1. 1 Allocation of Baseline Reduction in the Substitution Methodology Draft Presentation aimed for 11 th June Substitution Workstream John Baldwin Gas Strategies Consulting A Division of Gas Strategies Group Ltd 35 New Bridge Street London EC4V 6BW Tel: +44 (0)20 7332 9950 Fax: +44 (0)20 7332 9941 E-mail: consult@gas-strategies.com http://www.gas-strategies.com

2. 2© Gas Strategies Consulting Purpose of this Presentation To illustrate the actual impact of substitution on ASEPs with unsold capacity To bring out issues associated with deciding which ASEPs will have their baseline reduced NGG’s 2007 methodology had ‘nearest’ ASEP as the rule, within Zone first Aim is for NGG, Ofgem and Shippers to consider the allocation question as part of process of developing the NGG Substitution Methodology

3. 3© Gas Strategies Consulting Re-cap Baseline consultation almost completed with Ofgem proposing Option 1A Transfer-trade mod in place Process underway to inform National Grid’s Substitution Methodology One issue that has not been discussed relates to the allocation criteria for deciding which ASEP should give up capacity to a new or expanded ASEP This was not Identified as one of the key Issues in the 2007 discussions and the Feb 2008 NGG Summary Report and Discussion Document

4. 4© Gas Strategies Consulting Context (1) – Substitution Obligation

5. 5© Gas Strategies Consulting Context (2) – Other Obligations

6. 6© Gas Strategies Consulting Context (3) – UKCS Production By 2011 UKCS production forecast to be around 50 BCM which is less than half the 108 BCM in 2000 and so it can be expected that NTS capacity becomes available as this happens.

7. 7© Gas Strategies Consulting Context (4) – Troll Project Abandoned 2007 10YS – Troll project taken out – 20 MCMD reduction

8. 8© Gas Strategies Consulting Context (5) – Reduced Baselines There have been material reductions in baselines at 3 ASEPs from the 2002-07 level to the proposed new baseline (Option 1A): Barrow (was 65.5 MCMD, reduced to 28.4 MCMD) Teesside (was 70 MCMD, reduced to 44 MCMD) Theddlethorpe (was 78 MCMD, reduced to 56 MCMD) Total reduction 85.1 MCMD No other Baselines have been reduced

9. 9© Gas Strategies Consulting Context (6) – Capacity Increases The decline in UKCS has created space for gas from other sources with increases in entry capacity at Easington, Aldbrough, Isle of Grain, Milford Haven: Total new capacity at these 4 ASEPs of 202.1 MCMD Investment in any necessary incremental capacity underwritten by shippers

10. 10© Gas Strategies Consulting Allocation of Baseline Reduction If capacity is required at an ASEP (new or existing) then NGG’s proposals in 2007 were for substitution to be from the nearest ASEP We have looked at a number of potential ‘substitutions’ to understand the impact of this

11. 11© Gas Strategies Consulting Background 1 - The Entry Zones

12. 12© Gas Strategies Consulting Background 2 - Potential Increases in Entry Capacity From this BERR slide, we can select potential projects in each zone to understand how substitution could be implemented and its possible impact on other ASEPs, both in the same Entry Zone and out of Zone

13. 13© Gas Strategies Consulting Background 3 – Potential projects mapped by Zone Five projects identified by way of Illustration, we can look at each in turn

14. 14© Gas Strategies Consulting Background 4 – Unsold capacity by zone Based on 30 th May 2008 capacity sales update

15. 15© Gas Strategies Consulting Background 5 – Basic Project Data Dates and MCMD for projects based on Public domain data and so Indicative only

16. 16© Gas Strategies Consulting Clarification re “pipeline distance” The 2007 Methodology says: The nearest ASEP will be determined according to pipeline distance and is selected in preference to more distant ASEPs as this will create greatest interchangeability What does pipeline distance mean?

