Crude oil fell after a government report showed that U.S. fuel consumption declined.

Fuel demand averaged 19.5 million barrels a day during the past four weeks, down 5.3 percent from a year earlier, the Energy Department said today in a weekly report. Oil and gasoline supplies dropped as refineries cut operating rates to the lowest in at least 19 years, the department said.

``Demand stinks,'' said Kyle Cooper, an analyst at IAF Advisors in Houston. ``Prices have retreated a bit because of the demand number and because there's a flood of crude oil coming.''

Crude oil for November delivery fell 94 cents, or 0.9 percent, to $105.67 a barrel at 12:13 p.m. on the New York Mercantile Exchange. Prices rose as much as $2.89, or 2.7 percent, before the report's release at 10:35 a.m. in Washington.

``The demand number confirms that the slowing economy is having an impact on demand,'' said Christopher Edmonds, the managing principal of FIG Partners Energy Research & Capital Group in Atlanta.

Supplies of crude oil fell 1.52 million barrels to 290.2 million in the week ended Sept. 19, the department said. Gasoline stockpiles dropped 5.9 million barrels to 178.7 million barrels, the lowest since 1967. Inventory data prior to 1990 was reported on a monthly basis.

Refineries operated at 66.7 percent of capacity last week, the lowest since the department began compiling weekly figures in 1989.

President Hugo Chavez of Venezuela has signed a series of energy co-operation deals with China.

He said oil exports from Venezuela to China could rise threefold by 2012, to one million barrels a day.

Venezuela, one of the world's largest oil producers, is seeking new markets to reduce its dependency on exports to the United States.

Mr Chavez has now continued to Russia, for his third visit to Moscow within three months.

Energy co-operation

After holding talks with his Chinese counterpart Hu Jintao, the Venezuelan president told journalists in Beijing that China was a super-giant, which needed more energy, and that Venezuela was committed to help provide it.

"While the world enters an energy crisis, we are investing," said Mr Chavez.

Apart from oil exports to China, other plans include joint projects to build three oil refineries in the country capable of processing Venezuela's heavy crude oil.

As in Latin America, Mr Chavez is seeking to use his vast oil reserves to forge alliances away from Washington's influence.

Now he begins a visit to Russia, where, as with Beijing, energy co-operation is central to Venezuela's relationship.

But so too is military firepower.

In the past few years Hugo Chavez has signed arms contracts with Russia worth more than $4bn, and only last week a Russian Navy squadron left for Venezuela, where the two countries are scheduled to hold joint exercises in the coming weeks.

The US government says it is not concerned by the developments, but equally it cannot be happy about the encroachment by Russia, or China, into a region Washington has long considered its backyard.

Oil-rich Azerbaijan has responded to the Georgian crisis by reducing its reliance on trans-Caucasus oil pipelines, increasing shipments to Russia and starting to sell crude to Iran, in moves that will raise concerns in the US and the European Union.

Baku, which has cautiously nurtured ties with the west to counter strong Russian influence, initially portrayed the changes as temporary measures when the brief war between Georgia and Russia broke out in early August and the oil and gas routes across the Caucasus to the Black Sea and Turkey were shut down.

But Azerbaijan has since decided to keep shipping some oil through Russia and Iran even though the fighting stopped more than a month ago. "We don't want to insult anyone . . . but it's not good to have all your eggs in one basket, especially when the basket is very fragile," said Elhar Nasirov, the vice-president of Socar, Azerbaijan's state oil company.

Mr Nasirov said Azerbaijan would continue exporting oil to Russia and Iran, even though gas and oil shipments through Georgia had resumed, because of the increased risks in the Caucasus. He said: "We knew there was a risk of political turmoil in Georgia. But we did not expect war."

Separately, Elmar Mammedyarov, the foreign minister, told the FT: "We are trying to be friends with everybody, at the same time as acting in accordance with our national interests."

The small amount of oil that Azerbaijan is diverting to Russia is symbolically important to the Kremlin, which is determined to reassert control over Caspian energy. Azerbaijan forged close relations with the US in the 1990s when Russia was weak and allowed in western oil companies.

Nearly 1m barrels a day of oil - about 1 per cent of world output - now crosses the Caucasus, much of it through the US-backed Baku-Tbilisi-Ceyhan pipeline. Gas is shipped to Turkey via the south Caucasus pipeline.

But US efforts to persuade central Asian countries to use these pipelines have met with mixed success and may now be derailed.

Kazakhstan, which temporarily evacuated its oil port at Batumi on the Georgian Black Sea during the conflict, held talks this week with Moscow on new export pipelines to Russia.

Azerbaijan has not joined the west in condemning Russian action against Georgia despite the disruption caused to the oil business.

Ilham Aliev, Azerbaijan's president, ended talks with Dmitri Medvedev in Moscow last week, saying Azerbaijan sought "predictability" in the Caucasus. Mr Mammedyarov said Azerbaijan's main task was to preserve its independence and sovereignty.

Mr Nasirov said Azerbaijan was being courted for gas by Russia, the EU and Iran. "Russia knows it will have to pay a very high price if it wants all our gas," he said.

Meanwhile Azerbaijan remained committed to supplying Georgia with gas through a new pipeline completed last year.

Russia, the world's largest energy supplier, wants greater control over oil prices and will work with OPEC to accomplish that, Energy Minister Sergei Shmatko said.

The Energy Ministry is working on a set of measures, including the development of ``reserve'' fields that can be used to increase or decrease national oil output quickly, and will present them to members of the Organization of Petroleum Exporting Countries at an OPEC meeting in Algeria in December, Shmatko said today.

``There has to be a Russian factor'' in determining world oil prices, ``and maybe not just one,'' Shmatko told reporters in Petropavlovsk-Kamchatsky, the capital of the Far East Kamchatka region. Shmatko is traveling with President Dmitry Medvedev on a weeklong tour of remote regions to assess their economic potential.

