Market outlook for natural gas

Market outlook for natural gasIan LawrieManager Gas Market Analysis, London London March 17th 2011

Three important factors drove an oversuppliedgas market in 2009

• Demand reductions followingthe economic downturn

• Increase of US domesticproduction from shale gas resources

• Expected increase in LNG production capacity

European Demand (Bcm)

515

485

2008 2009

LNG production capacity (Bcm)

241

259

2008 2009

US shale gas production (Bcm)

63

88

2008 2009

* Source: Wood Mackenzie

Demand has generally recovered through 2010

554

527

552

2008 2009 2010

255 267322

2008 2009 2010

All key markets are showing signs of recovery (bcm)

European demand *

Asian demand **

US demand

Source: Wood Mackenzie EMT* Europe includes Turkey** Asia: Japan, S Korea, Taiwan, China and India

− Industrial demand starting to recover from the economic downturn

− Increased use of gas for power generation in Europe and North America

−Emerging markets step up LNG purchases608

606

615

2008 2009 2010

Price levels have recovered during 2010

• Demand growth in all markets

• Supply issues

• Cold weather

2

3

4

5

6

7

8

9

10

11

12

Jan-

09

Apr-

09

Jul-

09

Oct

-09

Jan-

10

Apr-

10

Jul-

10

Oct

-10

Jan-

11

Apr-

11

Jul-

11

Oct

-11

Jan-

12

Apr-

12

Jul-

12

Oct

-12

$/M

MBt

u

HH Cash $/MMBtu NBP DA ($/MMBtu) German border price

Market expectation

Political turmoil lifts oil prices

• Events in Tunisia, Egypt and Libya have pushed oil prices into a new, higher range

• Fears of contagion across North Africa/Middle East on the rise

• Higher oil prices also affect European gas

Dated Brent Oct 10 - Mar 11

80

90

100

110

120

Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11

$/bb

l Ben Ali steps down

Protests in Tunisia

Demand pull from China, but also OECD growthLower stocksCold weather

Assumptions of tighter market balance out in time and increased marginal production cost Geopolitics:

Mubarak steps downLibyan unrest and stalemateContagion/fear of contagion in MENA

European prices gravitate to coal substitutionCoal and emission prices

‘Based on 35% coal efficiency, 49% gas efficiency

60

70

80

90

100

110

120

130

140

Dec 09 Feb 10 Apr 10 Jun 10 Aug 10 Oct 10 Dec 10 Feb 11

$/t C

oal

10

20

30

40

50

€/t E

U ET

S

Coal ARA 1st month CO2 emission spot

Implied UK coal switching price

• European demand strong into 2011

• Increasing oil prices lift long term contract prices summer 2011 onwards

• Gas to power switching in power sector setting marginal pricing

– Boosted by strong coal prices

40

45

50

55

60

65

70

75

80

85

90

Spot Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012

p/th

erm

Implied switching price NBP TTF Long term German border price

Italian storage levels mask year on year deficit

• Overall European storage levels are 42% full or 31 Bcm

– 2 Bcm behind of 2010 levels (3 Bcm behind excluding Italy)

• Inventory levels in Italy stand at 56% full and 1 Bcm ahead of 2010 levels

– Stock piling ahead of postponed Transitgas pipeline outage buffers the market from lost Libyan

European Storage Inventory vs. 3-year average

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Jan Mar Jun Sep Dec

Mcm

in s

tore

3-year average 2011Source: GIE

Western Europe gas storage

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Baumgarten Germany PSV PEG Iberian NBP TTF(Eurohub)

