Plans to haul fuel by road from locations in England and Wales to Scotland will be put in place today ahead of a two-day strike at Grangemouth, Scotland's biggest oil refinery.

A strike by 1,200 workers at the refinery looks certain to go ahead on Sunday and Monday after negotiations between union officials and company executives collapsed last night.

Grangemouth has been in the process of shutting down since the weekend ,and the company said that it now had no option but to shut down the refinery completely for safety reasons.

It will take up to a month to bring the refinery back up to full capacity, according to its owners.

Contingency plans are being prepared by BP, which operates a fuel distribution terminal at Grangemouth, and the Government to try to minimise disruption to fuel supplies in Scotland and the North of England.

The Scottish government warned drivers today not to panic-buy petrol and said that there were sufficient emergency reserves in refineries and reservoirs around the country to last well into May.

John Swinney, the Scottish Finance Minister, is expected to outline the contingency measures in the Scottish Parliament today.

“We have ample supplies of petrol and diesel within the system well into the month of May — providing purchasing behaviour by members of the public remains the same, “ Mr Swinney said.

“We also have the ability to import fuel, if we need to support the stocks we already have in Scotland.“

Officials from Unite, the trade union, have been meeting with management from Ineos, which owns Grangemouth, at Acas, the conciliation service, for the past two days.

However, talks broke down last night and the union announced that it had failed to find a breakthrough in a dispute over pensions.

Ineos claimed this morning that it had taken pension proposals off the table and was prepared to spend three months discussing a resolution with the union and the help of pensions experts.

Tom Crotty, chief executive of Ineos Olefins, said: "We have done everything we can to help resolve this dispute. The plain fact is that the union seeems hell bent on pursuing a strike that will cause chaos and disruption for the people of Scotland and across the UK."

The AA, Britain’s largest motoring organisation, said that motorists should not panic unnecessarily.

Paul Watters, the AA’s head of public affairs, said: “I think motorists in Scotland are going to be wondering what on earth is going to happen, but there still is no reason for people to panic.“

As well as the distribution terminal, BP operates the Forties pipeline that delivers crude oil from the North Sea to the Grangemouth refinery.

The pipeline, which is running at between 650,000 and 700,000 barrels a day, supplies 30 per cent of UK’s crude oil demand.

There was growing concern among British gas traders that a Forties shutdown could have a knock-on effect on gas supplies from the North Sea.

The St Fergus gas terminal, which supplies about a third of the Britain's gas, feeds some hydrocarbon liquids extracted from the natural gas into the Forties pipeline system.

ConocoPhillips said that gas production at its Britannia field would have to stop if the Forties system, into which Britannia feeds crude, were shut down.

Some Scottish transport companies have already been forced to buy bulk fuel supplies from Hull rather than Grangemouth, while individual hauliers apparently had been refused permission to fill up at a succession of stations in the M6/M74 corridor.

The Forties pipeline system, which pumps crude oil from the North Sea, is set to shut down tonight, as 1,200 workers at the Grangemouth refinery in Scotland prepare to walk out in a dispute over pensions.

A spokesman for BP, which operates the pipeline, said that it expected the pipeline to close before power from Grangemouth was switched off late on Saturday, ahead of the 48-hour stoppage on Sunday and Monday.

Up to 50 North Sea oilfields may have to cease production when the main Forties system closes down.

The pipeline supplies 700,000 barrels of oil a day, equivalent to 20 per cent of North Sea oil production.

The shutdown will cost the UK's economy about £50 million a day, including about £25 million a day in revenues to the Exchequer.

Fears that the strike at one of the country’s biggest oil refineries could hit petrol supplies increased today when a Government minister said he could not guarantee that motorists would be able to fill up at garages.

Malcolm Wicks, the Energy Minister, said today that the pipeline was a “crucial” piece of infrastructure.

Mr Wicks, speaking on BBC Radio 4’s Today programme, said that petrol supplies across the UK should not be a problem, but he acknowledged that some motorists could be hit.

He said he could not guarantee that every garage and every forecourt would have petrol every time motorists arrived to fill up.

“I cannot guarantee that every garage forecourt will have petrol at that precise moment," he said.

"I hope the vast majority of people are sensible about this. They might have to be patient. People will have to be sensible and rational."

Oil prices have fallen this morning despite continuing supply concerns in the face of the planned strike at the 200,000 barrel per day refinery.

London Brent crude for June delivery was down $1.71 at $112.63.

Ed Meir, an MF Global analyst, said that the strike was potentially very serious for the industry. “We believe that there will be tremendous pressure on the two sides to settle," he said.

John Hutton, secretary of state for business, told MPs yesterday that fuel stocks and imports should be sufficient to maintain supplies during the strike.

Steam and electricity from the Grangemouth refinery are essential to operations at the nearby Kinneil processing plant, where crude oil from the Forties pipeline is stabilised by removing sulphur and extracting gas.

Unless Ineos can supply basic utilities to Kinneil to keep it running, oil and gas production from the Forties sector of the North Sea is likely to halt within the next 24 hours.

Tony Woodley, the general secretary of the Unite union that represents Grangemouth workers, has indicated that the strike could escalate. Mr Woodley will address a mass meeting of workers at Grangemouth today.

Mr Woodley has said that after the two-day strike there will be a pause, but he said that if the company remained intransigent then an escalation of the dispute was inevitable.

Unite has indicated that it will begin a work-to-rule after the dispute, which would make the 24 hour a day, seven day a week operation run by Ineos, Grangemouth's owner, very difficult.

“We understand the seriousness of the situation. It is extremely serious - that is why Unite has been behaving responsibly. We have made sure the plant and equipment is in a state to start up extremely quickly and we have made sure there is emergency cover for the emergency services,” Mr Woodley said.

He has accused Ineos of “going through the motions” during the two days of peace talks this week at Acas.

Royal Dutch Shell Plc said a militant attack on a pipeline has cut as much as 169,000 barrels a day of Nigeria's Bonny Light crude production as rebels claimed responsibility for two more strikes today.

The Movement for the Emancipation of the Niger Delta said it blew up a section of Shell's Greater Port Harcourt Swamp Line on April 17. MEND today said it has since attacked two more pipelines in Nigeria's Rivers State, possibly belonging to Shell and Chevron Corp.

The April 17 attack has halted about 169,000 barrels a day of crude production, Shell spokesman Rainer Winzenried said in an e- mailed statement today. That's about 9.5 percent of the crude oil scheduled to be exported from Nigeria this month, according to Bloomberg calculations based on loading programs.

Nigeria's oil industry has been targeted by militants over the past two years, cutting production of the country's light, sweet oil, valued by U.S. refiners because of its gasoline yield. MEND raids that started in February 2006 have cut more than 20 percent of exports from Nigeria, Africa's biggest producer.

Shell will declare a so-called force majeure on exports of Bonny crude exports in April and May from tomorrow as a result of the April 17 attack, Winzenried said. Force majeure is a legal clause that allows companies to miss contract deliveries because of circumstances beyond their control. Bonny exports were scheduled to average about 221,667 barrels a day in April. Total Nigerian exports were forecast at 1.78 million barrels a day.

New Record

Crude futures contracts in New York climbed to a new record after Shell said exports would be cut. Crude oil for May delivery rose to $117.60 a barrel in after-hours electronic trading on the New York Mercantile Exchange, the highest since futures started in 1983. Oil traded at $116.72 at 4 p.m. in London.

Today's attacks in Rivers State were on pipelines located in Isaka River and Abonnema River and took place at 1 a.m. and 3:10 a.m. local time, respectively, according to a statement today by the militants. In the statement, presented as an open letter open letter to President George W. Bush, the group said it would not be intimidated by the USS Swift warship, which is transiting the Gulf of Guinea.

The sabotage, billed as part of Operation Cyclone, "dispels the false impression that peace and security have been restored in order to gain the confidence of potential investors in the oil and gas sector," MEND spokesman Jomo Gbomo said in the statement.

Shell spokesman Precious Okolobo neither confirmed nor denied today's attack. Chevron spokeswoman Margaret Cooper said the company had "no information about an attack to Chevron pipelines in the region."

Injustice

MEND said today's attacks were aimed at protesting continued injustice in the Niger Delta and the detention of MEND leader Henry Okah, who is being tried for treason and next appears in court tomorrow.

Lieutenant Colonel Sagir Musa, spokesman for the Joint Task Force, denied MEND's claim. "We have our men stationed in the areas they claimed to have attacked, we have not received reports of any attack today," he said.

Levi Ajuonuma, a spokesman for the Nigerian National Petroleum Corp., which owns a majority stake in joint ventures with oil companies including Shell and Chevron, said he was unaware of today's attacks. He condemned MEND's increased violence in the Niger Delta.

"These people should realize that, at the end of the day, this will not solve anything," Ajuonuma said in an interview from Abuja. "They're just adding to the increase in the price of oil, this is not the way to go. They should return to dialogue."

'Not in Denial'

Gbomo said MEND was open to meeting with former U.S. President Jimmy Carter, saying Carter "is not in denial" about the role of freedom fighters, as witnessed by his recent meetings with the group Hamas.

MEND previously said it would intensify attacks to protest the arrest and closed trial of Okah.

Communities in the Niger Delta, a maze of creeks and rivers feeding into one of the world's biggest remaining areas of mangroves, are among Nigeria's poorest, according to a 2004 report funded by Shell. Unemployment is at more than 90 percent in some areas.

LONDON (Reuters) - Energy demand in the Middle East is growing as fast as in industrial powerhouse China and will help to offset any decline in the United States, the world's top fuel burner, as well as keep prices high.

Although it has only a fraction of the population, huge fuel subsidies and an economic boom fuelled by record oil prices have driven a rapid increase in Middle Eastern energy consumption.

"Middle East energy demand looks as if it will grow at the same rate as China but with 10 percent of the population," said Jeff Brown, managing director of Singapore-based FACTS Global Energy consultancy.

Crude consumption in Asia and the Middle East is forecast to grow by almost 900,000 barrels a day this year, whereas U.S. demand could fall by 400,000 bpd in a pessimistic scenario, said Eduardo Lopez, senior oil demand analyst at the International Energy Agency, energy adviser to developed consumer nations.

"The countries driving demand growth are relatively isolated at this point from any financial crisis the United States may face," said Lopez.

Record oil prices, rather than denting demand in the Middle East, will encourage greater consumption as the flow of petrodollars to the region will continue to stimulate rapid economic growth.

Huge subsidies, which make fuel almost free in many states, remove any incentives for energy efficiency, while environmental arguments for reducing carbon emissions have made little impact in the region.

SUBSIDIES TO CONTINUE

Almost all oil-rich countries will continue to subsidize fuel heavily as they have the funds thanks to soaring revenues but also because the region's authoritarian regimes see cheap fuel as part of a social pact with their populations.

"Cheap fuel is seen as a given right. It is a social bargain for political compliance," said Samuel Ciszuk, Middle East and North Africa analyst at Global Insight.

