Shale Gas and Global Gas Geopolitics. Jim Franks, Ernst & Young LLP Alex Fleming, Ernst & Young LLP

Shale Gas and Global Gas Geopolitics Jim Franks, Ernst & Young LLP Alex Fleming, Ernst & Young LLP

The global landscape for natural gas is shifting with North American supply as a catalyst for massive change Supply Shifts Technology Change Investment & Capability Logistics & Chokepoints Geopolitical Risk Page 1 Shale Gas and Global Geopolitics

Natural gas trade flows show clear import and export patterns, which could be fundamentally disrupted by Middle East and Pacific dynamics ~38.0 (planned) Source: BP Statistical Review of World Energy Page 2 Shale Gas and Global Geopolitics

North American over-supply is impacting global demand patterns, but the 2016 start up of LNG export facilities in North America will drive the impact further Supply Shifts Commodity Pricing What is your break-even price for NG in business case decisions? Do you have a volatility range and tripwires for in-progress investments? Total Cost of Ownership Will NG as a fuel change any of your operations or supporting cost areas? How will you model the supply risks of disruptions in the NG chain? Markets and Demand How will the rising demand for energy in India, China, and other demographic shifts affect your customer base and inputs? Will new trading points and pricing differentials create opportunities for you? Modes of usage and transport Can further innovations on usage, minimal transport, and midstream infrastructure help your business model? Page 3 Shale Gas and Global Geopolitics

The technological applications that led to the US shale revolution are spreading, and are leading to a number of other innovations to capitalize on the abundance of gas Technology Changes Horizontal Drilling/Fracturing Are the fundamentals of the US revolution repeatable and able to be made operational? LNG/CNG What kind of advances will be integrated into new build terminals? What is the role of CNG vs. LNG in the balance? FLNG (Floating LNG Ships) Is the floating model economical or simply a way to bypass limitations? Micro LNG Plants What is the future of smaller scale facilities to access the global market? Water & Shale Supply Chain How will different global infrastructure patterns respond to the constraints and possible drive new well designs or R&D investments? Page 4 Shale Gas and Global Geopolitics

Global players are driving for a share of the growth as well as gaining access to knowledge and capabilities for future markets Investment and Capability Patterns Capital flows Will the East to West investments continue or maintain after there is sufficient learning achieved? Investment Decision Making Can North America maintain the pace of exports with a withdrawal of foreign capital? Training and Knowledge Transfer How fast will global investors realistically be able to replicate US capabilities? How much financial impact will IP and knowledge transfers have on companies trying to export from North America? Global Mobility Will relocation and global management be able to be mobile to the level needed to maintain operations in new areas? Change Management How will local management and employees respond to the pace and agility required to compete in new markets? Page 5 Shale Gas and Global Geopolitics

Post-Panamax capabilities combined with supply demand balance changes in several countries will alter supporting trade patterns and hubs Logistics and Chokepoints Malacca Straight and the Role of Singapore How fast will Singapore develop as a trading hub and what will its level of independence realistically maintain? Middle East and OPEC with the Suez Canal As OPEC influence wanes, which players will be the market makers for natural gas pricing? How will market power manifest itself in a heavy West to East LNG world? Panama Canal scenarios and Atlantic/Pacific Trade Will the development of larger footprint vessels change trade patterns or supplement existing balances? How fast will investors push to utilize the new canal capacity? What will be the long term viability of Nuclear Power in Japan? Shipping capacity and flexibility How will shipyard constraints impact the ability to ramp up these activities? Page 6 Shale Gas and Global Geopolitics

Geopolitical risks are rising from a 20 year hiatus and need to be managed proactively to maintain visibility, control volatility of portfolios, and prevent irrecoverable losses Geopolitical Risks South China Sea Dynamics If a flashpoint develops that stops all non-china flagged commercial shipping do you have a contingency? Middle East and further OPEC destabilization Is there a role for OPEC in gas pricing in the post-2016 world? Are there any emerging cartels and how do you put yourself on the right side of them? European Russian relationship evolution Is the European status quo sustainable? What further dynamics will arise from US supply of natural gas and FLNG for European supply? Terrorism targeting and disruptions What is the contingency for selected targeting of offshore NG platforms by pirates or terrorists? How will you manage these disruptions? US isolationist tendencies US self-sufficiency will change intervention criteria and create the need for new alliances? How will these balance imperatives? Page 7 Shale Gas and Global Geopolitics

