Government’s Role in
Industry Growth
Gordon Slack
Business Director – Energy
April 29, 2005
*
*Trademark of The Dow Chemical Company
Breaking News!
Commodity Industry Competes
Based On Price
Winner: Low Cost Producer
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Liquid vs. Gas
Ethylene Feedstocks
(% of total)
100%
80%
60%
40%
20%
0%
Western Europe
United States
Liquid
Gaseous
And most power needs tied to natural gas!
Source: American Chemistry Council
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Key Questions
1. What is the problem?
2. How did we get here?
3. How do we get there?
What is Government’s Role
in Solution?
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The Problem
The U.S. has highest natural gas prices in the world !
NG Price $U.S./MMbtu
Russia
$0.95
W. Europe
$5.25
U. S.
$6.30
Trinidad
Venezuela $1.60
$0.90
N.
Africa
$0.80
Ukraine
$1.70
Middle East
$0.75-1.00
China
$4.00-5.00
Indonesia
$2.70
Argentina
$1.50
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16%
2003
12%
2004
Basic industrial chemical imports
Chemical industry transition:
net exporter
net importer
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Volatility!
$/Barrel
$/million BTUs
$60
$14.00
Oil Prices (left)
$55
Natural Gas Prices (right)
$12.00
$50
$10.00
$45
$40
$8.00
$35
$6.00
$30
$25
$4.00
$20
$2.00
$15
$0.00
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9
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Ja
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Ja
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-0
Fe 1
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Ju
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Fe 2
b03
Ju
n03
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ct
-0
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ar
-0
4
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ov
-0
4
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ar
-0
5
$10
Source: DOE, The Wall Street Journal
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Key Questions
How did we get “here”?
Those who don’t know history…
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Overwhelming
Natural Gas
Consumption Incentives
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Cheap Natural Gas
Natural Gas Price
10
$/MMBtu
8
6
4
2
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
0
• Little incentive to conserve
 U.S. lags well behind in energy efficiency
• High economic incentive to use gas
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Regulatory Incentives for GT Power
• Clean Air restrictions on coal-fired power
production
• Nuclear shut out
• Easy gas-fired permitting
+ Low GT capital costs
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U.S. Natural Gas
Consumption by Sector
“Consumption in most sectors flat but demand in electric sector strong…”
10
9
8
7
T Ft3
6
5
4
3
2
1
0
1973
1977
Industrial Consumption
1981
1985
Residential Consumption
1989
1993
1997
Electic Power Consumption
2001
Commercial Consumption
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Power consumption grows relentlessly --
Projected Growth in U.S. Power Production
GWh per year
6,000,000
5,500,000
5,000,000
4,500,000
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1981
1986
1991
1996
2001
2006
2011
2016
2021
Source: EEI
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The Power Debacle
The new 200,000 MW of GT power - - 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.
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Industry and Utilities
Battle Over Gas Supply
Utilities can automatically
pass through high costs
and volatility
Industry competes in global
marketplace
(When it gets dispatched)
Industry can move – jobs
move too
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Overwhelming
Natural Gas
Production Disincentives
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Cheap Natural Gas
Natural Gas Price
10
6
4
2
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
0
1970
$/MMBtu
8
• Little incentive to explore
• Little incentive for storage
• Little incentive to build pipelines
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Regulatory Disincentives for NG Supply
• OCS Moratoria
• Inter-mountain restrictions
• LNG terminal siting restrictions
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U.S. Dry Natural Gas Production
“Domestic production has done nothing … and peaked back in 1972.”
25
20
2004
1994
T Ft3
15
10
5
0
1970
1975
1980
1985
1990
1995
2000
Source: EIA
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Canada Imports Decline
Canadian Natural Gas Production by Consumption and Net Exports
Source: Canadian Association of Petroleum Producers
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Exports to Mexico Increase
Mexican Consumption by Production and Imports, 1994 - 2003
Source: 1994-2002 - Energy Information Administration, International Energy Annual 2002
2003 - International Energy Agency, Natural Gas Monthly Survey
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Supply / Demand Imbalance
Supply
Demand
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The Problem
The U.S. has highest natural gas prices in the world !
NG Price $U.S./MMbtu
Russia
$0.95
W. Europe
$5.25
U. S.
$6.30
Trinidad
Venezuela $1.60
$0.90
N.
Africa
$0.80
Ukraine
$1.70
Middle East
$0.75-1.00
China
$4.00-5.00
Indonesia
$2.70
Argentina
$1.50
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Key Questions
How do we get “there”?
“There” = Return to competitive feedstock/energy costs…
What is Government’s Role
in Solution?
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Rebalance the Imbalance
Supply
Demand
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Demand: Efficiency & Conservation
• Public education
• Appliance/equipment efficiency
standards
• Efficient dispatch of NG
• Smart metering
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Demand: Clear 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
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Demand: Coal Gasification
•
U.S. must take advantage of huge
resource
•
Power and feedstock use
•
Coal/lignite/petcoke feeds
•
“Clean” can include CO2, NOx, Sox, Hg
•
National Gasification Strategy includes financial incentives
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Demand: Renewables/Alternatives
• Economically sound encouragement
 R&D funding
 Production Tax Credits
• Hydrogen mixed bag
• Avoid Europe situation
 Forced use at above-market rates
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Demand: Nuclear Now
• Need national priority on Nuclear
 Permits, licensing
 Generation III reactor deployment
 Generation IV technology development
 Public confidence and support
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Supply: OCS Access
• States’ rights
 Gather reserves data
 Governor request lifting moratoria
 Bonus bids, enhanced royalties
 Coastal restoration assistance
• Access to remaining Lease
Sale 181
• Gas only leases
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Supply: On-shore Access
• Efficient permit processing
 Timely agency action
 Interagency cooperation
• Hydraulic fracturing states’
responsibility
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Supply: LNG Siting
• Clarify FERC siting jurisdiction
• One-year processing deadline
• Codify “Hackberry Decision”
• Pipeline liquids content rules
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Supply: Alaska Pipeline
• Resolve permit impediments
• Limited federal financial
support
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Supply: Storage/Infrastructure
• Market based rates for new storage
• Streamline pipeline permitting
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Less Effectual Measures
•
Trade policy: Anti-dumping

•
FOREX

•
Too late – must attack core competitiveness
Inherently short-term
Gas trading limits


Only affects short-term volatility
Treating a hangnail during a heart attack
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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
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CAANG Goal: Comprehensive Natural
Gas Bill in 2005 - Four Pillars
1.
Energy Efficiency and
Conservation emphasized.
2.
Greater Fuel Diversity. Promote
increased use of clean coal, nuclear,
and renewable energy.
3.
Additional gas supply. LNG
imports, coal-bed methane, a new
political consensus on development
of domestic natural gas resources.
4.
Improved Infrastructure. Increased
transmission and storage capacity.
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The Endpoint
The U.S. has competitive natural gas prices
NG Price $U.S./MMbtu
Russia
$0.95
W. Europe
$5.25
U. S.
$x.xx?
Trinidad
Venezuela $1.60
$0.90
N.
Africa
$0.80
Ukraine
$1.70
Middle East
$0.75-1.00
China
$4.00-5.00
Indonesia
$2.70
Argentina
$1.50
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Living.
Improved Daily.
*Trademark of The Dow Chemical Company
*