OPEC decided to keep production quotas unchanged at today’s meeting in Vienna, banking on a recovery in oil demand toward the end of the year.

The Organization of Petroleum Exporting Countries, responsible for 40 percent of global crude supply, agreed to maintain production quotas, Saudi Oil Minister Ali al-Naimi said. It’s the second time this year the 12-member group has met without revising that total.

OPEC’s resolve not to cut further comes even as U.S. inventories reached their highest level in two decades earlier this month and after a forecast from the International Energy Agency that global demand is falling the most since 1981.

Crude oil for July delivery traded up 1 cents at $63.46 a barrel on the New York Mercantile Exchange at 11:20 a.m. London time. Prices have gained 36 percent since the group’s last meeting in March.

OPEC’s choice not to cut further may have been influenced by its failure to complete previous reductions that came into effect at the start of the year.

The 11 nations bound by quotas, which exclude Iraq, pumped 25.81 million barrels a day in April, an increase of about 225,000 from March and the first increase in nine months, according to OPEC’s latest monthly report. The countries have a total target of 24.845 million barrels. That means the group has completed 77 percent of its cuts, down from a revised 82 percent for March.

The outcome of today’s gathering is in keeping with a Bloomberg survey, in which 25 of 27 analysts said they expected existing quotas to be upheld.

The International Energy Agency on Wednesday repeated its warning that reduced investment in energy could result in future supply shortages and a new oil price spike in a few years' time.

In a report prepared for last weekend's meeting of G8 energy ministers in Rome, the IEA said it saw "clear evidence" that energy investment across the world would drop sharply this year, with global upstream oil and gas investment budgets already cut by around 21% or almost $100 billion from 2008 levels.

"Between October 2008 and end-April 2009, over 20 planned large-scale upstream oil and gas projects, valued at a total of more than $170 billion and involving around 2 million b/d of oil production capacity and 1 bcf/d of gas capacity, were deferred indefinitely or cancelled," it said.

A further 35 projects, involving 4.2 million b/d of oil capacity and 2.3 bcf/d of gas capacity, had been delayed by at least 18 months, the agency said.

IEA chief economist Fatih Birol had already told Platts in a May 20 interview that lower investment as a consequence of the global economic crisis threatened future energy security as well as the effort to combat climate change.

The paper prepared for Rome, entitled "The impact of the financial and economic crisis on global energy investment," said the sharpest cuts in spending were likely to be focused on exploration.

SHARPEST SPENDING CUTS TO BE IN EXPLORATION

"It is likely that the upstream industry will reduce spending on exploration most sharply in 2009--largely because the bulk of spending on development projects is associated with completing projects that had already been launched before the slump in prices," the IEA said.

Canadian oil sands projects account for the bulk of the postponed oil capacity, the agency said, with the drop in upstream spending most pronounced in regions with the highest development costs and where the industry is dominated by small players and small projects.

"For these reasons, investment in non-OPEC countries is expected to drop the most. In addition, cuts in spending on existing fields risk pushing-up decline rates," the IEA said.

The agency said falling investment would have "far-reaching and... potentially grave effects on energy security, climate change and energy poverty."

It said cutbacks on infrastructure spending "will only affect capacity with a lag, often amounting to several years," so that the current demand weakness was likely to see spare production capacity increase in the near term.

REAL DANGER OF NEW SPIKE

"But there is a real danger that sustained lower investment in supply in the coming months and years could lead to a shortage of capacity and another spike in energy prices in several years time, when the economy is on the road to recovery," the IEA warned.

"The faster the recovery, the more likely that such a scenario will happen." The IEA said that while the financial crisis was generally thought to be the main immediate cause of 2008's sudden, sharp economic downturn, other factors--including the run-up in oil prices between 2003 and the middle of last year--"arguably played an important, albeit secondary, role."

"High oil prices certainly helped to render the economies of oil-importing industrialized countries more vulnerable to the financial crisis by damaging their trade balances, reducing household and business income, putting upward pressure on inflation and interest rates, and dampening economic growth," it said.

The paper referred to its 2006 analysis which concluded that the rise in oil prices over the previous four years had lowered average world GDP growth by an average of 0.3 percentage points per year and which drew attention to the fact that not all of the effects of higher prices had fully worked their way through the economic system.

"Nonetheless, the actual speed and the depth of the resulting economic and financial crisis took almost everyone by surprise," the IEA said.

"It follows that if there to be a sharp rebound in oil prices in the months to come, this would risk causing the economic recovery--when it comes--to stall."

The agency said a likely consequence of the current crisis could be consolidation across the energy sector, "as small and medium-sized firms that are struggling to meet their ongoing financial needs are taken over by or merge with competitors with stronger balance sheets."

It said falling share prices were likely to encourage this trend.

The price of oil rose to a six-month high of $63 a barrel today after Saudi Arabia's oil minister said that global demand was increasing.

Speaking ahead of the Opec meeting in Vienna on Thursday, Ali Naimi said that oil prices would continue to rise, recovering from lows near $32 at the turn of the year.

"The price rise is a function of optimism better things are coming in the future," said Naimi.

"We see offshoots of recovery. Demand is picking up, especially in Asia."

US crude oil for July delivery rose to $63.45 a barrel on the back of the news. This is the highest level since mid-November. In London, Brent prices increased by 81 cents to reach $62.05 a barrel.

It is the second day of strong gains for oil – prices rose more than 1% yesterday on the back of positive consumer confidence figures from the US. Signs of a modest recovery in Japanese exports further boosted oil prices today.

Andrey Kryuchenkov, an analyst at VTB Capital, said: "We're not really seeing a strong recovery yet, but I think Opec are implying they don't see oil demand falling any further.

"Everyone talks about green shoots but we're not completely out of the woods - to see a real price rally we'll need to see a larger pick-up in demand."

Opec, which produces 40% of the world's oil, is widely expected to keep the oil cartel's production steady when it meets tomorrow.

"All eyes will be on Opec this Thursday, with expectations for no change in the group's production quotas," added Kryuchenkov.

It has cut its production target three times since September in a desperate bid to stabilise prices that tumbled from record highs of above $147 per barrel in July 2008 to $32.40 in December.

The price of oil has leapt to nearly $62 a barrel. Another spike may be on the way RISING oil prices, believes Ali al-Naimi, Saudi Arabia’s oil minister, may soon “take the wheels off an already derailed world economy”. On the face of things, this concern is absurd. The plunge of $115 in the price of oil from its peak last July to its nadir in December was the most precipitous the world has ever seen. Demand for oil is still falling, as the world economy atrophies. Rumours abound of traders hiring tankers to store their excess oil. Rich countries’ stocks cover 62 days’ consumption, the most since 1993 (see chart 1). The average over the past five years has been 52 days’ worth.