In Saudi Arabia, gasoline costs 12 cents a liter compared with 68 cents in China, $2.14 in Britain and 86 cents in the United States. nL27166010

The exception is Iran, the world's fourth-largest crude exporter, which recently started to ration subsidized gasoline to control costs and to curb imports.

Iran is different because it has a much larger population than other Middle East states and because of U.S. sanctions it finds it more difficult to import fuel, forcing the country to turn to expensive spot market purchases.

In addition, relying on imported fuel makes the country vulnerable to pressure over its nuclear program.

"Iran is an anomaly in the region. You couldn't see (rationing) happening in Saudi Arabia or Kuwait as they do not have the same geopolitical problems," said the IEA's Lopez.

"They are not subject to sanctions so can buy what they need in international markets."

The situation in Iran is likely to change in coming years as the country is increasing its refining capacity and could become a gasoline exporter from 2012.

DEMAND GROWING FAST

Middle East oil demand stood at 6.6 million barrels a day in 2007, and is set to rise to 7 million bpd this year, according to the Paris-based IEA.

Chinese demand is around 7 million bpd and oil use in both China and the Middle East is forecast to grow between 5 and 6 percent a year, said the IEA.

FACTS consultancy forecasts energy demand in the two regions rising between 400,000 and 500,000 bpd over the next 5-7 years.

"If anything, the Middle East looks more robust than China. As oil prices go up, then their economies continue to boom and they don't feel any price impact at the retail level," said Brown from FACTS.

The International Monetary Fund this month revised up its forecast for Middle East economic growth by 0.2 percent to 6.1 percent, up from 5.8 percent in 2007.

Demand is soaring not only for transport fuels, including diesel and jet, but also for fuel oil for power generation as gas projects have failed to keep up with demand for natural gas for electricity production.

Apart from Qatar, all Gulf states are short of gas.

The region, especially Saudi Arabia, is planning a big expansion in refining capacity to meet local demand, including from its rapidly expanding petrochemical industry, as well as for export.

Much of the extra capacity will come onstream around 2013.

(Editing by James Jukwey)

Saudi Arabia, the world’s biggest oil producer, has put on hold any plans to further increase long-term production capacity from its vast oil fields, its most powerful policymakers have said.

In a series of statements, including one by the king himself, the kingdom has warned consumers it does not reckon there is a need for further expansion, an assumption disputed by the world’s biggest developed countries.

The realisation Saudi Arabia will not increase production to 15m barrels a day as quickly as important consumers and the markets had assumed could put further pressure on oil prices, which touched fresh records last week.

New York benchmark futures reached a record of slightly less than $117 a barrel last week in response to fear that Russia, the world’s second largest producer, was unable to increase production in the next years.

Abdullah Jum’ah, chief executive of Saudi Aramco, the kingdom’s oil company, said in a closed door meeting with oil ministers and executives in Rome on Sunday that market signals were ’imperfect’ and that there were uncertainties created by the move away from oil, the world’s worsening economic outlook and the recent turbulance in the financial markets, according to one person who took notes at the discussions. This has impacted Saudi Arabia’s view on the profitability of investing billions of additional dollars into its industry at this point, Gulf sources said.

In a recent interview with Argus, an industry newsletter, Ali Naimi, Saudi Arabia’s energy minister, made clear Saudi Arabia had “no plans” to embark on its next phase of expansion. “We are idling at around 9m bpd and we will reach capacity of 12.5m bpd by 2009.”

He added: “That is substantial spare capacity. As far as I know, all the latest projections, at least up to 2020, do not require anything higher than that.”

Forecasts by the International Energy Agency, the watchdog of the main consuming countries and an important participant in the forum, reach a different conclusion.

Most recently the group calculated that, even if all the policies to increase renewable fuels and to use oil more efficiently were to be enacted on Tuesday, the world would still need Opec’s daily production to increase by 11.5m barrels by 2030, the bulk of which would have to come from its biggest members, such as Saudi Arabia.

That is a tall order. It is more than 50 per cent more than Opec has managed to increase output during 1980 to 2006.

Recent announcements will harden the view of those sceptics who argue the kingdom is unable to boost production because of the high decline rates at its fields – a view that is still in the minority among those in the industry and one Riyadh emphatically rejects.

King Abdullah, reported by the official news agency this month, said: “I keep no secret from you that when there were some new finds, I told them: ‘No, leave it in the ground, with grace from God, our children need it’.”

ROME, April 19 (Rome) - Record oil of $117 a barrel calls for a demand response and a supply response, but for now there is little to stop prices heading still higher, the deputy executive director of the International Energy Agency (IEA) said on Saturday.

"We need both a demand response and a supply response," said William Ramsay on arrival in Rome for talks between energy producers and consumers.

"I certainly hope we'll start to get a demand response ... that's greater efficiencies and all those things we have talked about."

The Paris-based IEA, which represents the interests of consumer countries, does not give formal price predictions.

But asked whether he saw oil getting even more expensive, Ramsay said: "There's not much to get in the way."

A sustained bull run, which set in around 2002, has been driven by factors including strong demand and chronic under-investment that has left a very limited margin of error in the event of supply disruption.

"If there were greater (spare) capacity, it would reduce the anxiety, so if something happens in Nigeria, say, it would not make a difference (to the oil market)."

Nigeria's oil output has been disrupted by recurrent attacks and on Friday rebels said they had sabotaged a major pipeline operated by Royal Dutch Shell, forcing the company to shut in what it described as a small amount of production.

Many other oil producing countries have their "own set of issues", Ramsay said, and international oil companies and the IEA have argued they need to allow greater access to their reserves, so oil majors can help to develop them.

Emboldened by high oil prices, oil producers, already reluctant to allow the international community in, have tended instead to make terms for foreign operators ever tougher.

The secretary-general of Opec said yesterday that oil prices could rise even higher than the present record level of $117 a barrel.

Speaking at the start of the biannual conference between oil-producing and consumer countries in Rome, Abdullah al-Badri said that factors other than supply and demand, particularly the weakness of the US dollar, were pushing oil prices higher.

Many analysts expect oil to rise above $120 a barrel by the summer. Every $2 increase in the cost of oil adds about 1p to a litre of petrol at the pump in Britain.

Government ministers will meet energy companies, charities and consumer groups to discuss the issue of energy prices at a fuel poverty summit on Wednesday, hosted by Ofgem.

Allan Asher, the chief executive of energywatch, a consumer watchdog, criticised the record of the Government and energy companies. “Relying on more voluntary social programmes from energy suppliers is tantamount to sticking your head as far into the sand as it will go,” he said.

“Government has to be bold enough to admit its fuel poverty strategy has been broken on a vicious cycle of price rises. Price rises on such a shocking scale would be catastrophic for consumers; 25 per cent on energy bills means another million households consigned to the misery of fuel poverty.”

Chakib Khelil, the president of Opec, said yesterday that he saw no need to raise oil production to counter high oil prices, dealing a further blow to big oil-consuming countries such as Britain and the United States.

Gordon Brown and President Bush have called on Opec, which produces 40 per cent of the world’s oil, to increase its output, but Opec kept its daily output quota at 29.67 million barrels at its last meeting last month.

The US Department of Energy said this month that it expected American petrol consumption for the summer vacation season – when families take to their cars to go on holiday – to decrease for the first time in two decades.

Mr al-Badri said that while high prices may have an impact on demand in the US, they would not in Asia and developing countries, where it is “business as usual”.

About 500 delegates, including oil ministers from Opec countries, chief executives of oil companies and representatives of consumer countries, will attend the three-day meeting in Rome.

Oil producers will have the upper hand during negotiations as continuing demand despite high prices means that they can control access to their resources in the face of soaring demand from India and China, as well as other developing economies.

Last month, China imported almost 150 per cent of what it had imported the previous month. The country is building its fuel reserves for the Olympic Games later this year. Moreover, its spring planting season is under way, which is usually a time of high consumption.

The roaring oil boom of the last few months may be on its last legs as economic growth slows hard across the world and a clutch new refineries come into operation, Lehman Brothers has warned in a hard-itting report.

“Supply is outpacing demand growth,” said Michael Waldron, the US bank’s oil strategist.

“Inventories have been building since the beginning of the year. We have pretty significant projects starting soon in Saudi Arabia, and large off-shore fields in Nigeria,” he said.

The Saudi Khursaniya field has just opened with 500,000 barrels a day (b/d) of production, and the new Khurais field will start next year with a further 1.2m b/d.

The Saudis have pledged to spend $90bn (£45bn) on their oil industry over the next five years, lifting capacity to 12.5m b/d by the end of 2009.
US crude prices retreated yesterday from their all-time high of $119.90 a barrel earlier this week.

The latest spike was driven by fears that the 'Forties Pipeline’ from the North Sea might be closed as a knock-on effect from threatened strike action at Scotland’s Grangemouth oil refinery.

Lehman Brothers said the price of oil had been pushed to inflated levels by a $40bn inflow into commodity index funds this year, much of it coming from Mid-East sovereign wealth funds.

The petro-investors may have second thoughts about gaining “double exposure” to commodity prices.

“Financial flows have been the marginal driver of prices since the onset of the credit crunch. Investors are using oil as a hedge against inflation and a falling dollar,” said Mr Widmer.

The index effect has lifted prices by $20 to $30 a barrel. This could reverse sharply once the dollar starts to stabilize against the euro, since the euro/dollar exchange has become the proxy watched by oil traders for signals.

A dollar recovery may be on the cards after the G7 powers issued a statement condemning big moves in currencies as a threat to financial and economic stability, choosing the exact wording used before the joint intervention by central banks in September 2000.

A clutch of new refineries will add almost 8m b/d of new capacity by 2010, including a 600,000 b/d plant opening this year in India.

The cost of oil field machinery and rig maintenance has at last levelled after three years of galloping inflation. Drilling costs have even started to fall in the United States, while deep-water rig-rates have stopped rising after jumping fourfold from 2004 to 2007.

These are all time-honoured signs that the cycle may have topped.

Ominously for oil bulls, the underlying value of oil company reserves has slipped slightly over the last two years, failing to “confirm” the huge rise in spot oil prices. The divergence is a warning sign.

It invites arbitrage by hedge funds, who may start to take out “short” positions on crude futures.

The build-up in supply is taking place at a time of cooling world demand. Recession in the US is expected to curb consumption by 300,000 b/d this year.

Lehman has trimmed its forecast for global growth from 1.5m b/d to 1.1m b/d, predicting a slide in prices to $83 next year and $70 to $80 in 2010 – still high by historical standards.

For now, prices remain as tight as a drum. Russian output fell 1pc in the first quarter of this year. Nigeria, Venenezuela, Iraq, and Iran have all suffered setbacks, failing to meet supply targets.

The Saudi government appears to have backed away from its earlier plans to boost capacity to 15m b/d. King Abdullah said he wished to leave some of the country’s untapped reserves in the ground for future generation, rather than exploit it now.

The 'Peak Oil’ theorists may yet win the argument.

