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INTEGRATING LNG MARKET ACCESS INFRASTRUCTURE TO COMPLETE THE VALUE CHAIN AND OPTIMIZE VALUE
Richard Lammons Bill Hauhe Chevron

ABSTRACT As the global LNG trade expands both in traditional and new markets, the United States has become a more attractive destination for LNG both in terms of market capacity and pricing. Many consider the vastness of the Unites States market as an enabling factor in LNG supply project development in the Atlantic Basin and Middle East, with the market viewed as being able to absorb new volumes of LNG almost without limit. While the physical capacity of the United States natural gas market can accommodate numerous new LNG regasification terminals, the ultimate number of terminals built will be driven by the level of LNG supply that can be secured under long-term contracts. With the level of new regasification capacity being limited by the availability of supply, one must look at the impact of any new LNG supply on both the local market clearing price and the impact on the local and regional infrastructure. The United Stated natural gas market is both mature and efficient, and any fluctuations in supply, demand or price are quickly addressed and equilibrium restored. Capturing market upside on a sustainable basis is difficult at best. What is needed to position one for any upside capture is a combination of organizational capability, financial resources and access to infrastructure downstream of the regasification terminal. Integrating LNG regasification capacity with pipeline capacity, liquids processing, in-ground storage and energy and cost saving infrastructure can result in a competitive advantage and related cost reduction. Chevron has successfully integrated the downstream natural gas market with regasification through its capacity rights at the Sabine Pass and the self developed Casotte Landing receiving and regasification terminals.

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INTRODUCTION The North American natural gas market is frequently referred to, anecdotally, as being deep and liquid with the capacity to accept new sources of natural gas, including LNG, without limit. While this is certainly not technically correct, the general consensus in the industry is that the size and geographic diversity of the U.S. market provides ample opportunity for new LNG capacity to gain market access, particularly in the Gulf Coast region. By the end of 2005, total U.S. natural gas consumption reached 61 Bcf/d, of which 1.73 Bcf/d was in the form of LNG (courtesy EIA). CAPTURING MARKET ACCESS REGASIFICATION TERMINAL CAPACITY A key element of Chevrons Global Gas strategy is securing market access in targeted markets. In North America, Chevron produces 1.7 Bcf/d and markets and trades up to 8 Bcf/d. Given this market presence and organizational capability, it is not surprising that North America is a focus area. Securing market access via equity development of terminal capacity (onshore or offshore) or by contracting for capacity with a third-party was considered viable options. Chevron vigorously pursued both approaches with the goal of selecting the option which would provide the greatest added value. The end result was the decision to acquire the first tranche of capacity at Chenieres Sabine Pass terminal being developed in the state of Louisiana. The Sabine Pass terminal is located in an uncongested area. No major permitting issues were encountered and the project has continued to receive local and state government support. The location has deepwater access via the Sabine River Navigation Channel with two marine berths capable of handling of up to 250,000 m3 ships which will provide for marine transportation flexibility for suppliers. The base terminal includes three 160,000m3 storage tanks (10 Bcf total), 2.6 Bcf/d of vaporization capacity and will provide a 16-mile 2.8 Bcf/d pipeline to access existing infrastructure in the Gulf Coast region. The terminal location provides a new, large market entry point to gain direct access to nearby pipeline capacity for long-term LNG off-take to facilitate Atlantic Basin LNG projects and can readily be expanded to fulfill future needs if desired. Due to the expected natural decline of traditional Gulf Coast natural gas supplies, excess existing pipeline capacity should be available to accommodate new LNG supplies. The ability of pipelines from the Louisiana Gulf Coast to reach the nation made this an ideal location for LNG terminal development. STRATEGIC & ECONOMIC REASONS FOR PURSUING THE SABINE PASS TERMINAL CAPACITY The Sabine Pass terminal offers access the U.S. natural gas markets consistent with gas strategy. This opportunity 1) secured Chevron access to the North American gas market for equity Atlantic Basin LNG, 2) allowing the use of region pricing (e. g. Henry Hub) benchmarks and 3) create a strong market-pull opportunity with little or no volume risk to support the development of equity LNG projects.

