The U. S. Natural Gas Industry -an Overview

The U. S. Natural Gas Industry -an Overview

J. Richard MooreJ. Richard Moore

U.S. Natural Gas / Electric IndustriesU.S. Natural Gas / Electric Industries

Industry Comparisons / ContrastsIndustry Comparisons / Contrasts

• Both Provide Energy to Industrial, Commercialand Residential Customers.

• Facilities Making Deliveries to Consumers inBoth Industries are Rate Regulated Utilities.

• Electric Industry is Larger: 3-4 X in $ Valueof Deliveries to Consumers.

• Gas Industry Not Vertically Integrated.

• Gas Can Be Stored - Electricity Cannot.

Electric Industry Interest in GasElectric Industry Interest in Gas

• Gas is Fuel For Electric Generation (20% Cap).

• Electric Companies Buying Gas Utilities - GasNow Part of Product Line.

• Gas is Competitor in Some Cases.

• Deregulation Experience of Gas May BeInstructive For Electric Industry.

U.S. Natural Gas Industry - SegmentsU.S. Natural Gas Industry - SegmentsGas Industry FunctionGas Industry Function Electric Industry FunctionElectric Industry FunctionGas Industry SegmentGas Industry Segment

EXPLORATION

PRODUCTION

GENERATIONUPSTREAMUPSTREAM

GATHERING / PROCESSING

TRANSMISSION

TRANSMISSIONMIDSTREAMMIDSTREAM

DISTRIBUTION

CONSUMERS

DISTRIBUTION

CONSUMERS

DOWNSTREAMDOWNSTREAM

Production

Gross Withdrawals 24.1 TCF/YRDry Production 19.0 TCF/YRProducing Gas Wells 393,327Gas Well Average 124 MCF/DProduction: 10 to 30,000 MCF/D Well

Producers: 6,800 Companies, (21 Majors)

Consumption

# Volume Consumers 67.2 MM 20.6 TCF/YRResidential 61.9 MM 5.1 TCF/YRCommercial 5.1 MM 3.2 TCF/YRIndustrial .2 MM 12.3 TCF/YRConsumption: .1 to 400,000 MCF/D

Customer

Pipelines & Storage

Natural Gas Pipelines* 1,424,200 Miles Gathering Lines* 22,300 Miles Transmission Lines 304,000 Miles

Distribution Lines 1,097,900 Miles

Storage Facilities (429) 3,568 BCF Capacity(Working Gas)

Source: EIA Natural Gas Annual 2003AGA Gas Facts 2003

* Utility Pipelines (AGA)

U. S. Natural Gas Industry - ScopeU. S. Natural Gas Industry - Scope

Natural Gas Supply and Disposition in the United States, 2003

(Trillion Cubic Feet)

Natural Gas Supply and Disposition in the United States, 2003

(Trillion Cubic Feet)

Source: EIA Natural Gas Annual 2003Source: EIA Natural Gas Annual 2003

Japan0.064

Japan0.064

Mexico0.332

Mexico0.332

Canada0.294

Canada0.294

ExportsExportsCanada

3.49Canada

3.49Trinidad

0.378Trinidad

0.378Algeria0.053

Algeria0.053

Qatar0.014

Qatar0.014

Nigeria0.05

Nigeria0.05

Oman0.009

Oman0.009

Other0.003

Other0.003

ImportsImports

Residential5.1

Residential5.1

Commercial3.2

Commercial3.2

Industrial7.1

Industrial7.1

Vehicle Fuel0.02

Vehicle Fuel0.02

Electric Power5.1

Electric Power5.1

Vented / Flared0.1

Vented / Flared0.1

Reservoir Repressuring

(Used to MaintainOil Production)

3.5

Reservoir Repressuring

(Used to MaintainOil Production)

3.5

Non-HydrocarbonGases Removed

(N2, CO2, H2S, etc)0.5

Non-HydrocarbonGases Removed

(N2, CO2, H2S, etc)0.5

Extraction Loss1.0

Extraction Loss1.0

Dry GasProduction

19.0

Dry GasProduction

19.0

4.04.0

0.70.7

Lease, P/L, Plant Fuel,Misc., Bal.

1.6

Lease, P/L, Plant Fuel,Misc., Bal.