Oil production in Russia, the largest exporter of the fuel after Saudi Arabia, is declining for the first time in a decade as companies struggle with costs and maturing fields. The government is granting tax breaks to producers to encourage development of fields in remote regions.

At the same time, price volatility is making it harder for companies to plan capital expenditures for expansion. The price of Urals crude, Russia's main export blend, has fallen 30 percent since July 4, when it reached a record high of $142.94 a barrel.

With such ``rollercoaster'' swings, Russia must take measures to better influence price performance, including some that ``may be unexpected,'' Shmatko said.

Medvedev sent Deputy Prime Minister Igor Sechin to OPEC's meeting in Vienna on Sept. 10 to forge closer ties with the 12 nation alliance. Sechin, who is also chairman of OAO Rosneft, the country's biggest oil producer, said at the time that ``extensive cooperation with OPEC is one of Russia's priorities.''

Crude-oil supplies to China from Kazakhstan via a cross-border pipeline may rise 30 percent this year as energy demand increases in the world's fastest-growing major economy.

The China-Kazakh pipeline may transport 6.5 million tonnes of crude from the Central Asian country this year compared with 4.77 million tons in 2007, Guo Yi, vice president of PetroKazakhstan, a unit of China National Petroleum Corp, said.

The oil link will reach its full annual capacity of 10 million tons by October 2009 once China National Petroleum finishes building a branch pipeline from Kenjiyak to Kumkoil in Kazakhstan, Guo said.

Oil, gas industry gains on offshore drilling in exchange for higher taxes

WASHINGTON — Oil and gas companies could soon be helping fund renewable energy projects, via the Internal Revenue Service.

But the industry also may be one step closer to gaining access to more areas offshore as Democratic leaders agreed Tuesday to drop a quarter-century ban on drilling off the East and West coasts.

"The White House made it clear any new drilling provision was a nonstarter," said Drew Hammill, a spokesman for House Speaker Nancy Pelosi, D-Calif. "The future resolution of offshore drilling will have to be addressed with a new president."

In what could prove to be a pivotal day on Capitol Hill for the oil and gas industry, the Democratic-led Senate — in its ninth attempt — finally, and overwhelmingly, approved a measure that would provide $17 billion in tax credits for renewable energy sources, largely by hitting up the oil and gas companies for higher taxes.

The provision was rolled into a broader package that also would provide hurricane relief and help millions of American families avoid paying the unpopular and often costly alternative minimum tax.

The Bush administration, which had long objected to targeting one industry for higher taxes, dropped its opposition Tuesday, with White House spokesman Scott Stanzel noting that the energy provisions were part of the a broader tax-relief package.

The White House urged lawmakers to remove the oil company tax provision but did not threaten a veto.

Break for plug-ins
The measure would extend tax credits for wind, solar and geothermal energy, while granting a tax credit of up to $7,500 for consumers who buy plug-in electric vehicles. The proposal also would extend through 2009 a tax break for low-producing, "marginal" oil and natural gas wells and provide an incentive for refiners to increase capacity.

To help pay for these incentives, the legislation would freeze the tax deduction oil and gas companies receive for their domestic manufacturing operations at 6 percent, while other American manufacturers will see that deduction rise to 9 percent in 2010. That provision will raise $4.9 billion over 10 years.

The legislation would raise another $2.2 billion by tightening the rules applying to oil and gas companies' taxes on income earned overseas.

And the bill would raise $1.7 billion by increasing what producers must pay to the Oil Spill Liability Trust Fund from 5 cents to 8 cents per barrel starting in 2009 and then to 9 cents a barrel in 2017.

Measure goes to House
The package will now go to the House. Senate Majority Leader Harry Reid, D-Nev., warned that chamber not to try to alter it. "Everyone should understand that we have had a very difficult time getting to the point where we are," Reid said.

But Democratic leaders in the House were talking about splitting the package into a number of pieces. And House Democrats want to strip out some provisions they say benefit "dirty energy," including a tax credit to spur development of liquid fuels from coal.

With lawmakers poised to recess at week's end until after the Nov. 4 election, they aren't likely to have time for a conference committee to iron out differences.

Instead, the legislation is likely to pingpong back and forth between the two chambers over the next few days, perhaps evolving into an identical measure both chambers can approve.

Oil industry dismay
Unsurprisingly, the oil industry is not happy with the Senate tax provision.

"It is frustrating that Congress is not working on a balanced and realistic energy policy that would enhance our nation's energy security," said Karen Matusic, a spokeswoman for the American Petroleum Institute, an oil industry trade group.

But House Democrats gave the industry something to cheer about when they agreed not to include bans on offshore drilling in a resolution to keep the government operating while lawmakers are in recess.

President Bush lifted a similar presidential ban earlier this year.

Lee Fuller, vice president of government relations for the Independent Petroleum Association of America, said dropping the ban only means the U.S. Minerals Management Service, which leases offshore acreage, "would have the authority to start redoing the planning process, which takes years."

The Sierra Club's Kristina Johnson, however, said she worries that lifting the ban "does temporarily leave the fate of our fragile coasts in the hands of the Minerals Management Service, a scandal-plagued agency that has demonstrated beyond a doubt that it is far too cozy with the oil industry."

Top oil exporter Saudi Arabia has trimmed oil supplies to international majors and US refiners since the start of September, industry sources said on Monday.

The kingdom had throttled back on supplies even before it signed up to an OPEC deal earlier this month to reduce output above the group's targets, industry sources said.

Saudi pumped most of the extra barrels, so had the most to cut under the agreement with the Organisation of the Petroleum Exporting Countries (OPEC). The kingdom is the most influential member of OPEC, the producer group that supplies more than a third of the world's oil.

"They were marketing their crude very aggressively from June through August, but they slowed it down for September and October," said one industry source at a major oil company on condition of anonymity.

Saudi supply to international oil majors was down around 5% in September from August, another source said. The majors received close to their full contract volumes from June to August, sources said.

The kingdom pledged at a meeting of energy powers in Jeddah in June to pump at 9.7 million barrels a day, the fastest rate in decades to meet demand and tame runaway prices.

