In the oil patch, the mood has gone from boom to gloom in record time.

Less than a year ago, pundits were predicting $200-a-barrel oil, endless growth in Chinese energy demand, and a world running out of crude. But at CERAWeek, the big energy conference put on by data and advisory outfit IHS (IHS), running Feb. 9-13 in Houston, the talk has now focused on industry consolidation, how to beat down supplier costs, and just how low the price of oil might go.

"It has become painfully clear that our understanding of market forces remains imprecise at best," Ali Ibrahim Al-Naimi, Saudi Arabia's Minister of Petroleum & Mineral Resources, told conference attendees on the night of Feb. 10. "Groupthink dominated financial markets. What many forgot, ignored, or wished away is that markets are cyclical and recessions inevitable." Al-Naimi said that with a big new field coming on line, his country would soon have some 4.5 million barrels per day of spare oil production capacity, well above the 1 million to 2 million barrels per day the country typically maintains.

In July of last year, crude peaked at $147 a barrel. On Feb. 11 it was trading below $36. Investment bank Morgan Stanley (MS) recently predicted it could fall to $25 in the second quarter of this year.

The Cracks Are Showing
"The economic outlook has changed dramatically," Tony Hayward, CEO of oil giant BP (BP) said. "The impact on our industry has been sudden and severe."

The cracks are beginning to show in Houston, America's energy capital. The city seems to shine right now, with gleaming new parks, shopping centers, and sports facilities. All over town, cranes are still erecting luxury condo towers, giving the city the feel of a Dubai on the Bayou. Look more closely, though, and there are For Lease signs in the windows of furniture stores. A gray-haired man and his wife ask for gas money in the parking lot of a fancy Italian restaurant. And a swanky downtown boutique hotel with an empty bar practically pleads for customers with a $4 happy-hour menu.

The world, it turns out, really is flat, or at least not "decoupled" as some pundits once suggested. Zhou Jiping, the head of China National Petroleum, that nation's largest energy producer, said oil demand in his country has shrunk dramatically in the past year. "The heart of every Chinese feels the same vibration as the rest of the world," he said.

How all this gloom affects oil-company spending is a $300 billion question. Research firm John S. Herold expects capital spending on the part of the world's oil companies to fall 13% this year from last year's $300 billion. Many of the higher-cost fields that attracted capital in recent years may not be profitable at today's prices.

The Price Equals the Cost
Peter Mellbye, senior vice-president at Norwegian oil company Statoil Hydro (STO), displayed a slide showing the cost to produce a barrel of oil all over the world, from $20 in Saudi Arabia to more than $100 for the viscous goo found in Venezuelan lake beds. In a startling display of oil-company candor, Mellbye also showed Statoil's costs across all its projects. The average was $40 a barrel, about where the price is today.

Many of the major oil company execs at the conference tried to put on a brave face. Jeroen van der Veer, CEO of Royal Dutch Shell (RDSa), said his company's $32 billion-a-year in capital expenditures would drop "only a little" this year. Asked how he would justify that level of investment to shareholders, he said: "You have to explain long-term how compelling energy investments are. This is a better investment than paying out cash in dividends today."

BP's Hayward concurred that investments today make more economic sense because the cost of new leases and equipment are no longer being bid up, as they were over the past five years. Hayward said that new investments will be needed down the road, when the world economy rebounds. "The future is not canceled," he said.

But the severe price deflation hasn't yet hit all parts of the oil patch. Ali Moshiri, president of Africa and Latin America for Chevron (CVX), said the companies that supply the drill bits, rigs, and other oilfield supplies would have to bring their prices down further.

Shaving Expenses
"Oil prices have come back to 2005 levels but the cost of goods and services is twice as much," he said. "If we don't manage that, projects will be delayed, and suppliers will be hurting even more." Moshiri said an oil-production vessel that cost Chevron $500 million to build four years ago now costs $1.2 billion. To drill and test an exploratory well in deep water can cost $350 million. "We can't run our business that way," he said.

Other companies spoke of specific ways they were lowering costs. David Latin, vice-president for technology at BP, said his company was using fiber-optic lines and wireless connections to transmit data in real time from unmanned, offshore wells. By measuring the pressure, temperature, and oil flows remotely, the company could tweak the levels of chemicals, water, and gases used to flush out the hydrocarbons. The company has also improved its safety record because it no longer has to send workers out in helicopters to get data from the platforms. BP has cut its chemical costs by 15% as a result, its labor costs by 25%, and boosted production from old fields by 2% in the process.

At ConocoPhillips (COP), manager Stein Wolden is designing new work areas with input from psychologists and architects to get formerly disparate teams to work together. He said travel budgets have been cut, but video conferencing usage is up 30% since the economic crisis began last year. Shell, meanwhile, has developed new drilling vessels that are half the size of the old ones. They cost less and burn 50% less fuel.

Some things haven't changed. Oil execs still plead for more help from Washington, more access to off-limits regions, less regulation, and environmental programs that don't cost them too much. This year some of their requests may be answered. On Feb. 9, Representative Edward Markey (D-Mass.), the new head of the House Commerce and Energy subcommittee on energy and the environment, indicated oil producers may be allowed to drill in some new areas.

Reconsidering Steep Terms
"I think we can find areas of the Outer Continental Shelf that are acceptable for drilling, but we need to protect our most sensitive areas," he told conference attendees.

Several oil executives suggested that countries that charged much steeper terms for access to their oil in recent years may have to reconsider such terms as income from their oil lands has dwindled along with crude prices.

Colombia is showing how that might work. The former economic basket case cut its taxes sharply in the past three years and allowed foreign oil companies to invest without having to be partnered with national oil company Ecopetrol (EC). Chevron alone has invested $500 million in Colombia. The result of such efforts is a 30% increase in oil production over the past two years, to an estimated 650,000 barrels per day in 2009. Some two-thirds of that will be exported to countries such as the U.S.

"The overall government take in Colombia is less," said the country's Minister of Mines & Energy, Hernán Martínez Torres. "Right now, Colombia is one of the most competitive countries in the world."

And what of the world's biggest economic growth engine? China National's Zhou said the Chinese economy would start to rebound in the second half of this year, thanks in part to a $1 trillion government spending program. Oil prices, he predicted, would bounce back to $60 a barrel by 2010. He quoted optimistically from a 1,000-year-old Chinese poem: "Where the hills and streams end. There seems no road beyond…another village appears."

And, perhaps, another oil well.

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau

In a keynote speech today at the CERAweek energy industry conference in Houston, Jeroen van der Veer, chief executive of Royal Dutch Shell, emphasized that his company would continue investing through the current downturn, planning an outlay of $31 billion in 2009.

