A lack of investment in new sources of oil risks a supply crunch worse than the problems that pushed prices to $147 a barrel this summer, the developed world’s energy watchdog said on Wednesday.

The International Energy Agency warned that cuts and delays in investment that were prompted by the fall in oil prices and the credit crunch had put the world “on a bad path”.

Fatih Birol, chief economist at the IEA, said: “We hear almost every day about a project being postponed. This is a major problem.”

Last year, $390bn (€311bn, £259bn) was invested in oil and gas exploration and production, one of the highest amounts in recent years. Yet it still fell short of the $450bn the IEA said would be needed in both sectors.

There was no respite for the IEA in oil prices on Wednesday. West Texas Intermediate on the New York Mercantile Exchange dropped to a 20-month low of $56.35 a barrel, down almost $3, after the US department of energy said demand would remain flat for 2008-09.

Oil prices have fallen as economies have struggled in the credit crisis and demand has dropped, especially in the developed world.

The IEA predicted that shrinking demand would be a long-term phenomenon among members of the Organisation for Economic Co-operation and Development. “We think OECD oil demand has peaked. The OECD countries’ role in the energy world is becoming less and less important,” said Mr Birol.

Developing countries are expected to be the only source of growth in oil demand until 2030, with China contributing 43 per cent and India and the Middle East each about 20 per cent. The remainder will come from other emerging economies in Asia.

But meeting the demand growth is secondary to the big challenge of compen­sating for the fast-declining production from the world’s older fields, the IEA said. It suggested the oil price was too low to guarantee the necessary investment and noted that high-cost ventures, such as Canada’s tar sands, were producing oil at a cost of about $80 a barrel – more than $20 higher than the prevailing oil price.

The warning represents a change of tone from an organisation that has often criticised the Opec cartel of oil-producing nations for reducing production to prop up prices.

The main spur for the IEA’s focus on investment – and the oil price that it regards as necessary to stimulate investors – has been its exhaustive study on the rates of decline in production from 800 of the world’s biggest oil fields.

The watchdog found that even after recent investment, production from the fields was declining at an annual 6.7 per cent and that this rate was accelerating. This means 45m barrels a day would have to be found and tapped in the next 22 years simply to meet an unchanged world demand. As it stands, however, the IEA expects demand to rise from 85m b/d last year to 106m b/d in 2030, making the challenge that much greater.

Many of the fields experiencing the sharpest decline in production lie in developed countries, including in areas such as the North Sea and Alaska. This meant the west would become less and less of an influence in terms of production, while Persian Gulf countries would become more important.

The IEA said most of the projected increase would come from members of Opec, whose world share would jump from 44 per cent to 51 per cent by 2030.

“Their reserves are big enough for output to grow faster, but investment is assumed to be constrained, notably by conservative depletion policies and geopolitical factors,” said the IEA.

Petrobras, the Brazilian state oil company, said production this year would be 500,000 b/d lower than previously forecast.

View here for full IEA release documents

Opec has made a scathing attack on a report from the International Energy Agency which says that the world's existing oil producers face a “huge challenge” to keep up with a projected rise in global demand.

The report from the IEA, the respected Paris-based energy advisor to the Organisation for Economic Co-operation and Development (OECD) club of wealthy nations, said that to compensate for the depletion of existing oilfields, by 2030 the world would need to find new production equivalent to 45 million barrels per day, or the output of four Saudi Arabias, to maintain present levels of supply.

It added that additional production equivalent to six Saudi Arabias would be required if a projected rise in oil demand from 85 million barrels a day to 106 million was taken into account.

The IEA, which based its findings on a landmark study of decline rates at 800 of the world's largest oilfields, said that there was, in theory, enough oil left in the ground to meet demand. However, it would require investment of about $450 billion (£300 billion) a year, with the bulk of this spent in the 13 member states of Opec, where most of the world's remaining supplies lie.

Abdullah al-Badri, Opec's secretary-general, gave a withering verdict on the study. “I don't trust this report,” he said. “I don't think the IEA is equipped to review these oilfields...I don't see how it will be useful.”

He said that Opec, the cartel of 13 oil-exporting countries that produces 40 per cent of the world's oil, had not been involved in drafting the study, which he dismissed as alarmist. “We have the reserves, we have enough oil for the foreseeable future,” Mr al-Badri insisted.

Speaking at the London launch of the IEA's 2008 World Energy Outlook report yesterday, Nobuo Tanaka, the agency's executive director, a leading energy expert, adopted a markedly different tone, sounding a grave warning about the energy challenges facing the world. “Current trends in energy supply and consumption are patently unsustainable - environmentally, economically and socially - they can and must be altered,” Mr Tanaka said. He added that an “energy revolution” was needed urgently to meet surging global demand, which he predicted would soar by 45 per cent by 2030 - driven mainly by China and India - while also adopting low-carbon sources of power to prevent catastrophic climate change.

The dispute between the IEA and Opec goes to the heart of the debate over “peak oil” and how much of the world's energy needs its existing oilfields can supply in the years ahead. This year's World Energy Outlook report slashed its assessment of how much oil the world would be able to produce by 2030 by ten million barrels to 106 million per day and placed more emphasis than ever before on the need to develop alternatives.

Opec has traditionally adopted a much rosier view of the prospects for future global oil production growth. For years, it has also been accused of overstating its reserves for political reasons and to discourage the development of alternatives.

The IEA's report also gave warning that the present economic slowdown could have damaging consequences for the world's energy supplies by undermining crucial investment. “We cannot let the financial and economic crisis delay the policy action that is urgently needed to ensure secure energy supplies and to curtail rising emissions of greenhouse gases,” Mr Tanaka said. “We must usher in a global energy revolution by improving energy efficiency and increasing the deployment of low-carbon energy.”

LONDON - The International Energy Agency (IEA) on Thursday slashed its global oil demand growth forecasts in response to mounting evidence the world economy is far weaker than previously thought.

Demand has grown this year at the slowest rate in a generation and next year it is now expected to expand by only 350,000 barrels per day (bpd) -- down 340,000 bpd from the IEA's prediction a month ago.

The revision follows the release of weaker economic forecasts by the International Monetary Fund, which said on Nov. 6 that the world's developed economies are headed for the first full-year contraction since World War Two.

"This is very much related to the dramatic worsening of global economic conditions over the past few weeks as a result of the ongoing financial crisis," the IEA said in its monthly report.