1.6

Natural GasStorage Facilities

Natural GasStorage Facilities

Additions3.4

Additions3.4

Withdrawals3.2

Withdrawals3.2

LNG Alaska to JapanLNG Alaska to Japan

Gross WithdrawalsFrom Gas and

Oil Wells24.1

Gross WithdrawalsFrom Gas and

Oil Wells24.1

Source: EIA Gas Monthly

1.4

1.6

1.8

2.0

2.2

2.4

2.6

Jan-

00

Feb-

00

Mar

-00

Apr

-00

May

-00

Jun-

00

Jul-0

0

Aug

-00

Sep-

00

Oct

-00

Nov

-00

Dec

-00

Tri

llion

Cub

ic F

eet

(TC

F)

From Storage

Supply (Dry Gas Production + Net Imports)

Consumption

To Storage

Seasonality of Natural Gas ConsumptionSeasonality of Natural Gas Consumption

Map Pattern of Gas MovementsMap Pattern of Gas Movements

Source: Energy Information Administration / Natural Gas Annual 2000

5,0004,0003,0002,0001,000

0

Billion Cubic Feet

= Less than 100 BCF Flow

Natural Gas Formation and Exploration

Natural Gas Formation and Exploration

GEOLOGIC TIME

Years Ago Headlines

CENOZOIC ERA

MESOZOIC ERA

PALEOZOIC ERA

PRECAMBRIAN ERA

Man Appears

Horses AppearDinosaurs Disappear

Dinosaurs Appear

First AbundantFossil Record

Ozone Layer FormedBig Bang Heard

0

65 Million

225 Million

570 Million

4,600 Million

OIL AND GAS FORMATION

Depth Pressure & Temp

SurfaceSurface

5,000’

10,000’

SUCCEEDINGLAYERS

OF ROCKADD WEIGHT

ANDPRESSURE

ON EARLIERLAYERS

Heat and Pressure ConvertOrganic Debris to Oil & Gas

“BASEMENT” ROCK

IncreasingWith Depth

(5,000 PSI, 250 F)o

Rock Layers DepositedOver Time

Geology and Natural Gas FormationGeology and Natural Gas Formation

Natural Gas Reservoir RequirementsNatural Gas Reservoir Requirements

Reservoir Rocks (Sedimentary)

Name Example Requirements

Source Limestone Porosityand

PermeabilityReservoir Sandstone

Cap/Trap Shale Impermeability

Reservoir Requirements

(GAS)RESERVOIR ROCK

(WATER)

SOURCE ROCK

1. Identify ProspectA. SeismicB. Log Correlation

2. Obtain Mineral Lease3. Obtain Drilling Permit4. Prepare Site

Preliminary

1. Drilling ContractA. Rate: Day, Footage, TurnkeyB. Equipment & Start Date

2. Design Casing Program3. Evaluate Surface Equipment

Requirements

Contract & Design Issues

1. Well Control - Blow Outs / Lost Holes2. MWD - Directional Wells3. Logging and Analysis4. Decision to Complete5. Tight Hole - Confidential

Activities While Drilling

Drilling a WellDrilling a Well

CirculatingSystem(Mud)

PowerSystem

(Engines)

Major Rig Systems

1. Hoisting - Mast & Drawworks

2. Rotating - Turntable / Top Drive and Drill String

3. Circulating - Pumps and Mud

4. Power - Engines (Diesel / Electric)

Completion and Production Operations

Completion and Production Operations

Surface Casing

Intermediate Casing

Production CasingTop of Cement

Cement

Drilling Mud

Cased Well After Implacement ofCompletion Fluid

Cased Well After Implacement ofCompletion Fluid

CASING

CEMENTSHEATH

PERFORATIONSTHROUGH CASING,CEMENT SHEATH,

AND INTOFORMATION

ZONE OFINTEREST

Schematic of Perforated CasingSchematic of Perforated Casing

Wellbore

Formation

Fracture

Perforations

TreatingFluid

CementedCasing

PROSPECTIVEFORMATION PRODUCTION

CASING

SAND-LADENTREATING FLUID

CREATEDFRACTURE

DRILLED HOLE

PERFORATIONS

CEMENT SHEATH

Hydraulic Fracture SchematicHydraulic Fracture Schematic

Surface Casing

Intermediate CasingProduction Casing

Top of CementPacker

Tubing

Drilling Mud

Cased Well ProducingCased Well Producing

Non Associated (Gas Well) Gas

Producing Well

Gas

Water Water

• Water Drive

• Expansion Drive

Associated (Oil Well) Gas

Producing Well

Gas

Oil

Water Water

• Water Drive

• Solution Gas Drive

• Gas Cap Drive

Types of Reservoirs Containing Natural GasTypes of Reservoirs Containing Natural Gas

Condensate

LineHeater

Separator

H2SRemoval Dehydration

Unit

Sales Gas

Liquid Sales

To DisposalWater

Gas Well Surface Flow SchematicGas Well Surface Flow Schematic

Measurement of Natural GasMeasurement of Natural Gas

Measurement Purpose(Meter Function)

A

B

C

Allocation

Balancing (Operations)

Custody (Sales)

Meter Types(Equipment Types)

• Orifice Meter

• Diaphram Meter

• Rotary Meter

• Turbine Meter

• Sonic Meter

Meter SelectionIssues

• Volume to be Measured

• Volume Fluctuations

• Meter Cost / Operation

• Meter Function

Measurement Process(Steps in Calculating MMBTU)

