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Alaskan LNG Exports Competitiveness Study

Alaska Gasline Port Authority (AGPA)


Final Report




July 27, 2011




                                            Strategy with substance
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Background
             As part of its interest in promoting a large volume pipeline from the
             North Slope to a 2.7 bcfd liquefaction facility in Valdez (and a lateral
             to serve south central Alaskan demand), AGPA has contracted Wood
             Mackenzie to evaluate the economic competitiveness of Alaskan LNG
             exports relative to other proposed liquefactions projects at various
             stages of development.
             With oil prices hovering today around $100 per barrel, and expected
             to remain at or around that level for an extended period of time, the
             Alaskan LNG export opportunity appears today to make economic
             sense. Typical Asian oil-indexed LNG pricing delivers product to
             regasification terminals at over $15 per mmBtu. On the other hand,
             Lower-48 and Canadian natural gas, if exported as LNG, could
             potentially be delivered to Asia at or around a cost of $10 per mmBtu,
             subject to various assumptions and costs.
             The purpose of this report is to help AGPA to develop an informed
             perspective as to the overall economic attractiveness of the proposed
             Valdez LNG export facility.
             Please note all future values throughout this study are given in
             nominal terms.




                                                                                   © Wood Mackenzie 2

                                                                           Strategy with substance
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Agenda



         1   Executive Summary


         2   Setting the Context: Asian LNG Markets


         3   Alaska LNG Export Competitiveness


             Appendix – LNG Pricing Details




                                                              © Wood Mackenzie 3

                                                      Strategy with substance
www.woodmac.com

Agenda



         1   Executive Summary


         2   Setting the Context: Asian LNG Markets


         3   Alaska LNG Export Competitiveness


             Appendix – North American Gas Fundamentals & LNG Pricing Details




                                                                                  © Wood Mackenzie 4

                                                                          Strategy with substance
www.woodmac.com

From an economic perspective, Alaskan LNG exports are competitive, viable across
scenarios, and could generate between $220 and $419 billion for Alaska*
  The numbers generally “work” for Alaskan LNG                       Alaskan LNG exports have a delivered cost structure below $10/MMBtu.
  exports when the global oil price is north of                      Given a range of infrastructure cost scenarios, oil prices projected
  $75/bbl oil and Asian firm contract pricing                        utilizing Woodmac’s April 2011 NAGS price outlook or the NYMEX
  reflects a 13%(+) oil indexation** (indexation for                 forward strip, and LNG - oil indexation pricing to Asia of 13 – 16%,
  firm contracts today is approximately 14.85%)                      Alaskan LNG could be priced DES between $18.00 - $46.00/MMBtu
                                                                     through 2050.

  Proposed Alaskan LNG exports have a                                Alaskan LNG would use assets that are producing gas for re-injection
  substantial cost advantage relative to possible                    (essentially limited to gathering, transport and processing costs)
  competing LNG supply projects                                      Most competing Australian projects and proposed NA LNG exports yet
                                                                     to secure Final Investment Decision (FID) are expected to deliver LNG to
                                                                     Asia at costs of $10 - $12/MMBtu under current gas price assumptions

  Assuming start-up in 2021 and a project life of                    Royalties (12.5%) and state taxes (starting at 25% post-royalties) could
  30 years, royalties (12.5%) and state taxes                        yield $2.4 to $24 billion per year.
  (starting at 25% post-royalties) could yield a
  total of between $220 and $419 billion*

  While we do not address them, there are a                          Economics are important, but commercial issues such as the scale of
  number of commercial challenges associated                         value chain requirements (pipes, storage, etc.), buyer risk tolerance,
  with all liquefaction projects                                     financing arrangements, etc. are critical




  Taking all into account – basis, shipping, capital requirements – Alaska LNG export facilities can deliver LNG to Asia less
  Taking all into account – basis, shipping, capital requirements – Alaska LNG export facilities can deliver LNG to Asia less
          expensively than US Lower 48 or Canada and competitively vis-à-vis traditional Australian LNG sources
           expensively than US Lower 48 or Canada and competitively vis-à-vis traditional Australian LNG sources
            *Total undiscounted taxes and royalties values utilize nominal figures (2.4% inflation), 14.85% indexation, and avg. recourse           © Wood Mackenzie 5
            rate of $4.18. Assuming a nominal discount rate of 5%, the NPV of taxes and royalties is between $65 and 124 billion.           Strategy with substance
            **Oil indexation price example: With an oil price of $100/bbl, “oil indexation” of 14.85% yields a gas price of $14.85/MMBtu
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Agenda



