Governor s Economic Summit May 22, 2012

Transcription

1 TRANSFORMING DAILY LIFE Governor s Economic Summit May 22, 2012 The views expressed in this presentation are my own and do not necessarily reflect the positions and policies of Koch Industries, Inc.

2 Agenda Koch summary Global economic overview Debtor vs. creditor economies Significant volatility/policy implications USA / Kansas outlook Energy Agriculture Manufacturing Policy implications Questions 1

3 Koch Industries, Inc. 67,000 employees in 60 countries Forbes: #2 private company in America Fortune: 15 th largest company in America 45 bn in acquisition and capex in 10 years Moody s: Aa3 credit rating / S&P: A+ credit rating 2,800x increase in book value in 50 years, vs. 82x for S&P 500 Doubling, in many respects, every 5-6 years 2

4 Diverse Independent Companies Petroleum Refining Nitrogen Fertilizer Process Technology Commodity Trading Chemicals & Lubricants Minerals & Land Mgmt Pipelines Ethanol Ranching Consumer Products N. Amer. Retail Europe Commercial Packaging Medium Board Liner Pulp Building Products Plywood Lumber OSB Gypsum Intermediates Polymer & Resins Apparel Spandex Nylon Performance Surfaces & Materials Carpet Airbag Retail Commercial 3

5 Koch s Presence in Kansas 2,800 direct employees supporting 6,200 jobs in Kansas ~$400 mm in direct payroll to Kansas employees annually ~$20 mm in state income taxes annually ~$10 mm in state sales tax annually ~$10 mm in property taxes annually ~$10 mm in charity annually 1.2 mm square foot office complex 3 significant manufacturing sites in Kansas Future: potential for significant new investment which could increase our presence by 2x in the next 10 years. 4

6 Macro-Economic Views 5

7 U.S. Spending, Revenues & Budget Deficit/Surplus Source: Laffer Associates 6

8 Global Government Debt as % of GDP (Net) Source: Laffer Associates 7

9 Hidden Debt in the U.S.A. Add: Add: SSA Unfunded ($trn's) Stated Investment PV Med/SSA Debt GDP $ Ratio 70% 105% Not Possible Source: Koch Estimates 8

10 Deleveraging Will Take Years if Not Decades 9

11 Europe Total public support to European banks and sovereigns ( bn) Source: Bridgewater 10

12 European Periphery Debt Problem is Big 14% IMF typically started lending at levels of external debt and current account deficits well below where Greece is today All of these cases involved at least a 25% currency devaluation Previous IMF Bailouts compared to Euro Periphery (Bubble Size Indicates $ Value of External Debt) 12% Russia 1998 Greece 2010 Current Account Deficit (%GDP) 10% 8% 6% 4% Mexico 1994 Brazil 1998 Ukraine 2008 Argentina 2001 Korea 1997 Spain 2010 Portugal 2010 Thailand 1997 Ireland % Indonesia 1997 Turkey % 0% 50% 100% 150% 200% 250% External Debt (%GDP) Direct IMF lending cases do not include IMF lending to Hungary and Pakistan in External debt figures adjusted based on Bridgewater estimates of impact of pass-through lending and liabilities of foreign bank subsidiaries. Source: Bridgewater 11

13 Bank Funding Costs Source: Bridgewater 12

14 Implications for Kansas of Macro Conditions Anticipate higher interest rates Maintain your AA+ rating Pay down debt Anticipate volatility Maintain ample liquidity Anticipate constrained federal support Maintain budget discipline Invest in growth initiatives Tax reform Leverage your comparative advantages 13

15 Outlook for Kansas Businesses Comparative advantage in the following areas: Agriculture Energy Manufacturing competitiveness 14

16 Global Food Demand Growth CAGR Population growth ~1% Protein mix >1% Potential biofuels <1% Total demand ~3% 9 bn global population by 2030 vs. 7 bn today. 15

17 How Will This Demand Be Met? Historic (1) Future (2) Harvested acreage (3) 0.6% 0.3% Productivity 1.7% 2.7% Total 2.3% 3.0% (1) (2) (3) Source: USDA/Koch estimates 16

18 Investment Required to Meet This Demand? $ bn's (1) Historic global investment $ 140 Incremental investment 70 Annual investment $ 210 (1) 2009 = 100 / incremental = constant dollars. Includes investment necessary in new assets, upgrading depreciating assets, storage and processing. Source: Horizon 2050, FAO Panel 17

19 Why the Higher Investment? 1. Improve per acreage productivity, AND 2. Increase trade-related distribution capabilities (storage, distribution, preservation). In North America, for example, agricultural production needs to increase by 30% in the next 15 years, and nearly all for export, to maintain projected global balance. Source: OECD - FAO 18

20 Land Usage Percent of global land surface used for food production 11% Percent of landmass with highly fertile or inherently fertile soil USA / Canada 28% Non-USA / Canada 2% Source: Howard G. Buffet Foundation / Koch estimate 19

