The Evolving Global LNG Industry South Africa Gas Options, Cape Town, 3 rd 5 th October 2016

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1 The Evolving Global LNG Industry South Africa Gas Options, Cape Town, 3 rd 5 th October 2016 John Mauel Head of Energy Transactions, United States Norton Rose Fulbright US LLP

2 An industry in transformation Technological advances are uncovering massive new shale gas reserves and production is projected to continue increasing LNG infrastructure is expanding throughout the delivery chain Global liquefaction capacity is increasing dramatically and new liquefaction regions are emerging The number of countries with regasification capacity is growing and floating regasification is facilitating development of new markets The LNG shipping market is oversupplied and charter rates have fallen Natural gas prices are becoming increasingly decoupled from oil prices US LNG exports are introducing new pricing and flexibility Liquid US gas market as supply source US HH based pricing New market participants and destination flexibility Reservation fee model and quantity flexibility Remarketing of US LNG driving increase in short and medium term LNG trade 2

3 World natural gas reserves The world s proved natural gas reserves have grown by 40% over the last 20 years Estimates of proved reserves increased 31 Tcf from The largest change was for the US - proved reserves increased by 30 Tcf (9%) from 338 Tcf in 2015 to 369 Tcf in 2016 US reserves are now the world s 4 th largest (after Russia, Iran, and Qatar) New natural gas reserves are leading to the development of new LNG export regions World proved natural gas reserves (tcf) 1 World proved natural gas reserves (tcf) 3

4 China 2012 China 2040 Canada 2012 Canada 2040 US 2012 US 2040 World shale gas production World natural gas production is expected to increase 69% from 2012 to 2040 Shale gas is expected to account for 30% of world natural gas production by 2040 Shale gas is projected to account for over half of US production in 2040 Abundant shale reserves contribute to relatively low stable natural gas prices due to shale s ability to quickly respond to changes in price US, Canada, and China projected production 2 Shale gas Reservoir gas Tight gas Coalbed methane 4

5 LNG liquefaction capacity Global liquefaction capacity is expected to grow 32% from 2015 to 2019, reaching 57 Bcf/d Australia and the US account for 93% of the new liquefaction capacity In midterm, east Africa (Mozambique, Tanzania), western Canada, floating LNG in Malaysia and Australia Growth in liquefaction capacity and emerging LNG export countries facilitate supply source flexibility LNG capacity additions (Bcf/d) US Australia Malaysia Indonesia Columbia 5

6 LNG regasification capacity Regasification capacity continues to expand both for existing LNG importers and for emerging markets The addition of Egypt, Pakistan, Jordan, and Poland brings the number of LNG importing countries to 34 (108 active regas terminals) FSRUs have been the most common for new markets (costeffective and able to be developed in less time) Growth in regas capacity and new import countries facilitate diversion flexibility Total regasification capacity (Bcf/d) 4 Onshore Floating 6

7 Global LNG fleet The global LNG fleet expanded to 410 LNG vessels in 2015 A wave of newbuild orders tied to projects in Australia and the US, coupled with delayed ramp-up of new liquefaction, has deepened oversupply Spot charter rates have fallen from a post-fukushima driven $100,000/day in 2013 to $30,000/day in 2015 Growth in the LNG tanker market provides buyers and traders additional flexibility to bid on short-term FOB supply Number of LNG Vessels 5 Number of LNG Vessels 7

8 Jan-05 Feb-06 Mar-07 Apr-08 May-09 Jun-10 Jul-11 Aug-12 Sep-13 Oct-14 Nov-15 Decoupling of natural gas from oil prices Volatility in US gas to oil price ratio suggests periods of divergence over the long term US natural gas prices averaged $2.61/MMBtu in 2015 US natural gas fundamentals (abundant shale gas, improving pipeline access, decreasing drilling costs) drive prices much more than changes in oil prices Although lower oil prices have decreased the spread between oil-linked and US LNG in the short term, US LNG offers price diversity and projected relatively low prices long term $/MMBtu (5.8MMBtu per barrel conversion) 6 HH WTI Brent 8

9 Approved US LNG export projects Five projects in construction (62 Mtpa) First US export cargo shipped in February At COD of the projects under construction, US will become the third largest exporter (after Australia and Qatar) 7 9

10 Proposed US LNG export projects Many proposed US projects not already under construction face challenges in near-term given LNG oversupply However, abundant US reserves and future LNG demand growth expected to result in second wave of US projects 8 10

11 US LNG Contracting Seller supply source flexibility. Subject to Buyer s consent, Seller may deliver the LNG to Buyer from alternative liquefaction facilities provided that certain conditions are satisfied 9 Buyer destination flexibility. Subject to trade law and export authorization compliance, Buyer may sell the LNG at any destination 10 Buyer s cancellation right. Buyer may cancel scheduled cargos without a cancellation fee (but without monthly fixed charge relief) by providing notice prior to the cancellation deadline 11 Cover damages for Buyer s failure to take. Buyer generally pays cover damages (not take-or-pay damages) for failure to take Contract Sales Price. Price typically consists of (i) a commodity price (in US$/MMBtu) based on HH with a fuel factor, and (ii) a monthly fixed charge (in US$/month) designed to cover liquefaction and other fixed costs (including liquefaction company return on equity and, if applicable, tolling party margin) 11

