Nothing below this point Guide @ 2.68 Guide @ 1.57 Guide @ 1.97 Subtitle Guide @ 2.64 Guide @ 2.99 Nothing below this point Guide @ 0.22 Guide @ 4.77 Natural

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Natural Gas Pricing and Strategy Forum: 2008

IGS Energy

The Golf Club of Dublin5805 Eiterman RoadDublin, OH

August 5, 2008

This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This is not a research report and was not prepared by the Morgan Stanley research department. It was prepared by Morgan Stanley sales, trading or other non-research personnel. Past performance is not necessarily a guide to future performance. Please see additional important information and qualifications at the end of this material.

Alan LevineTeamLevine1775 Eye Street NWWashington, DC 20006(800) 630-7291

Global Wealth Management Group

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Morgan Stanley Private Client Futures Group

Overview

Tension between

Production Bears

Consumption Bulls

Globalization of Natural Gas Pricing

New Considerations in Pricing

LNG is the Balance Wheel

Charting the Price

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Overview of Natural GasThe Current Situation and Expectations

Prices in 2008 have thus far traded a $6.84 range.

The low seen on December 27, 2007 was $6.838

The top came on July 2, 2008 at $13.694 (+100.3%)

Prices fell to $8.81 in 20 trading sessions (-35.6%)

Concerns early in the year that lower LNG imports would support price have been frustrated by an improved storage outlook and softer crude oil prices.

Sustained lower 48 heat and the threat of potential hurricane activity have not supported prices as had been anticipated. Foreign natural gas prices exceed domestic prices offering little hope of supplemental supply.

Gas/Crude relative value is at an extreme, potentially supporting price.

Supply Situation

2008 production is well above expectations (+3 %.)

Canadian production decline should abate if Year-on-Year US storage deficit expands.

HDDs were 2% above normal in first four months of 2008, (last year 3% below.)

LNG imports about 50% below last year (1-1.5 Bcf/d.) Foreign (Japan, Spain) demand draining supplies ordinarily destined for US.

When available, spot cargoes have found more welcome in markets with a willingness to pay oil-indexed prices (e.g. Argentina.)

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Overview of Natural GasThe Current Situation and Expectations continued

2009 Expectations

2009 supply growth continues. Onshore will see largest gains. Accelerated drilling and multiple new resource plays. Will GoM declines accelerate?

Weather volatility still important, especially with greater reliance on electricity a national goal. Alternative fuels (resid/coal) will matter in periods of under/over supply. At current coal price, the natural gas floor is around $7/mmbtu, up from $4/mmbtu six months ago.

New project additions to LNG to be around 7.1 bcf/d.

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Daily, continuous NYMEX Natural Gas Futures

Source: www.esignal.com

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Production Bears

Consumption Bulls

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Natural Gas is Cheaper than Crude Oil


The value of a natural gas contractin crude oil BTU equivalent terms

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Btu Parity

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Global Natural Demand Growth (Bcf/d)

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Recent Growth in Natural Gas Production in Lower 48

Represents gains in Texas (+15%), Wyoming (+9%), Oklahoma (+6%), Louisiana (+4%), Gulf of Mexico (+2%)

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Major U.S. shale basins

Natural Gas Reserves•Grew in 10 of last 11 years•Shales will provide major new source, Barnett > 6% of lower 48 production

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Western Canadian NG Production

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Global Demand Growth: Gas Outpaces Oil, Expected To Continue

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Storage Projections

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Natural Gas Market: Revised Balance

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Globalization of Natural Gas Pricing

Geopolitics and Energy


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Geopolitics and Energy

Geopolitics is the interaction among politics, geography, demography and economics of nations.

Relates to national security and even national survival

Fragility of international energy markets

• Iraq

• The Middle East

• The former Soviet Union

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Oil and Natural Gas Hotspots Factsheet

Source: EIA

Petroleum Prod'n

(2004)

Petroleum Prod'n

(2010)

U.S. Imports (Jan-Mar

'05)

('000 bbl/d)

('000 bbl/d)

('000

bbl/d)1

Algeria 1,900 2,000 414 Armed militants have confronted gov't forces

Bolivia 40 45* 0Large reserves of NG (24 Tcf), exports may be delayed due to controversial new laws unfriendly to foreigners.

Caspian Sea 1,8002,400 - 5,900 0

BTC opened, many ethnic conflicts, high expectations for future oil production, no maritime border agt.

Caucasus Region2 negligible negligible 0 Strategic transit area for NG and oil pipelines

Colombia 551 450* 110Destabilizing force in S. America, oil exports subject to attack by protesters, armed militants.

Ecuador 535 850* 316 Unstable politically, protests threaten oil export

Indonesia 900 1,500 0No longer a net exporter, separatist movements, Peacekeeping forces in place, Violence threat to Strait of Malacca

Iran 4,100 4,000 0 Even though no direct imports to US, still exports 2.5 million bbl/d to world markets

Iraq 2,025 3,700 516 April 2003-May 2005 - 236 attacks on Iraqi Infrastructure

Libya 1,600 2,000 32Newly restored diplomatic relations, Western IOCs not awarded contracts in 2nd EPSA round

Nigeria 2,500 2,600 1071High rate of violent crime, large income disparity, tribal/ethnic conflict and protests have repeatedly suspended oil exports

Russia 9,300 11,100 4192nd only to S.A. in oil production, Yukos affair has bred uncertain investment climate

Saudi Arabia 10,400 13,200 1614 Long term stability of al-Saud family, Western oil workers subject to attacks

Sudan 344 530* 0 Darfur crisis & N-S conflict threatens government stability, security of oil transport

