Government’s Role in Industry Growth Gordon Slack Business Director – Energy April 29, 2005 * *Trademark of The Dow Chemical Company

Government’s Role inGovernment’s Role in Industry GrowthIndustry Growth

Gordon SlackBusiness Director – Energy

April 29, 2005

*

*Trademark of The Dow Chemical Company

The Dow Chemical Company

Breaking News!Breaking News!

Winner: Low Cost Producer

Commodity Industry Competes

Based On Price


Liquid vs. Gas Ethylene Feedstocks

(% of total)

0%

20%

40%

60%

80%

100%

United States Western Europe

Liquid Gaseous

Source: American Chemistry Council

And most power needs tied to natural gas!


Key Key QuestionsQuestions

1. What is the problem?

2. How did we get here?

3. How do we get there?

What is Government’s Role

in Solution?


TheThe ProblemProblem

U. S.$6.30

TrinidadTrinidad$1.60$1.60

N.N.AfricaAfrica$0.80$0.80

RussiaRussia$0.95$0.95

IndonesiaIndonesia$2.70$2.70

Middle EastMiddle East$0.75-1.00$0.75-1.00

VenezuelaVenezuela$0.90$0.90

W. EuropeW. Europe$5.25$5.25

ArgentinaArgentina$1.50$1.50

UkraineUkraine$1.70$1.70 ChinaChina

$4.00-5.00$4.00-5.00

NG Price $U.S./MMbtuThe U.S. hasThe U.S. has highest natural gas priceshighest natural gas prices in the world !in the world !


Chemical industry transition:

net exporter net importer

Basic industrial chemical importsBasic industrial chemical imports

16% 16% 2003200316% 16% 20032003

12% 12% 2004200412% 12% 20042004


$10

$15

$20

$25

$30

$35

$40

$45

$50

$55

$60

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00Oil Prices (left)

Natural Gas Prices (right)

$/Barrel $/million BTUs

Volatility!Volatility!

Source: DOE, The Wall Street Journal



How did we get “here”?

Those who don’t know history…


Overwhelming

Consumption Incentives

Natural Gas


Natural Gas Price

0

2

4

6

8

101

97

0

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

$/M

MB

tu

• Little incentive to conserveLittle incentive to conserve U.S. lags well behind in energy efficiencyU.S. lags well behind in energy efficiency

• High economic incentive to use gasHigh economic incentive to use gas

• Little incentive to conserveLittle incentive to conserve U.S. lags well behind in energy efficiencyU.S. lags well behind in energy efficiency

• High economic incentive to use gasHigh economic incentive to use gas

Cheap Cheap Natural GasNatural Gas


Regulatory IncentivesRegulatory Incentives for for GT Power GT Power

• Clean Air restrictions on coal-fired power production

• Nuclear shut out

• Easy gas-fired permitting

+ Low GT capital costs


U.S. Natural GasU.S. Natural Gas Consumption Consumption by Sectorby Sector ““Consumption in most sectors flat but demand in electric sector Consumption in most sectors flat but demand in electric sector strong…”strong…”

0

1

2

3

4

5

6

7

8

9

10

1973 1977 1981 1985 1989 1993 1997 2001

T F

t3

Industrial Consumption Residential Consumption Electic Power Consumption Commercial Consumption


Projected Projected GrowthGrowth in U.S.in U.S. PowerPower ProductionProduction

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

5,500,000

6,000,000

1981 1986 1991 1996 2001 2006 2011 2016 2021

GWh per year

Source: EEI

Power consumption grows relentlessly --Power consumption grows relentlessly --


The Power Debacle- battles its customers for fuel!

- causes unmeetable 2005-2007 U.S. gas demand except by having a factory shutdown.

- requires 62% of all U.S. gas production to run all 200,000 MW at the same time.

- operated at 40% of capacity in 2003.

- consumed over $100 Billion in new investment which is severely impaired or bankrupt.

The new 200,000 MW of GT power - -The new 200,000 MW of GT power - -


Utilities can automatically pass through high costs and volatility

(When it gets dispatched)

Industry competes in global marketplace

Industry can move – jobs move too

Industry and Utilities Battle Over Gas Supply


Overwhelming

Overwhelming

Production Disincentives

Natural Gas


Natural Gas Price

0

2

4

6

8

101

97

0

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

$/M

MB

tu

• Little incentive to exploreLittle incentive to explore

• Little incentive for storageLittle incentive for storage

• Little incentive to build pipelinesLittle incentive to build pipelines

• Little incentive to exploreLittle incentive to explore

• Little incentive for storageLittle incentive for storage

• Little incentive to build pipelinesLittle incentive to build pipelines

Cheap Cheap Natural GasNatural Gas


Regulatory DisincentivesRegulatory Disincentives for NG Supplyfor NG Supply

• OCS Moratoria

• Inter-mountain restrictions

• LNG terminal siting restrictions


Source: EIA

0

5

10

15

20

25

1970 1975 1980 1985 1990 1995 2000

T F

t3U.S. U.S. Dry Natural GasDry Natural Gas Production Production““Domestic production has done nothing … and peaked back in 1972.”Domestic production has done nothing … and peaked back in 1972.”

