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1LNG pricing mechanisms and the impact on LNG bunker fuel price Simon Ellis LNG Analyst, ICIS Rotterdam, 21 October 2013 www.icis.com Presentation summary • Supply/ demand balance • Global LNG price mechanisms LNG market  pricing trends • The shift from oil indexation to hub‐ based pricing European gas  pricing trends • Decline or opportunity? • Influence of origin on pricing Sources of LNG  for Europe • Gas hub or oil indices? • Alternatives to indices Options for LNG  bunker prices 2 www.icis.com Who we are ICIS provides market intelligence services to the global petrochemicals, energy and fertilizer markets. We are part of the Data Services division of Reed Business Information (RBI). RBI is a leading business to business information publisher. The other major data services include Bankers Accuity and Xpert HR. Other key divisions within RBI focus upon marketing solutions and leading magazine brands. RBI is part of Reed Elsevier. Reed Elsevier is one of the World’s largest professional information companies, employing over 35,000 people in 200 locations worldwide, with annual revenues of just over £6 billion in 2011. It is a leading provider of professional information and online workflow solutions in science and medical (Elsevier Science), legal, risk information and analytics (LexisNexis), and business sectors (RBI and Reed Exhibitions, the world’s largest exhibition organiser). www.icis.com ICIS – specialists in energy 3 www.icis.com 1. In high volume, long-term, pipeline and LNG supply contracts into Europe. 2. In short and medium term supply contracts. 3. In floating-price end-user contracts. 4. Infrastructure operators’ capacity sale and auction contracts. 5. In Energy Trading and Risk Management Systems. 6. In OTC derivative contracts. ICIS gas and power prices are leading benchmarks www.icis.com Trends in the global LNG spot market 4 www.icis.com Asian spot LNG prices have diverged from hubs Source: ICIS, NYMEX 0.00 5.00 10.00 15.00 20.00 25.00 04/04/2008 06/03/2009 05/02/2010 17/12/2010 18/11/2011 28/09/2012 01/08/2013 F r o n t   m o n t h   a s s e s s m e n t   $ / M M B t u East Asian spot LNG prices, NBP and Henry Hub 2008‐2013 ICIS DES Tokyo/ East Asia Index (EAX) ICIS NBP NYMEX Henry Hub www.icis.com In 2011 Japan faced unprecedented demand shock Source: FEPC Japan, customs  agencies 0 10,000,000 20,000,000 30,000,000 40,000,000 50,000,000 60,000,000 70,000,000 80,000,000 90,000,000 H1 2011 H2 2011 H1 2012 H2 2012 H1 2013 t o n n e s Japan's electricity utilities as share of total East Asian LNG  procurement H1 2011‐ H1 2013 Taiwan China South Korea Other Japan Japanese electricity utility 5 www.icis.com Asia dominates short-term since Fukushima Share of global short term (>5 year) LNG trade H1 2012  31.6 million tonnes (gross) H1 2013 East Asia Other Asia South America North America Europe 30.2 million tonnes (gross) www.icis.com Asian spot prices influenced by several factors • Seasonal peaks in winter (S.Korea,  N. China, Japan) and summer  (S.China, Taiwan, Japan) • Crude oil price still a ceiling for LNG Seasonality  and substitute  fuels Seasonality  and substitute  fuels • LNG still a physical market with  plants exposed to political and  operational risks  Production  issues Production  issues • Other markets, notably South  America, have shown ability to  compete at the margin Premium  demand  outside Asia  Premium  demand  outside Asia  6 www.icis.com Crude price a ceiling for Asian spot LNG Source: ICIS 8.00 10.00 12.00 14.00 16.00 18.00 20.00 22.00 04 Jan 11 04 Jul 11 04 Jan 12 04 Jul 12 04 Jan 13 04 Jul 13 $ / M M B t u East Asian spot prices Jan 2011‐ Sep 2013 ICIS East Asia Index (EAX) front month ICIS Brent front month ICIS NBP front month Japan Asia‐Pacific contract average www.icis.com Oil index still mainstay of Asian longer term contracts 5.00 10.00 15.00 20.00 