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LNG Commoditization – A Reality In the Future Or Just A Dream?

LNG Commoditization – A Reality In the Future Or Just A Dream?. Kyoichi Miyazaki – Poten & Partners Co Author: Majed Limam – Poten & Partners Co Author: Mike Reimers – Poten & Partners Co Author: Go Katayama – Poten & Partners.

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LNG Commoditization – A Reality In the Future Or Just A Dream?

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  1. LNG Commoditization – A Reality In the Future Or Just A Dream? Kyoichi Miyazaki – Poten & Partners Co Author: Majed Limam – Poten & Partners Co Author: Mike Reimers – Poten & Partners Co Author: Go Katayama – Poten & Partners

  2. Natural gas prices are regionally segregated, no signs of commoditization Oil prices – Brent, WTI, Dubai Crude Natural gas prices – Henry Hub, NBP, Japan LNG Price (JLC) VS Source: Bloomberg

  3. Seaborne oil trade facilitated interconnectivity between regions World Oil Consumption and Imports by Type Source: EIA, UNCTAD, Poten & Partners

  4. Low transport cost of oil, only about 1/6 of LNG’s Tanker CAPEX ($/MMBtu of installed annual capacity) 4.8 0.8 Source: Poten & Partners

  5. High liquidity with growth in futures market WTI and Brent Futures Contracts Traded by Year (Millions) Source: Bloomberg

  6. Oil evolved to become a readily traded commodity, although not a perfect one

  7. Equilibrium of aggregate demand and supply determines price… Region D Region C Region A Region B S1 S2 S3 S4 P3 P4 P1 P2 D1 D2 D3 D4 Q2 Q1 Q3 Q4 Global commodity price SGlobal = S1 + S4 + S3 + S4 DGlobal = D1 + D4 + D3 + D4 QGlobal PGlobal

  8. …no such demand/supply economics theory applies to global natural gas/LNG markets US (HH) UK (NBP) Continental Europe (Zeebrugge, etc.) Asia (Asian LNG prices) S1 S2 Oil linkage influence, with hub pricing gaining market share Typical oil driven formula, but increasing infiltration of HH and hybrid pricing P1 P2 D1 D2 Q2 Q1 No global gas price South America (HH, Oil, NBP.) Typically spot based, but also long-term HH and oil driven

  9. High CAPEX, transport and storage costs hinder “commoditization” of natural gas and LNG

  10. Gas is impractical to transport unless liquefied, placed under high pressure or converted to another product Parity of energy content of natural gas by volume, vs. oil Gas: 36,000 litres Oil: 35 litres CAUSES

  11. LNG’s total value chain CAPEX is 4 times Oil’s Value Chain CAPEX Comparison between Gas and Oil ($/MMBtu of installed annual capacity) Gas/LNG 23.9 Upstream & mid-stream segments Oil 6.1 Source: Poten & Partners CAUSES

  12. LNG a 10% share of global gas, limiting integration Global Gas/LNG Consumption (2014) Global Oil Consumption (2014) LNG Trade 10% Seaborne Pipeline Imports Imports 38% 19% Domestic Domestic Production Production 59% 71% Pipeline Imports 3% Source: BP, Poten & Partners Source: UNCTAD, BP, Poten & Partners EFFECTS

  13. Spot/Flexible LNG projected to reach 100 MMt/y by 2030… Global LNG supply by volume Global LNG Supply FORECAST Add more liquidity/ connectivity to the market Spot Flexible Fix Doesn’t add liquidity/connectivity to the market Source: Poten & Partners EFFECTS

  14. …but less than 30% market share Global LNG supply by ratio Spot 30% Flexible Fix Source: Poten & Partners EFFECTS

  15. Spot/Flexible LNG projected to provide minimal connectivity to the total natural gas market Global natural gas by LNG, pipeline gas, domestic consumption LNG Spot FORECAST LNG Flexible LNG trade LNG Fix Pipeline gas trade Domestic natural gas consumption Source: BP Statistics, Poten & Partners EFFECTS

  16. No commoditization in the horizon for LNG market • The changes that could be material to LNG commoditization are those focused on underlying causes – e.g., high project CAPEX, transportation/storage costs • Small steps to a commodity market may be possible – e.g., shift from JCC to Brent linkage • Long-term LNG SPA contracts will remain the backbone of the LNG industry – they are needed to anchor project development and financing

  17. NATURAL GAS & LNG CONSULTING CONTACTS: AMERICAS (NEW YORK) Contact: Jim Briggs Email: jbriggs@poten.com Tel: +1 212 230 2000 AMERICAS (HOUSTON) Contact: Doug Brown Email: dbrown@poten.com Tel: +1 713 344 2378 EUROPE, M. EAST, AFRICA Contact: Graham Hartnell Email: ghartnell@poten.com Tel: +44 20 3747 4820 ASIA PACIFIC Contact: Stephen Thompson Email: sthompson@poten.com Tel: +61 8 6468 7942

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