New England Natural Gas Supply Assessment

Planning Advisory CommitteeMarch 3, 2005

Prepared for ISO New England Inc.

byMerrimack Energy Group, Inc.

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New England Natural Gas Supply Assessment

OUTLINE: Summary and Conclusions Introduction Natural Gas Supply and Demand Northeast Natural Gas Infrastructure Competition for Gas in Neighboring Markets Future Gas Supply/Demand Scenarios

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Summary and Conclusion

New England’s natural gas supply has changed dramatically over the past 15 years

Canadian supplies provide 47% of total New England gas supply Gas supply availability and high price volatility will be the norm in

the near term at least through 2008 Historical sources of gas supply for New England are projected to decline

or remain flat Recent reassessments of gas supply availability from the WCSB and

offshore eastern Canada are troubling New supplies from the Arctic and MacKenzie Delta are several years

away Demand for gas in New England and other neighboring power

markets continues to grow Gas procurement strategies in other markets reverting to long-term

contracting

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2003 2005 200720062004 2008 2009 2010 2011

Disconnect between when incremental gas may be needed and when it is available.

Gas Supply Planning Timeline

Increased LNG from Existing Terminals

LNG From New Terminals

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Summary and Conclusions (cont.)

LNG is the most reasonable near-term option New England’s near-term gas supply requirements will have to be met by new

LNG facilities Most likely to be located in Maritimes Canada or Quebec Not likely to be located in New England

Gas infrastructure will have to conform to gas supply availability At least one or two LNG projects with access to New England markets will be

required Without these projects, gas prices will continue to be very volatile and

competition for gas supply will be exacerbated, particularly during the winter period

The gas supply and operational benefits provided by the Distrigas facility is critical to New England’s markets

A long-term reduction in gas supply from Distrigas without the availability of an equivalent replacement supply source will place upward pressure on gas prices, lead to supply limitations and decrease system reliability

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Introduction

Assessment of the natural gas supply situation relative to the requirements of New England’s gas-fired generators

Prospects for gas supply from existing supply areas Recent trends and projections of gas supply indicators Projected timing for new gas supplies from remote areas Prospects for additional LNG facilities in the Northeast Implications from developing gas procurement strategies in

neighboring power markets Gas price implications of potential demand/supply scenarios

Natural GasSupply and Demand

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New England Sources of Gas in 2003

Gulf Coast, 32%

LNG, 21%

Eastern Canada, 21%

Western Canada, 26%

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Major Natural Gas Producing Basins and Associated Transportation Corridors

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North American Gas Production 1Q03 vs. 1Q04 (Bcf/d)

0.97.4

WCSB

16.3 16.4

SOEP

0.5 0.4

EASTERN 2.5 2.5

ROCKIES

6.7 6.6

ANADARKO

7.37.2

SAN JUAN

3.7 3.6

PERMIAN

4.4 4.5

CALIFORNIA

GULF (On) GULF (Off)

11.9 11.9 13.6 12.4

0.8

LNG imports02 vs. 03

0.8 1.7

1Q03: 50.8 Bcf/d

1Q04: 49.6 Bcf/d

US Total Prod

Source: NEB

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East Coast Offshore Supply Outlook

Source: Duke Energy

ProjectedActual

0

100

200

300

400

500

600

700

Years

1,0

00 Dth

/d

12

$0

$2

$4

$6

$8

$10

$12

$14

Pri

ce (

Do

llar

s p

er M

MB

tu)

0

200

400

600

800

1000

1200

Nu

mb

er o

f R

igsNumber of Rigs Drilling

for Natural Gas

Weekly Henry Hub Spot Price

Source: Natural Gas Intelligence Weekly Gas Price Index, Baker-Hughes Weekly US Rig Report.

Spot Prices are High and Have a Lagged Affect on Drilling

**

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Source: Energy Information Administration, Advance Summary of U.S. Crude Oil, Natural Gas, and Natural Gas Liquids Reserves 2002 Annual Report

Reserve Additions Exceeded Production for 8 of the Last 9 Years

85%

108% 108% 107% 104%

83%

118%

152%

131%

118%

88%

0%

20%

40%

60%

80%

100%

120%

140%

160%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Pe

rce

nt

of

U.S

. G

as

Pro

du

cti

on

Re

pla

ce

d

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Year Estimated Production (Bcf) Proved Reserves (Bcf) Well Completions Reserves to Production

