A new wave of mergers is likely to sweep through the oil industry as cash-rich companies such as ExxonMobil eye up smaller rivals - possibly even Shell - after the collapse in the price of crude.

Analysts think many firms have made themselves vulnerable to takeover because they took on major new commitments when the oil price was rattling up to its summer high of $147 a barrel, compared with the current level of under $40.

Oil companies enjoyed record earnings over the last couple of years and have in some cases been spending billions of pounds rewarding investors through share buybacks. Service companies such as Schlumberger and Halliburton have also seen profits soar as steadily increasing crude prices led to a drilling boom that enabled them to charge much higher prices for providing rigs, well work and personnel. Until last year there were huge shortages of equipment, and massive inflation, in the industry. But now that situation is changing fast.

"In my 30-year career I have never seen before so many in the industry - even the most conservative companies - believe so hard in the fairytale of unjustifiably high crude prices," says Fadel Gheit, analyst with Oppenheimer & Co in New York. "We saw a range of mega-mergers in 1998 when the price collapsed to $9, including BP taking over Amoco, Exxon acquiring Mobil, and Chevron buying Texaco, and I would not rule out a similar outcome this year."

Gheit, who told US Senate committee hearings in 2008 that the high crude price was unwarranted by supply and demand fundamentals and would not last, says Exxon is likely to be the lead predator in a new wave of consolidation because it has $40bn of free cash and a pile of highly valued Treasury bonds.

"Every oil company is a potential takeover target for Exxon," says the Oppenheimer analyst, who believes an acquisition of Shell might be desirable for the world's biggest quoted oil company, but unlikely to happen because of competition concerns.

Shell has privately let it be known that it sees itself as a buyer in any future shake-up, having accepted that it let BP steal a march on it last time when its rival, then led by Lord Browne, bought Amoco, Arco and Burmah Castrol in quick succession. Under new chief executive Tony Hayward, BP is also unlikely to sit on the sidelines - but even Shell and BP together are now less than half the size of Exxon.

Much depends on the future direction of crude prices, which have been plunging on the back of scares about a collapse in demand triggered by a global economic slowdown.

The oil producers' cartel Opec has been busy cutting back its output in a bid to put a floor under future falls, so far to little avail, although some analysts, such as Barclays Capital, still expect a $76 oil price in 2009. Goldman Sachs, on the other hand, believes it could sink to $30 this quarter.

The damage being done to the oil sector will become visible at the start of February when BP will report a $6bn slump in pre-tax profits between the third and final quarter. Chevron is expected to show a more than 40% decline in earnings over that period.

This squeeze is likely to trigger a scaling-back in capital expenditure for the next 12 months, particularly for projects such as tar sands exploitation in Canada, which needs crude to cost more than $70 a barrel to be truly profitable. Firms in the North Sea can survive at prices of $45, but if prices remain around $50 this year - as most on Wall Street expect - no new investment is likely into developing new British fields.

The most vulnerable companies to takeover are the smaller independent exploration and production firms. Oilexco North Sea, which has been one of the most active drillers off the UK, has called in the administrator, saying that its lenders, led by Royal Bank of Scotland, were not prepared to underwrite the future development of new fields.

Schlumberger, the world's largest oil services group, has already outlined plans to axe 1,000 staff, and rival Halliburton has said it is also likely to make an unspecified number of redundancies. "We have been consistent in our view that our results would be affected in the event of a severe global economic downturn," says Schlumberger chief executive Andrew Gould.

Critics are surprised at the speed with which some companies have become distressed given recent records highs for oil, but industry insiders say companies expect to fund new developments with a mixture of their own, now declining, cashflow and bank borrowings, which are hard to obtain in a world where no one knows what lies ahead.

Meanwhile, bidding for a joint project between Saudi Aramco and ConocoPhillips to build a 400,000-barrels-a-day refinery in the Saudi port of Yanbu has been delayed. As one industry figure puts it: "Everyone sits up and takes note when Saudi Arabia starts cutting back on its investment levels."

CALGARY -- Layoffs, spending and dividend cuts and disappearing profits are expected in Canada's energy sector, which starts reporting fourth-quarter earnings Tuesday, led by oil sands giant Suncor Energy Inc.

After years of expansions and record profits, the full force of the global economic downturn and falling energy prices will translate into the worst financial results in years, analysts said.

The key themes will be: "Worst cash-flow-per-share and earnings-per-share declines (year-over-year and sequentially) in years, driven by plummeting commodity prices," UBS Securities Canada Inc. analyst Andrew Potter said in a research note Monday. "Downstream results range from weak for Imperial Oil Ltd. and Petro-Canada to horrible for Husky [Energy Inc.] and EnCana [Corp.]."

Suncor could announce Tuesday further cuts to its Voyageur expansion, predicted Andrew Boland, head of research at Peters & Co., which would be the most significant blow to the oil patch in the quarter. The oil sands company cut its 2009 spending plans by one third in October and Mr. Boland has already knocked out the expansion from his valuation calculations.

"That is probably [another] couple of billion dollars that will come out of their spending," Mr. Boland said. "So it will be another bit of bad news for the oil sands and certainly for employment in the greater Fort McMurray area."

Companies across the board will have one thing in mind: balance sheet preservation. That could mean dividend and distribution cuts, further capital spending cuts and layoffs, he said.

As bad as the fourth quarter may be, the biggest agony will be felt in the first quarter, as commodity prices are lower now than they were at the end of last year. According to Peters & Co., Edmonton light oil averaged $64.63 a barrel, Hardisty heavy oil averaged $49.40 a barrel, and gas was $6.46 per thousand cubic feet at the AECO hub.

In addition, Mr. Boland said the sector has not yet felt the full effect of tighter credit, which will hit the smaller to mid-sized companies, from explorers to trusts.

"The service industry has a lot of companies that are in trouble. When activity goes to zero, and you got debt and you got [general and administration costs], there isn't a lot you can do," he said. "On the oil and gas side, it's going to be forced sales due to the banks taking a stance."

Richard Wyman, analyst at Canaccord Adams, said: "The main problem isn't so much what the rear view mirror looks like, it's the impact of the difficult business environment on forward-looking stuff."

Resource plays in Western Canada will struggle at these prices and may no longer be economic, he said.

Lex Kerkovius, senior research analyst and fund manager at McLean & Partners Wealth Management Ltd., is keeping an eye on reserve reports, a measure of oil companies' value and key numbers considered by bankers before extending loans.

Because reserve assessments are based on oil and gas prices at the end of the years, many companies could be facing writedowns, he said.

Even though much of the damage is already priced into stocks, Mr. Kervokius said investors have to be choosy and pick companies that are likely to be the survivors.

"You have to look at the guys who have grown their reserves – who have done that in good and bad times. The guys who have production growth, the guys who have the low cost structure – this is where everything becomes really important – and where the balance sheets are very, very solid. That's absolutely critical."

Kazakhstan may cut planned oil production this year by 3 million tonnes from 79 million tonnes, Economy Minister Bakhyt Sultanov told reporters in the capital Astana today. “We’ll produce more than 70 million tonnes of oil this year,” Energy Minister Sauat Mynbayev said in an interview. “Output would have been higher if the oil price weren’t falling.” Sultanov said the Central Asian country’s metals production may decrease by 1 percent this year, after a decline in 2008.

Industry and Trade Minister Vladimir Shkolnik said metals output plans remain on track. Asked about Sultanov’s forecast, he said a 1 percent decrease is insignificant.

Kazakhstan, holder of 3.2 percent of the world’s oil reserves according to BP Plc, faces a financial crisis after a decade-long boom during which the economy expanded by an average of 10 percent a year, helped by a surge in the price of crude. The government said economic growth was expected to slow to 1 percent this year from more than 3 percent last year.

LONDON - Oil demand may never return to growth in the United States, Europe and parts of Asia, easing the strain on long-term supplies and prices as emerging countries burn ever more fuel.

