BP Interstate Municipal Gas Agency Natural

BP & Interstate Municipal Gas Agency Natural Gas Market Overview and Risk Management Discussion April 30 th, 2008

Market Overview

Market Overview • Near term supply outlook from traditional Canadian sources – Higher valued crude oil- NG staying home for syn-crude production • US Rockies and non-conventional supply availability set to grow – Significant supply growth in near term possible if pipeline capacity in place 1 bcf/day to Mid-Continent 1. 8/day to East Ohio in early 2009 – Tight sands/coal bed methane • LNG import capabilities growing, but must compete in global market – US market currently trading at a significant discount to Europe – Asian demand competing with Europe • Independence Hub shut-in currently 28 bcf, expected to reach 40 bcf • Economic conditions, both in the U. S. and Global demand, has driven money into commodities across the board – Demand destruction will be sector specific • Storage level slightly below 5 yr avg 1. 25 tcf, total storage capacity closer to 4 tcf now versus traditional 5 yr ago 3. 5 tcf • Drilling can shift more to oil vs. gas if oil price remains at a premium to nat gas

Market Overview Continued • Longer term supply outlook from traditional Canadian sources – Mc. Kenzie Delta Gas – Alaska delayed again (BP/Conoco. Phillips forge ahead with Denali) • Carbon Tax- Uncertainty around the use of coal in power generation – Longer term projects are turning to coal, due to uncertainty around tax and emission requirements associated with coal • LNG liquefaction capabilities growing, projects continue to be announced but delays – Questions around longer term geo-political stability surrounding LNG as a supply source

The Weak US$ Effect on Commodity Prices • • The US$ is trading at a greater and greater discount to other world currencies, (vs. Euro shown) As US currency weakens, commodities offer a hedge opportunity RH graph shows Euro/US$ exchange rate vs. CRB commodities index in gold Some effects of the weak US$ – Investment $$ move to commodities as hedge to currency risk – OPEC’s income is reduced, compelling to keep production low and increase price – Higher oil prices worsen US current account deficit, putting more downward pressure on dollar 5

Rigs vs. Henry Hub vs. Production Rigs August and September 2007 Forecasts from EIA STEO Bcfd & $US/MMbtu Sources: Baker Hughes, EIA

Canadian Supply: Rigs In Canada: • Service costs out of line with commodity price • Costs up 50% - 200% • E & P companies scale back 2007 gas drilling plans • Budgets diverted to higher return crude projects • Slowdown for service companies

Competing Fuel Prices

U. S. LNG Imports by Terminal Everett Cove Point Elba Island Lake Charles Energy Bridge Nymex currently trading at a significant discount to European gas Source: DOE, Office of Fossil Energy

Risk Management Discussion

What is Risk Management Unknown Prices in a Defined Range Known Risk Management is Trading Uncertainty for Certainty Strictly Confidential – for BP client use only

Risk Management with a Strategic Vision - Price risk management is best applied: Consistently Under guidelines of a corporate mandate With knowledge of the underlying market BP has the ability to equip you with the knowledge and information you need to formulate a long-term strategic risk management program, and the customized financial products you need to execute such a program.

A Framework for Energy Risk Mgt. Assess Corporate Risk Profile, Develop Policy Company Objectives: • Budgets • Cash Flow • Returns • Prudence • Volatility • Competitive Advantage Develop Market Outlook Quantify Risk • • Risks include Price Credit Operational Interest Rate FX Regulatory • • • Assess market factors Supply Demand Liquidity Other Market Factors Create Benchmarks And Review Develop Strategy Things to Consider • Product Types • Volume • Term • Liquidity • Flexibility • Internal Control • Contracts • • Define: Acceptable Benchmarks Assessment Criteria 13

Hedging Example- 3 Year Rolling Purchase Plan %of Hedge Volumes Hedged Cal 2009 Cal 2010 Cal 2011 Cal 2012 Cal 2013 By End of Month: Dec-2010 100% 50% 25% 0% Dec-2009 Dec-2008 100% 50% 25%

1/3/1/3 – 2/3 Portfolio Approach to Hedging In a Falling Market Fixed Price = loser Options = winner Index = winner 1/3 Fixed Price In a Rising Market Fixed Price = winner Options = winner Index = loser 1/3 Index Gas Requirements 1/3 Options *At all times you have 67% of the expected hedge volumes mitigated to the market, while 67% is participating in a falling market. 15

Financial Risk Management Discussion

Leading Energy Risk Management Provider Strictly Confidential – for BP client use only

Hedge Product Decision Matrix Price and Volatility can guide decisions as to which hedge product to apply. Strategy assumes an ongoing price risk management program and a market that has a mean-reverting nature: BUY SWAPS or ENHANCED COLLARS BUY CAPS Price Increasing BUY BASIS BALANCE PORTFOLIO: Execute underweighted Floor, Swap or Collar BUY COLLARS Increasing Volatility BUY SWAPS

Natural Gas Structured Products Winter (Nov 8 -Mar 9) Structure Examples- Nymex* NYMEX Swap Price Strike Price/Premium Costless Collar $11. 85 $10. 85 Put /$14. 00 Call $0. 00 Participating Swap 50% $11. 85 $13. 30 $0. 00 $11. 85 $9. 50 Put/ $11. 85 Call/$14. 25 Call $0. 00 3 -Way Collar-Leveraged $11. 85 Sell 2 x$8. 75 Put/ Buy 1 x $11. 40 Call/Sell 1 x $14. 00 Call $0. 00 ATM Call Spread $11. 85 Call /$13. 40 Call $0. 50 Call Spread-$. 50 of retention $11. 85 $12. 35 Call /$14. 25 Call $0. 50 $11. 85 $8. 50 Floor no upside protection NYMEX-$. 35 3 -Way Collar NYMEX Minus w/$8. 50 floor 19 Strictly Confidential – for BP client use only

