ODAC Newsletter - 06 March 2009
Welcome to the ODAC Newsletter, a weekly roundup from the Oil Depletion Analysis Centre, the UK registered charity dedicated to raising awareness of peak oil.
Oil prices jumped 9% this week to a 5 week high responding to news that China is to boost spending on commodity imports, and that US stockpiles last week were lower than anticipated. Even so, amid otherwise relentlessly bad economic news, and with a 4% drop during Thursday trading, OPEC will have to decide whether to make further production cuts when it meets later this month.
The possibility of a renewed European gas crisis arose on Wednesday as armed officials raided the headquarters of Ukrainian state gas company Naftogaz. Vladmir Putin warned that if Ukraine failed to make a payment due on Saturday, Russia would turn off the taps once again. Hours after this announcement Gazprom confirmed that the necessary payment had been received.
In the UK this week a government backed report has laid out plans to upgrade the electricity grid to accommodate up to 30% renewables by 2020. The £4.7bn plan is based on building infrastructure in anticipation of new power generation sources. Upgrading the grid is of course essential to create a more sustainable power supply but not sufficient. With renewable developers hit by low energy prices and share valuations and beset by planning difficulties, the government will have to do far more than providing the wires to achieve the necessary renewables penetration.
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Oil hovered above $45 on Thursday, after surging nearly nine percent overnight on government data showing a surprise drop in US crude stocks, which could signal recovering demand in the world's top energy consumer.
Traders will await the release of weekly US initial jobless benefit claims and January factory orders due later in the day, as well as February unemployment data out on Friday, for further clues on the health of the US economy.
Prices were also supported by remarks by China's Premier Wen Jiabao on Thursday that No. 2 oil consumer China would achieve 8 percent growth this year - a level considered key to maintain employment growth - despite the deepening global economic crisis.
US crude was down 24 cents at $45.14 a barrel by 08.15am, UAE time, after rising $3.73 overnight, while London Brent crude fell 42 cents to $45.70 a barrel.
"The momentum is bullish and could have a few legs – China is really engaged on the front foot with its stimulus package, and we're approaching the end of winter and going into a period where the driving season in the US starts, so we might see crude inventories fall further," said Peter McGuire, Managing Director of Commodity Warrants Australia.
"I wouldn't be surprised to see crude edging up to test the high $40s by mid-month, maybe even touching $50."
The US Energy Information Association said crude stocks declined by 700,000 barrels last week, countering analyst expectations for a 1.2-million-barrel build.
Demand for gasoline over the past four weeks also rose 2.2 percent from a year ago. Year-over-year gasoline demand has increased in the last several weeks, possibly indicating the start of a rebound in demand.
China's gauge of the health of its manufacturing sector, the purchasing managers' index (PMI), gained for the third month in a row in February, suggesting the domestic economy, and oil demand, could be recovering.
Premier Wen did not announce fresh economic stimulus as some investors had hoped, but his assurances helped extend a rally in Asian markets, after shares worldwide surged on Wednesday on reports China may boost spending to spur growth.
Optimism over China helped boost global stocks from multiyear lows on Wednesday, while metals prices rose, and the US dollar scaled four-month peaks against the yen.
Oil prices have traded in a narrow band around $40 since mid-December, pressured by slumping demand from the global economic downturn, but drawing support from expectations OPEC might cut production again when it meets on March 15.
OPEC planned to lower oil output by 4.2 million barrels per day from production levels in September, in a bid to boost falling prices, and a Reuters survey found OPEC members had already met at least 81 percent of their target.
Angola, which currently holds the presidency of the 12-member group, will not advocate further production cuts when the group meets on March 15 in Vienna, OPEC sources said on Wednesday.
Ecuador also said it sees no need for more reductions at the next meeting, while other OPEC members have yet to make a decision.
But Venezuela, Algeria and Libya have raised the possibility of a further cut. In the United States, last week's first-time claims for jobless benefits, due at 05.30pm, UAE time, are likely to show a total of 650,000 new filings, compared with 667,000 in the prior week.
January factory orders, due at 1500 GMT, are expected to fall 3.5 percent, down from a 3.9 percent drop in the previous month.
But Friday's employment report could show job losses accelerated last month, and the unemployment rate surged to a 25-year high. The market consensus is that non-farm payrolls shed about 650,000 jobs in February.
Oil prices have risen nearly 9% after the US government reported an unexpected drop in crude stocks and an increase in demand for petrol.
Prices were also supported by a rise in China's manufacturing index. China is the second biggest oil consumer.
US light crude rose by $3.73 to $45.38. Brent crude added $2.42 to $46.12.
US crude stocks fell by 700,000 barrels for the last week of February, while demand for petrol over the past four weeks was up 2.2% from a year ago.
"Overall the [US oil inventory] numbers are very bullish... again, gasoline remains the one bright spot in the market that can really pull the complex higher," said Chris Jarvis at Caprock Risk Management.
"Couple that with the composite of economic news out of China overnight and this is really setting the stage for the energy complex ... to move higher if the equities markets can maintain themselves."
Stock markets around the world have been rising on Wednesday on hopes China will announce an expansion to its economic stimulus plan.
However, Tom Kloza at Oil Price Information Service said that crude inventories had been bloated for months, and "oil prices won't move higher without some signs that the economic malaise has bottomed out".
