Hearings and Business Meetings

SD-366 Energy Committee Hearing Room 10:00 AM

Mr. Andrew Liveris

October 6, 2005

 

Dow Chemical Company
American Chemistry Council

STATEMENT FOR THE RECORD

 

SENATE ENERGY AND NATURAL RESOURCES COMMITTEE

HEARING ON

Hurricanes Katrina and Rita’s effects on energy infrastructure and the status of recovery efforts in the Gulf Coast region.


 

SECTION I Introduction and Executive Summary

“After Katrina we got a call from a bottled water company in the South
scrambling to get some HDPE(high density polyethylene plastic).  His regular supplier curtailed him.  He needed the plastic to make bottles so he could supply bottled water to FEMA.  Our Louisiana plants were still restarting, gas supply was curtailed and we were closing our TX plants in anticipation of Rita.  We couldn't help him.”
Chemical Company Executive Located in Hurricane Zone

 

The Dow Chemical Company and the American Chemistry Council welcome the opportunity to provide the Committee with an update on Hurricanes Katrina and Rita’s effects on energy infrastructure and the status of recovery efforts in the Gulf Coast region.

This topic is of acute interest to the US chemical industry because the Gulf Coast is home to the world’s largest concentration of chemical manufacturing capacity. The Gulf is to chemical manufacturing as Wall Street is to finance.

The chemical industry has been operating in the Gulf for more than seven decades. Our engineers and operators are experts in hurricane preparedness. Plants are designed and built to withstand Category Five storms. All members of the American Chemistry Council (ACC), under our trademark health, safety, environment and security program, Responsible Care®, have long-established hurricane plans that operate before, during and after storms.  Facilities cooperate with local, state and national authorities, other businesses and transportation systems, along the path of the storms and through recovery.  Companies will evaluate and enhance those plans to incorporate learnings from Katrina and Rita as part of their ongoing performance improvement process.

Typically, these emergency plans include the safe shutdown and lockdown of facilities, removal of vehicles and other equipment, evacuation and accounting of employees, and placement of emergency “ride-out” crews on-site, when feasible.  We then carefully assess post-storm conditions to allow facilities to resume operations safely.

Having said that, our industry has also been severely damaged by the hurricanes. Not by the high winds and not by the storm surges and floodwaters, but by the high cost and limited availability of natural gas.

Natural gas is of vital importance to our industry. It heats and powers our facilities, but it is also our most important raw material.  We process natural gas molecules into thousands of products that can be found everywhere in the economy.

Today, most chemical plants in the Gulf Coast are closed or are operating at reduced rates. For some, it is because they are without power. For others, they have been cut off from their gas supply or they are choosing not to pay today’s prices. Soon the loss of chemical manufacturing in the Gulf will ripple through the economy in the form of shortages and higher prices.

The industry faces hard choices on how and where it will base its operations in the future. On September 30, 2005 the wholesale spot price of natural gas was $14.50 per MMBtu. In Europe natural gas costs about $7.00. In China, it’s less than $5.00. In Saudi Arabia, it’s less than $1.00. US manufacturers must compete in global markets. Companies must decide where to locate production, where to locate jobs, where to pay taxes and support communities. When US production costs two to twenty times more than it does in the rest of the world, it is hard to justify investing in America.

Public policy makers will exert enormous influence on how those decisions are made. It is well documented how certain policies bid up demand for natural gas to make electricity in the US and other policies restrict access to supply.  What is not as well known is that the manufacturing sector pays the price for those policy decisions.  In the recent past, policy decisions costs the US chemical industry dearly. Policy induced price gyrations between 2000 and 2005 handed overseas chemical operations a huge competitive advantage: The US chemical industry went from posting the largest trade surpluses in the nation’s history in the late 1990’s to becoming a net importer. In that time, the industry lost more than $50 billion in business to overseas operations and more than 100,000 good-paying jobs in our industry have disappeared.  The National Association of Manufacturers reports that 2.9 million American manufacturing jobs disappeared in that time.

Policy makers are again in a position to influence the US manufacturing environment. The short-term outlook for natural gas consumers is grim. Until very recently, government officials had severely underestimated the combined impact of the two hurricanes (especially Rita) on the nation’s energy infrastructure. As of this writing, nearly 100 percent of the Gulf of Mexico oil production and 80 percent of natural gas output remain shut in. More than 20 natural gas processing plants on shore are closed, some are damaged, some have no power. Pipelines are not fully operational. Eight refineries remained closed and eight are restarting.  Power remains out in the Beaumont-Port Arthur-Lake Charles area.

