ENERGY INSECURITY

Part 1:

A Perspective on Energy

3

In real estate, it’s location, location, location.

If you want to understand natural gas, think…

OIL, OIL and OIL

•The world production for oil is approximately 85 million BOPD.

•Consumption is 84 million BOPD

•If a South Korean growth model is applied to future demand in China and India, the world could be short 9 to 12 million BOPD within 12 years.

5

6

Natural Gas Volumes: A Perspective

• 1 MCF is the volume of gas required to fill a 10’x10’x10’ room

• 84 MCF is the volume of gas the avg. US home uses per year

• 1 BCF/Day is the daily volume produced in the Powder River Basin

• 1 BCF is the avg. volume of gas a Piceance Basin well will produce over its lifetime

• 1.8 BCF/Day is the Export Capacity of the Kern River Pipeline

• 1.8 BCF/Day is the peak-day demand behind XCEL Energy

• 3 BCF is the volume of gas contained in 1 LNG Tanker, which is enough to heat approximately 35,000 homes for one year.

7

• 7 BCF is the avg. daily amt. of gas consumed in California

• 11 TCF is the amount of Reserves found in the Jonah Field, located in southwest Wyoming

• 500 TCF is the total reserve estimate for the world’s largest gas field, located in Iran

Natural Gas Volumes: A Perspective (cont’d)

8

A Penny Difference

At current North American production levels, an increase of $0.01 per MMBtu in natural gas prices nationwide is worth $657 million a year.¹

=¹Daily, Matt. Power Marketing Association Online, “Phony U.S. gas trades fan fears of huge lawsuits.” (February 3, 2003).

9

While Summer Power Demand Is Growing, Winter Demand Still

Dominates80.8 Bcf

53.457.4

Dec-Feb July-Aug July-Aug 01-05

Average Daily01-05

Average Daily06

Average Daily

BcfBcf

11

North American Gas Production

•Last year – 50% of the natural gas consumed in the US came from wells drilled in the prior 40 months

•2 years ago – 50% of the natural gas consumed in the US came from wells drilled in the prior 48 months

13

Source: National Petroleum Council: Summary of Findings and Recommendations, Volume1, September 2003

15

0%

5%

10%

15%

20%

25%

30%

35%

40%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Proportion of US Natural Gas Production from Federal Lands

Onset of deepwater GOM oil & gas production

Onset of significant deepwater GOM productionFederal Lands Share

16

Gas Resources on Federal Lands

“Of the remaining 975 trillion cubic feet (Tcf) of natural gas likely to be found in the U.S., an estimated 59 percent is expected to be found on federal lands.”

Access to Natural Gas Supplies--A Key to Meet Demand: American Petroleum Institute, Factsheet, July 2003.

Supply Growth Tilts West and South

17.616.415.8

Western Canada

3.73.53.3

7.99.7

10.8

5.15.14.9

4.24.24.1

4.24.75.0

0.30.40.3

1.41.51.9

2.26.8

12.1

9.012.314.3

4.84.54.1

7.47.66.9

Rockies

San Juan

Mid-Continent

Permian

Mexico

Shale Plays /

Carthage

Appalachia

Eastern Canada

Onshore Gulf

Gulf of Mexico

N.A. LNG Imports

AlaskaMackenzie

??

200720112016

Bcf/d

Source: El Paso Pipeline Group December 2007 Macro

18

Since 2001, Incremental Rockies Volumes Have Averaged 446 MMcfd

Average446 MMcfd

421455

322

450 441

584

2001 2002 2003 2004 2005 2006

Changes in Gross Withdrawals

19

US Population Distribution 2000

20

North American Natural Gas Basins

W e s te r n C anadi anSe di m e ntar y B as i n

G r e e n R i ve r

U i nta/P i c e anc e D e nve rJ ul e s be r g

P e r m i an

Anadar ko

G ul f C o as t

Appal ac hi anSan J uan

P o w de r R i ve r

W i ndR i ve r

21

North American Gas Pipeline Grid

22

* Percent change since 2000.Source:Modified from Energy Information Administration, GasTran Gas Transportation Information System, Natural Gas Pipeline State Border Capacity Database.

