Government’s Role in Industry Growth

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Governments Role in Industry Growth

• Gordon Slack
• Business Director Energy
• April 29, 2005

Trademark of The Dow Chemical Company
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Breaking News!
Commodity Industry Competes Based On Price
Winner Low Cost Producer
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Liquid vs. Gas Ethylene Feedstocks( of total)
And most power needs tied to natural gas!
Source American Chemistry Council
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Key Questions

• What is the problem?
• How did we get here?
• How do we get there?

What is Governments 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
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16 2003
12 2004
Basic industrial chemical imports
Chemical industry transition net exporter
net importer
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Volatility!
Source DOE, The Wall Street Journal
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Key Questions
How did we get here?
Those who dont know history
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Overwhelming Consumption Incentives
Natural Gas
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Cheap Natural Gas

• 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
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Projected Growth in U.S. Power Production
Power consumption grows relentlessly --
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
• (When it gets dispatched)

Industry competes in global marketplace Industry
can move jobs move too
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Overwhelming
Overwhelming Production Disincentives
Natural Gas
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Cheap Natural Gas

• 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.
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
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Key Questions
How do we get there?
There Return to competitive feedstock/energy
costs
What is Governments Role in Solution?
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Rebalance the Imbalance
Efficiency/ Conservation
Clear Skies Act
OCS access
On-shore access
Renewables/ Alternatives
Alaska pipeline
Coal Gasification Incentives
LNG Expedited Siting
Storage/ Infrastructure
Nuclear Now
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 hugeresource
• 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
• RD 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 LeaseSale 181
• Gas only leases

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Supply On-shore Access

• Efficient permit processing
• Timely agency action
• Interagency cooperation
• Hydraulic fracturing statesresponsibility

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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
• 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

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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

• Energy Efficiency and Conservation emphasized.
• Greater Fuel Diversity. Promote increased use of
  clean coal, nuclear, and renewable energy.
• Additional gas supply. LNG imports, coal-bed
  methane, a new political consensus on development
  of domestic natural gas resources.
• 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
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Living. Improved Daily.

Trademark of The Dow Chemical Company