19941994 20042004


Canada ImportsCanada Imports DeclineDecline

Source: Canadian Association of Petroleum Producers

Canadian Natural Gas Production by Consumption and Net ExportsCanadian Natural Gas Production by Consumption and Net Exports


Exports to MexicoExports to Mexico IncreaseIncreaseMexican Consumption by Production and Imports, 1994 - 2003Mexican Consumption by Production and Imports, 1994 - 2003

Source: 1994-2002 - Energy Information Administration, International Energy Annual 20022003 - International Energy Agency, Natural Gas Monthly Survey


Supply / Demand Supply / Demand ImbalanceImbalance

SupplySupply

DemandDemand


TheThe ProblemProblem

U. S.$6.30










$4.00-5.00$4.00-5.00

NG Price $U.S./MMbtuThe U.S. hasThe U.S. has highest natural gas priceshighest natural gas prices in the world !in the world !



How do we get “there”?“There” = Return to competitive feedstock/energy costs…

What is Government’s Role

in Solution?


RebalanceRebalance the Imbalancethe Imbalance

NuclearNuclear

NowNow

Supply Demand

OCS accessOCS access

On-shoreOn-shoreaccessaccess

LNGLNG

ExpeditedExpedited

SitingSiting

AlaskaAlaska

pipelinepipeline

Storage/Storage/Infrastructure

Infrastructure

Efficiency/

Efficiency/Conservation

ConservationClear Skies Act

Clear Skies Act

Coal GasificationCoal GasificationIncentives

Incentives

Renewables/Renewables/

AlternativesAlternatives


Demand: Demand: Efficiency & ConservationEfficiency & Conservation

• Public education

• Appliance/equipment efficiency standards

• Efficient dispatch of NG

• Smart metering


Demand: Demand: Clear Skies ActClear Skies Act

• Reasoned approach to emissions

Regulatory clarity for investment decisions

Flexible mechanisms bring efficiency

Retains coal power competitiveness

• Inclusion of CO2 would push NG demand


Demand: Demand: Coal GasificationCoal Gasification

• U.S. must take advantage of hugeresource

• Power and feedstock use

• Coal/lignite/petcoke feeds

• “Clean” can include CO2, NOx, Sox, Hg

• National Gasification Strategy includes financial incentives


DemandDemand: : Renewables/AlternativesRenewables/Alternatives

• Economically sound encouragement

R&D funding

Production Tax Credits

• Hydrogen mixed bag

• Avoid Europe situation

Forced use at above-market rates


Demand: Demand: Nuclear NowNuclear Now

• Need national priority on Nuclear

Permits, licensing

Generation III reactor deployment

Generation IV technology development

Public confidence and support

•


Supply: Supply: OCS AccessOCS Access

• States’ rights Gather reserves data Governor request lifting moratoria Bonus bids, enhanced royalties Coastal restoration assistance

• Access to remaining LeaseSale 181

• Gas only leases


Supply: Supply: On-shore AccessOn-shore Access

• Efficient permit processing

Timely agency action

Interagency cooperation

• Hydraulic fracturing states’responsibility


Supply: Supply: LNG SitingLNG Siting

• Clarify FERC siting jurisdiction

• One-year processing deadline

• Codify “Hackberry Decision”

• Pipeline liquids content rules


Supply: Supply: Alaska PipelineAlaska Pipeline

• Resolve permit impediments

• Limited federal financial support


Supply: Supply: Storage/InfrastructureStorage/Infrastructure

• Market based rates for new storage

• Streamline pipeline permitting


Less EffectualLess Effectual Measures Measures

• Trade policy: Anti-dumping Too late – must attack core competitiveness

• FOREX Inherently short-term

• Gas trading limits Only affects short-term volatility Treating a hangnail during a heart attack


Public Policy • Changed the energy policy debate

Consumer-focused• Alliance with non-traditional allies• Creation of the Consumers Alliance for Affordable Natural

Gas (CAANG)

• Position papers, issue education• Growing grassroots support for change

• Senator Alexander natural gas bill


CAANG Goal: Comprehensive Natural Gas Bill in 2005 - Four Pillars

1.1. Energy Efficiency and Energy Efficiency and Conservation Conservation emphasized. emphasized.

2.2. Greater Greater Fuel DiversityFuel Diversity. . Promote Promote increased use of clean coal, nuclear, increased use of clean coal, nuclear, and renewable energy.and renewable energy.

3.3. Additional gas supplyAdditional gas supply. . LNG LNG imports, coal-bed methane, a new imports, coal-bed methane, a new political consensus on development political consensus on development of domestic natural gas resources. of domestic natural gas resources.

4.4. Improved Infrastructure.Improved Infrastructure. Increased Increased transmission and storage capacity.transmission and storage capacity.


TheThe EndpointEndpoint

U. S.$x.xx?










$4.00-5.00$4.00-5.00

NG Price $U.S./MMbtuThe U.S. hasThe U.S. has competitive natural gas pricescompetitive natural gas prices

Living.Living.

Improved Daily.Improved Daily.

*

*Trademark of The Dow Chemical Company

Documents

Government’s Role in Industry Growth Gordon Slack Business Director – Energy April 29, 2005 * *Trademark of The Dow Chemical Company