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A Changing Europe – What Does it Mean for Petcoke?

A Changing Europe – What Does it Mean for Petcoke?. McCloskey’s Petcoke Conference July 20, 2004 by Holger Dewald Ben Ziesmer. Europe – Change Brings Uncertainty. Expansion of EU Economic growth – How much and when? Kyoto Protocol EU Trading Directive Rapid rise in energy costs

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A Changing Europe – What Does it Mean for Petcoke?

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

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

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

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

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

  6. Kyoto Protocol • Uncertain whether Russia will ratify • No Russia = no Kyoto • EU says it will proceed with or without Russia • Target = reduce CO2 emission by 8% by 2012 (basis 1990). • Germany to provide 2/3 of total EU reduction • Based on current trends, EU not going to meet requirements • Realities of Kyoto starting to be realized • Japan also likely to miss Kyoto targets • It’s not going to be easy • It’s going to be costly

  7. EU CO2 Emissions Trading Scheme(ETS) • Phase 1: Jan 1, 2005 through Dec. 31, 2007 • July 7, 2004 EU decisions - National Allocation Plans (NAP) • 5 approved: Denmark, Ireland, Netherlands, Slovenia, Sweden • 3 approved with conditions: Austria, Germany, UK • Spain & France NAPs close to being approved • 2 (Italy & Greece) warned for not submitting plans • 5 new entrants missed May 31 deadline for submitting NAP • Patterned after U.S. SO2 Allowance Program • Must have certificate of MT of CO2e that is emitted

  8. Phase 1 EU Emission Trading • Covers approx. 14,000 facilities = 40+% of emissions • Combustion: heat input > 20 MW (68 MMBtu/hr) • Metal production > 2.5 MT/hr • Cement kilns > 500 MT/day • Lime kilns > 50 MT/day • Pulp & Paper > 20 MT/day • Site, not unit, thresholds • Penalties for not having enough allowances • €40/MT of CO2e • Offset in subsequent year = allowance shortfall

  9. Implications of Recent EU ETS Decisions • EU committed to Jan 1, 2005 kick-off date • Already approved allocation of approx. 50% of Phase 1 allowances (2.9 billion MT CO2e) • Very pragmatic • Avoided big fight with Germany • Pushed hard decisions off to future • Future considered • Allocation reserve rules evaluated carefully • Path to Kyoto considered • Prices of CO2e Allowances have fallen

  10. Coal Costs Have Increased Rapidly

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

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

  13. Petcoke Demand – Cement Industry • Likely to use more alternative fuels to reduce coal use • But not petcoke • Strategy for EU emission trading unclear • NAP uncertainty = no firm industry plans • Composite Cement – how important? • Very effective way to reduce CO2 emissions • Niche or generally applicable? • Cement industry sales growth in eastern Europe, but not much impact on petcoke • Few conversions to petcoke in near term

  14. Power Industry Petcoke Demand

  15. Power Industry • Many companies planning to increase petcoke use • Test burns at U.K. power plants Ratcliffe-on-Soar (2,000 MW) and Drax (3,960 MW) important • Emission trading strategy appears to be to reduce power production to meet CO2e caps, not switch to natural gas • Margin more important than production (capacity factor) • Petcoke increases margin

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

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