1. Gas Supply and Demand Issues Living in a post Katrina/Rita World Presented to Houston Gas Processors Association Regional Meeting Kingwood, Texas October 11, 2005 Terry Ciliske En*Vantage, Inc tciliske@envantageinc.com www.envantageinc.com

2. 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 Natural Gas has a number of structural changes occurring in the supply and demand sides of the equations Natural Gas has a number of structural changes occurring in the supply and demand sides of the equations

3. 3 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.

4. 4 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: NGL supply in the U.S., largely a function of natural gas supplies and refinery processing of crude oils, is also a globally based commodity. The new influx of LNG is likely to have a significant impact on this issue. Fact: NGL supply in the U.S., largely a function of natural gas supplies and refinery processing of crude oils, is also a globally based commodity. The new influx of LNG is likely to have a significant impact on this issue. 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.

5. 5 Katrina and Rita Passed through the Heart of the Energy Complex of the U.S. Gulf Coast

6. 6 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.

7. 7 The Storms Impact LNG imports to the largest U.S. terminal at Lake Charles, LA were interrupted. LNG imports to the largest U.S. terminal at Lake Charles, LA were interrupted. Numerous pipelines (crude, refined products, NGLs and natural gas) remain shut down for short or extended periods of time. Numerous pipelines (crude, refined products, NGLs and natural gas) remain shut down for short or extended periods of time. The hurricanes have effectively eliminated, in the short run, crude production that is equal to or greater than the entire OPEC surplus capacity. The hurricanes have effectively eliminated, in the short run, crude production that is equal to or greater than the entire OPEC surplus capacity.

8. 8 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.

9. 9 Oil Surplus vs. Price

10. 10 Crude Oil prices have been in a upward trend for over 18 months

11. 11 Natural Gas generally trades with Crude Oil/Distillate acting as a Cap while Coal/Residual Fuel Oil acts as a Floor $ / MMBtu Coal Competition -.25 - 1.25 Bcfd Oil Prices Residual Fuel Oil - 1-2.5 (+) Bcfd seasonal NATURAL GAS SUPPLY/DEMAND BALANCE Distillate - 1-3 (+) Bcfd TIME

12. 12 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

13. 13 Natural Gas Demand Issues

14. 14 U.S. Seasonal Heating and Cooling Demands Previous Four Winters have been Milder than Normal, while Summers have been more Severe than Normal

15. 15 Residential and commercial demand are growing steadily, with efficiency gains dampening the effect of customer growth. Residential and commercial demand are growing steadily, with efficiency gains dampening the effect of customer growth. The industrial market has declined since the late 1990s. Future trends are uncertain with higher North American prices. The industrial market has declined since the late 1990s. Future trends are uncertain with higher North American prices. Power demand reached record peak this past summer. Power demand reached record peak this past summer. Supply stagnation has constrained demand; price will allocate consumption. Supply stagnation has constrained demand; price will allocate consumption. US Gas Demand by Sector Power Pushes Demand in the Future

16. 16 Plant Closures/Price Squeeze on Energy

17. 17 Energy Intensive Industrial Plants face closures Example: Ammonia Plants Poised for New Shutdowns? Source: The Market: Fertilizer News and Analysis; Sept. 29, 2005 Ammonia Plants shut down permanently in North America Shutdowns ???

18. 18 North America (including the U.S.) is losing its Worldwide Competitive Edge for Natural Gas Intensive Industries Source: BP World Statistics

19. 19 Natural Gas has Competition with new Coal Power Units Planned Only 2,500 MW of coal capacity is currently under construction. Another 8,000 MW is in the Advanced Development stage. Only 2,500 MW of coal capacity is currently under construction. Another 8,000 MW is in the Advanced Development stage. The bulk of coal projects (34,000 MW) are in the very early stages. Highly unlikely to see significant new coal build prior to 2010. The bulk of coal projects (34,000 MW) are in the very early stages. Highly unlikely to see significant new coal build prior to 2010.

20. 20 However Electrical Generation has been feeling the Affects of Higher Coal Costs Average Weekly Coal Commodity Spot Prices Business Week Ended September 23, 2005

21. 21 What is happening on the Supply side for Natural Gas?

