BOB PURGASON PRESENTATION

LSU Natural Gas Conference: 

LSU Natural Gas Conference Presented by: Bob Purgason VP Gulfcoast Region Williams Companies

Introduction: 

Introduction Structural shift in natural gas pricing The crude to gas ratio: A critical relationship for NGL processing Implications of a sustained shift in gas, crude, and NGL pricing relationships Implications for ethane Implications for heavier NGL’s

Hydrocarbon Value Chain: 

Well Gas Plant Y-Grade Pipelines Purity Storage Caverns Y-Grade Storage Caverns Purity Product Pipelines Refineries Chemical Plants Agricultural/Residential Fractionator Production Gas Processing Transportation Storage Liquids Processing Marketing “Residue Gas” to Interstate Pipelines Storage Tanks Distribution Hydrocarbon Value Chain Production Gathering Gas Processing

Slide4: 

TYPICAL UNPROCESSED GAS

Slide5: 

Phase I : The Abundant Commodity Phase II : The Tenuous Balance Phase III : The Supply Squeeze Source: Platts Evolution of Gas Pricing in North America Supply Perspective “Just Another Commodity” Manufacturing Strategies Declines in Traditional Basins Select “Growth Regions” Advent of the Deepwater Growing Imports The Supply Treadmill Prospect Shortfall Unprecedented Volatility Growth of Frontiers

The Crude to Gas Relationship: 

The relationship between natural gas and crude has varied widely over time The Crude to Gas Relationship

The Crude to Gas Relationship: 

The Crude to Gas Relationship The crude to gas ratio (crude divided by gas) has trended down as gas has strengthened relative to crude oil

The Crude to Gas Relationship: 

The crude to gas ratio correlates highly with historical NGL processing spreads The Crude to Gas Relationship

The Crude to Gas Relationship: 

Historically, low points in the crude to gas ratio have meant hard times for gas processors The Crude to Gas Relationship

The Crude to Gas Relationship: 

The Crude to Gas Relationship Historically, low points in the crude to gas ratio have meant hard times for gas processors

The Crude to Gas Relationship: 

Nat. gas - $2.66 Crude - $29.30 Ratio - 11 Ethylene - $.27/lb Strong Economy Nat. gas - $8.69 Crude - $28.40 Ratio – 3.3 Ethylene - $.27/lb Recession begins Nat. gas - $2.19 Crude - $25.93 Ratio – 11.8 Ethylene - $.17/lb Weak Economy Nat. gas - $5.76 Crude - $28.07 Ratio – 4.9 Ethylene - $.19/lb Weak Economy Analysis of recent frac spreads – the economy also plays a role… The Crude to Gas Relationship

The Crude to Gas Relationship: 

Current NYMEX price strips suggest a continuation of low crude to gas ratios The Crude to Gas Relationship

Implications of the Pricing Trends: 

Implications of the Pricing Trends Unprecedented NGL rejection has occurred during periods of low ratios/low frac spreads

Implications of the Pricing Trends: 

During January of 2001 1/3 of total NGL production – lost to rejection 650 MBPD 2.2 BCFD natural gas Between May and August of 2003 200 MBPD of ethane and 80 MBPD of propane remained in natural gas stream 0.85 BCFD The US has seen some degree of continual ethane rejection for the last year Implications of the Pricing Trends

Implications - Ethane: 

Because it is the most readily rejected NGL, ethane is the most responsive NGL to changes in gas price Implications - Ethane

Implications - Ethane: 

High gas prices relative to crude oil places ethane at a competitive disadvantage to heavier petrochemical feedstocks While ethane production suffers, demand for ethane has been equally weak Despite weak production, ethane inventories are near the 5-year-average Implications - Ethane

Implications - Heavier NGL’s: 

Implications - Heavier NGL’s The heavier NGL’s are highly correlated to crude oil…

Hydrocarbon Value Chain: 

Well Gas Plant Y-Grade Pipelines Purity Storage Caverns Y-Grade Storage Caverns Purity Product Pipelines Refineries Chemical Plants Agricultural/Residential Fractionator Production Gas Processing Transportation Storage Liquids Processing Marketing “Residue Gas” to Interstate Pipelines Storage Tanks Distribution Hydrocarbon Value Chain Production Gathering Gas Processing

Implications - Heavier NGL’s: 

…meaning that their processing margins are hardest hit when crude to gas ratios are low Implications - Heavier NGL’s

Implications - Heavier NGL’s: 

Implications - Heavier NGL’s Weak processing margins do result in some lost production of heavier NGL’s

Implications - Heavier NGL’s: 

However, heavy waterborne imports supplement propane and butane supplies… Implications - Heavier NGL’s

Implications - Heavier NGL’s: 

Keeping inventories closer to five-year averages Implications - Heavier NGL’s

Merchantability: 

The heavy rejection of NGL’s in recent years has caused significant operational problems for natural gas pipelines In response, natural gas pipeline companies have begun issuing “merchantability” notices These notices enforce the requirement that some NGL’s be removed to meet pipeline specs before entering the system Merchantability

Conclusions: 

Conclusions Strengthening natural gas prices relative to crude oil have significantly reduced the production of NGL’s in the US Waterborne imports will continue to play a critical role in balancing the heavier NGL’s The weakened feedstock desirability of ethane, combined with a struggling economy, have reduced demand and kept ethane supplies in balance

Conclusions: 

Conclusions The growing gap between NT and spot - an indication of an inactive spot market

Conclusions: 

Conclusions

Conclusions: 

Conclusions High natural gas prices will result in high feedstock costs for ethane Ethane pricing quickly responds to pricing changes in natural gas Reasonable price transparency Probable margin squeeze within ethylene chain Improving economy Minimal ethylene price transparency

LSU Natural Gas Conference: 

LSU Natural Gas Conference Presented by: Bob Purgason VP Gulfcoast Region Williams Companies

Structural Shift – Supply Side: 

Structural Shift – Supply Side Many traditional North American supply basins are in decline Western Canadian production, the marginal supply of the last decade, is prominent among the declining basins LNG and Arctic gas represent the marginal supply of the new era, but it will take years to develop the infrastructure

Structural Shift – Supply Side: 

Structural Shift – Supply Side More wells have not meant more production

Structural Shift – Demand Side: 

Structural Shift – Demand Side Expected increases in future natural gas demand for power generation…

Structural Shift - Supply Gap: 

Note: Consumption excludes pipeline, lease and plant fuel. Production excludes imports, storage and balancing adjustments. Structural Shift - Supply Gap