The surge in oil to a record near $150 a barrel last year heightened concern the world will run out of crude and supply will start to dwindle -- a theory known as "peak oil".
Now a deepening recession and oil price collapse have raised the issue of whether demand, not supply, is nearing its peak.

Oil use in the industrialised countries that are members of the Organisation for Economic Co-operation and Development (OECD), such as the United States, Japan and western Europe may have peaked already, according to some analysts.

"There is a reasonable likelihood that OECD oil demand has peaked," said Peter Davies, former chief economist at BP Plc who was in charge of preparing BP's annual Statistical Review of World Energy, a standard reference work.

Among OECD economies, the United States had sustained robust oil demand growth due to an expanding economy and less focus on conservation, while western Europe and Japan were posting declines.

U.S. patterns could be about to change as the recession erodes consumption. By the time rich countries return to economic growth, their efforts to use less oil and slow the impact of global warming could be taking hold.

Barack Obama, taking office as the 44th U.S. president, aims to greatly increase alternative energy production in the world's top energy consumer.

"More and more analysts are sold on the idea that U.S. oil demand peaked in 2007," Antoine Halff and Veronique Lashinski, energy analysts at Newedge brokerage, said in a report.
"The market meltdown is likely to entrench current demand losses not only in the U.S. itself but in the world at large."

RULING THE WORLD
The peaking of OECD demand will not choke off growth in oil consumption worldwide for the foreseeable future as emerging economies expand and billions of people seek to improve their living standards.

"The West no longer rules the world," said a senior oil executive who requested anonymity. "Whatever the OECD is doing, it will not prevent worldwide energy consumption from growing, due to emerging country growth." Oil's jump to more than $100 a barrel a year ago increased interest in peak oil supply, a theory that had long been consigned to the fringes of informed opinion.

This issue has faded as economic slowdown eroded demand, meaning supply is abundant for now and consumption is key to shaping oil market sentiment.

"The term (peak demand) has become fashionable over the last year, but applied to OECD, not global demand," said Newedge's Halff.

"Even the idea of a slowdown in non-OECD demand that would keep it from offsetting contraction elsewhere stretches the imagination at this stage."

Some believe global consumption of oil could reach a high point in the next decades, as policies to tackle climate change are put in place.

"Peak demand is only likely to be generated by effective implementation of climate change policies across a large part of the world," said Davies, who is now a consultant after retiring from BP last year.

"I would not expect this to occur within the next decade, although the policies could be in place by then that will eventually lead to peak demand."

Editing by Anthony Barker

US petroleum deliveries fell last year at the most rapid rate since 1980, underlining the drop in demand amid a slowing economy, plunging oil and natural gas prices and the credit squeeze.

The new data from the American Petroleum Institute showed deliveries falling by 6 per cent last year. US crude oil production in 2008 also sank below 5m barrels per day for the first time since 1946, as the result of lower Alaskan production and hurricane shutdowns in the Gulf of Mexico.

The data emerged as the industry begins to feel the crunch from falling demand. Drilling programmes are being curtailed, the leasing of acreage that took hold in the backfields of the US last year is slowing to a crawl and layoffs have begun.

Robin West, chairman of PFC Energy, a consultancy, fears a repeat of the slowdown in the 1980s, when industry cutbacks were so deep it took years for it to recover. "The oil and gas industry is cyclical and the less investment now, the greater the rebound when demand returns and prices begin to climb."

US consumers, according to a report by Bernstein Research, are using less fuel because of the downturn and the impact to driving habits from the "price shock" of $4 a gallon petrol in the first half of last year.

Iran's oil ministry anticipates a crude oil price of about $40 a barrel in 2009, oil minister Gholamhossein Nozari was quoted as saying on Saturday, suggesting Tehran does not expect the market to rebound soon.

Nozari also said crude producers outside the Organisation of the Petroleum Exporting Countries (OPEC) were not cooperating with the group in reducing output to restore stability, the Tehran based news agency IRNA reported.

The announcement comes days after OPEC oil ministers said they were looking for an oil price of $70 to encourage investment.

US light crude oil settled on Friday at around $36.5 per barrel, down more than $110 since July as the global economic downturn hit energy demand.

"In the opinion of the oil ministry, taking into account predictions by various international institutes, the anticipated oil price in the year 2009 will be around $40," Nozari said.

He said the ministry had proposed to the government that the price of oil be set at that level in the 2009-10 budget, which runs from March.

OPEC ministers agreed in December to cut production by a record 2.2 million barrels per day (bpd), taking total curbs since September to 4.2 million bpd, the equivalent of 5 percent of global oil supply.

But Nozari said supply from non-OPEC producers was expected to grow by 600,000 bpd during the year, without naming them.

"Under these conditions OPEC member countries decided to cut output but non-OPEC countries are not cooperating," he said.

Russia, the world's second-largest oil exporter, faced criticism from OPEC last month for refusing to join in the effort to support energy prices.

Russia has said it is considering all options, including joining OPEC, to defend its national interests. However it did not make any firm pledges when OPEC ministers, meeting at Oran in Algeria in December, agreed their deepest production cuts.

Earlier on Saturday, state radio quoted Iran's OPEC governor Mohammad Ali Khatibi as saying the producer group should reduce output further to bring balance to the oil market.

On the issue of OPEC members' observance of earlier cuts before the Algeria meeting, Nozari said: "The percentage of observance by 11 OPEC members, with the exception of Iraq, was in all reported as 85 percent. The worst performance belonged to Algeria which did not have any cut in its oil production."

That’s a nice picture, I tell Gérard Mestrallet, spotting a photo propped on a shelf in his Paris office. “Ees me on my ’orse. Ees my hobby,” says the boss of GDF Suez proudly in his French-accented English. Mestrallet’s second hobby after showjumping is drinking Belgian beer — so he is clearly quite a character.

“But I’m not drinking Belgian beer all day long, you know,” protests Mestrallet. “Just occasionally.”

Then he laughs. The good news is that one of the most powerful men in global business is also one of the most laid-back. Creator of a vast Franco-Belgian utility that now bestrides the world, Mestrallet, 59, is an engaging raconteur, with none of the aloofness that usually comes with running such international heavyweights.

But he is, first and foremost, a patient man. An aeronautics engineer by training, it took him two-and-a-half years to unpick French bureaucracy and union resistance in order to merge his water and energy business Suez with Gaz de France (GDF) late last summer, creating a giant that dwarfs any British or American utility.

With revenues of €80 billion (£71 billion)and a market value of €70 billion, it is matched only by its French compatriot EDF, majority owned by the French government, and German rival Eon. That makes Mestrallet a kingpin in European energy right now — with all the problems that involves.

As boss of the largest buyer and seller of natural gas on the Continent, he has the small matter of Russian-Ukrainian relations — and its effect on the gas pipeline to the West — at the top of his in-tray. And long term, how does GDF Suez keep investing to grow in a downturn, and get more involved in the British market?

Too much pressure? You wouldn’t guess it. Compact and craggy, jacket off, the bespectacled Mestrallet holds court round his desk in homely fashion, relaxed, drinking tea, with papers piled about and pictures and books filling shelves.

His customers, though, are rather more stressed. This month Mestrallet was on French radio, reassuring listeners that France had at least 80 days supplies of natural gas, so they need not worry about spats between Russia and Ukraine. His company has good relations with the Russian giant Gazprom, but Mestrallet says the solution for Europe’s energy future now is simple: diversify. GDF Suez is already doing just that.

“We combine supplies from Norway, the Netherlands, Algeria, Libya, Egypt, Qatar, Kuwait, Yemen, Nigeria and Russia. In fact Russia is only our fourth-largest supplier, with 15%. Norway, the Netherlands and Algeria supply more.”

So can he stand up to any Gazprom bullying? He smiles. “We have a very long-term relationship with Gazprom. They have always been a very reliable partner.”

And if gas suppliers form their own version of Opec, the oil producers’ group, to influence prices? “It would depend on the spirit with which it was done,” says Mestrallet , carefully.