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The base Sabine Pass Federal Energy Regulatory Commission (FERC) permit allows construction of a pipeline from the terminal on the Texas/Louisiana border, east to Johnson Bayou. Although, this pipeline accesses a large portion of the southern Louisiana pipeline infrastructure, it was determined, in conjunction with Chevrons North American natural gas marketing and trading organization, Chevron Natural Gas, that an alternative market access route would improve both market liquidity and netback pricing. IMPROVING PIPELINE INFRASTRUCTURE The initial terminal capacity holders (Chevron and TOTAL) worked together to evaluate alternate pipeline take away options including expansion of existing systems and new pipeline infrastructure. In the evaluation of any new pipeline take away infrastructure, one must consider the trade-offs between long distance pipeline cost of construction, the desire to directly access higher value markets (e.g. the U.S. Northeast), the expectation of successfully permitting the new infrastructure in a particular area and obtaining the highest level of physical market access possible. While it is desirable to access higher value markets, one must also consider the liquidity of the market so any risk of infrastructure or market constraints are minimized. The preferred pipeline route, based on expected capital cost and historical operational and pricing information, accesses a more robust market pricing and greater market liquidity in the Eunice, Louisiana area providing strong synergy potential with affiliated pipeline and natural gas marketing and trading activities. The recommended pipeline option is projected to enhance the value of LNG delivered to the Sabine Pass terminal through improved netbacks and higher market liquidity. In terms of economic impact, the increased pipeline tariff cost versus the Johnson Bayou option was predicted to be more than offset by the increase in market pricing. The net result is an expected, significant overall increase in enterprise value. The next decision was determining the preferred structure of the commercial arrangements for acquiring the pipeline transportation capacity, own or lease. It was agreed that the pipeline would be constructed and operated by a third-party under a longterm agreement. Chevron and TOTAL negotiated with multiple third-party pipeline companies for transportation of natural gas from the Sabine Pass terminal to 12 interstate pipelines along a 130 mile route to Eunice, La. Initial proposals from nine pipeline companies were narrowed to two alternatives. Kinder Morgan proposed a northern route through Lake Sabine and on to the Eunice area while the other shortlisted service provider had proposed a southern route along the coast through Johnson Bayou and then north through Lake Calcasieu and on to the Eunice area. The evaluation of both routes resulted in the view that both routes were viable from an environmental permitting and construction point-of-view. In the end, TOTAL and Chevron selected Kinder Morgan as the pipeline service provider. A Precedent Agreement (PA) with the pipeline service provider was executed, including typical conditions precedent, which allowed Kinder Morgan to conduct an open season as per FERC regulations as this new infrastructure would have some level of open access. Following the open season the PA transitioned into the final agreements allowing Kinder Morgan to move forward with detailed development and construction. The pipeline is designed to transport 2.0 Bcf/d of gas from the Sabine Pass terminal, of which

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Chevron has contracted for 1.0 Bcf/d. Chevron will pay a fixed unit price for transportation along the route. An interconnection to Natural Gas Pipeline (NGPL) and Johnson Bayou will be installed early to allow for interruptible transport prior to startup of the main header. The transportation agreement includes an initial term of 20 years. Line heating will be installed at the various interconnects to heat the gas to a guaranteed 40 degrees Fahrenheit minimum. The actual fuel used in the heaters will be charged back to the shipper. BTU MANAGEMENT Given the number of potential LNG supply sources that may utilize the Sabine Pass terminal, it was determined that some level of Btu or gas quality management (heating value control) would need to be available so as to not restrict market access due to pipeline operating restrictions. Because of the uncertainty surrounding the range of LNG composition, the terminal capacity holders completed a detailed evaluation of various Btu management technologies for possible integration into the Sabine Pass terminal. The technologies evaluated included various processes for NGL cold extraction from LNG and/or nitrogen dilution. Heating value adjustment can be achieved by either dilution with nitrogen or by extraction of higher heating value components from the LNG. For the nitrogen injection option, a pipeline would need to be built to supply the nitrogen from third-party sources located across the Sabine River near Port Arthur, Texas. Two possible options for achieving the nitrogen dilution are: 1. Absorb nitrogen gas at low pressure in a packed vessel similar to the recondensers already provided for absorbing boil-off gas (BOG). This would be accomplished at low pressure prior to boosting the LNG to pipeline pressure and vaporization. Process simulations indicate that nitrogen could normally be absorbed at the maximum allowable concentration. However, there could be times, during ship unloading at low send-out rates, when this option might not be practical because of the high concentration of BOG absorbed at those conditions. 2. Provide a compressor to boost the nitrogen to send-out pressure and inject it downstream of the LNG vaporizers. For the NGL cold extraction option, there are a number of proprietary processes available that could be integrated into the terminal operations. These processes would fractionate LNG within the terminal, extracting the heavier components as liquid while removing lighter components overhead. The gaseous overhead components, primarily methane, would then be condensed by heat exchange with the LNG fed to the processing unit. Since the processes start with the liquefied gas, capital and operating expenses are lower for these options. Also, the energy required by these separation processes contributes to the energy required to subsequently vaporize the LNG. All extraction processes operate at significantly less than send-out pressure. However, since these extraction processes are integrated with the LNG terminal to produce all liquid products, the condensed gas can be pumped to the pressure required for regasification and send-out.

