LNG Markets & Price Volatility. 2 Price determination in gas markets The portfolio approach Management of price risks Concluding remarks LNG Markets and

LNG Markets & Price Volatility

2

Price determination in gas markets

The portfolio approach

Management of price risks

Concluding remarks

LNG Markets and Price Volatility

3




Concluding remarks


4

Price determination

LNG markets are not isolated : LNG prices depend ultimately on

regional gas markets

Long-term gas price drivers :

marginal cost of supplying marketspattern of demand growth : generation, domestic, GDPgovernment policies : conservation, supply security...

Short-term gas price drivers :

day-to-day uncertainty on local supply/demand balance: gas production & transportation, weather, power generation…availability of “tools” : storage, flexibility, fuel switching,...positioning of each market participant

5

Price determination over time (US market)

•weather / temperature

•competing fuels / markets

•storage / interconnections

• industry confidence

0123456789

10

avr-9

9

avr-0

0

avr-0

1

avr-0

2

long-term trends

Henry Hub – 5 yrs

•gas supply options

•economic growth

•political / environment

$/m

mb

tu

short-term (days)

5.00

5.20

5.40

5.60

5.80

6.00

6.20

6.40

6.60

6.80

7.00

02

/03

/03

02

/08

/03

02

/13

/03

02

/18

/03

02

/23

/03

Prompt Month Nymex

•weather / temperature

• local market balance

Henry Hub – 1 yr

seasonal

1,50

2,00

2,50

3,00

3,50

4,00

4,50

déc-01 avr-02 août-02déc-02

6

Price formation in UK gas market

The National Transmission System (NTS) and the National

Balancing Point (NBP)

any licensed shipper can buy and sell gas in the high pressure network (NTS) under the Network Codewithin the NTS, natural gas is exchanged at a virtual trading hub (NBP)capacity must be booked or purchased through auctions to enter into and exit from the NBPNBP price is the immediately negotiable value for a given delivery period (day-, week-, month-ahead…)

Most UK gas is traded at fixed price at the NBP

7

Cu

sto

mer

s

Entry PointsCapacity Auctions

NBPNational

BalancingPoint

LDZ

LDZ

LDZ

LDZ

Exit PointsCapacity Booking

LocalDistributionZones

Capacity Trading Gas Trading Capacity Trading

St. Fergus

Teesside

Easington

Rough

Theddlethorpe

Bacton

Barrow

Burton Point

6300 km Pipelines

CompressorsRegulators

Terminals

LNG Terminal

Projects

Milford Heaven

Isle of Grain

UK National Transmission System (NTS) and National Balancing Point (NBP)

Demand: VLDMC (Very Large Daily Metered Customers) DM (Daily Metered sites) NDM (Non-daily metered sites) NBP sales Storage (injection) Interconnector

Supply: Production fields NBP purchases Storage (off take) Interconnector Future LNG imports

8

Spot UK gas prices remain high and above 2001 highs

Gas Year 2004 is assessed at ~ 24.6 p/th (12.5 €/MWH ~ 4.5 $/MMBTU)

How do spot gas prices compare with long term contract prices ?

Recent price developments in the UK

Front Gas Year: GY2002-GY2004

17.00

18.00

19.00

20.00

21.00

22.00

23.00

24.00

25.00

26.00IMPACT OF WAR & OIL

TXU DEBACLE

INTERCONNECTOR UNRELIABILITY & CONFUSION

ENRON COLLAPSES

9-11

SHORT DERIVS, 40-50P/th prompt, inc. OIL PX

POST 9-11 GLOBAL ENERGY SLUMP

SHORT DERIVATIVES,INCREASED DEMAND,COLDEST OCT SINCE 92,OFFSHORE RELIABILITY

2001 2002 2003

9

Price formation in Continental Europe

Over 90% of continental demand is imported from Russia, Algeria

and Norway

long-term natural gas compete with LNG importscrude oil and oil products indexation interact with spot gasemergence of continental spot trading hubs (Zeebrugge)

Dynamic linkage UK / Europe (Interconnector)

Growing distortion betweenlong-term horizon of supplies, andshort-term horizon of demand : most customers make competitive supply tenders every year

Market players must constantly balance portfolio

10

Continental European gas prices remain oil driven

Spot prices are influenced by short term supply/demand distortions (UK switch to import)

Contrary to recent history today’s spot prices (NBP or ZHUB) are above Long Term oil

indexed contract prices

LNG supply contracts must compete in this market

-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

May

-03

Jun-0

3

Jul-0

3

Aug-03

Sep-0

3

Oct-0

3

Nov-03

P/T

H

GY03

CAL04

GY04

CAL05

3 p/th ~ 1.5 €/MWh

0.5 $/MMBTU

How do spot prices compare with LT contract prices ?

