Triple Crunch Log Jeremy Leggett

BP man warns there is more carbon in reserves than needed to trigger dangerous climate change. Jan-Peter Onstwedder, BP's most senior risk manager (global head of risk) until December, now calculates potential carbon emissions from proven oil, gas and coal reserves at around 700 billion tonnes, compared with some 500 billion tonnes that can be emitted before intolerable risk of triggering dangerous climate change. “It prompts the question where does more exploration fit, do we already have all the reserves we possibly need?” he says. This fits with other such studies. For example, Malte Meinshausen of the Potsdam Institute calculates that no more than 400 billion tonnes of carbon can be emitted this century to have at least a 50:50 chance of staying within 2 degrees.¹⁹⁰

14.2.08. Investors remain keen on cleantech and solar through the credit crunch. New Energy Finance figures more than $117bn (£60bn) was invested in clean tech in 2007, 41% up on the year before, including $8.5bn in venture capital finance, up 27%, and $19bn raised in the public markets, up 80%. New funds include vehicles from HSBC, F&C, Schroders, Virgin and DWS. Young US solar companies raised $702m of early-stage venture capital funding in 2007, up from $181m in 2006. Clean energy asset financing raised a record $54.5bn notwithstanding the credit crunch. Impax, for example, focuses through a private-equity fund on big wind and solar projects. Why? “They have got low technical risk and scale, which means you can put a lot of money to work,” Ian Simm of Impax says. “They also have good cashflow profiles from an early stage and don't need favourable markets for an exit.”¹⁹¹

Energy firms will act on CCS only at a carbon cost around $100, Shell says. The cost will have to triple, in other words. Jeremy Bentham, the VP of business environment, says $50-100, and “probably” $100. Governments must give business certainty via regulatory change “within five years.”¹⁹²

15.2.08. UK third worst in EU for renewable energy use. Only Malta and Luxembourg are worse. 270 solar PV systems were installed on houses in 2007, compared to 130,000 in Germany. Total PV installed was UK 6 MW (16MW cumulative) vs Germany 1,100MW (3,800 cumulative, 237 times more). DBERR LCBP remains £10m underspent on solar, wind and micro-hydro for households, more than half the £18m allocated through March 2009, as a result of the £2.5k cap placed on systems in May. Each technology shows declining figures in 2007 vs 2006.¹⁹³

16.2.08. Dublin wants right to inspect new British nuclear power plants, if built. Environment Minister John Gormley, a Green, says: “There will now have to be greater co-operation in relation to this issue. That is where, in terms of north-south and east-west co-operation, we can make progress. We have a different perspective on nuclear power than Britain.”¹⁹⁴

17.2.08. UK government nationalises Northern Rock. The first run on a British bank for a long time has ended in a way the neoliberal free marketeers have strenuously resisted.

Stock market bubble in renewables may have burst, FT reports. Shares in the wind, solar and biofuels sectors have slumped since the start of the year on growing investor fears of recession, falling 25 per cent this year after peaking at the end of 2007. Stocks had risen 200 per cent between January 2006 and the end of December 2007. Suntech has underperformed the S&P 500 index by about 35 per cent this year after its share price soared close to 300 per cent at the end of 2007 from its launch in 2005.¹⁹⁵

18.2.08. Oil majors flock to bid as Iraqis open fields via tender. One anonymous exec, involved in the process: “We will do the acrobatics that the Oil Ministry requires of us, but in the end big oil companies have similar financing, shareholders, pension schemes and analysts, and with poor security and absolutely no legal framework in place, it is going to be a long time before we can persuade them that it is a good idea for the company invest $5 billion to $10 billion in Iraq.”¹⁹⁶

Nigerian violence is failing to shift the international oil companies. A two-year wave of violence by the Movement for the Movement of Emancipation of the Niger Delta, aiming to seize local control of the oil, shows no sign of abating. But the companies are standing firm, helped by the fact that much of the interest is offshore.¹⁹⁷

