Natural Gas 101

1
Natural Gas 101 Current Industry Issues

• Bruce McDowell
• American Gas Association
• AGA Financial Forum
• May 2006

2
Natural Gas Advantages

• Domestic resource
• Sufficient supply
• Competitively priced
• Relatively safe and clean burning

3
Natural Gas Accounts for Roughly One-Fourth of
U.S. Primary Energy Consumption
Source Dept. of Energy, Energy Information
Administration
4
Producing Wells
Natural Gas Transportation System
Transmission Lines
Gathering Lines
Processing Plant
Compressor Stations
LNG or Propane/Air Plant
Underground Storage
City Gate (Regulators/Meters)
Large Volume Customer
Residential Customers
Regulator/Meter
Commercial Customers
Large Volume Customers
Distribution Mains (Lines)
5
The US Natural Gas Industry At A Glance
Miles of Pipe
Regulatory Regime
Participants
Producers
6,800 Independents
0
Phased price deregulation
21 Majors
begun in 1979, completed in 1989
Pipelines
160
259,000
Federal Energy Regulatory Commission (FERC)
Natural Gas Marketers
Unregulated
250
0
Local Gas Utilities
335
840,000
State Utility Commissions
Investor-Owned
Municipal
860
300,000
Local Governments
End Users
Residential 62 million
Unregulated
0
Commercial 5 million
Industrial 200 thousand
Interstate - FERC
0
Electric Utilities 500
Intrastate - State Commissions
Source Dept. of Energy, Energy Information
Administration, AGA
6
Supply, Exploration Development
7
How Oil Gas Are Created
8
Locating Natural Gas Reserves New Technology
9
Recoverable Gas Resources in the US, 1968-2004
Trillion Cubic Feet
Coalbed Methane
Potential Resources
Proved Reserves
Cumulative Production
Source Potential Gas Committee
10
Well Success Rates
Wildcat well 10-20
Exploratory well 25-50
Developmental well 70
11
Drilling Rig
12
Completed Well
13
Horizontal Drilling Avoids Surface Hazards
American Petroleum Institute, 1986
14
Natural Gas Production Is Responsive to Market
Price
SOURCE U.S. Dept. of Energy, Energy Information
Administration
15
Tightening Demand And Supply Curves Price
Volatility
Lower-48 Dry Gas Production vs.Dry Gas
Productive Capacity
Source Energy and Environmental Analysis (EEA)
16
Pipeline Transmission System
17
Pipeline Activities

• Construction
• FERC or state approval
• Obtain right-of-way
• Construction
• Operation
• Compression
• Maintenance
• Underground Storage

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(No Transcript)
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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

20
Distribution System
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Distribution Operations

• Gas supply management
• Gate station
• Pressure reduction
• Odorant
• System construction operation
• Metering customer service

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Distribution CompanyGas Supply Management
Peak Day Profile
Annual Profile
Source Energy Information Administration, AGA
Survey
23
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)

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Distribution Rates

• Rates regulated by PSCs
• 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

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Customers
26
Residential

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

27
Commercial

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

28
Industrial

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

29
Electric Generation

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

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Current Gas Industry Issues Basically, It
Comes Down To Supply
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North American Gas Market

• North American supply/demand balance is and
  will remain tight.
• Gas consumption grows.
• New frontier gas supplies are necessary and
  take time.

• Gas prices remain relatively high.
• High levels of gas price volatility continue.
• LNG imports become an important player in natural
  gas pricing.

32
Lower-48 Dry Gas Production vs.Dry Gas
Productive CapacitySource Energy and
Environmental Analysis, Inc.
33
Shut-In Federal Offshore Gulf Natural Gas
Production(EIA, April 2006)
Bcf/d
/Mcf
Forecast
Henry Hub Price (right axis)
Shut In Production (left axis)
Trading on Henry Hub suspended from 9/23
10/6 Bcf/d Billion cubic feet per day, /Mcf
Dollars per thousand cubic feet
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Working Gas in Underground Storage Compared With
5-Year Range (EIA)
35
Gas Consumption Could Grow By More Than 20 By
2020
Source Energy Information Administration
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(No Transcript)
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STATUS OF U.S. UNCONVENTIONAL GAS PRODUCTION
In the past three years, unconventional gas has
helped maintain U.S. production and now accounts
for 35 of U.S. natural gas supplies.
JAF2004074.XLS
19.4
19.2
20.0
2000 2003
15.0
35 of U.S. total
10.0
U.S. Natural Gas Production (Tcf)
6.8
5.8
5.4
5.5
5.0
3.1
2.8
0.0
Associated Gas
Total Domestic Production
Onshore Conventional
Unconventional Gas

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

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STATUS OF U.S. UNCONVENTIONAL GAS PRODUCTION
All three of these unconventional gas resources -
- tight gas sands, coalbed methane and gas shales
have experienced increased production.
5.0
4.6
2000 2003
4.0
4.0
3.0
U.S. Natural Gas Production (Tcf)
2.0
1.6
1.4
1.0
0.6
0.4
0.0
Gas Shales
Coalbed Methane
Tight Gas Sands
Source Advanced Resources International data
base.
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LNG Imports Could Quadruple By 2009
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Existing, Proposed and Potential North American
LNG Terminals
CONSTRUCTED A. 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 FERC 1. 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 GUARD 13. Port
Pelican 1.6 Bcfd (Chevron Texaco) 14. Louisiana
Offshore 1.0 Bcfd (Gulf Landing -
Shell) PROPOSED TO FERC 15. 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 GUARD 28. 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
TERMINALS 53. 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 Bcfd 60. Topolobampo, MX 0.5 Bcfd
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50
49
48
47
52
46
45
43
38
42
34
A
22
44
35
39
10
36
20
16
41
B
19
28
15
29
C
7
37
54
17
21
55
6,27
2
D
24
23
3
4
5,26
57
11
1
8
32
31
30
18
9
12
E
33
25
14
40
60
13
58
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US Jurisdiction FERC US Coast Guard
59
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US pipeline approved LNG terminal pending
in Bahamas These projects have been approved
by the Mexican and Canadian authorities
As of November 30, 2005
Office of Energy Projects
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ALASKAN GAS IS READY AND WAITING
Source BP
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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
• OM - 20 billion

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Potential Incremental Gas Supply
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SOURCES OF CURRENT U.S. NATURAL GAS SUPPLY
ALASKA 2.2
ALASKA 2.7
2005 21.8 Quads
Canada 3.2
LNG 0.6
Lower-48 18.0
LOWER-48 19.0
Source Energy Information Administration
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Nontraditional Sources Of Natural Gas Will
Satisfy Growing Demand
ALASKA 2.2
2020 24.5 Quads
ALASKA 2.7
LNG 3.7
LNG 6.8
CANADA 1.6
CANADA 2.3
LOWER-48 19.0
LOWER-48 19.2
Source Energy Information Administration
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Questions?
47
Thank You!