Triple Crunch Log Jeremy Leggett

World investment in renewables exceeded $100 bn for the first time in 2007. Investment in renewables generally, and solar and wind power in particular, is growing fast. In 2007, some $71 billion was invested in new renewable energy capacity worldwide, excluding large hydropower, up from $55 billion in 2006. Almost half went to wind, 30% went to solar photovoltaics, and 9 percent to solar hot water. Germany invested the most, $14 billion. China invested the second most, $12 billion, and the US the third most, $10 billion. If we add investments in new manufacturing plants and equipment, around $10 billion, and spending on renewables research and development, some $16 billion in 2006, we reach a global total of over $100 billion.¹⁵²

2.2.08. UK wind capacity additions down more than 25% in 2007. The Renewables Obligation is enriching existing generators but not stimulating new turbines (427 MW in 2007 vs 631 in 2006). Subsidies paid from electricity bills will rise steadily from £600m a year now, through £1 bn in 2010, to more than £3 bn by 2020. So right now, with falling capacity, more goes to existing generators. People paying their utility bills (£c.10 per household bill p.a. for the RO) which do not show the RO share, are paying people more for generating less. Cost per tonne of CO2 saved is £184 to £481, far more than other policy measures (e.g. £12 to £70 under the ETS). The percentage of UK electricity from renewables barely rose in 2006 (the last year of figures): 4.6% up from 4.2% in 2005. In terms of renewables in total energy mix, UK is 1.3%, third from bottom in EU, which has an average of 8.5% and top score of 39.8% (Sweden). Capacity: Npower top on 460 MW, SSE fifth on 160 MW, but has just paid £1.1 bn for Airtricity, which has 1.1 GW in UK, Ireland and Germany. EDf is bottom, sixth, on 79 MW. None of the six will talk about profitability of projects. See article has figures on returns and more on capacities of companies etc.¹⁵³

Biggest ever survey of UK shoppers ethics shows shoppers care more about animals than climate. The Co-op surveyed 100,000 members and customers. 4% rate climate change as their top issue, 14% fair trade and 21% animal welfare. The Co-op has halted the sale of eggs from caged hens as a consequence.¹⁵⁴

4.2.08. Citigroup publishes oil analysis concluding production skeptics might be right. “Citi held a meeting with the editor of the Petroleum Review, Chris Skrebowski.  The discussion focused on growing fears that decline rates in global oil production — even assuming the relatively generous 4% proposed by recent studies — are such that visible growth projects will be unable to stave off overall production decline within a very visible timeframe. We were left with the impression that such views often tend to fail because of the lack of empirical evidence to support their cause. However, recent evidence of failed production growth would tend to shift the burden of proof onto the producers and not the sceptics.” Conclusion:  “Even the supply bulls argue for c. 1.5mmbpd of annual supply decline as being a realistic figure. More pessimistic analysis talks of decline levels of 3.5mmpd or even higher. Citi global oil analysts currently see c. 860kbpd of oil supply growth in 2008 from their coverage universe. The risk remains that this is too high, while estimates of upstream spending growth are substantially too low.”¹⁵⁵

In Russia, high oil prices are leading to “Dutch disease.” Moscow has become the most expensive city in the world, with inflation at 12% and equipment to build infrastructure increasingly unaffordable. The Kremlin has declared an infrastructure emergency, with Putin ordering a $1 trillion spend on ports, highways, power grids, and water plants over seven years, with 2,600 miles of new road each year. The first tenders are out, with Bouygues and Bechtel. “If Peak Oil drives crude ever higher,” writer concludes, “Russia may overtake Germany and America in per capita income within a decade.”¹⁵⁶

Iraq plans to sidestep law, invite IOCs in, and lift production to 6 mbd in five years. The oil minister is inviting BP, Shell, et al in without waiting for legislation to pass. he is determined to lift production from the current 2.5 mbd.¹⁵⁷

BP oil and gas production down 3% in 2007, and profits down 22%, leading to 5% job losses. Production was 3.82 mbde, better than the others. Profit was $17.3 bn, less than half Exxon’s. Reserves placement was more than 100%, for the fourteenth consecutive year, where others are less or have said nothing yet. Five percent of BP’s 97,000 workforce will lose their jobs as a result of this “bad” result. Yet BP raised its dividend by 31%, at the expense of share buy backs.¹⁵⁸ Companies buy back their own shares and then cancel them, via a broker, so reducing shares in issue as a means to boost earnings per share. BP has bought back $50 bn (£25.5 bn) of its own shares, some 16% of those in issue. Some analysts argue the method is an ineffective way to boost value. One accuses companies of “destroying billions in shareholder value,” because the returns were negligible.¹⁵⁹

BP plans to go for oil in Iraq. Meetings held with oil officials. Environmentalists accuse Tony Hayward of recarbonizing the company.

