Energy Conservation -2

Industry Will Begin to Experience Decreasing Demand and Increasing Energy Prices Which Will Reduce Profit Margins Significantly And Rapidly

The Petrochemical Industry Will Begin to Experience Decreasing Demand and Increasing Energy PricesBruce LaCour, P.E. Mech. Engr.December, 20151

The Facts of Life About The Petrochemical BusinessWhat is This Business About?This business is about making money as fast as possible just like all others that last, except non-profit organizations and governments. Its not about creating a new knick-knack or creating jobs despite the usual propaganda from new players. Therefore, whatever is not profitable to the owners is shutdown.This business is about producing basic and intermediate chemicals for final products. Final products are not being produced. Therefore, building a plant doesnt create demand for what is being produced. It only creates more competition, which has a tendency to reduce profit margins for all players in the future resulting in some of them leaving the business. This is something all these new players in the basic chemicals sector are going to learn yet again.2

The Facts of Life About The Petrochemical BusinessThis business is highly technical and potentially dangerous with severe consequences for mistakes in both the safety and environmental considerations and for an incomplete understanding of the commercial ability of the technology. The investors and employees of KIOR and Range Fuels and recently Abenoga found that about the biochemical industry. This business is about responding to changes in both technology and the economic climate, but always ruled by the bottom line. DuPont and DOW, two of the original basic chemicals players, are being forced to reduce their profiles to the low profit margin basic chemicals industry and aggressively urged by some major investors to move into higher profit margin specialty chemicals. Whenever CEOs dont respond, they are eventually replaced.3

The Facts of Life About The Petrochemical BusinessThis business is about maximizing the efficiency of what you have because there is generally little control over operating cost in the short term. The only fast response to lowering operating cost is to reduce labor cost, and that is coming.This business cost a great deal of initial capital to become a player. And then operating cash flows are equally large so that just short periods of economic slowdown can drive players quickly out of the game.This business requires significant recurring expensive capital expenditures in order to maintain competitiveness and to comply with safety and environmental regulations. These expenditures better be well thought out and efficiently applied.

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The Facts of Life About The Petrochemical BusinessWhat This Business Is Not About?This business is not predominantly about new technology where Wall Street will throw money at a new knickknack and the stock price starts to skyrocket and there is no need to make any profit.This business is not about a new technology or a new entrepreneur that is going to change the outcome of an existing marginal business. If a previous owner couldnt make the operation profitable, then what is a new owner going to do differently? The only possible answer is to cut operating cost drastically.This business is not about the dreamer who creates the new invention in his garage. The initial capital requirement is large even for the smallest operators.

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The Facts of Life About The Petrochemical BusinessGreenspan started a monetary policy in the early last decade that has created two more bubbles (the first being the dot.com bubble) in a row the sub-prime mortgage bubble and the tight oil-shale gas bubble. The last one is slowly deflating and could bust wide open any day with similar immediate financial problems to the last bubble bursting in 2008. This will result in unprecedented debt destruction and further reductions in the demand for everything. The continuous easy money policy and propaganda about the improving economy has created a mirage of a new petrochemical age which many new players have fallen for.Industry will experience decreasing demand and increasing energy prices which will reduce profit margins significantly and rapidly maybe starting as soon as next year.

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The Facts of Life About The Petrochemical BusinessMany pressures on natural gas supply will cause the equilibrium price to rise higher. Eventually the higher and higher natural gas prices will cause some plants to shutdown similar to late 1990s and early 2000s. The natural gas price may even reach levels in early next decade that cause Congress to rethink LNG export, just like they now prohibit domestic crude oil export.The following slides will give details about how these various pressures are developing.

