Alaskan LNG Exports Competitiveness Study by Wood Mackenzie

www.woodmac.comAlaskan LNG Exports Competitiveness StudyAlaska Gasline Port Authority (AGPA)Final ReportJuly 27, 2011 Strategy with substance

www.woodmac.comBackground As part of its interest in promoting a large volume pipeline from the North Slope to a 2.7 bcfd liquefaction facility in Valdez (and a lateral to serve south central Alaskan demand), AGPA has contracted Wood Mackenzie to evaluate the economic competitiveness of Alaskan LNG exports relative to other proposed liquefactions projects at various stages of development. With oil prices hovering today around $100 per barrel, and expected to remain at or around that level for an extended period of time, the Alaskan LNG export opportunity appears today to make economic sense. Typical Asian oil-indexed LNG pricing delivers product to regasification terminals at over $15 per mmBtu. On the other hand, Lower-48 and Canadian natural gas, if exported as LNG, could potentially be delivered to Asia at or around a cost of $10 per mmBtu, subject to various assumptions and costs. The purpose of this report is to help AGPA to develop an informed perspective as to the overall economic attractiveness of the proposed Valdez LNG export facility. Please note all future values throughout this study are given in nominal terms. © Wood Mackenzie 2 Strategy with substance

www.woodmac.comAgenda 1 Executive Summary 2 Setting the Context: Asian LNG Markets 3 Alaska LNG Export Competitiveness Appendix – LNG Pricing Details © Wood Mackenzie 3 Strategy with substance

www.woodmac.comAgenda 1 Executive Summary 2 Setting the Context: Asian LNG Markets 3 Alaska LNG Export Competitiveness Appendix – North American Gas Fundamentals & LNG Pricing Details © Wood Mackenzie 4 Strategy with substance

www.woodmac.comFrom an economic perspective, Alaskan LNG exports are competitive, viable acrossscenarios, and could generate between $220 and $419 billion for Alaska* The numbers generally “work” for Alaskan LNG Alaskan LNG exports have a delivered cost structure below $10/MMBtu. exports when the global oil price is north of Given a range of infrastructure cost scenarios, oil prices projected $75/bbl oil and Asian firm contract pricing utilizing Woodmac’s April 2011 NAGS price outlook or the NYMEX reflects a 13%(+) oil indexation** (indexation for forward strip, and LNG - oil indexation pricing to Asia of 13 – 16%, firm contracts today is approximately 14.85%) Alaskan LNG could be priced DES between $18.00 - $46.00/MMBtu through 2050. Proposed Alaskan LNG exports have a Alaskan LNG would use assets that are producing gas for re-injection substantial cost advantage relative to possible (essentially limited to gathering, transport and processing costs) competing LNG supply projects Most competing Australian projects and proposed NA LNG exports yet to secure Final Investment Decision (FID) are expected to deliver LNG to Asia at costs of $10 - $12/MMBtu under current gas price assumptions Assuming start-up in 2021 and a project life of Royalties (12.5%) and state taxes (starting at 25% post-royalties) could 30 years, royalties (12.5%) and state taxes yield $2.4 to $24 billion per year. (starting at 25% post-royalties) could yield a total of between $220 and $419 billion* While we do not address them, there are a Economics are important, but commercial issues such as the scale of number of commercial challenges associated value chain requirements (pipes, storage, etc.), buyer risk tolerance, with all liquefaction projects financing arrangements, etc. are critical Taking all into account – basis, shipping, capital requirements – Alaska LNG export facilities can deliver LNG to Asia less Taking all into account – basis, shipping, capital requirements – Alaska LNG export facilities can deliver LNG to Asia less expensively than US Lower 48 or Canada and competitively vis-à-vis traditional Australian LNG sources expensively than US Lower 48 or Canada and competitively vis-à-vis traditional Australian LNG sources *Total undiscounted taxes and royalties values utilize nominal figures (2.4% inflation), 14.85% indexation, and avg. recourse © Wood Mackenzie 5 rate of $4.18. Assuming a nominal discount rate of 5%, the NPV of taxes and royalties is between $65 and 124 billion. Strategy with substance **Oil indexation price example: With an oil price of $100/bbl, “oil indexation” of 14.85% yields a gas price of $14.85/MMBtu

www.woodmac.comAgenda 1 Executive Summary 2 Setting the Context: Asian LNG Markets 3 Alaska LNG Export Competitiveness Appendix – LNG Pricing Details © Wood Mackenzie 6 Strategy with substance

