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NEPOOL Reliability Committee – Agenda Item 2.2 October 5, 2005 Mark Babula – ISO-NE

* * D R A F T * * * Post Katrina and Rita Outlook on Fuel Supply Adequacy and Bulk Power Security in New England – Winter 2005/06. NEPOOL Reliability Committee – Agenda Item 2.2 October 5, 2005 Mark Babula – ISO-NE. Agenda. Hurricane impacts

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NEPOOL Reliability Committee – Agenda Item 2.2 October 5, 2005 Mark Babula – ISO-NE

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  1. * * D R A F T * * *Post Katrina and Rita Outlook on Fuel Supply Adequacy and Bulk Power Securityin New England – Winter 2005/06 NEPOOL Reliability Committee – Agenda Item 2.2 October 5, 2005 Mark Babula – ISO-NE

  2. Agenda • Hurricane impacts • Current and cumulative shut-in natural gas and oil production • Gulf of Mexico infrastructure update • Natural gas and oil price outlook for 2005/06 heating season • Natural gas / oil infrastructure considerations in New England with respect to bulk power security • General Observations

  3. Hurricanes Caused Extreme Disruption Across Gas / Oil Supply Chains • Massive short-term shut-in gas production • High impact on gas gathering and processing plants • Pipelines • Gathering systems • Long-haul pipelines serving Atlantic Seaboard • Oil production • Refineries • Oil transportation and delivery systems

  4. Current Gas and Oil Supply and Infrastructure Status - Hurricane Recovery • Current shut-in production as of September 28 (MMS) • Gas = 8.0 Bcf/d • ~ 80% total Gulf of Mexico production • ~ 16% U.S. daily production • Oil = 1.5 Million BPD • ~ 100% total Gulf of Mexico production • ~ 29% U.S. daily production • Cumulative production loss to date • Gas = 180.6 Bcf or ~1% U.S. annual production • Oil = 37.9 million barrels or ~ 2% U.S. annual production • Substantial decrease in gas deliverability on both Transco and Tennessee pipelines • Transco • Initial loss of about 3.4 Bcf/d out of 8.0 Bcf/d total certificated deliverability due to Katrina • Emergency scheduling procedure invoked • Continued adverse operating impacts to market centers in NYC/LI • Tennessee • 0.800 Bcf/d shut-in due to Rita • 0.650 Bcf/d remains shut-in due to Katrina

  5. Gas Infrastructure Update • Force Majeure with respect to physical deliveries at Henry Hub (Erath, LA) – resumption unlikely until mid-October • Industry/Gov. assessment of offshore gas gathering systems: • Functionality of the off-shore gathering systems dependent on resumption of offshore production and onshore processing • Lake Charles LNG terminal remains down • Minor damage reported, full operation when power restored • Excelerate Gulf Gateway offshore LNG terminal undamaged • Over a dozen gas processing plants off-line, several with significant damage • Most are expected to return to operation by the end of October when flooding recedes and power is restored • Williams’ Cameron Meadows (LA) and Dynegy’s Venice (LA) plants may take longer to repair damages (1.3 Bcf/d processing capacity)

  6. Oil Infrastructure Update • Louisiana Offshore Oil Port (LOOP) operating at 100% • Largest crude oil import facility in U.S. • 7 refineries around Lake Charles, LA / Port Arthur, TX • 1.7 Million BPD have suffered significant damage • Repairs and start-ups may last a month or more • 4 refineries likely to remain shut-down to EOY, ~5% of U.S. capacity • Chevron, Pascagoula, MS 325,000 BPD • ConocoPhillips, Belle Chasse, LA 247,000 BPD • ExxonMobil, Chalmette, LA 187,000 BPD • Murphy Oil, Meraux, LA 120,000 BPD Total 779,000 BPD

  7. Oil Infrastructure Update (cont’d) • Extended refinery shutdowns (> 2 weeks) equate to 14.8% of U.S. capacity • Substantial damage to deepwater oil and gas production platforms: • Shut-in oil from Shell Mars, Mensa, Ursa, and Cognac ~450,000 BPD and shut-in natural gas ~0.7 Bcf/d • Shut-in oil from Chevron Typhoon 45,000 BPD and shut-in gas ~60 MMcf/d • Not likely to return to production until January 2006

  8. Winter 2005/2006 Price Outlook

  9. Gas and Oil Price Outlookthru March 2006 • Pre/Post Katrina & Rita NYMEX futures prices (12-month strip November 2005 - October 2006) • Gas prices into-the-pipe likely to retain Katrina / Rita price impacts through 2005/06 heating season, a 24% increase from pre-Katrina levels • Crude oil and RFO prices have remained relatively stable at pre-Katrina levels • Withdrawals from SPR and European stockpiles as well as increased oil imports have tempered crude price run-up • Heating oil prices jumped 10% following Katrina / Rita