• Measure Gas Volume (MCF)

• Analyze Gas – Determine Heating Value (BTU/FT )

• Calculate Quantity of Energy Delivered

Volume x Heating Value = MMBTU

(MCF) x (BTU/FT ) = MMBTU

3

3

PRODUCTION GATHERING TRANSMISSION DISTRIBUTION

WELLHEAD

A

AB Processing

PlantC B C

B B

StorageOther P/L

C

C B C

C CONSUMER

CONSUMER

Natural Gas Gatheringand Processing

Natural Gas Gatheringand Processing

Natural Gas Gathering and ProcessingPlace in Physical Distribution NetworkNatural Gas Gathering and ProcessingPlace in Physical Distribution Network

Site / Facilities

WellheadC Compressor

P Pig Launcher/Retriever

High Pressure Gathering LineHigh Pressure Gathering Line

Medium Pressure Gathering LineMedium Pressure Gathering Line

Low Pressure Gathering LineLow Pressure Gathering Line

Gas Transmission PipelineGas Transmission Pipeline

P P Low Pressure

(25 – 75 PSI)

C

PPP

P

P PP

P

C

C

Medium Pressure(100 – 300 PSI)

High Pressure(300 – 500 PSI)

PC P

Gas T

ransmission P/L

TOPipeline,Truck,Barge

NGLS

Natural Gas

Pipeline QualityGas

ProcessingPlant

Functions / Activities

• Gathering – Connects Wells to Transmission Pipeline System

• Compression – Raises Pressure of Gas From Wellheads Permitting Gas to Flow Into Transmission System. Lehgthens Well Life.

• Treating – Removes Impurities

• Processing – Removes NGLS

Scope *

• 574 Plants (Excluding Refineries) (Down From 720 in 1993)

• Concentrated in TX, OK, LA, CO, WY, NM, & KS

• 1.839 MM BBLS/D Production from Processing Plants

• 82,322 MCF/D Average Plant Throughput(Typical Plant is Smaller)

• 3,204 BBLS/D Average Plant Production(Typical Plant is Smaller)

• 0.250 MM BBLS/D Net Refinery Production

• 0.270 MM BBLS/D Import

• Unregulated

• Cyclical

• Volatile Product Prices

• Excess Capacity(70% Average Utilization)

• Highly Competitive

• Top 20% of Plants = 80% ofCapacity

• Processing Cost Vary Widely($ 0.03 MCF / $ 0.30 MCF)

Characteristics of Business

* Source: O&GJ 06/28/04, EIA Petroleum Supply Annual 2003

Natural Gas Processing in the U. S.Natural Gas Processing in the U. S.

Natural Gas to Pipeline

NGL’S

Oil

Gas Cap orAssociated Gas

Water

Non-Associated Gas

Raw Natural Gas

CrudeOil

Lease Condensate

Lea

se S

e par

ato r

s

GASPROCESSING

PLANT

HYDROGENSULFIDE METHANE PROPANE NITROGEN

HELIUMNATURALGASOLINE

ISO-BUTANE ETHANE

DIRT&

RUST

CARBONDIOXIDE WATER

NORMALBUTANE

RECOVERABLE HYDROCARBONS

RESIDUE GAS

NON-HYDOCARBONS AND CONTAMINANTS

FROMWELLHEAD

SEPARATORS

TO GASPROCESSING

PLANTSPIPELINE

Typical Natural Gas StreamTypical Natural Gas Stream

What is Natural Gas Processing?What is Natural Gas Processing?

P Gas Conditioning / Treating

Solids Removal (Sand, Pipe Scale, Dirt)

Dehydration (Water Removal)

Acid Gas Removal

P Gathering and Compression

P Natural Gas Liquids (NGL) Recovery

P Produce Merchantable Natural Gas Product

P Avoid Natural Gas Transmission / Distribution FacilityOperating Problems

Increase Pipeline Efficiency - Avoid UnnecessaryHP Requirements (Capital Investment & Operating Cost)

Avoid Internal Corrosion Problems

Avoid Freeze Ups (Hydrates)

P Economic Value of NGL Components

Why is Natural Gas Processed?Why is Natural Gas Processed?

WITH LIQUIDS

WITHOUT LIQUIDS

GRADE

PIPELINE

UPSTREAM PRESSURE40 PSIG

DOWNSTREAM PRESSURE32 PSIG

GRADE

PIPELINE

UPSTREAM PRESSURE40 PSIG

DOWNSTREAM PRESSURE39 PSIG

Effect of Liquids AccumulationOn Pipeline Efficiency

Effect of Liquids AccumulationOn Pipeline Efficiency

Pipeline CorrosionPipeline CorrosionPipeline Corrosion

• Internal Corrosion

- Problem: Microbially Induced Corrosion (MIC)

Solution: Inhibitors (Coat Pipe), Biocides (Kill Bugs)

- Problem: Chemical Corrosion (Acid Gas)

Solution: Inhibitors (Coat Pipe), Remove H2S & CO2

and Remove Water.