ACC is doubtful that the Gulf’s energy infrastructure will be fully restored before the winter heating season starts. There is no surplus natural gas production capacity available to fill the void. There is not a “Strategic Natural Gas Reserve” available to make up for supply disruptions.  Natural Gas will be in short supply this winter.

Natural Gas consumers will be competing for a scarce commodity. Policy makers can cushion the blow, if swift action is taken to stretch the supply and curb consumption. We recommend the following:
1. Send a powerful message to the markets by eliminating barriers to energy production in the Outer Continental Shelf (OCS) and share revenues on new production with states.
2. Expedite leasing in the area of the eastern Gulf of Mexico known as Lease Sale 181, at least for areas greater than 100 miles from the coast of Florida.
3. Declare a national emergency before winter, shock national awareness of supply problem and mobilize federal resources
4. Give priority to dispatching highly efficient CHP and Natural Gas Combined Cycle generating capacity to the grid.
5. Restore service to damaged natural gas processing plants on the Louisiana coast.

More detailed policy recommendations are contained in Section V
 
If the right responses are put in place right away, tensions in the market can be eased and gas consumers can weather the current crisis.  If prices remain at or near current levels, manufacturers will be driven out of the market and many may not return.


SECTION II The US Chemical Industry at a Glance
The chemical industry fuels the American economy.
• The chemical industry is  the leading American export industry accounting for 10% of all U.S. exports.
• We generate more than half a trillion dollars to the U.S. economy each year. 
• The chemical industry has created a $154 billion trade surplus over the past ten years.
• The industry directly employs more than 885,000 people, a figure larger than the combined populations of Boston and Buffalo.
• Chemistry dependent industries account for nearly 37 million jobs or 26.6% of the entire workforce.

The chemical industry improves our health and keeps our families safe.
• New drugs and medicines made possible by chemistry have increased life expectancy in the US by more than 30-years over the past century.
• A plastic bicycle helmet, one of the chemistry industry’s most popular innovations, can reduce a child’s risk of head injury by 85% according to Safe Kids USA.
• 98% of all U.S. public drinking water is safe to use because of chemistry.
• According to the National Highway Traffic Safety Administration, more than 14,000 lives have been saved thanks to airbags, a product of chemistry.

Chemistry is essential to U.S. business and industry.
• The chemical industry supplies the raw materials used by virtually every industry from aircraft construction to zoo management.
• More than 80% of the materials used to formulate all medicine come from the chemistry industry.
• The chemical industry is America’s second largest rail shipper.
• The major innovations over the past century that have increased productivity from the phone, computer and Blackberry exist because of chemistry.

Chemistry is at the heart of innovation, helping to make our lives better, healthier and safer.
• The chemical industry invests more than $22 billion a year in research and development – the most of any single industry outside of national defense.
• One out of every eight new patents is awarded to the chemistry industry.
• The American chemical industry employs the highest percentage of knowledge workers of any industry and employs more than 80,000 chemists, scientists and engineers.

 

 


SECTION III Hurricane Katrina & Rita: Ripple Effects from Shortages

Potential Product Shortages Following Hurricanes Katrina and Rita

Some of the most commonly used consumer and industrial products may be in short supply in coming months due to North American chemical capacity shut-ins following the hurricanes in the Gulf of Mexico.  Following are some examples of products for which there may be shortages.

• Tires, radiator and other hoses, fan belts, and bumpers; seals and gaskets; automotive belts and hoses, asphalt binder and roofing.  (62 percent of North American butadiene capacity, used to make these products, is down)

• Oil, milk, detergent bottles; gasoline tanks; corrugated and drainage pipe. (55 percent of North American high density polyethylene capacity, used to make these products, is down.)

• Syringes, medical fabrics, automotive battery cases, dairy containers, diaper coverstock, and food packaging. (55 percent of North American polypropylene capacity used to make these products, is down).

• Diaper liners, shrink film and bread bags. (46 percent of North American low density polyethylene capacity, used to make these products, is down).

• Plastic resins, films and bottles; automobile antifreeze blends, including those for military vehicles, and for de-icing runways and aircraft; fire extinguishers and sprinkler systems. (39 percent of North American ethylene glycol capacity, used to make these products, is down)

Source: CMAI, petrochemicals consultant (www.cmaiglobal.com)

 

SECTION IV Background: The importance of affordable energy to the     US Chemical Industry, How the natural gas crisis      developed, and what the Energy Policy Act of 2005      accomplishes


America’s chemical industry is the nation’s largest energy consumer.  We use energy – especially natural gas – to heat and power our facilities, and as a raw material to make thousands of products consumers use every day.  Chemical companies use more natural gas than California and more electricity than the state of New York.  The chemical industry consumes enough natural gas to heat 30 million homes a year – almost half of the nation’s home heating needs

Natural gas can do amazing things. It can be used to heat and cool a home, to make electricity and as a key ingredient in products – lots and lots of products.  These include medicines, medical equipment, packaged goods, military applications and others.  Numerous “downstream” industries rely on natural gas-produced chemistry products,  including agriculture, steel, aluminum, and cement.

