Atlantic Basin LNG Dynamics

Howard V Rogers, Senior Research Fellow OIES

EPRG Winter Research Seminar 10th December 2010

OIES* Natural Gas Research Programme

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2

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Roadmap
Analytical Framework & Methodology Current Gas Market Status and Outlook UK Gas Market Future Challenges.
LNG trade-flows in the Atlantic Basin, trends and discontinuities, Howard Rogers March 2010, http://www.oxfordenergy.org/pdfs/NG41.pdf

European Supply Dynamics

Annual Contract Quantity

LNG
Pipeline Imports

Contract Flexibility

European Monthly Demand

Take or Pay Quantity

Pipeline Imports

Domestic Production

Global LNG System -1

Global LNG Supply

Niche Markets (Dominican Rep., Costa Rica, S America etc.) Asian Markets (Japan, Korea, Taiwan, China, India)

Normal Storage Inventory Level

Annual Contract Quantity Contract Flexibility Pipeline Imports Domestic Production Domestic Production Take or Pay Quantity

Pipeline Imports

North America

Europe

Global LNG System - 1

Global LNG Supply

Niche Markets (Dominican Rep., Costa Rica, S America etc.) Asian Markets (Japan, Korea, Taiwan, China, India)

Relative Flow between Europe and North America determined by arbitrage with (oil indexed) pipeline gas imports to Europe (within flexibility limits).
Annual Contract Quantity Contract Flexibility

Normal Storage Inventory Level

Pipeline Imports Domestic Production Domestic Production

Take or Pay Quantity

Pipeline Imports

North America

Europe

Arbitrage has lead to convergence between US Price and European Oil Indexed Price Optimal for European Gas Importers.

Global LNG System - 2

Global LNG Supply

Niche Markets (Dominican Rep., Costa Rica, S America etc.) Asian Markets (Japan, Korea, Taiwan, China, India)

Relative Flow between Europe and North America determined by arbitrage with (oil indexed) pipeline gas imports to Europe (within flexibility limits).
Annual Contract Quantity Contract Flexibility

Normal Storage Inventory Level

Pipeline Imports Domestic Production Domestic Production

Take or Pay Quantity

Pipeline Imports

North America

Europe

More Pipeline Import to Europe = Storage Overfill in US Henry Hub de-links and is lower than European Prices Sub-Optimal for European Gas Importers.

Global LNG System - 3

Global LNG Supply

Niche Markets (Dominican Rep., Costa Rica, S America etc.) Asian Markets (Japan, Korea, Taiwan, China, India)

Relative Flow between Europe and North America determined by arbitrage with (oil indexed) pipeline gas imports to Europe (within flexibility limits).
Annual Contract Quantity Contract Flexibility

Normal Storage Inventory Level

Pipeline Imports Domestic Production Domestic Production

Take or Pay Quantity

Pipeline Imports

North America

Europe

Lower Pipeline Imports to Europe = Storage Underfill in US Henry Hub de-links and is Higher than European Prices. Sub-Optimal for European Gas Importers.

Global LNG System - 4

Global LNG System Long Global LNG Supply

Niche Markets (Dominican Rep., Costa Rica, S America etc.) Asian Markets (Japan, Korea, Taiwan, China, India)

Relative Flow between Europe and North America determined by arbitrage with (oil indexed) pipeline gas imports to Europe (within flexibility limits).
Annual Contract Quantity Contract Flexibility

Normal Storage Inventory Level

Pipeline Imports Domestic Production Domestic Production

Take or Pay Quantity

Pipeline Imports

North America

Europe

US Storage Overfill; HH de-linked and below Europe oil-indexed prices. Europe Pipeline imports at minimum. Best Outcome within Constraints

Global LNG System - 5

Global LNG System Short Global LNG Supply

Niche Markets (Dominican Rep., Costa Rica, S America etc.) Asian Markets (Japan, Korea, Taiwan, China, India)

Relative Flow between Europe and North America determined by arbitrage with (oil indexed) pipeline gas imports to Europe (within flexibility limits).
Annual Contract Quantity Contract Flexibility

