ODAC Newsletter - 11 July 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.
Concern over the possibility of conflict with Iran was a key driver behind fluctuations in the oil price this week. Conciliatory talk at the beginning of the week saw prices drop back, but news of missile testing mid-week by the Iranians kept pressure on. As ODAC went to press, news of a break in the Niger Delta ceasefire and a five day strike at Petrobras in Brazil pushed prices back up, though not to previous records. Despite continued talk by OPEC and BP of speculation-driven pricing, the fundamentals of short surplus capacity and possible supply restrictions indicate that the markets are doing the job of hedging the risk.
There was more evidence this week, this time from the IEA, that oil demand in the developed nations is being hit by high prices. In the developing world however, there is still huge potential for increased demand. China is suffering significant power cuts, which could cause rising demand for diesel to fuel generators in the short-term. China and India this week pushed the onus for carbon reduction onto the G8 leaders whose countries have caused the mess, rather than agreeing to any constraints which might check the development of their own economies.
As the G8 discussed whether it should become the G13 or even 16, diplomacy and sabre rattling around energy security continues on in a way which points to an understanding of the fundamentals of supply challenges. The UK offered help to Nigeria in securing their production from attack, while the US pressed India to accept its nuclear deal even as this split the governing coalition parties. Gas supplies too are under pressure. Gazprom announced that the domestic consumption of gas in Russia has increased by 25 billion cubic metres in the last three years. Increased domestic consumption of oil and gas in producing nations is one of the key challenges facing the importing nations, which can only buy what is put on the market. This could mean effective peak supply before geological peak supply.
T Boone Pickens spoke this week about energy in the Clinton years being the sleeping dog that nobody wanted to kick. By now it is fair to say that the dog is awake and barking.
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LONDON - Oil rose above $137 a barrel on Thursday after workers at Brazil's state oil company Petrobras said they would begin a 5-day strike next week.
The market had been holding in a narrow range, supported by tensions over Iran, but the upside was limited by International Energy Agency forecasts for a more comfortable supply outlook next year.
U.S. crude for August was $1.07 up at $137.12 a barrel by 1349 GMT. London Brent crude was $1.12 up at $137.70 a barrel.
The strike will affect all 42 Campos basin offshore platforms, which account for more than 80 percent of Brazil's output of around 1.8 million barrels per day.
Iran tested more missiles in the Gulf on Thursday, while the United States pledged to defend its allies.
"A second day of missile tests probably has less impact on prices than on the first day," said Mike Wittner, analyst at Societe Generale.
Iran test-fired nine missiles on Wednesday, which it said included ones that could hit Israel and U.S. bases.
Concern over Iran has mounted after a big Israeli military exercise last month. The West fears Iran wants to master technology to build nuclear weapons.
These tensions boosted gold on Thursday, which was also supported by sagging equity markets.
The situation in the Middle East has played a part in oil's surge this year to record levels of more than $145 a barrel.
TOLL ON DEMAND
But high prices are starting to take their toll on demand.
World oil demand growth will slow in 2009 and the need for oil from the Organization of Petroleum Exporting Countries will fall, the International Energy Agency said in its monthly report.
This could help relieve the perceived tight supply/demand balance in the world oil market that has contributed to around a 50 percent jump in prices this year.
"We do see the potential for a build in spare capacity in 2009, that should help to improve the situation," said Lawrence Eagles of the IEA, which advises 27 industrialised countries on energy policy.
A pledge from Saudi Arabia to increase output this year could help provide more of a cushion for the market, he said.
Looking further ahead, OPEC warned of growing uncertainty over demand for its oil in its 2008 World Oil Outlook.
The Organization of the Petroleum Exporting Countries said demand for its oil could fall to 31 million barrels per day in 2012, below current production, as additions to supply excluding OPEC crude outpace growth in demand.
Oil has fallen back from a record peak of $145.85 on July 3, but had found some support from Iran tensions which helped the market hold above $135.50 a barrel on Wednesday, a key number for traders who use charts to track price movements.
The main militant group in Nigeria's oil-producing Niger Delta has said it would call off a ceasefire from midnight on Saturday after Britain offered to help tackle lawlessness in the region that has disrupted the country's oil exports.
Additional reporting by Felcia Loo in Singapore and Barbara Lewis in London
July 10 -- A Nigerian militant group said it will end the unilateral cease-fire it declared on June 24 because it objects to an offer by the U.K. to help the government of the west African country secure its oil facilities.
The Movement for the Emancipation of the Niger Delta, known as MEND, has, together with other militant groups, helped cut more than 20 percent of Nigeria's crude oil exports since 2006 by attacking pipelines and other operations.
To show its objection to British "support of an injustice, MEND will be calling off its unilateral cease-fire with effect from midnight, Saturday, July 12, 2008," the group's spokesman Jomo Gbomo, said in an e-mailed statement today.
British Prime Minister, Gordon Brown, said yesterday that the U.K. is prepared to help Nigeria quell unrest near its oilfields as part of an effort to boost world oil output and bring down prices. Brown met with Nigerian President Umaru Yar'Adua this week during the Group of Eight summit in Japan. Yar'Adua is scheduled to visit London next week.
The Nigerian president had called for G-8 help to tackle international trade in stolen crude oil which he said was fueling the violence in Niger Delta region, the source of nearly all of the country's crude oil.
MEND says it is fighting for a greater share of oil wealth for the impoverished inhabitants of the Niger Delta and accuses successive Nigerian governments of decades of oppression. The group declared a unilateral cease-fire days after it had conducted one of its most successful raids on June 19, attacking Royal Dutch Shell Plc's Bonga deep-water oilfield located 120 kilometers (75 miles) offshore and cutting production of 190,000 barrels of oil a day.
"Unrest in the region is as a result of over five decades of oil exploration that has developed other parts of Nigeria to the detriment of the environment and people of the Niger Delta," Gbomo said. "Should Gordon Brown make good his threat to support this criminality for the sake of oil, U.K. citizens and interests in Nigeria will suffer the consequences."
Crude oil for August delivery rose 6 cents to $136.11 a barrel as of 3:31 a.m. New York time in after hours electronic trade.
Iran has lost the last major western energy group that had been considering making a significant investment to develop the country’s huge gas reserves in a victory for Washington’s efforts to isolate Tehran over its nuclear ambitions.
Total, the French energy group, told the FT it was now too risky to invest in Iran, making it highly unlikely that the group will invest in a liquefied natural gas project linked to Iran’s South Pars gas field in near future.
The comments from Christophe de Margerie, chief executive, follow weeks of increasing tensions between Iran and Israel. On Wednesday, Tehran test-fired nine missiles and warned that it would provide massive retaliation to any military strike.
The US has also stepped up its push to impose tougher sanctions on Tehran in the dispute over Iran’s nuclear programme.
Mr de Margerie said: “Today we would be taking too much political risk to invest in Iran because people will say: ‘Total will do anything for money’.”
