Interconnecting global natural gas markets

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Interconnecting global natural gas markets
Classification Internal
Status Draft

• Ian Lawrie - Manager Marketing Infrastructure
• Statoil Natural Gas LLC
• SGA Centennial - Atlanta April 2008

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Disclaimer
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• This presentation contains certain
  forward-looking statements that involve risks and
  uncertainties. All statements other than
  statements of historical facts, including, among
  others, statements such as those regarding
  StatoilHydros oil and gas production forecasts,
  estimates, targets, costs and margins oil- and
  gas reserves start-up dates for projects and
  activities performance and growth targets
  product prices closing of future transactions
  expected investment level in the business
  segments and expected exploration and
  development activities or expenditures, are
  forward-looking statements. Forward-looking
  statements are sometimes, but not always,
  identified by such phrases as will, expects,
  is expected to, should, may, is likely
  to, intends and believes. These
  forward-looking statements reflect current views
  with respect to future events and are, by their
  nature, subject to significant risks and
  uncertainties because they relate to events and
  depend on circumstances that will occur in the
  future. There are a number of factors that could
  cause actual results and developments to differ
  materially from those expressed or implied by
  these forward-looking statements, including
  levels of industry product supply, demand and
  pricing currency exchange rates political
  stability and economic growth in relevant areas
  of the world development and use of new
  technology geological or technical difficulties
  the actions of competitors the actions of field
  partners the actions of governments relevant
  governmental approvals industrial actions by
  workers prolonged adverse weather conditions
  natural disasters and other changes to business
  conditions. Additional information, including
  information on factors which may affect
  StatoilHydros business, is contained in
  StatoilHydros Annual Report on Form 20-F filed
  with the US Securities and Exchange Commission.

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Ramblings of a puzzled mind
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• What did we know
• What do we know today
• What do we need to know for the future

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Why are we all in this room?
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World Energy Demand 2005 11.400 Mtoe
World Energy Demand 2030 17.700 Mtoe

• Primary gas consumption increases in all regions
  from 2,9 tcm in 2005 to 4,8 tcm in 2030
  
• In aggregate, annual world gas production expands
  by almost 1,9 tcm between 2005 and 2030
  
• Cumulative investments in gas-supply
  infrastructure amounts to 3,9 trillion over the
  period 2005-2030

Source IEA WEO 2007
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Why am I in this room?
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Barents seaGrowth/frontier area
Harstad
Norwegian seaGrowth area
70 of Norwaysoil production
90 of Norways gas production
36 oil and gas fields
North SeaMature area
Stjørdal
Bergen
Core areas
Stavanger
Offices
Fields operated by StatoilHydro
Numbers are rounded
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A major gas player in Europe
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Estimated market position in 20071
Markets forth-fifths of all Norwegian gas sold
in Europe
20-25 per cent Germany, France
Belgium, Ireland
Markets own gas and the Norwegian States gas
10-20 per cent Austria, Czech Rep
Netherlands, UK

Meets around 14 of current1,2 consumption in EU
5-10 per cent Spain
Meets around 80 of current1,2 consumption of 0,9
BCM in Norway
1 Based on current contracts/short term sales
(2007) StatoilHydro including SDFI
2 Status 2006
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The macro outlook for European gas
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• Continued growth expected, in particular
• Mediterranean Europe
• Gas for power generation
• Uncertainties
• Economic growth
• Price on competing fuels
• Energy policy
• Global competition for gas resources

Source IEA WEO 2007
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The grand tour begins
Classification Internal
Status Draft
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Germany
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UK

• Currently only supplied with pipeline gas from
  Eastern Europe (Russia) and Norway
  
• Have plans for LNG import terminals, but not
  likely to happen soon

Mainly supplied with domestic production, however
this is on decline Additional supply from mainlan
d Europe through the inter-connector, Norway and
through LNG The largest traded market in Europe
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France
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Spain

• Supplied with both LNG and piped gas
• Gas pipelines from Norway and mainland Europe
• Wide portfolio of supply contracts

Supplied both with LNG and pipeline gas from
North Africa and France physically
Contracted supplies from sources further away
such as Norway Historically limits on Algerian su
pply
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Italy
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Eastern Europe
Mainly supplied from Russia, but with some
contracted volumes from Western Europe, such as
Norway as a result of security of supply issues
Target for Caspian gas Ongoing disputes over pric
ing

• Currently supplied with both LNG as well as
  pipeline gas from Europe and Northern Africa
  
• Target for Caspian gas
• More LNG import terminals under development

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Suppliers Russia, Norway and Algeria
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• Russia is the biggest supplier to Europe with
  Norway and StatoilHydro on second place
  
