Windsor Energy Group Newsletter 31/01/2011 Windsor Energy Group Newsletter 10/09/2010 Windsor Energy Group Newsletter 10/09/2010

Monitoring international energy geopolitics

Dear Reader, Welcome to the Windsor Energy Group January newsletter. In this newsletter, we bring news that the political unrest in Egypt is driving down the Egyptian leading share index to its lowest point in the past couple of years. Also in the news is the fear that the high oil price will hinder the recovery of the global economy. BP has released its energy outlook for the next twenty years whilst its Rosneft deal is facing legal embroilment from its Russian TNK-BP partners and Centrica loses its competition law fight on its Rough gas storage business. In the Caspian Sea, a consortium led by Conoco-Philips has announced the largest oil find this year. This month’s commentary which focuses on global energy game changers is provided by our executive director, Mr Ian Walker. If you would like more information about the Windsor Energy Group, our newsletter or forthcoming events please do not hesitate to contact me on admin@meconsult.co.uk. We welcome any suggestions regarding articles, features and opinion pieces that might be included in future editions. Bara Sinnott Editor

Annual Consultation Windsor Castle March 4-6.
Topics to be covered this year include: the drivers behind the oil price; game-changing energy technologies; Middle East energy developments; European energy security concerns and shale gas; issues involved with the dash for nuclear and energy competition among Pacific Rim countries; High North energy prospects. Among those joining our weekend retreat are Lord Howell, honorary chairman of WEG and Minister of State at the FCO, Christof Ruehl, chief economist at BP, Lord Oxburgh, former chairman of Shell who heads the Carbon Capture and Storage Association, Lady Judge, the former head of the Atomic Energy authority who is advising the governments of Abu Dhabi and Jordan on their civil nuclear programmes, Prof Bill Arnold of Rice University, the former head of government relations in Washington for Shell, Dr Herman Franssen, adviser to the Oman Energy Minister and former chief economist at the IEA, Prof Tatsuo Masuda, a senior Japanese energy adviser who was one of two experts invited to address the OPERC meeting in Riyadh and Ambassador Arne Walther, former chairman of the governors of the IEA. And head of the Riyadh energy forum and current expert for the Norwegian government on the High north, and Philip Lowe, Director General for the Energy Directorate General of the European Union. Among the companies taking part will be Exxon, BGI, Barclays Capital, Worley Parsons, Kuwait Petroleum, BP and Aegis. If you would like to receive further information, please contact me, Bara Sinnott on admin@meconsult.co.uk

Windsor Energy Group Newsletter 31/01/2011 Windsor Energy Group Newsletter 10/09/2010 Windsor Energy Group Newsletter 10/09/2010

Upcoming events
FEBRUARY 8th The Global Nuclear initiative and the Global Strategy Forum will be hosting an expert roundtable discussion looking into the political implications of North Korea's nuclear ambitions. Gary Streeter MP, Vice Chair of the North Korea All-Party Parliamentary Group, will be chairing the event and Dr Jim Hoare, who opened up the British Embassy in Pyongyang, will be one of the speakers as well as Peter Jenkins, former UK ambassador to the IAEA. The event will be held at the National Liberal Club on February 8th at 12:30 for a 1pm start, 2pm finish. To register for this event please e-mail events@globalstrategyforum.org no later than Wednesday 2nd February 2011.

FEBRUARY 9TH Roundtable to be held on US-Middle East Foreign Policy. This will be held on February 9th at MEC's offices from 11am until 1pm and will discuss a study we are putting together discussing US-Middle East foreign policy post the mid-term elections and in light of the Wikileaks affair. (If numbers get too high we may have to re-locate this event) APRIL 7th We are holding a number of investment seminars this year to mark Sierra Leone's 50th year of independence. There shall be four sector based investment seminars focusing on Sierra Leone's extractive, fishery, agriculture, infrastructure and tourism industries. The first shall be a Sierra Leone extractive investment review on which we are working alongside a leading business man and the Sierra Leonean government. The event shall be hosted by Bloomberg, in London, on Thursday 7th April from 5pm to 8pm. To register for these event please email admin@meconsult.co.uk

