Triple Crunch Log Jeremy Leggett

2.9.08. Kingsnorth activists use prevention of loss of life from climate change as defence as they go on trial for causing £30,000 damage to a tower on the power plant (by painting “Gordon” on it. They were unable to complete the “bin it” part). This is the first time such a defence has been heard in a UK court.

3.9.08. Oil company profits fall despite rising oil price, study shows. IHS Herrold, a research firm, and Harrison Lovegrove, a corporate finance firm, study 232 oil companies and find no collective increase of reserves (down 1.5%) and only a slight increase in production (1.3%). Profits fell 3.5% to 19% in 2007 compared to 2006 as costs rise. Capital expenditure was 342bn up from $179bn in 2003.⁷⁶⁹

TNK-BP oligarchs get their way on all four demands as CEO Dudley departs under “peace” deal. A new Russian-speaking CEO will be appointed. The 50-50 structure of the partnership stays in place, but 20% of the company will be floated. the new board will have eleven directors, four from each side and three independents. the two Russian shareholder managers, Viktor Vekelsberg and German Khan, will stay on the management board.

Falling oil means many collapsing hedge funds. As many as 679 hedge funds may have been liquidated this year against 987 launched, Hedge Fund Research calculates. Oil has lost 40% of its price increase this year, and now sits just above $105.⁷⁷⁰

US environmentalists are halting a wave of new American coal power plants. Four years ago, the Bush administration drew up plans that included 150 new coal plants, together capable of emitting around 1 bn tonnes of CO2 annually. Today just 14 have been developed, and even they are under legal attack. Plants have been forced out of court in at least 30 states. Six have issued moratoria: California, Washington, Oregon and the conservative states of Florida, Idaho and Kansas. This is a huge and largely quiet, locally based, victory for environmentalists.⁷⁷¹

Huge greenhouses twinned with concentrating solar power make cropland without wells. As the name implies, the Sahara Forest Project is designed to produce energy plus strips of fertile land. Solar farms run seawater evaporators and pump damp, cool air through the greenhouses. The water vapour is condensed at the far end of each greenhouse, and used to irrigate crops in the immediate vicinity. Demonstration projects are up and running in Tenerife, Oman, and the UAE. The designers contend that virtually any vegetable can be grown in the conditions generated. Nutrients come from local seaweed, or the sea water.⁷⁷²

Tesco boss Terry Leahy sets out green vision. “If we want long term growth, we must go green.” Every £1 invested in climate change saves our children up to 20. “Failure to act means risking economic and social disruption on the scale of the great wars and economic depression of the last century.” The Tesco strategy is three pronged: green the company, green the suppy chain, and help the customers go green. The aim is to cut emissions from stores and distribution centres 50% by 2020. By end 2008, UK energy use per square foot will be half what it was in 2000. “We are achieving this while Tesco grows. That’s the critical point: the choice is not ‘green or grow’. That is a false choice. You can do both.”⁷⁷³

European PV industry says it can contribute 12% of EU electricity by 2020. The European PV Industry Association (EPIA), which has a history of very cautious estimates of industry growth versus real achievement, announces its latest conclusion at a trade fair in Valencia. 420 TWh would need to be generated to hit this target (i.e. a total European electricity market of 3,500 TWh is assumed by 2020). In this calculation, PV is at grid parity in 2010 in Spain, and most countries not long thereafter. PV would be addressing 60-90 percent of the market.⁷⁷⁴ (L)

4.9.08. Nabucco pipeline backers insist it is still on track. The €7.9bn project, backed by six nations, is due to begin construction in 2010 and ship gas 3 years later, from Azerbaijan, where new gas fields are due onstream then. Note: Russia ships 147.5 bcm in 2007, 50% of European imports. Norway shipped 86.1. The UK market, Europe’s largest, was 91.4 bcm.⁷⁷⁵

6.9.08. The government has a £1bn windfall as a result of the Non-Fossil Fuel Obligation, a scheme set up in the 1980s to support renewables, guaranteeing a fixed price for renewable electricity for 15 years. So the Guardian reveals. The NFFO ran at a loss at the beginning, but higher prices now mean the government is quids in – to the tune of £7 for every household in the UK. The Tories call it a “stealth tax.” This could go to help pensioners, as could some of the £257m paid by UK energy companies to shareholders last year.⁷⁷⁶

