Prepared for

1
Natural Gas Impact On The Industrial Sector
Not The Industrys Finest Hour

• Prepared for
• National Petrochemical Refiners Association
• 1899 L Street, Suite 1000
• Washington, D.C. 20036-3896

Prepared by August 4, 2003
Energy Ventures Analysis, Inc. 1901 N. Moore
Street, Suite 1200 Arlington, VA
22209-1706 [phone]
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Overview OF Impact On The Industrial Sector
Overview Of Impacts On The Industrial Sector

• The Primary Response To Date To High Prices Has
  Been Demand Destruction In the Industrial Sector
• Industrial demand 1 declined 2.8 BCFD, or 13
  percent, from 2000.
• Some of this decrease represents a permanent loss
  in demand.
• On a composite basis, for the six energy
  intensive industries that account for 65 to 70
  percent of gas demand within the industrial
  sector, production has declined sharply, since it
  peaked at the beginning of 2000.
• It is not clear when industrial production for
  these industries will return to 2000 levels.
• Further declines are projected for industrial
  sector gas demand in 2003 primarily because of
  further production declines for the six critical
  industries.
• Some regions are impacted more than others.

1. All gas consumption data for both the
industrial and electric sectors has been restated
to place this data on a comparable basis and
eliminate the inconsistencies contained in the
Energy Information Administration (EIA) format
for gas consumption. A summary of this restated
data is presented in the appendix to this report.
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Overview Of Impacts On The Industrial Sector
4
Overview Of Impacts On The Industrial Sector
5
Regional Impacts

• Industrial Gas Demand by State1

6
Impact On Specific Industries Chemicals

• The Industries Most Heavily Impacted By High Gas
  Prices Are
• Chemical Industry1
• Primary Metals
• High Gas Prices Represent A Fundamental Change
  For The U.S. Chemical Industry
• There have been a series of bankruptcies, plant
  closings and reductions in production levels at
  several facilities, because they can no longer
  compete at the current elevated gas prices
• The golden era of the U.S. chemical industry
  (i.e., the 1980s and 1990s) is over
• U.S. chemical sector is based heavily upon
  natural gas and natural gas liquids.
• European and Asian chemical sector is based
  heavily upon oil (i.e., naphtha).

• Basic organic chemicals (35), petrochemicals
  (18) and nitrogen fertilizers (13) account for
  approximately two-thirds of the gas
• consumption within the chemical sector.

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Impact On Specific Industries Chemicals

• There has been a fundamental shift in the cost
  ratio of these two feedstocks
• In the 1990s the simple ratio between gas and oil
  prices was approximately 0.6, while at present
  that ratio is approximately 1.0.
• This is about a 40 percent shift in the relative
  competitive advantage of feedstocks.
• Dow Chemical has noted that the U.S. has the
  highest gas prices in the world.1
• The petrochemical segment of the chemical
  industry has been affected more by high gas
  prices than most other segments of the chemical
  industry (i.e., see chart on page 8).
• One of the clearest indicators of this shift is
  the change in U.S. balance of payments for
  chemicals
• From over 8 billion surplus in 1999 to an
  estimated 9 billion deficit for 2003.
• U.S. used to be the worlds largest supplier of
  chemicals.
• Anecdotal evidence of Latin American chemical
  producers switching from importing U.S. chemicals
  to importing European chemicals.

(1) Natural Gas Week, July 7, 2003.
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Impact On Specific Industries Petrochemicals
9
Impact On Specific Industries Chemicals
10
Impact On Specific Industries Fertilizers

• One of the Hardest Hit Segments in the Chemical
  Sector is the Fertilizer Industry
• The U.S. ammonia-based fertilizer industry can
  not compete with foreign imports (i.e., Trinidad,
  Mexico, Russia and the Middle East) at elevated
  gas prices.1
• Tidewater plants along the Gulf of Mexico are
  particularly vulnerable.
• Inland facilities have a modest transportation
  advantage.
• The combination of the very high gas prices
  during 2000/2001 and in 2003 have caused several
  firms to declare bankruptcy and others to shut
  down plants.2

