INCREASING GLOBAL LNG INVESTMENTS a Presentation to The LNG North America Summit 2007 June 20, 2007 Houston JAMES T. JENSEN Phone (781) 894 2362 Jensen Associates Fax (781) 894 9130 49 Crescent Street; Weston, MA 02493 U.S.A. E Mail JAI-Energy@Comcast.Net Website JAI-Energy.com
FOR NEARLY TWO DECADES THE PACIFIC BASIN DOMINATED WORLD LNG TRADE As Recently as 1994-77% World Demand, 73% Supply North America and Europe - Local Production and Pipeline-Accessible Supply - Northeast Asia - LNG For Most of the Period - Pacific Basin Self-Contained In the Late 1990s - That Isolation Began to Change
North America, Europe - Outgrew Traditional Pipeline Supply Sources, Turned to LNG, Stimulated New Atlantic Basin and Middle East Supplies New LNG Markets in China and India The Former Soviet Union - Began to Look Eastwards as Well as Westwards for Markets - Considered LNG as an Export Option The Result - A Global Gas Market - Pipelines and LNG Compete for Markets - LNG Transmits Pricing Signals Around the World
THE IEA EXPECTS THAT INTERREGIONAL GAS TRADE WILL GROW RAPIDLY Interregional Imports - By 2030-41% of Supply of the Five Major Importing Regions - Europe, Northeast Asia, North America, China and India - Up From 11% in 2005 LNG and Pipelines Compete in Europe, China and India - LNG Will Predominate in North America, Northeast Asia FSU Exports Largely by Pipeline - Middle East Largely LNG
BCM Figure 1 THE GROWING RELIANCE ON INTERREGIONAL GAS SUPPLY 2005 AND IEA FORECAST [1] FOR 2030 GAS PRODUCED WITHIN THE FIVE MAJOR IMPORTING REGIONS COMPARED TO THEIR INTERREGIONAL IMPORTS 1000 The Five Major Importing Regions Relied on Interregional Imports for 11% of Demand in 2005 They Will be 41% Reliant By 2030 Other Interregional Mideast Former Soviet Union Regional Production 500 [1] World Energy Outlook 2006 0 North America Europe Northeast Asia China India North America Europe Northeast Asia China India 2005 2030 Jensen Associates
IF ONE CAN GENERALIZE ABOUT PUBLISHED WORLD GAS FORECASTS Optimistic About Demand in the 1990s as Enthusiasm for Gas-Fired Power Generation Took Hold Then Supply Problems in North America and the North Sea - Caused a Shift to Greater Emphasis on Imported LNG - Retained Optimism About Demand Sharp Increase in Energy Prices - Recognition of LNG Supply Limitations - Now Scaled Back Their Estimates EIA and IEA Gas Forecast Comparison
Figure 2 CHANGES IN FORECAST DEMAND EXPECTATIONS WITH LATER PROJECTIONS IEA WEO 2006 FORECAST FOR 2030 [1] COMPARED WITH WEO 2002 EIA IEO 2006 FORECAST FOR 2020 [1] COMPARED WITH IEO 2002 DEMAND IN TCF 250 200 Demand Estimates Significantly Reduced in Both Cases 150 100 50 0 IEA WEO 2002 EIA IEO 2006 iea WEO 2006 EIA IEO 2002 FORECAST FOR 2030 FORECAST FOR 2020 Rest of World Middle East Other Asia Former Soviet Union OECD Pacific OECD Europe North America [1] IEA Does Not Project 2020 in WEO 2006; EIA Does Not Project 2030 in IEO 2002
THE CURRENT OUTLOOK FOR LNG HAS BECOME HIGHLY UNCERTAIN BECAUSE OF Unexpected Sharp Increases in Demand Slow Supply Response Because of Construction Lead Time Surge in Demand for Plant Construction; Overwhelmed Construction Firms and Equipment Suppliers; Result - Higher Costs and Project Delays
Sharp Increase in Energy Prices; Effect on Demand Response and Interfuel Competition? Political Reaction to Global Warming; Effect on Competition Between Coal and Gas for Power Generation? Geopolitical Issues in Supplying Countries LNG's Sensitivity to Small Changes in World's Gas Supply/Demand Balance
