Natural Gas 101 & Current Industry Issues

Bruce McDowell American Gas Association May 2008

Copyright 2008 American Gas Association. All rights reserved

Natural Gas Advantages

Domestic resource Sufficient supply

Competitively priced
Relatively safe and clean burning

Natural Gas Accounts for Roughly OneFourth of U.S. Primary Energy Consumption
Natural Gas

Other

Coal

Oil
Source: Dept. of Energy, Energy Information Administration

Natural Gas Transportation System

The US Natural Gas Industry At A Glance

Participants Producers Pipelines
5,000 Independents 21 Majors
160 250

Miles of Pipe
0 300,000 0

Regulatory Regime
Phased price deregulation begun in 1979, completed in 1989

Federal Energy Regulatory Commission (FERC)

Unregulated

Natural Gas Marketers

Local Gas Utilities Investor-Owned Municipal End Users

360 860 Residential 64 million Commercial 5 million Industrial 200,000

894,000 320,000 0

State Utility Commissions Local Governments Unregulated

Electricity Generators 500

Interstate - FERC Intrastate - State Commissions

Source: Dept. of Energy, Energy Information Administration, AGA

Supply, Exploration & Development

Photo courtesy of OSHA

How Oil & Natural Gas Are Created Petroleum System Elements

Gas Cap Oil

Entrapment

Water

Seal Rock Reservoir Rock

Migration
120 F

Generation

350 F
24803

Reprint permitted by the American Association of Petroleum Geologists

Well Success Rates

Wildcat well: 10%-20% Exploratory well: 25%-50%

Developmental well: 70%+

Reprint permitted by the American Association of Petroleum Geologists

Crown Block

Drilling Rig
Mud Hose Kelly Rotary Table Mud Pump Traveling Block

Hook
Swivel

Casing Drill Pipe Bit

Draw Works

24803

Christmas Tree

Pipeline to Flow Process and Storage

Completed Well
Cement

Surface Casing

Intermediate Casing Cement Production Casing Tubing Completion Fluid Packer Cement

Well Fluids

Oil or Gas Zone Perforations

Reprint permitted by the American Association of Petroleum Geologists

Non-Traditional Drilling Techniques Reduce Environmental Impacts

Gas

Water

Oil

American Petroleum Institute, 1986

Natural Gas Production Is Responsive to Market Price

SOURCE: U.S. Dept. of Energy, Energy Information Administration

Tightening Demand And Supply Curves = Price Volatility

Lower-48 Dry Gas Production vs. Dry Gas Productive Capacity
56

Productive Capability
53

Bcfd

50

47

Gas Production

44
Ja n -9 5 Ja n96 Ja n97 Ja n98 Ja n99 Ja n -0 0 Ja n -0 1 Ja n -0 2 Ja n03 Ja n04 Ja n -0 5 Ja n -0 6 Ja n -0 7 Ja n08

Gas Production

Productive Capacity

Recoverable Gas Resources in the US, 1968-2006

Trillion Cubic Feet
2800 2400 2000 1600 1200 800 400 0
19 68 19 80 19 90 20 00

Coalbed Methane

Potential Resources

Cumulative Production
20 06

Source: Potential Gas Committee

Pipeline Transmission System

Photo courtesy of FERC

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

U.S. Natural Gas Pipeline Network

U.S. Natural Gas Pipeline Network

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

Distribution System

Photo courtesy of Michigan Public Service Commission

Distribution Operations
Natural gas supply management

Gate station Pressure reduction Odorant

System construction & operation Metering & customer service

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)

Distribution Rates
Rates regulated by PSCs
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

Customers

Residential
90% of total customers

22% of total consumption

Weather sensitive

Conservation impact

Commercial
9% of total customers

15% of total consumption

Somewhat weather sensitive

Conservation impact
Market opportunities

Industrial
Less than 1% of total customers 33% of total consumption Can help manage sendout

Primarily transportation customer

Electric Generation
Less than 1% of total customers

31% of total consumption

Demand growing

Difficult delivery requirements

Primarily transportation customer

Current Natural Gas Industry Issues

North American Natural Gas Supply Market

North American

Access to some gas

supply/demand balance is and will remain tight.

Gas consumption grows. Gas prices remain

supplies are restricted.

New frontier gas

supplies are necessary and take time.

LNG imports will

relatively high and volatile.

become an important player in natural gas pricing.

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

LNG Imports Could Triple by 2011

2.0
Trillion Cubic Feet Per Year

1.6 1.2 0.8 0.4 0.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Energy Information Administration, Annual Energy Outlook 2008-2030.

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

Consumer Response to Gas Prices

Consumer bills have been increasing

Conservation efforts Bill payment concerns

Typical Home Heating Costs Have Increased for Natural Gas Customers
$1,000
Winter Heating Costs

$900 $800 $700 $600 $500 $400 $300 $200 $100 $0

Winters 1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006- 20072000 2001 2002 2003 2004 2005 2006 2007 2008
Estimate

Source: Energy Information Administration

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

Policies to Address Price & Supply Concerns

Low-Income Household Energy Assistance

Program (LIHEAP) Increase access to gas supply State price regulation innovative rates

LIHEAP Funding Has Been Unsteady

$3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0

Regular

Emergency

1981

1990

2000

2008

Need For LIHEAP Has Grown

40 35 30
Served Households Eligible Households

Millions

25 20 15 10 5 0
1981 1983 1985 1987 1990 1993 1997 2001 2004 2006 (est)

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

Increase Access to Supply Areas

Tract 181 in eastern Gulf of Mexico

Outer Continental Shelf

Rocky Mountain area

Innovative Rate Designs

For the customer Budget billing Fixed bills/fixed cost For the company Cost trackers Non-volumetric rate design

Natural Gas Costs

Commodity Costs 70% of Utility Revenue Distribution Costs 30% of Utility Revenue Includes:
Customer Service Operations Maintenance Depreciation Taxes Return on assets used to

provide service

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

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

U.S. GREENHOUSE GAS EMISSIONS BY SECTOR 1990-2005 (TG CO2 EQUIVALENT)

8000 7000 6000 5000 4000 3000 2000 1000 0 1990 1995 2000 2005

Other Residential Other Residential N. Gas Commercial Other Commercial N. Gas Agriculture Industrial Transportation Electricity Generation

Source: U.S. Environmental Protection Agency

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

Questions?

Thank You!