Andrei Lugovoi and Alexander Litvinenko

Britain's most wanted

Andrei Lugovoi stands accused of the notorious polonium murder of Alexander Litvinenko, but is feted as a hero in Russia

Mark Franchetti

Sunday Times Magazine 25 November 2007

A few days after the British government requested the extradition of Andrei Lugovoi on suspicion of killing Alexander Litvinenko, the former KGB officer poisoned with polonium in London last year, Britain’s most wanted man spent a leisurely afternoon with friends and family at one of Moscow’s most exclusive social events. Sipping white wine in a VIP box overlooking Moscow’s racetrack as photographers took shots of him, Lugovoi placed bets and jumped up cheering when his nine-year-old son, Yegor, won £50.
Lugovoi appeared equally relaxed six weeks later when relations between Britain and Russia plunged to their lowest depths since the end of the cold war over Moscow’s blunt refusal to hand him over: the country’s constitution bars its citizens from being extradited.
And shortly after, as Britain expelled four Russian diplomats in protest and the Kremlin responded by kicking out four Brits, Lugovoi holidayed in luxury on the Black Sea. Since he became Britain’s most wanted man, his life, in short, has been one of endless VIP events, appearances on talk shows, and celebrity.
In a further snub to the British government, Lugovoi is standing for parliament in next Sunday’s elections as No 2 to Vladimir Zhirinovsky, the controversial leader of the ultranationalist Liberal Democratic party of Russia (LDPR). If elected, Lugovoi, who so far is not under investigation in Russia, would gain immunity from prosecution at home. The party may not win enough votes to stay in parliament, but polls show that his candidacy gave it a boost. Few may believe his vehement claims of innocence in Britain, but in Russia many will vote for him.

Over the past 10 months I have spent much time with Lugovoi and Dimitry Kovtun, a childhood friend who was with him in London when he last met Litvinenko, on November 1, 2006, the day the former KGB officer was poisoned. The meetings with him have been intriguing, lavish and occasionally bizarre: at one dinner in a Moscow restaurant, drinking from a £180 bottle of red wine and puffing from a Cuban cigar, Lugovoi denied any involvement in the murder and argued that he is the victim of a conspiracy hatched by Russia’s enemies and British intelligence. On a hunting trip in a remote forest close to the Volga river, I watched the two men drink vodka and sing sentimental communist-era songs around a camp fire. And at a party to celebrate Lugovoi’s 41st birthday, one guest presented him with a 1937 heavy machinegun mounted on wheels; another gave him a walking stick encrusted with precious stones and gold, which concealed a dagger in its handle.
Lugovoi invited me backstage during the LDPR party conference at which he launched his political career. He also took me in his chauffeur-driven BMW to a compound outside Moscow to watch him fire from a gun as bodyguards from his security company trained in the background.
He answered hundreds of questions about his KGB past, his current business and his alleged involvement in Litvinenko’s death. He never appeared to be off guard, and only once became agitated when I challenged his claims that he had nothing to do with Litvinenko’s poisoning. Nor did he make a secret of why he granted me access: “I wanted you to see me for what I am and make your own conclusions. Could I really have killed in cold blood then behave so calmly? I wanted you to watch how I behave, not only when I wear a tie but also when I sit by a fire and drink vodka. I have a very firm position: I’m innocent. I had nothing to do with it.”

Spending time with Lugovoi has been a journey that confounded my expectations. I suspected him, then believed his denials, only to later become even more confused, all while coming to like him, despite all my mistrust.
I have also watched him change. Apparently genuinely bewildered when his name was first linked to Litvinenko’s poisoning, only a few days before the former KGB officer died a slow and agonising death last November, Lugovoi has since become increasingly bullish and self-confident, if not cocky. He once asked if I could procure as a memento a copy of a British daily that ran his photograph on its front page.
The full truth about who ordered Litvinenko’s death or what role Lugovoi played in his murder, if any, is unlikely to be revealed. But in the story of a former KGB bodyguard-turned-businessman-turned-suspected killer-turned celebrity, there are echoes of the narrative of modern Russia.
Lugovoi’s world view, once enthusiastic about all things western, now increasingly distrusting and hostile, reflects those of millions of Russians. Similarly, his bullishness is indicative of Russia’s growing assertiveness, as it seeks to regain some of the influence it lost with the collapse of the Soviet Union. A millionaire businessman who is shadowed by bodyguards, he is also representative of a wealthy new elite born from the ashes of communism, which, as Lugovoi put it, “will be ruling Russia in the next 20 years”.

How is it possible, many will ask, that a man accused of the world’s first-known assassination involving a radioactive substance can have a political future? “Who is Lugovoi to the potential Zhirinovsky voter?” said Vladimir Pozner, one of Russia’s most respected political commentators. “If you believe he did murder Litvinenko, you say, ‘Good, Litvinenko was a traitor who should have been murdered, and this guy’s a hero.’ If you don’t believe he killed him, you say, ‘He is persecuted by people who hate us, the West, so he’s a hero.’ It’s a win-win situation.
Unlike during communist times, the anti-western sentiment here is at grass-roots levels now. It’s more dangerous – it’s led to nationalism, chauvinism and even to neofascist views, because the West miscalculated in its attitude to Russia. After communism collapsed, the feeling was one of gleeful rubbing of hands. Many Russians felt that, ‘Look, we’ve got rid of this terrible system. We’ve taken the brunt of this. Greet us with open arms.’ But quite the opposite took place.”
Andrei Konstantinovich Lugovoi was born into a patriotic military family. His grandfather was awarded a Soviet medal for his part in the 1945 battle for Berlin. His father served in the military and his brother was an officer on a nuclear submarine. His mother was a school teacher.
“Back in Moscow I joined the military college,” recalled Lugovoi, as he chopped wood during the hunting trip. Very much the leader of his group of old friends from the military, Lugovoi later cooked dinner on an open fire, sang and played the guitar. Our vodka supply of 15 bottles among 8 ran out in 24 hours. “An officer’s son joined the military; it was taken for granted,” he went on. “Just as I was expected to join the Communist party, which I did at 18.”
Aged only 20, he was selected to join the KGB and tasked with the personal security of the country’s leadership. “In the West you think everyone here lived in fear of the KGB,” said Lugovoi as he stirred a fish soup, while Kovtun, also the son of a military officer, sipped wine, dressed in camouflage and Prada boots. “Instead, most had huge respect for KGB officers because only the best were chosen. I was very proud. I was never a fervent believer in communism but the Soviet system had predictability.”
That security ended with the Soviet Union’s collapse. Millions lost their life’s savings to hyperinflation. Crime and corruption became rampant. A few ruthless and well-connected businessmen turned fabulously rich while millions struggled to survive. “My father took the collapse very badly,” recalled Lugovoi. “Unlike myself, he was very ideological and we used to argue about the changes.”
Soon Lugovoi too became disillusioned. Travelling to the United States for the first time in 1992 as a bodyguard to Yegor Gaidar, the former liberal prime minister, accompanying Yeltsin on a US-Russia summit, he and his KGB colleagues exchanged Soviet cigarettes for Marlboros with the US agents guarding George Bush Sr. “One packet of US Marlboros was the equivalent of a fifth of my monthly salary,” recalled Lugovoi. “I had three children by then,” – he now has four – “and was expected to care for them on the equivalent of five packets of US cigarettes. That’s how impoverished the army elites and ordinary Russians had become.”