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

23. 23 Long Term US Produced Gas Supply Requirements for growth: Requirements for growth: Strong commodity price Strong commodity price Increased access to federal acreage Increased access to federal acreage Reduced drilling restrictions Reduced drilling restrictions Growth in rig fleet/crews Growth in rig fleet/crews Evolving production technology Evolving production technology Increased pipeline takeaway capacity Increased pipeline takeaway capacity Higher producer risk threshold Higher producer risk threshold Play innovation Play innovation Source: Wood Mackenzie, Georgia Senate Home Heating Fuels Study Committee Presentation, Oct 4, 2005

24. 24 Canadian Supply Outlook Canadian supply maintained through recent high drilling activity. Canadian supply maintained through recent high drilling activity. Record drilling activity in the WCSB during Winter 2004 continued into 2005. Record drilling activity in the WCSB during Winter 2004 continued into 2005. CBM developments help to hold a production plateau until Mackenzie Delta supplies from Arctic Canada reach the market in 2010. CBM developments help to hold a production plateau until Mackenzie Delta supplies from Arctic Canada reach the market in 2010. As WCSB conventional production matures, Canadian supply declines. However, potential for growth exists in unconventional gas resources. Large scale, commercial CBM developments have just started. As WCSB conventional production matures, Canadian supply declines. However, potential for growth exists in unconventional gas resources. Large scale, commercial CBM developments have just started. Demand from Tar Sands Oil production is expected to grow as much as 1 BCF/d over the next decade more than potentially offsetting Mackenzie Delta contribution less declines. Demand from Tar Sands Oil production is expected to grow as much as 1 BCF/d over the next decade more than potentially offsetting Mackenzie Delta contribution less declines. Source: Baker Hughes

25. 25 Gulf of Mexico Supply Outlook Conventional shelf production has matured and is in decline. Conventional shelf production has matured and is in decline. Deepwater (WD>1312 ft) as well as Deep Shelf (TVD>15,000 ft) provides plateau and slight growth in GoM production in 2008. Deepwater (WD>1312 ft) as well as Deep Shelf (TVD>15,000 ft) provides plateau and slight growth in GoM production in 2008. Ultradeep Shelf (TVD>35,000 ft) offer additional growth potential (Several 1-3 Tcf fields estimated). Ultradeep Shelf (TVD>35,000 ft) offer additional growth potential (Several 1-3 Tcf fields estimated). Eastern GoM production growth in 2007 with Independence Hub operational. Eastern GoM production growth in 2007 with Independence Hub operational. Current drilling moratorium, state and local opposition, and infrastructure constraints limit Eastern GoM growth. Current drilling moratorium, state and local opposition, and infrastructure constraints limit Eastern GoM growth. Source: Wood Mackenzie, Georgia Senate Home Heating Fuels Study Committee Presentation, Oct 4, 2005

26. 26 Pipeline Infrastructure is not keeping pace with Regional Gas Supply and Demand Balances

27. 27 Recently Announced Projects Kinder Morgan/Sempra Wyoming to Ohio Pipeline Kinder Morgan/Sempra Wyoming to Ohio Pipeline $3 Billion – 2 BCFD $3 Billion – 2 BCFD Wyoming Natural Gas Pipeline Authority recently announced backing with 200 MMCFD sign up and pledge to explore the use of their $1 Billion bonding authority Wyoming Natural Gas Pipeline Authority recently announced backing with 200 MMCFD sign up and pledge to explore the use of their $1 Billion bonding authority Startup – staged 2006 to late 2008 Startup – staged 2006 to late 2008 El Paso Continental Connector – Kansas to Louisiana El Paso Continental Connector – Kansas to Louisiana 1-2 BCFD 1-2 BCFD Startup – Nov, 2008 Startup – Nov, 2008

28. 28 LNG to the Rescue? Worldwide competition Worldwide competition Specifications / Fungibility Specifications / Fungibility Import capability Import capability Impact on NGL industry Impact on NGL industry

29. 29 Global LNG Supply Outlook Global Liquefaction Capacity 2002 World LNG exports equaled 5.4 TCF 2002 World LNG exports equaled 5.4 TCF 2007 Forecasts for World LNG exports to increase to 9.4 TCF 2007 Forecasts for World LNG exports to increase to 9.4 TCF Source: Wood Mackenzie, Georgia Senate Home Heating Fuels Study Committee Presentation, Oct 4, 2005 Source: EIA, The Global Liquefied Natural Gas Market: Status and Outlook, Dec. 2003

