ODAC Newsletter - 16 May 2008
Welcome to the ODAC Newsletter, a weekly roundup from the Oil Depletion Analysis Centre, the UK registered charity dedicated to raising awareness of peak oil.
This week saw the oil price reach new heights, going to $126.98 on Tuesday, dropping back and then rallying. Key drivers this week came from around the world. Brazilís President da Silva told Der Spiegel that his country was considering joining OPEC. Whether or not they would be welcome in the cartel, such a move would be opposed by the US and Europe. Iran announced that it was undertaking a review of oil output, leading to fears that output would be cut. This worry appears so far to be unfounded, but fear of supply shortages had its effect. In China the devastating and tragic earthquake in Szechuan Province inevitably affected the energy industry there with coal mines, oil and gas wells needing to be shut for safety reasons.
A new delay of several years was announced this week in production at the major Kashagan oil field in Kazakhstan as the Eni-led consortium and the Kazakh government continue to wrangle. Meanwhile the IEA reported that the high oil price and economic downturn is causing them to reduce their demand figures for 2008. The forecast for reduction in demand is for the ëdeveloped economiesí while demand in China and India in particular continues to rise, thus echoing the Goldman Sachs report of last week. As a sign of the times, the IEA also reported that if we were to replace the current level of biofuels in the economy, which have been blamed for rising food prices, we would now need to extract an additional 1m b/d of crude oil. That figure is expected to rise to 1.5m b/d in 2008.
The role of the rising cost of oil production, as a result of both equipment and labour costs was highlighted this week by CERA. This will be strongly exacerbated as Petrobras has hired 80% of the available deepwater drilling rigs as part of its gearing up to exploit Tupi.
Rising oil costs in the US precipitated an interesting week on Capitol Hill this week. On Thursday Congress approved a bill, in defiance of President Bush, to halt oil stockpiling (in the Strategic Petroleum Reserve) while record prices persist. Earlier in the week, as President Bush began a tour of the Middle East, which will include Saudi Arabia, a group of Democratic Senators threatened to block an arms deal with the Kingdom unless it increased its oil output. The Saudi position, that oil supply is not the issue in recent high prices, was underlined by Saudi Oil Minister Naimi in a speech in S. Korea, which doesn't leave much room for optimism for Mr Bush.
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Oil prices soared to highs above $126 yesterday as the President of Brazil said that the South American country was considering joining Opec.
The latest record, the fifth in as many sessions, was driven by a new round of speculative buying as markets remained jittery about tight global supplies and booming demand. New York’s main oil futures contract, light sweet crude for June delivery, touched a high of $126.20 in early afternoon London trading. London’s Brent crude contract hit a record $125.90.
Investor sentiment was unnerved by comments from President da Silva of Brazil, where a series of oil discoveries promises to turn the country into a key global producer in the coming years.
In an interview in a German magazine, Mr da Silva said that Brazil aimed to produce oil from its Carioca field offshore from São Paolo in 2010 and was considering joining Opec, the cartel of 13 countries that produce 40 per cent of the world’s oil. “[From 2010] Brazil will then become a large oil exporter. We want to join Opec and try to make oil cheaper,” he was quoted as saying.
Last month Haroldo Lima, the head of Brazil’s National Petroleum Agency, cited data from Petrobas, the state oil company, which suggested that the Carioca field could contain reserves of as much as 33 billion barrels of oil. If confirmed, it would be the largest find in the world in the past 30 years.
Brazil is likely to come under heavy pressure from big consumer countries, especially the United States, not to join the cartel, which produces 32 million of the world’s 85 million barrels of oil a day.
This week, Opec brushed aside American calls for a production increase, insisting that the market was well supplied. Oil markets surged this week after a report from Goldman Sachs forecast that prices would reach $150 to $200 a barrel within two years.
Iranian President Mahmoud Ahmadinejad said a proposal for Opec's second biggest producer to cut crude output was under review by experts, Iran's semi-official Fars New Agency reported on Tuesday.
Oil Minister Gholamhossein Nozari said earlier on Tuesday the world's fourth-largest oil exporter was reviewing how much oil it pumps but had taken no decision on any changes.
"There has been such a proposal and it is under expert review," Fars quoted Ahmadinejad as saying when asked about the possibility of reducing output.
US oil futures hit a record $126.98 a barrel on Tuesday after Ahmadinejad's comment added momentum to a rally on tight fuel supplies.
Neither Ahmadinejad nor Nozari said why Iran was reviewing output, which hit 4.203 million barrels per day (bpd) in March, the highest level since its 1979 Islamic revolution.
"So far we have not decided to decrease output. We are reviewing the issue. The result of this review could lead to an increase or decrease of production," Nozari was quoted as saying by the Oil Ministry's website Shana.
"The amount of production and oil supply will be in proportion to the market's demand," he said.
Iran's semi-official Fars News Agency said on Tuesday Nozari had rejected talk of a cut.
Earlier, Fars quoted an informed source saying Tehran would begin curbing output next month, probably by between 400,000 bpd and one million bpd.
Refiners in Asia, customer for around 60% of Iranian crude, said they have not been informed of any output cuts.
The review of crude output may be connected to the growing volume of oil Iran is holding offshore in vessels being used as temporary storage, an oil industry source said. Iran would like to avoid adding to the offshore fleet, the source added.
