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Midstream Update & PrimerNovember 2008

Becca Followill

[email protected]

(713) 333-2995

Dave Pursell

[email protected]

(713) 333-2962

Anson Williams

[email protected]

(713) 333-2951


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3/41

3

Part I An Overview Frequently overlooked, the midstream industry is

a critical link to turn raw natural gas into usableproducts.

Natural gas is comprised of two parts - a light gascomponent and a heavier liquids component. Thelight gas consists of methane, while the liquidsconsist of ethane, propane, n-butane, iso-butaneand natural gasoline. These natural gas liquids(NGLs) are used in the petrochemical industry, asrefinery blend-stock, in home heating, and inmany other common applications.

Most wellhead gas does not meet the qualitystandards required by interstate pipelines, so itmust be processed, removing contaminates andthe heavier components (propane+).

After the NGLs and contaminants are removed,whats left is marketable gas (or dry gas),consisting of methane with some ethane. Thatgas is then ready to be delivered to interstate gaspipelines.

The raw NGLs are then sent to large fractionators

to break the stream into usable components(ethane, propane, etc.).

Dry orMarketable

Gas

Industrial/Heating

Fractionator

Refineries

PetrochemicalIndustry

Onshore andOffshore Wells

Midstream Overview

Raw NGLMix

Finished NGLs

Source: Tudor, Pickering, Holt & Co.

InterstatePipelines

Wet GasGathering

Normal Butane

Isobutane

Ethane

Propane

Natural gasoline

ProcessingPlant


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4

NGL Removal is Non-Discretionary

The typical NGL barrel looks like this: We stress: propanes and heavier components(propanes+), make up ~60% of the NGL stream, andhave to come out of the wet gas produced from the

wellhead. Pipeline specs mandate it. Ethane is discretionary, meaning

producers/processors can opt to keep it in thestream or remove it, depending on economics.

Keeping ethane in the steam is called ethanerejection (we know, it is the opposite of what isintuitive, but think of it from the processors

standpoint). The amount of Btus is always thesame - its just the state of matter thats different.

Ethane rejection = more gas, fewer NGLs

Normal processing = less gas, more NGLs10% Isobutane

25-30% Propane

40-45% Ethane

5-10% Normal Butane

10-15% Natural Gasoline


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5

What Drives Midstream Economics?

Contract Structure

Commodity

Sensitive?

Gathering Fee N

Processing Fee N

Keep Whole Y

Percent of Proceeds Y

Raw NGL Pipelines Fee N

Finished NGL Pipelines Fee N

Fractionation Fee N

Storage Fee N

Marketing Fee N

There are lots of ways to make moneythrough the midstream value chain.While most are fee-based, processing is

usually commodity sensitive.

Since processing involves convertingMMBtus from a gaseous form to a comboof liquids and gas, non fee-basedprocessing economics are dictated by thespread between the price of gas and the

price of NGLs (the frac spread).

Low gas prices/High NGL prices =Favorable processing economics(Btus worth more taken out of gas stream)

High gas prices/Low NGL prices =Unfavorable processing economics(Btus worth more in gaseous form)


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6

Frac Spreads The Midstream Economic BellweatherGulf Coast Frac Spread (45% Ethane)

($6)

($4)

($2)

$0

$2

$4

$6

$8

$10

$12

Jan

Feb

Mar

Apr

May

Jun Ju

lAu

gSe

pt Oct

Nov

Dec

$/mmb

tu

* 7-yr avg Gulf Coast Frac Spread ~$1.75/mmbtu

7-yr High

2008

7-yr Low

Frac spreads, like refiners crackspreads or power producers sparkspreads, are a measure of gross margin.It is the delta between the cost of gas

(processing input) and its value in NGLform (processing output).

Frac spread = NGL Value Cost of Gas

These spreads are an industrybellweather when watching processingeconomics.

If frac spreads are positive, the MMBtusare more valuable in NGL form. Ifspreads are negative, the MMBtus aremore valuable in gaseous form.

Shown here is a Gulf Coast frac spread,but frac spreads can vary significantly

by region.

Gulf Coast Frac Spread, 1999 to Present

($5.00)

($3.00)

($1.00)

$1.00

$3.00

$5.00

$7.00

$9.00

$11.00

$13.00

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: Bloomberg, Tudor, Pickering, Holt & Co.


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7

Frac Spread vs Ethane Production

400

450

500

550

600

650

700750

800

850

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Mbpd

-$4

-$2

$0

$2

$4

$6

$8

$10

$12

$/mmbtu

Ethane Production Monthly Average Frac Spread

If frac spreads go negative,processors will reject ethane (~35-

45% of stream) keeping it in thegas.

Gas supply then increases, gasprices go down, feedstock becomescheaper, and markets correct.

If frac spreads go negative, mostprocessors have conditioninglanguage, which allows them to atleast cover costs.

Gas price spikesfollowingKatrina/Rita

Cold winter andgas price spike

Source: EIA/DOE, Tudor, Pickering, Holt & Co.


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8

Market for Processing is Self-CorrectingNGL pricesincrease

Gas supply decreases

FewerNGLs areprocessed

EthanerejectionEthane

productiondecreases &gas supplyincreases

Gas pricesdecrease

E&Pshut-ins

Ethane economicto process moreethane produced

Too much ethane-prices

decrease


9/41

9

U.S. Gas Processing/NGL SnapshotU.S. Processing St at ist ics

2005 2006 2007

Gas processing capacity, bcfd 70.3 70.2 71.0

% Change -0.1% 1.2%

Gross (Wet) nat gas production, bcfd 64.3 64.4 67.2% Change 0.2% 4.4%

Gas processing throughput, bcfd 46.8 45.5 45.3

% Change -2.6% -0.4%

NGL production from processing, 1,000 bpd 1,717 1,739 1,783

% Change 1.3% 2.5%

U.S. gas processing capacity and wellhead NGLproduction have been relatively flat since 2005,increasing at a slower rate than gas production.

