Crude oil climbed above $70 and gasoline rose after militants attacked a Royal Dutch Shell Plc pipeline supplying an export terminal in Nigeria, Africa’s largest producer.

The Movement for the Emancipation of the Niger Delta, or MEND, said it attacked a pipeline supplying Shell’s Bonny terminal. Exxon Mobil Corp. began shutting a unit yesterday at the Baytown, Texas, refinery, the government said. Valero Energy Corp. and Marathon Oil Corp. said their Texas City, Texas, refineries experienced power disruptions yesterday.

“The buyers are back in control of the market,” said Tom Bentz, a senior energy analyst at BNP Paribas Commodity Futures Inc. in New York. “The Nigerian attacks triggered the move higher. There’ve been a couple refinery issues, such as the power outage at Valero’s Texas City plant, that have also been supportive.”

Crude oil for August delivery rose $1.60, or 2.3 percent, to $70.27 a barrel at 12:03 p.m. on the New York Mercantile Exchange. Futures, up 58 percent this year, have declined 4 percent from a seven-month high of $73.23 reached on June 11.

Gasoline for July delivery increased 6.5 cents, or 3.5 percent, to $1.9075 a gallon in New York. Futures are heading for the biggest gain since May 18.

An equipment failure caused the shutdown and a release of hydrogen sulfide at the Baytown facility, Dave Bary, a spokesman for the Environmental Protection Agency, said today.

Baytown, the largest refinery in the U.S., can process 563,000 barrels of oil a day, according to data compiled by Bloomberg News.

Valero’s refinery, located along the Houston Ship Channel, can process 210,000 barrels of oil a day, according to the U.S. Energy Department. The Marathon plant can process about 81,500 barrels a day.

Military Campaign

MEND has stepped up a sabotage campaign since a military offensive began last month in the Niger River delta, the country’s main oil-producing region.

Fighters from the Nigerian group damaged the Bille-Krakrama pipeline overnight, cutting supplies from Shell’s Cawthorne 1, 2 and 3 oil-pumping stations, MEND spokesman Jomo Gbomo said in an e-mail. A Shell spokeswoman confirmed an attack on a manifold on the pipeline and couldn’t say whether production was halted by the incident.

Nigeria’s state-owned oil company said it shut its 125,000- barrel-a-day Warri crude refinery after attacks cut the Chanomi Creek pipeline. Two more refineries in the southern oil hub of Port Harcourt are on “a planned slowdown” to allow for maintenance, Levi Ajuonuma, spokesman for the Nigerian National Petroleum Corp., or NNPC, said today.

Security Premium

“The Nigerian situation is likely to get a lot worse before there’s an improvement,” said Michael Lynch, president of Strategic Energy & Economic Research, in Winchester, Massachusetts. “There’s a security premium in the oil market, but it’s less than a few years ago because we have more supply available to replace any missing barrels.”

Oil also advanced as U.S. equities increased for a third day. The Standard & Poor’s 500 Index gained 1.8 percent to 917.45. The Dow Jones Industrial Average rose 1.8 percent to 8,447.83.

U.S. oil inventories fell by 3.87 million barrels to 353.9 million barrels last week, the lowest since March, the Energy Department said yesterday. Stockpiles, which have fallen in six of the past seven weeks, are up 17 percent from a year earlier.

Cushing, Oklahoma

Stockpiles at Cushing, Oklahoma, where New York-traded West Texas Intermediate crude is delivered, fell 733,000 barrels to 28.2 million last week, the lowest since the week end Dec. 26.

“The big drop in supplies at Cushing will definitely be felt on Nymex,” said Rick Mueller, a director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts.

Gasoline supplies rose 3.87 million barrels to 208.9 million last week, the Department of Energy said. Refineries operated at the highest rates this year and fuel demand fell 5.5 percent, the biggest drop since January.

“There’s been an impressive run-up in prices this year,” said Paul Crovo, a Philadelphia-based oil analyst with PNC Capital Advisors. “At some point in the second half of 2009 or in early 2010 we should see demand pick up. At that point the market will tighten and prices should move higher.”

Brent crude oil for August settlement increased $1.74, or 2.6 percent, to $70.07 a barrel on London’s ICE Futures Europe exchange.

Oil markets risk another speculative bubble unless the financial sector is reformed and transparency increased, but prices are not yet a threat to economic recovery, the EU and OPEC said after joint talks on Tuesday.

U.S. oil was trading at around $68 a barrel on Tuesday, far below a record of nearly $150 hit last year and also below the $75-$80 OPEC officials have said they seek.

"The 2008 bubble could be repeated if adequate regulatory reforms, including greater transparency, (are) not made as part of an overall reshaping of the global financial sector," the European Union said in a statement issued following the talks in Vienna.

It said the meeting had agreed the role of speculation in financial markets "had not been resolved."
The Organization of the Petroleum Exporting Countries has repeatedly blamed speculation for last year's run to record highs.

"Since the middle of 2008, we have been alerting the world ... that there is a bubble. We need to have some kind of regulation," OPEC Secretary General Abdullah al-Badri told a joint press conference after Tuesday's talks.

OPEC's leading producer Saudi Arabia said at the group's last conference in May oil prices of $75 a barrel could be achieved this year and the economy was ready to cope.
Members of the group have since nudged their price aspirations even higher and Angolan Oil Minister Jose Botelho de Vasconcelo, who is also OPEC president, said on Tuesday he "would love to reach $80 per barrel."

