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North American Gas At the Crossroads of World Energy Markets A Presentation to the NESA Annual Meeting October 2,

2. North American Gas Market Outlook: Bearish Short Term Dynamics . After steadily rising from $7/mmbtu in Dec 2007 to over $13/mmbtu in early July 2008: Henry Hub: down to ~$6.50 - $8.00 rangeand trying to decide which way to go ! Appalachian Coal: down 28%. Exports slowing down; world market

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North American Gas At the Crossroads of World Energy Markets A Presentation to the NESA Annual Meeting October 2,

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    1. North American Gas – At the Crossroads of World Energy Markets A Presentation to the NESA Annual Meeting October 2, 2008 By Edward Kelly – Vice President North American Gas and Power, Wood Mackenzie

    2. 2 North American Gas Market Outlook: Bearish Short Term Dynamics

    3. 3 North American Gas Prices Have Remained Well Below Those For Oil Since the US does not need LNG—although we can take it in periods when demand is weaker in other global markets—in the medium-term (through 2012) the domestic gas market will remain, on the strength of production growth, largely insulated from global gas markets, which should continue to be linked with oil pricesSince the US does not need LNG—although we can take it in periods when demand is weaker in other global markets—in the medium-term (through 2012) the domestic gas market will remain, on the strength of production growth, largely insulated from global gas markets, which should continue to be linked with oil prices

    4. 4 Defining the Floor for Price: Competition with Coal, and US Supply Costs

    5. 5 Short-term basis differentials – Infrastructure impacts already being felt

    6. 6 For Now, Domestic Supplies Have Responded to High Price and Demand… Tight gas is in a continuous deposit but with low permeability; shale gas is absorbed in organic matter and requires a pervasive natural fracture network; coal-bed methane is gas absorbed in coal and usually requires depressuring and dewateringTight gas is in a continuous deposit but with low permeability; shale gas is absorbed in organic matter and requires a pervasive natural fracture network; coal-bed methane is gas absorbed in coal and usually requires depressuring and dewatering

    7. 7 North American Gas Supply – A New Growth Story US lower 48 production is expected to climb by 6.0 bcfd between 2007 and 2013 Supply growth is being achieved through high commodity prices, increased drilling, aggressive development of unconventional resources, and continual development of exploration and production technologies.

    8. 8 US Gas Supply – Growth from Unconventional Gas Plays Decline in conventional supply mitigated through production growth in unconventional plays in the Rockies, Fort Worth Basin, East Texas and Arkoma Basin spurred by potential new reserves, higher recovery rates, and longer production life.

    9. 9 Shale Gas Forecast – Prior to the Haynesville; This could Double Improved technology and higher gas prices have led to strong growth from the shale plays. Significant upside from some newly announced plays

    10. 10

    11. 11 An Alaska Gas Pipeline – A Future Constant The State of Alaska received six bids for building the Alaska Gas Pipeline. Alaska government announced that the bid submitted by TransCanada alone met all the AGIA requirements. TransCanada’s proposal involves building a 48-inch pipeline that is expected to cost US$26 billion in 2007 dollars. The initial capacity is 4.5 bcfd, with expansion possible up to 5.9 bcfd. While the North Slope producers, ExxonMobil, BP and ConocoPhillips are keen on monetizing Alaskan stranded gas, they are opposed to the AGIA.

    12. 12 Based on the additional wells drilled and well profiles for each region and resource type, the corresponding additional production is developed The volumes represent the maximum possible production possible at a sustained higher price Maximum possible additional production after 18 years of investment decisions @ US$10.00 - 9.3 bcfd @ US$12.00 - 13.3 bcfd @ US$15.00 - 16.5 bcfd Even More Upside for Supply – If we Need It

    13. 13 Haynesville Shale Operators describing Haynesville as being one of the biggest plays in the region – still early to tell Current operator announced net resource potential over 75 tcf Announced initial production rates of 8-16.8 mmcfd Acreage holders include Devon, Chesapeake, PXP, Petrohawk, Comstock, EXCO, El Paso Chesapeake drilled four vertical tests and three horizontal wells in 2007. Operators announcing plans to increase rigs significantly Over 100 rigs by end if 2009 Horizontal wells expected to recover 4.5-8.5 bcfe

    14. 14 Haynesville Shale – Advantages/Challenges Existing gas production in the region – gathering infrastructure in place Rigs with the required depth rating and pressure pumping available in the region Spare capacity on existing pipelines in the region is 1-1.25 bcfd Infrastructural constraints expected by 2010 timeframe The earliest a pipeline could built is by 2012 considering FERC process Conclusion Large potential Earliest possible significant contribution to the North American supply – 2009 and beyond

    15. 15 Marcellus Shale Study estimates over 50 tcf recoverable reserves. Much higher than USGS estimate of 1.9 tcf. Range Resources controls 750,000 acres. Other operators include Chesapeake, Equitable, CNX Shale at a similar depth as Barnett (8,000 ft) and Barnett style slick water fracturing is effective Horizontal wells expected to cost US$ 2.5-3.3 million. Recent wells have had good initial production rates of 2.6-5.8 mmcfd Breakevens expected to be similar to Barnett non-core – US$5.1-5.6/mcf

