ODAC Newsletter - 29 August 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.
Oil price volatility continued this week with the current trend being upwards. The main driver is the possibility of hurricane Gustav hitting the Louisiana oil fields and causing damage there. The tension between Russia and the West continues to be a factor, with Russia’s recognition of the independence of S. Ossetia and Abkhazia this week bringing a frosty response from the US and EU nations. India is experiencing diesel shortages as people increasingly resort to generators in order to stave off the impact of power cuts. China however may cut fuel imports in the next month due to the stockpile it accrued prior to the Olympics. The extent of any Olympic hangover and its effect on prices will become apparent in the next months.
Volatility in the oil price has been predicted by key peak oil theorists such as Kenneth Deffeyes and Richard Heinberg. Essentially, a high oil price has the effect of destroying demand, thus leading to a drop in the price and a short-term recovery. Such recoveries are however on a backdrop of long-term decline as demand picks up again when the price drops, causing it to rise again and as supply gaps become more acute. As the UK economy slips into recession, Governor of the Bank of England Mervyn King this week painted a bleaker picture of the next 12 months than he has previously. He did however assure his audience that "This is just a transitory period of subdued growth and we will get through the other side and the growth will resume to more normal levels". In other words we are encouraged to believe that the good times will return, which in effect means that we don’t really need to change what we are doing.
On the international stage it is easier to see that the world is changing. The EIA is struggling to make meaningful oil price predictions in the light of increasing demand from the developing world and, in the words of UK Energy Minister Malcom Wicks “There is a huge global grab for energy going on...”. Nations are making strategic moves to claim territory or influence.
There are echoes of the Cold War in Georgian conflict, but this has little to do with ideology and this is no longer a world of two opposing superpowers.
Join us! Become a member of the ODAC Newsgathering Network. Can you regularly commit to checking a news source for stories related to peak oil, energy depletion, their implications and responses to the issues? If you are checking either a daily or weekly news source and would have time to add articles to our database, please contact us for more details.
Crude oil rose for a fourth day in New York as meteorologists forecast Tropical Storm Gustav will be the most damaging since Hurricane Katrina as it moves toward production platforms in the Gulf of Mexico.
Gustav may reach the coast of Louisiana, where U.S. oil and gas offshore platforms and pipelines are most concentrated, by 8 p.m. on Sept. 1, the National Hurricane Center said at 2 a.m. Miami time. The storm may become a "hurricane rivaling Rita and Katrina," whose disruption caused record prices, Joe Bastardi of AccuWeather.com said yesterday.
"The worst-case scenario is that it develops into a hurricane as it moves into the Gulf and hits oil infrastructure or refinery infrastructure," said david Moore, a commodity strategist at Commonwealth Bank of Australia Ltd. in Sydney.
Crude oil for October delivery rose as much as $1.10, or 0.9 percent, to $119.25 a barrel on the New York Mercantile Exchange, and traded at $118.60 at 2:38 p.m. Singapore time. Prices, 66 percent higher than a year ago, have dropped 19 percent from a record $147.27 a barrel on July 11. Yesterday, oil rose $1.88, or 1.6 percent, to $118.15.
Gustav was packing sustained winds of about 45 miles (75 kilometers) an hour, the National Hurricane Center said. The storm was about 105 miles south-southwest of Guantanamo, Cuba, and moving west-southwest at 8 mph. It is expected to turn west- northwest tomorrow and regain hurricane strength over the next 48 hours.
"If heading into the weekend it looks like it could strike some of the more critical areas, the market will build in a fear premium," said Toby Hassall, an analyst with Commodity Warrants Australia in Sydney. "All eyes are on how it progresses."
Royal Dutch Shell Plc, Europe's biggest oil company, said it has evacuated about 400 workers from its oil and natural-gas platforms in the Gulf of Mexico because of Tropical Storm Gustav.
The company will move another 270 workers today and plans to evacuate the remaining 600 on Aug. 29 and Aug. 30, Robin Lebovitz, a Shell spokeswoman, said in an e-mailed statement.
Energy producers planned to evacuate "several thousand" employees from offshore rigs yesterday because of the storm, said Ted Falgout, the director of Louisiana's Port Fourchon. Almost 20,000 workers are on offshore platforms, about one-quarter of which are needed to maintain output, Falgout said in an interview yesterday.
"Most companies are waiting until Friday to decide whether they need to shut down production," Falgout said. "If you look at models showing the storm's track, it should scare you."
The Gulf accounts for about 14 percent of U.S. gas output. The coast along Louisiana and Texas is home to 42 percent of U.S. refining capacity.
In August and September 2005, U.S. crude oil and fuel production plunged and prices rose to records when hurricanes Katrina and Rita struck the Gulf Coast. Katrina closed 95 percent of offshore output in the region. Almost 19 percent of U.S. refining capacity was idled because of damage and blackouts caused by the storms.
Prices also rose today after a government report showed that U.S. gasoline supplies dropped for a fifth week. Gasoline stockpiles fell 1.18 million barrels to 195.4 million barrels, the Energy Department said in its weekly report. A drop of 2.45 million barrels was expected, according to the median of 12 analyst responses in a Bloomberg News survey.
Crude-oil inventories dropped 177,000 barrels to 305.8 million barrels, the report showed. Expectations were for a gain of 1.1 million barrels. Imports fell 9.2 percent to 9.9 million barrels a day.
Suuplies of distillate fuel, a category that includes heating oil and diesel, climbed 57,000 barrels to 132.1 million barrels.
Brent crude oil for October settlement rose as much as 98 cents, or 0.8 percent, to $117.20 a barrel on London's ICE Futures Europe exchange. The contract was at $116.73 at 2:39 p.m. Singapore time.
Predicting energy prices is "more difficult" now because of the lack of sufficient information from emerging economies, the head of the U.S. Energy Information Administration said.
"No one could've predicted" recent record energy prices, Guy Caruso, administrator of the agency, said today at a press conference in Washington sponsored by Platts. Caruso, 66, announced earlier this month that he will step down on Sept. 3 as head of the agency, which is the statistical arm of the Energy Department.
Crude-oil futures prices reached a record $147.27 a barrel on the New York Mercantile Exchange on July 11. Members of Congress have asked the agency to review its modeling system, saying forecasts have been "dramatically lower" than current prices.
The agency currently forecasts oil prices will be between $120 and $130 a barrel for the rest of the year. According to the agency's annual energy outlook, prices will fall to a low of $57 a barrel in 2016 and then reach about $70 in 2030.
Caruso said he "certainly can understand the frustrations reflected by the criticism" of the agency's price forecasts.
"No one could've predicted all of these events on the political side or even the kind of economic growth that the emerging economies have achieved," he said.
Price forecasting is more difficult now because "the emerging economies are playing a more important role in energy markets," Caruso said.
"Those are the areas where data and other information on their energy economies is worse" than information from the 30 nations in the Organization for Economic Cooperation and Development.
He mentioned the difficulty in getting information on energy use from places such as China. "The data isn't there," he said.
The agency's price forecasts are "valuable as a tool" to help model the effects of changes in the law, Caruso said. "I wouldn't think it's that useful as a predictor in order to plan investments or things like that."
CHENNAI: June to August is usually considered a lean period for diesel usage, as opposed to October-March when the consumption increases manifold due to harvest and transportation of goods for the festival season. So the worse might just be beginning.
Oil companies, however, say they can't be blamed. "We don't have a diesel shortage in a typical sense. The oil marketing companies are pumping 25% more into Chennai than what we did during same time last year. Therefore we can safely state that there is no shortage. The problem is that our retail infrastructure is equipped to handle only the transportation segment," N Srikumar, executive director, corporate communications and planning at Indian Oil, said.
Another official with an oil company said: "The growth of economy at 8% and the growth of diesel-vehicle sector at 8-10 %, when read together with the 25% increase in diesel supply into the market , show the needle of suspicion pointing to the commercial establishments."
With Chennai experiencing power cuts and power holidays , owners of diesel generator sets are queuing up at bunks. This is a relatively new phenomenon for a city which has always boasted itself of surplus power. Organised diesel consumers like the state roadways, railways, and power plants don't queue up at retail stations. They buy in bulk from depots. But buyers like hotels, small businesses and small IT parks land up at retail outlets.
So what is the solution? One, bunks should stop selling diesel in cans - it should go straight to tanks of vehicles . This may affect the units which are in sudden need of diesel due to power holidays, but a few units can always team up and head for a depot. Two, government should increase the price of 'commercial ' diesel. A concept paper by OMCs has suggested differential pricing for units which purchase diesel for purposes other than transportation .
