NATURAL GAS MARKET AND REGULATORY TRENDS

1. NATURAL GAS MARKET AND REGULATORY TRENDS

2. What is the natural gas business… …and how should it be regulated? • Is it a competitive, upstream-driven business? • Is it an economies of scale, monopoly midstream-downstream business that affects the public interest? • How much of direct end use and conversion is competitive? • If the goal is to build the “natural gas factory,” then policy/regulatory approaches need to facilitate value chain development – “commercial frameworks.” Where does most profit, value creation take place?

3. Worldwide Natural Gas System Dynamics: Framework Issues Benefits of Competitive Supply

4. The Overall Challenge:Balancing the Market Mean reversion is a reality if market- clearing participants exist DEMAND SUPPLY LOW Prices HIGH

5. Achieving Competitive Supply Pricing Supply • The challenges: • Entry of new suppliers • Managing common pools • Developing liquidity to establish locational basis • Protecting market transparency • Dealing with third party wholesalers that are affiliated with regulated infrastructure • Access for new supplies • COMPETITIVE SALES • Wellhead producers • Third party wholesalers

6. Regulated Infrastructure as the Conduit for Supply Competition Pricing Transportation • The challenges: • Rate-making transitions • Setting maximum allowable rates with market transparency • Pricing new capacity • Dealing with access for • new capacity • Determining contestable • transportation markets • Dealing with market power • RESERVATION (DEMAND) • Fixed cost of investment • Return on equity • Taxes • Long term debt • A&G, DA, O&M • COMMODITY (USAGE) • Variable cost of operation • O&M

7. Does Power Offer Similar Opportunities… Unbundle electrons from wires, enable competitive generation and sales of electrons, enable comparable transportation service for shippers. …or new problems and challenges?

8. Price Volatility and Risk are the Trade Offs for Competition Commodity price risk flows E&P Pipelines LDCs End Users Power Capacity price risk flows Risk accepting entities

9. Electric Power DriverIt’s Stormy Out There! Market Structure Does choice matter? Real Time Pricing Load Management & Reliability Retail Competition? Measurement Aaagghh! Competitive Electricity Markets (Restructuring)

10. Around the world, countries and companies face a range of issues associated with commercial framework conditions

11. The U.S. CasePre-Natural Gas Restructuring FERC PUCs PIPELINES LDCs PRODUCERS Locate + Produce Purchase from Pipelines Aggregate Sell to Pipelines Storage Serve End User Sell to LDCs

12. The U.S. CasePost-Natural Gas Restructuring FERC PUCs Storage Services Production Transport Distribution Capacity Brokering Transport Services Aggregation Gathering Marketing Information Services Risk Management LNG Processing

13. Production1,2 Gathering1,2 Processing1 Intrastate Pipelines2 U.S. (Canada) Natural Gas Value Chains “LDC” Physical Bypass Industrial Commercial Residential, Small Commercial Interstate Pipelines “City Gate” Electric Generation (fuel, bulk market for power) “Unbundling” is the separation of transportation from sales (supply) to allow third party marketing with pipelines providing “open access” and comparable service to all shippers. 1,2 Often vertically integrated Transportation (pipe) Sales (commodity) Competitive Most Competitive Least Competitive

15. Producing Basins and RegionalNatural Gas Flows Source: U.S. EIA

17. Henry Hub, Louisiana

18. Market Transparency of price signals Price volatility Role of pipeline affiliates Demand response Problems in retail competition Supply security and capital to drill Policy/Regulatory Encourage market solution to price information No action (but debate) FERC Order 637 Under discussion Georgia re-bundling Producer incentives and LNG U.S. Case – How Well Does the Model Perform?

19. U.S. Wellhead Natural Gas Prices $/mcf, real “Gas bubble” NGPA Wellhead price control Open access era Source: U.S. EIA.

20. Natural Gas Spot Price Suspected market manipulation No suspected market manipulation Source: NYMEX

21. Are New Market Fundamentals Emerging?

22. U.S. Gas Resource Development Source: U.S. EIA.

23. U.S. Wells Drilled Source: U.S. EIA.

24. U.S. Well Costs ($/foot) Deep water effect Source: U.S. EIA.

25. U.S. Natural Gas Well Productivity(Mmcf/well) Source: U.S. EIA.

26. Post-Enron

27. Market Geography with PipeDe-bottlenecking, 1995-99 Spot prices, $/mmBtu, beginning of month Source: World Gas Intelligence

28. U.S. Gas Price Convergence $/mcf across all active U.S. and Canada market centers, hubs and major city gates Henry Hub Source: Natural Gas Week

29. Demand Destruction is Real Total Consumption, bcf Avg. Wellhead, cents/mcf Source: U.S. EIA

30. Gas Demand by Segment Source: U.S. EIA

31. U.S. Natural Gas Prices (Real) Source: U.S. EIA

32. U.S. Value Chain Issues Price differentials, $/mcf 1984-2000: Open Access Implementation Source: U.S. EIA

34. Electricity Demand Nonutility generation = 30% of total industry Source: BP

35. Natural Gas Consumption forPower Generation Source: BP

36. Does the U.S. Need More LNG? • Most of the natural gas used in the U.S. comes from domestic production. • Many fields are several decades old and are declining rapidly. • New natural gas reserves are being discovered, but with advanced recovery technologies these fields are quickly depleted. 74% from gas wells 26% from oil wells LNG is about 6% of worldwide natural gas consumption. It is about 94% of natural gas consumption in Japan.