7.9.08. US government takes control of Fannie and Freddie in the world’s biggest financial bail out to date. Together the two vast institutions have $5.4 trillion in outstanding liabilities, guaranteeing as they do more than half all US mortgages. The government will inject at least $100bn into each of them, will start buying mortgages backed by them, and extend unlimited credit until the end of 2008.⁷⁷⁷ The official jargon is “conservatorship,” but it is really nationalisation.

True US budget deficit is now over a trillion dollars, if future social security obligations, Medicare, Medicaid, and the cost of the war are put on the balance sheet. Currently they are kept off it: just like a corporation.⁷⁷⁸

8.9.08. The federal bailout has triggered a massive CDS default, because the taking of control has to be regarded as a bankruptcy in the credit derivatives market. The exact amount of CDS relating to the Freddie and Fannie is not known, but they are widely traded, and the value could be huge. Note: the total value of the entire credit derivatives market is $62 trillion (sixty two trillion). Analysts at Lehman say: “there is likely to be a considerable amount of notional protection outstanding.”⁷⁷⁹

Shell agrees the first oil or gas deal with the Iraqi government since the invasion: a gas deal worth $4bn. The government meanwhile has written to all oil companies sying it has abandoned its idea of awarding short-term technical support contracts. It will go straight to the big game of the longer-term development contracts. Shell’s deal involves the 700mcf of gas flared from oil operations in the south: around enough to power the entire country.⁷⁸⁰

9.9.08. Brown and Obama not “seizing the social democratic moment” by pinning the crisis on the right. The crisis was born in the lassez faire policies of conservative and Republican governments. Not to make this clear is “dumb politics,” Larry Elliot says.⁷⁸¹

US housing crisis spreads to prime loans. 6.4% of all loans are overdue by 30 days or more, a quarter of them prime loans. US house prices have been falling for three years, down by 25-30%.⁷⁸²

UK lags behind in gas storage boom. Germany and France can store 20% of annual consumption compared to the UK’s 4% (90% of it at Rough, a gas field with 100 bcf capacity controlled, and Hornsea, a salt cavern controlled by SSE). Yet the UK is forecast to import 80% of consumption by 2015. A boom is underway in siitable sites, with more than a dozen projects in preparation. Eni has paid over the odds for an acreage of good storage in the southern North Sea.⁷⁸³

10.9.08. US oil regulators accept ski holidays, cocaine and sex from the companies they regulate, an says US inspector general. The Mineral Management Service has “a culture of substance abuse and promiscuity,” the inspector general, Earl Devaney, writes in a memo to the Interior Secretary. He is investigating royalties-in-kind payments by companies to government, where oil companies are allowed to pay royalties instead of tax: a $10bn a year source of revenue to government. 55 staff at the MMS office in Denver admit to accepting cash and gifts over 4 years to 2006 from companies including Shell and Chevron.⁷⁸⁴

Brazil may completely nationalise its offshore oil. The recent finds, which Tony Hayward says are as significant as the North Sea, may be given to a new national oil company 100% owned by the government. Petrobras is controlled by the state via voting stock, but most capital is in non-voting shares held by foreign entities who would lose out under the proposals. 16 probes into the pre-salt layers so far have all found oil, but costs are rising hugely.

11.9.08. Holders of Freddie and Fannie credit default swaps face up to $25bn losses. Up to $500bn of credit derivatives in default – the latest estimates of dealers and analysts - could yield only 95c in the dollar, leaving the banks and insurance companies that hold them facing a bill of up to $50bn.