Third, when international crude prices crossed $95 a barrel mark, the prices of furnace oil and LSHS (used by power plants) shot up beyond that of diesel, prompting industries to switch over to diesel. If the government sets right this anomaly, then the diesel used by these units can be available in the market.
China’s state-owned oil companies are likely to stop imports of refined products such as diesel and petrol next month after a nine-month buying spree that has left stockpiles overflowing, one of Asia’s largest refiners said.
“Since China started whipping up imports in November last year, 25 per cent to a third of our diesel exports have gone there,” said Wilfred Wang, chairman of Taiwan’s Formosa Petrochemical (FPCC). “But this market will disappear next month.”
His remarks confirmed market expectations of an imminent end to a buying binge from Sinopec and PetroChina that has supported refining margins in the region but has been suspected of being out of line with end demand.
Since late last year, the two Chinese state-owned refiners had been importing increasing amounts of diesel, peaking at 960,000 tonnes in June, and the country became a net petrol importer for the first time in May.
Industry experts have attributed the buying binge to political orders to refiners to avoid shortages during the Olympics. The import wave had been boosted by tax rebates granted to Sinopec and PetroChina for imports of refined products.
However, much of the imported petrol and diesel has been stockpiled rather than consumed.
“The state refiners’ stockpiles are so full that they have been reselling the stuff,” FPCC said.
Mr Wang said this was one of many non-economic factors in the oil price.
The end of China’s import boom, along with additional capacity from India’s Reliance later this year, is expected to exacerbate a drop in refining margins across Asia.
The benchmark Singapore refining margin reached an average $9.92 per barrel in the first half of this year, 20 per cent above last year’s, partly driven by the Chinese buying, but the full-year average margin would slide back to last year’s level, the FPCC said. That would mean the Singapore refining margin could drop well below $6 per barrel in the second half.
“The highs in the refining margin are higher than last year’s, but the lows will be lower,” Mr Wang said.
The Russian oil boom, which has produced a gusher of cash, political power and an opulent elite - and has helped fuel the country's renewed assertiveness in Georgia and elsewhere - is on shakier ground than officials in Moscow would like to admit.
Most of the oil produced after the country's 1998 financial collapse has come from drilling and re-drilling old Soviet oil fields with more advanced equipment - squeezing more black gold out of the same ground - and efforts to develop new fields have been slow or non-existent.
That strategy is potentially disastrous, said Valery Kryukov, who researches oil companies in western Siberia for a government-funded think tank.
"If the situation which exists now stays the same, oil production will start to decline seriously in two years," Kryukov said in a phone interview from his offices in the city of Novosibirsk.
The implications extend far beyond Russia's borders. Last year, Russia was the world's second-largest oil producer. If its output begins to decline or is hampered by inept or corrupt business practices, the price of oil could begin climbing again.
The concerns about Russia's oil industry also raise questions about the health of the nation's economy, which has enjoyed stratospheric growth thanks to high oil prices since the economic crisis a decade ago, according to interviews with a dozen economists and analysts.
Higher oil and gas prices could further enrich and embolden resurgent Russia, but if production declines sharply, a hungry bear could prove to be even more troublesome than a prosperous one is.
That's a serious matter for a country where, by some estimates, the oil sector funded about a third of the national budget last year, and where by all accounts industrial, technological and agricultural businesses lag far behind. Russia's other major revenue source is natural gas, in which Russia leads the world; oil and gas sales are mainly responsible for the country's $592 billion in gold and foreign exchange reserves.
The practice of reaping quick profits and ignoring long-term interests is reminiscent of the former Soviet Union's development policies, and it was embraced by post-Soviet billionaires, known as oligarchs, who propped up flimsy companies to strip Russia's natural resources for as many fast rubles as possible. It continued as the government took over many of those private companies, often by brutish means.
Under Vladimir Putin, Russia's president from 2000 to 2008 and now the prime minister, the Russian government dismantled the nation's largest oil firm, Yukos, and imprisoned its founder.
The government declared oil to be part of a "strategic sector" in which foreign investors need permission from the government before they can buy a significant stake in companies. Foreigners have been steadily shoved out, including a recent incident in which the head of the joint Russia-UK company TNK-BP, one of the country's leading oil concerns, and 148 specialists left the country after their visa status was called into question.
In the short-term, business has been lucrative: Russian oil output jumped from about 6.1 million barrels a day in 1998, when the price of a 42-gallon barrel was less than $20, to an average of some 9.7 million barrels a day in the first half of this year. Prices reached $145 a barrel in July before dropping back to the $120 range.
At its current rate of production, though, Russia will run out of oil relatively soon, according to BP statistics. Saudi Arabia - last year's biggest oil producer - can continue pumping at its current clip for about 70 years, according to the same BP statistics.
A chart provided by the U.S. Energy Information Administration lays out the stark details: Only two of Russia's 14 largest oil producing fields were opened after the Soviet Union collapsed in 1991, and half of the 14 were more than 60 percent depleted in 2006. As fields are depleted, pumping oil out of them generally becomes harder and more expensive.
After a decade of oil production increases, there's been a slight drop - 0.5 percent - in production during the first seven months of this year, according to state statistics. Troika Dialog, Russia's largest investment bank, is forecasting a 0.7 percent decline in oil production this year from 2007.
In response, Russian officials have rolled out a proposed tax break that could enable oil companies to save an estimated $4.2 billion or more in the hope that firms will use the cash to go find more oil.
Economists who are bullish about Russian oil point to upcoming projects on offshore sites - awarded to two state-controlled companies - that could substantially increase the country's oil reserves.
Officials in Russia's ministry of economic development didn't respond to repeated requests for comment.
However, Valery Tsvetkov, a deputy of the institute of market problems at the state-funded Academy of Sciences, laid out an array of statistics showing what's wrong with Russia's oil industry.
Among them: In 1990, some 17.3 million feet of new wells were drilled looking for new reserves in the former Soviet Union, almost all of them in what's now the Russian Federation. In 2007, about 3.9 million feet were drilled.
"Why? Because today those who work in the oil industry find it easier to take the cream off the existing fields than to find new fields," Tsvetkov said. When he and others send research papers to the government about potential economic problems, he said: "No one reads them."
"The Russian government has few people with the mentality of statesmen," Tsvetkov said. "Today, the aim of many people is to become rich at the expense of the state."
Indeed, there are few signs of concern in the nation's capital, a caviar wonderland for the Learjet crowd. Moscow has more billionaires than any other city in the world - 74 according to Forbes magazine. Lest the millionaires feel left out, there's an annual Millionaire Fair where a big spender can buy a $1 million set of diamond-encrusted rims for his Mercedes or BMW.
Even optimists, however, are worried about the economy's dependence on oil revenues during a time when reserves are ebbing.
Valery Nesterov, an analyst at Troika Dialog, showed a reporter a map of Russia's oil and gas infrastructure - a vast array of wells and pipelines - and gestured to blank expanses in the eastern provinces. The oil under the ground there and in the waters surrounding Russia could secure its position as a world leader, he said.
When asked about the current flattening of production numbers, and the extent to which Russia's economy is tied to oil, Nesterov's tone changed.
"Every Russian who thinks is worried about this. Unfortunately, there are no signs this will change," Nesterov said. "These days, the economy is dependent on natural-resource exports, which is just a temporary bonanza. These resources sooner or later will be depleted."
A Western diplomat in Moscow said drilling in old fields makes sense from the perspective of Russia's ruling elite, who control energy companies only as long as they remain in power.
"If you're running Gazprom (a Russian natural-gas producer) but you don't really own it, then your interest is maximizing short-term profits, not long-term development," said the Western diplomat, who spoke on the condition of anonymity because of the delicacy of the subject. "If you look at most of the Russian companies - the energy companies - that's precisely what's happened. They have focused on profits or dividends and less so on long term development and replacing reserves."
In a nation with a history of economic tumult and social unrest, the diplomat said, it doesn't bode well for the future.
"They're not Keynesians," the diplomat said, "they're Russians."
MEXICO CITY - Crude output from Mexico's struggling Cantarell oil field fell for the 10th month in a row in July to 974,000 barrels per day, energy ministry data showed on Tuesday.
The fading jewel of Mexico's oil industry, Cantarell is now producing half what it was yielding at its 2004 peak, pulling down overall output in the world's No. 6 oil-producing nation and threatening Mexico's status as a top U.S. supplier.
