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BP & Interstate Municipal Gas AgencyNatural Gas Market Overview and Risk Management DiscussionApril 30th, 2008

              

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Market

Overview

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Market Overview• Near term supply outlook from traditional Canadian sources

– Higher valued crude oil- NG staying home for syn-crude production

• US Rockies and non-conventional supply availability set to grow – Significant supply growth in near term possible if pipeline capacity in place 1bcf/day

to Mid-Continent 1.8/day to East Ohio in early 2009– Tight sands/coal bed methane

• LNG import capabilities growing, but must compete in global market– US market currently trading at a significant discount to Europe– Asian demand competing with Europe

• Independence Hub shut-in currently 28bcf, expected to reach 40bcf

• Economic conditions, both in the U.S. and Global demand, has driven money into commodities across the board

– Demand destruction will be sector specific

• Storage level slightly below 5 yr avg 1.25 tcf, total storage capacity closer to 4 tcf now versus traditional 5 yr ago 3.5 tcf

• Drilling can shift more to oil vs. gas if oil price remains at a premium to nat gas

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Market Overview Continued

• Longer term supply outlook from traditional Canadian sources– McKenzie Delta Gas– Alaska delayed again (BP/ConocoPhillips forge ahead with Denali)

• Carbon Tax- Uncertainty around the use of coal in power generation – Longer term projects are turning to coal, due to uncertainty around

tax and emission requirements associated with coal

• LNG liquefaction capabilities growing, projects continue to be announced but delays– Questions around longer term geo-political stability surrounding

LNG as a supply source

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The Weak US$ Effect on Commodity Prices

• The US$ is trading at a greater and greater discount to other world currencies, (vs.Euro shown)

• As US currency weakens, commodities offer a hedge opportunity

• RH graph shows Euro/US$ exchange rate vs. CRB commodities index in gold

• Some effects of the weak US$

– Investment $$ move to commodities as hedge to currency risk

– OPEC’s income is reduced, compelling to keep production low and increase price

– Higher oil prices worsen US current account deficit, putting more downward pressure on dollar

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0

200

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1,200

1,400

1,600

Jan

-95

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-99

Jan

-00

Jan

-01

Jan

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Jan

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Jan

-07

0.0

10.0

20.0

30.0

40.0

50.0

60.0

Marketable Gas Production

Gas Rig Activity

HH

Rigs vs. Henry Hub vs. Production

RigsBcfd &

$US/MMbtu

August and September 2007 Forecasts from EIA STEO Sources: Baker Hughes, EIA

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Canadian Supply: Rigs

In Canada:

• Service costs out of line with commodity price

• Costs up 50% - 200%

• E & P companies scale back 2007 gas drilling plans

• Budgets diverted to higher return crude projects

• Slowdown for service companies

0

100

200

300

400

500

600

9/29/06 12/29/06 3/30/07 6/29/07 9/28/07

Active R

igs

Gas Rig Count

Previous Year

Source: Baker Hughes

Canadian Gas Rig Count as of 10/05/07: 198

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Competing Fuel Prices

Competing Fuels Prices

2

7

12

17

22

J an-04 J ul-04 J an-05 J ul-05 J an-06 J ul-06 J an-07 J ul-07 J an-08 J ul-08 J an-09 J ul-09

US

$/M

MB

tu

HHHO No.2 FO #6 LS: NY FO #6 HS: Gulf Cushing WTI

Forward Historical

Source: NYMEX/BP EVO MAR 6, 2008 Note: Historicals are monthly settle prices

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U.S. LNG Imports by Terminal

Source: DOE, Office of Fossil Energy

Everett

Cove Point

Elba Island

Lake Charles

Energy BridgeNymex currently trading at a significant discount to European gas

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Risk Management

Discussion

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What is Risk Management

Risk Management is Trading Uncertainty for Certainty

Risk Management

Prices in a Defined Range

Unknown Known

Strictly Confidential – for BP client use only

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Risk Management with a Strategic Vision

- Price risk management is best applied:- Consistently- Under guidelines of a corporate mandate- With knowledge of the underlying market

BP has the ability to equip you with the knowledge and

information you need to formulate a long-term strategic

risk management program, and the customized financial

products you need to execute such a program.

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A Framework for Energy Risk Mgt.