Nor are oil firms pumping nearly as much as they could. OPEC has announced three separate rounds of production cuts since September in a bid to steady prices. In all, it has vowed to trim its output by 4.2m barrels a day (b/d). That leaves them with as much as 6m b/d of spare capacity. Despite this growing glut, however, the price of oil has been rising steadily in recent weeks (see chart 2). On Wednesday May 20th it closed above $60 a barrel for the first time in more than six months. That marks an increase of more than 75% since February. The price of futures contracts suggests that energy traders see the price rising higher still in the coming months and years. (During the day on Friday it appeared to be nearing $62 a barrel.)

The explanation is simple. Oilmen are worried because they believe that many of the factors behind the record-breaking ascent last year remain in place. Much of the world’s “easy” oil has already been extracted, or is in the hands of nationalist governments that will not allow foreigners to exploit it. That leaves firms to hunt for new reserves in ever more inhospitable and inaccessible places, such as the deep waters off Africa or the frozen oceans of the Arctic. Such fields take a long time and a lot of expensive technology to develop. Worse, new discoveries tend to be smaller than in the past and to run dry faster.

So oil firms must work doubly hard to replace declining fields and to increase output. Yet the oil industry is short of equipment and manpower, thanks to underinvestment in the 1980s and 1990s, when prices were low. As soon as the world economy starts growing again, the theory runs, demand for oil will once again outstrip the industry’s ability to supply it. In other words, the global recession has only interrupted the “supercycle” of which many analysts used to speak, during which the normal boom-and-bust cycle of oil and other commodities would give way to a protracted period of high prices, as ever-growing demand from emerging markets swallowed everything the extractive industries could produce.

Oil bosses, OPEC ministers and anxious bankers all agree on what is needed to prevent this scenario becoming reality: lavish investment in the development of new fields and in exploration. Yet the reverse is happening. The oil industry is cutting its spending, bringing fewer new fields into production and exploring less. The International Energy Agency reckons that overall investment will drop by 15-20% this year.

In theory, this should not be happening. Big Western oil firms (“majors” in the industry jargon) claim that they continue to invest steadily throughout the cycle, irrespective of gyrations in price. Big fields, they argue, can take a decade or more to develop, and may then produce oil or gas for several decades more. The price of oil at the time the investment is approved is irrelevant; the important thing is to make sure projects will be profitable across a range of possible future prices. If anything, given that most oilmen expect prices to rise in the medium term, you would expect them to be increasing their investment, to capitalise on the good times to come. Nonetheless, the extreme volatility of prices over the past year must have made big firms more cautious about future investments.

Then there are the state-owned firms in oil-soaked countries. These companies control the overwhelming majority of the world’s oil. The better managed and funded of them plan to continue investing despite the downturn. Saudi Aramco, the world’s biggest oil producer, recently completed a five-year scheme to expand its production capacity from 10m b/d to 12.5m b/d, at a cost of $70 billion. But in Russia, the world’s second-biggest oil producer, output is falling largely because private capital has been scared off by a series of expropriations, while the state starves the firms it controls of sufficient cash for investment. And most oil-rich states, naturally enough, are happy to see the price rise. Many have become used to bumper revenues in recent years and have struggled to balance their budgets since the price slumped last year.

Falling costs within the industry will offset the impact of falling investment budgets to some extent. BP argues its slight cut in investment does not really represent a reduction, thanks to deflation. Yet many constraints on expansion remain. For one thing, the world still does not have as many experienced petroleum engineers and geologists as it needs, says Iain Manson of Korn/Ferry, a recruiting firm. He expects it to take a decade or more to overcome the shortage. Meanwhile, he says, wages in the oil industry are not falling by nearly as much as other costs.

Worse, there is little sign that governments are willing to grant oil companies easier access to the most promising territory for exploration. Iraq’s plans to sign big new contracts with foreign firms are years behind schedule, as is its new oil law. American sanctions continue to impede investment in Iran. The Nigerian government has been unable to quell the insurgency in the Niger delta, making it difficult for oil firms to operate there. Even in America, despite years of debate, most coastal waters and much of Alaska remain off-limits to drilling.

So when demand begins to revive, a sharp rise in prices is inevitable. That does not mean that a price spike is just around the corner, however. The speed with which it arrives will depend on the strength of the global recovery. For the moment, global consumption of oil continues to fall, despite the slight brightening of the economic outlook. At the recent OPEC powwow Mr al-Naimi, the Saudi oil minister, argued that a low oil price always sowed the seeds of a future price rise, since it led to underinvestment. The only question this time is how quickly the strain will emerge.

A longer version of this article appears in the print edition of The Economist

Saudi Arabia warned oil prices could spike to beyond the near $150 record high of 2008 within three years as it joined other energy leaders on Monday to call for more investment to boost production over the long term.

Energy ministers and officials at the Group of Eight energy summit wrapped up the two-day meeting by urging the industry to pump money into projects to expand capacity despite the credit crisis, which has put the brakes on investment.

Saudi Arabian Oil Minister Ali Naimi said the world was heading for a fresh spike after the current phase of faltering demand and lower prices, which he said reflected the economic downturn rather than being an indicator of things to come.

”We are maintaining our long-term focus rather than being swayed by the volatility of short-term conditions,” he said in prepared remarks at the summit.

”However, if others do not begin to invest similarly in new capacity expansion projects, we could see within two-to-three years another price spike similar to or worse than what we witnessed in 2008.

Mr Naimi painted a bleak picture of the investment scenario, saying low prices, weak demand, high costs, tight credit markets and energy policies focused on alternative fuel sources had all combined to hurt spending on new projects. He has been warning about the drop in investment in oil over the last few months.

The meeting came as oil prices have recovered from a low of $30 a barrell to a six-month high of over $60, but producers fret that it remains below the $75 level needed to spur investment while consumer nations fear further rise in prices could hurt global economic prospects.

The recent rally in prices is expected to have eased OPEC concerns about high inventories and weak demand, and Opec officials have suggested an output cut is unlikely at a Thursday meeting, though Libya says that possibility still exists.

“Opec will not want to take decisions which will harm the first signals of economic recovery”, said Chakib Khelil, president of Opec.

The International Energy Agency also expressed some concern regarding the impact the financial and economic crisis might have on global energy investment.

“Supply and demand side investments are being affected in the face of a tougher financing environment. Global upstream oil and gas investment budgets for 2009 have been estimated to be cut by around 21 per cent compared with 2008”, said Nobuo Tanaka, executive director of the IEA.

The capital intensive renewable sector could suffer from a drop in investments “by as much as 38 per cent although stimulus provided by government fiscal packages can probably offset a small proportion of this decline”, the IEA said.

