Long-term Trends in Natural Gas Supply and Demand

Vladimír Dlouhý, International Advisor, Goldman Sachs

presentation for

EGS24 Summit, Prague, May 24, 2012

2

A View on the Path to 80% Carbon Reduction in 2050 (1/4)The Road to Sustainable Energy Has to be Based on a Large Role for Natural Gas

Today to 2030

Gas’s high efficiency and low emissions of CO2 in heating and power generation can make a direct and immediate contribution to the reduction of GHG emission in the EU

Additionally, its flexibility can be well combined with the development of renewable sources

The share of natural gas in primary energy consumption is predicted to increase from 26% in 2010 to 30% in 2030 as the EU moves towards a low-carbon economy

The market share of gas in the residential and services sector is expected to decrease, but in the transport and power generation sectors, to increase

Source: Eurogas (Eurogas Roadmap 2050)

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A View on the Path to 80% Carbon Reduction in 2050 (2/4)The Road to Sustainable Energy Has to be Based on a Large Role for Natural Gas

Source: Eurogas (Eurogas Roadmap 2050)1 Including district heating, raw material and energy branch.

Natural Gas Market Development

63

162203 191

140

210 152

86120

106 114

112

1 28

33

34

4247

40

357

521544

462

1990 2010 2030 2050

BC

M

Power Generation Residential & Services Industry Transport Other¹

4

A View on the Path to 80% Carbon Reduction in 2050 (3/4)The Road to Sustainable Energy Has to be Based on a Large Role for Natural Gas

2030 to 2050

After 2030, the need for the development of natural gas power plants and industrial plants equipped with carbon capture and storage (CCS) technology will become apparent

The need for flexible gas-fired plants to support the necessary large-scale development of variable zero-carbon renewables will remain

Hence, the gas volumes in the power generation and industry sectors will be sustained. Moreover, the natural gas market share in the transport sector is expected to increase even further

In the residential and services sector, gas usage could decline further due to increased efficiency and behavioral changes

Source: Eurogas (Eurogas Roadmap 2050)

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A View on the Path to 80% Carbon Reduction in 2050 (4/4)The Road to Sustainable Energy Has to be Based on a Large Role for Natural Gas

Source: Eurogas (Eurogas Roadmap 2050)1 The study addressed energy related CO2 emissions by sector. Industrial processes and agriculture have not been considered.

GHG Emission Reduction of 82% (1990 – 2050)1

4132

143

18

16

11

5

19

13

10

3

22

28

19

7

80

57

1990 2010 2030 2050

Power Generation Residential & Services Industry Transport Baseline

10089

54

18

6

Market Dynamics (1/4)

Energy Demand

Factors determining future energy demand in Europe include

— Continued economic growth of 2% p.a. after the economic crisis has been overcome

— Near stable population

— Increased environmental awareness among politicians and consumers

— Growing trend to save energy and to improve energy efficiency

— Deliberations at the national level to use nuclear energy and expand the use of renewables

Energy consumption is expected to only increase by a minimal rate of 0.1% p.a.

Source: Eurogas (Long term outlook for Gas Demand and Supply 2007 – 2030)

Demand is Expected to Rise

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Market Dynamics (2/4)

Improvements in Energy Efficiency

Source: Eurogas (Long term outlook for Gas Demand and Supply 2007 – 2030)1 2007 – 2030.

Demand is Expected to Rise

0%

20%

40%

60%

80%

100%

120%

140%

160%

2006 2009 2012 2015 2018 2021 2024 2027 2030

GDP (+48%¹)

PEC (+2.6%¹)

PEC/GDP - Energy Intensity (-31%¹)

Investments in new energy efficiency efforts and climate change commitments will result in significant improvement in energy efficiency: +31%

8

Market Dynamics (3/4)

Growing Market Share for Natural Gas

Natural gas consumption in EU member states is expected to rise from 437 mtoe in 2007 to a range between 500 to 535 mtoe in 2030, corresponding to an increase of between 14% and 23%

At the same time, the share of natural gas in European primary energy demand could rise from 24% in 2007 to 27%-30% in 2030 (18% in 1990), with most of the growth expected from power generation

Due to its “green properties” and the existing highly efficient application technologies, natural gas will remain the fuel of choice and will continue to make a growing contribution to energy supply in the EU and Europe as a whole

Source: Eurogas (Long term outlook for Gas Demand and Supply 2007 – 2030)