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This feature requires much less energy than traditional non-integrated options that would require more expensive compression of the entire treated stream. The NGL cold extraction option selected for installation would need to offer the best combination of low capital and operating costs, operability, reliability and recovery of heavy components. Reliability should be 99-plus percent. Schedule for permitting, designing, and constructing each option must also be considered. At this time, the value of the recovered components to Stakeholders is uncertain, so simplicity of the installation will also be considered. It is desirable, though not absolutely necessary to limit power requirements of the extraction process as power comes from on-site gas turbine generators which have limited available capacity. NGL market studies were conducted to evaluate not only the suitability and integration of such a system into the terminal, but also the commercial issues that need to evaluated on the basis of the market impact of new sources of NGLs entering the market via LNG cargo. BUILDING DIVERSITY FOR MARKET ACCESS The Casotte Landing equity terminal development aligns with Chevrons Global Gas strategy to provide diversity in market delivery points for LNG. Coupled with the Sabine Pass access in the Western Gulf of Mexico, Casotte Landing provides access to the Eastern Gulf and the strong Southeast market, including the growth in Florida. The pipeline options through Casotte Landing provide the ability to manage market seasonality in the Southeast with access to systems delivering natural gas to the Northeast. This alternative market access improves market liquidity and netback pricing based on historical regional pricing basis to the Henry Hub. The Casotte Landing site adjacent to Chevrons Pascagoula Refinery provides significant infrastructure advantages which relate to improved operating costs and marine operations, and environmental stewardship. CASOTTE LANDING REGAS TERMINAL DESCRIPTION The terminal is located on a 264-acre parcel of industrial use land along the East Harbor of Bayou Casotte, Port of Pascagoula, Mississippi. The location is adjacent to the Chevron Pascagoula Refinery which provides mutual important operational efficiencies and environmental benefits. Casotte Landing has deepwater access via the Bayou Casotte channel. The major components of the terminal include LNG unloading facilities, LNG storage tanks, vapor handling facilities, an intermediate fluid vaporization system, NGL extraction facilities and natural gas pipeline interconnections. The Casotte Landing marine berth and offloading system is adequate to accept a range of LNG carriers up to 200,000-plus m3 size when future channel revisions allow the larger LNG carriers. The current channel configuration limits LNG vessel size to 160,000m3. A new slip will be constructed to accommodate a new LNG berth and a

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relocated oil berth. Safety zones around LNG carriers in transit will be provided based on review and concurrence with the United States Coast Guard. LNG will be stored in up to three 160,000 m3 full containment storage tanks to match the natural gas output will be a nominal 1.3 Bcf/d, with a peaking capacity of 1.6 Bcf/d. The Casotte Landing vaporization system will consist of a closed-loop circulating system which will transfer heat to an intermediate fluid (propylene glycol and water) for the LNG vaporization. Waste heat via water from the refinery cooling towers will be pumped to the terminal, cooled by thermal exchange with the intermediate fluid and then pumped back to the refinery cooling water towers through a closed-loop piping system. The system will be an ambient flow-through system with no other heating of the glycol intermediate fluid. The system also includes circulation pumps, ambient condition storage for the intermediate fluid and transfer pumps. This system application provides both improvement to operational costs and environmental impacts. To ensure the project meets market-driven reliability requirements, a back-up vaporization system that consists of two natural gas fired heaters for the intermediate fluid system is included. Scenarios requiring the backup system include un-seasonal cold weather in the Gulf Coast region, or turn-down of the warm water from the refinery. The nominal natural gas output will be approximately 0.9 Bscf/d during the back-up scenario. Vapor from the LNG storage tanks gathering system and some vapor from the LNG ship will be compressed by the BOG compressors and then, passed to the condensing system where it will be condensed into the outgoing LNG prior to being pumped up to the pipeline pressure in the sendout pumps. A portion of the vapor will be returned to the ship during unloading to replace the volume of liquid pumped out of the ship in to the LNG storage tanks to maintain system equilibrium. CONNECTIVITY TO NATURAL GAS MARKET Casotte Landing offers reliable entry to the U.S. natural gas market, and is key to providing an alternate source of supply to the southeast market, in particular the growing Florida power market. The Casotte Landing site has access to five existing interstate pipeline systems via interconnects on Chevron-controlled property with approximately 4.0 Bscf/d in take-away capacity. 36 Gulfstream Natural Gas System 12 and 16 Chandeleur Pipe Line Company 16 Destin Pipeline Company 12 Gulf South Pipeline Company The interconnects provide access to additional markets including Texas Eastern Transmission, Florida Gas Transmission, Southern Natural Gas and Transco Pipeline. The proposed pipeline interconnections will allow for marketing of significant volumes of natural gas in the local Mississippi market for power generation base load supply needs as well as to the Pascagoula Refinery which uses approximately 120 MMscf/d as part of normal operations.

