AUGUST 2007

EI SUMMER LUNCH
Reflections on the Energy White Paper

BULK STORAGE
Even the bad times are good

OIL SANDS
As production expands, so do the headaches

A LT E R N AT I V E F U E L S
Hydrocarbons versus carbohydrates

Covering the international oil and gas industry from field to forecourt exploration, production, refining and marketing
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AUGUST 2007 VOLUME 61 NUMBER 727 SINGLE ISSUE 21.00 SUBSCRIPTIONS (INLAND) 230.00 AIRMAIL 390.00

CONTENTS

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S P E C I A L F E AT U R E S
14 16 20 24 28 30 34 ENERGY INSTITUTE INTERVIEW Sir Roy Gardner goals and game plan US OIL AND GAS Concerns grow regarding US oil import dependency BULK STORAGE EUROPE Even the bad times are good E & P R E S E R V E S N AT I O N A L I S M Fighting back NORTH AMERICA OIL SANDS As the oil sands expand, so do the headaches A LT E R N AT I V E F U E L S Hydrocarbons versus carbohydrates ENERGY INSTITUTE SUMMER LUNCH Reflections on the Energy White Paper

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F E AT U R E S
18 26 32 36 38 40 42 46 MIDDLE EAST INSURANCE Call goes out for Islamic compliant products MIDDLE EAST GAS Iran steps on the gas A S I A - PA C I F I C E L E C T R I C I T Y Taiwan and Vietnam tackle electricity demand growth E U R O P E R E G U L AT I O N Red tape burden REACHed BIOFUELS BIOMETHANE The drive for biogas autofuels LNG MIDDLE EAST The epicentre of global LNG supplies A U T O F U E L S S P E C I F I C AT I O N S Review of relationship between Cetane Number and Cetane Index LNG CREDIT ISSUES Does Nakilats recent upgrade set a precedent?

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ABBREVIATIONS
The following are used throughout Petroleum Review: mn = million (106) bn = billion (109) tn = trillion (1012) cf = cubic feet cm = cubic metres boe = barrels of oil b/d = barrels/day t/y = tonnes/year kW = kilowatts (103) MW = megawatts (106) GW = gigawatts (109) kWh = kilowatt hour km = kilometre sq km = square kilometres equivalent t/d = tonnes/day

REGULARS
2 FROM THE EDITOR 4 8 P U B L I C AT I O N S / E - D ATA

No single letter abbreviations are used. Abbreviations go together eg. 100mn cf/y = 100 million cubic feet per year.

Front cover picture: Froth treatment at Shell Canadas Muskeg River Mine removes fine clay and sand particles. The result is a very clean bitumen product which is transported to the Scotford Upgrader, near Fort Saskatchewan Photo: Shell Photographic Services, Shell International

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FROM THE EDITOR

A historic month as the world scrambles for more gas and oil

hen the history of the oil and gas industry comes to be written, July 2007 will be seen as a key date. Over the last month the price of Brent has hit an all-time record, in cash terms, of over $79/b. The all-time record in real terms, however, remains the $90/b briefly reached at end-1979, when the world panicked about loss of supply following the Iranian revolution. July also saw UK petrol prices breaching the 1/litre barrier ($9 an imperial gallon or $7.50 a US gallon). US gasoline prices are also rising once again, having almost breached the inflation adjusted all time peak of $2.38/US gallon back in May 2007. However, in any future history, July 2007 is most likely to be remembered for being the point when the International Energy Agency (IEA) clearly warned that the world faced an oil supply shortfall by 2012. This idea was encapsulated in the main headline of the Financial Times on 10 July World will face oil crunch within five years.

to Europe and, second, it shows that Russia is open for inward investment by international oil companies (IOCs). Gazprom is still holding out the option to sell further stakes in the holding company while retaining 51% for itself. However, Russia has a very clear idea of its own self-interest and its strength relative to the IOCs. It is not yet clear if Totals ownership of the Kharyaga oil field is involved in the deal for the Shtokman development.

The scramble for gas

At the end of June Gazprom and Eni agreed to construct a new 900-km Southern Stream pipeline under the Black Sea, connecting Russia with Bulgaria. The gas will then go in two directions to Austria/Slovenia, or to the southern part of Italy. All the finer details remain to be determined following a feasibility study. The fact that the line bypasses Turkey immediately led the country to announce a deal to take between 20bn and 30bn cm/y of gas supplies from Iran and Turkmenistan. This would effectively revive the Nabucco gas pipeline project that the Southern Stream project would probably kill off. The Turkish announcement came immediately ahead of the Turkish elections. The US embassy then indicated a deal with Iran might not be acceptable on account of the Iranian nuclear programme. As if this wasnt complicated enough, Chinas CNPC then announced it had signed a deal in Beijing with Turkmenistan for 30bn cm/y of gas supply to be delivered through the Central Asia gas pipeline that the two countries have also agreed to build from Turkmenistan to China. Meanwhile, Russia was indicating that plans for a gas pipeline to the Far East built alongside the new oil pipeline were being progressed, with exports to China back on the table. Is this because Gazprom has now effectively got control of the Kovytka gas field? Clearly a global scramble for gas supplies is now in progress, but a number of

Good news
Before addressing some of the challenges facing the industry it is helpful to remember that there are also good news stories to report. The latest well on Chevrons Rosebank/Lochnagar field west of Shetlands strongly suggests a commercial development is in prospect and lays to rest fears that Buzzard would be the UKCS last major oilfield development. New capacity is certainly needed as, even with Buzzard approaching its production peak, UKCS oil production is still running 12% below year earlier levels (see p5). There also appears to be increasing interest in gas developments in the west of Shetland area and it may not be too long before plans to exploit the 4tn cf of gas discoveries in the area materialise. In an important political development, July also saw Total strike a deal with Gazprom to take a 25% stake in the holding company that will develop the Shtokman gas field in the Barents Sea. This is good news on two counts first it will improve future gas supplies

key questions remain to be answered are Turkmen gas reserves actually as large as is claimed? Will the US allow Iranian gas supplies to be developed for export to Europe? Does Russia have enough gas to supply both East and West given the recent rapid growth in the Russian economy and the rather tardy pace of new Russian gas field developments? Russian industrial production growth recorded a 10.9% year-on-year growth in June 2007, suggesting that the country is likely to be using more of its energy resources within its own borders. Similarly, in 2Q2007 Chinese economic growth was 11.9% the fastest rate in 12 years strongly hinting that Chinese energy imports are set to soar. But how will these be met? Turning back to the challenges in meeting future oil requirements, it superficially appears that it all hinges on future demand if the International Energy Agency (IEA) is right that 2008 demand will be 88.2mn b/d, then supply this winter will be very tight, oil prices high and there will be very large stockdraws. If, however, Opec is right in its assessment that 2008 demand will be 86.9mn b/d in 2008, meeting demand this winter will be reasonably straightforward although prices are still likely to rise. The Energy Information Agency (EIA) pitches 2008 demand in the middle of the other two, predicting 87.4mn b/d. However, the key determinant of future supply tightness is actually depletion, which is now running at levels twice those of demand growth. The IEA is now clearly addressing this issue noting in its latest Medium Term Report (p27), issued on 9 July, that: Net oilfield decline rates average 4.6% annually for non-Opec and 3.2% per year for Opec crude. It continues: All told, the forecast suggests the industry needs to generate 3mn b/d of new supply each year just to offset decline. Current indications are that the industry has projects underway to achieve this up to 2009/2010, but after that it becomes more problematic. Chris Skrebowski The opinions expressed here are entirely those of the Editor and do not necessarily reflect the view of the EI.

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UK
Large increases in oil and gas prices, coupled with rising costs in the industry, led to a massive rise in expenditure in the UK Continental Shelf last year of 27% to just under $24bn. This is one of the findings of Scottish Enterprise Energy Teams recently published 2007 Spends and Trends report on the sector. The survey also details new field developments and incremental projects on existing fields, with 25 fields predicted to come onstream during 2007. The report can be found at w w w. s c o t t i s h - e n t e r p r i s e . c o m /sedotcom_home/sig/sig-energy.htm Faroe Petroleum (5.9%) has announced the start-up of gas production from the Minke main gas field in southern North Sea block 44/24a. Minke is expected to produce some 60mn cf/d of gas, which will be transported via a new 15-km pipeline to the Dutch D15 platform, where it will enter the existing NGT pipeline System for delivery at Uithuizen in the Netherlands. The remaining Minke field partners are E.ON Ruhrgas UK Median (42.7%) and RWE Dea UK (35.8%).

NEWS
The 10 members of Opec bound by the group's crude oil output agreements boosted production by 40,000 b/d to 26.6mn b/d in June, from a revised May level of 26.56mn b/d, according to Platts (11 July). This was well above the 25.8mn b/d production target set in February by the so-called Opec-10. According to the latest Oil Market Report (OMR) from the International Energy Agency (IEA), the Opec-10 produced 26.62mn b/d in June, effectively unchanged from 26.61mn b/d in May. Total Opec output, including volumes from Iraq and new member Angola, averaged 30.22mn b/d in June, slightly higher than a revised figure of 30.21mn b/d for May, the Platts survey showed. Iraq does not participate in Opec output agreements, while Angola, whose membership of the group began in January, has yet to accept or be allocated any output target. In contrast, the IEA recorded a 50,000 b/d drop from 30.21mn b/d in May to 30.16mn b/d in June, largely because of a 60,000 b/d decline in Iraqi production. Small volume increases totalling 80,000 b/d from Angola, Iran, Nigeria and the UAE were almost completely offset by output decreases totalling

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Overview of Opec oil production

70,000 b/d from Iraq, Indonesia and Venezuela, according to Platts. Nigerian production in May has been revised downward to 2.05mn b/d from 2.13mn b/d. In June, the survey found Nigerian production to have risen to 2.08mn b/d from the revised May level. The IEA has called on Opec to increase production ahead of the winter to ensure consumer stocks are adequate. However, Opec has insisted that there is no current need for additional supply from its members but that it stands ready to produce more crude if this becomes necessary. Given what groups such as the International Energy Agency are saying is required for supply and demand to stay balanced in the second half of the year, consumers can't view this latest report as anything but discouraging, commented John Kingston, Platts Global Director of Oil. Particularly worrisome is the fact that in the best onestep-forward-one-step-back practice, the production gains that were recorded were offset by losses elsewhere, including Venezuela. A supplydemand balance that many see as a squeeze now, could be much tighter by the end of the year.

EUROPE
Danish scientists believe they are on the verge of developing a novel means of storing carbon dioxide (CO2), reports Mark Rowe. Conventional attempts at CO2 storage involve holding it underground as a gas or liquefied gas, but the reliability of storing carbon CO2 in empty oil and gas wells has been questioned. Professor Susan Stipp of the University

Angolas Rosa field onstream

Angolas state-owned Sonangol and Total (operator) report that the deepwater Rosa field in block 17 has entered production, tied back to the nearby Girassol floating production, storage and offloading (FPSO) vessel. Rosa has proven and probable reserves of some 370mn barrels. Production will help maintain the FPSOs production plateau at 250,000 b/d until early in the next decade. The Rosa field development will comprise 25 wells, including 11 for water injection and 14 producers, which will be tied into four manifolds. With Rosa onstream, all of the produced water from the Girassol, Jasmim and Rosa fields will be reinjected in the reservoirs. In addition, Total is reducing greenhouse gas emissions by using an innovative process that inerts and recovers gaseous effluent from the FPSO tanks.

Complete news update

The In Brief news items in Petroleum Review represent just a fraction of the news we regularly publish on the EI website www.energyinst.org.uk via the News in Brief Service link from the Petroleum Review drop-down menu. Covering all sectors of the international oil and gas industry, the News in Brief Service is a fully searchable news database for EI Members. Why not visit the site to find out more about the latest developments and trends in your industry?

Maintaining integrity of Brent benchmark

Platts has further enhanced its methodology for assessing the price of Dated Brent crude oil, implementing a quality threshold of 0.6% sulphur for Forties crude oil to be considered in its North Sea assessments. In addition, Platts has introduced a price de-escalator that will adjust downward the price of oil delivered by a seller to a buyer at suphur levels above 0.6%. Dated Brent is used in spot and long-term contracts to value around 60% of the 85mn barrels of crude oil produced in global oil markets each day. According to a press release on 7 June by the Forties Pipeline System (FPS), the summer quality of Forties crude oil will be significantly downgraded as a result of field maintenance activities. FPS said the Forties crude blend beginning in August will contain a significantly higher percentage of Buzzard, a more sulphurous and heavier crude oil. Since sulphur is an impurity that lowers the value of a crude oil, this would result in a distortion in the value of the Dated Brent benchmark if left unaddressed. The price de-escalator provides for an amount of $0.40 cents per barrel for every 0.1% of sulphur over the 0.6% quality threshold. More information can be found at www.platts.com
3

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of Copenhagen's Nanotechnology Centre is developing a process that extracts CO2 from the air by condensation and bubbles it through water to make carbonic acid. This carbon rich water is passed over heated basalt to make carbonised materials. Professor Stipp believes nano-versions of the minerals that make up basalt should accelerate the process.

NEWS
BP has unveiled plans for significant investment in its southern North Sea business, which it claims will lead to an increase in recoverable gas reserves and create opportunities for further development offshore. The Dimlington onshore compression and terminals integration project will see some 125mn ($250mn) invested in new gas compression facilities at the BPoperated terminal that receives gas from fields in the southern North Sea. This new equipment will reduce pipeline pressure between the offshore fields and the terminal, allowing the gas fields to increase production. BP expects remaining recoverable reserves in the West Sole and Amethyst fields to increase by around 30% as a result of the project. Dimlington receives gas from BPs Cleeton area (including Whittle and Wollaston) and Ravenspurn (North and South) fields, along with gas from a number of other operators gas fields in the southern North Sea.

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BP plans significant North Sea investment

The investment and new configuration will replace the existing facilities at the adjacent unmanned Easington terminal, allowing the facility to be closed and decommissioned. Easington currently receives gas from the West Sole, Hyde, Newsham and Hoton field, passing it to neighbouring Dimlington. It is expected that the new configuration of the Dimlington terminal will also prove attractive to other companies wishing to import gas through the terminal, thus maximising the potential of existing North Sea infrastructure. An additional benefit of the new project will be a reduction in the already low level of nitrogen oxide (NOx) emissions at the facility. A planning application has been submitted to East Riding of Yorkshire Council and BP intends to consult widely with local community groups and other interested parties. If approved, it is envisaged that the compression facilities will be in operation at Dimlington by late 2008/early 2009.

NORTH AMERICA
Shell and ExxonMobil are reportedly planning to sell their minority interests in the Deep Panuke gas project offshore Canada. Together, the two companies hold an 18% stake in Deep Panuke, which is operated by EnCana. Eni has completed the acquisition of Dominions upstream assets in the Gulf of Mexico. The deal is expected to increase the Italian companys equity production in the region from the current 36,000 boe/d to more than 110,000 boe/d in 2H2007. The main producing fields acquired are Devils Tower, Triton and Goldfinger (75% operated), and Front Runner (37.5%). In addition, other key fields currently in the development phase are San Jacinto (53.5% operated), Q (50%), Spiderman (36.7%) and Thunder Hawk (25%). Chevron reports that its $3.5 billion Tahiti project in the Gulf of Mexico will face delays because of metallurgical problems discovered in the facility's mooring shackles. Tahiti was scheduled for completion in mid-2008. The company has not indicated how long the project may be delayed. Husky Energy has been awarded exploration licences b 5 (2007-22) and block 7 (2007-24) offshore Greenland as part of the West Disko 2006 licencing round. Husky has an 87.5% interest in the licences and will act as operator. Nunaoil, Greenland's national oil company, holds the remaining 12.5%.

Call to develop CCS standards

Proper standards and best practices for capture, transmission and storage of carbon dioxide (CO2), as well as adequate qualification procedures, do not currently exist in the oil and gas industry. In order to develop these important guidelines and standards, Det Norske Veritas (DNV) has invited international industry leaders and key stakeholders to join three joint industry projects (JIPs). The three JIPs aim to provide a path forward for the industrial opportunity on carbon capture and storage (CCS). In addition, they will produce international standards, methodologies and guidelines that will form the basis for industrial agreements, and provide valuable input to implementation of national requirements, states DNV. The key challenges the projects will address include how to store CO2 in subseabed formations in a safe manner, how to qualify CO2 storage projects and new CO2 capture technology, and what should be the industrial standard for transmission of CO2 in pipelines. Industrial standards and best practices addressing these challenges do not currently exist.

Cavendish field produces first gas

Dana Petroleum (50%) reports that production has commenced from the Cavendish gas field, located in the UK southern gas basin in block 43/19a, in which Dana holds a 50% working interest. The expected initial production rate from the first well is approximately 60mn cf/d. Second and third wells are currently being drilled and are expected to come onstream before the end of the year. The development consists of a six-slot minimum facilities fixed platform, which is tied back to the Murdoch platform, part of the Caister Murdoch System (CMS) operated by ConocoPhillips, via 47 km of newly laid pipeline. Gas is then transported onward to the Theddlethorpe gas terminal in the UK. RWE Dea UK Development operates the Cavendish field, with a 50% equity.

A S I A - PA C I F I C

BHP Billiton has announced approval of the Pyrenees project located in licence block number WA-12-R in the Exmouth sub-basin, off the north-west Australian coast. The Pyrenees fields of Crosby, Ravensworth and Stickle are to be developed via 13 subsea wells tied back to a floating production, storage and offloading vessel (FPSO), at a cost of some $1.7bn. First production is expected during IH2010. Recoverable oil reserves are estimated at between

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PETROLEUM REVIEW AUGUST 2007

IN BRIEF
80mn and 120mn barrels of oil. Pyrenees is estimated to have an economic life of 25 years. BHP Billiton is the operator, partnered by Apache with a 28.57% interest. OMV has strengthened its New Zealand portfolio with three new offshore exploration licences in the Great South basin on the south coast of New Zealand. The new offshore exploration licences PEP 50119 (in blocks 5, 6 and 14), PEP 50120 (block 13) and PEP 50121 (blocks 11 and 12) lie in water depths ranging from 100 to over 1,000 metres. Petrobras is to increase its interest in block KG-DWN-98/2 in Indias Krishna Godavari basin to 30%. The company will jointly operate the block with ONGC. Earlier this year, the two companies had reached an agreement on swapping interests in a number of offshore blocks. It is understood that ONGC Videsh (OVL), ONGCs overseas operation, may take equity in three blocks in the Barrierinhas, Sergipe-Alagoas and Santos basins offshore Brazils east coast. Petrobras had previously waived its preemption right in offshore block BC-10 in OVLs favour, transferring a 15% interest to the company. Apache has announced that its Theo 3-H well flowed 9,694 b/d of oil in a test of the first horizontal well at the Van Gogh development in Western Australia's Exmouth basin. Apache is planning to drill 18 additional longreach horizontal laterals at Van Gogh later this year, with first production anticipated by the end of 1Q2009. Apache owns 52.5% of the $500mn Van Gogh development, which will utilise a floating production, storage and offloading (FPSO) vessel with a processing capacity of 63,000 b/d and a storage capacity of 620,000 barrels. State-owned PetroVietnam will begin receiving bids from foreign companies for seven offshore blocks from 21 September. Blocks 105-110/04, 111/04, 114, 115, 116, 120 and 121, located in the Song Hong basin in central Vietnam, were put out to tender in April. Recent studies by PetroVietnam suggest the blocks have oil reserves of more than 5bn barrels.

NEWS
Combined average daily oil and gas production for the UK Continental Shelf stood at 2,823,141 boe/d in April 2007, down 2.3% compared to the previous month, while annual output fell 7.8%, according to the latest (June) Oil & Gas Index from the Royal Bank of Scotland. Oil production was down 0.8% on the Year Month Apr 2006 May Jun Jul Aug Sept Oct Nov Dec Jan 2007 Feb Mar Apr Oil production (av. b/d) 1,575,033 1,476,553 1,426,657 1,427,799 1,194,620 1,306,821 1,447,498 1,402,400 1,506,880 1,468,453 1,469,670 1,395,428 1,384,740

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UK oil and gas production

month, at 1,384,740 b/d, and down 12.1% on the year. UK natural gas output decreased 3.8%, to 8,170mn cf/d, compared to March, and fell 3.2% on the year. Brent crude oil averaged $67.53/b in April, up $5.34/b on the month, but down $2.76/b on the year equivalent to a decrease of 3.9%. Gas production (av. mn cf/d) 8,441 7,883 6,525 6,351 5,375 6,189 6,745 7,703 7,694 7,544 7,695 8,495 8,170 Av. oil price ($/b) 70.29 69.87 68.69 73.68 73.19 61.80 57.82 58.92 62.27 53.88 57.45 62.19 67.53

Source: The Royal Bank of Scotland Oil and Gas Index, June 2007

North Sea oil and gas production

New Nomad rig a European first

under consideration. The T-211 rig will be mobilised in 3Q2007 to Algeria, North Africa, to work for BP/Sonatrach under a one-year contract with options with KCA Deutag. It is capable of drilling wells to 15,000 ft or more. According to Claus Chur, KCA Deutag Director Technical and Procurement: Existing rigs can take more than 10 days to move between locations, whereas the Nomad rig is designed to take five days to move up to 10 km between well locations over flat terrain. The Nomad Class rig is equipped with special transportation carriages which allow the derrick and drill floor substructure to be moved as complete assemblies over flat terrain conditions, thereby reducing the rig disassembly and assembly times. These assemblies can also be disassembled into smaller rig packages for moves over sand dune conditions. Believed to be the first rig of its kind developed in Europe, the Nomad Class rig also incorporates special HSE features such as pipehandling equipment, derrick, anti-collision system, iron roughneck, man-riding winch, dedicated equipment maintenance platforms, and special noise insulation in the generator packages.

L AT I N A M E R I C A
Fluor Corporation reports that it is to lead a consortium with J Ray McDermott to provide programme management, engineering, procurement, construction and installation (EPCI) of the 4,000-tonne topsides for

International drilling contractor, KCA Deutag, and drilling rig fabrication and engineering company, Bentec Drilling and Oilfield Services, have unveiled the first of a new land rig design called the Nomad Class, which has been jointly developed by both companies for desert terrain conditions such as those found in North Africa and the Middle East. A second identical Nomad Class rig is scheduled for completion in September 2007, with further Nomad rigs currently

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an offshore drilling and gas production platform for BG Trinidad & Tobago. The Poinsettia project will be located off the north-west coast of Trinidad in 530 ft of water. TOFCO of Trinidad will be fabricating the topsides at its fabrication yard in Trinidad. It is the first time that topsides of this size will be fabricated in Trinidad by a local fabricator. Project construction is slated to begin in autumn 2007, with first gas at the end of 2008. The World Bank's Finance Corporation is to lend $550mn to Anglo-Argentine oil and gas producer Pan American Energy, to help fund operations on the Cerro Dragon oil field, in the Golfo San Jorge basin, southern Argentina, writes Keith Nuthall. Pan American Energy is a joint venture between BP and Argentina's Bridas Corporation. The Peruvian government is reported to have awarded 13 new oil and gas blocks to nine different bidders in its latest licensing round. The winning bidders included US-based Hunt Oil, South Korea's SK Corporation, Samaraneftegaz of Russia, Irelands Pan Andean Resources, PetroVietnam Exploration and Production Company, and a consortium comprising Canada's Talisman Energy and Colombian state oil company Ecopetrol. Venezuela is understood to have invited Belarus to help develop two mature Venezuelan oil fields under a shared equity company. The Guara Este field is located in eastern Venezuela; the other field, in block 10, is located in Lake Maracaibo in western Venezuela. The two countries are also reported to be planning a joint venture project to develop an area of the Orinoco river basin.