NOT DAMAGING YET
For the fragile world economy, $80 could be alarming, but representing the European Union, Energy Commissioner Andris Piebalgs said a price approaching $70 was not damaging.

"What we also discussed in our meeting is that $70 per barrel, the current price, definitely does not impede the recovery of the economy," he said.

"We really believe the current situation has some good stability. If it continues it will be a chance for (economic) recovery and also guarantee that upstream investments will continue."

OPEC has often argued too low an oil price chokes off investment in new supplies and Tuesday's joint statement said any inability to invest in new production capacity "could lead to a perpetuation of damaging boom/bust cycles."

At its last two meetings, OPEC has kept existing output curbs in place, saying it wanted to prevent overly high prices that could jeopardise economic recovery, even though the amount of excess oil supply meant there was a case to cut production.

Badri said it was too early to say what the group's next meeting in September would decide, but OPEC's focus for now was on improving compliance with existing limits.

Discipline had dropped to 75 percent, he said, from highs earlier this year of about 80 percent, adding he hoped it would be back to more than 80 percent next month.

* Oil price not a threat to global economy for now
* OPEC seeks price of up to $80 a barrel
* OPEC working on tighter output discipline
* EU-OPEC talks discuss regulation

Additional reporting by Christopher Johnson and Pete Harrison; writing by Barbara Lewis; editing by James Jukwey

Recession will cut investments in the energy supply sector in 2009 by more than the $100-billion (U.S.) quoted in the International Energy Agency's report released in May, its chief economist said on Tuesday.

The agency, adviser to 28 industrialized countries, said in a report presented to the G8 energy ministers in May that oil and gas upstream investment would fall 21 per cent, or about $100-billion in 2009 from 2008 due to the global recession.

“The information that we are getting... may well mean that we are going to revise the numbers downwards,” Fatih Birol told Reuters in an interview.

Mr. Birol said the IEA had not made a comprehensive update of the G8 report but that the agency was getting signals the drop in investment would be worse than initially feared.

A more detailed update will be released for the IEA world energy outlook in November, he added.

Mr. Birol cited three reasons for the worse-than-feared decline in investments.

“The first thing is that the oil price prospect is still uncertain with most companies not having yet increased their price assumption to base their projects from $40-45 [a barrel],” he said.

He cited as other reasons the fact firms did not foresee demand picking up, and that key producing countries still had some spare capacity to be used.

“For those reasons I think it would be wrong to say that the investment appetite of the oil companies has returned,” he said.

Asked whether $75 a barrel, a price branded by Saudi Arabia as a target, would be fair for consumers and producers, Mr. Birol said: “In a normal world, when the global economy is running in order,..., to bring new investments in the offshore and oil sands to the market, you need a price level of $75 a barrel.”

But in the current economic context, any strong price rise from the current oil price of $68 a barrel would hurt the economic recovery, he said.

Oil markets may face a supply crunch by 2014 if global GDP growth hits 5% in the coming years, the head of the International Energy Agency said Tuesday.

"If economic GDP growth gradually rises through 2011 and 2012 ... then oil demand will come back and by 2014 you will maybe have a supply crunch," Nobuo Tanaka said at the Renewable Energy Finance Forum in New York, noting economic growth would have be around 5%.

The global economic crisis has battered fuel demand, knocking crude off record peaks near US$150 a barrel hit last July and causing inventories to swell.

Prices have rebounded from below US$33 in December - trading around US$67 on Tuesday - on signs of an economic recovery that could lift oil consumption.

Mr. Tanaka said that if the global economy grows at a slower rate, any oil supply crunch could be delayed.

"If GDP only grows 3% we will probably see a postponing of the supply crunch until after 2014," he said.

Vladimir Putin, Russian prime minister, yesterday gave the green light to Total to expand in Russia after the French oil major clinched an exploration joint venture deal with the country's largest independent gas producer.

Mr Putin, announcing a venture between Novatek and Total to develop the Termokarstovoye gas field in Russia's Arctic region, even held out the prospect that the French group could be chosen for the second phase of the highly coveted Shtokman project, one of the world's largest gas prospects. Total holds a 25 per cent stake in the initial development phase of state-owned Gazprom's exploration project.

"I know that you [Total] have offered to expand our co-operation and take part . . . in future stages. This is totally possible," Mr Putin said after meeting Christophe de Margerie, Total chief executive, and Leonid Mikhelson, head of Novatek, in Moscow.

Yves-Louis Darricarrere, head of Total's exploration and production division, welcomed the comments as "a clear signal that Total is welcome to develop its activities in Russia".

The political support will give Total the reassurance it needs to step up investment in a country that has proved hazardous for foreigners. Even Total has had setbacks, having initially been ousted from Shtokman with others in 2006 before being brought back in.

Since then Total has been one of the few foreign majors to flourish in Russia.

Under yesterday's deal, Total will take a 49 per cent stake in Terneftegaz, a Novatek subsidiary, which holds a licence at the 47.3bn cubic metre Termokarstovoye field in the Yamal-Nenets region in the Siberian Arctic.

Mr Putin said the unexplored Termokarstovoye field could become a "field of national importance" where foreign investors require special government permission to operate.

He said Total's early stage investment would be considered when future development was decided in 2011. About $1bn will be invested in the first phase.

