The main thing that keeps Ralph Hill, Williams’ head of exploration and production, up at night is the slow pace of Powder River Basin drilling permits issued by the Bureau of Land Management (BLM). Although the pace has quickened, Hill told analysts Thursday that it’s still a far cry from the pace predicted by BLM, and Williams may have to compensate by speeding up drilling in other basins.

“We believe that we’re in great shape in the Piceance, the San Juan and the Arkoma [basins]. The permits are there and the ability to drill is already there. The Powder [River, however, isn’t up to speed] — as you can see with the industry getting about 390 permits since the Record of Decision was issued [by BLM] in spring of last year; that’s obviously not a 3,000 a year pace,” Hill said at UBS’s 2004 Natural Gas & Electric Utilities Conference. “We need that to pick up. It is picking up, but clearly the biggest risk we have would be in the Powder.”

Williams, with its partner Western Gas Resources, is one of the biggest acreage holders in the Powder River Basin with about one million acres. It currently has about 4,100 wells with a 99% drilling success rate in 2003.

Contrary to some predictions, Hill said, the next big shift in the Powder River Basin from the WyoDak coalbeds to the Big George coal will be a step in the right direction, with about double the productivity and reserves per well but with only a slightly higher increase in costs (about $20,000 per well).

“We believe the Big George, where this is moving forward, will have approximately twice the thickness, gas content and reserves as the WyoDak. This is only going to get better.”

About 118 MMcf/d of production (12% of total Powder River Basin output) comes from the Big George coal, and about 860 MMcf/d comes from the WyoDak. The WyoDak, however, is in decline, and the Big George needs to gain steam to replace it. “The key there is whether we get permits,” said Hill, adding that Williams has about 277 permits pending. “We need about 600-900 permits a year for our peak.

“The analogy that I like to use is that we’re in the middle of the basketball season right now and need [BLM] to be on an up-tempo game with a little more fast break and a four corners offense. We’re optimistic that it will happen.”

Hill said if the permit rate does not pick up more, Williams could turn its focus more on the Piceance Basin, its biggest asset. “It’s something we might do anyway. The Piceance in the near term over the next two or three years could pick up the slack just by going to like a 15-rig pace [from a 12-rig pace]. Each rig costs about $20 million a year to run and drills about 20 wells; that $60 million could take over our budget for the Powder. As a portfolio we would be okay, but clearly we have a big resource in the Powder and would like to develop it.”

Williams has about 175,000 acres in the Piceance Basin and about 2,500 drilling locations and has 800 wells with nine rigs operating currently. It plans to increase the number of rigs to 12 or possibly 15 this year. Unlike the Powder River Basin, there is no regulatory risk in the Piceance. Williams has all of the permits it needs.

Hill noted that the E&P business will be the primary growth driver for Williams over the next few years. It has about 2.7 Tcf of proved reserves, 57% of which are proved undeveloped. The division had a 254% production replacement rate in 2003.

The E&P division is heavily hedged this year with prices locked in on 80% of its production, said Hill, compared to a historical average hedged position of about 20-50% of production. For 2005, about 47% of its production is hedged.

Also speaking at the UBS conference, Williams CEO Steve Malcolm told analysts the parent company is still working hard to get out of the power business. “As we endeavor to sell the book, we are trying to reduce risk, but given where power prices are today it makes it more challenging,” he said. “But near term, this business will be cash flow positive.”

Malcolm said Williams is a more disciplined company today than it was two years ago. In 2003, Williams sold $3 billion in assets. It still intends to sell about $500-700 million in assets this year, including its Alaska refinery, its power book, more domestic midstream assets and some midstream assets in Canada. Malcolm said the company is striving to reach investment grade status by 2005.

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