LNG’s Transformation

from Regional to Global

Commodity
7th Doha Natural Gas Conference &
Exhibition

G. M. (Chip) Schuppert, Jr
Manager, Global LNG Marketing &
Sales
ConocoPhillips
1 9-12 March 2009
 Dramatic Growth in LNG Trade
Growth in:
• Volume
• Number of trade
routes
• Diversion & short
term trades

Growth in ability for

more “commodity-
like” response to
market changes….

2
 Improved Ability to Respond to
Market Changes
• Recent “Perfect Storm” of 2007-8 in Asia
caused by:
– Unexpected decline in some existing LNG supplies
– Significant Japan nuclear power outage
– Significant delays in completion of new supply
projects
– Major equipment failures and supply interruptions
– Significant & rapid increase in demand from new
markets
• Result: Dramatic increase in need for
Supply response to “perfect storm” of 2007-8
additional LNG supplies to Asia in 2007-8
required unprecedented degree of flexibility from
3
LNG supply markets
 Increased Flexibility of LNG Supply
Markets
Supply Response to “Perfect Storm” of
2007-8

LNG was delivered:

» Where it was needed
» When it was needed

• The rerouting of supplies naturally required

corresponding changes in market price to prompt the
redistribution
• The LNG supply markets demonstrated a relatively
quick and significant “commodity-like” response
4
 Supply Response: 2007-8 Asia
Demand
16
As % from Atlantic Sources
14

12
Percent

10

2
Source: Cambridge Energy Research Associates.
Updated January 2009
0
2005 2006 2007 2008

Ability for relatively quick and significant supply

response was direct result of supply flexibility
5
developed in recent years
 Multiple Sources of Flexible
Supply
Key Enablers
Atlantic to Pacific Basin LNG • Contractual flexibilities
Flows
16.00
– Diversion Capability
Source: Wood
14.00 Mackenzie – Supply Aggregators
12.00 – Spot cargos from
10.00
uncommitted production
• Extra shipping capacity
mmtpa

8.00
– Speculative-built ships
6.00
– Ships associated with
4.00 delayed supply projects
2.00 • Construction of addt’l regas
capacity in liquid markets
-
2003 2004 2005 2006 2007 2008 • Indirect access to U.S. gas
storage
Algeria Egypt Eq. Guinea
Nigeria Norway Trinidad

6
 LNG: Transitioning to Worldwide
Commodity?
True Current State of LNG
Commodity
Single price Regional pricing – but tending to trend
together
Single quality Effectively 2 different standards – “rich” &
standard “lean”
Fungibilty 2 different quality standards reduce fungibility
(interchangeability – but many LNG Buyers adjusting to accept
) either for supply flexibility
True spot market Relatively small true spot market – but
significant growth in Diversion and Flexible
Supply markets
Fin. hedging highFinancial
Relatively cost ofhedging verymay
storage limited,
bedifficult
single and
available complex
biggest longer-term impediment to true
Relatively easy
“commoditization” High ($/mmbtu)
of rdLNG storage (and transport) costs,
7 access to storage no true 3 party merchant storage
 Relative High Unit Cost of LNG
Storage
StorageTankageCapexCost
$/MMBtu
100

90

80
$ per MMBtu

70

60

50

40

30

20
Source: ConocoPhillips
10

0
Fuel Oil RefinedProducts Intermediates LNG

LNG has one of highest storage costs per unit of

energy. But LNG markets indirectly accessing
8
storage through alternative means.
 Indirect Access to Storage
4,50 16
0
4,00
Sources: EIA, CERA,
WoodMac
% • N.A. has large gas
14
storage position

Storage Consumption
0 %
Maximum Storage

3,50 12
0
3,00
% • Indirectly benefits
0
2,50
10
% other world LNG
0
2,00
8% markets
0 •Facilitates
6%

Ratio (%)
1,50
0 4%
diversions to meet
(Bcf)

1,00
0
Buyers’ needs
500 2%
•Can serve as
1
“default” market for
N
A
S. Spai Japa U Sellers
Korea n n K
•
Liquid N.A./EU markets – as well asServes
excess toshipping
attenuate
LNG price volatility
capacity - have, to a degree, served as an indirect
9
form of LNG “storage”
 Relative High Unit Cost of LNG
Transport

Cost of shipping various fuels

0.00012
US$ US$/ MMbtu/ km

0.00010 Source: ConocoPhillips

0.00008

0.00006

0.00004

0.00002

0.00000
Crude2MM bbl Fuel oil Gasoline LPG LNG

10
 Impediments to Global
Commoditization
• Relatively high cost of storage & transport
• Indirect access to storage is limited & inefficient
• A-P Buyers’ supply-constrained environment
– Little to no indigenous supplies
– Little to no access to PL gas supplies
– Greater emphasis on security of supply
– Result: preference for regional supplies and longer-term
contracts
• Potential “tightening” of the shipping market
• “Terming up” of current flexible/divertible supplies
• Continued difficulties in sanctioning new supply projects
Some regionalization of markets is likely to
remain for some time even as LNG supplies
11
become more flexible
 Global LNG Price Setting Mechanisms

• Gas-to-gas competition• Dual price dynamic • Oil linked

- NBP spot contracts
• Liquid spot market
- Oil related contracts

Global LNG Links

Source: Cambridge Energy Research &
12
Associates
Arbitrage
 The Transformation of LNG
from Regional to Global Commodity
In Summary:
– Recent improvements in supply flexibility has enabled:
• Significantly improved supply response
• Greater worldwide “commoditization” of LNG
– Supply flexibility is poised to grow - but could be threatened by:
• Tightening of shipping market
• Terming-up of divertible supplies
• Continued difficulties in sanctioning new supply projects
– Relatively high costs of storage may continue to be a hurdle to the
complete and total “commoditization” of LNG
– Some “Regionalization” of the market place may continue - but with
greater trending and stronger correlation between regional markets

13
 Thank You

14