ODAC Newsletter - 29 Feb 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.

As ODAC went to press the oil price had broken through $103 for the first time ever, after a pipeline rupture in Ecuador, a fire at the Bacton gas terminal in Norfolk, UK, and as OPEC looks set to keep output unchanged at next week’s meeting.

Alan Greenspan has apparently joined the chorus urging the cartel to raise production, which is interesting in the light of his previous remarks. The former Fed chairman wrote in his memoirs published last year that “the Iraq war is largely about oil”, and said in an interview last December (Wall Street Journal, 15 Dec 2007) that oil was peaking “lower and sooner than had been contemplated”.

The impacts of soaring fuel prices are manifest this week: figures showed the US economy almost stalled in the fourth quarter of last year, while prices continue to rise, raising the risk of stagflation; soaring grain prices led the UN World Food Program to announce it was making plans to ration food aid to the world’s hungry; while in Britain it was noted that rising gas prices tend to worsen emissions by encouraging power generators to switch to coal.

Only a week after the row over UK energy companies’ profits, gas prices in Britain jumped again after fire closed a gas substation at Bacton which handles 13% of the UK gas supply. The whole terminal accounts for 33%.

A reminder of other risks to the gas supply came as Gazprom threatened to cut supplies to Ukraine once again, as part of the ongoing price ‘negotiations’, amid increasingly shrill calls from US officials urging Europe to hurry up and build the proposed Nabucco gas pipeline to bring gas from the Caspian to central Europe.

Meanwhile, as we reported last week, Gazprom continues to tighten its grip on the European gas supply by building relations with Iran, safe in the knowledge that if the US were ever to apply sanctions to the Russian energy giant, it would threaten the energy security of America’s allies in Europe. Russia, Iran and other major exporters are due to discuss the formation of a Gas OPEC in Moscow this summer.

The good news this week comes from ODAC trustee Jeremy Leggett – that a combination of renewables can provide baseload power. The bad news – from a British perspective – is that the UK hardly has any renewables. To understand why Britain is third worst in the European league, read UK lags behind on eco energy.

If you read nothing else this week, please read Roger Bentley’s comprehensive demolition of Odell’s recent Guardian piece, which expands on his initial thoughts in last week’s guest commentary.

Join us! Become a member of the ODAC Newsgathering Network. Can you regularly commit to checking a news source for stories related to peak oil, energy depletion, their implications and reponses to the issues? If you are checking either a daily or weekly news source and would have time to add articles to our database, please contact us for more details.

 

 

 

Oil

Oil smashes records on supply woes, UK gas fire

LONDON, Feb 29 (Reuters) - Oil prices surged to new record highs this week, smashing through the $100 a barrel barrier and beyond as more supply disruptions and a fire at a British gas import terminal shook an already jittery European energy market.

Brent crude oil hit a high of $101.27 and U.S. light crude soared to an all time high of $103.05 on Friday, above the inflation-adjusted high of $102.53 hit in 1980, as the Organization of the Petroleum Exporting Countries looked set to rebuff calls for more oil when it meets in Vienna next week.

Supply problems in major exporter Nigeria and the shutdown of a pipeline in OPEC-member Ecuador added further bullish pressure to global oil markets which some analysts say are also being supported as the plunging U.S. dollar encourages investors to pour money into commodities as a hedge against inflation.

Nervous oil markets were shaken again on Thursday evening by a big fire at Shell's North Sea gas import terminal in Britain, Europe's biggest gas market, which slashed supplies of the heating fuel by about 10 percent and sent spot UK gas prices up over 17 percent at one point. Although one of the two pipelines feeding into the terminal resumed flows into Britain's network at around midday on Friday, there was still no indication from Shell when the other pipeline might reopen, which helped support UK gas prices as cooler weather threatened to spread across the country.

Although other import pipelines and storage stepped up supplies to compensate, concern over the Bacton terminal pushed the working days of next week up by 3.25 pence to 56.00 pence per therm and March contracts up 2.50 pence to 54.50.

Benchmark gas oil futures also climbed to record highs, boosted by low stocks and upcoming refinery maintenance.

Gasoline prices remained weak with stocks in the Amsterdam Rotterdam Antwerp refining hub hitting a new record high this week.

Rising inventories in the United States are expected to limit the demand for European gasoline from the United States, the world's top gasoline consumer.

POWER RISES

European power forwards hit new highs early on Friday due to stronger oil, with the benchmark German Cal '09 baseload contract hitting a new record high of 65.15 euros ($98.40) a megawatt hour.

The French Cal '09 baseload contract also hit a new high of 65.90 euros/MWh early in the last session of the week.

As Europe's top exporter of electricity, rising French power prices can influence power prices in bordering markets, including Britain which is connected to it by subsea cable.

Even carbon emissions prices rose on Friday after easing for most of the week, with prices for December 2008 up 19 cents at 21.35 euros.

COAL FIRMS

Physical coal prices firmed gradually through the week from around $145.00 a tonne CIF/DES ARA on Monday to $149.50 a tonne on Friday. Benchmark South African prices also rose from around $114.00 a tonne FOB Richards Bay on Monday to close to $120.00 a tonne on Friday.

Strong global demand and increasingly tight supply because of production problems in major exporters South Africa and Australia continued to pressure prices.

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Scattered inheritance

MOSCOW. More than once Russia has confidently promised to meet the demand of European and other countries for oil and gas.

First Deputy Prime Minister Sergei Ivanov has recently confirmed this at the Munich conference on security. But does Russia have enough energy resources?

Senator Gennady Oleinik, who has worked in several oil companies, is not so optimistic. Talking about the problems of Russia's northern regions at a RIA Novosti news conference, he recalled that the North is the main national storeroom of natural resources, and a good owner should take care to keep it full. It is import to increase natural resources - at least by the amount of what has been put to use. But this is not being done now.

When the reform of the fuel and energy sector was gaining momentum in the early 1990s, the state made private companies responsible for geological prospecting. With rare exceptions, they were not very interested in this because for the most part they had enough raw materials for 10 to 15 years to come. There are no incentives or tax breaks that would encourage these companies to engage in geological studies. At best, they prospect for raw materials within the borders of their licensed territories, and are not undertaking risky projects.

As a result, for the last 15 years Russia has done practically nothing to reproduce its mineral wealth, but has been scattering the inheritance it received from the previous generations.

But the age of easy oil is almost over. There are few deposits where production is relatively inexpensive. The situation with gas resources is a little better. Today, Russian companies are developing more than 70% of the Soviet-explored oil deposits. The relevant figure for gas deposits is 60%. The plum has been picked; leftovers will be picked in the next few years.

In this context, reports about an imminent reduction in oil production in Russia are a source of concern. We have been giving promises to Europeans, Chinese and other foreign partners, but will we be able to keep them?

Major Western companies have also registered a decline in oil and gas production for the same reason.

Well-known energy expert Jeremy Legget wrote in the British Guardian the other day: "ExxonMobil, BP, Chevron, Royal Dutch Shell and ConocoPhillips used more than half of their increased operating cash flow between 1998 and 2006 not on exploration but on share buybacks and dividends." Geologists have received five times more money from them than their Russian colleagues.

In the meantime, the world's demand for energy is growing at an unprecedented pace. Analysts from the International Energy Agency believe that by 2030 it will increase by 60%. At present, total world oil production amounts to approximately 85 million barrels per day. Oilmen doubt that the desired goal of 100 million barrels will be achieved. Moreover, they fear that next year the oil production of the OPEC countries will go down by 2 million barrels.

Russia has a third of the world's resources of gas, one tenth of oil and one fifth of coal. But this data is mostly tentative and will have to be confirmed. Moreover, it will take a decade, if not more to start producing these raw materials.

The same is true of the Arctic shelf riches, on which our oilmen are pinning their great hopes. In tentative estimate, they amount to 100 billion metric tons in the oil equivalent. But out of 15 explored Arctic deposits, only two - Shtokman and Prirazlomnoye - are more or less ready for development. As for hypothetical hydrocarbon wealth in a zone claimed by Russia, this is a pie in the sky. Besides, there is no equipment that can operate in the severe Arctic conditions.

Former Soviet Minister of Geology, Professor Yevgeny Kozlovsky gloomily predicts that a "disastrous reduction in exploration will destroy the Russian economy." He recalls that about 20,000 deposits of natural resources were discovered in the Soviet times, out of which 2,000 determined the economic growth; no major deposit has been found in the last 17 years.

Economists are aware of this danger. Several years ago, the situation started changing, and the state began to invest huge funds in geological prospecting. But in 2007 and 2008, the growth rates of investment have sharply dropped, and are now merely adjusting for inflation.

Last year, 19.8 billion rubles (over $800 million) were earmarked from the budget for these purposes, and another 130 billion (over $5.5 billion) were added by private companies.

As Oleinik reported at the same conference, the Ministry of Natural Resources is urgently drafting proposals to double this investment. But this will not be enough, because it is necessary to make up for lost time and restore what has been almost totally destroyed.

Exploration in difficult-to-access areas requires special attention. The producers will find it too expensive to conduct it single handed. It is also risky - what if the forecasts do not come true? Such exploration calls for active government involvement. A conference held by the president with government members and oil corporations last January decided to set up a national company for exploration in the Russian continental shelf. The construction of a pipeline to the Pacific is in full swing, but it can be filled with oil by one third at best.

It is an open secret that Russia's high economic performance in then last few years, huge gold and currency reserves, and the Stabilization Fund have been made possible by skyrocketing prices of hydrocarbons, which make up half of the budget. Long-term programs of economic and social development (up to 2020 and even 2030) are largely based on these prices. If we do not have this oil and gas trump, all our achievements and ambitious plans will come under threat, not to mention the promises that we are giving to foreign partners without thinking.

The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.

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Energy companies plead for tax breaks to help raise production

Britain's oil and gas companies including BP, Shell and British Gas have been making record profits but say they need better tax breaks if they are going to meet higher production targets in the North Sea.

The energy sector is warning that unless the government stimulates activity the UK will miss its expected production targets and have to import more fuel from abroad, which may lead to higher energy costs for homeowners and lower tax revenues for the Treasury.

Ministers had set their sights on companies being able to raise production from the current 2.8m barrels a day to 3m barrels by 2010. But Oil & Gas UK, the industry body, said last night that the latest projections suggested there would be a 20% shortfall. The new level is likely to be closer to 2.4m barrels.

Companies are investing at the £3bn a year level that the government and industry had expected but the mounting cost of steel, platforms and manpower is undermining the effectiveness of the money, with inflation running at between 15 and 20% across the North Sea.

Malcolm Webb, chief executive of Oil & Gas UK, said much of the profits were being generated abroad. "It must be recognised that, even in the current price environment, the [North Sea] tax regime continues to have an impact on long-term investment confidence," he said.

The plea for better tax treatment came as a survey showed that oil and gas groups have overtaken banks as the biggest contributor to the Treasury. Energy and banking firms were responsible for nearly three-quarters of the £12.8bn of corporation tax paid by 74 of the UK's biggest companies in 2007, according to the report by accountant PwC.

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Greenspan Urges Gulf States to Raise Oil Output, Arab News Says

Former Federal Reserve Chairman Alan Greenspan said oil prices would remain high unless global production capacity increases, Arab News reported today.

There was an "urgent need" to raise crude oil output capacity, the newspaper reported Greenspan as saying during a speech at the Jeddah Economic Forum in Saudi Arabia. Increasing oil output alone wasn't enough to combat high crude prices, Greenspan said.