Both Fulvio Conti, CEO of Enel, and Roberto Poli, President of Eni, denied this, reassuring that investments are still being made. “Enel, present in 22 countries, is investing more than €6bn in new projects”, said Mr. Conti during a press conference.

Global energy demand is expected to soar 44 percent over the next two decades with most of the demand coming from developing countries such as China and Russia, the U.S. government's top energy forecasting agency said on Wednesday.

The worldwide economic downturn has hit energy consumption, but an expected recovery next year could respark demand and boost prices, the Energy Information Administration said in its new forecast.

U.S. oil prices are forecast to rise from an average $61 barrel this year to $110 in 2015 and $130 in 2030.

Oil prices "begin to rise in 2010-2011 period as the economy rebounds and global demand once again grows more rapidly than non-OPEC liquid supply," EIA acting administrator Howard Gruenspecht told a news conference.

Global oil demand is expected to rise to 107 million barrels per day over the next two decades from nearly 84 million bpd this year. Oil will account for 32 percent of the world's energy supply by 2030 from about 36 percent in 2006.

Almost 75 percent of the rise in global energy demand through 2030 will occur in developing countries, particularly China, India, Russia and Brazil, the agency said.

The Organization of Petroleum Exporting Countries will continue to provide 40 percent of the world's oil supplies during the period.

Renewable energy, like wind and solar power, will be the fastest growing energy source, making up 11 percent of global supplies. Biofuels, including ethanol and biodiesel, are expected to reach 5.9 million bpd by 2030.

The EIA said its long-term forecast does not reflect efforts the United States may take to cut greenhouse gas emissions or an expected international agreement to curb greenhouse gases.

Gruenspecht said the agency will analyze the possible impact of climate change legislation approved last week by the U.S. House of Representatives Energy and Commerce Committee.

But he said the bill may not change energy use initially, citing carbon dioxide emission limits and the allowed transfer of carbon cuts to developing countries.

"One could imagine that one could comply at least with the 2020 part of this proposal calling for a 17 percent reduction (from 2005 levels) just using the offsets and not having a significant change in our consumption or the way we use energy at all," Gruenspecht said.

If global climate change laws and policies don't change, world energy-related carbon dioxide emissions will rise by a third to 40 billion metric tons a year, the agency said.

The EIA's report also found that global natural gas demand will increase by almost 50 percent to 153 trillion cubic feet. The agency said that unconventional natural gas production, particularly from gas shale, will make the United States "virtually self sufficient in natural gas supply in 2030."

To see the forecast growth for OPEC oil production, please click here: http://graphics.thomsonreuters.com/059/CMD_OPECGR0509.jpg

The EIA's forecast also predicts that in 2030:
* World production of unconventional petroleum resources, including oil sands, extra-heavy oil and coal-to-liquids, will quadruple to 13.4 million bpd, representing 13 percent of total global petroleum supplies.
* Iraq's crude oil production will jump from 2 million bpd to 5 million bpd.
* China's electricity generation from coal-fired power plants will triple.

Editing by Russell Blinch, Neil Stempleman and David Gregorio

A SPECIAL federal task-force set up to help restore peace in Nigeria’s oil-rich but troubled Delta region has launched a wave of attacks on a militants’ camp, ending months of relative calm in the region. It is too soon to say whether it will squash the armed gangs and let the battered oil industry reassert itself in the area. In the short run, it may even have made things worse. Without a doubt, a lot of people have been killed.

After the government made overtures towards the Delta militants nearly a year ago, about eight months of relative peace ensued. As oil prices fell, so did the rate of oil theft and pipeline sabotage. But local human-rights campaigners say that since May 15th helicopters and naval gunships have killed hundreds of civilians and displaced thousands more. Government forces, they say, have shown scant regard for civilians.

The fighting is mainly in an area in the southern Delta state near the Escravos oil terminal, run by an American oil company, Chevron, where much of the crude that makes Nigeria Africa’s largest exporter is processed. With few roads or modern connections and plenty of swamps, government forces can hammer the militants—and the civilians among whom they live—with little scrutiny from outside.

The area’s main militant group, the Movement for the Emancipation of the Niger Delta, known as MEND, said it would move a British hostage, whom they have held since September, to the battle zone as a human shield. Echoing threats it made at the height of violence two years ago, MEND also told all foreign oil workers to leave the region for their own safety. Its additional threat to block the Delta’s waterways, which would disrupt oil exports even more, helped nudge world prices back up to $63 a barrel. On May 25th, MEND said it had blown up one of Chevron’s biggest pipelines in retaliation for the army’s offensive. The company had to shut off part of its output.

The militant camp the government is smashing is run by a local man known as Government Tompolo, who had been aligned with MEND but fell out with it after he was rumoured to be negotiating with state officials trying to persuade him to close his camp in return for handsome pay-offs for him and his friends. But the army comes under federal authority and is removed from decisions by officials of the state. No one is sure what sparked the latest wave of attacks but it seems likely that Mr Tompolo’s “boys” engaged the army in a series of skirmishes, provoking it to hit back as hard as it could.

MEND says it is fighting for a fairer share of the country’s oil revenue to go to the dirt-poor people who live in the area. But the Nigerian government says that MEND and other armed groups in the region are just criminals who sow chaos in order to steal vast amounts of the country’s crude oil, about a tenth of which is reckoned to be stolen before it reaches the export terminals. Aerial photographs of the Delta show dozens of tankers illegally linked to pipelines, siphoning off millions of barrels of crude for sale abroad. According to security experts, theft on such a scale requires the co-operation of large numbers of senior people in Nigeria’s navy.

In any event, banditry and insurrection in the Delta, which got out of hand in 2006 and worsened in 2007 with the emergence of MEND, have reduced Nigeria’s oil output by as much as a quarter. When Umaru Yar’Adua won the presidency two years ago, he promised to restore stability in the area. He has failed to do so. Oil monitors say Nigeria has been producing about 1.6m barrels a day, barely two-thirds of its quota set by OPEC, the Organisation of the Petroleum Exporting Countries.

Despite being the world's largest supplier of oil, the Middle East is facing a critical gas shortage, it has been revealed.

According to the Financial Times, many of the region's biggest producers are now worried that years of underinvestment in gas resources has left them unable to service their burgeoning demand for the fuel.

Some forecasters predict that up until 2015, the cumulative supply shortfall among members of the Gulf Cooperation Council will be at least 7,000 billion cubic feet.

Rajnish Goswami, an analyst at Wood Mackenzie, told the paper: "The long-term issue of ensuring adequate gas supplies to fuel growth has not gone away. We see, with the exception of Qatar and Iran, every other country in the region facing challenges in ensuring supply growth."

Qatar is already becoming a key strategic partner to countries such as the UAE and Kuwait, which face critical shortfalls.

