North American Natural North American Natural Gas Infrastructure NeedsGas Infrastructure Needs

Donald F. Santa, Jr.Donald F. Santa, Jr.

PresidentPresident

Interstate Natural Gas Association Interstate Natural Gas Association of Americaof America

The Independent Petroleum Association of AmericaAnnual MeetingAustin, TXOctober 26, 2004

IntroductionIntroduction

Challenges Facing North American Natural Challenges Facing North American Natural Gas Markets:Gas Markets: Supply is tightSupply is tight Prices have increased dramaticallyPrices have increased dramatically Price volatility is highPrice volatility is high Demand is being destroyed in some sectors and Demand is being destroyed in some sectors and

still is growing in others.still is growing in others. Increased difficulty accessing supply resources Increased difficulty accessing supply resources

and constructing infrastructure.and constructing infrastructure.

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U.S. Natural Gas Demand (21.5 Tcf in 2003)

Industrial33.5%

Commercial14.8%

Residential23.4%Power Generation

19.1%

Other9.1%

Source: The INGAA Foundation 2004 2

Sources of Growth in Annual Gas Demand by 2020

Power Generation67%

Industrial8%

Commercial8%

Residential14%

Other3%

Source: The INGAA Foundation 2004 3

Cost of Power from Gas Versus CoalCost of Energy Comparison at

Various Gas Prices

0

1

2

3

4

5

6

$3.00 $3.50 $4.00 $4.50 $5.00 $5.50 $6.00

Price of Natural Gas ($/MMBtu)

Bu

sb

ar

Co

st

(Ce

nts

pe

r k

Wh

)

New Supercritical Coal Plant

New Combined Cycle Gas Plant

Variable Gas Generation Cost

• 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

U.S. and Canadian Natural Gas Supply

Source: National Petroleum Council 2003 5

The Fundamental QuestionThe Fundamental QuestionCan Gas Supply Support a Growing Market?Can Gas Supply Support a Growing Market?

Yes!Yes! Sufficient gas resource is available in North Sufficient gas resource is available in North

America and around the world.America and around the world. These resources can be developed and delivered These resources can be developed and delivered

to the North American market at prices that will to the North American market at prices that will allow the gas demand to continue to grow.allow the gas demand to continue to grow.

But not without the construction of new But not without the construction of new facilities to access and deliver new frontier facilities to access and deliver new frontier gas supplies.gas supplies. Pipelines, storage, and LNG infrastructure. Pipelines, storage, and LNG infrastructure.

6

Infrastructure NeedsInfrastructure Needs

Even with slower demand growth, an EEA Even with slower demand growth, an EEA study for The INGAA Foundation*, and a study for The INGAA Foundation*, and a recent Merrill Lynch report**, suggest that recent Merrill Lynch report**, suggest that significant pipeline and storage significant pipeline and storage infrastructure will be required to satisfy still infrastructure will be required to satisfy still growing demand and shifting supply growing demand and shifting supply sources.sources.

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*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.

87

(113)

167

(264)(48)74

(10)

(85)

17

(20)

(18)

217

(138)

4025

255

582

28

450285

(428)

46

23

(344)

(84)

190

(8)

0

100

28

(35)

8

(2)

0

684

536192

25

17

34

Flow (Billion Cubic Feet per Year)Change from 2003 to 2010

19

117

285

4

(1)

(75)

82

10

102

3063

22

304(369)

126

(3)

(159)

(115)

35

603

215

23

(25)

123

(87)

22

40

(728)

63

EEA April 2004 Base CaseBlue lines are LNG Imports

730

365

164

183

365

S. California

Baja MX

Altamira MX Texas Offshore

Katy TX

Lake Charles and New Louisiana

Florida/Bahamas

Elba Island

Cove Point

Mid-Atlantic

Everett

New England

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

220

(471)

168

(354)6958

66

(105)

54

(4)

618

258

284

167631

281

700

132

6981193

(636)

(6)

33

(292)

(80)

181

(41)

720

(88)

84

14

(12)

1

2

822

665258

121

17

34

Flow (Billion Cubic Feet per Year)Change from 2003 to 2020

183

282

348

(4)

289

(157)

205

20

344

55(6)

(110)

261(286)

98

(53)

74

2

15

604

215

3

(36)

72

(142)

8

75

149

(35)

EEA April 2004 Base CaseBlue lines are LNG Imports

1392

365

220

439

461

1354

458

1025

S. California

Baja MX

Altamira MX Texas Offshore

Katy TX

Lake Charles and New Louisiana

Florida/Bahamas

Elba Island

Cove Point

Mid-Atlantic

Everett

New England

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

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Pipeline Construction Pipeline Construction ExpendituresExpenditures

To satisfy this growth in gas demand, over To satisfy this growth in gas demand, over $61 billion in investment in pipeline and $61 billion in investment in pipeline and storage is needed. storage is needed. (constant 2003 dollars)(constant 2003 dollars)

Of that $18 billion is associated with Arctic gas Of that $18 billion is associated with Arctic gas projects.projects.

