U.S. Energy Market Trends Living in a post Katrina/Rita World

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U.S. Energy Market TrendsLiving in a post
Katrina/Rita World

• Presented to
• Senate Home Heating Fuels Study Committee
• Georgia State Legislature
• Atlanta, GA
• October 4 , 2005

Terry Ciliske EnVantage, Inc tciliske_at_envantagein
c.com www.envantageinc.com
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Todays Takeaways

• The energy complex is highly integrated and
  interdependent across the commodity lines
• The recent hurricanes merely exacerbated issues
  that were already occurring
• The lack of investment in energy infrastructure,
  while efficient from a capital perspective, makes
  the national energy picture vulnerable to any
  stress on it
• In all of the above these are national issues

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To address these issues we will cover the
following areas today

• Oil and Refined Products
• Supply/demand issues pre/post storms. What has
  changed?
• Natural Gas
• What were trends prior to storms and what is
  situation in light of current conditions?
• LPG
• Near term impact on LPG supplies implications on
  prices?
• Electricity
• Will the storms have a material affect?

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Who is EnVantage, Inc.?

• Located in Houston, Texas, EnVantage, Inc. was
  founded in 1999 with the multiple purpose of
  investing  in assets and businesses within the
  energy and petrochemical industries, and to
  provide strategic, executive management, project
  development, marketing, trading and risk
  management advisory services to a wide range of
  clients within these same industries.
• Each of the EnVantage's Principals has senior
  management experience and combined, possess many
  decades of combined experience from Fortune 500
  companies. This experience allows us to offer
  energy companies solutions and services that are
  grounded from a practical and fundamental
  standpoint in a time efficient manner.
• Over the course of the past six years we have
  advised approximately 100 public and private
  clients on a wide range of energy related topics.

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Energy Value Chain
Nuclear, Hydro and Renewables
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Background

• Over the past few years the U.S. has been
  generally lulled into a belief that adequate
  cushion of supplies of energy existed to supply
  the world economy in all market conditions.
• Fact World oil production currently has little
  or no cushion for immediate production increases
• Fact Any cushion that might exist in world oil
  supply is generally of poorer quality feedstock
• Fact World wide upgrading (refining) capacity is
  tight, specially for poorer quality crude's.
  Energy Transportation and Conversion capacity had
  reached practical limits without significant new
  capital investment.

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Background

• Fact Natural Gas in North America is trending
  from a continental commodity to a globally based
  commodity.
• Fact Despite accelerated drilling for natural
  gas in North America, supply growth has been
  non-existent for a number of years.

• Fact Natural Gas infrastructure is currently
  putting artificial constraints on managing local
  supply/demand issues in the U.S.
• Fact LPG supply in the U.S., largely a function
  of natural gas supplies and refinery processing
  of crude oils, is also a globally based
  commodity.
• Fact Electricity demand has been growing
  substantially in the U.S. partially in response
  to more normal weather conditions. Growth in
  electricity supply in the U.S. is marginally
  produced from natural gas.

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Katrina and Rita Passed through the Heart of the
Energy Complex of the U.S. Gulf Coast
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The Storms Impact

• As much as 100 of the Gulf of Mexico oil
  production (1.5 MMBbl/d) and up to 80 of natural
  gas (8 BCF/d) shut in for weeks.
• As much as 30 (excess of 5 Million Bbl/d) of
  U.S. Refining capacity was down following
  Katrina/Rita, with 15 having significant damage
  that will force outages for weeks and months.
  Prior to the storms the U.S. refining industry
  had been running at 92-95 of nameplate capacity
  throughout the summer.

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The Storms Impact

• The Gulf Coast Gas Processing Industry suffered
  an unprecedented blow as numerous processing
  plants received severe damage. These plants are
  necessary both for the conditioning of natural
  gas prior to delivery into long haul gas
  transmission pipelines as well as providing
  necessary supplies of Natural Gas Liquids for the
  petrochemical and refining industries as well as
  home and commercial heating fuels.
• Currently there is almost 12 BCF/d of Processing
  Plant capacity affected by the two storms which
  represented almost 7 BCF/d (about 13 of total
  U.S. dry gas production) of actual throughputs
  prior to the storms.

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The Storms Impact

• LNG imports to the largest U.S. terminal at Lake
  Charles, LA are interrupted (capacity in excess
  of 1 BCFD) due to damage at the terminal and
  shutdown of tanker traffic on the Calcasieu
  River.
• Numerous pipelines (crude, refined products,
  NGLs and natural gas) are shut for short or
  extended periods of time. Problems include lack
  of power for pumping stations, lack of feedstock
  for the pipelines or failure of the pipelines due
  to wave action, mud slides or dragging anchors
  from platforms. Many systems will be impacted for
  months.

