1

Natural GasProducer to Consumer

Cy EsphahanianCCOP Beijing - June 2005

Scope of this PresentationScope of this Presentation

History and OverviewThe Physical Flow of Natural GasInfrastructureThe Financial/Business StructurePricingOutlook

2

0

50

100

150

200

250

300

350

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Low

er 4

8 D

ry G

as R

eser

ves

Tr

illio

n C

ubic

Fee

t

0

5

10

15

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35

Low

er 4

8 D

ry G

as P

rodu

ctio

n

Trill

ion

Cub

ic F

eet

Lower 48 ReservesLower 48 Prod (Dry)AEO 2000

HISTORY AEO 2000 Reference CaseReserves Peak

1967

Production Peak

1973 22 TCFWorld War IIEnds

Rapid

Proved Reserves Decline Flattens

High Gas Prices and Drilling

Lower Gas Demand

Projected Production in 202025.9 TCF

Lower 48 Dry Natural Gas Reserves and Lower 48 Dry Natural Gas Reserves and Production, 1945Production, 1945--20202020

U.S. Natural Gas Pipeline ProfileU.S. Natural Gas Pipeline Profile

• Interstate Interstate vsvs Intrastate Pipelines Intrastate Pipelines

•• Gathering System Gathering System ----> Gas Processing Plant > Gas Processing Plant ----> > Mainline Pipeline System Mainline Pipeline System ----> Underground > Underground Storage Storage ----> Local Distribution System > Local Distribution System

•• Size of pipelines range from 16Size of pipelines range from 16--42+ inches on 42+ inches on mainlines, 4mainlines, 4--16 inches for 16 inches for LDCsLDCs and gathering and gathering systems (some plastic)systems (some plastic)

••Hubs or Market Centers provide Hubs or Market Centers provide interconnections among pipelinesinterconnections among pipelines

3

Industry Segment Participants Regulatory RegimeProducers 6,800 U.S. oil and gas companies Phased price deregulation began in 1979

21 Major energy companies completed with Decontrol Act of 1989

Interstate Pipelines 90 FERCIntrastate Pipelines about 70 State Regulatory Commissions

Local Gas Utilities 1400 State Regulatory Commissions

Marketers about 300 Unregulated

Underground Storage 120 operators (415 Fields) FERC if part of interstate systemOperators State Regulatory Commissions for others

Gas Consumers Residential 59 million Commercial 5 million Industrial 235 Thousand Electric Generators: Utilities 648 plants Interstate commerce - FERC Non-Utilities 356 Plants Intrastate commerce - State Commissions

U.S. Gas Industry at a Glance

4

A Vast Network of Pipelines Provides A Vast Network of Pipelines Provides Interstate TransportationInterstate Transportation

Major Natural Gas Producing Basins and Major Natural Gas Producing Basins and Associated Transportation CorridorsAssociated Transportation Corridors

Sacramento Basin

San Joaquin Basin

Uinta/Piceance Basin

Williston Basin

Western CanadaSedimentary Basin

Green River Basin

San Juan Basin

Raton

Permian Basin

Powder River Basin

Denver-Julesberg Basin

Hugoton

South Texas Basin

Anadarko/ Arkoma

Illinois Basin

Gulf Coast Basin

East Texas/North Louisiana Basins

Black Warrior Basin

Michigan Basin

Appalachian Basin

Sable Island

Scotian Basin

3,0006,0009,000

12,00015,000

0

= Direction of Flow

= Bi-directional

Capacity (in Million Cubic Feet per Day) as of June 2002

Source: Energy Information Administration, GasTran Gas Transportation Information System

5

Average Pipeline Utilization Varied in 1998

= Less than 100 MMcf/d Capacity

Capacity (in Million Cubic Feet per Day)

9,0006,000

12,00015,000

03,000

6

Seasonal Natural Gas Load Patterns By Sector (BCF)

0

200

400

600

800

1000

Jan-0

1

Mar-01

May-01

Jul-0

1

Sep-01

Nov-01

Jan-02

Mar-02

May-02

Jul-0

2

Sep-02

Nov-02

0

200

400

600

800

1000

Jan-01

Mar-01

May-01

Jul-0

1

Sep-01

Nov-01

Jan-02

Mar-02

May-02

Jul-0

2

Sep-02

Nov-02

0

200

400

600

800

1000

Jan-01

Mar-01

May-01

Jul-0

1

Sep-01

Nov-01

Jan-02

Mar-02

May-02

Jul-0

2

Sep-02

Nov-02

Source: EIA.

