The Potential of Azerbaijan as a Caspian Gas Hub and Access to Global LNG Markets

JW Marriott Absheron Baku, 1 June 2017Presented by : Claudio H. Steuer

Ingworth Road, Vista Place Unit 4Poole, Dorset, BH12 1JY, UK

Tel: +44 20 7859 4575www.syenergy.co.uk

UK | USA | BRAZIL

24th International Caspian Oil & Gas Conference

Disclaimer

The material in this presentation has been prepared by SyEnergy and is general background information given in summary form and does not purport to be complete. Information in this presentation, including statements about future developments, should not be considered as advice or a recommendation to investors or potential investors and does not take into account the particular investment objectives, financial situation or needs of various stakeholders. Before acting on any information you should consider the appropriateness of the information having regard to these matters, and you should seek independent financial advice.

Large capital intensive energy projects are complex transactions involving various risks, including but not limited to, adverse or unanticipated market, commodity prices, currency, financial, legal or political developments. This presentation may contain forward looking statements and readers are advised not to place undue reliance on these forward looking statements. SyEnergy does not undertake any obligation to publicly release the result of any revisions to these forward looking statements to reflect events or circumstances after the date of this presentation to reflect the occurrence of unanticipated events.

While due care has been used in the preparation of this presentation, SyEnergy accepts no liability whatsoever and does not make or offer any representation, warranty or undertaking, express or implied, for any information, projections and opinions contained in this presentation, or to correct any unintended inaccuracies in or omissions from this presentation. No information set out in this presentation is intended to form the basis of any contract, investment decision or any decision to purchase or invest in any such assets.

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SyEnergy Overview

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• Energy consultancy on strategy, business/project development, technical, commercial & legal issues.

• Team located in UK, USA, and Brazil with 25-40+ years of experience in business development, project management, technical / engineering, contract / dispute negotiating, and senior management advice.

• Advised and developed energy projects located in West, East & North Africa, Middle East, Europe, South & North America, Indian Sub-continent, Caribbean, Caspian, Indonesia and Australia.

• Direct experience with LNG liquefaction operations in Nigeria, Qatar, Angola, Indonesia and Australia.

• LNG business development in Angola, Nigeria, Trinidad, Russia, Venezuela, Iran and Congo (FLNG).

• FSRU business development, advice, and negotiations in Argentina, Brazil, Pakistan, and USA.

• Power projects in Brazil, Nigeria, Egypt, Saudi Arabia, USA, Turkey and West Africa and SE Asia.

• Support, negotiation and conclusion of 50+ MoUs and 20+ GSA and LNG SPAs.

• Successful advice, negotiation and resolution of commercial disputes valued over $25 Billion.

• Senior decision and advisory support services : Government Authorities, complex project development, business process improvement, agreement negotiation, shareholder committees, board decisions.

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Principal Area of Activities

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LNG Supply

FLNG Development Gas Monetisation & Master Plan On-shore Regas

Power Generation

Project Mgmt + A&D Support Gas Pipelines

FSRU Development

Senior Advisory

Professional and Client Experience

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European Gas Hubs – Price Benchmark Assessment

What is a Gas Hub ?

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• Production

• Transportation

• Storage

• Processing

• Local sales

• Export sales

• Pricing point for physical contracts

• Pricing point for future contracts

• Pricing point traded in financial exchanges

• Pricing point deep, liquid with high “churn ratio”

Source: IGU, OIES

Caspian Region Gas Reserves Tcf

7

1,720

1,200

69

65

618

92

• ~60% of World Gas Reserves

• Land locked

• Water border disputes

• Limited gas infrastructure

• Reliance on long distance gas pipelines to key gas markets : Russia, Europe, China

• Russia only LNG producer

• Potential for cooperation ?

Source: USGS, EIA

Competition vs. Cooperation

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O&G industry encourages competition:

• Energy, national security, geopolitics…

• NOC Fiscal Terms

• Unitisation of upstream fields

• Competition between IOCs and NOCs

Examples of cooperation:

• Recent OPEC and Non-OPEC production cut

• Azerbaijan Southern Corridor Project (SCP)

• USA and EU support for SCP

Which country took 30+ years to have first LNG and in less than 10 years had 22 Mtpa of LNG becoming 4th largest world LNG producer ?

