ODAC Newsletter - 5 September 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.
Despite supply disruptions in the US this week resulting from precautionary shutdowns ahead of hurricane Gustav, and a number of refineries subsequently remaining out of action due to power cuts in Louisiana, the oil price continued to drop with some commentators predicting it will go below $100. For commentary on this see Hurricane destroys oil infrastructure; oil price falls, by Richard Heinberg. The hurricane season is not over yet with still a couple of months to run and prices rose temporarily today as hurricane Ike strengthened to a category 4. Prices fell back again at the close, and Brent is now only $4 away from the symbolic value of $100.
As the markets focus on weaker economic activity lowering demand in key consumer economies rather than supply concerns, some members of OPEC are calling for production cuts. The organization will be meeting on September 9th to agree quotas. Brazil this week turned down the offer to become a member.
The geopolitical repercussions of the Georgia conflict rattled on this week. Claims that Russia might cut oil supplies if the EU imposed sanctions were denied by Moscow, but as winter approaches, countries such as Turkey are concerned about the security of their gas and oil supplies.
While Dick Cheney visited Azerbaijan and Georgia in support of Western energy pipeline interests, the woman hoping to get his job, Sarah Palin put herself firmly into the ‘drill baby drill” lobby stating interests of national security. The idea that the US could have its own cheap oil if only people were prepared to put in the effort is seductive and in an election with a nervous electorate that can work better than the truth.
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MERAUX, Louisiana (Reuters) - The normally bustling Murphy Oil Corp refinery in Meraux, Louisiana, stood in eerie silence on Wednesday, apparently undamaged but paralyzed by a lack of reliable power in the wake of Hurricane Gustav.
The plant was one of 11 refineries -- representing just over 11 percent of the U.S. fuel supply -- still shut by the storm that made landfall near New Orleans on Monday. A chunk of that fuel production remains at the mercy of a power system that took a devastating hit.
"We don't have the damage from wind and flooding, so now we're just mainly focused on a damaged power grid, which could take days or weeks to recover," said oil analyst Jim Ritterbusch, president of Ritterbusch & Associates of Galena, Illinois.
Energy experts said U.S. fuel stockpiles appeared high enough to compensate for a temporary reduction in nationwide production, particularly as energy demand shrinks under the weight of high prices and a soft economy.
But a long delay could boost retail prices for gasoline and raise heating oil costs heading into the winter.
Entergy Corp, Louisiana's largest utility, said Tuesday that five out of a dozen refineries in Louisiana had no electricity due to extensive damage to Entergy's high-voltage grid from Hurricane Gustav.
Entergy did not name the five refineries, but said the worst damage was in the New Orleans-Baton Rouge area, home to some of the biggest U.S. plants -- including Exxon Mobil's giant Baton Rouge facility.
Louisiana Gov. Bobby Jindal said as many as 1.4 million homes and businesses state-wide were without power after the storm and called on Entergy to "quicken the pace by which power is being restored." He said the outages were the biggest obstacle hampering the state's recovery.
Entergy did not give an estimate for the duration of work, but said power restoration would be a "delicate balance" of adding load as repairs allow.
Refiners Valero Energy Corp, Exxon Mobil, Shell Oil and Murphy Oil have said initial indications showed little damage to their plants, but they added restarts at some of the facilities would depend on reliable power.
"If you notice, the parish is without power," said Richard Neyland, safety supervisor at Murphy's Meraux refinery. "It makes gas," Neyland said, looking at the idle plant, "but not without power."
Gustav was the first big hit to U.S. energy supplies since 2005, when hurricanes Katrina and Rita wrecked 100 offshore oil rigs and flooded several key refineries, including Murphy's Meraux plant, idling them for months.
But the relative weakness of Gustav has encouraged a steep sell-off in oil prices in recent days, with dealers betting on a quick recovery in oil and refining production. O/R]
As of Wednesday morning, more than 90 percent of the oil and natural gas production in the Gulf of Mexico was shut, along with 11 refineries along the coast. Another eight refineries were running at reduced rates. ID:nN03480957
"It seems like we were spared the severe damage caused by Katrina and Rita in 2005, but it will probably be one to three weeks at the most before much of this is resolved," said Rick Mueller, energy analyst at Energy Security Analysis Inc.
Energy companies said detailed damage assessments were ongoing at their installations, but early reports showed no significant structural problems.
Additional reporting by Eileen O'Grady; Editing by David Gregorio
ST. PAUL - U.S. reliance on imported oil poses a national security risk, and energy policy should include everything from expanding domestic drilling to finding alternative fuels, Alaska Gov. Sarah Palin said on Wednesday.
In her speech accepting the vice presidential nomination at the Republican National Convention, Palin said a natural gas pipeline under construction in Alaska would one day "lead America one step farther away from dependence on dangerous foreign powers that do not have our interests at heart."
She said the United States should not be so reliant on imported oil that it has to tap its Strategic Petroleum Reserve when a hurricane strikes oil production facilities in the Gulf of Mexico.
"With Russia wanting to control a vital pipeline in the Caucasus, and to divide and intimidate our European allies by using energy as a weapon, we cannot leave ourselves at the mercy of foreign suppliers," she said.
"To confront the threat that Iran might seek to cut off nearly a fifth of world energy supplies, or that terrorists might strike again at the Abqaiq facility in Saudi Arabia, or that Venezuela might shut off its oil deliveries, we Americans need to produce more of our own oil and gas," she said.
She said a McCain-Palin administration would lay more pipelines, build more nuclear plants, and research solar, wind, geothermal and other alternative energy sources.
"We need American energy resources, brought to you by American ingenuity, and produced by American workers."
Earlier on Wednesday, McCain touted Palin's experience in charge of Alaska's energy resources as evidence that she was prepared to serve as America's commander in chief.
In an interview with ABC's "World News," McCain repeatedly mentioned that his vice presidential pick had been in charge of "20 percent of America's energy supply" when she served in Alaska's natural resources agency.
"And one of the key elements of America's national security requirements are energy," he said. "She understands the energy issues better than anybody I know in Washington, D.C."
Editing by Jackie Frank
LOS ANGELES -- Russian Prime Minister Vladimir Putin claimed that his country's actions in recent hostilities with Georgia "did not in any way damage energy facilities"—including to the Baku-Tbilisi-Ceyhan oil pipeline.
Putin's remarks came ahead of a visit by US Vice-President Dick Cheney, who will arrive in Baku Sept. 4, before heading on to Georgia, Ukraine, and an economic forum in Italy.
Analysts said Cheney's visit is intended to secure US and European energy interests in the Caspian-Central Asian region following Russia's military incursion which last month shut down oil and gas export routes across Georgia.
During the hostilities, Georgia accused Russia of attempting to bomb all three of the main pipelines through the country during the conflict: the Baku-Tbilisi-Ceyhan and Baku-Supsa oil pipelines and the South Caucasus Pipeline, which carries gas to Turkey.
Anatoly Nogovitsyn, deputy head of Russia's general staff during the incursion denied early reports of attacks by his country on the BTC line, saying that, "The oil pipeline was never a target that needed to be bombed" (OGJ Online, Aug. 12, 2008).
Independent press reports, however, suggested that Russian warplanes targeted the lines, in addition to the main railway line connecting Azerbaijan with Georgia's Black Sea oil export terminals (OGJ, Aug. 25, 2008, p. 27). The attacks on the railway ended transport of some 50,000-70,000-b/d of crude and products.
In defense of his country's military actions, Putin said: "Russia does not pursue the purpose of interfering in any sort of energy processes in the region and did not in any way damage energy facilities on the Georgian territory."