0

200

400

600

800

1000

Jan-01

Mar-01

May-01

Jul-0

1

Sep-01

Nov-01

Jan-02

Mar-02

May-02

Jul-0

2

Sep-02

Nov-02

Residential

Industrial

Commercial

Electric Power

• Critical supply component during heating season

• Smoothes the production of gas throughout the year

• Withdrawals help satisfy sudden shifts in demand and supply caused by weather

• Supports hub services (parking, loaning…)

Natural Gas Storage

7

Consum ing East

Consum ing West

Depleted F ie lds

Salt CavernsAquifers

Producing

LNG Storage Facilit ies

Total withdrawal capability is 78 billion cub ic feet per day.

There are Over 400 Storage Facilities in the U.S.

Working Gas 3.9 TcfDeliverability 78 Bcfper day

Types of Underground Natural Gas StorageTypes of Underground Natural Gas Storage

Source: PB-KBB Inc

BA

CD

E

Underground Storage:A. Salt CavernsB. MinesC. AquifersD. Depleted ReservoirsE. Hard-rock Caverns

8

Changes in Storage Operations Over the last five years

More emphasis on inventory managementMore emphasis on inventory managementSignificant growth in deliverabilitySignificant growth in deliverabilityCommodization of storage Commodization of storage –– risk management risk management tool: price hedgetool: price hedgeEmergence of third party operatorsEmergence of third party operatorsIncreased capital investment by local utilities and Increased capital investment by local utilities and large consumerslarge consumersSupports hub services and intraSupports hub services and intra--day services day services Linkage between storage and spot pricesLinkage between storage and spot pricesSupports market liquiditySupports market liquidity

Peak Day Storage FacilitiesLiquefied natural gasLiquefied natural gas –– typically more typically more expensive than underground storage. expensive than underground storage. Used mostly in areas where other storage Used mostly in areas where other storage not available.not available.PeakPeak--shaving facilitiesshaving facilities (propane) (propane) ––typically used during brief periods when typically used during brief periods when demand spikes.demand spikes.Pipeline Line packPipeline Line pack –– through increased through increased compression, uses the pipeline as a compression, uses the pipeline as a temporary storage facility temporary storage facility

9

Infrastructure Development

There is No Centralized Planning of Additions to Gas Pipeline Capacity

Need determined by estimates of future gas Need determined by estimates of future gas demand demand

Pipelines obtain approval of FERC:Pipelines obtain approval of FERC:-- demonstrate need for capacitydemonstrate need for capacity-- minimize adverse environmental and minimize adverse environmental and cultural impactcultural impact

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Utility franchise (FERC regulation)Relatively capital intensive with long lived immobile facilitiesStable and predictable cash flow that provides financial synergies and higher credit ratings

Nature of Pipeline Investments – The Company Perspective

Demand Growth Has Led to Expanded Demand Growth Has Led to Expanded Pipeline CapacityPipeline Capacity

Options: Options:

-- New pipelinesNew pipelines

-- Additional compressionAdditional compression

-- LoopingLooping

-- A combination of each A combination of each

11

The expanding development of deepThe expanding development of deep-- water production in water production in

the Gulf of Mexico.the Gulf of Mexico.

The growing production capacity in western and offshore The growing production capacity in western and offshore

eastern Canada.eastern Canada.

Shippers seeking greater access to alternate sources of Shippers seeking greater access to alternate sources of

supply.supply.

Capacity constrained production seeking greater access Capacity constrained production seeking greater access

to Nonto Non-- traditional markets.traditional markets.

