The U. S.

Natural Gas Industry -

an Overview

J. Richard Moore
 U.S. Natural Gas / Electric Industries

Industry Comparisons / Contrasts Electric Industry Interest in Gas

• Both Provide Energy to Industrial, Commercial
and Residential Customers.
• Facilities Making Deliveries to Consumers in
Both Industries are Rate Regulated Utilities.
• Electric Industry is Larger: 3-4 X in $ Value
of Deliveries to Consumers.
• Gas Industry Not Vertically Integrated.
• Gas is Fuel For Electric Generation (20% Cap).
• Electric Companies Buying Gas Utilities - Gas
Now Part of Product Line.
• Gas is Competitor in Some Cases.
• Deregulation Experience of Gas May Be
Instructive For Electric Industry.

• Gas Can Be Stored - Electricity Cannot.

 U.S. Natural Gas Industry - Segments
Gas Industry Function Gas Industry Segment Electric Industry Function
EXPLORATION

UPSTREAM
UPSTREAM GENERATION

PRODUCTION

GATHERING / PROCESSING

TRANSMISSION
MIDSTREAM
MIDSTREAM
TRANSMISSION

DISTRIBUTION DISTRIBUTION

DOWNSTREAM
DOWNSTREAM
CONSUMERS CONSUMERS
 U. S. Natural Gas Industry - Scope

Production Pipelines & Storage Consumption

Gross Withdrawals 24.1 TCF/YR # Volume

Natural Gas Pipelines* 1,424,200 Miles
Dry Production 19.0 TCF/YR Consumers 67.2 MM 20.6 TCF/YR
Gathering Lines* 22,300 Miles
Producing Gas Wells 393,327 Residential 61.9 MM 5.1 TCF/YR
Transmission Lines 304,000 Miles
Gas Well Average 124 MCF/D Commercial 5.1 MM 3.2 TCF/YR
Production: 10 to 30,000 MCF/D Well Industrial .2 MM 12.3 TCF/YR
Distribution Lines 1,097,900 Miles
Consumption: .1 to 400,000 MCF/D
Producers: 6,800 Companies, (21 Majors) Storage Facilities (429) 3,568 BCF Capacity Customer
(Working Gas)

* Utility Pipelines (AGA)

Source: EIA Natural Gas Annual 2003

AGA Gas Facts 2003
 Natural Gas Supply and
Disposition in the United States, 2003
(Trillion Cubic Feet)
Gross
Gross Withdrawals
Withdrawals
From
From Gas
Gas and
and Non-Hydrocarbon
Non-Hydrocarbon
Oil Wells
Oil Wells Vented
Vented // Flared
Flared Gases
Gases Removed
Removed
24.1
24.1 (N2,
(N2, CO2,
CO2, H2S,
H2S, etc)
etc)
0.1
0.1
0.5
0.5
Extraction
Extraction Loss
Loss
Reservoir 1.0
1.0
Reservoir
Repressuring
Repressuring
(Used Imports Dry
Dry Gas
Gas
(Used to
to Maintain
Maintain Imports
Oil Production)
Oil Production) Production
Production
3.5
3.5 19.0
19.0
Canada
Exports
Exports
Canada Trinidad
Trinidad Algeria
Algeria Qatar
Qatar 4.0
4.0 Japan
3.49
3.49 0.378
0.378 0.053
0.053 0.014
0.014 Japan Mexico
MexicoCanada
Canada
0.064
0.064 0.332 0.294
0.332 0.294
0.7
0.7
Natural
Natural Gas
Gas Nigeria
Nigeria Oman
Oman Other
Other
Storage Facilities 0.05
0.05 0.009
0.009 0.003
0.003
Storage Facilities LNG
LNG Alaska
Alaska to
to Japan
Japan
Additions
Additions
3.4 Lease,
Lease, P/L,
P/L, Plant
Plant Fuel,
Fuel,
3.4
Misc., Bal.
Misc., Bal.
1.6
1.6
Withdrawals
Withdrawals
3.2
3.2

Residential
Residential Commercial
Commercial Industrial
Industrial Vehicle
Vehicle Fuel
Fuel Electric
Electric Power
Power
5.1
5.1 3.2
3.2 7.1
7.1 0.02
0.02 5.1
5.1

Source:
Source: EIA
EIA Natural
Natural Gas
Gas Annual
Annual 2003
2003
 Seasonality of Natural Gas Consumption
2.6

