ODAC Newsletter - 21 November 2008
Welcome to the ODAC Newsletter, a weekly roundup from the Oil Depletion Analysis Centre, the UK registered charity dedicated to raising awareness of peak oil.
Oil prices this week continued to plummet and on Thursday reached a new low for 2008 of less than $50/barrel. As producer nations feel the impact of the price collapse, OPEC officially upgraded its 29th of November meeting of Arab Nations to a full meeting of all members. There is little consensus so far on whether OPEC will agree further production cuts.
Even if OPEC fails to cut back, oil companies around the world are already doing so, creating the conditions for another oil price spike when the economy recovers. Russian Energy Minister Sergei Shmatko said this week that Russian companies may make production cuts in the face of the changing economics. The minister went on to say that "The situation today is that many countries are on the brink of production profitability."
As commentators and analysts continued to assess the International Energy Agency’s World Energy Review 2008, debate arose this week due to the intervention of Robert Hirsch. In a memo to other peak oil activists he cautioned against challenging the IEA report loudly at a time when leaders and voters are struggling with the economic crisis. But for the recovery to be anything other than a brief respite, we will need a realistic approach to the future oil supply. So keeping mum may not be the most responsible strategy.
The continuing credit crunch is having an impact on investment decisions across the energy sector in ways that will affect future supplies. Policymakers and citizens must confront the fact that there will be no return to business as usual.
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US crude fell $3.63 to $49.99 a barrel while the price of London Brent declined to $48.45 — its lowest level since May 2005 and 67 per cent below the all-time record of $147.27 a barrel reached in July.
Last month, Opec, the cartel of oil producing nations responsible for 40 per cent of global output, cut supplies by 1.5 million barrels a day to support the price of crude.
However, prices have continued to fall and while Opec is unlikely to reduce supplies when it meets at the end of this month, it is likely output will be reduced when the cartel convenes in Algeria in December.
Yesterday, Deutsche Bank predicted that the oil price could fall as low as $40 a barrel in 2009.
The further slide in the oil price today reinforced signs of waning demand for fuel as the economic downturn intensifies. Oil companies are planning to store millions of barrels until demand returns.
Shipping brokers told Reuters that Shell and Koch, the American oil trader, had reserved a number of supertankers, each with a 10 million barrel capacity — more than the daily output of Saudi Arabia, the world's leading producer — to store crude.
Since prices have fallen, Britain's largest supermarkets have passed on the falling cost of petrol to its customers. However, households are yet to benefit from lower energy bills, despite calls from Alistair Darling, the Chancellor, to pass on lower costs.
Last month, Shell reported profits up 71 per cent rise in profits to $10.9 billion (£7.3 billion) following a 148 per cent increase reported by its rival, BP.
The oil producers' cartel is expected to consider futher cuts to production in an attempt to put a floor under recent price falls.
Last month, Opec announced a cut of 1.5 million barrels per day in production but the move has so far failed to stimulate a recovery in prices.
Oil prices fell again this morning with US crude for December losing just over a $ to $57.21 a barrel, despite closing $2.08 higher on Thursday. London Brent crude for January, also lost $1.3 to $54.94.
The price of oil has dropped almost two-thirds in value since its July peak of $147.27, and on Thursday touched $54.67, its lowest since January 30 2007.
Oil project investment worldwide could also be hampered by continuing low prices, the head of the International Energy Agency has said, creating serious concerns about whether there will remain sufficient supplies when the global economy reverses its current slowdown.
Nobuo Tanaka, head of the IEA, told an energy industry symposium in Tokyo: "There are concerns that as [oil] prices fall, national oil companies and oil majors may backtrack high-cost and difficult projects.”
“The global economy may ultimately recover in a few years and push up oil demand. If supplies do not catch up with that, there may be serious consequences,” Mr Tanaka said.
Russian oil companies could cut output if crude prices stay at current levels, Russia's energy minister has said.
But it would be up to them, not to the government, to make the decision, Sergei Shmatko said about a possibility of Russia joining Opec production cuts.
He said that the supply level was not the only key factor that influences the market's mood.
Oil should cost no less than $60 to suit both producers and consumers, Mr Shmatko said.
Russia, which is not a member of the Opec oil cartel, is one of the world's leading oil exporters.
Some major oil companies in the country are controlled by the government.
Russia's Ural crude oil costs less than $50 per barrel, while the Russian budget assumption for this year is $75 a barrel and for $95 a barrel in 2009.
"Almost all Opec members... probably with the exception of Saudi Arabia, are seriously unhappy about the current oil price levels," Mr Shmatko said.
"The situation today is that many countries are on the brink of production profitability."
Opec, which controls 40% of the world's oil supply, agreed on a 1.5 million barrel-a-day reduction last month.
Now analysts are guessing whether the cartel will cut output again at its meeting later this month.
On Monday Opec's president downplayed the chance of a November output cut.
Russia has been criticised by some analysts for increasing output for several years while Opec was cutting production to support oil prices.
But Moscow has so far resisted calls to join the cartel's cuts.
"A cut is a serious issue," Mr Shmatko said.
"Our strategy consists of checking our investment programmes together with other producers and show the market that a substantial drop in production is possible if there are no fair prices."
Should the deans of the peak-oil movement give the world a break and shelve their dire warnings of impending supply shortages?
So urges Robert Hirsch, one of the true eminences of the peakist crowd. Hirsch penned a seminal 2005 report for the Energy Department called “Peaking of World Oil Production” that warned of stark consequences as world oil supplies tighten, slamming the world economy. He has since lectured widely on the topic.
But with the world economy now under seige for quite different reasons, Hirsch is urging his cohorts to tone down their bleakness for a while so as not to worsen the damage.
In a memo “To The Peak Oil Community,” Hirsch recommends that the group “minimize its effort to awaken the world to the near-term dangers of world oil supply.”
His rationale is itself plenty grim. “If the realization of peak oil along with its disastrous financial implications was added to the existing mix of troubles, the added trauma could be unthinkable,” he wrote to his colleagues.
Hirsch sent his memo to a Who’s Who of the peak movement, including retired petroleum geologist Colin Campbell; investment banker Matt Simmons; Swedish peak-oil scholar Kjell Aleklett; and Steve Andrews, director of the U.S. Association for the Study of Peak Oil.
But his appeal, sent Thursday, doesn’t seem to be winning much support.
“This is a very risky time to go silent on a problem far deeper and less fixable than the financial mess,” said Simmons, author of the 2005 peakist bible “Twilight in the Desert,” which cast doubt on Saudi Arabia’s abilities to pump evermore oil. “The current price of oil is as lethal to supply as $10-a-barrel oil was a decade ago when we were all petrified about the permanence of the Asian flu that had killed any growth in oil demand.”
For others, the approach of a new administration is another reason to keep banging the drum. “We are too close to peak oil and its impacts to be able to afford making more wrong turns (e.g., ethanol from corn) in energy policy,” said Andrews.
