ENERGY ECOSSEENERGY ECOSSE

SCOTLAND’S LEADING ROLEIN CARBON-CAPTURE

STORAGE TECHNOLOGY

BRIGHT IDEABRIGHT IDEASCOTLAND’S LEADING ROLE

IN CARBON-CAPTURESTORAGE TECHNOLOGY

SPECIAL REPORT ● THURSDAY 18 SEPTEMBER 2008

Montage: Craig Stephen

2 | ENERGY ECOSSE THURSDAY 18 SEPTEMBER 2008THE SCOTSMAN

Lesser lights of NorthSea generation takeon the leading role

Linking smaller ‘satellite’ fields to existing infrastructure is the future of oil and gas production, writes AnthonyHarrington

“The giant fields areprobably all discoverednow and the future lies insmaller discoveries”David Mendelson, Total E&P UK

Total’s plan totap intoneighbouringfields fromcentral ‘hubs’will ensure itsrigs remain busy

W ITH the current debate onenergy prices, and energysupply in the UK, it is ex-tremely heartening to

hear one of the North Sea’s mostsignificant players setting out a devel-opment strategy that looks decadesahead. Total, which derives about 10 percent of its global oil and gas productionfrom the North Sea, has confirmed theimportance of this province to its plan-ning over the next 20 years.

David Mendelson, business develop-ment director at Total E&P UK, pointsout that with the present and next gen-eration of North Sea discoveries highlylikely to be smaller, satellite fields,Total’s business strategy is based aroundits experience of building “hubs” andthen using these to exploit resources inthe surrounding acreage. Modern direc-tional drilling techniques, which allowoperators to tap into fields kilometresaway from the hub, even at great depths,have proved the viability of thisapproach.

“The North Sea industry was builtaround the discovery of huge fields like

Brent and the Forties fields. Those giantfields are probably all discovered nowand the future lies in smallerdiscoveries being developed off theinfrastructure already in place,”Mendelson says.

Total’s Alwyn operation provides anexcellent example of the hub model inaction, utilising the massive investmentin existing infrastructure to exploitsmaller adjacent satellite fields. AsMendelson points out, the smaller findsTotal has made around Alwyn wouldnever have been sufficient, in them-selves, to justify the construction of apipeline back to the UK. However, beingable to “piggyback” on the Alwyn infra-structure makes them cost effective.

“The problem with gas finds is thatyou really do have to have a pipeline toget the gas back to shore. With oil, youcan convey it in tankers but that’s not anoption for gas,” he says. Gas must bepiped directly to shore to access its mar-ket, which doesn’t help stranded gasfields out in the North Sea. Total firstbegan producing from Alwyn in 1987with a projected 20-year life on its facili-

ties. Then in 1994 the first satellite field,Dunbar, came on stream and was fol-lowed by the subsea satellites of Grantand Ellon fields, then by Nuggets, Forvieand the latest addition, Jura, which wasconnected to the upgraded Alwyn facil-ities this year. Having the infrastructureavailable allowed Jura to come on-stream only 17 months after discovery.

Mendelson says: “As a result of thesesatellite fields coming on stream, theAlwyn facilities are producing flat outat a capacity that exceeds that whichflowed through them when they cameonstream in 1987. Our most recent dis-covery is the Islay field and it will comeback to Alwyn through the Forvie-Jurasystem within the next few years. So thesuccess of this hub model has been phe-

nomenal for us. The facilities Total built20 years ago now look as if they will bevery much in demand for at least thenext 20 years.”

The company has followed a verysimilar strategy for its second hubaround the large Elgin Franklin fields.The Elgin field was a tremendous chal-lenge. It was the biggest, highest-pres-sure, highest-temperature field to be de-veloped in the world when it cameonstream in 2001. To exploit it, Total hadto build an 470-kilometre pipeline allthe way to Bacton in England. However,once the infrastructure was in place,Total was able to bring on further satel-lite fields – Glenelg, in 2006 and WestFranklin in 2007, both also high-pressure, high-temperature fields, six toseven kilometres under the sea bed, andthree to four kilometres horizontallyaway from the drill drop point.

“The temperatures in the field areover 200 degrees Celcius and the pres-sure is over 1100 bars, so directing anine-inch drill bit through a subsea areaseven kilometres down and four acrosswas a huge challenge. However, havingthe platform there and the infrastruc-ture there allowed us to do this. We havejust completed drilling a second well onWest Franklin which has improved ourview of the field, which now looks tohave close to 200 million barrels of re-source there,” he says.

Total also has a very exciting gas dis-covery in the West of Shetland area.Lacking any existing hub to develop thisresource, Total and its partners, DongEnergy, ENI, and Chevron, are currentlyin discussion with the oil and gas indus-try and the UK Government as to thebest way forward. At issue, as Mendelsonexplains, is the size of the pipeline to bebuilt. Last year, Total drilled the Tor-more exploration well close to the Lag-gan field, and is now prepared toproceed. However, the size of the discov-eries does not justify any oversizing of

the facilities and, sticking to North Seatradition, it would build a pipelinescaled for its own needs. Other com-panies with satellite fields in the areathat they wished to exploit would haveaccess to the pipeline when flow fromTotal’s field slowed to the point wheretheir reserves could be accommodatedin the pipeline.

The alternative is to build a largerpipeline from the outset. But thatwould require a substantial additionalinvestment. There are two possiblesources for this additional investment.It can come either from the industry, orfrom the Government through, per-haps, some accommodation on tax.

“The government has asked us to talkto the industry first, so this is the consul-tation process we are currently goingthrough,” Mendelson explains.

