. Speaking at Westminster last night Mr Salmond said the issue was wider than normal party politics and every effort must be made to end the dispute. He said there was enough fuel for everyone who needed it in Scotland.
Mr Salmond is due to meet John Hutton, the Business and Enterprise Secretary, today as Edinburgh and Westminister step up the pressure on both sides to go to arbitration. “This is where this dispute must end,” Mr Hutton said. There was some good news yesterday as an extra 65,000 tonnes of fuel, shipped from European ports, began to arrive in Scotland to relieve pressure on forecourts.
The dispute has forced BP to shut down the neighbouring Forties pipeline, which supplies nearly 40 percent of the UK's oil and gas. The pipeline brings more than 700,000 barrels of crude oil ashore every day and supplies international markets as well as Britain. It cannot function without power and steam from Grangemouth.
Although Grangemouth will return to some kind of normality today, it will take at least a week to get back to full production.
The strike caused some fuel shortages at the weekend in Scotland, but not the widespread panic buying many had feared. According to figures released by the Scottish Executive, just 25 of the 956 petrol stations in Scotland had been forced to close by yesterday evening, with another 55 experiencing supply difficulties. Around 600 deliveries to forecourts are expected to be made today.
There was no sign last night that the two sides were any closer to reopening talks on the issue at the heart of the dispute - the closure of the company's pension scheme to new employees - and attention will now switch to whether the Unite trade union begins to draw up plans for further industrial action.
Phil McNulty, the union's national officer, said: “We are going back to work and we want a period of peaceful reflection. We want to negotiate, there is no doubt about that, but we won't give in on this.”
A spokesman for Ineos said that restarting the Forties pipeline would be the first priority when the workers reported for their shifts today.
Jim Ratcliffe, Ineos's billionaire chairman, made a surprise visit to Grangemouth yesterday, where he held discussions with local management. He was booed and heckled by pickets as he arrived at the refinery. A company spokesman would not be drawn on the outcome of the meeting.
Mr Brown repeated his call for the workers and management to return to arbitration to settle their dispute. The union, however, has made clear that for that to happen, the management would have to withdraw its August 1 deadline for the planned pension scheme changes.
Meanwhile, Mr Hutton will visit Scotland today to meet with fuel industry representatives and retailers to thank them for their work in keeping supplies moving.
John Swinney, the Finance Secretary at Holyrood will visit Grangemouth today and urge the two sides to work together. Yesterday he praised the public for their “overwhelmingly measured and responsible” attitude.
President George W. Bush on Tuesday attacked Democratic-controlled Congress for blocking measures to increase domestic oil production and refining capacity, fuelling the heated debate over soaring energy prices in Washington.
Mr Bush called for Congress to reconsider its opposition to oil drilling in the Arctic National Wildlife Reserve (ANWR) in Alaska and to approve construction of the first new oil refineries in the US for more than 30 years.
His remarks came amid mounting public concern about high energy prices in the US, with Republicans and Democrats each seeking political capital from the issue on Capitol Hill and the presidential campaign trail.
Republicans have been pushing to open ANWR to oil drilling for decades but the proposal has faced resistance from many Democrats on environmental grounds.
Mr Bush said technological advances meant it was now possible to drill for oil in the reserve with minimal impact on wildlife and the environment and that doing so could increase annual US crude oil production by 20 per cent.
“One of the main reasons for high gas prices is that global oil production is not keeping up with growing demand,” he said. “Members of Congress have been vocal about foreign governments increasing their oil production, yet Congress has been just as vocal in opposition to efforts to expand our production here at home.”
The president also lambasted Congress for blocking his proposal to build new oil refineries on abandoned military bases, citing a shortage of refining capacity in the US among the reasons for record petrol prices.
“When you don’t build a refinery for 30 years, it’s going to be a part of restricting supply,” he said. “And therefore, we ought to expand our refining capacity by permitting new refineries and getting after it quickly.”