The steady decline of around 15 percent annually in the field's output has pressured the divided Congress to tweak laws in the closed energy sector. The government, with backing from centrists, hopes to push a bill through Congress to allow more private participation in the state-run oil business.
The conservative government's proposal seeks to shore up flagging output and reserves by having the national monopoly Pemex hire private companies under incentive-fee contracts, particularly in costly high-risk areas like deepwater oil.
Reserves have steadily declined in recent years, though Pemex chief Jesus Reyes Heroles said on Tuesday he expects a rebound this year in the replacement ratio, the rate at which it replaces extracted oil with new discoveries.
Reyes Heroles said the ratio would rise to close to 60 percent in 2008 from 50 percent last year. He did not specify if he was referring to the proved replacement rate, but the figures he gave for past years matched previously reported readings for proved reserves replacement.
Output at Cantarell, a shallow field in the southern Gulf of Mexico, fell in July from 1.018 million bpd in June.
Cantarell, for years the source of 60 percent of Mexico's crude, accounted for 35 percent of Mexico's overall July oil output, down from 36 percent in June.
A senior Pemex executive said in July that output at Cantarell would drop to just 600,000 bpd by 2012.
While lawmakers debate bringing in more private investment, which is politically sensitive, Pemex is trying to increase output at less productive fields, such as the offshore Ku Maloob Zaap complex and the onshore Chicontepec field.
Seismic tests indicate there could be huge deep-sea oil deposits in the Mexican Gulf. But with laws against foreign partners, Pemex executives say it could be 20 years before Mexico is producing substantial quantities of deepwater oil.
Editing by Marguerita Choy
Iraq and China have agreed the terms of a $3 billion oil service contract, Iraq's oil minister said on Wednesday, announcing the first major oil contract with a foreign firm since the fall of Saddam Hussein.
The contract is for the Adhab oilfield and replaces a contract signed with China before the 2003 US-led invasion of Iraq.
The revised deal has raised the target oil output for the field to 110,000 barrels per day (bpd), up from the previous 90,000 bpd, Hussain Al-Shahristani told Reuters in an interview.
Production should start in three years and continue for 20 years, he said.
The implementation of delayed short-term technical service contracts with oil majors was looking "more and more unlikely", Shahristani said.
Despite that, Iraq still hoped to boost oil output by 500,000 bpd by the middle of next year, he added.
At first glance Britain's green fields and ancient woodlands have little in common with deserts of Saudi Arabia or the Texas plains - but the oil deep beneath parts of the UK could be the next frontier in the bid to beat the energy crisis.
A record number of prospectors are scouring scores of sites across the East Midlands, Yorkshire and a swathe of southern England.
The dizzying rise in oil prices over the past year to above $147 a barrel has made even the smallest pockets of oil and gas commercially viable.
Environmentalists fear drilling for oil will ruin some of Britain's most beautiful landscapes but the government and oil companies say that it will help secure the UK's energy supplies amid a global grab for oil.
"Indigenous resources are becoming more important for security of supply," says Mark Abbott, managing director of Egdon Resources, an exploration and production firm that operates an oil field in the Lincolnshire Wolds.
Tiny but growing
The UK's onshore oil industry is still tiny compared to production in the North Sea but is attracting the attention of companies from as far afield as the US, Australia and Canada.
In May, the government awarded a record 97 new licenses to 54 applicants for onshore oil and gas exploration. Five years ago, only eight licenses were granted.
Hampshire-based Egdon Resources obtained six of those licenses, allowing the firm to prospect for oil and gas in Dorset and the East Midlands.
Mr Abbott says a typical UK oil field will contain one million to 10 million barrels of oil.
"It's not Saudi Arabia or even the North Sea.
"But if we find oil, it's quick and easy to put in small, low-key production facilities and then tanker the oil out to refineries," he says.
The company has proven reserves of one million barrels of oil - worth around $118m (£63m) at today's prices and nine million barrels of "contingent reserves" - reserves that in the company's opinion have a more than 50% chance of production.
Despite the potential bonanza it's a tough business.
The firm, which was established in 1997, is loss making and only saw its first sustained oil production in the second half of last year.
Total revenues from oil sales in the six months to January 31 totalled £758,000.
"It's a prolonged process - developing the ideas, applying for the licenses and finding partners. The first three or four years we were quite resource constrained."
The UK has a long history of oil production.
Onshore drilling in the East Midlands proved vital to the war effort during World War One and the discovery of oil and gas in the North Sea in the late 1960s allowed the UK to become largely self-sufficient in the two minerals.
But this is changing. The UK became a net importer of gas in 2004 and the UK is expected to become a net importer of oil by 2010 as production in the North Sea declines from its 1999 peak of about 2.9 million barrels a day.
Building and maintaining offshore platforms is costly and as fields mature there are fears that the return will no longer be enough to cover costs and make big profits.
Drilling onshore costs a tenth of the £10 million to £20 million needed to drill an offshore exploration well making even small reserves of oil highly profitable at today's high prices, says Egdon's Mr Abbott.
"We can operate at $30 to $35 a barrel (of crude). Offshore, only the biggest companies could operate at that level," he says.
The government is keen to encourage companies like Egdon to exploit the UK's energy resources.
"The era of cheap energy is well and truly dead and therefore Britain would do well to get its energy from sensible places and think imaginatively about where those places might be," Energy Minister Malcolm Wicks told BBC's Newsnight.
"There is a huge global grab for energy going on, we've got to make sure that Britain is protected; that we have the energy we need."
Energy companies, which must pay an additional 20% levy on top of corporation tax, are also big contributors to the Treasury's coffers.
According to industry group UK Oil and Gas, the sector paid £7.8bn in taxes in the 2007-2008 financial year and this is forecast to jump to between £12.5bn and £16.5bn next year depending on the direction of oil prices.
But not everyone shares the government's enthusiasm for exploiting the UK's resources.
Environmental groups have been angered by West Sussex County Council's decision to give permission to Northern Petroleum to drill an exploration well near Chichester.
The site in Markwells Wood is part of the South Downs National Park and a designated area of outstanding natural beauty.
Jacquetta Fewster, director of the South Downs Society, says the drilling would lead to the destruction of trees and hedgerows and the visual impact of the drilling tower and its lighting would be "inappropriate".
"It's very quiet, full of wildlife when you walk along the footpaths, you'll often come a across a deer," she says.
"Drilling for oil isn't compatible with a place that should be for quiet contemplation and getting away from urban life."
Northern Petroleum says that it will minimise the environmental impact and stresses the economic benefits of oil production.
"It is our opinion that 100 million barrels of oil or even more is recoverable from the UK South of England alone, possibly more," the company says.
"This would be advantageous to the country, not just for the creation of jobs in the haulage and service maintenance sector for example, but also... in adding a large amount to the chancellor's purse and reducing the UK's energy deficit."
Industry experts say fears of a Dallas-style oil boom in the UK are over stated given the small size of onshore reserves.
The UK has just 0.3% of the world's proven oil reserves and the lion's share of these are still under the North Sea.
But while oil prices remain above $100 a barrel, it seems certain that nodding donkeys and drilling rigs will become more commonplace among Britain's hedgerows, coppices and wheat fields.
UK OIL PRODUCTION - KEY FACTS
The UK produces 1.6 million barrels of oil a day
Onshore makes up just 1.5% of this
The biggest onshore oil field is BP's Wytch Farm in Dorset.
It produced 7.6 million barrels of oil last year, around 85% of the UK's total onshore production.
Source: BP, BERR
Indonesia, Southeast Asia's biggest oil and gas producer, may record a 14 percent fall in oil and condensate output in 2015 amid aging fields.
Production may decline to 840,000 barrels a day in 2015 from 977,000 barrels a day this year, R. Priyono, chairman of oil and gas regulator BPMigas, told a seminar in Jakarta today.
Crude output has dropped about 40 percent in the past 12 years, turning Indonesia into a net oil importer and prompting it to consider leaving the Organization of Petroleum Exporting Countries. Disputes with companies including Exxon Mobil Corp. have delayed field developments and deterred investments, adding to the production slump.
``The output fall is a natural decline because 90 percent of Indonesian fields are mature ones,'' Priyono said. At the country's 29 active fields, which account for 70 percent of overall output, ``the average annual decline rate is 16 percent,'' Priyono said.
