ODAC Newsletter - 13 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.
In the run up to OPEC’s meeting in Vienna on Sunday, the cartel is split along the usual lines, with Iran and Venezuela calling for further cuts in output, and Saudi reported to prefer closer adherence to existing quotas. In Guest Commentary this week, Sadad Al Husseini, former Executive Vice President for Exploration and Production at Saudi Aramco, offers five reasons why no further cuts are necessary.
The US Energy Information Administration (EIA) cut its global oil demand forecast yet again in its Short-term Energy Outlook released this week. The EIA now expects demand to fall by 1.4mbd 2009, 200,000 barrels more than it predicted only last month.
With no end to the economic gloom and reports that China has filled its strategic oil reserve and is reducing imports, some commentators anticipate a further price collapse. Many energy companies are hurting even at current prices, but Exxon in contrast promised this week to increase its 2009 capital spending and predicts global energy demand will grow 35% by 2030.
As the Copenhagen climate change summit approaches governments are grappling with low carbon ways of meeting their future energy demand. Spain, a country with no domestic fossil fuel resources, announced this week that it is now producing nearly 30% of its electricity from locally installed renewables. Another possibility that is gaining currency is to combine a wide range of renewables through a supergrid although, as with carbon capture and storage, the concept has not yet been demonstrated at scale.
In the UK this week the Business Secretary, Lord Mandelson and the Energy and Climate Change Secretary, Ed Miliband launched a new UK vision for a low-carbon industrial strategy. However, with the cabinet reportedly split over funding, the document was more fanfare than strategy. With growing concern that the UK is becoming too reliant on gas for heat and power, and time running short to replace opted-out coal and the ageing nuclear fleet, the government’s low carbon credentials will soon be tested.
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Top exporter Saudi Arabia wants OPEC to discuss stricter compliance with existing supply curbs before considering more cuts, a Saudi-owned newspaper reported on Monday.
Some members of the group, alarmed by falling demand, have made the case for more aggressive action.
Since September, the Organization of the Petroleum Exporting Countries has agreed to cut 4.2 million barrels per day -- about five percent of global daily supply.
So far, they have had only a limited impact on a price slide that has knocked more than $100 off the market since last July's record of nearly $150 a barrel for U.S. crude CLc1.
"There is no need to speak of a new production cut as it would be enough to enhance compliance with the previous decisions," al-Hayat reported, citing unnamed sources.
"Saudi has informed the presidency of the organization, which is Angola, that there must be... serious compliance with the latest reduction decision taken in December which has prevented oil prices from falling further," al-Hayat reported, citing a senior source.
Last week, a source told Reuters OPEC's president would propose no change at the March 15 meeting, although there was no official comment and the Angolan Oil Minister Jose Botelho de Vasconcelos said no decision had yet been taken.
The Angolan presidency has a mediating role, while Saudi Arabia as the biggest OPEC producer is the most influential of the group's 12 members.
Compliance with existing curbs is very high at more than 80 percent, according to independent observers, but that still leaves room for more discipline.
"If we have about 80 percent (compliance), then we still need about 800,000 bpd to cut," OPEC Secretary-General Abdullah al-Badri said on Monday.
VENEZUELA, IRAN NOT COMPLYING?
Those who have failed to comply include Iran and Venezuela, al-Hayat reported, adding the two countries were typically among the most outspoken advocates of supply cuts.
This time around, Venezuela has said inventories were high and it would agree to another output reduction.
Iran has said it did not see a need to reduce production for now, but it has called for "a mechanism to repair prices" and for collaboration from non-OPEC producers.
The Iranian Oil Minister Gholamhossein Nozari did not specify what he meant by a "mechanism".
Previous efforts to involve non-OPEC producers, including Russia, Norway and Mexico, have had little impact and attempts to establish a price target have also failed to convince the oil market.
The curbs implemented since last September have been the most rapid and deepest yet.
At the same time demand has fallen more drastically than in 1998 when the oil price fell to around $10 a barrel. Then demand was around flat. This time, demand has contracted in response to the deepest economic downturn in decades.
Speaking on the sidelines of a conference in Doha, Badri said on Monday OPEC would revise downwards further its forecast for 2009 oil demand in its monthly report to be published on Friday.
The group's last report in February predicted global demand would fall by 580,000 bpd and the March report on Friday would forecast a fall in consumption of one million bpd, Badri said.
Asked whether OPEC needed to cut again to balance the market, Badri said "all options are on the table".
"The price is not really acceptable to us," he said. "But given the economic crisis it is okay."
Writing by Barbara Lewis
Pressure is increasing on Opec to announce a further cut in oil supplies when the cartel meets in Vienna on Sunday, but Saudi Arabia is likely to argue for more compliance with existing cuts before it agrees to further reductions in output.
Expectation that a further cut was imminent sent the oil futures markets higher yesterday, with the price of US light crude trading more than $3 higher at $48.83 before falling back.
Abdullah al-Badri, the secretary-general of Opec, suggested that a cut was an option available to the group of oil exporters. “All options are on the table,” he said yesterday.
However, al-Hayat, a Saudi-owned newspaper, suggested that there was no need for a further cut if Opec members met the previous target of a reduction in output of 4.2million barrels per day (bpd).
Members of the cartel are suffering a cashflow squeeze because of a $100-a-barrel fall in the oil price since last July. In December, the 12 members agreed to a target of 24.845million barrels (excluding Iraq, which is suspended from quota obligations), but the full cut of 4.2million bpd has still not been achieved.
It is believed that only half the cut was achieved in January, with the most hawkish states - Algeria, Iran and Venezuela - making only token reductions amounting to no more than 200,000 bpd in total in output, while Saudi Arabia alone reduced its output by more than one million bpd.
Compliance in February is believed to have been greater, according to the Centre for Global Energy Studies (CGES). “There is evidence real cuts were made in March,” said Julian Lee, of the CGES, which estimates that compliance is now 800,000 bpd shy of the 4.2million bpd cut target.
Both Iran and Venezuela have called for further production cuts by Opec, arguing that stocks were still too high, and a further fall in global oil demand of one million bpd is being predicted.
Further evidence of weak demand emerged yesterday from China, where industry sources indicated that the country's strategic storage tanks of crude oil had been filled. China has been stockpiling crude in four new coastal storage sites capable of holding about 100million barrels of oil - equivalent to about one month of China's crude oil imports.
Confirmation that the storage tanks were being filled and that the process was complete represents a bearish signal to the oil market, according to Mr Lee. He said: “That would knock a little dent in Chinese demand. Over the next month or so, we will see a further slip in Chinese demand.”
Christopher Bellew, of Bache Commodities in London, said: “My feeling is that Opec is able to prevent further price weakness, but until the over-hang of oil stocks begins to be eroded, they will struggle to raise prices.”
Lately there is more talk about re-establishing a price band or a floor price as alternatives to reducing quotas. These are of course very problematic to agree on, let alone implement.
Beyond these there are also the issues of quota adherence. Pronouncements of over 80% adherence by some OPEC ministers sound good but are not consistent with OPEC's own February monthly report. We'll need to see what they report in their March estimate based on external sources.
Meanwhile dry cargo to China in the form of metals is reported to have increased significantly in recent weeks while oil shipping out of the Gulf is down to 16 million bd.
Perhaps the Chinese claim of 8% GDP growth for 2009 is starting to gain traction even though oil exports are marginally down. The global monetary stimuli packages followed by fiscal relaxation in the US (presumed) may improve the demand factor for finished goods and products in the US but we are still looking at a six months minimum lag time.
With Russian and Mexican declines, onshore rig levels at 60% in North America and slow-downs in capacity spending, oil supply capacity is diminishing across the board.
Could all this start lifting prices in late 2009 to clear Iran's desired $65 per barrel?
Sadad Al-Husseini, was the Executive Vice President for Exploration and Production for Saudi Aramco
In its latest Short-Term Energy Outlook (STEO), the Energy Information Administration has lowered its projections for oil demand in 2009-10 as the global economic contraction continues to depress energy demand.
EIA now expects US real gross domestic product (GDP) to decline 2.8% in 2009, leading to a reduction in energy consumption for all major fuels. EIA forecasts that an economic rebound will begin in 2010, with 1.9% year-over-year growth in US real GDP.
Average annual world oil consumption is projected to decline almost 1.4 million b/d in 2009, with consumption in Organization for Economic Cooperation and Development countries falling 1.6 million b/d. This expected decline is 200,000 b/d larger than in last month's STEO, reflecting lower expectations of global economic activity this year.
EIA assumes that worldwide GDP growth will decline 0.8% this year, followed by growth of 2.6% in 2010, compared with last month's assumption of a 0.1% decline this year and 3% growth next year.
