Global lng market assessment

Julie D October 2012

Global LNG MarketMarket Assessment

Table of Contents

Oil & Gas Market Trends ………………………………………………………………………………………………………3Natural Gas – Renewable Energy Forecast …………………………………………………………………………………...4LNG ……………………………………………………………………………………………………………………………..5

What is LNG? Key Applications State of LNG Industry & Forecast LNG Pricing Overview LNG Production – Economics LNG Exports by Country LNG Imports by Country LNG Trade Volumes Liquefaction Plants Liquefaction Capacity by Country & Region Liquefaction Technology Emerging LNG Markets & Growth Potential Receiving Terminals Transportation Unconventional Gas Natural Gas Resources Around the World Impact of Shale Gas

Appendix …………………………………………………………………………………………………………………………31

Key Commissioned LNG Projects Worldwide

Oil & Gas Market Trends This overview projects annual growth in the world economy to average 2.8% to 2040, roughly in line with the average growth over the last 30 years.

Emerging economies will continue to lead the way, with China and India expected to grow at 2.5-3 times the speed of the OECD countries.

Continued progress is foreseen for energy efficiency, so that growth in energy demand gradually will slow over the coming decades, with an annual average of 1.1% from today to 2040.

Demand will increase for all types of energy, but with individual growth rates ranging from 0.4% (coal and oil) to 7.4% (solar, wind and geothermal) per year.

Overall, global oil demand is expected to peak around 2030. Key uncertainty relates to future oil supply, with positive surprises in US tight oil and the comeback of Libya as important signposts the last year, but also with potential supply disruptions and uncertain long-term recovery factors affecting the outlook

Natural Gas – Renewable Energy Forecast

Natural gas is still seen as a fuel of the future. Positive drivers include significant new available supply at moderate costs and environmental policies. Markets will continue to be regionally differentiated, but with increasing integration due to LNG in particular.

Annual global gas demand is projected to add 60% by2040, growing by 1.6% per year.

Natural gas is expected to increase its share of global energy demand from 21.3% to 24.4% over the same period.

Development of new renewable energy will contribute to increasing the renewables share of total primary energy demand from 13.5% to almost 20% in 2040.

This development is driven by climate and environmental policies, by energy security concerns, and by price and cost developments, and is linked to growth in electricity as a source of final energy demand.

“The United States is projected to become a net exporter of liquefied natural gas (LNG) in 2016, a net pipeline exporter in 2025, and an overall net exporter of natural gas in 2021. The outlook reflects increased use of LNG in markets outside of North America, strong domestic natural gas production, reduced pipeline imports and increased pipeline exports, and relatively low natural gas prices in the United States compared to other global markets.” – EIA 2012

LNG

What is LNG?

Liquefied natural gas or LNG is natural gas (predominantly methane, CH4) that has been converted to liquid form for ease of storage or transport.

Liquefied natural gas takes up about 1/600th the volume of natural gas in the gaseous state. It is odorless, colorless, non-toxic and non-corrosive. Hazards include flammability, freezing and asphyxia.

During a typical LNG process. The gas is first extracted and transported to a processing plant where it is purified by removing any condensates such as water, oil, mud, as well as other gases such as CO2 and H2S. An LNG process train will also typically be designed to remove trace amounts of mercury from the gas stream to prevent mercury amalgamizing with aluminium in the cryogenic heat exchangers. The gas is then cooled down in stages until it is liquefied. LNG is finally stored in storage tanks and can be loaded and shipped.

The liquefaction process involves removal of certain components, such as dust, acid gases, helium, water, and heavy hydrocarbons, which could cause difficulty downstream. The natural gas is then condensed into a liquid at close to atmospheric pressure (maximum transport pressure set at around 25 kPa/3.6 psi) by cooling it to approximately −162 °C (−260 °F)

Key Applications

State of LNG Industry The Worlds LNG trade in 2011 grew by 8% primarily due to the sharp increase in

demand from Japan arising from the severe earthquake and tsunami which hit the country in March 2011.

The LNG spot market grew by almost 32%, just over a quarter of the overall LNG trade, with a majority of transactions coming from the Atlantic Basin. By comparison, the spot market made up only 16% of LNG trade in 2006.

LNG trade has not only grown in volume, but in geographical reach as well. 15 new regasification terminals came on-stream in 2011, including new facilities in the Netherlands, Norway, Sweden and Thailand, marking those countries first regasification capacity. With these nations new capacity, 27 countries now have the ability to import LNG, Angola is expected to join this list of exporters in 2012 with the start of its Angola LNG T1 development.