Total is also in talks with Gazprom about building an LNG plant on the Yamal peninsula, one of the biggest untapped gas provinces in the world.

China’s rush to secure MiddleEastern and African energy supplies intensified as Sinopec, its state-controlled oil refiner, sealed a £4.4 billion takeover of the British-listed Addax Petroleum.

Sinopec’s offer of C$52.80 (£28) per share for Addax, a Swiss-based company listed in Toronto and London, will give the Chinese group access to producing oilfields in northern Iraq, Nigeria and Gabon.

The offer was 16 per cent above Addax’s closing share price on Tuesday and appeared to have beaten off stiff competition for the group from Korea National Oil Company (KNOC). The deal includes a break fee of C$300 million, Addax said in a statement.

With 538 million barrels of proven and probable oil reserves, Addax produced an average of 134,700 barrels of crude oil a day in the first quarter of 2009.

Founded in 1994, it started as a largely Africa-focused oil company, but in 2005 became one of the first businesses to win a drilling licence in the semi-autonomous Kurdish region of Iraq, which is governed by the Kurdish Regional Government (KRG) in Erbil.

Addax now holds a 45 per cent stake in the Taq Taq oilfield, which is capable of producing 44,000 barrels of oil a day.

The company holds an additional stake in the Sangaw North block in the same region of Iraq.

“We are pleased that Sinopec has recognised the highly attractive asset portfolio and exceptional team that we have assembled at Addax Petroleum,” Jean Claude Gandur, the president and chief executive of Addax, said.

The takeover of the company, which employs 864 people, is the latest in a flurry of deals in the oil and gas sector. The London-listed Heritage Oil combined with Genel Energy, of Turkey, this month in a £3.7 billion merger designed to create an Iraq-focused oil explorer. Another state-owned firm, Emirates National Oil Company, is considering a takeover of Dragon Oil, which has operations in the Caspian Sea.

Sinopec’s takeover of Addax is one of the biggest offshore acquisitions by a Chinese oil company. It reflects the country’s growing drive to bolster its access to natural resources to feed its growing economy.

Sinopec, China National Offshore Oil Corporation (CNOOC) and China National Petroleum Corporation (CNPC) are among the companies to have qualified to bid in Iraq’s first oil-licensing round next week. With 115 billion barrels proven, Iraq has the world’s third-largest reserves, after Saudi Arabia and Iran.

Chinese interest in the international oil industry has also extended closer to home. It emerged this week that PetroChina, a division of CNPC, was considering a bid for part of the Grangemouth oil refinery on the Firth of Forth in Scotland, which processes much of the crude produced from the North Sea.

Sinopec is one of China’s biggest oil-refining companies.

A summer gas war is brewing in Ukraine, threatening another cut-off of Russian gas supplies into Europe and a worsening of the cash squeeze on Gazprom, Russia’s biggest company.

Eleventh-hour talks are under way between the European Union, the International Monetary Fund (IMF) and the European Bank for Reconstruction and Development to secure a stop-gap loan of $4 billion (£2.44 billion) to pay for Ukraine’s gas needs.

Naftogaz, Ukraine’s utility, has no cash to meet the payment for next month’s gas, which falls due on July 7, and European power companies fear that Gazprom will shut the taps on gas transit pipelines that traverse Ukraine, putting in jeopardy efforts to fill storage tanks for the coming winter.

José Manuel Barroso, the President of the European Commission, has told vulnerable EU states to make contingency plans and to prepare for the worst. He said: “We must not sleep-walk into another gas crisis. There is, indeed, the risk of another major crisis in weeks, not months, and we must protect European citizens.”

Ukraine needs to purchase 19 billion cubic metres of gas for storage to meet winter demand for fuel, but funds provided under an IMF rescue package have run out and the Government has admitted that it cannot pay the July gas bill.

A European Commission spokesman said: “We need stop-gap funds and we need a sustainable solution.”

Mr Barroso made clear that the EU would not provide funds: “We don’t have that money in the budget. We want to help our Ukrainian friends, but they have a structural problem . . . The basic problem is with Ukraine’s ability to pay for its gas supplies from Russia. But that is not our problem.” The Commission is convening a meeting at the end of this week between multilateral lenders, gas companies and the parties to the dispute in the hope of preventing a gas cut-off in July.

The global recession has worsened the confrontation between Ukraine and Russia, according to sources at a meeting of the Gas Co-ordination Group, a body set up by the European Commission this year amid the third confrontation since 2005 between the two countries over Ukraine’s failure to pay for gas. Russia is angry about the EU’s refusal to bankroll the insolvent Ukraine and concern is mounting in the Kremlin that Gazprom will suffer a significant loss of revenue if it is forced to cut off supplies in a showdown with Kiev over unpaid bills.

Gazprom is Russia’s biggest export earner and taxpayer but its business is held hostage by its troublesome neighbour as 80 per cent of Gazprom’s exports to Europe cross Ukraine. To make matters worse, Gazprom entered recession burdened with huge borrowings and its revenues have shrunk because of a sharp fall in demand for gas as European industrial activity weakened. The cash squeeze on Gazprom could worsen if Ukraine disrupts exports of gas to European utilities in the summer.

According to ICIS Heren, the gas market consultancy, European utilities have delayed filling up their storage tanks, hoping to profit from lower gas prices in the summer quarter. The filling of storage tanks is vital during the summer months if utilities are to cope with peak demand in January and February, but, according to Louise Boddy at ICIS Heren, companies need to catch up quickly. “Gas storage levels are way below where they were at this time last year. We will either get floods of Russian gas coming into Europe or no Russian gas,” she said.