37. Does the U.S. Need More LNG? • U.S. EIA estimates a shortfall in natural gas supply of about 8 tcf by 2025. • Canada may not be able to sustain increasing volumes of exports to the U.S. • LNG imports expected to reach 2.1 tcf a year by 2025, or about 6% of our total consumption. LNG is currently less than 1% of total U.S. consumption.

38. Oman & Others Algeria 12 64 Australia Nigeria 2 38 Qatar 23 Trinidad and Tobago 98 Does the U.S. Need More LNG? U.S. Natural Gas Imports, Exports in 2001, bcf LNG 66 Japan 166 Total 2001 U.S. consumption = 22.7 tcf Pipe exports to Mexico = LNG imports 3728 LNG 10 239 140 Source: U.S. DOE-OFE

39. Is LNG A Safe Fuel? • Worldwide LNG facilities: • 17 LNG export (liquefaction) terminals • 40 import (regasification) terminals • 136 LNG ships altogether handling approximately 120 million metric tons of LNG every year • Over 240 peakshaving and LNG storage facilities, some operating since the mid-60s • The U.S. has the largest number of LNG facilities in the world. • U.S. gas utilities use LNG extensively for “peak-shaving” with facilities located near population centers.

40. Is LNG A Safe Fuel? 113 active LNG facilities in the U.S.

41. Source: CMS LNG Facilities in the U.S. Baseload LNG regasification terminals The four marine LNG import terminals in the U.S. represent base load LNG facilities. Source: CMS

42. LNG Facilities in the U.S.

43. Proposed LNG Import Facilities,U.S. West Coast • Mare Island • Bechtal/ • Shell abandoned project. • Tijuana • Marathon led group • Filed permit application with CRE and selected EPC contractor. • Ensenada • Sempra/CMS • Filed permit application with CRE. • Lazaro Cardenas • Tractebel • Conducting feasibility study. • Baja California • ChevronTexaco • Filed permit application with CRE. Source: CMS Energy

44. Proposed LNG Import Facilities, U.S. Gulf & East Coasts • Energy Bridge • El Paso • Applied with USCG for deepwater mooring buoy. • Hackberry • Sempra • Received preliminary approval from FERC. • Freeport • Cheniere • Announced three Gulf Coast sites. • Bahamas • AES • Resolving pipeline design and construction issues. • Tractebel • Tractebel buys Enron interest. • Port Pelican • ChevronTexaco • Filed with the DOT under Deepwater Port Act. • Altamira • El Paso/Shell • RFP issued by CFE. Source: CMS Energy; note that plans include expansion of LNG facilities in Puerto Rico (not shown). 0103-001

45. DOE regulates natural gas imports/exports and helps to coordinate across federal agencies that have regulatory and policy authority for LNG FERC is responsible for permitting new onshore LNG regasification terminals and ensuring safety at these facilities DOT regulates offshore terminals and LNG tanker operations Coast Guard is responsible for assuring the safety of all marine operations at all LNG terminals and on tankers in U.S. coastal waters EPA and state environmental agencies establish air and water standards with which the LNG industry must comply Others include: Fish and Wildlife Service Army Corps of Engineers for coastal facilities and wetlands MMS for offshore activities National Oceanic and Atmospheric Administration State, county and local (municipal) agencies play roles to ensure safe and environmentally sound construction and operation of LNG industry facilities. Local police and fire departments. U.S. LNG Regulators LNG facilities are subject to U.S. Homeland Security

46. How Much Does LNG Cost? LNG Value Chain Sources: BG, ALNG, CMS

47. How Much Does LNG Cost? LNG costs are declining. Natural gas can be economically produced and delivered to the U.S. as LNG in a price range of about $2.50 - $3.50/MMBtu depending largely on shipping cost.

48. Prices Are Converging Oil indexed LNG v. Henry Hub $/mmbtu Source: BP Gas and Power

49. How LNG Competes Natural Gas Prices, $/mmBtu (U.S. DOE – OFE) * Includes both landed and tailgate prices; lower price is generally landed price. ** Mean, daily spot prices.

50. Global Gas Market Evolution Orange arrows are cargos shipped to U.S. for Henry Hub premiums. Green arrows are price dampening effects to other markets.