In reference to the shutdown of the 1-million-b/d BTC line, Putin blamed it on terrorist attacks along the pipeline's Turkish sector, saying that, "There are terror attacks, there is damage, but we have nothing to do with that."
The Russian prime minister, who did not mention the other oil and gas export routes shut down due to the hostilities, said that, "We treat our energy facilities very carefully and we are not going to damage anything. We do not and cannot have such a purpose."
Meanwhile, industry analysts said US Vice-President Dick Cheney will be looking to secure strategic energy corridors feeding oil and gas to the West during his visit to the region this week.
Rasim Musabekov, a political analyst based in Azerbaijan, said that Cheney's visit is first of all connected with energy questions. Azerbaijan and Georgia are parts of a corridor supplying energy resources to Europe, and the US wants assurances that that Azerbaijan will continue oil and gas deliveries through Georgia.
Vafa Guluzade, a Baku-based political analyst and former presidential advisor, said the US is concerned that Azerbaijan will begin sending its energy resources through Russia instead of Georgia, and this question will be one of the main points of Cheney's visit.
While Cheney will doubtlessly express concern over existing oil and gas export routes in the region, analysts said that he also will want to ensure continued Azerbaijani support for the proposed Nabucco gas pipeline.
Azerbaijan is seen as the key potential supplier for the project, a 3,300-km pipeline that would run via Turkey and the Balkan states to Austria. Construction is scheduled to begin next year, with the completion date set for 2013.
In competition with Nabucco, Russia backs the rival South Stream gas pipeline, being built by Gazprom and Eni. The South Stream line involves construction of a gas pipeline under the Black Sea from Russia to Bulgaria, with further branches to Austria and Italy.
The price of crude oil tumbled yesterday in the futures markets as the destructive force of Hurricane Gustav dwindled.
Traders are focused again on the weakening global economy and panicky behaviour is being detected within Opec, suggesting that some cartel members fear that the oil price could crash. The gloom in the commodities markets pushed the price of US light crude as low as $105.46 per barrel yesterday, a $10 fall. Iran, the most hawkish member of the oil cartel, called for agreement next week on a cut of 1.5 million barrels per day in output.
Crude oil has lost more than a quarter of its value since the price peak in July of $147 per barrel. Stock markets surged in Europe and North America yesterday, with big boosts for bank shares and airlines, whose profits have crumbled under the heavy cost of fuel. The weakening of Hurricane Gustav raised hopes that oil installations in the Gulf of Mexico and Texan refineries had been spared serious damage. US light crude recovered after its initial fall to $109, down $6 per barrel, while Brent fell to $104 per barrel at one stage, recovering to $107.
Opec's more aggressive members are already speaking of production cuts. Venezuela and Iran have said that $100 per barrel is a benchmark they will defend and an Iranian official said yesterday that as a first step the cartel's members must stop exceeding production quotas, which would imply an immediate cut of about half a million barrels per day.
Oil analysts doubted that Opec would agree to an output cut at its conference in Vienna on September 9, but unease over the price fall is being seen even in Saudi Arabia, the most moderate Opec member. Saudi Aramco has been cutting the discount at which it sells Arab heavy, a poor-quality crude which it uses to calm the oil price, off- ering large quantities at big discounts.
Leo Drollas, of the Centre for Global Energy Studies, said: “[The Saudis] . . . fear heavy oil price falls. They are trying to anticipate that by not putting much oil on the market.”
Russia has moved to allay fears that it could cut vital oil flows to Europe despite heightened tensions over the country's aggressive stance towards its former client states.
Russia's energy minister insisted that it was working to ensure stable oil supplies through the key Druzhba pipeline that links Russia to eastern Europe and the west.
"We are doing everything we can so Druzhba can keep working stably and supply European consumers with enough oil," Sergei Shmatko said during a visit to Tajikistan.
"We have worked for many years to gain not just the image, but the status of a reliable energy supplier to Europe and we would never let it suffer, even in this political situation." Officials at Lukoil also denied they had received political pressure to cut supplies next week.
Sources told The Daily Telegraph this week that the Kremlin has prepared Russian oil companies to cut supplies in the face of threatened economic sanctions from the European Union. Until yesterday, the EU had threatened to take a hard line towards Russia over its invasion of Georgia, but the comments from Russia coincided with those from French officials, whose country currently holds the rotating EU presidency, who appear to have since shied away from imposing any formal sanctions.
Yesterday, the Russian ambassador to the UK, Yury Fedotov, said he hoped “people will think twice before making such a decision because it would be quite dangerous, especially for the current economic situation”.
Energy markets have been nervously watching the dispute between Europe and Russia, the world's second-largest oil exporter and oil prices yesterday rose $2.23 to $117.82 a barrel. The possible threat of Tropical Storm Gustav becoming a hurricane and disrupting oil production in the Gulf of Mexico was also a factor in the rise. "Only a sick mind would think of cutting off Europe," a trader at a Russian oil company said.
"Technically it is practically impossible, since (Russian) refineries are running at maximum rates and it is difficult to arbitrage right now."
"You can't completely rule it out, though," the trader added. "Politics always interferes with work."
Although Russia claims it has never cut off oil supplies for political reasons - even during the height of the Cold War - analysts believe it has often done so in the past, albeit in different guises. Last month, Russia cut oil deliveries to the Czech Republic by 50pc citing technical issues that reduced the availability of crude. However it came as the Czech government approved plans to host a US radar that is part of its missile shield defence system, prompting accusations that the cutbacks were politically motivated. Russia was accused of playing a similar game with Ukraine and the Baltic states last winter, ostensibly hiking prices for economic reasons that many suspected were politically motivated as those countries moved further away from the Russian sphere of influence.
ASHGABAT - Turkmenistan will sell 40 billion cubic metres (bcm) of natural gas a year to China through a planned pipeline instead of the previously agreed 30 bcm, the leaders of the two countries said on Friday.
The link, being built by China, Turkmenistan and its Central Asian neighbours Uzbekistan and Kazakhstan, will have total annual capacity of 40 bcm. Kazakhstan has said it will reserve 10 bcm for its own needs.
Visiting Chinese leader Hu Jintao met Turkmen President Kurbanguly Berdymukhamedov on Friday. Earlier this month, Berdymukhamedov offered to boost the planned sales volume through the link which is due to be completed in late 2009.
"The volume of shipments to China will be 40 billion cubic metres, not 30 billion cubic metres as planned earlier," Berdymukhamedov said after the meeting.
The two leaders did not say how this would affect Kazakhstan's plans to use some of the pipeline capacity.
"We will speed up the work on the pipeline," said Hu.
Turkmenistan currently sells most of its gas, about 50 bcm a year, to Russia's Gazprom (GAZP.MM: Quote, Profile, Research, Stock Buzz) and analysts have questioned its ability to boost exports significantly.
Russia, keen to maintain control over Central Asian gas flows, has offered to buy Turkmen gas at the European price next year and build a new pipeline along the Caspian to take in more Turkmen gas.
A group of Russian officials was in Ashgabat on the same day preparing for Saturday's session of a bilateral economic cooperation commission.
Turkmenistan earlier estimated its reserves at more than 20 trillion cubic metres (tcm), while BP (BP.L: Quote, Profile, Research, Stock Buzz) put them at 2.9 tcm in its annual statistical review.
Shipments of liquefied natural gas to the U.S. declined by 63 percent in August on increased domestic production and higher Asian demand, a consultant said.