Together with Malaysia’s Petronas, Total was due to develop phase 11 of the South Pars field and had until Wednesday maintained it had not decided to drop its interest in the project. After May’s announcement that Royal Dutch Shell and Repsol YPF of Spain would pull out of Phase 13, Total was left exposed.
Total’s move is a big blow for Iran, which is now unlikely to be able to significantly raise its gas exports until late in the next decade at the soonest. Samuel Ciszuk, Middle East energy analyst at Global Insight, called Total’s decision “a death blow” for Iran’s LNG ambitions, because the country would now be unable to gain the knowhow it needed for such complex projects, even if it teamed up with Russia or China.
None of the western oil companies including Total is willing definitively to close the door on Iran’s massive hydrocarbon reserves. Shell and Repsol said they could still join later stages of the development of the field.
In a further sign of the increased scrutiny over investments in Iran’s energy sector, William Burns, the US state department’s top official on Iran, told a US congressional committee on Wednesday that Washington would conduct a “serious review” to see whether the Norwegian group StatoilHydro had violated US law by carrying out a large investment in Iran.
Washington had been particularly worried about Total, and US officials concede measures affecting the transfer of western investment and knowhow to Iran’s energy sector have a much greater impact than do financial sanctions. But Mr de Margerie voiced his anger at the policy, saying: “You take two major countries [Iran and Iraq] out of the system and then you say: ‘There is not enough oil and gas.’ Oh no, surprise, surprise.”
Wednesday’s test firing left the oil market unfazed, with oil prices failing to make up recent losses and trading at $136.20 a barrel.
Oil could face a "steep" fall if financial factors are removed from the current market, which gained around 40 per cent this year, the chief economist at BP said today.
Oil prices have more than doubled from a year ago, driven partly by geopolitical instability from Iran to Nigeria as well as expectations that global supplies will fail to keep pace with unrelenting demand growth in the years ahead.
Non-market fundamentals, including financial factors such as the easing of the US dollar against other currencies, have prompted investors to use oil and other commodities as a hedge against the weaker greenback and inflation.
"If the financial investors move out of the market, then there could be a rapid fall, a steep fall in prices," Christof Ruehl said on the sidelines of the London-based company's 2008 Statistical Review of World Energy in Seoul.
He declined to give an estimate on the fall.
"Financial investors will look at real developments, and they will act upon them," he said, adding that financial factors were not triggering, but accelerating oil price fluctuations.
Earlier in June, BP CEO Tony Hayward said oil prices were unstable because markets were not well supplied, and higher taxes in producing countries were discouraging investment in new output.
Ruehl also said that inventory was the main factor that would determine oil prices, as there were very few new supplies coming into the market.
US light crude for August delivery was around $136 a barrel today, falling nearly $10 from last Thursday's record high of $145.85 a barrel, mostly due to a stronger dollar that has reduced the appeal of commodities for investors.
Production at Mexico’s Cantarell oil complex, one of the world’s largest, has plummeted by a third in the past year, an indication the country could lose self-sufficiency in oil in the medium term.
Average daily production dropped to slightly more than 1m barrels a day in May compared with more than 1.6m b/d in the same month last year, according to the energy ministry.
Mexico’s total oil production fell about 10 per cent in the past 12 months to 2.79m b/d in May. That was only marginally above April’s output, which was the lowest in a decade.
“This is not a good sign,” said George Baker, head of energia.com, a Houston-based consultancy. “But it does at least strengthen the government’s position that there is an approaching crisis in oil production.”
The centre-right administration of President Felipe Calderón has for months been trying to use the deteriorating oil production figures to persuade Congress that something must be done quickly.
In April it presented legislators with a proposal for more flexibility in the service contracts that Pemex, the state oil company, signs with third parties. Currently, the contracts are narrow in scope and inflexible because Mexico’s constitution prohibits private investment in oil.
There is little optimism that the proposal will survive a slow-moving, entangled legislative debate amid strong resistance from both the main opposition parties.
Many opposition leaders argue the problems stem mainly from the government’s rising dependence on oil income, which has starved Pemex of cash it could use for exploration.
But the government maintains the vast bulk of the country’s reserves lie in deep waters and require technology and knowhow to develop that Pemex does not possess.
Billionaire oil investor T. Boone Pickens talked with the Tribune editorial board Wednesday about America's addiction to oil and his newest energy venture, wind power. Pickens wants the U.S. to build wind turbines and use natural gas resources to replace more than one-third of the oil the nation imports. "This is very close to war," he said.
Here is more of what he had to say.
The country has been in denial for a long time. I'm doing what I'm doing for the country. It's that simple. I think I know more about the oil industry than anybody else around. These [presidential] candidates do not understand. They don't understand how critical this all is.
I've talked to presidents before about energy. I was going to be the key energy adviser for Bob Dole in 1996. He said he wanted me to be chairman of Texas when he ran against Bill Clinton. I said, "OK, if I get to be the energy guy in the deal."
So maybe a month or two later, I said, "Do you think it's time to talk about energy?" He said, sure, go ahead and talk about it. He listened and said, "OK, now I'm gonna teach you something about politics. Right there, on the floor, that's a sleeping dog. Politicians don't kick sleeping dogs. Bill Clinton doesn't give a damn about energy and I don't either. Neither one of us is gonna kick a sleeping dog and so energy will not be an issue in this campaign. But in case one of us stumbles over the dog," he said, "you will be the guy that advises me on the issue." Neither one of them had a problem with energy, just like he said. They didn't want anything to do with it.
To blame Exxon Mobil for the price of gasoline being $4 a gallon is silly. The total amount of oil available every day in the world is 85 million barrels. That's it—that's blood, guts and feathers. That's the whole thing. And Exxon has 2.5 percent of that. That's all they have. Exxon is a peanut as far as owning oil in the global sense of things. Seventy percent of all the oil owned in the world today is owned by state-owned oil companies. The [U.S.] oil companies do not own the oil.
The OPEC countries this year will receive, in oil revenues, $700 billion [from the U.S.]. What does all that mean to us? I don't know what you call it—naive, weak, stupid or whatever—but we have drifted, drifted, drifted to where we're now importing almost 70 percent of our oil. In 40 years, we have never had an energy plan. Republican, Democrat, it doesn't make any difference. No one, nobody, has ever had an energy plan.
Ethanol is not a good fuel. It's an ugly baby, but it's our ugly baby. I'd rather have ethanol than I would foreign oil. I'd rather have anything than foreign oil.
The president said he wanted 35 billion gallons of ethanol by 2017. If all the corn went to ethanol, it'd be about half that amount. So you'd have to have something else to fill in if you're gonna try to make it 35 billion. It has to have something else.
You'll actually supplement [wind energy] with natural gas. You'll always have some natural gas working with your wind. And solar and wind can work together too. What's happened is we've never been pressed to find a solution because the oil was so cheap. Maybe some of these things will cost a little more than cheap oil. But oil is getting more and more expensive.
Coal is a resource that we have and it's cheap. It gets much more expensive when you start sequestering the carbon dioxide.