The adviser to 28 industrialised countries also cut its 2008 oil demand growth estimate by 320,000 bpd to a marginal 120,000 bpd -- the lowest in absolute terms since 1985.

World oil demand is now expected to average 86.2 million bpd in 2008, while in 2009 it is forecast to expand to 86.5 million bpd.

Oil prices were lower after the report was released. U.S. crude was down 3 cents at $56.13 a barrel at 1013 GMT. It has fallen sharply from a record high of $147.27 in July.

"The IEA report was every bit as bearish as expected," said Christopher Bellew, an oil broker at Bache Commodities Ltd.

OPEC CONSIDERS MEETING
The forecast for lower demand may add to calls from members of the Organization of the Petroleum Exporting Countries for a further cut in oil output to bolster prices.

OPEC, source of two in every five barrels of oil, is discussing whether to hold an emergency meeting on Nov. 28 in Cairo, Iran's OPEC governor told Reuters on Thursday.

The group agreed in October to reduce supply by 1.5 million barrels per day, about 5 percent, as of Nov. 1, but the move has failed to stem the price decline.

In its report, the IEA lowered its forecast for demand for OPEC oil in the last three months of 2008 by 600,000 bpd and trimmed the outlook for 2009 by 500,000 bpd.

The call on OPEC crude averages 31.1 million bpd in the fourth quarter of 2008, according to the IEA, much lower than their production in October of 32.1 million bpd.

As demand slows, oil stocks in Organisation for Economic Cooperation and Development (OECD) countries are rising. At the end of September they equalled 55 days of forward cover -- 2.2 days above the 2003-2007 average.

Preliminary October figures show a rebound of 51 million barrels, potentially raising stock cover to 56 days, it said.

While demand growth is now expected to be minimal over the next two years, a fall in investment in the oil sector has raised fears of tight global supplies when the economy recovers, causing prices to soar.

"The current credit squeeze is not just a demand-side issue for oil," the IEA said.

"Slowing oil sector investment in 2009 sows the seeds of a sharp tightening in market fundamentals if major projects are delayed, the impact being felt three to five years hence after economic recovery regains a foothold."
Editing by Anthony Barker

Oil rebounded today after tumbling to $50 a barrel after speculation heightened that Opec, the cartel of oil producing nations, will cut supplies to stop the steep fall in prices.

US oil recovered from a 22-month low when it rose 85 cents to $57.01 while Brent crude regained some ground, increasing to $52.85 after falling to just above $50 a barrel.

Since mid-July, when oil hit a peak of $147.27, prices have fallen by over 60 per cent on fears that the world's largest economies would cut demand as they struggle with shrinking GDP.

It emerged today that the US trade deficit in September narrowed more than forecast because a record decline in the cost of foreign crude oil caused fuel imports to fall.

The gap shrank 4.4 percent to $56.5 billion, the smallest in almost a year, from $59.1 billion in August, the Commerce Department said.

The International Energy Agency cut its global oil demand growth forecast for 2009 and said this year's increase in consumption has been the slowest since 1985.

Demand is predicted to rise by 350,000 barrels a day, a 340,000 fall on previous forecasts.

However, there are rumours that Opec, which produces around 40 per cent of the world's oil, is considering holding an emergency meeting at the end of this month to discuss reducing output after agreeing to cut daily supplies by 1.5 million barrels last month.

Last month, Chancellor Alistair Darling increased pressure on major oil companies to pass on the falling price of crude after BP and Shell reported record quarterly profits.

In contrast, since oil prices have started to fall, Britain's major supermarkets have cut the cost of petrol on their forecourts.

The U.S. government reduced its forecast for oil prices next year by 43 percent as the economic slowdown cuts energy demand.

West Texas Intermediate crude oil, the U.S. benchmark, will average $63.50 in 2009, down from $112 estimated in October, the Energy Department said in its monthly Short-Term Energy Outlook, released today in Washington.

Crude oil in New York has tumbled 62 percent since touching a record $147.27 a barrel on July 11 as the economic slump deepened and spread to emerging markets. Falling stock markets and consumer spending last month contributed to the cut in price forecasts, said Tancred Lidderdale, a government economist in Washington who supervises the report.

``The grim economic news kind of snowballed in October,'' Lidderdale said. ``The changing forecast is all due to the economy.''

Oil will average $101.45 a barrel this year, down 9.1 percent from $111.57 a barrel estimated last month, the report from the department's Energy Information Administration showed. Prices have been falling amid reduced demand for fuels from slowing world economies.

Crude-oil for December delivery declined $3.17, or 5.3 percent, to $56.16 a barrel at 2:46 p.m. today on the New York Mercantile Exchange, the lowest settlement since Jan. 29, 2007.

U.S. oil demand will average 19.56 million barrels a day this year, down 1.12 million barrels a day from 2007. This year's demand forecast was reduced 290,000 barrels from last month. Consumption will drop 250,000 barrels a day to an average 19.31 million barrels a day in 2009, the report showed.

Oil demand in the U.S. peaked at 20.8 million barrels a day in 2005, Lidderdale said.

World Oil Demand

Global oil consumption will average 85.89 million barrels a day this year, up 80,000 barrels from 2007, according to the report. The estimate is down 250,000 barrels from the forecast a month ago. Demand will average 85.93 million barrels a day in 2009, down 990,000 barrels from last month's forecast.

Regular gasoline at the pump, averaged nationwide, will cost $2.37 a gallon in 2009, down 33 percent from $3.56 estimated in the October report. The fuel will average $3.29 a gallon this year, down 7.6 percent. Prices last week dropped to a 21-month low of $2.224 a gallon, the department said Nov. 10.

The government cut its estimate of winter fuel costs from last month as prices fell. The heating season runs from October through March.

Heating Costs

Heating oil users will spend an average $1,694 this winter, down 29 percent from $2,388 forecast last month and 13 percent lower than the average $1,953 spent by households last winter.

``The falling heating-oil prices are good news for all the homeowners that didn't lock in prices for this winter,'' Lidderdale said.

Homeowners using natural gas will see average heating costs for the season of $889, down 12 percent from $1,010 forecast in the October report. The estimate is up 3.6 percent from an average $858 last winter, the report showed.

U.S. natural gas consumption in 2009 will drop 0.2 percent as demand from industrial users slides 2.2 percent, the report showed. Fuel use this year will probably expand 1.1 percent.