NEWS
Whilst the recent high-profile problems of the western oil majors operations in Russia have occupied the attention of politicians and the worlds media, the giant Russian oilfield services industry continues to work delivering the products and services that produce the oil. Addressing conferences in both London and St Petersburg, executives from energy analyst Douglas-Westwood (DWL) outlined the scale of the opportunities available to investors. Speaking in St Petersburg, John Westwood, DWL Managing Director, stressed the importance of Russia as an oil and gas producer. Russian oil production at over 9mn b/d is on a par with Saudi Arabia and Russian gas used in power generation is keeping many of the lights on in Western Europe, he said. Meanwhile, delivering a talk to members of the Energy Institute in London, DWLs Assistant Director Steve Robertson stated that: The oilfield services industry has evolved rapidly in recent years, driven by operators increasing use of outsourced services and a move to Western business models. However, the market remains fragmented and further consolidation is expected in the coming years, with

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Outlining Russian opportunities

independent indigenous companies and western providers playing an increasingly important role. Analyst Rod Westwood explained that major changes were underway as some of the existing producing regions decline, whilst growth in Eastern Siberia will soar 43% in the next five years. Opportunities abound as aging infrastructure such as drilling rigs are overdue for replacement, whilst on the demand-side activity is expected to grow as the new regions prove a far tougher challenge than the easy oil previously developed in Western Siberia. Onshore oilfield services of seismic, well drilling and workover sectors were a market valued at $11.4bn in 2006 and we forecast this will reach $22.5bn by 2011. Back in St Petersburg, Westwood told delegates that the new offshore developments in Russias arctic waters will stretch the limits of available know-how and will probably need to make use of Norwegian experience of such conditions. However, he said, this is not all a one-way street and Russia has a considerable track record of leading technological developments for military applications that could well be applied in offshore oil and gas applications.

Phase 1 of Shtokman to cost $15bn

Total is planning to invest between $4bn and $5bn in the development of the Shtokman gas condensate deposit in the Barents Sea within five years, Christophe de Margerie, head of the French oil company, is reported to have recently stated. This means that the first stage of the project will cost some $15bn. Russias Gazprom and Total intend to launch the first phase of the project, which is to last 25 years, this month. After completion of this phase, Total is to sell its 25% stake in the special purpose vehicle to Gazprom. Gazprom Deputy CEO Alexander Ananenkov is understood to have said that the company will implement the second, third and fourth phases of the project single-handed. The Shtokman field is estimated to hold some 3.2tn cm of natural gas and 31mn tonnes of gas condensate reserves.

AFRICA
Anadarko Petroleum has announced an oil discovery at the Mahogany-1 exploration well on the deepwater West Cape Three Points block offshore the Republic of Ghana. The well, which is located in a water depth of 4,330 ft, encountered a gross hydrocarbon column of approximately 885 ft with 312 ft of net stacked pay in a Cretaceous sandstone reservoir. Anadarko is the technical operator of the well with a 30.875% interest. Kosmos Energy is the block operator and holds a 30.875% stake. Other partners include Tullow Ghana (22.896%), Sabre Oil and Gas (1.854%), Ghanaian company EO Group (3.5%) and Ghana National Petroleum Corporation (10%).

Fort Hills oil sands project milestone

Petro-Canada, on behalf of Fort Hills Energy, has announced the formal design basis for its Fort Hills project an integrated oil sands mining project that includes a mine and bitumen extraction plant 90 km north of Fort McMurray, Alberta, and an upgrader in Sturgeon County, north-east of Edmonton. This milestone marks the partnership's commitment to proceed with the front-end engineering and design (FEED) stage. The first phase of the Fort Hills project is planned to produce 140,000 b/d of synthetic crude oil. Associated bitumen production is expected to be about 160,000 b/d. First bitumen production is expected to begin in 4Q2011, with first synthetic crude oil production from the Sturgeon upgrader anticipated in 2Q2012. The preliminary capital cost estimate for the mine and upgrading components of the first phase of the Fort Hills project is $14.1bn. The project is expected to produce up to a total of 280,000 b/d of synthetic crude oil by 2015, once all phases have been completed. Fort Hills Energy partners are PetroCanada (55%), UTS Energy (30%) and Teck Cominco (15%).
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UK
The UK government has launched a public consultation on the detail of how carbon and sustainability reporting will operate under the RTFO (renewable transport fuel obligation), which is a legal requirement on fuel suppliers to ensure 5% of all UK fuel comes from a renewable source by 2010. Details of the public consultation are available at www.dft.gov.uk/ consultations/open/rtforeporting In addition, the government has announced a package of measures on the sustainability of biofuels, as set out in a Written Ministerial Statement to Parliament, which can be viewed at www.dft.gov.uk/press/speeches statements/statements/rtfostatement Vopak is planning to expand its Teesside terminal at Seal Sands in the UK to store and handle bioethanol on behalf of Ensus. The latter recently began construction of a 400mn litre capacity bioethanol facility in Wilton, Teesside, that is due to be commissioned in 2009. Vopak will build eight new tanks, with a combined capacity of 40,000 cm. Foster Wheeler has been awarded a two-year extension of its existing alliance contract with Shell UK Oil Products for the provision of basic design, engineering, procurement and construction management services at Shell's Stanlow manufacturing complex in the UK. Total has begun construction of two new units at the Lindsey oil refinery, near Immingham, in the UK a hydrodesulphurisation (HDS) unit with a capacity of 1mn t/y and a hydrogen production unit (SMR steam methane reformer) that is necessary for the desulphurisation process. The units will increase Totals production of ultra low sulphur diesel, for which demand is growing steadily, and will substantially increase the refinerys capacity to process less expensive sour crudes. The UK oil fuel distributors industry is wasting 7.5bn worth of profit every year, according to a new study by business analyst Plimsoll Publishing. The report findings suggest that a staggering 370 of the 500 companies covered would make more profit under new ownership, resulting in 7.5bn extra revenue in the industry as a whole. At the moment, that money is being simply thrown away because of companies failure to control their losses and manage their businesses more effectively. The report is available to order contact Clair

NEWS
BP, Associated British Foods (ABF) and DuPont have unveiled $400mn investment plans for the construction of a world-scale bioethanol plant alongside a high-technology demonstration plant to advance development work on the next generation of biofuels. The bioethanol plant, in which BP and ABF subsidiary British Sugar would each hold 45%, with DuPont owning the remaining 10%, will be built on BPs existing chemicals site at Saltend, Hull, UK. Due to be commissioned in late 2009, it will have an annual production capacity of some 420mn litres from wheat feedstock. Although initial production will be bioethanol, the partners are planning to look at the feasibility of converting it to biobutanol once the required technology is available. Discussions are currently underway to explore strategic partnerships with grain trading business Frontier Agriculture for the supply of locally grown wheat feedstocks. The BP site in Hull has also been

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Next generation biofuels plant

selected as the preferred location for a planned biobutanol demonstration plant, funded and owned equally by BP and DuPont that could produce around 20,000 l/y of biobutanol from a wide variety of feedstocks. The facility will begin operation in early 2009. To begin market development of biobutanol, BP and DuPont are also establishing initial introduction plans for biobutanol in the UK. The companies will import small quantities of biobutanol, sourced from an existing first generation manufacturing facility in China. The first product is expected to arrive by the end of the year and will be used to carry out infrastructure and advanced vehicle testing. This testing will build upon initial laboratory engine tests using conventional butanol, which indicated that butanol has similar fuel performance properties to unleaded petrol. In addition, work will be undertaken to gather comprehensive data on the environmental footprint and sustainability of this next generation fuel.

New findings in food versus fuel debate

The findings of a new study by leading agricultural economist John Urbanchuk of LECG run counter to the popular argument that the rising cost of corn prompted by the increasing production of ethanol is the cause of increased food prices and other consumer-related inflation. Instead, the statistical research shows that escalating energy costs are the real culprit behind the recent run-up in retail food and beverage prices in the US, with rising energy prices having had twice the impact on the Consumer Price Index for food as had the price of corn. While it may be more sensational to lay the blame for rising food costs on corn prices, the facts dont support that conclusion. By a factor of two-to-one, energy prices are the chief factor determining what American families pay at the grocery store, said Urbanchuk. Moreover, he notes: Retail food prices are not likely to accelerate significantly in 2008 and beyond, even as ethanol production continues to expand. In fact, consumers will be more severely affected by rising gasoline and energy prices than by increases in corn prices. A text-only copy of Urbanchuk's LECG report entitled The relative impact of corn and energy prices in the grocery aisle can be downloaded from www.rippmedia.com/LECG-JU-Ethanol.doc

UK consumers sign up to energy saving trials

Around 40,000 households in the UK will be taking part in energy saving trials in a bid to cut household bills and help in the fight against climate change, Business and Enterprise Secretary John Hutton recently announced. Contracts have been signed with EDF Energy, E.ON UK, Scottish and Southern Energy, and Scottish Power to conduct the trials, which are to be funded by 10mn from the UK government, matched by a similar amount from the companies involved. The trials will include around 15,000 households receiving state of the art smart meters and 8,000 more receiving clip-on real time display units for their existing meters. The other households in the trial will be testing new ways of receiving information to help them cut their energy use. Clip-on real time display units can tell people how much energy they are using, and how much it is costing when individual appliances are turned on. Smart meters allow energy suppliers to communicate directly with their customers, removing the need for meterreadings, Smart meters tell people about their energy use either through linked display units or in other ways, such as through the internet.
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Sherwood on t: +44 (0)1642 626422 or e: c.sherwood@plimsoll.co.uk Petroleum Review readers can obtain a 20% discount by quoting the reference PR07.

NEWS
New regulations have come into force in the UK, which, it is claimed, will open up the market for biofuel production in the country. Previously the law required anyone producing any quantity of a biofuel (mostly biodiesel in the UK) to pay duty of 28.35* pence on every litre they produce as well as submit returns to HM Revenue & Customs and hold a permit. However, as from 30 June 2007, the following changes now apply: A production threshold of 2,500 l/y below which producers will not need to submit returns or pay duty. A reduction in the frequency of returns for all but the largest producers (defined as those producing over 450,000 l/y) from monthly to quarterly. There are currently some 1,400 pro-

downstream

New UK biofuel regs enter into force

ducers of biofuels in the UK, a large proportion of whom produce for their own personal use. This change in regulation means that everyone will have the opportunity to produce enough biofuel for their own personal consumption, duty free. The effectiveness of the 2,500-litre level will be monitored and the government will consider the scope for raising the threshold a year after its introduction. According to Geoff Riley, HM Revenue & Customs: This legislative change will reduce the administrative burden on HM Revenue & Customs as well as small producers. *For a current non-producer, the duty paid at retail pumps is 48.35 p/l, making the saving to them even greater.

EUROPE
Despite full market opening having occurred on 1 July 2007, the European Unions aim of creating a single European energy market remains far from guaranteed. With a high degree of structural diversity in the EU 27 energy market and widely differing attitudes at a political level, a single market remains far from assured, in at least the medium term, reports analyst Datamonitor. Whilst a single European energy market remains a possibility in the longer term, considerable progress and greater degrees of cooperation will be needed at both a corporate and governmental level, the company notes. Technip has been awarded a 472mn contract by Grupa Lotos, covering the engineering, procurement and construction of a new 45,000 b/d mild hydrocracking unit, based on Shell technology, for the Gdansk refinery in Poland. The project forms part of Lotos plans to increase throughput capacity at the refinery by 75%, bringing it to 10.5mn t/y of crude oil. The project is scheduled for completion in 4Q2010.

New SBS HGVs meet Euro V standards

SBS Logistics has invested 1.2mn in modernising its fleet of HGVs (heavy goods vehicles) in the UK. An additional 19 trucks are to be added to the companys fleet over the next few months, on a five-year lease agreement with Alex Aiken and Sons. The Premium 450.25 6x2 L TML E5 Renault trucks meet the Euro V standard in terms of emissions and superior fuel economy and are believed to be the first of their kind to be utilised in Scotland.

NORTH AMERICA
Syntroleum and Tyson Foods have unveiled plans to form Dynamic Fuels, which will produce synthetic fuels targeting the renewable diesel, jet, and military fuel markets. The 50:50 venture intends to construct and operate multiple stand-alone commercial facilities capable of producing ultra-clean, high quality, next generation renewable synthetic fuels using Syntroleum's patented BiofiningTM process, a flexible feed/flexible synthetic fuels technology. Feedstock primarily derived from animal fats, greases and vegetable oils will be supplied by Tyson. The first facility will produce about 75mn gallons of synthetic fuel annually. Construction of this initial facility is expected to start in 2008 at a yet-to-bedetermined site in the south-central US, with production targeted for 2010. Hybrid poplar trees grown on plantations for pulpwood may be a biofuel source of choice according to scientists from America's Agricultural Research Service. Researchers say using hybrid poplar wood could produce a threefold greater reduction in greenhouse

UK struggle to replace baseload capacity

The UK energy market will run out of power stations before it runs out of fuel, according to Global Energy Decisions. This forecast was made in the companys recently published report entitled The Great Britain and all-island energy markets spring 2007 reference case report, which draws conclusions from a 25-year, bi-annually updated, electricity price forecast that represents the next day spot prices as reflected in power markets. The report highlights that between 2008 and 2015, some 6.5 GW of nuclear capacity will disappear, to be partly replaced in the interim by a mix of fossil fuel and renewable fired plants. There will also be a 40% to 60% capacity reduction in coal plants, with a total capacity retirement of 6.8 GW by the end of 2015. Global Energy Decisions argues that there are not enough plants currently at planning stage, or in physical construction for the UK to be able to replace the reduced baseload capacity, let alone meet increased demand for power consumption. It states that simulations of the inability to replace the baseload have shown that blackouts will occur if additional capacity is not added to the system; prices will rise significantly, even with additional capacity being added; new gas-fired capacity is required before 2015 to replace the reduced generation potential in the system; and increased gas generation is required even in off-peak hours.

Find out more about the supplements offered with Petroleum Review and Energy World at www.energyinst.org.uk
PETROLEUM REVIEW AUGUST 2007

IN BRIEF
gas emissions compared to cornsoybean rotations, writes Monica Dobie. ExxonMobil is to launch worldwide a new addition to its Mobil Pegasus series of high-performance lubricants for natural gas engines. Formulated with the highest quality basestocks and advanced additive technology, Mobil Pegasus 1005 is designed to provide todays high output, low-emissions four cycle gas engines with exceptional levels of protection while also delivering superior performance for older model engines, states the company. According to ExxonMobil, extensive testing has shown that the new lubricant can provide double the oil life, compared with previous mineral-oil based Mobil Pegasus formulations, thus helping companies reduce their oil consumption, oil disposal and maintenance costs.

NEWS
BP and D1 Oils are to form a 50:50 joint venture, to be called D1-BP Fuel Crops, to accelerate the planting of Jatropha curcas a drought resistant, inedible oilseed bearing tree that does not compete with food crops for good agricultural land or adversely impact the rainforest in order to make more sustainable biodiesel feedstock available on a larger scale. Under the terms of the agreement, BP and D1 Oils intend to invest around $160mn over the next five years. D1 Oils will contribute into the joint venture its 172,000 hectares of existing plantations in India, southern Africa and south-east Asia and the joint venture will have exclusive access to the jatropha seedlings produced through D1 Oils plant science programme. As jatropha can be grown on land of lesser agricultural value with lower irri-

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New BP and DI Oils biofuels venture

gation requirements than many plants, it is an excellent biodiesel feedstock, said Phil New, head of BP Biofuels. D1 Oils progress in identifying the most productive varieties of jatropha means that the joint venture will have access to seeds which can substantially increase jatropha oil production per hectare. The joint venture will focus on jatropha cultivation in south-east Asia, southern Africa, central and south America and India. It is anticipated that some 1mn hectares will be planted over the next four years, with an estimated 300,000 hectares per year thereafter. Once all the planned plantations are established, the joint venture is expected to become the worlds largest commercial producer of jatropha feedstock, producing up to 2mn t/y, commented New.

RUSSIA & CENTRAL ASIA

Rosnefts 100% held indirect subsidiary Neft-Aktiv is to acquire Unitex fuel retail operations in Europe and southern Russia for $633mn. Assets include 495 forecourts and a number of product terminals. Neft-Aktiv is also to pay $190mn for some 100 service stations in southern Russia, as well as 100% of Stavropolnefteprodukt and other assets, as part of the auction of Yukos assets.

Asia-Pacifics role in biofuels market

With an almost insatiable demand for biodiesel in the US, Europe, Japan and Australia, the countries of south-east Asia are ideally situated and provisioned to meet that need, writes Brian Warshaw. Malaysia, Indonesia, Thailand and the Philippines produce the majority of the worlds crude palm oil (CPO), with Malaysia and Indonesia alone providing 84% of the total. In June 2007, following a mission to Europe, Datuk Sabri Ahmad, Chairman of the Malaysian Palm Oil Board (MPOB), called on the industry to become more productive in order to meet the requirement for 30mn tonnes of vegetable oil that the region will require by 2010 to meet its biodiesel target of 10%. He said that there were only 1mn hectares of available land left, to add to the 4mn already under cultivation, on which to grow sustainable palms. Datuks optimism is not shared by all the biodiesel producers. They fear that the industry is being made unviable by the changing relationship between the price of CPO and petroleum crude oil (PCO). In Malaysia, when biodiesel plants commissioned last year, and those due to come into production this year, were being planned, CPO was selling for around $450/t, while earlier this year June futures reached a peak of $807/t on the Bursa Malaysia Derivatives market. Meanwhile, PCO has remained at an average of $65/b, with a 2007 peak of $72/b. Proof of the problem is easy to see. Despite having been pre-commissioned, the 100,000-tonne SPC Biodiesel Malaysian plant will not open as planned, despite its total production capacity having been pre-sold. Australian owner Sterling Biofuels International was floated on the Australian Stock Exchange on 25 September 2006 at an opening selling price of A$1; eight months later its shares were available for A$0.285. Singapore has no CPO production of its own, but the country is a major draw for companies that import palm oil, process it and export the biodiesel. The German-based company Cremer Gruppe has built a 100,000 t/y facility to process its Nexsol brand of biodiesel; however, as a result of the current costings, it was expected to be operating at less than 50% of its capacity when it opened in July. Cremer Gruppe is also building a plant at Tanjung Langsat, Johore, Malaysia. Kenny Koh, head of Marketing for Cremers Asian operation, explained: At the rate things are going, it would be difficult to run the plants. I would guess that everyone is in the same boat. The palm guys have moved the market so high that the palm oil alone is priced higher than diesel even without the processing costs. Lereno Bio-Chem, which has plans for a 200,000-tonne biodiesel plant on Jurong Island, has recently announced that its intended September construction start has been delayed, without naming a new date. The evidence points to a south-east Asian slow-down in new biodiesel development, and the probability that many of the facilities that have been completed will be operated at reduced capacity or even mothballed. This is happening despite an almost insatiable demand from the developed world.
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L AT I N A M E R I C A
The Brazilian Mercantile & Futures Exchange (BM&F) has launched a new ethanol future contract. Brazil currently exports 5bn l/y of ethanol. The Latin American country is planning to use just 3% of its arable land to grow the sugar cane feedstock required to supply rising demand for ethanol, which is estimated could replace 10% of petrol used worldwide. It is claimed that the increase in sugar cane production will not affect food production, as the plantations will be planted in areas that are currently used for grazing purposes. It is reported that between 1975 and 2006, sugar cane production increased by 415% in Brazil; between 1990 and 2006 production of grains increased by 106%; and between 1994 and 2006, production of beef went up by 71%. Chevron is to sell its Uruguay fuels marketing business to DUCSA the state owned petroleum marketing and distribution company operating under the ANCAP brand. The agreement will add 90 ChevronTexaco-branded stations to DUCSA's existing fuel retail network in Uruguay.

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UK
Gazprom Marketing & Trading (GM&T), the UK based subsidiary of Gazprom, has acquired Natural Gas Shipping Services (NGSS) for an undisclosed sum. The acquisition comes a year after GM&T bought Pennine Natural Gas in Wilmslow, Cheshire, to gain entry into the UK gas retail market. BP Shipping has taken delivery of the British Emerald reportedly the worlds largest LNG carrier (LNGC) at 155,000 cm. This vessel is the first of a fleet of four Gem class dual-fuel diesel-electric gas ships that are to be delivered to BP British Diamond, British Ruby and British Sapphire will be delivered in 2008. The vessels are being built by Hyundai Heavy Industries in Ulsan, Korea. Paramarq has launched a new service to take advantage of customer expertise providing an impartial view of a business that it claims enables senior management to address hidden or ignored issues that are reducing organisational effectiveness. It also objectively highlights key success factors. Peter Swead, Chief Executive Officer, said: Paramarqs approach is both wider in scope and in more depth than quality based surveys. We provide senior management with an impartial view of the ever more rapidly changing customer perspective. They are frequently surprised to hear unfiltered customer views which routinely uncover unexpected business opportunities and issues. He continued: The technique does not suit every type of organisation. It is challenging providing feedback to difficult questions. It is best suited to pro-active management who can take objective feedback and act upon it.

NEWS

industry

BP and Gazprom unveil alliance

In a move designed to extend Gazproms access to international markets and deepen BP and TNK-BP involvement in Russian oil and gas, the companies have unveiled plans to establish a joint team to identify strategic opportunities for investment both overseas and inside Russia. According to BP Chief Executive Tony Hayward, the companies will initially be looking for projects of at least $3bn; he also noted that the potential for further growth could be very significant. Under the terms of the agreement, TNK-BP has agreed to sell Gazprom its 62.89% stake in Rusia Petroleum, the company that holds the licence for the Kovykta gas field in Eastern Siberia. The field has estimated resources of approximately 2tn cm of gas in place. TNK-BP will also sell its 50% interest in East Siberian Gas Company (ESGCo), which is constructing the regional gasification project. Gazprom will pay between $700mn and $900mn, subject to adjustments, for TNKBPs interests in Rusia and ESGCo. BP also reports that a longer-term call option for TNK-BP to buy a 25% plus one share stake in Kovykta at an independently verified market price has also been agreed with Gazprom.

Financing Middle East gas pipeline

Dolphin Energy plans to borrow $3bn to refinance what is reportedly the Middle East's largest cross-border gas pipeline project once the venture reaches full capacity in early 2008, an official recently stated. Dolphin is 51% owned by Abu Dhabi's government, in partnership with Total and Occidental Petroleum. The 364-km line will carry some 2bn cf/d of gas, equivalent to 333,000 boe/d, from Qatars North field to the United Arab Emirates. In 2005 Dolphin secured $2.45bn from a conventional lending facility and $1bn from Islamic financing, both for a period of four years, to fund what is the Persian Gulf's first cross-border pipeline project. Abu Dhabi Water & Electricity Authority and Dubai Supply Authority have each secured long-term agreements for more than 700mn cf/d from Dolphin's supplies, with Union Water & Electricity Authority in Fujairah, another UAE emirate, to receive some 140mn cf/d. Oman Oil will receive 200mn cf/d. Before being piped, the gas will be processed at Dolphin's onshore gas treatment plant at Ras Laffan, the world's biggest, which is currently in the start-up phase. Significant amounts of gas by-products such as condensate, LPG and ethane, will also be produced, which will be sold separately.