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Gas

U.K. Gas Prices to Rise After Blast and Fire at Bacton Terminal

U.K. natural gas prices are likely to rise after an explosion and fire yesterday damaged Royal Dutch Shell Plc's Bacton gas terminal in England, which handles supplies from the North Sea.

British natural gas jumped more than 20 percent in after- hours trading following the blaze in a water-treatment plant at the terminal. The facility on the U.K.'s east coast sustained "structural damage" from the blast, according to a recorded message from the local fire service, which wasn't more specific.

"Traders taking gas in through Bacton will have to replace those flows," Patrick Heather, an industry consultant and former head of gas trading at BG Group Plc, said in a phone interview. "The southeast is where the demand is. Bacton is our physical link to the continent."

The fire in the wastewater system at Shell's Bacton terminal was extinguished and the facility was shut down, Shell spokeswoman Dawn Flett said by telephone yesterday. All personnel on site have been accounted for, she said. The plant is 18 miles northwest of Norwich, U.K.

Within-day U.K. gas prices rose as high as 65 pence a therm on the APX exchange yesterday evening, compared with about 52.5 pence before the blaze was reported. They traded at 54.50 pence at 9:22 p.m. London time. A therm is 100,000 British thermal units. The price is equal to $10.86 a million British thermal units.

Gas Trading

News of the blaze came after normal trading hours for most gas brokers. The APX exchange is used by National Grid Plc, operator of the U.K.'s gas pipeline network, to buy and sell the fuel to balance daily demand.

Gas traders will "pounce" on the Bacton news when trading resumes today, Heather said.

Total SA halted export flows from the Elgin-Franklin fields in the North Sea, which ship gas to Bacton, spokeswoman Jenny Costelloe said. Those fields can pump 280,000 barrels of oil equivalent a day, including 175,000 of gas condensate, a type of light oil.

Bacton can handle as much as one-fifth of the U.K.'s net gas imports, Heather estimated. Shell's Bacton terminal processes gas from the U.K. North Sea and also handles supplies from the Balgzand-Bacton Line that links the Netherlands and the U.K., according to Shell's Web site. Exxon Mobil Corp. is a part-owner of the terminal, according to Shell.

No gas was flowing through either the Bacton Shell or Bacton Seal terminals, data from National Grid showed late yesterday.

"We'll have to wait on damage reports to see what the problem is and then we'll have an indication of how quickly it will be fixed" Stacy Nieuwoudt, a natural gas analyst at Tudor Pickering Holt & Co. in Houston, said yesterday.

"The U.K. could meet any incremental demand needs with LNG cargoes, you'll just have to pay more for it in the market."

Flows through the BBL pipeline from the Netherlands were unaffected by the fire, according to National Grid data on Bloomberg. The fuel was arriving into the U.K. at a rate of about 35 million cubic meters a day at 8:51 p.m. yesterday.

Interconnector (U.K.) Ltd. said its gas pipeline to Belgium, which has its U.K. terminal at Bacton, was not affected.

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Ofgem fines National Grid £41.6m

National Grid has been fined £41.6m by energy regulator Ofgem for restricting the development of competition in the domestic gas meter market.

Ofgem said the company had committed "a serious breach of competition law".

It said National Grid's actions had prevented gas suppliers from contracting with other firms for cheaper metering deals.

National Grid, which operates the UK's main gas pipeline system, has said it will appeal against the decision. <!-- E SF -->

The company is also responsible for the UK's long distance electricity transmission network.

Smart meters

Underlying the complaint is the issue of smart meters, which tell customers exactly how much energy they are consuming at any one time.

Ofgem has been a strong advocate of smart metering which they believe can help households reduce their energy consumption.

Liberal Democrat Environment spokesman Steve Webb said that "the government must now take urgent action to ensure a smart meter is installed in every home as quickly as possible."

"Smart meters are good for your pocket and good for the planet. It is vital that all households get access to these meters as soon as possible."

'Voluntary agreements'

Ofgem's decision relates to a number of metering contracts National Grid entered into with gas suppliers in 2004.

"These contracts were negotiated over a two-year period, were voluntarily entered into by gas suppliers and delivered immediate and substantial reductions in charges for meter services, saving customers around £120m over the four years of their operation," said National Grid.

"Ofgem was consulted throughout this process of contract development and negotiation and has acknowledged that National Grid had no intention to breach the Competition Act."

However, an Ofgem spokesperson said National Grid's assertion was untrue: "Ofgem was not consulted throughout the process of contract development negotiation. National Grid could have asked us for guidance but didn't."

Ofgem also counters that under the terms of National Grid's contracts, suppliers wrongly faced penalties if they replaced more than a certain number of gas meters.

"National Grid has abused its dominance in the domestic gas metering market, restricting competition and harming consumers," said Ofgem chairman Sir John Mogg.

The UK's gas distribution system was formerly run by Transco.

In 2002 its parent company, Lattice Group, merged with National Grid.

The new company was first called National Grid Transco, before being shortened to National Grid in 2005.

National Grid's turnover from its gas meter business is around £260m a year

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US tells Europe to stop dithering over pipeline

The Bush administration yesterday urged the EU to stop dithering over the building of a $6bn (£3bn) gas pipeline from the Caspian basin to central Europe and reduce its growing dependence on Russia's Gazprom.

"Follow your wallet," Matthew Bryza, US deputy assistant secretary of state, said, arguing that the troubled Nabucco project made sound commercial sense and would cut Europe's dependence on Gazprom by up to a quarter.

Bryza's outspoken comments came after talks with senior EU officials, including energy commissioner Andris Piebalgs, and took sideswipes at the "gigantic rents" [excessive prices] Gazprom is charging Europe for gas. They underline the growing geo-political importance of gas.

"Helping Europe diversify its gas supplies has become extremely urgent," said Bryza, adding that US backing for Nabucco was in the country's national interests even though no American companies are involved.

This week's controversy in Britain over the huge profits made by British Gas at a time when householders are having to spend an increasingly large proportion of their income on energy also highlight the sensitivity of the issue for politicians across Europe.

The 2,050-mile (3,300km) Nabucco pipeline, on which construction is due to start in 2009, is supported by six European companies, including new partner RWE of Germany, and is seeking a seventh, possibly France's Total or GDF. The European commission approved rules for its construction this month.

Nabucco would bring gas from US ally Azerbaijan, Turkmenistan and possibly Kazakhstan via Turkey to Romania, Bulgaria, Hungary, Austria and perhaps Germany. It could supply 31bn cubic metres of gas a year from 2012-13. It could also supply gas from western Iraq, said Bryza. With a Turkey/Greece/Italy pipeline, it could provide up to 44bn cubic metres of cheap gas or a quarter of Gazprom's current 160bn cubic metres of supply to the EU. Gazprom supplies a quarter of all Europe's gas but this could rise to more than a half.

Bryza said Gazprom could purchase gas for as little as $100 for 1,000 cubic metres in Central Asia and sell it for $300 in Europe, with unsavoury, shadowy middle-men close to organised crime enriching themselves in the process.

"We want to help Gazprom to move from a monopoly towards more market-based behaviour," he said. "We want it to be reliable and produce more gas at home in a more competitive domestic market rather than buying up as much infrastructure here in Europe or the cheapest possible gas it can find in Central Asia."

Bryza said a Gazprom-sponsored alternative to Nabucco, called South Stream and bringing gas under the Black Sea through Serbia to Europe, would cost anything up to $30bn and be less efficient and costlier.

He claimed that the Azeris and the Iraqis, once they had approved a new hydrocarbons law, could fill the Nabucco pipepine despite analysts' fears that there will not be enough gas available. Eventually, with a change of policy towards nuclear enrichment, Iran, the world's second-largest gas producer, could also become a supplier.

"I can't believe the stories that are running around Europe that there's no gas and Nabucco will be too expensive. These are ridiculous arguments based on non-truths," he declared. "It will be built, I'm convinced, because it makes commercial sense and will be more efficient and cheaper than other alternatives."

Bryza insisted that US backing for Nabucco was in the country's national interests even though no American companies are involved. "Helping Europe diversify its gas supplies has become extremely urgent."

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Nuclear

Uranium and the Nuclear Renaissance

A global nuclear construction boom is likely to keep the pressure on already tight uranium supplies. The market is responding with new mine projects, higher commodity prices, and new financial products, but will the supply meet the demand?

AS THE NUCLEAR POWER RENAISSANCE continues to build steam, the raw material needed to fuel that renaissance—uranium—became a darling of the mining and financial communities in 2007 and—like coal, oil, and gas—the subject of intense global exploration and acquisition activity.

The spot price of uranium skyrocketed to historic highs in 2007, capping a three-year upward trend and reaching $135 per pound in summer, as projected demand rose against limited supply. By autumn, it was back to the mid-$70s/lb but by year's end, up again to the low $90s—still historically high.

The phenomenal price rise was both a cause and, many argued, a consequence of the new interest in the uranium market by non-traditional participants like hedge funds and investment houses. Before the price began its upward march in 2004, it hadn't exceeded $20/lb in the previous 15 years.

New investments, and investment vehicles, have proliferated. In 2006, South African uranium miner Nufcor Group launched a uranium investment fund on the London Stock Exchange's AIM. In May 2007, the first uranium futures contract was launched on the New York Mercantile Exchange. In July, the DAXglobal Nuclear Energy Index was launched on the German stock exchange, tracking securities of companies engaged in nuclear energy. In August, Standard & Poor's launched its Global Nuclear Energy Index, and Van Eck Global launched the Market Vectors-Nuclear Energy exchange-traded fund on the American Stock Exchange.

The unprecedented attention from the financial world has led to industry discussions about changing price discovery and other mechanics of the world's nuclear fuel market. But traditional players have resisted giving up the hedge strategies they know—long-term contracts, often bilaterally negotiated—for risk management strategies developed in other energy commodity markets.

Uranium Available–At What Price?
While world uranium resources are generally considered to be more than adequate to meet foreseeable needs, ongoing production and supply constraints, and questions about whether new production can be timed to meet demand growth, mean the market is likely to remain tight for some years to come.

The OECD Nuclear Energy Agency and the International Atomic Energy Agency's latest (2005) Red Book predicted that primary uranium production could satisfy projected world uranium requirements by 2010 only if all expansions and mine openings proceeded as planned and production were maintained at full capability. Secondary sources, such as ex-weapons and government stockpile material, are expected to dwindle, particularly after 2015, it said.

In that environment, start-up companies and junior minors are proliferating, using venture capital to stake claims and obtain explorations permits the world over, hoping to find enough uranium to lead to a stock market listing—or at least to be bought out by one of the majors. Mines once closed as uneconomic are being re-evaluated and re-opened. The Red Book said the bulk of resources identified in 2003-05 were "not the result of new discoveries, but … re-evaluations of previously identified resources in light of … higher uranium prices."

According to a World Nuclear Association study released in September, an adequate supply of uranium is expected until 2030, with production picking up sharply between now and 2015. In 2010-15, WNA said, there could even be a surplus. The WNA study does say that, while uranium resources are considered to be extensive, many are not delineated, let alone developed.

The Reactor Count
Meantime, uranium's customer base is growing. In addition to the 438 reactors operating worldwide in 2007, the WNA counted 46 under or about to start construction.

Russia is on a crash course to build up to three nuclear power units per year to bring nuclear's share in its electricity supply from today's 15.4% to 23% by 2020.

China is also planning a major nuclear power expansion. China Guangdong Nuclear Power Holding Co. Ltd. announced plans earlier this year to have 6,000 MW of nuclear capacity on line by 2010, 15,000 MW by 2015, and 34,000 MW by 2020. The company operates half the 8,000 MW of nuclear capacity in China today. China is rapidly acquiring nuclear technology, partly through technology transfer agreements built into supply contracts with Western vendors, and hopes to begin exporting reactors by 2020.