2.4
Trillion Cubic Feet (TCF)

From Storage
2.2

2.0 Supply (Dry Gas Production + Net Imports)

1.8

To Storage
1.6

Consumption
1.4
Jan-00

Feb-00

Mar-00

Apr-00

May-00

Jun-00

Jul-00

Aug-00

Sep-00

Dec-00
Oct-00

Nov-00
Source: EIA Gas Monthly
 Map Pattern of Gas Movements

5,000
4,000
3,000
2,000
1,000
0

Billion Cubic Feet

= Less than 100 BCF Flow

Source: Energy Information Administration / Natural Gas Annual 2000

Natural Gas Formation and
Exploration
 Geology and Natural Gas Formation

GEOLOGIC TIME OIL AND GAS FORMATION

Years Ago Headlines Depth Pressure & Temp

0 Man Appears Surface Surface

SUCCEEDING
CENOZOIC ERA LAYERS
65 Million Horses Appear OF ROCK
Dinosaurs Disappear
ADD WEIGHT
MESOZOIC ERA
AND
225 Million Dinosaurs Appear 5,000’ PRESSURE
PALEOZOIC ERA ON EARLIER
First Abundant LAYERS
570 Million
Fossil Record Heat and Pressure Convert
PRECAMBRIAN ERA Organic Debris to Oil & Gas Increasing
“BASEMENT” ROCK With Depth o
Ozone Layer Formed 10,000’ (5,000 PSI, 250 F)
4,600 Million
Big Bang Heard
Rock Layers Deposited
Over Time
 Natural Gas Reservoir Requirements

Reservoir Rocks (Sedimentary) Reservoir Requirements

Name Example Requirements

Source Limestone Porosity

and (GAS)
RESERVOIR ROCK
Reservoir Sandstone Permeability (WATER)

Cap/Trap Shale Impermeability SOURCE ROCK

 Drilling a Well

Preliminary
Major Rig Systems
1. Identify Prospect
A. Seismic 1. Hoisting - Mast & Drawworks
B. Log Correlation
2. Obtain Mineral Lease 2. Rotating - Turntable / Top Drive
3. Obtain Drilling Permit and Drill String
4. Prepare Site 3. Circulating - Pumps and Mud
4. Power - Engines (Diesel / Electric)
Circulating Power
System System
(Mud) (Engines)

Contract & Design Issues Activities While Drilling

1. Drilling Contract
1. Well Control - Blow Outs / Lost Holes
A. Rate: Day, Footage, Turnkey
2. MWD - Directional Wells
B. Equipment & Start Date
3. Logging and Analysis
2. Design Casing Program
4. Decision to Complete
3. Evaluate Surface Equipment
5. Tight Hole - Confidential
Requirements
Completion and Production
Operations
 Cased Well After Implacement of
Completion Fluid

Surface Casing

Drilling Mud

Intermediate Casing

Top of Cement Production Casing

Cement
Schematic of Perforated Casing

PERFORATIONS
CASING THROUGH CASING,
CEMENT SHEATH,
AND INTO
FORMATION

CEMENT
SHEATH

ZONE OF
INTEREST
 Hydraulic Fracture Schematic
Cemented Wellbore
Casing

Fracture
Treating PERFORATIONS
Fluid
DRILLED HOLE

Perforations
CEMENT SHEATH

Formation SAND-LADEN
TREATING FLUID

PROSPECTIVE
PRODUCTION
FORMATION
CASING
CREATED
FRACTURE
 Cased Well Producing

Surface Casing

Drilling Mud

Tubing
Intermediate Casing
Production Casing
Top of Cement
Packer
Types of Reservoirs Containing Natural Gas
Non Associated (Gas Well) Gas Associated (Oil Well) Gas

Producing
Well
Producing
Well

Gas

Gas Oil

Water Water Water Water

• Water Drive
• Water Drive • Solution Gas Drive
• Expansion Drive • Gas Cap Drive
Gas Well Surface Flow Schematic
Sales
Gas

H2S Dehydration
Removal Unit

Separator

Condensate
Liquid Sales

Line
Heater Water To Disposal
 Measurement of Natural Gas

PRODUCTION GATHERING TRANSMISSION DISTRIBUTION

A
Processing
WELLHEAD C B Plant
B C C B C CONSUMER
A
B B C
C CONSUMER
Storage
Other P/L

