Triple Crunch Log Jeremy Leggett

NASA’s Jim Hansen warns we have only ten years in which to cut greenhouse emissions deeply. Therafter effects will be irreversible.

17.9.06. BP orders root-to-branch global overhaul as Browne faces sworn video testimony re Texas fire. John Mogford, VP Safety and Operations, will lead it with a staff of 90. It will take 5-10 years (sic).

Carbon-capping bills pile up in Congress as US utilities plan for future carbon regulation. The utility industry is increasingly looking for regulatory certainty, doubting that the Bush administration’s stance can last much longer. As one senior exec at the Edison Electric Institute annual meeting said of a bill calling for modest carbon limitations: “this could be the best deal we’ll ever get.”

18.9.06. BP’s Thunder Horse field suffers another delay to production: the supposedly biggest-ever find in the Gulf of Mexico is now 18 months late. The production manifold, a key component, has failed under test in Houston at the pressure likely in the field (it shot sixty feet up in the air). Discovered in July 1999, the field now won’t produce before mid 2008. Booked at 1.5 bn barrels, which would make it the largest find in the Gulf, an employee tells the FT that estimates are now around 600 mb. The oil price, which has been falling of late, rises on the news (to $63.80). The drilling platform was found tilting badly after Hurricane Dennis in July last year. The increase in project costs has been at least half a billion dollars.

Russia plans to use more coal domestically in order to leave enough gas for export. Kommersant reports that the gas shortage is currently running at 30% of total Russian demand.

Kremlin cancels environmental permit for Sakhalin 2. If its decision is ratified, the Russian natural resources ministry will have effectively stopped the building of the world’s largest LNG plant and pipelines from offshore fields. 4.5 bboe is at stake. The project is 80% complete. Gazprom wants a controlling stake. Blair has made his displeasure clear to Putin. 30.9.06. Putin himself chips in to support natural resources ministry, which now says the “barbaric damage” done by Shell could cost $50 bn to put right.

19.9.06. Kremlin faces international backlash over Sakhalin: Japan, UK and EU all protest. But Russian prosecutors have threatened meanwhile to suspend an exploration licence for the TNK-BP Anglo-Russian project aiming to develop Kovykta, a massive gas field in eastern Siberia.

California sues six carmakers for climate change damages: the most significant climate litigation to date. GM, Toyota, Ford, Honda, Chrysler and Nissan face hundreds of millions of dollars in damages, maybe more, if State DA Bill Lockyer has his way. “It is time to hold these companies responsible for their contribution to this crisis,” he says. Cars make up 30% of all emissions in California. The Alliance of Automobile Manufacturers calls it a “nuisance suit.”

US DoE study shows world will need to spend $1 trillion a year to mitigate peak oil starting 20 years before peak.

21.9.06. The Sun newspaper publishes “photographic proof” of climate change, and the Economist calls for a carbon tax. Both organs have hitherto either at scoffed at or downplayed the problem. Reporting today covering last two weeks.

Exxon drops funding of Competitive Enterprise Institute and other contrarian groups. Details emerge today in the WSJ of a meeting between Exxon and Royal Society, officials in July. The Society accused Exxon of funding groups that had been “misinforming the public about the science of climate change.” Exxon said it would review that funding. The CEI has received no funding in 2006.

Richard Branson pledges $3 bn profit diversion to clean energy investments over 10 years. Announcing the initiative at the Clinton Global Initiative in New York, he says he is doing it because “global warming could literally wipe out the world.” In all, $7bn is pledged to good causes at the Clinton meeting. See JL blog 18, 26.9.08.

23.9.06. Kremlin warns Exxon may have its licence revoked for Sakhalin 1. The reaons is that Exxon have been guilty of the same type of cost increases that Shell have experienced at Sakhalin 2.

24.9.06. Oil price falls below $60 as BP restores output at Prudhoe Bay earlier then expected. Goldman warns that the weakness in the market may only be fleeting.

