MACRUC’s Annual Education Conference June 3, 2008 Kevin R. Petak Vice President, Gas Market Modeling ICF International The Promising Future for Natural Gas - Based on ICF’s April 2008 Base Case -

2 Disclaimer This presentation provides the views of ICF International. The presentation includes forward-looking statements and projections. ICF has made every reasonable effort to ensure that the information and assumptions on which these statements and projections are based are current, reasonable, and complete. However, a variety of factors could cause actual market results to differ materially from the projections, anticipated results or other expectations expressed in this presentation.

3 Contents  Near-Term Market Outlook - High and Volatile Prices Expected  Gas Demand – Growth in the Foreseeable Future  Gas Supply – Many Opportunities  Gas Transmission and Storage – A Rapidly Changing Picture  Long-Term Gas Prices – High Prices Expected to Continue  Final Observations  Overview of Gas Disruption Analysis Effort for DOE

4 Divergent trends in gas supply and demand have led to a tight balance between supply and demand, higher gas prices, and increased price volatility since the 1990’s. TIGHT BALANCE EXPECTED TO CONTINUE The Natural Gas Balance Relative Price Stability Price Spike Winter Rising Prices Source for Historic Data: Platts Gas Daily Hurricane Ivan Lower-48 Dry Gas Production Vs. Dry Gas Capacity (Bcfd) Hurricanes Katrina & Rita

5 Gas Storage Trends The fundamentally tight balance between supply and demand remains in place.

6 U.S. Gas Supply/Demand Balance (Billion Cubic Feet per day) 1. Projected results assume normal weather, and no significant hurricane disruptions of gas production.

Near-term Natural Gas Prices – ICF’s Base Case Versus NYMEX Futures

8 Significant Price Volatility is Likely to Continue Changes in weather shift daily demand, causing wide swings in gas prices. Significant price volatility creates uncertainties for planners. Henry Hub Price Distribution for Jan – Dec. 2008

9  No, recent events have bolstered our views!  North American gas supply/demand balance still tight, and expected to stay that way. –Demand curve still shifting to the right, placing pressure on supply, supporting relatively high gas prices.  Observations: –The best means of bringing the market into better balance in the near term are efficiency and conservation. –In the longer term, new supply is needed and is being developed. Have Our Views Changed as a Result of Recent Market Events?

10 Important Demand Assumptions in Our Projection  U.S. and Canada economic activity continues at levels consistent with levels observed during the past 20 years. –A slowing economy yields 1.2% growth for U.S. GDP in 2008, but the economy is assumed to bounce back to 3.0% growth next year and remains at that level thereafter.  Carbon policy, ala McCain-Lieberman, is enacted. –Impacts of Lieberman-Warner would be much more stringent, resulting in even greater gas use than we project.  Adoption of DSM programs and conservation and efficiency trends continue, consistent with recent history. –No assumed policies that create additional DSM, conservation, and efficiency beyond those currently in place.

11  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.  Other sectors grow as a result of growth in input factors (i.e., GDP, disposable income, population, and industrial activity).  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 U.S. & Canada Gas Consumption (Billion cubic feet per day, Bcf/d)

12  1.9% growth per year in electric load drives the total generation requirement.  Gas-based power generation grows most during the next 15 years.  Penetration of gas- based generation will slow after 2020 as new clean coal units, renewable capacity, and some new nuclear units enter the market. Gas Generation as Percent of Total Generation 2006: 20% 2017: 26% 2030: 23% U.S. Power Generation Outlook

Source: Fixed-supply-demand.xls tab: Powergen_Demand 13 Even Without Carbon Policy, U.S. Gas Demand Growth Will Be Strong Source: Scenarios from ICF 2007 Multi-Client Study

14 Projected Gas Use for Different Areas (Bcfd) Area 1Area 2 Area 3 Area 4Area Bcfd by % by Bcfd by % by Bcfd by % by Bcfd by % by Bcfd by % by 2015

15 Summary of Gas Demand  Significant growth expected, particularly in the power sector.  Growth will occur with or without carbon policy, but greater growth is expected with carbon policy.  Growth outside of power sector will be more modest. DSM, conservation, and efficiency will limit opportunities for growth.  Growth east of the Mississippi will be stronger than western growth.

