1 The U.S. Midstream Sector in Transition: Outlook and Implications Presented to The Canadian Institute’s 6 th Annual Conference: Midstream 2003 November.

1

The U.S. Midstream SectorThe U.S. Midstream Sector in Transition: in Transition:

Outlook and ImplicationsOutlook and Implications

Presented to The Canadian Institute’s

6th Annual Conference: Midstream 2003November 25, 2003

Peter Fasullo

En*Vantage, Inc.

Houston, Texas

www.envantageinc.com

2

The U.S. Midstream Sector The U.S. Midstream Sector Is Undergoing a TransformationIs Undergoing a Transformation

Fundamental changes - upstream and downstream.

Excess capacity across most of the Sector’s value chain.

Independents* struggling to reduce margin volatility.

Tight credit hampering many Diversified Energy companies.

Major Integrated Oils reassessing if Midstream is core.

Assets being sold and new players entering the sector.

* Independents: Midstream Companies who primarily serve 3rd Parties

3

Major Major Questions

Can U.S. Independent Midstream entities prosper? How will relationships change between Midstream players

and their customers, upstream and downstream? What will be the factors for success? Will a new and improved business model emerge for the

U.S. Midstream Sector? Will changes in the U.S. impact the Canadian Midstream

Sector and how?

4

Topics to Be CoveredTopics to Be Covered

Broad Overview of the U.S. Midstream Sector

Structural History & Evolution

Current Players and Their Strategic Positions

Major Issues & Challenges

Factors for Success

Ideal Business Model and Future Ownership

Implications for the Canadian Midstream Sector

5

U.S. Midstream Sector:U.S. Midstream Sector: Broad OverviewBroad Overview

6

The Midstream Sector is a collection of assets & services that help bridge the supply side of the value chain with the demand side for any type of energy commodity.

As such… The Midstream Sector is only as strong as the linkages it has with energy producers and end users.

Simple Definition

Midstream

7

Typically U.S. Midstream Functions Are Typically U.S. Midstream Functions Are Considered Considered Deregulated Assets, Such As: Assets, Such As: Gas Gathering, Treating & Processing Gas Pipelines (Primarily Intrastate) Product Pipelines Fractionation Gas & Product Storage Inland Product Terminals Import/Export Facilities

Presentation focuses mainly on the gathering, processing and downstream NGL functions.

8

The The Midstream Sector Is Where the E&P, Gas, Sector Is Where the E&P, Gas, Refining and Refining and Petrochemical Industries Intersect Intersect

Downstream

Petrochemicals

Refining

PropaneRetailing

GasRetailing

PowerRetailing

PowerDistribution

GasDistribution

Independent PowerGeneration

GasStorage

GasTransportation

Gathering

Exploration &Production

Processing& Treating

NGLTransportation

NGLStorage

Fractionation

Midstream

Upstream

There are no distinct ownership borders

Subject to challenges outside of its control

WCSB

RockyMountains

San Juan

Permian

Anadarko

Arkhoma

South Texas

Gulf Coast & Offshore

Major Processing Regions

NGL Market Centers

(Storage, Fractionation, Pipelines)

NGL Product Flows

Specific Transportation Corridors Link MajorSpecific Transportation Corridors Link Major Processing Regions to NGL Market Centers Processing Regions to NGL Market Centers

NGL Flow Diagram

River

Conway

Sarnia

Mt.Belvieu

Edmonton/Ft. Saskatchewan

10

U.S. NGL Midstream Industry HighlightsU.S. NGL Midstream Industry Highlights

U.S. Midstream/NGL sector is a $15 to $20 billion a year business, but pales in comparison to Power & Gas: Electricity: $200 billion/year plus Gas Transportation: $50 billion/year plus NGL Transportation/Fractionation: $3 to $5 billion/year

Total U.S. NGL supplies (production and imports) are slightly below 3 million barrels per day (bpd): Gas Processing -- 1.90 million bpd (68% market share)

(Product Mix: Ethane 37%, Propane 29%, Butanes 18%, N. Gaso 16%) Refinery Production -- 0.68 million bpd (24% market share) Imports -- 0.23 million bpd (8% market share)

11

NGL Midstream Industry Highlights (Cont.)NGL Midstream Industry Highlights (Cont.)

