Midstream Overview MS01 – Midstream Overview V1

1. Oil & Gas Training Midstream Overview MS01 – Midstream Overview V1

2. Section Objectives In this section, participants will: • Gain an understanding of the variety of midstream operations • Become familiar with key processing terms • Learn the major players in the Midstream business • Identify qualities that determine a midstream company’s value • Learn the structure and benefit of MLPs • Identify key sources of industry information

3. The Definition For this course… The Midstream provides the vital link between far-flung petroleum producing areas and the population centres where most consumers are located. Gathering and transmission pipeline companies are a major part of the midstream petroleum industry. The midstream processes, stores, markets and transports commodities such as crude oil, natural gas, natural gas liquids (NGLs), mainly ethane, propane and butane) and sulphur. Fractionation plants which remove NGL’s from the produced oil & gas stream are also a component of the midstream activities.

4. Midstream Elements of the Upstream Oil Industry Upstream materials focus on gas and important sectors... Exploration Drilling Production Gas Storage & Pipelines Crude Gathering Seismic ...High Risk -- High Return

5. Raw Liquid Pipelines Elements of Midstream Activities A key link from wellhead to industrial consumer… Producers Fractionator Purity Liquid Pipelines Refineries Gas Plant Chemical Plants Gas Gathering Pipelines NGL Terminals Storage Caverns Industrial Fuels International LPG Shipping Fractionation & Storage Marketing Agricultural Gathering Transportation Processing & Residential

6. Characteristics of the Midstream Industry Some midstream business drivers are obvious, some are not... • It’s the low risk asset-based part of the industry • Depends on success of upstream operations and the health of the petrochemical industry • FERC regulations apply to interstate activities • Natural gas price level has impact on attractiveness of NGL’s as feedstocks

7. Gathering Asset A veritable spider web of pipelines from the field... Gathering systems are a group of small pipelines which move the oil or gas from wells and fields into a major pipeline or processing facility. It “gathers” the gas for transportation. This is the the starting point of the raw resource’s transformation into a usable product. Source: Crosstex Energy’s Gulf Coast gathering system

8. Processing Facilities Processing facilities separate certain hydrocarbon components and remove impurities from natural gas... Most of the processed liquids are fractionated into components such as ethane, butane and propane to be marketed as chemical feedstock, fuel or blend stock. They are then compressed for transportation With a throughput capacity of 2.4 billion cubic feet per day, ConocoPhillips’ Empress plant in Alberta, Canada, is one of the largest natural gas processing facilities in North America. The plant’s ability to separate individual natural gas liquids gives the company a strong position in the regional propane market.

9. Midstream Contract Example There are primarily two types of processing contracts entered into… Gas Purchase – title passes from producer to the plant owner at a sales meter on the lease rather than at the point where gas enters the plant. Payments for the gas may be based on formulas involving the liquid content of the gas, and sales prices received for the NGL products and residue gas by the plant owner. Gas Processing – title does not pass to plant owner. Rather, the plant owner charges a fee or takes a percentage of the gas or NGL in kind, stated as (1) a percentage of products extracted (POP), (2) a portion of the revenue received from sale of the products, or (3) a rate per mcf processed.

10. Fractionators Fractionation plants receive NGL stream from gas processing plants … The “rich” stream is separated or fractionated into separate products including: ethane (C2H6), propane (C3H8), butane (C4H10), and natural gasolines (C5’s to C10’s). These products are used by industrial end users, refineries, chemical plants.

11. Fractionator Operation Like refining, fractionation accomplished by heating and cooling the NGL mix in towers…

12. Storage Facilities - Underground Storage facility options - underground… Storage facilities house natural gas, natural gas liquids, or crude oil, in either above ground or in deep caverns or wells Injection Wells Many natural gas companies utilize storage facilities to capitalize on the seasonality of market prices. They store or “build” their inventory in the summer when prices are generally lower and sell in the winter when demand caused by colder weather drives prices up.