  10. Gas and Oil Price Outlook thru March 2006 (cont’d.) • 2004 v. 2005 NYMEX daily front month prices and daily 12 month strip prices show no significant backwardation through Q1 2006 • Pronounced upward gas price pressure following Ivan, Katrina and Rita • Pre-Katrina gas price volatility pattern continues • More significant Katrina and Rita heating oil price impacts (refinery outages) • Crude oil price impacts suppressed by global market trends • Good prospects for gas and oil mean price reversion towards end of Q2 2006

  11. Daily Spot Gas Prices $18.00 Katrina Makes Landfall Rita Enters GOM $17.00 Henry Hub $16.00 Dawn $15.00 Algonquin Citygates Transco Z6 NY $14.00 Spot Gas Price ($/MMBtu) $13.00 $12.00 $11.00 $10.00 $9.00 $8.00 8/1/05 8/8/05 9/5/05 8/15/05 8/22/05 8/29/05 9/12/05 9/19/05 9/26/05

  12. NYMEX Future Prices, November 2005 – October 2006 Before and After Katrina Makes Landfall Natural Gas Crude Oil Heating Oil 1.0% RFO (Henry Hub) (WTI) (NYH) (NYH) LAI Regression NYMEX Futures (Nov-05 to Oct-06) $/MMBtu 8/23/05 9.49 11.45 13.47 7.57 8/24/05 9.71 11.74 13.88 7.75 8/25/05 9.65 11.78 13.93 7.77 8/26/05 9.63 11.56 13.67 7.64 8/29/05 10.35 11.67 13.94 7.70 Katrina Makes Landfall 8/30/05 10.62 11.90 14.76 7.84 8/31/05 10.43 11.86 14.61 7.82 9/01/05 10.63 11.97 15.23 7.89 9/02/05 10.56 11.73 14.55 7.74 9/06/05 10.57 11.59 14.37 7.65 9/07/05 10.41 11.34 13.88 7.50 9/08/05 10.61 11.38 13.82 7.53 9/09/05 10.65 11.29 13.69 7.47 9/12/05 10.52 11.15 13.26 7.39 9/13/05 10.36 11.11 13.41 7.36 9/14/05 10.65 11.42 13.91 7.55 9/15/05 10.83 11.35 13.85 7.51 9/16/05 10.88 11.05 13.54 7.33 9/19/05 11.74 11.62 14.60 7.68 9/20/05 11.63 11.42 14.48 7.55 Rita Enters GOM 9/21/05 11.60 11.48 14.50 7.59 9/22/05 11.62 11.48 14.50 7.59 9/23/05 11.41 11.18 14.07 7.41 9/26/05 11.76 11.42 14.62 7.55 9/27/05 11.77 11.32 14.54 7.49 9/28/05 11.76 11.35 14.55 7.51

  13. Heating Oil and Henry Hub Forward Prices 16.00 15.00 NYH Heating Oil (Sep 27) 14.00 13.00 NYH Heating Oil (Aug 23) Forward Price ($/MMBtu) 12.00 11.00 Henry Hub (Sep 27) 10.00 9.00 Henry Hub (Aug 23) 8.00 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06

  14. Crude Oil and Residual Fuel Oil Forward Prices 12.00 WTI Crude Oil (Aug 23) WTI Crude Oil (Sep 27) 11.00 10.00 Forward Price ($/MMBtu) 9.00 8.00 NYH 1.0% RFO (Aug 23) NYH 1.0% RFO (Sep 27) 7.00 6.00 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06

  15. Natural Gas and Oil Infrastructure Considerations in New England

  16. Approximate Sources of Gas Supply for New England Sable Island 100% Canada 100% Canada 100% Distrigas 11% Gulf of Mexico 30% Iroquois 9% Tennessee 32% M&N 13% Canada 59% PNGTS 7% Algonquin 39% Distrigas 9% Gulf of Mexico 91% Note: Algonquin receives some Sable Island gas via Hubline

  17. Sable Island Production Depletion Trend

  18. LAI Outlook on Regional Deliverability Affecting Bulk Power (Heating Season, 2005-06) Business As Usual Potential Adverse Exposure Anticipated Constraints

  19. New England Gas Pipeline Operational Flow Order Penalties 1 Dth = 1 MMBtu

  20. Pipeline Tariff RestrictionsAffecting Non-Core • Iroquois has banished free riders • Quick start units cannot rely on line-pack in RTM w/o confirmation of nomination and upstream supply • Substantial hourly swing permitted for entitlement holders, i.e., 120% of the uniform take for 3 consecutive hours, twice a day • Tennessee and Algonquin can compel shippers to use gas ratably (uniform hourly flow) during cold snaps, capacity constraints/reductions or contingency events • LDCs have greater ability to manage hourly variances • Combined cycle plants operating around the clock may be able to manage variances • Combined cycle plants and peakers scheduled to follow load in DAM or RTM are exposed to heavy penalties