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The Total Demand for Natural Gas Continues to RiseThe total demand for natural gas continues to rise, which is no great revelation. However, lets analyze why and concentrate specifically on Louisiana and Texas, which is the heart of the U.S. petrochemical industry and is a large consumer of natural gas. All this data is available for viewing at the U.S. Energy Information Administration (EIA) site under Natural Gas Data.U.S. natural gas total consumption rose from a low of 17.28 million cubic feet (MMCF) in 1997 to about 26.69 MMCF in 2014. Thats a 55% increase in consumption. Note that U.S. 1996 consumption was even lower, but Louisiana and Texas consumption is not listed for 1996 so we will start from 1997. Louisiana total natural gas consumption in 1997 was 1.36 MMCF and was still only 1.32 MMCF in 2014. Texas total natural gas consumption in 1997 was 3.73 MMCF and decreased to 3.41 MMCF in 2014. 8

The Total Demand for Natural Gas Continues to RiseThe levelling off of natural gas consumption in Louisiana and Texas was largely due to the deindustrialization that began in 1990s with lower natural gas prices and increased operating competition in other parts of the world. That was unmistakable in the late 1990s as U.S. ammonia and methanol plants began shutting down and new plants began appearing in other countries.There are too many charts to show all this data; however, the chart on Slide 10 of the Henry Hub Natural Gas Spot Price is interesting because it shows spikes above $10 per million BTU (MCF) in 2001, 2003, 2005, and 2008. The last spike in 2008, in concert with the Federal Reserves resolve to prevent a economic collapse, is what set off the shale gas craze.For what it is worth, look at Slide 11 which is U.S. Natural Gas Industrial Price, which is not as volatile but has the same trend.9

The Total Demand for Natural Gas Continues to Rise

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The Total Demand for Natural Gas Continues to RiseSo what is causing the 55% increase (and even more if measured from 1996) in natural gas consumption from 1997 to 2014? It wasnt the petrochemical industry? That, along with much of other heavy industry, was moving overseas.Look at Slide 13, which is U.S. Natural Gas Consumption by End Use from 2009 to 2014. The categories are Lease and Plant Fuel, Pipeline & Distribution Use, and Volumes Delivered to Consumers: Residential, Commercial, Industrial, Vehicle Fuel, and Electric Power. The chart shows consumption in each category from 2009 to 2014, but the view history column shows you can get data from at least 1997. I wont show you every graph, but the sector that shows the largest increase from 1997 is Electric Power, which increased from 4.06 MCF in 1997 to 8.15 MCF in 2014 for a more than 100% increase. Slide 14 shows the graph for Electric Power Consumers.12


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The Total Demand for Natural Gas Continues to RiseNow look at Slides 16 and 17, which are Louisiana Natural Gas Consumption and Texas Natural Gas Consumption graphs. Slide 16 shows that demand for industrial natural gas in Louisiana has decreased 4% from 1997 to 2014 and Slide 17 shows that industrial natural gas has in Texas has decreased 23.6% during the same period that U.S. natural gas consumption for electricity production has steadily risen.Part of the rise in natural gas consumption for electricity production is due to the switch from coal to natural gas, which will continue at a much more rapid pace in the future. More importantly, electricity is an essential commodity to the American consumer, and the price has to rise significantly before Americans will reduce consumption to any degree that would place downward pressure on a rising natural gas price.15


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The Total Demand for Natural Gas Continues to RiseWhats the point? The point is that once the Shale Gas Ponzi Scheme starts to fall apart and the price of natural gas starts to reflect the true value of whats left then American based industry will see rising petrochemical feedstocks cost and rising electricity cost (which is up to 80% or more of operating cost) simultaneously. American consumers will not reduce consumption significantly, immediately to bring those costs down.Several pressures will keep the natural gas prices rising until something breaks. More than likely what will break first is the backs many operating plants along the Gulf Coast. And hence what I said in Energy Conservation Will Become The Primary Concern For United States Industry shown on the next slide.18

The Total Demand for Natural Gas Continues to Risethe many pressures on natural gas supply that will shift the supply curve upward and to the left to establish a new higher natural gas equilibrium price. The immediate affect will have the demand curve shift upward and to the right to maintain consumption levels, since many will not go out of business immediately, and will cause the equilibrium price to rise even higher. Eventually the higher and higher natural gas prices will cause some plants to shutdown similar to late 1990s and early 2000s. The natural gas price may even reach levels in early next decade that cause Congress to rethink LNG export, just like they now prohibit domestic crude oil export.Now what pressures?

