METI Gas Market Research Committee March 8 th, 2001 Joseph P. Hirl President and CEO Enron Japan Corp.

2 Benefits of Gas Deregulation Japan and the global gas market. Japanese Market Issues US: - Cost Savings - Growing Infrastructure Spending - More Services for Consumers - Efficient Use of Capital - Stranded Costs Other Countries

3 LNG Trade Movements

4 Historic Imports - Bcm Turkey Taiwan South Korea Germany Belgium Italy USA Spain Japan France UK Demand

5 East Asia Takes Up 80% of LNG Imports The pie is growing—China and India expect to import LNG up to 40 MMTPA, or 5.3 BCF/Day by BCF/Day

6 Long Term Contracts in Place in 1998

7 Japanese Market Issues - Very few natural gas resources - Expensive cost structure - Need for infrastructure development - Limited customer options - No incentives to maximize use of capital

ResidentialCommercialIndustrialElectric Generation % -37% -48% $9.48 $6.62 $8.36 $5.27 $5.79 $3.04 $2.62 $5.00 U.S. Average Gas Prices by Sector 1985 vs (1999$/MMBTU) Benefits: Cost Savings in U.S.

9 Source: U.S. DOE Natural Gas Annual, and Natural Gas Monthly, May 2000 [Price savings x volume = total savings] Base $0.5 $11.3 $28.0 $43.9 $58.4 $71.7 $86.6 $99.9 $110.4 $122.9 $138.1 $145.9 $149.9 $163.2 $174.8 Total savings since 1984 U.S. Natural Gas City Gate Cost Decline 1999 (cumulative) US$Billions

10 Source: American Gas Association, Gas Facts, 1998 U.S. Natural Gas Distribution Company Construction Expenditures (cumulative) Construction spending has been growing 5% per year $2.2 $43.3 $37.9 $33.7 $29.4 $25.6 $21.8 $18.1 $14.1 $10.7 $7.7 $60.1 $55.6 $51.9 $47.5 $4.8 US$Billions

11 Source: U.S. DOE, Oct 1999 Natural Gas Monthly and Oil and Gas Journal Database. U.S. gas pipeline construction has been averaging $3.0 billion a year since 1985, adding $44.3 billion in capital spending U.S. Gas Pipeline Construction Expenditures (cumulative ) US$Billions $2.8 $9.3 $5.9 $12.0 $13.9 $17.1 $21.9 $25.6 $29.3 $34.2 $36.5 $31.7 $44.3 $40.8 $38.5

12 The Role of the Marketer  Physical  - Buy and sell gas Fixed price, Index, Exchange for Physical (“EFP”) Long term, monthly, daily, hourly  - Transportation optimization Arbitrage Capacity release Annual/Seasonal/Daily/Hourly service choice  - Storage Own either capacity or facilities Provide peaking / no-notice service  Financial - Risk management products  - Basis Swaps  - Fixed Float Index Swaps  - Gas Daily Swaps  - Options (Puts/Calls)  - Combination of physical assets tied to derivative transactions

13 Released Capacity Has Increased

14 Natural Gas Billions $ Mitigants: Absorption Competitive Pressure New outlets for stranded assets Deregulation created more options to solve stranded cost problem Transition Issues - Stranded Cost Reduction

15 Australia, U.K., and Canada trends as a result of gas reforms show investment and trade improvements:  Australia –Gas export revenues growing 35% per year –New gas power plant growth at 5 to 9% per year –Gas capital investments of over $6 billion, or $750 million per year –Significant increase in number of marketers providing services  England –Gas export revenues growing $200 million per year - - at 25% per year –Gas power plant investments of $1.2 billion per year –Gas pipeline investments averaging $1.0 billion per year  Canada –Gas export revenues growing 34% per year –New gas power plant growth at 9% per year –Gas pipeline capital investments averaging $1.65 billion per year –Gas distribution investments averaging $700 million per year Trends Observed in Other Countries Adopting Market Reforms

16 Promoting Competition Open Access to Facilities Capacity Release Program Infrastructure Development Separation of Accounting Transparency Strong Regulator

17 Merchant LNG Trade

18 Capacity Release  Shippers may manage their firm capacity rights by releasing all or a portion of their pipeline capacity on a temporary or permanent basis.  Releases of greater than 30 days have to be posted and put up for bid. Releases of less than 30 days (“pre-arranged releases”) do not have to be put up for bid.  Existing regulations cap the amount Shippers may receive for released capacity equal to the pipeline’s maximum tariff rate.*  Released capacity competes with pipeline firm and interruptible transportation services. * Order 637 removes the cap on short-term releases for a 2-year experimental period.

19 There are: 110 Interstate Pipelines 190,000+miles of Transmission Lines Source: James Tobin, EIA, NARUC Winter Conference February 1999 Vast Network of Interstate Pipelines Serves the US

20 Limited contact producers and users One service, one price Heavily regulated, tariff driven Fragmented industry, traditional players, rigid system Old Market focus Multiple service and pricing Deregulated supply, “contractibility” Industry realignment, new players (aggregators) flexible system Future ProducerPipeline Local Distribution Company End User “Diverse Choices” ProducerPipeline Local Distribution Company IndustrialCommercialResidential Financial Guarantors “No Choice” “Closed” vs. “Open” Market Marketer

21 Japan Observations  By establishing a regulatory framework to foster domestic competition and the integration of the national gas infrastructure, the country has the opportunity to be a leading force in the reshaping of the global LNG industry.  Implementing open-access regulation for the terminals and gas transmission and distribution will lead to increased competition by attracting new participants.  Capacity release is an important feature of a deregulated market, as it ensures that existing assets are utilised efficiently.  Liberalisation, and the use of private capital, is the optimal way of efficiently developing and managing infrastructure.  At the very least, accounting must be separated to ensure that fair competition is able to develop without fear of cross-subsidisation. No transparency means no new entrant confidence, which means no infrastructure development.  Ongoing independent and proactive implementation of clearly defined objectives by the regulator is crucial to promoting a healthy competitive industry.

22 Natural Gas Act Phillips Decision Natural Gas Policy Act FERC Order No. 436 Wellhead Decontrol Act FERC Order No FERC Order No. 637 History of U.S. Natural Gas Regulation

23  Restructuring of Interstate Transmission happened in two stages: –Open Access (Order No. 436) required pipelines to transport third- party gas. (FERC remained concerned that pipeline sales service still had an advantage over transportation of third-party gas) –Unbundling (Order No. 636) unbundled pipeline sales and transportation functions  FERC Order 637 was recently adopted to refine regulation based on experiences since Order No. 636 Stages of Gas Restructuring in U.S.

24  Unbundled pipeline transportation and merchant function.  Requires pipeline to provide open-access transportation and storage service in a nondiscriminatory manner.  Requires pipelines to provide shippers with equal and timely access to information relevant to the availability of open-access services (Company Website).  Allows pipeline recovery of transition costs as a result of Order 636.  Pipelines must implement a capacity release program. Major Provisions of Order 636