www.woodmac.comChina is a key driver of Pacific LNG demand growth, but traditional JKT(Japan, Korea, Taiwan) markets still account for most uncontracted demand Pacific/ME LNG Demand Uncontracted Demand, Selected Countries 35 13 30 11 25 9 20 7 bcfdbcfd 15 5 10 3 5 1 0 2008 2010 2012 2014 2016 2018 2020 -1 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Japan South Korea Taiwan India China Mexico West Chile Kuwait Japan South Korea Dubai Thailand Taiwan India Other Post-Fukushima Demand China Post-Fukushima Demand Source: Wood Mackenzie LNG Tool, Feb’11, Global Gas Service H1 ‘11 © Wood Mackenzie 7 Strategy with substance

www.woodmac.comThe Pacific Basin market is short of proximate LNG and a number of projectswill compete for long-term supply requirements (including Alaska LNG) Pacific/ME Basin LNG supply vs demand 40 Buyer options for filling in the gap: 35 • Qatari ‘diversion volumes’ • Atlantic Basin/Other ME 30 ‘portfolio’ suppliers • Pre-FID projects 25 bcfd 20 15 Canada LNG Export potential 10 US LNG Export 5 potential 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Contracted LNG to Pacific Market Uncontracted Supply* (Existing & Under Construction) Uncontracted Pacific Supply (Pre-FID Potential) Demand Demand Post-Fukushima*Includes uncontracted supply from Pacific Basin and Middle East supply projects, but excluding ‘flexible’ Qatari volumes that are ‘allocated’ to the Atlantic Basin Source: Wood Mackenzie LNG Tool, Feb’11, Global Gas Service H1 ‘11 © Wood Mackenzie 8 Strategy with substance

www.woodmac.comThere is insufficient Atlantic portfolio LNG to bridge the gap and the market istighter than it appears (since Fukushima) supporting current LNG prices Pacific Basin uncontracted LNG supply vs demand, including portfolio supplies 20 1. Demand is trending upwards 1. Demand is trending upwards 18 2. New supply is drifting out in time 2. New supply is drifting out in time 3. Operational uncertainty could 3. Operational uncertainty could 16 tighten the market further tighten the market further 14 12 1 bcfd 10 2 8 6 3 4 2 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Existing Uncontracted Supply* Under Construction Portfolio Players Flexible LNG Availability Pre-FID Pacific Potential Uncontracted Demand Uncontracted Demand (Japan Sensitivity)*Includes uncontracted supply from Pacific Basin and Middle East supply projects, but excluding ‘flexible’ Qatari volumes that are ‘allocated’ to the Atlantic Basin Source: Wood Mackenzie LNG Tool, Feb’11, Global Gas Service H1 ‘11 © Wood Mackenzie 9 Strategy with substance

www.woodmac.comAgenda 1 Executive Summary 2 Setting the Context: Asian LNG Markets 3 Alaska LNG Export Competitiveness Appendix –LNG Pricing Details © Wood Mackenzie 10 Strategy with substance

www.woodmac.comAustralia will help fill the Pacific supply gap with over 7 bcfd of capacity on-stream or currently under construction… km 0 250 500 1,000 9 Ichthys DARWIN Prelude 8 Browse 7 Pluto (under cons.) NORTH W EST Arrow LNG Australian PacificIchthys LNG SHELF Northern Gladstone LNG Gorgon (under cons.) Territory Arrow LNG 6 Queensland Gladstone Wheatstone GLNG (under cons.) Scarborough QCLNG (under cons.) LNG 5 Browse bcfd AUSTRALIA Gorgon Exp. Western Australia 4 Pluto Wheatstone Brisbane Exp. Gorgon South Australia 3 Greater QCLNG Sunrise Perth New South Wales 2 Bonaparte GLNG NWS Sydney Darwin Exp. Prelude* AP LNG Pluto Exp. 1 Darwin Adelaide CANBERRA Scarborough Victoria Melbourne 0 Onstream Under Cons. Probable (FID within Proposed 12 Tasmania months) * Prelude took FID in mid MaySource: Wood Mackenzie. As of May 2011. © Wood Mackenzie 11 Strategy with substance

www.woodmac.com…and continues to dominate the global outlook for new LNG supply dueto its large gas resource base and attractive investment climate ‘Potential’ LNG supply*: Australia and the rest of the world 45 Stable Co Regime Reliable 40 sts LNG 35 30 supplier 64% 25 Domesticbcfd Upstream Gas 20 Resource Quality 15 Demand 10 er 36% P artn 5 LNG ent Geopolitics 0 Ali gnm Price 1 3 5 7 9 1 3 5 1 1 1 1 1 2 2 2 20 20 20 20 20 20 20 20 Australia Rest of the world*Includes under construction, probable and proposed LNG capacity globally Source: Wood Mackenzie LNG Tool © Wood Mackenzie 12 Strategy with substance

