Latest Developments in Carbon Regulation and its Impact on Petrochemical Feedstocks 17th Annual PFAA Conference Novembe

1. Latest Developments in Carbon Regulation and its Impact on Petrochemical Feedstocks 17th Annual PFAA Conference November 13, 2009 Allan Bedwell CantorCO2e LP 415.869.2035 abedwell@cantorco2e.com www.emissionstrading.com

2. I have one word for you… Carbon

3. Who Are These Guys? • Brokerage, advisory, regulatory assistance, strategy • >50 staff …est 1992 (staff in the business since 1981) • >50 geographic areas…worldwide offices, globally local • New York San Francisco Los Angeles • Vermont Houston Sao Paolo • Mumbai London Toronto • > $10 billion emission credit transactions • GHG VERs SO2 EAs NOx SIP Call ERC • RGGI RECLAIM HGA DERs • CERs RECs/ROCS CERs VERs • ATUs EU EAs Wastewater • Helping companies develop and implement carbon management strategies

4. Highlights and Take Aways • Carbon limits coming in 4 months • Big impacts to petroleum & chemical producers: accountable for 40-45% of GHG emissions cap • Markets • Offsets • Avoid classic mistakes • Weigh options now

5. Winners & Losers In Climate Bills Petroleum Producers

7. U.S. Last Emitted 1.6 BTCO2e in…. 1925

8. Waxman Markey – HB 2454 • 17% below 2005 levels by 2020; 83% below 2005 levels by 2050 • 4.6 billion allowances; • 85% free allocation • 15% auction • 2% for oil refineries from 2014 to 2026 • 25,000 MTCO2e threshold (250 tpy??) • Phasing of cap expansion, GPS for coal • Rebates for domestic transnationals • RES (RPS): 20% by 2025 • Commodity Futures Trading Commission, oversight • Offsets: 2 billion tonnes per year • State & regionalcap & trade: not allowed until 2018 • Safety valve of 2.5 billion allowances

9. Boxer Kerry - SB 1733

10. “End Game” Issues for Climate Bill • Allocation formulas and carbon liability • Fuels • Less stringent 2020 reduction target • Offsets • Carbon tariffs • Offshore oil drilling • Grandfathering of agriculture • State preemption • Consumer compensation

11. What If Climate Bill Get’s the Flu? • Supreme Court Ruling in 2007: Mass. v EPA • “Endangerment Finding” (next 3 weeks) • Finalize tailpipe standard (March 2010) • Stationary sources - “PSD/Title V GHG Tailoring Rule” • 100 tpy vs >25,000 MTCO2e py • If Congress doesn’t pass Climate bill: • EPA promulgates rule • …but loses court challenges re 25k threshold • ……and has to regulate sources emitting >100 tpy?? • 13,200 sources vs 6 million sources

12. Securities & Exchange Commission • Oct 27, 2009 Staff Legal Bulletin No. 14E (CF) • Carbon disclosure can’t be avoided by “no action” actions: • Manufactures disclose carbon intensity of products • Petroleum producers provide assessments of financial impact of climate legislation • Power generators ID how generation mix will change under cap-and-trade requirements • Insurers reveal potential actuarial impacts of climate change to their customers and rates • Disclose damaging information heretofore held under lock • Significant ripples in investment, insurance and lending activities

13. Resistance is Futile… GHG Emission Inventories Power Plant GHG Offsets GHG Emission Targets Regional Initiatives Climate Action Plans GHG Reporting Registries Source: Pew Center for Climate Change

14. Fifth Circuit Court – OK to Sue Petrochems on Climate • Katrina victims can sue oil & gas producers • Links emissions, climate change, storms, personal suffering • Plaintiffs have standing to assert claims for public and private nuisance, trespass and negligence • Cites Supreme Court opinion that “accepted as plausible the link between man-made GHGs and global warming” • Fact: “rising ocean temps may contribute to ferocity of hurricanes.” • Follows 2nd Circuit decision – governments have standing to sue to impose on caps on energy companies’ GHGs • Expect more lawsuits

15. Take California….please >52% Pop↑ 1990 - 2020 74% Pop↑ 2000 - 2050 • 25 - 30% reduction by 2020 • (80% below 1990 by 2050)

16. 2050 Emissions Cap What does ~80 million tonnes look like? 22.9 mill 46,540 mi2 36.7 mill 156k mi2

17. ImpactstoPetrochemCompanies Accountability for facility direct emissions and emissions from consumer use of petroleum products Refineries have a compliance obligation for about 43% of covered GHG emissions Industry to receive 2.25% of total allowances dropping to zero by 2026 Low Carbon Fuel Standard (LCFS)

18. Response by PetrochemCompanies • Reduced US refining investments, throughputs & utilizations with Int’l gains (crude & feedstocks) • By 2030: As low as12 mbd (compared to 16.4 mbd BAU) • Increased US refining costs • Highly limited allowances • Significant offset purchases • Limited international offsets • LCFS compliance in some states/regions • Higher NG and electricity costs • Increased refining imports • By 2030: 19.4% for refined products (compared to 9.6% BAU)

