Natural Gas Hub Development and the Asian LNG Market

Plenary Session 3, Structure of Asian Markets for Energy Commodities

Bradford G. Leach

Principal, Energy Advisory Services

5th IAEE Asian Conference

February 15, 2016

Perth, Australia

Energy Benchmark Characteristics

• Commodity Price Reference

• Regional or National Value Communication

• Strategic Supply/Demand Relevance

• Pricing Derived from Competitive Market Operations

• Transparent Delivery Procedures

• Established Regulatory Structure

• Access to Reliable Physical Delivery

• Delivery Infrastructure Available to New Market Participants

Standard Delivery Function

• Standard Delivery Futures Contract Location

• Operation and Costs Must Be Transparent and Non-discriminatory

• Ensures that Futures and Cash Market Values Converge

• Enables Participants to Close the Futures Contract Obligation with Physical Delivery

• Exchange of Futures for Physicals

• Alternative Delivery Procedure

Henry Hub Background

• In 1988, Sabine Pipe Line initiated Henry Hub service at the Henry Gas Processing Plant near Erath, Louisiana

• Sabine was a wholly owned subsidiary of Texaco. Chevron acquired Texaco and became the next owner/operator of the Henry Hub. Chevron sold Sabine Pipe Line and other midstream assets to Enlink (ENLK) in November 2014.

• In 1990, NYMEX launched its first natural gas futures contract which incorporated the Henry Hub as the standard delivery location.

• The current Henry Hub transportation service provides hub service among 10 inter and intrastate pipeline interconnections. ENLK charges a discounted rate of 4 cents per MMBtu for hub service related to the 10 pipeline interconnections and between these locations and the Sabine Hub Services Intra-Hub Transfers (IHT) agreement.

• IHT is a title transfer service and is provided on a non-jurisdictional basis

• Why was the Henry Hub selected by NYMEX?

0.00

2.00

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Louisiana and Central Gulf of Mexico Bcf/Day Production

North LA South LA Central GOM and State Offshore

Source: LA Department of Natural Resources

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4%

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98

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Percent of Louisiana OCS of Total U.S. Annual Natural Gas Consumption

Source: EIA and LA Department of Natural Resources

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CGT LA FLGas Z-2 Sonat LA TN 500 TN 800 TXE ELA TXE WLA TX G SL Henry Hub

Selected Platts LA Market Location Monthly Deal Counts

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23

7

1516

22

14

18

98

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23

4649

66

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37

101314

8

49

23

2930

1111

262828

17

10

29

161316

30

10

4745

28

24

28

20

49

2625

41

29

38

24

28

222424

6

10

26

35

14

20

39

212222

18

22

16

1212

56

2

1310

3

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18

29

8

211817

5811

40

19

10

458

202021

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8

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2020

11

15

11

791112

16

5

151215

10

3

7

22

910

14

4

9

20

2

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16

1096

12

5

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NO

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5

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R-0

6

SEP

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07

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Platts Henry Hub Monthly Deals

314

100

438

1

186170179127112

189239

429459

832

253

538

128123

538

154

466

308291

632

14799

240

336

481

135

336

255206

79

247284

151

528

839

625

538

385

625

1025

251

315

736

432461454

551

274

549

359

274

215

279

387

132

189

404

217

276

504

170

359

504

156159

33

107

25

183

9548

171135

203171

30

378334

273

80108

150

778

523

52

110

523

260240

403

213200

56

152

363

285

160134

285

123104

288

178

270

11589134

156129

80

156

246251

151

239

50

203241

20

105

160

65

123

6275

1328290

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Platts Henry Hub Monthly Volumes From 2004-2015000's MMBtu/Day

148,686

141,277

114,965 72,327

133,338 65,471

133,771

71,065

137,951 127,849

96,368

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500,000

1,000,000

1,500,000

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3,000,000

Henry Hub Delivery Operating Capacity and Scheduled Quantity (MMBtu)

Op Cap TSQ

U.S. Shale Production Areas

Annual Increase in Shale Production Compared to Conventional Production

Physical Hub Characteristics

• Strategic Hub Location

• Trusted Physical Operator

• Transparent Facility Fees

• Non-Discriminatory Third Party Facility Access

• Sufficient Facility Transfer Capacity

• Access to Storage at or Close to the Facility

• Facility Operator Interest in Business Development

• Delivery/Storage Expansion Capability

Financial Hub Characteristics

• Services that Complement Physical Facility Operations

• Title Transfer/Book Transfer

• Henry Hub Intra-hub Transfers (IHT)