NEW DELHI (AFP) — India's oil minister Murli Deora was to hold talks in Pakistan this week on a seven-billion dollar transnational gas pipeline from Iran, a senior oil ministry official said Tuesday.

Deora's three-day visit is the first contact between the rival South Asian states since the new coalition government took office in Islamabad last month.

He was also to explore the possibility of India exporting diesel to Pakistan, the official said.

Meetings between the two oil ministers starting Wednesday will focus on resolving differences over transit and transportation fees to be levied by Pakistan for allowing the pipeline through its territory, said the official who declined to be named.

While "transit fees will cover the security of the pipeline," expected to cross Pakistan's volatile Balochistan province, "transportation tariff is the normal fee charged for the passage of fuel," he said.

Islamabad is seeking 0.493 dollars per million British thermal unit as transit fee, while New Delhi has offered 0.15 dollars per unit or 60 million dollars a year, he said.

Differences on tariffs have been narrowed but are yet to be resolved.

"At the end of the day, the gas supplied to India at its borders has to be cost viable," said the official adding that India is "committed to the project for which it has participated in feasibility studies."

Deora's Pakistan trip comes a week ahead of Iran's president Mahmoud Ahmadinejad day-long stopover in New Delhi.

Talks on the 2,600-kilometre (1,615-mile) Iran-Pakistan-India pipeline began in 1994 but have been stalled by tensions between India and Pakistan.

Energy-hungry India, which imports more than 70 percent of its energy needs, has been racing to secure new supplies of oil and gas from abroad besides ramping up domestic production to sustain booming economic growth.

Deora and his Pakistani counterpart will also exchange views over the proposed Turkmenistan-Afghanistan-Pakistan gas pipeline, to be funded by the Asian Development Bank, the oil ministry official said.

"All the countries are keen that India participates in the project," the official said.

State-backed Petronet is girding for a tough fight with LNG buyers from Japan, South Korea and China for Australian supplies due to come on stream in the coming years, Prosad Dasgupta, the CEO of India's largest LNG importing company, told Platts in an interview. Petronet has been in talks with ExxonMobil for the latter's share of output from the Gorgon LNG project in Western Australia since 2005, but has not sealed any agreements yet.

The going will now get tougher with gas and power utilities in Japan and South Korea , historically world's major consumers of imported LNG, looking for alternatives to dwindling Indonesian supplies and newcomer China getting hungrier, Dasgupta said.

The supply volume under discussion between Petronet and ExxonMobil was 2.5 million mt/year originally, but after the project's decision in December 2007 to scale up to three liquefaction trains with a capacity of 15 million mt/year from the earlier 10 million mt/year, "we have sought 3.75 million mt/year -- Exxon's share with the third train," Dasgupta said.

"We haven't got a firm start-up date [for the Gorgon project] from them, but we believe it will be not before the end of 2013," he added.

Petronet operates a 6.5 million mt/year LNG import and regasification terminal at Dahej on India 's west coast, which will be expanded to 10 million mt/year capacity from October. The company so far has only 7.5 million mt/year of term LNG supplies tied up, from its maiden supplier RasGas of Qatar.

The Indian company is also building a 2.5 million mt/year import terminal at Kochi near the country's southern tip, slated for completion in 2011, in anticipation of a strong growth in domestic gas consumption in the coming years, but has not found the corresponding term supplies.

GORGON COULD START SUPPLYING IN 2014

ExxonMobil holds a 25% stake in Gorgon, with Chevron holding 50% and Shell 25%. Each partner is individually marketing its share of LNG from the project, which will be in proportion to its equity.

Only ExxonMobil supplies are still available; Shell and Chevron have already committed their shares of LNG. Chevron has agreed to sales deals with Japanese and South Korean companies, and earmarked some of the volume for its internal trading system. Shell has pledged some of its supply to China , and will be shipping some to Sempra's Energia Costa Azul terminal in Baja California , and possibly to its own Hazira terminal in India .

If the final investment decision on Gorgon comes about 2009, construction would take about four and a half years, putting the startup some time in 2014, Dasgupta estimated. Project leader Chevron has said it expects to complete front-end engineering design for Gorgon later this year, ahead of an FID.

While there is no longer any doubt that the project will materialize, Japan has emerged as a major contender for the supplies since last year, the executive said. "The Tepco plant failure has caused a pull of [an additional] 12 million mt/year from Japan alone ... They are buying 15-16 spot cargoes every month, which is over and above what they used to buy earlier."

Tokyo Electric Power Company, the world's largest power utility, has lost nearly half its nuclear generation capacity after shutting its 8.21 GW Kashiwazaki-Kariwa nuclear power plant since a major earthquake July 16, 2007. The outage, which is now expected to last into 2009, has forced Tepco to boost thermal power generation using natural gas, oil and coal.

At the same time, the expiration of a clutch of long-term Indonesian LNG export contracts with Japan and South Korea in the coming years would see importers from these countries "gunning for every LNG capacity that is available," Dasgupta said.

LNG PRICES MOVE TOWARD CRUDE PARITY

Meanwhile, burgeoning Asia-Pacific demand pitted against limited supplies and a rise in crude prices is bringing about a radical upward shift in LNG prices, the Petronet CEO said. Sellers would now be looking to achieve 100% crude price parity for LNG, he said. On a heating value basis, crude at $100/barrel equates to an LNG price of $16.70-17.00/MMBtu, Dasgupta estimated, adding, "the view is that progressively gas and LNG are going to reflect more and more parity with oil price. So we are in for a high-price regime."

The older term LNG contracts of Japanese and South Korean buyers are still yielding prices below those in the US benchmark market Henry Hub. But in the new deals, the LNG price will approach parity with Japan Customs Cleared or JCC basket of Japan 's average monthly crude import costs, Dasgupta said.

"This price [of around $17/MMBtu for LNG at $100/b crude] will get incorporated into a formula," he said. "Some of this would go as the fixed component, some as the floating component. But all put together, this [price] would be the expectation."

With buyers from Japan , South Korea and China also bidding for Gorgon LNG supplies, "we have to compete on the price," the Petronet CEO said.

"Whether we get Gorgon or not ... will depend on the price we are willing to offer ... That is the only thing that remains to be done."

Petronet was also eying supplies from Australia 's Browse and Pluto LNG projects, as well as a prospective third train at Russia 's Sakhalin 2 project, but the best time for the company to initiate negotiations was when a project was going into construction, Dasgupta said.

Australian Woodside Petroleum's Pluto LNG project, setting up 4.3 million mt/year capacity in phase one, is already under construction, with most supplies committed. The company is targeting FID for its Browse LNG project offshore Western Australia , which could produce up to 15 million mt/year LNG, in 2010.

Russia's Lukoil and other buyers are in talks with Regal Petroleum about purchasing its gas fields in Ukraine five months after a similar deal with Shell fell apart.

Regal, an exploration and development company with a chequered history, said it had received preliminary approaches about "possible transactions" but stressed that talks were at an early stage.

Shares in Regal, which fell 5.5% on Monday, moved cautiously ahead 1% to 165p as the new management led by chairman and chief executive, David Greer, confirmed it was talking to unnamed buyers. Lukoil was not named by Regal, but industry sources confirmed the Russian company could pay as much as $1bn (£500m) to increase its reserves in Ukraine.

Regal controls Ukraine's Mekhediviska-Golotvschinska and Svyrydivske fields which are together estimated to hold 169m barrels of oil and whose small production levels could be ramped up to 50,000 barrels a day in the medium term.

In November, the company announced it had tied up a sales agreement with Shell, only for it to be scrapped two days later.

Greer, a former Shell executive, joined at the same time, replacing Regal's then chairman Francesco Scolari and chief executive Neil Ritson, the architect of the original sales agreement with Shell.

Regal has been synonymous with turbulence and, in January, it was referred to the London Stock Exchange disciplinary committee after allegedly breaking the rules over the disclosure of price sensitive information. The move hails back to 2003 when Regal announced that a much-hyped well in the Adriatic Sea had produced more water than oil.

CIVITAVECCHIA, Italy — At a time when the world’s top climate experts agree that carbon emissions must be rapidly reduced to hold down global warming, Italy’s major electricity producer, Enel, is converting its massive power plant here from oil to coal, generally the dirtiest fuel on earth.

Over the next five years, Italy will increase its reliance on coal to 33 percent from 14 percent. Power generated by Enel from coal will rise to 50 percent.

And Italy is not alone in its return to coal. Driven by rising demand, record high oil and natural gas prices, concerns over energy security and an aversion to nuclear energy, European countries are expected to put into operation about 50 coal-fired plants over the next five years, plants that will be in use for the next five decades.

In the United States, fewer new coal plants are likely to begin operations, in part because it is becoming harder to get regulatory permits and in part because nuclear power remains an alternative. Of 151 proposals in early 2007, more than 60 had been dropped by the year’s end, many blocked by state governments. Dozens of other are stuck in court challenges.

The fast-expanding developing economies of India and China, where coal remains a major fuel source for more than two billion people, have long been regarded as among the biggest challenges to reducing carbon emissions. But the return now to coal even in eco-conscious Europe is sowing real alarm among environmentalists who warn that it is setting the world on a disastrous trajectory that will make controlling global warming impossible.

They are aghast at the renaissance of coal, a fuel more commonly associated with the sooty factories of Dickens novels, and one that was on its way out just a decade ago.

There have been protests here in Civitavecchia, at a new coal plant in Germany, and at one in the Czech Republic, as well as at the Kingsnorth power station in Kent, which is slated to become Britain’s first new coal-fired plant in more than a decade.

Europe’s power station owners emphasize that they are making the new coal plants as clean as possible. But critics say that “clean coal” is a pipe dream, an oxymoron in terms of the carbon emissions that count most toward climate change. They call the building spurt shortsighted.

“Building new coal-fired power plants is ill conceived,” said James E. Hansen, a leading climatologist at the NASA Goddard Institute for Space Studies. “Given our knowledge about what needs to be done to stabilize climate, this plan is like barging into a war without having a plan for how it should be conducted, even though information is available.

“We need a moratorium on coal now,” he added, “with phase-out of existing plants over the next two decades.”

Coal’s Advantages
Enel and many other electricity companies say they have little choice but to build coal plants to replace aging infrastructure, particularly in countries like Italy and Germany that have banned the building of nuclear power plants. Fuel costs have risen 151 percent since 1996, and Italians pay the highest electricity costs in Europe.

In terms of cost and energy security, coal has all the advantages, its proponents argue. Coal reserves will last for 200 years, rather than 50 years for gas and oil. Coal is relatively cheap compared with oil and natural gas, although coal prices have tripled in the past few years. More important, hundreds of countries export coal — there is not a coal cartel — so there is more room to negotiate prices.

“In order to get over oil, which is getting more and more expensive, our plan is to convert all oil plants to coal using clean-coal technologies,” said Gianfilippo Mancini, Enel’s chief of generation and energy management. “This will be the cleanest coal plant in Europe. We are hoping to prove that it will be possible to make sustainable and environmentally friendly use of coal.”