EIA forecasts that the global economic slowdown will cut the price of West Texas Intermediate crude by more than half from last year's $100/bbl average. EIA expects WTI to average $42/bbl in 2009, and $53/bbl in 2010. These price forecasts are slightly lower than in the previous STEO.
EIA also reported in the latest STEO that retail gasoline prices, which have been slowly increasing over the last 2 months, are projected to average $1.96/gal in 2009 and $2.18/gal next year.
The Henry Hub natural gas spot price is forecast to decline to about $4.70/Mcf in 2009, from an average of $9.13/Mcf in 2008 but then increase in 2010 to an average of almost $5.90/Mcf.
The US economic downturn is the principal cause for the decline in domestic natural gas consumption, EIA said, particularly in the industrial sector, where gas demand is projected to fall 6% in 2009.
EIA sees US natural gas consumption declining 1.3% this year, and then rebounding a bit in 2010. However, EIA forecasts that gas consumption by the electric power sector will grow 0.4% in 2009.
In recent weeks, as oil traded around $40 a barrel, the conventional wisdom among specialists was that the price decline that began last summer was largely over. Amid production cuts by the OPEC cartel, oil had apparently found a floor that would last until the global economy rebounded.
But a growing chorus of analysts and economists is questioning that notion. While theirs is a minority view, they see troubling conditions in the oil market that could still push prices down sharply — and a global economy that is getting worse, not better. Some are predicting that oil could fall to $20 a barrel and stay low for years.
Petroleum executives generally do not regard this prospect as likely. But in a year when dire predictions about the economy keep coming true, they fear it is a possibility. Another big drop could lead to a sustained period of low investments, and many executives say that would set the stage for prices to soar once the global economy finally starts to recover.
“The industry needs reasonable prices,” Zhou Jiping, the vice president of the China National Petroleum Corporation, said at a conference last month in Houston held by Cambridge Energy Research Associates. “If prices stay below $40 a barrel, a large number of wells have to be shut down.”
Lower oil prices have provided a welcome break in a tough economy. Gasoline, which peaked above $4 a gallon last summer, now sells for $1.94 on average. The drop has saved consumers billions of dollars.
But the concern about lower oil prices crimping new investment is shared by experts at the International Energy Agency, a leading forecaster, which has repeatedly warned that a “supply crunch” within the next five years could push prices to new records.
Among the community of analysts who track the oil markets closely, the view that prices could keep falling in the near term is not widely held. The Organization of the Petroleum Exporting Countries, they point out, is propping up the market by cutting production. OPEC has announced three production cuts since September.
Indeed, prices have been rising in the last three weeks as traders calculate that the cartel will announce another cut at a meeting this weekend in Vienna. Oil closed in New York trading on Monday at $47.07 a barrel, up $1.55 and well above the recent low of $33 a barrel in December.
But as the global economic outlook worsens, the view that prices have farther to fall seems to be gaining adherents.
The debate is not just a proxy for varying predictions about the economy. It also reflects divergent opinions about the future of the oil business, which has been rocked by an unprecedented boom-and-bust cycle in recent months.
Predicting oil prices is a tricky business. As prices rose to $147 a barrel last year, some analysts suggested that oil would reach $200 a barrel. Instead, prices plummeted after their July peak, dropping by more than $100 since the summer. The recent rise has not altered the view of the camp that believes the fall in oil prices is not over.
One of the biggest uncertainties is whether today’s market will mirror the early 1980s, when prices collapsed and stayed low for much of the next two decades, or whether it will prove more like 1998, when prices fell to $10 a barrel after the Asian financial crisis but rebounded within a few years as growth picked up.
With the global economy worsening and demand slowing, some economists, including Kenneth Rogoff of Harvard and Nouriel Roubini of New York University, say oil prices could keep declining in the short term.
“The twin engines of growth were the U.S. and China; the U.S. has fallen off and China has stalled, to put it mildly,” Mr. Roubini said. “In my scenario, oil will fall lower. I would not be surprised if oil even went to $20, if the recession is more severe.”
While many analysts expect oil demand to rebound sharply once the economy recovers, not everyone agrees that prices are necessarily going to soar at that point.
Edward L. Morse, the chief economist at the New York broker LCM Commodities, says that each energy shock in the last 60 years resulted in lower growth for oil demand in succeeding years.
This time, he said, should be no different. “The case is overpowering,” Mr. Morse said.
Before the energy crisis of 1973, he said, global oil demand was growing at 8 percent a year. But by the late 1970s, as many countries found ways to use less oil, that rate of growth had slowed to 4 percent a year. Similarly, after the oil shock caused by the Iranian revolution, demand growth slowed to 2 percent a year. And in the decade after Iraq’s invasion of Kuwait, consumption increased 1.5 percent to 1.8 percent a year.
Mr. Morse estimates that in the next recovery, global oil demand will grow perhaps 1 percent a year, because of lower demand growth in the United States, China and the Middle East.
In the longer term, another factor may keep prices down. As OPEC trims its output in the face of falling demand, it automatically raises the amount of spare production capacity.
After years with a thin cushion — a factor in pushing prices up — the market now has at least five million barrels a day of untapped output potential. That level could rise to as high as eight million barrels a day by the end of the year, according to estimates by cartel officials, a level unseen in more than a decade. The last time that happened, prices stayed low for years.
“By any economic measure, we still have much more downside for oil prices,” said Adam J. Robinson, director of commodities at Armored Wolf, a California hedge fund.
For the moment, the market’s focus is on consumption rather than supplies. In China, for example, oil consumption, which had been growing at more than 10 percent a year, fell by 4 percent in December, according to the International Energy Agency. This year, the agency expects “paltry” growth of 0.7 percent in Chinese oil demand.
In the United States last year, demand plummeted 6 percent, the steepest decline in nearly three decades. With Americans traveling less because of the bad economy, the demand for jet fuel fell 11 percent in January, compared with a year earlier.
A period of lower oil prices could also slow investments in alternative energy, a sector that is already suffering from the credit crisis and the economic slowdown. Without government subsidies, many technologies cannot compete with oil at today’s prices.
Some oil executives, however, have sought to remain optimistic, saying that costs for oil companies are beginning to fall.
“I remember a time when I thought $40 was a fantastic price,” said Tony Hayward, chief executive of BP. “Not much has changed, but we allowed our cost base to get ahead of us. The industry worked very well at $40 a barrel four years ago.”
The price has dropped by over $100 a barrel in the last seven months to about $45. But BP, Shell and ExxonMobil haven’t cut back on dividends or ambitious investment plans. Exxon, the largest major, says “it's business as usual”. Tony Hayward, BP’s chief executive, says the future isn’t cancelled.
They don’t want to be caught out when prices recover. The last time the oil price fell, in the late 1990s, Shell and others slashed spending, only to spend years playing catch-up. The majors don´t want to make the same mistake, especially since growth is hard to come by. They are planning for modest increases in production – a 2-3pc rate over the next five years at Exxon and 1-2pc growth out to 2020 for BP.
Yet there is reason for concern. BP says it needs $60 oil to break even, after costs doubled between 2004 and 2008. For the economics to work again, costs have to fall further, or the oil price has to rise. Most analysts expect oil to reach $60 sometime in the next two years.
Costs have certainly started falling, too The prices of key raw materials, including steel and oil, have dropped by the greatest extent since records began in 1948. But some costs, such as salaries, are sticky. And the continued investment might make it easier for more specialised suppliers to keep prices high.
In the meantime, the majors are confident enough to use their balance sheets to bridge the gap. At current oil prices, BP will face a funding gap of about $5.1bn this year, according to JPMorgan. Shell will need twice as much.
But these majors can afford to borrow. Exxon has an ample cushion, with $22bn on its balance sheet. Shell has gearing, including off-balance sheet obligations, of 23pc – within its target range of 20pc-25pc through the cycle. The figure is similar for BP. Citigroup estimates gearing would rise to 35pc at BP by 2010 – high, but doable.
The bet on either higher prices or lower costs looks reasonable. But if oil hovers below $45 for too long, the confidence may quickly turn to angst.
China has filled all four of its state-owned emergency oil reserve tanks to the brim and should now invest in oil tankers to add more to inventories while oil prices are low, a senior industry executive said on Monday in a rare acknowledgement of Beijing's secretive oil inventories.
Coupled with data last week showing a one-third rise in commercial crude oil stockpiles last year, the admission suggests that a large share of of China's oil import growth last year was pumped directly into storage, and could be relied upon quickly to soften any demand recovery or if prices should rise.
It also backs up speculation that the world's No. 2 energy user has been making good use of oil's $100 price fall to boost supplies while demand falters in an unfolding economic crisis.
China Shipping (Group) Co President Li Shaode told Reuters on Monday that he had proposed that the government use some of its foreign exchange reserves on floating oil storage.