India has a mostly indigenous nuclear power program and plans to have 20,000 MW on line by 2020, from today's 3,500 MW, and to get 25% of its electricity from nuclear by 2050. India may be aided by a special agreement with the US, which is to open up nuclear power trade despite India's refusal to give up its nuclear weapons program.

Japan, with 55 reactors, plans more but has difficulty with public acceptance for new sites. South Korea, which like Japan must import virtually all energy, continues its program to reach 26,600 nuclear MW by 2017. It has 18,400 MW today.

Russia has been corporatizing and consolidating its nuclear companies, long part of the state bureaucracy, in a bid to expand domestically and support Russian vendors in export markets. Russian industry has built reactors of Soviet design in China, India, Finland and Eastern Europe, and has a near monopoly on their fuel supply.

Global consolidation among nuclear vendors continued through 2007. They included French vendor Areva's acquisition of junior uranium miner UraMin and its assets in Africa; a General Electric-Hitachi joint venture for new nuclear construction; a Constellation Energy and Electricite de France tie-up to support deployment of Areva's EPR reactor design in the US; Westinghouse's purchase of IST Nuclear, a major supplier for the Pebble Bed Modular Reactor under development in South Africa; Kazakhstan national uranium miner Kazatomprom's purchase of a 10% share in Westinghouse from Japan's Toshiba, Westinghouse's majority owner; and Kazatomprom's 10% share in Russian industry's enrichment venture, the Angarsk International Uranium Enrichment Center.

Planned reactor construction in the US—where five requests for combined construction/operating licenses were filed with the Nuclear Regulatory Commission in late 2007 and up to 27 more are expected by 2010—is grabbing headlines.

But in addition, all the 104 operating US units are expected to run for 60 years, rather than the 40 years initially licensed, and most are being uprated, some by more than 100 MW.

In Europe, with reactors under construction in Finland, France, Romania, Bulgaria and Slovakia, the UK opted to allow industry to replace the rapidly aging reactor fleet, whose technical ills won't allow life extension. Nuclear has been supplying about a quarter of UK electricity, all carbon-free. With North Sea oil and gas reserves being rapidly used, increasing dependence on gas and coal imports, and strong commitment to CO2 reduction, the government was widely seen as having little choice but to approve new nuclear, despite virulent opposition by some environmental groups who were expected to continue to fight nuclear building in the courts.

Luc Oursel, CEO of Areva NP, said in September that the UK represents the first new large-scale nuclear power program in a European country that had effectively given up on nuclear. Also, the UK has one of Europe's most open, competitive energy markets, so a successful nuclear revival there would demonstrate anew nuclear's economic competitiveness, he said.

Europe's Environment Shift
After the 1986 accident at the Soviet nuclear unit at Chernobyl, many European countries began officially or unofficially pursuing nuclear phase-out. But with increasing global warming concerns and a newly aggressive EU energy policy, many countries are reconsidering.

In its first attempt at a comprehensive EU energy policy in January 2007, the European Commission for the first time openly supported new nuclear generation in the name of supply security and carbon emissions reductions. In a bow to officially anti-nuclear EU members, the EU maintains that use of nuclear power is up to individual countries. Nonetheless, the EU is gearing up towards increasing Europe's nuclear capacity.

Discussions are under way to reinvigorate the Euratom loan program, last used following the collapse of the Soviet Union to improve safety at Soviet-designed plants in eastern Europe. In 1977-87, 90 Euratom loans helped finance nuclear facilities in five countries. But the program has a budget cap of €4 billion. There are increasing calls, and quiet discussions, aimed at making Euratom loans again available to help finance nuclear plants by increasing the cap to at least €6 billion.

Similarly, the European Investment Bank, the EU's investment arm, has said it will once again consider financing new nuclear power plant construction in line with EC energy policy. Although it aided building reactors in the past, it hasn't done so since the 1980s.

Although new construction is still unlikely in some western European countries, upgrades to increase output of existing reactors have been under way for more than a decade and the idea of life extension is increasingly breaking through long-standing political agreements on phase-out.

In Belgium, Suez-Electrabel's seven units are scheduled to close beginning in 2015 under a 2003 nuclear phase-out law. While Belgium's fractured political parties had not succeeded in forming a new government months after the June 10 elections, the parties did agree during summer negotiations that at least some units should be allowed to operate beyond the 40-year limit. A Belgian government commission went further, arguing that without nuclear power and carbon capture and storage, Belgium would never reach its Kyoto Protocol carbon dioxide emission reduction targets, unless CO2 costs rose to between €500 and €2,000 per metric ton.

In the Netherlands, the single nuclear unit, Borssele, has overcome a politically-imposed phase-out and can now run 30 additional years. Discussion on new nuclear construction is under way, with utilities Essent and Delta said to be interested in building. An October report from the government's highest advisory body, the Social and Economic Committee, says that, while nuclear can not be considered a "renewable" source, it can contribute to CO2 reductions and is cheaper than on-shore wind facilities.

Sweden retains a ban on new nuclear, but power uprates at existing reactors will result in adding the equivalent of a large reactor by next year. Bulgaria has just begun a project to build two new Russian 1,000-MW reactors. Romania is planning to add one, and maybe two, Candu reactors at its Cernavoda station.

Slovakia will build another two Russian-design VVER-440 units under the aegis of Italy's Enel, owner of national utility Slovenske Elektrarne. In the Czech Republic, state utility CEZ is exploring adding a second pair of large reactors at Temelin. To join the EU, Lithuania was forced to plan shutdown of the two Soviet-design units at Ignalina, the largest of the Chernobyl design type, whose 2,400 MW produced 80% of the country's generation. With unit 2 to close in 2009, the government is moving to build a new reactor at the site, and has the national utilities of Latvia, Estonia and Poland on board. Ukraine, which got almost 50% of its electricity from nuclear in 2006, is considering adding up to 11 new reactors by 2030.

According to the Red Book, installed global nuclear capacity is projected to grow from about 369 GW net at the beginning of 2005 to about 449 GW net by 2025 in the lowest case and in the high case to 553 GW net. The uranium needed to fuel this growth is projected to increase by 22% and 50% in the low and high case, respectively, from 2004. The biggest growth is expected in East Asia, where uranium requirements are forecast to double between 2004 and 2025.

The Red Book says, "Planned capability from all reported existing and committed production centers based on resources recoverable at a cost of less than $80/kilogram uranium is projected to satisfy about 79% of the low case requirements and only about 64% of the high case requirements in 2025."

Along with predicted global shortages in manufacturing capacity for reactor components, technically skilled labor and management expertise, uranium too could become a limiting factor for the global nuclear renaissance.

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New UK nuclear must provide for decommissioning 'from day one'

Operators of new UK nuclear generation will be required by law to first establish a nuclear waste clean-up fund, the UK government said Friday.

UK business minister John Hutton said in a statment that new merchant nuclear generators must, as a precondition for receiving government approval, set aside money "from day one of generating electricity for their eventual decommissioning and waste costs."

Draft guidance released Friday explains how clauses in the government's energy bill published in January that require operators of new nuclear power stations to meet the full cost of decommissioning and their full share of waste management costs would work.

Companies would be required to: demonstrate detailed and costed plans for decommissioning, waste management and disposal before they even begin construction of a nuclear power station; set money aside into a secure and independent fund from day one of generating electricity; and have additional security in place to supplement the fund should it be insufficient.

A new Nuclear Liabilities Financing Assurance Board is to be set up to assist the minister in ensuring these safeguards, the statement said.

"It is in the national interest that the energy industry is able to invest in secure low-carbon energy sources. But it is also in the national interest that we take every step to ensure that the taxpayer is protected from the clean-up costs down the line," Hutton said in the statement.

"The energy bill and the guidance published today make clear that companies are liable by law to meet their full costs. Let me be clear--full means full," he added.

"Funds will be sufficient, secure and independent, it will be a criminal offence not to comply with the approved arrangements and we are taking powers to guard against unforeseen shortfalls."

Included with the draft guidance is an indicative schedule for the government to publish updated estimates of the costs of decommissioning and managing and disposing of the waste from new nuclear power stations.

This should enable it to set a fixed unit price for disposal of intermediate level waste and spent fuel. This will be set "at a level over and above expected costs and will include a significant risk premium, to provide the taxpayer with material protection."

Hutton said: "We consider that a decision by an operator to proceed in principle with building a new nuclear power station and therefore to request from the government a fixed unit price for waste disposal in a Geological Disposal Facility could come as early as mid-2009." Consultation on the draft guidance will end May 16, 2008.

Under the energy bill, operators of new nuclear power stations must produce a funded decommissioning program for approval, including a decommissioning and waste management plan and a funding arrangements plan.

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Renewables

Renewed energy

One of the loudest arguments of those who profess that traditional energy is needed even if renewables markets grow large is that modern nations cannot be powered properly without it. In particular, they say, renewables cannot meet baseload demand.

Late last year, a German economics ministry experiment showed that distributed power can indeed produce reliable baseload in a secure and reliable manner. Thirty-six decentralised renewable plants - a mix of biogas, wind, solar (photovoltaics, or PV) and hydropower - were linked by three companies and a university in a nationwide network controlled by a central computer.

Schmack Biogas AG, Enercon GmbH, SolarWorld AG and the Institute for Solar Energy Supply Systems (ISET) at the University of Kassel conceived and ran the experiment with 13 other partners, aiming to show in miniature via a "combined power plant" what could be done, if the will can be summoned on a national scale, to replace both fossil fuels and nuclear power.

The experimental network, capable of producing about 50 megawatt hours of electricity a year - 61% from wind (12.6MW of peak power), 25% from biogas (4MW peak), and 14% for PV (5.5MW peak) - was scaled to meet 1/10,000th of the electricity demand in Germany. It was equivalent to a small town with around 12,000 households.

The system met both continuous baseload and peakloads round the clock and regardless of weather conditions. During the day of the press conference to announce the results, there was no wind at all in Germany and the country was covered by cloud. Such intermittency of solar and wind, of course, means that bioenergy has to play an important role.

Four biogas plants were used along with three wind parks and 20 PV installations. The current cost of generating electricity from the combined power plant is currently 13 eurocents per kWh, twice as expensive as conventional electricity. But then the price of conventional polluting electricity is rising fast in Germany, as everywhere else.

If peak oil hits us in a few years, and if rising concern about climate change forces governments to avoid a dash for coal-to-liquids and coal use without carbon capture, the question then becomes how quickly renewables can rise from their current low level of global electricity production - alongside maximal energy efficiency - to meet the challenge.

There, sadly, the news is not good. We have been held back for too long after all the years of the great addiction. We can grow far faster than nuclear, but there would still be a sizeable gap, otherwise known as the third energy crisis.

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UK lags behind on eco energy


The British government says it is committed to renewable energy and has signed up to the latest EU generation target for 2020 - but countries across the world are doing better. Tim Webb explains how lack of investment is holding us back

Almost two years ago, cranes loaded three red 'Pelamis' wave machines - named after a species of sea snake - on to container ships in the Orkneys. Their destination: the coast of Portugal. Nothing could be more symbolic of how the UK has fallen behind in the race to embrace renewable energy.

The bizarre-looking devices, developed by Edinburgh-based Pelamis Wave Power, use the force of the sea to generate renewable and clean electricity. They are the product of Caledonian engineering and innovation, having been designed in Edinburgh, tested in the Orkneys and built in Scotland.