Measurement Process Measurement Purpose Meter Types Meter Selection

(Steps in Calculating MMBTU) (Meter Function) (Equipment Types) Issues
• Measure Gas Volume (MCF) • Orifice Meter • Volume to be Measured
A Allocation
• Analyze Gas – Determine Heating Value • Diaphram Meter • Volume Fluctuations
(BTU/FT 3 )
B Balancing • Rotary Meter • Meter Cost / Operation
• Calculate Quantity of Energy Delivered (Operations)
• Turbine Meter • Meter Function
Volume x Heating Value = MMBTU
C Custody (Sales) • Sonic Meter
3
(MCF) x (BTU/FT ) = MMBTU
Natural Gas Gathering
and Processing
 Natural Gas Gathering and Processing
Place in Physical Distribution Network

C Natural Gas
P

Gas Transmission P/L

P Pipeline Quality
P Gas
C P P P C P P
P Medium Pressure Processing
High Pressure Plant
e (100 – 300 PSI)
ur (300 – 500 PSI) NGLS TO
ess I) Pipeline,
r S
P w P 75 P Truck,
P P C Lo 5 – Barge
(2

Site / Facilities Functions / Activities

Wellhead • Gathering – Connects Wells to Transmission

C Compressor Pipeline System

P Pig Launcher/Retriever • Compression – Raises Pressure of Gas From

High Pressure Gathering Line
Medium Pressure Gathering Line
Low Pressure Gathering Line
Gas Transmission Pipeline
Wellheads Permitting Gas to Flow Into
Transmission System. Lehgthens Well Life.
• Treating – Removes Impurities
• Processing – Removes NGLS
 Natural Gas Processing in the U. S.

Scope * Characteristics of Business

• 574 Plants (Excluding Refineries) (Down From 720 in 1993) • Unregulated

• Concentrated in TX, OK, LA, CO, WY, NM, & KS • Cyclical

• 1.839 MM BBLS/D Production from Processing Plants • Volatile Product Prices

• 82,322 MCF/D Average Plant Throughput • Excess Capacity

(Typical Plant is Smaller) (70% Average Utilization)
• 3,204 BBLS/D Average Plant Production • Highly Competitive
(Typical Plant is Smaller)
• Top 20% of Plants = 80% of
• 0.250 MM BBLS/D Net Refinery Production Capacity

• 0.270 MM BBLS/D Import • Processing Cost Vary Widely

($ 0.03 MCF / $ 0.30 MCF)

* Source: O&GJ 06/28/04, EIA Petroleum Supply Annual 2003

 Natural Gas to Pipeline

GAS
PROCESSING
NGL’S
PLANT

Lease Separators
Raw Natural Gas

Lease Condensate
Crude
Oil

Gas Cap or
Associated Gas
Non-Associated Gas

Oil Water
 Typical Natural Gas Stream
FROM TO GAS
WELLHEAD PROCESSING
SEPARATORS PLANTS
PIPELINE

HYDROGEN NITROGEN NATURAL NORMAL

SULFIDE
METHANE PROPANE
HELIUM GASOLINE BUTANE

DIRT
ISO- CARBON
ETHANE & WATER
BUTANE DIOXIDE
RUST

RECOVERABLE HYDROCARBONS

RESIDUE GAS
NON-HYDOCARBONS AND CONTAMINANTS
What is Natural Gas Processing?

P Gas Conditioning / Treating

 Solids Removal (Sand, Pipe Scale, Dirt)
 Dehydration (Water Removal)
 Acid Gas Removal

P Gathering and Compression

P Natural Gas Liquids (NGL) Recovery

Why is Natural Gas Processed?

P Produce Merchantable Natural Gas Product

P Avoid Natural Gas Transmission / Distribution Facility

Operating Problems
 Increase Pipeline Efficiency - Avoid Unnecessary
HP Requirements (Capital Investment & Operating Cost)
 Avoid Internal Corrosion Problems
 Avoid Freeze Ups (Hydrates)

P Economic Value of NGL Components

 Effect of Liquids Accumulation
On Pipeline Efficiency
WITH LIQUIDS
GRADE

PIPELINE

UPSTREAM PRESSURE DOWNSTREAM PRESSURE

40 PSIG 32 PSIG

WITHOUT LIQUIDS
GRADE

PIPELINE

UPSTREAM PRESSURE DOWNSTREAM PRESSURE

40 PSIG 39 PSIG
 Pipeline Corrosion
Pipeline Corrosion Pipeline Pigs

• Internal Corrosion • Utility Pigs (Foam, Solid Cast Plastic, Spheres)

- Problem: Microbially Induced Corrosion (MIC) - Cleaning: Remove Deposits

Solution: Inhibitors (Coat Pipe), Biocides (Kill Bugs) - Sealing: Remove Liquids

- Problem: Chemical Corrosion (Acid Gas)