According to a report published by the Organization of the Petroleum Exporting Countries last year, demand for gas among Middle Eastern countries is now outstripping demand for oil.

Russia cannot guarantee that there will be no halts in gas supplies to Europe, President Dmitry Medvedev warned at a news conference closing an EU-Russia summit in Khabarovsk on Friday.

Further raising the specter of a new gas shut-off, Prime Minister Vladimir Putin separately indicated that the country would not extend any loans to Ukraine. Ukraine's failure to pay for Russian gas resulted in the halt of deliveries to more than 20 European countries in January.

"Russia has offered no assurances and will not offer any," Medvedev said when asked about the possible suspension of gas supplies to Europe later this year. "What for? There are no problems on our part. ... Let the one who pays for the gas offer assurances."

Adding to the tension, Medvedev said he had doubts about Ukraine's ability to pay for gas this year. "If the Ukrainian side has got the money, that's great. But we have got some doubts about the solvency of Ukraine," he said.

Ukraine currently needs about $4 billion to pump 19.5 billion cubic meters of gas into its underground reserves, Medvedev said.

Putin gave different figures later in the day, saying Ukraine needed about $5 billion.

"The gas should be pumped in now, because it will be impossible to pump it in the needed volume later," Putin said in the Kazakh capital, Astana, after talks with Ukrainian Prime Minister Yulia Tymoshenko. The prime ministers met on the sidelines of a CIS summit.

Asked to explain the discrepancy between Medvedev's and Putin's figures, Russian government spokesman Dmitry Peskov said the leaders had rounded off the figures.

Valentin Zemlyanskiy, a spokesman of Naftogaz, Ukraine's state-controlled gas monopoly responsible for filing the reserves, did not answer his cell phone Sunday.

Moscow has previously indicated that it was willing to lend the money to Kiev as an advance on gas transit fees for the next five years. But Putin said Friday that Ukrainian President Viktor Yushchenko "considers the form of payment unacceptable and nearly illegal."

"We will hardly be able to solve this problem under such a regime," Putin said, according to a transcript of his remarks posted on the government's web site.

Medvedev said in Khabarovsk that Russia wanted to help Ukraine but expected the European Union to share a considerable part of the burden. "In other words, if the talk is about loans, let's help the Ukrainian state obtain the amount of money it needs. It is not us who have problems with solvency, after all," he said, according to a transcript on the Kremlin's web site.

But Putin suggested that no loans would be forthcoming. "We have applied to the European Commission with this question" of providing financial support to Ukraine, Putin said. "We got the answer through a minister of finance, 'We have no money for Ukraine.'"

"Supplies for domestic consumers in Ukraine is a very important condition for gas transit to the European consumers," Putin said. "No one should pretend it doesn't concern him."

EU officials attending the summit in Khabarovsk expressed concerns about possible gas disruptions. "There should be no more suspensions in the gas supplies," European Commission President Jose Manuel Barroso said at the news conference. "We ask Russia and Ukraine to do everything in their power to prevent another crisis next year."

Medvedev, however, maintained that the Energy Charter -- the current legal framework that regulates energy supplies in EU countries and establishes rules for resolving disputes -- was not enough to prevent disruptions. "Ukraine ... is a member of the Energy Charter, and so what? They did what they wanted to do. They spat on the Energy Charter," Medvedev said. "It means that some other instruments are needed."

Medvedev has suggested a new energy charter that would replace the current one adopted in 1991 and signed by 51 countries. Russia signed the charter in 1994 but never ratified the document, which it now calls "outdated."

"We consider some of these ideas very useful," Barroso said, adding, though, that the EU would "rather build on existing agreements."

European Energy Commissioner Andris Piebalgs said in Khabarovsk that the EU was ready to consider incorporating some Russian proposals into the existing charter, Bloomberg reported. Russia, however, has insisted on a full overhaul of the document rather than spotty changes.

Turning to another thorny issue, the Eastern Partnership program, Medvedev said EU officials had "failed to persuade" him that it would not harm Russia's interests. "What confuses me is that some states ... take this partnership as a partnership against Russia," he said.

The Eastern Partnership program, which involves all 27 EU members as well as Azerbaijan, Armenia, Belarus, Georgia, Moldova and Ukraine, seeks free trade agreements and relaxed visa rules between the EU members and the former Soviet countries, and it promises support for political reforms in those countries. The partnership is worth at least 600 million euros ($841 million) from 2010 to 2013, according to the European Commission's web site. Russia is worried that an Eastern Partnership agreement that was signed on May 7 is an EU attempt to meddle in what it considers its sphere of influence.

"We have tried to persuade President Medvedev ... that the idea of the Eastern Partnership is not aimed against anybody and of course, not against Russia," Czech President Vaclav Klaus, whose country holds the EU's rotating presidency, said at the news conference, flanked by Barroso, Medvedev and EU foreign policy chief Javier Solana.

No progress was reached at the summit on a replacement for the EU-Russia Partnership and Cooperation agreement that expired in December 2007.

The Gas Problem

Russia called on the European Union on Friday to help find money for Ukraine to prevent a new gas supply crisis while failing to agree with Kiev on how to store gas to ensure smooth gas transit to Europe this winter. Any hint of a gas dispute raises the blood pressure of European governments and consumers (who get a fifth of their gas from Russia via Ukraine), piques the interest of Naftogaz bondholders and casts a shadow over ties between Russia and Ukraine.

The following are key facts about gas issues that the two countries have to resolve while grappling with a deep economic crisis that has hit the state finances and currencies of both.

• Gas has to be stored in Ukraine for the winter period to guarantee smooth transit to Europe.
• As gas consumption rises during winter, the two countries do a simple gas swap. Ukraine uses Russian gas meant for Europe entering the country in the northeast and compensates Russia by sending gas stored in the west of the country to Europe.
• More than 10 billion cubic meters needs to be stored to ensure this transit to Europe.
• Ukraine"s government has said it has 16 billion cubic meters of gas in storage and wants to buy a further 12 bcm, worth about $3.25 billion at current prices, to cover Gazprom"s and its own winter needs. Naftogaz has not confirmed these figures.
• At the start of the year, Ukraine had 17 bcm stored, and gas intermediary RosUkrEnergo had 11 bcm. RosUkrEnergo stocks were transferred to Ukrainian ownership, so about 12 bcm has been consumed since January as Ukrainian purchases of far dearer Russian gas fell.
• Gazprom does not want to simply give the storage gas to Ukraine for safekeeping.
• Ukraine prefers to limit its purchases of the gas now because prices are to expected to drop sharply later in the year when the gas is needed.
• Ukrainian state energy firm Naftogaz has proposed that it could buy the extra gas for storage using Gazprom"s advance payment of transit fees for using the Ukrainian pipeline system to pump gas to Europe.
• But with European consumption falling sharply, it is difficult to tell how much transit fees Gazprom will pay, risking Naftogaz having to pay back money later in the year.
• A Russian government source said Gazprom had paid its 2009 fees in full already. A Ukrainian source close to the gas talks said $2.15 billion had been paid, the majority of which Ч $1.7 billion Ч being the amount that was owed in the first quarter.
• The Ukrainian government, its finances stretched to the limit, has said state banks could lend Naftogaz the money for the extra gas. A bill in the parliament proposes the idea of the funds coming from the state purse.
• Naftogaz, receiving support from the state, needs to pay back a $500 million Eurobond by Sept. 30. Investors have been wary of a Ukrainian default after the currency plummeted and the country plunged into recession.

