McKinsey & Company 0|

Impact of New Supply and Industrial Projects on Infrastructure

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

Houston Texas – February 7, 2013

© McKinsey & Company

Mike Juden, McKinsey & Company, Inc., Houston

McKinsey & Company 1|

The world has changed in the midstream and pipelines must adapt

Pre-shale world

B Interstate system: Long-haul pipelines to connect supply in the Gulf, Rockies and Midcontinent to the consuming Northeast, Midwest and West

Interstate pipeline grid has been “built out;”regional pipelines to support dramatic increases in production close to market areas – especially Marcellus with volumes to the Northeast, Upper Midwest, eventually GoM

C Contracting for delivered supply: 15-20+ year contracts for Firm Transport –driven by Local Distribution Companies (LDC’s)

Most FT contracts expiring by 2020 (85%) with most recent renewals of 5 years or less, as LDC’s expect to reconfigure gas sources.Customer balance changing from LDC’s to Marketers/Producer Marketers and Producers; pipelines must reconfigure systems and redesign rates/offerings

A Basis: Wide basis, especially between the Gulf and Northeast

Collapsed basis, with new pipeline builds; erosion in NE bases with regional builds

New paradigm

D Midstream opportunities:Predominantly centered on natural gas, and long-haul pipeline focused

NGL and oil represent a large (60%+) and growing fraction of total opportunity; much greater competition for infrastructure including MLP’s, producers, and utilities

McKinsey & Company 2|

Significant midstream gas opportunity – But, who benefits?

2SOURCE: McKinsey North America Gas Model; McKinsey North American Basis and Flow mode; team analysis

ESTIMATES

~$150 Billion investment required

Will the interstatesbe able to benefit

significantly?

Discussion▪ Supply trends▪ Demand from industrial

projects▪ Resulting

infrastructure needs

Infrastructure area

80

10

Gathering, processing,and NGL’s

Laterals

27

Total

13

Interstate gas pipelines

146-154

Storage

Light Tight Oil (LTO)

4

Intrastate gas pipelines(pipes & compression)

12

Investment required thru 2020

18

McKinsey & Company 3|1 Excludes finding and land costs2 Associated gas plays and predominantly oil basins excluded from this chart

2000 1,800400 1,000

0

1,400

2

1,200 1,600

16

14

12

10

8

6

800600

4

NORTH AMERICAN SUPPLY TRENDS

Tight

Shale

Conventional

CBM

Gas production can yield ~10% returns in the $4-6/MMBturange, setting a “ceiling” for US gas prices

Technically Recoverable resources2, Tcf

Full cost Breakeven for gas basins1 2, $/MMBtu

2011 Prod. = 24 Tcf

SOURCE: McKinsey Supply Model

PRELIMINARY

McKinsey & Company 4|

Niobrara

Cody

Mowry

Gammon

Excello-Mulky

Marcellus (256)

Devonian

Chattanooga

Conasauga

Floyd-Neal

Fayetteville (20)

Haynesville/Bossier (251)

Woodford/Caney

Barnett (118)

Pearsall/Eagle Ford (>100)

Woodford (42)

Barnett and Woodford

Bend

PierreLewis

Hermosa

Mancos

Hilliard-Baxter-Mancos

Antrim

New Albany

Utica

Horn River Shale (40)

Montney (152)

ExplorationDevelopingProducing

Bakken

Incremental production – Bcfd growth vs. 2012

0

1

2

20172016201520142013 20202018 2019

Southern Supply

Appalachia Area

Rockies Area

Midcon Area

WCSB

MODELED

-2

0

20202017 2018 20192016201520142013

0

2

4

6

8

10

2018 2019 202020172016201520142013

-1

0

1

20192018 202020172016201520142013

-2

0

2

2018 2019 202020172016201520142013

SOURCE: McKinsey North American Supply Model; McKinsey analysis

NORTH AMERICAN SUPPLY TRENDS

Most incremental production expected out of Appalachia

McKinsey & Company 5|SOURCE: EIA AEO 2010 & 2008; EIA STEO; Baker Hughes; McKinsey analysis

Even the with high case demand response, growth is not likely to exceed 3-4 Bcfd per year (including LTO associated gas of ~1 Bcfd per year)

▪ Full suite of pending regulation passed1

▪ $4/MMBtu gas pricing

▪ $10/ton

▪ No renewable projects beyond FID

▪ Backfilled by gas

▪ 10-30% penetration for HD/MD trucks, buses, rail

▪ Sabine – all phasesKitimat, Douglas Channel

▪ 1 more (8 mtpa)