The total supply of natural gas from imported LNG during August 2008 fell to 30.7 billion cubic feet from 83.2 billion in August 2007, Pan EurAsian Enterprises, Inc., a U.S. LNG consultant, said in an e-mailed report yesterday. Total imports this year dropped 61 percent to 236.9 billion cubic feet.
Shipments of LNG may fall to 360 billion cubic feet of re- vaporized natural gas, the smallest amount since 2002, because higher domestic production of the cleaner-burning fuel keeps prices lower than in Asia and Europe, Pan EurAsian said in July.
``Market conditions in the global LNG business have changed dramatically in the past year with Asian demand for LNG picking up strongly in a supply-constrained marketplace,'' Pan EurAsian said. ``Prices for LNG in Asia are approaching $20 per million British thermal units versus natural gas market prices in the U.S. (Henry Hub) that are around $8 per million Btu.''
The price gap has led to traders diverting LNG shipments away from the U.S. and northern Europe to buyers in Japan, South Korea, China, India and Taiwan, according to the report.
The drop in imports has occurred even after the opening of U.S. LNG import terminals at Northeast Gateway, Massachusetts Bay and Sabine Pass, Louisiana, Pan EurAsian said.
Re-vaporized natural gas is fuel that's converted from the chilled, liquefied form.
With a looming energy crisis on the horizon with Russia, Turkey has started looking for alternative suppliers for its energy needs, especially in natural gas. Turkey's balanced approach to Russian-Georgian conflict has been put under increasing strain with Russia beginning to utilize economic tools to pressure Turkey.
Russia hopes that Turkey will cave in and break with the NATO camp when pressured enough and thus is causing significant losses in trade in Turkey. Russia may even halt the flow of natural gas, as Turkey depends on Russia to provide 65 percent of its demand for this resource. Yet analysts have urged the Turkish government to remain calm and not jeopardize relations with Moscow by openly siding with the West.
Prime Minister Recep Tayyip Erdoğan's statement on the weekend reflected a cautious approach. He said, "We would never want such a thing [cold war] to happen," adding: "America is our ally and the Russian Federation is an important neighbor. Russia is our number one trade partner. We are supplying two-thirds of our energy from Russia. Fifty-two percent of our electricity comes from natural gas power plants. We will be left in the dark," Erdoğan said.
The signs of strain between Russia and Turkey reached a new level last week when Russia imposed new customs barriers on Turkish trucks that transport exports to this country. Russia placed Turkey in the category of high-risk countries (for smuggled goods) and started to check all items loaded on trucks one by one instead of only examining samples from each truck, the normal method in customs.
Foreign Trade Minister Kürşad Tüzmen fired off a warning last week, saying Ankara will consider retaliating against Russia if it continues blocking trucks carrying Turkish goods. Tüzmen said the Russian move is pushing Turkish businessmen into a disadvantageous position in the Russian market.
The Cabinet meeting to be held today, presided over by Prime Minister Recep Tayyip Erdoğan, is expected to tackle the issue of imposing sanctions on Russian goods.
Analysts caution, however, that there is not much Turkey can do to Russia. Energy expert Necdet Pamir likens the fight between Turkey and Russia as a toothpick fighting with a baseball bat. He says placing sanctions on Russia at this juncture is ill conceived and likely to backfire. He blames former Prime Minister Mesut Yılmaz, who signed the Blue Stream agreement with Russia, for making Turkey dependent on Russian gas. At the time, Yılmaz accused people who voiced criticism of the deal of being traitors.
In the past Russia has used its energy resources to pressure neighboring countries. In 2006, Russia hiked its natural gas price to Georgia from $110 per cubic meter to $230, putting Georgians in a very difficult position. With the help of Turkey, which allocated 800 million cubic meters it bought from Azerbaijan to Georgia, the Tbilisi government was able to cope with the situation.
Whether the gas flow from Russia to Turkey is affected or not, the price increases in gas and fuel oil alone will cost the Turkish economy a substantial sum. The Energy Ministry has already prepared an emergency plan for this winter in case there is a halt in Russian gas or dramatic increases in energy prices.
Turkey considers resources in Azerbaijan and Iran as alternatives to Russian natural gas to meet its energy needs. Pamir argues that the Azerbaijan alternative is not realistic. Pamir explains that "Azerbaijan produces 11 billion cubic meters of gas yearly and consumes nearly as much. What's more, Georgians will also likely put another demand on Azerbaijan now that relations with Russia are in crisis." Turkey probably has no chance of obtaining Azeri gas this year, adds Pamir.
The Iranian option does not seem so promising, either. Turkey has its own problems with Iranian natural gas, which provides 18 percent of Turkey's demand. Iran had halted or diminished the flow of natural gas last winter because of increasing consumption in the Iranian domestic market. During the visit of Iranian President Mahmoud Ahmadinejad on Aug. 18, the issue was left unresolved as the Iranian side declined to provide a guarantee of flow in natural gas for the winter. A senior Turkish official from the Ministry of Energy told Today's Zaman that Iran is also demanding a price increase in natural gas. Speaking on condition of anonymity, he said price hikes would likely be around $350-370 per cubic meter. Turkey is currently purchasing Russian gas at $400 per cubic meter.
Pamir points out that there are structural problems with Iranian gas exports. "The pipelines are not ready to transfer large amounts of natural gas from Iran," he says, adding, "The development of infrastructure was prevented by the US." He also noted that the gas sold by Iran is partially coming from Turkmenistan's Körpece-Kurtköy line. "Iran's 111 billion cubic meters of production barely meets its internal consumption," Pamir notes.
Algeria, Nigeria not a remedy to Turkey's gas needs
The only viable and long-term solution for Turkey's energy needs is development of a Turkmen gas pipeline to Turkey. Iran objects to such a pipeline as it will negatively impact the Iranian role. The unresolved issues between Turkmenistan and Azerbaijan prevent such a line from crossing through Azerbaijan. Interestingly, both countries are selling cheap Turkmen gas to Turkey by marking up prices.
Analysts have advised the Turkish government to keep a cool head in relations with Russia and not to openly side with the US and the West against Russian interests. Pamir reiterated that there aren't any problems in the Black Sea with Russia and as such Turkey is exploring for natural gas and fuel under the sea.
Pamir does not expect Russia to halt the flow of gas as it produces substantial revenue for Moscow. "But when push comes to shove, they may not act rationally and may use energy as a tool to threaten Turkey," he says.
Increasing the amount of LPG, which is 5-6 billion cubic meters at the moment, being imported from Algeria, Egypt and Nigeria is not an option. Even if Turkey could increase the purchased amount, it does not have any place to store this gas. According to experts the natural gas reserves beneath Lake Tuz will not be in service for another 10 years. Even though the total capacity of the natural gas reserves in Tekirdağ and the Sea of Marmara Sea is 5 billion cubic meters, according to official numbers, in reality, this number is no greater than 2 billion cubic meters.
Though the price that Russia's gas monopoly Gazprom applied to Turkey and European countries was $256, this number exceeded $300 in the second half of 2008. This figure is expected to reach $400 in 2009.
The price of gas that Turkey purchases from Russia is determined according to a gas purchase agreement, which is kept in the deposit boxes of the Turkish Pipeline Corporation (BOTAŞ). According to the agreement, the price of gas that Turkey buys from Russia will be kept secret from other countries. One article of the agreement states that if another country learns the price of gas sold to Turkey, the country that divulged the price will have to pay damages to the other country. However, Russia had said the price of gas it was selling to Turkey was $260 during the natural gas crisis between Russia and Ukraine. BOTAŞ had been angered by this action, and Russia had said it had only divulged the figure in order to convince Ukraine, which was buying gas from Russia for $110, to buy gas for $230.
