The North American Gas Market for the Winter

The North American Gas Market for the Winter, 2005 and Beyond - The Struggle for Supply Edward M. Kelly Vice President, North American Natural Gas and Power IPAA Annual Meeting Austin October 26, 2004 www. woodmac. com

Page 2 The Natural Gas Market Paradox 2003 - 2005: t Bulging Storage Inventories t Growing Wellhead Supplies t Growing Imports NATURALLY LEAD TO …. . . www. woodmac. com

Page 3 The Natural Gas Market Paradox …. . NEAR RECORD PRICES www. woodmac. com

Page 4 The Natural Gas Market Paradox 2006 - 2010: t Struggling Supplies t Building Demand Pressure NATURALLY LEAD TO …. . . www. woodmac. com

Page 5 The Natural Gas Market Paradox …. . Moderating Prices www. woodmac. com

Page 6 Unravelling the Market Paradox 2004 and 2005: 2006 - 2010 t Record Oil Prices t Moderating Oil Price t Strong Economic Growth t Levelling Off of Economic Growth t Geopolitical Instability t Financial Speculation t LNG and Mexico Supplies t Canadian Frontier Supplies www. woodmac. com

Page 7 North American Supply: The Worst Fears are Unfounded t US Supply rebound in 2004 and 2005 driven by Deepwater and Rocky Mountains increases t Maintaining US supply becomes a challenge as Deepwater supplies decline from 2006 US Unconventional Supplies t US support from higher cost unconventional supplies t Continued technology improvement crucial to realizing potential www. woodmac. com

Page 8 United States Supply (excl. Alaska) t In the US, an overall flat supply profile through 2010 masks significant regional change t Gulf of Mexico, Gulf Coast and Mid-Continent all exhibit marked production decline. . . t …but offset by strong growth from the Rocky Mountains www. woodmac. com

Page 9 US Unconventional - The New Conventional t In the US, the threat posed by declining Production from mature basins is partially offset by increasing, higher-cost unconventional supplies t Gas production from tight sands and coalbeds shows strong growth www. woodmac. com

Page 10 Rocky Mountains - Key to US Supply Support t Focus area for many companies for a variety of reasons t Highest production growth potential in US Lower 48 - but not without risks t Expect more proactive pipeline development in contrast to boom/bust 1990 s www. woodmac. com

Page 11 Rocky Mountains Unconventional Once Again Key t CBM and tight gas plays will drive production growth in the region www. woodmac. com

Page 12 Canada and Mexico Supply t Holds up despite decline in traditional Alberta supplies t Following a rebound in production during 2004 and 2005, production flattens as increased activity is only sufficient to offset declines in existing production t CBM and development of deeper gas prospects in north and west of Basin plus British Columbia t Mexican supply is an important wild card t Without change in constitution and limited success on the MSC program, gas to market is expected to reach around 3. 8 bcfd in 2010 t This supply growth slightly outpaces demand growth after 2005 t By 2010, LNG imports of 900 mmcfd (main grid) lead to exports to US of more than 500 mmcfd www. woodmac. com

Page 13 LNG & Arctic Projects - will not materialize quickly, and will lag demand pressure, not relieve it. Any phase of price weakness likely transitory. t Mackenzie Delta supplies are expected to connect to the Alberta gas grid in 2009, building to flows of 800 mmcfd by 2010. This date may slip. t By 2005, summer LNG deliveries are constrained by available regas capacity. t The first greenfield US LNG regas facilities have been expected to come online in 2007, but for this to occur construction must begin soon. One Gulf Coast facility and one Baja facility could begin importing LNG that year. t LNG regas capacity and liquefaction capacity grow in step, with import volumes increasing to 6. 1 bcfd in 2010 t Alaskan supplies could still reach the North American gas grid in 2014, but that date is now slipping, and delays could push in-service back years. www. woodmac. com

Page 14 Domestic Supply is now Stable and Imports are Up t Domestic supply has stabilized t High rig counts took hold last year and are providing some support Year-over-year change in US Production and Net Imports (bcfd) t Seven new deepwater fields came online May-July, and Mars production resumed t Devils Tower - oil (& gas) field onstream May 2004 - due to ramp up to 90 mmcfd by Q 1 2005 Ivan Delay t Coulomb - gas field - onstream June 23 2004 - due to ramp up to c. 200 mmcfd in Q 3 2004 t Red Hawk - gas/cond field - onstream July 19 2004 - due to ramp up to 120 mmcfd by Aug 2004 t Marco Polo - oil (& gas) field - onstream July 2004 - due to ramp up to 60 mmcfd in early 2005 t Glider - oil (& gas) field - onstream July 20 2004 - due to ramp up to 35 mmcfd in aug 2004 t Tomahawk and Raptor - gas fields onstream June 16 2004 www. woodmac. com

Page 15 Wood Mackenzie’s WTI Oil Price Outlook: The Market Slowly Stabilizes, but Politics Still Rules Nominal $ t t t t 2003 2004 2005 2006 2007 2008 2009 2010 2004 $ $31. 10 $40. 97 $38. 50 $28. 00 $31. 72 $39. 96 $37. 75 $26. 91 $26. 39 $25. 87 $25. 36 $24. 86 www. woodmac. com

Page 16 Winter LNG market looks tight, but in 2005 Growth Resumes t No major liquefaction projects came online during 2004 Net LNG Imports t Global players are starting to grow into contracted positions t Warm European weather last winter helped support US imports t Cargo availability will increase through 2005 as new Atlantic Basin Projects come online. www. woodmac. com

Page 17 A Constrained Market Forecast Features New Assumptions Storage Inventories t Higher Withdrawal Season Storage Expectations t Cautious early season storage withdrawals t Early colder than normal weather, or forecasts will push gas prices up toward distillate fuel oil t Potential for Feb, Mar price weakness given expected inventory minimum of near 1, 200 Bcf t Wide potential range and high volatility in Feb and Mar prices t Production, LNG increase support strong 2005 injections www. woodmac. com

Page 18 Henry Hub Spot Price Outlook www. woodmac. com

Page 19 NA LNG Regas terminals and Proposals www. woodmac. com Source: Wood Mackenzie - Global LNG Online Service

Page 20 Forecasted imports t LNG into North America will not ä “Set the US Gas Price ä Provide a ceiling for US gas prices ä Flood the US gas price ä Single handily address the US gas supply shortfall t LNG into North America will ä Be “somewhat” responsive to the US market price - depends on spot cargoes available ä Provide a critical increment to US supply ä Dampen basis in specific areas close to landing points ä Offer a midstream opportunity * As taken from Wood Mackenzie’s revised Multi-Client study: “Falling Short: The Growing Challenge to Supply the North American Natural Gas Market through 2010” www. woodmac. com

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Page 23 The High Plateau: North America Sustains New Heights Henry Hub $2004 dollars 2003 - $5. 59 2004 - $5. 98 2005 - $5. 47 t. Oil price declines t. LNG Development t. Mexico Reversal t. Mackenzie Delta 2006 - $4. 65 2007 - $4. 78 2008 - $4. 66 2009 - $4. 45 2010 - $4. 30 www. woodmac. com

Page 24 The Gas/Oil Price Relationship— Linkages Continue www. woodmac. com

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