US NGL production from processing distributed within the major hydrocarbon basins in the country: Gulf Coast --- 24%. W.Texas/ Rocky Mtn. --- 53%. Mid-Continent --- 13%. Other --- 10%.

Majority of NGLs consumed along the Gulf Coast: Petrochemicals -- 56% of total NGL demand; 92% along G.C. Gasoline Production -- 15% of total NGL demand; 45% along

G.C. Fuel Uses -- 29% of total NGL demand; SE, Mid-Cont., NE.

• ~ 590 processing plants - 72 BCFD cap.

• 56% of plant capacity is cryogenic

• 70 fractionators - 2.0 million BPD cap.

• 85 % of frac capacity is centralized at

market centers

12

U.S. NGL Prices Are Set in Competition With U.S. NGL Prices Are Set in Competition With Other Hydrocarbon Products in the MarketOther Hydrocarbon Products in the Market

NGL

Primary

Market(s)

Competing

Products

Secondary

Market(s)

Competing

Products

Supply

Regions Ethane Ethylene Propane

N-Butane Naphtha Gas Oils

Retained in Natural Gas

Residual Fuel No 2 Fuel Oil Propane

North America

Propane Ethylene Ethane N-Butane Naphtha Gas Oils

Space Heating Natural Gas No 2 Fuel Oil Global

N-Butane Gasoline I-Butane

Other Gasoline Blendstocks

Ethylene Other Ethylene Feedstocks

Global

I-Butane Alkylate MTBE

Other Gasoline Blendstocks

Petrochemicals Global

Natural Gasoline

Gasoline Other Gasoline Blendstocks

Ethylene Other Ethylene Feedstocks

Global

13

U.S. Midstream Sector:U.S. Midstream Sector:Evolution & Current StructureEvolution & Current Structure

14

Evolution of U.S. Midstream SectorEvolution of U.S. Midstream Sector

Time Period Rationale Comments

Pre-’70s Major Oil Cos. Interstate Pipelines Petrochemical Cos.

Main purpose of Midstream was to: Bring equity production to market Secure supplies & grow rate base Secure fuel & feedstock supplies

• Utility Function• Not geared for 3rd parties• Unwillingness to sell or rationalize assets

The ‘80s

Emergence of Independents

Set up to be:

Profit driven, discretionary business

Serving 3rd parties in major producing regions and/or market

centers

• Price Deregulation of Gas • Gas “Bubble” • NGL Demand Growth• Margin & Price Volatility• Customer Relations

Early/Mid ‘90s

Independents Expand

Driven to: Achieve greater Scope & Scale

Acquire non-core midstream assets of E&Ps and Interstates

• Margins Expand• Competition Increases• Volatility Intensifies

15

Evolution of U.S. Midstream Sector Evolution of U.S. Midstream Sector (2)(2)

Time Period Rationale Comments

Mid/Late ‘90s

“Feeding Frenzy”

Independents acquired by: Energy Merchants Regulated Utilities

M&A driven by need for: Scope & scale in supply and/or market regions Customer diversity More products & services Marketing & trading platforms

Higher returns

Many midstream assets bought at: Peak earnings cycle EBITDA multiples of 10 times or more.

- Single digit returns

- Vulnerable to downturns

By 2000/2001

Some recent acquirers admit failure and exit.

Quick turnover of assets: Failure to recognize and hedge risks Inability to generate synergies Deteriorating fundamentals Tighter gas market & margins

Many midstream assets sold at: Bottom of earnings cycle EBITDA multiples of 5 to 8 times

16

Evolution of U.S. Midstream Sector Evolution of U.S. Midstream Sector (3)(3)

Time Period Rationale Comments

Since 2000

MLPs greatly increase presence in Midstream

- Independent MLPs

- MLPs spun off from Diversified Energies

Acquiring “fix fee” assets (pipelines, fractionators, storage and terminals) from: Corporate Parents Majors Distressed Energy Merchants

Net income taxed at shareholder level only.

MLPs yield 6% -8% distributions with annual growth of 5% -10%.

Sanctity of distribution very important.