But Hirsch argues that there may be some honor in silence. “In the near term,” he said in his memo, “keeping relatively quiet is likely the better part of valor.”
Here’s the memo in full:
TO THE PEAK OIL COMMUNITY:
The world is in the midst of the most severe financial crisis in most of our lifetimes. The economic damage that has already been wrought is considerable, and we have yet to see the bottom or the turnaround. Against this background, I suggest that the peak oil community minimize its efforts to awaken the world to the near-term dangers of world oil supply. The motivation is simple: By minimizing our efforts in the near term, we may not add fuel to the economic fires that are already burning so fiercely.
We are all aware of how disoriented governments and business are right now. Our leaders, leaders-to-be, and best minds are disoriented and seeking pathways out of the current morass. The public is in a quiet panic mode — those who were reasonably well off are less well of, and their options for action are limited. Those that have lost their jobs and/or homes are desperate. Businesses and the markets are in what might be called a free fall. If the realization of peak oil along with its disastrous financial implications was added to the existing mix of troubles, the added trauma could be unthinkable.
Like many of you, I’ve devoted my recent efforts to trying to wake the public and governments to the impending horrors of peak oil. As much as that awaking is urgently needed, continuing to press forward now is almost certainly not in the broader interest.
Many may be tempted to directly challenge the recent IEA World Energy Outlook. I am among those who were very disappointed. Pressing those concerns at this time might further the peak oil “cause,” but it could well do much more damage than any of us really intend.
Please keep up your studies and thinking, because helping the world realize the dangers of peak oil is an absolute must. In the near term, keeping relatively quiet is likely the better part of valor.
Euronav NV and TMT Co. Ltd., owners of ships designed to haul Middle East crude to Europe and the U.S., joined Frontline Ltd., the largest operator, in saying they are reviewing whether to divert carriers around South Africa. Bergen, Norway-based Odfjell SE, the world's largest owner of chemical transporters, already said it won't sail past Somalia while BW Gas Ltd., the biggest liquefied-gas shipper, may do the same.
``We've always told our captains to stay far from the coast in that region, but that may not be enough now,'' Euronav's Chief Financial Officer Hugo De Stoop said by phone from Antwerp, Belgium, yesterday. ``Terrorists or pirates, I don't really see the difference.''
Frontline, Euronav and TMT together control 90 supertankers, enough to carry more than two days of global demand, according to Athens-based Optima Shipbrokers. A decision to avoid the Suez Canal, Egypt's third-biggest foreign-currency earner, would delay oil deliveries and reduce the supply of available vessels.
TMT Chief Executive Officer Nobu Su, in an e-mail to Bloomberg yesterday, ``urged'' other owners to take the same action to secure trade routes. Jens Martin Jensen, interim chief executive officer of Hamilton, Bermuda-based Frontline's management unit, said Nov. 18 he may also divert ships.
Somali pirates on Nov. 15 seized their largest ever prize, a Saudi Arabian supertanker laden with 2 million barrels of crude, worth about $108 million at current prices. The ship itself is worth about $148 million.
The Sirius Star is now anchored in Somalia's northern Eyl coastal region with the hijackers negotiating a ransom payment with Vela International Marine Ltd., a Saudi Arabian state- backed oil-tanker company.
There have been at least 88 attacks against ships in the area since January and Somalian pirates are holding 250 crew hostage on board 14 merchant vessels.
Shippers sailing to the U.S. and Europe from the Middle East would instead have to take vessels around South Africa's Cape of Good Hope rather than the Suez Canal. The waterway links the Mediterranean and Red Seas.
Customers have been given ``the option to safeguard their cargo,'' BW Gas Chief Executive Officer Jan Hakon Pettersen said from Oslo yesterday. ``For us, we would prefer them to use the cape route.''
The Joint Hull Committee, representing ship insurers, is advising shipowners to ``seriously consider'' avoiding Somalian waters, Chairman Simon Stonehouse said Nov. 18.
Insurance premiums will rise and unless the Egyptian government becomes ``more actively interested'' in combating piracy in the region they risk damaging the business of the Suez Canal, Stonehouse said.
``If they stop shipping through the Suez, going round Africa instead, that's going to reduce supply,'' said Glenn Lodden, an analyst at DnB NOR Markets in Oslo. ``There's a clear incentive for owners to go around Africa.''
Other shipowners are likely to follow should Frontline, Euronav and TMT choose to divert vessels and after the Joint Hull Committee urged companies to do so, Lodden said.
AP Moller-Maersk A/S, Europe's biggest shipowner, may announce as soon as today that it will avoid Suez, Lloyd's List said yesterday, citing an unidentified spokesman.
Tanker owners may elect to charge more for sailing through Somalia's waters rather than re-routing, Per Mansson, managing director of shipbroker Nor Ocean Stockholm AB, said in an e- mailed note yesterday.
``Maybe one or two will avoid, but most will go there against a premium to start with,'' Mansson said. Still, ``one more hijacking of a tanker and the situation is in a different light.''
Derivatives contracts indicating the December cost of shipping Saudi Arabian crude to Japan, the industry benchmark, advanced 6 percent to 71 Worldscale points, Justin King, a broker of the contracts at Tradition Financial Services in London, said in an e-mailed note yesterday.
Worldscale points are a percentage of a nominal rate, or flat rate, for more than 320,000 specific routes. Flat rates for every voyage, quoted in U.S. dollars a ton, are revised annually by the Worldscale Association in London to reflect changing fuel costs, port tariffs and exchange rates.
The fact owners say they are considering rerouting is buoying demand for the contracts, said Ben Goggin, a broker at SSY Futures Ltd., a unit of the world's second-biggest shipbroker.
The European Union last month joined the North Atlantic Treaty Organization, India, Malaysia and Russia in deploying vessels to combat piracy.
Ernst & Young's Oil & Gas Eye Index, which monitors all Aim-listed companies in the sector, showed a 44 per cent fall in the three months to the end of September, the worst since the index was created in 2004.
Alec Carstairs, oil and gas partner at E&Y, said firms had been hit regardless of their size: "In just three months, all the gains made since mid-2004 had been wiped out in a steep downward trend, which has continued into the fourth quarter of 2008."
Many oil and gas firms on Aim are almost entirely exploration plays, with no revenue or cash flow of their own, meaning the ability to raise cash is essential. Carstairs said the current difficulties meant many might now be under threat. "The situation for many oil and gas juniors is nearing critical," he warned.
"The doors to equity and capital are fast closing and the importance of cash cannot be underestimated. A number of companies are already beginning to warn of uncertainty as to their ability to continue as a going concern."
Scotland is home to a number of Aim-listed companies in the sector, most of which have been punished in recent months. Kevin Hart, the chief executive of Edinburgh-based explorer Bow-Leven, hinted recently that its market valuation was making it difficult to secure a deal to develop part of its Cameroon assets.
