The Natural Gas/Electricity Nexus

Brad LeachSenior Director, Electricity and Natural

Gas ResearchNYMEX

APEX 2006 Annual ConferenceAssociation of Power Exchanges

Seoul, KoreaOctober 31, 2006

An Overview of NYMEX

• Regulated by Commodity Futures Trading Commission as a Trading Facility and a Clearing Organization

• Two Divisions: NYMEX and COMEX

• Continuous 133-Year History as Commodity Exchange

• Open Outcry Floor Trading

• Web-Based Clearing and Trading

NYMEX Regulatory Protections

• NYMEX CFTC Regulation

• Compliance Department

• Market Surveillance

• Trade Surveillance

• Financial Surveillance

NYMEX Clearinghouse and Financial Protections

• Currently 40 Clearing Members• Clearing Member Financial Requirements

– $5 Million Minimum Net Working Capital• Currently $14 Billion on Deposit in Margin Funds• Rated AA+ by S&P• Clearing Member Guaranty Fund of Over $140 Million• $100 Million Default Insurance• Margin Requirements

– Original– Variation

• NYMEX Emergency Procedures

Total Volume of NYMEX Cleared Contracts in Million Contracts / Year

0

20

40

60

80

100

120

140

160

180

96 97 98 99 00 01 02 03 04 05

Options

Futures

NYMEX Natural Gas Annual Volumes

05,000,00010,000,00015,000,00020,000,00025,000,00030,000,00035,000,00040,000,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Thru9/06

Contracts

Futures Options

NYMEX CLEARPORT®5/31/02-10/20/06

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

May

-02

Sep-0

2

Jan-

03

May

-03

Sep-0

3

Jan-

04

May

-04

Sep-0

4

Jan-

05

May

-05

Sep-0

5

Jan-

06

May

-06

Sep-0

6

Date

Co

ntr

acts

20-Day Average 5-Day Average 60-Day Average

NYMEX-CME Alliance – Growth thru Distribution and Superior Technology

Why the NYMEX/CME AllianceIs Succeeding

– Customer Access to Superior Technology– Global Distribution – Our customers want efficiency

of transaction, in one location.– Ability to add key new contracts for better market

efficiencies.

NYMEX CME Globex®Contracts

• Energy Contracts Listed on CME Globex®• Full Size Contracts

NYMEX miNY™ Contracts

• Crude Oil Financial Futures (WS) NYMEX miNY Crude Oil Futures (QM) Heating Oil Financial Futures (BH)NYMEX miNY Natural Gas Futures (QG)RBOB Gasoline Financial Futures (RT) NYMEX miNY Heating Oil Futures (QH) Natural Gas (Penultimate) Financial Futures (HP)NYMEX miNY Gasoline Futures (QU) Natural Gas (Last-day) Financial Futures (HH)    

• NYMEX Europe Contracts Brent Crude Oil Futures (SC)  NYMEX Europe miNY Brent Futures (QB)  Gasoil Futures (GR)   

• Physically Delivered Contracts• Crude Oil (CL)

Natural Gas (NG) Gasoline (HU, RB) Heating Oil (HO)

NYMEX ClearPort® Trading and CME Globex® Trading

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

No

v-0

5

De

c-0

5

Ja

n-0

6

Fe

b-0

6

Ma

r-0

6

Ap

r-0

6

Ma

y-0

6

Ju

n-0

6

Ju

l-0

6

Au

g-0

6

Se

p-0

6

DailyCPT

10-Day

20-Day

Globex

0.000

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

4/3

/1990

6/3

/1991

8/3

/1992

10/3

/1993

12/3

/1994

2/3

/1996

4/3

/1997

6/3

/1998

8/3

/1999

10/3

/2000

12/3

/2001

2/3

/2003

4/3

/2004

6/3

/2005

$/M

MB

tuNYMEX NATURAL GAS FUTURES

FRONT MONTH SETTLE(4/3/90-11/30/05)

0.000

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

18.000

4/1/

05

5/6/

05

6/10

/05

7/15

/05

8/19

/05

9/23

/05

10/2

8/05

12/2

/05

1/6/

06

2/10

/06

3/17

/06

4/21

/06

5/26

/06

6/30

/06

8/4/

06

9/8/

06

10/1

3/06

$/M

MB

tuNYMEX NATURAL GAS FUTURES

FRONT MONTH SETTLE(4/1/05-10/20/06)

UK NBP Natural Gas PricesDay-Ahead

0

5

10

15

20

25

30

35

11/2

/05

11/1

7/05

12/2

/05

12/1

7/05

1/1/

06

1/16

/06

1/31

/06

2/15

/06

3/2/

06

3/17

/06

4/1/

06

4/16

/06

5/1/

06

5/16

/06

$/M

MB

tu

U.S. Natural Gas Vintage Production

0

10

20

30

40

50

60

70

Year

BC

F/D

ay

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

<1990

Source: IHS Energy

Natural Gas VolatilityFront Month

0%20%40%60%80%

100%120%140%160%180%

Jan-01

Sep-01

May-02

Jan-03

Sep-03

May-04

Jan-05

Sep-05

May-06

Historical 20 Day Annualized Volatility Implied Volatility ( Front Month)

