“ Train Wreck ” Energy Prices and Infrastructure, the U.S. Economy and the American Consumer CIPA

1. “Train Wreck” Energy Prices and Infrastructure, the U.S. Economyand the American Consumer CIPA June 1, 2002

2. Energy in the United States • Where we are today. • How we got there. • Where we are heading.

3. 1. Where we are today.

4. Where We Are Today – OPEC • Regained control of the oil markets in 1999 • Lost control again in 2001 due to a collapse in demand and increased non-OPEC supply • Short term position may be tenuous (“Russian” factor) • Long term position may be stronger due to non-OPEC supply concerns outside of Russia • Worldwide demand and the economy will be the drivers • Wild cards – Israel, terror, Venezuela

5. Chavez Factor Source: J.P. Morgan Chase

6. Source: API

7. Natural Gas Inventory & Price SnapshotDuring the January 2001 Price Spike1/4/01AverageChange Natural Gas In Storage (BCF) 1,562 2,285 Down 32% Natural Gas Price $9.425 $2.300 Up 310% ($/MMBtu, Henry Hub, LA) Source: AGA, NYMEX

8. Natural Gas Inventory & Price SnapshotA Year Later1/4/021/4/01Average Natural Gas In Storage (BCF) 2,666 1,562 2,285 Natural Gas Price $2.350 $9.425 $2.300 ($/MMBtu, Henry Hub, LA) Source: AGA, NYMEX

9. Natural Gas 3/26/02 vs. Two Months Earlier • April 2002 closed at $3.472 up 68% • Storage 120% above a year ago • 56% over 8-year average • 9% over prior record in 1999 • Gas rig count down 43% from 2001 peak • Gas deliverability may be down as much as 5% year-to-year

10. Where We Are Today The supply of all our major energy sources is limited by both natural and political factors.

11. Where We Are Today More importantly, the infrastructure that makes it all work is inadequate for modern needs; the infrastructure is not being modernized.

12. Where We Are Today • The entire energy complex continues to experience a politically induced backlash • Last year it was high prices. This year it is “Enronitis” • This backlash takes many forms and threatens to further inhibit and restrict the energy complex’s ability to continue to provide plentiful and cheap energy to American businesses and consumers

13. Some Recent Infrastructure Events • Connecticut – Governor bans gas pipeline and electric transmission projects • New York – Senators propose legislation banning drilling in the Finger Lakes area • Great Lakes – Drilling under the U.S. portion is banned • Wyoming – US DOI Board of Appeals rejects CBM leases for first time

14. Where We Are Today The American success story of the past 100 years has had as its foundation: – A free market economy – A system of laws supporting property rights for both the individual and the enterprise – American ingenuity – American hard work ethic – Plentiful and low priced energy

15. 2. How we got there.

16. Critical Factors and Trends • Per capital consumption of energy up over 6% in last ten years • We haven’t built a major refinery in this country in over 20 years • We aren’t building enough pipelines • No new nuclear facilities since the 70s

17. Critical Factors and Trends • The national electric transmission grid and the regulations governing it are outdated • U.S. electric demand is up 23%, 1992 – 2000 • U.S. electric generation supply is up 6% over the same period • 95% of the new electric generation demand over the next five to seven years may have to be satisfied by natural gas

18. Critical Factors and Trends • The natural gas supply and the infrastructure to transport it may not be there in a healthy economy • Regulatory apparatus prohibits utilities from entering into long-term supply arrangements

19. California First; Guess Who Next • In 2000, California became a “third-world” country in terms of its energy infrastructure • California didn’t build a significant new electric generation facility between 1990 and 2000 • Their gas pipeline infrastructure was inadequate • Their electric transmission grid was in poor shape

20. California First; Guess Who Next • In 2000, California became a “third-world” country in terms of its energy infrastructure • California didn’t build a significant new electric generation facility between 1990 and 2000 • Their gas pipeline infrastructure was inadequate • Their electric transmission grid was in poor shape • Some progress has been made, but will they now fall back into a deep sleep?

21. U.S. Weekly Electricity Generation Billion kilowatt hours per month Source: Energy Directions, Inc.

22. High Tech Power Usage • “High-Tech’s” use of electric power was less than 1% of total electric demand in 1993 • It is now 10-12% • It may be over 20% by the end of the decade

23. 3. Where we are heading. – Political considerations

24. Observations About the American Consumer • We believe energy supply is abundant • We believe it should be inexpensive • We are committed environmentalists and expect no incremental costs for energy associated therewith • We support and encourage the politician’s and news media’s assertions that the energy industry is the enemy and the cause of our problems

25. Observations About the American Consumer • We remain poorly educated on energy issues • In the winter of 2000/2001, 57% of Californians believed there was no shortage of electricity • NIMBY – Not In My Back Yard

26. Observations About Hard Working Environmentalists • BANANA – Build Absolutely Nothing Anywhere Near Anything • They have never seen a cost/benefit analysis that they like • They are crusaders; the most committed and well financed movement in the world • NOPE – Not On Planet Earth

27. Observations About American Politicians • They are poorly informed about energy (especially at the local level) • Many take the position that there are no shortages, only price-fixers and gougers (CA – jail for generators) (Hawaii – Gasoline Price Caps) • They solve problems by affixing blame instead of directly confronting the issues • Why? Are they simply responding to what the uninformed voter wants to hear?

