Industries

Energy, Utilities & Mining

Value and Growth*

in the liquefied natural gas market

*connectedthinking
Liquefied natural gas (LNG) is one of the
fastest growing sectors of the energy
market. It is expected to almost double in
size between 2005 and 2010, delivering
around 40% of global gas supply growth
in just five years*.

*Source: International Energy Agency, Natural Gas Review 2006

Contents

01 Introduction page 2

02 LNG evolution page 4

03 LNG take-off page 8

04 LNG tomorrow page 16

05 Conclusion page 24

06 Contact us page 25

PricewaterhouseCoopers • Value and growth in the liquefied natural gas market 1

01 Introduction
Liquefied natural gas (LNG) is one of the
fastest growing sectors of the energy
market. It is expected to almost double
in size between 2005 and 2010,
delivering around 40% of global gas
supply growth in just five years*. In the
US a significant increase in gas imports is expected to
come from LNG. In Europe, many countries are making
or considering investments in LNG import infrastructure.
The hype around LNG is intense. It is easy to overlook
the fact that LNG is a means of delivery not a new energy
source. LNG technology and infrastructure provide a
means of monetising otherwise stranded gas reserves
and bringing them to market. As figure 1 shows, there are
vast proven gas reserves but 91.2% of these lie outside
of the main OECD market and much is beyond pipeline
export reach. For upstream owners of gas assets LNG
opens up a worldwide market for gas. For utility
companies and energy departments in end markets it is a
means of diversifying and securing energy supply.
Whether you are an LNG bear or an LNG bull, it is certain
that LNG will play a growing part in the future gas market
(see figure 2). However, the development of LNG projects
and businesses presents considerable new challenges for
companies, whether they are upstream national or
smaller oil and gas companies looking to find new
markets, super majors developing integrated LNG chains
or utility companies aiming to secure and diversify
primary fuel supply sources.
*Source: International Energy Agency, Natural Gas Review 2006
Richard Paterson Manfred Wiegand
Global Energy, Utilities & Mining Leader Global Utilities Leader
Peter Albrecht Klaus-Dieter Ruske
Eurofirms Industrial Products Leader Global Transportation & Logistics Leader
2 PricewaterhouseCoopers • Value and growth in the liquefied natural gas market
In this report we look at the challenges for the various
players. We map the nature of these challenges – from
handling geopolitical and trading risk to determining
the best commercial and tax structuring – and the
different strategies that need to be considered. We
look at how the LNG market is evolving and changing
from a previously concentrated market to a future
where it will take on more of the characteristics of the
global oil market. We look at where LNG is now and
where it will be in the decade ahead.
We see a market that is characterised by both
complexity and globalisation, in which the
disaggregation of dedicated LNG chains opens up new
potential opportunities. We look at how technological
advances will hold the key to just how far this market
evolution will run and the judgments companies and
other players will need to make in response.
Throughout the report, we feature a series of
‘LNG dialogues’, highlighting some of the critical
issues facing companies in the LNG sector and the
considerations they need to take into account.
These are based on our experience of working with
companies around the globe.
The future development of LNG as one of the fastest
growing areas of the energy market worldwide will also
require the development of new technologies and will
depend on the pace in which they are put into practice.
These challenges for the engineering sector and the
shipbuilding industry will have a considerable influence
on the investment programmes of governments,
infrastructure and transportation companies as well as
of private investors. Our report also covers these
possible or, even, probable consequences.
Michael Hurley
Global LNG Leader
We see a market that is characterised by both
complexity and globalisation, in which the
disaggregation of dedicated LNG chains opens
up new potential opportunities.

Figure 1: Current gas reserves vs future demand

Proven reserves 180 tcm Gas demand 2020 3.8 tcm

8.8%
16.1% OPEC
10%
CIS

Other countries
49.4% 14.7% 48.7%
OECD

31.8%

20.5%

Source: Cedigaz

Figure 2: Global gas volume growth (traded cross-border volumes)

bn cm 1400
37-38%

1200

30-31%
1000

800 22.2%

21.6%
600

400
23.5%
15.6%
200
% share of global LNG in the total
5.9%
Pipelines
0
1970 1980 1990 2000 2004 2010 2020

Source: Cedigaz
02 LNG evolution

Today’s rapid growth of the LNG sector might lead some people to believe
that it is a relatively young market. On the contrary, LNG transportation began
nearly fifty years ago. Indeed, the nature of LNG’s evolution has lessons for
the risks and opportunities of LNG in the future and influences many of the
characteristics of LNG today.

Figure 3: LNG – a floating pipeline

UPSTREAM DOWNSTREAM
Pipeline quality gas operations
and gas trading
Production MIDSTREAM
Regasification

Field processing/separation

Liquefaction plant

Note: This diagram is not to scale

4 PricewaterhouseCoopers • Value and growth in the liquefied natural gas market


“Both China today and the US in the 1980s and
1990s highlight the risk for downstream LNG
developers and power utilities.”
Distribution
Power/Industry
Liquefied natural gas, in effect,
provides a ‘floating pipeline’ with
gas cooled down to a liquid form
at -1600C and, in the process,
shrinking by a factor of 600,
making mass ship-borne
transportation possible.
LNG ups and downs
The LNG business has experienced
dramatic ups and downs over the
years. After the opening of four
Atlantic import terminals in the US
during the 1970s, for example, LNG
imports stalled due to falling natural
gas prices in the US and a pricing
dispute with the supplier country,
Algeria. Plant was mothballed and it
was not until the mid-1990s that US
LNG importation significantly revived
with a rise in natural gas prices and
increased energy demand.
Coming right up to date,
development of LNG import
infrastructure in China has similarly
stalled. Initial plans were for around
fourteen LNG terminals to increase
energy supplies and provide a
cleaner fuel alternative to coal. These
ambitions have been pared back to
four or five terminals by 2010.
Soaring global gas prices have
meant that LNG cannot compete for
the most part against cheaper coal,
leaving LNG developers caught
between high world energy prices
and the highly regulated domestic
energy market in China. Power
producers in China have had to shut
down plant because they have no
gas to burn.
PricewaterhouseCoopers • Value and growth in the liquefied natural gas market
02
Both China today and the US in the
1980s and 1990s highlight the risk
for downstream LNG developers and
power utilities. Unlike pipeline gas, a
major attraction of LNG for upstream
players is its flexibility. It can be
shipped to different markets and, of
course, there is no reason why
Australian and Indonesian LNG
suppliers would ramp up their
exports to China when far higher
prices can be obtained elsewhere.
The risks for developers in countries
like China and India where locally
regulated energy markets are out of
step with the global markets are
obvious. But the emerging global
market and increasing flexibility in
LNG trading also brings significant
risks in countries with more
liberalised markets. For example, the
years since 2003 have seen a
concerted drive to develop LNG
import infrastructure in the US.
However, despite rising US energy
demand and reduced supplies from
US gas fields, US LNG imports fell in
2005 and regasification facilities
operated at only half capacity.
Instead, LNG went to countries
prepared to pay higher prices,
including, in 2005, Spain where LNG
demand soared following a drought
that hit hydroelectric power output.
5
02 LNG evolution
PwC LNG Dialogue
Managing price uncertainty
“There is no uniform global price for
LNG, unlike other energy
commodities such as oil. However,
Henry Hub is increasingly becoming
the global benchmark price-setter
for LNG. Provided the US can
continue to attract LNG volumes,
LNG purchasers elsewhere
increasingly need to demonstrate
that their market is an attractive
market compared with
the US.”
Index pricing differences create price
volatility between the major demand
markets which represents a dilemma
and an opportunity for sellers and
buyers. They need to be sure what
pricing conditions will make a particular
region, such as Europe, represent best
value for the LNG over the lifetime of
the contract. Given the long-term
nature of contracts and the short-term
view provided by the traded
commodity markets this is not an easy
problem to resolve and may require
innovative solutions in either pricing or
technology to attract the LNG.
The construction of suitable pricing
mechanisms and indices that
appropriately share risks and rewards
across the chain over a range of
expected energy prices, and enable
profits to be generated and shared, can
help mitigate some of these concerns.
The selection of suitable pricing indices
is vital to ensure the gas price is
relevant to the destination market and
enables trading in the underlying
commodity so that companies can
effectively manage price risk.
6 PricewaterhouseCoopers • Value and growth in the liquefied natural gas market
Greater market dynamism
An evolution away from regional
markets towards a more global market
has been accompanied by a more
dynamic trading environment and
greater contract complexity. The part-
regional, part-global market mix
presents opportunities for arbitrage.
Diversion rights, accompanied by
compensatory conditions, create a
win-win situation for both exporters
and importers. The opportunities that
have created an active arbitrage
market in the Atlantic basin are
illustrated in figure 4 which shows the
price differential and netback between
three major Atlantic destinations for
Nigerian LNG. Different markets are
indirectly connected in that, as LNG
flows, market prices adjust to new
supply-demand balances.
A short-term ‘spot’ LNG trading
market has developed, accounting for
around 11.4% of LNG sales in 2004 if
swaps and diversions are included as
well as true spot deals. This is
expected to grow to around 20% in
the coming years (International Energy
Agency, Natural Gas Market Review
2006). However, true spot trading
(LNG produced in excess of
contractual arrangements) remains
rare.
Infrastructure costs mean that
producers largely need the security
of long-term contractual delivery to
underpin projects. Although some
LNG projects are now being
developed without traditional
long-term contracts, this is
uncommon. Nonetheless, the rise of
short-term trading in LNG has been
dramatic. As recently as 1997,
short-term trades accounted for just
1.5% of the LNG market (James T
Jenson, The Development of a Global
LNG Market, Oxford Institute for
Energy Studies, 2004).
LNG pricing
The limit on LNG volumes, compared
to pipeline gas, means that LNG is
often going to be a price-taker rather
than a price-setter, especially in
Europe and the US. The price of LNG
has traditionally been based on the
pricing norms of the delivery market.
The traditional link is to oil but, in
markets where natural gas is traded,
such as the US and the UK, prices
tend to be referenced against the gas
price.
Thus, we see a mix of pricing
reference points – US directly indexed
to gas (Henry Hub); UK directly
indexed to gas (National Balancing
Point (NBP)); continental Europe
typically indexed to fuel oil and gas
oil; and Japan indexed to the
Japanese Crude Cocktail (JCC) index.
The Henry Hub price is a key
determinant in the US, as is the NBP
price in the UK. Other trading hubs in
Europe can act as contract reference
prices for LNG, for example the
Zeebrugge Hub (ZBT) in Belgium and,
if proposed Dutch regasification
infrastructure is built, the Title
Transfer Facility (TTF) in the
Netherlands. Elsewhere in continental
Europe and Asia, where no liquid
market for natural gas sales exists,
the main reference is to crude oil and
specified petroleum products. In rarer
instance, there are also links to coal
and electricity prices.

