STRICTLY CONFIDENTIAL

LNG Malaysia Forum 2013 20 March 2013

Gas pricing and impact on LNG trade

Outline

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• Gas pricing overview

• Regional price disparity

• Impact on LNG industry

Global gas trade has three distinctive markets

North America

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• Liberal gas markets • Gas to gas competition –

henry hub linkage • Large number of supplier and

buyers • Ample storage and transport

systems • Availability of financial

instruments

• Continental Europe – Oil or oil products linkage

• Limited number of supplier and many buyers

• Storage and transport controlled by a few players

• Gas to gas competition mostly in North West Europe – NBP, TTF/Zee index

• For LNG, linkage to oil • Limited number of supplier s and

buyers • Some pipeline markets -oil

products linkage • No significant financial markets

trading gas

Europe Asia Pacific

North America – Henry Hub (HH) pricing

Henry Hub

• Official delivery location and pricing point for natural gas futures contracts on the New York Mercantile Exchange (NYMEX).

• Most liquid physical natural gas trading point among the 30 major market hubs in the US.

• Located in Louisiana and owned by Sabine Pipeline LLC.

Malin

Transco Z6 NY

HH

Waha

Midcon Socal

PG&E Opal

AECO

App

Chicago

Transco S85

FGT Z3 HSC

STX

Dawn

Niagara

Dracut

4

Henry Hub trend

Source: Bloomberg

• Determined by the interaction of buyers and sellers. i.e. gas-to-gas competition.

• Factors affecting the spot price include weather, economy, demand, storage and production.

• Abundance of domestic production (shale gas) has depressed price.

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0

2

4

6

8

10

12

14

16

US$/MMBtu HH historical prices

Europe - UK National Balancing Point (NBP) pricing

Source: Intercontinental Exchange

• Europe’s mature and liquid virtual trading hub

• Europe virtual trading hub established in 1998.

• Pricing and delivery point for the Intercontinental Exchange (ICE) natural gas futures contract.

• Most liquid gas trading point in Europe.

• Trades in pence per therm which exposed to forex risk.

• Operated by the National Grid as the transmission system operator in the UK.

NBP

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Other trading hubs in Europe

Source: tri-zen

Gas Pool

EuroHub GmbH

Baumgarten

TTF

BEB virtual point

PSV

PEG Balancing Zones

Zeebrugee Hub

Notional/Virtual hubs

Trans-regional/physical hubs

• Besides NBP, Title Transfer Facility (TTF) and Zeebrugge are the two major gas trading points in Europe:

• TTF:- – virtual trading point for natural gas in the

Netherlands with close linked to the NBP.

– Established by Gasunie in 2003 with ‘entry-paid gas’ system.

– Trades within the Dutch network in euros per megawatt hour.

• Zeebrugge hub:- – Physical natural gas trading point in Belgium.

– Interconnected with the UK pipeline.

– Price principally driven by the NBP.

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NBP trend

Source: Bloomberg

0

2

4

6

8

10

12

14

16

US$/MMbtu NBP historical prices

• Determined by supply and demand. i.e. gas-to-gas competition.

• NBP is usually used for LNG spot trading while most European long term contract uses Dated Brent as price reference.

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Asia Pacific – Japan Crude Cocktail (JCC)

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• Asian LNG trade started in 1969 with the export from Alaska to Japan with a fixed

pricing.

• In 1973-74 , prices were linked to crude oil . First Indonesian contract into Japan was at 90% oil parity.

• Japan JCC (Japan Crude Cocktail) is the weighted average price of all crude oils imported into Japan.

• Widespread use of JCC reflects the importance of Japan in the development of LNG market and as the largest importer.

JCC

LNG Price = 14.85 x JCC + Constant + S curve

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On Shore

Lower Slope

LNG Price

(US￠/MMBtu)

JCC（US＄/bbl）

Base Slope 14.85

To help buyer under extremely high oil price (improve competitiveness of LNG against crude oil)

To help seller under extremely low oil price

Slope: Determines the responsiveness of the price to crude oil price fluctuation. E.g 14.85% around 85% parity to oil whereas 17.24% for full oil parity

JCC: Japan Crude Cocktail (JCC) is the weighted average price of all crude oils imported into Japan, calculated from the tables contained in “Trade Statistics” announced by the Ministry of Finance, Japan

Constant: a fixed figure which determines the price level in accordance with a slope

S curve: introduced as a helping hand to both seller and buyer when oil price is either extremely high/low

JCC trend

Source: Japan Tariff Association, Bloomberg

0

20

40

60

80

100

120

140

160

US$/bbl

JCC Brent

• JCC is widely used in the LNG contracts globally.

• Highly correlated with major crude like Middle-Eastern crude, Brent etc.

JCC historical prices

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Source: PFC Energy 12

• Far East is still the premium market due to linkage to oil • Has two different implications either from sellers perspective or buyers.

0

2

4

6

8

10

12

14

16

18

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

USD

/mm

btu

Far East delivered price vs HH & NBP

Far East

HH

NBP

These three regional markets have disconnected

pricing levels

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Sellers perspective:

More new supply competing for premium Asia market

50 mtpa

25 mtpa

70 mtpa

2015:

PETRONAS T9

PETRONAS FLNG 1

QCLNG T1 Australia

PNG LNG T2

Gorgon LNG T1

QCLNG T2

Gladstone LNG T1

Gorgon LNG T2

APLNG T1

2014:

PNG LNG T1

Donggi-Senoro LNG

2016:

PETRONAS FLNG 2

Gorgon LNG T3

Gladstone LNG T2

APLNG T2

2017:

Ichthys LNG T1

Wheatstone T1

Wheatstone T2

2018:

Ichthys LNG T2

2016:

Sabine Pass Export Phase 1

2017:

Sabine Pass Export Phase 2

Freeport Export

2018:

Cameron LNG Export

Lake Charles Export

2019:

Cove Point Export

2018:

Pacific Northwest LNG

Kitimat LNG 2020:

BC LNG

2019:

Shell CNPC LNG

More LNG trade to interconnect gas market and reduce regional disparity

20 mtpa

2018:

Mozambique

Buyers perspective: Desire cheaper LNG

Source: Team analysis

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Volatility aspects and regulatory hurdles to be met

Henry Hub Liquefaction

cost Shipping

~ 115%HH ~$3-3.5/mmbtu ~$3- 4.50/mmbtu

+ Regas cost Pipeline tariff

However, henry hub cost alone is misconception as delivered prices will be higher

Approximate LNG cost

delivered to Asia:

~$10- 12/mmbtu

Once trade is introduced, price will rise.

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Price increase reduce arbitrage opportunity

Pa

Pb

P

Q

S D + Exports

D

Supply – demand

To a certain extent, LNG trade will be influenced by hub

prices but oil-link is perceived to be predominant

Source: Wood Mackenzie, Team analysis 16

Higher hub prices may limit the potential of exports Other new projects will remain oil link to reflect investment

Potential over 40-50

MTPA of exports from

USA by 2020 offering hub

pricing subject to

approval

Majority new

projects are oil-

linked

0

100

200

300

400

2011 2020

MTP

A

Only 10-12% LNG trade is expected to be hub-based by 2020

Conclusion

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• Current disparity in regional prices encourages arbitrage.

• Far East is the premium market and remain as target for sellers.

• Buyers want cheaper LNG . But there are incremental costs for

export delivery of henry hub cargoes.

• Hub-based prices are more volatile, likely to rise once export trade

begin. Therefore does not guarantee cheap gas.

• Oil-link prices will remain predominant although regional disparity

in price may reduce.

Thank You