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com

ENERGY
FINANCIAL TIMES SPECIAL REPORT | Thursday November 5 2009
How will
Copenhagen
affect the
sector?

www.ft.com/energy­nov2009

Wind of change in corridors of power

Cutting emissions
while meeting rising
demand is going to be
a tough challenge,
writes Ed Crooks
on the outcome of Copenhagen.
An agreement next month
would accelerate some of the
trends, and a failure would hold
them back. But even a complete
breakdown in the negotiations
will not stop the industry evolv-
ing.
It will be an enormous chal-
use, or within a decade of com-
mercial deployment. By 2050, for
example, electricity production
could be largely carbon-free, by
using a combination of nuclear
power, renewables such as wind
and solar, and fossil fuel power
stations that can capture their
carbon dioxide emissions and

W
hen historians look
back at 2009, they
may judge the most
significant event of
the year to have been not the
global recession, or the war in
Afghanistan, but the UN climate
talks in Copenhagen in Decem-
ber.
At that meeting the world will
face a choice between agreeing a
concerted effort to curb – and
eventually reduce – greenhouse
gas emissions, and deciding that
the costs of doing so would be
too great, and the attempt will
have to be put off for another
time.
Whichever way the meeting
goes, it will have profound
implications for the energy
industry worldwide.
Energy use – specifically,
burning fossil fuels – creates
more than two-thirds of man-
made greenhouse gas emissions,
and a concerted plan to cut
them would mean a revolution
in energy production and use.
Yet in the industry there are
already huge changes under
way that do not depend solely
lenge to keep emissions low
enough to give us a chance of
restricting global warming to a
tolerable level of 2°C, while
meeting the world’s growing
demand for energy.
The baseline assumption of
Industry experts
believe that delivering
the required emissions
reductions will be
technically possible –
just about
the International Energy
Agency, the rich countries’
think-tank, is that on
unchanged policies, world
energy consumption will rise by
45 per cent by 2030.
Nevertheless, industry experts
believe that delivering the emis-
sions reductions required will
be technically possible, just
about.
Many of the technologies that
will be required are already in
store them underground.
Other forms of energy are
more difficult, and transport
fuels present a particularly
knotty problem.
But if there is an agreement
at Copenhagen, it will have at
its heart targets for emissions in
the medium term – in other
words, by 2020 – and they will
be achievable using technology
available today.
Whether there will be an
agreement is still hard to read.
It is in the nature of such nego-
tiations for the bargaining to
drag on to the eleventh hour.
This week, officials from the
172 countries that are members
of the UN Framework Conven-
tion on Climate Change, the
body that formally convened the
Copenhagen conference, have
met for what was scheduled to
be a final round of preparatory
talks in Barcelona.
There have been widespread
concerns that the UN process is
moving too slowly, and before
the Barcelona meeting Connie
Continued on Page 2

Inside this issue On FT.com

Iraq As the UK Andrew Bolger explores the future for the oil
troops withdraw, and gas industry in the North Sea as the region
energy groups passes peak production
are hoping to
move in, writes Libya Heba Saleh reports on the struggle between
Carola Hoyos conservatives and reformists over oil policy
Page 2
One­tonne
Transportation society
Emissions from air, land and sea travel are set to Lars Josefsson
more than double by 2050 unless something is (pictured)
done to stop them, writes Ed Crooks Page 3 explains the
importance of a
Guest column Michael Rothman says the global low carbon
economy is likely to be dependent on the oil price future for the
for many years to come Page 4 energy industry

Smoke bellows from the chimneys of Belchatów power station in Poland Reuters
2 ★ FINANCIAL TIMES THURSDAY NOVEMBER 5 2009

Energy | Regional Focus

Competition for infrastructure resources Help needed
AUSTRALIA

Peter Smith looks

to make
Richard Quin, a Perth-
based analyst at Wood Mac-
kenzie, the consultants,
hurdles in the current eco-
nomic climate, the greatest
of which is gaining market
secure off-take agreements
and contractor capacity to
build infrastructure.
“We believe that this bull-
ish longer-term pricing
environment reflects buyer
Problems also
because most of the big
arise

