Paul N. Cicio President Industrial Energy Consumers of America -Energy & Environment Policy- Implications for Manufacturing Competitiveness Paul N. Cicio President Industrial Energy Consumers of America

Key Public Policy Issues Natural gas resources – but at what price? Natural gas exports – long-term, potential to drive U.S. prices to international levels. Overreliance on natural gas for power generation. Higher costs and reliability issues. EPA GHG regulation on EGUs.

Manufacturing is Important to U.S. Economy Contributed $1.87 trillion to the economy, up from $1.73 trillion. 11.9 percent of GDP. Every $1.00 adds another $1.48, the highest multiplier effect of any economic sector. Supports 17.2 million jobs, one in six private sector jobs (12 million direct or 9 percent).

Industrial Energy Consumption to Increase by 21.8% by 2025 Source: EIA

U.S. Natural Gas Demand to Increase by 29.9% by 2020 (Bcf/day) Actual Demand 2012 EIA Forecast 2020 2012 vs. 2020 Difference Industrial 19.78 22.16 12.0% Residential 11.37 12.22 7.5% Commercial 7.95 8.66 9.0% Electric 24.96 24.14 -3.3% Transportation 0.082 0.219 166.7% Lease & Plant Fuel 3.82 4.77 24.9% Pipeline & Distribution Use 1.99 2.00 0.5% Exports of LNG -- 5.70  -- Exports to Mexico 1.70 3.01 77.1% Exports to Canada 2.66 2.96 11.3% Total Demand 74.31 85.84 15.5% Imports from Mexico -0.0009 -0.00 -100.00% Imports from Canada -8.12 -6.00 -26.1% Imports from LNG -0.48 -0.41 -14.6% Total Imports -8.60 -6.41 -25.5% NET TOTAL (Bcf/d) 65.71 79.43 20.9% NET TOTAL (Tcf/y) 24.0 29.0 20.8% Source: EIA – AEO 2014 Early Release, Net Demand

Energy-Intensive Industries Use 82% of All Energy from Industrial Sector (Small Energy Price Increases Have Large Competitive Impacts) Sector % of Operating Cost Aluminum 30-35% Recycled Steel 25% Integrated Steel 85% (energy and raw materials) Plastics 80% (feedstock) Chemicals Varies greatly 15-20% (fuel only) Paper 10-20% Glass 20-25% Fertilizer Food Processing 30% Cement 25-35% Refining 15-20% (fuel only)

Energy Price Sensitive Products are Essential for Economic Growth Commercial & Consumer Products Convert to Building Block Industries Chemicals Plastics Fertilizer Glass / ceramics Steel Aluminum Pulp and Paper Cement Food Processing Food Production Automobiles Consumer goods Construction Medical Supplies Energy Production Appliances Household products Defense industries Telecommunication

The Relationship of Natural Gas Prices and Jobs

“A Direct Relationship Between Energy Costs and Jobs” (Natural Gas Prices Increased 209% from 1999 to 2008) (23% / year increase) Source: EIA, Bureau of Labor Statistics

An Average Loss of 441,667 per Year: Natural Gas Prices Significantly Contributed to the Loss of 5.4 Million Manufacturing Jobs (-31%) 54,905 Facilities Lost (Since 2001) An Average Loss of 441,667 per Year: (Jobs created in 2010 - 2012- 376,000) Source: Bureau of Labor Statistics

Manufacturing job losses Loss of Manufacturing Competitiveness Resulted in About 8.6 Million Job Losses Manufacturing job losses 5.4 Million Non-Mfg. Job losses 3.1 Million Total 8.5 Million Source: NAM, based on 2009 data

Loss of Competitiveness Accelerated Manufacturing Imports by 42% (2000-2013) 2013 Deficit: $448 Billion Source: Department of Commerce

The Cost of Natural Gas to the Industrial Sector Source: EIA

The Cost of Electricity to the Industrial Sector Source: EIA

100-Year Supply of Technically Recoverable Resources Natural Gas Resources are More Uncertain than Believed

Recoverable at what price? “Technically recoverable” does not mean that it is “economically” recoverable. Recoverable at what price?