25.00 50.00 70.00 90.00 110.00 130.00 150.00 L N G   p r i c e   $ / M M B t u JCC/ Brent price ($/bbl) Selected oil‐indexed contracts into Asia 2008‐2012 Long‐term East Asia 2008 Long‐term East Asia 2012 Long‐term S‐curve 2010 Short‐term east Asia 2011 Mid‐term East Asia 2011 7 www.icis.com But other price indices emerging • Cheniere has signed free on board (FOB) deals at  115% Henry Hub + $3/MMBtu liquefaction + shipping  (paid for by buyer) US FOB  sales • Hybrid deals in Asia have indexed to e.g. Oil/Henry  Hub and Oil/NBP on long‐term basis • Mid‐term deals in Asia indexed to spot benchmarks Hybrid  contracts • South American buyers have bought on mid‐term  basis at  Henry Hub plus $11‐12/MMBtu Americas  mid‐term www.icis.com European gas pricing trends 8 www.icis.com European gas pricing: Hub prices put pressure on oil-linked contracts 5.00 10.00 15.00 20.00 25.00 30.00 35.00 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 P r i c e s   € / M W h Hub prices vs German import Jan 2008‐ July 2013 (ICIS, BAFA) NBP Heren monthly  index €/MWh TTF Heren monthly  index (€/MWh) German import price  (BAFA) €/MWh www.icis.com About 50% of gas imports now linked to gas hub pricing - trend toward gas will continue RWE wins natural gas price dispute with Gazprom 27 Jun 2013 18:06:21 | esgm Italian Edison wins Algerian long-term natural gas contract case 01 May 2013 15:33:34 | esgm Edison wins arbitration against Eni on Libyan natural gas price 01 Oct 2012 18:07:36 | esgm E.ON and Gazprom settle natural gas long-term contract price dispute 03 Jul 2012 17:16:21 | edem esgm Germany's RWE moves away from oil-indexation on natural gas supply contracts as profits drop 10 Nov 2011 16:02:52 | esgm 9 www.icis.com OTC traded volumes 2009-2013 - TTF on strongest growth trend 0 200 400 600 800 1000 1200 1400 1600 J u l ‐ 0 9 O c t ‐ 0 9 J a n ‐ 1 0 A p r ‐ 1 0 J u l ‐ 1 0 O c t ‐ 1 0 J a n ‐ 1 1 A p r ‐ 1 1 J u l ‐ 1 1 O c t ‐ 1 1 J a n ‐ 1 2 A p r ‐ 1 2 J u l ‐ 1 2 O c t ‐ 1 2 J a n ‐ 1 3 A p r ‐ 1 3 J u l ‐ 1 3 NBP Zee TTF PSV PEG Nord PEG Sud NCG GASPOOL CEGH TWh Source: ICIS www.icis.com European spot prices historically high Average NBP Day-ahead price 0 10 20 30 40 50 60 70 80 2005 2006 2007 2008 2009 2010 2011 2012 2013 p/th Pre Langeled and Isle of Grain start up. Source: ICIS 10 www.icis.com Sources of LNG for Europe www.icis.com NW European LNG imports have fallen rapidly 0 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 H1 2011 H1 2012 H1 2013 H1 2011 H1 2012 H1 2013 H1 2011 H1 2012 H1 2013 H1 2011 H1 2012 H1 2013 Belgium France Netherlands UK European LNG imports H1 2011‐2013 (Eurostat, ICIS) Qatar Algeria Egypt Nigeria Norway Peru Trinidad US Yemen 11 www.icis.com Supply tight at least until 2015 Background • H1 2013 production appeared to fall year‐ on‐year to around 118m tonnes Ongoing  problems • Egypt now reduced to one train of Idku • Indonesia fell nearly 25% y‐o‐y in H1 2013 Recurring  risks • Nigeria LNG/ Yemen (sabotage/ political),  Snohvit (technical), Australia (weather) www.icis.com Europe has emerged as reload market 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 H1 2012 H1 2013 H1 2012 H1 2013 H1 2012 H1 2013 H1 2012 H1 2013 Belgium Spain France Portugal L N G   r e ‐ e x p o r t s   ( t o n n e s ) European re‐exports by destination: H1 2013 vs H1 2012 Middle east/ India East Asia Mediterranean Mexico Brazil Argentina 12 www.icis.com NW Europe LNG stocks remain robust 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 L N G   s t o c k s   ( t o n n e s ) LNG stocks at NW Europe terminals (National TSOs, LSOs) UK France (Montoir) Belgium Netherlands www.icis.com Contracts into N. Europe main source of LNG Gate Qatargas-E.ON <1.4mtpa to 2018, flexible, hub-index Iberdrola-DONG <1mtpa to 2021, flexible, hybrid Shell-Eneco <0.35mtpa to 2015, flexible Zeebrugge RasGas-Eni 2.05mtpa to 2027, firm, Zee-indexed RasGas-EDF <3.4mtpa