ODAC Newsletter - 17 October 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.
There was an initial recovery in world markets at the beginning of the week following news of major cash injections into banks across Europe and the US. This was quickly overtaken by pessimism though as traders anticipate global recession. Concerns of weaker Chinese demand are adding to the downward pressure on oil and commodities prices. What effect OPEC can exert on the trend remains to be seen, but the level of anxiety about the impact of the decrease is evident in the fact that the organization has brought forward its emergency meeting on the topic from November 18th to October 24th.
As Iraq held the biggest sale of oil assets ever seen this week in London, the US government reported that crucial Iraqi export pipelines are in such bad repair that they could fail at any time. Companies bidding to invest in Iraq are taking enormous risks with regard to the physical and political security of their investment. However given the narrowing opportunities for the independent oil companies and the scale of Iraq’s resources, it is a risk they will take.
It was a good week in the political life of Gordon Brown as leaders around the world followed the UK example to rescue their financial institutions. Clearly the job of “saving the world” must have been clouding his mind when he stated that “we have had some success in bringing down oil prices”. While worldwide recession and skirting the financial abyss may bring the new political thinking required to steer the world towards a more sustainable economic model, it is difficult to believe that it was part of Mr Brown’s plan to rein in the price of oil.
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With a barrel of Brent crude down more than 50pc on its July peak of $147, the oil cartel said it would now meet on October 24.
Last week the Organization of Petroleum Exporting Countries said it was going to meet on November 18 "to discuss the global financial crisis, the world economic situation and the impacts on the oil market".
Oil has followed movements in equity markets this month and with share prices down sharply worldwide, the price of a barrel of Brent crude in London was trading down $4.60 at $66.20 in afternoon trading - a 15-month low.
"Following consultations with the president of the OPEC Conference and colleague ministers, it has been decided to re-schedule the extraordinary meeting of the OPEC Conference," the cartel said in a statement, citing a decision by OPEC Secretary General Abdalla Salem El-Badri.
"The Organization is concerned about the deteriorating economic conditions," it said in a statement.
"The subprime mortgage problems that have been observed for a long time have created a shock wave in financial institutions resulting in huge losses, and an escalating credit squeeze which has turned into a deep financial crisis."
Tightening credit has eroded demand and pushed prices down 18pc from a year ago, and 51pc from the record $147.27 a barrel reached on July 11.
OPEC yesterday cut its forecast for demand next year by 450,000 barrels a day, or 0.5 pc, to 87.2m barrels a day because of "dramatically worsening'' financial market conditions.
"Demand not just for energy but across all consumer products is going to be hit,'' said Jonathan Kornafel, a director for Asia at Hudson Capital Energy in Singapore.
"That's just going to export recession to Asia and the manufacturing economies. Next year is not going to be pretty.''
Federal Reserve chairman Ben Bernanke said yesterday that efforts to calm financial markets will probably not result in an immediate economic rebound.
Fears that the world was heading for an economic slowdown saw oil prices fall to their lowest level for nearly 14 months, impacting on several areas of consumer spending and raising hopes that consumer price inflation, which hit a 16-year high in September at 5.2 per cent, may be about to decline.
One upside to the drop in oil to a 14-month low has been a cut in petrol prices. Yesterday oil company BP and supermarket chains Asda and WM Morrison cut the price of unleaded petrol to 99.9p a litre.
LONDON - A looming global recession could make even aggressive members of OPEC more tolerant of cheaper oil, but the group still needs to cut output by early next year to control swelling stocks and insure against a price collapse.
Already top exporter Saudi Arabia has begun to pare back production in line with expectations of lower demand, which last week pushed oil to a 13-month low below $80 a barrel, nearly 50 percent down from the July peak of $147.27 for U.S. crude.
"'What is the highest price the market can profitably pay?' is the real question," said Serene Gardiner of Standard Chartered Bank.
"Expectations of what oil producers can get for their oil have shifted along with events in the financial world. It's bad for business to add oil to the fire, so to speak. And as such we have noticed a shift in rhetoric."
Ahead of an emergency OPEC meeting called for Nov. 18, Standard Chartered Bank has said the level the exporters' group would "vigorously defend" was $80 a barrel.
That chimes with an OPEC source, who said the Organization of the Petroleum Exporting Countries was unlikely to cut unless the price of crude produced by its members fell below $80 a barrel.
"The price is still reasonable," the source told Reuters.
Saudi Arabia and other Gulf producers can afford to be relatively relaxed. They have low production costs and can balance their budgets with oil at well below $60.
Others including Iran, Venezuela and Iraq need higher prices to meet major spending commitments. Adding to already hefty expenses, Iran has a presidential election to finance next year and Iraq is recovering from years of war.
Venezuela has the greatest needs of all OPEC members and would next year require an average price of $97 to balance its external accounts, according to Washington-based PFC Energy.
"I think we're seeing a re-emergence of the doves and the hawks. Venezuela and Iran would like to see $100 or more and need it," said David Kirsch, consultant at PFC.
"Doves would like to see a level of $90. The difference is that doves are aware that major economies need to enact fiscal and monetary stimuli. They want to ensure the oil price is not so high that it counteracts this."
The categories of doves and hawks are disliked by many in OPEC, but are often used to distinguish between producers like Saudi Arabia, an ally of top consumer the United States, and hawks such as Venezuela and Iran that are more concerned about balancing their books than keeping the top energy user happy.
They are pumping close to capacity, are worried about the falling value of their earnings and think the onus should be on Saudi Arabia, the only OPEC member pumping significantly above its agreed output target, to lead any cuts in production.
ACTION IN SEPTEMBER
At OPEC's last meeting in September, Saudi Arabia, in a move some interpreted as an attempt to win unity ahead of challenging times, signed up to a tougher-than-expected deal.
The group said it would adhere strictly to targets, removing around 500,000 barrels per day pumped above an agreed ceiling.
Saudi Arabia has not commented publicly, but the Saudi-owned Al-Hayat newspaper reported after the September meeting the kingdom did not intend to cut output unless customer demand fell.
So far, it is still pumping above target, but reduced output in September to 9.55 million bpd, from 9.65 million bpd in August, according to a Reuters survey.
PFC has said the group would need to remove around one million bpd from the market by the second quarter of next year. Otherwise, it would face a stock build of between one and 1.5 million bpd in the second and third quarters, Kirsch said.
If the price slide accelerates, OPEC might be stung into further action even before November, but it could also wait until the next conference scheduled for December in Algeria.
"More important than changes to output at this point is the group's demonstration of its determination to respond responsibly to changing economic conditions and avoid the mistakes of the Asian financial crisis when internal fighting among OPEC members helped to lead to the collapse of prices to $9 a barrel," PFC Energy said in a note. After the Asian crisis in the late 1990s, poor OPEC discipline meant the group produced above agreed limits as demand fell sharply.
By the start of 2002, non-OPEC producers, including Russia, the second biggest exporter after Saudi Arabia, had agreed to collaborate with OPEC supply cuts to try to support prices.
In a sign of renewed closeness to the producer group, Russia sent its most senior delegation yet to observe the September meeting.
Apart from any political agenda, Russia needs an estimated $70 a barrel to balance its books, although it can draw on gold and foreign exchange reserves.
That still leaves the problem of Russian energy companies, whose stagnating output will decrease regardless of any OPEC decision unless they can meet capital expenditure needs.
Oil major LUKOIL's chief executive told Reuters the firm's output would only rise next year if prices held above $105.
Additional reporting by Simon Webb and Luke Pachymuthu in Dubai and Dmitri Zhdannikov in Moscow, editing by Anthony Barker
Crude oil fell for a third day, taking its decline from the July record to more than 50 percent, after a global stock plunge heightened concern bank bailouts won't prevent a recession.
Oil, which has followed movements in equity markets this month, traded below $73 a barrel as Asian stocks slumped after the Standard & Poor's 500 Index had its biggest loss since 1987 yesterday. The Organization of Petroleum Exporting Countries cut its 2009 demand forecast because of ``dramatically worsening'' financial market conditions.
``Demand in not just energy but across all consumer products is going to be hit,'' said Jonathan Kornafel, a director for Asia at Hudson Capital Energy in Singapore. ``That's just going to export recession to Asia and the manufacturing economies. 2009 is not going to be pretty.''