Windsor Energy Group Newsletter 31/01/2011 Windsor Energy Group Newsletter 10/09/2010 Windsor Energy Group Newsletter 10/09/2010 News & Developments

London listed oil and gas companies exposed to Egypt
(27/01/2011) In light of political unrest in Egypt the Daily Telegraph have published a list of energy companies active in the region Read More

Caspian oil find could be biggest this year (24/01/2011) A consortium of companies led by Conoco Philips, could have struck the largest oil find this year Read More Tullow Oil expects 2010 revenues of € 800 Million (28/01/2011) Tullow oil expects its revenues to top€ 800 Million. This is due to the

TNK-BP's Russian owners seek to block Rosneft deal
(28/01/2011) AFP reports on the ongoing dispute between TNK-BP’s Russian shareholders over the BP and Rosneft deal. Read More Gas find leads to share price drop (27/01/2011) The Independent reports on Heritage Oil’s find of Gas in northern Iraq and how this has led to a 29% fall in share price as investors were hoping for oil Read More EU bans certain emission off set trading credits from its emission trading scheme (ETS) (21/01/2011) The EU observer reports that from May 2013, the European Union will ban the trading of certain credits on some industrial gases Read More The Gulf of Mexico oil spill caused dividend shortfall (31/01/2011) The effect of the BP oil spill on British listed companies was substantial in that it caused a £2 Billion shortfall in the dividends paid out Read More

rising place of oil
Read More The UN says that the EU’s offset ban will create a demand in African clean energy projects (26/01/2011) Bloomberg reports that the United Nation view the European union’s ban on certain emission offset trading credits will potentially increase the demand for Clean Development Mechanism (CDM) projects in Africa. Read More Fear over UK shale gas projects (17/01/2011) The Guardian reports that a study commissioned by the Co-op is calling for a moratorium on all UK shale projects Read More Centrica loses fight with the Competition Commission (31/01/2011) The Competition Commission has rejected an appeal by Centrica to have restrictions loosened on its Rough gas storage facility

Read More

Windsor Energy Group Newsletter 31/01/2011 Windsor Energy Group Newsletter 10/09/2010 Windsor Energy Group Newsletter 10/09/2010

Through a Glass Darkly - Global Energy Trends

An assessment of some of the global game-changers
By Ian Walker, Executive Director of Windsor Energy Group
St Paul wrote about seeing the future through a glass darkly. That is particularly true of energy markets. You stand a better chance of making money by backing an outsider at a horse race than betting on global energy price trends. A lot of people have lost their shirts trying to predict energy futures so this article needs to be treated with caution. The energy market has proved massively unpredictable over several decades despite attempts by oil tycoons, such as Paul Getty, or energy producers, such as OPEC, to fix the market. So what is coming down the tracks that could make things different? One big change is the way the climate change balloon was popped at the UN conference in Copenhagen in December 2009, with concern over misrepresentation of the facts and a failure to agree any global framework. The political will to act on new energy has fragmented. As a result carbon fuel will remain as the world’s major source of energy for the foreseeable future. The new energy technologies will not attract sufficient investment and development to make any significant inroads on demand for gas and oil. The two dominant players in Copenhagen, and indeed the world, China and the US, may be different in many ways, they also share many similarities. They are both big countries with a huge demand for energy to move things around and to keep large populations warm. Even more astonishing over the last decade is how middleclass Chinese want to show off their wealth by driving cars causing massive traffic jams and air pollution, just like Americans! The smog in Beijing has caught up with the smog in Los Angeles as cars are replacing bicycles. The resulting growth in energy consumption means that both countries are now competing head-on in global energy markets. The Chinese can now be found in Africa, Latin America, the Gulf and many other parts of the world competing with US and other energy consumers. What is also similar in both countries is the way in which they support both their energy companies in their international activities and their major supply countries. The US offers military protection to producers in the Gulf and in Africa. China follows a different strategy: it offers to build big infrastructure projects such as railways and ports to win local contracts. But significantly the first Chinese military vessel paid a visit to the Gulf last year. Echoes of the gunboat diplomacy pursued by Europe and the US in the past. China is also developing a deepwater navy supported by a “string of pearls” (major ports) linking China with its international energy markets. A good example of this is the port China acquired in Sri Lanka, thanks to the military help it offered to the Sri Lankan government to finish the Tamil revolt. The Chinese presence in Sri Lanka is viewed with concern by India and the US.

