GLOBAL DYNAMICS OF LNG BUSINESS GIE ANNUAL CONFERENCE GRONINGEN 6-7 MAY 2009 JEAN VERMEIRE President GIIGNL

GLOBAL DYNAMICS OF LNG BUSINESS

GIE ANNUAL CONFERENCE

GRONINGEN6-7 MAY 2009

JEAN VERMEIREPresident GIIGNL

Presentation of GIIGNL

• The International Group of LNG Importers, better known by its French acronym GIIGNL, is a non-profit organisation which was established in Paris, France, in December 1971

• GIIGNL membership presently includes 61 member companies from 20 countries of Asia, Europe and the Americas , or nearly every company involved in the importation of LNG and the operation of LNG receiving terminals

• Membership has evolved in line with the development of the LNG industry and now includes gas merchant and power companies, infrastructure companies and several of the major international oil companies

Legal Notice

The information presented here represents the views of the author and not necessarily those of the member companies of the International Group of LNG Importers (GIIGNL)

MAJOR THEMES

Global LNG Supply/Demand Outlook– Near-term: next 5 years– Long-term: 2013-2030

Developments in LNG Markets and Trade– Changes in Business Models– Spot trade, Flexible LNG and Arbitrage– Pricing: is Convergence likely?

Global LNG Supply/Demand Outlook : next 5 Years

« Sudden » supply overhang due to:• Worldwide reduction gas demand, primarily in

industry and power (economic crisis, fuel switching )

• Collapse U.S. LNG import needs (push unconventional gas production)

• Offtake commitments under long-term pipegas contracts in Europe

• Sharp increase liquefaction capacity 2008-2010

( +35% over 2007) from pre-2006 FID’s

North America functions as market of last resort and soaks up surplus

• LNG is price taker• Increase of summer cargoes into G of M• Low prices causes rapid decline U.S. production• Alternative of shutting-in LNG production

technically and commercially unattractive

Global LNG Supply/Demand Outlook : next 5 Years

• New projects suffered start-up delays and commissioning hick-up’s leading to supply surge in 2009/2010

• Limited supply additions between 2010 and 2013:

• Postponement FID for several projects may lead to supply shortage from 2014/2015 onwards as demand recovers:– Awaiting further cost reductions

– Declining prices (and faster than costs …)

– Security of demand concerns (recession)

– Financing obstacles

– Conflicts in allocation feedgas between domestic and export use

– Environmental hurdles

– Political tensions

Capacity additions 2008 to 2010

Source: Cambridge Energy Research Associates. own updates

Nigeria Train 6 (4.1 MTPA)

1Q08

RasGas Train 6 (7.8 MTPA) 3Q09RasGas Train 7

(7.8 MTPA) 1Q10

Liquefaction Plant—Existing/Under Construction

NWS (4.2 MTPA) 4Q08

Tangguh Train 1- 2(7.6 MTPA) 2Q09

Dua Debottleneck(1.5 MTPA) 3Q09

QatarGas II Train 4 (7.8 MTPA) 1Q09

QatarGas II Train 5(7.8 MTPA) 4Q09Qatargas III 3Q10Qatargas IV 4Q10

Sakhalin II Train 1-2(9.6 MTPA) 2Q09

Yemen Train 1- 2(6.7 MTPA) 3Q09

LNG Final Investment Decisions

Source: adapted from CERA.

•Australia-Darwin•Egypt-Idku•Equatorial Guinea•Nigeria-NLNG4-6•Norway•Oman-Qalhat•Qatar-QatarGas II,RG 5•Russia-Sakhalin•Trinidad 4

•Australia NWS 5•Indonesia Tangguh•Qatar-RasGas III•Qatar-QatarGas III & IV•Yemen

•Algeria-Skikda• -Gassi Touil•Australia-Pluto•Peru•Angola

•Australia - Gorgon - Ichthys - Wheatstone - Curtis•Papua New Guinea•Egypt Damietta 2•Russia Shtokman•Nigeria - Brass - T7 - OK LNGet al….

2002-04

PLAY

2005

FAST FORWARD

2006/2008

PAUSE

2009

STOP?