         1   Executive Summary


         2   Setting the Context: Asian LNG Markets


         3   Alaska LNG Export Competitiveness


             Appendix – LNG Pricing Details




                                                              © Wood Mackenzie 6

                                                      Strategy with substance
www.woodmac.com

China is a key driver of Pacific LNG demand growth, but traditional JKT
(Japan, Korea, Taiwan) markets still account for most uncontracted demand
                     Pacific/ME LNG Demand                                Uncontracted Demand, Selected Countries

       35
                                                                     13
       30
                                                                     11
       25
                                                                      9
       20
                                                                      7




                                                              bcfd
bcfd




       15
                                                                      5
       10
                                                                      3
       5
                                                                      1
       0
        2008     2010   2012   2014     2016    2018   2020          -1



                                                                           2008
                                                                                  2009

                                                                                         2010
                                                                                                2011
                                                                                                       2012

                                                                                                              2013
                                                                                                                     2014
                                                                                                                             2015

                                                                                                                                     2016
                                                                                                                                            2017

                                                                                                                                                    2018

                                                                                                                                                           2019
                                                                                                                                                                  2020
            Japan                     South Korea
            Taiwan                    India
            China                     Mexico West
            Chile                     Kuwait                          Japan                                                 South Korea
            Dubai                     Thailand                        Taiwan                                                India
            Other                     Post-Fukushima Demand           China                                                 Post-Fukushima Demand

                                                                                  Source: Wood Mackenzie LNG Tool, Feb’11, Global Gas Service H1 ‘11

                                                                                                                                                   © Wood Mackenzie 7

                                                                                                                                    Strategy with substance
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The Pacific Basin market is short of proximate LNG and a number of projects
will compete for long-term supply requirements (including Alaska LNG)
                                                            Pacific/ME Basin LNG supply vs demand

           40                                                     Buyer options for filling in the gap:

           35                                                         • Qatari ‘diversion volumes’
                                                                      • Atlantic Basin/Other ME
           30                                                           ‘portfolio’ suppliers
                                                                      • Pre-FID projects
           25
    bcfd




           20

           15                                                                                                                                            Canada LNG
                                                                                                                                                         Export potential
           10
                                                                                                                               US LNG Export
            5                                                                                                                  potential

            0
            2008          2009          2010          2011         2012          2013          2014          2015        2016         2017        2018         2019        2020
                    Contracted LNG to Pacific Market                                                      Uncontracted Supply* (Existing & Under Construction)
                    Uncontracted Pacific Supply (Pre-FID Potential)                                       Demand
                    Demand Post-Fukushima
*Includes uncontracted supply from Pacific Basin and Middle East supply projects, but excluding ‘flexible’ Qatari
   volumes that are ‘allocated’ to the Atlantic Basin                                                               Source: Wood Mackenzie LNG Tool, Feb’11, Global Gas Service H1 ‘11

                                                                                                                                                                   © Wood Mackenzie 8

                                                                                                                                                       Strategy with substance
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There is insufficient Atlantic portfolio LNG to bridge the gap and the market is
tighter than it appears (since Fukushima) supporting current LNG prices
                           Pacific Basin uncontracted LNG supply vs demand, including portfolio supplies

             20   1. Demand is trending upwards
                  1. Demand is trending upwards
             18   2. New supply is drifting out in time
                  2. New supply is drifting out in time
                  3. Operational uncertainty could
                   3. Operational uncertainty could
             16
                  tighten the market further
                   tighten the market further
             14

             12
                                                                                                                                                            1
      bcfd




             10
                                                                                                                                                                        2
              8

              6
                                                                                                                                                            3
              4

              2

              0
              2010          2011             2012             2013             2014             2015          2016           2017           2018           2019             2020
                                  Existing Uncontracted Supply*                                              Under Construction
                                  Portfolio Players' Flexible LNG Availability                               Pre-FID Pacific Potential
                                  Uncontracted Demand                                                        Uncontracted Demand (Japan Sensitivity)