Oil has since fallen to around $106 from a peak of $147.27 in July.

"They were practically forcing it on customers," said another source. "But obviously as the price fell there was no need to do that any more. The price seems to be back at a level the Saudis are more comfortable with."

US refiners were also receiving less crude in September and October than in August, sources said.

Demand in top consumer the United States has fallen at the fastest rate since the oil shock of the early 1980s as record fuel prices and a slowing economy eat into demand. Global financial turmoil has increased concern that the slowdown in demand will become even more pronounced.

China

But lower Saudi supply to majors and the US was partly compensated by an increase in supply to China, one source said.

State oil giant Saudi Aramco shipped its first cargo of crude to China's Dalian refinery in August.

The refinery in northeast China is in the final stages of an upgrade to double its capacity to 400,000bpd, and received a two-million-barrel cargo from Aramco last month.

Demand from the world's number-two oil consumer China has compensated for falling consumption in the United States and other top consumers. China's apparent demand grew by 7% in August from a year earlier as energy firms boosted imports ahead of the Olympics.

But the rate of demand growth may slow as refiners draw down on high stocks and the global credit crunch hits manufacturing and export industries.

Indications from buyers this month and last was that Saudi supplies would be steady in September and October from August.

But oil exporters can still reduce actual supply volumes by using a contract term called tolerance, which allows producers to supply several percent above or below notified volumes.

While the fur has been flying on financial markets, the bullets have been flying in the Niger Delta. The Niger Delta news didn't make many headlines last week, but the conflict there continues to be a major drag on oil supplies -- and with the Nigerian government in disarray, there's no end in sight.

The usually accurate spokesperson for the Movement for the Emancipation of the Niger Delta (MEND) reported in an e-mail that there had been several new attacks on oil facilities last week. On Friday, Royal Dutch Shell acknowledged that an "upsurge" of attacks had taken place and that earnings would take a hit as a result.

Bloomberg quoted Nigeria's state oil company as saying that the country's daily crude oil output has fallen by 280,000 barrels since Sept. 13, as a result of MEND's attacks in the Niger Delta region. Crude production fell 22 percent to 1.9 million barrels a day since the end of 2005, when the country was pumping about 2.5 million barrels a day, Bloomberg said. A senior European oil executive told me that the total amount of production lost as a result of fighting could be as high as 1.2 million barrels a day, and that if the fighting were to stop and production were to return to normal, output could top 3 million barrels a day. That would help drive down world prices, which dipped this week before rebounding to $104 a barrel.

But fighting isn't likely to end soon. That's partly because the Nigerian government may step up efforts to crack down on insurgents, especially if rival government officials in the capital city of Abuja want to prove their toughness. As the Eurasia Group, a consulting firm, noted in a update on Friday,

"The new counter-terror law passed by the Nigerian Congress signals a renewed military offensive against the MEND, as well as the termination of the floundering peace summit plans. Moreover, the health of President Umaru Yar'Adua continues to be a question, raising concern about political instability around the succession process if he dies."

In an August report, the Eurasia Group noted that Yar'Adua had reshuffled military leaders before going on a "little hajj" to Saudi Arabia, where he might have received medical treatment for kidney and/or cardiovascular problems. Worried about a possible coup, he sent two dozen officers into retirement. If Yar'Adua dies, the vice president would bring a different ethnic group to power. Yar'Adua and northern Muslim elites may be trying to change the succession order.

None of this augurs well for making peace in the Niger Delta.

Here a few examples of what the MEND spokesperson, who goes by the name Jomo Gbomo, has been reporting about an offensive that he or she calls "Hurricane Barbarossa." He has a distinctive style and consistent point.

The week started like this: "At 2210 Hrs on Monday, September 15, 2008, a major crude oil pipeline at Bakana Front in Degema Local Government Area in Rivers state of Nigeria belonging to the Shell Petroleum Development Company was destroyed with high explosives by Movement for the Emancipation of the Niger Delta (MEND) detonation engineers backed by heavily armed fighters."

The next day Gbomo said: "About 2200 Hrs on Tuesday, September 16, 2008, fighters from the Movement for the Emancipation of the Niger Delta (MEND) and the Niger Delta Volunteer Force (NDVF) in a new alliance attacked and destroyed the Orubiri flow station operated by the Shell Petroleum Development Company in Rivers state of Nigeria.

"All the soldiers on guard were killed and provided more weapons for the campaign. Their houseboat was equally destroyed...

"Soldiers and oil workers are advised to abandon all oil facilities including the off shore rigs of Bonga and Agbami as we want to minimize casualties before Hurricane Barbarossa arrives....A word is enough for the wise."

The next day, he reported: "A very major trunk crude oil pipeline we believe may belong to both Agip and Shell has been blown up today, September 17, 2008 at about 0930 Hrs by our explosives specialists at Rumuekpe, in Rivers state of Nigeria."

And the following day Gbomo had more to report: "At 1830 Hrs today, September 18, 2008, fighters from the Movement for the Emancipation of the Niger Delta (MEND) using high explosives have destroyed a major pipeline belonging to Shell Development Company at the Elem-Kalabari Cawthorne Channel axis in Rivers state of Nigeria.

"A gunboat patrol who happened to bump into the MEND fighters begged for their lives and showed their magazines to proof that they had not fired from their guns. They were spared and allowed to go but not after they had pledged loyalty to the struggle and denounced the criminality of the oil companies and the government. One of the soldiers actually defecated in his trousers."

On Sunday Gbomo said that the offensive called Hurricane Barbarossa had been "downgraded" to a "tropical storm" and that MEND would declare a ceasefire. It's always hard to tell whether that sort of thing is done out of magnanimity or necessity, but there's no denying that it was a rough week for the oil companies in the delta.

