North American Natural Gas: Where do we go from here?

BP North American Gas and Power April 2012

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Participants should seek their own advice and guidance from appropriate legal, tax, financial and trading professionals when making decisions as to positions to take in the market.

Current driving factors

• Mother nature is having a large impact on US energy markets − Much above normal temps are a big departure from last year • The economy continues to weigh on demand − Weather adjusted load growth has been sluggish at best • • • Competing fuel prices − Prompt month gas hovering around $2.07/MMBtu; PRB at $8.15/ton Supply, supply, supply…exports?

EPA policies on hold??

− −

Stay issued for Cross States Air Pollution Rule (CSAPR) Mercury and Air Toxics Standards (MATS) issued in December

− Is this the next court battle to be fought?

−

Carbon standards for new plants proposed for new builds

• Wind generation & tax credits?

North American energy prices

Source: Various, April 9, 2012 $6 $4 $ $2 $14 $12 $10 $8 $28 $26 $24 $22 $20 $18 $16 Jan -00 Jan -01 HH/NYMEX WTI Jan -02 Jan -03 Jan -04 Jan -05 Jan -06 Jan -07 Jan HH/NYMEX 6-mths ago FO NYH #6 1% -08 Jan -09 Jan -10 Jan -11 Jan -12 HO #2 NYH Coal NYMEX (unadj) Jan -13 Jan -14

Where is the weather??

Nov 2010 – Mar 2011 Nov 2011 - Mar 2012 Source : EarthSat

U.S. storage inventories: Large year on year surplus

4,400 4,000 3,600 3,200 2,800 2,400 2,000 1,600 1,200 800 400 0 7 Year Min/Max Previous Year Current Year 7 Year Average Source : EIA US inventories are 887 Bcf above year ago levels, and 892 Bcf above the five year average

US economy remains resilient

US GDP 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% 1Q 01 1Q 02 1Q 03 1Q 04 1Q 05 10-year average 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11 Services and manufacturing industries stabilize 60 50 40 30 Ja n 08 Ap r 08 Ju l-0 O 8 ct -0 8 Ja n 09 Ap r 09 Ju l-0 O 9 ct -0 9 Ja n 10 Ap r 10 Ju l-1 O 0 ct -1 0 Ja n 11 Ap r 11 Ju l-1 O 1 ct -1 1 Ja n 12 Non-Manufacturing Index Manufacturing Index 2,500 Depressed home values contributing to depressed housing market $340 2,000 $320 1,500 1,000 500 0 $300 $280 $260 $240 $220 18% 8% 12% 8% 4% 2% 2% Real Ja n M 06 ay S -0 6 ep -0 Ja 6 n M 07 ay -0 S 7 ep -0 Ja 7 n M 08 ay -0 S 8 ep -0 Ja 8 n M 09 ay -0 S 9 ep -0 Ja 9 n M 10 ay -1 S 0 ep -1 Ja 0 n M 11 ay -1 S 1 ep -1 Ja 1 n 12 Housing Starts Average Home Price Ja n-0 6 Ma 06 y-0 M 6 -0 Se 6 p-0 6 -0 Ja 6 n-0 7 07 Ma y-0 7 Se S 7 p-0 7 Ja 7 n-0 8 08 Ma y-0 8 Se 8 p-0 8 Ja 8 n-0 9 Ma -0 y-0 9 Se 9 -0 p-0 9 9 Ja n-1 0 Ma -1 y-1 0 ep Se -1 p-1 0 0 Ja 11 n-1 1 ay Ma -1 y-1 S 1 1 ep Se -1 p-1 1 Ja 12 n-1 2 Source: Federal Reserve Board, Bureau of Labor Statistics, Census Bureau, & Congressional Budget Office

Industrial gas demand: Modest growth

22 22 21 21 20 20 19 19 18 18 17 17 16 16 15 15 14 14 Source: EIA, Apr. 12 EIA is projecting 4.9% industrial gas demand growth for 2011; 0.8% growth in 2012 (relative to 2011) • Gas demand in industrial sector has surpassed pre-recession levels, driven by petchems sector

