Presentation 1.3: Energy technology, perspectives, scenarios and strategies to 2050 Mr Petri Vasara Principal, Dottore Poyry Forest Industry Consulting Oy P.O. Box 4, Jaakonkatu 3 Vantaa FI-0162 Finland Tel: +358 10 3322611 Fax: +358 10 3321482 Email: petri.vasara@poyry.com

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1

Energy Policies as a Global Investment Factor

International Seminar on Energy and the Forest Products Industry

Dr. Petri VasaraPia Nilsson

Pöyry Forest Industry Consulting Oy

Rome, October 30-31, 2006

2

In the Grips of the Climate and Energy Storm: Three Energy Pathways

Can the forest

industry

somehow

reach a

balance in the ”Eye of

the Storm”?

Can the forest

industry

somehow

reach a

balance in the ”Eye of

the Storm”?

Should one

be swept

along in

”Business

As Usual”?

Should one

be swept

along in

”Business

As Usual”?

Is there a

way to

”Ride the

Storm”?

Is there a

way to

”Ride the

Storm”?

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3

The Geography of EnergyAnnual Fuel Consumption: Size Proportional to Absolute Consumption

Fuel consumption per year (Image: SASI Group,

Univ. Sheffield/M Newman, Univ. Michigan)

On the ”fuel globe”, the US, EU, China, India and Japan form five almost equal

blocks.

4

”To have and have not”: Nouveau riche, still poor

− The rich and the poor countries are perhaps not where oneassumes them to be. A resource-oriented world has otherpriorities.

An index based on water,

forest, energy and arable land

gives a new geography for the

rich and poor.

Resource-poor

Resource-rich

Resources = (water + forest + energy + arable land) / capita

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5

Cost Structure

6

Eye of the Storm

− In the eye of the storm there is calm.

− We could make an analogy: a position for a forest industry company, where the sensitivity to energy costs and product prices in various scenarios is such, that it in most cases stays on top of the competition, and makes a profit.

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7

An Example of a Cost Structure

0

20

40

60

80

100

120

20,4

16,9

9,45

21,9

15,5

15,9Component

OtherLabourEnergyChemicalsRPWood

We have taken one

example cost structure (which is from an

almost real, really

anonymous mill), and

normalised it to 100.

We have taken one

example cost structure (which is from an

almost real, really

anonymous mill), and

normalised it to 100.

8

An Example of a Cost Structure

0

20

40

60

80

100

120

20,4

16,9

9,45

21,9

15,5

15,9Component

OtherLabourEnergyChemicalsRPWood

For a sensitivity analysis of the cost structure, we make the assumptions:

Behind wood cost in sensitivity analysis:

mean price as now,

standard dev. 10 % of

mean price

Recovered

paper: mean =

current + 10 %, standard dev.

10 %

Chemicals:

mean = current + 10 %, SD 10 %

Behind energy: oil up;

electricity up 40

%, SD 40 % of

current

For labour

and other, now + 5 %,

SD 5 %

It’s just an example for a presentation. One could

argue endlessly about the items, and the

politics behind it.

It’s just an example for a presentation. One could

argue endlessly about the items, and the

politics behind it.

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9

The Outcome

The average

scenario

(thousands run): cost up

13 %,

weighted

heavily above 10 % increase

The average

scenario

(thousands run): cost up

13 %,

weighted

heavily above 10 % increase

In 5 % of cases,

above 30 %

increase

In 5 % of cases,

above 30 %

increase

In 5 % of cases,

below

current

In 5 % of cases,

below

current

10F9TT01.XLS

REAL PRICE OF NBSK

(USD/TON/CIF WE)

0

200

400

600

800

1000

1200

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

- 1998/USD -

Very high

prod. stocks

USD weakForecast

USD strong

BC strike

Oil shock

RecessionBC strike

Exch. rate

based

increases

Supply

burst

High prod.

stocks

Supply down/

Cluster Rule/

USNew

supply

Low

prod.

stocksAsian demand

down - econ.

crisis

Supply

burst

Strike

threat

in BC

What about trend prices?

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11

So...

− ... we have, in a sensitivity scenario, a 95 % likelihood of increased costs, and

- apparently sinking trend prices

- with normal mathematics, this would not look good.

- Let’s hope that

- the sensitivity scenario was flawed

- if it wasn’t flawed, we’ll hit the lucky 5 % where the costs decreased

- trend prices are just projections – something will turn the trend

- However, reaching calm in the cost-and-price-change-storm does not look easy.

12

Investment Costs

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13

Specific Investment Requirements: Kraft Pulp Mills

0

500

1000

1500

2000

2500

3000

3500

4000

0 200 400 600 800 1000

Mill capacity, 1000 ADt/a

USD/t of capacity

New bleached hardwood kraft pulp mill projects

14

Specific Investment Requirements: Paper Mills

Some recent paper mill projects

Capital Costs of Paper Mills

2nd quarter of 2001

1230

11001020

1500

1300

0

500

1,000

1,500

2,000

2,500

3,000

3,500

0 100,000 200,000 300,000 400,000 500,000 600,000

Production, at

EUR / at

News, Brownfield

LWC, Brownfield

Power (News, Brownfield)

Power (LWC, Brownfield)

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15

The Paper Industry Is Among the Capital-Intensive Sectors...