Annualized demand to 2020 Bcfd, Annualized Key assumptions

0.7

1.8

0.4

Postponed RPS

CO2 regulations 0.3

Coal retirements 0.70.3

0.20.1

0.1

Ammonia andmethanol

0.1

NG vehicles 0.30.1

0.2

Base High

Total 2.60.8

LNG export 0.40.3

Even optimistic demand scenarios cannot keep pace with supply growthDEMAND FROM INDUSTRIAL PROJECTS

Dry Onshore L48 gas production growth, Bcfd

US has demonstrated adding 2.3 - 3.1 Bcfd of incremental supply per year

2.3

1.0

2.7

3.1

0.2

08072006 201009

▪ 6-8 Ammonia plants, 1.4-2.3 mmtpa; 2-5 methanol plants, 2-5 mmtpa

Does not include ~1 Bcfd per year

from light tight oil (LTO)

Does not include ~1 Bcfd per year

from light tight oil (LTO)

1 Rig count updated until March 17, 2011; 2 Based on STEO (monthly); 3 Based on AEO (Annual)

With this much excess supply, prices will likely remain low

With this much excess supply, prices will likely remain low

McKinsey & Company 6|1 Pipeline to Mont Belvieu

U.S. (lower 48 states) production Natural gas liquids

US shales will drive a 58% increase in US L48 NGL production over the this decade and require ~$80B in capex – which is most of the opportunity

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

+58%

Refining

US Base NGLProduction

Barnett

Eagle Ford

Marcellus

Avalon

Bakken

Niobrara

Granite Wash

Woodford

2020181614121008062004

SOURCE: McKinsey North America Gas Model; Government and company reports; team analysis

Thousand bpd

Capital requirement

$ Billion incremental capital

5

3

3

9OtherShales

2813

Bakken 93

Niobrara 106

Eagle Ford 136

Marcellus 2411 51

NGLs Pipelines

Fractionation

Gathering

Processing

Total >$80B

RESULTING INFRASTRUCTURE NEEDS

McKinsey & Company 7|

Southwest to Southeastern

Southwest toNortheastern

Southwest toMidwestern

Southwest Panhandleto Midwestern

Southwest to Western

Western Canada toMidwestern

Rocky MountainArea to Midwest Rocky Mountain

Area to West

Canada to West

Eastern CanadaNortheast

Western Canada to Northeast

1

3

2

9

8

7

10 11

4

6

5

SOURCE: EIA, Office of Oil and Gas, Natural Gas Division, GasTran – Gas Transportation Information System; McKinsey modeling and analysis

Additional peak capacity needed (Bcfd)

2.7

Upper Midwest market areaUpper Midwest supply area

Southwest Northeast market area

Northeast coastal corridor Southeast (Eastern LA to FL) Appalachia supply area

Cumulative investment ($ Bill.)

2.9

Additional peak capacity needed (Bcfd)

1.2

Cumulative investment ($ Bill.)

1.8

Additional peak capacity needed (Bcfd)

2.1

Cumulative investment ($ Bill.)

2.8

Additional peak capacity needed (Bcfd)

2.0

Additional peak capacity needed (Bcfd)

2.3

Cumulative investment ($ Bill.)

3.9

Additional peak capacity needed (Bcfd)

13.3

Cumulative investment ($ Bill.)

6.6

Additional peak capacity needed (Bcfd)

2.0

Cumulative investment ($ Bill.)

3.0

Cumulative investment ($ Bill.)

1.5

MODELEDAn estimated 29 Bcfd (~$27 Billion) of additional interstate transport capacity could be required through 2020 – but most will be regional

RESULTING INFRASTRUCTURE NEEDS

West (including WCSB)

Additional peak capacity needed (Bcfd)

3.5

Cumulative investment ($ Bill.)

4.2

McKinsey & Company 8|

Proposed1 natural gas, interstate pipeline projects – are all regional pipelines, expansions or laterals

SOURCE: Ventyx Energy Velocity, EIA; Company websites and presentations; Trade press

1 Includes projects under construction, approved, filed and proposed in all regions. Does not include two oil pipeline conversion projects (limited data); 8/122 Laterals to storage, LNG, power plants

RESULTING INFRASTRUCTURE NEEDS

Areas of concern▪ Appalachian

supply▪ Routes to

NE/Midwest

44

34

180

Laterals2

Expansion

Regional

Trunklines

Number of projects

96

Proposed1 natural gas pipelines

Miles

3,983.4

599.7

922.5

2,461.2

0

Bcfd

46.6

9.9

22.9

13.9

0

McKinsey & Company 9|

Marcellus production is displacing imports – pipes will eventually reverse

SOURCE: Ventyx Energy Velocity; team analysis

16

14

12

10

8

6

4

2

0

Ju

l 20

12

Jan

20

12

Ju

l 20

11

Jan

20

11

Ju

l 20

10

Jan

20

10

Ju

l 20

09

Jan

20

09

Ju

l 20

08

Jan

20

08

Ju

l 20

07

Jan

20

07

Production

REX

Canada2

MA LNG

TGP (Tenn.)