21 North America Agricultural Recap Dominant Large producer High per capita supply Productive Land availability Source: Wells Fargo 20

22 Policy Implications: Agricultural Sector Support private sector investment in the agricultural sector Permits can take 2-3 years to obtain Koch Nitrogen considering ~$4 bn in investments in Kansas, Oklahoma, Nebraska, Iowa, Texas, and Canada Canada likely advantaged from a permit/regulatory perspective Continue focusing on water policy Use it or lose it repeal good reform Ongoing irrigator knowledge systems 21

23 Kansas Advantages Agriculture Energy rapid advances in technology and know-how. Fantastic opportunities to create value. Manufacturing competitiveness 22

24 Oil and Gas 1.5 trillion barrels of oil in shale in the USA. Five times the stated proven reserves of Saudi Arabia. 1.7 trillion barrels of oil deposits in Canada. 125 years of proven natural gas reserves in the USA. Supply of gas liquids has made many North American chemical producers the current low cost operator in the world. Technology advancements ongoing. 23

25 Shale Plays Create Investment Opportunities 24

26 Bakken Production Growth Source: Midstream Business 25

27 Eagle Ford Production Growth Source: Midstream Business 26

28 Economic Growth Drives Demand Petroleum Demand and GDP 28,000 24,000 Total Consumption of Petroleum Products (MBD) 20,000 16,000 12,000 8,000 Russia 4,000 India Japan China U.S. Germany 0 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 Source: Energy Information Administration GDP (B 2005$'s) North America Central & South America Europe Eurasia Middle East Africa Asia & Oceania 27

29 Decline rates for current oil fields are estimated at 4.4%. This means 3.8 MMBPD of new oil is needed every year even without demand growth. The IEA expects demand to grow 1.6%/yr World Oil Production Natural gas liquids Non-conventional oil Crude oil - additional enhanced oil recovery 4.35% Decline Rate Crude oil - fields yet to be found Currently producing oil fields - reserves yet to be developed Crude oil - currently producing fields 28

30 Crude prices must remain high enough for new production to offset ~4% decline rates even without demand growth. 100 Global Oil Supply Costs for 2008 WTI Equivalent Prices (Source: IHS CERA et al) 90 Replacement Cost: Oil Sands w/ Upgrader = 85 IRR Supply Cost, $/Bbl Saudi Arabia Other ME Russian Federation China Libya Mexico Other SA, Europe, Eurasia, Africa UK North Sea Other NA Brazil Deep Water US GOM Deep Water Angola Deep Water Nigeria Deep Water Canada Oil Sands Other SA, NA Cumulative Quantity (MMBD) Crude Supply Full Cash Cost, $/Bbl (PIRA) Crude Supply Capital Recov (12%), Royalty, et al, $/Bbl 29

31 Policy Implications: Crude Oil Crude prices should continue to be well supported. As a top 10 oil and gas state, billions of direct economic activity can be stimulated. In North Dakota, for example, new energy related activity enabling potential property tax elimination. While producer pricing should remain strong, local production should benefit consumers. Regional basis differentials 30

32 Significant Economic Advantage for U.S. Natural Gas Consumers $14 $13 $12 $11 $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 German Border NBP (UK) Henry Hub AECO Average Annual Natural Gas Prices (2012 $) Actual (in 2012 $) Forward Curve

33 Policy Implications: Natural Gas Support private enterprise s continued investment in shale technology and development. Eliminate renewable energy mandates: not necessary. 29 states with renewable energy mandates could have an average of 30% higher energy costs with lower reliability than the other 21 states. Why? 32

34 Return on Investment: Utility Fuels $300 $275 $250 $225 $200 New-build Merchant Power Economics by Generation Type 10% Unlev Return on Newbuild Fixed Expense Variable O&M Fuel Expense Estimated cost after renewable subsidies (e.g. Production Tax Credit PTC, Investment Tax Credit ITC ) $203 $/MWh $175 $150 $148 $153 $163 $131 $125 $100 $75 $50 $75 $39 $95 $105 $51 $99 $45 $147 $149 $25 $0 Assumptions: Capital ($/kw) Const Time (Years) Capacity Factor Fuel ($/mmbtu) Gas Combined Cycle Coal Wind(1) Biomass Solar Nuclear Combustion Turbine (CT) $1, % $4.50 $2, % $4.00 $2, % $0.00 (1) Wind economics include incremental capital for transmission infrastructure required to transport wind power to demand centers. Wind economics have not been adjusted for opportunity cost of limited ability to dispatch on demand ERCOT planning assumptions are based on 9% availability for Wind resources. 33 $2, % $9.00 $3, % $0.00 $6, % $0.50 $ % $4.50

35 Outlook for Kansas Businesses Three reasons for optimism: Agriculture Energy Manufacturing competitiveness 34

36 U.S. Manufacturing Productivity Continues Source: The Boston Consulting Group 35

37 USA vs. China China total cost advantage Product with 20% labor content, before destination freight and duties. 36

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