Normal Storage Inventory Level

Pipeline Imports Domestic Production Domestic Production

Take or Pay Quantity

Pipeline Imports

North America

Europe

US Storage Underfill; HH de-linked and Above Europe oil-indexed prices. Europe Pipeline imports at Maximum. Best Outcome within Constraints

Gas Prices 2007 - 2010

25

20

15

$/mmbtu mmbtu

Brent AGIP Proxy Japanese cif LNG

10

AGIP AGIP Proxy NBP AGIP NBP HH HH

0 Jan - 07

Jul - 07

Jan - 08

Jul- 08

Jan- 09

Jul- 09

Jan- 10

Jul- 10

Sources: Argus, BAFA, EIA, Own analysis

AGIP = Average German Import Price (Oil Indexed Gas) NBP = UK National balancing Point Price HH = Henry Hub US Price

European LNG Imports Jan 2005 Oct 2010

European LNG Imports
300

250

200

UK Portugal

mmcm/day

Italy 150 Greece Belgium Turkey 100 France Spain

50

0 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

Source: Waterborne LNG

North Atlantic LNG Balance 2008 - 2013

500

North America LNG Imports

0 3,000

Europe Supply & Demand

2,500
Demand Storage Inj./Withdrawal

2,000
LNG Imports

mmcm/day

1,500

1,000
Domestic Production Pipeline ACQ

500
CY 08/09 CY 09/10 CY 10/11 CY 11/12 CY 12/13

92%
0

98%

99%

102%

111%

Pipeline TOP @85% of ACQ

Pipeline imports (Russia, N Africa, Azerbaijan & Iran)

Sources: IEA Monthly Data, Waterborne LNG, Own analysis

% of TOP level achieved

Global Factors Influencing the European Market

European Domestic Production to 2000 - 2025

400

350

300 Others 250

bcma

Romania Italy

200

Germany Denmark

150

Netherlands Norway

100

UK

50

Sources: IEA, WoodMackenzie, National Grid, Dutch Ministry of Foreign Affairs, Energi Styrelsen, Own Analysis

Shale Gas - Dynamics

European Rig-Count - 2000 - 2010

80 70
Rig Count

800 Shale Gas Wells/Year Oil Rig Count

60 50 40 30 20 10
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 0

Gas Rig Count

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Sources: IEA WEO 2009, Baker Hughes

Jan-10

Global LNG Supply Assumptions 2008 - 2025

700

Yemen Venezuela USA Trinidad Russia Qatar Peru Papua New Guinea

600

500

Qatar

Oman Norway Nigeria Malaysia Libya Iran Indonesia Guinea

400 bcma

Nigeria
300 200

Egypt Brunei

100

Australia

Bolivia Australia Angola Algeria Abu Dhabi

0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Sources: Waterborne LNG, Company Reports, Own analysis

Asian LNG Import Assumptions

Korea
350

CAGR 2010 - 2025 Total 3.5%

300

9.8%
250

bcma

China
200

India Taiwan

11.6% 0.9% 1.7%

150

South Korea
100

50

Japan Japan

1.3%

0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Sources: IEA, WoodMackenzie, Own analysis

Competing Sources of New Supply for Europe ?

10 9 8 7 6 5 4 3 2 1 0

Export Tax Uncertainty Range Upstream and Transportation Regas Transportation Liquafaction Upstream

$/mmbtu

19

*WEO2009, p482 plus 30% export tax. **WEO2009, p481 plus regas @$0.60/mmbtu. *** Broad estimate.

The Gas Exporters Conundrum

Export projects at international prices for govt revenue. Investment terms for foreign companies tightened Domestic supply quota a disincentive to further export investment as dev. costs rise.

Low cost gas reserves discovered

Domestic residential and power sectors developed at low gas price.

Demand booms at low regulated prices

Domestic Price rise politically unacceptable, may need to import some gas at international prices.

Gas exports constrained

Industrial Sector developed for added value and skilled employment.

