Middle East Natural Gas OutlookOpportunities and Challenges

7th Doha Natural GasConference & Exhibition

March 9 - 12, 2009

Michael Corke

Purvin & Gertz - Dubai

2

Topics

Gas Utilization Today

Gas Demand Potential

Supply-Side Issues

Gas Valuation and Pricing

Strategies for Success

3

Middle East Primary Energy Supply

Petroleum and natural gas account for 98% of primary energy supply

Natural gas growing at 6.7% CAGR 1997-2007 and gaining market share from oil

6.7% CAGR doubles consumption in 11 years

Natural gas growth will be constrained by supply

0

100

200

300

400

500

600

700

800

1997 2002 2007

Other

Natural Gas

Petroleum

Primary Energy Supply, million toe

Source: International Energy Agency & Purvin & Gertz Analysis

5.1% p.a

4.7% p.a

4

Reflecting supply and infrastructure limits, gas use varies widely through the region

Natural Gas as a % of TPES in the Middle East

32

34

36

38

40

42

44

46

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

(%)

Natural Gas

Natural Gas as a % of TPES in Middle East countries - 2007

0

10

20

30

40

50

60

70

80

90

Mid

dle E

ast

Iraq

Syria

Jord

anKSA

KuwaitIra

n

Oman UAE

Bahrain

Qatar

(%)

Natural Gas

6.7% p.a

Source: International Energy Agency & Purvin & Gertz Analysis

5

Natural gas penetration data show where unsatisfied demand exists

2007 Natural Gas Consumption

Historical Natural Gas Share of TPES

MTOE % of TPES 2002 1997

Iran 91.4 51 47 42

Iraq 2.9 10 6 10

Kuwait 10.1 39 35 46

Qatar 16.2 81 83 82

KSA 52.9 35 34 31

UAE 35.4 72 74 73

Region 237.0 44 40 37

6

Considerable potential exists for energy efficiency gains in the Middle East

Primary Energy per Capita

0

5

10

15

20

25

TOE per Capita

Primary Energy per $'000 GDP

0

0.2

0.4

0.6

0.8

1

1.2

TOE per $'000 GDP

7

Regional natural gas reserves appear sufficient to support demand growth but …

Remaining reserves have increased substantially despite rising production

Total reserves likely to be much higher than proven reserves

Access to reserves may not be straightforward: 20-25% is associated gas Some sour and with high

development costs Some earmarked for export

Some inter-country tensions

Middle Eastern Proven Gas Reserves

0

10

20

30

40

50

60

70

80

90

100

1997 1999 2001 2003 2005 2007

TCM

Iran Qatar Other

Source: BP Statistical Review of World Energy

8

The region is not a single market

Pipeline projects have been slow to develop: E.g. Qatar > Bahrain, Kuwait E.g. Iran > Bahrain, Kuwait, UAE Conflicting and changing price ideas Reserve uncertainty Regional costs often high

Inter-country tensions can frustrate projects Countries compete for inward investment:

Long-term wealth and employment creation Natural gas, ethane availability & pricing key factors

Competition from gas export projects

9

Outlook: natural gas growth to be constrained by efficiency gains and supply constraints

Primary Energy OutlookBusiness as Usual + Efficiency Gains Scenario

0

100

200

300

400

500

600

700

800

900

1000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

MTOE

Other

Natural Gas

Petroleum

Natural gas CAGR 1.8% vs petroleum 2.1% (transport sector driving petroleum demand)

Source: Purvin & Gertz scenario

10

Topics

Gas Utilization Today

Gas Demand Potential

Supply-Side Issues

Gas Valuation and Pricing

Strategies for Success

11

Since 2003 prices for LNG in export markets have increased dramatically

Higher oil prices and oil linkages in Asian LNG pricing formulae have pulled LNG prices higher

Now starting to follow oil prices downwards

S-curve provisions that historically reduced volatility have mostly been removed

Netbacks to the Middle East have followed the same pattern 10

30

50

70

90

110

130

150

2003 2004 2005 2006 2007 2008

0

2

4

6

8

10

12

14

16

18JCC Price

LNG Delivered to Japan

$/barrel $/mmbtu

Source: Purvin & Gertz analysis

12

Traditional Continental European pipeline gas price formulae also follow oil prices