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As a complement to the Florida market access, Casotte Landing will have access to the Northeast markets thought the Transco interstate pipeline. The ability to access the Florida market and Northeast is expected to balance the seasonality associated with summer demand in Florida and winter demand in the Northeast. The Florida natural gas demand is projected to increase significantly due to incremental natural gas fired cogeneration. As natural gas fired generation continues to grow, Florida will increase its dependence on natural gas as a clean burning fuel source for electric generation. Attributes of Casotte Landings location holds a similar attractiveness to the Sabine Pass terminal to Chevron including: the expected decline of traditional U.S. Gulf Coast natural gas supplies resulting in excess pipeline capacity and the ability of pipelines from the Louisiana Coast to reach the nation. Natural gas storage options provide additional flexibility, operational benefits to the regasification terminal and enhance natural gas marketing capabilities. A number of storage options are available of under development in the region. Natural gas storage may be captured through equity participation in a greenfield development, or by leases of a new or expanded capacity in existing sites. Specific sites include Mobile Gas Storage, McIntosh, Southern Pines Energy Center, Petal, Richton and Hattiesburg, all located in the southern Mississippi region. BTU MANAGEMENT AND NGL MARKETS Btu or gas quality management is an integral aspect of Casotte Landing and enhances the ability to attract a wide range of LNG compositions while meeting U.S. pipeline specifications. Three technologies evaluated for Casotte Landing included conventional gas processing, nitrogen injection and a proprietary cold extraction process. The Btu management system will offer the best combination of low capital and operating costs, operability, reliability and recovery of heavy components. Casotte Landing will have the capability to accept a wide range of LNG compositions through on-site gas processing via a proprietary cold extraction (CE) technology. The heavier NGLs include ethane (C2), propane (C3), and butane (C4) and will be removed from the LNG stream prior to vaporization though a cold extraction process. NGL market studies were conducted to evaluate not only the suitability and integration of such a system into the terminal, but also the commercial issues that need to evaluated on the basis of the market impact of new sources of NGLs entering the market via LNG cargos. The NGL product will be transported via the Tri-Sates pipeline through an interconnect at the Chevron Pascagoula Refinery. The Tri-States pipeline is connected to two of south Louisianas main fractionators (Promix and Baton Rouge). Depending on the LNG supply composition, Casotte Landing is expected to produce substantial quantities of NGL (primarily ethane) for delivery into the south Louisiana regional market. Texas and Louisiana have the worlds best ethane market infrastructure with an approximate demand of 700,000 to 800,000 bpd.

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CASOTTE LANDING REGULATORY STATUS Chevron has received Federal Energy and Regulatory Commission (FERC) approval for the facility to be located adjacent to Chevrons Pascagoula Refinery in Jackson County, Mississippi where Chevron has operated in the region for more than 40 years. The strong community relationship was developed through a track-record of community support, safe operations and environmental stewardship. Chevron employs over 1,200 people (excluding contractors) from the local and surrounding communities. The Casotte Landing development has actively engaged the local and surrounding communities through project open houses and meetings with civic and government organization. The interest of Chevrons continued investment in the region, coupled with the attention of community sensitivities is reflected in the support for a Chevron LNG terminal.

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