Consumer Costless Collar- Nymex Nov 08 -Mar 09 Description Market Price Your Price Cap Floor End user limits their upside price exposure Commonly structured as value neutral Price Details Buy Cap / Sell Floor Current Market 11. 85 $14. 00 Cap Current Swap 11. 85/MMBtu $10. 85 Floor End user chooses a range: opportunity given on the downside is used to fund the cost of the upside price protection Scenarios ØIf market price is above $14. 00, end user pays $14. 00 ØIf market price is between $10. 85 and $14. 00, end user pays market ØIf market price is below $10. 85, end user pays $10. 85 20 Strictly Confidential – for BP client use only

50% Participating Swap- Nov 08 -Mar 09 ØDescription ØProvides price protection from rising prices while offering flexibility to participate in downside movements $13. 30/MMBtu Price ØDetails ØMaximum cost of gas known today ØCostless structure ØAbility to participate if market fundamentals change ØOnly receive 50% of downward market move ØCan set % of participation Market Price Current Swap $11. 85/MMBtu Your Price Time 50% volume Scenarios ØIf market price is above $13. 30, end user price is $13. 30 ØIf market price falls or stays below $13. 85, 50% of volume is priced at $13. 30 and remaining 50% priced at market 21 Trade Ideas Strictly Confidential – for BP client use only

Consumer Three-Way Collar- Nov 08 -Mar 09 Description Market Price End user limits their upside price exposure below a Costless Collar Your Price Cap 1 Cap 2 $ 14. 25 Sell Cap 1 $ 11. 85 Floor 1 Buy Cap 2 End user gives up protection in well above -market prices to gain a lower initial upside price protection Price End user participates in a range of downward price movements. Structured as value neutral. Details Sell Cap 1/ Buy Cap 2 / Sell Floor Current Swap $11. 85/MMBtu $9. 50 Sell Floor Current Swap is $11. 85 End user receives additional premium for selling a call which creates better initial range economics vs the costless collar Scenarios ØIf market price is above $14. 25, end user price is market price minus $2. 40 ØIf market price is between $11. 85 and $14. 25 end user pays $11. 85 ØIf market price is between $9. 50 and $11. 85, end user pays market price ØIf market price is below $9. 50, end user pays $9. 50 Trade Ideas 22 Strictly Confidential – for BP client use only

Leveraged- Consumer Three-Way Collar- Nov 08 -Mar 09 Description Market Price End user limits their upside price exposure below a Costless Collar Details Sell 1 x Cap 1/ Buy 1 x Cap 2 / Sell 2 x Floor Price Structured as value neutral. Cap 1 $ 14. 00 End user participates in a range of downward price movements. End user gives up protection in well above -market prices to gain a lower initial upside price protection Your Price Cap 2 Floor 1 Sell Cap 1 Current Swap $11. 85/MMBtu $ 11. 40 Buy Cap 2 $8. 75 Sell Floor Current Swap is $11. 85 End user receives additional premium for selling a call which creates better initial range economics vs the costless collar Scenarios ØIf market price is above $14. 00, end user price is market price minus $2. 60 ØIf market price is between $11. 40 and $14. 00 end user pays $11. 40 ØIf market price is between $8. 75 and $11. 40, end user pays market price ØIf market price is below $8. 75, end user pays $8. 75 on two times the volume Trade Ideas 23 Strictly Confidential – for BP client use only

At-the-Money Call Spread Nov 08 -Mar 09 Objective Ø End user limits their upside price exposure with protection starting at lower call strike Ø End user participates in all downward price movements. Ø Sell cap 1 $13. 40 Buy cap 2 $11. 85 End user gives up protection in well above-market prices to gain a lower initial upside price protection Current swap $11. 00 End user Collar Mechanics: Sell Cap 1/ Buy Cap 2 Ø End user pays $. 50 for coverage between $11. 85 and $13. 40 Scenarios ØIf market price is above $13. 40, end user price is market price minus $1. 55 ØIf market price is between $11. 85 and $13. 40 end user pays $11. 85 ØIf market price is below $11. 85, end user pays market price 24 Trade Ideas Strictly Confidential – for BP client use only

Call Spread w/$. 50 of Retention Nov 08 -Mar 09 Objective Ø End user limits their upside price exposure with protection starting at lower call strike Ø End user participates in all downward price movements. Ø Sell cap 1 $14. 25 Buy cap 2 $12. 35 End user gives up protection in well above-market prices to gain a lower initial upside price protection Current swap $11. 85 End user Collar Mechanics: Sell Cap 1/ Buy Cap 2 Ø End user pays $. 50 for coverage between $12. 35 and $14. 25 Scenarios ØIf market price is above $14. 25, end user price is market price minus $1. 90 ØIf market price is between $12. 35 and $14. 25 end user pays $12. 35 ØIf market price is below $12. 35, end user pays market price 25 Trade Ideas Strictly Confidential – for BP client use only

Risk Management Structures Delivered Transactions immediately executable from the Financial Products Desk: • Collar • Straddles • Swap • Basis Swap • Bounded Swap Collar • Index Swap • Range Forwards • Swing Swap • Participating Collar • Participating Swap • Three Way • European Call • Double Down • European Put • Extendable • Asian Call • Index w/Floor • Asian Put • Heat Rate Swaps & Options • Tiered Volume Restructure • Weather Contingent GD Option • Time Spread • Binary Options • Call Swaption • Put Swaption • Deferred Premium Structures Transactions are easily tailored for client needs: Varied volumes by period; Varied Strikes for month; Settlement adjustments; etc… 26 All structures are priced NPV per appropriate discounting per counterparty credit status