• External Corrosion

- Pipe Wraps / Coating

- Cathodic Protection

• Issues

- Safety

- Maintenance Expense

Pipeline Pigs

• Utility Pigs (Foam, Solid Cast Plastic, Spheres)

- Cleaning: Remove Deposits

- Sealing: Remove Liquids

• In Line Inspection Tools (Smart Pigs)

- Measurements: Wall Thickness, Diameter

- Detection: Leaks, Cracks, Corrosion

- Photographic Inspection

• Gel Pigs

- Gelled Liquids

- Used in Trains Within P/L

- Clean Up, Corrosion Inhibition

Squeegee Pig Brush Pig

Gas Processing TechnologyGas Processing Technology

Below -90o F

Down to -40o F

AmbientTem

pera

ture

(Col

der

)

Rec

over

y R

ate

(Hig

her

)

Absorption

Refrigeration

Cryogenic

1920 - 1940 1940 - 1960 1960 - 1980

Source: GPA

Natural Gas TransmissionNatural Gas Transmission

Natural Gas Transmission PipelinesPlace in Physical Distribution Network

Natural Gas Transmission PipelinesPlace in Physical Distribution Network

SITE / FACILITIES

Supply Source

Market

Gathering Lines

Intrastate Transmission Pipeline

Interstate Transmission Pipeline “A”

Interstate Transmission Pipeline “B”

City Gate

Local Distribution Company Pipelines

Compressor

Underground Storage

M

CG

US

C

S

FUNCTIONS / ACTIVITIES

• Provide High Pressure / Long Distance Transportation of Gas

• Pipeline Uses Pressure from Reservoir or Compressors (Pumps) to Move Gas

• Pipeline Uses Storage Facilities and Line Pack to Meet Supply / Demand Swings

• Safety & Environmental Regulation - DOT,OSHA, EPA, MMS

• Intrastate Rate Regulation - State Agencies

• Interstate Rate Regulation - FERC

M

S

S

S

SS S

US

S

S

M

M

M

M

CG

US

C

CC

CG

M

M

M

Major Natural Gas Transportation Routes Major Natural Gas Transportation Routes From Canada to Northwest

4,412 MMcf/d From Expanding Coalbed Production4,286 MMcf/d

From Canada to Midwest/Central6,939 MMcf/d

Into the Chicago Area Hub11,835 MMcf/d

From Canada to New England1,546 MMcf/d

Into the Boston Metro Area2,210 MMcf/d

Into the New York Metro Area3,157 MMcf/d

Capacity(in Million Cubic Feet per Day)

as of December 2000

15,00012,0009,0006,0003,000

0

Direction of FlowBi-directionalFrom Gulf Coast Production

22,472 MMcf/dFrom West Texas/Kansas/Oklahoma to Midwest6,810 MMcf/d

Into Southern California5,355 MMcf/d

Into Northern California2,080 MMcf/d

Western

Central

Midwest

Northeast

SoutheastSouthwest

Interstate Natural Gas Transmission PipelinesInterstate Natural Gas Transmission Pipelines

NUMBER OF COMPANIES

MILES OF PIPELINE

TRANSPORTEDVOLUMES (TCF/YR)

TOTAL 111 195,038 32.9

Majors (> 50 BCF YR) 68 188,178 32.2

LARGEST 10 (VOL) 10 93,859 15.6

SOURCE: 08/23/04 O&GJ, FERC Form 2

Natural Gas Transmission Pipeline OperationsNatural Gas Transmission Pipeline Operations

M MARKETSS SUPPLY

SPAGHETTI BOWL

INTE

RCONNE

CTING

PIP

ELIN

E

STORAGE

M

M

M

M

SS

S

S

S

S

LONG LINE

SUPPLY(PRODUCTION)

SUPPLYAREA

STORAGE

INTERCONNECTING PIPELINE

M

MM

MARKETAREA

STORAGE

Natural Gas Transmission PipelineCustody vs. Ownership

Natural Gas Transmission PipelineCustody vs. Ownership

OWNS GASPIPELINE

STORAGE

S M

Custody and Ownership Transfer Point

• Pipeline Controls Receipts/Deliveriesto Achieve Operational Stabilityand Serve Demands.

• Storage and Line Pack are Tools Usedto Deliver Gas Commodity.

• No Balancing Problems/Issues.

Pipeline Owns All Gas in its Custody

IS TRANSPORTER ONLYPIPELINE

STORAGE

S M

STORAGE

Custody Transfer Point(Ownership May Transfer at Multiple Points)

Custody Transfers To/From Pipeline When Gas Enters/Leaves System

• Pipeline Monitors Receipts/DeliveriesControls Only if Shipper Not in ComplianceWith Contract.