www.woodmac.comBut rising costs are putting pressure on Australian project economics…Which sponsors are best placed to mitigate against cost over-runs and delays? Australian oil and gas upstream and DES cost stacks for Australian LNG projects liquefaction capital expenditure (base Capex)* 40 14.00 35 12.00 FID in 2010/11 10.00 2010 US$/mmbtu 30 2010 US$bn 8.00 25 6.00 20 4.00 15 2.00 10 - 5 G e s G Ic n o G e se hy on ud go ut LN LN LN w Pl ht st el or ro G C P at Pr G Q A B 0 he W 2007 2008 2009 2010 2011 2012 2013 Upstream Liquefaction Shipping to India* The analysis is taken from the February 2011 LNG Service Insight: ‘Might Rising Costs In AustraliaPropel North America LNG Exports’. Source: Wood Mackenzie CAT, LNG GEM, LNG Tool © Wood Mackenzie 13 Strategy with substance

www.woodmac.comThere may be headroom for a few North American LNG export projects Douglas Channel Energy Douglas Channel Energy Dominion has announced Dominion has announced AGPA is promoting a AGPA is promoting a Partnership project is a Partnership project is a plans to add export capacity plans to add export capacity potential “All Alaska” potential “All Alaska” proposed 0.9 mtpa barge proposed 0.9 mtpa barge at the Cove Point regas at the Cove Point regas pipeline and liquefaction pipeline and liquefaction facility near Kitimat facility near Kitimat facility facility project from Valdez project from Valdez Kitimat LNG is a Kitimat LNG is a proposed 5 mtpa facility proposed 5 mtpa facility BG and Southern Union BG and Southern Union (Apache/EOG/EnCana) (Apache/EOG/EnCana) Petronas and Progress Petronas and Progress have announced plans to have announced plans to fed with shale gas from fed with shale gas from Energy have signed a Energy have signed a add 2 bcfd of export add 2 bcfd of export Horn River // Montney Horn River Montney strategic partnership to strategic partnership to capacity at the Lake capacity at the Lake investigate an export investigate an export Charles regas facility Charles regas facility facility fed with Montney facility fed with Montney unconventional gas unconventional gas Cheniere is proposing to add 1.0 Cheniere is proposing to add 1.0 bcfd of export capacity at the bcfd of export capacity at the existing Sabine Pass LNG regas existing Sabine Pass LNG regas Shell/Mitsubishi (with Shell/Mitsubishi (with facility and has signed 6 non- facility and has signed 6 non- PetroChina, KOGAS and PetroChina, KOGAS and binding MOUs for capacity binding MOUs for capacity several Japanese several Japanese utilities) and Nexen/LNG utilities) and Nexen/LNG Japan are reportedly Japan are reportedly Macquarie/Freeport are Macquarie/Freeport are considering similar considering similar proposing to add 1.4 bcfd of proposing to add 1.4 bcfd of schemes in the BC area schemes in the BC area export capacity at the existing export capacity at the existing Freeport LNG regas facility Freeport LNG regas facilitySource: Wood Mackenzie © Wood Mackenzie 14 Strategy with substance

www.woodmac.comAccess to currently re-injected gas upstream puts the Alaska LNG liquefactionproject in an economically competitive position relative to others… ESTIMATE Key Assumptions Key Assumptions Greenfield Alaska LNG Cost Build Up •• All data from “Transcanada All data from “Transcanada 14.00 XOM Alaska Pipeline Project XOM Alaska Pipeline Project Open Season Notice, 2010, Open Season Notice, 2010, Valdez LNG Case” except Valdez LNG Case” except below items: 12.00 below items: •• Liquefaction: Liquefaction: •• CapEx: $1,200/ton; est. rate Currently re- CapEx: $1,200/ton; est. rate 10.00 covers CapEx, Opex, 12% covers CapEx, Opex, 12% injected gas (0.67) 0.59 8.50 nom. ROE. offsets higher 4.00 nom. ROE. 2011$/mmbtu •• Alaska LNG losses 9.65% pipeline costs Alaska LNG losses 9.65% 8.00 •• Shipping Assumptions: Shipping Assumptions: •• Ship: 155,000 m33 Ship: 155,000 m •• CapEx/ship: $200 million 6.00 CapEx/ship: $200 million 0.40 •• OpEx: $15,000/day; 2.33% OpEx: $15,000/day; 2.33% 1.70 annual escalation annual escalation 4.00 •• 8% ROE after tax 8% ROE after tax 2.22 •• LNG Processing Losses: LNG Processing Losses: estimated from AGIA NPV estimated from AGIA NPV 2.00 Report, Fig. 7.2 Report, Fig. 7.2 •• Liquids credit determined using 0.26 Liquids credit determined using $80/bbl netback price for LPG $80/bbl netback price for LPG 0.00 and volumes provided by AGPA and volumes provided by AGPA WH- Processing Transport LNG Losses Liquefaction Liquids Shipping Total (88,000 MMBtu/d; ~20,000 bpd) (88,000 MMBtu/d; ~20,000 bpd) Processing & Shrinkage credit Source: Wood Mackenzie © Wood Mackenzie 15 Strategy with substance

