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MONTH 2008
© POTEN & PARTNERS 2008
CONFIDENTIAL
Impact of North American LNG on
Australian Projects
AUGUST 2014
Stephen Th...
MONTH 2009
© POTEN & PARTNERS 2009
CONFIDENTIAL
Page 2
© POTEN & PARTNERS
AUGUST 2014
Three key impacts of North American ...
MONTH 2009
© POTEN & PARTNERS 2009
CONFIDENTIAL
Page 3
© POTEN & PARTNERS
AUGUST 2014
New business and pricing models
Aust...
MONTH 2009
© POTEN & PARTNERS 2009
CONFIDENTIAL
Page 4
© POTEN & PARTNERS
AUGUST 2014
Upstream: from lottery to factory
• ...
MONTH 2009
© POTEN & PARTNERS 2009
CONFIDENTIAL
Page 5
© POTEN & PARTNERS
AUGUST 2014
Exploration risk has been largely el...
MONTH 2009
© POTEN & PARTNERS 2009
CONFIDENTIAL
Page 6
© POTEN & PARTNERS
AUGUST 2014
UG development payback is necessaril...
MONTH 2009
© POTEN & PARTNERS 2009
CONFIDENTIAL
Page 7
© POTEN & PARTNERS
AUGUST 2014
North American liquefaction has cont...
MONTH 2009
© POTEN & PARTNERS 2009
CONFIDENTIAL
Page 8
© POTEN & PARTNERS
AUGUST 2014
A quarter of Asian SPAs signed in th...
MONTH 2009
© POTEN & PARTNERS 2009
CONFIDENTIAL
Page 9
© POTEN & PARTNERS
AUGUST 2014
The LNG menu
• For the traditionalis...
MONTH 2009
© POTEN & PARTNERS 2009
CONFIDENTIAL
Page 10
© POTEN & PARTNERS
AUGUST 2014
Price and volume focal points
Austr...
MONTH 2009
© POTEN & PARTNERS 2009
CONFIDENTIAL
Page 11
© POTEN & PARTNERS
AUGUST 2014
• Focal point: A solution that work...
MONTH 2009
© POTEN & PARTNERS 2009
CONFIDENTIAL
Page 12
© POTEN & PARTNERS
AUGUST 2014
• Game 2: If you and the person nex...
MONTH 2009
© POTEN & PARTNERS 2009
CONFIDENTIAL
Page 13
© POTEN & PARTNERS
AUGUST 2014
• Game 3: I will show two slides ta...
MONTH 2009
© POTEN & PARTNERS 2009
CONFIDENTIAL
Page 14
© POTEN & PARTNERS
AUGUST 2014
MONTH 2009
© POTEN & PARTNERS 2009
CONFIDENTIAL
Page 15
© POTEN & PARTNERS
AUGUST 2014
MONTH 2009
© POTEN & PARTNERS 2009
CONFIDENTIAL
Page 16
© POTEN & PARTNERS
AUGUST 2014
• In schematic decision tree, optim...
MONTH 2009
© POTEN & PARTNERS 2009
CONFIDENTIAL
Page 17
© POTEN & PARTNERS
AUGUST 2014
Competition
Australia needs greater...
MONTH 2009
© POTEN & PARTNERS 2009
CONFIDENTIAL
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© POTEN & PARTNERS
AUGUST 2014
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• Over the course of the new millen...
MONTH 2009
© POTEN & PARTNERS 2009
CONFIDENTIAL
Page 20
© POTEN & PARTNERS
AUGUST 2014
NATURAL GAS & LNG CONSULTING CONTAC...
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Stephen Thompson - Poten & Partners - North American LNG – Impact for Australian projects

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Stephen Thompson delivered the presentation at the 2014 South East Asia Australia Offshore and Onshore Conference (SEAAOC).

SEAAOC is Northern Australia's largest and longest established petroleum conference and brings together major players involved within Australasia's oil, gas and petroleum industries. The event is run as a partnership between Informa Australia and the Department of the Chief Minister - Northern Territory Government of Australia.

