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Near-Term Outlook on the North American Natural Gas Market Presented to Petrobras Greg W. Hopper and James L. Gooding December 06, 2007. Black & Veatch delivers consulting, engineering and construction services to critical infrastructure industries. Energy. Water. Information. Government.

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  1. Near-Term Outlook on the North American Natural Gas MarketPresented to PetrobrasGreg W. Hopper and James L. GoodingDecember 06, 2007

  2. Black & Veatch delivers consulting, engineering and construction services to critical infrastructure industries Energy Water Information Government

  3. Black & Veatch – Enterprise Management Solutions / Lukens Energy Group services Strategy Process Application Services

  4. 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. USA demand continues to rise . . . Source: EIA AEO 2007

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

  7. Residential demand is forecasted to increase 21% by 2020 Source: EIA

  8. Commercial demand is forecasted to increase the fastest: 31% by 2020 Source: EIA

  9. Industrial demand is forecasted to rebound from recent declines and grow by 21% through 2020 Source: EIA

  10. 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

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

  12. North America includes many different gas-producing basins in different states of development Alaska North Slope Mackenzie Delta Mid-Continent Western Canada Rockies Gulf Coast Gulf of Mexico (GOM)

  13. Gulf of Mexico (GOM) production has become more significant and complex Represents ~20% of “Lower 48” gas supply Shallow water/deep gas is a wildcard Deepwater increases thru 2012 Source: TGS

  14. Offshore GOM production will steadily decline in response to rising production costs Source: Lippman Consulting, LEG/B&V Analysis

  15. Canadian production is expected to decline and the decline is compounded by delay in the Mackenzie Valley project Source: LEG/B&V Analysis

  16. Substantial LNG imports will be needed to meet demand Source: LEG/B&V Analysis

  17. Non-conventional production is a growing source of natural gas supply Source: EIA, AEO 2007

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

  19. Mid-Continent production is expected to grow on the strength of non-conventional shale gas plays Source: LEG/B&V Analysis

  20. 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

  21. Barnett Shale (north-central Texas) – peak production not expected for another 10 years Source: LEG/B&V Analysis

  22. 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

  23. USA existing and proposed LNG terminals are concentrated along the Gulf & Northeast Coasts Source: FERC

  24. LNG import expectations continue to moderate Source: EIA, LEG Analysis

  25. World liquefaction capacity is expected to more than double through 2010 Expected Worldwide Liquefaction Capacity Source: LNG OneWorld

  26. NYMEX seasonal spreads imply market concerns for tightening supplies Abnormally high seasonal spreadfor gas year 2006

  27. North America will compete with Europe and Asia for LNG supplies UK National Balancing Point (NBP) prices compared to Henry Hub

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

  29. North American supply realignment is driving new strategies and infrastructure investments

  30. 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%

  31. 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

  32. 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 Source: LEG/B&V Analysis

  33. Mid-continent supplies and pipelines will increase supplies to the Southeast USA Transco (3.4 Bcfd) Southern Natural (1.3 Bcfd) Florida Gas (2.1 Bcfd) Gulfstream (1.13 Bcfd) Source: Energy Velocity

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

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

  36. Natural gas storage must provide the critical flexibility and security to optimize LNG sales and satisfy demand Source: Energy Velocity

  37. Storage inventories have been close to 5-yr highs since 2006 EIA Weekly Storage Level and 5-yr range

  38. Basis prices may evolve to reflect wider western and eastern Gulf price spreads Pascagoula Area West LA Area Sabine Pass - West LA LNG Sites Henry Hub Area Pascagoula LNG

  39. Many new gas storage facilities have been proposed along the Gulf Coast where pipelines and LNG terminals will connect Source: Energy Velocity

  40. Expansion of Previously Built Storage New Storage Field Proposed Storage Field New storage will be justified as LNG imports and markets grow 100% of current Gulf Coast LNG regas capacity Golden Triangle Storage Source: Energy Velocity

  41. USA Generation Needs Could Drive Nearly $0.5 Trillion in New Capacity Investments by 2027 NPCC 6.9/18.7 MAPP Other WECC 5.1/12.0 0/2.1 MAAC 8.2/20.2 ECAR MAIN WECC 12.8/25.0 12.6/34.3 CA SPP 12.9/30.1 Rocky Mtn. 2.6/15.0 TVA Southern / VACAR 7.9/25.0 2.1/12.1 16.9/53.2 SERC ERCOT Entergy 5.0/25.0 FRCC 0/0 12.8/31.9 Total Capacity Need by 2015 – 106 GW Total Capacity Need by 2027 – 305 GW Source: B&V Analysis

  42. 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

  43. CO2 Emission Variations with Type of Power Plant

  44. 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

  45. LNG is the lynchpin of a global market for natural gas Source: BP Statistical Review of World Energy, 2007

  46. Thank you. Greg W. Hopper Vice President 713.590.2280 hoppergw@bv.com

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