Falling oil price puts oil development projects at risk. Total says that some its most expensive projects are close to no longer being viable. Deep water projects off Angola need $90 a barrel to hit a 12.5% IRR. Tar sands projects need $90.⁷⁸⁵

UK government’s much-discussed energy efficiency package is announced at last and greeted as “a mouse of a proposal” by back bencher Frank Field. It may insultate only 150,000 extra homes this winter, and energy companies will pass the cost on to consumers, says the Association of Electricity Producers. The programme would involve legislation requiring energy companies to spend some £910m on top of the existing requirement they have to spend £2.8bn over the next three years. It would entail them investing in energy efficiency directly in homes for the first time. The proposals involve offering free cavity wall and loft insulation to those over 70, cash incentives of 50% off all insulation to all households, more grants for central heating and energy efficiency measures for low-income and pensioner households (the Warm Front Programme, where an extra £74m of grants over two years does not restore a £55m cut in the programme last year), cold weather payments (triggered after 7 days), and a freeze on this years bills for the 600,000 poorest households. Backbenchers still want a windfall tax on the energy companies.⁷⁸⁶

Greenpeace activists, arguing climate change as defence, found not guilty of damaging Kingsnorth. Six of them are cleared of criminal damage by a jury at Maidstone Crown Court by majority verdict of a jury of 9 men and 3 women. In a landmark trial, they admitted painting a slogan on the smikestack, but argued that they did it to prevent a greater crime. Jim Hansen gave evidence of the defence. Hundreds more have pledged to take similar action against expansion of coal: a clear problem for the government.

Brazil may set up a 100% government-owned oil company to exploit its new oil finds, which are “as significant as the North Sea,” says Tony Hayward. Petrobras is currently government-controlled via voting stock, but foreign shareholders hold 60% of non-voting shares. The size of the sub-salt fields is not known. The one measured field is 5-8bb. 16 wells sunk to date have all found oil. Ministers are assuming there is 50-80bb in all. Petrobras thinks it can develop them on its own, but keeping overseas investors at bay may make that a challenge, an analyst says.⁷⁸⁷

12.9.08. Lehman, under attack, fights to stay afloat. Investors give a thumbs down to a survival plan, and the bank is in a last ditch effort to find a buyer, or buyers. Shares have halved this week.

Polluters will make hundreds of millions from over-allocation of European carbon emission permits. The European Commission has allocated so many permits that they can be sold in volume for cash, a Guardian investigation shows. Take Castle Cement, which makes a quarter of UK cement. They emitted 2.1 mt of CO2 in 2007, but have been awarded 2.9 mt for each of the next 5 years. As many as 200 companies have been overallocated in this way. Only the electricity sector comes up short on allocations, by 70mt.⁷⁸⁸ Note: A tonne of CO2 currently trades under the EU ETS at €23 (£18), around twice the price charged by offsetting companies. Most analysts think we need €75 to get the scheme working. Over-allocation means we won’t get close.

Hurricane Ike devastates Coastal Louisiana and Texas leaving millions without water and power. Curfew imposed in Houston, fifty miles inland from Galveston, which bore the brunt. 14 refineries are shut, a quarter of US capacity.

13.9.08. As the British party conference season gets underway, Labour ponders ever larger deficit. Total government spending this year is £536.35bn. The biggest line items in order of size: NHS £90.7, State pensions £57.6, Schools £41.2, Defence £36.2, Debt interest £29.9.⁷⁸⁹ (L)

15.9.08. DAY ONE OF THE 2008 CRASH: Monday

Lehman goes bankrupt in the early hours, Merrill Lynch folds into Bank of America, and AIG (one of the world's biggest insurers) has asked the fed to pay its bills for failed insurance of credit. The Dow Jones falls its furthest since the day following 9.11. The fed has allowed a big financial institution to go under for the first time. Up to now they have been bailing them out with the peoples' money (Bear Stearns, Fannie Mae, Freddie Mac, and the BoE's bailing out of Northern Rock). On the Today programme a well-known City of London venture capitalist is heard calling for all the bosses of the loss-making banks to be fired on the grounds that the people who presided over the unregulated greed-fest were still mostly in post.