Crude oil for November delivery fell as much as $3.03, or 4.1 percent, to $71.51 a barrel in after-hours trading on the New York Mercantile Exchange, the lowest since Aug. 29, 2007. It was at $71.52 a barrel at 3:11 p.m. Singapore time.
Prices are down 18 percent from a year ago and have dropped 51 percent from the record $147.27 a barrel reached on July 11.
The retreat in stock prices over the past two days erased almost all of the gains in the S&P 500 and Dow Jones Industrial Average on Oct. 13, when the market rallied the most since the 1930s on speculation government intervention will ease the credit crisis.
Efforts to calm financial markets probably won't result in an immediate economic rebound, Federal Reserve Chairman Ben S. Bernanke told the Economic Club of New York.
OPEC, supplier of more than 40 percent of the world's oil, cut its forecast yesterday for oil demand next year by 450,000 barrels a day, or 0.5 percent, to 87.21 million barrels a day. The 13-member group will hold an extraordinary meeting on Nov. 18 in Vienna, after a decision to trim supplies last month failed to stem a slump in prices.
Last week, the International Energy Agency, an adviser to 28 nations, lowered its projection for global oil demand next year by 0.5 percent to 87.2 million barrels a day.
``The story at the moment remains the fears of an international economic slowdown and what that means for oil demand,'' said David Moore, a commodity strategist with Commonwealth Bank of Australia Ltd. ``The weakened economic outlook means the oil market is less tight.''
A government report today will show that U.S. crude-oil and gasoline inventories rose last week, according to the median of responses by analysts in a Bloomberg News survey. The report will be released a day late because of the Columbus Day federal holiday Oct. 13 in the U.S.
Hovensa LLC, operator of the third-biggest refinery in the Americas, was to close processing units at its St. Croix, U.S. Virgin Islands, facility because Hurricane Omar was forecast to hit the islands yesterday.
Brent crude oil for November settlement declined as much as $3.30, or 4.7 percent, to $67.50 a barrel on London's ICE Futures Europe exchange, the lowest since May 31, 2007.
The November contract expires today. The more-active December futures fell as much as $3.25, or 4.9 percent, to $69.33 a barrel.
Sanford C. Bernstein & Co. cut its crude oil price forecasts to $70 a barrel from $90 a barrel for 2009 and to $80 a barrel from $95 a barrel for 2010 because of weakening global demand growth and increasing spare capacity.
It also reduced its 2008 forecast to $105 a barrel from $110 a barrel, according to an e-mailed research report today from analysts Neil McMahon and Ben Dell.
``In the long run we continue to believe that oil and gas prices will trend up in line with the marginal cost of supply,'' the analysts said, adding that this is currently estimated to be about $75-$80 a barrel for oil.
``However prices should continue to cycle between the cash cost at the bottom ($45-$50 a barrel) and the price of demand destruction ($110-$125 a barrel) at the top, with the peaks and troughs of the oil cycle dependent on near-term supply demand dynamics,'' they said.
China, the world's second-largest energy user, increased crude oil imports by 10 percent in September to meet rising demand from refineries.
Imports climbed to 15.03 million metric tons, or 3.66 million barrels a day, last month, the Beijing-based Customs General Adminsiration of China said on its Web site today. The rate of increase compares with an 11.5 percent gain in August and a 7 percent decline in July.
Chinese oil companies are expanding refineries to meet fuel demand from the world's fastest-growing major economy. China's processing capacity increased at least 5 percent in the third quarter as the nation's two biggest oil companies, PetroChina Co. and China Petroleum & Chemical Corp., boosted capacity in Qingdao and Dalian.
Imports in the first nine months rose 8.8 percent to 135 million tons, the customs said today. The country increased crude-oil imports to 140 million tons, the customs said in a separate statement yesterday, suggesting purchases reached a record 20 million tons in September. Exports were 580,000 tons, it said today.
Crude oil imports may keep rising in the next few months as the country takes advantage of falling prices to increase stockpiles, Li Yujin, an oil analyst with China International Chemical Consulting Corp., said by telephone from Beijing.
Crude Oil Prices
Crude oil prices have fallen 44 percent from a record $147.27 a barrel reached on July 11 because of concerns the global credit crisis will damp economic growth and oil demand. Crude oil for November delivery rose 2.35 percent to $83.10 a barrel at 12:49 p.m. Singapore time.
Oil-product imports reached 2.55 million tons last month and gained 16.5 percent to 31.28 million tons in the first nine months. Fuel exports rose 3.7 percent to 12.3 million tons during January to September and stood at 1.38 million tons last month.
China, the world's largest coal producer, exported 2.08 million tons of the fuel, the customs said today. Overseas coal shipments fell by 6 percent to 35.72 million tons in the first nine months, it said, without giving imports figures
To win allies and forge an anti-American front, Mr Chavez sells oil to friendly countries at low prices. Ironically, the only big customer buying Venezuelan oil at the full market price is the United States, which the president routinely denounces as the "Empire".
"As production falls, the sales to the US become more important," said Pietro Donatello, an oil analyst from Latin Petroleum in the capital, Caracas. "Only the US is paying the full amount for Venezuelan oil and in cash, the rest are in some kind of barter agreements."
The state oil company, PDVSA, produced 3.2 million barrels per day in 1998, the year before Mr Chavez won the presidency. After a decade of rising corruption and inefficiency, daily output has now fallen to 2.4 million barrels, according to OPEC figures. About half of this oil is now delivered at a discount to Mr Chavez's friends around Latin America. The 18 nations in his "Petrocaribe" club, founded in 2005, pay Venezuela only 30 per cent of the market price within 90 days, with rest in instalments spread over 25 years.
The other half - 1.2 million barrels per day - goes to America, Venezuela's only genuinely paying customer.
Meanwhile, Mr Chavez has given PDVSA countless new tasks. "The new PDVSA is central to the social battle for the advance of our country," said Rafael Ramirez, the company's president and the minister for petroleum. "We have worked to convert PDVSA into a key element for the social battle."
The company now grows food after Mr Chavez's price controls emptied supermarket shelves of products like milk and eggs. Another branch produces furniture and domestic appliances in an effort to stem the flow of imports. What PDVSA seems unable to do is produce more oil.
Venezuela has proven reserves of 80 billion barrels, but estimates suggest that it may possess 142 billion barrels - more than anywhere else except Saudi Arabia. But the crude is of low quality and must be upgraded before it can be shipped. There are only three upgrade units currently operating, processing only 600,000 barrels per day.
"There is a bottleneck in the Venezuelan production system," said Mazhar al-Sheridah, 68, an oil expert at the Central University of Venezuela. "It will cost at least $32 billion to build another three upgrading units and take some five years, meaning that Venezuelan production is stuck at current levels for a while yet."
All this means that Venezuela has missed much of the benefit from the oil boom and, now that prices are falling, Mr Chavez faces huge financial problems. Nobody is sure at what point his government would be unable to pay its bills, but most sources consulted believe this would probably happen if oil falls to $80 a barrel. Yesterday, oil was trading at $79.80.
The ownership of BG Group’s biggest oil and gas asset is under discussion as KazMunaiGaz, the state energy company of Kazakhstan, seeks a share in Karachaganak, a gas and condensate field that accounts for almost a fifth of the British company’s oil and gas output.
KazMunaiGaz wants part of the giant field north of the Caspian Sea, which since 1995 has been under the control of foreign oil companies and which last year produced more than 120 million barrels of hydrocarbons. In January the Kazakh Government doubled its stake in Kashagan, another giant Caspian oilfield, to 16 per cent after lengthy negotiations with a consortium of foreign companies.
Karachaganak is the only significant oil and gas asset in which the Kazakh State does not have a shareholding and, according to Timur Kulibayev, chairman of KazEnergy, the Kazakh oil industry association, KazMunaiGaz wants to rectify the situation. A change in ownership would require that existing shareholders, including BG, give up part of their stake. For BG, Karachaganak represents 18 per cent of the British company’s output, which averaged 604,000 barrels per day last year.
Since 1995, Karachaganak has been controlled by foreign companies under a production-sharing agreement (PSA) that gives the companies a licence to extract oil and gas and sets a formula under which profits from oil sales are shared between the company and the Government. Under the present PSA, which dates from 1997 and runs for 40 years, BG and Eni, of Italy, have 32.5 per cent each, Chevron has 20 per cent and Lukoil, of Russia, holds the remaining 15 per cent.
Speaking to The Times in Almaty, Mr Kulibayev said that the role of the national oil company was increasing. “Karachaganak is a very good example,” he said. “KazMunaiGaz would like to participate and now it is the subject of negotiation.”
