1	The U.S. Midstream Sector: “Meeting the Challenges in Turbulent Times”
2	The Midstream Sector is no stranger to challenges as demonstrated by past themes of Annual GPA Conferences 1983 - “Challenging New Horizons” 1993 - “Succeeding in a “World of Challenges” 1998 - “Creating Value in a Challenging World” 2003 - “Extracting Opportunities in Turbulent Times”
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4	Topics to be Covered Define the Midstream Sector Look at its History & Past Challenges Examine its Current Make-up Identify the Major Issues & Challenges Discuss the Ability of Midstream Players to deal with these Issues & Challenges Ponder the Sector’s Future & Its Leadership
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6	Typically Midstream Assets are considered deregulated assets, such as: Gas Gathering & Processing Gas Pipelines (Primarily Intrastate) Product Pipelines Fractionation Gas & Product Storage Inland Product Terminals Import/Export Facilities
7	The NGL Midstream Sector is where the E&P, Gas, Petrochemical and Refining Industries Meet
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9	History and Past Challenges
10	Early history of the Midstream Sector Majors built midstream assets to bring equity production to market and to supply their refineries & petrochemical operations. Interstate Pipelines expanded into gathering & processing to grow their rate base and secure supplies “Old Line” Chemical Companies built NGL gathering lines, gas pipelines, fractionators and storage facilities to secure their fuel and feedstock supplies.
11	Early Participants had Strong Upstream Drivers, Downstream Drivers or both Midstream assets had an utility function and did not necessarily operate as a profit center. Seldom were these midstream assets set up to serve third parties. Unwillingness to rationalize capacity or sell marginal assets
12	Independent Midstream Players became prominent in the ’80’s. Such players were: Delhi, Enterprise, HPL, MAPCO, Mitchell, Tejas, and Valero. Oriented in major producing basins and/or in major market centers. Operated in a fairly deregulated environment. Mostly dependent on the wholesale markets. Operated for profit, serving third parties.
13	The excesses of the 80’s led to rationalization & consolidation in the early 90’s Some E&P companies sold their midstream assets as their equity production declined and/or their focus was redirected internationally M&A activity among independent midstream players began to occur.
14	In the mid to late 1990’s, a 2nd flurry of M&A activities engulfed the Midstream Sector Independents buying the midstream assets of the Majors. Tejas buying Exxon’s intrastate gas pipelines, Transok and Amoco Gas NGC buying Warren and Trident One exception: Shell buying Tejas Diversified Energy Companies adding to their midstream positions. Williams buying MAPCO El Paso buying Tenneco (Oasis, Channel), Cornerstone, Tejas Power PanEnergy buying Mobil midstream and Associated Natural Gas Regulated Utilities acquiring midstream PG&E buying Valero Natural Gas Duke Power buying PanEnergy and UPR midstream Pacificorp buying Tejas Power (storage) Utilicorp buying Aquila Gas/Oasis
15	Back then, the common motivators for Midstream transactions were to: Acquire non-regulated assets to achieve greater rates of returns and margins Enhance or provide scope & scale in a supply and/or market regions Create synergies through integration with upstream or downstream operations Broaden customer diversity Secure more products and services Create a “platform” for marketing and trading
16	However, many acquirers failed to recognize the risks...... Being non-regulated, midstream entities can be susceptible to host of business risks: Many midstream assets were bought at EBITDA multiples of 10 x or more. Implied a ROI in the single digits Particularly sensitive to profit downturns.
17	.....or knew how to succeed
18	By 2000, some Acquirers had had enough with Midstream PG&E dumps Valero Natural Gas TransCanada jettisons their Louisiana assets Shell sells Tejas Gas Pipeline LG&E dumps Hadson Pacificorp sells Tejas Power Koch sells Delhi
19	Recently, a new wave of Midstream transactions and turnovers is being driven by: The implosion of the Energy Merchants and Utilities -And- Master Limited Partnerships Acquiring midstream assets from their corporate parents, if they have one; or, Acquiring from Energy Merchants seeking to strengthen their balance sheets
20	Current Top Players Along the NGL Value Chain (ranked according to operating position)
21	Current Realities, Issues & Challenges
22	Current Realities & Issues
23	“Frac Spread” is highly volatile due to the fluctuations in crude & natural gas prices
24	Fundamental Shift is occurring in North American Gas Markets
25	On the Supply Side...A structural change could be underway: Lower 48 basins are maturing with the exception of deep water GOM and the Rockies. Drilling needs to accelerate to offset natural declines from conventional sources. Majors focusing on international prospects, unconventional plays & deep water GOM. Many producers less optimistic about accessing new & additional U.S. sources. Many producers limited by leveraged balance sheets.