The country has chartered a fleet of supertankers to store over 28 million barrels of crude, and booked another tanker to add to the 13 vessel fleet, shipping sources said on Tuesday.
Iran has trimmed exports by about 200,000 bpd since early April to match a fall in demand from refiners in maintenance, a top oil official said last week, adding shipments should recover during the second half of May when refiners restart production.
Bijan Khajepour, head of Atieh Bahar Consulting in Tehran, said he did not believe Iran would reduce output. He said Iran would lose international clients and that the country did not have enough capacity to refine the crude itself.
"I would be very surprised if they cut oil production," Khajepour told newswire Reuters.
Opec has repeatedly rejected calls for more oil to try to ease prices, saying the market has been driven by factors other than supply and demand.
Senior management at the state-run National Iranian Oil Company attended a scheduled annual meeting in Tehran on Tuesday, an industry source said.
AGIP-KCO, the consortium operating the giant Kashagan oil field in Kazakhstan, wants to push back the first production at the field further to 2012-13, a spokeswoman with the Kazakhstan energy ministry said Monday.
In January, following the negotiations with the Kazakhstan government and the consortium led by Italy's Eni, it emerged that the startup of oil production at the field was likely to be postponed to late 2011 from the latest deadline set for the second half of 2010.
The consortium is in talks with the energy ministry to agree on the development plan for the second stage of the project and is expected to make an announcement on the project's cost and timeline on June.
Two sources close to the consortium however said that the parties are unlikely to agree by the end of this month. AGIP-KCO was not available for immediate comment. In January, Kazakhstan reached an agreement with the Kashagan consortium on increasing its stake in the project to 16.81% from 8.33%, after months of disputes over the project development with then project operator Italy's Eni.
According to the latest agreement, the stakes of Eni, ExxonMobil, Shell and Total will be reduced to 16.81% each from 18.52%. ConocoPhillips' stake will be reduced to 8.39% from the current 9.26%, while Inpex Holding's 8.33% stake will be reduced to 7.56%.
Kashagan was originally expected to come on stream in 2005, but numerous delays led to Eni most recently forecasting a late-2010 start-up.
After Eni officially requested another postponement for the start of commercial production and a budget increase in June 2007, the government then said it wanted to raise Kazakhstan's stake in the project and force Eni to give up its role as project operator.
The International Energy Agency, the energy adviser to 27 nations, cut its forecast for global oil demand in 2008 for a fourth month as record prices crimp consumption in the world's most developed economies.
The forecast was cut by 390,000 barrels a day to 86.84 million barrels a day, from 87.23 million barrels last month, the Paris-based agency said today in its monthly report. After today's revision, which "may not be the last," the group expects world consumption to grow 1.2 percent this year, the slowest expansion since 2006.
Oil prices have doubled over the last year to $126.40 a barrel yesterday, and record energy costs may cause a global recession, IEA Executive Director Nobuo Tanaka said last month. Crude may rise to between $150 and $200 within two years as supply stagnates, Goldman Sachs Group Inc. analysts led by Arjun Murti said last week.
"Oil prices are too high for everyone, especially for developing countries which are also facing other price increases," Tanaka said at a conference in Paris today. "There's no clear single explanation for the high oil prices."
Stockpiles of crude and oil products in the developed economies of the OECD fell by 1.3 million barrels in March to 2.56 billion barrels, the IEA said. That's enough to satisfy demand in the world's most developed economies for 53.3 days and was little changed from last month, the group added.
"It's not surprising when you get a doubling of price to $120 a barrel that you get a reduction in demand," Lawrence Eagles, head of the IEA's Oil Industry and Markets division, said today in an interview. The reduction "is concentrated in developed economies at this point."
Demand in both in China and the Middle East will rise 4.9 percent this year, making up for a drop in demand from North America and Europe, the IEA said. Countries in Asia, including India and Indonesia, subsidize fuel to allow consumers to buy at below-market prices.
Indonesia, where subsidies on fuel will reach $12 billion in 2008, is under increased pressure to reduce them, while China may spend about $45 billion subsidizing oil refiners who suffer from fuel price caps.
Crude oil for June delivery rose 48 cents at $124.71 a barrel in electronic trading on the New York Mercantile Exchange as of 1:03 p.m. in London. The contract earlier fell as much as $1.13 to $123.10.
There's a decoupling, part of which "is based on price subsidies and as prices go up, these subsidies become considerable," Eduardo Lopez, an analyst at the IEA, said in a television interview. "Countries in Asia are struggling to keep them. Prices can't continue to rise indefinitely, something will have to give."
The Organization of Petroleum Exporting Countries, whose members produce more than 40 percent of the world's oil, will need to supply an average of between 31.3 and 31.6 million barrels a day of crude this year in order to balance global demand, less than April's 31.9 million a day, the report said.
"If we start seeing demand down by this amount, it should have an effect on the market," said Robert Montefusco, a broker with Sucden (U.K.) Ltd. in London. "I think OPEC has been right to say the market has a lot of crude around."
U.S. President George W. Bush will ask Saudi Arabia, the world's largest exporter, to increase oil production when he visits the kingdom later this week. A previous request by Bush for OPEC to raise output was snubbed when he visited in January.
"OPEC representatives appear to have dismissed the idea that releasing more crude to the market would affect runaway crude prices," the IEA report said.
OPEC will stick to its current schedule of meeting in September and won't produce more crude in the meantime, said Iran's OPEC Governor Hossein Kazempour Ardebili and Venezuelan Energy and Oil Minister Rafael Ramirez this week.
