Operations Conference May 22, 2015 Climate Change & Emission Reductions: Risks and Opportunities for Natural Gas Bringing it Home

Pipeline Safety Initiatives are Driving Natural Gas Emissions Down Safe and Reliable Gas Delivery is Core Business of Natural Gas Utilities Pipeline Safety Initiatives are Driving Natural Gas Emissions Down EPA Seeking Reductions in CO2 and Methane AGA: Focused on Data Driven Decisions & Practical Solutions [First – make points] Long day – and some of us may be sagging after all the fun we had last night - get you up and moving and learn who is in the room Straw poll First, do I have any press in the room? Raise your hand if you have responsibility over environmental compliance or policy. – Now, who believes our climate is changing or at least might be changing ? – raise your hands Ok – stand up if you think carbon dioxide and methane emissions from human activities are contributing? And of those who aren’t sure, or who definitely think there is no global warming or climate change going on – i.e. if you are still sitting down – raise your hand if you think political pressures could require our industry to reduce the amount of methane emitted from natural gas production, transmission and distribution systems?

I. Methane Context - Why methane reductions? Baseline – How much do we emit? Reductions – Voluntary or Rule?

Context: Natural gas systems represent a small share of annual GHGs Even though methane emissions from the natural gas value chain are a relatively small part of the pie, this is still important to address because it affects the perceived value of our product: natural gas. (Dr. Ramon Alvarez study – 3.2%, 1.4%, 1%) So it is important to get the facts straight. AGA has been advocating for fact based decisions, and we are working to get the facts through peer-reviewed, scientifically sound studies. The U.S. natural gas system is comprised of thousands of well and drilling rigs, well completion equipment, numerous processing facilities, trillions of cubic feet of underground storage capacity, millions of meters, and an extensive transmission and distribution network comprised of 2.4 million miles of pipeline. EPA categorizes the natural gas system into four distinct stages: production, processing, transmission and storage, and distribution. Methane and, to a lesser extent, CO2 are two the principal emissions related to the operation of natural gas systems. Methane emissions from natural gas systems represent the second largest source category for methane in the United States, constituting 23 percent of all methane released. In 2012, natural gas system methane emissions equaled 130 MMTe or 2.0 percent of total U.S. greenhouse gases. Source: Inventory of U.S. Greenhouse Gas Emissions and Sinks 1990-2012, Environmental Protection Agency

Methane is the second largest contributor to greenhouse gas emissions after CO2. Major economic sectors that produce methane emissions are agricultural processes including livestock management and rice cultivation, and natural gas systems. Other major contributors include landfills, petroleum production, and coal mining. In 2012, methane emissions were 567 MMTe and accounted for 9 percent of all U.S. GHG emissions.  

Technological advances, industry best practices, and infrastructure investment… add up to a declining emissions trend Stage 1990 2005 2007 2008 2009 2010 2011 Field Production 60.8 75.5 83.1 76.4 61.9 57.2 53.4 Processing 17.9 14.2 15.2 15.9 17.5 16.5 19.6 Transmission and Storage 49.2 39.5 40.8 41.2 42.4 41.6 43.8 Distribution 33.4 29.8 29.3 29.9 28.9 28.3 27.9 Total 161.2 159.0 168.4 163.4 150.7 143.6 144.7 EPA Estimates of Natural Gas System Methane Emissions Show a Continued Decline Source: Inventory of U.S. Greenhouse Gas Emissions and Sinks 1990-2012, Environmental Protection Agency

Emissions Have Declined Even as Pipeline Miles Have Grown Source: AGA Analysis based on Department of Transportation data and EPA Inventory of U.S. Greenhouse Gas Emissions and Sinks 1990-2012

Baseline Emissions How much to we emit? And why does it matter?

Natural Gas is a Climate Solution – But Do We Need to Reduce Emissions More? 2012 Study by Dr. Ramon Alvarez: Switching to natural gas provides immediate climate benefits - IF methane emissions – 3.2 % - Power Plants – Coal to Nat Gas 1.4% - Light Duty Vehicles – Gasoline to Nat Gas 1% - Heavy Duty Vehicles EPA Inventory: Methane already down to 1.2% of annual production… and we think it is actually lower

Emissions Leakage Rates Only 0.24% of produced natural gas is emitted from systems operated by natural gas utilities Production 130 Bcf 0.41% Processing 122 Bcf 0.38% Transmission & Storage 84 Bcf 0.27% Approximately 1.2% of gross natural gas production is estimated to be emitted throughout the supply chain. Distribution 66 Bcf 0.24% Source: U.S. Department of Energy and U.S. Environmental Protection Agency

EPA Inventory Annual Inventory of Greenhouse Gas Emissions in the U.S. (April 15, 2015) covers emissions 1990-2013 Emissions from entire natural gas value chain in 2013 = 1.2% of annual produced natural gas Of this – only 0.24% of produced natural gas was emitted from distribution systems Estimates are based on 20-year old emission factors for plastic pipe, cast iron, bare steel, etc. Newer data show distribution system emissions are actually much lower than EPA estimates

Are EPA’s Numbers Too High? Yes We think EPA’s Inventory numbers are too high – based on 20-year old emission factors “Bottom-up” studies – Measure emissions directly from specific sources Multiply average measured emissions times number of widgets or miles of pipe to estimate overall emissions Environmental Defense Fund (EDF) Methane Studies: Production: Texas University (TU)- EDF Production study published Sept. 2013 – emissions from well completions much lower than EPA estimated Partly offset by higher emissions from pneumatic valves Net result somewhat lower than EPA Inventory estimate Distribution: Washington State University (WSU) – EDF Multi-City Distribution Study – Distribution emissions up to 70% lower than EPA’s estimate