• Use of Storage and Line Pack Determined byShippers Actions and May Be Subject ofCharges in Addition to Transport Fees.

• Major Balancing Problems/Issues.

Pipeline Does Not Own All Gas in its Custody

Services Offered by Natural GasTransmission Pipelines

Services Offered by Natural GasTransmission Pipelines

I. TRANSPORTATION ONLY PIPELINES (INTERSTATE)

A. TRANSPORTATION - FIRM, INTERRUPTIBLE, NO-NOTICE (SWING)

B. STORAGE - FIRM, INTERRUPTIBLE

C. OTHER - TREATING, BLENDING, BALANCING, PARKING

I. TRANSPORTATION ONLY PIPELINES (INTERSTATE)

A. TRANSPORTATION - FIRM, INTERRUPTIBLE, NO-NOTICE (SWING)

B. STORAGE - FIRM, INTERRUPTIBLE

C. OTHER - TREATING, BLENDING, BALANCING, PARKING

II. COMMODITY SALE AND TRANSPORTATION PIPELINES (INTRASTATE)

A. TRANSPORTATION, STORAGE, & OTHER SERVICES

B. GAS SUPPLY (SALE) SERVICE

II. COMMODITY SALE AND TRANSPORTATION PIPELINES (INTRASTATE)

A. TRANSPORTATION, STORAGE, & OTHER SERVICES

B. GAS SUPPLY (SALE) SERVICE

Natural Gas Customer Service SelectionNatural Gas Customer Service Selection

CUSTOMER CONSIDERATIONSCUSTOMER CONSIDERATIONS

• Initial Fuel Choice

• Alternative Fuel Capability

• Alternative Gas Supplies (Multiple Pipelines)

• Consequences Of Curtailment

• Availability Of Service

• Cost Of Service

• Cost Of Wrong Service

% OF DELIVERIES TO CONSUMERS% OF DELIVERIES TO CONSUMERS

TYPE SALES TRANSPORT TOTAL

Residential 23 (88) 3 (12) 26

Commercial 10 (62) 6 (38) 16

Industrial 4 (10) 32 (90) 36

Elec. Power 1 (5) 21 (95) 22

Other (Veh. Fuel) * * *

Total (2003) 38 62 100

* Less Than 1%

SOURCE: AGA Gas Facts 2003

Natural Gas Transmission Pipeline OperationsNatural Gas Transmission Pipeline Operations• Tariff / Contractual Provisions Specify Rights and Obligations of Parties• Tariff / Contractual Provisions Specify Rights and Obligations of Parties

Penalties, Overrun or Storage Charges, Etc.

Fees Paid For Unauthorized Use of Capacity

Means of Controlling Shippers Conduct

Operational Flow Order Order to Adjust Receipts and / or Deliveries

Order Issued to Correct Imbalance

Curtailment Order to Reduce Receipts and / or Deliveries

Order Issued to Reserve Capacity For Critical Customers

Imbalance / Overrun Must Correct by Adjusting Receipts / Deliveries

Calculates and May assess Penalties on Shippers

Gas Receipts / Deliveries Should Monitor Throughout Month

Monitors (Daily) During Month –Issues Imbalance Notices

Nominations Submits Prior to 1st of Month Aggregates – Allocates Capacity if Necessary

Item / IssueItem / Issue ShipperShipper PipelinePipeline

Natural Gas DistributionNatural Gas Distribution

Natural Gas Distribution-Place in Physical Distribution Network

Natural Gas Distribution-Place in Physical Distribution Network

Tra

nsm

issi

on P

ipel

ine

1. PressureRegulator

2. Measurement

3. Odorization

Distribution Main - Trunk (100 PSIG)

1. Storage2. LNG3. CNG4. Propane/Air

Distribution Main (20 PSIG)

(1/4 PSIG)4 oz.

PressureRegulator

CityGate

PeakingSupply

PressureRegulator

CustomerMeter

Customer(House)

Miles of Pipe

Steel - 553,400Plastic - 501,200Other - 43,300

Total - 1,097,900

Company

Investor OwnedMunicipalPipelineOther

Total

Utility Sales by Company Type and Class (TCF)

Residential

4.1610.3030.0260.091

4.581

Commercial

1.8000.1870.0260.048

2.061

Industrial

0.5700.1720.8320.048

1.622

Elec. Gen.