“The part-regional, part-global market mix presents
opportunities for arbitrage. Diversion rights,
accompanied by compensatory conditions, create a
win-win situation for both exporters and importers.”
LNG origins
LNG has its origins in the nineteenth
century when the first experiments took
place to liquefy gas. However, it was
many years later when the first
commercial liquefaction plant opened, in
Ohio in 1941. The world’s first LNG sea
transportation was in 1959 with a journey
from the US to the UK followed by seven
further cargoes which were delivered with
only minor problems over the next
14 months.
From those beginnings, the LNG sector
began to develop. Initial plans to import
LNG from Venezuela to the UK were
overtaken by the discovery of enormous
gas reserves in Algeria. The shorter
journey to the UK, compared to
transatlantic imports, meant that Algeria
became the world’s first regular LNG
exporter and the UK the first regular
importer in the mid-1960s.
Regional LNG markets
LNG trading evolved in the three decades
from the 1970s onwards in an essentially
regional pattern in the Atlantic and Pacific
basins with hardly any interaction
between the two.
Algeria became an exporter to European
countries and the US. Indonesia became
a major supplier to Japan and South
Korea, both of whom lack any indigenous
gas supplies. By the mid-1980s, LNG
imports by Japan dominated LNG activity,
accounting for three-quarters of world
LNG trade.
Destinations and trading were
characterised by long-term contractual
relations, high transportation costs and
geographic market distinctions.
Figure 4: Netback prices to Nigeria
Netback from Lake Charles: US$4.59/mmBtu
Henry Hub, 1st month, Dec 2006: US$5.63/mmBtu
Shipping: US$0.59/mmBtu
Regas: US$0.45/mmBtu
Netback from Isle of Grain: US$6.99/mmBtu
UK NBP, 1st month, Dec 2006: US$7.87/mmBtu
Shipping: US$0.43/mmBtu
Regas: US$0.45/mmBtu
Netback from Zeebrugge: US$6.75/mmBtu
Zeebrugge, 1st month, Dec 2006: US$7.64/mmBtu
Shipping: US$0.44/mmBtu
Regas: US$0.45/mmBtu
Source: Argus Global LNG, January 2007
A more global market
In recent years, a host of new supply and
destination countries have emerged,
bringing greater volume and dynamism to
the LNG market. Higher energy prices,
improved and more cost-effective
technologies and depleting indigenous
reserves in major markets have spurred
growth.
Australia has developed LNG projects to
join Indonesia and Malaysia in supplying
Far East and Asian markets. In the
Atlantic, Trinidad & Tobago and Nigeria
have both invested in LNG projects.
Perhaps most significant is the upsurge in
Middle Eastern production, as a result of
major expansion of LNG in Qatar as well
as in Egypt and Oman. This has created
one supply-side link between the
previously separate Atlantic and Pacific
markets.
Qatar will shortly become the global
leader in LNG production. It produces
large volumes that can ‘swing’ either way.
This, coupled with a reduction in
transportation costs, has strengthened
price relationships in what is now an
increasingly global LNG market. The
strongly regional nature of LNG trade is
breaking down. Price signals are now
transmitted freely between previously
isolated regional markets.
PricewaterhouseCoopers • Value and growth in the liquefied natural gas market
02
PwC LNG Dialogue
Greater contract complexity
“More dynamic trading markets are
introducing considerable complexity
into supply and purchase agreements
and company accounting. These
complexities are being given a further
twist by the continuing evolution of
International Accounting Standards.”
Contract pricing will generally reflect the
best estimation of the LNG price in the
destination markets. Different parties,
however, may differ in their view of
which market the commodity ultimately
competes in.
Another accounting complication stems
from the fact that trading contracts may
be based on traditional oil index pricing
formulas when the destination market
has developed in an actively traded spot
and future market. Those types of
contracts represent a value compared to
the market that should be considered for
fair value accounting under International
Accounting Standards. The
determination of an active market,
however, often leads to much debate.
Also, how should optimisation of sales
and purchases within the conditions set
in the contract be treated? Is it
considered trading activity, precluding
the contract from applying for the ‘own
use’ exemption for fair value accounting,
or should it be viewed as part of normal
practice in the industry, designed for
operational reasons? The answer lies in
the intention and actual behaviour of the
company.
7
03 LNG take-off
The LNG market is taking off around the globe. For
decades, LNG had been restricted largely to markets
with limited fuel choices. Indeed, by 2005, Asia Pacific
trade, dominated by Japan and South Korea, still
accounted for the majority of global LNG imports. This
dominance is fast being eroded by import growth in
Europe and the US.
LNG today
The current pattern of LNG trade is
shown in figure 5. Figure 6 gives a
breakdown of volumes between
different import and export countries.
Japan and South Korea dominate
imports, accounting for over 56.5%
of global LNG trade. On the export
side, four countries – Indonesia,
Qatar, Algeria and Malaysia –
account for 59.3% of production.
However, the situation is changing
rapidly. Much of the growth in LNG is
being driven by expansion of
liquefaction in countries such as
Qatar and Nigeria that can serve
European and North American
markets.
 03
“We are shifting towards a global market that is set
to be fairly evenly balanced between Asia, Europe
and North America.”

Figure 5: LNG trade movements, 2005*

*Based on trade movements of LNG in 2005

United States

United Kingdom

Belgium
France
Italy
Spain
United States Turkey
Portugal South Korea
Greece
Japan
Algeria
Libya Egypt Taiwan
Qatar India
Puerto Rico UAE
Oman
Dominican Rep.

Trinidad & Tobago Nigeria Brunei

Malaysia
Indonesia

Australia

Existing export country/state

Existing import country

Trade route

Figure 6: Import and export volumes by country

Export Plants:
Trinidad & Tobago

bn cm Abu Dhabi ADGAS (Das Island I & II)