``The weakness in global economic growth could limit U.S. exports of natural-gas-intensive products and further reduce consumption by industrial consumers,'' the department said.

Gas output will probably expand by 6 percent in 2008, driven by new production in Texas, Oklahoma and Wyoming, the department said. Production will increase by 2 percent in 2009.

Lower prices next year and ``poor economic conditions'' will limit expansion of supplies, according to the report. Gas will average about $6.82 per thousand cubic feet in 2009, down from $9.25 this year.

Natural gas for December delivery fell 30 cents, or 4.5 percent, to settle at $6.405 per million British thermal units today on the New York exchange. Gas is down 20 percent from a year ago. Prices per million Btu are roughly equivalent to prices per thousand cubic feet.

MOSCOW — Russia's Prime Minister Vladimir Putin said the country must act to influence oil prices hit by the global economic crisis, in what could signal a significant change of approach by the major crude exporter.

"We need to work out a whole range of measures that will allow us to actively influence the market," he said in comments broadcast on television after a government meeting on oil production.

"As one of the major exporters and producers of oil and petroleum products, Russia cannot stand aside from formulation of global prices for this natural resource."

Oil prices have fallen sharply from record highs of 147 dollars per barrel in July as the global financial crisis has slowed economic growth and demand.

Russia is not a member of the Organization of Petroleum Exporting Countries (OPEC) and has traditionally steered clear of working closely with the cartel to set production and pricing levels.

Vice-premier Igor Sechin said on Wednesday, however, that Russia was ready to cooperate with other oil producing countries to prop up the price of crude but was determined to stay in charge of its own production levels.

OPEC last month decided to cut production by 1.5 million barrels a day in a bid to stem the fall in the price of oil.

World oil prices climbed in Asian trade on Monday after OPEC refused to rule out further output cuts and China announced a massive stimulus package aimed at boosting domestic spending, dealers said.

Oil prices fell Monday on profit-taking after earlier jumping by more than three dollars, with New York's main contract, light sweet crude for delivery in December slipping 33 cents to 60.71 dollars per barrel. The contract earlier went as high as 65.56 dollars.

OPEC's 13 countries account for around 43 percent of world production with Russia on 12 percent.

Putin also suggested that the export tax on oil should be reviewed monthly, instead of every two months as at present. The government sharply lowered it this month to 287 dollars per tonne.

"The world financial crisis, the instability on international markets and raw materials and the fall in the price of oil, demand that we adopt measures that will ensure lasting development of the sector in current conditions," Putin said on Monday.

Leading Russian oil producers, including TNK-BP, BP's Russian affiliate, are grappling with a collapse in profits from the export of Siberian oil.

Heavy export tariffs have almost wiped out the profit margin from selling crude oil outside Russia, forcing Siberian producers to sell at prices as low as $10 a barrel on Russia's domestic market. Fears are mounting that the profits squeeze may speed the decline in Russian oil output, already down 6 per cent this year.

The profits crunch, caused by the collapse in the worldwide price of crude, is provoking concern within Russia's oil community that capital expenditure budgets will have to be cut if profits from oil sales do not recover. “The tax burden is very tough,” Valeri Nesterov, an oil analyst at Troika Dialog, the Moscow brokerage, said. “The problem is that the future of the oil sector might be jeopardised if the Government doesn't reduce the tax burden.”

Transneft, the Russian state oil pipeline monopoly, reported over the weekend that shipments of crude were running at only three quarters of planned exports for November. Oil traders suggested that leading producers, including Tatneft and Rosneft, the biggest Russian oil producer, were likely to cancel tanker exports from Black Sea ports due to the heavy tax burden.

A BP spokesman confirmed that Russian exporters were experiencing problems due to high export taxes. “In October, you would have made a loss,” he said.

The problem has emerged because of the precipitous decline in the price of crude from its peak in July of $147 a barrel to present levels of around $56 a barrel.

Russia imposes an export duty on crude oil, a significant source of government funding, but the level of the tax is set in arrears, calculated according to the export price of Urals blend crude over the previous two months. Oil producers complain that the levy is always excessive, but when oil prices fall quickly, the change in the tax rate takes months to catch up. The Government cut the export tariff at the start of this month from $51 a barrel to $40 a barrel. However, Urals blend crude fell to $53 a barrel yesterday, suggesting that exporters would continue to suffer losses after meeting production costs and pipeline tariffs.

“Profits will decline, but the main problem is that in order to sustain oil output they need to maintain capital expenditure. It is nearly impossible to borrow money and, if your profit falls, you have less money to invest,” Mr Nesterov said.

Reports from Moscow yesterday said that TNK-BP was in talks to secure a $600 million (£399 million) loan from its bankers. The fundraising was put on ice last summer when a row erupted between BP and its oligarch partners over control of the joint venture. Since then, the syndicated lending market in Moscow has virtually disappeared because of the sudden outflow of funds from Russia in the continuing global credit crisis.

Alexei Kudrin, the Russian Finance Minister, said yesterday that the Government was forecasting an average oil price in 2009 of $50 a barrel. He said that Moscow would consider using its foreign currency reserves to prop up state finances next year. They had been budgeted on an oil price of $95 a barrel.

Russia continued to intervene in the markets yesterday, selling dollars in its effort to prop up the sagging rouble.

“You will see more support measures for the economy this week. I think we will need to work hard for at least another year,” Mr Kudrin said. “The Finance Ministry has been put into army barracks regime, and the central bank is working until 2am, reacting to everything.”

The U.S. could soon find itself scrambling to make up 11 percent in lost oil imports.

Mexico, the third-largest foreign supplier of U.S. oil, faces the real possibility of having to halt oil exports in four years, a former top Mexican energy official was reported as saying Tuesday in Mexico’s El Universal newspaper.

Rogelio Gasca Neri, the former head of Mexico’s federal electricity commission, blamed the inability of the nation’s oil industry to produce enough oil to meet rising demand.

His prediction comes on the heels of the Mexican Congress last month overturning decades of resistance to allowing private and foreign participation in Mexico’s aging energy infrastructure.

Neri’s comment, made in Mexico at a business forum on reforms in the nation’s energy industry, also joins that of a growing number of energy experts who see an end to Mexican oil exports coming soon.

John Padilla, director of finance and advisory for IPD Latin America, argues that with Mexico’s oil production falling, and its demand for gasoline and other petroleum products on the rise, Mexico could cease to be an oil exporter around 2010 or 2011.