Advances in Energy Efficiency

Fortunately, the chemical industry has made great strides in energy efficiency.  For example, we can make a pound of product with half as much energy as it took a generation ago. But even with these efficiency improvements, an immense amount of energy is still required for chemical manufacturing.  Chemical makers need more energy than the entire country of Mexico, and roughly the same amount as Brazil.

Many chemistry products that are made with natural gas help make other parts of the economy more energy efficient. Energy-saving products such as insulation, lightweight vehicle parts, advanced window systems and reflective coatings are all made from chemicals made from natural gas. 

Supply/Demand Imbalance Leads to Skyrocketing Natural Gas Costs

The problem is, America is using more and more natural gas and producing less and less.  As a result, the price of natural gas has increased by 700 percent since the late 1990’s.  If the same thing happened to gasoline, prices at the pump would be more than $7.00 a gallon.

For industries like ours, those high prices hurt. In 1999, the chemical industry paid about $25 billion for all of its energy inputs – fuel, power and feedstocks such as natural gas. Last year, the tab topped $52 billion.    Beginning in 2000, the industry has shelled out $80 billion more for energy than it was paying in the 1990’s.

The effect of those additional costs – think of it as a huge energy tax – has been severe. We’ve seen a 20 percent decline in natural gas consumption in the chemical industry.  Call it demand destruction. Dozens of plants around the country have closed their doors and gone away – and are never coming back.

US chemical industry domestic operations lost $50 billion in business to overseas operations since 2000. We went from posting trade surpluses in excess of $20 billion – the most successful export industry in the history of this nation – to becoming a net importer of chemicals. More than 100,000 American jobs have been displaced, in large part due to the hidden “energy tax.”

Not long ago, Business Week noted that of the 120 large-scale chemical plants under construction around the globe, only one is being built in the United States.  The plants under construction are located in places where natural gas supply is abundant, reliable and affordable.

Unlike oil, natural gas is a regional commodity, not a global one. And US natural gas prices are the highest in the world – at the moment, US gas prices are 20 times higher than in Saudi Arabia.

Impact of Government Policies on Natural Gas Supply, Price

In the 1990’s, new government regulations began driving electric utilities to reduce air emissions by burning natural gas to make power.  An enormous amount of gas-fired power generation capacity came on line in the past decade.  Utility consumption of natural gas grew by 31 percent in a few short years.

The nation’s appetite for electricity is rapidly growing and is expected to increase by as much as 50 percent in the next 20 years.  Natural gas supply cannot meet incremental demand. The government says that new supplies of domestically produced natural gas will only meet 30 percent of future demand growth. Quite simply, there’s not enough gas to go around.  To meet this challenge, the U.S. must meet its growing energy needs by investing in new technologies that produce power from renewables (for example wind and solar), non-polluting nuclear, agricultural sources of energy (sometimes called biomass) and low-polluting coal power.

Energy Policy Act of 2005
 
In August of 2005, the president signed into law a sweeping new energy bill called the Energy Policy Act of 2005. On balance, it is a very good policy and, over the long haul, it can change the way the nation makes and uses power.  The legislation breaks new ground in the area of energy efficiency: We will see new standards of performance for appliances, homes and buildings as a result of the legislation’s efficiency measures.

It also makes a serious effort to diversify the energy supply – to move away from the natural gas-is-the-answer-to-everything mentality that dominates current policy.  The legislation will launch a new generation of technologies used to make power, including coal gasification, renewable energy and nuclear power.

The nation’s energy infrastructure will get a much-needed facelift. The legislation will lead to new investment in gas pipelines and storage facilities and will result in new LNG terminals.

SECTION V:  Unfinished Business. New policies needed in the post-    Hurricane period

Expand natural gas supplies and reduce concentration of nation’s energy infrastructure in three ways: 
• eliminate barriers to energy production in OCS and share revenues on new production with states.  MMS estimates that OCS contains 406 TCF of recoverable natural gas. More than 85 percent of OCS is off-limits to use as a result of federal policies set in place 25 years ago when NG was cheap and plentiful;
• increase gas production on shore by removing red tape and seasonal restrictions; 
• accelerate and increase tax credits and guarantees for investing in gasification technologies for the production of fuels and feedstocks;
• expedite leasing in the area of the eastern Gulf of Mexico known as Lease Sale 181, at least for areas greater than 100 miles from the coast of Florida.
• Site new LNG terminals, especially on Atlantic and Pacific coasts. Set a goal of four new terminals (not all on Gulf Coast) by 2010.