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Announcements for Export LNG Plants in the U.S. ContinueNow let us look at this ridiculous concept of exporting American natural gas to other countries and what pressure this will have on the price of natural gas.Slides 21, 22, and 23 show North American LNG Import/Export Terminals Existing, Approved, and Proposed, respectively.Notice on Slide 21 that many of these existing facilities are import facilities. It wasnt that long ago that the major concern was importing enough natural gas to keep the electricity and consumer natural gas prices and also the industrial natural gas price from rising because conventional natural production was decreasing. Now shale gas is the new savior for U.S. industry! We now have more than enough and can even export to other countries!Slide 22 shows how far along this nonsense has been taken and it is still moving forward as shown on Slide 23. 20

Announcements for Export LNG Plants in the U.S. Continue

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Announcements for Export LNG Plants in the U.S. ContinueFurthermore, there are other announcements that havent even made it to the FERC proposed list. Just lately on November 24, KBR announced a contract for a FEED for another two-train LNG facility for G2 LNG on the Calcasieu Ship Channel.Who is this going to benefit? Not the American consumer and not the U.S. based petrochemical industry either!However, reality is setting in as the world economy continues to contract and the price of oil and natural gas remain low. The title for a Bloomberg article on November 20 by Sarah Chen reads US LNG exports face new threat. A statement from the article reads The Asian nation (meaning China) will accept only 77% of contracted cargoes (meaning LNG) in 2015 as the slowest economic growth since 1990 cuts demand24

Announcements for Export LNG Plants in the U.S. ContinueThen there is the October 9 article in The Advocate (Baton Rouge) by Ted Griggs with the title 85 of 90 planned LNG export terminals unnecessary, report says. The article refers to a study by consulting firm, IHS, Inc., which says that only one in 20 of the planned (LNG) projects are actually necessary by 2025.Think about this. If you are in China or in most of Europe, where would you rather get natural gas? From Russia by pipeline without an expensive regasification plant or from across the Pacific or Atlantic oceans from the United States, where prices have no where to go but up? Also, there is always Qatar and even Iran (as a last resort) for Europe and Australia for Japan and Russia for China.Before this U.S. LNG craze ends, additional pressure will be applied to the upward movement of the natural gas price and many Gulf Coast operations will suffer the consequences.25

The Power Industry Movement from Coal to Natural Gas is IrreversibleOn Slide 14 I showed how U.S. natural gas deliveries to electric power consumers continue to increase in spite of several price spikes in the last decade.Now there is complacency that these low energy prices will last for a long time. Add in the unrelenting movement to reduce worldwide coal consumption, and U.S. coal power plants are under increasing pressure to reduce emissions, which many can not afford to do. This means that the movement to replace coal with natural gas will pick up speed.Slide 27 shows a graph of potential coal power plant retirements from an article The Fall of Coal at Politico.com.

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The Power Industry Movement from Coal to Natural Gas is Irreversible

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The Power Industry Movement from Coal to Natural Gas is IrreversibleThe Institute of Energy Research issued a report in 2014 titled: Impact of EPAs Regulatory Assault on Power Plants: New Regulation to take More than 72 GW of Electricity Generation Offline and the Plant Closing Announcements Keep Coming. The following first two paragraphs (on Slide 29) of the report describes the concerns.28

The Power Industry Movement from Coal to Natural Gas is IrreversibleMore than 72 gigawatts (GW) of electrical generating capacity have already, or are now set to retire because of the Environmental Protection Agencys (EPA) regulations. The regulations causing these closures include the Mercury and Air Toxics Standards (colloquially called MATS, or Utility MACT), proposed Cross State Air Pollution Rule (CSAPR), and the proposed regulation of carbon dioxide emissions from existing power plants.To put 72 GW in perspective, that is enough electrical generation capacity to reliably power 44.7 million homesor every home in every state west of the Mississippi River, excluding Texas. In other words, EPA is shutting down enough generating capacity to power every home in Washington, Oregon, California, Idaho, Nevada, Arizona, Utah, Montana, Wyoming, Colorado, New Mexico, North and South Dakota, Nebraska, Kansas, Oklahoma, Minnesota, Iowa, Missouri, Arkansas, and Louisiana.29

The Power Industry Movement from Coal to Natural Gas is Irreversible96% of this capacity is coal fired. It remains to be seen if this total capacity actually shuts down, but ever since President Obama made the following statement to the San Francisco Chronicle in January 2008 So if somebody wants to build a coal fired plant they can. Its just that it will bankrupt them pressure to shutdown coal capacity has increased.No doubt the consumption of natural gas will increase as a result of environmental regulations forcing closures of coal power plants. Unrelenting upward pressure on the natural gas price will also result.

