Natural Gas…At A Crossroads?

2 Commodities (before peak)

3 Commodities (to current)

4 Futures – Are They Accurate? " That's mathematics, son. You can argue with me, but you can't argue with figures.“ Foghorn Leghorn

Commodity Price Forecasts Qualitatively Quantitatively OilGas OilGas $90/bbl $6.50/mcf Cardinal Rule Of Price Forecasting Never Provide Both Price And Year At The Same Time! 5

6 Natural Gas Ample gas supply in almost any demand scenario – long term □ Shale gas 1 bcf/day net demand growth assumed Shale, Shale and more Shale Fewer rigs required (~1,500) Lower equilibrium natural gas price □ $6.20/mcf in 2010 □ $6.50/mcf in Implications for all energy subsectors/stocks

7 HUGEGAP NPC Study…Way Off Target

8 Shalemania – Shale is a Game Changer Long Term – ample gas supply □ Need fewer rigs in fewer places □ Shales will grow □ Everywhere else declines Near Term – “damn the torpedoes” □ Lot’s of drilling to hold acreage □ Uh Oh! Cliff ahead. Crude oil □ The Rod Tidwell of energy “You’re loving me now!” □ Lots of desire to “get oily”…but harder to accomplish

9 Why Shale? Meet GOM Shelf Production “I can hardly remember how I built my bankroll, but I can't stop thinking about the way I lost it." Mike….Rounders

Total Production Base Case Rig Count Production Forecast Production History 10 Only ~1,500 rigs needed to balance market longer term…shales and non-shales TPH Base Case Scenario: ~1,500 total rigs (1,100 gas) needed for 1 bcf/d long-term growth (down ~830 rigs from Q3’08 peak of 2,330 rigs) Falling supply stimulates gas prices and significant 2010 rig count increase (peaking at 1,640 rigs) Pullback (~120 rigs) starting in 2011 as market is oversupplied and prices move toward equilibrium of $6.50/mcf Shift to unconventional (shale) drilling likely displaces activity in other conventional basins…if US demand growth is limited to 1 bcf/d

Production History Shales –The Growth Engine Rig Count Production Forecast 11 Shale gas 12/08 □ Production = 8 bcf/d (12% of US) □ Rig Count = 357 rigs (18% of US) Shale gas 12/13 □ Production = 22 bcf/d (35% of US) □ Rig Count = 614 rigs (41% of US) Demonstrates dependence on shale gas to maintain/grow US supply as conventional production declines Betting on the turn…early in producing life of most shales. Long-term production profile is a big unknown Source: Rig Count = Rig Data Onshore/Baker Hughes Offshore, Production History = HPDI and EIA, Forecast = TPH Estimates Note: Wellhead production is wet gas. Rig count is total rig count gas/oil and onshore/offshore.

Production History Non-Shale Production Rig Count Production Forecast 12 Non-Shale gas 12/08 □ 56 bcf/d (88% of US) □ 1,600 rigs (82% of US) Non-Shale gas 12/13 □ 41bcf/d (66% of US) □ 900 rigs (59% of US)

Highly Technical – Revenge of the Nerds Horizontal Drilling – Orientation / optimum Length Completion – Hydraulic Fracture…can’t boilerplate □ Number of stages □ Slickwater vs. Gelled Fracs □ Proppant type Geology – Faulting, heterogeneity, seismic Don’t forget the reservoir engineer! □ Decline curve and recovery □ Well spacing/drainage area (ultimate recovery) □ Reservoir modeling is difficult  Natural fracture spacing orientation  Isotherm, gas-in-place, free gas porosity 13

14 Production Declining…but Less Than Expected

Damn the Torpedoes…Full Steam Ahead 15

Not Just Public Co’s Ignoring the Torpedoes 16

Natural Gas Demand Forecasting 1 bcf/d annual demand growth long-term from depressed 2009 levels Driver of growth is electricity sector with 0.7 bcf/d of annual demand increase. □ 2% annual GDP growth □ A 10% renewable standard is achieved by 2020 Industrial demand grows 0.3 bcf/d (~1.5%) annually from depressed 2009 levels □ Reversing long-term trend of declining industrial demand 17

GDP and % Renewables – Key Variables 18

Electricity is Gas Demand Driver 19

Industrial Demand Growth Ample gas supply and lower long-term gas prices, combined with GDP growth spurs industrial demand recovery 0.3 bcf/d (~1.5%) annual growth is from depressed 2009 levels If overall US natural gas demand is flat at current levels, we would expect equilibrium gas prices to average $5.50/mcf (vs. our base case of $6.50/mcf) 20

Existing Gas Flows…Go East Young Man? Rockies Supply Gulf Coast Supply Haynesville Eagle Ford Marcellus Appalachia Supply Source: Tudor, Pickering, Holt & Co. 21 According to the map we've only gone 4 inches. Harry Dumb and Dumber

10% IRR Marginal Cost Cumulative Rig Count 20% IRR 22 Long-Term Price Forecast Marginal cost curve shifts to the left as a higher percentage of the overall US drilling portfolio includes shale wells Our long-term gas price is $6.50/mcf "Ah! It's a profit deal! Navin Johnson The Jerk (Most Economic Basins)(Least Economic Basins)

23 Gas Supply Wild Cards Shale Performance Officer and a Gentleman □ “I got nowhere else to go” Gas Macro Variables □ LNG □ Renewables □ Canada Shales/Imports □ Demand High-Grading/Well efficiency Frac Regulations Infrastructure Build-Out

Midstream/MLP Sector Implications 24 Near term: Likely greater gathering and intrastate pipeline declines. Biggest impacts in 2H’09 and 1H’10 Opportunities for investment in shale play takeaway capacity and processing Narrowing of basis differentials across the board Lower gas prices and higher oil prices positive for domestic NGL business and processing utilization Longer term: some long-haul pipelines may be re-contracted at discounts or capacity utilization drops

Power Sector Implications 25 Stabilizing impact on power markets Enhances natural gas as obvious choice for next generation of supply Reduces attractiveness of renewable generation Provides a practical solution to reduced carbon

Final Thoughts Natural Gas – a $6.5/mcf commodity E&P’s acting like prices are already there...ugh Shales are a game changer □ But non-shales will set the marginal price of gas 26

27 Conclusion Formula for success: “Rise early, work hard, strike oil.” J. Paul Getty Note: Getty said “Oil”…not more shale gas!