“Clean coal” is a term coined by the industry decades ago, referring to its efforts to reduce local pollution. Using new technology, clean coal plants sharply reduced the number of sooty particles spewed into the air, as well as gases like sulfur dioxide and nitrous oxide. The technology has minimal effect on carbon emissions.

In fact, the technology that the industry is counting on to reduce the carbon dioxide emissions that add to global warning — carbon capture and storage — is not now commercially available. No one knows if it is feasible on a large, cost-effective scale.

The Struggle to Be Green
The task — in which carbon emissions are pumped into underground reservoirs rather than released — is challenging for any fuel source, but particularly so for coal, which produces more carbon dioxide than oil or natural gas.

Under optimal current conditions, coal produces more than twice as much carbon dioxide per unit of electricity as natural gas, the second most common fuel used for electricity generation, according to the Electric Power Research Institute. In the developing world, where even new coal plants use lower grade coal and less efficient machinery, the equation is even worse.

Without carbon capture and storage, coal cannot be green. But solving that problem will take global coordination and billions of dollars in investment, which no one country or company seems inclined to spend, said Jeffrey D. Sachs, director of the Earth Institute at Columbia University.

“Figuring out carbon capture is really critical — it may not work in the end — and if it is not viable, the situation, with respect to climate change, is far more dire,” Mr. Sachs said.

There are a few dozen small demonstration projects in Europe and in the United States, most in the early stages. But progress has not been promising.
At the end of January, the Bush administration canceled what was previously by far the United States’ biggest carbon-capture demonstration project, at a coal-fired plant in Illinois, because of huge cost overruns. The costs of the project, undertaken in 2003 with a budget of $950 million, had spiraled to $1.5 billion this year, and it was far from complete.

The European Union had pledged to develop 12 pilot carbon-capture projects for Europe, but says that is not enough.

Many have likened carbon capture’s road from the demonstration lab to a safe, cheap, available reality as a challenge equivalent to putting a man on the moon. Norway, which is investing heavily to test the technology, calls carbon capture its “moon landing.”

It may be even harder than that. It is a moon landing that must be replicated daily at thousands of coal plants in hundreds of countries — many of them poor. There is a new coal-fired plant going up in India or China almost every week, and most of those are not constructed in a way that is amenable to carbon capture, even if it were developed.

Plants that could someday be adapted to carbon capture cost 10 to 20 percent more to build, and only a handful exist today. For most coal power plants the costs of converting would be “phenomenal,” concluded a report by the United States Environmental Protection Agency.

Then there is the problem of storing the carbon dioxide, which is at some level an inherently local issue. Geologists have to determine if there is a suitable underground site, calculate how much carbon dioxide it can hold and then equip it in a way that prevents leaks and ensures safety. A large leak of underground carbon dioxide could be as dangerous as a leak of nuclear fuel, critics say.

As for its plant here, Enel says it will start experimenting with carbon-capture technology in 2015, in the hopes of “a solution” by 2020. “That’s too late,” Mr. Sachs said.

In the meantime, it and other new coal plants will be spewing more greenhouse gas emissions into the atmosphere than ever before, meaning that current climate predictions — dire as they are — may still be “too optimistic,” Mr. Sachs said. “They assume the old energy mix, even though coal will be a larger and larger part.”

An Efficient Plant
On many other fronts, the new Enel plant is a model of efficiency and recycling. The nitrous oxide is chemically altered to generate ammonia, which is then sold. The resulting coal ash and gypsum are sold to the cement industry.

An on-site desalination plant means that the operation generates its own water for cooling. Even the heated water that comes out of the plant is not wasted: it heats a fish farm, one of Italy’s largest.

But Enel’s plan to deal with the new plant’s carbon emissions consists mostly of a map of Italy with several huge white ovals superimposed — subterranean cavities where carbon dioxide potentially could be stored.

The sites have not been fully studied by geologists as yet to make sure they are safe storage sites and well sealed. There is no infrastructure or equipment that could move carbon into them.

The new Enel plant here opens its first boiler in two months. It will immediately produce fewer carbon emissions than the ancient oil boiler it replaces, but only because it will produce less electricity, officials here admit.

Unhappy Neighbors
In the towns surrounding Civitavecchia, the impending arrival of a huge coal plant, with its three silvery domes, is being greeted with a hefty dose of dread.

“They call it clean coal because they use some filters, but it is really nonsense,” said Marza Marzioli of the No Coal citizens group in the nearby ancient Etruscan town of Tarquinia. “If you compare it to old plants, yes it’s better, but it’s not ‘clean’ in any way.”

The group says that Enel has won approval for a dangerous new coal plant by buying machines for a local hospital and by carrying out a public relations campaign. Enel advertisements for the project show a young girl erasing a plant’s smokestack.

Most people who took part in a 2007 local referendum voted no, but the plant went ahead anyway, the group said.

The European Union, through its emissions trading scheme, has tried to make power plants consider the costs of carbon, forcing them to buy “permits” for emissions. But with the price of oil so high, coal is far cheaper, even with the cost of permits to pollute factored in, Enel has calculated.

Stephan Singer, who runs the European energy and climate office of WWF, formerly the World Wildlife Fund, in Brussels, said that math was shortsighted: the cost of coal and permits will almost certainly rise over the next decade.

“If they want coal to be part of the energy solution, they have to show us that carbon capture can be done now, that they can really reduce emissions” to an acceptable level, Mr. Singer said.

Poland's largest hard coal companies said Wednesday they produced 1.8 million metric tonnes less in this year's first quarter compared to the same period last year, raising concerns about supplies to the country's power plants. Poland produces almost 95% of its electricity from coal-fired plants.

Poland's largest coal producer, Kompania Weglowa, produced 11.4 million mt in the first quarter, close to 0.9 million mt less than in the same period in 2007, company spokesman Zbigniew Madej told Platts.

"But in relation to the company's first quarter production forecast we produced only around 100,000-150,000 mt less than expected. The main reason for this was that the geological conditions caused some difficulties," Madej said.

Kompania Weglowa, which operates 17 hard coal mines and produces around 47 million mt/year, expects to supply 20.5 million mt hard coal to the country's power plants this year.

First quarter production at the country's second largest company, Katowicka Grupa Kapitalowa, which comprises five mines owned by Katowicki Holding Weglowy and the KWK Kazimierz Juliusz mine, was 3.6 million mt, 900,000 mt less than in 2007.

"The reasons for the fall are purely of a mining and geological nature. Some coal seams are close to exhaustion and we have been preparing to exploit new ones. We had planned for this. But by the end of this year we expect to produce 900,000 mt more coal than in 2007," company spokesman Ryszard Fedorowski told Platts.

Fedorowski said the company had fallen short of its first quarter production forecast by 47,000 mt. Poland's grid operator, PSE Operator, said at the beginning of this year that part of the production from the country's generators was unavailable due to a lack of coal supplies.

Production at Vattenfall Poland's hard coal-fired CHP plants has not been affected but it's feeling the shortfall. The company has bought around 300,000 mt of Russian coal already this year.

"Our analysis shows that we lack around 470,000 mt of coal in 2008. We need more coal than the Polish coal mines can supply. Now we are preparing for winter and we are looking for a supplier, maybe in Denmark, the Netherlands or Russia. But buying coal on the spot market is about twice as expensive as buying from Polish coal mines," company spokesman, Lukasz Zimnoch, told Platts.

Vattenfall Poland's three CHP plants and two heating plants in Warsaw consume around 3 million mt/year of hard coal. Zimnoch pointed out that Polish coal producers failed to honor their supply contracts in 2007 and delivered less than the contracted amount.

Industry experts say that the decision to close down several mines at the beginning of the decade has contributed to the current problem. Last year, coal companies produced about 7 million mt of hard coal less than assumed and this year's production could be down by 9 million mt, some experts have warned.

Lonmin, the world's third-largest primary producer of platinum, admitted yesterday that South Africa's power crisis, labour disputes and rising costs would severely dampen production this year.

The company lowered its full-year forecast for platinum sales by nearly 10pc to 775,000 ounces, and warned that production could be further hit if South Africa's power crisis continues.

Lonmin shares rose 16p to £32.98 on relief that the production cuts were not worse, although some analysts said the lowered target may be difficult to hit.

Brad Mills, chief executive, said Lonmin was involved in "preliminary dialogues" about setting up separate power stations in case the state provider Eskom is unable to deliver on its energy supply growth programme.

Ofgem, the energy regulator, began a formal investigation yesterday into alleged mis-selling of energy contracts by npower, one of Britain's top six power suppliers.

The inquiry comes after claims that sales representatives of npower - which has 6.8million customers and is owned by RWE, the German utility group - had lied to customers and used illegal practices to sell contracts.

The alleged tactics included exploiting customers with a poor command of English, making people sign forms without revealing that they were contracts and lying about charges.

If found guilty, Ofgem can impose a maximum fine of 10 per cent of RWE's global turnover, which was €42 billion (£33billion) in 2005.

The timing of the announcement is particularly galling for npower.

Today Andrew Duff, its chief executive, is to meet Sir Alistair Buchanan, Ofgem's chief executive, Malcolm Wicks, the Energy Minister, Hilary Benn, the Environment Secretary, plus fellow industry executives and representatives of organisations such as Age Concern at a conference on fuel poverty hosted by Ofgem.

Adam Scorer, director of campaigns for Energywatch, the independent watchdog, welcomed the npower investigation.

“With the evidence suggesting npower's sales staff were caught red-handed bullying, deceiving and harassing consumers, an example must be made of them,” he said.

The inquiry is the latest sign of a clampdown on sharp practice in the energy sector.

Two weeks ago, Ofgem began an inquiry into alleged market abuse by ScottishPower and Scottish & Southern Energy. In February, it began a competition review and also fined National Grid £42million.

Npower said that it planned to co-operate fully with the Ofgem investigation and that it was “very concerned” about the claims. It said that several staff had been suspended pending disciplinary hearings.

News of the inquiry will infuriate npower's customers, who in January became the first to be hit by the latest round of fuel price rises when the company introduced bill increases of up to 17 per cent.

Ofgem's fuel poverty meeting is being held amid growing expectations that energy companies are preparing for a second round of price increases this year as global oil prices continue to rise, feeding into higher wholesale gas and electricity prices.

One top energy executive told The Times this week that rising bills for UK customers were virtually inevitable unless wholesale gas prices, which are linked to crude prices, fell dramatically.

David Bootle, spokesman for National Energy Action, the campaign body, said that if suppliers increased fuel bills by a further 25 per cent this year, a further million UK households would be plunged into fuel poverty - defined as spending a tenth or more of income on energy.

About 4.5 million people live in fuel poverty. Mr Bootle said that an extra 40,000 households are added to this total for every percentage point rise in bills.

A further 25percent rise would lift the total to about 5.5million homes.

Only one in fifteen fuel-poor households is on a social tariff, which offers the cheapest deals to the most vulnerable customers. Npower, for example, offers help to only 2,557 customers.

Today's meeting comes after an announcement this month of a deal between the Government and the big energy companies to boost their collective annual spending on social programmes by £225million over the next three years.

