DUAL PLENARY SESSION: Energy Market Integration - Developments in LNG Effects of recent and future developments in LNG markets on the interconnectedness of regional gas markets Fisoye Delano Poten & Partners Doc. 51106 32nd IAEE International Conference June 21-24, 2009 San Francisco, California,
Page 1 Poten & Partners: Consultants to Gas and LNG Industry Poten & Partners (Poten) was established over 60 years ago. Poten s client list is extensive and includes oil and gas companies in the private and public sectors, power generation and industrial companies, trading companies, shipowners and shipping companies, shipyards, storage terminal and pipeline operators, Government agencies, banks and financial institutions. Poten currently employs approximately 135 employees and has offices in New York, London, Houston, Athens, Perth, Singapore and Guangzhou. Poten & Partners has the largest team of consultants dedicated to the LNG industry. Currently very active across West Africa. Poten advises across the entire LNG Value Chain Poten advised an NOC on LNG Plant EPC price negotiation Poten advised an NOC on placing their long term equity LNG Poten advised a major gas company on their shipping entry strategy Poten was retained by one of Europe s largest gas utilities to assist their entry into the LNG business
Old LNG Model Relied on a Rigid Chain Anchor customers in Japan, Korea and Taiwan Dedicated chain locked by contracts and financing no diversions S-curves protected financing when oil prices were low Reliable relationships at a premium Deals negotiated over long periods 4 Typical S-Curve Protects financing at low oil prices LNG Price $/MMBtu 3.5 3 2.5 2 10 15 20 25 30 Oil Price $/Bbl
For Decades, LNG Meant Japan 100% Historical LNG Demand 80% % Total LNG Market 60% 40% 20% 0% 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Japan France Spain Taiwan Korea US India Other Key markets need LNG. More than half of all LNG sales were to Japan from 1977 through 2001 Japan is still by far the largest LNG importer but the market is much more diversified Huge diversification of companies
Power Generation will Drive LNG Demand Growth Natural Gas remains a highly desirable fuel LNG industry will experience rapid growth due to major new projects under construction or in startup phase LNG demand growth based on gas-fired CCGT (Combined Cycle Gas Turbine) 400 Forecasted LNG Demand 350 300 250 New major markets: 17% p.a. growth MMt/y 200 150 100 Traditional major markets: 3% p.a. growth 50 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
LNG Market Oversupplied Through 2013 Largest capacity increase in industry history meets worst economic downturn since the Great Depression Poten s base forecast does not place all the volume likely to be produced Deviation from expected economic growth or weather could help or worsen surplus Unallocated LNG Volumes Under Poten Base Case 16 14 12 MMt 10 8 6 4 2-2009 2010 2011 2012 2013
Page 6 And what happened to LNG Project FID s $1,000 $800 $600 $400 $200 $0 Learning curve / Economies of scale Liquefaction EPC costs (2009 $US/tpa) Cost inflation / Capacity constraints Source: Poten & Partners 2009 1998 2000 2002 2004 2006 2008 2010 2012 Start-up Year Greenfield projects Expansion projects Cost trend EPC costs have reached unprecedented levels choking off FID Only 5 projects have taken Final Investment Decision (FID) in the last three years versus 24 from 2002-2005 Unless FID s are taken soon, the supply gap will open.
Page 7 And gas for LNG will be available But LNG economics need to be sound for those with domestic gas needs Excess Available for Export Truly Stranded
Highest Prices in Markets where Alternative is Oil UK NBP* Henry Hub Gas-on-gas competition in US and UK Pricing based on Oil Products in Spain and rest of Europe P = ά + β.jcc** Oil linked Markets in Far East * UK National Balancing Point ** Japanese Customs Clearance price ( Japanese Crude Cocktail ) Oil-linked markets offer highest long-term prices Gas-on-gas markets such as US and UK trend to lower prices Continental Europe is oil-linked, driven by Algerian, Russian and Norwegian contracts
Page 9 LNG is no longer a niche Markets developed for seasonal and short term trades Contracts now have destination flexibility and share diversion upside Innovative price formulas for oil-indexed contracts Contracts with US and UK as primary destination provide flexible gas Domestic needs for power generation have constrained LNG exports
Page 10 Good projects will reach FID Sound project design and downside risk management Exploration & Production Liquefaction Shipping Regasification Marketing & Distribution Reserves certification Gas quality Inerts Liquids Deliverability Well Security Domestic obligation EPC Contracts Proven Technology Economies of scale Expansion trains Lump Sum Turnkey Projects Shipping Long term charter Efficient financing Flexibility for destination flexibility Regas Reasonable spare capacity Flexible lower cost options Markets Premium markets Credible offtake Commercial Long term contracts Fair downside protection Destination Flexibility More Conservative Financing
LNG Value Chain Costs and Key Players $7.0 Capex $ Billion $3.4 $1.2 Production Liquefaction Shipping Regasification $/MMBtu $3.00 $1.00 $0.40 $2.60 $5.60 $6.60 $7.00 Typical Netback to Producers Gas Market Price Top 10 Players QP Sonatrach Pertamina Shell Petronas ExxonMobil BP NNPC Total British Gas MOL NYK QGTC K-Line Shell MISC Iino Lines Mitsui & Co. Teekay Mitsubishi KOGAS TEPCO Chubu Elec. QP/ ExxonMobil GdF Suez Osaka Gas British Gas Total Shell Cheniere LNG Marketing Based on equity LNG Based on ships owned Based on terminal capacity Key Assumptions: - Liquefaction: 10 MMt/y, 2 trains - Shipping: West Africa Gulf of Mexico (6,000 nm), 13 x 165,000 cum ships - Regasification: 1.3 Bcf/d send out rate
Page 12 Summary Power Generation will continue to Drive LNG Demand Growth EPC costs are falling, but not as rapidly as LNG prices Markets are developed for seasonal and short term trades Exporting governments effort to balance domestic and export demand Good projects will reach FID
LNG & NATURAL GAS CONSULTING CONTACTS: AMERICAS Contact: Jim Briggs Email: jbriggs@poten.com Tel: +1 212 230 2000 EUROPE, MIDDLE EAST, AFRICA Contact: Graham Hartnell Email: ghartnell@poten.com Tel: +44 207 493 7272 ASIA PACIFIC Contact: Daryl Houghton Email: dhoughton@poten.com Tel: +61 8 9278 2439