Saudi Arabian crude output was down 30,000 barrels a day to 8.77 million barrels a day in April, the IEA said. Iran produced 3.93 million barrels a day, less than last month's 4.02 million, the group said.
Biofuels will contribute about two-thirds of the total growth in non-OPEC fuel production this year, increasing by 425,000 barrels a day, the report said. Total non-OPEC supply will average 50.4 million barrels a day in 2008, an annual increase of 680,000 barrels.
To replace the global supply of ethanol and biodiesel-based biofuels added to the U.S. and European markets since 2005 would require an additional 1 million barrels of crude oil to be processed per day, the International Energy Agency said Tuesday.
Rising food prices have damped the political will behind biofuel policies, however, the IEA said it was unlikely biofuel targets would be scrapped in the near term.
"It is sobering to realize the amount of oil that would be needed to replace them," said the IEA.
Global biofuels supply is expected to grow to 1.5 million barrels per day in 2008, said the report.
Turmoil in financial markets is to blame for record oil prices, rather than a shortage of supply in a world that's seen the doubling of crude oil reserves since 1980, Saudi Arabian Oil Minister Ali al-Naimi said.
"Oil and other commodity markets are becoming increasingly more interconnected with the financial markets where rapid developments in the latter have intensified oil price volatility," he said in a speech today in South Korea, where he received an honorary doctorate from Seoul National University.
Oil prices have doubled in the past year on surging demand, disruptions to supply in places such as Nigeria and commodity purchases by investors as a hedge against a weakening U.S. dollar. Oil futures traded in New York reached a record $126.98 a barrel on May 13. New York oil was 78 cents higher at $125 a barrel as of 10:10 a.m. London time.
Demand for oil continues to rise in emerging markets even as prices reach a record, Naimi said.
Asian oil consumption is expected to increase by 20 million barrels a day by 2030, he said, accounting for almost two-thirds of the projected increase in global oil demand, predominantly met by Middle Eastern output. Asia's gain in demand is more than twice the current production of Saudi Arabia, the world's largest oil exporter.
New Oil Supplies
Bringing new oil supplies on stream, which costs more to produce, is also contributing to current price levels, the minister said. "Increasing costs of production, refining and other related infrastructure bottlenecks, as well as the rush into costly alternatives such as biofuels in some countries are increasing the costs of the marginal barrel worldwide."
U.S. President George W. Bush is on his way to Saudi Arabia where he will raise concern over high oil prices during his meetings with King Abdullah tomorrow. His first trip to the country this year on a similar quest did not yield additional oil. Naimi said at the time the kingdom would boost production only if the market justified it.
The Organization of Exporting Countries, which supplies more than 40 percent of the world's oil, has left oil output targets unchanged at its past three meetings on March 5, Feb. 1 and Dec. 5, saying supply was adequate. OPEC oil ministers have so far been adamant there is no need for any change in official policy before the next scheduled gathering in Vienna on Sept. 9.
OPEC's last production increase, of 500,000 barrels a day, was agreed in September last year and took effect Nov. 1. The 13-member group pumped 32.1 million barrels of crude oil a day in April, according to Bloomberg estimates, of which Saudi Arabia produced 9.1 million barrels.
Saudi Arabia plans to boost oil production capacity to 12.5 million barrels a day by 2009 and is investing $90 billion dollars until 2012 to raise oil output and building new refineries, Naimi said, reiterating previous comments.
The country plans to raise refinery capacity by 50 percent to more than 3 million barrels a day by 2013 to meet local and global demand for oil products such as gasoline and diesel. State-owned Saudi Aramco and Total SA will begin to build one of three new refineries in the kingdom, producing 400,000 barrels a day of refined products in Jubail, the companies said yesterday.
A group of Democratic Senators Tuesday threatened to block a multi-million dollar US arms deal with Saudi Arabia, unless the kingdom ups oil production and helps cut soaring gasoline prices.
The Senators introduced a resolution of disapproval on the arms sale, as President George W. Bush prepared to head for Saudi Arabia, partly on a mission to contain runaway oil prices.
"We are saying to the Saudis that, if you don't help us, why should we be helping you?" said New York Democratic Senator Chuck Schumer.
"We are saying that we need real relief, and we need it quickly. You need our arms, but we need you to cooperate and not strangle American consumers."
The resolution, expected to be fast-tracked to the Senate floor, would prohibit the mammoth arms sale unless Saudi Arabia agrees to increase oil production by one million barrels per day.
Schumer said such an increase could bring down the price of a gallon of gasoline at the pump by 50 to 75 cents.
"We're losing our wealth. Our economy is heading south. That is the highest priority, not the Saudis getting the top-notch weapons," Schumer said.
The US offered last year to sell Saudi Arabia and Gulf states a $20 billion arms package, as part of a wider regional program aimed at deterring Iran and Syria, Lebanon's Hezbollah and Al-Qaeda.
The resolution specifically mentions a sale of 900 kits to Saudi Arabia, which turn conventional bombs into laser-guided explosives or Joint Direct Attack Munitions (JDAM).
Schumer said a motion of disapproval needed only 51 votes in the 100 seat Senate to pass and could not be filibustered.
Bush was heading to the Middle East on Tuesday, for a tour which commemorates the 75th anniversary of the formal establishment of US-Saudi relations.
