Global Gas Markets:

‘Pulling in Opposite Directions

at the Same Time’

Benjamin Schlesinger and Associates, LLC

Bethesda, Maryland

EIA 2012 International Natural Gas Workshop

August 23, 2012

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Agenda

Introduction

Gas supply: shale gas (and shale oil)

Gas demand

Global markets and risks

Discussion.

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BSA – 28 years of gas and energy

advisory services.

Economics, pipeline tariffs,

contracting, price risks.

– Research & training

– Negotiation of gas contracts

– Due diligence – Review for

lenders in financing of LNG,

power plants, gas storage

– Expert in courts & arbitrations,

testified in 16 jurisdictions.

500+ assignments, 27 nations.

Clients: Energy buyers & sellers, electricity

and heating plants, gas and oil pipelines,

banks, governments, universities.

Expertise Major Assignments

Power generators

Lenders

Pipelines/traders

LNG projects

Regulators

Expert testimony

UNECE

European pipelines

GdF Suez, Repsol, BG

Eastern Europe

West African pipeline

Sonatrach (Bechtel)

Japan gas utilities

Mitsubishi

Philippine NPC

3

UN Economic Commission for Europe

(ECE) 2012 LNG Report

Current State and Prospects of LNG in the

UNECE Region:

– LNG Markets

– The LNG chain

– Regulation of LNG

– Physical, operational issues

Status: Fall 2012.

4

Qatar’s 7.6 Bcf/day has balanced

global LNG markets.

7.6

3.1

3.1

2.5

2.4

2.0

1.9

1.3

1.1

1.0

3.6

Bcf/day

Qatar

Indonesia

Malaysia

Australia

Nigeria

Trinidad & Tobago

Algeria

Russian Federation

Oman

Egypt

All Others

5 Source: ENI 2012, from BP Statistical Review 2011 (data for CY 2010).

Shale gas revolution drivers – price,

technology and market structure.

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2000 2002 2004 2006 2008 2010 2012

Ga

s P

rod

uct

ion

, B

cf/d

ay

Other Barnett

Fayettevillle Woodford

Marcellus Haynesville/Bossier

Eagle Ford

Despite the words, Americans

really don’t have a grip on this.

Most U.S. policy, economic,

adademic and government

studies still rely on outdated

information, e.g., from

Internet/Google searches.

This steep growth rate cannot

and will not continue in the

future.

6 Source: BSA 2012, from ARI thru 2010, FERC/Bentek 2011, BSA estimates 2012.

2010

In gas alone, the US has added 4.8

MBD equivalent since 2002.

1.5 2.2 2.5

6.1

2.4

4.2

10.5

-

2.0

4.0

6.0

8.0

10.0

12.0

Holland Qatar Norway EU, Total Venezuela Iran Saudi

MB

D,

equ

iva

len

t

Annual US shale gas production (increased amount only)

Source: BSA 2012, from BP Statistical Review 2011 & BSA/ARI/FERC (est. shale production).

Gas Production, 2010 Oil Production, 2010

7

North America’s hydrocarbons price

gap is crippling natural gas E&P.

$-

$5.00

$10.00

$15.00

$20.00 Ja

n-0

1

Jan

-03

Jan

-05

Jan

-07

Jan

-09

Jan

-11

Jan

-13

Jan

-15

Jan

-17

Jan

-19

$/M

MB

tu Henry Hub Acutals

WTI Actuals

Brent Actuals

Henry Hub Futures

WTI Futures

Brent Futures

Source: BSA 2012, from NYMEX August 17, 2012 Closing; Platts. 8

Shale-rich North Dakota is now the

2nd largest US oil-producing state.

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800 Ja

n-0

2

Oct

-02

Jul-

03

Ap

r-0

4

Jan

-05

Oct

-05

Jul-

06

Ap

r-0

7

Jan

-08

Oct

-08

Jul-

09

Ap

r-1

0

Jan

-11

Oct

-11

Bb

l/d

ay, t

ho

usa

nd

s

Field Production of Crude Oil, Thousands of B/D

North Dakota

California

Alaska

Texas

9 Source: BSA June 2012, from EIA.

Most surplus gas will be spent

replacing coal in aging power plants.

10

- 10 20 30 40 50 60

50 years or older

40-50 years old

30-40 years old

Newer than 30 years

Capacity, GW

Age of Coal-Fired Power Plants in “Coal Country”

Source: BSA 2012, data for 20 Northeast and Mid-West states from EIA, plus Ontario.