Global regasification capacity stands at 608 MTPA- a 64% increase over capacity in 2006

Most remarkable phenomenon is the number and geographic reach of countries that have started importing LNG. Argentina, Brazil, Canada, Chile, China, Kuwait, Mexico, and the United Arab Emirates have begun importing LNG since 2006, joining the existing 15 importers which include Belgium, the Dominican Republic, France, Greece, India, Italy, Japan, Portugal, Puerto Rico, the Republic of Korea (Korea), Spain, Taiwan, Turkey, the United Kingdom and the United States.

State of LNG Industry - Forecast Over the next few years, Qatar will be on of the beneficiaries of the market tightness

due to potential delays to greenfield Australian projects on the supply side and the fallout from Japan’s Fukushima disaster on the demand side.

The market is expected to tighten towards 2016, by which time, several Australian projects should have started up, along with, potentially, the Sabine Pass project in the US. Until then, few suppliers will be able to meet the expected demand shortfall.

In response, Qatar has adjusted its strategy. It softened its hardline stance on full oil parity for pricing. In 2011, it has offered long-term contracts effectively in a price more akin to Australian projects.

With softer prices from Qatar and the US and high construction costs, together with potential project delays in Australia, most new buyers have less incentive to priorities LNG purchases from Australia's remaining projects.

While global LNG supply has not changed, Asian demand for LNG has risen by 13% year-over-year, driven by strong growth in almost every major importer, including China (>21%), Thailand (>23%), Japan (>15%), and India (>13%).

The reorienting of the LNG market towards Asia has been much commented upon in the market, and how the market has balanced (Asian growth against stagnant supply) to move cargoes from Atlantic basin buyers and to Asia. This is leading to a market for gas not sold under long-term contract. It appears that suppliers are now prepared to offer more flexibility in pricing, although this may only happen on Qatari terms.

LNG Pricing Overview Although gas is an increasingly global commodity, there is still no “global” gas

market. Value is set by micro rather than macro factors. In particular, location contract structure and timing are more influential in determining value than the global balances.

Gas pricing systems can be organized into four main categories:

1. Hub-based systems- Supply and demand set prices at liquid hubs. In North America, the most important price market is Henry Hub. At Present, US projects are offering LNG volumes to East of Suez buyers linked in the domestic HH price instead of to the oil price.

2. Oil-Linked systems- Most of the gas traded in Europe and Asia, and specifically long-term LNG contracts, falls in this category. Gas contract formulas vary in a number of ways based on the following factors: Indexation, Slope/Coefficients of the indexation, presence of S-curves, Lag and Average Mechanisms.

3. Regulated systems- In many parts of the world, prices are regulated. In this case the government sets wellhead transportation and end-use prices

4. Subsidized systems- In most countries in the middle East and North Africa, gas prices barely suffice to cover production costs. In Latin America, the former Soviet Union and much of Africa, gas prices are similarly set with no linkage to oil or costs.

LNG Production – Economics There are two ways for natural gas to be traded between countries that have a lot of natural gas to those that don't. The first is building natural gas pipelines. The second is to build facilities to liquefy natural gas or to make LNG. LNG has some fixed costs above and beyond the cost of the raw natural gas. These costs are typically  amortized over 20 years. The most significant of those fixed costs are: 1. Liquefaction plant $1.1 per Mcf +/- $0.202. Shipping costs (LNG tankers and operating costs) $0.70 per Mcf +/- $0.30 depending

on distance. Average tanker costs $200 Mil.3. Cost for regasification $0.35 per Mcf.

The costs come out to $2.15 per Mcf. This does not include the costs to develop the natural gas resource and get it to the LNG facility.

For an LNG facility to be economical, the operator has to have a committed natural gas resource large enough that there will be sufficient natural gas to ship for 20 years. Typical LNG Time line in the US

LNG Exports by Country By the end of 2011, 18 countries were

exporting their gas resources as LNG. In addition, five countries, namely Belgium, Brazil, Mexico, Spain and the United States, were re-exporting LNG previously imported from another source.

Qatar is by far the largest LNG exporter. In 2011, the countries supplied 75.5 MT of LNG to the market – Nearly one third (31%) of global supply

Malaysia overtook Indonesia as the second largest LNG exporter in 2011. together with Australia, these three Pacific Basin exporters accounted for about 27% of the worlds LNG supply.

Regionally, Middle Eastern exporters outpaced Asia-Pacific exporters in total volumes exported in 2006 and have continued to supply more volumes to the market in the intervening years. This trend is likely to reverse in the coming decades as new Australian projects come on stream.