Matt Simmons says that 2005 peak oil in regular production grows ever more likely. “I am acutely watching the EIA reported crude and condensate production and the all time record output of 74.3 mmb/d set in 5/05. The longer this stays as record, the stronger the likelihood that we have seen crude peak.”¹⁶⁰

Texas City bereaved try to block the $50m settlement between BP and the US government. The fine fails to match the crime by a mile, they say. Eva Rowe, who lost both parents: “Was pollution BP’s greatest sin? BP’s greed murdered 15 people. I will never forget seeing my father’s blood-soaked face” (in the morgue) “with the lines running from his eyes down his cheeks from the tears that he cried before he died.”

Climate scientists identify nine areas in danger of passing points of no return, and suffering catastrophic collapse before the end of the century. They say it may already be too late to save the Arctic ice (it may be gone in as little as 25 years) and the Greenland ice sheet (already a 50% chance it will melt unstoppably), which are in the most immediate danger. The Amazon rainforest, where decreased rainfall threatens vast areas of forest, is next in line. The research, by an international team from many centres of climate research, appears in the proceedings of the National Academy of Sciences. It includes a poll of more than 50 experts asked to rank the areas at risk.¹⁶¹

UK wind industry says planning bill is too little, too late. Measures will not begin before 2009, there will be inevitable delays over putting a commission together, and the bill only applies to large windfarms over 50 MW. A backlog is inevitable. There are 2.5 GW of wind in the UK at the moment and 9 GW stuck in the pipeline.¹⁶²

6.2.08. Europe’s power companies say green regulation risks an energy crisis. Green laws and planning difficulties are rife just as €2 tn ($1.5 tn) needs to be spent on upgrading Europe’s power supply. Companies are already cancelling plants and power line projects as a result. So says the COO at E.ON, Johannes Teyssen. The European Commission plan to make companies pay for pollution permits from 2013 is a particular problem, he says. The companies in Eurelectric, the pan-European industry lobby, say 520 GW of new capacity will be needed by 2030. The big companies are also blocking, via their governments, the commission’s push to liberalize still further by forcing the energy giants to unbundled gas and electricity networks and pipelines to let smaller new operators in.¹⁶³

7.2.07. Russia threatens to cut off Ukraine’s gas again. Gazprom will cut off up to a quarter, within a few days, if debts are not paid. $1.5 bn is overdue. No other country will be affected. In 2006, Russia, when it cut supplies to Ukraine, Russia blamed Ukraine for shortfalls to Europe. 80% of Russian gas exported to Europe goes via Ukraine. Ukraine wants to remove shady middlemen who control the gas trade with Russia, Kazakhstan, Turkmenistan and Uzbekistan, e.g. Swiss-based Rosukrenergo, a quarter owned by Gazprom. Putin is resistant for some reason.¹⁶⁴

BP faces another full investigation by US government after more fatal accidents at Texas City. Since the explosion in 2005 that killed 15, there have been three more fatal accidents, the most recent in January. A US Chemical Safety Board visit just after that last one has led to the new probe. BP has spent $1 bn on safety upgrades since Hayward took over. 41 people have died on the site in the last 32 years.¹⁶⁵

Biofuel farms increase CO2 emissions, study shows. Net carbon from clearing land for farms (whether rainforests, peatlands or grasslands), versus carbon saved, is negative. US researchers, in Science magazine, calculate that corn or sugarcane for ethanol, or palms or soybeans for biodiesel, could release 17-420 times the carbon saved annually. The worst carbon debt comes from palm oil production in rainforest.

