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Government’s Role in Industry Growth Gordon Slack Business Director – Energy April 29, 2005 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 The Dow Breaking News! Commodity Industry Competes Based On Price Winner: Low Cost Producer The Dow Chemical Company

Liquid vs. Gas Ethylene Feedstocks (% of total) And most power needs tied to Liquid vs. Gas Ethylene Feedstocks (% of total) And most power needs tied to natural gas! Source: American Chemistry Council The Dow Chemical Company

Key Questions 1. What is the problem? 2. How did we get here? 3. 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? The Dow Chemical Company

The Problem The U. S. has highest natural gas prices in the world ! 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 The Dow Chemical Company

16% 2003 12% 2004 Basic industrial chemical imports Chemical industry transition: net exporter net 16% 2003 12% 2004 Basic industrial chemical imports Chemical industry transition: net exporter net importer The Dow Chemical Company

Volatility! Source: DOE, The Wall Street Journal The Dow Chemical Company Volatility! Source: DOE, The Wall Street Journal The Dow Chemical Company

Key Questions How did we get “here”? Those who don’t know history… The Dow Key Questions How did we get “here”? Those who don’t know history… The Dow Chemical Company

Overwhelming Natural Gas Consumption Incentives The Dow Chemical Company Overwhelming Natural Gas Consumption Incentives The Dow Chemical Company

Cheap Natural Gas • Little incentive to conserve § U. S. lags well behind Cheap Natural Gas • Little incentive to conserve § U. S. lags well behind in energy efficiency • High economic incentive to use gas The Dow Chemical Company

Regulatory Incentives for GT Power • Clean Air restrictions on coal-fired power production • Regulatory Incentives for GT Power • Clean Air restrictions on coal-fired power production • Nuclear shut out • Easy gas-fired permitting + Low GT capital costs The Dow Chemical Company

U. S. Natural Gas Consumption by Sector “Consumption in most sectors flat but demand U. S. Natural Gas Consumption by Sector “Consumption in most sectors flat but demand in electric sector strong…” The Dow Chemical Company

Power consumption grows relentlessly -- Projected Growth in U. S. Power Production Source: EEI Power consumption grows relentlessly -- Projected Growth in U. S. Power Production Source: EEI The Dow Chemical Company

The Power The new 200, 000 Debacle MW of GT power - - battles The Power The new 200, 000 Debacle 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. The Dow Chemical Company

Industry and Utilities Battle Over Gas Supply Utilities can automatically pass through high costs 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 The Dow Chemical Company

Overwhelming Natural Gas Production Disincentives The Dow Chemical Company Overwhelming Natural Gas Production Disincentives The Dow Chemical Company

Cheap Natural Gas • Little incentive to explore • Little incentive for storage • Cheap Natural Gas • Little incentive to explore • Little incentive for storage • Little incentive to build pipelines The Dow Chemical Company

Regulatory Disincentives for NG Supply • OCS Moratoria • Inter-mountain restrictions • LNG terminal Regulatory Disincentives for NG Supply • OCS Moratoria • Inter-mountain restrictions • LNG terminal siting restrictions The Dow Chemical Company

U. S. Dry Natural Gas Production “Domestic production has done nothing … and peaked U. S. Dry Natural Gas Production “Domestic production has done nothing … and peaked back in 1972. ” 1994 2004 Source: EIA The Dow Chemical Company

Canada Imports Decline Canadian Natural Gas Production by Consumption and Net Exports Source: Canadian Canada Imports Decline Canadian Natural Gas Production by Consumption and Net Exports Source: Canadian Association of Petroleum Producers The Dow Chemical Company

Exports to Mexico Increase Mexican Consumption by Production and Imports, 1994 - 2003 Source: 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 The Dow Chemical Company

Supply / Demand Imbalance Supply Demand The Dow Chemical Company Supply / Demand Imbalance Supply Demand The Dow Chemical Company

