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