www.woodmac.com…and it competes favorably with both proposed Australian and other NorthAmerican export facilities which have yet to reach FID DES Cost Stack Comparison Alaska’s estimated cost allows it Alaska’s estimated cost allows it 14.00 to compete based on price to compete based on price 12.17 11.35 11.76 12.00 11.12 10.50 10.50 10.58 2011 US$/mmbtu 10.00 8.75 9.33 8.50 8.00 6.00 4.00 2.00 0.00 AP LNG GLNG Alaska Wheatstone Kitimat Pluto Ichthys Sabine Gorgon Browse FOB Breakeven Shipping to Asia Source: Wood Mackenzie © Wood Mackenzie 16 Strategy with substance

www.woodmac.comTwo pricing norms have emerged in recent long-term Pacific Basin deals Conventional LNG Coalbed Methane (CBM) LNGM Most recent deals are understood to have been Recent deals are understood to feature s- priced at 14.85% JCC, with additional deals for curves, reflecting the fact that CBM LNG is a pre-FID projects being negotiated at the same harder sale than conventional LNG level • Primary slope of ~14.5% JCC between theM Qatar is now also understood to be willing to kink points accept 14.85% JCC as a price from ‘established’ • Slopes of ~12% above and below the kink- Asian buyers pointsM Some evidence that buyers are seeking high s- Market rumours indicate that APLNG has gone curves in new deals in light of the current high beneath these levels oil price outlook • But exact pricing terms remain uncertain Lower (s-curve) prices, combined with non- price concessions (see next slide) are essential in order to sell CBM LNG into a market with limited appetite for the product Oil indexation will technically remain the standard in long-term gas contracting but additional mechanisms will be required to ensure that pricing remains within the relevant pricing boundaries © Wood Mackenzie 17 Strategy with substance

www.woodmac.comWe evaluated Alaskan LNG export economics based upon two primary long-term crude oil pricing scenarios WTI Oil Nominal Prices• The extended forward NYMEX strip from July 5, 2011 is treated as a $350.00 base case $300.00• Combining the NYMEX strip scenario with a second scenario $250.00 Nominal $/BBL utilizing Woodmac’s April 2011 $200.00 Worst Case NAGS price outlook, we establish NYMEX Forw ard the range of likely NPVs $150.00 WoodMac• In a final test, we evaluated a “worst $100.00 case” scenario of an inflation adjusted oil price of $75 / bbl $50.00 throughout the projection period $-• Oil prices and oil price scenarios are 2020 2025 2030 2035 2040 2045 2050 viewed as fully disconnected from Year North American natural gas prices NYM EX fo rward strip data fro m July 5, 201 ; Wo o dmac data fro m A pril 201 NA GS outlo o k; all prices nominal 1 1 Source: CME.COM and Wood Mackenzie © Wood Mackenzie 18 Strategy with substance

www.woodmac.comThe Alaska LNG export project’s estimated cost is below typical LNGcontract prices… Range of LNG Costs Delivered to Asia vs. Typical Contract Price Range Asian Long-term LNG contract price bands are Asian Long-term LNG contract price bands are expected to have slopes between 14% and 16% expected to have slopes between 14% and 16% 20.00 JCC within the analyzed oil price range JCC within the analyzed oil price range 18.00 16.00 2011 US$/mmbbtu 14.00 12.00 10.00 8.00 6.00 The Alaska LNG project’s estimated costs The Alaska LNG project’s estimated costs 4.00 are below this typical price range are below this typical price range 2.00 0.00 Australia US Gulf Cost Canada West Coast Alaska LNG LNG Contract Range LNG Cost Range AVG LNG Cost Players who win LNG contracts first win the race to FID © Wood Mackenzie 19 Strategy with substance