Shell said it was "deeply concerned" about casualties and civilians. "We are equally concerned about the resultant damage to oil and gas facilities and possible environmental damage caused by crude oil that has been spilled from damaged equipment," the company said in an email. The company urged dialogue. "This is desirable not just because of oil and gas production but also for the sake of millions of innocent, law abiding residents of the Niger Delta whose safety and means of livelihood are severely impacted by the crisis," Shell said.

You would think this hassle would be enough to send the oil companies packing, but there is enough high-quality oil in the Niger Delta that they are willing to wait. And wait. And wait.

Paolo Scaroni, the chief executive of the Italian oil giant ENI, talked about this during a stop at the Post this week. "It's very oil rich," he said. He said that ENI has been doing business in Nigeria since the 1950s, even during the Nigerian-Biafran war, the civil war that lasted from 1967 to 1970. The secessionist Biafra region included much of the oil production region in the delta. Scaroni said that if ENI could wait through that bloody conflict, it could wait now. But, he acknowledged, "It's not Switzerland."

Shell has become the first western oil company to win significant access to the energy sector in Iraq since the 1970s, in a $4bn move which could bring liquefied natural gas (LNG) to Britain.

The deal has angered anti-war campaigners and senior Iraqi figures who complained yesterday that there was no competitive tendering for the contract.

The Anglo-Dutch company said it had signed an agreement with the oil ministry in Baghdad to establish a joint venture with the South Gas Company in the Basra district of southern Iraq to process and market natural gas extracted on 19,000 sq km (7,300 sq miles) of land.

"Iraq has one of the world's largest natural gas resource bases and I am delighted that the Iraqi government, including the ministry of oil, have supported Shell as the partner for joint venture with the South Gas Company," said Linda Cook, executive director of Shell.

The company will own 49% of the new Iraqi business which will collect some of the 700m cubic feet a day of gas produced by oil suppliers and "flared off" into the atmosphere - a practice condemned by environmentalists as contributing to global warming.

Shell said its actions in Iraq would reduce greenhouse gas emissions and create value for the economy by providing the gas as a domestic power source.

The combined operation, which will make use of the South Gas Company's 3,500 staff, would initially focus on local markets but Shell added that "in the future the [joint venture] could develop a liquefied natural gas facility to export natural gas not needed for local domestic use".

LNG would be shipped to markets in the Mediterranean and further west, possibly Britain, according to well placed sources. Shell will not put a value on the deal but industry experts believe it could be worth $4bn in the short term at least.

The first big contract signed by a western oil company since the invasion of Iraq was condemned by Platform, a British-based organisation which monitors oil companies and Iraq in particular.

"The big issue here is that the whole thing has been done in secret. We are not being told what the terms of the deal are - such as are there extension rights [for Shell to gain Iraqi reserves] and why has there been no competitive bidding process," said Greg Muttitt of Platform.

"What has definitely happened here is that a country under occupation has introduced an oil policy that is favourable to western oil companies. The [US] state department has already admitted that it has advisers working on oil policy and there is a likelihood they may have drafted the Shell contract."

His views were reinforced by Issam al-Chalabi, Iraq's oil minister between 1987 and 1990, who questioned the lack of competitive tendering for the gas gathering contract and claimed it had gone to Shell as the spoils of war.

"Why choose Shell when you could have chosen ExxonMobil, Chevron, BG or Gazprom? Shell appears to be paying $4bn to get hold of assets that in 20 years could be worth $40bn. Iraq is giving away half its gas wealth and yet this work could have been done by Iraq itself," Chalabi said.

He claims that his country spent $2bn in the 1980s putting a South Gas gathering project in place which was fully operational by 1990. A British vessel was loaded with LPG, he said, but the infrastructure was damaged in the first Gulf war and sanctions made it difficult to mend.

"Since 2003 nothing has been done to repair or replace compressor stations that were damaged. There were studies financed by Japan that showed how it could be done for a few hundred million dollars," Chalabi argued.

Shell, BP and other oil majors are lining up for other big deals in Iraq with the oil ministry holding a meeting in London on October 13.

A US diplomat has denounced the controversial Baltic natural gas pipeline as “a special arrangement between Germany and Russia.” His remarks have ruffled feathers in Berlin and highlighted growing US-German tensions over relations with Russia.

Michael Wood, 61, is an athletic man. He has an impressively low golf handicap of 12. The former corporate executive has often gone mountain biking with US President George W. Bush, a connection that may have helped him acquire his current position. Wood has been the US ambassador to Sweden for the past two years.

He is not, however, very well versed in the art of diplomacy. At the end of the week before last, the Swedish daily newspaper Svenska Dagbladet published an op-ed article by the ambassador that set down some unmistakable ground rules. According to Wood, when the Swedish government evaluates the proposed Baltic natural gas pipeline project over the coming months, it should examine more than just environmental aspects. He wrote that the pipeline represents “a special arrangement between Germany and Russia” that “bypasses the Baltic States and Poland,” which are “potential customers.” Wood calls for the EU to speak “with a single voice to counteract the power of Russia’s energy weapon.”

The article alarmed the German government. Rüdiger von Fritsch, head of economic affairs at the German Foreign Ministry, promptly called up the American embassy in Berlin and demanded an explanation. Von Fritsch said the German government was “annoyed” by this highly “unusual” approach.

On the other end of the line, Deputy Chief of Mission John Koenig said that he was surprised by the ambassador’s statements. He underscored that the US position remains unchanged: Washington will issue no comment on the private pipeline deal. Koenig suggested that the article may have been insufficiently screened in Washington -- a PR mishap, so to speak.

The two experienced diplomats agreed to avoid a “public scuffle.” However, von Fritsch made one condition: Nothing like the Wood article must be allowed to happen again.

Nevertheless, the incident has created an air of suspicion. “The Americans are no longer pursuing their opposition to the pipeline under the table, but publicly,” complained Eggert Voscherau, who represents German chemical giant BASF on the advisory board of the pipeline operator Nord Stream. Martin Schulz, the leader of the Social Democrat parliamentary group in the European Parliament, even sees the Wood article as a “helpful” indicator of “what the Americans aim to do, namely destabilize Europe.”

