FT SPECIAL REPORT

Energywww.ft.com/reports | @ftreportsMonday April 20 2015

Inside

Sun and wind prepareto competeRenewables ride wave ofsuccess as prices falland spending jumpsPage 2

InnovationEfforts are afoot to lowerthe cost of extracting anddelivering oil and gasPage 2

US nuclearBattle lines drawn asObama moves to cutgreenhouse gasemissionsPage 3

Coal remainscompetitiveIndustry hopes there isstill a lucrative marketfor the black stuffPage 3

A sk anyone running a globalenergy company how farthe oil price will fall andyou will probably get a wrysmile inresponse.

Little wonder when the market hasturned on its head. Opec’s unexpecteddecision in November not to cut outputin the face of a US supply glut and weak-eningdemandinChinatriggeredacrashnobodypredicted.

Saudi Arabia, Opec’s de facto leader,has said it will no longer play its tradi-tional role of swing producer. “Whetherit goes down to $20, $40, $50, $60, it isirrelevant,” said the kingdom’s oil min-ister Ali al-Naimi in December. Theeffectof thosewordshasbeentoremoveany implicit price floor. Since then,internationally traded Brent crude hashit a six-year low of $45 a barrel. It isdown 50 per cent from last summer’speak and within touching distance ofthe financial crisis nadir of 2008. Areturnto$100-plus levels looksremote.

Therepercussionsof theslideareonlynow starting to be felt. A wave of corpo-rate takeovers could reshape an energyindustrybatteredbytheprice fall.RoyalDutch Shell’s agreed £55bn offer thismonth for UK-based BG Group, the big-gest energy deal in more than a decade,mayusher infurtherconsolidation.

The winners are likely to be theworld’s big consuming economies: theUS, Europe and China. Households willenjoy greater purchasing power and the

fall could boost overall growth in theglobal economy. But the regions thatproduceoilwillbehithard.

Countries that rely heavily on oilexport revenues, those with limited for-eign exchange reserves and sizeablepopulations — Iran, Iraq and Venezuela,

for example — will struggle. Russia’sposition looks increasingly precarious,with its vast energy sector also affectedby western sanctions because of theconflict in Ukraine. Thousands of work-ers linked to the Canadian oil sandsindustry, one of the highest cost produc-

ing regions, have lost their jobs. Citiessuch as Calgary in Canada and Aber-deen, home to businesses operating inBritain’sNorthSea, faceableak2015.

Bob Dudley, chief executive of BP, haslikened the collapse in prices to theslump that crippled the industry in

Volatile climate puts billions at riskChristopher Adamsfinds a sectorpreparing for apainful adjustment

1986. Then, Opec decided to switchfrom a policy focusing on prices to onefocusing on market share, in effect adecisiontoallowcrudeprices to fall.

“This is a supply-led crisis,” Mr Dud-ley says, warning that companiesshould be prepared for several years oflowerprices.

Indeed, rising stocks of US crude, theproduct of America’s “shale revolution”,have almost filled tanks in the country’sstorage hub in Cushing, Oklahoma.And, even as the smaller, independentproducers which have led that revolu-tion cut sharply the number of drillingrigs used in exploration, there is no signof a reversal in US production. It contin-uestoglidehigher.

The world’s biggest oil companies arereacting. Exploration budgets for thisyear are expected to be cut by 30 percent, according to Wood Mackenzie, theenergy consultancy, as the so-calledsupermajorsaxecapital spending.

Emma Wild, head of upstream oiladvisory at KPMG, says shareholdersare demanding the majors become“leaner and more efficient” after yearsof soaring costs have eroded returns oncapital. Now, following the fall in prices,as much as $1tn of investment is at risk,saysGoldmanSachs.

The oilfield services industry is bear-ing the brunt of a wave of cost-cutting,as rig contracts for costly deepwaterexploration are pared back or aban-doned. Rates for offshore rigs have tum-bled20percent fromyear-ago levels.

Except for Shell, which is pressingahead in Alaska, drilling plans for theArctic, the next big oil frontier, havelargely been put on hold. But the scale ofthe cuts varies widely, with someexplorers such as Tullow slashing their

Continuedonpage2

On FT.comJapan’s aggressive pushon renewable energyafter the 2011Fukushima nucleardisaster has stalled

Pipeline: US crude has almost filled tanks in the country’s Cushing storage hub in Oklahoma — Daniel Acker/Bloomberg

2 ★ FINANCIAL TIMES Monday 20 April 2015

Energy

expenditure by up to 80 per cent to con-serve cash, while Shell is keeping thisyear’s spendingbroadlysteady.