Algeria Arzew GL1Z; GL2Z; GL4Z (Camel);
Total imports
United States

From Skikda GL1K Phase I & II

Australia Darwin LNG; NWS Australia LNG T1-4
Indonesia

Malaysia
Australia

Brunei Lumut
Nigeria
Algeria

Brunei

Egypt Damietta LNG; ELNG T1-2

Oman

Egypt
Qatar

Libya
UAE

Indonesia Arun Phase I-VI; Bontang A-H

To Libya Marsa el-Brega
Malaysia Bintulu MLNG I-III
North America Nigeria NLNG T1-5
Oman OLNG; Qalhat LNG
United States - 12.44 0.07 0.08 - 2.75 2.05 - 0.23 - - - 0.25 17.87 Qatar Qatargas 1; RasGas 1 & 2
Trinidad Atlantic LNG T1-4
United States Kenai
S and C America
Dominican Republic - 0.25 - - - - - - - - - - - 0.25 Import Terminals:
Puerto Rico - 0.67 - - - - - - - - - - - 0.67 Belgium Zeebrugge
China* Guangdong
Dominican Rep. Andres
Europe France Fos-sur-Mer; Montoir-de-Bretagne
Greece Revythoussa
Belgium - 0.08 - - - 2.90 - - - - - - - 2.98 India Dahej; Hazira
Italy La Spezia
France - - 0.08 - - 7.50 1.05 - 4.20 - - - - 12.83 Japan Chita; Chita (Kyodo); Chita-Midorihama;
Greece - - - - - 0.46 - - - - - - - 0.46 Fukuoka; Futtsu; Hatsukaichi; Higashi-
Niigata; Higashi-Ohgishima; Himeji;
Italy - - - - - 2.50 - - - - - - - 2.50 Himeji II; Kagoshima; Kawagoe;
Mizushima; Negishi; Ohgishima;
Portugal - - - - - - - - 1.58 - - - - 1.58 Senboku I; Senboku II; Shin-Minato;
Shin-Oita; Sodegaura; Sodeshi/Shimizu;
Spain - 0.50 1.65 4.56 0.31 5.19 3.53 0.87 5.00 0.08 - - 0.16 21.85 Tobata; Yanai; Yokkaichi (LNG centre);
Turkey - - - - - 3.85 - - 1.03 - - - - 4.88 Yokkaichi (Works)
Mexico* Terminal de LNG de Altamira
United Kingdom - 0.07 - - - 0.45 - - - - - - - 0.52 Portugal Sines
Puerto Rico Penuelas
South Korea Gwangyang; Inchon; Pyeong Taek;
Tong Yeong
Asia Pacific Spain Barcelona; Bilbao; Cartagena; Huelva;
India - - 0.08 5.80 - - - - - 0.16 - - - 6.04 Sagunto
Taiwan Yung-An
Japan 1.84 - 1.25 8.35 6.75 0.08 - - - 13.05 8.35 19.00 17.65 76.32 Turkey Izmir; Marmara Ereglisi
United Kingdom Grain LNG
South Korea - - 5.93 8.31 0.08 - 0.30 - - 1.16 0.80 7.51 6.36 30.45 United States Cove Point; Elba Island; Everett; Gulf
Taiwan - - 0.16 - - - - - - 0.40 - 4.95 4.10 9.61 Gateway; Lake Charles

Total exports 1.84 14.01 9.22 27.10 7.14 25.68 6.93 0.87 12.04 14.85 9.15 31.46 25.52 188.81
* Became importers during 2006

Source: Cedigaz/Petroleum Economist LNG Data Centre, 2006

PricewaterhouseCoopers • Value and growth in the liquefied natural gas market 9

03 LNG take-off
PwC LNG Dialogue
Taking account of regulatory risk
“LNG operations are spreading to many
new locations. The maturity and format
of regulatory frameworks vary
considerably. The economic viability of
an LNG chain can be influenced
significantly by national or regional
regulation, particularly on regasification
facilities.”
In developed markets, companies need to
negotiate and manage arrangements
concerning third party access exemption,
network access capacity and access to
markets and storage. Even within the
same regulatory area, companies in
mature markets will encounter regulatory
variation. In the European Union, for
example, country regulators can make
their own decisions on certain
derogations, such as on how third party
access rights are applied.
Such policies can have a major impact.
For example, regulators may not only
deem that a certain proportion of
regasification capacity is offered to the
market but also insist that the owner ‘uses
or loses’ the capacity reserved for
themselves. Without effective utilisation
management, infrastructure owners may
quickly find that they lose their exemption
rights.
In developing markets, pricing and access
regulation can potentially strike at the
heart of the overall viability of the project.
Tariff-setting is critical for cost recovery
and returns on investment. In many
instances, where LNG infrastructure is
new and end-markets are relatively
immature, companies need to be the
active policy-shapers. Market access,
with concurrent development of pipeline
distribution capacity, is also fundamental.
The structure of network and end-tariff
regulation varies greatly and
understanding the roles of regulators in
each downstream market will provide
useful data regarding market risks and
likely returns. Even if an LNG developer
is not directly selling to end-market,
off-takers (and therefore contract
counterparties) will be exposed to those
risks and the developer should
understand his counterparty risk in this
regard.
10 PricewaterhouseCoopers • Value and growth in the liquefied natural gas market
Demand growth
In Europe and North America,
domestic natural gas production
cannot keep up with demand. There is
increasing concern about security of
supply and a desire to diversify away
from over-reliance on single sources.
The result is a major surge in LNG
volumes and a shift towards a global
market that is set to be fairly evenly
balanced between Asia, Europe and
North America by 2020 (see figure 7).
Looking ahead, in the near term the
International Energy Agency observes
that “a conservative estimation of LNG
trade is 300-350 bn cm per year by
2010 up from 192 bn cm in 2005.
The figure will be higher if all
production projects are realised as
planned” (Natural Gas Market Review,
2006). In the longer term, many
observers forecast a trebling of the
LNG market in the fifteen-year period
running up to 2020 (see figure 7).
These projections, however, assume
that key major LNG projects will come
to fruition. The challenges that
companies face in delivering these large
mega-projects are considerable. Many
projects are in environmentally sensitive
areas or face other planning hurdles.
Financing is often complex. The
technological and construction
challenges are substantial and are
compounded, in some locations, by
shortages of qualified engineers and
contractors. These factors are
exacerbated by currency risk,
particularly the recent weakness of the
US dollar.
Companies developing LNG projects
also face considerable political risk,
both in their dealings with national
governments and at a regional or
community level within countries.
In Russia, for example, the companies
developing the Sakalin-2 project finally
ceded majority control following
sustained pressure from the Russian
authorities.
This included threats to revoke licences,
including the withdrawal of a permit for
the LNG part of the project, and open
criminal investigations for alleged
violations of environmental rules. In
Nigeria, LNG developers have faced
more local political risk in the form of
civil unrest.
Growth projections also assume that
companies will remain committed to
LNG. The impact of the withdrawal of
projects on future supply was
highlighted by Gazprom’s decision in
2006 to switch the giant Shtokman gas
field development from a US-bound
liquefied gas hub to a pipeline venture
supplying European markets. Shtokman
LNG could have been expected to
become available around 2015. The
effect will be to leave a gap of 30 million
tonnes in the projected worldwide LNG
market (Go-it-alone tactics from
Gazprom leave experts divided,
Financial Times, 10 October 2006).
The high oil and, consequently, high gas
price environment, combined with more
efficient infrastructure and lower
transportation costs, has boosted
expectations on returns on LNG
investment.
However, it has also reduced LNG’s
cost competitiveness with other fuel
choices such as coal, nuclear and,
where available, pipeline gas. The price
placed on pollution emissions from
carbon trading and other regulatory
schemes, thus, becomes a highly
relevant consideration in projecting
demand for LNG.
The changing LNG marketplace
The LNG marketplace is changing.
On average, US$20-30bn capital
expenditure in LNG infrastructure is
expected to be required per annum for
the completion of all planned LNG
projects. However, the contracts in
developed downstream markets are
moving to shorter contract periods or
indexation to gas prices. This creates
risks with regard to cost recovery
should a low price energy environment
recur.