“Mexico, whether it’s 2011, 2012 or 2015, the country is poised to become a net importer,” said Amy Jaffe, associate director of the Rice University energy program. “It’s a tragedy really both for the country and in general. The tragedy is it’s avoidable. It was avoidable and it could be avoidable if they would change their policies.”

But “the grim reality is Pemex’s production is falling very dramatically,” Padilla said this week of the state-owned energy company at a conference hosted by the Center for Strategic and International Studies in Washington, D.C.

For the U.S., the end of Mexican oil exports means companies will have to find alternative suppliers.

“Mexico has been a reliable and stable supplier,” Jaffe said. “The only thing you have to worry about is a hurricane.”

It takes 50 days for oil to arrive in the U.S. from Saudi Arabia, compared to five days from Mexico, she said.

Output falling
The Paris-based International Energy Agency, in a report issued last month, estimated Mexico’s crude output would average 2.8 million barrels a day this year and then drop to about 2.6 million barrels a day in 2009.

Mexico has long relied on production from the country’s largest oil field, the offshore Cantarell field in the Bay of Campeche. But Cantarell’s output has been dropping precipitously.

Production at Cantarell peaked in 2004 at 2.14 million barrels a day, the U.S. Energy Information Administration reported.

During the first nine months of this year, Cantarell’s production averaged less than 1.1 million barrels a day, and during September output dipped below 1 million barrels a day, Padilla said.

With Cantarell’s output sliding, Mexican energy officials have pinned their hopes on the Chicontepec field, which holds 38 percent of the country’s total reserves.

Last year, Chicontepec produced 31,000 barrels a day, Padilla noted. The target for that field is 600,000 barrels a day.

But to achieve that goal, Padilla said, Pemex would have to drill more than 15,000 wells, and the state oil company to date has not come close to that.

More consumers
With a population expected to top 110 million by 2010, Mexico’s thirst for gasoline and other refined products is on the rise, although that growth softened as the credit crisis began gripping the world’s economies.

Mexico currently has 17.2 million cars on the road, up from only 7.3 million in 1995, Padilla said.

Mexico imports about 40 percent of the gasoline it uses, according to the International Energy Agency. And Pemex has estimated that could grow to 50 percent next year.

Mexico is the United States’ third-largest foreign oil supplier after Canada and Saudi Arabia, providing 1.4 million barrels of petroleum products a day, or about 11 percent of U.S. oil imports, according to the U.S. Energy Information Administration.

“The big oil companies in Houston all import oil from Mexico,” said George Baker, president of Houston-based Baker & Associates, Energy Consultants.

However, he casts doubt on the end of the oil exports.

“Mexico’s credit rating is linked to Mexico being an oil exporter. That’s the very last thing they are going to give up, is being an oil exporter,” Baker said. “Whatever they have to do to make that not happen, they are going to do it.”

Energy companies are cutting back development of Canadian oil sands, the world's biggest energy reserves outside Saudi Arabia, as crude prices plunge and processing costs become prohibitive.

Royal Dutch Shell Plc, the world's second-largest oil company, and Calgary-based Suncor Energy Inc. and Encana Corp. said they will reduce plans to extract bitumen, the tar-like raw material for the crude, after prices fell 65 percent to $37.07 a barrel since July 4. The Canadian Association of Petroleum Producers reduced its forecast for spending next year by 20 percent to C$16 billion ($13.6 billion).

In June, the trade group said companies would spend C$126 billion over the next five years on pipelines, mines and upgrading plants as record oil prices made the Canadian reserves in Alberta increasingly lucrative. The figure has now been chopped to about C$80 billion, Greg Stringhamd, a vice president at the association, said in a Nov. 7 interview.

``Because of the economic uncertainty and turmoil that's out there right now, both the availability of capital and the lower pricing, people are waiting to see how long and how deep that is going to be,'' Stringham said.

Suncor, which peaked May 20 at C$72.37, fell 63 percent since then and closed at C$27.01 yesterday on the Toronto Stock Exchange. Petro-Canada has declined 56 percent to C$26.30 from C$60.00 on May 22. Imperial Oil Ltd., Canada's largest oil company, and Encana losses track roughly with the S&P 500 Index, which has fallen 35 percent since May 20.

Companies can get oil from processing bitumen dug from mines or coaxed from the ground using steam. It takes two tons of oil sands to make one barrel of oil.

`Most Expensive Barrel'

Oil-sands projects will be profitable if crude is priced at $95 to $100 per barrel in coming decades, said Ryan Todd, an analyst for Deutche Bank AG in New York. Bitumen can be tapped at existing projects for roughly $40 a barrel, he said.

``The oil-sands oil typically tends to be the most expensive barrel to produce out there,'` Todd said.

Crude on the New York Mercantile Exchange dropped 58 percent to $62.41 a barrel on Nov. 10 since it reached a record $147.27 on July 11.

Fuel from oil sands lost value at a faster pace than crude because of higher processing costs. Cold Lake, a bitumen blend, sold at a 41 percent discount to benchmark West Texas Intermediate crude on Nov. 10, compared with a gap of 11 percent on Aug. 21.

Oil Demand Crunched

The Cold Lake blend must go through an upgrading process, adding C$20 to C$25 to the cost of the product that goes to refineries, Stringham said.

Oil prices fell as the global credit crunch that forced financial companies to report $688 billion in losses and writedowns since the start of 2007 caused the world economy to slow.

The cooling economy will cut global oil demand for the first time in a quarter of a century next year, Wood Mackenzie Consultants Ltd. said Nov. 6. Oil demand in the U.S., the oil sands only export customer, will slump 830,000 barrels per day, or 4.3 percent this year from 2007 to 19.8 million barrels per day, the Energy Department predicted Oct. 7.

Encana cited financial market uncertainty on Oct. 15 when it delayed a plan to spin off Cenovus Energy, which was formed to manage oil-sands projects in Alberta and U.S. refineries.

Closely held Value Creation Inc., based in Calgary, stopped work on a C$4 billion upgrader, which separates bitumen from sands and converts it to heavy oil, because of financing, Gerry Gabinet, director of economic development in Strathcona County Alberta where the upgrader was planned, said in a telephone interview Sept. 25. The company did not respond to phone calls seeking comment.

Encana, Imperial, Suncor

Oslo-based StatoilHydro ASA, Norway's largest oil company, said August 11 that it may postpone the start of its oil-sands upgrader.