www.woodmac.com…The NYMEX strip scenario (base case) yields annual tax and royalty revenues of $2to 16 billion to the state, for a total of $220 billion over the 30-year life of the project* Model 2021 2022 2023 2024 2025 Nominal WTI oil price $ 109.56 $ 112.19 $ 114.88 $ 117.64 $ 120.46 Asia DES Price 16.86 17.26 17.68 18.10 18.54 Less Infl adj. Shipping Rate / MMBtu 0.59 0.60 0.62 0.63 0.65 • Model at right depicts the NYMEX Less Pipe Transportation (will not vary significantly) 4.18 4.18 4.18 4.18 4.18 strip base case utilizing Woodmac’s Less Liquefaction = Wellhead Net Back Value / MMBtu 4.00 8.09 4.00 8.48 4.00 8.88 4.00 9.29 4.00 9.71 2.4% inflation rate beyond NYMEX Daily production in millions of MMBtu 2.7 2.7 2.7 2.7 2.7 projected years. Annual production in millions of MMBtu 986 986 986 986 986 Taxes and Royalties Alaska 12.5% share of production in MMBtu 123 123 123 123 123 • Producer net income of $178 billion Alaska royalty = 12.5% share * Netback Value 997 1,045 1,094 1,145 1,196 Remaining gas Taxable under ACES in MMBtu 862 862 862 862 862 Tax Rate to $5 / MMBtu 0.25 0.25 0.25 0.25 0.25 Tax Rate between $5 and 15.42 / MMBtu 0.324 0.334 0.343 0.353 0.363 Tax Rate beyond 15.42 / MMBtu 0.324 0.334 0.343 0.353 0.363 Total ACES Taxes 2,263 2,440 2,629 2,829 3,041 Total Royalties and Taxes 2,386 2,564 2,752 2,952 3,164 Sum of Royalties and Taxes 220,101 Period (years from 2011) 10 11 12 13 14 Discount Factor 0.61 0.58 0.56 0.53 0.51 PV of Taxes and Royalties ($MMs) 1,465 1,499 1,532 1,565 1,598 NPV Taxes and Royalties 2021 - 2050 ($MMs) $ 65,021 Producer Revenues = 87.5% share * netback value ($MMs) 6,979 7,315 7,660 8,013 8,375 Less ACES Taxes 2,263 2,440 2,629 2,829 3,041 Post-tax netback to producer 4,716 4,875 5,031 5,184 5,334 Sum Producer Netback 178,278 Period 10 11 12 13 14 Discount Factor 0.39 0.35 0.32 0.29 0.26 PV 1,818 1,709 1,603 1,502 1,405 Producer NPV 2021 - 2050 ($MMs) $ 22,576 Players who win LNG contracts first win the race to FID *NYMEX strip to 2018 then 2.4% inflation;14.85% indexation, avg. recourse rate $4.18 assumed to be flat (annual increases in © Wood Mackenzie 20 operational costs would be incrementally small). Model uses nominal figures and nominal discount rate. Assuming 5% Strategy with substance nominal discount rate, NPV of taxes and royalties amounts to $65 billion.

www.woodmac.com…The Woodmac scenario yields annual tax and royalty revenues of $3 to 24 billion tothe state, for a total of $419 billion over the 30-year life of the project* Model 2021 2022 2023 2024 2025 Nominal WTI oil price $ 121.97 $ 125.75 $ 130.99 $ 136.40 $ 141.96 Asia DES Price 18.70 19.28 20.07 20.89 21.73 Less Infl adj. Shipping Rate / MMBtu 0.59 0.60 0.62 0.63 0.65 • Model at right depicts the Woodmac Less Pipe Transportation (will not vary significantly) 4.18 4.18 4.18 4.18 4.18 Less Liquefaction 4.00 4.00 4.00 4.00 4.00 scenario, which uses the NAGS = Wellhead Net Back Value / MMBtu 9.93 10.49 11.27 12.08 12.90 April 2011 oil price forecast through Daily production in millions of MMBtu 2.7 2.7 2.7 2.7 2.7 2030, followed by the 2030 price Annual production in millions of MMBtu 986 986 986 986 986 projected to 2050 using Woodmac’s Taxes and Royalties Alaska 12.5% share of production in MMBtu 123 123 123 123 123 long-term inflation rate of 2.4% (oil Alaska royalty = 12.5% share * Netback Value 1,224 1,293 1,389 1,488 1,589 Remaining gas Taxable under ACES in MMBtu 862 862 862 862 862 prices shown in nominal terms) Tax Rate if below $5 / MMBtu 0.25 0.25 0.25 0.25 0.25 Tax Rate if between $5 and 15.42 / MMBtu 0.368 0.382 0.401 0.420 0.440 Tax Rate if beyond 15.42 / MMBtu 0.368 0.382 0.401 0.420 0.440 • Producer net income of $187 billion Total ACES Taxes Total Royalties and Taxes 3,155 3,278 3,455 3,579 3,893 4,016 4,371 4,495 4,891 5,014 Sum of Royalties and Taxes 419,101 Period (years from 2011) 10 11 12 13 14 Discount Factor 0.61 0.58 0.56 0.53 0.51 PV of Taxes and Royalties ($MMs) 2,013 2,092 2,236 2,384 2,532 NPV Taxes and Royalties 2021 - 2050 ($MMs) $ 124,030 Producer Revenues = 87.5% share * netback value ($MMs) 8,565 9,049 9,720 10,413 11,125 Less ACES Taxes 3,155 3,455 3,893 4,371 4,891 Post-tax netback to producer 5,410 5,594 5,827 6,041 6,234 Sum Producer Netback 187,551 Period 10 11 12 13 14 Discount Factor 0.39 0.35 0.32 0.29 0.26 PV 2,086 1,961 1,857 1,750 1,642 Producer NPV 2021 - 2050 ($MMs) $ 24,126 Players who win LNG contracts first win the race to FID *WM NAGS price outlook to 2030 then 2.4% inflation; 14.85% indexation, avg. recourse rate $4.18 assumed to be flat © Wood Mackenzie 21 (annual increases in operational costs would be incrementally small). Model uses nominal figures and nominal discount rate. Strategy with substance Assuming 5% nominal discount rate, NPV of taxes and royalties amounts to $124 billion.