"The four onshore reserve bases have been fully filled, so we need to invest urgently in floating storage," Li said on the sidelines of the country's annual parliament.
The first set of China's strategic oil reserves, which can hold about 100 million barrels, were built over the past two years, but data on their status is considered a state secret and information about their operations or tank levels is scarce.
China plans to build a second-phase strategic reserve that will nearly triple the first batch to 280 million barrels by 2011, and industry executives have said the current storage capacity has already become a hurdle to bringing in more imports.
Crude oil imports rose 9.6 percent last year to 179 million tonnes or about 3.58 million barrels per day (bpd), while implied oil demand rose by just 3.8 percent last year to about 7.26 million bpd, according to Reuters calculations.
China is taking the supply security issue more seriously than the market thought, says Yan Kefeng, Beijing-based senior oil analyst with Cambridge Energy Research Associates (CERA).
"We expect China's oil stockpiling to reach a peak in 2009, and continue into the next year," Yan said, but did not give an estimate on the volume of stockbuild he expected.
Apart from pushing forward plans to add state reserves, Beijing has also been urging its state oil giants Sinopec Corp and PetroChina to stock up under so-called corporate mandatory reserves, said Yan.
"Apart from reasons of supply security, China also wants to contain the investment risk of its foreign exchange reserves." said Yan, adding that China did not stop replenishing crude reserves last year when global crude topped $147 a barrel in July.
The remark is consistent with recent comments by government officials that China should better use its massive foreign exchange reserve to stock up key commodities from grain to metals to crude oil, and last week Beijing announced that it would boost its budget for stockpiling resources by $10 billion.
At $40, many believe oil presents a good opportunity to buy.
"China should do everything to take advantage of this short-term price opportunity; $40 oil is not going to last too long. I keep telling them (government officials) -- what do you have to lose?" said Lin Boqiang, director of China Centre for Energy Economics Research at Xiamen University.
China should act quicker to boost storage capacity as its import dependence is set to surge in the coming decade.
"Floating storage bases are a good idea because China needs to do everything to boost reserves," Lin said.
The stockfill was in line with a separate set of data released by China OGP, a publication run by the official Xinhua News Agency, which showed China's crude inventories surged by about 70 million barrels last year to about 34 days of forward demand, although it did not make clear whether the figure referred only to commercial stocks or also strategic ones.
Together with record high stocks of gasoline and diesel accumulated ahead of last summer's Olympics, the stockbuild also meant Chinese oil demand may have slowed more than it appeared.
The International Energy Agency has forecast Chinese oil demand to rise a mere 1.1 percent in 2009, the lowest growth rate since 2001, compared with an estimated 4.2 percent growth last year. Some analysts have already pointed to a contraction for this year.
"Apart from gasoline, we expect diesel, naphtha and fuel oil all to show negative growth in demand," said CERA's Yan.
Additional reporting by Chen Aizhu and David Stanway; Writing by Chen Aizhu; Editing by Ken Wills and Jonathan Leff
Iran needs $24 billion to complete oil projects this year and the lack of sufficient investments is a “challenge,” Etemaad reported, citing a ministry official.
The budget of Iran’s National Iranian Oil Co. for the calendar year starting March 20 has been cut by a third because of the fall in oil prices, Managing Director Seifollah Jashnsaz said, according to the newspaper.
Investment shortage is the state-owned company’s “most important challenge,” Jashnsaz said, without giving details of the projects.
Exxon Mobil Corporation, the world's largest publicly traded petroleum and natural gas company, said on Thursday it was planning to increase its capital spending in 2009 to $29 billion from $26 billion, despite the drop in oil prices.
Senior vice president and treasurer Donald Humphreys said the company would invest between $25-30bn a year for next five years, adding the global energy demand was set to rise 35 percent by 2030.
Oil prices have slumped more than $100 from their record high of more than $147 a barrel back in July 2008. On Thursday, crude was trading at just under $43.
Exxon, which has 37 refineries worldwide, and a 56m barrels per day (bpd) capacity, is the largest investor in the energy industry in Saudi Arabia , has operations in Qatar and Egypt as well as a presence in Abu Dhabi and Dubai.
Speaking at the Wharton Global Alumni Forum in Dubai, he said Exxon Mobil hadn't changed its capital budget plan unlike many of its competitors faced by the global economic crisis.
"The global energy business is a vital part of the world economy and has the potential to help reignite a much needed recovery in growth in the midst of a downturn," he added.
He said hydrocarbons would continue to play a critical role in world's future energy market and that by 2030 oil would account for 34 percent of global energy needs with natural gas contributing 25 percent.
He forecast that by 2030, global energy demand would be 35 percent higher than in 2005 with demand from developing countries especially China and India driving the growth.
He added that by the same date, the Middle East would also be a substantial market.
On clean energy, Humphreys said the company had invested more than $1.5bn since 2004 in activities to reduce greenhouse emissions and it planned to spend another $500m in energy efficient solutions over next few years.
THE government is finalising the terms of a rescue package for North Sea oil firms amid warnings that more than half the companies in the sector will fail this year and put tens of thousands out of work.
The plan could include several unprecedented measures, including immediate release of several hundred million pounds held by the Treasury in accumulated tax credits and an offer to groups that won licences in last year’s auction of new North Sea blocks to hand them back if they are unable to fund their development.
The industry boomed with the rising oil price of recent years but is contracting now, caught out by the $100 drop in the price of oil and an inability to raise new funds from the closed debt and equity markets.
Jim Hannon, managing director of North Sea oil consultancy Hannon Westwood, predicts a bloodbath. “There are 176 companies in the North Sea, 100 of them have no production and no cash flow. That never made any sense,” he said.
“It was a bubble in the last few years and the low oil price will just accelerate the inevitable. Most of these will disappear or be consolidated. I see no alternative.”
Officials at the Treasury and the Department of Energy and Climate Change have held several meetings with industry leaders in recent weeks to finalise terms to be included in next month’s prebudget report.
One Treasury proposal would introduce a new “value allowance”, to increase the tax deduction that companies get for new wells.
The industry says more urgent action is needed to address the immediate problem: cash flow. It has asked the Treasury to immediately release several hundred million pounds sitting on its books in accumulated tax breaks that, under the current regime, companies cannot take advantage of until they start producing. A well can take up to five years to be brought into production – too long for most companies. They need new funds now.
Malcolm Webb, chief executive of Oil and Gas UK, said: “If corrective action is not taken, exploration in the North Sea will crater. Fifty thousand well-paid jobs are at risk.”
The government recently informed the industry that the next North Sea licensing round, which was expected to take place this year, had been postponed indefinitely.
Two weeks ago the energy department sent letters to more than 100 companies that won blocks for new exploration in the North Sea, giving them the option to relinquish their rights. The deadline for responses passed on Friday.
Sasol, the world’s leading producer of liquid fuels from coal and gas, has reduced its capital expenditure for the coming three years by 40 per cent despite posting a sharp rise in profits.
Despite a 45 per cent year-on-year rise in net profit to R13.2bn ($1.2bn) for the six months to December, the company cut interim dividend from last year’s R3.65 per share to R2.5, and warned of falling earnings ahead, illustrating the abrupt change of fortune for oil companies, particularly purveyors of costly technologies such as Sasol.
The price of a barrel of Brent Crude oil, the industry benchmark, has fallen from $148 in July to an average of about $45 over the past month, as the world’s gas-guzzling countries fell into recession.
Pat Davies, Sasol chief executive, told the Financial Times the Johannesburg-based company had based its planning on the assumption that the oil price would remain between $40 and $45 per barrel for the next two years.
That spells trouble for a business that sells a technology which makes economic sense only when oil prices are high.
Using techniques pioneered by Nazi Germany to convert coal and gas resources into liquid fuel, Sasol operates a major synthetic fuel plant in its native South Africa and its new natural gas-to-liquid facility in Qatar is now operating at close to full capacity.
It has similar projects in various stages of development in India, China, the US, Uzbekistan and elsewhere, and Mr Davies said Sasol was in early talks about a project to convert Indonesia’s copious seams of lignite, a soft form of coal, into liquid fuel.
“I still believe these big projects are viable,” said Mr Davies. He said the company had not yet decided which initiatives would fall by the wayside as it trims capital expenditure budgets by 40 per cent from its earlier projections to R15bn annually.
Sasol, one of Africa’s biggest companies with a market capitalisation of R168bn, reduced its gearing – the ratio of net debt to equity – to 2.3 per cent from 20.5 per cent in the six months to December. “This is not the time to be running about to banks where there’s very little liquidity available to be funding your growth projects,” Mr Davies said.
Its shares closed 6.1 per cent lower at R246.47.
A huge expansion of global capacity for producing liquefied natural gas is set to bring additional volumes on to an already depressed global market.
