1. A Changing Europe – What Does it Mean for Petcoke? McCloskey’s Petcoke Conference July 20, 2004 by Holger Dewald Ben Ziesmer

2. Europe – Change Brings Uncertainty Expansion of EU Economic growth – How much and when? Kyoto Protocol –EU Trading Directive Rapid rise in energy costs Liberalization (deregulation) of energy markets –Natural gas –Power

3. EU Added Ten Countries 1 May 2004 Population increased by 20% to 455 million GDP increased by 9% to $10.3 trillion

4. New Entrants Add Uncertainty Economies of the eastern countries appear to be getting a big boost from joining EU Eastern Europe economies are more flexible, with lower labor costs and tax rates than western Europe Jobs are being relocated from western Europe to the east –Creating political stress Western European countries are looking for ways to stem the migration of jobs

5. EU Economic Growth GDP growth has been anemic but increasing –2004 = 1.6 – 2.0% –Confidence in recovery increasing – 2005 forecast = 2.4% Not uniform –U.K. = 3.0% –Germany = 1.5% Unemployment stable @ approx. 9.0%

6. Kyoto Protocol Uncertain whether Russia will ratify –No Russia = no Kyoto EU says it will proceed with or without Russia –Target = reduce CO 2 emission by 8% by 2012 (basis 1990). –Germany to provide 2/3 of total EU reduction –Based on current trends, EU not going to meet requirements Realities of Kyoto starting to be realized –Japan also likely to miss Kyoto targets –It’s not going to be easy –It’s going to be costly

7. EU CO 2 Emissions Trading Scheme (ETS) Phase 1: Jan 1, 2005 through Dec. 31, 2007 July 7, 2004 EU decisions - National Allocation Plans (NAP) –5 approved: Denmark, Ireland, Netherlands, Slovenia, Sweden –3 approved with conditions: Austria, Germany, UK –Spain & France NAPs close to being approved –2 (Italy & Greece) warned for not submitting plans –5 new entrants missed May 31 deadline for submitting NAP Patterned after U.S. SO 2 Allowance Program –Must have certificate of MT of CO 2e that is emitted

8. Phase 1 EU Emission Trading Covers approx. 14,000 facilities = 40+% of emissions –Combustion: heat input > 20 MW (68 MMBtu/hr) –Metal production > 2.5 MT/hr –Cement kilns > 500 MT/day –Lime kilns > 50 MT/day –Pulp & Paper > 20 MT/day –Site, not unit, thresholds Penalties for not having enough allowances –€40/MT of CO 2e –Offset in subsequent year = allowance shortfall

9. Implications of Recent EU ETS Decisions EU committed to Jan 1, 2005 kick-off date –Already approved allocation of approx. 50% of Phase 1 allowances (2.9 billion MT CO 2e ) Very pragmatic –Avoided big fight with Germany –Pushed hard decisions off to future Future considered –Allocation reserve rules evaluated carefully –Path to Kyoto considered Prices of CO 2e Allowances have fallen

10. Coal Costs Have Increased Rapidly

11. Liberalization Is Changing Energy Market Causing prices to drop in wholesale power market –Plant operations driven by profit motive, not “obligation to serve” Long-term impact on power industry uncertain –U.K. power market first major competitive power market Power plants in bankruptcy No new construction, except wind Power shortage forecast but nothing happening Increasing natural gas access –U.K. market tied to EU –U.K. about to become net importer –CIS supplies are critical

12. European Petroleum Coke Consumption - 2003 Total 16 million MT Cement Power Iron & Steel Residential Others

13. Petcoke Demand – Cement Industry Likely to use more alternative fuels to reduce coal use –But not petcoke Strategy for EU emission trading unclear –NAP uncertainty = no firm industry plans Composite Cement – how important? –Very effective way to reduce CO 2 emissions –Niche or generally applicable? Cement industry sales growth in eastern Europe, but not much impact on petcoke –Few conversions to petcoke in near term

14. Power Industry Petcoke Demand

15. Power Industry Many companies planning to increase petcoke use –Test burns at U.K. power plants Ratcliffe-on-Soar (2,000 MW) and Drax (3,960 MW) important Emission trading strategy appears to be to reduce power production to meet CO 2e caps, not switch to natural gas –Margin more important than production (capacity factor) –Petcoke increases margin

16. Conclusions Cement demand – little change for 2005 –General trend of increased use of alternate fuels somewhat offset by improving economic outlook –Emission trading strategy unclear “We’ll jump off that bridge when we come to it” – Wisconsin Senator describing strategy to handle future budget problems Power industry demand likely to increase significantly –Depends on outcome to trials at Drax & Ratcliffe –Emission trading strategy: run coal fired units less