"To invest or not to invest. We are convinced that it is better to keep on investing. You have to replace easier oil with more difficult oil. You can do that best with long-life projects that you can do for years," said van der Veer, singling out as an example Shell's $20 billion investment in Russia's Sakhalin 2 project.

Van der Veer's comments echoed those earlier in the day by BP (nyse: BP - news - people ) Chief Executive Tony Hayward, who pledged a similar scale of investments for his company. (See "BP Chief Urges Oilpatch To Keep Investing.")

In a time of low commodity prices, said van der Veer, cash is better invested in future projects than returned to shareholders. "Investing is about timing. You care about costs," said van der Veer, adding that Shell is constantly balancing the relative value of growing organically versus acquiring other companies. Shell earned $31 billion in 2008, up 14% from a year earlier.

Without declaring expressly that oil and gas prices were set to rise, van der Veer insisted that energy demand will likely double by 2050 as the global population surges from 6 billion to 9 billion. "People like electricity, and they like to drive in cars," he said. "But oil and gas is not enough to supply the future energy demands of the world."

As for green energy alternatives? He said that renewable energy will come, but its adoption will be slow, because in economic terms "even the difficult oil and difficult gas is competitive." Even so, Van der Veer says he put costly solar panels on his own house at the encouragement of his children. "I told my children my break even point will come when I am 103," he said. Worldwide, "there is no point in building a hell of a lot of stuff that is too expensive."

Currently, with economic concerns outweighing environmental ones, Shell won't be investing much in carbon dioxide solutions: "This is not a good climate to do a lot of carbon capture projects." That said, there are easy ways for governments to encourage renewables. "Why is there more wind energy in the U.S. than Europe? Because you can get the permits very quickly," he said. "Especially in a time of recession, getting permits can really help."

World oil demand will contract by far more than previously expected in 2009 due to extreme weakness in the global economy, the International Energy Agency (IEA) said on Wednesday.

Demand is expected to fall by 980,000 barrels per day (bpd) in 2009 to 84.7 million bpd, the agency said in its monthly market report. The IEA's forecast last month was for demand to contract by 500,000 bpd this year.

The forecast adds to evidence that the financial crisis is sharply eroding fuel use. The IEA, which advises 28 industrialised countries, said the latest reduction to demand may not be the last.

"The bottom line is that 2009 looks like a pretty weak year," David Fyfe, head of the IEA's Oil Industry and Markets Division, told Reuters.

"It's far too early to say if this is the end of the downward demand revisions because the financial and economic spillover is still unfolding. We're hostage to any further weakening in the overall economy."

World oil demand is now expected to average 1.4 million bpd less than it did in 2007, before crude's price spike and the slowdown in the global economy started to cut demand.

The IEA said it was revising its oil demand forecast lower after the International Monetary Fund sharply cut its estimate for global GDP growth in 2009 to just 0.5 percent.

"The continued - and dramatic - revisions of the past few months underscore the extreme weakness of the global economy," the IEA said.

"The slowdown in industrial activity and consumption is the unavoidable sequel to the financial meltdown."

Oil prices pared gains after the IEA report was issued. US crude was up 28 cents at $37.83 a barrel as of 01.45pm, UAE time.

The IEA also cautioned that future oil supply growth has come under threat from the collapse in prices, with decline rates in mature oilfields likely to accelerate if oil remains at $40 a barrel.

"Hand in hand with the downward revisions in demand is the impact on supply," said Fyfe at the IEA. "The trend now is that downside demand revisions are being matched on the supply side."

Oil prices peaked at $147.27 a barrel in July 2008 due in part to burgeoning demand from economies such as China and India, but have since collapsed due to the steep drop in demand.

As demand has fallen, oil inventories in the Organisation for Economic Co-operation and Development (OECD) have remained at high levels.

Stocks at the end of December stood at 57 days of cover, compared with 56.4 days at the end of November, the IEA said. However, the IEA said that if the Organization of the Petroleum Exporting Countries (OPEC) is successful in implementing recent output cuts, supplies would be 1.5 million bpd day below its estimate of demand for the producer group's oil in 2009.

"This implies a substantial draw in stocks later in the year unless demand again trends weaker, or non-OPEC supplies prove stronger than expected," the IEA said.

Up to 50,000 jobs could be lost in the offshore oil and gas industry over the next two years because of a fall in investment caused by plunging oil prices, the industry association warned on Wednesday.

The jobs at risk represent one in eight of the industry’s workforce of 400,000.

At today’s oil price and cost levels, two-thirds of potential new field developments would be only marginally profitable at best, according to Oil & Gas UK, which represents offshore operators and suppliers. New North Sea developments typically need an oil price of more than $40 per barrel to break even: Wednesday Brent crude traded at about $45.

The industry is urging the government to provide more tax breaks to encourage investment and help for smaller oil companies that are struggling to raise funds because of the financial crisis.

Malcolm Webb, O&GUK’s chief executive, said the industry was entering “a period of adjustment.

“It will come back again but we want to make sure the collateral damage to the infrastructure is not too great,” he said.

The North Sea’s infrastructure, much of it installed in the 1970s, is ageing. The region’s old fields are running dry and the new ones being discovered are typically very small.

Production fell about 5 per cent last year to 2.63m barrels equivalent of oil and gas. That decline was slower than the 7.5 per cent annual average for 2002-07 but was achieved only thanks to heavy investment of about £5bn a year in recent years.

O&GUK expects investment in 2009 to be lower than last year’s £4.8bn ($6.9bn), which was in turn less than in 2007 and 2006, but said the decline could be anything from 6 to 27 per cent.

If investment falls steeply, the industry argued, jobs would be lost and output would fall faster.

The downturn has already hit Oilexco, a Canadian-based company that had been the most active driller of wells in the North Sea. It has put its UK business into administration.

Royal Dutch Shell said last month it was delaying development of the Pierce field. Other companies have been thinking about similar moves.

Mr Webb said he was “very hopeful” there would be help for the industry in the Budget, probably through a “value allowance”, a new tax relief for companies developing more difficult fields.

However, he said the Treasury had also indicated that further help might be available, perhaps through a more generous tax allowance for exploration wells, as used by Norway.

Carl Hughes, lead partner for energy at Deloitte, the professional services firm, drew a contrast between the treatment of the oil and gas industry and the help provided to carmakers.

“The automotive sector, where the majority of companies are foreign owned, can attract a £2.3bn financial injection in the form of loan guarantees, when its contribution to UK economic growth is significantly less than the oil and gas sector,” he said.

