LNG PRICING A MIDDLE EAST SUPPLIER'S PERSPECTIVE LE PRIX DU GNL LE POINT DE VUE D UN VENDEUR DU MOYEN ORIENT

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1 LNG PRICING A MIDDLE EAST SUPPLIER'S PERSPECTIVE LE PRIX DU GNL LE POINT DE VUE D UN VENDEUR DU MOYEN ORIENT Mr. Faisal M. Al Suwaidi Vice Chairman and Managing Director Qatar Liquefied Gas Company Limited Ras Laffan Industrial City, Qatar ABSTRACT As a leading Middle East LNG supplier, Qatargas is uniquely located to supply existing markets in Asia and Europe, the re-awakening market in the United States, and the potentially large markets emerging in India and China. While our geographic position provides access to all the world s LNG markets, that access presents the dilemma of how to sell LNG into three or possibly more separate LNG pricing regimes - regimes that are changing as competition re-shapes markets. To date, long term LNG sales have been regional. West of Suez suppliers sell to West of Suez buyers and the same applies East of Suez; therefore, LNG prices have developed to meet regional markets. For Qatargas to reach its full potential we must be able to supply all LNG markets, and this requires us to have the flexibility to adopt pricing solutions that are unique to each market. Qatargas experience making short term sales to Europe, Korea and the USA while supplying long term customers in Japan shows our flexibility and willingness to work with buyers. We will continue to work with LNG buyers to find price solutions that are flexible and that adapt to the rapid changes occurring in the market. RESUME Comme principale fournisseur de GNL au Moyen-Orient, Qatargas est spécialement bien positionné pour approvisionner les marches éxistants en Asie, en Europe et du marché qui se réveil aux Etats-Unis ainsi que le grand potentiel des marchés émergeant en Inde et en Chine. Tandis que nôtre position géographique permet d accéder aux marchés du GNL mondialement, cet acces présente le dilemme de la façon de vendre le GNL sous la forme de trois ou probablement plus de structures de prix différentes ces structures qui changent pendent que la concurrence re-structure les marchés. Jusqu à présent, les ventes de GNL au long-terme ont été régionaux. A l ouest de Suez les fournisseurs approvisionnent les acheteurs situés à l ouest, et le même raisonnement s applique sur les marchés à l est de Suez. Ainsi, les prix de GNL se sont développés en s adaptant aux marchés régionaux. Pour que Qatargas atteigne sa pleine capacitée nous devons pouvoir approvisionner tout les marchés de GNL, et ceci exige une certaine flexibilité pour évaluer et adopter des solutions de prix unique à chaque marché. Ayant obtenu des ventes à court-term en Europe, aux Etats-Unis et en Corée, Qatargas ayant néenmoins continué l approvisionnement de ces clients au long-terme au Japon démontre notre flexibilité, disponibilité et envie de travailler avec les acheteurs. Nous continuerons à travailler avec les acheteurs de GNL pour trouver des prix flexibles qui s adaptent aux changements qui se produisent sur le marché. PS1-2.1

2 LNG PRICING A MIDDLE EAST SUPPLIER'S PERSPECTIVE Qatargas signed its first long term LNG sales contract with a Japanese buyer in May 1992, and loaded its first cargo for delivery to that buyer on December 23 rd, Qatargas was the second LNG export project located in the Middle East and the first project to liquefy natural gas produced from Qatar's massive North Field. The field has proven recoverable reserves of 373 trillion cubic feet of natural gas and 8 billion barrels of condensate, and is often described as the world's largest non- associated gas field. We can produce as much as 1.6 billion cubic feet or natural gas and 60,000 barrels of condensate per day from our complex in North Field Block Bravo, a 100 square kilometer block located 80 kilometers offshore. Natural gas is processed offshore and piped to shore where it is liquefied at our three train LNG plant located at Ras Laffan city. Qatargas is strategically located between the major LNG markets, and has ample natural gas reserves to supply LNG to established LNG markets as well as emerging markets. Qatar is well positioned to supply the established LNG markets of East Asia, where our eight (8) Japanese long term buyers are located. We are located near existing LNG buyers located in Mediterranean Europe, and we have made more than 1.7 million tons of short term sales to European buyers since Qatar is also located closer to US markets than all but a few existing LNG suppliers, and we have exploited that fact by making short term sales of more than 1 million tons into that re-awakening market. We may be even better located with respect to emerging markets. o Qatargas is located only 1,300 miles from prospective LNG import locations on the West Coast of India and about 2,600 miles from India's East Coast. India, with huge potential gas and LNG demand, has two LNG import projects under development and as many ten more in the planning phase. Qatar is also well positioned to supply prospective new markets in China, which is some 5,000 miles distant. China is currently forming its first LNG import project, and is selecting foreign shareholders for the import venture. We expect that when LNG imports do begin LNG demand in China will grow quickly to an impressive size. When you combine Qatar's strategic location, which allows us to access all existing and emerging LNG markets, with the virtually unlimited proven reserves available in Qatar's North Field, you can see the potential for Qatar to emerge as the world s premier supplier of LNG. In 2000, we sold and delivered 6 million tons to our long term buyers in Japan. In addition, we sold more than 0.8 million tons of short term LNG. In doing so, we have demonstrated our technical capability. However, to fulfill our potential to be the leading LNG supplier to established and emerging LNG markets, Qatargas must enhance its skills to be a global LNG supplier in a business that has developed a regional pricing structure. One of the main challenges will be to establish LNG price structures that enable PS1-2.2

