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Dow Exec Says Industry 'Challenged' by High Gas Prices

The U.S. natural gas market continues to be the "nation's silent energy crisis," but The Dow Chemical Co. has been "anything but silent...and is pounding the pavement" to seek solutions to dwindling domestic supply and increasing demand, John Dearborn, Dow's vice president of energy, said Tuesday.

Speaking at ChemicalWeek's third annual Chemical Industry Annual Energy Outlook in Houston, Dearborn said higher oil and gas prices have led Dow to focus on sustaining its chemical operations through efficiency and technology. In 2005, Dow spent $20 billion on its products, which translated into $46 billion in sales. About 41% of the costs were in feedstock prices, he noted. In 2002, the same products cost $8 billion, and feedstock prices accounted for 29% of the sales volume.

"This really frames the issue we are dealing with," Dearborn said. "We are in a much more competitive marketplace today. And industry is challenged by higher U.S. gas prices." He said, "Energy costs remain critical for the United States, and most definitely the chemical industry. The $2/MMBtu era is likely over, and price volatility will continue for the foreseeable future."

Among other things, Dow owns about 15% of the Freeport LNG Development LP project on Quintana Island, TX, which is about 70 miles south of Houston. The proposed 1.75 Bcf/d liquefied natural gas (LNG) import terminal received final authorization from the Federal Energy Regulatory Commission last month to increase the sendout capacity of the terminal to 4 Bcf/d (see Daily GPI, Sept. 25). Capacity of the first phase of the project is sold out on a long-term basis to ConocoPhillips (1 Bcf/d) and Dow (0.5 Bcf/d).

The LNG project will guarantee not only Dow has gas supplies for its chemical operations, but also will bring new supplies to a growing Gulf Coast region, said Dearborn. Dow also is exploring supply alternatives, renewable energy and new technology to lower its energy costs. It also is involved in fuel cell projects, wind energy, landfill gas projects, coalbed methane and coal gasification. But that alone is not enough, he said.

"Technical innovation is no doubt part of the solution," said Dearborn. However, he said industry "must join together to advocate for a sound energy policy." The Energy Policy Act of 2005 was only a beginning, he said.

Dearborn noted that U.S. policy favors consuming more natural gas, but there are "significant natural gas resources that remain untapped... Dow has been very outspoken about lifting restrictions" to drilling both on- and offshore, "in, of course, an environmentally responsible manner." Dow favors increasing fuel diversity as part of the solution.

"Extreme price spikes and volatility impacts business results and deters investments," said Dearborn. "We compete in a globally competitive marketplace, and prices will continue to impact the chemical industry. High prices are having a permanent impact on us," which has "diminished our competitiveness."

To remain competitive, Dow has gone on the offensive because "forces continue to impact us here," he said, referring to North America. Because gas costs are lower overseas, Dow has begun to migrate some of its growth capital overseas, and this is where the company will move more business in the future.

"We are taking growth out of the United States, but we are continuing to spend judiciously here," he said.

He said Dow is focused on efficiency more than ever before. It exceeded its 2005 goal to reduce its energy consumption, reaching a 22% goal that was 2% higher than expected. The reduction has saved Dow about $4 billion, he said. It now has a goal to reduce energy consumption another 25% by 2015.

"That is stretching the target, no doubt," said Dearborn. "But we will lead by example."

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