It is particularly challenging for otherplayers to go down this route since noone yet has any certainty about the scaleof their likely gas flows, or indeed,whether there will be any gas flows atall. The odds are that there will be, butwest of Shetland is a very challengingenvironment, with 600 metres of seadepth, 20-metre wave swells, and noprotection from the worst of theAtlantic.

There are several development op-tions, however Total’s preference inanswer to the environmental challengewould be to build shore-based gasprocessing facilities with plans to run a127-kilometre pipeline from the subseawell head infrastructure on the Lagganfield to Shetland, where it would site agas processing plant alongside the exist-ing facilities at Sullom Voe.

The past is no guarantee of the future,but building on the success of the devel-opments in the North Sea to date weshould be confident that new areas suchas those to the west of Shetland still holdexciting prospects for the next 20 yearsand beyond.

ENERGY ECOSSE | 3THURSDAY 18 SEPTEMBER 2008 THE SCOTSMAN

O IL & Gas UK, the industry bodythat represents productioncompanies and the industrysupply chain, has emphasised

the continuing importance of oil to thegovernment’s grand strategy to growthe UK’s indigenous energy supply.

Earlier this month, Oil & Gas UK’s chiefexecutive, Malcolm Webb, reminded theScottish Council for Development andIndustry’s conference Scotland’s EnergyFuture that the UK will still be dependenton oil and gas for 70 per cent of its energyneeds in 2020.

“If investors are given the encourage-ment they urgently need, the reserveson our doorstep have the potential tosatisfy two-thirds of oil and a quarter ofgas demand in 2020, reducing the needto import oil and gas at the nation’sexpense,” he told delegates.

He pointed out that the transitionfrom a UK energy supply with fossilfuels at its centre to one based largely onthe use of renewable energy sources andlow carbon technologies will nothappen overnight, nor by 2020, so it is amatter of absolute priority thatGovernment encourages investment inthe oil and gas sector.

“If investment in our own oil and gasis boosted, domestic production will bea crucial support on the road to the newenergy mix. Not doing this is a sure firerecipe for an enduring crisis in thenation’s energy supply, beginning in thenear future with unthinkable economicand social implications for the UKand Scotland in particular,” hecommented.

Oil & Gas UK will be staging two keyevents before the end of the year. OnTuesday, 11 November, it will be hostingShare Fair, the industry forum where oiland gas producers share their forwardplans with the supply chain, so they canposition themselves to attract thisbusiness. Oil & Gas UK operationsdirector Paul Dymond notes that this isthe tenth such event that the organisa-tion has run. On every occasion theyhave been extremely well attended andthe number of companies participatinggoes up every year.

“Attendees will get an 18-month totwo-year look-ahead on the majorproducers’ plans, representing poten-tial new business in the region of£4bn. Another major part of this eventis the opportunity for one on one con-tact between suppliers and producers,”Dymond comments.

The day after Share Fair, Oil & Gas UKwill be holding its annual conference,

‘Britain can’t fuel change without oil and gas’

focusing this year on the supply chain.“We have a stellar cast of speakers andthis year we have the Secretary of Statefor Trade and Industry speaking as well.We look as an industry to learn fromother industries as well, so we haveprominent speakers from outside theoil and gas sector. We anticipate anotherreally good conference,” Dymond says.

In the spring of 2009, Oil & Gas UKwill be staging the Next GenerationConference. Dymond says: “The aimhere is to attract people into theindustry, be they graduates or lateralhires from other industries. We had thefirst such event in April this year and itwas a huge success. There were somevery good ideas bouncing about and alarge number of very dynamic youngdelegates.”

Dymond points out that althoughthe oil price has declined in recentmonths from its high of about $130 abarrel, the current price is still wayabove the $50 to $60 a barrel thatexploration and production companieswere factoring in to their equationsbefore the oil price took off.

“It is likely that price overshot that

expected from the simple supply-demand dynamics for a bit, and it is nowsettling back down to a more reasonablelevel,” he says.

“The impact of the high oil price,when coupled with the illiquidityprompted by the credit crunch, hascaused a downturn in global demandwhich has pushed the oil price down.The key point is that it is still high andwe are in a different world from the $10 abarrel pricing of eight years ago. Look-ing round our members, it seems clearthat the North Sea activity is as high nowas it was a year ago.”

The industry needs a huge amount ofinvestment. Volatility in the market orin the fiscal regime is not a good thing,since it affects investment sentiment.The important fact to keep in mind isthat there is still potentially 25 billionbarrels of oil equivalent in the NorthSea, with 38 billion already produced.Only about 10 billion barrels yet to beextracted are covered by existingprojects, so the North Sea really doesneed investors to stay interested and tostay involved if its full potential is to beachieved.

CONTENTS

Editor Stuart Farquhar, 0131-620 8879 Production Charlie Cooper, Kathryn Dunn, Tom Hunter, Dick Pringle, Andrew Rainey Advertising Ken Mowbray, 0131-620 8984

DEALER’S CALLTheservicessegmentoftheoilandgas

sector is bucking the trendPage4

DOWN UNDERThe business opportunities for carbonstorage below the North Sea are huge

Page6

UP AND AWAYWhy oil and gas prices will continue

to spiral upwardsPage8

NUCLEAR REACTIONStand by for the next generation of

power stationsPage9

POWER POLITICSThere is one issue on which the US

presidential hopefuls agreePage10

FUELING THE DEBATEWhere Obama and McCain stand on

energy and global warmingPage11

We dream of goinggreen, but investment infossil fuels is vital to theUK’s long-term energyneeds, hears GarthWood

Malcolm Webb,of UK Oil & Gas,maintains thatinvestment inthe North Seais crucial

4 | ENERGY ECOSSE THURSDAY 18 SEPTEMBER 2008THE SCOTSMAN

have very strong brands and reputa-tions in various sectors so what is veryimportant is that we are able to deliveron a transaction within specific time-lines for clients with the appropriatefunding packages – that’s the differen-tiator at the moment.”

