Oil and gas Markets Where to from Here? Shale Gas and an Interplay with Coal

Oil and gas Markets Where to from Here? Shale Gas and an Interplay with Coal A Wood Mackenzie Presentation Prepared for the Platts Pipeline Development and Expansion Conference by Edward M. Kelly Vice President, N Am. Gas and Power September 23, 2010 Houston

The New Big Picture North American Gas Market Overview Gas is Available in Any Feasible Quantity at a Moderate Price But It s Not $4.50. Short-Term: Through early 2012 Weighted by sluggish economic recovery and supply strength; coal displacement continues to influence the gas market Mid-Term: Late 2012-2016 With an increasing call on production as demand growth resumes, there is potential for growing pains as the market transitions from retrenchment to expansion; prices rise to the $5.75 - $7 range. Long-Term: 2016 and Beyond Consistent demand growth appears likely, with the pace of growth shaped by coal retirements, potential carbon legislation and long-term US domestic resource strength. With the rebuilding of the upstream, pricing remains moderate: $6.50 - $7.50 Within this Base Case view of the North American market, policy and politics will become increasingly influential, and can shift the fundamentals Wood Mackenzie 2

Several Headwinds Will Inhibit Any Strong Gas Price Recovery Over The Next Two to Three Years Muted economic growth. Growth rates for 2011 and 2012 are expected to average only 2.0% and 2.5%; holding back power generation growth and also keeping industrial demand in check. Demand shifts back to coal. Gas displacement of coal accounted for about 2 bcfd of total power sector demand, but through 2010 and 2011, even a modest recovery in gas prices will shift that load back toward coal. Coal capacity additions Drilling incentives Favorable hedges, cost carry arrangements with joint-venture partners, hold-byproduction leases, and stock price support have supported drilling even as cash prices fall. North American GDP growth expectations GDP 8% 6% 4% 2% 0% -2% -4% -6% -8% 2000 2003 2006 2009 2012 2015 US Canada Mexico Wood Mackenzie 3

$/mmbtu Setting the stage The next 18 months High storage, a looser global market, and non-economic drilling through 10 precludes a winter boost Flat supply, firmer global markets, and power demand supports price rebound from current lows 20 18 16 14 12 Short-Term Price Outlook Oct-Dec price expected to average $4.53/mmbtu Prices below $4.00/mmbtu are short-lived For 2011, prices remain in the mid $4.00s ($4.58 nom) as the market remains well-supplied Drilling levels look vulnerable late in year Market support develops by winter 2011/2012 ($5.75 2012 price) 10 8 6 4 2 0 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 CAPP Coal Henry Hub Resid Source: Wood Mackenzie Wood Mackenzie 4

bcfd million tons GW The coal/gas relationship remains pivotal through short-term Monthly Expected Coal Displacement 2.5 3.0 2.0 2.5 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Northeast South Atlantic Other 2009 Avg 8 7 6 5 4 3 2 1 0 2009 2010 2011 2012 Mid Atlantic East North Central West North Central Mountain New Coal Capacity South Atlantic East South Central West South Central Source: Wood Mackenzie Wood Mackenzie 5

bcfd Global balances are also rounding out the North American supply story Changes in global fundamentals make any expectation extremely fluid Europe should pull additional cargoes 3.0 2.5 Short-Term Global Dynamics Present North America with a Range of LNG Possibilities Demand from counter-seasonal markets such as Argentina and Kuwait is exceeding expectations Nigeria continues to produce well below capacity Expected flows from Algeria, Egypt and Indonesia are all down 2.0 1.5 1.0 0.5 The North American role as world LNG sink introduces volatility 0.0 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Source: Wood Mackenzie US Canada Mexico Source: Wood Mackenzie Wood Mackenzie 6

bcfde bcfde By 2013, demand growth accelerates as carbon supports gas and coal retirements outpace new construction Gas and Coal Demand Growth in Power Sector Power Sector Trends 4 3 2 0.7 bcfd average growth 0.3 bcfd average growth 0.9 bcfd average growth 80 70 60 30% 25% 1 0 50 20% -1 40 15% -2-3 -4-5 30 20 10 10% 5% -6 2009 2010 2011 2012 2013 2014 2015 0 2010 2012 2014 2016 2018 2020 0% Coal Gas Coal Gas Gas's share Source: Wood Mackenzie Wood Mackenzie 7

