U.S. Energy Market Trends Living in a post Katrina/Rita World Presented to Senate Home Heating Fuels Study Committee Georgia State Legislature Atlanta, GA October 4, 2005 Terry Ciliske En*Vantage, Inc

2 Todays Takeaways The energy complex is highly integrated and interdependent across the commodity lines The energy complex is highly integrated and interdependent across the commodity lines The recent hurricanes merely exacerbated issues that were already occurring The recent hurricanes merely exacerbated issues that were already occurring The lack of investment in energy infrastructure, while efficient from a capital perspective, makes the national energy picture vulnerable to any stress on it The lack of investment in energy infrastructure, while efficient from a capital perspective, makes the national energy picture vulnerable to any stress on it In all of the above these are national issues In all of the above these are national issues

3 To address these issues we will cover the following areas today Oil and Refined Products: Oil and Refined Products: Supply/demand issues pre/post storms. What has changed? Supply/demand issues pre/post storms. What has changed? Natural Gas: Natural Gas: What were trends prior to storms and what is situation in light of current conditions? What were trends prior to storms and what is situation in light of current conditions? LPG: LPG: Near term impact on LPG supplies; implications on prices? Near term impact on LPG supplies; implications on prices? Electricity: Electricity: Will the storms have a material affect? Will the storms have a material affect?

4 Who is En*Vantage, Inc.? Located in Houston, Texas, En*Vantage, Inc. was founded in 1999 with the multiple purpose of investing in assets and businesses within the energy and petrochemical industries, and to provide strategic, executive management, project development, marketing, trading and risk management advisory services to a wide range of clients within these same industries. Located in Houston, Texas, En*Vantage, Inc. was founded in 1999 with the multiple purpose of investing in assets and businesses within the energy and petrochemical industries, and to provide strategic, executive management, project development, marketing, trading and risk management advisory services to a wide range of clients within these same industries. Each of the En*Vantage's Principals has senior management experience and combined, possess many decades of combined experience from Fortune 500 companies. This experience allows us to offer energy companies solutions and services that are grounded from a practical and fundamental standpoint in a time efficient manner. Each of the En*Vantage's Principals has senior management experience and combined, possess many decades of combined experience from Fortune 500 companies. This experience allows us to offer energy companies solutions and services that are grounded from a practical and fundamental standpoint in a time efficient manner. Over the course of the past six years we have advised approximately 100 public and private clients on a wide range of energy related topics. Over the course of the past six years we have advised approximately 100 public and private clients on a wide range of energy related topics.

5 Energy Value Chain Downstream Petrochemicals Refining Propane Retailing Gas Retailing Gas Distribution Gas Storage Gas Transportation Gas Gathering Exploration & Production Processing & Treating NGL Transportation NGL Storage NGL Fractionation Midstream Upstream Oil Gathering & Transportation Crude Oil Refining Product Transportation Product Terminals Product Retailing Natural Gas Crude Oil Power Retailing Power Distribution Power Generation Mining Coal Rail Transportation Nuclear, Hydro and Renewables

6 Background Over the past few years the U.S. has been generally lulled into a belief that adequate cushion of supplies of energy existed to supply the world economy in all market conditions. Fact: World oil production currently has little or no cushion for immediate production increases Fact: World oil production currently has little or no cushion for immediate production increases Fact: Any cushion that might exist in world oil supply is generally of poorer quality feedstock Fact: Any cushion that might exist in world oil supply is generally of poorer quality feedstock Fact: World wide upgrading (refining) capacity is tight, specially for poorer quality crude's. Energy Transportation and Conversion capacity had reached practical limits without significant new capital investment. Fact: World wide upgrading (refining) capacity is tight, specially for poorer quality crude's. Energy Transportation and Conversion capacity had reached practical limits without significant new capital investment.

7 Background Fact: Natural Gas in North America is trending from a continental commodity to a globally based commodity. Fact: Natural Gas in North America is trending from a continental commodity to a globally based commodity. Fact: Despite accelerated drilling for natural gas in North America, supply growth has been non- existent for a number of years. Fact: Despite accelerated drilling for natural gas in North America, supply growth has been non- existent for a number of years. Fact: Natural Gas infrastructure is currently putting artificial constraints on managing local supply/demand issues in the U.S. Fact: Natural Gas infrastructure is currently putting artificial constraints on managing local supply/demand issues in the U.S. Fact: LPG supply in the U.S., largely a function of natural gas supplies and refinery processing of crude oils, is also a globally based commodity. Fact: LPG supply in the U.S., largely a function of natural gas supplies and refinery processing of crude oils, is also a globally based commodity. Fact: Electricity demand has been growing substantially in the U.S. partially in response to more normal weather conditions. Growth in electricity supply in the U.S. is marginally produced from natural gas. Fact: Electricity demand has been growing substantially in the U.S. partially in response to more normal weather conditions. Growth in electricity supply in the U.S. is marginally produced from natural gas.