individual LNG projects are

at the prospects for
the array of new
natural gas projects
The world’s liquefied natu-
ral gas industry sat up and
paid attention in September
when Chevron approved the
A$43bn Gorgon natural gas
project off the coast of
Western Australia.
With more than an esti-
mated 40,000bn cu ft of nat-
ural gas in its fields, Gor-
gon is a significant resource
for fast-growing Asian econ-
omies. But Gorgon’s go-
ahead will worry the devel-
opers of the more than two
dozen LNG projects in Aus-
tralia and neighbouring
Papua New Guinea.
Analysts say less than
half have a chance of reach-
ing so-called “final invest-
ment decision”, and secur-
ing customers will be cru-
cial for their survival.
Orinoco f low
says the scale of Gorgon
will place heavy demands
on Australia, from labour
and logistical support to
housing: “At every point,
Gorgon will put considera-
ble pressure on the system
given how big it is.”
On top of Gorgon, Aus-
tralia has two other signifi-
cant LNG projects in pro-
duction – Woodside Petro-
leum’s North-West Shelf
venture and ConocoPhillips’
Darwin LNG plant, and a
third in construction, Wood-
side’s Pluto project.
“As Pluto is still in the
construction phase and
with the North-West Shelf
gas project continuing to
invest in new offshore infra-
structure development,
capacity in Australia is
already stretched,” Mr Quin
says. “Gorgon will, how-
ever, take the challenge to a
whole new level.”
As well as logistics, the
proposed LNG projects face
share given the number of
competing projects. That
question is particularly rel-
evant for the four groups
trying to convert coal bed
methane reserves in the
eastern Australian state of
Queensland into LNG.
The CBM industry is still
young but it has attracted
big names: the UK’s BG
Group; a joint venture
between ConocoPhillips and
Australia’s Origin Energy;
Australia’s Santos and Pet-
ronas of Malaysia and
Royal Dutch Shell with
Arrow Energy.
Three of these are looking
to reach final investment
decision within about eight
months, although some
analysts believe Conoco-
Phillips/Origin Energy is
lagging its rivals.
Adrian Wood, an analyst
at Macquarie Group, says
the rising number of LNG
projects in Australia will
intensify competition to
He predicts “big bottle-
necks” in the LNG sector,
and warns that contractors
seeking to build part of
their kit offshore will
encounter limits in Asia’s
steel fabrication factories.
“There are likely to be
Few projects
seem to be having
problems finding
customers
and long­term
contracts
losers whose projects are
significantly delayed or
worse still scrapped,” he
says.
However, he adds that
few projects to date seem to
be having problems finding
customers, and long-term
contracts have been signed
at attractive prices.
concerns over China’s
determination to aggres-
sively grow its LNG
imports,” he says.
China has a stated target
to increase LNG imports to
60m tonnes per annum by
2020.
“On the supply side, the
worry is that Australia will
struggle to deliver the huge
number of projects that the
market expects in a timely
fashion,” says Mr Wood.
He adds that of the 48
LNG processing trains
being considered, 17 are
undergoing front-end engi-
neering and design activi-
ties (Feed). However, he
believes Australia has the
resources to build only four
to six simultaneously.
“Developments need to be
synchronised which means
that many will be signifi-
cantly delayed,” he says.
Delays of one, two or
three years could lead to
LNG shortages.
owned by multiple parties.
The Woodside-operated
Browse gas fields, for exam-
ple, have encountered diffi-
culties over what part of
the Australian coast to
locate the LNG processing
facilities, while Sunrise,
which straddles the mari-
time borders between Aus-
tralia and East Timor, has
also been complicated by
where to locate its process-
ing facilities.
“These are quality fields
and they would be signifi-
cant developments if they
overcome the hurdles,” says
one analyst.
In barely three years,
Australia has become one
of the world’s most attrac-
tive LNG markets. Gorgon
and the boom in Queens-
land’s CBM industry have
added to the country’s
allure but they will cause
headaches for some of the
developers hoping to get
their projects over the line.
VENEZUELA
Benedict Mander
explains the
changing attitude
in Caracas
Sitting on top of what Presi-
dent Hugo Chavez assures
everyone are the largest oil
reserves in the world, Vene-
zuela has attracted interest
from foreign oil companies.
Indeed, when he swept
through 10 countries in Sep-
tember on his latest world
tour, Mr Chavez collected
investment pledges worth
some $36bn from Russian
and Chinese companies
alone.
But despite being keen to
get a piece of the pie, tradi-
tional oil majors have been
more cautious about com-
mitting themselves to a
ners,” says Carlos Rossi, a
Caracas-based petroleum
economist, who highlights
their capital, technological
expertise and efficiency.
If Venezuela is to boost
its oil production, that
boost is more likely to come
from the Orinoco’s Cara-
bobo block, according to
Patrick Esteruelas, a Vene-
zuela specialist at Eurasia
Group in New York.
Originally assigned to
Brazil’s Petrobras, which
subsequently pulled out,
the Carabobo block has
since attracted the interest
of 19 oil companies – includ-
ing BP, Chevron, ENI,
Shell, Statoil and Total – in
what is being billed as the
largest oil auction ever.
The project is divided into
three areas which could
produce up to 400,000 b/d
each, and are each expected
to require investments of

Baghdad
country whose socialist gov-
ernment has frequently
shown hostility towards pri-
vate investment.
Nevertheless, for the first
time in a decade, Venezuela
up to $60bn.
“Carabobo has better
prospects of being devel-
oped ahead of Junin, due to
the likely broader participa-
tion of international oil

starts to
is trying to attract new
investor interest. The presi-
dent of the state oil com-
pany, PDVSA, says that
Venezuela plans to double
production over the next
companies with more expe-
rience in heavy crude
extraction and upgrading,
and the fact that it’s geolog-
ically a lot more attractive,”
says Mr Esteruelas.

rebuild its
decade from over 3m bar-
rels a day (b/d) currently
(although many independ-
ent analysts reckon Vene-
zuela is producing as much
as 1m b/d less than that) to
RoseAnne Franco, lead
Latin America analyst at
PFC Energy, points out that
some state oil companies,
such as China’s CNPC, do
have experience in the

oil industry
about 6m b/d. development of heavy oil.
The extra production
would come from the Ori-
noco Belt, one of the larg- The government
est, mostly untapped, oil may be willing to
reservoirs in the world.
Venezuela has 142.3bn bar- make concessions
IRAQ Hussain Shahristani, Iraq’s oil
minister, laid out his ambitious
rels of proven reserves,
although that figure could
to make private
Renewed confidence plans last month. rise to 316bn barrels once sector participation
in global demand is “What we expect from the first
bid round and what we hope for
the process of certifying the
Orinoco reserves is con-
more attractive
having a beneficial from the second round is that cluded – this would outstrip
effect, writes Iraqi production will be between
10m and 12m barrels a day,” he
even Saudi Arabia.
In September, a consor-
“That said, clearly more
state oil companies do not
Carola Hoyos said, “and this will make Iraq tium of Russian companies have this capacity and their
equal to the world’s biggest oil – Gazprom, Lukoil, Rosneft, projects will struggle to