About 100,000 households are expected to benefit.

Discussions are expected to focus on how this money should be spent to help those in need and how to tackle related problems, such as people failing to claim fuel-poverty benefits to which they are entitled.

BEIJING, April 22 (Reuters) - China's power demand this year could outpace supply by up to 10 gigawatts (GW), with temporary brownouts hitting parts of the south during the summer, the deputy head of the country's power regulator said on Tuesday.

China's power firms are building new power stations each year but coal burning generators are struggling with soaring fuel costs, an over-stretched domestic transport system and strong competition for supplies.

Wang Yeping, vice-chairman of the State Electricity Regulatory Commission, told a news conference that fuel stocks at major power plants had slipped to levels that cover 12 days of generation, from 15 days in early March.

At plants in Hebei province bordering Beijing, Anhui province in the east, and the western municipality of Chongqing, stores had collapsed even further, to under 7 days of use.

"Since March, the country's thermal coal supply has again shown some tightness. Coal stocks fell again. At some power plants, thermal coal supply is already quite tight," he said.

Coal prices shot up to record highs during power and coal shortages in early February, when freak winter weather cut off roads, railways and power lines and left some plants with coal to cover just 2 days of production.

Prices have eased as winter heating demand ebbs and mines resume production. Benchmark spot prices at Qinhuangdao, China's top coal port, for top-grade coal, were at 640-650 yuan ($91.44-$92.87) per tonne on Tuesday.

This was below 670-680 yuan in early February, but still 37 percent higher than a year earlier, according to http://www.cqcoal.com/, a coal market information website operated by a business venture.

Despite these high prices, Beijing is reluctant to take one measure analysts say could bolster coal supplies, increase investment in new plants and ensure existing ones run at full steam -- raise state set power prices.

Inflation is currently running close to the highest level in over a decade, and Wang said Beijing had to consider many factors, including the impact on inflation, when weighing up whether to increase power prices.

But prices are currently so low they leave an increasing number of plants in the red, and could exacerbate shortages.

And Wang's forecast may be conservative, as booming Guangdong province, a manufacturing hub had warned last month it alone could face shortfalls of 10 GW.

Although Guangdong is expected to face some of the worst problems, other rich coastal provinces are likely to strain to meet demand as well over peak summer months. ($1=6.999 Yuan)

Reporting by Jim Bai; Writing by Rujun Shen, Editing by Emma Graham-Harrison

E.ON, the German-owned utility which supplies gas and electricity to millions of customers in Britain, said yesterday that it planned to build two nuclear power stations in the UK.

The company, which has run into controversy over its plans to build a coal-fired plant at Kingsnorth, Kent, wants to use a new generation of 1,600MW atomic reactor, designed by Areva of France.

E.ON, which is also pressing ahead with wind farm developments, has not officially revealed where it wants to build the plants but sources say it is considering sites in the south of England now owned by British Energy.

"It's clear that a new generation of nuclear power stations will ensure that the UK will have a secure and reliable source of low-carbon power for decades to come, and E.ON is right at the forefront of those plans," said the firm's UK chief executive, Paul Golby. "It's now up to us to work with our partners and with government to make that a reality."

E.ON, which has been building its public profile in the UK by sponsoring the FA Cup, has signed a letter of intent with Areva and the German engineering group Siemens, to help build the plants, which are unlikely to be in place before 2018.

E.ON has joined the French electricity provider EDF in making explicit its desire to press ahead with nuclear given government provision of the framework. There has also been speculation that RWE, of Germany, would like to construct a facility to replace the nuclear power station at Wylfa, on Anglesey, Wales.

The momentum comes amid talks between E.ON, EDF and RWE with the UK's nuclear operator, British Energy, which generates 18% of the country's electricity from its existing facilities and owns the key sites that could be used for a new generation of plants.

British Energy is a potential takeover target of EDF and RWE. Sources close to E.ON say the German group is interested in a small equity stake in the nuclear generator rather than full control but is fearful that EDF or another firm might buy the company outright and effectively gain a stranglehold on the best potential newbuild sites.

It seems clear that E.ON would be willing to ask that the government or industry regulator prevents any one company getting an unfair advantage.

EDF, the world's largest nuclear operator, could team up with Centrica, the owner of British Gas, to make a bid for British Energy, while RWE, possibly in cooperation with Vattenfall, of Sweden, could be another bidder for the UK group, which is owned 35% by the government. RWE is already reported to have proposed a 700p indicative offer for the UK nuclear firm, valuing it at £11bn.

The Scottish energy minister, Jim Mather, said this morning that the 181-turbine project, which would have dominated the moors of northern Lewis, would have had "significant adverse impacts" on rare and endangered birds living on the peatlands – a breach of European habitats legislation.

The decision to turn down the proposals from Amec and British Energy was greeted with delight by local opponents and environment groups, and dismay by the developers. Nearly 11,000 islanders had objected to the scheme, which had been supported by the Western Isles council and the island's main community trust.

Dina Murray, a crofter who farms part of the moor affected, said: "I'm absolutely delighted, and I'm delighted for the people of Lewis who fought long and hard against this, on the same grounds as the wind farm has been rejected. The environment, the landscape and the peatlands are worth far more than any wind farm."

Mather said the decision did not mean his Scottish National party administration in Edinburgh was opposed to wind farms in the Western Isles or in general. Ministers were pushing ahead with plans for a new sustainable "green" energy programme for the islands, which experts believe has amongst the greatest renewable energy potential of any part of the UK.

"Nor does today's decision alter in any way this government's unwavering commitment to harness Scotland's vast array of potentially cheap, renewable energy sources," he added.

The SNP had agreed to 13 new schemes since last May, and was processing applications for a further 35 wind and hydropower schemes. Along with existing schemes, this would generate enough to supply all Scotland's homes.

Yet the conflict over the Lewis proposal, which would have generated 650MW of electricity - roughly 10% of Scotland's electricity needs - has exposed some of the most significant tensions and challenges facing onshore wind farms.

Lewis Wind Power, the joint venture company set up by Amec and British Energy, said it was "bitterly disappointed" by the decision. The farm would have brought 400 jobs to Lewis, injected £6m a year in rental payments and other benefits to the island, and meant a crucial "interconnector" to take electricity to the mainland would have been built.

"Sadly all of this has been lost because of the government decision which, we believe, represents a huge missed opportunity," the firm said.

Wind power opponents are now focusing on the frequent use of peatlands, particularly in Scotland, for major new schemes. They argue that "industrialisation" of peat moors risks destroying these habitats and will release the carbon stored in the peat through erosion and drainage.

The Scottish Tory MEP Struan Stevenson urged European commission officials last week to develop a more coherent strategy for locating wind farms on land, claiming that Scotland's 1.9m hectares of peat and bog were part of the planet's "airconditioning system".

Murray said many crofters fully supported his criticisms. "You can't replace peat with concrete, and ever hope to get away with it. There are thousands and thousands of years of vegetation growing and rotting, year after year after year. That's how it was intended to be. But I would fully support going offshore as long as it doesn't have any marine conservation consequences."

G8 and some African governments hope that the Grand Inga dam in the Democratic Republic of Congo will generate twice as much electricity as the world's current largest dam, the Three Gorges in China, and jump start industrial development on the continent, bringing electricity to hundreds of million of people.

But while governments and banks expect the dam to export electricity as far away as South Africa, Nigeria and Egypt, and even Europe and Israel, environment groups and local people warned that it could bypass the most needy and end up as Africa's most ruinous white elephant, consigning one of the poorest countries to mountainous debts.

The dam is being planned to exploit one of the largest major water falls by volume anywhere in the world - nine miles of rapids which lie 90 miles from the mouth of the Congo where the world's second largest river drops nearly 100 metres in just eight miles. Two hydroelectric plants, known as Inga 1 and Inga 2, were constructed near there in the 1970s and a third is planned, but Grand Inga is intended to dwarf them all. One feasibility study suggests the 40,000MW dam will be 150m high, and will harness 26,000 cubic metres of water a second, with more than 50 turbines each producing nearly as much power as a British nuclear reactor.

Grand Inga was proposed in the 1980s but never got beyond feasibility studies because of political turmoil in central Africa. But now it stands a chance, according to Gerald Doucet, secretary general of the World Energy Council thinktank, which is convening the London meeting.

"It is the greatest sustainable development project, offering Africa a unique chance for interdependence and prosperity," said Doucet. "It's much more feasible now than ever. There is a peace settlement in Congo, and economic and technical studies have all shown it is possible."

Grand Inga's prospects of being completed by 2022 are said to have risen significantly in the last year as countries, banks and private companies have found they can earn high returns from the emerging global carbon offset market and UN climate change credits. In return for investments in clean power, rich countries such as Britain hope to be able to offset their own greenhouse gas emissions against the renewable energy that dams such as Grand Inga would produce, and constructors are making windfall profits out of renewable energy projects in developing countries.

"The banks and the City of London see that Grand Inga is serious. The G8 countries are behind it because they can get UN clean development mechanism [CDM] credits to offset their emissions. Chinese, Brazilian and Canadian dam-building companies, as well as the World Bank, are all interested," said Doucet.

But advocacy groups said yesterday the plans ignored local people and could leave Congo with massive debts rather than a sustainable industrial base.

"The project would be a magnet for corruption in one of the world's least stable regions. Its enormous budget and large contracts could devolve Inga into a corruption-riddled white elephant. Inga will centralise a vast store of the region's electric and financial power, a development model that can foster tensions and civil wars," said Terri Hathaway, Africa campaigner with International Rivers, a watchdog group monitoring the project.

Hathaway said that the 94% of people in Congo DRC and the two in three Africans who have no electricity now were unlikely to benefit because the dam depends on exporting its electricity to existing centres of industry, especially in South Africa where there have been power shortages.

"As it stands, the project's electricity won't reach even a fraction of the continent's 500 million people not yet connected to the grid. Building a distribution network that would actually light up Africa would increase the project's cost exponentially. It would be very different if rural energy received the kind of commitment and attention now being lavished on Inga," she said.

Despite Congo having exported electricity for years from Inga 1 and Inga 2, access to electricity across the country is less than 6%, and in rural areas where nearly 70% of people live, it is only 1%.

"My village is 3km from Inga's power lines. They built a line almost 2,000km to the mines [in Katanga province] but in all of these years we have been left without electricity," said Simon Malanda, a community representative.

Doucet acknowledged that "there are huge social issues around Grand Inga that must be dealt with. Congo must benefit. If Congo is bypassed then the whole project fails," he said.

Speaking at the United Nations, the Bolivian president, Evo Morales, said the increased use of farmland for fuel crops was causing a "tremendous increase" in food prices.

The Reuters news agency reported that the Peruvian president, Alan Garcia, called on developed countries to grow more food. In the last few months, food prices in Peru have run ahead of the country's general rate of inflation.

Their attack coincided with a report published today by the environmental group Friends of the Earth warning the EU of the perils of expanding biofuel use in Latin America. Last year the EU agreed on a target of 10% biofuel use for transport by 2020.

