LNG

1
LNGs Transformationfrom Regional to Global
Commodity
7th Doha Natural Gas Conference Exhibition G.
M. (Chip) Schuppert, Jr Manager, Global LNG
Marketing Sales ConocoPhillips 9-12 March 2009
2
Dramatic Growth in LNG Trade

• Growth in
• Volume
• Number of trade routes
• Diversion short term trades

Growth in ability for more commodity-like
response to market changes.
3
Improved Ability to Respond to Market Changes

• Recent Perfect Storm of 2007-8 in Asia caused
  by
• Unexpected decline in some existing LNG supplies
• Significant Japan nuclear power outage
• Significant delays in completion of new supply
  projects
• Major equipment failures and supply interruptions
• Significant rapid increase in demand from new
  markets
• Result Dramatic increase in need for additional
  LNG supplies to Asia in 2007-8

Supply response to perfect storm of 2007-8
required unprecedented degree of flexibility from
LNG supply markets
4
Increased Flexibility of LNG Supply Markets

• Supply Response to Perfect Storm of 2007-8
• LNG was delivered
• Where it was needed
• When it was needed
• The rerouting of supplies naturally required
  corresponding changes in market price to prompt
  the redistribution
• The LNG supply markets demonstrated a relatively
  quick and significant commodity-like response

5
Supply Response 2007-8 Asia Demand
As from Atlantic Sources
Source Cambridge Energy Research
Associates. Updated January 2009
Ability for relatively quick and significant
supply response was direct result of supply
flexibility developed in recent years
6
Multiple Sources of Flexible Supply

• Key Enablers
• Contractual flexibilities
• Diversion Capability
• Supply Aggregators
• Spot cargos from uncommitted production
• Extra shipping capacity
• Speculative-built ships
• Ships associated with delayed supply projects
• Construction of addtl regas capacity in liquid
  markets
• Indirect access to U.S. gas storage

Source Wood Mackenzie
7
LNG Transitioning to Worldwide Commodity?
True Commodity Current State of LNG
Single price Regional pricing but tending to trend together
Single quality standard Effectively 2 different standards rich lean
Fungibilty (interchangeability) 2 different quality standards reduce fungibility but many LNG Buyers adjusting to accept either for supply flexibility
True spot market Relatively small true spot market but significant growth in Diversion and Flexible Supply markets
Fin. hedging available Financial hedging very limited, difficult and complex
Relatively easy access to storage High (/mmbtu) storage (and transport) costs, no true 3rd party merchant storage
Relatively high cost of storage may be single
biggest longer-term impediment to true
commoditization of LNG
8
Relative High Unit Cost of LNG Storage
Source ConocoPhillips
LNG has one of highest storage costs per unit of
energy. But LNG markets indirectly accessing
storage through alternative means.
9
Indirect Access to Storage
16
4,500

• N.A. has large gas storage position
• Indirectly benefits other world LNG markets
• Facilitates diversions to meet Buyers needs
• Can serve as default market for Sellers
• Serves to attenuate LNG price volatility

Sources EIA, CERA, WoodMac
4,000
14
3,500
12
3,000
10
2,500
Storage Consumption Ratio ()
Maximum Storage (Bcf)
8
2,000
6
1,500
4
1,000
2
500
NA
S. Korea
Spain
Japan
UK
Liquid N.A./EU markets as well as excess
shipping capacity - have, to a degree, served as
an indirect form of LNG storage
10
Relative High Unit Cost of LNG Transport
Source ConocoPhillips
11
Impediments to Global Commoditization

• Relatively high cost of storage transport
• Indirect access to storage is limited
  inefficient
• A-P Buyers supply-constrained environment
• Little to no indigenous supplies
• Little to no access to PL gas supplies
• Greater emphasis on security of supply
• Result preference for regional supplies and
  longer-term contracts
• Potential tightening of the shipping market
• Terming up of current flexible/divertible
  supplies
• Continued difficulties in sanctioning new supply
  projects

Some regionalization of markets is likely to
remain for some time even as LNG supplies become
more flexible
12
Global LNG Price Setting Mechanisms

• Gas-to-gas competition
• Liquid spot market

• Dual price dynamic
• - NBP spot
• - Oil related contracts

• Oil linked contracts

Global LNG Links Arbitrage
Source Cambridge Energy Research Associates
13
The Transformation of LNGfrom Regional to Global
Commodity

• In Summary
• Recent improvements in supply flexibility has
  enabled
• Significantly improved supply response
• Greater worldwide commoditization of LNG
• Supply flexibility is poised to grow - but could
  be threatened by
• Tightening of shipping market
• Terming-up of divertible supplies
• Continued difficulties in sanctioning new supply
  projects
• Relatively high costs of storage may continue to
  be a hurdle to the complete and total
  commoditization of LNG
• Some Regionalization of the market place may
  continue - but with greater trending and stronger
  correlation between regional markets

14
Thank You