3 us to sell LNG into each regional market, without reference to existing prices in other markets. QATAR STRATEGIC LOCATION 8700 miles 5100 miles 1300 miles 5000 miles 6400 miles Since its inception, the LNG business has developed as a regional business. East of Suez supply projects were developed to deliver LNG to East of Suez buyers, and likewise West of Suez supply was delivered to West of Suez buyers. Until short term sales appeared in the mid 1990's, LNG rarely was sold from one region into the other. East of Suez LNG suppliers once sold almost exclusively to three Asian buyers, and LNG prices and formula structures were developed that were specific to those regional trades. Both ex-ship and FOB price structures developed with the idea that landed prices of LNG would be competitive with the delivered price of LNG from other projects, irrespective of the source of the LNG. West of Suez a single supplier dominated the LNG business for more than two decades. The majority of its LNG was sold to European buyers, with smaller quantities going to the USA. Two separate price regimes developed, one for Europe and a second for the USA. West of Suez sales were primarily on an FOB basis, and the LNG commodity price was established to yield a delivered LNG price that was competitive in the Buyers markets. PS1-2.3

4 The following graph shows: the weighted average price of LNG delivered to Japan, estimated delivered LNG cost for European buyers, and the delivered cost of LNG to the Everett terminal in the United States. For reference, we also show a crude oil price, since many think of crude oil prices setting a reference energy price. 6.0 LNG Delivered Cost & JCC LNG to Japan LNG from Algeria to Europe (Except Turkey & Greece) LNG to USA JCC (Right Hand Scale) The ex-ship price of LNG delivered to Japan is higher than the price of crude oil through most of the period. However, since late 1999, LNG prices have dropped below crude oil as "S" curves take hold and reduce LNG prices in the current high oil price environment. The Japanese LNG price level reflects many factors that are unique to East Asian LNG markets. There are no significant energy resources in the importing countries and, LNG buyers are dependent on imports to meet their energy requirements. Therefore, the supply and import facilities and contractual obligations must be structured to provide a level of supply security and reliability that reflects both the buyers' obligations to supply domestic customers and the buyers' dependence on imported energy. An important factor that has influenced East of Suez prices is the cost of constructing and operating a chain of dedicated LNG facilities that are tightly linked, both technically and commercially, to provide the security and high reliability that Asian utilities demand. European LNG and gas prices are generally lower than crude oil prices. Because of the formula structures, LNG and gas prices lag crude oil and product price changes by 6 months to a year. Natural gas and LNG prices are largely indexed either directly to the price of oil products with which natural gas competes, or indirectly through the use of crude oil netback prices. This price structure was developed in the pipeline gas business to price natural gas with reference to the price of products with which it competes in the end market such as gas oil, low sulphur and high sulphur heavy fuel oil. Since LNG competes directly with pipeline gas in the end market, LNG prices are indexed to a similar mix of product prices. PS1-2.4