By contrast, German Foreign Minister Frank-Walter Steinmeier and his team are afraid that the American slip-up has let the cat out of the bag on how the US actually views the issue. Sources inside the German Foreign Ministry say that for months US diplomats have been working behind the scenes to undermine the proposed 1,200-kilometer (745-mile) underwater pipeline between the Russian port of Vyborg and Greifswald, Germany. They say that the Americans fear the pipeline will increase Western Europe’s dependency on Russian gas and make it more vulnerable to blackmail.

The dispute over the undersea pipeline threatens to divide the US and Europe, just as the Georgian crisis has done. Last Thursday, US Secretary of State Condoleezza Rice spoke about US relations to Russia at an event hosted by the German Marshall Fund in the lavish ballroom of Washington’s Renaissance Mayflower Hotel. At times her address sounded like a return to the days of the Cold War. She said that Russia’s actions follow a worsening pattern of behavior. Rice referred to “Russia’s intimidation of its sovereign neighbors” and its “arms sales to states and groups that threaten international security.” In addition she criticized “its use of oil and gas as a political weapon.”

During the luncheon held after the speech, Utah Republican Senator Bob Bennett echoed Rice’s sentiments. “Russia is becoming an oil or a gas state,” said the economics expert. Bennett maintains that Germany is so dependent on Russian gas that this gives Moscow more political elbow room, for example, in Georgia. He says that Europeans have to do something about this “with pipelines that come from other countries to Europe.”

When it comes to Russia, politicians in Washington generally view Germany with suspicion. They accuse the Germans of being so dependent on Russian gas that they don’t dare speak their mind to the Russian strongman, Prime Minister Vladimir Putin. But the Baltic States, Poland and the Scandinavians are also uneasy about the pipeline. They are afraid that Moscow and Berlin have made a special deal. However, such objections have their limits. Countries like France, the United Kingdom and the Netherlands would also be supplied by the pipeline.

In Germany, where members of Chancellor Angela Merkel's Christian Democrats (CDU) are normally fairly critical of Russia, the conservatives see little reason for sharing the skepticism of the Americans this time around. “The Baltic Sea pipeline would not lead to a one-sided dependency on Russia, which would in fact be dangerous,” says CDU foreign policy spokesman Eckart von Klaeden. “After all, the enormous Russian investments have to be paid off.”

Chancellor Merkel, who had already warned of the dependency on Russian gas before taking office, now supports the project without reservations. She recently traveled to Sweden, just as Foreign Minister Steinmeier has done, to clarify the German position on the pipeline. She called it a “European strategic project.” The chancellor said that Sweden has a right to implement environmental licensing procedures, but nothing more.

That is exactly what the Swedes will do. “This will be the most stringent environmental assessment,” says a Berlin diplomat, “that a pipeline has ever been subjected to.”

Britain is likely build more coal-fired power stations under a controversial move that John Hutton, the business and enterprise secretary, said was necessary to avoid serious energy shortages over the next decade.

Greater use of coal, along with building more nuclear power stations, was essential for Britain's energy security in a world where most resources were in "unstable" regions, Mr Hutton told the Labour Party conference.

Committing Britain to more coal-fired stations will be contentious and open the Government to further criticism that it is not serious about meeting climate change targets by cutting emissions.

But Mr Hutton told the conference in Manchester: "Coal is a critically important fuel for the UK. Flexible. Available. And it will help us reduce our reliance on imported gas. Some people claim that if we consent to new coal fired power stations it would make our climate changes targets unachievable.

"But the inconvenient truth is that our carbon emissions are capped by EU agreements. Additional emissions will have to be offset by reductions elsewhere. So stopping the building of new coal fire power stations would make no difference to the UK's total carbon emissions, but I think it would damage our energy security."

Britain's economic competitiveness, "indeed our sovereignty as a nation", means becoming more self-sufficient in energy, he said. The depletion of resources in the North Sea means Britain is now a net importer of gas to power its electricity generating stations.

Western Europe imports about a quarter of its gas from Russia, which threatened to cut off supplies to Belarus in December 2006 and temporarily cut off deliveries to Ukraine the previous January. Concern intensified in August when war broke out between Georgia and Russia, threatening a pipeline that delivers gas to Europe.

Mr Hutton, who is already progressing with plans for more nuclear reactors, said that by 2020, some 80pc of the UK's gas will have to be imported, "much of it from the most unstable regions on the planet".

Greenpeace criticised Mr Hutton's support for coal fired stations saying they would make a "colossal contribution" to climate change. Executive director John Sauven said: "John Hutton somehow manages to sound like a cross between Arthur Scargill and Margaret Thatcher. New coal-fired power stations cannot be an option because of their colossal contribution to climate change."

View full speech

NEW YORK - Nobel Peace Prize winner and environmental crusader Al Gore urged young people on Wednesday to engage in civil disobedience to stop the construction of coal plants without the ability to store carbon.

The former U.S. vice president, whose climate change documentary "An Inconvenient Truth" won an Academy Award, told a philanthropic meeting in New York City that "the world has lost ground to the climate crisis."

"If you're a young person looking at the future of this planet and looking at what is being done right now, and not done, I believe we have reached the stage where it is time for civil disobedience to prevent the construction of new coal plants that do not have carbon capture and sequestration," Gore told the Clinton Global Initiative gathering to loud applause.

"I believe for a carbon company to spend money convincing the stock-buying public that the risk from the global climate crisis is not that great represents a form of stock fraud because they are misrepresenting a material fact," he said. "I hope these state attorney generals around the country will take some action on that."

The government says about 28 coal plants are under construction in the United States. Another 20 projects have permits or are near the start of construction.

Scientists say carbon gases from burning fossil fuel for power and transport are a key factor in global warming.

Carbon capture and storage could give coal power an extended lease on life by keeping power plants' greenhouse gas emissions out of the atmosphere and easing climate change.

But no commercial-scale project exists anywhere to demonstrate the technology, partly because it is expected to increase up-front capital costs by an additional 50 percent.