Latest E&P developments in Qatar

Qatar Petroleum (70%) and Shell (30%) have formed the Qatargas 4 joint venture, which will own the Qatargas 4 projects onshore and offshore assets. The newly formed joint company has also signed a sale and purchase agreement (SPA) with a Shell affiliate as buyer of all the LNG volume produced by this largescale project. The Qatargas 4 project comprises upstream gas production facilities to produce approximately 1.4bn cf/d of natural gas, including an average of approximately 24,000 b/d of LPG and 46,000 b/d of condensate, from Qatar's North field over the 25-year life of the project. It also includes a 7.8mn t/y liquefaction plant and the required LNG shipping capability. First LNG cargoes are scheduled for delivery around the end of the decade. Qatargas 4 LNG volumes are intended to flow primarily into natural gas markets in the eastern US. Shell has arranged for capacity at the Elba Island LNG import terminal as well as in the new Elba Express natural gas pipeline to receive and regasify the US LNG imports. Meanwhile, Shell International Trading and Shipping has taken responsibility as the shipping and maritime services provider for Qatar Gas Transport Companys (Nakilat) fleet of some 25 newbuild LNG carriers. Shell will provide a full range of shipping services for Nakilat, including staff recruitment, training and operational management of the vessels. Operational management of the ships will be transferred to Nakilat within 12 years of the delivery of the last vessel. Nakilats fleet of LNG vessels, currently under construction, will be put into service over the next four years to transport LNG from four of Qatars major LNG projects Qatargas II (Train 5), Qatargas 3 (Train 6), Qatargas 4 (Train 7) and RasGas III (Train 7). These vessels will have capacities ranging between 210,000 cm and 266,000 cm. Nakilat has equity interests (ranging from 20% to 60%) in a further 29 LNG carriers and also has a 50% stake in four LPG vessels.
PETROLEUM REVIEW AUGUST 2007

EUROPE
Eni and Gazprom have signed a memorandum of understanding covering the implementation of a technical and economic feasibility study of South Stream, a new gas pipeline system that will link Russia to the European Union across the Black Sea. According to preliminary studies carried out by Saipem, costs of building the proposed pipeline are comparable with the development of an LNG chain (liquefaction plants, ships and re-gasification plants). The 900-km offshore section of South Stream would cross the Black Sea from the Russian coast of Beregovaya the same starting point as the Blue Stream

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IN BRIEF
pipeline to the Bulgarian coast. For the onshore section, two different routes from Bulgaria are being studied a route towards the north-west and one towards the south-west. RWE is reportedly planning to lead a consortium to set up an Energy Bridge LNG receiving terminal at Wilhelmshaven, Germany. Excelerate Energy, which already has GasPort terminals established in the US and UK, will be a partner, along with NordWest Oelleitung. It is understood that the company aims to have the ability to feed up to 600,000 cm/h of regasified LNG into the German network by the end of 2010. Eni is to take a 27.8% stake in Altergaz, the main independent operator in Frances gas market. Altergaz will distribute up to 1.3bn cm/y of gas supplied by Eni to Frances retail and commercial market, which accounts for more than 60% of overall gas volumes sold in France, with a potential 11.5mn customers. Gaz de France is the lead player in the French gas market, with a 79% market share, followed by Total (9%) and SuezDistrigaz (3%).

NEWS
BP and Statoil, as operators of the Shakh Deniz gas condensate development project, and Azerbaijan Gas Supply Company (AGSC) report that gas started to flow into BOTASs gas transportation system on 3 July 2007. This follows gas supply to Azerbaijan and Georgia from Shakh Deniz. The gas is being transported to the BOTAS gas transportation system via the South Caucasus Pipeline (SCP), which is routed through Azerbaijan and Georgia. The pipeline has been operational since late 2006, transporting gas to Azerbaijan and Georgia from Shakh Deniz Stage 1. Following its commissioning the pipeline was suc-

industry

Shakh Deniz gas enters Turkish pipeline

cessfully tied-in with the Turkish pipeline system at the GeorgianTurkish border. The SCP has a dual operatorship, with BP as the technical operator, being responsible for construction and operation of the SCP facilities. Statoil, as commercial operator, is responsible for SCP's business development and administration. Shakh Deniz, operated by BP, has been producing over 8.5mn cm/d of gas and about 25,000 b/d of condensate. Production will continue to increase during the year as the remaining predrilled well is brought onstream. Drilling of new wells will commence from the platform later this year.

Changes at Sincor heavy oil project

Total has signed a memorandum of understanding with the Venezuelan authorities to transform operating company Sincor, formed by the project partners, into a mixed company. The agreement is in line with the law of 26 February 2007, passed by presidential decree, on transforming strategic joint ventures in the Faja region, known as the Orinoco Belt, into mixed companies. Under the memorandum of understanding, Totals interest in Sincor will be reduced to 30.323% from 47%, while PdVSAs will increase to 60%. Statoils interest will be 9.677%. Brought onstream in 2000, the Sincor project comprises the upstream development of the Zuata extra-heavy oil field in the Orinoco Belt and the downstream upgrading of the oil in a dedicated facility. Sincors production capacity is around 200,000 b/d of extraheavy oil, corresponding to 180,000 b/d of synthetic crude.

NORTH AMERICA
The Cacouna energy project, a joint development by Petro-Canada and TransCanada, report that the Quebec government has granted a decree approving the proposal to construct what will be the first LNG re-gasification terminal in Quebec. The 500mn cf/d sendout capacity terminal will be located in Gros Cacouna, approximately 200 km east of Quebec City on the south shore of the St Lawrence River.

Dana Gas completes Bahraini acquisition

Dana Gas, reportedly the largest regional private-sector natural gas company in the Middle East, has announced the completed acquisition of its Bahraini affiliate Danagaz Bahrain. The company will be owned 66% by Dana Gas and 34% by Bahraini partners. Its first investment will lead the consortium to build, own and operate the Gulf of Suez gas liquids plant in Egypt. The Gulf of Suez project involves the engineering, fabrication, installation and operation of a high-efficiency gas liquids extraction and manufacturing plant near Ras Shukheir, on the western shore of the Gulf of Suez, Egypt. The plant will be capable of processing approximately 55bn cf/y of natural gas and will produce approximately 120,000 t/y of propane and butane in liquid form. The project will be executed by a joint venture company, Egyptian Bahraini Gas Derivative Company (EBGDCO), which will be owned 40% by Danagaz Bahrain, 40% by state-owned Egyptian Natural Gas Holding Company (EGAS) and 20% by the Arab Petroleum Investment Corporation (APICORP). Egypt is a net exporter of propane and is a net importer of butane for domestic consumption. The propane from this project will be exported by ship to European markets such as France, Spain, Italy and Turkey, which import significant quantities of propane to meet national needs. Potentially higher margin Indian Ocean region markets are a future possibility. Propane is used for industrial fuel, space heating, automobile fuel and petrochemical feedstock. The butane produced, approximately 10,000 t/y, will be sold on long-term contracts at the plant boundary to the Egyptian General Petroleum Company (EGPC) to help meet Egypts domestic requirements.

MIDDLE EAST
RasGas and EdF are understood to have signed 4.5-year LNG supply agreement covering the delivery of up to 3.4mn t/y of LNG from Qatar to Zeebrugge, Belgium. Amec has been awarded a 20mn fouryear engineering services contract by Saudi Arabian Chevron Inc/Kuwait Gulf Oil Company Joint Operations (JO) covering the Kuwait onshore portion of the Divided Zone between Kuwait and Saudi Arabia. The work covers the provision of engineering advisory services, including front-end engineering, design work and the preparation of tender documents.

Visit the Energy Institute website at www.energyinst.org.uk

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UK
In the recent UK government restructure, the Department of Trade and Industry has become the Department for Business, Enterprise and Regulatory Reform (DBERR). Malcolm Wicks has been appointed Minister of State for Energy and Hilary Benn has been appointed as the new Secretary of State for Environment, Food and Rural Affairs. The Rt Hon John Hutton has been appointed Secretary of State for Business, Enterprise and Regulatory Reform, assuming responsibility for energy. Meanwhile, Professor Robert Watson has been appointed the new Chief Scientific Advisor for Defra. Lord Truscott has announced the new Advisory Committee on Carbon Abatement Technologies (ACCAT) in the UK. The ACCAT provides an invaluable forum for discussion between industry, academia and government on the development of technologies allowing fossil fuels to be used without environmental disadvantages. The new committee will also see a strengthening of expertise in the areas of CO2 capture and storage. Members of the UK Parliament and Peers have created the All Party Parliamentary Group (APPG) on Peak Oil, to study the effects of resource limitations on all types of energy. Working with the Oil Depletion Analysis Centre, the Association for the Study of Peak Oil and lobby groups such as PowerSwitch, the APPG has a number of sources of information that it can use.

NEWS

government

Latest developments from the EU

The European Union (EU) has struck an important deal with Algeria, ensuring it supplies gas to European markets competitively, scrapping restrictive profit sharing contracts, writes Keith Nuthall. Algeria is a key gas exporter in the EUs fight to secure energy security without relying on Russia, and Algiers has now agreed with the European Commission (EC) that pipeline gas can be sold-on within Europe, without a cut going to Algerian gas producer Sonatrach. The same would apply to most LNG contracts. Territorial restrictions effectively preventing Algerian gas moving outside the Mediterranean region will also disappear. EU Competition Commissioner Neelie Kroes said the deal eliminates an important obstacle for the creation of a single EU-wide market in gas. Brussels wants Algerian gas supplies to the EU to increase to 78.5bn cm by 2010. In other EU news: The European Parliament has given the EC much needed political cover as it prepares to propose further liberalisation of gas markets later this year. Brussels is facing tough opposition from some EU member states over unbundling, notably France, but in a detailed report the parliament said it considered transmission ownership unbundling to be the most effective tool to promote investments in infrastructures [and provide] fair access to the grid for new entrants and transparency in the market. The move follows the parliament industry committees backing for anticipated Commission proposals insisting upon a 20% share for renewable sources of EU energy supplies by 2020. The EC has launched a string of legal actions against member states regarding oil and gas issues. It is taking Belgium to the European Court of Justice (ECJ) for failing to maintain the minimum level of oil stocks required by EU law. It is formally threatening legal action at the ECJ against Italy for restricting a 50% tax break for regenerated lubricating oils to those collected within the country and not other EU member states. It has also formally required Portugal to abolish special rights held by its government within privatised energy companies EDP (Energias de Portugal) and GALP Energia. The European Investment Bank (EIB) is planning to lend 200mn to Italian energy giant Eni to build and operate an 800-MWe combined cycle gas turbine (CCGT) cogeneration plant at its petrochemical site in Ferrara. The EIB is also planning to lend 117.5mn to Heron Thermoelektriki and GEK Holdings Real Estate Construction Company to build and operate a 400-MW natural gas fire combined cycle power plant in Thiva, south Greece. The European Bank for Reconstruction and Development (EBRD) is planning to lend Russian power producer OGK-2 262mn to install two CCGT 400-MW generators at Stavropolskaya, southern Russia. The EBRD is also investing 60mn in South Eastern Energy Capital (SENCAP), a joint venture revamping run-down energy infrastructure in south-east Europe. At a Brussels conference, Brazilian President Luiz Inacio Lula da Silva called for an end to EU import tariffs charged on Brazillian ethanol, which dont apply to imported mineral oils and natural gas .

NORTH AMERICA
Chief Enforcement Officer of the US Federal Energy Regulatory Commission (FERC), Susan Court, has expressed confidence that the federal government can adequately monitor the expanding physical and financial energy markets in the US. Court emphasised the Commissions enforcement efforts as members of Congress and State Officials increasingly call on federal regulators to explain rising energy prices. FERC has now joined the ranks of federal enforcement agencies, Court said.

EU emissions target unrealistic

The proposed European Union carbon dioxide (CO2) emissions target for automobiles of 130 g/km by 2012 was damned as unrealistic at a recent Fdration Internationale de lAutomobile (FIA) conference of manufacturers, legislators and transport interests, reports David Haworth. As part of the mix to achieve hefty reductions in average emissions, alternative fuels and propulsions are welcome but not necessary, experts were told by an engineer from ADAC, the German automobile organisation. The consumption of compressed natural gas (CNG), LPG and ethanol represent less than 1% in every vehicle class and will not be much more significant by 2012, said Dr Reinhardt Kolke. The biggest market shift will come in diesel use during the next six years or so, he continued for example, the diesel market share for a family car, currently at 70%, will grow to 75% by 2012. For a small family car the equivalent figures are 58% and 62%, so a focus on diesel formulation and car propulsion would be more effective. The conference heard the industry is facing a variety of fuel economy standards in different parts of the world. In the US a further 10 states have followed California in developing fuel economy standards that will cover some 35% of the countrys total population. The FIA favours a progressive, upward convergence of car fuel efficiency standards at a global level and backs the development of a global fuel economy standard via the UN Economic Commission for Europes World Forum for Harmonisation of Vehicle Regulations. Such a standard could become a norm for fuel economy and CO2 emissions reduction, the FIA believes.
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MIDDLE EAST
The Iraqi government has approved an amended draft law on how to share the countrys wealth, Prime Minister Nouri Maliki has said. The US has been pressing Iraq to pass a law as part of efforts to promote peace in the country.
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E NERGY INSTITUTE

Interview

Sir Roy Gardner goals and game plan

Sir Roy Gardner, who has recently taken over as the Energy Institutes President, talks to Petroleum Review, about his career to date and the challenges facing both the industry and the EI in the future.*
Q: Can you explain how you started your business career and your ambitions at that date? A: Ive always been driven to work hard, probably because as a child I came from a family where money was always scarce. As a teenager I had paper rounds and during the summer holidays worked at the local bacon-packing factory. I worked so hard that I was soon earning the maximum bonus. It was worth it as I earned enough money to buy the new football kit I wanted. I was a huge football fan and its no real secret that my original career ambition was to be a professional footballer; I did, in fact, have a trial for Queens Park Rangers. But it wasnt to be and instead I joined the British Aircraft Corporation as an accountancy trainee. There was never any expectation that I would go to university; it just wasnt on the agenda. I cant say that being an accountant was specifically a career choice, but it seemed to be a job with good development opportunities and, rather importantly to me at that time, it was a way into BAC who had a great football team! Accountancy certainly lived up to my expectations of having a good career development path and I worked my way through a number of different roles (see box), finally achieving my aim of becoming a Chief Executive when the British Gas group was split and Centrica was formed in 1997. Q: Gordon Brown appointed you Chairman of the Apprenticeships Task Force can you tell us a little more about this? A: In 2002 Gordon Brown, then Chancellor of the Exchequer, approached me and asked me to chair a task force that he was establishing with the aim of increasing the number of employers offering apprentice places. With the changes in the global economy, the UK will find it increasingly difficult to compete on the global stage unless it raises its skills levels. We decided that the best way of convincing employers to get involved was to show them that there is a solid business case for it. We undertook research that demonstrated improved productivity, better motivation, competitive advantage and increased profitability. Case proven. The task force was established with a finite life, but has since been superseded by the Apprenticeship Ambassadors Network, which, again, Gordon asked me to chair. The network is an independent group of 25 employers who are all committed to apprenticeships and who act, literally, as ambassadors. It is about using employers to target other employers. It is also worth mentioning here the Ambition: Energy initiative. This was launched in 2002 by the Prime Minister, Tony Blair and, as a member of the National Employment Panel, I was asked to chair the initiative. The aim was two-fold to provide training for those people who are disadvantaged in the labour market, for example the long-term unemployed, the disabled and lone parents, as well as to help address the predicted shortage of skilled engineers in the energy, water and waste industries. Q: Can you tell us about the challenges faced in the demerger of British Gas and the formation of Centrica? What do you regard as your major achievements at Centrica? A: At the time of the demerger some

commentators didnt give Centrica much hope; in fact, one designated the company Duff Gas plc. Many of my colleagues thought I was mad to want to be its Chief Executive! Survival was the first challenge. The business had a seriously uncompetitive cost base. It was suffering from significant overmanning, but the main problem was the amount it was paying for its gas thanks to its historical take or pay contracts. These were contracts that the old British Gas had entered into, in many cases before competition in retail markets was even a glimmer in the governments eye, in order to secure the supply of gas for its customers. But the contracts locked us into buying too much gas at prices way above the market. The cost was crippling; a potential exposure of 4bn. Some of its subsidiary businesses were making substantial losses; as much as 1mn/d. Customer service was at a low point; some of the media were referring to British Gas as being the most loathed company in Britain. I brought in a skilled negotiator to help me create the conditions within which we could renegotiate the take or pay contracts. I put in some hard management with a clear brief to turn round or shut down the loss-making businesses. And we invested heavily in systems and training to improve the quality of our customer service; it was the lead item at every meeting with my executive team and we became the first utility to make customer satisfaction an integral part of our executive

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pay packages. The other challenge was that, if Centrica survived, it was in danger of becoming a shrinking business. Competition was already starting to take away market share and the possibility for increasing margins in the short term was virtually non-existent. So we had to look at how we could grow our business into new markets and new geographies. Ironically, the thing that Id count as one of my major achievements is also the source of one of my major frustrations that is, the development of competition in European energy markets. At Centrica we had a very successful lobbying strategy; we got competition onto the agenda of the European Parliament. The fact that many European companies are under investigation by the Commission for potential anti-competitive practices is a major step forward from where we were five years ago and I do believe that Centrica played a major part in getting to this point. Q: In accepting the Presidency of the Energy Institute you have returned to the energy industry. What do you see as the main challenges facing the energy industries in the UK? And worldwide? A: There are a massive number of challenges, so I will just talk about three. The ability for Europe and, more specifically the UK, to secure adequate supplies of oil and gas at an affordable price. I am concerned at the extent to which these fuels around the world are concentrated in the hands of a small number of countries, most of which (excluding Norway of course) are politically unstable and where ownership is used as a tool for political purposes. Secondly, the ability for UK energy firms to compete in Europe. The lack of cross-border integration, the existence of national markets and the dominance of former national monopolies are strong structural barriers to an effective market on a European scale. I feel very strongly that whilst over half of the energy supply accounts in the UK are served by European energy companies, British companies have been able to make only limited inroads into Europe. In fact not a single household in France, Germany or Spain is supplied by a British company and thats not for the want of trying. The other key global challenge of course is development of a sustainable energy future in the face of increasing demand caused by population growth, increasing prosperity and the rapid development of nations such as China and India.

Sir Roy Gardner, EI President

Currently Chairman, Compass Group; Director, Willis Group Holdings; Senior Advisor, Credit Suisse. Previously Chief Executive, Centrica, having joined the former British Gas in November 1994 as Executive Director, Finance. Prior to British Gas, Sir Roy was Managing Director of GEC Marconi and was appointed to the Board of GEC in 1994. Previous positions include Chief Operating Officer, Northern Telecom Europe, following its take-over of STC; Managing Director of STC Communications Systems and a member of the Board of STC, having joined the company in January 1986 as Finance Director from the Marconi Company where he was Group Finance Director (19791985). Sir Roy began his career at the British Aircraft Corporation, where he worked in the Commercial Aircraft Division. Other roles include Chairman of the Advisory Board of the Energy Futures Laboratory, Imperial College (2007); Non-Executive Director of Manchester United, acting as Non-Executive Chairman (March 2002June 2005); NonExecutive Director of Laporte (December 1996April 2001). February 1998 appointed President of the Carers National Association, now Carers UK. He is also a Trustee of the Development Trust (for the Mentally Handicapped). December 2002 appointed as Chairman of the Apprenticeships Task Force, now Chairing the successor body, Apprenticeship Ambassadors Network. Sir Roy also Chaired Ambition:Energy as a member of the National Employment Panel. Sir Roy was knighted in 2002 for services to the gas and electricity industries. More has to be done, on a global scale, to manage the demand-side of the supply/demand equation. Energy efficiency initiatives must be promoted more strongly. Industry has to look at ways of using technology. And governments around the world have to look at incentives for reducing consumption. Additionally, the energy industries have to keep investing in both the development of alternative technologies as well as ways of economically recovering the hydrocarbons that do exist, but are as yet too costly to extract. Q: What do you see as the main challenge for the Energy Institute over the next few years? A: I think the main challenge is the same as for any professional institution keeping in touch with the needs of its members. We represent a body that is diverse, yet related, in its skills and interests. We have to remember that diversity and ensure that none of our members feel disenfranchised. Q: Are there any particular directions you would like to see the Energy Institute moving in or particular areas of activity you see as particularly important? A: The two key areas I feel are particularly important are the ones that I highlighted in my speech at the AGM in June. Firstly, helping the industry to maintain and raise its overall skills levels. We have a lot of talented people in energy, some very innovative people and some very skilled engineers, but what we need, if you excuse the pun, is a pipeline of new blood coming into the sector. We have got to get young people to see the energy industry as a good career choice. And we have to keep them within the sector, which means looking at remuneration and reward packages. The other area I see as important is continuing to inform and influence policy. Both at home, where there is still much work for the government to do to achieve a workable, effective and sustainable energy policy, and also in Europe to achieve liberalisation of energy markets. The crucial role for the Institute is to inform and advise on the basis of scientific facts, supportable data and technical expertise. Fact-based argument is far more difficult to ignore than argument based on emotion or commercial interests. Id also like to see a slightly more public role for the Institute. With energy so high on the public agenda I think it would be good for the man on the street to know that there is a significant body that knows what it is talking about, which is getting involved in the debates and helping to shape the energy future. I am convinced that this would raise the level of the debate and be more effective than political rhetoric or the views of the academics at getting the public to understand the issues for example the need for energy efficiency and the need for planning consents for developments such as LNG terminals, pipelines and windfarms. *This is an abridged version. For the full Q&A article, visit www.energyinst.org.uk About us, Council.

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US

Oil and gas

Concerns grow regarding US oil import dependency

Last year the US imported 10.1mn b/d of crude oil, almost half the nations total oil consumption. Unless substantial quantities of alternative fuels are developed soon, this import level will undoubtedly increase, writes Judith Gurney.

he US Energy Information Administration (EIA) warns that imports could reach 13mn b/d within ten years as a result of higher demand and lower domestic output. It calculates that additional output from the offshore Gulf of Mexico will be offset by declining production from Texas, California and, especially, Alaska, where production last year was only 768,000 b/d compared to a 1988 output of 2mn b/d. As Table 1 shows, Canada, Mexico, Saudi Arabia and Venezuela are the principal exporters of oil to the US. There are concerns, however, about the future of this traditional supply pattern. The amount of oil that Middle East producers send to the US has been falling for several years, largely as a result of rising demand for crude in the Far East, especially China. In 2006, US Middle East imports reached their lowest level since 1977. Shipments from Africa, mainly from Nigeria, are currently making up for this import shortfall, but this may not last if civil unrest disrupting output from Nigerias oil-producing Delta region escalates. There is also uncertainty about future oil imports from both Mexico and Venezuela. Mexico has long supplied

some 8% of the crude consumed annually in the US, but it may not be able to support this level of exports. Production from its Cantarell offshore oil field, which is responsible for some two-thirds of Mexicos crude output, is falling rapidly despite efforts to stem the depletion of shallow-water wells. Untapped oil reservoirs are believed to exist in deeper waters, but finding and developing these will be difficult as Pemex, the state oil company, is barred from forming joint ventures with foreign oil companies in order to benefit from their deepwater expertise.