If the tension between Russia and Georgia turns into an international crisis and the instability in the Caucasus becomes permanent, Turkey will be the most affected by these developments. The market watchers are worried that oil prices, which fell below $120 recently, will increase to new highs if the tension in the Caucasus turns into a US-Russia crisis. Many observers emphasize that even an explosion on the Baku-Tbilisi-Ceyhan pipeline can affect world oil prices and worry that the tension in the Caucasus and the Black Sea region could do permanent damage to the oil market.
According to political scientist and foreign policy expert Hikmet Aydın, the tension in the Caucasus will bring about a new Yalta Conference, which was the meeting that ended World War II. Aydın thinks Russia, which earns a lot of money from gas and oil sales, will not cut gas sales, adding however, that if Russia calls on its citizens not to go to Turkey for their vacations, this would seriously hurt the Turkish economy. Aydın also argues that former Prime Minister Yılmaz, who made Turkey dependent on Russia in terms of energy with the Blue Stream Agreement, should be tried for treason.
"The US cannot accept China as a competitor as China has a strong economy and has nuclear weapons. However, the US found a partner similar to itself in order to prevent China from becoming even more competitive. This partner is the US' former rival, Russia, which has a bad economy but is a nuclear power. Enmity is cooperation at the same time. This step is taken not to let other rivals [China or India] compete against them. They are following a strategy in order not to let other countries struggle in the same league with them. They do not want a big enemy. Russia will never launch a stupid rivalry with Turkey. Russia's main problem is not with Turkey. Russia's headache is Ukraine. Russia wants to tell the US that if you take Ukraine from my area of influence, then I will leave you a weakened Turkey," says Aydın.
The supply of natural gas from Egypt to Israel was halted on Friday and has yet to be resumed. Concern is mounting in Jerusalem: Sources there believe Egypt is struggling to supply all its clients, and has chosen to cut back its supply for its neighbors, including Israel, some of which pay especially low prices for the fuel.
Israel receives Egyptian gas through Egyptian-Israeli consortium EMG.
The Israel Electric Corporation, which is the main consumer of the Egyptian gas, has resorted to buying larger amounts from the Tethys Sea group through spot deals that are significantly more expensive. The outcome could well be higher electricity bills for Israel's consumers as the IEC rolls over the higher cost onto them.
In 2001, EMG won a tender issued by the IEC to supply gas at an attractive price of $2.75 per million BTU (British thermal units). The commercial contract with the IEC was signed in 2005, after the governments in Cairo and Jerusalem signed an umbrella agreement guaranteeing the supply of gas.
The contract locks in a 15-year supply of gas, at a pace of 1.7 billion cubic meters (BCM) a year, with the options of increasing the supply by 25% and extending the deal by five years.
In 2006 EMG began laying down a 100-kilometer undersea pipeline to bring the gas from El-Arish in Egypt to Ashkelon, at a cost of $470 million. The works ended in 2007 and gas began to flow on May 1, 2008.
But the pipeline's operation has been anything but smooth, sometimes halting because of problems with the quality of the gas. Also, only about a third of the promised amount has been forthcoming.
Meanwhile, opposition has been rising in Egypt, partially against the sale of gas to Israel, but mainly against the relatively low price set in the contract. Officials from both countries have held a series of dramatic, top-secret meetings regarding the volume of supply and change to the contract signed between EMG and the IEC.
Egyptian sources strongly implied that they want to reopen the deal. Talks have broken down since then.
EMG has frozen talks to sell Egyptian gas to other Israeli consumers, until the relations between the two countries clear up. However, EMG did place a bid in another IEC tender, for the supply of 5 BCM more.
Sources in Israel's energy market say that Egypt simply doesn't have the production capacity to supply its own consumption of gas and its contractual obligations to clients. That is why Cairo has had to decide on cutbacks in the gas it supplies - and it decided to start with the countries to which it supplies gas at subsidized prices - Jordan and Syria, or at a discount - Israel.
Meanwhile, in any case, voices of opposition to the deal with Israel have been growing stronger. Foreign news agencies have been reporting that a Cairo court will be discussing a petition by opposition politicians in Egypt, challenging the legality of the agreement between Israel and Egypt.
"The commercial agreement between the Israel Electric Corporation and EMG rests on the agreement between the two nations to supply gas to consumers in Israel," the IEC stated. "We are handling the day-to-day issues, while the government is handling the strategic issues. Based on the information we have at hand, we believe that the gas supply problems will be resolved shortly."
The National Infrastructures Ministry commented that it was aware of the technical difficulties in supplying gas from Egypt to Israel, but stressed that it has faith in the agreement between the two countries.
"We have no doubt that Egypt will stand by the agreement it signed with the government in Israel, including the commercial agreement signed between EMG and Israeli customers. The ministry is in constant contact with government officials in Cairo and in parallel is making great effort to assure additional sources of gas, including Russia and Azerbaijan," the ministry stated.
Beneath the gargantuan grey boiler towers of Schwarze Pumpe power station which pierce the skies of northern Germany, a Lilliputian puzzle of metal boxes and shining canisters is about to mark a moment of industrial history.
This mini power plant is a pilot project for carbon capture and storage (CCS) - the first coal-fired plant in the world ready to capture and store its own CO2 emissions.
Next week the pilot - an oxyfuel boiler - will be formally commissioned.
A cloud of pure oxygen will be breathed into the boiler. The flame will be lit. Then a cloud of powdered lignite will be injected.
The outcome will be heat, water vapour, impurities, nine tonnes of CO2 an hour¿ and a landmark in clean technology.
Because the CO2 will then be separated, squashed to one 500th of its original volume and squeezed into a cylinder ready to be transported to a gas field and forced 1,000m below the surface into porous rock where it should stay until long after mankind has stopped worrying about climate change.
Map showing location of the Schwarze Pumpe plant (Image: BBC)
This is the technology once lavishly described by the former UK Chief Scientist Sir David King as "the only hope for mankind".
The plant operators, Vattenfall, have worked furiously for two years to get the pilot running.
"We are very proud - we think this is the future for coal," says Vattenfall's Hubertus Altmann.
They funded the 70m-euro project themselves because they wanted to lead a technology they believe solves the conundrum of providing energy security through plentiful coal supplies whilst avoiding the CO2 emissions officially blamed for climate change.
Green-carpeted marquees are currently being furnished for the guests who will swell the applause at the grand inauguration.
But big questions hang over this technology overall, particularly over where the CO2 will be stored and who will pay the high costs of building and running the CCS plants.
The EU wants to see 10-12 full-scale power plants demonstrating CO2 capture within the next few years.
But although a number of other firms will soon join the race with pilot projects, no full-scale CCS coal plant has yet been commissioned.
The British government has promised a decision in October on how it will fund a full-scale CCS in the UK.
It hopes to avoid landing the taxpayer with the bill, but questions over CCS funding in Europe are as yet unresolved by the European Commission and the European Parliament.
The main options are:
* New rules mandating that all coal power plants must be fitted with CCS - ie industry and the consumer will pay
* Direct funding from the EU or member states (but member states do not want to pay)
* A feed-in tariff so generators get a premium for the amount of CO2 they sequester. Monitoring may be difficult
* Creating a new fund within the EU's Emission Trading Scheme (EUETS), which would give firms valuable carbon credits for every stored tonne of CO2. This would cost nothing but might undermine the CO2 market
* Setting a CO2 emission limit for all new power stations of, say, 350g of CO2 per kilowatt hour of electricity. This would make it impossible to build a coal plant which did not capture at least some of its CO2. This option is being pushed hard by UK Conservatives
Taking cash from EUETS auctioning. The permits for big firms to emit CO2 will be auctioned from 2013 (at the moment, they are given away). This will raise many billions - some of which could be diverted to fund CCS projects.
