LNG PRICING AN INDEPENDENT VIEW

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1 Advisors and Investment Bankers to the Energy Industry LNG PRICING AN INDEPENDENT VIEW Veldanda V. Rao, Managing Director, Galway Group Asia March 23, 2011 A Member of the Galway GroupLP

2 Flexible SPA Quantities Are Growing Rapidly 2010 Flexible Quantities are roughly equivalent to total LNG quantities in Source: 2010 BP Statistical Review and Galway Analysis 2

3 Flexible SPA s Enable More Globalized Markets NBP & Other Hubs Brent (85%), NBP (15%) Long Term: JCC Short Term: NBP/Other Hubs Henry Hub/ NYMEX Markets LNG Pipeline Global marketing Networks Regional two-tier pricing Worldwide spot price linkage No worldwide long-term price linkage 3

4 Typical Galway Client Questions Are we moving towards a single worldwide LNG price mechanism? What s the future for oilindexed pricing? Which index makes more sense for long-term SPA s? 4

5 Seller/Buyer Long-Term Preferences Sellers typically prefer oil linkage Usually higher than gas Easy to manage price risk Buyer s alternative fuel cost Buyers typically prefer gas linkage Usually lower than oil Enhances international industrial and domestic market competitiveness 5

6 Current Objectives for New Long-Term SPA s ASIAN BUYERS Replace 100% JCC linkage with market-representative index (blended JCC/spot?) Reduce JCC slope; re-instate S-Curves EUROPEAN BUYERS Link LNG to gas indices (NBP, etc.) instead of oil Use spot gas (including LNG imports) as leverage to restructure oil price linkages for cross-border pipeline gas SELLERS Look past the current market demand is booming again Focus on oil-linked SPA opportunities Keep gas-linked SPA s as flexible as possible LENDERS Predictable, risk-manageable price outlook 6

7 Where are Oil and Gas Prices Headed? Oil Options Spread Gas Options Spread 7

8 Pacific Basin LNG Pricing Scenarios HIGH ECONOMIC GROWTH HIGH LNG DEMAND HIGH LNG SUPPLY LOCALIZED VOLATILE MARKETS High oil demand/high oil prices Weakly correlated oil & gas prices Buyers comfortable with LNG supply risks New projects not needed NOW Volatile spot LNG prices Perceived future supply/demand sets pricing for new LNG projects LOW LNG SUPPLY OIL IS KING High oil demand/high oil prices Coupled oil & gas prices Buyers see LNG supply risks New LNG facilities needed ASAP Oil sets LNG replacement price Spot LNG prices higher than longterm prices Suppliers have leverage to obtain oillinked prices for new LNG projects LOW ECONOMIC GROWTH LOW LNG DEMAND AWASH IN LNG Oil price floor set by F + D costs Fully decoupled oil & gas prices Buyers comfortable with LNG supply risks World Gas on Gas competition Henry Hub or NBP sets worldwide spot LNG prices Downward pressure on pricing for new LNG projects LOCALIZED STABLE MARKETS Oil price floor set by F + D costs Weakly correlated oil & gas prices LNG supply risk, but mitigated by low oil prices Spot LNG prices fluctuate between oil and gas (Henry Hub & NBP) based on lowest priced alternative Perceived future supply / demand sets pricing for new LNG projects 8

9 What About Europe? Economic recovery lagging versus Asia Fundamental gas market structure in flux Regulatory push for transparent open-access markets Buyers comfortable with spot LNG supply risk Atlantic Basin gas on gas competition sets spot gas & LNG prices Buyers capitalizing on opportunity to use spot/short term LNG from existing LNG projects: Reduces overall cost of gas Diversifies overall gas supplies Leverage to re-structure oil price linkage for pipeline imports Sellers pushing for oil linked pricing and positioning to divert spot/short term supplies elsewhere (including Asia) to capture oil prices 9

10 Rising Spot Prices After Earthquake Indicate an Expected Increase in LNG Demand 10

11 Takeaways New LNG projects are needed to meet growing demand Lenders and equity investors will continue to require longterm SPA s for new projects 20 years is a long time; think beyond today s situation Short-term (spot) and long-term deals are done for fundamentally different reasons Are we moving towards a single worldwide LNG price mechanism? What s the future for oil-indexed pricing? Which index makes more sense for long-term SPA s? 11

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