Still, production will gain in 2012, before resuming its fall in 2013, on peak output from fields including those operated by Exxon and Chevron Corp., Priyono said.
HOUSTON — American natural gas production is rising at a clip not seen in half a century, pushing down prices of the fuel and reversing conventional wisdom that domestic gas fields were in irreversible decline.
The new drilling boom uses advanced technology to release gas trapped in huge shale beds found throughout North America — gas long believed to be out of reach. Natural gas is the cleanest fossil fuel, releasing less of the emissions that cause global warming than coal or oil.
Rising production of natural gas has significant long-range implications for American consumers and businesses. A sustained increase in gas supplies over the next decade could slow the rise of utility bills, obviate the need to import gas and make energy-intensive industries more competitive.
While the recent production increase is indisputable, not everyone is convinced the additional supplies can last for decades. “The jury is still out how big shale is going to be,” said Robert Ineson, a natural gas analyst at Cambridge Energy Research Associates, a consulting firm.
Still, many people in the natural-gas industry believe a new era is at hand, and a rising chorus of Wall Street analysts and Congressional lawmakers supports that notion. Competition among companies for rights to the new gas has set off a frenzy of leasing and drilling.
“It’s almost divine intervention,” said Aubrey K. McClendon, chairman and chief executive of the Chesapeake Energy Corporation, one of the nation’s largest natural gas producers. “Right at the time oil prices are skyrocketing, we’re struggling with the economy, we’re concerned about global warming, and national security threats remain intense, we wake up and we’ve got this abundance of natural gas around us.”
Senior Democrats in Congress are getting behind natural gas, portraying it as an alternative fuel for transportation that can serve as a stopgap until renewable sources of energy, like solar and wind power, become economical on a broad scale.
“You can have a transition with natural gas that is cheap, abundant and clean,” the House speaker, Nancy Pelosi of California, said Sunday on “Meet the Press” on NBC.
She also said that an investment she and her husband had made in a company that produces natural gas for use in automobiles, revealed last week by The Wall Street Journal, was not a conflict of interest because “I’m investing in something I believe in.”
Representative Rahm Emanuel of Illinois, the chairman of the House Democratic caucus, has introduced legislation to offer more tax credits to producers and consumers of natural gas and mandate the installation of natural gas pumps in some service stations.
Domestic gas production was up 8.8 percent in the first five months of this year compared with the period a year earlier, a rate of increase last seen in 1959, during the great drilling boom that followed World War II.
Most of the gain is coming from shale, particularly the Barnett Shale region around Fort Worth, which has been under development for several years. The increase in gas production stands in sharp contrast to the trend in domestic oil production, which has been declining steadily since 1970 and dropped 21 percent in the last decade alone.
The Barnett region proved that, using new technology, shale gas could be extracted on a large scale. But lately, companies have set their sights on shale formations that could produce far more gas than the Barnett.
Testing to determine the productivity of fields has been completed on just a tiny fraction of the potential acreage. According to a new report by Navigant Consulting, paid for by a foundation allied with the gas industry, there could be as much as 842 trillion cubic feet of retrievable gas in shales around the country, enough to supply about 40 years’ worth of natural gas, at today’s consumption rate. But thousands of wells need to be drilled before the exact reserves will be known.
Domestic natural gas prices have already plunged 42 percent since early July, an even faster drop in price than oil or most other commodities, in part because the rapid supply growth has begun to influence the market. Price spikes remain possible, of course, but throughout the industry the shale discoveries are causing a shift in thinking about the long-term outlook.
Black or brown shales are a type of sedimentary rock, high in organic matter, found beneath millions of acres in at least 23 states, including New York. The rock has been known for more than a century to contain gas, but it was considered virtually worthless until a decade ago because typical wells on such sites would produce gas briefly and then die.
Now, companies are drilling long, horizontal wells and pumping in water to fracture the rock, releasing vastly more gas than could the vertical wells of old.
The Barnett was the first shale field to undergo major development, and gas production has gone up tenfold since 2001, so that it now produces 7 percent of the nation’s supply of natural gas. At least two other shale formations, the Haynesville in Louisiana and Texas and the Marcellus in Appalachia, are believed to be even larger, though substantial production in those will take another two to five years.
Prospectors have identified at least two dozen shale beds in North America that could contain large amounts of gas.
“Production is clearly growing, and the growth is sustainable,” said Michael Zenker, a natural gas analyst at Barclays Capital.
A Deutsche Bank report, by the analyst Shannon Nome, recently estimated that production from the eight largest shale fields was likely to hit 6.6 billion cubic feet a day this year, or 11.8 percent of national gas production, and then rise to 14.5 billion cubic feet a day by 2011 — almost a quarter of domestic production.
“Shale is the most significant domestic natural gas find in 50 years,” said Chris Ruppel, an analyst at the institutional brokerage firm Execution, “which means the United States will become gas independent, and more industrially competitive versus Europe for gas-intensive industries such as chemicals, fertilizer, smelting iron and aluminum.”
Shale gas could ultimately be important beyond North America. The rest of the world has shale formations on an immense scale. Many of them are known to contain gas, but exploration and assessment of those fields with the new production techniques have barely started.
Several large shale fields are being explored in Canada. In the United States, real estate speculators are becoming overnight millionaires in Pennsylvania, Louisiana and Texas by buying up parcels of land and flipping them to companies that drill for natural gas. Wildcatters are ordering every rig they can get their hands on, and paying signing bonuses of $25,000 an acre to drill below houses, schools and churches. Pipeline companies are building as fast as they can to get the new gas to market.
As the frenzy unfolds, some energy experts urge caution in projecting how big the new supplies will be and whether they will alleviate the loss in productivity of conventional wells, particularly those in the Gulf of Mexico.
“It’s hard for me to believe we will have more domestic gas production in six years than we have now,” said Chip Johnson, president and chief executive of Carrizo Oil and Gas, a Houston company involved in several of the shale fields.
The Energy Department’s 2008 estimates for shale gas reserves that may one day be economically produced stand at 125 trillion cubic feet, about a seventh of the most optimistic industry estimates. Jeffrey Little, a department gas analyst, said the government estimate was based on 2006 data and could increase after further testing.
“The larger reserves could very well be out there, but their magnitude is uncertain,” he said.
Some industry experts warn that shortages of engineers and rigs, scarcity of pipelines near some shale fields and fights over land and water use could slow development in some states.
In the Marcellus field, drilling and pipeline work must be done over woody and hilly terrain, and enormous amounts of water are needed to fracture the shale. Drilling has been halted in places after local regulators caught companies drawing water from streams without permits.
“We see natural gas as potentially a very important transitional fuel, but we can’t use it at the expense of our natural resources,” said Kate Sinding, a senior lawyer for the Natural Resources Defense Council, who warned that water-intensive drilling in shale could threaten local water supplies and aquifers.
Domestic gas production was in decline from the early 1990s to 2005, before production from shale beds and some lesser unconventional fields led to increases beginning in 2006. In the meantime, consumption increased by more than 15 percent, satisfied largely by rising imports.
Prices in recent years soared from less than $2 per thousand cubic feet in 1999 to more than $13 as recently as last month, before a precipitous decline in recent weeks. Natural gas closed Friday on the New York Mercantile Exchange at $7.84 per thousand cubic feet, the lowest price since Feb. 1.
With the growth of power generation from natural gas, the Energy Department estimates that gas consumption will increase 3 percent this year and an additional 1.7 percent in 2009. But that is well below expected supply increases.
Such increases carry risks. Some in the gas industry fear that if prices fall too much, producers will pull back on their investments in drilling and development. “If prices drop much more,” said Mr. Johnson of Carrizo Oil and Gas, “producers will slow down or at least not be as aggressive.”
Russian president Dmitry Medvedev on Tuesday recognised the independence of South Ossetia and Abkhazia, the two Russian-controlled breakaway regions of Georgia, in a surprise move that provoked strong criticism from the US and the European Union.
The decision could deepen the divide between Russia and the west and undermine efforts to establish political stability in the Caucasus region, the route of important oil and gas pipelines.
The Russian stock market fell 4.2 per cent on the news, reflecting concerns that Moscow might now face difficulties accessing international capital markets.
Condoleezza Rice, US secretary of state, said Washington regretted Russia’s decision and would block any attempt to secure wider recognition at the UN. “I want to be very clear,” Ms Rice said during a stop in Ramallah. “Since the United States is a permanent member of the [UN] Security Council, this simply will be dead on arrival.”