12 Implications for South Africa s Gas to Power Potential LNG suppliers. The number and type of potential LNG suppliers to South Africa has expanded Available LNG. Huge volumes of LNG have been made available from US LNG remarketing and portfolio players and traders New FSRU technology. FSRUs have provided a potential solution to South Africa s need for early gas power generation Quantity flexibility. US LNG cancellation and quantity flexibility, coupled with growing non-long term trade, may help suppliers align with South Africa s power load and dispatch requirements Pricing. HH pricing and US shale gas price elasticity of supply may contribute to a relatively low cost stable LNG supply to South Africa Credit requirements. Portfolio players and traders, with US LNG and increased ability to mitigate failures to take by the South Africa LNG buyer, may be more flexible on credit 12

13 References (cited and background) 1/ U.S. Energy Information Administration, International Energy Outlook 2016, DOE/EIA-0484(2016) (Washington DC: May 2016) (figure data). 2/ U.S. Energy Information Administration, International Energy Outlook 2016, DOE/EIA-0484(2016) (Washington DC: May 2016) (figure data). 3/ U.S. Energy Information Administration, International Energy Outlook 2016, DOE/EIA-0484(2016) (Washington DC: May 2016) (figure data). 4/ U.S. Energy Information Administration, International Energy Outlook 2016, DOE/EIA-0484(2016) (Washington DC: May 2016) (figure data). 5/ Gas in Focus, Evolution of the global LNG carrier fleet, Source: IGU World LNG Report (2016) (downloads). 6/ U.S. Energy Information Administration, Natural Gas Data (September 2016) (Source: Thomson Reuters, Henry Hub Natural Gas Spot Price, Europe Brent Spot Price, Cushing OK WTI Spot Price FOB (with Brent and WTI converted from barrels to MMBtu at a ratio of one barrel to 5.8 MMBtu). 7/ U.S. Federal Energy Regulatory Commission (August 3, 2016) 8/ U.S. Federal Energy Regulatory Commission (August 3, 2016) 9/ See, e.g., Cheniere Energy Partners, L.P., Current Report (Form 8-K) (Jan. 25, 2012), LNG Sale and Purchase Agreement (FOB) Dated January 25, 2012 between Sabine Pass Liquefaction, LLC (Seller) and BG Gulf Coast LNG, LLC (Buyer), Exhibit (generally, Seller intends to load cargoes from the Sabine Pass Facility, but, subject to the prior written consent of Buyer (such consent not to be unreasonably withheld), Seller may deliver cargoes to Buyer from any alternative Gas liquefaction facility; provided that [among other conditions] Seller has agreed to reimburse Buyer an amount equal to Buyer s reasonable estimate of the increased costs that would be incurred as a result of the delivery of LNG at such alternative source. ) 13

14 References (cited and background) - continued 10/ See, e.g., Cheniere Energy Partners, L.P., Current Report (Form 8-K) (Jan. 25, 2012), LNG Sale and Purchase Agreement (FOB) Dated January 25, 2012 between Sabine Pass Liquefaction, LLC (Seller) and BG Gulf Coast LNG, LLC (Buyer), Exhibit (generally, Subject to [trade law and export authorization compliance], Buyer shall be free to (a) sell such LNG free on board at the Sabine Pass Facility or at any other point during a voyage, or at or after the unloading of any LNG purchased hereunder and (b) transport the LNG to, and market such LNG at, any destination of its choosing. ) 11/ See, e.g., Cheniere Energy Partners, L.P., Current Report (Form 8-K) (Jan. 25, 2012), LNG Sale and Purchase Agreement (FOB) Dated January 25, 2012 between Sabine Pass Liquefaction, LLC (Seller) and BG Gulf Coast LNG, LLC (Buyer), Exhibit 10.1 (generally, Buyer may cancel all or any portion of the Scheduled Cargo Quantity if Buyer issues a notice of cancellation to Seller on or prior to the Cancellation Deadline. There shall be no cancellation fee; however, Buyer shall continue to be responsible for paying the Monthly Sales Charge. ) Corbeau and Ledesma, LNG Markets in Transition: The Great Reconfiguration, Oxford Institute for Energy Studies and the King Abdulla Petroleum Studies and Research Center (Oxford University Press 2016). Foss, M.M. 2012, AIPN and BEG/CEE-UT, LNG Supply, Trade and Contracting Patterns: Is Transformation Happening?, October International Gas Union, 2016 World LNG Report, (2016) U.S. Energy Information Administration, Annual Energy Outlook 2016, DOE/EIA-0484(2016) (Washington DC: May 2016) 14

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