1. Natural Gas: Balancing Supply, Demand and the Environment May 24, 2005 Bruce B. Henning (703) 528-1900 bhenning@eea-inc.com Framing the Natural Gas Issues Energy and Environmental Analysis, Inc. 1655 N. Fort Myer Drive Suite 600 Arlington, Virginia 22209

2. Energy and Environmental Analysis, Inc. 2 Contents u Background –The changing balance u Imperative to address high gas price –Natural gas utilities and pipelines –Energy efficiency community –National Environmental Trust and other environmental groups u Portfolio of options

3. Energy and Environmental Analysis, Inc. 3 Divergent trends in gas supply and demand have led to a tight balance between supply and demand, higher gas prices, and increased price volatility. TIGHT BALANCE EXPECTED TO CONTINUE The Changing Gas Balance Hurricane Ivan Relative Price Stability Price Spike Winter 2000-01 Rising Prices Winter 2002-03 Source: Platts Gas Daily Source: Energy and Environmental Analysis, Inc.

4. Energy and Environmental Analysis, Inc. 4 Gas Market Fundamentals: Gas Quantity And Price Equilibrium

5. Energy and Environmental Analysis, Inc. 5 Gas Price Response to Demand Shifts

6. Energy and Environmental Analysis, Inc. 6 Needed for Deliverability Replacement

7. Energy and Environmental Analysis, Inc. 7 u Gas consumption in the power sector will grow substantially. –Over 200 GW’s of new gas-based generating capacity in the U.S. will be used to satisfy increasing electric load. u Modest growth in R/C gas consumption. u Industrial gas consumption will fluctuate around current levels. –Well below pre-2000 levels. u When necessary, price- induced demand reductions will balance the market. The North American gas market may be best characterized as a “demand leads supply market” for the foreseeable future. Gas Demand Outlook Delta 2004-2025 +7.0 Tcf +1.1 Tcf +0.7 Tcf +1.3 Tcf +0.2 Tcf Delta 2004-2015 +5.7 Tcf +0.3 Tcf +0.4 Tcf +0.7 Tcf +0.2 Tcf

8. Energy and Environmental Analysis, Inc. 8 Projected Annual Average Henry Hub Gas Price Continued price pressure likely to persist for next few years. Long-term prices in parity with oil prices. Long-term oil price of about $35 per barrel (real$) assumed. Henry Hub gas prices will average between $5 and $7 per MMBtu - 1990 levels will not return. Sources: Historical data from Platts Gas Daily, Projection by Energy and Environmental Analysis, Inc.

9. Energy and Environmental Analysis, Inc. 9 Convergence of Interests u A diverse group of interests find it important to work to find mechanisms to address the fundamentals that are driving gas prices. –Consumer groups in all sectors. –Natural gas utilities and pipelines. –Energy efficiency research and advocacy groups. –Environmental groups that view gas as an important element of programs to improve air quality and address climate change.

10. Energy and Environmental Analysis, Inc. 10 Natural Gas & A Clean Air Future u High NG prices are negatively affecting clean air outcomes now and will do so in the future. –“Economic dispatch” policies led to a 400,000 ton increase in SO2 emissions last year from utilities. –More than 100 new “traditional” coal-fired power plants are under development. –Given current prices, coal – not NG - is expected to fill the void that will be created with impending nuclear unit retirement. –Future carbon reductions are far more difficult without increased reliance on NG for base-load electricity generation.

11. Energy and Environmental Analysis, Inc. 11 CO 2 & Electricity Production u Fossil plants - largest US source: 2.6 billion tpy, 40% of US & 10% of world total. u 1990-2001: 24% increase; economy as a whole posted a 16% increase. u DOE projects 41% additional increase by 2025. u Projected carbon growth does not include “CO 2 Jump” associated with nuclear unit retirements by 2025. u State-of-the art NGCC turbine produces 60% less CO 2 per unit of electricity produced. u CONCLUSION: NG needs to remain as a fuel option in a carbon-constrained future.

12. Energy and Environmental Analysis, Inc. 12 COAL'S KNOCKOUT BLOW TO KYOTO According to EIA and industry estimates, by 2012, expected cuts in greenhouse-gas emissions under the Kyoto treaty will be swamped by emissions from a surge of new coal-fired plants built in China, India, and the United States Prepared by National Environmental Trust

13. Energy and Environmental Analysis, Inc. 13 u Production from mature producing areas will decline by about 1% per year. u New frontier supplies will account for 44% and 53% of total U.S. and Canada gas supply in 2015 and 2025, respectively, versus only 20% today. Relying On New Frontiers Natural Gas Supply U.S. & Canada Gas Supply

14. Energy and Environmental Analysis, Inc. 14 “Abundant… But Potentially Costly” U.S. and Canada Gas Supply With today’s technologies, about 500 Tcf of supply remains to be developed at gas prices around $4 per MMBtu. Curves more elastic at $3, yielding a “support level” on gas prices.