Electricity demand: Signs of growth in industrial sector

6.0

5.0

4.0

Source: EIA, Apr. 12 Forecast 3.0

2.0

30% 30% 20% 20% 1.0

10% EIA is projecting 0.8% electricity demand

decrease

for 2011; 0.4%

decrease

in 2012 0% 0.0

-10% Ja n 08 Ma y 08 Se p 08 -10% -20% Ja -20% n 09 Ma y 09 Coal Se p 09 Ja n 10 Ma y 10 Se p 10 Gas Ja n 11 Ma y 11 Se p 11 Change in total electricity consumption -30% -30% Ja n 12 Ma y 12 Se p 12 Coal Gas Residential D ec 08 Ja D n-0 Fe ec 9 Ja Change in total electricity consumption b-0 n-0 Fe 9 9 Commercial b-0 M 9 -0 M ar-0 9 pr 09 -0 M 9 n-0 ay 09 Ju l-0 n-0 9 Ju -0 S A ep ug -0 Oc S 9 t-0 ep N 9 ov Oc D 09 N ec ov 09 Ja D n-1 Fe ec 0 Ja Industrial b-1 n-1 0 Fe 0 b-1 M 0 0 -1 M ar-1 0 0 pr 10 -1 M 0 n-1 ay 0 Ju Ju l-1 A 0 ug Ju -1 S A 0 ep ug -1 0 Oc S 0 t-1 ep N -1 0 0 Oc D 10 N ec ov 10 D 10 ec 10

Year on Year Change in Power Generation: Coal to Gas Displacement

40% 30% 20% 10% 0% Coal Gas Source: EIA STEO, Apr. 12 Forecast -10% -20% -30% Ja n M ar M ay Ju l S ep No v 2009 vs 2008 Ja n M ar M ay Ju l S ep No v 2010 vs 2009 Ja n M ar M ay Ju l S ep No v 2011 vs 2010 Ja n M ar M ay Ju l S ep No v 2012 vs 2011

Weather and natural gas are weighing on coal

Coal Inventories

300 250 200 150 100 50 Jan Feb Mar A pr May Jun 2000 to 2010 Range Jul A ug S ep 2011

Coal Share of Power Gen

60.0% 55.0% 50.0% 45.0% 40.0% 35.0% Source: EIA 30.0% Ja n O ct Nov 2012 Dec Fe b M ar Ap r M ay Ju n 2000 to 2010 Range Ju l Au g 2011 Se p O ct N ov 2012 • Production continues to be flat to down year on year • Low natural gas prices, mild weather, and slow electricity demand recovery continue to depress US steam coal demand • Stockpiles could approach the highs of 2009 (driven by weather and gas prices) D ec

North American electricity demand growth projections have steadily declined

• • Comparison of average annual growth rates for NERC-wide summer peak demand Impacts of slower economic growth, demand-side efficiency • • Comparison of demand growth and annual growth rates by assessment area PJM accounts for approx. 25% of the 10-year growth in the US Source: NERC

EPA Mandates: Coal retirements could significantly impact the gas and power markets

GW

: Brattle Group’s projected retirements in Gigawatts (0.5 Bcfd)

Brattle Group estimates 40 to 55 GW of retirements, and up to 5.8 Bcfd of incremental demand

(0.4 Bcfd) (0.1 Bcfd) (1.5 Bcfd) (2.3 Bcfd) (0.1 Bcfd) (0.3 Bcfd) (0.7 Bcfd)

Lower costs and liquids uplift continue to drive shale growth

8.00

7.00

6.00

5.00

2012 Forward Strip: $2.52/MMBtu 4.00

3.00

2011 Forward Strip: $4.17/MMBtu 2.00

1.00

0.00

Fr La ui nc tla e nd Pi ne La da nc le e Jo Ea M na gl es h e av Fo er rd de C oa Fa ls ye M tte ar vi ce lle M llu on s M tn S ar ey ou ce th llu w s es N t or th U ea tic st Ba a rn - A et pp t al G ac ra hi ni a te W H as or h n R Ar iv C ko er he m ro a Po ke W w e oo de M df r R es or iv av d er er C de Al m BM P ic on ea d nc W e am N io H su br or tte ar a se r C sh An od oe ad el C ar l an ko yo W n oo df or d M an H co ay D s ne uv sv er ille na y D S ee ha p le B os Bo Bl si ss ac er ie k r S W ha ar rio le r C C oa ha ls tta no og a C od y An tri m C Pi ot er to re n Va N lle ew y A lb an y Pa lo D ur o Source: WoodMackenzie

