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The Honorable Suedeen G. Kelly

Commissioner, Federal Energy Regulatory Commission

IPAA 2004 Mid-Year Meeting

June 14, 2004

“A FERC Perspective on Natural Gas Issues”

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Henry Hub Gas Prices ($/MMBtu)

Nu

mb

er o

f G

as R

igs

Rig Count Responds to Higher

Prices

Sources: OMOI analysis, Baker Hughes, Platts Gas Daily, some underlying data from Banc of America Securities

Rig Count versus Gas Price

U.S. Gas Drilling and Gas prices, 6-Month Lag

• The rig count levels off at around 1,000 rigs with a muted response to higher prices.

• Although utilization is at 75% to 80%, additional drilling will be limited by the quality of prospects.

• Much of the drilling is lower risk- development versus exploration.

Exploration as a Percentage of Total Drilling Capital

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$2

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1991 1993 1995 1997 1999 2001 2003

Pri

ce (

$/M

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tu)

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1,000

1,200

Nu

mb

er of U

.S. R

igs

U.S. Rigs Drilling for Natural Gas

Henry Hub Average Weekly Price

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10%

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1993 1995 1997 1999 2001 2003

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1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

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Reserves R

eplacem

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ate (%)

% PUD Independents% PUD MajorsIndependents Reserves ReplacementMajors Reserves Replacement

• Reserves added per well have declined since 2000.

• 3-D seismic contributed to growth in proved reserves per well during the 1990s. Similar growth rates may be difficult to repeat in the near-term.

• Proven Undeveloped Reserves (PUDs) have increased. – Converting PUDs to proved developed

producing reserves (PDPs) requires capital and typically one to two years.

– Represent a backlog of prospects but also entail higher risk. Reportedly, 75% of El Paso’s revisions involved PUDs.

Supply Is Not Rebounding; The Nature of Proven Reserves May Be Changing

Sources: OMOI analysis, EIA, some underlying data from Banc of America Securities

Drop in Proved Reserves Added

Domestic PUD and Replacement Percentages

0.0

0.5

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1993 1995 1997 1999 2001 2003

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Super Majors Majors Independents

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• Returns are lower for independents with neither downstream nor international operations and for majors too big to grow domestically and unable to compete internationally with the super majors. May lead to more consolidation.

• Only the super majors, on average, earn attractive returns given risk. The majors and independents have difficulty recovering their cost of capital.

• The domestic industry is struggling with balancing financial returns and production growth.

Higher Prices Have Improved Financial Returns but Sustainable Domestic Investment is Limited

Sources: OMOI analysis, percentage return on capital data from CERA (1993-2002) and Bloomberg, L.P. (2003)

Percentage Return on Capital

Each bar represents one year from 1993–20041993–2003 Average

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Traditional vs. NEPA Pre-Filing Process

AnnounceOpen

Season

AnnounceOpen

Season

Develop

StudyCorrido

r

DevelopStudy

Corridor

Conduct

Scoping

Conduct

Scoping

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Review DraftResource Reports& Prepare DEIS

IssueDraftEIS

IssueDraftEIS

FileAt

FERC

IssueOrder

IssueOrder

FileAt

FERC

Prepare ResourceReports

Prepare ResourceReports

IssueFinalEIS

IssueFinalEIS

(months)

Traditional - Applicant

Traditional - FERC

NEPA Pre-Filing - Applicant

NEPA Pre-Filing - FERC

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Kern River Expansion Project

• 716 miles of pipeline looping through CA, NV, UT, WY

• 3 New Compressors• $1.2 Billion • 885.6 MMcf/day of additional

capacity– Doubles Kern River’s

capacity from 845.5 MMcf/day to 1.7 Bcf/day

Map is Non-Public Internet

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Cheyenne Plains Pipeline Project

Map is Non-Public Internet

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How Much Natural Gas Is Out There?