29.9.06. Sub-Arctic forest and bogs are just 1C away from disastrous thaw, says NASA. Jim Hansen et al’s study shows that surface temperatures have been increasing on average at a rate of 0.2C every decade for last 30 years. Warming is at its highest in the sub-Arctic boreal forests of Siberia and North America. One more decade of increase like this will pass the tipping point for unstoppable climate change. Central Siberia has seen a 2C rise since 1970, three times the global average; the Alaskan interior is up by 2C warmer since 1950. 2003 saw a record number of forest fires in Siberia, destroying 40,000km^2. Similar changes are taking place in Alaska. The melting of the permafrost in boreal forests is bringing about the release of methane. The effect of this is potentially enormous: “in past eras, the release of methane from melting permafrost and destabilised sediments on continental shelves has probably been responsible for some of the largest warmings in the Earth’s history.”

1.10.06. Chief engineer of TNK-BP Siberian unit is shot dead in Irkutsk. Hallmarks of a contract killing: three shots, one to head.

3.10.06. Kashagan’s production slips still further, into 2009, as costs escalate. Production was due to start in 2008, but Kazakhstan’s energy minister now puts the date at 2009. The costs of the development have increased by 50% to $15bn, from the initial estimate of $10bn. One major cause for delay is the high level of toxic hydrogen sulphide, which constitutes 18% of the Kashagan reservoir.

Kremlin takes journalists to view Shell’s eco-“crimes” at Sakhalin 2. The Kremlin’s man Oleg Mitvol leads a group of journalists and ecologists on a tour of Shell and its partners’ alleged environmental violations. He believes the cost of righting Shell’s errors could reach $50bn. The main issue is that the pipeline crosses 1,000 salmon streams and rivers. Mitvoi vows to carry out a criminal case for every tree illegally destroyed. Shell denies the allegations and suggests that it is a scheme to force Shell to give Gazprom a slice of the project. The Kremlin is angered by Shell’s unwillingness to renegotiate the production-sharing agreements established in the 90s, at a time when the country was financially week and had no choice but to accept unfavourable terms. Under the Sakhalin-2 agreement Shell are able to recoup all project costs, estimated to be worth $20bn, before it must share profits with the Russian government. As for the NGOs, “we are prepared to be prostitutes to anyone if the end result is the protection of the environment.” (Igor Chestin, Head of WWF Russia). Greenpeace say the pipeline is four times wider than agreed. Mitvol: “I am going to do everything in my power to stop this project and force Shell to put right it’s mistakes.”

Petrocanada delays decision to proceed with tar sands project. CEO Ron Brenneman has said that in 2008 the firm will decide whether to proceed with the Fort Hills project, which could cost up to $19bn if past trends hold. He continues to hope that production will begin in 2011, but this too could be pushed back. Petrocan is just one of many companies to admit that the pressures in the Fort McMurray region - including both labour and supplies shortages - are taking their toll on the beginning of project proceedings. French company Total SA said in August that their project will not produce oil until 2013, a delay of 3 years on their initial estimate.

China’s coal-to-liquids programme plans for expansion, despite hitting technical problems. A CTL project launched in Pingdingshan in 1999 is forced to close due to unfit coal being used. 2001 saw the 863 Program speed up CTL projects. Shenhua group emerged as leaders: in 2004 they began an unparalleled direct coal-liquefaction scheme in Ordos, Inner Mongolia, with a planned annual capacity of 5m tons at estimated costs of 24.5bn yuan ($3bn). Aside from 3 government-approved projects, recently other areas have planned and built CTL projects. Economic returns mean the rush to CTL is significant. 30 CTL projects are being planned or at feasibility stage. The estimated capacity of these exceeds 16m tons, involving investment of over 120bn yuan ($15bn). Predictions point to China’s annual oil output rising to 50m tons by 2020 ….c 1 mbd only.

Montana announces a coal-to-liquids plant: one of US’s first. Bull Mountain CTL plant is estimated to begin production of 22,000 barrels of diesel fuel per day within 6 years.

4.10.06. A drop in ocean temperatures in last 2 years flies in face of global trend, puzzling researchers. National Oceanic and Atmospheric Administration finds upper 750m of ocean have lost sufficient heat to cause 0.02C overall drop in temperature. The oceans can hold a thousand times more heat than the atmosphere. Sea surface temperatures have risen inexorably for 50 years, though there was another downward blip in 1980-83. The 50 year trend drowns the small drop.