He cited Tengiz, another giant oilfield operated by Chevron under a PSA. “KazMunaiGaz has a 20 per cent interest in the Tengiz project and the project has been successful and KazMunaiGaz receives a dividend,” he said. “The Government receives taxes and the national company their due dividend.”
When asked what shareholding in Karachaganak would be appropriate for KazMunaiGaz, he said: “Whatever interest would allow us to be equal to other partners. We speak of between 10 per cent and up to 20 per cent. KazMunaiGaz has been negotiating.”
Fiscal pressures on foreign operators are rising, including a new oil export duty and a change in the corporate tax regime applied to energy companies. Mr Kulibayev said that companies operating under PSAs would be exempt from the company fiscal changes, but the Karachaganak consortium already is challenging the export duties, saying their imposition breaches their agreement with the Kazakh Government.
Mr Kulibayev said that the Government wanted a uniform tax regime that would not deter investment in Kazakhstan.
BG Group declined to comment yesterday on negotiations.
The credit crunch is set to unleash a “forest fire” of consolidation across the oil industry as smaller exploration companies struggle to refinance debts, according to industry experts.
“Right now, if you are a pure exploration play in need of cash, then you have no hope. You are in dire straits,” Richard Griffith, director of equity research at Evolution Securities, said.
As smaller companies struggle to refinance debt in the market turmoil, stronger companies are well placed to bolster their reserves by snapping up weaker rivals. Steep falls in oil and share prices have also demolished valuations that had soared as crude prices touched highs of $147 per barrel.
Urals Energy, the Russia-focused oil explorer led by Boris Yeltsin's former son-in-law, could be among the first UK-listed oil companies to fall victim to the credit squeeze. It has estimated reserves of 822 million barrels of oil, mainly in two fields in Siberia, but its share price has plunged by more than 90 per cent in the past year to only 15p.
The AIM-listed company is struggling to renegotiate two separate loans worth more than $600 million (£352 million), which are due to roll over next month. The group, fearful that negotiations with Sberbank, of Russia, will fail in the present turmoil, is locked in talks with a large oil company, thought to be Royal Dutch Shell, about a joint venture that could lead to its share of some of its best assets being heavily diluted. Shell and Urals Energy have declined to comment.
Urals is not the only vulnerable company: a slew of bids has ignited the oil and gas sector, even as global markets have fallen. As the FTSE plunged by 9 per cent on Friday, shares in Soco, the Asia and Africa-focused oil group, surged by 40 per cent as it confirmed that it had received an approach, thought to be from SinoChem, of China. Others likely to be concerned about their vulnerability include Bowleven, the Cameroon-focused explorer, Borders & Southern, Dominion, Falklands, Faroe, Indago and Nautical. “It will be like a forest fire, with only the stronger trees left standing in a few months time,” Mr Griffith said.
Those with existing production and cashflows stand to benefit, including mid-sized groups such as Cairn Energy and Tullow, as well as giants, such as Shell and BP.
How far can it fall? People have been anxiously wondering as they watch the plunging stock market. But increasingly the same question is being asked about another crucial figure: the price of oil. It has plummeted nearly 40% in just three months, from about $147 a barrel in July to below $83 on Friday, with no obvious bottom in sight. If that sounds good, you are probably a driver who winces these days at filling your gas tank. But the downward spiral could mean trouble for oil-rich countries and for the environment.
Oil analysts admit that most of them failed to predict how fast oil prices would drop. Just a few months ago, some were saying oil might reach $200 a barrel by year's end. "The analysts have been quite surprised by the pace and volatility of the decline," says David Fyfe, senior oil analyst for the International Energy Agency in Paris, which as a rule does not predict oil prices. "The volatility has been quite marked."
This year's sky-high oil prices are partly responsible for the drop. Since oil hit $100 a barrel for the first time early this year, Americans (who consume one-quarter of the world's energy) began cutting back. When gas began selling above $4 a gallon, American consumers made "a psychological shift into the sense of crisis and a sense of permanence," says Greg Priddy, oil analyst for the Eurasia Group in Washington. Instead of believing that gas prices would finally fall again, many began changing their daily habits — they started driving the smaller car in a two-car garage or consolidating shopping trips. That has meant a huge slump in Americans' gas use. Even before the market meltdown, Americans consumed 800,000 barrels of oil a day less during the first half of this year than the same period last year. As demand fell, so did prices, and as prices have fallen, investors have begun pulling money out of the oil market, fearing a collapse, says Leila Benali, an expert on Middle East oil for the Cambridge Energy Research Associates in Paris, adding: "People are getting nervous about demand next year. There is talk of a global recession."
For oil-rich countries the slump has come at a bad time. As the oil price began rising during the past few years, governments and big oil companies plowed billions into exploring and developing new fields in Russia, Angola, Mexico, Brazil and Saudi Arabia — projects whose costs have more than doubled in the past few years, in part because soaring steel prices drove up drilling equipment costs and oil-rig rentals. Just as global demand has begun to slow, millions more barrels of oil a day from new fields have hit the world market.
The big oil producers have good reason to be nervous. Many are still haunted by a disastrous error made at an Opec meeting in Jakarta in 1999, when the cartel — which produces more than a third of the world's oil — opted to raise its production levels. Within weeks Asian stock markets tumbled, driving world oil prices down to $11 a barrel. Oil officials in Saudi Arabia and elsewhere have cited that price crash as the reason they've rebuffed pleas from President Bush to pump more oil. Says Benali: "Countries have learned the lessons of the past."
Though oil-producers and environmentalists rarely agree about anything, both groups have done extremely well from sky-high oil prices during the past year. The high price at U.S. gas pumps has pushed both Barack Obama and John McCain into making the development of alternative fuels and electric cars key elements of their campaign platforms. But if gas prices continue to drop, those initiatives might begin to seem unnecessarily costly to many Americans. (Time's Bryan Walsh reported this week that some countries are already reviewing environmental initiatives as gas prices fall.) "If gas prices drop under $3 a gallon, it will be interesting to see whether it saps the political will," says Priddy. "Americans like their sprawl and generally don't like to give those things up."
If oil producers have their way, oil prices could start rising again. Their growing anxiety erupted early this week, when Iranian and Venezuelan officials warned that if Opec waited much longer before cutting its output, it could face another massive price collapse. On Thursday, Opec officials scheduled an emergency meeting in Vienna for Nov. 18 rather than wait until the cartel's scheduled summit in Algiers in early December. In the meantime, the world's biggest oil producer, Saudi Arabia — which increased production in the summer — has already begun loading less oil on its tankers, according to global oil figures.
For some countries there is a fear far greater than an economic recession: political turmoil. Iran, which earns 80% of its revenues from oil exports, set this year's budget on the assumption that oil would trade at $90 a barrel — a figure which seemed conservatively low until recently, but which is now above the world price. "If the price stays there a while Iran would cut spending," Priddy says. That might include cutting heavy gas subsidies for Iranian drivers, who have rioted in the past when the government tried to ration gas or raise the price at the pump. Hugo Chavez could face similar problems in Venezuela if oil prices drop below $75 a barrel — the rate at which the country calculated this year's budget. The problems lower prices could cause in those countries could be more visceral than those posed so far by the current financial upheaval.
The biggest ever sale of oil assets will take place today, when the Iraqi government puts 40bn barrels of recoverable reserves up for offer in London.
BP, Shell and ExxonMobil are all expected to attend a meeting at the Park Lane Hotel in Mayfair with the Iraqi oil minister, Hussein al-Shahristani.
Access is being given to eight fields, representing about 40% of the Middle Eastern nation's reserves, at a time when the country remains under occupation by US and British forces.
Two smaller agreements have already been signed with Shell and the China National Petroleum Corporation, but today's sale will ignite arguments over whether the overthrow of Saddam Hussein was a "war for oil" that is now to be consummated by western multinationals seizing control of strategic Iraqi reserves.
Al-Shahristani is expected to reveal some kind of "risk service agreements" that could run for up to 20 years, with formal offers to be submitted by next spring and agreements signed in the summer.
Gregg Muttitt, from the UK-based social and ecological justice group Platform, says he is alarmed that the government is pushing ahead with its plans without the support of many in Iraq.
"Most of the terms of what is being offered have not been disclosed. There are security, political and reputational risks here for oil companies but none of them will want to see one of their competitors gain an advantage," he said.