The White House has said he will stress US concerns about soaring oil prices when he meets King Abdullah on May 16, and is expected to press the Saudis to boost their oil production as a way of curbing spiraling fuel prices.
The Senate approved and sent to the White House late yesterday legislation directing President Bush to temporarily halt oil shipments to the government's emergency reserve. Bush has refused to halt the shipment of about 70,000 barrels of oil a day into the Strategic Petroleum Reserve, saying it was such a small amount that it has no impact on gasoline or crude oil prices. But the White House has indicated that he will sign the bill.
The world’s leading oil companies are struggling to contain spiralling industry costs which are compounding the upward pressure on global oil prices, according to a leading industry research group.
A report published today from Cambridge Energy Research Associates (CERA) and seen exclusively by The Times shows that the cost of a range of equipment, from drilling rigs and platforms to the construction of refineries and petrochemical plants, has risen by 6 per cent in the past six months alone and in many cases has doubled since 2005.
The sharp increases are forcing oil companies to delay major new projects, which in turn is having a significant impact on global oil production.
“Rising costs have become one of the new fundamentals driving the price of oil,” said Daniel Yergin, chairman of CERA and a leading industry authority.
“These costs are a serious concern and a major challenge for oil and gas companies and are contributing to the delays and postponements of many projects,” warned Pritesh Patel, CERA director.
The fastest increases of all were for specialist deepwater equipment for pumping oil from fields deep beneath the seabed.
Rising labour costs because of a global shortage of skilled personnel was also a major factor.
CERA noted that the rising oil price was creating a vicious circle effect by amplifying cost inflation for the industry in transportation and energy.
This in turn is forcing companies to delay projects, which restrains production and leads to constraints in supply, which forces up prices.
Mr Yergin noted that costs have been rising steadily since 2003 driven by booming global demand for oil, high-energy prices and the weak US dollar.
Raw materials for steel, such as iron ore, have risen 65 per cent this year already.
CERA said its Upstream Capital Costs Index, which measures costs in the exploration and production sector, has risen to a record 210 over the past six months from a previous high of 198. The index shows that a piece of equipment that cost $100 (£51) in 2000 would cost $210 today.
CERA’s Downstream Capital Costs Index, which monitors costs of building new refineries and petrochemical plants, rose from 166 to 176 over the same period.
Petroleo Basileiro SA, Brazil's state-controlled oil company, leased about 80 percent of the world's deepest-drilling offshore rigs to explore prospects including the Western Hemisphere's biggest discovery in decades.
Petrobras, as the Rio de Janeiro-based company is known, is hiring rigs that can drill in at least 3,000 meters (9,800 feet) of water, Chief Executive Officer Jose Sergio Gabriellie said in an interview last week. The world has 21 such vessels, according to Rigzone.com, which tracks the offshore drilling industry.
The company's "insatiable" demand is forcing producers including Exxon Mobil Corp. and BP Plc to pay more as they compete for the remaining units, said Kjell Erik Eilertsen and Truls Olsen, analysts at Fearnley Fonds AS in Oslo. Explorers that don't have rigs under contract may delay projects or pay rents of more than $600,000 a day.
"The oil majors have their backs against the wall as Petrobras has aggressively locked up significant rig capacity," said Omar Nokta, head of maritime research at Dahlman Rose & Co. in New York.
Petrobras is negotiating for as many as 17 more vessels to probe the Tupi discovery and neighboring fields, said Bill Herbert, an analyst at Simmons & Co. International in Houston. The company already controls almost seven times as much capacity as the next biggest user of rigs that can drill in 7,500 feet of water, according to research by Dahlman Rose.
U.S. and European oil companies probably will pay $50,000 more per day to lease deepwater rigs during the next three years because Petrobras has already contracted for so much of the worldwide fleet, Nokta said. Such units are designed to cope with high seas and hold equipment needed to bore beneath the seafloor and identify oil and gas deposits as much as 6 miles below the ocean surface.
Exxon Mobil, the world's biggest oil company, plans to begin drilling a Brazilian prospect known as BM-S-22 in the third quarter with a Seadrill Ltd. rig in 2,100-meter seas. New York-based Hess Corp. and Petrobras own stakes in the project.
Record oil prices and cost cutting have made up for rising drilling expenses, Exxon Mobil spokesman Henry Hubble told investors on a May 1 conference call. First-quarter profit climbed to $28.62 per barrel of oil equivalent produced from $23.27 a year earlier. Irving, Texas-based Exxon Mobil doesn't disclose how much it spends on rigs.
London-based BP had profit of $21.42 per barrel produced in the first quarter, up from $13.25 a year earlier. The company discovered oil last month 31,150 feet below the surface of the Gulf of Mexico in a prospect called Kodiak. BP doesn't report drilling costs.
'Return to Balance'
"There's more demand than there are available rigs," BP spokesman Daren Beaudo said. "We expect that over the next couple of years, the rig count will return to balance."
At Petrobras, net income per barrel jumped 88 percent to $18.24. The increase outpaced the gains of 23 percent at Exxon Mobil and 62 percent at BP.
Petrobras has signed leases this year for six deepwater rigs, more than twice as many as any other producer, according to Dahlman Rose. The contracts have an average duration of five years and four months at rates of $410,000 to $580,000 a day.
Exxon Mobil leased Seadrill's West Polaris unit last month for $600,000 a day, Nokta said. BP agreed on May 1 to pay $540,000 a day for a Pride International Inc. drillship, $60,000 a day more than the company committed to three months earlier for an identical Pride rig, he said.
