Eii Overview & Energy Presentation.10.18.07

Environmental Impact Initiative (EII)
Organization & Energy Industry Overview

Managing Director
David A. Champion

Revision Date: October 18, 2007

EII –Organization & Energy Industry Overview

Contents
Questions & Answers 2
Environmental Impact Initiative –Premise & Mission 5
Presentation Scope 7
Glossary of Terms & Acronyms 8
Executive Summary 9
What is energy? And, why is it important? 12
Where does energy come from? –The life cycle of gasoline, coal and natural gas 13
Why is energy demand increasing? –Macroeconomics 17
How do hydrocarbons affect our environment? 26
Why is the cost of fossil fuels increasing? 42
Fossil fuels are a limited natural resource 61
U.S. energy policy 69
Renewable energies (Wind, Solar, Hydro, Geothermal) 72
Improving existing technologies (Clean-Coal, Natural Gas, Nuclear, Waste-to-Energy) 99
Automobiles & Alternative fuels (Ethanol, Bio-diesel, Hydrogen) 121
Energy conservation 151
Carbon footprint & offsets 170
Conclusion 174
Sources & References 175

–2–
©2007 Environmental Impact Initiative

EII

Questions:
1. The United States represents 5% of the earth’s population; what percent of the world’s greenhouse gas
emissions do we emit?
2. What percent of waste does America recycle?
3. How much carbon dioxide does 1 gallon of gasoline produce?
4. What is the federally mandated fuel economy standard in the U.S.?
5. If every car in the U.S. increased its fuel efficiency by 7.6 miles per gallon, we could stop importing oil from
which global region?
6. If the United States became solely dependent upon its own domestic production of oil from current wells to
fuel our economy, how long could we sustain our current consumption rates?
7. What costs more 1 gallon (8 x 16 oz. bottles) of filtered water, or one gallon of regular unleaded gasoline?
8. How many trees would the average U.S. household have to plant each year to absorb the amount of carbon
dioxide they emit?
9. Where does our electricity come from in the United States?
10. How many children today have asthma in the United States?
11. How many of the contiguous 48 states is it NOT permissible to eat all types of fresh water fish due to high
levels of mercury?
12. Two of the fastest growing renewable energy generation methods are Solar and Wind, where were these
technologies invented?

–3–

EII

Answers:
1. The United States emits 30% of the world’s greenhouse gases. The average U.S. household emits 41,800 lbs.
of carbon dioxide or 5 times the average global household quantity.
2. According to the U.S. EPA, Americans dispose of 250 million tons of municipal solid waste per year (4.5 lbs.
per person/per day) and recycle 23.8% of this waste and compost 8.4%.
3. 1 gallon of gasoline at 6.3 lbs. produces 19.4 lbs. of carbon dioxide, this is because when hydrocarbons burn,
the carbon molecules are combined with two oxygen molecules to form CO2, which is 3 times heavier than
the original gasoline. The average car burns its weight in CO2 every 4 months.
4. In 1987 the U.S. fuel economy was 22.1 miles per gallon (mpg) for light-duty vehicles and was reduced to
20.9mpg in 1997 and then 21.0mpg in 2006, remaining relatively unchanged for over 20 years.
5. 7.6 more miles/gal. on every car in the U.S. would result in independence from Middle East oil imports.
6. The U.S. holds about 680 million barrels of strategic oil reserves, produces 4.66MM barrels per day
domestically, but consumes 21MM barrels per day resulting in only 40 days of domestically available oil.
7. The average U.S. price for a 16oz. bottle of purified water is $1.00 x 8 = $8.00/gallon or 2.5 times more than a
gallon of gasoline. Americans consumed 8.3billion gallons of bottled water in 2006, costing $66.4bn dollars.
8. The average mature tree consumes about 48 lbs. of CO2 per annum. If the average U.S. household emits 41,800
lbs. of carbon dioxide, each household would need to plant 871 trees per year to be carbon neutral.
9. 49% of our electricity comes from coal-fired power plants, 20% from natural gas, 19.4% from nuclear, 7%
hydroelectric, 2.4% from renewable energy sources such as, biofuels, waste to energy, solar and wind.
10. Asthma currently affects 6.2 million children and is the most common chronic childhood disorder, it is the
leading cause of absenteeism in schools. 80% of asthmatic cases, especially in Black and Hispanic children
takes place in industrial regions that do not meet U.S. EPA federal air pollution standards.
11. You cannot eat all types of fresh water fish in 44 states due to high levels of mercury. The burning of coal and
mining causes the majority of mercury, lead, and arsenic poisoning in the United States.
12. Both solar and wind electrical generation were invented in the U.S.A., however both of these technologies are
now predominantly supplied by German, Japanese, and Chinese companies.
–4–

EII

The Environmental Impact Initiative -Premise
The questions and answers on the previous pages are meant to be thought provoking and provide
examples of the energy related challenges that exist today both globally and in the U.S. These
challenges are summarized below:

There exists today an uncertain and diminishing supply of conventional energy sources at
affordable prices to meet a growing world demand.
Fossil fuels used as the primary energy source, cause human and environmental harm.
Poor waste management and a lack of sustainable business practices affect our natural resources
such as water, soil, air, and forests.
Animosity towards the U.S. based on our per capita energy use and pollution emissions will only
increase unless we take a leadership role in environmental stewardship, sustainable product
development, renewable energy projects and international energy policy.

Be sure that these issues will define this new millennium. The solutions to these challenges rest in
our ability to adopt energy efficient practices and products, in our ability to develop economically
viable renewable energies, to produce alternative transportation vehicles and fuels, and in managing
our waste and pollution emissions with the goal of protecting our valuable natural resources and
progressing a sustainable energy future.
The Environmental Impact Initiative (EII) was created to be the vehicle through which we
communicate the above issues, research affordable and actionable solutions, and through our
members and sponsors, we make these solutions a reality.