How much to we emit? Reconciling the Gap “Bottom-up” Studies - Measure Measurements of Methane Flow Rates from Equipment – Examples: EPA Inventory based on GRI 1992 Study Washington State University (WSU)-EDF March 2015 Study Emissions 1.2 percent of annual production “Top-Down” Studies - Measure Methane Concentrations in Atmosphere – from planes, towers, or cars Harvard Boston Study Jan. 2015 EDF-Google Car Methane Mapping – Los Angeles May 2015 Claim Emissions 2-3 times larger than EPA Inventory (2-3% of annual production over value chain)

Top-Down/Bottom-Up Reconciliation

EDF COORDINATED STUDIES BY SUPPLY CHAIN SEGMENT 1. NOAA Denver-Julesberg 2. NOAA Barnett 3. Coordinated Campaign 4. UT Phase 1 7. CSU Study 8. CSU Study 11. WSU Multi-City 9. Methane Mapping 10. Boston Study 12. Indianapolis Study 13. WVU Study 5. UT Phase 2 6. HARC/EPA Results public Submitted, not yet public Not yet submitted 14. Pilot Project 15. Gap Filling 16. Project Synthesis

Methane Reductions Voluntary? Or By Rule?

EPA Methane Rules & Programs January 2015 - White House announced path forward for reducing methane from on oil and gas: Mandatory regulations for upstream and midstream sources – Focusing on equipment evaluated in 2014 Technical White Papers: New Source Performance Standards (NSPS) Control Techniques Guidelines (CTG) for Existing Sources Rule Schedule: Proposal: Summer 2015 Final: Spring 2016 Distribution – Voluntary only Expanded Voluntary Natural Gas STAR Program

EPA Voluntary Methane Program – Enhanced Gas STAR Proposal EPA went back to drawing board after Gold Star proposal failed Two alternative frameworks under consideration Best Practices Approach Percentage Reduction Approach EPA likely to propose allowing companies to choose the approach they prefer – Proposal expected in June 2015 EPA to run Best Practices Approach: Company would commit to apply at least one “Best Practice” across its operations (for gas utility – within any one state) – by 2025 E.g. replace x percent of cast iron pipe by 2025 Early Actors Rewarded – e.g. qualify immediately if already replaced all or most cast iron or unprotected steel main

EPA Voluntary Program – Enhanced Gas STAR Proposal “One Future” Would Run Percentage Reduction Approach: Consortium of companies working to reduce emissions from value chain by 30% - from 1.2 Percent to 1 Percent or less of annual production – Goal for Distribution Sector would be about 0.2% of throughput Two options likely within this second approach: By 2025, reduce company’s emissions intensity to the goal for the sector – e.g. 0.2% of a distribution company’s throughput. OR By 2025, reduce company’s emissions intensity by 30 percent from the company’s current baseline (e.g. if 0.4% currently, reduce to 0.28% of annual throughput)

II. C02 Reductions EPA Rules for Power Plants New & Existing NSPS for New Power Plants 111(d) Rule for Existing Plants

EPA Rule for New Power Plants Final Rule this summer Authority: Clean Air Act section 111(b) New Source Performance Standard (NSPS) Based on performance of Natural Gas Combined Cycle

Existing Power Plant Rule Authority: Clean Air Act section 111(d) When EPA issues NSPS for a pollutant not covered by National Ambient Air Quality Standards, State Implementation Plans (SIPs) or other provisions for existing sources – Section 111(d): EPA to develop Guidelines for State Plans – Similar to SIP process- using the “best system of emission reduction” (BSER)

Existing Power Plant Rule June 18, 2014 Proposed Rule would establish emission reduction goals for each state based on the “best system of emission reduction” (BSER) considering costs and other factors Goals set based on four “building blocks” Increasing the thermal efficiency of coal fired power plants by 6% Increase level of use (dispatch) of existing natural gas combined cycle (NGCC) plants Increase the market penetration of zero-carbon electricity sources – renewables & nuclear) Reduce growth in electricity demand through end use energy efficiency programs

Existing Power Plant Rule Important: EPA proposed to allow states flexibility to achieve goals Not limited to the four building blocks So can use e.g. Natural Gas Combined Heat and Power (CHP) or Replacing electric water heaters with Natural Gas – Direct Use

EPA Proposed 111(d) CO2 Rule for Existing Power Plants AGA did not comment on how to set the state emission reduction goals AGA has advocated for flexible compliance options: Natural gas not just for power plants Reduce cost by looking outside the fence for compliance: Demand side management Renewable Energy, and yes… Natural Gas for homes and businesses Natural gas used for direct thermal load heating water and space Cuts net CO2 emissions by 50% on average AGA developing “Tool Kit” to help members show states how to use natural gas Combined Heat and Power (CHP) and “Direct Use” to reduce emissions from existing power plants

CONCLUSION AGA is navigating the risks and opportunities of climate policy for its members – Seeking recognition for the strong environmental value of natural gas as a foundation for a clean energy economy.

Find Us Online Pamela A. Lacey Senior Managing Counsel, Environment placey@aga.org 202.824.7340 Find Us Online www.aga.org www.truebluenaturalgas.org http://twitter.com/AGA_naturalgas www.facebook.com/naturalgas www.linkedin.com/company/50905?trk=tyah