The oil and gas industry, including the supply chain, employed more than twice as many people as the automotive industry, he added.

Is leverage a problem for the world economy? Is the global "savings glut" at the root of the current credit crisis?

In our view, the answer is no. Saving is good - provided it is well directed - and leverage per se is not a hindrance to economic growth. If capital can be efficiently allocated to the most productive sectors in the global economy, a high savings rate can enable a high investment rate. In turn, a high investment rate can allow for a higher rate of economic growth in the long run. In the five years preceding the current crisis, however, excessive leverage and non-productive investment helped fuel both a credit bubble and an economic boom, with global GDP expanding at the fastest pace since the 1960s. The main question is not whether the world economy was running on too much leverage, but whether the financial sector was able to allocate global capital efficiently. In many countries, misguided government policies favoured investment in housing from the mid-1990s. Meanwhile four of the world's top five largest oil and gas reserves holders, in effect, shut their doors to outside investment from 2000. Financial institutions reacted by channelling excess savings from fast-growing emerging economies into the real estate sector in OECD countries. Attracted by the perceived safety of property markets, capital flows avoided capacity investments in volatile sectors such as commodities. In other words, markets failed and too much money went into real estate, too little into energy. The spike in energy and food prices that followed - primarily the result of under-investment in productive energy capacity and rapid demand growth - crippled fast-growing emerging markets. The financial turmoil is thus coming from a gross global misallocation of capital, not excess indebtedness.

Now, the cyclical downturn in energy prices is pushing investment out of the sector at a time global oil field decline rates are accelerating. In our base case scenario, we estimate global oil production decline rates for mature fields of at least 5 per cent, and see non-OPEC oil output in the current 49-50m barrels a day range over the next seven years. There is a risk, however, that decline rates accelerate to 6 per cent if the investment drops further. This situation could push non-OPEC production down precipitously towards 47m b/d by 2015 from the current levels.

The IMF recently estimated the current global downturn will be the most severe in the post- war period. In the short run, the scarcity of consumer credit will continue to feed into many parts of the global economy from construction to travel and vehicle sales. In the medium term, however, large fiscal and monetary policy stimuli and bank bail-outs could succeed in supporting aggregate OECD demand. Yet, if the energy and credit crises are indeed linked to the same market failure, we could witness a second round of commodity price inflation. With the ongoing upward shift in the cost of credit, investors now require higher rates of return, and investment into marginal energy projects such as oil sands is drying up. Therefore, even if governments are successful in reigniting the global economy, physical energy supply constraints will prevent a return to the high world GDP growth rates of recent years.

The commodity super-cycle is not over, it is just pausing. For the world economy to resume growth of 5 per cent, energy supply must expand by a similar rate. But with lower oil prices and a credit crunch, energy investment is plummeting, suggesting global energy demand will eventually pick up more rapidly than productive energy capacity. Assuming the ongoing global recession does not turn into a multi-year event that pushes energy demand down structurally, steep decline rates could again put upward pressure on oil prices as soon as 2010 or 2011. In particular, if the low oil price/high cost of money environment persists for most of this year and next, our base case scenario for non-OPEC production could prove optimistic, exacerbating the second leg of the commodity super-cycle. If and when the global economy starts to recover, too many dollars chasing too few barrels will only lead to much higher oil prices.

The writer is managing director and global head of commodities research at Banc of America Securities-Merrill Lynch  

Riyadh: Economic relations between Saudi Arabia and China received a shot in the arm with the signing of five landmark agreements aimed at taking ties to a new height.

The agreements, including the one for the ambitious Makkah mono-rail project, were signed yesterday - the first day of a high-profile official visit from Chinese President Hu Jintao.

King Abdullah Bin Abdul Aziz and Hu were present at the signing ceremony. Earlier, both leaders highlighted the significance of further strengthening bilateral relations during their talks, which covered a wide-range of issues.

The agreements signed included cooperation in oil, gas and mining; in the field of health; on quality inspection and standards of goods and services; a memorandum of understanding to set up a chapter of King Abdul Aziz Public Library in Beijing and the Makkah railway project.

The signing of agreements during the second visit of Hu is regarded as another milestone in the growing bilateral ties between the two countries , which gained momentum after the visit of King Abdullah to China in January 2006, the first ever visit of the monarch to a foreign country after ascending to the throne.

China is keen to ensure huge supply of oil and petrochemicals for its industries from the Kingdom while Saudi Arabia, the largest oil producer and supplier in the world, wants to tap the potential of the most populous country in the world.

China Petroleum and Chemical Corporation (Sinopec) and the Kingdom's oil giant Saudi Aramco signed earlier agreements to establish oil refineries in the Kingdom.

Sinopec has been joining hands with Saudi Aramco in oil exploration since 2004.

According to Saudi Arabian officials, the Kingdom would spend 450 billion riyals ($120 billion) on infrastructure projects over the coming five years.

The report, released by the Chinese embassy in Riyadh, showed that Saudi Arabia has been the largest trading partner of China in West Asia and Africa over the past eight years and the value of trade exchange between the two countries exceeded $41.8 billion in 2008.

Last week, Kingdom's Al Rajhi-led consortium has won the 6.79 billion riyal contract for implementation of the Haramain Railway project linking the cities of Makkah and Madinah.

The contract involves undertaking the civil works, the first part for laying rail lines from Makkah to Madinah passing through Jeddah city and King Abdul Aziz International Airport. Al Rajhi Alliance includes China Railway Engineering Corporation and France's Alstom Transport.

Oil held above $36 a barrel on Thursday, pausing after steep overnight losses, as lingering worries over the health of the global economy and forecasts for a hefty fall in global energy demand weighed on sentiment.

Markets were cheered after the US Congress reached a deal on $789 billion in new spending and tax cuts on Wednesday, but investors remained sceptical towards a separate US bank rescue plan unveiled on Tuesday that was lacking in specifics.

Investors will now train their eyes on US weekly jobless claims and January retail sales data due later in the day, which will give a clearer indication of how the US economy is faring.

US light crude for March delivery edged up 23 cents to $36.17 a barrel by 06.47AM, UAE time. The contract settled down $1.61, or 4.3 percent, on Wednesday.

"The deterioration in US demand drove crude oil inventories higher by more than expected ... short-term risks to oil prices remain on the downside," Goldman Sachs' commodities analyst Malcolm Southwood said in a note.

Oil has tumbled around 10 percent this week, having fallen four sessions in a row since last Friday, on demand worries and fears the US bank rescue plan would not go far enough to revive the ailing financial sector.

