LSU Natural Gas Conference - PDF Free Download

LSU Natural Gas Conference Presented by: Bob Purgason VP Gulfcoast Region Williams Companies

Introduction Structural shift in natural gas pricing The crude to gas ratio: A critical relationship for NGL processing Implications of a sustained shift in gas, crude, and NGL pricing relationships Implications for ethane Implications for heavier NGL s

Hydrocarbon Value Chain Y-Grade Storage Caverns Purity Storage Caverns Refineries Purity Product Pipelines Gas Plant Y-Grade Pipelines Fractionator Well Storage Tanks Chemical Plants Production Gas Processing Residue Gas to Interstate Pipelines Storage Agricultural/Residential Distribution Industrial Fuels Production Gathering Gas Processing Transportation Liquids Processing Marketing

Propane 9% Butanes 4% Natural Gasoline 2% Cont. 4% Ethane 13% Methane 68% TYPICAL UNPROCESSED GAS

Evolution of Gas Pricing in North America Henry Hub Natural Gas Price 10.00 9.00 Phase I : The Abundant Commodity Phase II : The Tenuous Balance Phase III : The Supply Squeeze 8.00 7.00 $ per MMBTu 6.00 5.00 4.00 3.00 2.00 1.00 0.00 Jan-91 Jul-91 Supply Perspective Source: Platts Jan-92 Jul-92 Jan-93 Just Another Commodity Manufacturing Strategies Jul-93 Jan-94 Jul-94 Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Declines in Traditional Basins Select Growth Regions Advent of the Deepwater Growing Imports Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 The Supply Treadmill Prospect Shortfall Unprecedented Volatility Growth of Frontiers

The Crude to Gas Relationship Gulf Coast Natural Gas Price vs. NYMEX Crude $/MMBtu 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 34.00 30.00 26.00 22.00 18.00 14.00 10.00 $/Barrel Gulf Coast Natural Gas NYMEX Crude Oil The relationship between natural gas and crude has varied widely over time

The Crude to Gas Relationship Historical Crude to Gas Ratio Crude/Gas 24 21 18 15 12 9 6 3 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 The crude to gas ratio (crude divided by gas) has trended down as gas has strengthened relative to crude oil

The Crude to Gas Relationship Crude to Gas Ratio versus Gulf Coast Frac Spread Crude/Gas 24 21 18 15 12 9 6 3 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 40 32 24 16 8 0-8 -16 cents per gallon Crude to Gas Ratio Gulf Coast Frac Spread The crude to gas ratio correlates highly with historical NGL processing spreads

The Crude to Gas Relationship Crude to Gas Ratio versus Gulf Coast Frac Spread Crude/Gas 24 21 18 15 12 9 6 3 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 40 32 24 16 8 0-8 -16 cents per gallon Crude to Gas Ratio Gulf Coast Frac Spread Historically, low points in the crude to gas ratio have meant hard times for gas processors

The Crude to Gas Relationship Gulf Coast NGL Frac Spread Nat. gas - $2.66 30 25 20 15 10 5 0-5 -10 J-99 M-99 S-99 J-00 M-00 S-00 J-01 M-01 S-01 J-02 M-02 S-02 J-03 cents per gallon M-03 Crude - $29.30 Ratio - 11 Ethylene - $.27/lb Strong Economy Nat. gas - $8.69 Crude - $28.40 Ratio 3.3 Ethylene - $.27/lb Recession begins Nat. gas - $2.19 Crude - $25.93 Ratio 11.8 Ethylene - $.17/lb Weak Economy Nat. gas - $5.76 Crude - $28.07 Ratio 4.9 Ethylene - $.19/lb Weak Economy Analysis of recent frac spreads the economy also plays a role

The Crude to Gas Relationship Natural Crude Crude/Gas Gas Oil Ratio Oct-03 4.430 29.10 6.6 Nov-03 4.830 28.82 6.0 Dec-03 5.082 28.35 5.6 Jan-04 5.262 27.94 5.3 Feb-04 5.212 27.65 5.3 Mar-04 5.107 27.33 5.4 Apr-04 4.802 27.03 5.6 May-04 4.709 26.81 5.7 Jun-04 4.719 26.61 5.6 Jul-04 4.724 26.41 5.6 Aug-04 4.724 26.25 5.6 Sep-04 4.721 26.10 5.5 Oct-04 4.729 25.96 5.5 Nov-04 4.861 25.84 5.3 Dec-04 5.004 25.72 5.1 Jan-05 5.091 25.62 5.0 Feb-05 5.036 25.53 5.1 Mar-05 4.881 25.43 5.2 Apr-05 4.561 25.34 5.6 May-05 4.456 25.27 5.7 Jun-05 4.456 25.22 5.7 Jul-05 4.463 25.19 5.6 Aug-05 4.463 25.18 5.6 Sep-05 4.463 25.17 5.6 Oct-05 4.488 25.17 5.6 Nov-05 4.668 25.17 5.4 Dec-05 4.843 25.18 5.2 Note: As of 9/30/2003 Crude/Gas Historical & NYMEX Futures Crude to Gas Ratio 24.0 21.0 18.0 15.0 12.0 9.0 6.0 3.0 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 Crude to Gas Ratio NYMEX Futures Current NYMEX price strips suggest a continuation of low crude to gas ratios

Implications of the Pricing Trends US NGL Production vs. Gulf Coast Frac Spread MBPD 2100 1900 1700 1500 1300 96 97 98 99 00 01 02 03 40 32 24 16 8 0-8 -16 cents per gallon Total US Gas Plant NGL Production Gulf Coast Frac Spread Unprecedented NGL rejection has occurred during periods of low ratios/low frac spreads

