Natural Gas & LNG Fundamentals Greg Kist Vice President, Marketing, Corporate & Government Relations

Marketing & Risk Management Strategy •

Hedge up to 50% of production – currently focused on protecting AECO basis differentials

•

Prefer downside protection through put options

•

Diversify sales portfolio

•

Take advantage of abundant takeaway capacity in operating region

•

Develop pipeline strategy to get Montney gas to westcoast LNG facility

•

Develop an LNG Export facility through JV with PETRONAS

2

Future for Natural Gas •

Immediate environmental benefits

•

Natural gas to play vital role in reducing overall emissions and underpinning renewable energy

•

New technology has allowed industry to access “hard-to-get-at” resources

•

Significant demand growth potential in North America and globally

•

New sources of demand emerging – transportation fuel

•

Reason for optimism – IEA “Golden Age of Gas”

3

US Demand Growth 100

90

Annualized Growth of 3% Y/Y Bcf/d

80

70

60

50

40 Jan

Feb

Mar

Apr

2007

May

Jun

2008

Jul

2009

Aug

Sept

2010

Oct

Nov

Dec

2011

4

US Supply Growth 70

65

Bcf/d

60

55

50

45

40 Jan

Feb

Mar

Apr

2007

May

Jun

2008

Jul

2009

Aug

Sept

2010

Oct

Nov

Dec

2011

5

Short Term Pricing Challenges

•

Slow economic growth in the US limits industrial demand

•

Lower 48 gas development has led to supply growth outpacing demand

•

Producer share prices driven by ability to grow and less on earnings

•

North American prices are depressed relative to European and Asian.

6

Western Canadian Market $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00

Station #2

Sep-11

Jul-11

May-11

Mar-11

Jan-11

Nov-10

Sep-10

Jul-10

May-10

Mar-10

Jan-10

Nov-09

Sep-09

Jul-09

May-09

Mar-09

Jan-09

$0.00

AECO Daily 7

Canadian LNG Net benefit is enormous • Alleviates supply demand imbalance – Compliments gas exports to the US • Provides diversification benefits for producers and consumers – Canadian producers diversify from single market, Asian consumers reduce dependence on Middle East supply • Job creation – Upstream, downstream and construction • Ensures investment in NEBC for 20+ years – 1 Bcf per day facility requires over 9 Tcf of gas • Strong government support – Building royalty and tax base for western provinces 8

Arbitrage too large to ignore 16.00

Average Price ($/MMBtu)

14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 2000

2001

2002

2003

2004

Japan

2005

2006

2007

2008

2009

2010

2011YTD

Canada

9

Global LNG Market is Tightening - Global LNG Supply/Demand (mmtpa)

Potential to be 150 mmtpa short or ~20 bcf/d

10

East Asia is Short LNG Pacific LNG Balance Potential to be 80 mmtpa short or ~10 bcf/d

mmtpa Short-term Short-term :: Post Post Fukushima Fukushima has has created created 10-12 10-12mtpa mtpa of of incremental incremental LNG LNG demand demand Mid Mid to to Long-term Long-term :: Uncertain Uncertain as as Japan Japan continues continues to to debate debate postpostFukushima Fukushima nuclear nuclear policy policy

-*

11

Shifting the Fuel Mix in Japan •

Japan LNG Imports

peak power demand

14,000

• 12,000 MMcf/d

Primary concern is balancing

Upside for gas into power is partly offset by rediverted gas from industry

10,000

Post-Fukushima

Post-Fukushima

8,000

Pre-Fukushima

•

Energy policy is being reshaped with a likely

-Pre-Fukushima

6,000

emphasis on energy efficiency 2000

2005

2010

2015

2020

2025

2030

and renewables

12

Pacific Basin LNG Demand is Robust Pacific Basin LNG Demand by Country (mmtpa) -300

-“JKT” -“JKT” drops drops from from 86% 86% of of Basin Basin demand demand in in 2009 2009 to to 52% 52% in 2025 in 2025

-250

-China -China increases increases from from 5% 5% to to 19% 19% over over the the same same period period

-“Other” -“Other” comprises comprises Bahrain, Bahrain, Bangladesh, Bangladesh, Indonesia, Indonesia, New New Zealand, Zealand, Pakistan, Pakistan, Peninsular Peninsular Malaysia, Malaysia, Vietnam, Vietnam, the the Philippines, Philippines, Singapore Singapore and and South South Africa Africa

OTHER

CHINA 14.3% CAGR -200 INDIA 9.5% CAGR TAIWAN 2.0% CAGR

-150

SOUTH KOREA 2.8% CAGR -100 JAPAN 2.0% CAGR

-50

-0 -2009

-2011

-2013

-2015

-2017

-2019

-2021

-2023

-2025

JKT remains key, but China is the growth story, at least in this decade 13

LNG Export Joint Venture •

80% PETRONAS – 20% Progress with PETRONAS operating

•

Progress is one of few with equity interest in a LNG project

•

Partnered with a leader in LNG development, shipping and marketing

•

PETRONAS is involved in the full LNG value chain

•

Major supplier to Japan, Korea and Taiwan

•

Supplier/offtake relationships since 1983

•

Developing new markets in China

14

PETRONAS – an LNG Major •

One of the largest production facilities in a single location with 23.3 mmtpa (3 bcf/d) at Bintulu, Malaysia

•

Largest LNG ship operator with 29 ships

•

Currently developing three LNG projects

•

•

Egypt LNG

•

Dragon LNG

•

Gladstone LNG

Reputable and reliable LNG supplier

15

LNG Export Joint Venture •

Detailed Feasibility Study (DFS) for technical phase launched - Awarded to KBR of Houston - 9-month DFS phase - Includes site selection - Initial design for 2 trains each capable of 3.7 mmtpa or 0.5 bcf/d each

•

DFS for Permitting & Regulatory phase and Market Assessment expected to be awarded mid-November

16

DFS Phase sets Foundation for LNG -Sept 2011 to end August 2012

September 2012 to July 2013 to Q3 2014

Q3 2014 to end 2018

Development Phase

Feasibility Phase

DFS

--PreFEED PreFEED

OBJECTIVES

Key Activities

Feasibility Study Phase aims to ascertain technical feasibility and commercial viability of the proposed LNG export facility by

Month

--FEED FEED

2011

A

DFS (Technical)

Execution Phase

2012

S O N D

J

-Site Selection

F M A M J

J

2013

A

S

O N D

J

F M A M J

J

2014

A

S

O N D Q1

Q2

Q3

Q4

-LNG Plant Dev.

-Contracting Process -Technical Review

1.Identifying potential site for LNG project

-Contracted Works

-Market Study

DFS (Commercial)

2.Developing a basis of design to be taken as an input to Pre-FEED

-Consultant -Pre-screening

-Economic Evaluation -Commercial Review -Initial Engagement

-Permitting

Regulatory & Permitting

3.Identifying and preliminarily planning stakeholder (govt, First Nations. etc) engagement

Milestones

-Internal Activities

-Tax Study

Roadmap -Identify Stakeholders -ExComm -Meeting 1

-Permitting Activities -Biophysical Eff. -ExComm -ExComm -Meeting 2

-ExComm

-Meeting 3

-Meeting 4

-DFS Report Completion

4.Identifying marketing strategy, target market (buyers) and pricing

Pre-FEED & FEED

5.Assessing economic potential of the project

-& Stage Gate

-Pre-FEED

-Stage Gate -FEED

-FID

-RESERVE CERTIFICATIONS

Upstream

17

DFS Deliverables REGULATORY & PERMITTING

TECHNICAL Plant Engineering

Environmental & Stakeholder

• To assess technology options optimal to gas and climatic conditions

•

• To develop a Basis of Design with CAPEX estimate of ±30%

•

To identify environmental permitting requirements, key milestones and processes To identify and develop stakeholder (first nations, government agencies) engagement plans

COMMERCIAL Market & Pricing • • •

Domestic gas market and pricing Export market (LNG) and pricing Preliminary marketing strategy

Site Selection

Legal & Regulatory

Finance & Valuation

• To analyze 3 to 4 sites and recommend one site for LNG Plant

•

• Financing options, tax • Project economics valuation

Roadmap to securing export license from NEB and other regulatory requirements for business

-Other internal scope • Project risk assessment • Organization, schedule and budget for PreFEED and FEED • Setting up business entity

18

LNG Export Joint Venture Captures the Full LNG Value Chain EXPLORATION & PRODUCTION

•

– Progress has the expertise in the North Montney – First mover in the North Montney

LIQUEFACTION

•

– Shared learnings from Gladstone and other projects – PETRONAS has technical expertise

SHIPPING

•

– PETRONAS controls the world’s largest LNG shipping fleet

GASIFICATION & OFFTAKE

•

– Existing long term supply agreements with the major LNG importers – Japan, Taiwan, South Korea, China

19

Pipeline to the West Coast •

Develop pipeline capacity to deliver 0.5 bcf per day by 2017/2018

•

Expandable to handle up to 1 bcf per day

•

Site to be determined through DFS phase

•

Alternatives: • • •

Standalone project-specific pipeline Common carrier Well-capitalized pipe companies Prince Rupert

20