Seven gas plant projects were completed in2007, adding ~0.8 Bcfd of capacity. For 2008,seven more projects either have been completedor are expected in-service, which will add ~1.9Bcfd of additional capacity.

An additional 2.0 Bcfd of expansions are plannedfor 2010+.

Two major NGL pipelines recently completed orunder construction, Arbuckle and Overland Pass,should add 270k bpd of NGL pipeline capacity byQ109.

Source: Oil and Gas Journal 2008 & 2005, EIA/DOE, Tudor, Pickering, Holt

Gas

processing

73%

Imports10%

Crude

refining

17%

Gasoline

blending

25%

Heating & fuel

17%

Exports

3%

Petrochemicals

55%

NGL Sources NGL Uses



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10

Major U.S. Gas Processors The table to the left shows the major U.S. gas

processors. Gas processing represents only onesegment of the midstream value chain.

E&P companies used to be the primary ownersof gas processing plants, in order to supporttheir E&P operations. In the 1990s, companiesbegan selling off midstream assets to focus ontheir core E&P business.

The industry consolidated further as puremidstream plays developed. In 2008, thetop ten gas processors held two-thirds of U.S.processing capacity (excluding Alaska).

MLPs now dominate the space, as midstreamearnings are perceived to provide a certaindegree of stable, reliable cash flows,especially when exposure to the frac spread isminimized.

Source: Oil and Gas Journal 2008, Tudor, Pickering, Holt (Excludes Alaska)

Top U.S. Gas Processor s

Processing

Stock Capacity % of

Company Symbol MMcf/d U.S. Total

DCP Midstream LLC SE/COP/DPM 13,117 21%

Enterprise Products Partners LP EPD 4,666 8%

Williams Cos. WMB/WPZ 4,376 7%

Targa Resources Private/NGLS 4,341 7%

BP PLC BP 4,163 7%

Crosstex Energy LP XTEX 2,936 5%

Aux Sable Liquid Products LP EEP/FCE.UN/WMB 2,200 4%

ONEOK OKS/OKE 1,751 3%Enbridge Energy Partners LP EEP 1,470 2%

Kinder Morgan Energy Partners LP KMP 1,293 2%

ExxonMobil Corp. XOM 1,195 2%

CDM Max LLC Private 1,100 2%

Copano Energy LLC CPNO 1,058 2%

Chevron Corp. CVX 854 1%

Total 44,520 72%


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11

U.S. NGL Production by Region (2007)

3.6%

(64 Mbpd)


12.1%

(216 Mbpd)

4.9%

(87 Mbpd)

12.3%

(219 Mbpd)

10.2%

(182 Mbpd) 36.0%

(641 Mbpd)

5.4%

(97 Mbpd)

14.5%

(258 Mbpd)

1.1%

(20 Mbpd)

Gas processors describe natural gasas rich (wet) or lean (dry),depending on the amount of heavyrecoverable components contained.

A very rich gas may contain 5-6gallons of recoverable liquids permcf (gpm). A lean gas usuallycontains 1 gpm or less.

Deepwater Gulf of Mexico (GoM) gascan have 4+ gpm, compared with 1-1.5 gpm for the GoM shelf and 2-3gpm on the Texas Gulf Coast. WestTexas gas is also very rich.

Coal bed methane gas is essentiallyfree of NGLs and is comprised of onlymethane, water and sometimes CO2.


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12

Processing Plants Follow Major Producing Areas

Source: EIA/DOE

U.S. Gas Processing Plants There were 539 gas processing plants and32 fractionators operating in the U.S. as ofJanuary 1st, 2008.

About 33% of U.S. gas processing capacity islocated along the Gulf Coast. But the bulkof new adds are planned for the Rockies(currently 11% of capacity) and Ark/La/TX(20% of current capacity).

About 80-85% of fractionation takes place

along the Gulf Coast; the NGLs areproduced close to the primary end-users petrochemical companies.

The average gas processing plant is gettinglarger and more efficient.


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13

Getting NGLs to Market

Source: Canadian NEB, edited for changing ownership & new pipelines proposed

There are 2 major U.S NGLtrading hubs and 2 Canadianhubs: Mont Belvieu, TX;Conway, KS; Edmonton/FortSaskatchewan, Alberta; and

Sarnia, Ontario. NGL pipelines transport NGLs

from producing fields to thesehubs, where they are stored,fractionated, and/or distributedfor end use.

Mont Belvieu, the largest ofthese hubs, is located on theTexas Gulf Coast where there isthe highest concentration ofpetrochemical, storage,pipeline, fractionation, andrefinery infrastructure.

Given its strategic location,Mont Belvieu is considered theprice setter for North AmericanNGL markets.


