Plains All American Pipeline, L.P. (PAA)

Natural Gas Storage Market Overview

        After treatment for impurities such as carbon dioxide and hydrogen sulfide and processing to separate heavier hydrocarbons from the gas stream, natural gas from one source generally is fungible with natural gas from any other source. Because of its fungibility and physical volatility and the fact that it is transported in a gaseous state, natural gas presents different logistical transportation challenges than crude oil and refined products. From 1990 to 2007, domestic natural gas production grew approximately 0.4% annually while domestic natural gas consumption rose approximately 1.0% annually, resulting in an approximate 3.1% annual increase in the domestic supply shortfall over that time period. In addition, significant excess domestic production capacity contractually withheld from the market by take-or-pay contracts between natural gas producers and purchasers in the late 1980s and early 1990s has since been eliminated. However, this trend of an increasing domestic supply shortfall is not expected to continue. During 2008, domestic production increased approximately 6% over production levels in 2007, with the majority of the increases being associated with onshore development of various resource plays, including shale gas. Through 2008, consumption of natural gas was approximately the same as consumption in 2007 on an average daily basis.

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        The downturn in the economy clearly has had a negative impact on industrial demand. A portion of this demand destruction has been offset by a significant decrease in commodity price coupled with continued growth for natural-gas fired electric generation. An unprecedented amount of new infrastructure in the form of large diameter pipelines bringing unconventional supply (shale gas) to markets to meet this forecasted demand will have a significant impact on changing traditional physical flows of natural gas particularly in the Gulf Coast area. Even with the growth of unconventional shale plays, North American LNG imports are forecasted to play a potentially significant role. LNG imports totaled approximately 2.1 Bcf per day in 2007 and 1.0 Bcf per day in 2008, but are projected to increase to 4.2 Bcf per day in 2014 with the majority of this supply expected to be delivered to the U.S. markets in the spring and summer.

        We believe new pipeline infrastructure, increased domestic supply and increased seasonal deliveries of LNG combined with fluctuations in domestic consumption related to seasonal and economic factors will continue to drive demand for strategically located natural gas storage facilities with multi-cycle injection and withdrawal capabilities. We believe our natural gas storage locations, which have access to critical transportation infrastructure, will continue to play an increasingly important role in balancing the markets and ensuring reliable delivery of natural gas to the customer during peak demand periods. We believe that our expertise in hydrocarbon storage, strategically located assets, financial strength and commercial experience will enable us to play a meaningful role in meeting the challenges and capitalizing on the opportunities associated with the evolution of the U.S. natural gas storage markets.

Natural Gas Storage Market Overview

        After treatment for impurities such as carbon dioxide and hydrogen sulfide and processing to separate heavier hydrocarbons from the gas
stream, natural gas from one source generally is fungible with natural gas from any other source. Because of its fungibility and physical volatility and the fact that it is transported in a gaseous
state, natural gas presents different logistical transportation challenges than crude oil and refined products. From 1990 to 2007, domestic natural gas production grew approximately 0.4% annually
while domestic natural gas consumption rose approximately 1.0% annually, resulting in an approximate 3.1% annual increase in the domestic supply shortfall over that time period. In addition,
significant excess domestic production capacity contractually withheld from the market by take-or-pay contracts between natural gas producers and purchasers in the late 1980s
and early 1990s has since been eliminated. However, this trend of an increasing domestic supply shortfall is not expected to continue. During 2008, domestic production increased approximately 6% over
production levels in 2007, with the majority of the increases being associated with onshore development of various resource plays, including shale gas. Through 2008, consumption of natural gas was
approximately the same as consumption in 2007 on an average daily basis.

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HREF="#bg12101a_main_toc">Table of Contents

        The
downturn in the economy clearly has had a negative impact on industrial demand. A portion of this demand destruction has been offset by a significant decrease in commodity price
coupled with continued growth for natural-gas fired electric generation. An unprecedented amount of new infrastructure in the form of large diameter pipelines bringing unconventional supply (shale
gas) to markets to meet this forecasted demand will have a significant impact on changing traditional physical flows of natural gas particularly in the Gulf Coast area. Even with the growth of
unconventional shale plays, North American LNG imports are forecasted to play a potentially significant role. LNG imports totaled approximately 2.1 Bcf per day in 2007 and 1.0 Bcf per day in 2008, but
are projected to
increase to 4.2 Bcf per day in 2014 with the majority of this supply expected to be delivered to the U.S. markets in the spring and summer.

        We
believe new pipeline infrastructure, increased domestic supply and increased seasonal deliveries of LNG combined with fluctuations in domestic consumption related to seasonal and
economic factors will continue to drive demand for strategically located natural gas storage facilities with multi-cycle injection and withdrawal capabilities. We believe our natural gas storage
locations, which have access to critical transportation infrastructure, will continue to play an increasingly important role in balancing the markets and ensuring reliable delivery of natural gas to
the customer during peak demand periods. We believe that our expertise in hydrocarbon storage, strategically located assets, financial strength and commercial experience will enable us to play a
meaningful role in meeting the challenges and capitalizing on the opportunities associated with the evolution of the U.S. natural gas storage markets.

After treatment for impurities such as carbon dioxide and hydrogen sulfide and processing to separate heavier hydrocarbons from the gas stream, natural gas from one source generally is fungible with natural gas from any other source. Because of its fungibility and physical volatility, natural gas presents different logistical transportation challenges than crude oil; however, we believe the U.S. natural gas supply and demand situation will ultimately face storage challenges very similar to those that exist in the North American crude oil sector. We believe these factors will result in an increased need and an attractive valuation for natural gas storage facilities in order to balance market demands. From 1990 to 2004, domestic natural gas production grew approximately 5% while domestic natural gas consumption rose approximately 16%, resulting in a 160% increase in the domestic supply shortfall over that time period. In addition, significant excess domestic production capacity contractually withheld from the market by take-or-pay contracts between natural gas producers and purchasers in the late 1980s and early 1990s has since been eliminated. This trend of an increasing domestic supply shortfall is expected to continue. By 2030, the EIA estimates that the U.S. will require approximately 5.6 trillion cubic feet of annual net natural gas imports (or approximately 15 billion cubic feet per day) to meet its demand, nearly 1.6 times the 2004 annual shortfall.

The vast majority of the projected supply shortfall is expected to be met with imports of liquefied natural gas (LNG). According to the FERC as of January 2006, plans for 39 new LNG terminals in the United States and Bahamas have been announced, 18 of which are to be situated along the Gulf Coast. Of the 18 proposed Gulf Coast facilities, three are under construction, six have been approved by the appropriate regulatory agencies, eight have applied for approval and one has been announced.

Normal depletion of regional natural gas supplies will require additional storage capacity to pre-position natural gas supplies for seasonal usage. In addition, we believe that the growth of LNG as a supply source will also increase the demand for natural gas storage as a result of inconsistent surges and shortfalls in supply based on LNG tanker deliveries, similar in many respects to the issues associated with waterborne crude oil imports. LNG shipments are exposed to a number of risks related to natural disasters

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and geopolitical factors, including hurricanes, earthquakes, tsunamis, inclement weather, labor strikes and facility disruptions, which can impact supply, demand and transportation and storage logistics. These factors are in addition to the already dramatic impact of seasonality and regional weather issues on natural gas markets.