Pipeline Expansion Projects Pipeline Expansion Projects Reflect: Reflect:

Kern River Pipeline 1992(750 MMcf/d)

Mojave Pipeline 1992(450 MMcf/d)

Tuscarora Pipeline 1995(110 MMcf/d)

TransColorado Pipeline 1996(Southern Leg)(120 MMcf/d)

Pony Express Pipeline 1997(255 MMcf/d)

Garden Banks Offshore System 1997(600 MMcf/d)

Nautilus Pipeline 1997(600 MMcf/d)

Manta Ray Gathering System 1997(300 MMcf/d)

Crossroads Pipeline 1995(250 MMcf/d)

Bluewater Pipeline 1995(250 MMcf/d Bi-directional)

Discovery Pipeline 1997(600 MMcf/d)

Mobile Bay Pipeline 1993(600 MMcf/d)

DIGS Main Pass Gathering System 1997(200 MMcf/d)

Empire Pipeline 1994(500 MMcf/d)

Iroquois Pipeline 1991(850 MMcf/d)

Between 1990 & 1998, 18 new natural gas pipeline Between 1990 & 1998, 18 new natural gas pipeline systems were built in the U.S. systems were built in the U.S.

Destin Pipeline 1998(1,000 Mmcf/d)

PNGTS/Maritime 1998(632 Mmcf/d)

Northern Border Extn 1998(650 Mmcf/d)

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Proposed natural gas pipeline expansionsProposed natural gas pipeline expansions20002000--2002 (78 Projects, 23.7 2002 (78 Projects, 23.7 Bcf/dBcf/d))

Northeast23 Projects - 5.9 Bcf/d

Southeast12 Projects - 3.5 Bcf/d

Midwest 17 Projects - 8.4 Bcf/d

Southwest7 Projects - 1.9 Bcf/d

Western9 Projects - .9 Bcf/d

Central 10 Projects - 3.1 Bcf/d

13

4,030

2,574

6,542

8,460

12,350

5,613

1,875

1,725

6,210

6,350

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Mill

ion

Cub

ic F

eet p

er D

ay

Except for 1994Except for 1994--96, the amount of added 96, the amount of added capacity each year has been above 4 capacity each year has been above 4 Bcf/dBcf/d

Additions to Capacity(Announced

and/or ApprovedProjects)

Expenditures for pipeline Expenditures for pipeline development/expansions development/expansions

could jump to almost $5 billion in 2000 could jump to almost $5 billion in 2000

1996 1997 1998 1999 20000

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

552

1,397(Preliminary)

2,124

4,876

Mill

ions

of D

olla

rs

Proposed

(Estimated)

Completed

2,380

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Financial/Business Structure

How Pipelines Make MoneyProvide transportation and storage service under firm and interruptible contractsMost revenue collected under long term contracts with creditworthy customersRelatively limited exposure to throughput and basis fluctuationsSubject to Cost of Service regulationAllowed to recover prudently incurred costsRates include an allowed rate of returnAllowed to recover costs through rates based on“Cost of Service”O&M and A&G Expenses+ Depreciation Expense+ Taxes Other Than Income (state, ad valorem)+ Federal and State Income Taxes+ Allowed ReturnCost of Service (revenue)o Allowed Return = Rate Base x Rate of Return %Rate Base = Net Plant + Working Capital – Deferred TaxesRate of Return % = weighted average cost of debt and equity

15

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Physical Changes:increase in pipeline capacitydevelopment of high-deliverability storagenew pipeline routes, more interconnections technology advancesDevelopment of market centers

Structural Changes:regulations -- encourage competition, protect environmentrole of pipelines -- transporters onlyopen access to suppliers Development of futures market deregulation of wellhead prices, spot marketemergence of a secondary market for trading pipeline capacity

U.S. Gas Market Changes over the Last Decade

17

Financial transactions are no longer Financial transactions are no longer closely tied to the flow of the closely tied to the flow of the

commoditycommodityPhysical Flow of Natural Gas Remain Much the SamePhysical Flow of Natural Gas Remain Much the Same

More Market Participants Involved in Financial TransactionsMore Market Participants Involved in Financial Transactions

Transportation Commodity Bundled

= Transactions captured by current data collectors.= Transactions not captured by current data collectors.

