Current and Future Pathways for U.S. Energy (and ......BEIJING BRUSSELS CHICAGO DALLAS FRANKFURT GENEVA HONG KONG HOUSTON LONDON LOS ANGELES NEW YORK PALO ALTO SAN FRANCISCO SHANGHAI

BEIJING BRUSSELS CHICAGO DALLAS FRANKFURT GENEVA HONG KONG HOUSTON LONDON LOS ANGELES NEW YORK PALO ALTO SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C.

Current and Future Pathways for U.S. Energy (and Environmental) Policy

The Automotive & Fleet Leasing Association 2012 Annual Meeting – San Antonio, Texas – September 11, 2012

Timothy K. Webster (202) 736-8138; [email protected]

Agenda

• Energy Policy Pressures • State of Petroleum, Natural Gas, and Electricity • Mobile Source Regulatory Initiatives Impacting

Energy – Fuel economy standards – Emission standards – Renewable fuels – State standards

• Other Pressure Points • Take Aways

2

Energy Policy

3

Now: 83% of Energy Consumption is Fossil Fuels 2010 total U.S. energy use = 98.0 quadrillion Btu

Source: EIA, Annual Energy Review 2010

Primary energy demand by fuel Primary energy demand by sector

Natural gas 25.2%

Coal 21.3%

Renewable 8.2%

Nuclear 8.6% Petroleum

36.7%

Electricity – Residential

15.6%

Residential and Commercial 11.2%

Electricity – Commercial

14.3%

Electricity – Industrial 10.4% Industrial

20.4%

Transportation 28.1%

4

Future: Slow Grown, Increased Efficiency U.S. primary energy consumption quadrillion Btu per year

Source: EIA, Annual Energy Outlook 2012

History Projections 2010

37%

25%

21%

9%

7%

1%

32%

26%

20%

11%

9%

4%

Shares of total U.S. energy

Nuclear

Oil and other liquids

Liquid biofuels Natural gas

Coal

Renewables (excluding liquid biofuels)

5

What’s Driving Energy Consumption?

• EIA reports that first quarter CO2 emissions from energy use fell to lowest level since 1992

• What are the drivers? – Decline in heating demand due to mild winter – Decline in coal consumption due to low natural gas

prices – Decline in gasoline demand

• Conclusion – market forces and weather can play a large role – Comparative pricing between energy alternatives – Significant weather impacts (e.g. ongoing drought)

6

The Petroleum Update

7

U.S. liquid fuels supply million barrels per day

Projections History

Natural gas plant liquids

Petroleum production

Biofuels including imports

Net petroleum imports

15%

12%

36%

36%

10%

49%

36%

5%

Liquids from coal 1%

2010


Imports Down; Natural Gas and Biofuels Up

8

U.S. liquid fuel supply million barrels per day

Projections History 2010

Consumption

Domestic supply

Net petroleum imports 49% 36%

60%

2005


Reliance On Imports Drops Significantly

9

annual average price of light low sulfur (LLS) crude oil real 2010 dollars per barrel



High Oil Price

Low Oil Price

AEO2012 Reference

Wide Range of Potential Future Oil Prices

10

annual average price of light low sulfur (LLS) crude oil real 2010 dollars per barrel



High Oil Price

Low Oil Price

AEO2012 Reference

Wide Range of Potential Future Oil Prices

11

The Natural Gas Update

12

The Shale Gas Revolution

• Major driver of changes in stationary source energy consumption

• Contributor to current low prices of natural gas

• Important to domestic energy and environmental policy

• Many environmental and community concerns

13

2%

U.S. dry gas production trillion cubic feet per year


Non-associated offshore

Projections History

Associated with oil Coalbed methane

Non-associated onshore

Shale gas

2010

10%

6%

9%

7%

21%

23%

9%

9%

6%

49%

Alaska 1%

Tight gas 26%

22%

Major Increase In Shale Gas Production

14

-5

0

5

10

15

20

25

30

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035

U.S. dry gas trillion cubic feet per year



Consumption

Domestic supply

Net imports

U.S. Poised to Become Net Exporter of Natural Gas

15

Wide Range of Future Natural Gas Prices

16

…But Transportation Use of Natural Gas Will Remain Small

17

U.S. dry gas consumption trillion cubic feet per year

*Includes combined heat-and-power and lease and plant fuel. **Includes pipeline fuel. Source: EIA, Annual Energy Outlook 2012

Projections History

Industrial*

Electric power

Commercial

Residential

34%

17%

14%

32%

3%

31%

21%

13%

33%

3% Transportation**

The Electricity Update

18

percent growth (3-year rolling average)