The KGB, which Yeltsin renamed the Federal Security Service (FSB) and broke up into separate agencies to reduce its power, suffered a huge brain drain. Russia’s secret policemen resigned in droves to work in the lucrative private sector. At a time when contract killings became the favoured method of settling disputes, security for Russia’s early tycoons was imperative. As their wealth and power grew, so did their private armies of former KGB officers. They offered protection, connections and, crucially, sensitive information.
The murkier Russian business grew, the more shadowy their work. Gathering kompromat – dirt – on rivals, industrial espionage, eavesdropping, intimidation and blackmail were, and to some extent still are, commonplace.
As a bodyguard to the Russian prime minister, Lugovoi was well placed to find a new employer. Lobbying and seeking favours, politicians and businessmen paid Gaidar visits. Lugovoi met them as they paced in the waiting room. That is how he met Boris Berezovsky in 1993. Then Russia’s most controversial oligarch, with the best Kremlin contacts, Berezovsky later fell out with Putin and is now wanted by the Russians on charges of embezzlement. To the Kremlin’s fury he was granted political asylum in Britain.
The right opportunity came in 1996 when Lugovoi resigned to become head of security at ORT, a national television channel controlled by Berezovsky. His monthly salary shot from £250 to £2,500, plus a chauffeur-driven car.
He was taken under the wing of Badri Patarkatsishvili, Berezovsky’s business partner.
As head of security, Lugovoi was embroiled in a ruthless battle for political influence between ORT and NTV, then Russia’s other privately owned national channel, which belonged to Vladimir Gussinsky, a rival of Berezovsky’s. “Phone-tapping, surveillance, buying compromising documents – it all went on, I won’t deny it. It was normal then,” said Lugovoi.

Also employed by Berezovsky, not at ORT but as part of his private group of former KGB/FSB officers, was Alexander Litvinenko. An FSB organised-crime investigator, Litvinenko became close to Berezovsky when he was sent to probe a car-bomb assassination attempt that wounded the tycoon and killed his driver. At the time, Litvinenko and Lugovoi crossed paths but barely knew each other.
Their affiliation to Berezovsky became a liability when the tycoon turned fervent Putin critic. Litvinenko – who publicly accused the FSB of several crimes, including a plot to kill the tycoon – was briefly jailed. He later fled Russia, settling in London, from where, on Berezovsky’s payroll, he sought to discredit Putin and the FSB.
Lugovoi also ran into trouble. Accused of plotting to help break free a jailed Berezovsky business partner, he too was imprisoned, for 15 months. Most believe the charges were trumped up, but in the wake of Litvinenko’s death, his detractors, including Berezovsky, suspect that in jail Lugovoi was either recruited or cut a deal with the FSB. He was released in 2002.
“There is a saying, ‘There is no such thing as a former KGB man,’ ” said Andrei Vasiliev, editor of Kommersant, one of Russia’s top dailies, once owned by Berezovsky. Vasiliev, who knows Lugovoi, used to be close to the tycoon. “I find Lugovoi’s story a little strange. He was in prison, had a criminal record and suddenly he is okay, is allowed to do business, still having contact with Berezovsky. It raises questions.”
Lugovoi, who likes to joke I am an undercover MI6 officer, strongly rejected the claims that he was recruited by the FSB, and cited examples of people who were jailed, including Berezovsky associates, but did well after their release. He started out as an entrepreneur with a private security company that hires out bodyguards to wealthy Russians. He still owns the business, which also provides consultancy to investors.
Until recently, Lugovoi was a shareholder in a soft-drinks company. He and his partners are building and selling industrial warehouses, and are now seeking to buy swathes of agricultural land. He estimated the total worth of businesses he is a shareholder in to be around £100m.
“I’m a successful businessman,” said Lugovoi, as we dined with an old KGB friend of his, now a business partner. “In the last seven years under Putin, we Russians have been given back what we lost: our self-respect and dignity.”
It is a view shared by millions of Russians. “The word democracy, in Russian, is democratia,” said Pozner, the political commentator. “When communism collapsed, everyone was saying, ‘We want democracy.’ But suddenly the stores were empty and people lost everything, while a few became billionaires. So people changed the word to der-mo-cra-tia – shit-o-cra-cy. Even today, if that’s democracy, most say, ‘Then no thank you.’
“Under Putin the message is that Russia is back, it’s powerful again, you can’t push it around like you did when the Soviet Union disintegrated. That’s why he’s so popular.”