But you got to do it and it will work. There's no question it will work. And we gotta do it. I'm for everything, if it's in this country, because it creates jobs for us, it helps the economy. We just can't have the money leaving the country. It's a horror story.
MOSCOW: Gazprom wants to buy any additional natural gas produced by Libya and some of the country's oil, the North African country's top oil official said Wednesday.
"Gazprom has expressed its willingness to buy Libyan oil and any available quantities of gas," Shokri Ghanem told Reuters, adding it did not mean Gazprom would buy all of Libya's oil.
Earlier on Wednesday, Gazprom said in a statement after its chief executive, Alexei Miller, met with the Libyan leader Muammar Gaddafi that it hoped to buy "all future volumes" of gas, oil and liquefied natural gas available for export at market prices.
A cooperation agreement signed in 2006 between Gazprom, which supplies about a quarter of Europe's gas, and Algeria prompted fears that the two biggest suppliers to Europe could work together in a similar way to the OPEC group of oil exporters.
State-run Gazprom's latest bid to strengthen its grip on gas supplies around Europe comes as no surprise, David Cox, the president of Poyry Energy Consulting, said.
"It fits with their strategy of, if not forming a gas OPEC by discussion, then doing it by just cornering all the resources," he said.
"Hydrocarbons is where they want to be and having as much of it as possible. And the amount of money they must have sloshing around in their coffers."
Cox said it was unlikely that Libya would want to commit to selling its oil to one buyer and would most likely stick to selling its crude on the open market.
The world's largest gas firm is also planning a joint refining venture with Libya's National Oil Corporation, or NOC, Gazprom said, and to build pipelines.
Gazprom also accepted Libya's offer to build pipelines to Europe from the North African state, and said that a second, possible joint venture is also being looked at, focusing on gas and oil exploration and development.
Gazprom and Eni of Italy formed a strategic partnership in 2006, which allowed for energy asset swaps, including those Eni has in Libya.
Gazprom's interest further cemented in April, when it signed a memorandum of cooperation with NOC in Tripoli. At the time it said it wanted to develop infrastructure including pipelines.
The North African country aims to become a major gas producer and expand production to 3 billion cubic feet per day by 2010, with a potential for 3.8 billion cubic feet per day by 2015 versus 2.7 billion cubic feet per day now.
From next year, Gazprom will buy its gas from Central Asia at double today's rates, following the trend of high prices in Europe, CEO Alexei Miller said in a televised meeting with Prime Minister Vladimir Putin on Tuesday.
Miller also reiterated that he saw Gazprom's average gas prices to Europe rising to $500 per 1,000 cubic meters by the end of the year, a prediction he made in Azerbaijan last week.
Such price rises will most likely be passed on to Ukraine, the biggest buyer of Gazprom's gas from Central Asia, and could spur renewed price disputes with Kiev.
Growing domestic demand for gas has led to consumption increasing by over 25 billion cubic meters in the last three years, Miller said.
"That is a lot of gas, as much as Gazprom exports to a country like Italy each year," he said.
"The domestic market is becoming a very serious rival to the external market," Miller said, especially after the government decided to move toward reduced gas subsidies for Russian customers.
To meet increasing demand, Gazprom has revised its annual production target from 561 bcm to 563 bcm and will aim for 570 bcm by 2010, Miller said.
In response, Putin said the government would ensure "a much more gentle transition" to market prices for Russian customers than it had planned last year, Interfax reported. He added that the government had not yet made a final decision on exactly when the domestic price liberalization would be pushed through.
Valery Nesterov, an energy analyst at Troika Dialog, said that while such predictions of output growth were reasonable, the real test for Gazprom would come after 2010.
"There is a lot of uncertainty for Gazprom after that. That will be the moment of truth, to see if they can stick to their schedule for Shtokman," Nesterov said, referring to Gazprom's plans for its huge field in the Barents Sea. The field is estimated to hold 3.7 trillion cubic meters of gas.
In his meeting with Putin, Miller also announced that Gazprom was seeking to purchase gas outside of its main Central Asian suppliers of Kazakhstan, Turkmenistan and Uzbekistan.
Gazprom will soon hold price talks on buying gas from Azerbaijan, Russia's ambassador in Baku, Vasily Istratov, said Tuesday, Trend news agency reported.
Miller and President Dmitry Medvedev held talks with Azeri officials during an official visit to Baku last week.
Azerbaijan, which is currently developing a large gas field in the Caspian Sea, has said it is willing to hold talks with Gazprom on sending its gas north via Gazprom's pipelines, but also plans to export most of its gas westward through a pipeline to Turkey and then on to Europe.
Azerbaijan is also considering U.S.-backed plans to construct a gas pipeline across the Caspian that would export Turkmen gas to Europe, a step that would break Gazprom's current stranglehold on Central Asian gas exports.
Nesterov said potential deals between Gazprom and countries such as Azerbaijan were still only "wishful thinking."
"There are serious doubts about whether Azerbaijan will agree to the deal," Nesterov said. "Gazprom is proud of its status as a unique supplier to Europe. But it is not an indispensable intermediary. For now, Azerbaijan can probably sell its gas on its own."
NEAR ALMATY, Kazakhstan, July 9 (Reuters) - Kazakhstan joined construction of a pan-Central Asia pipeline on Wednesday, a major project to link up Caspian Sea gas reserves with energy-hungry China.
The pipeline is the first significant independent gas link connecting the former Soviet region with eastern markets while bypassing Russia. Russian gas monopoly Gazprom (GAZP.MM: Quote, Profile, Research) is currently the main buyer of Central Asian gas.
Under the scorching sun of southern Kazakhstan, Kazakh and Chinese flags flapped in the wind as engineers assembled segments of the pipeline in a symbolic ceremony attended by senior energy officials.
"This project will be implemented in five stages with the final stage scheduled for completion by 2013," said Sauat Mynbayev, Kazakhstan's energy minister.
The ceremony was held on the open steppe 40 kilometres (25 miles) north of the commercial hub Almaty -- one of 3 sites in Kazakhstan where construction began simultaneously on Wednesday.
The Kazakh link is part of a route that links Turkmenistan's natural gas deposits with China via Uzbekistan and Kazakhstan.
Uzbekistan also started construction of its part this month while Turkmenistan launched its segment last year.
Gas shipments will start in 2010 at 4.5 billion cubic metres (bcm) a year and will eventually reach 40 bcm a year. China will receive 30 bcm and Kazakhstan 10 bcm for its southern regions which face an energy deficit due to growing consumption.
China's CNPC, the leading operator of the project, has signed deals with state oil and gas firms of Turkmenistan, Uzbekistan and Kazakhstan giving them 50 percent stakes in their respective parts of the pipeline.
It has yet to announce the project's cost. Mynbayev declined to give the figure for the Kazakh part on Wednesday.
Turkmenistan, sitting on Central Asia's largest gas reserves, will be the major supplier of the 7,000 kilometre (4,350 miles) pipeline.
