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Will Non-oil Indexation be the Liberator of Asian Buyers?

Will Non-oil Indexation be the Liberator of Asian Buyers?. Prepared for China International NC/CNG/LNG Distribution Conference. Ming Cai, Senior LNG & Gas Analyst. Poten & Partners 简介. 全球 LNG 和天然气行业的权威专家 40 位专 家 , 5 位权威顾问，总共超过 600 年的能源行业经验 自 2005 年起，在 54 个国家，完成超过 400 个咨询项目

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Will Non-oil Indexation be the Liberator of Asian Buyers?

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  1. Will Non-oil Indexation be the Liberator of Asian Buyers? Prepared for China International NC/CNG/LNG Distribution Conference Ming Cai, SeniorLNG & Gas Analyst

  2. Poten & Partners简介 • 全球LNG和天然气行业的权威专家 • 40位专家, 5位权威顾问，总共超过600年的能源行业经验 • 自2005年起，在54个国家，完成超过400个咨询项目 • Poten 的专家曾在相关行业的各大领先企业担任高层决策者 • 全方位的产业链服务——最好的技术与商业结合 再气化终端 及下游应用 上游开采 液化工厂 船舶运输

  3. 提供世界一流的专业技术分析和精确详尽的成本分析提供世界一流的专业技术分析和精确详尽的成本分析 • Poten 通过与Merlin Associates 的并购整合，正式成立了Merlin Advisors • 结合两家全球顶级的LNG行业咨询服务提供商强大的技术力量和人脉网络，Merlin Advisors 可为客户提供最专业最全面的技术分析支持 • Merlin Advisors 可为客户提供如下五大类专业咨询服务 • 项目的技术可行性分析 • 项目资本/成本性分析 • 项目的技术/商业/船运的尽职调查 • 项目各类技术评估 • 项目技术/商业方面的基准化分析（Benchmark Analysis） • 通过与多个项目的成本数据进行对照比较，Merlin Advisors 可以为客户提供精确度在 ± 10% 以内的项目成本分析

  4. 涵盖全球超过75%的LNG项目融资相关的尽职调查

  5. 我们的服务涵盖了液化天然气的整个产业链 产业链 企业类别 咨询项目类别 项目公司 上游 市场销售 以及采购策略 项目开 发支持 国际性油 气企业 燃气与 电力企业 LNG 船运分析 各大国有 油气企业 企业战略 中游 贸易公司 市场分析 地区的 政策分析 政府 天然气开 发策略 金融机构 尽职调查 下游 1 技术评估 合同谈判 其他机构 合同商 工业用户 包括天然气的储运 1

  6. Pricing in world gas markets is fragmented Oil-linked markets Gas-on-gas markets NBP Shale gas driven Henry Hub Oil Products JCC/Brent ? ? ? ? Henry East Africa Hub/ NBP / Brent Current Regional LNG Prices USA ($4.2/MMBtu) Asia LT* ($16.0/MMBtu) UK ($11.4/MMBtu) OIL PARITY Source: Poten & Partners Note*: Represented by Japanese average LNG price in December, 2013.

  7. Recent divergence among regional gas prices Gas and Oil Price History Pre shale gas revolution Post shale gas revolution • Major trends • Shale revolutions in US • Oil price boom in the world market • Fukushima nuclear crisis • Diversion of available LNG volumes from the Atlantic Basin to Asia Pacific JCC Oil-linked LNG prices Japan LNG NBP Gas-on-gas market prices Henry Hub Source: Poten & Partners

  8. HH-linked price is not “cheap” historically • HH price averaged $5.8/MMBtu from 2004-08 (hereafter, the “Historical High” case) • This is higher than average JCC price for the period • For a 20-year, 1 MMt/y contract, the Historical High average price would yield a $5.9 billion loss for a buyer who purchased LNG under HH-linked price rather than oil-linked price . Major pricing comparisons under Current Base case and Historical High case $2.8 ($5.8) Source: Poten & Partners

