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~ PACE <br />Fourth Quarter 2007 <br />Gas Demand Uncerta(nty: European Coal-Fired <br />Generation <br />Steep increases in both commodity prices for <br />international steam coal and ocean vessel rates for dry <br />bulk shipments have caused delivered coal prices into <br />Europe to reach very high levels. Specifically, as of <br />November 30, 2007, McCloskey's marker price for <br />steam coal delivered to Northwest Europe had reached <br />US$128.50/metric tonne, an increase of US$25.20/ <br />metric tonne over the past month and US$60.50/tonne <br />over the past year. This has resulted from a combination <br />of high steam coal demand (due to high Chinese and <br />Indian demand, and unusually large outages of nuclear <br />generating capacity in both Japan and Europe) and <br />constrained international supplies of steam coal due to <br />production and transportation difficulties in Australia, <br />Indonesia, and South Africa. Ocean vessels suitable for <br />dry bulk shipments are currently also in short supply <br />since additions to the vessel fleet have not yet caught <br />up with very strong Chinese demand. This comes as <br />Authored by: <br />unfortunate timing for the Europeans who are trying to <br />get their heads around the impact of carbon <br />compliance costs which are to be rolled out on January <br />3rd. <br />The pending carbon compliance costs are no trivial <br />matter, adding nearly 50% to current prices or <br />approximately 55 Euros on a ton of delivered coal -- <br />assuming 2.4 tons of COZ per ton of coal and carbon <br />compliance costs at 23 Euros a ton of CO2. At such <br />levels, gas-fired generation begins to look economical. <br />Although it appears likely that international prices for <br />steam coal will remain high through most of 2008, Pace <br />expects that the current coal supply bottlenecks are <br />likely to be resolved over the next two to three years. <br />Substantial additions to dry bulk vessel capacity are <br />also expected by 2010. Therefore, Pace expects both <br />the coal commodity prices and the vessel rates <br />applicable to international steam coal shipments to <br />drop substantially by 2010. <br />Greg Ballheim, Manager <br />For further information on this <br />analysis, please see our <br />Market Outlook Series <br />Proprietary and Confidenlial <br />-3- <br />www.paceglobal.com <br />Is Liquefied Natural Gas a Dream or Reality? <br />