The report says the certification schemes being set up by some South American countries to ensure sustainable production of sugar cane and soya bean crops are not enough to prevent damage to the environment and "fail to address the biggest problems" caused by the cultivation of land currently covered by forests or smaller farms.

In his UN comments, Morales criticised "some South American presidents" for pushing biofuels. The Bolivian president did not name them but his views are in sharp contrast to those of the Brazilian president, Luiz Inacio Lula da Silva, who has said developing countries have enough land to produce both food and biofuels.

Morales called on developed nations to accept that problems created by biofuels in developing countries were partly their responsibility. After his speech, he told a news conference that "it is not an internal problem, it is an external problem".

"This is very serious," he said. "How important is life and how important are cars? So I say life first and cars second."

In his UN speech, Morales called for the International Monetary Fund and the World Bank to take action against the biofuel industry "in order to avoid hunger and misery among our people".

Reuters reported Garcia as saying biofuels were "creating very serious problems for countries that have to import these (food) products. We believe there are alternative energies that do not put the world's food in danger."

Peru's government has been forced to hand out food to the poorest in the country's capital, Lima, because of the crisis caused by rising food prices. It has cut tariffs and raised interest rates to try to curb inflation, which rose 4% last year.

Both leaders are facing challenges to their authority. This month, Garcia's approval rating sank to 26% - the lowest since he took office in 2006 - and 57% of those polled said rising prices was the main reason for their disapproval.

Morales, meanwhile, is fighting opposition leaders in four eastern provinces who want significant autonomy from the central government.

The European commission is backing away from its insistence on imposing a compulsory 10% quota of biofuels in all petrol and diesel by 2020, a central plank of its programme to lead the world in combating climate change.

Amid a worsening global food crisis exacerbated, say experts and critics, by the race to divert food or feed crops into biomass for the manufacture of vehicle fuel, and inundated by a flood of expert advice criticising the shift to renewable fuel, the commission appears to be getting cold feet about its biofuels target.

Under the proposals, to be turned into law within a year, biofuels are to supply a tenth of all road vehicle fuel by 2020 as part of the drive to slash greenhouse gas emissions by 20% by the same deadline.

The 10% target is "binding" under the proposed legislation. But pressed by its scientific advisers, UN authorities, leaders in Europe, non-government organisations and environmental lobbies, the commission is engaged in a rethink.

"The target is now secondary," said a commission official, adding that high standards of "sustainability" being drafted for biofuels sourcing and manufacture would make it impossible for the target to be met.

Britain has set its own biofuels targets, which saw 2.5% mixed into all petrol and diesel fuel sold on forecourts in the UK this week. The government wants to increase that to 5% within two years, but has admitted that the environmental concerns could force them to rethink. Ruth Kelly, transport secretary, has ordered a review, which is due to report next month.

A commission source indicated that the EU executive would not object if European governments ordered a U-turn.

"This is all very sensitive and fast-moving," said a third commission official. "There is now a lot of new evidence on biofuels and the commission has become a prisoner of this process."

The target is being strongly criticised by the commission's own scientific experts and environmental advisers to the EU.

"The policy may have negative impacts on soil, water, and biodiversity," said Professor Laszlo Somlyody, who led a team of climate scientists analysing the policy for the Copenhagen-based European Environment Agency, which advises the EU. "This can lead to serious problems," he told the Guardian.

His report, published last week, calls on Brussels to freeze its biofuels policy because of the potential risks to the environment. "The over-ambitious 10% biofuel target is an experiment whose unintended effects are difficult to predict and difficult to control," the scientists found.

In March last year, European leaders sought to seize the global moral high ground by backing the commission's climate change package aimed at making Europe the world's first low-carbon economy. In January, the commission fleshed out the details of the measures, based on a carbon trading scheme which is to supply the bulk of the cuts in greenhouse gases.

But since then there has been a torrent of expert reports citing biofuels as part of the climate change problem.

This week, Jean Ziegler, the UN's rapporteur on the right to food, dubbed biofuels "a crime against humanity" because they allegedly divert food from the poor to provide fuel for the rich.

"The diversion of crops to fuel can raise food prices and reduce our ability to alleviate hunger," warned a 2,500-page analysis of global food trends from UN agricultural scientists.

While Germany recently announced a retreat from its biofuel policies, Alistair Darling, the chancellor, asked the world's wealthiest countries to assess the impact of biofuel development on the food crisis for a G7 summit this summer.

An ad hoc group of EU experts will meet next month to wrangle over the sustainability criteria to be entered into the legislation. The commission is proposing that the overall impact of biofuels - produced from biomass from rapeseed, corn, sugar cane or palm oil - results in carbon dioxide cuts of 35% compared to fossil fuel equivalents.

What will we promise the world's hungry this time? When I was a girl, my father, King Hussein of Jordan, related a story about the last global food crisis and a famous promise made to the world's hungry by Henry Kissinger, who was then US Secretary of State.

Dr Kissinger came to Amman after attending the World Food Conference in Rome in 1974, called hastily as global food prices skyrocketed and widespread hunger threatened to engulf the developing world. Secretary Kissinger related how he had boldly pledged that within a decade, no child would go to bed hungry anywhere in the world.

You have to give him credit for being ambitious and inspired, but sadly, more than three decades later, there are more hungry children in the world than there are Americans. That number grows with each passing week, as once relatively well-fed families in Cameroon, Indonesia and Egypt struggle to cope with the rising cost of a decent meal.

In the 1970s, global market conditions eventually improved, thanks in part to the dramatic impact of the Green Revolution in South Asia. But the development banks, aid agencies and donors soon forgot the lesson of the crisis, cutting in half the percentage of aid they devoted to agriculture despite repeated warnings by the Food and Agriculture Organisation.

Developing country governments did no better and failed to invest enough in agriculture. They looked the other way when the number of hungry started to grow again in the 1990s. In short, when it comes to food, the donor community has been asleep at the wheel, or at the very least dozing: they were warned for years by the World Food Programme that rising food and transport prices were cutting into their deliveries on the ground.

The symptoms of an emerging food crisis have been around for a while and visible to anyone willing to see them. First, there were riots in Mexico City over the price of maize and then suddenly the price of farmland in Iowa was rising faster than real estate in Belgravia or Manhattan. The European Union, which for years accumulated surplus lakes of oil and mountains of grains, began asking its farmers to put land back into production and milk was in short supply. Meanwhile, the United States quietly dropped all subsidies of its grain producers and experienced a near-explosion in food exports. And finally, consumers across the world have begun to protest as they pay more to buy the family groceries; the riots that began in Mexico City have spread to other cities.

Even if global economic output dips this year as forecast, demand for food will still strain supplies, and as one market forecaster put it: “Food will become the next oil.” And so, we are finally paying attention.

Rising food costs are very worrisome for many, but they are downright dangerous for the 850 million chronically hungry people who do not earn enough to afford this newspaper. Even when food was relatively cheap, these people suffered malnutrition and disease that left them cut off from the global rise in incomes. Their stunted children had little hope for the future and even less now.

So far, the donor response to hunger outside well-publicised emergencies such as Darfur has been tepid at best. While, on the surface, it looks like Official Development Assistance is at historically high levels, topping $100 billion, much of this is debt relief and has little impact on the price of a meal in Africa's rural villages. Aid transfers to sub-Saharan Africa - where one person in three is chronically hungry - have actually declined recently. Worse yet, food aid has dropped to its lowest level since Dr Kissinger's famous speech in Rome, plummeting to 6.7 million tonnes in 2006, less than half the level in 2000. And no one really sounded the alarm bell when it happened.

Now the World Bank and bilateral donors are scrambling to compensate for the lack of investment in agriculture over decades. But that may not be so easy: just to feed the same number of needy people this year the World Food Programme has appealed for an extra $500 million.

President Bush's announcement of a $200 million release from the US emergency reserve will help, but stocks worldwide are at frighteningly low levels. A curb in biofuels production might help too... but economists note that this will have little impact on wheat and rice output or address the fundamental issue of growing Asian demand.

So what more can be done? The £1 billion initiative by the former UN Secretary-General Kofi Annan, with the Gates and Rockefeller foundations to create a Green Revolution for Africa, is one bright spot on the horizon. It was, after all, the first Green Revolution that helped India so much during the food shortages of the 1970s. But in the meantime, the message to donors, public and private, is simple: Food must come first. The world's poorest live in farming areas: new seeds, small-scale irrigation and educational services will help them to turn their lives around.

Let's hope there are no more false promises and we do our very best to deliver what Henry Kissinger so proudly promised to the world's children more than three decades ago - a life free of hunger.

Princess Haya has been Goodwill Ambassador for the World Food Programme and is wife of the Ruler of Dubai.

Families have been warned that the prices of basic foods will rise steeply again because of acute shortages in commodity markets.

Experts told The Times yesterday that prices of rice, wheat and vegetable oil would rise further. They also forecast that high prices and shortages — which have caused riots in developing countries such as Bangladesh and Haiti — were here to stay, and that the days of cheap produce would not return. Food-price inflation has already pushed up a typical family’s weekly shopping bill by 15 per cent in a year.

A further 15 per cent increase in the price of a standard Kingsmill loaf would push it up from £1.09 to to £1.24. Butter has gone up by 62 per cent in the past year. A similar rise would bring the price of a 250g pack to £1.52.

The price of rice, which has almost tripled in a year, rose 2 per cent on the Chicago Board of Trade yesterday as the United Nations food agency gave warning that millions faced starvation because aid agencies were unable to meet the additional financial burden.

Gordon Brown responded to mounting concerns about the global rise in food prices by signalling that he might scale back Britain’s commitment to biofuels, which critics say has exacerbated the food crisis because land has been given over to grow crops for energy rather than food.

John Bason, finance director of Associated British Foods, one of Britain’s biggest food producers, said that wheat prices had doubled in a year and supermarkets would have to raise the price of bread again. Vegetable oil was also likely to soar in price because the price of corn oil in the US had almost tripled, he said.

Poor harvests and fierce competition for food supplies has already meant the price of eggs, rice, bread and pasta in supermarkets has rocketed.

MySupermarket.co.uk said that eggs from free-range poultry in Tesco, Asda and Sainsbury’s were 47 per cent more expensive than a year ago; basmati rice was up 61 per cent and fusilli pasta 81 per cent.

At a meeting at Downing Street yesterday, Mr Brown asked farmers, supermarkets and consumer groups to agree steps to rein in rising food costs. He said that Britain must become “more selective” in how it supported environmental initiatives to counter climate change.

“If our UK review shows that we need to change our approach, we will also push for change in EU biofuels targets,” he wrote on Downing Street’s website.

Britain is now likely to press the European Union to recast its target for 10 per cent of transport fuels to be supplied from biofuels by 2020.

Downing Street sources said that ministers would press for any such target to be introduced in a more “sustainable” way and that Britain would not go beyond its own target for 5 per cent of fuels to come from biofuels by 2010. Rising food costs will pile the pressure on Mr Brown, coming after double-digit increases in household fuel bills earlier this year and the continuing row over tax increases for millions of low-paid workers.

