Energy Conservation -2

Bruce LaCour, P.E. Mech. Engr.
December, 2015
1

 What 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. It’s 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 doesn’t 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

 This 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 don’t respond, they are eventually replaced.
3

 This 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.
4

 What 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 couldn’t 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.
5

 Greenspan 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.
6

 Many 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.
7

 The total demand for natural gas continues to rise, which is no great
revelation. However, let’s 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. That’s 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 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 Reserve’s 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

 So what is causing the 55% increase (and even more if measured
from 1996) in natural gas consumption from 1997 to 2014? It wasn’t
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 won’t 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

 Now 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

 What’s 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 “what’s 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 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?
19

 Now 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 wasn’t 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

 Furthermore, there are other announcements that haven’t 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 demand…”
24

 Then 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

 On 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.
26

 The Institute of Energy Research issued a report in 2014 titled:
“Impact of EPA’s 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

“More than 72 gigawatts (GW) of electrical generating capacity have
already, or are now set to retire because of the Environmental
Protection Agency’s (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 homes—or 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

 96% 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. It’s
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.
30

 Before 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 Power’s Kemper County Coal Gasification
Plant in eastern Mississippi and Duke Energy’s 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

 As 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 Power’s parent, to refund
$350 million in Kemper cost overrun charges that it had charged to
consumers.
32

 In 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

 Another 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. It’s 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 refinery’s
34

 petroleum-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

 In 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 Sasol’s extravagant plans, announced a $12.5 billion GTL plant
36

 for 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

 Since 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 projects
38

 along 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

 Last 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 don’t
want to hear that the past can’t 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 won’t 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

 In 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:
42

1. Shale 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.
2. Individual well decline rates range from 75 to 85 percent after
36 months of production.
3. 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.
4. 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.
5. 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 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
won’t 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”.
44

 From 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.
45

 The 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 it’s 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

 2016 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.
49

 Bernanke’s helicopters may finally fly. This foolish combination of
trying to prop up a failing economy combined with China, Russia, and
Saudi Arabia’s 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 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

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