Oil prices took a battering on Wednesday after the US Energy Information Administration said that domestic crude stocks had ballooned 4.7 million barrels to 350.8 million barrels in the week to Feb. 6, against a forecast for a 3.1 million barrel rise.

The latest increase in US crude stocks comes on the heels of a combined rise of over 13 million barrels in the prior two weeks, and crude inventories are now moving significantly above their five-year range, BNP Paribas said in a report.

Oil's losses were further exacerbated by a separate report from the International Energy Agency forecasting that global demand would contract by nearly a million barrels per day (bpd) - the most since 1982 - to 84.7 million bpd in 2009.

Underlining the damage caused by the global financial crisis, data showed global trade activity in goods and commodities had tumbled.

The United States reported a fifth straight monthly fall in exports and imports in December, while China's January exports fell 17.5 percent from a year earlier, a sharp acceleration from a 2.8 percent dip in December.

Imports plummeted 43 percent, twice as much as in the previous month.

A how-to guide for the political leaders of poor countries on how to manage natural resources was launched this week, aimed at ending the so-called "resource curse" plaguing the economic development of poor nations rich in oil, gas and other natural assets.

Some of the world's poorest countries are also some of the richest in natural resources, among them Nigeria, Angola or the Democratic Republic of Congo, as they suffer from the "resource curse". Instead of being an opportunity for economic development, natural assets tend to foster political instability and corruption as greedy individuals try to get their hands on them. Natural assets are also so valuable that they remove the incentive to develop non-extractive industries.

But the potential for development is huge, as the value of these assets dwarfs any international aid they might receive. Angola, ranked 162nd out of 177 countries in the UN's human development index in 2007-08, had oil revenues in 2008 that were twice as large as the total amount of international aid given to the world's 60 poorest countries that same year.

The Resource Charter is an 11-point plan prepared by a group of high-profile economists, lawyers and political scientists, including Michael Spence, 2001 laureate of the Nobel prize in economics; Robert Conrad, an expert on natural resources economics at Duke University, and Tony Venables and Paul Collier, professors of economics at Oxford University.

"We want to provide a policy toolkit," says Collier, who is also the author of the 2008 book The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It. "We're not here to tell government off. We are saying to them: 'If you want to turn national assets into broad-based development, these are the key steps that you need to get right'. These steps are not obvious, as governments and societies have got them wrong over the years."

A draft of the Resource Charter was presented on Wednesday at an international conference in Kuwait. It will be open for comments until its official launch in Oslo in May, when it will be available online at http://www.naturalresourcecharter.org/.

The Resource Charter is backed by the International Monetary Fund, the World Bank and the African Development Bank, but receives no money from these bodies. The document was conceived on a shoestring, during the academics' spare time, in an attempt to provide easily accessible information to decision-makers and citizens of nations hit by the resource curse.

"There is huge frustration in these countries as to why they are poor when they have such valuable assets," says Collier. "We want citizens to find the material easily, free of the technocratic gobbledegook, so they understand these issues and push their governments for change … Reform can only happen from the inside."

One of the key steps recommended by the Resource Charter is to use the revenues of natural assets to boost domestic investment. "Saving the money into a sovereign wealth fund is wrong for these countries, as their big problem is lack of domestic capital," says Collier. "Neither should the revenues be used in the ordinary state budget because they come from a depleting natural resource. Instead, nations should invest in investing, by increasing the mass of domestic capital available."

When it comes to fighting corruption, countries should auction extraction rights, rather than engage in one-on-one negotiations. "Auctions force companies to inadvertently reveal the real value of extraction rights, something that the government may not know," explains Collier.

"In a straight negotiation, there is also a strong incentive on the side of the company to bribe the government officials taking the decisions," he says. "In an auction, the bid's winner is usually the closest to the true value of the natural assets."

Auctions can also limit corruption when public contracts are concluded. "In 2004 the Nigerian minister for solid minerals, Obi Ezekwesili, introduced competition to award public procurement projects. Overnight the costs of these projects to the government went down 40% [as opportunities for corruption were removed]," says Collier.

The economic crisis is hitting resource-rich poor countries hard as demand for them falls. "We have just seen the end of one of the biggest commodities booms and you can be sure that the governments of these countries are kicking themselves for not taking advantage of it to boost economic development. The spirit now is 'never again'," says Collier, which believes the current crisis could be an opportunity for change. "They want to get it right so that they can harness the value of natural assets better in future."

Energy and Climate Change Minister Mike O'Brien granted consent for the construction three new power stations on Thursday – the largest addition to the UK's generating capacity since the construction of Drax power station in Yorkshire in 1986.

The new sites will generate a combined 4 gigawatts of electricity, enough for around four million homes. The government has approved the construction at sites in Pembroke in West Wales, King's Lynn in Norfolk and Hatfield in Hertfordshire.

RWE's npower unit will build a 2,000 megawatt combined cycle gas turbine power station at Pembroke, Powerfuel will construct a 900 megawatt integrated coal gasification gas-fired power station at Hatfield and Centrica has permission to develop a 1,020 megawatt combined cycle gas turbine power station at King's Lynn.

Each of these companies agreed during the planning process that they would ensure that enough land was left available in the design to retrofit a carbon capture and storage (CCS) plant.

CCS technology is currently being developed to "scrub" carbon from emissions which can then be stored in deep geological locations or even under the ocean, although the Department for Energy and Climate Change says that some of the captured carbon could be used for commercial purposes.

Consent was also given to build a second phase at Hatfield, which will consist of a coal gasification combined cycle power station, which uses coal to produce hydrogen for fuel.

Mr O'Brien said: "It is essential to replace older polluting power stations that are reaching the end of their lives with new stations that operate more efficiently. Investment like this in the energy sector will create new engineering and construction jobs."

Gas fired power stations produce less than half of the carbon emissions of traditional coal fired stations, according to government data.

The world's largest utility is reviewing its budget for 2009 as demand for energy shrinks and its sales and revenues tumble.

Gazprom is facing a cash squeeze as shrinking demand for energy in Europe forces the world's largest utility to curb spending, postpone the development of new gasfields and put its domestic customers on a regime of prepayments for fuel.

The Russian company, which cut off supplies to the Ukraine in January in a dispute over unpaid gas bills, said that it was reviewing its budget for 2009 because of an anticipated fall-off in export volumes and revenues.

In a presentation to investors in London yesterday, Gazprom said it was expecting volumes to Western Europe to shrink by 5percent this year while prices would fall by almost a third.

The utility giant reckons exports to former Soviet satellite states will tumble 15percent and Andrey Kruglov, head of finance, said the budget would be revised and financial efficiency would be improved.

“We will be prioritising projects. That will allow us to see which projects will be funded anyway, which will be postponed and which will be funded if the economy improves,” he said.