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14

U.S. Petrochemical Plants

Puget Sound

CVX

CVX

Ineos

LA Refining

Frontier

Alon

Flint Hills

Premcor

Lyondell

Lyondell

CVX

Westlake

Sunoco

Marathon

IneosIneos

Sunoco

Marathon

BP

WMB

Sunoco

Sunoco CVX

Motiva

Sunoco

Sunoco

TX Eastern

XOM

EP DLyondellValero

LyondellIneos

Formosa

Lyondell

Javelina

MarkWest

Flint Hills

Citgo

Dow

Westlake

MarathonValeroCVX

Louis Dreyfus

Dow Shell

Lyondell

CitgoSasol

Valero

BRPCXOM

WMBMarathon

Dow

Murphy

CVX

Ineos

El DupontBASF

MotivaHuntsman

Source: ICIS Plants & Projects Database, Company Press Releases, Tudor, Pickering, Holt


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15

Part II Summary and Historic Trends

The first section of this primer discussed four drivers of Midstream profitability:

U.S. gas production

NGL supply

NGL demand

Relationship between price of gas, crude oil, and NGLs

This section reviews the historic trends of each of these drivers. With the recent collapse in commodity prices andeconomic conditions, everything has been turned on its head. While historic trends arent always indicative ofwhere things are headed, the perspective should be helpful. Part III of this primer (p. 25) tackles where we thinkthings are headed.

In the meantime, a brief summary of historical trends:

U.S. gas production: On the rise, +9% ytd after years of stagnant production. But, rig count is falling (andwith it, we hope, production).

NGL supply: Also on the rise, albeit at a slower pace than gas production as NGL yields have fallen(movement to leaner onshore gas production from richer offshore).

NGL demand: Until quite recently, on the rise amid strong worldwide economies and a weak U.S. dollar.Recentlyin the tank.

Relationship between gas, crude oil and NGLs: Midstream economics are most favorable when gas trades ata discount to crude oil on a mmbtu basis and when NGLs trade at a high percent of crude oil price.Historically NGLs have traded at 65-70% of crude oil, but the recent economic turmoil has pushed NGLsdown to ~45% of crude oil. Historically natural gas has traded at a 6:1 ratio (crude:gas). Over the pastcouple of years, with the spike in crude, that ratio expanded to as high as 14:1. With the recent decline incrude, the ratio is back to ~10:1.


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16

U.S. Gas Production On the Rise

Change in Gross U.S. Nat Gas ProductionYTD Change

Region Thru Aug

Texas 16.0%

Wyoming 11.4%

New Mexico -3.0%

Oklahoma 4.2%

Louisiana 4.3%

Other 12.6%

Onshore Total 10.9%

GoM -3.2%

Total 9.0%

Source: EIA/DOE

After stagnant/decliningproduction since 1997, U.S.domestic production has been onthe rise since mid-2006, driven bya step change in gas prices, above

$6/mcf.

Biggest increases in Texas (BarnettShale) and the Rockies (Piceance,Powder River Basin and GreenRiver Basin), tempered by declinesin New Mexico and the GoM.

Excluding 2 months ofIndependence Hub downtime (atalmost 1 bcf/d), GOM productionyear-to-date is +0.6% y/y.

EIA-914 Gross U.S. Natural Gas Production Data

35

40

45

50

55

60

65

Jan

-05

Mar

-05

May

-05

Jul-0

5

Sep

-05

Nov

-05

Jan

-06

Mar

-06

May

-06

Jul-0

6

Sep

-06

Nov

-06

Jan

-07

Mar

-07

May

-07

Jul-0

7

Sep

-07

Nov

-07

Jan

-08

Mar

-08

May

-08

Jul-0

8

Production(Bcf/d)

6%

8%

10%

12%

14%

16%

18%

20%

Total Production Onshore Production Offshore as % of Total Production


17/41

17

NGL supply growing at a slower rate

U.S. Monthly NGL Production (Jan '01- Aug ' 08)

1,300

1,500

1,700

1,900

2,100

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

1,

000bpd

Source: EIA/DOE and Tudor, Pickering, Holt & Co.

Since early 2001, U.S. gas production is+0.2%/yr on average.

During the same period, NGL

production is -0.9%/yr on average. The slower pace of growth of NGLs is

due to periods of ethane rejection(ethane kept in gas stream, resulting inless NGLs processed out) as well aslower NGL yields (leaner gas).

More recently, with the surge in U.S.

drilling, natural gas production is +9.0%while NGL production is +5.2% (year-to-date vs. 07).


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18

driven by lower NGL yields

Annual U.S. Historical NGL Yield (1970-2007)

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

gal/Mcf

NGL yields (measured inGPM or gallons of liquidsper mcf) have beendeclining since 1982.

The shift to drilling inlower GPM/leaner gasresource plays hasinfluenced the decline inyield.

Declines have alsooccurred despite addingmore deep cutcryogenic processing.

Monthly U.S. Historical NGL Yield (Jan '01 to Aug '08)

1.10

1.20

1.30

1.40

1.50

1.60

Jan-01

Jul-0

1

Jan-02

Jul-0

2

Jan-03

Jul-0

3

Jan-04

Jul-0

4

Jan-05

Jul-0

5

Jan-06

Jul-0

6

Jan-07

Jul-0

7

Jan-08

Jul-0

8

gal/Mcf

DecliningNGL yields

Leaner onshoreproduction



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19

NGL Stream Components and End Users

Component % Use

Optional to

Process?

