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Ofgem LNG Seminar – Impact of LNG on UK gas supply and prices Sam Shoro and Rebekah Bostan Senior Consultants – European Energy Services Wednesday 11 th February 2009

Copyright © 2009 IHS Global Insight. All Rights Reserved. Impact of the Global LNG Market on the UK Will there be enough import capacity? Will there be enough supply to meet potential demand? Short term impact of the recession? Price implications?

Copyright © 2009 IHS Global Insight. All Rights Reserved. Globalisation of the UK gas market UK Gas supply initially developed from the North Sea in the 1970’s - Priced at marginal cost Demand rose during the 1980’s because gas was cheaper than oil Norwegian gas from the Frigg and other fields introduced - but indexed to oil UK gas market liberalised between with the introduction of the Network Code and the NBP - This led to wholesale spot and forward markets with prices based on gas trades and the fundamentals of supply and demand NBP

Copyright © 2009 IHS Global Insight. All Rights Reserved. Globalisation of the UK gas market IUK Interconnector opened in 1998, linking the UK market with Continental oil-indexed prices BBL pipeline operational in 2006 As indigenous UK gas production declined, Norwegian/Continental imports increased - Linking UK prices further to oil Langeled came on line during 2007 and we saw the growing influence of Russian gas - Also oil-indexed The Isle of Grain LNG Terminal commissioned in 2005, introduced the influence of US Henry Hub prices on the UK gas market

Copyright © 2009 IHS Global Insight. All Rights Reserved. Globalisation of the UK gas market Expansion of Grain last year, and the commissioning of South Hook and Dragon this year will open up the UK to a global market where events in Asia and the USA will impact on UK prices Pacific Basin Atlantic Basin Trans-Atlantic arbitrage already has an influence on UK gas prices during the winter Last summer we saw the impact of record high Pacific basin prices on UK LNG deliveries

Copyright © 2009 IHS Global Insight. All Rights Reserved. What does a global LNG market mean for UK gas supply? Increased flexibility But the UK has low levels of contracted supplies going forward leading to possible high level of exposure to the global LNG market

Copyright © 2009 IHS Global Insight. All Rights Reserved. UK Balance – Increasing Import Dependency Import Dependency: 2005 – 18% 2010 – 52% 2030 – 96%

Copyright © 2009 IHS Global Insight. All Rights Reserved. LNG will Deliver Increased Flexibility Storage capacity increases planned (additional 2.9 bcm working volume) Pipeline Capacity (new supply routes NOR and NET, increased capacity from IC) LNG Infrastructure (potential 67 bcm new capacity)

Copyright © 2009 IHS Global Insight. All Rights Reserved. UK Reliance on LNG Spot Dependence on spot imports rise from 9% (2009) to 80% (2020) If contracts are renewed spot imports will still rise to 62% (2020) LNG spot imports could potentially make up 70% of total spot imports bcm 2010 to 55.4 bcm by 2030

Copyright © 2009 IHS Global Insight. All Rights Reserved. What does a global LNG market mean for UK gas supply? Increased flexibility But the UK has low levels of contracted supplies going forward leading to possible high level of exposure to the global LNG market Need to compete in a global LNG market – will long-term liquefaction deliver? What about liquefaction development delays - Africa?

Copyright © 2009 IHS Global Insight. All Rights Reserved. Competing in Worldwide LNG Market POTENTIAL GLOBAL LNG DEMAND POTENTIAL GLOBAL LNG SUPPLY

Copyright © 2009 IHS Global Insight. All Rights Reserved. Liquefaction Utilisation Rates

Copyright © 2009 IHS Global Insight. All Rights Reserved. Liquefaction Commissioning

Copyright © 2009 IHS Global Insight. All Rights Reserved. Liquefaction Project Delays

Copyright © 2009 IHS Global Insight. All Rights Reserved. Expected Worldwide Spot Volumes Available Main source of spot volumes: Nigeria, Qatar, Algeria – all within $4/mmbtu

Copyright © 2009 IHS Global Insight. All Rights Reserved. What does a global LNG market mean for UK gas supply? Increased flexibility But the UK has low levels of contracted supplies going forward leading to possible high level of exposure to the global LNG market Need to compete in a global LNG market – will long-term liquefaction deliver? What about liquefaction development delays - Africa? Therefore – potentially more price stability!

Copyright © 2009 IHS Global Insight. All Rights Reserved. Marginal cost of LNG supply to Grain Source: 27p/th 47p/th

Copyright © 2009 IHS Global Insight. All Rights Reserved. What does a global LNG market mean for UK gas prices? LNG will set the floor for the winter, and possibly the summer too (depending on coal and carbon prices) as our import dependency grows - The short term outlook is bearish, due to weakness at Henry Hub, and a lack of demand from the US and Asia, caused by global recession - Competition will increase from the Pacific once the recession is over In the medium term, the influence of crude on UK gas prices will diminish as liquidity increases on the Continental gas hubs and as they become price setting locations. This will lead to the end of oil-indexation across Europe. Prices will be driven by the fundamentals of global supply and demand, with LNG linked to Henry Hub becoming a key source of Flexibility. If this is managed well, along with storage and pipeline imports, then gas prices should stabilise. 80% of the UK’s LNG requirement from 2020 is un-contracted, and this constitutes a major risk to the NBP price forecast. - Wholesale gas prices can go up as well as down..

Copyright © 2009 IHS Global Insight. All Rights Reserved. Current gas prices (Quarterly)

Copyright © 2009 IHS Global Insight. All Rights Reserved. Impact of current drivers on the UK gas market Key Drivers Effect on UK Gas Market Softening Crude Prices Weaker EU oil-indexed prices from Q1’09 Global Recession Reduced Industrial demand for gas Gas into Power Sector Reduced Demand for Gas Softening Coal Prices Reduced Demand for Gas ETS – Weak post Kyoto Agreement Coal Preferred to Gas Low EUA Price –dark/spark spreads LNG Demand Weaker in US/Pacific Increased LNG Supply for Europe Link to Henry Hub LNG Infrastructure Enhanced Improved Flexibility Fundamentals Healthy Supply / Good Storage / End of Winter Outlook is Bearish

Copyright © 2009 IHS Global Insight. All Rights Reserved. Forward curves (Monthly/Quarterly) Forward Prices

Copyright © 2009 IHS Global Insight. All Rights Reserved. Conclusion Will there be enough import capacity? - Yes Will there be enough supply to meet potential demand? - Yes Short term impact of the recession? - Project delays, but supply sufficient to meet reduced demand At what price? - Bearish in the short term, stronger with more seasonality in the medium term - Closer link between NBP and Henry Hub

Thank you Sam Shoro Senior Consultant – European Energy Services Rebekah Bostan Senior Consultant – European Energy Services