Famine will be the outcome of peak oil, Goldman Sachs infers. Jeff Currie, the bank’s commodity chief, warns that famine is likely in vulnerable regions within the next three years as rising oil prices spill over into rising food prices. “We’ve never been at a point in commodities where we are today. …Over the next 18 to 36 months we are probably going into crisis mode across the commodity complex.” Global oil output has been flat for four years and biofuels are just about plugging the gap for the moment, but at the expense of food. “The key is going to be agriculture. China is terrified of the current situation. It has real physical shortages.” Currie doesn’t mention peak oil in his quotes, but the correspondent writes: “peak oil is turning into peak food.” Over the last six years land use for biofuels has risen from 12m to more than 80m hectares worldwide as biofuel has grown to 3% of global energy needs. Sugar cane would be the only viable biofuel if it wasn’t for oil shortage: it runs at $35 a barrel (of oil equivalent) now. The others are sugar beet ($103), corn ($81), wheat ($145), rapeseed ($209), soybean ($232), cellulose ($305). Subsidies drive the business, with the US offering tax relief of $1 a gallon for biodiesel.¹⁶⁶

US spending more than any other nation on clean energy, by government and privately. In January DoE set up the advanced research agency ARPA-E, with a budget of $4.9 bn over 5 years to develop transformational clean energy technologies. The Hydrogen Fuel Initiative has $1 bn over six years. California is spending $2.9 bn over 10 years on solar alone. UK Energy Technologies Institute by contrast has a budget £100m over 10 years.¹⁶⁷

8.2.08. Exxon freeze’s PDVSA’s assets, making it difficult for Venezuela to invest in heavy oil expansion. Court action in the UK and Netherlands means $12 bn of assets are frozen. Exxon is seeking compensation for lost assets during Chavez’s nationalisation drive last year, when Exxon walked away from $2.3 bn of projects in the Orinoco belt, home to the world’s largest heavy oil deposits, after PDVSA took over a majority stake. Analysts now say PDVSA will have difficulty raising finance. Other companies may follow Exxon’s example.¹⁶⁸

Wheat price soars as US inventories reach a 60 year low amid fears of global food price inflation. “The market is desperately trying to tell producers that we need more acres for food production,” says one trader. Global stocks of wheat are expected to fall now to a 30 year low.¹⁶⁹

Three of Wall Street’s largest banks issue “Carbon Principles,” requiring climate considerations to be factored into financing of fossil-fuel power plants in the US. Citigroup, JPMorgan Chase and Morgan Stanley have signed up to the document. Those seeking finance will need to show they have considered renewables and carbon trading, potential for CCS, and budget for future legislation.¹⁷⁰

10.2.08. A further $236bn injected in the US, and cash loans to banks in Europe. Still the regulators focus on liquidity, not solvency.

G7 finance ministers warn sub-prime losses will exceed $400 bn. Every economy will be affected. Write-offs of losses on securities linked to the toxic mortgages are way higher than the $120 bn admitted by Wall Street banks and and other institutions so far, and the $100-150 bn estimated by the US Federal Resrve. The path of the credit crunch remains uncertain. The first audited accounts since the crisis began appear within a fortnight.¹⁷¹

Small investors increasingly turn to ethical products. A CIS survey shows 85% of ISA investors will consider using an ethical scheme, up from 67% last year. Almost 80% believe they can perform at least as well as the mainstream. The total in ethical financial products is up 15% year-on-year, now standing at £13.3 bn.¹⁷²

BP warns staff not to write about troublesome Thunder Horse equipment. An internal e-mail warns staff involved not to create documents, write e-mails, or send Blackberry messages about the “tree coupler,” a vital component of the delayed floating platform. Such a measure has never been suggested before, staff say. Production in the Thunder Horse field was first scheduled for 2005, now late 2008. Meanwhile, a federal judge will rule in the next two weeks on BP’s effort to resolve all cases pending with the US government to do with Texas City and the leaking Alaska pipelines via a one-off $380 m payment.¹⁷³

EU presses Turkey to support the Nabucco pipeline, doubting their commitment. The 3,300 km project is designed to bring gas from Azerbaijan and other Caspian countries, providing an alternative to Gazprom. The first phase is due to begin in 2013, principally from Azerbaijan, notwithstanding doubts that there is enough gas there. Stafan Judisch of RWE, speaking last week, voiced the hope that – as the FT puts it – “once Nabucco was built, it would encourage companies to find more gas in the region.”¹⁷⁴