 

Reuters

The latest round of pipeline politics between Moscow and the European Union masks a new reality: Changes under way in Europe are likely to damp the Continent's appetite for Russian gas, weakening Russia's much-vaunted status as an energy superpower.

Russian and EU leaders met Friday in the eastern Russian city of Khabarovsk to heal a relationship badly damaged by the January gas cutoff of Russian gas that left thousands of people in Eastern Europe shivering in their homes.

The EU sought assurances that would never happen again. Russia refused to provide any. Instead, President Dmitry Medvedev said Moscow doubted that transit state Ukraine had enough money to pay for the gas Russia supplies, hinting at more disruptions to come.

But behind the bravado, Russia is worried. Europe's economic slowdown has led to a collapse in demand for natural gas, while January's crisis has triggered a new push by EU states to find alternatives to Russian imports.

Added to that, many industry analysts are revising down their long-term projections for natural-gas use in Europe, with far-reaching implications for Russia's resource-based economy.

"The days of high growth rates for European gas consumption are surely over," Bernhard Reutersberg, chief executive of German energy company E.ON Ruhrgas AG, told a conference in Berlin this week.

Such pronouncements strike a chill through the Kremlin. OAO Gazprom, the state-run gas export monopoly, is Russia's largest company and its export revenues account for about a tenth of the country's gross domestic product. Over the past 10 years, it has become a symbol of Russia's rising self-confidence and growing international clout.

As oil and gas prices rose, Gazprom's ambitions grew. It talked of increasing its share of the European gas market from 25% to a third by 2015. Last summer, it boasted it would be the world's most valuable company by 2015, with a capitalization of $1 trillion.

But as recession demolished Europe's appetite for gas, Gazprom's fortunes turned. IHS Global Insight says it expects gas demand in Europe to fall nearly 10% this year.

Gazprom has responded by slashing production: Output fell 28% in April, to the lowest level in a decade. Gazprom's market cap is now around $85 billion.

"The bottom line is Gazprom's revenues will fall 30-40% this year," said Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies. "We've never had a decline in demand as dramatic as this."

Gazprom's exports should start to rise again later this year. The gas price in its long-term supply contracts is linked to the price of a basket of oil products, but with a six-to-nine month lag -- so the price Gazprom charges its customers will fall sharply in a few months' time. Many of them are delaying purchases till then.

But the gas monopoly could find itself under pressure from customers to renegotiate some of those traditional long-term contracts, especially as alternative sources of gas emerge. A huge wave of liquefied natural gas from countries like Qatar will hit global markets over the next two years, much of it finding its way to Europe. Many analysts expect rising competition between LNG supplies and pipeline gas in the years to come.

"If the global recession lasts, or the recovery is slow, the market will be awash with LNG," says Pierre Noël of EPRG, an energy research group at Cambridge University. "The timing couldn't be worse for Russia."

Russia itself hasn't helped. Its reputation as a reliable energy supplier was damaged by the gas cutoffs of last winter and January 2006, even though many in the industry say Ukraine was equally to blame. Mr. Medvedev's hard-line rhetoric at Friday's summit will do little to reasssure Russia's European partners.

Long term, the picture is also far from rosy for Gazprom. The EU has set targets to reduce emissions of greenhouse gases by 20% by 2020, wants 20% of energy demand to be sourced from renewables such as solar and wind power, and has set a nonbinding goal of improving energy efficiency by 20% by 2020.

Many think the targets are too ambitious. But if met, they could transform Europe's energy landscape. IHS Cambridge Energy Research Associates says if the renewables and energy efficiency goals are made mandatory and oil and gas prices rebound next year, total natural-gas consumption across the EU could drop 16% by 2020 and 35% by 2030.

In Berlin this week, E.ON's Mr. Reutersberg made a similar prediction. If the EU's goals are met, and if the price of oil goes up to $100 a barrel next year, European gas use in 2020 would be 22% lower than today and import needs 5% lower, he said.

Solar power stations that concentrate sunlight could generate up to one-quarter of the world's electricity needs by 2050, according to a study by environmental and solar industry groups. The technology, best suited to the desert regions of the world, could also create hundreds of thousands of new jobs and save millions of tonnes of CO2 from entering the atmosphere.

Concentrating solar power (CSP) uses mirrors to focus sunlight onto water. This produces steam that can then turn turbines and generate electricity. It differs from photovoltaics, which use solar panels to turn sunlight directly into electricity and can operate even on overcast days. CSP only works in places where there are many days with clear skies and is a proven, reliable technology.

At the end of 2008 CSP capacity was around 430MW, and worldwide investment in the technology will reach

€2bn (£1.8bn) this year, according to Sven Teske of Greenpeace International and co-author of the report. He said investment could increase, under a relatively moderate scenario, to €11.1bn by 2010 and provide 7% of the world's generating capacity by 2030. By 2050 investment could reach €92.5bn, creating almost 2m jobs by 2050 and saving 2.1bn tonnes of CO2 every year.

"Due to the feed-in tariff in Spain and a few schemes in the US, this technology is actually taking off and we wanted to highlight that we have a third big technology to fight climate change — wind, photovoltaics and now CSP," said Teske.

Spain is leading the field on CSP: more than 50 solar projects in the country have been approved for construction by the government and, by 2015, it will generate more than 2GW of power from CSP, comfortably exceeding current national targets. Spanish companies are also exporting their technology around the world.

Environmentalists argue that many countries in the "sun-belt" around the equator would benefit from CSP technology — including desert regions in the southern United States, north Africa, Mexico, China and India.

The new study, carried out by Greenpeace International, the European Solar Thermal Electricity Association and the International Energy Agency's (IEA) SolarPACES group, looked at three scenarios of future growth in CSP. The first was business-as-usual reference scenario that assumed no increases at all in CSP; the second continued the CSP investments seen in recent years in places such as Spain and the US; while the advanced scenario was most optimistic, removing all political and investment barriers to give figures for the true potential of CSP.