Heinrich Matthee, a senior Middle East analyst at the specialist risk consultant Control Risks Group, also believes there are many pitfalls for those considering whether to make an offer.
"Currently it is unclear which party in Iraq is authorised to award a contract and at the same time to deliver its side of the bargain," he said. "Any contract with an independent oil company will be subjected to opposition and possible revision after pressure by resource nationalists."
Oil companies will find their reputations at risk from the actions of their Iraqi counterparties, such as joint venture partners, suppliers and agents. They will also have to contend with oil smuggling and the possibility that the ruling alliance could collapse, Matthee said.
He said that if the conspiracy theory that western oil companies egged on US and British governments to invade Iraq were true, the plan could backfire on them and benefit rivals in Asia instead. "It is possible the American army has provided the economic stability that will encourage Malaysian, Chinese and other Asian companies to become involved," he said.
There is no precedent for proven oil reserves of this magnitude being offered up for sale, said Muttitt. "The nearest thing would be the post-Soviet sale of the Kashagan field [in the Caspian Sea], which had 7bn or 8bn barrels."
China's state-owned oil group, CNPC, has already agreed a $3bn (£1.78bn) oil services contract with the government of Iraq to pump oil from the Ahdab oil field.
The deal is the first major oil contract with a foreign firm since the US-led war and was followed up by an agreement with Shell, potentially worth $4bn, to develop a joint venture with the South Gas Company in Basra.
This deal has also triggered controversy. Issam al-Chalabi, Iraq's oil minister between 1987 and 1990, questioned why there had been no 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?" he asked. "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."
The Baghdad government says it aims to increase crude oil production from 2.5m barrels a day to 4.5m by 2013, but faces internal opposition from regional governors and political opponents.
The sale today comes as oil prices have plummeted after stockmarket turmoil on Friday. The price of crude fell by more than $4 at one point to $75 a barrel - the lowest point since September last year and a sharp drop from its peak of $147 in July. Opec, the oil producers' cartel, has called an emergency meeting to agree a cut in output to bolster prices in spite of protestations from politicians including Gordon Brown. Brown said on Friday: "We've had some success in getting the price of oil down: the price this morning is roughly $80, about half what it was a few months ago. I want these price cuts passed on to the consumer as quickly as possible.
"I'm concerned when I hear that the Opec countries are meeting, or are about to meet, to discuss cutting production - in other words, making the price potentially higher than it should be.
"I'm making it clear to Opec it would be wrong for the world economy and wrong for British people who are paying high petrol prices and high fuel prices to cut production and therefore keep prices high."
A government source said: "The one chink of light has been the fall in the price of oil. The last thing we want is to head into a difficult period with a return to high oil prices. People need to act responsibly."
Pipelines vital to Iraq’s oil industry are in such poor condition they could rupture at any time, choking off the supply of oil from the region and devastating the country’s economy, according to the US State Department.
A previously undisclosed notification to the US Congress, obtained by the Financial Times, says the ageing underwater pipelines, which link storage facilities near Basra to offshore tanker fuelling terminals, are in urgent need of back-up or repair.
“The likelihood of a worst-case catastrophic failure, subsequent collapse of Iraqi crude oil export revenue resulting in a devastating drop in the Iraqi GDP, global economic market impacts and a possible ecological and environmental disaster should warrant concern,” the document says.
The two 50km pipelines carry nearly all of Iraq’s oil exports, linking the southern fields, where about three-quarters of the country’s oil reserves are found, to the Gulf. Oil revenues finance more than 90 per cent of the government budget.
“Oil experts in US Army Corps of Engineers and at [Iraq’s] South Oil Company have concluded based on available information that the dual 48-inch crude export lines could potentially fail at any time,” the notification says. According to a preliminary assessment, the pipelines could be suffering from “severe corrosion and vulnerability to rupture, thus reducing their ability to withstand attempted interdiction or sabotage”.
It adds that remedial action – possibly including a new pipeline – could cost up to $5bn.
“The pipes are 10-20 years past their useful life and are operating at roughly 25 per cent of their designed capacity,” the notification says, adding that reports of oil leaks are “routine” and pointing to claims of increased salinity and rust in the oil itself.
Hussein Shahristani, Iraq’s oil minister, told the FT: “We are very conscious of our need to expand our export facilities, especially in the south.”
But US officials indicate concern that Iraq has not proceeded more quickly to deal with the problem. “It is in Iraq’s interest to begin this project as soon as possible,” a State Department official told the FT, noting that Iraq often took longer to make such decisions than would “an established democracy”.
Iraq produces 2.2m barrels of oil a day, 300,000 b/d less than its average before the US invasion in 2003. Iraq pumped as much as 3.7m b/d before the outbreak of war with Iran in 1979.
The price of gas collapsed over the weekend as warm weather and full storage tanks forced importers to give away gas for - literally - nothing.
At one stage on Sunday, the within-day delivery price for wholesale gas fell to 0p per therm as suppliers were forced to give away surplus fuel in order to balance the system.
The zero-trades occurred on APX, a 24-hour trading platform, and followed a weekend of weak prices and unusually warm weather. A price of zero or a negative price is highly unusual, according to ICIS Heren, the gas price assessor.
Two years ago, prices briefly went negative when huge volumes of Norwegian gas were suddenly pumped into Britain during the commissioning of a new pipeline.
However, Sunday's price collapse was different. Louise Boddy, the managing editor at ICIS Heren, said: “This is about supply and demand, it is all bearish at the moment.”
Householders will not immediately benefit from the bizarre trading over the weekend, but the falling short-term spot prices will, eventually, feed through into the wider market. On Monday, the within-day price had bounced back to 28p per therm, but even that figure is far below the average price of 60p per therm during the summer, according to ICIS Heren.
The collapse in the spot price is occurring because large volumes of Norwegian gas are being pumped into Britain through Langeled, a new pipeline, at a time when gas storage is full.
Britain suffers from a shortage of storage, a lack of flexibility that causes high gas prices during periods of high winter demand. However, the present coincidence of weak demand and nowhere to put surplus gas has left importers with no choice but to give away the fuel.
Ms Boddy does not expect the zero pricing to recur quickly. “The Norwegians are not stupid; they will bring volumes down.”
Meanwhile, forecasters are predicting a global fall in gas prices because of weakening markets for oil and coal. Goldman Sachs, the investment bank, said that it was lowering its UK and US natural gas price forecast to reflect the economic outlook and weakening demand for oil.
The weakening outlook is still not reflected in forward prices for gas next year. Yesterday, the price for gas to be delivered in the first quarter of 2009 was 84p per therm, reflecting a perceived risk premium for supply disruption and cold weather.
Another factor keeping prices high is the link to oil because the British market is connected to mainland Europe by pipeline, where gas is priced on oil-based indices, not on spot markets.
The sudden price collapse is good news for consumers, as it indicates that the British spot market can sever its link from oil-based pricing and reflect underlying supply and demand.
According to ICIS Heren, if the gas price were fully linked to an oil index, it would be trading close to 70p per therm.
— Iraq has opened the way to foreign investment in its oil industry as the country's Oil Minister held talks in London yesterday with 34 oil companies, including BP, Shell and Total.
The talks, presided over by Hussain al-Sharistani, the minister, focused on the terms of 20-year service agreements to operate some of the biggest oil and gasfields that have been put up for tender by the Iraqi Government.
Iraq's oil reserves, estimated at 115 billion barrels are the third-largest in the world after Saudi Arabia and Iran
Woodside Petroleum Ltd. and Chevron Corp. are among liquefied natural gas producers in the Australian region that may delay committing to new projects costing more than $70 billion because of lower oil prices and difficulty in raising finance, analysts said.
The most-expensive projects, such as Woodside's proposed Browse LNG and Chevron's Gorgon off northwest Australia may be worst affected, said Di Brookman, an oil and gas analyst at Citigroup Inc. in Sydney. Most projects not already approved will probably ``slide in time,'' said Stuart Baker, an energy analyst at Morgan Stanley.
Australia is expected to show the biggest growth in LNG production capacity through 2022, according to the International Energy Agency. Inpex Holdings Inc., BG Group Plc, ConocoPhillips and Petroliam Nasional Bhd are among other companies proposing to build more than $60 billion of LNG plants in the country.
``All these big LNG projects, they all need external financing, debt and equity, and that's going to be tough,'' said Melbourne-based Baker. ``Historically the industry had just assumed oil prices would hang in and the money would flood in. Well the game has just changed in the past two weeks.''