Petrobras plans to start pumping oil in the first quarter of 2009 from Tupi, the biggest find in the Americas since Mexico's 1976 discovery of the Cantarell field in the Gulf of Mexico. Petrobras also is evaluating as many as seven nearby fields, including the Carioca prospect, Gabrielli said.
Petrobras has risen 32 percent in Sao Paulo trading since announcing the Tupi discovery in November, quadruple the gain by major U.S. oil companies.
CEO Gabrielli, 59, said Petrobras began signing multiyear drilling leases as far back as 2004 because it foresaw a shortage of deepwater vessels.
"We could get very good deals at that time," Gabrielli said. "We moved some of our contracts from $70,000 a day to $250,000 a day, which seemed like a very large increase back then, but now, of course, drilling rigs are $600,000 and $700,000 a day."
Petrobras is in talks with Transocean Inc., the world's biggest offshore driller, to extend leases as much as three years ahead of expiration, Robert Long, chief executive officer for the Houston-based contractor, said last week.
BP is caught in the crossfire of a growing struggle over the ownership of its Russian oil venture, TNK-BP, as a shareholder in the venture launched a fresh legal action to ban 148 workers seconded from BP from working at the company.
TNK-BP said on Wednesday that a Russian regional court had issued an injunction against the company’s employment of BP specialists after a minority shareholder in the company filed suit against TNK-BP’s service agreement with the BP workers.
The move is a new blow for the company, which was raided in March by Russian security services, while an employee was briefly arrested on charges of industrial espionage.
The company’s biggest oil field, Samotlor, is being probed for possible environmental violations and the company has been hit with a $255.3m (£130.9m) back tax claim. The visas of the BP workers seconded to TNK-BP were declared invalid in March but the issue was recently resolved – until the lawsuit again prevented the specialists from going to work. The added pressure comes amid increasing signs Gazprom, the Russian state-controlled energy major, may be preparing to take a stake in the company, which is 50-50 owned by BP and a clutch of Russian billionaires. TNK-BP’s Russian shareholders have repeatedly denied that they are seeking to sell, but a moratorium on share sales expired at the end of last year.
Bankers familiar with the situation said the onslaught against the company appeared to be linked to infighting among TNK-BP’s Russian shareholders before a share sale, as they position for a better slice of the deal.
TNK-BP’s Russian billionaire shareholders include Mikhail Fridman and German Khan of Alfa Group, Len Blavatnik of Access Industries, and Viktor Vekselberg’s Renova holding company.
The minority shareholder that filed the suit in arbitration courts in Moscow and the Tyumen region in Siberia was a small Moscow brokerage called Tetlis, the company said in a statement. Tetlis advertises itself on its website as an expert in taking control of Russian business assets.
It lists Alexander Tagayev, a former employee of Alfa Bank, as its general director, and Vadim Zykov, a former employee of Alfa Invest management, as its executive director. Both companies are key subsidiaries of Alfa Group. There was no immediate sign that the directors could have been working at the behest of Alfa Group.
TNK-BP said the actions had no legal merit. The court in Tyumen issued the injunction on May 5 and it is due to hold preliminary hearings on May 20.
As the company faces increased legal attack, a deal to sell its flagship Kovykta gas field to Gazprom is being repeatedly delayed. Gazprom had said it expected the deal to be closed by the end of April. But the ongoing wrangling is prompting suggestions by industry insiders that the deal could be folded into a larger operation to give Gazprom a stake in TNK-BP.
There is a broad consensus in Brussels on the need for an external energy policy to diversify suppliers and routes and loosen Russia’s grip on the European natural gas market.
Writing recently about the emerging European energy diplomacy, Benita Ferrero-Waldner, commissioner for external relations, said the European Union had signed or was negotiating agreements with Azerbaijan, Ukraine, Kazakhstan, Turkmenistan, Algeria, Egypt, Morocco, Jordan, Iraq, the countries of the Gulf Co-operation Council and, “when the political situation will allow it”, it would negotiate with Iran.
The list looks impressive but, in fact, the scheme makes little sense. Almost everything in this vision – the availability of gas resources, the possibility to develop them, the political and commercial feasibility of the transport infrastructure – is hypothetical at best.
The recent announcements about Turkmen and Iraqi gas exports to Europe illustrate the virtual nature of the EU’s foreign energy policy. It is not clear whether Turkmenistan, given existing contractual commitments, has 10bn cubic metres of gas available for the EU. But it will not be tested as the proposed options to ship Turkmen gas to the western shore of the Caspian Sea are nowhere near credible. In any case no commercial contract has been signed. The Iraqi announcement (of 5bn cubic metres annually starting “in the next 3-4 years”) has even less commercial reality behind it.
The common denominator in these two announcements is the Nabucco project, a new “gas corridor” to Europe through Turkey that is the centrepiece of the European plan to diversify away from Russia. Yet there is no earmarked gas to feed Nabucco, either in central Asia or the Middle East. The pipeline is conceived as an enabling project that, once built, will gather gas from various sources.
But financing a multibillion euro international gas pipeline requires a long-term contract between buyers and an upstream company controlling a large resource base. Diplomatic involvement can help reduce non-commercial risk, but cannot substitute for commercial logic. EU officials are desperate to show there is potentially a lot of gas that could flow through Nabucco, but even if that is true it does not make it more likely to be built.