E
arlier this year, industry
executives flocked to
Baghdad for the chance
to win the right to
develop the country’s vast fields.
But only BP, the UK energy
group and its partner, CNPC of
China, walked away with an
agreement and the auction was
branded a shocking failure by pol-
iticians and industry executives.
But as summer turned to
autumn, international energy
companies and Iraq’s oil ministry
made renewed attempts to find
common ground. Last month
their bilateral discussions began
to yield results.
Oil prices have now spent
enough time around the $70 a bar-
rel mark that few executives fear
they will again fall back to the
lows of $32 a barrel, which they
hit following the collapse of Leh-
man Brothers and the onset of the
global economic downturn.
The more certain investment
climate has prompted companies
to return to deal-making, and
mergers and acquisitions have
again been popping up around the
globe.
The renewed confidence in the
global market for oil and financ-
ing has also borne fruit in Iraq. In
October, Baghdad secured its sec-
ond big oil deal this year as Eni of
Italy, Korea’s Kogas and Occiden-
tal of the US agreed to develop
the Zubair field.
Once the companies gain cabi-
net approval, they will, for the
first time since Iraq nationalised
its oil industry 40 years ago, have
the opportunity to work in the
country with the world’s third
largest oil reserves.
producers.”
The opportunity to help quadru-
ple Iraq’s total production of
about 2.5m b/d is all the sweeter
because almost every one of the
world’s big international oil com-
panies is struggling to expand.
In the past few years they have
been losing that battle as 80 per
cent of all oil fields remain out of
their reach, guarded by the coun-
tries that own them.
For Iraq, the need to boost its
most important revenue stream
has become critical, especially
since falling oil prices have
burned a large and worrying hole
in the national budget.
This is one important reason
Baghdad finally got its political
act together to auction off the
right to develop the fields, says
one UK diplomat who has spent
time corralling private invest-
ment for the country.
But at its auction in June, Iraq
insisted it would pay only $2 a
barrel to oil companies once they
had boosted a field’s production to
its maximum plateau. One after
the other, Mr Shahristani sent oil
executives back to reconsider
their bids. Only BP and CNPC,
the Chinese state oil company,
proved willing to bend to Bagh-
dad’s wishes.
Their prize was the right to
develop Iraq’s biggest field. The
giant Rumaila field is believed to
hold 65bn barrels of oil, 20bn of
which are thought to be recovera-
ble. BP and CNPC pledged to
increase its production to 3m b/d
from about 1m b/d.
Executives working for BP’s
competitors scoffed at the com-
pany’s brazenness, but no one
Rehabilitation of flagging sector: an engineer works at the Barjisiya oil fileds in Zubair One
was entirely sure who had been
more foolish: the companies that
had walked away from the biggest
prize in decades, or the company
that was willing to reduce its fees
by half to get a toe-hold in the
most import oil patch to open up
since the fall of the Soviet Union.
For Iraq, the need
to boost its
most important
revenue stream has
become critical
Tony Hayward, BP’s chief exec-
utive, staunchly defends his deci-
sion to return to the Rumaila
field, which BP discovered in 1952.
He told Petroleum Intelligence
Weekly, the industry newsletter:
“We understand the rocks. We are
confident that the returns from
this investment will be compati-
ble with other opportunities in
our portfolio. That means a 15-20
per cent return.”
The details about each of the
contracts remain undisclosed,
making any accurate comparison
between BP’s June agreement and
Eni’s October accord impossible.
Iraq says Eni agreed to accept
$2 a barrel after Mr Shahristani
clarified other parts of the taxa-
tion. Eni sees it differently. The
Italian oil company believes Bagh-
dad made concessions on taxes
that significantly improved the
overall profitability of the
projects, which it believes will
require a total investment of
about $20bn.
Either way, Eni has promised to
boost production at the Zubair
field from 200,000 to 1.1m b/d and
Iraq is now well on its way to
beginning the rehabilitation of its
most important industry.
Meanwhile, other oil companies,
AFP
including Lukoil of Russia and
ExxonMobil of the US, are now
also back at the negotiating table.
It is critical that any agree-
ments signed in the coming
months remain in force, even if
next year’s Iraqi elections mean a
change in power.
Unfortunately, that is far from
assured because Iraq still lacks a
hydrocarbon law, largely because
it has failed to agree critical pay-
ment issues with the Kurdistan
regional government.
But Mr Shahristani has driven a
hard bargain with the oil compa-
nies and the next government will
hardly be able to argue credibly
that the country is being fleeced
by foreigners. If it does derail the
process, BP, Eni and their peers
will be bitterly disappointed, but
the far greater loss, will be that of
the Iraqi people, who desperately
need the additional revenue so
they can begin to rebuild their
country.
Surgutneftegaz and TNK-BP
– agreed to invest $20bn
over three years to eventu-
ally produce as much as
450,000 b/d from Orinoco’s
Junin block. A week later,
Mr Chavez announced that
a group of Chinese compa-
nies had signed an agree-
ment to invest $16bn to pro-
duce a similar amount in
the same area.
Other national oil compa-
nies are studying projects
in the Orinoco, with Mr
Chavez handing out dozens
of oil blocks since 2006 to
political allies including
Belarus, Cuba, Uruguay and
Vietnam. Although they are
not known for their exper-
tise in extracting the tar-
like oil found in the area,
some have already started
producing small amounts,
with India’s ONGC now
pumping some 30,000 b/d.
But private companies –
at least those not associated
with governments Vene-
zuela’s anti-capitalist presi-
dent considers allies – have
been more circumspect.
Claims by PDVSA officials
in September that France’s
Total was going to invest
$25bn in a project in the
Junin block were played
down.
Nevertheless, there is no
doubt that for Venezuela’s
production targets to be ful-
filled, international oil com-
panies must be involved.
“Venezuela cannot do
without them. It needs pri-
vate companies as part-
move from certification to
development,” she says.
“Still, with PDVSA func-
tioning as operator, perhaps
a partner’s financial capital
will be sufficient.”
Although the Carabobo
bidding round has stag-
nated over the past year,
the government was
recently reported to be will-
ing to make concessions to
make private sector partici-
pation more economically
attractive.
With worries centring on
profitability and the extent
of operational control, as
well as the risk associated
with investing in Vene-
zuela, the government is
now believed to be willing
to lower royalties and taxes
for the first time in 10
years. But it remains
unclear whether or not
companies will be able to
take any investment dis-
putes to international
courts, for example.
The latest terms for the
Carabobo auction will be
revealed on November 12,
and companies will have
until January 28, 2010 to
submit their bids. Whatever
happens, doubts remain
about how soon any of the
projects will actually begin
to start pumping oil. Mr
Esteruelas reckons that, at
best, it will take five years
for production to start.
“I have serious doubts
about either Carabobo or
Junin being developed any-
time soon,” he says.