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Coal Gasification (IGCC) Is Very ExpensiveBefore the shale gas craze ramped up, coal gasification with carbon capture (IGCC) was many of the new saviors of mankind being talked about. You can use low price coal and save the environment at the same time by capturing carbon underground!!!!Some began to fall for yet another nonsensical idea. Some of the projects died before they could waste investor money, but a few made it through the logic zone. Two of the projects that moved forward were Mississippi Powers Kemper County Coal Gasification Plant in eastern Mississippi and Duke Energys plant in Edwardsport, Indiana. Both projects are way over budget and behind schedule.The Edwardsport plant began operation in June 2013 burning 1.7 to 1.9 million tons of Midwestern coal per year. The original budget for the plant was $1.9 million, but ended up costing $ 3.5 billion.31

Coal Gasification (IGCC) Is Very ExpensiveAs of February 2015, the Edwardsport 618 megawatt plant output had barely risen above 50%, and Duke Energy was trying to pass some of the operating cost overrun onto consumers. By September, 2015, Duke Energy agreed to absorb $85 million in cost associated with the plant construction in addition to the $900 million the company paid in 2012.Edwardsport was bad enough, but the Kemper power plant is even worse. This plant had an original budget of $2.8 billion. The latest projected final cost is $6.3 billion, but it keeps rising.In November 2015, the Mississippi Public Service Commission ordered Southern Company, Mississippi Powers parent, to refund $350 million in Kemper cost overrun charges that it had charged to consumers.32

Coal Gasification (IGCC) Is Very ExpensiveIn May 2015, the Southern Mississippi Electric Power Association, which had originally agreed to purchase a 15% stake in the Kemper project, backed out because it had become too expensive. Mississippi Power had to return to Southern Mississippi the original $275 million deposit on the stake plus interest.This technology will do nothing but add significant upward pressure to rising electricity costs.33

Gas to Liquids (GTL) Will Increase Upward Pressure to Natural Gas PriceAnother technology that has been touted as the savior of the petrochemical industry and a way to replace declining crude oil production or make the U.S. energy independent or whatever hook line and sinker that can be dreamed up is gas to liquids. Its simple, replace crude oil with natural gas to produce transportation fuels and petrochemical feedstocks at the same time.This is mainly based on pre WWII technology, with some improvements, called Fischer Tropsch.A little history lesson is in order. In WWII the Germans used this technology with coal as the feedstock to produce low octane aviation gasoline because they were cut off from sufficient crude oil supply. Their fighter airplanes, which were shooting the American B-17s out of the sky in 1943-44, used this fuel. Then Americans brought in the P-51s with high octane gasoline (care of Baton Rouge refinerys 34

Gas to Liquids (GTL) Will Increase Upward Pressure to Natural Gas Pricepetroleum-based FCC technology) and blasted the Germans out of the sky. Eisenhower himself even credited FCC technology as playing a significant part in winning WWII.After WWII, the Fischer Tropsch technology was relegated to the second string except in South Africa where coal was still plentiful and access to crude oil was sometimes severely limited. After WWII, petroleum refining technology assumed first string status and has remained so ever since.Now that the feedstock for the first string process seems to be waning, the Dutch (Shell) and the South Africans (Sasol) say that the second string is the answer to Super Bowl level U.S. 21st century transportation fuel problems. 35

Gas to Liquids (GTL) Will Increase Upward Pressure to Natural Gas PriceIn September 2011, Sasol announced plans to build a gas to liquids (GTL) plant in Calcasieu Parish, La. next to its existing facility for $10 billion, later raised to $11-14 billion. Sasol estimated that the facility would produce 96,000 barrels a day of diesel and some jet fuel. Later Sasol announced an $8.1 billion ethane cracker and derivates plant and cancelled plans for the $11-14 billion dollar GTL plant.In 2003, Shell started talking about a GTL plant in Qatar that would cost about $5 billion dollars. As the project progressed the cost kept increasing, and by 2007 the estimated final cost was $18 billion with Qatar Petroleum (the Shell partner) expecting the cost to reach as high as $24 billion. The plant was started in 2014 at a reported final cost around $19 billion. In September 2013, Shell not to be outdone by Sasols extravagant plans, announced a $12.5 billion GTL plant36