With little chance of the Democratic-controlled Congress reversing its opposition to Mr Bush’s proposals before he leaves office, his comments appeared aimed at fighting back against Democrats’ attacks on energy prices.
Democrats, including Hillary Clinton and Barack Obama, the party’s presidential hopefuls, have blamed the Bush administration for defending tax breaks for oil companies at the expense of consumers.
But Mr Bush accused Democrats of proposing policies that would lead to further increases in energy prices, including aggressive caps on carbon emissions to tackle global warming.
“Many of the same people in Congress who complain about high energy costs support legislation that would make energy even more expensive for our consumers and small businesses.”
Rising petrol prices are the top economic concern of American people, with 44 per cent describing them as a “serious problem”, according to a survey by the Kaiser Family Foundation.
Australian coal producer Gloucester Coal Ltd (GCL.AX) said Thursday that it discovered a significant new coking coal discovery in the Gloucester Basin of New South Wales state, about 2.5 kilometres from its coal plant.
It did not give details on the expected size of the discovery, but said that drilling results have shown that about 70 to 75 percent of the coal could be extracted.
"We expect further drilling over the coming months will enable us to delineate resources and therefore increase standard reserves and resources as a result of this success," Chief Executive Officer Rob Lord said in a statement.
He added the coal will enable Gloucester to increase the proportion of coking coal in its sales mix to take advantage of higher prices.
About 50 percent of the product would be an 8 percent ash semi-hard coking coal with a sulphur content of less than 1 percent, Gloucester Coal said.
Shares in Gloucester Coal have jumped 49 percent since the start of the year, thanks to soaring coal prices. The stock ended flat at A$9.84 on Wednesday.
Hopes of a bidding war for British Energy were dealt a blow on Wednesday after it emerged that Vattenfall, Suez and Eon were not planning to bid for the UK nuclear group.
This leaves RWE and EDF as the most likely companies to bid for the UK government’s 35 per cent stake in British Energy before the deadline of next Friday, May 9. Buying this stake could trigger a full takeover of the company, which at Wednesday’s closing price of 760p, down 8p, had an equity value of roughly £12.2bn.
Several of Europe’s largest energy companies have been in talks with British Energy, which, as well as being the UK’s largest generator of electricity, owns the best sites for building new nuclear reactors in the UK.
But many of these companies on Wednesday either ruled themselves out or said they would not overpay for the British Energy stake, making a bidding war less likely.
Vattenfall, the Swedish state-owned energy company, had been talking to British Energy but decided at a board meeting earlier this week not to pursue a bid.
That decision came after the Swedish government expressed fears that a bid would contradict its policy of phasing out nuclear power. Officials for Fredrik Reinfeldt, Sweden’s prime minister, and Maud Olofsson, the minister for energy, declined to comment, although others who asked not to be named confirmed the doubts.
Vattenfall is run as a commercial company with an independent board but is 100 per cent owned by the government.
The company remains keen to expand into the UK power market and is looking at the possibility of building new nuclear plants on sites owned by the Nuclear Decommissioning Authority, the UK government body responsible for shutting down and cleaning up the country’s oldest reactors.
Lars Josefsson, Vattenfall’s chief executive, said he wants to expand the company geographically and made clear when it announced first-quarter results on Tuesday that he was “interested” in the UK market.
Franco-Belgian utility Suez and Eon of Germany have also been in talks with British Energy for some time, but people close to both companies on Wednesday played down expectations that they would submit bids.
Suez is concentrating on completing its merger with Gaz de France. A person close to the group said it was “not Suez’s style” to get involved in auctions for assets or bidding wars.
RWE of Germany and EDF are the frontrunners to bid for British Energy, but both have been keen to stress their discipline when it comes to not overpaying for acquisitions. Jürgen Grossmann, RWE chief executive, said on Tuesday that it was interested in expanding its nuclear investments outside Germany, but added “we won’t engage in bidding wars”.