“The switch to a seller’s market presents new
opportunities for upstream players to move
downstream.”
The oil sector went through a similar
development in the early 1970s.
However, the LNG market may not
ultimately conform to a market model
that has straightforward parallels. Key
differences constrain, for example, the
extent to which it can achieve the
liquidity of the oil market. The number
of market participants and the number
of loading and unloading ports is
always going to be far less than oil due
to the high investment cost and the
specialised technology required.
The emerging and dual character of the
LNG market presents challenges for
market participants. As one study of
LNG observes: “The clash between the
two structural models of the
international LNG industry – the
traditional, risk-averse, contract-
dependent model and the free market
trading model – has substantially shifted
the balance of risks and rewards among
the parties in ways that are not yet fully
understood” (James T Jenson, The
Development of a Global LNG Market,
Oxford Institute for Energy Studies,
2004). The implications of wider
acceptance of the new model are that
the scope for greater liquidity and spot
trading of LNG is expected to increase
further in the coming decade.
Figure 7: The changing global LNG market
77 bn cm (4% global gas) 180 bn cm (7% global gas)
1990 2004
Source: Shell, The role of LNG in a global gas market, Oil & Money Conference, London 2005
Steering a course in changing seas
There are considerable challenges
facing companies in all parts of the
LNG market. On the supply front, LNG
presents a paradoxical picture. On the
one hand, supplies are potentially
abundant. Nigeria alone has an
estimated 180 tcf of gas reserves and
is reported to be flaring about half of
its daily gas output of five bn cf which
could go to the LNG market if the
infrastructure was in place. On the
other hand, LNG has shifted from
being a buyer’s market to a seller’s
market. LNG supply has become the
constraint point in the global LNG
chain. Financing, infrastructure
construction and project management
challenges, partnering arrangements,
national government and international
government relations, environmental
and geopolitical concerns come
together in various combinations to
create uncertainty for many upstream
LNG projects.
However, the switch to a seller’s
market presents new opportunities for
upstream players to move
downstream. In particular, it opens up
a chance for new players, national oil
companies and smaller oil and gas
companies to move down the value
chain by putting together contractual,
technological and partnership
arrangements with buyers.
635 bn cm (15% global gas)
Europe
Americas
Asia
2020
PricewaterhouseCoopers • Value and growth in the liquefied natural gas market
03
PwC LNG Dialogue
Optimising asset portfolios
“Many companies are struggling to
optimise their LNG portfolio of assets
and contracts in a way that
maximises value. Opportunities for
‘arbitrage’ profits require ever more
clever valuation and modelling. The
companies that identify, assess and
manage the increasingly complex
interdependencies and uncertainties
in the evolving LNG market will be
the ones who take the profits.”
An LNG player who wishes to move
beyond the traditional model of long-
term point-to-point contracts in search
of higher margins must first establish an
LNG portfolio and then actively manage
this portfolio in response to market
signals.
Establishing the initial portfolio requires
decisions such as what sources of
supply and market access points to
take positions in, the balance of short-
term versus long-term contractual
arrangements between them, and the
level of committed versus uncommitted
volumes. Active management of the
portfolio is then needed with companies
recognising and acting on signals for
portfolio optimisation. A major cause of
complexity stems from the fact that the
initial portfolio will actually depend on
expectations of what additional value
(option value) that portfolio can
generate in the future. Thus,
optimisation modelling is needed to
help build the portfolio in the first place.
A dynamic optimisation model can
project potential opportunities for
additional profits by using stochastic
modelling to project potential future
price differentials between markets and,
thereby, provide the signals for cargo
diversions and spot trades. Once the
portfolio is in place, a static model can
also help minimise shipping costs
between predetermined points by using
linear programming to calculate the
optimal allocation of shipping journeys
between sources and destinations
(supplemented by any opportunities for
cargo swaps).
11
03 LNG take-off: LNG asset strategies
Companies are responding to the challenges of
a changing LNG market in a variety of ways. It is
possible to identify four strategic plays that arise
from the asset position of companies in different
parts of the market.
1 2
‘Upstream push’
Who?
National oil companies or small independent oil and gas
companies.
What?
These entities have upstream supplies and have developed
an upstream field and associated liquefaction plant either on
their own or with a partner. Their involvement in the LNG
chain had traditionally ended at that point with LNG being
sold ‘free on board’ at the liquefaction outlet. Many such
companies, though, are now building presence further
downstream.
Key issues?
The key challenge for such players is to ‘push’ LNG from the
upstream and attract the best transfer price. In the past,
transfer prices were modest, reflecting the low alternative
economic value of the gas. Now, companies are seeking to
gain a greater share of the market netback price and any
extra value that can be gained from switching between
outlets. In the short term with tight market conditions, these
companies have no real need to ‘push’ LNG at the market
since the market is coming to them. However, they are
moving further down the LNG chain for a variety of other
reasons – to capture more of the economic rent of the
gas/LNG produced, to negate adverse implications of
regulatory constraints (e.g. the EU second gas directive,
which covers topics such as non-discriminatory pricing,
removal of destination clauses, and market access) and to
match their aspirations to develop into portfolio/global
players. Companies such as the Nigerian National Petroleum
Company (NNPC) and Sonatrach have established
themselves in the shipping part of the chain. The latter
company is also progressively seeking to secure direct
access in downstream markets by holding regasification
capacity in, for example, the UK’s Isle of Grain.
Challenges?
High oil prices could encourage more gas reserves to come
onstream, in turn bringing more liquidity and allowing the
LNG market to become less tight. In this scenario, the
balance of power will swing away from the upstream. Other
high oil price scenarios could include LNG becoming
uncompetitive in the power utility market compared to
nuclear and coal which, again, would see market advantage
swing away from the upstream. Alternatively, supplies could
remain constrained, even with high oil prices. In this
situation, upstream players would remain in a strong
position.
12 PricewaterhouseCoopers • Value and growth in the liquefied natural gas market
‘Market pull’
Who?
Downstream utility supply companies or governments seeking
to diversify supply sources.
What?
Downstream utilities with significant gas demand from their
customer base can either build or buy access to regasification
facilities. The challenge then is to make their proposition easy
and attractive to ‘pull’ LNG supplies to them. To mitigate risk,
these companies will move up the LNG value chain, e.g.
Gaz de France acquiring an equity interest in Egypt and
Norway’s liquefaction facilities or CNOOC taking an interest in
Australia’s Northwest Shelf (NWS) LNG venture.
Key issues?
In response to tight market conditions, some downstream
players are moving up the value chain by taking equity
positions upstream to secure supply. Utility companies such
as GdF and Mitsui, for example, have procured directly with
producers. Typically these companies have invested in the
midstream part of the LNG chain such as shipping and
liquefaction as well as being present in the downstream.
Increased demand from existing markets and new markets
such as China, as well as European liberalisation, has
increased downstream pull demand. Some of these new
entrants are also willing to invest in upstream producing assets
in addition to midstream assets to help them secure LNG for
their markets. European liberalisation and dramatic economic
growth in Asia Pacific have also increased the number of
downstream companies willing to enter the LNG market as
companies seek to diversify their procurement portfolios and
strengthen their ability to compete in new markets. This is
reflected in the average utilisation of regasifiation terminals
(see figure 8).
Challenges?
Understanding the position of LNG contract prices relative to
other energy contracts serving the market is a critical
consideration for these companies. The situation of ‘market
pull’ companies will vary considerably between territories. The
regulatory framework for power utilities will have a crucial
impact, in particular vis-à-vis price-setting and the extent to
which LNG is competitive in the energy mix. For the same
reason, the future direction of carbon emission regulation will
also be an important influence.

3 4
‘Full integration’
Who?
Large international oil companies seeking to gain value by
managing an integrated value chain.
What?
A dedicated chain with the same company, or partnership of
companies, being present in all parts of the chain in the
same proportions, with LNG flowing from one source to one
market, like a ‘floating pipeline’.
Key issues?
The strategy offers the advantages of simplicity, stability and
a sound basis for financing. The disadvantage is that it can
limit opportunities to capture value from other markets,
thereby limiting upside. It also concentrates risk between
one export and one import country.
Challenges?
This traditional model may become more prevalent for NOCs
as they increasingly integrate downstream. If these
integrated chains are repeated at different destination
locations, it gains a portfolio dimension, albeit only in the
downstream.
PricewaterhouseCoopers • Value and growth in the liquefied natural gas market
03
‘Portfolio players’
Who?
Companies who manage their assets as a portfolio with
presence in many parts of the LNG chain with liquefaction
and regasification capacity in a number of locations. The
exact proportion of their involvement may be different in
different parts of the chain. They have a variety of upstream
and downstream positions in terms of equity stakes, supply
agreements, offtake agreements, access rights and options.
What?
This positioning enables them to buy and sell, taking
advantage of location, market pricing and changes in
demand, and to manage these different types of conditions
as a portfolio. Portfolio optimisations can reduce costs,
alleviate operational difficulties and allow them to take
advantage of arbitrage opportunities.
Key issues?
The scale and presence of international oil companies puts
them in a strong position to gain value from managing
their LNG assets as a portfolio player. However, the success
of such a strategy requires a more liquid market with more
commodity to play with. In such conditions, LNG moves
closer to oil market-like trading, albeit overlaid with
continuing structural challenges that create economic and
commercial barriers to entry. This, of course, is a strong fit
with international oil and gas company expertise and
experience.
Challenges?
The success of this strategy will be closely linked to how the
characteristics of the LNG market evolve with liquidity being
a key factor.
13
03 LNG take-off
PwC LNG Dialogue
Structuring infrastructure contracts
and ownership
“LNG relies on two vital ingredients –
infrastructure and gas. Sometimes
the owner of the infrastructure and
the owner of gas who uses the
infrastructure capacity is the same
company. In other cases, they are
separate entities. In either case,
companies face choices in how they
allocate risk between capacity and
equity optimisation.”
Tolling arrangements for the use of LNG
infrastructure, such as regasification
and liquefaction plant, are well
established. The user of the capacity
takes on the volume and price risk. The
low volatility of cash flows for an
infrastructure owner associated with this
model gives the infrastructure owner a
strong basis for a more highly leveraged
financing structure with long debt tenor
and the ability to release near term cash
distribution to equity investors.
Most European regasification terminals
are structured on a tolling basis, even
when the regasification plant
commercially is part of a single
integrated value chain. The
regasification terminal is structured as a
separate legal entity to maximise the
amount of non-recourse funding (project
financing). Such a mechanism provides
stable but only limited returns to
infrastructure equity investors.
However, companies need to make
careful judgements. There is high
reliance on a single entity (the toller),
who must represent an adequate credit
rating and/or demonstrate a long-term
need for the tolling services. Companies
also need to judge the allocation of
capacity and how much market
exposure to take on. This will, in turn,
determine how much ‘anchor load’
should be tolled and how much
capacity should be left free for the
infrastructure owner to use, auction or
otherwise expose to the market.
14 PricewaterhouseCoopers • Value and growth in the liquefied natural gas market
Figure 8: Utilisation of regasification terminals (2005)
Belgium 37.87% Total capacity
Dom Republic 18.12% Utilisation of capacity
France 75.47%
Greece 20.81%
India 58.36%
Italy 51.76%
31.54%
Japan
Portugal 28.62%
Puerto Rico 97.10%
South Korea 48.28%
Spain 53.55%
Taiwan 88.49%
Turkey 84.14%
UK 11.43%
US 53.96% Total World: 418.82 bn cm (45.08%)
0 20 40 60 80 100 240
bn cm
Source: Cedigaz/Petroleum Economist LNG Data Centre, 2006
Managing risk along the value chain Companies who decide to monetise
gas through LNG must then establish
Companies undertaking LNG minimum offtake volumes in order to
operations need to manage a provide an assured revenue flow and
multiplicity of risks. At a strategic be sure that the gas price will be
level, there is the threat of high gas high enough to deliver acceptable
prices leading to demand reduction economics.
as LNG competes against other
fuels, initially through fuel switching Liquefaction is a lower risk activity
and more permanently through than those associated with LNG’s
capital investment decision making. upstream operations. Project finance
Currently, companies also face requirements often make a tolling
considerable resource shortages and arrangement appropriate to provide
costs, in terms of both hardware and long-term stable revenues and low
people. At both the export and the risk. In turn, however, this part of the
import end, infrastructure projects value chain tends to attract a lower
can also raise social and rate of return because of the lower
environmental concerns which have risks involved.
to be managed carefully.
Moving further along the value chain,
Starting at the top of the value chain, the ‘marketing company’ is the entity
the upstream E&P arena presents that takes the responsibility for
normally the highest risks related to exporting and shipping the gas. It
project completion, development may be a wholly owned subsidiary or
costs, reserves uncertainty and a joint venture company. The
facilities performance. ‘marketing company’ carries
significant volume and price risk
arising from trading activity.
 CEO checklist: the key issues
1 LNG versus the alternative options
03
• Producers – LNG vs. pipeline gas, Gas to liquids (GTL), domestic supply,
compressed natural gas, power
• Buyers – LNG vs. pipeline gas, coal, renewables, oil, nuclear

