Global LNG Dynamics: Implications for Emergence of a Middle East Gas Marker

Presented at Middle East Petroleum and Gas Conference April 27, 2010 JW Marriot Kuwait City, Kuwait By Shahriar Fesharaki Vice Chairman FGE
This presentation material contains confidential and privileged information intended solely for Middle East Petroleum and Gas Conference attendees. The dissemination, distribution, or copying by any means whatsoever without FACTS Global Energys prior written consent is strictly prohibited.

A Radically Different Market

www.FGEnergy.com

Global LNG market pricing changes in the last 18 months.

Pressure Points: Atlantic Basin Relatively unaffected US domestic production Cost reductions and efficiency gains Effect on HH and NBP? Asia Spot/short-term Long-term contracts Global economic crisis Drop in oil prices from peak in July 2008 Expectations on supplies

Surplus or Deficit?
www.FGEnergy.com

800

World Liquefaction Capacity vs. LNG Demand

Market conditions favorable for buyers Tightness in supply as fewer projects come online: upward pressure on prices Market swinging back in favor of buyers? LNG market in balance?

700

600

500

400

mtpa

300

200

100

2000

2005

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

Asia Pacif ic In Operation

Middle East In Operation

Atlan. Basin In Operation

Asia Pacif ic Under Construction

Med. Basin In Operation

Atlan. Basin Under Construction

Med. Basin Under Construction Atlan. Basin Planned

Total Speculative

Middle East Under Construction Med. Basin Planned

LNG Demand Base Case

Asia Pacif ic Planned Middle East Planned

2030

Middle East Gas Consumption (2000-2020)

www.FGEnergy.com

bscf/d

80
70 Bahrain UAE Saudi Arabia Others Kuwait Qatar Iran

60 50 40 30 20 10 0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2010 2012 2015 2020

Middle East GasFeast or Famine?

www.FGEnergy.com

Iran export volumes will be much smaller than Qatar.

Large domestic gridprice $0.45/MMBtu Massive gas re-injection of some 10 bscf/d Substantial political opposition to gas exports Political challenges for international investment in LNG projects

Qatar is now the largest LNG exporter in the world. We cannot assume infinite supplies

About 77 million tonnes are already committed For now, no new sales are contemplated
Yemen, Oman, and Abu Dhabi are out of supply.

From Exporter to Importer

www.FGEnergy.com

Despite the regions massive petroleum reserves, gas production in almost all Middle East countries is struggling to keep abreast with demand, especially by the industrial and power sectors.
mtpa

12

Middle East LNG Imports

10

Middle Eastern energy market dynamics shifted dramatically in 2009 as a result of the commencement of Kuwaiti LNG imports. Kuwaits status as an LNG importer illustrates the Middle Easts strong dependence on natural gas and the rapidly increasing gap between supply and demand.

0 Low Base High Low Base High Low Base High Low Base High Low Base High Case Case Case Case Case Case Case Case Case Case Case Case Case Case Case 2009 2010 2012 2015 2020

This is evidenced by the fact that other countries like the UAE, and possibly Bahrain, will use LNG to augment domestic gas supply in the coming years.
6

New Equations in Middle East Domestic Gas Market

www.FGEnergy.com

High Gas Prices in Import/Export Projects

Recently, the Dolphin Project asked Sharjah and Ras Al Khaimah to pay US$4.75$5.00/MMBtu for interruptible deals. Iran is currently paying high import gas prices from Turkmenistan ($6-10/MMBtu) Kuwait has already paid LNG market prices. The UAE will import LNG based on an oil linked formula with high crude oil parity. Iran is not eager to export gas to Middle East countries like the UAE, Oman, Kuwait, and Bahrain at low prices. Iran has defined the sales prices to Turkey as its regional benchmark.

Higher Production Costs for Middle East Gas Producers

Gas production costs have increased significantly compared to the past due to cost escalation in material, labor, and contractor costs. Gas production costs for utilization of complicated gas reserves, such as sour gas reserves in the UAE and/or Saudi Arabia are more expensive.

New changes will push governments to set higher prices for gas in their domestic market.
7

Challenges in Middle East Gas Projects

www.FGEnergy.com

High costs are still an important challenging issue in upstream and downstream gas projects. Upstream Projects
Massive Increase in Drilling Costs (Compared to 2003) Massive Cost Increase in Equipment 80-100% Increase in Construction Costs for Gas Pipelines (Offshore and Onshore Pipelines)

Pipelines
Gas Processing Plants

100-120% Increase (Compared to 2003) in Construction Costs for New Gas Processing Plants

More Expensive Gas Prices in Middle East Import Projects

More Pressure on Governments to Set Higher Prices for Their Domestic Consumers
8

A New Price Marker in the Making?

www.FGEnergy.com

Atlantic Basin
Middle East price marker in the making?

Middle East

Asia Pacific

HH Index

NBP/Zee/TTF Index & Brent/GO/FO Index

9

JCC/No Real Time Index

A New Marker Price for Gas Imports in the Region

www.FGEnergy.com

Iran and Qatar are two important gas suppliers who can play key roles in pipeline trades within the region.
Regional buyers need to understand that regional suppliers have alternative markets, whether it is LNG exports to the East and West or even pipeline exports to Europe, and therefore need to benchmark their price expectations off these markets. Delivered prices for regional pipeline exports could be a friendly price and keep potential suppliers such as Iran and Qatar somewhat neutral in choosing between LNG and pipeline exports. The idea of a fixed price mechanism will not continue in the region in the long term and the new price based on market realities may be an oil-linked price, which is between HH/NPB and new alternative prices for LNG.

10

Conclusion
www.FGEnergy.com

The domestic market is growing fast and it will likely have an influence on Middle East gas exports. It is unlikely that the region experiences a massive LNG expansion in the future. Gas re-injection will be an important component of gas utilization for the region and could be a form of gas storage in the future. Gas re-injection into the oil fields can provide higher returns in some Middle East countries such as Iran and the UAE as compared with gas exports. A price increase is likely in the region especially for large domestic markets (Iran, Saudi Arabia, and Qatar) but its impact on growing demand is expected to be limited. Gas prices for new export projects in the region indicate higher prices for regional importers. Regional import prices need a new benchmark as potential suppliers such as Iran and Qatar are not eager to sell gas at previous cheap prices (US$1-1.5/MMBtu). Sellers will be looking at netback values of LNG as an indicator of wellhead value for regional exports. A import market price between HH/NBP and Asian oil-linked price is likely to emerge.

11

Thank You!

Head Office: 105 Cecil Street #07-02, The Octagon Singapore 069534 SIN@FGEnergy.com

Global Offices: Honolulu, HI Washington D.C. Houston TX London, UK Yokohama, Japan Beijing, PRC (808) 944-3637 (301) 907-0353 (713) 530-6221 (44-20) 7014-2600 (81-80) 5449-4338 (86-10) 8480-2701/02 INFO@fgenergy.com FGE@fgenergy.com FGE@fgenergy.com FGE@fgenergy.com FGE@fgenergy.com L.Wang@fgenergy.com
Singapore London Hawaii Dubai Beijing Yokohama Houston Washington, D.C.

12