The UAE has signalled its intention to develop nuclear power as the local grid strains to cope with soaring energy consumption. Arabian Business reports on the nuclear race against time, and reveals why the cost of electricity is set to rocket across the region.
The UAE expects demand for power to triple in the next 12 years - not much longer than the time required to build a nuclear power plant from scratch.
That's why the Gulf state which controls almost 10% of the world's oil reserves has signalled its intention to go nuclear, with plans to invest US$100m in establishing the Emirates Nuclear Energy Corporation.
As much as 80,000 megawatts of new generating capacity is needed across the region over the next decade - demanding roughly 22 trillion cu ft in additional gas requirements, according to international power consultant PFC Energy.
It is one reason why nuclear energy is now under serious consideration among the Gulf states, which together account for the world's largest gas reserves.
But what of the cost of delivering nuclear power plants at a time when construction and engineering costs are soaring and when other cheaper alternatives exist such as the abundant natural gas lying beneath the desert?
UAE Foreign Minister HH Sheikh Abdullah bin Zayed Al Nahyan stressed the cost and environmental advantages of nuclear power, as the government published its white paper that outlines nuclear ambitions that are still under evaluation.
"In-depth studies carried out by government entities have shown that nuclear energy represents a commercially competitive and environmentally friendly option for the secure generation of electricity in the UAE, particularly in light of projected gas shortages," he said.
As construction costs continue to soar amid a weakening dollar environment, some commentators are questioning why energy-rich countries such as the UAE need to generate nuclear power.
The cost of building a nuclear plant is between 50% and 300% higher than a coal or gas-fired facility, says PFC.
"While the initial construction costs of a nuclear power plant would have typically averaged between US$1000 to US$2500 per kilowatt, capital expenditure costs today have soared and can reach US$8,000 per kilowatt," according to research from the consultant.
· £2bn UK windfarm project now at risk, says partner
· Move comes as company invests in Canadian oil
The future of the world's largest offshore wind farm and a symbol of Britain's renewable energy future was thrown into doubt last night after it emerged that Shell was backing out of the project and indicated it would prefer to invest in more lucrative oil schemes.
Shell said the decision to sell its 33% stake in the £2bn London Array off the coast of Kent was part of an "ongoing review of projects and investment choices" and was not part of any major rethink about renewables versus other oil and gas projects.
But environmentalists will see the decision to drop one of only two renewable schemes being worked on by Shell in Britain as a further sign that the company is retreating back to hydrocarbons at a time when the price of oil has risen to about $120 a barrel.
Shell, which earlier this week reported first quarter profits of £4bn, has been selling off much of its solar business while moving more into Canada's carbon-heavy tar sands. The Department for Business said last night that a number of successful offshore wind projects had seen changes of ownership in the past "and we would therefore anticipate that the project will be able to proceed".
But Shell's partner, E.ON, expressed disappointment at the decision and made clear the project was now on a knife-edge. "While we remain committed to the scheme, Shell has introduced a new element of risk into the project which will need to be assessed," said Paul Golby, chief executive of E.ON UK.
"The current economics of the project are marginal at best - with rising steel prices, bottlenecks in turbine supply and competition from the rest of the world all moving against us."
The London Array is a vital part of the government's plans to produce more low-carbon power as North Sea oil and gas runs out and climate change bites. The wind farm, 12 miles out to sea, would provide 1,000 megawatts of clean power - more than double the amount of Britain's existing capacity of 400MW.
Britain is already struggling to meet the EU target of producing 20% of the country's total energy from renewables by 2020. That target has been reduced to 15% but even that is a major leap given the current level of 2% - a figure that has not increased for several years.
Last week, plans for a massive wind farm on the Hebridean island of Lewis were scrapped after Scottish ministers decided the turbines would devastate an important peatland.
The government said yesterday it was doing all it could to help win new schemes which will play a vital role in helping it meet the EU target.
"Because this technology is new, we are seeking powers to provide additional financial incentives to offshore wind as well as making connection to the grid easier as set out in our energy white paper," it explained.
