ema 2009 - 2012 & beyond: operating in a carbon constrained environment - perspectives of a...

Interstate Pipelines | Exploration & Production

Fiji C. GeorgeManager, Corporate Development

2012 & Beyond: Operating in Carbon Constrained Environment—Perspectives

of a Natural Gas Company

Environmental Market Association Fall 2009 Conference

October 22, 2009Houston, TX

Cautionary StatementRegarding Forward-looking Statements

2

This presentation includes certain forward-looking statements and projections. The company has made every reasonable effort to ensure that the information and assumptions on which these statements and projections are based are current, reasonable, and complete. However, a variety of factors could cause actual results to differ materially from the projections, anticipated results or other expectations expressed in this presentation, including, without limitation, our ability to implement and achieve our objectives in the 2008 plan, including earnings and cash flow targets; our ability to meet production volume targets in our E&P segment; uncertainties and potential consequences associated with the outcome of governmental investigations; outcome of litigation; our ability to comply with the covenants in our various financing documents; our ability to obtain necessary governmental approvals for proposed pipeline projects and our ability to successfully construct and operate such projects; the risks associated with recontracting of transportation commitments by our pipelines; regulatory uncertainties associated with pipeline rate cases; actions by the credit rating agencies; the successful close of our financing transactions; our ability to successfully exit the energy trading business; our ability to close our announced asset sales on a timely basis; changes in commodity prices and basis differentials for oil, natural gas, and power and relevant basis spreads; inability to realize anticipated synergies and cost savings associated with restructurings and divestitures on a timely basis; general economic and weather conditions in geographic regions or markets served by the company and its affiliates, or where operations of the company and its affiliates are located; the uncertainties associated with governmental regulation; political and currency risks associated with international operations of the company and its affiliates; competition; and other factors described in the company’s (and its affiliates’) Securities and Exchange Commission filings. While the company makes these statements and projections in good faith, neither the company nor its management can guarantee that anticipated future results will be achieved. Reference must be made to those filings for additional important factors that may affect actual results. The company assumes no obligation to publicly update or revise any forward-looking statements made herein or any other forward-looking statements made by the company, whether as a result of new information, future events, or otherwise.

AgendaIntroduction

The View

Implications for Natural Gas

Corporate Strategies

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Overview of El Paso Corporation

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10%+ EBIT growth 2008–201342,000 miles of interstate pipeline17 17 Bcf/dBcf/d throughput (28% of gasthroughput (28% of gasdelivered to U.S. consumers)delivered to U.S. consumers)Nearly $8 billion committed project backlog

Premier Pipeline Franchise

El PasoNatural Gas

MojavePipeline

ColoradoInterstate Gas

WyomingInterstate

CheyennePlains Pipeline

TennesseeGas Pipeline

SouthernNatural Gas

Florida GasTransmission (50%)

Elba IslandLNG

Gulf LNG (50%)2011

*As of 12/31/07 excluding reserves related to properties divested in 2008; also includes reserves from proportionate share of Four Star

2.8 Tcfe proven reserves*

Top 10 independent domesticgas producer

International developments

Top 10 independent E&P

Legislative Considerations


Climate Change Bills

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2004 2008 2012 2016 2020 2024 2028 2032 2036 2040 2044 2048

MM

Tonn

es C

O2e

Electric Power

Petroleum /Liquid Fuel

IndustrialRes/Comm

Kerry-Boxer Cap

Non-CappedCapped Sectors

Waxman-Markey Cap

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Key Policy Considerations for Natural Gas

Section 811 S. 1733…a good improvementFugitive emissions should not be regulated

Equitable treatment for natural gasSection 181

Support funding through a 2% set aside from the capLCPS vs. RES

Offsets from natural gas fugitive emissions on a “positive list”Federal pre-emption

State/regional cap and trade and performance standardsCAA regulations – NSPS, PSD, Title V

Pass through/cost recovery

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Regulatory Drivers


• Reporting• Tailoring Rule

GHG Mandatory Reporting Rule

Finalized on September 22, 2009

Applies to facilities with emissions greater than 25,000 tonnes per year of GHG emissions

Compliance to begin on January 1, 2010First report due on March 31, 2011

CO2 emissions from combustion only

EPA will finalize rules for fugitive emissions in 2010 and will require compliance from 2011

Will require monitoring and recording of fugitive emissions

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GHG Tailoring Rule:“The Glorious Mess”?