Bruce March, chief executive officer for Imperial, which is 70 percent-owned by Exxon Mobil, said Aug. 6 the company is deciding whether to proceed with the Kearl oil sands project, citing rising costs of development.

Suncor, said on Oct. 23 it will cut back on construction at its Voyageur oil-sands project in Northern Alberta because of tumbling crude prices and will focus on another site. The same day, Petro-Canada and UTS Energy Corp., based in Calgary said they may postpone an oil-sands processing facility near Edmonton.

A week later, Shell said it will delay an investment decision on expanding its Athabasca oil-sands project because of construction costs. The Hague-based company said it will press ahead with the first phase of the project

Environmental Woes

U.S. policies that discourage fuel purchases from heavy- polluting sources are further reducing incentives to exploit oil sands. The crude creates three times more greenhouse gases than conventional wells, and a U.S. law enacted in December bans federal agencies from buying fuels that cause more emissions than alternatives.

Oil-sands mines along the Athabasca River near Fort McMurray, Alberta, can be 80 meters (262 feet) deep and claimed almost 500 square kilometers (311 square miles) of forest. They have created bitumen and clay-laden ponds with an oily sheen of grays and green hues that have killed scores of birds.

Still Investing Billions

Oil sands hold the equivalent of 173 billion barrels, enough to supply the U.S. for 24 years. Only Saudi Arabia has more crude.

Producers are trying to get pipelines built that would take the oil to millions more consumers by allowing shipments to Asia and to the U.S. Gulf Coast, home to 47 percent of the nation's refining capacity, according to U.S. Energy Department data.

A line sponsored by Enbridge Inc. to the British Columbia coast may not be built before 2014, Pat Daniel, the company's chief executive officer, said in a conference call to analysts July 31. Two conduits to Texas cosponsored by Enbridge, one with Exxon Mobil and another with BP Plc, won't be ready until 2012 at the earliest, Enbridge said in separate August statements.

Petroleo Brasileiro SA, the investor darling among the world's largest oil companies in the first half of the year, has become the biggest loser.

Petrobras, as Brazil's state-controlled oil producer is known, is the worst performer among the top 10 publicly traded oil companies since May. The stock dropped 53 percent on concern falling energy prices and the global credit crisis will block or delay efforts to tap the biggest offshore discovery in the Americas in three decades. Earnings growth will slow from 80 percent in the third quarter to 6.2 percent next year, according to the averages of analyst estimates compiled by Bloomberg.

``The decline in oil prices and the current financial crises will at some level impact Petrobras,'' said Gianna Bern, president of Brookshire Advisory & Research Inc. in Flossmoor, Illinois. ``Deepwater exploration is a very high-cost, high-risk proposition, and $60 or $70 oil will prompt them to re-evaluate their highest-priority developments.''

Since passing Microsoft Corp, as the world's sixth-biggest corporation by market value in May, Petrobras has fallen to No. 31, behind drugmaker Pfizer Inc. and China Construction Bank Corp., according to data compiled by Bloomberg. The company may need to fund capital spending of more than $30 billion annually to tap offshore prospects, including its Tupi discovery announced last year, and it faces a market in which Latin American bond sales have plummeted.

``For those who don't have a lot of cash, it's getting very complicated, especially for those who hope to develop gigantic finds like those in Brazil,'' said Joseph Stanislaw, an economist and co-author of ``The Commanding Heights: The Battle for the World Economy.'' ``Normally, you would borrow to fund development of the fields, but I'm sure their ability to do that has become more difficult and constrained.''

Prices, Shares Collapse

Like Exxon Mobil Corp. and other major producers, Petrobras benefited as crude-oil futures in New York climbed to an all- time high above $147 a barrel in July. Petrobras doubled in market value between August 2007 and May of this year as price gains added trillions of dollars in value to Brazil's so-called sub-salt offshore petroleum deposits.

Since then, oil has dropped more than $80. Natural gas, which rose even faster than oil in this year's first half, has fallen 49 percent since the end of June.

Petrobras shares have dropped 57 percent since peaking in May. Stocks from Sao Paulo to Prague to Moscow had outsized declines over that period as investors shifted money out of emerging markets. Petrobras' ratio of stock price to estimated earnings per share is about 6.6, down from almost 22 in May.

Exxon, Shell, BP

Mirian Guaraciaba, a company spokeswoman, said Petrobras won't comment on the decline in market value until its third- quarter earnings report is released tomorrow.

Exxon Mobil, based in Irving, Texas, remains the world's largest company by market value. It trades at about 8.5 times estimated earnings. Houston-based ConocoPhillips and San Ramon, California-based Chevron Corp., as well as Royal Dutch Shell Plc, in The Hague, and London-based BP Plc have ratios between 4.5 and 6.5.

The outlook for slowing earnings growth also is weighing on shares of Rio de Janeiro-based Petrobras. The company probably will report tomorrow that third-quarter profit excluding one- time costs and gains jumped 80 percent to about 9.9 billion reais ($4.6 billion), according to analyst estimates compiled by Bloomberg.

Full-year profit growth probably will slow to 6.2 percent in 2009 from 51 percent this year because oil prices fell, the analyst predictions showed. Global demand for gasoline, diesel and other petroleum-derived fuels is forecast to expand next year at less than half the rate of the previous half decade, the International Energy Agency said last month.

Price Pressure

Falling energy prices may complicate efforts to exploit Tupi and neighboring offshore prospects. Drilling wells and constructing platforms to pump crude and gas from deposits that in some cases lie beneath six miles (10 kilometers) of sea and rock may cost $600 billion over the next few decades, Julio Bueno, industry secretary for Rio de Janeiro state, said in a September interview in London.

``Prices affect the economics of oil production, and there's a bottom commodity price below which a company won't produce a resource,'' said Don Goddard, a geologist at Louisiana State University's Center for Energy Studies in Baton Rouge.

Tupi may cost $100 billion to bring into production and operate, according to Peter Wells, director of U.K. research firm Neftex Petroleum Consultants Ltd. Petrobras had less than 1 percent of that amount in cash as of June 30. Exxon Mobil's cash hoard was 40 times that size, public filings showed.

Credit Needs

Petrobras is looking to become ``a more frequent issuer'' of bonds to help fund its offshore developments, Chief Financial Officer Almir Barbassa said in an April interview.