Demand is Expected to Rise

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Market Dynamics (4/4)

Rising Share of Natural Gas in Primary Energy Consumption

Source: Eurogas (Long term outlook for Gas Demand and Supply 2007 – 2030)

Demand is Expected to Rise

24.0%

25.7%26.4%

26.9% 26.7%

2007 2015 2020 2025 2030

Base Case Environmental Scenario

27.8%28.4% 28.7%

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Demand DevelopmentsSector Trends

Residential and Commericial Sector Natural gas has a 35% market share and is the leader in this sector Further market penetration in this sector will slow down considerably

— Already reached high market penetration in major gas consuming countries and upcoming saturation in the sector in others

— Low population density which limits greater market penetration— Improving energy efficiency of buildings and moderately growing European population

Gas currently accounts for 31% of industrial final energy consumption (excluding industrial power stations)

The price of energy plays an important role in the sector and gas will only be able to gain market share at the expense of oil and coal, if it can be supplied at competitive prices

Depending on the economic developments and gas price competitiveness, gas sales to the industrial sector could increase slightly to 123-129 mtoe in 2030

Industrial Sector

Power Generation The role of natural gas in the power generation segment has increased considerably since 1990 and

now gas-fired power stations produce 20% of the electricity in the EU (7.5% in 1990) The exact development of the demand for gas in this segment cannot be ascertained However, given the resource’s considerable potential for reducing CO2 emissions in power generation

at low cost, it is expected that power generation would increase its share from 30% (in 2007) to 36-38% of total gas demand by 2030

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Natural Gas Demand Outlook by Sector

161 167 164 170 163 170 160 168

117 113 116 120 119 123 123 129

131 154 169 184 179 197 182 2022729 30 30 31

31 3131

1 2 3 3 44 4

5

406

2007

2009

2015

2020

Ba

se C

ase

2020

En

viro

nmen

tal

Scen

ario

2025

Ba

se C

ase

2025

En

viro

nmen

tal

Scen

ario

2030

Ba

se C

ase

2030

En

viro

nmen

tal

Scen

ario

MTO

E

437 465 482 507 496 525 500 535

Residential & Commercial Industry Power Generation Others (Heat Plants & Others) NGV

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Supply and Dependency on Imports (1/4)

Key Developments Indigenous gas production in Europe is going to further decline

Given the increasing gas demand and the gradually declining indigenous production, the currently contracted gas supply cannot meet gas demand in the longer term, so new imports will be necessary from 2015 onwards

European gas production (including Norway) in 2010 accounted for 55% of supplies to the European gas market; by 2030, the EU gas market will need around 70% from regions outside Europe

Natural gas reserves are abundant worldwide, however, with the global proved reserves accounting for 185 trillion m3

Although Russia will remain the key gas supplier for Europe, African countries and the Middle East will provide Europe with increasing quantities of gas as well

Source: Eurogas (Long term outlook for Gas Demand and Supply 2007-2030), British Petroleum 2010)

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Supply and Dependency on Imports (2/4)

EU27 Supply Outlook

Source: Eurogas (Long term outlook for Gas Demand and Supply 2007-2030), British Petroleum 2010)

177140

102 76 57

7185

9793

88

189 240 270274

260

13 54 9538 83 130

0

100

200

300

400

500

600

2007 2015 2020 2025 2030

MT

OE

EU27 Indigenous productionAvailable volumes from NorwayContracted imports and possible prolongations from outside EuropeAdditional supplies to be defined - Base CaseAdditional supplies to be defined - Environmental Scenario

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Supply and Dependency on Imports (3/4)

Future Security of Supply Potential shale gas reserves in Europe could strengthen the continent’s position

as well

— There have been increasing exploration efforts in Poland and Romania with largely positive results

To ensure the future security of supply

— Gas production and recovery must be maximized from indigenous sources

— New technologies for exploration and exploitation must be supported

— Stable and competitive fiscal and regulatory regimes must be created

— Infrastructure must be improved: new supply routes to Europe and LNG terminals

— Planning and permitting processes for major projects must be facilitated

— Research and development into biogas production, distribution and final use should be encouraged

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Supply and Dependency on Imports (4/4)

EU27 Import Dependency from Outside Europe

Source: Eurogas (Long term outlook for Gas Demand and Supply 2007-2030), British Petroleum 2010)