"We have announced plans to open up the UK's seas to a massive expansion of offshore wind - enough to potentially power the equivalent of every home in the UK by 2020. Three new offshore wind farms are due to be completed by the end of this year and we will shortly become the leading country in terms of offshore wind operating capacity."
Shell said its decision to dispose of the shareholding in London Array was part of its normal business practice. "We constantly review our projects and investment choices in all of our businesses, focusing on capital discipline and efficiency," it said last night in a written statement.
The retreat should not be seen as an indictment of the tax treatment of renewable schemes, it insisted.
"We emphasise that the UK government has established a positive policy and support framework for offshore wind projects and the decision to divest our equity is not related to this support.
"Indeed, the government and NGOs have been very supportive in taking the project thus far and we are hopeful that it will proceed as planned," it added.
Nor should it be interpreted as disillusionment with wind projects generally, Shell argued. It pointed out it was involved in 11 such operations spread across the US and Europe, with a total capacity of around 1,100 megawatts - of which Shell's share was 550MW.
But Shell has in recent years been selling off much of its solar business while its rival oil group BP - under new chief executive, Tony Hayward - has also talked about selling part of in its alternative energy division, abandoned a carbon capture scheme in Scotand and moved into the Canadian tar sands for the first time.
BP was the first oil company that seemed to understand the importance of climate change, with its former chief executive, John Browne, once promising to go "beyond petroleum."
The company's new boss insists that the "green" agenda has not been dumped and he points to the investment in United States wind farms and commitments to biofuels.
But the £4bn the company is spending on renewables over 10 years compares with well over double this amount being poured into oil and gas investment annually.
· Plans for one of Europe's largest onshore wind farms in the Outer Hebrides were formally rejected after Scottish ministers ruled the £500m scheme would devastate a significant peatland. The 181-turbine project would have had "significant adverse impacts" on rare and endangered birds.
· BP and partners Southern and Scottish Energy dropped plans for an innovative carbon capture and storage (CCS) experiment at Peterhead, Scotland, blaming lack of government guarantees. It would have been the largest plant of its kind in the world. A report by Policy Exchange think tank found the number of proposed CCS projects in the UK has halved since last year.
· BP considers floating or selling all or part of its renewable operations, which it believes are worth $7bn (£3.5bn).
· Britain has some support programmes for renewables but spending has virtually stalled. It is one of the worst performing countries among its EU peers, producing only 2% of its energy from renewables and on current policies will miss the EU target of 15% by 2020.
The European Commission is inviting comments from all interested parties on how to identify and overcome barriers to developing offshore wind in the EU, an EC spokesman said Friday.
Offshore wind "has the potential to make a significant contribution" to reaching the EU's binding target to have 20% of its final energy use from renewable sources by 2020, EC energy spokesman Ferran Tarradellas told reporters in Brussels.
"But exploiting this potential is associated with a number of specific challenges that might require further, more targeted actions," he said.
These challenges include reinforcing onshore grids, connecting offshore grids, sharing costs, getting permissions and developing technology.
The EC is particularly interested to hear what EU level actions would be needed. It is to take account of the online public questionnaire responses in an EU offshore wind energy action plan it is to publish in the second half of 2008.
The EC is also encouraging respondents to flag up if and where similar actions would be needed for other offshore renewable technologies such as wave, tidal and ocean current energy.
The questionnaire is available at:
The deadline for responses is June 20.
LONDON - Rich countries must commit to cutting carbon emissions by 80 percent by 2050 and developing nations must agree that by 2020 they too will set their own targets, leading economist Nicholas Stern said on Wednesday.
He said the only way the world could defeat the climate crisis was by ensuring that global carbon emissions peaked within 15 years, were then halved from 1990 levels to 20 billion tonnes a year by 2050, and cut to 10 billion thereafter.
"There is a real hurry for this. The developed world must lead by example," Stern told a meeting to publish his latest work on global warming, "Key Elements of a Global Deal on Climate Change".