Kazakhstan, which hosts 1,300 kilometres (800 miles) of the pipeline, plans to extend its part in the future, connecting it to its own gas fields near the Caspian.
Russia's Gazprom buys about 50 bcm of Turkmen gas annually for resale in Europe. It also imports about 11 bcm from Uzbekistan and 8 bcm from Kazakhstan.
To maintain its influence over Central Asian gas flows, Russia has signed agrrements with Turkmenistan, Uzbekistan and Kazakhstan to build a new pipeline along the Caspian.
Gazprom has also vowed to pay European prices for Central Asian gas from 2009, but the exact figure has not been revealed.
India faces a new energy crisis — unavailability of gas in the international market — that could worsen power supplies and impact a wide range of industries.
Indian companies have been importing liquefied natural gas (LNG) because domestic demand exceeds supply. A third of these imports are secured in the spot market and the balance through multi-year term contracts.
|TROUBLE IN THE AIR|
|Gas demand in India||180 mcmd|
|Gas availability in India||90 mcmd|
|Gas available as LNG||40% *|
|*of which a third is bought in the spot market
mcmd = is million cubic metres per day
This sourcing pattern is a problem because, as Prosad Dasgupta, managing director of Petronet LNG, India's largest importer of LNG, explained, "There is a huge shortage of spot LNG cargoes in the world market."
This is because most of the cargoes have been bought by Japan, which is using gas to fire its power plants after its Kashiwazaki nuclear power plant closed last year.
Japan has imported close to 9 million tonnes per annum (mtpa) of spot LNG over the last year — more than India's LNG re-gassification capacity of 7.5 mtpa owned by Petronet LNG and Shell Hazira.
Spot LNG prices have increased — they mimic oil prices — but the supply constraint is a first. Prices at the New York Merchantile Exchange have more than doubled to 13.50 per mBtu (million British thermal unit) from $5.89 per mBtu in August 2007.
Users of spot LNG include NTPC — the country's largest power generator. "Spot LNG purchases are becoming a problem. When they are available we are paying $22-25 per mBtu. Our plants are also facing a shortage of gas," said an NTPC spokesperson.
"Shortage of spot LNG also affects smaller industries such as tile- and glass-makers and small power plants," said a Delhi-based analyst. "The larger players tend to have term contracts," he added.
Gas producing countries liquefy gas and transport it in cryogenic ships to consuming countries that are not connected by pipelines. The liquefied gas is easier to transport but is more expensive since the buyer has to pay liquefaction and regassification costs.
Most industries in Gujarat, where India's LNG regassification terminals are located, are worried.
"We may have to increase retail prices of gas in Gujarat," said an official in Gujarat State Petroleum Corporation, which sells gas to households and vehicles.
Industries across the country are waiting for Reliance Industries to start producing gas from the Krishna-Godavari basin off the Andhra Pradesh coast. At peak production, gas from this field is expected to double availability in India.
When Christophe de Margerie, Total’s chief executive, floated the idea early last year that the French oil and gas company eventually needed to be part of the “nuclear adventure” he stressed this would only be in the very long term.
Even so, the rest of the industry scoffed at the notion that an oil and gas company would some day go nuclear.
But the very long term has become the short term and Mr de Margerie has mapped out his strategy far more quickly than even he had expected.
Through bringing nuclear energy to the Middle East, Mr de Margerie wants to win access to oil reserves, make a decent return and help the region overcome its gas shortage.
And the unusually frank and sometimes provocative Frenchman is no longer alone. Paolo Scaroni, chief executive of Italy’s Eni and a fierce competitor, wants to do the same.
The catalyst, ironically, has been the oil price. International benchmark oil prices have more than doubled in the past year, prompting oil-rich countries, such as Kazakhstan and Venezuela, to demand an ever-increasing stake in projects and to squeeze international oil companies out of fields.
This has meant big oil and gas companies, including BP, Royal Dutch Shell, Eni, Total, ExxonMobil and Chevron, have struggled to increase their production and are looking for new ways to grow.
Many are moving into liquefied natural gas but even here there is a limit to the amount of projects available in the next decade.
That leaves the companies sitting on huge piles of cash. Even with a generous buy-back policy and consistent dividend payment plan, ExxonMobil, the biggest of the bunch, holds more than $40bn.
Exxon may not be ready to move into nuclear energy yet – an adventure the company says it tried unsuccessfully in the 1980s – but Eni and Total believe nuclear may be a better place for their money than the bank.
The move may be controversial but it would also help the world meet the huge challenge of generating the 50 per cent increase in energy forecasters say will be needed to satisfy demand in the next 22 years.
To cut CO2 emissions aggressively while meeting demand, the world would need to build 32 new nuclear plants each year from 2010-2050, the International Energy Agency, the developed countries’ watchdog, told the G8 last month.
That makes nuclear a more interesting industry than alternatives such as solar and wind, in spite of its high entry cost, some oil executives believe.
But why are Total and Eni focusing first on the Middle East?
The nuclear industry long assumed that the region would use its gas resources and therefore have no need of nuclear power.
However, the Middle East now faces an acute shortage gas and power.
In spite of billions of barrels of reserves, the region is short of gas, largely because its countries have failed to invest adequately in oil’s “poorer brother”.
Some analysts estimate the total shortfall for the six countries of the Gulf Co-operation Council – Saudi Arabia, Kuwait, Qatar, Bahrain, Oman and the United Arab Emirates – will reach at least 7,000bn cubic feet by 2015.
That is as much as 41 per cent of the UK’s entire remaining proven gas reserves. This shortage could have profound effects on the countries’ ability to meet the quickly rising power demand that comes with booming economies in need of air conditioning, or to fulfil their ambitions to grow their petrochemicals business, which needs gas as a feedstock.
Eni and Total believe they can capitalise on the region’s interest in nuclear energy – and perhaps in the process redefine themselves.
Even Saudi Arabia, in whose rich oilfields most international oil companies wish they could operate, has expressed an interest in nuclear power.
There could be other benefits from moving into the nuclear arena.
Eventually companies such as Total may well be forced by dwindling natural gas supplies to use nuclear power to extract extra heavy oil from the Alberta tar sands.
Having an understanding of the industry could give them an edge over their competitors. Even those who do not agree with Total and Eni’s nuclear vision acknowledge that their companies are having to change profoundly.
Antonio Brufau, executive chairman of Repsol YPF, said oil and gas companies would have to find new ways to grow in the future. “In 10-15 years companies like us will become energy companies, not oil companies,” he said.
“Markets will narrow, we are converging into one single thing.”
Mr Brufau said this would happen gradually and include acquisitions, resulting in companies involved in everything from oil and gas exploration to providing power to the end consumer. “In the end we will have to invest more in markets.”
Judging from the speed with which Mr de Margerie has moved towards nuclear, that time may be closer than Mr Brufau thinks.
Moves to boost the role of nuclear power in the global energy mix at this week's summit of the Group of Eight (G8) leading industrial nations could be the most difficult issue for German Chancellor Merkel.