Plants scheduled to come on stream over the next year will increase global LNG production capacity by 30 per cent, putting downward pressure on natural gas prices worldwide, particularly in the US and Britain.
LNG – gas super-cooled to -160°C so that it can be transported by tanker – has been the fastest-growing fossil fuel of the past decade. It provides only about 7 per cent of global gas supply but plays an increasingly important role in meeting marginal demand.
A wave of LNG projects approved in the middle of the decade – in particular the vast facilities in gas-rich Qatar – is due to come on stream this year and next.
Some of their production has already been sold on long-term contracts but much of it will go into spot markets, where prices have fallen steeply over the past year.
Professor Jonathan Stern of the Oxford Institute for Energy Studies said that gas demand had “gone off a cliff” worldwide, with electricity generators and industrial users such as car manufacturers cutting their use sharply.
Prof Stern estimated that Asian and European markets could shrink by 10 per cent this year.
Asian buyers are using flexibility in their contracts to take less gas, leaving sellers to look for markets in the US and Europe.
Several new terminals for receiving LNG are also coming into operation in the first half of this year, including Sabine Pass in Louisiana, South Hook in Wales and Rovigo in north-east Italy.
Much of the surplus gas is likely to head for the US. LNG from Qatar costs about $2.50 per million British thermal units to deliver to America, according to Frank Harris of Wood Mackenzie, a consultancy.
That makes it competitive in the US market, where the Henry Hub benchmark price was at a 29-month low of $3.93 per million BTU on Friday.
Mr Harris said that companies with LNG projects due to come on stream this year “would not be rushing hell for leather to get production at full tilt”, and the additional volumes coming on to the market were likely to be well below the planned increase in capacity.
However, projects under construction cannot be deferred indefinitely. So if the new plants do not reach full production this year, they are likely to do so next year. “2010 may be the really horrendous year,” Mr Harris said.
Russian Prime Minister Vladimir Putin said state energy giant Gazprom and the Hungarian Development Bank would sign a natural pipeline deal.
The deal was "ready for signing," Putin said Tuesday. The project involves construction of a Hungarian section for the South Stream pipeline, designed to carry 31 billion cubic meters of natural gas per year to the Balkans and from there to other European countries.
Hungary, Bulgaria, Serbia, Italy and Greece are involved in the deal, RIA Novosti reported.
The first deliveries are expected in 2013.
Putin also said a separate deal to build a large underground natural gas storage facility in Hungary was in the works.
Hungarian energy company MOL is Gazprom's partner in that project, Putin said.
A RECENT American television advertisement features a series of trustworthy-looking individuals affirming their faith in the potential of “clean coal”. One by one, a sensible old lady in a hat, a lab-coated scientist standing by a microscope, a fresh-faced young schoolteacher, a weather-beaten farmer and a can-do machinist face the camera square-on and declare, “I believe.”
The idea that clean coal, or to be more specific, a technology known as carbon capture and storage (CCS), will save the world from global warming has become something of an article of faith among policymakers too. CCS features prominently in all the main blueprints for reducing greenhouse-gas emissions. The Stern Review, a celebrated report on the economics of climate change, considers it “essential”. It provides one of the seven tranches of emissions cuts proposed by Robert Socolow of Princeton University. The International Energy Agency (IEA) reckons the world will need over 200 power plants equipped with CCS by 2030 to limit the rise in average global temperatures to about 3°C—a bigger increase than many scientists would like.
Politicians have duly lined up behind the idea. Barack Obama talked up CCS during last year’s election. Gordon Brown, Britain’s prime minister, has said the technology is necessary “if we are to have any chance of meeting our global climate goals”. The leaders of the G8, a rich-country club, want it to be widespread by 2020.
Despite all this enthusiasm, however, there is not a single big power plant using CCS anywhere in the world. Utilities refuse to build any, since the technology is expensive and unproven. Advocates insist that the price will come down with time and experience, but it is hard to say by how much, or who should bear the extra cost in the meantime. Green pressure groups worry that captured carbon will eventually leak. In short, the world’s leaders are counting on a fix for climate change that is at best uncertain and at worst unworkable.
CCS sounds beguilingly simple. It entails isolating carbon dioxide wherever it is produced in large quantities, such as the smokestacks of coal-fired power plants, compressing it and pumping it underground. The oil and chemical industries already use most of the processes that this involves, although not in combination. And oil, gas and salt water seem to stay put in certain rock formations indefinitely, suggesting that carbon dioxide should as well.
CCS particularly appeals to politicians reluctant to limit the use of coal. Coal is the dirtiest of fossil fuels, and burning it releases roughly twice as much carbon dioxide as burning natural gas. The world will struggle to cut greenhouse-gas emissions dramatically if it continues to burn coal as it does today. Yet burning coal is one of the cheapest ways to generate power. In America, Australia, China, Germany and India coal provides half or more of the power supply and lots of jobs (see chart). Rejecting cheap, indigenous fuel for job cuts and international energy markets is seen, naturally enough, as political suicide. CCS offers a way out of this impasse.
In a purely technical sense, CCS looks promising. There are several proven ways to isolate carbon dioxide from fossil fuels, using a variety of combustion techniques and an assortment of chemical “scrubbers” to react with the gas. Oil firms, meanwhile, have long experience of pumping carbon dioxide into reservoirs to increase their pressure and thus squeeze out more fuel. To that end, Exxon Mobil runs the world’s biggest carbon-capture facility, at La Barge, Wyoming. America boasts a network of 5,800km (3,600 miles) of pipes to carry carbon dioxide from such facilities to the oil- and gasfields where it is needed.
For the most part, oil firms do not worry what happens to the carbon dioxide used in this way after they have got hold of their oil and gas. But in recent years a few of them have launched projects to test whether it stays underground. The oldest project, Sleipner, off the coast of Norway, has been up and running for 13 years without any sign of leaks.
Last year Vattenfall, a Swedish utility, opened the first power plant to incorporate CCS at Schwarze Pumpe, in Germany. It is only a pilot project, less than a twentieth of the size of most modern coal-fired plants. But so far, Vattenfall says, it is working fine. Several other firms hope to start pilot plants on a similar scale this year.
Money for nothing
The problem with CCS is the cost. The chemical steps in the capture consume energy, as do the compression and transport of the carbon dioxide. That will use up a quarter or more of the output of a power station fitted with CCS, according to most estimates. So plants with CCS will need to be at least a third bigger than normal ones to generate the same net amount of power, and will also consume at least a third more fuel. In addition, there is the extra expense of building the capture plant and the injection pipelines. If the storage site is far from the power plant, yet more energy will be needed to move the carbon dioxide.
Estimates of the total cost vary widely. America’s government, which had vowed to build a prototype plant called FutureGen in partnership with several big resources firms, scrapped the project last year after the projected cost rose to $1.8 billion. Philippe Paelinck, of Alstom, an engineering firm that hopes to build CCS plants, thinks a full-scale one would cost about €1 billion ($1.3 billion).
In 2005 the Intergovernmental Panel on Climate Change, a group of scientists that advises the United Nations on global warming, came up with a range of $14-91 for each tonne of emissions avoided through CCS. Last year, the IEA suggested that the price for the first big plants would be $40-90. McKinsey, a consultancy, has arrived at an estimate of €60-90, or $75-115.
Either way, that is more than the price of emissions in the European Union: about €10 a tonne. America does not have a carbon price at all yet. A bill defeated last year in the Senate would have yielded a carbon price as low as $30 in 2020, according to an official analysis. So CCS might not be financially worthwhile for years to come.
Analysts assume that the price of emissions will rise, as governments impose tighter restrictions, and that the price of CCS will fall, as engineers learn how to do it more cheaply. The IEA, for example, predicts CCS will cost just $35-60 per tonne of emissions reductions by 2030. McKinsey foresees a price of €30-45 when the technology is mature, some time after 2030.
But these estimates entail some generous assumptions. McKinsey, for example, imagines that CCS plants will break down no more often than normal coal plants, despite their more complicated machinery. It assumes that the average cost of capital for CCS plants will be no more than 8%. And it projects that costs will fall by 12% for every doubling in capacity. That is roughly the same rate as for wind power, even though most of the processes in CCS are already widely used in other industries, suggesting that the scope for improvement is slender.
Greenpeace, a pressure group, argues that it is impossible to be certain that carbon dioxide will not eventually leak out of the ground. Carbon dioxide forms an acid when it dissolves in water. This acid can react with minerals to form carbonates, locking away the carbon in a relatively inert state. But it can also eat through the man-made seals or geological strata intended to keep it in place. A leakage rate of just 1% a year, Greenpeace points out, would lead to 63% of the carbon dioxide stored in any given reservoir being released within 100 years, almost entirely undoing the supposed environmental benefit.
