Flexibility, Liquidity & Price Formation;
Ann Collins / Andrew Walker / Jenny Solomon
Flexibility, Liquidity & Price Formation; A brief history of, and outlook for, LNG from a trade-structure perspective Gastech, Singapore, Oct 2015 Legal notice
The following presentation contains forward-looking statements concerning BG Group plc’s strategy, operations, financial performance or condition, outlook, growth opportunities or circumstances in the countries, sectors or markets in which BG Group plc operates or the recommended cash and share offer by Royal Dutch Shell plc for BG Group plc announced on 8 April 2015. By their nature, forward-looking statements involve uncertainty because they depend on future circumstances, and relate to events, not all of which can be controlled or predicted. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. Actual results could differ materially from the guidance given in this presentation for a number of reasons. For a detailed analysis of the factors that may affect our business, financial performance or results of operations, we urge you to look at the “Principal risks and uncertainties” included in the BG Group plc Annual Report & Accounts 2014. Nothing in this presentation should be construed as a profit forecast and no part of this presentation constitutes, or shall be taken to constitute, an invitation or inducement to invest in BG Group plc or any other entity, and must not be relied upon in any way in connection with any investment decision. BG Group plc undertakes no obligation to update any forward-looking statements.
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2 Structural evolution of the LNG industry LNG industry evolution 1964 - 1985: Early days LNG trade by contract length • Few buyers / sellers 250 (1985 - present) • Bilateral, tramline trades • Secondary price formation 200 29% (ref. to crude oil & oil products) Spot and short- term trade* 1985 - 2000: Slow evolution 150 • ‘Wedge’ (ramp-up) volumes spare mtpa • Flexible, new high-growth buyers: 100 71% Spain & S. Korea Mid & long-term 2000 - Present : Growing flexibility 50 contracts • ‘Tyranny of distance’ broken • US / EU hub markets ‘wired-in’ 0 • Asia demand shocks 1985 1990 1995 2000 2005 2010 • Rise of the portfolio players • ‘Non-flexible’ players also start to evolve Data source: Poten & Partners (2000), GIIGNL (2015) *Contact duration of 4 years or less (GIIGNL) 3 Structural evolution of the LNG industry US + Canada LNG imports (2002 to present)
Bcfd ‘Chuetsu’ ‘Fukushima’ July 2007 April 2011 Lake Charles 3 Others Realization of extent of shale gas
2 Lake Charles - USA
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0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: US Department of Energy (May 2015), Waterborne (Sep 2015), Canada National Energy Board (May 2012) Lake Charles the ‘swing’ terminal 4 Structural evolution of the LNG industry LNG today: increasingly flexible …. Assumptions mtpa An assessment of flexible volumes • Qatar’s unallocated volumes plus flexible volumes Flexible - US 400 backstopped against Europe Flexible - non US Flexible volumes that can respond to • US volumes considered Qatar market signals 300 flexible unless known to be Fixed locked into a particular buyer / market 200 Inc. renewals Inc. • Flexible non-US includes renewals 100 equity volumes, portfolio volumes from non-US sources, and unallocated 0 volumes 2000 2005 2010 2015 2020 2025 • New non-US supplies Flexible volumes (% of total) assumed to be 20% flexible without Qatar 1% 5% 12% 13% 21% 25% and 80% non-flexible with Qatar 1% 6% 14% 25% 29% 32% inc. renewals 1% 6% 14% 25% 35% 42% • All renewals become flexible shown as a sensitivity Source: BG Group data (2015) 5 Structural evolution of the LNG industry LNG today: … and diversified
Supply Markets
Exports / sellers Supply concentration Importers / buyers Purchase concentration by country* by country* 80 1.0 140 Number of; Number of; 1.0 0.9 0.9 Exporting HHI 120 Importing HHI countries 0.8 Herfindahl-Hirschman countries 0.8 Herfindahl-Hirschman 60 Exporting Index Index 0.7 100 Importing 0.7 terminals terminals Sellers 0.6 0.6 80 Buyers 40 0.5 0.5 60 0.4 Concentration 0.4 Concentration 0.3 Highly 40 0.3 Highly 20 0.2 Moderately 0.2 Moderately 20 0.1 0.1 Unconcentrated Unconcentrated 0 0.0 0 0.0 1965 1980 1995 2010 1965 1980 1995 2010 1965 1980 1995 2010 1965 1980 1995 2010
BG Group interpretation of Wood MacKenzie and IHS data (2015) *each country considered a single supplier / buyer. Market categories for HHI: US Department of Justice 6 Structural evolution of the LNG industry But how liquid is the LNG trade?
80 2014 volumes • Hard to quantify - limited data
• GIIGNL estimate that in 2014; 60 – 70 mt sold on a 4 years-or-less basis
source: GIIGNL (2015) 40 mtpa • BG Group estimate that in 2014;
20 – ~40 mtpa was traded on a 1 year-or-less basis – ~10mtpa was traded in the ‘prompt’ period 0 4 years or 1 year or 'Prompt' less less
Source: 4 years or less: GIIGNL (2015), others: BG estimate based on available market data and market conversations 7 Structural evolution of the LNG industry US supply; ‘changing the game’
• Supply chain is fragmenting in the US • Transparent pricing regime • Growing potential for Gulf of Mexico liquidity • But HH-indexed supply will still require intermediation for some buyers • Most project developers will still Sabine Pass export terminal visualization need to secure financing Source: Cheniere analyst presentation (April 2014)
8 Structural evolution of the LNG industry Demand-side trends also driving change Market trends • Buyers dealing with greater market Consolidation Fragmentation uncertainty mtpa 45 Buyers JV & New markets & new • LNG market place is fragmenting – 40 co-ordinating buyers emerging more buyers – but smaller volumes 35 contracted volumes 2018 30 • Role of LNG is changing – markets New 25 buyers increasingly have other choices since late- 20 2013 • Increasing buyer focus on cost and 15 flexibility – LNG will have to become 10 New markets ‘14/’15 - more competitive & responsive 5 import estimate 2015 0 • Portfolio players advantaged in a JERA fragmenting and uncertain market Egypt Chubu Jordan TEPCO Pakistan place Lithuania Source: BG Group (2015) 9
Structural evolution of the LNG industry Will LNG become a global commodity?
Drivers Inhibitors
Increase in liquidity Global market place - no overarching policy-maker Increase in number of market participants Limited buyer-seller alignment
Fragmentation of the supply chain Existing long-term contracts will take time to play through LNG & gas hub initiatives in Asia Financing currently secured through long-term contracts
Hub-price index credibility & price-level track-record will take time to establish
Lack of standardised trading lot and location consensus 10 Conclusions • LNG has been evolving since 1964 – Bilateral, tramline deals as industry ‘found its feet’ – Era of growing flexibility 1985 onwards – starting slowly, building momentum after 2000 – Today: increasingly flexible and diversified – but limited liquidity
• Future evolution will be determined by – Increasing liquidity - driven by US volumes – Buyer requirements - driven by increasing demand uncertainty and competing fuel options – Constraints – lender requirements for financing of new capacity
• Continued evolution towards a more ‘efficient’ global market-place is clear – Significant ‘drivers’ and ‘inhibitors’ make it unclear how fast evolution will be – A rapid tilt to ‘commoditisation’ seems unlikely in the near-term
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