"It's going to be a shaky year. The fundamentals are still poor," he said.
Saudi Arabia, OPEC’s largest producer, may oppose a further production cut this month as a stronger dollar boosts the value of revenue from oil sales.
The CHART OF THE DAY shows that while crude futures have slumped 70 percent to around $44 from a July 11 record, the strength of the dollar means the country has about $12 a barrel more in spending power than if the currency had kept steady.
“The Saudis would prefer prices in the $60-70 range, but can live with $50 a barrel, given a world which is in meltdown,” said Leo Drollas, deputy director of the Centre for Global Energy Studies, a London-based consultant founded by former Saudi Arabian Oil Minister Sheikh Ahmad Zaki Yamani. “They don’t want to push the price up against all the odds. OPEC won’t do much on March 15.”
The euro has fallen 10.2 percent against the dollar this year on concern the financial crisis is worsening in Europe. The European Union is the largest trading partner for Middle East Gulf countries including Saudi Arabia, according to European Commission data.
OPEC members, scheduled to meet in Vienna on March 15, may earn $428 billion from oil exports this year, half of the $857 billion they made in 2008, yet close to the level the group got in 2005, Drollas said.
Crude oil, which fell to a five-year low of $33.87 on Dec. 19, has rebounded as OPEC restricted supply. At its last meeting in December, members agreed to a record 9 percent reduction in supply targets effective Jan. 1.
BP, Britain’s largest company, has cut its oil and gas production targets, as plummeting crude prices undermine its plans for growth.
Speaking at the oil giant’s annual strategy briefing to investors, Andy Inglis, the production chief, said BP now expects production growth of between 1 and 2 per cent a year to 2013, rather than the 3 per cent it had predicted until 2012 last year.
The figures indicate that BP no longer expects to be able to boost production to 4.3 million barrels per day by 2012 but is instead projecting an increase to around 4.1 million.
The forecasts compare with current production levels of around 3.9 million barrels per day.
A drop of more than $100 in the price of crude since last July has reshaped the economics of the oil industry.
At the meeting at BP’s London headquarters, Tony Hayward, chief executive, said some of its projects now appeared uneconomic because of a doubling in industry costs since 2004.
On others, BP’s partners lack the funds to proceed while a string of Opec production cuts are also set to affect the oil giant, which operates production agreements in member states such as Angola.
BP shares dropped over 4 per cent to 404.5p on the announcement.
But Mr Hayward vigorously rejected investor concerns that BP could be forced to cut its dividend this year for the first time since 1992.
Despite repeated questions about the threat of a cut, he insisted that BP had sufficient flexibility and balance sheet strength to meet its different demands, despite oil’s fall from a peak of $147 last July to less than $45 this week.
“Our view is that the right current balance is both to continue paying the dividend and to maintain investment to grow the firm – and to use the capacity of our balance sheet while the industry cost structure adjusts,” said Mr Hayward.
With gearing of around 20 per cent, Mr Hayward suggested that BP could if necessary boost its level of borrowing to help fund its investment plans and maintain its commitments to shareholders.
Richard Griffith, director of equity research at Collins Stewart, the broker, said: “They could easily go up to 30 per cent gearing - perhaps higher - so there is plenty of headroom.”
Mr Hayward pointed out that BP had been built to operate with crude at much lower prices than were seen last year and that the business would be able to withstand even a sustained period of oil as low as $25.
He said industry costs were already falling and that BP expects total costs to fall by $2 billion this year.
“There is an enormous deflationary wave coming through this business,” he said. “The challenge is how fast can we get it into our business.”
BP is planning to invest between $20 billion and $21 billion in its capital expenditure programme this year.
Mr Hayward also hinted that BP was considering selective acquisitions.
“We intend to meet the challenges of 2009 head on and, where possible, to turn them to our advantage,” he said.
The company also said it had added 1.7 billion barrels of new oil and gas to its reserves last year, meaning that it had discovered 21 per cent more oil than it pumped.
It was the 15th successive year in which BP has reported a higher rate of reserves replacement than annual output.
The company also said that with reserves of 18.2 billion barrels, the group’s growth could be maintained until 2020 without further discoveries.
“Our aim remains to strike the right balance between investing for the future, providing current returns via the dividend, and ensuring an appropriate and prudent level of gearing,” said Mr Hayward
Oil and gas companies in the North Sea could become increasingly vulnerable to takeover as they face greater funding challenges, according to a report by Ernst & Young.
For the first time in five years, no new oil and gas companies have listed on AIM in a quarterly period, highlighting the distress in the sector and reflecting a worldwide slowdown in initial public offerings in the second half of 2008.
E&Y’s Oil and Gas Eye index — a quarterly index that tracks the fortunes of oil and gas companies on AIM — reports that a lack of both equity and debt is continuing to upset the market, with only £23.6m raised by just 42 oil and gas juniors in the final quarter of 2008, compared with £229m in the previous quarter and £325m a year ago.
According to the latest Oil and Gas Eye index, this worrying trend is continuing into 2009 with just £1.19m raised by the sector in January.
“This is a stark continuation of the slowdown in capital raising now being witnessed in the sector,” says Alec Carstairs, oil and gas partner at Ernst & Young.