As for GDF Suez’s own growth, he says there will be no change to a planned three-year, €30 billion capital-spending programme, taking in expansion in renewables, LNG (liquefied natural gas, of which GDF Suez is the world’s largest importer) and nuclear power. He has already raised more money with a bond issue.

“We have a vision of the long-term drivers of the energy sector, based on demography, the need for electricity and gas, and the necessity to protect national resources, to diversify supply and maintain security, and to fight against climate change — all these are long-term factors and we are in a sector of long-term investment.

“What we decide today comes into operation after the crisis, that is for sure. Therefore we have decided not to change anything.”

As for demand, he says, the need for gas and electricity will be high in the future. The problem for Europe is that its own gas sources, save for Norway, will run out in 10 years. “So we have to import. Our societies are shifting from oil-addict to gas-addict because it is clean and easy to use. It is inevitable.”

In Britain, GDF Suez already has the country’s largest combined-cycle gas-turbine plant, located on Teesside, and an interest in the waste firm Sita, part of its environment division, which it was forced to float as the price for the merger. It is also installing heating and cooling systems in the London Olympic village. And last year it nearly bought British Energy, which was eventually sold to rival EDF.

This year, we can expect more. GDF Suez wants to raise its stake in nuclear energy in the UK, so it is likely to bid for government contracts to construct new-generation nuclear power plants.

Competing against EDF? Mestrallet gives a Gallic shrug. “We compete against them here, in Germany, in Italy but, you know, we are much more international than they.”

The scale of the new GDF Suez is vast, from hydro-electricity works in South America to power and desalination projects in the Middle East and 35 power plants in America plus projects in Asia. More tellingly, it gives France two global energy champions to Germany’s one, and Britain’s none. What went wrong in Britain?

Mestrallet grins. “I guess the British electricity boards could have been privatised differently. Cutting them into regional pieces was inspired by the view of business as local. That’s not our vision. We consider it must be international and global.”

Why? Because, he says, the markets may be local but the know-how and capacity to build big projects are not.

So the British government got it wrong? Mestrallet, once an adviser to the politician Jacques Delors, shakes his head. “In our case, you know, it wasn’t the government’s idea to create an international energy champion. It was my idea. But the government here accepted it.”

It took time, however, and the French government insisted on keeping a 35% stake, as the merger required the privatisation of Gaz de France, nationalised since 1945. Not a problem, says Mestrallet.

“For us, it’s the best of both worlds — the government’s stake gives us a very stable shareholding structure."

Even if it stops him making the efficiency cuts he wants? The new entity has almost 200,000 workers.

“No, we have a plan that will reduce costs by ¤1.8 billion. We have an age pyramid that is very favourable and we hire 20,000 people a year, so it’s easy to adjust.”

Reports suggest that Mestrallet was less phlegmatic over losing the Suez water and waste division, stripped out to balance the merger, though GDF Suez retains a stake.

“We found good agreement,” says Mestrallet. “They cannot be bought by surprise, and we can continue to deliver synergies between energy and environment.”

There is a logic and wit to much of Mestrallet’s presentation. The second of three brothers who all entered business, he also has a diplomat’s charm. Belgian politician Etienne Davignon, who sits on GDF Suez’s board, describes him as a clever strategist. “And for a Frenchman he is very modest, which is important to how he is seen internationally.”

Mestrallet says he adheres to his parents’ simple values. “Work hard, and try to be useful to others. Getting to the top was not my motivation.” Others might raise an eyebrow at that.

He joined the Suez conglomerate in 1984 as vice-president, special projects. Eleven years later he was chief executive, overseeing a radical overhaul in which Suez sold its financial-services and property interests, and refocused on energy.

“Yeah, we could have switched the lights off and walked away,” he says. “But for the teams and shareholders, what we decided to do was much better, eh? Back then the market value was ¤4 billion. Today?” He gestures upwards with his hands.

The reality is, he fought off considerable shareholder unrest — led by activist investor Knight Vinke — and took at least seven years to win over the French government to his plan. It wasn’t until the Italian utility Enel threatened to buy and break up Suez that he got his way.

So why did the merger take so long? “Because it had not been prepared with the unions,” says Mestrallet. “Therefore, immediately everyone was against it. But, hey, in Britain, you are renationalising, eh? Hahaha . . .”

I think he means that fondly. Does he expect more consolidation in the energy markets? Yes, he says. Size brings benefits. It has enabled GDF Suez to buy a third of Yemen’s gas production for the next 20 years.

“It’s not in the government’s interest to stop consolidation. The need for investment in electricity and gas is tremendous, about ¤1,000 billion in the coming years. Only the private sector can find that, not governments on their own. Not after they have invested so much in banks, eh?”

Then he chuckles again and beams. Like the showjumper he is, he takes each fence at a time, and look what he’s got? Soon the world may be run by big companies protected by big government stakes. And it seems the French just got there first.

Turkey signalled today it might withhold support from the Nabucco gas pipeline, a project viewed as central to Europe’s drive for energy security, unless the European Union unblocked the energy section of Turkey’s EU membership talks.

Recep Tayyip Erdogan, Turkey’s prime minister, delivered the warning at a time when Europe’s energy worries have never been higher, with a Russian-Ukrainian dispute depriving Europe of Russian gas supplies for almost two weeks so far this winter.

Mr Erdogan was speaking at a think-tank conference in Brussels, where he was making his first visit to EU headquarters since 2004 in an attempt to inject fresh life into Turkey’s EU membership bid.

“If we are faced with a situation where the energy chapter is blocked, we would of course review our position,” Mr Erdogan said, referring to Nabucco, a planned 3,300km-long pipeline intended to transport gas from the Caspian Sea and central Asia through Turkey to Europe.

Since it started its EU membership talks in October 2005, Turkey has opened 10 of the 35 chapters, or policy areas, that must be completed before a country can enter the bloc. However, the EU froze eight chapters in 2006, citing Turkey’s refusal to open its ports and airports to vessels and aircraft from the internationally recognised Greek Cypriot government of Cyprus.

In addition, to the dismay of EU member states sympathetic to Turkey, Cyprus is blocking the start of talks on the energy section of Turkey’s accession negotiations.

José Manuel Barroso, European Commission president, said after talks with Mr Erdogan today that European and Turkish energy security was too important to be held hostage by Turkey’s EU membership bid.

“We should not link the question of energy security to a specific point we’re dealing with in the accession negotiations,” Mr Barroso said. “At the Commission we’re doing everything we can to unblock every chapter, including the energy chapter.”

Mr Erdogan, speaking with Mr Barroso at his side, appeared to soften his warning on Nabucco without withdrawing it. “The Nabucco project is very important. We are aware of our responsibilities,” he said.

Question marks hang over Nabucco, because construction of the pipeline, due to be completed by 2014, has not begun and the cost is estimated at €8bn ($10.5bn, £7.2bn), up from €5bn when it was first proposed.

Moreover, it remains doubtful that the countries identified by the EU as potential suppliers have enough gas to provide Europe with the planned 31bn cubic metres a year. 

Russian gas has begun to flow to Europe through Ukraine ending a two week disruption in supplies that forced thousands of factories and schools to close and deprived millions of heating as temperatures plunged below zero.

But as countries in eastern Europe and the Balkans struggled back to normality, the European Commission President, Jose Manuel Barroso, launched an unusually outspoken attack on both Russia and Ukraine.

Visibly exasperated at the chaotic negotiations between Moscow and Kiev during the past fortnight, the former Portuguese prime minister said that he had negotiated many agreements with countries around the world, including Africa, over the years. Every one had been honoured. But on this occasion, agreements were announced and then repudiated the following day.

“This is the first time in my life that I saw agreements that were systematically not implemented. That has never happened with any other partner in the world. There was a complete contradiction between discourse and reality,” he said.

