LNG Update

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LNG Update

• Red River Conference
• October 3, 2007

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Agenda

• Featherwood Capital /Natural Gas and Power
  Ventures (NGPV)
• LNG Basics
• Traditional Value Chain
• Recent Changes
• Addition of off-shore option
• Current Issues
• Supply Issues
• Netback Comparison
• Atlantic Basin Supply
• North American re-gasification Capacity
• Construction Costs
• Permitting Issues
• Technology Changes
• Emerging Issues
• Evolution of the spot market
• Survival of the netback
• Where does all the gas go?

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Featherwood Capital/Natural Gas and Power
Ventures (NGPV)
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Experience

• Natural Gas and Power Ventures has over 60 years
  of experience in the financial and commercial
  energy markets
• The principals have over 25 years major tier
  investment banking experience
• The principals have been involved in numerous LNG
  projects from upstream producers to downstream
  end users
• Currently advising major upstream producers and
  downstream receiving facilities
• Notable projects we have been involved with
  include the following
• Port Dolphin USCG Deepwater Port Project
  Management
• Access Northeast Energy (Bear Head) LNG receiving
  facilities
• Snohvit LNG Liquefaction project SPA Agreements
• Elba Island reactivation and LNG deliveries and
  Agreements
• Negotiated El Paso sale and purchase agreements
• Lake Charles LNG deliveries
• Cove Point, negotiations (reactivation and supply
  contract)
• Consultant to National Oil Companies for upstream
  and downstream LNG
• Multiple Global Energy Bridge tm projects

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LNG Basics
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Traditional Value Chain
Liquefaction
Shipping
Regassification
Delivery
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LNG vs. Traditional Value Chain

• LNG Value chain Mimics traditional gas value
  chain
• LNG functions essentially as a Pipeline in a Box

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Pipeline in a BOX
Transport and Regas Vessel
Liquefaction
APL Buoy System
Gas Purchaser
Pipeline to end user
Market Co. purchases 20-year LNG supply contract
at HH minus price
Market Co. charters vessels for 20-year charter
at set ROA
Market Co. sells 20-year natural gas contract at
HH plus price
Market Co. leases buoy and pipeline from US
Asset Co. for 20-years at set ROE
HH minus Fixed Return Fixed
Return HH plus
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Contractual Schematic (Operational)
Time Charter
Holding Co.


LNG SPA
Market Co.
Gas Purchasers





Contingent Credit
Legend Natural Gas Payments
Contracts Normal Flow Contingent Flow
Terminal Co.

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Upstream and Traditional Liquefaction

• Targets stranded gas reserves
• Recoverable reserves sufficient for 20-year
  delivery obligations
• Reserves near or with access to coastal
  facilities or capable of supporting construction
  of additional sites
• Capital intensive
• Requires long-term off-take agreements with
  significant credit support or financial backing
  to support debt structure
• Multiple product streams from liquefaction
  facility
• Condensate
• LPG, GTL
• LNG

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Traditional Shipping

• Size Matters
• Larger size vessels increase the efficiency and
  economics for LNG valuation
• Two common types of LNG tankers

Membrane
MOSS
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Traditional Re-Gasification and Pipelines

• North American regas facilities
• Originally located near regional demand centers
• Provided an alternative to standard pipeline
  delivered gas
• On-shore facilities have benefits
• Storage
• Scalability
• The main limitations are
• Costs
• Storage capacity
• Berthing capabilities
• Permitting issues

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(No Transcript)
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Recent TrendsUpstream and Liquefaction

• New land based liquefaction standard of 1Bcf/day
  train
• Higher LPG extraction rates and focus on
  delivering LNG to meet target market
  specifications
• Substantial variations in LNG quality
  specifications
• Specific LNG standards have been specified for
  FGT
• Off-shore liquefaction is being actively
  investigated by a number of parties

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Recent ChangesState of the Art Vessels

• Vessels have now been ordered that do not rely on
  steam for propulsion
• Diesel or Diesel electric can cut fuel costs
  significantly
• Larger vessels up to 265,000 m3 can be expected
  to reduce total transport costs
• A number of existing terminals are being modified
  to accept larger vessels
• On-board re-liquefaction helps to stabilize gas
  composition
• Ongoing development of ship-to-ship transfer
  technology