  9. Volatility has recently returned to US gas market • HH price has been below $5/MMBtu since early 2010 • However, HH price has exceed $8/MMBtu twice in February 2014 • This is equivalent to $12.7/MMBtu LNG FOB price. • HH volatility never ends, especially in the winter peak season!!!! Historical HH spot price $8.1/MMBtu Source: EIA

  10. Huge potential for US LNG exports Planned US LNG export volume by region • About 290 MMt/y of announced US liquefaction capacity in total in DOE’s list • Only two trains at Sabine Pass are under construction, totaling 9 MMt/y capacity • Freeport LNG & Expansion, Lake Charles ,Cove Point and Cameron have got DOE approval to export LNG to non-FTA countries, but are still waiting for approval from the Federal Energy Regulatory Commission (FERC).

  11. Uncertainty exists among future HH forecasts • EIA forecasts for HH in 2035 range from $11/MMBtu to $6/MMBtu • HH-linked price DAP Asia could range between $13/MMBtu and $19/MMBtu by 2035 HH-linked price forecast based on EIA’s forecast Source: Poten & Partners *oil-linked price based on average oil price of $94.4/bbl during the period from 2009 to 2013;

  12. Portfolio performance varies towards price environment • Heavy-weighted HH-linked portfolios (P7, P11,P12) show different characteristics under different market environment • Historical High (2004-2008): low volatility, high price. • Current Base (2009-2013): low volatility, low price. Price analysis of alternative portfolios of HH and oil-indexed contracts – average vs. standard deviation Historical High (2004-2008) Current Base (2009-2013) Source: Poten & Partners

  13. Three scenarios used to test 2004-13 portfolio prices Base, high and low cases used for our demonstrative portfolio simulation • Base: Historical average prices (JCC/HH/NBP) • Low: Base prices - 1.5 sigma • High: Base prices + 1.5 sigma High Base Low Source: Poten & Partners • Low & Base case: Price Oil-linked< Price HH-linked • High case: Price Oil-linked> Price HH-linked

  14. Optimal goal to move towards efficient frontier Portfolio efficient frontier: average price vs. standard deviation • Minimize risk at a given expected price; or • Achieve the best (lowest) expected price at a given risk level. Efficient frontier Source: Poten & Partners • Heavy-weighted oil-linked portfolio: lower price but high volatility • Add more HH-linked contracts to significantly reduce its volatility • Heavy-weighted HH-linked portfolio: higher price but low volatility • Add more oil-linked contracts to reduce its portfolio price

  15. Multi-tranche approach to pursuit optimized portfolio Multi-tranche approach to pursuit optimized portfolio • Start with lower supply risk supply to guarantee base requirement is met • As portfolio diversifies, move toward a more balanced approach • A more detailed practical approach is required to take more real world factors into account and help Asian buyers to design a customized procurement strategy – Poten has developed real practices on this Source: Poten & Partners

  16. Conclusion • Recent high oil prices and low HH prices have spurred Asian buyers to seek non-oil indexation in Asia Pacific • However, Asian buyers face large risks in accessing non-oil linked supplies • Portfolio price performs differently (price & risk) under different market conditions • Asian buyers are required to optimize their portfolio price • Minimizing the overall price risk under different market prospects and • Achieving the lowest LNG portfolio price at a similar risk level • In their pursuit of an optimized portfolio, Asian buyers should consider: • Current position; • Future expectation; • Ability to take / mitigate risks; • Ability to secure LNG via non-oil linked contracts and negotiate with a lower oil-linked contracts.

  17. General Disclaimer This material has been compiled by gathering market intelligence from various public and industry sources which is subject to limited validation procedures and may include estimates or judgments. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information, opinions and conclusions contained in this presentation. To the maximum extent permitted by law, Poten & Partners (Australia) Pty Ltd, together with its affiliates and their respective officers, directors, employees and agents disclaim any liability (including without limitation any liability arising from fault or negligence) for any loss arising from any use of this presentation or its contents or otherwise arising in connection with this presentation. This presentation should not be distributed or otherwise reproduced.

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