In the latter case, Gazprom is likely to suffer heavy losses, gas industry insiders say, as Europe’s utilities will fill their tanks with Norwegian gas and liquefied natural gas [LNG]. Recession has left Norway with spare capacity and LNG prices have fallen amid weak demand in North America. Power stations in the Far East are also turning down LNG cargoes.

Britain needs to pump up investment in gas storage facilities because increased dependence on imports poses a serious threat to the nation's security, a think tank said on Tuesday.

Higher dependence on gas supplies from mainland Europe will also leave Britain vulnerable to the manipulation of energy for political purposes, the Institute for Public Policy Research said it will warn in a final report to be issued next week.

The think tank -- whose findings cited tensions between gas producer Russia and transit state Ukraine as a major risk -- will publish the two-year review next week to coincide with an expected government report on a national security strategy.

"Our national circumstances have changed radically in supply terms in recent years, bringing new risks," said Paddy Ashdown, former head of Britain's Liberal Democratic Party, who co-chaired the panel that compiled the report.

"We need to build strategic gas storage capacity as a matter of urgency, while bringing on stream new technologies that are both climate friendly and can make us more energy independent and resilient," Ashdown said in a statement.

Britain has the lowest amount of storage capacity as a share of its total demand of any major European economy, leaving the nation increasingly exposed to supply disruptions from other countries as its own gas production declines.

In April, British tax authorities agreed to calls from gas storage operator Centrica -- which runs the country's biggest storage facility -- for tax relief to spur investment in new facilities and boost energy security.

The commission -- also co-chaired by former defence minister and NATO secretary general George Robertson -- will urge the government to consider using public funds to boost gas storage capacity and set targets for the amount of additional supplies needed as well as a timetable for delivering them.

It also argues Britain should also continue to press hard for an integrated and coordinated gas market across Europe to ensure suppliers cannot divide the region in a bid to exert political influence.

Developing alternatives to gas in power generation and the use of so-called smart grids to help allocate power most efficiently need to be priorities as well, the panel will say in the final report.

"At the European level there are already concerns about Russia, an important regional supplier of gas which has increasingly sought to use energy supplies for political ends, and about overall gas supply constraints in the medium term," an excerpt from the final report, issued to journalists, said.

Editing by Anthony Barker

Brussels turned up the heat on Britain yesterday over the Government’s plunge into the red as a result of the recession and the banking crisis.

In a fresh warning shot at the Treasury over its soaring budget deficit, the European Commission classed Britain alongside the struggling Irish Republic and stricken Latvia as the European Union economies whose national finances had been most dangerously hit by the costs of the crisis.

Alistair Darling was again urged to take more urgent and radical measures to bolster the UK’s budgetary position, which Brussels said was set to be even worse next year than the Chancellor has forecast so far as the recession bites harder than the Treasury expects.

“Taking into account the probability of a worse-than-expected deterioration in the UK’s budgetary position in the near-term, and the heightened risks to fiscal sustainability, there is a need for a more ambitious consolidation effort in the medium-term,” a Commission report found.

Brussels forecasts that the Treasury will have to borrow 12.75 per cent of GDP next year — more than £10 billion higher than Mr Darling predicts. It said that the Chancellor should take significant steps to raise taxes or cut spending, starting in the 2010-11 financial year, and set out plans for a longer-term financial improvement.

Gordon Brown has ordered top ministers at the Treasury and Department of Business to draw up plans to cope with rising oil prices and a lending drought for UK companies, amid fears that the nation's economic recovery risks being derailed.

Brown is seeking an international agreement to tackle the rising cost of crude, which rose to almost $72 a barrel on Friday.

With Gulf economies including Saudi Arabia at risk of plunging into recession later this year, according to private forecasts by the International Monetary Fund, western governments fear Opec producers will have a powerful incentive to restrict oil production and force prices even higher.

Whitehall officials are examining proposals for handing the IMF the task of monitoring oil prices as part of the Washington lender's new beefed-up role as guardian of the global economy. The plan could form part of Britain's agenda for the next summit of G20 leaders in Pittsburgh, in the US, this autumn.

Brown believes that the G20 meeting in London in the spring missed an opportunity to put in place measures to stabilise the oil price, after it fell from a peak of $147 a barrel to less than $35 early this year.

The concern now in Whitehall is that higher commodity prices will spark inflation and tempt the Bank of England to tighten policy before the economy is fully back on its feet.

The Treasury's confidence in the Bank's ability to manage the delicate job of withdrawing the massive stimulus package at the right time was dented by Threadneedle Street's reluctance to slash interest rates last year as the economy nose-dived.

Downing Street is also nervous that the failure of banks to turn on the lending taps could leave Britain's businesses unable to invest for recovery. Bank figures revealed last week that lending to businesses actually fell in April, by the highest amount in nine years.

Ministers have ordered officials to conduct an in-depth probe of recent lending figures in order to see whether the problem lies with weak demand from industry or a reluctance by banks to lend.

Some firms have been able to exploit a rising stockmarket to raise money from share issues, but the government is worried about small- and medium-sized companies that rely heavily on banks for their finance.