Currently

New Entrants -

Private Equity Funds

Taking advantage of distressed sales: Buy low and exit in 5 to 7

years achieving returns of

20% or more. IPO assets into MLP.

Not clear if they have a growth plan.

Will they repeat the mistakes of previous acquirers?

17

1. DEFS* ----------------2. BP ---------------------

3. El Paso --------------- 4. Williams -------------- 5. ExxonMobil ---------- 6. Enterprise ------------ 7. ONEOK --------------- 8. ConocoPhillips** ---- 9. Devon ----------------- 10. Dynegy --------------- Total Prod. ----------- % of US NGLs - Top 5 % of US NGLs - Top 10

1. GPM (Phillips) ------- 2. Amoco -----------------3. Texaco ---------------- 4. Enron ------------------ 5. Warren ---------------- 6. Valero------------------ 7. Conoco-----------------8. Exxon ------------------ 9. Arco -------------------- 10. Shell -------------------- Total Prod. - - - - - - - % of US NGLs - Top 5 % of US NGLs - Top 10

Top 10 U.S. Gas Processing Operators(In terms of NGL Production in MBPD)

1992157948584826464646159814

30% 49%

20013961991581211207574666259

1330 54% 72%

* DEFS - Duke Energy Field Services

** ConocoPhillips owns ~ 30% of DEFSSource: Gas Processors Report

18

CurrentCurrent Top PlayersTop Playersof the U.S. NGL Value Chainof the U.S. NGL Value Chain

(Ranked According to Operating Position in 2001)(Ranked According to Operating Position in 2001)

Gas Processing

1. DEFS*

2. BP

3. El Paso

4. Williams

5. ExxonMobil

6. Enterprise*

7. ONEOK

8. ConocoPhillips

9. Devon

10. Dynegy*

Fractionation

Koch

Enterprise*

ConocoPhillips

Dynegy*

Gulfterra

ExxonMobil

BP

ONEOK

DEFS*

Williams

Salt Dome Storage

Enterprise*

TEPPCO

Dow

Dynegy*

Williams

ConocoPhillips

BP

ExxonMobil

Gulfterra

ONEOK

Product Distribution

Enterprise*

Dow

ConocoPhillips

TEPPCO

Koch

KinderMorgan

ChevronTexaco

Dynegy*

Gulfterra

ExxonMobil

Raw Mix Pipelines

Enterprise*

TEPPCO

Koch

ChevronTexaco

Dynegy*

BP

Gufterra

ExxonMobil

ConocoPhillips

Waterborne

Terminals

Enterprise*

Dynegy*

Dow

ChevronTexaco

Trammo

Publicly Traded MLPsMajor Integrated Oils and Large E&P Companies

Diversified Energy Companies

* In Joint Venture or has Business Alliance with a Major

19

Majors and Large E&P Companies.– Focusing on E&P: offshore and international.– For many, Midstream is no longer core.

Energy Merchants or Diversified Energies.– Repairing balance sheets in many instances.– In some cases, selling midstream assets; or,– Completing transfer of assets to their MLP.

Large Independents (MLPs, Joint Venture Companies).– A few are actively growing their midstream business.– Some have business alliances with producers and customers.

– However, most MLPs are risk adverse & avoiding processing.

Small Independents... niche players.– Filling regional gaps created by the exit of larger players.– Many, being funded by Private Equity Funds.

Despite Recent M&A Activities, Sector Despite Recent M&A Activities, Sector Remains FragmentedRemains Fragmented

20

U.S. Midstream Sector:U.S. Midstream Sector: Realities, Issues & ChallengesRealities, Issues & Challenges

21

Current Realities & IssuesCurrent Realities & Issues

Price & Margin Volatility

High Priced Gas Environment

A Maturing Gas Resource Base

A Sluggish Petrochemical Industry

MTBE Phase Out

Excess Capacity

Not Unique

Not Entirely Mutually Exclusive

Cause & Effect

Not all participants affected equally

22

““Frac Spread” Volatile and Trending Downward Frac Spread” Volatile and Trending Downward

Historical Processing Margins(Mont Belvieu NGL Price Basket versus Henry Hub Gas Price)