• On average it takes 34 MMBTU to produce a metric
  ton of ammonia. With worldwide prices for
  ammonia ranging from 140 to 200 per ton,
  natural gas at 3.50 per MMBTU delivered can
  represent between 60 and 85 percent of total
  revenue, which leaves a minimal margin for other
  cost, such as labor, building costs, etc.
• Bankrupt fertilizer firms include Farmland
  (Midwest and Louisiana), Vicksburg Chemical (MS),
  Agrifos (TX), Mulberry Phosphates (FL), and Agway
  (Syracuse, NY). Mississippi Chemical (Yazoo City,
  MS) has had a one year credit extension and Terra
  Industries (Sioux City, IA) has acknowledged
  limited ability to effectively hedge future gas
  prices. Mississippi Chemicals has permanently
  shut down its Donaldsonville, LA plant and Air
  Products has ceased production at its Pace, FL
  plant. Additional plant shut downs in early June
  include PSC Chemicals in Geismar, LA and Memphis,
  TN Terra Industries in Verdigris, OK Koch in
  Enid, OK and Sterlington, LA and IMC Global in
  Faustina, LA.

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Impact On Specific Industries Primary Metals

• The Primary Metals Sector Also Has Been Impacted
  Severely By High Gas Prices
• The U.S. aluminum industry has become the swing
  producer for the world because of its high costs
• Particularly its high power costs with gas-fired
  generation in most instances setting the marginal
  power prices.
• This has caused eight U.S. facilities to idle
  capacity and it is questionable if these idled
  plants will ever reopen1
• It is doubtful if there will ever be another
  greenfield aluminum plant built in the U.S.
• At present there are only two plants operating in
  the Pacific Northwest, which is the heart of the
  U.S. aluminum industry, and one of these is at
  20 capacity

1 Currently idled aluminum plants include
Alcans West Virginia plant, the Mead, Tacoma and
Trentwood, WA plants for bankrupt Kaiser, Alcoas
Troutdale, OR and Rockdale, TX plants, and the
bankrupt Longview, WA plant and the Goldendale
plant. These eight plants may never reopen. At
present in the Pacific Northwest only two plants
are operating (i.e., Glencores Columbia Falls in
Kalispell, MT at 20 capacity and Alcoas
Ferdnale plant in Bellingham, WA)
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Impact On Specific Industries Other Industries

• Other Industries Have Been Adversely Affected By
  High Gas Prices. Specific Examples Included the
  Following
• Sugar or Sweetener Industry1
• High fuel costs (e.g., elevated gas prices) have
  been a critical factor in the closing of a number
  of sugar beet factories and sugar cane processing
  mills.2
• A recent example is the closure of the Western
  Sugar Cooperative facility in Greely, Colorado.
• Sugar beet growers also have been impacted by
  high gas prices.
• Natural gas is the primary fuel used to operate
  irrigation pumps and is a major cost for the
  sugar beet growers.

• The sugar beet, sugar cane and corn sweetener
  industry accounts for 21 billion in economic
  activity in 42 states. Sugar beets, in specific,
  are grown in 12 states with 27 sugar beet
  factories and account for 88,200 full time direct
  and indirect jobs.
• Since 1996 19 plants, or 25 percent of all U.S.
  sugar processing facilities, have been shut down.

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Impact On Specific Industries Other Industries

• Agriculture industry has been impacted adversely
  by high gas prices
• Corn growers, in particular, are heavily
  dependent on ammonium fertilizers in order to
  maintain yields.
• High gas prices have caused fertilizer prices to
  increase.
• Corn growers also are incurring higher fuel costs
  (i.e., natural gas) to run their irrigation
  pumps.
• There are indications that corn growers will
  reduce fertilizer usage and as a result sacrifice
  yields.
• Estimated impact of these phenomenon is that corn
  yields could be reduced one bushel per pound of
  fertilizer.1
• 1 Wall Street Journal, Natural- Gas Prices may
  affect plantings of Corn and Soybeans, March 10,
  2003, p.c-11