"It's very difficult to sell something for ten that the market values at one," he told The Scotsman this month, as BowLeven announced it was seeking permission to raise hundreds of millions of pounds.
BowLeven, which focuses on exploration in West Africa, has seen three-quarters of its market valuation wiped out since a recent peak this year on concerns it may be forced into a fire-sale of its assets or become prey to an opportunistic acquirer.
E&Y said the fall in share prices had been exacerbated by institutions reportedly liquidating their positions. "This retreat by some institutional investors from the sector represents the loss of a key source of funding for Aim's early-stage explorers."
Jon Clark, a director in E&Y's oil and gas team, said the market difficulties were likely to hasten consolidation in the sector.
The department proposed rules for the oil shale program in July, but until recently shale development has been banned by lawmakers for environmental reasons. Democratic lawmakers allowed the prohibition to expire at the end of September, however, as they faced an intense showdown with Republicans over increasing domestic energy production.
"In the short run, the U.S. economy will continue to rely on oil and that means we need to increase supply, particularly here at home," Assistant Secretary of Land and Minerals Management Stephen Allred told reporters.
Allred said U.S. oil shale resources could meet current U.S. oil needs for 110 years and help supplant foreign fuel imports.
Oil shale is a fine-grained sedimentary rock containing organic matter from which oil may be produced. The United States holds more than half the world's oil shale resources, with the largest known deposits located in a 16,000-square mile (10.2 million acres/4.1 million hectares) area in the Green River formation in Colorado, Utah, and Wyoming.
Although the rules have been finalized, it would likely be five to 10 years before the department begins any lease sales, because the department would have to ensure that there was enough demand for oil shale development and also prepare a National Environmental Policy Act report for any proposed leases.
Commercial oil shale production is still several years away as it is not technologically viable.
Allred said it was important to establish these rules even though no commercial oil shale development currently exists.
"The companies involved here are going to spend hundreds of millions of dollars, they need ... a set rules of the road by which they can judge whether those activities are properly taking place," he said.
The rules outlined by the department include establishing the maximum size of oil shale leases, setting timetables to ensure diligent development of leases and setting the royalty rates lease holders will pay.
Environmentalists have opposed oil shale production because it consumes large amounts of water and power, both of which are scarce in the West. Shale rock is heated with steam to extract the oil.
"Cooking rocks and scorching earth is not a solution to our energy crisis," Amy Mall, senior policy analyst for the Natural Resources Defense Council, said in a statement. "This is just another government giveaway to Big Oil, which doesn't make sense when we have better, cleaner energy sources available now."
It is possible Democrats, who have picked up seats in Congress, would attempt to restore the ban on oil shale production when Congress reconvenes. It's not clear that Democratic President-Elect Barack Obama would support such a move.
During the campaign Obama said he supported expanding offshore drilling as a part of a larger energy package.
Recently an aide to Obama said he would likely reverse an executive order by President George W. Bush that allowed drilling in fragile lands in Utah.
Editing by Marguerita Choy
A declaration signed by the European Commission, the US and 15 countries at an energy summit in Baku, the Azerbaijan capital, on Friday, called for deeper co-operation in Caspian oil and gas transport projects to improve international energy security.
“We consider it is important to continue policies aimed at diversifying oil and gas supply routes from the Caspian basin to European and world markets,” the declaration said. It emphasised the importance of the stalled Nabucco pipeline to bring Central Asian and Azerbaijani gas to Europe and of a pipeline linking Turkey, Greece and Italy with the Caspian.
Pipelines and railways carrying Caspian oil and gas across the Caucasus to the west were halted briefly during the war between Russia and Georgia last August, exposing the vulnerability of energy infrastructure in the region.
Mikheil Saakashvili, the Georgian president, warned that Russia’s goal was to establish control over Caspian energy infrastructure and resources. But Samuel Bodman, the US energy secretary, said the war in Georgia had “shown the importance of energy resources diversification.”
Kazakhstan, the Caspian country with the biggest oil and gas reserves, attended the summit, but did not sign the declaration, possibly out of deference to Russia, its main transport route to energy markets.
However, Kazakhstan signed an agreement to form a joint company with Azerbaijan to ship Kazakh oil across the Caspian to enter the Baku-Tbilisi-Ceyhan pipeline to the Turkish Mediterranean.
Sauat Mynbaev, the Kazakh energy minister, said Kazakhstan “held great hopes” for the $3bn trans-Caspian export project that will transport 1.2m barrels a day of Kazakh oil to western markets.
"Net imports of fossil fuels are expected to stay at roughly today's levels in 2020 even when EU's climate and energy policies are fully implemented," the Commission says in a new 'action plan' on energy security and solidarity, released yesterday (13 November) in Brussels.
The action plan, which is the 'chapeau' document for a massive package of over 45 related communications, contains a myriad of measures, data and recommendations distilled into a five-point plan that charts the policy priorities for the next Commission, due to take office in September 2009.
Energy infrastructure, notably gas pipelines, and external energy relations top the list. The Nabucco and Baltic Sea pipelines are listed as priority in the review, along with four other projects.
Energy Commissioner Andris Piebalgs recently toured the Caspian region in an effort to secure a commitment to gas provision from Azerbaijan for Nabucco (EurActiv 04/11/08). Moscow, which has existing and extensive energy relations with Baku, is competing with the EU for privileged access to Azeri gas.
Concrete actions to address oil supply security are not listed in the review, however. This is due to the liquid nature of oil market, says the text. In contrast, "gas supply depends mainly on fixed pipeline infrastructure," it adds.
Oil supply constraints are also being addressed with EU rules for vehicle CO2 emissions and green transport legislation, Pieblalgs told journalists during the presentation of the review. EU Commission President José Manuel Barroso added that the Commission was "seriously considering" inserting special incentives for clean vehicle development as part of a planned €40 billion package to assist Europe's automotive industry (EurActiv 30/10/08).
But the review's central focus on gas rather than oil has angered some green MEPs (see positions). The text may also raise eyebrows at Russia's state-owned gas monopoly Gazprom, which has made efforts to assuage EU concerns about disruptions in gas supply on the grounds that a vibrant European energy market is a strategic interest for Russia.
In addition to calling on member states to convey a 'single message' in external energy relations, Barroso, who travels to Nice today (14 November) for an EU-Russia summit, downplayed conerns that the document could irk Moscow. "This is not a package targeted at Russia," he said, insisting that the EU was in a state of "positive inter-dependence" with the country. EU consumers should nonetheless be aware of the risk that "external supplier countries cannot honour their commitments," he said.