Solution: Inhibitors (Coat Pipe), Remove H2S & CO2
and Remove Water.
Squeegee Pig Brush Pig

• External Corrosion
- Pipe Wraps / Coating • In Line Inspection Tools (Smart Pigs)

- Cathodic Protection - Measurements: Wall Thickness, Diameter

- Detection: Leaks, Cracks, Corrosion

• Issues - Photographic Inspection

- Safety
- Maintenance Expense • Gel Pigs
- Gelled Liquids
- Used in Trains Within P/L
- Clean Up, Corrosion Inhibition
 Gas Processing Technology

Cryogenic
Below -90o F

)
)

Recovery Rate
Refrigeration
Down to -40o F
Temperature

(Higher
(Colder

Absorption
Ambient

1920 - 1940 1940 - 1960 1960 - 1980

Source: GPA
Natural Gas Transmission
 Natural Gas Transmission Pipelines
Place in Physical Distribution Network
M M M
S CG
C
C M
S
US
M
C US
S
CG M
S
S S S M M
S

SITE / FACILITIES FUNCTIONS / ACTIVITIES

S Supply Source • Provide High Pressure / Long Distance
M Market Transportation of Gas

Gathering Lines • Pipeline Uses Pressure from Reservoir or

Compressors (Pumps) to Move Gas
Intrastate Transmission Pipeline
Interstate Transmission Pipeline “A” • Pipeline Uses Storage Facilities and Line
Pack to Meet Supply / Demand Swings
Interstate Transmission Pipeline “B”
• Safety & Environmental Regulation - DOT,
CG City Gate
OSHA, EPA, MMS
Local Distribution Company Pipelines
• Intrastate Rate Regulation - State Agencies
C Compressor
• Interstate Rate Regulation - FERC
US Underground Storage
 Major Natural Gas Transportation Routes
From Canada to Northwest
4,412 MMcf/d From Expanding Coalbed Production From Canada to Midwest/Central
4,286 MMcf/d 6,939 MMcf/d
Into the Chicago Area Hub
11,835 MMcf/d
From Canada to New England
1,546 MMcf/d

Central
Midwest
Northeast

Western
Into the Boston Metro Area
2,210 MMcf/d
Into the New York Metro Area
3,157 MMcf/d
Capacity
(in Million Cubic Feet per Day)
as of December 2000
15,000
Southeast 12,000
Into Northern California Southwest 9,000
2,080 MMcf/d 6,000
3,000
Into Southern California 0
5,355 MMcf/d
Direction of Flow
From Gulf Coast Production Bi-directional
From West Texas/Kansas/Oklahoma to Midwest 22,472 MMcf/d
6,810 MMcf/d
 Interstate Natural Gas Transmission Pipelines

NUMBER OF MILES OF TRANSPORTED

COMPANIES PIPELINE VOLUMES (TCF/YR)

TOTAL 111 195,038 32.9

Majors (> 50 BCF YR) 68 188,178 32.2

LARGEST 10 (VOL) 10 93,859 15.6

SOURCE: 08/23/04 O&GJ, FERC Form 2

Natural Gas Transmission Pipeline Operations
LONG LINE SPAGHETTI BOWL

M M
M
S
M S
M

MARKET
AREA
STORAGE

NE
LI
STORAGE

PE
INTERCONNECTING PIPELINE

PI
G
IN
CT
S

N NE
SUPPLY

CO
AREA M
S

R
TE
STORAGE

IN
S

SUPPLY
(PRODUCTION)
S M

S SUPPLY M MARKETS
 Natural Gas Transmission Pipeline
Custody vs. Ownership
PIPELINE OWNS GAS
STORAGE
S M
S M
Custody and Ownership Transfer Point
Custody Transfers To/From Pipeline When Gas Enters/Leaves System
Pipeline Owns All Gas in its Custody
• Pipeline Controls Receipts/Deliveries
to Achieve Operational Stability
and Serve Demands.
• Storage and Line Pack are Tools Used
to Deliver Gas Commodity.
• No Balancing Problems/Issues.
PIPELINE IS TRANSPORTER ONLY
STORAGE
STORAGE
Custody Transfer Point
(Ownership May Transfer at Multiple Points)
Pipeline Does Not Own All Gas in its Custody
• Pipeline Monitors Receipts/Deliveries
Controls Only if Shipper Not in Compliance
With Contract.
• Use of Storage and Line Pack Determined by
Shippers Actions and May Be Subject of
Charges in Addition to Transport Fees.
• Major Balancing Problems/Issues.
 Services Offered by Natural Gas
Transmission Pipelines