Historical Pr ice

Relationship to

Crude

2000-2003: 51%2004-2007: 46%

2008 YTD: 37%

2000-2003: 75%

2004-2007: 69%

2008 YTD: 60%

Petrochemical feedstock, 2000-2003: 87%fuel, gasoline blending, 2004-2007: 82%

propellant 2008 YTD: 71%

Petrochemical feedstock, 2000-2003: 92%

gasoline blending, 2004-2007: 85%

refrigerant, propellant 2008 YTD: 73%

2000-2003: 97%2004-2007: 96%

2008 YTD: 89%

Petrochemical feedstock,

gasoline blending

Yes

Partially

No

No

No

Petrochemical feedstock

Petrochemical feedstock,

heating & fuel

Natural Gasoline

40-45%

25-30%

5-10%

10%

10-15%

Ethane

Propane

Normal Butane

Isobutane



20/41

20

Demand Drivers for NGLs: Ethylene

Ethylene is the simplest alkene and the most widely produced organic compound in the world. 97% ofethane is used for ethylene production.

About 50% of ethylene is polymerized into polyethylene. This polymer is used most commonly to formlightweight packaging products (i.e. shopping bags) from low-density polyethylene (LDPE) and as a mediumfor injection molding (to make products like plastic containers) from high-density polyethylene (HDPE).

Uses of Ethane & Et hyl ene

Surfactants: Ethylene glycol

Paints (antifreeze)

Fabric Softener

Adhesives Detergents

Inks

Insecticides Construction

Laxatives

Ethyline oxide

PVC

Ethylene dich loride Vinyl chloride monomer Polyvinyl chloride

Ethane Ethylene

Polyethylene UpholsteryHigh density (HDPE): Flooring

Containers Clothing

Welding gas Low density (LDPE): Automotive fittings Signs

Fruit ripener Packaging Plumbing Electronics

Anesthetic Films

VCM

30%

Other

97%

50%

Other Uses

50%Petrochemicals



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21

Demand Drivers for NGLs: Propylene

Propylene is the second simplest alkene and is most commonly produced as a byproduct in ethylene production.About 62% of propylene is polymerized into polypropylene. This polymer is most commonly used as a medium forinjection molding (for plastic products like containers) and in the fibers market (i.e. carpeting, textiles).

Propane demand has two seasonal offsets. Residential/commercial demand (40% of total) peaks during the winterheating season and troughs in the summer. Petrochemical demand (49%) peaks during the summer when propaneprices are lower, as the petrochemical industry switches between feedstocks depending upon price.

Uses of Propane & Propyl ene

Medicines

Cosmetics

Cumene Nailpolish remover

Butanols Construction

Residential/Commercial (solvents)Heating Transportation

Cooking Propylene Oxide

Furniture/Bedding

Propane Propylene Polypropylene Packaging

Textiles

Stationary

Acrylonitrile Plastics

Farming Paints Auto components

Crop drying Adhesives Banknotes

Weed control Detergents Acrylic fibers Synthetic rubber

Fuel PVC

Rubbing alcohol

Conveyor belts

62%49%

Other Uses8%

6% 6%

27%

24%

21%

40%8%

5%

Petrochemicals



22/41

22

AAR Weekly Chemical Car Loadings

20,000

22,000

24,000

26,000

28,000

30,000

32,000

34,000

36,000

38,000

Jan

Feb

Mar Ap

rM

ay Jun

Aug

Sep

Oct

Nov

Dec

CarLoadings

10-Yr Average

10-Yr Low

10-Yr High

2008

Petrochemical Demand

Ideally, we would have outlinedethylene and propyleneconsumption, but we just couldntfind any good source (if you haveone, please tell us!) However, we

feel that chemical rail car loadingsare a good proxy for petrochemdemand/NGL demand.

2007 and 2008 saw a big pick-up inloadings, driven by strong world-wide economies and a weak U.S.dollar.

The sharp fall-off in 2H08 reflectsthe immediate impact of HurricaneIke, which slammed into the heart ofpart of the Gulf Coast petrochemicalsector. But more than a monthlater, railcar loadings are still at 10-year lows as a weak economy takesits toll.

Source: Association of American Railroads (AAR), Tudor, Pickering, Holt

Annual Chemical Carloads (1993-2007)

1.3

1.4

1.5

1.6

1.7

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Million

CarLoadings

Economic weakness


23/41

23

NGLs, Crude and Nat Gas have historicallybeen highly correlated

0%

20%

40%

60%

80%

100%

120%

140%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

NGLs

as%

ofCrude

$0

$20

$40

$60

$80

$100

$120

$140

$160

WTI($/b

bl)

NGL Composite (% C rude) WTI ($/Bbl)

From a price standpoint, midstream economics aredictated by 2 key factors: 1) the relationshipbetween crude oil and natural gas; and 2) theprice of NGLs relative to crude oil.

The crude oil/gas relationship is importantbecause gas needs to trade at a discount tocrude/NGLs in order to have an economic

incentive to convert the btus from a gaseous formto a liquid form. Generally, crude forms theceiling while natural gas forms the floor.

Processing economics have directionally improvedover the past 10 years, as crude traded at higherand higher premiums to nat gas.

NGL prices are mainly influenced by the price ofcrude oil, as NGL feedstocks compete mostdirectly with crude oil-based feedstocks such as

naphtha and heating oil. NGLs trade near parity with oil on a heat content,

or Btu basis. However, on a volume basis, theyhave historically traded at about 65-70% of crudeoil.

More recently, with the decline in crude oil pricesand softening chemical demand, NGLs have tradedat closer to 45% of crude oil on a volumetric basis.

Part of the reason for the declining relationshipbetween NGLs and crude oil is that NGLs arealmost purely a physical commodity influenced byend-user supply/demand. Crude is influencedmuch more significantly by financial markets.