-20

-15

-10

-5

0

5

10

15

20

25

30

Aug

-90

Feb-

91

Aug

-91

Feb-

92

Aug

-92

Feb-

93

Aug

-93

Feb-

94

Aug

-94

Feb-

95

Aug

-95

Feb-

96

Aug

-96

Feb-

97

Aug

-97

Feb-

98

Aug

-98

Feb-

99

Aug

-99

Feb-

00

Aug

-00

Feb-

01

Aug

-01

Feb-

02

Aug

-02

Feb-

03

Aug

-03

cent

s pe

r ga

llon

Winter ‘02/’03

Winter ‘01/’02

First Gulf War

Variable Cost Breakeven Range

OPEC Discipline

Winter ‘95/’96 Crude Price Collapse

23

Fundamental Shift is occurring in North Fundamental Shift is occurring in North American Gas MarketsAmerican Gas Markets

Jan

-02

Jan

-03

Gas to Crude Price Ratio(Henry Hub to WTI)

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

Jan-9

1

Jan-9

2

Jan-9

3

Jan-9

4

Jan-9

5

Jan-9

6

Jan-9

7

Jan-9

8

Jan-9

9

Jan-0

0

Jan-0

1

Jan-0

2

Jan-0

3

’91-’94: 51%’95-’98: 70%’99-’02: 77%

Winter ‘00/’01

Winter ‘02/’03

“Gas Bubble “

Early ‘80s to Early ‘90s

“” Bursting of the Bubble”

Late ‘90s to Now

24

On the Supply Side...A Structural Change On the Supply Side...A Structural Change Could Be Underway:Could Be Underway:

Lower 48 basins are maturing with the exception of Gulf of Mexico and the Rockies.

Drilling needs to accelerate to offset natural declines from conventional sources.

Majors focusing on international prospects, unconventional plays & deep water GOM.

Many producers less optimistic about accessing new & additional U.S. sources.

Many producers limited by leveraged balance sheets.

25

Natural Gas Consumption: Electric Generation versus Industrial

2.00

3.00

4.00

5.00

6.00

7.00

8.00

1986 1988 1990 1992 1994 1996 1998 2000

Ga

s C

on

su

mp

tio

n (

TC

F/Y

ea

r)

Repeal of the

Fuel Use Act

Source: EIA

Electric Generation

Industrial

On the Demand Side...Industrials must compete with Electric Generation for Natural Gas

26

U.S. Midstream Sector Increasingly Dependent U.S. Midstream Sector Increasingly Dependent on the U.S. Petrochemical Industryon the U.S. Petrochemical Industry

US Market Share Demand for NGLs

1974 1984 1994 2002

Petrochemicals 32% 36% 52% 56%

Refining 32% 25% 20% 15%

Fuel & Other 36% 39% 28% 29%• 92% of U.S. ethylene capacity along Gulf Coast

• Over 75% of that capacity directly accesses Mt. Belvieu.

• Over 90% of U.S. ethylene capacity connected to U.S. NGL transportation system• Almost every ethylene plant accesses salt dome NGL storage

27

Ethylene Capacity Market Share

1997

• Exxon......... 10.7%

• Dow............. 9.6%

• Shell............ 8.9%

• Phillips......... 8.1%

• Millennium... 7.2%

• Union Carb.. 7.0%

• Lyondell....... 6.8%

• OxyChem.... 6.5%

• Chevron....... 5.9%

• Amoco......... 5.7%

• Others......... 23.6%

2002• Dow* .............. 21.9%

• Equistar ......... 18.1%

• ExxonMobil*... 14.4%

• Chv Phillips*... 12.0%

• Shell*............... 8.6%

• Formosa*......... 5.2%

• BP*.................. 5.1%

• Huntsman........ 4.0%

• Others.............10.7%

Top 5 Ethylene Producers Control 75% of U.S. Ethylene Capacity

75% 44%

* Own & Operate Midstream Assets

28

A High Priced Gas Environment Could Force the A High Priced Gas Environment Could Force the Ethylene Industry to Minimize Ethane Cracking.Ethylene Industry to Minimize Ethane Cracking.