*Includes uncontracted supply from Pacific Basin and Middle East supply projects, but excluding ‘flexible’
   Qatari volumes that are ‘allocated’ to the Atlantic Basin                                                     Source: Wood Mackenzie LNG Tool, Feb’11, Global Gas Service H1 ‘11

                                                                                                                                                                © Wood Mackenzie 9

                                                                                                                                                    Strategy with substance
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Agenda



         1   Executive Summary


         2   Setting the Context: Asian LNG Markets


         3   Alaska LNG Export Competitiveness


             Appendix –LNG Pricing Details




                                                             © Wood Mackenzie 10

                                                      Strategy with substance
www.woodmac.com

Australia will help fill the Pacific supply gap with over 7 bcfd of capacity on-
stream or currently under construction…
                                                                                                                                                                          km
                                                                                                                                          0     250       500          1,000
          9                                                           Ichthys   DARWIN

                                                         Prelude
          8
                                                   Browse

          7         Pluto (under cons.)    NORTH W EST
                                                                                                                              Arrow LNG
                                                                                                                              Australian PacificIchthys
                                                                                                                                                 LNG
                                             SHELF                              Northern                                      Gladstone LNG
              Gorgon (under cons.)                                              Territory                                                 Arrow LNG
          6                                                                                            Queensland                         Gladstone
                      Wheatstone                                                                             GLNG (under cons.)
                     Scarborough
                                                                                                             QCLNG (under cons.)
                                                                                                                                               LNG
          5                                                                                                                                 Browse
   bcfd




                                                                                AUSTRALIA                                                Gorgon Exp.
                                           Western Australia
          4                                                         Pluto                                                                Wheatstone
                                                                                                                                           Brisbane
                                                                                                                                               Exp.
                                                                   Gorgon        South Australia
          3                                                                                                                                 Greater
                                                                   QCLNG                                                                    Sunrise
                                          Perth                                                             New South Wales
          2                                                                                                                               Bonaparte
                                                                    GLNG
                               NWS                                                                                         Sydney        Darwin Exp.
                                                                   Prelude*                         AP LNG                                Pluto Exp.
          1                   Darwin
                                                                                                 Adelaide        CANBERRA
                                                                                                                                         Scarborough
                                                                                                            Victoria
                                                                                                                  Melbourne
          0
                           Onstream                            Under Cons.                  Probable (FID within                         Proposed
                                                                                                12 Tasmania
                                                                                                   months)
 * Prelude took FID in mid May
Source: Wood Mackenzie. As of May 2011.

                                                                                                                                                                © Wood Mackenzie 11

                                                                                                                                               Strategy with substance
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…and continues to dominate the global outlook for new LNG supply due
to its large gas resource base and attractive investment climate
              ‘Potential’ LNG supply*: Australia and the
                            rest of the world
        45                                                                                          Stable
                                                                                         Co         Regime          Reliable
        40                                                                                 sts
                                                                                                                      LNG
        35

        30
                                                                                                                     supplier
                                                                                   64%

        25                                                                                          Domestic
bcfd




                                                                                         Upstream                     Gas
        20
                                                                                         Resource                    Quality
        15                                                                                           Demand
        10                                                                                     er
                                                                                   36%   P artn
          5                                                                                                             LNG
                                                                                                ent Geopolitics
          0                                                                              Ali gnm                        Price
         1


                  3


                           5


                                     7


                                                9


                                                          1


                                                                    3


                                                                              5
          1


                   1


                          1


                                     1


                                               1


                                                         2


                                                                    2


                                                                               2
       20


                20


                       20


                                  20


                                            20


                                                      20


                                                                 20


                                                                            20




                       Australia              Rest of the world

*Includes under construction, probable and proposed LNG capacity globally                                     Source: Wood Mackenzie LNG Tool

                                                                                                                          © Wood Mackenzie 12

                                                                                                                  Strategy with substance
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But rising costs are putting pressure on Australian project economics…
Which sponsors are best placed to mitigate against cost over-runs and delays?