Proposed on September 30, 2009Establishes PSD and Title V thresholds on a “temporary level” basis for 6 years

PSD permit is required for “construction” or “modification”Title V permit is required for “operations”25,000 tpy of CO2e for new or “minor” facilities10,000 – 25,000 tpy of CO2e “significance” levels for existing major facilities

Over 5000 memos, guidance documents and court decisions govern the minutia of PSD & Title V permits

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Implications of GHG Tailoring Rule (1)PTE limits vs. FERC certificatesPresumptive BACT?

CH4 and CO2 BACTTreatment of fugitive methane

Fugitive source vs. fugitive emission point?Definition of a facility for E&P sources?Title V fees?Permit application status – if stay is NOT granted

Pending air permit applications (major or minor NSR)?

New permit applications?

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Implications of GHG Tailoring Rule (2)

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GHG Tailoring Rule Analysis

010002000300040005000600070008000

6500 7500 8000 8500 9000 9500 10000 11000

Heat Rate

Com

pres

sor H

P

Facility HP @25k - MST

Facility HP @10k -Signif icance

Major Source Thresholds at ~ 5500 hpSignificance levels at ~ 2000 hp

Implications of GHG Tailoring Rule (3)Natural gas a clear winner! Not quite…

ComplexityFugitive/vented vs. “simple” combustion

Fugitive emissions exists even when the unit is NOT running!

Multiple emission points vs. few stacksEven new NGCC installation will now have a BACT review

Time consuming and costly for natural gas sectorPermitting process can take years (especially in north-east)Delays to FERC permits

No flexibility in reduction alternativesBACT alternatives are relatively more cost effective$$ add up due to BACT on multiple sources

Limits can conflict with FERC certificates

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Implications for Natural Gas


Natural Gas Sector Business Impacts:Impact of Allowance Price on Fuel

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$/Tonne CO2

Natural Gas($/MMBtu)

Gasoline($/gallon)

Coal($/MMBtu)

$10 $0.53 $0.10 $0.95

$20 $1.06 $0.21 $1.90

$30 $1.60 $0.31 $2.85

$40 $2.13 $0.41 $3.80

$50 $2.66 $0.51 $4.75

Carbon Allowance Forecasts

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Carbon allowance prices depend on assumptions on:Electric demand and demand growthAvailability of low carbon intensive technologiesAvailability of offsets and other cost containment features

Coal -> Gas Switch? There is a “sweet spot” for natural gas…

Carbon prices for fuel switching at $40/t coal Carbon prices for fuel switching at $60/t coal

Source: BoA – Merrill Lynch Research, April 29, 2009

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Source: ICF

And Past Experience Tells Us…

“There is no reason to believe that cost estimates for greenhouse gas reductions will be any more accurate than the 1990 SO2 estimates; indeed, they are likely to be less reliable. This is not to say that they will be too high; they may be too low.”

— CRS, September 2009

1990 Estimates of Compliance cost with Acid Rain Cap and Trade(Source: CRS, September 2009)

EPA-ICF

NCAC-Pechan

EEI-TBS

Estimated Actual Costs2000–2007: Ellerman, et al. 2010: EPA

$2.7–$3.6

$4.4–$4.6(annual averagefor 2000–2009)

$7.1–$8.7

$1.9(annual averagefor 2000–2007)

$3.4–$8.0

No estimate

$7.9–$11.2

$2.2

2000 2010(Billions, 2005$)

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H.R. 2454: EIA Capacity Additions (thousand MWs)—2030 (cumulative)

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EIA Scenarios show bulk of generating capacity added coming from zero/low carbon sourcesAdvanced Coal w CCSNuclearRenewables