For more information about the event, please visit: http://bit.ly/SEAAOC2014

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Transcript of "Stephen Thompson - Poten & Partners - North American LNG – Impact for Australian projects "

  1. 1. MONTH 2008 © POTEN & PARTNERS 2008 CONFIDENTIAL Impact of North American LNG on Australian Projects AUGUST 2014 Stephen Thompson Manager, LNG & Gas, Asia Pacific
  2. 2. MONTH 2009 © POTEN & PARTNERS 2009 CONFIDENTIAL Page 2 © POTEN & PARTNERS AUGUST 2014 Three key impacts of North American LNG • New business and pricing models are forcing Australia to clarify its value proposition • Price and volume focal points are causing Australian ventures to wrestle with regret minimization • Competition is imposing greater Australian capital discipline
  3. 3. MONTH 2009 © POTEN & PARTNERS 2009 CONFIDENTIAL Page 3 © POTEN & PARTNERS AUGUST 2014 New business and pricing models Australia must clarify its value proposition
  4. 4. MONTH 2009 © POTEN & PARTNERS 2009 CONFIDENTIAL Page 4 © POTEN & PARTNERS AUGUST 2014 Upstream: from lottery to factory • Industry adopted new business processes for large numbers of wells • Factory-like models used to reduce time and cost in multi-year programs • Well design was standardized to avoid limit engineering hours and streamline supplier interface • Pace set by external constraint such as rig availability and infrastructure for gathering • Companies achieved cost reductions of up to 40% and accelerated time to production by 30% Conventional gas life cycle The unconventional gas “factory”
  5. 5. MONTH 2009 © POTEN & PARTNERS 2009 CONFIDENTIAL Page 5 © POTEN & PARTNERS AUGUST 2014 Exploration risk has been largely eliminated • The old calculus of exploration risk…. p(Source x Path x Reservoir x Trap x Timing) = p(Success) 90% x 90% x 90% x 90% x 90% = 59% • …no longer applies p(Source x Path x Reservoir x Trap x Timing) = p(Success) Very large, known resource beds Risk eliminated: produce directly from source rock
  6. 6. MONTH 2009 © POTEN & PARTNERS 2009 CONFIDENTIAL Page 6 © POTEN & PARTNERS AUGUST 2014 UG development payback is necessarily short • Shale gas production declines exponentially • Short payback effectively de-risks drilling • Near-term forecasts inherently more certain than long-term • Financial hedging products readily available to cover much of production period
  7. 7. MONTH 2009 © POTEN & PARTNERS 2009 CONFIDENTIAL Page 7 © POTEN & PARTNERS AUGUST 2014 North American liquefaction has continued industry trend toward unbundling of value chain
  8. 8. MONTH 2009 © POTEN & PARTNERS 2009 CONFIDENTIAL Page 8 © POTEN & PARTNERS AUGUST 2014 A quarter of Asian SPAs signed in the last three years are hub-linked • Oil-link is forecast to remain the dominant mechanism to price new long- term contracts in Asia, amid increasing presence of HH- linked volumes in Asian markets • Variety of pricing alternatives and supply options with new and very different business models is good for the industry • Need to look hard at risk/reward profile of alternative offers—no “$100 bills lying on the sidewalk” Long-term contracts into Asia signed 2010-13 (Total 66 contracts) Oil Linked 74% HH, NBP, JKM & Hybrid 26%
  9. 9. MONTH 2009 © POTEN & PARTNERS 2009 CONFIDENTIAL Page 9 © POTEN & PARTNERS AUGUST 2014 The LNG menu • For the traditionalist • Oil-linked supply from a venture led by an established sponsor • For the adventurous • Henry-Hub indexed supply or tolling service from a new player • For those who can’t make up their minds • Hybrid contracts from an aggregator . . .