Operated by Anadarko Petroleum and owned by Enterprise (80%) and Helix (20%), Independence Hub is the Gulf of Mexicos largest natural gas processing facility, with the capacity to bring 1bn cf/d of natural gas to US consumers - some 10% of all natural gas production from the Gulf of Mexico Source: Anadarko Petroleum

Although Venezuela has traditionally been the fourth largest supplier of crude oil to the US, the hostility of President Hugo Chavez to foreign oil companies and to the US threatens to change this. His government has seized majority control of all of the Orinoco oil fields, including those of BP, ConocoPhillips, ExxonMobil, Chevron and Total. Although PdVSA, the state-owned oil company, has invited foreign companies to be minority partners, there are doubts regarding the ability or intention of PdVSA to maintain output and Orinoco oil exports. Canada remains the top US crude supplier, having eclipsed Saudi Arabia last year, and it will undoubtedly continue in this role. Optimism is bolstered by estimates that Canadian crude oil production will increase from 3mn b/d to 4mn b/d by 2015. There is some uncertainty here, however, based on

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Supplier Canada Mexico Saudi Arabia Venezuela Nigeria Iraq Angola Algeria Ecuador Kuwait

2006 1,723 1,562 1,428 1,130 1,019 1,582 1,529 1,369 1,279 1,178

2005 1,633 1,556 1,445 1,241 1,077 1,527 1,456 1,228 1,276 1,227

2004 1,616 1,598 1,495 1,297 1,078 1,655 1,306 1,215 1,232 1,241

2003 1,549 1,569 1,726 1,183 1,832 1,481 1,363 1,112 1,139 1,208

2002 1,445 1,500 1,519 1,201 1,589 1,459 1,321 10,30 1,100 1,216
Source: Oil & Gas Journal

Table 1: US crude oil imports top 10 suppliers (in 1,000 b/d) concern over the continued economic viability of production from oil sands which now account for more than onethird of Canadas total oil output. Oilsands production is costly and sensitive to oil price levels. In addition, the extraction and upgrading of oil from sands requires natural gas, a dwindling Canadian resource.

Repercussions for refineries

A bigger role by Canada as a crude supplier has implications for the US refining industry, which will need to make adjustments and upgrades to handle increased volumes of lower-quality oil. The Midwest refineries currently receiving Canadian shipments are unable to process more of the heavy, sour oil coming from oil sands and pipeline operators are adjusting their networks to move this oil to Gulf coast refineries better able to process it. Enbridge and ExxonMobil are said to be considering building a new pipeline from an Illinois transportation hub to the Gulf coast for this purpose. Current US refineries have a theoretical capacity of 17.3mn b/d, although the industry runs at less than full capacity due to operational and maintenance requirements. Early last year, refiners announced plans to add 1.75mn b/d Project Gotcha Mission Deep Kaskida Thunder Bird Caesar Friesan Claymore Pony Raton Redrock Ringo Longhorn North Operator Total Anadarko BP Murphy Anadarko Shell Anadarko Hess Noble Energy Noble Energy Nexen Eni

capacity by modernising and expanding current facilities. However, late this spring it was reported that many refiners, including ConocoPhillips, Tesoro and Valero Energy (the nations largest independent marketer and refiner) were delaying or cancelling their expansion plans. They cited cost escalations due to shortages of skilled labour, construction services and materials. They also expressed worries that their future profit margins would be seriously affected if initiatives for the production of alternative fuels succeeded. Furthermore, they were concerned over reports that several refineries being built abroad were planning to ship part of their output to the US.

Natural gas shortfall

As with crude oil, the US is not producing enough natural gas to satisfy demand. Gas output from conventional sources is falling due to rising exploration and production costs and lower well productivity. To some extent, increased output from unconventional sources, mainly shale and tight sands formations in the Rocky Mountains and Texas, is compensating for the depletion of conventional wells. Hopes pinned on the production of Area* AC 856 GC 955 KC 292 MC 819 GC 683 GC 599 AV 140 GC 468 MC 248 MC 204 MC 546 MC 502 Water depth (ft) 7,600 7,300 5,860 5,673 4,457 3,800 3,700 3,440 3,400 3,334 2,500 2,330

known Alaskan gas reserves have faded. The plan by former Governor Frank Murkowski for a pipeline to ship Alaskan gas produced by ExxonMobil, ConocoPhillips and BP to the Lower 48 states had not been approved by the Alaskan legislature when Murkowski lost his re-election campaign last November. Governor Sarah Palin has come up with a new pipeline proposal, but its terms have yet to be negotiated with the oil producers or accepted by the state legislature. In the face of declining natural gas output, the US depends on imports. Canada is the primary source of imported gas, with pipeline shipments now meeting 16% of US demand. Canadas requirements for gas for its own consumption, including its use in the production of oil from tight sands, makes an increase in its exports unlikely. LNG imports now cover only a small fraction 2.6% of US demand. Trinidad and Tobago supply the lions share, with some coming from Algeria and Egypt, and occasionally, from Nigeria, Malaysia, Qatar and Oman. Despite the fact that LNG imports have been declining in volume recently, the EIA forecasts a growth from the current 560bn cf to 1,080bn cf in the next few years. Achieving this will require more terminals to complement the six existing import facilities in the US. A number of plans for new terminals have been announced, but several including one by Shell in the Gulf of Mexico and another by BHP off the California coast have been cancelled due to costs and difficulties in acquiring siting permissions. Not all projects have stalled. Construction is due to begin soon on Excelerate Energys Gateway terminal off the east coast near Boston. In addition, existing and new LNG terminals in Canada and Mexico are expected to add to the US gas supply. The other problem the US faces with increasing LNG imports is competition in world markets, where many buyers ensure their positions by making longterm commitments with gas producers. US purchasers are reluctant to enter into these kinds of contracts because of uncertainty about future US gas prices.

Gulf of Mexico still producing

The Gulf of Mexico continues to be an important source of oil and gas, supplying some 25% of the nations domestic oil production and 16% of its natural gas production. A significant portion of this output comes from deepwater reservoirs. Oil output, which had been increasing gradually, fell in 2004 and 2005, due partly to hurricane damage. It has recently started to pick up again. Despite a steady decline over the past few years, natural continued on p22...

*AC Alaminos Canyon, AV Atwater Valley, GC Green Canyon, KC Keathley Canyon, MC Mississippi Canyon. Table 2: Gulf of Mexico deepwater discoveries during 2006
Source: US Department of the Interior, Minerals Management Service

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MI D D L E E A S T

Insurance

Call goes out for Islamic compliant products

Energy was not in short supply when senior managers from oil, gas and power companies across the Middle East recently met with the worlds leading insurers in Dubai. The Ninth Middle East Energy Conference hosted by insurance broker Aon brought together companies and their insurance partners for two days of discussion and debate along with warnings from both sides on the changing nature of the region and the industry itself. Jon Guy reports.
Middle East is now looking at new forms of energy to meet the demand. This was a view backed by Chairman of Aons Global Natural Resources practice, Magne Seljeflot. What we are now seeing, I think, is a recognition that the Middle East can create a higher revenue by completing the refining and other manufacturing processing rather than simply shipping the crude oil and gas, he said.

Islamic compliant products

The huge planned projects will demand significant insurance cover, but international underwriters were warned that they will continue to miss opportunity after opportunity unless they can offer Islamic-compliant products. Islamic law requires specifically constructed products, particularly insurance policies which are based on a not-for-profit and shared wealth system. Rasheed Al Rasheed, Managing Director of ACWA Power Development Company, one of Saudi Arabias leading power companies, said demand for water and power was outstripping supply and there was now some $15bn of new projects underway with completion set for this year. A similar amount of investment is earmarked for integrated water and power plants in 2008, to meet the need for Saudis four new economic cities. The insurance market is missing out on opportunities in Saudi Arabia because it is not offering Islamic compliant insurance, Al Rasheed stated. The lenders are looking for insurance coverage, but they want that coverage to comply with Islamic laws. The insurance market has the opportunity to play a major role in these projects if they provide the right product. What is clear is that, while the Middle Easts energy sector offers a great deal of opportunity for the insurance industry, there remains growing unease in terms of the insurance markets ability to charge premium rates that insurers believe are commensurate with the potential value of claims. From the energy companies point of view, they are warning insurers that they need to invest in the region and the development of Islamic-compliant products if they want to play a significant role in current and future projects.

he sheer scale of the energy projects underway in the Middle East has seen international insurers keen to play their part however, delegates were warned that they needed to invest in the region, its people and its culture in order to do so. David Hawksby, President of the Global Downstream Energy Division for insurance giant AIG, told delegates they had to look at the rising costs of claims and whether their policies would cover those costs. He explained repair costs were rising, as was the value of business interruption claims, and firms had to examine the maximum values contained in their insurance policies. The cost of insurance may have remained steady, but the values of claims have risen, he said. Companies have to take a long hard look at the values they have in their insurance policies because what may have been valued at $1.2bn last year may now cost $1.4bn this year. He stated that the specialist nature and the size of energy companies operations made it vital that the client and insurer worked as a partnership. Price will always be an important driver in the choice of insurance provider, but you have to look at other issues, Hawksby noted. Premiums may be in the millions, but often claims are in the billions. He said energy companies need to ensure that their insurance providers were in the market for the long term, were strongly rated and could offer a broad coverage of all their risks.

However, while insurers are looking at how they can reduce the spiralling cost of energy claims, the regions energy producers are now looking at how they can better utilise the wealth they are generating. Chief Executive of the Dubai International Financial Centre, Nassar Al Shaali, told the conference that the region was now using many more of the energy products it would have previously exported. Furthermore, the thirst from China as a global economic force had put further strain on the energy resources across the region, which remains home to 60% of the worlds oil reserves and 40% of its natural gas reserves. What we are seeing is a growth in the east-to-east global trade between the Middle East and Asia, he said. Growth in the region continues to be rapid in the first quarter of the year. Within the UAE, growth was at 20%. The Gulf Cooperation Countries, along with Iran and Iraq, have $13tn of new projects already announced and the GCC, Iran and Iraq simply do not have the capital to support that level of investment and that includes the insurance and reinsurance capacity. He added that the Middle Easts energy firms were now looking at how they could maximise the revenue from their products, adding that it was his belief that oil prices would remain at their current level and would increase before there was any cut in the cost per barrel. The name of the game now is energy optimisation, Al Shaali said. Dubai has the highest wattage use per capita of any city in the world and the

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B ULK STORAGE

Europe

Even the bad times are good

who said: This is a very attractive class of infrastructure with numerous opportunities to grow existing capacity in North America and Western Europe, and expand into new regions and markets.

Where the money is going

Meanwhile, business continues as normal, and LBC is just one of a number of firms investing in new capacity in the Amsterdam-Rotterdam-Antwerp (ARA) area in northern Europe. In a joint venture with Spanish oil marketer CEPSA, which has a 25% stake, LBC is building a greenfield terminal in Antwerp, the first phase of which is due to open this month (August). This will offer 10,000 cm of storage capacity for phenol, with a second phase already under way that will add another 25,000 cm for phenol and other petrochemicals early in 2008. A third phase will see 10,000 cm of capacity for biofuels and feedstocks open in mid-2008, while further expansion up to a total of 150,000 cm is being planned by the end of the decade. Vopak, the worlds largest independent tank terminal operator, is also building a brand new site in Antwerp. The Linkeroever facility is due to open for business on 30 May 2008, with an initial capacity of 100,000 cm in 60 tanks, primarily for chemicals. Expansion to a planned total of some 400,000 cm is predicted within a few years. Vopak is also adding a significant volume of tankage in Rotterdam, expanding capacity for oil products by 440,000 cm next year. However, the focus of the companys growth is outside Europe and, having sold its interest in the tank container operator VOTG and its tank cleaning stations in Sweden, and undertaken a $375mn share placement in the US, Vopak is planning to add more than 2mn cm of storage capacity worldwide in the next few years. Much of this will be located in China, Singapore and Latin America, although there are ongoing developments in Europe, such as the conversion of tankage to handle biofuels at the Botlek-Noord terminal in Rotterdam. Oiltanking, the second largest independent terminal operator, is also investing in Antwerp where, following the sale last year of a 50% interest to Stolt-Nielsen, it is adding new jetties and 50,000 cm of chemical tanks over the next three years, taking total chemical capacity to more than 325,000 cm. One of the smaller regional operators, ADPO, is also adding to capacity in Belgium. Some 60,000 cm of new tankage is currently being added, of which 15,000 cm is due onstream in 3Q2007 and 12,500 cm in 2Q2008. At its Ghent facility, ADPO is putting

Independent terminal operators in Europe continue to enjoy profitable market conditions, underpinned by demand growth resulting from changing trade flows for traditional cargoes and the rise of biofuels.

his years annual review of developments in the European tank storage sector may seem familiar to those who recall the 2006 edition operators report full tanks as industry moves increasing volumes of product in and out of the region. This reflects the pace of economic and industrial development in Asia, particularly in China, and the growing market for biofuels, both ethanol-based and biodiesels derived from vegetable oils. While for the global operators this means that a lot of their current investments are heading east, smaller regional players have also invested in adding capacity and capabilities within Europe. The cash generated by these market conditions, which have now lasted for more than two years, has also generated interest in the sector from investment funds, which already have a presence in the European market. At the StocExpo show in Antwerp last April, the air was thick with rumours about impending moves by the

Vopak terminal, Hamburg, Germany

funds, some of which have borne fruit, or of existing investors looking to take profits by selling off their holdings. One example of this trend is LBC, the worlds second largest independent operator of chemical storage capacity. In its report on the 2006 trading year, the Parisbased company cited occupancy levels up 1.9% on 2005 at 95.5%, throughput up 4.7% at 10.9mn tonnes, turnover up 4.3% to 128.9mn and profit (EBITDA) up 8.9% at 50.2mn. A few days before releasing these figures, LBC also announced that its owner, One Equity Partners part of JP Morgan Chase & Co had agreed to sell the company to the Australia-based investment firm Challenger Infrastructure Fund (CIF), three years after buying the terminal chain. At the time of the announcement, Steve Bickerton, CIFs Fund Manager, stated: Storage terminals, with their infrastructure characteristics, deliver long-term predictable cash flows and growth opportunities. His words were echoed by Greg Martin, Chief Executive of Infrastructure for CIFs parent, Challenger Asset Management,

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ment in new tank capacity spread more widely, reflecting local demand conditions. In Spain, Tepsa is adding 50,000 cm of capacity for diesel, vegoil and kerosene at its Barcelona facility and two 20,000 cm diesel tanks in Bilbao. Decals Huelva terminal has already been expanded with the construction of four 5,000 cm tanks for methyl esters and building work has started on 28 new tanks for vegoils, all to feed the developing biodiesel sector in Spain. Decals 35mn investment also includes a new automation system to handle in-line biodiesel blending and additional rail loading points for vegoils and methanol. In southern France, LBC is considering a plan to add up to 50,000 cm of new capacity in Marseille to handle heavy fuel oil and biofuels. It is also adding some 53,000 cm of tankage at the joint-venture Tanquipor terminal in Lisbon to handle automotive fuels, including biofuels, and is installing new biodiesel blending facilities linked to a 10-year contract with BP due to come into effect next year. In Italy, PIR has just completed a new tankpit comprising 8,300 cm of tankage for low flash products and will add another 10,000 cm next year. The company is also investing in rail connections and pipelines to help increase throughput. Decal is considering adding four 12,000 cm tanks at its Porto Marghera terminal. Turkish terminal operator Solventas is in the midst of a major upgrade of its Gebze terminal, where five new tanks were put into service in April. Another 12 tanks are due for completion before the end of the year, taking total capacity for chemicals up to some 220,000 cm.
So far, the recommendations from the board set up to look at the Buncefield incident have had a limited impact on terminal operators

Threats and opportunities

Rarely has the international tank storage sector enjoyed such a sustained period of positive fundamentals. In such a trading environment, it is always tempting to believe that these conditions will last forever. However, terminal operators are a pessimistic lot and no conference passes without its share of gloomy predictions. At the moment such predictions cover two sets of issues firstly, that the impetus given to the sector by the introduction of new fuels cannot last, given that the youthful market for biofuels depends to such a large extent on financial support provided by governments keen to promote their environmental credentials. The financial difficulties experienced by some of the early champions of biodiesel seem to bear this out, but it has to be recognised that this first generation of biofuels is already giving way to a more sophisticated business model, in which there is plenty of room for terminal operators to get involved through the provision of dedicated infrastructures, as well as taking advantage of their expertise

in a further 25,000 cm of new capacity in mild steel tanks to cope with expanding demand from existing clients. Another local operator, Noord Natie, has received approvals to expand its Antwerp site and will build 18 tanks totalling 38,400 cm. A new name is also due to arrive soon in Antwerp. Belgian stevedoring firm SeaInvest, which already runs bulk liquids terminals in Ghent and in Rouen, France, is building a major new facility on a brownfield site in the central harbour area. With land in Rotterdam currently very difficult to come by, other expansion projects in the ARA range are focused largely on Amsterdam, which is being positioned as a major import and transhipment hub for gasoline and fuel oil, particularly for exports from the Baltic. Oiltanking is currently adding some 150,000 cm of capacity at its Amsterdam site, which will take total capacity close to 1.6m cm by the end of this year. Demand for gasoline storage and blending will, the

company says, encourage further growth and it is already looking at another 200,000 cm expansion. Additional berths opened at the end of last year to help cope with the extra tanker calls. One significant project that is going ahead in Rotterdam is Rubis Terminals development of a new facility in Botlek. Work began at the end of 2006 on the first phase, which is due to put 82,000 cm of new tankage onstream early next year. The terminal, which will handle both chemicals and petroleum products, will be expanded to an ultimate capacity of 130,000 cm. Rubis Terminal is also adding to capacity at its Rouen site in northern France, where 20,000 cm of tankage has already been completed and another 45,000 cm is under construction; much of this is designed to hold liquid fertilisers.

Growth in the Med

Lacking a dominant entrept location, Mediterranean Europe is seeing invest-

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B ULK STORAGE

Europe
techniques and equipment, and to improve planning for handling any incidents that occur. Operators are more concerned about the possibility that regulations will be put in place that require them to retrofit or upgrade secondary containment, which could prove costly at many sites. Any regulatory impact in the UK resulting from the Buncefield investigation would be likely to be taken up by a future revision to the EUs Seveso II Directive and, therefore, require implementation across Europe. The impact on terminal operators of the EUs REACH Directive on the registration, evaluation and authorisation of chemicals is as yet unclear, although the legislation took effect on 1 July this year (see p36). This could be good news for terminals if the provisions of the regulations make it more expensive for chemicals to be produced within Europe and users turn to imported material. On the other hand, it may be that industrial consumers turn to importing finished goods rather than chemicals. One piece of good news for operators is that the EUs proposed supply chain security legislation, which would have placed a great burden on terminal operators, now seems to have taken a back seat and will not appear any time soon.

Tank under construction at OKZ terminal in the Czech Republic

in the handling, blending and storage of volatile liquids. The second set of issues relates, as ever, to regulations and the costs to the terminalling industry of compliance. At the top of everyones agenda is the potential fallout from the long-running

inquiry into the Buncefield oil depot explosion in December 2005. So far, the recommendations from the board set up to look at the circumstances of that incident have had a limited impact on terminal operators they have been urged to look at their overfill prevention

...continued from p17 gas output has also recovered a bit this year. Exploration continues to reveal new offshore oil and gas fields. Exploratory wells drilled last year resulted in the 12 deepwater discoveries listed in Table 2. Four of these are in water depths greater than 5,000 ft (1,524 metres), where a well can take three to six months to drill and can cost up to $200mn as a result of high temperatures, elevated pressures, and thousands of feet of overlying salt. Anadarko, Marathon and Shell have announced discoveries this year, all in the Green Canyon area. Many of the fields found in very deep waters are natural gas reservoirs. When these are developed, some will be connected to the Independence Hub operated by Anadarko. Located in a deepwater block in the Mississippi Canyon area, Independence Hub is a permanently moored, deep-draft, semi-submersible platform that can accommodate the tieback of multiple fields. It is scheduled to begin operations this autumn, handling the output from seven deepwater gas fields.

fields came onstream last year and that 16 are scheduled to come online this year. Three major projects are due to begin production over the next two years. These include BPs Thunder Horse and Atlantis fields, and ChevronTexacos Tahiti field. Together, these three fields expect to produce 570 b/d of oil and 447mn cf/d of natural gas. The MMS forecasts that oil production will increase to 2.1mn b/d from current levels of between 1.34mn and 1.4mn b/d by 2016 if discovered and as-yetundiscovered fields come onstream as expected, and that natural gas output will grow from 8bn cf/d to 8.3bn cf/d by 2010. Skeptics of these figures suggest that recent royalty rate increases will dampen enthusiasm for exploration in the Gulf of Mexico and that reservoirs in the deep sands of the Lower Tertiary age may not be able to sustain long-term production at economic rates.

leasing programme includes newly accessible acreage not only in the eastern Gulf of Mexico and offshore Alaska, but also off the coast of Virginia where substantial gas fields are believed to exist. The MMS will allow seismic studies in these waters, but moratoria would have to be rescinded before exploratory drilling could begin.

Government energy policies

There has been a lot of emphasis on developing alternative fuels as a means of reducing the nations dependency on imported oil. President Bush has called for a massive increase in the use of ethanol and Congress is considering mandates for the use of alternative, cleaner automotive fuels. Achieving these goals will require time. In June, the new Congress began considering the contents of an energy bill to curb gasoline consumption, reduce imports and lower the reliance on natural gas by electric power plants. There were demands for reducing subsidies given to oil companies by the executive branch and former Congresses, including the repeal of income-tax relief, and for increased regulatory control of oil and gas drilling. It is too early to predict what form a new energy bill might take or if President Bush would sign it.

New areas for exploration

Although federal moratoria enacted after an oil spill off the California coast in 1982 have barred oil companies from offshore waters along the east and west coasts and around Florida, Congress has recently opened a small portion of these offshore areas for exploration. A proposed MMS five-year offshore

Future projects
The US Minerals Management Service (MMS) reported that 10 new deepwater

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E &P

Reserves nationalism
Finally, there is a question about enforcement of such clauses before arbitration tribunals. There do not yet appear to be decisions on the balancing kind of stabilisation clause that might guide an investor. There have been decisions, however, which by analogy might be relevant to investors in the petroleum industry. These are considered below.

Fighting back
Peter Cameron, Professor of International Energy Law and Policy, Dundee, UK, outlines how oil companies can defend their petroleum contracts against host governments changes in the rules.
A new approach emerged, emphasising the idea of balance of interests between the parties to the contract. If a host government chose to adopt a legislative measure that had a negative impact on the fiscal core of the contract, this action would trigger a negotiation process in which the parties would seek to identify and introduce a compensating measure to restore the balance or equilibrium in the contract. The growth of national oil companies (NOCs) means that often this restoration of equilibrium would involve some corrective action by the NOC that is a party to the contract with the foreign investor (such as payment of additional fiscal obligations). This modern approach to stabilisation of contracts is not aimed at combating attempts at expropriation, but is likely to be activated when an investor is faced with the phenomenon of creeping expropriation, a use of regulatory power (usually over tax or environmental matters) that cumulatively has a similar effect. A variety of stabilisation clauses have emerged over the years, with this balancing or equilibrium approach easily the most popular, although taking many different forms. It faces a number of limitations, however. Firstly, there is the enforcement hurdle. In some versions, it looks like an agreement to agree and will require a sound arbitration provision as a backup. Secondly, some countries such as Saudi Arabia and Brazil (and the North Sea states) reject such stabilisation clauses and are in a position to secure deals without them. So, in a number of cases, this form of comfort is not available to a foreign investor. Thirdly, only a few governments would ever consent to a form of contract stability that went beyond fiscal issues. Matters of environmental protection, health and safety will be routinely reserved to the host state as ones that a sovereign state cannot fetter by contract. The significance of this is evident in the continuing rise in environmental protection levels that affects the energy industries as a whole and the lack of generally accepted standards in many areas. A current illustration of how a states environmental powers might be used to require changes in existing contracts is evident in Russia, in the environmental agencys approach to the contract for the Sakhalin-2 project and to the Kovykta gas field licence held by TNK-BP.