Mr Barroso, who had almost 30 phone conversations with the Russian and Ukranian leaders in a bid to broker a deal, confirmed that he had been prepared to take legal action against both if the gas had not started flowing. He added that companies considering legal action to seek compensation for their losses during the dispute could call on the Commission’s expertise.

The first supplies reached Slovakia this afternoon and are due to reach Bulgaria, which had suffered the most from the crisis, later today as Russia resumed its daily supplies of 335 million cubic metres of gas to Europe.

Under the ten-year deal between Russia’s Gazprom and Ukraine’s Naftogaz, the cost of gas to Ukraine will be linked to western prices and not negotiated annually as at present. EU officials hope this will reduce the prospect of Europe being taken hostage in regular bilateral disputes, but insisted that the recent crisis emphasised the imperative for the EU to diversify its energy mix and sources of supply.

Plans to build a fleet of nuclear reactors in Britain could be accelerated under a scheme being considered by the Government and some of Britain’s biggest power companies.

If implemented, the plans could chop as much as 18 months off the time required to complete nuclear stations by applying new construction methods and by shortening a detailed review of the technology proposed for use in the UK.

E.ON, the German power giant; EDF, its rival controlled by the French state, and Areva, the French designer of so-called EPR reactors proposed for use in Britain, are all studying “modular” construction methods similar to those developed to build offshore oil platforms.

Senior executives at EDF, including Bill Coley, chief executive of British Energy, its UK subsidiary, have said that their adoption could cut the time needed to build each reactor from five to three and a half years.

Rather than conventional on-site construction, the proposal would involve prefabricating large pieces of the reactors, each of which are expected to cost about £5 billion, at another, probably indoor location, then floating them into place on giant barges. The concept is considered suitable for Britain because the proposed sites for the new stations are at waterside locations. The concept is already being used by Toshiba Westing-house, Areva’s key rival in the market for nuclear reactor technology.

Paul Golby, chief executive of E.ON UK, the German company that is also planning jointly to build at least four nuclear reactors in the UK, told The Times this week that use of modular construction could significantly “compress the timeframes”, although he emphasised that it would still be impossible to complete any reactors in Britain before 2015.

Adverse weather has been a big problem in the conventional construction of the world’s first EPR reactor at Olkiluoto in Finland, which is up to three years behind schedule.

EDF said modular construction offered potential benefits but added that there were also practical problems, including the need for large areas to lay down equipment and good access roads and ports close to proposed sites.

All but one of Britain’s ten ageing nuclear stations, which produce 20 per cent of the country’s electricity, are due to be retired from service by 2025 at the latest – threatening a yawning gap in Britain’s power supply in about four years’ time as the process unfolds. The Government wants to replace them but, under current plans, the first new plant would not enter service before 2017.

Another possibility being studied by the Government is to speed up the certification of new reactor designs by the nuclear safety regulator. Building reactors is a lengthy and complex process but, because the proposed designs have never been used in the UK before, a detailed safety review has to be carried out before construction can begin.

The Government believes that by strengthening the Nuclear Installations Inspectorate (NII) with extra resources and funding, the construction time could be cut.

Ministers are also looking at ways to allow the NII to borrow from similar French and American reviews of the new reactors that are already under way.

“It would be more of a peer review model where UK inspectors could verify and build on work already carried out elsewhere,” one industry source said.

A spokeswoman for the Department for Energy and Climate Change said that a series of detailed reforms of the NII were likely to be tabled this month.

Fresh doubts have emerged over Britain’s plans for a huge expansion of offshore wind power after Abu Dhabi said yesterday that it was reconsidering the viability of a £3 billion scheme to build the world’s largest offshore wind park in the Thames Estuary.

The London Array project, a plan to build 341 turbines with the capacity to generate 1,000 megawatts of electricity – more than that produced by most of the nuclear reactors in Britain – has been in trouble since last May, when Shell pulled out of the project, citing spiralling costs.

Masdar, a $15 billion (£10.3 billion) renewable energy fund controlled by the oil-rich city-state, subsequently acquired Shell’s 20 per cent stake, a move that drew strong support from Gordon Brown and his Government.

Yesterday, however, Masdar raised questions about its commitment. “The economics of this project should be revisited,” Ziad Tassabehji, the director of innovation and investments for Masdar, said at a renewable energy conference in Abu Dhabi. “We are working with our partners to study the feasibility of the project.”

Masdar’s other partners in London Array include E.ON, the German power group, which holds a 30 per cent share, and DONG Energy, of Denmark, which owns the other half. A spokesman for E.ON said yesterday that no final decisions had been taken. “We’re going through the tendering process for London Array and, until we ensure that the project is economic, we’re unable to give it the green light,” he said.

“However, while the economics are certainly difficult, we’re hopeful that the sums will add up and that the project will get built on time.”

He said that a key consideration was the price of steel, which has collapsed in recent months, a factor that could help to bolster the economic case for the project. He said: “We’re waiting to see if current economic difficulties mean that reducing steel prices will see falling turbine prices.”

A DONG spokesman said that no final investment decision had been taken, but declined further comment.

London Array is the latest in a string of renewable energy schemes to hit trouble in recent month. The credit crunch and the collapsing oil price has undermined the economic case for many of them.

Industry experts say that the cost of building offshore wind developments in Britain is about £3 million per mega-watt of electrical generating capacity. That is more than three times the cost of building a conventional gas-fired power station.

If built, the London Array scheme would be spread across a 90-square-mile site more than 12 miles off the Kent and Essex coasts. The first stage, comprising 175 turbines, is scheduled to be working by 2012. The second stage is to increase capacity to 1,000MW of electricity production, enough to power 750,000 homes. equivalent to a quarter of all domestic housing in the capital.

The development would contribute a significant part of the Government’s aim of generating 20 per cent of the UK’s energy from renewable sources by 2020.

Separately, Abu Dhabi said yesterday that it planned to generate 7 per cent of its electricity from renewable sources by 2020.

Britain's attempts to position itself as a centre for the green power industry suffered a blow today when it emerged that ministers have refused to commit the country to a new international body set up to promote renewable power.

The German environment secretary, who came up with the idea for the International Renewable Energy Agency, said he was disappointed countries such as the UK and America were dragging their feet.

"Please join the club. It's a club for the future," said Matthias Machnig from Abu Dhabi where he is attending the World Future Energy Summit. He plans to formally launch the new organisation in Bonn next Monday.

The new body, which has been planned for 18 months, was a "very important signal" that nations were committed to a greener future, the minister said.

Asked whether he was frustrated at Britain's unwillingness to sign up so far, he said: "I don't comment on the British way of making decisions. Maybe it is going to happen."

France, Holland and Spain are among the 60 countries that have joined. Machnig said various countries were putting themselves forward to host the organisation.

There is mounting hope that the US will join once Barack Obama gets his feet under the table at the White House.

Britain is thought to be hesitant to put its name to the group because it is viewed with suspicion by the International Energy Agency.

The IEA, established by Britain and America in the aftermath of the 1970s oil shock, does not want to see its role eroded. But the green energy sector has become more and more critical of the Paris-based body, claiming it is an oil lobby group with a vested interest against wind and solar. A recent report by the IEA was deemed by some critics to have underplayed the role of renewables, something it vehemently denies.

Machnig said the new body could have a wider international membership because the IEA was essentially "an OECD-driven agency".

Britain has liked to see itself as a leader in the fight against climate change and has trumpeted London as the centre of carbon trading and other clean technology innovation.

Machnig has used the Gulf summit to call on the European Union to hold its nerve and stick to carbon reduction targets in the face of the credit crunch.

Machnig's warnings came alongside others from politicians, environmentalists and even members of royalty about the dangers of not acting quickly enough to counter global warming.

Willem-Alexander of the Netherlands, the Prince of Orange, said a "revolution" was needed to hasten the introduction of new cleaner technologies.

He made an analogy with the Roman empire, which he claimed came to an end partly because of "peak wood". The Romans allowed Europe to be deforested so depleting a source of cheap fuel.