• Facilitates Title Transfers at Low and Known Cost

• Anonymous Sourcing through IHT

• Can Be Offered by Operator or Third Party

The Asian Natural Gas Market

• Asia is the Fastest Growing Natural Gas Consumption Market

• LNG Is the Primary Natural Gas Supply

• Regional Natural Gas Markets Are Not Uniformly Connected By Pipelines

• Increasing Focus on Pipeline Delivery

• Historical Natural Gas Pricing is Based on Oil-Based Indexation

• Increasing Interest in Gas-to-Gas Competitive Pricing

• Development of LNG Price Indices

• Asia Lacks a Natural Gas/LNG Physically Delivered Trading Hub

$21.63

$8.23 $6.55

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Monthly Brent Spot in MMBtu

$1.95

$1.93

$21.63

$6.55

$19.46

$4.62

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Brent Spot MMBtu and the Henry Hub Spot Price

Henry Hub Brent MMBtu Difference Source: EIA

Cheniere Energy LNG Pricing

• Henry Hub means the final settlement price (in USD per MMBtu) for the New York Mercantile Exchange’s Henry Hub natural gas futures contract for the month in which a relevant cargo’s delivery window is scheduled to begin;

• Under the SPAs, the customers

• will purchase LNG from Sabine Pass Liquefaction for a price consisting of a fixed fee plus 115% of Henry Hub per MMBtu of LNG.

Source: Cheniere SEC Filings

Cheniere Energy Long-Term LNG Pricing Example

Henry Hub Final Settlement for February 2016: $ 2.19

115% of Final Settlement: $ 2.52

Liquefaction Fee: $ 3.50

Total Price Without Shipping Cost: $ 6.02

ICE Brent on 1/27/16: $33.10MMBtu Conversion: $5.71

Asian LNG Market Pricing Developments

• Platts Japan Korea Marker (JKM) Launched in February 2009• Daily Market on Close Price Assessment of Bids, Offers, and Trades

• Increasing Interest in Spot and Short-Term Deals

• Exchange Cleared JKM Futures • Intercontinental Exchange Launched JKM Cleared Swap in 2012 (Converted

to Futures)• 24 Consecutive Trading Months Listed• 3/16-12/16 Open Interest of 750 Contracts as of 2/11/16

• CME Group Launched JKM Cleared Swap Futures in 2012• 12 Consecutive Trading Months listed• No Open Interest or Recent Trades

Asian LNG Market Pricing Developments

• 9/14: FOB Singapore SGX LNG Index Launched by SGX and EMC

• 9/12/14: Japan OTC Exchange (JOE)Lists LNG Non-Deliverable Forward Contract

• 1/25/16: SGX FOB Singapore SLInG LNG Futures and Swaps Launched

• 2/22/16: CME Group to List LNG DES Japan RIM Futures to Clear JOE trades

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ICE JKM and SGX SLlnG Daily Settlements for 2/11/16

ICE JKM SGX SLlnG

Singapore Developments

• Government/Energy Market Authority Support Energy Hub Development

• Development and Operation of the Singapore LNG Corporation

• SGX Launch of FOB Singapore SGX LNG Index, Swaps, and Futures

• Increased Competition in the Commodity Exchange Sector• 2014: ICE Acquires Singapore Mercantile Exchange renamed ICE Futures

Singapore

Summary• Henry Hub selected due to its location which was relevant to the developing interstate

spot market and the related access to Gulf production

• Physical deals and volumes have steadily declined along with OCS and Gulf regional onshore production

• Henry Hub continues to be relevant as a benchmark for U.S. Gulf pricing. The start of LNG Gulf exports is a supporting factor through conditioned on world LNG pricing

• Asian natural gas market interest in alternatives to oil indexation

• Multiple LNG price indices have developed since 2009: JKM, SGX LNG Index, and RIM. JKM is the most visible to date. The ICE JKM futures contract is the most active as to volume, open interest, and forward pricing.

• A physically delivered hub location has not yet developed. Such a location could form the foundation for a physical and financial benchmark for Asian natural gas.

For further info contact: bradleach@energyadvisoryservices.net