Fair and equitable treatment

The growth of investment protection agreements between states has been rapid, amounting to more than 2,300 of such BITs in existence. Most of these allow a foreign investor to have recourse to an international tribunal to arbitrate a dispute it has with a foreign state. A principal venue for such arbitrations is the International Centre for the Settlement of Investment Disputes (ICSID), part of the World Bank group. These agreements may also lend treaty status to stabilisation provisions contained in a host governments petroleum regime by way of the fair and equitable treatment provision that is contained in most BITs or by means of the language that some BITs have. Investors may make claims about a breach of legitimate expectations or denial of due process rules by courts or other local decisionmaking bodies. Although it appears that there are no recent arbitral awards that directly address stabilisation clauses, there are some that are potentially relevant since they concern the imposition of fiscal obligations that alter the economic balance struck by the parties at the time the contract became effective. A general conclusion from cases decided so far is that a finding in favour of an investor on the basis of unfair and inequitable treatment may have greater chances of success than one based on indirect expropriation. A measure of the effectiveness of the international arbitration route may be gauged from the fact that some producing countries have decided to review their obligations under various international treaties such as ICSID. Bolivia indicated in May 2007 that it intends to withdraw from ICSID jurisdiction and to revise the terms of no less than 24 BITs in areas affecting the definition of an investment, performance requirements and dispute settlement. Ecuador has stated that it will terminate its BIT with the US. Taking this Latin American lead, other countries can be expected to show a stronger preference for local methods of dispute settlement in preference to international arbitration. This turn towards a local approach is no guarantee of more favourable treatment for the host state, however.

he spectre of resource nationalism is sweeping through the international oil industry. A growing number of governments in producing countries have taken or initiated unilateral action to change the terms of existing contracts Venezuela, Bolivia and Russia provide vivid examples of this trend. First a threat of expropriation is made and then a period of coercive renegotiation follows. Some of the largest oil companies have been targeted in the process. Faced with these and similar, but less-publicised, actions, investors are increasingly taking the last resort option of international arbitration to resolve disputes with host governments. This article examines some ways in which investors are able to defend their interests in the current, volatile environment of heightened political risk. In particular, it looks at the relevance of stabilisation clauses; at the protection offered by bilateral investment treaties (BITs) and at the revived role of the multilateral investment treaty, the Energy Charter Treaty.

Contract stabilisation
The most familiar instrument in the international petroleum industry to limit political risk is the stabilisation clause found in many petroleum agreements.1 The classical examples of this were aimed at freezing the fiscal terms in the petroleum agreement, with the intention of limiting the risk of expropriation by the host state. However, once it became clear that international law permitted a sovereign state to expropriate provided that such action was accompanied by full, fair and prompt compensation, the raison detre of such provisions crumbled.

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Year (case registered) 2001 2001 2003 2003 2004 2005 2005 2005 2005 2005 2005 2006 2006

Investor

Host country

Subject matter

Result

AES Summit Generation Nykomb Synergetics Technology Holding Plama Consortium Petrobart Alstom Power Italia Yukos Universal Hulley Enterprises Veteran Petroleum Trust Ioannis Kardossopoulos Amto Hrvatska Elektropriveda Libananco Holdings Azpetrol International Holdings (et al)

Hungary Latvia Bulgaria Kyrgyzstan Mongolia Russian Federation Russian Federation Russian Federation Georgia Ukraine Slovenia Turkey

Electricity sale agreement Electricity sale agreement Oil refinery investment Gas delivery contract Thermal energy project Discriminatory measures + expropriation Discriminatory measures + expropriation Discriminatory measures + expropriation Oil and gas distribution enterprise Nuclear power plant Nuclear power plant Electricity generation and distribution Oil and gas distribution, trade, storage and transport Electricity concessions Electricity concessions

Settled Award made Pending Award made Settled Ongoing Ongoing Ongoing Pending Pending Pending Pending

Azerbaijan

2006 2007 Total

Cementownia Turkey Europe Cement Investment & Trade Turkey 15

Pending Pending Pending

Table 1: Energy Charter Treaty cases

Energy Charter Treaty

Another recent development of note is the revived role of the Energy Charter Treaty. It entered into force in 1998 and remains the only international treaty dedicated specifically to the energy sector. Initially, the Treaty became caught in a quagmire of negotiations on an additional protocol on transit and various diplomatic manoeuvres to secure ratification by its most important member, the Russian Federation. These were drawn out and have proved so far unsuccessful. Yet, curiously, the dispute settlement provisions of the Treaty have attracted growing interest among energy companies since 2001, leading to at least 15 arbitration cases by mid-2007, with more to follow involving Azerbaijan and the Russian Federation.2 Essentially, Article 26 provides various options to investors to take host governments to international arbitration in the event of an alleged breach of the Treatys investment provisions. Each State that is party to the Treaty is obliged to provide for effective enforcement of arbitral awards in its country. There are three ways of bringing an action: ICSID. Sole arbitrator or an ad hoc tribunal established under the UN Commission on International Trade Law. An application to the Arbitration Institute of the Stockholm Chamber of Commerce.

As investors have experienced difficulties with States in Central and Eastern Europe, they have sought to defend themselves by reference to the protections given through the Energy Charter Treaty. There is now a clear trend in this direction. Does this mean that investors have found the Treaty to be a highly effective instrument? Not exactly. As Table 1 indicates, many of these cases are still pending; only a few have resulted in an award. Several cases involving Yukos and its subsidiaries were due to only reach the hearing stage in June 2007. A number of the countries involved in these arbitrations have become members of the EU since the disputes began, so questions arise about the interface between EU law and the rules of the Energy Charter Treaty, and whether investors might not prefer in future to rely on EU law remedies alone. However, it is beyond question that awareness of the Treaty among energy investors and the legal community has grown significantly, and new cases are being initiated. Finally, although Russia has signed but never ratified the Treaty and has shown no intention of doing so, there are some who regard it as provisionally bound by the Treaty under Article 45.

not detract from the fact that disputes are still, for the most part, settled by negotiation. In that sense, the kind of provisions that contract negotiators seek to design in a stabilisation clause with its typical emphasis on the steps that the parties need to take to restore a loss of balance following unilateral action captures a fact of life in the petroleum industry. However, at a time of high oil prices and limited access to favourable new prospects, the perception that a host government can leverage a better deal from the foreign investor with gains in popular standing at home has proved tempting. This is the context for the current robust interest in last resort methods of settling disputes. It looks likely to continue for some time yet. 1. For an extensive discussion, see authors report for the Association of International Petroleum Negotiators, Stabilisation in Investment Contracts and Changes of Rules in Host Countries: Tools for Oil and Gas Investors, July 2006. Visit www.aipn.org or contact the author on e:peterdcameron@btinternet.com 2. There is no obligation to make public a recourse to the Treaty in investor-State disputes, so this information is based on that made public by the Energy Charter Secretariat and available on its website: www.encharter.org

Looking ahead
The high profile of formal legal methods of dispute settlement should

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MI D D L E E A S T

Gas

Iran steps on the gas

Hedayat Omidvar, responsible for Strategic Studies, Research & Technology Department, National Iranian Gas Company (NIGC), Tehran, provides a brief overview of Irans gas sector.
The lions share of Irans gas will come from the giant offshore South Pars gas field, located in the Persian Gulf, which is undergoing phased development. Besides condensate production and enhanced oil recovery, South Pars gas is intended for both domestic consumption and export by pipeline and also possibly by LNG tankers. Iran is able to produce more than 400mn cm/d of natural gas from the field, half of which can be assigned to exports, inter-regionally or worldwide. South Pars is considered a reliable gas resource with extremely competitive development costs. The high volume of condensates produced by the field provides a significant revenue stream. Based on experience gained from LNG projects elsewhere in the world, liquids revenues will play an essential role in underpinning overall project economics. the north, the Persian Gulf and India and Pakistan in the south-east, and Turkey and Europe. With its enormous natural gas reserves, extensive domestic gas transmission system and its unique geographical situation, the country is therefore well-placed to supply large quantities of gas to meet international demand. The state oil company, National Iranian Gas Company (NIGC), plans steady expansion of Irans transmission and processing infrastructure as part of a programme that envisions increases in both imports and exports of natural gas. NIGC is to invest about $18bn through 2009 in high-pressure gas pipelines, compressor stations, gas processing plants, underground storage, distribution networks and maintenance.

atural gas takes third place after oil and coal in meeting the demands of the global energy market, currently providing 23% of the worlds energy needs. Its share, however, has been growing due to a number of factors, including a sharp rise in proven natural gas reserves worldwide, the growing priority given by major oil importing countries to security and diversification of energy supplies, and increasing concern for the environment. Iran currently holds over 27.57tn cm of natural gas some 18% of the world's total natural gas reserves placing the Middle East state as the second largest gas reserves holder in the world. More than 60% of Iran's gas reserves are located in non-associated undeveloped or partially developed fields. The major nonassociated gas fields include South Pars (280500tn cf), North Pars (50tn cf), Kangan (29tn cf), Nar (13tn cf) and Khangiran (11tn cf). There are also several other large gas fields with multi-tn cf reserves in place.

Pipeline projects
To accommodate market growth, NIGC expects Iran to have 29,400 km of gas transmission pipeline in place and a distribution network of some 125,000 km by 2009. Many of the pipeline projects planned by the company are associated with links to the Iranian Gas Transmission (IGAT) system as show in Figure 1. Some 20,000 km of transmission pipelines currently take gas from various sources to destinations across the whole country. Pipeline diameters range from 42, 48 and 56 inches, with the system carrying more than 500mn cm/d of natural gas.

National security
However, the way in which Irans impressive natural gas reserves are utilised will have a decisive impact on national security issues within the country. Security of supply for domestic energy requirements has to be reconciled and balanced with the economic security that commercial relations and energy transactions with other nations in the world bring. The requirement for foreign exchange revenues and most appropriate use of national assets are fundamental issues that have to be addressed. Iran is the connecting bridge between the Caspian Sea and Central Asian Basin in

Gas plants and storage

Seven gas processing plants have recently been completed or are planned and under construction in Iran (see Figure 2). NIGC has also identified three reservoirs that might be converted for use as underground gas storage. One of them is the Sarajeh gas and condensate field, about 40 km east of Qom, which has produced at rates restricted by surface equipment for about 45 years. Another prospect for gas storage is the Yortsha Dome saltwater reservoir 25 km south of Varamin. An additional saltwater reservoir under study for use as gas storage is the Talkheh Dome in central Iran, which contains negligible amounts of light and heavy hydrocarbons. Other areas that NIGC thinks might have reservoirs suited to gas storage are located in Abardejno, Siahkooh, Marehtapeh, Prandak and parts of the eastern Azerbaijan provinces.

LNG projects
Figure 1: Natural gas transmission system in Iran
There are currently three LNG projects underway in Iran. The first is NIOC LNG, from which National Iranian Oil Company

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Figure 2: Natural gas treatment plants in Iran

(NIOC) expects to produce 10mn t/y of LNG by 2010, using a two-train plant fed by almost 1.94bn cf/d of natural gas from South Pars Phase 12. The plant will be located on Tombak Island, 60 km from Assalouyeh, and will target both the

European and Asian markets. It will be equipped with two 5mn t/y trains. The Pars LNG project is being undertaken by NIOC (50%), Total (40%) and Petronas (10%). The plan is to export 10mn t/y of LNG to Europe, Asia and the Far East. The plant will use two 5mn t/y trains. FEED (front-end engineering and design) work has been completed and the project partners expect to begin production by 2009. The plant will also be located on Tombak Island. In addition to LNG, the Pars plant will also produce 680,000 t/y of LPG, 250,000 t/y of condensate and 700 t/d of sulphur, using 2bn cf/d of natural gas from South Pars Phase 11. The third project, Persian LNG, is being developed by NIOC (50%), Shell (25%) and RepsolYPF (25%). It is planned to export 16mn t/y of LNG to Europe, Asia and the Far East. The plant will use two 8mn t/y trains. FEED work began in June 2006, with production expected by early 2011. This plant, too, will be located on Tombak Island. In addition to LNG, the project is expected to produce 1.5mn t/y of LPG, 4.5mn b/y of condensate and 200,000 t/y of sulphur, fed with 2.8bn cf/d of natural gas from South Pars Phase 13.

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NORTH AMERICA

Oil sands

As the oil sands expand, so do the headaches

services. Mayor Melissa Blake stated that there is a dire need for more schools, waste water treatment, housing and services; the health care system alone requires a 100% increase in residential doctors. In 2006, when C$20bn ($18.7bn) in new oil sands applications came before the Alberta Energy and Utilities Board (EUB), the municipality took the unprecedented step of intervening, begging the regulator to slow down the pace of development. The strains are not limited to Fort McMurray. The two-lane highway which connects the oil sands to Edmonton, some 450 km to the south-west, is woefully inadequate to handle the commercial and passenger traffic load, let alone the truck convoys that slowly trundle boilers and other large prefabricated modules northwards, and must be expanded. Nearby Aboriginal communities, which are courted by project operators to supply contractual services, are also in need of roads, housing, water and sewage treatment. When everything is tallied up, the National Energy Board (NEB) estimates that the region requires C$1.2bn ($1.1bn) to meet all its infrastructure needs. In March, the Alberta government announced a comprehensive plan to help Wood Buffalo by investing C$396mn ($369.5mn) over the next three years. Over C$200mn ($186.6mn) will be spent on health care, building three new clinics and offering bonuses to attract new staff. Water treatment will receive C$103mn ($96.1mn) in order to complete a facility currently under construction. Housing will receive a C$52mn ($48.5mn) boost to build 300 affordable units. Local officials were pleased with the announcement, but others felt that the initiative was inadequate. Theyre taking baby steps, said Provincial Opposition Leader Kevin Taft. Three hundred housing units for one of the largest industrial developments on the planet just isnt going to make much of a difference. Calls have also gone out to industry to contribute to infrastructure needs. Although the oil and gas sectors general opinion is that taxes and royalties should fund such services, there is an understanding that everyone must help. What I do believe is that all of us the town, the cities, the universities, the

All is not well in the land of sandy oil, writes Gordon Cope. As plans to triple production from 1.1mn b/d to over 3mn barrels over the next decade get underway, a number of major hurdles have come to the forefront. First is the growing political will in Canada to curb the growth of greenhouse gas emissions that contribute to global warming; second is the clamour to review the current provincial fiscal regime that allows operators to recoup all their capital investments before paying royalties; and third is the increasing environmental pressure to acknowledge the accumulated impact of so many megaprojects in one place. However, there are other concerns that lie slightly below the radar that may have an even greater impact.

he Regional Municipality of Wood Buffalo, which encompasses Fort McMurray and the surrounding oil sands, is suffering growing pains. The population of this frontier town, carved

from the Arctic boreal forest, has almost doubled in the last decade to 64,500, and, according to a government report, it will triple by 2011. Such a growth spurt has placed severe strain on government

At the Suncor oil sands mine, huge 240- to 380-tonne trucks deliver about 500,000 t/d of oil sand to the ore preparation plants Source: Suncor

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A number of 400-tonne 797B Caterpillar trucks carry raw ore from Shells Muskeg River mine to the crusher, 24 hours a day, 365 days a year Source: Shell Photographic Services, Shell International

province and industry itself have to work together to get this right, said Shell Canadas head, Clive Mather.

Gas pains
Considering that Canada produces around 17bn cf/d of natural gas, one might not, at first glance, think that a lack of the stuff would be a potential problem. However, conventional fields are fast dwindling and non-conventional sources, such as coal bed methane, tight sands and shale gas are not filling in the gaps. In order to produce the oil sands, a great deal of natural gas is consumed in the order of 500 cf to 1,000 cf to produce one synthetic barrel of oil. Currently, the oil sands consume 0.7bn cf/d, about 1% of North Americas total usage. According to the NEB, however, that usage could increase to 2.1bn cf/d, or 3%, in the next ten years. Part of that increase was expected to be met from

Oil sand is a mixture of bitumen (a thick, sticky form of crude oil), sand, water and clay Source: Suncor

the production of stranded Arctic gas, but delays in the approval process for the Mackenzie gas project (MGP) pipeline have not only pushed the delivery date back into the mid-next decade, but increases in the budget from C$7bn ($6.5bn) to over C$16bn ($14.9bn) have placed the entire project in doubt. Oil sands producers have various ongoing strategies to reduce natural gas consumption including lowering the temperature at which mined bitumen is separated from sands and clays but much of the natural gas is consumed by in-situ production, such as steam assisted gravity drainage (SAGD), in which water is heated to steam and injected to warm the reservoir sufficiently to allow bitumen to be pumped out. A new production technique called fire flooding, in which air is injected into the reservoir and ignited to form a fire front, has shown promise. However, perhaps one of the most intriguing alternatives is to use nuclear energy. Gary Lunn, Federal Natural Resources Minister, was recently asked about the nuclear option in the oil sands. It is not a matter of if, but when, a nuclear reactor will be built to supply energy, he said. Nuclear energy is relatively emission-free, produces no greenhouse gases, and there are no pollutants going out. To that end, Energy Alberta Corporation is planning to supply future electricity needs to new oil sands projects by building two Advanced Candu Reactors (ACR) capable of generating 2,200 MW. We have a number of off-takers, and we are moving ahead, says Wayne Henuset,

President. Three communities in northcentral Alberta would like to host them. We hope to put an application for a site in the next 90 days. The units will be located far enough away from Fort McMurray to avoid infrastructure and labour issues there. We will transport the electricity by transmission lines. There wont be any steam shipped, Henuset continues. Most of the critical components will be manufactured offsite. Approximately 2,000 workers will be needed during peak construction, and 800 permanent staff to operate. We hope to start in 20102011, and be in operation by 20162017. Both facilities will cost C$6.2bn ($5.8bn) in total, and deliver electricity at the cost of C$75/MWh ($70/MWh). Natural gas costs a little less, but if they come in with carbon costs, it will be more, says Henuset. While nuclear reactors would sideline much of the expected demand in natural gas and reduce the growth in greenhouse gas (GHG) emissions, there is still the issue of radioactive waste. Energy Alberta Corporations plan is to store spent fuel rods on site until they can be recycled, but such technologies are expensive. In order to weigh all available alternatives, a natural gas-cutting study is being commissioned by EnergyINet, a joint government and industry research organisation. It will look at alternative sources of oil sands energy (including bitumen, coal and coke gasification and nuclear energy), from economic, environmental and sustainability aspects. We will be putting all the options into a matrix and evaluate the best possible solution, explains Soheil Asgarpour, President of Petroleum Technology Alliance Canada.

Water, water everywhere

While most conventional oil reservoirs produce lots of unwanted water, the opposite is true for the oil sands. It takes about 10 barrels of fresh water to transport and separate the bitumen from sand and clay before it can be processed into synthetic crude. Most of that is recovered, up to 80%, but between two and four barrels ends up as gelatinous clays in tailings ponds. Normally, this would not be a great problem. Canada is well known for its abundance of water, and the Athabasca basin in which the oil sands are situated is blessed with a good supply. Unfortunately, that supply varies widely with the seasons. During the spring and summer, run-off from the Athabasca glacier in the Rockies fills the Athabasca River to overflowing, but in the winter, when precipitation falls as continued on p44...

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A LT E R N AT I V E F U E L S

Ethanol

Hydrocarbons versus carbohydrates

Biofuel, superfuel, forests of fuel. Of all of the strategies fostered by governments and industry in the hope of solving the contemporary conundrum of high oil prices, insecure supplies and the Earths climate, ethanol is either the perfect answer or the road to starvation, writes Maria Kielmas.

ccording to its supporters, ethanol not only will reduce oil dependency by substituting a renewable resource, but also will help revive depressed rural areas in both the developed and developing world. To its detractors, the growth of ethanol use as a fuel is extracting an enormous land cost, destroying biodiversity and reducing the land available for food crops. As a result, food prices are rising beyond the reach of the worlds poor. Although there seems little room for compromise between these opposing opinions, the crucial factor dominating ethanols future may not be its environmental impact, but the working conditions of sugarcane labourers in Brazil. This is not a matter the juggernaut of western hemisphere political and business interests dubbed the Ethanol Alliance is keen to highlight. In March this year, US President George W Bush and Brazilian President Luiz Inacio Lula da Silva launched an initiative to enhance the role of ethanol fuel in both countries energy mixes and expand this programme globally. We aim to set in motion a reassessment of the global strategy to protect our environment, noted President Silva.

Serious geopolitics
Serious geopolitics rests on this alliance. For US security hawks, a wall of ethanol could
Sugarcane train

become a major weapon in the war on terrorism. By reducing dependence on Middle East oil supplies, and Venezuelas, the US may help cut terrorisms financing which, it claims, is sourced largely by oil export revenues. One of the main proponents of this point of view is former CIA chief James Woolsey, who for the past decade has supported a government commitment to produce more corn ethanol. Such an alliance also consolidates US relations with Brazil, thus underwriting that countrys leadership of the Latin American region against the ambitions of Venezuelan President Hugo Chavez. Brazil and the US together produce

about 70% of total world ethanol production (13.489bn gallons in 2006) in roughly equal proportions. Brazils ethanol is sourced from sugarcane, while the US sources its ethanol predominantly from corn. In January 2007, President Bush mandated the use of 35bn gallons of ethanol in the national fuel mix by 2017. At least 6bn gallons of this are needed each year to replace the MTBE (methyl tertiary butyl ether) fuel additive. Brazil is the worlds largest sugar producer and exporter, with an output of almost 300mn tonnes of sugar from 15mn acres of land. Depending on the level of oil prices, about half of this is converted into

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Brazils ethanol is sourced from sugarcane (above), while corn is the feedstock in the US

ethanol, of which 15% is exported, while some 100,000 tonnes of sugar are exported. Petrobras is constructing a 1,000-km ethanol pipeline from the Sao Paulo state interior to Rio de Janeiro. Flex-fuel cars, which run on a combination of ethanol and petrol, account for some 40% of all national car sales. The US is the worlds largest producer of corn, accounting for 40% of the total world production of 26.3bn bushels in 2006, and over half of all world corn exports. US corn production is expected to rise by 14% in the coming harvest, depending on the weather, according to the US Department of Agriculture, as farmers have planted more of the cereal to take advantage of growing demand for its use in fuel generation. As a result, soya bean production will fall by 14%.

$200mn in initial capital expenditure. The hope is to raise this sum to $2bn. Reichtuls partners include David Zylberstajn, the former General Director of the oil regulator National Petroleum Agency (ANP); James Wolfensohn, the former World Bank President; Steve Case, the founder and former head of AOL; Vinod Khosla, the premier Silicon Valley venture capitalist and founder of Sun Microsystems; and Ron Burkle, the supermarket magnate and founder of Yucaipa Investments. Burkle is known as a long-time fund-raiser for the Democratic Party, but has also contributed to the funding of campaigns by the Republican Governor of California, Arnold Schwarzenegger. Burkle is also a close friend of former US President Bill Clinton, while outgoing UK Prime Minister Tony Blair has been tipped as a board member of one of Burkles companies. Meanwhile, the European Union, which produces 80% of the worlds biodiesel from rapeseed and sunflower seeds, is no slouch on the biofuels bandwagon. The European Commission plans for 5.75% of motor fuel to include ethanol sourced from wheat and sugar beet by 2010, rising to 10% by 2020.