                       Australian oil and gas upstream and                                                              DES cost stacks for Australian LNG projects
                         liquefaction capital expenditure                                                                             (base Capex)*

                40                                                                                                       14.00


                35                                                                                                       12.00         FID in 2010/11

                                                                                                                         10.00




                                                                                                       2010 US$/mmbtu
                30
   2010 US$bn




                                                                                                                          8.00
                25

                                                                                                                          6.00
                20
                                                                                                                          4.00
                15
                                                                                                                          2.00
                10
                                                                                                                           -
                5




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                0




                                                                                                                                   he
                                                                                                                                 W
                     2007   2008      2009        2010        2011         2012        2013

                                                                                                                            Upstream      Liquefaction     Shipping to India
* The analysis is taken from the February 2011 LNG Service Insight: ‘Might Rising Costs In Australia
Propel North America LNG Exports’.
                                                                                                                                             Source: Wood Mackenzie CAT, LNG GEM, LNG Tool
                                                                                                                                                                        © Wood Mackenzie 13

                                                                                                                                                               Strategy with substance
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There may be headroom for a few North American LNG export projects


  Douglas Channel Energy
  Douglas Channel Energy                                               Dominion has announced
                                                                        Dominion has announced
                                AGPA is promoting a
                                AGPA is promoting a
   Partnership project is a
   Partnership project is a                                           plans to add export capacity
                                                                      plans to add export capacity
                                potential “All Alaska”
                                potential “All Alaska”
  proposed 0.9 mtpa barge
  proposed 0.9 mtpa barge                                                at the Cove Point regas
                                                                         at the Cove Point regas
                              pipeline and liquefaction
                              pipeline and liquefaction
     facility near Kitimat
      facility near Kitimat                                                       facility
                                                                                   facility
                                 project from Valdez
                                 project from Valdez


        Kitimat LNG is a
        Kitimat LNG is a
   proposed 5 mtpa facility
   proposed 5 mtpa facility                                               BG and Southern Union
                                                                          BG and Southern Union
    (Apache/EOG/EnCana)
     (Apache/EOG/EnCana)
                                        Petronas and Progress
                                        Petronas and Progress            have announced plans to
                                                                         have announced plans to
   fed with shale gas from
    fed with shale gas from
                                        Energy have signed a
                                         Energy have signed a              add 2 bcfd of export
                                                                            add 2 bcfd of export
      Horn River // Montney
      Horn River Montney
                                       strategic partnership to
                                        strategic partnership to           capacity at the Lake
                                                                            capacity at the Lake
                                         investigate an export
                                          investigate an export            Charles regas facility
                                                                           Charles regas facility
                                      facility fed with Montney
                                       facility fed with Montney
                                          unconventional gas
                                           unconventional gas      Cheniere is proposing to add 1.0
                                                                   Cheniere is proposing to add 1.0
                                                                    bcfd of export capacity at the
                                                                     bcfd of export capacity at the
                                                                   existing Sabine Pass LNG regas
                                                                   existing Sabine Pass LNG regas
    Shell/Mitsubishi (with
    Shell/Mitsubishi (with                                          facility and has signed 6 non-
                                                                     facility and has signed 6 non-
  PetroChina, KOGAS and
  PetroChina, KOGAS and                                               binding MOUs for capacity
                                                                       binding MOUs for capacity
       several Japanese
       several Japanese
  utilities) and Nexen/LNG
  utilities) and Nexen/LNG
    Japan are reportedly
     Japan are reportedly                                               Macquarie/Freeport are
                                                                        Macquarie/Freeport are
     considering similar
      considering similar                                            proposing to add 1.4 bcfd of
                                                                     proposing to add 1.4 bcfd of
  schemes in the BC area
   schemes in the BC area                                           export capacity at the existing
                                                                    export capacity at the existing
                                                                      Freeport LNG regas facility
                                                                      Freeport LNG regas facility
Source: Wood Mackenzie