15. Energy and Environmental Analysis, Inc. 15 Alaska Gas and (Not Or) LNG Imports Playing a Major Role Alaska Gas Pipeline LNG Imports and Alaska gas will provide about 30% of the U.S. and Canada’s gas supply by 2025. There would be little growth in supply without these new sources of supply. 4,000 MMcfd Added November 2014 4000 Alberta Alaska British Columbia U.S. & Canada LNG Imports, Bcfd LNG Imports Total 2.2 Bcfd by 2005, 16.3 Bcfd by 2015, and 24.7 Bcfd by 2025

16. Energy and Environmental Analysis, Inc. 16 World LNG Supply u Oil and gas producers throughout the world have proposed building as many 50 new liquefaction projects in the next five years. u About 6 Tcf per year or 16.5 Bcfd of liquefied gas is pointed toward U.S. markets at delivered prices under $4.50 per MMBtu.

17. Energy and Environmental Analysis, Inc. 17 The Fundamental Question Can Gas Supply Support a Growing Market? Yes! u Sufficient gas resource is available in North America and around the world. u These resources can be developed and delivered to the North American market at prices that will allow the gas demand to continue to grow. u But not without the construction of new facilities to access and deliver new frontier gas supplies. –Pipelines, storage, and LNG infrastructure. But what if the facilities are not built or delayed.

18. Energy and Environmental Analysis, Inc. 18 u Large Capital Requirements u Recent Liquidity Crunch u “Wall Street” Recognition of Opportunities u Price Volatility Creates Uncertainty There is much uncertainty about future gas supply development. Obstacles For Supply Growth u Uncertainty About Future Gas Demand u Access Restrictions u Cumbersome Approvals Process u Environmental and Siting Issues u Contracting Issues

19. Energy and Environmental Analysis, Inc. 19 u LNG imports will likely become the most important determinant of market conditions in the next 10 years. u Many different scenarios are possible: –“NIMBY Wins” - Existing terminals are expanded, but no new terminals are completed. –Base Case - Approximately 16 Bcfd of imports by 2015. –“Turbocharged LNG” - 10 Bcfd of LNG added to the Base Case by 2015. LNG Imports - A Wildcard

20. Energy and Environmental Analysis, Inc. 20 u Different levels of LNG import yield very different “worlds” over time. u Excessively high growth of LNG imports in the Gulf Coast may push gas prices at Henry Hub down toward $3 and push domestic supplies out of the market. –Gulf Coast infrastructure will be a constraining factor and localized price depression is likely in high import scenarios. u Little growth in LNG imports would constrain the market, keeping demand near today’s level and yielding $10+ gas at Henry Hub. –Expect healthy market growth in both the Base and Turbocharged cases. Gas Demand and Prices with Different Levels of LNG U.S. and Canada Gas Consumption Henry Hub Gas Prices

21. Energy and Environmental Analysis, Inc. 21 Role for Energy Efficiency u Supply solutions take years to come to market. u If modest increases in gas demand produced large price increases, then small decreases should produce large price reductions. u Efficiency energy and renewable energy can produce savings in both the near-term and longer- term.

22. Energy and Environmental Analysis, Inc. 22 Using EEA Natural Gas Model u EEA utilized as independent natural gas analysts. –Model used was also used for NPC Natural Gas studies, AGF 2020 study and INGAA Infrastructure studies. u Fully integrated natural gas market model incorporating supply, transmission, storage and consumption at 106 nodes. u Using July 2003 projection as base case. u ACEEE modified consumption and renewable penetration only – model handles other issues. (e.g., fuel switching, demand destruction, addition resource choices)

23. Energy and Environmental Analysis, Inc. 23 Gas Consumption Reductions from Energy Efficiency Source: ACEEE 2005

24. Energy and Environmental Analysis, Inc. 24 Impact of Energy Efficiency on Henry Hub Natural Gas Pricing Source: EEA 2004 and ACEEE 2005

25. Energy and Environmental Analysis, Inc. 25 Benefits and Costs from Reductions in Energy Expenditures 2004-2008 Total Benefits = $142,800 Million Total Investment and Program Costs = $22,441 Million Benefits Costs

26. Energy and Environmental Analysis, Inc. 26 American Gas Foundation: Natural Gas Outlook to 2020 Actual and Projected Natural Gas Prices (Henry Hub)

27. Energy and Environmental Analysis, Inc. 27 American Gas Foundation: Natural Gas Outlook to 2020 Study Implications u Under no scenario will natural gas markets return to the 80’s-90’s era of supply surplus and low, stable prices u Policy makers and industry decision makers need to act immediately u Failure to take action will lead to more instability and cost U.S. consumers billions of dollars in additional energy costs

28. Energy and Environmental Analysis, Inc. 28 u Gas supply/demand balance will remain tight. u Gas consumption is posed to grow, mostly as a result of growth in gas-based power generation. u “New frontier” gas supplies are necessary. u Supply development is likely to face many obstacles and will take time. u LNG imports will be an important determinant of gas prices. Key Findings u Energy efficiency and renewables can moderate gas prices if the technologies can be deployed. –Historically consumers have under-invested in efficiency. u A portfolio of “frontier” gas supply development and energy efficiency/renewable deployment provides the most effective relief from high gas prices. u In virtually all analyses of carbon constrained scenarios, natural gas demand is significantly above baseline levels. –Often 3 to 5 Tcf per year or more.