19. ImpactstoPetrochemFeedstock Cos • Demand for reduced carbon content of feedstocks (mass and intensity) • Cap and Trade • LCFS • Investors, insurers, and lenders • Demand for alternative feedstocks • Higher costs for production • Emission caps • Fuel/Electricity • Commodities (domestic and imported) • Transport/distributio

20. Closing the Carbon Gap Petroleum Producers

21. Option 1: In-house Reductions • Product feedstock changes • Processing improvements • Capital improvements • Fuel switching • Energy Efficiency • Fugitive emission capture • Outsourcing

22. Option 2: Markets, Fer em or Agin Em?

23. Declining Emissions Checkbook

24. Single Year Trade 400 300 200 Buys 100 allowances from seller Sells 100 allowances to buyer Seller Buyer $$$$$$$

25. Multiple Year Trade 300 250 200 150 100 50 Required obligation Actual emissions Surplus saleable reduction 2012 2013 2014 2015 2016 2018 2019 2020

26. What’s Carbon Going to Cost? • $300/tonne – CA Refinery & Carbon Capture & Sequestration • $150 - $200/ton tax by 2050** • $80/tonne - modeling • $44/tone EUAs (4/06) • $28/tonne –BK pressure relief • $15/tonne – Congressional Budget Office 2012 • $14- 25/ton - ConocoPhillips • $13-$39/tonne – Obama Staff • $10/tonne – WM/BK Floor Price • $10 – 09 CAR CA Forestry (11/09) • @ $8 - $10 08 – 10 (11/09) • $7.50 - $8.50 09 Climate Action Registry (11/09) • @ $7.5 – National Dairy (11/09) • $7 - $8.25 – 09-13 CAR Landfill Gas (11/09) • $6.5 - $7– 09 CAR LFG (11/09) • @ $5.25 CA VCUs 09 - 13 (11/09) • $2.19/ton - RGGI Auction (9/09) • $0.14/tonne EUAs (9/07)

27. The Survey Says….

28. Types of Trades • Exchange Traded and Cleared Markets in the US • Spot Delivery • CRTs CCX Exchange offsets • RGGI EAs CFIs • Future Delivery • CRTs RGGI EA • CCX Exchange offsets CFIs • Dec 2013 CFI (Fed Contract) • Options on Futures • CRTs RGGI EAs • Dec 2013 CFI (Fed Contract) • Futures Trades • Spread Trades Futures Rolls • Call Spreads Put Spreads RGGI EAs & Dec 2013 CFI Contracts

29. Types of Trades (contd) • OTC Traded and Exchange Cleared • same as above • OTC Trades • Individual year CRTs trades (spot or future delivery) • Stream CRT trades (future delivery) • Options on CRT streams or vintages • Swaps

30. Types of Trades (contd) • Offset projects • Carbon attributes • RECs • Gas • Power • Tertiary products • Off-take • Project participant • Managing partner • Company purchase • Technology

31. I have another word for you… Offsets

32. Guidance…The Story MattersCreate Carbon with a Story

33. Not a Bad Story…

34. Offsets With Good Stories • Wind, solar, hydro • Fuel switch • Livestock (manure management) • Waste management • Landfill gas capture • Wastewater treatment plant • Cogeneration • Avoided conversion, reforestation, urban forestry

35. Build a Portfolio • Have reductions from multiple: • Sectors • Geographies • Verified and Quantified • Reductions should fit your corporate profile • Consider customers and share-holders

36. Lessons Learned – Before We Leap • Acid Rain • 40% decrease in SO2, 40% increase in electricity generation over first decade o • Houston/Galveston NOx MECT • Targets a 79% reduction in 2008 from program onset of 2000 • Lead phase down • Refineries and feedstock firms • 1982 – 1988, US EPA • Ten fold reduction, 2 phases • >50% refineries participated • >$226 million savings (1985$) over 2.5 years (20% of est cost) • RECLAIM • 62% NOx reduction, 50% SOx reduction in 12 years

37. Some of the Companies We Keep…

38. CantorCO2e Greenhouse Services • Transactions • Continuous and customized auctions • Forward sales -- debt, finance projects • Transaction clearing • Market analysis • Methodology development • Project screening, feasibility assessments • Project documentation development • Coordination and management of approvals processes • Technology advice • Equity investment fund advice • Investor project introductions • Corporate strategy • Policy consulting

39. The CantorCO2e Difference • Your advocate – not a principal or retailer • Competitive markets – price and quality • 10 years in greenhouse gas markets • 16 years in environmental markets • Globally local (rules, opportunity, markets) • Distinguish compliance and voluntary carbon • Know what makes a quality carbon project • Get it done…quietly

40. Highlights and Take Aways • Carbon limits coming in 4 months • Big impacts to petroleum & chemical producers: accountable for 40-45% of GHG emissions cap • Markets • Offsets • Avoid classic mistakes • Weigh options now

41. Thank you Allan Bedwell CantorCO2e LP 415.869.2035 abedwell@cantorco2e.com www.emissionstrading.com