                                                                                     © Wood Mackenzie 14

                                                                             Strategy with substance
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Access to currently re-injected gas upstream puts the Alaska LNG liquefaction
project in an economically competitive position relative to others…
                                                                                                                                           ESTIMATE
  Key Assumptions
   Key Assumptions                                                            Greenfield Alaska LNG Cost Build Up
  •• All data from “Transcanada
     All data from “Transcanada                       14.00
     XOM Alaska Pipeline Project
     XOM Alaska Pipeline Project
     Open Season Notice, 2010,
     Open Season Notice, 2010,
     Valdez LNG Case” except
     Valdez LNG Case” except
     below items:                                     12.00
     below items:
  •• Liquefaction:
     Liquefaction:
     •• CapEx: $1,200/ton; est. rate                                 Currently re-
         CapEx: $1,200/ton; est. rate                 10.00
        covers CapEx, Opex, 12%
         covers CapEx, Opex, 12%                                     injected gas
                                                                                                                             (0.67)       0.59           8.50
        nom. ROE.                                                   offsets higher                               4.00
         nom. ROE.
                                        2011$/mmbtu




     •• Alaska LNG losses 9.65%                                     pipeline costs
         Alaska LNG losses 9.65%                       8.00
  •• Shipping Assumptions:
     Shipping Assumptions:
      •• Ship: 155,000 m33
         Ship: 155,000 m
     •• CapEx/ship: $200 million                       6.00
        CapEx/ship: $200 million
                                                                                                     0.40
     •• OpEx: $15,000/day; 2.33%
        OpEx: $15,000/day; 2.33%                                                        1.70
        annual escalation
        annual escalation                              4.00
     •• 8% ROE after tax
         8% ROE after tax
                                                                            2.22
  •• LNG Processing Losses:
      LNG Processing Losses:
     estimated from AGIA NPV
      estimated from AGIA NPV                          2.00
     Report, Fig. 7.2
      Report, Fig. 7.2
  •• Liquids credit determined using                            0.26
      Liquids credit determined using
     $80/bbl netback price for LPG
      $80/bbl netback price for LPG                    0.00
     and volumes provided by AGPA
      and volumes provided by AGPA                               WH-     Processing    Transport   LNG Losses Liquefaction   Liquids      Shipping       Total
     (88,000 MMBtu/d; ~20,000 bpd)
      (88,000 MMBtu/d; ~20,000 bpd)                           Processing & Shrinkage                                          credit

                                                                                                                                          Source: Wood Mackenzie
                                                                                                                                                 © Wood Mackenzie 15

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…and it competes favorably with both proposed Australian and other North
American export facilities which have yet to reach FID
                                                           DES Cost Stack Comparison


                                   Alaska’s estimated cost allows it
                                   Alaska’s estimated cost allows it
                  14.00               to compete based on price
                                       to compete based on price
                                                                                                                                    12.17
                                                                                                          11.35    11.76
                  12.00                                                                        11.12
                                                            10.50          10.50     10.58
 2011 US$/mmbtu




                  10.00            8.75        9.33
                          8.50
                   8.00
                   6.00
                   4.00
                   2.00
                   0.00



                                                                                      AP LNG




                                                                                                                                      GLNG
                          Alaska




                                                              Wheatstone




                                                                                                                     Kitimat
                                                                                                           Pluto
                                                 Ichthys




                                                                            Sabine
                                    Gorgon




                                                                                                 Browse
                                                            FOB Breakeven            Shipping to Asia
                                                                                                                       Source: Wood Mackenzie
                                                                                                                               © Wood Mackenzie 16

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Two pricing norms have emerged in recent long-term Pacific Basin deals

               Conventional LNG                                    Coalbed Methane (CBM) LNG


M Most recent deals are understood to have been            Recent deals are understood to feature s-
  priced at 14.85% JCC, with additional deals for          curves, reflecting the fact that CBM LNG is a
  pre-FID projects being negotiated at the same            harder sale than conventional LNG
  level                                                        •   Primary slope of ~14.5% JCC between the
M Qatar is now also understood to be willing to                    kink points
  accept 14.85% JCC as a price from ‘established’              •   Slopes of ~12% above and below the kink-
  Asian buyers                                                     points
M Some evidence that buyers are seeking high s-            Market rumours indicate that APLNG has gone
  curves in new deals in light of the current high         beneath these levels
  oil price outlook
                                                               •   But exact pricing terms remain uncertain
                                                           Lower (s-curve) prices, combined with non-
                                                           price concessions (see next slide) are essential
                                                           in order to sell CBM LNG into a market with
                                                           limited appetite for the product