The global carbon market had to be expanded and improved, there had to be massive investment in research and development in low carbon technologies, and rich nations had to bear the brunt and help the poorer world leapfrog into a low carbon era.
Stern said the developing world, where emissions are booming as economies grow, should be given time to prepare to sign up to caps and cuts but that time should have a strict limit and by 2020 they too should be reducing emissions.
Stern, a former British Treasury economist whose seminal work 18 months ago on the economics of climate change galvanized the international agenda, said the emission target was based on the goal of halting the temperature rise to two degrees Celsius above pre-industrial levels.
That in turn meant achieving global average carbon emissions of just two tonnes per head -- 20 billion tonnes divided by the anticipated world population of nine billion people -- from the current average of seven tonnes per head, he said.
"Everything flows from the figures. That is the simplicity of the argument. If you buy into stabilization at 500 parts per million (atmospheric carbon -- equivalent to two degrees rise) the rest is arithmetic," Stern told an audience at the London School of Economics.
As emissions in the United States already stood at 20 tonnes per head, with those in Europe and Japan between 10 and 12 tonnes, that meant the bulk of the efforts had to come from the rich world.
But even China, whose economy is growing at 10 percent a year and which is building a coal-fired power station a week, was already emitting five tonnes of carbon a head and India was close to two tonnes and would soon exceed that.
That meant that they too would have to slow, halt and reverse their emissions.
The US air force will this week call for the world's top scientists to come together in a 21st-century Apollo-style programme to develop greener fuels and tackle global warming. It wants universities, governments, companies and environmental groups to collaborate on a multibillion-dollar effort to work out greenhouse gas emissions of existing and future fuels.
William Anderson, an assistant secretary of the air force, said the project aimed to calculate the overall carbon footprint of the world's energy sources, rather than merely measure their direct emissions.
He said controversy over the environmental impact of biofuels showed such an effort was needed to avoid making the situation worse: "If you look at the situation with bioethanol from corn, a lot of people saw that as a panacea, but now it seems that if you include the lifecycle greenhouse gas emissions, the carbon footprint may be worse than people realised.
"If the world wants to get serious on greenhouse gas emissions, we have to figure out where they're coming from."
Anderson said the effort required was the modern equivalent of the Apollo missions to put a man on the moon, "and the US air force knows something about that". The project will be discussed on Wednesday at a meeting in Washington DC organised by the Connecticut Centre for Advanced Technology. Anderson said the project aimed to combine research already under way across the world, and to encourage governments and companies to release "billions of dollars" of funds.
US officials have already met the Royal Air Force and French air force to discuss ways to make their activities more environmentally friendly. A second meeting is scheduled for Paris in June.
Anderson said the military could learn from civilian airlines, which have studied how to reduce weight and increase fuel efficiency. He said: "What everybody sees is the fighter aircraft, but the predominant part of what we do is transporting people and stuff around. And so do British Airways, so do Virgin and so do Fed Ex."
Concerned about future supplies of oil, the US air force plans to switch its aircraft to a synthetic liquid fuel made from coal. It has tested the new fuel in aircraft such as the B-52 bomber, and is encouraging the British and French to follow. Anderson said: "Energy demand is going to outstrip any gains from renewables. As oil starts to diminish, coal is going to play big."
Environmental campaigners have criticised such fuels, which they say have overall carbon emissions about double those from oil. But Anderson said much of the carbon pollution could be trapped and stored underground. He insisted the air force would not switch to new technology unless it "has a greener carbon footprint" than existing fuels.
Eos, the premium airline that flew between London and New York, filed for Chapter 11 bankruptcy protection last night, a move that appeared to signal the end of cut-price executive-only flights across the Atlantic.
The American carrier’s flights were suspended last night, leaving hundreds of passengers stranded at Stan-sted and John F Kennedy airports.