Under the third, most optimistic, scenario there could be a giant surge in investments to €21bn a year by 2015 and €174bn a year by 2050, creating hundreds of thousands of jobs. In this case, solar plants would have installed capacity of 1,500GW by 2050 and provide 25% of the world's electricity capacity. Even in the second scenario, which sees only modest increases, the world's combined CSP capacity could reach 830GW by 2050, representing up to 12% of the world's energy generation needs.

Teske acknowledged that these estimates were far higher than official figures from the IEA. It says that by 2050, CSP would provide only0.2% of global power generation. But Teske added that the IEA analysis does not assume any increases in production capacity in the next few decades, hence CSP forms a very small part of the overall energy mix.

The new report also said that CSP technology was improving rapidly, with many new power plants fitted with storage systems for steam so that they could continue to operate at night. In addition it said the cost of the electricity produced , currently at €0.15 to €0.23 a kilowatt, would fall to €0.10-€0.14 by 2020 if governments continued to support the technology with incentives such as feed-in tarriffs.

Global electricity consumption will fall this year for the first time since 1945, according to the International Energy Agency.

The watchdog for developed energy consuming countries will tell energy ministers from the Group of Eight leading economies on Sunday that electricity demand will fall 3.5 per cent in 2009.

In China, where power use is seen as a more reliable barometer of economic activity than official economic measures, consumption will be more than 2 per cent lower than 2008. Russia will see a fall of almost 10 per cent, while countries in the Organisation for Economic Co-operation and Development will see a fall of almost 5 per cent.

Three-quarters of the global decline in consumption is accounted for by industrial rather than household demand, reflecting the fall in demand from China’s manufacturing-heavy economy. Consumption in India, by contrast, is expected to increase 1 per cent.

“This shows how deep a recession we are in,” said Fatih Birol, IEA chief economist. “Oil demand has declined in the past due to oil price shocks, financial crises – but electricity consumption has never decreased.”

In a report published last year, before the extent of the financial crisis was clear, the IEA forecast that electricity consumption would rise 32.5 per cent between 2006 and 2015. World electricity demand grew almost a quarter between 2000 and 2006. In 2007 it rose 4.7 per cent and in 2008, the year the crisis set in, it grew 2.5 per cent.

“It’s a good barometer of economic activity,” said David Rosenberg, chief economist at Gluskin Sheff. “It’s very cyclical and often early.”

Global oil demand, which is more sensitive to consumer sentiment than electricity, has fallen several times since the second world war. The IEA this month forecast oil consumption would be 3 per cent lower in 2009 than 2008, the ninth consecutive lowering of its forecast for this year.

The agency will also tell ministers that its calculation of the stimulus spending required from G20 nations on renewable energy was inadequate and should rise by a factor of six if greenhouse gas emissions targets set by the United Nations were to be met.

The IEA will also warn that a fall in investment in oil production could lead to a supply squeeze in 2012. The agency said about 2m barrels per day in capacity were cancelled, and another 4.2m bpdwere delayed by at least 18 months.

The next generation of nuclear power stations will not be built unless the Government steps in with financial assistance, the head of the UK's biggest nuclear generator has warned.

Energy companies fear generous subsidies for wind farms will make investing in new reactors risky and might not bother.

Vincent de Rivaz, UK boss of power giant EDF Energy, said in a newspaper interview that a 'level playing field' had to be created to make building the power stations attractive.

His comments are an embarrassment to Energy Secretary Ed Miliband, who recently promised that the new generation of nuclear plants could be achieved without subsidy.

The Government announced in April it had identified 11 potential sites for the new power stations.

EDF, which last year paid £12.5billion to buy nuclear generator British Energy, was planning to build at least four reactors in Britain, at a cost of up to £4.4billion each.

But Mr De Rivaz argues that as the Government has promised support for other low-carbon sources of electricity, such as offshore wind farms and 'clean coal', it should do likewise for the nuclear sector.

He said the company still needed to assure its investors - including the French government, which owns an 85 per cent stake - that the plans made commercial sense.

He told the Financial Times: 'We have a final investment decision to make in 2011 and, for that decision to give the go-ahead, the conditions need to be right.'

Mr De Rivaz suggested a solution would be to help the nuclear industry by making sure the penalties paid by rival fossil fuel power generators under green EU rules were kept high.

He said that this would be necessary before companies would be confident enough to invest the tens of billions of pounds need to build the new reactors.

EDF is also worried that incentives for wind power will lead to so many wind farms that nuclear power stations will have to be shut down at times, jeopardising their chances of making a profit.

The new generation of nuclear power stations are intended to maintain Britain's ability to generate its own energy after existing nuclear and coal-fired stations are shut down.

The first station could go live in 2017.

While critics warn that the move could mean a £75billion clean-up bill to deal with the waste produced by the new facilities, there is hope that the planned stations will bring jobs.

A spokesman for EDF Energy was unable to comment.

In recent months the government seemed to be making remarkable progress towards its goal of building a new generation of nuclear power stations in Britain.

Today’s warning from EDF about the need for more financial support for nuclear power shows that there is still a long way to go.

Since Ed Miliband took charge at the newly created Department of Energy and Climate Change last October, his two most significant decisions have been to increase the subsidies paid to new offshore wind farms under the Renewables Obligation system, and to promise a new subsidy for pilot “clean coal” power stations that can capture and store their carbon dioxide emissions.

Mr Miliband is now under pressure to say whether he will offer the same kind of support to nuclear power.

The core of EDF’s case for stronger financial guarantees is the need to “decarbonise” electricity production.

The government has set a target of cutting Britain’s carbon dioxide emissions by 80 per cent by 2050, an ambitious goal that implies that all of electricity production will have to be emissions-free.

It will not be easy to prevent all emissions from power generation, but for other forms of energy use, such as transport and heating, it will be even harder.

Decarbonised electricity can come from three sources: renewables such as wind power; coal and gas plants fitted with carbon capture and storage equipment; and nuclear.

The argument that, of those, nuclear is the only technology that is both proven and reliable, made forcefully by EDF, is accepted by many in government and the rest of the energy industry.

“We need to develop and increase the use of a large number of technologies,” says Robert Bell of AEA Technology, the consultancy. “Nuclear will be in that mix.”

He says the percentage of nuclear electricity is set to decrease over the next decade from its present share of about 20 per cent – as old stations shut down – but it could be back to more than 25 per cent by 2030.

Recent progress towards that objective has been impressive. Last year the government secured the £12.5bn sale of British Energy, owner of most of the country’s working nuclear power stations and many of the best sites for building new ones, to EDF of France, the west’s biggest nuclear generator.

Centrica, the owner of British Gas, has agreed to join EDF, taking a 20 per cent stake in British Energy for £2.3bn. EDF said it wanted to build at least four reactors with a total capacity of 6,400 megawatts.

