FT REPORT – ENERGY: A new climate of change

By Ed Crooks, Financial Times
Published: Jun 19, 2007

Thomas Brooks, vice chairman of Constellation, the US energy supplier, says he can measure the status of his industry by the reactions of his neighbours. A few years ago, when he told them what he did for a living, they would smile politely and their eyes would glaze over. Now, they are riveted, and bombard him with questions.

The twin imperatives of climate change and security of supply have focused attention on the energy industry as never before; not even in the crisis of the 1970s.

Awareness of the threat created by man-made global warming is the new factor that has transformed the terms of the debate.

As the scientific consensus on the reality of the danger has hardened, many who were sceptical have been won over, or at least brought to accept that the issue is serious.

Even US president George W Bush, the sceptics’ cheerleader, has said he wants the US to be “actively involved, if not taking the lead” in creating a new global framework for limiting greenhouse gas emissions, to follow the Kyoto protocol.

At the Group of Eight summit in Heiligendamm, Germany, this month, he signed up to UN-sponsored negotiations on drawing up that framework at a meeting in Bali later in the year.

Even ExxonMobil, excoriated by environmental groups for its support for arguments against policies to combat global warming, has under Rex Tillerson, its chief executive, made an effort to persuade its critics that it has not denied the reality of the threat, but only challenged the specific policy mechanism set out to address it under Kyoto.

The highly-regarded report for the British government on the economics of climate change has made an unlikely celebrity – in certain circles, at least – out of Sir Nicholas Stern, the former chief economist of the World Bank and of the UK Treasury.

Al Gore’s film documentary An Inconvenient Truth has become an even less likely popular success and Oscar-winner.

That change in attitudes has already begun to affect business behaviour. Suddenly, lower-carbon forms of energy are in demand.

For example, Kohlberg Kravis Roberts and Texas Pacific Group gave their $44bn offer for TXU a head start by offering to scrap plans for some of the high-emitting coal-fired power plants that TXU planned to build.

A recent PwC survey of utilities executives around the world found that over the past year there had been a leap in expectations of growth in wind and nuclear power.

Other manifestations of this shift are that wind power companies such as Horizon Wind Energy in the US and Repower in Germany have been changing hands for high prices. The price of uranium – and of uranium mining companies – has soared. The UK and French governments are planning to cash in, selling stakes in their nuclear industry companies. Those businesses are buoyed by hopes that a new generation of nuclear power stations will be built in a number of countries around the world, including the UK – where the government is signalling a commitment to new nuclear power stations – and the US.

At the same time, the traditional concerns about security of energy supplies have returned to the top of the agenda.

The Organisation of the Petroleum Exporting Countries has flexed its muscles, cutting production by 1.7m barrels of oil a day in two steps since last October. It has resisted calls from the International Energy Agency, the rich countries’ energy watchdog, to raise output again. Although it is watching the state of the market, especially the level of consuming countries’ stocks, and no decision has yet been taken, Opec seems unlikely to increase production at or before its next scheduled ministerial meeting in September.

The cartel has welcomed in a new member, Angola, which is one of the most significant contributors to growth in world oil supply as a number of large projects come on stream. If Opec’s production constraints bite on Angola – it has not yet been decided exactly how the limits will work – the effect on oil markets could be significant.

So oil is currently about $70 a barrel for Brent crude; not that far from its peak last summer above $78. The price is now what a few years ago would have seemed an alarmingly high level; yet the world economy, and demand for oil, continue to grow. The world has proved it can afford $70 oil, so that is what it is likely to have to pay.

Natural gas, on the other hand, has fallen in price, at least in markets such as the US and UK that are open and competitive and where prices are not tied to oil. But gas supplies, too, have been threatened by the spectre of a “gas Opec”: a cartel of countries with large gas reserves including Russia, Qatar and Algeria.

The gas market, which works mainly on long-term contracts, is not susceptible to short-term management the way the oil market is, and talk of a gas Opec sounds mostly like wishful thinking. The present gas producers’ group is no more than a talking-shop.

But Russia’s enthusiasm for forming such a cartel has reinforced fears over its reliability as a gas supplier, stirred by its willingness to interrupt supplies to Ukraine, and by the ambitions of Gazprom, the state-controlled gas company.

Russia’s value as a trading partner has also been called into question by its treatment of Royal Dutch Shell’s Sakhalin 2 project of its far eastern coast, where Gazprom was levered into taking a majority stake after pressure over alleged environmental violations. BP’s 50 per cent-owned Russian joint venture TNK-BP is currently undergoing similar pressure.

All this adds up to a powerful case for taking a new view of energy, how we get it and how we use it. The problem is that this view appears to be inaccessible.

The best energy is energy saved, the saying goes, but that is a maxim that few appear to have appreciated. In spite of efforts such as initiatives to improve the fuel economy of cars in Europe and the US, for example, or projects by a few utilities to save energy for their customers, the world as a whole is showing little sign of learning how to use energy better.

The recent BP Statistical Review of World Energy pointed out that use actually grew faster relative to economic growth in 2001-06 than it did in the previous five-year period. China’s industrialisation, run on electricity from coal-fired power stations, means global growth is driven by more and dirtier energy than in the 1990s.

There has been a swelling tide of money pouring into entrepreneurial companies hoping to make money out of new ideas in alternative energy, using a dizzying variety of new technologies from algae to fuel cells.

Often, these companies are in the same place – California – and involve the same people as in the last technology boom: the dotcom and information technology mania of the 1990s. Already the warnings are growing that, just as in the 1990s, this speculative investment is running out of control, and that most people funding these alternative energy enterprises are going to lose their money.

Like the dotcom boom, it may be that the alternative fuel boom will leave us with some real benefits, even if a lot of investors lose their shirts. But for the forseeable future, worries about climate change and security of supply – and the heightened interest in the energy industry – will stay with us.

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