Distressed companies have now become a driving force behind acquisitions, with transaction activity providing eleventh-hour rescues for some oil and gas companies.
Aberdeen-based Dana Petroleum snapped up distressed Canadian rival Bow Valley Energy but Ernst & Young warns that North Sea oil companies could become the hunted as well as the hunters as North Sea production declines, creating a bigger liquidity gap between players.
Following on from a record 52% fall in the Ernst & Young index in the last quarter of 2008, it was down by just 4% by mid-quarter of 2009, suggesting the market may be bottoming out, but Ernst & Young doesn’t expect a substantial rebound in the short term.
“The industry as a whole is in a stronger shape than in previous downturns and is better placed to deal with challenges,” said Carstairs. “Although oil prices have fallen sharply from recent peaks, they remain above long-term averages. However, the timing of a full recovery will depend on the speed of recovery in the US and other economies.”
The first oil joint venture between Britain and Iraq for decades has been set up by Mesopotamia Petroleum Corporation, a small British company that will drill wells for the country's state-owned oil companies.
David Miliband, foreign secretary, described the $400m (£941m) agreement signed in Baghdad yesterday as "an important message to British business that Iraq is open for business".
MPC will have 49 per cent, with the rest held by the government-owned Iraqi Drilling Company.
News of the drilling deal sent shares in Ramco, the London-listed company that owns 32.7 per cent of MPC, up 40 per cent yesterday.
The joint venture reflects Iraq's determination to raise its oil production from about 2.3m barrels a day to about 3m b/d as quickly as possible. It will bring much-needed investment and expertise in modern techniques to Iraq's oil industry, which has been starved of funds and cut off from international technological progress since the 1970s.
MPC will train and work with Iraqi engineers, and import 12 drilling rigs, to work as a contractor for the state-owned companies that produce Iraq's oil.
The deal shows how smaller companies, which come with less political baggage and can take more chances, can succeed ahead of the big international oil groups. Steve Remp, MPC executive chairman, was a pioneer of the development of the Caspian region after the break-up of the Soviet Union, and saw Iraq as a similar opportunity.
"We are all experienced guys, who saw this as the last frontier," he said.
Idriss Al-Yassiri, director-general of IDC, said: "They were the most persistent. And they were most courageous, willing to come to Iraq while other companies are still hesitating."
BP, Royal Dutch Shell and other big multinational oil companies have been in talks about a bidding round for contracts in Iraq, but are concerned about the failure of the country's politicians to agree a new legal framework for the industry.
Ramco shares closed up 16¾p at 58¾p last night.
Armed agents of Ukraine's national security service raided the head office of the state energy company, Naftogaz, in Kiev yesterday, as part of an investigation into the alleged diversion of gas.
The head of the company's legal department said that they had been looking for the original documents, signed by representatives of Ukraine and Russia on 19 January, which had allowed the resumption of Russian gas supplies to Ukraine and south-eastern Europe.
The documents, believed to have been signed by, among others, the Ukrainian Prime Minister, Yulia Timoshenko, and her Russian counterpart, Vladimir Putin, have been controversial in Ukraine, where a presidential election is due this year. The pro-Western President, Viktor Yushchenko, and his team have accused Ms Timoshenko – who was his chief ally during the Orange Revolution four years ago – of agreeing too high a price.
The precise terms of the deal have not been released. According to published details, Kiev agreed to pay $360 per 1,000 cubic metres of gas, a 20 per cent discount on the market price, while Russia received a 20 per cent discount on pipeline transit fees. Both are to pay full market prices from 2010.
The raid on Naftogaz's headquarters came three days before Ukraine's next gas payment is due, and many fear that Ukraine – whose currency, the grivnya, has lost a third of its value against the US dollar since the autumn – will not be able to pay, triggering a new gas cut-off.
One partial solution being mooted is that Ukraine, whose industry has been hard hit by the international credit crisis, could reduce its bill by negotiating a 25 per cent reduction in supplies. But Kiev is also hoping the IMF will release the second tranche of a $16.5bn (£12bn) standby credit agreed last November. Officially, the IMF is waiting for assurances on Ukraine's budget; unofficially, it is said to want additional guarantees, after a part of the first tranche vanished into unidentified private accounts.
Yesterday's raid also reinforces a view, already widespread in international energy circles, that the dispute at the turn of the year was not primarily about price (as the Russians insisted), nor (as Ukraine and its supporters maintained) about "punishing" Ukraine for its EU and Nato aspirations, but about what money was creamed off into whose pockets. The new agreement eliminated a mysterious third company, RosUkrEnergo, which had helped to facilitate the agreement that ended the previous cut-off at the end of 2005. In so doing, it may have deprived key interested parties of their dividend.
If the quarrel is to be reopened, however, the dynamic may have changed compared with January. Then, the European Union was able to make up much of the energy lost. As a result, Russia's whip hand over the EU has been weakened, but so has Ukraine's leverage as a transit route to Western markets.
Ukraine's energy company, Naftogaz, paid Gazprom its February bill for gas in full on Thursday, just hours after the Russian prime minister, Vladimir Putin, warned that supplies to Ukraine would be cut off if the bill was not made by Saturday.
Mr Putin had warned that the suspension might stop gas deliveries to other European customers, as well.