I.I. TRANSPORTATION
TRANSPORTATIONONLY
ONLYPIPELINES
PIPELINES (INTERSTATE)
(INTERSTATE)

A.
A. TRANSPORTATION
TRANSPORTATION--FIRM,
FIRM,INTERRUPTIBLE,
INTERRUPTIBLE,NO-NOTICE
NO-NOTICE(SWING)
(SWING)
B.
B. STORAGE
STORAGE --FIRM,
FIRM,INTERRUPTIBLE
INTERRUPTIBLE
C.
C. OTHER
OTHER --TREATING,
TREATING,BLENDING,
BLENDING,BALANCING,
BALANCING,PARKING
PARKING

II.
II. COMMODITY
COMMODITYSALE
SALEAND
ANDTRANSPORTATION
TRANSPORTATIONPIPELINES
PIPELINES(INTRASTATE)
(INTRASTATE)

A.
A. TRANSPORTATION,
TRANSPORTATION,STORAGE,
STORAGE,&
&OTHER
OTHERSERVICES
SERVICES
B.
B. GAS
GASSUPPLY
SUPPLY(SALE)
(SALE)SERVICE
SERVICE
 Natural Gas Customer Service Selection
%
%OF
OFDELIVERIES
DELIVERIESTO
TOCONSUMERS
CONSUMERS CUSTOMER
CUSTOMERCONSIDERATIONS
CONSIDERATIONS

TYPE SALES TRANSPORT TOTAL

Residential 23 (88) 3 (12) 26 • Initial Fuel Choice
Commercial 10 (62) 6 (38) 16
• Alternative Fuel Capability
Industrial 4 (10) 32 (90) 36
Elec. Power 1 (5) 21 (95) 22 • Alternative Gas Supplies (Multiple Pipelines)
Other (Veh. Fuel) * * *
• Consequences Of Curtailment
Total (2003) 38 62 100

• Availability Of Service

• Cost Of Service
* Less Than 1%
• Cost Of Wrong Service

SOURCE: AGA Gas Facts 2003

Natural Gas Transmission Pipeline Operations
•• Tariff
Tariff // Contractual
Contractual Provisions
Provisions Specify
Specify Rights
Rights and
and Obligations
Obligations of
of Parties
Parties

Item
Item//Issue
Issue Shipper
Shipper Pipeline
Pipeline

Nominations Submits Prior to 1st of Month Aggregates – Allocates Capacity if

Necessary

Gas Receipts / Deliveries Should Monitor Throughout Monitors (Daily) During Month –
Month Issues Imbalance Notices

Imbalance / Overrun Must Correct by Adjusting Calculates and May assess

Receipts / Deliveries Penalties on Shippers

Curtailment Order to Reduce Receipts and / or Order Issued to Reserve Capacity

Deliveries For Critical Customers

Operational Flow Order Order to Adjust Receipts and / or Order Issued to Correct
Deliveries Imbalance

Penalties, Overrun or Storage Fees Paid For Unauthorized Use of Means of Controlling Shippers
Charges, Etc. Capacity Conduct
Natural Gas Distribution
 Natural Gas Distribution-Place in
Transmission Pipeline Physical Distribution Network
City Distribution Main - Trunk (100 PSIG) Pressure Distribution Main (20 PSIG)
Gate Regulator

1. Pressure Peaking Pressure

Regulator Regulator
Supply
2. Measurement (1/4 PSIG)
1. Storage Customer 4 oz.
3. Odorization 2. LNG
Meter
3. CNG
4. Propane/Air
Customer
(House)

Local Distribution Utilities

Miles of Pipe Utility Sales by Company Type and Class (TCF)

Company Residential Commercial Industrial Elec. Gen. Total
Steel - 553,400
Plastic - 501,200 Investor Owned 4.161 1.800 0.570 0.179 6.710
Other - 43,300 Municipal 0.303 0.187 0.172 0.039 0.701
Pipeline 0.026 0.026 0.832 0.130 1.014
Total - 1,097,900 Other 0.091 0.048 0.048 0.038 0.225