Caspian Region Gas Pipelines – Regional Cooperation

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South Caucasus Pipeline – 25 bcm (~692km, ~$4bn) – BP 28.8%, TPAO 19%, SOCAR 16.7%, Petronas 15%, Lukoil 10%, Naftiran 10%

Trans Anatolian Pipeline – 16 bcm (~1,841km, ~$11bn) – SOCAR 58%, Botas 30%, BP 12%

Trans Adrian Pipeline – 15 Bcm (~870km, ~$7bn) – BP 20%, SOCAR 20%, SNAM 20%, Fluxys 19%, Enagas 16%, Axpo 5%

~3,400km gas pipeline ~$22bn invested to transport Azeri gas to Greece, Albania, Balkans & Southern Italy

BP Shah Deniz II adds 16 bcm to 9 bcm of Phase I: 6 bcm sold to Turkey and 10 bcm sold to TAP clients

Caspian Region LNG Project – Ceyhan LNG

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• Erzurum – Ceyhan Gas PL

• ~800 km gas pipeline

• ~$5 bn pipeline investment

• ~$20-30 bn LNG investment

• ~3 bcf/d – 28 bcm/yr gas supply

• ~20 Tcf - 20 Mtpa LNG plant

• Shah Deniz Phase III ? Other Azeri Gas ?

• Caspian region cooperation involving Turkmenistan, Kazakhstan & Turkey ?

• SOCAR Malta LNG supply

• Similar investment as Baku –Brindisi pipeline to market ~85% more gas to a much wider gas market in EU, SA, Caribbean

TANAP

SCP

Azerbaijan - Caspian Gas Hub - Pipeline / LNG Gas Supply

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• Shah Deniz ~42 Tcf GIIP• Kashagan ~35 Tcf GIIP• Tengiz ~24 Tcf GIIP• Galkynysh (South Yolotan) ~490 Tcf GIIP

• Geopolitical opposition from Russia and Iran• Sea border disputes and environmental issues

• 1921 and 1940 Treaties on Peace, Friendship, Commerce and Navigation - shared use of waters by all Caspian Nations

• Marine CNG• Coated pipelines and pressure vessels

200nm

Source: Hantong Ship Heavy Industries, own estimates

Azerbaijan - Caspian Gas Hub - Turkey Synergies

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Turkey Gas Imports 2015 ~50 Bcm• 83% Pipeline and 16% LNG• 56% Russia• 16% Iran• 11% Azerbaijan• 8% Algeria• 4% Qatar• 3% Nigeria• 1% Other LNG spot• 1% Production

Source: Botas, EMRA, EIA, BP Statistical Review 2016

Azerbaijan - Caspian Gas Hub – Ceyhan Strategic Location

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Ceyhan LNG Shipping Distances (nm)

Aliaga/Çakmakli 700

Revithousa 800Marmara 840Malta 1,060Rovigo 1,400

Fos Caveau 1,650Barcelona 1,700Sines 2,300Milford Haven 3,140

Rotterdam 3,380Swinoujscie 4,030Klaipeda 4,280

• Competitive Mediterranean location to supply Europe, Caribbean and South American markets

• Similar shipping distance to South America as US Gulf LNG and Mozambique LNG

LNG & Gas Power Generation – Robust Future Demand

14Source: The Brookings Institution, BP Energy Outlook 2017, ExxonMobil Outllook for Energy 2017, Shell LNG Outlook 2017

Innovative Gas / LNG to Power Energy Solutions

15Source: Wartsila, 7seas, Hoegh

Barge LNG Regas / Power : ~0.2-0.4 Mtpa or 200-400 MW

Growing range of potential solutions combining FSRU + Power, and LNG Regas Barges + Power Barges with jetty-less solutions reducing cost of marine facilities

Significant reduction of LNG & Power capex enabling new market demand.

Tolling business model may be possible.