Again, internationalisation is playinga large part in decisions to invest. “A lotof the oil services businesses have verygood positions in the North Sea, butwhat they are doing now is leveragingoff that and following their customersinto the Gulf of Mexico, Asia Pacific andinto Baku [Azerbaijan],” Grant adds.

“People say the North Sea is quite amature market – it is, but you’ve got a lot

of very established, very good suppliersof service businesses in there whichhave now got a very attractive globalopportunity.”

Graeme Sheils, inset left, senior auditadvisory partner – and a partner withinthe oil and gas team – in Deloitte’s Aber-deen hub, believes that international-isation is the way to go in the servicessector. And he suggests that any servicesector company owner eyeing thefuture, but uncomfortable about growth,should seriously consider options in astill healthy vendor marketplace.

“Clearly there is very high demandand activity levels are high. So the ser-vice sector has been working at a sus-

A S THE shockwaves of recessionintensify, the cold wind blow-ing over most industrialmerger and acquisition (M&A)

deals is palpable.But there is one apparently defiant

exception: the services segment of theoil and gas sector, which continues to in-ternationalise, with Aberdeen taking itsplace as one of the world class centres ofexcellence, marketing its globally trans-ferable skill sets and the enabling tech-nology capabilities.

Activity remains doggedly buoyantand, barring unmanageable volatility inoil price fluctuations or rapid deploy-ment of a government windfall tax, itseems likely to remain so in the forth-coming quarters, according to industryfinance and legal specialists.

Price per barrel may have movedsouth from a peak of around $140, but itspersistence at higher levels is driving de-mand for a finite supply of specialist ser-vices and encouraging further explo-ration and production (E&P) activities.With it, there is more demand for well-positioned services companies – inter-nationally. This is no great surprisegiven that many E&P investment deci-sions – other than by the recent breed ofsmaller, more aggressive operators – arebased on a barrel price between $40 and$60.

This is not idle crystal ball gazing,talking up prospects in the face ofprofit threats. Nor is it all down tothe effect of a change in the taxregime in April applying to capi-tal gains, fuelling a surge in assetor share disposals by vendorswho might already have beencontemplating a sale, at a time ofinvestor interest.

The usual suspects fromthe banking world – suchas RBS, HBOS, Barclaysand Clydesdale – retaina strong presenceacross the industryor in their carefullydeveloped niches,but competitors that

have previously not had a significantpresence in the sector have turned to itas a honeypot for potential earnings.

That said, the singular attraction ofthe sector is the priority factor ratherthan any refuge from the bricks andmortar implosion. “There is no doubtthat the banks have an appetite to dobusiness in the oil sector and that can beseen by the players that are currently inthe market and the banks that are mov-ing into it,” says Scott Swankie, a partnerin the banking and finance specialismof lawyers Maclay Murray and Spens’Aberdeen office.

Swankie’s firm has been involved inseveral deals this year, including Aber-deen-based Triton Group’s recent acqui-sition of VisualSoft, Triton’s eighth pur-chase in a spree now valued at morethan £100m since forming only in2007.

VisualSoft is a £2.7m turnover, nine-employee specialist in offshore digitalvideo inspection systems and said to bea world leader in its field. It is a good ex-

ample of what’s been going on in themarket. Last month, Triton

completed another pillar ofits plan to focus on provid-ing state-of-the-art technol-ogy and services to arapidly expanding inter-national subsea oil and gassector.

Aberdeen sits in an elitelist of oil territory centres

that includes Houston, Sin-gapore, Dubai, Calgary, Oslo,

Stavanger and Rio deJaneiro. And Swankie is inno doubt that the GraniteCity will continue to play abig part in deal activityand contribute to the UKeconomy in the future.

“Aberdeen is no

longer just about the North Sea,”Swankie explains. “Practically all thebusinesses we’re looking at are globalbusinesses with international reach,and Aberdeen is fast becoming a centreof excellence for the international oiland gas sector.”

The Aberdeen arm of Aker Solutions,the global engineering and construc-tion services group, purchasedPortlethen-based PSV Solutions, a fabri-cation business, in May. Rod Buchan,managing director of Aker SolutionsOffshore Services, says: “PSV will help usmaximise the value we add to ourclients. We are often working againstvery tight deadlines on production-related modifications, and the critical

Oil and gas serviceslaunch Aberdeen onvoyage of growth

High oil prices are sustaining robust levels of dealmaking among North Sea operators, says KenMann

“Aberdeen is firmly on themap as an internationalcentre of excellence forthe oil and gas sector”

New power generation required

path of the bottleneck is often the fabri-cations – so this (acquisition) optimisesthe process between engineering andfabrication, and improves the lead timesto our customers. The benefit of a weekor two weeks earlier makes a big differ-ence to them.” The company has engi-neers working in the UK on projects asfar afield as Greenland and India.

Jamie Grant, head of leverage financefor Scotland, Barclays CommercialBank, who represents one of the oldguard of deal funders in the sector,agrees that rivals with less obvious off-shore industry portfolios have enteredthe ring on the back of sustained in-vestor bullishness.

