Global LNG Market

Risks and Prospects for the European and Italian Energy Systems

Milan, 29 September 2008

Page 2

Market designers should promote re-gasification and storage overcapacity, market liquidity and transparency. Companies should take position upstream

� Context• Global gas demand is increasing• In Europe, gas production is declining and hence import dependence is increasing• LNG will cover a greater portion of gas demand• The LNG is becoming a global seller market, with producers taking advantage of

arbitrage potential

� Issues• For the market designer, to attract gas into LNG terminals located in Europe and

Italy• For the gas supplier, to take full advantage of the LNG market opportunities

� Possible solutions• Some overcapacity is needed to take advantage of spot trading and to sign LNG

supply contracts with producers. Storage overcapacity is also needed to fill the plants with cheap LNG cargos

• Market liquidity and transparency is necessary to attract spot LNG cargos• To take full advantage of arbitrage possibilities and to hedge against gas final prices

volatility, LNG buyers need take positions in the upstream segment of the market

Page 3

With increasing demand and declining domestic production, EU27 import dependence is increasing to 83% in 2020

� EU27 gas demand is expected to grow from 438 Mtoe in 2005 to 625 Mtoe in 2030 (CAGR +1,4%)

� European gas production is declining fast. UKCS reserves should be depleted by 2020� European gas import dependence, at 59% in 2005, will stand at 83% in 2020

Outlook of EU27 Gas Balance

Source: Eurogas Long Term Outlook to 2030

50 127 171 241

0

200

400

600

800

2005 2010 2015 2020 2025 2030

Mto

e/y

Production Import form Norway Other Pipe + LNG Imports Gap Demand

Page 4

LNG dependence is increasing, from 9% to 30% in 2020

� LNG imports in 2005 covered 9% of EU27 gas demand� The dependence on LNG is expected to reach 30% in 2020� Pipe imports relative dependence is expected to remain somehow stable in the next

years

Outlook of EU27 Production, Pipe and LNG Imports

Source: Cedigaz

9% 12%22%

30%

0%

20%

40%

60%

80%

100%

2005 2010 2015 2020

Production Pipe Imports LNG Imports Demand

Page 5

The LNG market is divided in 3 balanced regions, Asia Pacific (148 Bcm), Europe (53 Bcm), America (25 Bcm)

� Markets are balanced. Asia demand was 148,0 Bcm in 2007, supply was 145,3 Bcm� Europe demand was 53,3 Bcm in 2007. Supply was 61,8 Bcm� America demand was 25,1 Bcm in 2007. Supply was 19,3 Bcm

Gas Long Term Trade Flows, Bcm, 2007

America

Europe

Natural Gas

LNG

9.9

8.8

107.3

13.2

5.4

9.9

6.16.2

23.1

124.4

41.9

41.9

16.469.7

6.2

4.2

16.1

3.314.1

8.544.3

23.1

8.6

17.

6

7.6

22.614.4

4.55.4

3.2

12.8

2.6

> 20 bcm

10-20 bcm

< 10 bcmAsia Pacific

Source: BP Statistical Review of World Energy June 2008

Page 6

Utilization of world liquefaction capacity is 85%

� Total world liquefaction capacity stands at 267 Bcm/y� World liquefaction capacity is used at 85%� The liquefaction capacity is sold predominantly in association with long term LNG supply

contracts

Liquefaction Capacity and Utilization, 2007

Source: Capgemini, BP Statistical Review of World Energy June 2008, GIIGNL The LNG Industry 2007

93% 97%

76%

100%87% 90%

72%

83%91%

66%

0

10

20

30

40

50

Qat

ar

Mal

aysia

Indo

nesia

Austra

lia

Om

an

Alger

ia

Niger

ia

Egypt

T & T

Oth

ers

Bcm

/y

Used Capacity Idle Capacity Utilization (%)

Avg 85%

Page 7

World re-gasification capacity is in excess. Its utilization stands at 42%

Re-gasification Capacity and Utilization, 2007

� Total world re-gasification capacity stands at 542 Bcm/y� World re-gasification capacity is used at 42%� Excess re-gasification capacity is an “entry ticket” and an outlet for arbitrage� Low utilization in the US is financially feasible by the potential for storage plays

Source: Capgemini, BP Statistical Review of World Energy June 2008, GIIGNL The LNG Industry 2007