Total 4.581 2.061 1.622 0.386 8. 650

Source: AGA Gas Facts, 2003

 Natural Gas Distribution
Components of Delivered Residential Gas Price *

Distribution Costs 42 %

Transmission Costs 14 %

Commodity Costs 44 %

* Average of Winter Prices 1999 - 2002

Source: EIA (Brochure) Residential Gas Prices

 Natural Gas Distribution Issues

3 Seasonality of Demand - Meeting Peaks Economically

3 Fragmented Regulation - State / Local vs National

3 Retail Competition - Commodity Sale vs Gas Delivery

3 Information Needs - Custody vs Ownership

3 Balancing - Receipts vs Deliveries

Natural Gas Supply
 Map Pattern of Gas Movements

5,000
4,000
3,000
2,000
1,000
0

Billion Cubic Feet

= Less than 100 BCF Flow

Source: Energy Information Administration / Natural Gas Annual 2000

 U.S. Natural Gas Supply - Components
12/31/03 Reserves (Dry Basis)

Source 1992 Supplies (Gross) 2003 Supplies (Gross) Proved

TCF % TCF % TCF %
Onshore 17.3 72 18.9 69 165.4 88
Offshore 4.8 20 5.2 19 23.6 12

Total U.S. 22.1 92 24.1 88 189.0 100

Imports (Net) 1.9 8 3.3 12 N/A N/A

Total 24.0 100 27.4 100 N/A N/A

Notes:
• Onshore Reserves and Production Stimulated in Early 1990’s by Tax Credits
• Offshore Will Have Shorter Reserve Life (Smaller R/P Ratio) Due to High
Investment & Operating Costs Requiring Higher Flow Rates For Reserves
to be Economic.
• Recent Year’s Higher Gas Prices Have Encouraged Development of Uncoventional
Gas Supplies ( “Tight Gas”, CBM and Shales )

Source:
Source: EIA
EIA
 U.S. Natural Gas Supply - Future Sources
Potential
Source / Area Gas Reserves (TCF) Issues

Unproved Recoverable (2000)

Alaska 252 Access / Pipeline / Economics

Onshore Lower 48 872 Access / Pipeline / Economics

Offshore Lower 48 307 Access / Pipeline

Subtotal Unproved 1,431

Proved Reserves (2003) 189

Total U.S. Potential Reserves 1,620

Canada N/A Pipeline / Economics

LNG N/A New Terminals / Economics

Hydrates (U.S.) 320,222 Technology / Economics

Source:
Source: EIA
EIA
 Natural Gas Supply

Liquified Natural Gas (LNG)

 LNG Plants / Terminals
Existing US Import Terminals June 2004

Baseload Planned Total With Annual

Location Capacity (BCF/D) Expansion (BCF/D) Expansion (BCF/D) Capacity (BCF)
Everett, MA 0.725 N/A 0.725 265
Lake Charles, LA 0.630 1.170 1.800 657
Cove Point, MD 0.750 0.800 1.550 566
Elba Island, GA 0.446 0.360 0.806 294
Total 2.551 2.330 4.881 1,781

Proposed North American LNG Import Terminals June 2004

Number of Annual
Location Projects Capacity (BCF)
Bahamas 3 910
New England 3 922
Texas 6 3,139
Alabama 1 365
Louisiana 6 2,993
California 3 1,369
Mexico 3 1,241
Canada 2 548
Total 27 11,487

Source:
Source: EIA
EIALNG
LNGMarkets
Marketsand
andUses
Uses June
June2004
2004Update
Update
 LNG Economics
Main Price Components of LNG Project: % of Cost

• Gas Production (Reservoir to LNG Plant Including Gas Processing and Associated Pipelines) 15 – 20

• LNG Plant (Gas Treating, Liquefaction, LPG & Condensate Recovery, LNG Storage & Handling 30 – 45

• LNG Shipping (Vessel and Operations) 10 – 30

• Receiving Terminal (Unloading, Storage, Regasification and Distribution) 15 - 25

• 90 of World LNG Sold Under Long Term Contracts

• Crossover Point For LNG vs Pipeline: 1,250 Miles Offshore / 2,500 Miles Onshore (Per EIA Consultant)

• US 2002 Imports of LNG ~= 4% of World Market

• Worldwide Proved Gas Reserves = 5,500 TCF (60 Times 2002 Worldwide Consumption)

Source: EIA
 LNG SHIPPING

3 3
•• Standard
Standard Vessel Increasing from 125,000 m to
Vessel Increasing from 125,000 m to 138,000
138,000m
m
3 ~
•• Purchase
Purchase Price of 138,000 m Vessel = $155
Price of 138,000 m Vessel = $155 Million
Million

•• 10
10––30%
30% of
of Delivered
Delivered LNG
LNG Cost
Cost is
is Shipping
Shipping