Yet Pelamis Wave Power will soon launch them into the sea off the coast of Portugal, not the UK, to create the world's first commercial wave farm. Unlike those offered by the Portuguese, the paltry subsidies available from the UK government were not enough to make the new technology economic.

It's a story repeated throughout the renewable and clean energy sector in Britain. Despite all the talk from the government about being a world leader on climate change - not to mention all the wind and waves at the UK's disposal - its track record on delivering on these promises is not so impressive. Max Carcas, business development manager of Pelamis Wave Power, says: 'It was not our choice where we put the technology, it was the customer's. The customer has to get a return which is competitive. The UK talks a good game, but the action to deliver has been lacking.'

It's not only in marine energy where the UK is falling behind. According to the European Wind Energy Association, at the end of last year, the UK had the sixth-largest wind farm capacity in Europe, with 2,400 megawatts installed, enough to power two-and-a half cities the size of Birmingham when the wind is blowing. That amounts to about 2...#8239;per cent of total UK generation capacity, far behind the top two countries in Europe, Germany and Spain, which have installed 22,200MW and 15,100MW respectively, despite having less coastline off which to install turbines. Globally, the United States, China and India are all far ahead too.

The UK is even further behind on solar power, with installed capacity of 16MW at peak times, compared with 3,800MW in Germany.

Yet the government insists it is committed to renewable energy. Last month, it signed up to a European Union target of about 15 per cent of energy consumed from renewable sources by 2020. Because it is much harder to get cars and planes to run on renewable energy, much of the burden will fall on electricity generators to meet the target. Some estimates say that about 40 per cent of electricity will have to come from renewable sources to meet the target.

In almost all cases, renewable energy is more expensive than conventional forms of electricity generation, such as coal and gas. This means that if the government is serious about renewable energy targets, it must subsidise, directly or indirectly. Yet UK governments do not tend to hand out large direct grants compared with those in Europe. Last year, Westminster awarded grants to help meet the cost of installing solar photovoltaic systems to just 270 households, compared with the 130,000 fitted by the Germans. And even this paltry amount is drying up: last month no awards were granted after the government cut the overall funding pot last year.

In the 1990s, the Danish government handed out huge subsidies to develop a domestic renewable energy industry. As a result, it now boasts the world's largest wind turbine manufacturer, Vestas. Germany and Japan are the world's largest generators of solar power for the same reason. As Bruce Jenkyn-Jones, director of investments at specialist environmental fund manager Impax Asset Management, says: 'There are very few UK companies really leading the way. The UK government is not prepared to put in big subsidies - it's just not the way we do things here.'

James Cameron, chairman of specialist investment bank Climate Change Capital, says the government's blinkered approach to subsidies is a missed opportunity: 'On solar, for example, I've had conversations with government people here saying "Japan and Germany have already done solar, they're better at it than us and it's expensive anyway, so we won't concern ourselves with it". I find these kinds of argument unacceptable when we have so much to contribute to design, implementation and application of the technology, and when there is so much growth left in the market.'

As well as providing bigger grants to developers, European governments also favour offering guaranteed higher fixed tariffs for renewable generators. In Germany for example, some wind farms receive £110 per megawatt hour (MWh), more than double the wholesale price of electricity and about a fifth more than wind farms currently earn in the UK.

Instead, the British government has favoured more market-based incentives. Rather than dole out big grants to companies to build wind farms, it introduced the 'renewable obligation scheme'. This requires suppliers to source an increasing amount of electricity from renewables.

Under the scheme, generators must get a 10th of their electricity from renewable sources by 2010, rising to a fifth by 2020. To do this, they must amass sufficient 'renewable obligation certificates' (Rocs), which renewable generators sell together with the electricity they provide.

A Roc's value varies depending on how many certificates suppliers need: if there is a shortage in the market, the price is higher. Under current prices, a wind farm may receive about £40 for each MWh it generates based on the wholesale price of electricity. On top of that it receives about another £45 for the Roc it can sell on.

The problem with this system is that developers do not know how much a Roc will be worth from one year to the next because the value fluctuates according to supply and demand. While it is possible to estimate how much it will earn, it does not offer the same level of certainty that fixed feed-in tariffs do overseas. As Jenkyn-Jones says: 'Rocs are less bankable than a feed-in tariff.' As a result of the higher risk, it costs developers more to raise the money to build the wind farms - costs which are ultimately passed on to the consumer.

Carcas adds: 'From an academic point of view, such a market-based mechanism sounds very nice and pure. But in reality it's not the most efficient way of bringing forward emerging technologies.' Indeed, the renewable obligation scheme is certainly not cheap. Energy regulator Ofgem says it has cost £1.7bn in its first five years, on average £7 per year per household.

The renewable obligation scheme was introduced in 2002, since when four energy ministers have come and gone. The current minister, Malcolm Wicks, has even admitted it is a 'blunt instrument'. What he is referring to - and what has irked the likes of Pelamis - is its one-size-fits-all nature. Until the rules change later this year, the scheme does not differentiate between different types of renewable generators. This means onshore wind farms receive the same funding as more expensive offshore projects. That's great for onshore developments: costs of building and operating them are £50 per MW or lower. Since they can sell their green electricity for as much as £90 per MWh, developers are making a tidy windfall.

Yet in Portugal and Spain for example, wave farms receive more than twice as much for their electricity than cheaper wind farms - which is why Pelamis is about to be deployed in Portugal, not Scotland.

The one-size-fits-all approach is also partly to blame for the slow roll-out of riskier and more expensive offshore wind farms. Of the 2,400MW of operational wind farms in the UK, only a fifth are offshore. Another 2,500MW of offshore wind projects have received planning permission but not yet been built. Many developers are concerned that their offshore projects are no longer economic. Costs have almost doubled in the past five years as a result of higher steel prices and a shortage of turbines and tugs to fix them to the seabed.

One such project hanging in the balance is the London Array development off the Kent and Essex coast, which at 1,000MW would be the world's largest offshore wind farm. Developers Shell and Eon will decide this spring whether or not to go ahead.

Matthew Clayton, fund manager at Triodos Renewables, explains the risk facing investors of such projects: 'If you are buying a gas turbine from Rolls-Royce, the company can demonstrate millions of hours of running time. Sticking a wind turbine in 30 metres of seawater is a different proposition.'

The government has belatedly agreed to introduce a banding system for renewables this year. This means offshore wind will receive 1.5 certificates for each MWh generated and marine power will get two. Ironically, this may be too little too late for the likes of London Array because the changes may not be enough to offset developers' spiralling costs.

Even research commissioned by the government suggests that the extra support for marine energy will not be enough to make a big difference. An Ernst & Young study recommended that marine energy - which currently does not operate commercially in Britain - would initially need three times as much support as onshore wind, the cheapest renewable. If marine energy received such backing, Ernst & Young projected that 1,000MW of capacity could be deployed. But when the government opted to grant only two, rather than three, Rocs for marine energy, Ernst & Young slashed its estimates about how much capacity would be installed by 90 per cent, to a paltry 100MW.

'Roc banding is great,' Carcas says. 'But what is disappointing is that it has not been set at the right level for marine energy. What is the point of setting the banding at a level where nothing ever happens?'

Planning is also a huge issue. Figures from the British Wind Energy Association seen by The Observer show that the approval rate of planning applications for wind farms has plummeted to less then two-thirds, a record low. This is partly because many of the easier sites have already been taken, while developers also report that the Ministry of Defence - which complains that the turbines interfere with its radar - has become more obstructive. As a result, the number of new applications being submitted has slumped.

Clayton of Triodos Renewables says: 'There has been a shift for the worse from the Ministry of Defence in the past six months. It is standard that it will say "no" to your application, but then you don't get a timely response when you ask why or for further information. It's also typical for the MoD to bring in objections at the last minute as part of its strategy to block projects.'

The government is passing a planning bill that is supposed to make it easier to build infrastructure projects such as wind farms, but investors are not convinced how much difference it will make in practice.

Cameron from Climate Change Capital also points to the absence of regional development banks in the UK, which, on the continent, invest in wind farms. If you add together planning issues and bureaucracy, the UK is not the most attractive places to invest, he says. 'Our guys work really hard to put relatively small amounts of money to work in the UK. It's harder to do the deals than in other countries.'

The UK has a lot of catching up to do, but there are some grounds for optimism. Companies involved in energy efficiency and waste management are promising targets for investment. And the political momentum over tackling climate change is getting stronger and stronger. This year, the government will launch another consultation on how to meet its new EU renewable energy targets. The big question for investors and the industry is whether it can now deliver on its promises over subsidies and planning.

Clayton from Triodos Renewables adds: 'There is confidence that the government will be supportive of renewables and climate change in general. But an element of doubt creeps in over how this will play out and whether the government gets it right'.

Efficiency: a bright idea

Energy efficiency and waste treatment, which conjure up images of energy-saving light bulbs and rubbish dumps, may not be subjects to set most people's pulses racing. But clean-tech investors, particularly in the UK, are getting excited about these rather unglamorous sectors.

The UK, as with much related to clean tech, is lagging behind the rest of Europe, and no more so than in waste treatment. Only Greece and Portugal dump more rubbish in landfill than the UK. But the number of available sites for new dumps is fast running out.

So the government has introduced new rules forcing local authorities and companies to recycle and treat more waste instead, providing fertile ground for investors to develop and build the facilities to do this.

The government is also trying to promote greater energy efficiency in the home, with mixed success. But with utility bills rocketing, it makes financial and environmental sense to find ways to cut down on energy use. As Bruce Jenkyn-Jones, director of investment at specialist environmental fund manager Impax, says: 'Energy efficiency may not be as glamorous or photogenic as renewables, but it's going to be a big growth area. Energy efficiency is also subsidy-free - one of the big risks with renewables is that the subsidies will be withdrawn.'

Policymakers are also starting to cotton on to the fact that it is easier to cut energy demand in the first place rather than build more renewables.

James Cameron, chairman of Climate Change Capital, adds: 'We are far too obsessed with supply when we should also focus on demand management and energy efficiency.'

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Energy Geopolitics

Ukraine's PM to brief Yushchenko on Russian gas debt payment

KIEV - Ukraine's prime minister will make an emergency report to Ukrainian President Viktor Yushchenko at 9:00 a.m. local time [7:00 a.m. GMT] on Wednesday over the repayment of the country's Russian gas debt, Ukrainian ICTV said.

Russian energy giant Gazprom warned on Tuesday that it would reduce natural gas supplies to Ukraine by 25% on March 3 at 7:00 a.m. GMT, if problems, primarily debts, were not settled.

Ukrainian TV said Yulia Tymoshenko's report would concern Russia's ultimatum.

Yushchenko has urged Tymoshenko to pay off the country's gas debt to Russia as soon as possible.

The presidents of Russia and Ukraine agreed on a plan two weeks ago to settle Kiev's $1.5 billion debt for Russian gas supplies, with Yushchenko promising that his country would pay off the debt.

Gazprom has threatened to completely halt supplies to Ukraine if Kiev fails to pay back $1 billion before March 14. An agreement was also reached to establish direct fuel supplies between Russian energy giant Gazprom and Ukraine's national oil and gas company Naftogaz.

Russia also proposed that Gazprom and Naftogaz set up two joint ventures on a parity basis. The two new companies would replace RosUkrEnergo, which holds a monopoly on gas exports, and gas import monopoly UkrGazEnergo.

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Oil giants are poised to move into Basra

Western oil giants are poised to enter southern Iraq to tap the country's vast reserves, despite the ongoing threat of violence, according to Gordon Brown's business emissary to the country.

