Global Gas Price Outlook and Parity. Dianne Nicotra Energy Spot Trader September 2013

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1 Global Gas Price Outlook and Parity Dianne Nicotra Energy Spot Trader September 2013

2 State of the Natural Gas World Fastest growing fossil fuel Rapid growth in developing countries Traded via pipeline or shipped as LNG Fuel of choice for power generation Lowest carbon-intensive fossil fuel Competitive energy source Source: BP 2013 Statistical Review of World Energy 2012 Review

3 State of the Natural Gas World LNG One third of world natural gas mix (234 MT in 2012) faster growth than pipelines Substantial export capacity under development globally Qatar is the largest exporter 77 MTPA Japan & Korea premium consumers largest importers

4 Pricing Mechanisms Oil-linked pricing Long-term contracts with price formulas. Linked to either crude oil prices or oil product prices, usually with some discount. Competitve Gas on Gas hubs Trading hubs marketplace liquidity & price discovery. Government regulated pricing Can reflect production and other costs or provide subsidies for natural gas consumers. Source: International Gas Union

5 Hubs versus Spot versus Contracts is the gas price divergence a true market signal?

6 Oil Versus Gas Historical reason for oil-linkage Same production process Many gas exporters also oil exporters People understood oil markets Switchable alternate fuel Natural Gas tends to be slightly discounted to discourage fuel switching

7 What Has Shaped Gas Prices Today? Global Recession Continued economic slowdown Europe and Russia Renewables push decreased European energy demand Fukushima disaster Nuclear shutdowns Increasing cost of doing business in Australia North American Shale Gas Revolution Middle East unrest and sabotage

8 Global LNG Market Test 2011 Japan Earthquake handled demand surge without shortages or price spikes Growing number of suppliers and consumers drives competition Producing countries growing: 15 at the beginning of 2008, ~30 by 2020 Over 25 countries have terminals destination flexibility of LNG cargoes..or coincidence? Less competitive compared to other fuels in Europe means gas exported elsewhere Plenty Shale Gas supply

9 Upcoming LNG Supply/Demand Balance Thirty countries with proposed LNG projects BUT few projects to be completed in next two years Increased production in US price can only be discounted so far

10 Domestic Gas Price Divergence China Example Source: Energy Quest Quarterly

11 Global Gas Price Divergence Source: International Gas Union

12 World LNG Trade Source: The Institute of Energy Economics Japan

13 World LNG Trade Two distinct regions developed Qatari Exports (bcf/d) Source: Citi Research Atlantic Basin Pacific Basin Two separate regions with unique suppliers and project structures Qatar playing the role of swing producer Cargoes now routinely sold and transferred between the regions Spot trades Destination diversion clauses

14 European Experience Back to the Future US offloading cheap coal to Europe Increasing gas costs in Europe gas redirected to Asia Renewables boom price closer to grid parity Higher capital expenditure industrial slowdown Economic slowdown, lower energy demand and efficiency measures Credit Suisse: Coal IS KING unless gas prices go down 30% Until 2009, gas prices in US and Europe were comparable

15 European Experience Source: Bloomberg; Henderson 2012

16 Geopolitical Issues Middle East unrest Egypt, Syria, Iran Plant Sabotage Nigeria Polical Tensions Russia vs Europe Unlikely Allies Russia & Syria vs oilproducing countries and finally Energy Independence for the US for now

17 Conclusion 1 of 2: A Truly Global Market? Increasing worldwide competition Increasing global unconventional gas development could hasten competitive pricing regimes Will North America approve all new shale gas projects for export? Production costs will put a floor on unsustainably low prices Long-term contracts to remain supply security and supplier income But more access to spot and redirected cargoes Keep an eye on Australian LNG project costs

18 Conclusion 2 of 2: Pricing Mechanisms Outlook Increased hub competition Old contracts ending or renegotiated Replaced by hub/spot gas Contracts with more flexible indexation clauses Move from oil-indexing to market fundamentals supply and demand Asia-Pacific increased spot LNG imports Domestic versus export gas price parity In 20 to 30 years, the market will be absolutely liquid, mobile maybe resemble the oil market Ramp up in LNG export capacity to continue pressuring Russia Reduction in regulated subsidies world wide

19 Thanks Questions?

20 APPENDIX A: LNG Projects coming up First Wave was: Algeria, Malaysia, Indonesia, Qatar Second Wave is: Australia, Qatar continues Third Wave: potentially the US?

21 APPENDIX B: Where are we headed Biggest demand growth non-oecd countries China 5 year plan - gassification India growth Two distinct LNG trade regions Atlantic vs Pacific

22 APPENDIX C: Wholsale prices increasing except North America Source: International Gas Union

23 APPENDIX D:

24 APPENDIX E: Price DISparity comparing Apples with Apples? Domestic price Export price Domestic 71% (91,400 PJ) Mostly hub, rest regulated Pipeline Imports 19% (24,000 PJ) 50% oil-linked: mostly Europe Russian exports Bilateral Monopolies 40% hub Europe & North America LNG Imports 10% (12,000 PJ) Two-thirds Oil-linked mostly Asia, some Europe One-third spot, mainly cargoes to Japan and Korea Source: International Gas Union

25 Where are we headed Just how many proposed projects will go ahead? Risk of flooding LNG market with supplies May not be enough gas at affordable prices to supply LNG plant Early movers multi-billion dollar companies Energy investment $$$$$ Late-comers left with few buyers, demanding cheaper price Proposed LNG capacity by 2025 MTPA North America 136 Australia 62 East Africa 40 Canada 35 Russia 28 Other 75 Source: EEnergy Informer August 2013

26 The North American Story vs The Australian Story North America Shale Boom luring $$$$$ billions investments Favourable regulatory and political environment Lower construction costs 40% cheaper Australian LNG export projects giving away competitive advantage Downstream industries booming jobs, higher wages, greater government revenue Cheaper feedstock for secondary industries and for export $US3 per gigajoule vs AUD moving towards export parity pricing ( x3) Industrial customers facing difficulty securing long-term contracts

27 LNG Australian Projects

28 The cost of doing business in Australia but projects still mainly contracted

29 North America the Henry Hub The US has a number of trading hubs Henry Hub No direct oil linkage but prices tended to move together However as oil prices increased, discount for natural gas grew 2008 shale gas production significantly weakened natural gas prices

30 Europe mixture of contracts and hub pricing and at ransom to Russia Long-term oil-linked contracts small discount discourages fuel switching Hub pricing not yet universal like North America Extensive pipeline network Russia facing increased competition Source: Oxford Institute of Energy Studies

31 Asia Markets Premium Gas Users Asia historically traded under long-term contracts, linked to crude oil prices less integrated fewer pipelines, governed by regulations Recently: destination flexibility, spot LNG cargoes US LNG contracts linked to Henry Hub Inevitable Asia Hub development China, Japan, Singapore?

32 Global Gas Price Divergence LNG imports Source: Energy Quest Quarterly

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