Mr Kruglov said that it was too early to determine which projects would be postponed. He indicated that major projects such as the Bovanenkovskoye gasfield in the Yamal peninsula, the Shtokman gasfield in the Barents Sea and the Nord Stream pipeline to Germany would not be affected.

Within the company, costs are being cut with a 10percent staff reduction in the parent company and cuts in advertising and sponsorship.

Once known for its colossal waste, corruption and sprawling business interests, Gazprom has become more focused on its job as a supplier of energy to consumers and taxes to the Russian Government.

The Government is allowing it to raise prices to domestic consumers and, after the row over unpaid bills in Ukraine, Gazprom's domestic consumers will begin to feel the heat from the monopoly supplier.

Mr Kruglov said that Gazprom would introduce an advance-payment system for domestic customers.

The prepayment system is aimed at local communities that typically order excessive quantities of gas under long-term regulated contract to avoid the high cost of purchases on the open market.

In addition, Mr Kruglov said he was not ruling out the possibility of payment problems as the recession affects Russian businesses.

Gazprom had borrowings in June of $48 billion (£33 billion) and must repay about $10 billion in borrowings this year. At the same time the company has important commitments in spending on projects necessary to maintain gas production with $29 billion already budgeted for 2009.

The capital budget for this year is a reduction of almost $10 billion from spending in 2007 and Mr Kruglov indicated that capital expenditure would be trimmed again but the size of the cut would not be finalised until the end of the first quarter.

Cuts in spending on new gas production are likely to create anxiety among Europe's gas importers due to concern that Gazprom will be unable to meet increasing demand when economic growth picks up.

Gazprom is committed to several huge projects in the Arctic, including Shtokman, with 3.7 trillion cu m of gas reserves. Gazprom has said that it expects gas to begin flowing from Shtokman by 2013.

Qatari Oil Minister Abdullah Al Attiyah said Qatar would reach its target LNG capacity of 77 million tonnes per year by 2012, a newspaper reported on Sunday.

Attiyah said Qatar's gas production currently stood at 31 million tonnes a year and would increase by 46 million tonnes over the course of the next three years, Al Watan reported.

The oil minister had recently said the world's largest liquefied natural gas (LNG) exporter would ramp up production by 2010, while officials at state gas companies had said Qatar would not reach the 77-million tonne target until 2012.

The minister also said OPEC was becoming accustomed to the rise and fall in oil prices but that there were expectations conditions in the market would stabilise in 2010, Al Watan said.

An ambitious plan to build the world’s largest “clean coal” power station at an old colliery in Yorkshire moved a step closer after the government gave a green light to the first stage of the project.

Powerfuel, a company owned by Richard Budge, a mining entrepreneur, was granted approval to build a 900 megawatt power station at Hatfield in Yorkshire which would supply enough electricity to power almost 1 million homes.

Mr Budge has proposed to build the plant in two phases, starting with a conventional gas-fired station which could then be converted to the use of coal gasification technology, in which coal from the colliery would be turned into gas with the carbon emissions stripped out for safe storage underground.

Energy minister Mike O’Brien granted approval for the first stage of the project although the government said further evidence would be needed to guarantee that the carbon could be stored safely before the second stage could be approved.

The first stage is expected to cost around £900 million with the second costing up to £1 billion.

If completed, the Hatfield plant would be the first and largest plant in the world equipped with carbon capture and storage (CCS) technology, which strips carbon dioxide from power-plant emissions and buries it deep underground in rock formations.

The decision was announced alongside approval for two other conventional gas-fired power stations - by Centrica at King’s Lynn in Norfolk and RWE N-Power at Pembroke in Wales.

The Centrica station will generate around 1000 megawatts of power while the N-Power station will provide around 2,000 megawatts.

In total the new plants will generate 4,000 megawatts of electricity or enough to supply 4 million homes.

“It is essential to replace older polluting power stations that are reaching the end of their lives with new stations that operate more efficiently,” said Mr O’Brien.

Congressional leaders reached agreement on a compromise $789bn stimulus deal on Wednesday as Tim Geithner hit back against widespread criticism that his separate US financial rescue plan lacks specifics.

The stimulus package, which is likely to be signed into law by President Barack Obama by his target date of Monday, is smaller than both versions individually passed by the House and Senate.

After days of intense debate, the speed of agreement reflected pressure exerted by the White House to reach a deal. It trimmed tax cuts and health and education spending to keep the figure below $800bn, a ceiling insisted on by moderate Republicans and Democrats in the Senate.

Meanwhile, a Treasury official said that Mr Geithner would urge other nations to join the US in taking aggressive action to fight the crisis at this weekend’s meeting of finance ministers and central bank chiefs from the G7 industrialised nations.

“We will certainly be asking the others about their plans and encouraging them to take bold measures to help sustain the global economy,” the official said. The US understood countries had “different scope for actions” and indicated that the US would seek to establish whethercountries were doing everything they are were able to do to, given, for instance, their existing debt burdens. “That discussion needs to take place,” the official said.The official said Mr Geithner would also set out the administration’s position in favour of reform of financial regulation that would make regulation “more consistent across the globe” and ensure “high regulatory standards that are applied across jurisdictions”.

Earlier, Mr Geithner told the Senate regarding the financial rescue plan: “I completely understand the desire for details and commitments. But we are going to do this carefully.” He left the door open for a request for more bail-out funds at a later date. “We want to be careful before we come to you and ask for additional resourcesor authority that we have done so with as much care and consideration on design as possible,” he said.

Mr Geithner said regulators would use a stress test for big banks under the rescue planto “provide a more realistic, forward-looking assessment” of the losses they might face. This could require banks to step up provisioning.

The rescue plan was still attracting criticism on Wednesday. Ed Yardeni, president of Yardeni Associates, an advisory firm, said Mr Geithner was “an empty suit with an empty plan”. But Lawrence Summers, director of the National Economic Council, said it reminded him of the initially negative reaction to the successful 1994 Mexico bail-out.

A second senior administration official said the plan was intended to ensure banks had access to a larger capital cushion to withstand the recession.

He said the administration decided against providing insurance-style guarantees across the banking system because “guarantees could leave the government with risks it cannot price and cannot manage, and it looks like you are trying to avoid dealing with the reality of the situation”.

Investors said they could be interested in investing in toxic assets alongside the government providing there was attractive government financing and guarantees – but said there was little to go on in Tuesday’s announcement. “I don’t know who, exactly, they’re talking about, or how they’re going to lure people in,” one private equity investor said.