Approximately 45,000 miles of pipe is required.Approximately 45,000 miles of pipe is required. 35,000 of new pipe and 10,000 miles of 35,000 of new pipe and 10,000 miles of

replacement pipe.replacement pipe. Approximately 7.8 million horsepower of Approximately 7.8 million horsepower of

compression.compression.

10

North American Pipeline Additions(miles)

11

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1997 2000 2003 2006 2009 2012 2015 2018

Replacement Pipe New Pipe 1/ Alaska Project /2/1

Includes estimates for new transmission pipe, production plant hookup, pipe for new underground storage, and power plant connection laterals./2

Includes new pipe built to Chicago in conjuction with Alaska Pipeline Project and pipe to connect production plants to the pipeline.

Alaska Pipeline Project

Mackenzie Delta Pipeline Project

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

1997 2000 2003 2006 2009 2012 2015 2018

Replacement Compression Storage Compression New Compression Alaska Project /1

/1 Includes new pipe built to Chicago in conjuction with Alaska Pipeline Project and pipe to connect production plants to the pipeline.

Alaska Pipeline Project

MacKenzie Project

North American Compression Additions(1000 Horsepower)

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Infrastructure Obstacles and Infrastructure Obstacles and Cost ImpactCost Impact

Lead times for construction are growing longer.Lead times for construction are growing longer. NIMBY oppositionNIMBY opposition State administration of federal laws like Coastal Zone State administration of federal laws like Coastal Zone

Management Act and Clean Water Act.Management Act and Clean Water Act. Lack of shippers willing to sign for long term Lack of shippers willing to sign for long term

capacity.capacity. Cost of Delay: EEA Study for Cost of Delay: EEA Study for THE INGAA THE INGAA

FOUNDATION, INC.FOUNDATION, INC. predicts a 2 year delay in predicts a 2 year delay in construction will cost U.S. gas consumers in excess construction will cost U.S. gas consumers in excess of $200 billion by 2020.of $200 billion by 2020.

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EEA Recommendations EEA Recommendations (INGAA Foundation Infrastructure (INGAA Foundation Infrastructure

Study)Study)

Federal and State regulators should adopt policies Federal and State regulators should adopt policies that encourage the long-term contracts that are that encourage the long-term contracts that are needed to underpin infrastructure construction.needed to underpin infrastructure construction. Regulation should recognize the public benefit of Regulation should recognize the public benefit of

capacity into a market and create a cost recovery capacity into a market and create a cost recovery mechanism that promotes the construction of sufficient mechanism that promotes the construction of sufficient facilities to allow for incremental supplies of gas to be facilities to allow for incremental supplies of gas to be delivered during peak demand periods. delivered during peak demand periods.

Regulators should consider electricity resource planning Regulators should consider electricity resource planning that reflects the reliability benefits of firm pipeline and that reflects the reliability benefits of firm pipeline and storage capacity serving gas fired generation as well as storage capacity serving gas fired generation as well as alternative fuel capability.alternative fuel capability.

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RecommendationsRecommendations (Continued)(Continued)

Industry should work with state and local officials to Industry should work with state and local officials to ensure that all of the societal, employment, and ensure that all of the societal, employment, and consumer cost benefits of a pipeline, storage, or LNG consumer cost benefits of a pipeline, storage, or LNG terminal project are considered in the siting and terminal project are considered in the siting and permitting process.permitting process.

Federal and state regulators should conduct regional Federal and state regulators should conduct regional analysis to identify the requirements of multi-state analysis to identify the requirements of multi-state regions.regions.

Homeland security and safety concerns, particularly Homeland security and safety concerns, particularly regarding LNG, must be met with a balanced and regarding LNG, must be met with a balanced and informed evaluation of risk and recognition of the informed evaluation of risk and recognition of the societal costs of a failure to build infrastructure. societal costs of a failure to build infrastructure.

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ConclusionConclusion

No silver bullets.No silver bullets. Solutions have long lead times - postponed Solutions have long lead times - postponed

decisions delay, and possibly foreclose, solutions.decisions delay, and possibly foreclose, solutions. There will be a price to pay for government There will be a price to pay for government

policies and public opinions that deny access to policies and public opinions that deny access to resources and hinder construction of resources and hinder construction of infrastructure.infrastructure.

Ultimately the market will balance, but the result Ultimately the market will balance, but the result may be sub-optimal due to public policy barriers to may be sub-optimal due to public policy barriers to efficient resource and infrastructure development.efficient resource and infrastructure development.

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