Americas Natural Gas Market Challenge 2006-2007 American Gas Association September 2006.

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Americas Natural Gas Market Challenge 2006-2007 American Gas Association September 2006 Slide 2 Gas Consumption Could Grow By More Than 20% By 2020 Source: Energy Information Administration Slide 3 For many commodities, price is set by marginal cost of supply. For natural gas today (since 2001), price is being set by marginal cost of consumption. North American Natural Gas Market Demand for gas to power gen. continues to grow. Industrial gas demand levels even as GDP grows. Slide 4 NYMEX Natural Gas Futures (September 1, 2006) Month-YearSettle ($/MMBtu) Oct-20065.88 Nov-20068.06 Dec-2006 9.90 Jan-2007 10.56 Feb-2007 10.60 Mar-2007 10.43 Apr-20078.38 May-20078.23 Jun-20078.32 Slide 5 RECENT WEATHER EVENTS December 2000 Summer 2005 January 2006 July 15-Aug. 5 2006 December 2000 Slide 6 Prices versus Weather Winter Summer Slide 7 Estimated Peak Month Gas Supplies 2006-2007 Source Bcf % Domestic Production1,60057.2 Underground Storage 84030.0 Supplementals 6 0.3 Net Canadian Imports 29510.6 LNG Imports 60 2.2 Subtotal2,801100.0* Mexico Exports 35 Total Gas Supplies 2,766 Peak Gas Consumption2,701 Bcf (January 2003) (*Do not add due to rounding) Slide 8 Working Gas in Underground Storage Compared With 5-Year Range (EIA) Slide 9 Domestic Natural Gas Production US natural gas production still accounts for 83 percent of domestic consumption. LNG provides about 3 percent of gas consumed. Canada provides the balance. Slide 10 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 Henry Hub Price * (right axis) Shut In Production (left axis) Forecast Bcf/d $/Mcf Slide 11 Lower-48 Dry Gas Production vs. Dry Gas Productive Capacity Source: Energy and Environmental Analysis, Inc. Slide 12 U.S. Natural Gas-Directed Drilling Activity Short-Term Energy Outlook, Oct. 2005 Slide 13 STATUS OF U.S. UNCONVENTIONAL GAS PRODUCTION Source: Conventional/Offshore EIA Annual Reserve Reports. Unconventional Advanced Resources International data base. Total Domestic Production Onshore Conventional Unconventional Gas U.S. Natural Gas Production (Tcf) 0.0 5.0 10.0 15.0 20.0 2000 2003 35% of U.S. total JAF2004074.XLS 19.2 19.4 5.5 5.4 Associated Gas 3.1 2.8 Federal Offshore 4.8 4.4 5.8 6.8 Unconventional gas has helped maintain U.S. production and now accounts for 35% of U.S. natural gas supplies. Slide 14 Lower-48 Annual Dry Production Source: Lippman Consulting, Inc. Slide 15 21 TCF 346 TCF 31 TCF 43 TCF 100% 40% 100% 56% Restricted Percentage Major Portions of the Gas Resource Base Are Not Accessible Approximately 29 trillion cubic feet (TCF) of the Rockies gas resources are closed to development and 108 TCF are available with restrictions. Slide 16 Canada Dry Gas Production and U.S. Pipeline Exports Source: Lippman Consulting, Inc. Slide 17 Northern Gas Market Options Slide 18 Mackenzie Gas Project Construction on 1.2 Bcf/d pipeline to begin in late 2007. Expected to recover 7 Tcf from three existing fields with future discoveries anticipated after infrastructure is in place. Begin flowing gas in 2011. NWT will need to import workers (current pop. 48,000 over area the size of Texas) Slide 19 Alaska Natural Gas Pipeline Proposed 4.5 Bcf/d pipeline from North Slope to NA grid interconnect in Alberta. Agreement between state of Alaska and ExxonMobil, BP and ConocoPhillips must be approved by Alaska legislature. Adds 35-40 Tcf of reserves immediately to US total with expectations for more with development of trans infrastructure. Slide 20 New Supply Must Come From New Areas But Will Only Come at a Price that Supports Development. Source: CMS Panhandle Companies Slide 21 Slide 22 LNG Import Capacity (Bcfd) Total Current Capacity: 5.2 Bcfd Under Construction: 2.3 Bcfd Sources: FERC, US Coast Guard, LNG Express, WGI, LNG Observer (July 2006) Slide 23 New LNG Import Capacity (Bcfd) Under Construction, July 2006 Total Phase 1 Capacity: 8.6 Planned Phase 2 Capacity: 7.6 Sources: FERC, US Coast Guard, LNG Express, WGI, LNG Observer, Cheniere, State of TX Slide 24 2005 US LNG Imports 2004 Source: DOE; * Estimated by Waterborne LNG, **EIA Forecast Bcf 2006:760 Bcf**(2.1 bcfd) 2005: 631 Bcf (1.7 bcfd) 2004: 624 Bcf (1.7 bcfd 2006* Slide 25 Jan 2006 Atlantic Basin Natural Gas Prices $/mmbtu Source: Energy Intelligence Unit Slide 26 National Energy Legislation 2005 1. 15-year depreciation for new natural gas distribution lines placed in service after 4/11/2005 and before 1/1/2011) 2. Numerous provisions to maintain current domestic production and to bring forth new supplies of natural gas, including LNG. 3. A substantial increase in the authorized level for LIHEAP funding to $5.1 Billion. 4. Repeal of the Public Utility Holding Company Act. 5. An energy efficiency title that does not discriminate against natural gas, as well as a National Academy of Sciences study on total energy efficiency. Slide 27 Natural Gas Henry Hub Spot Prices (EIA, September 2006) *The confidence intervals show +/- 2 standard errors based on the properties of the model. Slide 28 West Texas Intermediate Crude Oil Price (EIA, September 2006) *The confidence intervals show +/- 2 standard errors based on the properties of the model. Slide 29 North American supply/demand balance is and will remain tight. Gas consumption has the potential to grow. Supply gains will come. New frontier natural gas is necessary. North American Natural Gas Market Natural gas prices remain strong. High levels of gas price volatility will continue. LNG imports become an important player in natural gas pricing. Slide 30 Thank You! Christopher B. McGill Managing Director Policy Analysis 202.824.7132 [email protected]