•• 151
151 Vessels
Vessels in
in LNG
LNG Trade,
Trade, 55
55 Ships
Ships on
on Order
Order

•• LNG
LNG Vessel
Vessel Charter
Charter Rate
Rate==$55,000
$55,000--$65,000/Day
$65,000/Day==$.30
$.30--$.90/MMBTU
$.90/MMBTU
o o
•• LNG
LNG Cargo
Cargo Transported
Transported at
at -163
-163 CC (-260
(-260 F)
F) Atmospheric
Atmospheric
Pressure
Pressure (1/600
(1/600 Reduction)
Reduction)
3
•• 11 Million
Million Metric
Metric Tons
Tons == 48.7 BCF; 125,000 m = 2.7 BCF;
~ 48.7 BCF; 125,000 m = 2.7 BCF;
11 Million
Million Metric
Metric Tons
Tons == 18
18 Cargoes
Cargoes

Source:
Source: EIA
EIA
Natural Gas Storage
 U.S. Underground and LNG Storage
Summary of Underground and LNG Storage, by AGA Region and Reservoir Type, 2000
Consuming West

Consuming East

Depleted Fields
Salt Caverns
Aquifers
LNG Storage Facilities

Producing
Source: EIA Natural Gas Storage in U.S. 2001
 U. S. Underground Gas Storage Facilities

Statistics

Type
Type Sites
Sites Working
Working Gas
Gas Daily
Daily Working
Working GasGas//
Capacity
Capacity Deliverabilty
Deliverabilty Deliverabilty
DeliverabiltyRatio
Ratio
# % BCF % MMCF/D %
Depleted Gas / Oil 348 84 3,368 86 57,674 74 58

Aquifer 40 10 392 10 8,644 11 44

Salt Cavern 27 6 139 4 11,416 15 12

Total 415 100 3,899 100 77,734 100 50

Source: EIA Natural Gas Storage in US 2001

 U. S. Underground Gas Storage Facilities

Characteristics (Generalization)

Type
Type Cost
Cost To
To Base
Base Gas
Gas Working
Working Gas
Gas Daily
Daily
Build
Build Requirement
Requirement Capacity
Capacity Deliverabilty
Deliverabilty

Depleted
Depleted Reservoir
Reservoir Least
Least Higher
Higher Larger
Larger Less
Less

Aquifer
Aquifer More
More Higher
Higher Larger
Larger Less
Less

Salt
Salt Dome
Dome Most
Most Low
Low Smaller
Smaller Greatest
Greatest
Natural Gas Marketing
 Natural Gas Marketing
Gas Marketing Paths
Historical Path Today’s Paths

Industrial Residential
Residential Customer Consumer
Consumer

Commercial
Commercial Consumer
Consumer
Gas Local
Producer Pipeline Distribution
Gas Local
Producer Company Company
Pipeline Distribution
Company Company Industrial
Industrial Consumer
Consumer Gas
Marketing
Company
EUG
EUG Consumer
Consumer EUG
Consumer

Title and Custody Related Title and Custody NOT Necessarily

Related
 Natural Gas Marketing
Players in the Open Access Environment

Producers Marketer Pipeline Local Utility Consumer

Independent Affiliated Interstate Investor Owned Residential/Commercial
Types: Major Independent Intrastate Municipal Industrial

Devon El Paso TENNESSE GAS P/L ATMOS McDonalds Franchise

Examples: Exxon DYNEGY HOUSTON PIPELINE MEMPHIS EUG Plant

Gas Well Gas Supply Aggregation Transportation Supply Aggregation Market For Gas
Contribution: Oil Well Gas Logistics Management Storage Transportation Market For Services

Price Regulated: No No Yes Yes No

Produce Reserves Margin on Gas Fee For Service Fee For Service Secure Supply
Objectives: Generate Cash Margin on Services Return on Capital Return on Capital Minimum Cost
 Natural Gas Marketing
Considerations of Participants

