BUILDING A WORLD OF DIFFERENCE ® Near-Term Outlook on the North American Natural Gas Market Presented to Petrobras Greg W. Hopper and James L. Gooding

BUILDING A WORLD OF DIFFERENCE®

Near-Term Outlook on the Near-Term Outlook on the North American Natural Gas MarketNorth American Natural Gas Market

Presented to PetrobrasPresented to Petrobras

Greg W. Hopper and James L. GoodingGreg W. Hopper and James L. Gooding

December 06, 2007December 06, 2007


2 December 06, 2007

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3 December 06, 2007

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4 December 06, 2007

Today’s Discussion

North American Demand Projections

Supply Response to Rising Prices

Realigning Midstream Infrastructure

Natural Gas Prices

Natural Gas Storage

Signposts Beyond the Near-term


5 December 06, 2007

USA demand continues to rise . . .

Source: EIA AEO 2007

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Elec Core Ind


6 December 06, 2007

. . . as does Canadian demand, reducing the availability of gas supplies for export to the USA

Canadian Demand

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Source: EIA


7 December 06, 2007

Residential demand is forecasted to increase 21% by 2020

Source: EIA

0

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6000

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Historical EIA Forecast


8 December 06, 2007

Commercial demand is forecasted to increase the fastest: 31% by 2020

Source: EIA

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1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019



9 December 06, 2007

Industrial demand is forecasted to rebound from recent declines and grow by 21% through 2020

Source: EIA

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1000

2000

3000

4000

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7000

8000

9000

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019



10 December 06, 2007

Electric-power generation involves a variety of fuels, including natural gas which has been the fastest growing fuel of choice in recent years

Source: EIA Data as of 2005



By 2030, coal is expected to comprise a larger proportion of the USA electric-power generation fuel portfolio

Source: EIA

5,789 Billion KWh Total

Coal58%

Nuclear15%

Natural gas16%

Renewables9%

Petroleum2%



North America includes many different gas-producing basins in different states of development

Mackenzie Delta

Alaska North Slope

Western Canada

Rockies

Mid-Continent

Gulf Coast

Gulf of Mexico (GOM)



Gulf of Mexico (GOM) production has become more significant and complex

Source: TGS

Represents ~20% of “Lower 48” gas supply

Deepwater increases thru 2012

Shallow water/deep gas is a wildcard



Offshore GOM production will steadily decline in response to rising production costs

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5

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15

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25

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Bc

f/d

Deep Waters

Shallow Waters

Source: Lippman Consulting, LEG/B&V Analysis



Canadian production is expected to decline and the decline is compounded by delay in the Mackenzie Valley project

Canadian Production

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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Bc

f/d

Sable Island Ontario Alberta British Columbia Saskatchewan MacKenzie Delta

Source: LEG/B&V Analysis



Substantial LNG imports will be needed to meet demand

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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Bc

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Production Pipeline Imports Consumption




Non-conventional production is a growing source of natural gas supply

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1990 2005 2020

Tc

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Historical Projections

Lower 48 NA unconventional

Lower 48 NA conventional onshore

Lower 48 NA offshore

Lower 48 AD

Alaska

Source: EIA, AEO 2007



USA Rockies non-conventional production is providing valuable relief to supply constraints

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Bcf

/d

Pinedale Jonah Uinta-TB Piceance-ParadoxEast GR West GR Powder River Big HornWind River Pool Madden Anadarko-Raton-Denver



Mid-Continent production is expected to grow on the strength of non-conventional shale gas plays

Mid-Continent Production

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Bc

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MidCont OK MidCont TX MidCont KS MidCont ARSE OK Northeast OK Fayetteville Shale Woodford Shale




Mid-Continent production is projected to increase due to Fayetteville Shale prospects

Fayetteville Shale is a Mississippian-age shale accumulation located in Arkoma Basin across several counties of Arkansas.

Southwest Energy, the dominant player in the play, has drilled and completed 172 wells as of Dec. 31, 2006, of which 92 are horizontal wells.

Assuming average well ultimate recovery of 1.4 Bcf and 80-acre spacing, Southwest Energy estimated an ultimate recovery of over 11Tcf

Fayetteville shale production forecast is based on Lippman Consulting projections and an assumed growth rate



Barnett Shale (north-central Texas) – peak production not expected for another 10 years

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Historical Production Production Forecast




Woodford Shale, East OK also provides Mid-Continent production with upside potential

Woodford shale is the geological equivalent of Barnett Shale and Fayetteville Shale in East Oklahoma on the west part of the Arkoma basin.

Major players in Woodford shale include Newfield Exploration and Devon Energy. Newfield plans to drill 233 to 322 new wells by 2009.