Out of Rockies 3,677 MMcfd

(+10%)

= Bi-directional

3,0006,0009,000

12,00015,000

0

Capacity (MMcfd)as of December 2002

= Direction of Flow

Northeast

SoutheastSouthwest

Western

Central

Midwest

Into Southern California5,752 MMcfd (+10%*)

Into Northern California2,391 MMcfd (+14%*)

From Canada to Midwest 6,971 MMcfd (0%*)

From Canada to Northwest 4,643 MMcfd (+5%*)

From Canada to New England 1,158 MMcfd (+1%*)

Into the New York Metro Area 3,568 MMcfd (+9%*)

From Gulf Coast Production 25,127 MMcfd (+5%*)

From West Texas/Kansas/Oklahoma to Midwest 7,045 MMcfd (+3%*)

Into the Boston Metro Area 2,247 MMcfd (+2%*)

Into the Chicago Area Hub 11,867 MMcfd (0%*)

Natural Gas Transportation

23

Western North

American Pipelines

24

Timely Development

Development Delayedby Uncertainty

Supply Available

Time

Ca

pa

cit

y

Gas Not Available to the Gas Not Available to the National GridNational Grid

Effects of Uncertainty of Gas Supply on Capacity Development

Brian Jeffries. House Task Force on Affordable Natural Gas. Colorado Field Hearing, August 25, 2003.

25

0

500

1000

1500

2000

2500

3000

1/1/

2005

4/1/

2005

7/1/

2005

10/1

/200

5

1/1/

2006

4/1/

2006

7/1/

2006

10/1

/200

6

1/1/

2007

4/1/

2007

WBI KMI SSC CP CIG TB Capacity

Rockies Pipeline Export Capacity Moving East

Source: Bentek Energy

26

0.00

500,000.00

1,000,000.00

1,500,000.00

2,000,000.00

2,500,000.00

3,000,000.00

3,500,000.00

1/1/

2005

4/1/

2005

7/1/

2005

10/1

/200

5

1/1/

2006

4/1/

2006

7/1/

2006

10/1

/200

6

1/1/

2007

4/1/

2007

KR TC-SO NW-SO Capacity

Rockies Pipeline Export Capacity Moving Southwest

Source: Bentek Energy

27

Rockies Pipeline Export Capacity Moving Northwest

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

1/1/

2005

4/1/

2005

7/1/

2005

10/1

/200

5

1/1/

2006

4/1/

2006

7/1/

2006

10/1

/200

6

1/1/

2007

4/1/

2007

NW Flow NW CapSource: Bentek Energy

28

8

Rockies Express Pipeline Proposed Route

29

Rockies Natural Gas Historical Prices

CIG Index Basis Differential Nymex

2002 $1.97 ($1.29) $3.26

2003 $4.04 ($1.40) $5.442004 $5.17 ($0.93) $6.092005 $6.95 ($1.60) $8.552006 $5.63 ($1.63) $7.262007 $3.97 ($2.96) $6.932008* $8.05 ($3.31) $11.36

Note: All prices in $/MMBtu. Rockies price based on CIG indices.

*6 months actual prices and 6 months forecast

Part 2:

A North American Short-fall

31Natural Gas Projections from EIA and Six Others: March 28, 2007

Natural Gas Production, Consumption, and Imports

0

5

10

15

20

25

30

1960 1970 1980 1990 2000 2010 2020 2030

(tri

llio

n c

ub

ic f

ee

t)

16%

21%Net ImportsConsumption

ProductionNatural Gas Net Imports, 2005 and 2030

(trillion cubic feet)

3.0

0.60.9

4.5

0

1

2

3

4

5

6

7

Pipeline Liquefied Natural Gas

20052030

Source: Annual Energy Outlook 2007

20.5 Tcf

26.1 Tcf

History Projections

32

33

Lake Charles, Louisiana, Terminal

Source: Fairwinds

Constructed in 1981

34Source: Bentek Energy

7.9 Bcfd of New LNG Facilities Will Come Online in 08 and 09

Golden Pass 09 (2.0 Bcfd)

Freeport 08 (1.5 Bcfd)

Cameron 09 (1.8 Bcfd)

L Charles 08 Liquids

Sabine 08 (2.6 Bcfd)

LNG Supply?A month ago, Qatar announced

3 deals

• Qatar/China: $60 Billion 5m tonnes per year - 25 year deal

• Qatar/UK: 7.8m tonnes per year

• Qatar/Poland: 2.5Bcm per year

38

Actual LNG Imports to U.S. 2004 - 2006

BCF

652

631

580

2004 2005 2006Year

39

2007 US LNG Deliveries

53.4

44.1

86.8

98.794.3

86.6

98.3

87.5

41.7

31.9

26.5

20.8

0

20

40

60

80

100

120

Janu

ary

Febru

ary

Mar

chApr

ilM

ayJu

ne July

Augus

t

Septe

mbe

r

Octo

ber

Novem

ber

Decem

ber

Am

ou

nt

(BC

F)