30. 30 Existing U.S. LNG Import Terminals As of today, there are five operating liquefied natural gas (LNG) import terminals in North America with a combined peak sendout capacity of 4,400 Bcf/d and expansion plans for another 2.44 Bcf/d of peak sendout capacity: As of today, there are five operating liquefied natural gas (LNG) import terminals in North America with a combined peak sendout capacity of 4,400 Bcf/d and expansion plans for another 2.44 Bcf/d of peak sendout capacity: Excelerate Energy's Gulf Gateways Energy Bridge offshore Louisiana, the newest North American LNG terminal; Excelerate Energy's Gulf Gateways Energy Bridge offshore Louisiana, the newest North American LNG terminal; Dominion's Cove Point LNG in Lusby, MD; Dominion's Cove Point LNG in Lusby, MD; Suez Energy North America's Everett LNG terminal in Everett, MA; Suez Energy North America's Everett LNG terminal in Everett, MA; El Paso Corp.'s Elba Island LNG terminal in Elba Island, GA; and El Paso Corp.'s Elba Island LNG terminal in Elba Island, GA; and Southern Union's Trunkline LNG terminal in Lake Charles, LA. Southern Union's Trunkline LNG terminal in Lake Charles, LA.

31. 31 New Approved North American LNG Import Terminals Plans for another 55 LNG import terminals with an expected total combined peak sendout capacity of nearly 62 Bcf/d. Plans for another 55 LNG import terminals with an expected total combined peak sendout capacity of nearly 62 Bcf/d. 13 terminals with a combined peak sendout capacity of more than 17 Bcf/d had received final regulatory approvals in the United States, Canada or Mexico as of July, 2005: 13 terminals with a combined peak sendout capacity of more than 17 Bcf/d had received final regulatory approvals in the United States, Canada or Mexico as of July, 2005:

32. 32 Europes Appetite for LNG is growing also Source: Gladstein Neandross & Associates, LNG Imports, Natural Gas Vehicle Technology Forum Washington, D.C. August 4, 2005

33. 33 Interestingly the bulk of LNG import terminals that appear to be moving forward are to be located on the U.S. Gulf Coast, yet the shipping costs are the highest there

34. 34 However, expectations are for an incremental 2.2 BCF/d of LNG imports from new terminals by 2010 – Can we say potentially overbuilding?

35. 35 LNG Transactions are moving towards spot markets allowing for worldwide arbitrage

36. 36 The Hot LNG Issue The Gulf Coast has the capability to convert the Hot LNG to U.S. pipeline specifications….. The Gulf Coast has the capability to convert the Hot LNG to U.S. pipeline specifications….. However, it could result in an incremental 100,000-200,000 Bpd of ethane/propane on the gulf coast which will be partially offset by declines in indigenous production in the area. This is contrasted with peak U.S. ethane production today of nearly 800,000 Bpd. However, it could result in an incremental 100,000-200,000 Bpd of ethane/propane on the gulf coast which will be partially offset by declines in indigenous production in the area. This is contrasted with peak U.S. ethane production today of nearly 800,000 Bpd. NGL Logistics on the gulf coast could be a significant issue as well as the supply/demand equation NGL Logistics on the gulf coast could be a significant issue as well as the supply/demand equation

37. 37 Conclusions Indigenous gas supplies in North America are likely to represent a smaller percentage of overall supply. Indigenous gas supplies in North America are likely to represent a smaller percentage of overall supply. LNG, while increasing in supply logistics, will be problematic as we will be in greater competition with growing world demand. LNG, while increasing in supply logistics, will be problematic as we will be in greater competition with growing world demand. Industrial demand has the potential to continue to shrink as North America becomes less competitive for energy intensive industries. Industrial demand has the potential to continue to shrink as North America becomes less competitive for energy intensive industries. Price volatility will increase as a greater percentage of gas demand shifts to weather related consumption (space heating and power generation) and less base load industrial demand. Price volatility will increase as a greater percentage of gas demand shifts to weather related consumption (space heating and power generation) and less base load industrial demand. Lack of effective infrastructure is limiting efficient distribution of energy supplies throughout North America Lack of effective infrastructure is limiting efficient distribution of energy supplies throughout North America