The threat raised the prospect of a repeat of the January suspension that cut off most Russian gas supplies to Europe for weeks as the result of a bitter price dispute with Ukraine.
The stoppage left millions of Europeans without heat during a cold spell and angered the European Union, which accused Russia and Ukraine of holding its citizens hostage to their standoff.
About 20 per cent of the gas consumed in the European Union comes from Russia through pipelines that cross Ukraine.
Naftogaz transferred the final $50 million instalment of a $360 million payment for gas consumed in February, the Ukrainian company's spokesman Valentyn Zemlyansky said. Gazprom confirmed that Naftogaz had paid in full for February supplies.
After the sides forged a hard-won deal to end their January price dispute and restore the flow to Europe, Gazprom cautioned that any payment delays could prompt a fresh cut-off.
Mr Putin's threat came after Ukraine's national security service searched the offices of Naftogaz on Wednesday in a raid seen as part of the struggle between President Viktor Yushchenko and Prime Minister Yulia Tymoshenko. The national security service is controlled by Mr Yushchenko. Miss Tymoshenko's government controls Naftogaz.
Ukrainian security agents showed up Thursday at the main office of a Naftogaz branch, Ukrtransgaz, as part of what officials have called an investigation into alleged diversion of huge amounts of Russian gas. Naftogaz employees sent the agents back, citing a court decision they claimed had halted the probe.
Mr Putin said on television that the Naftogaz raid was "a source of extreme concern."
If the dispute caused Naftogaz to miss Saturday's payment deadline, Putin said, "it will lead to the stoppage of our supplies of our energy both to consumers in Ukraine itself and maybe also to our consumers in Europe, since we are hearing about attempts to confiscate the transit contract."
MOSCOW - OAO Gazprom, the world's largest producer of natural gas, posted solid third-quarter profit but said it will be forced to cut spending this year due to falling demand in key markets.
Natural-gas demand is crumbling in key markets as national economies slow, and gas-export prices are set to decline significantly later this year. As a result, state-controlled Gazprom's earnings are expected to fall throughout 2009, possibly affecting the Russian company's ambitious investment plans.
Gazprom's output fell in the first two months of the year, and data from the first days of March show output down by one-fifth from average production in March 2008. This has triggered concern among analysts that lower demand will cut into its profit.
"The big question is how much demand will fall this year," said Ron Smith, chief strategist at Russia's Alfa Bank.
"It's already clear we'll have to revise the production plan approved late last year," said Andrei Kruglov, deputy chairman of Gazprom, noting lower demand in Europe, the company's key export market. "We simply won't be able to sell such volumes," he added.
Mr. Kruglov also said Gazprom might revise its investment program several times this year. The company usually reviews its spending plans twice a year.
Gazprom, which supplies a quarter of Europe's natural-gas needs, estimates it lost about $2 billion in January when supplies were cut off to European countries for nearly three weeks amid a pricing dispute with Ukraine. In February, the gas producer saw output drop 16% from a year earlier, according to government statistics this week.
Less than a year ago, Gazprom Chief Executive Alexei Miller forecast oil prices would hit $250 a barrel and voiced ambitions to boost the company's market capitalization to $1 trillion. Since then, the price of oil has plunged, taking Gazprom's share price with it. The company's stock, which has lost 80% in value since its peak in mid-May, closed 2.8% lower Tuesday on Moscow's RTS exchange.
"We think that Gazprom's difficulties are rooted in the collapse of European deliveries," said Troika Dialog analyst Oleg Maximov.
In the quarter ended Sept. 30, Gazprom's net profit rose 16% to 131.7 billion rubles ($3.66 billion) from 113.1 billion rubles a year earlier, helped by European export prices, which rose to record levels during the period. Still, the earnings missed analyst expectations.
The results were weighed down by a foreign-exchange loss and a revaluation of the option held by Italy's Eni SpA to buy a 20% stake Gazprom Neft, the Russian company's oil arm.
Gazprom's quarterly sales rose 60% to 829.7 billion rubles from 516.2 billion rubles, backed by a 25% boost in domestic gas tariffs Jan. 1 and higher export volumes. Operating profit more than doubled to 306.1 billion rubles.
"The revenue line, in particular, provides a snapshot of the world as it was before the crisis," Mr. Maximov said.
In the commodity pits and the electronic dealing rooms that are supplanting them, US natural gas traders require an extra dose of intestinal fortitude to deal with sometimes astounding volatility. They will need it this spring and summer as an epic bust is likely to get even worse when heating demand fades. A smaller-than-normal drawdown of stockpiles this winter threatens a summer glut.
Prices that have dropped from more than $15 per million British thermal units are hovering just over $4 for front-month futures. Summer contracts indicate a dip to $3 or below. Analysts at Strategic Energy and Economic Research are more bearish, expecting a fall below $2 by late summer, a ruinous price for nearly all producers. Even worse, a weak economy could leave so much gas in pipelines and storage facilities some producers will be ordered to cut output.
Such low prices will slam wholesale power prices because these are set by the cost of natural gas.
But this famine could be followed by a stunning feast once the next heating season begins.