New rules on emergency oil and gas stocks are contained under point three of the action plan, followed by revisions of existing EU energy efficiency laws on appliances, tyres and buildings. "Making better use of the EU's indigenous energy resources" is the final point of the action plan, which lists renewable energy as the "greatest potential source of indigenous energy". A Communication on the development of a North Sea offshore wind energy grid features among the six priority infrastructure projects.
Coal is listed as an "essential component" of the EU's domestic energy supply, followed by nuclear, which "contributes to the EU's security of energy supply as a major source of baseload electricity".
Going green, later
"Deep structural change such as carbon-free electricity generation, or a radical technological shift such as breaking transport's dependence on oil will take considerably more time," according to the action plan, which includes a 'vision for 2050' characterised by a carbon-free energy production, the end of oil dependence in transport, low energy buildings and 'smart' interconnected electricity grids.
However, it has been left to the next Commission to sort out the details on how this structural shift will be realised. In 2010, the EU executive is expected to propose a renewed EU energy policy vision.
20 equals 12?
The action plan has created some confusion about the likely savings the EU will make by 2020 through energy efficiency improvements.
In its energy and climate package, the Commission points to 20% greater energy efficiency by 2020. Brussels admits that while this target, unlike the 20% targets for CO2 reduction and renewable energy uptake, is non-binding, it will be achieved in any case since member states will need to make considerable energy efficiency improvements as part of their CO2 reduction efforts. But the figures contained in Annex 1 of the Second Strategic Energy Review point to only a 12% reduction in final energy demand by 2020.
Piebalgs explained the discrepancy on the grounds that energy efficiency and energy demand reduction figures carry a different weight. "A 20% target means not allowing [energy consumption] to grow plus coming down. That's why 20% less would mean actually energy efficiency by somewhere [around] 30%. So if we had a target of 30% energy efficiency, it would correspond in 2020 to 20% less energy consumption," he said.
The Liberals in the Parliament were "impressed" by the package and called it "the basis for a credible and effective piece of legislation". But individual ALDE MEPs like France's Anne Laperrouze called for more efforts in the area of research, while the UK's Fiona Hall was "concerned that [the energy demand projections] are inconsistent with the Commission's support elsewhere for energy efficiency".
Luxembourg Green MEP Claude Turmes, along with German Green MEP Rebecca Harms, have been among the most vocal critics of the action plan. Turmes, who called the plan a "manipulation of politicians, media and the broader public," argued that the Commission was "overstretching" the EU's gas supply concerns while ignoring the bloc's near total dependence on oil for the transport sector.
Green groups also gave the action plan a cold reception. The WWF called it a "Christmas tree of measures" and pointed to "major contradictions between suggested policies". Greenpeace accused the Commission of being "unable to send a clear message on energy security by once again downgrading the importance of energy efficiency and providing a lifeline to coal and nuclear energy".
The two sides had signed a deal last year on joint gas production and export of Iranian gas via Turkey to Europe.
But since then they have been working to finalise the deal, such as hammering out investment terms. The report on the Iranian oil ministry's web site SHANA about Monday's MoU gave few details.
Turkish Energy Minister Hilmi Guler has been in Iran to discuss expanding energy cooperation, a move that has drawn criticism from the United States which is seeking to isolate the Islamic Republic over its nuclear plans.
"This (MoU) is about the development of phases 23 and 24 of South Pars gas field with joint investment of Iran and Turkey and 50 percent of gas produced from these fields will be sold to Turkey," Oil Minister Gholamhossein Nozari said, SHANA reported.
Nozari said a second part of the deal covered tranferring gas to Turkey from Iran, and a third element covered transfering 35 billion cubic metres of gas a year on to Europe.
Under the deal signed last year, Turkey was to produce 20.4 billion cubic metres of gas from South Pars.
Turkish Energy Ministry sources told Reuters last month that the neighbours had resolved problems on planned investment in South Pars and that they might sign a deal in November.
Ankara imports about 10 billion cubic metres (bcm) a year of gas from Iran, about 30 percent of its natural gas needs. An Iranian deputy oil minister, Akbar Torkan, said Turkey had asked Iran for more gas but did not give details.
Iran sits on the world's second biggest gas reserves but last winter it cut exports to Turkey in an unusually cold snap when Tehran struggled to meet domestic demand. Iranian officials have since said they have taken measures to prevent a shortfall.
"We have had positive negotiations with Iranian officials and they have promised us there will not be any problem with respect to gas supply to Turkey this winter, and we have no worries," Guler was earlier quoted by SHANA as saying.
Guler was speaking from Assalouyeh, the heartland of Iran's gas industry on the Gulf.
Iran and Turkey are also discussing plans for joint venture electricity generation.
Iranian state radio quoted Iranian Energy Minister Parviz Fattah as saying the two reached agreement about power plants with 6,000 MW capacity.
"We agreed that part of these power stations would be constructed on Iranian territory and a part on the Turkish territory near the Iranian border," Fattah said after talks with Guler, adding Iran would supply gas or gas oil for the plants.
He also said there were plans for hydroelectric power generation in Iran. After previous discussions, officials said the hydroelectric plant would have capacity of 10,000 MW.
Additional reporting by Hashem Kalantari and Hossein Jaseb; writing by Edmund Blair
There has been no significant decline in gas demand yet, industry officials and analysts say, but expect it to drop in coming months as the economic downturn and higher retail gas and power prices encourage consumers and industry to save energy.
"As consumer demand for goods turn down, we will see a lower level of gas demand ... We may see further reduction in terms of prices," said James Hanks from John Hall Associates, adding he had started to see evidence of big gas consumers looking to buy less fuel this winter.
"That may have to do more with prices," he said.
British gas prices for the first quarter of 2009 have dropped by about 40 percent since July to around 65 pence per therm, but are still 30 percent higher than where Q1 2008 was traded a year ago.
This compares with a fall in oil prices of more than 60 percent from a record above $147 in July to $55 a barrel now.
"It hasn't really followed oil down as you would expect," said Eddie Proffitt, gas group chairman from Major Energy Users Council Ltd.
"I would expect when recession starts to bite worldwide, there might be less demand for products like LNG and that will allow more to come to this country and therefore depress prices."
So far this winter two LNG cargoes have come to Britain, despite earlier expectations that none might arrive because Asian consumers were willing to pay more.
Asian demand has fallen markedly in the last few weeks, making more cargoes available to European buyers.
COAL, NEW PLANTS
The recession has already started to erode power demand, with Britain's grid operator National Grid on Thursday reducing its forecast for Britain's peak electricity demand this winter because of a drop in industrial use.
Of Britain's 2007 gas consumption of 39.5 billion therms, or 1,000 terawatt hours, industrial and commercial users such as ceramics and chemical sectors, accounted for about 35 percent.
The power sector accounted for 25 percent and householders used the remaining 40 percent for heating and cooking.
"The primary issue for gas demand going forward, (is that) most of the demand growth is anticipated from power generation sector," said another private analyst, who declined to be named.
