Natural Gas Outlook

1. Natural Gas Outlook National Association of State Energy Officials State Heating Oil and Propane Conference August 30, 2004 William Trapmann Energy Information Administration (EIA) William.Trapmann@eia.doe.gov www.eia.doe.gov

2. Presentation Coverage • Natural Gas Prices • Production Trends • Natural Gas Imports • Storage • Short-Term Market Outlook

3. Natural Gas Prices

4. Natural Gas Prices Generally Track Oil Prices NYMEX Natural Gas Futures Near-Month Contract Settlement Price, West Texas Intermediate Crude Oil Spot Price, and Henry Hub Natural Gas Spot Price Henry Hub Spot Price NYMEX Futures Price Update WTI Spot Price

5. Why Are Current Natural Gas Prices High? • High Petroleum Prices • Returns to Drilling • Lags in Bringing New Production to Market • Net Imports Flat • Demand

6. Natural Gas Production Trends

7. Reserve Additions Exceeded Production for 8 of the Last 9 Years Source: Energy Information Administration, Advance Summary of U.S. Crude Oil, Natural Gas, and Natural Gas Liquids Reserves 2002 Annual Report

8. Drilling Increases Are Necessary to Maintain Production Levels …… A Growing Percentage of Production Is from Wells Three Years Old or Less 60 50 40 < 1 Year Old < 1 Year Old Percent Total Wellhead Capacity < 2 Years Old < 2 Years Old 30 < 3 Years Old < 3 Years Old 20 10 0 1993 2003 Sources: EIA.

9. Gas Rigs Tend To Follow Spot Prices With A Lag * * Source: Natural Gas IntelligenceWeekly Gas Price Index, Baker-Hughes Weekly US Rig Report.

10. Rig Growth Continues but Production Remains Flat Sources: EIA, Baker Hughes Gas Rig Counts, Short-Term Energy Outlook, August 2004

11. Natural Gas Imports

12. Pipeline Imports Are Expected to Decline, While LNG Imports Increase LNG Imports: 2003: 507 Bcf 2004: 690 Bcf 2005: 800 Bcf Sources: History: EIA; Projections: Short-Term Energy Outlook August, 2004.

13. LNG Imports at Existing Terminals History Projection Cove Point, MD Total Elba Island, GA Lake Charles, LA Everett, MA Source: History, Natural Gas Monthly; 2004-2005: Short-Term Energy Outlook, August 2004.

14. There Are Numerous Proposals For New LNG Import Facilities Projects shown as of June 2004 Sources: Energy Information Administration, U.S. LNG Markets and Uses: June 2004 Update.

15. Natural Gas Storage

16. Seasonal Natural Gas Load Patterns By Sector (BCF) Residential Commercial Industrial Electric Power Source: EIA.

17. Underground Natural Gas Storage Facilities In the Lower 48 States

18. Natural Gas in Storage Now Exceeds The 5-Year Average Note: Actual working gas stocks denoted by red line; blue lines show the maximum and minimum volumes in 1999-2003. Source: Energy Information Administration, Weekly Natural Gas Storage Report, August 12, 2004.

19. Natural Gas in Storage Entering Heating SeasonIs Expected to Exceed the Range of the Past Five Years Projection: 3,196 Bcf Refill Volumes Working Gas in Storage (billion cubic feet) Stocks at end of March Storage Stocks as of the End of October Source: Historical data: EIA; Projected data: Short-Term Energy Outlook August 2004

20. U.S. Liquefied Natural Gas Facilities Notes: Map excludes the import facility in Puerto Rico. “Other” includes: stranded utilities, vehicular fuel facilities, nitrogen rejection units and other special processing plants. Source: Energy Information Administration, U.S. LNG Markets and Uses: June 2004 Update, June 2004.

21. LNG Facilities in the U.S. Northeast NewWMF Source: Adapted from Energy Information Administration, U.S. LNG Markets and Uses: June 2004 Update, June 2004.

22. Short-Term Price Outlook

23. Short-Term Outlook for Natural Gas • Continued price pressure • No short-term relief expected • Consumption – flat growth in 2004 and 2005 • Production – marginal growth through 2005 • New well completions are offset by the production declines for existing wells • Net imports – slight increase in 2004 and then decrease in 2005 • Increasing LNG imports are offset by decreasing pipeline imports from Canada

24. 12.0 10.0 8.0 6.0 Dollars per Thousand Cubic Feet 4.0 2.0 Projections 0.0 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Sep-04 Sep-05 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 May-99 May-00 May-01 May-02 May-03 May-04 May-05 Monthly Natural Gas Spot Prices Are Expected to Average $6.21 This Year(Base Case and 95% Confidence Interval*) Average Spot Price: about $6.21 /Mcf in 2004 about $6.60 /Mcf in 2005 *The confidence intervals show +/- 2 standard errors based on the properties of the model. The ranges do not include the effects of major supply disruptions. Sources: History: EIA; Projections: Short-Term Energy Outlook, August 2004.

25. U.S. Natural Gas Prices Are Expected to Trend Upward Through 2005 History Outlook Sources: History: EIA; Projections: Short-Term Energy Outlook, August 2004.

26. Heating Demand Indicators:Probability Ranges for U.S. Degree-Days* This Winter Winter weather was warmer than normal last year. *Gas-weighted heating degree-days Sources: History: EIA; Projections: Short-Term Energy Outlook, August 2004.

27. D4 D1 S D3 D2 wellhead price D2 D1 Price D2 D1 0 82 92 83 87 89 90 94 96 97 99 80 85 Supply Capacity Utilization Rate percent supply utilization rate Volatility HappensIllustrative Supply and Demand Curves

28. Illustrative Consumer Prices and Expenditures for Heating Fuels During the Winter Average 2001-2002 2002-2003 2003-2004 2004-2005 1998-2000 Actual Actual Actual Base Forecast Natural Gas (Midwest) Consumption (mcf) 88.8 81.3 95.2 89.9 97.8 Avg. Price ($/mcf) 7.61 7.41 8.40 9.69 10.72 Expenditures ($) 676 602 800 871 1049 Heating Oil (Northeast) Consumption (gals) 673 577 743 728 696 Avg. Price ($/gal) 1.12 1.10 1.34 1.36 1.57 Expenditures ($) 754 635 993 991 1094 Propane (Midwest) Consumption (gals) 877 803 941 888 966 Avg. Price ($/gal) 1.10 1.11 1.20 1.30 1.41 Expenditures ($) 964 888 1125 1156 1361 Notes: Consumption based on typical per household use for regions noted. Prices shown are national average delivered-to-household prices. mcf = thousand cubic feet. gal = gallon. Household Winter Heating Fuel Summary Notes: Consumption based on typical per household use for the regions noted. Sources: History: EIA; Projections: Short-Term Energy Outlook August 2004.

29. www.eia.doe.gov