5 United States prices shown are based on reported costs for LNG landed in the Distrigas terminal at Everett, Massachusetts. That price is a function of the exterminal price of natural gas sold from the terminal. There is no direct link or indexation to crude oil or product prices in US natural gas or LNG prices. Rather the price is a function of gas prices at the terminal where the LNG is imported. For long term sales to the US prices have been based on a netback from the exterminal price of LNG. Short term LNG sales prices are often based on the NYMEX Henry Hub futures price for the month in which the LNG cargo is delivered. The graph clearly demonstrates the price differences that exist between Japanese, European and United States LNG prices. These are the three existing LNG markets and the price regimes that have developed in those regions. As I noted earlier, the challenge is for LNG producers to work in these very different price regimes, and be sensitive to the Buyers' requirements to purchase LNG at a market clearing price in its specific market. Qatargas has made great strides toward being a major supplier of LNG. In the four years since the first cargo was loaded, Qatargas has delivered more than 13 million tons of LNG to its eight long term buyers in Japan. In addition, Qatargas has emerged as a dominant player in the spot and short term markets, accounting for between 13% and 33% of world wide short term sales since In our first four years of operation, Qatargas has made sales to 15 major LNG buyers representing most of the existing LNG importing countries. In 1997, our first year of commercial operation, we sold 4 short term cargoes equal to 127,000 tons of LNG, to Enagas. In 1998, we sold 19 short term cargoes, a total of 769,000 tons to Enagas and Botas. In 1999, Qatargas sold 21 short term cargoes totaling more than 1 million tons to buyers in Europe and the US. In 2000, we sold 15 short term cargoes totaling some 830,000 tons. Ten (10) of these cargoes were sold to CMS, two (2) each to Gas Natural and Korea Gas, and one (1) to Gaz de France. Our short term sales total more than 2 million tons of LNG, and generated revenues exceeding $200 million. To successfully market LNG into seven different countries, Qatargas has developed a sensitivity to the requirements of each individual LNG buyer. We have sold LNG into the three distinct LNG price regimes we described above. However, to date sales to West of Suez markets have been on a short term basis. Cargoes were sold at fixed prices where the term of the sale was very short. We also sold on a formula linked basis when a term contract was involved. The next step is converting the experience and relationships gained from our success in the short term business to enter into new long term sales. However, the playing field is changing at the same time that we are trying to manage this transition. Nearly every existing LNG market is undergoing some form of privatization and opening of its gas markets to competition, and emerging markets are still developing their pricing strategies. In Asia, Korea and Taiwan plan to privatize the state owned LNG importing companies, and re-structure the LNG and gas business by abolishing the PS1-2.5

6 importing monopolies. New companies will be allowed and encouraged to import LNG and compete for gas markets. There may be multiple buyers in each country, and each buyer may have its own LNG supply portfolio. In Japan, regional electric power and city gas markets that were protected by monopoly franchises are being opened to competition. The city gas companies and electric power generators that enjoyed cooperative relationships in the past are now beginning to compete. The possibility of opening the market to new entrants that could import LNG, sell natural gas to large customers and generate electricity from LNG is being explored. In Europe, with significant prodding from the European Union, the LNG and gas import, distribution and sales monopolies that were held by state and privately owned companies are being dismantled. Third party access rules are being developed for LNG import facilities and natural gas transmission and distribution infrastructure to promote further competition. Again, there are significant prospects for new gas marketers and LNG importers to emerge and compete for markets. Gas markets in the United States are already open for competition and most facilities grant third party access. As a result there is already a relatively large number of importers in the US with prospects for more to emerge. When the Cove Point and Elba Island terminals reopen, the market will expand, but the pricing basis should remain relatively unchanged. New LNG buyers in India are still trying to determine the price structure that is appropriate. Frankly, we do not expect that there will be one answer for all buyers. Electric power generators may have one price requirement based on their alternative fuels, while industrial customers and fertilizer manufacturers are likely to have different price requirements based on their alternative fuels. To date, Indian buyers have agreed rather conventional East of Suez price terms, but the large potential of the Indian market will not be realized until price and other sales terms are tailored to the requirements of individual Indian gas and LNG buyers. China is another new market with huge potential LNG demand. The Chinese trade press has made the point repeatedly that demand will be very price sensitive. If LNG sellers and buyers can reach acceptable price terms, the size of the market in China could be virtually unlimited. We see no shortage of challenges to expanding our LNG sales. While we have been very successful selling short term quantities worldwide, the market changes described above are likely to result in changes to price structures in established LNG markets. With emerging markets, two new price regimes may develop: one for India, and one for China. For a supplier such as Qatargas, with aspirations to sell LNG worldwide, selling LNG at market clearing prices in distinctly different price regimes while meeting the expectations of our shareholders will no doubt be a major challenge. Economic returns need to be commensurate with the investments made and risks borne by our shareholders, and must meet the expectations of the State of Qatar for depletion of its resource. We believe that the advantages provided by our strategic location, large gas reserves and commercial ingenuity will allow us to structure unique solutions to the meet the changing demands of a global LNG business. Qatargas is up to the challenge and we expect to succeed. PS1-2.6