11




Concluding remarks


12

The global market

LNG is the only physical link between world gas markets

LNG participates in the global equilibrium of gas pricesdirect influence is however difficult to demonstrateconversely flows of LNG are directly influenced by variations in regional gas prices, leading to arbitrage opportunities

Aspiring leading market players will need to

balance the right mix of gas and LNG suppliessecure access to logistics assets (regas terminals, pipes, ships)access end-user marketsbe active in most gas and LNG marketsdevelop sophisticated risk management expertise (hedging)

13

Integrated Oil Companies as LNG buyers

IOCs have been traditional players in upstream markets and LNG

liquefaction

IOCs are becoming purchasers of LNG

leverage their gas reserves and allow for faster launch of upstream project by securing outletsIOCs are developing a strong marketing base, with direct access to end-user marketscredit worthinessexpertise in technical, commercial and financial matters, as well as risk management (Oil, Gas, Power, FOREX)

14

Why developing a portfolio ?

In today’s complex environment, back-to-back deals will become

exceptional

Market players hold a set of purchase and sale commitments that

cannot fully match

Portfolio

manage sum of purchase and sale commitments, and adjust base load and swing supplies to demandmanage time horizon discrepanciesaggregate risks using a unique “rule book”take advantage of correlations between price formulasminimize cost of commercial operations and logistics

15

LNG is a long term business (15 yrs +)

Trading is perceived as a short term activity (1 day +)

Retail & Marketing are medium term businesses (1 yr +)

Portfolio management conciliates these different time horizons

Trading

Marketing UK

Marketing SPAIN

Production UK

Production Norway

LNG & Gas contracts

Marketing FRANCE

Spot

market share

commercial margin

credit worthiness issues

balancing risk

LT absolute price risk

production performance issues

short to medium term price risk

transportation & capacity risk

supply / demand adequation

oil vs. natural gas

FOREX exposure

accrual accounting FAS 133 compliance mark to market accounting accrual accounting

How TOTAL portfolio aggregates flows & risks in Europe

16

UK 6.7 BCM

20% I&C

UK 6.7 BCM

20% I&C

NWE 1 BCM

NWE 1 BCM

As of 2004, TOTALend-user European demand amounts

to 17 BCM/y

FRANCE8 BCM

17% market share

FRANCE8 BCM

17% market share

TOTAL European Gas Marketing Assets

Leading supplier to I&C market

1/3 Equity in FOS 2 terminal

4th marketer in Spain

SPAIN 1.3 BCM

6% market share

SPAIN 1.3 BCM

6% market share

Cross-border pipeline project

17

The Gas & LNG portfolio of TOTAL in the Atlantic basin

Cartes - PlanisphŠre

Pour r‚cup‚rer le symbole, taper "Alt A"

France & NWEGas marketing

NorwayGas supply

France Gas supply

Spain Gas marketing

UKGas marketing

USGas marketing

MexicoGas marketing

Mid EastLNG supply

NigeriaLNG supply

AlgeriaGas supply

AlgeriaLNG supply

NetherlandsGas supply

USGas supply

LNG

arbitrage

NorwayLNG supply

UKGas supply

The building blocks of a worldwide portfolio are progressively put in place

18




Concluding remarks


19

The best hedge ? The right formula !

A right price formula initially

LNG price formula must be representative of the fair value of gas in the target marketversus alternative competing supplies (gas or LNG)

A right price formula during contract’s life

long term take-or-pay and price reviews are linkedprice review mechanism is of utmost importance to guarantee that the contract will remain balancedLNG price formula must remain representative of gas prices

20

The representation of risks

Mark-to-market

flows & risks are recorded when commitment is takenexposure can then be evaluated and categorized against set of references, driven by market standardscontracts are said to be “marked to the market”examples of such references: Henry Hub in the US, NBP in the UK, oil-indexed prices in Continental Europe

At portfolio level, mark-to-market exposure of all contracts, LNG

as well as pipeline gas, can be aggregated

identification of overall riskimplementation of appropriate hedging strategy

21

Risk management in LNG markets

Risk management over long-term horizonthe “right” formulaprice review mechanism

Risk management over mid-term horizonadequation between expected import flow and marketmarket risks are evaluated when the annual delivery programme is knownbuyer can decide to take hedging and corrective action for exchange rates, oil vs. gas, crude vs. products

Risk-management over short-term horizonday-to-day adjustment to schedules and actual physical flows

22

LNG competition (LNG vs. LT gas - FRANCE Zone North)

Brent $/bbl

$/M

MB

TU

Pipe gas in North Zone $/MMBTU (high crack spread)

LNG delivered in North Zone $/MMBTU

Pipe gas in North Zone $/MMBTU (base case)

Pipe gas in North Zone $/MMBTU (low crack spread)

low crack

high crack

1 BCM/y ~ 15,000 bl/d refining margin risk

15 20 25 30 35 40

BRENT ($/bl)

CR

AC

Khigh crack

market

low crack

+ (LNG < LT gas)

- (LNG > LT gas)

LNG vs. LTNatural Gas

23




Concluding remarks


24

Concluding remarks

LNG markets have achieved a maturity comparable to gas

markets in North West Europe and North America

For IOCs acting as buyers, LNG purchases are now an

integral part of their global gas portfolio supplying their

marketing affiliates

Mastering the technicalities of markets is a key part of the

commercial expertise required to be a successful player in

LNG markets

Documents

LNG Markets & Price Volatility. 2 Price determination in gas markets The portfolio approach Management of price risks Concluding remarks LNG Markets and