Mexicans experienced a worse downside to the biofuel boom when prices for cornbased food staples such as tortillas tripled between November 2006 and February this year. The blame was placed squarely on corn farmers, who were exporting their produce to the hungry US ethanol market. Agronomists later suggested that weather, over-optimistic harvest expectations, the suspension of corn exports from Argentina and the fall in Australian wheat production were major factors in corn price rises. However, as wheat and rice prices rose to 10-year highs, warnings abounded that as farmers planted more corn for ethanol and fewer areas with other crops, so the relationship between food producers and food processors would be turned on its head. The losers would be the worlds poorest populations. Even the United Nations cross-agency body, UN-Energy, warned in a recent report that the expansion of biofuels could threaten the availability of adequate food supplies.

Environmental impact
Denis Avery says that the world is already farming about 37% of the global land area. Any additional farmland will have to come at the expense of forest and wild species and is likely to incur heavy costs in terms of soil erosion, drought risks and loss of biodiversity. This is the threat looming over Asian rain forests as palm oil producers hoping to tap into the biofuel market expand their production. If the current world population expands from todays 6.3bn to between 8bn and 9bn by 2040 as the United Nations Population Division projects, and a significant number of these people are able to afford meat, milk, and fresh fruit and vegetables, for both themselves and their non-vegetarian pets, the world will run out of crop land if the present biofuel push continues, Avery says. So, which of these three faces cuts ethanol production, food production, or the population? The EU intends to continue with its biofuel programme, with the proviso that the advantages should not be offset by environmental damage through inappropriate land use or outdated production processes, says Energy Commissioner Andris Piebalgs. The Commission is working on a system to discourage biofuel production that creates more greenhouse gas emissions than it saves and the conversion of land with a high biodiversity value to grow feedstock for biofuels. According to John Hoyles, Chairman of the National Farmers Union (NFU), Sugar Board and East Anglian sugar beet farmer, sugar beet is a very efficient crop to process into ethanol. In the UK, sugar is first processed from the beet and this, in turn, is converted into ethanol. continued on p44...

Coming in for criticism

It came as an unwelcome jolt when two professors of food industry economics at the University of Minnesota C Ford Runge and Benjamin Senauer observed in a recent edition of the Foreign Affairs paper that filling the 25-gallon tank of an SUV with pure ethanol requires 450 pounds of corn which contains enough calories to feed one person for one year. This dovetailed with earlier criticisms by Dennis Avery, Director of the Center for Global Food Issues at the Hudson Institute, a Washington DC conservative think-tank, that given the high fossil fuel inputs to produce and process corn for ethanol (fuel costs for seeding, harvesting, fermenting and processing, as well as herbicides and pesticides), the US needs to produce five gallons of ethanol for each gallon of petrol it replaces. Meanwhile, the US National Corn Growers Association has been pushing its members to lobby Congress to increase domestic fossil fuel production by opening the Arctic National Wildlife Reserve and Outer Continental Shelf for exploration and production, because of the US agricultural industrys overwhelming dependence on fossil fuels for its existence. US corn Dry mill 0.53 0.52 1.05 US sugar US sugar EU sugar Cane 1.48 0.92 2.40 Beets 1.58 0.77 2.35 Beets 0.97 1.92 2.89
Source: D. Avery

Recycled establishment
Prior to this years South American Energy Summit (see Petroleum Review, June 2007), diplomacy the real springboard for western hemisphere ethanol came in December last year with the launch of the Interamerican Ethanol Commission. This was presented by Jeb Bush, former Florida State Governor; Roberto Rodrigues, President of the Agribusiness Superior Council of the Sao Paulo State Industries Federation (Fiesp) and a former Agriculture Minister of Brazil; and Luis Alberto Moreno, the President of the Interamerican Development Bank (IDB). As local and foreign investors scramble for deals in Brazils bullish ethanol market, the countrys current and former energy establishment is busy reinventing itself to fit in. March this year saw the creation of the Brazilian Renewable Energy Company (Brenco), which is headed by former Petrobras Chairman Henri Philippe Reichstul and which has committed Brazil Cane 0.30 0.51 0.81 US corn Wet mill 0.40 0.63 1.03

Feedstock Processing Total cost

Table 1: Ethanol costs per gallon (in $)

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A SIA-PACIFIC

Electricity

Taiwan and Vietnam tackle electricity demand growth

Strong long-term electricity demand growth forecasts in many parts of the Asia-Pacific region have revived interest among governments and investors in the use of private sector funding to build power stations to ensure stable power supplies for the future. Natural gas and coal remain the fuels of choice for private investors building large power stations, while wind power appears to be a popular option for investors in renewable energy, together with solar and minihydroelectric schemes, reports David Hayes.

n Taiwan, privately operated power stations account for about 22% of total installed generating capacity. Plans call for independent power producer (IPP) power stations totalling more than 5,000 MW installed capacity to be built over the next 10 years, accounting for about 25% of all

new generating capacity to be installed during the period. As part of this drive, the government recently invited the submission of IPP tenders for state-run Taiwan Power Companys (Taipower) fourth IPP programme for the construction of IPP power stations totalling 1,980 MW; the electricity produced to be sold to Taipower for distribution. IPP projects for which bids have been received include Formosa Plastics Corporations 600-MW coal-fired scheme, the 1,200-MW (2 x 600-MW) Long Vong coal-burning station in central Taiwan and the 1,200-MW (2 x 600-MW) Hoping coalfired station in eastern Taiwan. Three power plants using imported LNG also have been proposed the 480-MW Guo Gang combined cycle station in Linkou, the estimated 480-MW Long Gang combined cycle LNG station in Miaoli, and the estimated 400-MW Hsintou LNG-fired plant at Taoyuan in northern Taiwan. Other IPP investors are preparing their applications. If all these initial projects are approved then there will be too much gas demand compared with present LNG supplies, noted Yu Shang-Hsiung, Director of Taipowers Department of Power Development. We think a third LNG receiving terminal would be preferable for security of supply, but Chinese Petroleum Corporation says that their two existing terminals are sufficient. Applicants have to submit their IPP proposals by the end of 2007. The first power plant to start up will be about 2011, while all projects should be completed by 2013. They have priority, so if

they can complete the projects early they can sell electricity. It will be good for baseload if they can complete their projects early. Taipowers current three-phase IPP power programme totals 7,707 MW of installed capacity, of which 7,217 MW has been built, while the remaining 490-MW Starbuck power station is under construction. The recently announced fourth IPP phase will raise the companys total IPP generating capacity to about 9,700 MW when completed. The government supports IPP power projects in Taiwan because private developers face less opposition from local communities than Taipower when applying to build a new power station.

Rising energy demands

Taiwans changing economy and society means the country is becoming more energy intensive. The use of electrical equipment and appliances in the home and by business is growing as the industrial sector continues to expand into hi-tech manufacturing. In 2007 we expect almost 4.1% power demand growth. Peak load demand is forecast at 33,000 MW, while last year it was 32,100 MW, Yu said. Last year there was a 3.6% peak load growth caused by both industry and residential customers. Residential and service construction has increased, also some other industrial sectors, like artificial fibres, plastics and agriculture. There is growth from semiconductor manufacturing. Electronics industry load growth was up 10% its constantly up by more than 10% annually. According to Yu, thermal power plants generated 76.3% of Taiwans total 196,567

The streets of Taiwan (left) and Vietnam (right)

Source: David Hayes

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GWh power production in 2006. Nuclear stations generated a further 19.5% of power output, compared with a 2.2% share for renewable energy. Coal-fired and gas-burning thermal power plants totalling 27,618 MW account for 73.9% of the total 37,371 MW installed electricity-generating capacity in Taiwan. Nuclear power plants totalling 5,144 MW account for 13.8%, while pumped storage schemes totalling 2,602 MW represent 7% of total installed capacity. Power plants using renewable energy fuel sources totalling 2,007 MW are 5.3% of capacity a share that is due to grow in the future. Yu pointed out that Taipower has chosen imported LNG as its major clean fuel option. The proportion of gas-fired generation should be quite high in future. By 2013, gas should be 31% of our generation mix. Over 30% is quite high, so we hope we can develop power sources in balance gas, coal, renewable energy, hydro and nuclear, which does not emit carbon dioxide.

Renewable potential
In addition to using natural gas as the major clean fuel option, Taipower is looking to develop Taiwans renewable energy potential. Plans call for power plants based on renewable fuels totalling 3,386 MW installed capacity to be built over the next 10 years. This will lift the total installed generating capacity based on renewable energy to 5,388 MW, which, in 2017 will represent 9.1% of Taiwans forecast 58,927 MW of installed generating capacity. IPP developers will construct 2,584 MW, or 70%, of the 3,462 MW of planned renewable energy-based electricity generating capacity built from 2005 to 2017. The private power plants will sell electricity to Taipower for onward distribution. Taipower is planning to construct the remaining 878 MW of renewable-based capacity, representing about 30% of the new renewable generating capacity. Already work is underway on schemes totalling 548 MW, most being wind power and photovoltaic schemes. There will still be some renewable energy deployment by the government as well, such as biofuels, biodiesel and recycling waste by government, Yu noted. Also, some hydroelectric projects are still to be planned by Taipower, but these face local protests and are just small in capacity. Its not going to be easy to attain the governments target of renewables becoming 20% of total electricity use by 2020.

industries. Meanwhile, lower-tech, more labour-intensive manufacturing continues to move offshore. A recent trend has been for Taiwanese companies to build a second factory in Vietnam, after initially building a plant in China. Indeed, Taiwan has become one of the largest foreign investors in Vietnam, where the government is also trying to encourage private investors to build power stations. Most Taiwanese and other foreign investors prefer the fastdeveloping southern region, where a series of gas-fired power plants are being built to burn locally produced gas. Vietnam faces the prospect of continuing power cuts this year as strong economic growth is causing a surge in electricity demand that the national grid is unable to meet. The country relies on hydropower for 40% of its electricity supply. However, low rainfall has resulted in hydroelectric dam reservoir levels being well below normal levels. Consequently, insufficient water reserves are available for dam power houses to operate at full capacity. Vietnam relies on gas-fired power plants for about 45% of its electricity supplies. Although new gas-fired units have been commissioned this year, the increase in gasfired generating capacity is not sufficient to cover lost hydropower capacity. Coal-fired stations are the other main source of electricity, all coal-burning units being located in the north near Vietnams coal deposits, while gas-fired stations are all located in the south. Currently, construction is underway on several power plants that are due to enter commercial service during the next 18 months. The plants are owned by IPP developers and state-run power utility Electricite de Vietnam (EVN), which operates a national electricity transmission and distribution system that supplies about 90% of the 84mn population. The 462-MW Nonh Trac combined cycle plant in southern Dong Nai province is due to enter commercial operation shortly, followed later by the first 750-MW unit at the gas-fired Ca Mau power plant in southern Vietnam. A second unit will start up in 2008.

Fast growing economy

Vietnam is one of the worlds fastest growing economies and has enjoyed an economic growth rate of between 7% and 8%/y for the past decade, raising electricity demand growth to about 15% annually. Vietnams National Assembly has set a target 7.5% to 8% annual GDP growth for 2006 to 2010, which is expected to create an additional 8mn jobs. Meeting the governments economic growth targets will depend to a large extent on developing an efficient power sector. Government plans include restructuring state-run EVN, which will involve the establishment of an electricity

Vietnamese investment
As already noted, electricity demand in Taiwan is increasing due partly to the development of more energy-intensive

trading market to supply power distribution companies. Electricity demand is forecast to grow by 15% to 16%/y from 2005 to 2010, and by 12% annually thereafter. Power demand was 8,280 MW in 2004, while electricity consumption that year reached 39.9 TWh following a three-fold power consumption increase from 1995 to 2004. During that time, system losses dropped from 21.7% to a more manageable 13.5%. Industrial development is expected to accelerate and electricity demand is poised to grow in parallel. The governments revised Fifth Power Development Master Plan for 2001 to 2010 now forecasts that electricity generation will reach between 100 TWh and 113 TWh in 2010. Peak demand is projected to hit anywhere from 17,570 MW to 19,550 MW. Based on these projections, government plans call for Vietnams installed generating capacity to more than double to 22,600 MW by 2010 in order to meet future load growth. This compares with 10,870 MW at the start of 2005. Achieving this target involves adding about 2,000 MW/y of capacity until 2010. At the same time, the nations high- and medium-voltage power transmission systems are being upgraded and extended to overcome transmission bottlenecks and further reduce system losses. According to the World Bank, however, Vietnams power system expansion targets will no longer be sufficient to meet future power demand growth. The Banks Hanoi office reports that the nations power system needs to be expanded to 25,400 MW installed capacity by 2010 in order to cope with projected load growth. Foreign investors will provide some of the funding, although current regulations and bureaucracy mean that the inflow of foreign finance for power plant construction remains slow. BP, EdF of France, Sumitomo and Tokyo Electric of Japan are among foreign investors in Vietnams power sector. Domestic investors also are involved in developing power plant projects, most being state-run enterprises, including construction companies. Among current schemes, a Chinese firm is building a 600-MW hydroelectric dam in northern Quang Ninh province, while J-Power of Japan is proposing to build a 2,640-MW coal-fired plant. Foreign companies are also funding construction of several large gas-fired stations. Meanwhile, Vietnam also is using private capital to develop renewable energy schemes to provide electricity to communities living in remote areas. According to government figures, more than 150,000 micro-hydropower units have been sold and installed in Vietnam, capable of generating from 100 Watts to 1,000 Watts each.

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E NERGY INSTITUTE

Summer Lunch

Reflections on the Energy White Paper

carbon capture and storage (CCS) coalfired power station in Teesside. Before continuing, Laidlaw then reminded everyone that we often take gas and power for granted, seldom realising how difficult and dangerous the process is, with people putting their lives at risk in order to power our homes. As we look forward, the technical challenges of extracting oil and gas in more hostile environments and adapting new power generation technology will get greater, whatever the type of power. How we rise to the challenge safely will be a big issue, he said.
Photos: Jim Four

New Energy White Paper

Laidlaw then outlined the current energy policy landscape. After numerous Energy Ministers and a third White Paper, there have been successive policy mechanisms and targets introduced and then expanded upon. So far, we have seen the UK Emissions Trading Scheme being replaced by the EU Emissions Trading Scheme (EU ETS), the Non-Fossil Fuel Obligation being replaced by the Renewable Obligation and the Energy Efficiency Standards of Performance Scheme becoming the Energy Efficiency Commitment which, in turn, led to the Carbon Emission Reduction Target. We can also add the Carbon Reduction Commitment an emissions trading scheme for large users that will run alongside the Climate Change Levy and the introduction of Energy Performance Certificates for all homes and businesses. If this wasnt complicated enough, we also have numerous agencies established to police these policy mechanisms, Laidlaw added. He then commented that, separate to the European Commission, European Parliament, Council of Ministers, DTI (now DBERR), DEFRA, DCLG, HMT and various other government departments, we also have Ofgem, the Environment Agency, the Energy Savings Trust, the Carbon Trust, EnergyWatch, the Office for Climate Change, the Climate Change Committee and many others. In terms of policies and agencies, if we had a blank sheet of paper, we wouldnt have started from here! he noted.

Speaking at the EI Summer Lunch held at the Landsdowne Club, London, on 4 July 2007, Sam Laidlaw, Chief Executive, Centrica, highlighted the importance of the governments most recent Energy White Paper and its impact on the utilities industry.

Sam Laidlaw, speaking at the EI Summer Lunch

ith energy policy seldom out of the news, Laidlaw began by reminding those present that as the issues surrounding it become more and more complicated, the stakes get higher and higher. The debate has produced too much heat and not enough light, he said. Before focusing thoughts on the Energy White Paper, he gave a brief overview of Centrica, noting that the evolution of the company reflected the development of the UK energy market as a whole. First came privatisation, where everyone made a point of buying shares. Centrica still has over 900,000 loyal shareholders, but, as Laidlaw noted, privatisation without liberalisation allowed monopolies to operate without competition, as can be the case on the Continent. Liberalisation of the UK energy market after privatisation ultimately resulted in the formation of Centrica, BG and the National Grid what some Europeans refer to as full ownership unbundling. He explained that contrary to what many people believe, this delivered great returns for shareholders and UK consumers. For consumers, customer service and security of supply have both improved as a result. UK retail gas prices dropped and are still the lowest in Europe. Although this hasnt been without its problems, overall, the UK has created probably the most dynamic and competitive energy market in the world today. Centrica has grown significantly, acquiring six million electricity customers in the UK alone. The company now plans to invest 750mn in renewable projects, having established a new business unit, British Gas New Energy, and is looking to develop a

Security of supply
Laidlaw then outlined the governments multiple objectives. The twin pillars of climate change and security of supply can be both conflicting and complimentary. He explained that after a tight winter in

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2006 and following the sabre rattling of certain producer countries, it is no surprise that security of supply takes priority, stressing that there will be no opportunity for a green agenda if the lights go out. The UK is a heavily gas-dependent economy and, in terms of gas supplies, the majority of the countrys gas still comes from the UK Continental Shelf. But the picture is changing fast, Laidlaw explained; in 10 years from now we could be importing 70% of our gas supplies. Security of supply is a complex issue that deserves a mature debate. For me, diversity of supply is crucial, he said. In the UK gas market, some 21 companies from 12 different countries have delivered 10bn in new gas infrastructure. This gas will come via LNG or pipeline, will be based upon a range of short- and long-term contracts and will come from a diverse number of suppliers. The benefit of having a number of companies source, transport and supply the gas is that you get the benefit of a variety of commercial strategies, a variety of risk tolerances and a variety of short- and long-term supply and demand, delivering robustness and flexibility, he explained. The alternative approach of creating a national champion vastly reduces diversity thereby increasing risk as well as encouraging inefficiency. If a company fails in a liberalised market, its shareholders suffer. If a national champion fails, everyone suffers, he noted. The White Paper was right to allow the market to continue to deliver the UKs security of supply, Laidlaw stated. Moves to speed up planning are very much welcome in this area. He then pointed out that as the UK moves into gas importation, the countrys ability to efficiently source gas for UK customers will increasingly depend on the pace of European energy market liberalisation. Much of the gas that the UK needs will come from Eastern Europe and getting access to European networks and pipelines will be critical. Laidlaw then noted that in power generation, the government is also allowing the market to deliver. In the longer term, with a robust carbon price, companies will be looking to hedge their commodity risk by building a variety of power stations using gas, clean coal and CCS, nuclear and wind. The price of carbon is critical and for this to happen there needs to be an effective EU ETS. He explained how Phase 1 was good in theory, but not in practice meaning that the low price of carbon seen in Phase 1 accurately reflected the oversupply of carbon credits on the market. Now this has tightened up in Phase II, there is a much stronger carbon price. The key question is whether the Phase II price will be enough to

prompt technology or behavioural change, he noted. Laidlaw argued that at the moment this looks unlikely, but shouldnt be ruled out particularly until it is clear how the aviation sector is to be brought in and some meaningful targets are set beyond 2012. In the meantime, its important that the government proceeds with strengthening the Renewable Obligation and pushes on with the support mechanisms for CCS projects, he stressed. The banding of Renewable Obligation certificates to reflect the different economics of different technologies was a positive step in the White Paper, in Laidlaws opinion, and will essentially stimulate the scale of offshore wind investment required to meet the targets. Similarly, it is important that the government works to clear the decks should companies decide they wish to build new nuclear plants.

Climate change
Laidlaw then discussed the second clear priority. With heightened public awareness, the climate change issue has risen high on the political agenda. He noted that British Gas had recently contacted nine million customers and asked them to complete a report on the energy saving properties of their home. There were 1.5mn responses Centricas most successful marketing initiative ever. Of these responses, 750,000 customers promised to implement the energy efficiency measures advised, resulting in average savings of 160 per household. Households in the UK account for 20% of carbon emissions. Simple measures such as installing new energy-efficient condensing boilers can reduce these emissions by 20%. I welcome what the White Paper is trying to do in this area, particularly as energy efficiency has proven consistently to be the least cost solution to carbon abatement, Laidlaw said. However, he noted that it is not just the residential sector that needs to take action the introduction of a Carbon Reduction Commitment, a mandatory cap-and-trade scheme for large nonenergy intensive organisations, is a better way for companies to deliver energy efficiency savings rather than a flat tax. But it would be fair to say that, up until now, the utility sector has not had its iPod moment a single moment that has transformed the industry. He explained that the development of smart meters might be the turning point they have the potential to transform the industry, to end meter reads and estimated bills, to help customers reduce their carbon footprint and bring huge efficiencies to the industry. Laidlaw noted that Centrica is fully

committed to the effective roll-out of smart meters and believes the industry has developed a model that combines the best elements of a competitive market with the efficiencies that some kind of mandated roll-out could deliver. Were all waiting for the word to go and will work with government to ensure this new technology is rolled out to all consumers, he said. In conclusion, the Energy White Paper was never going to be definitive, nor will it be the last word on the subject, Laidlaw stated. The energy market in the UK has numerous policy mechanisms and policing agents, but it also has competing objectives and is becoming increasingly complex. The danger is that intervention results in unintended consequences, needing further interventions to correct initial interventions. That is not to say that the White Paper should have torn up the script and started from scratch. We know that markets may not always deliver environmental or social goods and, therefore, in modern energy markets, some political risk comes with the territory, he said. However, he went on to explain that that is not to say the government shouldnt try to reduce political risk to improve transparency, to regulate where possible with a light touch and, most importantly, allow the market to deliver where markets deliver best. The government energy policy is taking us on a journey, Laidlaw said, tweaking direction every now and then. In this respect the White Paper delivered much that was good and has been well received in the energy sector. We now have our blueprint and we need to act on it, he concluded.

Honorary EI Fellowship
An Honorary EI Fellowships was awarded at the EI Summer Lunch, presented by the EI Council in recognition of outstanding contributions to the furtherance of the energy profession. The award went to Dennis Anderson, Professor of Energy and Environmental studies at Imperial College, London and advisor to Sir Nicholas Stern.

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E UROPE

Regulation

Red tape burden REACHed

It could be said that preparation, preparation and preparation is the best way to deal with the European Unions (EU) chemical control system REACH, and maybe this is more true for the oil and gas industry than any other, because it is based on, well preparations. Keith Nuthall explains.
Source: Jaeger 5432, Wikipedia

onfused? Well, with REACH, you could be forgiven. The regulation that was approved last December and came into force on 1 June 2007 is probably the most complex piece of legislation ever devised by the EU not an organisation famed for legislative simplicity. And for the oil and gas industry the key is that its main products are chemical preparations, which under the REACH regulation means a mixture or solution composed of two or more substances. As a result this covers commercial gasoline, most diesel, lubricants, LPG extracted from fuels other than natural gas, and many petrochemicals. Pretty much the bulk of the oil and gas industrys output is covered by REACHs rules on preparations, so companies making these products or importing them had better be sure they are able to comply with REACH, or find themselves in breach of the law and unable to import, make or use a particular input or preparation. That said, it is worth pointing out that REACH does not cover naturally occurring substances such as crude oil or natural gas, but it does cover the chemically altered products derived from them. Lothar Kistenbruegger, REACH Technical Coordinator for CONCAWE, the European association for health, environment and safety in refining and distribution, is adamant that industry players should exercise the correct due diligence. However, he is concerned about small companies and their ability to comply. The question is not whether REACH is worthwhile, it is whether it is do-able, especially for smaller producers of [chemical] substances and importers of preparations, he says. If a small oil and gas

industry service company imported a paint from China, under REACH it would have to register every small component of that paint, he warned. How on earth will it be able to register these substances? REACH is not an esoteric regulatory issue, REACH is a business and strategic issue. If you do not understand it as a manufacturer or importer, you may be faced one day with being out of the market.