Restore lost gas and oil production.  The government should use its authority to speed emergency reconstruction of damaged pipelines (Emergency Reconstruction of Interstate Pipeline ruling of 2003) and implement other red-tape cutting measures to restore damaged drilling rigs and production platforms. The government should also employ the Coast Guard, Army Corps of Engineer and other federal assets as needed to speed repairs of damaged production sites and infrastructure. Priority should be given to restoring service to damaged natural gas processing plants on the Louisiana coast. In addition to removing sulfur and other impurities, these plants also remove natural gas liquids, such as ethane and propane, primary chemical feedstocks.  Three of those damaged plants process the equivalent of three LNG terminals. Help is needed to transport and house repair crews, pump out the plants, restore power, repair damages and resume operations.

Encourage Efficient Consumption. To avert shortages this winter and in future years, actions are needed now to ease the strain on natural gas markets. In the short term emphasis should be placed on reducing gas demand through conservation and efficiency measures. These immediate actions are needed:

• Declare a national emergency before winter, shock national awareness of supply problem and mobilize federal resources, including…
• Fund in 05 the national public education campaign authorized in Title I of EPACT05.  Doing so will harness the American people’s strong desire to “do something” to help recovery efforts. Little actions can achieve big results. If all Americans turned down their thermostats by 2 degree this winter, it would free up 3 BCF of gas per day.
• Move up to Oct. 1, 2005 effective date for tax credits authorized in EPACT05 for homeowners, builders and commercial building owners for investment in energy efficiency.
• Require up-to-date building codes in states using federal funds to recover from the hurricanes and encourage all states to use most current codes.
• Accelerate completion of tardy appliance codes and development of new codes authorized in the energy bill.
• Expand and spotlight The Partnership for Home Energy Efficiency (DOE,HUD,EPA).
• Expand funding for weatherization programs and dispatch crews to go into homes, audit energy consumption, and install weatherization materials and equipment as needed.


Encourage Efficient Generation:  In many parts of the country inefficient natural gas power generators supply baseload power and highly efficient generation is reserved for peak demand. To make power generation more efficient, the following actions are needed:

• Build new and efficient transmission capacity in order to remove system constraints.
• Retire or put in reserve inefficient single-cycle generation capacity
• Give priority to dispatching CHP and Natural Gas Combined Cycle capacity … restore CHP tax incentives. 


Diversify Fuel Supplies.  The large build up of natural gas fired power generation in recent years is putting an unsustainable strain on natural gas supplies.  Gas consumption for power generation increased by 25 percent this summer, driving prices up from $6.00 to nearly $10.00 per million BTU. Utilities should be encouraged to make power from other fuel sources, by:

• Accelerating coal and biomass gasification. The US has the world’s largest reserves of coal and (potentially) biomass. Gasification technology is ready for deployment and the government should help speed up commercial use by utilities.
• Site new nuclear power. Nuclear answers environmental and energy questions. The government should consider building new reactors on federal lands.

Distribute energy supply and power generation.  The Hurricanes proved that the entire nation can be affected by regional disruptions and the energy infrastructure is highly reliant on the integrity of the electrical grid.  To reduce economic and national security vulnerabilities government should:

• Create incentives for refineries, pipelines and large energy using industrial, institutional and commercial facilities to produce heat and power on site
• Encourage all states to implement “efficient portfolio standards” defined to include renewables, CHP, gasification and other low-polluting means.

Increase Natural Gas storage capacity to make the natural gas system more resilient.  The Strategic Petroleum Reserve did its job and restored calm to jittery oil markets. Natural gas does not have adequate reserve capacity and that contributes to price volatility.  Additional storage capacity would help the market adjust to temporary supply shortages.

 

 

 

 

 

 

 

 

 

 

 


Hurricane Katrina & Rita: Ripple Effects from Shortages
(Source: CMAI and ACC)


 
Acrylonitrile –, 55% of North American acrylonitrile capacity is down. It is used to manufacture ABS resins for automotive trim, irrigation, and office equipment, telecommunications and appliance housings and to manufacture SAN resins used in medical housings and industrial batteries, among other applications.

Butadiene -  62% of North American butadiene capacity is down. It is the primary olefin used to make a variety of synthetic elastomers including: styrene-butadiene used in tires, radiator and other hoses, fan belts, and bumpers; polybutadiene used in seals and gaskets, belts, and tires; and polychloroprene used in automotive belts and hoses, asphalt binder, and roofing.