The chancellor pointed to the perils of high oil prices in his Mansion House speech to the City last week. He said a $25-a-barrel rise in oil prices over the past three months was a growing concern. "A sharp spike in commodity prices could slow down the recovery. We must act - together with other countries - to reduce price volatility," he said.

Hinting at the government's policy agenda, Darling said Britain wanted improved transparency in oil markets, the removal of barriers to energy supply and better energy efficiency.

The government believes the current oil price is not justified by the weakness of the global economy and that international action could bring it back down to a fairer level.

Tentative green shoots have begun to emerge in the UK over recent weeks, with the housing market stabilising and industry surveys beginning to suggest the worst is over - but the prime minister is keen to rein in hopes of a rapid return to business as usual.

Striking oil refinery workers are to stage a demonstration outside the Paris headquarters of energy supplier Total.

Announcement of the demo, planned for next week, came as talks were due to resume over the jobs row at the Lindsey oil refinery in North Lincolnshire.

The sacking of almost 650 strikers sparked wildcat sympathy strikes.

Unions are demanding reinstatement of the Lindsey workers, and guarantees of no victimisation of activists involved in sympathy strikes.

The GMB said it planned to take two coach-loads of Lindsey workers to Paris next week to stage a protest outside the head office of Total, which owns the refinery.

Negotiations with contractors and Total were adjourned after five hours on Tuesday.

Some 4,000 power station and oil or gas terminal workers have been striking.

Sites hit have included the Drax power station in Selby, Yorkshire, along with others in Milford Haven, west Wales, Longannet in Fife and on Teesside.

About 900 contract workers at the Sellafield nuclear site in Cumbria returned to work on Wednesday, only for 100 to later walk out again.

Operations 'unaffected'

The Lindsey workers first withdrew their labour on 11 June in protest at a sub-contractor axing 51 jobs while another employer on the site was hiring people.

Just over a week later, Total announced that 647 construction workers had been sacked for taking part in unofficial strikes.

Among the unions' demands are the provision of jobs for the 51 workers originally laid off.

A spokeswoman for the GMB union said some progress had been made during Tuesday's talks but that "significant hurdles" remained.

A spokesman for the South Hook liquefied natural gas (LNG) terminal in Milford Haven, west Wales, said that despite strike action, normal operations remain unaffected.

"Approximately 230 of the contract construction workforce working on the build of phase two at the South Hook terminal near Milford Haven walked off site for the third consecutive day," he added.

The GMB has launched a £100,000 hardship fund to support strikers.

It is pressing ahead with a national ballot of thousands of workers in the industry in a long-running dispute over jobs and conditions.

Leader Paul Kenny said the start of the ballot was about a week away. Another union, Unite, is also planning a national ballot of its members.

Electric cars, smart meters and new ways to store energy can help balance power supply and demand by 2020 when Britain will rely more heavily on wind farms and nuclear plants, Britain's grid operator said on Friday.

National Grid said in a report that extra back-up for variable wind power was not the only solution and suggested that finding ways to get consumers to reduce demand can play an important role in balancing electricity supply and demand in coming years.

Britain and other European Union members have agreed to a pact calling for countries to source 20 percent of their energy from renewables by 2020 to help reduce carbon emissions.

For Britain, this may mean a sharp rise in the amount of wind farms used to generate power -- something that leaves a bigger portion of power supplies at the mercy of the country's famously changeable weather.

Bigger nuclear power plants expected to come on line over the next few decades may generate a bigger share of electricity as well, raising the risk that future nuclear outages will require a larger amount of back-up power to keep the lights on.

"Traditionally people have thought you just need more back-up generation," a National Grid spokesman said.

"But there are some really good ways we can bring demand down in the future."

National Grid, which operates the electricity transmission system and gas network across Great Britain, also said that better wind forecasting, sophisticated control systems and new technologies to boost an operating reserve of back-up supplies could help.

More wind generation will likely require possible reserve requirements to rise to 8,000 megawatts from 4,000 MW currently, the 82-page report found. A thousand megawatts is enough to power about 1 million homes.

"There will be times when there is not wind out there and that can coincide with peak demand," Larque said.

Smart meters and smart grids could take shift times when consumers use power to ease demand at peak times, National Grid said. Getting consumers to do things like charge electric cars overnight instead of during the day was another option.

Storage could also play a far bigger role with new battery technology and the use of large flywheels or compressed air that could potentially quickly convert energy into electricity by turning a turbine, the report found.

These kinds of measures could free up another 8,000 megawatts of power, the report found. "The way we operate and the way the electricity market operates is likely to change," National Grid said in the report. "The way that consumers, large and small may interact with the market may also change considerably."

Editing by William Hardy

BP’s lengthy hunt for a new chairman ended today with the appointment of Carl-Henric Svanberg, the chief executive of Ericsson, the Swedish telecoms company, to replace Peter Sutherland.

BP, Britain's largest company by market value, said that Mr Svanberg, 57, will step down at Ericsson at the end of the year after a seven-year tenure and take up the role at BP on January 1.

Mr Svanberg will be based in London and although he will remain as a non-executive director of Ericsson, he will devote the majority of his time to BP business.

Tony Hayward, BP's chief executive, said: “Peter Sutherland has been an outstanding chairman, guiding the company through one of the most successful periods in its history. He will be a hard act to follow.

“But I am sure Carl-Henric will be a worthy successor. Our shared views on many aspects of global business give me great confidence that we will work very effectively together on the next phase of BP’s progress.”