Venezuela 2,900 3,700 1579Large exporter to U.S., President Chavez frequently threatens to divert those exports, nationalize resource base

*Estimate or non-EIA source

Country/Region Strategic Importance/Threats

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Regime Changes Have Rendered Production Lower

Source: Morgan Stanley Research

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1. Unresolved Hydrocarbon Policy

▫ 70% of Iraqi Economy

▫ Impacts Sectarian Violence

▫ Regional Autonomy

2. Unresolved Control of Oil Fields

▫ Revenue Sharing

▫ Dispute Resolution

3. Diminishing Production Expectations

▫ Potential to grow to 3.5 million barrels daily in five years

▫ Well down from expectations of 7 million in ten years offered in November, 2006

Iraq’s Petroleum Situation

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4. Independent Undertakings to Develop Oil Without Central Government

▫ Kurdish Iraq

▫ Shiite militias in southern oil fields

5. Trade in Illicit Petroleum

▫ Funds insurgent activity

▫ 60 million barrels of crude oil missing in 2005 according to Iraq’s oil ministry

Iraq’s Petroleum Situation con’t

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Elsewhere In The Region…

1. Saudi Arabia has an aggressive policy

▫ Increase spare drilling capacity to 3 million daily barrels by 2011

▫ Spare capacity now 2 million barrels per day

2. Current tight demand limits Saudi ability to influence price

3. Could use oil availability to assert regional pre-eminence and offset Iranian exports

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And in the former Soviet Union…

Belarus Natural Gas

Ukraine Natural Gas

Yukos re-acquisition

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Threats to Stability Transit Choke Points

Source: Energy Information Administration (EIA)

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Imports

LNG Infrastructure

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Demand Driven By Developing World

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Accelerating Chinese Natural Gas Demand Growth

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Global LNG Imports by Country

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LNG: A Growing Proportion of Global Supply

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U.S. Imports of LNG, 2007

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LNG imports expected to overtake pipeline imports

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LNG Imports: What’s Changed

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Import Dependency Increasing (OECD, Ex-Australia) (Bcf/d)

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Liquefaction Growth: Short of Expectations (Bcf/d)

Source: Morgan Stanley Research Estimates

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LNG Project Delays

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North American Re-Gas Capacity

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North American Re-Gasification Inventory

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Asian Re-Gasification Inventory

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LNG Transportation Cost (current indicative) $/mmbtu

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Longer-Dated NG Prices Will Need to Move Higher to Attract LNG Cargoes to the US

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North America: A Call On Global Storage (Bcf)

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Daily, continuous NYMEX Natural Gas Futures


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Daily, continuous NYMEX NG - Elliott Wave Analysis


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Monthly, continuous NYMEX CL – Elliott Wave Analysis


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Weekly, continuous NYMEX NG – Elliott Wave Analysis


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Disclaimer

© 2008 Morgan Stanley

This material was prepared by sales, trading or other non-research personnel of Morgan Stanley & Co. Incorporated. (together with its affiliates, hereinafter “Morgan Stanley”). This material was not produced by a Morgan Stanley research analyst, although it may refer to a Morgan Stanley research analyst or research report. Unless otherwise indicated, these views (if any) are the author’s (if any author is noted) and may differ from those of the Morgan Stanley fixed income or equity research department or others in the firm.

This material was prepared by or in conjunction with Morgan Stanley trading desks that may deal as principal in or own or act as market maker or liquidity provider for the securities/instruments (or related derivatives) mentioned herein and may trade them in ways different from those discussed in this material. The trading desk may have accumulated a position in the subject securities/instruments based on the information contained herein. Trading desk materials are not independent of the proprietary interests of Morgan Stanley, which may conflict with your interests. Morgan Stanley may also perform or seek to perform investment banking services for the issuers of the securities and instruments mentioned herein.

The author(s) (if any authors are noted) principally responsible for the preparation of this material receive compensation based upon various factors, including quality and accuracy of their work, firm revenues (including trading and capital markets revenues), client feedback and competitive factors. Morgan Stanley is involved in many businesses that may relate to companies, securities or instruments mentioned in this material. These businesses include market making and specialized trading, risk arbitrage and other proprietary trading, fund management, investment services and investment banking.

This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security/instrument or to participate in any trading strategy. Any such offer would be made only after a prospective investor had completed its own independent investigation of the securities, instruments or transactions and received all information it required to make its own investment decision, including, where applicable, a review of any offering circular or memorandum describing such security or instrument. That information would contain material information not contained herein and to which prospective participants are referred. This material is based on public information as of the specified date, and may be stale thereafter. We have no obligation to tell you when information herein may change. We make no representation or warranty with respect to the accuracy or completeness of this material. Morgan Stanley has no obligation to provide updated information on the securities/instruments mentioned herein.

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Disclaimer (continued)

© 2008 Morgan Stanley

The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. This material does not provide individually tailored investment advice or offer tax, regulatory, accounting or legal advice. This material was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Prior to entering into any proposed transaction, recipients should determine, in consultation with their own investment, legal, tax, regulatory and accounting advisors, the economic risks and merits, as well as the legal, tax, regulatory and accounting characteristics and consequences, of the transaction. The value of and income from investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies and other issuers or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Morgan Stanley does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. Some of the information contained in this document may be aggregated data of transactions in securities or other financial instruments executed by Morgan Stanley that has been compiled so as not to identify the underlying transactions of any particular customer.

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Nothing below this point Guide @ 2.68 Guide @ 1.57 Guide @ 1.97 Subtitle Guide @ 2.64 Guide @ 2.99 Nothing below this point Guide @ 0.22 Guide @ 4.77 Natural