Yesterday’s meeting on food prices also focused on the impact on developing countries of global increases in food costs, driven by higher production costs as oil prices soar and increased demand due to population growth.

The Department for International Development announced that it would allocate £400 million over five years to research into hardier and higher-yielding crops. It also promised £30 million to the World Food Programme for countries where the risk of hunger is greatest, plus £25 million in aid for Ethiopia alone.

The Government will meet consumer groups to discuss how households are coping with higher prices. Jonathan Shaw, the Rural Affairs Minister, will host the meeting next Thursday as part of a study into the impact of the higher household bills on the poorest, most vulnerable groups in society.

Opposition parties accused Mr Brown of making the squeeze on families worse.

Philip Hammond, Shadow Chief Secretary to the Treasury, said: “At a time when families are facing soaring food, fuel and mortgage bills, Gordon Brown’s response is to clobber them with higher taxes.”

Vince Cable, the Liberal Democrats’ Treasury spokesman, said: “Rising food bills will hit families already struggling to keep their heads above water following big rises to many utility bills.

“The Government must show more urgency in ensuring the current world talks on agricultural trade no longer drift hopelessly because of a lack of political will.”

The United Nations Food Agency said that rising food prices threatened to plunge 100 million people across the world into hunger.

Josette Sheeran, head of the UN’s World Food Programme, said before yesterday’s meeting: “This is the new face of hunger — the millions of people who were not in the urgent hunger category six months ago but now are.”

The government stepped into a mounting row over air freight and "food miles" yesterday by accusing the Soil Association of endangering the livelihoods of 21,000 farmers in Africa.

But the organic certifying organisation hit back last night accusing ministers and supermarkets of making "outrageous" claims in a self-interested bid to stop higher ethical standards being introduced through its proposed new labelling scheme aimed at cutting carbon emissions.

Gareth Thomas, a minister for the Department for International Development, urged the Soil Association not to adopt its new code on air freight, saying it would threaten producers in the poorest regions of Africa already hit by soaring food prices. "Our view is that the Soil Association should not go ahead with its proposed changes. We are pretty clear that they will have a negative impact on African farmers and it gives the sense that air freight is automatically bad," said Thomas, who has been meeting local farmers while on a trade trip to Ghana.

On Tuesday the Guardian revealed that the Co-operative group had written to the head of the Soil Association saying it made no sense to give a negative weighting in its labelling system to air freight on the grounds it was a "very poor proxy" for the environmental impact of a product.

But the Soil Association said last night that the Co-op, along with other supermarkets, were doing all they could to stymie higher standards agreed by the Fairtrade Foundation and supported by many other groups such as Oxfam, Christian Aid and Friends of the Earth.

"Big business and the government do not want us to do anything. The government is still fixated with free trade," said Lord (Peter) Melchett, the association's policy director. The figure of 21,000 farmers affected by the changes was "self-evidently ludicrous" and reduced use of air freight was inevitable amid soaring oil costs and aviation being brought inside the updated Kyoto protocol, he added.

Leaders of Japan and the European Union have called for "highly ambitious and binding" global targets to fight climate change.

Leaders said the G8 summit of rich nations - to be held in Japan in July - must be a real moment of breakthrough on greenhouse gas emissions.

The Kyoto Protocol on carbon emissions runs out at the end of 2012.

The annual meeting in Tokyo also called for urgent action to cope with rising world food prices.

The joint statement was issued by European Commission chief Jose Manuel Barroso, Japanese Prime Minister Yasuo Fukuda and Prime Minister Janez Jansa of Slovenia, the current EU president.

Beyond Kyoto

Japan wants this year's G8 summit to shape the course of negotiations to reach a post-Kyoto Protocol deal by the end of 2009 on curbing global warming.

But the joint statement fell short of giving a specific figure for binding cuts.

The European Union has proposed emissions reductions of 20 to 30% by 2020 from 1990 levels.

Japan has joined the United States in saying it is too early to set numbers for future emission curbs.

Japan and the EU also called for action to address spiralling food and oil prices, which they said "could slow down the growth in the global economy and have negative effects on developed and developing nations."

Jose Manuel Barroso told a news conference after the summit that a fall off in official development aid for a second straight year in 2007 was "alarming".

Russian authorities have turned up the heat on BP's joint venture TNK-BP, filing a claim for 6bn roubles (£130m) in back taxes.

It comes as the deputy chief executive of Gazprom, Alexander Medvedev, hinted that the state energy company might be losing patience with BP over delays in selling a huge gas field.

TNK-BP, which paid $1.4bn (£707m) in November 2006 to settle back tax claims, now faces an additional bill, according to the Russian business daily Vedomosti. The claims, confirmed by TNK-BP, relate to value added and extraction taxes.

Gazprom is negotiating with BP to take control of the vast Kovykta gas field. Gazprom agreed to buy TNK-BP's 63pc stake in the field last June, but has failed to conclude terms.

Mr Medvedev said in Moscow yesterday that Gazprom was still awaiting additional information about the field. "The ball is not in our court," he said. "We, frankly speaking, are a little disappointed."

Russia could soon follow the Middle Eastern sovereign wealth funds and invest billions of dollars in direct overseas investments if, as expected, its national welfare fund is given more freedom to invest.

Dmitry Pankin, Deputy Finance Minister, said that there was hot political debate about how the fund should be invested. He told The Times: “It is possible to invest ... abroad . ..to buy corporate bonds ... to buy shares. It is less risky to buy government bonds than to buy corporate shares. But we are analysing all proposals.”

Russia is awash with cash largely because of soaring revenues from its oil and gas. But the country is also struggling with inflation as the economy grows rapidly. For that reason, it is now having to limit government spending on infrastructure even though much of its transport network and other parts of its national framework badly needs to be upgraded.

Mr Pankin said that revenues from the spiralling oil price was “manna from heaven” but that it should be regarded separately because it would not last for ever.

Last year, Russia divided its huge stabilisation fund - large amounts of which have been used to improve its networks - into two. It kept the biggest part, more than $125 billion (£63 billion), for a reserve fund and put more than $32 billion into the national welfare fund. This fund will be capped at 10 per cent of GDP but it is expected that it will be able to make riskier, and potentially better rewarding, investments.

Mr Pankin told a Russian investment conference in London that it was difficult to resist pressure for more spending at home because there was so much money available. He admitted that “the roads are terrible and the healthcare is in a dire state”, but said that inflation needed to be kept in check. He added: “It is not possible now to invest more money in

Russia. In that case, inflation will grow and that will be very serious for our economy.”

Last week, the Russian Government raised its forecast for inflation this year to 9 to 10 per cent from 8 to 9.5 per cent. The year-on-year rise in inflation in the middle of this month stood at 13.8 per cent. Inflation is being driven by high food prices, which are ratcheting the rate up despite a slowdown in import price inflation.

Roger Munnings, chief executive of KPMG in Russia and the Confederation of Independent States, the countries from the former Soviet Union, said that attempts by Russia to loosen parts of its economy while keeping a firm control of other parts meant it was at an economic crossroads.

"The rapidity of growth has been helped by oil prices and by utilising spare capacity,” he said. “But it has also exposed the lack of investment over previous years. I think Putin and Medvedev understand the need for diversification. You can be a wealthy country if you have oil and gas and still have unemployment. I think they understand the importance of growing the small and medium-sized businesses.”

The Government will decide later in the year how to invest its national welfare fund. It may then also create a special government agency to run the fund or devolve it to external management. The creation of such an agency would mark a huge swing away from the apparent tightening control by the Government on the economy.

Last year, Russia moved to a three-year budget, rather than an annual spending programme, to allow for the injection of more strategic planning into the economy.

Some of the national welfare fund may be pumped into domestic financial markets, but the amount could be restricted to 5 per cent to avoid excessive money supply.

Russia has become KPMG's fastest growing market, outstripping China for audit and consultancy services. Last year, the accountancy group's business there increased by 65 per cent

The American airline industry lost $1.5 billion (£760 million) in the first three months of the year and fears are growing that European carriers will be the next to feel the pain.

High oil prices have caused enormous losses among airlines in the United States, forcing them to seek bankruptcy protection, cut capacity and look for mergers.

The City expects European airlines to experience the same problem as high oil prices drive up operating costs. British Airways’s share price has more than halved since this time last year and analysts expect it to report a second profit warning within months.

Andrew Fitchie, aviation analyst at Collins Stewart, said: “It’s going to be very bad indeed.”

In the past week the US airlines have been reporting their first-quarter results and only Southwest, the pioneer of the low-cost model, has achieved a profit – $34 million, down from $96 million in the same period last year.

United Airlines lost $537 million, American lost $328 million, Delta lost $274 million, Northwest lost $191 million, Continental lost $80 million and JetBlue lost $8 million. Frontier, ATA, Aloha and Skybus have all been grounded by high costs while in Europe, Oasis has gone bust and Silverjet is looking for a buyer.

These results come from a quarter when oil prices were in the $100 to $110 per barrel range, but oil is now trading at $120, and with no indication that fuel costs will fall soon, many airlines are preparing for the worst.

Douglas Steenland, the chief executive of Northwest, admitted: “We are in uncharted waters.”

The US carriers have been hit first by high oil prices because many have only just emerged from Chapter 11 bankruptcy protection after the collapse after the terrorism attacks of September 11, 2001. This meant that they were unable to invest in new aircraft and are flying aeroplanes that are decades old and use 25 per cent to 40 per cent more fuel than current ones.

However, European airlines are also feeling the effect of high fuel costs and the situation is about to get worse as much of their oil hedging ends in the next two months. Carriers that are paying about $80 for half their fuel requirements will soon pay the full market rate and analysts expect that this could trigger a crisis. Airlines such as British Airways and Virgin Atlantic have been unwilling to increase airfares and risk being uncompetitive, so they have instead added “fuel surcharges” to tickets. BA’s surcharge for its longest flights has now reached £58 each way.

The budget carriers have found another way to introduce stealth increases to airfares by adding ancillary charges for services such as checking baggage or airport check-in.

However, both tactics have a natural limit and airlines will have to consider other strategies to deal with rising costs.

The most likely outcome is that airlines will reduce capacity and shut down routes that are not operating with near-full planes, while other carriers will seek mergers in the hope of finding big cost reductions. Delta has decided to pursue both of these strategies and will cut the number of services it offers by 11 per cent this year, while also merging with Northwest in a deal that will create the world’s largest carrier by passenger numbers. United is rumoured to have made an approach to Continental and American is also thought to be considering merger opportunities.

Air France-KLM, Lufthansa and BA are expected to drive consolidation in Europe, creating mega carriers capable of withstanding a long period of high costs.

Doug McVitie, managing director of Arran Aerospace, an aviation consultancy, said: “The legacy of rising oil prices may turn out to be an aviation industry that is dominated by only a handful of super-sized airlines.”