Less than $6 billion in Latin American bonds have been sold since the end of June, according to data compiled by Bloomberg, down 70 percent from the same period a year earlier.

``It's been very sporadic,'' said David Spegel, head of emerging-market strategy at ING Financial Bank NV in New York. ``Some months have been up, some months have been down. There's been nothing in October and almost nothing in September.''

Petrobras is scheduled to announce a new five-year capital spending plan next month. The company will raise spending 39 percent to about $170 billion to account for Tupi and other new fields that will be costly to develop, Subhojit Daripa, an analyst for at Morgan Stanley in Sao Paulo, said in a note to clients.

MOSCOW - Russia may scrap its Baltic Sea gas pipeline project, Nord Stream, and build gas liquefaction plants instead if Europe keeps delaying the pipeline, Russian Prime Minister Vladimir Putin said on Wednesday.

"Europe must decide whether it needs this pipeline or not," Putin told Finland's Prime Minister, Matti Vanhanen, at a meeting in Moscow.

"If you don't we will build liquefaction plants and send gas to world markets, including to European markets. But it will be simply more expensive for you. You are free to make the calculations yourself," he added.

The European Union has identified the plan to pump Russian gas under the Baltic Sea by to Germany -- involving Russia's Gazprom , Germany's E.ON EONG.DE and BASF  and Dutch Gasunie -- as a key project to ensure secure gas supplies for Europe.

But EU lawmakers have called for a new investigation into the pipeline's environmental impact and it has been criticised by Poland, Lithuania and Estonia, angered at being shut out of a leading gas supply route.

An expert on Russian gas said Gazprom was unlikely to build any LNG plants quickly enough to give it an export alternative to Nord Stream, which the partners hope to start laying next year.

Jonathan Stern, director of gas research at the Oxford Institute of Energy Studies, added Putin may be warning the EU that it needs Nord Stream to reduce the risk associated with importing gas from Russia across the Ukraine and Belarus.

"Essentially he is saying 'if you want to take the transit risk on Ukranie and Belarus then fine, but we don't want you to blame us if there's a problem because we offered you Nord Stream and you couldn't get your act together'," he said.

"That's the subtext of this."

Ukraine's ageing gas tranport network and its disputes with Russia over the last few years over gas pricing have heightened concerns in Western Europe over the reliability of gas flows across the country.

Nord Stream would bypass Ukraine by taking gas along the seabed of the Baltic from near St Petersburg to the German coast north of Berlin.

Additional reporting by Daniel Fineren, writing by Dmitry Zhdannikov

A supergrid of power supplies to protect Europe’s energy from the threat of a Russian stranglehold will be announced today.

The building blocks of the proposed supergrid would be new cables linking North Sea wind farms, and a network patching together the disparate electricity grids of the Baltic region and the countries bordering the Mediterranean, according to a blueprint drawn up by the European Commission and seen by The Times.

EU states will also be asked to pay for at least two ambitious gas pipelines to bring in supplies from Central Asia and Africa. The plans also call for a Community Gas Ring, or a network allowing EU countries to share supplies if Russia turns off the taps.

Analysts estimate the two projects will cost billions of pounds.

The EU Energy Security Plan notes that Europe imports 61 per cent of its gas, a figure projected to rise to 73 per cent by 2020. Russia sells about two-fifths of the total, including the entire supply of several countries.

The proposals come a day before an EU summit meeting with Russia in France, which is designed to reopen talks on a pact covering economic and energy links after the crisis in relations caused by the war in Georgia in the summer.

Europe must take “the first steps to break the cycle of increasing energy consumption, increasing imports, and increasing outflow of wealth created in the EU to pay energy producers”, according to the European Commission document. Without referring specifically to Russia, it adds: “Remaining reserves and spare production capacity are becoming increasingly concentrated in a few hands.

“With respect to the EU, this is of most concern with respect to gas, where a number of member states are overwhelmingly dependent on one single supplier. Political incidents in supplier or transit countries, accidents or natural disasters . . . remind the EU of the vulnerability of its immediate energy supply.”

Britain supports the first step of the supergrid scheme to connect all the wind farms in the North Sea, which will channel electricity into a central hub from the waters of several countries including the Netherlands, Germany, Norway and the UK.

Supporters argue that a shared system will make each country less reliant on local weather conditions for renewable energy in the drive to replace Russian hydrocarbons.

Nick Medic, of the British Wind Energy Association, said: “This follows an agreement between Norway and Holland to connect the two countries with an undersea cable. The logic is that hydropower [in Norway] can offset the variability of wind power [from Holland]. If the wind power goes up, you can switch off the hydro. It is something that Denmark and Norway have also done for years.

“The proposed North Sea grid means that if you have less wind in the British sector, you can access wind blowing off the German coast.” An EU-wide network will mean that wind power becomes even more reliable.

The Government supports the plans. “We have been calling for the EU to do more on energy security. The idea of a supergrid could support the Government’s aim of developing offshore wind power and other renewables and implementing more interconnection between European electricity markets,” a spokeswoman said.

Similar link-ups will be outlined today for the Baltic region and the Mediterranean, with the long-term goal of a single European grid.

The common EU gas ring will require construction of the southern corridor pipeline to bring gas supplies from Azerbaijan and a trans-Saharan pipe for gas from Nigeria. The EU faces tough competition, however, from Gazprom, the huge gas company in Russia, which is already negotiating to buy supplies from both countries for rival projects.

All of these measures will run alongside the EU goal of a 20 per cent increase in energy efficiency by 2020, as well as a 20 per cent reduction in CO2 emissions and 20 per cent of energy to come from renewable sources, the so-called 20-20-20 targets.

The European Commission will spell out the urgency of making progress with energy security, because of the dominance of Russia and because of the economic uncertainties surrounding imports. “This work appears as a key element of the EU response to the current financial crisis and thus should be accelerated,” the draft document states.

Could Big Oil end up financing tomorrow’s wind farms?

One key instrument for backing wind farms has been the federal production tax credit. Financial backers pony up money to a developer and get a nice tax break in return when the turbines start turning. But turmoil on Wall Street has upended this market. Lehman Brothers was active, but is now gone. GE Energy Financial Services is a major player, but is “facing constraints at the moment,” said a spokesman.

Who will step in? Whoever does needs a reliable stream of taxable income to offset with tax credits. That’s a shrinking group these days. But one still-profitable is drawing a lot of interest: oil companies. These fossil fuel purveyors have a growing interest in wind projects, as evidenced by BP PLC’s decision last week to build wind farms in the U.S. Not just do these companies have the kind of solid, reliable earnings that a tax shelter can help offset, they also have a lot of cash sitting on their balance sheets.