The only constant will be change and variability, successful players will cultivate flexibility to manage through pricing changes and sources and ensure access to supply Constant Variability Varied Markets Multiple Pathways Page 8 Shale Gas and Global Geopolitics

EY Advisory s Oil & Gas practices are actively working with our clients to tackle these issues Page 9 Shale Gas and Global Geopolitics

For more information, please reach out to: Alex Fleming alex.fleming@ey.com Jim Franks james.franks@ey.com

EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. How EY s Global Oil & Gas Center can help your business The oil and gas sector is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. EY s Global Oil & Gas Center supports a global network of more than 9,600 oil and gas professionals with extensive experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oilfield service sub-sectors. The Center works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant key sector issues. With our deep sector focus, we can help your organization drive down costs and compete more effectively. 2014 EYGM Limited. All Rights Reserved. BSC no. ED 1114 This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

Seminário de Gás Natural Page 12 Shale Gas and Global Geopolitics

Asian natural gas market Page 13

The Asian Pacific natural gas market is complex and fragmented The region has three separate markets which have their distinct dynamics. First, the mature, well established markets of Japan, Korea and Chinese Taipei, which are isolated, mainly supplied by LNG and have limited scope for further growth. Second, the emerging giants, China and India, which will develop considerable natural gas demand supplied through both pipeline and LNG. Third, the area of South East Asia, which consists of several large LNG producers (Malaysia, Indonesia and Brunei) and rapidly growing economies interconnected to a limited extent by pipelines. Page 14

Gas-fired power demand will remain strong until early 2015 Natural gas demand in Asia, 1990 2017 Natural gas consumption has grown by more than 250% since 1990 until 2010. Japanese consumption represented the mainstay of Asian natural gas demand, especially in LNG, until 2010, when China surpassed Japan as the largest natural gas market in Asia. Overall demand in the Asia Pacific region is expected to follow global demand trends, growing at around 3% per annum to reach 875 bcm in 2017. Note: Other Asia Pacific in this graph consists of: Brunei Darussalam, Mongolia, Myanmar, Nepal, New Zealand, Korea, the Philippines, Singapore, Sri Lanka, Vietnam, and other. Source: IEA Page 15

Mt Demand for natural gas/lng is not inelastic Rises in natural gas price result in decline of its demand Combined demand from four major natural gas importers in Asia will reduce 9 Mt to 14 Mt if price rises by 10% Full impact of increase in price of imported LNG in China & Japan not passed to customers resulting in losses to NOC/ utility companies Changes in natural gas demand if price rises by 10% 0 China Japan Korea India -1-2 -3-4 -5-6 Source: IEEJ Presentation 10 September 2013 Page 16

Demand supply gap in natural gas in Asia to widen which will be met by LNG imports Growth in natural gas demand in Asia to be robust, driven by strong growth in demand from China Supply growth boosted by Australia Structural supply shortage to be met by LNG imports 1200 1000 800 Natural gas supply and demand in Asia and China (2010-25, in BCM) Asia (Demand) China (Demand) Asia (Supply) China (Supply) 600 400 200 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Source: 2013 World LNG report by International Gas Union Page 17

$/mmbtu Majority of forecasts show downward trend for prices in Asia Henry Hub plus is attractive if spot-gas prices stay under $6/million BTUs attractive to both buyers Notably, most long-term US gas price assumptions are at around $5-$6/million BTUs. Actual and forecast price of natural gas /LNG 18 16 14 12 10 8 6 4 2 0 Japan LNG Contracts (90% JCC @$100/bbl) Asian LNG Spot NBP/TTF $6.50/mmbtu $4.50/mmbtu Henry Hub 2010 2015 2020 2025 90% JCC Asian Spot NB P Henry Hub Source: Oxford Institute of Energy Studies, Presentation 4 December, 2013 Page 18