www.woodmac.com…The “worst case” scenario yields annual tax and royalty revenues of $0.4 to 6 billionto the state, for a total of $75 billion over the 30-year life of the project* Model 2021 2022 2023 2024 2025 Nominal WTI oil price $ 75.00 $ 76.80 $ 78.64 $ 80.53 $ 82.46 Asia DES Price 10.34 12.01 12.30 12.59 12.89 • Model at right depicts the “worst Less Infl adj. Shipping Rate / MMBtu Less Pipe Transportation (will not vary significantly) 0.59 4.18 0.60 4.18 0.62 4.18 0.63 4.18 0.65 4.18 case scenario in which prices are Less Liquefaction 4.00 4.00 4.00 4.00 4.00 = Wellhead Net Back Value / MMBtu 1.57 3.23 3.50 3.78 4.07 held flat at an inflation adjusted Daily production in millions of MMBtu 2.7 2.7 2.7 2.7 2.7 price of $75/bbl Annual production in millions of MMBtu 986 986 986 986 986 Taxes and Royalties • Producer net income of $131 billion Alaska 12.5% share of production in MMBtu Alaska royalty = 12.5% share * Netback Value 123 194 123 398 123 431 123 466 123 501 Remaining gas Taxable under ACES in MMBtu 862 862 862 862 862 Tax Rate to $5 / MMBtu 0.25 0.25 0.25 0.25 0.25 Tax Rate between $5 and 15.42 / MMBtu 0.168 0.207 0.214 0.221 0.228 Tax Rate beyond 15.42 / MMBtu 0.168 0.207 0.214 0.221 0.228 Total ACES Taxes 228 577 646 720 799 Total Royalties and Taxes 351 701 769 843 922 Sum of Royalties and Taxes 74,939 Period (years from 2011) 10 11 12 13 14 Discount Factor 0.61 0.58 0.56 0.53 0.51 PV of Taxes and Royalties ($MMs) 215 410 428 447 466 NPV Taxes and Royalties 2021 - 2050 ($MMs) $ 21,617 Producer Revenues = 87.5% share * netback value ($MMs) 1,357 2,784 3,020 3,261 3,509 Less ACES Taxes 228 577 646 720 799 Post-tax netback to producer 1,129 2,206 2,373 2,541 2,710 Sum Producer Netback 131,018 Period 10 11 12 13 14 Discount Factor 0.39 0.35 0.32 0.29 0.26 PV 435 773 756 736 714 Producer NPV 2021 - 2050 ($MMs) $ 13,217 Players who win LNG contracts first win the race to FID 2.4% inflation, 14.85% indexation, avg. recourse rate $4.18 assumed to be flat (annual increases in operational costs would © Wood Mackenzie 22 be incrementally small). Model uses nominal figures and nominal discount rate. Assuming 5% nominal discount rate, Strategy with substance NPV of taxes and royalties amounts to $22 billion.

