Southeast Infrastructure Update and Impact

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Southeast Infrastructure Update and Impact

• SGA Management Conference
• Atlanta, GA
• April 21, 2008
• Russell Murrell
• Vice President, Marketing

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EnergySouth Midstream Storage Facility Map
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Gulf Coast Gas Market Environment

• Demand growth will primarily come from electric
  generation (seasonal/peaking)
• Conventional supply sources will continue to
  ratably diminish and be replaced with more price
  sensitive unconventional supplies (shale/LNG)
• Marginal gas supply to meet increased gas demand
  will come from batched LNG imports - received
  primarily off peak - as the U.S. must compete
  with global markets for this supply during peak
  winter season

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Impact of Changes to Gulf Coast Gas Market

• Increase in peaking gas demand, matched with
  redistribution of gas supply portfolio will lead
  to increased seasonal and daily price volatility
• Will the Southeast be long or short?
• Pipeline takeaway expansion
• LNG
• Demand growth
• Additional infrastructure is needed to balance
  the mismatch between physical supply/demand

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2007 Domestic Natural Gas Demand Supply
Components
Demand
Supply
Source EIA
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U.S. Gulf Coast Natural Gas Demand Forecast
Growth (2007 - 2016) Elec. Gen 34.2 Industrial
4.2 Res Com 11.0 Other 8.9
Source PACE
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Cancelled Coal-Fired Generation Projects since
2004
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Illustrative Domestic Daily Gas Demand Load By
Sector

• Gas demand growth will come from the
  non-industrial, weather sensitive sectors leading
  to increased swings in daily gas usage and
  greater price volatility

Source EIA
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Proven Global Gas Reserves as of 2006 (TCF)
2006 Proven Gas Reserves (TCF) Middle
East 2,593 (40.5) Europe Eurasia 2,263
(35.3) Asia Pacific 523 (8.2) Africa
501 (7.8) N. America 282 (4.4) S.
America 242 (3.8) Total TCF 6,404
2,263
282
2,593
523
501
242
Source BP Statistical Review of World Energy 2007
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Historical Proven Global Natural Gas Reserves
Source BP Statistical Review of World Energy
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U.S Gulf Coast Natural Gas Supply Portfolio Shift
Source PACE
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Domestic Natural Gas Import Forecast
Source PACE
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Domestic Natural Gas Supply Characteristics

• Conventional Reserves
• Declining production
• Less price sensitive (baseload)
• Becoming more expensive to produce (deepwater)
• Pipeline Imports
• Domestic imports rapidly declining
• Canadian production used increasingly for oil
  sands recovery techniques
• Unconventional Reserves
• High initial depletion rate
• Very price sensitive
• Expensive to produce
• LNG Import Supplies
• Batched deliveries
• Subject to global natural gas demand profile
  (counter-seasonal for US market)
• Subject to geopolitical risk
• Subject to weather sensitivity
• Subject to mechanical complexities

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Overview of Global LNG Market

• LNG is becoming increasingly more of a
  freely-traded, global spot market commodity
  although majority of LNG is still sold through
  traditional long term contracts
• Annual liquefaction capacity is expected to
  increase 30 to 12 Tcf by 2010
• LNG shipping capacity is expected to grow 50 by
  2010 as 58 new ships are added to the existing
  fleet of 251
• Source CERA

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U.S. LNG Import Forecast (TCF/Year)
Source Pace
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Forecasted seasonality of LNG Imports into U.S.
Source PACE
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LNG Balancing Requirement Forecast
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Impact of LNG on Domestic Natural Gas Storage

• Asia and Europe have historically paid more for
  LNG shipments and will continue to be the highest
  bidders in peak demand periods (the northern
  hemisphere winter)
• Increased liquefaction capacity will lead to
  available cargos during lower demand periods
• The U.S.s gas infrastructure is best equipped to
  receive and store the excess cargo capacity
• Gulf Coast is friendliest for regas development
• Anticipated result of LNG imports is an increase
  in both daily and seasonal natural gas price
  volatility
• Batched deliveries of LNG will require
  significant additional high-deliverability
  storage facilities

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Components of Domestic Natural Gas Supply Demand

• Demand Drivers
• Electric Generation
• Residential
• Commercial
• Industrial

• Sources of Supply
• LNG Imports
• Unconventional Production
• Pipeline Imports
• Conventional Production

Higher Growth
Lower Growth (or Decline)
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Components of Domestic Natural Gas Supply Demand

• Demand Drivers
• Electric Generation
• Residential
• Commercial
• Industrial

• Sources of Supply
• LNG Imports
• Unconventional Production
• Pipeline Imports
• Conventional Production

Price Volatility
Price Stability
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U.S. Natural Gas Flow
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Gulf Coast Gas Flow
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Gulf Coast Supply Disruptions
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Historical U.S. Natural Gas Storage Capacity
Sources FERC / PACE
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U.S. Gulf Coast Storage Demand Forecast
Source PACE
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Gulf Coast Natural Gas Storage

• 50 existing storage facilities currently provide
  858 Bcf of storage capacity and over 24 Bcf/d of
  peak deliverability within the Gulf Coast.

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Gulf Coast Natural Gas Storage by State

• Texas and Louisiana currently possess the highest
  amount of storage capacity, but additional
  development is taking place in downstream
  locations in Mississippi.
• Proposed salt cavern developments, in particular,
  are projected to add as much as 18.5 Bcf/d of
  deliverability in Louisiana and Mississippi.

Source Pace
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Gulf Coast Natural Gas Storage by Type

• Nearly all of U.S. salt cavern storage capacity
  is situated in the Gulf Coast, but Depleted
  reservoir facilities still represent over 80
  percent of capacity in the region.
• However, currently proposed salt cavern storage
  facilities represent over 80 percent of proposed
  capacity in the Gulf Coast, as well as over 90
  percent of incremental deliverability.

Source Pace
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Salt Storage vs. Reservoir Storage
SALT
RESERVOIR
High Performance Flexible Nimble
Slow Steady Seasonal
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Cost Comparison of Salt and Reservoir Storage

• Different types of storage suit different
  customers needs
• Reservoir storage provides a lower cost per total
  Dth of capacity contracted, while salt storage
  provides a lower cost per Dth of withdrawal
  capacity

Calculations based on 100,000 Dth/day of
withdrawal capacity
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Conclusion for Southeast Natural Gas Storage
Industry

• Increased peaking natural gas demand, met with
  increasingly volatile natural gas supply
  components will lead to increases in both
  seasonal and daily price volatility as well as
  increased requirements for physical balancing
  resulting in a substantial increase in demand for
  gas storage capacity and deliverability at
  strategic locations on the natural gas grid.

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Thank You for Your Attention

• For more information
• Russell Murrell
• Vice President, Marketing
• 281-423-2789
• www.esmidstream.com