Contributors
Ed Crooks
Energy Editor
Wind of change blowing through corridors of power
Carola Hoyos Continued from Page 1
Chief Energy
Correspondent
Hedegaard, who as Den-
Sheila McNulty mark’s climate and energy
US Energy Correspondent minister is the host of the
Copenhagen talks, warns:
Bernard Simon “It will require real courage
Canada Correspondent from the negotiators to
solve some of the crunch
Peter Smith
issues this week.”
Australia Correspondent
On the other hand, the
Benedict Mander distance that many coun-
Venezuela Correspondent tries have moved over the
past year towards reaching
Tom Griggs
Commissioning Editor
an agreement has been very
significant.
Steven Bird
Designer
In particular, the biggest
obstructions – the US and
Andy Mears
key emerging economies
Picture Editor
such as China and India –
For advertising, contact: have become much more
Liam Sweeney willing to make a deal.
+44 020 7873 4148 Several leading emerging
Fax +44 020 7873 4006 economies, such as Indone-
liam.sweeney@ft.com, sia, have made commit-
ments to emissions limits,
and China has indicated
that it is prepared to do the
same, although it has not
yet made clear what figure
it will be taking to Copen-
hagen.
India has made a commit-
ment not to be a “deal-
breaker” at the talks.
Meanwhile, the US has an
administration under presi-
dent Barack Obama that is
determined to do a deal,
and a Congress that could
make it possible.
The US negotiating posi-
tion is hampered by the fact
that the Kerry-Boxer energy
bill now before the Senate,
which mandates a 20 per
cent cut in US emissions, is
highly unlikely to have
passed by the time of
Copenhagen.
Nevertheless, the admin-
istration hopes that it will
be able to offer the world
the prospect of an emis-
sions reduction of that
scale, and then hope that
the bill will be passed to
fulfil that promise next
year. Officials involved in
the talks have been at pains
recently to define what suc-
cess at Copenhagen would
look like. It is extremely
unlikely that a new climate
treaty will be signed.
Instead, the hope is that
there will be a high-level
political agreement, with
many of the key details
spelled out, that can be cod-
ified into a treaty to be
signed next year.
That prospect is what the
senior Chinese climate
negotiator meant, when he
said that Copenhagen
would be the beginning, not
the end, of a process.
An agreement at the talks
would galvanise low-carbon
industries everywhere.
Alternatives to fossil
fuels, from nuclear power to
biofuels, are almost invaria-
bly dependent on govern-
ment support to be commer-
cially viable, and a strong
declaration from Copenha-
gen would represent a com-
The imperatives of
energy security do
not always point in
the same direction
as the fight against
climate change
mitment that that support
is going to be sustained.
Meeting the targets for
emissions expected to be
part of a deal – absolute
cuts in the developed coun-
tries, cuts relative to “busi-
ness as usual” baseline
growth in developing ones –
will require sustained
changes to energy produc-
tion and use. There will
also be fresh impetus
behind financing mecha-
nisms creating incentives to
invest in low-carbon
energy, such as the emis-
sions trading scheme for
the US envisaged by the
Kerry-Boxer bill, and
schemes for investors in
rich countries to finance
emissions reductions in
emerging economies.
Even if there is no clear
resolution for Copenhagen,
however, many of the forces
driving change in the
energy industry will not
disappear. Some countries
will continue to push for
emissions reductions
because of national or
regional commitments,
such as the European
Union’s promise to cut
emissions by 20 per cent
and derive 20 per cent of its
energy from renewable
sources by 2020.
Other countries, the US
and China probably among
them, are likely to be
increasingly preoccupied
with energy security, as the
pressure of rising demand
in developing countries
runs up against the con-
straint of limited supplies of
fossil fuels, especially oil.
One does not have to be a
paid-up believer in “peak
oil” theory – the idea that
the world is now past or
close to the highest oil pro-
duction it will ever reach –
to accept that the depletion
of mature basins such as
the North Sea, combined
with political and security
problems in countries from
Nigeria to Russia, will
make it increasingly diffi-
cult and expensive to meet
that rising demand.
The imperatives of energy
security do not always
point in the same direction
as the fight against climate
change; coal, plentiful in
the US and China, is the
worst fuel for carbon diox-
ide emissions.
Often, however, the two
forces push in the same
direction. Support for both
renewables and nuclear
power is likely to gain
strength in both China and
the US, for example.
The world is on a long
slow journey away from fos-
sil fuels, and while the out-
come of Copenhagen will
undoubtedly influence the
speed of that transition, it
will not change the direc-
tion of travel.
FINANCIAL TIMES THURSDAY NOVEMBER 5 2009 ★ 3