Additional reporting by Julie MacIntosh

The European Union on Wednesday scheduled two emergency anti-recession summits in an effort to suppress protectionism, sustain employment and prevent the bloc’s political fragmentation into old and new member states.

EU heads of state and government will convene in Brussels on March 1 to discuss their latest steps to counter the financial sector crisis. They will meet again in Prague in May to consider the recession’s impact on the 27-nation bloc’s job market. This is in addition to a previously scheduled summit of EU leaders on March 19-20 in Brussels that will also deal mainly with economic issues.

The apparent aim of the March 1 summit is to rally EU governments behind the bloc’s core economic achievement – a single internal market for the free movement of people, goods, services and capital – and to stiffen their determination not to slip into economic nationalism.

“Only by co-ordinated and united action will we overcome the crisis. The internal market is the vehicle that will drive us out of it,” said Mirek Topolanek, the Czech prime minister, after talks with José Manuel Barroso, European Commission president.

The two men announced the summits as the EU tried to limit the fall-out from a clash between French and Czech leaders that has exposed cracks in Europe’s unity just when the EU confronts the most serious economic difficulties in its history.

“My feeling is that this is something that’s very damaging to both of us,” Mr Topolanek said of his row with Nicolas Sarkozy, France’s president. “We haven’t dealt with it in person because, frankly, it wasn’t worth it. Now I’ve learnt a lesson. It’s better to call each other up.”

The dispute broke out last week when Mr Sarkozy suggested that French car manufacturers operating in new EU member-states, such as the Czech Republic and Slovakia, should switch production to France and protect French jobs.

Tensions rose on Tuesday when Mr Topolanek accused unnamed eurozone governments of “deforming” the project of European monetary union with misguided responses to the financial crisis.

The quarrel now shows signs of evolving into a broader conflict between the EU’s older, western European countries, most of which use the euro, and the newly admitted states of central and eastern Europe. Most of the second group are outside the eurozone and are potentially more vulnerable to severe financial disruption the longer the crisis persists.

“Already we can see small countries entering into problems with liquidity, as the price of their bonds decreases and they are not able to sell them,” said Mr Topolanek, whose country took over the EU’s rotating presidency from France on January 1.

The Czech Republic is also angry and frustrated at the disapproving noises heard in certain western European capitals about its supposedly weak leadership in the financial crisis.

In an apparent allusion to France and its newly unveiled €6bn aid plan for the French car industry, Mr Topolanek said the real division in the EU was between “those who think it’s possible to violate the rules right now, and those who think it’s not, and I’m one of the latter”.

Mr Barroso, striking a balance between support for France and defence of the EU single market’s integrity, said: “We must not let our industries perish because of a temporary downturn ... But we will need to scrutinise very carefully the details of the [French] subsidies.”

Mr Barroso added: “All over the world there’s a real threat to the global economy from economic nationalism and narrow protectionism. We must resist this temptation. If one country decided to go it alone and take unilateral measures, others might decide to do likewise. But I reject the idea that it is a specifically European problem.”

There is going to be a previously scheduled summit of EU leaders on March 19-20 in Brussels, also to deal mainly with economic issues.

Fears that China is facing deflation are mounting after the country’s consumer prices grew at their slowest pace in 30 months years in January and producer prices accelerated their fall.

The consumer price index was up 1 per cent last month from the same period a year earlier, 0.2 percentage points less than in December, the government said. The producer price index dropped 3.3 per cent year-on-year, a sharper fall than the 1.1 per cent recorded a month earlier.

A 4.2 per cent year-on-year jump in food prices was the only reason the CPI growth rate was still positive in January. Consumer prices excluding food prices decreased by 0.6 per cent year-on-year, the National Bureau of Statistics said.

This is driving economists to forecast deflation in the coming months.

“China’s CPI inflation is likely to dip into negative territory in early-2009, due to the high base in early-2008, when food and commodity prices were surging and severe winter snowstorms brought disruptions to agricultural and industrial activity,” said Jing Ulrich, chairman of China equities at JP Morgan in Hong Kong.

“However, consumer prices should stabilise towards mid-year as the lower base of 2008 takes effect, and the implementation of stimulus policies bolsters consumption.”

Another factor is the drought affecting the wheat belt in Northern Central China. Er Jinping, secretary-general of the State Flood Control and Drought Relief Headquarters, said more than 80 days without rain in several provinces had weakened winter wheat crops with the proportion of lower-yielding seedlings rising by more than 4 per cent compared with last year.

But given a series of good harvests in recent years, it is not expected that the water shortage will drive up food price inflation significantly. Economists said the Central Bank was therefore expected to cut rates further in the months ahead. 
 

More than 12,500 jobs are to be created or safeguarded through a multi-billion pound order for new trains, the Government announced today.

Transport secretary Geoff Hoon said passengers on some of the country's busiest rail routes would benefit from the single biggest investment in intercity trains for a generation.

A £7.5 billion contract has been awarded to a British-led consortium called Agility Trains, to build and maintain a fleet of new "super express" trains for the Great Western and East Coast main lines.

The new trains will replace existing high speed trains which are 20-30 years old.

Agility, made up of John Laing, Hitachi and Barclays, said it would make a "significant" inward investment as part of this contract.

They will build a new train manufacturing plant in the UK, as well as depots in Bristol, Reading, Doncaster, Leeds and west London, with upgrades to existing depots throughout Great Britain.

Mr Hoon said: "This announcement demonstrates that this Government is prepared to invest, even in difficult economic times, by improving our national infrastructure.

"It is good news for the British economy that over 12,500 jobs will be created and safeguarded, good news for the regions that the Government is supporting significant inward investment, and good news for passengers that we are taking the steps necessary to improve their rail journeys."

The first of the new trains will enter service on the East Coast mainline in 2013.

They will be fully operational from 2015, linking London with Cambridge, Leeds, Hull, York, Newcastle and Edinburgh and linking the capital with the Thames Valley, Bristol and South Wales.

The Government said its rail experts, working alongside the industry, had created a new specification for the trains that would offer more seats, more reliable services and reduced journey times.

Professor Andrew McNaughton, Network Rail's chief engineer, said: "Network Rail has been delighted to support the Department for Transport from the very start on the development of this project. This will be the first train for many years which has been developed as part of a system together with the GB rail infrastructure.

"We have worked with DfT to optimise the design of both train and infrastructure to give the best capacity and passenger experience and the best whole life costs. This is a big train, but it will tread softly and so reduce the amount of maintenance and network down-time needed."

Alec McTavish, Association of Train Operating Companies' (ATOC's) director of policy and operations, said: "This announcement is good news for the rail industry and passengers.

