Fuel Price Forecasting Service A New Era of Higher Prices? Fuel Price Forecasting Service Graham Weale, Director of European Energy Service David Goldsack – Coal Graham Loveland – Oil Graham Freedman – Gas 17th February 2005 Teleconference

Are We Entering a New Era of Higher Prices? Oil Price per Barrel Gulf War Quotas followed. Far East Demand Up “9/11” Oversupply

Higher Prices – Not Just Oil 300 Oil $/toe 250 Oil €/toe Gas $/toe 200 Gas €/toe $/toe or €/toe 150 Coal $/toe 100 Coal €/toe 50 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

What is the Basis of Pricing Pressure? What has driven prices up to their levels? ....and why no higher? To what extent are the drivers common across fossil fuels? Will we see classic economic responses: Producers increasing output? Consumers cutting back? Will new forms of technology arrive? Are we now in a new pricing era?

How are the Main Price Drivers Impacting Higher Fuel Prices? OIL GAS COAL Variable costs inc. freight   Fixed costs Demand level  Capacity margin(s) Stocks Producer market power  Value of alternative fuels Market sentiment & events

Two Explanatory Factors for Demand Higher price demand elasticity China Low price demand elasticity

……..but Only One for Supply High producer concentration Limited scope for expansion

Will Oil Continue to Set Fuel Prices?

Higher Finding Costs and Increased call on OPEC Oil Higher Finding Costs and Increased call on OPEC

Evidence that a new Era is Beginning… The Relationship between Price & Stock Breaks Down. 7.5 12.5 17.5 22.5 27.5 32.5 37.5 42.5 47.5 52.5 -8 -6 -4 -2 2 4 6 8 Variation in days cover from seasonal average BFO price $/barrel Nov Oct Sep Aug Jul May Jun

Finding and Development Costs are Rising F&D Costs for Different Groups of Oil Companies

Whither demand? …Whither OPEC?

But if the “Peak Oilers” are right…. The “Peak Oil” Debate “Debate? ….What debate?” Wide discrepancy of views Tends to focus on resources and reserves Falling discovery rates, access issues, oil company behaviour, manpower/logistics, and lack of investment are probably more important But if the “Peak Oilers” are right….

Will the LNG Market Destroy Oil-Price Indexation? Gas Will the LNG Market Destroy Oil-Price Indexation?

The End of Oil Indexation? Oil-price Indexation is under attack. Competition is increasing. Some countries are oversupplied Removal of destination clauses LNG enhances supply flexibility Gas-on-gas competition will undermine the traditional link to oil products. How quickly will this happen? 3 years?….5 years? ….or longer? 15

Impact of Coal Indexation as Required for Power Sector Differences in indices can & will be traded, further undermining oil indexation.

Price Outlook – Oil-indexed or Cost-based? Large Margins encourage new entrants Margin $2.5/mmbtu

Prospects for Atlantic Basin Price Convergence When will LNG trade volumes affect market prices? Phase 1: When will rising LNG trade change gas prices at market hubs? Phase 2: When will LNG producing countries force convergence to NYMEX Henry Hub prices? United States Average Natural Gas Price Europe Years Source: Global Insight

How long will prices sit at twice costs? Coal How long will prices sit at twice costs?

How will Cross-Fuel Competition Impact Coal Prices? History of delivered prices to ARA

Will Prices Stay at Their Current Level? Coal prices are normally driven by marginal cost of production being regulated by supply/demand position Current prices reflect tighter supply, high freight & high cost of competitor fuel (gas) Freight markets are volatile & supply demand imbalances are normally regulated within 2 year time frame As freight & supply markets come back into balance, prices will fall – based on whether: producers maintain gas price linking coal-on-coal competition causes prices to become detached

Both Freight and Mine Costs include a real return on investment of 10% Actual Freight and fob Coal show scope for future price decreases ( all in tonnes basis 6000 Kcal, NCV) Both Freight and Mine Costs include a real return on investment of 10%

Cross-fuel Conclusions

Broad Fuel Price Moderation is Likely to Lie Ahead…

Issues to Watch Early gas liquidity in Europe End of oil-price indexation, preserves oil-price correlation Peak oil issue and higher finding costs Pressure on coal producers soften prices to accept cost of carbon?

For Additional Information on Global Energy Products & Services, Graham Weale 44-20-8544-7882 graham.weale@globalinsight.com Peter Seager 44-20-8544-7924 peter.seager@globalinsight.com