Relatively low number of skilled jobs created.

Potentially value destructive if creates glut of petrochemicals

Time

UK Future Supplies and Import Infrastructure

160

Actual
140 120 100 80 60 40 20 0 2005 -20 -40 -60 Production Norway

Modelled

bcma

2010

2015

2020

2025

Netherlands

IUK imports

LNG

Ireland Exports

IUK exports

Demand

NB. Assumes storage in existing & under construction categories only (i.e. 5.7 bcm by 2014)
Sources: IEA, DECC, Waterborne LNG, own analysis

mmcm/day
-150 -100 -150 -100 100 150 200 -50 -50 50 0

mmcm/day
100 150 200 50 0

Jan-05

Jan-05 Jun-05 Nov-05 Apr-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08

Sources: IEA, DECC, Waterborne LNG, own analysis

Jun-05 Nov-05 Apr-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08

UK Storage 5.7bcm in 2014, rising to 10.7 bcm by 2018

Based on Global Balance with UK Storage 5.7bcm in 2014+

Actual

Actual

Mar-09 Aug-09 Jan-10 Jun-10 Nov-10

Mar-09 Aug-09 Jan-10 Jun-10 Nov-10

Modelled

Modelled

Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Jul-17 Dec-17 May-18 Oct-18 Mar-19 Aug-19 Jan-20 Jun-20 Nov-20 Apr-21 Sep-21 Feb-22 Jul-22 Dec-22 May-23 Oct-23 Mar-24 Aug-24 Jan-25 Jun-25 Nov-25

Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Jul-17 Dec-17 May-18 Oct-18 Mar-19 Aug-19 Jan-20 Jun-20 Nov-20 Apr-21 Sep-21 Feb-22 Jul-22 Dec-22 May-23 Oct-23 Mar-24 Aug-24 Jan-25 Jun-25 Nov-25

IUK Flows 2005 - 2025

With BBL Line reverse flow

Import Max

Export Max

IUK Flow

With BBL Line reverse flow

Import Max

Export Max

IUK Flow

Wind Intermittency Impact on Gas Fired Generation

Impact on gas and other generation fuels/technologies using future demand and generation view.

Hourly wind speed data at 15 UK locations from historical database

Generation algorithm using standard turbine output curve

Impact on short term gas demand

Database of existing and future wind farms capacity, location start-up timing

Construct different future capacity cases

Requirement for additional salt cavern storage

GWh GWh/hour
15 20 25 30 35 10 0 5

1 170 339 508 677 846 1015 1184 1353 1522 1691 1860 2029 2198 2367 2536 2705 2874 3043 3212 3381 3550 3719 3888 4057 4226 4395 4564 4733 4902 5071 5240 5409 5578 5747 5916 6085 6254 6423 6592 6761 6930 7099 7268 7437 7606 7775 7944 8113 8282 8451 8620

Hourly Wind Generation 2009, 2015 and 2020

Hours
2009 2015 2020

Conclusions
Global LNG System
Model valid but recession and US Shale gas growth (minimal LNG imports) has eliminated trans-Atlantic arbitrage for time being. Analytical framework still highly useful for exploring European balance (LNg vs Pipeline imports ) as domestic production declines.

Medium Term Outlook

De-linkage of Henry Hub and NBP could remain until 2014/15, with NBP arbitraging on coal and oil-indexed price. However balance could soften periodically and therefore expect prices to be volatile. 2015 + system tightening due to Asian demand growth, European domestic production decline. Will US shale growth plug the gap between demand and declining US and Canadian conventional gas ? Outlook for new sources of long distance gas trade uncertain; incremental new supplies will not be low cost.

UK Market
Uncertainty on demand levels but rise in imports inevitable. Space heating market will require significantly more seasonal storage capacity. Wind power intermittency will require fast response from CCGTs and more salt cavern storage.

Questions Welcome. Thank You for your attention.

Howard V Rogers Senior Research Fellow , OIES Natural Gas Programme howard.rogers@oxfordenergy.org