1. The UK Gas Market Presentation to Durham Centre for Doctoral Training in Energy 17th February 2011 Niall Trimble Managing Director

2. © 2005 The ENERGY CONTRACT Company UK Gas Market Recent Spot Market History Recent Developments in the Market Forecasts of Gas Supply and Demand Gas Price Forecasts

3. © 2005 The ENERGY CONTRACT Company Recent Spot Market History

4. © 2005 The ENERGY CONTRACT Company Day Ahead Prices for 2008/09 to 2010/11 (p/therm @ NBP)

5. © 2005 The ENERGY CONTRACT Company Gain in Forward Curve less pronounced

6. © 2005 The ENERGY CONTRACT Company Significant Developments in the Market Place

7. © 2005 The ENERGY CONTRACT Company Why did prices increase in Summer 2010? Rising gas demand in UK 1 st 9 months of 2010 gas demand up 9% on 2009 Developments in rest of Europe Demand also above 2009 Above Take or pay level Contract re negotiation Take or Pay level reduced Much greater interest in UK spot gas Big increase in Interconnector exports in summer 2010 Summer 2009 flows 35% of capacity Summer 2010 flows 64% of capacity Overall effect market firmer prices higher

8. © 2005 The ENERGY CONTRACT Company High demand in Q4 2010 Despite price increase in summer Market still weak Temperatures very low in December Coldest December for 100 years Demand exceptionally high Record demand on 20 th December –[469] mcm/d Little reaction from Day ahead market Highest price 65p/therm –Cf 165p in November 2005 –Cf 196p in March 2006 Market still oversupplied?

9. © 2005 The ENERGY CONTRACT Company Significant Developments in the Market Place Gas prices remain decoupled from oil? In 2009 gas prices decoupled from Oil * In 2010 gas prices rose but so did oil No convergence Big reduction in price seasonality* Very Significant for storage Historic Average Winter Summer Differential 18p/therm Current Forward Curve Differential 8p/therm Cause of the reduction Due to weak markets caused by oversupply Seasonality may reappear when markets tighten up Return of volatility for same reason

10. © 2005 The ENERGY CONTRACT Company Are Gas prices re converging with Oil?

11. © 2005 The ENERGY CONTRACT Company Gas Price Seasonality 2004/05 to 2015/16

12. © 2005 The ENERGY CONTRACT Company Rising imports Imports 2008/09 78 mcm/d 2009/10 116 mcm/d Up 49% in 2009/10 Massive increase in LNG imports Imports = 43 % of UK demand in 2009/10

13. © 2005 The ENERGY CONTRACT Company Rising Imports

14. © 2005 The ENERGY CONTRACT Company Big disparity between UK and European Prices Basis of Comparison UK Day Ahead Price Continental Long Term Contract Prices (flat gas basis) UK prices lower for last 5 years Average Discount – 24% Even in 2010 Discount – 28%

15. © 2005 The ENERGY CONTRACT Company Comparison of UK And European Prices

16. © 2005 The ENERGY CONTRACT Company Lack of Progress on Storage UK Storage Capacity (bcf) Built 161 Under Construction 37 PP but not started 98 Storage Capacity as a % of annual demand UK 5-6% Europe 16% USA 18% Lack of progress Planning barriers removed Many projects with PP not going ahead Due to lack of seasonality in forward curve

17. © 2005 The ENERGY CONTRACT Company UK Gas Supply Demand Forecasts

18. © 2005 The ENERGY CONTRACT Company Supply /Demand Forecasts Demand Significant decline in forecast levels of UK gas demand 2005 to 2009 due to –High prices –Decline in UK Industry –Global recession Further decline in future due to policies to reduce CO2 emission Government expects UK gas demand to fall to 66 bcm/year by 2020 2011 forecast 19 % below 2005 forecast* 16% below 2008 forecast

19. © 2005 The ENERGY CONTRACT Company UK gas sales to industry have declined 34% since 2000

20. © 2005 The ENERGY CONTRACT Company Annual Gas Supply Demand Forecast – Declining Demand forecasts

21. © 2005 The ENERGY CONTRACT Company Supply /Demand Forecasts Supply Growing proportion of LNG 1% of supply in 2008/09 11% of supply in 2010/11 21% of supply in 2016/17 LNG supply is Price Sensitive, so terminal load factor will vary 2008/09 to 2013/14 only 30% 2014/15 onwards 48% Big Seasonal variations in Load Factor Winter 70% Summer 25% Lower in 2008/09 to 2013/14

22. © 2005 The ENERGY CONTRACT Company Forecast of UK Annual Gas Supply and Demand

23. © 2005 The ENERGY CONTRACT Company Maximum Beach Supply as a % of Q1 Demand - 1997/98 to 2019/20

24. © 2005 The ENERGY CONTRACT Company Gas Price Forecasts

25. © 2005 The ENERGY CONTRACT Company Key Drivers until 2013/14 Gas Market will be depressed until 2013 or 2014 Driven largely by Supply Demand fundamentals Winter supply demand ratio very favourable Modest influence of European Oil linked prices 2006 to 2010 - UK prices 24% below European level

26. © 2005 The ENERGY CONTRACT Company Key Drivers 2014 onwards Market should start to tighten up around 2013 or 2014 Winter supply demand ratio starts to fall Increasing influence of European Oil related prices * Prices will become higher and more volatile Due to deficiencies in UK traded market * Key driver – building of offshore storage Onshore storage will be insufficient Offshore is expensive and risky More offshore storage would reduce price and volatility

27. © 2005 The ENERGY CONTRACT Company Gas Price Forecasts – Background to the Forecasts - 1 Oil Price Important post 2013 - 3 cases Low Case - $55/Barrel by Q1 2012, then rising with inflation. Base Case - $90/Barrel until Q4 2011, then rising with inflation High Case - $120/Barrel by Q3 2012, then rising at 1.0% above inflation

28. © 2005 The ENERGY CONTRACT Company Deficiencies in the UK market Market very vulnerable to disruption in longer term Much worse placed than US Forward Curve doesnt work well Supply dominated by a few suppliers ExxonMobil, Gazprom, Statoil and Qatar Gas will have 30-40 % of market in 3 years Could they withhold supply? Lack of storage is a problem UK gas storage capacity is 5-6% of annual demand (with under construction) cf USA 17.9% No sign of this being resolved Bad for UK gas consumers but good for gas producers!

29. © 2005 The ENERGY CONTRACT Company Month Ahead Gas Price Forecast, 2011 to 2016

30. © 2005 The ENERGY CONTRACT Company

32. Implications of the Forecasts Day Ahead prices expected to rise significantly in 2-3 years Not reflected in forward curve Time for Buyers to hedge? Seller should hedge summers for 3 years Cheap UK spot gas has affected other parts of Europe Competition has lead to reduction in price to end users Profitability seriously reduced in many markets Intensive activity on price reviews Many going to arbitration Era of cheap UK spot gas may end in 2-4 years time This would feed through into Long term contracts Through price review process More arbitrations to increase price by 2014/15

33. © 2005 The ENERGY CONTRACT Company