LNG Imports – Dec. 2007 Monthly Report U.S Department of Energy

TOTAL LNG IMPORTS (Bcf/day)Month 2007 2008 YOY Change

JAN 1.72 0.82 0.89 -52%

FEB 1.52 0.81 0.71 -46%

MAR 2.8 0.75 2.06 -73%

APR 2.8 0.75 2.06 -73%

MAY (e) 3.04 1.14 1.9 -63%

AVG 2.38 0.85 -1.52 -64%

Source: Waterborne LNG    

41

Part 3:Who Has the Natural Gas?

42

Greatest Natural Gas Reserves by Country, 2006

Rank Country

Proved Reserves

(trillion cu ft)

1 Russia 1,680

2 Iran 971

3 Qatar 911

4 Saudi Arabia 241

5 United Arab Emirates 214

6 United States 193

7 Nigeria 185

8 Algeria 161

9 Venezuela 151

10 Iraq 112

11 Indonesia 98

43

182.8

542.9

54.6

82

589.1

64

45.8

85.5

39.2

Gross Gas Production,

Billion Cubic Meters (2004)

8.8

56.6 Canada 15

9.8 186.9 United States 14

53.1 102.4 Turkmenistan 7

55.4 160.4 Algeria 6

81.5 1694.4 Russia 5

105.5 238.4 Saudi Arabia 4

132.3 213.9 United Arab Emirates

3

321.6 970.8 Iran 2

657.7 910.1 Qatar 1

Reserves to Production Ratio

(R/P)*

Proved Reserves, Trillion Cubic Feet

(2004)

Country Rank

World Gas Reserves

CountryReserves

(Trillion Cubic Feet)Percent of World Total

World 6,040 100.0Top 20 Countries 5,391 89.3 Russia* 1,680 27.8 Iran* 940 15.6 Qatar 910 15.1 Saudi Arabia 235 3.9 United Arab Emirates 212 3.5 United States 189 3.1 Nigeria 176 2.9 Algeria* 161 2.7 Venezuela* 151 2.5 Iraq 110 1.8 Indonesia 90 1.5 Malaysia 29 0.5 Norway 75 1.2 Turkmenistan 74 1.2 Uzbekistan 71 1.2 Kazakhstan 66 1.1 Netherlands 65 1.1 Canada 62 1.0 Egypt 57 0.9 Ukraine 40 0.7Rest of World 649 10.7

World Natural Gas Reserves by Country as of January 1, 2005

Source: "Worldwide Look at Reserves and Production," Oil & Gas Journal, Vol. 102, No. 47 (December 20, 2004) pp. 22-23

* These 4 countries account for 48.6% of world natural gas reserves.

45

Let’s discuss your cost of natural gas.

46

Natural Gas Cartel?

47

Energy Security?

• By the year 2020, Gazprom will supply nearly 70% of the European Union’s natural gas.

48

Gazprom’s Near-Monopoly Supply Position

Slovakia 100%Finland 99%Bulgaria 97%Lithuania 84%Hungary 80%Greece 76%Austria 74%Poland 62%Turkey 60%Germany 40%Italy 30%France 25%

% of Supply from Gazprom/Russia

49

Energy Security Consider European (EU) and Former Soviet State

Supply Options

• Gazprom is the largest Russian company and is the largest extractor of natural gas in the world.

• Gazprom, with a $200 Billion (US) market capitalization, is the world’s 3rd largest corporation.

• Gazprom accounts for 93% of Russian natural gas production and 25% of the world’s natural gas reserves.

• The Kremlin owns a 51% controlling interest in Gazprom.• Gazprom supplies almost all the gas needs of Central Europe,

Eastern Europe, and the former Soviet Union.