6.10.06. Forest fires spread dangerous air throughout Indonesia: 51 of 42 air monitoring stations register the air as unhealthy. Widespread fires in Sumatra and Borneo have been started either to clear land quickly, or ignited spontaneously.

8.10.06. Oil price falls below $60. Is the oil boom over?, Newsweek asks on front cover. Leonardo Maugeri, Senior VP for strategies at Eni, debunks peak oil, ascribes global-market mood swing to geopolitical risks receding, including the “myth” of endless Chinese demand, and claims producers are in the process of solving the crisis through investment in exploration and development. China’s oil consumption amounts to 8% of global demand. If investment is sustained, production capacity could increase by 12 million to 15 million barrels per day between 2010 and 2012, he says. The IEA forecast demand growth of just 1.3%, compared to 4% forecast in 2004.

Gazprom says it will develop the giant Shtokman gas field in the Barents Sea on its own. The field, which may contain as much as 3.2 trillion cu m (113 trillion cu ft) of gas and 31 m tonnes condensate, was discovered in 1988 more than 500 km north of Murmansk. 18 years later it is still years from production. Gazprom says production will bein in 2013. Nobody believes they or any combination of Russian companies can do it.

Oil majors offer gloomy prognoses of lower prices combined with rising costs. Value creation at oil companies is almost at a standstill. Costs are rising faster than profits, and high prices are unlikely to last. The price drop to $59 is viewed as start of slippery slope taking prices down as low as $30. Most Western oil companies are predicted to make only a 2% rise in return on capital since 2000. The average price-to-earnings ratio on S&P 500 at only 9.8, half the usual average, considerably lower than other big-company stocks. Major concerns of bosses include restricted access to new resources, increased oil nationalism, shortage of skilled professionals. They’ve been planning based on cost falling to $35 per barrel. During the last 2 decades over 400 Western oil companies have folded, considered to be a “missing generation in the oil business.” BP and Shell are the most aggressive cost reducers. Now the debate focuses on whether BP overreacted, risking safety. Further tests remain to be done to discover the causes behind the Prudhoe Bay leaks and the Texas City fire. CERA estimate offshore costs have risen by 68%. BP’s Baku-Ceyhan pipeline is to exceed budget by $1bn, Shell’s Canadian tar sands projects are looking at costs 50% higher than in 2005. Another major problem is increased nationalism: only 25% of global resources are open to the Western majors, down 85% since 1960s. Shell’s Sakhalin project is to run $10bn over budget because of labour and material costs. Russian politicians are angry at the delay in profit return, revoked Shell’s permit to operate in Sakhalin.

Home Secretary Jack Straw’s comments about use of veil in a multicultural society launches a storm of debate. Veil increasingly seen as indication of separatist aspiration and oppression of women. Found disturbing and consciously socially detaching, makes a statement about women’s position. Liberal democracies under attack from fundamentalist sections who are empowered by the watering down of liberal democratic values. Political correctness combined with fear gives way to compliance with radical Islamism. & see 16.10.

9.10.06. Investors are becoming impatient with governments for lack of policy progress on climate. Crucially, the EU emissions trading scheme lapses in 2012 as things stand. How do investors model cash flows far enough out? The Institutional Investors Group on Climate Change (IIGCC) holds a meeting in Paris this week.

US Insurance Information Institute urges insurers to do more in addressing climate change. Some initiatives exist: the Fireman’s Fund use rate credits for builders who use green practices. Travelers Insurance offers hybrid drivers 10% discount. The industry now takes $3.4bn p.a. in premiums.

10.10.06. Drought pushes wheat prices to a ten year high: stockpiles are at a 20 year low. Drought has affected harvests in Australia, Argentina, Europe and America. In Ukraine, the Eurygaster beetle has infested crops.

11.10.06. China’s billionaire club grows fast, and the richest is a recycling entrepreneur. Female, worth $3.4 bn. 15 billionaires this year, Shi 5^th $1.95 bn.

12.10.06. UK government says a new law will be needed to tackle climate change. Reason: the consensus is now formidable. It will include means to achieve cuts, not annual targets. FoE has been pushing for 3% CO2 reductions year on year.