Spills would also be a health risk, since carbon dioxide is heavier than air, and so can build up in low-lying or poorly ventilated spots. Earlier this year, Zurich Financial Services said it would offer insurance for CCS plants and storage sites while they were operating, and for a limited time thereafter. But CCS advocates all assume that governments will eventually take charge of reservoirs, along with all the monitoring costs and legal liabilities. America’s lawmakers went a step further, and agreed to insure the proposed FutureGen plant and to indemnify the firms behind it from all lawsuits arising from leaks.
Last year the EU passed a law requiring its members to draw up rules for CCS. In theory these should be in place within two years, although such deadlines often pass unmet. At a minimum, governments are supposed to lay down criteria for selecting storage sites and to set standards for monitoring, financial guarantees, safety and so on. If the safety regulations require stored carbon dioxide to be pure, for example, they would add to the cost of CCS, points out Anthony Hobley, of Norton Rose, a law firm. Meanwhile, those considering CCS plants in poor countries cannot earn UN-backed carbon credits, since the Kyoto protocol, the UN’s treaty on climate change, makes no provision for the technology.
All this uncertainty and expense has doubtless put off utilities. Omar Abbosh, of Accenture, a consultancy, says that carbon trading as practised in the EU and contemplated in America does not give enough certainty about future carbon prices to justify an investment in a CCS plant. Mr Paelinck of Alstom agrees: no board would risk spending €1 billion on one, he says, without generous subsidies.
Statoil Hydro, the Norwegian firm behind the Sleipner project, says that even with Norway’s heavy carbon tax, which last summer reached over €40 a tonne, CCS does not make financial sense. Hydrogen Energy International, a joint venture between two big resource firms, Rio Tinto and BP, says that its proposed CCS plant in California will need extra subsidies, even though the state is imposing a carbon price and the project will earn revenues from enhanced oil recovery.
Many governments are offering lavish handouts. America’s stimulus bill set aside $3.4 billion for CCS. Earlier this year the EU proposed spending €1.25 billion on a few demonstration plants. It has also said it will give some 300m emissions permits, now worth around €3 billion, to the operators of CCS plants. Australia, Britain and Norway, among others, also plan to help pay for CCS projects.
Yet CCS’s expected advent keeps receding. FutureGen was scheduled for 2012, but has now been scrapped in favour of several smaller projects that have yet to be selected. Britain’s subsidised plant has suffered repeated delays. In 2007 the IEA called for 20 plants to be under way by 2010—a goal that seems certain to be missed. CCS’s boosters now talk of the first full-scale plant being ready by 2015 or so.
Al Gore, America’s green conscience, does not see CCS working commercially “in the near term or even the medium term”. Sam Laidlaw, the boss of Centrica, a British utility, thinks it will take at least 15 years, and probably 20, to roll out CCS plants in large numbers. By contrast, Centrica is keen to invest in nuclear plants right away, without any subsidy. Greenpeace argues that CCS will never be competitive, since other low-carbon technologies, such as wind power, are already cheaper and becoming more so as time passes. It is hard to square these views with the G8’s ambition for widespread CCS by 2020, or the IEA’s call for 200 plants by 2030.
Some sceptics feel so strongly they have started airing advertisements of their own to lambast CCS. In one of them, an engineer with a hard hat and a clipboard promises a tour of a “state-of-the-art clean-coal facility”. He pushes open a factory door to reveal a patch of barren scrubland; the factory, it turns out, is just a façade. “Amazing!” he shouts, gesturing at the empty space. It is a fairly accurate portrait. For the moment, at least, CCS is mostly hot air.
Thomas Edison might have relished the irony. Just as his most famous legacy, the incandescent light bulb, heads for extinction, his other great passion, direct current, is set to boom. The bulb that dominated lighting for over a century is now a pariah of climate change and banned in many countries. Meanwhile direct current, which was defeated by alternating current in the race to establish the industry standard during the 1890s, is now emerging as crucial weapon in the fight against global warming, in the form of high voltage direct current (HVDC) transmission lines.
Although the world’s electricity transmission grids are almost wholly AC, it is now becoming clear that HVDC will be crucial to meeting soaring electricity demand and cutting carbon emissions – by transmitting large amounts of power efficiently over long distances and connecting remote offshore wind farms. HVDC even promises to solve the vexed problem of the intermittency of wind turbines and solar panels by allowing the creation of continent-wide ‘Supergrids’, which smooth out the variable generation from many far-flung sources to create a dependable supply. Supporters claim this will make it possible to ditch coal, gas and nuclear altogether and replace them entirely with renewables within a couple of decades.
Elements of a European Supergrid are already beginning to emerge, with plans for offshore HVDC grids being developed in both the Baltic and the North Sea. And political momentum behind the idea is growing: in January the European Commission proposed €300 million to subsidize the development of HVDC links between Ireland, Britain, the Netherlands, Germany, Denmark, and Sweden, as part of a wider €1.2 billion package supporting links to offshore wind farms and cross-border interconnectors throughout Europe. Meanwhile the recently founded Union of the Mediterranean has embraced a Mediterranean Solar Plan to import large amounts of concentrating solar power into Europe from North Africa and the Middle East.
In the US, President Obama’s $150 billion energy plan includes a target of 25 per cent renewable electricity by 2025, implying massive investment in high voltage lines. A recent report from the US Department of Energy found that achieving 20 per cent wind penetration would require new ‘transmission superhighways’ stretching more than 12,000 miles. America’s existing 200,000 mile high voltage transmission network is almost entirely AC, but many of the new lines are likely to be HVDC. According to Dr Graeme Bathurst, technical director of the British grid consultancy TNEI, “Whichever way you look at it, there is absolutely no doubt that HVDC’s time has come”.
It is ironic that Edison lost his ‘battle of the currents’ with Tesla and Westinghouse because in one sense direct current is far superior; it suffers much lower transmission losses than alternating current. That’s because in a DC line the voltage is constant, whereas in an AC line it reverses direction 100 times per second, meaning more energy is lost as waste heat. Because of this, HVDC has long enjoyed a niche role transporting large amounts of power efficiently over long distances. One of the earliest big projects was a 600MW link in New Zealand connecting the north and south islands, built in 1965, and later upgraded to 1200MW.
One disadvantage of HVDC lines is the need for converter stations where they connect to an AC grid. These are big and expensive: for a 3000MW line the converter stations at either end would cover 9 football pitches and cost around $200 million each. But once the link is longer than about 600km, the extra cost is increasingly outweighed by the energy savings, making it economic to transport power over vast distances that with AC would be expensive and technically difficult
The length and capacity of new HVDC projects is rising fast, particularly in China, where lines are being built to transmit hydro power from deep in the country’s interior to consumers on the coast. The Swiss engineering firm ABB has recently been commissioned to build a link from the Xianjiaba dam to industrial Shanghai, which is the world’s longest, at 2000km, and most powerful, at 6.4GW - equivalent to the output of three large power stations. The line’s converter stations will cover 20 football pitches each, but when the project opens in 2011, the company says it will deliver major environmental benefits.
Dr Gunnar Asplund, ABB’s research and development manager for HVDC, explains that enormous amounts of power will be transmitted along a single line of pylons, whereas a traditional AC link would need three abreast. And because the alternative to transporting hydro electricity long distance would have been to build more coal fired power stations near Shanghai, Dr Asplund reckons the carbon dioxide savings could amount to 40 million tonnes per year.
Another major advantage of HVDC is that it can operate over much greater distances underground and under water than AC. That’s because AC produces powerful alternating electric fields that cause large additional energy losses if the line is buried or submerged, whereas for DC this ‘capacitance’ effect is practically negligible. That makes HVDC essential for sub-sea ‘interconnectors’, like the 600km NorNed cable between Norway and the Netherlands that opened last year.
NorNed was intended to reduce electricity prices by sending cheap Norwegian hydro power south during the day, and Dutch off-peak coal and gas fired power north by night. But this year has been exceptionally wet in Norway, making hydro-power so cheap that so far the trade has been almost all one way. That could easily reverse though, says Odd Hoelsaeter, the recently-retired chief executive of the Norwegian grid operator Statnett, “in a dry year like we had in 2002-3, we would be massive importers. Quite apart from the trading benefits, this is a major increase in energy security for both our countries”.
HVDC will also be essential for connecting the more remote offshore wind farms now being planned off Britain and Germany, although this will depend on a new generation known as voltage source converter (VSC) technology, which ABB markets as HVDC Light, and Siemens as HVDC Plus. That’s because, unlike classic HVDC, VSC does not require a strong AC grid at both ends in order to function, and its converter stations are compact enough to fit on an offshore platform.
Perhaps the biggest potential role for HVDC will be to enable the ‘Supergrid’ concept now gaining support in Europe and America. The idea itself is not new - it was first proposed by Buckminster Fuller in the 1950s – but only now is it becoming a practical possibility because of advances in HVDC technology.