Source: Bloomberg, Tudor, Pickering, Holt

Relationship Between Nat Gas & Crude

NGL Basket as Percent of Crude Price

-

2

4

6

8

10

12

14

16

18

20

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Crude/

GasRatio

$0

$20

$40

$60

$80

$100

$120

$140

$160

WTI($/bbl)

Crude/Gas Ratio WTI ($/Bbl)


24/41

24

Ethane Propane N-Butane I-Butane N-Gasoline Composite

1999 61% 74% 88% 91% 93% 73%

2000 56% 81% 93% 95% 101% 74%

2001 52% 76% 86% 92% 95% 69%

2002 41% 66% 79% 87% 93% 60%

2003 53% 78% 90% 93% 98% 71%

2004 51% 75% 89% 89% 101% 69%

2005 45% 68% 81% 85% 93% 63%

2006 41% 64% 77% 79% 91% 59%

2007 45% 70% 82% 87% 98% 64%

2008TD 37% 60% 71% 73% 89% 54%

NGL Products (% of Crude)

Ethane/Crude The Critical NGL Component

Since ethane is the largest component ofthe NGL stream and is the onlydiscretionary NGL, its price andrelationship to crude is the most volatileand closely watched.

The ethane market is domestic, with verylittle storage (30mmbbls or ~40 days ofsupply). Most ethane is used real-time inthe petrochemical industry, so pricesreflect real demand.

The historic relationship between NGLcomponents and crude oil is shown

below.0%

20%

40%

60%

80%

100%

120%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

$0

$10

$20

$30

$40

$50

$60

$70

Ethane (% of Crude) Ethane ($/Bbl)

Source: Bloomberg, Tudor, Pickering, Holt


25/41

25

Part III What is Changing?

What a difference a few months make! This summer, the midstream industry was experiencing record frac spreads,rig count was at record highs, and massive investment was planned to increase ethylene and propylene capacity.

There was mounting concern that the U.S. would not be able to absorb the incremental ethane coming on as aresult of the surge in drilling and de-bottlenecking of NGLs via new pipelines. But there were also a number ofpetrochemicals looking to expand, driven by a weak U.S. dollar and strong worldwide economies.

Slam on the brakes and put it in reverse. Fracs spreads have fallen from $10+ to negative; ethane is trading at 25%of crude and NGLs 45%; petrochemical plants are idling across the globe; ethylene prices have fallen belowUS$350/MT in Asia from highs of US$1,650 this summer; and while we havent seen it in scale yet, we expect to seemajor projects cancelled/postponed. Its about as ugly as it gets.

Fortunately, as we discussed earlier, this business is cyclical, which means rig count/gas production will fall.Processors will reject ethane. Ethane, ethlyene and propylene inventories will fall. And well start the up cycleagain.

This downcycle may last a little longer than others because of the potential depth of this recession and the amountof new NGLs coming online the result of both higher production and NGL debottlenecking due to the completion of

NGL take-away pipelines.

As a result, for our Midstream companies, for the next couple of years we are modeling that NGLs trade at ~50% ofcrude oil (vs. historic 65-70% and 45% currently).

When we first looked at the amount of new ethylene and propylene capacity coming online, it was worrisome (39%increase if everything done, but almost all outside the U.S.). Were now assuming that only plants currently underconstruction are completed, resulting in 3.5%/yr average growth in ethylene/propylene capacity worldwide through2012.


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26

Worldwide NGL Production Still on the Rise,While U.S. Contribution Continues to Decline

Global Annual NGL Production 1970 -2007

0

2,000

4,000

6,000

8,000

10,000

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

1,0

00

bpd

0%

20%

40%

60%

80%

Global Production % U.S.

Global Monthly NGL Production (Jan-2001 to Aug '08)

6,000

6,500

7,000

7,500

8,000

8,500

Jan-01

Jul-0

1

Jan-02

Jul-0

2

Jan-03

Jul-0

3

Jan-04

Jul-0

4

Jan-05

Jul-0

5

Jan-06

Jul-0

6

Jan-07

Jul-0

7

Jan-08

Jul-0

8

1,

000bpd

15%

20%

25%

30%

35%

Global Production % U.S .



27/41

27

Gas Processing Capacity

U.S. Gas Processing Capaci t y

0

10,00020,000

30,000

40,000

50,000

60,000

70,000

80,000

2007 2008 2009 2010

MMcf/d

Alaska Other Gulf Coast Ark-La-Tex Mid-Con Rockies

Source: Oil and Gas Journal 2008, Company Press Releases, Tudor, Pickering, Holt

We see only modest gas processingcapacity additions 2008-2010,increasing L-48 capacity by 7%.

However, this is in a market whereethane and other NGL demand isweak, so incremental capacitymatters.

Gas Processing Capaci t y (mmcf/d)

Existing Capacity % Added

YE'07 2008 2009 2010 ('08-'10)

Rockies 8,059 1,560 780 350 33%

Ark-La-Tex 14,396 680 565 0 9%

Mid-Con 6,198 610 120 0 12%Gulf Coast 23,294 120 0 200 1%

Other 9,342 40 20 0 1%

Alaska 9,525 0 0 0 0%

Total 70,813 3,010 1,485 550 7%

Planned/Completed Adds


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28

New NGL Pipelines

MAPL Expansion(EPD) 50,000 bpd

Overland Pass(OKS) 110,000 bpd

Arbuckle (OKS)160,000 bpd

Source: Canadian NEB, edited for changing ownership & new pipelines proposed

The U.S. NGL system has been, and willbe, further de-bottlenecked via the

completion of several key NGLpipelines.

