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LNG Expansion in the Asia-Pacific Region: Prospects

for LNG Trade and Implications for China

A Presentation for

2007 APEC Expert Group on Clean Fossil Energy Workshop

By

Shahriar (Shasha) Fesharaki

Vice Chairman, FACTS Global Energy

Kang Wu

Senior Fellow and Head of China Energy Project

East-West CenterHonolulu, Hawaii, USA

November 5-7, 2007 China


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Outline

1. Future Trends in LNG Markets

2. Evolution of LNG Pricing in the Asia-PacificRegion

3. Projected Existing Price Formulas up to 2020

4. Implications for New Buyers5. Implications for China


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1. Future Trends in LNG Markets


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Japan

South

Korea Taiwan India China

t er

New

Markets

Mature

markets

New

markets

est

Amer ican

Coast

Total Asia

Pacific

2005 58.0 22.3 7.1 4.5 0.0 0.0 87.4 4.5 0.0 91.9

2006 62.1 25.3 7.7 6.2 0.7 0.0 95.0 6.8 0.0 101.92010 70.2 28.4 10.2 9.0 6.2 0.4 108.8 15.6 7.7 132.02015 77.0 34.6 13.0 14.0 15.3 6.8 124.6 36.1 11.4 172.22020 82.0 32.4 15.5 22.0 32.6 20.9 129.9 75.5 11.4 216.8

Asia Pac if ic LNG Demand Forecasts Scenar ios (mtpa)

Base-CaseTotal Asia Pacific

-

20

40

60

80

100

120

2005 2006 2007 2010 2015 2020

LNG Uncommitted Demand (mtpa)

India

China

Taiwan

Korea

J apan

Asian LNG Markets Outlook

6.7% average annual

growth for LNG demand until

2010, 5% afterwards.

New markets will develop

mostly after 2010-15 and will

be very sensitive to prices

LNG uncommitted demand:

12 mt in 2010, 57 mt in 2015,

113 mt in 2020.


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Emerging Asian Markets

CLP Project (up to 3 mtpa)Targeting 2012 for start-up

1.30.1Hong Kong

Mashal LNG Project (Sui Southern Gas): 3.5 mtpaTargeting 2010/11 for start-up

3.51.5Pakistan

Mariveles Terminal by GN Power, 1.4 mtpa,2009-2010 start-up seems very difficult to achieve.

Other terminals pending.1.51.2Philippines

Contact Energy and Genesis Power project:

1.2 mtpa by the end of the decade1.21.1New Zealand

3 mtpa (2012-2017)expandable to 6 mtpa (2018 -2035)

1.20.8Singapore

5 mtpa targeting 2010 start-up. (unlikely)--Thailand

Terminal Capacity20152012

FGEs Estimated Import Volumes

Volumes (mtpa)

Country

Receiving Terminal Projects

Price will be an issue and a lot of projects are likely to be further delayed


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Limited Supply Available in the Near Future

In the Middle East, Yemen, Oman, and Abu Dhabi

are out of supply.

In Asia, Australian supply will emerge as the focal

point.

Qatar on path to be largest LNG exporter in theworld

Mistake to assume infinite supplies

Around 90-100 million tonnes might be the limit About 77 million tonnes are already committed

For now, no new sales are contemplated


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For Iran, we expect much smaller export volumes.We see 20-30 million tonnes as a potential LNGsupply and some volume of pipeline gas. The

reasons are: Large domestic grid-price $0.35/MMBtu.

Massive gas re-injection requirements of some +10

billion cf/d. Massive gas-based petrochemical projects.

CNG projects to provide a major volume of gasolinesupplies as early as end of this decade.

Political opposition to gas exports by certain quarters such as the Iranian Parliament.


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Radical Change in LNG Equation

Gas/LNG prices have risen for five distinct reasons:

1. Higher oil prices mean higher natural gas prices directionally,

though gas prices are capped by competition from coal andnuclear at the burner tip, especially in the longer term.

2. Construction costs have risen significantly!

3. The United States has entered the LNG market from virtually zero,early in the decade, and is very likely going to become the secondlargest LNG importer next to J apan after 2010. J apan, willcontinue to be the largest importer of LNG through 2020.

4. Indonesia, once the worlds largest LNG exporter is heading for amassive decline of exports (except for Tangguh) due to a

combination of resource problems and political pressure to divertresources to the domestic market.

5. Qatar holds most of the cards in the near termand they know it!


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2. Evolution of LNG Pricing in the

Asia-Pacific Region


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Buyers Market vs. Sellers Market

The Asian LNG market has gone through 3 distinct phases overthe last 20 years:

Legacy Contract Phase (Pre-2000): Legacy contracts were signed between J apan, Korea, andTaiwan, and key Asian and Middle East suppliers before2000.