    16. 16 Marcellus Shale - Challenges

    17. The Global Market Dynamic and LNG Imports into North America

    18. 18 Future US imports of LNG dictated by global competition for supply Will pay oil-parity and beyond to secure ST, MT and LT volumes First call on LT Pacific Basin LNG and re-marketed [allocated] LNG

    19. 19 In the absence of emerging shale plays, LNG is required to meet long-term US demand growth

    20. 20 Wood Mackenzie: Crude Price Outlook

    21. 21 Adequate Crude Supply To Meet Demand Growth out to 2025 We believe 2008 is expected be the peak year in terms of upward influence on oil prices from the weak dollar. Oil market is at risk of a price decline, as fears about supply (if not realized) ease, especially because demand growth is faltering already in the US and OECD. Post 2010, in the base case, there is a pull back in price because of the gradual increase in supply from some OPEC and several non-OPEC producers The new, higher floor price for crude oil in 2014-2016 reflects escalating upstream costs and the need for higher prices in order to blunt oil demand growth From 2014-2016, the price is at its lowest annual average of $71.50 per barrel for WTI and $70 for Brent in real (2008$) terms, based on analysis of upstream breakeven economics. In nominal terms, the lowest annual average is $83.00 for WTI and $81.50 for Brent. Prices rise from 2017 to 2025 reaching $85 for WTI and $83.50 for Brent in 2025 (real) In nominal terms, in 2025 price is $129 for WTI and $127 for Brent. OPEC producers need to develop capacity steadily but aggressively during this time. Growing unconventional supply is key part of non-OPEC supply plateau to 2025

    22. 22 Meeting longer term US demand growth requires LNG…North America competes for flexible cargoes

    23. 23 With the added shale gas supplies, the US doesn’t need to compete for flexible LNG cargos until 2013/2014 – OR LATER US remains insulated from oil price movements slightly longer than it does in the Base Case Overall US gas prices are slightly lower, and the US price is below UK prices Japanese price follows the US price Alaskan supplies result in a slightly longer dislocation Overall, US higher cost domestic supply development is lower Henry Hub average price 2012-2020 is now $7.90/mmbtu (real)

    24. 24 High Capital Costs and Carbon Uncertainty Push US Natural Gas Demand Growth Even At Global Prices

    25. The Wood Mackenzie View The North American Gas Price Outlook

    26. 26 Oil’s influence is limited as gas remains decoupled. The higher coal and production cost floor remains in play, in the $6.50 - $7.00 range. With winter consumption sourced from approximately 80% flowing gas, continued US supply growth means storage is adequate, and winter 2008/2009 draws on inventories are lower. Adequate storage and continued domestic supply growth further weakens oil’s influence in 2009-2012 Henry prices 2009 – 2012 remain in a $7.00 - $7.50 range. North American Gas and Oil Markets Through 2012: Weak on the Gas Side

    27. 27 Oil’s influence grows as gas approaches resid prices 2014 – 2018. The timing of the LNG import requirement is key to any re-linking. Linkage could be delayed until 2018 by shale gas growth above expectations. For 2013 – 2020, Henry Hub prices average approximately $8.25. Beyond 2020, natural gas strengthens with oil in a re-linked global market. Henry prices average $9.50 for 2021-2025. Natural Gas and Oil Through 2025: Gas Begins to Follow Oil, as the US Needs to Compete for Oil-Linked Imports - Maybe

    28. The Wood Mackenzie View Natural Gas Infrastructure Development, and Basis NESA Annual Meeting

    29. 29 Storage?

    30. 30 Storage?

    31. 31 Power generation load growth will be uneven: Some areas may allow more baseload alternatives to natural gas to be constructed, eventually reducing gas’ market share in power generation. Power loads and variability differ by region and locality – weather patterns, demand characteristics, and baseload generation sources all will determine how much gas is required to handle load swings. Renewables will play varying roles in different regions, and require differing degrees of fossil-based backup service. Proximity to new production areas and regas facilities, and the usefulness of storage for balancing and other services, will vary Regas facilities will have differing utilization rates, and players at some will contract for more downstream pipeline capacity and storage than others. A large amount (more than 8 Bcfd) of long-haul pipeline capacity is being constructed out of the Rockies and Midcontinent, while declining supplies are emptying pipes out of the Gulf and Canada. Pipeline line-pack and imbalance services will be readily available to compete with storage on some pipeline systems, but not others.

    32. 32 And … Storage Developments are Already Occurring at a Rapid Pace

    33. 33 We Can’t Count on Canada: Canadian Imports Decline as Production Slows and Local Demand Climbs, Narrowing AECO Basis Canadian production is expected to continue to decline from 2006 level of 16.6 bcfd to 14.0 bcfd in 2012. Expected ’08 export decline of 1.1 bcfd At the same time, Canadian industrial demand is growing steadily as higher oil prices incent oil sands projects to ramp-up. Gas demand for oil sands projects grows from 1.2 bcfd this year to 1.75 bcfd in 2012. 3 bcf/d by 2020. Expecting 7.9 bcfd in Canadian imports this year, declining to 5.3 bcfd in 2012.

    34. 34 But, Between the Storage and the Pipe Adds, New Infrastructure Projects coupled with LNG supplies build the East-to-West Basis Bridge

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