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LNG 101: SUPPLY, DEMAND, PRICING AND GLOBAL MARKET EVOLUTION
Ross Wyeno, Senior Energy Analyst, Platts Bentek
BENPOSIUM 2016
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Agenda:
• Global Supply and Demand Overview • LNG Contract Types: Oil-indexed vs. Gas-indexed, Long-
term vs. Spot
• Global Gas Pricing Anchors
• The Evolution of Global LNG Markets and the Role of the US
BENPOSIUM 2016
3
GLOBAL SUPPLY AND DEMAND OVERVIEW
Section 1.
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Global Gas Price Convergence
0
5
10
15
20
25
2010 2011 2012 2013 2014 2015 2016
$/M
MB
tu
Global Gas Prices
Henry Hub NBP JKM - Delivered Oil-indexed (13.5% JCC/Brent)
Global LNG Oversupply
Global Hydrocarbon Oversupply
Global LNG Shortage
BENPOSIUM 2016
5 Source: Platts Bentek
$(10)
$(5)
$-
$5
$10
$15
$20
2010 2011 2012 2013 2014 2015 2016
$/M
MB
tu
Global Gas Spreads
JKM to NBP JKM to Oil-Index JKM to Henry Hub
Spreads Between Markets Tightening
Price Parity
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6 Source: Platts Bentek
Global Spread $13.58 Global Spread $8.27
Global Spread $6.51
Asia Pacific Growth Slowing; Europe and Middle East Making Up For Declining Asian Demand
BENPOSIUM 2016
7 Source: Platts Eclipse Energy
19.2 20.9 22.8 23.5 23.2
8.4 6.5 5.1 5.1 5.4 0.5 0.5 0.4 0.6 1.0
0
5
10
15
20
25
30
35
2011 2012 2013 2014 2015
Bcf
/d
Global LNG Demand
Asia Pacific Europe South America Middle EastNorth Africa North America Central America West Africa
Japan and South Korean Demand Falling; Emerging Markets in Middle East, Europe, and SE Asia Picking Up the Slack
BENPOSIUM 2016
8 Source: Platts Eclipse
01234567
Bcf
/d
Emerging Market Demand
India Kuwait JordanIndonesia Jordan TurkeyEgypt Singapore Pakistan
0
5
10
15
20
25
30
Bcf
/d
Northeast Asian Demand
China Japan South Korea Taiwan
LNG CONTRACT TYPES
Section 2.
BENPOSIUM 2016
Primary LNG Contract Attributes
Indexation
Oil-index
Gas-index
Hybrid
Term
Long-term 20+ yr
Medium Term 5-20
Tenders 1 mo - 5 yr
Spot
Traditional Contract Terms
New Contract Terms
BENPOSIUM 2016
10
Project Financing
Secondary Marketing of LT
Capacity
Growing Market
Primarily US Imports/Exports
US Gas Indexed Contracts Will Make Up 20% of Global Market by 2020
0
10
20
30
40
50
60
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Bcf
/d
US Henry Hub Indexed Contracts
Rest of World US Gas Indexed
0%10%20%30%40%50%60%70%80%90%
100%
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Mar
ket S
hare
US Henry Hub Index by Market Share
Rest of World US Gas Indexed
Oil-Index: • Traditional index for LNG supply • Monetization of byproduct gas • New Australian projects largely oil-
indexed
Gas-Index: • Relatively new contract terms • Primarily US import/export
contracts • Disconnecting global LNG price
from the oil price
BENPOSIUM 2016
11 Source: GIIGNL
Short-term/Spot vs. Long-term
0%
5%
10%
15%
20%
25%
30%
35%
0
5
10
15
20
25
30
35
2010 2011 2012 2013 2014 2015
Bcf
/d
Long-term vs. Short-term/Spot Sales
Long-term Spot/Short-term % Short-term
0%
10%
20%
30%
40%
50%
60%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2010 2011 2012 2013 2014 2015
% S
hort
-term
Bcf
/d
Yearly Contract Signings
Long-Term Medium Term Short-term % Short-term
Long-term: • 20+ year contracts • Underwrite LNG project financing • Usually, 80%+ of project capacity
long-term contracted
Short-term: • <4 year contracts • Largely sold by portfolio marketers
(Shell, BP, Cheniere, Etc.) • Expected to become more
common with flexible US LNG supply
BENPOSIUM 2016
12 Source: GIIGNL
LNG Contracts: Tolling/Fee Based vs. SPA
US Tolling and Fee Based Agreement
• Project owner provides liquefaction processing services to client for a fee
• Or project offers full “turnkey” service
• Buyer carries full commodity price and transport risk
• Indexed to Henry Hub
Traditional Sale and Purchase
Agreement
• Project owner provides LNG to client for a fee (DES or FOB)
• Project owner responsible for supply procurement/development
• Project owner carries all commodity risk and takes upside differential
• Traditionally linked to oil
BENPOSIUM 2016
13
Tolling Agreement
14 14
LNG Facility does not bear commodity or pipeline capacity risk LNG Facility does not share in upside potential of gas-to-LNG price spread