"Obviously in the event of economic slowdown, there will be less demand for energy and therefore less demand for new power stations to be built ... From that standpoint, there's a question of how low demand from power stations can actually go."
In addition to a downturn in demand for electricity, analysts said the sharp drop in coal prices and carbon emissions was encouraging power generators to burn more coal than gas, which is also eating into gas demand.
"With the big fall in coal prices, we are going to see a shift towards coal generation this winter in the UK away from gas, which means less use of gas," said Fabien Roques from Cambridge Energy Research Associates (CERA).
"As a result, demand for gas could be significantly lower. And of course, it could have a big impact on prices," Roques, CERA's associate director for European Gas and Power said.
Data compiled by Reuters showed gas promised larger profits for prompt contracts, coal offered more profits for forward contracts, including December.
For December baseload electricity, for example, profits from gas was about 20 pounds ($29.62) per megawatt hour, compared with coal at 30 pounds, even after generators pay for the permits to produce more carbon dioxide they need to burn coal. For peakload the gap is smaller at about 10 pounds.
Gas demand from Britain's power sector will rise in the longer term, analysts and industry officials said, as many of the country's coal and nuclear plants are replaced by gas-fired power stations over the next decade.
Gas-fired plants require less capital investment and are quicker to build than nuclear, while the future of coal-fired generation in Europe is uncertain because of increasingly strict controls over carbon dioxide emissions and pollution.
Editing by Daniel Fineren
The fears are outlined in an internal advice note drawn up by City law firm Berwin Leighton Paisner for the Department of Business, Enterprise and Regulatory Reform (BERR), looking at consultation on construction plans and how wider policy changes may affect the programme.
"The government aims to get national policy to parliament as quickly as possible, but it will face further legal challenges which are capable of knocking back the programme by a year or more, if it continues to give the impression that the [outcome of the nuclear consultation] process is a foregone conclusion," it argues.
The lawyers highlight at least nine potential problems after the successful Greenpeace challenge to "flawed" market research conducted for the BERR. The Market Research Standards Board agreed with Greenpeace that consultation for the 2008 energy white paper had not been conducted in an even-handed way.
Ian Trehearne and Tim Pugh, from the planning and environment practice of Berwin Leighton Paisner, say the first risk of legal challenge will come with the "justification process" of the planning bill, which is scheduled to pass into law before the end of the year.
This could be followed by trouble early next year from the introduction of the strategic environment assessment (SEA) and strategic site assessment (SSA) of new power stations.
There could be court action "if the SEA and SSA processes become separated and inconsistent with European law as embodied in national law", the advice note says. Care must be taken over the nomination of relevant sites for the construction of nuclear stations, the lawyers argue.
"There seems no doubt that if the system is to be capable of working properly without causing major disturbances and political dissatisfaction, the formulation of national policy in national policy statements will have to be precise about locations and sites. If not, the process risks being bedevilled by arguments about the potential of better sites.
"The consultations being undertaken by BERR in relation to nuclear sites at present seek to reduce the risk in this connection. The way has been prepared carefully, but it remains to be seen whether the new system will be able to deliver in a sensitive and transparent way which is satisfactory without delay from the courts or electoral upset."
The potential legal pitfalls facing ministers are highlighted as the government tries to encourage the private sector to invest in a new generation of nuclear stations as the country's ageing fleet of reactors gradually comes off line.
A new generation of nuclear plants is seen as crucial in meeting a future energy gap as well as providing low-carbon electricity to alleviate climate change.
EDF, the French power group, has already promised to forge ahead with new stations, the first of which it hopes to have operating by 2017. Many experts question whether that schedule is realistic, and there is a risk of shortages as old power stations are decommissioned.
The government is confident it can avoid any energy crunch but the note from Berwin Leighton Paisner makes clear this is far from guaranteed. Ann Harrison, a partner with commercial law firm Beachcroft and chair of a national planning group at the Environmental Law Association, said the advice note showed that ministers were likely to face legal obstacles every step of the way. "They are going to have to be spot on in everything they do to minimise the risk of challenge," she said.
The government's attempt to fast-track planning applications through its new bill could have the opposite effect. "The new system is more complicated and could just invite further challenges, slowing everything up", Harrison said.
But this is confection. Until 2004, BP was called British Petroleum. And in the real world of business, the giant energy company continues to plunder most of its profits from - and sink the great bulk of its investment into - barrels of oil. Who is it kidding?
Well us, it hopes. You may have seen another of its posters. "There's energy security in energy diversity," it says. "BP provides oil, natural gas, wind, biofuels, solar and options." Or, reading its recent print adverts, you may have puzzled at what it means by the headline "Hydrocarbons and low carbons living in harmony."
Let's get real. BP likes to say that it is investing $1.5bn (£980,000) a year in "alternative energy". True, I am sure. But that word "alternative" is clever. Delve a little further and it turns out that BP's alternative energy division includes not just wind and solar and biofuels but also natural gas-fired power stations. Natural gas may be less polluting than coal and oil, but at the end of the day it's a fossil fuel filling the atmosphere with CO2. Alternative? Not by my definition.
Also sheltering in the alternative energy division is BP's "emissions assets business", which makes money out of carbon trading, and a venture capital unit. But even if we lump all this "alternative" activity together, it still only makes up 7% of the company's planned $21bn (£13.85bn) investment this year. The remaining 93% is oil, spiced up with some coal.
Now if BP were new kids on the alternative scene, we might regard 7% as good progress. But the sad thing is that BP was making waves in renewables a decade and more ago. Back then, it was a pioneer among oil companies. In 1997, the year the Kyoto protocol was agreed, environmentalists applauded the green initiatives of then-chief executive Sir John Browne. For a while they looked like deeds rather than just words. Soon, Sir John was Lord Browne. But some of BP's investors got cold feet. Browne was ousted and the oilmen returned to centre stage.
Take one example of the difference this has made. Back in 1999, Browne pulled BP out of its involvement with developing Canadian tar sands – an energy-intensive process with a carbon footprint several times that of conventional oil. Last year, BP bought its way back into Canadian tar sands.
The current bout of BP greenwash is especially questionable for its British customers and shareholders. Earlier this month, BP pulled out of wind power in Britain. And, after years justifying its continued involvement in coal by extolling the potential for capturing and burying carbon dioxide emissions from coal-fired powers, it withdrew from a British government competition to come up with a viable technology.
Yes, BP is continuing with a clean-coal project in Australia; and yes, it is investing in wind power in the US, in anticipation of a renewables push from president-elect, Barack Obama. But this niche activity is small fry for a company that just announced profits for just three months of $10bn (£6.59bn). BP claimed that those profits paid for investment in alternative forms of energy. Maybe. But those 13 weeks' profits also exceeded its anticipated investment in renewables for the next six years.