0.1790.0390.1300.038

0.386

Total

6.7100.7011.0140.225

8. 650

Local Distribution Utilities

Source: AGA Gas Facts, 2003

Natural Gas Distribution Components of Delivered Residential Gas Price *

Natural Gas Distribution Components of Delivered Residential Gas Price *

Source: EIA (Brochure) Residential Gas Prices

Distribution Costs

Transmission Costs

Commodity Costs

42 %

14 %

44 %

* Average of Winter Prices 1999 - 2002

Natural Gas Distribution IssuesNatural Gas Distribution Issues

Seasonality of Demand - Meeting Peaks Economically

Fragmented Regulation - State / Local vs National

Retail Competition - Commodity Sale vs Gas Delivery

Information Needs - Custody vs Ownership

Balancing - Receipts vs Deliveries

Natural Gas SupplyNatural Gas Supply

Map Pattern of Gas MovementsMap Pattern of Gas Movements

Source: Energy Information Administration / Natural Gas Annual 2000

5,0004,0003,0002,0001,000

0

Billion Cubic Feet

= Less than 100 BCF Flow

U.S. Natural Gas Supply - ComponentsU.S. Natural Gas Supply - Components

Source: EIASource: EIA

TCF17.34.8

22.11.9

24.0

%7220

928

100

1992 Supplies (Gross)

TCF18.95.2

24.13.3

27.4

%6919

8812

100

2003 Supplies (Gross)

TCF165.423.6

189.0N/A

N/A

%8812

100N/A

N/A

Proved

12/31/03 Reserves (Dry Basis)

Notes:

• Onshore Reserves and Production Stimulated in Early 1990’s by Tax Credits

• Offshore Will Have Shorter Reserve Life (Smaller R/P Ratio) Due to High

Investment & Operating Costs Requiring Higher Flow Rates For Reserves

to be Economic.

• Recent Year’s Higher Gas Prices Have Encouraged Development of Uncoventional

Gas Supplies ( “Tight Gas”, CBM and Shales )

OnshoreOffshore

Total U.S.Imports (Net)

Total

Source

U.S. Natural Gas Supply - Future SourcesU.S. Natural Gas Supply - Future Sources

Source: EIASource: EIA

Alaska

Onshore Lower 48

Offshore Lower 48

Subtotal Unproved

Proved Reserves (2003)

Total U.S. Potential Reserves

Canada

LNG

Hydrates (U.S.)

252

872

307

1,431

189

1,620

N / A

N / A

320,222

Access / Pipeline / Economics

Access / Pipeline / Economics

Access / Pipeline

Pipeline / Economics

New Terminals / Economics

Technology / Economics

Source / AreaPotential

Gas Reserves (TCF) Issues

Unproved Recoverable (2000)

Liquified Natural Gas (LNG)Liquified Natural Gas (LNG)

Natural Gas SupplyNatural Gas Supply

LNG Plants / TerminalsLNG Plants / TerminalsExisting US Import Terminals June 2004

Location

Everett, MA

Lake Charles, LA

Cove Point, MD

Elba Island, GA

Total

Baseload

Capacity (BCF/D)

0.725

0.630

0.750

0.446

2.551

Planned

Expansion (BCF/D)

N/A

1.170

0.800

0.360

2.330

Total With

Expansion (BCF/D)

0.725

1.800

1.550

0.806

4.881

Annual

Capacity (BCF)

265

657

566

294

1,781

Proposed North American LNG Import Terminals June 2004

Location

Bahamas

New England

Texas

Alabama

Louisiana

California

Mexico

Canada

Total

Number of

Projects

3

3

6

1

6

3

3

2

27

Annual

Capacity (BCF)

910

922

3,139

365

2,993

1,369

1,241

548

11,487

Source: EIA LNG Markets and Uses June 2004 UpdateSource: EIA LNG Markets and Uses June 2004 Update

LNG EconomicsLNG Economics

Main Price Components of LNG Project:

• Gas Production (Reservoir to LNG Plant Including Gas Processing and Associated Pipelines)

• LNG Plant (Gas Treating, Liquefaction, LPG & Condensate Recovery, LNG Storage & Handling

• LNG Shipping (Vessel and Operations)

• Receiving Terminal (Unloading, Storage, Regasification and Distribution)

% of Cost

15 – 20

30 – 45

10 – 30

15 - 25

• 90 of World LNG Sold Under Long Term Contracts

• Crossover Point For LNG vs Pipeline: 1,250 Miles Offshore / 2,500 Miles Onshore (Per EIA Consultant)

• US 2002 Imports of LNG = 4% of World Market

• Worldwide Proved Gas Reserves = 5,500 TCF (60 Times 2002 Worldwide Consumption)

~

Source: EIA

LNG SHIPPINGLNG SHIPPING

• Standard Vessel Increasing from 125,000 m to 138,000 m

• Purchase Price of 138,000 m Vessel = $155 Million

• 10 – 30% of Delivered LNG Cost is Shipping

• 151 Vessels in LNG Trade, 55 Ships on Order

• LNG Vessel Charter Rate = $55,000 - $65,000/Day = $.30 - $.90/MMBTU

• LNG Cargo Transported at -163 C (-260 F) AtmosphericPressure (1/600 Reduction)