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• LNG supply growing• Multiple LNG supply proposals announced• Long term LNG supply outlook robust

Global LNG Supply

WORLD PROVEDRESERVES 2002:

6,270 TCF

NORTH AMERICARESERVES4%

Source: Cedigaz, NPC

ExistingUnder ConstructionProposed

Global LNG Supply Facilities

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Existing Terminals with Approved ExpansionsA. Everett, MA : 1.035 Bcfd (Tractebel – DOMAC)B. Cove Point, MD : 1.0 Bcfd (Dominion – Cove Point LNG)C. Elba Island, GA : 1.2 Bcfd (El Paso – Southern LNG)D. Lake Charles, LA : 1.2 Bcfd (Southern Union – Trunkline LNG)

Approved Terminals1. Hackberry, LA : 1.5 Bcfd, (Sempra Energy)2. Port Pelican: 1.6 Bcfd, (Chevron Texaco)3. Bahamas : 0.84 Bcfd, (AES Ocean Express)*4. Gulf of Mexico: 0.5 Bcfd, (El Paso Energy Bridge GOM, LLC)5. Bahamas : 0.83 Bcfd, (Calypso Tractebel)*

Proposed Terminals and Expansions – FERC6. Freeport, TX : 1.5 Bcfd, (Cheniere / Freeport LNG Dev.)7. Fall River, MA : 0.8 Bcfd, (Weaver's Cove Energy/Hess LNG)8. Long Beach, CA : 0.7 Bcfd, (SES/Mitsubishi)9. Corpus Christi, TX : 2.6 Bcfd, (Cheniere LNG Partners)10. Sabine, LA : 2.6 Bcfd (Cheniere LNG)11. Corpus Christi, TX : 1.0 Bcfd (Vista Del Sol/ExxonMobil)12. Sabine, TX : 1.0 Bcfd (Golden Pass/ExxonMobil)13. Logan Township, NJ : 1.2 Bcfd (Crown Landing LNG – BP)14. Lake Charles, LA: 0.6 Bcfd (Southern Union – Trunkline LNG)15. Bahamas : 0.5 Bcfd, (Seafarer - El Paso/FPL )16. Corpus Christi, TX: 1.0 Bcfd (Occidental Energy Ventures)17. Providence, RI : 0.5 Bcfd (Keyspan & BG LNG) 18. Port Arthur, TX: 1.5 Bcfd (Sempra)

Proposed Terminals – Coast Guard19. California Offshore: 1.5 Bcfd, (Cabrillo Port – BHP Billiton)20. Louisiana Offshore : 1.0 Bcfd (Gulf Landing – Shell)21. So. California Offshore : 0.5 Bcfd, (Crystal Energy)22. Louisiana Offshore : 1.0 Bcfd (McMoRan Exp.)23. Gulf of Mexico: n/a (Compass Port - ConocoPhillips)

Planned Terminals and Expansions24. Brownsville, TX : n/a, (Cheniere LNG Partners)25. Mobile Bay, AL: 1.0 Bcfd, (ExxonMobil)26. Somerset, MA : 0.65 Bcfd (Somerset LNG)27. Belmar, NJ Offshore : n/a (El Paso Global)28. Altamira, Tamulipas : 1.12 Bcfd, (Shell)29. Baja California, MX : 1.0 Bcfd, (Sempra & Shell) 30. Baja California - Offshore : 1.4 Bcfd, (Chevron Texaco)31. California - Offshore : 0.5 Bcfd, (Chevron Texaco)32. St. John, NB : 0.5 Bcfd, (Canaport – Irving Oil)33. Point Tupper, NS 1.0 Bcf/d (Bear Head LNG - Access Northeast Energy)34. Pleasant Point, ME : 0.5 Bcf/d (Quoddy Bay, LLC)35. St. Lawrence, QC : n/a (TCPL and/or Gaz Met)36. Lázaro Cárdenas, MX : 0.5 Bcfd (Tractebel/Repsol)37. Gulf of Mexico : 1.0 Bcfd (ExxonMobil)38. Mobile Bay, AL: 1.0 Bcfd (Cheniere LNG Partners)39. Cherry Point, WA: 0.5 Bcfd (Cherry Point Energy LLC)40. Cove Point, MD : 0.8 Bcfd (Dominion)41. Puerto Libertad, MX: 1.3 Bcfd (Sonora Pacific LNG)42. Offshore Boston, MA: 0.8 Bcfd (Northeast Gateway – Excelerate Energy)*US pipeline approved; LNG terminal pending in Bahamas

Existing and Proposed North AmericanLNG Terminals

June 2004

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C

1 3 5

2 4

32

727

15

6

24

28

9

198

26

22

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3335

34

36

20

29

30

1137

1012

17

13

B

3125

14

39

40

16

3823

18 D41

US Jurisdiction

FERC

US Coast Guard

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Years (beginning in 2000)

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Total Production Canada

Existing Terminals Approved Terminals (FERC & Coast Guard)

Proposed and Planned Terminals (FERC & Coast Guard) Net Exports to Mexico

Alaska (to Lower 48) Demand - US

US Natural Gas Balance