European Natural Gas Outlook. Andrew Ellis Global Insight

European Natural Gas Outlook Andrew Ellis Global Insight

Agenda Key Issues Facing the Sector Short-term Outlook (to Q4 2009) Long-term Outlook (to 2025) Copyright 2006 Global Insight, Inc. 2

Agenda Key Issues Facing the Sector Short-term Outlook (to Q4 2009) Long-term Outlook (to 2025) Copyright 2006 Global Insight, Inc. 3

Key Points 20,000 18,000 6.3 Oil-indexed gas prices remain the benchmark Don t expect change soon. 2006 Inland demand 16,000 GWh/day 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Spot markets show increased seasonality but oscillate around oilindexed prices 3.3 0.1 0.4 0.1 0.0 0.8 NBP Zeebrugge TTF PSV PEGs BEB-VP CEGH Ratio of traded volumes to inland demand Copyright 2006 Global Insight, Inc. 4

Key Issues Price of oil Most important risk due to oil-indexation Winter premium & summer discount Seasonal premiums have grown on tight winter supply Impact of new infrastructure & volumes LNG New dimension to flexibility Arbitraging Atlantic-basin storage Speed of liberalisation German market is the key Copyright 2006 Global Insight, Inc. 5

Agenda Key Issues Facing the Sector Short-term Outlook (to Q4 2009) Long-term Outlook (to 2025) Copyright 2006 Global Insight, Inc. 6

European Border Price Development 30 25 Waidhaus Velke Kapuszany Emden Dutch Border Dutch border Blaregnies Montoir LNG Baumgarten Baumgarten Tunisia Barcelona Zeebugge (LNG) Zeebrugge (Troll) 20 per MWh 15 10 5 0 Jan 98 Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Copyright 2006 Global Insight, Inc. Source: Heren 7

European Border Gas Prices (Nominal) 30 25 GI FORECAST Norwegian Troll - Zeebrugge Russian gas - German border (Waidhaus) Algerian Pipe Gas to Italy - Alg/Tunis border 20 /MWh 15 10 5 0 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 Source: Heren and Global Insight Copyright 2006 Global Insight, Inc. 8

Spot Price Developments 120 100 NBP Zeebrugge TTF 80 /MWh 60 40 20 0 10/1/2004 2/1/2005 6/1/2005 10/1/2005 2/1/2006 6/1/2006 10/1/2006 Copyright 2006 Global Insight, Inc. Source: Heren and IPE 9

Spot Price Developments 25.00 20.00 15.00 /MWh 10.00 5.00 NBP Zeebrugge TTF 0.00 6/1/2006 7/1/2006 8/1/2006 9/1/2006 10/1/2006 11/1/2006 12/1/2006 Copyright 2006 Global Insight, Inc. Source: Heren and IPE 10

Spot Volatility 25% 20% NBP Zeebrugge TTF Volatility 15% 10% 5% 0% 4Q 2004 2005 2Q 2005 2005 4Q 2005 2006 2Q 2006 2006 Copyright 2006 Global Insight, Inc. Source: Global Insight 11

European Spot Gas Prices (Nominal) 40 35 30 GI FORECAST UK - NBP Belgium - Zeebrugge TTF - Dutch France - PEG Nord 25 /MWh 20 15 10 5 0 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 Copyright 2006 Global Insight, Inc. Source: Global Insight 12

UK Winter Gas Demand Probability Distribution 0.35% 0.30% 2006/7 0.25% 1/20 winter Probability 0.20% 0.15% 2000-2006 1/50 winter 0.10% 0.05% 1990-2006 0.00% 50.5 51.3 52.1 52.9 53.7 54.5 55.3 56.1 57.0 57.8 58.6 59.4 60.2 61.0 61.8 62.6 63.4 64.2 Winter demand (bcm) * Winter demand November to March Copyright 2006 Global Insight, Inc. Source: Global Insight 13

UK Winter Gas Demand Probability Distribution 0.35% 2006/7 Probability 0.30% 0.25% 0.20% 0.15% Firm supplies: Prodn NW BBL Storage TOTAL 41.8 bcm 5.7 bcm 5.0 bcm 3.8 bcm 56.3 bcm 1/20 winter 1/50 winter 0.10% 0.05% 0.00% 50.5 51.3 52.1 52.9 53.7 54.5 55.3 56.1 57.0 57.8 58.6 59.4 60.2 61.0 61.8 62.6 63.4 64.2 Winter demand (bcm) * Winter demand November to March Copyright 2006 Global Insight, Inc. Source: Global Insight 14

NBP v Zeebrugge Troll 40 35 30 GI FORECAST UK - NBP Norwegian Troll - German border (Emden) 25 /MWh 20 15 10 5 0 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 Copyright 2006 Global Insight, Inc. Source: Global Insight 15

NBP Summer-Winter Spreads 45 40 35 30 25 Actual Global Insight Forecast Global Insight Low 5/10/2004 7/4/2006 11/20/2006 p/th 20 15 10 5 0-5 1997/8 1998/2000 2001/2 2003/4 2005/6 2007/8 2009/10 Copyright 2006 Global Insight, Inc. Source: IPE and Global Insight 16