So-called geo-sequestration of carbon sees carbon dioxide liquefied and pumped into underground rock layers for long term storage.

Additional reporting by Timothy Gardner; Editing by Christine Kearney and Xavier Briand

The UK government on Wednesday used the proposed £12.5bn sale of British Energy to EDF of France as an opportunity to stress its controversial support for a new generation of nuclear power stations.

“New nuclear is becoming a reality... Nuclear is clean, secure and affordable; its expansion is crucial for Britain’s long term energy security,” said Gordon Brown, prime minister.

John Hutton, business minister, reinforced the point that EDF’s acquisition would be not so much about the operation of British Energy’s eight ageing plants as a fleet of new generators. “Today is just the start,” he said. “EDF’s plans to build four new nuclear reactors will also create a wide range of jobs and a wealth of opportunities for Britain’s manufacturers”.

EDF has said it could have the first new plant operating by the end of 2017. The four reactors it plans would supply 13 per cent of forecast UK electricity demand. However, this would depend on the speed at which planning consent could be won. The government is currently looking at streamlining the planning process after industry complaints that public opinion was blocking infrastructure projects.

The UK government, which holds a 36 per cent stake in British Energy, confirmed that it had committed to accept the 774p a share bid that the generator’s board has recommended.

The deal is expected to complete as early as the fourth quarter of this year but is subject to clearance by European Union authorities.

EDF will sell some of the land assets of British Energy – likely sites for new nuclear power stations – to third parties, a measure aimed at ensuring competition in new nuclear power generation. However, these sales are conditional on the progress of planning consents at Hinkley Point and Sizewell, the sites preferred by EDF for its own new plants.

The government, which has a bill before Parliament to streamline the planning process, will maintain that this condition does not imply that it is pre-judging the outcome of planning enquiries into the sites.

The government took a stake in British Energy in 2005 when the then troubled company was restructured. The stake was vested in the Nuclear Liabilities Fund, charged with ensuring the safe decommissioning of plants. The government said on Wednesday that with the proceeds of the sale plus other assets, amounting to a total of £8bn, the NLF would have the funds it needed for this work.

Centrica, which earlier this year had been expected to buy British Energy in conjunction with EDF, confirmed it had signed a memorandum of understanding to acquire 25 per cent of British Energy from EDF at the same price per share that EDF paid for British Energy.

The UK energy group would then have the right to take 25 per cent of British Energy’s current output, earn 25 per cent of profits, and have a one-quarter share in nuclear new build activities.

Yesterday, the Labour Government did quite the opposite. It agreed to sell its last remaining substantial investment in the energy industry by offloading its stake in British Energy for £4.3bn.

That cash will probably be shovelled into the Government's bottomless pit of public-sector wages and pensions. But whether or not you agree that this is throwing good money after bad, the deal puts the future of our energy needs firmly in the hands of free-market capitalists and big business that got so roundly trounced in Manchester this week.

It is telling that the Government is willing to sell British Energy, and the long-term energy problem it represents, to the likes of EdF and Centrica, owner of the much-maligned British Gas. There is an energy crunch approaching and the lights will go out from 2015. Why? Because a third of our power-generating capacity is disappearing, either because it's too old and dangerous or it's too dirty, or both.

Either way, a lack of investment so far has left us with a £100bn investment gap. Judging by the Government's decision to sell, a nationalised energy industry supported by the likes of Woodley is not the answer to bridging this gap. It's over to the fat cats, I'm afraid.

New generating capacity has to be both clean but also capable of producing energy on a scale to power one of the world's largest economies. It also has to be affordable. Wind will be a big part of that solution but is the most expensive technology at £2m per megawatt hour and has a bad habit of disappearing when the weather's clement. Nuclear can provide the base load required, is clean but, at £1.5m per megawatt hour, is still more expensive than conventional gas-fired power plants costing £500,000 per megawatt hour.

However, build a nuclear power plant and it has a life of 50 years before it's decommissioned. Go out and buy another gas field and you'll get 10, maybe 15, years out of it. So nuclear power represents good value for money. It's the kind of long-term investment that hopelessly short-term British governments have never been able to commit to, although Labour has recently come round to the need for nuclear energy, despite the opposition of many of its financial supporters. The fact that it is a French energy company buying the lion's share of British Energy reveals just how damaging the decades of policy vacillation have been in this area.

But Westminster still has a vital role to play, be it a Labour or Conservative-led House. In the immediate term, extra gas-fired generating capacity must be built because energy rationing is no more than seven years away and new nuclear won't be ready until 2017 at the earliest. However, energy companies will demand higher returns for building such short-term capacity. Regulators may not like it, but their political masters have not left them in a strong negotiating position.

As far as nuclear is concerned, EdF and others won't deliver if they can't win the planning permission, technology licences and site approvals that are in the gift of our bureaucracy. We must have a safe nuclear fleet but its creation needs expediting. Long- term capital has signalled its commitment through yesterday's £12.5bn deal. It's time for short- term politics to keep its side of the bargain and keep red tape out of our energy future.

EdF already has the approval of the government and Invesco, British Energy’s largest shareholders. with a combined stake of more than 45pc. The government is set to make £4.5bn from selling its 35.6pc holding.

The French power company is offering investors 774p a share in cash or 700p in cash plus a ``contingent value right’’ of one so-called nuclear power note for each share they hold.

The nuclear power note will be linked to the British Energy’s output and wholesale power prices, giving holders the opportunity to profit from future growth. The government has accepted the cash offer.

EdF has signed a ``memorandum of understanding’’ with Centrica over the sale of a 25pc stake in British Energy.

That would enable the owner of British Gas to participate in the building of new nuclear power stations on a 75:25 basis with EdF. The French company said its offer is not conditional on reaching a deal with Centrica.

British Energy owns and operates eight nuclear power stations, including Dungeness, Sizewell and Torness.