28. Observations About American Politicians • They have been most skillful the past 30 years hiding the true costs of the environmental movement from their constituents • It’s fixin’ to get a lot tougher to hide

29. Great Energy Fallacies of Our Time • Electric cars generate less pollution • OPEC is the problem/solution • Nuclear power is unsafe • Fuel cells will save us • Wind and solar power will save us

30. Great Energy Fallacies of Our Time • Price fixing/gouging is rampant across the entire energy industry landscape • Building electric power generation facilities will cure our problems • High voltage transmission lines cause cancer • Energy conservation is easy to obtain, even with low prices

31. Where we are heading. • – The cycle

32. Short Term Horizon The high prices for natural gas and oil in late 2000 and early 2001 significantly dampened demand for energy and helped to slow the U.S. economy.

33. Agriculture Industry (Entire) Aluminum Smelters Ammonia Plants Brick Makers Carbon Black Plants Cement Makers Chemical Plants Citrus Farms Copper Mines/Milling Dairy Farms Electric Utilities Fertilizer Plants Glass Plants Greenhouses (Flower Industry) Methanol Refineries Paper Mills Plastic Plants Potato Processors Steel Industry Some Industries Directly Damagedby last round of high prices

34. The Emerging Energy Cycle • High prices cause demand for energy to drop at the same time energy supply starts to increase (March 2000 – January 2001) • Energy prices drop (April – December 2001) • Oil and gas drilling activity and energy infrastructure improvements slow down (July 2001 – Today) • Energy supply drops. At the same time demand rebounds with the improving economy (Today) • Another energy shortage occurs (Late 2002 – Early 2004) • The next one could be much worse

35. Why It Could Be Worse • The recession and corresponding energy price collapse have swept the energy supply and infrastructure problems under the rug. Will they return as bigger problems when the economy recovers? • Supply drops are becoming steeper with each cycle; the infrastructure is further deteriorating

36. Why It Could Be Worse • Energy price volatility and the political landscape continue to make it hard for U.S. energy companies to access capital markets and find places to drill • Lack of investment capital will delay the rebuilding of the energy infrastructure. Will make problems worse later in the decade.

37. Tough Times in the Oil Patch • Invest $100 in DJIA stocks on 12/31/80 • Now have $1,825 (1) (2) • Invest $100 in independent oil and gas companies on 12/31/80 • Now have $51 (1) (3) • Energy stocks down 14% from their peak on May 21st of last year • If you want to make a little bit of money in oil and gas; invest a lot of money • As of 3/28/02. • Includes average dividend yield of 2.0% p.a. and dividends reinvested. • Assumes no dividends paid.

38. 3. Where we are heading.

39. The First Decade of the 21st Century –The Tough Options to Be Balanced

40. Where we are heading – physical considerations – 2000-2020 • Demand for energy increases 1.4% per year. • Demand for electricity increases 1.8% per year. • Hydrocarbon’s market share increases from 85% to 87% • Imports rise from 60% to 69% Source: EIA

41. U.S. Total Energy Demand – Market Share Total Share Source: Gas Technology Institute

42. U.S. Total Energy Demand – Market Share Electric Share Source: Gas Technology Institute

43. Nuclear Power Still fulfills 8% of total U.S. energy needs 21% of electric generation More people will die today on U.S. highways than have died in U.S. nuclear power accidents throughout the industry’s history No new plants since the early 70s TMI China Syndrome Chernobyl

44. Nuclear Power Nuclear waste disposal remains biggest problem – Nevada NIMBY Environmentalists/consumers – NIMBY, BANANA, NOPE If you want clean air, definitely one of the fuels of the early 21st century No CO2 problems No SO2, NOx problems

45. Coal Fulfills 24% of total U.S. energy needs 55% of electric generation Excess capacity shut down due to CAA Virtually no new plants being built Will have to step up later in the decade Enviros/Consumers – NIMBY and BANANA May be able to clean up SO2, NOx. Will be expensive No solution for CO2 emissions

46. Hydropower Fulfills 3% of total energy needs 9% of electric generation – most in western U.S. Low inventory for Western U.S. last summer (“Train Wreck” – high prices, avoided blackouts but hurt the region’s economy) No more dams (BANANA, NOPE)

47. Petroleum Fulfills 38% of total U.S. energy needs Only 2% of electric generation High winter home heating oil demand pressures summer gasoline supplies High summer gasoline demand pressures winter home heating oil supply

48. No new refineries built in this country in over 20 years (324 then to 150 +/- now) Must now import refined products to meet demand 16 different blends of RFG in three grades (48 total) are complicating matters, especially to meet regional political interests We import almost 60% of the crude oil consumed in this country Petroleum

49. Major U.S. accumulations off limits (ANWR, coastal waters) Drilling wells – NIMBY, BANANA Building refineries – NIMBY, BANANA Building oil-fired electric generation facilities – NIMBY, BANANA Petroleum