Perth-based Woodside, 34 percent-owned by Royal Dutch Shell Plc, said last month that the added costs of carbon trading may threaten the Browse project, estimated to cost as much as $30 billion. Chief Executive Don Voelte said last month he was ``planning on a different world than what we've seen in the past 12 months'' because of the financial crisis.
The company can't comment further, said Roger Martin, a spokesman.
Chevron's proposed Gorgon LNG project has already been delayed several years. It was first put on hold in 1998 when the Asian economic crisis hit. More recently, the venture, which includes Shell and Exxon Mobil Corp., scrapped a timeline for approving and building the plant as they seek to tackle a surge in construction costs.
Chevron's ventures in Australia are making ``good progress,'' spokeswoman Nicole Hodgson said in an e-mailed response to questions. Chevron remains committed to Gorgon and the venture has ``recently secured an additional A$1 billion ($670 million) in vital funding,'' she said.
``The Chevron-operated Gorgon and Wheatstone projects continue to make good progress, with both projects ramping up staff and contractor positions as we speak,'' she said.
The Gorgon project may cost A$20 billion, the Western Australian government has said. Australia will account for 16 percent of global gains in LNG output capacity through 2022, the Paris-based IEA estimates.
LNG is natural gas chilled to liquid form, reducing it to one-six-hundredth of its original volume, for transportation by tanker to destinations not connected by pipeline. Prices in long-term contracts may be linked to the price of crude oil, which has fallen more than 45 percent since reaching a record $147.27 a barrel on July 11. Chevron owns 100 percent of the separate Wheatstone venture.
Australian funding costs eased today after Prime Minister Kevin Rudd guaranteed bank deposits and European leaders promised to shore up lenders, seeking to unlock frozen credit markets.
The premium charged to exchange floating- for fixed-rate interest payments in Australia for a period of one year shrank to 84 basis points, the biggest decline since 2002. Rudd said yesterday the government will guarantee all deposits with institutions for the next three years and all ``term wholesale funding'' by Australian banks operating in international credit markets.
PNG `Looks Good'
Exxon Mobil's proposed $11 billion LNG project in Papua New Guinea, due to start shipments in late 2013 or 2014, is one of the best placed, both Brookman and Baker said. The economics of the venture are boosted by a ``very attractive fiscal regime'' and the volume of condensates, a type of light oil contained in the gas, which will boost profitability, Brookman said.
``I think PNG still looks good because you've got Exxon there,'' Baker said. ``After that it gets hard to see where the money's going to come from. You've got the world banking system on the verges of collapse. No-one's going to rush out and lend $10 billion for a long-dated LNG project.''
Onshore LNG projects proposed on Australia's east coast may be better placed to weather the effects of lower LNG sales prices and tighter credit markets, Brookman said.
East Coast Projects
Projects such as those proposed by Petronas and Santos Ltd., ConocoPhillips and Origin Energy Ltd., and BG and Queensland Gas Co. have higher rates of return than some of the ventures in Western Australia that require the development of distant offshore fields and lengthy pipelines and have to pay higher royalties, she said. Queensland Gas gained as much 28 percent in Sydney trading today, after slumping 38 percent last week.
Still, even the east coast projects may be re-examined, Morgan Stanley's Baker said.
Any delays in project approvals will push out a forecast shortage of LNG supply beyond a current estimate of 2015, Brookman said.
``If we have any slippage in a lot of the projects that are earmarked at the moment then we'll continue to have that shortage for longer,'' she said
Chevron Corp. the second-biggest U.S. energy company, said it will spend almost $6 billion on Asian energy projects this year and the global financial crisis won't derail expansion plans.
The company will spend a quarter of the $23 billion allocated for global expansion in Asia this year, Kurt Glaubitz, the head of media relations for exploration and development, said in Hong Kong today. ``We have a $5 billion credit facility that we expect will be fully available to us and our cash position is strong,'' said Glaubitz, who is based in the company's headquarters in San Ramon, California.
The worst financial crisis since the Great Depression is freezing lending, causing delays in projects such as London's Olympic Village and pushing the world economy toward recession. Benchmark crude oil prices in New York have fallen more than 50 percent from a record in July on concerns the global stock market plunge will damp economic growth and curb demand.
``We are watching the crisis closely,'' said Glaubitz. ``Fundamentally, the long-term Asian energy demand growth prospects are still strong.''
Chevron said last week its third-quarter earnings will exceed $5.98 billion it earned in the previous three months even though output will fall for an eight straight quarter. The company has $8 billion of cash as at the end of the second quarter, Glaubitz said today.
The shares slumped 12.5 percent yesterday to $59.98 in U.S. trading. The stock has fallen almost 36 percent in the past year, compared with a 38 percent decline in the Dow Jones Industrial Average.
Analysts have said Chevron is among liquefied natural gas producers in the Australian region that may delay committing to new projects because of lower oil prices and difficulty in raising finances.
Chevron's proposed Gorgon LNG project has already been delayed several years. It was first put on hold in 1998 when the Asian economic crisis hit. More recently, the venture, which includes Shell and Exxon Mobil Corp., scrapped a timeline for approving and building the plant as they seek to tackle a surge in construction costs.
Chevron's ventures in Australia are making ``good progress,'' spokeswoman Nicole Hodgson said in an e-mailed response to questions earlier this week. Chevron remains committed to Gorgon and the venture has ``recently secured an additional A$1 billion ($670 million) in vital funding,'' she said.
``The Chevron-operated Gorgon and Wheatstone projects continue to make good progress, with both projects ramping up staff and contractor positions as we speak,'' she said.
The government today committed the UK to cutting greenhouse-gas emissions by 80% by the middle of the century in a bid to tackle climate change.
In a move that was widely welcomed by environmental campaigners, Ed Miliband, the new energy and climate change secretary, said that the current 60% target would be replaced by the higher goal in the climate change bill.
Miliband told MPs that the tough economic conditions were not an excuse to "row back" on the commitment to tackle global warming.
He accepted the recommendations of the government-appointed Climate Change Committee, chaired by Lord Turner, which said last week that the UK ought to commit to an 80% reduction from 1990 levels for all greenhouse gases and covering all sectors.
He also pledged to amend the energy bill to create "feed-in tariffs", allowing small-scale energy producers - such as homes with wind turbines or solar panels - to sell electricity at a guaranteed price.
And he issued a warning to energy companies to act "in a satisfactory way" to reduce charges for customers with pre-payment meters and those not connected to the gas main.
He said the government expects "rapid action or explanation to remedy any abuses" and warned if the firms do not act then ministers would consult on legislation to prevent "unfair pricing".
Dr Doug Parr, Greenpeace's chief scientist, said: "This is a hugely encouraging first move from the new climate change secretary. In a decade in power Labour has never adopted a target so ambitious, far-reaching and internationally significant as this.
"To meet it will require determined action from Gordon Brown and every one of his successors for the next four decades. Hard choices will be made that will touch every Briton, but it can and must be done."
He added: "Ed Miliband obviously understands the urgency of the threat we face from climate change. He is absolutely right to say Britain should set an example to the rest of the world in tackling this issue, and we will support him wholeheartedly if the decisions he takes in the coming weeks and months genuinely reflect this ambition."
Ruth Davis, the head of climate change at the RSPB, said: "This is one of the most far-sighted and far-reaching climate change initiative any government could take and is testament to the efforts of campaigners."
Andy Atkins, Friends of the Earth's executive director, said: "Miliband's admission that pollution from international aviation and shipping will be dealt with outside the bill is a sign that these industries are being picked out for special treatment yet again.
"The Committee on Climate Change made it clear that we have to reduce all carbon emissions by 80%. We cannot leave the cuts in aviation and shipping emissions to chance."
Greg Clark, the shadow climate change secretary, also welcomed the announcements. He said: "The choice between aggressive and ambitious action on carbon reduction and a successful, powerful economy is, in fact, not a choice at all - they are one and the same."
Miliband, making his first statement to the Commons as head of the newly created department, said: "In tough economic times, some people ask whether we should retreat from our climate-change objectives.
"In our view it would be quite wrong to row back and those who say we should misunderstand the relationship between the economic and environmental tasks we face."
The 2006 Stern report showed that the costs of doing nothing "are greater than the costs of acting", he said.
The climate change bill would be amended to set the higher target, which "will be binding in law".