“Experience is obviously very impor-tant but in the current climate it is moreabout deliverability. All of these banks

Youngstershave to bedrawn in if theoil sector is toattract qualityworkers in thefuture

ABERDEEN’S oil and gas indus-try may be undergoing some-thing of a boom at the time ofwriting, but in at least one way ithas turned out to be a victim ofits own success.

The problem, in short, is thatthere aren’t enough skilled em-ployees to go round. The indus-try has always been a cyclical one,and this means there have beentimes – notably in the mid-1980sand late-90s – when cutbacksafter an oil price drop led to afreeze on recruitment and toworkers being laid off.

The result is that there is nowa shortage of qualified staff,particularly of experienced spe-cialists in their 40s, who would

normally be expected to trainand develop the new generationof staff entering the industry.

“In essence, we are paying thecost of the ups and downs of thelast 20 years,” says Martin Ellins,Aberdeen-based regional man-ager for the UK and West Africafor AGR Petroleum Services, theworld’s largest independent wellmanagement company.

Many in the sector agree thatthe skills shortage is severeenough to be imposing tangibleconstraints on growth at a timewhen the high global oil pricemeans the sector is booming.Companies like AGR have madea strong commitment to attract-ing people into the business,

developing a programme whichpromotes the sector to schoolpupils and university studentswhile also offering extensivetraining and opportunities tonew recruits.

“Things have never been asdynamic as they are now interms of industry growth, but weare missing a layer of expertise inthe industry,” Ellins adds. “Weare involved in a number of ini-tiatives to get people to enter thesector.”

The government-backedScience and Engineering Am-bassadors initiative helps topromote these subjects inschools through workshops andthe participation of industry

professionals, and it is hopedthat at least some of the pupilsinspired to take these subjectswill end up in the oil and gasindustries.

“I think there is an awarenessof the skills problem within theScottish Government – certainlyAlex Salmond seems to under-stand the issues and says theright things. But I still don’tthink the education system issupporting us enough, which iswhy we need outside organisa-tions to go into schools,” saysEllins.

He adds that Scotland is luckyin certain ways, in that it hasgood universities, such as RobertGordon in Aberdeen and Heriot-

ENERGY ECOSSE | 5THURSDAY 18 SEPTEMBER 2008 THE SCOTSMAN

last 12 months prices [per barrel of oil]shot up from $80 or $90 a barrel to $140and back down to $100. This has made itvery difficult to value things,” he says. “Inthe lead-up to that spell, the oil price wasmore stable and there were lots of buy-ers chasing very few assets. It appearsthat both sellers and buyers are saying,‘let’s see how it settles down in order tovalue things sensibly’.”

But activity based on internationalprospects remains strong, he says. “Ithink Aberdeen may pull off its usualtrick of being counter-cyclical to theeconomy. So long as the oil price staysnorth of $80 a barrel, there is enoughmoney to be made to attract capital.”

tained higher level over the last coupleof years and there continues to bescarcity of resources. Companies haveseen very high demand for their ser-vices,” he comments. “They are generat-ing strong cash flows. That obviouslymakes them attractive for acquisition.”

But Sheils does sound a cautionarynote. Gaining the same banking termsand levels of debt finance available pre-credit crunch and property slump willbe more difficult on leveraged deals,which will inevitably affect sale price.

Valuation can be difficult in currentconditions, agrees David Sheach, man-aging partner of Stronachs LLP, whichhas a noted oil and gas law team. “In the

The North Seamay be seen asa maturemarket, butservicesuppliers, suchas Triton, topright, havehuge globalopportunitiesPicture: CraigStephen

Watt in Edinburgh, which un-derstand the energy industryand its training requirements.

“Young people are wanting tocome into the sector these daysand there are some very goodrecruits coming through. Butyou can only bring traineesthrough at a certain pace,” Ellinspoints out.

“That said, there are some veryclever people in the business andthere are now opportunities forpeople to work past retirement.Age isn’t an obstacle in this busi-ness these days as long as you’rehale and hearty.”

Another organisation whichis working hard to solve theproblem of the skills gap isOPITO – the Oil and GasAcademy. It has been formed bymajor players in the sector in thenorth-east who have pooledresources to create an employer-led, industry-funded body

aimed at developing the work-force.

With the subsea sector aloneestimated to be short of morethan 6,000 people, there is apressing need for solutions. An-nette Thomas, OPITO’s UK busi-ness development director, saysthe sector needs to show young-sters how job opportunities canbe exciting. She says: “We’regoing to work with the ScottishCurriculum for Excellence andare providing support materialsbased on things that go on in theindustry.”

Plugging the skills gap on itsown is not enough – in a boom-ing and fiercely competitivemarket, companies need to re-tain staff as well as train them.

“To keep people, companiesneed to be inventive in what theyare offering,” says Ellins. “Moneyis important, but so is lifestyle – anine-day fortnight, perhaps, or

extra holidays, or a friendly andgood working environment in anice location.”

Another danger point withthe potential for losing staff iswhen they travel abroad to work,especially to projects in develop-ing countries.

“There can be a culturalchallenge over issues such ashealth when people go to workabroad,” says Dr Oliver Lo, amedical director with thecorporate assistance specialistInternational SOS.