ZEE

Mcm

in s

tore

Stock level Remaining capacity 2010 levelSource: GIE

US production machine keeps on running

Source: EIA & Baker Hughes

• US demand has been boosted by lower prices

• Production continues to increase

• Gas to power demand forms “collar” around prices

Year-on-year US Domestic production

53,000

54,000

55,000

56,000

57,000

58,000

59,000

60,000

61,000

62,000

Jan

Feb

Mar

Apr

May Jun Jul

Aug

Sep

Oct

Nov Dec

MM

cf/d

ay

2009 2010 2011Source: EIA

US Domestic production vs. Rig count

44,000

46,000

48,000

50,000

52,000

54,000

56,000

58,000

60,000

62,000

Jan-

08

Mar

-08

May

-08

Jul-

08

Sep-

08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-

09

Sep-

09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-

10

Sep-

10

Nov

-10

Jan-

11

Mar

-11

MM

cf/d

ay

0

300

600

900

1200

1500

1800

Gas

rig

cou

nt

Lower 48 States Dry Gas Production (MMcf/d) Operative Gas RigsSource: EIA & Baker Hughes

US storage withdrawals drop as warmer weather arrives

• US storage levels are at 45% full as strong withdrawals take inventories to:

– 3.7 Bcm below 5 year average

– 5.5 Bcm below 2010 levels

US storage inventory vs. 5 year average

-

20

40

60

80

100

120

Jan Apr Jul Oct

Bcm

in s

tore

5yr average 2011Source: EIA

US Residential & Commercial Demand vs. 5yr average

0

5

10

15

20

25

30

35

40

45

50

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb

Bcf/

day

US Residential & Commercial demand 5-year average

• Continued cold weather in the North East has pushed up demand and increase withdrawals

• Capacity bottlenecks into New York City caused prompt prices to spike

Gas demand is increasing and result in tighter coupling between Europe and Asia

Indigenous Production

US (bcm) Europe (bcm) Asia (bcm)

Import Upside potential

Source: Statoil internal

0

200

400

600

800

1000

2010 2020 20300

200

400

600

800

1000

2010 2020 2030

0

200

400

600

800

1000

2010 2020 2030

Asia needs more LNG in spite of extensive growth in domestic production

• LNG supply from many sources

• LNG depends on Australia delivering

• Further growth depends on LNG versus domestic supply in China and India

Asian supply by source

(bcm)

Source: Wood Mackenzie GGM 2H2010* Domestic includes intra-Asian pipelines

0

200

400

600

800

1000

1200

2008

2009

2010

2012

2015

2020

2030

Domestic* LNG Pipel ine

Watch for step ups in domestic production in China

−No new LNG projects sanctioned with start up date after 2016

−New LNG production capacity requires significant investments

Available LNG volumes are limited

Growth in new LNG capacity is levelling out and majority of volumes are committed (bcm)

Source: WoodMackenzie and Statoil

252280

327 340 343 348 361 374

2009 2010 2011 2012 2013 2014 2015 2016

Committed LNGLNG production

Gas is competitive in power generation

Gas is very competitive, and does not require subsidies

Gas and gas technology is available when

old capacity is retired

Soruce: CERA and PlattsSoruce: IEA 2009

Reduction in CO2 emissions of up to 70% compared with

old coal fired plants

Soruce: Deutsche Bank

Europe

Older than 40 yrs

31 – 40 yrs

21 – 30 yrs

11 – 20 yrs

0 – 10 yrs

New capacity

Gas Coal Nuclear Wind

Investment Operation Fuel

Emissionsold coal

plant

Reductionnew coal

plant

Reduction with new gas

plant

Emissionsnew gas

plant

$10/MMbtu$11/MMbtu

$15/MMbtu

The shale gas ”revolution” has increased the global gas resource estimates

Source: IEA World Energy Outlook 2009

Global gas resources 2008 (TCM)

Unconventional gasConventional gas

210

OECD

200

Rest of the world

200

Russia / FSU

170

Middle East

15

What to watch in 2011

USAsia

Europe

China growth

US shale production and power

demand

Russian exports

European policy trends (EU 2050)

Asia and Europe’s ability to absorb new LNG

Conclusions

− The gas market is improving

− The gas market has big growth potential

− Natural gas is part of the solution to the climate challenge

Forward looking statements

This presentation contains certain forward-looking statements that involve risks and uncertainties. In some cases, we use words such as "ambition", "believe", "continue", "could", "estimate", "expect", "intend", "likely", "may", "objective", "outlook", "plan", "propose", "should", "will" and similar expressions to identify forward-looking statements.

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