Copyright © 2009 IHS Global Insight. All Rights Reserved. IHS Group We are pleased to announce that...

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Ofgem LNG Seminar – Impact of Ofgem LNG Seminar – Impact of LNG on UK gas supply and pricesLNG on UK gas supply and prices

Sam Shoro and Rebekah Bostan

Senior Consultants – European Energy Services

Wednesday 11th February 2009


Impact of the Global LNG Market on the UK

• Will there be enough import capacity?

• Will there be enough supply to meet potential demand?

• Short term impact of the recession?

• Price implications?


Globalisation of the UK gas market

• UK Gas supply initially developed from the North Sea in the 1970’s

- Priced at marginal cost

• Demand rose during the 1980’s because gas was cheaper than oil

• Norwegian gas from the Frigg and other fields introduced - but indexed to oil

• UK gas market liberalised between 1982-97 with the introduction of the Network Code and the NBP

- This led to wholesale spot and forward markets with prices based on gas trades and the fundamentals of supply and demand

NBP



• IUK Interconnector opened in 1998, linking the UK market with Continental oil-indexed prices

• BBL pipeline operational in 2006

• As indigenous UK gas production declined, Norwegian/Continental imports increased

- Linking UK prices further to oil

• Langeled came on line during 2007 and we saw the growing influence of Russian gas

- Also oil-indexed

• The Isle of Grain LNG Terminal commissioned in 2005, introduced the influence of US Henry Hub prices on the UK gas market



• Expansion of Grain last year, and the commissioning of South Hook and Dragon this year will open up the UK to a global market where events in Asia and the USA will impact on UK prices

Pacific Basin

Atlantic Basin

• Trans-Atlantic arbitrage already has an influence on UK gas prices during the winter

• Last summer we saw the impact of record high Pacific basin prices on UK LNG deliveries


What does a global LNG market mean for UK gas supply?

• Increased flexibility

• But the UK has low levels of contracted supplies going forward leading to possible high level of exposure to the global LNG market


UK Balance – Increasing Import Dependency

0

20

40

60

80

100

120

2000 2005 2009 2010 2015 2020 2025 2030

bcm

/yr

LNG Pipeline Production

Import Dependency:

2005 – 18%

2010 – 52%

2030 – 96%


LNG will Deliver Increased Flexibility

• Storage capacity increases planned (additional 2.9 bcm working volume)

• Pipeline Capacity (new supply routes NOR and NET, increased capacity from IC)

• LNG Infrastructure (potential 67 bcm new capacity)

0

20

40

60

80

100

2000 2005 2009 2010 2015 2020 2025 2030

bcm

/yr

Isle of Grain Isle of Grain Expansion (1) Isle of Grain Expansion (2)Dragon LNG Dragon LNG Expansion South Hook LNGSouth Hook LNG Expansion Port Meridian LNG Canvey IslandTeeside LNG Teeside GasPort Almwych, AngeleseyLNG Imports


UK Reliance on LNG Spot

0%

24%23%

0% 0% 0%

96%81%

26%

44%

0

10

20

30

40

50

60

70

80

90

2005 2006 2007 2008 2009 2010 2015 2020 2025 2030

bcm

/yr

Spot Imports

Contracts

% Contracted

Capacity

• Dependence on spot imports rise from 9% (2009) to 80% (2020)

• If contracts are renewed spot imports will still rise to 62% (2020)

• LNG spot imports could potentially make up 70% of total spot imports - 3.2 bcm 2010 to 55.4 bcm by 2030





• Need to compete in a global LNG market – will long-term liquefaction deliver?

• What about liquefaction development delays - Africa?


0

100

200

300

400

500

600

2006 2010 2015 2020 2025 2030 2035

bcm

Africa

Europe

Russia

Asia-Pacific

Middle East

Americas

Competing in Worldwide LNG Market

0

100

200

300

400

500

600

2005 2006 2007 2008 2009 2010 2015 2020 2025 2030

bcm

Americas

Asia Pacific

Middle East

Europe

POTENTIAL GLOBAL LNG DEMAND

POTENTIAL GLOBAL LNG SUPPLY


Liquefaction Utilisation Rates

84%81%

58%

65%

53%

64%

87%

93%

69%

76%78%79%

67%72%

57%61%

81%80%82%

76%

0

50

100

150

200

250

Asia

Pacifi

c20

1020

1220

1520

25

Europe/

Russ

ia20

1020

1220

1520

25

Africa

2010

2012

2015

2025

Mid

dle E

ast20

1020

1220

1520

25

Amer

icas

2010

2012

2015

2025

bcm

/yr

Operational Under Construction Planned and Feasibile GI View Exports


Liquefaction Commissioning

0

10

20

30

40

50

60

2006 2007 2008 2009 2010-2015 2015-2020

bcm

/yr

Asia Pacific

Europe and Russia

Africa

Middle East

Americas


Liquefaction Project Delays 2010-2015

372

2

0

50

100

150

200

250

Asia

Pacifi

c20

1020

1220

15

Europe/

Russ

ia20

1020

1220

15

Africa

2010

2012

2015

Mid

dle E

ast

2010

2012

2015

Amer

icas

2010

2012

2015

bcm

/yr

Operational Under Construction Planned and Feasibile GI View Exports Series6


Expected Worldwide Spot Volumes Available

0

50

100

150

200

250

300

350

400

2005 2006 2007 2008 2009 2010 2015 2020 2025

Bcm

/yr

Algeria Angola Bolivia Brunei

Egypt Equatorial Guinea Iran Libya

Mauritania Nigeria Norway Oman

Peru Qatar Russia Trinidad and Tobago

UAE USA Venezuela Yemen

Main source of spot volumes: Nigeria, Qatar, Algeria – all within $4/mmbtu





• Need to compete in a global LNG market – will long-term liquefaction deliver?