Low Price Phase (Post-2002): Post-2002 with very low prices, lower oil linkages and more

flexibility for buyers.

Tight Energy Market Phase (Post-2005): Recently emerging, with prices well above the low price

phase, coupled with tougher seller attitudes.


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The Switch to a Sellers Market in 2006

Sellers have started to regain the upside and renegotiate prices. We have seen

the abandonment of S-curves for straight lines and an increase in the

relationship to crude oil.

Qatar is setting the standards and has become the price setter with some 48

mt directed to the West which can be diverted to the highest paying market;

thus creating a real linkage between the markets.

In the East, two new markers have emerged since mid 2006:

NWS allocation process at around $8/MMBtu at $60/barrel JCC price.

Qatars proposed long-term diversion eastward at around $10.5/MMBtu at

$60/barrel JCC price.

Most sellers are now attempting to position themselves in between these two

markers, while referencing directly or indirectly to HH or NBP prices.


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Analysis of Recent Contracts to Japan and Korea (DES)

2

4

6

8

10

12

14

10 15 20 25 30 35 40 45 50 55 60 65 70

JCC ($/bbl )

LNG(

$/MMBtu)

NWS Traditional to J apan NWS-T1-3 Bilateral Renewals Gorgon to J apan (HOA)

NWS Allocation Process RasGas to KOGAS from 2007 Crude Oil Parity

Oct 05 - Mar 06

Mar - May 06

Apr il - May 06

December 06

Sellers positioning between these markers


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3. Projected Existing Price Formulas up to 2020


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Living in a High Oil Price World

We have moved to a higher oil/gas price world. This is an

irreversible change.

Still, we will have cycles, but from a higher price base.

A global demand growth of say, 1.5 million b/d, cannot be supported

too long by incremental oil supplies. Prices will rise to reduce the

growth in demand.

Our scenarios point to a base price of around $80/b in real terms by

the middle of the next decade, resulting in a demand loss, which

then settles to a price in the range of $60/b for Dubai crude.


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Changes in Non-OPEC Output 2005-2015

mb/d

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

2005 2010 2015

North America Europe Latin America Africa Middle East Asia Pacific FSU


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OPEC Coming to Fill the Supply/Demand

Gap?

After a short-term spike, non-OPEC supply growth will slow and most

likely reach a plateau sometime in the middle of the next decade.

OPEC faces a natural decline of some 1.2 million b/d. Adding

capacity is very difficult as much new capacity is needed just to stay in

the same place.

OPEC may have trouble adding some 1 million b/d of additionalcapacity annually, which may be required once non-OPEC plateaus.

Political, legal, and management problems are unlikely to allow for

new capacity additions large enough to respond to the demandgrowth.

At the very least, OPEC will have a comparatively easy time

sustaining price levels.


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A New Price Plateau?

Price Forecast Scenarios for Dubai, $/bbl

20

25

30

35

40

45

50

55

60

6570

75

80

85

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Possible Scenario:Modest demand growth, supply response.

* Actual up to 2006, 2007$ thereafter.

Most Likely "base-case" Scenario:Robust demand, supply constraint.


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Projected Asian Long-Term LNG Prices (DES) $2007

0

2

4

6

8

10

12

14

16

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

LNG ($/MMBtu)

0

10

20

30

40

50

60

70

80

90

Oil ($/bbl)

Existing Australia to J apan* Australian New Projects to J apan

NWS Renewals (Average) KOGAS Tender-Average Price

RasGas to India Average China

Crude Oil Parity ($/MMBtu) Average New Qatari Contracts to J apan and Korea

Average DES Price to Traditional Markets Crude Oil ($/b) Right Scale

*NWS Trains 1 to 4 and Darwin


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4. Implications for New Buyers


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New Buyers: Where Will They Get Their Supply?

New buyers will find it difficult to obtain supply unless they are willing to

pay higher prices for the gas. Even so, there will be limited supply

volumes to spare.

With the exception of Qatar, the Middle Eastern suppliers are all booked.

In Asia Pacific, the realistic potential suppliers by 2015 are Russias

Sakhalin II (Train 3), Indonesias Tangguh (Train 3), Australias NorthwestShelf (NWS), Gorgon, Pluto, etc.

The LNG market remains very tight and prices will be high. Buyers will

need to pay high prices for shorter-term cargosthere is no choice andthey will have to deal with this reality.