50

Comparative Market Capitalization

TOTAL 200.1

Encana Corporation 37.0

Devon Energy 29.8

Dominion Resources 29.0

Anadarko Petroleum 20.1

XTO Energy, Inc. 17.5

Williams Companies 15.7

EOG Resources 15.5

Noble Energy 8.7

Ultra Petroleum 7.3

Questar Corporation 7.2

Pioneer Natural Resources 4.9

Forest Oil 2.0

Whiting Petroleum 1.7

Berry Petroleum 1.3

Bill Barrett Corporation 1.2

Delta Petroleum 1.2

Gazprom 271.0

CompanyMarket Cap

(US $ Billions) CompanyMarket Cap

(US $ Billions)

51

Conclusion:Major Energy Issues Looking Forward

Global Economic Impact

• It’s about oil, oil and oil• Current Global Oil Consumption versus

production

52

Conclusion

• Uncertainty related to coal-fired emissions

• Supreme Court decision on CO2 2 emissions

• Next administration may impose a carbon tax

• Such a “carbon tax” would cause a “gas price explosion” according to Peabody Energy’s CEO Gregory Boyce

53

Conclusion

What was once considered a fringe opinion, is now a central cultural document.

What type of carbon tax future do we face?

54

John A. HarpolePresident

Mercator Energy LLC

www.mercatorenergy.com (303) 825-1100 (work)(303) 478-3233 (cell)

Contact Information

Analysis of Southeast/Gulf Natural Gas Infrastructure

Premium Southeast

• Transco Station 85

• TETCO M1• FGT Z3

Houston Ship

Channel

Henry

CarthagePerryville

“I” of the Storm

Source: Bentek Energy

GS ETX to MS 1.7 Bcf

Enbridge 0.7 Bcf

Trunk ETX to WLA .625 Bcf

NGPL .2 Bcf

GulfSouth SE Exp 1.272 Bcf

ETC 0.6 Bcf ETC

0.6 Bcf

CP .316 Bcf

SESH 1.12 BcfC

GT

to FG

T .18 B

cf

ETC Paris Loop 0.35 Bcf

ETC Cleburne to Carthage .5 BcfET

C S

. Shale 0.6 B

cf

ET

C K

aty 0.4 Bcf

ET

C B

ossier Exp 0.9 B

cfK

M 0.225 B

cf

Gulf Crossing 1.6 Bcf

Enterprise Sherm

an 1.1 Bcf

TGT Fayetteville Shale 0.8 Bcf

TGT Greenville .75 Bcf

ET

C B

ossier Exp 0.4 B

cf

GS ETX to MS 1.7 Bcf

Enbridge 0.7 Bcf

Trunk ETX to WLA .625 Bcf

NGPL .2 Bcf

GulfSouth SE Exp 1.272 Bcf

ETC 0.6 Bcf ETC

0.6 Bcf

CP .316 Bcf

SESH 1.12 BcfC

GT

to FG

T .18 B

cf

ETC Paris Loop 0.35 Bcf

ETC Cleburne to Carthage .5 Bcf

ET

C S

. Shale 0.6 B

cf

ET

C K

aty 0.4 Bcf

ET

C B

ossier Exp 0.9 B

cfK

M 0.225 B

cf

Gulf Crossing 1.6 Bcf

Enterprise Sherm

an 1.1 Bcf

TGT Fayetteville Shale 0.8 Bcf

TGT Greenville .75 Bcf

ET

C B

ossier Exp 0.4 B

cf

Markwest 0.5 Bcf

ETC Paris Loop 0.55 Bcf KM MEP 1.4 Bcf

KM MEP 1.0 BcfTe

nne

ssee 8

00

0.4

Bcf

KM MEP 1.0 Bcf

SONAT Exp .375 Bcf

FGT Phase VIII 0.8 Bcf

34

Transco Station 85 North to Virginia Expansion

0.25 Bcf (open season)

Transco Station 85 North to Virginia Expansion

0.25 Bcf (open season)

35

Williams Perdido Norte PipelineOffshore Gathering to Support Deep H2O GOM - 0.20 Bcf

Williams Perdido Norte PipelineOffshore Gathering to Support Deep H2O GOM - 0.20 Bcf

36

2008 2009 2010 2011

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q2/Q3 Q1/Q2

Source: Bentek Energy

Periodically, The SE Gulf Region May Have its Own ‘Rockies Experience’

13 Projects7.4 Bcf/d

7 Projects6.6 Bcf/d

5 Projects4.2 Bcf/d

11 Projects6.3 Bcf/d

4 Projects7.1 Bcf/d

40 Projects31.6 Bcf/d

Henry Hub

REX

D

ispl

acem

ent

Source: Bentek Energy