It was business, not friendship, that reunited Litvinenko and Lugovoi in London, nearly 10 years after first meeting in Moscow. As Lugovoi recalls it, Litvinenko called him in November 2005, encouraging him to come to London to meet with a British company seeking a security consultant in Russia.
A month later the two former KGB officers met at Oxford Circus. Litvinenko took Lugovoi to the offices of Risc Management, a security consultancy, to discuss business in Russia. On a subsequent trip, Litvinenko introduced him to another big security company. Lugovoi, a fan of Sherlock Holmes novels, London and, in particular, Harrods, was soon impressed with the meetings. The two agreed that Litvinenko would receive a 20% cut of business deals he helped clinch in Britain.

In 2006, Lugovoi flew to London at least 10 times. On each trip he met Litvinenko, often more than once. Since the former FSB officer’s death, Lugovoi has claimed that contacts Litvinenko introduced him to were MI5 officers seeking to recruit him as a source, which is not implausible. Lugovoi refused but continued to have dealings with Litvinenko. “I was briefly denied a UK visa, obviously to pressurise me. I was clinching other contracts in London. I feared I wouldn’t be allowed back if I severed ties with Litvinenko’s contacts too abruptly.”
On October 16, 2006, Lugovoi flew to London with Kovtun, who was also looking for business contracts in Britain, and introduced him to Litvinenko. Scotland Yard has not spoken of its evidence against Lugovoi, but the first traces of polonium-210, the isotope that killed Litvinenko, are believed to have been found in places Lugovoi and Kovtun visited on that trip.
Ten days later, Lugovoi again met with Litvinenko in London, while Kovtun flew to Germany. Polonium traces were found in Hamburg and London in places they visited.
On November 1, 2006, both men were back in London, this time to attend a football match. Lugovoi was with his family. According to him, he had no plans to see Litvinenko on that day but agreed to a brief meeting after the former FSB officer insisted they get together. In late afternoon, Lugovoi, Kovtun and Litvinenko met at the Pine Bar of the Millennium Hotel in Mayfair. According to British investigators, that is when Litvinenko was poisoned with polonium 210-laced tea that, 23 days later, killed him.
Again, polonium traces were found in locations visited by Lugovoi and Kovtun. It was discovered in about a dozen sites, including hotel rooms, planes and the Emirates stadium, where Lugovoi watched a game. Investigators believe there was more than one attempt to poison Litvinenko, hence the early traces.

As he wasted away, baffled British doctors struggled for two weeks to identify the poison. They finally discovered it was polonium just two hours before Litvinenko died.
Lugovoi and Kovtun were also contaminated and rushed to a Moscow hospital a few days after Litvinenko’s death. Kovtun suffered the greatest exposure. “We were really shocked when we first heard of polonium,” said Lugovoi.
It was in hospital that Scotland Yard investigators questioned the two, but, bizarrely, never summoned them to London for further questioning. Lugovoi and Kovtun, who made a statement at the British embassy in Moscow when their names surfaced, even phoned one of the senior British investigators. “They questioned us once as witnesses, didn’t make contact for months and suddenly announced that I’m the prime suspect and should be extradited to Britain,” said Lugovoi. “Call that fair justice? They hardly encouraged me to go to London voluntarily.”
Lugovoi’s version of what might have happened is unconvincing. “I was framed. I suspect this was some British-intelligence operation involving Litvinenko and possibly Berezovsky that went wrong. I was contaminated by Litvinenko or someone else, not the other way round. I think polonium was planted on us and left in places we visited, to frame us. Why? To discredit Russia and Putin. I’m certain of one thing: I’m innocent. I’m not a cold-blooded killer.”

If, as Scotland Yard alleges, Lugovoi did poison Litvinenko, it is almost certain that he was in the dark about what substance he was handling.
How else can one explain that he contaminated not only himself and Kovtun, but his family too? Had he known he was dealing with a deadly killer that, if discovered, would leave traces, surely Lugovoi would have been more careful? Is it possible he did not know he was killing Litvinenko?
Assuming, as some suspect, that Lugovoi was part of a Russian special-services operation, and killed Litvinenko in cold blood, would he not have demanded a cover, and gone under a false name?
In Moscow, those who think he did poison Litvinenko say he could have been told the substance used to lace Litvinenko’s tea was a truth serum or some debilitating drug, being used so Russian agents could question Litvinenko – who had links to Chechen insurgents and was considered a traitor – or lure him to London’s Russian embassy.
I asked a former KGB general, now an MP, for his expert opinion. Assuming Litvinenko’s death was ordered by Russian agents, as the British government privately suspects, why involve someone like Lugovoi? Why use polonium? And if you had been in charge of such an operation, what would you have told Lugovoi? “They say it would have been easier to kill Litvinenko with a gun or in a car accident,” said Alexei Kondaurov, who spent 22 years in the KGB. “Not true. Killing someone on foreign soil is difficult without getting caught. One thing is getting your agent close to the target. Much harder is pulling him out without leaving traces.
“Polonium is difficult to detect. It doesn’t work immediately, so it’s easy to get the agent out of the country.”
Kondaurov argued that if Russia was behind Litvinenko’s death, Lugovoi was recruited because he had access to him. As a former KGB officer, “it would also be easier to come to an arrangement with him”.
“What would I tell him?” speculated Kondaurov. “As little as possible. Why tell him the aim is to kill? What if his hands start shaking? I’d say the powder will give Litvinenko dysentery or something. If Lugovoi took part in the operation, most likely he wasn’t aware it would lead to death.”
Kondaurov stressed he did not know who was behind Litvinenko’s murder. However, if this was the work of his former colleagues, the success of the operation hinged on one crucial factor: whoever chose polonium as the weapon banked on it never being discovered.
“Moral aspect aside, had the polonium not been detected, it would have been a brilliant coup. The target’s dead. No traces. And you’ve spread fear. They almost got away with it.”