Work starts of world’s first solar city. The cornerstone is laid on the $22 bn effort to create a sustainability blueprint for the hot countries. Masdar will be home to 50,000 people living without cars and waste, and with solar energy and water conservation. The city will use 75% less electricity and less than half the water of conventional cities. 1,500 businesses will work on solar and other alternative energy within the city.¹⁷⁵

11.2.08. “Apart from used chip fat there is no such thing as a sustainable biofuel,” says Guardian columnist George Monbiot. He makes an interesting point: most agricultural waste is needed in the soil as nutrient and to hold it together. He cites a paper by Paul Crutzen saying increased fertliser use would wipe out all biofuel savings via nitrous oxide emissions, and a study that suggest removing crop residue can increase soil erosion a hundredfold. “Our addiction to the car could lead to peak soil as well as peak oil.”¹⁷⁶

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“Given the long lead times of at least 5-10 years from discovery to production, an oil crisis is coming and sooner than most people think. Unfortunately, we are behaving in ways that suggest we do not know there is a serious problem.”
John Hess

CEO, Hess Energy

February 2008
2.2.08. Hess CEO joins the club of oil bosses blowing the whistle on peak oil. John B. Hess, chairman and chief executive of Hess Corp, tells the CERA annual meeting in Houston (12.2) that oil companies, oil-producing countries, and consumers need to act now to avoid an oil crisis that is coming, he believes, within the next 10 years. “It is not only a matter of demand. It is not only a matter of supply…. We need to take steps on both fronts, and we need to start today,” 60% of the world’s oil production is from countries that have already peaked, he says. Tar sands need to be encouraged, but “their contributions to supply are not material enough to bridge the gap in oil requirements over the next 10 years.” “We must increase investment. In 2007, global E&P investment was estimated to be approximately $350 billion, having grown about 15% each year over the previous 5 years. This increased investment has helped offset field declines and added new production.” But given the long lead times, “the current sum that both OPEC and non-OPEC nations are investing is far below what is needed to ensure sufficient production for our future.” There also is a manpower problem, he says. US upstream employment is down from 700,000 in the early 1980s to 400,000 today. “The project delays our industry is seeing today result in part from workforce shortages and inexperience. ….We are replacing our 30- and 40-year veterans with recent graduates. Even if we stepped up our investment levels today where they need to be, we simply do not have the skilled workforce to support the many projects that may be needed.” ¹⁷⁷

Russia and Ukraine resolve gas dispute, and cut out middleman …but Putin issues nuclear threat. Ukraine will settle the debt, RosUkr-Energo will be replaced with a JV owned by Gazprom and the Ukraine energy monopoly, Naftogaz Ukrainy.¹⁷⁸ Immediately after the meeting Putin threatens to point missiles at Ukraine if they go ahead with their plan to join Nato and allow omponents of the US missile defence system to be sited on their soil. NB The US has not asked the Ukraines to be involved yet.¹⁷⁹

Kremlin throws lavish 15^th birthday party for Gazprom, which has brought no new developments on in all that time. The recent party saw Tina Turner performing to a crowd of 6,000. FT editorial: “Both psychologically and practically, Gazprom is not a commercial enterpise. It is the single most important instrument of the resurgent Russian state.” It is more than half owned by the state, but is still attractive to investors simply because of the high demand-driven gas price. Gazprom may be 15 years old but has yet to open a single substantive new gas field. It relies of depleting giants found in the Soviet era in Siberia, and new prospects such as Yamal and Shotkman are years from production.¹⁸⁰

BP puts drilling in Sakhalin on back burner after disappointing results. BP and Rosneft have agreed to an indefinite “lull,” because, as the company puts it, “the region hasn’t been the huge success that some thought it might be.” Also, the Kremlin is considering extending tax breaks for oil exploration in eastern Siberia to the offshore.¹⁸¹