2 Risk exposure
• Producers – optimum level of market exposure, natural hedging by
integrating down the value chain (shipping, regasification, marketing)
• Buyers – maximum security of supply, natural hedging by integrating
up the value chain

3 Flexibility requirements
• Producers – volumes, timings, destination, storage PwC LNG Dialogue
• Buyers – seasonality, volumes, diversity of supply, storage
Maximising tax efficiency
4 Pricing “Tax treatment of LNG operations
• Producers – minimum price willing to accept (price of next best option), poses a significant challenge for
caps + collars companies. LNG taxation is highly
• Buyers – maximum price willing to pay (cost of next best option), link to dynamic, with complex and evolving
oil, oil product or power prices rules spread across many tax
jurisdictions. Specialised tax
5 Contractual arrangements structuring is needed to realise all the
• Producers – volumes required to underpin finance, volumes under advantages afforded through the
long-term contracts, capacity set aside for spot trading opportunities (if any) interaction of the various systems.”
• Buyers – investment capital requirements, supply and offtake guarantees
LNG supply sources are, by their nature,
Underpinning success factors typically located in areas far removed
• Managing geopolitical and regulatory risk from end-markets. Stretched supply lines
• Managing planning and environmental issues require international organisation of
• Credible lender selection and clearly agreed finance structure people and resources. In turn, this
• Expert project development, experienced contractors and smart asset management necessitates complicated corporate
• Managing gas specification requirements structures, often spread across many tax
jurisdictions. Different tax jurisdictions
have developed their own specific
approaches for taxing the business of
This risk will be subject to the On the operational side, the LNG production, transportation and
contract terms of the LNG Gas ‘marketing company’ needs to secure marketing.
Purchase Agreement (GPA) under access to liquefaction, shipping and
International business operations have
which it purchases LNG from the regasification capacity. To some
unique taxation considerations that can
upstream supplier, and the terms of extent, its risks can be mitigated if lead to the need for complex structuring.
the Gas Sales Agreement (GSA) the company has a large number of Global inter-group cash flows, often
under which it sells gas to the regasification terminals serving necessitated by the need for new capital
downstream offtaker(s). The partners different markets. as projects expand or relocate, create
challenges to tax optimisation when
will need to agree a risk sharing
those flows move across tax jurisdiction
contract (as part of the shareholder Regasification is a lower risk activity boundaries. Consideration must be given
agreement) that clearly allocates the than the upstream and to debt or equity financing alternatives
exposure as well as the rewards to marketing/shipping activities. LNG and to future prospects for repatriation
the relevant parties. The ‘marketing shipping is also a lower risk activity dividend flows from subsidiaries. Global
or regional finance centres are often
company’ may need to have parent than the upstream and marketing
appropriate to deal with these issues.
company guarantees, which means activities. It is even considered to be In each of these cases, tax ramifications
that the parent companies are fully lower risk than regasification and should be understood and considered in
exposed to the risks of the liquefaction, because ships can be the overall decisions.
‘marketing company’ and will need to used elsewhere and are therefore not
In addition, the physical movement of
put this exposure on their balance necessarily linked to the markets of a
LNG products through the phases of a
sheet. particular project. company's business model, be it
production, transportation, marketing,
The ‘marketing company’ guarantor or all three, often occurs across
needs a sufficiently high credit rating jurisdictional borders and between legal
entities, adding more complication to the
to back long-term contracts and
overall tax position. Transfer pricing
credit lines so that they can survive concerns and questions about the exact
periods of adverse market conditions. timing or location of a legal title transfer
require specific consideration if
companies are to optimise their tax
position.

PricewaterhouseCoopers • Value and growth in the liquefied natural gas market 15

04 LNG tomorrow
The future map of the LNG sector around the world
will be very different from today. Major new
developments are set to come onstream over the next
decade. The commercial risk posed by the shortage of
LNG over the next five years or so highlights the
importance of such developments.
As we saw in the previous chapter,
though, many of these developments
are far from certain. In this chapter,
we look at the future landscape of
LNG and consider how smaller-scale
and more flexible technology is likely
to further change the nature of LNG
trading.
The future LNG world
The future LNG world map (figure 9)
looks very different from the current
one shown on page 9. By 2015,
Qatar is expected to be the
undisputed lead producer. There will
be significant expansion of LNG from
sources like Nigeria. In addition, new
sources may enter the market from
the Russian Federation and Iran.
Increased imports by China and
India in the Asia Pacific region, the
UK and Italy in Europe and the US in
North America will fuel LNG growth
(see figure 11). The growth in imports
by the US alone is expected to
account for between a third and a
half of the increase in global LNG
volumes between 2005 and 2015.
 04

Figure 9: LNG trade movements, 2015*

Norway
Russian Federation
United States
Canada

United Kingdom Netherlands

Poland
Belgium Germany
France Croatia
Italy
Spain
United States Turkey
Portugal South Korea
Greece China
Cyprus
Iran Japan
Pakistan Taiwan
Bahamas Egypt Qatar
Algeria Libya
India
Mexico UAE
Jamaica Puerto Rico Oman
Dominican Rep. Philippines
Honduras Yemen Thailand
Trinidad & Tobago
Venezuela Nigeria Brunei
Malaysia
Equatorial Guinea Singapore
Indonesia

Peru
Brazil Angola

Chile Australia
Export country/state

Import country

Trade route
(contracted)
Other prospective countries with studies in progress include:
Trade route Exporters - Brazil, Mauritania, Papua New Guinea
(non contracted) Importers - Hong Kong, New Zealand, Sweden, Ukraine

*Note: All trade movement figures associated with this table are directly derived from contracts currently in place (either as SPA, HOA or MOU) as at December 2006,
according to Cedigaz data. No concession has been made for current contracts expiring before 2015 or for current HOAs or MOUs to be terminated.