Chlorine –  16% of North American chlorine capacity is down.
It is used directly in water treatment, paper manufacturing, and in the production of certain lightweight metals (titanium and magnesium) used in aircraft.  Indirectly, it is used to make a variety of important building-block chemicals, such as trichloroethylene, phosgene, chlorinated hydrocarbons, neoprene, polyvinyl chloride (PVC), hydrogen chloride, and ethylene dichloride.  In turn, these are used to ultimately produce thousands of industrial and consumer products.  Some indirect applications include the production of pharmaceuticals, wool, flame retardant materials, and special batteries (lithium and zinc).  Chlorine is also used in the processing of fish, meat, vegetables, and fruit.  The largest end uses of chlorine include the making of ethylene dichloride, vinyl chloride monomer, and PVC resins (used to make a variety of products such as medical bags and tubing, adhesives, protective clothing, pipes, siding for homes, and raincoats). 

Caustic soda is co-produced with chlorine and a similar share is down. Caustic soda is used in glass making and variety of products. It’s used in epichlorohydrin used in glycerin for food products as well as epoxy resins for coatings, aircraft composites, dry toner resin, electronic encapsulants, automotive leaf springs, printed circuit boards, etc. Caustic soda is used to manufacture carbomethylcellulose for oil drilling muds, food processing, and pharmaceuticals. Caustic soda is used to manufacture sodium citrate used as a food conditioning agent in cheese and meat as well as in detergents. Caustic soda is used to manufacture polycarbonate used for eyeglass lenses, helmets, computers, and CDs.

Cyclohexane –  80% of North American cyclohexane capacity is down. It is used to manufacture nylon resins used in electrical and automotive components, wire jackets, non-textile monofilament, and tool housing as well as nylon fibers used in parachutes and other textile applications.

Ethylene Glycol -  39% of North American ethylene glycol capacity is down. Most ethylene glycol produced is use to make polyethylene terephthalate (PET), which is used to make plastic resins, films, and bottles. The other major end use is as a coolant in automobile antifreeze blends, including for military vehicles. It is used in de-icing runways and aircraft. It is also used in fire extinguishers and in sprinkler systems. Army boot soles are derived from ethylene glycol. 

Ethylene Oxide –  43% of North American ethylene oxide capacity is down. The largest share is used to make ethylene glycol (which is used to make polyester fibers/resins and antifreeze).  The next largest application is in the making of surfactants and detergents.  This chemical is also used to make other chemicals, such as ethanolamines (used for gas conditioning and soap production) and glycol ethers (used to make paint, brake fluids, aircraft fuel additives).  Ethylene oxide is also used as a petroleum demulsifier, as a fumigant, in the making of rocket propellant, and as a sterilizing agent for industrial applications.

HDPE –  55% of North American HDPE (high density polyethylene) capacity is down. Important products made from HDPE include oil, milk, and detergent bottles, as well as conduit, gasoline tanks, and corrugated and drainage pipe.

LDPE –  46% of North American LDPE (low density polyethylene) capacity is down. Important products made from LDPE include diaper liners, shrink film, and bread bags.

LLDPE –  73% of North American LDPE (linear low density polyethylene) capacity is down. Important products made from LLDPE include chemical tanks, trash bags, pallet wrap, produce bags, food storage bags, and landfill liners.

Methyl Methacrylate -  69% of North American methyl methacrylate capacity is down. This is used to manufacture acrylic paints as well as acrylic resins used in disposable and reusable medical devices, especially in the area of drug delivery components and diagnostics. Other resin applications include automotive tail lights, instrument cluster lenses, optical disks, glazing, and safety signs.

Phenol -  38% of North American phenol capacity is down. It is used to manufacture bisphenol-A which is used to manufacture polycarbonbate resins (eyeglass lenses, safety helmets, etc.) and caprolactum used to manufacture nylon resins (fan blades, brake reservoirs, etc.) Phenol is also used to manufacture phenolic resins used in structural panels for reconstruction.

Polybutadiene -  84% of North American polybutadiene capacity is down. It is used in seals and gaskets, conveyor belts, and the tread for automotive tires.

Polypropylene –  55% of North American polypropylene capacity is down. Important products made from polypropylene include syringes, medical fabrics, automotive battery cases, dairy containers, diaper coverstock, and food packaging.

PVC –  21% of North American PVC capacity is down. PVC resins are used in pipe, conduit, siding and other construction products needed for re-building after Katrina and Rita. Vinyl resins are also used in IV and other medical tubing and bags.