12%

27%

33%

28%

Old King Coal has been

dethroned in US electricity generation.

0

20

40

60

80

100

120

140

160

180

2007 2008 2009 2010 2011 2012 thru

May

GW

h, th

ou

san

ds

per

Mon

th

Coal

Oil

Gas

Nuclear

Hydro

Renewables

11

Replacing old coal with new gas cuts

CO2 emissions by 70%.

Carbon emissions:

– Chemical advantage: Gas

burning emits 46% less CO2

than coal.

– Efficiency advantage of new

gas CCGTs versus old coal

boilers: 55-60% vs. 31-33%.

– Carbon emissions savings

from fuel cycle as well.

Other pollutants reduced or

prevented, especially sulfur,

particulates.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

COAL GAS

12 Source: BSA 2012.

Market dynamics suggest 6-7 Bcf/day

can readily be sold abroad.

Status = inevitable:

– All six “brownfield” projects are

approved for free-trade partners

– Sabine Pass is fully approved

– FID will depend on commercial

throughput contracts.

In Canada, Kitimat is approved.

US politicians argue about

impact on gas, electricity prices

But gas prices are already

unsustainably low.

2.2

2.8

2.0

1.0

2.5

0.5

US LNG Export Applications, 11 Bcf/day

Sabine Pass Freeport & FLNG

Lake Charles Dominion Cove Point

Cameron Southern LNG

13 Source: BSA 2012; data in chart from US Department of Energy, 31 May 2012.

Europe’s demand for US imports will

rise with supply & nuclear issues.

Plunging European gas

production is intensifying

winter supply crises, and is

building LNG demand.

In less than a decade, the UK

has transformed from exporter

to LNG importer on scale

soon to exceed Spain.

The Nord Stream pipeline

entered partial service in June

2011; other lines are planned

from the Middle East.

0

50

100

150

200

250

300

1990 2000 2010 2020 2030

EU

27

Ga

s P

rod

uct

ion

, B

CM

United Kingdom Netherlands

Germany Hungary

Romania Italy

Poland Denmark

Other

Source: UNECE Sustainable Energy/Working Party on Gas LNG Report, 2012, from Gas Strategies, 2011. 14

European gas trading caught hold in

the 2009 recession..

Russian gas dominates at oil-

indexed prices

Northwestern points emulate

the contract market:

– NBP, the marker, is no Henry.

– Even less liquidity at TTF,

Zeebrugge, Gaspool.

Spain is 80% LNG-based.

EU’s grand plans for gas

infrastructure are encumbered

by market mechanics.

15

Source: EU Sept 2011, courtesy Gas Strategies, Ltd.

Fukushima’s impact on gas demand

cannot be understated.

Worst-case Japan nuclear

plant capacity availability

came true in Winter 2012.

Source: M. Toyoda, Institute of Energy Economics-Japan, October 2011. 16

Exports of LNG from the US will

remain in the money through 2020s.

$5.40 $5.40

$3.06 $3.06

$0.83 $0.35

$1.06 $0.44

$13.02

$11.03

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

Japan .. UK

JCC, NBP forward

Regas tariff

Panama Canal

Boiloff

Fuel

Vessel charter

15% + $2.25

Henry Hub - Jan-15

Gulf to Japan Gulf to UK

Source: Deutsche Bank Global Markets Research, 10/2011. 17

Conclusions & Thoughts:

US shale gas production is here to stay, but increases will soon

flatten: the solution to low prices is, of course…low prices!

Shale is changing US role in energy, with deep impact on fossil

fuel, renewables, energy financings, balance of trade, security.

Most reporters are behind the curve, blindsided and confused.

The world has huge shale resources, but equally huge barriers,

hence little risk to US exports till late 2020s.

– Institutional and cultural impediments, generally closed gas markets,

public royalties, other priorities, lack of a competitive E&P sector.

US exports will be muted as the surplus is spent at home in

CCCTs and, later, directly as LNG and CNG vehicles.

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Benjamin Schlesinger and Associates, LLC The Bethesda Gateway

7201 Wisconsin Avenue, Suite 740

Bethesda, MD 20814

Phone: (301) 951-7266 Fax: (301) 951-3381

Visit us at www.BSAenergy.com

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