8 Katrina and Rita Passed through the Heart of the Energy Complex of the U.S. Gulf Coast

9 The Storms Impact As much as 100% of the Gulf of Mexico oil production (1.5 MMBbl/d) and up to 80% of natural gas (8 BCF/d) shut in for weeks. As much as 100% of the Gulf of Mexico oil production (1.5 MMBbl/d) and up to 80% of natural gas (8 BCF/d) shut in for weeks. As much as 30% (excess of 5 Million Bbl/d) of U.S. Refining capacity was down following Katrina/Rita, with 15% having significant damage that will force outages for weeks and months. Prior to the storms the U.S. refining industry had been running at 92-95% of nameplate capacity throughout the summer. As much as 30% (excess of 5 Million Bbl/d) of U.S. Refining capacity was down following Katrina/Rita, with 15% having significant damage that will force outages for weeks and months. Prior to the storms the U.S. refining industry had been running at 92-95% of nameplate capacity throughout the summer.

10 The Storms Impact The Gulf Coast Gas Processing Industry suffered an unprecedented blow as numerous processing plants received severe damage. These plants are necessary both for the conditioning of natural gas prior to delivery into long haul gas transmission pipelines as well as providing necessary supplies of Natural Gas Liquids for the petrochemical and refining industries as well as home and commercial heating fuels. The Gulf Coast Gas Processing Industry suffered an unprecedented blow as numerous processing plants received severe damage. These plants are necessary both for the conditioning of natural gas prior to delivery into long haul gas transmission pipelines as well as providing necessary supplies of Natural Gas Liquids for the petrochemical and refining industries as well as home and commercial heating fuels. Currently there is almost 12 BCF/d of Processing Plant capacity affected by the two storms which represented almost 7 BCF/d (about 13% of total U.S. dry gas production) of actual throughputs prior to the storms. Currently there is almost 12 BCF/d of Processing Plant capacity affected by the two storms which represented almost 7 BCF/d (about 13% of total U.S. dry gas production) of actual throughputs prior to the storms.

11 The Storms Impact LNG imports to the largest U.S. terminal at Lake Charles, LA are interrupted (capacity in excess of 1 BCFD) due to damage at the terminal and shutdown of tanker traffic on the Calcasieu River. LNG imports to the largest U.S. terminal at Lake Charles, LA are interrupted (capacity in excess of 1 BCFD) due to damage at the terminal and shutdown of tanker traffic on the Calcasieu River. Numerous pipelines (crude, refined products, NGLs and natural gas) are shut for short or extended periods of time. Problems include lack of power for pumping stations, lack of feedstock for the pipelines or failure of the pipelines due to wave action, mud slides or dragging anchors from platforms. Many systems will be impacted for months. Numerous pipelines (crude, refined products, NGLs and natural gas) are shut for short or extended periods of time. Problems include lack of power for pumping stations, lack of feedstock for the pipelines or failure of the pipelines due to wave action, mud slides or dragging anchors from platforms. Many systems will be impacted for months.

12 Oil and Refined Products Supply/demand issues pre/post storms. What has changed?

13 World Oil Supply Cushion is Gone Within the last 12 months, OPEC has effectively lost control of the market as they have little or no surplus production capacity. Since World War II, world wide crude supply has featured a production cushion controlled by a political entity Since World War II, world wide crude supply has featured a production cushion controlled by a political entity Initially the Texas Railroad Commission controlled the surplus until 1971 when Texas ceased being the worlds swing producer and proration went to 100% of available production Initially the Texas Railroad Commission controlled the surplus until 1971 when Texas ceased being the worlds swing producer and proration went to 100% of available production Since 1971, the political entity known as OPEC has controlled the surplus production whip. Since 1971, the political entity known as OPEC has controlled the surplus production whip.

14 Oil Surplus vs. Price

15 Crude Oil prices have been in a consistently upward trend for over 18 months as world demand climbed and the surplus deliverability declined

16 Hurricanes Katrina and Rita OPEC claims that they have as much as two million barrel per day of surplus (most of the world doubts this figure, the EIA estimate as of August, 2005 is million barrels per day). OPEC claims that they have as much as two million barrel per day of surplus (most of the world doubts this figure, the EIA estimate as of August, 2005 is million barrels per day). The hurricanes have effectively eliminated, in the short run, crude production that is equal to or greater than the entire OPEC surplus capacity and theoretically puts the world into a short term deficit condition. Currently this deficit is being cushioned with withdrawals from the Strategic Petroleum Reserve. Realistically this is somewhat of a moot point in that we do not currently have sufficient operable refining capacity to process the pre-storm levels of crude oil. The hurricanes have effectively eliminated, in the short run, crude production that is equal to or greater than the entire OPEC surplus capacity and theoretically puts the world into a short term deficit condition. Currently this deficit is being cushioned with withdrawals from the Strategic Petroleum Reserve. Realistically this is somewhat of a moot point in that we do not currently have sufficient operable refining capacity to process the pre-storm levels of crude oil.