Since 2003, Desertec, an organization founded by the Club of Rome and the National Energy Research Center of Jordan, has promoted one version of the Supergrid based largely on concentrating solar power (CSP) in North Africa and the Middle East. CSP is still relatively expensive, but one big advantage is that some of the heat captured during the day can be stored in molten salts and used to generate electricity overnight, and Desertec says this technology alone could supply 17% of Europe’s power by 2050, imported over 20-40 long-distance HVDC lines. But other supporters of the concept argue that the Supergrid could deliver even more - a wholly renewable electricity supply.
The problem with renewable electricity – its detractors claim - is the wind doesn’t always blow, nor the sun always shine. But that is only true of a single location. The wind is always blowing somewhere, and sunrise and sunset come at different times depending on geographical location. So given a large enough grid, the variations in renewable generation should tend to even out, making the supply much more reliable overall.
The potentially huge impact of this ‘spatial smoothing’ has been demonstrated by Dr Gregor Czisch, an energy system consultant, who has made the first quantitative study of how to build an economically viable, wholly renewable electricity supply for Europe and its neighbours – an area stretching from Iceland to Kazakhstan, and down into North Africa (see map at original). To do this Dr Czisch used a technique called linear optimization, originally developed to solve complicated logistical problems, which is widely used in business. It took Czisch years to gather the necessary data, including detailed weather and electricity consumption data for the whole area, and investment costs for all the main renewable technologies.
Czisch then told the programme to devise the cheapest electricity supply system that could satisfy demand entirely from renewables. Based on all the data, the model would decide which forms of generation should be sited where, and plan the routes and capacity of the HVDC lines. The results were astonishing: not only could the electricity demand of more than a billion people be supplied solely from renewables throughout the year – the lights would never go out - but it also wouldn’t break the bank.
At first glance the numbers look enormous: the entire project would cost more than €1.5 trillion over 20 years, of which €128 billion would go on the Supergrid itself – the HVDC lines and equipment – and around €1.4 trillion on renewable generating capacity. But to put these figures in context, the International Energy Agency forecasts that the global power industry will have to invest $13.6 trillion by 2030 in any case, even under a business-as-usual scenario in which coal and gas continue to dominate the electricity supply. Under the Czisch plan the idea is that investment in clean technologies would displace spending on dirty ones, not add to it.
Or course wind and solar are currently more expensive than gas and coal fired plants – at least if the cost of emissions is excluded, or set unrealistically low - but one of the advantages of the Supergrid is that renewables can be sited in the best locations, where the wind and the sun are strongest and most consistent, meaning the efficiency and economics improve. And although the Supergrid itself would cost billions, because it represents only a small proportion of the total investment, the extra cost has little impact on the overall price of electricity. So even without factoring in a price for carbon, Czisch calculates the system could deliver power for less than 4.7 Euro cents per kilowatt hour, roughly the price of German wholesale electricity in 2005 when the study was completed.
In Czisch’s reference scenario, the bulk of the energy comes from onshore wind (70%), the cheapest form of renewable generation, with powerful summer winds in Morocco and Egypt complementing winter gales around the North Sea. Most of the rest comes from existing hydro power in the Nordic countries and the Alps, which the model holds in reserve and despatches only when the other sources fail to match demand. Another scenario shows that European demand could be satisfied entirely from renewables even without imports, but at slightly higher cost. “European politicians are still arguing about whether we can achieve our 2020 targets”, says Dr Czisch, “but my work shows there is nothing to stop us going completely renewable. It is just a question of political will”
To make the system work would mean building tens of thousands of kilometres of new HVDC lines, which in Europe could provoke public outcry and lengthy planning disputes. But Czisch argues that the Supergrid would represent only a small addition to the existing infrastructure; Germany for instance would need around 8,000 kilometres of new HVDC, whereas its existing HVAC grid spans more than 100,000km. “So for a less than 10% increase in lines we get a totally renewable electricity supply. This is not a problem; it’s a bargain”.
Government investment worth £50bn would convince private companies that power from the Sahara solar scheme is feasible and attractive option, expert says
European countries could transform their electricity supplies within a decade by investing in a giant network of solar panels in the Sahara desert, an expert told a global warming conference in Copenhagen today.
Dr Anthony Patt of the International Institute for Applied Systems Analysis in Africa said some £50bn of government investment was needed over the next decade to make the scheme a reality. That would convince private companies that power from the Sahara was both feasible and an attractive investment, he said.
In the long term, such a plan, combined with strings of windfarms along the north Africa coast, could "supply Europe with all the energy it needs".
He said technological advances combined with falling costs have made it realistic to consider north Africa as Europe's main source of imported energy.
"The sun is very strong there and it's very reliable. There is starting to be a growing number of cost estimates of both wind and concentrated solar power for North Africa....that start to compare favourably with alternative technologies. The cost of moving [electricity] long distances has really come down."
He said only a fraction of the Sahara, probably the size of a small country, would need to be covered to produce enough energy to supply the whole of Europe.
The results are the first findings of a major research effort, together with experts at the European Climate Forum and the Potsdam Institute for Climate Impact Research, to judge whether such a Sahara solar plan is realistic.
Patt said the team was looking at questions of security and governance, as well as ways to pay for the technology. The full results will be presented to governments later this year.
He said sunshine in the Sahara is twice as strong as in Spain and is a constant resource that is rarely blocked by clouds even in the winter.
The scheme would use mirrors to focus the sun's rays onto a thin pipe containing either water or salt. The rays boil the water or melt the salt and the resulting energy used to power turbines.
Unlike wind power, which usually has to be used immediately because of the cost of storing the electricity generated, the hot water and salt can be stored for several hours.
Trials of such concentrated solar power plants are planned for Egypt, Morocco, Algeria and Dubai, but Libya and Tunisia could also be considered.
Patt said that starting such a scheme would not be all plain sailing though. There would likely be opposition from local communities across Europe who unhappy about transmission cables installed near their homes. Piecemeal national transmission networks could also pose a problem.
The findings were revealed at the Copenhagen Climate Congress, a special three-day summit aimed at updating the latest climate science ahead of global political negotiations in December over a successor to the Kyoto treaty.
The rolling plains of Castilla-La Mancha are dominated by the windmills that provoked the fevered imagination of Don Quixote. But Spain’s relentless investment in wind power and other renewable energy sources has proved wrong those who thought it was tilting at windmills.
The sleek white wind turbines and hydroelectric plants that have sprung up across the country in recent years generated 30 per cent of Spain’s energy this year for the first time.
A wet and windy January and February boosted the amount of electricity produced from wind and hydro-power, according to the Spanish Grid. The impressive figure means that Spain has already completed targets set by the European Union in 2001 for renewable energy by 2010. In comparison, carbon energy produced 14.3 per cent and nuclear 20.9 per cent.
This is no flash in the pan, experts say. Spain is expected to keep up renewable energy production.
Miguel Duvison, head of operations at the Spanish Grid, said: “Even though in the next few months it will fall, renewable [energy] will not go much lower than [the current] level. The total for the year will be closer to 30 per cent than 20 per cent.” Last year wind power generated 16,740 megawatt-hours of electricity but the Spanish Grid and the Wind Energy Association (AEE) believe it can generate 20,155 megawatt-hours by 2010. The AEE says that in 2008 wind power saved Spain spending €1.2 billion (£1.1 billion) on imported fossil fuels, created 40,000 jobs and prevented the emission of 20 million tonnes of CO2 – or 5 per cent of the total.
Spanish backing for renewable sources has earned praise from President Obama. In a speech to a US wind power association last month he said: “Think of what’s happening in countries like Spain and Japan, where they are making real investments in renewable energy. They are surging ahead of us, poised to take the lead in these new industries.”
Spain also has the fastest-growing solar energy market in the world.
- Solar energy plants are expanding rapidly in Spain with 1,500 megawatt (MW)-hours of energy produced in plants in 2008. One MW can power 1,000 homes
- Regulations passed in 2006 require that all new homes must generate energy for 30 to 70 per cent of their hot water using solar power. All new commercial buildings must include solar panels
- The 16,740 MW of wind energy generated in 2008 compares to 3,241 in the UK, 3,404 inFrance and 23,903 in Germany
Britain's wind industry is calling for government support to shield it from the falling pound and ensure existing wind farm projects go ahead. The British Wind Energy Association is to submit a list of demands ahead of next month's budget calling for government loan guarantees and other measures amid City forecasts that the global wind industry is heading for a 20% decline this year.
The UK sector has won a deeper level of subsidies to make the recently launched third round of offshore wind licensing more attractive, but argues wider action is still required to save existing schemes.
Adam Bruce, chairman of the BWEA, said urgent action was required: "If this [downturn] had happened two years ago it might have killed the industry. It is much more robust now, but clearly there are schemes that are under threat unless help can be obtained."