Gulf Of Mexico Gas DeclineFirst Year Well Depletion

0%

10%

20%

30%

40%

50%

60%

Wells Completed During Time Period

Effe

ctiv

e D

eclin

e R

ate,

%/y

r

SOURCE: Simmons & Company International

Texas First Year Natural Gas Well Depletion

Source: Gary S. Swindell

Canada First Year New Well Depletion

0%

10%

20%

30%

1966-69 1970-74 1975-79 1993 1995 1996 1997

Date Well Completed

An

nu

al D

ecl

ine

Ra

te,

%

SOURCE: Simmons & Company International

Gulf of Mexico - Shelf / Deep Water Comparison

0

2

4

6

8

10

12

14

16

Year

Bcf

/day Deep Water

Shelf

Source: IHS Energy

Source: EIA

U.S. Natural Gas Total Consumption

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

Jan

Feb Mar Apr

May Ju

nJu

lAug

Sep Oct

NovDec

2001

2002

2003

2004

2005

Source: EIA

1997 U.S. Natural Gas Consumption Sector Distribution

24%

15%

41%

0%

20%

Residential

Commercial

Industrial

Vehicle

Electric

Source: EIA

2005 U.S. Natural Gas Consumption Sector Distribution

32%

29%24%

15%

Residential

Commercial

Industrial

Vehicle

Electric

Source: EIA

U.S. Natural Gas Sector Distribution Summary

(1997-2005)

• Industrial use has declined from 41% to 32% of total U.S. consumption (-1.9 Tcf)

• Electricity use has increased from 20% to 29% of total consumption (1.7 Tcf)

• This shift from industrial to electric use has resulted in an increase in total natural gas that is subject to weather sensitive demand and pricing

2003 Natural Gas Electricity Generation

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

FranceCanada

Germany

KoreaGreece

SpainUS Japan

MexicoUK Italy

Turkey

Source: IEA

NYMEX Electricity Complex Volume

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1996 1998 2000 2002 2004 2006(Jan-Sep

NYMEX Electricity Complex• Monthly Peak Contracts

– PJM– NYISO– ISO-NE– AEP-Dayton– NI Hub– MISO Hubs– ERCOT– DOW Jones Western Indices

• Monthly Off-Peak Contracts– PJM Western Hub– NYISO– ISO-NE– AEP-Dayton– NI Hub– Cinergy

• PJM Options Contract• Daily Peak Contracts

– PJM– NYISO– ISO-NE– NI Hub– AEP-Dayton– Cinergy

New England Natural Gas and Electricity Prices

2/3-3/31/03

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

$MW

h

0.00

5.00

10.00

15.00

20.00

25.00

30.00

$MM

Btu

NE Power NE Gas Avg

PJM and ISO-NE DAM Electricity Prices v. Natural Gas7/10-8/31/06

0

50

100

150

200

250

300

10

-Ju

l

17

-Ju

l

24

-Ju

l

31

-Ju

l

7-A

ug

14

-Au

g

21

-Au

g

28

-Au

g

$MW

h

0

2

4

6

8

10

12

$MM

Btu

ISO-NE DAM PJM Western Hub M-3

Mass Hub and PJM Western Hub Electricity Real-Time Peak Daily Prices

0

50

100

150

200

250

300

350

7/11

/200

6

7/21

/200

6

7/31

/200

6

8/10

/200

6

8/20

/200

6

8/30

/200

6

MassHub

PJMWesternHub

PJM Western Hub Peak Real-Time Hourly Prices 7/10-8/31/06

0

100

200

300

400

500

600

700

800

900

$/M

Wh

Year on Year Power Demand for Natural Gas - NPCC

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7/10

7/17

7/24

7/31 8/

78/

148/

218/

28

NPCC 2005 NPCC 2006Mcf

New England Pipeline Capacity Utilization 7/10-8/31/06

0%

10%

20%

30%

40%

50%

60%

70%

10-Jul

17-Jul

24-Jul

31-Jul

7-Au

g

14-Au

g

21-Au

g

28-Au

g

Year on Year Power Demand for Natural Gas - Total US

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

20,000,000

2005 2006Mcf

Many Storage Fields Will Reach Capacity Before November

NYMEX NG Forward Curves

$0

$2

$4

$6

$8

$10

$12

$14

$16

Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09

10/20/2006

12/9/2005

9/20/2005

6/20/2005

December Natural Gas Prices Settlements in USD

• 10/23/06 12/13/05

• NYMEX: $7.81 $15.38

• UK: $11.15 $16.65

• Zeebrugge: $11.06

December Spark SpreadsQuotes in USD

10,000 7,000Btu/KWh

• U.S. -25.92 .87

• U.K. -15.59 17.85

• Germany -31.01 2.12

DISCLAIMER

The New York Mercantile Exchange, Inc., (the “Exchange”) is making this information available for informational purposes only. The Exchange has attempted, wherever possible, to make statements in good faith based upon current information and expectations by using words such as "anticipate," "believes," "expects" and words and terms of similar substance. Any forward-looking statements made by, or on behalf of the Exchange, involve a number of risks, trends, and uncertainties and other factors that may cause actual results to differ materially. As such, readers are cautioned not to place undue reliance on the information contained herein, which only speaks as of the date of the issuance of this information.