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Window of Opportunity Has Closed

Realistically the window of opportunity to sign relatively low-priced LNGsupply contracts has passed. Buyers seeking to sign long-termcontracts for deliveries 3-5 years in the future will face the followingmarket realities:

Negotiation Period

2007-08

Over the next 1-2 years, Qatar holds all the cards and it will seek tomaximize returns by isolating desperate buyers. Others (e.g.,Tangguh) will follow on Qatars coattails.

2009-2011

The market will loosen somewhat as Qatari supply ramps up and itbecomes clearer when other ME/Asia projects will come on line.Qatar will move beyond targeting only the most desperate buyers,as Asian netbacks and Asias relatively stable prices are attractivevis--vis HH and NBP.


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Window of Opportunity Has Closed

2012-15

Market eases somewhat as new projects come on line and

deliveries into US and Europe are well established.

Large Asian premiums to HH/NBP will diminish due toincreased competition amongst sellers, as there are manyopportunities for diversions to the East. However, HH/NBP

and oil prices are projected to remain high. Contracts willreflect this fact.

Some Asian contracts may be linked to HH, but most will

retain oil linkage. However, HH will have an increasinglylarge bearing on contract negotiations.


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Supply Will Remain Tight

World Liquefaction Capacity and LNG Demand

0

100

200

300

400

500

600

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

mtpa

Middle East Planned

Med. Basin Planned

Atlan. Basin Planned

Asia Pacific Planned

Middle East Under Construction

Med. Basin Under Construction

Atlan. Basin Under Construction

Asia Pacific Under Construction

Middle East In Operation

Med. Basin In Operation

Atlan. Basin In Operation

Asia Pacific In Operation

LNG Demand Low Case

LNG Demand High Case

LNG Demand Base Case


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5. Implications for China


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Natural Gas Demand and Supply in China

Outlook for Natural Gas Product ion andConsumption in China

0.0

5.0

10.0

15.0

20.0

25.0

2000 2001 2002 2003 2004 2005 2006 2007 2010 2015 2020

Production

Consumption

(bscf/d)

Note: 2000-2006 are actual except for 2006 consumption which is preliminary; 2007 data are estimates; 2010-2020 are projections.


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China's Sectorial Gas Consumption: Base-Case

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

02 03 04 05 06 07 10 15 20

Power

Industry

Residential and Commercial

Transport

Others

(mmscf/d)

Natural Gas Demand by Sector in China


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Gas Price Issues in China Prices in China are regulated. For traditional fields, prices are low, ranging

from US$1.99/MMBtu for fertilizer production in Xinjiang to US$3.26/MMBtufor residential use in Southwest China

However, new pipelines and fields commend higher prices. Below are

examples of newer fields, pipelines, and prices

Natural Gas Prices for Selected Pipelines in China

Length Prices

Pipeline km miles Type yuan/m3 US$/MMBtu

West-East 4,000 2,489 Baseline Price to Shanghai 1.32 4.72

Ordos-Beijing I 864 538 Gov't Approved Price at City Gate 1.34 4.79

Ordos-Beijing I 864 538 Actual Price at City Gate 1.13 4.04

Ordos-Beijing II 926 576 Actual Price at City Gate 1.28 4.57Pinghu-Shanghai 400 249 Price at City Gate 1.45 5.18


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Gas Price Issues for China (contd)

International Pipelines:

Price is a big issue for any international pipelineproject to China

Russian gas to China: price, along with resourceavailability and the rising demand in Russia itself, are

some of the major reasons the negotiation stalled

Turkmenistan gas to China: The prices at theChinese border will be higher than $2.8/MMBtu to

Russia, and are likely in the range of US$4.4 to5.0/MMBtu


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E

C

AP

Existing

Under Construction

ApprovedPlanned

Initial Capacity

Terminal Expansion

Legend

E

Guangdong (5 mtpa)

Expansion approved: 6.6 mtpa

Fujian (2.6 mtpa)

Expansion planned: 5 mtpa

Zhejiang (3 mtpa)


Shanghai (3 mtpa)


Rudong (3.5 mtpa)

Expansion planned: 2.5 mtpa

Qingdao (3 mtpa)

Yingkou (3 mtpa)

Guangxi Guangdong

Fujian

Zhejiang

J iangsu

Shandong

Hebei

Beijing

Liaoning

Guangxi (3 mtpa)

Hainan (2 mtpa)Expansion Planned: 1 mtpa

Hong Kong (up to 3 mtpa)

Existing

Under Construction

Approved

Planned

CNOOCPetroChina

Sinopec

EurOrient

XinAo Group

E

C

A

Legend

CLP

Wenzhou

Wenzhou (3 mtpa)

Lianyungang

Caofeidian (3 mtpa)

Tangshan (3 mtpa)

Zhuhai (3.5 mtpa)

Rizhao (0.5 mtpa)


Dalian (3 mtpa)