Meanwhile, a consortium of RWE and Eon, Germany’s biggest energy groups, has bought sites at Wylfa on Anglesey and Oldbury in Gloucestershire, and said it wants build up to six reactors with a total capacity of 6,000MW. Together, those plans would mean an increase in nuclear power generation in Britain.

However, it is still much too early for the government to be counting its nuclear chickens.

Planning is one issue that worries many in the industry. The new planning regime, including the national Infrastructure Planning Commission, which comes into force next year, is intended to smooth the path for major projects such as nuclear power stations, to prevent repetition of the delays that dogged Sizewell B. However, the system is as yet untested.

Perhaps even more of an obstacle, though, is created by the financial framework.

The cost of building new reactors is vast: up to €5bn (£4.4bn) a time, EDF estimates, and the delays and budget overruns suffered at a new reactor being built in Finland have been a vivid reminder of the problems that can emerge.

Revenues, meanwhile, are also uncertain because of the variability of energy prices and the cost of emissions permits in the European Union’s trading scheme.

EDF’s solution is that nuclear power’s competitive position should be protected by setting a floor under emissions permit prices to benefit all forms of decarbonised electricity.

As Vincent de Rivaz, EDF’s UK chief executive, puts it: “We need a plan that everybody can refer to. Not with too many potentially conflicting targets and distorting subsidies. But with a simple, level playing field tool: a robust carbon price with a realistic floor.”

Mr Miliband often talks about the need for a stronger government role in energy policy, not to replace the competitive market but to shape it to meet strategic policy objectives.

With the government’s support for nuclear as firm as ever, but the market’s ability to deliver now called into question, he is facing the stiffest test of what that principle means in practice.

The IEA’s report for G8 energy ministers, to be presented this Sunday in Rome, has generated a few stories. Some picked up on the oil supply squeeze that awaits the world due to massive cuts in production investment. I wrote yesterday that the IEA forecasts that, for the first time since World War II, world electricity consumption will decline in 2009.

IEA chief economist Fatih Birol said he personally thought the electricity forecast was the most striking finding of the report.

However he was also keen to highlight concern about green spending in the G20 stimulus packages:

The agency will also tell ministers that its calculation of the stimulus spending required from G20 nations on renewable energy was inadequate and should rise by a factor of six if greenhouse gas emissions targets set by the United Nations were to be met.

Some more comments from Birol that didn’t make it into the story:

“We have looked at all G20 stimulus packages - and all the money they are putting into renewable energy. The money they have put aside for renewables is definitely important, but it is still much lower than what it should be, if we want it to be come to a sustainable level of energy treds - to bring CO2 emissions down. In order to come to that trend, [spending on] renewable energy needs to increase by a factor of six.”

It’s worth remembering that the IEA is the energy policy advisor to 28 developed nations including the US, Japan, Germany and the UK. It is one of the most respected sources of energy research, but is more known for its statements on fossil fuel markets, as it was founded during the 1973-74 oil crisis to further the interests of Opec’s main customers.

Although environmental protection is now a key part of its mandate - along with energy security, economic development - it is hardly an environmental agency.

Birol also warned about renewable energy, saying investments would fall 38 per cent in 2009 - again, the first fall recorded.

This was particularly serious, he said, because renewable energy industries are in their infancy and more vulnerable to a fall in investment:

“… oil is much more consolidated, whereas renewable energy is still in childhood - if they get a big hit, it will be very difficult for them to get on their feet. From that point of view it is very difficult that renewable indutries are hard hit, as we need them for fighting climate change and for energy security.”

So the question is: will its member countries listen?

Peter Voser, the energy giant's in-coming chief executive, told a meeting of 200 of Shell's top managers in Berlin, that a sweeping re-organisation was needed.

In a hard-hitting email to all staff yesterday morning and seen by The Daily Telegraph, Mr Voser said: "Our behaviours need to change if we want to enable leadership performance in a strong performance culture. That will mean that fewer people will make strategic decisions. More people will implement them, and improving performance will be our guide and goal. We will become a simpler place to work. These are key changes, aiming to make our company fitter for the future."

The changes, which will be effective from July 1, when Mr Voser succeeds Jeroen van der Veer, will also bring a new strategic focus on to Shell's American operations to answer President Obama's demands for more domestic energy production.

Shell's three main business units - Exploration Production, Oil Sands and Gas & Power which employ 22,000 people - will be merged into two: Upstream Americas covering North and South America, and Upstream International covering the rest of the world. Shell's windpower business will be part of the upstream portfolio.

The "down-stream" divisions, which consist of the refining, marketing and chemicals businesses, will be expanded to include Trading and Alternative Energy units, except for wind. A new, group-wide business called Projects and Technology, has been created which will be responsible for project execution across the group. Matthias Bichsel, a Shell veteran, will join the executive committee as boss of the new division.

Shell's headquarters, which employs 2,000 people, will also be restructured. Marvin Odum, currently boss of Shell in the US, joins the executive committee has been appointed head of Upstream Americas. His current boss Malcolm Brinded, who is head of E&P, will be in charge of Upstream International, which will include most of the current Gas & Power business run by Linda Cook, who announced her decision to step down on Tuesday.

The overhaul, which echos BP's restructuring when Tony Hayward took over two years ago, was described by analysts as a "step in the right direction" after years of investor frustration with Shell's old-fashioned, rigid organisation that has been blamed for project delays and loose cost controls.

After BP publicly anointed Pavel Skitovich, a former head of Russian mining group Polyus Gold, as its choice on Tuesday, it was forced to issue a statement on Wednesday saying he would serve alongside a candidate nominated by its Russian partners – and the choice of new chief executive had been deferred.

BP's Russian partners have named Maxim Barsky, a former managing director of West Siberia Resources, as their candidate. Mikhail Fridman, one of the four major Russian shareholders in TNK-BP, will take the role of interim chief executive.

BP is a joint partner in TNK-BP with Alfa Access Renova (AAR) – a consortium of four Russian oligarchs headed by Mr Fridman. BP has nomination rights for five of the nine directors, including the chief executive.

The AAR shareholders have insisted that the new chief executive be a Russian speaker with experience within the country.

A spokesman for BP after Mr Skitovich's nomination on Tuesday said: "As far as we are concerned, the search for a new CEO is over. We have formally nominated a very strong candidate and we hope that the approval process will be completed in due course."

However, it is believed that the Russian partners questioned Mr Skitovich's lack of oil industry experience. Both Mr Skitovich and Mr Barsky will take senior roles in TNK-BP and a decision on who will head the venture is expected by the year end.

