Whitehall Prepares For Major Cuts Under Coalition Government

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Imagine that you are a minister with an important decision to take. The decision is finely balanced and you have your doubts about costs and the commitments on deliverability. You are inclined to say no. But hold on – the firm involved employs your wife as a consultant which brings in a helpful £ 40,000 a year. If you take the wrong decision the consultancy is very likely to come to a rapid end.

Or consider that you are a moderately senior civil servant who can see your career coming to an end as one round of spending cuts follows another. There is a company, already successful, and if it expands further it will need experienced staff. You like them and they like you, as they have made clear over a couple of very pleasant lunches. The only slight problem is that in order to expand they need a decision taken on which your advice is likely to be decisive. Read more

BRAZIL-ROUSSEFF-CONSTRUCTION-SALONThe corruption investigation initiated by the Brazilian prosecutor, Rodrigo Janot, into 54 individuals including leading politicians is just beginning. The allegations behind the inquiry concern the diversion of huge amounts of money from Petrobras, the state oil company.

No one know how much money is involved, which means that no one knows what the company is now worth.

Petrobras’s share price has fallen by 44 per cent over the last year, with some some $90bn wiped off the value of the company in just six months.

Part of that is due to falling oil prices, but more is the direct result of the company’s internal problems. There are no signs yet of the ambulance-chasing investors who like to pick up undervalued assets for a song piling in. They must think, probably with good reason, that the worst is yet to come.

In the US a class action law suit has begun. The scandal could yet bring down the Brazilian government, not least because for most of the period when the corruption is said to have happened Dilma Rousseff just happened to chair Petrobras. It could also be a deep embarrassment for the audit firms who seemed to have missed what was happening.

The question for the moment is what happens now to Petrobras itself. Read more

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I have never given much credence to the idea that an international agreement on climate change capable of establishing a global carbon price was likely to be reached – either in Paris this December or anywhere else – anytime soon.

If Europe, which is way ahead of the rest of the world when it comes to climate policy, can’t set its own carbon price, what hope is there that the US, India and all the others will?

As a result I’ve never taken seriously the view that a vast amount of energy investment by the oil and gas companies will be left stranded as carbon-generating fuels are priced out of the market. The argument has always felt like wishful thinking. If everyone obeyed the Ten Commandments there would be no prisons and the police forces of the world would be redundant.

But, and it is a very important qualification, change doesn’t come just through legislation and international treaties. Technology is arguably much more important and there is growing evidence that some fundamental changes are coming that will over time put a question mark over investments in the old energy systems. Read more

The borders drawn by Churchill and other politicians in the aftermath of the First World War have shaped the Middle East for almost 100 years. Now, however, sectarian upheaval combined with the US withdrawing from day-to-day engagement suggests that those boundaries could be redrawn as a result of the shifting balance of power on the ground. That process has started in northern Iraq and won’t stop there. The redrawing of the maps will have profound implications for the energy business. Read more

The next few months will be a critical period in the history of the North Sea. After 50 years which have seen 42 billion barrels of oil and gas produced, the province could now see a significant proportion of activity brought to a premature end. Fields which are uneconomic at current prices could be closed down and then decommissioned. Much of of the oil and gas which remains ( between 12 and 24 bn barrels ) could be left behind, undeveloped and valueless. For some fields, such as Brent, the exhaustion of reserves makes decommissioning inevitable. For others, however, we should be finding a way to maintain operations and to ensure that the resources in place can be developed when prices rise again. Read more

Saudi Arabia's newly appointed King Salman meets with US President Barack Obama

Saudi Arabia's newly appointed King Salman meets with US President Barack Obama  © SAUL LOEB/AFP/Getty Images

Having talked vaguely for many years about the possibility of developing nuclear power as an alternative source of energy, it seems that Saudi Arabia under its new leadership may finally be taking steps towards what would be one of the world’s largest nuclear building programmes over the next decade. Read more

The urgent attempts by Europe’s leaders to negotiate a solution to the crisis in Ukraine represent an open acknowledgement that the policy of sanctions has so far failed. Mr Putin continues to destabilise the Government in Kiev and to undermine its authority in the east of the country. They may also reflect a growing realisation that sanctions are in danger of backfiring. Greece faces a serious debt crisis but at least the debate on how to resolve that crisis is now being held in the open. we know the options and the risks. In Russia, however, there is another debt crisis which is going unmanaged and which could easily get out of hand. Read more

News has diminished value if it comes from far away. Just as terrorism gets more coverage if it occurs in Paris, much of the analysis of the consequences of falling oil prices has focused on the US shale industry and the North Sea. But spare a thought for some of the other losers, starting with Nigeria where the fall will not only further damage a fragile state but will pose risks which could affect all of us before too long.