Michael Wareing, who heads the new Basra Development Commission, acknowledged that there would be concerns among Iraqis about multinationals exploiting natural resources.

Basra, where 4,000 British troops are based, has been described as 'the lung' of Iraq by Prime Minister Nouri al-Maliki. The region accounts for 90 per cent of government revenue and 70 per cent of Iraq's proven oil reserves. It has access to the Gulf and is potentially one of the richest areas in the Middle East, but continues to be plagued by rival militias.

Wareing, international chief executive of KPMG, was asked by Brown to help kick-start business in the Basra region in the hope that prosperity will bring stability. On his first visit last week, he met officials and business leaders but a sandstorm forced him to cancel a flight to Baghdad to meet Maliki and General David Petraeus, the US's commanding officer in Iraq.

In the first interview since his appointment, Wareing, 53, told The Observer that security had improved significantly in recent months and was no longer an issue for investors. 'If you look at many other economies in the world, particularly the oil-rich economies, many of these places are quite challenging countries in which to do business,' he said. 'Frankly, if you can successfully operate in the Niger Delta, that is a very different benchmark from imagining that Basra needs to be like London or Paris.'

Iraq's parliament has yet to pass a hydrocarbon law setting out the terms oil companies will operate on and how profits will be split. 'My sense is that many of the oil companies are very eager to come in now, and actually what they're waiting for is the hydrocarbon law to be passed and various projects to be signed off. That is what is causing them to pause, rather than the security position,' he said.

Wareing declined to name names but it is thought that Shell, Exxon Mobil and dozens of others are watching closely. The role of American corporations in Iraq has been hugely sensitive since the US-led invasion in 2003, which some critics said was motivated by the Gulf state's oil wealth.

Wareing acknowledged: 'If you look at any oil-rich country in the world today you will find there are real concerns in terms of how those energy assets are developed between the role of the multinationals and what is for the benefit of the local people. You'll find that very much in Russia, for example. You can imagine in the future that is something the Iraqis will be focused on, but I haven't really seen much evidence of that at all to date.'

Basra fell largely under the control of Shia militias after the ousting of Saddam Hussein and has witnessed a violent turf war, as well as high rates of murder and kidnapping. Corruption is rife, residents are afraid to use banks in case they are robbed and smuggling of oil and other goods helps fund militias and criminal gangs. Unemployment has been put at between 30 per cent and 60 per cent, and the agricultural sector is in serious decline as cheap imports grow.

The commission, funded by the Department for International Development, is a crucial part of Britain's strategy in Iraq, following the handover of power in Basra to Iraqi forces last December. Ports, airports, agriculture and banking are also seen as possible investment areas. The commission has organised an investor conference in Kuwait next month, targeted at Iraqi expats among others, and will stage an event in London in April for European and possibly US companies.

Wareing, a father of six from Worcestershire, has often travelled to 'challenging' locations in his role with KPMG, and was asked to take the unpaid position by Brown, whom he describes as 'a persuasive man'.

He said: 'The security and prosperity of Iraq isn't just about Iraq, it's about the Middle East and probably wider than that as well. To be asked to play a small part in that isn't something you get asked every day of the week.'

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Climate

Rising energy prices create global climate conundrum

LONDON (Reuters) - The price of carbon is rising, which is what governments wanted in the fight against global warming, but now it is here no one is quite so sure anymore.

Energy prices have risen sharply in recent months, driving up domestic gas and electricity prices, an effect governments had said would help promote increased energy efficiency and therefore reduce emissions of climate warming carbon gases.

But demand has barely twitched, fuel poverty has mushroomed and instead of carbon emissions falling, they are all set to boom as coal becomes everyone's favorite fuel once more.

"The paradox here is that what looks like an increase in energy prices is in fact feeding through to an increase in carbon emissions rather than a reduction," said Oxford University economist and government adviser Dieter Helm.

"That is because the oil price is not a genuine carbon tax. Far from cutting demand for carbon, the high energy prices have prompted a rush for coal -- the dirtiest fuel," he told Reuters.

While known reserves of oil are expected to last only to around mid-century, and gas is in relatively plentiful but still finite supply, coal reserves are estimated to last for several centuries more.

There are big increases in coal burn in China, India and the United States where even tar sands have started to look attractive to investors again.

Even in Europe, which has set itself the tough target of getting 20 percent of its energy from renewable like wind, waves, solar and biomass by 2020, utility operators are starting to talk about building new coal power stations.

"This is a catastrophe," said Helm. "The big story is that around the world because of the rising price of oil we are driving towards the dirtiest form of fuel available."

Britain last month gave the go-ahead to a new coal-fired power station, the first to be built in the country in quarter of a century.

After strong lobbying by operator E.ON, the plant will be built without carbon capture and storage technology -- one of the main but expensive and largely untried techniques of preventing carbon from power plants entering the atmosphere.

UNINTENDED CONSEQUENCES

"The contradiction is that governments are trying to drive down the price of electricity to maintain competitiveness at the same time they are trying to solve climate change by driving up the price of carbon," said Tom Burke of the E3G environment lobby group.

"There are a lot of unintended consequences. What happened when the price of oil went up from $40 to $100 a barrel was not a drive to cut consumption it was a massive drive to make megabucks from coal to liquids, biofuels and tar sands."

Scientists say global average temperatures will rise by between 1.4 and 4.0 degrees Celsius this century due to burning fossil fuels for power and transport, causing floods and famines and putting millions of lives at risk.

While the science and causes of climate change are now largely undisputed, there is no meeting of minds on how to tackle it or, more importantly, who should bear the cost.

By and large the policy from the developed nations is that creating a high carbon price will make all else fall into place.

But many disagree with a view they term simplistic.

"Evidence shows that there are few visible behavioral changes as a result of high prices. Governments need to do more than just rely on the price mechanism," said Jim Watson of the Sussex Energy Group. "You need demand side measures too."

It is an argument Burke strongly supports.

"It is time that governments became really focused on the fact that price is a necessary but not a sufficient condition to achieve the levels of investment that need to be made to make the transition to a low carbon economy," Burke said.

"They have got to create the investment incentives and the regulatory framework. Those two are going to be much more important parts to making the transition to low carbon than any price signal."

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Economy

Economy close to stalling in fourth quarter

The collapse of the US housing market caused the economy almost to stall at the end of the last year but prices continued to surge, increasing the threat of stagflation.

The economy grew at a 0.6 per cent annual rate in the last three months of the year, according to the first revision of the government’s fourth-quarter estimate of gross domestic product, unchanged from its previous forecast.

This compared with growth of 4.9 per cent in the third quarter and came as a disappointment to economists who had forecast a slight uptick to 0.8 per cent. For the whole of 2007, GDP rose by only 2.2 per cent, the weakest since 2002.

Fourth-quarter personal consumption expenditure was revised higher to an annualised 4.1 per cent from 3.9 per cent, although core expenditure, which strips out volatile food and energy purchases, held steady at 2.7 per cent.

The combination of increased pricing pressures and near dormant growth poses an unpalatable policy dilemma for the Federal Reserve which cannot use monetary policy to tackle both simultaneously.

Ben Bernanke, the Fed chairman, said on Thursday in testimony on Capitol Hill that he did not anticipate stagflation and signalled he remained prepared to keep cutting interest rates.

Adding to the unsavoury mix is the threat of rising unemployment. Initial jobless claims rose 19,000 in the latest week to 373,000, far higher than a rate of 350,000 rate forecast by economists, after the previous week’s estimate was also revised upwards.

After the reports the US dollar reversed earlier gains and plunged to a new low of $1.5150 against the euro.

One of the few positive details of the GDP report was that net exports remain strong, adding 0.9 points to the GDP growth rate calculation, compared with a 0.4 per cent contribution in the previous estimate.

However, this was offset by a downward revision to inventory investment and a more than 25 per cent decline in residential investment, the steepest decline since 1981.

“Economic growth was very weak in the fourth quarter—were it not for the addition of trade, the economy would have contracted in the fourth quarter,” John Ryding, chief US economist at Bear Stearns, said.

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Euro tops $1.50 on expectations of US rate cuts

The Federal Reserve faces an increasingly complicated job weighing the need for interest rate cuts to fuel the economy against the inflationary pressures building because of an accelerating decline in the value of the US dollar.

The euro surged to an all-time record against the greenback yesterday, topping $1.50 for the first time in its nine-year history in early morning trading in Asia and continuing its appreciation through the day. Last night, it stood at $1.5119 as the Fed chairman Ben Bernanke's testimony on Capitol Hill appeared to favour further rate cuts.

A steady drip of poor economic news in the US this week has led foreign exchange investors to underweight the dollar, and it fell yesterday against all the other major currencies. At one point, the pound was back up to within half a penny of the $2 mark, which it traded above during the second half of last year.

The euro, however, was particularly strong, following surprisingly robust consumer confidence figures in Germany earlier in the week, which suggested the eurozone economy is withstanding fears of a global slowdown.

"The market is counting on the Fed lowering the interest rates even further and on the fact that the European Central Bank is going to keep them where they are," said Christoph Schmidt, an anal-yst with NM Fleischhacker Trading Bank. Divergent interest rates were "good for the euro and bad for the dollar", he said.

The falling value of the dollar is fuelling fears that inflation, already close to the top of the Fed's comfort level, will creep higher. This concern has been strengthened because of the relationship between the weak currency and the rising cost of raw materials, fuel and food.

Such commodities, traded in dollars, get cheaper for non-US investors as the US currency declines, and there were more big rises in commodities prices yesterday.

On the Chicago Board of Trade, wheat was trading at a record $13 a bushel, and the prices of coffee and cocoa were at multi-year highs. The oil price was lower after data showed an unexpected rise in US stockpiles last week, but still traded above the psychologically important $100-a-barrel mark.

Mr Bernanke reiterated his view that inflation will moderate later in the year but added: "The further increases in the prices of energy and other commodities in recent weeks, together with the latest data on consumer prices, suggest slightly greater upside risks to the projections of both overall and core inflation than we saw last month."

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UK

£10,000 loan to install renewables in your home

The government should adopt a radical new system of assistance for people wanting to install renewable energies on their houses, the Renewable Energy Association says today.

Frustrated by the failure of the government's low-carbon buildings programme grants to boost the installation of solar panels or ground source heat pumps, the REA is calling for a £1bn fund to be set up whereby people could get up to £10,000 interest-free to fit a renewable system to their property.

The funds would be secured by a second charge on the building, dubbed a "recharge" by the REA's head of onsite renewables, Andrew Cooper.

If the householder later sold his or her property, the money they received from the fund would have to be returned. However this would likely be covered by the increase in value that the renewable energy technology would give the property, especially after the big rises in electricity and gas prices of recent years. The returned money could be recycled by the fund to finance more renewables elsewhere. The average house is sold every seven years so money would move in and out of the pot quite quickly.

The recharge system would have the advantage, says Cooper, that it would get round the big upfront costs that deter many homeowners from investing in renewables and would also get away from the debate about payback times.

Cooper proposes that the European Investment Bank (EIB) be approached to put in the £1bn of funding. Brussels recently decreed that 20% of the bloc's energy must come from renewables by 2020. The EIB's remit is to lend to projects that support EU policies.

The interest on the loans could either be paid by the government, he says, or by the fund itself, or by gas and electricity companies, for whom it would be a relatively cheap way for them to meet their commitments on energy efficiency and saving.

"A second charge scheme could deliver large numbers of renewable heat and power installations to millions of homes in the UK," says Cooper.

