Benjamin Schlesinger and Associates, LLC (BSA)

Bethesda, Maryland, USA

National Capital Area Chapter of the U.S. Association for Energy Economics (www.ncac-usaee.org)

Washington, DC – September 18, 2009

Global Natural Gas and LNG Markets

– Promise out of Disarray

Agenda

!! Introduction – purpose

!! Supply

!! Demand

!! Price

!! Conclusions.

About BSA…

•! Independent consultants on energy economics, supply, contracting, pricing, rate design, system costs, regulatory and lender risks worldwide

•! Three major practice areas: –! Market research, energy analysis and forecasting

–! Due diligence on fuel risks for 105 power projects, and gas storage and pipeline financings

–! Expert witness on gas markets, pricing, rates, market power, cost of capital, contract issues in 16 jurisdictions

•! 400 assignments since founding in March 1984.

•! A part of the Galway Group, L.P. of Houston, TX.

Much natural gas lies within a few

hundred miles of the 60th longitude.

Source: BSA 2009.

More than 75 countries hold reserves

of natural gas.

1,351

112

152

162

182

214

237

240

911

974

1,680

- 200 400 600 800 1,000 1,200 1,400 1,600 1,800

All others

Iraq

Venezuela

Algeria

Nigeria

United Arab Emirates

United States

Saudi Arabia

Qatar

Iran

Russia

Proved Gas Reserves, 2007 (Tcf)

Source: BSA 2009, from EIA.

The problem is that proved reserves

don’t tell the whole story.

The U.S.’s shale gas bounty is mostly

classified from p50 to p90.

0

500

1,000

1,500

2,000

2,500

2006 Estimate 2008 Estimate

TC

F

Remaining US Gas Supplies

Speculative

Possible

Probable

Proved (EIA)

Source: Potential Gas Committee/Colorado School of Mines, 2009.

Drilling in 2009 has been insufficient

to sustain growth in shale gas.

!"!!!!

!#$$!!

!%&$$$!!

!%&#$$!!

!'&$$$!!

!'&#$$!!

!(&$$$!!

!(&#$$!!

!)&$$$!!

*+,"$-!

./0"$-!

*+,"$1!

./0"$1!

*+,"%$!

./0"%$!

*+,"%%!

./0"%%!

*+,"%'!

!"#$

%

&'()*+%,'-.+/%0+**%1-234562.%

1-27*+%894:;%<=>%

234!5678/9:7;!

$!

%&$$$!

'&$$$!

(&$$$!

)&$$$!

#&$$$!

<&$$$!

=&$$$!

-&$$$!

1&$$$!

%$&$$$!

$>$$!

$>#$!

%>$$!

%>#$!

'>$$!

'>#$!

(>$$!

(>#$!

<%2?%1-2345@.:%0

+**A%

BC:%$'@*D%1-234562.%

,"#$

%

,'-.+/%&;'*+%1-234562.%1+'E+3%F'-*D%

G;@A%H+'-I%

?+@@4!A6B@@+8! A3B@C!5678/9:7;!

50% production decline in 1st year.

Source: Galway 2008, from Texas RR Commission.

Schlesinger’s Rule

!! Never make a bet against gas supply.

In the 2020s, the U.S.’s ‘baby Siberia’

will replace leveling unconventionals.

0

100

200

300

400

500

600

700 20

06

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

BC

M p

er y

ear

Projected Sources of US Gas Production

Alaska

Lower 48 Offshore

Tight Gas

Coalbed Methane

Gas Shale

Conventional

Source: BSA 2009, adapted from EIA AEO 2009 and other sources.

Globally, a few major market centers

dominate gas demand.

World Gas Markets Gas Demand in 2008

!! North America, 28.5 Tcf, is currently self-sufficient.

!! Europe is supplied largely from Russia, Algeria, Norway, Netherlands

!! Eurasia (FSU), exports to Europe.

!! In addition, industrial Asia is highly dependent on LNG.

0.0

5.0

10.0

15.0

20.0

25.0

30.0

23.2

2.9 2.4

25.2

20.5

7.8

3.6

3.2

2.8

India & Pakistan

China & Taiwan

Japan

Rest of A&O

Europe (41)

FSU

Mexico

Canada

USA

Source: BSA 2009, from EIA.

U.S. recently completed a massive build

of gas-fired power plants.

Gas Market Share, % Annual Capacity Additions, GW

2000 2005 2006 2007 0

10

20

30

40

50

60

70

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

All Other

Wind

Solar

Nuclear

Gas

Hydro

Geothermal

Coal

Source: BSA 2009, from EIA data.

Coal’s heading over a cliff in North

America.

!! TU, WE, many others have cancelled major coal-fired plants needed in near-term.

!! Gas, wind and solar will fill the gap in the next decade. !!Gas has fastest entry to

service

!! Lowest capital cost.

!! US gas demand could gain 10 Bcf/day by 2020.

Cliffs of Moher County Clare, Ireland

Actually, this was our foggy snapshot!

New builds will be mainly gas and

renewables through the 2010s.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

10 12 14 16 18 20 22 24 26 28 30

% N

ew E

lec

Gen

Cap

acit

y A

dd

ed in

Ea

ch Y

ear

Nuclear

Other renewables

Wind

Coal IGCC w/seques.

Coal, pulverized burn

CCCT & other gas

Source: BSA 11/2008 revision.

EIA is projecting that gas demand will

level off.

-

1,000

2,000

3,000

4,000

5,000

6,000

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

Fuels Used to Generate Electricity in AEO09

Other

Renewable Sources

Nuclear Power

Natural Gas

Petroleum

Coal

Source: EIA AEO 2009 Reference Case, assumes virtually no CO2 emission limits.