“In emerging economies, thelevel of professional medicalskills may not be on a par withdeveloped countries. People un-derstand this and have no prob-lem about something like seeinga GP, but if they suddenly startgetting things like chest pains,they’re going to wonder ifthey’re in the right place.”ANDREW COLLIER

8 | ENERGY ECOSSE THURSDAY 18 SEPTEMBER 2008THE SCOTSMAN

Why the priceof oil and gasis sure to flareever upwards

SOME TIME in 2005, the UK passeda milestone, the effects of whichare now being noticed by peoplewho use gas in their homes. In

that year, after a third decade in whichBritain had been self-sufficient innatural gas due to the North Sea finds ofthe 1960s and 70s, this country became anet importer of gas once again.

In fewer years than we might care toimagine, this will also be true of oil. Theimpact of our failing carbon resourceson consumers has already begun to bitewallets hard, and long-term trends aswell as plain common sense suggest theeconomic impact will be tougher yet.

People are genuinely worried abouttheir power costs and, while a greatmany consumers are also concernedabout issues such as global warming,overwhelmingly it is the price of gas andpetrol which is causing anger and bewil-derment among the citizenry.

Consumers have seen petrol pricessoar by 30 to 40 per cent, then fall backagain, though not to pre-rise levels. Gasprices have shot up by 40 per cent andmore in 12 months as suppliers react toglobal markets which have seen whole-sale prices of gas almost double in thelast year.

Why is the market so volatile? Whydid the increase in petrol and gas pricescatch so many people on the hop? Howmuch higher are prices going to go?

The National Housing Federationrecently forecast that the averageenergy bill for a gas-dependent housecould rise to more than £1,400 next year,up from a “mere” £676 in 2005. Thatmeans one in four British householdswill be in “fuel poverty”, defined asspending more than 10 per cent onenergy. The trend, it seems, is pricesheading ever upward.

The reasons for the price volatility aremany and complex, but one of them isthe fact that Britain is fast losing the pro-

tection of having its own carbon-basedresources.

Our natural gas resources in theNorth Sea are running out fast. Statisticssuggest that by 2010, we will need toimport 40 per cent of our gas. By 2020,that figure will rise to 80 per cent. In anutshell, those who use gas will bedependent on other countries for theirsupply, which will increasingly come inthe shape of imported liquefied naturalgas (LNG) rather than via pipeline fromthe North Sea.

Malcolm Webb is the chief executiveof Oil & Gas UK, the leading represent-ative organisation for the offshore oiland gas industry. He warns that whilethe UK still has sizeable reserves of nat-ural gas, they are running out.

He says: “The gas market in Britaincontinues to evolve as sources of supplyand circumstances in world marketschange. While UK gas production satis-fied three quarters of our demand in2007, indigenous production is now indecline, but we must remember that 40per cent of our gas reserves still remainto be extracted.

“Alongside maximising domestic gasproduction, the UK and Europe willneed to draw gas from increasinglydiverse and more distant sources.”

Britain’s gas suppliers are now in aglobal market where countries such asSpain and China are outbidding UKfirms. Increasing demand from devel-oping countries has been stated as thebiggest cause of the price rises in gas andoil, although there is some evidencethat commodities speculators have bol-stered inflationary trends.

But surely all this could have beenforeseen years ago and action taken toensure long-term stability? Actually, itwas predicted, and the diminution ofour carbon wealth is one of the mainforces driving the government’s rush toencourage the development of renew-

able resources – as well as the fear ofglobal warming, of course.

But wind turbines are not being builtfast enough, Britain’s nuclear reactorsare ageing fast, and possibly Scotland’sgreatest future source of renewable en-ergy, tidal power, is in its infancy.

Similarly, eco-friendly alternatives tothe internal combustion engine’sreliance on petrol are a long way frombecoming mainstream. For the foresee-able future, Britain is going to be relianton other people’s oil and gas and, as therecent rollercoaster ride of the price ofpetrol has shown, the global marketremains volatile.

Another reason for this volatility isthe fact that trading in oil is conductedin dollars, and fluctuations in that cur-rency are by themselves a major cause ofprice variation, caused by continuinguncertainty over the US economy.

The inevitable law of supply anddemand really does impact on house-hold bills, but many other factors do aswell. Britons should perhaps familiarisethemselves with the Strait of Hormuz,through which more than 40 per cent ofthe world’s oil trade passes. If the stand-off between the US and Iran deterio-rates, there could well be disruption totanker traffic through the Strait, and oilprices will rise massively overnight.

But the gas price rise is an immediateproblem. Paul Dimond, operationsdirector at UK Oil & Gas, explains thebackground: “The UK gas market is verycomplex,” he says. “We have our ownindigenous source which provides themajority of gas at the moment, and mostof the rest comes from Norway. Theyalso supply the Continent, and most ofthe continental buyers are looking forlong-term fixed amounts with escal-

ation linked to oil. Because we are a con-nected market with the Continent, witha pipeline flowing both ways, we areinextricably linked to the market.

“We have a very flexible spot pricemarket in the UK, whereas in the EU it ismuch more rigid. They are two verydifferent markets supplied by varioussources, including LNG supplies.

“Gas used to be such a local market,but with the volumes of LNG flowingaround the world, the gas market nowhas much more of a global element to it.When it was all point-to-point pipelineit was much more of a local market withfixed contracts of long duration.”

Volatility will continue, then, and UKconsumers of oil and gas will perhapspay more attention to foreign news, asthere is no longer any doubt that whathappens in one corner of the global vil-lage can seriously affect your income.

ONE OF the most interestingpresentations at the recentScotland’s Energy Futureconference in Edinburgh was byDavid Socha, principalconsultant in energy, utilitiesand telecoms for Logica.

Socha’s main point is thatenergy consumers, particularlydomestic ones, usually onlyworry about one aspect of theirenergy supply – price.