–5–

EII

The Environmental Impact Initiative -Mission
Mission Statement:
To initiate environmental stewardship with businesses and residents by demonstrating the positive
financial and social impacts of resource preservation, energy conservation, pollution minimization
and waste management best-practices within the urban setting.
Vision:
Pollution controls, waste management, renewable energies, energy-efficient technologies, and
environmental best-practices will protect our depleting natural resources, provide sustainable
energy to the masses, and will yield both ecological as well as financial benefits to the cities in
which we execute our mission.
Guiding Principles:
Lead by example, be a catalyst for positive environmental change at home and in your community
Solutions must be financially and environmentally justified to be sustainable
Tirelessly research and analyze new products, technologies and practices to establish best-in-class
solutions
Remain politically neutral as pollution, resource depletion, and improving our living environment
equally impacts every person despite their political preference
Focus on positive messages, benefits and actions
Build an effective and active membership based upon these key traits: trust, honesty, diversity,
mutual respect, complete communication, a shared vision, and a collaborative effort focused on
results
All funding and use of monies will be made transparent to sponsors and members
Perform every task with a sense of urgency
–6–

EII

EII: Research, Promote, Act
Research: The environmental impact initiative will tirelessly research and analyze products,
services, companies, and processes which will fulfill our mission statement. The EII will act
as a resource for other institutions and clients, therefore must stay abreast of the latest
environmental and energy trends. Research tools include various publications, industry or
technology expert reviews, company specific meetings, research papers done by financial or
academic institutions, and from meetings with other energy/environmental groups.
Promote: Education and public awareness are at the forefront of long-term, sustainable
changes and social movements. Clients must be aware of the issues and potential solutions in
order to properly act. The use of billboards, newsprint, promotional products, and our
website will be used to create awareness. Presentations at schools, businesses, and
environmental events will help educate the public. Hosting large environmental seminars
with expert discussion panels, company/product overviews, and subject specific breakout
sessions will help promote the adoption and investment in our subject matter. A strong and
diverse social network of EII members and sponsors will help spread the word.
Act: Through our sponsors and members we will work to implement the services, products,
technologies, processes and practices that we promote. Action can take many forms:
volunteer work at an environmental community project, writing and implementing a best-in-
class recycling program for a commercial office building, motivating residents or businesses to
better insulate their homes or purchase energy-efficient appliances, working with target
businesses to evaluate the implementation of solar panels on their property and working with
city or state officials to influence policy, promote renewable projects, carbon offsets, energy-
efficient products or purchasing fuel efficient vehicles.
–7–

EII

Presentation Scope

This presentation is designed to:

Provide potential members and sponsors with an overview and purpose of the EII organization

Articulate the EII view of the energy industry, current issues, and viable solutions

Validate our view with factual data, detailed references, and expert advice

Inspire our audience to make changes in their own lives and to be a positive example for others

To recruit members and sponsors

–8–

EII

Glossary of Terms & Acronyms
AEO – Annual Energy Outlook LNG – Liquid Natural Gas
Bbls – Billion Barrels of Oil MCF – Thousand Cubic Feet
BTU – British Thermal Unit MTOE – Million Tonnes Oil Equivalence
CO2 – Carbon Dioxide MW – MegaWatt
CNG – Compressed Natural Gas NAP –Northern Appalachian Coal
DOE – U.S. Department of Energy NG – Natural Gas
EIA – U.S. Energy Information Administration Non-OECD – Non members of the OECD
EII – Environmental Impact Initiative OECD – Organisation for Economic Co-
operation & Development
EPA – U.S. Environmental Protection Agency
OPEC – Organization of the Petroleum
EtOH - Ethanol
Exporting Countries
EU – European Union
PTW – Pump to Wheels
FC – Fuel Cell
PV – PhotoVoltaic –solar cells
FCV – Fuel Cell Vehicle
R&D –Research & Development
GDP – Gross Domestic Product
RFG – ReFormulated Gasoline (regular gasoline
GHG – Greenhouse Gas blended with ethanol)
H or H2 - Hydrogen TCF – Trillion Cubic Feet
HEV – Hybrid Electric Vehicle TW – Terawatts (1 trillion watts)
ICE – Internal Combustion Engine USD – United States Dollar
ICEV – Internal Combustion Engine Vehicle WTI – West Texas Intermediate –crude oil
IEA – International Energy Agency designation
kWh – KiloWatt Hour WTP – Well to Pump
LDV –Light Duty Vehicle WTW – Well to Wheel
–9–

EII

Executive Summary
World energy demand is increasing at a rate of 1.8% per annum, due to global population growth, the
industrialization of China and India, and the desire of industrialized nations to continue to grow their own
gross domestic products.
87.5% of the world’s energy currently comes from the burning of hydrocarbons (fossil fuels). Electricity is
primarily generated by coal and natural gas, whereas transportation fuels come from petroleum.
As fossil fuels are burned and converted into energy, they release carbon dioxide as well as a variety of other
harmful greenhouse gases and pollutants. Scientists and politicians around the world now believe that the
continued use of fossil fuels negatively impacts human health, the environment as well as geo-political
stability. As a result, hydrocarbons carry with them a very high societal cost.
Fossil fuel prices will remain relatively high vs. historical values. Prices will be driven by increased global
demand, resource depletion, marginal cost increases in extracting more difficult unconventional sources,
higher refinement costs of heavier more sulfur laden oil, transporting fuels from greater distances,
production constraints of petroleum providers and the additional cost of pollution controls.
Fossil fuels are a limited natural resource. As these increasingly important and costly resources diminish we
are seeing examples of protectionism, fascism, and war play out on the global stage.
Energy independence needs to become a primary objective of the United States. Reducing our dependency
upon foreign energy supplies, minimizing energy price fluctuations, and diversifying our energy portfolio
means long-term economic stability for America.
The United States will follow the rest of the world with some form of a carbon tax or carbon cap and trade
proposal in efforts to reduce greenhouse gas emissions, but will most likely not mandate the change until the
next presidential election in 2009 or until the next evolution of the Kyoto protocol envisioned by 2012.

