Natural Gas 101 &Current Industry Issues

Bruce McDowell

American Gas Association

AGA Financial Forum

May 2006

Natural Gas Advantages

Domestic resource Sufficient supply Competitively priced Relatively safe and clean burning

Natural Gas Accounts for Roughly One-Fourth of U.S. Primary Energy Consumption

Coal

Oil

Other

Natural Gas

Source: Dept. of Energy, Energy Information Administration

Producing Wells

Gathering LinesTransmission Lines

Processing Plant

CompressorStations

UndergroundStorage

Large Volume Customer

Regulator/Meter

City Gate(Regulators/Meters)

LNGor Propane/Air Plant

Natural Gas Transportation System

Residential Customers

CommercialCustomers

Distribution Mains (Lines)

Large Volume Customers

Participants Miles of Pipe Regulatory Regime

Producers 6,800 Independents 0 Phased price deregulation21 Majors begun in 1979, completed in 1989

Pipelines 160 259,000 Federal Energy RegulatoryCommission (FERC)

Natural Gas Marketers 250 0 Unregulated

Local Gas Utilities335 840,000 State Utility Commissions

End Users Residential 62 million 0 UnregulatedCommercial 5 millionIndustrial 200 thousand

Electric Utilities 500 0 Interstate - FERCIntrastate - State Commissions

The US Natural Gas Industry The US Natural Gas Industry At A GlanceAt A Glance

Source: Dept. of Energy, Energy Information Administration, AGA

Investor-OwnedMunicipal 860 300,000 Local Governments

Supply, Exploration & Development

How Oil & Gas Are Created

24803

Petroleum System ElementsPetroleum System Elements

120° F120° F

350° F350° FGenerationGeneration

MigrationMigration

Seal RockSeal Rock

Reservoir RockReservoir Rock

OilOil

WaterWater

Gas CapGas Cap

EntrapmentEntrapment

Locating Natural Gas Reserves – New Technology

Vibrator Truck(Energy Source)

Recording Truck

Geophone(Receivers)

American Petroleum Institute, American Petroleum Institute, 19861986

ReturningReturningSound WavesSound Waves

Recoverable Gas Resources in the US, 1968-2004

0

400

800

1200

1600

2000

2400

1968 1980 1990 2000 2004

Potential Resources

Proved Reserves

Cumulative Production

CoalbedMethane

Trillion Cubic Feet

Source: Potential Gas Committee

Well Success Rates

Wildcat well: 10%-20%

Exploratory well: 25%-50%

Developmental well: 70%+

Drilling Rig

24803

Traveling Block

Hook

Swivel

Draw Works

Mud PumpRotary Table

Kelly

Mud Hose

Crown Block

Casing

Drill Pipe

Bit

Completed Well

ChristmasTree

Pipeline to Flow

Process and

Storage

Surface Casing

Intermediate Casing

Production Casing

CompletionFluid

CementPacker

Cement

Cement

Tubing

WellFluids

Oil or Gas Zone

Perforations

Horizontal Drilling Avoids Surface Horizontal Drilling Avoids Surface Hazards

GasGas

OilOilWaterWater

American Petroleum Institute, 1986

Natural Gas Production Is Responsive to Market Price

0

5,000

10,000

15,000

20,000

25,000

30,000

We

lls D

rille

d P

er

Ye

ar

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

Wel

lhea

d P

rice

(19

99 $

)

Gas Wells Drilled

Real Wellhead Price

SOURCE: U.S. Dept. of Energy, Energy Information Administration

Tightening Demand And Supply Curves = Price Volatility

Source: Energy and Environmental Analysis (EEA)

40

45

50

55

Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06

Bcf

d

Gas Production Productive Capacity

Lower-48 Dry Gas Production vs.Dry Gas Productive Capacity

Pipeline Transmission System

Pipeline Activities

ConstructionFERC or state approvalObtain right-of-wayConstruction

OperationCompressionMaintenanceUnderground Storage

Pipeline Rates

Rate of return regulated by FERC Traditional contracts with set rates Capacity release market

Types of contracts/services Firm Interruptible Released capacity No-notice

Factors impacting returns Demand - weather Competition from other pipelines Types of contracts

Distribution System

Distribution Operations

Gas supply management Gate station

Pressure reductionOdorant

System construction & operation Metering & customer service

Distribution CompanyGas Supply Management

Co. Ow ned Gas44%

Storage36%

Co. Production1%

Other2%LNG SNG Propane

5%

Transport12%

Co. Owned Gas30%

Transport62%

Storage8%

Other0%

LNG SNG Propane

0%

Annual Profile Peak Day Profile

Source: Energy Information Administration, AGA Survey

Gas Supply Management

Gas Supplier Options Producer Marketer Intrastate pipeline Company-owned production