IN THIS ENVIRONMENT, IT IS UNLIKELY THAT ANY FORECAST - NO MATTER HOW WELL DONE - WILL GET IT RIGHT However, Jensen Associates Has Just Finished an Analysis of Possible LNG Trade to the Year 2020 Assumes That High Prices, High Costs and Geopolitical Constraints Will Ultimately Reduce Earlier LNG Growth Expectations Assumes That Market Can Absorb Major Near Term Capacity Additions But Moderates Growth Rates Beyond 2012
Figure 3 ONE PROJECTION OF WORLD LNG TRADE JENSEN ASSOCIATES ESTIMATES Million Tons 400 9.4% Per Year 4.4% Per Year 300 Annual Growth Rates Per Period 200 100 5.8% Per Year 7.6% Per Year A More Sober Response to Prices, Costs and Geopolitics After 2012 LNG Trade History LNG Trade Forecast LNG Growth Rate Accelerates and Carries Over Into Current Projects 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Jensen Associates
WHERE WILL THE LNG COME FROM? RESOURCES, TECHNOLOGY AND GEOPOLITICS World's Natural Gas Reserves - Very Large; Appear to be Able to Support Gas Trade Far Into the Future 56% of the World's Proved Reserves are Uncommitted to Any Application But Many Not Readily Available - Constrained by Economic, Technological or Geopolitical Issues
Projected LNG Supplies Largely From the Uncommitted 56% 84% of the Uncommitted Reserves - And Most of the Undiscovered Resource Base - Located in the FSU or the Middle East Despite Major Resources Elsewhere, Longer Term LNG Outlook Depends on How Those Regions Respond to World Demand
Figure 4 THE WORLD'S PROVED GAS RESERVES BY MARKET STATUS (FOCUSSING ON INTERREGIONAL TRADE) TCF - Year End 2005 (Source - Jensen Associates Estimates) Interregional Trade Deferred Only 28% of World Reserves are Committed to Markets Regional Markets 56% of World Reserves are Uncommitted Marginal Uncommitted Total Proved Reserves - 6,348 Tcf Jensen Associates
Figure 5 REGIONAL SHARE OF THE WORLD'S UNCOMMITTED GAS TCF - Year End 2005 (Source - Jensen Associates Estimates) 84% of the World's Uncommitted Gas Reserves Are in the Middle East and the Transition Economies Middle East 40% 44% 6% Pacific Basin Former Soviet Union Total Uncommitted Gas 3,567 Tcf 7% South America Africa Europe Jensen Associates
MUCH OF THE WORLD'S LNG WILL COME FROM THE MIDDLE EAST BETWEEN NOW AND 2020 61% of Region's Uncommitted Gas in a Single Gas Field - North Field in Qatar, South Pars in Iran With Additional Uncommitted Gas in Iran, Those Two Countries Account for 90% of Middle East's Uncommitted Gas U.S. Geological Survey Optimistic About Saudi Arabia's Resource Base - Most of that Gas Still Undiscovered - Saudis Have Shown Little Interest in LNG
Qatar's Expansion Plans - One Third of the World's Capacity Additions Between Now and 2012 - Country Has Adopted a "Wait and See" Policy on Further Expansion Iran Currently Preoccupied With Developing Gas for Domestic Markets, Oil Field Reinjection Given its Priorities, Geopolitical Controversy Over International Sanctions, Country Has Yet to Establish Firm Policy on LNG Exports Qatar's Caution Plus Iran's Geopolitical Constraints Make It Difficult to Project Quantities and Timing of Additional Middle East LNG Supplies Beyond 2012
Figure 6 MAJOR GAS EXPORT SOURCES FOR THE MIDDLE EAST IRAQ IRAN Iranian Oil Fields KUWAIT Iranian Offshore Gas North Field/South Pars SAUDI ARABIA Saudi Arabia's Largely Undiscovered Gas Resource Regions QATAR UAE OMAN YEMEN