Historical Trend in 2008 Term Dollars

Data from Wood Mackenzie (used by permission)

LNG Liquefaction Capex

-

200

400

600

800

1,000

1,200

1,400

1,600

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Year

$/tp

a

Global LNG Supply Demand Outlook : 2015-2030

Worldwide LNG demand forecast influenced by - but not necessarily parallel to - gas demand forecast

Distinguishing factors between LNG and gas demand scenarios :– Monetizing new large discoveries of « remote » gas– Geopolitics and interregional pipeline development– Security of supply and diversification of sources– Exploration/production performance domestic (unconventional) resources– LNG chain construction costs

Long-term liquefaction capacity projections

0

1

2

3

4

5

6

7

8

9

2000 2005 2010 2015 2020 2025 2030

100 Million mt/year

High

Low

New FID’s required

Range of LNG supply scenarios to 2030

High

• 2013-2030: 6 % p.a. (compared to 7.5 % p.a. in 2000-2013)

• Bullish view on new export projects (significant new discoveries remote gas,

security of supply concerns, decline domestic production, construction cost decline)

• Largest contributors:– Atlantic: Nigeria; Russia– Pacific: Australia– Hybrid: Iran (post 2020)

• Australia and Nigeria may overtake Qatar

Low

• 2013-2030: 3 % p.a.

• High development costs and political /commercial uncertainties; unconventional production growth sustained

• Supply growth barriers in Atlantic and Middle East, but Pacific less affected

• Supply shortages likely if U.S. import needs turn out higher

• Qatar remains largest exporter

Where Will Next Generation LNG Come From?LNG Capacity by Status and Country

0 10 20 30 40 50 60 70 80 90

QatarIndonesia

AlgeriaAustraliaMalaysia

NigeriaTrinidad

EgyptOman

RussiaBruneiYemen

Abu DhabiPeru

NorwayEquatorial Guinea

LibyaIran

VenezuelaPapua New Guinea

AngolaMynamar

Mauritania

Million Tons per Year

Existing

Commited

Proposed

N.B. Proposed projects have varying degrees of likelihood

Source: CERA

MAJOR THEMES

Global LNG Supply/Demand Outlook– Near-term: next 5 years– Long-term: 2013-2030

Developments in LNG Markets and Trade– Changes in Business Models– Spot trade, Flexible LNG and Arbitrage– Pricing: is Convergence likely?

Changes in Business Models

Structural changes in the LNG industry and underlying reasons– Traditional model: “tramline projects” with long-term

dedicated contracts and bi-lateral trade

– Major expansion expected in US was catalyst for change in Atlantic Basin

– Transition in Europe further induced by early cargoes or additional volumes associated with long term contracted production without contractual destination

– Growing trend towards portfolio play with shorter term contracts, cargo deviations, spot trade and arbitrage play


Changes in contracting strategies for LNG supply Changes in contracting strategies for LNG supply

– Destination flexibility is key, but who controls?Destination flexibility is key, but who controls?– Removal of destination restrictions in European contracts Removal of destination restrictions in European contracts

replaced by shift from FOB to DES contractingreplaced by shift from FOB to DES contracting– Profit-sharing mechanisms for cargo deviations under scrutiny Profit-sharing mechanisms for cargo deviations under scrutiny

by competition authoritiesby competition authorities– Acceptable compromise are “push-button” diversion clausesAcceptable compromise are “push-button” diversion clauses– Master sales agreements and confirmation notices per Master sales agreements and confirmation notices per

transaction allows rapid execution of spot tradetransaction allows rapid execution of spot trade


Commercial Strategies– Resource holder/producer strategies

• Shorter contracts

• Not contracting entire capacity

• Self-contracting

– Marketers and gas merchants pursue LNG trading for arbitrage gains and to mitigate volume risk

– Aggregators assume volume risk under long-term FOB contracts in return for destination flexibility of LNG


• Vertical integration in both directions to mitigate risk (security of supply as well as of demand ) and enhance margins

• All battle for the midstream, with producers holding trump card in sellers’market,..but near-term outlook has changed suddenly !

• Only niche operators protected by specialized expertise (e.g. shipping companies) or regulatory measures (e.g. terminal developers/operators) escape integration drive

Spot trade, Flexible LNG and Arbitrage

Source and development of LNG Spot Market– Annual growth rate past 10 years

• Spot/Short-term LNG Trade = 15% (currently 20% of total)

• All LNG Trade = 7.5 %

– Source of spot/short-term trade• “true spot”• “flexible LNG”

– According to CERA :• 50% of capacity added in 2008-2010 is flexible• By 2010 25% of total capacity is flexible LNG• Major growth of flexible production in Middle East


Drivers of and conditions for spot trade– Flexible LNG seeks markets of highest netback

– Price signals determine redirections of contracted volumes and destination of cargoes tendered

– LNG buyers competing on global basis for flexible LNG

– Trade of flexible LNG requires:• spare regas capacity • spare shipping• ample LNG supply …..and willing buyers !


