LSU Natural Gas Conference Presented by: Bob Purgason VP Gulfcoast Region Williams Companies.

LSU Natural Gas Conference

Presented by:

Bob Purgason

VP Gulfcoast Region

Williams Companies

Introduction

Structural shift in natural gas pricing The crude to gas ratio: A critical

relationship for NGL processing Implications of a sustained shift in gas,

crude, and NGL pricing relationships– Implications for ethane– Implications for heavier NGL’s

Well

Gas PlantY-Grade Pipelines

Purity Storage

Caverns

Y-GradeStorageCaverns Purity

Product Pipelines

Refineries

Chemical Plants

Agricultural/Residential

IndustrialFuels

Fractionator

Production Gas Processing

Transportation

Storage

Liquids Processing

Marketing

“Residue Gas”to

Interstate Pipelines

Storage Tanks

Distribution

Hydrocarbon Value Chain

Production

Gathering

Gas Processing

Cont.4%

Methane68%

Natural Gasoline

2%Butanes

4%

Propane9%

Ethane13%

TYPICAL UNPROCESSED GAS

Phase I : The Abundant Commodity

Phase II : The Tenuous Balance

Phase III :

The Supply Squeeze

Source: Platts

Evolution of Gas Pricing in North America

SupplyPerspective

•“Just Another Commodity”

•Manufacturing Strategies

•Declines in Traditional Basins•Select “Growth Regions”•Advent of the Deepwater•Growing Imports

•The Supply Treadmill•Prospect Shortfall•Unprecedented Volatility•Growth of Frontiers

Henry Hub Natural Gas Price

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

$ p

er M

MB

Tu

The relationship between natural gas and crude has varied widely over time

The Crude to Gas Relationship

Gulf Coast Natural Gas Price vs. NYMEX Crude

1.002.003.004.005.006.007.008.009.00

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03

$/M

MB

tu

10.00

14.00

18.00

22.00

26.00

30.00

34.00

$/B

arre

l

Gulf Coast Natural Gas NYMEX Crude Oil

The Crude to Gas Relationship

Historical Crude to Gas Ratio

3

6

9

12

15

18

21

24

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03

Cru

de/

Gas

The crude to gas ratio (crude divided by gas) has trended down as gas has strengthened relative to crude oil

The crude to gas ratio correlates highly with historical NGL processing spreads

Crude to Gas Ratio versus Gulf Coast Frac Spread

369

1215182124

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03

Cru

de/

Gas

-16-80816243240

cen

ts p

er g

allo

n

Crude to Gas Ratio Gulf Coast Frac Spread

The Crude to Gas Relationship

Historically, low points in the crude to gas ratio have meant hard times for gas processors

The Crude to Gas Relationship

Crude to Gas Ratio versus Gulf Coast Frac Spread

369

1215182124

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03

Cru

de/

Gas

-16-80816243240

cen

ts p

er g

allo

n

Crude to Gas Ratio Gulf Coast Frac Spread

The Crude to Gas Relationship

Crude to Gas Ratio versus Gulf Coast Frac Spread

369

1215182124

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03

Cru

de/

Gas

-16-80816243240

cen

ts p

er g

allo

n

Crude to Gas Ratio Gulf Coast Frac Spread

Historically, low points in the crude to gas ratio have meant hard times for gas processors

Gulf Coast NGL Frac Spread

-10-505

1015202530

J-99

M-9

9

S-9

9

J-00

M-0

0

S-0

0

J-01

M-0

1

S-0

1

J-02

M-0

2

S-0

2

J-03

M-0

3

cent

s pe

r ga

llon

Nat. gas - $2.66

Crude - $29.30

Ratio - 11

Ethylene - $.27/lb

Strong Economy

Nat. gas - $8.69

Crude - $28.40

Ratio – 3.3

Ethylene - $.27/lb

Recession begins

Nat. gas - $2.19

Crude - $25.93

Ratio – 11.8

Ethylene - $.17/lb

Weak Economy

Nat. gas - $5.76

Crude - $28.07

Ratio – 4.9

Ethylene - $.19/lb

Weak Economy

Analysis of recent frac spreads – the economy also plays a role…

The Crude to Gas Relationship

Current NYMEX price strips suggest a continuation of low crude to gas ratios

Natural Crude Crude/GasGas Oil Ratio

Oct-03 4.430 29.10 6.6Nov-03 4.830 28.82 6.0Dec-03 5.082 28.35 5.6Jan-04 5.262 27.94 5.3Feb-04 5.212 27.65 5.3Mar-04 5.107 27.33 5.4Apr-04 4.802 27.03 5.6