The middle East & North Africa region faces several issues which impact development from country to country, these include rising domestic demands, regulatory or energy policy clarity, economic and political stability, and reserves which are more difficult to recover.

LNG Imports by Country LNG imports by Far East nations increased by

14% in 2011. Chinese import rose by 48%, while Japan’s rose by 12% and South Korea’s increased by 9%. A continuation of this rising trend in 2012, coupled with an increase in LNG exports, is likely to keep short-term freight rates firm in the near future.

Slackening demand for LNG imports was largely a function of energy needs being met from other sources.

In Europe, Spanish demand fell because of the country’s increased reliance on the renewable energy and domestically produced coal.

In the United States, rising unconventional gas supply kept gas prices low and made LNG unattractive.

In developed and emerging markets, gas is increasingly a fuel of choice to supply electricity, provide heating and cooling and support economic growth. During the last five years, 10 new countries started to import LNG, namely: Argentina, Brazil, Canada, Chile, China, Kuwait, Mexico, the Netherlands, Thailand and the UAE.

Three additional markets that do not currently import LNG are also building regasification capacity to satisfy growing demand in the face of uncertain piped supplies: Singapore and Israel expect to bring their terminals on-stream by 2013; and Poland expects to bring its terminal on-stream in 2014

LNG Trade Movements 2011

LNG Trade Volumes Between Countries, 2011

Liquefaction Plants

At the end of 2011, global liquefaction capacity stood at 278.7 MTPA from 96 trains in 18 countries.

Two more liquefaction projects are expected on-stream in 2012; the 4.3 MTPA Pluto LNG in Australia and the 5.2 MTPA Angola LNG T1 in Angola.

The Angola project, which is the countries first, will bring the number of countries with liquefaction capacity to 19.

Global liquefaction capacity of 278.7 MTPA at the end f 2011 marks 52% growth in capacity since 2006. With 84 MTPA of liquefaction capacity under construction, global capacity is expected to increase to 334.9 MTPA by 2016 (However, not all of the capacity under construction are expected to come on-stream by 2016)

Liquefaction Capacity by Country

• At the end of 2011, 18 countries had liquefaction capacity for exporting LNG, Three countries hold 48% of that capacity; Qatar, Malaysia and Indonesia

Liquefaction Capacity by Region

• The Pacific Basin continues to dominate the LNG export business, with 38% of 2011 liquefaction capacity located there and the majority of capacity expected on-stream by 2016.

• The Qatari projects have led to a significant rise in liquefaction capacity in the Middle East, but with little room for growth, capacity in the region is expected to remain flat in the medium term.

• Though the Atlantic Basin has seen slow growth, 101.3 MTPA of capacity has been proposed or is in some stage of FEED in the US Gulf of Mexico.

• Though Australian capacity is expected to eclipse the rest of the world in the medium term, a number of other Pacific Basin projects – including those in Canada, Russia and Mozambique – have the potential to add significant liquefaction capacity in the Asia-Pacific region in the long term.

Liquefaction Technology

• New processes are being employed at several projects. • Shell’s Dual Mixed Refrigerant

(DMR) process is being used at Sakhalin LNG in Russia, this process uses two Mixed Refrigerant cycles in series and the process is air cooled for process and environmental reasons.

• APCI’s AP-X technology is used for the Qatari mega-trains

• Linde Mixed Fluid Cascade (MFC) process is in use at Snohvit LNG in Norway

• APCI-AP X technology was first employed by ExxonMobil and Qatar Petroleum.

• Floating liquefied natural gas (FLNG) are facilities float above an offshore gas field, and produce, liquefy, store and transfer LNG at sea before carriers ship it directly to markets. The first FLNG facility is now in development by Shell, due for completion in around 2017

• As Shell and PETRONAS took final investment decisions on their respective FLNG project, the world is eagerly anticipating other companies that will do the same, while also paying close attention to the progress that these two companies are making

Emerging LNG Markets & Growth Potential

Emerging LNG markets accounted for 10.9 MT, or about 4.5% of the world LNG trade in 2011. This volume is expected to grow further as these countries acquire more volumes and new emerging markets start to import LNG.

The wave of emerging LNG importers continues to grow for a number of reasons, In some markets (e.g Malaysia and Indonesia), countries look to match geographically diverse reserves with demand centres as basins near demand centres mature

For markets such as Argentina and Chile, which are facing insufficient production – and oftentimes reserves, imports are needed to satisfy domestic gas demand

Finally, other markets (e.g. Thailand, Poland) have embraced LNG imports as a method to diversify gas supply originations.

