1. Global Wealth Management Group
Natural Gas Pricing and Strategy Forum: IGS Energy The Golf Club of Dublin 5805 Eiterman Road Dublin, OH August 5, 2008
Alan Levine
TeamLevine
1775 Eye Street NW
Washington, DC 20006
(800)
This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy.  This is not a research report and was not prepared by the Morgan Stanley research department.  It was prepared by Morgan Stanley sales, trading or other non-research personnel.  Past performance is not necessarily a guide to future performance.  Please see additional important information and qualifications at the end of this material.

2. Overview Tension between Production Bears Consumption Bulls
Globalization of Natural Gas Pricing
New Considerations in Pricing
LNG is the Balance Wheel
Charting the Price

3. Overview of Natural Gas The Current Situation and Expectations
Prices in 2008 have thus far traded a $6.84 range.
          The low seen on December 27, 2007 was $6.838
          The top came on July 2, 2008 at $ (+100.3%)
          Prices fell to $8.81 in 20 trading sessions (-35.6%)  
Concerns early in the year that lower LNG imports would support price have been frustrated by an improved storage outlook and softer crude oil prices.
Sustained lower 48 heat and the threat of potential hurricane activity have not supported prices as had been anticipated.  Foreign natural gas prices exceed domestic prices offering little hope of supplemental supply.
Gas/Crude relative value is at an extreme, potentially supporting price.
Supply Situation 
2008 production is well above expectations (+3 %.) 
Canadian production decline should abate if Year-on-Year US storage deficit expands.
HDDs were 2% above normal in first four months of 2008, (last year 3% below.)
LNG imports about 50% below last year (1-1.5 Bcf/d.)  Foreign (Japan, Spain) demand draining supplies ordinarily destined for US.
When available, spot cargoes have found more welcome in markets with a willingness to pay oil-indexed prices (e.g. Argentina.)

4. Overview of Natural Gas The Current Situation and Expectations continued
2009 supply growth continues.  Onshore will see largest gains.  Accelerated drilling and multiple new resource plays.  Will GoM declines accelerate?
Weather volatility still important, especially with greater reliance on electricity a national goal.  Alternative fuels (resid/coal) will matter in periods of under/over supply.  At current coal price, the natural gas floor is around $7/mmbtu, up from $4/mmbtu six months ago.
New project additions to LNG to be around 7.1 bcf/d.

5. Daily, continuous NYMEX Natural Gas Futures
Source:

6. Production Bears
Consumption Bulls

7. Natural Gas is Cheaper than Crude Oil
The value of a natural gas contract
in crude oil BTU equivalent terms
Source:

8. Btu Parity

9. Global Natural Demand Growth (Bcf/d)

10. Recent Growth in Natural Gas Production in Lower 48
Represents gains in Texas (+15%), Wyoming (+9%), Oklahoma (+6%),
Louisiana (+4%), Gulf of Mexico (+2%)

11. Major U.S. shale basins Natural Gas Reserves
Grew in 10 of last 11 years
Shales will provide major new source, Barnett > 6% of lower 48 production

12. Western Canadian NG Production

13. Global Demand Growth: Gas Outpaces Oil, Expected To Continue

14. Storage Projections

15. Natural Gas Market: Revised Balance

16. Globalization of Natural Gas Pricing
Geopolitics and Energy
LNG is the Balance Wheel

17. Geopolitics and Energy
Geopolitics is the interaction among politics, geography, demography and economics of nations.
Relates to national security and even national survival
Fragility of international energy markets
Iraq
The Middle East
The former Soviet Union

18. Oil and Natural Gas Hotspots Factsheet
Source: EIA

19. Regime Changes Have Rendered Production Lower
Source: Morgan Stanley Research

20. Iraq’s Petroleum Situation
1. Unresolved Hydrocarbon Policy
▫ 70% of Iraqi Economy
▫ Impacts Sectarian Violence
▫ Regional Autonomy
2. Unresolved Control of Oil Fields
▫ Revenue Sharing
▫ Dispute Resolution
3. Diminishing Production Expectations
▫ Potential to grow to 3.5 million barrels daily in five years
▫ Well down from expectations of 7 million in ten years offered in November, 2006

21. Iraq’s Petroleum Situation con’t
4. Independent Undertakings to Develop Oil Without Central Government
▫ Kurdish Iraq
▫ Shiite militias in southern oil fields
5. Trade in Illicit Petroleum
▫ Funds insurgent activity
▫ 60 million barrels of crude oil missing in 2005 according to Iraq’s oil ministry

22. Elsewhere In The Region…
1. Saudi Arabia has an aggressive policy
▫ Increase spare drilling capacity to 3 million daily barrels by 2011
▫ Spare capacity now 2 million barrels per day
2. Current tight demand limits Saudi ability to influence price
3. Could use oil availability to assert regional pre-eminence and offset Iranian exports

23. And in the former Soviet Union…
Belarus Natural Gas
Ukraine Natural Gas
Yukos re-acquisition

24. Threats to Stability Transit Choke Points
Source: Energy Information Administration (EIA)

25. LNG is the Balance Wheel
Imports
LNG Infrastructure

26. Demand Driven By Developing World

27. Accelerating Chinese Natural Gas Demand Growth

28. Global LNG Imports by Country

29. LNG: A Growing Proportion of Global Supply

30. U.S. Imports of LNG, 2007

31. LNG imports expected to overtake pipeline imports

32. LNG Imports: What’s Changed

33. Import Dependency Increasing (OECD, Ex-Australia) (Bcf/d)

34. Liquefaction Growth: Short of Expectations (Bcf/d)
Source: Morgan Stanley Research Estimates

35. LNG Project Delays

36. North American Re-Gas Capacity

37. North American Re-Gasification Inventory

38. Asian Re-Gasification Inventory

39. LNG Transportation Cost (current indicative) $/mmbtu

40. Longer-Dated NG Prices Will Need to Move Higher to Attract LNG Cargoes to the US

41. North America: A Call On Global Storage (Bcf)

42. Daily, continuous NYMEX Natural Gas Futures
Source:

43. Daily, continuous NYMEX NG - Elliott Wave Analysis
Source:

44. Monthly, continuous NYMEX CL – Elliott Wave Analysis
Source:

45. Weekly, continuous NYMEX NG – Elliott Wave Analysis
Source:

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