The Guardian (UK): Beware of energy nationalism, warns global agency

· IEA attacks countries with tight grip on production
· Demand for gas and oil growing faster than ever

Terry Macalister
Tuesday July 10, 2007

A growing trend towards nationalism over resources in Russia and even Britain could backfire by cutting expenditure on oil and gas worldwide at a time when demand is likely to rise faster than expected over the next five years, the International Energy Agency warned yesterday.

At the same time, Shell signed a strategic agreement with Kremlin-controlled oil company Rosneft, weeks after BP agreed a similar deal with government-owned gas group, Gazprom. Both companies appear to be signalling that they need the influence of local operators in order to be involved in big developments in Russia.

The IEA criticised governments of energy-producing countries for using a period of high oil prices – currently $76 per barrel – to tighten their control over production. This comes as the IEA has adjusted its oil demand growth forecast from 2% per year over the next five years to 2.2% on the back of booming consumption in the US and China.

“It is little wonder that consumers focus on supply diversity, both geographically and by fuel form. This can create a vicious circle for investment,” said the IEA, the Paris-based adviser to 26 industrialised nations including Britain, in its medium-term oil market report.

Resource nationalism, where governments impose tougher terms on independent oil companies, has seen Shell and BP forced to hand over control of the Sakhalin-2 and Kovykta gas schemes in Russia while ConocoPhilips has in effect been made to leave Venezuela. But the IEA also said there were recent examples of rather more “benign” examples of the trend with the recent North Sea tax rises and other developments in Britain and Norway.

All governments tend to use higher oil prices as an opportunity to shift revenue flows in their favour, the IEA explained. It said this was a trend that had been seen across the last century with Mexico nationalising its oil industry in the 1930s and Opec, the producers’ cartel, being formed in 1960.

The current run of four years of high oil prices has done little to dampen demand. The IEA now forecasts that global demand will increase from its current level of 86.1m barrels a day to 95.8m after 2011 and producing countries will struggle to keep up.

Yesterday the price of August-dated Brent crude increased to above $76 a barrel after dipping slightly following the release of British child, Margaret Hill, aged three, who was kidnapped in Nigeria last Thursday. The seizure of the child, whose father works in the oil industry, fed into fears about political stability in Nigeria, a key oil producer. The day before Margaret Hill was grabbed, there was an attack on a Shell oil platform and five oil workers were taken.

Shell, meanwhile, announced it had agreed a deal with Rosneft under which the two companies are expected to work on joint projects in Russia.

Shell is keen to access the large reserves that Russia offers while Rosneft needs the kind of technology that the Anglo-Dutch group can offer. Shell denied that the latest deal was a snub to Gazprom which wrenched a controlling stake in the $20bn Sakhalin-2 scheme after allegations that the operator was breaking its licence conditions. “Russia has a diverse and significant set of opportunities where Shell can add value, and we look to grow business links with all the major Russian companies, including Gazprom and Rosneft,” said a Shell spokesman.

Artyom Konchin, oil analyst with Aton Capital in Moscow, said only time would tell how significant the agreement was, but he believed it showed that Shell – like BP – accepted it could only be considered for multibillion dollar projects by “holding hands” with a local state-owned firm.

The IEA warned in its report that additional refining capacity over the next five years would lag behind earlier expectations owing to rising costs and a shortage of engineers.

Opec has been aggressively defending its policy of cutting production to keep prices at high levels and has said that a move in the west to develop biofuels could encourage it to cut further investment in hydrocarbons.

Future of biofuels

Biofuel production should double over the next five years to 1.75m barrels a day but “green petrol” will remain marginal – perhaps 2% – of the fuel mix because of competition with food needs, according to the International Energy Agency.

The IEA said it was raising its 2006 biofuels supply figure by 79,000 bpd to 863,000 bpd, reflecting stronger than expected growth.

But looking ahead, its latest medium-term oil market report said there was still relatively limited data, making prediction more difficult. There would be commercial strains on the sector until second generation biofuels could be made from non-food crops.

“Price pressure this year on feedstocks such as corn, sugar, soya beans, wheat and palm oil reinforces our concerns over economic viability,” it said. While economics were uncertain, the IEA said green fuel production should be boosted by increased political support.

http://business.guardian.co.uk/story/0,,2122594,00.html