17 Ritas Impact on Gulf Coast Refining Capacity Compounds the Ongoing Impact of Katrina

18 Natural Gas generally trades with Crude Oil Prices acting as a Cap (short term excursions above 100% of crude oil energy equivalent occur from time to time)

19 While Natural Gas Inventories Behaved (remain surplus year on year) – prices remained in a band of 75-85% of Crude Prices on a Btu Basis – Elimination of surplus in August leads to rapidly escalating prices compounded by the Hurricanes

20 Natural Gas Issues Inventories in the U.S. were at elevated levels following winter of 2004/2005 that was 7% warmer than normal Inventories in the U.S. were at elevated levels following winter of 2004/2005 that was 7% warmer than normal Year on year surplus was over 400 BCF during the later part of the winter. Year on year surplus was over 400 BCF during the later part of the winter. The year on year surplus was eliminated by mid-August of this year due to higher than normal cooling demand in the U.S. The year on year surplus was eliminated by mid-August of this year due to higher than normal cooling demand in the U.S. We have been living on lower than normal winter demand for four straight winters; not since the winter of 2000/2001 were we at or above normal for the seasonally accumulated heating degree days across the U.S. We have been living on lower than normal winter demand for four straight winters; not since the winter of 2000/2001 were we at or above normal for the seasonally accumulated heating degree days across the U.S.

21 U.S. Seasonal Heating and Cooling Demands Previous Four Winters have been Milder than Normal, while Summers have been more Severe than Normal

22 Is more drilling in the U.S. adding to Natural Gas deliverability or are we merely running in place?

23 Existing U.S. Natural Gas Regional Pipeline Infrastructure

24 Pipeline Infrastructure is not keeping pace with Regional Gas Supply and Demand Balances

25 North America (including the U.S.) is losing its worldwide competitive edge for natural gas intensive industries

26 Energy Intensive Industrial Plants face closures Example: Ammonia Plants Poised for New Shutdowns? Source: The Market: Fertilizer News and Analysis; Sept. 29, 2005

27 Wholesale Propane Prices have remained low (relatively speaking) from a historical relationship to crude oil until the hurricanes arrived

28 Current wholesale U.S. Propane Inventories are not in bad shape; the question will be what will happen with the loss of Gas Processing Capacity and throughput this fall?

29 Offsetting part of the supply loss for NGLs is the temporary shutdown of almost 20% of the ethylene production capacity in the U.S. as a result of Hurricane Rita

30 Electrical Generation was already feeling the affects of higher fuel costs prior to the hurricanes Average Weekly Coal Commodity Spot Prices Business Week Ended September 23, 2005

31 Since the Hurricanes, Coal Shipments along the Gulf Coast have been disrupted Coal is a major commodity transported through the Port of Mobile and New Orleans on the Mississippi River and coastwise on the Gulf Intracoastal Waterways System. Waterborne traffic since Hurricane Katrina has progressed from totally shut down in some areas to partially restored. Coal export facilities and domestic coal shipments through the lower Mississippi River were impacted more seriously than coal import capacity. Coal is a major commodity transported through the Port of Mobile and New Orleans on the Mississippi River and coastwise on the Gulf Intracoastal Waterways System. Waterborne traffic since Hurricane Katrina has progressed from totally shut down in some areas to partially restored. Coal export facilities and domestic coal shipments through the lower Mississippi River were impacted more seriously than coal import capacity. The two major coal facilities near New Orleans incurred damage. The two major coal facilities near New Orleans incurred damage.

32 Current NYMEX (eastern) coal prices continue to put a significant floor price on natural gas

33 Conclusions It will be difficult to correct the energy issue quickly, the near term solution will involve managing demand through conservation and demand destruction. We need to be prepared to support those in need as we face the upcoming winter demand. It will be difficult to correct the energy issue quickly, the near term solution will involve managing demand through conservation and demand destruction. We need to be prepared to support those in need as we face the upcoming winter demand. Longer term solutions generally revolve around additional capital investment on supplies as well as infrastructure while directing focus on efficient use of the resources that are available to us. Longer term solutions generally revolve around additional capital investment on supplies as well as infrastructure while directing focus on efficient use of the resources that are available to us.