MW

h

Who is right?

!! The Obama Administration

!! Timothy Geithner

!! EIA

!! Potential Gas Committee

!! Schlesinger??

If we all are, then the U.S. is going to

export a lot of LNG!

Map: BSA 2002-2008.

North America’s LNG balance may waver

between imports and exports.

0

100

200

300

400

500

600

700

800

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

BC

M p

er y

ear

LNG Demand

Net Pipeline Imports

US Production (including Alaska)

Source: BSA 2009.

Where will the LNG exports go?

Where will the LNG exports go?

!! Follow the money…

Gas-hungry Europe…

7.1

2.5

4.2

LNG 7.1 5.6

Source: Gas Strategies, 2009, projected pipeline capacities in 2015, Tcf/year.

Differing views on European gas

demand growth, but mostly growth:

400

450

500

550

600

650

700

750

800 20

06

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

EIA - IEO 2009

IEA - WEO 2008

WoodMackenzie (Gastech 2009)

E.On Reference (Gastech 2009)

E.On Low (Gastech 2009)

Sonatrach

GDFSuez (Gastech 2009 - CERA Reference)

Wingas (3/21/2009 Platts LNG article)

IGU (June 2009)

Galway Frcst (Spring 2009)

Eurogas (Natural Gas Demand and Supply Long-Term Outlook

Source: Galway 2009, from sources indicated.

EU-27 gas demand in power and

industrial uses is expected to rise.

5.5 7.2 8.0

7.0

7.9 8.2

6.3

7.1 7.5

0.0

5.0

10.0

15.0

20.0

25.0

2007 2015 2020

TC

F Industry & other

Residential & Commercial

Power & heat

Source: Cedigaz 2009.

Growing pessimism on future Russian

gas export potential…

!"!!!

!%$>$!!

!'$>$!!

!($>$!!

!)$>$!!

!#$>$!!

!<$>$!!

!=$>$!!

!-$>$!!

'$$<! '$$=! '$$-! '$$1! '$%$! '$%%! '$%'! '$%(! '$%)! '$%#! '$%<! '$%=! '$%-! '$%1! '$'$!

,"#$

%

J4AA@'%K'L4-'*%M'A%,'*'.5+%

A+D3;8! 5EF!+GH76I4!I7!J/67H+! 5EF!+GH76I4!I7!*KL! FM2!JGH76I4! 5678/9:7;!

Source: Galway 2009, from various Russian Federation sources, IEA baseline.

…suggests rising European LNG

importation requirements.

Source: Cedigaz 2009.

Issues

!! Can competition come to Europe’s gas industry?

!! The LNG chain imbalance – lot’s more receiving/regas capacity than production or shipping.

!! U.S. style open access: !! Supply competition / demand competition

!! Independent, private pipelines

!!A mean regulator!

!! The big price gap….

Most gas prices are indexed to oil

markets, North America’s differs.

$-

$5

$10

$15

$20

$25 Ja

n-91

Jan-

93

Jan-

95

Jan-

97

Jan-

99

Jan-

01

Jan-

03

Jan-

05

Jan-

07

Jan-

09

Jan-

11

Jan-

13

Jan-

15

Jan-

17

NO!

!,L4%

Henry Hub gas

WTI crude oil

Henry Hub gas futures

WTI crude futures

Source: BSA, from Platts, NYMEX at 9/17/09 closing.

02-*3%M'A%

K2-L;%B(+-@5'.%

M'A%

Recession realities… !! European gas demand is down, just like North America’s. !! But oil indexation is forcing contract gas prices to excessively

high levels. !! Europe’s buyers are facing a take-or-pay crisis – shades of the

U.S. in 1984. !! Meanwhile, the “natural” gas price (think: Henry Hub) more

accurately reflects current market realities.

!! Only time will tell how long Europe will take to reform, renegotiate, restructure, buy-down, buy-out its oil-indexed long-term gas contracts.

!! And when this happens, look to wide Henry Hub pricing.

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

Extra Slides

Current US round of LNG import

capacity additions is nearly complete.

0

2

4

6

8

10

12 20

02

2003

2004

2005

2006

2007

2008

2009

Bcf

/d

ay (

aver

age)

Sabine Pass, LA

Northeast Gateway Energy Bridge

Lake Charles, LA

Gulf Gateway Energy Bridge

Freeport, TX

Everett, MA

Elba Island, GA

Cove Point, MD

Source: BSA 2009, from trade press.

US LNG imports falling as terminal

capacity rises.

$>$!

'>$!

)>$!

<>$!

->$!

%$>$!

%'>$!

%)>$!

N3;"$)!

./0"$)!

O36"$#!

P9I"$#!

O3C"$<!

A+9"$<!

N/@"$=!

*+,"$-!

K+H"$-!

Q9RE83C!S3T+630+U!

LK!FM2!

VDH76I4!

W3H39BIC!

Source: BSA 2009, from EIA & trade press.

But US gas demand could outpace

supply growth, forcing added LNG.

0

100

200

300

400

500

600

700

800

1997

19

99

2001

20

03

2005

20

07

2009

20

11

2013

20

15

2017

20

19

2021

20

23

2025

20

27

2029

US Gas Demand, Power Generation and Other, BCM

Non-elec gas demand - forecast

Electric Power demand - forecast

Non-elec gas demand - 2009E

Electric Power demand - 2009E

Non-elec gas demand - actuals

Electric Power demand - actuals

Source: BSA 2009.