Most western Europeans fear Russia as an unreliable energy supplier, poll shows. An FT/Harris poll in UK, Germany, France, Italy, Spain and US shows a clear majority in the first four countries opposed to Russian investment in national companies. But a majority say they are still willing to pay nothing extra for renewable supplies. Of those who would, the majority would only pay 5%. Majorities in Italy and the US favour more nuclear plants, and majorities are against in the UK, Spain and Germany, with France divided.¹⁹⁸

Saudi Aramco CEO calls for “better planning and co-operation between industry and governments” if global demand for liquid fuels is to be satisfied for the “many decades” it can be because of the 3 to 6 trillion barrels of recoverable conventional and unconventional oil. Speaking at the CERA annual meeting, Abdallah S. Jum’ah sees “tremendous potential” to discover more resources on new frontiers, but - interestingly – emphasises unconventional. “We should tap the vast potential of nonconventional resources,” with co-operation of “ground-breaking” technologies, in addition to the allocation of necessary gas and water resources.” Note: he says SA is raising recoveries to 70% in some fields (or original oil in place). Intends to invest $90 bn upstream and downstream in SA and around the world over the next 5 years. SA has 3 mbd of new capacity in progress, and offsetting depletion this will take Saudi Arabia from 11 mbd now to 12 mbd next year.¹⁹⁹

19.2.08. Nigerian gas, being mostly shallow offshore and onshore in the delta, is coming under threat. The global gas market is mostly regional, so can’t afford many failures of far-flung LNG supply. Nigeria is the sixth biggest exporter, and according to Bernstein Research the violence there is in danger of threatening the planned tripling of capacity by 2012: one fifth of the incremental supply the world expects between 2010 and 2015 is in danger, in other words. Both Europe and the US need more gas and the idea is for the two to bid up prices to attract LNG tankers one way or the other across the Atlantic. But….²⁰⁰

Oil breaches $100 again, setting new record at $100.10. This time the jitters come from suspicions that OPEC will tighten supply when ministers meet 5 March.²⁰¹

Porsche plans to take London mayor to court for CO2 charge. Will seek a judicial review of Ken Livingstone’s plan to put a £25 a day charge on the most polluting cars, those emitting more than 225g/km of CO2.²⁰²

First Chinese coal to liquids plant may open within weeks. Shenhua’s plant will be the first of its kind in the world. Three similar Apartheid-era plants in South Africa produce a third of the nation’s energy needs (check that). The IEA says CTL plants are planned in Japan, US, Australia, NZ, India, Indonesia, Botswana and the Philippines. The US Air Force has flown a B52 on fuel made from coal. The technology is economic above $25-40 barrel for oil. The Chinese government has expressed concern about environmental impact, but two more plants are under construction nonetheless. Converting and burning the liquid from coal emits twice the greenhouse gas of diesel. Of the 30 or so plants underway around the world, only one (in Australia) plans CCS.²⁰³

20.2.08. Centrica reports 50% rise in pre-tax profits to £1.9bn, and looks to the ME for future supply. CEO Sam Laidlaw says the priority for 2008 was to invest upstream in gas assets and power supply so as to reduce exposure to volatile wholesale gas and electricity markets. Own-source supply is 25% and he wants 35%. he will look to buy North Sea gas fields, and for the longer term is talking LNG with governments in north and west Africa, and the ME.²⁰⁴

UK transport secretary orders biofuels review. Ruth Kelly says the 2.5% target in transport fuel by April will stay in place though.²⁰⁵

21.2.08. Ofgem launches an investigation into UK gas and electricity prices. Five of the big six have put their prices up. Energy Watch says they are colluding. Lombard says they need the profits to fund the future.²⁰⁶ Nils Pratley says the enquiry is overdue, and some of BG’s argument are “risible” e.g. citing the 10%-plus margins of retailers like M&S as though it were in the same business.²⁰⁷

Chinese jet fuel demand set to grow by 11-13% each year until 2020. So say Chinese aviation industry experts at a conference in Hong Kong. Average was 14% pa between 1980 and 2005. There were 152 civilian airports in China last year. There will be 192 in 2010 and 244 by 2020. There were 185m passengers in 2007. There will be 270m in 2010 and 770m by 2020. The Chinese economy has been growing at 10% or more pa for the last five years.²⁰⁸