Only in the case where nuclear technology/CCS is limited with no international offsets does NGCC/CT show significant contribution

H.R. 2454: EIA Generation by Fuel type—2030

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Natural gas generation grows when nuclear/CCS are limited or more expensiveLimitation on international offsets results in greater nuclear andrenewable generation in lieu of natural gas

Natural Gas Prices

NG prices increase more steeply with increased gas demandAgain, this occurs with stricter limits on low carbon technologies

‐

5.00

10.00

15.00

20.00

25.00

2010 2015 2020 2025 2030 2035 2040 2045 2050

Delivered

Price (2007$

per M

MBtu)

Natural Gas Price Curves

EIA Base Case EPA Base Case EIA No Int'l/Limited Nuclear EPA Limited Nuclear

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Natural Gas DemandNatural gas demand drivers in a carbon constrained environment

Cap sizeEnergy demandLow/zero carbon technologiesPrice of natural gas Price collars on allowance pricesOffsets

Models depict natural gas demand and prices going down in most cases

Governmental models have an optimistic view of low carbon technologies

96–135 GW of nuclear additions!! ORRenewable generation increasing by ~50%-3x Low carbon technologies have greater impact in reducing natural gas demand than offsets 22

And the future for natural gas?

Realistic assumptions on nuclear, renewable and CCS will likely result in may increase gas demand

A level playing field?ACES does not provide any incentive for natural gas, other than a theoretical carbon price signalEnvironmental targets and cost containment can be managed cost effectively with increased natural gas use

Section 181LCPSExisting cost containment features

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Corporate Strategies


El Paso Corporate: Greenhouse Gas Commitment

“Assess, engage and act”Commitment statement http://elpaso.com/profile/mainneighbor.shtm

Carbon Disclosure Project (CDP) 5–7http://www.cdproject.net/

Issued first CSR in June 2008http://elpaso.com/CSR/index.html

California Climate Action Registry (CCAR)First company in CCAR history to certify without significant errorsFirst company to achieve Climate Action Leader™ for 2007First natural gas company to join CCARFirst natural gas company to certify all GHG emissions from operations in the entire US

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El Paso Corporate: Greenhouse Gas Commitment

Serves on Advisory Committee—The Climate Registry (TCR)El Paso Natural Gas and Colorado Interstate Gas areTCR “Founding Reporters”

Coalition for Emission Reduction Projects (CERP)

Signatory to the Tropical Forest-Climate Unity Agreement

2008 Southern Gas Association (SGA) Environmental Excellence Award for leadership on GHG matters

Committed to developing the $3 billion proposedRuby Pipeline as a carbon-neutral project

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El Paso GHG Organizational Response

Board and Executive Committee leadershipExecutive in chargeOptimizing GHG tasks between corporate and business units

GHG teams at business unitsClimate risk management

Shadow pricingDisclosures

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Ruby Pipeline’s Goal ofApproaching Carbon Neutrality

http://www.rubypipeline.com/

FERC in Docket No. CP09-54-000

Our goal to achieve acarbon-neutral project

Mitigate construction and operational Scope I emissions relative to a “business as usual”design

“Portfolio” approachElectric compression via RECsBest (methane) management practicesInternal pipe coatingAllowances, VERs andre-forestation

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ConclusionsCO2 regulations are here

GHG Tailoring Rule has serious implications on natural gas infrastructure projects

Complex factors will dictate the role of natural gas in a carbon constrained environment

Natural gas should be a “foundation fuel” under reasonable forecasts and a level playing field

Assess and incorporate carbon risks

Need to initiate NOW Certifiable grade inventory took three years

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Fiji C. GeorgeManager, Corporate Development

2012 & Beyond: Operating in Carbon Constrained Environment—Perspectives

of a Natural Gas Company

Environmental Market Association Fall 2009 Conference

October 22, 2009Houston, TX

ema 2009 - 2012 & beyond: operating in a carbon constrained environment - perspectives of a...

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