"The fleet will provide long distance operators with the trains they need to meet the needs of a growing market and passengers with an attractive, cost effective travel choice, which is essential if rail's potential to reduce the UK's carbon footprint and transport congestion is to be realised.

"ATOC and its members have been working closely on the development of the trains' specification and will now work with the Department and Network Rail to bring them into service."

Mr Hoon also announced that the DfT was in advanced negotiations with National Express East Anglia to provide 120 new carriages for the Stansted Express service from London Liverpool Street to Stansted Airport.

The preferred bidder for this order is Bombardier Transportation, which plans to build them in Derby.

There will be options to deploy the 125mph trains on London commuter services on the West Coast Main Line and on services between London and the West of England (Penzance and Exeter).

The fleet will comprise an electric, self-powered (diesel), and a bi-mode variant, the latter being able to make use of an electric or a diesel power source at the end of the train.

This is the first time in recent history that a bi-mode train has been earmarked for the UK rail network. Bi-mode trains are common on some mainland European national rail systems.

The new trains will be cleaner, greener and generate less noise than the trains they will replace.

Despite being larger, the new trains will be up to 17% lighter than their counterparts, meaning that they will be more energy efficient and faster at accelerating.

The electric and bi-mode versions of these trains will include regenerative braking, a system whereby electricity is re-cycled back through the overhead wires when the driver applies the brakes.

The diesel and bi-mode versions will benefit from the latest hybrid power technology which will reduce fuel consumption by up to 15%.

The new carriages will be 26 metres long as opposed to the 23 metres of intercity vehicles currently in use. This will mean that they will carry up to 21% more passengers per train than current rolling stock. The faster journey times will also allow operators to run more frequent services.

A typical journey between London and Leeds will shorten by about 10 minutes, between London and Edinburgh by 12 minutes, between London and Bristol by 10 minutes and between London and Cardiff by 15 minutes.

Today's announcement represents the largest-ever procurement of rolling stock.

A rival consortium bidding for the contract, which included Bombardier, the only company making trains in the UK, expressed disappointment at missing out on the work.

Express Rail Alliance, comprising Bombardier Transportation, Siemens, Angel Trains and Babcock & Brown, has been asked to maintain their status as reserve bidder.

The Government said both bids were "deliverable and substantially compliant".

A spokesman for the consortium said: "We are extremely disappointed not to have been awarded preferred bidder status for the intercity express programme.

"We have spent 18 months developing a compliant, competitively priced, innovative and sustainable solution which would have significantly benefited the rail manufacturing economy in the UK and Europe."

Executives from major energy firms yet to cut prices in 2009 have said they are "optimistic" that gas and electricity bills will fall soon.

But senior figures from EDF Energy, E.On and Scottish Power did not tell MPs when such moves would be made, and Npower was non-committal on cuts.

British Gas and Scottish and Southern Energy (SSE) have already trimmed bills for some of their customers.

However, further cuts may not be forthcoming, one executive warned.

Wholesale energy prices for summer 2010 are about 10% higher than they are now, SSE's chief executive Ian Marchant told the Energy and Climate Change Committee.

"I'm concerned that if the wholesale price increases, we might see an increase," he said.

"I would have expected us to see another round of decreases [in energy bills] later this year or early next year, but objective analysis suggests that this might not happen."

Consumer groups said the news was a "big blow" to customers already struggling with bills.

'Low profits'

Soaring wholesale energy prices have pushed bills to record levels.

But energy bosses told the Energy and Climate Change Committee that while wholesale prices were 75% higher than February 2007, energy bills had risen by 30% that time.

Nick Horler, chief executive of Scottish Power, said the pricing of energy was a "positive story" and that his firm and others were helping UK customers.

While some European customers faced bills based on the wholesale price of recent months, Scottish Power used its "size and strength" to buy energy in advance to "protect our customers from a volatile market", he said.

Scottish and Southern Energy has said that from the end of next month, its average prices for electricity customers will fall by 9% and average gas bills will be trimmed by 4% - the first price cut since March 2007.

SSE's Mr Marchant told MPs he had "no idea" why many of his rivals were yet to cut prices.

"It's the two British-listed companies who have made cuts this year. I don't know whether this is significant but it's an interesting question," he said.

"Part of me hopes that they do not reduce prices because I can win customers - but that's not the right thing for the UK, so I hope they get off their backsides and do something."

British Gas is to cut gas bills by 10% from 19 February - which it said would cut the average "dual fuel" customer's bill by £66.

Chief executive Phil Bentley insisted that there was no huge profiteering by his company, saying that after tax, the firm made a profit of about £2 for every £100 of a domestic bill.

'Very optimistic'

Scottish Power's Mr Horler said he was "very well aware that two of our largest competitors have set dates from which decreases will take place".

"We don't want to lose customers and therefore we are looking to move soon," he added.

And commercial director of EDF Energy, Martin Lawrence, said is firm was "actively looking at prices" and expected price moves "soon".

E.On commercial director Jim MacDonald said he was "very optimistic" about prices being reduced.

However, Npower company secretary Guy Johnson was less clear about the prospect of similar cuts in standard pricing.

Mr Johnson stressed his company had invested heavily in energy efficiency and introduced lower prices for more vulnerable customers.

"We've seen coming through in 2008, maybe not in headline prices but in the way that I'm describing," he said.

Fuel poverty

The suggestion that falls in energy bills would be limited was a "big blow to consumers", said Mark Todd, director at Energyhelpline.

He estimated that five-and-a-half million people in the UK were in fuel poverty - spending 10% or more of income on heating - a level he forecast could "escalate".

"Since the New Year, calls to our help line have doubled, with customers concerned about their costs," Mr Todd said.

"Furthermore, the number of callers who are now resorting to wearing extra jumpers to stay warm has trebled. Many callers are also noting that they have turned off their heating in parts of their house to be able to pay the bills."

Construction workers renewed pressure on the government over foreign labour contracts yesterday, mounting brief blockades of two new power stations at dawn.

The protests came as unemployment figures showed foreign-born workers in Britain bucked the downward trend last year, with a further 214,000 finding jobs.

The rise, to 3.8 million, contrasted with a fall of 278,000 in the employment of UK-born workers to 25.6 million. But the foreign-born category includes people who came to Britain as children and are only now entering the workforce after leaving school or university, and does not signal a sudden rush of migrant workers.

Yesterday's protests included a march on a job centre in Newark, Nottinghamshire, where unemployed local people say they have lost out to Spanish and Polish workers on 850 jobs. A small number of engineers at the nearby Staythorpe site, where an advanced gas turbine power station is being built, walked out in support in spite of disciplinary warnings. Approximately 300 local demonstrators were joined by 200 outside supporters, including veterans of last week's successful action at Total's Lindsey refinery on the Humber estuary.