to 2027, Flexible South Hook Qatargas-Exxon Mobil/Total <9.9mtpa to 2033 firm/flexible, NBP-indexed Montoir NLNG-Enel <2.5mtpa to 2021 Firm/ flexible, oil-indexed Dragon Qatargas-PETRONAS <1.14mtpa to 2018 NBP-indexed, flexible? Świnoujście Qatargas-PGNiG 1mtpa to 2034 Firm, oil-indexed Isle of Grain Qatargas-Centrica <2.4mtpa to 2014 Firm/flexible, NBP-indexed Terminal committed to bunkering Potential bunkering terminal 13 www.icis.com Selected Northern Europe LNG bunkering sites To Hammerfest Existing LNG plant Planned LNG plant Existing bunkering Planned bunkering www.icis.com LNG prices indices in Europe Source: ICIS, Cheniere statements, NYMEX 8.00 9.00 10.00 11.00 12.00 13.00 14.00 L N G   p r i c e   $ / M M B t u Possible European LNG prices at futures market prices  (based on NYMEX Brent/Henry Hub, ICIS NBP 16 Oct 2013)  US liquefaction DES Europe (Cheniere) US liquefaction FOB NBP 12% Brent 13% Brent 14 www.icis.com Pricing possibilities for LNG bunkering www.icis.com LNG bunker market growth price-dependent 0 200 400 600 800 1000 1200 1400 HFO LNG MGO $ / t o n n e DMA central case end‐user prices On Board Delivered Fuel Prices by 2020   (DMA assumptions) Danish Maritime Authority (DMA) study for EU assumed 4.2 million tonne LNG market growing by 2020 at these prices (see graph) $/tonne prices misleading as: -tonne of LNG≈52 MMBtu -tonne of MGO≈41 MMBtu -tonne of HFO≈39 MMBtu 15 www.icis.com Potential pricing mechanisms for bunkering • European gas hub-indexed (Premium to NBP/TTF) • Oil-indexed (Brent) • Indexed to competing ship fuels (MGO/ HFO) • US LNG indexed (Henry Hub plus fixed cost) • Hybrid of any of the above • Fixed price (dependent on global LNG prices) • Northern Europe LNG bunker assessment www.icis.com Features of different price mechanisms Seasonality Risk  management Market  dynamics NBP/TTF  indexed Price indexed to  European hub  prices plus a mark‐ up Significantly higher winter prices  OTC market  liquid for >2  years  forward Hub liquidity  growing but  requires  more  supply sources  Henry  Hub indexed Price indexed to  Henry Hub plus  Moderately  higher winter  prices OTC traded,  “90% of  bilateral trade  cleared” (ICE) Vast number of  producers, exports  and switching could  shift demand   Oil  indexed Price indexed to  mainstream oil  benchmark or products Limited  seasonal variation Highly liquid  physical and  financial  markets (Brent) Liquid but opaque  price formation,  OPEC limits  downside  New LNG  Bunkering  index Assessment based  on supply/ demand  in LNG bunker  market Depends on  source of LNG,  demand  structure Likely to  develop as  liquidity grows Responsive to  supply/demand  balance in bunker  market 16 www.icis.com Theoretical price indices at breakbulk terminal 10.00 11.00 12.00 13.00 14.00 15.00 16.00 17.00 18.00 19.00 20.00 F u e l   p r i c e   $ / M M B t u Possible small‐scale FOB indices at  futures market prices  (based on NYMEX Brent/Henry Hub, ICIS NBP 16 Oct 2013, DMA)  US liquefaction FOB +$4/MMBtu NBP+3/MMBtu LNG (15% Brent‐indexed) HFO (DMA end‐user central case) LNG (DMA end‐user central case) *MGO (DMA end-user central case) ≈$30.00/MMBtu Premium at final bunker  terminal or vessel www.icis.com Origin of future supplies could influence price • Over 185mtpa of US LNG export capacity at  approval stage with >40mtpa approved • Western Canada > 20mtpa of capacity targeted for  development by 2020. North  America  • Mozambique – 50tcf of gas found in Rovuma Basin   Anadarko/Eni plan 20mtpa capacity project by 2018 • Tanzania – over 9tcf of gas discovered – BG Group  plan multi‐train export project  East Africa  • Russian LNG – (Vladivostok, Yamal LNG)  • East Mediterranean (Tamar FLNG, Leviathan LNG) • Australasia (Browse , Arrow , Bonaparte, PNG) • West Africa (Cameroon FLNG, Equatorial Guinea 2)  Other supply  sources  17 www.icis.com Thank you very much Simon Ellis, [email protected]