Indeed, Merkel goes into the talks with G8 leaders saddled with a law passed by Germany's former Social Democrat-led (SPD) government aimed out phasing out nuclear power by 2021, which she is opposed to.
This now forms part of the coalition agreement her conservative Christian Democrat-led political bloc forged with the SPD about three years ago to form the government she now heads.
But with Italy's elections in April paving the way for a more pro-nuclear coalition headed by Silvio Berlusconi, Germany is now the only member of the G8 club resisting expanding nuclear power as part of efforts to address the threat posed by global warming.
Ready for a nuclear rethink?
However, sensing a shift in the public mood in Germany about extending the life of the nation's remaining 17 nuclear reactors, Merkel and her supporters have attempted to fire up a fresh campaign for a German rethink on phasing out atomic power in the country.
Amid spiraling oil and gas prices, an opinion poll commissioned by German public broadcaster ARD and released this month found that 51 percent wanted the nation to continue along the path to phasing out nuclear energy.
But 44 percent of those polled by the pollsters Infratest dimap wanted a reconsideration. This represented an increase of 8 percent since December 2007.
Moreover, with Merkel and her supporters opposed to winding back nuclear power, the question has sparked fresh tensions in her coalition with the SPD and raised the prospect of atomic energy emerging as a key issue at next year national German election.
Speaking ahead of her trip to Japan for the G8 summit, Merkel lashed out at the decision to end nuclear power in Germany, saying it was "absolutely wrong." She repeated her call for a mix of energy sources for Europe's biggest economy including fossil fuels and renewable power as well nuclear plans.
G8 climate goals
The last G8 summit in Germany agreed that industrial powers would "consider seriously" at least halving carbon emissions blamed for global warming by 2050. But critics say that the agreement is meaningless without binding targets for what to do in the mid-term to 2020.
European Commission chief Jose Manuel Barroso voiced hope that the summit in the mountain resort of Toyako would at least agree on the principle of each G8 nation setting its own mid-term target.
"Serious consideration is not enough; we need a decision," Barroso told reporters. "It is not likely that during this summit we will achieve a concrete numerical target for a mid-term agreement," he said.
But "if we come with a long-term commitment of a 50 percent reduction by 2050 and a principle agreement on mid-term reduction, we can speak of success," he said.
A pro-nuclear G8
On Sunday, Barroso joined the debate in Germany on the future of nuclear power, telling the Bild am Sonntag newspaper that atomic energy could help to ease the current energy crisis.
A G8 communiqué stressing the importance of nuclear power in the battle to combat climate change could initially cause Germany a measure of political discomfort. But it could also have the effect of bolstering the chancellor's case for jettisoning Germany's current anti-nuclear law.
The US, backed by six other G8 members, has pointed to the building of more nuclear power plants as a way to cut greenhouse gas emissions.
Briefing the press on the sidelines of the G8, US President George W. Bush's environment advisor, Jim Connaughton, stressed the "green" properties of nuclear energy.
France developed nuclear energy to reduce foreign energy dependence after the oil shock of the 1970s. It now receives nearly 80 percent of its electricity from nuclear power and is a net exporter of electricity. The country has been constructing its first European Pressurized Reactor, or EPR, on the Normandy coast. It is expected to go into service in 2012.
Nuclear power provides 30 percent of Japan's electricity. The country is working to increase this to 37 percent by 2009 and 41 percent by 2017.
Britain, Canada, Italy, Russia are all broadly in favor of atomic power.
An EU survey published last Thursday found that some 44 percent of Europeans are either "totally in favor" or "fairly in favor" of nuclear energy, according to the survey, carried out in February and March.
The last time the survey was carried out in 2005 the figure was 37 percent.
Chancellor Merkel's supporters have launched a campaign to reverse Germany's push to shut down its nuclear reactors, also declaring "atomic energy is an ecological energy."
Nuclear supporters have also begun to argue that Germany could fail to meet future commitments to cut the CO2 emissions that cause global warming unless it reverses the phasing out law and extends the life of nuclear reactors.
But Merkel's Environment Minister Sigmar Gabriel, an SPD member, has hit back, insisting that "the risks of this technology could not be played down."
Instead, the SPD has sought to underscore the importance of pushing ahead with developing alternative energy sources such as wind and solar power.
With this mind, Infrastructure Minister Wolfgang Tiefensee, also a SPD member, has announced a dramatic expansion of wind energy, including the building of wind parks in the sea.
"We are emphasizing renewal energy and not atomic energy," Tiefensee told Germany's weekly Welt am Sonntag, adding that the aim was to make the nation independent of foreign sources of energy.
France's two biggest energy groups, EDF and GDF Suez, are vying to build the country's latest nuclear power plant, casting fresh doubt on their participation in Britain's planned nuclear renaissance.
Last week President Nicolas Sarkozy gave the go-ahead for a second new-generation European pressurised reactor (EPR) on an existing site. It will be France's 60th nuclear power plant.
State-owned EDF said immediately it was ready to take part in the project in view of the increased demand for electricity and constraints imposed by global warming, and said it owned several potential sites for the new reactor.
GDF Suez indicated its interest but said it would decide by early 2009 at the latest. Analysts said it is certain to go ahead given its plans to extend its nuclear presence from Belgium to France.
EDF, which is helping to build France's first EPR at Flamanville on the Normandy coast, is still said to be considering whether to increase its rejected offer to buy British Energy, Britain's main nuclear power operator. Industry sources say its interest is waning, given that BE shareholders want much more than EDF's indicative offer of 680p a share. EDF is thought unwilling to go much above 700p.
The French group is the only player left in the running to acquire the government's 35% stake in BE after Suez, Spanish group Iberdrola and Germany's RWE withdrew from the bidding process. It has been talking with Centrica, owner of British Gas, about the UK group's role in the process.
The British government, already facing delays to its planned nuclear new-build programme because of skills shortages, could meet further setbacks if the BE sale fails to materialise.
China, the world's second-biggest energy consumer, shut 2.5 percent of its coal-fired power plants, prompting local governments to limit electricity consumption and issue warnings on possible blackouts.
Insufficient coal supplies forced the closure of 58 power- generating units in central and northern China as of July 6, or 14,020 megawatts of capacity, data from the State Grid Corp. of China showed yesterday. The nation's total coal-fired capacity stood at 554,420 megawatts last year, according to the State Electricity Regulatory Commission.
Coal inventories at State Grid, the country's biggest power distributor, were enough for about 11 days of consumption as of July 6, compared with 12 days in April and 15 days in March. China shut 7 percent of its coal-fired plants in January after the worst snowstorms in 50 years hampered fuel transportation, leading to electricity shortages affecting half of the nation's 31 provinces.
"The power problem is beginning to look deep-seated and structural and unlikely to be resolved rapidly," said John Kemp, a London-based analyst with Sempra Metals Ltd.
