Mervin Bovaird Professor of Energy Business and Finance US Natural Gas (LNG) Exports: Opportunities and Challenges 34th USAEE/IAEE North American Conference October 23-26, 2016 Tulsa. Oklahoma Ronald D. Ripple, PhD Mervin Bovaird Professor of Energy Business and Finance

Outline Misnomers about USA LNG Global natural gas imbalances US Lower-48 LNG export applications and approvals Cheniere business model International prices Shipping costs Full cost recovery versus Marginal cost recovery Implications

LNG Misnomers in the media LNG market AND natural gas market We are exporting shale gas There is a market for natural gas; there is not really a market for LNG LNG is only a transportation phase for natural gas to be moved from one location to another over water. LNG is always regasified for use of any sort; it is never used in its cryogenic liquid form. What we are exporting is NOT shale gas

Source: BP Outlook 2016; author calculations Source: BP Outlook 2016; author calculations. To convert to Bcf/d multiply by 48 and divide by 365. For example, the 2020 shortfall for Asia Pacific is equivalent to 16.7 Bcf/d.

Cheniere Business Model Cost-plus in nature Henry Hub plus 15% for sourcing the gas Cheniere acquires and owns all the gas to be processed, so theirs is NOT a tolling operation A processing cost is factored in before delivery to ship side This is a take-or-pay fee, so it is effectively a fixed cost to the off-taker Buyers take possession, and ownership changes hands, at dock side Shipping and further handling costs are borne by the buyer

Cheniere Sabine Pass exports Exporting since February, 2016 Through July: 21 shipments 9 different countries Average send out of approximately 423 MMcf/d Prices (at export point) range from $3.12/MMBtu to $5.60/MMBtu

Low day rate High day rate

International prices As of Thursday, October 20 UK – NPB -- $5.87/MMBtu Europe – TTF -- $5.44/MMBtu The latest data for Japan (from METI) for LNG delivered in September -- $5.70/MMBtu

Netback values Full-cost recovery: Marginal-cost recovery/shutdown: UK -- $5.87 – 0.46 – 5.84 = -$0.43 Europe -- $5.44 – 0.46 – 5.84 = -$0.86 Japan -- $5.70 – 0.96 – 5.84 = -$0.60 Marginal-cost recovery/shutdown: UK -- $5.87 – 3.59 = $2.28 Europe -- $5.44 – 3.59 = $1.85 Japan -- $5.70 – 3.59 = $2.11

Implications Significant market opportunity Price will matter Full-cost recovery may be a challenge No shutdown in sight for those facilities under construction AND take-or-pay contracts in place No economic incentive to build more capacity that does not carry take-or-pay for the liquefier

Thank you! R. D. Ripple www.utulsa.edu Q & A Thank you! R. D. Ripple www.utulsa.edu