www.woodmac.comAgenda 1 Executive Summary 2 Setting the Context: North American Natural Gas Markets & Scenarios 3 Alaska LNG Export Competitiveness Appendix –LNG Pricing Details © Wood Mackenzie 23 Strategy with substance

www.woodmac.com Gas price ceilings differ by region – in Asia, the price ceiling is increasingly based on displacing oil products in the R/C/I sectors Asia gas demand growth 2010 - 2030 35 Historically, the desire for fuel 30 diversity and need for security of 27% supply (primarily in Japan) drove Power generation (2030) 25 Hydro relatively high regional gas prices 13% Nuclear Moving forward, Wood Mackenzie 20 10% sees oil substitution in the R&C andbcfd Gas 28% 4% Industrial sectors in China and India 15 Oil Coal as the primary force behind 70% 1% maintaining premium pricing in the 10 Asian market 39% It is however expected that in JKT a 5 premium will continue to be paid for 48% 54% 28% security of supply 0 21% China India JKT Industrial Power R&C Other Source: Wood Mackenzie Global Gas Tool, H2 2010 © Wood Mackenzie 25 Strategy with substance

www.woodmac.com While in Europe the gas price ceiling is “soft” and influenced by the economics of alternative forms of power generation Europe gas demand Europe power generation screening curve 250 70 Demand growth 3% 21% 60 CCGT - $75/t CO2 14% 62% 200 50 Coal - $75/t CO2 CCGT - no carbon 150 Nuclear - 40 $/MWh $7,500/kw bcfd Wind 30 Coal - no carbon 100 Nuclear - $5,000/kw 20 At 12% slopes and $100/bbl oil, natural 50 gas has significant competition in 10 European generation markets 0 0 2010 2030 50 75 100 125 175 $/bbl Industrial Power R&C OtherNote: 12% discount rate, no taxes, levelized capital cost, Gas fired CCGT: LNG costs at 12% slope plus $0.8/mmbtu combined shipping and regas. $1,200/kw, 25 years useful life. 6,900 Btu/KWh, LHV heatrate, 92.5% utilization, 1135 lbs/MWh of CO2 emissions; Coal: $3,750/kW, 30 years useful life. $4.25/mmbtu delivered, $9,275 btu/kWh heat rate, 92.5% utilization. 2250 lbs/MWh CO2 emissions; Nuclear: 30years useful life, 92.5% utilization. No subsidies; Wind: $1,800/kw, 20 years useful life, 27.5% utilization, $25/MWh grid access. No subsidies © Wood Mackenzie 26 Strategy with substance

www.woodmac.comUltimately the markets develop a relative hierarchy by geography and tenor Short tenor markets Long tenor markets • Remain thinly traded as • The premium price excess supply is limited market in the world is and will remain so Asia driven by growth in R/C/I sectors in China & India Supply Security Concerns • Used for portfolio • Soft ceiling moving to optimization but have Rest of Europe alternative fuel limited liquidity economics in generation keeps pricing under Asia • NBP tied to both • Almost all contracts (in last European & NA pricing NW Europe/U.K decade) are NBP linked • Large excess supply • Largely financial not keeps pricing modest & North America physical contracts physical tenors short Transport arbitrage defines regional price differences in spot and short-tenor transactions Transport arbitrage defines regional price differences in spot and short-tenor transactions but has a decreasing influence as tenor increases but has a decreasing influence as tenor increases © Wood Mackenzie 27 Strategy with substance

www.woodmac.comLong-tenor gas contracts will remain oil-indexed in geographiesthat lack liquid, reliable gas indices as an alternative Requirements for Gas-Indexed Term Deals Requirements for Gas-Indexed Term Deals Rationale Behind Oil-Indexed Deals Rationale Behind Oil-Indexed Deals A reputable index must exist that is deep and A reputable index must exist that is deep and Historical comfort: sellers are largely long oil Historical comfort: sellers are largely long oil difficult, if not impossible, to manipulate; e.g.: difficult, if not impossible, to manipulate; e.g.: price risk and don’t mind more; sellers have price risk and don’t mind more; sellers have • North America (HH et al) • North America (HH et al) done similar deals for years done similar deals for years • • The UK (NBP) and NW Europe The UK (NBP) and NW Europe Oil indices are deep and solid; manipulation risk Oil indices are deep and solid; manipulation risk • • Not the Rest of Europe, not Asia Not the Rest of Europe, not Asia is relatively low is relatively low Agency risk: no one has ever lost their job for Agency risk: no one has ever lost their job for The index must reflect floor and ceiling The index must reflect floor and ceiling doing an oil-indexed deal. Buyers, particularly doing an oil-indexed deal. Buyers, particularly economics in the market in which it is used; economics in the market in which it is used; certain Asian buyers, do not generally seek certain Asian buyers, do not generally seek that is, to gain widespread acceptance the index that is, to gain widespread acceptance the index must serve a real economic purpose to buyers innovation in LNG contract pricing terms innovation in LNG contract pricing terms must serve a real economic purpose to buyers and sellers and sellers For the most part, oil indexation does what it is For the most part, oil indexation does what it is • HH makes obvious sense in NA (just as NBP • HH makes obvious sense in NA (just as NBP supposed to do supposed to do does in the UK) as the index is related to does in the UK) as the index is related to actual development costs and alternative actual development costs and alternative • • For buyers with oil product alternatives, oil For buyers with oil product alternatives, oil fuel economics fuel economics indexation at slopes less than oil-equivalent indexation at slopes less than oil-equivalent • But would there be significant demand for • But would there be significant demand for prices locks in economics prices locks in economics HH-indexed gas in Asia where the floor is oil HH-indexed gas in Asia where the floor is oil or fixed price linked and the ceiling is oil or fixed price linked and the ceiling is oil linked? linked? © Wood Mackenzie 28 Strategy with substance