Supply and pipeline capacity
Liquefaction Shipping
Customer= $$ Source supply and
capacity Customer= $$
Customer= $$ Pays toll to turn
natural gas into LNG
BENPOSIUM 2016
Buyer holds title throughout
Sale and Purchase Agreement
15
LNG Facility can capture upside to supply basis differentials and commodity price swings
Shipping Supply and
pipeline capacity
Liquefaction
Customer pays one fee for supply and liquefaction
Customer= $$
BENPOSIUM 2016
15 Buyer Takes Title FOB
US Sale Purchase Agreement a Little Different…
16
US Sale and Purchase Agreement (Cheniere)
• Project owner provides “turn key” LNG FOB for a fee • Project owner responsible for supply procurement and
transport • Project owner carries all transport risk, but sales indexed
to Henry Hub, but buyer assumes most commodity price risk
BENPOSIUM 2016
US LNG Contract Terms
BENPOSIUM 2016
17 Source: Platts Bentek
0
2
4
6
8
10
2016 2017 2018 2019 2020 2021B
cf/d
US LNG Capacity Additions
Sales Purchase Agreement Tolling Agreement
Project Contract Structure Capacity Fee $/MMBtu Usage Fee Contract Duration YearsSabine Pass Sales and Purchase Agreement $2.25 - $3.00 HH + 15% 20Corpus Christi Sales and Purchase Agreement $3.50 HH + 15% 20Cameron Tolling Agreement $3.25* 11%* 20Freeport Tolling Agreement $3.25* 11%* 20Cove Point Tolling Agreement $3.25* 11%* 20
Long-term Contract Terms
*Estimate
US LNG Contract Features: • Henry Hub indexation • New “Tolling Agreements” allow
upstream intergradation and hedging
• Destination flexibility encourages spot sales/trading
0
2
4
6
8
10
12
$4.45 $4.50 $4.55 $4.60 $4.65 $4.70 $4.75 $4.80 $4.85 $4.90
Bcf
/d
US LNG Average Supply Price 2020
Sabine Pass Long-term Sabine Pass - Cheniere MarketingCorpus Christi Long-term Corpus Christi - Cheniere MarketingCameron LNG Freeport LNGCove Point
US LNG Supply Costs Stratified by Location & Contract Type
31% of US Supply $4.50-$4.60
29% of US Supply $4.60-$4.75
40% of US Supply >$4.75
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18 Source: Platts Bentek
$0.25/MMBtu Range
GLOBAL GAS PRICING ANCHORS
Section 3.
BENPOSIUM 2016
Triggering New European Demand Will Require a Lower Price
0.01.02.03.04.05.06.07.08.09.0
10.0
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0
$/M
MB
tu
Bcf/d Switching Potential
European Coal Switching Prices
EU Coal Switching Channel UK Coal Switching Channel
June Dutch TTF @ ~$5/MMBtu
2 Bcf/d Switching =
~$3.50/Mmbtu 5 Bcf/d Switching = ~$2.50/Mmbtu
20
BENPOSIUM 2016
Source: Platts Eclipse
$-
$2
$4
$6
$8
$10
$12
$14
$16
2014 2015 2016 2017 2018
$/M
MB
tu
European Price Anchors
NWE CSP UK CSP Oil index (9,0,3)NBP HH DES Eu + $0.5 NBP Forecast
European Gas Prices Bound By UK CSP and Oil Indexed Prices on the High Side, US LNG Imports and NWE CSP on Low Side
Forecast Dynamics
BENPOSIUM 2016
21 Source: Platts Eclipse
THE EVOLUTION OF GLOBAL LNG MARKETS AND THE ROLE OF THE US
Section 4.
BENPOSIUM 2016
Global Supply Growth Expected to Outpace Demand
0
10
20
30
40
50
60
2016 2017 2018 2019 2020 2021
Bcf
/d
Global Supply and Demand Growth
Supply Growth Delta Baseload Demand Growth
Source: Platts Eclipse
BENPOSIUM 2016
23
Demand Will Rise Due to Falling Prices and Producer “Push”, But Not Enough to Cover All Supply Growth
24
0
10
20
30
40
50
60
2016 2017 2018 2019 2020 2021
Bcf
/d
Global Supply and Demand Growth
Supply Excess SupplyDelta Baseload Demand GrowthIncremental Demand Growth
Source: Platts Eclipse
BENPOSIUM 2016
0
10
20
30
40
50
60
2016 2017 2018 2019 2020 2021
Bcf
/d
Global LNG Suply
Australia USA Global
Global Supply Capacity to Grow by 21 Bcf/d (65%) by 2021
Between 2015-2021: 46% of Global Supply Growth from the US
35% of Global Supply Growth from AUS
BENPOSIUM 2016
25 Source: Platts Eclipse
US LNG Exports Expected to Be Underwhelming Until 2020+
26 Source: Platts Bentek
77%
56% 58% 44%
53%
69%
0%10%20%30%40%50%60%70%80%90%100%
0
2
4
6
8
10
12
Util
izat
ion
Rat
e
Bcf
/d
US LNG Exports
Forecast Baseload Dispatched to Europe Capacity Utilization
BENPOSIUM 2016
Key Takeaways
27
• Global price spreads are converging • New demand centers are popping up in
response to low LNG prices • Global LNG supply expected to grow
faster than demand • US LNG export terminals will face
possible underutilization between 2017-2020
