1. Update on the Natural Gas Situation: Terry H. Morlan Northwest Power Planning Council Power Committee Briefing July 16, 2003

2. Recent Natural Gas Prices: Henry Hub

3. Excess Capacity Has Been Eliminated

4. Capacity Utilization Above 90% is Associated With Volatile Prices

5. Volatile Short-Term Prices React to Supply and Demand Changes Weather (and weather forecasts) Cold spells in winter And more recently, hot spells in summer Storage levels compared to normal for time of year Electric generation for air conditioning now competes with storage refill Storm threats in Gulf that may affect supply

6. Unusual Heating and Cooling Needs Affect Prices

7. For Example: Cold Weather Leads to High Natural Gas Prices

8. Gas Storage is Used to Meet Heavier Winter Demand

9. Gas Price is Sensitive to Storage Position Relative to Normal

10. Storage Levels Deteriorated During 2000, But Recovered in 2001

11. Storage Levels Deteriorated Rapidly in December 2002, and Continued

12. Natural Gas Demand and Supply Respond to Price Demand Fuel switching Plant closures (fertilizer and chemicals especially) Invest in fuel switching capacity, alternative technologies Longer-term plants may move offshore Supply Short term, changes in storage injections or withdrawals Long term, changes in drilling activity Longer term, invest in alternative supplies, e.g. LNG capacity

13. Drilling and Well Completions Respond to Price Changes

14. Council Forecast Compared to EIA and Futures Prices

15. Futures Prices are Sensitive to Current Prices and Conditions

16. Long-Term Concerns Declining natural gas production in major producing areas Observed decline in average size of new wells Well productivity declines more rapidly New sources of supply will be deeper, more expensive Replacement supplies such as LNG or Alaskan gas pipeline will take time to develop Growth in gas-fired electricity generation (increase summer demands versus normal winter peaks)

17. On the Other Hand …… Drilling technology improving, costs falling Gas well productivity is stable Production has been replaced in 7 of last ten years Gas discovered per well drilled does not show a long-term declining trend Increased gas-fired generation should increase overall capacity utilization rates, decrease costs

18. Drilling Success Improving Over Time

19. Gas Well Productivity Stabilized

20. Proved Reserves Have Increased Adequately to Replace Production

21. Gas Discoveries Per Well Drilled Does Not Show the Downward Trend

22. Transitional Difficulties Developing more multiple fuel capability Growth of summer demand for electricity generation Development of a more diverse and flexible supply base Conflicting environmental policies Financial stress in energy businesses