Newfield Exploration estimates the ultimate recoverable reserves ranges from 2 – 5 Tcf

Woodford Shale production forecast is based on Lippman Consulting projections



USA existing and proposed LNG terminals are concentrated along the Gulf & Northeast Coasts

Source: FERC



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/d

Freeport

Cameron

Sabine Pass

Golden Pass

Excelerate

Lake Charles

Elba Island

Cove Point

Everett

EIA - AEO 2005

EIA - AEO 2006

EIA - AEO 2007

LNG import expectations continue to moderate

Source: EIA, LEG Analysis



World liquefaction capacity is expected to more than double through 2010

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Bcf

/d

Pacific BasinMiddle EastAtlantic Basin

Source: LNG OneWorld

Expected Worldwide Liquefaction Capacity



NYMEX seasonal spreads imply market concerns for tightening supplies

Max Winter less Min Summer Spreads per Gas Year (based on Daily Data)

$-

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in

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tu

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Abnormally high seasonal spreadfor gas year 2006



North America will compete with Europe and Asia for LNG supplies

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$/M

Mb

tu

UK - NBPNYMEX Futures

UK National Balancing Point (NBP) prices compared to Henry Hub



The expected seasonality of LNG into USA terminals will provide supply for power generation and industrial markets

LNG Imports - By Month

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Bcf

/d

Everett Cove Point Elba Island Excelerate FreeportLake Charles Sabine Pass Cameron Golden Pass

WinterSummer



North American supply realignment is driving new strategies and infrastructure investments



Rockies gas producers are targeting eastern markets

Zone 3 – Lebanon to Clarington

In Service: Jun-09

Capacity: 2.0 bcf/d

FT rate: $1.094

Fuel: 2.22%



Producer commitments to new pipeline capacity is a valuable sign of confidence in supply certainty

Status: Conducting a binding Open Season, to be completed Jan-07

Texas Panhandle to Alabama

Expected Capacity: 1.4 Bcf/d to CGT, 1.0 Bcf to Transco St 85

Expected in-service date – Feb 2009

Proposed Recourse Rate:

Zone 1: Daily Demand $0.31

Zone 2: Daily Demand: $0.24



Additional NG pipeline capacity is expected from the Boardwalk/Gulf South – Gulf Crossing Project

355 Miles Interstate Pipeline from Sherman, TX to Perryville Hub

Expected Capacity: 1.65 Bcf/d

CapEx: 1.1 Billion

Expected in service date: 4th Quarter, 2008




Transco (3.4 Bcfd)

Florida Gas (2.1 Bcfd)

Southern Natural (1.3 Bcfd)

Gulfstream (1.13 Bcfd)

Mid-continent supplies and pipelines will increase supplies to the Southeast USA

Source: Energy Velocity



Prices across the USA remained volatile in winter 2006-07 although lower than high levels experienced in winter 2005-06

$4

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cf

Chicago city-gates

Henry Hub

SoCal Gas

Transco, zone 6 N.Y.



Near-term Henry Hub prices are expected to remain in the range of $6 to $9 / Dth

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Historical

LEG/B&V

NYMEX 07/09/07

EIA AEO 2007



Natural gas storage must provide the critical flexibility and security to optimize LNG sales and satisfy demand




Storage inventories have been close to 5-yr highs since 2006

EIA Weekly Storage Level and 5-yr range



Basis prices may evolve to reflect wider western and eastern Gulf price spreads

Henry Hub AreaPascagoula LNG

Sabine Pass - West LA LNG Sites

Pascagoula AreaWest LA Area



Many new gas storage facilities have been proposed along the Gulf Coast where pipelines and LNG terminals will connect




Golden Triangle Storage

New Storage Field

Expansion of Previously Built Storage

Proposed Storage Field

New storage will be justified as LNG imports and markets grow

100% of current Gulf Coast LNG regas capacity




USA Generation Needs Could Drive Nearly $0.5 Trillion in New Capacity Investments by 2027

Other WECC

0/2.1

CA12.9/30.1 Rocky Mtn.

7.9/25.0

MAPP

5.1/12.0

SPP

2.6/15.0

ERCOT

5.0/25.0FRCC

12.8/31.9

MAIN12.8/25.0

ECAR12.6/34.3

NPCC6.9/18.7

MAAC8.2/20.2

SERC

Entergy

0/0

TVA2.1/12.1

Southern / VACAR16.9/53.2

WECC

Total Capacity Need by 2015 – 106 GW

Total Capacity Need by 2027 – 305 GW Source: B&V Analysis



A power market dominated by gas and coal offers numerous solutions to carbon limitations

Fossil fuel options for a clean environment are at the forefront of complex utility IRP decisions

Successful investment decisions will turn on numerous dynamic variables

Carbon legislation inserts a wild card into long-lead investment decisions

Efficiency /Efficiency /DSMDSM

NuclearNuclearRenewRenew--ablesables

Gas Gas CCCTCCCT

IGCCIGCC

CleanCleanCoalCoal

Coal Coal UpgradesUpgrades

Efficiency /Efficiency /DSMDSM

NuclearNuclearRenewRenew--ablesables

Gas Gas CCCTCCCT

IGCCIGCC

CleanCleanCoalCoal

Coal Coal UpgradesUpgrades



CO2 Emission Variations with Type of Power Plant



Kermit was right: “It’s not easy being green”

A 2006 Black & Veatch survey of utility executives showed that 72% believe that federal legislation to limit carbon emissions will be approved in the next five years.

The focus on carbon has redoubled political and popular interest in renewable and nuclear power alternatives to fossil fuels in the generation of electricity

But for all the rhetoric, economics and pragmatism mean that natural gas and coal resources must continue to shoulder society’s need for power

For this reason, our interest in carbon legislation focuses on the tipping point where the incentives for gas or coal use become significantly skewed toward either fuel



LNG is the lynchpin of a global market for natural gas

Source: BP Statistical Review of World Energy, 2007


Thank you.Thank you.

Greg W. HopperVice President713.590.2280

[email protected]

Documents

BUILDING A WORLD OF DIFFERENCE ® Near-Term Outlook on the North American Natural Gas Market Presented to Petrobras Greg W. Hopper and James L. Gooding