– 10 –

EII

Executive Summary –(continued)
Federal and state governments as well as concerned citizen utility boards work to keep our gas prices and
utility costs low by mandating utility price caps on electricity, maintaining low taxes on gasoline and other
fuels, providing subsidies and tax incentives to offset the increased cost of fossil fuel discovery and
production, and have grandfathered in older- more pollutive facilities which do not meet current U.S. EPA
clean air standards. Inadvertently, these practices perpetuate the use of older, less efficient power plants
and deter the capital investment in more efficient generating technologies, renewable energies and pollution
control systems.
The U.S. federal government along with many states are working to develop new energy policies, incentives
and grants focused on energy conservation, fuel-efficiency standards, renewable energy projects, alternative
transportation fuels and, green building design/construction. Today, residents and businesses alike can
benefit financially as well as environmentally by taking advantage of existing tax credits, grants, green
mortgages, solar & wind projects, and the purchase of energy-efficient appliances.
Coal is a highly abundant domestic resource which promises to supply the United States with enough
energy to meet our needs for the next 200 years. Coal however, in its current form, has the worst pollution
profile of any electrical generation fuel and poses serious health and environmental risks. Given that 49% of
today’s electricity in the U.S. is generated by coal-fired power plants, significant research & development in
clean-coal technologies, and strict government pollution policies are required to keep coal a viable, long-
term energy source.
Nuclear power, although heavily debated as a ‘clean energy’ will continue to be instrumental on a global and
U.S. basis to meet future electricity demands. Nuclear power offers low kWh costs, reliable electrical
output, low societal costs and virtually zero greenhouse gas emissions.
Wind power has achieved global compounded annual growth rates of 30%. Larger wind turbines and
component economies of scale allow wind to be on grid parity with fossil fuel generators. However, wind
farms need to overcome variable power output with more electrical storage capacity, need to be strategically
placed in areas which do not effect migratory bird paths and require better marketing to overcome their
negative aesthetics and sound perceptions.
– 11 –

EII

Executive Summary –(continued)
Solar promises to offer the greatest energy potential of any electrical generation method. More solar energy
hits the earth in 1 hour than the planet uses in an entire year. Harnessing that solar energy through
photovoltaic and thermal cells requires increased R&D on materials and cell efficiencies. The U.S. as well as
other governments are sharing in R&D expenses and offering financial incentives to early adopters to
facilitate economies of scale for solar producers. The solar industry expects PV cells to be at electrical grid
parity by 2012.
Capturing and using methane gas from dairy farms, ranches, landfills, and sewage treatment facilities has a
dual benefit: 1) methane gas accounts for about 18% of greenhouse gas emission and is 25 times more potent
than carbon dioxide at trapping heat in the atmosphere, and 2) methane gas can be combusted to drive
electrical generators or can be used to generate steam for industrial purposes.
In the U.S., corn ethanol will increase in growth and popularity with continued government blender credits
and import tariffs, but is not sustainable in the long-term. Corn ethanol has a high feedstock cost,
inadequate farmable acres to meet future growth expectations, requires large water reserves, has quality
issues, increases the cost of corn for livestock feed, and is not competitive to regular gasoline in price or btu
value. Although still in the developmental stage, cellulosic and thermal-chemical ethanol promises to
produce lower cost ethanol using a wide variety of municipal solid, agricultural, or forestry waste.
Increased government fuel efficiency standards for automobiles, greater environmental awareness and
higher conventional fuel prices will drive more hybrid adoption, the return of the electric car, and the slow
evolution of the hydrogen fuel cell.
The term “negawatt”, coined by Amory Lovins, means a unit of saved energy. Instead of looking for ways to
generate more energy to meet our growing global demand, we instead look for ways to reduce our energy
demands. This concept has sparked a wide variety of energy saving products, services and practices that can
help home-owners, commercial building owners, and industrial spaces save money and the environment by
reducing their overall energy or utility spend.
The U.S. EPA-Energystar and U.S. Green Building Council’s LEED programs are changing the way that
architects, builders, and construction suppliers design, build and operate new or renovated spaces.
– 12 –

EII

What is energy? And, why is it important?
en·er·gy [ énnərjee ] (plural en·er·gies) -1. ability to do things: the ability or power to work or
make an effort, 2. vigor: liveliness and forcefulness, 3. forceful effort: a vigorous effort or
action, 4. power supply or source: a supply or source of electrical, mechanical, or other form
of power, 5. physics capacity to do work: the capacity of a body or system to do work.
Energy is used in every aspect of modern day life whether its driving your car, turning on a
light, or preparing food, energy is important because we wouldn’t have the quality of life that
we so enjoy without it’s benefit.
The truth is that most American’s don’t think about energy, unless fuel prices increase
significantly enough to affect our purchasing decisions or change our behavior. However, it is
important to understand the ‘life cycle’ of the energy we use. This includes which energy
source or fuel we are consuming, where the fuel came from, how it was produced, how it was
supplied to us, what benefit do we receive from it, what waste or byproduct does it generate,
and what is the net affect on society, the environment, and our economy?
To demonstrate the life cycle of a few key energy sources, we will look at a simplified
selection of our most common energy sources: petroleum for motor fuel, coal for electricity,
and natural gas for heating. We will look at all major steps of these fuel sources to gain a
better understanding of the process and industry that is in place to provide us with the
comforts and quality of life that we enjoy.

– 13 –

EII-Where does energy come from?