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Oil and Refined Products

• Supply/demand issues pre/post storms. What has
  changed?

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World Oil Supply Cushion is Gone

• Since World War II, world wide crude supply has
  featured a production cushion controlled by a
  political entity
• Initially the Texas Railroad Commission
  controlled the surplus until 1971 when Texas
  ceased being the worlds swing producer and
  proration went to 100 of available production
• Since 1971, the political entity known as OPEC
  has controlled the surplus production whip.

• Within the last 12 months, OPEC has effectively
  lost control of the market as they have little or
  no surplus production capacity.

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Oil Surplus vs. Price
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Crude Oil prices have been in a consistently
upward trend for over 18 months as world demand
climbed and the surplus deliverability declined
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Hurricanes Katrina and Rita

• OPEC claims that they have as much as two million
  barrel per day of surplus (most of the world
  doubts this figure, the EIA estimate as of
  August, 2005 is 0.9-1.4 million barrels per day).
  
• The hurricanes have effectively eliminated, in
  the short run, crude production that is equal to
  or greater than the entire OPEC surplus
  capacity and theoretically puts the world into a
  short term deficit condition. Currently this
  deficit is being cushioned with withdrawals from
  the Strategic Petroleum Reserve. Realistically
  this is somewhat of a moot point in that we do
  not currently have sufficient operable refining
  capacity to process the pre-storm levels of crude
  oil.

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Ritas Impact on Gulf Coast Refining Capacity
Compounds the Ongoing Impact of Katrina
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Natural Gas generally trades with Crude Oil
Prices acting as a Cap (short term excursions
above 100 of crude oil energy equivalent occur
from time to time)
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While Natural Gas Inventories Behaved (remain
surplus year on year) prices remained in a band
of 75-85 of Crude Prices on a Btu Basis
Elimination of surplus in August leads to rapidly
escalating prices compounded by the Hurricanes
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Natural Gas Issues

• Inventories in the U.S. were at elevated levels
  following winter of 2004/2005 that was 7 warmer
  than normal
• Year on year surplus was over 400 BCF during the
  later part of the winter.
• The year on year surplus was eliminated by
  mid-August of this year due to higher than normal
  cooling demand in the U.S.
• We have been living on lower than normal winter
  demand for four straight winters not since the
  winter of 2000/2001 were we at or above normal
  for the seasonally accumulated heating degree
  days across the U.S.

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U.S. Seasonal Heating and Cooling
DemandsPrevious Four Winters have been Milder
than Normal, while Summers have been more Severe
than Normal
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Is more drilling in the U.S. adding to Natural
Gas deliverability or are we merely running in
place?
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Existing U.S. Natural Gas Regional Pipeline
Infrastructure - 2004
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Pipeline Infrastructure is not keeping pace with
Regional Gas Supply and Demand Balances
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North America (including the U.S.) is losing its
worldwide competitive edge for natural gas
intensive industries
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Energy Intensive Industrial Plants face closures
Example Ammonia Plants Poised for New Shutdowns?
Source The Market Fertilizer News and
Analysis Sept. 29, 2005
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Wholesale Propane Prices have remained low
(relatively speaking) from a historical
relationship to crude oil until the hurricanes
arrived
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Current wholesale U.S. Propane Inventories are
not in bad shape the question will be what will
happen with the loss of Gas Processing Capacity
and throughput this fall?
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Offsetting part of the supply loss for NGLs is
the temporary shutdown of almost 20 of the
ethylene production capacity in the U.S. as a
result of Hurricane Rita
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Electrical Generation was already feeling the
affects of higher fuel costs prior to the
hurricanes
Average Weekly Coal Commodity Spot
PricesBusiness Week Ended September 23, 2005
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Since the Hurricanes, Coal Shipments along the
Gulf Coast have been disrupted

• Coal is a major commodity transported through the
  Port of Mobile and New Orleans on the Mississippi
  River and coastwise on the Gulf Intracoastal
  Waterways System. Waterborne traffic since
  Hurricane Katrina has progressed from totally
  shut down in some areas to partially restored.
  Coal export facilities and domestic coal
  shipments through the lower Mississippi River
  were impacted more seriously than coal import
  capacity.
• The two major coal facilities near New Orleans
  incurred damage.

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Current NYMEX (eastern) coal prices continue to
put a significant floor price on natural gas
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Conclusions

• It will be difficult to correct the energy issue
  quickly, the near term solution will involve
  managing demand through conservation and demand
  destruction. We need to be prepared to support
  those in need as we face the upcoming winter
  demand.
• Longer term solutions generally revolve around
  additional capital investment on supplies as well
  as infrastructure while directing focus on
  efficient use of the resources that are available
  to us.