The FSB has vehemently denied any involvement in Litvinenko’s death. Too small a fish, they say. But they have also claimed that he was an MI6 agent who sought to recruit former FSB colleagues to work for British intelligence. Some would say that would have been reason enough to kill him. Nikolai Patrushev, the head of the FSB, recently accused MI6 of seeking to influence Russian politics.
At a time when Russia and Britain have both stepped up their spying against each other, what could be a more potent message of Russia’s resurgence than killing one of its “agents” in London and – had the polonium not been found – leave no trace? If so, Litvinenko’s death had nothing to do with what he might have known – most say he had no secrets – but is linked to a new war between Russian and British intelligence.

Lugovoi has often asked me if I think he killed Litvinenko. I confronted him with the theory, which I support, that he did murder but is not a cold-blooded killer. I told him I think he was recruited by Russia’s secret service but was tricked and used without his full knowledge. He did not flinch. He again voiced his innocence, and agreed he was framed, but by MI5.
“C’mon, Andrei, we both know that if you did take part in Litvinenko’s murder, you are hardly going to tell me, are you?” I often said to him. Every time he smiled a wide, spontaneous grin. For me, that has always been revealing.
Russia will never hand over Lugovoi. For now, at least, his star is rising. Making accusations against the British, running for parliament, all seem to keep him in the public eye. Since he knows too well what prison is like, that is probably his best protection.

Energy crisis and the oil price: WEO report

Rising global demand for oil provoking new energy crisis

Jad Mouawad

International Herald Tribune 8 November 2007

With oil prices approaching the symbolic threshold of $100 a barrel, the world is headed toward its third energy shock in a generation. But today's surge is fundamentally different from the previous oil crises, with broad and longer-lasting global implications.
Just as in the energy crises of the 1970s and '80s, today's high prices are causing anxiety and pain for consumers, and igniting wider fears about the impact on the economy.
Unlike past oil shocks, which were caused by sudden interruptions in exports from the Middle East, this time prices have been rising steadily as demand for gasoline grows in developed countries, as hundreds of millions of Chinese and Indians climb out of poverty and as other developing economies grow at a sizzling pace.
"This is the world's first demand-led energy shock," said Lawrence Goldstein, an economist at the Energy Policy Research Foundation of Washington.
Forecasts of future oil prices range widely. Some analysts see them falling next year to $75, or even lower, while a few project $120 oil. Virtually no one foresees a return to the $20 oil of a decade ago, meaning consumers should brace for an era of significantly higher fuel costs.
At the root of the stunning rise in the price of oil, up 56 percent this year and 365 percent in a decade, is a positive development: an unprecedented boom in the world economy.
Demand from China and India alone is expected to double in the next two decades as their economies continue to expand, with people there buying more cars and moving to cities to seek a way of life long taken for granted in the West.
But as prices rise, the global economy is entering uncharted territory. The increase so far does not appear to be hurting economic growth, but many economists wonder how long that will last. "These prices are too high and will end up hurting everybody, producers and consumers alike," said Fatih Birol, chief economist at the International Energy Agency.
Oil futures closed at $95.46 on the New York Mercantile Exchange Thursday, down nearly 1 percent from the day before. But the price has become volatile, and many analysts expect the psychologically important $100-a-barrel threshold to be breached sometime in the next few weeks.
"Today's markets feel like the crowds standing up in the final minutes of a football game shouting: 'Go! Go! Go!,'" said Daniel Yergin, an oil historian and the chairman of Cambridge Energy Research Associates, a consulting firm. "People seem almost more relaxed about $100 than they were about $60 or $70 oil."
Oil is not far from its historic inflation-adjusted high, reached in April 1980 in the aftermath of the Iranian revolution. At the time, oil jumped to the equivalent of $101.70 a barrel in today's money.
For most of the 20th century, as it transformed the modern world, oil was cheap and abundant. Throughout the 1990s, for example, oil prices averaged $20 a barrel. Even at today's highs, oil is cheaper than imported bottled water, which would cost $180 a barrel, or milk, at $150 a barrel.
"The concern today is over how will the energy sector meet the anticipated growth in demand over the longer term," said Linda Cook, a board member of Royal Dutch Shell, the big oil company. "Energy demand is increasing at a rate we've not seen before. On the supply side, we're seeing it is struggling to keep up. That's the energy challenge."
More than any other country, China represents the scope of that challenge. As it turned into a global economic behemoth over the last decade, China also became a major energy user. Its economy has grown at a furious pace of about 10 percent a year since the 1990s, lifting nearly 300 million people out of poverty. But rapid industrialization has come at a price: oil demand has more than tripled since 1980, turning a country that was once self-sufficient into a net oil importer.
India and China are home to about a third of humanity. People there are demanding access to electricity, cars, and consumer goods and can increasingly afford to compete with the West for access to resources. In doing so, the two Asian giants are profoundly transforming the world's energy balance.
Today, China consumes only a third as much oil as the United States, which burns a quarter of the world's oil each day. By 2030, India and China together will import as much oil as the United States and Japan do today.
While demand is growing fastest abroad, Americans' appetite for big cars and large houses has pushed up oil demand steadily in this country, too. Europe has managed to rein in oil consumption through a combination of high gasoline taxes, small cars and efficient public transportation, but Americans have not. Oil consumption in the United States, where gasoline is far cheaper than in Europe, has jumped to 21 million barrels a day this year, from about 17 million barrels in the early 1990s.
If the Chinese and Indians consumed as much oil for each person as Americans do, the world's oil consumption would be more than 200 million barrels a day, instead of the 85 million barrels it is today. No expert regards that level of production as conceivable.
More realistically, global demand is expected to rise to about 115 million barrels a day by 2030, a level that is likely to tax the world's ability to pump more oil out of the ground. Already, the world is running on a limited cushion of spare capacity; any interruption in supplies, whether from hurricanes or armed conflict, causes prices to spike.
"We don't have any shock absorbers," Goldstein said.
For oil companies, high prices have set off a frenzied search for new sources around the world. After a long lull in investments through most of the 1990s because of low prices, major oil companies have invested billions of dollars to bring in more supplies.
The trouble is that these big new developments take a long time, and companies have been hobbled by higher costs. The cost of drilling rigs, for example, the basic tool of the trade, has doubled in recent years. Analysts say it will take time, but new supplies will eventually work their way to market.
Supplies have also been hampered by political tension in the Gulf, the war in Iraq, devastating hurricanes in the oil-producing Gulf of Mexico, production difficulties in Venezuela and violence in Nigeria's oil-rich province. Many of these geopolitical factors have contributed to a political risk premium variously estimated at $25 to $50 a barrel. Recently, in just nine weeks, oil jumped from $75 to $95 a barrel for little apparent reason.
"Fifty-dollar-a-barrel oil seems so far away at this point," said Thomas Bentz, a senior energy analyst at BNP Paribas in New York, citing a figure that seemed an impossibly high price for oil only a few years ago. "Oil will stop rising when we see demand destruction. We haven't seen that yet."
When will it happen? Veterans of the oil business, having lived through booms and busts, say no one should count on oil rising forever. Economic slowdowns in China or the United States — or especially, in both — would probably send prices tumbling.
It happened a mere decade ago, after the Asian financial crisis sent economies there into a tailspin. Global oil prices fell by half, from $20 a barrel to $10, in months.
"It would be a big mistake to think the laws of supply and demand have been abolished," Yergin said.