All the options would benefit from the sort of certainty over future carbon prices that would be provided by the successor to the Kyoto Protocol - but that is facing severe difficulties. And, meanwhile, industry is crying out for politicians to make an early decision so it can invest the billions that are needed.
"We need CSS urgently because the world is building a whole new generation of coal power plants and unless we find out whether this technology operates at scale and we can make these plants zero-carbon in the future, those will be a liability," says Nick Mabey of the think-tank e3g.
"The UK has talked a good game on this, it has said it wants to build a demonstration, but it's yet to show where the money is going to come from for the plants it wants built in Europe and worldwide."
Part of the problem is that the exact cost of large-scale CCS is unknown. This has left green groups uncertain and divided on the topic.
The latest estimates suggest CCS power will cost roughly the same as wind power - maybe 50% more than it does at the moment.
Coal train (BBC)
The firms providing the technology are doing their best to re-assure national treasuries that they can do it at a price which leaves coal competitive.
Philippe Joubert, of Alstom, who built the oxyfuel boiler at Schwarze Pumpe, said: "We will have a very good indication one or two years from now where we will have the first result of the bigger size demonstration plant.
"Currently we are at 5 MW; it's not enough to set a price. In our business, the size is a real issue, and if you start to have a real market, probably the price will drop."
The real test of CCS, though, is not in Europe.
The global CO2 savings many scientists believe are needed to control global warming are only likely to happen if politicians in rich nations are ready to ignore high energy prices, put up the price of their cheapest fuel through CCS - and then help developing countries to do the same.
The Nasa scientist who first drew attention to global warming 20 years ago appeared in a British court yesterday as a key witness in support of climate change activists charged with damaging a power station.
Professor James Hansen gave evidence at Maidstone Crown Court in the case of six Greenpeace members who scaled a 630ft chimney at the Kingsnorth plant in Hoo, Kent, last October in protest against plans to build new coal-fired units there.
The activists planned to paint the slogan "Gordon Bin It" on the chimney, but only got as far as the Prime Minister's christian name before they obeyed a High Court injunction ordering them down. They were charged with causing £35,000 of damage – the sum it cost the plant's owner, E.ON, to scrub off the word "Gordon".
Greenpeace argues that under the Criminal Damage Act 1971, its activists had a "lawful excuse" to cause the damage because they were seeking to prevent even greater damage being caused to property – such as flooding from rising sea levels and damage to species caused by climate change.
Yesterday, Prof Hansen, who has spoken out against the Bush administration's stance on global warming, said Britain had a responsibility to take a lead on limiting climate change because it was responsible – owing to its long industrial past – for much of the CO2 already in the atmosphere. Phasing out coal-burning power stations was crucial in tackling global warming, he told the court.
"Somebody needs to stand up and take a leadership role," Prof Hansen said. "It is an opportunity for the Prime Minister. If we are to avoid disintegration of the ice sheets, minimise species extiction and halt or reverse... climate change there is just time to accomplish it, but it requires an immediate moratorium on new coal-fired power plants that do not capture or sequester CO2."
Prof Hansen joined the Kingsnorth debate in December when he wrote to Gordon Brown and urged him to drop plans for coal-fired plants that do not capture CO2 emissions. E.ON wants to build two new coal-fired units at the ageing plant. The Government is considering whether to approve the planning application.
Before travelling to Kent, Prof Hansen met the David Miliband, the Foreign Secretary, who is thought to be unhappy about the plan for Kingsnorth, which is being promoted by John Hutton, the Business Secretary. Mr Brown will have the final say later this year.
One day, historians might speculate that it was the ambition of the companies that sought to profit by building coal-fired power stations that triggered the beginning of the end for humans' most polluting habit.
Four years ago, campaigners in the US raised concerns over plans to build 150 coal-fired power stations nationwide. Today, nearly half those plans have been defeated in the courts or abandoned, while half of the remaining proposals are being actively opposed. Just 14 of the 150 plants are being developed, and environmental lawyers are all still pursuing them.
"The enormity of what they were proposing to do provided a platform to have that whole debate about pollution, including global-warming pollution, " says Bruce Nilles , director of the national coal campaign for the Sierra Club, America's biggest grassroots environment group.
In a few years, the backlash against coal power in America has become the country's biggest-ever environmental campaign, transforming the nation's awareness of climate change and inspiring political leaders to take firmer action after years of doubt and delay. Plants have been defeated in at least 30 of the 50 states, uniting those with already strong environmental records, such as California, with more conservative areas, such as the southern and central states.
The success of the US campaign is also now inspiring a global wave of protests, many in Europe, against similar schemes that plan to build coal-fired generators before carbon capture technology exists. If the European protesters succeed, Nilles believes US legislators will be likely to support presidential candidates' promises to join international efforts to cut emissions. By implication, though, if the protesters fail in Europe, the impact on a US or international deal would be disastrous.
The US anti-coal campaign is being linked to protests against similar plans in Australia, Germany, Italy and the UK, where there are demonstrations at almost every public appearance by E.ON, the company that plans to build Britain's first new first new coal power station for two decades in Kingsnorth, Kent, where protesters set up a protest camp against the new development in August.
US campaigners say they are concerned that if the UK and other European countries go ahead with new coal plants, the momentum to tackle climate change will be lost. " The rest of the world has been leading on this, particularly Europe," says Nilles. "Building new coal makes it increasingly difficult, if not impossible, to meet [emissions] targets, so it's critical the European community countries do not fail."
Coal power returned to the US political agenda when vice-president Dick Cheney's 2001 energy policy lifted key pollution restrictions. It took two years for environmental groups to see what emerged: state by state, project by project, a total of 150 new plants were put forward, almost all of them not to replace old coal but to augment it. Individually, some plants would have emitted more CO2 than some African countries. Together, the plants would have emitted an estimated1bn tonnes of CO2 annually - more than the total emissions cuts by countries that have signed the Kyoto protocol.
That realisation mobilised an incredible national campaign, led by a few national groups including the Sierra Club, the Union of Concerned Scientists and others, but driven by state and local membership of these and many more organisations and employing a wide array of tactics. The first job was to raise public awareness that the cumulative threat was far greater than each local project, says Nilles. "The projects were moving through the public process and nobody was paying any attention."
Using town hall debates, local media and political connections, they stirred up interest and recruited new supporters to the cause, including powerful hunting and fishing interests and religious leaders in the Appalachian mountain states, where opencast coal mining is often affecting the poorest communities. Then the campaign began. State politicians were persuaded to legislate either against emissions, as in the case of California, or in favour of alternatives such as renewables and energy efficiency, in Minnesota. Campaigners targeted banks, telling them that investing in coal might be too risky because of the threat of international emissions caps and high carbon prices, prompting the banks to set tougher conditions on lending.
Then the environmentalists highlighted a little-noticed Federal grant fund that gave billions of dollars for new coal power; following their publicity six planned plants were dropped. Legal challenges successfully blocked more plants on the basis of local pollution in Illinois and Montana. It was also proven that burning coal was not the cheapest method of generating electricity, breaking state rules in Minnesota and Florida.
In 2007 the US Supreme Court ruled that greenhouse gases were a pollutant under the clean air act and so could be regulated. In July this year for the first time a coal plant in Georgia was blocked by a local court using this ruling. Meanwhile, concrete and steel prices have escalated so high that other projects have been dropped on cost grounds.