Arthur Hanna, managing director forenergy at Accenture, says that much ofthe industry had expected a marketreaction to Opec’s November decisionbut that many executives were sur-prisedbytherapidityof theprice fall.

“That has led to a lot of activity toshore up balance sheets for 2015. Thesupermajors are looking at ways sharedservice co-operation could be extended:financial services, pay, treasury andbackoffice functions.”

At the same time, billions of dollars inassets have been put up for sale amidexpectations of a wave of mergers andacquisitions. Some operators are look-ing to reduce their exposure to higher-cost producing regions, such as theNorthSeaandtheGulfofMexico.

So far, not withstanding the BG take-over, predictions of transformativedealscomparable to thetakeoversof the1990s that created today’s supermajorslook overheated. Mergers on this scaleare risky and — some argue — rarelydeliverpromisedsavings.

More likely is consolidation among

Continued frompage1 smaller US explorers that borrowedheavily to finance their part in the shaleboom and which now find themselvesstruggling to meet bond repayments orare at risk of breaching covenants onreserves-based bank loans. Othersremain insulated from the effects of theslide in crude, having hedged their out-put well into this year by selling barrelsin advance at higher prices. But those hedgeswill soonexpire.

When they do, the high levels of bor-rowing could have a decisive influenceon what happens next. The stock of debtissued by oil and other energy compa-nies accounts for some 15 per cent ofleading US investment grade and high-yield debt indices. Yields on the bondsissued by riskier energy groups, whichmove inversely to prices, have risen asoil prices fell, reflecting investors’ con-cerns. That pushes up companies’ refi-nancingcosts.All thiscouldspurconsol-idation. Sarah Wiggins, a M&A partner

at Linklaters, estimates there is $180bnof “dry powder” ready to be deployed byfunds including distressed equity inves-tors. Ms Wiggins points to $8bn recentlyraised in the bond markets by Exxon-Mobil, the US giant, which has said it is“alert” tobolt-onacquisitions.

Other possible buyers include privateequity groups such as Carlyle and Black-stone, while Russian billionaire MikhailFridman has launched a $10bn fund,run by former BP chief executive LordBrowne, tohunt foracquisitions.

However, the fierce cost-cutting andscale of the corporate debt burden isalso likely to constrain production. Thereason US oil and gas output has contin-ued to grow is that producers havefocused on their most productive andprofitablewells. Intime,reducedinvest-ment and slower growth in outputshouldputafloorunderthemarket.

Standard & Poor’s forecasts a recov-ery for Brent to about $75 a barrel by2017. By then, say some analysts, it willbe the “Lower 48” — the home of USshale — that has turned global swingproducer, able to turn on and off thetapstomeetdemand.

Expect a volatile ride on the way, andapainfuladjustment for the industry.

Volatile climate puts billions at risk

£55bnRoyal DutchShell’s offer forUK-basedBG Group

$1tnThe amount ofinvestment atrisk, according toGoldman Sachs

T he past five months havebeen full of hearteningnews for the renewableenergy industry, which hasgrownusedtotheopposite.

Instead of the subsidy cuts, bankrupt-cies, trade rows and investment dipsthat dominated the sector three or fouryears ago, there have been record levelsof installations, surprising price fallsandawelcomesurge inspending.

Global investment in renewableenergy bounced up for the first time inthree years last year to $270bn, a 17 percent rise from 2013, the UN Environ-mentProgrammereported lastmonth.

A$75bnboominsolarpower installedin China and Japan drove part of thesurge,alongwitharecordamountofoff-shorewindfarminvestment inEurope.

But the more interesting aspect of the$270bn spent last year, that does notinclude investment in large hydropowerplants, is the record amount of so-calledmodernrenewables ithelpedfund.

At least 95 gigawatts of wind and solargenerating capacity was installed lastyear, far more than the 70GW built in2011, the only year when the dollaramount invested was higher — at$279bn.

That also illustrates the rate at whichcosts are falling, especially for solarpanel technology, a shift some greenpower companies claim will cause a pro-foundlydisruptiveshift.

“Solar and wind are about to gobbleup market share around the world,”says Thierry Lepercq, chairman ofSolairedirect, a fast-growing French

company that has 57 solar parks builtor under construction around theworld. “We’re generating power at lowerprices than other energy sources inChile, IndiaandSouthAfrica,”hesays.