Styrene -  85% of North American styrene capacity is down. Styrene is used to manufacture polystyrene, ABS & other styrenic resins, SB latex used in carpeting, unsaturated polyester, and SBR elastomers. The latter is the key elastomer for tires, radiator hoses, and fan belts

Styrene-Butadiene Rubber (SBR) -  55% of North American SBR capacity is down. It is the key elastomer for tires (it provides abrasion resistance), radiator hoses, and fan belts

 

 

 

 

 

 

 

 

 

 

Notable Quotes
 
“’Chemical companies have been under assault for several years’, said Robert Koort, an analyst at Goldman Sachs who has an attractive rating on the chemical sector.”
“As Natural Gas Prices Rise, So Do the Costs of Things Made With Chemicals,” The New York Times, September 28, 2005

“The chemical industry also has been slugged with rising fossil fuel prices, in the form of natural gas.  Now its customers must deal with potential shortages.”
“Spikes and Shortages Go Far Beyond Gas,” The Washington Post, September 2, 2005

“While there is concern about high gasoline prices, a more serious impact may be felt this winter with regards to natural gas, with sky-high winter utility bills looming. On an ominous note, natural gas prices on the New York Mercantile Exchange closed Thursday at the highest level since 1990.”
“Rita Adds to Gulf Gas Woes as Shut-ins Mount in Wake of Storm,” Natural Gas Week, Sept. 26, 2005

“Natural gas prices set a record yesterday, pointing to sharply higher heating bills for a majority of Americans this winter and soaring costs for makers of plastics and chemicals, which use natural gas as their main fuel and raw material.”
“Heat Costs Expected to Surge: Natural Gas Price Continues Climb,” The New York Times, Sept. 30, 2005

“Natural gas not only fuels chemical plants, but it is used to extract chemical ingredients…Natural gas prices, which were already high, soared after Katrina.  They have more than doubled in the last year.  The complications from Rita are expected to boost prices on a whole range of products from milk containers to computers to pharmaceuticals.”
    The Nightly Business Report, PBS, Sept. 23, 2005

“American industry consumes a third of the country’s natural gas, while residential use is less than a quarter.  As a result of the current supply crunch, prices for all sorts of goods are likely to rise, some products may be in short supply and the flow of U.S. jobs to overseas plants may increase.”
“The Other Gas Crisis: Katrina’s Blow to Natural Gas Will Pinch Chemical Makers, Cost Jobs and Raise Prices for Cars and Shampoo,” CQ Weekly, Sept. 19, 2005.

“The Institute for Supply Management, which issues a monthly report on the U.S. industrial sector, reported this week that prices manufacturers are paying for goods surged in August. Rising energy costs pushed a key index measuring prices to 62.5 from July’s 48.5.”
“Cost of Warm, Stocked House Surges; Household Goods’ Raw Materials Scarcer,” The Baltimore Sun, September 3, 2005.

 

 

“Industry groups, including the American Chemistry Council, argue it is important to find more natural gas to get prices down. The fuel, which has increased five-fold in recent years, not only is used widely to heat homes and for electric power but also in the making of fertilizer and other chemical products.”
“Katrina Spurs New Debate on Energy Policy,” Associated Press, September 12, 2005

“Although not as prominent as oil – its fossil fuel cousin – natural gas is used for heating and cooking in over 61 million homes, according to the U.S. Energy Information Administration.  Nearly 25 percent of the country’s electricity comes from gas.”
“Natural Gas Prices Put U.S. Jobs and Businesses At Risk,” CQ Green Sheets, Sept. 22, 2005

“The U.S. Energy Information Administration estimates natural gas prices could rise by 71 percent in the Midwest and an average of 50 percent nationwide. And Mother Nature may yet again make the problem worse…If we have a particularly cold winter, an unusually cold winter, the market will be even then much tighter.”
The Today Show, NBC News, Sept. 29, 2005

“The Energy Information Administration predicts that natural gas prices will remain above $10 per million cubic feet throughout peak winter demand. EIA analysts estimate that the average Midwestern household will pay between 71 percent and 77 percent more for natural gas this winter compared to last year.”
“Bingaman Says Agencies Must Immediately Implement Energy Law,” EnergyWashington Week, Sept. 28, 2005

“The U.S. Interior Department reported that as of September 29, 2005…shut-in [natural] gas production [in the Gulf of Mexico, following the hurricanes] is 7,979 cubic feet (79.79 percent of the daily production.)”
“Hurricane Update,” CMAI, petrochemicals consultant, Sept. 29, 2005

“Marshall Steeves, energy analyst at Refco in New York,..said [natural] gas traders are worried about the amount of supply affected by the recent hurricane. A US government report this week raised the amount of natural gas production shut down in the US Gulf of Mexico from 78 to 80 per cent. ‘The market has been looking for more gas to come back into production. Instead there appears to be more output affected than we first thought,’ he said.”
“Natural Gas Prices Rise to Record High,” Financial Times, Sept. 30, 2005