Miliband said: "However, we all know that signing up to an 80% target in 2050 when most of us will not be around is the easy part. The hard part is meeting it and meeting the milestones that will show we're on track."
The Climate Change Committee will advise on the first 15 years of carbon budgets in December, "national limits to our total emissions within which we will have to live as a country".
The announcement on feed-in tariffs will be welcomed by Labour backbenchers, who staged the biggest revolt of Gordon Brown's leadership over the issue.
In April, 35 backbenchers rebelled on the issue during debate on the energy bill, with two more Labour MPs acting as tellers.
Miliband said: "Having heard the debate on this issue, including from many colleagues in this house, on this side of the house and on others, I also believe that complementing the renewables obligation for large-scale projects, guaranteed prices for small-scale electricity generation - feed-in tariffs - have the potential to play an important role, as they do in other countries."
Last week Ofgem, the energy regulator, highlighted "unjustified" higher charges for 4 million customers without mains gas.
The regulator also believes that many homes using pre-payment meters - often the poorest customers - are being "overcharged".
Miliband said: "Unfair pricing which hits the most vulnerable hardest is completely unacceptable. I made that clear to the representatives of the big six energy companies when I met them yesterday.
"I also told them that the government expects rapid action or explanation to remedy any abuses. I will meet them again in a month to hear what they have done."
He added: "If the companies don't act in a satisfactory way, and speedily, then we will consult on legislation to prevent unfair pricing differentials."
Miliband said the measures announced today were part of an energy and climate change policy "that is fair and sustainable, which meets our obligations to today's and future generations".
Clark said there had been a "decade-long void" in the government's policy towards energy, in which "successive ministers have looked the other way rather than address the issue of future energy needs".
He welcomed the acceptance of Turner's 80% target, saying: "We have always said that we should be guided by the science on that matter."
But he called for the target to be kept under constant review, saying that just eight years ago 60% was considered to be the right number.
Clark also pressed Miliband to "lead the world" on carbon capture and storage by committing to three UK-based demonstration projects and said smart metering should be introduced for microgeneration.
Top economists and United Nations leaders are working on a "Green New Deal" to create millions of jobs, revive the world economy, slash poverty and avert environmental disaster, as the financial markets plunge into their deepest crisis since the Great Depression.
The ambitious plan – the start of which will be formally launched in London next week - will call on world leaders, including the new US President, to promote a massive redirection of investment away from the speculation that has caused the bursting “financial and housing bubbles” and into job-creating programmes to restore the natural systems that underpin the world economy.
It aims to convince them that, far from restricting growth, healing the global environment will be a desperately -needed driving force behind it.
The Green Economy Initiative - which will be spearheaded by the United Nations Environment Programme (UNEP), headquartered here, and is already being backed by governments – draws its inspiration from Franklin Roosevelt's New Deal, which ended the 1930s depression and helped set up the world economy for the unprecedented growth of the second half of the 20th century.
It, too, envisages basing recovery on providing work for the poor, as well as reform of financial practices, after a crash brought on by unregulated excesses of the free market and the banking system.
The new multimillion dollar initiative – which is being already funded by the German and Norwegian Governments and the European Commission – arises out of a study commissioned by world leaders at the 2006 G8 summit into the economic value of ecosystems. It argues that the world is caught up in not one, but three interlinked crises, with the food and fuel crunches accompanying and intensifying the financial one.
Soaring prices of grain and oil, it stresses, have stemmed from outdated economic priorities that have concentrated on short term exploitation of the world's resources, without considering how they can be used to sustain prosperity in the long term. Over the last quarter of a century, says UNEP, world growth has doubled, but 60 per cent of the natural resources that provide food, water, energy and clean air have been seriously degraded.
Achim Steiner, UNEP's Executive Director, adds that new research shows that every year, for example the felling of forests deprives the world of over $2.5 trillion worth of such services in supplying water, generating rainfall, stopping soil erosion, cleaning the air and reducing global warming . By comparison, he points out, the global financial crisis is so far estimated to have cost the world the smaller one-off sum of $1.5 trillion.
“We are pushing, if not pushing past, the limits of what the planet can sustain,” he says. “If we go on as we are today’s crisis will seem mild indeed compared to the crises of tomorrow”.
Switching direction and concentrating on 'green growth', he says, will not only prevent such catastrophes, but rescue the world's finances. “The new, green economy would provide a new engine of growth, putting the world on the road to prosperity again. This is about growing the world economy in a more intelligent, sustainable way.
“The 20th century economy, now in such crisis, was driven by financial capital. The 21st century one is going to have to be based on developing the world's natural capital to provide the lasting jobs and wealth that are needed, particularly for the poorest people on the planet”
He says for example, that it makes more sense to invest in preserving forests, peatlands and soils, which naturally absorb carbon dioxide, than destroying them and then developing expensive technology to do the job.
He points out that the world market for environmental goods and service already stands at $1.3 trillion and is expected to double over the next 12 years even on present trends, and adds. “There is an enormous opportunity to ride on this increasing global demand for environmental improvement and turn it into the driver of economic growth, job creation and poverty reduction that is now so desperately needed. And in some places it is already beginning to happen.”
Mr Steiner will launch the initiative in London a week on Wednesday, October 22nd, with the announcement of three projects, concentrating on how investing in the world's natural systems, in renewable energy and in other green technologies would stimulate growth and provide jobs, and giving examples of where it is already taking place.
He will describe, for example, how Mexico is now employing 1.5 million people to plant and manage forests, how China has created the world's biggest solar energy industries from scratch in just a few years, and how Germany has leapt from being a laggard to a leader in renewable energy by giving people attractive incentives to install it in their home.
Pavan Sukhdev, the chair of Deutschbank's Global Market Centre, who is leading the initiative, says: “. Hundreds of millions of jobs can be created, there is no question that traditional industries like steel and cars cannot provide them. But this is a really huge business opportunity.”
Barak Obama will classify carbon dioxide as a dangerous pollutant that can be regulated should he win the presidential election on Nov. 4, opening the way for new rules on greenhouse gas emissions.
The Democratic senator from Illinois will tell the Environment Protection Agency that it may use the 1990 Clean Air Act to set emissions limits on power plants and manufacturers, his energy adviser, Jason Grumet, said in an interview. President George W. Bush declined to curb CO2 emissions under the law even after the Supreme Court ruled in 2007 that the government may do so.
If elected, Obama would be the first president to group emissions blamed for global warming into a category of pollutants that includes lead and carbon monoxide. Obama's rival in the presidential race, Republican Senator John McCain of Arizona, has not said how he would treat CO2 under the act.
Obama ``would initiate those rulemakings,'' Grumet said in an Oct. 6 interview in Boston. ``He's not going to insert political judgments to interrupt the recommendations of the scientific efforts.''
Placing heat-trapping pollutants in the same category as ozone may lead to caps on power-plant emissions and force utilities to use the most expensive systems to curb pollution. The move may halt construction plans on as many as half of the 130 proposed new U.S. coal plants.
The president may take action on new rules immediately upon taking office, said David Bookbinder, chief climate counsel for the Sierra Club. Environment groups including the Sierra Club and Natural Resources Defense Council will issue a regulatory agenda for the next president that calls for limits on CO2 from industry.
`Hit Ground Running'
``This is what they should do to hit the ground running,'' Bookbinder said in an Oct. 10 telephone interview.
Separately, Congress is debating legislation to create an emissions market to address global warming, a solution endorsed by both candidates and utilities such as American Electric Co., the biggest U.S. producer of electricity from coal. Congress failed to pass a global-warming bill in June and how long it may take lawmakers to agree on a plan isn't known.
``We need federal legislation to deal with greenhouse-gas emissions,'' said Vicki Arroyo, general counsel for the Pew Center on Climate Change in Arlington, Virginia. ``In the meantime, there is this vacuum. People are eager to get started on this.''
Bush Fought Court
Burning coal to generate electricity produces more than a third of energy-related carbon dioxide emissions and half the U.S. power supply, according to the Energy Department. Every hour, fossil-fuel combustion generates 3.5 million tons of emissions worldwide, helping create a warming effect that ``already threatens our climate,'' the Paris-based International Energy Agency said.
The EPA under Bush fought the notion that the Clean Air Act applies to CO2 all the way to the Supreme Court. The law has been used successfully to regulate six pollutants, including sulfur dioxide and ozone. Regulation under the act ``could result in an unprecedented expansion of EPA authority,'' EPA Administrator Stephen Johnson said in July. The law ``is the wrong tool for the job.''