Global oil exploration investment was flat in 2007, study finds. 232 oil and gas companies studied by HIS Herrold and Harrison Lovegrove invested $402bn, unchanged from 2006. yet revenues were 10% higher, at a collective $931bn, and net income 2% higher at $246bn. Upstream profit margins were lower for the third successive year.⁷⁹⁰

Investors are warned that any assets in the tar sands involve growing carbon risk. The Social Investment Forum organises a meeting in London where lead ethical investors and environmentalists tell investors that there is appreciable “carbon risk” in tar sands projects, wherein Paul Monaghan of the Co-op calls for a moratorium on investment. Assets could become economic as carbon costs rise. Platform argues that tars sands projects produce up to 5 times more CO2 than normal oil projects (80-135 kg per barrel vs 28.6 kg). Shell says only 15% more. Only 2.4% of Shell production comes from tar sands, but more than 9% of reserves.⁷⁹¹ A group of US and Canadian investors has written to the SEC urging them not to soften the rules on allowing tar sands to be counted in reserves, and to take carbon into account. They include Calpers and Ceres Power.⁷⁹²

Report for government shows major scope for solar on non-domestic buildings in Britain. Consultants Element Energy calculate that 33 GW could be installed with the potential to provide >25 TWh per year on 1.5 million individual sites, if current economics were not a constraint. With a level of subsidy at 5 ROCs per MWh, only around 1GW could be installed by 2020. At a feed-in tariff of 40p per kWh, however, the potential of all the buildings in the non-domestic sector could be unlocked by 2014, and installation at a constant 5% per annum, 15.4 GW could be installed by 2020. That would provide 12.5 TWh/year of electricity, some 4.8% of the UK 2020 renewable energy target and more than 10% of the renewable electricity target, saving 5.4 million tonnes of CO2 per year.⁷⁹³ (L) Note: But why would the uptake be constant and not accelerating after grid parity? Also: Their figures for “large” systems above 100 kWp are a starting price assumption in 2008 of just £3,858/kWp falling to £2,058/kWp by 2018, then £1,956 in 2019 and £1,855 in 2020 (i.e. less than £2 a watt: at 800 kWh per kW over 25 years, that is 9 pence a kWh in today’s prices!).  The figures for what they describe as “medium” systems of 10-100 kWp are slightly higher. BERR used significantly higher figures in the original renewables consultation document, and on which the very unhelpful comparisons with solar thermal and other technologies were based. 

16.9.08. DAY 2: Tuesday

The Fed lends $85bn to AIG. AIG’s market capitalisation was $173bn a year ago, now it is $7.5bn. Its shares fall 40% in a day. According to some analysts, AIG failing could result in $180bn of losses to other institutions, wiping out half the capital companies have raised to date to deal with the credit crunch. With a trillion dollar balance sheet – much bigger than Lehman - the fed probably dare not let it fail, for fear of a chain reaction of failures. It has little choice but to pump in liquidity.

Fears grow for HBOS, where £1bn of deposits are withdrawn in what threatens to be a Northern Rock-type run on the bank. HBOS, which has more private shareholders than any other company on the stock market, also suffers a 40% share price fall. A year ago its market capitalisation was $70bn, now it is 22bn. Of a total half year turnover of £6.47bn and profit of £848m before tax, the biggest sector was high street banking with a £2.7bn turnover and a £992m profit. The smallest sector (after corporate banking, international, and insurance investment: all of which were profitable), was Treasury and asset management, with a £384m turnover and …..a £871m loss after a £1bn credit crunch hit. This is a big argument for reinstating the firewall between investment banking and retail erected in the 1930s, and only recently pulled down, if ever there was one.

Money markets freeze: Libor soars above 6.4%, the highest for 7 years. Central banks pump $200bn in to the markets, but fail to halt the slide in shares. The Fed keeps interest rates at 2%, causing outbreaks of booing on trading floors. The Liberal Democrats call for the FSA to stop hedge funds shorting banks’ shares. The value of the average UK pension is now down 20% on the beginning of the year.⁷⁹⁴

Howard Davies says regulators face just two choices: meltdown or nationalisation. The former head of the FSA, an original architect of light-touch regulation, is asked fresh from a Morgan Stanley board meeting what is going to happen next. In an interview played on the Today Programme, he says either a meltdown or a massive programme of nationalisation of financial institutions.