US gas rig activity by county: Focus on key areas

1,000 900

Total US Gas Rig Activity

700 600 500 All other gas rigs

DJ/ Niobrara Appalachia/ Marcellus

400 300

TX GC/Eagleford San Juan Anadarko/ Granite Wash

200

LA Land/Haynesville Permian

100 -

Anadarko/GW Haynesville

Ja n 08 M ar 08 M ay-08Ju l-0 8 S ep -08 Nov-08Ja n 09 M ar 09 M ay-09Ju l-0 9 S ep -09 Nov-09Ja n 10 M ar 10 M ay-10Ju l-1 0 S ep -10 Nov-10Ja n 11 M ar 11 M ay-11Ju l-1 1 S ep -11 Nov-11Ja n 12 M ar 12

Marcellus Eagle Ford/ S TX Gulf Coast

Source: Smith Bits, Baker Hughes

US oil rig activity by county: Steady increase

Williston/ Bakken

Total US & Canadian Oil Rig Activity

San Joaquin/ Monterey

2,000 1,800

Rockies

1,600 1,400

DJ/ Niobrara

Canada: 108 1,200 1,000

Anadarko

800 US: 1,329 600 400 200 Canada: 98

Permian

US: 323 0 Ja n 08 A pr -0 8 Ju l-0 8 O ct -0 8 Ja n 09 A pr -0 9 Ju l-0 9 O ct -0 9 Ja n 10 A pr -1 0 Ju l-1 0 O ct -1 0 Ja n 11 A pr -1 1 Ju l-1 1 O ct -1 1 Ja n 12 A pr -1 2

Eagle Ford/S TX Gulf Coast

Source: Smith Bits, Baker Hughes

US Shale Gas Production Outlook

• • • Current production in the US doubled in last 2 years and surpassed 20 Bcfd Production from existing shales (excl Eagle Ford) expected to double in next 20 years

Key risks include: Environmental impact (footprint, water), Operating challenges (costs, people) Bcfd Current Shale Gas Production Shale Gas Production Outlook

Source: EIA, Feb 2012 Source: MIT Study, June 2010

10 20 30 40 50 60 70

Long-term US natural gas balances: What a difference a year makes

EIA 2011 Outlook

LNG

EIA 2012 Outlook

70 60

27 Bcfd 22 Bcfd

50 40 30 20 10 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 L48 Offshore Shale Total Consumption Onshore conventional Net Pipeline Imports CBM Alaska 0 20 09 20 10 20 11 L48 Offshore Shale Total Consumption 20 12 20 13 20 14 20 15 20 16 Onshore conventional Net Pipeline Imports 20 17 20 18 CBM Alaska 20 19 20 20 Source: EIA AEO 2011/2012

Profound changes in US gas supply outlook

US Dry Gas Production

57 55 53 51 49 47 45 65 63 61 59 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08 20 10

US LNG Import Forecast

16 14 12 10 8 6 4 2 0 -2 AEO 2005 AEO 2007 AEO 2010 AEO 2011 AEO 2012 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20 Source: US EIA AEO Source: US EIA

Multiple LNG export projects are currently under consideration

Source: FERC

Long-Term Henry Hub spot price outlooks

10.00

9.00

8.00

7.00

6.00

Historical Forecast Source: Various, April 9, 2012 5.00

4.00

3.00

2.00

1.00

Range of spot price outlooks Historical Henry Hub prices NYMEX forward curve NYMEX year ago 0.00

20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20

View of gas demand, competing fuels, supply costs, production and LNG trends will influence long-term outlook of gas prices – many moving parts!

Key insights

• North American

market works

: price works to balance supply and demand •

Short-term balances

influenced by mother nature, economic trends • Growth potential in industrial / power gen sectors influenced by

gas price environment and policy direction

; will impact generation fleet •

Unconventional gas/oil

production expected to make up larger share of total supply…

but not without risk

• Significant investment in

new infrastructure

new energy supply – evolving flow dynamics required to move • Long-term price assumptions:

many moving parts!

Contact Information

• • • • • • • •

Paul Burgener

Director Structured Products Americas BP Corporation North America Inc.

[email protected]

Office: 312-594-7505 Mobile: 630-300-4914 AIM: BurgenerCL Yahoo IM: burgenerpaul