1. North American Natural Gas Infrastructure Needs Donald F. Santa, Jr. President Interstate Natural Gas Association of America The Independent Petroleum Association of America Annual Meeting Austin, TX October 26, 2004

2. Introduction Challenges Facing North American Natural Gas Markets: Challenges Facing North American Natural Gas Markets:  Supply is tight  Prices have increased dramatically  Price volatility is high  Demand is being destroyed in some sectors and still is growing in others.  Increased difficulty accessing supply resources and constructing infrastructure. 1

3. U.S. Natural Gas Demand (21.5 Tcf in 2003) Industrial 33.5% Commercial 14.8% Residential 23.4% Power Generation 19.1% Other 9.1% Source: The INGAA Foundation 2004 2

4. Sources of Growth in Annual Gas Demand by 2020 Power Generation 67% Industrial 8% Commercial 8% Residential 14% Other 3% Source: The INGAA Foundation 2004 3

5. Cost of Power from Gas Versus Coal As gas prices pass $4, building new coal plants starts to look economically attractive compared to new gas units. But even at gas prices above $5.50, existing gas units are a threat to capital recovery of a new coal unit. As a result, do not expect to see many new coal units built over the next seven years. New coal plants can compete on a cost basis with new gas units, but face tough competition from existing units and have environmental and siting risk. Source: The INGAA Foundation 2004 4

6. U.S. and Canadian Natural Gas Supply Source: National Petroleum Council 2003 5

7. The Fundamental Question Can Gas Supply Support a Growing Market? Yes! Yes! Sufficient gas resource is available in North America and around the world. Sufficient gas resource is available in North America and around the world. These resources can be developed and delivered to the North American market at prices that will allow the gas demand to continue to grow. These resources can be developed and delivered to the North American market at prices that will allow the gas demand to continue to grow. But not without the construction of new facilities to access and deliver new frontier gas supplies. But not without the construction of new facilities to access and deliver new frontier gas supplies.  Pipelines, storage, and LNG infrastructure. 6

8. Infrastructure Needs Even with slower demand growth, an EEA study for The INGAA Foundation*, and a recent Merrill Lynch report**, suggest that significant pipeline and storage infrastructure will be required to satisfy still growing demand and shifting supply sources. Even with slower demand growth, an EEA study for The INGAA Foundation*, and a recent Merrill Lynch report**, suggest that significant pipeline and storage infrastructure will be required to satisfy still growing demand and shifting supply sources. 7 *An Updated Assessment of Pipeline and Storage Infrastructure for the North American Gas Market, The INGAA Foundation, Inc. 2004. Study available at: www.ingaa.org. **Maximum Allowable Operating Pressure, Merrill Lynch, Sam Brothwell/Sara Nainzadeh, May 25, 2004.

9. 2003-2010 Greatest increases in supply are from the Deep Gulf, Rockies, and LNG imports. No significant increase in Canadian imports until northern projects are developed. Offshore Eastern Canada dependent on development plans. U.S. LNG imports increase to nearly 2,800 Bcf per year (about 506 Bcf in 2003). Location of LNG terminals will affect flow patterns. New Gas Supplies Affect Regional Flow Patterns 8

10. 2003-2020 New frontier supplies from Alaska, MacKenzie Delta, LNG imports, Rockies, and the Deep Gulf of Mexico grow to over 17,000 bcf per year. Other “traditional” North American production declines. Alaskan and Canadian Arctic development increases imports from the north. U.S. LNG imports increase to 6,600 bcf per year. New Gas Supplies Affect Regional Flow Patterns Includes Arctic Gas 9

11. Pipeline Construction Expenditures To satisfy this growth in gas demand, over $61 billion in investment in pipeline and storage is needed. (constant 2003 dollars) To satisfy this growth in gas demand, over $61 billion in investment in pipeline and storage is needed. (constant 2003 dollars)  Of that $18 billion is associated with Arctic gas projects.  Approximately 45,000 miles of pipe is required.  35,000 of new pipe and 10,000 miles of replacement pipe.  Approximately 7.8 million horsepower of compression. 10

12. North American Pipeline Additions (miles) 11

13. North American Compression Additions (1000 Horsepower) 12

14. Infrastructure Obstacles and Cost Impact Lead times for construction are growing longer. Lead times for construction are growing longer.  NIMBY opposition  State administration of federal laws like Coastal Zone Management Act and Clean Water Act. Lack of shippers willing to sign for long term capacity. Lack of shippers willing to sign for long term capacity. Cost of Delay: EEA Study for THE INGAA FOUNDATION, INC. predicts a 2 year delay in construction will cost U.S. gas consumers in excess of $200 billion by 2020. Cost of Delay: EEA Study for THE INGAA FOUNDATION, INC. predicts a 2 year delay in construction will cost U.S. gas consumers in excess of $200 billion by 2020. 13

15. EEA Recommendations (INGAA Foundation Infrastructure Study) Federal and State regulators should adopt policies that encourage the long-term contracts that are needed to underpin infrastructure construction. Federal and State regulators should adopt policies that encourage the long-term contracts that are needed to underpin infrastructure construction.  Regulation should recognize the public benefit of capacity into a market and create a cost recovery mechanism that promotes the construction of sufficient facilities to allow for incremental supplies of gas to be delivered during peak demand periods.  Regulators should consider electricity resource planning that reflects the reliability benefits of firm pipeline and storage capacity serving gas fired generation as well as alternative fuel capability. 14

16. Recommendations (Continued) Industry should work with state and local officials to ensure that all of the societal, employment, and consumer cost benefits of a pipeline, storage, or LNG terminal project are considered in the siting and permitting process. Industry should work with state and local officials to ensure that all of the societal, employment, and consumer cost benefits of a pipeline, storage, or LNG terminal project are considered in the siting and permitting process. Federal and state regulators should conduct regional analysis to identify the requirements of multi-state regions. Federal and state regulators should conduct regional analysis to identify the requirements of multi-state regions. Homeland security and safety concerns, particularly regarding LNG, must be met with a balanced and informed evaluation of risk and recognition of the societal costs of a failure to build infrastructure. Homeland security and safety concerns, particularly regarding LNG, must be met with a balanced and informed evaluation of risk and recognition of the societal costs of a failure to build infrastructure. 15

17. Conclusion No silver bullets. No silver bullets. Solutions have long lead times - postponed decisions delay, and possibly foreclose, solutions. Solutions have long lead times - postponed decisions delay, and possibly foreclose, solutions. There will be a price to pay for government policies and public opinions that deny access to resources and hinder construction of infrastructure. There will be a price to pay for government policies and public opinions that deny access to resources and hinder construction of infrastructure. Ultimately the market will balance, but the result may be sub-optimal due to public policy barriers to efficient resource and infrastructure development. Ultimately the market will balance, but the result may be sub-optimal due to public policy barriers to efficient resource and infrastructure development. 16