Source: Cedigaz/Petroleum Economist LNG Data Centre, 2006

Figure 10: LNG exporters – main growth countries Figure 11: LNG importers – main growth countries

2005 2015 % increase 2005 2015 % increase

bn cm bn cm bn cm bn cm

Qatar 27.1 115.0 324% US 17.9 75.0 319%

Nigeria 12.0 33.7 180% Spain 21.9 29.8 36%

Australia 14.8 26.4 78% UK 0.5 21.0 3925%

Egypt 6.9 17.1 146% Italy 2.5 19.7 685%

Iran 10.8 n/a India 6.0 16.9 179%

Russian Federation 10.6 n/a China 12.0 n/a

Yemen 8.8 n/a Portugal 1.6 3.5 119%

Source: Cedigaz/Petroleum Economist LNG Data Centre, 2006

PricewaterhouseCoopers • Value and growth in the liquefied natural gas market 17

04 LNG tomorrow

The expected increased capacity in In Africa, current construction of

Qatar is spectacular, accounting for
two thirds of the increase in LNG
exports between 2005 and 2015.
Seventy per cent of the planned
expansion in infrastructure capacity
in Qatar is already under
construction so this element of
overall LNG growth is relatively
certain. In contrast, the growth in
Iran is speculative and is yet to move
to the planning stage. Elsewhere,
new LNG export infrastructure is a
mix of current construction, planned
and speculative projects.
plant is expected to bring Equatorial
Guinea on to the LNG map by 2007
or soon after. The main export and
import growth countries are listed in
figures 10 and 11. On the import
side, the table highlights the extent
to which demand expansion in
countries such as the UK, US and
Italy represents a significant material
shift from the current situation.

Figure 12: Top Ten LNG exporters (by capacity)

Million t/y 1995 Million t/y 2006 Million t/y 2015*

Sonatrach 21.95 Sonatrach 21.95 Qatar Petroleum 52.46

Pertamina 13.70 Petronas 18.70 Shell 39.00
Petronas 11.97 Qatar Petroleum 16.92 NNPC 36.40
Shell 4.65 Pertamina 16.16 Pertamina 23.16
Mitsubishi 4.01 Shell 12.72 ExxonMobil 22.90
ADNOC 3.92 BP 8.52 Sonatrach 22.75
JILCO (Indonesia) 3.74 NNPC 8.36 NIOC (Iran) 21.57
VICO (Indonesia) 3.62 ExxonMobil 7.46 Petronas 20.28
Brunei Government 3.60 BG 7.24 BP 19.09
NOC (Libya) 2.30 Total 6.50 Total 19.02

Total World 86.85 Total World 186.23 Total World 459.48

Top Ten 84.58% Top Ten 66.87% Top Ten 60.21%

Total capacity

Utilisation of capacity

1995 2006 2015*

Note: *Derived from data based on all known future projects

Source: Petroleum Economist LNG Data Centre, 2006

18 PricewaterhouseCoopers • Value and growth in the liquefied natural gas market

 04

Behind the overall growth in LNG is

the growth of individual players in
the marketplace. Not surprisingly, the
national oil and gas companies in
Qatar and Nigeria figure prominently
(see figure 10). These companies,
together with the international
majors, are set to dominate the LNG
export top ten which is now taking
on a different look compared to past
decades when LNG trade in the Far
East took the dominant share of
world LNG trade. Figure 12 also
shows a trend towards an
increasingly competitive marketplace
with more players. By 2015 the ten
largest exporting companies’ share
of total world LNG export capacity
will have fallen to 60% compared to
84.5% back in 1995.
“We are seeing an increasingly competitive
marketplace that is less concentrated on the
Technology advances
biggest players and has more companies
The increased competitiveness of overall.”
the market is likely to be boosted
still further by technological
advances. Economies of scale and
learning have reduced unit costs of
gas transport by LNG at a greater
rate than by pipeline alternatives.
Investment in LNG infrastructure
occurs in smaller increments than
pipelines. LNG costs have been
reduced. Nonetheless, infrastructure
investment remains large-scale and
places constraints on the number of
companies that can enter the
market.

PricewaterhouseCoopers • Value and growth in the liquefied natural gas market 19

04 LNG tomorrow

Small-scale liquefaction Liquefaction hubs Alternative source and uses of LNG

Ultimately, any natural gas that is Liquefaction hubs are likely to be Opportunity fuels (any fuel that has
accessible to shipping, either both regionally and globally the potential to be used for
offshore or piped to coastal significant as the LNG industry economically viable power generation
locations, could be directly used for matures and new gas supply sources but is not traditionally used for this
the LNG market. Typically, gas fields are pulled into existing liquefaction purpose) such as associated gas,
that were developed for LNG exports infrastructure positions. Currently, landfill gas, and coal-methane could
had minimum proven reserves of 500 liquefaction plants can be very also be suitable for small-to
bcm or above. However, small-scale effective barriers to entry that medium-scale LNG applications.
liquefaction plants (i.e. 250 to 1,000 prevent new upstream suppliers This would enable methane gas
tonnes per day) are now being entering the market. However, some recovery from coal mining or landfill
developed and tested. Small-scale, traditional gas supplies are sites to be converted to LNG and
and to some extent mobile, LNG becoming depleted and existing transported by LNG road tanker to
production units and flexible LNG infrastructure owners/stakeholders regasification facilities. Alternatively,
transportation in ten ton containers will be very keen to see new gas LNG applications as a transport fuel
could monetise smaller reserves. supplies pulled in to utilise the may evolve in regions where it is
This could increase the number of existing liquefaction infrastructure. In economical to do so. For example,
reserves and markets, opening up Indonesia, Malaysia and Australia, for LNG-powered buses and heavy
the prospect of many more players example, it is likely that LNG machinery in Western Australia.
with a greater number of loading and liquefaction asset lives will be
offloading options. extended by becoming hubs for
disparate gas supplies. This will
open up the potential for non-
traditional suppliers to break into the
traditional supply models/consortia.
Such developments will become
even more likely in the light of the
planning difficulties of developing
new greenfield LNG infrastructure.
In contrast, existing liquefaction sites
offer brownfield opportunities for
development.

Figure 13: Capital cost (US$/LNG gallons per day)

Capital cost per day (US$)

1,000

800 Conventional negative

scaling effect
600

400 Target small-scale

liquefaction plants Conventional
200 liquefaction plants

0 100 1,000 10,000 100,000 1,000,000 10,000,000

LNG gallons per day
Source: MEI LLC, a member of the ILF Group

20 PricewaterhouseCoopers • Value and growth in the liquefied natural gas market

 04
“Technological innovation could open up the
prospect of many more players with a greater
number of loading and offloading options.”

Figure 14, for example, illustrates an Figure 14: Floating LNG production
example of the use of floating LNG
production vessels to capture
offshore gas and eliminate flaring. OFFSHORE PRODUCTION
Medium-sized vessels could equally
be well used. So far only concepts
exist of this type of application.
A number of hurdles need to be
overcome. Separation treatment of FLOATING LNG PRODUCTION
the raw gas has to take place before Intermediate LPG Storage
liquefaction. Also, the technology to LPG Extraction
reliquefy boil-off gas on vessels Gas Treatment
exists but not yet on a scale suitable Cold Box
for LNG production. Intermediate LNG Storage

Wet Gas

Source: MEI LLC, a member of the ILF Group

Gas storage for peak shaving

Type Cushion to Utilisations
working gas ratio (cycle times per year)
Typically large-scale (150 to 500 m cm)
underground gas storage using Aquifer and depleted Cushion: 50% to 80% 1
depleted oil and gas fields or salt oil and gas reservoirs
caverns have been used for seasonal
Salt cavern Cushion: 20% to 30% 6-10
gas storage for peak shaving
purposes. Smaller and more flexible Cryogenic surface storage Heel: 3% to 6% 24
cryogenic storage could be utilised for
smaller communities/islands or regions
where no underground gas storage is
possible. Current technology enables
small-scale LNG peak shaving plant
and satellite plants to provide flexible
options for power utilities. Already, the
latter are fairly common in the US
although they are rare in Europe and
the rest of the world.

PricewaterhouseCoopers • Value and growth in the liquefied natural gas market 21

04 LNG tomorrow
Shipboard regasification
The development of shipboard
regasification and shipboard
liquefaction would enable LNG to be
sourced and supplied to a
multiplicity of sources without the
need for significant investment in
liquefaction and regasification
infrastructure. Excelerate Energy’s
Energy BridgeTM shipboard
regasification technology has been
operational in the Gulf of Mexico
serving LNG terminals in Louisiana
since 2005 and in Teesside (UK)
which is due to be on-stream in
2007. The reduced need for
investment at the receiving port can
make LNG an economic option for
more destinations. An example is
situations where only seasonal
supplies rather than baseload
supplies are needed and where,
otherwise, the utilisation rate of any
regasification plant would be
uneconomically low. Shipboard
liquefaction and regasification also
helps to allay safety fears sometimes
expressed by people living or
working near port LNG infrastructure.
This was, for example, a factor
behind the initiatives in the Gulf of
Mexico.
“The different and evolving LNG environment of
today and tomorrow demands a mind-shift by
many players away from the predominant linear
fixed supplier and buyer chain of supply to a more
flexible, disaggregated model of the market.”
22 PricewaterhouseCoopers • Value and growth in the liquefied natural gas market
A truly global market?
The LNG market will undoubtedly
become more global in the sense
that the historical concentration of
volumes in the North East Asian and
Pacific markets will become
balanced by the rapid growth of
demand from Europe, North
America, India and China. New
sources of LNG supply may emerge
from countries such as Libya, Angola
and Equatorial Guinea. This will
further accelerate the shift in LNG
from the Pacific to the Atlantic.
Middle Eastern sources will play a
pivotal supply role in the market with
the flexibility to serve both eastward
and westward destinations.
The traditional value chain represents
a linear set of investments. However,
the different and evolving LNG
environment of today and tomorrow
demands a mind-shift by many
players away from the predominant
linear fixed supplier and buyer chain
of supply to a more flexible,
disaggregated model of the market.
Instead of fixed routes and wholly-
owned value chains, we are entering
an era where, increasingly, more
cargoes move to where they can
gain the highest netback and many
companies use trading, partnerships
and other mechanisms to assemble
their own value chains.