Invesco, which rejected EdF’s first advances because of its belief in the future of nuclear energy, has been persuaded to approve the deal by the terms of the new CVR.

M&G, the investment arm of Prudential and a 5pc shareholder in British Energy, had not yet decided last night whether to give its support to the bid. The investment house has been pushing hard for a deal that includes Centrica.

The next step will be winning approval from Brussels. The deal will hasten the Government’s nuclear revolution as EdF wants to use some of British Energy’s sites to build a new generation of atomic power stations.

From a distance, they look like nothing more than thin red lines on the horizon, easily lost amid the tumbling blue of the Atlantic Ocean. But get closer and the significance of the 140m-long tubes, 10 years in the making by a British company and now floating in the sea off the coast of Portugal, becomes apparent: they are the beginning of an entirely new industry in the hunt for clean power.

Yesterday, the red snake-like devices were inaugurated as part of the world's first commercial-scale wave-power station, three miles from the coast of the northern Portuguese town of Aguçadoura. The project, which will generate clean electricity for more than 1,000 family homes in its first phase, marks the latest step in Portugal's moves to become a leader in developing renewable energy sources.

At the heart of the Aguçadoura power station are three cylindrical wave energy converters, designed and built by the Edinburgh-based company Pelamis Wave Power. Moving up and down on the endless supply of waves in the open sea, they convert the motion into electricity, without emitting any of the carbon dioxide responsible for warming the planet.

"The future of wave energy starts today," said Manuel Pinho, Portugal's economics minister.

"Finland is very good in mobile phones, Portugal wants to be good in renewable energy. We are among the top five in the world, and we are just in the beginning of the process.

"Renewable energy is the source of energy for the future and we think this can create an industrial revolution and a lot of opportunities for jobs and research and we want to be ahead of the curve."

Peak output

At peak output, the Pelamis wave machines near Aguçadoura will generate 2.25MW, enough for the annual needs of about 1,500 family homes. Eventually, the station will be expanded with a further 25 Pelamis machines so that it can generate up to 21MW of power. That will save 60,000 tonnes of CO2 per year compared with a conventional fossil fuel plant.

"If you compare it to wind energy, wave is more predictable and is more sustained typically," said Ian Sharp of Babcock and Brown, the company that built and commissioned the Aguçadoura wave farm.

Each of semi-submerged Pelamis devices is 142m long, has a diameter of 3.5m and is made from 700 tonnes of carbon steel. A single wave converter is composed of four articulated sections that move up and down as the waves pass along it. At each of the hinges between the sections, hydraulic rams use the wave motion to drive generators to produce up to 750KW of power at peak output.

The electricity generated by the three Pelamis devices will be carried by undersea cable to a substation in Aguçadoura, which will then feed the power into the Portuguese national grid.

In addition to this flagship wave power, the Portuguese are investing heavily in other renewable technologies. They are already spending £250m on more than 2,500 solar photovoltaic panels to build the world's largest solar farm near the small town of Moura in eastern Portugal. It will have twice the collecting area of London's Hyde Park and supply 45MW of electricity each year, enough to power 30,000 homes.

In the past three years, the country has also trebled its hydroelectric capacity and quadrupled its wind power sources – northern Portugal has the world's biggest wind farm with more than 130 turbines and a factory that builds the 40m-long blades.

Pinho wants Portugal to rival Denmark or Japan in its commitment to developing renewables industries – he predicts his country will generate 31% of all its power from clean sources by 2020, compared with Britain's target of 15%. The Portuguese target means increasing the generation of electricity from renewable sources from 20% in 2005 to 60% in 2020.

'Time to take note'

Greenpeace UK's chief scientist, Doug Parr, said the UK government's energy secretary, John Hutton, should take urgent note of the developments in Portugal. "Wave technology invented in Scotland is powering Portuguese homes and making money for Portuguese suppliers, because our government has consistently neglected the renewables industry here in the UK."

The €9m (£7.14m) first phase of the Aguçadoura project, which involves the energy firms Enersis and Energias de Portrugal, has been helped partly by the Portuguese government agreeing to guarantee a premium for the electricity the station will generate via a feed-in tariff of 25c per KWh. The project has also been given a €1.25m grant from the Portuguese Agência de Inovação.

"The Portuguese government has moved forward on wave energy more quickly than has happened in the UK," said Sharp.

"[In Portugal] we have a feed-in tariff arrangement so we had a guaranteed price for the power that was produced and you don't have that in the UK. The environment here was better to stimulate development."

Parr said there could be dire consequences for the UK unless the government got its act together in developing renewable industries: "There is a danger that jobs, investment and clean energy will go overseas because of Hutton's obsession with old technologies like coal and nuclear power.

"It's time we stopped the rot before our performance on renewables becomes a national disgrace."

Friends of the Earth's renewable energy campaigner, Nick Rau, said that wave and tidal power could play a significant role in tackling climate change and reducing the UK's dependency on fossil fuels. "The potential for this technology in the UK is enormous - but the government is not doing enough to develop it."

In the UK, Pelamis is also involved in the South West Development Agency's project to build a wave power station off the north coast of Cornwall, called Wavehub. This will be the UK's first offshore facility for demonstrating a commercial-scale wave power plant - but it is not expected to be operational until at least 2010. The SWDA estmates the project could create 1,800 jobs and inject £560m into the British economy.

FOR years, the cows at Green Mountain Dairy here produced only milk and manure. But recently they have generated something else: electricity.

The farm is part of a growing alternative energy program that converts the methane gas from cow manure into electricity that is sold to the power utility’s grid.

Central Vermont Public Service, which supplies electricity to 158,000 customers around the state, was among the first utilities in the country to draw electricity from cow manure on dairy farms. About 4,000 utility customers participate by agreeing to pay a premium for the electricity.

“We realized we could help meet a customer demand for renewables, help solve a manure management problem and make these farmers more financially secure,” said Steve Costello, a spokesman for Central Vermont Public Service.

Four Vermont dairy farms are producing electricity for the utility, and two more are expected to be online by year’s end, Mr. Costello said. The utility hopes to add six more farms by 2010.