Regasification terminals are crucial for the LNG infrastructure, not only for the access, but also as suppliers of downstream flexibility. Regasification operational, under construction and planned in Asia Pacific, 2000 17 The yearly capacity utilization in Asia Pacific is estimated to have been 34% in 2000, slowly rising to around 50% in 2011 and projected to stabilize around this level as new and planned capacity comes on stream. Source: IEA databases; various company websites Page 19

Singapore could become a LNG hub With moderately growing demand, increasing infrastructure capacity and supply secured from various sources, Singapore s natural gas market can increasingly be considered a mature market located in the centre of a fast growing demand region. Note: + = currently contributing towards a competitive natural gas market; = currently not contributing towards a competitive natural gas market; +/ = currently unclear. To develop a Singaporean natural gas trading hub and increase confidence among market parties will likely require the regulator to revise current import limitations on PNG. It is crucial that these issues be resolved in a timely manner in order to allow for a reliable pricing signal to develop in this market. Singapore has certainly positioned itself (both through geography and infrastructure) to expand the effect of a Singaporean natural gas price beyond its borders. Page 20

The impact of government policies on market structure The rigidity of the LNG supply chain has traditionally provided considerable impetus to governments to secure long term security of supply through state owned natural gas companies. These organizations can match supply and demand for LNG through the vertical integration of their activities along the value chain. Regasification terminals are generally developed to accommodate long term supply contracts concluded by state owned enterprises and, without unbiased third party access, further limit LNG supply flexibility to consumers. The natural gas market structure in most Asian economies limits competition as a result of strong national organizations, which are generally regulated monopolies. Objective: to maximize revenues on their long term, oil indexed LNG contracts in their respective home markets. Nearly 79% of the terminals in operation, under construction or planned until 2017 are owned and operated by vertically integrated, government owned entities. Page 21

Development of Natural gas and shale gas in China The NOCs lead the natural gas development of China. Similar to oil E&P, these companies partner with international companies to develop projects requiring more technical expertise. The shifting landscape of China's natural gas supply sources towards greater imports and the need to bolster investment were sufficient grounds for China open its first natural gas spot trading market in July 2012 as part of its gas price liberalization. Shale Gas China held its first shale gas licensing round in 2011 in the Sichuan Basin and awarded the tenders to two Chinese companies (Sinopec and Henan Coal). Tendering is available not only to NOCs but also to private and local companies, and foreign investors may participate indirectly if they hold a PSC contract with a participating Chinese firm. Source: EIA, Technically Recoverable Shale Oil and Shale Gas Page 22

Russian natural gas market Page 23

Russia holds the largest natural gas reserves in the world, and is the second-largest producer of dry natural gas Russia's reserves account a quarter of the world's total proven reserves. The majority of these reserves are located in Siberia, with the Yamburg, Urengoy, and Medvezh'ye fields alone accounting for more than 40% of Russia's total reserves, while other significant deposits are located in northern Russia Page 24

The impact of government policies on market structure The state-run Gazprom dominates Russia's upstream, producing about 74% of Russia's total natural gas output. Gazprom's position is further cemented by its legal monopoly on Russian gas exports, although its monopoly on gas exports may be ending soon. Russia's government has announced that it intends to liberalize liquefied natural gas (LNG) exports, breaking Gazprom's absolute export monopoly. Russia's natural gas production 2012 Company Bcf/d Gazprom 47.1 Rosneft 1.2 LUKoil 1.6 Surgutneftegaz 1.2 TNK-BP 1.3 Others 1.6 ITERA 1.2 Novatek 5.5 PSA operators 2.6 Total 63.4 Independent gas producers such as Novatek have been increasing their production rates, with non- Gazprom sources expected to increase further in the future. Higher production rates have resulted from a growing number of companies entering the sector, including oil companies looking to develop their gas reserves. Source: Eastern Bloc Energy Page 25

Europe is the principal Russian Natural gas exports Russia sends about 76% of its natural gas exports to customers in Western Europe, with Germany, Turkey, Italy, France, and the United Kingdom receiving the bulk of these volumes. Smaller volumes of natural gas are also shipped via the Gazprom pipeline network to Austria, Finland, and Greece. Page 26