Gas Contract Options Contract length Contract pricing

Indexed (monthly, weekly) Fixed Spot Hedged (NYMEX)

Distribution Rates

Rates regulated by PSC’s Costs spread over fixed and commodity Purchased gas costs recovery

Rate schedules based on demand Firm Interruptible/special contracts Transportation

Factors impacting returns Weather Competition New construction/marketing Conservation

Customers

Residential

90% of total customers 23% of total consumption Weather sensitive Conservation impact Bad debt

Commercial

9% of total customers 14% of total consumption Somewhat weather sensitive Conservation impact Market opportunities

Industrial

Less than 1% of total customers 38% of total consumption Can help manage sendout Price causing demand destruction Primarily transportation customer

Electric Generation

Less than 1% of total customers 25% of total consumption Demand growing Difficult delivery requirements Primarily transportation customer

Current Gas Industry Issues –

Basically, It Comes Down To Supply

North American supply/demand balance is and will remain tight.

Gas consumption grows.

“New frontier” gas supplies are necessary and take time.

North American Gas Market

Gas prices remain relatively high.

High levels of gas price volatility continue.

LNG imports become an important player in natural gas pricing.

Lower-48 Dry Gas Production vs.Dry Gas Productive CapacitySource: Energy and Environmental Analysis, Inc.

40

45

50

55

Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07

Bcf

d

Gas Production Productive Capacity

Shut-In Federal Offshore Gulf Natural Gas Production(EIA, April 2006)

* Trading on Henry Hub suspended from 9/23 – 10/6

Bcf/d = Billion cubic feet per day, $/Mcf = Dollars per thousand cubic feet

0

2

4

6

8

10

Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06

1.1 0.8 0.6

7.55 7.50 7.51

Apr May Jun0

4

8

12

16

20Henry Hub Price *

(right axis)

Shut In Production (left axis)

Forecast

Bcf/d $/Mcf

Working Gas in Underground Storage Compared With 5-Year Range (EIA)

Gas Consumption Could Grow By More Than 20% By 2020

Gas Consumption (Trillion Cubic Feet, Tcf)

0

5

10

15

20

25

30

'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

Residential

Commercial

Industrial

Power Generation

Other

Source: Energy Information Administration

66

Ch ar tin g_ a_ Pat h_W or ksh op _I _0 82 70 3

US Lower-48 Undiscovered Gas Resources Subject to Access Restrictions*

PacificOf fshore

Shelf and Slope

19 Tcf

Eastern GulfShelf and Slope

AtlanticOffshore

Shelf and S lope

27 Tcf

OCS Sale181

CanadianScotian Shelf

BaltimoreCanyonTrough

CarolinaTrough–

Salt Basin

BlakeP lateauBasinGas production/discovery

Oil production

Oil and gas production

Major basinsaffected• Green River• Powder River• Paradox/San Juan• Uinta/Piceance• Montana Thrust Belt

Rockies**

29 Tcf

24Tcf

10530-43

Sou rc e: Cam b rid ge Ene rg y R ese a rch Asso cia tes .

No te: 20 7 Tcf ha ve re str ictio ns or ar e off lim its:

* 9 9 Tcf a re o ff lim its for e xp lor atio n an d d ev elo pm en t.

** An a dd ition al 10 8 Tcf o f t he Ro ckie s g as re so ur ces ar e ava ilab le with re str ict ion s.

M ay 20 03

STATUS OF U.S. UNCONVENTIONAL GAS PRODUCTION

Source:• Conventional/Offshore – EIA Annual Reserve Reports.• Unconventional – Advanced Resources International data base.

TotalDomestic

Production

OnshoreConventional

UnconventionalGas

U.S

. Nat

ural

Gas

Pro

duct

ion

(Tcf

)

0.0

5.0

10.0

15.0

20.0

2000 2003

35% of U.S. total

JAF2004074.XLS19.2 19.4

5.5 5.4

AssociatedGas

3.1 2.8

FederalOffshore

4.8 4.4

5.86.8

In the past three years, unconventional gas has helped maintain U.S. production and now accounts for 35% of U.S. natural gas supplies.

STATUS OF U.S. UNCONVENTIONAL GAS PRODUCTION

GasShales

CoalbedMethane

Tight GasSands

U.S

. Nat

ural

Gas

Pro

duct

ion

(Tcf

)

Source: Advanced Resources International data base.