No walk in the park

Of course, many firms in the oil and gas sector are not small, and have ample resources to cope well with REACH but it will be no walk in the park. From now until the year 2022, a series of deadlines will pass, telling a company handling, importing, processing or making chemicals to register, test, assess and certify these commercially crucial substances. Separate rules apply for articles goods that take their form from a manufacturing process separate from their chemical inputs and the manufacture and input of basic chemical substances themselves. But for the oil and gas industry, they pale in importance compared to the rules for preparations. Basic crude oil and natural gas are not covered by REACH. However, when a chemical is added to them (other than a stabiliser) maybe a colourant, or lubricant or a smell to create a commercial fuel or petrochemical, then they become a preparation, and there are special rules in

REACH for these items. Kistenbruegger summed up the requirements concisely, when talking to Petroleum Review from his Brussels office: If you buy a preparation from a European manufacturer, you have no [immediate] obligations under REACH. The manufacturer will have a safety data sheet for that preparation. If you buy a preparation from outside the EU, you have to register all the components yourself [with the newly formed European Chemicals Agency (ECHA), based in Helsinki]. If you are a manufacturer [of a preparation] and buy a component [chemical substance] from a manufacturer in the European Economic Area [the EU, plus Norway, Iceland and Liechtenstein], you have in principle no obligations under REACH, other than to communicate to that supplier how you are using the substance. If you are a manufacturer [of a preparation] and import a component of a preparation you have to register the component. If I am a manufacturer of a preparation that has been registered by someone else, I have to make sure my use of the preparation is covered by the registration document, notably that its use does not expose people or the environment to a chemical above and

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Source: European Commission

imported (roughly), and some contact details. So, calculations about what chemicals are in play REACH-wise must be done by that date. For new substances, the rule is simple if registration is required from now on, and there is no registration made, sale or use in the EU of products containing them are banned. These are far from being the only steps that must be taken by oil and gas companies under REACH, but they are the key ones at least in its earlier days.

Other issues
There are a number of other issues worth considering. By 1 June 2008, the European Commission must have specified the REACH fees and charges that will apply. It must also ensure practical access to REACH assessment documents is made available, something of key importance to environmental watchdogs. Also by this date, member states are supposed to have forwarded to the ECHA existing risk information about chemicals and related substances that already have market approval. By 1 August 2008, the agency is supposed to have received notification from manufacturers and importers of new chemical substances that have been officially declared to regulators, but have yet to hit the market. These substances will be allotted an identity number so that they can be assessed and registered later. Oil and gas players need to make sure their suppliers keep abreast of these demands. Furthermore, this year importers and manufacturers of preparations have to make sure their regulatory houses are in order. Under the existing EU hazardous substances directive and the classification of dangerous substances directive, chemical companies are required to issue safety data sheets to their customers about the use of their chemicals. Under REACH, they have to make sure this has been done and according to a new set format. Furthermore, oil and gas companies handling potentially harmful chemicals have to make sure they are abiding by existing restrictions on their use that have been collated and written into the REACH regulations Annex XVII. Meanwhile, the European Commission has to undertake three reviews of REACH, which may lead to changes by June 2008. This includes whether chemical safety reports that will be required of producers and importers under REACH can be streamlined, and whether substances that are currently excluded from its controls as harmless (such as starch or glucose), should actually be included. Next June will also be when the REACH systems gatekeeper, the European Chemicals Agency, should be properly established. From now until then, it will recruit an executive director and around 200

beyond that accepted in this official declaration. If not, I as a manufacturer can go back to a supplier and ask them to extend the registration, or I can inform the chemical agency of that use and demonstrate to the agency that I can guarantee the safe use of this substance within the preparation. If I dont have a valid registration, I will have to stop manufacturing or importing. So, there is much to do. If you are an oil major and you are importing crude oil to refine and further process in Europe using chemicals imported from elsewhere, theres a lot to consider. Where an oil or gas company has to provide a registration, it involves providing information about its classification, identity and use, in a format as laid down in Annex VI of the regulation.

Time to comply
Fortunately, however, all this work does not have to be done at once. As regards registration, the speed at which this work must be completed varies according to the importance or toxicity of a chemical substance. For existing substances deemed by the agency to be carcinogenic, mutagenic or toxic to reproduction, as well as substances produced or imported by an applicant in volumes exceeding 1,000 t/y, the deadline is 1 December 2010. For those produced or imported in volumes exceeding 100 t/y, it is 1 June 2013. For smaller volume substances exceeding 1 t/y, it is 1 June 2018. However, preparation for this registration needs to be completed in most cases by 1 December 2008, which is the deadline for the so-called pre-registration process. This involves the agency being given basic information about the product which will be registered, such as a definition of the substance, how much is produced or

staff, as well as creating helpdesks in its office and each member state to help companies and regulators navigate the complex legislative pathways of REACH. ECHAs role is really a facilitator it has powers to prioritise the chemical substances under review, to choose those requiring tougher assessments and demand more data. However, the final say on decisions with REACH will often lie with the European Commission. Another key date is 1 June 2009, when the second pillar of REACH, its special authorisation procedure saying how chemical substances deemed particularly hazardous can or cannot be used, comes into force. This is when the chemicals agency makes its recommendation for substances that must be subject to a rigorous screening process detailed in the REACH regulations Title VII. The agency is charged with refreshing this list at least every two years from this date, and is supposed to include chemicals that it is really worried about in its 2009 announcement. Just to be clear, under REACH it is the chemical substance that has to be registered and maybe be subject to a separate safety authorisation. We are not talking about the end product gasoline, say but the chemicals that go into making it something other than crude oil. These are far from being the only steps that must be taken by regulators and chemical producers or importers under REACH, but they are probably the key ones, at least in its earlier days. By the time we get to the last current mandated deadline, on 1 June 2022, when the agency must prepare draft decisions on proposals for tests suggested within registrations received by June 2018, the aim is that the EUs use of chemicals will have been carefully and comprehensively documented, scrutinised and made safe. Given the scale of REACH, it is hard to imagine that not happening, but it is also hard to imagine this process not causing a lot of extra work and a good deal of stressful headaches for companies and public officials. The European Commission has released a lot of explanatory notes online, that are available to download free of charge. See, for example http://ec.europa.eu/environment/ chemicals/reach/reach_in_brief04_09 _15.pdf and http://ec.europa.eu/environment/ chemicals/reach/reach_intro.htm To really check the letter of the law and read the articles and annexes mentioned above, there is the voluminous REACH regulation itself visit http://eur-lex.europa.eu/JOHtml. do?uri=OJ:L:2006:396:SOM:EN:HTML

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B IOFUELS

Biomethane
policies on waste reduction, air quality management and noise reduction can also be used to promote the case for biomethane. Trevor Fletcher of Hardstaff gave a presentation on the case for gas, borne of his companys own experience as a provider of NGV technology, refuelling infrastructure and as a road haulage operator. The company currently operates 86 NGVs and plans to increase to 100 vehicles by this summer. Using Hardstaffs OIGI dual-fuel technology, natural gas (NG) can substitute up to 90% of diesel in HGV operation, reportedly resulting in CO2 savings of over 30 t/y for a 44-tonne truck. A dual fuel engine is just like a normal diesel engine and has the same thermal efficiency. Burning methane in a diesel engine yields 27% lower CO2 emissions than diesel because a methane molecule has a higher hydrogen to carbon ratio compared to diesel (with 14 carbon atoms). With 80% of diesel substituted by natural gas, the CO2 savings are thus 21.6% (0.8 x 27). The savings from converting diesel to diesel-natural gas dual fuel are therefore highly significant. If biomethane is used instead of a fossil methane, the total CO2 reduction is around 75%. Meanwhile, Christopher Maltin of Organic Power, which produces anaerobic digestion systems, asserted that the adoption of biomethane as a vehicle fuel must be preceded by the wide rollout of pipeline-fuelled NGVs. Posing the question as to why the worldwide experience with NG is not being mirrored by UK activity, he postulated that the UK had been an early adopter of NG vehicles, but suffered from adverse reaction as some of these vehicles experienced teething problems. He added that there was a pressing need for joined-up thinking to take into account the clear CO2 and air quality benefits from biomethane vehicles. An obvious area to look at related to buses UK buses currently receive a grant based on their consumption of diesel, which acts as an incentive that increases local air pollution and puts UK cities out of step with the likes of Paris, Rome and Madrid where most new buses ordered are now NG-powered. Guy Hitchcock of Sustainable Transport Solutions concluded the session with analysis showing that biomethane could substitute between 8% and 10% of road fuel, or around 30% of heavyduty fuel use. In looking at the environmental benefits of biomethane, he presented data that showed that biomethane generated from anaerobic digestion of liquid manure actually has negative well-to-wheels greenhouse gas

The drive for biogas autofuels

John Baldwin of CNG Services looks at the prospects of biomethane for use as a road transport fuel.

atural gas vehicles are becoming increasingly available in the UK as a result of developments by OEMs (original equipment manufacturers), driven by the German NGV (natural gas vehicle) market which is growing at 50% annually, and by innovative UK companies making dual fuel (25% diesel, 75% natural gas) trucks that offer around a 25% reduction in carbon dioxide (CO2) emissions compared to conventional diesel. In addition, NGVs are well placed to exploit the potential of new investments underway in anaerobic digestion of waste to produce biomethane. These were the key messages that emerged from the one-day conference Naturally gas production and use of methane in low carbon automotive applications held at Loughborough on 1 May 2007. Attended by around 150 delegates from over 90 organisations, the event was hosted by Cenex, the UKs national centre of excellence in low carbon and fuel cell technologies, and the Low Carbon and Fuel Cell Technology Knowledge Transfer Network (LCFC KTN), in partnership with the Natural Gas Vehicle Association (NGVA)

and the National Society for Clear Air (NSCA). The conference opened with a presentation by Robert Evans, CEO of Cenex, who explained his organisations strategy to broker technology demonstration projects, and to promote networking and knowledge transfer in key low carbon technology areas via the LCFC KTN (www.lowcarbonfuelcellktn.org.uk). A buoyant worldwide picture of the uptake of NGVs in Germany, Italy, Sweden and other European countries was presented by session chair Mike Ellithorn of the NGVA. Worldwide, there are 11,500 refuelling stations and almost 7mn NGVs, and the number of new vehicles being introduced is rising by 20% annually. The German market has seen a rise of 80% in NGV sales in the last 12 months. Professor John Murlis of University College London (UCL) then presented a paper on policy drivers for the take-up of biomethane in the UK. He noted that while the primary policy driver affecting the further growth of biomethane use is the global wish to alleviate climate change, other European and domestic

A brand new Mercedes truck running on natural gas awaiting its supermarket livery

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emissions, since the process effectively captures methane that would otherwise be released into the atmosphere.

Renewable natural gas

The conference also saw the launch of Biomethane for Transport, a forum that intends to establish a community to promote the use of biomethane as a fuel. One of its key objectives is to persuade government to create a level playing field for renewable natural gas compared to renewable electricity. At present, a wind turbine operator in Scotland can sell its output for use to provide lighting for a building in central London. However, if a new anaerobic digester is built to make biomethane from domestic organic waste, and then this gas is put into the gas grid, it loses its renewable status. This manifests itself in large numbers of generally low-efficient (35% to 40% being the norm) electricity generation plants at landfill sites and sewage works, where there is often no use for all the waste heat. The gas and digester industries want biomethane to be given the same status as renewable electricity so that customers can decide what to use it for. If British Gas, for example, wants to sell carbon free natural gas to be used for domestic heating and cooking then it can. If customers want to run a CNG car fuelled at home, direct from the grid with biomethane, then they can. The premium paid for zero carbon homes and zero

carbon motoring can be used to fund more anaerobic digester plants, capturing large volumes of methane that would otherwise pass into the atmosphere causing a global warming impact of 21 times that of CO2. The vision is for UK consumers to be able to use biomethane to heat their homes and fuel their cars so that, wherever they live, their homes and transport can become zero carbon. They should not have to take out new, efficient condensing boilers to do this. Given that the UK has a comprehensive natural gas grid, it can be used to bring secondgeneration biofuels to customers, putting the cost in one place (as in Sweden) and leaving the undoubted efficiencies of natural gas at the network (unit cost to move energy) and appliance level. If we did not have a nationwide gas grid this would not make sense, but the UK has invested 30bn on its gas distribution network and so the incremental investment of making renewable biomethane is immaterial. This has to make the most sense for the UK economy and environment. In Sweden there are a total of 35 anaerobic digester plants (spread over some 20 municipalities) delivering biomethane for use in vehicles. Biomethane is delivered into the NG grid in three locations and then withdrawn for use in vehicles at other locations. At all other biomethane production facilities the gas is delivered via local low-pressure pipelines to times worse than CO2 in terms of climate change, is actually improving the environment rather than just being less bad by merely replacing fossil fuels with renewable fuels. Nearly all countries now have a mission to work out schedules for sustainable development, and powering vehicles from fuel made from wastes is a very obvious and direct example.

biomethane refuelling sites for use in buses, trucks and light duty vehicles. The total Swedish NGV fleet is now approaching 13,000 vehicles, including some 800 city buses and some 300 heavyduty trucks, passenger cars and vans. Last year, more than half of all methane used in Swedish vehicles consisted of biomethane (and less than half of natural gas, which is only available in the southwest part of Sweden). All other municipalities, including the capital city of Stockholm, solely rely on biomethane. Unlike the UK, Sweden does not subsidise electricity generation based on the burning of biogas because of its inherent thermal inefficiency. This means that the biogas producers earn more money when upgrading the gas and supplying pure biomethane for use in vehicles than if just using partially cleaned (sulphur removed) biogas for electricity generation. Sweden is continuing to invest in new plants for production of pure biomethane, including a large plant (80mn cm/y) for production of biomethane based upon gasification of forest industry waste, scheduled to be ready in 2011/2012. This represents a secondgeneration biofuel, moving the industry away from the debate about fuel versus food (see p30). For more information on the conference, visit www.lowcarbonfuelcellktn.org.uk raw biogas is mainly used in stationary engines that generate electricity. At sewage works it is used to power the machinery on site, and at landfill sites it is fed into the national electricity grid.

Biogas fact file

Biogas, or renewable natural gas, is the name given to the mixture of methane and carbon dioxide (CO2) gases that is formed whenever organic materials decompose in the absence of air. This process is known as anaerobic digestion and, when it occurs in nature, the gases escape to the atmosphere. However, this natural process can be managed in an industrial plant. To make it more efficient, the industrial process requires warmth, air to be excluded, and the organic material is usually prepared before being fed into tanks which allow the gases to be captured and used. Modern industrial processes can make renewable natural gas in a matter of days rather than the thousands of years taken to produce natural gas. Renewable natural gas is by far the most environmentally friendly fuel in the world when compared with other fuels currently available. Capturing the methane which would otherwise be emitted from decomposing organic materials, and preventing this from becoming a greenhouse gas that is 21

Biogas as a vehicle fuel

To use biogas as a vehicle fuel the CO2 needs to be removed so that the methane content is similar to that in natural gas. If the CO2 is allowed to remain in the biogas mixture the operating range of the vehicle is compromised as CO2 does not burn. Hydrogen sulphide also needs to be removed as this is corrosive. Treated biogas for automotive applications is referred to as biomethane.

Manufacturing process
Biogas can be manufactured from just about any organic material. Historically, it has been produced from sewage sludge and animal slurries, but more recently the focus has been on producing gas from energy crops such as grass or maize, and wastes such as those that arise from food manufacturing, brewing, and household rubbish. On average, some 60% of the contents of a household dustbin are organic and can be used to make gas. The biogas produced by natural processes contains about 65% methane, 35% CO2 and some trace gases including hydrogen sulphide (HS). This

Environmental option
In a report from the Swedish Committee of Alternative Fuel, biogas was acknowledged as the best alternative fuel available today with regards to climate, environment and health due to its low emissions and no net contribution to the greenhouse effect.

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L NG

Middle East

The epicentre of global LNG supplies

With demand for LNG surging across the globe, the Persian Gulf is at the epicentre of LNG developments due to its vast gas resources. However, the rapid expansion of the sector is not without complications, writes Paul Cochrane in Beirut. Rising commodity prices have impacted on production costs, certain fields have not yielded the volumes expected, and the ongoing US sanctions on Iran have effectively thwarted the exploitation of the country's huge gas reserves.
estimated gas reserves of approximately 1,300tn cf (221bn boe), according to Austria's OMV, and has naturally warranted much of this investment. However, US sanctions on Iran have prevented the development of the South Par's estimated 500tn cf (85bn boe) of natural gas. The majors have shied away from investing, and exploitation of the reserves is hindered by the ban on American technologies, which are deemed essential for LNG extraction and production. As a result, Qatar has been the focus for the majors, working alongside the state-run LNG companies Qatargas held by Qatar Petroleum (65%), Total (10%), ExxonMobil (10%), Mitsui (7.5%) and Marubeni (7.5%) and the Ras Laffan Company (RasGas), which is majority owned by Qatar Petroleum and ExxonMobil. Qatar is investing some $70bn over the next five years on the energy sector. Some $14bn is being spent on RasGas' three LNG trains Train 5, Train 6 and Train 7, which are expected to supply 40mn t/y by 2010. Train 4, supplying Europe with 4.7mn t/y, came online in 2005, and a fifth train completed earlier this year. Meanwhile, Qatar Petroleum and ExxonMobil are developing a second plant that will boast the two largest liquefaction trains in the world, each with a capacity of 7.8mn t/y, which will come onstream later this year and in 2008. The two companies are also involved in developing a second RasGas plant with two 7.8mn t/y trains, with production expected in early 2008. Qatari LNG will account for 40% of the US and UK's LNG following the expansion of the latest Qatargas and RasGas projects, according to UK energy consultant Wood Mackenzie. In 2005, the US signed an agreement for Qatar to supply up to 30% of US LNG needs, with some 15.6mn t/y from 2009. The $1bn Ras Laffan port is to triple in size by 2014 to cater for an expected 1,000 ships a year, according to RasGas. The expansion of the port is running in parallel with the Qatar Gas Transport Company's (Nakilat; see p46) order of the Q-Flex and $300mn, 260,000-tonne Q-Max ships, which will bring Qatar a total of 80 ships in the next few years (see Petroleum Review, July 2005). To handle such juggernauts, destination countries are engaged in port expansion projects. The US Federal Energy Regulatory Commission (FERC) currently has 60 proposals for terminals on the eastern and western seaboards, with terminals for the 200-tonne-plus ships limited to the Gulf of Mexico. Such developments led Qatar to overtake Indonesia last year as the biggest exporter of LNG, according to a report by Italy's Eni, exporting 31.09bn cm, or 15% of global LNG exports. By comparison, Indonesia and Malaysia exported 29.57bn cm and 28.04bn cm respectively.

Expansion brings problems

Such rapid expansion, however, has brought its own problems, with Qatar struggling to acquire enough raw materials to fuel expansion in parallel with massive infrastructure projects in the capital, Doha. There may be issues in terms of delays of projects due to challenges of constructing facilities, said Andrew Pearson, a Senior Analyst at Wood Mackenzie. Equally, finding qualified manpower to handle the projects is proving difficult until Qatar's universities pump out enough trained graduates to work in the energy field. It is simply a digestion problem over and above financial and resource issues to handle so many projects at the same time they just can't handle more big projects, commented Ian Moncrieff, Vice President, Oil and Gas Practice, at the US consultancy firm Kline and Company. According to Wood Mackenzies Pearson, LNG costs have doubled in the past 18 months, a primary reason why no projects have been finalised in that period (see Petroleum Review, July 2007). The same applies to gas-to-liquid (GTL) projects, which compete with LNG for capital resources. The high costs of GTL compared to LNG have meant the latter has received more investment, with a tonne of LNG costing between $150 and $250 to construct, while a tonne of GTL capacity costs between $800 and $1,000 to build. This in part explains ExxonMobil's recent decision to pull out of a GTL project in favour of LNG. A second thing working in LNG's favour is the fact that LNG chain thermodynamic efficiency is 90% versus 60% for GTL, noted Moncrieff. When you combine the higher losses at higher current gas netbacks with the five-fold unit capital cost penalty relative to LNG, you have a gearing factor which works against GTL, so it is really no surprise that there have been cancellations. Along with rising costs, exploration projects have run into problems. Four out

n many ways it is a case of too much development, too fast, particularly in the case of Qatar, which has embarked on an aggressive LNG drive in the last five years to meet the spike in global demand. The International Energy Agency's (IEA) World Energy Outlook in 2006 stated that global LNG consumption increased by over 30% in the five years to 2005. Rising European and North American demand has driven this surge, with global production capacity expected to double between 2005 and 2010 to 345mn t/y on the back of $73bn in investment in liquefaction trains. The bulk of this investment, some 45%, is in the Middle East and Africa. Containing Qatar's huge North field and Iran's South Pars field, the largest known gas field in the world, the Gulf region has combined

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that the facility will amount to and will be set, explained Pearson. With the way costs are going this is hard to predict, and if you tie down an agreement with NOIC and costs go through the roof, then the project is going to look fairly ugly.

Contract changes
Elsewhere, long-term contracts are gradually being eased back in favour of spot cargoes. New clients in the US, China and India have changed the LNG contracting paradigm. The traditional long-term contracts; the FOB [free onboard] sale; the destination clause; the high takeor-pay obligation; and the pricing terms; all have changed. What this means is that LNG is becoming a commodity, as older contracts renew on more favourable terms for buyers. The corollary is that LNG sellers are being forced to take more risk. Higher oil prices have accelerated this trend as emerging market growth is critical to the future success of the LNG industry, explained Moncrieff. Whether Iran will follow this route anytime soon is unlikely, with Tehran inking a $22bn agreement with Delhi in June to provide India with 5mn tonnes of LNG over a 25-year period, starting in 2009. Natural gas equivalent to this 5mn tonnes is to be pumped to India through a 1,600-mile pipeline that is slated to cost over $4bn. Iran, meanwhile, appears to have circumvented the US sanctions through an agreement with Oman to develop BukhaHengam and other fields that would be converted into LNG at Oman's Qalhat plant, where exports would then be marketed by a joint company. Elsewhere in the Gulf, Abu Dhabi is keen to utilise its gas supplies, although turning the gas into LNG is complicated by the high sulphur content of the countrys gas. Saudi Arabia is listed fourth in world natural gas reserves, with 249/68tn cf, although it is primarily used for domestic use and oil extraction. The world's eyes, however, will remain focused on Qatar, while holding its breath for the potential opening up of Iran. With Qatar's national capacity rising from the current 30mn t/y to an expected 80mn t/y by 2010, the Gulf is truly at the heart of global LNG supplies.

LNG marine terminals (Source: California Energy Commission); inset Qatars North field/Irans South Pars (Source: IHS)

of five exploration projects carried out by ConocoPhillips this year drilled blank patches, resulting in incremental contracts on the new field to be put on hold. Reservoir evaluation is ongoing and will take until 2010 when the current status of the field will be reviewed, said Pearson. Nonetheless, gas supply is not going to be a problem in the long-term. Qatar is talking of increasing capacity to 80mn t/y or more, which is a quadrupling of current capacity, so we are talking about huge sums of money still to be committed, commented Moncrieff.