Among the industry milestones of thepast five months was a contract thatDubai’s state utility awarded for a solarpower plant to the ACWA group fromoil-rich Saudi Arabia that will sell elec-tricity for less than 6 US cents per kilo-watt hour. That is at least 2 to 3 centscheaper than generation from gas inDubai, according to Adnan Amin, headof the International Renewable EnergyAgency. Solar panel prices havedropped 75 per cent since 2009 and thetotal installed costs of big, utility-scalesolar plants fell by as much as 65 percent between 2010 and 2014, accordingtotheagency.

Those lower prices are one reason thecity of Georgetown in Texas, also famedfor its oil wealth, declared in March itwas going to become the first city in thestate to get all its electricity from solarandwindfarmsby2017.

Jim Briggs, interim city manager,says: “Georgetown Utility Services isn’trequired to buy solar or other renewa-bles. We did it because it will save onelectricity costs and decrease waterusage [used in conventional power gen-eration].”

When the industry’s history is writ-ten, today’s chapter will be called“renewable energy reaches adulthood”,says Neil Auerbach, chief executive ofthe US private equity group HudsonClean Energy Partners. “It’s a young

adult, but it is still an adult,” he adds,explaining the sector is now less relianton the government subsidies that pro-pelled itsearlygrowth.

“Also, the size and quality of the big-gest players is more meaningful,” hesays, pointing to the larger companies

emerging in the sector. They include theUS groups SunEdison, a solar and windpark developer, and First Solar, a solar-panel maker, both of which have a mar-ketvalueofmorethan$6bn.

Still, the recent fall in oil prices hasdented some forms of renewableenergy. One of the UK’s biggest biofuelplants, the Ensus factory on Teesside,was temporarily closed in Februaryamid a sharp fall in biofuel prices, whichmirrortheoilprice.

But oil accounts for a small percent-age of electricity generation in mostcountries, and is only about 1 per cent in

nations such as the US, so it is not clearthat lower crude prices will have a bigimpactonrenewablepowergeneration.

Evenso, thesector’srecentgrowthhastobeseenincontext.

In the past seven years, renewablepower (not including large hydroelec-tric plants) as a percentage of globalelectricity generation has only grownfrom 5 to 9 per cent, according to theBloomberg New Energy Financeresearchgroup.

At current rates of growth, it will takeuntil 2030 for renewables to reach20percentofglobalpowergeneration.

Offshore oil and gas fields supply muchof the world’s energy, but it is not alwaysappreciated that the very platformsextracting and delivering supplies toshore are themselves considerable con-sumersof fuel.

Larger platforms deployed in theNorth Sea can typically consume powerat a rate of 50 to 100 megawatts across alarge range of processes — including oilseparation, gas compression, waste-watertreatment,gas lifting,andtheulti-mateexportofoilandgastoshore.

One study suggests that more than aquarterofNorway’s totalcarbondioxideemissions could be attributed to NorthSea oil and gas platforms operating in itswatersat thebeginningof thedecade.

However, a combination of environ-mental lobbying, engineering problem-solving and economic calculations haveprompted the oil-rich nation to raise itsgame.

Statoil, Norway’s oil industry cham-pion, announced last month the awardof a $155m contract to engineering com-pany ABB for initial work on the firststages of a land-based power supply forthe development of the Johan Sverdrupfield — the biggest North Sea oil discov-eryofrecentyears.

In total, partners backing the schemeare budgeting more than five times thatamount to send power from Norway’sgridsystem,which isnormally fullysup-plied by the country’s abundant hydro-electricity, via a high-voltage, directcurrent cable to help fuel oil and gasextractionfrom2019onwards.

A 200km long submarine cableshould have the capacity also to poweradjacent fields scheduled for develop-ment from 2022, in line with commit-ments demanded by a coalition of Nor-wegian political parties last year tosecure public backing for the launch ofproductionfromJohanSverdrup.

The four platforms that make up thefirst phase of the development areplanned to be entirely powered fromshore by a 100MW HVDC link, withplanned production of 550,000-650,000 barrels of oil equivalent per dayexpectedtoaccount forabig jumpinthecountry’soffshoreproduction.

Other hydrocarbon operators appearto be learning that tapping grid suppliescan make reputational as well aseconomic sense — particularly whenthese supplies are derived in part fromrenewable or low-carbon sources notalways fully exploited by other indus-tries.

The first power-from-shore oilfieldcablewas installed inSaudiArabia’sAbuSafah development 50km into the Per-sian Gulf in 2003. Since then, two Nor-wegian platforms — Statoil’s Troll andBP’s Valhall facilities — have also tappedelectricity from land rather than relysolelyongasturbinesonboard.