US president George W. Bush condemned Russia’s decision to recognise the two regions. “This decision is inconsistent with numerous United Nations Security Council resolutions that Russia has voted for in the past, and is also inconsistent with the French-brokered six-point ceasefire agreement which President Medvedev signed,” Mr Bush said in a statement from his Texas ranch. “Russia’s action only exacerbates tensions and complicates diplomatic negotiations.”
Speaking in Estonia, Angela Merkel, the German chancellor, who on Monday predicted the Kremlin would not proceed with recognition, said: “This contradicts the basic principles of territorial integrity and is therefore absolutely unacceptable.”
Georgia condemned the Russian move as “unconcealed annexation” and called on the west for support. President Mikheil Saakashvili said: “This is a test for the entire world and a test for our collective solidarity . . . Today the fate of Europe and the free world is unfortunately being played out in my small country.”
Mr Medvedev responded by dismissing western critics, saying in a television interview that “nothing frightens us, including the prospect of a cold war, but we do not want this, and in this situation all depends on the position of our partners”.
Western officials privately indicated they would not seek to push relations with Russia to breaking point, in view of the need for Moscow’s co-operation on issues including Iran and global terrorism. Their positions also reflect the practical difficulties the west would face giving military support to Georgia and the splits between more hawkish positions taken by the US and some east European states, and more conciliatory approaches of Germany and France.
However, tensions remained high on Tuesday night with Mr Medvedev accusing the US of shipping arms to Georgia on American naval vessels due to deliver aid today and later this week at the Georgian port of Poti. “And what the Americans call humanitarian cargoes, of course, they are bringing in weapons,” said the Russian president in a television interview.
The US dismissed this suggestion as “ridiculous”.
Mr Medvedev said Georgia’s leadership had brought the crisis on itself by attacking South Ossetia on August 7-8, to which Russia responded with armed intervention leaving it in control of large parts of Georgia.
Writing in Wednesday’s Financial Times, Mr Medvedev said: “Russia had no option but to crush the attack, to save lives. This was not a war of our choice. We have no designs on Georgian territory, but we had to halt a murderous assault.”
Additional reporting by Daniel Dombey in Washington
Over the last couple of days, the post-mortems have begun to roll in from big-thinkers on Russia. The prescriptions advised in order to bring about status-quo ante in Georgia — ejecting Russia from G-8, distancing Moscow further from global trade treaties — add up to a consensus of “Oh Dear, Oh My.” Non-membership in G-8 and WTO no doubt is provoking snickers in the Kremlin.
Contrary to these views, however, the West and the U.S. in particular do have one very real lever, one that Karl Rove might recognize — Russia’s very strength.
Russia’s Achilles Heel is its petro-power. It’s a message that both senators Barack Obama (and his running mate Joe Biden) and John McCain should keep in mind as they prepare to deal with Russia.
For more than a year, O and G has been describing progressive U.S. setbacks in what I’ve called the Pipeline War, the struggle with Russia for energy-driven political influence in Europe. We’ve also been writing here during that period about the growing tensions between Russia and Georgia.
In a nutshell, Russia understands that power in a large swath of the world — Europe, the former Soviet Union and parts of the Middle East — can be exerted from control of oil and natural gas pipelines. That’s how the U.S. has inserted its power into Russia’s backyard — through the Baku-Ceyhan oil pipeline that crosses the country of today’s conflict, Georgia. Now, Vladimir Putin intends to build on Russia’s restored power by erecting two gigantic new natural gas pipelines into Europe, which already relies on Russia for almost a third of its gas.
Here’s where the Achilles Heel comes in. One of these pipelines — South Stream — would pass through nations like Bulgaria, Hungary, Serbia and Austria. These are countries in which the U.S. has influence.
If the U.S. wants Russia’s attention, persuade these countries and others — for instance Germany, the main European partner on the second pipeline, called Nord Stream — to freeze their support for the lines until it’s satisfied that Georgia’s sovereignty is no longer compromised.
Energy, and specifically Nord Stream and South Stream, are a Russian strength, and a genuine vulnerability.
Beneath the melting ice of the Arctic Ocean, the world's last great land grab is under way.
Global warming is opening the Northwest Passage that sailing ships sought 500 years ago, and some of the world's biggest oil reserves are becoming accessible under the polar sea. Russia, the U.S., Canada, Norway and Denmark are jockeying for territory in moves that could end up in clashing claims.
With an eye on asserting Canada's stake, Canadian Prime Minister Stephen Harper and his cabinet will travel this week to the Arctic town of Inuvik, as the country completes its largest- ever military exercise in the region. The town, where the summer sun never sets, lies 4,100 kilometers (2,548 miles) from Ottawa.
"You have the recipe for trouble if there isn't real energy invested early to help resolve some of these issues," said Scott Borgerson, a fellow at the Council on Foreign Relations in New York. "You can envisage a future in which all the ice is gone, there is this wild-west environment in terms of lack of respect for whatever national law."
Western nations are playing catch-up in laying claim to the Arctic. Russia, which planted a titanium flag on the Arctic seabed last year, already deploys strategic-bomber flights to patrol the region. It has also begun training troops for combat in the far north, where temperatures can drop to less than -57 degrees Celsius (-70 degrees Fahrenheit).
If Arctic disputes come to a head, the divide between leaders in Moscow and the West may soon stretch beyond Georgia, where a war with Russia broke out this month over the breakaway region of South Ossetia.
"Events in Georgia should wake people up to what the Russians have been doing," said Rob Huebert, associate director of the University of Calgary's Center for Military and Strategic Studies. "The northern developments are where they're going to get their next major source of petrol dollars and they're going to be very aggressive there."
Canada is in the midst of its own military buildup in the Arctic Ocean, an area about the size of Russia. It has budgeted C$7.4 billion for Arctic ships, and its fighter jets regularly shadow Russian TU-95 bombers.
"We remind them we want to see their tail end, not their front-end," said Defense Minister Peter Mackay, 42, in a telephone interview from a military base in Alert, Nunavut, the world's northernmost inhabited place. "The presence of Canadian forces is increasingly important to not just claim our sovereignty but exert it."
The cabinet's trip, coming weeks before possible parliamentary elections, helps Harper, 49, project the image of a strong leader who fights for Canadians, said Norman Hillmer, a Carleton University professor in Ottawa specializing in Canada's foreign policy.
Harper is slated to arrive today in Inuvik, population about 3,500, where he'll stay at the MacKenzie Hotel opposite Canada's northernmost traffic light. On Aug. 28, he'll meet at the hotel with his 13-member core cabinet.
Tomorrow, Harper crosses the treeless permafrost on a Hercules C130 military transport plane to tour Tuktoyaktuk, an Inuit community on the shores of the Arctic Ocean. The next day he makes an announcement on national security.
"Every so often, Canadians get seized of the north," said Hillmer. "It comes to the front of our minds mostly when it seems threatened. It seems to be threatened at the moment."
The five Arctic nations have sought to ease the tension. At a two-day summit in Greenland in May, they agreed to work for an "orderly settlement" of any conflicting claims.
Canadian Natural Resource Minister Gary Lunn said at a Madrid conference in July that overlapping claims "will be minimal," while Margaret Hayes, director of the State Department's Bureau of Oceans, Environment and Science, told reporters Aug. 11 that Russia's territorial assertions aren't "intruding" on U.S. interests.
"I don't think we're ever going to have a battle up in the Arctic, at least I hope not," Paul celluci , a former U.S. ambassador to Canada, said in a telephone interview. "I think these determinations are going to have to be made in some sort of a legal framework and I think ultimately the Russians will understand that as well."
Under the United Nations Law of the Sea convention, the economic rights of countries on the Arctic Ocean extend 320 kilometers from their shores. They can base claims on the reach of their continental shelf, creating the potential for overlapping stakes.
`Oil and Gas'
"This is an instance when science has tangible geopolitical consequences," Mikhail Flint, said deputy director of ecology at the Institute of Oceanology of the Russian Academy of Sciences. "In this case everything is related to oil and gas."
The cobination of rising temperatures and soaring oil prices is fueling the urgency of the land rush.
The region is warming about twice as fast as the global average, the U.N.'s Intergovernmental Panel on Climate Change said in a report last year. The fabled Northwest Passage, a shortcut between the Atlantic and Pacific oceans, opened this year for only the second time in recorded history.
The retreat of the ice allows oil exploration for the first time as near-record prices make working the area economically viable. The Arctic may hold 90 billion barrels of oil, more than the proven reserves of Nigeria, Kazakhstan and Mexico combined, and enough to supply the U.S. for more than a decade, the U.S. Geological Survey said in July.