Britain has a lamentable record on renewables. It gets only about 2% of its total energy from them - the third worst in the EU. It has 1/250th the number of solar photovoltaic systems as Germany, and 10% of its installed wind capacity.

The low-carbon buildings programme is currently giving out almost no grants for renewables on domestic buildings. Its £18m of funds, designed to finance it through to spring next year, is likely to give out less than half the total amount. Applications dried up last year after the Department for Business (BERR) slashed the maximum grant available and made it harder to apply for them.

A pilot recharge scheme is being launched in Kirklees in April.

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Bike bids invited for cycling demonstration towns

Cycling England, the independent body created by the Department for Transport in March 2005 to plan and co-ordinate cycling, has invited local authorities to bid for a share of £47m of funding.

The money has been released by the government to pay for 11 new cycling demonstration areas following the success of schemes in Aylesbury, Brighton, Darlington, Derby, Exeter and Lancaster.

Phillip Darnton, chairman of Cycling England, has invited local councils to come forward with bids for a share of the funding for the new demonstration areas, which forms part of a £140m funding package for cycling announced by transport secretary Ruth Kelly in January (Transport Briefing 22/01/08).

The successful 10 new towns and one city will receive money to pay for initiatives such as redesigning and building new cycle routes and training people to ride safely. More than 60 local authorities have so far expressed an interest in becoming demonstration areas.

The deadline for applications is 31 March 2008 and Cycling England will announce the winning city in early June, along with at least five or six of the ten new towns. Work to improve cycling facilities in those areas will begin in September this year and the remaining demonstration towns are expected to be announced in the autumn.

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Transport

Airline in first biofuel flight

The first flight by a commercial airline to be powered partly by biofuel has taken place.

A Virgin Atlantic jumbo jet has flown between London's Heathrow and Amsterdam using fuel derived from a mixture of Brazilian babassu nuts and coconuts.

Environmentalists have branded the flight a publicity stunt and claim biofuel cultivation is not sustainable.

Earlier this month, Airbus tested another alternative fuel - a synthetic mix of gas-to-liquid.

Virgin boss Sir Richard Branson said the flight marked a "vital breakthrough" for the entire airline industry.

"This pioneering flight will enable those of us who are serious about reducing our carbon emissions to go on developing the fuels of the future," he said.

But he said fully commercial biofuel flights were likely to use feedstocks such as algae rather than the mix used on the passenger-less flight.

Virgin's Boeing 747 had one of its four engines connected to an independent biofuel tank that it said could provide 20% of the engine's power.

The three other engines were capable of powering the plane on conventional fuel had there been a problem.

The company said the babassu tree, native to Brazil, and the coconuts did not compete with staple food sources and came from existing mature plantations.

Both products are commonly used in cosmetics and household paper products.

'Gimmick'

One problem with flying planes using biofuel is that it is more likely to freeze at high altitude.

The technology is still being manufactured by companies GE and Boeing, but Virgin believes airlines could routinely be flying on plant power within 10 years.

Kenneth Richter, of Friends of the Earth, said the flight was a "gimmick", distracting from real solutions to climate change.

"If you look at the latest scientific research it clearly shows biofuels do very little to reduce emissions," he said.

"At the same time we are very concerned about the impact of the large-scale increase in biofuel production on the environment and food prices worldwide.

"What we need to do is stop this mad expansion of aviation. At the moment it is the fastest growing source of greenhouse gases in the UK, and we need to stop subsidising the industry."

Greenpeace's chief scientist, Dr Doug Parr, labelled the flight a "high-altitude greenwash" and said less air travel was the only answer.

"Instead of looking for a magic green bullet, Virgin should focus on the real solution to this problem and call for a halt to relentless airport expansion."

Airbus ran its test using the world's largest passenger jet, the A380.

The three-hour flight from Filton near Bristol to Toulouse on 1 February was part of an ongoing research programme.

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Branson acknowledges peak oil

In an interview with Global Public Media, Sir Richard Branson told journalist David Strahan that aviation could be made “truly sustainable” at the launch of test flight fuelled in part by coconut oil. But the Virgin boss conceded that meaningful supplies of alternative fuel might not be available before the advent of peak oil, which he said could happen within six years.

Virgin Atlantic flew a Boeing 747 from London to Amsterdam with one of the four engines powered by a mixture of 80% conventional jet fuel and 20% biofuel. The biofuel was supplied by Imperium Renewables of Seattle, and made from the oil of coconuts from the Philippines and babassu nuts from Brazil. Because the nuts came from mature plantations or were harvested from rainforest, Virgin and its partners, including Boeing and GE, insisted the fuel does not compete with “staple food” production or contribute to deforestation.

The test flight was intended to prove that the biojetfuel could perform as well as conventional fuel at the freezing temperatures encountered at altitude. Although the biofuel formed just 5% of the aircraft’s total fuel, the partners have ground-tested a blend containing 40% biofuel. John Plaza, president and CEO of Imperium, held out the prospect of the entire aviation industry running solely on biofuel in the future, but both he and Sir Richard stressed that the feedstock would not be coconuts, but next generation sources such as jatropha or algae.

Jatropha is a hardy bush that grows in the tropics and subtropics which produces oily nuts that can then be processed to produce biofuel. Because it can grow on relatively poor land jatropha need not compete with food production. However the amount of land that would be required to replace the world’s jetfuel consumption is prodigious.

Aviation currently consumes 5 million barrels of jetfuel per day, or 238 million tonnes per year. Even with relatively generous assumptions about yield – say 2 tonnes of jatropha oil per hectare – replacing that would take almost 1.2 million square kilometres. To put this in context, D1 Oils, the British company pioneering biofuel from jatropha, plans to plant 10,000 square kilometres over the next four years.

When GlobalPublicMedia.com raised this issue at a press conference held in Virgin’s hangar at Heathrow, Sir Richard did not attempt to explain where so much land might be found, but did reveal that peak oil was part of the motivation for developing biojetfuel: “Apart from global warming, in about four or five years’ time there’s going to be more demand for fuel than there is fuel on this planet. So fuel prices will go through the roof, and so planes, ships, we’ve all got to come up with alternatives”.

Sir Richard also said that the most promising source of biojetfuel in future would be algae, which can be grown on non-productive land in ponds of seawater. Algae looks likely to be far more productive than first generation biofuels, but here too the actual yields are controversial.

Boeing claims that an acre of pond could produce between 10,000 and 20,000 gallons of fuel per year, meaning that current global jetfuel consumption could be supplied from a land area roughly equivalent to Belgium.

However, Dr Ami Ben Amotz, senior researcher at Israel’s National Institute of Oceanography, who has been producing algae commercially for twenty years, is deeply skeptical. He maintains that for technical reasons the maximum practical output will be about 4,300 tonnes per acre, meaning that replacing current global jetfuel consumption would take a land area almost 2 ½ times the sized of Belgium. Aviation demand is forecast to grow massively over the next few decades.

Sir Richard later told GlobalPublicMedia.com that algae might provide enough fuel for the entire global aviation industry, and that such technological breakthroughs represented the only chance of avoiding peak oil – which otherwise might come within six years. Asked if jatropha or algae could be ready in so short a time he conceded this was a good question, and concluded that “we have to try our best to make them available as fast as we possibly can”.

David Strahan is the author of The Last Oil Shock: A Survival Guide to the Imminent Extinction of Petroleum Man

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China's growth to send jet fuel demand up by 11-13%/year to 2020

China's jet fuel demand is forecast to increase by an average 11-13%/year until 2020 on the back of continuing fast economic growth of the world's second-largest energy consumer, Chinese aviation industry experts said Friday.

Addressing a jet fuel conference in Hong Kong, Xiao Yanying of the Civil Aviation Management Institute of China projected the country's demand for jet fuel would reach between 16.11 million mt and 18.18 million mt (348,682-393,485 b/d) by 2010, increasing to between 26.99 million mt and 33.04 million mt (584,167-715,112 b/d) five years later.

By the turn of the next decade, the mainland Chinese aviation sector would need between 44.83 million mt and 60.25 million mt (970,293-1.3 million b/d) of jet fuel to satisfy its growing needs, Xiao said.

The average rate of increase in jet fuel demand was about 14%/year between 1980 to 2005. Even though China's jet fuel demand first touched the 10 million mt mark in 2005, it would take less than 10 years for that volume to double, according to Xiao.

The country's aviation sector has thrived especially in the recent years amid exponential growth of the Chinese economy, at 10%/year or more for the past five years. In another paper for the conference, Sun Jihu, director of China's Aviation Transportation Economics and Management Sciences Research Base, noted that between 1978-2007, China registered an average 18% jump in total transportation volume each year, 16.3%/year growth in passenger traffic, and a 15.4%/year rise in air freight and post transportation volume.

Current projection continues to show a booming picture of the industry in China, propped by the country's efforts in developing tourism, foreign trade and logistics industry, Sun observed. The number of civilian airports in China will climb from 152 last year to 192 in 2010 and 244 by 2020. The number of passengers would hit 770 million by the turn of the next decade, up from 270 million in 2010 and 185 million in 2007. Total volume of cargo and post transportation would climb to 16 million mt in 2020, from 5.7 million mt in 2010 and just below 4 million mt last year.

IMPORTS TO MEET PRODUCTION SHORTFALL

Jet fuel production of Chinese refineries is expected to fall short of the double-digit growth in demand. This would prompt a growing volume of imports to fill the supply gap.

CAMIC's Xiao forecast Chinese jet fuel production would be about 18.93 million mt (409,718 b/d) by 2010, 13 million mt or 68.7% of which would be consumed by the domestic civilian aviation sector. The remaining portion of the production would be channeled to the export pool and for consumption of the Chinese military.

With China's jet fuel demand projected at about 18 million mt by 2020, the Chinese aviation sector would have to rely on imports to meet a shortfall of about 5 million mt, about 28% of the country's projected total demand.

On the other hand, the contribution of imports to China's overall jet fuel supply has grown from 31% in 1999 to 48% in 2006, according to Xiao.

Currently, South Korea and Singapore together supply 95% of China's jet fuel import needs.

Xiao also forecast major supply shortfall of domestic jet fuel output in the southwestern, northern and eastern regions of China by 2010, while the northeastern region would be the sole region in the country with a supply surplus of jet fuel production by the turn of this decade.

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Russia's $1 Billion Aircraft Complex

Russian president Vladimir Putin has ordered the creation of an aircraft manufacturing complex, to be built near Moscow and to include facilities for design, construction, testing and marketing of aircraft. The goal of the project is to revive Russia's aircraft industry from its current 10 commercial aircraft per year and raise that schedule to 5,800 aircraft by 2025 (of which 2,600 would be commercial aircraft). Putin also hopes the consolidation of facilities will provide a foundation for Russian aircraft manufacturing to cooperate and compete with other manufacturers like Airbus SAS and Boeing. The state-owned OAO United Aircraft Corp. would take on creation of the center, but no timeline has yet been announced. OAO envelops Sukhoi, Tupolev and Aeroflot aircraft, among other holdings.

Putin will step down from his position in May, but may retain significant political influence. Questions remain over how the new facility, to be located in Zhukovsky, would be staffed -- particularly, what personnel would be relocated and how other facilities already in place elsewhere would be utilized.

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Indian rail to get big investment

India's giant state-run railway network is to get an $56bn (£28.5bn) investment programme over the next five years.

The announcement by Railways Minister Lalu Prasad Yadav came as he unveiled the railway's budget for 2008/2009.

Indian Railways, which operates the world's largest train network, will see the money spent on new routes, better safety and other improvements.

For the current financial year ending March, the network will post a cash surplus of $6.3bn.