The BWEA says it cannot confirm what kind of help it wants from ministers because this is still being worked out, but loan guarantees and specific aid from the European Investment Bank might be in the mix. The industry says it would also like some short-term financial support similar to what the government is providing for the private finance initiative (PFI).
A key difficulty faced by British wind farm developers is that all turbines are imported when the value of the pound is very low against the dollar and euro. Vestas, Britain's biggest turbine maker, ships equipment from Denmark, pushing up the relative cost for UK wind developers.
The irony, Bruce says, is that in 2003 Vestas set up a turbine factory at Machrihanish, Scotland, only to close it down last year with the loss of 92 jobs because it said there was too little demand.
Faced with these problems, the Royal Bank of Scotland and other leading backers of British wind farms have been pulling in their horns over project financing.
Centrica, the owner of British Gas and one of the biggest investors in wind with a £4bn programme, has already sounded the alarm over the perilous economics of the industry. The company said late last year that soaring costs, coupled with the rise in the cost of financing, meant that "we need to revisit all our numbers to ensure that our projects are economic before we give them the go-ahead".
Alternative energy analysts at HSBC expect the industry to shrink by 20% this year although they are still hopeful that economic stimulus measures in Britain, the US and China will trigger some kind of bounce back in the second half of 2009.
BP and Shell shook confidence in the UK industry when they abandoned all plans for developing wind farms in Britain last year in favour of the US, where the tax treatment – and planning regime – is considered far more favourable. The exit of Shell was a particular blow because it was backing the world's biggest offshore wind farm, the London Array, off Kent.
British Waterways is to invest £120m over the next three years in a project aimed at generating enough renewable energy to power thousands of homes.
It has signed a partnership with The Small Hydro Company, which develops hydro-electricity installations.
The initiative will develop 25 hydro-electricity schemes along British Waterways' 2,200-mile network of canals, rivers, docks and reservoirs.
British Waterways says the plan will create 150 construction jobs.
It also says it will generate 210,000 mega watt hours of renewable energy a year, enough to power about 40,000 homes.
Energy and Climate Change Secretary Ed Miliband said: "This will help cut carbon emissions and further secure energy supplies."
British Waterways has been responsible for water networks in England, Scotland and Wales since the late 1940s when the waterways were nationalised.
In October, British Waterways announced an initiative to bring forward wind turbines on land by canals.
Income from both initiatives will be used to maintain the waterways.
In a bleaker assessment than those of most private forecasters, the World Bank predicted Sunday that the global economy would shrink in 2009 for the first time since World War II.
The bank did not provide a specific estimate, but bank officials said its economists would be publishing one in the next several weeks.
Until now, even extremely pessimistic forecasters have predicted that the global economy would eke out a tiny expansion but had warned that even a growth rate of 5 percent in China would be a disastrous slowdown, given the enormous pressure there to create jobs for the country's rural population.
The World Bank also warned that global trade would contract for the first time since 1982, and that the decline would be the biggest since the 1930s.
In a report prepared for a meeting next week of finance ministers from the 20 industrialized and large developing countries, the World Bank said the economic crisis that started with junk mortgages in the United States was causing havoc for poorer countries around the world, not only stifling their growth but also choking off their access to credit as well.
The bank said the financial disruptions were all but certain to overwhelm the ability of institutions like it and the International Monetary Fund to provide a buffer.
The bank, which provides low-cost lending for economic development projects in poorer countries, pleaded for wealthy governments to create a "vulnerability fund" and to set aside a fraction of what they spend on stimulating their own economies for assisting other countries.
"This global crisis needs a global solution and preventing an economic catastrophe in developing countries is important for global efforts to overcome this crisis," said Robert Zoellick, the World Bank president. "We need investments in safety nets, infrastructure, and small and medium-size companies to create jobs and to avoid social and political unrest."
The bank said developing countries, many of which had been growing rapidly in recent years, were now being devastated by plunging exports, falling commodity prices, declining foreign investment and vanishing credit.
The effect of the global slowdown varies widely among countries, and the drop in prices for oil and other commodities has created winners and losers, But as a whole, the bank said, emerging-market countries faced a combined financing gap in 2009 of at least $270 billion and as much as $700 billion.
The report detailed the variety of ways in which the global slowdown had hammered poorer countries in Latin America, Central Europe, Asia and Africa.
Central European countries like Poland, Hungary and the Czech Republic are hurting from diminished exports to Western Europe as well as a severe credit crunch among major European banks, which have suffered huge losses on U.S. mortgages and mortgage-backed securities.
East Asian countries are reeling from plunging global trade. Demand for inexpensive manufactured goods has plunged in the United States. That slump has hit many Asian countries directly and indirectly, through falling demand by China for raw materials and component products.
Lower commodity prices have caused great problems in many African and Latin American countries. The steep slide in oil prices - 69 percent between July and December of 2008 - has spurred growth in poorer oil-importing countries but has caused immense difficulty in poorer oil-exporting countries.
Brazil, an exporter of oil as well as many other commodities and manufactured goods, reported its first trade deficit in eight years as exports dropped 28 percent in 2008.
Zoellick called for rich countries to set aside 0.7 percent of the amount of money they spend to stimulate their own economies for a "vulnerability fund" to help stabilize poorer countries.
Zoellick said the new fund could then make the money available to countries through the World Bank, the United Nations or other global financial institutions like the International Monetary Fund.
He said the World Bank had the potential to triple its own lending in 2009 to $35 billion, though that would still be a small fraction of even the most optimistic estimate on the shortfall facing poor countries.
Alistair Darling is blocking a multibillion-pound plan to green Britain, even though Gordon Brown last week described it as an "urgent imperative" for economic recovery, The Independent on Sunday can reveal.
The Chancellor's opposition, which has lasted for months, has led to Britain falling far behind other countries in launching a Green New Deal, even as the Prime Minister and other cabinet ministers promise to "lead the world" on this path out of the recession.
Mr Darling is frustrating a drive by Ed Miliband and Peter Mandelson, the new Energy and Business secretaries, to launch a "low-carbon industrial revolution" to combat climate change and boost business – and threatens to undermine an increasingly close partnership between Mr Brown and President Barack Obama to push the greening of the global economy at next month's G20 summit in London.
As reported in the IoS last week, a survey by the HSBC bank puts Britain near the bottom of the international league, both in the amount of money it has devoted to green measures in its economic rescue package, and in the proportion of the stimulus devoted to them – even though it has spent a far higher proportion of its GDP on bailing out banks than any other country.
For months Mr Miliband and Lord Mandelson – whose new-found enthusiasm for greening the economy has taken cabinet colleagues by surprise – have been pressing for a package running into billions, against entrenched Treasury opposition. Mr Darling defied them by heavily downplaying environmental measures in November's pre-Budget statement, and has continued to block them as too costly.
Ministers promised last autumn to launch a "strategy" to "position UK business at the forefront of the low- carbon revolution" early this year. But when the moment came on Friday it proved to be a damp squib, despite rousing speeches from Mr Brown, Mr Miliband and Lord Mandelson.
Instead of publishing the promised weighty strategy, the event – overshadowed by an anti-aviation protester dousing Lord Mandelson in green custard – produced one of the flimsiest documents ever to be accorded such a top-level launch, a 10-page glossy pamphlet setting out the Government's "vision", in generalities. Instead of initiating urgent measures, it merely asked for "views on how we can achieve that vision... to inform policy development".
Afterwards, neither Lord Mandelson's nor Mr Miliband's departments could say when any action would result. The Department of Business, Enterprise and Regulatory Reform said there would be "continuing discussions" but "no exact timeline". The Department of Energy and Climate Change added there would be "a lengthy consultation" leading up to publication of a strategy in the summer, to be followed by "further correspondence with business" – but, asking when action would finally result was "unfair".
Yet, at Friday's launch, Mr Brown stressed the "urgent imperative to create a low-carbon economy" as "one of the key drivers of our future prosperity." Lord Mandelson called for Britain to "compete" for business opportunities in achieving "a transformative shift in our economy". And Mr Miliband promised Britain would "lead" rather than be "a middle-of-the-pack country".
Government sources insisted the delay would make the final package bigger and more comprehensive, and emphasised that the business and energy secretaries were determined to push it through. Heavy pressure will be put on Mr Darling to green his Budget.
But before this year's unusually late Budget on 22 April, Mr Brown and Mr Obama will try to persuade the world's leading economies to adopt "a global green new deal" at the G20 summit at the beginning of the month.
The two leaders achieved much greater and warmer agreement on this – and on combating climate change – than has been reported during the PM's visit to Washington last week, and the President took the unusual step of phoning him while his plane was awaiting take-off to stress this. They expect to speak daily to prepare for the summit.
