Update on the Natural Gas Situation:

Terry H. MorlanNorthwest Power Planning Council

Power Committee BriefingJuly 16, 2003

Recent Natural Gas Prices: Henry Hub

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Excess Capacity Has Been Eliminated

Capacity Utilization Above 90% is Associated With Volatile Prices

Volatile Short-Term Prices React to Supply and Demand Changes

Weather (and weather forecasts)Cold spells in winterAnd more recently, hot spells in summer

Storage levels compared to normal for time of year

Electric generation for air conditioning now competes with storage refill

Storm threats in Gulf that may affect supply

Deviations from Normal

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Unusual Heating and Cooling Needs Affect Prices

For Example: Cold Weather Leads to High Natural Gas Prices

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Gas Storage is Used to Meet Heavier Winter Demand

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Net Withdrawal

Weather Sensitive Demand

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+ = Storage Withdrawal

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Gas Price is Sensitive to Storage Position Relative to Normal

Natural Gas Prices vs. Storage Deviations from Previous 5-Year Average

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Storage Levels Deteriorated During 2000, But Recovered in 2001

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1997-2001Range

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Storage Levels Deteriorated Rapidly in December 2002, and Continued

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1997-2001Range

Heavy Withdrawals in Winter 2002-03

Natural Gas Demand and Supply Respond to Price

DemandFuel switchingPlant closures (fertilizer and chemicals especially)Invest in fuel switching capacity, alternative technologiesLonger-term plants may move offshore

SupplyShort term, changes in storage injections or withdrawalsLong term, changes in drilling activityLonger term, invest in alternative supplies, e.g. LNG capacity

Drilling and Well Completions Respond to Price Changes

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Gas Rigs

Wells

Council Forecast Compared to EIA and Futures Prices

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Council Draft

EIA ST

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EIA LT

Council Revised

Futures Prices are Sensitive to Current Prices and Conditions

History of Closing Prices for July 2003 NG Futures ($/MMBtu)

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Futures for July 2003

Cash Price

Long-Term ConcernsDeclining natural gas production in major producing areasObserved decline in average size of new wellsWell productivity declines more rapidlyNew sources of supply will be deeper, more expensiveReplacement supplies such as LNG or Alaskan gas pipeline will take time to developGrowth in gas-fired electricity generation (increase summer demands versus normal winter peaks)

On the Other Hand ……Drilling technology improving, costs fallingGas well productivity is stableProduction has been replaced in 7 of last ten yearsGas discovered per well drilled does not show a long-term declining trendIncreased gas-fired generation should increase overall capacity utilization rates, decrease costs

Drilling Success Improving Over TimePercentage of Dry Wells

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Gas Well Productivity StabilizedAverage Gas Well Productivity

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Proved Reserves Have Increased Adequately to Replace Production

Change in Proven Natural Gas Reserves

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Gas Discoveries Per Well Drilled Does Not Show the Downward Trend

Gas Discoveries Per Well Drilled

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Transitional DifficultiesDeveloping more multiple fuel capabilityGrowth of summer demand for electricity generationDevelopment of a more diverse and flexible supply baseConflicting environmental policiesFinancial stress in energy businesses