The prince also took a sideswipe at those promoting carbon, capture and storage, saying it could "distract" people from the primary objective of ridding the world of its dependence on fossil fuels.

James Alix Michel, president of the Seychelles, attacked the west for failing to do enough to tackle an issue which could put his own country under water.

While the Seychelles was working hard to become a carbon-neutral country, others were not.

"We find it difficult to understand why countries with far greater resources fail to follow suit," he said. "The time for straddling the fence is over. We can save these (endangered) communities if only we have the will."

But Michel also railed against longhaul aviation taxes, saying they unfairly penalised countries like his own which need longhaul visitors for much of their wealth. Developing countries were already suffering disproportionately from the credit crunch, he said. "When large economies sneeze, small islands don't get a cold but a fever."

BP's green energy arm is under pressure from plunging oil prices and the credit crunch, its chief executive admitted yesterday.

Vivienne Cox, chief executive of BP Alternative Energy, said it would be "foolish" to deny it was harder to get cash for projects in the current climate.

"Like everyone else, we are looking at our total capital budget and we will tell you in February how we are placed," she said.

"It would be foolish to say there are no limits on capital spending in the existing portfolio."

Cox was speaking during the World Future Energy Summit in Abu Dhabi, where she warned delegates about a shortage of debt and equity financing in the wider renewables sector.

BP group's fourth-quarter figures are due next month, when it may outline capital expenditure levels for 2009-10.

Oil companies are under pressure because oil prices have plunged from highs of $147 last summer to below $40. Some firms have cut spending, especially on high-cost oil projects such as tar sands schemes in Canada.

Environmentalists say BP's carbon-intensive tar sand schemes in North America sit uneasily with the wind and solar schemes pursued by Cox.

Cox denied it was a contradiction for the group to do both, saying the world needed all kinds of energy to meet growing demand.

The eurozone economy will shrink by 1.9 per cent this year – its first contraction since the single currency was established a decade ago – and will grow by only 0.4 per cent in 2010, the European Commission predicted yesterday.

The outlook for 2009 represents a marked deterioration from the 0.5 per cent contraction the EC forecast only last month. Joaquin Almunia, the EU's economic and monetary affairs commissioner, said: "The overall outlook is grim. In 2009, we are forecasting negative growth for 11 out of the 16 euro area members."

However, Mr Almunia played down the risk of Spain, the eurozone's fourth-biggest economy, defaulting on its debt after the rating agency Standard & Poor's cut Madrid's sovereign credit rating from AAA to AA+, because it expects the country's public finances to deteriorate further.

Mr Almunia added: "I don't think ... the risk of default is important. Risk of default ... always exists in the private and public sectors but, in the case of euro area members, I don't think the risks are high or are significant."

S&P cut Greece's credit rating last week. The EC has forecast that 11 of the 16 eurozone countries will fall into recession in 2009, compared with just two in 2008. Of the 16, Ireland will suffer the most, tumbling by 5 per cent, while Germany will endure the second-biggest contraction, of 2.3 per cent.

The grim EC forecast follows the European Central Bank's decision last week to cut interest rates by 0.5 per cent to 2 per cent, their lowest since 1999. However, the eurozone base rate remains noticeably higher than the Bank of England's 1.5 per cent and the near-zero levels in the US and Japan.

EU governments have prepared massive financial stimulus packages to help shore up their flagging economies, Germany's proposed measures will cost up to €50bn (£45.3bn), while those in France will cost €26bn £23.5bn).

China's economic growth slowed to 9% last year, its lowest rate of growth for seven years.

The world's third-largest economy was hit hard by the global financial crisis that led to a fall in orders for Chinese exports.

But the official who announced the figures said the economy had still done relatively well in trying times.

There has also been gloomy news from South Korea, where the economy shrank by 3.4% in the last quarter of 2008.

Meanwhile, Japan reported that its exports plummeted 35% last month - the sharpest fall on record.

'Eventful year'

At first glance, China's figures appear to show that its economy is still doing very well. Overall growth of 9% for the year would leave most governments ecstatic.

But China recorded 13% growth in 2007, and figures announced on Thursday show economic growth slowed rapidly towards the end of 2008.

Growth in the first quarter of last year was 10.6%, but that had slowed to just 6.8% in the last three months - after the financial crisis had struck.

At a press conference to announce last year's figures, Ma Jiantang, head of the national bureau of statistics, said: "In 2008, we saw an eventful and extraordinary year."

He said China's economy had been affected by a series of natural disasters, such as the earthquake in May, and by the financial crisis.

It is this last event that has hit the Chinese economy hardest - leading to less demand for Chinese products across the world -and the crisis is getting worse, said Mr Ma.

He revealed that millions of migrant workers - villagers who travel to cities to work in factories - had already lost their jobs.

He did not give an absolute figure for the number of migrants who are now jobless, but he said a survey showed about 5% had lost work.

Growth slows but China is not collapsing

China's Academy of Social Sciences recently said that there were about 200 million migrant workers - meaning about 10 million migrants are now unemployed.

Independent Chinese economist Andy Xie said the number of migrant workers without jobs could rise to more than 20 million.

"A lot of factories are not going to reopen after the Chinese New Year. The workers will be told not to come back," he said.

China worries that these unemployed people will cause an increase in social unrest if they are unable to find new jobs.

Mr Ma acknowledged that this was a problem. "[We] take this issue of migrant workers very seriously," he said.

To reinforce the point, he reminded those listening that China's communist leaders were improving ordinary people's living standards.

"Despite all economic difficulties, the incomes of both urban and rural households continue to climb," he said.

Mineral deposits, like football stars, are scouted today so they can be developed over a decade before reaching their peak productivity.

But shocks in the mining sector are arresting the process that turns today’s raw deposits into tomorrow’s star mines.

The fall in commodities prices and freeze in finance are forcing miners to drop exploration and development indefinitely.

This creates a long-term threat: fewer new mines coming on stream means fewer minerals will reach the market – and the possibility for price spikes several years from now when growth picks up and supplies become depleted.

The scores of smaller mining companies focused on exploration – many of which populate London’s Aim board – will be hit hardest because financing has dried up for resources companies that do not yet produce anything that can be sold.

But these smaller companies have the most critical role in the development pipeline – they act as the on-the-ground discoverers and “eyes and ears” for big mining companies that buy them when a big discovery is made. Exploration companies undertook more than half of global exploration in recent years, according to Metals Economics Group.

Revisiting 1997
The current “bloodbath” in the exploration sector draws comparisons with the 1997 Bre-X fraud that scared investors off the mineral exploration sector, writes William MacNamara.

In 1995 Bre-X, a Canadian exploration company, claimed it had discovered a large gold deposit in Indonesia. But there was no deposit, only sprinklings of gold dust.

This was discovered after the company’s chief geologist was killed in mysterious circumstances, falling from a helicopter into the Indonesian jungle.

Resources investors and financiers lost billions of dollars when the company’s inflated stock collapsed, and exploration companies became associated with bad speculative risk.

The “exploration bear market” that followed lasted for five to six years, say executives, before recovering after 2003.

The previous kill-off of the sector – which followed the Bre-X fraud in 1997 – was fundamental to the creation of the recent commodities boom, several analysts and executives say. Then, a lack of new discoveries combined with China’s growing demand pushed metals prices toward the historic highs from which they crashed last year.

This boom and bust is all too repeatable, says Michael Carvill, managing director of Kenmare Resources, an Aim-listed explorer that brought its titanium mine in Mozambique into production last year after 20 years.

“When markets turn,” he says, “the ability of exploration companies to raise capital just disappears. Projects mid-way through development go bust. The only people who can keep on developing are the big companies.

“Then there is a return to growth,” he says, “and people see there is a shortage of minerals and the prices of metals rise, stoking inflation, and there becomes a ready market for any carpetbagger who ever saw a diamond at Tiffany’s to come along and say, ‘I’ve got a great project.’ And money is thrown at it.”