Iran an untapped diamond

Until these bigger projects get off the ground, the delays may work to Iran's advantage, which could be in danger of losing some of the gas in the South Pars field to Qatar. There is connectivity in that reservoir, so by sucking hard enough on the Qatari side they could get some of the resources. Obviously the major impetus in Iran is going to be South Pars, noted Moncrieff. He added that the published 971tn cf of Iranian reserves was conservative. If you understand the geology

and amount of exploration, that is a very conservative number. In terms of the future potential out of the Gulf, Iran is the untapped diamond. The issue for Iran is not confined to the US sanctions, said Pearson. What is their priority for developing gas? There is local demand, injection into oil fields for enhanced recovery, piping gas to potential markets Pakistan and onwards and export. I suspect that their priority is to develop gas resources to recover oil and satisfy growing domestic demand, he commented. International players are nonetheless trying to position themselves to access Iran's LNG when it becomes more accessible. The fact is we will need Iranian energy sooner or later, perhaps sooner, said Moncrieff. However, players trying to enter into agreements with the National Iranian Oil Company (NOIC) face certain challenges. NOIC has traditionally granted licences on buy-back contracts, which for oil can be profitable over a six- to seven-year period, whereas the lifespan of an LNG project is typically up to 25 years. In addition to this, under an Iranian contract, there is a cost ceiling and you have to negotiate the cost

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AUTO FUELS

Specifications

Review of relationship between Cetane Number and Cetane Index

It is a requirement of the European Specification for Automotive Diesel Fuel BS EN 590 that both the Cetane Number (CN) and Cetane Index (CI) are determined and reported. This article, which summarises the findings of an Energy Institute (EI) sponsored Technical Development Project carried out by Cliff Lilley*, outlines a review of the suitability of the current CI equation used in IP 380 Calculation of Cetane Index of middle distillates by the four-variable equation (EN ISO 4264) (ASTM D 4737 procedure A**) for calculating CI, to predict CN as measured by IP 41 Determination of the ignition quality of diesel fuels Cetane engine method (ASTM D 613).
information on more recent fuels, whilst the latter provides smoother overall trends as it is less sensitive to individual fuels. The five-year study also provides year-on-year information. For the sake of brevity, the full monthly data for the fiveyear period are not given, but these are available from the EI.

Outliers and unusual fuels

For each fuel property in turn, the data were first checked for unusual individual laboratory results. Any outliers detected by Hawkins test, according to IP 367 Determination and application of precision data in relation to methods of test (EN ISO 4259), were excluded from further analysis. Such outliers may be the result of laboratory bias or transcription errors. The means of the data excluding outliers were then used to provide estimates of the true values of CN, density and distillation recovery temperatures. The latter means were then used in IP 380 to derive the CI values. The fuel samples for July 2003, March 2004, September 2004, February 2005, May 2005, June 2005, September 2005, October 2005, May 2006, August 2006, September 2006 and October 2006 contained cetane improver. The sample for August 2004 had T50 and T90 values outside their recommended ranges. All 13 fuels are thus outside the scope of IP 380, and have been excluded from these analyses. CN Range min max

he Energy Institute (EI) runs the IP Gasoline and Diesel Fuel Engine Correlation Scheme, within which up to 25 laboratories worldwide determine Cetane Number (CN) by the IP 41 (ASTM D 613) method. Many of these laboratories also determine density and distillation recovery temperatures, thereby enabling the Cetane Index (CI) to be calculated according to IP 380. The fuels used in the correlation scheme are selected to represent production fuels with a wide range of CNs, thus providing Bias Year mean SD

data on fuels that meet the BS EN 590 specification minimum of 51 CN and the BS 2869 A2 specification minimum of 45 CN.

Data sets
As the occasional fuel can have an undue effect on the trend between CN and CI, it is better to base any comparisons on larger data sets. This review looks at two ranges of data the year 2006 and the five years covering the period 20022006. The former study period provides CN/CI correlation Best-fit slope

RMSEb

Trend line RMSEr

2002 2003 2004 2005 2006 2002 2006

0.3 0.1 0.4 0.7 0.1

1.5 0.6 0.5 0.9 1.5

1.5 0.6 0.7 1.2 1.5

0.96 0.99 0.99 0.98 0.98

0.83 0.88 0.94 1.06 1.05

1.2 0.4 0.5 1.0 1.6

44.3 46.0 45.3 41.4 37.5

57.6 55.3 54.1 53.2 59.7

0.1

1.1

1.1

0.97

0.94

1.1

37.5

59.7

Table 1: Trends in CN and IP 380/EN ISO 4264

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Figure 1: IP ST-B-1 data 2006

Analysis
There are various ways to assess the suitability of IP 380 to predict CN. They include: Mean bias between CN and CI, defined as mean (CNCI). Bias standard deviation (SD) a measure of scatter about the mean bias. A trade-off between mean bias and bias SD, as measured by the root mean square error (RMSEb) that is square root of the sum of the squared bias mean and squared bias SD. Correlation between CN and CI, a measure of dependence between CN and CI. Bias trend in terms of the slope of the best-fit CN/CI regression line. Data consistency, as measured by the root mean square error (RMSEr) about the best-fit regression line. It is not enough to do well in just one of the above. For example, an overall bias of zero could hide either a bias slope very different to the ideal CN=CI slope or a large scatter of CI about CN. Furthermore, a small RMSEr could hide either a large bias or a far-from-ideal bias slope. The precisions of the test methods involved imply that some scatter of CI about CN is to be expected. As this scatter is dependent on the choice of fuels, then bias SD and

RMSEr will naturally vary over time. Therefore IP 380 can be considered appropriate when (i) the overall bias is close to zero, and (ii) the overall bias SD and RMSEr are consistent with test precisions. The bias slope will usually be close to ideal when both (i) and (ii) are attained, unless the range of CN and/or CI is relatively small.

Results
Trend information relating to CN and IP 380 is given in Table 1 for all relevant dates. They are (i) mean bias, bias standard deviation and a trade-off between the two, (ii) correlation between CN and CI, (iii) best-fit regression slope between CN and CI, (iv) trend line RMSEr from the regression, and (v) the range of CN. The CN/CI results are shown graphically in Figures 1 and 2. Figure 1 shows the bestfit regression line through the 2006 data, while Figure 2 shows the best-fit regression line through the 20022006 data. Points to note are: The high number of out-of-scope fuels in 2005 (due to addition of cetane improver) means that the statistics for the 2005 within-scope data are only based on seven fuels and subject to more uncertainty than in other years. Similarly, the 2006 and 2004 data sets are based on eight and

nine fuels respectively. The overall IP 380 bias is small over five years, although this average hides the poor and negative bias in the 2005 data set. The various measures on scatter (bias SD, bias RMSEb and RMSEr) tend to be very similar in a given year. The larger scatter of results in some years may be due to the occasional unusual fuel or to changes in fuel composition. Overall CI has a tendency to overpredict above 53 CN, and to underpredict below 53 CN. This has also been the case in recent years. The subset of low (<49) CN fuels in Figure 2 may indicate a bias problem for fuels with very low CN. The IP 380 best-fit slope was best in 2006 with a value of 1.05, although this is based on only eight fuels. Over five years, the overall best-fit slope is reasonable. For all recent years, the CN/CI correlation was good, reflecting consistent data. The overall trend line RMSEr reflects the natural variability in the fuels, with some years better than others. This is to be expected.

Conclusions
Three main conclusions can be drawn from this review: The overall IP 380 bias is small when estimating CN. The noticeable bias in 2005 looks to be due to chance, particularly when based on fewer fuels. On average, IP 380 estimates CN very well. The scatter associated with individual CN estimation fluctuates year-on-year, suggesting a random element. The equations used in IP 380 for calculating CI are satisfactory and do not require revision at this time. However, a bias problem may exist for very low CN fuels. The EI will continue to monitor the relationship. *Cliff Lilley specialises in statistical analysis of data sets and runs his own consultancy Cliff Lilley Consultancy. **It should be noted that ASTM D 4737 procedure B Cetane Index is relatively new and only applicable to fuels meeting the ASTM D 975 Standard specification of diesel fuel oils grade 2-D low sulphur requirements. If you would like further information about this article or the IP Gasoline and Diesel Fuel Engine Correlation Scheme, please contact the EI Library and Information Services, t: +44 (0)20 7467 7100, e: lis@energyinst.org.uk

Figure 2: IP ST-B-1 data 2002 to 2006

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NORTH AMERICA
...continued from p29 snow, the river drops to flows under 100 cm per second (cm/s). The Alberta government, which has already allocated slightly over 11 cm/s to current and future oil sands projects, has placed a cap of 15 cm/s on withdrawals. Unfortunately, this is still up to 15% of the minimum flow. There is a direct relationship between how much water is in a river and the overall health of its fishery, notes Dan Woynillowicz, a Senior Policy Analyst with the Pembina Institute, a respected environmental NGO (non-government organisation). The First Nations downstream rely on the fishery for subsistence and a business. You can take water out, but if you take too much, there will be irreversible changes. When flows reach a minimum, Pembina recommends that withdrawals temporarily stop. There are options to allow shut off, says Woynillowicz. In the short term, you can increase the amount of storage on site, which is what new projects are building. In the longer term, you can reduce the amount of water going to tailing ponds by producing drier tailings. You can increase the rate of taking tailing pond water back using treatments like RO [reverse osmosis]. And you can take steps to reduce fresh water requirements. Changes in the type of oil sands production may also help. Currently, most production is mining, but as the oil sands expand to 3mn b/d, about half will be produced in-situ by SAGD, which uses ground water that has been boiled to steam and injected underground to melt the bitumen. While SAGD does not impact the Athabasca River, there is no clear idea about where the groundwater is, how much there is, and how it interacts with surface water. Eventually, many water concerns may be sidelined by techniques that use no water at all. Fire floods for in-situ recovery eliminates water altogether, as does Vapex, a procedure in which solvents are injected underground to dissolve the bitumen and allow it to flow to the surface. However, the benefit of these experimental procedures lies in the future, while the need to manage water is in the present. Water is emerging as a top-of-mind issue to Albertans, comments Woynillowicz. There will be increasing pressure to protect water resources. I can foresee water being a

Oil sands
limiting factor for oil sands growth unless the government takes steps toward managing our water requirements.

Looking ahead
There is a final, major concern, however, that may make all of the above worries moot. In a recent oil sands report, Wood Mackenzie stated that the capital costs per peak flowing barrel had increased by 55% since the beginning of 2005, primarily due to labour and material shortages. As a result, proposed capital spending budgets for the next decade have risen from C$88bn ($82.1bn) to C$125bn ($116.6bn). All of this has caused companies to cancel projects or do major reevaluations. During a recent AGM, Petro-Canadas CEO sought to address the future of the companys Fort Hills oil sands project, slated to deliver 170,000 b/d of synthetic crude by 2011. These projects seem to be getting hammered in a number of different ways, said Ron Brenneman. All of these things weigh upon a project. Were going to have to wait and see what it all looks like when we put that against the costs that we see.

...continued from p31

Tax subsidies
However, for critics of biofuels such as Vaclav Smil, Professor at the University of Manitoba Faculty of the Environment, the EU may just as well shut down its biofuel programme altogether. It makes no sense to grow sugar beet anywhere in temperate climates because of its needs for high volumes of pesticides and fertilisers, and even higher taxpayer subsidies, all in the midst of ample world cane sugar supplies. The only reason countries grow sugar beet is to support farmers, he notes. In the US, corn growers and ethanol producers also only make profits because of taxpayer subsidies. These are a 53 US cents per gallon tax credit on ethanol production and a 51 US cents per gallon tariff on foreign (mostly Brazilian) ethanol imports. The only biofuel feedstock worth the trouble is Brazilian sugar cane, Smil says. This is because of the available land, the tropical climate, adequate rainfall and the development of a strain of sugar cane by German-born agronomist Johanna Doebereiner that fixes nitrogen. Thus, several harvests of the crop may be grown on land cleared long ago.

Brazils advantage and downside

Brazils competitive advantage in ethanol production is significant (see Table 1) and due to more factors than land and weather. Small-scale ethanol production began in Brazil in the 1920s, but it was the

combination of high oil prices, low sugar prices and a subsequent balance of payments crisis in the mid-1970s that persuaded the then government to stimulate domestic ethanol production. Ethanol prices were pegged to those of petrol and the whole programme was controlled by a government entity, the Sugar and Alcohol Institute (IAA). Unsurprisingly, ethanols fortunes fluctuated with the oil price and stagnated in the late 1980s and early 1990s. Economic and energy market deregulation, as well as sugarcane and ethanol price deregulation in the late 1990s, stimulated domestic demand, as did the introduction of flex-fuel cars. However, Brazilian consumers are unwilling to buy ethanol fuel unless it is priced at least 30% below that of petrol. So, todays ethanol prices in Brazil in real terms are less than 30% of those in 1975. As Brazils federal government plans to invest $6bn over the next four years in its national ethanol programme to address future demand for the fuel, so world attention has focused on working conditions in the industry that help keep ethanol prices low. Some 30% of the sugarcane sector is controlled by 10 producers eager to increase efficiency through mergers and mechanisation. The labour force of cane cutters consists of about 200,000 seasonal labourers working mostly in the annual Sao Paulo state harvest, and, of which, at least one-fifth are seasonal migrants from the north-eastern states of

Pernambuco and Minas Gerais, the poorest regions of the country. Since 1980 the required productivity rate per worker has increased by 50% while the average age of the labourers has fallen from mid- to late20s to late teens. So sugar production in Sao Paulo costs $165/t, while in Europe it is $700/t. In an effort to address pressure from radical factions of his Workers Party (PT) and organisations such as the Landless Peoples Movement (MST) who push for land reform, President Silva has created a Social Fuel Seal. This provides tax incentives for ethanol producers to source their feedstock from small farmers and family cooperatives, while also providing the small landholders with access to credit. Nevertheless, Brazilian analysts predict that as pressure for efficiency increases, such smallholdings will be bought out by the large producers and will result in a handful of large producers and/or multinationals dominating the entire sector as is the case in the soya and wheat sectors. Brazil plans to increase land under sugarcane cultivation from 6mn to 30mn hectares by 2025. Today, such expansion plans are accompanied by dire predictions of ecological disasters caused by crop monoculture and social unrest as the rural unemployed migrate to urban slums. Perhaps it would be easier all round if the worlds fuel industries concentrated on hydrocarbons rather than carbohydrates.

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L NG

Credit issues

Does Nakilats recent upgrade set a precedent?

Following the recent upgrade of the Qatarbased LNG shipping company Nakilat, Karim Nassif, an Associate at Standard & Poors, discusses the key credit issues facing the LNG shipping sector.
Supporting the supply chain
In more general terms, when rating LNG ship financings, LNG shipping is considered as an integral part of the complete LNG supply chain starting from natural gas development and production from the gas field, before moving through liquefaction and regasification at the import terminals, and the final sale to the end markets. It is a rating approach underpinned by two key elements counterparty risk and the legal structure, including construction and charter agreements. The counterparty risk specifically relates to the upstream project producing the LNG. Since the project is typically the source of payments to the shipper, any alternative use for the LNG ships would be limited in the event that the project failed. As a result, the credit quality of the underlying LNG project usually provides one of the key constraints for the rating of LNG ship financing. If there is an alternative charterer, other than the project company under analysis, its credit quality would also be important, as it provides a measure of the certainty and reliability with which cash flows will be earned by the vessel owners under the charter agreement for the purposes of repaying debt. Furthermore, counterparty risk is inherent in the construction of the ships. Therefore, the credit quality, experience, transaction support through third-party liquidity, and reputation of the shipbuilder are all also essential elements in the overall analysis of an LNG shipping project. play when rating the shipping deal. The two are inextricably linked in the value chain because the ships rely on the project to produce the LNG, and the project is paying the charter fees. In some cases, however, it may be possible for the LNG shipping project to achieve a rating above that on the supply project if some delinkage is achieved from the underlying supply project. In this situation, assurance would be required that the ships could earn sufficiently robust cash flow without the supply project, through either redeployment by earning long-term contracts, or through the spot market.

Recovery analysis
When analysing the recovery potential for LNG ship financings, an assessment of the redeployment of LNG vessels after a project default is likely to be included, using a similar delinking approach. Yet, notably, the recovery analysis would be less focused on assessing enterprise value, than on considering the ability of the vessels to continue to service debt under low charter-hire rate assumptions. This could reflect historical lows witnessed in the spot market or longterm charter market, or the anticipated future lows of either. While there is no simple solution to the debt service ratios or leverage levels that would guarantee an investment grade rating for LNG shipping projects, the financial risk that a project can absorb is derived from the underlying project risks, as well as the structure of financing and liquidity. Certainly, refinancing risk is usually present. Although this is considered a weakness, it can often be somewhat mitigated through a refinancing strategy. However, the most important mitigating factor is the sale and purchase agreements that will support the transaction far beyond the refinancing date. These will also provide comfort to the financial markets that the entity will generate sufficient cash to repay the new debt. So, are investment grade public ratings possible for future LNG ship financing projects? Clearly yes, although few will contain the critical support Nakilat enjoys from the Qatari government limiting the precedent set by the recent upgrade.

akilats rating, which is the firstever public rating on an LNG shipping entity, has recently been raised in line with the upgrade of the State of Qatar (rated: AA-/Stable/A-1+). The decision reflects Standard & Poors continuing expectation that, if Nakilat was to experience stress, there is strong potential for extraordinary support from the sovereign state as long as the government stands behind its LNG and gas monetisation strategy. It is the importance of Nakilats ships to Qatars economy and the states strategic plans to maintain its position as the worlds number one LNG exporter that has led us to this conclusion. Furthermore, the implicit support provided by the state through the involvement of Qatar Petroleum along the LNG supply chain also confirms that Nakilat is a government-related entity. State support is the key to Nakilats rating. When such support is weaker, the focus will instead rest on the ship financings stand-alone strengths and weaknesses. For a ship financing to be upgraded toward a sovereign rating, the strategic rationale for the countrys LNG sector and, ultimately, LNG ship financing, must be very strong that is, material to that countrys government. For example, government ownership of a shipping company and direct financial support mechanisms are ways to link the credit rating on a ship financing more closely to that of the sovereign.

Legal contracts
Meanwhile, the legal structure of LNG ship financings involves charterparty and construction contracts. To support an LNG shipping projects credit quality, the charterparty contract should last through the debt tenure. It should also guarantee availability-based fixed payments with inbuilt escalation clauses to cover growing operating and material costs. Similarly, for construction contracts, there would need to be fixedprice, date-certain arrangements with established shipbuilders, coupled with shipbuilder-completion guarantees. The creditworthiness of the underlying LNG supply project also comes into

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PUBLICATIONS
Liquefied natural gas: The law and business of LNG
Consultant Editor Paul Griffin (Globe Business Publishing, New Hibernia House, Winchester Walk, London SE1 9AG, UK. t: +44 (0)20 7234 0606; f: +44 (0)20 7234 0808; www.gbplawbooks.com) 172 pages. ISBN 1905783019. Price: 120. The liquefied natural gas (LNG) business has transformed into a broad international industry spanning several continents. The production and liquefaction of gas and its shipping, regasification and use, bring together diverse jurisdictions under longterm contractual agreements and increasingly, short-term arrangements. This book features contributions by specialists in their fields on a range of topical subjects including structuring LNG projects, sale and purchase agreements, LNG trading, LNG shipping, finance and geopolitics. The contributors provide a guide to the legal, regulatory, political and practical elements of the LNG chain.

E-DATA

Dictionary of energy and fuels

Clifford Jones and Nigel Russell (Whittles Publishing, Dunbeath Mains Cottages, Dunbeath, Caithness, Scotland KW6 6EY, UK. t: +44 (0)1593 731333; f: +44 (0)1593 731400; e: info@whittlespublishing.com www.whittlespublishing.com) 368 pages. ISBN 1904445446. Price: 16.99. This new dictionary provides ready-reference work on solid, liquid and gaseous fuels, comprising of over 1,300 definitions and brief articles. It includes information on the production of fuels including major coal reserves and large oil and gas fields. Economics are addressed with entries included for all the major indices for oil, coal and natural gas pricing. The geopolitical perspective is also dealt with, covering the oil-producing countries and Opec. Environmental issues also feature, as do entries on chemical compounds, trade names and industrial processes.

Outsourcing energy management

Steven Fawkes (Gower Publishing, Gower House, Croft Road, Aldershot, Hampshire GU11 3HR, UK. t: +44 (0)1252 331551; f: +44 (0)1252 344405; e: info@gowerpub.com www.gowerpub.com) 194 pages. ISBN 056608712X. Price: 65. This book describes energy management outsourcing as a way of addressing the current energy challenges facing all organisations, namely high and volatile energy prices, the need to mitigate climate change and potential supply constraints as oil production peaks. The book describes the basic processes of energy management and how to outsource them in a strategic way to achieve maximum results. The validity of this process can be verified by a new model of energy management looking at total costs, which is presented in the book.

Energy and American society thirteen myths

Edited by Benjamin K Sovacool and Marilyn A Brown (Springer, Ashbourne House, The Guildway, Old Portsmouth Road, Guildford, Surrey GU3 1LP, UK. t: +44 (0)1483 734666; f: +44 (0)1483 734429; www.springer.com) 371 pages. ISBN 1402055633. Price: 42.50. This book discusses current events related to US energy policy including high energy prices, the 2003 Northeast blackout, the Kyoto Protocols enactment, the passing of the Energy Policy Act of 2005 and the influence of recent Gulf Coast hurricanes on energy supplies and prices. It takes on the central quandary in the study of energy and environmental policy as 24 of the USs leading experts discuss what myths continue to exist in American culture concerning energy, the environment and society.

ABS guide for the class notation coating performance standard (CPS)
ABS Group (16800 Greenspoint Park Drive, Suite 300, South Houston, Texas 77060-2393, US. t: +1 281 673 2800; www.eagle.org) Downloadable from www.eagle.org/absdownloads/getpub.cfm?pub=153 Guidance in the application of the new IMO coating performance standard to oil tankers and bulk carriers subject to the IACS common structural rules is now available from ABS. Compliance with the standards contained in the guide will result in the issuance of the new ABS notation CPS. By issuing a notation, it will be clear in reviewing ABS records whether a particular ship was built in conformance with the new coating requirements. The ABS notation will also be made available for any ship, regardless of type or size that is built according to the standards contained in the new guide.

MV has relaunched its website www.omv.com to target individual groups in the oil and gas sector. Both private and business customers can find relevant information on individual national sites, important information on OMV filling stations, products, services and special offers. OMV international data, facts and key indicators, in both German and English, can be also found on the new site. Aveva, provider of marine and plant design and engineering lifecycle solutions, has relaunched its website to mark its 40-year anniversary. The new site is part of a programme to ensure that the Aveva brand reflects the companys position as a global technology player and strategic partner to organisations which have complex engineering requirements. Visit www.aveva.com LogicaCMG and Swedish energy company Vxj have announced that they will jointly develop a web-based system for energy analysis of households, the purpose being to increase customers awareness by making electricity consumption analysis simple and informative. The project, part of the European Commissions SESAC project, will last five years and involve three participating cities Vxj in Sweden, Delft in the Netherlands and Grenoble in France. A learning and resource site for the global energy and emissions markets has been launched to provide an opportunity to learn about carbon trading and other emissions markets. It features data search tools that give quick and easy access to relevant information and aims to help those who need to understand and get up to speed on the history, structure and future of the energy and emissions markets. Visit www.energyandemissions.com A new site has been launched by the Global Bioenergy Partnership, a UN-run organisation that promotes the sustainable production of biofuels. The Romebased group helps exchange know-how and technology, whilst identifying potential investment for the sector and advising on overcoming obstacles hindering its development. Visit www.globalbioenergy.org ODS-Petrodata, provider of news, data and consulting services specific to the offshore oil and gas industry, has launched Energy Current, a new online news service offering global coverage of targeted industry segments. www.energycurrent.com provides timely, in-depth news and analysis on the global energy industry. Platts has launched an online tool that will improve transparency, efficiency and user experience of Platts Market-on-Close price assessment process. With eWindow, Platts will provide customers its real-time oil information service, Platts Global Alert. Visit www.platts.com

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