As tax-credit financing has slowed, yields have risen to attract new investors. The annual yields on these projects is approaching 10%, say renewable energy industry watchers. That’s below the 15% oil companies typically want to see before they spend capital on a big project such as developing a new deepwater oil field. “The oil companies look at it and say as a pure economic decision, it’s a better deal for me to pay my taxes and build a [liquefied natural gas] terminal,” says Martin J. Pasqualini, a founding partner of CP Energy Group LLC, a boutique investment banking firm that specializes in renewable energy deals.

Non-economic concerns could lure them into the space. It’s a good bet that the big oil companies will be called before Congress soon and asked to explain why they are making so much money, what they’re spending it on and why they aren’t doing more to support renewable energy. Doing a production tax-credit deal could give them some cover.

“I don’t know what’s the value of PR-slash-political premium, but it has to be worth something,” says Ethan Zindler, head of North American research at New Energy Finance Ltd.

So far these companies aren’t changing dance partners. ConocoPhillips says it is focusing on its oil and gas portfolio. A Chevron Corp. spokesman said the California company had evaluated it in the past, but “we are not currently pursuing tax credits for wind projects.” Exxon Mobil Corp. declined comment.

Government plans for Britain to become a world leader in clean energy technology suffered a double setback yesterday after BP said that it was abandoning the country's wind energy industry and pulling out of a competition to build a demonstration carbon-capture and storage plant.

The oil company informed the Government last week that it would no longer be submitting a bid for a government-funded scheme to develop a coal-fired power plant using carbon capture and storage (CCS), an experimental technology that strips out CO2 emissions for safe storage. The CCS competition was announced in November last year and is a key feature of the Government's plans to fight climate change while creating one million green-collar jobs in renewable energy.

A spokesman for BP, which announced record third-quarter profits of £6.4 billion last week, said that the group had withdrawn because it had struggled to find suitable partners.

“We came to the conclusion that we could no longer put together a winning consortium,” the spokesman said. He added that BP was dropping plans to invest in UK windfarm projects in favour of better returns in the industry in the United States.

BP's move triggered protests from green groups, which accused the company of abandoning its stated commitment to move “beyond petroleum”.

Keith Allott, the head of the climate change programme of WWF-UK, said: “It's deeply disappointing that one of Britain's leading companies in this field is choosing not to invest in the green energy revolution we so desperately need while continuing to invest in conventional hydrocarbons. It seems incompatible with the company's previous positioning of moving ‘beyond petroleum'.”

The development of CCS technology is considered a critical step in tackling climate change. In theory, CCS equipment could be retrofitted to existing coal-fired power stations around the world, allowing for rapid cuts in CO2 emissions. BP Alternative Energy had been on a shortlist of four companies that was announced in July. It included E.ON UK, which wants to deploy CCS technology at its proposed coal-fired power station at Kingsnorth, Kent, as well as Peel Holdings and ScottishPower.

By reducing the field to only three players, the withdrawal of BP represents a significant blow for the Government's competition.

A spokeswoman for the Department of Energy and Climate Change sought to play down the significance of BP's decision. “We continue to have three strong bidders who are committed to the project and to CCS,” she said. “BP's decision does not compromise the integrity of the competition.”

BP insisted that it remained committed to renewable energy throughout the world. “We remain very supportive of alternative energy technology and we continue to invest in hydrogen energy projects in Abu Dhabi and California,” a spokesman said.

Royal Dutch Shell, the largest UK company by market value, also withdrew from the UK wind energy industry this year, citing rising costs.

Compounding the problems facing the Government's CCS project, RWE npower is preparing to initiate a legal challenge over the selection process for the competition. Npower was excluded from the shortlist because of a technicality.

Long-term global temperatures are on course to rise by 6C (43F) unless radical changes are adopted in the way that the world produces energy, the International Energy Agency (IAE) said yesterday.

In its 2008 World Energy Outlook, the IEA said that if present trends continued, greenhouse gas emissions from the burning of coal, oil and gas “would be driven up inexorably”, putting the world on track for a doubling in atmospheric carbon dioxide levels by the end of the century.

The IEA said that the biggest single contributor to global emissions over the next two decades was likely to be the use of coal - the world's second- most important fuel after oil, accounting for 26 per cent of energy demand.

It said that coal production was set to rise by 60 per cent between 2006 and 2030, with 90 per cent of the increase coming from developing countries. Chinese coal output alone is expected to double. Global demand for the fuel has been growing at nearly 5 per cent per year since 2000, compared with total energy demand growth of about half this level, or 2.6 per cent.

The IEA said that to stabilise greenhouse gas concentrations at 450 parts per million of carbon dioxide equivalent - which would limit the temperature increase to a more manageable 2C- a sharp drop in all emissions would be necessary from 2020 onwards.

Nobuo Tanaka, the IEA's executive director, said: “We would need concerted action from all major emitters. Our analysis shows that OECD countries alone cannot put the world on to a 450ppm trajectory even if they were to reduce their emissions to zero.”

This would require the use of lowcarbon energy to account for 36 per cent of global energy production by 2030, up from 19 per cent in 2006.

Environmental campaigners, such as Robin Webster, of Friends of the Earth, welcomed the IEA's call for an “energy revolution”to address climate change, claiming that it could provide economic benefits through the creation of new “green-collar” jobs.

Chinese Premier Wen Jiabao has said developed countries should change their "unsustainable lifestyles" to tackle global warming.

Mr Wen said richer nations should help poorer ones solve the global problem.

United Nations climate chief Yvo de Boer said rich countries had to transfer cleaner energy technologies to developing nations.

The two were speaking at a two-day conference in Beijing discussing climate change.

Mr Wen said the international community must not waver in its determination to tackle climate change.

But he made it clear where the main responsibility lay.

Developed countries had a "responsibility to tackle climate change and should alter their unsustainable lifestyle", he said.

'Weightier problem for us'

Among others, Chinese officials have previously suggested that rich nations use 1% of their gross domestic product to pay for the transfer of clean energy technologies to developing nations.

While promising China will play its part, Mr Wen said his country faced a more difficult task than developed countries.

He said it took rich countries several decades to get round to saving energy and cutting greenhouse gas emissions, which cause global warming.