Producers Pipelines LDC’s End Users

Producers(Wellhead

Prices)Pipelines

LDC’s

MarketersOff-SystemEnd Users

On-SystemEnd Users

Interstate Transportation Market in 2000

Pipelines Pipelines ---- Transporters, Not Merchants Transporters, Not Merchants

More Choices for ShippersMore Choices for Shippers

Improved Pricing InformationImproved Pricing Information

Increased CompetitionIncreased Competition

New ServicesNew Services

New ChallengesNew Challenges

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Effects of Physical and Structural Changes: Pipeline Companies

Shifting risk/costShifting risk/costIncreased competitionIncreased competitionCustomer orientedCustomer orientedNew business strategies:New business strategies:

consolidateconsolidate“spin“spin--off”off”diversifydiversifyenter unregulated business areasenter unregulated business areas

Choices of Pipeline Services Have Changed in the 1990’s

0

5

10

15

20

25

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Qua

drill

ion

Btu

Released Capacity

Interruptible Transportation

Sales

No-Notice Service

Firm Transportation

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Natural Gas Market Centers Serve As Major Trading Natural Gas Market Centers Serve As Major Trading and Transshipment Pointsand Transshipment Points

California Energy Center

Golden Gate Center

PGT Center

Sumas Hub

Waha (Delphi) Hub

PG&E Waha Hub

Mojave Center

Western Center

Waha (Lone Star) Hub

Blanco Center

Katy (Western) Hub

Waha (TECO)Hub

Katy (TECO) Hub

Carthage Hub

Aqua Dulce Hub

Houston Hub

Buffalo Wallow Center

Mid-Continent Center

Egan Hub

Moss Bluff Hub

Henry Hub

Louisiana Center

Equitable Resources Hub

Chicago Center

Columbia Gas Center

Texaco Gulf Star Center

CNG/Sabine Center

Ellisburg-Leidy Center

New York Center

Iroquois Center

Perryville (NORAM) Center

Market Center and Hub Services

WheelingWheelingParkingParkingLoaningLoaningStorageStoragePeakingPeakingBalancingBalancingGas SalesGas Sales

Title TransferTitle TransferElectronic TradingElectronic TradingAdministrationAdministrationCompressionCompressionRisk ManagementRisk ManagementHubHub--toto--Hub TransfersHub Transfers

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Effects of Physical and Structural Changes: Industry

New industry players: MarketersNew industry players: MarketersIncreased competitionIncreased competitionDevelopment of hubs and market centersDevelopment of hubs and market centersEfficiency Gains: Increased throughput, decreased unit Efficiency Gains: Increased throughput, decreased unit costscostsTechnology advancesTechnology advancesMarket signals communicatedMarket signals communicatedCorporate combinations & convergenceCorporate combinations & convergenceSpot Market DevelopmentSpot Market DevelopmentMore opportunities and risks (volatility)More opportunities and risks (volatility)

New responsibilities and risksNew responsibilities and risks

More Choices More Choices -- for services and providersfor services and providers

More transparent price informationMore transparent price information

Changes to delivery system utilizationChanges to delivery system utilizationstrategic use of storagestrategic use of storagemore inventory managementmore inventory managementshedding unused capacityshedding unused capacity

Financial instruments (e.g. future market)Financial instruments (e.g. future market)

Effects of Physical and Structural Changes: Shippers

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To Obtain Transportation ServicesStep 1.Step 1. Reserve capacity (via contract) with the pipeline or Reserve capacity (via contract) with the pipeline or

a releaser of capacitya releaser of capacity

Types of contracts:Types of contracts:

LongLong--term firm transportation (FT)term firm transportation (FT)ShortShort--term firm serviceterm firm serviceInterruptible (IT)Interruptible (IT)Capacity release (firm or recall)Capacity release (firm or recall)

Step 2.Step 2. Nominate to use capacityNominate to use capacity

Step 3.Step 3. Confirmation of nomination by the pipeline Confirmation of nomination by the pipeline

companycompany

Step 4.Step 4. Gas flows are scheduled by the pipeline companyGas flows are scheduled by the pipeline company

Trends in Transportation Contracts

LDCsLDCs hold the bulk of contracted capacity.hold the bulk of contracted capacity.

Contract expirations are significantContract expirations are significant

Shippers want flexibility and reliability Shippers want flexibility and reliability

In the aggregate total commitments have increased In the aggregate total commitments have increased

slightly.slightly.

The length and size of longThe length and size of long--term contracts have term contracts have

decreased.decreased.

Market concentration varies by regionMarket concentration varies by region

22

Marketers Have Increased Their Share of the Marketers Have Increased Their Share of the Transportation MarketTransportation Market

July 1, 1999Electric Utilities

4%

Marketers27%

LDCs52%

Industrials5%

Pipeline Companies

7% Others5%

Total Firm Capacity is 97 trillion Btu per day.