Implications of the Pricing Trends During January of 2001 1/3 of total NGL production lost to rejection 650 MBPD 2.2 BCFD natural gas Between May and August of 2003 200 MBPD of ethane and 80 MBPD of propane remained in natural gas stream 0.85 BCFD The US has seen some degree of continual ethane rejection for the last year

Implications - Ethane Mont Belvieu Ethane vs. Gulf Coast Natural Gas $/MMBtu 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 60 50 40 30 20 10 cents per gallon Gulf Coast Natural Gas MB Ethane Because it is the most readily rejected NGL, ethane is the most responsive NGL to changes in gas price

Implications - Ethane High gas prices relative to crude oil places ethane at a competitive disadvantage to heavier petrochemical feedstocks While ethane production suffers, demand for ethane has been equally weak Despite weak production, ethane inventories are near the 5-year-average

Implications - Heavier NGL s Propane & Heavier NGL's vs. NYMEX Crude $/Barrel 40 35 30 25 20 15 10 5 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 NYMEX Crude Oil C3 IC4 NC4 C5 The heavier NGL s are highly correlated to crude oil

Implications - Heavier NGL s NGL Gulf Coast Frac Spreads by Product cents per gallon 60 50 40 30 20 10 0-10 -20-30 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 C2 C3 IC4 NC4 C5 meaning that their processing margins are hardest hit when crude to gas ratios are low

Implications - Heavier NGL s Propane & Heavier NGL's Production vs. Gulf Coast Frac Spread % of max production 100% 95% 90% 85% 80% 75% 96 97 98 99 00 01 02 03 C3+ Production C3+ Gulf Coast Frac Spread 30 25 20 15 10 5 0-5 -10 cents per gallon Weak processing margins do result in some lost production of heavier NGL s

Implications - Heavier NGL s Millions of Barrels 30 20 10 0-10 Net US Waterborne LPG Imports 1 1997 1998 1999 2000 2001 2002 2003 1 Includes both propane and butane imports YTD 9/03 However, heavy waterborne imports supplement propane and butane supplies

Implications - Heavier NGL s API US NGL Inventory Levels (Millions of Bbls) w/out Current Five-Year % Over/ Waterborne 8/31/03 Average Under Imports Ethane 21.8 22.1-1.2% -1.2% Propane 63.0 65.9-4.4% -33.3% N. Butane 33.4 40.9-18.3% -30.5% I. Butane 7.5 8.2-7.5% -32.0% N. Gasoline 9.1 9.2-0.5% -0.5% Total NGL's 135.0 146.3-7.8% -25.5% Keeping inventories closer to five-year averages

Merchantability The heavy rejection of NGL s in recent years has caused significant operational problems for natural gas pipelines In response, natural gas pipeline companies have begun issuing merchantability notices These notices enforce the requirement that some NGL s be removed to meet pipeline specs before entering the system

Conclusions Strengthening natural gas prices relative to crude oil have significantly reduced the production of NGL s in the US Waterborne imports will continue to play a critical role in balancing the heavier NGL s The weakened feedstock desirability of ethane, combined with a struggling economy, have reduced demand and kept ethane supplies in balance

Conclusions CMAI NT Ethylene vs. Spot Ethylene J-98 M-98 S-98 J-99 M-99 35 30 25 20 15 10 S-99 J-00 M-00 S-00 J-01 M-01 S-01 J-02 M-02 S-02 J-03 M-03 cents per lb ethylene CMAI NT Ethylene Spot Ethylene The growing gap between NT and spot - an indication of an inactive spot market

Conclusions 35 30 25 20 15 10 CMAI NT Ethylene vs. Spot Ethylene vs. Mont Belvieu Ethane 60 50 40 30 20 10 J-98 M-98 S-98 J-99 M-99 S-99 J-00 M-00 S-00 J-01 M-01 S-01 J-02 M-02 S-02 J-03 cents per lb ethylene cents per gallon ethane M-03 CMAI NT Ethylene Spot Ethylene MB Ethane

Conclusions High natural gas prices will result in high feedstock costs for ethane Ethane pricing quickly responds to pricing changes in natural gas Reasonable price transparency Probable margin squeeze within ethylene chain Improving economy Minimal ethylene price transparency

LSU Natural Gas Conference Presented by: Bob Purgason VP Gulfcoast Region Williams Companies

Structural Shift Supply Side Many traditional North American supply basins are in decline Western Canadian production, the marginal supply of the last decade, is prominent among the declining basins LNG and Arctic gas represent the marginal supply of the new era, but it will take years to develop the infrastructure

Structural Shift Supply Side 200 400 180 350 160 140 300 Production per Well (Mcf per Day) 120 100 80 60 40 Number of Wells Production per Well 250 200 150 100 Number of Wells (thousands) 20 50 Source: Cambridge Energy Research Associates. Data: Energy Information Administration. 30402-2 0 1990 1992 1994 1996 1998 2000 2002 1991 1993 1995 1997 1999 2001 0 More wells have not meant more production

Structural Shift Demand Side 8.0 Incremental Gas Demand for Power Generation (Growth over 2002) 7.0 6.0 5.0 Bcf per Day 4.0 3.0 2.0 1.0 0.0 2003 2004 2005 2006 2007 2008 2009 2010-1.0 Expected increases in future natural gas demand for power generation

Structural Shift - Supply Gap MMcf per day 68,000 66,000 64,000 62,000 60,000 58,000 56,000 54,000 52,000 50,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 US Production US Consumption Note: Consumption excludes pipeline, lease and plant fuel. Production excludes imports, storage and balancing adjustments.