The prospects for the emergence of a
truly global market that comes closer
to the characteristics of the oil market
with a fairly homogenous price are
more questionable. How far the LNG
sector can move in that direction will,
in part, be dependent on the extent to
which technological developments,
with the development of super-scale
tankers combining shipboard
liquefaction and regasification, can
increase the volume of short-term
trading. Another key factor will be
growth in the number of supply and
receiving points.
A key macro-level determinant of
LNG growth will, of course, be LNG’s
competitiveness against other fuel
sources. Its inability to compete
against cheap coal continues, for
example, to restrict LNG supply
growth in the major markets of India
and China. Changes in energy market
regulation, environmental taxes and
carbon trading will all have an
influence on LNG’s future place in
the fuel mix.
PricewaterhouseCoopers • Value and growth in the liquefied natural gas market
04
PwC LNG Dialogue
Factoring in the cost of carbon
“Downstream power utilities are already considering the cost
of carbon in their operational and investment decision
making. Notwithstanding the medium-and longer-term
uncertainty surrounding the regulatory framework around
carbon, it is imperative that energy players evaluate the risks
and opportunities around this new value driver in the energy
markets.”
What is striking about the EU Emissions Trading Scheme
(EU-ETS) is its rapid success in providing a new price signal.
The electricity markets now distinguish between the dark spread
(the differential between power prices and the coal price
component of generation costs) and the green spread (the
differential after taking into account the cost of the carbon
allowance associated with generating the power). When the
market price of carbon allowances fell, this had repercussions for
generators’ share prices. Operating companies are taking carbon
impacts into account in their investment decisions, and investors
are looking to benefit from the potential upside.
It is often claimed that the short-term nature of carbon
regulation, both within the EU-ETS and under the Kyoto
Protocol, combined with significant volatility in carbon markets,
are a major disincentive to long-term investment. The power
sector, in particular, has argued strongly that it requires a much
longer regulatory horizon (ten-year carbon trading windows or
more) if major investment shifts to cleaner generation are to
occur. This will naturally have implications further upstream and
should favour cleaner fuel sources such as LNG.
Many energy players have already taken the strategic view that
a price for carbon will exist after 2012 and are planning
accordingly. The year 2006 saw announcements on power
projects incorporating carbon capture and storage (CCS)
projects despite there being no mechanism currently in place
through which a dollar value can be attributed to the CO2 saved.
CCS technology may offer an interesting bridge between
upstream and downstream activities. It is likely that similar plays
could emerge around LNG value chains, particularly with
respect to the separation of CO2 in gas treatment phases (from
high CO2 content fields) prior to liquefaction.
23
05 Conclusion

As we look ahead, it is clear LNG will have a growing part to play

in world energy. It is likely that this will be in the context of a
market that will become increasingly flexible and liquid, although
still characterised by structural and regional differences.
Opportunities for arbitrage will continue to be a feature of the
marketplace.

The extent to which companies will be able to optimise their LNG

strategies through portfolio trading will, in a large part, be
determined by whether the market remains constrained. In a tight
market, supplies will be dominated by the national oil companies
and sufficient liquidity is unlikely to be present for such trading to
play a central role. However, both current infrastructure
developments and future technological developments point to
greater volumes, more market participants and, hence, greater
liquidity. This will allow all players to benefit from more flexible
value chains.

This trend may be reinforced by technological developments.

Increasingly, niche technology will mean LNG can be taken from
locations where gas is currently not recovered. This will enable
the LNG sector to offer flexible small-scale transportation and
delivery options as well as larger-scale LNG shipping routes, akin
to the strategy currently being played out in the aviation industry
between Boeing’s investment in a smaller-scale shorter haul fleet
versus Airbus’s investment in the large-scale longer distance
super-jumbo.

The ultimate course of LNG development will depend on its

competitiveness on both the supply and demand side. On the
supply side, GTL may provide an increasingly significant
alternative route to monetise stranded gas. On the demand side,
technology, price regulation and government policies will be key
influences on the big macro-level question of LNG’s
competitiveness in the power utility fuel mix. Clean coal and
nuclear power will be potential demand dampeners. However, all
are likely to be part of the energy mix, especially in a future where
LNG can be accessed by utility companies in more locations, in
greater volumes and in more flexible delivery modes.

24 PricewaterhouseCoopers • Value and growth in the liquefied natural gas market


Global contacts
Richard Paterson
Global Energy, Utilities &
Mining Leader
Telephone: +1 214 756 1579
Email: richard.paterson@us.pwc.com
Manfred Wiegand
Global Utilities Leader
Telephone: +49 201 438 1517
Email: manfred.wiegand@de.pwc.com
Michael Hurley
Global LNG Leader
Telephone: +44 207 804 4465
Email: michael.hurley@uk.pwc.com
Fred Cohen
Global Energy, Utilities & Mining
Advisory Leader
Telephone: +1 646 471 8252
Email: fred.cohen@us.pwc.com
James Koch
Global Energy, Utilities & Mining
Tax Leader
Telephone: +1 713 356 4626
Email: james.koch@us.pwc.com
Peter Albrecht
Eurofirms Industrial Products Leader
Telephone: +49 201 438 1518
Email: peter.albrecht@de.pwc.com
Klaus-Dieter Ruske
Global Transportation
& Logistics Leader
Telephone: +49 211 981 2877
Email: klaus-dieter.ruske@de.pwc.com
Contact us 06
Territory contacts
Europe
Austria
Gerhard Prachner
Telephone: +43 1 501 88 1800
Email: gerhard.prachner@at.pwc.com
Bernhard Haider
Telephone: + 43 1 501 88 2900
Email: bernhard.haider@at.pwc.com
Belgium
Joost De Groote
Telephone: +32 2 710 7419
Email: joost.de.groote@be.pwc.com
Central and Eastern Europe
Tibor Almassy
Telephone: +36 1 461 9644
Email: tibor.almassy@hu.pwc.com
Czech Republic
Helena Cadanova
Telephone: +420 251 152 011
Email: helena.cadanova@cz.pwc.com
Denmark
Per Timmermann
Telephone: +45 39 459 145
Email: per.timmermann@dk.pwc.com
Finland
Juha Tuomala
Telephone: +358 9 228 01 451
Email: juha.tuomala@fi.pwc.com
France
Jean Gaignon
Telephone: +33 1 565 74 028
Email: jean.gaignon@fr.pwc.com
Philippe Girault
Telephone: +33 1 565 78 897
Email: philippe.girault@fr.pwc.com
Germany
Manfred Wiegand
Telephone: +49 201 438 1517
Email: manfred.wiegand@de.pwc.com
PricewaterhouseCoopers • Value and growth in the liquefied natural gas market
Greece
Dinos Michalatos
Telephone: +30 1 687 4730
Email: dinos.michalatos@gr.pwc.com
Ireland
Carmel O’Connor
Telephone: +353 1 662 6417
Email: carmel.oconnor@ie.pwc.com
Italy
John McQuiston
Telephone: +390 6 570 25 2439
Email: john.mcquiston@it.pwc.com
Malta
Frederick Mifsud Bonnici
Telephone: +356 256 47 604
Email: frederick.mifsud.bonnici@mt.pwc.com
Netherlands
Aad Groenenboom
Telephone: +31 26 371 2509
Email: aad.groenenboom@nl.pwc.com
Fred Konings
Telephone: +31 70 342 6150
Email: fred.konings@nl.pwc.com
Arthur Kramer
Telephone: +31 70 342 6033
Email: arthur.kramer@nl.pwc.com
Norway
Ole Schei Martinsen
Telephone: +47 95 261 162
Email: ole.martinsen@no.pwc.com
Poland
Wilhelm Simons
Telephone: +48 22 523 4150
Email: wilhelm.simons@pl.pwc.com
Portugal
Luis Ferreira
Telephone: +351 213 599 296
Email: luis.s.ferreira@pt.pwc.com
25
06 Contact us