This is not necessarily worrying. The idea that Europe lacks, or will soon lack, access to a diversified and secure (read: non-Russian) natural gas supply is not backed by the data. Even as Russia expanded exports to Europe, its share of European imports (for the 27 current member states) has roughly been halved since 1980, from 80 per cent to about 40 per cent. Since 1990, 80 per cent of the rise in EU gas imports has been from non-Russian sources. Europe already enjoys a diversified natural gas supply. Russia’s failure (or unwillingness) to develop its resource base and expand exports to Europe is bound to make the European market all the more attractive for other exporters in the coming years – though it will also mean higher prices.
Europe faces three main gas security challenges. The first is to export gas supply diversity from western Europe to eastern Europe, where the rate of dependence on Russia is much higher but gas markets are much smaller. Market integration is the only way to do that. A single European gas market would create de facto solidarity between all consumers and the bilateral dependencies would become largely irrelevant.
The second challenge is to increase the ability of Europe as a whole to cope with supply disruptions, whatever their causes.
Here again, market integration and competition is the way to go. A well-functioning market transforms any localised physical shortage into a universal price increase. Additional measures such as interruptible contracts and emergency inventories would help reduce the economic impact of supply shocks.
The third challenge is to remove the debilitating effect of the EU-Russia gas relationship on EU foreign policy towards Russia. A European integrated and flexible gas market would make eastern Europe more secure, just as it would make the relationship between Gazprom and large utility importers in Germany, Italy or France less cosy. This is a better position from which to speak with one voice to Moscow.
Building a well-functioning internal gas market is less grandiose than developing a foreign energy policy, but also more promising. This is what the Commission should concentrate on.
The writer is a researcher at EPRG (Cambridge University) and the European Council on Foreign Relations
Millions of homeowners face a second rise in the gas and electricity bills this year as British Gas owner Centrica grapples with a slump in its profits.
British Gas customers were dealt a 15 per cent rise in their energy bills in January as the company struggled to deal with the near doubling in the cost of buying gas in the wholesale markets.
That price rise did not go far enough for Centrica however as a trading update revealed that as the continued rise in wholesale gas prices "has caused profit margins in British Gas in the first half of the year to be squeezed to levels below our long run expectations."
British Gas has lost 100,000 customers since the January price rises, leaving total customer base at 15.9 million the company reported today. The group had 17.7 million British Gas customers at the start of 2005.
The loss in customers however will not stop Brtish Gas from hiking its prices again shortly. Centrica warned today in a statement to the stock exchange: "While the current outlook for gas prices does create a challenging environment for energy suppliers, we will take the necessary action to deliver reasonable margins in the retail business."
Centrica is also suffering from being held to about 16 large loss-making energy contracts struck years ago directly with large UK industrial companies. The company previously guided that losses for these contracts would be between £100 million and £200 million this year. The recent hike in wholesale gas prices however means that losses on those contracts are now expected to be "materially higher than previous guidance."
U.S. natural gas rose to the highest since December 2005 after Enterprise Products Partners LP delayed resumption of a pipeline.
Natural gas for June delivery rose as much as 37.2 cents, or 3.3 percent, to $11.794 per million British thermal units in electronic trading on the New York Mercantile Exchange. The contract traded at $11.705 at 8:37 a.m. London time. Futures gained 56 percent so far this year.
Enterprise yesterday delayed the start of its Independence Trail natural gas pipeline in the Gulf of Mexico to the first half of June, a month later than planned. At full production, the link accounts for 2 percent of U.S. gas supplies and represents 10 percent of deliveries from the Gulf, according to the Enterprise Products Web site.
The outage coincided with the annual push by utilities and large industrial consumers to build stockpiles of gas during the U.S. summer. Utilities and large industrial consumers build gas stockpiles during the summer to meet their needs in winter.
About 900 million cubic feet a day of gas moves on the line from its hub in the Gulf. It closed on April 9 after a leak in a flex joint was detected.
On April 11, Enterprise declared force majeure, a clause in contracts allowing the company to blame an unexpected or uncontrollable event for the shutdown and avoid penalties for failing to fulfill delivery contracts
China, the world's biggest producer and consumer of coal, has shut all coal mines in southwestern Chinese areas that were stuck by the nation's strongest earthquake in 58 years.
Coal mines in other regions should ``actively organize production'' to ensure domestic supply and stabilize coal prices, the Beijing-based China National Coal Association said in a statement dated yesterday. It didn't give any figures for the production that has been shut down since the May 12 quake.
The government on May 13 ordered coal mines, chemical plants and oil and gas wells in areas affected by the earthquake to halt production to avoid further casualties. The magnitude 7.9 temblor has killed about 15,000 people.
Twenty-two coal mines in Sichuan, Chongqing and Gansu provinces had been affected by the quake as of 4 p.m. May 13, the National Development and Reform Commission, China's top economic planner, said yesterday. Twenty coal miners have been killed and 132 are trapped after the earthquake struck near the southwestern city of Chengdu, it said.
On the face of it, the two deals, announced yesterday on opposite sides of the Atlantic, looked entirely unrelated.
Chloride Group, a provider of "uninterrupted power supply"—big batteries and smart technology boxes that keep the servers running and the refineries pumping in the event of a blackout—yesterday rejected a £657m takeover bid from American industrial conglomerate Emerson.
Having recently hiked its growth forecasts against a "background of deteriorating power quality" around the world, the company is predicting major growth in demand for its kit. The approach, it said, "materially undervalued" its business. Emerson, a company that has built itself into the largest supplier of power equipment to the oil industry through a string of acquisitions, is not keen to be drawn into paying much more for the company. If it can't reach an agreed deal with Chloride's board, it may just look elsewhere.
International Power meanwhile agreed to pay £439m to the US buyout group Warburg Pincus for four power plants in the mid-west and eastern part of the United States: plants that will spend most of their lives standing idle. The "peaking" plants make most of their money via subsidies from government in America, which pays for them to be kept "hot"—something akin to idling an engine—so that they can immediately go into action when demand spikes surpass the capabilities of the fleet of plants in place to provide baseload power. Much less efficient than so-called combined-cycle plants, which utilise waste heat from one turbine to power another, the peaking plants are built to run only when they can capture the high prices companies will pay when demand is highest.
There is a commonality to both transactions. Both can be boiled down to an issue that has economists increasingly worried: energy supply and security. There is a causal relationship between energy usage and economic growth. It was a point made yesterday by Rodrigo de Rato. In a speech in London on energy's role in the economy, the former head of the International Monetary Fund issued a stark warning about the growing gap between demand and new supply.
"Since 2006 we've seen more and more constraints of supply," he said. Manifested in part by the soaring price of oil, he pointed out that under-investment in new supply has become severe, calling it "very dangerous for growth. It is clearly a constraint." He added: "There is no question that we are at a peak in term of energy prices, but we are also at a low in terms of spare capacity."
In short, economies can't continue to grow if they are starved of the power they need to do so. With power scarcity worsening, it is of little surprise that price inflation is rampant. The oil price has reached new highs almost weekly in recent months. Centrica, the country's biggest energy supplier, yesterday warned of unprecedented increases to household energy bills, coming as they would on top of the average 15 per cent hikes pushed through earlier this year. Economists had already begun to fret that rising bills were diverting money that would otherwise be spent on other sectors of the economy, adding another brake on growth. In response to Centrica's hints yesterday, Joe Malinowski of the energyshop.com said: "Now would be a good time to start panicking."
Thus far, emerging economies like China and India have been proceeding relatively unscathed by the problems being experienced by the likes of the United States – which is sliding toward recession if it's not there already – and much of Europe. Yet the sheer rate of growth in the developing world has begun to put the energy system under increasingly heavy strain. China, India and South Africa all hit the headlines this year after power cuts led entire industries – especially the power-hungry mining industries of China and South Africa – to shut down for days at a time. Thousands of Indians took to the streets earlier this month after swathes of the country were left without electricity. The growth of these economies is acting as a ballast against the global economy following America and Europe on their downward slope. If they are dulled, it could exacerbate an already deteriorating situation.
It is little wonder then why Emerson has shown such an interest in Chloride. Earlier this year, the company opened regional offices in Singapore and Russia to capitalise on the opportunities in those burgeoning markets. Specialising in high-end sectors like information technology, financial services and oil and gas, the company's clients will happily pay to keep the lights on when sudden shut-downs can damage sensitive equipment or lead to data loss. Chloride also ensures that the power that does come through is "clean", evening out the spikes and troughs that come through the system and can be potentially ruinous.
The deteriorating energy backdrop means that Chloride's services can command an increasingly high premium. It also bodes well for those providing the desperation wattage – like International Power's new acquisitions. In the two regions in which the new plants are located, spare generation capacity is predicted to fall sharply every year out to 2013. That will force prices ever higher. "The tightening supply-demand conditions are the rationale for this investment," an International Power spokeswoman said.
Twenty-foot waves battered the Lisa A on the night of Sept. 16 in the Irish Sea, damaging two of the turbine-installation platform's undersea legs and forcing the crew to evacuate as it listed to 30 degrees.
The barge has been out of service ever since, halting work on E.ON AG's Robin Rigg wind farm for seven of the past eight months because only one short-term replacement could be found.
Equipment shortages and rising costs are stalling as much as $120 billion of offshore projects the European Union and other governments are counting on to reduce the use of fossil fuels and combat global warming. Royal Dutch Shell Plc on May 1 said it planned to sell its 33 percent stake in the London Array, the world's biggest sea-based wind park.
"It's been more difficult to build offshore projects than everyone thought," said Goeran Lundgren, head of Nordic power generation at Stockholm-based Vattenfall AB, which has put a 640- megawatt wind farm in the Baltic Sea on hold. "I don't think we'll see any large-scale offshore parks until we've taken a few big development steps."
London Array, proposed by Shell, E.ON and Dong Energy A/S in 2001, would be a collection of as many as 341 turbines 12 miles off the southeast coast of Britain. It would generate 1,000 megawatts of power, enough to supply a quarter of London's homes.
Because they use wind -- not coal, oil or natural gas -- to generate electricity, such projects produce no carbon dioxide, the gas blamed for global warming. Building offshore also increases production by providing access to more consistent winds. The EU has set a goal of producing 4 percent of the region's electricity from sea-based installations by 2020.
"Offshore wind is going to be a hugely important part of our renewable energy policy," U.K. Energy Minister Malcolm Wicks said in an interview.
Shell's decision to sell its stake in London Array shows how difficult it will be to meet those goals. After the announcement on May 1, Skaerbaek, Denmark-based Dong Energy and Dusseldorf- based E.ON, Germany's biggest utility, said they may reduce the size of the project.