  10. 10. MONTH 2009 © POTEN & PARTNERS 2009 CONFIDENTIAL Page 10 © POTEN & PARTNERS AUGUST 2014 Price and volume focal points Australia wrestles with regret minimization
  11. 11. MONTH 2009 © POTEN & PARTNERS 2009 CONFIDENTIAL Page 11 © POTEN & PARTNERS AUGUST 2014 • Focal point: A solution that works because it is obvious, not because it is right • Game 1: If you and the person next to you choose the same square you win a prize. Which square do you choose, and why? • Corollary #1: he who controls the focal points (sometimes) drives the negotiations Focal points in negotiations
  12. 12. MONTH 2009 © POTEN & PARTNERS 2009 CONFIDENTIAL Page 12 © POTEN & PARTNERS AUGUST 2014 • Game 2: If you and the person next to you choose the same price you win a prize. Which price do you choose, and why? The pricing focal point
  13. 13. MONTH 2009 © POTEN & PARTNERS 2009 CONFIDENTIAL Page 13 © POTEN & PARTNERS AUGUST 2014 • Game 3: I will show two slides taken from the US Department of Energy website. If you and the person next to you choose the same number you win a prize. Which number do you choose, and why? • Corollary #2: the more politicized a negotiation is, the more focal points count The volume focal point
  14. 14. MONTH 2009 © POTEN & PARTNERS 2009 CONFIDENTIAL Page 14 © POTEN & PARTNERS AUGUST 2014
  15. 15. MONTH 2009 © POTEN & PARTNERS 2009 CONFIDENTIAL Page 15 © POTEN & PARTNERS AUGUST 2014
  16. 16. MONTH 2009 © POTEN & PARTNERS 2009 CONFIDENTIAL Page 16 © POTEN & PARTNERS AUGUST 2014 • In schematic decision tree, optimal decision is “buy” Australian LNG • Five “wins” vs. two “looses” • Regret-minimizing decision is “do nothing” • Zero possibility of a loss Regret minimization HIGH WIN Oil Price NO LOW WIN HH availability HIGH YES HIGH TIE Oil Price HH Price LOW WIN HIGH WIN LOW Oil Price NO LOW WIN BUY HH availability YES HIGH LOOSE Oil Price LOW LOOSE Purchase Decision DO NOTHING $0
  17. 17. MONTH 2009 © POTEN & PARTNERS 2009 CONFIDENTIAL Page 17 © POTEN & PARTNERS AUGUST 2014 Competition Australia needs greater capital discipline
  18. 18. MONTH 2009 © POTEN & PARTNERS 2009 CONFIDENTIAL Page 18 © POTEN & PARTNERS AUGUST 2014 0 50 100 150 200 250 300 350 400 450 500 2000 2005 2010 2015 2020 2025 2030 MMt/y East Africa North America Australia West Africa Qatar North Africa Malaysia/Indonesia Others Total Demand North America and East Africa compete for markets • Australia and Qatar will provide close to 44% of the global supply by 2020 • Limited growth from both countries post 2020 • East Africa and North America near 116 MMt/y by 2030, gaining 26% of global market Two markets account for almost all new supply from 2020-30 ProjectionHistorical
  19. 19. MONTH 2009 © POTEN & PARTNERS 2009 CONFIDENTIAL Page 19 © POTEN & PARTNERS AUGUST 2014 • Over the course of the new millennium, Australian costs per unit of capacity have increased by 300%-500% • Investors aren’t buying it Capital discipline was short-changed in rush to FID LNG-weighted equity index vs S&P 500
  20. 20. MONTH 2009 © POTEN & PARTNERS 2009 CONFIDENTIAL Page 20 © POTEN & PARTNERS AUGUST 2014 NATURAL GAS & LNG CONSULTING CONTACTS: AMERICAS (NEW YORK) Contact: Jim Briggs Email: jbriggs@poten.com Tel: +1 212 230 2000 EUROPE, M. EAST, AFRICA Contact: Graham Hartnell Email: ghartnell@poten.com Tel: +44 20 3747 4820 ASIA PACIFIC Contact: Stephen Thompson Email: sthompson@poten.com Tel: +61 8 6468 7942 AMERICAS (HOUSTON) Contact: Daryl Houghton Email: dhoughton@poten.com Tel: +1 917 2225 7636
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