Proponents of regulation are hoping for better results under a new president. Obama adviser Grumet, executive director of the National Commission on Energy Policy, said if Congress hasn't acted in 18 months, about the time it would take to draft rules, the president should.
``The EPA is obligated to move forward in the absence of Congressional action,'' Grumet said. ``If there's no action by Congress in those 18 months, I think any responsible president would want to have the regulatory approach.''
States where coal-fired plants may be affected include Nevada, Utah, New Mexico, Texas, Montana, Minnesota, Illinois, Michigan, Ohio, Pennsylvania, Virginia, Georgia and Florida.
The alternative, a national cap-and-trade program created by Congress, offers industry more options, said Bruce Braine, a vice president at Columbus, Ohio-based American Electric. The world's largest cap-and-trade plan for greenhouse gases opened in Europe in 2005.
Under a cap-and-trade program, polluters may keep less- efficient plants running if they offset those emissions with investments in projects that lower pollution, such as wind- energy turbines or systems that destroy methane gas from landfills.
McCain `Not a Fan'
``Those options may still allow me to build new efficient power plants that might not meet a higher standard,'' Braine said in an Oct. 9 interview. ``That might be a more cost- effective way to approach it.''
McCain hasn't said how he would approach CO2 regulation under the Clean Air Act. McCain adviser and former Central Intelligence Agency director James Woolsey said Oct. 6 that new rules may conflict with Congressional efforts. Policy adviser Rebecca Jensen Tallent said in August that McCain prefers a bill debated by Congress rather than regulations ``established through one agency where one secretary is getting to make a lot of decisions.''
``He is not as big of a fan of standards-based approaches,'' Arroyo said. ``The Supreme Court thinks it's clear that there is greenhouse-gas authority under the Clean Air Act. To take that off the table probably wouldn't be very wise.''
How new regulations would affect the proposed U.S. coal plants depends on how they are written, said Bill Fang, climate issue director for the Edison Electric Institute, a Washington- based lobbying group for utilities. About half of the proposed plants plan to use technologies that are 20 percent more efficient than conventional coal burners.
``Several states have denied the applicability of the Clean Air Act to coal permits,'' Fang said in an Oct. 10 interview.
In June, a court in Georgia stopped construction of the 1,200-megawatt Longleaf power plant, a $2 billion project, because developer Dynegy Inc. failed to consider cleaner technology.
An appeals board within the EPA is considering a challenge from the Sierra Club to Deseret Power Electric Cooperative's air permit for its 110-megawatt Bonanza coal plant in Utah on grounds that it failed to require controls on CO2. One megawatt is enough to power about 800 typical U.S. homes.
``Industry has woken up to the fact that a new progressive administration could move quickly to make the United States a leader rather than a laggard,'' said Bruce Nilles, director of the group's national coal campaign.
Growing evidence that the worldwide bank rescue plans have come too late to avert a deep global recession drove down stock markets in Europe and the US on Wednesday and prompted renewed selling in Asia on Thursday.
The S&P 500 index fell more than 9 per cent, its biggest one-day decline in percentage terms since the stock market crash of 1987.
In Asia the Nikkei 225 fell more than 1,000 points on Thursday and European markets were set to open lower once again.
Investor fears came as bad economic data were released across the world, and emerging economies appeared more vulnerable than thought to the world slowdown.
Ben Bernanke, chairman of the Federal Reserve, warned that even if bank rescue plans succeeded in stabilising financial markets “broader economic recovery will not happen right away”.
He said the US economy had been deteriorating even before the latest intensification of the financial crisis with “marked slowdowns in consumer spending, business investment and the labour market”.
In the US, retail sales dropped 1.2 per cent in September, the sharpest fall for three years, leaving them 1 per cent lower than a year earlier, signalling that consumers were deterred from spending by the string of financial sector collapses throughout the month.
Meanwhile, the Fed’s beige book survey of economic conditions revealed pervasive weakness, with tight credit, deteriorating consumer spending and a weak labour market across the nation.
In the UK, the unemployment rate leapt half a percentage point to 5.7 per cent in the three months to August compared with the previous quarter, its biggest rise since 1991. Many forecasters expect the rate to rise to above 7 per cent in the coming year as companies stop hoarding labour as their financial positions deteriorate.
Sluggish growth was also revealed across the world by numerous indicators of falling demand for commodities.
The Reuters-Jefferies CRB index, a global benchmark for commodity prices, yesterday fell to a fresh 22-month low of 289.34, down almost 40 per cent from July’s record high.
Oil prices dropped below $75 a barrel for the first time since September 2007. Opec, the oil countries’ cartel, warned of “dramatically worsening conditions” and a “negative impact on the real economy”, while Rio Tinto, one of the world’s largest mining companies, said Chinese demand for commodities was weakening.
With Iceland, Hungary, Ukraine and Serbia either seeking funds from the International Monetary Fund or talking to the IMF about their prospects, the vulnerabilities of many emerging economies to the financial crisis were clear.
Equity investors also appeared disappointed by the slow pace of improvement in credit markets following the unveiling of sweeping rescue plans by governments on both sides of the Atlantic.
Benchmark interbank lending rates edged lower, and the cost of buying insurance against defaults by some banks protected by rescue plans declined too.
But all these measures of financial stress remained at very elevated levels. Meanwhile, spreads on non-financial corporate debt widened on recession concerns, with a particularly marked jump in spreads on riskier high-yield debt.
Economists expect interest rates to fall rapidly across Europe in response to the worsening economic outlook.
In the US, Mr Bernanke said “we will continue to use all the tools at our disposal” – a comment that is likely to fuel expectations that the Fed will cut rates further from 1.5 per cent to 1 per cent, possibly at its policy meeting later this month.
Mining shares plunged after commodity prices fell and Rio Tinto said it was reviewing its capital expenditure plans in the light of a slowdown in Chinese metals demand.
The five biggest fallers in the FTSE 100 index yesterday were all mining companies, with shares in ENRC, Kazakhmys, Anglo American, Xstrata and Vedantalosing more than 17 per cent. Rio Tinto shares lost almost 17 per cent, while those of its rival and suitor BHP Billiton fell 15 per cent.
Rio Tinto said that it was still positive about the long-term outlook for metals demand but that in the short term "the Chinese economy is pausing for breath".
As well as the knock-on effects of slowdowns in North American and western European economies, Chinese demand would be depressed by the government's decision last year to tighten monetary policy as a way of fighting inflation.
Investor sentiment towards mining stocks was also hit yesterday by a slide in base metals prices on the London Metals Exchange, and general fears that the recent banking bail-outs by governments around the world would not be enough to fend off a world-wide recession.
Rio Tinto is the latest mining company to say that it is considering scaling back expansion plans in reaction to lower metals demand. Alcoa, the US aluminium producer, and Freeport, the US copper miner, have both said they would cut back on building new mines and smelters in order to conserve cash.
The fall in metals prices and the scarcity of debt financing is also showing signs of disrupting the wave of mergers and acquisitions that has reshaped the metals and mining industry in the past five years.
Vedanta yesterday refused to comment on reports that it was shelving its planned $2.6bn (£1.5bn) acquisition of Asarco, the bankrupt US copper miner, because of the change in market conditions.
Asarco is a relatively high-cost producer of copper and analysts have said that the deal no longer looks attractive to Vedanta.
Earlier this month Xstrata walked away from a £5bn attempt to take over Lonmin, the UK-listed platinum miner.
Although Xstrata cited uncertainty in the credit markets for its decision, several analysts have said that the sharp fall in the price in platinum, and the resulting plunge in Lonmin's share price, was the real reason that Xstrata dropped the bid. It is likely that Xstrata will try and buy Lonmin at a cheaper price next year.
LONDON -- The cost of food in the U.K. is rising at a faster rate than elsewhere, putting more pressure on an economy already squeezed by the credit crisis.
A 12.7% increase in food prices in September from a year earlier helped to drive overall inflation last month to 5.2%, its highest level in 16 years, the Office for National Statistics reported Tuesday.
Amid the global banking crisis, the high food prices are further crimping Prime Minister Gordon Brown's ability to adjust economic policy. Because they add to inflation, they affect the Bank of England's ability to bring down rates, and take more money out of consumers' pockets. Though Mr. Brown's handling of the banking crisis has boosted his standing from its lows a month ago, food prices are politically damaging: They're immediately visible and can make people feel poorer quickly.