Paraffin shortages hit Malawi and prices soar for consumers with no other options. An illegal paraffin trade has sprung up and poor quality paraffin being sold. John Keane witnesses several long paraffin queues and hears similar stories in Zambia.²⁰⁹

22.2.08. Shell pleads with SEC to allow it to book unconventional oil and gas as reserves. The SEC normally classifies tar sands as a mining operation and discounts them from bookable reserves. Shell is expected to announce next month that it has barely replaced its reserves in 2007. They will be lower because of Sakhalin 2 and the high oil price and its impact on production-sharing agreements, which mandate lower production at higher oil prices. The long term strategy of going for unconventionals is worrying investors, the FT says.²¹⁰

RWE says it will triple renewable capacity in its growth strategy. Wind, solar, wave and biomass will all be provided, CEO Jurgen Grossman hopes. RWE has set a CO2 emissions reductions target of 60m off its current 187m tonnes, by 2015 (32%). The megamergers that have grown Iberdrola, Enel and E-On are not on RWE’s agenda.²¹¹

23.2.08. Texan oil billionaires rue the switch of power and wealth from Texas to the Middle East. George Mitchell and T. Boone Pickens used to have many fellow wildcatters around them on the Forbes 400 list, but no longer. The CEO of Halliburton has moved to Abu Dhabi. “Houston has got to fight back,” says Mitchell.²¹²

Self-policing carbon rationing network – carbon rationing action groups (CRAGs) - spread in UK. They tend to number around ten people, meeting in homes and pubs, who pledge reductions and exact fines or “carbon community service, when they fall short. Most try to reduce their 6 tonnes per average household by a quarter. There are 16 now in the UK.²¹³

24.2.08. Virgin 747 flight is partly fuelled by biofuels. One tank has 20% biofuel, from coconut oil. Branson says that it fully commercial biofuels will likely come from jatropha and algae, but this experiment is a start: a “breakthrough” showing that there are alternatives.²¹⁴

Soaring food prices cause UN to warn of rationed food aid. The World Food Programme is drawing up plans for rationing. The budget requirements are growing at several million dollars a week. The WFP talks of a “new area of hunger.” Prices of agricultural commodities such as rice, wheat, corn and soybeans are rising because of population growth (and the growth of prosperous populations in India and China), more frequent floods and droughts, and the biofuels industry sucking up grains.²¹⁵

National grid fined by Ofgem for restricting competition in the domestic gas meter market. The offense, preventing gas suppliers to contract with other firms for cheap metering deals through the terms of contracts in 2004, was called a “serious breach of competition law by Ofgem, but the fine was only £41.6m. NG has a £260m turnover from gas meters.²¹⁶

25.2.08. The WFP deficit is half a billion dollars, and without it millions more will starve, UN says. The annual budget for 2008 is $2.9bn (£1.5 bn), but food prices have gone up 40% in the last year (75% since 2005, having fallen in the three decades before) and fuel prices have soared too. There is food on shelves, but people are being priced out. As a result, there are food riots in countries where they have been seen before. Food riots have taken place in Morocco, Yemen, Mexico, Guinea, Mauritania, Senegal and Uzbekistan. This year one third of the US maize crop will go to biofuels. Meat is also a problem, as meat consumption rises in newly affluent countries and more grain goes to cattle.²¹⁷


“For the last fifteen years Russia has done practically nothing to reproduce its mineral wealth, but has been scattering the inheritance it received from the previous generations.”
RAI Novosti

Russian newspaper

February 2008
BP, Shell and BG plead for tax breaks to hit North Sea production targets. Ministers want them to lift production from 2.8mbd today to 3 mbd by 2010, but they won’t come close without tax breaks they say. Oil and Gas UK says 2.4 mbd is more likely. Companies are investing at £3 bn a year but inflation (steel, manpower etc) is running at 15-20% across the North Sea. Meanwhile, PWC calculate that three quarters of the Treasury’s 12.8 bn from 74 biggest UK companies in 2007 comes from energy banking firms.²¹⁸