Polling of US voters shows energy independence has emerged as the number one issue. A big survey on Aug 27^th showed 42% for reducing dependence on foreign oil. The war in Iraq scored 26% with Strengthening America’s military on 12%. James Carville, the Clinton advisor who coined “it’s the economy stupid,” now advises that Democrats should grab and own energy security the way Republicans do tax cuts. People want strong regulation, he says, like in California: higher mileage standards, energy codes in buildings and appliances.

US-Iraqi study in The Lancet shows 650,000 Iraqis killed since the invasion: 1 in 40 of the population. Study undertaken by a group of Iraqi and American public health scientists. Comprehensiveness of study confirmed by further study. Mostly men between 15 to 44. US-UK occupation blamed for death toll. 650,000 deaths is equal to 2.5% of Iraqi population. Unprecedented humanitarian disaster, more so considering UK presence aimed to protect the population. Lancet study produces figures much higher than those produced by Bush.

Moscow banker shot dead in contract hit, of which there have been four in last month. Not least Putin’s big critic, journalist Anna Politkovskaya (date of assassination? burial 10 Oct)

13.10.06. Coal use grows in the UK as the gas price rises. Coal was 29% of power in 1999, now 34%. Drax was put into administration 4 years ago, but now is flat out providing 7% of UK power. The 2003 energy review barely mentioned coal, the 2006 review advocates setting up a group to secure the “long-term contribution of coal-fired generation.” Carbon capture and storage is on the horizon, but could more than double the cost of coal generation.

14.10.06. Media stats at IFG: 7 corporations control 75% of global media – from film, through books, and increasingly the internet. 3 control 70% of the 75%: Fox, TimeWarner, Disney. 16.7% of the global population uses the internet (1 billion). No paper.

16.10.06. Time is running out for BP to turn its problems around, says Fortune magazine. A criminal investigation is underway on Prudhoe Bay, with a grand jury convened, after six miles of pipeline was found to be badly corroded. The hole in the pipeline that spilt 5,000 gallons of crude was the size of a dime. In congressional hearings, the BP official in charge of anti-corrosion at Prudhoe pleaded the Fifth Amendment on grounds he could incriminate himself. Fortune has a 2002 letter from a BP inspection and quality-assurance specialist warning of a potential catastrophe. Not enough “pigging” was done (sending of mechanical cleaning and monitoring devices down the pipe). In Galveston, a civil suit starts next month . BP is belatedly spending billions on its infrastructure. (L: Stunning data in this Fortune article on lack of “pigging runs” in the affected pipelines).

Only one in 8 of British Energy’s nuclear power plants is working normally. The share price plunges 24% on the news. Two are closed, and two more are about to be, as a result of serious cracks in boiler pipes. 20% of the UK’s electricity comes from the 8 nukes and 1 coal station owned by the company.

17.10.06. Former Goldman Sachs MD says it would be naive to believe oil price wasn’t manipulated down by friends of the Bush administration in the run up to elections. Subtle manipulation is a form of control, writes Nomi Prins. In September the crack spread (difference between the cost of crude and the price of gasoline post refining) narrowed substantially. This was because the refinery owners were deliberately taking lower margins so as to help their friends. Similarly, the Federal Reserve stopped raising interest rates and sent a strong message that inflationary pressures would “moderate.” It was not obvious why. The market slide began the next day.

18.10.06. Cap Gemini, leading consultancy, warns that Europe could face blackouts. Growth in demand has outstripped investment in new stations. The average margin – the excess of available electricity supply over peak-load demand – dropped to just 4.8% last winter.

18.10.06. Qatar fears it may not have as much gas as it once thought in the world’s largest gas field. The North Field (extending into Iran as South Pars). Doubt is now being thrown on LNG plans. The majority of the world’s gas comes from Russia, Iran, and Qatar.

19.10.06. OPEC cuts 1.2 million barrels per day output in an effort to stabilise the oil price. This would reduce the OPEC quota to 26.3 mbd when the cut begins in November, spread across OPEC pro rata. The market wasn’t expecting such a big cut.