16 Important Supply Assumptions in Our Projection  Oil prices are consistent with futures market prices from a month ago in the near term, and are extrapolated from the futures market in the longer term.  About 270 Tcf of gas reserves and over 1,600 Tcf of gas resource remain in the U.S. and Canada.  Future E&P costs continue at levels consistent with today’s levels.  Robust global trade of LNG develops in the longer term. Countries continue to develop liquefaction for stranded gas reserves.  Alaskan and Mackenzie Delta gas is developed within the next 15 years.

17  Production from mature producing areas will decline.  New frontier supplies will account for 40% of total U.S. and Canada gas supply in 2015, 50% in 2025, and 51% in 2030 versus only 25% today. Natural Gas Supply Relying On New Frontiers U.S. & Canada Gas Supply (Bcf per day) 40% 25% 60% 49% 50% 75% 51%

18 Conventional versus Unconventional Production (Bcf per day)

19 Conventional Production (Bcf per day)

20 Unconventional Production (Bcf per day)

21 Regional Gas Supply (Bcf/d) LNG to the rescue! LNG to the rescue! The Rocky Mountain Basins continue to shine. The Rocky Mountain Basins continue to shine. Alaska always 10 years out- but needed. Alaska always 10 years out- but needed. Alaska West Canada North American Total Production East Central/ Midwest Gulf Offshore LNG 1 1) U.S. and Canadian LNG Imports Only (Mexican imports not included.) Canada declines even with MacKenzie Delta, coalbed methane, and some shale production. Shale production boosts the Midcontinent. Gas Supply CAN support a growing market, but “new frontier” supplies and additional infrastructure are required. Gulf / Midcon

22 LNG Imports will provide about 10% of U.S. and Canadian gas supplies by North American LNG Imports, Bcfd LNG Imports Total 2.4 Bcfd in 2007, 7.0 Bcfd by 2015, and 13.6 Bcfd by 2030 North American LNG Imports

23 Summary of Gas Supply  Significant growth expected, satisfying the levels of demand in our projection.  North America’s conventional gas production declines significantly, but increases in unconventional production offset the decline.  Incremental LNG imports and Arctic gas are necessary to foster growth in the market. Otherwise, the total market may not grow by much in the next 20 years.  Growth in gas production from shales and from the Rocky Mountains will increase the west to east push of gas.

24 Important Gas Transmission Assumptions in Our Projection  Gas pipeline projects included according to project plans. –We apply some judgment on the timing and sizing.  Model moves gas based on opportunity costs or the marginal values for transmission. Transmission patterns are a result of supply and demand evolution. –Regional basis increases as load factor rises.  Generic pipeline projects added when regional basis exceeds the costs for expansion on a unit basis.

25 Changes in Gas Flow in MMcfd, 2007 to Western Canada to West Coast -2,800 Western Canada East-Bound +1,400 Rockies West-Bound +2,400 Rockies East-Bound -500 From West Texas +1,700 To Midwest +2,200 To East Coast +1,650 To Florida +600* From Costa Azul LNG * Net change in flow, as Baja shifts from being a net importer to a net exporter of gas.