37% 36%

47%

79%

96%

44%

76% 73%

43%

0

50

100

150

200

250

Japan South

Korea

Taiwan China India Spain France Italy US

Bcm

/y

Used Capacity Idle Capacity Utilization (%)

Avg 42%

Page 8

Re-gasification costs are 1% of total. Overcapacity is hence not expensive

� Gas costs in Italy was 41 c€/cm in Q107, excluding taxes� 1% of total are re-gasification costs (and 2% of total are storage costs)� Hence, re-gasification overcapacity would not increase much the level of gas costs

Italian Gas Cost Components (Taxes Excluded), Q107

Source: Capgemini, AEEG data Q107

100%

15%

18%8%

2%1%

55%

-

10

20

30

40

50

LNG

DES c

osts

Re-gas

ificat

ion

cost

s

Stora

ge c

osts

Trans

miss

ion

cost

sDis

tribu

tion

cost

sCom

merc

ial c

osts

Total

c€/c

m

Page 9

Average gas price in 2007 was 7,4 $/Mbtu, with differences among markets in the range of 1 $/MBtu

� Average gas price in 2007 was 7,4 $/Mbtu• Japan 7,7 $/MBtu, -1,2 $/MBtu to Europe, +0,7 $/MBtu to US• Europe 8,9 $/MBtu, +1,9 $/MBtu to US, +1,2 $/MBtu to Japan• US 7 $/MBtu, -0,7 $/MBtu to Japan, -1,9 $/MBtu to Europe

Gas Prices Evolution

Source: BP Statistical Review of World Energy June 2008

0,00

5,00

10,00

15,00

20,00

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

$/M

Btu

0,00

20,00

40,00

60,00

80,00

$/b

bl

Japan cif EU cif UK NBP US Henry Hub Crude oil ($/bbl)

Page 10

Shipping costs can range from 3% to 15% of total, depending on distance

� Shipping costs can go from 0,2 to 1,1 $/MBtu, representing 3% to 15% of total gas costs� Price differentials of 0,2 $/MBtu support the case for cargo diversions� Nigeria, Qatar and T&T can swing among markets, also thanks to flexible contracts

Shipping Costs

Source: Capgemini, GIIGNL The LNG Industry 2007

US

Spain

Japan

0

0,2

0,4

0,6

0,8

1

1,2

Algeria Nigeria Qatar T&T

$/M

Btu

SwingSwing

Swing

Page 11

Price differentials among markets generate options for arbitrage

� The dynamics of the gas markets produce prices differentials supporting arbitrage� Transparency of the markets and representativeness of price indexes are necessary

conditions for the development of arbitrage and spot trading

Evolution of Major Gas Price Indexes

Source: Platts, BAFA, APX

0

2

4

6

8

10

12

14

Sep-05 Dec-05 Mar-06 Jul-06 Oct-06 Jan-07 Apr-07 Aug-07 Nov-07

$/M

Btu

Henry Hub ZEE BAFA

Arbitrage to Zee

Arbitrage to US

Arbitrage to EU

Page 12

America

Europe

Asia Pacific

Algeria, Nigeria, Qatar and T&T are the LNG swing producers

� Qatar sold spot 14,1 Bcm to America� T&T sold spot 14,8 Bcm, some to Europe and Asia Pacific� Algeria and Nigeria sold spot 10 Bcm each, to America and Asia Pacific

LNG Spot Trade Flows, 2007

0.90.2

0.9

0.3

0.2

0.2

4.4

2.10.6

0.6

0.4

0.7

4

0.6

0.9

0.2

0.6

0.1

0.8

1.7

1.20.2

0.20.3

1

0.31.1

Source: GIIGNL The LNG Industry 2007

Page 13

America

Europe

Asia Pacific

The gas suppliers are taking position upstream to profit by possible arbitrages, like producers do, and hedge against price volatility

� GdF Suez has titles to the LNG output in Trinidad & Tobago and Norway� Eni has titles to the LNG output in Nigeria, Egypt and Australia� Gas suppliers take advantage of arbitrage potential and hedge against price volatility

Major Gas Suppliers LNG Upstream Positions

1.6

4

2.2

5

0.1

8

1.3

4

0.3

6

1.2

8

1.4

5

0.3

0.5

0.7

5

0.9

3

9.2

6

1.8

2

2.3

8

2.4

6

2.3

82.9

7

Source: Capgemini