But in spite of growing pressure fromenvironmental lobbies and economicself-interest, such energy-saving meas-ures remain the exception rather thantherule.

Offshorefields usepower sentfrom land

The US may be the world’s largest crudeoil importer, but one of its main energypolicytussles isoveroilexports.

Liberalising the 40-year-old US banon exporting most domestic crude oilhas become the subject of congressionalhearings, intense lobbying and a multi-tudeofstudies.

The debate seems curious, becausethe US still has gross crude oil imports of7m barrels a day. But the volume hasbeen dropping thanks to resurgentdomestic production. Supplies of“light,” low-sulphur domestic oil fromUS shale formations have replaced mostimportsofsimilarquality.

Opponents mobilising against the banwarn these supplies will saturate the

market, depress domestic prices andslowdownfurtheroutputgains.

The ban was passed in 1975 after theArab oil embargo crippled US fuel sup-plies. At the time, economic policyincluded price controls, and crudeexport restrictions were needed toeffect these controls, according toColumbia University’s Center on GlobalEnergy Policy. The ban restricts exportsto everywhere but Canada, with fewexceptions. For decades, the law was lit-tle more than cocktail-party trivia forpolicy specialists. US crude oil importsclimbed steadily along with domesticfuel consumption to a peak above 10mb/d in 2005, making the question ofexports irrelevant.

But it has come back into focus as oilsuppliesclimbfromstatessuchasNorthDakota and Texas. Last year, US produc-tion rose by 1.2m b/d, the largestincrease in records dating to 1900. Com-mercial crude inventories this springwereat theirhighest for84years.

“For most of the past 40 years, the

thought of exporting crude oil was notan issue. Folks had pretty much forgot-ten that when we lifted oil price controlsin the early 1980s, we forgot to lift theban,” says Robert McNally, president ofThe Rapidan Group, a Washington-basedconsultancy.

The ballooning supply is reflected inprices. US benchmark West Texas Inter-mediatehas fallentoadiscounttoBrent,the global marker. Keeping the exportbanwillwidenthisdiscountandresult in“lower US crude oil production andhigher prices for global crude oil andgasoline”, says IHS, a consultancy, in areportsponsoredbyenergycompanies.

The refining industry, the primaryconsumer of crude, says there is no glutand is investing $5bn to process an addi-tional 730,000 b/d of light crude by2016. Opening the floodgates for UScrude exports would be unfair, it argues,unless Congress also repeals a 1920 lawrequiring all tanker and barge ship-ments to go on US-flagged, US-built ves-sels. The law, called the Jones Act,

makes it more expensive to ship Texasoil to Pennsylvania than to some foreignrefineries.

US refiners may freely export petro-leum products, such as petrol and die-sel, and are doing so in record volumes.They have enjoyed fat profit margins byrefining relatively cheap US crude feed-stockintoproductssoldatglobalprices.

The White House cracked open thedoor to additional exports last year,when the Department of Commercesaid crude oil processed through a sim-ple distillation tower would qualify ashaving been refined enough for export.In practical terms, the announcementapplied to condensate, a type of ultra-light oil prevalent in the Eagle Fordshale of Texas. Since then, several com-

panies have received classifications toexport processed condensate, says JakeDweck, a partner at Sutherland, the lawfirm.Othersarerelyingontheseclassifi-cations as a precedent to export conden-satewithoutexplicitapproval.

Exports of processed condensate sofar have been modest. Yet even thesevolumes were sufficient to help driveBrent oil below $75 a barrel in thesecond half of 2014, says Colin Fenton,managing partner at BlacklightResearchandafellowatColumbia.

The White House has some scope toopen the door wider under current law.One option is to allow US producers toswap their light oil with equal amountsof heavy oil from Mexico. In late March,according to Reuters, Mexico’s state oilcompany Pemex was awaiting approvalto swap some oil. A group of senatorshas urged the White House to go furtherandallowunfetteredexports toMexico.

Ending the ban would take an act ofCongress. But lawmakers are sensitivetobeingblamedforhigherpetrolprices.

