COMPETITIVE ANALYSIS OF CANADIAN LNG. CERI Breakfast Overview Allan Fogwill, President & CEO Sept 19, 2018

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1 COMPETITIVE ANALYSIS OF CANADIAN LNG CERI Breakfast Overview Allan Fogwill, President & CEO Sept 19, 2018

2 Overview Canadian Energy Research Institute Founded in 1975, the Canadian Energy Research Institute (CERI) is an independent, registered charitable organization specializing in the analysis of energy economics and related environmental policy issues in the energy production, transportation, and consumption sectors. Our mission is to provide relevant, independent, and objective economic research of energy and environmental issues to benefit business, government, academia and the public. CERI publications include: Market specific studies Geopolitical analyses Commodity reports (crude oil, electricity and natural gas) In addition, CERI hosts an annual Petrochemical Conference.

3 Core Funders: Donors: In-kind: Ivey Foundation

4 Presentation Outline Market Overview Methodology and Assumptions Supply Costs Competitive Analysis Conversion factor BCF/d = 7.6 MTPA

5 Global Market Overview Global trade in LNG increased to 258 million tonnes per annum (MTPA) in 2016 from 245 MTPA in 2015 and 241 MTPA in 2014

6 Market Share of LNG Supply ( )

7 Update on Australia Adding 15 MT capacity in Should be largest exporter at 81 MT by Domestic supply challenge

8 Update on U.S. Approximately 27.5 MTPA mid Total to reach approximately 73 MTPA by end of No domestic supply challenge. Not much opportunity for flow through of Canadian gas (e.g. Marcellus production could increase by more than 10 bcfd). 5 facilities under construction

9 LNG Imports

10 Significant Trends 1. Increase in Demand from lower credit worthy customers 2. Increase in Natural Gas Supply from Unconventional Sources 3. Changes in the Business model (70/30) Fragmentation of projects Redirection of shipments and profit sharing Changes in reference pricing, time periods and use of tolling 4. Technological changes Offshore regasification Offshore liquefaction 5. Carbon Management substitution of LNG for coal in electricity markets

11 Canadian Projects 35 LNG export licenses issued 28 in BC 3 in QC 3 in NS 1 in NB Key projects Goldboro LNG NS 5-10 MTPA, integrated, 2018 FID Bearhead LNG NS 8-12 MTPA, tolling, 2018 FID Woodfibre LNG BC 2 MTPA, merchant, active LNG Canada BC MTPA, integrated, 2018 FID Kitimat LNG BC 10 MTPA, integrated, n/a

12 Methodology Supply cost model 6 projects in 5 jurisdictions (2 in CA, 1 in AU, 3 in the US) Cases: a) liquefaction added to regasification, b) another train added to an existing project and c) a greenfield project Feedstock costs - multiple supply basins Pipeline cost model for projects lacking pipeline capacity (long distance mainly for CA and AU) Shipping cost model includes distance, charter rates, cost of fuel and destination LNG spot price Sensitivity analysis

13 Feedstock Costs

14 Import Markets Market Benchmark, early May 2018 Average Maximum for Japan Spot (proxy for Japan, Korea, China) $8.2 $9.2 $16.8 (2012) Old North-East Asia (NEA) Contract price (14.5% of Brent + $0.5) New North-East Asia (NEA) Contract price (11.5% of Brent price) $11.6 $9.8 $16.7 (2012) $8.9 (-$2.7 or 24% compared to old contracts) - - India $8.0 N/A N/A UK NBP $7.4 $6.3 $10.8 (2008) TRS France / Spain (MIB Gas) $7.6 N/A N/A

15 Cost of Western Canada LNG Project Cost 13 MTPA 26 MTPA Economies of scale USD CAD USD CAD % Capital Feedstock Pipeline Operating Corporate taxes LNG Income tax Carbon Tax Total (mmbtu)

16 Cost of Eastern Canada LNG Project Cost AECO Marcellus Local USD CAD USD CAD USD CAD Capital Feedstock Pipeline Operating Corporate taxes LNG Income tax Carbon Tax Total (mmbtu)

17 Key Differentiators of Canadian Projects West Abundant liquids-rich natural gas reserves in the proximity Competitive cost of natural gas Competitive temperature regime Competitive operating costs Closeness to the Asian markets Relatively high capital costs Need for a dedicated pipeline built in a mountainous terrain Relatively remote area Additional specific taxation: carbon tax and LNG income tax No domestic experience in delivering LNG project East Reliable AECO-C/Marcellus gas Competitive temperature regime Competitive operating costs Closeness to European and Latin American and India Markets Lack of developed local natural gas supply (fracking ban) Need for a dedicated transprovincial pipeline High transportation costs Moderate capital costs No domestic experience in delivering LNG projects

18 Merchant versus Integrated Facilities

19 Landed Costs in Japan

20 Path to Competitiveness at Japan

21 Landed LNG Costs at the UK

22 Path to Competitiveness Landed at the UK

23 Conclusion Global trade is increasing faster than expectations mostly in Asia Domestic Competitiveness Eastern integrated projects (if local gas was available) slightly more competitive than western projects Merchant projects in the west more competitive mainly due to proximity to AECO Incentives a factor in project FIDs (steel tariff exemption, LNG tax exemption)

24 Conclusion - continued Asian Markets CA projects more expensive than Japan spot Western CA market more competitive than AU and US Breakeven price is $8.99 in Japan Oil price needed = $80 European Markets CA projects more expensive than UK spot US projects more competitive than Eastern CA projects Breakeven price is $11.4 in the UK Oil price needed = $100 Market dynamic uncertainty = Gazprom

25 Thank You for Your Time CANADIAN ENERGY RESEARCH UPCOMING STUDIES: Natural Gas Liquids Market and Pricing Urban Energy Systems and Transportation Methane Emissions and Controls for the Natural Gas System