May-04 4.709 26.81 5.7Jun-04 4.719 26.61 5.6Jul-04 4.724 26.41 5.6

Aug-04 4.724 26.25 5.6Sep-04 4.721 26.10 5.5Oct-04 4.729 25.96 5.5Nov-04 4.861 25.84 5.3Dec-04 5.004 25.72 5.1Jan-05 5.091 25.62 5.0Feb-05 5.036 25.53 5.1Mar-05 4.881 25.43 5.2Apr-05 4.561 25.34 5.6

May-05 4.456 25.27 5.7Jun-05 4.456 25.22 5.7Jul-05 4.463 25.19 5.6

Aug-05 4.463 25.18 5.6Sep-05 4.463 25.17 5.6Oct-05 4.488 25.17 5.6Nov-05 4.668 25.17 5.4Dec-05 4.843 25.18 5.2

Note: As of 9/30/2003

Historical & NYMEX Futures Crude to Gas Ratio

3.06.09.0

12.015.018.021.024.0

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05C

rud

e/G

as

Crude to Gas Ratio NYMEX Futures

The Crude to Gas Relationship

Implications of the Pricing Trends

Unprecedented NGL rejection has occurred during periods of low ratios/low frac spreads

US NGL Production vs. Gulf Coast Frac Spread

1300

1500

1700

1900

2100

96 97 98 99 00 01 02 03

MB

PD

-16-80816243240

cen

ts p

er g

allo

n

Total US Gas Plant NGL Production Gulf Coast Frac Spread

During January of 2001 1/3 of total NGL production – lost to rejection 650 MBPD 2.2 BCFD natural gas

Between May and August of 2003 200 MBPD of ethane and 80 MBPD of propane remained

in natural gas stream 0.85 BCFD

The US has seen some degree of continual ethane rejection for the last year

Implications of the Pricing Trends

Because it is the most readily rejected NGL, ethane is the most responsive NGL to changes in gas price

Implications - Ethane

Mont Belvieu Ethane vs. Gulf Coast Natural Gas

1.002.003.004.005.006.007.008.009.00

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03

$/M

MB

tu

102030405060

cen

ts p

er

gal

lon

Gulf Coast Natural Gas MB Ethane

High gas prices relative to crude oil places ethane at a competitive disadvantage to heavier petrochemical feedstocks

While ethane production suffers, demand for ethane has been equally weak

Despite weak production, ethane inventories are near the 5-year-average

Implications - Ethane

Implications - Heavier NGL’s

Propane & Heavier NGL's vs. NYMEX Crude

5

10

15

20

25

30

35

40

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03

$/B

arr

el

NYMEX Crude Oil C3 IC4 NC4 C5

The heavier NGL’s are highly correlated to crude oil…

Well

Gas PlantY-Grade Pipelines

Purity Storage

Caverns

Y-GradeStorageCaverns Purity

Product Pipelines

Refineries

Chemical Plants

Agricultural/Residential

IndustrialFuels

Fractionator

Production Gas Processing

Transportation

Storage

Liquids Processing

Marketing

“Residue Gas”to

Interstate Pipelines

Storage Tanks

Distribution

Hydrocarbon Value Chain

Production

Gathering

Gas Processing

…meaning that their processing margins are hardest hit when crude to gas ratios are low