Projections

History Period Annual Growth 1950s 9.8 1960s 7.3 1970s 4.7 1980s 2.9 1990s 2.4 2000-2010 1.0 2010-2035 0.8

2010


0

2

4

6

8

10

12

14

1950 1960 1970 1980 1990 2000 2010 2020 2030

Growth of Electricity Generation Continues to Slow

19

18%

15%

electricity net generation trillion kilowatthours per year


2010

24%

20%

45%

10%

1%

38%

28%

1%

Nuclear

Oil and other liquids

Natural gas

Coal

Renewables

Move to Lower Carbon Options

20

Major Increase In Renewables non-hydropower renewable generation billion kilowatthours per year


Wind

Solar

Biomass

Geothermal Waste

Industrial CHP

Power sector

Advanced biofuels cogeneration

2010

21

Greenhouse Gas Regulation

22

Contributors to domestic GHG emissions --EPA 2010

31% of CO2 is from the transportation sector --EPA 2010

Fuel Kg CO2/ mmBtu

Bituminous coal

93.4

Petroleum coke

103.5

Natural gas 53.0 Gasoline 70.1 Biodiesel 73.8 Ethanol 68.4

CO2 emissions by fuel type (kilograms per million Btu) --EPA 2010

GHG Primer

23

Transportation Energy Consumption By Type of Vehicle

24

U.S. transportation energy consumption million barrels per day oil equivalent


Rail Air

Projections History

Heavy-duty vehicles

Light-duty vehicles

Marine

2010

5%

66%

2%

9%

18%

GHG Roadmap Petition for regulation of

CO2 emissions from cars

Denial by EPA

Reversed by the Supreme Court – CO2 is a pollutant

Denial by the D.C.

Circuit

Endangerment Rule

Challenges denied by

D.C. Circuit

LDVR Heavy-Duty Vehicle Rule

D.C. Circuit Challenge Pending

LDVR2

Challenge? Supreme Court?

25

EPA GHG Rules

• Endangerment Finding Rule – Final Rule - December 15, 2009

• Light-Duty Vehicle Rule Standards – MY2012–2016 – Final Rule – May 2010 – Combined EPA/NHTSA standards

• Light-Duty Vehicle Rule Standards 2 – MY2017–2025 – Final Rule – August 2012 • Average fleet standard of 54.5 mpg • MY16: 35.5 mpg • MY25 vehicle would emit ½ GHGs of MY10

• Medium & Heavy-Duty Truck/Engine Standards – MY2014–2018 – Final Rule – September 2011 – Combined EPA/NHTSA standards

26

Fuel Economy

CO2

LDVR2

What if today’s models were built in 2025?

* EPA estimates; city/highway not specified 27

Model 2012 mpg 2025 mpg*

Honda Fit 27 city/33 highway 61.1

Ford Fusion (non hybrid) 22/ 30 54.9

Chrysler 300 18/27 (3.6 L 5-spd) 48

Ford Escape (4WD) 21/28 (2.5 L auto 6-spd) 47.5

Nissan Murano 18/24 43.4

Toyota Sienna (2WD)

19/24 (2.7 L) 39.2

Chevy Silverado (4WD)

14/18 (4.3L 4-spd) 33

LDVR2 (cont.)

No standards yet for time traveling DeLoreans

28

U.S. light car and truck sales millions


0

5

10

15

20

2000 2010 2015 2020 2025 2030 2035

Gasoline-only vehicles without hybrid technologiesE85 flex fuel

Mild hybrid electric

Diesel

Hybrid electric

Plug-in hybrid and all-electric

Gaseous and fuel cell

Gasoline-only Vehicles Without Hybrid Technologies Decline As A Share Of New Vehicle Sales

29

2005 2020 2035 Energy-related CO2 emissions

6.00 5.55 5.81

% change from 2005 - - -7.5% -3.2%

Energy-Related CO2 Emissions Don’t Return to Pre-Recession Levels for at Least 25 Years

30

billion metric tons carbon dioxide

Source: EIA, Annual Energy Outlook 2012 Early Release

Projections History 2010 2005

Congressional Action to Address GHGs

• Prospects have steadily diminished, mid-2009 to the present

• American Clean Energy and Security Act (Waxman-Markey) – Passed U.S. House June 26, 2009

• American Clean Energy Leadership Act (Bingaman) – Passed Senate Energy & Natural Resources Committee July 16, 2009

• Clean Energy Jobs and American Power Act (Boxer-Kerry) – Introduced September 30, 2009

• Kerry-Graham-Lieberman bill – Graham abandoned process April 2010; bill never acted on

• Cap and trade now seems moribund

• Attempts at targeted bills (utility only, RPS only) as well as bills going in the other direction (e.g., Rockefeller bill to slow or stop EPA action) may continue