0.0

1.0

2.0

3.0

4.0

5.0

2000 20034.0

4.6

1.4 1.6

0.40.6

All three of these unconventional gas resources - - tight gas sands, coalbed methane and gas shales – have experienced increased production.

LNG Imports Could Quadruple By 2009 LNG Imports Could Quadruple By 2009

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Year

Tri

llio

n C

ub

ic F

ee

t

LNG L-48 ImportsLNG Import Capacity

23

25

A

3 4

46

17

8

2815

30

29

4748

56

14

54

55

B

37

36

1

19

49

3112

57

US Jurisdiction

FERC US Coast Guard

5150

* US pipeline approved; LNG terminal pending in Bahamas** These projects have been approved by the Mexican and Canadian authorities

52

21

10204116

42

7C

2D

1811

32

3313

5,269

6,27

40

3435

2239

E

CONSTRUCTEDA. Everettt, MA : 1.035 Bcfd (Tractebel - DOMAC)B. Cove Point, MD : 1.0 Bcfd (Dominion - Cove Point

LNG)C. Elba Island, GA : 0.68 Bcfd (El Paso - Southern

LNG)D. Lake Charles, LA : 1.2 Bcfd (Southern Union -

Trunkline LNG)E. Gulf of Mexico: 0.5 Bcfd (Gulf Gateway Energy

Bridge - Excelerate Energy)

APPROVED BY FERC1. Lake Charles, LA: 0.6 Bcfd (Southern Union -

Trunkline LNG) 2. Hackberry, LA : 1.5 Bcfd (Sempra Energy)3. Bahamas : 0.84 Bcfd (AES Ocean Express)*4. Bahamas : 0.83 Bcfd (Calypso Tractebel)*5. Freeport, TX : 1.5 Bcfd (Cheniere/Freeport LNG

Dev.)6. Sabine, LA : 2.6 Bcfd (Cheniere LNG)7. Elba Island, GA: 0.54 Bcfd (El Paso - Southern

LNG)8. Corpus Christi, TX: 2.6 Bcfd (Cheniere LNG)9. Corpus Christi, TX : 1.0 Bcfd (Vista Del Sol – ExxonMobil)10. Fall River, MA : 0.8 Bcfd (Weaver's Cove

Energy/Hess LNG)11. Sabine, TX : 1.0 Bcfd (Golden Pass -

ExxonMobil)12. Corpus Christi, TX: 1.0 Bcfd (Ingleside Energy -

Occidental Energy Ventures)

APPROVED BY MARAD/COAST GUARD13. Port Pelican: 1.6 Bcfd (Chevron Texaco)14. Louisiana Offshore : 1.0 Bcfd (Gulf Landing -

Shell)

PROPOSED TO FERC15. Long Beach, CA : 0.7 Bcfd

(Mitsubishi/ConocoPhillips - Sound Energy Solutions)

16. Logan Township, NJ : 1.2 Bcfd (Crown Landing LNG - BP)

17. Bahamas : 0.5 Bcfd, (Seafarer - El Paso/FPL )18. Port Arthur, TX: 1.5 Bcfd (Sempra)19. Cove Point, MD : 0.8 Bcfd (Dominion)20. LI Sound, NY: 1.0 Bcfd (Broadwater Energy -

TransCanada/Shell)21. Pascagoula, MS: 1.0 Bcfd (Gulf LNG Energy

LLC)22. Bradwood, OR: 1.0 Bcfd (Northern Star LNG -

Northern Star Natural Gas LLC)23. Pascagoula, MS: 1.3 Bcfd (Casotte Landing -

ChevronTexaco)24. Cameron, LA: 3.3 Bcfd (Creole Trail LNG -

Cheniere LNG)25. Port Lavaca, TX: 1.0 Bcfd (Calhoun LNG - Gulf

Coast LNG Partners)26. Freeport, TX: 2.5 Bcfd (Cheniere/Freeport LNG

Dev. - Expansion)27. Sabine, LA: 1.4 Bcfd (Cheniere LNG - Expansion)

PROPOSED TO MARAD/COAST GUARD28. California Offshore: 1.5 Bcfd (Cabrillo Port - BHP