July 1, 1997

Others3%

Pipeline Companies

7%

Industrials5%

LDCs59%

Marketers22%

Electric Utilities4%

Total Firm Capacity is 93 trillion Btu per day.

Volatility of Natural Gas Prices has Increased Over the Last Several years

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$1

$2

$3

$4

$5

Constant 2003 Dollars

Nominal Dollars Projection

$0

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Dol

lars

per

Tho

usan

d C

ubic

Fee

t

Sources: History: EIA; Projections: Short-Term Energy Outlook, August 2003

Average Annual Wellhead Prices Have Been Close To The Record High Price Set In 1983

$0

$2

$4

$6

$8

$10

$12

$14

$16

Jan-9

6

Jan-9

7

Jan-9

8

Jan-9

9

Jan-0

0

Jan-0

1

Jan-0

2

Jan-0

3

Jan-0

4

Jan-0

5

Dol

lars

Per

Mcf

Residential

Commercial

Industrial

Electric Utilities

Wellhead

U.S. Natural Gas Prices Are Expected to Trend Upward Through 2005

Sources: History: EIA; Projections: Short-Term Energy Outlook, August 2004.

History Outlook

24

In Recent Years Natural Gas Prices Show Greater Volatility

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Dol

lars

per

Mcf

Nominal Dollars

1999 DollarsJanuary 1980 - January 2000

Natural Gas Spot Prices Are Volatile

Source: Natural Gas Intelligence, Natural Gas Index

$18.85 on 2/25/03

0.50

2.50

4.50

6.50

8.50

10.50

Dec

-97

Apr

-98

Aug

-98

Dec

-98

Apr

-99

Aug

-99

Dec

-99

Apr

-00

Aug

-00

Dec

-00

Apr

-01

Aug

-01

Dec

-01

Apr

-02

Aug

-02

Dec

-02

Apr

-03

Dol

lars

per

MM

Btu

Henry Hub Daily Midpoint Price

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Weather Weather

Economic/business Economic/business conditions conditions

Stock levelsStock levels

Pipeline capacityPipeline capacity

Operational difficultiesOperational difficulties

Lack of timely,Lack of timely,reliable informationreliable information

Affects Supply Affects DemandAffects Supply Affects Demand

What Are The Main Drivers Of Short-term Price Volatility?

Illustrative Supply and Demand Curves

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2

4

6

8

10

12

14

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18

20

80 82 83 85 87 89 90 92 94 96 97 99

percent supply utilization rate

wel

lhea

d pr

ice

SD3

D3

D4

D4

More Inelastic Demand More Elastic Demand

percent supply utilization rate

SD1D2

D1D2

0

2

4

6

8

10

12

14

16

18

20

80 82 83 85 87 89 90 92 94 96 97 99

wel

lhea

d pr

ice

26

1991 1992 1993 1994 1995 1996 19970

20

40

60

80

100Vo

latility

Inde

x (P

erce

nt)

Electricity at Palo Verde

Electricity at CA-OR Border

Natural Gas

Average of 3 Petroleum Products

Natural gas is second only to electricity in energy futures price volatility

Winter 1999/2000: Fuel Oil and Gas Market Developments

New England heating oil prices increased $0.78 per gallon (to $1.97) between 1/17 and 2/7

Factors that led to the surgeincreases in crude oil pricescold weatherlow fuel oil stocksrefinery outagestransportation problemsnatural gas interruptible load switching to distillate

27

Natural Gas Futures Trading Market Is Used to Hedge Against Price Volatility

New York Mercantile Exchange (NYMEX) fordeliveries at Henry Hub

Allows a buyer to lock-in a price for an amount of gas (10,000 MMBtu) that will be delivered at some time in the future (36 consecutive months).

Trading for the next month’s deliveries stop three business days prior to the first day of the delivery month.

The Gap Between Crude Prices and Gas Prices Widened During Winter 1999/2000

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

Jan-99 Feb-99 Mar-99 Apr-99 May-99 Jun-99 Jul-99 Aug-99 Sep-99 Oct-99 Nov-99 Dec-99 Jan-00 Feb-00

Dol

lars

per

MM

Btu

West Texas Intermediate

NYMEX Henry Hub near-month futurescontract closing priceHenry Hub Spot Avg