Energy | Emissions

Dirty fuel needs more than a bucket and spade

OIL SANDS
Bernard Simon on
the objections to
Canada’s reserves
As the Copenhagen climate-
change summit approaches,
environmental activists are
stepping up their attacks on the
vast Alberta oil sands as a
prime example of the world’s
dependence on “dirty” energy.
Greenpeace protestors have
driven home their message in
recent weeks by disrupting oper-
ations at Royal Dutch Shell and
Suncor projects. Others entered
a Total refinery in Normandy,
France, to protest against that
company’s investments in the
oil sands, and defaced Total bill-
boards around Edmonton, the
Alberta capital, accusing it of
"environmental destruction".
Chanting demonstrators con-
fronted Stephen Harper, Can-
ada’s prime minister, when he
visited the White House in Sep-
tember, accusing him of “dirty-
oil salesmanship”.
In a potentially more damag-
ing threat, some members of
Congress have proposed includ-
ing a low-carbon fuel standard
in pending climate-change legis-
lation. If adopted, such a stand-
ard would bar the US from
importing crude produced from
the oil sands.
The critics have no shortage
of ammunition. Across an area
the size of Florida, the bitumen-
like oil sands are estimated to
contain reserves of 173bn bar-
rels of oil, a figure exceeded
only by Saudi Arabia.
The slump in the oil price in
late 2008 and early this year has
slowed work on many projects.
Even so, the Canadian Associa-
tion of Petroleum Producers
expects output from projects
already in operation or under
construction to grow to 1.9m
barrels per day in 2015 from
1.2m b/d last year. More invest-
ment will be channelled into oil
sands production if the oil price
climbs above $100 a barrel.
Vast quantities of water are
needed to produce steam that is
used to extract deep oil sands
deposits. The landscape around
Fort McMurray, the main town
in the area, is dotted with the
huge, open-pit mines from
which shallower deposits are
unearthed. The upgraders that
turn the oil sands into heavy
crude spew greenhouse gases
into the atmosphere.
The Pembina Institute, a local
environmental group, warned in
a report last year that nine
upgraders planned at the time
would consume 10 times as
much fresh water as Edmon-
ton’s 750,000 residents, use more
electricity than all of the homes
in Alberta, and emit as much
pollution as 10m motor vehicles.
Syncrude, one of the biggest
producers, found itself in a pub-
lic-relations nightmare earlier
this year when 1,600 ducks died
after landing in one of its tail-
ings ponds and being coated
with bitumen residue.
Producers are aware
of the need to improve
their environmental
record
The producers and their sup-
porters are scrambling to find
an effective strategy to counter
the critics. Their response up to
now has rested heavily on the
argument that the oil sands’
environmental costs are out-
weighed by their economic and
geo-political benefits. Encapsu- which currently makes up about Meanwhile, some of Canada’s
lating the industry’s point, the half of oil sands output, is being leading scientists are weighing
Consumer Energy Alliance, a overtaken by the less unsightly in on the oil sands in the hope
US group lobbying against the
low-carbon fuel standard,
steam-assisted gravity drainage
(SAGD) recovery method.
of bringing a greater measure of
dispassionate analysis to the
asserts on its website that Syncrude has taken a slew of debate.
“without Canadian crude, US measures to avoid a repetition The Royal Society of Canada
consumers would be forced to of last spring’s duck deaths. set up an eight-member panel in
find those supplies elsewhere, They include installing more October to assess the industry’s
forced to pay more to get them, noise cannons – bringing the impact on the environment and
and forced to rely on people and total to 190 – and firing them public health. Led by Steve
places halfway across the world earlier in the year than before. Hrudey, professor emeritus of
whose values and interests don’t A radar monitoring system, sim- environmental health sciences
always align with our own”. ilar to those used at busy air- at the University of Alberta, its
But producers are increas- ports, is being installed to track members also include experts in
ingly aware of the need to bird flight patterns. air and water quality, land rec-
improve their environmental
record and to communicate the
But the outcry over the ducks
has also elicited contrition sel-
lamation and public health,
among others.
improvements to the public. dom seen in the past. Syncrude The panel promises that its
With financial support from ran full-page newspaper ads conclusions will be “balanced,
the government, the industry is offering “a heartfelt and sincere thorough, independent [and]
spending heavily on “carbon apology”. Even Mr Harper, free from conflict of interest”.
capture” technology that diverts whose environmental record is Its report, due in the spring of
carbon dioxide to underground one of his Conservative govern- 2011, is sure to be closely stud-
storage reservoirs. ment’s weak spots, weighed in, ied by all sides. The question is
In addition, the producers describing the ducks’ fate as “a whether it will change any
point out that open-pit mining, terrible tragedy”. minds.

Dash for gas

is a fast way
to cut carbon
emissions
UNITED STATES drop in costs across the sec-
tor.
Sheila McNulty Next year, however, fewer
explains why it is producers are hedged. Inde-
pendents, who account for
now regarded as a most of US onshore natural
viable alternative gas production, have only
30-35 per cent of natural gas
production hedged in 2010,
As Congress struggles to according to David Trice,
pass climate legislation, an chairman of the American
Plug power: automotive shows are full of demonstrator models such as this one in Munich but electric cars are still compromised by insufficient battery life and short ranges Getty increasing number of Natural Gas Alliance, an
energy analysts are offering advocacy organisation.
up a quick way to reduce Many are counting on an

Problems with the alternatives carbon emissions – use

more natural gas.
In the past three years,
estimates of natural gas
supplies in the US have
grown from 30 years supply
economic rebound
improve demand for natural
gas in the industrial and
power sectors in 2010. That
would empty from storage
the oversupply of natural
to

TRANSPORT FUEL
Ed Crooks looks at
the potential for
new technologies
emissions – petrol, diesel
and jet fuel – offer a
uniquely attractive combi-
nation of cost and energy
content relative to volume.
The technologies that
could deliver a low-carbon
future for transport are
increases in biofuels pro-
duction has faltered, and
governments have typically
insisted that future growth
must be in second-genera-
tion biofuels that do not
compete with food, such as
cellulosic ethanol made
stimulus package, has
developed a $109,000 all-elec-
tric roadster.
However, none of these
companies has yet solved
the central problem of bat-
tery-powered cars: short
range – 40 miles in the case
Steven Chu, the US energy
secretary, is a sceptic,
describing it as only a long-
term option, although the
Senate ignored his doubts
and voted to continue fund-
ing hydrogen research.
Honda, the Japanese car
to be cost competitive with
conventional petrol. Others,
such as cellulosic ethanol,
will require higher oil
prices and/or technological
advances, the IEA believes.
One message from that
assessment is that a higher
at current consumption lev-
els to 100 years supply, as
technology and experience
have enabled producers to
extract economically large
amounts of the fuel from
previously inaccessible
shale rock.
gas that is putting down-
ward pressure on prices.
But Jen Snyder, natural
gas analyst at Wood Mac-
kenzie, the energy research
firm, is forecasting a recov-
ery to only $4-$4.50 per
mBtu next year, as imports