TCF Figure 7 UNCOMMITTED MIDDLE EAST NATURAL GAS RESOURCES [1] INCLUDES UNCOMMITTED RESERVES, DEFERRED RESERVES AND UNDISCOVERED RESOURCES TRILLION CUBIC FEET AS OF 12/31/2005 1000 750 500 250 The USGS is Optimistic About Saudi Arabia's Long Term Potential Despite Current Lack of Interest in Gas Exports In the Nearer Term, Export Focus is on Qatar's North Field and its Extension, Iran's South Pars UNDISCOVERED RESOURCES [2] DEFERRED RESERVES UNCOMMITTED RESERVES [1] Jensen Estimates Based on USGS, Cedigaz, BP, AAPG and Country Data 0 [2] Includes Undeveloped Reserves Saudi Arabia North Field South Pars Other NA Oil Fields UAE Iraq Kuwait Oman Yemen QATAR IRAN Jensen Associates
THE FORMER SOVIET UNION - RUSSIA AND THE CENTRAL ASIAN REPUBLICS - HOLDS THE LARGEST BLOCK OF UNCOMMITTED RESERVES Russia - Traditionally European Pipeline Exporter - Interested in Diversifying Into LNG and into Pacific Basin Markets Russia Has Major Policy Issues to be Resolved in Western Siberia and the Offshore Barents Sea - Outcome Will Influence How Russia Approaches LNG and Longer Term Expansion into the Pacific
Western Siberia's Nadym Pur Taz Region Maturing - Russia Wants to Develop Arctic Reserves - Yamal Peninsula or Offshore Barents Sea (Shtokman) Shtokman Appeared to be Leading Candidate for LNG Exports to North America - Russia Now Seems to Have Cooled on the Idea - Is Russia Still Serous About Atlantic LNG? Pipelining to Europe From Either Shtokman or Yamal Now Receiving Renewed Attention
Russia's Eastern Reserves - Sakhalin and Irkutsk (Kovytka) Destined for Pacific Basin - Particularly China - How Much of Sakhalin Will Ultimately be Developed as LNG? International Oil Companies Allowed a Significant Role in Eastern Russia Which They Were Denied in the West Russia Appears to be Reasserting Control Over Eastern Exports - Renegotiated Shell's Sakhalin II License (Russia's First LNG Project) - Now Discussing Kovytka with BP How This Will Affect Further Development of Pacific Basin Supplies or Russia's Interest in LNG Unclear
Figure 8 MAJOR GAS EXPORT BASINS FOR THE FORMER SOVIET UNION Barents Sea (Shtokman) Kara Sea Yamal Peninsula RUSSIA Nadym Pur Taz KAZAKHSTAN Irkutsk Sakhalin AZERBAIJAN UZBEKISTAN TURKMENISTAN
TCF Figure 9 MAJOR UNCOMMITTED FSU NATURAL GAS RESOURCES [1] INCLUDES UNCOMMITTED RESERVES AND UNDISCOVERED RESOURCES TRILLION CUBIC FEET AS OF 12/31/2005 700 The USGS is Very Optimistic About the Potential of the Arctic Offshore as Well as the Central Asian Repblics and Eastern Russia 600 500 400 UNDISCOVERED RESOURCES [2] UNCOMMITTED RESERVES 300 200 [1] Jensen Estimates Based on USGS, Cedigaz, BP, AAPG and Country Data 100 0 Nadym Pur Taz Yamal [2] Barents Sea Kara Sea Central Asia Eastern Russia [2] Yamal Peninsula Undevleoped Resouces Combined with Nadym Pur Taz Jensen Associates
THERE ARE SUBSTANTIAL GAS RESERVES OUTSIDE THE MIDDLE EAST AND THE FSU FOR EXPORT Largest Blocks of Readily Available Uncommitted Reserves with Active Projects in Australia, Nigeria and Algeria Also Active Projects in Angola, Egypt, Equatorial Guinea, Peru, Norway and Yemen Geopolitical Issues Raise Questions about How Rapidly Reserves in Indonesia, Venezuela, Nigeria and Bolivia Will be Developed
TCF 300 200 Figure 10 UNCOMMITTED NATURAL GAS RESOURCES [1] SELECTED POTENTIAL EXPORTING COUNTRIES INCLUDES UNCOMMITTED RESERVES, DEFERRED RESERVES AND UNDISCOVERED RESOURCES TRILLION CUBIC FEET AS OF 12/31/2005 Nigeria, Australia, Algeria and Indonesia Have the Largest Uncommitted Reserves UNDISCOVERED RESOURCES [2] DEFERRED RESERVES UNCOMMITTED RESERVES 100 [1] Jensen Estimates Based on USGS, Cedigaz, BP, AAPG and Country Data 0 Indonesia Venezuela Australia Nigeria Norway Algeria Malaysia Libya Brunei Trinidad Bolivia Egypt [2] Includes Undeveloped Reserves