31

Renewable Fuels

32

Renewable Fuel Standard (“RFS”)

• Established in 2005 Energy Policy Act and revised Energy Independence and Security Act of 2007 – Mandates sale of significant volumes of four types of renewable fuels:

“renewable fuel,” “advanced biofuel,” “cellulosic biofuel,” and “biomass-based diesel”

• To qualify, fuels must have low “lifecycle greenhouse gas emissions,” which include all emissions related to production of the fuel

• Sets minimum volume requirements for blending renewable fuels with gasoline and diesel fuel – Total volume increasing from 9 billion gallons (2008) to 36 billion

gallons (2022) – Minimum volume requirements for specific fuel categories – EPA approval of renewable fuels based on life cycle analysis

• Creation of Renewable Identification Number (RIN) trading program • Monetary penalties for failing to meet fuel blending targets • EPA adopts a rule each year that requires refiners to sell specified

percentages of each fuel type

33

Other Advanced

billions ethanol-equivalent gallons

Legislated RFS in 2022 Biodiesel Net imports

Cellulosic biofuels

Corn ethanol

AEO2011 AEO2012

Sources: EIA, Annual Energy Outlook 2012 and EIA, Annual Energy Outlook 2011

Biofuels fall short of the RFS target in 2022, but exceed 36 billion gallons by the early 2030s

34

Corn Ethanol and Drought

• 43% of U.S. corn crop used to make sufficient ethanol to meet RFS requirements

• Severe drought creating conflict between ethanol production and other uses – Corn production projected to

decrease by 15% or more – Corn futures prices increased by

35% over summer – $0.22 drop in “crush spread”

between corn and ethanol prices • Pressure on EPA to waive the RFS

standard – Industry – States – Delaware, Maryland,

North Carolina, Arkansas request waiver

– House of Representatives – letter from 165 members

35

RIN Fraud

• Renewable fuel producers “generate” renewable identification numbers (RINs) that are transferred with fuel or sold on open market

• Rodney Hailey, Clean Green Fuels, LLC – Convicted in June, 2012 of selling 32 million fraudulent

RINs for more than $9 million – Several additional companies charged with RIN fraud

• Enforcement actions possible throughout supply chain • Efforts to prevent RIN fraud

– EPA revising program to prevent RIN fraud – Energy and Commerce Committee hearings – National Biodiesel Board task force

36

E-15

37

EPA Approval of E-15 Gasoline

• All Fuel Additives Must Be Approved by EPA (CAA Section 211

• EPA Issued Two Partial Waivers Allowing E-15 for MY 2001 and Newer Vehicles

• Concern: Corrosivity of Ethanol May Damage Engines

• Necessary to Meet Renewable Fuel Standard?

38

EPA Conditions for E-15 Approval

• Prohibition on use of E-15 in engines not covered by waiver

• Fuel pump warning labels required for all retail facilities selling E-15

• Requires specific product transfer documents to ensure E-15 is handled safely

• E-15 sellers must conduct surveys to ensure that retail facilities comply with labeling and other safety requirements

39

Grocery Manufacturers of America v. EPA

• Diverse coalition of trade associations challenged EPA waiver decisions in D.C. Circuit – Manufacturers – Petroleum producers and refiners – Food products industry

• Bases for Legal Challenge – EPA lacks authority to issue partial waivers – Vehicles using E-15 cannot meet emissions standards

• D.C. Circuit dismissed challenge due to lack of standing (but was sympathetic on merits)

• Appeal?

40

Other Standards

41

The Rise of Selective Catalytic Reduction

• In 2001, EPA issued new tailpipe emission standards for medium and heavy duty diesel engines

• One major change was a 90%+ decrease in emissions of nitrogen oxides (NOx), which contribute to the formation of ground-level ozone (smog).

• Manufacturers were given until MY2010 to fully develop and implement reduction technology

42

SCR and DEF

• Technology used at power plants uses a catalyst together with ammonia or urea to reduce excess NOx to nitrogen and water – Called selective catalytic reduction (SCR)

• Turned out to be the only technology that worked for diesel engines

• Requires both a catalyst and a supply of “diesel exhaust fluid”

• Metered into the exhaust at a rate of about 2% of fuel consumption

43

Is DEF Here to Stay?