International and inland gasoil / fuel oil prices are used as oil price indices

Time lags cause a counter-seasonal gas price pattern

UK spot prices also tracking oil prices as a result of pipeline links to Continent

US (not shown) the third major potential market

0

20

40

60

80

100

120

140

2003 2004 2005 2006 2007 2008

0

2

4

6

8

10

12

14Dated Brent Price

Average German Pipeline Gas Price

$ / barrel $ / mmbtu

Source: Purvin & Gertz analysis

13

LNG netbacks higher since 2003, but still below AG oil products parity in most periods

Comparative Fuel Values, FOB Arabian Gulf

0

5

10

15

20

25

30

Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct

$/mmbtu

Average LNG Netback to Qatar

Gasoil FOB AG

Fuel Oil FOB AG

2003 2004 2005 2006 2007 2008

Source: Purvin & Gertz analysis

14

Conclusion: where possible new gas should be sold locally rather than exported as LNG

Price advantage for local sales at thermal parity with oil products vs LNG netbacks 2003-2008 $2/mmbtu vs HFO, $7/mmbtu vs GO 2006-2008 $4/mmbtu vs HFO, $10/mmbtu vs GO

This simple price comparison excludes Infrastructure investment and operating costs Technology-related fuel efficiency differences such as gas

CCGT advantage in power generation Potential additional revenue ~ $2 billion/year for the

equivalent of a 7.8 mtpa LNG train basis 2006-2008 prices

Potential sales security benefits Geographical diversification Fundamentally supported oil-based price indexation

15

Other issues for Middle East gas sellers

Linkages between oil and gas prices in mature gas-consuming regions are tenuous, are being questioned

Excessive LNG prices are unsustainable: sales are susceptible to competition: From pipeline and indigenous gas as seen recently in the US In the longer term from coal and nuclear

Oil and gas market price volatility is likely to continue: Impact of too much information and financial speculation Markets don’t send timely signals in capital intensive

industries: this will not change Conservation of gas resources for future generations? Oil-rich regional gas buyers may value petroleum fuels

at their costs of production rather than market value Ethane pricing must remain internationally competitive

16

Coal likely to constrain long-term gas prices

The power sector seen as driving 2/3 of global gas demand growth

Underlying competition between coal producers likely to keep prices low

NIMBY factor and carbon costs can favour gas

Use of indigenous coal in China, India, FSU inevitable

Coal use in Middle East a real option

0

5

10

15

20

25

2003 2005 2007

Low Sulfur Fuel Oil CIF NWE

Average German Pipeline GasPriceEurope Steam Coal Import Price

$ / mmbtu

Source: Purvin & Gertz analysis

17

Middle East natural gas outlook

Supply and demand growth, but slower than historical Higher regional gas prices:

Justified by alternative fuel prices, LNG netbacks Will support development of higher-cost reserves Will support regional gas trade and infrastructure Beneficial impact on energy efficiency:

• Environmentally desirable• Higher prices cost-neutral if balanced by grants

New pipeline, local LNG and ethane recovery projects Increased flexibility to handle associated gas

production and seasonal demand shifts: Underground storage investments Synergy between local and North Atlantic gas demand pattern

Natural Gas resource conservation?

18

About this Presentation

This presentation has been prepared for the benefit of the conference attendee. Any party in possession of this presentation may not rely upon its conclusions without the consent of Purvin & Gertz. Possession of the presentation does not carry with it the right of publication.

Purvin & Gertz conducted this analysis and prepared this presentation utilizing reasonable care and skill in applying methods of analysis consistent with normal industry practice. All results are based on information available at the time of review. Changes in factors upon which the review is based could affect the results. Forecasts are inherently uncertain because of events or combinations of events that cannot reasonably be foreseen including the actions of government, individuals, third parties and competitors. NO IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE SHALL APPLY.

2007 ICIS Middle East Base Oils Conference - Dubai 19

Michael CorkeSenior Vice President

Purvin & Gertz, Inc. Dubai

T. +971 4 4370 388M. +971 50 515 0197F. +971 4 4370 390

mjcorke@purvingertz.com

www.purvingertz.com