Carrying flags and placards in freezing temperatures, men on the picket line said a deal like that agreed with Total - which gave local workers half of 220 jobs once earmarked for Italians - was their aim.

Saville Wells, 64, said: "We've no objection to foreign lads coming to work here but we should have been given a fair chance. Instead, they brought in their own people as a package.

"It was a done deal. It's threatening the system that's worked well for everybody for the 47 years I've been in the trade. These demonstrations are peaceful. We want to persuade them, to win the argument that way."

Younger protesters said that they were starting to think that the industry had no future, with "package deals" involving complete imported workforces spreading by the week. Adam Hughes, 26, from Wrexham, said: "I did four years' apprenticeship to become a pipeworker but I can see that I may have to change my job. This is happening all over. There's a big power station due down at Pembroke, but they've started building hostel foundations there. Will that be for British workers? I don't think so."

A second demonstration of about 70 protesters gathered before dawn outside a second power station building site at the Isle of Grain, in Kent. Like Staythorpe, the project is being run by the French firm Alstom, which strongly denies discriminating against British workers.

The number of passengers using UK airports fell sharply in January, as demand for air travel continued to fall and airlines cut capacity and removed some unprofitable routes.

The sharp traffic decline along with the problems for potential bidders of raising debt finance are making the sale of BAA airports, led by the disposal of Gatwick, a fraught process for the UK group and Ferrovial of Spain, its majority owner.

BAA, which operates seven UK airports, said it handled 9.4m passengers in January, a 6.3 per cent decline from the same month in 2008 and the tenth successive year-on-year decline in monthly passenger numbers. The number of flights to and from the seven airports, which include Heathrow, Gatwick and Stansted, fell 7.5 per cent year-on-year in January.

The decline in air traffic is hitting BAA at a very difficult time, as it seeks to find a buyer for Gatwick, the second busiest airport in the UK, and shortly before the Competition Commission is expected to demand that it should also sell Stansted and either Edinburgh or Glasgow airports. The competition watchdog, which is expected to publish the final report on its investigation into BAA within weeks, believes that the group’s monopoly of the leading airports in London and Scotland should be broken up in order to foster more competition in the airports market.

The BAA traffic figures released on Tuesday showed that both Gatwick and Stansted were being hit hard by falling passenger and flight volumes.

At Gatwick, the number of passengers handled last month fell 10.8 per cent year-on-year as the grip of recession tightened. By comparison passenger volumes in the 12 months to January at 33.9m were 3.6 per cent lower than a year earlier. Traffic at Gatwick has been falling steeply year-on-year since September.

The airport has been affected by the transfer of a large number of its US long-haul services to Heathrow as a result of the US-European Union “open skies” treaty, which opened Heathrow to full competition for all US and European carriers for the first time in March last year. Some of its carriers also collapsed into bankruptcy last year. Both American Airlines and Continental Airlines have closed their Gatwick bases, and British Airways has transferred several US long-haul services from Gatwick to Heathrow and is shrinking its short-haul operations.

Gatwick is proving increasingly attractive for the low-cost carriers, however, with EasyJet adding new routes from the airport and Aer Lingus setting up its first operating base outside the island of Ireland at the airport.

Traffic at Stansted airport, the most important airport for low-cost airlines in Europe, is also being hit hard, particularly by the reduction of capacity at Ireland’s Ryanair during the winter months.

Volumes have been falling at Stansted for 15 months in succession, also undermining the timing of BAA’s plans to build a second runway there. The group said passenger numbers at Stansted fell 11.2 per cent year-on year to 1.29m in January, representing a 19 per cent decline in two years.

More than one in four homes in the UK will be offered a complete eco-makeover under ambitious plans expected to be announced this week to slash fuel bills and cut global warming pollution.

The campaign is thought to involve giving 7m houses and flats a complete refit to improve insulation, and will be compared to the 10-year programme that converted British homes to gas central heating in the 1960s and 1970s. Householders could also be encouraged to install small-scale renewable and low-carbon heating systems such as solar panels and wood-burning boilers.

In total, it is thought the Department of Energy and Climate Change will commit to cutting a third of greenhouse gas emissions from households by 2020.

The announcement by the energy and climate secretary, Ed Miliband, and the communities and local government secretary, Hazel Blears, which is expected on Thursday, will be widely welcomed by environmental groups and fuel poverty campaigners who have been lobbying hard for more action to tackle emissions from homes. The proposals are likely to require skills training and create thousands of jobs.

Ed Matthew, head of UK climate for Friends of the Earth, said: "Twenty-seven percent of emissions in this country come from people's homes and if they don't cut emissions from homes radically we have got no hope of achieving our climate change targets."

However, campaigners will be worried about how much money the government is prepared to commit. Last year, the prime minister, Gordon Brown, announced nearly £1bn from power companies for energy-saving initiatives. By contrast, various reports have estimated the cost of insulation and small-scale clean energy alone to be £2bn-£12.9bn a year to reach the government's target of an 80% cut in greenhouse gas emissions by 2050.

Matthew said the targets would only be met if each home treated was insulated well enough to cut those emissions by two-thirds, the financial incentives were high enough, and people on low incomes had the work paid for to tackle fuel poverty. It is estimated that more than 5m households are in fuel poverty, meaning they spend more than 10% of their income on heat and power.

"My concern is they will not be investing enough money to take these homes to a high enough energy efficiency standard to insulate them from rising fuel prices," he added.

A report by Oxford University's Environmental Change Institute in 2007 found that carbon dioxide emissions had risen 5% since Labour came into power in 1997, and only four out of every 1,000 homes had any "low-and-zero carbon technologies". The report also warned that with rising population and falling household numbers, emissions from the sector would rise by 23% by the middle of the century "if nothing else changed".

As well as the target of seven million homes, the heat and energy saving strategy is understood to push for a dramatic increase in the level of insulation for each house or flat, and to encourage more small-scale zero-or-low carbon heat.

The schemes will be voluntary, but Miliband is expected to announce financial incentives.

Similar schemes overseas included grants or cheap loans, transferable to a new homeowner if the property is sold. Also, the Sustainable Energy Academy estimates that if homeowners spend £15,000-20,000 they would save that amount in lower bills in 10-15 years, even less if fuel prices rise. Another possibly option is for whole districts to be offered community clean energy schemes, or mass fitting of efficiency improvements.

The Conservatives have proposed grants of up to £6,500 per household, which would be repaid over up to 25 years from expected savings of £160 on gas and electricity bills.