 Oil indexation will technically remain the standard in long-term gas contracting but additional mechanisms
            will be required to ensure that pricing remains within the relevant pricing boundaries

                                                                                                   © Wood Mackenzie 17

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We evaluated Alaskan LNG export economics based upon two primary long-
term crude oil pricing scenarios
                                                                                      WTI Oil Nominal Prices

• The extended forward NYMEX strip
  from July 5, 2011 is treated as a                           $350.00
  base case
                                                              $300.00
• Combining the NYMEX strip
  scenario with a second scenario                             $250.00



                                              Nominal $/BBL
  utilizing Woodmac’s April 2011
                                                              $200.00                                                                          Worst Case
  NAGS price outlook, we establish
                                                                                                                                               NYMEX Forw ard
  the range of likely NPVs
                                                              $150.00                                                                          WoodMac

• In a final test, we evaluated a “worst                      $100.00
  case” scenario of an inflation
  adjusted oil price of $75 / bbl                              $50.00
  throughout the projection period
                                                                 $-
• Oil prices and oil price scenarios are                                2020   2025   2030     2035       2040       2045       2050
  viewed as fully disconnected from                                                            Year
  North American natural gas prices        NYM EX fo rward strip data fro m July 5, 201 ; Wo o dmac data fro m A pril 201 NA GS outlo o k; all prices nominal
                                                                                       1                                 1



                                                                                                                          Source: CME.COM and Wood Mackenzie

                                                                                                                                                © Wood Mackenzie 18

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The Alaska LNG export project’s estimated cost is below typical LNG
contract prices…
                              Range of LNG Costs Delivered to Asia vs. Typical Contract Price Range
                           Asian Long-term LNG contract price bands are
                            Asian Long-term LNG contract price bands are
                           expected to have slopes between 14% and 16%
                           expected to have slopes between 14% and 16%
                   20.00       JCC within the analyzed oil price range
                                JCC within the analyzed oil price range

                   18.00
                   16.00
 2011 US$/mmbbtu




                   14.00
                   12.00
                   10.00
                    8.00
                    6.00
                                                                                    The Alaska LNG project’s estimated costs
                                                                                    The Alaska LNG project’s estimated costs
                    4.00                                                                are below this typical price range
                                                                                        are below this typical price range

                    2.00
                    0.00
                              Australia                     US Gulf Cost        Canada West Coast                 Alaska LNG
                                              LNG Contract Range           LNG Cost Range     AVG LNG Cost
                                         Players who win LNG contracts first win the race to FID
                                                                                                                               © Wood Mackenzie 19

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…The NYMEX strip scenario (base case) yields annual tax and royalty revenues of $2
to 16 billion to the state, for a total of $220 billion over the 30-year life of the project*
                                                                     Model                                                        2021         2022       2023         2024    2025
                                                                     Nominal WTI oil price                                    $ 109.56    $   112.19   $ 114.88 $    117.64 $ 120.46
                                                                     Asia DES Price                                              16.86         17.26      17.68       18.10    18.54
                                                                     Less Infl adj. Shipping Rate / MMBtu                         0.59          0.60       0.62        0.63     0.65
 • Model at right depicts the NYMEX                                  Less Pipe Transportation (will not vary significantly)       4.18          4.18       4.18        4.18     4.18
   strip base case utilizing Woodmac’s                               Less Liquefaction
                                                                     = Wellhead Net Back Value / MMBtu
                                                                                                                                  4.00
                                                                                                                                  8.09
                                                                                                                                                4.00
                                                                                                                                                8.48
                                                                                                                                                           4.00
                                                                                                                                                           8.88
                                                                                                                                                                       4.00
                                                                                                                                                                       9.29
                                                                                                                                                                                4.00
                                                                                                                                                                                9.71
   2.4% inflation rate beyond NYMEX                                  Daily production in millions of MMBtu                          2.7          2.7      2.7          2.7      2.7
   projected years.                                                  Annual production in millions of MMBtu                        986          986       986          986      986