Curbs needed to avoid energy crunch

Russell Hotten

Daily Telegraph 7 November 2007

Oil prices have inched closer to $100 a barrel just as an international watchdog set out a stark warning that the rapid pace of economic growth in China and India threatened to disrupt energy supplies unless all countries took immediate action to curb demand.
A barrel of oil jumped above $98 yesterday for the first time, driven by the weak dollar, fears about a winter supply shortage, and a reluctance among members of the Opec producers' group to help reduce prices by pumping more crude onto the market.
In a report yesterday, the International Energy Agency (IEA) pointed to a worrying run-down of stocks held by leading oil-consuming nations. This was also pushing up prices, as countries would eventually have to start replenishing stock cover.
Nobuo Tanaka, the executive director of the IEA, said: "Stocks provide an important cushion between supply and demand. They add flexibility and minimise the incentive for speculation."
He called on the main oil producing nations to turn on the taps. "At current prices the market is signalling that stocks need to be higher –something that is in the power of producers to address," Mr Tanaka said.
But analysts do not see oil prices falling anytime soon. Mark Spelman, energy expert at Accenture, said: "It will be no surprise if oil goes over $100 in the next week. In 2008 we can expect ongoing volatility in the oil price as economics and politics play out. The debate will soon shift to $120 oil."
Even the IEA, which published its World Energy Outlook yesterday, believes oil could eventually hit $159 a barrel if countries do not reduce their thirst for crude. The agency, which advises countries within the Organisation for Economic Co-operation and Development, believes there could be a supply "crunch" as early as 2015 because of demands from China and India.
China could replace the US as the world's largest user of energy within five years, and its demand for oil will more than double to 16.5m barrels a day by 2030. China and India will account for almost half of a projected 55pc increase in world energy demand, the IEA said.
The IEA's chief economist, Fatih Birol, said: "From 2012, oil supply will be tight. This is not good news for anybody who wants to see an ease in prices. The message to our governments is to slow down the demand increases, and to producers to invest more if we want to avoid a supply crunch."
The IEA's projection for oil production is up to 116m barrels of oil a day by 2030, an increase from about 85m barrels a day now. Yet, demand would reach 120m barrels a day and crude prices as high as $159 a barrel in a "high growth scenario," Mr Birol said.
Mr Birol, who has overseen the 600-page World Energy Outlook since 2002, said this year's prediction for energy demand and the carbon emissions created by it, were worse than in the 2006 report. This was disturbing, given that countries are trying to reduce CO2 emissions, he said. "World energy demand is on a pathway that is not sustainable. This message is not new. But it is shocking because efforts have been made to try to stop it."
One worrying development, the report said, was that coal, one of the dirtiest sources of energy, would be increasingly in demand. "Coal sees the biggest increase in demand in absolute terms, jumping by 73pc between 2005 and 2030. China and India, which already account for 45pc of coal use, drive over four fifths of the increase to 2030."
The IEA urged governments to focus on developing clean coal technologies. Emissions of greenhouse gases will rise by 57pc by 2030 over current levels, leading to a rise in Earth's temperature of at least 3C, the report warned.

Business comment: This doorstopper opens our eyes to the energy crisis

Tom Stevenson

Daily Telegraph 7 November 2007

The International Energy Agency's annual review is not for the faint of heart. Whether your principal concern is energy security, the price of oil or global warming, the 663-page World Energy Outlook doorstopper is a wake-up call.
The main point to emerge from the report is that, like it or not, we will be living in a fossil-fuel world for the foreseeable future. Oil, coal and gas will have to meet pretty much all of a massive increase in energy demand by 2030.
The demand for oil alone, which at just over 80m barrels a day, has already pushed the oil price to within a whisker of $100 a barrel, is set to rise by a third. And that's assuming relatively pedestrian growth rates for the Asian economic powerhouses of less than 7pc, well short of their current expansion.
Many of the figures in the report are mind-boggling. The vehicle fleet in China is set to grow seven-fold by 2030 to 270m cars. By then, China will be importing as much oil as America does today. Even so, it will still only have 140 cars for every 1,000 people, less than a quarter of Europe's 680 cars per 1,000.
It will hardly have started.
If you think the 37pc rise in demand for the black stuff is a worry, it's nothing compared with the expected rise in coal use up by 73pc as China, especially, turns increasingly to the dirtiest of all fuels.
The impact of this on global carbon dioxide emissions scarcely bears thinking about. The IEA expects them to rise by 57pc in 25 years. With every Chinese still emitting less than half as much as the average American, this could even be conservative.
The IEA's report is not all doom and gloom. There's plenty of energy in the world, it concludes, and there's plenty of money to get it to market. But what we might be short of is time, because the decisions that are made over the next 10 years will lock in the world's energy make-up for decades to come.
The massive growth of China's power stations over the next 10 years will determine its greenhouse gas emissions for 60 years. Its poor energy efficiency standards mean its massive construction boom - half of all the building in the world could condemn us to unnecessary emissions for 50 years or more.
Sky-high energy prices and climate change look unavoidable. What we can't escape, we'll have to adapt to.