− ... and unless a redesign of pulping and papermaking succeeds, will

continue to be so

− Thus: mill cost structures are highly sensitive to energy, and

investment costs are high

16

Energy Investment Compass

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17

Compass of Investments

18

Energy Policy End Game: Green and Black Chess

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19

End Game: The Green Queen and the Black Queen

− In assessing the impact of energy policies on global paper industry

investments, the fact that we are dealing with a complex issue is not just a

disadvantage. We also have an arsenal of complex strategies at our disposal

− An investment strategy is a high-stakes game of strategic moves. The

game board is complicated and the rules many. Chess is a suitable analogy - chess played on a green-and-black board, between the green

energy and the black energy sides, influenced by energy policies.

− The final diagram is a snapshot from international energy markets and

politics - a tough game with many participants. It is important to bear in mind

that the naming used in the green-and-black-chess game only takes into

account the greenhouse gas emissions during energy generation. It does not

consider e.g. the following facts:

− When uranium is mined carbon dioxide is released during processing.

− When biomass decays in the dam where hydropower is processed,

methane is released.

− Bioenergy combustion generates large amounts of green carbon dioxide.

Bioenergy

Coal

A dark horse:

New coal technology

Hydropower

Lost renewable energy

resources

Oil

Oil

NuclearNuclear Fusion

technology ?

Lost fossil

fuel resources

The Great Chess Game: The contest between energy recourses

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21

The Pieces: The Green Side

The king symbolises the green side - the non-fossil greenhouse gas emissions.

The green queen, bioenergy, could not be more on the policy agenda – but this presentation is too short to even touch upon all the intricacies of the issue. Biorefineries are a particular variation of this theme.

The green rook, nuclear power, is an energy form with a large “momentum” - it is difficult to shift it from its path. It is difficult to restructure the nuclear industry, investments are very significant, which is a disadvantage in competing against other resources. The GHG competitive advantage is, however, strong. No emissions coupled with large amounts of energy.

The dark green horse symbolises fusion technology and other new unheard-of technologies, which may appear at any moment, or never. Political and governmental support, market forces, public opinion and flashes of genius are all needed. The dark green house symbolises the player who can take unexpected steps in several directions. This ability makes it a dangerous player but also a weak player who can never make a straight decision.

Green pawns symbolise hydropower – a true treasure for those who happen to have it. It can produce important amounts of energy with small emissions.

22

Pieces: The Black GHG Side

The king, naturally symbolises the black side - the fossil greenhouse gas emissions.

The black queen, coal, has the highest greenhouse gas generation potential. The coal industry is politically supported by many different players.

The black rook, oil, is in the same category with coal. It has, however, a lower emissions potential, but extremely strong political clout in many sectors, including transport.

The black pawns, natural gas, are pieces with the potential to grow stronger. Natural gas pipelines are major construction projects with few “politically safe” routes. The emission amounts are further increased by important methane leakage from the pipelines.

The dark horse symbolising new fossil fuel technologies is not a phantom piece: these already exist in laboratories and more will surely be found.

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23

The Rules of Political Energy Chess

Our green-and-black chess follows the rules of the standard chess game, but

energy policies may change the rules. Among possible new rules, we have:

Rule 1: The battle between shutting down or revitalising energy. Shutting

down means removing the green rooks

Rule 2: “No new hydropower” is an often-heard demand. In other words,

green pawns cannot become green queens.

Rule 3: Indigenous energy security sometimes means utilising present coal

resources, which means introducing more black queens into the game at the

start.

Bioenergy

Coal

A dark horse:

New coal technology

Hydropower

Lost renewable energy

resources

Oil

Oil

NuclearNuclear Fusion

technology ?

Lost fossil

fuel resources

The Great Chess Game: The contest between energy recourses

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25

A Green-and-Black Chess Policy Problem: How to Ensure a Victory for the Green Side

− Among all the possible positions and moves in this game, we have chosen

the one shown. A possible energy policy problem is bringing the green side to victory. The game has only begun. However, many critical questions

for the final outcome are about to be answered. Who loses the queen first ?

That is: which will remain longer on the board, coal or bioenergy? This is left

open for the listener. Other questions evoked by the board are:

− Nuclear power (green rook) could be stuck in the corners. This also applies

to oil (black rook). The political pressure against these two pieces makes this

fairly probable in some regions. However, it is possible for the rook to make

forceful attacks, if some space is cleared for it.

− The dark horse in the middle symbolises the unknown future. The horse

could take any direction and attack several players: the chosen R&D strategy

decides.

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Conclusions

− We have left the play open on purpose, e.g. by not mentioning whose

turn it is.

− It is unnecessary for the chess fanatic to analyse the board too

deeply: if something is impossible, well, many seemingly impossible

things happen on the energy front.

− What the player of the game (e.g. a paper mill, a paper company, the

whole sector) needs is political savvy, engineering knowledge,

innovations in e.g. energy efficiency and advanced strategic thinking.

− The paper industry has to make a series of moves - that is

unavoidable. Otherwise, somebody else makes them for him. In the

latter case, the results will not be to the player’s liking.

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