EPDs MAPL line was completed earlier

this year and OKS Overland Pass linebegan ramping up in early October.Arbuckle (also OKS) should becompleted by Q109.

All the pipes wont be full from the

beginning. Overland Pass will somewhatcannibalize MAPL, but that simply

relieves MAPLs fully utilized facility.

All told, these pipelines have thecapacity to allow an increase in NGL

supply by 18%.

Further expansion is possible. OKS hasbeen planning to expand Overland Pass

by 145,000 bpd by 2010, but we wouldnot be surprised to see that pushed outa little. Arbuckle is expandable by50,000 bpd with additional pump

stations


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29

Changing Dynamics: Ethylene & Propylene

Currently, the U.S. has the most ethyleneand propylene processing capacity in theworld, at 22% and 27%, respectively. China

is second, with 8% of both ethylene andpropylene capacity.

Prior to the financial meltdown, there wasmounting concern that a massive amount ofplanned new international ethylene andpropylene capacity would flood the market,eventually resulting in the U.S. becoming anet importer, thus backing off demand for

domestic NGLs. The vast majority of the adds are in the

Middle East, where theyll use cheap gas tomake NGLs to feed the new petrochemicalplants.

Given the economic slowdown, we are nowassuming that only the plants currentlyunder construction will be built. In total,these add 15% to existing capacity, or3.5%/yr growth not helpful in a weakeconomy, but not the onerous 39% additionif everything was built.


Worldwide Planned Ethylene Capacity Adds, by Status

Capacity (tonnes/yr) % of Existing

Construction under way 19,110,000 15%

Engineering under way 4,170,000 3%

Planned 1,160,000 1%

Approved 4,180,000 3%

Study 22,010,000 17%

Potential Added by 2012 50,630,000 39%

Worldwide Planned Propylene Capacity Adds, by Status

Capacity (tonnes/yr) % of Existing

Construction under way 11,365,000 15%

Engineering under way 3,823,000 5%

Planned 1,010,000 1%

Approved 1,250,000 2%

Study 10,195,000 13%

Potential Added by 2 012 27,643,000 35%


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30

Changing Ethylene Dynamics by Region

Existing Global Ethylene Capacity (2008)

NAM

27.0%

Asia/Pac

30.3%

W Europe

19.6%

Middle East

13.5%

Africa

0.8% Australia

0.4%

SAM

3.9%E Europe

4.5%

Planned Ethyl ene Capaci t y Under Const ruct ion (t onnes/y r)

Existing Planned Adds Total Capacity

Region Capacity to Capacity After Adds % Increase

NAM 35,170,000 0 35,170,000 0%

Asia/Pac 39,480,000 7,545,000 47,025,000 19%

W Europe 25,560,000 100,000 25,660,000 0%Middle East 17,568,000 11,080,000 28,648,000 63%

E Europe 5,925,000 185,000 6,110,000 3%

SAM 5,055,000 200,000 5,255,000 4%

Africa 1,075,000 0 1,075,000 0%

Australia 565,000 0 565,000 0%

TOTAL 130,398,000 19,110,000 149,508,000 15%


Global Ethylene Capacity After Adds (2012)

NAM

23.5%

Asia/Pac

31.5%

W Europe

17.2%

Middle East

19.2%

E Europe

4.1%

SAM

3.5%

Australia

0.4%

Africa

0.7%


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31

Changing Propylene Dynamics by Region

Existing Propylene Capacity (2008)

NAM

29.5%

Asia/Pac

35.3%

W Europe

21.5%

Africa

0.6%Australia

0.1%

SAM

3.4%E Europe

3.8%

Middle East

5.9%

Planned Propylene Capacity Under Construction (tonnes/yr)

Existing Planned Adds Total Capacity

Region Capacity to Capacity After Adds % Increase

NAM 22,984,000 0 22,984,000 0%

Asia/Pac 27,523,000 6,965,000 34,488,000 25%

W Europe 16,747,000 0 16,747,000 0%Middle East 4,624,000 4,045,000 8,669,000 87%

E Europe 2,969,000 0 2,969,000 0%

SAM 2,640,000 355,000 2,995,000 13%

Africa 455,000 0 455,000 0%

Australia 60,000 0 60,000 0%

TOTAL 78,002,000 11,365,000 89,367,000 15%


Global Propylene Capacity After Adds (2012)

NAM

25.7%

Asia/Pac

38.6%

W Europe

18.7%

Middle East

9.7%

Africa

0.5% Australia

0.1%

SAM

3.4%E Europe

3.3%


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32

NGL Supply Outlook

There are two ways to look at NGL supply domestically and on a global basis

In the U.S., while gas production is +9% year-to-date, NGL production is up a more modest 5%.Going back to 2001, the trend has been declining

NGL production as the overall gas stream becomesdrier. We think the recent surge in NGLproduction is driven, in part, by incredible NGLprocessing economics, which incent companies tomaximize NGL extraction. More recent processingeconomics (negative-to-breakeven frac spreads)should stem the rate of NGL production growth.

On a global basis, NGL production is clearly on therise, growing at a CAGR of 5% since 2000

(excluding North America) and 3% including NorthAmerica. Going forward, most of the incrementalproduction is destined for in-country use, primarilypetrochemical, to feed new plants.

The risk to the U.S. NGL industry is over-buildingof worldwide ethylene and propylene plants,resulting in cheap exports, and a decline in theU.S. petrochemical industry. With the recenteconomic meltdown, the risk of overbuilding hasbeen greatly reduced.