“[Senator Jeff] Bingaman's letter to Energy Secretary Samuel Bodman urges the [Dept. of Energy] to take action to reduce natural gas demand by consulting with states, consumers and industry to develop an action plan. The first step would be to initiate a public outreach similar to the one employed in California during the 2000-01 energy crisis. The Energy Policy Act of 2005 authorizes $90 million a year for DOE to implement a conservation campaign. ‘I urge you to initiate a public outreach program targeted at natural gas this fall,’ wrote Bingaman.”
“Bingaman Says Agencies Must Immediately Implement Energy Law,” EnergyWashington Week, Sept. 28, 2005

“Natural gas again hit record highs Wednesday as the delay in restarting production in the Gulf of Mexico worries investors that damage may be more severe than expected… …The hurricanes boosted prices for natural gas more than for other commodities because the country cannot import enough gas to make up for possible deficiencies.  Moving natural gas long distances involves liquefying the gas, and the country has limited facilities to process such gas. ‘Industry is starting to realize that natural gas is scarce. There's no such thing as a strategic natural gas reserve. We're on our own,’ said Walter Otstott, a trader with Dallas Commodity Co.”
“Natural Gas Hits Record: Production Delays Spur Fears That Rita Damage Is Worse Than Expected,” The Dallas Morning News, Sept. 29, 2005
 

 

 

 

 

 

 

 

 

 

The Dow Chemical Company and the U.S. Natural Gas Crisis:
Update on Actions Taken to Remain Globally Competitive

 

 

 

 

 

 

 

 

 

 

 

Over the past six years, inflated and volatile domestic natural gas prices have wrought havoc on the U.S. manufacturing sector, including our nation’s price-sensitive chemical industry, which depends on natural gas as both a fuel source and a critical raw material.  The Dow Chemical Company, in an effort to offset the extreme negative impact of skyrocketing U.S. natural gas prices -- and to remain globally competitive -- has already been forced to:
• implement an aggressive cost-reduction plan, which involves the elimination of manufacturing jobs
• shift some production overseas to countries such as Kuwait, Argentina, Malaysia, Germany and the Netherlands -- where energy prices are far more competitive.  
• shut down underutilized and non-competitive plants across the U.S.
• form partnerships to build an LNG import terminal in Texas
• raise product prices to counteract the margin squeeze caused by inflated energy and feedstock costs
• implement aggressive energy conservation and efficiency programs
Below is an update on specific actions taken by Dow, as a result of the U.S. natural gas crisis:

Implementing Aggressive Cost-Reduction Plans and Eliminating Jobs

In 2003 Dow introduced an aggressive cost-reduction plan, which called for the elimination of approximately 6,500 jobs worldwide through 2004. These job cuts represented a painful 15% reduction in the company’s already very lean workforce.  While there were other factors that contributed to our need to eliminate these jobs, the driving force behind this global streamlining effort was the need to offset rising costs in order to remain globally competitive and meet our customers’ needs.  U.S. energy and feedstock prices remain our most significant external costs.

Planning for Growth Overseas – Where Energy Prices are More Competitive

Dow fully expects to realize our share of the projected 4% annual volume growth in the global chemical industry. However, that growth will not be seen in the U.S.  Dow’s future growth strategy is heavily influenced by the prospect that U.S. natural gas prices will remain the highest in the world.  If natural gas prices remain structurally high and volatile, Dow will be unable to serve export markets with basic chemicals and plastics made in the U.S.  We will instead continue to seek growth opportunities in parts of the world where natural gas is cheaper.  For example, over the next five years, more than 50% of Dow’s new capacity investment in ethylene plants will be in the Middle East.  There are currently no new ethylene plants planned in the U.S.   Dow has announced several new joint ventures and planned investments in the Middle East and China – where energy prices are lower than in the U.S.:
• In August 2005, Dow announced plans to build a new Dow Center, comprising a state-of-the-art Research & Development facility and a global information technology center, in Shanghai, China
• In March 2005, Dow and Petrochemical Industries Company (PIC) of Kuwait, a wholly owned subsidiary of Kuwait Petroleum Corporation, completed a groundbreaking ceremony for their new ethylene and derivatives complex in Shuaiba, Kuwait.  This project was announced in May 2003.
• In July 2004, Dow announced a new joint venture project to design, build and operate a petrochemical complex in Oman. 
• In June 2004, Dow announced the formation of two new joint ventures with PIC, our Kuwaiti partner.
 
Further, Dow’s customers are generally manufacturers of consumer goods, such as automobiles, appliances, electronics, and pharmaceuticals. These industries are now feeling the ripple effect of high U.S. natural gas prices and are increasingly factoring these costs into their long-term investment decisions.