This figure represents a continuing turnaround for the network's financial performance, after it was threatened by bankruptcy in 2001.

Analysts said the generous new railways spending should mean further fiscal generosity in Friday's national budget.

The increased spending comes ahead of the next Indian general election, which is due within 12 to 15 months.

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Food

UN warns over food aid rationing

The director of the UN's World Food Programme has said it is considering plans to ration food aid because of rising prices and a shortage of funds.

Josette Sheeran told the BBC that the WFP needed increased contributions from donors to make sure it could meet the needs of those who already rely on it.

She said it also faced growing demands from countries like Afghanistan, where people were now unable to afford food.

Food prices rose 40% last year because of rising demand and other factors. <!-- E SF -->

Earlier this month, the UN Food and Agriculture Organisation (FAO) said the rising price of cereals such as wheat and maize had become a "major global concern".

The FAO estimated poor countries would see their cereal import bill rise by more than a third this year. Africa as a whole is expected to see a 49% increase.

The organisation has called for urgent action to provide farmers in poor countries with improved access to seeds and fertiliser to increase crop production.

'Growing needs'

In an interview with the BBC on Monday, Ms Sheeran said the WFP was holding talks with experts to decide whether food aid would need to be stopped or rationed if new donations did not arrive at the agency in the short term.

 

The former US undersecretary of state said she hoped the cuts could be avoided, but warned that the agency's budget requirements were rising by several millions of dollars a week because of the higher food prices.

"If food is twice as expensive, we can bring half as much in for the same price and the same contribution," she said.

"It will take increased contributions to make sure we can meet those already assessed needs."

Ms Sheeran said there was an urgent need for the funding shortage to be addressed because "in many places, we are the only source of food for some people".

"We're also seeing some new growing needs in some places like Afghanistan, where people are being thrown into food insecurity just simply due to the higher food prices."

She said those who had been hardest hit so far were people in developing countries who were living on 50 US cents (£0.25) a day, 80-90% of which was already being spent on food.

 

"In some of these developing countries, prices have gone up 80% for staple food," she added. "When you see those kinds of increases, they are simply priced out of the food markets."

Even middle-class, urban people in countries such as Indonesia, Yemen and Mexico were increasingly being priced out of the food market or forced to sacrifice education and healthcare, she warned.

Ms Sheeran said Egypt had just widened its food rationing system after two decades and Pakistan had reintroduced ration cards after many years.

China and Russia were meanwhile imposing price controls, while Argentina and Vietnam were enforcing foreign sales taxes or export bans, she said.

The WFP's ability to mitigate the impact of rising food prices has also been hampered by a significant decrease in the past five years of supplies of "in-kind food aid" - food produced abroad and delivered to vulnerable people in emergencies.

In-kind food aid peaked in 2000, when there were large surpluses and low prices for cereals.

The US, the world's largest donor of food aid, has since reduced its surplus and instead chosen to provide funding to international agencies.

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The World's Growing Food-Price Crisis

Soaring prices of staples — which have risen about 75% since 2005, driven by growing demand, rising oil prices and the effects of global warming — have sparked riots in several countries, as people reel from sticker shock and governments scramble to feed their people. Crowds tore through three cities in the West African nation of Burkina Faso late last week, burning government buildings and looting stores; when officials tried to talk peace with one group of protesters, the enraged crowd hurled stones at them. The riots followed similar violent protests over food prices in Senegal and Mauritania earlier this year. And, last October, protesters in India burned hundreds of food-ration stores in West Bengal after stockpiles emptied, leaving thousands of people unfed.

Governments might succeed in quashing the protests, but lowering food prices could be far tougher and will likely take years, according to analysts who track global food consumption. The Washington-based International Food Policy Research Institute, or IFPRI, said last December that high prices are unlikely to fall soon, partly because world food stocks are being squeezed by soaring demand. The wild ride in agricultural markets has attracted intense speculation among investors, with billions of dollars being poured into commodities markets. On Monday, the price of wheat shot up about 25% on the Chicago Board of Trade, after officials in Khazakstan announced plans to restrict exports of their giant wheat crop in order to ensure the food supply to their own citizens. Russian officials have also said they are planning to restrict grain exports.

For the world's poorest people, the price rises are already proving devastating, since the speed at which prices have risen has wrought havoc on government relief programs. Earlier this month, a top official at the U.S. Agency for International Development admitted that in order to meet current targets, it had been forced to skim off funds from future food-aid programs, worth about $120 million.

The problem is exacerbated by the fact that millions more people who were previously earning enough to feed their families can now no longer afford the food in their local stores, and are now swelling the ranks of those expecting relief from aid organizations. "We are seeing a new face of hunger," the executive director of U.N.'s World Food Program, Josette Sheeran, told TIME on Tuesday. "People who were not in the urgent category are now moving into that category." The organization currently feeds about 73 million people, including millions who get by on just 50 cents a day. After hosting a series of emergency meetings with international organizations and food experts this month at WFP's Rome headquarters, Sheeran said the organization has concluded that food prices will remain high for years. She announced on Monday that the organization might have to cut its relief programs unless it raises an extra $500 million this year. "There is no way we can absorb a 25% price rise in one day and the volatility of the markets," Sheeran said.

One factor driving up the cost of food is the rocketing price of oil, which raises agricultural costs of everything from fertilizer to transport and shipping. Like the oil price, the cost of food is responding, in part, to the burgeoning demand in China and India, where rising incomes allow people to eat bigger meals, and to buy meat far more frequently. That, in turn, has helped to squeeze the world's supply of grain, since it takes about six pounds of animal feed to produce a pound of meat.

Then there is climate change: Harvests have been seriously disrupted by freak weather, including prolonged droughts in Australia and southern Africa, floods in West Africa, and deep frost in China and Europe. And the push to produce biofuels to replace hydrocarbons is also adding to the pressure on food supplies — generous U.S. subsidies for ethanol has gobbled up needed food acreage, as farmers switch from producing food. "The area used for biofuels is increasing each year," says Nik Bienkowski, head of research at ETF Securities, a commodities trading firm in London.

The food price rises are not bad news for everyone, says Bienkowski, who estimates that his company took in about $2 billion worth of investments last year. And millions of farmers whose income has languished through years of cheap food are now earning well.

"U.S. and British farmers are laughing all the way to the bank," says Simon Maxwell, director of the London-based Overseas Development Institute, an independent think tank. "And some poor people will get jobs on farms or in local communities." Yet those people will need to buy food, whose prices are rising far faster than wages. With relief agencies struggling to feed the hungry and the shelves in Pakistan, Burkina Faso, Senegal and many other countries in the developing world stocked with food many locals can no longer afford, the prospects for chaos are steadily growing.

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Svalbard's giant cold store

Hardly anything grows on Svalbard. In this Arctic archipelago, the permafrost is 1,000ft deep, the nearest tree grows 600 miles to the south, and the sun does not rise for four months of the year. But it is on this frozen, barren outpost that the future of mankind's food supply depends.

Today sees the inauguration of the Svalbard global seed vault, a top-security repository that will house batches of seeds from nearly every variety of food crop on the planet, such as wheat, rice or maize. The aim is to protect them in case of a global catastrophe. "It is the last line of defence against the extinction of our agricultural diversity," says Cary Fowler, executive director of the Global Diversity Crop Trust (GDCT), the brain behind the project. "People are aware of the extinction of the dinosaurs, but they don't know that we are currently experiencing a mass extinction of our crop diversity."

According to Fowler, maintaining agricultural diversity is essential to protect our food supply. "We need [it] to help farmers and to help agriculture adapt to climate change, pests and diseases, droughts, and whatever demands we're going to have make of agriculture, including feeding more people."

"If we only cultivate the same variety of wheat, a disease can easily wipe it out. It has happened before," adds the 58-year-old US scientist, pointing out the blight that ravaged northern Europe's potato crops in the 1840s - and contributed to the great Irish famine.

Preserving crop diversity is becoming increasingly complex with global warming. It is going to be "the biggest thing ever thrown at our agricultural system", reckons Fowler. "It will create new climate conditions, to which plants will have to adapt quicker than ever before.

"We think we will be seeing concrete effects for which we will need new varieties of agricultural crops within the next twenty years. We're going to need that crop diversity more and more to be able to adapt," he says.

So to protect the planet's crops, a £4.7m refrigerated warehouse has been built inside a mountain overlooking Longyearbyen, a mining community of about 2,000 souls. It has been dubbed the "doomsday vault".

From the outside the vault looks like the perfect layer for a 007 villain. The entry, a narrow triangular portal made of concrete and steel, shoots out of the mountainside and offers spectacular views over Svalbard's snow-capped mountains and the Arctic Sea.

Inside, a 120m reinforced concrete tunnel gently slopes into the heart of the mountain towards three chambers, each measuring about 1,500 cubic metres. The seeds will be stored at –18C to prevent them from germinating. They will be contained in grey envelopes made of polyethylene and aluminium to protect them from air and moisture. The envelopes are stored in corrugated plastic boxes, up to 400 envelopes per box, on metal shelves.

At today's ceremony, the first 250,000 samples will be placed in the vault, with more on their way. It is estimated there are 2-3m unique varieties of crops in the world.

Should a variety of crop disappear, a sample could be taken out of the vault and sent to the gene bank it belongs to. It could then be germinated - and the crop reconstituted.

The Svalbard seed vault is not the first seed bank in the world. There are at least 1,500 of them worldwide. But some of the existing seed banks are vulnerable, and this is the first attempt to build a complete collection. "I don't think there is a single seed bank in the world that is securely funded," reckons Fowler. "None have secure multi-year budgets. Many are located in dangerous places in the world. All would be vulnerable to certain kinds of standard risks, such as fire, natural disasters; that type of thing." The seed banks in Iraq and Afghanistan, for instance, were looted and destroyed, and most of the seed collections of the Philippines's National Plant Genetic Resources Laboratory were obliterated during a typhoon two years ago.

A backup was needed, and this is why Svalbard was chosen. The cold keeps the seeds at constant freezing temperature; the islands are isolated; it is far away from the troubles of the world; instead "we have a friendly, stable and well-respected government with Norway [which has sovereignty over Svalbard]," reckons Fowler. "I can't think of a better location."

Norway also financed the construction of the vault. The GDCT will take charge of the £63,000 yearly operating costs. Britain is an indirect contributor too: it is providing £10m to the trust's overall budget between 2007 and 2011 - the largest contribution by any country.

So from today, the world's food supply should be a little safer. For Fowler, "this is an insurance policy for the most valuable natural resource on earth".

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ODAC Guest Commentary

Reports of the oil industry's imminent death are greatly exaggerated

Below is Roger Bentley’s comprehensive demolition of Odell’s recent Guardian piece, which expands on his initial thoughts in last week’s guest commentary.

Guest Commentary: Dr. Roger Bentley

Last week in the ODAC Newsletter I presented four background reasons why Professor Odell could write what he did in response to the article 'The great fuel folly' by Jeremy Leggett (The Guardian, February 15th and 5th 2008, respectively). The main reason was the existence of two very different data sets for how much oil the world has discovered - the oil industry's proved and probable ('2P') data, and the very misleading proved reserves ('1P') data to which Odell has access. (See below for why 1P data can be so treacherous).

The other reasons mentioned were: lack of detailed discussion between the parties, absence of a complete reference source for the topic, and the strength of the standard 'economic view' of oil depletion.

Here I examine the remarks by Odell in more detail. Odell's article has eight paragraphs; I deal with these in turn, citing remarks by Odell, and then giving a response.

Paragraph 1.
Odell: "I am utterly perplexed by Jeremy Leggett's attempt to foretell the impending demise of the oil industry".