High-Priced Oil Adds Volatility to Power Scramble

Mark Landler

New York Times 7 November 2007

As the price of oil surges toward a symbolic milestone of $100 a barrel — hitting $96.70 yesterday — it is creating new winners and losers across the globe.
In southern China, high oil prices forced Wang Pui, a trucker, to wait in line 90 minutes the other day to fill up, just to be told he could pump only 25 gallons, as China faced spot shortages of gasoline and diesel fuel.
When Vladimir Putin was making Russia’s bid to be host of the 2014 Winter Olympics last July, he reached into the country’s deep pockets, bulging with oil profits, and pledged $12 billion to turn a Black Sea summer resort into a winter-sports paradise. Russia, which was nearly bankrupt a decade ago, won the Games.
The prospect of triple-digit oil prices has redrawn the economic and political map of the world, challenging some old notions of power. Oil-rich nations are enjoying historic gains and opportunities, while major importers — including China and India, home to a third of the world’s population — confront rising economic and social costs.
Managing this new order is fast becoming a central problem of global politics. Countries that need oil are clawing at each other to lock up scarce supplies, and are willing to deal with any government, no matter how unsavory, to do it.
In many poor nations with oil, the proceeds are being lost to corruption, depriving these countries of their best hope for development. And oil is fueling gargantuan investment funds run by foreign governments, which some in the West see as a new threat.
“Five months ago, readers would not have recognized S.W.F. as meaning sovereign wealth fund,” said Daniel Yergin, chairman of Cambridge Energy Research Associates, referring to the funds set up by Russia, Norway and others to invest their oil profits. “And yet now,” he said, “they’re recognized as one of the fundamental forces of the global economy.”
The basic calculus of expensive oil still holds: exporters enjoy a windfall and importers bear a heavier burden. But some unexpected countries are reaping benefits, as well as costs, from higher prices.
Consider Germany. Although it imports virtually all its oil, it has prospered from extensive trade with a booming Russia and the Middle East. German exports to Russia grew 128 percent from 2001 to 2006; exports to the United States grew just 15 percent.
Throughout Europe, the rise of the euro has acted as a hedge against fluctuations in the dollar-denominated oil market, while the heavy taxation of fuel has made rising oil prices less jarring to motorists.
“For Europeans,” said David Fyfe, a senior oil market analyst at the International Energy Agency in Paris, “$100 oil is mostly symbolic.”
Elsewhere, it is much more. For developing countries, oil can be a tool of national transformation — whether the goal is a middle-class standard of living or a utopian society.
In Venezuela, President Hugo Chavez is pouring oil proceeds into a socialist revolution, creating free health care, free education and cheap food; enabling heavy public spending that has helped fuel four years of economic growth.
The trouble, said Theresa Paiz, a Latin American director for the Fitch ratings agency, is that “it’s not really clear how the money is invested.” Mr. Chávez’s government is steering large chunks of money to development funds and state-owned companies not subject to audits.
Transparency International, an organization that tracks corruption, ranks countries from least to most corrupt, and in its 2007 index Venezuela was at 162 out of 179 countries.
Concerns about corruption are even more pronounced in Nigeria and Angola.
Oil-rich Angola is taking in two and a half times the cash it did three years ago. Hotels in the capital, Luanda, are booked months in advance, largely by foreign oil companies. Sales of luxury cars are booming, and the IMF projects the economy will grow 24 percent this year, one of the world’s fastest rates. Yet analysts for the Catholic University of Angola’s research center say two in three Angolans live on $2 or less a day, the same ratio as in 2002, when the country’s decades-long civil war ended.
The government is eager to show that oil wealth is benefiting ordinary citizens. It has rebuilt 2,400 miles of roads, refurbished 4 airports, and laid 430 miles of new railroad track.
But many Angolans take it as a given that oil has enriched public officials most of all. In 2003, a newspaper in Luanda identified the 20 richest people in Angola: 12 were government officials; 5 were former officials. Angola’s growing muscle — it is now the biggest oil supplier to China and the sixth biggest to the United States — is leading it to rethink its global position. It recently joined the Organization of the Petroleum Exporting Countries and is limiting its cooperation with the I.M.F.
In perhaps the most far-reaching change, China has become Angola’s financier, lending Luanda as much as $12 billion for the country’s reconstruction, in return for guaranteed oil supplies.
The contest among importers to secure access to oil supplies has become fierce.
China, a one-time oil exporter that now must import half its oil to lubricate its booming economy, is facing politically troublesome shortages of fuel from Shenzhen to Beijing, as Chinese refining companies refuse to supply diesel at unprofitable state-regulated prices. To head off a crisis, China raised retail prices for fuel nearly 10 percent on Nov. 1.
India is potentially even more vulnerable than China, some analysts say. Although it consumes a third as much oil as China, it imports 70 percent of its oil. It also has no strategic reserves, and demand is growing faster than in any other economy except China’s. Like China, India subsidizes fuel, particularly the kerosene used by lower- and middle-class families for cooking — a policy that costs it some $12 billion a year. If oil reaches $100 a barrel and stays there, analysts say, India will be forced to roll back those subsidies.
“Sooner or later, prices are going to bite,” said Subir Gokarn, Standard & Poor’s chief economist in Asia. “Clearly household budgets will be significantly affected.”
Without an increase in retail prices, officials at the Ministry of Petroleum and Natural Gas warned recently, they might no longer be able to buy adequate supplies of crude for India’s refineries. “Unless consumers are paying for what they consume,” said M. S. Srinivasan, the petroleum secretary, the ministry “is going to be left with a big hole in its pocket.”
But raising fuel prices could ignite even greater civil unrest in India than in China, where a man was killed recently after jumping a line to buy gas in the city of Xinyang, in Henan Province.
Even in developed countries like Canada, rising oil prices can cause dislocation. The region around the oil sands in northern Alberta is the closest thing the developed world has to a 19th-century boom town. The influx of workers has created a shortage of skilled labor in neighboring British Columbia, where construction is under way for the 2010 Winter Olympics.
In comparison, the problems faced by other oil producers seem almost benign. For them, the most burning question is what to do with all the money. Norway, the world’s 10th-largest oil producer, wants to guarantee every child a subsidized kindergarten spot by the end of 2008.
It has increased spending on kindergarten to $3.3 billion this year, from $2.75 billion, partly using money transferred from its $350 billion State Pension Fund, once known as the Petroleum Fund. Most of the fund is earmarked to pay the future pensions of Norway’s 4.6 million people.
“The discipline is structural,” said Johan Nic Vold, a consultant and former executive at Royal Dutch Shell “Without it, the demands on politicians to use the oil revenue would be almost insatiable.”
Perched on the Persian Gulf, Dubai has taken a similarly long view. Treating its oil reserves as temporary, it used the proceeds to expand pell-mell into tourism, trade, real estate and construction. The oil sector now accounts for only 5 percent of Dubai’s gross domestic product.
But perhaps no country has reveled in its oil wealth like Russia. NetJets Europe, the private-jet company, plans to open an office in Russia because the traffic between Moscow and London has become so dense.
This month, Christie’s will stage what it expects to be a record-setting auction week dedicated to Russian art, including the auction of a Fabergé egg made for the Russian royal family.
Russians have kept London’s high-end real estate market buzzing. “There are a lot of Russian buyers around who are prepared to pay a vast amount of money,” said Michael Chetwode of the Home Search Bureau.
Back home, Russia’s oil wealth is trickling down. Mr. Putin is using it to finance “priority national projects,” like improved health care and education, and access to affordable housing.
Oil may also help Mr. Putin cling to power after he leaves the presidency, perhaps as prime minister. As he noted recently, “We all remember what state the country was in seven, eight years ago.”
Eight years ago, oil was trading at $16 a barrel.