The latest power-plant closures come even as the government last month imposed "caps" on thermal-coal prices through the end of the year to control raw-material costs and ensure electricity production.
"Coal suppliers may sell the fuel to consumers willing to buy at much higher prices," David Fang, a director of the China Coal Transport and Distribution Association, said by telephone in Beijing on July 4. "This would worsen the coal shortage."
Small Mines Shut
Aggravating the shortfall, China has been shutting thousands of small and unsafe mines in Shanxi and other areas. China generates almost 80 percent of its power from coal, with the northern province its biggest producing region.
Shanxi, which has issued a "red" alert, will "resolutely" limit power supplies to energy-intensive and polluting factories, the State Electricity Regulatory Commission said in its in-house newsletter yesterday.
Aluminum Corp. of China Ltd., the nation's biggest producer of the metal, halted output at a venture in the province because of power shortages. That pushed the price of aluminum to a record yesterday.
Shanxi ordered smelters to cut output to ensure power supply for farming, Wang Suomin, a manager at the Shanxi Huaze Aluminum & Power Co. venture, said by phone yesterday.
The central province of Henan restricted electricity use in eight cities as power plants shut because of fuel shortages, Xinhua News Agency reported on June 27. Henan will face a power deficit when consumption peaks in summer, it said.
State Grid Corp., which buys electricity from 541 coal- fired power plants and distributes it to more than 1 billion people across the country, said yesterday the coal stockpiles of 64 power plants have fallen below the "caution line." That means that the inventories of those generators can't meet more than three days of consumption.
"The government may introduce more steps in the coal industry because the price caps may prove ineffective in easing thermal-coal shortages," Fang said last week.
Overseas suppliers may be unwilling to sell the fuel to China because of the government caps on domestic prices announced on June 19, Fang said on July 1. That would aggravate the country's coal shortages.
Domestic thermal-coal prices range between 800 yuan ($117) and 900 yuan a ton, Fang said at the time. That's lower than prices at Australia's Newcastle port, a benchmark for Asia, where the fuel jumped to a record $194.79 a ton in the period ended July 4, according to the globalCOAL NEWC Index.
Global coal prices will "move modestly higher over the next six to 12 months," Daniel Brebner, UBS AG's executive director of commodity research in London, spoke in a phone interview on July 3. "You have infrastructure issues building in both the U.S. and Russia, and a potential power crisis in China over the summer."
BEIJING, July 10 (Xinhua) -- China, the world's second-largest energy consumer, imported 11 percent more crude oil in the first half of 2008 than in the year-earlier period.
Crude imports stood at 90.53 million tons, the General Administration of Customs said on Thursday. The growth rate was down 0.2 percentage points from last year.
The imports were valued at 64.98 billion U.S. dollars, up 85.8 percent, as world prices surged. Import prices hit a record high of 849.10 U.S. dollars per ton in June.
Angola, Saudi Arabia, and Iran were the top three oil suppliers.
China also imported 21.01 million tons of refined oil products in the first half, up 16.4 percent year-on-year.
Meanwhile, the country exported 2.37 million tons of crude and 7.88 million tons of refined products, up 30.6 percent and down 0.3 percent, respectively, from a year earlier.
The administration suggested that the government act to ease the increasingly direct and large impact of oil prices on the economy. It said that further measures were needed to curb oil exports and reform the fuel pricing system gradually to ensure domestic supply.
The great oil shock of 2008 is bad enough for us. It poses a mortal threat to the whole economic strategy of emerging Asia.
The manufacturing revolution of China and her satellites has been built on cheap transport over the past decade. At a stroke, the trade model looks obsolete.
No surprise that Shanghai's bourse is down 56pc since October, one of the world's most spectacular bear markets in half a century.
Asia's intra-trade model is a Ricardian network where goods are shipped in a criss-cross pattern to exploit comparative advantage. Profit margins are wafer-thin.
Products are sent to China for final assembly, then shipped again to Western markets. The snag is obvious. The cost of a 40ft container from Shanghai to Rotterdam has risen threefold since the price of oil exploded.
"The monumental energy price increases will be a 'game-changer' for Asia," said Stephen Jen, currency chief at Morgan Stanley. The region's trade model is about to be "stress-tested".
Energy subsidies have disguised the damage. China has held down electricity prices, though global coal costs have tripled since early 2007. Loss-making industries are being propped up. This merely delays trouble.
"The true impact of the shock will only be revealed over time, as subsidies are gradually rolled back," he said. Last week, China raised internal rail freight rates by 17pc.
BP 's Statistical Review says China's use of energy per unit of gross domestic product is three times that of the US, five times Japan's, and eight times Britain's.
China's factories "were not built with current energy levels in mind", said Mr Jen. The outcome will be "non-linear". My translation: China is at risk of blowing up.
North Carolina's furniture industry is coming back from the dead as companies shut plant in China. "We're getting hit with increases up and down the system. It's changing the whole equation of where we produce," said Craftsmaster Furniture.
China is being crunched by the triple effects of commodity costs, 20pc wage inflation, and sagging import demand in the US, Canada, Britain, Spain, Italy, and France.
Critics warn that Beijing has repeated the errors of Tokyo in the 1980s by over-investing in marginal plant. A Communist Party banking system has let rip with cheap credit - steeply negative real interest rates - to buy political time for the regime.
Whether or not this is fair, it is clear that Beijing's mercantilist policy of holding down the yuan to boost exports share has now hit the buffers.
Foreign reserves have reached $1.8 trillion, playing havoc with the money supply. Declared inflation is just 7.7pc, but that does not begin to capture the scale of repressed prices, from fuel to fertilisers. "There is a lot more bottled-up inflation in this economy than meets they eye," says Stephen Green, from Standard Chartered.
Inflation merely steals growth from the future. It defers monetary tightening until matters get out of hand, which is where we are now. Vietnam has already blown up at 30pc. India is on the cusp at 11pc, so is Indonesia (11pc), the Philippines (11pc), Thailand (9pc) - leaving aside the double-digit Gulf.
Of course, oil prices may fall again. They plunged to $50 a barrel in early 2007 after the Saudis raised production. The scissor effect of slowing global growth and extra crude later this year from Brazil, Azerbaijan, Africa, and the Gulf of Mexico may chill the super-boom.
The US Commodities Futures Trading Commission is on an "emergency" footing, under orders from the Democrats on Capitol Hill to smash speculators. If it is really true that investment funds have run amok, we will soon find out.
I suspect that the energy markets have fallen prey to their own version of the "shadow banking system" that so astonished regulators when the credit bubble burst.
I also suspect that Hank Paulson and his EU colleagues have a surprise up their sleeve for the late-cycle über-bulls. Those who claim that derivatives (crude futures) cannot drive spot prices have overlooked a key point. The Saudis and others use the IPE Brent Weighted Average of futures contracts as their pricing mechanism. Futures now set the spot price.