"China has to solve the same problem in a relatively much shorter period," he said.

China has so far declined to place a cap its greenhouse emissions.

Technology transfer

Mr de Boer, executive secretary of the UN Framework Convention on Climate Change, also said richer nations should pay more to tackle the problem.

"If international technology transfer happens, countries like China will be able to take action which is not affordable to them at the moment," he said, speaking at the same conference as the Chinese premier.

He urged developed countries to speed up the transfer of these technologies.

The current treaty that tries to limit greenhouse gas emissions - the Kyoto Protocol - runs out in 2012.

Negotiators will start discussing what will replace it in Poland next month.

Evidence is mounting that the global economy is in steep decline, with more bad financial news from Europe and Asia.

A report by the German government says the nation is officially in recession, for the first time in five years. The report says the economy shrank one-half of one percent in the third quarter of 2008 - the second straight quarter of decline. Shrinking exports are blamed for the contraction.

Germany is the world's third-biggest economy and the largest in Europe.

In Asia, major indexes closed sharply lower today, following Wednesday's major selloff on Wall Street and a decision to change the focus of the $700 billion financial rescue plan.

Meanwhile, the Paris-based Organization for Economic Cooperation and Development says the world's developed nations are in recession, and facing a prolonged downturn.

Leaders of the world's 20 biggest industrialized and emerging nations are due to discuss the economy in Washington on Saturday.

The OECD report says overall growth will fall by three-tenths of one percent in 2009. The group says the United States will contract nearly one percent next year, while Japan's economy will fall by one-tenth of one percent.

In today's trading sessions, both Japan's Nikkei and Hong Kong's Hong Seng indexes lost more than five percent by the closing bell, while Australia's index lost nearly six percent. Markets in Seoul and Wellington also sustained significant losses.

On Wednesday, U.S. Treasury Secretary Henry Paulson announced a decision to use the recent $700 billion rescue plan to assist financial institutions that offer consumers credit for such loans as college and automobile purchases.

The decision shifts the focus away from buying failed investments from struggling banks, including bad mortgages.

Japan will reportedly offer up to $105 billion to the International Monetary Fund to help emerging nations cope with the global financial crisis. Prime Minister Taro Aso will make the proposal at the upcoming Washington summit. 

China, the world's second-largest energy user after the U.S., will ``take advantage of good timing'' to bring domestic fuel prices closer to international levels to reflect production costs, said Premier Wen Jiabao.

Wen didn't give details or a timetable on changes to the nation's fuel and natural gas prices in the statement posted on the government's Web site late yesterday. The plan forms part of seven measures to ward off a financial slump and comes a day after China announced a 4 trillion yuan ($586 billion) stimulus package to spur economic expansion.

Local newspapers have speculated the government will cut fuel prices for the first time in two years to reflect the 60 percent slump of crude prices from a record reached in July. Lower oil prices will help ease costs as the Chinese economy grew at the slowest pace since 2003 in the third quarter.

China controls fuel prices to curb their impact on inflation. The government has repeatedly said it plans to set up a mechanism to adjust domestic fuel prices in line with global levels. Benchmark crude prices in New York have fallen from a record $147.27 a barrel, as global equities tumbled on fears the financial crisis will send the world into a recession, curbing fuel demand.

The Chinese government raised fuel prices in November 2007 and again in June 2008. In June, prices were increased by as much as 25 percent.

China's consumer prices rose 4 percent in October from a year earlier, the slowest pace in 17 months, the statistics bureau said today. This may allow the government to increase gas prices, which are capped at lower than global levels.

Shanghai, China's commercial center, raised the retail price of natural gas by 19 percent yesterday, the first increase in five years, to help distributors cover costs.

India’s truck manufacturers are being forced to suspend production because of falling demand, in the clearest sign yet that the global financial crisis has begun to strike at the heart of Asia’s third-largest economy.

Tata Motors, the country’s largest producer of commercial vehicles, last week shut a key plant for three days and warned that it would suspend production at two more facilities this month. Rival Ashok Leyland is also cutting production to three days a week for the next month.

Abdul Majeed, head of India automotive practice at PwC, said the country’s heavy truck industry – the backbone of its transport system – was facing its most difficult period in more than a decade. He warned: “Finance costs are very high, infrastructure construction is slowing, manufacturing is slowing, the economy is slowing.”

Indian medium and heavy commercial vehicle sales fell sharply in October, with Ashok Leyland and Tata Motors reporting a decline of about 50 per cent for the month compared with a year earlier.

Even sales of Tata’s best-selling light commercial vehicles, favoured by small businessmen and farmers, declined by 10 per cent in October, having grown by 19.4 per cent in the third quarter.

It said: “Unavailability of finance, coupled with high interest rates, is forcing customers to postpone purchases”.

To avoid a build-up of stocks, the company confirmed that it had suspended commercial vehicle production for six days at Jamshedpur in eastern India and would suspend production for six days each at plants in Lucknow, northern India and at Pune, western India.

The collapse in sales at its most important division could not have come at a worse time for Tata, which is struggling to digest its $2.3bn acquisition of Ford’s Land Rover and Jaguar marques, and is suffering setbacks to its ultra cheap Nano car project.

The problems afflicting the commercial vehicle industry, one of India’s most important manufacturing sectors with up to 5m trucks plying its roads, is also spilling over to the financial sector. Staff at the Mumbai office of GE Capital, a subsidiary of US conglomerate General Electric, said they had not written any new loans for commercial vehicles in the past fortnight.

An executive in the 60-person strong office said: “Every month, on average, approvals of 200-215 loans in the heavy machinery and commercial vehicle segment were made, totalling nearly Rs400m ($8.4m). But, in the last 15 days, not a single business loan has been approved.”

Shriram Transport Finance, India’s largest commercial vehicle finance company, meanwhile, reported a 30 per cent dip in number of loans sanctioned in the past month.

Umesh Revankar, executive director, said: ”We have started asking customers to put more money on the block for financing options. Hence many have deferred buying trucks”.

The fall in heavy vehicle sales comes as India is struggling to maintain its high economic growth of recent years, in which gross domestic product has expanded at rates approaching 10 per cent.

Manmohan Singh, prime minister said last week that he would do whatever it took to sustain growth, which the central bank predicts will be between 7.5 and 8 per cent this year – but which private sector forecasts put at 7 per cent or lower.

Additional reporting by Varun Sood in Mumbai