The Russians aren't the only worry for Canada. The U.S. contests Canada's sovereignty over the Northwest Passage, which could shrink travel between Shanghai and New Jersey by 7,000 kilometers, and the two are disputing a sliver of water just north of Alaska.
Building a military and civilian presence in the region is key to Canadian control of its Arctic resources, officials say.
"I don't believe we should be out there assuming the others don't want to cooperate," said former Prime Minister Paul Martin, 69, Harper's predecessor, in a telephone interview. "But if that occurs, then we should be able to respond very quickly."
It was life as normal yesterday on Ascension Island, a barren British territorial outpost that pokes out of the Atlantic ocean 4,044 miles from Land's End.
The 1,100 residents were largely unaware that their volcanic rock was taking centre stage at the United Nations, where British diplomats were requesting sovereignty over 77,220 sq miles of submarine territory around the island.
Yesterday's slideshow presentation in New York before 21 members of the UN Commission on the Limits of the Continental Shelf (UN CLCS) laying claim to an area of the ocean floor roughly the size of the UK's entire land surface is just the first of three submissions the UK is set to make under an international law that allows states to expand their jurisdiction.
A senior Foreign Office official told the Guardian yesterday that the UK has decided to submit similar territorial claims for seabed surrounding the Hatton-Rockall area, west of Scotland, and South Georgia and the Falkland Islands in the South Atlantic.
The reason for Britain's interest? The hope of tapping into new reserves of oil, gas and minerals. At present, countries can extract resources from the seabed up to 200 nautical miles from their shoreline. But with permission from the UN commission, they can extend their jurisdiction over the seabed up to 350 miles beyond a coastline. All they have to do is show that the ocean floor is a continuation of their continental shelf.
Britain's venture is part of a global scramble for resources prompted by technological advances that make oil and gas reserves deep in the ocean more accessible. The UN commission has set a deadline of May next year for countries to submit maps and supporting scientific evidence.
Britain's claims will anger diplomats in Denmark and Iceland, who have overlapping claims to the mineral-rich Hatton-Rockall area, and Argentina and Chile, which contest sovereignty over the seabed around the Falkland Islands.
The decision follows a breakdown in negotiations between Danish and Icelandic lawyers and their British and Irish counterparts over the underwater shelf surrounding Rockall.
The Foreign Office official, who has detailed knowledge of Britain's territorial claims, said that the UK government had invited Argentina for "technical and legal" discussions about the continental shelf around the Falkland Islands, but no talks had taken place since 2005.
Agreement between neighbouring states is required if the UN commission is to award territorial rights, meaning some claims could take several decades to resolve, he said.
"Ideally we would like to reach agreement with all the parties where there are overlapping claims. But if it is not possible to resolve a dispute, then we will be preparing a submission [to the UN CLCS] anyway, as the UK." He added: "I can confirm we will be making all three additional submissions by May 2009."
He added that Britain "reserves the right" to lodge submissions over the British Antarctic Territory, although it has no immediate plans to do so.
The Ascension Island claim means the UK has officially joined 11 other countries staking claims to submarine territory. A further 30-40 are expected to lodge claims, including some developing countries.
Although it could take up to three years for the commission to rule on Ascension Island's continental shelf, the Foreign Office is confident of success.
Speaking from his office overlooking a beach, Michael Hill, Ascension Island's administrator, said that the submission to the UN could only benefit residents. "It is clearly, having read a bit about it, a very long-term project."
Yesterday's delegation of legal and scientific experts, led by Doug Wilson, a legal adviser to the Foreign Office, and Lindsay Parson from the National Oceanography Centre, in Southampton, presented the commission with supporting geological and geophysical surveys.
"Ascension Island is going to be the only [territorial claim] that is relatively unproblematic," said Martin Pratt , director of Durham University's International Boundaries Research Unit.
"There could always be a scientific spanner in the works, but it's going to be a simple question of the commission assessing whether the areas claimed are legally part of the [island's] continental shelf."
The vast Hatton-Rockall basin, off the west coast of Scotland, believed to be rich in hydrocarbons and mineral deposits, is likely to prove more controversial.
It has been the subject of a seven-year wrangle between the UK, Ireland, Denmark and Iceland.
Shuttle diplomacy appears to have reached stalemate. Recent meetings in Reykjavik, Dublin and Southampton failed to agree maritime borders. The Danes and Icelanders are likely to stake out extensively overlapping claims.
Technological advances had raised expectations that wells could soon operate commercially, even in the storm-blasted seas around Rockall. The government is already offering exploration blocs in the area close to the outer limit of the UK's 200 mile economic zone.
The UN regulations do not, however, allow small islands that have never been inhabited to be the basis of claims for extending control over the surrounding seabed. Britain's claim on Rockall is currently based on measuring out from the island of St Kilda in the Outer Hebrides.
Rockall was Britain's last colonial land grab, annexed by a boarding party from HMS Vidal in 1955. A plaque was cemented atop the desolate rocky pillar that protrudes 63 feet above the Atlantic. The sailors sang "God Save the Queen" and gave three cheers.
Downturn could 'drag on for some time', warns Bank deputy governor
The current global economic downturn could "drag on for some considerable time", the Bank of England's new deputy governor warned today.
Charles Bean said the financial climate appeared to be as bad as the 1970s and admitted senior analysts had "their fingers crossed".
Speaking at the annual conference of the world's top central bankers in Jackson Hole, Wyoming, Bean claimed that there was light at the end of the tunnel if oil prices and credit markets could be stabilised.
But he added that every time financial markets appeared to look in better shape "another grenade" exploded.
Bean said: "We've got our fingers crossed that things will improve. But there is the recognition that there is still a long way to go yet.
"It looks like it will drag on for some considerable time further yet."
The Bank of England governor, Mervyn King, has already warned that the UK economy faces a rough ride due to a combination of high inflation and rapidly slowing growth.
Figures from the Office for National Statistics, released earlier this month, showed no growth from the first quarter of 2008.
But Bean, who took over as deputy governor earlier this year, warned against placing too much significance on the statistics.
Despite "considerable caution" he predicted that growth should pick up and inflation would fall next year.
"This is just a transitory period of subdued growth and we will get through the other side and the growth will resume to more normal levels," he said.
Mounting gloom about the German economy pushed the euro to a six-month low against the dollar on Tuesday as a closely watched survey showed business leaders in Europe’s biggest economy more nervous about the six months facing them than at any time in the past 15 years.
The pound also fell, hitting a fresh two-year low of just over $1.83 against the dollar.
Germany’s Ifo business climate index, which measures confidence in the current and future economic situation, fell unexpectedly sharply, reaching its lowest level in three years. The component covering expectations was the lowest since February 1993.
With Germany’s rapid deceleration dragging down the 15-country eurozone, expectations are mounting that the European Central Bank will move towards cutting interest rates.
But Jürgen Stark, ECB executive board member, on Tuesday night seemed to step up the bank’s hawkish rhetoric. He told a German newspaper “second-round effects” – the spread of inflationary pressures beyond energy prices into wages and other costs – had become “broad-based”.
Meanwhile, the dollar’s rally steamed ahead, with the dollar trade-weighted index rising 0.48 per cent to 77.197.
The dollar’s move came as the US economic outlook brightened marginally after data showed a deceleration in the pace of the decline in house prices and improved consumer confidence.
According to the Case-Shiller index, house prices in 20 large cities dropped by 0.5 per cent between May and June – the slowest decline since July 2007 and well below falls of as much as 2 per cent early in the year.
This offered some encouragement to economists hunting for indications of when the mortgage crisis will start to loosen its grip on the US economy, even as the yearly decline in house prices experienced a record 15.9 per cent drop in June.
“The market will see this data in an optimistic light, or as a sign that the light at the end of the tunnel is not a train coming at us,” said Alan Ruskin of RBS in Greenwich, Connecticut.
US consumer confidence rose from 51.9 in July to 56.9 this month.
After the Ifo index was released, the euro fell more than 1 per cent to $1.4567 against the dollar, but it recovered slightly later. It also dropped against the yen and the Swiss franc.
The government last night appeared to be backing away from calls to impose a windfall tax on energy companies amid concern the cost would merely be passed on to consumers.
Electricity companies warned yesterday that a "legalised raid" on their profits would drive investors away and would "end up on the customers' bills".