BETWEEN 1998, WHEN LNG INTEREST BEGAN TO TAKE OFF, UNTIL 2012, WHEN CURRENT PROJECTS ARE COMPLETED Five Countries - Qatar, Trinidad, Nigeria, Egypt and Australia - Account for 75% of the Capacity Additions We Project That Their Contribution Will Drop to 50% for the Period 2012-2020 Only Nigeria and Australia Are Expected to Increase Their Contributions The Other Major Suppliers in the Out Years - Iran, Venezuela and Atlantic Russia - All Raise Geopolitical Issues
Figure 11 THE PERCENTAGE CONTRIBUTION TO LNG CAPACITY ADDITIONS - 1998/2012 AND FORECAST 2012/2020 JENSEN ASSOCIATES ESTIMATES PERCENT OF PERIOD ADDITIONS 100% 75% 50% 25% The Top Five 1998/2012 Iran, Venezuela and Atlantic Russia Move into the Top Five in the Latter Part of the Next Decade Only Nigeria and Australia of the Earlier Top Five Increase Their Contributions All Other Atlantic Russia Venezuela Iran Australia Egypt Trinidad Nigeria Qatar 0% 1998/2012 2012/2020 Source: Jensen Estimates Jensen Associates
FOR A TIME, LNG COSTS APPEARED TO BE DECLINING AND IT WAS ASSUMED THAT THE TREND WOULD CONTINUE Trend Towards Declining Plant Costs Dashed by Cost Increases from Overloaded Project Construction Industry "Hard" Information About What Has Happened to Costs Very Difficult to Obtain At the Turn of the Decade, LNG Plant Construction Costs Were Approaching $200/Ton of Capacity
Current Costs - A Multiple of That Level - Several "Problem Trains" Quoted at $1,200 and Above Key Questions - Are Quotations Just a Temporary Aberation in an Overheated Market? Or Do They Represent Reasonable Estimates for the Future? In Such an Uncertain Cost Environment, It is a Challenge to Put Together a Capital Cost Projection for the Industry
THE CAPITAL EXPENDITURE ESTIMATES IMPLIED BY OUR LNG FORECAST SUGGESTS A $350 BILLION OUTLAY FOR LNG FOR THE PERIOD OF 2006 TO 2020 Includes Liquefaction, Regasification and Tankers - Does Not Include Upstream Investment in Field Development Nor in Downstream Infrastructure Of The Total - Liquefaction $210 Billion - Regasification Facilities $75 Billion - Tankers $65 Billion Largest Liquefaction Investments in Middle East and West Africa Largest Regas Investments in North America and Northeast Asia
Figure 12 ESTIMATED TOTAL CAPITAL EXPENDITURES ON LNG INFRASTRUCTURE - 2006/2020 (EXCLUDES PRODUCTION) CAPEX $ BILLION $400 $ BILLION $300 $200 Capital Expenditure Estimates are Clearly Highly Speculative in the Current Uncertain Cost Environment Nearly $350 Billion Required Over the Fifteen Year Period Tankers Regasification Liquefaction $100 $0 Source: Jensen Estimates Jensen Associates
Figure 13 GEOGRAPHIC DISTRIBUTION OF LIQUEFACTION AND REGASIFICATION CAPEX FOR THE 2005/2020 PERIOD $ BILLION LIQUEFACTION CAPEX - $ BN $250 REGASIFICATION CAPEX - $ BN $100 $200 $150 $100 $50 Southeast Asia Russian Far East North Africa Northwest Europe Latin America Australia West Africa Middle East $80 $60 $40 $20 Other India Latin America China OECD Europe Northeast Asia North America $0 $0
IN CONCLUSION Despite Unprecedented Uncertainties, a Global Gas Market Has Finally Arrived It Will be Based on Increasing Competition Between LNG and Pipelines With LNG Providing Price Signals Among Regions It Will Require Very Large Investments, Primarily in the Producing Countries (Field Development Plus Liquefaction) Exposing its Growth to Geopolitics How the Market Ultimately Develops Will be Shaped by These Geopolitical Issues Together With Costs and Interfuel Competition at High Price Levels