The grounding of Eos follows the collapse of Maxjet last December and the announcement that Silverjet, which operates from Luton, is seeking a bailout from new investors. L’Avion, which flies from Paris to New York, is also thought to be struggling. Last night it emerged that mainstream carrier Continental Airlines had withdrawn from merger talks with United Airlines amid concerns about United’s financial health in the face of high oil prices. Continental is now focused on a possible alliance with British Airways and American Airlines.
All four of the pure business class airlines were launched over the past couple of years to take advantage of a boom in business-class travel between Europe and the United States. They hoped to take on the established transatlantic carriers such as British Airways and Virgin by offering services tailored to business-class travellers.
However, sustained high oil prices have pushed up operating costs while the worsening economic environment has reduced demand for premium air travel and the new carriers struggled to compete with better-capitalised rivals.
Eos occupied the top end of this niche market and flew only 48 passengers on its Boeing 757s, styling itself a budget-first class service. Silverjet, the last of the British all-business-class carriers, flies 100 passengers on its larger 767 aircraft and charges from £999 for a business-class return – about a third of a typical BA business-class fare.
None of the three premium-only carriers that operated from Britain has ever made a profit. In regulatory filings in America, Eos said that it had lost $37 million (£18.6 million) in the first nine months of last year on revenue of $53 million. Silverjet was losing about £1 million a month and its share price has fallen from a peak of £2.09 last March to 14p.
A spokesman for Silverjet said: “We are a different model to Eos and we remain very confident of continuing to fly.”
Eos, which was founded by David Spurlock, a former British Airways executive, was the first of the low-cost business operators to launch, starting flights in October 2005, and it raised $212 million from private equity groups and individual investors. Eos had begun to edge its way into the City’s favours and is thought to have been included on the preferred airline lists of a number of big institutions. However, it still needed additional financing and approached its original investors seeking more money this month. When that move failed, Eos approached rival airlines, including BA and Virgin, to propose a takeover. It found no interest.
Jack Williams, the chief executive of Eos, said: “There are times when even though you execute your business plan, external forces prevent you from controlling your own destiny.”
Rising oil prices are causing havoc in the airline industry and Eos is the seventh carrier in two weeks to seek bankruptcy protection or go bust.
Silverjet, the last business class-only airline flying from Britain, has secured a $25 million (£12.6 million) lifeline from a Middle Eastern investor to keep it operating for at least the remainder of this year.
The money is thought to have come from an Abu Dhabi investment fund and includes the promise of up to $75 million more to develop the airline's operations in the future, particularly in the Middle East and Asia.
Silverjet's new partner is providing the initial investment as a debt and equity package and will receive a 28 per cent stake in the airline. Silverjet's share price has collapsed by 90 per cent since it floated 18 months ago and last year it was losing about £1 million a month.
The carrier offers 100 business-class seats on its flights, which depart from a private terminal at Luton airport to New York and Dubai. Its fares are typically £1,200 return to New York, about half of what other airlines charge. Eos, which offered a similar business-only service from Stansted airport, went into bankruptcy protection last weekend. MaxJet, which also flew from Stansted, went into bankruptcy protection last Christmas and is now operating as a charter service.
Despite lower fares these carriers have struggled to compete with the major airlines such as British Airways and Virgin Atlantic, which offer greater frequency of services, air miles and departures from principal airports. However, before the credit crunch affected business travel the concept of a business-only airline looked attractive as these passengers represent the profit margin for most carriers. BA is thought to reap about 70 per cent of its profits from premium passengers on the North Atlantic route. BA and Virgin both considered starting their own all-business services but then scrapped the idea when fuel prices continued to rise and the United States economy slowed.
Silverjet's survival will owe much to the praise that passengers have heaped on the airline for its service. However, like other airlines it will still struggle to become profitable this year with oil prices at $120 a barrel.
Under the terms of the rescue deal announced yesterday, Silverjet will issue new equity worth £4.1 million at 17p a share. The airline is now planning new routes to India, South Africa and the US West Coast. Shares were up 2.5 per cent to close at 17p.