Pressure builds on US to ease crude export banOil

Lobbyists warn of glut indomestic supplies and fallingprices, says Gregory Meyer

Extraction costs

Extracting and delivering oiland gas offshore uses a lotof fuel, but some companiesare working to change that,writes Michael Kavanagh

Renewables ridewave of successas prices fall andspending jumpsMarket share Contracts in oil-rich regions showsolar andwind can compete, reports Pilita Clark

FT graphic Sources: Epia; BP ** Renewables includes solar, wind, geothermal, biomass, biofuels and waste

Consuming energy

Solar megawatt capacitySelected countries, 2013(Figure in bracketsis % change 2012–13)

0

20

40

60

80

100

120

140

2000 02 04 06 08 10 13

Rest of the world*Middle East and AfricaChinaAmericasAsia PacificEurope

* Methodology used for RoW data collection changed in 2012

Energy consumedGenerated by renewables**, million tonnesof oil equivalent, 2013 ( top 15 countries )

Cumulative installedphotovoltaic capacityGigawatts

0 1 0 20 30 40 50 60US

ChinaGermany

SpainBrazilItalyIndia

UKJapan

FranceSwedenCanadaPoland

DenmarkPortugal

US(65%)

Spain(3%)

Australia(35%)

UK(52%)

Greece(68%)

India(95%)

SouthKorea(43%)

Canada(58%)

Romania(2,200%)

1,1501,210

1,467

2,291

2,579

2,892

3,255

4,828

12,022 Japan(102%)

13,643Italy(9%)

17,600 China(161%)

18,300

Germany(10%)

35,948

Total World(37%)

139,637

France(15%)

4,632

‘Solar andwind are about togobble upmarket sharearound theworld’

Jake Dweck:Several companieshave receivedclassifications toexport processedcondensate

Monday 20 April 2015 ★ FINANCIAL TIMES 3

Energy

F ive years ago, the talk was of arenaissance in US nuclearpower.Today, thesector isbat-tling to avoid a slide back intothe dark ages. Threatened by

competition from plants fuelled bycheap natural gas, the nuclear industryis at risk of being forced into furtherretreat.

Over the past year, the threat tonuclear generation has risen up theagendaforutilitiesandregulators.

As President Barack Obama’s admin-istration moves to cut US greenhousegas emissions, with detailed regulationsof its plan for power generation due inthe summer, supporters of nuclearpower have become increasingly vocalin urging policy to support the country’slargestsourceof low-carbongeneration.

The argument is far from over, how-ever. Proposals for regulatory changesthatwouldhelpnucleargeneratorshavebeen attacked as a “bailout” for theindustryat theexpenseofconsumers.

The industry argues that nuclearpower is an essential part of the energymix that will fade away without greaterfinancial support, but regulators andpoliticiansareyet tobeconvinced.

For now, the decline of nuclear in USelectricity supply is moving slowly. Itaccounted for 20 per cent of the coun-try’s power generation in 2009, and willbe about 19 per cent this year, accordingto the government’s Energy Informa-tionAdministration.

This year is even expected to bringsome positive news for the industrywith the start-up of Watts Bar 2, sched-

uled to be the first nuclear plant to comeon line in the US since 1996. The projectwas launched by the Tennessee ValleyAuthority in the 1970s, and construc-tionwasstopped in1985butrestarted in2007. Its completion will add about 1.1gigawatts to US nuclear capacity ofabout104GW.

However, the long-delayed arrival ofWatts Bar 2 is being offset by shutdownsof other US reactors. Duke Energy’sCrystal River plant in Florida and Edi-son International’s two reactors at SanOnofre in California were shut downafter they were hit by technical prob-lems that would have required heavyexpendituretoputright.

There have also been a couple ofplants closed as a result not of technicalproblems, but of the economics of theirlocal markets. Dominion’s Kewauneeplant in Wisconsin was shut down inMay 2013, and Entergy’s Vermont Yan-kee ceased operating at the end of lastyear.

Exelon, the Chicago-based electricitygroup that has the largest number ofnuclear plants in the US, has warnedthat five of its reactors at three plants inIllinois are uneconomic, and are at riskof closing, unless the structure of thepower market that includes the state isreformed.

Some US regulators have begunmoves in that direction. Late last yeartheFederalEnergyRegulatoryCommis-sion held workshops to discuss reformsto market design and pricing structures.It has also been studying the reliabilityofpowersupplies.

Marvin Fertel, president of theNuclear Energy Institute, the industrygroup, said in February that the coldweather in the US early in 2014 hadwoken regulators up to the importanceof thereliabilityofenergysupplies.

When coal piles and handling equip-ment froze, and gas production was dis-rupted by the extreme cold, nuclearplantswereunaffected.

That lesson, Mr Fertel says, was beingacknowledged by generators, regulatorsandgridoperators.

PJM Interconnection, which runs thegrid covering a large section of thenorthern and eastern US, includingIllinois, has set out proposals for a plan,called Capacity Performance, to rewardcompanies that supply guaranteedflows of power when needed. Nucleargenerators would be among the princi-palbeneficiaries.