Cypress Express 0.31 Bcfd 2007 Elba Express 1.2 Bcfd 2010 KM Louisiana PL 2.1 Bcfd 2010 Texas Gas Fayetteville Lateral 0.8 Bcfd Bcfd 2012 Texas Gas Greenville Lateral 0.4 Bcfd 2009 Boardwalk Gulf Crossing 1.5 Bcfd 2008 Gulf South (SEP) 1.2 Bcfd 2008 CenterPoint (SESH) 1.0 Bcfd 2008 Sabine Pass & Creole Trail 2.6 Bcfd 2008 Independence Trail 1.0 Bcfd 2007 Energy Transfer Barnett-Texoma 0.7 Bcfd 2007 North Paris Loop 0.7 Bcfd 2008 SE Bossier 0.95 Bcfd 2008 ExxonMobil Golden Pass 2.5 Bcfd 2009 Midcontinent Express 1.5 Bcfd 2009 CenterPoint Carthage to Perryville 1.46 Bcfd 2007 Interstate Pipeline Projects Connecting New Supply with Markets A large amount of new pipeline capacity is being built – projects shown total over 20 Bcfd. Kinder Morgan Rockies Express 1.8 Bcfd 2008/09 Boardwalk Gulf South East Texas to Mississippi 1.7 Bcfd 2008 Enterprise Sherman Extension 1.1 Bcfd Enbridge East Texas 0.7 Bcfd 2007 Gulfstream Phase Bcfd 2009 Markwest Arkoma Connector 0.63 Bcfd 2009 Southern Star Highland Trails 1.0 Bcfd 2010

27  Greatest increases in supply are from the Rockies, the Midcontinent shales, and imported LNG.  Exports from Western Canada to the Lower- 48 are down due to declining production and increased gas consumption in Western Canada.  U.S and Canada LNG imports increase to about 5.9 Bcfd by New Gas Supplies Affect Regional Flow Patterns Lower-48 Net imports from Canada down by about 4.8 Bcfd from 2007 to Increased gas use in Western Canada dominates the trends

28  Greatest increases in supply are from the Rockies, the Midcontinent shales, and imported LNG.  Exports from Western Canada to the Lower- 48 are down about 0.3 Bcfd, even with 7 Bcfd of Alaskan and Canadian Arctic gas development.  U.S and Canada LNG imports increase to close to 10.5 Bcfd by New Gas Supplies Affect Regional Flow Patterns Lower 48 net imports from Canada down about 2.3 Bcfd from 2007 to 2030.

29 Summary of Gas Transmission and Storage  Eastward flows out of the Rockies and the Midcontinent and Gulf Coast increase significantly in our projection.  Flows out of Western Canada decline significantly.  A number of pipelines will experience an increase in value due to the supply push from the Midcontinent Shales and the demand pull from Eastern states.

30 Important Gas Price Assumptions in Our Projection  Gas prices are the result of the balance between supply and demand over time.  Oil price affects gas prices. Near-term oil prices are consistent with those observed in the futures market about a month ago. Longer term oil prices are extrapolated from the futures market.  Regional prices reflect the opportunity costs or marginal value of moving gas between regions.

31 Projected Annual Average Henry Hub Price ($ per MMBtu) Sources: Historical data from Platts Gas Daily and EIA Natural Gas Distillate WTI Residual Oil Rockies and Midcontinent Shale Production Long-term gas prices in parity with oil prices. Henry Hub gas prices average $10 per MMBtu in our projection.

32 Final Observations  Natural gas consumption is likely to grow significantly, particularly east of the Mississippi. –Power generation gas use is likely to grow with or without carbon policy. However, carbon policy encourages greater levels of gas use as gas becomes an important “bridge fuel”.  Growth in gas supply is needed to satisfy the demand in our projection. –Significant growth in production from the Midcontinent Shales and the Rocky Mountains is expected. Incremental LNG imports and Arctic gas are needed for the total market to grow. Without these supplies, prices could be extremely high and market growth could be compromised.  A significant amount of new pipeline capacity will make west to east movement of incremental gas supply possible. –This movement is necessary to satisfy increasing gas demand and offset declining imports from Western Canada.  Assuming oil prices consistent with futures market prices from about a month ago, Henry Hub gas prices will average about $10 per MMBtu in nominal terms in our projection. –These price levels are adequate to foster significant growth in gas supply without compromising market growth.

33 Contact Information Kevin Petak ICF International