Billiton)29. So. California Offshore : 0.5 Bcfd (Crystal

Energy)30. Louisiana Offshore : 1.0 Bcfd (Main Pass

McMoRan Exp.)31. Gulf of Mexico: 1.0 Bcfd (Compass Port -

ConocoPhillips)32. Gulf of Mexico: 2.8 Bcfd (Pearl Crossing -

ExxonMobil)33. Gulf of Mexico: 1.5 Bcfd (Beacon Port Clean

Energy Terminal - ConocoPhillips)34. Offshore Boston, MA: 0.4 Bcfd (Neptune LNG -

Tractebel)35. Offshore Boston, MA: 0.8 Bcfd (Northeast

Gateway- Excelerate Energy)

POTENTIAL SITES IDENTIFIED BY PROJECT SPONSORS

36. Coos Bay, OR: 0.13 Bcfd (Energy Projects Development)

37. California - Offshore: 0.75 Bcfd (Chevron Texaco)

38. Pleasant Point, ME : 0.5 Bcfd (Quoddy Bay, LLC)

39. St. Helens, OR: 0.7 Bcfd (Port Westward LNG LLC)

40. Galveston, TX: 1.2 Bcfd (Pelican Island - BP)41. Philadelphia, PA: 0.6 Bcfd (Freedom Energy

Center - PGW)42. Astoria, OR: 1.0 Bcfd (Skipanon LNG - Calpine)43. Robbinston, ME: 0.5 Bcfd (Downeast LNG -

Kestrel Energy/Dean Girdis)44. Boston, MA: 0.8 Bcfd (AES Battery Rock LLC -

AES Corp.)45. Calais, ME: ? Bcfd (BP Consulting LLC)

CANADIAN APPROVED AND POTENTIAL TERMINALS

46. St. John, NB : 1.0 Bcfd (Canaport - Irving Oil)**47. Point Tupper, NS 1.0 Bcf/d (Bear Head LNG -

Anadarko)**48. Quebec City, QC : 0.5 Bcfd (Project Rabaska -

Enbridge/Gaz Met/Gaz de France)49. Rivière-du- Loup, QC: 0.5 Bcfd (Cacouna

Energy - TransCanada/PetroCanada)50. Kitimat, BC: 0.61 Bcfd (Galveston LNG)51. Prince Rupert, BC: 0.30 Bcfd (WestPac

Terminals)52. Goldboro, NS 1.0 Bcfd (Keltic Petrochemicals)

MEXICAN APPROVED AND POTENTIAL TERMINALS53. Altamira, Tamulipas : 0.7 Bcfd

(Shell/Total/Mitsui)**54. Baja California, MX : 1.0 Bcfd (Sempra)** 55. Baja California - Offshore : 1.4 Bcfd (Chevron

Texaco)**56. Lázaro Cárdenas, MX : 0.5 Bcfd

(Tractebel/Repsol)57. Puerto Libertad, MX: 1.3 Bcfd (Sonora Pacific

LNG)58. Offshore Gulf, MX: 1.0 Bcfd (Dorado -

Tidelands)59. Manzanillo, MX: 0.5 Bcfd60. Topolobampo, MX: 0.5 Bcfd

Existing, Proposed and PotentialNorth American LNG Terminals

Office of Energy Projects

58

As of November 30, 2005

53

59

60

38

24

44

4345

ALASKAN GAS IS READY AND WAITING

NGL Extraction Plant

Designed Over 5000 miles

of pipeline• 52”, 2000 to 2500 psig

• 24 - 28 Compressors Stations

• Over 1200 Stream Crossings

• Over 1500 Road Crossings

World-class Gas Treating Plant for CO2 removal

Source: BP

Alaska Natural Gas Pipeline

Proposed 4.5 Bcf/d pipeline Agreement between state & oil companies must be

approved by Alaska legislature. Adds 35-40 Tcf of reserves immediately to start Costs:

Construction - $20 billion Financing - $20 billion O&M - $20 billion

Potential Incremental Gas Supply

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Eastern GOM LNGExpansions

New LNGTerminals

Alaskan GasPipeline

Bcf

/d

SOURCES OF CURRENT U.S. NATURAL GAS SUPPLY

ALASKA

2.7

LOWER-48

19.0

Source: Energy Information Administration

ALASKA

2.22005: 21.8 Quads

LNG

0.6

Lower-48

18.0

Canada

3.2

Nontraditional Sources Of Natural Gas Will Satisfy Growing Demand

ALASKA

2.7

LOWER-48

19.0

LNG

6.8

CANADA

2.3

Source: Energy Information Administration

2020: 24.5 QuadsALASKA

2.2

LNG

3.7

CANADA

1.6

LOWER-48

19.2

Questions?

Thank You!