Oil falls >$5 in a day to $90 but Houston filling stations charge an unprecedented $5 in the wake of Hurricane Ike. Power supplies are expected to be out for several weeks in some parts of the city. The White House has released more than a million barrels from the Strategic Petroleum Reserve. Virtually all the Gulf production, some 20% of the US has been down since Hurricane Gustav (1 September). Ike hit on 13^th, and around 20% of US refining capacity has been shut since.

Brussels squares up to Gazprom in Nigeria with their own bid for the Trans-Sahara pipeline. EU officials offer the Nigerian government financing for feasibility studies, the prospect of EIB financing, and political support for the $15bn pipeline idea (through Niger and Algeria to the Med: projected capacity 20-30 bcm a year. Europe’s current 300 bcm of gas consumption is expected to double by 2030. Meanwhile, violence escalates in the delta, where security sources tell Reuters 100 have died in an assault on a militant camp. The main rebel group declared an oil war last week.⁷⁹⁵

Eon cuts 400 jobs in energy services. The reason is apparently the downturn in the property market. This is nearly 10% of the 4,400 staff in energy services.⁷⁹⁶

NGO report warns that tar-sands investment could be as toxic as sub-prime mortgages. The dangers are twofold, Greenpeace and Platform argue. The oil price could fall below the level needed to generate profit against the industry’s rocketing costs, and assets could be stranded as evolving politics bans or limits production. 30% of Shell’s reserves are in tar sands. More than $125bn is due to be invested by 2015.

17.9.08. DAY 3: Wednesday

Panic grips the credit markets and Lloyds pulls HBOS bank from the brink with a £12bn merger, creating the UK’s biggest bank with a mortgage loan book of £335bn: 28% of the market, and links to 40% of all UK homes, if savings and credit card accounts are included.⁷⁹⁷ Such a mega-deal would never be allowed under normal merger rules. The rulebook, however, is being ripped up, and still the global panic builds. Lending between US and European banks has effectively stopped. Lloyds TSB market value a year ago was £30bn, now it is £16bn. HBOS market value a year ago was £32bn, now 7.75bn.

Morgan Stanley and Goldman Sachs shares plummet as they too come under fire from speculators. Wall Street’s last surviving standalone investment banks face record costs for insurance against financial default. Yields on US Treasuries were at their lowest level since the war as investors flooded into them (0.02% on 3 month bills). The SEC curbs short-selling.

The two Russian stock exchange are suspended as oil price falls and nerves about stocks spreads. The Russian finance ministry pumps $60bn into Russia’s three biggest banks, to prop up liquidity (including Gazprombank). The crisis threatens a re-run of the 1998 crash, when the rouble was devalued, banks defaulted on loans, and many peoples’ savings were obliterated. Note: the economy is much stronger today. Russia has the third largest financial reserves and receipts of some $850m a day from oil and gas exports.⁷⁹⁸

Calls for drastic regulatory action grow. FT columnist Martin Wolf argues that “greater regulation is, alas, inescapable, even if doomed to be imperfect.”⁷⁹⁹ John Kay argues that the politicians don’t know enough to regulate effectively. David Cameron has come out in favour of not “overreacting.”

Nigerian militants say they will carry their fight to offshore oil fields for the first time. The Movement for the Emancipation of the Niger Delta (Mend) have been responsible for bombings that have cut a fifth of Nigeria’s oil output lately.

18.9.08. DAY 4: Thursday

U
“In budget after budget I want us to do even more to encourage the risk takers.”
Gordon Brown

2004
S government discusses giant vehicle to take on the toxic mortgage debt on bank balance sheets, paid for by the taxpayer.

Brown pledges to “clean up the City”, and short selling is banned for three months. (This is on Thursday 18th. If he had done that on Monday, he could have saved HBOS). The world’s leading central banks have poured $550bn in extra liquidity into money markets this week, $180 in the latest injection yesterday. The UK national debt now stands at £632.7bn, which is bigger then annual national spending. In Russia, the stockmarkets remain closed for a second day.

Standard and Poor’s says the worst is yet to come: banks will suffer a second wave of losses over the next few months. Homes in some US states are 50% down in price, and as prices fall S&P says credit crunch losses could rise as high as $500bn. (Up from their earlier estimate of $250bn).