The Problem The U. S. has highest natural gas prices in the world ! 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 The Dow Chemical Company

Key Questions How do we get “there”? “There” = Return to competitive feedstock/energy costs… Key Questions How do we get “there”? “There” = Return to competitive feedstock/energy costs… What is Government’s Role in Solution? The Dow Chemical Company

Rebalance the Imbalance On-sho re access LNG d ite xped E g Sitin ss Rebalance the Imbalance On-sho re access LNG d ite xped E g Sitin ss CS acce O Alaska e pipelin Storag e/ Infrast ructure Supply Effi Con ciency ser vat / ion ct ies A Sk ear Cl s/ wable Rene ives ernat Alt Coal G asifica tion Incenti ves Demand r lea c Nu ow N The Dow Chemical Company

Demand: Efficiency & Conservation • Public education • Appliance/equipment efficiency standards • Efficient dispatch Demand: Efficiency & Conservation • Public education • Appliance/equipment efficiency standards • Efficient dispatch of NG • Smart metering The Dow Chemical Company

Demand: Clear Skies Act • Reasoned approach to emissions § § Flexible mechanisms bring Demand: Clear Skies Act • Reasoned approach to emissions § § Flexible mechanisms bring efficiency § • Regulatory clarity for investment decisions Retains coal power competitiveness Inclusion of CO 2 would push NG demand The Dow Chemical Company

Demand: Coal Gasification • U. S. must take advantage of huge resource • Power Demand: Coal Gasification • U. S. must take advantage of huge resource • Power and feedstock use • Coal/lignite/petcoke feeds • “Clean” can include CO 2, NOx, Sox, Hg • National Gasification Strategy includes financial incentives The Dow Chemical Company

Demand: Renewables/Alternatives • Economically sound encouragement § R&D funding § Production Tax Credits • Demand: Renewables/Alternatives • Economically sound encouragement § R&D funding § Production Tax Credits • Hydrogen mixed bag • Avoid Europe situation § Forced use at above-market rates The Dow Chemical Company

Demand: Nuclear Now • Need national priority on Nuclear § Permits, licensing § Generation Demand: Nuclear Now • Need national priority on Nuclear § Permits, licensing § Generation III reactor deployment § Generation IV technology development § Public confidence and support The Dow Chemical Company

Supply: OCS Access • States’ rights § § Gather reserves data Governor request lifting 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 The Dow Chemical Company

Supply: On-shore Access • Efficient permit processing § Timely agency action § Interagency cooperation Supply: On-shore Access • Efficient permit processing § Timely agency action § Interagency cooperation • Hydraulic fracturing states’ responsibility The Dow Chemical Company

Supply: LNG Siting • Clarify FERC siting jurisdiction • One-year processing deadline • Codify Supply: LNG Siting • Clarify FERC siting jurisdiction • One-year processing deadline • Codify “Hackberry Decision” • Pipeline liquids content rules The Dow Chemical Company

Supply: Alaska Pipeline • Resolve permit impediments • Limited federal financial support The Dow Supply: Alaska Pipeline • Resolve permit impediments • Limited federal financial support The Dow Chemical Company

Supply: Storage/Infrastructure • Market based rates for new storage • Streamline pipeline permitting The Supply: Storage/Infrastructure • Market based rates for new storage • Streamline pipeline permitting The Dow Chemical Company

Less Effectual Measures • Trade policy: Anti-dumping § • FOREX § • Too late 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 The Dow Chemical Company

Public Policy • Changed the energy policy debate Consumer-focused • Alliance with non-traditional allies 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 The Dow Chemical Company

CAANG Goal: Comprehensive Natural Gas Bill in 2005 - Four Pillars 1. Energy Efficiency 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 The Dow Chemical Company

The Endpoint The U. S. has competitive natural gas prices NG Price $U. S. 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 The Dow Chemical Company

Living. Improved Daily. rademark of The Dow Chemical Company * Living. Improved Daily. rademark of The Dow Chemical Company *