I
n the worldwide push
to cut greenhouse gas
emissions, transport
fuels present one of
the thorniest obstacles.
The International Energy
Agency, the rich countries’
think-tank, estimates that
almost a quarter of the
world’s energy-related car-
bon dioxide emissions are
generated by transport. The
global spread of personal
mobility – with the number
of cars on the road expected
to triple to 2bn over the
next four decades – and the
rise in national and interna-
tional travel and trade
means those emissions are
set to more than double by
2050, unless something is
done to stop them.
Reversing that trend will
be difficult, because the oil-
based products that create
starting to emerge. But in
some cases full commercial
deployment could be dec-
ades away. The three most
promising technologies –
biofuels, battery-powered
electric vehicles, and hydro-
gen fuel cells – all have
their disadvantages.
Biofuels have already
established small but signif-
icant shares of fuel markets
in the US, Japan and
Europe, helped by govern-
ment mandates. But soar-
ing crop prices have raised
concerns about fuel versus
food competition, and the
purported benefits of biofu-
els in terms of emissions
reduction have been chal-
lenged in the case of US
corn-based ethanol and
biodiesel from palm oil
sourced in Indonesia. Politi-
cal support for further
from straw or wood chips.
Many companies are
involved in developing sec-
ond generation biofuels,
some of them backed by
grants from the US govern-
ment and partnerships with
big oil companies including
Royal Dutch Shell, BP and
now even ExxonMobil.
However, production has
until now been on a rela-
tively small scale, and no
one has yet demonstrated
that second generation bio-
fuels can be commercially
viable on a large scale.
Electric vehicles are also
receiving huge investment,
with companies including
Toyota, GM and Nissan sell-
ing or developing wholly or
partly battery-powered
vehicles. Tesla Motors, a US
company recently backed
with federal funds in the
of GM’s Chevy Volt – and
long recharging times.
Hybrid vehicles with a bat-
‘The first priority
should be to adopt
technologies that
are cost­effective
today’
tery and a petrol engine,
such as the Toyota Prius
and the Volt, get round
those problems, at the cost
of continued – if reduced –
dependence on oil.
The third leading technol-
ogy option is the hydrogen
fuel cell. Still backed by
many because of its high
energy content, hydrogen
has fallen out of fashion.
group and a strong support-
ers of hydrogen fuel cell
vehicles, has recently
admitted that introducing
them on a large scale could
be slow and difficult.
Like electric vehicles,
hydrogen cars would
require a new refuelling
infrastructure. And for
now, the prices of hydrogen
vehicles are stratospheric –
$400,000-plus, says GM – so
that unlike battery cars, it
is hard to see them going
on commercial sale soon.
At today’s oil price of
about $80 per barrel, all
three of those alternative
energy sources may have
trouble competing. The IEA
estimates that even at $120
per barrel, hydrogen made
from natural gas – not the
ideal method – may be one
of the few alternative fuels
rate of tax on oil-based fuels
is badly needed.
Taxing conventional pet-
rol and diesel more heavily
will encourage the develop-
ment of low-carbon fuels,
providing more reliable
incentives for investment
without relying on the
vagaries of a volatile oil
market. It will also drive
improvements in fuel effi-
ciency.
Nobuo Tanaka, the IEA’s
secretary-general, argues:
“The first priority should be
to adopt technologies and
practices that are cost-effec-
tive today. This will lead to
substantial gains in vehicle
fuel economy.”
While the world waits for
solutions to the problems of
biofuels, batteries and fuel
cells, that is surely the best
advice to follow.
Natural gas has about
half the carbon emissions of
coal, which fuels 50 per cent
of US electricity production
versus about 25 per cent for
natural gas.
“Congress should make
natural gas part of the pol-
icy solution,” says Joe Stan-
islaw, independent senior
advisor to Deloitte, the con-
sultancy. “It could take care
of energy security and cli-
mate change concerns at
the same time.”
The natural gas industry
has banded together to con-
vince Congress to do just
that, and it has gained some
traction in the climate bill
being pushed through the
Senate.
“We want them to under-
stand the game truly has
changed in natural gas,”
says Rod Lowman, presi-
dent, America’s Natural
Gas Alliance, the grouping
that has been attempting to
get the industry’s position
of liquefied natural gas that
were delayed in 2009 begin
to flow into the US.
“It could leave some play-
ers more exposed next
year,” Ms Snyder says. “It
could be a more painful
year to endure.”
Particularly if producers
jump back into the field too
soon.
Barclays Capital notes
that while storage stands at
3.32 tcf, 17 per cent above
‘This whole
unconventional gas
play is a game­
changer in north
American energy’
last year and 18 per cent
above the five-year average,
natural gas production has
been rising. Producers are
starting to put more rigs