17. 17© Gas Strategies Consulting Substitution – illustrative projects The next slides look at 5 potential new projects and discuss the possible substitution scenarios They have been selected to help provide a range of scenarios so that shippers can understand how the methodology could be applied and the choices that exist NGG requested to provide feedback

18. 18© Gas Strategies Consulting Whitehill (1)

19. 19© Gas Strategies Consulting Whitehill (2) If Whitehill passes NPV test, it may be able to access small amount of unsold capacity at Hatfield Moor Next, may be able to access unsold capacity in other Zones: From NGG’s 2007 methodology, consider nearest ‘non zonal’ ASEPs Nearest ASEP is Theddlethorpe (33 miles), Teesside 70 miles (Google earth, not pipeline distances) What would the Exchange rates be between? Whitehill and Theddlethorpe Whitehill and Bacton Whitehill and all the ASEPs in the Northern triangle?

20. 20© Gas Strategies Consulting Saltfleetby (1)

21. 21© Gas Strategies Consulting Saltfleetby (2) If Saltfleetby passes NPV test, likely to be large amount of unsold capacity at Theddlethorpe (assuming in same zone) Around 48 MCMD unsold, with no potential new flows identified by NGG to increase utilisation

22. 22© Gas Strategies Consulting Bletchingley (1)

23. 23© Gas Strategies Consulting Bletchingley (2) If Bletchingley passes NPV test likely to be unsold capacity at Bacton No other donor ASEP in zone Similar distance to Theddlethorpe (but not in SE Zone) Around 86 MCMD unsold, but with potential flows that can use this capacity So, should Bacton baseline be reduced or Theddlethorpe?

24. 24© Gas Strategies Consulting Baines (1)

25. 25© Gas Strategies Consulting Baines (2) Assuming that Barrow has sold out (eg Gateway), then there is likely to be unsold capacity in the Northern Triangle: St Fergus – 82 MCMD Teesside – 26 MCMD Glenmavis – 8 MCMD NGG 2007 methodology would take up to the 26 MCMD from Teesside as the nearest ‘within zone’ substitution

26. 26© Gas Strategies Consulting Baines (3) Looking at 2007 10YS, by 2011 St Fergus could have flow as High as 120 MCMD, Teesside 33MCMD, Glenmavis could be 9 MCMD

27. 27© Gas Strategies Consulting Baines (4) - Issues What about Partington which is closer geographically and has potentially 16.5 MCMD unsold? Why not take from other Northern Triangle ASEPs which utilise the same infrastructure as Teesside (South of Teesside)? 1 to 1 exchange rate in Northern Zone for Transfer-Trade Why not take into account SO costs associated with different ASEPs? Longer distance = higher opex (compressor fuel) and greater buy back risk Why not take into account ‘spare’ capacity over possible gas flows? Why not pro rata of unsold capacity in a zone?

28. 28© Gas Strategies Consulting Portland (1)

29. 29© Gas Strategies Consulting Portland (2) If Portland passes NPV test, may be able to access unsold capacity in South West UK Zone Avonmouth potentially has 13.5 MCMD unsold After that, is it Bacton or Dynevor Arms What exchange rate for Dynevor to Portland and bacton to Portland? After Avonmouth and Bacton/Dynevor, what next? Partington? Does reduced flows down West Midlands allow higher flows into NTS in South West?

30. 30© Gas Strategies Consulting Selection of donor ASEP – summary This issue has not been debated yet, we need to understand the options and choices: NGG’s 2007 methodology had ‘nearest’ ASEP as the rule, within Zone first Nearest within zone appears arbitrary Abandonment of Troll project has major impact on NTS capacity availability as St Fergus was forecast to be potentially fully utilised by 2011 Latest forecast has minimum of 30 MCMD spare Other Licence Obligations need to be considered such as ‘economic and efficient’ and ‘non discrimination’ which may mean that the ‘nearest’ methodology is not appropriate We would like NGG, Ofgem and Shippers to consider this question