© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

Russian Gas Exports and the “Perfect Storm” in Global Gas

1

Moscow June 2010

Thane Gustafson, Senior DirectorRussian and Caspian EnergyIHS Cambridge Energy Research Associates

© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

Key Points: The Dramatic Winter of 2009-10

1. The “shale gale” in the U.S. is blowing strongly, limiting the market for imported LNG

2. LNG poured into Europe in the winter of 2009, lowering spot prices to as little as half of Russian contract prices

3. A combination of recession and LNG imports put unprecedented pressure on the structure of long-term oil-linked contracts

4. The Russians have responded a series of orderly and pragmatic responses

5. Which were effective in relieving the pressure—for last winter at least

2

Moscow June 2010

© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

The “Shale Gale” Continues

4

Moscow June 2010

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Unconventional Gas Has Led to Very Rapid Production Increases in the US

55

Moscow June 2010

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6

US Natural Gas Reserves and Resources Have Doubled

Source: EIA, PGC, and IHS CERA.00112-27

Moscow June 2010

© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

77

Source: IHS Cambridge Energy Research Associates.90902-4

Haynesville92Tcf – 16.4 Bcfd - $3.10

Woodford9Tcf - 3Bcfd - $3.64

Montney96Tcf – 17.1 Bcfd - $3.96

Horn River90Tcf – 16.0 Bcfd - $2.74

Mancos20Tcf - 5Bcfd

Marcellus149Tcf – 26.6 Bcfd - $3.29

Fayetteville7Tcf – 1.3 Bcfd - $2.57

Shale Gas is Widely Distributed—Including in the Northeast US

Barnett28Tcf - 5Bcfd $5.24 FWS & $3.89 SB

North American Consumption: 27 Tcf per yearHigh Commercial Resource: 520 Tcf (19 years)

Eagleford28Tcf – 5.0 Bcfd - $2.07

Granite Wash10Tcf – 1.6 Bcfd - $2.20

7

Moscow June 2010

© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

8

Half of Identified Shale Gas Plays are Economic at Henry Hub Prices of $4/MMBtu

Source: IHS CERA.Note: Proved, possible, and potential resources.00112-6 Moscow June 2010

© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

Henry Hub Price Outlook Keeps Dropping

10

Moscow June 2010Source: IHS CERA.

© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

With Limited Market in North America,LNG is Going into Europe

11

Moscow June 2010

© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

0

20

40

60

80

100

120

Russia North Africa Norway LNG

Mtpa

2008 2009

+ 24 %

+ 4 %

- 16 %

- 13 %

12

Europe’s Supply Sources in 2009

Source: IHS CERA.60501-44_061107

LNG imports increased by 24% despite depressed demandLNG contributed to push back Russian gas under minimum bill

MillionTonsEquivalent

12

Moscow June 2010

© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

13

LNG Supply to European Markets Expected to Grow Strongly through 2012(millions tons)

Source: IHS CERA.

2010

2009

2008

20112012

Total Europe

Turkey

Greece

Italy

PortugalSpain

France

BelgiumUK

17

12 1

4 14

25 4 5 5

2 2 2 3 4

21

19

19 19 20

9 10 10 11 12

13

5 6 71 1 1 1 1

4 4 5 7 8

41

51

60

68 7

3

0 0 0 1 2

Other Europe

Moscow June 2010

© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

14

Moscow June 2010

14

Looking Beyond 2012: Planned LNG Regasification Capacity Across Europe Could Transform the Supply Mix

• In the two years from January 2008, LNG regasification capacity in Europe grew by 52 Bcm (45%), mainly in Italy and the United Kingdom.

• If all projects currently planned are built, this could grow to over 350 Bcm by 2015.

Source: IHS CERA.The graph shows all terminals existing, under construction, or currently planned with a likely completion date. Some of the planned terminals may not be built.

United Kingdom

Italy

Spain

France

Netherlands

0

50

100

150

200

250

300

350

400

450

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Bcm

Sweden

Cyprus

Ireland

Lithuania

Germany

Greece

Poland

Romania

Belgium

Portugal

Albania

Croatia

Turkey

Netherlands

France

Spain

Italy

United Kingdom

Bcm

2008:115 Bcm

2010:167 Bcm

2015:350+ Bcm?

2012:205 Bcm

© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

Domestic Production

Russia

LNG

Norway Pipe

Algeria Pipe

Other Europe

Other Pipe

0

100

200

300

400

500

600

700

1992 1995 1998 2001 2004 2007 2010 2013

Bcm

15

Moscow June 2010

15

European Supply Outlook—Growth of LNG Limits Growth of Pipeline Supply

• Large growth of LNG supply into Europe expected to continue following a global supply surge, and the expansion of regasification capacity.

• Russian supply to grow again, after 13% fall in 2009—but may not recover 2008 levels until 2014.

• Norwegian pipeline supplies expected to continue steady growth, as domestic production falls.

Forecast

Source: IHS CERA.Central Europe = Czech Republic, Hungary, Poland, and Slovakia.