The threat came as the chancellor, Alistair Darling, faced increasing pressure to help families struggling with soaring gas and electricity bills. More than 70 Labour MPs have signed a petition urging the prime minister to claw back some of the huge profits made by energy companies.
The Treasury has not ruled out a windfall tax but insiders believe it looks increasingly unlikely. One possibility being considered is the introduction of energy vouchers, worth between £50 and £100, to help low-income families.
John McFall, chairman of the Treasury select committee, said: "The government has got to be seen to be helping ordinary people in these difficult economic times. The price of oil is going up, and therefore fuel prices are going up.
"My own view on the prospect of a windfall tax on energy companies is that the government will be cautious about introducing something which has an implicit retrospective element to it."
Supporters of a windfall levy stress the cash could help shore up the government's increasingly stretched finances, and fund tax breaks for poorer families.
Lindsay Hoyle, Labour MP for Chorley, said a windfall tax would be a way to curb the "immoral" and "excessive" profits of energy companies, while David Kidney, parliamentary private secretary to transport minister Rosie Winterton, urged the chancellor to make the levy the centrepiece of his pre-budget report.
The petition for a windfall tax, organised by the left-wing Labour group Compass, has been signed by several government members. But David Porter, chief executive of the Association of Electricity Producers, warned: "A legalised raid on the company's bank accounts ... would be very unhelpful because it would scare off investors and also could make the cost of investment much higher and, in the end, that would end up on the customers' bills.
"Every £1m you take out of each company through this legalised raid is £1m they have to raise elsewhere."
The "big three" energy firms - Shell, BP and British Gas - have posted huge profits over recent years. Shell made £4bn in the second quarter of this year, up 4.6% from 2007, while BP raked in £3.4bn - a rise of 6%. Centrica, which owns British Gas, recorded profits of £992m in the first half of this year, while raising prices by 35%.
A YouGov poll for the Observer at the weekend found that 67% supported the idea of a windfall tax.
Local government leaders have called for an annual levy on energy companies to fund a national home insulation programme. The Local Government Association said the scheme would lift 500,000 people out of fuel poverty and would be more effective than one-off payments to the hardest hit.
FAQ: Windfall tax
What is the energy windfall tax?
Labour's Compass group, supported by 80 MPs, wants the chancellor to levy a one-off tax on the soaring profits of private energy companies. The cost of electricity has gone up three times more for consumers than generators, Compass said. The tax receipts would be given to people struggling with fuel bills and invested in a national energy efficiency programme. Labour raised £4.5bn with a similar tax on privatised utilities in 1997.
Who would it apply to?
The main energy companies operating in Britain (E.ON, British Gas, npower, EDF, Scottish Power and Scottish and Southern), which have seen their profits rise from £557m in 2003 to over £3bn. Oil companies would also be targeted.
Is the tax fair?
Campaigners against fuel poverty believe it would correct a social injustice because 2.5m families spend more than 10% of their household income on keeping their homes warm while firms make huge profits. The Confederation of British Industry says it would be unfair because energy firms' profits are volatile and do not always run so high.
Would the tax be simply passed on to the consumer?
Businesses say it could lead to higher prices in the long term and even advocates of the tax concede it is a risk. But they also say it would be scandalous if energy companies passed the tax on.
The credit crunch and the rising cost of running a car has caused traffic on Britain's major roads to drop for the first time since congestion was measured, a report has revealed.
The study, which examined traffic on 34 motorways and trunk roads in England, Scotland and Wales, found congestion fell by 12 per cent in the first six months of this year, compared with the same period in 2007.
The route with the most dramatic fall in congestion was the northern section of the M25, which showed a 26 per cent reduction in traffic jams over the period measured. Journey times around Birmingham also improved markedly with a decrease of 9.9 per cent. Overall journey times have improved by 0.3 per cent even though the average speed of traffic slowed from 63.3mph to 62.2mph.
The report's publication follows figures released by the Department of Transport which show the number of cars on the road has decreased in the first two quarters of this year, compared with the same period last year. The number of new cars sold in Britain in July fell by 13 per cent from June. It was the sharpest decline since December 2006.
Experts said the credit crunch and the rising cost of petrol and road tax had contributed to people cutting back on car use. Petrol is now more than £1.20 per litre in some places, while a litre of diesel can cost as much as £1.40.
The journey-times index was collated by monitoring the number of alerts received by the traffic monitoring company Trafficmaster, which controls a network of 7,500 cameras on Britain's major motorways and trunk roads. They send alerts to a central computer when the average speed of traffic on any road falls below 20mph.
Based on the number of these alerts received every year, Trafficmaster then assesses the level of congestion across the road network. From June 2006 to June 2007, the company received 932,001 alerts, compared with 837,063 between June 2007 and June 2008.
It is the first time that congestion has eased as opposed to worsened in the four years that the journey time index has been collated.
Georgina Read, from Trafficmaster, said: "We have been monitoring traffic for a long time and trends don't just happen for no reason. In the past six months, congestion has eased quite significantly. The credit crunch is clearly the reason for that."
"Rising fuel prices and general economic concerns are making people think carefully about how they drive. The upshot of less traffic is a drop in congestion levels, meaning motorists can get from A to B quicker while travelling at slower and more economical speeds."
Elizabeth Dainton, a spokeswoman for the RAC Foundation, said: "Part of the reason for these decreases is simply that there are fewer cars on the road as the price of fuel is making it too expensive for people to drive.
"People's budgets are being squeezed and what is happening is that they are changing their driving habits. While they are not necessarily getting rid of their cars, they aren't driving as often or they are perhaps car-sharing to save money.
"The figures show that congestion has steadily continued to ease over the past six months. It will be very interesting to see what happens over the next year or so because the credit crunch looks like it's going to continue."
One of the findings of the report is that people are driving slower on the motorway to save fuel. Ms Dainton added: "It is true that people appear to be aware of what is known as eco-driving. They realise that if they drive slower they will be able to make a tank of fuel go that bit further. It's quite sensible when you consider most people will be paying upwards of £60 for a tank of fuel."
Hugh Bladon, a spokesman for the Association of British Drivers, agreed. He said: "It does not surprise me in the least to hear that the price of fuel and the country's economic situation is driving people off the road. I think that what is happening is that people are continuing to make necessary journeys, but they are cutting down on social driving."
When Eamon Hyland needed an extra vehicle to cope with a surge in orders at his decorating business in south London, he turned to Streetcar.
The car-sharing club is best known for renting pay-as-you-go small cars to cost-conscious Londoners for quick shopping runs or weekend trips, but Mr Hyland secured a Volkswagen Transporter van to help with deliveries for his small business. He likes the service’s flexibility and all-in rates, which cover insurance and all other overheads needed to run the vehicle, including fuel.
“I’m one of the few people filling up the petrol with a smile on my face,” he says.
Streetcar and its biggest competitor, Zipcar, are now pursuing more business customers such as Mr Hyland as they push to build scale for their fast-growing businesses, which let customers pick up and drop off cars parked at designated bays around a specific city.
Streetcar, which is trebling in size by the year, aims to have 250,000 members by 2012. “At this stage, it’s a new concept for the UK,” says Brett Akker, its co-founder. Zipcar, its biggest rival with 225,000 customers worldwide, mostly in North America, does not report its UK membership numbers, but thinks total car club membership in London could hit 150,000 by 2012.
The private US company plans to expand into other European cities and Scott Griffith, its chief executive, thinks car clubs could become a “multi-billion-dollar industry” within five to 10 years. An initial public offering at some stage is also under consideration.
Both companies say they have seen a spike in membership with this year’s rise in petrol prices and the government’s increase in motoring taxes announced in March. Mr Griffith says his business is seeing growth in membership this year three times last year’s rate.
“Because of the credit crunch and because of the fuel hike, over 60 per cent of our members are telling us they are not choosing to buy a car, or giving up a car,” says Paul McLoughlin, Zipcar’s general manager for Europe.
The companies are touting their cars as an alternative to fleet vehicles for a business customers seeking to cut costs.
Britain’s tough new corporate manslaughter law, which holds companies responsible for deaths or damage caused by employees driving on duty, has prompted fleet managers to take another look at the cars their staff use.
Businesses are also appealing customers for the car clubs as they are more likely to use vehicles during the week than at weekends, when private demand is heavier. Before renting a van from Streetcar Mr Hyland, the small businessmen, had used its private cars since 2006.