Another proposal to help nuclear gen-eration is the plan for a 15-year powerpurchase agreement in Ohio put for-

ward by FirstEnergy, the Akron-basedelectricity group. The state’s regulatorsare now assessing the idea, which wouldcommit utilities to buying power fromone nuclear and two coal plants ownedorpart-ownedbyFirstEnergy.

Carol Browner, who led the US Envi-ronmental Protection Agency duringBill Clinton’s presidency and was MrObama’s top adviser on climate andenergy policy during 2009-11, last yearjoined the leadership council of NuclearMatters, a group backed by Exelon,Dominion, FirstEnergy and other com-panies that works to raise awareness ofthe threat to the industry. She supportsthe campaign, she says, in part becauseof the role nuclear power plays in hold-ingdownUScarbonemissions.

“Climate change is the biggest prob-lemtheworld faces,andwecan’t justgetrid of these carbon-free sources ofenergy while we figure out how to man-age this over not just the next five years,butoverthenext25,50,100years.”

Battle lines drawnas Obamamovesto cut greenhousegas emissionsUS nuclear The country’s largest generator oflow-carbon energy fights back, writes Ed Crooks

Risky waters:Exelon haswarned that fiveof its reactors inIllinois are at riskof closingChuck Berman/Chicago Tribune

Coal is the most abundant and obviousenergy source in the world, but oppo-nents to itsusearemorevocal thanever.

It is not just concern at coal’s role increating carbon emissions — and henceclimate change — that is a problem fordemand. Economics also play a part,with coal’s competitiveness againstothertypesof fuelhavingfallen.

In the US, for example, the emergenceof shale gas has meant some coal outputhas been priced out of the market. Pea-bodyEnergy, theUS’s largestcoalminer,says falls in the price of natural gas will

cut US coal demand by 60m-80m tonsthis year. US coal demand last year wasclose to 920m short tons, says the USEnergyInformationAdministration .

Coal still provides about 30 per cent ofglobal primary energy needs and gener-atesmorethan40percentof theworld’selectricity, according to the World CoalAssociation, the coal miners’ industrybody. In the world’s most populouscountries, China and India, the percent-age of energy needs met by coal is evenhigheratabout70percent.

The International Energy Agencyestimatescoaldemandwillgrowbyonly0.5percentayearupto2040,comparedwith 2.5 per cent annually over the pastthree decades. In the US, coal use willfall by one-third during that period, andeven in China — whose voraciousdemand for coal kept the market buoy-ant formuchof thepastdecade—apeakcouldcomeby2030, theIEAsays.

Indeed, coal consumption in Chinafell in 2014, with imports down 11 percent, the first fall in a decade. Economicgrowth has slowed, while China is alsomaking strenuous efforts to cut coal useto reduce pollution. Coal-fired electric-ity plants are running at little over halftheir installed capacity and, combinedwith abundant supply, this has pusheddown global coal prices. Benchmarkexport thermal coal prices have fallenabout60percent froma2011peak.

If China is committed to reducing coaluse, it will mirror the efforts being madein developed markets. In the US, newrules known as Mercury and Air ToxicsStandards, or MATS, are expected tolead to the withdrawal from service ofabout 60GW of coal-fired generatingcapacity by 2018. That is about one-fifthof the installed capacity. Even tougherUS rules are in the pipeline in the shapeof a “Clean Power Plan” by the Environ-

mental Protection Agency. Aimed atcutting carbon emissions from powergeneration, they could cut US coaldemand by a quarter by 2020, but coalcompanies are fighting hard against themeasures, with Peabody saying they area“majorover-reach”bytheEPA.

Where does this leave coal miners?Growth in developing countries is stillthegreathope.Glencore,oneof the larg-est coal miners, points out that Asia’sannual demand for coal is still expectedto rise by more than 1bn tonnes by 2025— more than current total globaldemand for maritime traded thermalcoal — with half the expected increasecomingfromoutsideChina.

Much depends on the pace of transi-tion to a lower-carbon economy. If allthe policy changes that have beenannounced to cut carbon emissions donot take place, demand for coal isexpectedtobestrongerstill.

Industry hopes there is still an enduringmarket for the black stuffCoal

Failure to transition to alow-carbon economy offersbig mining companiesrespite, reports James Wilson

Brent crude at half the level of last Junehas made the production of expensiveoil — from the Arctic to Brazil —unattractive. And the liquefied naturalgas (LNG) industry could becomeanothercasualty.