U.S. Monthly Gas & NGL Production (Jan '01- Aug ' 08)

1,000

1,200

1,4001,600

1,800

2,000

2,200

2,400

2,600

2,800

Jan-01

Jul-0

1

Jan-02

Jul-0

2

Jan-03

Jul-0

3

Jan-04

Jul-0

4

Jan-05

Jul-0

5

Jan-06

Jul-0

6

Jan-07

Jul-0

7

Jan-08

Jul-0

8

NGLPr

oduction(mbpd)

45

47

4951

53

55

57

59

61

63

65GasProduction

(Bcf/d)

NGL Production Marketed Gas Production

Global & North American NGL Production (Jan '01 - Aug '08)

0

2,000

4,000

6,000

8,000

10,000

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

NGLProd

uction(mbpd)

Global (ex/NAM ) North American (NAM ) Global


33/41

33

Appendix Midstream Primer

Dry or

MarketableGas

Industrial/Heating

Fractionator

Refineries

PetrochemicalIndustry

Onshore andOffshore Wells

Midstream Overview

Raw NGLMix

Finished NGLs


InterstatePipelines

Wet GasGathering

Normal Butane

Isobutane

Ethane

Propane

Natural gasoline

ProcessingPlant

There are four primarysegments within the Midstreambusiness:

1. Gathering transports andoften compresses naturalgas and removes water andother contaminants;

2. Processing extracts NGLs,resulting in dry/marketable

natural gas and a raw NGLstream

3. Fractionation splits rawNGLs into finished product

4. Marketing stores,transports and marketsfinished NGLs


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34

Step 1: Gas Gathering

Gas gathering systems simply transports gasfrom the well-head to the processingfacilities.

Gathering lines typically operate at relativelylow pressures (just below wellhead pressure)and utilize pipe diameters of less of than12. Lower pressure systems reduce theneed to install field compression andgenerally allow for greater production.

At this stage, the gas is usually treated toremove natural gas condensates, water andother contaminants to prevent thecomponents from obstructing flow in ordestroying the integrity of the gatheringsystem. Small-scale gas-oil separators,condensate separators, and dehydration units

are typical treating equipment.

Gathering System

ProcessingPlant

Source: Williams Companies and Tudor, Pickering, Holt


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35

Step 2: Plant Processing

Plant processing takes wet gas from the fieldand removes the heavier, more liquidcomponents (NGLs) and other contaminants(water, hydrogen sulfide, etc) to create

marketable gas also known as dry orpipeline quality gas.

For safety and integrity reasons, pipelinesimpose restrictions on the composition of gasallowed to enter the line. Gas composition ismeasured in terms of dew point (the

temperature at which vaporized liquid willcondense at pipeline pressure) and the heat, orBTU content of the gas. A higher BTU contentmeans more liquids in the stream.

Processing economics depend, in part, on theprice of the liquids removed vs. their equivalent

BTU content if left in the original gas. Thedifference between the price of the liquidsremoved vs. their value in gaseous form iscalled a frac spread.

Marketable Gas toInterstate Pipelines

Processing PlantRaw NGL Pipeline

Wet Gas(Wellhead

gas)

(Typical NGL Mix)

Ethane (40-45%)

Propane (25-30%)

Normal Butane (5-10%)

Natural Gasoline (10-15%)


Isobutane (10%)


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36

Step 3: Fractionation

Fractionator

NGLPipeline

ProductsPipelines

Storage

Raw NGLBarrel

Fractionation

Ethane

Propane

NormalButane

NaturalGasoline

Source: Tudor, Pickering, Holt

Fractionation is the process ofturning the raw NGL stream intomarketable products.

One-by-one, the hydrocarbons areboiled off, moving lightest (ethane)to heaviest (natural gasolines).

Fractionators are much larger scalethan gas processing plants, handlingthe output from multiple processing

plants. They are usually locatedclose to the petrochemical end-users.

Raw NGL pipelines transport NGLsfrom processing plants tofractionators. Finished NGLs

pipelines transport the product tomarket.

Isobutane

40-45%

25-30%

10%

5-10%

10-15%


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37

Step 4: Marketing

Storage

Industrial & OtherEnd-Users

Fractionator

Refinery

Chemical Plant


NGL marketers match up sellers (E&P andMidstream companies) with buyers petrochemicals, industrials, farmers, propanecompanies, etc.

Services include NGL transportation, storageand risk management services.

NGL marketing is primarily a physical business,with limited liquidity on financial hedging ofindividual NGL components much beyond 6-12months. Beware companies with dirtyhedges NYMEX crude as proxy for regional

NGLs.


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38

Gas Processing: Three Major Contract Structures

Keepwhole (KH)

St ructure: Processorcompensates (keeps whole)the producer for the amount ofgas removed from theprocessing stream. Processorgets paid in NGLs, but

compensates producer basedon gas prices.

Commodit y Exposure: LongNGLs, short gas. So twosources of exposure relativegas/NGL prices and absoluteNGL prices.

Volati l i ty: High. Frac spreads

can and do move wildly andseasonally. Becausemidstream assets are heldmore by MLPs who do not likethat exposure, the trend hasbeen to negotiate away fromkeep whole contracts and toinsert, conditioning language,which provides minimum feesif fracs go negative.

Percent of Proceeds (POP)

St ructure: Processor is paid byretaining a percent of theoutlet stream, either NGLs,gas or a combination.