Competition - East Med, East Africa & Iran

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• Total Cyprus Block 11 discovery could be as significant as Zohr

• BP buys 10% of ENI Zohr (BP/ENI partners in UGDC NGL plant)

• XOM buys 27.5% of ENI Moz Area 4

• Shell ~20 Tcf in Tanzania blocks 1,4, and 100% of blocks 5, 6, 9-12

• Total seeks 50% in South Pars 11 (~$4 Billion) and keen on 10 Mtpa Iran LNG @ Tombak Port

• Shell agrees Iran MoU for Azadegan and Yadavaran oil , and Kish gas fields

75

35

7 15

+ ENI Zohr +32 ?

+ Total Block 11 ?

132

Source: USGS, EIA, IHS Markit, BankMed, Bloomberg, Reuters

Competition – Gazprom’s TurkStream

17Source: Gazprom, TurkStream Project, South Stream Transport B.V., IEA World Energy Outlook 2015

• December ‘14: Botas & Gazprom MoU• March ’17 : ENI MoU southern corridor to EU including taly• May ‘17 – Offshore construction began• Completion of both lines expected late 2019• 15.75 Bcm intended for Turkey• 15.75 Bcm intended for Southern / South-eastern Europe

• 2 x 32” pipelines• 910 km length• 2,000m depth

Competition - Russia to Become No 1 LNG Exporter ~2030 ?

18Source: MIT Center for Energy and Environmental Policy Research (July 2011), IEA 2009, Gazprom, own estimates

Pipelines & LNG – China & Far East

Pipelines & LNG – EU & Global LNG Markets

Pipelines – Russian Domestic Market & EU

Russia is keen to protect its market share in Turkey and Europe.Caspian gas remains vulnerable.

Competition - Qatar New Phase of North Field Development

19Source: EIA, Qatar Petroleum, own estimates

Qatar is moving to protect its market share – New LNG supplies by 2022-2025

• Qatar has 77.5 Mtpa of LNG production capacity• Existing infrastructure and low cost gas• Lowest unit cost of LNG shipping

• April ’17: CEO Qatar Petroleum announced productionplans for 2 Bcf/d additional. Enough for ~15 Mtpa of LNG

• Loss of oil revenues, new LNG supplies: Australia & USA• Competitive pressure from Russia, East Africa & East Med• Improved West – Iran relations – South Pars LNG

AZERBAIJAN

CASPIANTURKEY

Azerbaijan - Caspian Gas Hub - Stakeholder Alignment

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Valuable Gas Monetisation, New Investments, Economic Growth

Extra Gas and LNG Supply, New Investments, Economic Growth

Valuable Gas Monetisation, New Investments, Economic Growth

Project SponsorsFeasible Project

Return on InvestmentOperating Environment

Resource HolderGovernment Take

Domgas DevelopmentLocal Content

Financial CommunityLegal & Fiscal Stability

Sustainable DevelopmentRobust Cash-Flow

People

Process Projects

What Key Project Stakeholders Want ?

Caspian Region Stakeholder Alignment ?

More complex energy projects fail due to lack of key stakeholder alignment

than due to lack of technology or commercial value.

European Gas Hubs – Price Benchmark Assessment

Azerbaijan as a Gas Hub ?

21Source: IGU, OIES

ü Production

✘ Transportation

ü Storage

ü Processing

ü Local sales

ü Export sales

• Pricing point for physical contracts

• Pricing point for future contracts

• Pricing point traded in financial exchanges

• Pricing point deep, liquid with high “churn ratio”

Where Can SyEnergy Add Value ?

• Competitive Intelligence, Strategy Formulation, and Business / Project Development

• Regional Gas Master Plan, Gas Supply Plan, and Gas Monetisation Alternatives

• Conceptual and Feasibility Studies

• Gas / LNG Procurement and Portfolio Development Strategy

• Gas / LNG Pricing, Netback and Quantitative Analysis

• Support and/or Lead Key Commercial Contract Negotiations (Marine CNG, Gas / LNG Supply)

• Pre-FID Project Support and Value Assurance Review

• Structured Transaction Support and Due Diligence

• Project Team and Senior Management Advice

• Dispute Resolution, Arbitration, and Price / Contract Renegotiation

• Bespoke Energy Training

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