Is this a company that has stopped putting most of its investment "in one barrel"? Is this a company seriously trying to create a world "beyond petroleum"? Sadly it is not. Worst of all, it is a company that appears to be retreating from deeds to words.
Now, however, comes an abrupt reversal in fortunes. From Britain to Australia, developers are facing fierce headwinds as the credit crunch bites and plunging oil prices undermine the economic rationale of more costly renewable energy schemes. In May, Shell provoked uproar when it withdrew from the world's largest offshore windfarm - the London Array in the Thames Estuary - after the costs allegedly had risen from £1 billion in 2003 to £3 billion. Last month, BP followed suit, blaming the spiralling cost of labour and materials on its decision to exit the UK renewables industry. Across the Atlantic, FPL Group, America's largest wind-power operator, is cutting its spending next year by nearly a quarter to $5.3 billion and new wind-power generation to 1,100 megawatts, from 1,500.
Industry executives complain of tough conditions, with bottlenecks in the supply of key equipment such as wind turbine blades forcing up costs. Project finance is also tougher to find and more expensive than it was a year ago, with bankers less willing to lend because of falling oil prices and the turmoil in debt markets.
Yet this is only a delay in the advance of sustainable energy. Global warming is not an issue that is going away and thus the rationale for wind power, solar energy and others will survive its present squeeze. Indeed, this may be the time in which braver players invest, ready for the time that the financial climate changes again.
Eco-development Chudleigh Mill, situated near the river Yeo in Somerset, is promising homeowners free electricity for 10 years, thanks to a hi-tech hydroelectric generator that uses river water to produce power. The generator will cover at least 95 per cent of electricity costs, so even if residents do receive a bill, it will most likely be minuscule.
Geoff Grant of TST Properties, the developer behind Chudleigh Mill, says: 'We wanted to create properties that had lower running costs. People are concerned about rising prices - you just don't know how high bills will be in the next few years and the prospect of using renewable energy like this is appealing.'
According to Grant, the generator will provide 20 kilowatts of power every hour to the development. (A standard house generally uses one kilowatt an hour.) In addition, there is a rainwater recycling tank and the properties have been built using sustainable eco-materials, while the original mill buildings are also being restored and converted into flats.
'We're highly thermal-efficient,' says Grant. 'The heating in the show flat has only had to come on twice in the year, because it retains heat so well otherwise.'
The 10 two-bedroom flats (two of which will be within the restored original mill buildings) at Chudleigh Mill are scheduled for completion early next year and start from £175,000. The apartments all overlook the water and some have over-water verandas.
After 10 years of free electricity, homeowners will have to pay a small nominal fee to the developers to help cover the running costs of the generator. All the properties will still be connected to the national grid, so if there ever is a problem with the generator, they will still have electricity.
Meanwhile, in Nottingham, the River Crescent project is relying on wind turbines to help keep energy costs down. Five wind turbines generate electricity for the common areas of the development, which at present houses 146 apartments.
According to John Rhodes, development director of Trent Park Developments, the company behind River Crescent, use of the wind turbines brings service charge costs down. The turbines are also used to drive heat exchangers to warm up the residents' swimming pool.
Rhodes says: 'The turbines are a real talking point. There's definitely a green element to the development - we're providing free bicycles and a fleet of electric cars for residents to use for a small fee - but equally, people are more interested in how energy bills will hit their pocket than global warming at the moment.'
The flats all face south, and feature solar-reflective glazing to avoid overheating in the summer and retain heat in the winter. The next phase will incorporate more wind turbines and photovoltaic solar panels to help generate even more power. One-bedroom flats at River Crescent start at £185,000, with two-beds from £295,000.
• Chudleigh Mill, 01935 432440, http://www.chudleighmill.co.uk/; River Crescent, 0115 912 3456, http://www.trentpark.co.uk/; The Tree House, http://www.treehouseclapham.org.uk/
Will Anderson has been responsible for generating his own electricity since 2006, when he moved into his self-designed carbon-zero home, The Tree House, in Clapham, south London.
The house, which took Anderson about three years to design and takes its inspiration from the 80-year-old sycamore in the front garden, generates 100 per cent of its own electricity using solar tiles that convert daylight to electricity and a heat pump that takes heat from the ground into the house for heating.
'I wanted to create something very beautiful but also very energy-efficient,' Anderson says. 'When you think about it, trees are the image of sustainability - they get all their energy from the sun and recycle it in all their nutrients. I thought, "Why can't we do the same?" and that's how it started.'
He is still connected to the national grid and plugs into it at night, since the solar tiles can't generate electricity in the dark. Even so, he still has no bills, since the electricity he buys from his energy supplier at night is offset by the unused electricity he produces during the day (it is sold back to his energy supplier for the same price).
The photovoltaic solar roof tiles cost £30,000 from SolarCentury, but Anderson says the fact that he has no energy bills far outweighs the initial purchase cost: 'I'm saving around £1,500 a year by self-generating. I'm coming out on top because I'm purely running on solar electricity.'
For Anderson, it's important not only to have built an eco-friendly home but also to live in it in an environmentally friendly way - he recycles and has an allotment nearby, while the rest of the timber-clad Tree House is made predominantly from sustainable and reclaimed materials. The staircase is made from tree trunks from the forest floor in Sussex, the sinks have been salvaged from scrap heaps, most of the furniture has been bought second-hand off eBay and walls are painted with natural eco-paints.
'When you're living in a home that makes its own energy, you're very aware of everything you're using and wasting, so you're very careful about what you spend energy on,' he says. 'We've reduced our energy demand by super-insulating the house and making sure that our appliances are the most energy-efficient they could possibly be. Sometimes you have to make lifestyle changes to live in a green way.'
According to people present at the London meeting, arranged by the Baltic Exchange, there were widespread complaints about breaches of contracts both by industry customers and by some ship operators.
Industry confidence relies heavily on the assumptions parties will abide by contracts even when conditions move sharply against them. Rates to charter ships have collapsed in the last few weeks, which has led customers with contracts to charter ships at higher rates to break them and hire ships at the new, lower prices. Capesize vessels, the largest kind, which cost an average $233,988 per day to hire at the market’s peak in June, now cost just $3,691 per day.
The meeting, which was closed to the press, heard some customers had claimed to be unable to honour contracts of affreightment – agreements to give certain shipowners set levels of cargo per year – because there was nothing to ship in the current difficult economy. However, they had then chartered other shipowners’ vessels at far lower prices.
One shipowner referred to the situation as “war”, one participant said, while several participants said a shipowner had suggested the sector stage a co-ordinated 25 to 30-day strike to remind customers of their importance. That suggestion was immediately dismissed.
The crisis has been particularly acute because shipowners often charter vessels to companies that then charter them on, raising concern about possible defaults by other parties in such complex transactions.
The meeting considered the possibility of setting up a central clearing-house to clarify parties’ responsibilities in such transactions.