Ukraine, the strategic entrance for the Russian Natural Gas to Europe Five pipelines have a combined capacity of nearly 6 Tcf (trillion cubic feet) per day to Europe. The Yamal-Europe I, Northern Lights, Soyuz, Bratstvo, and Nord Stream pipelines all carry Russian gas to Eastern and Western European markets via Ukraine, Belarus, and across the Baltic Sea. Page 27

Social problems in Ukraine impact in the Natural Gas supply from Russia. Energy in Ukraine depends on the Russia Natural Gas Russia Ukraine relations were established in 1991 immediately upon the dissolution of the Soviet Union of which both were founding constituent republics Ukraine is divided, the population of the east, near the Russian border, is influenced by Russian culture, and tends to be pro-moscow. On the other hand, the population of central and western region original from Ukraine, wants to join the European Union. In June 2014, Ukraine signed a free trade and political cooperation agreement with the European Union Russia, which fears losing power and influence over Ukraine, issued a warning advising that the country of the former Soviet republic could suffer consequences for that decision. Ukraine restructured the military force of the country. Page 28

Social problems in Ukraine impact in the Natural Gas supply from Russia (continue ) Some months ago, Russia cut off supplies of natural gas to Ukraine after a pro-western government have ascended to power. The Europe Union needs to import more than a half of the energy needed and 40% of these imports are from Russia. This measure has increased concerns about supply for Europe, since most of the Russian natural gas stream passes through Ukraine "There is a high risk that the gas supplied by Gazprom to Europe, is illegally used by Ukraine for own use" (Russian Energy Minister Alexander Novak). The dispute in prices has led to an accumulation of debt in the amount of 5.3 billion dollars. Moscow already has a history of using the price of gas as a political weapon by turning off the gas supply to Ukraine twice in the past decade, causing interruptions in gas supplies to Europe in 2006 and 2008. Page 29

GNL in Europe, a new perspective for the European Union countries. The EU (Europe Union) LNG regasification capacity has more than doubled in the past five years. In 2012 LNG net imports were 631.3 TWh (terawatt hour), a 28% less than 2011 The 19 LNG terminals in the EU in 2012 provided a total nominal regasification capacity of 191 bcm (or about 2063 TWh) per year of gas LNG Supplies in Europe, 2012 (631.3 TWh) Freighters from Qatar and Algeria bring LNG to Europe via ports, but European buyers usually resell these shipments abroad for higher prices, instead of supplying its domestic market. The EU Commission is considering banning this practice to strengthen reserves. The EU regulation number 994/2010, passed in 2010 to protect the offers gas, which may include banning gas companies sell LNG shipments outside Europe by keeping more gas in the reserves, and order the industry to stop using gas.. Source: Eurogas Statistical Report 2013 Page 30

Russia seeking for new frontiers for the Natural gas exports Considering the political and geographic troubles between Russia and Europe, new frontiers like China are analyzed as an alternative China and Russia have a long history of relations with signed agreements. Among the agreements signed, the most important relates to energy planning, in which the Russian giant Gazprom would seal a partnership with CNPC (China National Petroleum Corporation). The agreements signed would allow China to build pipelines that would link Russia (Russia's Far East to western China). Source: IBP- OS ACORDOS DE GÁS NATURAL ENTRE RÚSSIA E CHINA: ESTRATÉGIA POLÍTICA E ECONÔMICA Page 31

Russia seeking for new frontiers for the Natural gas exports (continue ) In March 2013, representatives of both countries agreeing to a $400 billion deal to deliver Russian natural gas in China through pipelines east. Supply around 38 bcm of gas per year to the Chinese territory The memorandum signed by CNPC and Gazprom determined by the duration of 30 years, beginning in 2018, with the option to expand the volumes up to 60 bcm China has one of the largest shale gas reserves in the world. However, in the short term this option would not be feasible due to the lack of technology for this type of exploration. The major obstacle that Russia and China encountered on past attempts to make it to the altar was price. Outside analysts are saying that the price agreed is close to what the Chinese have paid for gas from Turkmenistan last year. Picture from Fortune Magazine - Russian President Vladimir Putin s and Chinese President Xi Jinping Source: IBP- OS ACORDOS DE GÁS NATURAL ENTRE RÚSSIA E CHINA: ESTRATÉGIA POLÍTICA E ECONÔMICA Page 32