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Recent ChangesImplications of New Vessels

• Ability to accommodate large vessels can provide
  terminal with a competitive advantage
• A 250,000 class vessel would have a substantial
  advantage over a 155,000 class vessel over long
  distances
• Producers will definitely quantify the advantage
  in the calculated netbacks
• Producers rely on netbacks and shipping is often
  the single largest cost element in the chain
• New larger vessels with advanced propulsion will
  have a clear advantage
• Latest generation of re-gasification vessels
  utilize intermediate fluid heat exchangers
  boosting daily send-out capacity to 1.2 Bcf/day
  with minimal environmental impact
• Regulators limit or prohibit use of open loop
  systems in many areas due to environmental impacts

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Recent Changes Re-gasification and Pipelines

• Air-to-air heat exchangers are being employed at
  new (warm weather) regas sites
• Provides a efficiency gain of approximately 1 of
  throughput over submerged combustion vaporizers
• New Gulf Coast terminals have substantially
  greater throughput capacity than traditional
  facilities
• APL buoy system is becoming the standard mooring
  system for off-shore regas facilities
• High pressure (100-150 bar) pipelines are
  standard for connecting receiving facilities to
  down-stream points

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Recent Changes Re-gasification and Pipelines

• Offshore terminals are gaining support
• Reduced NIMBY issues
• Minimal onshore footprint
• Ability to locate in remote secure areas
• Requires each vessel or FSRU to have vaporization
  skids
• FSRU concept requires ship to ship transfers
• Only proven in minimal sea-state conditions
• Wave characteristics are critical
• Treatment of gas (except odorant) for delivery
  can be problematic

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Current Issues
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Supply Issues- The Sky is Falling!!

• Supply Shortage- NOT REALLY
• Netback is KING!!
• Suppliers target higher netback for current and
  future production
• LNG supplies will fill from highest to lowest
  netback
• Facilities unable to offer competitive netback
  pricing will typically lack sufficient margin to
  attract supply

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Netback Comparison
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Netback Comparison of Existing Terminals
Site
Basis
Fuel Loss
Shipping
Regas
Pipeline
Netback
Assumes 5.00 Henry Hub Price, shipping based on
Norway transaction
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Netback Comparison to Proposed Terminals
Site
Basis
Fuel Loss
Shipping
Regas
Pipeline
Netback
Assumes 5.00 Henry Hub Price, shipping based on
Norway transaction
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Netback Values FOB Algeria
Boston NB - 4.32
Cove Point NB - 4.17
TETCO
TRANS
Lake Charles NB - 3.92
Elba Island NB - 3.84
Existing Under Construction Proposed
Production Areas
Sabine Projects NB -3.52
Port Dolphin NB - 4.21
Freeport
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Atlantic Basin LNG Production
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Atlantic Basin Supply Outlook

• Current commitment for 9 Bcf per day of LNG
  production capacity targeting
• North American
• Europe
• Suppliers Qatar, Nigeria, Norway, EG, Algeria,
  Egypt, Yemen
• Proposed projects that could add up to an
  additional 10 Bcf per day into the same market
  between 2012-2014
• Russia, Nigeria, Angola, Algeria, Trinidad
  Egypt
• Plus potential projects in Libya, Iran, Venezuela
  Mauritania

Supply Commitment terms 2007 thru 2012
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Current and Potential LNG Supply
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Atlantic Basin LNG Producers

• Five major producers are in operation in the
  Atlantic Basin - Nigeria, Algeria, TT, Norway
  and Egypt
• Three new producers adding to the supply balance
  by end 2007 Qatar, Egypt, and EG
• Egypt will likely be a 4 train producer by 2011
• Qatar has announced five 1-Bcf trains targeting
  the Atlantic Basin
• EG has one train going into service and is
  considering 2 more by 2012
• Angola, Libya (new train) and potentially Russia
  are supply options between 2011 and 2013

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Atlantic Basin LNG Producers Cont.

