Natural Gas 101 & Current Industry Issues

1. Natural Gas 101 &Current Industry Issues

2. Natural Gas Advantages • Domestic resource • Sufficient supply • Competitively priced • Relatively safe and clean burning

3. Natural Gas Accounts for Roughly One-Fourth of U.S. Primary Energy Consumption Source: Dept. of Energy, Energy Information Administration

4. Natural Gas Transportation System

5. The US Natural Gas Industry At A Glance Miles of Pipe Regulatory Regime Participants Producers 5,000 Independents 0 Phased price deregulation 21 Majors begun in 1979, completed in 1989 Pipelines 160 300,000 Federal Energy Regulatory Commission (FERC) Natural Gas Marketers Unregulated 250 0 Local Gas Utilities Investor-Owned 360 894,000 State Utility Commissions Municipal 860 320,000 Local Governments End Users Residential 64 million Unregulated 0 Commercial 5 million Industrial 200,000 Interstate - FERC 0 Electricity Generators 500 Intrastate - State Commissions Source: Dept. of Energy, Energy Information Administration, AGA

6. Supply, Exploration & Development Photo courtesy of OSHA

7. How Oil & Natural Gas Are Created Reprint permitted by the American Association of Petroleum Geologists

8. Well Success Rates Wildcat well: 10%-20% Exploratory well: 25%-50% Developmental well: 70%+

9. Crown Block Mud Hose T raveling Block Kelly Hook Rotary T able Swivel Mud Pump Draw W orks Casing Drill Pipe Bit 24803 Drilling Rig Reprint permitted by the American Association of Petroleum Geologists

10. Pipeline to Flow Process and Storage Christmas Tree Surface Casing Cement Intermediate Casing Cement Production Casing Tubing Completion Fluid Packer Cement Oil or Gas Zone Well Fluids Perforations Completed Well Reprint permitted by the American Association of Petroleum Geologists

11. Gas Oil Water Non-Traditional Drilling Techniques Reduce Environmental Impacts American Petroleum Institute, 1986

12. Natural Gas Production Is Responsive to Market Price SOURCE: U.S. Dept. of Energy, Energy Information Administration

13. Tightening Demand And Supply Curves = Price Volatility Lower-48 Dry Gas Production vs.Dry Gas Productive Capacity Productive Capability Gas Production

14. Recoverable Gas Resources in the US, 1968-2006 Trillion Cubic Feet Coalbed Methane PotentialResources Proved Reserves Cumulative Production Source: Potential Gas Committee

15. Pipeline Transmission System Photo courtesy of FERC

16. Pipeline Activities • Construction • FERC or state approval • Obtain right-of-way • Construction • Operation • Compression • Maintenance • Underground Storage

17. U.S. Natural Gas Pipeline Network

18. Pipeline Rates • Rate of return regulated by FERC • Traditional contracts with set rates • Capacity release market • Types of contracts/services • Firm • Interruptible • Released capacity • No-notice • Factors impacting returns • Demand - weather • Competition from other pipelines • Types of contracts

19. Distribution System Photo courtesy of Michigan Public Service Commission

20. Distribution Operations • Natural gas supply management • Gate station • Pressure reduction • Odorant • System construction & operation • Metering & customer service

21. Natural Gas Supply Management • Natural gas supplier options • Producer • Marketer • Intrastate pipeline • Company-owned production • Natural gas contract options • Contract length • Contract pricing • Indexed (monthly, weekly) • Fixed • Spot • Hedged (NYMEX)

22. Distribution Rates • Rates regulated by PSC’s • Costs spread over fixed and commodity • Purchased gas costs recovery • Rate schedules based on demand • Firm • Interruptible/special contracts • Transportation • Factors impacting returns • Weather • Competition • New construction/marketing • Conservation