But even if oil comes down for a year or two, the mid-term outlook of the International Energy Agency warns that crude markets will be tighter than ever by 2012. Call it Peak Oil, or just Peak Non-Cooperation by the dictatorships that control most of the world's remaining 5 or 6 trillion barrels (Mankind has used one trillion so far).
Come what may, globalisation has passed its high-water mark. The pendulum will now swing back from China to America. The mercantilists will have to reinvent themselves.
China and India failed on Wednesday to give their support to halving carbon emissions by 2050, dimming briefly raised hopes of a breakthrough on climate change at the Group of Eight summit.
The inability to win over the developing countries is a blow to the G8, which had expected their support. This is the first time they have defied the developed world openly on this issue.
The G8 summit this week has grappled with what Gordon Brown, UK prime minister, called the “triple shock” of a food, oil and financial crisis. But G8 leaders struggled to take decisive action, merely expressing “serious concern” at high oil prices and seeking to sketch out longer-term solutions to food shortages.
Leaders of the big emerging economies showed little willingness to compromise, insisting it was largely for rich nations to clear up their own mess.
Japan said Australia, South Korea and Indonesia had expressed support for the 50 per cent cuts agreed by the G8. But China, India, Brazil, Mexico and South Africa issued a statement saying that rich countries needed to slash carbon emission levels by 80-95 per cent from 1990 levels.
The UK appeared to agree with the statement. David Miliband, the UK’s foreign minister, signed a communique with South Africa this week calling on rich countries to embrace the deeper cuts.
Yasuo Fukuda, Japan’s prime minister, tried to put a positive spin on the talks, saying: “We saw eye to eye.”
US officials who have blocked previous attempts to reach agreement declared themselves happy. James Connaughton, chairman of President George W. Bush’s council on environmental quality, said: “The G8 has taken a significant step forward in its level of ambition.”
In a conference dominated by what one Japanese official called a “nexus of interrelated issues” – climate change, rising oil and food prices, African poverty and financial strains in the west – the G8 was sometimes revealed as lacking in clout.
Nicolas Sarkozy, president of France, floated the idea of enlarging the G8 to a G13, but his proposal was cold-shouldered by the US, Japan and other countries happy with present arrangements.
Mr Fukuda said the summit was the most important in years, coming as it did amid a welter of urgent global problems. But he also hinted at the G8’s impotence, saying, for example, that high oil prices were largely a “structural problem” of supply and demand.
Mr Fukuda expressed hope, but little conviction, that rising fuel and food prices – which are threatening global inflation – might calm down following the summit.
Without major Middle Eastern oil producers present, experts said, there was little G8 leaders could do on petroleum prices except call for more investment and market transparency. They did express a desire for more regular dialogue between producers and consumers. They also stressed the importance of energy efficiency as a long-term solution to fossil-fuel dependence.
Oxfam’s Jeremy Hobbs said: “The G8 failed to rise to the challenge of a world crisis” describing the consensus reached on climate as “at best shallow”. WWF called the Major Economies Meeting of G8 plus major emitters, which campaigners see as a willful distraction from the UN process, as a “Major Embarrassment Meeting”.
G8 leaders also discussed aid to Africa amid accusations from charities that they were reneging on their own pledges made at Gleneagles in 2005. Mr Fukuda denied that, saying: “Some might suggest we are not delivering on our commitments. But don’t we meet those commitments? Well, probably we do.”
The UK will continue to expand the use of biofuels in petrol and diesel for transport, despite the findings of an independent review which found today that the controversial fuels can drive up food prices and do little to combat global warming.
Ruth Kelly, the transport minister, told the Commons that Britain needed to press ahead with biofuels because the technology could still prove beneficial. But she said the government would slow down their introduction.
She said: "I believe it is right to adopt a more cautious approach until the evidence is clearer about the wider environmental and social effects of biofuels. We also need to allow time for more sustainable biofuel technologies to emerge."
The move follows the long-awaited publication of a review of the environmental and social impact of biofuels by Professor Ed Gallagher, the head of the government's Renewable Fuels Agency.
Gallagher's report recommended that the introduction of biofuels should be slowed until more effective controls were in place to prevent the inadvertent rise in greenhouse gas emissions caused if, for example, forests are cleared to make way for biofuel production. Food prices can also rise as competition for land increases.
The report said that if these displacements are left unchecked, current targets for biofuel production could cause a global rise in greenhouse gas emissions and an increase in poverty in the poorest countries by 2020.
Gallagher's main recommendation is to slow down the UK's Renewable Transport Fuel Obligation. This forces fuel suppliers to mix 2.5% biofuels into the road transport fuel they sell in 2008-09. It further proposes that this target increase by 1.25% per year to 5% in 2010-11.
Gallagher said the target increase should be reduced to 0.5% per year.
Anything beyond 5% biofuel after 2013-14 should only be agreed by governments if the fuels are demonstrated as sustainable, including avoiding indirect effects such as change in land use. Kelly said the government agreed with that conclusion.
The review also suggested incentivising the production of biofuels from waste and fuels grown on marginal land that is not already used to grow food. To help create a market for more newer technologies, Gallagher said that the EU could introduce an obligation to produce up to 2% of biofuels from these methods.
Gallagher said: "Our review makes clear that the risks of negative impacts from biofuels are real and significant, but it also lays out a path for a truly sustainable biofuels industry in the future."
Green groups said the review did not go far enough, and they renewed calls for biofuels targets to be scrapped.
Mark Avery of the RSPB said: "We all know what someone who finds themselves in a hole should do. This review seems to be saying that it's OK to keep digging, as long as we dig with a little less enthusiasm. The review's analysis is based on rational argument but its conclusion comes with a large dollop of politics mixed in."
Boris Johnson, the mayor of London, has dropped plans for a £25 congestion charge for bringing "gas guzzler" 4x4 vehicles into the centre of the capital.
The mayor abandoned the proposal to extend the existing congestion charging scheme after a legal challenge by Porsche, the German carmaker.
Under plans put forward by Ken Livingstone, Mr Johnson's Labour predecessor, vehicles emitting more than 225 grams of carbon dioxide per one kilometre and cars registered before March 2001 with engines larger than 3,000cc would have faced a £25 charge.
The plan, which had been due to take effect in October, would have affected nearly one in five of all vehicles in London, reflecting the popularity of large SUV-type cars.
Mr Johnson campaigned against the plan before his election in May, and said he was pleased to kill the charge.
Mr Johnson said: "I am delighted that we have been able to scrap the £25 charge, which would have hit families and small businesses hardest.
"I believe the proposal would actually have made congestion worse by allowing thousands of small cars in for free."
Porsche went to the Administrative Court to seek judicial review of the proposal after uncovering research from King's College which showed that the new charge would actually increase CO2 emissions in Greater London by making people drive further to avoid the congestion charging zone.
The company said it had been awarded legal costs expected to amount to a six-figure sum.
Porsche Managing director Andy Goff said: "The charge was clearly unfair and was actually going to increase emissions in London.
"Porsche is proud to have played a decisive role in striking down such a blatantly political tax increase targeting motorists."