It would be good to be able to be optimistic about Nigeria — a country which in the past has been listed as one of the possible economic powerhouses of the 21st century. Remember MINT (Mexico, Indonesia, Nigeria and Turkey), the successor grouping to the BRICS (Brazil, Russia, India, China and South Africa)? Great acronyms invented by the always imaginative Jim O’Neill, but in both cases the groupings look a little shaky and performance is well short of promise. Nowhere more so than in Nigeria, which provides a sharp reminder that even if Opec is broken, oil is still vulnerable to political upheaval. Read more

Meet EVA — the latest racing car. EVA has an elegant shape, with aerodynamics worthy of any of the cars which race in Formula One. The difference is that EVA is solar powered. Read more

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One of the many lessons to be learnt from the dramatic developments in the world energy market over the past six months is that outcomes are driven primarily by economics – often at the micro level. Another is the extent to which the market, in its rough and ready way, is linked globally and across the range of fuels. In the oil market, for example, a mild downturn in China upset expectations and started to pull down oil prices across the world because China has been the main engine of demand growth. Once the fall began, it turned out that no one had the power to call a halt. The result has been a fall beyond all expectations, with consequences across the world – from Libya to Angola, from Russia to Mexico and Venezuela. In the coal market, prices fell globally because shale gas was pushing coal out of the US power sector and because of Chinese import tariffs. Politicians in one country or another can try to cut themselves off from the underlying economics, but they rarely succeed for long. The economic impacts are not limited to the oil and coal markets. A set of changes beginning in the US is set to transform the global petrochemical business. A surplus of ethane, driven by shale gas development, is undermining the status quo. Read more

View inside the Hunterston B nuclear power station

Inside the Hunterston B nuclear power station in Scotland  © Jeff J Mitchell/Getty Images

2015 will be a crucial year for the nuclear industry across the world. Japan is expected to start bringing its nuclear reactors back on stream — four years after the Fukushima disaster. Elsewhere, a dozen different countries are considering whether or not to commit to new plants, with the decisions further complicated by the fall in the price of competing fuels such as coal and natural gas. Much depends on what happens in the UK, where the progress of proposed new developments will signal whether nuclear can be competitive as a long term source of energy. Read more

The process of adjustment in the energy market is far from over. After the dramatic halving of the oil price since June there is now every chance that natural gas will follow suit. Indeed the fall has already begun. During December, US natural gas prices fell below $3 per million British thermal units for the first time since 2012. But that is just the beginning.

Two further factors suggest a continued, and worldwide decline in 2015. First, in Europe in particular, gas supply contracts — for instance from Gazprom into Germany — are tied to the oil price. The link is historic and is gradually giving way to direct gas-to-gas competition. But the older, longer term contracts remain in place for now and that means that a radical downward shift in prices will occur through the coming year.

Secondly, after years of uncertainty since the 2011 Fukushima disaster, there are signs that Japan is ready to accept the gradual reintroduction of nuclear power. The initial steps will be small — perhaps just one or two reactors at first. But even that will be sufficient to undermine gas prices in Asia which rose at times to almost $20/mmbtu as Japan was forced to substitute imported gas for nuclear. Each nuclear station brought back online will reduce demand for gas, and just as prices surged in 2011 now they will slip back. A Reuters survey of some serious analysts, including Wood Mackenzie, forecast a fall of up to 30 per cent in Asian natural gas prices in 2015. Read more

Wind turbines in Peitz, Germany.