Feedstock Flexibility of US Ethylene Industry(MBPD)

44.5%

18.6%

46.5%

NA

NA

350

250

150

275

150

875*

450

150

675

230

525*

200

0

350

80

Ethane

Propane

N-Butane

Nat’l Gaso/Naphtha's

Gas Oils

Swing Vol. as % of US Supply

SwingVolumes

MaxDemand

BaseDemandFeedstock

44%

19%

46%

NA

NA

350

250

150

275

150

825

450

150

675

230

475

200

0

350

80

Ethane

Propane

N - Butane

Nat’l Gaso/Naphtha's

Gas Oils

Swing Vol. as % of US Supply

SwingVolumes

MaximumDemand

MinimumDemandFeedstock

29

Ethane Cracking Trending DownEthane Cracking Trending Down

Feedstock Consumption by US Ethylene Plants

0

100

200

300

400

500

600

700

800

900

1000

Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

MB

PD

Ethane

Heavy Feeds

Propane

Butane

(Thousand Barrels Per Day)

30

U.S. Phase Out of MTBE Will Negatively U.S. Phase Out of MTBE Will Negatively Impact U.S. Midstream.Impact U.S. Midstream.

Reduces need for butanes from US processors by 15% or about 50 MBPD.

Shuts down discretionary butane isomerization units. Forces N-Butane into Petrochemical Feedstock Market.

– Puts more competitive pressure on ethane.

Impact can be mitigated with rapid conversion of world-.scale MTBE units to Alkylate or Iso-Octane.

– Chances are unlikely rapid conversion will occur due to permitting problems and uncertainty of returns.

– Some units being permanently dismantled or put into “deep sleep”.

31

Average Utilization Rate of U.S. Gas Average Utilization Rate of U.S. Gas Processors at Very Low LevelsProcessors at Very Low Levels

U.S. Plants: Number & Utilization( As of Jan 1 of each year)

500

550

600

650

700

750

1992 1994 1996 1998 2000 2002

# o

f P

lan

ts

60

62

64

66

68

70

72

74

Uti

liza

tio

n R

ate

s %

Number of plants

Utilization rates %

Oil & Gas Journal

32

U.S. Has Surplus Ethane Extraction CapabilityU.S. Has Surplus Ethane Extraction Capability

Observations

• ~ 200 MBPD of ethane has been rejected in 2003.

• For the past 20 years, US Processors built cryogenic plants to maximize ethane extraction.

• Most processing plants lack de-ethanization capabilities, making ethane rejection inefficient.

• Surplus ethane extraction also implies that NGL downstream assets are under utilized.

(MBPD)

(MBPD)

US Petrochemical Demand for Ethane US Refinery Supply of Ethane Ethane Required from US Processing Ethane Extraction from US Processing*

Surplus Ethane Extraction

(825)

85

(740)

750

10

(475)

85

(390)

750

360

* At current utilization rates

33

In Summary: Upstream and Downstream In Summary: Upstream and Downstream Fundamentals Squeezing U.S. MidstreamFundamentals Squeezing U.S. Midstream

High Priced Gas Market U.S. Midstream

Reduced NGL Demand

Reduces Margins and Volumes Throughout

the Value Chain

34

U.S. Midstream Sector:U.S. Midstream Sector:Factors for SuccessFactors for Success

35

The Convergence of a Number of Issues Is The Convergence of a Number of Issues Is Challenging Midstream Participants To:Challenging Midstream Participants To:

Gain a Greater Understanding of Market Dynamics Adjust to Low Margins Across the NGL Value Chain Minimize Processing Risks & Margin Volatility Rationalize Underused Capacity Achieve Economies of Scale & Scope Lower Operating Costs Upgrade Plants to Reinject Ethane Improve Access to Upstream & Downstream Drivers Repair Balance Sheets, in some cases

36

Gas Aggregation

Gas Processing

NGL Transport

NGLFractionation

NGLStorage

NGLMarketing

Key: Identify and Manage Profit Drivers Key: Identify and Manage Profit Drivers & Risk Factors Along the Value Chain& Risk Factors Along the Value Chain

• Drilling

• Reserve Life

• Location

• Gas Quality

• Gas Prices

• Power Costs

• Gov’t Regs

• Competition

• Counter Party Risks

• NGL Prices

• Gas Pipeline Specs

• Residue Gas & NGL Takeaway Capacity

• Price Liquidity

• Market Demand

• Market Location

37

U.S. Producers and Processors Must U.S. Producers and Processors Must Recognize a Paradigm Shift Is Occurring.Recognize a Paradigm Shift Is Occurring.