Transco

TETCO

Col. Gulf

TGT (Tx. Gas)

1 Production estimated based on processing plant data, and McKinsey supply model after 1/1/112 Canada includes Canadian imports, M&NE, Canaport LNG and Sable Island

Northeastern supply1

Million Dth/day

A

C

B

D

E

Declining flows from the Gulf – 28% decline in cumulative flows from 1/2010 to 1/2012 (Bcfd)

0

2

0.5

0

Jul 2012

Jan 2012

Jul 2011

Jan 2011

Jul 2010

Jan 2010

1

0

2

0

2

1

0

TGP (Tenn) – Station 209

TETCO - Berne compressor (OH/PA)

Transco – Station 180

Columbia Gulf – Leach KY

TGT (Texas Gas) – Dillsboro compressor

20%

24%

78%

50%

35%

X% 2012 utilization

RESULTING INFRASTRUCTURE NEEDS

McKinsey & Company 10|

Northeast▪ Demand: 10.1 Bcfd▪ Production: 6.8 Bcfd

SOURCE: McKinsey North American Supply Model; McKisney Basis Model; Ventyx Energy Velocity; team analysis

Appalachian gas balance is expected to move from ~3.8 Bcfdimports, in 2012, to ~3.7 Bcfd exports, in 2020 . . .

Canada

(0.01 Bcfd)

REX (0.7 Bcfd)

Gu

lf

(2.5

Bcfd

)

M&NE

&

Can

ada

(0.5

Bcf

d)

LNG (MA)(0.04 Bcfd)

Gu

lf /

SE

Canada

(Daw

n)

Average 2012 flows Average 2020 flows

Northeast▪ Demand: 12.7 Bcfd▪ Production: 16.4 Bcfd

0

5

10

15

20

2020191817161514132012

BcfdContract and flow reconfiguration in response to demand-supply balance

Export dynamics drive contracting as region becomes net exporter

Northeast gas supply and demand outlook

Demand

Marcellus

Utica

Conventional

REX?To Midwest

~3.7 Bcfdexports

12 20

12

20

~3.8 Bcfdimports

ESTIMATES

RESULTING INFRASTRUCTURE NEEDS

McKinsey & Company 11| 111 Assumed rollover contracts expire at the next time they are due to expire, rather than rollover again;

cumulative expirations by end of year

SOURCE: Ventyx Energy Velocity; Pipeline bulletin boards; team analysis

0

10

20

30

40

50

60

70

80

Post 2022

20222021202020192018201720162015201420132012

REX

Alliance

Vector

Northern Border

Great Lakes

CenterPoint MRT

Midwestern

Panhandle

Trunkline

ANR

NGPL

Northern Natural

Texas Gas

Transco

Columbia Gulf

Texas Eastern

Tennessee Gas

. . . but contracts for nearly 65 Bcfd of pipeline capacity to the Midwest and Northeast are due to expire by 2020

Pipeline contracts expiring1

Bcfd

Gulf to NE

Canada/ Rockies to Midwest

~85% expirations

Total Contracts = 75 Bcfd

Gulf/MidConto Upper Midwest

RESULTING INFRASTRUCTURE NEEDS

McKinsey & Company 12|

Opportunities and challenges for the interstates – How to respond?

12

Opportunities to 2020

ESTIMATES

Challenges to 2020

▪ Growth in infrastructure needs downstream of the plant– Interstate pipelines and storage -

$25-30 Billion– Intrastate compression and pipeline

expansions - $10-15 Billion– Laterals - $10-15 billion

▪ Growth in gas and NGL gathering needs of ~$80 Billion

▪ Dramatic change in flows to/from Northeast– Elimination of long-haul to Northeast– Dramatic change in how storage is used

▪ ~85% of interstate FT contracts expiring in Eastern and Midwestern corridors

▪ Most recent renewals have been for terms of 5 years or less– Customers positioning for turnbacks

or reductions to regional hauls?

▪ Increase in competition for regional pipeline growth

▪ New services – now – rather than later – why wait?▪ Begin to think about system reconfiguration/rate design

– Back hauls and reversals (some are implementing)– New uses/new customers for market area storage

▪ How to better compete for regional pipelines, laterals, and even gathering

Implications – How to respond?

RESULTING INFRASTRUCTURE NEEDS

McKinsey & Company 13|

Impact of New Supply and Industrial Projects on Infrastructure

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

Houston Texas – February 7, 2013

© McKinsey & Company

Mike Juden, McKinsey & Company, Inc., Houston