This is because the LNG market isdominated by long-term contractswhose pricing is linked to oil. Existingprojects,manyofwhichcameonstreamrecently to meet Asian demand, haveseen lower revenues, while expectationsfor what can be earned on new projectshavebeenreduced.

The oil rout — prices are hovering at$62 a barrel — has also meant develop-ers of big projects have less money tospend. Energy companies have beenforced to retrench, re-evaluating invest-ment plans, reassessing cost structuresandcuttingexpenditure.

Trevor Sikorski of Energy Aspects, aconsultancy, says: “Most integratedLNG developers are also oil majors and

do not report separate capital expendi-ture for LNG projects.” The companiesthat are big LNG suppliers, from Exxon-Mobil toBPandStatoil,haveannouncedcuts totalling $45bn this year — close toa20percentyear-on-yearreduction.

The timing is not ideal. LNG priceshad already fallen as the rise in globalenergy demand slowed on weaker eco-nomic growth and milder weather. Atthe same time supplies were increasing.By mid-March 2015 spot LNG pricesdelivered into Asia, for example, hadfallen by more than 50 per cent year onyear. This has wiped out the priceadvantageofUSLNGprojects.

In the next four years about 150bncubic metres of new LNG supply isexpected to come on stream, as a waveof predominantly Australian and USprojects under construction becomeoperational, says the Oxford Institutefor Energy Studies. This raises the vol-umeofglobalLNGtradebynearlyhalf.

Jonathan Stern, director of gasresearch at the Institute, says: “Not onlyare these new projects coming on to themarket in a lower price environmentthan was expected, but the pace of LNGdemand growth, particularly in Asia,appears to be weakening.” The drop inthe price of crude has only compoundedmatters.

For showcase LNG projects across the

globe, the impact of lower oil prices aswell as a drop in gas prices will not beuniform. For those projects that havealready been financed Hogan Lovells’energy lawyers, specialists in the area,say banks might sit tight as they awaitan oil price recovery in the next 18months. However, if the price lookslikely to remain low for longer, restruc-turing of financing arrangements mayberequiredforsomeprojects.

Gas analysts say projects that arealready under construction are likely tocontinue as planned. By 2018, Australiawill see new capacity come online fromroughly $180bn in investments, whichwill result in a 25 per cent increase inglobal liquefaction capacity, accordingto Moody’s Investors Service. Mean-while, the US is poised to become a netLNGexporterbytheendof thisyear.

Although much of this LNG supplyhas buyers already secured, the remain-ing portion may struggle to find them.Initially destined for Asia, it may bemore likely to land in Europe, given theshorter shipping distances. It may alsobe harder to achieve the expectedreturnoninvestment.

In the US, those projects expected tobe completed on schedule includeCheniere Energy’s Sabine Pass terminalon the border between Texas and Loui-siana, the Freeport terminal in Texas

and the Cameron terminal in Louisiana,accordingtoBostonConsultingGroup.

Moody’s says Cheniere Energy’s Cor-pus Christi project will most likely moveforward this year, since it is “among thevery few projects in advanced develop-ment that have secured sufficient com-mercial or financial backing to beginconstruction”.

Simon Ashby-Rudd, head of oil andgas investment banking at StandardBank, sees better prospects in low-costregions such as Mozambique and PapuaNew Guinea that are still economical ina lower oil price environment. But DanTyrer, energy lawyer at Linklaters,stresses that the pool of buyers is lim-ited. “Mozambique is proceeding asplanned with final investment decisionsexpected this year,” he says. But “Tanza-nia, which is geologically similar, maygetdelayedfurther”.

Projects elsewhere could be deferredor cancelled altogether. Final invest-ment decisions for large, capital-inten-sive greenfield projects, such as in Aus-tralia and Canada, are likely to be put onhold. The Pacific Northwest project inBritishColumbia isasignof this.

Moody’s says low LNG prices willresult in the cancellation of the majorityof the nearly 30 liquefaction projectscurrentlyproposed intheUS,18 inwest-ernCanada,andfour ineasternCanada.

Oil rout forces companies into radical policy rethinkLiquefied natural gas

Projects under constructionand those in low-costregions are better prospects,reports Anjli Raval

LNGlong-termcontractswhich havepricing thatis linked tooil havebeenunder fire

A lack of early-stageproposals for carboncapture and storageschemes could hamper therate of uptake of thetechnology, a key tool forradically reducingindustrial emissions.

The number of carboncapture and storage (CCS)schemes doubled in 2014to 22 globally — 13 inoperation and nine inconstruction — withanother 14 projects inadvanced planning and 18in early development, saysBrad Page, chief executiveof the Global CarbonCapture and StorageInstitute.