Advantages of frugal fuel
Guest Column
ANDREW WARREN
Invest €8bn. Get back
€25bn. That is how much
the European economy
should benefit by
implementing a new
European Union directive,
according to its economic
impact assessment.
The initiative examines
just how efficiently all
energy produced is used –
in this case in Europe’s
190m buildings, where
almost half of all fuel is
consumed – and finds it
sadly wasteful.
At current energy prices,
about one-third of all of
the energy consumed in
buildings could be saved,
with rates of return way
beyond any conventional
investment scheme.
Employ the best available
technology, and you are
talking about halving fuel
use while still enjoying the
same standards of comfort
and efficiency.
The European
Commissioner in charge of
energy for the past five
years is Andris Piebalgs.
He has presided over a
revolution in thinking in
his directorate in Brussels.
“My first priority is always
energy efficiency,” he
announced on his first day
in the job. Doing more
with less has become his
leitmotif.
His arguments have been
threefold. The first is that
the more money European
businesses and households
spend on fuel, the less they
have to spend on other
goods and services.
Being energy-efficient
makes industry more
competitive and people
better off. He has also been
very aware of the
enormous employment
potential of making
economies more fuel
frugal.
Certainly a great number
of jobs can be created by
the refurbishment of the
existing building stock –
insulating the fabric,
installing low energy glass
and lighting,
revolutionising control of
the heating system.
A draft action plan for
energy efficiency policy
over the next decade,
under discussion by the
Commission, is entitled
“Seven Measures for Two
Million new EU Jobs”.
Of these, 1.7m would be
created as a result of
seriously improving the
energy efficiency of the
building stock. The second
argument concerns the
security of energy supply.
All the forecasts are that,
within 15 years, Europe
will move from importing
half of its fuel, to about 75
per cent.
This carries political and
economic risks, with some
countries particularly
vulnerable to cuts in gas
supplies. The less fuel is
burnt, the less the risk of
supply failure.
And then there is the
threat of uncontrolled
Saving energy is
the most readily
available and rapid
way to reduce
greenhouse gases
climate change. This has
become one of the world’s
most urgent political
problems: hence the
unprecedented gathering of
world leaders next month
in Copenhagen to address
this single topic.
It has long been clear
that energy saving is the
most readily available and
rapid way to achieve
greenhouse gas reductions.
It also has the great
political advantage of being
a popular policy option
with the public, as
countless Eurobarometer
opinion polls have shown.
Whereas every non-fossil
fuel option carries with it
strong opposition –
whether of a localised
Nimby (not-in-my-back-
yard) basis as with wind
power, or of concerns
about waste, proliferation
and safety as is the case
with nuclear fission.
After all, as Mr Piebalgs
observes, “the most
ecologically friendly form
of energy is that which
you don’t use in the first
place”.
The International Energy
Agency has consistently
pointed to the need for a
step change among its
member governments in
the policy resources
committed to increasing
energy efficiency.
It warns that “only
strong progress on energy
efficiency now can make
further commitments on
greenhouse gas emission
reductions in the short to
medium term realistic”.
For those concerned,
progress can seem
agonisingly slow.
Even with the knowledge
Cost and effectiveness of green stimulus measures* heard in Washington. into the field.
Maximum cost/saving (€ per tonne CO2 equivalent) The problem is that the They do not want to risk
game has changed for pro- losing leases (which require
50 ducers, as well. they be drilled or let go,
Solar
The surfeit of US natural typically after three years
1st 2nd Biomass
Low co-firing gas led prices to fall this in the more popular fields)
Cost generation generation intensity
biofuels biofuels of existing year to a seven-year low, as amid a change in confi-
Electricity
wind power demand has dropped with dence about the future of
0 High plants
from landfill
gas intensity the economic downturn. US natural gas.
Nuclear
Geothermal wind Producers have continued The sector is optimistic
to feed into this oversupply Congress will recognise nat-
Saving Residential insulation retrofits
situation because the fields ural gas as a necessity to
50
the industry have tapped reaching its climate change
Residential heating into are tremendous. goals.
Commercial and air conditioning
insulation improvements Unlike in oil production, Natural gas is the lowest-
Lighting-energy
saving bulbs retrofits which often yields dry carbon fossil fuel and pro-
100 holes, in these shale fields, vides back-up power to
0 10 20 30 40 there is little risk of not renewables, when wind-
Green effectiveness finding anything. mills do not turn and the
(reduction in GtCO2 equivalent per year) “It’s not a structure that sun does not shine.
you’re trying to hit that “This whole unconven-
Source: McKinsey & Co * Maximum global potential by 2030
was created by a trap, as in tional gas play is a game
oil production,” says Raoul changer in north American
that it can deliver such very best components are LeBlanc, senior director, energy,” says Robin West,
enormous benefits, the always installed. PFC Energy, the consul- chairman of PFC Energy,
directive that promises Yet these kind of details tancy. “It’s like a big blan- the consultancy.
these returns has this are surely becoming ket. You always hit gas.” Mr Trice says the natural
autumn been subject to central to energy policy as But at a time when US gas advocacy group is mak-
grindingly-detailed scrutiny we increasingly recognise natural gas storage is ing inroads in the Senate,
within the official
Triologue process.
it is not energy per se that
anybody wants but rather
reaching capacity, that is
not good news in terms of
where it hopes for better
treatment than it received
This arcane method of the services they provide; prices. in the House. Lobbying con-
negotiation places and that these services can Producers have been able tinues in Washington.
European Commission be provided with a fraction to hang on this long “Natural gas can be a cor-
officials, representatives of of the units of energy because 75 per cent of the nerstone of energy policy,”
governments and senior currently used. sector is hedged at US natu- he says.
MEPs into the proverbial As Mr Piebalgs says: ral gas prices of $8 or $9 per While that might point to
darkened (if no longer “Energy efficiency is the million British thermal more favourable tax breaks
smoke-filled) rooms. For cheapest and most effective units (mBtu) this year. in the long run, it is not
hours at a time, they try way to reduce energy While that is down from going to help producer pros-
to reach agreement on the policy risks.” The last year’s record high of pects in the short term,
exact wording of what is arithmetic remains: invest $13.69 per mBtu, it is far when confronting the possi-
required to ensure all new €8bn, get back €25 bn. higher than the prices of bility of natural gas prices
buildings become very low below $3 per mBtu hit in below $3 per mBtu.
energy users, and that Andrew Warren is director recent months. “I don’t think anything is
whenever any existing of the UK Association for Companies are also bene- economic at $2.50,” Mr Trice
building is upgraded, the the Conservation of Energy fiting from a 30-35 per cent says.
4 ★
Energy | Supply & Demand
Crisis or a rosy future?
OIL CRUNCH
Carola Hoyos asks
whether the
industry is set for a
squeeze or a boom
A
string of impres-
sive discoveries
from America to
West Africa have
prompted optimism that a
widely-touted supply
crunch may not be as immi-
nent as industry watchers
have suggested.
Some executives say that
the drop in demand and the
overhang in capacity will
delay an oil crunch for
some time to come.
Ian Taylor, head of
energy trader Vitol, notes
that tanker rates are still
below marginal cost, US
refineries are running at lit-
tle more than 80 per cent
capacity and distillates are
being stored in tankers