Residents and businesses that get their electricity from the program pay a premium of 4 cents a kilowatt hour above the typical rate of 12.5 cents. Most of that money goes to the farmers, who must purchase their own equipment, which can run up to $2 million per farm. Most farmers expect to make back their investment in 7 to 10 years.

The brothers who own Green Mountain Dairy, Bill and Brian Rowell, were looking to squeeze more profit from their farm, where they have 1,050 cows and have begun acquiring 600 heifers. Milk prices had dipped and they wanted another source of income.

They also thought that the huge amount of waste their cows produced could be used for something other than fertilizer. So they decided to give electricity a try, armed with about $750,000 in federal, state and utility company grants.

“We saw this as an economic and environmental management tool,” Bill Rowell said. “It’s helped to diversify our farm,” which was named the 2008 Vermont Dairy Farm of the Year.

The Rowells’ cows live in a barn where a mechanical scraper sweeps the animals’ waste into a large drain. The waste is then pumped into a huge sealed concrete tank known as a digester, which holds 21 days’ worth of waste and is kept at a temperature of 101 degrees Fahrenheit. Anaerobic bacteria break down the organic matter in the waste, producing a mix of methane and other gases, known as bio-gas. The gas is burned in an engine that runs an electrical generator.

The cow waste produces 250 to 300 kilowatts of electricity daily, enough to power 300 to 350 homes, according to the utility.

“We’re making a resource out of a waste stream,” said Bill Rowell, who is running for the State Senate.

In return, the Rowells receive a payment based on the wholesale cost of power, which averages about 7 cents per kilowatt hour, plus the 4-cent premium. Mr. Rowell said they earned about $200,000 from electricity annually, and with the additional cows should receive $235,000 to $240,000 in revenue from electricity.

The Rowells are also transforming commercial waste. The farm processes about 500,000 gallons of waste and outdated ice cream from Ben & Jerry’s each year and puts it in the digester. The free ice cream, which the company drops off, helps the Rowells generate more electricity and saves Ben & Jerry’s the cost of disposing of it. “We’re improving our processes, and they’re improving theirs,” Mr. Rowell said.

The digester produces more than electricity. After 21 days, the waste is pumped through a separator, which siphons off the liquid into a silo and drops the solids into a barn.

The liquid manure is used as fertilizer, while the solids are used for cow bedding. The bedding saves the Rowells thousands of dollars a month on sawdust, and they sell the excess to garden stores.

Other utilities across the country are purchasing power from farms as part of their renewable energy portfolios. Some, like Central Vermont Public Service, charge their customers a premium, while others do not.

Alliant Energy, which supplies electricity to rural customers in Wisconsin, Iowa and Minnesota, draws power from four digesters and is working to add more. About 20 independent farms in Wisconsin have digesters and sell electricity to various utilities, said William A. Johnson, manager of biofuels development at the utility.

“Our economy is agriculture, and people recognize that supporting the industry is a positive,” Mr. Johnson said. The utility charges 2 cents a kilowatt hour more for cow power.

“Rural customers, in particular, are very excited that something that is considered by some to be a liability, manure, has become, in essence, a resource,” Mr. Johnson said.

In Ohio, Buckeye Power went online with a digester at the end of August and plans to turn waste from a chicken farm into electricity next year.

“We were interested in finding a type of green power that was, No. 1, not intermittent, like wind or solar,” said Steve Oden, a spokesman for Buckeye, which will not charge extra for the power.

Marie Audet’s family farm in Bridport, Vt., was the first in the Central Vermont system and went online in 2005. The family invested $1.3 million and expects to make that back in four years.

“We’re saving money by not using sawdust, reducing original waste by recycling and generating revenue by selling electricity into the grid,” Ms. Audet said.

And many customers here have chosen to pay more for power that is both renewable and supports local farmers.

Maggie Hatch, who owns the Newbury Village Store in Newbury, Vt., operates half of the business with cow power. The renewable power adds $200 to $400 a month to the store’s electric bill, but Ms. Hatch and her husband, Gary, say it is worth it.

“It’s worth it to us to spend that money to help the producers and use power that helps sustain the environment,” Ms. Hatch said. “When you live in a place like we do, which is a beautiful part of the country, you’re really aware of the environment and want to keep it that way.”

The founder of Suzlon Energy, one of the world’s biggest makers of wind turbines, is to invest $5bn over the next five years in building and acquiring wind farms.

Tulsi Tanti will make the investment, funded partly through $3.5bn of debt, through Suzlon Green Power, a sister company to the turbine maker, owned by him and his family. The investment is one of the biggest to date in the wind market.

The money will be spent on building about 3,500 megawatts of wind generation capacity in China and India. Mr Tanti estimated that the investment would bring low-carbon electricity to about 10m people.

China and India are two of the world’s fastest growing markets for wind, and China is forecast to have more wind generating capacity than any other country within the next five years. “There is a need for more and more energy in India and China, and we want to ensure that it is [low-carbon],” Mr Tanti said.

Wind has become an attractive investment with soaring energy prices and rising demand. Some wind farms in developing countries such as India and China are also eligible to receive carbon credits from the United Nations, which can be sold on the international carbon markets as an additional source of income.

Mr Tanti said that branching out into building wind farms rather than simply making turbines was another step in the company’s vertical integration. Last year the company bought Hansen, a maker of gear-boxes for wind turbines.

But he said the move would not put Suzlon in competition with its customers. “Our customers are mainly the utilities and these wind farms will be selling their electricity to the utilities,” he said.

There is currently a shortage of wind turbines on the world market, as manufacturers cannot keep up with burgeoning demand, and customers sometimes face long waits for delivery of their turbines. But Mr Tanti said the investment would not lead to customers waiting longer for turbines, as Suzlon was building more manufacturing capacity.

He also raised the possibility that some of the $5bn investment would be spent on solar power projects, and said that the wind projects could source turbines from other manufacturers.