THE EVOLUTION OF MARKET PREMIUMS -- NATURAL GAS

• Jurisdiction: United States

Federal and Indian Oil and Gas Royalty Valuation and Management Book 1
(Feb 2004)
CHAPTER 3A
THE EVOLUTION OF MARKET PREMIUMS -- NATURAL GAS
Scott R. Smith
Lukens Energy Group
Houston, Texas

Presentation overview

• Market expectation for future natural gas prices

• North American supply projections:

□ Production

□ LNG

• North American demand projections

• Infrastructure requirements to meet future supply / demand

• Impacts to the natural gas marketplace

• Implications for companies in the natural gas market

Natural gas prices at Henry Hub are expected to average $4.00 to $6.00 through 2010

Historical and Forward Monthly Henry Hub Prices
Sources: Gas Daily, NYMEX and Lukens Energy Group Analysis

Historically - the U.S. has relied upon domestic production to supply its natural gas needs

Source: EIA AEO 2003

Looking forward - there is a wide divergence of expectations for U.S. production

US Natural Gas Production

Key uncertainties:

• Gulf of Mexico

□ Shallow water - deep prospects

• Rockies

□ Coal bed methane

Sources: EIA, AGA, Simmons, Jeffries and Lukens Energy Group Analysis

National Petroleum Council ("NPC") estimates are flat to moderate growth in North American natural gas production

North American Gas Production
Source: NPC

LNG economics are now attractive in North America

South American LNG
West African LNG
Note: All cost components include estimated return on capital
Source: "Liquefied Natural Gas II" - Solomon Smith Barney, February 15, 2002

U.S. LNG import terminals are doubling capacity

Source: U.S. LNG Markets and Uses, EIA January 2003

A substantial number of new LNG terminals have been announced - how many will be built?

Existing Terminals

A. Everett, MA: 0.715 Bcfd (Tractebel)

B. Cove Point, MD: 1.0 Bcfd (Dominion)

C. Elba Island, GA: .806 Bcfd (El Paso)

D. Lake Charles, LA: 1.2 Bcf.d (Southern Union)

Proposed Terminals

Northeast

1. St. John, NB: 0.550 Bcfd, (Irving Oil)

2. Nova Scotia: .5 Bcfd, (ANE)

3. Fairwinds LNG, Maine, .5 Bcfd (ConocoPhillips)

4. Somerset LNG: .4 Bcfd

5. Fall River, MA: 0.4 Bcfd, (Weaver's Cove Energy)

6. Providence, RI: .6 Bcfd, (BG)

7. Marcus Hook. PA: .8 Bcf (BP)

Gulf Coast / Florida

8. Ocean Express: 0.842 Bcfd, (AES)

9. Calypso: 0.83 Bcfd, (Tractebel)

10. Hackberry, LA: 1.5 Bcfd, (Sempra)

11. Port Pelican: .8 Bcfd, (Chevron Texaco)

12. Gulf of Mexico: 0.5 Bcfd, (El Paso) EnergyBridge

13. Gulf Landing: Gulf of Mexico, I Bcfd (Shell)

14. Main Pass Energy Hub, 1 Bcfd (McMoran Exploration)

15. Sabine Pass, TX: 1.5 Bcfd, (Cheniere LNG)

16. Sabine Pass, TX: 1.0 Bcfd (Exxon Mobil)

17. Freeport, TX: 1.5 Bcfd, (Freeport LNG/ Cheniere)

18. Corpus Christi, TX: 1.5 Bcfd, 2005± (Cheniere LNG)

19. Corpus Christi, TX: 1.0 Bcfd (Exxon Mobil)

20. Mobile, Alabama: 1.0 Bcfd (Exxon Mobil)

21. Liberty LNG, 1 Bcfd (Conversion Gas)

22. Altamira, Tamulipas: 0.7 Bcfd, (Shell/Total)

California / Baja

23. Offshore Ventura, CA, 1 Bcfd (Crystal Energy)

24. Tijuana Regional Energy: .750 Bcfd (Marathon)

25. Baja California: 1.0 Bcfd, (Sempra)

26. Baja California: 1.4 Bcfd, (Chevron Texaco)

Source: FERC and EIA

Since 1997, total gas consumption has been flat but the consumption by sector has changed

1997
2002
Source: EIA (excludes approximately 1.8 Tcf of lease, plant, and pipeline fuel)

Efficiency gains have offset market growth in the residential & commercial sector

Residential/Commercial Gas Consumption (Tcf)
Consumption/Customer (1987 = 100%)
Source: EIA

Higher prices have squeezed industrial consumers

Industrial Gas Consumption vs. Henry Hub Gas Price
Source: EIA, Platt's Gas Daily

Growth in gas fired electrical generation comprises the majority of demand increases

Electrical Generation Gas Consumption
Source: EIA

NPC projections for demand growth have been revised downward

North American Gas Consumption
Source: NPC

Pipeline infrastructure requirements are expected to remain high

"Pipeline and distribution investments...