Spare shipping capacity to allow for cargo deviations and arbitrage

Rapid expansion Capacity increase

2006: 28 deliveries 4.0 mln m3 (liquid)

2007: 33 deliveries 5.0 mln m3

2008: 52 deliveries 10.0 mln m3

2009 (est.) 50 deliveries 8.5 mln m3

End of 2009 355 vessels in fleet 45.5 mln m3 total capacity

Source: Poten and Partners

"Theoretical redundancy in LNG shipping capacity: +/- 35%" (CERA)


Impact on security of supply and prices

– Flexible LNG supply suitable for demand peaks and supply Flexible LNG supply suitable for demand peaks and supply disruptions, less for base load needs (unless reliable access to disruptions, less for base load needs (unless reliable access to alternative supplies)alternative supplies)

– Need to outbid competition on global basis to attract cargoes, Need to outbid competition on global basis to attract cargoes, leading to increased volatility of wholesale pricesleading to increased volatility of wholesale prices

– Critical will be the timing of transition of US market from Critical will be the timing of transition of US market from current “sink” to base load buyer (unconventional resources current “sink” to base load buyer (unconventional resources are key)are key)


Rationale for investing in regas capacityRationale for investing in regas capacity

– Easier to control own supply logistics for new entrantsEasier to control own supply logistics for new entrants

– Necessary condition to procure LNGNecessary condition to procure LNG

– Relatively small cost as % of total LNG chainRelatively small cost as % of total LNG chain

– Value of option for arbitrage play higher than regas Value of option for arbitrage play higher than regas cost (price hedge)cost (price hedge)

– Insurance against supply disruption (physical hedge)Insurance against supply disruption (physical hedge)

– Unreliable secondary market and impractical UIOLIUnreliable secondary market and impractical UIOLI

– Low “annual average” utilization can be misleadingLow “annual average” utilization can be misleading

Implications for pricing: is convergence likely?

Price Setting mechanisms

– Concepts for gas pricing can be based on: traded markets, bi-lateral contract markets or government determination

– Europe has different price setting for spot and for long term transactions

– Europe and US have different supply/demand drivers and have different short-term clearing price mechanisms

– Can physical trading link between both markets lead to price convergence in traded markets?


Conditions for price convergence

– Convergence understood as: operation of single price Convergence understood as: operation of single price mechanism between two traded marketsmechanism between two traded markets

– Requirements for LNG trade to establish convergence Requirements for LNG trade to establish convergence between US and Europe (and eventually Asia)between US and Europe (and eventually Asia)

• Sufficient discretionary supplies which respond to price signalsSufficient discretionary supplies which respond to price signals

• Surplus shipping capacitySurplus shipping capacity

• Accessible surplus regas capacityAccessible surplus regas capacity

• Supply and demand in balance in respective marketsSupply and demand in balance in respective markets

LNG must become “price maker” instead of “price taker”LNG must become “price maker” instead of “price taker”


Outlook on convergence or divergence– Past: occasional influences between HH and NBP but no

convergence

– Outlook: convergence in Atlantic Basin only if USA needs more LNG and ample supply of flexible LNG available

– Critical developments

• Can recent increase US gas production be sustained?

• Will new LNG projects continue to feed sufficient flexible LNG into Atlantic Basin?

Thank you for your attention

Back-up slides

LNG Supply Chain : Typical costs & returns

5 Mt$400 per

tonne capacity

5 Mt single train$750 per

tonne capacity

5 ships$220M per ship

$90M per 1 BCM/yr capacity

US$2.0bn US$3.75bn US$1.1bn US$0.6bn US$7.45 bn

(27%) (50%) (15%) (8%) (100%)

Source : Wood Mackenzie, Deutsche BankOwn estimates

13.7%

?

Note: Hybrid = Capacity which could routinely supply both the Atlantic and Pacific region LNG markets, not necessarily

rigidly committed to particular markets at present

Source: IEA analysis.

Expected LNG export capacity by region

Documents

GLOBAL DYNAMICS OF LNG BUSINESS GIE ANNUAL CONFERENCE GRONINGEN 6-7 MAY 2009 JEAN VERMEIRE President GIIGNL