Venezuela stops selling oil to Exxon in retaliation, and Chavez threatens to stop US exports. PDVSA says commercial relations have been suspended in response to Exxon’s “judicial-economic harassment.” Chavez threatened to cut off oil supplies to the US this week as a result of Exxon’s move.¹⁸²

npower survey of heavy business users shows 88% support commitments to cut CO2 emissions. This despite 70% believing the various commitments will make the UK uncompetitive, and almost two-thirds expecting the costs to outweigh the benefits.¹⁸³

Carbon price must be very high to stimulate lower consumption. Paul Ekins what price will trigger behaviour able to get on track with 450-550 ppm CO2e, but knows it must be “much higher” than today’s. The government must put an indefinite escalating carbon tax on all existing energy taxes it we are to decarbonise, he says. DEFRA has come up with the concept of a “shadow carbon tax” that factors in the economic damage of climate change. The idea that you decide a single figure in £ per tonne is laughable, considering the science, Ekins feels. Stern estimates $312 at 700 ppm and $110 at 550 ppm. So DEFRA chooses to use $110 in the consulation over the third runway at Heathrow. Ekins: “This is Alice-in-Wonderland economics. One can just imagine the White Queen saying: ‘We are on a low-carbon emissions trajectory because I say we are, and that means I can emit as much carbon as I like.”¹⁸⁴

Shipping emissions three times higher than previously assumed, UN says. The largest container ship burns 350 tonnes of fuel a day, emitting more than 300,000 tonnes of CO2 per year, the same as a medium size power plant. There are 90,000 large ships today, , of a tonnage that has tripled since 1970, carrying 90% of world trade. Shipping was thought to be responsible for 1.8% of emissions, but a new report puts the figure at 4.5%, or 1.2 bn tonnes a year, more than twice as much as aviation. Shipping uses the cheapest and most polluting fuel, “bunker fuel”, which is tarry almost solid residue from refineries.¹⁸⁵

Biodiesel from wood chips and furniture offcuts: Choren plans to have a full plant by 2012. Price tag: €800m. Shell is the partner for the catalyst, using Fischer-Tropsch technology. They have also taken a minority stake in the company.¹⁸⁶

13.2.08. Production falls at Exxon, Shell and BP despite $60 bn capex. Shell tar sands production falling. ING puts the lead time from exploration to production at 7-8 years. Shell backtracked from previous targets for production in the tar sands. Chief Financial Officer Peter Voser said a plan for 1-2 percent growth to 2010 could not now be met and output was likely to fall “slightly” in 2008. “Shell is still in this rather dull period, where the startup of big, long-lasting projects is still some way off in terms of investors' time horizons,” Pether said.¹⁸⁷

Total is the only oil major to lift production in 2007, and promises 4% pa increase through 2010. By 1.5% to 2.39mbdoe, well below the 7% promised. de Margerie says that production would increase by 4% annually through to 2010, and bring into development 5 bn boe. Profit was €12.2 bn, ($17.8 bn). producing countries are keen to protect reserves, and had to be be persuaded “to bring more energy to western countries without harming their own interests.” Total is helping Abu Dhabi to access nuclear, as a partial route to this goal, via partnerships with Suez and Areva.¹⁸⁸

South Africa faces electricity rationing in all sectors as Eskom begins to address national crisis. Peak demand is close to capacity because no power plants have been built for years, despite the government being fully aware of the approaching crunch. In January the monopoly state utility Eskom began rolling power cuts of up to 8 hours a day, and must begin building plants soon. Even if so, shortages can be expected until 2013 at least. The public enterprises minister says the situation will remain an “emergency” for the next six months, and remain tight for four years. Maximum operational capacity has barely changed since 1994 at c. 37 GW. Eskom has long warned the government, and now wants to spend $39 bn by 2020 to get to 80 GW. How has the problem arisen? The ANC government is enamoured with the privatisation model, wanting to copy the British model and split the monopoly up to encourage competition. But the ANC hasn’t actually been able to do it, because it holds South African electricity at some of the lowest price levels in the world, pursuant to its social policies. Foreign companies have not seen how they can compete in the face of this contradiction. The government intends to ration households and industry 10%, commercial enterprises 15%, and hotels and malls 20%. The impact on the economy? One economist has calculated half a percent will be docked from GDP, but who knows. NB: electrification stood at 71% in 2005: more than a quarter of the population have no electricity.¹⁸⁹