TTF Summer-Winter Spreads 18 16 14 12 Actual Global Insight Forecast Global Insight Low 8/31/2006 11/1/2006 /MWh 10 8 6 4 2 0 2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 Copyright 2006 Global Insight, Inc. Source: Heren and Global Insight 17

Wholesale Gas Prices 25 20 Belgium Germany Italy Spain UK GI FORECAST 15 /MWh 10 5 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Copyright 2006 Global Insight, Inc. Source: Global Insight 18

Agenda Key Issues Facing the Sector Short-term Outlook (to Q4 2009) Long-term Outlook (to 2025) Copyright 2006 Global Insight, Inc. 19

Source of Incremental European Gas Demand (2005-25) Europe Industry & Feedstocks 21% 276.7 bcm Commercial 7% Residential 17% Other 1% Power 54% Copyright 2006 Global Insight, Inc. Source: Global Insight 20

Dark Minus Spark Spreads 15 5-5 GI FORECAST NBP v ARA Coal /MWh -15-25 -35-45 Spark spread Clean spread -55 2004 Q1 2004 Q4 2005 Q3 2006 Q2 2007 Q1 2007 Q4 2008 Q3 2009 Q2 15 Spark spread 5 Clean spread -5 Phase 1 8.70/tCO2 Phase 2 17.45/tCO2 /MWh -15-25 -35-45 -55 GI FORECAST 2004 Q1 2004 Q4 2005 Q3 2006 Q2 2007 Q1 2007 Q4 2008 Q3 2009 Q2 TTF v ARA Coal Copyright 2006 Global Insight, Inc. Source: Global Insight 21

Full Levelised Cost Including Carbon Price (Coal V Gas) 80 80 70 70 60 60 $ per MWh 50 40 30 $ per MWh 50 40 30 20 20 10 10 0 2006 2007 2008 2009 2010 -------- 2015 2020 0 2006 2007 2008 2009 2010 -------- 2015 2020 Coal levelised cost Gas levelised cost Coal levelised cost Gas levelised cost Carbon price = 20/tCO2 Carbon price = 10/tCO2 Copyright 2006 Global Insight, Inc. Source: Global Insight 22

Oil Indexed World Norway Russia Key drivers Use regressions on core oil-indexed contracts for delivery in country Adjust for transportation Adjust for constraints Algeria Algeria Copyright 2006 Global Insight, Inc. 23

Liberalised World: Gas-to-Gas Competition LNG Russia Key drivers Marginal therm into the European pricing point Adjust for transportation away from the European pricing point Adjust for constraints allow price disconnect from rest of Europe Algeria Copyright 2006 Global Insight, Inc. 24

LRMC Gas Supply Curve for Europe 6.00 5.00 Cumulative supplies LNG LRMC $/mbtu 1800 1500 4.00 1200 3.00 Import range 2.00 $ per mmbtu BCM per year 900 600 1.00 300 0.00 0 Norway - Existing fields Algeria - Illizi Basin Norway - Troll Norway - Satallite North Sea Russia - Existing fields Algeria - Trias Basin Algeria - Grand Erg Tunisia - Pelagian Basin Russia - Kamennomysskoye (NPT) Kazakhstan - North Caspain Egypt - Nile Delta Egypt - Red Sea Libya - Pelagian Basin Libya - Sirte Basin Russia - Kharasaveyskoye (Yamal) Russia - Bovanenskoye (Yamal) Russia - Zapolyarnoye (NPT) Norway - Norwegian Sea Libya - Trias Basin Nigeria - Lagos Russia - Other (Yamal) Turkmenistan - Amu-Darya Qatar - Great Ghawa uplift Russia - Semakovskoye (NPT) Trinidad & Tobago - Port of Spain Iran - Zagros basin Abu Dhabi - Fahud salt basin Venezuela - Christobal Colon Russia - Leningradskoye (Kara Sea) Libya - Illizi Basin Russia - Stokomanovskoye (Barents Sea) Russia - Other (Kara Sea) Oman - Ghaba salt basin Turkmenistan - South Caspian Russia - Rusanovskoye (Kara Sea) Russia - Other (Barents Sea) Norway - Barents Sea Russia - East Siberia (Nepa) Russia - Far East Russia - East Siberia (Baykrit) Uzbeistan - North Ustyurt Copyright 2006 Global Insight, Inc. Source: Global Insight 25

Evolution of Gas Market Liberalisation Share of gas market set by gas-to-gas comp 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% GI FORECAST Base Case Low High 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 Copyright 2006 Global Insight, Inc. Source: Global Insight 26

Annual Average Wholesale Gas Price 25.00 GI FORECAST 20.00 Germany Italy Netherlands UK /MWh (2005 prices) 15.00 10.00 5.00 0.00 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Copyright 2006 Global Insight, Inc. Source: Global Insight 27

German Delivered Gas Prices Scenario Results 30.00 25.00 Base Low High /MWh (2005 prices) 20.00 15.00 10.00 5.00 0.00 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Copyright 2006 Global Insight, Inc. Source: Global Insight 28

Thank you! Andrew Ellis Director of European Gas andrew.ellis@globalinsight.com