Gas to Liquids (GTL) Will Increase Upward Pressure to Natural Gas Pricefor somewhere in Louisiana. It only took them until December 3, 2013 to cancel their plans and announce that the expected cost would be $20 billion, not $12.5 billion. I guess Shell had overrun enough projects for now.This technology will probably never get a significant foothold in the United States, but if it ever does, it will help drive natural gas prices through the roof.37

More Ammonia, Methanol, and Ethylene Plants Means Higher Natural Gas PricesSince about early 2011, after shale gas production started to take off in 2010, every Tom, Dick, and Harry has been announcing a basic chemicals plant ammonia, methanol, or ethylene in the United States. Most have been in the traditional petrochemical heartland, the Gulf Coast from just east of the Mississippi to Corpus Christi, Texas. However, some announcements are for the West Coast, North Dakota, the Marcellus and Utica play locations, and ammonia plants all over the U.S.The excitement has been equivalent to someone announcing fire in a crowded theatre. Everyone flies to the back door. How many will make it? Relatively few will make it to through the door, but the ones that do will find out there was no fire and they were severely injured getting through the door. I personally have tried to keep up with all the announcements, but I have only been partially successful in keeping track of the projects38

More Ammonia, Methanol, and Ethylene Plants Means Higher Natural Gas Pricesalong the Mississippi River from Baton Rouge to the mouth of the Mississippi. See Slide 40. This may not be totally up to date. A few of these are not part of the basic chemicals industry, but will still would be consuming natural gas. How long will this irrational exuberance continue, to use a phrase that Greenspan used to describe something he started? It will continue until the players either run out of money or come to their senses. It will probably be the former.The lasting result will be additional significant upward pressure on the natural gas price.39

More Ammonia, Methanol, and Ethylene Plants Means Higher Natural Gas Prices

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Solar and Wind Energy Much Too Little Much Too LateLast decade Boone Pickens, former major player in the traditional petrochemical industry, tried to get Americans interested in the future by building wind farms and talking about expansion through the central part of the United States. He found out Baby Boomers dont want to hear that the past cant continue unabated into the future. He then switched to a more traditional song and dance that they can continue their suburbia lifestyle with long drives to work and frequent trips to Walmart with natural gas powered automobiles. This shows that the American public is not going to rally for renewable energy until it is too late. The demand for natural gas wont diminish any time soon because of renewable energy.While solar and wind energy will be in the future energy portfolio, for now they are insignificant contribution, and the shale gas craze will keep it that way until it is too late to prevent a major restriction in energy supply probably resulting in some electrical blackouts.41

The Shale Gas Boom is TemporaryIn 2006 the Shale Gas craze began. Natural gas drilling started to increase significantly in Barnett and later in Fayetteville and Haynesville plays in response to the rising natural gas price. The New Petrochemical Age had begun in the United States!!!! What had really begun was the third economic bubble in a row and all bubbles burst eventually.Much has been written about shale gas in the last ten years. The proponents, mostly main stream economists, the bureaucrats at the EIA, and various others famous for telling you what you want to hear say a new petrochemical age has been created and will last a long time. However, independent forecasters like Art Berman, a petroleum geologist, and J. David Hughes, among others, have tried to bring experience and data to the discussion about the realistic prospects of tight oil and shale gas. The following facts have been tirelessly pointed out:

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The Shale Gas Boom is TemporaryShale gas plays are not inexhaustible in that only small sweet spots within the plays offer the most production and most of the area is much less productive.Individual well decline rates range from 75 to 85 percent after 36 months of production. Some wells in a play are very productive, but they are typically a small percentage of the total number of wells in the play and are concentrated in a few sweet spots.Overall field declines of 30-45% per year require more and more drilling each year as the sweet spot wells decline and the less productive wells are all that remain.Shale gas is not profitable at current natural gas prices for many (probably most) wells. Art Berman recently published an article on his web site that states that Haynesville shale gas requires $6.50 per thousand cubic feet to break even. 43

The Shale Gas Boom is TemporaryThe EIA has continuously overstated recoverable reserves in both tight oil and shale gas plays. Who is to question them? The politicians? The main stream economists paid to paint rosy pictures for the relentless businessman? How about the bureaucrats who just want to last long enough to get a government pension? It certainty wont be the ones who are selling the stuff! Rebuttal is left to geologists, scientists, and analysts who use logic and data to back up their conclusions.One of those countering the EIA projections is J. David Hughes, an earth scientist who has studied resources for Canada for four decades, including 32 years with the Geological Survey of Canada.Hughes has published several studies with the Post Carbon Institute that challenge both EIA tight oil and shale gas projections. One of the latest in 2014 is Drilling Deeper.

