Stephen Thompson - Poten & Partners - North American LNG – Impact for Australian projects

MONTH 2008

© POTEN & PARTNERS 2008

CONFIDENTIAL

Impact of North American LNG on

Australian Projects

AUGUST 2014

Stephen Thompson

Manager, LNG & Gas, Asia Pacific

MONTH 2009


CONFIDENTIAL

Page 2 © POTEN & PARTNERS

AUGUST 2014

Three key impacts of North American LNG

• New business and pricing models are forcing Australia to clarify its value proposition

• Price and volume focal points are causing Australian ventures to wrestle with regret

minimization

• Competition is imposing greater Australian capital discipline

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New business and pricing models

Australia must clarify its value proposition

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Upstream: from lottery to factory

• Industry adopted new

business processes for

large numbers of wells

• Factory-like models used

to reduce time and cost in

multi-year programs • Well design was

standardized to avoid limit

engineering hours and

streamline supplier interface

• Pace set by external

constraint such as rig

availability and infrastructure

for gathering

• Companies achieved cost

reductions of up to 40%

and accelerated time to

production by 30%

Conventional gas life cycle

The unconventional gas “factory”

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Exploration risk has been largely eliminated

• The old calculus of exploration risk….

p(Source x Path x Reservoir x Trap x Timing) = p(Success)

90% x 90% x 90% x 90% x 90% = 59%

• …no longer applies

p(Source x Path x Reservoir x Trap x Timing) = p(Success)

Very large,

known

resource

beds

Risk eliminated: produce directly

from source rock

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UG development payback is necessarily short

• Shale gas production declines exponentially

• Short payback effectively de-risks drilling

• Near-term forecasts inherently more certain than long-term

• Financial hedging products readily available to cover much of production period

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North American liquefaction has continued industry

trend toward unbundling of value chain

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A quarter of Asian SPAs signed in the last three years

are hub-linked

• Oil-link is forecast to remain the

dominant mechanism to price new long-

term contracts in Asia, amid increasing

presence of HH- linked volumes in Asian

markets

• Variety of pricing alternatives and supply

options with new and very different

business models is good for the industry

• Need to look hard at risk/reward profile of

alternative offers—no “$100 bills lying on

the sidewalk”

Long-term contracts into Asia

signed 2010-13 (Total 66 contracts)

Oil Linked 74%

HH, NBP,

JKM &

Hybrid

26%

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The LNG menu

• For the traditionalist • Oil-linked supply from a venture led by an

established sponsor

• For the adventurous • Henry-Hub indexed supply or tolling service

from a new player

• For those who can’t make up their

minds • Hybrid contracts from an aggregator

.

.

.

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Price and volume focal points

Australia wrestles with regret minimization

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• Focal point: A solution that works because it is obvious, not because it is right

• Game 1: If you and the person next to you choose the same square you win a prize.

Which square do you choose, and why?

• Corollary #1: he who controls the focal points (sometimes) drives the negotiations

Focal points in negotiations

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• Game 2: If you and the person next to you choose the same price you win a prize. Which

price do you choose, and why?

The pricing focal point

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• Game 3: I will show two slides taken from the US Department of Energy website. If you

and the person next to you choose the same number you win a prize. Which number do

you choose, and why?

• Corollary #2: the more politicized a negotiation is, the more focal points count

The volume focal point

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• In schematic decision tree, optimal

decision is “buy” Australian LNG • Five “wins” vs. two “looses”

• Regret-minimizing decision is “do

nothing” • Zero possibility of a loss

Regret minimization

HIGHWIN

Oil Price

NOLOW

WIN

HH

availability

HIGH YES

HIGHTIE

Oil Price

HH PriceLOW

WIN

HIGHWIN

LOW Oil Price

NOLOW

WIN

BUYHH

availability

YESHIGH

LOOSE

Oil Price

LOWLOOSE

Purchase

Decision DO NOTHING$0

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Competition

Australia needs greater capital discipline

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0

50

100

150

200

250

300

350

400

450

500

2000 2005 2010 2015 2020 2025 2030

MMt/y

East Africa

North America

Australia

West Africa

Qatar

North Africa

Malaysia/Indonesia

Others

Total Demand

North America and East Africa compete for markets

• Australia and Qatar will provide close to 44% of the global supply by 2020 • Limited growth from both countries post 2020

• East Africa and North America near 116 MMt/y by 2030, gaining 26% of global market

Two markets account for almost all new supply from 2020-30

Projection Historical

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• Over the course of the new millennium,

Australian costs per unit of capacity have

increased by 300%-500%

• Investors aren’t buying it

Capital discipline was short-changed in rush to FID

LNG-weighted equity index vs S&P 500

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NATURAL GAS & LNG CONSULTING CONTACTS:

AMERICAS (NEW YORK)

Contact: Jim Briggs

Email: [email protected]

Tel: +1 212 230 2000

EUROPE, M. EAST, AFRICA

Contact: Graham Hartnell


Tel: +44 20 3747 4820

ASIA PACIFIC

Contact: Stephen Thompson


Tel: +61 8 6468 7942

AMERICAS (HOUSTON)

Contact: Daryl Houghton


Tel: +1 917 2225 7636

Business

Stephen Thompson - Poten & Partners - North American LNG – Impact for Australian projects