The crisis facing global shipping was further underlined on Wednesday when Singapore’s Neptune Orient Lines, the world’s number seven container shipping line, warned about the severity of the crisis facing the sector, saying the “severe and prolonged downturn” could last several years.
The line, which had already said it would slip into loss in the fourth quarter and has started to lay up ships, announced it would cut 1,000 jobs, or 9 per cent of its workforce, and leave its US headquarters in Oakland, California.
“The negative conditions we are seeing in the market place are unprecedented in our industry’s history,” said Ron Widdows, chief
executive. “What we are seeing goes beyond a normal cyclical downturn.”
NOL, like other container carriers, is heavily exposed to European and North American consumer demand because its main business is to ship Asian-manufactured consumer goods to the world’s most developed economies. Its warning comes only days after Denmark’s AP Møller-Maersk, owner of by far the world’s largest container line, announced an unprecedented fall in volumes on the key Asia-Europe route.
Most of NOL’s job cuts will be in North America, where the company’s cost base is highest. The most symbolic announcement is the plan to close the Oakland US headquarters and move to a cheaper location. The downtown office block was the historic headquarters of American President Lines, which NOL bought in 1997. NOL’s ships still operate under the APL brand.
The Treasury said that it had raised £54 million through the sale of four million permits for £13.60 per tonne under the next stage of the European Union's Emissions Trading Scheme (ETS). Yesterday's auction marked a departure from the policy of handing out the permits to industry for free. By 2012, in the second phase of the scheme, 85 million permits will be auctioned, possibly raising more than £1 billion for the Treasury. From 2013, this figure is expected to rise to about £2.5 billion a year, according to WSP, the environmental consultancy.
Campaigners said that the Treasury's decision to put the proceeds into its coffers rather than ringfencing them for use in environmental projects plays into the hands of critics, who fear that the ETS will be treated as little more than a green tax.
Robin Oakley, the head of Greenpeace's climate change team, said: “Investing in new low-carbon technology while making our homes and businesses more efficient is good news for our country and for the wider fight against climate change, but by hoarding revenues from the emissions trading scheme this Government is eroding trust in the concept of green taxes.”
Lisa Harker, the co-director of the Institute of Public Policy and Research, agreed that Britain should follow the lead of the Netherlands and Germany, which have pledged to spend the cash on measures such as improved energy efficiency and alternative energy projects. She said: “This is a great opportunity to help poorer households make their homes cheaper to heat and warmer, and create jobs through investment in new green technologies.”
Mike O'Brien, the Energy Minister, brushed aside any criticisms. “Today's first auction demonstrates continued UK leadership in reducing carbon emissions as part of the fight against dangerous climate change,” he said.
“The EU ETS is central to keeping the price of tackling climate change as low as possible to industry and the economy. We want more auctioning in the future and are planning to auction 100 per cent of the allowances needed by the power sector from 2013.”
The scheme puts a cap on the emissions from about 12,000 factories and power plants across the EU responsible for about half of the region's emissions. Companies receive a set quota of allowances that they can then trade, thereby creating a price for polluting.
The European rules governing the scheme allow member governments to auction up to 10 per cent of the allowances that allocated from 2008 to 2012. From 2013, the EU, which has committed to cutting its carbon emissions by 20 per cent by 2020, is expected to move towards 100 per cent auctioning of the permits, which will raise tens of billions of pounds a year for member states. Next year, the British Government plans to auction 25 million permits - a process that would raise £335 million at yesterday's prices.
Environment Minister Jane Davidson committed Wales to becoming a "one planet nation", using only its "fair share" of the world's resources.
The targets include an 80 to 90% cut in carbon-based energy and a move towards recycling or re-using all waste.
But the Conservatives said "appalling" local council funding deals would hinder efforts to achieve the goal.
A consultation document, 'One Wales: One Planet' said the aim was to achieve the targets "within the lifetime of a generation".
A spokesman clarified the timescale envisaged as being around "30 to 40 years".
Last month, the UK Government pledged to cut carbon emissions by 80% by 2050.
The assembly government report said there was a need to "organise the way we live and work so we can travel less by car, wherever possible, and can live and work in ways which have a much stronger connection with our local economies and communities".
Using more locally grown food and in season was also proposed.
Ms Davidson said ministers would use all their powers "from health, transport to education - to lessen Wales' environmental impact on the world and help protect our country for future generations."
"For the first time, we have committed ourselves to becoming a one planet nation - to only use our fair share of resources to sustain our lifestyles," she said.
"Wales' ecological footprint is currently 5.16 global hectares per person, compared to a global availability of 1.88 global hectares.
"It tells us that within our small nation we are using 2.7 planets worth of resources to sustain our lifestyles.
"Unchecked, this could rise by 20% by 2020, the equivalent of 3.3 planets worth of resources.
"We cannot go on like this," Ms Davidson added.
Earlier in November, the minister launched a "green charter" with 40 construction industry bodies to cut carbon emissions.
Friends of the Earth Cymru said a 90% reduction in use of carbon-based energy was "ambitious" but "absolutely necessary", given the scientific evidence on the seriousness of the threat from climate change.
Campaigner Haf Elgar said it was "doubtful whether this 90% target can be achieved quickly enough by the Welsh Assembly Government's current commitment to 3% annual reductions".
"We have to look seriously at the 9% cuts being considered by the (assembly) government's own Climate Change Commission," she added.
The Conservatives accused the minister of offering "hollow promises" rather than action.
Party environment spokesman Darren Millar said: "The minister has yet to fulfil her pledges on the devolution of building regulations and new powers over large energy developments, environmental protection, and waste management.
"Without these there is little prospect of delivery on today's pledges."
Consultation on the plan is due to run until 4 February.
Average UK prices dipped from 106.4p a litre in mid-October to 94.86p a litre in mid-November.
The 11.54p drop comfortably beat the previous record fall of 7.9p between mid-August and mid-September this year.
Diesel prices fell 8.86p a litre in the last month - dipping from an average of 117.68p a litre in mid-October to 108.82 in mid-November.
The AA said the big reduction in the price of petrol at the pumps had:
* Slashed the cost of a 50-litre tank refill by £5.77
* Reduced the monthly petrol cost of a two-car family by £24.73
* Pumped daily an extra £7.7 million into potential consumer spending from the reduced UK spending on petrol.
Compared with mid-July, when petrol prices peaked at 119.7p a litre, a tank of petrol now costs £12.42 less.
London is the most expensive place to buy petrol at present, with average prices at 95.8p a litre. North-west England currently has the cheapest petrol - at 94.2p a litre.
AA president Edmund King said: "Tesco set the momentum of big price falls with their 3p drop midway through October. However, Asda and Morrisons remain the cheapest supermarkets to buy petrol - on average almost a penny cheaper than their two bigger rivals.
"We have already spotted 91.9p a litre at some forecourts as competitive independents, often with their minimarts, try to undercut supermarket prices and make their money on non-fuel sales.