Producers Marketers Pipelines Local Utility (LDC) Consumer

1. Generate Cash 1. Achieve Margin 1. Generate Transport/ 1. Commodity Sales 1. Type of Service
Flow (Spread) Storage Revenue (Sale or Transport,
2. Service Obligation Firm or
2. Ensure Access to 2. Avoid Imbalance 2. Extract Value For
Market Interruptible)
Penalties Service Provided 3. Supply Security/Cost
(Swing) 2. Supply Security
3. Obtain Best Price 3. Manage Price Risks 4. Transport Revenue
3. Impose Discipline on 3. Commodity Price
4. Match Supplies to 4. Seasonal Arbitrage Shippers (Receipt vs 5. Pipeline/Storage
Markets Delivery Imbalances) Capacity Access 4. Access to
5. Avoid Imbalance 5. Geographic Arbitrage Alternatives
4. Account For Ownership 6. Pipeline Imbalances
Penalties 6. Profit Opportunities in of Gas in Pipeline 5. Hedging
6. Cost vs Benefit Managing Risks Custody 7. Imbalances on LDC
6. Imbalances
of Selling For Others 5. Optimize System 8. Commodity Price
Further Down Operations
the Channel Risk

7. Seasonal Arbitrage
8. Commodity Price
Risk (Hedging)
 Natural Gas Price Hedging
Natural Gas Futures Contract

NYMEX Futures Contract Terms Definitions

•• Quantity
Quantity :: 10,000
10,000 MMBTU
MMBTU •• Spot
Spot (Prompt)
(Prompt) Month
Month :: Futures
Futures Contract
Contract
Closest
Closest to
to Maturity.
Maturity.
•• Price
Price Quotation
Quotation :: $$ Per
Per MMBTU
MMBTU
•• Basis
Basis :: Difference
Difference Between
Between CashCash // Futures
Futures
•• Delivery
Delivery Point
Point :: Henry
Henry Hub
Hub -- Sabine,
Sabine, LA.
LA. Prices
Prices (Location
(Location ,, Time,
Time, etc.)
etc.)

•• Number
Number of
of Months
Months Listed
Listed :: 72
72 Consecutive
Consecutive •• 12
12 Month
Month Strip
Strip :: Average
Average Value
Value of
of The
The
Next
Next 12
12 Months
Months Futures
Futures Price.
Price.
•• Expiration
Expiration Date
Date :: 33 Days
Days Prior
Prior to
to First
First
Calendar
Calendar Date
Date of of Delivery
Delivery Month
Month •• Divergence
Divergence :: Cash
Cash // Futures
Futures Prices
Prices Do
Do Not
Not
Expired
Expired Futures
Futures Go Go to
to Delivery
Delivery Move
Move In
In Same
Same Direction
Direction // Amount.
Amount.
 Natural Gas Hedging
Sharing
Sharing // Apportionment
Apportionment of
of Risk
Risk and
and Rewards
Rewards

6.0
Cash & Futures Price
(Future Position Sale Price)
5.0

4.0 $ 2 Gain
$ MMBTU

3.0

$ 2 Loss
2.0
Hedge Price = $3.00
(Futures Position
Purchase Price)
1.0

0.0
MAY

SEP
JUL

OCT

NOV

DEC
AUG
FEB
JAN

MAR

APR

JUN

Cash / Futures Price 5 5 4 2 2 3 4 4 3 1 3 4 Avg = 40/12 = $3.33

Futures Gain Loss 2 2 1 -1 -1 0 1 1 0 -2 0 1 Avg = 4/12 = $0.33
Net Gas Cost
(Cash + Futures Gain/Loss)
3 3 3 3 3 3 3 3 3 3 3 3 Net = $3.00
 Natural Gas Price Hedging
Types of Instruments Available

Futures Futures Swap

Contract Option Contract

Commitment
Buyer Buy Commodity Right to Futures Position Make Payment if Due
Seller Sell Commodity Obligation to Provide Position Make Payment if Due

Regulation Yes (CFTC & Exchange Yes No

NYMEX) OTC No

Delivery Capability Yes No No

Term 18 Months Exchange 12 Months Open

OTC - Open (Years) (Years)

Costs
Margin Yes Depends No
Administrative Highest Lower Lowest
 Natural Gas Price Hedging
Considerations of Players

Gas Producers Gas Marketers Financial Local Utility (LDC) Consumer

Speculators
Fix Margin Trade Gain
Purpose: Price Floor
(On Physical) (On Paper)
Fix/Cap Gas Cost Price Ceiling

Secure Cash Flow Competitive Pressure

Secure Value
Objective: (For Drilling/ in Contracts Trading Business
Regulatory Pressure
Limit Gas Cost
Acquisition)

Basis Differentials Basis Differentials

Basis Differentials Purchased vs. Basis Differentials
Produced vs.
Counter Party Price Volatility Hedged Volume Consumed vs.
Hedged Volume
Risk: Risk Counter Party Regulatory Hedged Volume
NRI Hindsight
Keep Book Risk Counter Party
Counter Party Balanced Counter Party Risk
Risk Risk
THE END