Cumulative Domestic Production Pull (bcfd) Strength in power demand and declining LNG increases the call on US domestic supply Evolving Fundamentals Power demand shifts up, industrial growth continues LNG pulled into other markets Canadian supply declines continue Higher prices push a faster upstream development pace This higher pace of development and competition with oil for resources increases costs 7 6 5 4 3 2 1 0 2012 2013 2014 2015 Industrial Power LNG Offset Piped Offset Source: Wood Mackenzie Wood Mackenzie 8

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 $/Barrel WoodMac s Long-term Oil Outlook Reflects Significant Supply Uncertainties In Contrast to US Gas With many economic uncertainties, oil demand has become a major uncertainty in the market. There are sufficient oil supplies for a moderate demand growth world, for 5+ years. But, beginning 2012, we expect a tightening in the supply/demand balance, driven by resumed demand growth and slowing supply investments, increasing the call on OPEC supplies. As a result, oil prices begin to rise, to $90 real and $100 in nominal terms by 2013. Yet-to-finds begin to enter the supply mix between 2015 and 2020. 250 200 150 100 50 0 Long-Term WTI Price Forecast Nominal and Real WTI Real WTI Nominal Wood Mackenzie 9

$2010 / mmbtu In Relative Terms Gas Remains Cheap Oil and Gas Diverge and Stay Apart Average price WTI: 2010-15: $89.46 2016-20: $92.21 2021-30: $105.26 Plentiful exploration risk, and reservoir performance risk in this oil outlook, in contrast to US gas. 25.00 20.00 Oil and Gas Commodity Price Forecasts Average price Henry Hub: 2010: $4.53 2011-15: $5.83 2016-20: $6.65 2021-30: $6.91 Average WTI to Henry Hub Differential 15.00 10.00 5.00 $2010/mmbtu 2000-2008 2.83 2009 6.88-2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 WTI 1% GC No. 2 HH 2022 2024 2026 2028 2030 2010-2020 9.55 2021-2030 11.24 Wood Mackenzie 10

bcfd Shale gas production set to grow steeply Haynesville benefits from lease related activity in the short term Marcellus set to see growth as gathering infrastructure improves Activity modestly picking up in Barnett 35 30 25 20 15 10 5 0 Eagle Ford Montney Horn River Marcellus Haynesville Woodford Fayetteville Barnett 2008 2010 2012 2014 2016 2018 2020 2022 2024 Barnett Fayetteville Woodford Haynesville Marcellus Horn River Montney Eagle Ford Source: Wood Mackenzie NAGS and Upstream Service Wood Mackenzie 11

bcfd bcfd Led by these key shales, US supply growth continues Over the last six months, Haynesville, Fayetteville, and Marcellus production climbed by 1.5 bcfd 14 12 10 8 6 4 2 0 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 US production Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Haynesville Marcellus Fayetteville Total 62.0 60.0 58.0 56.0 54.0 52.0 50.0 48.0 46.0 Wood Mackenzie 12

Horizontal Shale Gas Rigs But current rig counts do not reflect a sustainable price-drilling equilibrium, due to several supportive, non-economic factors Steady increase during the last six months Hedge support Asset sales Hold-by-production clauses Cost carries 500 450 400 350 300 Shale Rig Counts 250 200 150 100 50 0 1/4/08 7/4/08 1/4/09 7/4/09 1/4/10 7/4/10 Barnett Haynesville Marcellus Eagleford Woodford Fayetteville Wood Mackenzie 13

Gas rigs By 2012, though, more rigs will be needed, and significant cost pressure will ensue During 2010, drilling holds despite low prices Price uptick in 2011 offsets reduced hedge support Leases phase out Haynesville land rush was mostly in 2008 1,600 1,400 1,200 1,413 Rig Count 1,501 1,247 1,462 Cost carries continue 2012: A year of reckoning? Keeping pace with demand growth requires another uptick in drilling and price 1,000 800 600 810 950 925 Current supports erode 400 Competition with oil? 200 0 2007 2008 2009 2010 2011 2012 2013 Wood Mackenzie 14