www.woodmac.comBut many of those “oil-indexed” deals will remain so in name only “Oil indexation” is just the beginning . . . . . . but not the end In reality “oil parity” indexation would appear to As a result, a variety of mechanisms have and meet both buyer and seller needs only within a will continue to emerge and evolve to shape the limited range of oil prices risk profile of the typical “oil indexed” contract; • Development costs for LNG in Asia of around e.g.: $9-$10/mmBtu FOB suggest the need for • Different slopes or constants floors around $60/bbl at 14.85% slopes • S-curves, even extreme examples, that better • In Europe, even at more modest slopes (e.g., match the economic market reality of floor 12%) as oil prices rise above roughly costs and ceiling alternative pricing $100/bbl other generation sources are • A variety of contract re-openers predicated increasingly advantaged on certain oil prices or other triggersOil indexation will technically remain the standard in long-term gas contracting but additional mechanisms will be required to ensure that pricing remains within the relevant pricing boundaries © Wood Mackenzie 29 Strategy with substance

www.woodmac.comAssumptions used in the tax and revenue discount modelAssumptionsProduction 2.7 Bcf/d Conversion 0.000001Shipping $ 0.59Asia DES Price calculated as % of WTI: 14.85%Base Case: 14.85% of real 2011 priceWM Price Case: April 2011 NAGS Price OutlookNYMEX Forward Curve Case:Transportation Cost Scenarios:Low Negotiated $ 2.25High Negotiated $ 2.92Low Recourse $ 3.64High Recourse $ 4.72Average Recourse $ 4.18Liquefaction $ 4.00Base Royalty on Net Back Value 12.5%Taxable under ACES Law 87.5%Base ACES Royalty 25%Incremental tax for each $ beyond 5 2.4%Incremental tax for each $ beyond 50% tax 0.6%State of Alaska Nominal Discount Rate 5%WoodMac LT Inflation Rate Forecast 2.4%Producer Nominal Discount Rate 10% © Wood Mackenzie 30 Strategy with substance

www.woodmac.comWood Mackenzie Disclaimer This report has been prepared for AGPA by Wood Mackenzie, Inc. The report is intended for the benefit of AGPA and the use of its contents and conclusions by any third parties shall be done so without any liability on the part of Wood Mackenzie. The information upon which this report is based has either been supplied to us by AGPA or comes from our own experience, knowledge and databases. The opinions expressed in this report are those of Wood Mackenzie. They have been arrived at following careful consideration and enquiry but we do not guarantee their fairness, completeness or accuracy. The opinions, as of this date, are subject to change. We do not accept any liability for your reliance upon them. © Wood Mackenzie 31 Strategy with substance

www.woodmac.comGlobal Contact Details Global OfficesEurope +44 (0)131 243 4400 Australia Japan United Arab EmiratesAmericas +1 713 470 1600 Brazil Malaysia United KingdomAsia Pacific +65 6518 0800 Canada Russia United StatesEmail energy@woodmac.com China SingaporeWebsite www.woodmac.com India South Korea Wood Mackenzie is the most comprehensive source of knowledge about the world’s energy and metals industries. We analyse and advise on every stage along the value chain - from discovery to delivery, and beyond - to provide clients with the commercial insight that makes them stronger. For more information visit: www.woodmac.com © Wood Mackenzie 32 Strategy with substance

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Alaskan LNG Exports Competitiveness Study by Wood Mackenzie

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Alaskan LNG Exports Competitiveness Study by Wood Mackenzie — Presentation Transcript