• What about liquefaction development delays - Africa?

• Therefore – potentially more price stability!


Marginal cost of LNG supply to Grain

Source: 27p/th

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0

Abu DhabiBruneiAlgeriaYemenOman

MalaysiaQatar

EquatorialUSA

TrinidadNigeriaAngolaEgyptLibya

IranIndonesia

VenezuelaNorway

PeruRussia

Australia

$/mmBtu

Feedgas Cost

Liguefaction Cost

Shipping Cost

Re-Gas Cost

47p/th


What does a global LNG market mean for UK gas prices?

• LNG will set the floor for the winter, and possibly the summer too (depending on coal and carbon prices) as our import dependency grows- The short term outlook is bearish, due to weakness at Henry Hub, and a lack of

demand from the US and Asia, caused by global recession - Competition will increase from the Pacific once the recession is over

• In the medium term, the influence of crude on UK gas prices will diminish as liquidity increases on the Continental gas hubs and as they become price setting locations. This will lead to the end of oil-indexation across Europe.

• Prices will be driven by the fundamentals of global supply and demand, with LNG linked to Henry Hub becoming a key source of Flexibility. If this is managed

well, along with storage and pipeline imports, then gas prices should stabilise.

• 80% of the UK’s LNG requirement from 2020 is un-contracted, and this constitutes a major risk to the NBP price forecast. - Wholesale gas prices can go up as well as down..


Current gas prices (Quarterly)

0

10

20

30

40

50

60

70

80

1Q2006

2Q2006

3Q2006

4Q2006

1Q2007

2Q2007

3Q2007

4Q2007

1Q2008

2Q2008

3Q2008

4Q2008

1Q2009

2Q2009

3Q2009

4Q2009

1Q2010

Brent Crude (€/bbl) Brent - Lagged (€/bbl) Germany (Troll - Emden)

Historic Price Development - Gas v Crude(€/MWh or €/bbl)

0

10

20

30

40

50

60

70

80

1Q2006

2Q2006

3Q2006

4Q2006

1Q2007

2Q2007

3Q2007

4Q2007

1Q2008

2Q2008

3Q2008

4Q2008

1Q2009

2Q2009

3Q2009

4Q2009

1Q2010


Dutch - TTF (€/MWh) UK - NBP (€/MWh) Henry Hub (€/MWh)


0

10

20

30

40

50

60

70

80

1Q2006

2Q2006

3Q2006

4Q2006

1Q2007

2Q2007

3Q2007

4Q2007

1Q2008

2Q2008

3Q2008

4Q2008

1Q2009

2Q2009

3Q2009

4Q2009

1Q2010


Dutch - TTF (€/MWh) UK - NBP (€/MWh) Henry Hub (€/MWh)

LNG EU Terminal (€/MWh)



Impact of current drivers on the UK gas market

Key Drivers Effect on UK Gas Market

• Softening Crude Prices Weaker EU oil-indexed prices from Q1’09

• Global Recession Reduced Industrial demand for gas

• Gas into Power Sector Reduced Demand for Gas

• Softening Coal Prices Reduced Demand for Gas

• ETS – Weak post Kyoto Agreement Coal Preferred to Gas• Low EUA Price –dark/spark spreads

• LNG Demand Weaker in US/Pacific Increased LNG Supply for Europe

Link to Henry Hub

• LNG Infrastructure Enhanced Improved Flexibility

• Fundamentals Healthy Supply / Good Storage / End of Winter

Outlook is Bearish


Forward curves (Monthly/Quarterly)

0

10

20

30

40

50

60

70

80

90

100

110

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

NBP - Forward Curve (06/02/09) IHS Global Insight Q1'09 NBP Forecast

IHS Global Insight Q1'09 Henry Hub Forecast

Forward Gas Curves(p/th) ($/mmBtu)

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60

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80

90

100

110

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

IHS Global Insight Q4'08 NBP Forecast IHS Global Insight Q1'09 Henry Hub Forecast

Europe Terminal Japan Terminal

Forward Gas Curves(p/th) ($/mmBtu)

Forward Prices


Conclusion

• Will there be enough import capacity? - Yes

• Will there be enough supply to meet potential demand? - Yes

• Short term impact of the recession?- Project delays, but supply sufficient to meet reduced demand

• At what price? - Bearish in the short term, stronger with more seasonality in the medium term

- Closer link between NBP and Henry Hub

Thank youThank you

Sam ShoroSenior Consultant – European Energy [email protected]

Rebekah BostanSenior Consultant – European Energy [email protected]

Copyright © 2009 IHS Global Insight. All Rights Reserved. IHS Group We are pleased to announce that...

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