Des Kilalea, mining analyst at RBC Capital Markets, says the current bust will not kill off exploration entirely because big mining companies such as BHP Billiton will continue to explore in spite of “spending less and being more selective”.

But there is potential for cutbacks to overshoot the levels necessary to support a price recovery for metals. “At some point the world is going to say, ‘No one has been building copper or uranium mines or the like,” says Mr Kilalea, “and prices could spike. But when demand comes back it will be more moderated than [in 2003], and the price rises will be less frenetic.”

More worrying than this year’s bust, say some, is that few big deposits have been discovered over the past decade in spite of large exploration budgets.

“But all that money has not yielded much,” says Jason Goulden, MEG’s director of corporate exploration strategy. “In this past cycle, the party was over before it even started.”

More money was spent on reviving old mines than on “grassroots” exploration, or hunting for new deposits, he says.

Big miners have long pointed out that the “easy” bonanzas have been found. Now grassroots exploration is more onerous.

Environmental concerns can mire any discovery, and many of the best prospects are in countries with high political risk and poor infrastructure.

The mineral promise of countries such as Congo and Angola – new frontiers during the commodities boom – were always overshadowed by high risks and costs. Many of the Aim-listed explorers operated in these countries have stopped exploring to save cash.

Eric Finlayson, director of exploration at Rio Tinto, says Rio will continue to explore in Congo. He characterises the shutdown in the junior exploration sector as an inevitable part of a boom and bust industry. “The junior explorers wax and wane, but there will always be sophisticated money out there that will flow to the best projects.” He added periodic clearings were necessary to separate quality projects from frothy ones.

“We will sustain our exploration programme in good times and bad,” he says.

But Rio will scale back planned exploration expenditure as part of a reduction in 2009 capital expenditure from $9bn (£6.2bn) to $5bn. 

The pound is a currency with no underpinning and should fall against the dollar and the euro, says Jim Rogers, chairman of Rogers Holdings and co-founder of the Quantum Fund with George Soros.

He says his view reflects the UK’s dire economic situation: “It’s simple, the UK has nothing to sell.”

Mr Rogers says the two main pillars of support for sterling have been North Sea oil and the strength of the UK financial services sector, in particular, the City of London’s role.

But Mr Rogers says just as North Sea oil is running out, so London’s standing as a major financial centre is set to suffer.

“I don’t think there is a sound UK bank now, at least, if there is one I don’t know about it,” he says.

“The City of London is finished, the financial centre of the world is moving east. All the money is in Asia. Why would it go back to the west? You don’t need London,” says Mr Rogers.

Mr Rogers thinks the pound is more vulnerable than the dollar or the euro. He says the UK housing market is arguably in a worse state than that of the US, given pockets of strength in the US and prices that are sliding across the board in the UK.

Meanwhile, he says, the UK is in worse shape economically than the eurozone, where most countries are not big debtors and do not run huge trade deficits. “If the UK discovers more North Sea oil, I might change this view,” he says. “But I don’t see that happening.”

The controversial comments from the investor and author came as fresh evidence emerged that the UK’s economy is falling deeper into recession.

UK unemployment rose to its highest level since 1997 in the three months to November, while mortgage lending fell to a fresh record low in December.

New figures released on Wednesday also showed UK public finances were deteriorating. December’s budget deficit – tax receipts minus expenditure – totalled £11.4bn against a shortfall of £4bn a year earlier, partly because of the £20bn state recapitalisation of the Royal Bank of Scotland which swelled the government’s net cash requirement to £44.2bn.

The pound, which on Monday was trading as high as $1.4909 against the dollar, dropped to a low of $1.3713.

This was its lowest level in more than seven years and just above the 23-year low of $1.3682 it hit in June 2001.

The pound recovered some ground to stand down 1.3 per cent at $1.3730 by late morning in New York.

Sterling also fell 1.1 per cent to £0.9370 against the euro and lost 3.8 per cent to a record low of Y120.16 against the yen.

Meanwhile, the minutes of the Bank of England’s January meeting did nothing to support sterling, showing that eight members of its nine-strong Monetary Policy Committee voted for a 50 basis point cut in interest rates with the one dissenter voting for a more aggressive 100 basis-point move.

The pound has fallen sharply this week, losing more than 7 per cent against the dollar, amid uncertainty over government attempts to bail out UK banks and fears of a creeping nationalisation of the sector.

Analysts said given the UK bank bail-out had failed to help lift investor sentiment, unorthodox monetary policy steps looked more likely from the Bank of England now that interest rates were approaching zero.

Indeed, this was underlined by comments from Mervyn King, governor of the Bank of England, who said that the UK economy was likely to shrink significantly in the first half of the year, and that policymakers needed to consider more than just using interest rates to stimulate demand.

Mr King said the Bank was set to start buying billions of pounds in high-grade corporate bonds within weeks to attempt to head off a deep recession.

Maurice Pomery at IDEAGlobal said the comments suggested UK interest rates were set to fall at least 50 basis points to 1 per cent at the Bank’s February meeting, and that now that buying of corporate bonds had been sanctioned, it raised the possibility of the central bank buying UK government debt at some point.

He said sterling was in trouble, despite the sharp slide already seen so far this week.

“The surprise is still to the downside and I fear that international investors maybe turning their back on the UK,” said Mr Pomery. “The whole structure of the UK and its global presence is at risk here in the longer run and sterling could see a loss of confidence not seen for many years.”  

President Barack Obama, in his inaugural address to the packed crowds on the National Mall in Washington DC, told his rapt audience that America needed a "new era of responsibility" to deal with both the financial and environmental crises his new administration faced.

After a stammering through the oath of office, the subtext of the gritty speech was that it would be hard – very hard – but America had the resourcefulness to reinvent itself.

The new president's commitment to his environmental agenda shone through the dour images of a world economy in crisis with references to "rolling back" global warming through transforming the way America uses energy by harnessing "the sun and the wind and the soil".

"My fellow citizens. I stand here today humbled by the task before us," he said, "Every so often the oath is taken amidst gathering clouds and raging storms." Those storms are the metaphorical tempests on the global markets, but they are also the gales that will literally result from climate instability caused by rising CO2 emissions.

Obama hinted that the Bush administration's championing of fossil fuels had created grave problems – both climatic and geopolitical. "The ways we use energy strengthen our adversaries and endanger our planet," he said, referring presumably to Middle Eastern oil. But ultimately, his message was one of hope. The challenges the country faces will are not insurmountable, he said. "Know this America, they will be met," he said, "On this day we gather because we have chosen hope over fear."

"We remain the most prosperous, powerful nation on Earth… Our capacity remains undiminished," he added.

Today was not a day for detailed solutions to the climate change threat or for a policy-wonk's guide to the new green economy that Obama promised on the campaign trail. That hard graft begins later. But there was a statement of intent that scientific and environmental issues would occupy a renewed place in the Oval Office. "We will restore science to its rightful place," he said, "We will harness the sun and the wind and the soil to fuel our cars."

Before the inaugaration, Obama had already delighted scientists and environmentalists with his choice of green-minded scientists that will join his administration and his professed attitude to scientific evidence. He has emphasised the need to listen to scientists, "especially when it is inconvenient". In a signal of this renewed respect for evidence he has restored the authority of the president's science advisor to the White House. Obama's pick for the position, John Holdren, professor of environmental policy at the John F Kennedy School of Government at Harvard University, has been uncompromising in his warnings about the threat posed by climate change (he dislikes the phrase "global warming" because it he says oversimplifies the nature of the problem).

The new president has invited Jane Lubchenco, a marine biologist at Oregon State University to become head of the National Oceanic and Atmospheric Administration (NOAA), the government agency that studies the climate and monitors the health of marine ecosystems. She has been a powerful advocate for action on climate change. Obama has also received plaudits for his pick of Nobel prizewinning physicist Steven Chu for energy secretary.