• 1 Million Metric Tons = 48.7 BCF; 125,000 m = 2.7 BCF;1 Million Metric Tons = 18 Cargoes

• Standard Vessel Increasing from 125,000 m to 138,000 m

• Purchase Price of 138,000 m Vessel = $155 Million

• 10 – 30% of Delivered LNG Cost is Shipping

• 151 Vessels in LNG Trade, 55 Ships on Order

• LNG Vessel Charter Rate = $55,000 - $65,000/Day = $.30 - $.90/MMBTU

• LNG Cargo Transported at -163 C (-260 F) AtmosphericPressure (1/600 Reduction)

• 1 Million Metric Tons = 48.7 BCF; 125,000 m = 2.7 BCF;1 Million Metric Tons = 18 Cargoes

3

33

o o

~

3 ~

Source: EIASource: EIA

Natural Gas StorageNatural Gas Storage

U.S. Underground and LNG StorageU.S. Underground and LNG StorageSummary of Underground and LNG Storage, by AGA Region and Reservoir Type, 2000

Depleted FieldsSalt CavernsAquifersLNG Storage Facilities

Consuming West

Consuming East

ProducingSource: EIA Natural Gas Storage in U.S. 2001

U. S. Underground Gas Storage FacilitiesU. S. Underground Gas Storage Facilities

Statistics

SitesSites

348

40

27

415

# %84

10

6

100

Working GasCapacity

Working GasCapacity

3,368

392

139

3,899

BCF %86

10

4

100

DailyDeliverabilty

DailyDeliverabilty

57,674

8,644

11,416

77,734

74

11

15

100

MMCF/D %

Working Gas /Deliverabilty Ratio

Working Gas /Deliverabilty Ratio

58

44

12

50

TypeType

Depleted Gas / Oil

Aquifer

Salt Cavern

Total

Source: EIA Natural Gas Storage in US 2001

U. S. Underground Gas Storage FacilitiesU. S. Underground Gas Storage Facilities

Characteristics (Generalization)

Type

Depleted Reservoir

Aquifer

Salt Dome

Type

Depleted Reservoir

Aquifer

Salt Dome

Cost ToBuild

Least

More

Most

Cost ToBuild

Least

More

Most

Base GasRequirement

Higher

Higher

Low

Base GasRequirement

Higher

Higher

Low

Working GasCapacity

Larger

Larger

Smaller

Working GasCapacity

Larger

Larger

Smaller

DailyDeliverabilty

Less

Less

Greatest

DailyDeliverabilty

Less

Less

Greatest

Natural Gas MarketingNatural Gas Marketing

Historical Path Today’s Paths

ResidentialConsumer

CommercialConsumer

IndustrialConsumer

EUGConsumer

LocalDistributionCompany

GasPipeline

CompanyProducer

Title and Custody Related Title and Custody NOT Necessarily Related

ResidentialConsumer

CommercialConsumer

IndustrialConsumer

EUGConsumer

LocalDistributionCompany

GasPipeline

CompanyProducer

IndustrialCustomer

GasMarketingCompany

EUGConsumer

Natural Gas MarketingGas Marketing Paths

Natural Gas MarketingGas Marketing Paths

Natural Gas MarketingPlayers in the Open Access Environment

Natural Gas MarketingPlayers in the Open Access Environment

Producers

IndependentMajor

DevonExxon

Gas Well GasOil Well Gas

No

Produce ReservesGenerate Cash

Types:

Examples:

Contribution:

Price Regulated:

Objectives:

Marketer

AffiliatedIndependent

El PasoDYNEGY

Supply AggregationLogistics Management

No

Margin on GasMargin on Services

Pipeline

InterstateIntrastate

TENNESSE GAS P/LHOUSTON PIPELINE

TransportationStorage

Yes

Fee For ServiceReturn on Capital

Local Utility

Investor OwnedMunicipal

ATMOSMEMPHIS

Supply AggregationTransportation

Yes

Fee For ServiceReturn on Capital

Consumer

Residential/CommercialIndustrial

McDonalds FranchiseEUG Plant

Market For GasMarket For Services

No

Secure SupplyMinimum Cost

Producers

1. Generate CashFlow

2. Ensure Access toMarket

3. Obtain Best Price

4. Match Supplies to Markets

5. Avoid Imbalance Penalties

6. Cost vs Benefit of Selling

Further Downthe Channel

7. Seasonal Arbitrage

8. Commodity Price Risk (Hedging)

Marketers

1. Achieve Margin (Spread)

2. Avoid ImbalancePenalties

3. Manage Price Risks

4. Seasonal Arbitrage

5. Geographic Arbitrage

6. Profit Opportunities inManaging Risks

For Others

Pipelines

1. Generate Transport/Storage Revenue

2. Extract Value ForService Provided

(Swing)3. Impose Discipline on

Shippers (Receipt vsDelivery Imbalances)