Investment in new wells has been slashed by companies such as Chesapeake Energy as prices no longer justify them. Many newer fields are only profitable at $5-$6/MMBtu and some only above $8 or more. Winter storage capacity, meanwhile, is finite. As older fields decline, underinvestment could cause a price surge and spikes in electricity prices.
As always, exogenous factors can play havoc with such forecasts. A damaging hurricane could elevate summer prices and a heat wave could exacerbate this. Another factor could be some coal plants becoming pricier to run than gas, giving another fillip to demand. As a trail of scarred hedge funds can attest, timing such big moves is not for the faint of heart. But, unless the laws of supply and demand are revoked, today’s bust is setting the groundwork for quite a boom.
A proposed £4.7bn investment in the electricity grid to connect up new wind farms and nuclear power stations has been backed by the government, which hailed the plan as a big opportunity that would support employment.
The proposals include two large new undersea cables running off the east and west coasts to bring electricity from Scotland to England.
But, most of the money will not be spent until 2012 at the earliest, according to the energy regulator, and environmental groups complained that progress in modernising the grid to take more renewable energy was still too slow.
The blueprint for grid investment was drawn up by a joint group backed by the government, the industry, and Ofgem, the energy regulator. It marks a break with the previous policy, under which the regulator would sanction investment to connect up a location only if there were a firm plan for new generation capacity to be built there.
The new model, which has been proposed by Ofgem but not yet adopted, would allow the electricity network companies to invest in grid connections for areas where they expect new power stations or wind farms to be built. This approach, known as "anticipatory investment", has long been urged by the renewable energy industry, which has argued that problems in securing grid connections are one of the greatest obstacles to investment in wind power.
The £4.7bn of extra investment was proposed by the government-backed Electricity Networks Strategy Group as necessary by 2020 to hit the European target that 15 per cent of Britain's energy should come from renewable sources by 2015.
It would also allow connections for the nuclear power stations that by the end of the next decade are expected to be either completed or under construction at Sizewell in Suffolk, Hinkley Point in Somerset and Wylfa on Anglesey. The money would be spent by National Grid, which owns the electricity transmission network in England and Wales, and by ScottishPower and Scottish and Southern Energy, which own the network in Scotland.
An ambitious part of the plan is the £1.5bn proposal for the undersea cables, which would bring electricity to customers in England from wind farms offshore and onshore in Scotland.
Mike O'Brien, the energy minister, said there was an "urgent" need to bring down the barriers to connecting up new renewable and nuclear energy to the grid.
"There's an aggressive timetable to meet and I want this report to galvanise the necessary action right across the energy sector," he said.
Friends of the Earth, the environmental campaign group, welcomed the planned investment, but Andy Atkins, its executive director, added: "The government must now show that it has the bold political vision to make it a reality."
Sam Laidlaw, chief executive of Centrica, has warned that coal plants fitted with carbon capture storage (CCS) equipment are unlikely to be ready to make big cuts in Britain's emissions before 2030.
The country's geology is not suited to the technology, which is expensive and unproven, he said. This meant it would take "at least 15 years and probably closer to 20 years" before companies were in a position to deploy the technology on a large scale.
This week, energy and climate change secretary Ed Miliband confirmed reports in the Guardian that the government wanted to fund more than one CCS demonstration project to accelerate development of the technology. The government favours "post-combustion" technology which could be retrofitted to clean up existing coal plants to capture their emissions.
Centrica had been developing "pre-combustion" technology which can only be attached to new plants. Laidlaw said there was a risk that CCS technology is never retrofitted to a new generation of highly-polluting coal plants. "The risk is that it will never be technically feasible because the coal plants are too far from spent aquifiers [in the North Sea where the carbon can be stored], the costs are probably high and the technology can't be retrofitted," he said. "If you start from scratch it's a better solution."
The comments came as Centrica announced it was creating 1,500 mostly "green-collar" jobs to build wind farms and low-carbon power plants such as nuclear reactors and also to install energy-saving boilers and solar panels in homes.
Laidlaw said the jobs will be created over the next year as it gears up to invest £15bn by 2020 to build the equipment, as well as investing in new sources of gas supply and gas storage facilities.
The owner of British Gas, which announced it was cutting gas bills last month by 10%, did not commit to further price cuts. Last year British Gas increased gas bills by half, blaming soaring oil and wholesale energy prices. Since last summer's peak, energy prices have slumped by more than half.
Laidlaw said: "If we see wholesale gas prices continue to fall I would hope that by the end of the year we might be able to do further price reductions."
Laidlaw said negotiations were continuing with French-owned EDF Energy over buying a stake in nuclear generator British Energy. EDF signed an agreement in principle to sell a 25% stake in the company to Centrica when the French group bought British Energy last autumn. Since then power and share prices have slumped and some Centrica shareholders are understood to be urging Laidlaw to pull out of the deal.
Centrica announced that group profits for last year fell by a fifth to £904m because of higher taxes. It announced £1.4bn of writedowns on the value of forward contracts it had signed to purchase gas and electricity in the market. A slide in energy prices has left these costing more than current market rates.
Profits fell at the British Gas supply business because the company did not pass on the full increase in the wholesale cost of energy when prices were at their peak. This was offset by a rise in profits at Centrica's gas production arm, which benefited from higher gas prices.
British industrial demand for electricity has fallen by up to 6 per cent over the past year as the recession bites.