Europe (continued) The Americas

Russia and the Former Soviet Union United States

John Gross Martha Carnes
Telephone: +7 495 967 6260 Telephone: +1 713 356 6504
Email: john.c.gross@ru.pwc.com Email: martha.z.carnes@us.pwc.com

Gerald Rohan Paul Keglevic

Telephone: +7 495 967 6267 Telephone: +1 312 298 2029
Email: gerald.j.rohan@ru.pwc.com Email: paul.keglevic@us.pwc.com
Stephen Parker
Spain
Telephone: +1 713 356 6505
Francisco Martinez
Email: stephen.g.parker@us.pwc.com
Telephone: +34 91 568 47 04
Email: francisco.martinez@es.pwc.com Christopher Bryant
Telephone: +1 713 356 4572
Sweden Email: christopher.bryant@us.pwc.com
Mats Edvinsson
Telephone: +46 8 555 33 706 Manish Kumar
Email: mats.edvinsson@se.pwc.com Telephone: +1 713 356 4014
Email: manish.k.kumar@us.pwc.com
Switzerland Dario Quiroga
Ralf Schlaepfer Telephone: +1 703 918 1151
Telephone: +41 58 792 1620 Email: dario.quiroga@us.pwc.com
Email: ralf.schlaepfer@ch.pwc.com
Canada
Turkey Angelo Toselli
Faruk Sabuncu Telephone: +1 403 509 7581
Telephone: +90 212 326 6082 Email: angelo.f.toselli@ca.pwc.com
Email: faruk.sabuncu@tr.pwc.com
Tom Collins
United Kingdom Telephone: +1 403 509 7359
Ross Hunter Email: tom.collins@ca.pwc.com
Telephone: +44 207 804 4326
Email: ross.hunter@uk.pwc.com Latin America
Jorge Bacher
Albrecht Muller von Blumencron Telephone: +54 11 485 06 801
Telephone: +44 207 213 3956 Email: jorge.c.bacher@ar.pwc.com
Email: albrecht.muller.von.blumencron@uk.pwc.com
Adrian Leaker Mexico
Telephone: +44 207 213 2203 Javier Hernandez
Email: adrian.j.leaker@uk.pwc.com Telephone: +52 555 263 5819
Email: javier.hernandez@mx.pwc.com
Pooya Alai
Telephone: +44 207 804 9808 Jorge Silva
Email: pooya.alai@uk.pwc.com Telephone: +52 555 263 8632
Email: jorge.a.silva@mx.pwc.com
John Hutchins
Telephone: +44 207 212 2760
Email: john.d.hutchins@uk.pwc.com

26 PricewaterhouseCoopers • Value and growth in the liquefied natural gas market


Asia-Pacific
Australia
Derek Kidley
Telephone: +61 2 826 69 267
Email:derek.kidley@au.pwc.com
Robert Gray
Telephone: +61 3 860 33 499
Email: robert.c.gray@au.pwc.com
China
Gavin Chui
Telephone: +86 10 653 32 188
Email: gavin.chui@cn.pwc.com
Allan Zhang
Telephone: +86 10 653 37 280
Email: allan.zhang@cn.pwc.com
India
Kameswara Rao
Telephone: +91 40 233 00 750
Email: kameswara.rao@in.pwc.com
Singapore
Robert Montgomery
Telephone: +65 623 64 178
Email: robert.montgomery@sg.pwc.com
PricewaterhouseCoopers • Value and growth in the liquefied natural gas market
Contact us 06
Middle East
Paul Suddaby
Telephone: +971 4 304 3451
Email: paul.suddaby@ae.pwc.com
Oman
Kenneth Macfarlane
Telephone: +968 24 563 7113
Email: kenneth.macfarlane@om.pwc.com
Qatar
Ian Clay
Telephone: +974 44 15 722
Email: ian.clay@qa.pwc.com
Timothy Wells
Telephone: +974 44 15 700
Email: timothy.j.wells@qa.pwc.com
Africa
Elias Pungong
Telephone: +241 77 2335
Email: elias.pungong@ga.pwc.com
Angola
Julian Ince
Telephone: +244 2 395 004
Email: julian.ince@ao.pwc.com
Allan Dulany
Telephone: +244 2 395 004
Email: allan.a.dulany@ao.pwc.com
Nigeria
Uyiosa Akpata
Telephone: +234 1 320 2101
Email: uyi.n.akpata@ng.pwc.com
Southern Africa
Stanley Subramoney
Telephone: +27 11 797 4380
Email: stanley.subramoney@za.pwc.com
Additional information
Olesya Hatop
Global Energy, Utilities & Mining Marketing
Telephone: +49 201 438 1431
Email: olesya.hatop@de.pwc.com
27
Fast-paced growth in LNG:
How PwC can help you

Higher natural gas prices and growing
efficiencies in the LNG value chain are
making it economically feasible to ship
LNG over long distances, transforming
natural gas from a regional to a global
marketplace. LNG is one of the fastest
growing energy markets worldwide.
Given the number of new LNG projects
proposed or under construction, global
production capacity could more than
double by the end of the decade.
According to the International Energy
Agency, such fast growth will require
$250 billion to be invested in
liquefaction plants, coastal
regasification import terminals, and
special LNG tankers over the next
30 years.
Market analysis and strategic options
• LNG capacity and phasing decisions
• Which markets should be served?
• Assessment of market trends and drivers
• Pipeline versus LNG supply analysis
• LNG Workshops
Economic and commercial assessments of LNG projects
• Commercial feasibility analysis
• Netback calculations for the entire value chain
• Which project will increase shareholder value the most?
• Return and risk assessment
• Risk mitigation
• Tariff calculation/setting along the value chain
• International tax and tax structuring

The players in the LNG market include

integrated oil and gas companies, Project development and structuring
national oil companies and
governments, independent upstream • Partnering along the value chain
players, utilities, infrastructure and • Commercial principles and Heads of Terms
transportation companies, and private • Development of suitable project structures
investors. The upstream and • Financial structuring
downstream players hail from all • Finance raising
corners of the globe – Americas, Africa, • Refinancing procurement tenders
Europe, Middle East and Asia Pacific. • Selection of EPC contractors
Although the economics of widespread
use of LNG are becoming more
attractive, there still remain a number of
issues that need to be addressed to
bring on many of the planned projects.

PricewaterhouseCoopers has been

working with clients who are deeply
involved in the LNG market across the
globe and are at the leading edge of
developments. We have worked with
these clients across all stages of
LNG projects:

For further information, please visit

www.pwc.com/lng

28 PricewaterhouseCoopers • Value and growth in the liquefied natural gas market

List of abbreviations used throughout this report

bn cf billion cubic feet

bn cm billion cubic metres
CIS Commonwealth of Independent States
GTL Gas to liquids
JCC Japanese Crude Cocktail
LPG Liquefied Petroleum Gas
mmBtu million British thermal units
m cm million cubic metres
NBP National Balancing Point
NNPC Nigerian National Petroleum Company
OECD Organisation for Economic Co-operation and Development
OPEC Organization of the Petroleum Exporting Countries
tcf trillion cubic feet
tcm trillion cubic metres
TTF Title Transfer Facility
ZBT Zeebrugge Hub

More LNG terminology can be found in LNG – A glossary of terms,

which PricewaterhouseCoopers has published in conjunction with
The Petroleum Economist Ltd. as a practical contribution to promoting
transparency, understanding and knowledge in the global LNG industry.
Furthermore, together with The Petroleum Economist Ltd.,
PricewaterhouseCoopers produced the The Future of LNG Map.
This map represents the global LNG market with a focus on future
projects: construction of liquefaction and regasification terminals around
the world and an indication of future LNG trading routes.

To order the LNG – A glossary of terms or The Future of LNG Map,

please visit: www.petroleum-economist.com

Acknowledgments

We would like to acknowledge the assistance of BP p.l.c. for providing

images used throughout this report.
Front cover, inside front/back cover, pages 2, 8, 16, 19, 22, 23 and 24 © BP p.l.c.

*connectedthinking
PricewaterhouseCoopers (www.pwc.com) provides industry-focused
assurance, tax and advisory services to build public trust and enhance
value for its clients and their stakeholders. More than 140,000 people
in 149 countries across our network share their thinking, experience and
solutions to develop fresh perspectives and practical advice.

PricewaterhouseCoopers refers to the network of member firms of

PricewaterhouseCoopers International Limited, each of which is a
separate and independent legal entity.

The Global Energy, Utilities and Mining group (www.pwc.com/energy) is

the professional services leader in the international energy, utilities and
mining community, advising clients through a global network of fully
dedicated specialists.

For copies of the report, order online at:

www.pwc.com/lng

© 2007 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of
PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. *connectedthinking is a
trademark of PricewaterhouseCoopers LLP.

*connectedthinking