Building scale is important for car sharing clubs if they want to gain broader acceptance for their business model. “If you have to walk 20 minutes to find a Zipcar, you’re probably not going to do it,” says Mr McLoughlin.
But while North American cities such as New York abound in parking garages, Zipcar is struggling to shore up spaces in London, where garages are fewer and more cars are parked on streets. “One of the challenges we face here to scale is parking,” says Mr McLoughlin.
Streetcar, which Mr Akker co-launched in 2004 with a friend from university, starting with eight cars in Clapham, has since spent “12 years of man hours” securing parking spaces, he says.
Both companies are working with local authorities to shore up spaces and persuade them of the merits of car clubs, which Transport for London is also seeking to promote.
Both are also working with property developers to secure spaces. Developers, under pressure from councils to reduce parking in new properties, are turning to car clubs as one solution for doing so – and leaving more room for usable residential or office space.
Zipcar claims its customers range from dwellers of neighbourhoods such as Notting Hill, who choose not to own cars, to less affluent Londoners who cannot afford them. “We see this concept as mainstream,” says Mr McLoughlin. “We have people from all walks of life who belong.”
Toyota Motor Corp., the world's second-largest automaker, cut its 2009 sales forecast 6.7 percent as gasoline prices near $4 a gallon damp demand for trucks in the U.S., its biggest market.
The company aims to sell 9.7 million vehicles worldwide next year, compared with an earlier estimate of 10.4 million, it said in a statement today. This year's sales are expected to total 9.5 million, according to an earlier forecast.
Toyota has halted production of Sequoia sport-utility vehicles and Tundra pickups in the U.S. for three months as a 34 percent jump in gasoline prices threatens to push industrywide vehicle sales to a 15-year low. Toyota President Katsuaki Watanabe is betting on expansion in India, China and Brazil to offset sagging demand in North America and Europe.
"The operating environment is getting tougher, that's for sure," said Edwin Merner, who oversees $2 billion as president of Atlantis Investment Research Corp. in Tokyo. "Those numbers are fairly realistic."
Toyota cut its 2009 North American sales forecast to 2.7 million vehicles from its previous estimate of 3 million. Sales in Japan may total 2.25 million units, down from its previous estimate of 2.4 million. In Europe, the carmaker cut its estimate to 1.3 million units from 1.45 million.
The forecast includes its Daihatsu Motor Co. and Hino Motors ltd. subsidiaries. The two companies' sales account for about 10 percent of the Toyota's estimate.
Toyota closed unchanged at 4,770 yen at the 3 p.m. close of trading on the Tokyo Stock Exchange. The stock has fallen 28 percent in the past year.
The company's U.S. light-truck sales slipped 15 percent in the first seven months of this year, triggering the Sequoia and Tundra production halt that will last until November.
Responding to a shift in U.S. demand for fuel-efficient cars, Toyota also plans to build Prius gasoline-electric hybrid cars in the country from 2010.
The move will ease production constraints on the Prius that have left U.S. dealers with shortages of the car and an oversupply of its biggest trucks. Toyota mainly builds the model in Japan.
General Motors Corp., the world's biggest automaker, is also reorganizing its production to reflect plunging vehicle sales in the U.S. GM's U.S. vehicle sales this year through July fell 18 percent. Toyota's fell 7.6 percent. Full-year industrywide sales may drop to 14.2 million, the lowest since 1993, according to J.D. Power & Associates.
Toyota, which expects to make and sell 1 million vehicles a year in China early in next decade, plans to more than double capacity at its factory in Chengdu by the first half of 2010.
Watanabe today said he plans to boost Toyota and Lexus dealerships in China to 850 outlets in 2010 from 500 in 2008. Dealers in Russia will jump to 148 from 72 in 2007, he said.
"Toyota will come out from its doldrums," said Hitoshi Yamamoto, chief executive officer of Tokyo-based Fortis Asset Management Japan Co., which manages $5.5 billion in Japanese equities. "The company is shifting its gears to new markets, because they are now leading the global economy."
Imperial Energy, the west Siberian oil explorer, has agreed to a takeover by India's ONGC Videsh for £1.4bn.
The agreement comes after weeks of market speculation over a bid battle in which the state-controlled Indian group was competing against Sinopec, China's biggest state-owned oil company.
Sinopec played down the prospect of a counterbid yesterday, saying it was "conducting an internal assessment but no decision has been made".
Imperial and ONGC said in a joint statement they had agreed a recommended pre-conditional cash offer of £12.50 a share. The deal depends on the approval of the Russian government and monopolies regulator. There was talk yesterday that ONGC would form a partnership with the Russian state oil firm Rosneft.
Shares in Imperial, which floated on the London Stock Exchange at 25p four years ago, dropped 25p to £12.15, a fall of 2%.
Peter Levine, the founder and chairman of Imperial, stands to make £90m from his 6.1% stake and share options.
Levine said the offer reflected "fair value" and was a premium of 62% on Imperial's share price the day before it disclosed an approach. The group has grown rapidly from an Aim-listed firm worth £2m in 2004 to a FTSE 250 company.
Analysts welcomed the deal. Andrey Gromadin, at J P Morgan Cazenove, described the price as reasonable and a "positive result for shareholders".
Tim Heeley, at Daniel Stewart, said: "This is an excellent price, given that the oil price has come off, stockmarkets are in a mess and the whole situation in Russia is changing." He thought a counterbid was "highly unlikely given the terms of the bid. It's as done a deal as you can imagine".
Imperial has received irrevocable undertakings from its directors and Baillie Gifford, its largest shareholder.
India and China are increasingly targeting Russia as a source of energy, despite moves by the Kremlin to tighten its grip on the oil industry. ONGC is a partner in the Sakhalin-1 oil and gas consortium headed by Exxon Mobil.
R S Butola, managing director of ONGC Videsh, said: "We view this as an important opportunity to expand on the continuing cooperation between Russia and India in the energy sector."
Should the deal fail to go through, Imperial has agreed to pay £14.23m to ONGC.
We are set for a grim winter on the energy front - utilities are scrambling to buy gas at ever higher prices and the price of oil, which seemed to be cooling, is heating up again, agitated by war in the Caucasus, oil nationalism, China and Opec.
It is not only consumers who are at risk. This world of high prices, high walls and high tension is bad for big oil companies. Their share prices have been in freefall for three months; since the end of May the world’s top three, ExxonMobil, Royal Dutch Shell and BP, have lost about a fifth of their market value. Oil company shares are volatile, buffeted by the value of the underlying commodity, but the sell-off in the majors began even before the July peak in the crude price. The worry is that these companies are beginning to see the end of the road. The fear is not that the world as a whole is running out of oil. It is that the oil majors are at the end of a production growth cycle that began in the 1960s when they were rescued by the discovery of Prudhoe Bay in Alaska and Brent in the North Sea.
Back then, the prospects for a group of Western oil companies, dubbed the Seven Sisters, were similarly threatened by nationalism, the closing of doors in the Middle East. Exploration success was their saviour. But, aside from a big find in Brazil, there are no signs that wildcat drilling will save these companies from becoming dull utilities. To add insult to injury, the main beneficiary of Tupi, the Brazilian find, is not a Western oil major but a state oil company, Petrobras.
The message to Exxon, Chevron, BP and Shell is clear: we can do this ourselves.
When companies cannot grow through their own efforts, they write cheques and issue shares. The last big oil merger cycle was a decade ago and we are set fair for another bout. The majors have held back - a year ago BP toyed with the idea of courting Shell and Shell has an on-off love affair with BG Group.
BP is the weakest link. Its shares trade on only six times next year’s earnings and its management is buffeted by strife in Russia and now Georgia. There can be little doubt that rivals are watching and considering what might be done.
The most likely predator is ExxonMobil, whose stock is so highly rated that its market value now exceeds that of BP and Shell combined.
Of course, any deal would require divestments to satisfy the Department of Justice. But BP’s troubled American fuel factories are not its crown jewels and would find a better home elsewhere.
The prize is upstream, where Exxon needs more. It is too reliant on a big gasfield in Qatar. BP would be a mouthful, but Exxon is getting hungry.
The items contained in this newsletter are distributed as submitted and are provided for general information purposes only. ODAC does not necessarily endorse the views expressed in these submissions, nor does it guarantee the accuracy or completeness of any information presented.
FAIR USE NOTICE: This newsletter contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of issues of environmental and humanitarian significance. We believe this constitutes a 'fair use' of any such copyrighted material. If you wish to use copyrighted material from this newsletter for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner.