Natural Gas Storage: The LNG Factor

Natural Gas Storage Contracts George E. (Ned) Crady June 27, 2005

Natural Gas Industry Participants • Thousands of Natural Gas Producers – major oil companies – independent production companies – privately owned production wells

• Approximately 100 Interstate Pipeline Companies – sell capacity for transportation of gas across state lines

• Intrastate Pipeline Companies – transport natural gas for use within one state

• Emerging Natural Gas Storage Companies – store, park, loan and hub natural gas…in intrastate commerce or interstate commerce 2

Natural Gas Industry Participants (cont’d) • Local Distribution Companies (“LDC”) – traditionally the prime users of pipeline and storage capacity – regulated by the states – distribute gas for commercial, industrial and residential use

• Natural Gas Marketers – aggregate natural gas suppliers for downstream customers, principally LDCs and electric generators – emerging as major holders of interstate pipeline and natural gas storage capacity 3

Why Do These Players Matter? (See Demand Profile)

4

EIA Lowered Consumption Projections in AEO 2005 by Sector, in 2003, 2010, and 2025 (trillion cubic feet)

30

31.4

30.7

8.4 9.4

25

26.2

25.4

6.7

6.7

22.4 20

Electric Power

5.1 11.9 10.3

15

9.7

9.0

3.5

3.4

Industrial

8.3

10

4.0 3.2

4.1

Commercial

5 5.1

5.5

5.5

6.1

6.0

Residential 0 2003

AEO2004

Source: Annual Energy Outlook 2005

AEO2005

2010

AEO2005 Transportation

AEO2004

2025 5

Natural Gas Regulation Department of Energy Organization Act of 1977 •

established Federal Energy Regulatory Commission (FERC)

•

abolished Federal Power Commission

•

charged with regulating natural gas markets in a period of well head price controls and bundled transport and gas product sales

6

What is the FERC? • Government Agency – Decisions subject to review by the federal courts

• 5 Voting Commissioners – Appointed by the President – Confirmed by the Senate – 5 year terms

• Over 1,000 Employees – Engineers, Technical Specialists – Economists – Lawyers 7

Role of FERC Under Section 7C of the Natural Gas Act of 1938, FERC (formerly the Federal Power Commission) has jurisdiction over: – The Transportation and sale for resale of natural gas in interstate commerce; and – The construction and operation of facilities to be used for that purpose

8

Role of FERC (cont’d) • Under Section 3(a) of the Natural Gas Act of 1938, FERC has jurisdiction over: –The siting, construction and operation of any facility in the United States used to import or export natural gas (or LNG) into the country

9

Regulatory Requirements NGA Section 3 • No Open Access • No Rate Oversight • Closed Access – 3rd Party access is discretionary

• Approval unless Project will not be consistent with public interest

NGA Section 7 • Open access • Cost based or market based rates • Open season/tariff • Certificate of public convenience and necessity

10

What about Intrastate Transport/Sale? Federal

State

• FERC

• 50 State Commissions

• Wholesale Transactions (Transactions in interstate commerce)

• Retail Transactions (Transactions in intrastate commerce)

• Rates, terms and conditions of service for interstate pipelines

• Rates, terms and conditions of service for local distribution service

11

Natural Gas Industry Pre-1985 Bundled Product Wellhead

Gas Producer

Intrastate and Interstate Pipelines

LDCs

End Users

• Natural Gas Producers sold gas to interstate pipelines • Pipelines sold bundled product (natural gas and transportation capacity) to LDCs

12

Problems with Interstate Transportation of Natural Gas Prior to Restructuring • Price Disparities between Intrastate and Interstate Gas – producers preferred to sell gas in the intrastate market because unregulated market prices were greater than interstate, regulated prices – created shortage in interstate markets and consumption states

• Lack of Supply Competition – customers could not choose natural gas suppliers – interstate pipelines controlled both natural gas supply and transportation capacity 13

Order No. 436 (1985) • Transitional step created incentive for pipelines to offer unbundled transportation services – nondiscriminatory access to transportation – set maximum and minimum tariff rates for transportation service

• Limited authority for customers to modify bundled contracts to take advantage of unbundling • Did not prohibit pipelines from continuing to offer bundled sales and transportation options • Equitable sharing of Take-or-Pay Costs between pipelines and customers 14

Order No. 636 (1992) • Mandated unbundling of supply, transportation and storage services by all interstate pipelines • Required nondiscriminatory open access to transportation and underground storage capacity or the right to use space in storage reservoirs • Required separation of pipeline transportation and sales functions (marketing affiliates) • Required customers be given the opportunity to sublease any of their contracted storage capacity (Capacity Release) 15

Post Order 636 Price transparency and market innovation emerges: – rapid gas storage inventory turnover (cycling) capability develops with unbundling, new technology and development of Salt Domes – development of facilities in producing regions of the Gulf Coast to facilitate natural gas production schedules (“smoothing of production volumes”) – development of facilities near transportation capacity to enhance deliverability – sponsorship by independent storage developers – year round capability for injection and withdrawal – little or no notice required to inject or withdraw gas – traders develop new trading and hedging services 16

Cycling Increases

17

Post Order 636 Market Centers Emerge Services offered by market centers and hubs vary significantly. The list below provides only some of the general types of services offered. The definitions were obtained from the Federal Energy Regulatory Commission. – Transportation/Wheeling – Transfer of gas from one interconnected pipeline to another through a header (hub), by displacement (including exchanges), or by physical transfer over the transmission of a market center pipeline. – Parking – A short-term transaction in which the market center holds the shipper’s gas for redelivery at a later date. Often uses storage facilities, but may also use displacement or variations in linepack. 18

Market Centers Emerge (cont’d) – Loaning – A short-term advance of gas to a shipper by a market center that is repaid in kind by the shipper a short time later. Also referred to as advancing, drafting, reverse parking, and imbalance resolution. – Storage – Storage that is longer than parking, such as seasonal storage. Injection and withdrawal operations may be separately charged. – Peaking – Short-term (usually less than a day and perhaps hourly) sales of gas to meet unanticipated increases in demand or shortages of gas experience by the buyer. – Balancing – A short-term interruptible arrangement to cover a temporary imbalance situation. The service is often provided in conjunction with parking and loaning. 19

Market Centers Emerge (cont’d) – Title Transfer – A service in which changes in ownership of a specific gas package are recorded by the market center. Title may transfer several times for some gas before it leaves the center. The service is merely an accounting or documentation of title transfers that may be done electronically, by hard copy, or both. – Administration – Assistance to shippers with the administrative aspects of gas transfers, such as nominations and confirmations. – Compression – Provision of compression as a separate service. If compression is bundled with transportation, it is not a separate service. – Risk Management – Services that relate to reducing the risk of price changes to gas buyers and sellers, for example, exchange of futures for physicals. – Hub-to-Hub Transfers – Arranging simultaneous receipt of a customer’s gas into a connection associated with one center and an instantaneous delivery at a distant connection associated with another center. 20

21

22

But How Does the Market Center Add Value? Example 1: A shipper with firm capacity on Pipeline A wants to deliver gas to an end user located off Pipeline B. The shipper can make arrangements to transfer the gas through the market center, with the center providing (de-)compression services if pipelines A and B operate at different pressures. Needed capacity on Pipeline B may be sought and acquired at the center if trading services (or traders) have such posted. Similarly, the shipper can use the center’s services to revise its nominations (or temporarily release some capacity) on Pipeline A, with the center handling the administrative requirements, including confirmations, associated with the transactions. To cover any imbalances that might occur when the purchased production volume exceeds nominated capacity on Pipeline A, the shipper can execute an operational balancing agreement with the center. Source: Energy Information Administration Natural Gas 1996: Issues and Trends

23

But How Does the Market Center Add Value? (cont’d) Example 2: A large end user or local distribution company with firm capacity on Pipeline D buys gas in an area serviced by Pipeline C, which has only interruptible capacity available. The shipper can arrange to have supplies moved on Pipeline C during nonpeak periods; any excess gas is injected into (high-deliverability) storage at the center. When the shipper experiences a sudden increase in demand, the center will provide the necessary incremental support from storage. If the shipper temporarily exceeds its storage inventory at the center, the center offers gas loaning, with the shipper responsible for replacement of the gas within a specified period. Similarly, storage withdrawal and loaning by the center can also be used to cover shortfalls when purchased production flowing into Pipeline C does not equal transportation nominations. Many centers also provide a real-time tracking service to notify shippers immediately when such imbalances are imminent. Source: Energy Information Administration Natural Gas 1996: Issues and Trends

24

25

The Regulatory Environment of a Natural Gas Storage Facility Rates 1. Section 7(c) NGA cost based rates; or 2. NGPA Section 311 market based rates

Construction 1. Open Season – Market Study (demand) a. Customer demand-signature of precedent agreement for ___% capacity over ___ years

2. Environment Assessment/Impact Assessment a. Varies depending upon expansion -vs- greenfield b. Surrounding habitat (existing natural gas reservoir or virgin salt dome) 26

Cost Based Rates •

Equitable Method – recovery of fixed costs (capital costs, taxes, debt service) • 50% based on storage deliverability • 50% based on storage capacity – recovery of variable costs (operating expenses; fuel) • 100% from injection and withdrawal charges

•

Most 1 to 2 cycle facilities are cost based

•

Lower capital costs for such facilities makes such facilities low cost provider

•

FERC’s September 30, 2004 Staff Report concludes that a 2 cycle Reservoir Storage Facility costs approximately $5-6MM per BCF of working gas capacity versus development costs of approximately $10-12MM per BCF of working gas capacity for a Gulf Coast 6 to 12 cycle Salt Cavern 27

Cost Based Rates (cont’d) •

Additionally FERC’s September 30, 2004 Staff Report concludes that: 1.

Median cost-of-service rate per Dth of annual working gas capacity for firm storage service is $0.64 (based on 20 tariffs on file with FERC)

2.

Median cost-of-service unit storage cost for a salt cavern approximates $2.93 per MCF per year –

Assuming Cap Ex of $60MM for a 5 BCF cavern and annual cost of service of @ $14.63MM (assumes 13% ROE, 8% debt cost, 50/50 D/E ratio, 34% tax rate, 3% state ad valorem tax, 20 year book life, 10 year tax life)

28

Cost Based Rates (cont’d) • BUT THE MARKET DEMANDS LOAD FOLLOWING, MULTI-CYCLE SERVICE

29

Volatility Driving Multi-Cycle Service

Source:

National Petroleum Council Task Group Report, September 2003

30

Cost Based Rates (cont’d) • DEVELOPERS DEMAND RETURNS GREATER THAN 13% FOR RISK OF A MERCHANT FACILITY (OR FACILITY WITH SHORT TERM CONTRACTS TIED TO VOLATILE GAS FIRED GENERATION DISPATCH) • HENCE, THE QUEST FOR MARKET BASED RATES

31

Electricity Generation Capacity Additions by Fuel Type, 2001-2025 (gigawatts) Natural gas Coal Renewables

80 70 60 50 40 30 20 10 0 2001-2005

2006-2010

Source: Annual Energy Outlook 2005

2011-2015

2016-2020

2021-2025 32

Market Based Rate Authority Test:

Whether applicant can withhold services, and thereby increase its price by a significant amount (ten percent or more) for a significant period of time; and whether the applicant can unduly discriminate in either price or terms and conditions of service.

Hurdle: Applicant must demonstrate it lacks market power or that such market power can be sufficiently mitigated.

33

Market Based Rate Authority (cont’d) Criteria: (1) Define Relevant Product and Geographic Market (2) Measure firms size market share and market concentration (3) evaluate other pertinent factors (ease of entry into the market, among others) See alternatives to Traditional Cost-of-Service Rate making for Natural Gas Pipelines, et al., 74 FERC §61,076 at 61,230, reh’g denied, 75 FERC §61,024 (1996)

34

Market Based Rates • How do you demonstrate you lack market power? – Identify product (storage, hub service, other) and geographic market – Market share is measured with respect to total working gas capacity and maximum daily deliverability as a percentage share of the total of those storage capabilities in the relevant markets – FERC uses the Herfindahl-Hirschman Index (1800 safe harbor that one lacks market power) – Ex: • Gulf Coast Market @ 800 BCF and daily deliverability of @ 25,000 MMCF • New project has 15 BCF of working gas capacity and 700 MMCF/d deliverability • Multiple pipelines and storage “alternatives” in region 35

Market Based Rates (cont’d) • Other pertinent factors? – Ease of entry into market (competing projects) – Competitive alternatives: LNG, propane air injection facilities, interstate pipeline balancing

• Hub Services? – Bingo Card/Matrix demonstrating “optionality” within interconnection points of interstate and intrastate pipelines to evidence “good alternatives” mitigate market control

36

Market Based Rates (cont’d) •

What can go wrong? Red Lake Gas Storage, LP, 102 FERC §61,077(2003), reh’g denied 103 FERC §61,277(2003) •

• •

12 BCF salt cavern designed for high deliverability, quick cycling to accommodate injections/withdrawals on less than one hour’s notice to “load follow” electric generation dispatch Strong demand, underserved Arizona market Substantial public benefits without significant adverse impact

37

Market Based Rates (cont’d) •

Problem: • • •

•

too large a market entrant (share) existing pipelines fully subscribed, and therefore no good alternatives applicant could increase prices for a significant time (i.e. peak periods)

Mitigants: • •

Comparison geographic regions of Northern California and Texas contain different deliverability and peaking periods Constrained pipeline capacity to any markets 38

Natural Gas Storage Contracts • Contracts for Service • Tariffs (PUC or FERC) • General Terms and Conditions • Operating Statements

39

Nature of Services 1. Non-Jurisdictional – Subject to subpart C of Part 284 of FERC’s regulations (18 CFR 3284.121 et seq.) implementing Section 311 (a)(2) of the NGPA.

2. Services: (a) injection, storage, withdrawal and delivery of Gas owned by customer (b) parking, loaning, hubbing, load following

40

Storage Quantity Quantity: 1)

Storage up to Maximum Storage Quantity (MSQ)

2)

Injection up to Maximum Daily Injection Quantity (MDIQ)

3)

Withdrawal up to Maximum Daily Withdrawal Quantity (MDWQ)

4)

Wheeling up to Maximum Daily Transportation Quantity (MDTQ)

5)

Load Following up to: a) b) c)

Contract Hourly Injection Quantity (CHIQ) Contract Hourly Withdrawal Quantity (CHWQ) Contract Hourly Transportation Quantity (CHTQ)

41

Receipt and Delivery Nominations pursuant to procedures outlined in Tariff and/or General Terms and Conditions – Normally nominations for injections/withdrawals required X business days in advance of Month – Nominations after the first of the Month required by [10:30 AM] CST on business day preceeding effective day of nomination – Intraday nominations must be made [one] hour prior to effective hour of nomination and subject to procedures of transporting pipeline 42

Receipt and Delivery of Gas Subject to Facility and third party pipeline nomination procedures, Storage Co. will provide services for the account of customer on a 1. firm basis; or 2. interruptible basis; provided that services limited to: 1. Storage up to MSQ (maximum storage quantity) 2. Injection up to MDIQ (maximum daily injection quantity)

43

Receipt and Delivery of Gas (cont’d) 3. Withdrawal up to MDWQ (maximum daily withdrawal quantity) 4. Load following up to:

a) MTQ (maximum transportation quantity) b) MPQ (maximum parking quantity) c) MLQ (maximum loaning quantity)

44

Why So Many Limitations on Injections/Withdrawals? • Not all storage Facilities are created equal

45

Inventory Turnover Varies Among Facilities

Source: FERC Staff Report (9/30/2004)

46

Points of Receipts and Deliveries Receipt Points

Minimum Volume

Maximum Volume

P/L X

[5000] mmbtu/day

As per Gas Control

P/L Y

[5000] mmbtu/day

As per Gas Control

P/L Z

[5000] mmbtu/day

As per Gas Control

Delivery Points

Minimum Volume

Maximum Volume

P/L X

[5000] mmbtu/day

As per Gas Control

P/L Y

[5000] mmbtu/day

As per Gas Control

P/L Z

[5000] mmbtu/day

As per Gas Control

47

Monthly Rates for Storage Services • Reservation Fee (Firm) = $___ x CSQ (Contract Storage Q) • Injection Fee = $___ x MIQ • Withdrawal Fee = $___ x MWQ • Fuel Charge = [2%] x (MIQ + MWQ) • Hub Services Fee = $___ x MTQ • Parking Services Fee = $___ x MPQ • Loaning Services Fee = $___ x MLQ

48

Monthly Rates for Storage Services (cont’d) •

Overrrun Charge - Authorized overrun charge = $___ x AOQ - Unauthorized overrun charge = $___ x UOQ

•

Load Following/Balancing Services - $_____ x (24 x (MDIQ+MDWQ)) - Customer must keep Gas Storage Inventory Account at zero balance each day relative to DBGQ (daily baseload gas quantity) required by customer

49

Term • Storage contract for a primary term of [__] years • Rolls over to [month to month] until terminated by 30 days written notice or termination event • Termination Events: • • • • •

Loss of NGPA §311 status Failure to pay (Customer or Company) Material Adverse Change (Credit Rating trigger) Insolvency Event Breach of covenant that remains uncured

50

Related Transactions; Customer Gas Storage Inventory Account •

Customer responsible for all ancillary services incident to purchase, sale, transport of Customer Gas (permits authorization, taxes, nominations, and royalties) unless expressly contracted for herein

•

On expiration of Term, must settle Customer Gas Storage Inventory Account –

–

If Customer Account positive, Company to 1. Allow customer to withdraw gas subject to MDWQ and any fee therefore If Customer Account negative, Company will liquidate Customer’s Account, and remit sales proceed to Customer net of all expenses. 51

Quality, Pressure & Scheduled Maintenance • Quality: Gas must comply with minimum standards specified in Pipeline Operating Statements of Receiving Pipeline, Delivering Pipeline and Storage Facility • Pressure: Pressure must be sufficient to overcome operating pressure of Receiving Pipeline (Customer Obligation), and Delivering Pipeline (Company Obligation) • Scheduled Maintenance: • Interruptible Service curtailed first • Thereafter Firm service curtailed pro rata based on users respective MSQ nominations 52

Measurement and Meter Testing • Meters maintained and operated by Receiving pipeline and Delivery pipeline, and in accordance with such pipeline’s Operating Statement • Meter Testing • periodic testing and calibration in accordance with pipeline Operating Statement

53

Assignments and Transfers 1. Consent of counterparty, not to be unreasonably withheld – Company right to encumber, pledge and collaterally assign Gas Storage Contract (and Customer credit support) to Facility Lender – Customer will execute Lender consent if requested

2. Customer Assignment shall proportionately assign Customer MDIQ, MDWQ and MSQ – bundled rights of service – can not unbundle

54

Penalties • If Gas does not flow as scheduled for reasons other than Force Majeure or pressure problem, then Customer charged a Scheduling Penalty $___ per MMBtu x (Scheduled Volume - Actual Volume) • Company/Customer shall indemnify the other from any imbalance penalty on a third party pipeline caused by the act or omission of Company or Customer • Imbalances shall be reflected in Customer’s Gas Storage Inventory Account, and the imbalance shall be remedied by injection/withdrawal of gas by Company/Customer until balance restored 55

Title – Other than any statutory lien rights Company may have (see Tex. Bus.& Com. Code Ann. §7.209 (Vernons 2000), title to Gas credited to Customer’s Gas Storage Inventory Account remains with Customer – Customer warrants title, and indemnifies Company against claims relating to title – Customer pays all taxes, royalties or charges relating to gas

56

Liens - Company will protect against third party liens attaching to working gas of Customer, and will redeliver such gas free of any liens - Company indemnifies Customer from third party liens during care, custody and control of Company

57

Risk of Loss 1. Customer has care, custody and control a) prior to receipt by Company at Receipt Point b) after delivery by Company at Delivery Point • Customer indemnifies Company from all Losses therefrom [except those caused by the gross negligence or willful misconduct of Company]

2. Company has care, custody and control a) after receipt of Gas at the Receipt Point b) until re-delivery of Gas at the Delivery Point • Company indemnifies Customer from all Losses therefrom [except those caused by the gross negligence or willful misconduct of Customer]

58

Billing & Payment Monthly Statement for prior Billing Month identifying: 1) Volume of MMBtu and MMcf of Gas delivered by or on behalf of Customer at Receipt Point 2) Volume of MMBtu and MMcf of Gas re-delivered to or on behalf of Customer at Delivery Point 3) Number of MMBtu of Gas in Customer Gas Storage Inventory Account at beginning and end of Billing Month 4) any adjustments to any months prior to Billing Month 5) amount payable for any other services rendered

59

Billing & Payment (cont’d) Payment is net [10] days. Billing Adjustments: 1) If good faith dispute, pay amount in dispute and seek dispute resolution 2) Reasonable access to books and records solely to verify accuracy of billing statement 3) No access or right to billing adjustment after [24] months

60

Taxes • Ad Valorem Taxes: Customer pays any ad valorem or sales tax on Gas it receives from or delivers to Company • Other Taxes: – Any tax imposed on Gas stored in the Facility, transported to or from the Facility, injected/withdrawn from Facility, Customer shall reimburse Company for Customer’s pro rata share – Excludes taxes on capital stock, income, franchise, or gross receipts 61

Regulatory Authority Applicable Laws • Parties obligations subject to applicable law, and obligations hereunder shall be modified to conform with any change in law to extent possible • Company right to terminate if NGPA §311 market based rates disallowed

62

Regulatory Authority (cont’d) Applicable Regulatory Authority • Services in interstate commerce under NGPA §311(a)(2) and FERC regulations at 18 C.F.R. Part 284, Sub-Part C; or • Services in intrastate commerce and regulated by State Public Service Commission - Texas: TRC under Texas Utilities Code, Section 104 and TRC rules in Texas Administrative Code, Title 16, Part 1, Ch.7 63

Regulatory Authority (cont’d) Operating Statement • Storage Contract subject to Company’s Operating Statement on file with FERC (and/or State Public Service Commission)

64

Force Majeure • If either Party is unable, in whole or in part, by Force Majeure, to carry out its respective obligations under this Agreement, other than the obligation to make payments of amounts due hereunder, then upon written notice of such facts within a reasonable time after the discovery of same, the obligations of such Party shall be suspended during the continuance of such force majeure event provided such cause shall be remedied so far as is reasonably commercially practicable by the Party asserting same

65

Force Majeure (cont’d) • Carve out for payment of fixed demand charges for firm service and taxes related thereto • Force Majeure Includes: Acts of God, governmental action, war, strikes, [breakage of/accident to/mechanical failure of machinery, equipment, pipelines, subsurface storage reservoirs, rights of way] failure of third party pipelines, not reasonably within the control of Party Excludes: -

interruptible transportation by Transporting pipeline for reasons other than FM

-

firm transportation by Transporting pipeline for reasons other than a curtailment or FM

66

Liquidated Damages •

Liability for a Delivery Default (failure to withdraw and re-deliver) and a Receipt Default (failure to receive injections) shall be: 1. Delivery Default = Replacement price x Replacement Gas Volume 2. Receipt Default = Replacement price x Replacement Gas Volume

67

Liquidated Damages (cont’d) •

Payment of Delivery Default, Company pays Customer but Customer Gas Storage Inventory Account is decreased by Replacement Gas Volume (Customer paid out at spot market price) (Customer wanted to withdraw)

•

Payment of Receipt Default, Customer pays Company but Customer Gas Storage Inventory Account is increased by Replacement Gas Volume (Company receives spot market gas proceeds) (Customer wanted to inject) 68

Miscellaneous • Governing Law • Dispute Resolution • Further Assurances • Attorneys Fees • Confidentiality • Severability • Recording of Phone Conversations 69

Why Do Market Based Rates Matter? • Storage Economics: • Regulated Returns ≈ 12% • Unregulated Returns ≈ 20% +++

70

Volatility Driving Multi-Cycle Service

Source:

National Petroleum Council Task Group Report, September 2003

71

Development Costs Vary

Source: FERC Staff Report (9/30/2004)

72

Pad Gas Requirements and Cycling Capability Differ

Source: FERC Staff Report (9/30/2004)

73

Seasonal and Load Following Volatility Demand More Cycling Capability

74

Key Drivers of Natural Gas Price Volatility Affects

Affects

Supply

Demand

9

9

Weather Inelasticity of Demand

9

(during winter peaks) Storage Levels

9

Pipeline Capacity

9

Operational Factors

9

Lack of Timely,

9

Reliable Information Alternate Fuel

9 9

Price Volatility Source:

National Petroleum Council Task Group Report, September 2003

75

Storage in Proximity to Supply

76

Production Area Storage –vsConsumption Area Storage

77

Why Does Storage Matter? • EIA says the U.S. is short 8 TCF of gas by 2025

78

Why Does Storage Matter? • National Petroleum Council says North America needs 700 Bcf of new storage between now and 2025

79

Recent Gas Storage Projects

80

What does LNG have to do with this? • Where is the incremental 8 TCF going to come from?

81

WE ARE MAXED OUT ON NATURAL GAS IMPORTS U.S. Net Imports of Natural Gas, 1970-2025 (trillion cubic feet) 7

History

6

Projections Liquefied Natural Gas

5 4 3

Canada

2 1 0 Mexico -1 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 Annual Energy Outlook 2005

82

700

Recent LNG Sources U.S. LNG Imports by Country, 1992-2004 (billion cubic feet) Nigeria

600 500

Qatar

400

Trinidad and Tobago

300

Other

200 100

Algeria

Australia

19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04

0

Energy Information Administration

83

Where is the LNG to go?

84

Current U.S. LNG Import Terminals

Lake Charles, Louisiana 6.3 Bcf Storage Capacity Regasification Capacity: Peak: 1.2 Bcf per day Baseload: 630 MMcf per day

Gulf Gateway Energy Bridge No Storage Capacity Regasification Capacity: Peak & Baseload: 500 MMcf per day

Energy Information Administration

Everett, Massachusetts 3.5 Bcf Storage Capacity Regasification Capacity: Peak: 885 MMcf per day Baseload: 710 MMcf per day Cove Point, Maryland 7.8 Bcf Storage Capacity Regasification Capacity: Peak: 1 Bcf per day Baseload: 750 MMcf per day Elba Island, Georgia 4.1 Bcf Storage Capacity Regasification Capacity: Peak: 675 MMcf per day Baseload: 460 MMcf per day

85

We are short terminal capacity

86

U.S. LNG Imports, 1990-2025 (trillion cubic feet) History

Projections

4.5

New Terminals

4.0 3.5 3.0 2.5

Existing Terminals

2.0 1.5 1.0 0.5 0.0 1990

1995

Annual Energy Outlook 2005

2000

2005

2010

2015

2020

2025 87

Planned Terminals

88

Regional LNG Imports at New Terminals, 2010, 2015, 2020, and 2025 (billion cubic feet) 2010 2015 2020 2025

114 128

New England

WA/OR Mountain

(2020)

New England

West North Central 2008

East North Central

Mid Atlantic

256 128

(2020)

Middle Atlantic 413

CA AZ/NM

West South Central

1551

East

South Central

South Atlantic

807

244

188

(2016)

930 930

1086 183183183

South Atlantic

293 293 293 615

(2007)

310

FL

Mexico into US

146

(2010)

Florida

(2010)

(20xx) – Start year of first new terminal

East South Central West South Central (2006)

Annual Energy Outlook 2005

89

But What does LNG Have to Do With Natural Gas Storage? •

LNG will go into storage pending alignment of credit worthy, baseload gas purchasers who can take 100% of terminal send out capacity

•

LNG will require cover gas in the event of: • production and liquefaction outages • shipping delays • weather delays • Force Majeur, quality issues

•

Make up LNG will in turn be vaporized and swapped into storage to replace cover gas

•

Natural Gas Storage Facilities • are cheaper than another LNG tank • provide more pipeline alternatives 90