Current Market Conditions June-July 2010

Natural gas markets in June and July typically respond to weather as warmer temperatures increases the use of air conditioning units which often creates additional demand for natural gas for electricity generation. Along with temperature-related demand fluctuations, over the next two months, the natural gas market in Canada and the U.S. will continue to be affected by robust levels of gas in storage, steady levels of production and a moderately recovering economy. April and May, generally considered the "shoulder" months, when demand is weakest, saw prices around US$4/MMBtu. Over June and July, prices are expected to remain close to that level.

Drilling activity in Canada drops off from March into May, as rigs are removed from the field during the usual spring thaw, and then activity gradually builds back up. Although overall drilling activity through mid-May 2010 was significantly higher than the same period last year, almost all of this increase was from oil drilling rather than gas drilling, as oil prices are much higher than natural gas prices on an energy-equivalent basis.

U.S. natural gas drilling activity increased steadily from last-year's lows until mid-April, when activity levelled off. Most of this increase is attributed to horizontal drilling that is used to access shale gas. The current level of U.S. natural gas drilling should be enough to maintain U.S. production at current levels over the summer.

Natural gas production in Canada and the U.S. is supplemented by imports of LNG. Monthly LNG import volumes in April and May are estimated at 86 Bcf. Although this was slightly higher than LNG imports during February and March, volumes are almost 18 Bcf lower than for the same period in 2009. Through July, LNG imports are not expected to significantly deviate from last summer's average of about 40 Bcf per month. Ample supply of natural gas in Canada and the U.S. and higher prices for LNG in international markets are working against higher North American imports of LNG.

Thus far in 2010, North America has experienced record levels of natural gas in storage. By mid-May, storage was over half full, and is currently almost 100 Bcf higher than at this time last year and 250 Bcf more than the five-year average. Injection rates over June and July are expected to remain strong, although likely lower than last year's rapid injection pace.

Demand for natural gas in the industrial sector generally reflects economic conditions. As the economy and employment recover from the economic downturn, natural gas demand for industrial use should continue to increase. A modest economic recovery is being observed, but overall industrial demand levels are still below those observed in 2008.

An additional source of demand for natural gas could come from utilities that choose to displace coal-fired generation with gas. This phenomenon occurs when the coal and natural gas fuels are priced competitively on an energy equivalent basis. Less efficient coal plants are particularly targeted for displacement by natural gas-fired generation. For 2010 coal-gas displacement is expected to be somewhat lower compared to this time last year, as natural gas prices are expected to be slightly higher than last summer.

Summer weather will also affect the demand for natural gas, and subsequently its price. Temperatures across Canada and the western U.S. are forecast to be above average, with pockets of below average temperatures over the U.S. Midwest. The U.S. Pacific Northwest continues to experience low precipitation levels, resulting in lower than average water levels for hydro-electric generation. Consequently, increased demand for natural gas for electricity generation is expected to compensate for reduced hydro-electric generation.

June and July prices are expected to remain around US$4.00/MMBtu. Stronger than anticipated production levels, increased imports of LNG and milder weather could place downward pressures on prices. Conversely, stronger than anticipated economic growth, a warmer summer and continued dry-spells in the Pacific Northwest could increase demand for natural gas and push prices higher.

Temperature Outlook - June-July 2010

Listed below is a summary of the factors discussed and their expected impact on natural gas prices.

North American Price Pressures

• Improving than anticipated economic recovery, supply declines (upward pressure on price)
• Increased LNG imports, rising production levels (downward pressure on price)
• Weather-related demand (uncertain pressure on price)

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