The global gas market price dynamics and implications for Norway www.woodmac.com May 2009 Kerry Anne Shanks Delivering commercial insight to the global energy industry
Introduction The energy industry is facing an unprecedented period of uncertainty and challenges Energy prices are highly volatile Access to and reliability of energy supply is a key concern Environmental policies are unclear, increasing consumer risks In this context, an understanding of future energy dynamics is an essential input into the future strategy of energy intensive consumers These challenges are particularly acute for major consumers of gas Gas is the most expensive fuel to store and transport CO 2 emission policy shifts likely to have a disproportionate affect on global gas markets
Until recently, major market players saw gas supply constraints We don't see any new projects coming from Indonesia, no new projects from Brunei or from Malaysia," "Australian LNG is the only hope for east Asian buyers.' CPC (Taiwan) 2006 we re now seeing multiple markets competing for the same LNG volumes, with price signals in one part of the world influencing behaviors and prices elsewhere. Martin Houston EVP, Global LNG, BG, April 2007 There are now serious concerns that there will be a (global) supply crunch...'' Tan Sri Hassan Marican, Petronas CEO, April 2007 (Gas) is very, very undervalued compared with oil...the World is under estimating the importance of gas Qatar Minister Al Attiyah (25/10/07) "The days of cheap energy for Europe seem to be over EU Commission, Energy Policy for Europe, 2007 The price of gas today is out of line with that of other alternative fuels, and that means we are encouraging the use of gas when, to the contrary, we should discourage it, Petrobras CEO Jose Gabrielli - Nov 07
... But recent events have not been so encouraging for gas producers Global Slide Into Deep Recession Financial Times, 2 Dec 2008 Australian LNG Cargo to UK Dramatic Natural Gas Growth Seen in Unconventional Areas New York Times, 8 April 2009 Gazprom braces for export drop Reuters, 1 April 2009 Expansion of LNG Threatens Gas Glut Financial Times, 9 March 2009 Global Natural Gas Glut New York Times, 21 March 2009 Japan Leads Asia Demand Decline Platts LNG Daily, 12 Mar 2009 Platts LNG, 5 May 2009 Another natural Gas Forecast, Another Expected Price Decline The Daily Oil Bulletin, 3 February 2009
So what challenges face the gas industry in 2009 2009 2007 Sellers Market Access to Gas Buyers Market Weak Demand Dynamics of Global Gas Market Oversupply in a Global Gas Market Prospect of Higher Prices Risk of Low Prices Increasing Costs Environmental Policy Security of Supply Environmental Policy
The three main gas markets developed independently North America Multiple buyers and sellers Liquid traded gas market Prices set by production costs and competition with competing fuels Europe Supplier and buyer concentration Prices generally set by oil (product) indexed contracts Increasing liquidity and trading especially in NW Europe Asia (LNG importers) Buyer concentration Almost exclusively oil indexed contracts Spot LNG purchases But increasingly markets are linked via LNG
Historically gas prices have trended together, but with considerable volatility 25 Benchmark Gas Prices in different regions Jan 2000 Feb 2009 20 15 10 5 - Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Range Japan Weighted Average Japan UK (NBP) US (Henry Hub) German BAFA
Growth in global gas trade is set to continue Source: Wood Mackenzie Global Gas Model
Trade growth will be driven by LNG Over 100 bcm of LNG capacity is under development LNG Capacity by FID Year New Global LNG Capacity Availability 60 140 50 Nearly 120bcm of new LNG Less than 25bcm 120 100 40 bcm 30 Lack of recent FID results in a slow down in LNG growth from 2011 bcm 80 60 20 40 10 20 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Atlantic Middle East Pacific Post FID Source: Wood Mackenzie LNG Service
There are some parallels between gas and oil in the path to commoditisation Oil Oil Contracted markets Increased Trading Global Spot price reference 1950-1972 1973-1979 1980 s Spot market insignificant LT integrated contracts Price regulated by governments & companies Spot sales 5% of total market Nationalisation of upstream business breaks vertical integration Supply surplus increase in non- Opec production WTI futures traded on NYMEX Spot sales reach 30% of market Maturing Commodity 1990 s to today Initial increase in volatility Derivatives are developed and traded markets become liquid Netback pricing 1960 s - 2004 2002-2009 LNG LNG sold on LT contracts. Buyer - seller relationships key Some spot sales 5-15% of market Nationalisation of some upstream business
How quickly will the drivers for a flexible gas market change Current 2015 2025 Flexible regas capacity in key markets No Yes Pricing references in all key markets No Flexible shipping capacity Yes Yes Yes Flexible supply Yes LNG Storage No Yes Interchangeability of different gas qualities No Yes Single price reference No Financial hedging available No Yes
There are a lot of moving parts affecting future global gas dynamics and pricing Gas demand growth in US & Europe Major pipe exporters sales strategy & tactics Pace of shale gas growth Upside in China demand Pace of growth of West Africa LNG projects Qatar s sales strategy & tactics Pace of growth of Australian LNG projects Pace of global economic recovery
What do global gas market fundamentals mean for Norway Short term managing weak gas demand in export markets Long term Norway increasingly part of a global gas market Gas commercialisation decisions to be made
There is significant potential upside to Norwegian gas production Norway s Barents Sea Dominated by Statoil s major Snøhvit LNG project, but offers oil development upside with sanction of Eni s Goliat oil and gas project UK and Norway Northern North Sea Mature oil and gas sector but with significant remaining reserves and extensive infrastructure. Can be harsh environment. Most majors and numerous IOCs present. Mid-Norway Well-established gas and oil sector, with growing production and good remaining prospectivity. Key core area for many majors and some smaller players Norway Central North Sea Maturing oil and gas sector but with significant remaining reserves. Still core for all majors. Late-life field management and redevelopments are key
Gas Producers will generally seek the highest netback for their gas Netback gas price to the producer = Market price (capital cost recovery + operational cost recovery + taxes) The key drivers for assessing the netback are: Market price for gas Distance to market (cost to deliver gas to consumption point) Government policy
There are various options for commercialising gas Power Sell into Domestic Gas Market Residential/Commercial Industry Commercialising Gas Export as Gas LNG / Pipeline / CNG Norway s gas commercialisation strategy is focused around gas exports GTL Methanol Convert to products Fertiliser
In summary Regional gas prices will trend together in the long term Growth in LNG markets is enhancing connectivity and flexibility in global gas markets High cost of gas storage and transportation means gas prices will show more volatility than other energy commodities Norway has gas production upside Gas commercialisation decisions will generally be made depending on which gas sales option provides the best netback As global gas prices trend together, policy and locations of reserves will be key determinants of Norwegian gas commercialisation strategies
Disclaimer This presentation has been prepared by Wood Mackenzie Limited for delivery at Gassmaks Conference 2009. The presentation is intended solely for the benefit of the attendees of the afore-named event and its contents and conclusions may not be disclosed to any other persons or companies or republished without Wood Mackenzie s prior written permission.
Kerry Anne Shanks European Gas & Power Consulting Wood Mackenzie Ltd 5 th Floor, 1 Finsbury Square London EC2A 1AE UK Global Contact Details Europe +44 (0)131 243 4400 Americas +1 713 470 1600 Asia Pacific +65 6518 0800 Email energy@woodmac.com Global Offices Australia - Canada - China - Japan - Malaysia - Russia - Singapore - South Africa - United Arab Emirates - United Kingdom - United States Wood Mackenzie has been providing its unique range of research products and consulting services to the Energy industry for over 30 years. Wood Mackenzie provides forward-looking commercial insight that enables clients to make better business decisions. For more information visit: www.woodmac.com