Reporting was contributed by Ian Austen in Ottawa; Keith Bradsher in Shenzhen, China; Thanassis Cambanis in Dubai; Walter Gibbs in Oslo; Jens Erik Gould in Caracas, Venezuela; Sophia Kishkovsky in Moscow; Sharon LaFraniere in Angola; Heather Timmons in New Delhi; and Julia Werdigier in London.

Oil Prices: It Gets Worse

Vivienne Walt

Time 7 November 2007

Oil prices hit a record high of $97 a barrel on Tuesday, but the next generation of consumers could look back on that price with envy. The dire predictions of a key report on international oil supplies released Wednesday suggest that oil prices could move irreversibly over the $100-a-barrel threshold in the not too distant future, as the global economy faces a serious energy shortage.
This gloomy assessment comes from the International Energy Agency, the Paris-based organization representing the 26 rich, gas-guzzling member nations of the Organization for Economic Cooperation and Development (OECD). The agency is not known for alarmist warnings, and its World Energy Outlook is typically viewed by policy wonks as a solid indicator of global energy supplies. In a marked change from its traditionally bland, measured tones, the IEA's 2007 report says governments need to make urgent, bold decisions on energy policy, or risk massive environmental and energy-supply crises within two decades — crises and shortages that could spark serious global conflicts.
"I am sorry to say this, but we are headed toward really bad days," IEA chief economist Fatih Birol told TIME this week. "Lots of targets have been set but very little has been done. There is a lot of talk and no action."
The reason for the IEA's alarm is its expectation that economic development will raise global energy demands by about 50% in a generation, from today's 85 million barrels a day to about 116 million barrels a day in 2030. Nearly half that increase in demand will come from just two countries — China and India, which are electrifying hundreds of cities and putting millions of new cars on their roads, most driven by people who once walked, or rode bicycles and buses. By 2030, those two countries will be responsible for two-thirds of the world's carbon gas emissions, which are the primary human activity causing global warming.
India and China have argued against enforcing strict emission controls in their countries, on the grounds that these could hinder their economic growth and prompt a global economic slowdown. But the new IEA report says working with China and India on alternative energy sources and curbing emissions is a matter of global urgency.
The bad news is not only environmental. As the world scrambles to boost energy supplies over the next two decades, an ever-greater percentage of its supplies of oil and gas will come from a dwindling number of countries, largely arrayed around the Persian Gulf, as the massive North Sea and Gulf of Mexico deposits are finally exhausted. That will leave the industrialized countries far more dependent on the volatile Middle East in 2030 than they are today, and the likes of Saudi Arabia, Kuwait and Iran will dictate terms to companies like ExxonMobil and Chevron, which increasingly operate as contractors to state-run oil companies in many producer nations.
"Most of the oil companies are going to be in an identity crisis, and need to redefine their business strategies," Birol says. The soul-searching may have already begun, as oil executives begin sounding the alarm about the supply crunch that lies ahead. Last week, Christophe de Margerie, CEO of the French oil giant Total, told the Financial Times that even the target of 100 million barrels a day is an optimistic one for an industry that currently produces 85 million — far short of the 116 million barrels a day the IEA projects will be needed by 2030 to fuel the global economy.
And in a sharp departure from the usually reassuring comments offered by Big Oil executives, De Margerie said companies and governments now realize that they have overestimated the amount of oil that could be extracted from places difficult to reach and costly to explore. "It is not my view, it is the industry view," he said. In other words, the message is that the current sky-high oil prices may not be a temporary burden on the world economy.
Forecasting prices, however, has become an increasingly inexact science for analysts, as prices in recent months have galloped ahead of their worst predictions. Says Oswald Clint, a London-based analyst for Sanford Bernstein: "A year ago, our predictions for November 2007 were about $50 to $62 dollars a barrel" — at least $35 short of Tuesday's price. The oil-research firm predicts that expanded production will bring oil prices back to $70 a barrel by 2010. But to Birol, that sounds optimistic.
"If you want to lower prices you have to slow down oil demand growth in China and India, use cars more efficiently, use biofuels, and also convince producing countries to pump more oil," says Birol. But he is uncertain any of that will happen. "I don't see the political will."