It is not only energy policy that has changed: public opinion on climate change has been transformed during this time, thanks in part to extreme weather events across the US, says Nilles.
"The sceptics will say that you can't say one flood is down to global warming. That's right, but we can see an up-tick in extreme and unprecedented weather patterns: wildfires sweeping across California, the drought that stretches [across] the southern tier of states, extreme flooding up in the mid-west, and an up-tick in tornados across the Great Plains."
Public opinion, in turn, has helped persuade at least six states, directly or through emissions limits, to put an effective moratorium on new coal power - California, Washington, Oregon and, perhaps more surprisingly, the conservative southern and midwest states of Florida, Idaho and Kansas. Governors of states that have taken action are also now putting pressure on their peers to stop them building generators that would wipe out their own hard-won emissions reductions. Nilles believes new coal power is now doomed in the US. "My sense is less than 10% [of the 150 plants proposed] will ultimately get built," he says. After this campaign, protesters will turn their attention to existing coal power and the mining industry, he says. "Ultimately, we need to phase out coal entirely .We don't need it and it's very expensive. The US has some of the best [renewable energy] resources in the world."
In Germany, where 25 plants have been mooted, campaigners are winning local referendums and blocking the proposals. India has also had some resistance to new coal, for example in Chamalapura near the city of Mysore. China is facing a fierce public response to pollution caused by coal and other industrial sites: an environmental official in 2006 estimated there had been 51,000 pollution-related protests the previous year. In Australia, protesters kicked off six planned climate camps around the world this year by chaining themselves to a coal train and blocking access to two plants.
Source: European Climate Foundation
In two years' time, the UK seems certain to miss one of the core environmental targets of the Blair-Brown years. The Government pledged that 10 per cent of the country's electricity would be generated from renewable sources, principally from wind farms, but also including tidal and solar power.
Press releases from the Department for Business, Enterprise and Regulatory Reform (Berr) still boast of the target, which was first promised in 2000 and enshrined three years later in the energy White Paper. And in a statement to The Independent on Sunday, a spokesman for Berr insists that all is well and that: "Estimates show there's more than enough renewables developments either up and running or in the pipeline to potentially meet the 10 per cent goal."
But the energy industry does not agree. Senior figures point out that less than 5 per cent of electricity was generated from renewable sources in 2007, up from just over 4 per cent the previous year. This is not, they argue, a sign of rapid progress from a country that that has a far less buoyant renewables industry than Germany and Denmark, although it is far windier.
Despite the impending failure, the Government is pushing for still-tougher targets. The Secretary of State at Berr, John Hutton, is currently consulting with energy companies on plans to generate 15 per cent of all energy – that is, transport fuel and heat as well as electricity – from renewables by 2020 in line with EU ambitions. Responses are due next month, and seem set to recommend that one-third of electricity should come from renewables, to make up for shortfalls in heat and transport. The cost of this is £100bn.
James Vaccaro, managing director of the renewables fund at Triodos, a pioneer in ethical banking, offers one of the gloomier predictions for 2010: that the UK will hit around 6 per cent rather than 10. He recalls a civil servant from the then Trade and Industry Department visiting Triodos's Bristol offices in 2000.
"The official said, imagine the 2010 target as being part of a pie," recounts Mr Vacarro. "He said small commercial projects were a small part of the pie, but it would be big renewables schemes that took up the major share."
Mr Vaccaro countered that there were simply not the available resources in the UK energy market to build the massive wind farms needed to provide the 10 to 15GW to generate 10 per cent of all electricity. Instead, the industry had to be built from the bottom up, with a series of small wind farms of around 10MW that would cost in the region of £12m to £14m. He added that the UK had to get used to the idea of the necessity of these smaller schemes.
It's a view he still holds. As an example, he points to a British Energy/Amec joint venture to build a 650MW scheme off the coast of Scotland on the Isle of Lewis, rejected in April on the grounds that it threatened the island's bird population.
Planning is one of the big problems for these wind farms. Although there are hopes that recent changes to the planning process, such as fast-tracking major infrastructure proposals and revamping the appeals procedure, will enable schemes to be approved faster, there is a huge backlog of wind-farm applications that councils have to go through.
Gaynor Hartnell, deputy director at the Renewable Energy Association, says there are "reams of projects" in the pipeline, perhaps as much as 14GW, mainly in Scotland. This would correlate with the Government's claims that there are "potentially" enough developments to meet the 2010 deadline. However, Ms Hartnell says that delays in granting planning permission – there is also a shortage of qualified planners working for local authorities – means that the UK will not hit the 10 per cent target until 2012.
Juliet Davenport, chief executive of Good Energy, a renewables firm that last week announced interim results showing an 18 per cent increase in turnover to £6.3m, is equally critical of the planning system. And while she remains optimistic that the Government can reach 8 per cent renewables in two years, Ms Davenport has a real planning horror story.
The Ministry of Defence (MoD) has opposed Good Energy's application to construct a 10MW wind farm, arguing that it could harm its communications ports. However, Good Energy is unable to respond, as the MoD will not provide information on its concerns. Officials say that the relevant documents are classified. "They said that they would not hand them over to us because of the threat of terrorism," sighs Ms Davenport. "You end up going round and round in circles."
It is this type of problem, she adds, that has led to the UK having the lowest renewables use as a percentage of all its energy in Europe, bar Malta and Luxembourg. "We've got the engineers to build the wind farms, but it's a difficult market because of the regulatory regime," she says.
Richard Ford is the UK grid connections manager at Renewable Energy Systems, a company that has developed wind farms for 20 years. What is delaying renewables' progress, he says, is the difficulty of linking the farms to the National Grid. Faced with a huge volume of applications, the grid will not allow power stations to connect until it has developed the extra capacity required to take the additional power.
Mr Ford would like the grid to manage demand, rather than wait until there is space, since a slot might not be available for 10 years. Planning permission lasts five years in England and Wales, and three in Scotland. As a result, a company can build a wind farm and leave it idle for five or seven years, or it can secure a slot and wait to apply for planning permission, which it might not secure.
"We and others are making applications to the grid before we are certain the developments can be built," explains Mr Ford. "We would prefer a 'connect and manage' approach."
The Association of Energy Producers believes some progress has been made. Its chief executive, David Porter, points out that just five years ago, renewables projects accounted for only 2 per cent of the UK's electricity.
Mr Porter's great worry is that this new target of 15 per cent of all energy coming from renewables by 2020, set by the UK in agreement with other EU states, is much tougher. As wind power is by far the UK's most advanced technology, with the Scottish government looking into the possibility of a £5bn off-shore grid to connect turbines, it will be the electricity providers that will have the biggest role to play in meeting this target.
He talks of the need to "minimise the cost impact on consumers", and says a radical overhaul of planning and grid connection is vital "to stand a chance of meeting 2020 targets".
Already, then, the energy industry is playing down its chances of success at this next stage. Berr can talk up its achievements all it likes, but few in the know appear to believe the department will be able to back this up when the first renewables deadline is reached it in just two years.
Vast greenhouses that use sea water for crop cultivation could be combined with solar power plants to provide food, fresh water and clean energy in deserts, under an ambitious proposal from a team of architects and engineers.
The Sahara Forest Project, which is already running demonstration plants in Tenerife, Oman and the United Arab Emirates, envisages huge greenhouses with concentrated solar power (CSP), a technology that uses mirrors to focus the sun's rays, creating steam to drive turbines to generate electricity.