It’s fairly clear that in the not-too-distant future, many moredomestic energy consumers

may have “micro-generation”,using renewable energy sourcessuch as perhaps solar panels or awind power generator.

Another possibility is thatconsumers could also tiethemselves into a local network,supplied by a small generator –using renewable sources, ofcourse.

At this point in time, Ofgem(the electricity and gasregulator) is activelyencouraging increasedconnection of distributed

generation, but Socha pointsout that there’s no real “green”benefit if customers powered bylocal generation are alsopermanently connected to thenational distribution networkand large-scale generation, withthe same security of supply theycurrently enjoy, just in case theirlocal scheme might fail.

Socha says: “The logicalconclusion to this argument isthat, in future, consumers maybe able to choose to balance thecost of energy against how

secure their supply is. At oneextreme, no connection to thegrid and, therefore ‘free’ energyfrom their own generation andat the other extreme, double-price energy, with low-carbonhome generation when thewind blows, but a guaranteedback-up from the grid when itdoesn’t. Are consumers readyfor this?” As Britain dependsmore and more on volatile oiland gas markets, it’s a questionmore and more people arestarting to ask.

Balancing the cost of energy against the security of supply

Gas prices shot up by 40 per cent and more in 12 months as suppliers reacted to global markets Picture: Getty

The UK’s failing carbon resources are biting walletshard – and things can only get worse, says BobMagill

ENERGY ECOSSE | 9THURSDAY 18 SEPTEMBER 2008 THE SCOTSMAN

Nuclear triggers a mixed reaction

NOW is a busy time forthe various consortiawho have submitteddesigns for the UK’s

new generation of nuclearpower facilities.

The general assessment pro-cess that will pick the winningdesign is scheduled to take threeyears, but there is still much to doand the commercial stakes hereare huge.

In September, WestinghouseElectric Company, part ofToshiba, signed agreementswith BAE Systems, Rolls-RoyceGroup and Doosan Babcock,which would see all three in-volved in building the Westing-house AP1000 nuclear reactor inthe UK if Westinghouse’s bid issuccessful.

To improve its bid in the eyesof the UK Government, Westing-house has indicated that itwould expect to see somethinglike 80 per cent of the construc-tion work provided by UK com-panies. The three designs up forconsideration are the EDF/ArevaEuropean Pressurised Reactor(EPR), the GE ESBWR and theWestinghouse AP 1000,

However, one angle that is notbeing given much air time orvisibility – rather oddly so giventhe current interest in energysecurity – concerns the globalpressure on uranium stocks. In2005, a report by the Asia PacificFoundation of Canada antici-pated a 45,000 tonne shortage ofuranium through the nextdecade caused by a surge indemand from China.

John Busby, a nuclear fuelsexpert writing on the websitewww.after-oil.co.uk, points outthat France’s uranium mines arealready worked out and, sinceFrance gets 78 per cent of itselectricity from nuclear, thisleaves it in a perilous positionwith respect to sourcing suffi-cient uranium to meet its energyneeds in the medium term.

The problem, Busby argues, isthat across the world uraniummining is rapidly runningthrough the easy-to-get-at ore,and is having to go deeper anddeeper, and to mine ore of in-creasingly dubious purity, tomeet demand. “In Canada, theleading supplier of uranium,two mines have closed and twoof the three operating uraniummines have passed theirHubbert’s Peaks.” Hubbert’s Peakis the point on the graph thatmarks the apex of world oil pro-duction – the oil sector isalready beyond that point andso, now, is uranium mining.

Big users of uranium, such asthe United States, which uses 30per cent of the world’s supplyand mines just 8.4 per cent ofthat, use recycled uranium fromdecommissioned weapons as asecondary source, but that is verymuch a finite source. As an aside,Hubbert himself saw nuclearfusion, using deuterium fromthe world’s oceans, as a way ofgetting “astronomical levels ofenergy resource”, but was hugelyannoyed by the world’s failure tofinance research and develop-

ment into fusion. He finallycame to see solar energy as themost obvious way for the worldto go in a post oil era and thoughtnuclear should be phased out asreactors reached the ends oftheir design lives (see www.-hubbertpeak.com).

Busby’s careful analysis showsthat the lower the grade of ura-nium ore, the more energy onehas to spend to mine it, and veryrapidly, a point is reached wherethe idea that nuclear is a “clean”technology becomes laughable.The nuclear industry, he says,frequently points to the fact thaturanium is present in phos-phates and seawater, which pro-vide a vast potential reserve.However, Busby reminds us, it isonly present in very low concen-trations.

“The energy required to ex-tract it would exceed many timesthe energy obtained from anynuclear power resulting, and thecarbon emissions would bemassive,” he notes.

As and when the UK pushesahead with nuclear new-builds,it may well find itself runninginto a skills shortage, since Chinahas plans for at least 24 newnuclear plants for immediate ornear-immediate construction,and another 76 are planned. Thatprogramme dwarfs the UK’s pro-posal for 10 new plants and will

pull in a hefty slice of the world’snuclear-build skills base.

Andy Renton, head of energyand utilities at Dundas & Wilson,and Hamish Lal, the partnerleading the firm’s nuclear initia-tives, say the big risk for nuclearis that the government will failto find a way to allow it tohappen in a timescale thataccommodates the energy gap.

“If the energy gap starts to bitebecause existing plants come tothe end of their lives, and new gasand coal generation comes intoplay to meet base-load needs,then the danger is that nuclearwill go back onto the backburner, so to speak,” they say.