Potential Gas Committee Assessment 2013 (“technically recoverable”) Tcf Probable (existing fields) 708.5 Possible (“new fields”) 952.3 Speculative (“frontier fields”) 558.7 TOTAL 2,225.6 Alaska -193.8 Available to Lower 48 2,031.8 Key Point: 74% of potential supply in lower 48 is from “less certain” resource estimates. Source: Potential Gas Committee

Potential Gas Committee (Undiscovered Technically Recoverable Resources – Tcf) Source: Potential Gas Committee, 2013

Can Production Meet and Sustain New Demand? More demand to be added between 2016 and 2020 than in the past 20 years combined! Must replace declining “conventional” well production of 19 bcf/d. Production base decline from horizontal wells is 30% equal to 10 bcf/d. This means replacing almost four times the production of the Barnett Shale each year!

LNG & Pipeline Exports Six approved by DOE for shipments to non-free trade countries. New demand of 8.7 bcf/d or +12.4%. 26 others pending. Potential demand of 14.1 Tcf/year, + 54% (DOE). Pipeline exports to Mexico and Canada to increase by 37% to 6 bcf/d by 2020 (EIA).

U.S. Natural Gas Gross Exports Exceed 5 Tcf in 2025 U.S. natural gas imports and exports trillion cubic feet per year billion cubic feet per day History 2012 Projections 2025 25 5.4 tcf of exports (14.8 bcf/day) 20 Pipeline exports to Mexico 15 Pipeline exports to Canada 10 Lower 48 states LNG exports 5 Alaska LNG exports Pipeline imports from Canada -5 2.0 tcf of imports (5.4 bcf/day) LNG imports -10 -15 Source: EIA, Annual Energy Outlook 2014 Early Release Adam Sieminski, December 16, 2013 21 21

Australia: Manufacturers and Power Generators are Being Asked to Pay the LNG Export Price

Overreliance on Natural Gas for Power Generation

Major EPA Regulations Directed at Stopping Coal Use Industrial Boiler MACT Utility MACT (Mercury) Cross State Air Pollution Rule (SO2, NOx) Fly Ash Rule (Classify as a hazardous material) Proposed GHG regulation for new power plants (Only natural gas qualifies) GHG regulation for “existing” power plants GHG regulation for “industrial” facilities (TBD).

Electricity Sector Costs, 2012-2020 (MACT, CSAPR, Coal Combustion Residuals, Cooling Water Regulations) (Billion 2010$) Annual Avg. Present Value Environmental Controls $15 $89 Replacement Capacity $2 $11 Fuel $5 $28 Total $21 $127 Notes: - Compliance costs from 2012 through 2020 are discounted to January 1, 2011 using a real annual discount rate of 7 percent. - Annual average costs are based on the present values and discounting. - The cost of environmental controls includes net cost savings for operating and maintenance (O&M) expenses. Source: ACCCE

All of the $127 billion in costs over eight years will be passed onto the consumer!

Coal Retirement Predictions Source Retirement Date EPA 17.5 GW December 2011 EIA 49 GW July 2012 Credit Suisse 60 GW September 2010 ICF International 75 GW October 2010 NERC 36.4 GW The Brattle Group 57.5 GW December 2010 ICF/EEI 71.5 GW January 2011 FBR Capital Markets 37.5 GW March 2011 FERC 60.5 GW August 2011 NERA Economic Consulting 48 GW September 2011 The McIlvain’ Company 50 GW March 2012 Bloomberg Finance 55 GW June 2012 68 GW October 2012 Source: Bloomberg Finance

Coal is a Low Cost Source of BTUs for Electricity Generation Coal is a low cost source of energy. Its price has consistently been low and is not price volatile like natural gas. Natural gas on the other hand saw escalating prices because of supply issues and was the most price volatile commodity in the world. The chart illustrates why it is important to keep coal in the fuel mix. We need natural gas, coal, nuclear and renewable energy to all compete with one another and not become increasingly too dependent on natural gas. When these energy sources compete…..consumers win. Source: EIA

Implications of Greater Natural Gas Consumption in Power Generation As natural gas prices rise…and they will…industrials will be impacted by both higher natural gas costs plus higher electricity costs!! Base load coal generation is needed to compete on a BTU basis with natural gas. Coal use and fuel diversity is essential for reliability.

EPA Regulation of EGU GHGs Higher electricity prices and reduced reliability. Set precedent for regulation of industrial sector. Support: inside fence-line standards based on engineering limitations of equipment. An emission rate – not a mass-based limit.

Industrial Energy Consumers of America 1776 K Street, NW, Suite 720 Washington, DC 20006 202-223-1661 pcicio@ieca-us.org