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The Shale Gas Boom is TemporaryFrom Drilling Deeper, Slide 47 shows the Hughes forecast for total production from each of the major plays that produce either shale gas or associated gas from tight oil wells. This production is for the period 2014 to 2040. The three vertical bars are EIA Annual Energy Outlook (AEO) 2014, AEO2015, and the Hughes projection, respectively. Notice how much EIA projections change from 2014 to 2015. Frequent changes, sometimes drastic, seem to be the EIA standard.In its Annual Energy Outlook for 2011, the US Energy Information Administration (EIA) more than doubled its estimate of technically recoverable shale gas reserves in the US to 827 trillion cubic feet from 353 trillion cubic feet. In the 2012 Outlook, the estimate was lowered back down to 482 trillion cubic feet in one of many gross overestimates followed by estimate downward corrections the EIA continues to make.

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The Shale Gas Boom is TemporaryThe IEA revised the original Monterey play total recoverable tight oil reserves estimate from 13.7 billion barrels to 600 million barrels in 2014, a 96% reduction.Slide 48 shows Hughes (blue) versus IEA (red) estimate of total shale gas production through 2040. Big difference!Now you believe what you want to believe, but 2016 is going to show that the shale gas craze is on its way down and eventually not significant enough to stop the natural gas price from rising to the $10 per MCF level and higher.That rising natural gas price may take several years because first a long overdue economic downturn resulting in deflation will take out the weak players that have been kept alive by the propensity for Wall Street to throw money into the latest bubble.46

The Shale Gas Boom is Temporary

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The Shale Gas Boom is Temporary

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The Petrochemical Industry Will Begin to Experience Decreasing Demand and Increasing Energy Prices2016 and possibly some of 2017 will experience deflation due to the economic slowdown that is inevitable as a result of many years of overbuilding that the Federal Reserve low interest policy has attempted to maintain. The only thing that this policy has accomplished since Greenspan started it in the early last decade is two more bubbles in a row the sub-prime mortgage bubble and the tight oil-shale gas bubble. The last one is slowly deflating and could bust wide open any day with much worse financial problems compared to the last bubble bursting in 2008. This will result in unprecedented debt destruction and further reductions in the demand for everything. The result will be deflation, but the Fed sometime in 2016 probably in concert with the IMF, will again foolishly attempt to halt the inevitable economic recession (depression?) with direct contributions to the American consumer.

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The Petrochemical Industry Will Begin to Experience Decreasing Demand and Increasing Energy PricesBernankes helicopters may finally fly. This foolish combination of trying to prop up a failing economy combined with China, Russia, and Saudi Arabias movement to reduce the influence of the American Dollar will cause the start of massive inflation in the United States.Industry will then experience decreasing demand and increasing energy prices simultaneously which will reduce profit margins significantly and rapidly.I am not an environmentalist (Mother Nature will take care of herself) nor am I a socialist. I believe in minimum government regulation and maximum business opportunity. If you think you have what it takes, go for it! But logic and sound data based on engineering knowledge and economics based on mathematics, not unremitting faith in government manipulation or wishful thinking, has to return to American industry. 50

The Petrochemical Industry Will Begin to Experience Decreasing Demand and Increasing Energy PricesThe past is quickly coming to an end. Now what about the future? The World is about to enter a transitional tunnel, a kind of worm hole to a different world, that will involve drastic social, environmental, economic, and natural resource changes that probably will last for ten years. This transition will not be kind to those who think that the past way of life can be continued. Whatever business comes out the other end of this tunnel will need to be doing the maximum using the minimum both employees and energy consumption.51

Energy Conservation -2

Engineering

Transcript of Energy Conservation -2