Middle East natural gas market Page 33

Middle East had the highest growth in natural gas production in the last decade. Middle East gas production is set for growth, as the region looks to alternative domestic energy sources to release lucrative oil production for export. Middle East increased the Natural Gas production in 7.5% by year pushed by Qatar production. World Natural Gas production, Bcm 3.500 3.000 2.500 2.000 1.500 1.000 500 Source: BP Statistical Review 2014 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 North America S. & Cent. America Europe & Eurasia Middle East Africa Asia Pacific Page 34

Middle East Gas Rises, but the consumption does too Countries like Saudi Arabia, Kuwait and the UAE are targeting increased gas output as feedstock for power generation. Saudi Aramco recently accelerated its shale gas development plans and announced that a record number of rigs will be deployed to target gas. Qatar spent many years developing its natural gas resources particularly in the North Field and in 2012, Qatar was the second-largest dry natural gas producer in the Middle East and the fourth-largest producer in the world. 600 500 400 300 200 100 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: BP Statistical Review 2014 Gas Consumption, Bcm Gas Production, Bcm Page 35

Qatar walking to a big exporter of Natural Gas Qatar has become a major producer of gas in the region, with 83% of its production destined for export Qatar spent many years developing its natural gas resources (North Field), and in 2012 was the second-largest dry natural gas producer in the Middle East and the fourth-largest producer in the world. With a relatively low domestic energy demand, Qatar is able to export nearly all of its natural gas production. Middle East production, Bcm 600 500 400 300 200 100 Source: BP Statistical Review 2014 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Iran Kuwait Oman Qatar Saudi Arabia United Arab Emirates Yemen Other Middle East Page 36

The most reserves of Natural Gas in Iraq are associated with oil In January 2013, Iraq's proven natural gas reserves were the 12th largest in the world (3.6 Tcm). Over 60 percent of these reserves lie in the south of Iraq. Three-fourths of Iraq's natural gas resources are associated with oil. The majority of non-associated reserves are concentrated in several fields in the North. Source: EIA Page 37

The majority of Iraqi natural gas production is flared Some of the natural gas is used as fuel for power generation, while a portion of it is re-injected to enhance oil recovery. However, the majority of Iraqi natural gas production is flared. Flaring losses in some months have exceeded 60 percent of production, due to a lack of sufficient pipelines and other infrastructure to transport it for consumption and export. As a result, Iraq's five natural gas processing plants, which can process over 21.6 Bcm per year, sit mostly idle. Iraq is taking steps to reduce flaring and to use its natural gas resources in power generation and for re-injection to increase oil recovery. To reduce flaring, Iraq signed an agreement with Royal Dutch Shell to create a new joint venture, Basrah Gas Company, to capture flared gas in Basrah Province. The 25-year project costing $17 billion has a planned production capacity of up to 56 Mcm per day. Under the agreement, processed gas would go to the state-owned South Gas company for domestic use. Any gas not bought for use by Iraqi power plants could be exported as LNG. Source: EIA Page 38

Despite having the greatest impact on oil production, conflict with Iraq generate impacts in the region Page 39

THANK YOU!! Page 40

Grow Protect Innovate Optimize Backup Slides Page 41

XOM Projection of growth in fuel for power generation Page 42

Basic demographics will drive demand patterns Page 43

LNG Export Facilities (Red Permit issued, Blue proposed) US EIA Page 44

Big prize but can it be produced at scale? Technically Recoverable Shale Gas Resources (Tcf) Technically Recoverable Shale Oil Resources (Billion Barrels) 1. U.S. 1,161 1. Russia 75 2. China 1,115 2. U.S. 48 3. Argentina 802 3. China 32 4. Algeria 707 4. Argentina 27 5. Canada 573 5. Libya 26 6. Mexico 545 6. Australia 18 7. Australia 437 7. Venezuela 13 8. South Africa 390 8. Mexico 13 9. Russia 285 9. Pakistan 9 10. Brazil 245 10. Canada 9 11. Others 1,535 11. Others 65 TOTAL 7,795 TOTAL 335 Page 45