In a “Tight BTU Market” not all of the Liquids Extracted by Processing will always receive a Premium Price to their BTU Value in the Gas Stream.

In a High Priced Gas Environment, having Rich Gas may reduce rather than enhance the Value of the Gas Stream.

38

Processing Agreements Must Be Retooled to Processing Agreements Must Be Retooled to Minimize Risks to IndependentsMinimize Risks to Independents

High Risk to Processor Low

Keep Whole

Margin Sharing

% of Liquids(POL)

% of Proceeds(POP)

Economic Election

Processing Fee

Processor keeps extracted NGLs as fee for processing

Must purchase and return to producer merchantable gas to replace fuel & shrinkage

Producer and processor share value delta between NGLs and gas, i.e.. 50%/50%.

Producer gets 100% of wellhead BTUs

Processor paid a % of NGLs as processing fee.

Producer keep their % of NGLs in kind or have processor sell NGLs and receive cash.

Could have keep whole provisions

Processor paid a % of NGLs & gas as processing fee

Producer keep their % of NGLs & gas in kind or have processor sell NGLs & gas and receive cash.

Could have keep whole provisions

Under uneconomicconditions, producers either bypass plant or pay processor a fee.

Fee could be POL or POP or cash

Producer pays processor a processing or conditioning fee.

Fee is market base and could be POL or POP or cash.

Low Risk to Producer High

39

Gas Aggregation

Gas Processing

NGL Transport

NGLFractionation

NGLStorage

NGLMarketing

Link & Leverage the Right Assets to Manage Risks Link & Leverage the Right Assets to Manage Risks and Maximize Value --- Avoid Stranded Assets.and Maximize Value --- Avoid Stranded Assets.

• Ability to aggregate should exceed processing capacity.

• Reserve life should exceed the depreciated life of plant.

• Seek production dedications

• Network asset groups.

• Connect to logistics that yield highest netback prices.

• Diversify NGL supply sources.

• Secure volume dedications

• Have connectivity with highest value markets.

• Have sufficient scale to lower costs and attract customers.

• Know your competition and customers

Recognize• NGL markets are shifting.

• Market liquidity is poor.

• Counter party risks exist.

40

Care Must Be Taken When Forming Care Must Be Taken When Forming Midstream Joint VenturesMidstream Joint Ventures

Pros.Joint Ventures can:

Increase chances of making a project a reality.

Distribute monetary burden and risks.

Pool different resources. Diversify sources of supply. Provide opportunity to:

– Build Critical Mass.– Achieve Economies of Scale.

Cons.

The Dark Side: Operator is usually in control. Decision making is more

difficult and cumbersome. Conflicts of interest can and

often occur. Preference rights can hamper

a sale. Often one party wants to exit

or buy out the other parties after awhile.

41

U.S. Midstream Sector:U.S. Midstream Sector:Business ModelBusiness Model & & Future OwnershipFuture Ownership

42

Although There Are Challenges, Midstream Although There Are Challenges, Midstream Opportunities Will Continue.Opportunities Will Continue.

The “Midstream Bridge” must exist because: Gas will continue to be the clean fuel of choice. N. American gas reserves can support demand growth:

– LNG bridging supply/demand gaps.– North Slope and MacKenzie Delta potential long-term supply

sources.

80% of gas produced will need processing or conditioning. U.S. and Canada have the World’s largest logistics

infrastructure to handle NGLs and Gas. Petrochemical and Refining Industries remain the World’s

largest, but it is imperative that both stay healthy.

43

“Back to the Past”

Business risks so great that

Midstream Activities, particularly

Processing, revert to being

functions of the Major Integrated

Oil Companies.

U.S. Midstream at Critical Juncture

Midstream Functions

“Back to the Future”

Independents effectively manage

risks, provide value added

services and achieve greater

cash flow stability to generate

reasonable returns.

Midstream Profit Centers

?