Dorothy Thompson, chief executive of Drax Power, who announced a 10 per cent fall in 2008 earnings to £454 million, said there were also signs that households were using electricity more frugally after unprecedented rises in electricity bills last year.
Drax operates Britain’s largest power station, near Selby in North Yorkshire, where six coal-powered turbines produce about 7 per cent of the country’s electricity.
Ms Thompson expected that European environmental rules aimed at coal-fired stations would force many to close several years before a 2016 deadline and that there could be power shortfalls unless new generation is brought on stream quickly.
Decisions about any new coal-fired power plants in the UK have been delayed until the autumn, prompting warnings from energy companies about the growing risk that the country could run out of electricity generating capacity.
Ministers were due to make a decision last year on an application to build the first new coal plant in the UK for a generation at Kingsnorth in Kent - a move expected to trigger submissions for further projects.
However, insiders said the decision was not now expected until after the summer because of a decision by the energy and climate change secretary, Ed Miliband, to order a fresh review of coal policy. The Guardian revealed last week that Miliband was considering plans for tough new limits on global warming emissions from coal plants and wanted the government to help fund more carbon capture and storage projects to make this happen.
The decision was earlier delayed by another government consultation on what companies building new coal plants would have to do to make them "capture ready", announced last year.
Jonathan Smith, E.ON's media relations manager, said: "We do not expect any imminent decision, by any stretch of the imagination."
A further delay in the controversial decision about Kingsnorth will delight environmentalists, who have singled out the Kent plant for opposition, because coal is the most polluting form of energy, and because of concern that building a coal plant without strict pollution control would destroy attempts to curb carbon emissions in emerging economies.
However, Smith said further delays raised the threat that the UK could not build the new plants in time to replace the nuclear and old coal power stations that are due to be closed in the next decade.
A spokesman for the Department of Energy and Climate Change said: "A decision on Kingsnorth will follow our consultation on the conditions around new coal-fired power stations. We are aware of the need to ensure security of energy supplies."
US biodiesel exporters face additional tariffs after the European Union on Tuesday announced temporary anti-dumping and anti-subsidy duties .
A European Commission trade committee has imposed tariffs ranging from €29 (£20.60, $36) to €41 per 100 kg for an initial period of six months, according to people familiar with the matter.
The move is the latest in a series of transatlantic trade spats and comes at a time of rising fears over protectionism. It highlights the perilous state of an industry that is suffering overcapacity and thin margins.
European producers blame their woes almost entirely on imports of US biodiesel, which benefit from a $1 per gallon government subsidy.
Those subsidies, they claim, have helped US exports to Europe grow from just 60,000 tonnes in 2006 to more than 1.5m tonnes last year.
At least 15 European producers have declared bankruptcy in the past two years, according to the European Biodiesel Board, an industry trade group, with dozens more cutting production.
The EBB estimates that after investing heavily in recent years to build 16m tonnes in annual production capacity, European output is running at less than 40 per cent.
US biodiesel producers say their smaller European competitors suffer from inefficient operations and poor geographical locations.
The Commission is expected to publish a formal decision on the extra tariffs and duties on March 12, which would come into force the next day. After four months, those provisional duties could be extended for up to five years.
Sean Sutcliffe, chairman of Biofuels Corporation Trading, which built and is operating the UK’s largest biodiesel plant at Seal Sands, Teesside, said: “All we have ever asked for was a level playing field.”
The Bank of England has cut interest rates to an historic low of 0.5pc and unveiled radical plans to inject £75bn of new money into the economy to combat recession.
The cut matched the expectation of City economists and leaves interest rates more than 5 percentage points lower than their recent peak. However, the focus will now be on the bank's effort to pump new money into the ailing economy.
The Bank, which has cut the cost of money dramatically since the collapse of Lehman Brothers in September intensified the financial crisis, is now moving beyond making money cheaper. By adding new money to the economy at a time when interest rates are close to zero, the Bank's Governor Mervyn King will be hoping that money is lent and helps ease the credit drought suffered by consumers and businesses alike.
“Savers lose out again as the Bank of England opts to cut rates and inject more adrenaline into the ailing economy," said Stuart Porteous, Head of RBS Group Economics. "The focus is now on the next stage as the Bank takes UK policy into uncharted territory - printing money."
The most likely action for the Bank is for it to use the money to buy government debt, or gilts. Government bonds are among the most liquid assets around and owned by a range of investors including banks and institutional investors. The hope will be that the money received for the gilts will be lent out, invested in other assets and driven around an economy starved of credit.
"Credit starvation is the biggest problem facing the UK economy and increasing the supply of money should help to loosen these restrictions and boost the supply of money and credit," said Hetal Mehta, an economist at Ernst & Young Item Club.
"They (the Bank) will be hoping for the multiplier effect," said Andre de Silva of HSBC. "That whatever money they inject will then be spent and whoever gets that will spend it and so on."
The Bank is embarking on its unprecedented policy to prevent the UK economy - already mired in the deepest recession since the 1980s - from tipping into something worse. Despite the massive recapitalisation of the crippled banking system, unemployment is rising and consumer confidence collapsing as the crisis spreads from financial markets into the broader economy.