Implications - Heavier NGL’s

NGL Gulf Coast Frac Spreads by Product

-30-20-10

0102030405060

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03

ce

nts

pe

r g

allo

n

C2 C3 IC4 NC4 C5

Implications - Heavier NGL’s

Weak processing margins do result in some lost production of heavier NGL’s

Propane & Heavier NGL's Production vs. Gulf Coast Frac Spread

75%

80%85%

90%95%

100%

96 97 98 99 00 01 02 03

% o

f m

ax

pro

du

ctio

n

-10-5051015202530

cen

ts p

er g

allo

n

C3+ Production C3+ Gulf Coast Frac Spread

However, heavy waterborne imports supplement propane and butane supplies…

Implications - Heavier NGL’s

Net US Waterborne LPG Imports1

-10

0

10

20

30

1997 1998 1999 2000 2001 2002 2003

Mil

lio

ns

of

Bar

rels

1 Includes both propane and butane imports

YTD 9/03

Keeping inventories closer to five-year averages

Implications - Heavier NGL’s

w/outCurrent Five-Year % Over/ Waterborne8/31/03 Average Under Imports

Ethane 21.8 22.1 -1.2% -1.2%Propane 63.0 65.9 -4.4% -33.3%N. Butane 33.4 40.9 -18.3% -30.5%I. Butane 7.5 8.2 -7.5% -32.0%N. Gasoline 9.1 9.2 -0.5% -0.5%

Total NGL's 135.0 146.3 -7.8% -25.5%

API US NGL Inventory Levels (Millions of Bbls)

The heavy rejection of NGL’s in recent years has caused significant operational problems for natural gas pipelines

In response, natural gas pipeline companies have begun issuing “merchantability” notices

These notices enforce the requirement that some NGL’s be removed to meet pipeline specs before entering the system

Merchantability

Conclusions

Strengthening natural gas prices relative to crude oil have significantly reduced the production of NGL’s in the US

Waterborne imports will continue to play a critical role in balancing the heavier NGL’s

The weakened feedstock desirability of ethane, combined with a struggling economy, have reduced demand and kept ethane supplies in balance

Conclusions

The growing gap between NT and spot - an indication of an inactive spot market

CMAI NT Ethylene vs. Spot Ethylene

10

15

20

25

30

35

J-98

M-9

8S-9

8J-

99M

-99S-9

9J-

00M

-00

S-00

J-01

M-0

1S-0

1J-

02M

-02S-0

2J-

03M

-03

cen

ts p

er lb

eth

ylen

e

CMAI NT Ethylene Spot Ethylene

CMAI NT Ethylene vs. Spot Ethylene vs. Mont Belvieu Ethane

101520253035

J-98

M-9

8S-9

8J-

99M

-99S-9

9J-

00M

-00S-0

0J-

01M

-01S-0

1J-

02M

-02S-0

2J-

03M

-03

cen

ts p

er l

b

eth

ylen

e

102030405060

cen

ts p

er

gal

lon

et

han

e

CMAI NT Ethylene Spot Ethylene MB Ethane

Conclusions

Conclusions

High natural gas prices will result in high feedstock costs for ethane

Ethane pricing quickly responds to pricing changes in natural gas– Reasonable price transparency

Probable margin squeeze within ethylene chain– Improving economy

– Minimal ethylene price transparency

LSU Natural Gas Conference

Presented by:

Bob PurgasonVP Gulfcoast Region

Williams Companies

Structural Shift – Supply Side

Many traditional North American supply basins are in decline

Western Canadian production, the marginal supply of the last decade, is prominent among the declining basins

LNG and Arctic gas represent the marginal supply of the new era, but it will take years to develop the infrastructure

Source: Cambridge Energy Research Associates.Data: Energy Information Administration.30402-2

400200

Productionper Well

(Mcf perDay)

NumberofWells(thousands)

180

160

140

120

100

80

60

40

20

0

350

300

250

200

150

100

50

01990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Productionper Well

Numberof Wells

Structural Shift – Supply Side

More wells have not meant more production

Incremental Gas Demand for Power Generation(Growth over 2002)

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2003 2004 2005 2006 2007 2008 2009 2010

Bc

f p

er

Da

yStructural Shift – Demand Side

Expected increases in future natural gas demand for power generation…

50,000

52,000

54,000

56,000

58,000

60,000

62,000

64,000

66,000

68,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

MM

cf p

er d

ay

US Production US Consumption

Note: Consumption excludes pipeline, lease and plant fuel. Production excludes imports, storage and balancing adjustments.

Structural Shift - Supply Gap