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27	The Midstream Sector is growing increasingly dependent on the U.S. Petrochemical Industry
28	A high priced gas environment could force the Ethylene Industry to minimize ethane cracking.
29	Petrochemical Consolidation
30	"1." 1. DEFS* ---------------- 2. BP --------------------- 3. El Paso --------------- 4. Williams -------------- 5. ExxonMobil ---------- 6. Enterprise ------------ 7. ONEOK --------------- 8. ConocoPhillips** ---- 9. Devon ----------------- 10. Dynegy --------------- Total Prod. ----------- % of US NGLs - Top 5 % of US NGLs - Top 10 1. GPM (Phillips) ------- 2. Exxon ------------------ 3. Amoco ----------------- 4. Texaco ---------------- 5. Dynegy ---------------- 6. UPR -------------------- 7. Valero ------------------ 8. Conoco ---------------- 9. Arco -------------------- 10. Shell -------------------- Total Prod. - - - - - - - % of US NGLs - Top 5 % of US NGLs - Top 10
31	Despite past consolidations and plant closures the avg. utilization rate of U.S. gas processors remains at around 70%.
32	The convergence of a number of issues is challenging the Midstream Sector to:
33	For Gas Processors, managing price & margin volatility is a major challenge:
34	The Direction of the Midstream Sector
35	Although there are challenges, opportunities will continue to exist: Gas will continue to be the clean fuel of choice N. American gas reserves can support demand growth with LNG bridging supply/demand gaps 80% of gas produced will need processing or conditioning The U.S. Petrochemical and Refining Industries will remain the largest in the world
36	But, the Midstream Sector needs to continue to evolve to become: ….. more efficient, ………...more focused, and …………………….. more nimble to tackle the challenges and extract the opportunities.
37	How will the Midstream Sector accomplish this task ? Are the risks so great that Midstream assets revert back to being functions controlled by the integrated Majors or large E&P companies? - or - Can there be profitable independent midstream players providing value added services to upstream & downstream customers?
38	It all depends on the actions & abilities of the current players: Smaller, niche players Filling regional gaps created by the exit of larger players Energy Merchants Repairing balance sheets in many cases In some cases, selling midstream assets; or, Completing transfer of assets to their MLP Majors Focusing on E&P: offshore and international Holding pattern with regards to their midstream assets Large Independents (MLPs, JVs) A few are actively growing their midstream business Enterprise, TEPPCO, DEFS (Have alliances with “Customers”) However, most MLPs are risk adverse & avoiding processing
39	The Midstream Sector needs and can support a small number of integrated players across the NGL value chain Presently there are opportunities to link together complementary midstream assets that are in a “holding pattern” But it takes vision, desire, capital, and the right approach to profitably grow a midstream business In time, solutions will be found to deal with the major issues ....... Alliances or Ventures with “customers” may play a key role
40	The key is linking & leveraging the right assets to manage risks and maximize value...You can’t have a collection of individual assets
41	....with factors for success still depending on having: The Vision & Desire to grow the business Strong linkages to one or more major producing region Access to efficient logistic systems to major market centers and customers Low cost operations Selective acquisitions that are synergistic Customer orientation with alliances or JVs Integration to minimize business risks Ability to leverage through incrementality
42	In Conclusion Midstream Sector at another inflection point in its history Another round of rationalization & consolidation is needed Companies with Midstream assets will be challenged to decide whether they have the vision & desire to capture the opportunities Companies that can effectively network the right assets together will be successful