"However, the reality is that with the value of the pound against the dollar dropping more than 13% in the past month, some fuel stations would be charging close to 90p a litre."
During what will probably be the last few days of scrutiny before the climate change bill becomes law, the government made concessions in the House of Commons and the Lords, surprising green campaigners by tabling a further amendment to the energy bill - increasing from three megawatts to five the size of renewable projects that can benefit from its new feed-in tariffs.
The government's move to impose a limit on carbon emission reductions achieved abroad came in response to criticism from a cross-party group of peers. Theywere concerned that the UK's commitment to an 80% reduction in carbon emissions by 2020 - recently increased from 60% - would be met by purchasing international offset credits, raising the possibility of no industrial behaviour change.
In a letter to a newspaper yesterday the peers, including Labour lords Whitty and Puttnam, and both opposition spokesmen on energy and climate change Lords Taylor of Holbeach and Lord Teverson, said: "Relying sufficiently on emission reductions which take place overseas could influence long-term investment decisions here in the UK, particularly in the power sector, locking the country into high carbon economy for years to come, when the overwhelming need is to tackle climate change, develop clean technologies and benefit from the growth in green jobs."
The amendment says it will set a limit on carbon units it would be allowed to buy from abroad after "taking into account" the advice of the independent Committee on Climate Change.
The government has also fortified its plans for feed-in tariffs, which will be debated by MPs when the energy bill returns to the Commons today - a measure that will help it meet the targets in the climate change bill.
Friends of the Earth said the tariffs were not being introduced speedily enough. Labour backbencher Alan Simpson, the shadow energy secretary Greg Clark and Liberal Democrat Steve Webb have tabled an amendment calling for the government to introduce the tariffs within a year.
“You have old nuclear plants, old coal, expensive gas, a need to invest in renewables to reach unrealistic targets, and a slow [planning] process. Doesn’t that sound like a problem to you?” he said. “The situation in the energy sector in the UK is more difficult than a number of other countries in Europe, without people fully realising it.”
Coming from the cigarillo-smoking German, arguably Europe’s most powerful energy executive, it is a damning indictment. He has not been shy about sharing his views with the government. “We have seen the energy adviser at No 10,” he said. “We need a framework that enables and encourages investment.”
His assessment comes amid fresh concerns about a looming energy generation gap that some fear will mean blackouts across Britain. By 2015, nine coal and oil-fired power plants will close due to tightening EU pollution controls. Eight of the country’s nine nuclear plants will shut by 2020. All these closures will take out about a quarter of our generating capacity. Yet new stations to replace them are held up in the planning process, where the average waiting time is nearly two years.
Bernotat, a former Shell oil executive, knows this only too well. He is trying to build Britain’s first new coal-fired station in more than 30 years, a £1.5 billion plant at Kingsnorth, Kent. Environmentalists camped out there this summer in protest, and some MPs have argued against it. Nearly two years after submitting its request for planning approval, Eon is still awaiting a green light.
“The planning process takes too long,” said Bernotat. “We must be thinking about supply security, affordability and environmental concerns, and bringing those three factors together in a balanced way. It is very difficult but that is the challenge.”
After years of foot-dragging, the government is listening. Last month it created a stand-alone energy department, headed by Ed Miliband. A planning reform bill that would set up an independent commission to approve large infrastructure projects and remove local councils’ veto is expected to become law next year. The energy industry argues it is vital if it is to invest the £100 billion needed for new nuclear, coal and gas-powered stations, wind farms, and upgrades of the ageing gas and power grids.
Eon is at the centre of those plans. In addition to Kingsnorth, Bernotat wants to build one or two new nuclear plants at a cost of almost £4 billion each. He is also one of three developers of the £3 billion London Array, the world’s largest proposed offshore windfarm, in the Thames estuary.
But just as the government has accepted the urgency of Britain’s situation, the credit crunch threatens to derail its best intentions. Bernotat said last week that the company had decided to review its €63 billion (£54 billion) global spending plan . “There are a number of conventional powerplant projects for which we have made no firm commitments,” he said. “Component prices have just passed a peak and they may come down in the wake of lower steel and other commodity prices. Thus keeping such projects on hold looks the right thing to do.”
Kingsnorth, the Array and the nuclear projects all fall into that category, though he said the company remains committed to them. Soaring costs forced Eon last month to bring in Masdar, the Abu Dhabi renewable-energy investor, as a partner in the Array. Royal Dutch Shell sold out of the project this year because of its “questionable” economics.
The dearth of project financing has put all the utilities in a similar position. Pressure is growing, meanwhile, to reduce household energy bills. All the big six utilities pushed through two rounds of price rises as the oil price, to which gas and electricity prices are closely linked, rose to a record in July. It has lost 60% since then. Scottish & Southern Energy was the first company to come out last week to say it would cut prices in the new year.
Bernotat offers no such comfort, saying the UK retail business made a loss year and will perform worse this year.
He still chafes at the mention of fuel poverty. Gordon Brown strong-armed the industry this summer into funding a £1 billion package to help poor customers. “Is this really something the provider of goods and services should do something about? Is it not an issue where the state should find mechanisms and systems to address it?” he said. “Where do you stop? Milk? Bread? Petrol?”
Bernotat regards such measures as heavy-handed. Last year Eon made a profit of €12.5 billion on €69 billion in revenue from operations in 30 countries. In the grand scheme of things, Britain is small beer.
“We operate on a worldwide scale, so it is normal that we want to invest where conditions are right so that we can make a good return,” he said. We are not doing things on a national basis or as part of a government implementation scheme. Principally, you go where you can get the best possible conditions.”
With the government’s decision on Kingsnorth imminent, Eon will remain uncomfortably in the public eye in Britain. Miliband has been non-committal on the project whereas his predecessor John Hutton had thrown his support behind it. In September, the government-funded Environment Agency called for a moratorium on new coal stations until carbon capture and storage (CCS) technology is proven on an industrial scale. This is at least 10 years away.
Bernotat shrugs off the mixed signals. “Sometimes government behaviour isn’t rational,” he said. Eon has entered Kingsnorth in a government competition worth hundreds of millions of taxpayers’ money to build the first pilot CCS plant in Britain. Even if it loses the competition, Eon has pledged to build the plant - assuming it receives planning consent.
Nuclear power is no less tricky after the government agreed to sell British Energy, holder of the keys to all the country's reactors and the most desirable sites for new ones, for £12.4 billion to France’s EDF. The French have pledged to build four new reactors, and said they will sell some sites so that other companies can build more. Bernotat will believe it when he sees it.
Eon wants to build at least one, possibly two new nuclear power stations in Britain.
“The real question is whether EDF will be in a position to build all those reactors. We are talking easily more than €30 billion in one market, one fuel, all eggs in one basket. I am a bit more sceptical.”
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