• Algeria supplies both through pipelines as well
  as LNG
  
• Disputes between Russia and Ukraine on
  compensation for consumed gas has disrupted
  volumes destined for the rest of Europe at
  several occasions, raising the a red flag on
  security of supply issues
• Russia is entitled to get paid for their gas and
  therefore to withhold gas supplies to Ukraine,
  however Ukraine seems to continue consuming,
  leaving the pipes exiting the country empty

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The EU energy policyThe Dilemma of Multiple
Objectives
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Security of supply

• Facilitate new imports
• Competition vs. mergers
• Unbundling vs. investments

• Natural gas vs. coal
• Nuclear
• National Allocation Plans for CO2

Environment
Competitive prices
Renewables vs. fossil fuels Emission Trading Sy
stem vs. power prices
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Does LNG glue global gas?
Classification Internal
Status Draft
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Towards one integrated world LNG market
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Far East LNG formula
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• Changes in formula shapes reflects evolving view
  of future oil prices and Atlantic Basin
  competition for supply.
  
• From ceiling S-curve shape to straight line.

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Traditional European oil-indexed gas prices
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• Majority of European gas still sold on long term
  take-or-pay contracts
  
• Gas contract price
• Competitiveness with alternative fuels
• Netback at border or other delivery point
• Price formula indexed to predominantly prices for
  gas oil and fuel oil
  
• UK first fully functioning spot market in Europe
• Seasonality
• Tracking prices for oil-indexed gas
• Signalling supply concerns in near term

Pt P0 55GO GO 82 (GOt - GO0)
45FO HFO 90 (HFOt - HFO0)
Source German statistical office, Platts
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Spot LNG respond to market prices
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USD/MMBtu
Spot cargoes to Japan in competition with Spain,
US and UK

• Japan, South Korea, Spain, UK and the United
  States competes for spot/diverted LNG cargoes
  
• Japanese/Korean markets willing to pay more than
  index to secure volumes
  
• High spot prices no guarantee for securing spot
  or diverted cargoes

US imports at full capacity UK at minimum
Source IEA, P. Heren
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Globalisation/seasonality of LNG supply to the US
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• A strong summer market due to cooling load will
  keep cargoes floating to the US market in the
  summer
  
• Winter cargoes will go to the highest priced
  market
  
• US due to strong overall market
• Europe - due to more seasonality of demand
• Japan - due to seasonality of market and current
  nuclear outages
  
• Storage becomes important to the US market to
  keep whole in the winter
  
• The possible consequences is that the US gas
  market will inherit some of the seasonality from
  other markets

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Increasing distance from source to market
Estimate of remaining reserves of natural gas
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of total world reserves 1975 2006 N. Am
erica 17 4 L. America 2 4 Europ
e 6 4 Africa 7 8 Middle East
26 40 Russia/FSU 38 32 Asia Pacif
ic 4 8
World proven gas reserves 64 TCM (
1975)
182 TCM (2006)


Numbers are rounded
Source BP Statistical Review 2007
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Growing import needs in major markets Estimate
of distribution of consumption and remaining
reserves of natural gas 2006
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32
22
18
4
27
40
4
10
8
3
15
8
5
4
Per cent of the worlds gas consumption
Per cent of the worlds proven gas reserves
Numbers are rounded
Source BP Statistical Review 2007
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StatoilHydros LNG positioning
Classification Internal
Status Draft
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Lifting Snohvit a GFU project
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• Before investing at Snohvit Norway needed gas
  sales contracts
  
• These were found in Spain and the US (El Paso)
• Traditional LNG value chain concept
• Liquefaction, shipping provided by supplier
• Regas provided by the purchaser
• End of the GFU 2001
• End of the El Paso deal late 2002
• Statoil enters the LNG regas capacity at Cove
  Point 2003
  
• Statoil now involved in all parts of the value
  chain

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Creating an arbitrage position
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• Flexibility in the deliveries from Snohvit allows
  gas to be delivered elsewhere
  
• Cove Point Expansion capacity provides a position
  to take further advantage of arbitrage
  
• Barriers for arbitrage
• Shipping availability
• Shipping size
• Gas Quality
• Operational time-tables
• Inflexible supply contracts
• Challenge of marketing vs. spot trading

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Building new international value chains
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I leave you with these thoughts
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• Today LNG does not connect the markets on a daily
  basis
  
• Tomorrow LNG will connect markets stronger
• But not all the time
• LNG as the marginal source of supply in tight
  periods, but not all the time