CompanyObjectives:• Budgets• Cash Flow• Returns• Prudence• Volatility• Competitive

Advantage

Assess CorporateRisk Profile, Develop Policy

Develop Strategy

Create Benchmarks

AndReview

QuantifyRisk

DevelopMarketOutlook

• Risks include

• Price

• Credit

• Operational

• Interest Rate

• FX

• Regulatory

• Assess market factors

• Supply

• Demand

• Liquidity

• Other Market Factors

Things to

Consider

• Product Types

• Volume

• Term

• Liquidity

• Flexibility

• Internal Control

• Contracts

• Define:

• Acceptable Benchmarks

• Assessment

• Criteria

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Hedging Example- 3 Year Rolling Purchase Plan

%of Hedge Volumes Hedged

Cal 2009

Cal 2010

Cal 2011

Cal 2012

Cal 2013

By End of Month:          

Dec-2008 100% 50% 25% 0%  

         

Dec-2009   100% 50% 25% 0%

         

Dec-2010     100% 50% 25%

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1/3/1/3 – 2/3 Portfolio Approach to Hedging

Gas Requirements

1/3Fixed Price

1/3 Options

1/3 Index

In a Falling MarketFixed Price = loserOptions = winnerIndex = winner

In a Rising MarketFixed Price = winnerOptions = winnerIndex = loser

*At all times you have 67% of the expected hedge volumes mitigated to the market, while 67% is participating in a falling market.

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Financial Risk

Management Discussion

Confidential Information 17

Strictly Confidential – for BP client use only

energy risk energy risk

2008 2007#1 Natural Gas Dealer #2 Natural Gas Dealer

Top 3 Rankings in 9 of 10 North America categories

Top 3 Rankings in 6 of 10 North America categories

energy risk energy risk

2006 2005#1 Natural Gas Dealer #2 Natural Gas Dealer

Top 3 Rankings in 6 of 10North America categories

Top 3 Rankings in 11 of 18 North America categories

Leading Energy Risk Management Provider

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Price and Volatility can guide decisions as to which hedge product to apply.

Strategy assumes an ongoing price risk management program and a market that has a mean-reverting nature:

Hedge Product Decision MatrixIn

crea

sing

Pri

ce

Increasing Volatility

BUY SWAPS BUY COLLARS

BUY BASIS

BUY SWAPS or ENHANCED COLLARSBUY CAPS

BALANCE PORTFOLIO: Execute underweighted Floor, Swap or Collar

Confidential Information 19

Strictly Confidential – for BP client use only

Winter (Nov8-Mar9) Structure Examples- Nymex*

NYMEX Swap Price Strike Price/Premium

Costless Collar $11.85 $10.85Put /$14.00Call $0.00

Participating Swap 50% $11.85 $13.30 $0.00

3-Way Collar $11.85$9.50Put/

$11.85Call/$14.25Call $0.00

3-Way Collar-Leveraged $11.85Sell 2x$8.75 Put/ Buy 1x

$11.40Call/Sell 1x $14.00Call $0.00

ATM Call Spread $11.85 $11.85Call /$13.40Call $0.50

Call Spread-$.50 of retention $11.85 $12.35Call /$14.25 Call $0.50

NYMEX Minus w/$8.50 floor $11.85$8.50 Floor no upside

protection NYMEX-$.35

Natural Gas Structured Products

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Consumer Costless Collar- Nymex Nov08-Mar09

Strictly Confidential – for BP client use only

Description

End user limits their upside price exposure

Commonly structured as value neutral

DetailsBuy Cap / Sell FloorCurrent Market 11.85

End user chooses a range: opportunity given on the downside is used to fund the cost of the upside price protection

Scenarios

If market price is above $14.00, end user pays $14.00 If market price is between $10.85 and $14.00, end user pays marketIf market price is below $10.85, end user pays $10.85

Price

Market Price Your Price Cap Floor

$10.85 Floor

$14.00 Cap

Current Swap 11.85/MMBtu

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50% Participating Swap- Nov08-Mar09

Trade Ideas Strictly Confidential – for BP client use only

DescriptionProvides price protection from rising prices while offering flexibility to participate in downside movements

DetailsMaximum cost of gas known todayCostless structure Ability to participate if market fundamentals changeOnly receive 50% of downward market moveCan set % of participation

ScenariosIf market price is above $13.30, end user price is $13.30If market price falls or stays below $13.85, 50% of volume is priced at $13.30 and remaining 50% priced at market

Market Price

Your Price

$13.30/MMBtu

Time

50% volume

50% volumeP

rice

Current Swap $11.85/MMBtu

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Consumer Three-Way Collar- Nov08-

Mar09

Trade Ideas Strictly Confidential – for BP client use only

Description

End user limits their upside price exposure below a Costless Collar

End user participates in a range of downward price movements.