Russian senator doubts Russia can meet energy commitments to the west. Senator Gennady Olenik, who has worked in the oil industry, tells a RIA Novosti news conference that private companies, since being created in the early 1990s, have not been prospecting in the oil-and-gas rich north because no incentives have been made available for doing so. RIA Novosti: “…In this context, reports about an imminent reduction in oil production in Russia are a source of concern. We have been giving promises to Europeans, Chinese and other foreign partners, but will we be able to keep them?” A former Soviet Minister of Geology, Yevgeny Kozlovsky, backs this up. He recalls that 2,000 “major deposits of natural resources” determined the economic growth of the country. No major deposit has been found in the last 17 years. The Ministry and Natural Resources is urgently drafting proposals to boost stagnant investment.²¹⁹

25.2.08. UK government threatens windfall tax for energy giants over energy bills. Cut bills or else, Chancellor Alistair Darling says. Ofgem proposed a windfall tax last month. Now 4.5 m are in fuel poverty (>10% disposable income has to be spent on energy), up from 4 m last year. The companies will be handed £9bn as part of the second phase of the EU emissions trading scheme from 2008-12. Labour last slapped a windfall tax on the utilities in 1997.²²⁰

27.2.08. EC launches court proceedings against UK and Belgium for energy efficiency failures. They are not implementing the 2002 Energy Performance in Buildings Directive satisfactorily, the Commission alleges.²²¹

BP floats the idea of selling part of its alternative energy operation. The company thinks it is worth up to $7bn (£3.5bn), only around 3% of its market capitalisation ($2 bn for wind farms and $2-4bn for its solar operation). Tony Hayward says he is looking to realise the value by selling stakes or forming joint ventures and other partnerships. BP has invested $1.5 bn 2005-6 and will invest another $1.5 bn this year, some 7% of total capital spending of $21.5 bn.²²² Note: the presentation on strategy was Hayward’s first, ten months into the job. The company claims it replaced 112% of the reserves it produced in 2007, and has 17.8 bboe of proved reserves under the SEC definition. He says BP can produce a steady 4 mbd out to 2020 even without any more discoveries, and “we expect to do much better than that.” He projects 4m next year up from 3.82 this, and 4.3 mbd by 2012 assuming avge £$60 oil (if the price is higher, production is lower because of production sharing agreements with governments, who take a higher percentage of the oil). Of the $21-22 capital spending $15 bn goes to the upstream. Thunder Horse is due onstream at the end of the year.²²³

CERA report finds the aggregate decline rate of producing oilfields is 4.5% a year (3.8 mbd), not the 8% (9 mbd+) that some quote. The report, by CERA and HIS, analyses 811 oilfields, around two thirds total global production. The rate is not increasing with time. 41% of production is from fields in decline phase. The rest are in the build-up and plateau phases. CERA believes the study reinforces their view that global liquids capacity can grow to 112 mbd by 2017.²²⁴

Exxon appeals in the Supreme Court against Exxon Valdez punitive damages. Still trying to avoid penalties nearly 20 years after the case started, Exxon argues that it should be forgiven the $2.5 bn damages previously awarded in court to victims of their drunken captain. Exxon’s lawyer is a former acting solicitr general. He argues that spending $3.4 bn on clean up as they have is punishment enough.²²⁵

Iberdrola files complaint against EDF over competition as EU looks set to fail in “unbundling”. A complaint lodged with the EC alleges that the state-controlled French giant is unfairly protected by the government, and asks the Commission to investigate whether this breaches European law. EDF has cited Iberdrola as a takeover target.²²⁶ Meanwhile, the EC looks set to lose in its effort to “unbundle” ownership of the energy giants. The Competition Commissioner is fearful that they bar new operators and maintain artificially high prices. France, Germany, and eight other countries join the companies in resisting the the proposal and this seems set to a result in no change.²²⁷