Choke points
The Chinese strategy is to have a capability to protect international energy shipments, like the US does. For instance, the Chinese are now contributing to the multi-national naval team seeking to suppress piracy off the Horn of Africa that has already seen tankers being held for ransom. They share with Japan and Korea concern about energy choke points in the Strait of Hormuz and the Strait of Malacca. China is therefore planning an overland pipeline to avoid any naval blockade in the Straits of Malacca. The Chinese fear that their energy supply routes could be squeezed if there were tensions over Taiwan. Integration of Taiwan into the mainland remains a Chinese goal. Another possible flashpoint could come in the contested waters and energy exploration rights involving China, Korea and Japan. China’s growing energy relationship with Iran is also viewed with concern by the US, as it is seeking to impose an economic blockade over the threat of the possible development of Iranian nuclear weapons. If this issue is somehow resolved, and Iran is allowed to develop its massive energy reserves, then there will be even more gas flooding onto global markets then there is now, with a downward effect on prices. Alternatively, if diplomatic efforts fail, there could be military action, which could lead to war in the Strait of Hormuz. If this happens ,energy prices will go through the roof. Unlike the situation on the gas market, oil production capacity is currently quite constrained, even though there are big projects underway in areas such as offshore Brazil, East Africa and even more in West Africa. Russia seems to be producing at full capacity. OPEC producers believe that in the absence of any major climate change programme and lack of oil from other sources, they can balance global prices in the short term. This is a change as in recent years non-OPEC production put the cartel in a weak position. The OPEC producers in the Gulf are now seen as crucial to future oil supply. They are currently sitting on a (quite limited) oil spare capacity of some 2-3 million barrels per day, largely in Saudi Arabia, Kuwait and the United Arab Emirates. They are planning to invest several billions in expanding this capacity to 7 million barrels within a decade. They argue that their stateowned energy companies should be willing to carry the cost of this spare capacity to help keep the OPEC target of $75 a barrel manageable. Some analysts think this spare capacity could vanish by the end of 2011 and that the new capacity will take many years to come on stream. The key issue here is that Saudi Arabia needs this income to meet its existing government commitments. It has little room for manoeuvre as it has a fast-growing population with more than half the population being younger than 20, and they have few prospects of jobs. Saudi Arabia is also worried by the growing Shia-Sunni tension in

Windsor Energy Group Newsletter 31/01/2011 Windsor Energy Group Newsletter 10/09/2010 Windsor Energy Group Newsletter 10/09/2010
the region. Iran has become the leader of Shia dissatisfaction and has won plaudits in the Arab world for its stand against Israel. Saudi has produced its own Middle East peace plan but, sadly, there seems to be little chance of any resolution to the Israel-Palestinian problem. The Shia-Sunni proxy battle is being fought out in Iraq as well. Here Iran has strong connections in the south while Saudi Arabia is supporting the Sunnis in the middle of the coutnry. This leaves the Kurds in the North to pursue their own agenda for quasi-independence. Iraq has the potential to become a game-changer with its massive reserves of cheap oil which would wreck OPEC’s stability plans. Maybe of even more concern to the Saudis is that the bulk of the world’s oil and a growing amount of gas comes from the Eastern Province of Iraq which has a Shia majority.