22.10.06. UK regulator Ofgem calls on energy suppliers to develop a flexible market for micro- generators. In a report, “Ofgem and Microgeneration,” Ofgem promises to remove much regulatory red tape. Proposed next steps’ are more simplified export arrangements and more accessible information on areas such as installation and health and safety. The report allso calls for efficient meters which would be interoperable. Ofgem wants more work by the distribution network to make sure that prices accurately reflect the advantages of microgenerators. The report draws attention to the advantages of innovation in meter technology for providers.

23.10.06. Jeff Skilling sentenced to 24 years for his role in the Enron fraud. Ken Lay died on 5 July, before he could be sentenced.
25.10.06. Kremlin calls for criminal prosecution of Shell over Sakhalin. The managers of the project are potentially facing criminal charges over five counts of breaking environmental law. Prison sentences of seven years could be imposed. The Natural Resources Ministry is to extend its audit by one month. As a result, Shell is under further pressure to downscale its involvement and let Gazprom take more power. Many Western analysts are of the opinion that the fuss created over the environmental issues is loose camouflage for bullying Shell into an asset swap. The Kremlin has never hidden this aspiration, and is increasingly unhappy with the increasing costs of the operation: they have doubled to at least $20bn.

26.10.06. US Senators write to Exxon to ask that they end climate change denial campaigns. Jay Rockefeller and Olympia Snowe call for the end of funding for climate change “echo chamber.” They argue that the debate that the scepticism these groups create, many of which rely of ExxonMobil funding, has led to damage to the US’s reputation within the international community.

Scientists warn of serious consequences of weakening of the Gulf Stream. Data has shown that part of the current stopped altogether in November 2004. Lloyd Keigwin of the Woods Hole Oceanographic Institution called the halt “the most abrupt change in the whole [climate] record.” Harry Bryden of the National Oceanography Centre has shown that the rate of flow decreased between 1957 and 1998. If it did stop altogether, it would lead to regional cooling of between 4 and 6 degrees Celsius during the next 20 years.

27.10.06. European Commission shows that Europe is failing miserable on climate change targets. New figures emerging suggest that 2010 emission levels could actually surpass those of 2004 by 0.3%. Spain is predicted to exceed 1990 emissions levels by 51.3%. Kyoto had allowed for 15%. Only by purchasing the rights to emit greenhouse gases in Eastern European countries will the EU come close to reaching its 8% reduction target.

28.10.06 BP faces court action from daughter of couple killed in Texas City Refinery explosion. Eva Rowe continues with plans for the first civil lawsuit against the oil giant, despite offers of compensation. She is to allege that her parents were killed as a direct result of BP cutting corners through cost-cutting on health and safety. It is likely that CEO John Browne will have to testify personally.

Likelihood of massive mergers between oil giants grows as times get harder for them. Morgan Stanley observes that 2001 saw five companies in four countries valued at over $50bn. That number has risen to 14 in 9 countries today. Access to resources can only become more difficult. Oil giants control 20% of this, the other 80% is under the control of national oil companies. Their reserve position is considerably weaker than their production, and unless this can be remedied they are in trouble. Recent experience has not been promising: in 1997 the giants replace 140% of their reserves, in 2005 replacement had shrunk to 75%. If they find no more resources outside national companies’ territories they will have to look at other activities to make up the deficit. The other choice is massive mergers, such as between Shell and BP, creating the largest energy company in the world.

29.10.06. UK Stern review predicts the global economy could face a £3.68 trillion bill from climate damage if we don’t act within the next ten years. Commissioned by the Treasury and hailed as “the most comprehensive review ever carried out on the economics of climate change.” Potential consequences include making 200 million people refugees as their homes are destroyed through flood or drought. Stern pushes for a follow-up to the Kyoto agreement to be signed in 2007, 3 years before the original plan for 2010. He believes that 1% of global GDP must be spent tacking the problem, or face costs of up to 20 times higher if the damage is allowed to continue- a cost as high as £566 for each of the 6.5 billion people on the planet. In the report, commissioned by The Treasury, he says that “ if no action is taken we will be faced with the kind of downturn that has not been seen since the great depression and the two world wars.” Stern also points to the opportunities afforded by the changes necessary, worth, according to one measure, $2.5tr. The report also forecasts that the low-carbon technology market could be worth up to $500bn by 2050, if the appropriate measure are taken.⁵⁴ (L) See JL blog 19, 1.1.06.