Because it has a small farming sector, Britain imports more of its food than other major economies, making it vulnerable to movements in commodity prices and its currency. The U.K. runs a trade deficit in food equal to 1% of gross domestic product, compared with a balance in the U.S. and a surplus in countries like France.
While the rate of food inflation is starting to decline as commodity prices ease, it remains higher than that of almost all of Britain's neighbors. In August, the last month for which comparable figures exist, food prices rose 14.5% -- twice the rate in France and Germany, and well above the 6.1% increase in the U.S.
"The relative price of food will be much higher [in the U.K.] over the next decade than over the last two decades," says Peter Spencer, a professor of economics and finance at York University.
Jumps in gas and electricity costs also are contributing to U.K. inflation. Because of high inflation, interest rates have been higher for longer in Britain than elsewhere, economists say. Even after the Bank of England cut its key rate to 4.5% last week from 5% in response to the financial crisis, rates are well above those in the U.S., where the federal-funds rate is 1.5%.
Housing sales in England and Wales fell to a record low in September, the Royal Institution of Chartered Surveyors said Tuesday. Many would-be buyers haven't been able to get mortgages as banks have trimmed lending amid the credit crunch, said the group, which began tracking housing sales in 1978.
A handful of companies dominate food sales in Britain. The country's largest retailer, Tesco PLC, for example, has a 31.4% share of the grocery market, followed by Wal-Mart Stores Inc.'s Asda chain with 17.1%, according to Taylor Nelson Sofres World Panel market-share data. Some consumer groups have blamed that concentration for high food prices. But a recent investigation by U.K. antitrust regulator the Competition Commission found that supermarkets compete to offer lower food prices.
High food prices in Britain have deep roots. The country now produces 60% of its food, down from 80% in 1984, according to government data. Few other major economies rely so heavily on food imports. The U.S., France and Germany typically grow enough to feed their populations or run small deficits. In Britain, some 90% of fruit comes from other countries, including Spain, South Africa and the U.S.
Because the U.K. imports so much food, prices have been hit by both the rising cost of fuel and the falling value of the pound. Almost 70% of the U.K.'s food comes from the European Union, and the pound has fallen 15% against the euro since August 2007.
Chatham House, a London think tank, said in a recent report that Britain may have maxed out its ability to produce more food, a phenomenon it calls "peak food" after the "peak oil" theory that the world is running out of oil.
Mr. Brown's government, however, isn't looking at increasing farming at home. Instead, in keeping with his approach of championing open-border commerce, the U.K. is trying to help farmers abroad by putting money and expertise into farming in developing markets, government advisers say. It believes this will increase Britain's ability to secure regular food supplies.
"I don't think the pressures on the food supply are short term," says Robert Lee, a professor specializing in food regulation at Cardiff University. He wants the government to do more to promote farming in the U.K.
There are signs that more people are growing their own food. Waiting lists to rent plots of land to grow vegetables -- land every urban U.K. authority must provide -- are getting longer, says the National Society of Allotment & Leisure Gardeners.
The cost to taxpayers of running the rail system has fallen sharply but at the expense of continuing above-inflation fare increases and overcrowding, according to a government watchdog.
Many commuters are also set to suffer more overcrowding until fresh investment provides new carriages on busy routes, warns the report by the National Audit Office, published on Wednesday. In 2006, the last date for which information was available, trains travelling to and from London at peak times were carrying 3.5 per cent more passengers than they were designed to carry.
Fares regulated by government have been rising by 1 percentage point above retail prices since June 2003, the report adds.
There have also been sometimes substantial increases in off-peak fares – including a 20 per cent increase in some fares on South West Trains.
“Although there will be some service improvements, passengers overall will pay more,” the report says. “Crowding will increase for many commuters until expected investment delivers more carrying capacity.”
The report examines the Department for Transport’s handling of competitions to run eight rail franchises, from 2005 to 2007.
The franchises were the first let by the DfT after taking over responsibility for the process – where train operators bid to run services on a set route for a set time – from the abolished, semi-autonomous Strategic Rail Authority.
The SRA’s abolition and the bringing of the franchising process into the DfT have been deeply controversial in the rail industry, with widespread accusations that the department has been over-prescriptive in the terms set out for franchisees.
The £811m ($1.41bn) subsidy paid to the eight franchises examined in 2006-07 was projected to turn into a £326m payment from the operators to government in 2011-12, the report says. The franchises involved currently operate as South West Trains, Southeastern Trains, First Capital Connect, First Great Western, East Midlands Trains, London Midland, Arriva Cross Country and National Express East Coast.
Despite falls in payments to train operators, the rail industry still receives an overall government subsidy because of direct payments to Network Rail, owner of the network. But the overall proportion of costs paid by taxpayers rather than fare-payers is set to fall.
The continuing reduction in taxpayers’ share of costs depends on continued strong growth in passenger numbers, the report says. Clauses in train operators’ franchise agreements protect them from some of the cost of lower-than-expected revenues, just as the DfT gains if revenues are higher than expected.
The government must allow companies to build offshore wind farms much closer to shore, as part of a series of measures to revitalise a sector that has almost stalled due to insufficient support, competitive pressures and rising costs, an authoritative report warns today.
"Without urgent action there is a risk that little additional offshore wind power will be built by 2020 beyond the eight gigawatts already planned or in operation," says the report from the Carbon Trust, an organisation established by the government to help build a greener future.
It estimates that operators could save up to £16bn if they were allowed to site turbines in shallower waters, and argues that it would be possible to take a further £14bn off the estimated £75bn investment needed if more funding were given to research and development.
The trust argues that the government's incentives mechanism, the Renewables Obligation, needs to be made more attractive, and hopes that establishing a Department of Energy and Climate Change will herald a new beginning for wind power.
Without such measures, Britain will fail to meet the climate change targets it has pledged to the European Union at a time when companies such as Shell are pulling out of offshore schemes in pursuit of cheaper onshore wind opportunities in the US, it says.
Tom Delay, the trust's chief executive, said: "We need something similar to the [1990s'] 'Dash for Gas' if offshore wind is to play the role expected of it. Industry costs have become very, very expensive, and both government and companies need to work hard to tackle this."
He stressed that wind farms nearer to shore need not be in sight of beaches, just closer than areas such as the Dogger Bank, which is 60 nautical miles away. Inshore areas have calmer weather and permit smaller, lighter structures, making them cheaper to build and operate.
The government said last night that the trust report highlighted interesting savings but was cautious about the demands for shallower waters to be opened up. Mike O'Brien, energy and climate change minister, said: "The issues of fairness and cost-effectiveness, along with impacts on the environment and on other users of the sea, will be considered carefully in the lead-up to our renewable-energy strategy to be published next spring."
In its report, the trust argues that the UK will need at least 29GW of offshore wind power by 2020 to hit the EU's renewable goals but only less than a third is in the pipeline, partly because steel and other construction materials have tripled in price since 2005.
"Currently the risk/return balance for offshore wind is not sufficiently attractive, and regulatory barriers would delay delivery well beyond 2020," says the report, put together with input from industry and government.
Delay said the 29GW target by 2020 was a "significant challenge" but realisable. Technology costs needed to fall but £600m of public money plus £1.2bn of private funding could bring breakthroughs that could cut the overall bill by £14bn.
The government introduced policies this summer that will kickstart the wider renewable sector, the trust accepts, but it says the incentive scheme needed to be expanded and extended: "The required adjustments to the Renewable Obligation will in any case bring it closer to a feed-in tariff [an above-market return for feeding green electricity to the grid]. The government should choose the option that minimises disruption for industry."
The trust also believes the government must reform regulations to make planning easier, and update National Grid transmission lines. These measures could create 70,000 jobs in Britain and £8bn of annual revenues here and abroad, it says.
Nick Rau, renewables campaigner at Friends of the Earth, expressed caution at siting turbines too near the shoreline, and said each project needed to be assessed on its merits. "But we accept there are huge costs involved in offshore wind, and they are escalating. We need some kind of government intervention if we are to overcome these hurdles; all the evidence is that a feed-in tariff would help."
John Sauven, executive director of Greenpeace, said: "We need to promote a massive redirection of investment away from the speculation that caused the bursting financial and housing bubbles and into green industries and job-creating programmes that will help us tackle climate change. Offshore wind could be a huge business opportunity for Britain."
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