Mr Svanberg is widely credited with overseeing a turnaround at Ericsson during which he pursued an aggressive cost cutting drive.

At BP, he will face a series of challenges including completing a restructuring effort initiated by Mr Hayward, dealing with encroaching carbon regulation in the US and Europe at a time of mounting global concern over climate change and restoring the group's position in Russia, where last year BP became embroiled in a fierce row over ownership of its Moscow joint venture, TNK-BP.

Mr Svanberg, who was paid a total of 20.4m Swedish kronors (£1.6 million) by Ericsson last year, will face pressure from investors to maintain the group's dividend at a time of relatively weak oil and gas prices while continuing to invest in BP's costly long-term exploration and production programme.

He will also help settle the debate over the future of BP's alternative energy business, which has been uncertain since the departure of Lord Browne, Mr Hayward's predecessor as chief executive. Some critics have attacked BP for failing to live up to its 'Beyond Petroleum' slogan.

Mr Svanberg, who will be the first chairman of BP who is neither British nor Irish and beat off stiff competition for the job from Paul Anderson, the American former chief executive of BHP Billiton, has a reputation for social and environmental advocacy.

He is a member of the external advisory board of the Earth Institute at New York's Columbia University, the sustainable development group - a title he shares with Bono, the Irish rockstar and debt campaigner as well as Rajendra Pachauri, chairman of the Intergovernmental Panel on Climate Change.

Mr Svanberg said that the BP role was a great privilege as well as "quite a challenge", adding: "I'm hugely excited about joining the energy industry which is so much at the heart of the global economy. I look forward to it with relish."

The announcement brings to an end a search which began well over a year ago led by Sir Ian Prosser, BP’s deputy chairman, alongside Anna Mann, the City headhunter.

BP’s preferred initial candidate, Paul Skinner, the chairman of Rio Tinto, had to pull out of the race earlier this year after a rift with the mining group’s shareholders over a controversial tie-up with Chinalco, a Chinese state-controlled manufacturer of aluminium.

Mr Svanberg, who is also stepping down as the chairman of Sony Ericsson, said: “BP is a recognised world leader in the energy sector and it’s a great privilege to be invited to lead its board. Following such a distinguished predecessor is quite a challenge but I’m hugely excited about joining the energy industry which is so much at the heart of the global economy.”

Shares in BP have fallen 17 per cent over the past year, partly tracking the drop in oil from the record high of $147 glanced last July.

The energy generator Drax raised £108m yesterday in a shares placing to pay down its debt and help keep its credit rating above junk status.

The 15.5 million new shares, representing about 7.5 per cent of the issued stock, sold in a matter of hours at a 425p – a 5.3 per cent discount from the previous day's closing price. The shares closed down 2.78 per cent at 436.5p.

The placing was made after the ratings agency Standard & Poor's lowered Drax's rating to BBB-minus last month and reduced its outlook from stable to negative in the light of falling power prices and the unpredictable effect of the next phase of the European emissions trading scheme from 2013.

The money raised will be used to pay down the group's £370m term debt, the remains of which will be refinanced by the end of the year. The company is also instituting a plan to pay off the rest of its debt by the end of 2012, to address S&P's longer term concerns about the unknown impact of the trading scheme, which will require all emissions permits to be bought.

Under the previous debt plan, Drax was to pay off a £65m tranche this year, and the same again in 2010, with the remaining £240m to be refinanced at the end of next year.

Dorothy Thompson, the Drax chief executive, said: "This is a prudent and measured response to specific factors existing in our market at this time, which is at the low point of the cycle."

The S&P rating is vital to Drax because its contracts for both selling power and buying coal supplies are contingent on an investment grade rating for its debt. If the rating falls below investment grade it triggers a requirement for Drax to post collateral against its trading positions in the market, which would put considerable strain on its balance sheet.

With only one notch left below BBB-minus before hitting junk status, and a negative outlook over the longer term, the company was left almost no room to manoeuvre – hence yesterday's equity raising.

UK rail freight traffic has fallen sharply in the past quarter, according to new figures that show the effect of the recession on the industry is deepening.

Falling demand for consumer goods, building materials and cars has led to an 8.6 per cent drop in the volume of freight moved on the rail network in the first quarter of 2009 compared with the same period last year.

The decline has doubled since the previous quarter to Christmas last year, according to the Office of Rail Regulation, the industry’s spending watchdog.

Freight is often considered a bellwether industry, as demand rises and falls according to wider spending patterns in the economy. Shipping, road and air cargo traffic have also been hit by the collapse in the international goods trade and manufacturers cutting back on components.

The biggest fallers were metals, including steel, which declined 50 per cent to 240m net tonnes; international container goods, down 16.3 per cent; and construction, down 13.6 per cent. However, coal freight increased 8.6 per cent on a like-for-like basis.

Analysts said the figures suggested green shoots had yet to take hold. “It’s not a good sign,” said Douglas McNeill of Astaire Securities. “It suggests no improvement in international trade flows.”

The decline in train cargo volumes could undermine government attempts to shift haulage from the roads to rail to ease congestion and reduce carbon dioxide emissions. Rail accounts for 12 per cent of UK freight, and Network Rail, the not-for-profit infrastructure owner, said this could more than double by 2030. In April it slashed track access charges 35 per cent in an attempt to increase take-up.