British Airways will issue its second profit warning of the year next month due to the record oil price that has already sent several carriers into bankruptcy and forced others to raise fares to deal with the unprecedented rise in costs, analysts said.
At BA's investor day last month, the chief executive, Willie Walsh, abandoned his long-trumpeted target of achieving a 10 per cent operating margin and predicted that it would fall to 7 per cent next year. Analysts said yesterday that since then the carrier has been "actively guiding" their expectations lower before its annual results on 16 May and that the sustained high oil price would mean its margin would shrink to as little as 3 per cent next year.
"They are already guiding lower," said Andrew Lobbenberg, an analyst at ABN Amro. When BA made its profit predictions last month, they were based on $85 (£43) per barrel oil. Yesterday it hit a new high at $120 after the shutdown of up to 70 platforms in the North Sea due to the refinery strike at Grangemouth in Scotland and civil unrest in Nigeria causing production stoppages. The price of oil has increased by a quarter since the start of the year, confounding experts who had predicted that the slowing economies in Europe and America would lead to a relaxation of demand. Sustained growth in emerging economies in China and India and vast amounts of money being poured into oil by investment funds seeking a hedge against the falling dollar have instead sent it to new highs.
This is excruciating for airlines, for whom jet fuel makes up between a third and half of their overall bills. BA, for example, has said that for each dollar increase to the oil price, £18m of operating profit disappears.
Such rapidly shrinking margins could be the catalyst to consecrate long-simmering merger talks between carriers. A BA spokeswoman said that it continues to "explore opportunities" with American Airlines on a deeper alliance. Mr Lobbenberg said: "To the extent that their earnings are under pressure, there will be greater impetus for them to do something." BA is particularly vulnerable because only 54 per cent of its fuel is hedged on fixed long-term contracts this year – well below the 75 per cent hedged positions of rivals like BMI and Virgin Atlantic.
There is no relief in sight. The president of Opec, the cartel of oil-producing nations, predicted yesterday that oil could hit $200 per barrel if the dollar continues to fall.
Carriers are doing everything in their power to offset the costs except, oddly, reducing capacity by cutting routes. Qantas, the Australian flag carrier, announced an across-the-board fare increase. After Continental Airlines abruptly ended long-running merger talks with United Airlines at the weekend, it emerged yesterday that United had redoubled talks with US Airways and could announce a tie-up within days. The news came less than a week after the beleaguered carrier, just two years out of bankruptcy, unveiled its largest ever quarterly loss of $537m.
Meanwhile Eos Airlines, the first and best capitalised of the small fraternity of business-class only airlines that started up in recent years, folded last weekend after it failed to secure an 11th-hour $50m bailout package. In its last desperate days, it appealed to larger rivals to see if they would buy the company, Virgin Atlantic among them. There were no takers. Paul Charles, of Virgin Atlantic, said: "A lot of airlines out there are getting pretty desperate. There will certainly be a lot more consolidation. The landscape a year from now will be very different."
Silverjet, the only remaining business class-only carrier left – Maxjet folded in December – is in talks with several investors about a possible deal to shore up its financing or to be taken over outright.
Ryanair said yesterday that from next week it would raise the fees it charges customers to check in at the airport, from £3 to £4, and to check luggage into the hold from £6 to £8. The low-cost carrier billed the charges as part of its drive to get 50 per cent of its passengers to use online check-in and only travel with carry-on bags in its never-ending quest for efficiency. More crudely, the move was all about oil. Ryanair chief executive, Michael O'Leary, said in February that if oil stayed at $85 per barrel and demand softened slightly, the company's profit of €510m (£401m) last year could halve this year.
With oil brushing up against $120, charging up to an extra £12 per passenger per flight becomes not a profit padder but a necessity for survival. Assuming for a moment that every one of the 50 million-plus passengers the carrier flies annually pays the extra fees, those extra fees equate to £600m.
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