43%

51%59%

66%71%

61%

68%73%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2015 2020 2025 2030

Import dependency - Base Case Import dependency - Environmental Scenario

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Supply Potential for Europe (1/2)

Overview Supply Potential

Netherlands and UK production is declining with some increase in Norwegian production

Pipeline infrastructure being established (Nord Stream, South Stream, Nabucco) which would add around 150 bcm to existing capacity

LNG regasification growing rapidly, supplied in the near term by LNG from Egypt, Trinidad and Qatar

Shale gas with strong growth in the US leading to LNG cargo diversion, and potential in Europe

Source: ENTSOGI, British Petroleum 2010

Supply is Set to See Substantial Change Towards Imported Gas

0

1

2

3

4

5

6

7

8

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020(G

Wh

/y in

mill

ion

s)

Indigenous Production RussianNorwegian LNGAlgerian LibyanAzeri

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Supply Potential for Europe (2/2)

Gas Reserves Around Europe (tr m3)

Source: ENTSOGI, British Petroleum 2010

Russia44.38

Other LNG40.96

Qatar25.37

Turkme-nistan8.10

Nigeria5.25

Algeria4.50 Libya

1.54Iraq3.17

Azerbaijan1.31

Norway

2.05

Indigenous Gas Production (MTOE)

Import Dependency from Outside Europe (in % of Demand)

177

140

102

76

57

2007 2015 2020 2025 2030

43%

71%

2007 2030

Supply is Set to See Substantial Change Towards Imported Gas

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Development of Supply Situation

Section Title

Total import capacity in Europe is set to increase from 466bcm in 2010 to 639bcm in 2020 and 715bcm in 2030. Whilst this significantly exceeds the demand projections of the EU27, several projects might still get delayed or cancelled

Overview of Key Supply Regions

2010 94 bcm

2020 115 bcm

2030 120 bcm

Norway

Yr Capacity

2010 6 bcm

2020 6 bcm

2030 6 bcm

T&T, Venezuela

Yr Capacity

2010 21 bcm

2020 38 bcm

2030 45 bcm

West Africa

Yr Capacity

2010 166 bcm

2020 196 bcm

2030 207 bcm

Russia

Yr Capacity

2010 NA bcm

2020 13 bcm

2030 13 bcm

Turk. & Azerb.

Yr Capacity

2010 44 bcm

2020 68 bcm

2030 88 bcm

Qatar/UAE/Oman/Yemen

Yr Capacity

2010 81 bcm

2020 110 bcm

2030 115 bcm

Algeria

Yr Capacity

2010 12 bcm

2020 25 bcm

2030 38 bcm

Libya

Yr Capacity

2010 23 bcm

2020 28 bcm

2030 28 bcm

Egypt

Yr Capacity

2010 NA bcm

2020 5 bcm

2030 20 bcm

Iraq

Yr Capacity

2010 NA bcm

2020 35 bcm

2030 35 bcm

Iran

Yr Capacity

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Pan-European Gas Pipeline Projects

Nord Stream Established in 2005 for the construction of two

1,224km natural gas pipelines through the Baltic sea, delivering Russian gas to Germany and West Europe, the project is near its completion with Line 1 completed in Nov 2011 and Line 2 expected to be operational by Q4 2012

When operational, the two pipelines will have capacity to transport combined total of 55bcm of gas a year

Pipelines are designed to operate for 50 years

South Stream

The South Stream project is another step towards strengthening European energy security and it executes Gazprom’s strategy of diversifying the Russian natural gas supply routes

When operational the pipeline’s capacity is planned to be 63bcm per year

The final investment decision on the construction of the planned pipeline will be taken in Nov 2012

Map of Planned Major Pipeline Projects

Source: Project websites, Press release

Nabucco - ???

Nord Stream

South Stream

Nabucco

Germany

Romania

Turkey

Serbia

HungaryAustria

Russia

Slovenia

Bulgaria

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Natural Gas in the Czech Republic

Demand will follow the expected European trends above strategic decision: gas vs. nuclear

Supply Diversification of supply routes

Almost 100% import dependence 50 % supply from FR, rest from Norway (RF:N approx. 3:1) and spot market

Impact of Nord Stream Strategic position vis-a-vis gas deliveries to western Europe Gazelle, more interconnectors in the future, potential link to South Stream

Flexibility as to market volatility and emergency situation Underground natural gas storages

40% annual consumption, potential of 60 mil. m3 per day, for 30 days max. Open market, competition

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Thank you