13. LPG tank Storage Facilities - Surface Types of surface storage facilities… Crude oil tank farm

14. Ownership of Interstate Pipelines There are over 206,000 miles of interstate pipelines in the USA… Apache @ PESA Conference 4/2002

15. Gas Processing: Duke Energy Field Services British Petroleum El Paso* Williams ExxonMobil* Fractionation: Koch Enterprise Conoco Phillips Dynegy* El Paso L.P. * Storage: Enterprise TEPPCO Dow Dynegy * El Paso L.P. * Distribution: Enterprise Dow Conoco Phillips TEPPCO Koch Key Midstream Participants Most companies participate across the midstream value chain… * - PwC audit clients Source: www.envantageinc.com

16. Pipeline Factors Favoring MLP’s Pipeline characteristics in USA make MLP model effective… • Established and, in many cases, ‘monopoly’ franchises support consistent growth going forward. • Throughput increases leveraged into even higher income and cash flow gains as the majority of costs remain fixed. • Products pipelines have advantage of ‘grandfathered’ rates that are deemed just and reasonable and include inflationary (PPI-1%) rate increases. • Inelastic demand shields earnings from most vagaries of the economy. Source: Goldman Sachs

17. Master Limited Partnership - Advantages MLP use by midstream companies to leverage cash flow assets… Master Limited Partnerships (MLPs) are a business structure comprised of one General Partner (GP) and at least one Limited Partner (LP). Typically, companies will exchange low growth, but revenue-producing assets to investors in return for a promise to pay out the cash flow after maintenance expenses, but they retain control. Allows companies to obtain cash upfront for their investment in revenue-producing assets from investors, yet maintain operation control. The primary investor advantage of an MLP is that it allows them to avoid corporate (double) taxation and get a tax-deferred stream of income or pay less individual taxes on cash distributions, which are typically lower than corporate rates. Many of the pipeline & midstream MLPs are publicly traded http://www.mcdep.com/kmpingpr20311.PDF

18. Buckeye Partners Gulfterra Energy Partners (El Paso) Enbridge Energy Partners Enterprise Products Partners Kaneb Pipe Line Partners Kinder Morgan Energy Partners Northern Border Partners Plains All American Partners Trans Canada Pipelines TEPPCO Partners Valero, L.P. Magellan Midstream Partners (Williams) Sunoco Logistics Refined products pipeline and storage Nat. gas, oil, and NGL pipelines, storageand E&P Crude oil pipeline, natural gas gatheringand transmission Diversified NGLs and naturalgas pipelines Refined products pipeline and storage Refined products, natural gas and CO2 pipelines and storage Natural gas pipeline, gathering and processing Crude oil pipeline, gathering, marketingand storage Natural gas pipelines - Canada Refined products, LPG and oil pipelinesand gas gathering Crude oil and refined productspipelines and storage Refined products pipeline and storage,ammonia pipeline Refined products pipeline and storage BPL 1,037 DT GTM 1,715 PwC EEP 1,568 PwC EPD 3,733 DT KPP 954 KPMG KMP 4921 PwC NBP 1,638 KPMG PAA 1,260 PwC TCLP 450 KPMG TPP 1,754 KPMG VLI 718 E&Y MMP 992 E&Y SXL 351 E&Y Pipeline MLP’s – Publicly Traded MarketCap (03/2003) $ MM A variety of midstream facility combinations now MLP’s… Symbol Auditor Source: Goldman Sachs

19. Auditing and Accounting Headlines Some auditing and accounting issues affecting Midstream clients… • Asset Retirement Obligations (FAS 143) • Pipeline imbalances • Inventory valuation and measurement • Other accounting, auditing and reporting issues

20. To Dig Deeper Future references to assist with client engagements…. Websites: Oil & Gas Journal – www.ogjonline.com Oil Price Information Service – www.opisnet.com Energy Information Administration –www.eia.doe.gov References: Petroleum Accounting –Principles, Procedures & Issues, 4th and 5th ed., PricewaterhouseCoopers, published by Professional Development Institute, Denton TX “The US Midstream Sector – Meeting the Challenges in Turbulent Times,” March 11, 2003, written by Peter Fasullo, En*Vantage Inc. (found at www.evantageinc.com)

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