The installations would turn deserts into lush patches of vegetation, according to its designers, and do away with the need to dig wells for fresh water, an activity that has depleted aquifers across the world.
Charlie Paton, a member of the team, and the inventor of the Seawater Greenhouse, said the scheme was a proven way to transform arid environments. "Plants need light for growth but they don't like heat beyond a certain point," he said.
Above certain temperatures the amount of water lost through leaves' stomata rises so much plants stop their photosynthesis and do not grow. The solar farm planned by the project runs seawater evaporators, pumping damp, cool air through the greenhouses. This reduces the warmth inside by about 15C, compared with the temperature outside.
At the other end of the greenhouse from the evaporators, water vapour is condensed. Some of this fresh water is used to water the crops, some for cleaning the solar mirrors.
"So we've got conditions in the greenhouse of high humidity and lower temperature," said Paton. "The crops sitting in this slightly steamy, humid condition can grow fantastically well."
The designers said that virtually any vegetables could be grown in the greenhouses. The demonstration plants already produce lettuces, peppers, cucumbers and tomatoes. The nutrients to grow the plants could come from local seaweed or be extracted from the seawater.
Michael Pawlyn, of Exploration Architecture, based in London, worked on the Eden Project for seven years and is now part of the Sahara Forest team. He said that the Seawater Greenhouse and CSP provided substantial synergies for each other. "Both technologies work extremely well in hot, dry, desert locations. CSP produces a lot of waste heat and we'd be able to use that to evaporate more seawater from the greenhouse. And CSP needs a supply of clean, de-mineralised water in order for the [electricity generating] turbines to function and to keep the mirrors at peak output. It just so happens the Seawater Greenhouse produces large quantities of this."
Paton said the greenhouse produced more than five times the fresh water needed to water the plants inside, so some of the water could be released to the outside, creating a microclimate for hardier plants such as jatropha, a crop that can be turned into biofuel.
The cost of the Sahara Forest Project could be relatively low as both CSP and Seawater Greenhouses are proven technologies. The designers estimate that building 20 hectares (nearly 50 acres) of greenhouses combined with a 10MW CSP scheme would cost about €80m (£65m).
Paton said groups in countries across the Middle East, including in UAE, Oman, Bahrain, Qatar and Kuwait, have expressed interest in possibly funding demonstration projects.
He said use of Seawater Greenhouses could reverse the environmental damage done by the glasshouses already built in places such as the desert region of Almeria, southern Spain, where, constructed over the past 20 years to grow salad crops, they now covered more than 40,000 hectares.
Paton said: "They take water out of the ground something like five times faster than it comes in, so the water table drops and becomes more saline. The whole of Spain is being sucked dry. If one were to convert them all to the Seawater Greenhouse concept it would turn an unsustainable solution into a more sustainable one."
Pawlyn said: "In places like Oman they've effectively sterilised large areas of land by using groundwater that's become increasingly saline. The beauty of the Sahara Forest scheme is that you can reverse that process and turn barren land into biologically productive land."
Neil Crumpton, an energy specialist at Friends of the Earth, said the potential of these desert technologies was huge. "Concentrated solar power mirror arrays covering just 1% of the Earth's deserts could supply a fifth of all current global energy consumption. And 1 million tonnes of sea water could be evaporated every day from just 20,000ha of greenhouses."
Governments should invest in the technologies and "not be distracted by lobbyists promoting dangerous nuclear power or nuclear-powered desalination schemes", Crumpton added.
The International Energy Agency estimates that the world needs to invest more than $45 trillion (£22.5 trillion) in new energy systems over the next 30 years.
The Government was involved in frantic negotiations with Britain's energy suppliers yesterday to salvage a deal aimed at tackling fuel poverty.
Gordon Brown had hoped to announce an initiative this week that would see up to £1bn invested in fuel vouchers for poorer households, energy saving measures such as insulation and a public awareness campaign.
However, a number of foreign-owned companies such as EdF, Npower, E.On and Scottish Power are understood to be unhappy with the scheme, claiming it would dent investment elsewhere, put domestic rivals at an unfair advantage and have implications for their home markets.
The package drawn up by the Government would cost around £1bn - comprising £250m already pledged plus an extra £750m.
Initially, the Government had intended to raise the money by increasing the amount of carbon emission allowances firms are forced to buy instead of being granted free from 7pc to 10pc.
The European Commission is understood to be against the changes, which would require changes to complex rules. The firms fear if the Commission changes the rules in the UK, they could face similar challenges in their domestic markets.
As a result, the Department for Business, Enterprise and Regulatory Reform is attempting to hammer out an agreement under which Britain's energy suppliers would voluntarily contribute money they would otherwise have had to pay.
Domestic utilities including Centrica - which has less of its own generating capacity and so is less affected - are understood to have signed up to the Government's package.
However, the foreign-owned utilities are facing opposition from their parent companies and continue to argue they are already investing more in the country than they take out. They suggest fresh demands from the Government would discourage them from investing further capacity at a time when Britain faces an energy shortage.
The Government is desperate to reach a deal which it hoped would form the centrepiece of attempts to relaunch its strategy. Fuel vouchers worth around £150 would be granted to families, with more spent on insulation.
If no agreement is reached it may be forced to scale back the proposals or return to the idea of a one-off windfall tax, which, although supported by many Labour MPs, is believed to be opposed by Number 11.
Britain's largest remaining coal miner has been hit by the slump in the housing market as it tumbled into the red during the half year.
UK Coal, which supplies around 15pc of coal burned in the UK - mainly to Drax, EdF and E.On - said weakness in the land market meant its property portfolio, largely made up of redundant mines, rose in value far less than in the previous period.
This meant it could not offset losses in its core mining business.
However, the company predicted the losses would be erased in the second half as it sold more coal under new more lucrative contracts, rather than under legacy terms. It reported a pre-tax loss of £9.9m for the six months to June 30, compared with a profit of £40.6m a year ago.
Chief executive Jon Lloyd said the company had been selling coal at £1.55 a gigajoule under the old contracts, compared with current prices of up to £4. He added that the new contracts the company had signed also had mechanisms which would allow UK Coal to benefit from any further rises, ensuring the group would meet full-year forecasts.
In addition, he said UK Coal would produce 5m tonnes of coal in the second half, compared with 3.7m in the first half. The company is even considering reopening old mines that could boost production even further over the next three years to as much as 12m tonnes.
"The future of coal is very strong," he said. "The need for energy will have to outweigh any environmental concerns if the lights are to stay on and in terms of carbon footprint, burning locally produced coal has 14pc less impact than coal imported from Russia."
Despite the upbeat assessment, UK Coal is also facing a sharp rise in steel, used in underground mining, and diesel, used to carry the soil needed to restore surface mining operations. As a result, it booked a £5.6m provision in the first half.
Aside from coal operations, the company has around £112m in agricultural land - still rising in value - and £438m in development land which it said it could sell from around 2012. UK Coal shares rose 7½p to 433½p.
Airline losses are forecast to exceed $5bn this year with the industry expected to remain heavily in loss in 2009, under pressure from high oil prices and a sharp slowdown in the rate of growth in demand for air travel.
Giovanni Bisignani, director-general of Iata, the global airline trade association, said year-on-year growth in passenger demand had fallen to 1.9 per cent in July, the lowest level for five years.
Air cargo volumes, a barometer for world trade, fell 1.9 per cent year-on-year in July, the second successive monthly decline.
Asia-Pacific carriers, the largest participants in the air cargo market, reported a 6.5 per cent drop in demand.