This sentence has three ideas: 'utterly perplexed', 'Leggett's attempt to foretell', and 'demise of the oil industry'.

a). 'utterly perplexed'.
It is a serious matter that those who understand peak have not yet managed to explain the idea to those who don't. For a region producing conventional oil, its resource-limited production peak occurs some while after discovery has begun to fall off, and specifically at the point when decline in production from the large early fields is no longer compensated - because discovery has become so sparse - by bringing on-stream the smaller later fields of the region.

This seems straightforward enough. But if one does not have access to reliable discovery data peaking is counter-intuitive. This is because just before peak there is little sign that the peak is about to occur: production in the region has always been rising, the region has large reserves, exploration is still finding new fields, and technology is raising the recovery factor in the fields already discovered. Without good discovery data, the peak comes as a surprise.


Empirically, the peak frequently occurs when about half of the recoverable oil in a region has been produced. There are now a hundred or so large regions in the world past their resource-limited peak in conventional oil production, so there are many good examples to illustrate the mechanism.

The UK is one such example. UK offshore discovery started with a small find in 1969, but over the next seven years virtually all the major fields were discovered. From this discovery trend it was not difficult to estimate the total amount ever likely to be found. In 1976 the UK government released its first figure for this total, about 35 billion barrels. They then fitted this amount to the production trend and calculated that UK production would not reach its resource-limited peak until around the mid-1990s. The government, however, recognised the implication of such a peak: it would likely herald oil supply difficulties for the UK, as the UK peak was expected to be only a little in advance of the world peak. (See: 'Oil forecasts, past and present'. R.W. Bentley. Energy Exploration & Exploitation vol. 20, pp 481-492, Multi-Science, 2002. Copyright of this article belongs to the publisher, so it must not be put up on the web.)

Over subsequent years the UK government released revised estimates for this likely total of offshore recoverable oil in its annual 'Brown Book'. These estimates were given as quite a wide a range, but the simple average of this range - while fluctuating somewhat - has stayed pretty close to the 35 billion barrel figure over this 30 year period. It takes the same value today. Resource-limited peaking of conventional oil in a region is not hard to calculate, provided good data are available.

But in understanding 'utterly perplexed', we need to see what the UK proved reserves data indicated over this same period. Since 1986 the UK's proved reserves have stayed at around 5 billion barrels; roughly five years' worth of production. So although it was estimated that the UK offshore contained about 35 billion barrels of recoverable oil, the 'secure' proved reserves - oil in fields sanctioned by government and close to market - stood each year at only 5 billion. As the years passed, and this secure 5 years' worth was continually eaten up by production, magically there was still always 5 years' of reserves left. As the discovery rate by now was low, the standard explanation by the UK government, the IEA and elsewhere was that better knowledge and better technology were generating these new reserves; and that this was a process with no clear end in sight. That few analysts tied together the fairly static UK estimate for total likely offshore oil with this evolution of proved reserves was an error that has cast a long shadow.

The same line of thinking developed in the US - where proved reserves are equally uninformative about how much oil has been discovered - and this led to the widespread acceptance that any forecast assuming a fixed stock of oil was fatally flawed.

But as the UK and many other countries now show (and as Hubbert showed for the US, provided 'grown' proved reserves were used) a 'fixed stock' model, though approximate and missing some undoubted economic feedbacks, is generally accurate. In essence, the scientists who assumed a fixed stock of oil, and who used the 'mid-point peaking' rule to draw a bead on the date of peak, were correct.

Is fairly certain, however, that this abhorrence of a 'fixed stock' model is what - in major part - lies behind Odell's phrase 'utterly perplexed'.

b). "Leggett's attempt to foretell".
As Leggett has made clear in his book 'Half Gone' and elsewhere, he does no forecasting himself. He refers to the 'early toppers' (those who calculate the peak as now, or soon), and the 'late toppers' (those who see peak as being typically at 2030 or beyond). What has changed is that the early toppers used to be a handful of scientists with access to oil industry data and a concern to get the modelling right. But there are now - as Leggett points out - a growing number of senior oil people on record who see the early peak as probable. It is true, as Odell says, that this group does not yet include Exxon nor the US' EIA (nor the UK's BERR for that matter), but increasingly a wide range of experts - including all too belatedly the IEA - are now beginning to understand the issue.

c). 'demise of the oil industry'.
In Leggett's article it is not fully clear if 'demise of the oil industry' refers only to the private oil companies, or to the entire industry including the nationalised oil companies (NOCs). What is known is that the private oil companies, as Leggett points out, while currently producing large profits have, in general, and for some years now, not been able to raise output. LBST, drawing on company annual reports, has produced a good summary graph of this. For output from the whole oil industry, see the forecasts mentioned in last week's commentary, as well as the information below.

Odell: " … highly favourable to his solarcentury company."

As Leggett's book 'The Carbon War' makes clear, his earlier fight was in bringing the scientists' fears of rapid climate change - as opposed to 'global warming' - to public attention, and it was this concern that ultimately led to the setting up of solarcentury.

Despite his academic background in petroleum geology, Leggett came to oil peaking much later. Though aware of the topic for some time, it was Shell's dramatic reserves revisions that led him to examine the evidence. (There is an irony here: Shell's Sir Philip Watts was an explorationist, and the disputed oil - mostly as condensate - really had been found. It was SEC rules, however, that did not permit the booking of these as proved discoveries, and hence the trouble in which Shell found itself. For a good description of this see David Strahan's The Last Oil Shock.) Today Leggett is one of the still relatively few scientists who see the urgency of both climate change and oil depletion.

Odell: "But Leggett seriously understates the ability of the many oil-producing countries to sustain provision of oil and natural gas."

As mentioned above, Leggett's concern is based primarily on the detailed forecasts by the 'early toppers', listed last week.

Paragraph 3:
Odell: "Countries outside the OECD, together with OECD members Norway, Italy and Austria are now at the forefront of the world's oil and gas industries.

Gas is a separate issue (but see the forthcoming LBST study on this as well as other consultancy reports; the gas picture is far from rosy).

Certainly OPEC still has a lot of oil, but the oil data from Norway, Italy and Austria tell a familiar, dismal story. Norway peaked in 2001, at 3.4 Mb/d. By 2006 production had fallen to 19% below this peak. Italy peaked in 2005 at 0.12 Mb/d; by 2006 production was 5% below peak. Austria peaked over 40 years ago, in 1955 at 0.07 Mb/d; by 2005 production had fallen to 73% below its peak. (And if Austria was a typo. error for Australia, the latter peaked in 2000 at 0.8 Mb/d; by 2006 production was 33% below this peak.)

Odell: "And countries outside OPEC - such as China, India, Brazil and Malaysia - not only have large proven and probable reserves, but are intent on enhancing production at as high a rate as possible."

The story here also is not good, and Odell really ought to know this.

Though China is not yet at peak, its peak is expected soon: between about 2010 and 2015. But more importantly, China became net importer 15 years ago. Its current imports stand at nearly 4 Mb/d (behind only the US and Japan). These imports are expected to continue to increase. Its gently rising production to peak thus helps to satisfy China's demand only a little, and helps demand in the rest of the world not at all.

India peaked in 2007, driven primarily by its single very large field of Bombay High. Brazil and Malaysia are both at some distance from their predicted peaks (in 2016 and 2018, respectively, according to Energyfiles), but like China they see rapidly growing demand at home. Brazil has always been an importer, and though the deep offshore fields will continue to grow, her internal demand will grow also. Malaysia's consumption is well over half her moderate production level of 0.8 Mb/d.

No-one should look to any of the countries Odell lists above for significant help with future oil supply.

Odell: "There is a similar situation in some of the former countries of the Soviet Union, most notably Russia, Kazakhstan and Azerbaijan, .. which have significant potential for increased production."

Here, likewise, Odell's views do not reflect what is in the 2P data.

Oil industry 2P discovery data show that oil discovery in Russia peaked many years ago. Russia's main production peak was back in 1987, at 11.5 Mb/d. Following the Soviet collapse when production fell to 6.1 Mb/d, production has now climbed back to 9.8 Mb/d. Some think it might just exceed the earlier peak; but from the 2P data it is clear that Russia has produced far past the mid-point of its likely total discovery, so no very large future production increases should be expected. Moreover, Russian demand looks to be edging up, so its scope for increasing exports will soon enough be under threat of reversal.

Kazakhstan's peak is indeed some distance off (2016 according to Energyfiles), and with low consumption its oil will indeed come on to the market. Azerbaijan's peak, however is next year according to Energyfiles. (You can see Energyfiles' forecasts of peak from the 'Depletion Atlas' map at www.oilshock.com. More recent forecasts can be obtained from the company directly.)

Odell: "Meanwhile all member countries of OPEC continue to increase their annual production.

This statement is true if applied to OPEC as a whole. But it bears examination.

Several large OPEC members are past their resource-limited peaks. Iran peaked over 30 years ago in 1974 at 6.1 Mb/d; in 2006 she produced 72% of this. Kuwait's production also peaked more than 30 years ago, in 1972 at 3.3 Mb/d; in 2006 it was at 81% of peak. Libya peaked nearly 40 years ago, at 3.4 Mb/d; in 2006 she pumped 55% of this. Indonesia peaked in 1991 at 1.7 Mb/d; in 2006 produced 64% of this.

Several more OPEC countries are expected to peak fairly soon, including Algeria and Nigeria.

In considering the above data it is absolutely essential to realise that these peaking dates cannot be known from production data; and also nor from proved reserves. Iran is a case in point. If you download the statistical data for Iran from the BP website you can see that Iran did indeed have a peak in production in 1974, but also that production has been rising strongly in recent years. So how can one know that the 1974 peak was resource-limited in the sense that future production will not pass this level? Only by examining the oil industry 2P discovery data; by combining these with creaming curves vs. wildcat wells drilled, and by use of geological knowledge about the remaining prospective areas. Odell's situation - and that of many other analysts - is of only knowing what can be seen from the public-domain data.

In looking at this question it is also important to realise that most of the current detailed models mentioned last week are bottom-up by-field (or by field-group) models. With peak so close, these models no longer need to assume either an estimate for 'ultimate', nor that peaking occurs at a 'mid-point'. These models make estimates for yet-to-find by region, and this is the final, but important, criticism to make of Odell's piece.

It makes no sense to simply list countries or regions with likely future oil as a counter to the detailed forecasts. This is because such forecasts - as explained above - include quantitative estimates for future oil likely to be found within the forecast timeframe. So what critics of such models - such as Odell (and the UK's BERR) need to show is not that oil is likely to be found in future - recognised by everyone - but that future discoveries will significantly exceed what is assumed in the models. BERR, for example, recently quoted the large new Brazilian find of Tupi as a proof that peak must be far away. But such a find - as BP's Miller points out - merely moves oil from the forecasters' 'yet-to-find' category into 'discovered'.

Thus these comments by BERR, and here by Odell, only serve to highlight the extraordinarily poor understanding of oil peaking among many recognised analysts in the field. Hopefully, what I have written here may raise this level of understanding a little.

Dr. Roger W. Bentley is Visiting Research Fellow, Department of Cybernetics, University of Reading

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The items contained in this newsletter are distributed as submitted and are provided for general information purposes only. ODAC does not necessarily endorse the views expressed in these submissions, nor does it guarantee the accuracy or completeness of any information presented.

FAIR USE NOTICE: This newsletter contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of issues of environmental and humanitarian significance. We believe this constitutes a 'fair use' of any such copyrighted material. If you wish to use copyrighted material from this newsletter for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner.