ODAC Newsletter - 30 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.
$130 oil, lorry drivers’ protests and a massive power cut, this was the week that the British government began to panic in public about energy – as well it might, given the state of British energy policy.
Gordon Brown wrote an article blaming the soaring oil price on “technical, financial and political” factors, while missing the most important from his list: “geological”. He and Alistair Darling compounded the impression of men who really don’t get it by hijacking a meeting of UK Oil & Gas trade group and pleading with the assembled oil men to pump harder. Every little helps they cried, while making much song and dance of a paltry tax incentive on some small fields that will raise output by just 20,000 barrels per day, and while other ministers hinted strongly at a flip-flop on fuel and vehicle excise duty in the offing.
George Monbiot’s open letter to King Abdullah of Saudi Arabia highlighted the gear-grinding internal contradictions of policy, while ODAC trustee David Strahan explained why our leaders are so conflicted: the alternative to blaming OPEC is to get serious about cutting demand, which they are evidently too terrified to do. The Environmental Audit Committee this week recommended the adoption of personal carbon trading as a much better way of cutting demand than high taxes, but both Labour and the Tories dismissed it, in identical terms, as “an idea whose time has not yet come”.
The story of the International Energy Agency’s reassessment of the global oil resource, and growing hints that they will conclude it is much smaller than their previous forecasts have assumed, must by now be high on the government’s radar. Broken by lastoilshock.com last year, the story subsequently appeared in the Financial Times, the Wall St Journal and last week in the Observer. Perhaps it is in this light that we should consider a less widely covered aspect of British energy policy – that the government has claimed an extension of territorial waters around Ascension Island, St Helena and Tristan da Cunha. A Foreign Office official told the Telegraph, apparently with a straight face, that the move was intended to "protect the environment".
Meanwhile countries with a claim on Arctic hydrocarbons agreed to make nice and abide by the UN law of the sea rather than creating some new institution, while they gather information to settle the competing claims. Let’s see how long the harmony lasts.
Elsewhere there was a clutch of bearish developments on the oil supply: production at Cantarell continued to plunge; yet another pipeline attack in the Niger Delta; Indonesia pulled out of OPEC because its output has fallen so far that it is now an oil importer; the TNK-BP shareholder brawl got nasty; OPEC’s president ruled out an output hike; and Morgan Stanley said Brent crude could easily hit $150.
In another sign of desperation ministers claimed repeatedly this week that plans for future diversification out of oil would moderate the current price. Gordon Brown grabbed a headline by restating the position previously set out by Business Secretary John Hutton that Britain should not just replace but expand its nuclear fleet. Given the lead-times, can they seriously believe these issues are connected and that one will help the other in the short term? If so we really are in trouble.
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The International Energy Agency has ordered an inquiry into whether the world could run out of oil, The Observer has learnt. It will consider whether fears about global shortages are real.
Observers say that the IEA, which provides authoritative research to OECD countries, is concerned that the supply of oil could fail to keep up with demand driven by the fast-industrialising economies of China and India. The investigation comes at a time of mounting concern that the sky-high price of oil could derail the global economy and plunge the world into recession. Oil hit $135 a barrel last week, the highest price on record, forcing airlines to cut back on flights to save fuel and pushing up the cost of living around the globe.
Lawrence Eagles, head of oil markets research at the IEA, said the situation was complex but added: 'Our findings will form part of short- and long-term forecasts that we intend to publish in July and November. Up to now we have believed that supply can cope with demand. One caveat is that we don't know for certain whether estimates of reserves in countries such as Saudi Arabia are entirely accurate.'
John Waterlow, analyst at oil research consultancy Wood Mackenzie, said: 'Many oil-producing countries are closed, secretive societies where it can be difficult to pinpoint the level of provable reserves.'
Analysts disagree about cause of the jump in oil prices - some have blamed commodity speculators but others point to surging international demand from Asia and South America as factors that have pushed the price higher.
IEA researchers have warned that even if there is enough oil under the ground, which is probable, supply difficulties could emerge because national oil companies and Western multinationals have failed to invest sufficiently in the equipment and pipelines needed to extract oil and convey it to consumers.
The IEA is worried about an extremely narrow capacity margin by 2012, when demand is expected to have reached 95 million barrels a day. At that point spare capacity could be at just a million barrels a day - which may not be enough to make good any sudden interruption of supply from volatile countries such as Nigeria or Venezuela - or Iraq, which is now estimated to have overtaken Saudi Arabia as the largest holder of reserves.
Energy Watchdog Warns Of Oil-Production Crunch IEA Official Says Supplies May Plateau Below Expected Demand
The world's premier energy monitor is preparing a sharp downward revision of its oil-supply forecast, a shift that reflects deepening pessimism over whether oil companies can keep abreast of booming demand.
The Paris-based International Energy Agency is in the middle of its first attempt to comprehensively assess the condition of the world's top 400 oil fields. Its findings won't be released until November, but the bottom line is already clear: Future crude supplies could be far tighter than previously thought.
A pessimistic supply outlook from the IEA could further rattle an oil market that already has seen crude prices rocket over $130 a barrel, double what they were a year ago. U.S. benchmark crude broke a record for the fourth day in a row, rising 3.3% Wednesday to close at $133.17 a barrel on the New York Mercantile Exchange.
For several years, the IEA has predicted that supplies of crude and other liquid fuels will arc gently upward to keep pace with rising demand, topping 116 million barrels a day by 2030, up from around 87 million barrels a day currently. Now, the agency is worried that aging oil fields and diminished investment mean that companies could struggle to surpass 100 million barrels a day over the next two decades.
The decision to rigorously survey supply -- instead of just demand, as in the past -- reflects an increasing fear within the agency and elsewhere that oil-producing regions aren't on track to meet future needs.
"The oil investments required may be much, much higher than what people assume," said Fatih Birol, the IEA's chief economist and the leader of the study, in an interview with The Wall Street Journal. "This is a dangerous situation."
The agency's forecasts are widely followed by the industry, Wall Street and the big oil-consuming countries that fund its work.
Phil Flynn of Alaron Trading on the disappearance of Gulf coast crude oil and its knock-on effects. MarketWatch's Steve Gelsi reports.
The IEA monitors energy markets for the world's 26 most-advanced economies, including the U.S., Japan and all of Europe. It acts as a counterweight in the market to the views of the Organization of Petroleum Exporting Countries. The IEA's endorsement of a crimped supply scenario likely will be interpreted by the cartel as yet another call to pump more oil -- a call it will have a difficult time answering. Last week, the Saudis gave President Bush a lukewarm response to his plea for more oil, saying they were already adding 300,000 barrels a day to the market, an announcement that did nothing to cool prices.
At the same time, the IEA's conclusions likely will be seized on by advocates of expanded drilling in prohibited areas like the U.S. outer continental shelf or the Alaska National Wildlife Refuge.
The IEA, employing a team of 25 analysts, is trying to shed light on some of the industry's best-kept secrets by assessing the health of major fields scattered from Venezuela and Mexico to Saudi Arabia, Kuwait and Iraq. The fields supply over two-thirds of daily world production.
The findings won't be definitive. Big producers including Venezuela, Iran and China aren't cooperating, and others like Saudi Arabia typically treat the detailed production data of individual fields as closely guarded state secrets, so it's not clear how specific their contributions will be. To try to compensate, the IEA will use computer modeling to make estimates. It will also collect information gathered by IHS Inc., a major data and analysis provider based in Colorado, as well as the U.S. Geologic Survey, a smattering of oil and oil-service companies, and national petroleum councils.
But the direction of the IEA's work echoes the gathering supply-side gloom articulated by some Big Oil executives in recent months. A growing number of people in the industry are endorsing a version of the "peak-oil" theory: that oil production will plateau in coming years, as suppliers fail to replace depleted fields with enough fresh ones to boost overall output. All of that has prompted numerous upward revisions to long-term oil-price forecasts on Wall Street.
Goldman Sachs grabbed headlines recently with a forecast saying that oil could top $140 a barrel this summer and could average $200 a barrel next year. Prices that high would add to the inflationary pressures weighing on the world economy and to the woes of fuel-sensitive industries such as airlines and autos.
The IEA's study marks a big change in the agency's efforts to peer into the future. In the past, the IEA focused mainly on assessing future demand, and then looked at how much non-OPEC countries were likely to produce to meet that demand. Any gap, it was assumed, would then be met by big OPEC producers such as Saudi Arabia, Iran or Kuwait.
But the IEA's pessimism over future supplies has been building for some time. Last summer, the agency warned that OPEC's spare capacity could shrink "to minimal levels by 2012." In November, it said its analysis of projects known to be in the works suggested that the world could face a shortfall by 2015 of as much as 12.5 million barrels a day, unless there was a sharp drop in expected demand. The current IEA work aims to tally the range of investments and projects under way to boost production from the fields in question to get a clearer sense of what to expect in production flows.
"This is very important, because the IEA is treated as the world's only serious independent guardian of energy data and forecasts," says Edward Morse, chief energy economist at Lehman Brothers. Examining the state of the world's big oil fields could prod their owners into unaccustomed transparency, he says.
Some critics of the IEA, while praising its new study, say a revision in the agency's long-term forecasting is long overdue. The agency has failed to anticipate many of the big energy developments in recent years, such as the surge in Chinese demand in 2004 and this year's skyrocketing prices. "The IEA is always conflicted by political pressures," says Chris Skrebowski, a London-based oil analyst who keeps his own database on big petroleum projects and is pessimistic about supply. "In this case I think they want to make as incontrovertible as possible the fact that we are facing a real crunch."
The U.S. Energy Department's own forecasting shop, the Energy Information Administration, has long stuck to the same demand-driven methodology as the IEA, assuming that supply will keep up with the world's growing hunger for oil. But the U.S. agency also has embarked on its own supply study, which it hopes to complete this summer. Like the IEA, its preliminary findings are somewhat gloomy: They suggest daily output of conventional crude oil alone, now about 73 million barrels, will plateau at 84 million barrels, and that it will take a significant uptick in production of nonconventional fuels such as ethanol to push global fuel supplies over 100 million barrels a day by 2030.
"We are optimistic in terms of resource availability, but wary about whether the investments get made in the right places and at a pace that will bring on supply to meet demand," says Guy Caruso, the U.S. agency's administrator.
In Paris, analysts at IEA also fret that a lack of investment in many OPEC countries, combined with a diminished incentive to ramp up output, casts serious doubt over how much the cartel will expand its production in the future. The big OPEC producers have been raking in record profits, creating a disincentive in many countries to sink more billions into increased oil production.
Meanwhile, politics and other forces are delaying projects that could bring more oil on-stream. Continued fighting in Iraq has stymied efforts to revive aging fields, while international sanctions on Iran have kept investments there from moving forward. Rebel attacks in Nigeria and political turmoil in Venezuela have cut into both countries' output. Big non-OPEC producers such as Mexico and Russia, which have either barred or sidelined international operators, are seeing production slump. The U.S., with a legal moratorium barring exploration in 85% of its offshore waters, is struggling to keep its output steady.
The IEA study will try to answer one question that bedevils those trying to forecast future prices and the supply-demand balance: How rapidly are the world's top fields declining? The rates at which their production dwindles over time are a much-debated barometer of the health of the world's oil patch.
A study released earlier this year by the Cambridge Energy Research Associates, a consulting firm and unit of IHS, concluded that the depletion rate of the world's 811 biggest fields is around 4.5% a year. At that rate, oil companies have to make huge investments just to keep overall production steady. Others say the depletion rate could be higher.
"We are of the opinion that the public isn't aware of the role of the decline rate of existing fields in the energy supply balance, and that this rate will accelerate in the future," says the IEA's Mr. Birol.
Some analysts, however, contend that scarcity isn't the issue -- only access to reserves and investment in tapping them. "We know there is plenty of oil and gas resource in the world," says Pete Stark, vice president for industry relations at IHS. He says the difficulties of supply aren't buried in oil fields, but are "above ground."
Mr. Morse at Lehman Brothers notes that there are plenty of questions about supply yet to be answered. "However confident the IEA may be about the data it has, they know nothing about the resources we've yet to discover in the deep waters or in the arctic," he says.
Mexico City - Production at the giant Cantarell complex in the Sound of Campeche -- long the mainstay of Mexico's crude output -- slumped by 33% year on year in April, twice as fast as the decline forecast for this year by the state-owned Pemex, Energy Ministry figures showed Monday.
Production of Cantarell in April was 1.074 million b/d, half of its peak of four years ago and the lowest since secondary recovery by nitrogen injection began at the turn of the millennium.
Cantarell's decline is only being partly offset by increased production from other fields.
In April, Pemex produced 2.767 million b/d of crude, down 13% from the same month of last year, while crude exports dropped by 14.3% year on year to
1.439 million b/d.
And production dropped year on year for every month of 2007 as it has now for 2008.
Mexico's crude production peaked at 3.38 million b/d in 2004; this year so far it has averaged just over 2.87 million b/d.
Crude exports have followed a similar pattern, falling by about 500,000 b/d between 2004 and this year.
More than 80% of crude exports go to the United States.
Late last year, the Energy Ministry published a document that warned that Mexico's days as a major crude exporter were numbered unless deregulation and fiscal reforms -- along with better management of state-owned Pemex -- could release the nation's oil potential.
The ministry's 2007-2016 Prospectus for crude predicted that, if Pemex continued to work under its present constraints, crude output would fall over the period from 3.26 million b/d to 2.14 million b/d.
At the time, the ministry was criticized in some quarters for scaremongering, but so far reality is proving worse than its forecasts.
The ministry predicted crude output of almost 3.1 million b/d for this year; the decline to current levels was not supposed to happen till 2011.
Yet Pemex officials remain optimistic. In a recent conference call on the company's first-quarter results, Carlos Morales, the director- general of Pemex's upstream subsidiary, insisted that output of 3-3.1 million b/d could still be achieved by the end of the year.
And, despite the fall in the volume of exports, they are currently earning Pemex some $4 billion/month, at least twice as much as in 2004. That is good news for the government, which depends on oil for a third of its income. But it may have taken some of the steam out of President Felipe Calderon's proposal for energy reform that aims to leave the door slightly ajar for private-sector exploration in deep water -- the area on which Pemex is pinning its hopes for the future, but where it lacks the know-how and financial muscle to go it alone.
Calderon launched the proposal early in April in the hope that it would be approved by Congress by the end of the month. But a vociferous opposition movement persuaded legislators to hold a "national debate," similar to US public hearings, on the issue in the Senate through July.
Nigerian militants said on Monday they had sabotaged an oil pipeline belonging to Royal Dutch Shell, the latest in a string of attacks that have helped drive oil prices to record highs.
The raids have increased pressure on President Umaru Yar’Adua to show he is making progress in delivering on promises made before his election a year ago. He pledged to find a lasting solution to the insurgency in the oil-rich Niger Delta area.
The latest claim, made by the Movement for the Emancipation of the Niger Delta, Mend, has further heightened concerns over oil supply from Nigeria. Funding shortfalls in joint ventures between the government and western oil companies are also hitting output.
Shell made no immediate comment on how much, if any, disruption was caused to its exports on Monday.
Recent attacks on pipelines have dented Nigeria’s exports of about 2.1m barrels a day since last month.
A spokesman for Mend said in an e-mailed statement on Monday that its members had blown up a pipeline in the early hours of Monday morning in Rivers State, in the east of the Niger Delta region.
“Today’s attack is dedicated to the administration of [President] Umaru Yar’Adua and [vice president] Goodluck Jonathan who have failed after one year in office to ensure peace, security and reconciliation in the Niger Delta region,” the statement said.
Mend said its fighters had killed 11 soldiers and blown up their river patrol vessel. The army confirmed reports of a pipeline blast but denied losing any men.
One of many armed groups in the Niger Delta, Mend has waged an increasingly aggressive campaign, partly in protest against the decision to hold the trial of Henry Okah, one of the delta’s most prominent militant leaders, away from public view. Mr Okah was arrested in Angola last year and extradited to Nigeria. He faces charges of treason and gun-running.
Mr Yar’Adua told the Financial Times this month he hoped to convene a Niger Delta peace summit in Abuja within eight weeks. A summit had been planned for last October but has been repeatedly postponed.
The latest violence has underlined the fragility of the region’s security, despite security generally improving since Mr Yar’Adua took office last May.
Some 175,000 b/d of output was stopped in April after militants sabotaged pipelines. Odein Ajumogobia, the oil minister, said on Monday he was confident Nigeria would soon recover the loss.
Indonesia has said it will quit the oil producers' body Opec as it is no longer a net exporter of the commodity.
Energy minister Purnomo Yusgiantoro confirmed the move, which had been anticipated for some time.
Opec's sole member in South East Asia, Indonesia became a net importer of oil in recent times after production fell and it struggled to find new reserves.
Soaring oil prices have pushed up inflation in Indonesia and a recent cut to fuel subsidies prompted protests.
Indonesia will leave the 13-member organisation when its membership expires later this year.
Opec has yet to comment on the development.
The BBC's Lucy Williamson in Jakarta says the decision is not unexpected, since Indonesia's production - largely concentrated in northern Sumatra - has stagnated and it has precious few sources of proven new reserves.
But she adds that ministers are leaving the door open for it to return, should any future discoveries of oil transform the state of its industry.
Some analysts said the move may have been triggered by unhappiness about Opec's reluctance to increase output in the face of the recent price surge, which took the cost of a barrel of oil above $135.
But others said it simply reflected the reality of the country's flagging oil sector.
Indonesia is currently producing about 860,000 barrels of oil a day but growth in demand is expected to continue to outstrip output, increasing the need for imports over time.
Foreign oil firms have historically been deterred from investing in Indonesia, because of concerns about corruption and weak legal controls.
In recent times, the government has increased financial incentives for foreign firms to invest in exploration and extraction but has found itself forced to import more supplies from the likes of Iran, Saudi Arabia and Kuwait.
Indonesia's exit will not affect the amount of oil it produces or imports.
"I don't see any substantive loss, other than on the prestige," said Victor Shum, from energy analysts Purvin & Gertz.
"They really have not had much influence within Opec."
But the country's growing dependence on imports is proving increasingly expensive as global prices soar.
The Indonesian government reduced direct fuel subsidies over the weekend for financial reasons, immediately sending prices up 30%.
Indonesia joined Opec in 1962, two years after the organisation was founded.
Gabon was the last country to pull out of Opec in 1995. Ecuador left the organisation in 1992 but returned to the fold last year.
The five states bordering the Arctic Ocean agreed on Wednesday to solve territorial disputes over the polar region, and its potentially huge mineral resources, through the existing United Nations framework.
“Any dispute between the countries will be solved peacefully,” Per Stig Moller, the Danish foreign minister, said afterwards.
Wednesday’s ministerial meeting was aimed at creating a period of calm in which Russia, the US, Canada, Norway and Denmark could gather scientific evidence to back up claims to the UN commission overseeing the Law of the Sea Convention, the international treaty that sets out the overarching legal structure for settling Arctic disputes. This was an attempt to avoid a repetition of the squabbling over maritime boundaries that broke out last year.
“We remain committed to this [UN] legal framework and to the orderly settlement of any possible overlapping claims,” the ministers said in a statement after day-long talks in Ilulissat, Greenland.
“We therefore see no need to develop a new comprehensive international legal regime to govern the Arctic Ocean.”
In a sign officials say was intended to convey US commitment to a co-operative approach to the Arctic, Washington sent a high-level delegation, headed by John Negroponte, deputy secretary of state. However, the US has still to ratify the Law of the Sea Convention.
The coastal powers have woken up to the commercial potential of the pole because rising global temperatures could leave much of the Arctic ice-free in the summer, enabling easier exploration and navigation.
At the same time, soaring oil prices and improved technology have made Arctic petrochemical reserves more viable. The Arctic region is thought to contain up to one quarter of the world’s undiscovered oil and gas reserves.
Russia, Canada, Norway and Denmark (through its sovereignty over the semi-autonomous territory of Greenland) are already busy collecting geological evidence to show that their continental shelves extend towards the Arctic and that, therefore, their territorial waters should be extended beyond 200 nautical miles offshore.
But the US has not submitted its claims, amid an enduring political controversy as to what the Convention would entail.
Some Republican legislators argue that the treaty would give too many powers to the UN and have been unmoved by the Bush administration’s calls for its ratification.
Officials and Congressional aides say ratification is now unlikely until after the US presidential election at the earliest, partly because of the pressures on the Senate’s remaining time.
Disputed claims submitted to the UN commission will have to be resolved by negotiation, potentially delaying any exploration. One solution could be joint stewardship of contested areas, allowing exploration to take place before boundaries are finally demarcated.
However, environmentalists have called for an international agreement such as governs the Antarctic – to prevent commercial exploitation of the pole’s fragile ecosystem.
Yesterday’s meeting did little to address these fears but the five Arctic powers did agree to work together to improve the safety of maritime navigation and reduce the risk of ship-based pollution in the Arctic Ocean.
They also agreed to strengthen co-operation on scientific research, a particular ambition of the US which has been unhappy about access to Russian territorial waters.
A fevered scramble for control of the world's seabed is going on - mostly in secret - at a little known office of the United Nations in New York.
Bemused officials are watching with a mixture of awe and suspicion as Britain and France stake out legal claims to oil and mineral wealth as far as 350 nautical miles around each of their scattered islands across the Atlantic, Pacific, and Indian oceans. It takes chutzpah. Not to be left out, Australia and New Zealand are carving up the Antarctic seas.
The latest bombshell to land on the desks of UN's Commission on the Limits of the Continental Shelf is a stack of confidential documents from the British Government requesting an extension of UK territorial waters around Ascension Island, St Helena and Tristan da Cunha.
The three outposts between them draw big circles in the Mid and South Atlantic, covering unexplored zones that may one day offer deep reserves of crude oil and gas.
A similar request has already been made for eastward expansion from the Falklands and South Georgia - much to the fury of Argentina. "If the British do not change their approach, we shall have to interpret it as aggression," said President Nestor Kirchner, before he handed power to his wife Cristina.
Ascension Island - famed for its enormous green turtles - is a dusty cluster of 44 volcanoes, covered with cinder. It is barely big enough to host America's "Wideawake" airfield and a tracking station for Ariane 5 space rockets. First garrisoned by the British in 1815 to keep an eye on Napoleon, it now boasts 1,100 hardy souls. St Helena - the "Atlantic Alcatraz" - is yet more remote, if greener.
The forgotten relics of the Empire make Britain a player in the marine race. There are the waters off the Falkland Islands and South Georgia, already home to a clutch of oil exploration companies; the Pitcairn Islands in the Pacific; Diego Garcia in the Indian Ocean; and a string of outposts such as Montserrat, the Caymans, the British Virgin Islands, the Turks and Caicos, and Bermuda.
The French "Outre-Mer" is a bigger network - from the Isles Crozet to Saint-Paul and Kerguelen in the southern seas, to Clipperton off western Mexico. They too have been busy at the UN, requesting an extension of their zone off French Guiana and New Caledonia.
All the maritime powers are nibbling gingerly at the edges of Antarctica, though the Antarctic Treaty bans fresh claims on the world's last pristine landmass.
The two-page summary of Britain's submission to the UN gives little away. It merely notes that the UK is providing information on the limits of shelf "beyond 200 nautical miles", adding that there will be further requests. A Foreign Office spokesman said the motive was to "protect the environment".
Greenpeace demurs. "It is a grab for resources. These countries are in a panic about commodity prices and now view the seas as key to their national security," said Charlie Kronick, the group's climate chief.
The Law of the Sea allows the maritime powers to claim 200 miles of waters around their islands. They can win an extension to 350 miles if the geology of the seabed fits a set of complex technical conditions.
The requests are studied by a panel of world experts, and usually granted on a strict scientific basis. This is not conducted like the Eurovision Song Contest, where imperialists score "nul points".
The deadline expires in May 2009, so there is now a rush to stake out claims. If countries waive their right, the area from 200 to 350 miles automatically returns to the world community: claim it now, or lose it forever.
In a sense, the system is deeply unfair. China gets virtually nothing. Poor landlocked countries get absolutely nothing. Yet the old powers - after enjoying the fruit of imperial rule for four centuries - enjoy a second bite of the cherry. "The sea goes to the most powerful states that were able to colonise the remote parts of world. That's the way the law is," said Martin Pratt, head of the international boundaries unit at Durham University.
Nobody has ever explored these regions thoroughly for oil and minerals, although Mr Pratt said there was a burst of interest 20 years ago in "polymetallic nodules" - boulders of manganese, and such, on the sea floor. Commodity prices did not stay high enough to make it worthwhile investing, and the waters were mostly too deep.
That calculus is now changing fast as oil futures contracts for 2016 vault to $135 a barrel. The International Energy Agency warns that world output will fall far short of the estimated 116m barrels per day by 2030 unless there is massive investment.
The technology of deep-water drilling is improving in leaps and bounds. Three-dimensional seismic imaging can look through the salt canopies that cover up reserves and play havoc with exploration.
The ageing North Sea rigs drill to around 3,000ft: the Jack 2 test well, run by a consortium of oil companies, plunges through 7,000ft of water and 20,000ft of sea floor into the entrails of the earth below the Gulf of Mexico.
The state-of-the-art fields off Angola may soon be routinely drilling at near 9,000ft. It is no longer far-fetched to imagine rigs drilling as deep as 15,000ft, once oil companies learn to cope with crude gushing out at temperatures of 300C.
Shell and Lasmo explored the Falklands in the 1990s, but gave up when crude prices crashed to $10 a barrel. Nothing much came to light. Desire Petroleum, Rockhopper, Borders & Southern and Falkland Oil and Gas are all probing again. Desire plans to start drilling this year. "A working hydrocarbon system in the North Falkland Basin has been established," it said.
Dr Phil Richards from the British Geological Survey - who helped to prepare the UK's extension claim - doubts stories that the area could hold 60bn barrels of oil (Saudi Arabia purports to have 260bn).
"That is not credible. It is based on how much oil the rocks are potentially capable of holding. We won't know how much there is until we actually drill. All we have so far are educated guesses," he said.
Mr Richards denies that the Government is privy to secret discoveries. "There are no vast reserves that we know about. But who knows, it may come good for our grandchildren," he said.
Is it in the interests of mankind to tap deep-sea reserves? We may have no choice. The world has consumed one trillion barrels of oil already. The second trillion is located but not yet tapped, and will take us to 2035 or so. The third trillion eludes us. Any suggestions?
Hundreds of lorry drivers converged on London yesterday to protest at rising fuel costs. Police closed a section of the A40 — one of the capital’s main arteries — so that it could be used as a massive lorry park.
From there the drivers made their way to a rally at Marble Arch, where they told of jobs under threat, severe belt-tightening and family companies facing closure.
Early yesterday morning, as the convoys set off from Kent, Essex and all points north and west, they were greeted with spontaneous applause from motorists, who are also feeling the pinch with petrol prices rising to an average of about 114p a litre and diesel to 126p.
The hauliers were in good spirits, with horns blaring and banners waving, but by the time they reached Marble Arch — where a sign lamented “Dying for a rebate” — the mood was more sombre.
The rally organisers, TransAction 2007, had hoped for 1,000 lorries but seemed satisfied with the 200-300 parked in rows on the A40, and another 100 that joined a protest in Wales.
Peter Knight, from Kent, said that the industry was in “complete meltdown” and that he felt like painting “HM Charity” on the side of his 23 lorries. His daughter, Sharon Knight, who helps to run the family company, claimed that the size of the protest proved there was “a groundswell” of support for the hauliers’ demands.
At lunchtime a delegation from TransAction 2007 headed for Downing Street to deliver a letter asking Gordon Brown for an urgent meeting and warning him that “this situation is a crisis”.
The letter said: “We are not faceless multinational companies — we are small and medium family companies built up over generations with hard work and determination. Our colleagues are being driven to despair and bankruptcy on a daily basis.”
The lobby group wants an “essential user rebate” on fuel duty to allow the British haulage industry to compete with companies in European countries where fuel is considerably cheaper. The group also cited the rebates given to bus companies in Britain.
Chris Lewis, 62, an independent haulier from Oswestry, Shropshire, said that he wanted “a simple thing — just give us a rebate and bring us on a level playing field with Europe”. He added: “All my earnings are going on fuel.”
Mr Lewis even wondered whether he would be able to afford a forthcoming holiday that he booked last year.He said: “I’m reaching the point where I feel like parking the truck up.”
That, he added, may be the only way of getting the Government’s attention, because of the knock-on effects for deliveries of food, clothing and other goods. “If we parked all the trucks up it would stop everything,” he said.
He was not the only one to think that more direct action may soon be needed. Jose Girvan, 36, a driver from Ruislip, West London, said that he was struggling with rising mortgage costs and other bills and feared that his job might be on the line: “I’m just waiting for my governor to say that he’s packing it in.”
Expressing his disappointment at the scale of yesterday’s protest, he said: “I would like to have caused a bit more of a disruption. We were talking earlier about blocking off all the bridges \ and that’s what needs to happen. It needs to happen regularly. I’d give up a day a week to do that.”
Jim Jordan, 64, who operates four lorries from his base in Shrewsbury, has calculated that it costs him about £33.48 an hour to run a typical heavy goods vehicle, of which £15.85 goes to the Treasury. “It’s a horrific amount of money,” he said. He had little hope of bluer skies to come, saying: “I think it’s going to be rough going."
Britain was hit by electricity blackouts as a string of power station shutdowns wreaked havoc on the national generating system yesterday.
National Grid issued a highly unusual plea to electricity suppliers to reduce the voltage to homes after a raft of power plant closures threatened a supply shortage during the hours of peak demand last night.
The operator of the country's power grid sent out its plea after several regions, including south-west London, Merseyside and Cheshire, suffered power cuts following the unexpected shutdown of British Energy's Sizewell B nuclear reactor during the morning. British Energy refused to reveal the reason for the incident but said it had already begun to get the plant up and running again. National Grid cut off supplies automatically to "protect the integrity of the network," a spokesman said.
As the day wore on, however, a total of nine power stations shut down for various reasons, forcing National Grid to issue three increasingly urgent notices. The last – a so-called "demand control imminence" notice – is rare and is sent out about once every four years. It was issued yesterday after it became clear that the country's electricity supply could fall short by about 400 megawatts – equivalent to just under 1 per cent of national demand.
David Hunter, an energy analyst at McKinnon & Clarke, said theincident reflected "the crumbling nature of the insufficient infrastructure on which homes and businesses depend".
A spokesman for National Grid said some customers would have noticed a "slight dimming" of the lights last night as the power delivered to their homes was reduced slightly to spread the load elsewhere.
There was speculation among energy traders that the highly unusual shutdown of so many plants at once was caused by some companies trying to cash in on the rising wholesale price of electricity by taking supply out of the market. The wholesale price jumped by 13 per cent yesterday as the margin between supply and demand tightened.
However, others experts said this was unlikely because any generator that closed down a plant had to buy the power to cover its commitments. More power was pumped into the grid as a result of the notices and National Grid said it expected it to be "business as usual" today.
The global economy is facing the third great oil shock of recent decades. The oil price, just $10 a barrel a decade ago, has reached $135, pushing up the price of petrol and domestic heating as well as contributing to higher food prices. And I know that families up and down the country are feeling the impact in the cost of filling up at the petrol station and in the rise in gas and electricity bills.
As every country faces increased costs, it is now understood that a global shock on this scale requires global solutions. This is why the UK is arguing that at the top of the economic agenda for the forthcoming G8 summit in Japan should be a global strategy for addressing the impact of higher oil prices.
The cause of rising prices is clear: growing demand and too little supply to meet it both now and - perhaps of even greater significance - in the future. Higher demand is one of the major results of the scope, speed and scale of globalisation as Asian economies, as well as Opec countries themselves, demand more oil. To take one example: by 2020 there could be as many as 140m cars in China - more than three times as many as today. Overall, by 2020, global demand for energy will rise by 50%.
It is the market's belief that ever-growing demand will continue to outstrip supply that has pushed up the oil price. And we are becoming increasingly aware of the technical, financial and political barriers to the production of more oil. Every country must find ways of being more efficient and diversifying supply. And as continuing high oil prices present us all with an immense challenge, the way we confront these issues will define our era.
While the world will always seek new sources of supply, and we must continue to reduce barriers to investment, our strategic interests - reducing energy costs, increasing our energy security, tackling climate change - all now point in the same direction: decreasing dependency on oil, through substitution with other energy sources and through energy efficiency. And what we do to change the balance for the medium and long term can have an effect in the short term because it can give greater certainty about future supply and demand, and create a more stable market.
So our goal that Britain becomes a low-carbon economy is now an economic priority as well as an environmental imperative. And if we are to ensure a better deal for consumers, energy security and lower greenhouse gas emissions, Britain, Europe and the world will have to change how we use energy and the type of energy we use.
So, as John Hutton has said, we need to accelerate the development and deployment of alternative sources of energy, reducing global dependence on oil. Britain will increase its investment in renewables, including decentralised generation. We will build one of the world's first commercial-scale carbon capture and storage coal plants and we have committed to a nuclear building programme to ensure that the UK's emissions and dependence on fossil fuels do not rise as existing nuclear stations close.
But, as we manage this transition to a low-carbon economy, we must also do more to help the oil market operate more efficiently. Globally, producers and consumers share common interests in market stability. So instead of Opec going its own way, there should be an enhanced dialogue between producers and consumers about the advance of nuclear, coal and renewables and about greater energy efficiency - as well as about future oil reserves.
With greater transparency on both sides, oil producers and consumers should gain a better understanding of trends in supply and how they affect the price of oil. Just as we are examining how we can maximise the recovery of oil from the North Sea oilfields, so all oil producers should re-examine whether the barriers that exist to strategic investments should be broken down. And in advance of the G8 summit, I will be proposing further work internationally to achieve a better dialogue on supply possibilities and trends in demand.
But each country has also to act now to help those hit by high fuel bills. In Britain this means increased winter fuel payments; a new one-stop service on home energy efficiency; free insulation for people on low incomes and the over 70s and a £150m programme financed by the utility companies to cut fuel bills for lower income families.
And we will do more. In the next three years, energy firms will insulate another 5m homes. Three million more households should get access to free or discounted energy-efficiency products. And "smart" metering will allow informed decisions about energy use.
This domestic action will help. But however much we might wish otherwise, there is no easy answer to the global oil problem without a comprehensive international strategy. We have made a start, but over the coming weeks, as this new economic challenge moves to being the first item on every country's agenda, getting the world to act together will be the top priority at the EU and G8 summits and beyond.
Oil industry leaders are anticipating more North Sea tax relief after the first signs of a Government U-turn. Modest tax changes were announced yesterday as the Prime Minister and Chancellor intervened to try to boost flagging production.
Gordon Brown and Alistair Darling took the unprecedented step of making a direct appeal to oil industry leaders to increase output and accelerate developments. They took members of Oil and Gas UK, the industry trade body, by surprise by asking to join what was planned as a routine meeting of the organisation near Aberdeen yesterday.
They held out the prospect of regulatory and tax changes to attract more North Sea investment and provide the incentives to develop new discoveries which are little more than 'puddles' compared with the giant Brent and Forties fields.
Malcolm Webb, chief executive of Oil & Gas UK, said the proposals "could have a significant impact on the near-term production".
Yesterday's tax change represented little more than tweaking. John Hutton, Business Secretary, announced an easing of Petroleum Revenue Tax rules to allow new fields to be carved out of the unprofitable parts of some existing discoveries. The changes will affect around 30 fields but only add 20,000 barrels a day or 1m tonnes a year to production.
Oil companies felt the shift was an encouraging pointer and believe the Prime Minister is ready to reverse some of the tax changes he made as Chancellor.
The Treasury has completed a review of the complex North Sea set-up and Oil and Gas UK is cautiously optimistic that Mr Darling will take on board its proposals for 'targeted taxation' to provide incentives for developments such as technically difficult gas accumulations west of Shetland.
The oil and gas 'summit' was accompanied by a Government go-ahead for the development of two more 'puddles'- West Don and Don South West, capable of producing up to 50,000 barrels a day or 2.5m tonnes a year.
Some senior industry figures felt there was a "smack of desperation" about the production appeal from the Government's two senior figures, even though it was given an international dimension with an indirect appeal to Opec.
One said: "You can't turn oil and gas production on and off like a tap. There's been little incentive to work in the North Sea because taxation and the cost of development is too high."
North Sea output has passed its peak and, although an estimated 40pc of recoverable reserves still remain to be tapped, production is falling at the rate of 4pc-5pc a year.
The region has lost its attraction because of the high cost of offshore development and the end of the era of giant discoveries. BP, Shell and the other North Sea pioneers have been running down their interests in what is now regarded as a mature oil province and the Government has been attempting to persuade smaller oil companies to fill the gap.
But with tax rates of between 50pc-75pc it has had mixed success, although Mr Hutton said the latest round of offshore licensing had attracted a record 193 applications for 277 exploration blocks.
Gordon Brown yesterday threw his weight behind the government's commitment to expanding the UK's future nuclear capability, writes Jean Eaglesham .
Speaking after meeting oil industry executives, the prime minister linked the fuel crisis to the role nuclear could play in increasing the UK's energy security by reducing dependence on imported gas.
"We want to do more to diversify our supply of energy and that's why I think we are pretty clear that we will have to do more than simply replace existing nuclear capability in Britain," Mr Brown said. "We will be more ambitious for our plans for nuclear in the future."
Ministers are driving through measures to try to encourage inward investment in the multi-billion pound replacement of the ageing fleet of existing reactors.
John Hutton, the business secretary, told the FT in March he expected the new generation of nuclear power to supply significantly more of the country's electricity than the 19 per cent the existing ones deliver.
"We need the maximum contribution from nuclear sources in the next 10 to 15 years," he said.
Gordon Brown is planning to use a massive expansion of green energy to win back voters angry at spiralling fuel prices.
They will be offered guaranteed prices for generating their own power that could fund loan schemes to pay for energy-saving technology under plans being finalised by ministers.
The plans are expected to be contained in a major offensive to promote domestic solar and wind power, as well as promoting energy conservation, that will be launched by the Prime Minister next month.
Senior ministers believe the programme will help win over hard-pressed families by offering energy-saving and renewable power packages to cut their fuel bills for good. Under the plans, ministers will agree to a key demand of environmentalists to back so-called "fee-in-tariffs", which offer householders guaranteed premium prices if they sell surplus renewable power back to the national grid.
The idea has been used in Germany to kick-start a dramatic expansion of renewable power in the home, such as domestic wind turbines or electricity-generating solar power, where householders can sell power back to the grid for four times the standard rate for 20 years. The scheme can dramatically reduce payback times for renewable energy, which have proved the major obstacle to their acceptance here.
Ministers are exploring using guaranteed payments to secure "green homes loans" to pay for energy generating equipment. Other proposals include a scheme to force water companies to help install energy-saving showers and appliances that could cut hot water bills by 60 per cent by reducing waste.
Mr Brown has been buffeted by calls for the Government to row back on green tax measures, such as increases in fuel duties and car tax, in order to throw a lifeline to families suffering the effects of the economic downturn and rising food and fuel prices.
But senior figures in the Government believe they can promote affordable energy-efficiency measures as a way of fighting spiralling prices. One said: "People might think it's too expensive to go green and we can't afford it. We are saying you can go green and cut your fuel bills."
Low income households are already benefiting from energy-efficiency improvements to cut fuel bills under a £1.5bn programme funded by energy companies.
Yesterday environmentalists urged ministers not to abandon green measures as they attempt to deal with the economic downturn.
Friends of the Earth's head of campaigns, Mike Childs, said: "The Government must make it cheaper and easier for people to go green. It must urgently introduce a range of measures to help people save energy, switch to greener energy sources and cut bills. If the UK became a genuine leader in developing a low carbon economy, the economic and employment benefits would be huge."
The government should go ahead with a system of personal "carbon credits" to meet emissions targets, MPs have said.
The Environmental Audit Committee said the scheme would be more effective than taxes for cutting carbon emissions.
Under the scheme people would be given an annual carbon limit for fuel and energy use - which they could exceed by buying credits from those who use less.
Ministers said there were practical drawbacks to the proposal but they were looking at other initiatives.
The committee's report criticised the government for shelving the proposal following a preliminary study.
The MPs admitted members of the public were likely to be opposed to the move, but urged the government to be "courageous".
Their report said: "Persuading the public depends on perceptions of the government's own commitment to reducing emissions, and of the priority given to climate change in its own decision making."
It added: "Further work is needed before personal carbon trading can be a viable policy option and this must be started urgently, and in earnest.
"In the meantime there is no barrier to the government developing and deploying the policies that will not only prepare the ground for personal carbon trading, but will ensure its effectiveness and acceptance once implemented."
Committee chairman Tim Yeo said it found that personal carbon trading had "real potential to engage the population in the fight against climate change and to achieve significant emissions reductions in a progressive way".
He said "green" taxes, such as a petrol tax, cost poor people more because everyone - "billionaires and paupers" - paid the same amount.
"Under the personal carbon trading, someone who perhaps doesn't have an enormous house or swimming pool, someone who doesn't take several holidays in the Caribbean every year, will actually get a cash benefit if they keep a low carbon footprint."
He said it could be administered by the private sector, following the model of supermarket loyalty schemes in which a complex computer system is accessed by a "single plastic card".
But Mr Benn said there were problems with the plan: "It's got potential but, in essence, it's ahead of its time, the cost of implementing it would be quite high, and there are a lot of practical problems to overcome."
Mr Benn said that the report found the cost of introducing the scheme would be between £700 million and £2 billion, and would cost £1bn-£2bn a year to run.
There would also be difficulties in deciding how to set the rations, taking into account a person's age, location and health.
Climate Change Minister Joan Ruddock said work on personal carbon trading had not been completely abandoned.
"We have simply decided not to undertake further work paid for by the taxpayer when a number of other studies are under way," she said.
Environmentalist George Monbiot applauded the scheme. "It's more progressive than taxation, it tends to redistribute wealth from the rich to the poor; it's transparent; it's easy for everyone to understand, you all get the same carbon ration.
"It also contains an inbuilt incentive for people to think about their energy use and to think about how they are going to stay within their carbon ration."
ExxonMobil chairman and chief executive Rex Tillerson has survived an attempt by descendants of founder John D Rockefeller to separate his dual roles at the oil giant.
Just 39.5pc of shareholders voted in favour of the resolution, which was aimed at stripping Mr Tillerson of his dual role, in part because of the company's alleged unwillingness to invest in green energy alternatives to oil.
The shareholder rebels, led by the founder's great-granddaughter Neva Rockefeller Goodwin, needed a simple majority for their proposal to succeed.
However, the company did not receive the large majority it had privately hoped for and was also partially wounded in a number of other shareholder-led votes linked to alternative fuels.
A proposal that would require ExxonMobil to set goals to reduce its greenhouse gas emissions received support from 30.9pc of those shareholders who voted, while one that required the company to set a policy to increase money spent on research in renewable energies received 27.4pc of the vote.
At the company's annual meeting, held in Dallas, Texas, a deputy to California state controller John Chiang, himself a trustee of the CalPERS pension fund, said she wanted to see the board do a better job of developing an alternative fuel strategy if Mr Chiang's support for the board was to continue.
Mr Tillerson and the ExxonMobil board have long argued against the proposal to split the two senior roles at the company, arguing that no one system of governance could be deemed to be the most appropriate.
The resolution has been put to the company's annual meetings a number of times before but this year gained traction due to the campaign by Ms Rockefeller Goodwin on behalf of her and some of her family members.
Although it had been thought that as many as 100 Rockefeller descendants supported the motion to split the roles, only 15 Rockefellers signed this resolution or other resolutions at the meeting linked to climate change, with ExxonMobil pointing out that the family's shareholding accounts for just 332,000 of 5.3bn shares outstanding.
The family argues that the company has dragged its feet when it comes to investing in green alternatives to oil, when compared to rivals such as BP and Royal Dutch Shell, at the expense of shareholders.
By separating Mr Tillerson's role, and appointing a non-executive chairman, it had been hoped that the board might be able to hear and debate both sides of the green argument.
The proposal was supported by a number of well-known institutional shareholders, including the state treasurers of California and New York, as well as F&C Asset Management and Morley Fund Management in the UK.
Infighting between BP and its Russian partners in its TNK-BP oil venture erupted in the open on Tuesday, when the Russian billionaire shareholders publicly censured the company’s BP-backed chief executive and the two sides aired differences over strategy.
The public bickering over investment strategy and the role of foreign specialists at the company heightened the tension at TNK-BP amid speculation it was being targeted for takeover by Gazprom, the state-controlled energy conglomerate. Bankers familiar with the situation said growing pressure on the company to do a deal was creating friction between its shareholders as they sought an exit strategy.
BP confirmed they had differences over strategy following comments by Robert Dudley, chief executive, published in Vedomosti, the FT’s sister paper in Russia, in which he disclosed the shareholder infighting and said it could damage production.
Mr Dudley’s comments were swiftly followed by reports in the Russian media on Tuesday that he could resign and be replaced by one of the Russian shareholders. TNK-BP declined to comment on the resignation report, as did BP. TNK-BP’s Russian shareholders could not be reached for further comment.
TNK-BP’s Russian shareholders issued a joint statement on Tuesday that censured Mr Dudley’s remarks as “deeply inappropriate” for disclosing a dispute that it said should be decided on “a shareholder level”. But the statement confirmed differences over strategy on investments in foreign assets and said TNK-BP should be allowed to develop in foreign markets “even if such development would bring it into direct competition with BP”.
BP defended Mr Dudley: “BP fully supports Bob Dudley’s position as president and CEO of TNK-BP,” it said in a statement. “BP has absolute confidence in him.”
TNK-BP said it could not comment on reports that Mr Dudley could be forced to stand down and be replaced by Viktor Vekselberg, one of the venture’s four chief Russian shareholders.
BP and its Russian shareholders have also expressed differences over the role of foreign specialists.
TNK-BP this year hired 148 BP specialists, a practice it has followed since the company’s founding in 2003. But the specialists were barred from working at the company by a court injunction this May, after a minority shareholder filed a lawsuit claiming the payments to BP for the specialists were dividends unfairly received by BP at the expense of other shareholders. The development came after visa problems for the specialists.
Airlines are being forced to pay cash in advance for jet fuel as the major oil companies tighten the screws on an industry that is being crushed by an extraordinary surge in the price of crude oil.
Sources within the airline industry indicate that credit is being denied to most of the leading American carriers and the practice is moving to Europe and Asia. So uncertain is the cash solvency of the industry that jet fuel suppliers insist on prepayments into special bank accounts.
A credit controller at a leading European multinational oil company told The Times that the oil industry was moving to jet fuel prepayment. “It’s common in the US and it is moving to Europe. We have been moving to prepayment since Swissair went bust.”
The need to put up money before delivery of fuel is a huge financial burden that has been shifted from the oil companies to the airlines. According to John Armbrust, a US jet fuel consultant, the oil industry had $5 billion (£2.5 billion) of jet fuel credit outstanding to airlines before the 9/11 terrorist attacks. Now they are demanding that airlines leave cash on deposit.
“The airlines can’t afford it. Traditionally, oil companies extended credit for 14 or 21 days and some as long as 30 days. Now, most American airlines are on prepay. South West is one of a few likely to still get credit.”
The extent of the cash squeeze was highlighted last week when American Airlines said that it would charge $15 per bag checked even as it revealed plans to shed 75 aircraft, shrinking the airline’s capacity by 12 per cent.
The price of jet fuel has risen by 60 per cent since January and American Airlines paid $665 million more for fuel in the first quarter of this year than in the same period of 2007.
The credit crunch is likely to worsen and a number of financial institutions will fail, according to research from Atradius, the credit insurance group which conducted a global survey of its customers’ views of the financial outlook. Although Atradius said that companies expect the number of failures to be small, about 65 per cent expect there to be failures.
The group added that direct exposure to sub-prime lending is higher in Europe than in the United States even though the bulk of the sub-prime mortgage defaults are in the US and many of the securities these loans are packaged into would have originated from US-based mortgage companies.
“Some explanation for this may be investments by European companies in US securities offering higher returns and more frequent use of secondary financial markets to securitise receivables by European countries,” it said.
Atradius added that only 12 per cent of companies across the world do not expect an economic slowdown in the next year. In Britain, more than 90 per cent of companies surveyed expect a slowdown, the highest percentage. About one in six companies expects a slowdown of only the national economy; a quarter expect a slowdown of the global economy and half expect a slowdown of both. The expectation of a slowdown is also high in Mexico, the United States, Spain, Italy, France and Belgium and lowest in Sweden and the Netherlands.
Atradius found that larger companies are more likely to have been affected by the credit crisis. Although fewer than 30 per cent of small companies reported an impact, almost half of all large companies (with more than €1 billion annual gross sales) said that they had felt the credit-crisis pinch.
Companies operating within the energy industry have been especially affected, but those in the healthcare and services industries reported a relatively low frequency of impact.
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