Richard Branson says peak oil could happen within 6 years. At a press conference in Virgin’s Hanger at Heathrow (see 25^th), he says: “Apart from global warming, in about four or five years’ time there’s going to be more demand for fuel than there is fuel on this planet. So fuel prices will go through the roof, and so planes, ships, we’ve all got to come up with alternatives”. Virgin has ground tested a 40% biofuel mix in aviation fuel, and sees the main contribution coming from biofuels that don’t compete with food, such as jatropha and algae. Aviation today uses 5 million barrels of jetfuel per day, or 238 million tonnes per year. Assuming an ambitious 2 tonnes of jatropha oil per hectare, replacing 238 mty would take nearly 1.2 million square kilometres. As for algae, Boeing claims that a typical pond could produce 10-20,000 gallons of fuel per year per acre. A land area roughly equivalent to Belgium would be needed for current jetfuel by that reckoning. Dr Ami Ben Amotz, senior researcher at Israel’s National Institute of Oceanography, has been producing algae commercially for twenty years. He claims maximum practical output will be about 4,300 tonnes per acre. On that reckoning a land area almost 2 ½ times the sized of Belgium would be needed.²²⁸

First moves to meet nuclear skills demand as leading university sets up a training centre. The University of Manchester is setting up a Centre for Nuclear Energy. More than 9,000 graduates will be needed in the next ten years. British Energy says 30% of staff are set for retirement in the next ten years. Another problem is that numbers of engineering and physics graduates are falling.

Water diversion for the Beijing Olympics threatens millions, Chinese official warns. Provinces have been told to pump clean water to the capital to ensure potable supplies. Meanwhile Saudi Arabia announces a phased plan to halt wheat production because of concerns about water supply.²²⁹

28.2.08. Cost of Iraq and Afghanistan wars is $16 bn a month, Nobel prize-winning economist calculates, a sum equivalent to the entire annual budget of the UN. This is on top of regular Department of Defense expenses. Joseph Stiglitz publishes a book, “The Three Trillion Dollar War,” referring to the US costs alone to date. The UK rest of the world shoulders about a further $3 trillion. The current operating costs of the war cost each US household $138 every month. The annual cost to the US of the rising price of oil runs at $25 bn at the moment, and a projected extra $1.6 trillion over the period to 2015. Haliburton has received more than $19 bn in untendered contracts for work in Iraq. Much cash goes missing, including the infamous $8.8 bn for the Development Fund for Iraq. America is currently spending $5 bn a year in Africa. Americans will have paid $1 trillion in interest alone on the money borrowed to fight the war by 2017: a couple of hundred billion a year. Bush cut taxes at home while waging costly war, so having to borrow more. The USA is now so deep in debt that it can’t easily bail out its own banks. Funds from abroad bailed out Merrill Lynch and Citibank.²³⁰

In a surprise move, Eon agrees to break itself up so as to escape anti-trust fines. Eon, the number two European electricity and gas group after EdF (by market cap), has offered to sell off its electricity grid and some of its generation (4.8 GW, some 20% of all their generation), a package worth some €5 bn, in order to escape possible anti-trust fines covering two cases against it of €7 bn. German politicans, EdF, RWE and others are furious. Vattenfall, however, says it may also sell its grid.²³¹ Background: The EU competition commissioner, Neelie Kroes, aims to unbundle the utilities with a combined strategy of anti-trust and legislation. She held an anti-trust review in 2006, finding severe market distortions and chronic lack of competition. She has anti-trust cases outstanding against EdF, Electrabel and others.²³² What happens now? The attitude of investors will be important. Precedent: The 1997 unbundling of BG led to much added value for shareholders. Note: Eon has not offered to sell its much more valuable gas transmission network.²³³ The deal took a month of secret talks, with the EC confident they could make the charges of manipulating wholesale prices and other anti-competitive practices stick. Eon denies any wrongdoing but has caved in, fearing potential huge expossure to dmages actions by customers, plus the fines.²³⁴

Oil price hits record high approaching $103 after fire at UK gas terminal. Bacton in Norfolk handles as much as a third of British imports. Though it is soon put out, price is still impacted because it triggered a rush of speculative buying in New York.

1.3.08. FAO’s global food price index rose 24% in 2007, joining oil price rise to stoke inflation. This was the biggest rise since 1990. Demand from China and drought played a big part, as did the biofuel boom, which has hiked the price of foodstuffs such as Mexican tortillas and American beef. Food imports cost a record $745 bn in 2007, up 21% on 2006, the FAO estimates. The year on year increases were dairy 84%, oils 66%, grains 45%, and meats 16%.²³⁵