End user gives up protection in well above-market prices to gain a lower initial upside price protection

Structured as value neutral.

DetailsSell Cap 1/ Buy Cap 2 / Sell Floor

Current Swap is $11.85

End user receives additional premium for selling a call which creates better initial range economics vs the costless collar

Scenarios

If market price is above $14.25, end user price is market price minus $2.40If market price is between $11.85 and $14.25 end user pays $11.85If market price is between $9.50 and $11.85, end user pays market priceIf market price is below $9.50, end user pays $9.50

Price

Market Price Your Price Cap 1 Cap 2 Floor 1

$ 14.25

$ 11.85

$9.50

Sell Cap 1

Buy Cap 2

Sell Floor

Current Swap $11.85/MMBtu

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Leveraged- Consumer Three-Way Collar- Nov08-Mar09

Trade Ideas Strictly Confidential – for BP client use only

Description

End user limits their upside price exposure below a Costless Collar

End user participates in a range of downward price movements.

End user gives up protection in well above-market prices to gain a lower initial upside price protection

Structured as value neutral.

DetailsSell 1x Cap 1/ Buy 1x Cap 2 / Sell 2x Floor

Current Swap is $11.85

End user receives additional premium for selling a call which creates better initial range economics vs the costless collar

Scenarios

If market price is above $14.00, end user price is market price minus $2.60If market price is between $11.40 and $14.00 end user pays $11.40If market price is between $8.75 and $11.40, end user pays market priceIf market price is below $8.75, end user pays $8.75 on two times the volume

Price

Market Price Your Price Cap 1 Cap 2 Floor 1

$ 14.00

$ 11.40

$8.75

Sell Cap 1

Buy Cap 2

Sell Floor

Current Swap $11.85/MMBtu

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At-the-Money Call Spread Nov08-Mar09

Objective

End user limits their upside price exposure with protection starting at lower call strike

End user participates in all downward price movements.

End user gives up protection in well above-market prices to gain a lower initial upside price protection

End user Collar Mechanics:Sell Cap 1/ Buy Cap 2

End user pays $.50 for coverage between $11.85 and $13.40

Trade Ideas

ScenariosIf market price is above $13.40, end user price is market price minus $1.55If market price is between $11.85 and $13.40 end user pays $11.85If market price is below $11.85, end user pays market price

Strictly Confidential – for BP client use only

price

Market Call 1 StrikeCall 2 Strike Consumer Price

Current swap $11.00

$13.40

$11.85

Sell cap 1

Buy cap 2

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Call Spread w/$.50 of Retention Nov08-Mar09

Objective

End user limits their upside price exposure with protection starting at lower call strike

End user participates in all downward price movements.

End user gives up protection in well above-market prices to gain a lower initial upside price protection

End user Collar Mechanics:Sell Cap 1/ Buy Cap 2

End user pays $.50 for coverage between $12.35 and $14.25

Trade Ideas

ScenariosIf market price is above $14.25, end user price is market price minus $1.90If market price is between $12.35 and $14.25 end user pays $12.35If market price is below $12.35, end user pays market price

Strictly Confidential – for BP client use only

price

Market Call 1 StrikeCall 2 Strike Consumer Price

Sell cap 1

Buy cap 2

$14.25

$12.35

Current swap $11.85

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• Swap

• Basis Swap

• Index Swap

• Swing Swap

• Participating Swap

• European Call

• European Put

• Asian Call

• Asian Put

• Collar

• Bounded Swap Collar

• Range Forwards

• Participating Collar

• Three Way

• Double Down

• Extendable

• Index w/Floor

• Heat Rate Swaps & Options

•Straddles

• Tiered Volume Restructure

• Weather Contingent GD Option

• Time Spread

• Binary Options

• Call Swaption

• Put Swaption

• Deferred Premium Structures

Transactions immediately executable from the Financial Products Desk:

Transactions are easily tailored for client needs: Varied volumes by period; Varied Strikes for month; Settlement adjustments; etc…

All structures are priced NPV per appropriate discounting per counterparty credit status

Risk Management Structures Delivered