Life cycle of gasoline
5Blender-distributors take
Crude oil is discovered, 3
1 Refineries purify, distill
drilled, and pumped from the motor fuel and mix it
and formulate a number
deep sea platforms or with detergents & octane 7
of different fuels as well
Consumers pump the gas
from land-based jack- enhancers such as ethanol
as petrochemicals
to create different grades of into their vehicles and
pumps
drive off
gasoline

2 Crude oil is
4
sent through Motor fuels are 6 Tank trucks then
pipelines or usually piped to large transport the
delivered to storage tanks or can blended fuels to
refineries via be transported via multiple gas
oil freighters railcars or tank trucks stations
to storage tanks
Inputs: electricity, natural gas, motor fuels, energy intensive heavy equipment, massive logistics & infrastructure
Outputs: fossil fuel pollution, physical and residual destruction to ocean floor, land, aquifers, natural gas and
methane release or flare, petroleum vapors from distribution, storage and pumping, combustion of petroleum is
the single largest contributor to carbon dioxide emission in the United States
66% of U.S. oil is imported contributing $314 billion dollars to the U.S. deficit per year, the burning of petroleum
contributes to 25% of the smog in our cities, the U.S. spends $50bn per year to militarily secure oil supplies
– 14 –


Life cycle of coal-fired electrical generation
4 Coal-fired power plants burn 6 Electricity
1 the coal in large boilers which provides us
3 Coal is
Coal is excavated from either heats water into steam which with the
transported
underground coal mines or then turns a large turbine ability to run a
to power
large topical strip mines creating electricity wide variety of
plants in
appliances,
large
equipment and
quantities
products
via barges or
railcars
called unit
trains

2 Coal is then
pulverized into
5 Electricity is then carried
smaller chunks and
through a vast network of
made ready for
substations and power
transport
lines to our homes and
businesses
Inputs: electricity, natural gas, motor fuels, energy intensive heavy equipment, massive infrastructure &
logistics, difficult and hazardous working conditions
Outputs: sulfuric acid water run-off, sulfur dioxide leading to acid rain, nitrogen oxides, mercury, lead, arsenic
along with other heavy metal pollution, coal is the second largest contributor to CO2 emissions in the U.S.
Note: 49% of U.S. electricity is generated from coal-fired plants consuming 1 billion tons of coal per year, coal is
domestically available and is a primary export of the United States.
– 15 –


Life cycle of natural gas
1 Natural gas (NG) 3 Processing plants remove
comes from similar impurities from the gas and 5 Storage facilities
underground wells hold the methane
make the gas ready to be 8 NG and LNG can be used to fuel
like oil; exploration, gas and make it
compressed and moved
our ovens, stoves, furnaces, hot
drilling and regionally available
through pipelines, or they can
water heaters and automobiles
production takes for use
turn the gas into liquid fuel
place in the ocean or (LNG) 6 Gas meters
on land
measure our
consumption

2NG is then
4 Gas pipelines are compressed at 100 mile
piped or
shipped in bulk intervals, allowing the gas to travel long 7 Natural gas is used to
distances, most of these pipes are
to a processing generate electricity as well as
underground
plant for industrial heat
Inputs: electricity, natural gas, motor fuels, energy intensive heavy equipment, large infrastructure & logistics
Outputs: although cleaner than coal or petroleum, natural gas is still considered a fossil fuel which releases
carbon dioxide, carbon monoxide, and methane gases. The exploration, production and distribution of
natural gas is destructive to the ocean floor, land, forests, air and water.
– 16 –


Section Review
The previous slides demonstrate three conventional fossil fuel supply chains or ‘life
cycles’. The supply chains for petroleum, coal and natural gas are energy intensive,
complex, span multiple continents, require massive amounts of capital cost, annual
maintenance, and logistics.

These supply chains are also prone to disruptions for a number of reasons: war, natural
phenomenon like hurricanes and floods, political embargoes or maneuvering, production
capacity constraints, safety violations, regulatory reasons, and of course natural resource
depletion.

In order to provide a growing global market with ample and stable supplies of energy at
affordable prices, the supply from these fossil fuel sources need to continue to grow in
line with global demand. To better understand what is driving global demand, and how
much more of these primary energy sources will be required, we need to look at global
economics.

– 17 –

EII-Why is energy demand increasing?

Macroeconomics
The global population currently stands around 6.6 billion people and is growing at a rate of 1.3% or 78
million people per year
China and India (and other non-OECD nations), will grow their energy demands by 2.6% p.a. as they work
towards a GDP growth rate of 5.3% vs. mature OECD economies whose energy demands are only increasing
by .8% per year with GDP targets of 2.5%
Global GDP per capita is approximately $9300 and growing at a rate of 4.1% per annum. As GDP increases
so does demand for energy and energy sources per person. In comparison, global energy (in BTUs) per
capita is 70MM whereas the U.S. is 284MM BTUs per person, this indicates that there is a lot more energy
to be consumed per person as the majority of the world’s population achieves a higher GDP
The shift in energy consumption demonstrates that OECD nations are moving from energy intensive
industries to more services, and non-OECD nations are growing GDP through industrialization, which
requires more energy and electricity generated from cheap sources
Global energy demands will be led by industrial uses, transportation, residential and then commercial
sectors; electrical generation for industrial uses requires the vast majority of coal & natural gas, while the
transportation sector requires oil.
Oil, Coal, Natural Gas, Nuclear and Renewable are today’s ranking of global energy sources. The EII
believes that there will be a major shift from oil as the primary energy source to coal, and that wind will
break out as the primary ‘renewable’ source in the short-term, followed by hydroelectric and then solar in
the long-term
OPEC has 77% of the world’s oil reserves, the former Soviet Union has 10%, whereas the U.S. only has 2%.
However, the U.S. consumes 26% of global oil production making energy independence a major issue for the
U.S. as well as other countries.
– 18 –

EII-Why is energy demand increasing? -Macroeconomics

The world population is growing by 78MM people per annum,
additional energy production is required to meet growing demand

Global population
estimated at 6.6 bn in 2007

2007

– 19 –


Growing GDP, especially through the industrialization of Non-
OECD nations China & India = 1/3 Earth’s population

14.0
Non-OECD GDP
Non-OECD Energy Demand
12.0
GDP & Energy Growth % per Year

OECD GDP
Non-OECD GDP &
Energy Demand
OECD Energy Demand
“Cumulative Growth”
10.0
Global GDP/Energy Analysis:
8.0 •4.1% annual global GDP
growth rate
OECD and Non-
OECD GDP
•1.8% annual global Energy
growth from 1980
6.0
base level growth rate
•Non-OECD GDP growth =
4.0 5.3%
•Non-OECD Energy growth =
2.0 2.6%
•OECD GDP growth = 2.5%
0.0 •OECD Energy growth = 0.8
1980
1984

1988
1992
1996
2000

2004
2008
2012
2016

2020
2024
2028

Energy Information Administration, International Energy Outlook 2007
– 20 –


Comparison of US, China and India GDP and carbon emissions per capita. As China and
India grow so will their energy demands and their pollution emissions

Carbon Dioxide Emissions & GDP Per Capita 2004

40.0

35.0

CO2 Emissions (Mt/Capita)
GDP (Thsd USD/capita)

GDP per Capita
30.0

25.0
GDP per CapitaCapita
Emissions per
20.0
Emissions per capita
15.0 Global GDP per
10.0 capita average
5.0

0.0
Japan

India
Africa
Australia/New
Canada

OECD Europe
South Korea
Russia
Mexico

China
Other Non-
Other

Other Non-
United States

Brazil
Middle East

Energy Information Administration, Carbon Dioxide & GDP per capita by region, 2004

– 21 –


Global energy use by sector –Industry leads, demonstrating more
energy required by industrializing nations: China & India

Energy by End Use Sector

300.0

250.0
quadrillion btus

Transportation
200.0
Industrial
150.0
Residential
100.0
Commercial
50.0
0.0
2004 2015 2030

Energy Information Administration, International Energy Outlook 2007

*To put these figures into perspective, total global electricity demand is now 470.63 quadrillion btu’s or equal to
approx. 5,372,489 megawatts of power per year. This is equal to 7,163 average sized coal-fired power plants or
4,297 average nuclear plants. Our global electricity demand is expected to grow to 714.62 quad btu’s per annum
by the year 2030. This means that we need to increase our electrical supply by 52% over the next 23 years. Much
of which is occurring in China and India by adding 1 new 750MW coal-fired power plant per week!
– 22 –


The transportation sector uses 60% of all oil produced, global
demand requires an additional 580 million more barrels per year
Oil Use by Sector (Mtoe)

3500

3000

2500

Transport
2000
Industry
Mtoe

All Other Sectors
1500
Non-energy Uses

1000

500

0
2002 2010 2020 2030

Source: IEA WEO2004

*To put this global demand figure into perspective, the world consumes 30.3 billion barrels of oil per year
today, the U.S. consumes 7.7 billion barrels per year or 26% of the world’s total. By 2030, world demand is
expected to grow to 43.07 billion barrels per year or 42%. The U.S. is expected to represent 24% of this
total or 10.1 billion barrels per year.
– 23 –


Comparison of global energy supply from 2007 to 2030
2030
2007 World Energy Breakdown %
Hydroelectric
Coal surpasses Oil as the primary energy
•
5.8% source
Natural
Nuclear
Natural Gas and Oil decrease, giving way to
•
Gas Wind
6.0%
growing alternative energies
23.1% 0.6%
Coal
Wind is now the dominate alternative
•
BioFuels
26.8% energy source, renewables represent 20.3%
0.6%
of total
Geothermal
0.1% More nuclear plants are established,
•
Oil
Solar
followed by Hydro and Solar electricity
37.0% Other
0.0%
generation
7.1%

2007 2030 World Energy Breakdown %

87.5% of the world’s energy comes
• Hydroelectric
Wind
from fossil fuels Nuclear
Natural Gas 4.1%
12.0% 4.5%
20.7%
Oil is dominate energy source
• Solar
mainly for transportation 3.4%
Oil
Hydroelectric power generation
• Geothermal
25.4%
and Nuclear are the largest “clean 0.4%
energies” BioFuels
Coal
Hydrogen 0.2%
29.1%
Renewables only represent 7% of
• 0.1%
total energy supply
Coghill Capital Research, Energy Generation Matrix 2007
– 24 –


United States energy production by fuel type

U.S. Energy Generation by Source 2006

Renewable Petroleum
(Solar/Wind) 2% Other (landfill
2% methane)
1%
Hydroelectric Coal
7%
Natural Gas
Nuclear Nuclear
Coal
19%
Hydroelectric
49%
Renewable (Solar/Wind)
Petroleum
Natural Gas Other (landfill methane)
20%

Source: EIA, net Generation by Energy Source, 2006 Annual Review

Today, fossil fuels represent 72% of the energy fuel used to power the U.S. What will
be the leading energy source in 10, 20, 50 years from now? Coal?, Nuclear?, Solar?
What are the political, industrial, and environmental impacts of changing energy
sources?
– 25 –


Section Review
Population growth creates an inherent demand on energy to feed, cloth, and shelter
more people in the world. As emerging nations like China and India grow their
economies through industrialization they will require more energy than OECD or
industrialized nations. Furthermore, as China and India develop a middle class, these
individuals now have the ability to purchase motorized vehicles which require
gasoline, homes or apartments which require heat and electricity, and now have the
disposable income to purchase more clothing, food, and consumables, all of which
consume more energy.
Currently, fossil fuels represent the largest portion (87.5%) of the world’s energy
sources, and 72% of the United States energy sources. If we are to meet a growing
world and U.S. demand, we need to locate, produce, distribute, and consume more
fossil fuels, also known as hydrocarbons.
In the following section, we will chemically define what a hydrocarbon is and why
burning or combusting hydrocarbons are believed to cause unprecedented human and
environmental health risks.

– 26 –

Molecular Components and Weight of Dry Air
EII –How do hydrocarbons affect our environment? Molecular Mass-M M in Dry Air
Component Component %
Nitrogen (N2) 0.7809 28.02 21.88
Oxygen (O2) 0.2095 32.00 6.704
Argon (Ar) 0.00933 39.94 0.373
Carbon Dioxide (CO2) 0.0003 44.01 0.013

The chemistry of hydrocarbon combustion Hydrogen (H2) 0.0000005 2.02 0
Molecular Mass = 28.97

Pure Hydrocarbon (Methane) = CH4 Where 1 carbon is bonded with 4 hydrogen molecules
H=1
(M=16) where M – indicates molecular weight
H = 1C=12H = 1

H=1

Hydrocarbon chains link additional carbon molecules with more hydrogen molecules to form
straight, branched or ring structures = ethane (C2H6), propane (C3H8), kerosene (C12H26), etc…
Complete Combustion occurs when hydrocarbons are burned in the presence of excess oxygen,
resulting in carbon dioxide, water vapor, and the release of energy as heat and light.
H=1
O=16 C=12 O=16 O=16
O=16 O=16
H = 1C=12H = 1 O=16
O=16 H=1 H=1
H=1 H=1
O=16
H=1
H2O H2O
CO2
2O2
CH4 M = 18 M = 18
M = 44
M = 64
M = 16
Incomplete Combustion occurs when insufficient oxygen is present, resulting in carbon monoxide,
straight carbon (or both), water vapor, and the release of energy as heat and light.
H=1
C=12
O=16 O=16
H = 1C=12H = 1
O=16 H=1 H=1
O=16
H=1
H2O
O2 CO
CH4 M = 18
M = 32 M = 28
M = 16

*To summarize, combusting hydrocarbons breaks apart carbon and hydrogen molecules and allows them to be
bonded with other available molecules such as oxygen, sulfur, nitrogen, and other carbon or hydrogen molecules
to create entirely new chemical compounds.
– 27 –

EII –How do hydrocarbons affect our environment?

How does hydrocarbon combustion affect our environment?
Complex and naturally occurring hydrocarbons have been concealed underground for
millions of years in the form of coal, crude oil, and methane gas. Only in the past 200
years since the industrial revolution have we begun to excavate, produce and combust
these fossil fuels for electricity, motor fuel, and heat at increasing levels.
As we learned in the previous slide, hydrocarbon combustion results in the creation of
new chemical compounds. Free carbon molecules are combined with oxygen molecules
to form CO carbon monoxide –a toxic gas, or two oxygen molecules to form CO2 carbon
dioxide –which is believed to be the major contributor to the greenhouse effect.
Furthermore, water vapor (H2O M=18) and carbon monoxide (CO M=28) are lighter
than dry air (N,O,H M=29) and will rise, and carbon dioxide (CO2 M=44) and ozone
(O3 M=48) are heavier than dry air and will form a grey haze near the ground which we
call smog.
Other than burning very pure methane gas, hydrocarbons almost always contain
impurities. These impurities can range from mercury, lead and arsenic to low levels of
uranium and thorium or other naturally occurring radioactive isotopes. All of which are
considered carcinogens or mutagens and adversely affect humans and animals.
According to Oak Ridge National Laboratory, Americans living near coal-fired power
plants are exposed to higher radiation doses than those living near nuclear power plants.
Beside the carbon oxides discussed above, other chemical compositions resulting from
the burning of hydrocarbons include noxious and poison compounds like sulfur oxide &
nitrous oxide, both of which are federally regulated now by the United States. Ozone
(O3) is an indirect byproduct of hydrocarbon combustion and sunlight, resulting in a
powerful oxidizing agent as well as a leading cause of bronchial aggravation or asthma.
Although numerous byproducts come from the combustion of hydrocarbons, it is the
greenhouse gases that have stirred so much controversy over the past 10 years.
– 28 –


The Greenhouse effect
Greenhouse gases include water vapor, carbon dioxide, methane, nitrous oxide and ozone. These
greenhouse gases are the primary byproduct of hydrocarbon combustion.

NACC/USGCP graphic Union of Concerned Scientists for Environmental Solutions

– 29 –


Scientists speculate that the Earth’s temperature will rise in
correlation to carbon dioxide levels in our atmosphere
Ice core samples dating back 400,000 years demonstrate the positive correlation between
atmospheric CO2 content and the Earth’s surface temperature

Red Line is Carbon
Dioxide Content (PPM)
Blue Line is Earth’s
surface temperature (C)

Historical carbon dioxide record from the Vostok ice core samples, “Climate and atmospheric history of the past 420,000 years” 1999, Petit J.R., Jouzel J;
.and Alexey Fedorov The Pliocene Paradox, Science 312, 1485-1489, June 2006 Yale

– 30 –


Greenhouse gases primarily come from electrical generation,
industrial processes, transportation and agricultural byproducts

Emissions Database for Global Atmospheric Research, (EDGAR) version 3.2, 2000

– 31 –


A proliferation of headlines, articles and books inspire political
and scientific debate, global warming or just pollution?

– 32 –


United Nations Framework Convention on Climate Change
In 1992 the UNFCCC was created as an environmental treaty aimed at
reducing emissions of greenhouse gases to combat global warming.
Signatories to the treaty were split into three categories: 1) Annex I
(industrialized nations), 2) Annex II (developed countries which pay
for costs of developing countries) and, 3) Developing countries.
In 1997 the UNFCCC adopted the first legally binding protocol, named
after the place of signing Kyoto Japan. The Kyoto protocol bound
signatories to reducing their countries carbon emissions between 6-8%
below 1990 levels. Although the U.S. signed the protocol, it was not
sent to the U.S. Senate for ratification. The U.S. was concerned about
the impact to the U.S. economy, method of funding developing
countries, the fact that developing countries were not required to also
reduce their carbon emissions, and that the U.S. could not use
agricultural and forest ‘carbon sinks’ in its reduction program.
In 2001, the UNFCCC found resolution to many of these negotiations and agreed to 1) Flexible
mechanisms including carbon emissions trading, joint implementation of carbon offset projects and
Clean Development Mechanisms (CDM) which allow industrialized nations to fund emission
reduction activities in developing countries, 2) Agricultural and forest carbon sinks were allowed to
country specific caps, 3) Compliance procedures and mechanisms with consequences to countries
who do not meet emission limits, 4) Financing -3 new funds were created to provide assistance to
climate change programs.
The UNFCCC and the publicity and debate that the Kyoto protocol created inspired the world to
look at new energy policies, energy efficient products and services, environmental and human-health
impact of fossil fuels, damage to fragile ecosystems, sustainable packaging and product life-cycles, all
of this wrapped up into a global movement concerned about “GLOBAL WARMING”.
WARMING
– 33 –


CO2 emissions are expected to continue to rise unless we reduce
the combustion of hydrocarbons or find a way to sequester CO2
Billions of metric tonnes Co2

27%

19%

Source: International Energy Agency, world outlook 2006
– 34 –


Long-term effects of global warming according to the
Intergovernmental Panel on Climate Change second assessment:
Increased global surface temperature causing the retreat of glaciers, melting of North Atlantic
and Artic ice caps and the rise of sea level by 0.2 cm/year
The slowing of the thermohaline –oceanic circulatory pump which regulates global sea
temperatures and produces regular global weather patterns
Increased severe weather patterns, droughts in some areas, floods in others, stronger and more
frequent hurricanes
Increased spread of disease and insects due to longer warming periods which allow the pests
to survive longer, examples: dengue fever, malaria, west nile virus & mountain pine beetle
Decreased permafrost increases biodegrading and methane release from typically frozen
biomass such as peat bogs, which further aggravates global warming
Acidification of the ocean as more CO2 is absorbed and changes the pH level of the water,
effecting calcifying organisms such as: corals, mollusks, crustaceans, some of the lowest level
species in our food chain
Evaporation of wetlands and topical fresh water reserves –Florida everglades, and Africa’s
lake chad are examples which will impact not only millions of people who depend on the
water, fish, and vegetation growing from these reserves, but also the millions of animal species
which depend upon these ecosystems
Increased health risks including asthma and lung disease from ozone, and longer, more severe
heat waves
The Stern report on global warming released October 2006 estimated that global warming
could cost as much as $9 trillion dollars through lost productivity, mass migration, insurance
outlays, crop damage, land and property damage, healthcare costs and mortality

– 35 –


The Societal Cost of Hydrocarbons
The burning of hydrocarbons has not only a high product cost for petroleum, natural gas, and coal,
but also includes a very high societal cost. Societal costs can be more difficult to calculate than
commodity costs and they vary from society to society. We will look at the societal cost of fossil
fuels broken down into three main categories: environmental, military, and healthcare costs.

*Thick gray layer of smog
over Eastern China, NASA
Terra Satellite images 2005 Beijing

Jinan

Shanghai

– 36 –


The use of hydrocarbons have not only an economic product cost,
but also a very high societal cost to the entire population
Environmental Costs: Air, Water & Soil pollution regulation & clean-up

Beijing before & after rainfall Industrial waste pouring into the Yangtze river Soil erosion and run-off in Iowa

U.S. Related Data:
Regulation of air, water and soil pollution = $8.1 billion p.a.
Oil pollution from motor vehicles causes $4.6 billion in damages to crops, forests, rivers,
lakes, buildings and monuments p.a.
Air, water and soil pollution from electrical generation (coal and natural gas fired boilers)
costs between $14.8-90.3 billion each year
1 gallon of spilled oil can contaminate 1 million gallons of fresh water
1 MWh from a coal-fired generation plant releases 2,249 lbs. of CO2, 13 lbs. of sulfur
dioxide, 6 lbs. of nitrogen oxides, and various levels of toxic mercury and arsenic, depending
upon the purity of the coal
– 37 –


Societal Cost of Hydrocarbons
Military Costs: Strategic U.S. military bases ($49bn), oil & gas supply route security ($20bn),
strategic petroleum reserves ($30bn), War in Iraq has a financial cost of $275 million per day x 4
years= $401.5 billion dollars before any rebuilding or long-term health costs are applied

Healthcare Costs: Lung disease & asthma treatments caused by pollution ($16.1bn), lead,
mercury and arsenic poisoning from coal fired plants causes mental retardation, a host of learning
disabilities, premature mortality, and has been linked to the growing number of autism cases in the
U.S. ($88-640bn), 760,000 Chinese die prematurely each year from air & water pollution ($99bn)

– 38 –


So what are the societal costs of fossil fuels in the United States?

Fossil Fuel Costs (billions USD)
Low Mid High
$49.00 $75.00 $100.00
Military Base & Supply Route Security
$14.80 $53.00 $90.30
Environmental Monitoring & Clean-up
$24.30 $237.00 $450.00
Healthcare treatment & mortality from pollution
$88.10 $365.00 $640.30
Total Fossil Fuels Costs

Using the Mid range of societal costs above divided by the total quantity of fossil fuel sourced
consumed in 2006, we can calculate the financial impact to these fuel sources:
2006 Avg. Cost Add Mid Societal Cost Total Cost/Unit Consumer Increase
$20.49 $93.83 $114.32 $0.0454 cents/kWh
Coal (short ton)
$60 $26.68 $86.68 $1.54 per gallon
Crude Oil (barrel)
$6.80 $2.74 $9.54 $0.0235 cents/kWh
Natural Gas (mmcf)

The Mid range societal costs increase: (this is generation cost ONLY, no distribution or retail costs included)
Coal fired electrical generation costs go from $0.026 cents to $0.0714 cents per kWh
Natural gas electrical generation costs go from $0.0615 cents to $0.0851 cents per kWh
Regular gallon of unleaded gasoline goes from $3.46 to $5.01 dollars per gallon
Sources: Intergovernmental Panel on Climate Change, Department of Resource Economics and Public Policy –University of Massachusetts, Ontario Ministry of Energy,
National Defense Council Foundation, and the Institute for the Analysis of Global Security we will consider the following costs of fossil fuels (in billions of US dollars)
– 39 –


Importing 5 bbls of oil per year + economic loses + societal costs =
$10 per gallon

Defense Spending Oil Supply Disruptions

$1 $1
39 34
Jobs Lost Overseas Taxes Lost Overseas
$5 $0 43
19
Healthcare Costs Environmental Cost
$1
$0 51 21
Total
$1 07
0
Source: National Defense Council Foundation & Institute for the
Analysis of Global Security

– 40 –


Societal costs are allocated to the price of gasoline in other
countries through gas or carbon taxes, but U.S. has the lowest tax

Automotive Gasoline -April 2007
$/Gal. No-
Country Tax Tax Rate Taxes Total $/Gallon
UK 2.21 205% 4.54 6.76
Germany 2.32 190% 4.41 6.74
Italy 2.51 157% 3.95 6.46
France 2.33 174% 4.05 6.38
Spain 2.47 111% 2.74 5.21
Japan 2.23 86% 1.91 4.14
Canada 2.46 42% 1.03 3.50
USA 2.41 14-16% 0.40 2.81
International Energy Agency –End-User Petroleum prices April 2007

– 41 –


Section Review
The burning of fossil fuels (hydrocarbons) is the major contributor to global pollution. Of primary
concern to humans, plants and animals is the release of heavy metals such as mercury and
radioactive isotopes like uranium, which are known carcinogens and mutagens. As of 2005 the U.S.
set a mercury emission limit on generation facilities, but has yet to create a financial method (cap
and trade, tax or penalty) to enforce or influence mercury reduction. Successful emissions limits
(cap and trade system) have been set for nitrogen oxide (NOX) as well as sulfur dioxide (SO2) both
of which are responsible for acid rain. Greenhouse gases from the combustion of hydrocarbons is
believed to have adverse environmental effects such as: melting ice caps, extreme weather patterns,
methane release from melting permafrost and the increased lifespan and spread of certain pests.
The United Nations Framework Convention on Climate Change (UNFCCC) has organized an
intergovernmental panel on climate change to scientifically and politically address the effects of
global warming. The U.S. is the second largest carbon emitter in the world behind China. In the
U.S., petroleum combustion results in 2.6 trillion lbs. of carbon dioxide equivalent greenhouse
gases per year, representing 45% of our nation’s total. Coal emits 4.8 trillion lbs. or 35% and
natural gas (methane) represents 19% or 2.6 trillion lbs. per year. According to the EIA 2007
outlook, U.S. greenhouse gas emissions increased 25% over the past 17 years since 1990 and are
expected to continue to grow at a rate of 1.2% per year through 2030.
Fossil fuels carry a high societal cost, including large military costs to secure and protect oil
producing nations, healthcare costs associated premature mortality, lung disease and a host of
mental conditions, and finally the cost of monitoring and cleaning up water, soil and air related
pollution. In our base case analysis, U.S. societal costs amount to $365 billion dollars per year.
Associating these societal costs to fossil fuels is one reason why we believe hydrocarbons will
increase in fuel price in the future. In the next section we will explore several other reasons why
we believe fossil fuels will remain at relatively high prices in the future.

– 42 –

EII –Why is the cost of fossil fuels increasing?

Why is the cost of fossil fuels increasing?
There are a number of reasons why we believe the cost for petroleum, coal and natural
gas as our primary energy sources will continue to increase in the future:
Global demand is increasing as we reviewed in the macroeconomics section
Societal costs are being allocated to fossil fuels as we reviewed in the last section
In the financial commodities market “energy” futures are linked by their btu value,
thus as one commodity rises the others follow by their btu equivalent ratio
Global supplies of conventional oil and natural gas are decreasing, thus these limited
resources are depleting, we will look at peak oil and gas estimates
The marginal cost (production and transporting) of supplying oil, gas and coal is
increasing along with higher motor fuel and equipment costs
Global oil production is at 95+% of capacity, any supply disruptions will result in
outages and higher oil prices
More countries are mandating carbon taxes or carbon caps, thus increasing the cost of
operations which utilize fossil fuels and emit large quantities of carbon dioxide or
other greenhouse gases
– 43 –


Historical prices of West Texas Intermediate crude oil
*Note the historical price spikes from oil disruptions

WTI Crude Oil Price
West Texas Intermediate Historical Prices
Linear (WTI Crude Oil Price)
90
2005 Hurricanes
Katrina and Rita
80 disrupt gulf coast oil
1990 Iraq
supply
invasion of
70 Kuwait
USD/Barrel (2007 CPI adj.)

60
Sept. 11, 2001
50 Terrorist
Attack on U.S.
40

30

20

10

0
7
88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07
19 8
19

19

19

19

19

19

19

19

19

19

19

19

20

20

20

20

20

20

20

20
Source: Bloomberg USCRWTIC commodity prices 1987 -2007, CPI adjusted for inflation
– 44 –


Historical prices of Nymex –Henry Hub natural gas
Natural gas has a btu value of 1,031,000 per mcf equal to 302 kWh/mcf. Whereas, oil has a btu value of 5,800,000
per barrel or 1700 kWh/brl. Natural gas historically traded at a ratio of 5.6:1 to crude oil. Any oil supply
disruptions would also adversely effect natural gas.

U.S. Natural Gas Prices
Nymex/Henry Hub Natural Gas Prices

Linear (Nymex/Henry Hub Natural Gas Prices)
16
2005 Hurricanes Katrina and
Rita disrupt gulf coast NG
USD per MMbtu (2007 CPI adj.)

Winter 2000-2001
14
supply
California energy
crisis, pipeline
12
explosion & cold
winter
10

8

6

4

2

0
90
91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07
19
19

19

19

19

19

19

19

19

19

20

20

20

20

20

20

20

20
Source: Bloomberg Nymex/Henry Hub commodity prices 1990 -2007, CPI adjusted for inflation
– 45 –


Historical prices of Central Appalachian Coal
Although coal production and supply chain activities were not effected by either the California energy crisis or
hurricanes Katrina and Rita, the energy relationship with oil and natural gas, increased the price of coal as seen
below

U.S. Central Appalachian Coal Prices
U.S. CAPP Price
Linear (U.S. CAPP Price)
80
2005 Hurricanes Katrina and
Rita, disrupted energy market,
70 rising oil and gas prices led to
USD per ton (2007 CPI adj.)

higher coal prices
60
Winter 2000-2001
50 California energy crisis

40

30

20

10

0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: Bloomberg CAPP Coal BUS index prices 1990 -2007, CPI adjusted for inflation
– 46 –

Eii Overview & Energy Presentation.10.18.07

Eii Overview & Energy Presentation.10.18.07

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