However, in their view, thereseems to be an inevitabilityabout the nuclear new-builds.Renton says: “We will probablystart seeing a new generation ofnuclear power stations goinginto production around 2017.Strategic site assessments andthe environmental studies aremoving ahead slowly, but the bigfrustration right now is aroundthe progress of the planning bill,which is moving through thecommittee stage very slowly.”

Stand by for a newgeneration of powerstations – assumingfuel and skills canbe sourced, writesAnthonyHarrington

Supplies of easy-to-get-aturanium ore are dwindling.Above: Westinghouse’sAP1000 reactor

10 | ENERGY ECOSSE THURSDAY 18 SEPTEMBER 2008THE SCOTSMAN

“It seems that whichevercandidate wins, the US isirrevocably heading for amove away from fossilfuels at the gas pumps”

Bear with a sore head still a safe bet

ENERGY policy ranks high on thelist of campaign issues for bothUS presidential candidates,Barack Obama and John McCain.

The two are united in wanting to weanAmerica off its dependence on im-ported oil.

For McCain, typically, the emphasis ison oil security. “Dependence on oil pro-vides direct support to our enemies andthreatens the peace,” is one of his coreslogans. So McCain plans to “lead theeffort to promote energy independenceand to cut off the flow of oil wealth torepressive dictatorships like Iran.”

This kind of thing goes down wellwith the Republican right, since itdoesn’t threaten America’s own oil in-terests, and anything that bashes Iran or“brutal dictators” gets the conventioncrowds a-cheering and a-waving.

For Obama, America’s dependenceon oil is also “a threat to our nationalsecurity, our planet and our economy”.Like McCain, he sees breakthroughs intechnology, specifically in hybrid vehi-cles, battery-powered cars and bio-fuels, as the way to go. So at one level itseems that whichever candidate wins,the US is irrevocably heading for a moveaway from fossil fuels at the gas pumps.

Both candidates show some aware-ness of the fact that many experts areblaming the current record increases infood prices around the world on the factthat agricultural resources are beingshifted, by the sheer strength of Amer-ica’s emerging demand for bio-feed-stocks, away from food crop to fuel cropproduction. Revving up the biofuelsmotor with this backdrop seems sure tocreate more than a few challenges. Butboth are committed to ramping up “sus-tainable” biofuel production.

There are huge differences in the tonestruck by the two speakers on energy.Obama sees the Republican-dominatedWashington of the Bush Presidency as“the enemy”. McCain appears to see theoil-producing nations of the MiddleEast as the real foe. This difference feedsthrough into their energy policies.Obama attacks the oil interests thatbacked the Bush campaign ofyesteryear. He wants to introduce awindfall profits tax on US oil com-panies to fund government handouts of$1,000 this winter to hard-pressed USfamilies faced with rising heating bills.

McCain doesn’t have plans for asmash-and-grab raid on oil companyprofits, of course. But both want to accel-erate all aspects of America’s domesticoil and gas production, including open-ing areas of environmental sensitivity,such as Alaska and other sensitive off-shore sites. With just 5 per cent of theworld’s oil reserves, America can never

meet its energy demands on its own, butboth candidates see increased produc-tion as a way of damping down pricerises and reassuring the electorate.

Obama wants to introduce a “use it orlose it” approach to the domestic explo-ration assets US oil companies havebeen granted. He has also pledged tospend a massive $150bn over 10 years to“catalyse private efforts to build a cleanenergy future”. This initiative, he claims,will help to create an additional fivemillion US jobs.

Through technological advances inthe car industry and in heating, he saysthe country could save more oil annu-ally, within ten years, than it currentlyimports from the Middle East andVenezuela combined. He also wants theUS car industry to build a million “plug-in hybrid cars” capable of doing 150miles per gallon of petrol, by 2015.

The renewables industry gets a look-

in too. Obama says he wants to ensurethat 10 per cent of the country’s electric-ity comes from renewable sources by2012 and 25 per cent by 2025. In a sharpdeparture from the Bush administra-tion’s policy over the last eight years, hewants to implement a programme tocut US greenhouse gas emissions by anastonishing 80 per cent by 2050. If thisbecomes policy, US companies will facea huge challenge to stay price competi-tive as they implement the changesneeded to get anywhere near such a tar-get. It would certainly give environmen-tal organisations a big fillip in their driveto get big business to green up its act.

McCain likes to focus on the US’s run-away consumption of Middle East oil asthe core challenge. “Since 1973, theUnited States has gone from importingsix million barrels of oil a day to 12million barrels per day with petroleumpayments comprising 41 per cent of the

US trade deficit ($293bn of $759bn),” hesays. About one third of the US’s oil im-ports come from Canada and Mexico,both of which are friendly states. Mc-Cain wants to lift the federal govern-ment moratorium on about 18 billionbarrels of reserves and free them up forimmediate production.

He also intends to boost the US auto-motive sector’s attention to bringingdown car emission rates, through a sin-gle $5,000 tax credit to every customer

who buys a zero emissions car, and toprovide decreasing levels of tax creditsas the emissions rise from zero. He plansto stimulate work on battery researchthrough a $300m prize for a winningcommercial design of battery for a plug-in hybrid or full electric car.

He is also committed to trying to stopspeculation in oil by the commoditymarkets. He wants the regulations gov-erning the oil futures market to be“tightened”, though he wisely refrainsfrom suggesting how this could be donewithout the law of unintended conse-quences cutting a swathe through theUS commodity market system. He isalso committed to upgrading the USnational electricity grid to pave the wayfor the electric car of the future.