The company said it would donate the legal costs awarded to youth charity Skidz, which helps turn young people away from crime by training them as mechanics.
A cut of 5p a litre in the price of petrol and diesel was proposed by the Tories yesterday, with radical plans to change the way tax is levied on fuel in the wake of record global prices for oil.
The shadow Chancellor, George Osborne, launched a consultation on plans to scrap the existing fuel duty escalator and to replace it with a "fair fuel stabiliser" which would automatically allow the tax on fuel to fall when the world price for oil goes up.
He said fuel would be 5p a litre cheaper and inflation would be lower if the Tories' proposed system had been introduced in the Chancellor's Budget last March. This would save up to £3.50 on each tank of fuel for a Ford Mondeo, or £2.60 for a Vauxhall Astra.
On Thursday, the Prime Minister, Gordon Brown, gave the clearest hint so far that the 2p rise in fuel duty would be cancelled before it is introduced in October. The announcement could come before the 24 July by-election in Glasgow East where the rising price of fuel is a key issue. The hauliers have also caused fears in Downing Street that there could be damage to the economy if lorry pro-tests were repeated this summer.
"We are proposing a totally different way of doing fuel duty," Mr Osborne said on the BBC's Andrew Marr programme. "Under the current system, you wait for Gordon Brown to drop hints at select committees or Alistair Darling to come on this programme to make hints about what he may or may not do with the 2p. Not only is that an insult to families who want some clear direction from the Government but it is also extremely destabilising for the public finances."
The average household would have saved more than £90 in fuel costs under the stabiliser regime, said the Tories. Inflation would have remained below 3 per cent – the trigger point for the letter to the Chancellor by the Governor of the Bank of England, Mervyn King – rather than hitting 3.3 per cent with the threat of higher interest rates.
The Tories claim that the Treasury has had a windfall of bet-ween £4.6bn and £9.2bn in revenue from oil at $130 a barrel, which would be enough to pay for the cut in fuel duty. Adopting the more cautious estimate, the consultation document says the best independent evidence suggests public finances gain about £100m for every $1 change in the oil price.
The Tories say that diesel prices in Britain are the highest in Europe and petrol prices have risen faster here than anywhere in Europe except Estonia. Under the Tory plan, duty would rise if fuel fell below $84 a barrel, the baseline forecast in the last Budget for the price of oil, but it would fall if it remained above that level. The threshold for a fall in duty would be reviewed to make sure the public finances did not suffer too much.
"If this money was used so that around half of the change in fuel prices at the pumps caused by changing oil prices was offset by changes in fuel tax, the public fin-ances would be much better insulated against fluctuating oil prices," said Mr Osborne
"Clearly, as the scale of North Sea oil production and revenues change over time, the optimal degree of stabilisation will change. The exact structure of a Fair Fuel Stabiliser should therefore be reassessed every Parliament to ensure it remains consistent with stable public finances."
About 60 per cent of the current retail price of fuel is accounted for by tax. The document says a 115p-per-litre price for unleaded petrol is typically made up of 50.35p in fuel duty, 17.13p in VAT, 37.35p for the cost of the product, and 10.17p for delivery and retail.
The AA welcomed the proposals, saying that it had proposed a similar system in January. The AA's president, Edmund King, said: "The Government needs to review fuel duty as the price of a barrel of oil has doubled in just 12 months."
Business advisers Grant Thornton added: "The basic concept of an FFS is sound in economics terms. There is a strong argument to the effect that it would help smooth out fluctuations [to the price of road fuel, to inflation, and to the public fin-ances] arising from the fact the UK is simultaneously a measurable oil producer, and an oil consumer."
Northwest Airlines, facing a major financial threat from skyrocketing oil prices, announced Wednesday that it will cut about 8 percent of its workforce and impose more fees on passengers.
The carrier intends to reduce 2,500 front-line and management positions -- including an undisclosed number in Minnesota -- and hopes to achieve most of those cuts through early retirement, voluntary leaves and attrition.
Northwest employs about 31,000 workers, including 11,500 in Minnesota.
As it cuts expenses, Northwest also introduced two passenger fees and raised a third with the goal of increasing revenue by $250 million to $300 million a year.
Northwest will begin charging many customers $15 for a first checked bag and up to $100 for redeeming frequent-flier miles. Charges to change some domestic tickets will jump to $150, up from $100. Some international change fees will rise even more.
Airlines have been scrambling to deal with record oil prices, which have doubled in the past year to around $140 a barrel. They've revealed plans to slash many domestic flights -- as well as some international routes -- cut their fleets and pare workforces as their costs jump and stock prices sink. Most of the cuts in flight schedules will occur after the summer travel season ends.
Northwest's cuts, while major, aren't out of line with other carriers. American Airlines, the world's largest carrier, last week announced that it would cut almost 7,000 jobs and Delta Air Lines has trimmed 4,100 workers.
Northwest is "just moving in lockstep with everybody else," said David Stempler, president of the Air Travelers Association. Other big carriers, attempting to raise revenue wherever they can, also have been raising fares and fees.
Northwest CEO Doug Steenland recently testified before Congress that more bankruptcies and liquidations will occur if oil prices don't fall.
Viktor Vekselberg, one of the four Russian billionaires who together own a 50 per cent stake in TNK-BP, last night set out a four-point peace proposal aimed at ending the bitter dispute with joint venture partners BP.
Both sides are due to meet tomorrow for a board meeting of TNK-BP International, the company’s parent, and Mr Vekselberg said the agenda would include four main proposals, designed to “buy time” to resolve the feud.
These include a call for all TNK-BP management to leave at the start of next year, with BP retaining the right to nominate a chief executive. Robert Dudley, TNK-BP’s chief executive, who is backed by BP, narrowly held on to his job on Monday after the billionaires failed in their attempt to fire him.
The proposal also calls for directors at the venture’s subsidiaries to be split evenly among BP and the private investor nominees.
Lastly, Mr Vekselberg, whose Renova Group owns 12.5 per cent of TNK-BP, would restore power of attorney to Russian executives at the venture.
“We want to find a peaceful solution,” Mr Vekselberg said, but added that Renova would seek international arbitration if a deal with BP cannot be reached. “If we don’t come to an agreement, we don’t have any choice,” he said.
Mr Vekselberg said he is not looking to change the shareholder structure of the venture. The four billionaires — Mr Vekselberg, Mikhail Fridman, Len Blavatnik and German Khan — own 50 per cent of Russia’s third-largest oil company through their AAR consortium, with BP holding the other 50 per cent. This ownership structure is reflected fully only on the board of TNK-BP International, the parent company, to which TNK-BP management reports.
The four-point plan follows revelations that the Russian authorities have begun a fresh investigation into TNK-BP’s tax arrangements, just hours after Gordon Brown held talks with Dmitry Medvedev, the Russian President, over the battle for control of TNK-BP.
Tax inspectors have demanded reams of documents relating to payments made to BP specialists seconded to the company between 2006 and 2007.
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