BA margins hit

The City expects British Airways to announce a further profits warning this year as rising fuel bills cut its margins potentially to zero. Willie Walsh, the chief executive, said last month that BA's fuel bill would rise by 20 per cent to £2.5 billion this year and this forced him to scrap a promise to reach profit margins of 10 per cent. The revised profit margin is 7 per cent, which translates into a £273 million profit reduction. However, aviation analysts have been downgrading the stock more severely as they expect fuel to cost even more and the company's share price has halved since this time last year. Exane BNP Paribas, the broker, has predicted that BA's margin will be only 4 per cent, reducing profits by a further £250 million. Both Collins Stewart and Morgan Stanley, the investment banks, have halved their earnings per share estimate to 20p.

Fuel costs up and up

The fuel bill for flying from London to New York has quadrupled in the past eight years because of rising oil prices. A Boeing 767 or Airbus A330 will burn 12,800 gallons of jet fuel during the 3,180 nautical mile journey from London's Heathrow to New York. On return, the average is 10,800 gallons due to tailwinds. In 2000, the cost of jet fuel was 87 cents per gallon, which would cost $20,532 for a return journey ($11,136 alone for the outward trip). The price of jet fuel has risen even faster than oil prices due to a shortage in refining capacity and is now $3.44 per gallon. The outward leg of a transatlantic flight now costs $44,000 and $81,152 for a return journey - a four-fold increase. Airlines have put up fuel surcharges, but economy airfares have stayed static due to the intense competition.

No room to cut

The low-cost model that fuelled the growth of Ryanair and easyJet is under threat from rising fuel prices. High fuel costs and the economic slowdown prompted Michael O'Leary, chief executive of Ryanair, to say profits could fall by 50 per cent this year, but analysts fear that the situation could get worse. No-frills carriers have met rising oil prices by cutting other costs and by introducing new charges, such as bag-checking fees. However, fuel has risen so fast that it now accounts for half of an airline's total costs, which leaves the budget carriers little room to keep total costs down. Also, both Ryanair and easyJet are taking delivery of new aircraft. Analysts see the potential for a perfect storm of budget carriers offering more seats that cost more to operate but with fewer passengers to buy them. Then even established names could go bust.

Flying on fumes

Continental is operating smaller aircraft across the Atlantic in a strategy to cut costs, but last year 96 of its planes ran low on fuel as they approached New York. Continental now uses 180-seat Boeing 757s rather than 250-seat 767s on some flights from London to New York and British Airways is planning to do the same on its new services from Amsterdam and Paris to the US. These smaller aircraft burn less fuel and are easier to fill with passengers. The range of the 757 is 3,900 nautical miles, enough to cross the Atlantic but not to take into account the strong headwinds that blow from west to east. Last year there were 96 incidents when Continental 757s ran low on fuel having made the Atlantic crossing. This strategy has been criticised by aviation safety experts but the airline insists that the flights were safe as they still had a fuel reserve onboard.

He is still more than a week away from taking office, but Italy's newly elected Prime Minister, Silvio Berlusconi, is wrestling with his first major crisis: the imminent bankruptcy of Alitalia.

If the national carrier goes under, more than 18,000 staff could lose their jobs. There would also be repercussions for the country's airports and its tourist industry – quite apart from the humiliation for the government – but there is only enough money in the kitty to keep the company flying until the end of April.

Alitalia's imminent collapse is Mr Berlusconi's fault. Romano Prodi's government negotiated an agreement with Air France-KLM that would have kept the airline flying. The French carrier, the world's largest by revenue, was the only one willing to take on the Italian company with its ageing fleet, cosy union agreements, shrinking customer base and massive debts – at a cost of 2,300 jobs.

But in the thick of the election campaign, Mr Berlusconi described the French offer as "arrogant and unacceptable", and said that if he was re-elected he would overturn it. Heartened by Mr Berlusconi's rhetoric, the airline's unions went back on their agreement with the French and increased their demands.

Air France responded by suspending talks, but the unions were convinced that it was just a ploy and that the company would come back to the table once Mr Berlusconi was in office. After winning the election last week, Mr Berlusconi belied his hostile remarks on the stump by saying that he planned to raise the issue of the airline's future with President Nicolas Sarkozy.

But this week the French decided that the light was not worth the candle. Jean-Cyril Spinetta, Air France-KLM's chairman, informed Mr Berlusconi's adviser, Gianni Letta, of his decision on Monday, citing his "extreme tiredness with the negotiations and the increasingly grim economic picture". In a terse one-line statement, the French airline said it was retiring from negotiations to take over the Italian national flag carrier, "because preconditions have not been met". Those conditions include acceptance of the agreement by the incoming government and the unions, and the dropping of a legal case by SEA, the company that operates Milan's Malpensa airport, against Alitalia.

Alitalia is losing €1m (£800,000) per day and the Italian government has been forbidden by the EU to lend it any more money. The company has for years been the plaything of governments and unions, leaving the taxpayer to settle the bill.

Mr Berlusconi signally failed to get a grip on the airline's finances during his last term as prime minister, despite being in office for five years. La Repubblica yesterday calculated that Alitalia had cost the country €15bn over the past 15 years, "or €270 for every citizen, newborn babies included".

During the election campaign Mr Berlusconi claimed that Italian investors – possibly including members of his family – could be found to rescue the airline, but they have been slow to come forward. A smaller Italian company, Air One, this week said it could be interested in having another look.

Mr Berlusconi, who last week hosted President Vladimir Putin at his Sardinian villa, also hopes to generate interest from the Russian airline Aeroflot, which last year looked into a deal but declined to make an offer.

Last night, Mr Prodi's outgoing government held an emergency cabinet meeting to discuss the crisis and announced a €300m bridge loan to the airline, in defiance of the EU, to be repaid by 31 December, to stop the airline going bust on Mr Prodi's watch. That adds a further €5.13 per citizen to the carrier's bill.

Delta Air Lines and Northwest Airlines have both recorded multi-billion dollar losses for the first three months of 2008, hit by crippling fuel costs.

The firms agreed to merge in a $5bn (£2.5bn) deal last week as a way to cut costs and boost revenue as oil prices hover near $120 a barrel.

The entire sector is battling to deal with the spike in fuel and a decelerating global economy.

US carriers are suffering most as demand for domestic flights drops.

Delta Air Lines posted a net loss of $6.4bn for the period, compared to a loss of $130m the year before.

The main reason behind the loss was a $6.1bn charge related to a recalculation of the firm's value to reflect higher oil prices.

The rise in the oil price helped to drive Delta's operating expenses up 20% in the three months of the year compared to the same quarter in 2007.

With the US economy on the brink of recession, Delta Air Lines - like most of its domestic rivals - is having a tough time filling internal flights and plans to aggressively scale these back.

Turbulent times

Northwest Airlines also suffered, posting a $4.1bn net loss, much wider than the $292m a year earlier when it was struggling to emerge from chapter 11 bankruptcy.

Like Delta, the vast portion of this - $3.9bn - was a one-off accounting charge to take into account the negative effect of fuel prices, which cost Northwest an additional $445m in the quarter, 57.3% more than in the same period a year earlier.

"Today's results demonstrate the volatility of the airline industry and the challenges that airlines face related to uncontrollable increases in input costs such as oil," said Dave Davis, Northwest Airline's chief financial officer.

The merger between the two airlines depends on approval from the competition authorities and the unions, but if successful it will create the biggest airline by passenger volume.

Consolidation elsewhere in the sector is expected, with reports that UAL, parent of United Airlines, is in talks with rival Continental.

Shares in bus and train operator Arriva have fallen on concerns its business could be hurt by high fuel prices.

The firm, which said that revenue had risen 60% in the first three months of 2008, acknowledged that fuel prices had risen "substantially".

It said a hedging policy would protect it from high fuel prices this year but kept silent over the impact on 2009.

Arriva shares ended down 3.62%, or 24 pence, at 638.50p as investors shunned transport sector stocks.

Arriva runs over 13,000 buses and trains across the UK and Europe and said in a statement before its annual shareholder meeting that it had seen strong growth on the continent.

"The outlook for 2008 is positive and we are confident of substantial revenue and earnings growth during the year," Arriva's chairman, Sir Richard Broadbent, said.

"Fuel prices have increased substantially since the beginning of the year. Our hedging policy protects the group from any material impact during 2008."

Oil prices in New York hit a record high of close to $120 a barrel this week.

London taxi drivers could soon have one less thing to complain about - or one more. The capital’s black cab drivers, who are famous for their opinions on all aspects of life, may begin next year helping to reduce pollution in the city with the introduction of plug-in electric taxis.

Manganese Bronze, the Coventry-based maker of the black cabs, plans to ramp up its green credentials by working on an electric version of its TX4 cab. The company will work with Tanfield, the specialist electric car designer and developer. The plug-in taxi is planned to be available by the middle of 2009.

The green version of the black cab will be able to run for at least 100 miles on one charge of its lithiumion battery. The Licensed Taxi Drivers Association (LTDA) estimates that the average driver clocks up between 120 and 150 miles a day.

The upside for the drivers will be the running costs. At today’s electricity prices, the green taxi will cost about 4p per mile to run. According to the LTDA, the average spend on diesel, which the vast majority of taxis run on, is £70 to £80 a week, making the cost per mile between 8.5p and 9.3p.

Like other professional drivers, taxi drivers have suffered escalating costs in recent months. Yesterday the price of oil hit a new record at $118.59 a barrel.

The downside will be the cost of the cab, already an expensive item. Manganese has said that the electric version would cost more than the standard engine, but has yet to set a figure. Depending on the desired specification, a new black cab costs between £30,000 and £43,000.

Taxi drivers will also need to remember to plug in their vehicles overnight. It takes six hours to charge from flat, with a fast charge of 25 per cent in one hour.

An LTDA spokesman gave the green taxi a cautious green light: “It depends how much it is going to cost. But taxi drivers are very reasonable people. Anything that is clean and green will be good for taxi drivers and the community and they will back it. If it makes economic sense, of course they will support it.”

London taxis already have some green credentials in terms of how long they last compared with ordinary vehicles and the higher mileage rate of diesel engines compared with standard petrol. A black cab can last up to 20 years because it is serviced and repaired more frequently than passenger cars.

If the green cabs prove successful, they could find their way on to the streets of China through Manganese’s joint venture Shanghai LTI. The company will soon start production of its taxis in China.

Manganese chose to develop an all-electric car rather than a hybrid electric/petrol model because it is using technology already established by Tanfield. Tanfield makes all-electric vehicles for Sainsbury’s and TNT, among other customers. Last year sales of its electric cars rose 37 per cent to £26 million. This year it expects to raise production from 260 vehicles last year to between 875 and 1,100.

Last week Tanfield unveiled two new vehicles based on Ford cars as it works with the American carmaker to develop zero emissions versions of its cars. The US market is more receptive to electric cars than Europe at present.

Darren Kell, chief executive of Tanfield, said of its work on London black cabs: “This partnership will create a unique and highly marketable zero emissions vehicle.”