around the world because
no one wants to buy them:
“We think there has been
over-investment in the sup-
ply chain,” he says. “Even
with strong [economic]
growth, oil demand will not
absorb the capacity for sev-
eral years.”
Others take a different
view, believing China’s oil
demand will bounce back
and uncertainty in volatile
countries such as Vene-
zuela and Nigeria could
quickly drive up prices.
“It does not take a lot to
take 2m barrels a day off
the market,” counters
Albert Helmig, president of
the Hong Kong Mercantile
Exchange.
Christophe de Margerie,
chief executive of Total,
this month challenged
industry executives to
stand up and disprove his
theory that the world would
never be able to produce
more than 100m b/d – about
20 per cent more than
present production rates –
because much of the
remaining oil lies in coun-
tries either unable or
unwilling to tap it.
There are two main rea-
sons many in the industry
believe oil prices could
spike. First, new discoveries
have struggled to outpace
the speed with which old
fields are declining. The
world depends on a few
giant, old, slowing fields
and nothing has been found
to compare with them since
the 1970s, argues Matthew
Simmons, a consultant and
former investment banker.
One of the starkest
declines is that of the Can-
tarell field. A 25 per cent
annual drop in production
means Mexico, one of Latin
America’s largest oil export-
ers, may become a net
importer by the end of the
decade.
Recent discoveries
signal that coastal
waters from Ghana
to Sierra Leone
may be rich in oil
Second, as oil prices have
fallen, companies have
trimmed budgets. Invest-
ment cuts have led many in
the industry to worry that a
supply crunch risks push-
ing oil prices back above
$100 a barrel.
ConocoPhillips, the US
group, plans to cut capital
spending by $1.5bn and
shed $10bn in costs over
two years; Eni of Italy, has
slashed its dividend to con-
tinue funding its opera-
tions; oil projects in high-
cost areas such as Canada’s
oil sands have been delayed
and exploration licensing
rounds, such as in Algeria,
have yielded less interest
than in the past.
Falling prices in the oil
services sector, which pro-
vides equipment such as
rigs and pipes, should have
eased cost pressures, but as
oil prices have settled at
around $70-$80 a barrel, so
have the falling costs. This
makes it more difficult for
companies to avoid delay-
ing marginal and more
expensive projects.
But all is not lost. The oil
industry has recently had
more reason for optimism:
oil prices are up on signs of
economies strengthening
and Iraq appears serious
about allowing oil compa-
nies to develop its huge
fields – development deals
under discussion could add
7m b/d to Iraq’s production.
Moreover, exciting discov-
eries around the world
show that the seven years
of oil price rises that ended
in 2008 prompted smaller
companies to explore virgin
territories and encouraged
larger companies to make
big bets on new technology.
Anadarko of the US and
Tullow of the UK struck oil
off the coast of Sierra
Leone, signalling that the
coastal waters from that
country to Ghana, site of
the large Jubilee field, may
be rich in oil.
BP crossed a new frontier
in the Gulf of Mexico, a
well-known oil region, by
finding oil trapped in
deeper rocks than ever pre-
viously found.
But the area getting most
attention is Brazil. A recent
discovery by Petrobras, the
state oil company, has
prompted upward revisions
of the country’s reserves.
These discoveries need
billions of dollars in invest-
ment. It will be up to oil-
rich governments to make
sure the investment climate
allows this to happen.
But executives also warn
that oil-consuming govern-
ments must also make sure
their policies to reduce car-
bon dioxide do not make oil
and gas exploration so unat-
tractive that investment
falls before greener alterna-
tives become available.
FINANCIAL TIMES THURSDAY NOVEMBER 5 2009
West African Jubilee: Tullow Oil’s Songa Saturn rig searches for oil off the coast of Ghana
Prosperity of
the world
hinges on oil
Guest Column
MICHAEL ROTHMAN
When the price of oil
neared $150 a barrel last
year, blame was attributed
to unusual trading patterns
related to an explosion in
oil derivatives trading, “oil
as an asset class”
transactions and an
unprecedented correlation
between crude prices and
the US dollar.
Lawmakers and the
investment community
have made Herculean
efforts to root out
speculative influences but
the reasons for instability
in the oil market are much
more fundamental.
The oil market cycle that
began in 2003 is unlike any
we have seen previously
and suggests that the
world economy may have
become alarmingly
dependent on the price of
oil.
The rally in oil prices
that started the current
cycle stemmed from fears
about availability after
three supply shocks in a
five-month period took
about 8 per cent of global
oil supply out of the
market in 2003: the
Venezuelan oil workers’
strike cut the country’s oil
output by 90 per cent, the
second Gulf War led to the
complete shut-down of
Iraq’s production and
rioting in Nigeria related
to the presidential election
interrupted 40 per cent of
its oil output.
These outages may have
been transitory, but they
nevertheless generated
fears about oil availability
which were reinforced by
other supply-side
considerations such as the
effective re-nationalisation
of Yukos in Russia and
indications that Iran was
developing nuclear
weapons.
In a market where fear
drives oil prices, there are
two possible solutions: a
supply response, which in
terms of the global oil
market means an increase
in supply from non-Opec
producers, or a decrease in
demand.
A similar fear-based
market existed at the end
of the 1973-1980 cycle
which saw Iran’s oil output
shut down completely
(taking 10 per cent of the
world’s supply offline). But
when that cycle came to
an end, non-Opec output
was in the midst of a 35
per cent rise. In the
current cycle, the non-Opec
supply response has been
very limited: since 2004,
when capital expenditures
for oil exploration and
production activity started
a major upswing, the
cumulative non-Opec
supply growth has totalled
less than 2 per cent and it
is difficult to find any data
that suggests non-Opec
growth will exceed 1 per
cent in any given year
over the next five years.
This lack of a supply
response from outside the
Opec cartel illustrates the
neglect of the oil industry
over the last two decades,
but, more importantly, it
represents the first time
since the second world war
that the industry has not
managed a meaningful
supply response to higher
average oil prices.
The second option to
assuage the fear in the
market is to decrease
demand. Here again, it is
helpful to examine the
1973-1980 cycle: from 1979
to 1983, roughly 10 per cent
of global oil demand
evaporated as oil used for
heat and electricity
generation was displaced
by coal, natural gas and
nuclear power. This
demand destruction
stemmed from the fact that
roughly 30 per cent of the
world’s oil use during the
1970s was for heat and
power.
Today, however, such a
dramatic shift away from
oil demand is highly
improbable: over 70 per
cent of global oil
consumption is currently
for transportation fuels,
while a quarter is used for
petrochemical feedstocks or
specialty materials –
neither of which can easily
be replaced by alternative
fuels.
Inelastic structural
demand means oil
has become the
most significant
influence on the
health of the global
economy
With structural demand
for petroleum now so
inelastic, demand for oil
has become the most
significant influence on the
health of the global
economy. But without a
meaningful non-Opec
supply response, the only
possible response to limits
on availability are to
change the level of
consumption. However,
high and rigid demand
characteristics mean it is
extremely difficult for the
world economy to adapt its
demand to the limits on
supply.
The result is that the
price of oil has an ever
greater interdependency
with the wider economy.
Or, put another way, the
global economy is staring
down the barrel of a series
of boom-bust cycles that
will be directly caused by
the availability of oil.
Michael Rothman, is the
president and founder of
Cornerstone Analytics, an
energy consultant to
government and
quasi-government
organisations and a former
chief energy strategist at
Merrill Lynch