Wind turbines in Peitz, Germany © Sean Gallup/Getty Images

Forget Opec. If cartels can’t control output, they can’t control prices and in due course they fall apart, usually with a great deal of ill will in the process. The evidence of the last six months is that Opec can’t control the market — ask yourself how many Opec members want to see a price of $60 a barrel for their oil. Some in Saudi Arabia think a low price can squeeze out competing suppliers, but that feels like a justification after the fact of a fall which they can’t control. The question now is how the process of adjustment to the new price level will work. Read more

  © Samuel Kubani/AFP/Getty Images

There were two contenders for this year’s award. The most obvious, and certainly the man who has won the most coverage in this (and every other) publication, is Vladimir Putin. Mr Putin has certainly been highly visible, but he has actually changed very little in the energy market. Russian gas still flows to Europe and to Ukraine, helped by western payments of outstanding debts. Europe may be rethinking its energy mix and opening new and more diverse sources of supply, but any change will be very gradual. Russia will trade more with China and India, but that was coming anyway and is a natural and logical balancing of supply and demand. Read more

Russian president Vladimir Putin greets Chinese president Xi Jinping at the Apec meeting in Beijing last month © AFP

Russia’s President Vladimir Putin heads to New Delhi next weekend and will sign a deal with India on energy supply, marking the latest step in a remarkable set of developments that will reshape the international energy business and particularly the natural gas market for years to come. Read more

As Martin Wolf has noted in the Financial Times, world oil prices have fallen 38 per cent since the end of June. A Martian listening to George Osborne’s Autumn Statement would have no idea of this. For consumers lower oil prices can have positive effects but for mature producing provinces they are very damaging and could be fatal.

Mr Osborne proposed a cut in the supplementary charge on oil company profits by 2 percentage points from 32 per cent to 30 per cent. There is to be a “cluster” area allowance to help the development of small fields which sit next to each other. The ringfence expenditure supplement is to extended from six years to 10. Wow! That will really keep the investment flowing. Read more

One of the most exhilarating aspects of working in the energy business – at least for a humble economist such as me – is that companies think and act on a timescale measured in decades. Projects are built to last for 30-40 years, and often longer still. This is in sharp contrast to the government where timescales are measured in hours and where long-term means the not-too-distant horizon of the next election. It is also in contrast to sectors such as telecommuications where the pace of change is so fast that thinking more than five years ahead makes no sense. But, as the current slide in oil, gas and coal prices demonstrates, a long-term perspective does not make investment judgments easier.

Most oil and gas fields, coal mines, nuclear power plants, wind farms and other energy sources are designed to last for decades. The construction time can be long: a liquefied natural gas plant can take six or eight years; a new nuclear power station a decade or more especially if the technology is unproven or excruciatingly complex. Payback only comes when the plants have been on stream for several years. Beyond that, however, the operating costs are usually low and the cash flow is strong and secure. Or, at least it should be. Read more

CEO of energy company Total, Patrick Pouyanne, speaks during the Oil and Money conference in London on October 30

Patrick Pouyanne, the new chief executive of Total, speaks at a conference in London on October 30  © BEN STANSALL / AFP / Getty Images

The guard is changing in the international energy sector. Shell, Total, BG, EDF, Areva and a host of other companies have appointed — or are about to appoint — new leaders. There are more to come, including strong rumours of a change at Gazprom as it struggles to cope with the implications of sanctions, a shrinking market and sector-wide dividend cuts, and as other companies adjust to the sharp fall in prices and realise that there are no contingency plans to cope with sub-$80 oil. Read more

BP oil platform in the North Sea  © Reuters

After 40 years of production that far exceeded original expectations, the North Sea oil and gas industry is in serious jeopardy. At the beginning of the year, there was a degree of optimism following Sir Ian Wood’s report and the establishment of a new, more interventionist regulator considered capable of driving a further wave of activity. But with the fall in oil prices over the past four months, the mood has changed dramatically. Read more

A solar thermal research facility  © Michael Hall/ Getty Images

Given the seriousness of the messages contained in last week’s report from the International Panel on Climate Change, one might expect some sense of urgency around the search for solutions. Regrettably, that is not the case. Governments and campaigners especially in Europe seem rigidly focused on pursuing the holy grail of a global deal, under which the world’s major economies would move together in a synchronised process of decarbonisation. The futility of that approach is evidenced by the fact that Europe itself has been unable to set an effective carbon price and has done almost nothing to advance the technology of carbon capture and storage (CCS), which is one of the few ways in which emissions could be managed. Read more