Then again, nothing fuels political will like a soaring price at the gas pump.

The Next 10 Years are Critical - the World Energy Outlook Makes the Case for Stepping up Co-operation with China and India to Address Global Energy Challenges

International Energy Agency: World Energy Outlook Report

Press release 7 November 2007

07 November 2007 London --- “The huge energy challenges facing China and India are global energy challenges and call for a global response. The World Energy Outlook 2007 charts a course to a more secure, competitive, lower-carbon energy system – a course that must involve the world’s two emerging giants”, said Nobuo Tanaka, Executive Director of the International Energy Agency (IEA) today in London at the launch of the latest edition of the Outlook. The annual flagship publication of the IEA this year focuses on energy developments in China and India and their implications for the world. “WEO-2007 demonstrates more clearly than ever that, if governments don’t change their policies, oil and gas imports, coal use and greenhouse-gas emissions are set to grow inexorably through to 2030 – even faster, in fact, than in last year’s Outlook. These trends would threaten energy security and accelerate climate change. But the Outlook also shows how new policies can pave the way to an alternative energy future”, Mr. Tanaka stressed. Energy developments in China and India are transforming the global energy system as a result of their sheer size and their growing importance in international energy markets. “Rapid economic development will undoubtedly continue to drive up energy demand in China and India, and will contribute to a real improvement in the quality of life for more than two billion people. This is a legitimate aspiration that needs to be accommodated and supported by the rest of the world”, said Mr. Tanaka. “Indeed, most countries stand to benefit economically from China’s and India’s economic development through international trade.” But the consequences of unfettered growth in global energy demand are alarming for all countries. If governments around the world stick with existing policies – the underlying premise of the WEO Reference Scenario – the world’s energy needs would be well over 50% higher in 2030 than today. China and India together account for 45% of the increase in global primary energy demand in this scenario. Both countries’ energy use is set to more than double between 2005 and 2030. Worldwide, fossil fuels – oil, gas and coal – continue to dominate the fuel mix. Among them, coal is set to grow most rapidly, driven largely by power-sector demand in China and India. These trends lead to continued growth in global energy-related emissions of carbon-dioxide (CO2), from 27 Gt in 2005 to 42 Gt in 2030 – a rise of 57%. China is expected to overtake the United States to become the world’s biggest emitter in 2007, while India becomes the third-biggest emitter by around 2015. China’s per-capita emissions almost reach those of OECD Europe by 2030. Consuming countries will increasingly rely on imports of oil and gas – much of them from the Middle East and Russia. In the Reference Scenario, net oil imports in China and India combined jump from 5.4 mb/d in 2006 to 19.1 mb/d in 2030 – this is more than the combined imports of the United States and Japan today. World oil output is expected to become more concentrated in a few Middle Eastern countries – if necessary investment is forthcoming. Although production capacity at new fields is expected to increase over the next five years, it is very uncertain whether it will be sufficient to compensate for the decline in output at existing fields and meet the projected increase in demand. A supply-side crunch in the period to 2015, involving an abrupt escalation in oil prices, cannot be ruled out. Government action can alter appreciably these trends. If governments around the world implement policies they are considering today, as assumed in an Alternative Policy Scenario, global energy-related CO2 emissions would level off in the 2020s and reach 34 Gt in 2030 - almost a fifth less than in the Reference Scenario. Global oil demand would be 14 mb/d lower – a saving equal to the entire current output of the United States, Canada and Mexico combined. Measures to improve energy efficiency are the cheapest and fastest way to curb demand and emissions growth in the near term. The savings are particularly large in China and India. For example, tougher efficiency standards for air conditioners and refrigerators alone would, by 2020, save the amount of power produced by the Three Gorges dam. Emissions of local pollutants in both countries, including sulphur-dioxide and nitrous oxides, would also be reduced sharply. But even in the Alternative Policy Scenario, global CO2 emissions are still one-quarter above current levels in 2030. In a “450 Stabilisation Case”, which describes a notional pathway to long-term stabilisation of the concentration of greenhouse gases in the atmosphere at around 450 parts per million, global emissions peak in 2012 and then fall sharply below 2005 levels by 2030. Emissions savings come from improved efficiency in industry, buildings and transport, switching to nuclear power and renewables, and the widespread deployment of CO2 capture and storage (CCS). Exceptionally quick and vigorous policy action by all countries, and unprecedented technological advances, entailing substantial costs, would be needed to make this case a reality. Economic growth in China and India could turn out to be significantly faster than assumed in the Reference and Alternative Policy Scenarios, resulting in more rapid growth in energy demand, oil and gas imports and CO2 emissions. In a High Growth Scenario, which assumes that China’s and India’s economies grow on average 1.5 percentage points per year faster than in the Reference Scenario, energy demand is 21% higher in 2030 in China and India combined. Globally, energy demand rises by 6% and CO2 emissions by 7%. “In this case, it would be all the more urgent for governments around the world to implement policies to curb the growth in fossil-energy demand and related emissions”, Mr. Tanaka said. “The emergence of new major players in global energy markets means that all countries must take vigorous, immediate and collective action to curb runaway energy demand”, said Mr. Tanaka. “The next ten years will be crucial for all countries, including China and India, because of the rapid expansion of energy-supply infrastructure. We need to act now to bring about a radical shift in investment in favour of cleaner, more efficient and more secure energy technologies.” IEA countries have long recognised the advantages of co-operation with China and India, reflected in a steady broadening of the range of collaborative activities through the IEA. “This relationship symbolises the interdependence of the global energy community. One of my priorities as the new IEA Executive Director is to step up our co-operation with both countries. In good time this could hopefully pave the way, with the support of all the governments concerned, to an ultimate objective of their future membership of the Agency.”

Full text of WEO Executive Summary:
http://www.iea.org/Textbase/npsum/WEO2007SUM.pdf

More on the WEO 2007:
http://www.worldenergyoutlook.org/