"Rising costs of materials," including steel and turbines "are the reasons for reassessment of our position," said Shell spokeswoman Eurwen Thomas.
The price of offshore turbines rose 48 percent to 2.23 million euros ($3.45 million) per megawatt in the past three years, according to BTM Consult APS, a Danish wind power consultant. By comparison, land-based rotors cost 1.38 million euros per megawatt after rising 74 percent in the same period.
Vestas Wind Systems A/S of Randers, Denmark, and General Electric Co. of Fairfield, Connecticut, the world's biggest turbine makers, are focusing on onshore equipment because it's more profitable and easier to install.
Vestas hasn't sold a sea-based turbine since December 2006. The company suspended sales of its 3-megawatt V90 offshore model after it had to replace faulty gearboxes at three wind parks. It began offering the model again this month.
Offshore "is a niche," said Chief Executive Officer Ditlev Engel. "Looking ahead, it will basically be onshore."
Projects also are being held up by a shortage of construction vessels and the high-voltage cables needed to link wind parks to the electricity grid, according to Ben Warren, director of renewable energy at Ernst & Young LLP.
Sea-based wind farms use rotors that are as much as 100 meters (328 feet) in diameter, perched atop towers rammed into the seabed. Installation requires platforms equipped with cranes and stabilizing legs.
There are only four self-powered turbine-installation vessels in the world, according to Lloyds Register Fairplay, a shipping data provider.
E.ON hired a replacement for Lisa A last December but had to stop work at Robin Rigg again after a month, when the ship moved on to another job. The utility plans to restart construction on the 180-megawatt project this month, after Lisa A is repaired.
The offshore power industry had counted on getting vessels and workers from the North Sea oil and gas industry as those fields become depleted, Warren said. Instead, a five-year oil rally has drawn resources to Brazil, West Africa and the Gulf of Mexico, where production is more profitable.
"The volume of the manufacturing challenge is pretty enormous," said Tom Murley, who manages HgCapital's 300 million- euro Renewable Power Fund. He hasn't invested in offshore wind because of concerns about costs and reliability.
Emerging Energy Research, a Cambridge, Massachusetts-based consulting firm, estimates utilities worldwide will build as much as 40,000 megawatts of offshore wind parks by 2020 at a cost of $120 billion. About 1,100 megawatts had been installed at the end of last year.
The biggest sea-based project currently operating is Dong's 166-megawatt Nysted wind farm, built five years ago off the Danish island of Lolland.
Utilities will hesitate to build large-scale offshore projects until supplies of material and equipment have stabilized, said Warren at Ernst & Young.
"At the end of the day, nobody wants a 4 billion-euro white elephant in the middle of the sea," he said.
Royal Dutch Shell has apparently caved into political pressure from the US in backing out of a $10 billion gas project in Iran.
Shell and its partner, the Spanish oil firm Repsol, are not going ahead with phase 13 of the giant South Pars project on the border with Qatar, the company confirmed this morning.
The two companies signed a deal last year with the Iranian national oil company to develop phases 13 and 14 of South Pars.
They have now agreed "the principle of substitution of alternative later phases" for the project, Shell said in a formal statement, which would allow other oil companies to step in.
Total, the French oil company that is also involved in South Pars, confirmed this morning it was still interested in the project despite the withdrawal by Shell and Repsol.
Shell is considering taking part in phases 20 and 21, which are a long way off being developed, the statement added.
America has been putting political pressure on Western companies not to participate in projects in Iran because of suspicions that the Islamic regime is developing a nuclear arms programme.
The Gaza Strip faced new power blackouts on Sunday after its only electricity plant shut down after receiving no fuel from Israel in four days, senior Palestinian officials said.
"There is a very serious crisis with respect to electricity," Jamal Al-Dardasawi, spokesman for the Gaza electrical distribution company, told newswire AFP.
"With the power station having shut down we are only receiving 120 megawatts from Israel and we need around 250 megawatts. There is a shortfall of around 50%," he said.
The Gaza plant provides 30% of the impoverished and densely populated territory's electricity, with most of the rest directly supplied by Israel and a small amount coming from Egypt.
Israel cut off fuel shipments to the Hamas-ruled territory after Palestinian militants attacked Gaza's main Nahal Oz fuel terminal on April 9, killing two Israeli civilian employees.
It later resumed the supply of industrial-grade fuel for the power plant, which provides most of the electricity for Gaza City and surrounding areas, despite several subsequent attacks on Nahal Oz and other crossings.
An Israeli army spokesman on Saturday said the last shipment of fuel for the plant entered the territory on Wednesday and that another was due to arrive on Sunday, but the terminal remain closed.
"Until now we haven't received any fuel. The shipment was supposed to arrive this morning but we didn't receive anything," said Rafiq Maliha, the plant's director.
Another army spokesman contacted on Sunday, who asked not to be named, said the Ministry of Defence had decided not to open the crossing.
Israel sealed the Gaza Strip off from all but vital humanitarian aid since Hamas - which is pledged to its destruction - seized power in June 2007 after routing forces loyal to Palestinian president Mahmud Abbas.
In April Palestinian militants launched a series of attacks on the crossings used to bring in aid, as Israel accused Hamas of deliberately hindering its delivery to worsen the humanitarian situation in the Gaza Strip.
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