Shutting Down Plants in the U.S.

Since 2002, Dow and the Union Carbide Corporation, a wholly owned subsidiary of Dow, have been forced to shut down 23 inefficient production plants in North America, at manufacturing sites such as:

 
• LaPorte, TX
• Texas City, TX 
• Seadrift, TX
• Sheldon Road, TX
• Midland, MI 
• Institute, WV
• South Charleston, WV
• Nashua, NH
• Elizabethtown, KY
• Somerset, NJ
• Boundbrook, NJ
 
 
Forming Partnerships to Import LNG

In December 2004, Dow subsidiary Texas LNG Holdings LLC purchased a 15 percent ownership interest in Freeport LNG Development, LP, an organization that is now building an LNG receiving terminal in Freeport, TX. In June 2004 Dow announced an agreement for the long-term use of this terminal.  These dramatic steps are part of Dow’s effort to bring a reliable supply of affordable natural gas to Texas – to help fuel growing consumer demand.

Exploring Alternative and Renewable Fuel Sources

Dow today is an industry leader in exploring alternative and renewable energy sources: 
• On January 17, 2005 World Energy. Inc. announced an exclusive production agreement with Dow Haltermann Custom Processing (DHCP), a Dow business unit comprised of operations within The Dow Chemical Company and Johann Haltermann, Ltd., to produce biodiesel fuel from vegetable oil.  In May 2003, Dow announced an agreement to test fuel cells from General Motors– and to use those fuel cells to convert byproduct hydrogen into electricity that can be used at our Texas Operations site. 
• In July 2003, Dow joined 11 other U.S. businesses in the World Resources Institute’s Green Power Market Development Group, to explore the use of renewable and clean energy sources to save money, protect the environment, and reduce our nation’s dependence on conventional fuels.  Dow is currently evaluating a project  in Dalton, Georgia to produce steam for manufacturing -- from landfill gas. 

Dow continues to look for niche opportunities to utilize renewables, and the company understands the opportunities provided by these alternatives.  However, to meet our nation’s energy needs, consumers must have access to larger-scale, conventional, competitive energy sources, such as cleaner coal and nuclear power.


Implementing Aggressive Energy Conservation & Efficiency Programs

Dow has taken significant, proactive steps to reduce our energy demand,  improving our energy efficiency by 42% since 1990. We recently exceeded our publicly stated goal of improving energy efficiency by 20 percent by the year 2005 from 1994.  By year-end 2004, Dow had already achieved a 21% energy intensity improvement vs. 1994.   In 2004, alone, we reduced our energy intensity by 5.4% vs. 2003.  We are now setting a new aggressive goal to continue our energy efficiency drive through 2015.  Within the chemical industry, Dow is a leader in efficient energy use.  We use cogeneration to generate 95% of the power and heat needed to run our processes in the U.S. and 75% of that needed globally.  Cogeneration is 20-40% more efficient than producing power and steam separately.

Reaching the Limits of What We Can Do without Help From Our Government

As detailed above, Dow is doing everything within the company’s power to help reduce our demand for U.S. natural gas and to offset the extreme negative impact of inflated and volatile energy and feedstock costs on our company and our industry.  However, we’re reaching the limits of what we can do without help from Congress and the Administration. 

Calling for Government Help to Resolve the U.S. Natural Gas Policy Imbalance
The situation in the U.S. has been several years in the making. Natural gas has been positioned and promoted by the natural gas industry, the U.S. government and the environmental community as the "growth fuel" for the electric power industry.  However, this was destined for failure from the start due to the enormous size and growth rate of the power sector – and the relatively smaller and declining natural gas production sector.  The domestic supply of natural gas has not only failed to meet the resultant increase in demand but has actually declined despite five years of record high prices.  Production declined again in 2004.  The imbalance between supply and demand has resulted in enormous domestic price increases, hurting our nation’s residential, commercial, agricultural and industrial consumers.

The U.S. Government Must Act Now to Create a Balanced Energy Future
The Energy Policy Act of 2005 was a good start toward addressing the supply-demand problem that drives the U.S. natural gas crisis, and it contained many important provisions related to energy efficiency & conservation, improved infrastructure, and fuel diversity – including clean coal and advanced nuclear power.  However Congress must take further action now – to fully close the projected supply/demand gap -- and increase the nation’s energy supply:  

• Promote environmentally responsible energy production in the Outer Continental Shelf – giving coastal states a greater role, and sharing revenues from new production with them;
• Expedite leasing in Lease Sale 181– at least for areas greater than 100 miles from the Florida coast;
• Declare a national energy emergency right now -- and mobilize every American to save energy;
• Assure that the most efficiently generated energy is dispatched to the power grid first.

 

 

 

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