Lingering Supply Overhang in Europe

16

Moscow June 2010

© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

171717

Unprecedented Demand Drop Across Europe in 2009

Source: IHS CERA.60501-44_061107

UnitedKingdom

Italy

Austria

Czech Republic

DenmarkGermany

Belgium

France

Spain

- 2%

- 4% - 5%

- 6%

- 10%

- 3%

- 7%

+ 2%

Turkey

- 11%

Poland

- 6%

- 8%

Gas demand change 2008–09

: Main LNG markets

Moscow June 2010

© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

18

Moscow June 2010

18

Evolution of European Demand

• Total decline of 35 Bcm (6%) in 2009, driven by recession-led falls in industrial production and GDP

• Expected increase of 23 Bcm (4%) in 2010—but 6-9 Bcm of this is due to the cold first quarter

• Future growth to come from:

— Gas-fired generation capacity build

— Growth of residential consumption in emerging markets

— Post-recession recovery of industrial production

300

350

400

450

500

550

600

650

1994 1997 2000 2003 2006 2009 2012 2015

Bcm

2000-2009

2009-2015

Trendline

© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

19

Europe Contractually Oversupplied

Source: IHS CERA.60501-44_061107

Domestic production (excluding

contracted exports)

LNG-contract

Other pipeline

Netherlands

Algeria-pipeline

Norway

Russia

0

100

200

300

400

500

600

700

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Gas demandMinimum bill

supply

The oversupply is estimated at 50 Bcm (36 million tons) between 2009 and 2011

Bcm

19

Moscow June 2010

© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

Jan

Mar

May Ju

lS

epN

ov

Jan

Mar

May Ju

lS

epN

ov

Jan

Mar

May Ju

lS

epN

ov

Jan

Mar

May Ju

lS

epN

ov

Jan

Mar

May Ju

lS

epN

ov

Jan

Mar

May Ju

lS

epN

ov

Jan

Mar

May Ju

lS

epN

ov

Jan

Mar

May Ju

lS

epN

ov

Jan

Mar

May Ju

lS

epN

ov

2004 2005 2006 2007 2008 2009 2010 2011 2012

US

Do

lla

rs p

er

MM

Btu

Henry Hub

Oil Parity (JCC)

Term Japan LNG

Term Europe

20

Will a Persistently High Oil-Gas Spread Cause the Oil Link to Break Down and Endanger the Long-Term Contract Structure?

Source: IHS CERA. Moscow June 2010

© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

The Russians React

21

Moscow June 2010

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Russia Adjusts on All Fronts

1. Investment Priorities Altered: Yamal Peninsula— June 2009: Production from Yamal postponed to 2012— September 2009: Pipeline construction halted, but drilling program

maintained

2. Atlantic LNG Phased Back:— February 2010: Shtokman postponed to 2016 (pipeline phase) and 2017

(LNG phase)— March 2010: Gazprom does not acquire Trinidad LNG asset

3. Shift to Asia Stepped Up:— February-March 2010: Gazprom Marketing and Trading expands its

Singapore office— Reallocates 1 mt of Sakhalin LNG intended for Costa Azul on west coast of

Mexico to trade elsewhere in Pacific Basin— Investment in Sakhalin-Khabarovsk-Vladivostok pipeline continues

4. Renewed emphasis on primacy of pipeline exports to Europe:— Russians accept 15% spot component and lower minimum bills— In effect, Russia has assumed the role of market balancer

5. Shale Gas: Take a Stake in a US Shale Gas Producer?

22

Moscow June 2010

© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

23

0

20

40

60

80

100

120

2008 2009

Mill

ion

to

ns

pe

r ye

ar

European imports10 Bcm lower than minimum billRussian Exports to Europe

≈ 7 Mtpa

Minimum bill level

Source: IHS CERA. Moscow June 2010

© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

242424

The Dilemma in Gas Pricing: Oil Link or Spot?

• Hub-related pricing subject to manipulation in the long run by dominant (oligopoly) sellers

• Maintaining oil-linkage preserves integrity of the commercial relationship, but loses customers

Solution—a mix of price and volume concessions

Moscow June 2010

What Next?

25

Moscow June 2010

© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

CERA’s View:

Good News in the Near Term: European Gas Market Expected to Stabilize in 2012-3

— European gas demand to return to 2008 levels by 2012-13, as industrial production increases

— Large-scale additions of gas-fired electricity generation on the way— Residential gas demand to grow strongly in emerging markets,

especially Turkey

But Longer-Term Outlook Could be Problematic:— Financial crisis and austerity programs will constrain GDP growth— Long-term de-industrialization of Europe threatens industrial demand— Efficiency improvements could limit residential gas demand— LNG surge could resume in 2016 after pause in 2014-2015

26

© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

0

50

100

150

200

250

300

350

Mil

lio

n T

on

pe

r Y

ea

r

Pacific Basin Demand

Potential supply from Extra-Regional Producers*

Un-contracted Supply from Pacific Producers*

Firm supply contracts for delivery in Pacific Basinfrom Pacific and Middle East Producers

Proposed Liquefaction Projects in Pacific Basin

LNG Balance Asia PacificTightening supply-demand balance post-2012 opens up opportunities, but large pipeline of planned projects makes competition fierce

27

* Supply from Existing and Committed Liquefaction projects at an average 93% utilization rate

Source: IHS Cambridge Energy Research Associates.

27

Moscow June 2010