Europe's economy will also be in focus today as pressure mounts on the European Central Bank to sharply cut interest rates and signal a willingness to cut further. Many of Europe's major economies - including Germany - are already contracting.
China will meet its goal of 8 per cent economic growth this year, Premier Wen Jiabao said on Thursday, although he did not outline any new spending proposals to revive the economy.
In his annual “work report” to the National People’s Congress in Beijing, Mr Wen said that the global financial crisis was deepening but that the goal of 8 per cent growth, which has been an unofficial target for months, was still realistic.
“As long as we adopt the right policies and appropriate measures and implement them effectively, we will be able to achieve this target,” Mr Wen said.
Global financial markets rose on Wednesday after Chinese officials indicated Mr Wen would introduce new stimulus measures on Thursday. However, Mr Wen did not announce additional measures beyond the Rmb4,000bn ($585bn) investment plan unveiled in November, and Asia-Pacific equities put in a mixed performance following the speech. The Shanghai Composite Index dropped 0.6 per cent to 2,184.240, while the Hang Seng in Hong Kong fell 0.4 per cent to 12,284.79.
Mr Wen provided only a few extra details to help clarify how much of that investment will be genuine new spending that would not have taken place anyway and where the money will be allocated.
He said that China would run a budget deficit this year of Rmb950bn, equivalent to nearly 3 per cent of gross domestic product. Central government spending on education would rise 24 per cent and on healthcare by 38 per cent, although much of the budgets for these services are financed by local governments. Investment in low-income housing would rise 171 per cent to Rmb49.3bn this year.
In his two-hour speech, Mr Wen warned that the international environment was getting more complicated. “First, the global financial crisis continues to spread and get worse. Demand continues to shrink on international markets; the trend toward global deflation is obvious; and trade protectionism is resurging,” he said. “The external economic environment has become more serious, and uncertainties have increased significantly.”
Economists believe that China has the fiscal room to announce additional measures over the coming months if the economy does not begin to rebound as expected.
Ed Miliband, the energy and climate change secretary, has no direct control of 80% of the savings needed to meet challenging European Union demands for huge cuts in household energy consumption by 2020, a report by MPs says today.
It warns that the bulk of savings will need to come from the enforcement of building regulations and obligations on electrical, heating and building suppliers to provide energy-efficient goods. None of this is under direct ministerial control, yet the supply and regulation of energy-efficient materials and goods will account for the vast majority of savings to meet the 2020 target of a 36% cut in household consumption.
According to the report, hardly any checks are made to see if new homes meet building regulation standards and very little work has been done to see if installed insulation does not leak heat or whether homes are poorly constructed.
The report says consumers are also confused by the wide variety of energy advice they receive from government departments and MPs called on ministers to simplify the system.
Although energy consumption by households has started to fall, it is still 8% higher than it was in 1990 and is well below Dutch and Swedish levels.
Edward Leigh, the chairman of the public accounts committee, said: "The seemingly good news that household energy consumption fell between 2004 and 2007 is confounded by two sobering facts. One is that households in 2007 were still using 8% more energy than in 1990. The second is that household energy use will continue to rise, a function of the need for extra housing, rising expectations about how warm dwellings should be and an ever-rising use of electrical appliances.
"The hardest thing will be to persuade people to stop paying lip service to concerns about climate change, to change their behaviour and to enable them to take real steps, based on reliable advice, to make their homes much more energy-efficient."
Britain is falling far behind other big economies in launching a Green New Deal, despite Government promises to "lead the world" on this path out of the economic slump, a report reveals.
The most comprehensive study yet of "green stimuli" being introduced around the world – puts Britain near the bottom of the international league. China, for example, has devoted well over a hundred times as much money to recession-beating environmental measures, despite being castigated as an international laggard in tackling pollution.
The study will embarrass Gordon Brown as he prepares to host next month's G20 summit, which he says should spark "a low carbon recovery". And it contradicts his repeated insistence that green measures are "imperative" as a "key driver" of future economic growth. He returned to the theme yesterday in his speech to the Labour Party's National Policy Forum in Bristol. And a policy document published to complement his address calls for Britain "to lead the world in building the low carbon society with a low carbon economy".
But the report, A Climate for Recovery published by the HSBC Bank, reveals that Britain has, so far, devoted only $2.1bn (£1.5bn) to a green stimulus, less than a third of France's $7.2bn and less than a sixth of Germany's $13.8bn. China's spending, at $221.3bn, is more than 110 times that of the UK.
In addition, only 6 per cent of Britain's stimulus packages is devoted to green measures such as energy efficiency, renewable sources and public transport. This is less than a third of the proportion given as a "benchmark" by the London School of Economics' Grantham Institute. It constrasts with 13 per cent in Germany, 21 per cent in France, 38 per cent in China and 81 per cent in South Korea. Britain's is one of only three out of 16 green financial initiatives analysed by the study to be classed as "pending". Worldwide, says the report, some $430bn has been allocated to Green New Deals, although President Barack Obama's initiative has received most attention.
Such measures, the report says, raise the prospect of "killing a flock of birds with one or two stones" by tackling the economic, energy and climate issues simultaneously, creating many more jobs than conventional financial stimuli and ushering in a green technology revolution to provide "the next wave of productivity and innovation".
The head of the commission that monitors spending by hospitals and councils has warned of "substantial" cuts in services after the recession.