Ed Milliband, Secretary of State for Energy and Climate Change, visited the Transition Network conference on Friday afternoon as a ‘Keynote Listener’, which all went very well. He was meant to only stay for half an hour, but ended up stayed nearly an hour and a half. When he arrived I explained to him how Open Space worked, and he looked through the list of Open Space sessions and picked a few he’d like to go to. After sitting in on 3 sessions, including a very interesting one about how to communicate the idea of ‘less’, he came back down to the atrium where Peter Lipman and myself (well, Peter mostly…) interviewed him. It was a fascinating conversation, one you can hear below.

Britain could lose its cherished top-tier credit rating that provides access to cheap borrowing on international markets after a downgrade of its economic outlook by Standard & Poor's yesterday. The ratings agency expressed alarm about the country's ballooning budget deficit and switched its outlook from "stable" to "negative," prompting the Conservatives to issue further calls for an immediate general election.

Figures out yesterday showed Britain ran a record deficit in April of £8.5bn and consultancy PricewaterhouseCoopers warned that balancing the public finances will cost every British family £5,000 a year by 2018.

S&P said there was a "one-in-three" chance that Britain's AAA credit rating on its sovereign debt may be cut. A lower credit rating pushes up the cost of borrowing.

The surprise news pushed shares in London down sharply and caused gilt yields to soar on renewed fears about the economy. The FTSE 100 closed down 2.75%, or almost 123 points, at 4,345.

Coming a day after the prime minister warned against complacency over the economy and the IMF and CBI called for a credible plan to reduce the enormous budget deficit, the S&P report was seized on by the Tories.

"It's now clear that Britain's economic reputation is on the line at the next general election, another reason for bringing the date forward and having that election now," said the shadow chancellor, George Osborne. "For the first time since these ratings began in 1978, the outlook for British debt has been downgraded from stable to negative."

The Liberal Democrat Treasury spokesman, Vince Cable, said: "Alistair Darling has relied on implausible growth forecasts for the economy which nobody but himself believes. Markets hate uncertainty and until the government comes clean about how it intends to pay back its debt, it is perfectly possible that we will see a further deterioration in Britain's rating."

A Treasury spokesman insisted that the chancellor had laid out plans in last month's budget to halve the deficit in the next five years. "Standard and Poor's have reaffirmed the UK's AAA rating on the basis of our 'wealthy, diversified economy; high degree of fiscal and monetary flexibility' and 'relatively flexible product and labour markets'," he said. "There are significant uncertainties in the global economy at the present time and S&P point out that the outlook could be revised back to stable 'if fiscal out-turns are more benign than [they] currently anticipate'."

Other agencies such as Moody's and Fitch have reaffirmed their AAA ratings for Britain.

S&P credit analyst David Beers said the ratings agency had based its outlook revision "on our view that, even factoring in further fiscal tightening, the UK's net general government debt burden may approach 100% of GDP and remain near that level in the medium term".

"We base our opinion on our updated projections of general government deficits in 2009-2013," he said, referring to the huge upward revisions to government borrowing projections announced by Darling in his budget on 22 April.

Colin Ellis, European economist at Daiwa Securities, said that with the AAA rating under threat, the S&P move highlighted the bad state of the public finances. "Whoever wins the next election, tax hikes and sharp spending cuts will be the order of the day - but today's announcement by S&P puts that much more pressure on the next government to act quickly."

PricewaterhouseCoopers released a study illustrating what future governments needed do to bring debt back below 50% of national income and cope with the effects of an ageing population.

John Hawksworth, head of macroeconomics at PwC, said there would need to be a "fiscal squeeze" - a combination of tax rises and public spending cuts - building up to between £115bn and £133bn a year by 2018, equivalent to about £5,000 for every family in the country.

He also said the government should consider raising the retirement age more quickly to combat the effects of increased longevity. "Provisions for these potential costs should be made sooner rather than later."

Britain's railways may need to double their capacity in the next 30 years to cope with the demand from passengers, according to train operators.

In a joint report with infrastructure owner Network Rail, they say long-term plans must be made within five years.

New lines will need to be built, rather than just adding extra trains, it says.

A new high-speed London to Scotland line and the electrification of the Great Western and Midland main lines are among the options it suggests.

These moves would take the pressure off the West Coast Mainline, which operators predict will be full by 2010.

Up to three times as many passengers could be travelling on the railways by 2020, according to the report.

The BBC's transport correspondent Tom Symonds said the report was "a concerted effort by the train companies and Network Rail to think about the long-term future of the railways".

He said that if the predictions prove to be true: "The railways will have to be available all week round, despite the pressure of engineering work, and severe delays should be a thing of the past."

The transport secretary will call on Thursday for an international consensus on ensuring that shipping and aviation are included in any global environmental deal in Copenhagen this year.

Geoff Hoon will tell the International Transport Forum in Leipzig, Germany, that it was “a great missed opportunity” that the two dominant international modes of transport were omitted from the last global climate change deal, signed in Kyoto in 1997.

“That led to over a decade of inaction,” he will tell the conference. “We cannot afford to wait any longer. It is vital that we put that right at Copenhagen.”

However, the tone of Mr Hoon’s speech, which will dwell on the benefits of transport and the potential for improved technology to reduce emissions, is likely to worry many environmental campaigners on transport issues. Most believe use of some forms of transport, such as aviation, will need to fall to meet emissions reduction targets.

The International Transport Forum is an annual meeting of transport ministers and other policymakers, organised under the auspices of the Organisation for Economic Co-operation and Development. The audience will include many of those that the UK has to win over if it is to get agreement on including shipping and aviation in any Copenhagen deal. Mr Hoon will call for transport policymakers to take charge of the sector’s response to the climate change issue, rather than leaving it to others such as environment ministers.

“If we do not lead this debate, then others will,” he will say.

Transport “will leave itself wide open to accusations that it is part of the problem, rather than part of the solution” if ministers take no action, he will add. The sector could also find solutions imposed on it that do not take account of competition or the realities of international transport, he will say.

However, much of the speech is likely to focus on potential technical solutions to aircraft and ship emissions that many environmental campaigners believe will never be sufficient to curb emissions without substantial reductions in traffic volumes.

Mr Hoon will point to changes in aircraft technology such as blended wings, a technique that reduces drag and fuel consumption, and lighter composite materials as potential ways of reducing aviation emissions. He will also point to improved engine and ship design as means of reducing ships’ emissions. “Technological advances can also help to generate business and trade,” he will say.

Environmental campaigners fear that a focus on potentially less polluting means of transport could distract from the need to reduce overall use of some forms of transport.

While referring to a number of potential means of curbing transport emissions, including rail electrification, Mr Hoon will avoid any reference to road-user charging. A number of reports have found charging for road use – which is officially government policy but has received far less attention in the past two years – could bring about significant emission reductions.