1. Evolution of Commercial LNG: Drivers, Status, and Outlook presented at New York Energy Forum February 5, 2008 David Nissen Center for Energy, Marine Transportation & Public Policy School of International and Public Affairs Columbia University dn2022@columbia.edu www.cemtpp/nissen dn2022@columbia.edu

2. Center for Energy, Marine Transportation, & Public Policy SIPA, Columbia University 2 LNG  Purpose – transport remote, low-value gas to high-value market  No incremental local market growth  Must start “big” with joint commitment of facilities and service on both ends of the trade  Result – ~layered bilateral trade commitments expanded transportation scope but denied opportunistic trading  Atlantic – competitized continental gas and electricity markets forced supply competition and eroded monopoly franchised utilities ~IOCs emerge as “LNG merchants” with control over dispatchable capacity through the chain ~trading structures proliferate  Pacific – downstream utilities still rule but are moving upstream  Shipping control becomes strategic

3. Center for Energy, Marine Transportation, & Public Policy SIPA, Columbia University 3 “Project-utility business model” structure  Business structure ~Export project (JV of IOCS, NOC, & maybe buyers) is the LNG seller ~Buyers are monopoly franchised utilities -- integrated utilities (Japan) or merchant gas transportation companies (Korea, Taiwan, Europe) ~Trades and facility/shipping services are bilaterally committed  Commercial structure ~Facilities and shipping -- optimized and dedicated ~Quantity risk – buyer assumes w/ high take-or-pay commitment ~Price risk – seller – Oil- indexed pricing (because no gas market) needs endorsement by buyers’ regulatory and political structure ~Neither side has incentive to defect w/ energy market value movements  Primary purpose – limit “post-commitment counter party opportunism”

4. Center for Energy, Marine Transportation, & Public Policy SIPA, Columbia University 4 Commercial LNG Sale and purchase of LNG using existing facilities on contemporaneous commercial terms  Drivers of commercial LNG ~Lower LNG costs reduce funding coverage and permit project commitment without full capacity sold ~Competitive inland gas markets reduce export project offtake risk if shipping and import capacity is available ~Expanded LNG market scope increases “liquidity of exchange” for uncommitted production, shipping import capacity  Requires uncommitted capacity and commercial access “through the chain” – ~For LNG supply ~For LNG shipping ~For LNG import/regas ~For demand aggregation and inland access  “Optionality” is embedded in shipping, which becomes strategic

5. Center for Energy, Marine Transportation, & Public Policy SIPA, Columbia University 5 Trading flexibility  The “revolutionary” structure of Atlantic LNG (Trinidad): ~buyers’ (Cabot LNG – now Suez, Enagas, now GN/Repsol) guaranteed 100% FOB offtake (in their own ships) ~destination flexibility between Spain and Boston ~further swaps of Algerian and Trinidad cargoes  Contracts between Qatar and most of its western buyers allow for the flexibility to divert cargoes and provide for the sharing of profits between the producer and the original buyer from such sales.  Tangguh (Indonesia)-Sempra (Baja California) has diversion flexibility with trading profit sharing  Nigeria LNG has embedded destination flexibility in mid-term Asia sales  Yemen LNG is reported to being committed in anticipation of trading East and West  European Commission, however, has taken a strong stand against contractual trading profit sharing in P/L and LNG contracts (Norway

6. Center for Energy, Marine Transportation, & Public Policy SIPA, Columbia University 6 Trading hubs and contracts  Dubai -- Dubai Multi Commodities Centre (DMCC) and its partner, LNG Impel envisage the development of a world-class storage facility -- up to 3Mcm  Gulf of Mexico -- A 50:50 joint venture between trading houses Sojitz (formerly Nissho-Iwai) and Sumitomo is looking at an additional 1 Mt/yr of LNG at a receiving terminal in the Gulf of Mexico under a terminal-use agreement  Singapore -- Most Japanese LNG trading companies are not considering an immediate launch of LNG desks in Singapore despite the country's introduction of a 10-year tax break  Gazprom –SONATRACH trading swaps  CNOOC – master spot contract with Total  Qatar Master Spot Contract