23. Customers

24. Residential • 90% of total customers • 22% of total consumption • Weather sensitive • Conservation impact

25. Commercial • 9% of total customers • 15% of total consumption • Somewhat weather sensitive • Conservation impact • Market opportunities

26. Industrial • Less than 1% of total customers • 33% of total consumption • Can help manage sendout • Primarily transportation customer

27. Electric Generation • Less than 1% of total customers • 31% of total consumption • Demand growing • Difficult delivery requirements • Primarily transportation customer

28. Current Natural Gas Industry Issues

29. North American Natural Gas Supply Market • Access to some gas supplies are restricted. • “New frontier” gas supplies are necessary and take time. • LNG imports will become an important player in natural gas pricing. • North American supply/demand balance is and will remain tight. • Gas consumption grows. • Gas prices remain relatively high and volatile.

30. Lower-48 Supplies Will Not Be Enough • Canadian imports will be limited • Liquefied Natural Gas (LNG) imports will increase • Alaskan natural gas could flow to the continental US by 2020

31. LNG Imports Could Triple by 2011 Source: Energy Information Administration, Annual Energy Outlook 2008-2030.

32. Alaska Natural Gas Pipeline • Proposed 4.5 Bcf/d pipeline • Application process ongoing • Adds 35-40 Tcf of reserves immediately • New supply will meet 7% of annual needs • Estimated cost of $30 billion

33. Consumer Response to Gas Prices • Consumer bills have been increasing • Conservation efforts • Bill payment concerns

34. Typical Home Heating Costs Have Increased for Natural Gas Customers Winters Estimate Source: Energy Information Administration

35. Energy Efficiency Efforts Have Made Impacts • Use/customer dropped about 1%/yr pre 2000 • Appliance efficiency & better home construction • Rate structures adapting to conservation • Recent conservation has been more intense • Use/customer dropped 2.2%/yr post 2000 • Consumers do react to gas price increases • Past conservation not easily reversed

36. Policies to Address Price & Supply Concerns • Low-Income Household Energy Assistance Program (LIHEAP) • Increase access to gas supply • State price regulation – innovative rates

37. LIHEAP Funding Has Been Unsteady

38. Need For LIHEAP Has Grown

39. What are Utilities Doing to Help • 45% offer rate discounts • 35% forgive part or all of past arrearages • 38% participate in fuel funds • 50% have shareholder assistance programs • 10% offer discounts on the reconnection fee • 35% have other programs Source: AGA Survey

40. Increase Access to Supply Areas • Tract 181 in eastern Gulf of Mexico • Outer Continental Shelf • Rocky Mountain area

41. Innovative Rate Designs • For the customer • Budget billing • Fixed bills/fixed cost • For the company • Cost trackers • Non-volumetric rate design

42. Natural Gas Costs Commodity Costs Distribution Costs 30% of Utility Revenue Includes: Customer Service Operations Maintenance Depreciation Taxes Return on assets used to provide service • 70% of Utility Revenue

43. Types of Non-Volumetric Rates Revenue Decoupling Automatic Adjustments (partial decoupling) • Weather Normalization Clause Rate Stabilization Tariffs Monthly Fee • Fixed Monthly Distribution Charge • Two-Tier Customer Charge • Straight Fixed Variable (Demand Rate) • Modified Rate Blocks 43 million customers in 31 states are being served under non-volumetric rates

44. Climate Change Laws Are on the Horizon • GHG reduction goals will require major lifestyle changes • Several competing bills in Congress • Most call for about 70% reduction by 2050 • Gradual reductions over time • Expectations that legislation will pass in next administration

45. U.S. Greenhouse Gas Emissions by Sector – 1990-2005(Tg CO2 Equivalent) Source: U.S. Environmental Protection Agency

46. Summary • Tight energy market will continue • Consumers & gas utilities have responded • Technology, prices, consumer attitude & legislation will further promote energy efficiency • Need for cleanliness and high efficiency will serve natural gas well

47. Questions?

48. Thank You!