Weaker economic growth outside the US is being reflected in a deterioration in the outlook for both air travel and freight, and Iata said it had revised down its forecast for traffic growth.
Industry losses are being exacerbated by growing overcapacity as rising deliveries of new aircraft leave airlines flying with more empty seats and capacity growth exceeds growth in traffic volumes.
“The situation remains bleak,” said Mr Bisignani. “The toxic combination of high oil prices and falling demand continues to poison the industry’s profitability.”
The recent fall in the crude oil price from the record level of $147 a barrel reached in July has eased airlines’ worst fears about the outlook, but Mr Bisignani said the year-to-date average was still $113 a barrel, $40 more than the $73 a barrel average in 2007.
The rise was expected to push the global industry fuel bill up by $50bn this year to $186bn, with fuel accounting for 36 per cent of industry costs up from 13 per cent in 2002.
Mr Bisignani said that more than 25 airlines had collapsed since the start of the year. Last week Italy’s Alitalia went into administration and Anglo-Canadian Zoom Airlines ceased operations.
He said the situation was expected to deteriorate further in the coming winter months as traffic volumes declined and airlines struggled to maintain cashflows to pay salaries and fuel bills.
“This crisis is reshaping the industry in more severe ways than the demand shocks of Sars [the epidemic of severe acute respiratory syndrome] and 9/11 [the September 11 2001 terror attacks in the US],” said Mr Bisignani.
“When fuel goes from 13 per cent of your costs to 40 per cent in seven years, you simply cannot continue to do business in the same way. Fundamental change is needed.”
In the six years between 2001 and 2006 the global airline industry suffered net losses of $42bn and only returned to a $5.6bn profit in 2007.
Iata forecast that the industry would plunge back to a loss of $5.2bn this year (assuming an average oil price of $113 a barrel) with a further net loss of $4.1bn expected in 2009 (at an oil price of $110 a barrel).
Fuel could account for 40 per cent of total airline industry costs next year, as hedging provided less protection. The industry in North America is being hardest hit with forecast losses of $5bn this year and $4bn in 2009 compared with a profit of $2.8bn last year.
Profits in Asia-Pacific are forecast to fall from $900m last year to $300m in 2008 with profits in Europe falling from $2.1bn to only $300m this year.
Iata said most economies were expected to deliver weaker economic growth next year.
Oil company BP has signed a deal aimed at resolving the long-running and bitter dispute at its Russian joint venture TNK-BP.
Under the terms of the accord, TNK-BP chief executive Robert Dudley, who has been forced to manage the business from overseas, will step down by the end of the year, the partners in the venture said in a statement.
The deal should finish three months of rowing between BP and Mikhail Fridman, German Khan, Viktor Vekselberg and Len Blavatnik, the Russian partners in the venture. Analysts reckon the agreement is likely to hand TNK-BP's Russian partners more influence over future strategy in Russia, which contributes a quarter of BP's total output across the world.
Oleg Maximov, an oil analyst at Troika Dialog brokerage in Moscow said: "This agreement could be positive for the Russian market in general. Many investors were very concerned about this situation." Shares in BP rose almost 5pc to 525p on the news, but have fallen almost 15pc so far this year.
Edward Collins, a fund manager at New Star Asset Management, told Bloomberg: "Any settlement is good news. It removes a cloud from the shares."
OAO Gazprom, Russia's natural-gas exporter, plans a joint venture with Nigerian National Petroleum Corp. to develop energy projects in Africa.
Gazprom Chief Executive Alexei Miller and his Nigerian counterpart, Abubakar Yar'Adua, signed a memorandum of understanding at a Moscow meeting, the Russian company said in an e-mailed statement today. The accord covers cooperation in the exploration, production and transportation of oil and gas.
"It's a general MOU, an agreement in principle welcoming Gazprom's interest to invest in our oil and gas sector," said Levi Ajuonuma, spokesman for the Nigerian state oil company, known as NNPC. ``The specifics will be worked out later.''
State-run Gazprom said in June that the two companies had agreed to construct a gas pipeline network in Nigeria and had discussed a gas link across the Sahara. They may also build electricity assets in Nigeria, Gazprom said today.
Nigeria, Africa's second-biggest crude exporter after Angola, has the continent's biggest reserves of more than 30 billion barrels of crude and 187 trillion cubic feet of gas, according to official figures.
China's central bank has acquired a secret stake in Drax, the owner of the UK's biggest coal-fired power station.
The People's Bank of China is understood to have been building its stake in Drax for about a year and now owns just over 0.7pc of the company.
The stakebuilding provides a further illustration of the extent to which the Chinese government is deploying its vast foreign exchange holdings in overseas markets as it seeks greater returns than those yielded by its holdings of US treasury bills.
A Drax spokesman said the company was aware of the People's Bank of China's investment. "We welcome all long-term shareholders," he said.
Although the value of the stake in Drax is relatively modest, at almost £18m, it forms just a small part of the FTSE 100 shareholdings now being amassed by China's central bank.
In recent weeks, it has emerged that Legal & General, Old Mutual and Prudential, the insurance groups, have also been the subjects of investment from the People's Bank of China, which has acquired shareholdings with a combined value of more than £200m.
None of the stakes have been announced publicly because they are all below the 3pc disclosure threshold applying to companies listed on the London Stock Exchange.
One reason for acquiring such small shareholdings is that Chinese officials are aware of their potential political sensitivity, although this is a relatively minor issue in Britain, where Prime Minister Gordon Brown has declared that the "door is open" to Chinese investment.
Other companies targeted by China include BP, BG Group and Barclays.
Miner Rio Tinto also has a large shareholder in the shape of Chinalco, the aluminium producer which is keen to have a voice in the potential takeover of Rio by BHP Billiton, its larger rival. Chinalco has gained approval to increase its stake and said yesterday it would consider doing so.
A leading General Motors executive has called for government loans of up to $50bn to help American car markers build more fuel-efficient cars.
Bob Lutz, GM's vice-chairman, warned that major US car manufacturers need the money to re-tool their factories and are unlikely to be able to raise enough capital alone due to tight credit markets.
Mr Lutz's comments come against background of ongoing talks between leading US car makers and politicians in recent weeks over enhanced government backing to enable a shift to greener production.
The three major US car manufacturers, GM, Ford and Chrysler, are working with the United Automobile Workers union to lobby Congress for a further $3.75bn on top of the $25bn in loans authorised for the industry last year.
"The American auto industry is deserving of government loan guarantees," said Mr Lutz during a GM launch of new line-up for next year.
Detroit carmakers have announced plans to revamp numerous truck plants so that they can build the smaller cars and crossover vehicles that have become scarce at many dealers.
But the industry wants more money - up to $50bn (£27m) - to cope with the demand for more fuel efficient cars, a response to record petrol prices.
GM is at the forefront of the move to focus on greener vehicles. It has announced plans to potentially sell its gas-guzzling Hummer brand, and is working hard to ensure its Chevy Volt becomes the first fully electric-powered car on the market when it launches in 2010.
Financially GM continues to struggle, as sales slip and the cost of raw materials increases.
As a result, Mr Wagoner announced plans last month to bolster its cash position by $15bn, by cutting white collar staff costs by 20pc, ending health insurance for many retired workers, foregoing bonuses for the company's board, as well as selling and restructuring assets.
GM has recorded losses of $57.5bn in the last 18 months, but Mr Lutz said that the board is hoping for a return to profit in 2010.
He predicted that despite the fluctuations in the industry, if GM can continue its focus on costs, and if sales volumes begin to tick up, "Then I see a very good opportunity that basically I would hope that everything could be break-even to profitable."
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