• One manufacturer – Navistar, Inc. – challenged virtually every aspect of the use of SCR – Lawsuits against EPA and CARB

• Navistar had invested in a competing technology based on exhaust gas recirculation – Worked well but could not meet the standard

• Navistar lost a major court case, Mack Trucks v. EPA, in May 2012

• Navistar subsequently dropped all of its challenges to SCR and announced that it would adopt that technology

44

State Regulations

45

California Mobile Source Regulation

• California can set its own standards under the CAA – CARB independently certifies engines sold in California

– Other states can and do follow California’s regulations • For example, 14 other states adopted California’s MY2009-2011 vehicle emission

standards (the LEV II) to varying degrees: Maine, Vermont, Massachusetts, Connecticut, Rhode Island, New York, New Jersey, Pennsylvania, Delaware, Maryland, New Mexico, Arizona, Oregon, and Washington

• LEV III – Sets fleet emission standards for cars, light- and medium-duty vehicles

– Lower PM standards than LEV II

– Zero evaporative emissions for cars/light-duty; lower standards for medium-duty vehicles

– Fuel economy same as EPA MY2012-2016 standards with additional regulations for CO2, CH4, and N2O

– Similar technology incentive and credit system as EPA

46

California Mobile Source Regulation

• Advanced Clean Cars program

– Applies to MY15-25 cars sold in California

– Reduces smog-forming pollutants by 75%; will be classified as “super ultra-low-emission vehicles” (near 0 emissions) by 2025

– Reduces GHGs by 34% in 2025 • Emission decreases will be mostly from electric and hydrogen cars

47

Alternative Fuels Infrastructure California Clean Fuels Outlet Regulation

• Market for low emission vehicles (LEVs) impeded by lack of fueling infrastructure

• Lack of fueling infrastructure could threaten ability to achieve goals for LEV production

• California Clean Fuels Outlets

– Owners and Lessors of retail gasoline outlets required to install and maintain alternative fuel outlets

– Regulatory trigger (20,000 vehicles) has not been met

– 2012 Proposal would shift regulatory obligation to gasoline refiners and importers

48

Other Pressures on Energy

49

Name Effective New Sources

Existing Sources

GHG Prevention of Significant Deterioration and Title V Permitting

1/2/2011 Yes No

Cross-State Air Pollution Rule

1/1/2012 stayed

Yes Yes

Mercury Air Toxics Rule 4/16/2012 Yes Yes Proposed GHG New Source Performance Standards

At time of proposal (3/12)

Yes, at time of proposal

Yes, following final rule

National Ambient Air Quality Standards

Upcoming PM, SO2, and Ozone revisions

Selective Stationary Source Regulations

50

Petroleum Bottleneck

• Petroleum Bottleneck in Cushing, Oklahoma – Changes in Domestic Oil Supplies

• Canadian Oil Sands • Bakken and Williston Shale Oil

– Pipeline infrastructure not prepared for increased North American supply

– Low prices in Midwest; high prices in Gulf of Mexico

• Industry Responses – TransCanada – Keystone Gulf Coast Project – Enbridge & Enterprise – Reversal of Seaway Oil Pipeline

51

Crude Supply & Refinery Capacity: Disparate Impacts

• Little investment in increased refining capacity over past 30 years

• Significant reduction in East Coast refining capacity – Changes in crude oil composition leading to reduced

profitability – Refining capacity may be reduced by 50% – Potential for significant localized price increases

• Increased crude oil supply in Midwest leading to improved profitability

• 8.7% increase in gasoline prices in Bay Area after fire at Chevron refinery

52

Energy Subsidies

• Subsidy/government investment – expect less government support – Serious budget and deficit issues – Significant political support for subsidy phase-outs

• Examples • Volumetric Ethanol Excise Tax Credit (VEETC) – phased out • Wind production tax credit – scheduled to expire by 2013

– Obama wants to extend – Romney wants to end

– Solyndra fallout

53

Role of the Election

• Pre-election regulatory calm in Washington, D.C. • Are major changes coming November 6th?

54

Take Aways

• Fuel economy standards are being ratcheted up to reduce domestic greenhouse gas emissions from both cars and trucks

• Significant increases in domestic natural gas production are driving the increased use of natural gas for energy production, but petroleum is still the king of the road

• The push for renewable fuels and alternative fuel vehicles is strong, but is tempered by demand and an other constraints

• Multiple layers of federal and state regulation are creating an increasingly complicated regulatory landscape for vehicle and engine manufacturers

• The election may significantly alter the executive branch’s approach to environmental regulation, but don’t expect Congress to make dramatic changes

55

Questions

Timothy K. Webster

Sidley Austin LLP 1501 K Street, N.W.

Washington, D.C. 20005 202-736-8138 (phone)

202-736-8711 (fax) [email protected]

56

Documents

Current and Future Pathways for U.S. Energy (and ......BEIJING BRUSSELS CHICAGO DALLAS FRANKFURT GENEVA HONG KONG HOUSTON LONDON LOS ANGELES NEW YORK PALO ALTO SAN FRANCISCO SHANGHAI