Audit Commission chief Steve Bundred told the BBC the government will be forced to limit public expenditure to pay back its huge borrowing bill.
He advised public sector managers to prepare themselves for cuts now, rather than "slash and burn" later.
Britain's national debt is already at its highest proportion since 1978.
Steve Bundred, chief executive of the Audit Commission, said the government's planned tax rises may not be enough to pay back the debt in the worst case scenario.
He said big cutbacks in public spending would be required, once the UK emerged from the recession.
"The measures that the government is taking to stimulate the economy may well be absolutely necessary but they involve unprecedented levels of public borrowing and public debt," he said.
"As soon as we see some signs of recovery, in order to maintain overseas confidence it is inevitable that the government will have to rebalance public finances and that will involve very substantial expenditure cuts."
"That won't be able to be achieved simply through the tax increases that have already been announced; it will require very substantial reductions in public spending.
"What I am saying to those who manage public services is that they need to see that coming and they need to prepare for that now."
He added the scale of the cuts would be "substantially" larger than the £30 billion spending cuts in the aftermath of the 1990s recession.
Managers needed to plan now to avoid the "slash and burn" reaction seen then and in the 1970s, he said.
Mr Bundred said he did not envisage the UK having to go "cap in hand" to the IMF for help but warned the country was not likely to see signs of recovery until the middle of next year.
"It won't be until the other side of the election that we will start to see the first shoots of economic recovery but as soon as that happens the need to rebalance the public finances will be urgent," he said.
Figures published this month by the Office for National Statistics (ONS) indicate that Britain's national debt rose to £703.4bn in January, or 47.8% of gross domestic product.
It is the biggest proportion since 1978, when net debt was 49.1% of GDP.
The ONS said that figure would increase sharply if the money being pumped into Britain's faltering banks was taken into account.
In an article for The Times on Thursday, Mr Bundred warned that if borrowing pushed above 65% of GDP, there was a "distinct possibility" Britain could face "the Armageddon scenario most feared by the Treasury: that there will be insufficient lenders to match the planned level of borrowing".
The AA has joined calls for a scheme which would pay motorists to trade in their old cars and buy new ones.
Support for the programme, already backed by motor manufacturers, comes amid fears new registration sales will not sufficiently boost the industry.
But the government has said it was unsure the "scrappage" scheme would provide value for money.
The 09 registration plates have gone on sale but analysts expect a low-take up as consumers tighten their belts.
Several car firms have had to cut jobs and reduce workers' hours in response to slowing demand.
The "scrappage" scheme has been adopted in several European countries.
As well as giving a boost to the carmaking sector, which is among the industries suffering most in recession, many believe it could also help meet targets for cutting greenhouse gases.
In Germany, drivers get 2,500 euros (£2,220; $3,170) for trading in a car more than nine years old, while in France motorists can receive up to 1,000 euros. Scrappage has also recently been introduced in Spain.
"There will be fewer new registration plated cars on the road than for many years and this will be a very visible example of how the credit crunch and hard economic times have slashed new car sales," said AA spokesman Paul Watter.
"There is no time to lose in introducing a scrappage scheme which is adopted policy in a large number of European countries.
"We must give a boost to the sale of new cars which are cleaner and safer than the ones they replace."
The number of new cars registered in the UK in January declined 30.9% year-on-year, according to industry figures, worse than December's contraction. February's figures are due to be published this week.
The Society of Motor Manufacturers and Traders (SMMT) has also been pressurising the government to offer financial help to owners of older cars to persuade them buy newer models.
Last month, chief executive Paul Everitt said there was "a clear need to stimulate demand for new vehicles in the UK market".
And a spokesman said the industry remained "firmly committed to the introduction of a workable scrappage scheme".
A total of 5.5 million people could be in "fuel poverty" this summer, 1.7 million more than a year ago, according to the watchdog Consumer Focus.
The benefits from the recent price cuts from four of the largest six energy suppliers will be wiped out by the spiralling effects of the recession, the watchdog has warned.
Fuel poverty is defined as when a family needs to spend at least 10 per cent of their income on heating and lighting their home.
Despite various initiatives from the Government – which set a target to eradicate fuel poverty by 2010 – the number of people suffering from fuel poverty jumped last year as annual household fuel bills increased from an average of £912 to £1,303.
Recent modest cuts will take the average down to just £1,285. Consumer Focus has warned that with unemployment climbing sharply an increasing number of people will suffer from a sharp drop in their income and be unable to pay their bills.
As a result the number of people in fuel poverty will increase from 3.8 million this time last year to as much as 5.5 million this summer.
A private members bill next month is being introduced to try and eradicate fuel poverty. The Fuel Poverty bill, introduced by David Heath, would force gas companies to offer their most vulnerable customers the cheapest possible tariff.
Many energy giants' cheapest bills go to customers who sign up to online deals, leaving those on so-called "social tariffs" paying much more.
Jonathan Stearn, energy expert for Consumer Focus, said: "We need action not more warm words from our politicians if we are to tackle fuel poverty and bring the poorest consumers in from the cold. The Fuel Poverty Bill provides a huge opportunity to help millions of vulnerable households by 'fuel poverty proofing' homes and legally requiring suppliers to provide improved social tariffs."
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