But the price cuts may have come too late, according to John Manners-Bell, analyst at Transport Intelligence, a consultancy.

Road hauliers have taken market share from rail during the past six months because they have fewer fixed costs and are better placed to compete on price.

Lorry drivers’ core business of delivering to local British markets has proved more resilient than the import-dependent rail freight market. While retailers have been exhausting existing supplies rather than ordering new goods from Asia, consumers are still buying, albeit at a slower rate.

This means the next quarter will be crucial, according to Mr Manners-Bell.

Four operators have dominated the market since privatisation in the 1990s – Freightliner, Direct Rail Services, First GB Railfreight and DB Schenker. All have parked up wagons or cut jobs.

Tony Berkeley, chairman of the Rail Freight Group, said prices were being squeezed. “It’s a service industry; it relies on what customers want and the market will go where the downturn goes,” he said.

“Still, no one has gone out of business, yet. They are waiting for the upturn.”

Tensions between train operators and the government escalated after Brian Souter, Stagecoach chief executive, accused the Department for Transport of being “either dysfunctional or deceitful” in its attitude towards rail companies.

Mr Souter said the DfT had become “chaotic” and that its handling of the South West Trains franchise was a “dog’s breakfast”. Stagecoach is in a dispute with the DfT over the amount of revenue support it should receive for the franchise, which runs trains from London Waterloo to south-west England.

Stagecoach has already warned that its rail division risks making a loss in the year to April 2011 if it fails to win the dispute, but its shares rose 8½ per cent to 127¾p yesterday as the company said the potential shortfall was £100m – less than originally expected.

The stream of allegations by the Stagecoach chief executive included accusations that the DfT owed the company a total £200m. This included £1m for consultancy work on a carriage replacement programme and compensation to cover changes to the way that ticket prices are calculated.

Douglas McNeill, analyst at Astaire Securities, said: “At root, this is about cash. The DfT is having to husband its resources as realisation dawns that it has underwritten overoptimistic passenger projections and won’t get any help from a cash-strapped Treasury.”

The five big bus and rail operators have been under pressure this year, as rising unemployment has hit fare revenues.

Stagecoach said passenger and revenue growth at its major rail businesses had slowed, but that its bus operations was resilient.

Reporting its results for the year to 30 April, the company said that revenue rose from £1.8bn to £2.1bn.

Pre-tax profits, before intangibles and exceptional items, rose from £174.4m to £196.4m, beating market expectations of £189.4m. After intangibles and exceptionals, pre-tax profits rose from £167.3m to £170.8m. The final dividend rose from 4.05p to 4.2p, giving a total of 6p for the year.

●FT Comment

Stagecoach’s bus division is prospering in spite of the recession, and a strong balance sheet gives the group fire power should the downturn throw up acquisition opportunities. But, based on Panmure Gordon’s forecast earnings per share of 15.88p for the year to April 2010, the shares are already trading on a forward price/ earnings ratio of 8, which is in line with the sector average. They are likely to mark time until the dispute with the DfT is resolved.

THE new transport secretary, Lord Adonis, believes a 200mph high-speed rail network in Britain will spell the end for domestic flights and short flights to Europe.

In his first interview since joining the cabinet, Adonis said the market for internal flights would collapse within the next 20 years as the train becomes the preferred mode of travel.

The proposed high-speed rail network would cut journey times from London to Manchester to 1hr 22min and Glasgow to 2hr 42min. Adonis envisages that it could use French-style TGV trains.

He said high-speed rail would also replace flights from Britain to destinations including Amsterdam, Brussels, Cologne, Lyon and Rotterdam. He believes the rise of high-speed rail will help to cut carbon emissions and offer passengers more comfortable and enjoyable journeys than travelling by plane.

“High-speed rail is not only important for providing additional rail capacity between our biggest conurbations. I would like to see domestic and short-haul flights largely replaced by high-speed rail over the next 20 years,” he said.

“The evidence internationally is that passengers want to have the choice of making these journeys by train rather than plane, because [trains offer] greater convenience, comfort and [are] much less hassle than going through airports. This is not about the government dictating to people how to travel, but the free choices that people make when they are offered a viable and attractive alternative to flying.”

The proposed high-speed rail network, due to be completed by 2020, would initially run from London to Birmingham and eventually extend to Manchester and Glasgow. Detailed plans are being developed by a government-backed company. Early estimates indicate that the line will cost up to £30 billion. The government will make its final policy decision in early 2010.

“We have a very exciting agenda for transport investment over the next 10 years and I believe that will be a central part of our manifesto,” Adonis said.

Rail is already gaining at the expense of air travel. Domestic flights have been in steady decline in recent years, with the number of passengers falling from 26.1m in 2005 to 24.3m last year. The number of passengers travelling from London to Manchester by air has fallen from 1.94m in 2003 to 1.35m last year. The number of railway passengers has increased over the same period, from 2.1m to 3.3m.

According to Adonis, by 2029 many European cities will be within 3½ hours from London by train, which he sees as the tipping point at which people switch from air travel.

By the end of the year a new high-speed link from Brussels to Amsterdam will help to cut journey times from London to Amsterdam from five hours to 3½. Another new line will cut journey times from London to Cologne to four hours.

Adonis believes the success of high-speed rail in Europe will provide a template for Britain.

“Air France has stopped flying between Paris and Brussels because of high-speed rail, Lufthansa has stopped flying between Cologne and Frankfurt,” he said.