During the campaign, Obama committed himself to a $150bn investment over the next decade in green energy. He wants to put 1m plug-in hybrid cars, with a fuel consumption of 150 miles per gallon, on the road by 2015. He also pledged that 10% of US electricity supplies should come from renewable sources by 2012 and 25% by 2025. He also signalled an intention to reduce greenhouse gas emissions by 80% by 2050. He will be under pressure to make good on these commitments and quickly.

In his closing statements, President Obama pledged to "roll back the spectre of a warming planet". But his message was even more fundamental than just changing the way the US and world uses energy. "We can no longer afford indifference to the suffering that occurs outside our borders. Nor can we consume the world's resources without regard to the effect," he said.

"What is required of us now is a new era of responsibility… This is the price and promise of citizenship." It remains to be seen whether ordinary Americans are prepared to take that responsibility and make the sacrifices their new leader is asking for.

Standard tariff gas prices will be reduced by 10 per cent from February 19.

The company claims the move will benefit more than 7.5 million homes and save customers £79 on an average yearly gas bill.

The move sees British Gas become the first major energy supplier to announce a cut in more than a year, and rivals will be expected to follow suit.

The company raised its prices twice in 2008 - by 15 per cent in January and a record 35 per cent in July. Other suppliers raised their prices by more than 20 per cent.

The Government and campaigners have been calling for sharp price cuts since the price of oil and other wholesale energy costs began tumbling from their peak last July.

Phil Bentley, the managing director of British Gas, said: "We understand energy bills are a significant cost and we are committed to providing the best possible prices for customers.

"This price cut will go some way to helping customers manage their budgets, and we will continue to do what we can, when we can."

The company said it will also introduce a "prompt payment discount" of up to £15 per year for customers on standard gas tariffs who pay quarterly.

To the casual observer, there is something distinctly creepy about the silver van I'm crouching inside. On a pitch-black winter evening, we're crawling the streets of Reading, taking pictures of every home we pass.

Surrounded by computers in the back of the van, thermal surveyor Chris Brind points to a screen displaying a camera feed. Ghostly multicoloured images of houses flicker in front of him. "White will be really hot, the lowest temperature will be blue," he says. Snug in their homes on this cold, rainy evening, no one indoors has any idea that their houses are being inspected.

Fortunately for these unsuspecting homeowners, Brind and his van are here to help. The images - real-time snapshots of heat escaping from a building - will be familiar to anyone who has seen thermal pictures of public buildings, including City offices and the houses of parliament, taken by energy campaigners to show how much energy is leaking out. Brind's company, Heatseekers, has been working in partnership with 25 local authorities across Britain since last October. It hopes that by confronting homeowners with visual evidence of exactly how their buildings are wasting heat (and money) it will galvanise them into tackling the problem.

Energy efficiency in homes is an urgent, if unloved, issue: around a third of the UK's carbon emissions come from the energy needed to heat buildings, and a lot of that energy is wasted. Put simply, the Victorian, Edwardian and Georgian homes many of us live in are terrible at keeping in the heat. On cold nights, their uninsulated walls and lofts do a great job of warming the outside air, at the expense of the planet and our wallets: experts estimate that one pound in three spent on household energy bills is wasted.

This results in more CO2 in the atmosphere than all of Britain's flights and is equivalent to all emissions from cars. If we could get a lid on it, the climate benefits would be vast.

"In the UK alone, there are probably eight million properties that require insulation of some sort," says Keith Hewitson, director of Heatseekers. "If you're looking at getting cavity wall insulation and good quality roof insulation, to a depth of about 250mm, you could save £200 to £300 per year on fuel bills."

The difficulty is getting that message across to householders. Endless government schemes offering financial incentives to insulate homes have come and gone for decades, with limited results. Heatseekers thinks its images will reverse many people's inaction. "When they see an image of their property, they can see exactly what's escaping from their house," says Hewitson.

The surveys are carried out in the winter months, with shifts starting late in the evening when temperatures drop and householders crank up their heating. The colder the surrounding air, the more clearly warm walls show up on the pictures. Driving down a street at 10mph, surveyors can take energy snapshots of up to 1,000 homes an hour.

After the images have been recorded, energy advisers pinpoint homes they think need attention - usually ones with no insulation or those with patches that don't seem to be working - and call on them a few days later to offer a face-to-face consultation. Typically advisers will help the householders to arrange quotes and provide information on government-funded schemes such as Carbon Emissions Reduction Target (Cert), which can pay some or all of the costs for any work needed.

Part-time receptionist Kirsten Chapman from Leicestershire had her house scanned late last year before she was visited by a Heatseekers energy adviser. Chapman says it was immediately clear that her home was leaking energy. "It opened my eyes. Had I seen the pictures years ago, I probably would have taken steps to insulate sooner." Like much of Britain's housing stock, Chapman's semi-detached home, built in the 1960s without any insulation, needs loft and wall cavity insulation. The work will cost several hundred pounds but she is convinced that it won't be long before it pays for itself.

Thermal images can also reveal faulty seals around windows that might need replacing, chimneys and garage doors that are surreptitiously leaking heat, or show whether any double glazing that has been installed is doing its job properly.

In the three months since Heatseekers started its surveys it has grown from a one-van operation to a fleet of seven. Hewitson says councils have been lining up to use the company to survey their streets. "Currently we're working with local authorities from the Isle of Wight to the north-east. By the end of this year we should b e working with 30 to 40 local authorities."

Reading council was one of the first to ask Heatseekers to drive along its streets and, so far, 6,000 homes have been surveyed, paid for by Cert. "There's a direct benefit for local people, especially those on low incomes," says councillor Paul Gittings. He points out that the Cert scheme can cover the entire cost of insulation for those on benefits or a low income. In an attempt to tackle fuel poverty and climate change, the council aims to survey all their homes and then insulate 5,000 houses over three years - around half of the estimated need in the town.

Chapman says people approached with a thermal image of their homes should take the time to sit down with an energy adviser. "Don't dismiss it - it's easy to do that when people knock on your door, but when you see the images, it's an eye-opener".

• Grants are available for cavity wall and loft insulation. Go to energysavingtrust.org.uk/gid to search the Energy Saving Trust database for information relevant to your area, or call it on 0800 512 012.

Concerns for the financial health of the rail industry were mounting last night after figures confirmed a sharp slowdown in passenger growth.

They came as the chief executives of the five largest public transport groups - Stagecoach, National Express, Go-Ahead, Arriva and FirstGroup - prepare for a summit with transport secretary Geoff Hoon tomorrow, where the impact of the economic downturn will be on the agenda. Go-Ahead, Britain's busiest train company, has warned that rail services might have to be cut if the slump worsens, while bus services across the UK are under threat from a proposed reform of fuel subsidies.

It is understood that the chief executives will discuss allowing "flexibility" in their rail contracts, which guarantee huge payments to the government over the next decade including £1.4bn from National Express East Coast and £1.2bn from Stagecoach's South West Trains. The Department for Transport is adamant that it will not renegotiate contracts and reacted to the financial troubles of the previous east coast operator, GNER, by stripping the company of its £1.3bn deal in 2006 and putting the contract out to auction. A government source told the Guardian last week that the franchise owners had yet to approach the DfT with a proposal and, until then, they will be expected to honour contracts that were signed when the rail sector was riding on the coat tails of an economic boom.

The executives will attend the meeting armed with evidence that a boom period for the railways could be drawing to a close. According to figures seen by the Guardian, the number of rail journeys last year rose by less than 5%, down from 7.8% in 2007 and 6.7% in 2006. The tail-off in passenger growth follows an even steeper fall in revenue growth in the final two months of last year, with fare income rising by just 4% - prompting fears that some franchise contracts are coming under pressure. Analysts have warned that some recently awarded contracts need revenue growth closer to double figures to keep pressure off their owners.

"This is a material slowdown and, if it continues, then the business plans of certain franchises may start to look too optimistic. Trouble is, the slowdown could conceivably last for several years," said Douglas McNeill, analyst at Blue Oar Securities.