  21. Oil Infrastructure in New England • No pipeline network linking New England with major refineries • Limited pipeline products distribution within New England • Distillate and RFO delivered by tankers and barges to Boston, New Haven, Portsmouth, Portland, Bridgeport • Limited truck or rail transportation to inland power plants • Supplies from East & Gulf coast refineries, New Brunswick & Foreign sources • Storage at port terminals, regional terminals, and at plant sites

  22. New England Sales of Distillate Fuel Oilby Sector - 2003 Electric 1% Commercial / Industrial 18% Residential 51% Other 30% Source: EIA

  23. Distillate Market Constraints • High and volatile distillate oil prices should rationalize oil stocks to New England ports and marine terminals • Severe constraints on redelivery during cold snaps from terminals to end-users • Extreme limitations concerning number of trucks, drivers, hours, hazardous roads • Core markets top priority for deliveries • Generator plant site refills problematic • Gas-fired combined cycle capacity in New England • ~6,500 MW (19%) has back-up fuel capability • Average on-site storage = 23,300 Bbls, about 67 hours equivalent operation at full load* • Allowable winter generation on oil: 8.5 TWH, but 28.5% permitted only when gas is “unavailable”* *LAI estimate based on averages from Tables 2 and 7 of “Dual-Fuel Generating Capacity and Environmental Constraints Analysis” Interim Report

  24. New England Sales of Residual Fuel Oilby Sector - 2003 Industrial 16% Commercial 11% Electric 73% Source: EIA

  25. RFO Outlook – Winter 2005-06 • RFO capacity characteristics • Plants with waterborne delivery should be able to obtain necessary fuel supplies • On-site storage 16.3 MM Bbl • Typical RFO Unit Parameters • Minimum run time 8 – 50 hrs • Minimum down time 8 – 50 hrs • Cold start 6 – 20 hrs • Hot start 2 – 12 hrs • State regulations and/or air permits limit % Sulfur content • Typical requirement = 0.5% Sulfur or less

  26. Northeast Home Heating Oil Reserve 2.0% of total distillate sales for 2003 8 days of Winter season sales of No. 2 Heating Oil No home heating oil reserve in MA, NH, ME and VT

  27. General Observations

  28. Summary Observations re Katrina / Rita Impacts on New England • Total anticipated natural gas production losses for 2005 may exceed 300 Bcf (1.6% of total U.S. annual production) • 2006 winter losses may be more • About 1 Bcf/d (10% of Gulf production) may be unavailable this winter – assuming no additional weather induced destruction • Substantial lost offshore gas gathering capacity is likely to result in a continuing supply deficit thru Q2 2006 on those trunklines serving the Atlantic seaboard -- in particular, Transco and Tennessee pipelines • Substantial loss of oil refinery capacity in the Gulf portends tight distillate supplies and very high prices at least through the heating season, perhaps through 2008 • Crude and fuel oil production losses can be mitigated by increased imports—at high incremental costs

  29. Summary Observations re Katrina / Rita Impacts on New England (cont’d) • Increased natural gas imports from western and Atlantic Canada as well as LNG from Distrigas are unlikely to significantly replace lost production from the Gulf of Mexico on a sustained basis • Increased natural gas withdrawals from major storage fields at Dawn, Ellisburg, Leidy, & other Columbia/Dominion storage facilities are predominantly for peak shaving of core gas markets and are not a base load substitute for reduced production from the Gulf of Mexico • Increased interconnect gas flows at Wright, Brookfield, Shelton and/or Mendon may alleviate gas supply constraints, but are unlikely to be sustainable throughout the entire heating season to assure quick-start (gas turbine) or combined cycle operations, particularly in Connecticut • Gas supply constraints are likely to impact non-core customers, i.e. electric sector, disproportionately

  30. Summary Observations re Katrina / Rita Impacts on New England (cont’d) • Uncertainties about gas supply and deliverability for power generation in New England heighten the region’s dependence on oil-fired generation • Quick start units may require distillate oil rather than gas • Exploitation of pipeline line pack ill-advised and potentially detrimental to core gas customers • Residual Fuel Oil should be available at high prices by tanker or barge to coastal locations throughout the heating season • Trucking logistics to replenish fuel oil inventories at generating plants during cold snaps appear daunting and would be detrimental to core

  31. Data Sources • U.S. Energy Information Administration Data and Reports • U.S. Department of Energy, Office of Fossil Energy • ICF Consulting, “A study of New England and Massachusetts Petroleum Infrastructure and Distribution Systems”, submitted to Commonwealth of Massachusetts, Division of Energy Resources (2002) • U.S. Army Corps of Engineers Navigation Data Center • ISO New England RSP05 Report • ESS Group, “Dual-Fuel Generating Capacity and Environmental Constraints Analysis Interim Report”, prepared for ISO-NE • Electricity Sector Information Sharing Analysis Sector • Sprague Marketwatch • Northeast Gas Association • Massachusetts Division of Energy Resources

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