Ratio

1991 17,202 167,062 9,526 9.7

1992 17,423 165,015 8,209 9.5

1993 17,789 162,415 10,017 9.1

1994 18,322 163,837 9,538 8.9

1995 17,986 165,146 8,354 9.2

1996 18,861 166,474 9,302 8.8

1997 19,211 167,223 11,327 8.7

1998 18,720 164,041 11,308 8.8

1999 18,928 167,408 10,877 8.8

2000 19,219 177,427 16,455 9.2

2001 19,778 183,468 22,083 9.3

2002 18,964 186,900 16,155 9.8

US Natural Gas Production, Reserves andWell Completions

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Canadian Producing Area Discovered Resources Undiscovered Resources Ultimate Potential

Western Canadian Sedimentary Basin

178 96 274

East Coast (OffShore)

Nova Scotia 5 18 23

Labrador 5 23 28

Grand Banks 4 13 17

Other 0 23 23

West Coast 0 17 17

Mackenzie/Beaufort 9 52 61

Arctic Islands 12 28 40

Other Northern Canada 1 14 15

Ontario 1 1 2

Gulf of St Lawrence 0 1 1

Total 215 286 501

Canadian Gas Reserves by Basin (Tcf)

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17

Pipeline Options for ConnectingNorthern Gas Reserves

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Alaskan Gas Project Timeline

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Proposed LNG Import FacilitiesAffecting New England

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Gas Supply & Demand: Conclusions

Recent concerns about short-term gas availability due to:• Increasing gas well decline rates• Lower productivity levels for wells in traditional supply areas• Reductions in excess capacity

Long-term outlook for gas supply remains positive• Increases to the resource base• Improvements in drilling technology• Increases in non-conventional gas supply• Opportunities from new supply areas• Imported LNG

Most forecasts expect imported LNG to be the marginal source of gas supply over the near to mid-term• Just recently, Canadian gas was viewed as the incremental source of

supply

NORTHEAST NATURAL GAS INFRASTRUCTURE

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Northeast Pipeline Grid

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Typical Northeast LDC Natural GasLoad Duration Curve

Typical LDC Load Duration Growth

1 15 60 150 366

Capacity Mcf/d

Pipeline Supplies

Underground Storage

Peaking Supplies

Days

Competition for Natural Gasin Neighboring Markets

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Competition For Natural Gasin Neighboring Markets

Availability and price of gas in New England will also be influenced by demand for gas in neighboring markets

Demand for electric power in Ontario, Quebec and New York expected to increase, with gas-fired supplementing a good portion of incremental demand

These neighboring gas-fired projects will compete for gas supplies and transportation capacity with New England’s power generators

The newer gas procurement strategies of many of these projects reflect the long-term nature of the underlying power contracts

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Incremental Electric Capacity Requirements in the Northeast

Region 2007 2010

Ontario 2,000 2,750

Quebec 507 1,107

New York 4,580 5,780

-------- ---------

Total (MW) 7,087 9,637

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Competition For Natural Gasin Neighboring Markets

The projected gas-fired power generation needs in neighboring markets will require additional firm pipeline capacity and incremental gas supply1.2 Bcf/Day of pipeline capacity by 20071.6 Bcf/Day of pipeline capacity by 2010300 Bcf of gas supply per year by 2007430 Bcf of gas supply per year by 2010

FUTURE NATURAL GAS SUPPLY/DEMAND SCENARIOS

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Gas Supply/Demand Balance Scenarios

Supply Demand

2. Build New LNG Plant

1. S/D Existing LNG Plant

3. New Power Plants built ex- New England

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Gas Prices Week of Jan 12 - 16, 2004

0

10

20

30

40

50

60

70

9-Jan 10-Jan 11-Jan 12-Jan 13-Jan 14-Jan 15-Jan 16-Jan

$/M

MB

tu

HH Dawn Niagara Wadd Dracut AGT Del

Source: Gas Daily

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Scenario 1: Competition for Gas With Other Markets

Natural gas is still the fuel of choice in other markets New England generators will be competing with other generators

operating under long-term power contracts Concern that demand growth in Ontario and Quebec could absorb

existing pipeline capacity from western Canada and the midwest US New England generators will have to compete with projects in New

York for pipeline capacity originating from the north and south It is important to develop new gas supply sources to feed the supply

constrained pipelines of M&N and PNGTS Without new gas supply and infrastructure, price volatility in the region

will remain high, particularly during the winter Concern over system reliability as load continues to grow and gas

supply growth lags demand.

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Scenario 2: Reduction inGas Supply

Reduction in supply could be due to a hypothetical reduction in the availability of gas supply from the Distrigas facility

Reduction in supply would have significant ramifications on New England’s gas supply picture

Distrigas provides a range of product options necessary to the region

LNG provides 20% of the annual gas consumed in New England, most of which is supplied by Distrigas

Availability of gas from Distrigas allows for a more efficient operation of the pipeline system

Unless loss of supply can be offset with supplies from the north, loss of supply from Distrigas will have reliability implications and lead to higher price volatility

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Distrigas Overview

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QUESTIONS