Scottish Power today became the latest of Britain's power generators to unveil plans to build a new gas-fired power station. The company wants to build a 1,000 megawatt plant, close to its existing Damhead Creek facility in the Medway area of Kent, at a cost of £500m.
"There is an immediate need to invest in new generation plants in the UK as older power stations come towards the end of their operational lives," said Nick Horler, Scottish Power's chief executive.
Up to a third of Britain's existing power generation capacity needs to be replaced as ageing coal-fired and nuclear plants are taken out of service, opening the prospect of a "generation gap" by around 2015.
The government is keen to see Britain avoid becoming dependent on a single energy source and to build up a broad-based generation portfolio, spanning new nuclear, cleaner coal, gas and renewables. However, gas-fired power stations are often cheaper and less controversial than the alternatives, leading to concerns that Britain could see a new "dash for gas".
The government has recently given the go-ahead for three new gas-fired plants, including a 2,000 megawatt plant in Pembrokeshire.
Philip Cox, chief executive officer of independent generator International Power, said yesterday that Britain could have less time than some experts were predicting to tackle the generation gap.
He warned that a number of oil- and coal-fired power stations that had not fitted flue gas desulphurisation equipment (FGD) and which would have to close by 2015 at the latest, could be forced to shut sooner. Plants without FGD are limited to 20,000 hours of operation up to 2015 and Cox said a number had already used a substantial part of their allocation.
"If they carry on at that run rate they will be out of their allocation by 2011/12," Cox said.
Yesterday International Power reported profits from its operations had risen by 16% last year to £1.05bn and earnings per share were 20% higher, helped by higher profits from North America and Australia.
However the company warned that unless wholesale power prices improved in the UK and US, profitability in 2009 was likely to be down on last year.
The Tories released figures from the National Grid showing that the UK now only holds enough gas to meet 4.1 days of demand.
Gas reserves are usually at their lowest at the end of winter, but the current holdings are less than half the size of the 9 days of reserves held two years ago, and down from the 4.3 days in storage last year.
The Tories said the figures were a cause for concern. Ministers accused the opposition of scaremongering.
Greg Clark, the shadow energy secretary, said: "With less than five days worth of gas in storage, Britain is facing the prospect of a severe gas shortage and possible interruptions to supply if we were to have a cold snap or disruptions to imports before the winter is over.
"It is only the fact of reduced demand due to the recession that has prevented this situation from becoming an emergency."
Britain's maximum reserves are about 15 days' consumption. Germany and France can both hold around 100 days' of gas.
Government sources insisted the reserve figures are "misleading." Because Britain routinely imports gas through several different routes, there is no realistic threat of supply interruptions, officials said.
"We get most of our gas from the North Sea and imports from Norway so we have less need for dedicated storage in comparison to other countries which are more heavily dependent on imports," said Mike O'Brien, the energy minister.
Still, Britain's gas supply capacity has been a source of concern for several years. Industry groups and MPs have repeatedly warned that Britain's limited reserve capacity is a potential problem.
Ministers have promised new planning laws to accelerate the building of more storage facilities, but the recession has undermined some companies' plans to construct gas holding sites.
The row over energy supplies came as Gordon Brown prepared to forecast
400,000 new "green" jobs over the next eight years in renewable energy sources like nuclear, wave and wind power.
Mr Brown will chair a Low Carbon Industrial Strategy Summit in London to discuss the commercial opportunities arising from climate change.
He will tell the meeting: "We can expect 400,000 new environmental sector jobs over the next eight years - with a total of 1.3 million people employed in these sectors by 2017. That is an annual growth rate of 5 per cent - even with today's economic difficulties - underlining the tremendous economic opportunities the low carbon economy provides for jobs and for our future prosperity as a nation."
Ed Miliband, the Climate Change secretary, will tell the meeting that environmental protection presents commercial opportunities.
"Tackling climate change doesn't just make moral sense, it makes economic sense too," he will say.
Air France-KLM and Lufthansa, the two leading European airlines, announced further capacity reductions for the summer season on Wednesday in the face of the deepening world recession.
Airlines around the globe are being hit by the mounting crisis in the aviation sector. More are seeking to defer delivery of new aircraft, undermining the outlook for production at jetmakers Airbus and Boeing, and smaller producers such as Brazil’s Embraer and Canada’s Bombardier.
Cathay Pacific, the de facto Hong Kong flag carrier, reported its biggest annual loss in its 63-year history as it felt the impact of a sharp fall in demand for air travel and wrong-way bets on the hedging of its fuel purchases.
In Ireland Aer Lingus, which has fought off a second hostile takeover bid from Ryanair, announced it had fallen into loss last year and warned it was “unlikely” to report a pre-tax profit this year as passenger fares and cargo volumes fall sharply. Michael O’Leary, chief executive of Ryanair, which owns 29 per cent of Aer Lingus, accused the Aer Lingus board of “misleading” shareholders, and said he planned to submit formal complaints to the London and Irish stock exchanges, the take-over panel and the financial services regulator.
Cathay said 2009 would remain “extremely challenging” as the financial crisis curbed passenger and cargo traffic. It warned that high hedging losses would continue to hurt its bottom line, if fuel prices remained at their present level. “The aviation industry is in crisis,” said Christopher Pratt, Cathay’s chairman. “We cannot say how and when things may get better. Our assumption at this stage is that demand and yield will continue to slide in the coming months.”
To counter the recession, Cathay has already cut capacity, grounded flights, delayed construction of a cargo terminal and offered unpaid leave to staff.
German carrier Lufthansa said it was cutting its dividend sharply and reducing planned capacity growth, as it reported a two-thirds fall in net profit in 2008 due in part to the impact of some troubled investments.
But, with demand for air travel falling as the global recession bites, Wolfgang Mayrhuber, Lufthansa chief executive, said 2009 sales and operating profit would fall well below 2008 levels.
Denmark’s AP Møller-Maersk, owner of the world’s largest container shipping line, has become the latest company to reveal the extent of the crisis facing the sector, saying volumes shipped in January were down 20 per cent on a year earlier.
The container volume declines, together with falling oil prices and problems at Danske Bank, of which Maersk owns a fifth, prompted the company to warn that this year’s profits would be significantly lower than in 2008. The charges Maersk was able to levy per container shipped no longer covered the variable costs of moving them on some routes, the company said.
Maersk traditionally claimed it enjoyed a “natural hedge” against oil price movements, owning both significant shipping interests that burn oil and a large oil-producing business.
However, it announced last year that, thanks to improved fuel efficiency, its ability to pass on price rises to container shipping customers in surcharges and the profitability of its oil and gas business, it was a net beneficiary of oil rises.
That process is now working in reverse. Nils Andersen, chief executive, said that while there was usually a short period while prices were declining where fuel surcharges fell more slowly, prices tended quickly to reflect falls in fuel prices. The falling price is also set to hit the earnings of the oil and gas division, which last year produced nearly all the company’s profits.
There remain benefits, nevertheless. Lower fuel prices mean Maersk has been able to afford to divert many of its ships round the Cape of Good Hope, rather than using the Suez Canal. That has helped the company to avoid the risk of piracy – one of its tugs was seized in 2008.
For container ships, which are less vulnerable, it has saved on Suez Canal fees, which can be up to $750,000 per sailing.
The warning came as Maersk announced 2008 results and despite significant profitability improvements in the container shipping division, which mainly consists of Maersk Line, the industry leader. The division has been struggling since the botched integration of P&O Nedlloyd, then the world number three, in 2005.
Post-tax profits at the division rose to $205m from $106m on revenue up to $28.7bn from $25.8bn. Group net profits rose to $3.46bn on $61.2bn in sales, up from $3.42bn on $51.2bn of revenue the previous year.
Nils Andersen, chief executive, said the efforts Maersk had made to improve profitability – including redundancies and efficiency improvements – had paid off.
However, he went on: “Needless to say, with the rates and the market development we are facing at this point in time, it’s very easy to predict that 2009 will be a very difficult year.”
Maersk is also likely to see declining earnings at its oil and gas business, which operates rigs off Denmark, the UK, Qatar and elsewhere.
Profits also slumped at Danske Bank, Denmark’s largest bank, in which Maersk holds 20 per cent. Maersk’s share of the profits fell to $39.3m, against $2.92bn in 2007. The group also wrote off $216m in goodwill on its stake.
Profits at the tankers, offshore and other shipping operations division also fell.
Mr Andersen, who last year said he planned significant disposals of businesses but has had little success executing them, said market conditions meant the company was likely to dispose of few assets this year.
“In the present market, it’s not realistic to calculate on being able to sell at reasonable prices this year,” he said.
The container shipping industry is suffering not only from falling demand for the goods – such as Chinese-manufactured toys – carried in its ships but also a significant over-supply of ships.
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