Commodit y Exposure: Long

liquids and/or natural gas,depending on contractstructure.

Volati l i ty: Moderate. Highercommodity prices = higher POPproceeds.

Fee-Based

St ruct ure: Fixed fee, eithervolumetric or a demandpayment.

Commodit y Exposure: None.

Volati l i ty: If volumetricpayment, only volatility isthroughput based.

Keepwhole Margin =

NGLs Removed (MMBtu) x FracSpread ($/MMBtu)

Percent of Proceeds Margin =

[NGLs Removed (MMBtu) xNGL Price ($/MMBtu) x % ofNGLs Retained] +[Gas Remaining (MMBtu) xGas Price ($/MMBtu) x % of GasRetained]

Fee Margin =Inlet Gas (MMBtu) x ProcessingFee ($/MMBtu)


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39

Frac Spread Sum of the Parts is Worth More Than the Whole

Composite

($/gal)

NGL Price($/gal)

WeightedAverage

ConversionFactor

(MMBtu/Gal)

AssumedMix

F $0.998E 0.0843Total NGL

$0.182$1.8150.01180.117810%Natural

Gasoline

$0.148$1.4750.00520.103710%Normal

butane

$0.074$1.4800.01000.09975%Iso butane

$0.374$1.2480.02750.091630%Propane

$0.221$0.4900.02990.066445%Ethane

=[D*A]DC

=[A*B]

BA

$11.84 Gas Price = Frac Spread Step 3: Subtract natural gas price from composite NGL price:

Step 4: Adjust spread for transportation, operating costs, and plant processing fuel.

$11.84 Step 2: Divide F by E to get composite NGL price ($/mmbtu):

Step 1: Calculate the NGL value ($/MMBtu). Multiply component prices bythe heat content and composition of the gas. Frac spread is the difference

between the value of theprocessed NGLs and the value ofthe equivalent btus of gas inputinto the processing plant.

Frac spreads are negatively

correlated with gas prices (gasgoes up, fracs go down) andpositively correlated with NGLprices (NGLs go up, fracs go up).

Frac spreads are volatile andusually seasonal narrowing withhigher gas prices during thewinter.

Source: Targa Resources and Tudor, Pickering, Holt


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40

Appendix Midstream Terminology

Conditioning mode Processing mode when NGL economics are unfavorable whereby the processor removesonly the minimal amount of NGLs, saving on fuel and other operating expenses. Most keep whole contractsnow contain conditioning language in the event frac spreads go negative.

Ethane rejection mode Process of keeping ethane in the gas stream (rejecting it from processing) becauseeconomics dictate the btus will receive a higher price for gas than liquids.

Fee Based Midstream contract gathering, processing, fractionation, etc. where services are conducted ona fee/unit basis.

Frac spread - Value of natural gas liquids after they are processed out of natural gas, in excess of the price ofthe gas itself (i.e. gross margin on NGLs).

Fractionation process of splitting the raw NGLs into marketable products.

Keepwhole Contract type whereby processor keeps 100% of the liquids and keeps the producer whole bycompensating them for the btus on a gas-equivalent basis.

Naphtha - a distillation product from petroleum or coal tar containing certain hydrocarbons. Naphtha is usedprimarily as feedstock for producing a high octane gasoline component (via catalytic reforming). It is also usedin the petrochemical industry to produce olefins in steam crackers and in the chemical industry for solvent(cleaning) applications.

Natural gas condensate Output of the processing of wellhead gas.

NGLs (Natural Gas Liquids) Portions of natural gas that are liquefied via gas processing. They include ethane,

propane, butane, and natural gasoline. NGL shrink Reduction in gas available for sale as a result of removing NGLs from the gas stream.

Percent of proceeds Processing contract where processor receives a percent of the outlet stream eithergas, NGLs, or a combination.


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41

Analyst Certification:

We, Becca Followill, Dave Pursell and Anson Williams, do hereby certify that, to the best of our knowledge, the views and opinions inthis research report accurately reflect our personal views about the company and its securities. We have not nor will we receive director indirect compensation in return for expressing specific recommendations or viewpoints in this report.

________________________________________________________________________________________________________

Important Disclosures:

The following analysts were involved in creating or supervising the content of this message; Becca Followill, Dave Pursell, and AnsonWilliams. None of these analysts (or members of their household) have a long or short position in the securities mentioned in thisreport.

Analysts compensation is not based on investment banking revenue and the analysts are not compensated by the subject companies.In the past 12 months, Tudor, Pickering, Holt & Co. Securities, Inc. has received investment banking or other revenue from EquitableResources and Questar. In the next three months we intend to seek compensation for investment banking services from the companiesmentioned within this report.

This communication is based on information which Tudor, Pickering, Holt & Co. Securities, Inc. believes is reliable. However, Tudor,Pickering, Holt & Co. Securities, Inc. does not represent or warrant its accuracy. The viewpoints and opinions expressed in thiscommunication represent the views of Tudor, Pickering, Holt & Co. Securities, Inc. as of the date of this report. These viewpoints andopinions may be subject to change without notice and Tudor, Pickering, Holt & Co. Securities, Inc. will not be responsible for anyconsequences associated with reliance on any statement or opinion contained in this communication. This communication isconfidential and may not be reproduced in whole or in part without prior written permission from Tudor, Pickering, Holt & Co.Securities, Inc.

For detailed rating information, distribution of ratings, price charts and other important disclosures, please visit our website

at http://www.tudorpickering.com/Disclosure/ or request a written copy of the disclosures by calling 713-333-2960.

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