Emerging LNG Markets & Growth Potential

• Along with the 32 countries that have existing regasification capacity or terminals under construction, another 30 emerging LNG import markets have announced plans to build capacity, If all of these terminals are built, these countries will have a combined capacity of 246 MTPA by 2018 – nearly half the total global regasification capacity of 608 MTPA in 2012

LNG Receiving Terminals

There were 89 regasification terminals around the world at the end of 2011, representing 608 MTPA in regasification capacity.

Out of the 89 terminals, 29 started commercial operations between 2006 and 2011, totaling 245 MTPA in new capacity,

Ten of these terminals are offshore facilities: nine of those use floating regasification technology and one (Adriatic LNG in Italy) employs a gravity-based structure.

Regasification capacity continues to grow, especially in new markets. Out of the 24 projects currently under construction, 18 are completely new terminals.

Once these are completed, five new countries will have LNG import capacity: Indonesia, Israel, Malaysia, Poland and Singapore.

LNG Transportation

At the end of 2011, the global LNG fleet consisted of 360 vessels of all types, with a combined capacity of 53 mmcm, which was 150% higher than in 2006. Growth was largely the result of deliveries associated with the last cyclical boom in orders for new built LNG vessels. The order book for LNG carriers rose sharply, up 63% to 73 Vessels equivalent to around a fifth of the current fleet.

Shell and Technip’s FPSO vessel, which took FID in conjunction with the Prelude LNG project in 2011, will be the world’s largest vessel estimated at about 600,000 tonnes. Several other players are interested in pursuing FPSO new builds, but non have thus far made as much progress as the Shell-Technip duo, except Malaysia’s FLNG project offshore Sarawak.

Vessel Types

Conventional LNG vessels – refer to the Moss-type or membrane vessels, which are greater than 125,000cm and less than 180,000cm.

Non-Conventional vessels include Q-Series types, which offer the largest capacities between currently available, in addition to FSRUs

FSRU- are typically capable of both transporting LNG like traditional LNG carriers, and additionally offer the onboard functionality of re-gasifying LNG, which is delivered to land usually via a buoy-connected pipeline.

Unconventional Gas The growth in gas production has been driven

chiefly by the ability to produce unconventional resources at ever cheaper rates

Unconventional gas includes shale, coal bed methane and tight gas which are all characterized by low natural permeability in the reservoir.

Using horizontal drilling and hydraulic fracturing, combined with tighter well spacing and a higher rate of drilling versus conventional gas fields, companies have been able to create sufficient permeability to extract ever increasing commercial volumes from these reservoirs.

Many are of the view that, in decades to come gas may take the place of coal as the worlds second favorite fuel. Environmental concerns may restrict the development of shale gas, unless contemporary concerns about shale gas drilling and “fracking” are properly addressed. But overall, the future is likely to be one in which more gas will be traded more freely.

Natural Gas Resources Around the World

Impact of Shale Gas on the LNG Industry The growth in shale gas production has emerged as a shock to the LNG system for two

reasons: It has made clear that the US will not import significant volumes of LNG over the

next decade, altered the dynamic of both the Canadian and Mexican gas markets There is growing uncertainty over whether other countries will be able to replicate

the experience of the US and hence, reduce their own needs for imports.

The implication of the “shale gas revolution” is that the US no longer needs as much LNG as previously forecasted.

Gas companies must reduce the environmental footprint and community impact, yet still exploit the full potential of shale gas.

Need to evolve the brute force approach towards a technology package that will allow the optimization of completion design, or completion quality, as a function of reservoir quality.

In time the industry will find ways to map shale reservoir quality and tie this directly to wireline, mud-logging or logging-while-drilling measurements. This will enable the industry to optimize well design, completion design and fracturing treatments. The result will be that only the best wells are drilled and fractured

There is no doubt that the world’s shale-gas resources are huge, but so many unknowns remain that is extremely difficult to estimate any shale reservoir’s ultimate potential. We have insufficient data, and do not yet have a reservoir-modeling capability that can lend credibility to reserve or recovery numbers.

KEY COMISSIONED LNG PROJECTS WORLDWIDE

World LNG Projects – Under ConstructionTotal: 22 terminals under constructionCapacity: 75.95m t/y

*Based on 2011 IGU Data

World LNG Projects – Planned & ProposedTotal: 38 terminals planned or proposedCapacity: 101.10m t/y

*Based on 2011 IGU Data- Does not show planned Mozambique LNG