Hainan

Qinhuangdao (2 mtpa)


Location of Chinas LNG Terminals

Expansion planned: 3-7 mtpa


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LNG Supplies for China

NWS Trains 4 and 5There is no new supply from these two trains that is available to

China

Gorgon LNG In early September 2007, PetroChina signed a binding HOA with

Royal Dutch/Shell for 20 years of LNG supply at 1 mtpa. TheHOA covers the key terms of the transaction and the two parties

are aiming to conclude an LNG sales and purchase agreement(SPA) before December 2008

MLNGThe Shanghai LNG SPA was signed on J uly 31, 2006 with

Malaysia LNG Tiga.The contractual volumes will build-up from 1 mtpa to a plateau of

3.03 mtpa within three years of commencement of the contract.The following table summarizes Chinas supply and demandbalance until 2020


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LNG Supplies for China (contd)

Browse Basin Gas Project

In September 2007, PetroChina signed a non-bindingagreement including key commercial terms with WoodsidePetroleum for 15-20 years of LNG supply at 2-3 mtpa fromthe proposed Browse Basin gas reserves. The agreementis subject to conditions, including a final investmentdecision on both Gorgon and the Browse project andrelevant government approvals.

Together with the Gorgon deal, PetroChina may target

either Rudong or Dalian LNG terminal for the combinedvolumes of the two deals


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South Pars Phase 12 (Iran LNG)

The capacity totals 10 mtpa. Sinopec signed an MOU

with NIOC in 2005 for 10 mtpa of LNG supply Iran LNG has marketed more gas than the project can

supply and is facing serious delays

South Pars Phase 11 (Pars LNG) Capacity totals 10 mtpa

PetroChina signed an HOA with Pars LNG for 3 mtpa over25 years. The LNG supplies could be delivered to the

Dalian or J iangsu terminals. Petronas/Total agreed to lift 6mtpa and wish to make available 3 mtpa to PetroChina,but PTTEP had an MOU for 3 mtpa


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Exporter

ContractVolume

Start-UpDate 2006 2007 2010 2015 2020

NWS 3.3 2006 0.7 2.0 3.7 3.7 3.7

Tangguh 2.6 2009 - - 1.5 2.6 2.6

MLNG 3.0 2010 - - 1.0 3.0 3.0

Total 8.9 0.7 2.0 6.2 9.3 9.3

0.7 2.0 6.2 15.3 32.6

- - - 6.0 23.3

FACTS Base-Case LNG Demand

Forecast

China Uncommitted Demand

China's Existing LNG Contracts (mtpa)


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Is China Ready for High Priced Gas Imports?

Evolution of Chinese Contractual Prices (DES)

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

10 15 20 25 30 35 40 45 50 55 60Crude Oil ($/bbl)

LN

G(

$/MMBtu)

NWS to Guangdong Tangguh to Fujian Renegotiated MLNG to Shanghai

Oct 2002

Sept 2006

Ju ly 2006


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Is China Ready for High Priced Gas Imports? (contd)

What are the implications for PetroChinas two deals withRoyal Dutch/Shell for LNG supply from Gorgon LNG and with

Woodside Petroleum supply from the proposed Browse Basingas reserves in early September 2007?

Is China ready for high priced gas imports?

The answer is maybe, but there is a cap!

PetroChinas deals are based on resources poolingandprice poolingstrategies, which expensive LNG imports aremixed with cheaper pipeline gas from domestic fields

CNOOC can use the same strategy to leverage against itslow-priced Guangdong and Fujian LNG, but only for short-term trade and spot cargos


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Is China Ready for High Priced Gas Imports? (contd)

As such beyond the pooling,there is a limitation to how farChina can go to accommodate higher prices of imported LNG

After all, powerplants in China cannot afford prices ofmore than US$4/MMBtu

However, China has been accepting higher prices gradually

US$3.2/MMBtu for Guangdong LNG

US$3.5/MMBtu for Fujian LNG US$5.9/MMBtu for Shanghai LNG

And now US$10/MMBtu for PetroChina deals

The mindset has changed. After all, the NDRC approved theShanghai LNG prices and PetroChina deals

However, the US$10/MMBtu cannot be sustained for mostChina deals


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Concluding Remarks for China

China will rely on three sources to meet its future gasdemand: domestic resources, imported LNG, and

imported pipeline gasThe biggest challenges facing the Chinese natural gas

markets and the sector as a whole lie in four areas:

prices, market development, distribution networks, andforeign investment in China

For gas imports, with the Shanghai LNG deal andPetroChinas two HOAs, there is a signal that China is

moving towards a higher gas price environment.However, China still cannot afford prices that are toohigh on a permanent basis!


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