7. Center for Energy, Marine Transportation, & Public Policy SIPA, Columbia University 7 Pricing  Lake Charles cargoes around 85% of Henry Hub, leaving enough to easily cover a regasification fee of over 10%, plus a location discount that on a weekly average basis has been just 8¢ per million Btu -- although the weekly average spot price differential has varied from a discount of $1.24 to a premium of 45¢ over the period. Exceptions to the 85% rule for LNG pricing tend to be to the downside, with some cargoes sold at greater discounts.  SoCal is already the price indicator prescribed for Sempra's long- term Indonesian supply and, as such, appears to have been the starting point for ongoing negotiations to divert part of that LNG to Asian markets. But netback equilibrium in Asia markets not likely, because Calif. market too thin  Efficient arbitrage of Asia, Europe, No. America market values  But inefficient pricing in Europe

8. Center for Energy, Marine Transportation, & Public Policy SIPA, Columbia University 8 Merchants emerge from both ends of the chain -- gas producers integrate downstream MerchantExport positionsShippingImport positions BGTrinidad (Atlantic LNG), Egyptian LNG, Iran (prop.) YesLake Charles, LA Brindisi, Italy (prop.) BPTrinidad (Atlantic LNG), Angola LNG (prop.), Abu Dhabi, Indonesia, Iran (prop.), YesBilbao, Spain, Cove Point, MD ExxonMobilQatar, West Niger Delta LNG (prop.), Angola LNG (prop.), Indonesia YesUK, France, and Gulf of Mexico (all prop.) ShellNigeria LNG, Venezuela (prop.), Oman LNG, also Brunei, Australia NWS, Malaysia, Sakhalin YesCove Point, MD, Elba Island, GA, Altamira, Mexico SONATRACHAlgeriaYesEl Ferrol, Spain (prop.)

9. Center for Energy, Marine Transportation, & Public Policy SIPA, Columbia University 9 … and buyers integrate upstream MerchantExport positionsShippingImport positions GdFSnohvit, Egyptian LNGYesFrance (2) Repsol/YPFTrinidad (Atlantic LNG)YesBilbao, Spain, Altamira and Lazaro Cardenas, Mexico (prop.) Suez/TractebelTrinidad (Atlantic LNG)YesZeebrugge, Bel., Everett, MA, Bahamas-FL (prop.), Petrobras Union Fenosa-ENISEGAS LNG (Egypt), and purchase from Oman LNG YesSagunto El Ferrol, Spain Tokyo Gas, Tokyo Electric Equity positions in Pluto (Woodside) YesTokyo, and trading

10. Center for Energy, Marine Transportation, & Public Policy SIPA, Columbia University 10 Gas Cartel?  Gas production and transportation projects are essentially different from oil ~projects are businesses ~facilities are costly and optimized ~bilateral reliability is foundation  Market power must be exerted by not building new capacity  Current situation – cost avoidance, resource nationalism, or market power ~Qatar has stopped new projects, probably mostly cost avoidance ~Russia has changed the terms of participation (Sakhalin, Stokhman, Kovykta), locked up Caspian Gas ~Gazprom is not developing Yamal quickly, may bring Kovykta west  My assessment – Gazprom is exerting market power, LNG producers are not

11. Center for Energy, Marine Transportation, & Public Policy SIPA, Columbia University 11 Costs vs. Oil Price how much is increased resource difficulty (offset by technical change) how much is being “netted back” as short-term rent to scarce inputs? how much of this is rent that will be eroded by entry? when? Source: UBS, JSHerrold

12. Center for Energy, Marine Transportation, & Public Policy SIPA, Columbia University 12 The energy world is currently in a massive disequilibrium  Tripling (?) the oil price increased the list of viable projects in all energies (at long-run costs) by an order of magnitude  E.g., Our cost estimates in 2002 could get LNG from anywhere to Henry Hub for $4/MBtu ($2/MBtu if you count the condensate credit in most places)  What’s scarce – the “capacity to form capacity”  Cost escalation rations this capacity  This environment foster “rent-capture” and resource nationalism, not efficiency  What is going ahead is high-rent sovereign projects  Plus huge environmental regime uncertainties ~unwillingness to finance coal-fired power plant, TXU, current reports  Long-run equilibrium costs plus carbon levy will favor gas, but when?