“While we are seeingprojects that should reachthe stage of making afinancial investmentdecision in the next 12months, what we’re notseeing is projects comingin at the bottom of theprocess . . . The pipeline isnot full,” says Mr Page.

A difficult financialclimate and uncertaintyabout global commitmentto addressing climatechange have slowed thepipeline of projects after asignificant increase in 2014.

CCS schemes, whichcapture carbon dioxideemissions produced byburning fossil fuels andstore them deepunderground, are oftenfound in the power sectorbut are starting to makeheadway in other heavyemitting sectors, such assteel and cement.

The world’s first CCS iniron and steel, backed by ajoint venture between theAbu Dhabi National OilCompany (Adnoc) and theAbu Dhabi Future EnergyCompany, is expected tocome online in 2016 in theemirate.

Mr Page says there hasalso been a lot of interestconcerning cement, but noprojects are confirmed.

“Without CCS, the costto avoid a global warmingof more than two degreesCelsius would more thandouble [rising] by 138 percent,” he says.

The US and Canada areleading the world indeveloping CCS, and are

home to the bulk ofoperational schemes. Chinaand the UK also plansignificant projects. “Threeand a half years ago, Chinadid not rate a mention inour annual report. In 2014,they’ve hit number two inthe world,” says Mr Page.“ . . . They are not climatechange deniers.”

At Boundary Dam,Canada’s groundbreakingCCS coal power plantscheme, SaskPowerexecutives attest to thelevel of Chinese interest.

“We have a Chinesedelegation here every twoor three weeks,” says MikeMonea, president of CCSinitiatives at SaskPower, aCanadian utility. “They’rewatching what’s happeningat Boundary and learningfrom us. China is justgathering information rightnow. When it moves, it willbe significant. I think that’swhere the next projects ofsize and number will behappening.”

The Boundary scheme,the world’s firstcommercial-scale CCS on acoal power plant, hascaptured an estimated200,000 tonnes of CO2

since it opened in Octoberlast year.

The captured emissionstravel down a 66kmpipeline to either anenhanced oil recoveryfacility for the oilfields,or a saline reservoir3.2km below the earth’scrust for permanentstorage.

The company will makea decision in the next 12months on building twomore CCS schemes.

With the engineeringexperience gained fromthe first scheme, costswould be reduced by 30per cent.

Mr Monea says: “We’vegot all the expertise ofbuilding a carbon captureplant — but nobody wantsto build one, unless they’reforced to”.Naomi Mapstone

Carbon captureChina’s interestin innovativescheme grows

With years of strong growth in China’scoal use seemingly slowing, India isemerging as the coal industry’s greathope to take up the slack.

India has the world’s second-largestpopulation and its economy still reliesheavily on coal, which meets well overhalf of energy demand. The election ofNarendra Modi as Prime Minister, seenas a reformer wanting to step upeconomic growth, is seen as positivefor coal use. “The Indian growth storyis starting to gain traction,” MikeHenry, a senior BHP Billiton executive,told investors last year.

The International Energy Agency(IEA), expects India to become thesecond-largest coal consumer by2020, overtaking the US. It also

expects that India will overtake Chinato become the largest importer ofthermal coal, used for generatingpower. How beneficial this is for globalcoal exporters is likely to depend onhow quickly India can improve itsdomestic coal mining industry.

Coal India, the state-owned miner, isbeing asked to double output over thenext five years — an ambitious target.India may therefore become a muchmore important global market.

The IEA puts India’s rise in coaldemand in the next five years at 250megatons. That is more than iscurrently consumed by any countryother than China, the US and Indiaitself. Yet, as the agency says: “There isno other China out there”. JW

India Ambitious targets may boost demand

ContributorsChristopher AdamsEnergy editorEd CrooksUS industry and energy editorPilita ClarkEnvironment correspondentAnjli RavalOil and gas correspondentMichael KavanaghEnergy and utilities reporterJames WilsonMining correspondentGregory MeyerMarkets reporterGavin JacksonStatistics journalist

Naomi MapstoneJames SimmsFreelance writers

Aban ContractorCommissioning editorSteven BirdDesignerAndy MearsPicture editorChris CampbellGraphic artist

For advertising details contactLiam Sweeney on+44 (0)20 7873 4148, orliam.sweeney@ft.com.

All editorial content in thisreport is produced by the FT.Our advertisers have noinfluence over or prior sight ofthe articles.All FT Reports are available atft.com/reports

Success: Boundary Dam

4 ★ FINANCIAL TIMES Monday 20 April 2015