“Since the high-speed line opened between Madrid and Barcelona, the proportion of people [in Spain] travelling by train compared to plane has risen from 16% to 68%.”

The Department for Transport believes high-speed rail could reduce the number of passengers on domestic and short-haul flights at Heathrow by 9.4m, equivalent to 14% of all flights from the airport. However, Adonis remains committed to a third runway at Heathrow, insisting the extra capacity will be needed because of an increase in long-haul flights.

He wants to improve access to Heathrow by public transport, either with a high-speed rail hub or new interchanges.

“Heathrow is currently running at 99% capacity and, given the projections for long-haul traffic over the next 20 years, an increase in airport capacity in the southeast is needed,” he said.

Adonis is a self-confessed train lover rather than a motoring enthusiast. He owns a Vauxhall Vectra, which he rarely drives, while his ministerial car is a Toyota Prius.

“When I say I drive a Vauxhall Vectra, I drive it a few miles every weekend to do the shopping and take the children to their events. Virtually all my long-distance journeys are made by train,” he said.

He is, however, anxious not to antagonise the motoring public. In the interview he ruled out a national road pricing scheme, and committed the government to relieving congestion by opening up the hard shoulders on motorways to traffic, despite concerns among some motoring groups over safety. Work is under way on hard shoulder schemes on stretches of the M6, M1, M25 and M4.

“Hard shoulder running produces a big increase in capacity but at a fraction of the cost of motorway widening and much less of an environmental impact. It has no impact on safety whatsoever,” Adonis said.

Driving a Smart car, he was joined by Lord Drayson, the Science minister, who drove a Mini E model.

The Mini E will be tested in Oxford, in one of eight trials in Britain in which members of the public and businesses will be invited to take part.

Other areas where tests will take place include Glasgow, Coventry, Birmingham, Newcastle-upon-Tyne and Oxford. Cars being tested include a Ford Focus battery electric vehicle, Nissan vehicles and Peugeot electric cars.

The Government is putting £25 million into the project which is being organised by the Technology Strategy Board.

Lord Adonis said: "People have doubted that electric and ultra-low carbon vehicles would come on to the market soon but they are available and the public will be able to drive them.

"We hope it will only be a short period of time before these vehicles come on to the market. We want Britain to be at the forefront of ultra-low carbon automotive technology, blazing a trail for environmentally friendly transportation."

Lord Drayson said: "This is the world's largest ever trial of electric vehicles."

He added that it was important that hard data on just how the vehicles worked and were driven was gathered in.

"If we can make the UK the best place to do the research and development into these vehicles, we can help secure the future of the UK motor industry," he said.

Iain Gray, the Technology Strategy Board chief executive, said: "The journey towards low-carbon transport will not be easy but the demonstrator programme which we are launching is a major step in the right direction."

Edmund King, president of AA said the announcement was "a great leap forward on the road to a lower-carbon future", while Society of Motor Manufacturers and Traders chief executive Paul Everitt said ultra-low carbon vehicles were "now mainstream business for the motor industry".

The project will use electric car batteries to store excess energy and feed electricity back into the grid when the weather is calm

Cars could be the solution to the intermittent nature of wind power if a multimillion European project beginning on a Danish island proves successful.

The project on the holiday island of Bornholm will use the batteries of parked electric cars to store excess energy when the wind blows hard, and then feed electricity back into the grid when the weather is calm.

The concept, known as vehicle-to-grid (V2G) is widely cited among greens as a key step towards a low-carbon future, but has never been demonstrated. Now, the 40,000 inhabitants of Bornholm are being recruited into the experiment. Denmark is already a world leader in wind energy and has schemes to replace 10% of all its vehicles with electric cars, but the goal on the island is to replace all petrol cars.

Currently 20% of the island's electricity comes from wind, even though it has enough turbines installed to meet 40% of its needs. The reason it cannot use the entire capacity is the intermittency of the wind: many turbines are needed to harness sufficient power in breezes, but when gales blow the grid would overload, so some turbines are disconnected.

So the aim of the awkwardly named Electric Vehicles in a Distributed and Integrated Market using Sustainable Energy and Open Networks Project – Edison for short – is to use V2G to allow more turbines to be built and provide up to 50% of the island's supply without making the grid crash.

Each electric vehicle will have battery capacity reserved to store wind power for the island rather than for travelling. This means it acts like a buffer, says Dieter Gantenbein, a researcher at IBM's Zurich Research Laboratory. IBM is developing the software needed for the island's smart grid, and will showcase its work next week. When the cars are plugged in and charging their batteries, they will absorb any additional load the grid cannot cope with and then feed it back to power homes when needed, he says.

"It's never been tried at this scale," says Hermione Crease of Cambridge-based Sentec, which develops smart grid software. There are plenty of smart grid trials already under way, usually involving the use of software to monitor and manage supply and demand, for example, by temporarily switching off industrial cooling units during periods of peak load, she says. But unlike these so-called "negawatt" approaches, proving that cars can be used as part of the grid has yet to attempted.

Andrew Howe of RLTec in London, another smart grid technology firm, says many important questions need answers. It is not clear, for example, how the cost and lifetime of batteries will influence the economics of such a system.

These are the kinds of issue the project seeks to shed light on, says the project manager Jørgen Christensen of the Danish Energy Association, which with technology companies Siemens and Dong and the government are running the scheme.