Nuclear capacity
Interestingly Gulf producers are looking at new energies to hedge their bets. Abu Dhabi has signed up with the Koreans to build the Arab world’s first civil nuclear plant. Saudi Arabia is also developing a nuclear capacity and has said it will not accept the constraints imposed by the US on the Abu Dhabi deal. Other Arab countries such as Kuwait, Jordan and Egypt are moving towards nuclear as well. Abu Dhabi has set up an energy investment group, Masdar, that is tracking and reviewing new energy developments. Qatar has established Green Gulf to provide global alternative energy test beds to evaluate new energy technologies. Even though Masdar, part of state-financed Al Mubadala, has a green focus, it is also looking for oil and gas investments in areas such as Central Asia, where it signed contracts in Kazakhstan. In a horse race without clear favourites it can be helpful to back more than one runner. The United States game-changer has of course been the massive and rapid development of shale gas. This has turned the US from being a gas importer to becoming a potential exporter, completely upsetting global gas markets. In Europe, Poland is sitting on the largest shale gas reserves and if these are developed then Central Europe’s dependency on Russian gas will be much reduced. Even the OPEC offices in Vienna turn out to be sitting on shale gas reserves. Significantly these will not be developed because of planning and environmental concerns which could also slow and reduce the scope of shale gas production in other countries across Europe. The High North is another energy frontier that has the potential for becoming a game-changer in the same way as Brazil will impact the market once large-scale production begins in that country. The most recent discoveries in the Arctic have been made off Greenland as glaciers melt. Russia claims half the reserves in the Arctic region with a flag planted on the Arctic Ocean floor. Other players have other worries. While the Norwegians are interested in big fields jointly operated with the Russians there are those who argue that the threat to the pristine environment is too great a price to pay. Canada is interested not just in oil and gas development but also in the potential of a North West passage opening up, allowing new energy and other shipping corridors. This implies the need for a closer working relationship with the Russians.

Safe prediction
Where does this leave Europe? The EU is trying hard to find a new energy policy while it continues to import large amounts of Russian gas.Your view on what this policy should be depends on where you stand. If you are French, then developing nuclear power using French technology makes sense. If you are British, then you want to see a carbon price mechanism to encourage alternative energy such as wind farms. If you are Spanish, then you want to become an energy gateway for North African energy and possibly green electricity from the massive “Desertec” developments now underway in Morocco with German backing. Germany has had a successful longterm energy relationship with Russia but there are changes taking place. German law has been changed to ensure that strategic assets are protected from international acquisitions by countries such as Russia. Against this confused picture, the EU is pushing the building of the Nabucco pipeline to bring Caspian energy into the picture to diversify supplies. Finding a common policy to meet all the conflicting interests is a tall order. Coal continues to be the main source of energy for countries such as the US and China. In Europe, it is again Poland that is sitting on Europe’s biggest coal reserves. The challenge is to find a technology that will allow clean burn. Chinese cities suffering severe air pollution are desperate for relief. At the moment such technology is available but expensive. Then there is the question of what to do with carbon capture. This is very costly, although things do seem to be moving. One new centrifuge technology has reduced the cost of carbon capture by a factor of ten. Even so the technology is still 30 per cent more expensive than conventional coal burn. It is possible that rapid research and implementation of carbon capture and storage could result in the re-emergence of coal as a fuel of choice. In the short-term however gas is generally seen as the energy that will be central in the transition to a greener future. The gas glut means that gas prices should continue to stay low. The other big game-changer is economic. Will the world’s markets recover and expand, thus increasing energy demand? Or is there a risk of protectionism and slow-down with reduced demand as countries seek to protect their own economies from imports? The jury is still out on whether the West’s bad debts can be cleared up. Equally the Chinese have just increased interest rates for the first time in three years as they are concerned that a bubble may be developing. All this leaves us looking through a glass darkly. The only safe prediction about global energy markets is that the current price stability will not last. There are too many factors that could change the demand and supply equation. As the Chinese proverb has it, I fear we are living in interesting times.

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