Franchise owners have slashed more than 1,500 jobs recently, with National Express cutting 750 across its business, South West Trains shedding 480 and Go-Ahead's Southeastern losing 300. National Express also admitted this weekend that its East Coast operation is considering charging passengers at least £1 to reserve a seat. Other franchises have expressed private sympathy, saying that too many customers make multiple reservations and never use them, but they have disregarded it after deciding that the public would react badly to extra charges when many fares are rising by as much as 10%.

The cost-cutting is taking place against the backdrop of a gradual elimination of the net government subsidy to franchise owners over the next three years. The government's subsidy of eight major franchises - including South West Trains, National Express East Coast and Southeastern - totalled £811m last year but that is scheduled to become a state profit of £326m by 2012. However, those numbers are predicated on consistently strong passenger and revenue growth. Fare growth, say analysts, is dependent on the economy being strong enough for passengers to swallow inflation-busting rises in off-peak fares and on enough commuters staying in work to maintain season ticket sales.

The financial resilience of the franchise system, and whether it represents value for money to passengers, will come under parliamentary scrutiny on Wednesday when the Public Accounts Committee grills senior DfT officials, including the department's head of rail. The hearing caused controversy two years ago when Dr Mike Mitchell, the DfT director general of railways, said it was "acceptable" for commuters to stand for half an hour in a journey even if they pay up to £5,000 a year for a season ticket.

Go further in Serbia
Off-peak rail fares are higher in Britain than anywhere else in Europe, the Liberal Democrats are to say today. They looked at "anytime" single rail tickets across Europe, and found that in Britain, £10 only takes travellers an average of 26 miles. In contrast, £10 in Serbia provides 512 miles of rail travel. Even with an off-peak return ticket in Britain, £10 only buys 56 miles of travel. The Lib Dem transport spokesman, Norman Baker, said: "In Serbia, £10 will take you almost the distance between London and the Swiss Alps while an English ticket will take you only as far as Basildon.

Plans to strengthen the security of Britain's energy supplies by building more gas storage facilities are being threatened by the collapsing demand for salt in the chemicals industry.

Two of Britain's largest gas storage projects are being built at saltmines in Cheshire close to a site at Runcorn where Ineos, Britain's largest private company, produces plastics and chemicals. Ineos uses the salt as a key raw material to make products including construction materials and vinyls used in car manufacturing. The extraction process, which involves injecting water into wells and leaching out the salt as brine, creates large underground caves suitable for secure gas storage.

However, the collapse in industrial demand for many of the products from Runcorn has raised questions about the proposed timetables for opening the gas storage sites, which are being developed by E.ON, the German power group, and GDF-Suez, its French competitor. The delays will increase fears about Britain's vulnerability to energy supply shocks.

Britain has 15 days of gas storage against 99 in France and 122 in Germany, leaving it far more exposed to disruptions such as the recent pipeline dispute between Russia and Ukraine. Once built, E.ON's 162 million cubic metre gas storage facility at Holford would hold enough gas for 3.5 million British homes, but it is up to three years behind schedule because of technical problems, a spokesman said.

Sources say that falling industrial demand for chemicals produced by Ineos at Runcorn is emerging as a key issue that could delay the opening still further.

David Steven, chief operating officer of British Salt, a company that is developing a third gas storage project at nearby Warmingham, Cheshire, said that falling industrial salt demand had placed several UK gas projects under threat, although he pointed out that its site already had ten existing cavities and therefore remained on track.

GDF-Suez is developing an even bigger project at nearby Stublach with 28 caverns and 400millioncubic metres of storage. If built, it would represent 10 per cent of Britain's gas storage capacity. The project is due to be commissioned between 2014 and 2018.

Plunging demand for salt is the latest in a series of hurdles to confront Britain's struggling gas storage developers. The UK has four billioncubic metres of gas storage, most of which is at a single subsea location operated by Centrica in the North Sea.

A further four billion cubic metres are planned but schemes have been held up by financing problems as well as difficulties obtaining planning permission from local authorities fearful of their environmental impact.

Most British supplies of natural gas have come from the North Sea, but reserves are falling rapidly, making the country more dependent on imports. By 2015, it is thought that up to 80 per cent of the UK's gas supplies will be imported, compared with 40 per cent at present.

BAA is expected to fast-track a third runway at Heathrow after the government yesterday backed expanding the airport as soon as possible after 2015. The transport secretary, Geoff Hoon, recommended that the airport owner "brought forward" a planning application for the runway after he made the surprise decision not to increase flights on the existing runways.

He said his refusal to allow more arrivals and departures on the existing site in west London made the need for a new runway all the more urgent.

Hoon brushed off concerns about the environmental impact of expanding Britain's largest airport by announcing that a third runway could be finished at the earliest in six years' time.

The £8bn development would add an estimated 350 flights a day at Heathrow, increase annual passenger numbers from 66 million to about 82 million, and put thousands more vehicles on the heavily congested roads surrounding the airport.

But Hoon told the Commons: "Doing nothing will damage our economy and will have no impact whatsoever on climate change."

However, cabinet members who oppose the third runway, led by the environment secretary Hilary Benn and energy secretary Ed Miliband, won some concessions. The government attached three green "sweeteners". The third runway would operate at half capacity when opened, raising the total number of flights from 480,000 a year to 605,000, rather than the 702,000 intended; aircraft using the new runway would meet strict greenhouse gas emissions standards; and carbon dioxide emissions from UK aviation would be limited to 2005 levels by 2050.

"This gives us the toughest climate change regime for aviation anywhere in the world," said Hoon.

He said the Civil Aviation Authority and the Environment Agency would be able to block the opening of the third runway if it threatened to breach noise and air pollution guidelines. Taking the runway to full capacity could not happen before 2020 and had to be approved by the Climate Change Committee, the independent body set up to monitor the government's sustainability record. If the committee believed the aviation industry was not making sufficient progress towards its 2050 carbon dioxide reduction target it would block the increase.

Yesterday's announcement allows BAA to push ahead with a planning application for the 2,200-metre runway, north of the existing site, and a sixth terminal for Heathrow.

However, it is understood the application will not be ready until 2011 at the earliest. A planning inquiry is expected to last two years with runway and terminal construction taking another three.

The government gave the go-ahead to the £8bn project after a consultation to determine whether it would breach guidelines on air and noise pollution and public transport access. It decided the expansion would meet this criteria, which includes EU guidelines on nitrogen oxide. The noise limits stated that the size of area exposed to 57db had to be no more than about 46 sq miles. BAA faces a planning inquiry and an expected judicial review of the decision brought by local councils.

The announcement by Hoon was accompanied by public transport measures that instantly drew criticism from green campaigners, who said they were half-baked, unfunded or already announced.

The plans include a £6bn increase in road capacity (already announced) involving use of the hard-shoulder on parts of the M1 and M6. There would also be a new company called High Speed 2, for the development of a London-to-Birmingham 200mph high-speed rail link scheme via Heathrow. Additionally, Hoon announced more studies on electrifying the Great Western and Midland Mainline rail lines.

Hoon said High Speed 2 would report on progress by the end of the year. But rail industry doubts funding can be found for such a project costing an estimated £5bn alone to run from London to Heathrow.

Environmental groups said the government had made a firm commitment on Heathrow but given lukewarm backing to the public transport concessions.

Stephen Joseph, executive director of the Campaign for Better Transport, said: "We have got a clear commitment to expand Heathrow and some vague promises to consider high-speed rail and electrification. It takes us in the wrong direction, which is away from a low-carbon economy."

The transport minister, Lord Adonis, said critics of the high-speed proposal were "completely wrong". He added: "You cannot build a £20bn railway until you have a detailed, credible and environmentally sustainable plan." However, the line could take an estimated 10 years to build and not open until after 2020.

The government also unveiled a £250m scheme for low-carbon vehicles.

The most significant concession by Hoon was the refusal to introduce a scheduling change which would have increased flights from Heathrow's existing runways by more than 100 a day.