Question: Who Can Best Manage the Risks Question: Who Can Best Manage the Risks and Capture the Opportunities in Midstream?and Capture the Opportunities in Midstream?

- OR -

Business Model Needs to Better Balance Risks & Returns Between Independent and “Customer”

44

The U.S. Midstream Sector Needs The U.S. Midstream Sector Needs Diversified, Integrated Independents Across Diversified, Integrated Independents Across the Energy Value Chain.the Energy Value Chain.

Currently, just a few US companies devoted to NGL Midstream as a core business.

Majors focused on finding and producing Oil & Gas. Petrochemicals have their own issues to resolve.

Many Diversified Energies still restructuring balance sheets. Opportunities exist to link complementary and strategic NGL

Midstream assets that are in a “holding pattern” by current owners.

But it takes vision, desire, capital, and the right approach to profitably grow a midstream business;

…..and, the concerted effort of Producers, Midstream Players and End Users to insure that an Independent business model survives.

45

The Ideal Midstream Player Will The Ideal Midstream Player Will Display the Following Characteristics:Display the Following Characteristics:

Long-term business alliances with upstream and downstream customers.

Long-term fee-for-service and/or fixed margin contracts.

Ownership in processing in one or more major producing regions.

Access to high capacity gas take-away pipelines.

Ownership in efficient T&F systems to link NGLs to major market centers and customers.

Economies of scale and low cost operations. Ability to make selective, synergistic and

accretive acquisitions. Ability to leverage along value chain with

incremental deals.

Achieve Greater Cash

Flow Stability to Compete

for a Broader Range of

Opportunities

46

A Word to the WiseA Word to the Wise

The more involved a company becomes in the U.S. Midstream Sector, the more leveraged its profits will be to the health of the U.S. Petrochemical Industry.

A Company with a diversified portfolio of(complementary) midstream activities serving other energy commodities, offers better income stability during times when the Petrochemical Industry is in a downturn.

47

More Consolidated U.S. Midstream Sector More Consolidated U.S. Midstream Sector in the Futurein the Future

Processing sector will be downsized and more efficient:– Number of plants will shrink --- smaller, marginal plants shutdown.– Less emphasis on max Ethane recovery plants (Cryogenic).– More of a fee-based service business rather than a margin based,

discretionary one .

Value chain ownership will rotate and consolidate:– Majors, E&Ps and Diversified Energies continue divesting non-core

assets.... only involved in Midstream to protect franchise operations.

– Diversified MLPs to be the most active players --- dominate T&F assets, gradual entry into processing as fee-based business develops.

– Small Independents slowly consolidate into existing or new MLPs.

48

U.S. Midstream Sector:U.S. Midstream Sector:Implications for CanadaImplications for Canada

49

In Many Respects, Canadian Midstream Is In Many Respects, Canadian Midstream Is Better Situated to Handle ChallengesBetter Situated to Handle Challenges

Canadian Ethylene Industry lacks the feedstock switching capability of the U.S. industry, it’s mainly captive to ethane.

– Competition is not with U.S., but foreign producers of ethylene. Canadian Midstream more dominated by Producers than

Independents. Overall, Canadian Midstream is a more fee-based, fixed margin

business than its U.S. counterpart. Canadian Processors less dependent on cryogenic plants with the

exception of the large straddle plants. There are alternative uses for NGLs that are not found in U.S.

– Miscible flooding.– Diluents for heavy crude production and transportation.

50

The Transformation of U.S. Midstream Will The Transformation of U.S. Midstream Will Have Limited Impact on the Canadian SectorHave Limited Impact on the Canadian Sector

Unlikely to see U.S. companies buying Canadian assets as was the case several years ago.

– In fact, companies such as Williams and Dynegy are exiting the Canadian Sector as they repair their balance sheets.

– Many rushed in too soon to position for “Northern” gas flowing through Western Canada.

– U.S. MLPs are limited in investing in foreign assets. Although similarities with the U.S. exist, Canada must examine the

profit drivers and risk factors shaping its Midstream industry and adjust accordingly.

Like the U.S., the global competitiveness of the Canadian Petrochemical Industry can dramatically impact Canada’s Midstream Sector.