Like Obama, he wants to introduce a“cap-and-trade system” to limit green-house gas emissions while encouragingthe development of low-cost compli-

THERE are two opposed views ofRussia’s credibility today as astable supplier of oil and gas to

Europe. There are those who point to itsheavy-handed approach to its mini-warwith Georgia and warn that the Russianbear is not to be trusted. Those who takethis view stress the dangers inherent inEurope’s dependence on Russian gas toheat homes and drive manufacturingfacilities.

On the other hand, there are thosewho bother to look at Russia’s record as asupplier, going back to the height of the

Cold War, and what they find is a nearunblemished record of contract deliv-ery. When asked about the likelihood ofRussia cutting off supplies to the West ifthe European Union imposed somekind of sanctions regime followingRussia’s recognition of Georgia’s break-away region, Russia’s deputy prime

minister, Igor Sechin, who is also thechairman of Russia’s largest oilcompany, Rosneft, was quoted by theRussian State News Agency as saying:“Even during the Cold War, regardless ofpolitical or any other circumstances, theSoviet Union always fulfilled its con-tractual obligations to supply Europe

with energy, and Russia, a responsibleand reliable partner, adheres to thesame principle.”

Of course, that is only reassuring forthose who believe him. Not a lot thatRussia said about its Georgian adven-ture was that credible in Western ears.Since then, the Russians have gone out oftheir way to say that they will keep theDruzhba pipeline pushing oil suppliesthrough to Europe.

The point about Georgia, apart fromit being a pro-Western state, is that it is akey oil and gas through-route and spatsbetween it and Russia that involve mili-tary hardware and high explosives quiterightly give the West the jitters.

Still, Russia’s economy is hugelydependent on the flow of oil and gasexport revenues. According to Inter-

national Monetary Fund estimates, thecountry gets about 64 per cent of itsexport revenues from the sector. The oiland gas sector is now very heavily statedominated. In what amounts to arenationalisation programme, foreign-owned companies have been effectivelysqueezed out or marginalised. Howeverthat leaves Russia with an antiquatedpipeline network that the governmentis going to have to spend some of itsoil wealth renewing. Its current projectis the 4,300 kilometre, $12bn Taishet-Nakhodka pipeline to channel 80million tones of oil annually to Chinaand the Asia-Pacific market.

With those kinds of investment inplace, Russia cannot afford to cultivatea reputation as an untrustworthysupplier.

Presidential candidatesBarack Obama and JohnMcCain do agree on oneissue – the energy crisis,writes AnthonyHarrington

Run-ins with its neighbours make the West nervous,but Russia’s supply record is good, writes GarthWood

Power takescentre stage

of US politics

ENERGY ECOSSE | 11THURSDAY 18 SEPTEMBER 2008 THE SCOTSMAN

Obama and McCainstrike very differenttones on the issue ofenergy but thesubstance of whatthey say is broadlysimilar, bothrecognising theneed for USconsumers toreduce theirdependency onimported oilPictures: Reuters/AP

ance options. As he explains, under acap-and-trade system, market partici-pants are allotted total permits equal tothe cap on greenhouse gas emissions. Ifthey can invent, improve, or acquire away to reduce their emissions, they cansell their extra permits for cash. The ideais that the profit motive will act to co-or-dinate the efforts of venture capitalists,corporate planners, entrepreneurs, andenvironmentalists and will spur themon to reduce emissions. McCain says hisadministration would aim to get to 60per cent below 1990 levels by 2050.

With both candidates making this acentral plank of their energy policy,America looks sure to set off in an en-tirely new direction post Bush. The dayswhen US industry could expect theWhite House to soft-pedal on the envi-ronment, thus saving them from sub-stantial expenditure on reducing theiremissions, should soon go up in smoke.

As Americans prepare for the volume to be cranked up on the presidential election campaigns of Republican John McCain and theDemocrat’s Barack Obama, which is the party of choice for voters committed to sustainable energy policy?

Senator McCain’s running mate, the self-styled “pit bull terrier with lipstick” Sarah Palin, has taken away much of the issues-basedmedia coverage, a target, say her supporters, of Democrat slur tactics on her personal and political background.

It has been an unintentional veil over policy issues of international importance. For the record, then, here is where eachcandidate stands on energy and global warming.

Vladimir Putinexamines plansfor Russia’s oilpipeline to theFar East

★ FUELING THE DEBATE: US DEMOCRATIC AND REPUBLICAN PARTY POSITIONS ★

DEMOCRATS – OBAMA...★Is pushing a ten-year $150bnprogramme encouragingclimate-friendly energysupplies, funded by businessesbidding for a “right to pollute”★Wants mandatorycaps on greenhouseemissions★Supports tougherfuel emissions targets★Wants a limitedincrease on offshoredrilling, with none in theArctic reserve

★Proposes windfall profits taxon large oil companies, payingfor a rebate in energy bills of up

to $1,000 for domesticusers

★Opposedsuspension of thepetrol tax★His globalwarming plan would

increase energy costs★Is content to tap the

country’s strategic petroleumreserve for short-term relieffrom high energy costs

REPUBLICANS – McCAIN...★Led the Senate effort to put acap on greenhouse gasemissions, going againstPresident Bush★Favours tougher fuelefficiency measures★Wants a planslashing greenhouseemissions by 60 percent by 2050★Supports morenuclear power,setting asidefederal money to

help build 45 nuclear powerreactors by 2030★Proposes more offshoredrilling, except in the ArcticNational Wildlife Refuge★Proposed suspending the

current 18-cent a gallonfederal tax on petrol – but

the idea failed to gainbacking★His plans to reduceAmerica’s contribution

to global warmingwill increase energycosts