• Algeria
• Volumes available from expiring contracts
• Dominant supplier to Spain
• Pipeline transport is most efficient route to
  Spain
• New pipeline to be built for direct supply of
  volumes
• Large volume LNG contracts expire in 2006-2012
  timeframe
• New train under construction (650/day capacity)
• Additional train(s) contemplated

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New Projects in the Atlantic Basin

• Equatorial Guinea Marathon Oil sponsored
  project
• All train 1 volumes sold to BG (Lake Charles)
• Incremental investment in liquefaction and
  shipping
• Large vessels could be used
• Two additional trains under development

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New Projects in the Atlantic Basin

• Snøhvit LNG
• All train 1 volumes committed to Statoil and
  Iberdrola
• Online in September 2007
• Pre-designed as a multi-train project
• Statoil is the sole US buyer
• Snøhvit opens the Barents Sea as an emerging
  supply area
• Russia is considering a 6-train project

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Additional Atlantic Volumes

• TT Four trains in service
• Adds substantial volumes to Spain and US buyers
• Supply to Suez at Everett
• Supply to BP at Cove Point
• Supply to BG at Elba Island and Lake Charles
• Train 5 is under discussion
• Dispute with Venezuela settled which provides
  additional surety of reserves
• Venezuela reserves, which are substantial, have
  not been tapped

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North American Re-Gasification Capacity
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Existing Terminals

• Everett, MA- Owned and operated by Suez. High
  demand in winter, summer has had excess volumes
• Cove Point, MD- Current capacity fully
  subscribed, expansion capacity controlled by
  Statoil
• Elba Island, GA- Cypress gives access to Northern
  Florida, but at substantial cost
• Lake Charles, LA- BG controlled site that
  effectively gives Henry Hub link

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Current Capital Costs
Upstream and Liquefaction
Re-Gasification and Pipeline
Delivery Point
Shipping
Traditional 200,000M3 to 265,000M3
Vessels 275MM-325MM
Traditional Terminal 750MM-1.25Bn plus Pipeline
Site Specific
Off-shore Buoy System 50MM per Buoy plus
Pipeline
Regas 200,000M3 to 265,000M3 Vessels Additional
30MM per Vessel
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Traditional Value Chain Technological/Industry
Advances
Upstream and Liquefaction
Re-Gasification and Pipeline
Delivery Point
Shipping
N2 injection helps mitigate off-spec
deliveries North American terminals are requiring
strict gas delivery specifications
Traditional Vessels utilizing diesel/diesel
electric engines On-board liquefaction maintains
gas quality specifications
Traditional Liquefaction standardized 1 Bcf
train LPG Extraction for target gas composition
l
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Off-Shore Value Chain Technological/Industry
Advances
Upstream and Liquefaction
Re-Gasification and Pipeline
Delivery Point
Shipping
Vessels utilizing diesel electric
engines On-board liquefaction maintains gas
quality specifications Vessels utilizing
intermediate fluid heat transfer
Key growth sector for industry, several options
are currently under development
APL buoy system has become the standard Gas
composition is a key issue
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Off-Shore Technology Utilization
LNG Ships with Ship Board Re-gas Capability
Buoy System
Technology proven through many years of nearly
uninterrupted operation in the extremely harsh
conditions of the North Sea off the Coast of
Norway
Currently being utilized and chosen for all
off-shore re-gasification projects.
Buoy moors vessel and transfers gas through a
specialized compartment in vessel foredeck
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Emerging Issues
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Evolution of the Spot Market

• LNG spot market is fundamentally different from
  the crude market
• Production, transport and regas costs from world
  class LNG producers can account for a third of
  the total product value
• In comparison, production and transportation for
  a world class crude producer accounts for less
  than 10 of product value
• Result no speculative LNG liquefaction
  facilities have been built to date
• LNG value chain existing capital structure
  requires long-term contractual obligations to
  meet financing obligations
• Majority of LNG spot transactions are
  diversions of existing contracts or sale of
  over-run capacity
• Spot market will develop as additional trains
  begin production

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Survival of the Netback

• Build it and they will come?
• Sunk costs vs. fixed costs
• Does Basis matter?
• Basis is the prize
• Greater basis to Henry Hub allows stronger
  negotiations position with suppliers
• Niche market vs. mass market
• How unlimited is take-away?
• Does money float?

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Where Does All the Gas Go?

• The Gulf Coast loves LNG!
• Is 10 Bcf enough for the Gulf Coast?
• East, West or North, the gas must flow
• Storage anyone?
• Who wins the pipe game?