And several onshore oil plays are now being targeted Oil plays Bakken Niobrara Eagle Ford Monterey Everything Permian Liquids-rich Barnett Combo Granite Wash Anadarko Woodford Wood Mackenzie 15

Marginal Cost bcfd This liquids focus could mean reduced gas production and higher costs Capital shifting away from gas could lead to lower drilling 10% lower capital directed to gas can lead to 1.5 bcfd lower production by 2015 Service-intensive shale oil puts upward pressure on costs Cost pressures could be strong in the medium term Increased IRR expectations depending on degree of success in shale oil plays 65 60 55 50 7.00 6.50 6.00 5.50 5.00 4.50 US Lower-48 Gas Supply (bcfd) 2012 2013 2014 2015 Increasing Costs Base 5% Shift 10% Shift Base 5% Shift 10% Shift 2012 2013 2014 2015 Source: Wood Mackenzie Wood Mackenzie 16

Regional Coal Retirements Where is the Opportunity for Gas? The # below each bar set is existing coal generating capacity in each region. RFC is by far the most coaldominant region, with 104 GW of capacity. Of this amount, 18 GW is expected to be retired by 2025. Other coal-heavy regions include SERC VACAR, Central, and Southern, as well as ERCOT. SERC Gateway, leader in terms of percentage coal retirements, begins with 14,384 MW in 2010, but approximately 4,600 MW are assumed to retire by 2030. MRO Canada: 2 GW MRO US: 25 GW SPP: 21 GW ERCOT: 18 GW NPCC Ontario: 6 GW SERC Gatew ay: 14 GW SERC Delta: 9 GW SERC Central: 25 GW RFC: 104 GW NPCC Quebec: 0 GW NPCC ISO New England: 3 GW NPCC New York ISO: 3 GW SERC VACAR: 25 GW SERC Southeastern: 26 GW FRCC: 9 GW 22 GW NPCC Maritimes: 2 GW Legend Spring 2010 - Total Retirements by 2030 No Carbon Case - Total Retirements by 2030 Wood Mackenzie 17

MMCFD Marcellus Flows: Vast Majority are Displacement 57% of 2027 flows go into NY, PA, and NJ 12,000 Destination Balance Marcellus 83% go into forward-haul markets generally, including storage. Evidence of backhauls is limited, but emerges in Ohio deliveries of 300-400 Mmcfd after REX contracts roll off in 2019. 10,000 8,000 6,000 Storage Pipe Use Lease & Plant Other DE RI OH Should Marcellus production exceed this outlook, there would be little alternative but to increase backhauls. 4,000 2,000 VA CT MA NJ PA NY - 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 Source: WoodMac - 20100818c Wood Mackenzie 18

MMCFD Mid Atlantic Supplies: Marcellus and Appalachia Dominate Marcellus and the eastern US supply over 80% of Mid Atlantic demand by 2027 Mid Atlantic demand does grow by approximately 2 Bcfd, concentrated in the power sector. Gulf Coast area supplies (Barnett, ArkLaTex, Haynesville) remain positive on the margin, sustaining a basis floor at Gulf Coast plus fuel charges. Should Marcellus production exceed this outlook, there would be little alternative but to increase backhauls. 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - Energy Balance MA 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 Source: WoodMac - 20100818c BaseCase.xls ELC IND LDC Other Deepwater Haynesville Gulf Coast Mid-Continent Rocky Mountains Barnett Shale ArkLaTex Eastern US Marcellus Wood Mackenzie 19

$/mmbtu MMCFD While Marcellus grows into Ohio, Appalachian Basis remain Positive 3,000 Energy Balance OH Marcellus supplies (red portion of bars) grow to the 300-400 Mmcfd range into Ohio, as backhauls increase. Ohio Supplies 2,500 2,000 1,500 ELC IND LDC Other Gulf Coast Barnett Shale ArkLaTex Appalachian basis indices (bottom graph) decline into the $.07 $.20 range by 2011, implying Gulf Coast plus fuel on peak, less offpeak. 1,000 500-2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 Source: WoodMac - 20100818c BaseCase.xls 0.80 Marcellus Eastern US Haynesville Mid-Continent Rocky Mountains 0.70 0.60 0.50 Appalachian Basis 0.40 0.30 0.20 0.10 0.00 2005 2006 2007 2008 2009 2010 2011 2012 2013 Dominion South Point Dominion North Appalachia 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Wood Mackenzie 20

(0.17) 0.27 (1.08) Total Increase : 16.4 Lower 48 Increase: 14.3 2.67 (1.09) (0.04) (2020-2027) 1.83 0.70 3.25 1.17 (1.93) (.97) 1.58 (0.31) 0.52 Can the Gas be Delivered? At the Macro Level, Largely Yes. At the Micro Level Arctic U.S. & Canadian Production Increase Producers are ensuring that their gas gets to a fair marketable point. Out of the Rockies: up to 2.3 Bcfd by 2011. Haynesville: 5 + bcfd of pipe build 2010-2012; further need uncertain. BC production can stabilize WCSB, but more pipe needed out of BC 2015-2020. Out of Eagle Ford: 1.3 Bcfd already in the works. Marcellus: 5 + bcfd by 2013 with shippers; more needed. Producer-Driven Hybrid Market-Driven 0.00 West Coast Horn River 2.01 WCSB San Juan Rockies Permian Williston MidCon Barnett Eagle Ford 2.55 2010-2020.. ArkLaTex Haynesville GOM Shelf Other Gulf Coast GOM Deep East US Utica 0.06 Marcellus 7.16 Source: WoodMac - 20100901 BaseCase East Canada (0.19) Wood Mackenzie 21

Longer Term: The Arctic, Marcellus, BC, Exports? AK gas competes in a $6.50 - $7.00/mmbtu market. Arctic 4.48 CA and FLA needs are largely intra- state; FLA would need some upstream capacity as well. Marcellus needs are ongoing if production is allowed to reach 8 bcfd. Backhauls are real possibility. Volatility in New England likely to attract storage and pipe, or just pipe. Exports to Mexico needed; LNG exports? Producer-Driven Hybrid Market-Driven West Coast (0.08) Horn River 1.43 WCSB (0.90) (0.56) Total Increase : 11.8 Lower 48 Increase: 5.7 Bcfd U.S. & Canadian Production Increase San Juan Rockies 1.76 Permian 1.28 Williston (0.02) (2020-2027) MidCon 0.27 Eagle Ford (.25) Barnett (0.37).. ArkLaTex 1.79 0.46 Haynesville GOM Shelf 0.38? Other Gulf Coast.37 0.12 GOM Deep (0.85) East US (0.10) Utica 1.04 Marcellus 1.61 Source: WoodMac - 20100901 BaseCase East Canada 0.02 Wood Mackenzie 22

Long-term risks and uncertainties Resource Base is vast, but production levels and cost remain uncertain Ultimate shale/unconventional production performance By 2013-2014, we will know much more about how shale wells perform longer term, and will have a much better idea of ultimate recoveries and production potential for a given well Environmental resistance hydraulic fracturing regulations, for example. Environmental resistance, and political attention, is building Regulatory costs and permitting delays could slow development considerably Competition with oil for upstream dollars and services As companies move toward oil, gas shale plays must compete for horizontal rigs and crews A booming opportunity in oil could raise target IRRs on gas plays as producers seek the best margins Demand opportunities require major capital commitment or policy help Carbon and environmental policy Wide range of possibilities w. carbon depending on the targets, timing, price and investment focus EPA regulation and pressure on older coal units how many retire? New (or renewed) markets for gas Gas-intensive industries represent an opportunity, but depend on liquids and global dynamics NGVs? Difficult competition from plug-in hybrids for passenger cars and energy density issues for long haul heavy duty vehicles Wood Mackenzie 23

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