4. Account For Ownershipof Gas in Pipeline

Custody

5. Optimize SystemOperations

Local Utility (LDC)

1. Commodity Sales

2. Service Obligation

3. Supply Security/Cost

4. Transport Revenue

5. Pipeline/StorageCapacity Access

6. Pipeline Imbalances

7. Imbalances on LDC

8. Commodity PriceRisk

Consumer

1. Type of Service(Sale or Transport,

Firm orInterruptible)

2. Supply Security

3. Commodity Price

4. Access to Alternatives

5. Hedging

6. Imbalances

Natural Gas MarketingConsiderations of Participants

Natural Gas MarketingConsiderations of Participants

• Spot (Prompt) Month : Futures ContractClosest to Maturity.

• Basis : Difference Between Cash / FuturesPrices (Location , Time, etc.)

• 12 Month Strip : Average Value of TheNext 12 Months Futures Price.

• Divergence : Cash / Futures Prices Do NotMove In Same Direction / Amount.

• Spot (Prompt) Month : Futures ContractClosest to Maturity.

• Basis : Difference Between Cash / FuturesPrices (Location , Time, etc.)

• 12 Month Strip : Average Value of TheNext 12 Months Futures Price.

• Divergence : Cash / Futures Prices Do NotMove In Same Direction / Amount.

• Quantity : 10,000 MMBTU

• Price Quotation : $ Per MMBTU

• Delivery Point : Henry Hub - Sabine, LA.

• Number of Months Listed : 72 Consecutive

• Expiration Date : 3 Days Prior to FirstCalendar Date of Delivery MonthExpired Futures Go to Delivery

• Quantity : 10,000 MMBTU

• Price Quotation : $ Per MMBTU

• Delivery Point : Henry Hub - Sabine, LA.

• Number of Months Listed : 72 Consecutive

• Expiration Date : 3 Days Prior to FirstCalendar Date of Delivery MonthExpired Futures Go to Delivery

NYMEX Futures Contract Terms Definitions

Natural Gas Price HedgingNatural Gas Price HedgingNatural Gas Futures ContractNatural Gas Futures Contract

Natural Gas HedgingSharing / Apportionment of Risk and Rewards

Natural Gas HedgingSharing / Apportionment of Risk and Rewards

0.0

1.0

2.0

3.0

4.0

5.0

6.0

JAN

FE

B

MA

R

AP

R

MA

Y

JUN

JUL

AU

G

SE

P

OC

T

NO

V

DE

C

$ M

MB

TU

Cash & Futures Price(Future Position Sale Price)

$ 2 Loss

$ 2 Gain

Hedge Price = $3.00(Futures PositionPurchase Price)

Cash / Futures Price 5 5 4 2 2 3 4 4 3 1 3 4 $3.33Avg = 40/12 =$0.33Avg = 4/12 =

$3.00Net =

Futures 2 2 1 -1 -1 0 1 1 0 -2 0 1Gain Loss

3 3 3 3 3 3 3 3 3 3 3 3Net Gas Cost(Cash + Futures Gain/Loss)

Natural Gas Price HedgingTypes of Instruments Available

Natural Gas Price HedgingTypes of Instruments Available

FuturesContract

FuturesOption

SwapContract

Commitment

Buyer

Seller

Buy Commodity

Sell Commodity

Right to Futures Position

Obligation to Provide Position

Make Payment if Due

Make Payment if Due

Regulation Yes (CFTC & NYMEX)

Exchange Yes OTC No

No

Delivery Capability Yes No No

Term 18 Months Exchange 12 MonthsOTC - Open (Years)

Open (Years)

Costs

Margin

Administrative

Yes

Highest

Depends

Lower

No

Lowest

Natural Gas Price HedgingConsiderations of Players

Natural Gas Price HedgingConsiderations of Players

Purpose:

Objective:

Risk:

Gas Producers

Price Floor

Secure Cash Flow(For Drilling/

Acquisition)

Basis DifferentialsProduced vs.

Hedged VolumeNRI

Counter PartyRisk

Gas Marketers

Fix Margin(On Physical)

Secure Valuein Contracts

Basis DifferentialsCounter Party

RiskKeep Book

Balanced

FinancialSpeculatorsTrade Gain(On Paper)

Trading Business

Price VolatilityCounter Party

Risk

Local Utility (LDC)

Fix/Cap Gas Cost

Competitive PressureRegulatory Pressure

Basis DifferentialsPurchased vs.

Hedged VolumeRegulatoryHindsight

Counter PartyRisk

Consumer

Price Ceiling

Limit Gas Cost

Basis DifferentialsConsumed vs.Hedged VolumeCounter Party

Risk

THE ENDTHE END