                                                                     Taxes and Royalties
                                                                     Alaska 12.5% share of production in MMBtu                     123           123       123          123      123
 • Producer net income of $178 billion                               Alaska royalty = 12.5% share * Netback Value                  997         1,045     1,094        1,145    1,196
                                                                     Remaining gas Taxable under ACES in MMBtu                     862           862       862          862      862
                                                                     Tax Rate to $5 / MMBtu                                       0.25          0.25      0.25         0.25     0.25
                                                                     Tax Rate between $5 and 15.42 / MMBtu                       0.324         0.334     0.343        0.353    0.363
                                                                     Tax Rate beyond 15.42 / MMBtu                               0.324         0.334     0.343        0.353    0.363
                                                                     Total ACES Taxes                                            2,263         2,440     2,629        2,829    3,041
                                                                     Total Royalties and Taxes                                   2,386         2,564     2,752        2,952    3,164

                                                                     Sum of Royalties and Taxes                                220,101

                                                                     Period (years from 2011)                                       10            11        12           13       14
                                                                     Discount Factor                                              0.61          0.58      0.56         0.53     0.51
                                                                     PV of Taxes and Royalties ($MMs)                            1,465         1,499     1,532        1,565    1,598

                                                                     NPV Taxes and Royalties 2021 - 2050 ($MMs)               $ 65,021

                                                                     Producer
                                                                     Revenues = 87.5% share * netback value ($MMs)               6,979         7,315     7,660        8,013    8,375
                                                                     Less ACES Taxes                                             2,263         2,440     2,629        2,829    3,041
                                                                     Post-tax netback to producer                                4,716         4,875     5,031        5,184    5,334

                                                                     Sum Producer Netback                                      178,278

                                                                     Period                                                         10            11        12           13       14
                                                                     Discount Factor                                              0.39          0.35      0.32         0.29     0.26
                                                                     PV                                                          1,818         1,709     1,603        1,502    1,405

                                                                     Producer NPV 2021 - 2050 ($MMs)                          $ 22,576


                                     Players who win LNG contracts first win the race to FID
            *NYMEX strip to 2018 then 2.4% inflation;14.85% indexation, avg. recourse rate $4.18 assumed to be flat (annual increases in                            © Wood Mackenzie 20
            operational costs would be incrementally small). Model uses nominal figures and nominal discount rate. Assuming 5%
                                                                                                                                                         Strategy with substance
            nominal discount rate, NPV of taxes and royalties amounts to $65 billion.
www.woodmac.com

…The Woodmac scenario yields annual tax and royalty revenues of $3 to 24 billion to
the state, for a total of $419 billion over the 30-year life of the project*
                                                                      Model                                                        2021         2022       2023         2024    2025
                                                                      Nominal WTI oil price                                    $ 121.97    $   125.75   $ 130.99 $    136.40 $ 141.96
                                                                      Asia DES Price                                              18.70         19.28      20.07       20.89    21.73
                                                                      Less Infl adj. Shipping Rate / MMBtu                         0.59          0.60       0.62        0.63     0.65
 • Model at right depicts the Woodmac                                 Less Pipe Transportation (will not vary significantly)       4.18          4.18       4.18        4.18     4.18
                                                                      Less Liquefaction                                            4.00          4.00       4.00        4.00     4.00
   scenario, which uses the NAGS                                      = Wellhead Net Back Value / MMBtu                            9.93         10.49      11.27       12.08    12.90
   April 2011 oil price forecast through                              Daily production in millions of MMBtu                         2.7           2.7      2.7          2.7      2.7
   2030, followed by the 2030 price                                   Annual production in millions of MMBtu                        986          986       986          986      986

   projected to 2050 using Woodmac’s                                  Taxes and Royalties
                                                                      Alaska 12.5% share of production in MMBtu                     123           123       123          123      123
   long-term inflation rate of 2.4% (oil                              Alaska royalty = 12.5% share * Netback Value                1,224         1,293     1,389        1,488    1,589
                                                                      Remaining gas Taxable under ACES in MMBtu                     862           862       862          862      862
   prices shown in nominal terms)                                     Tax Rate if below $5 / MMBtu                                 0.25          0.25      0.25         0.25     0.25
                                                                      Tax Rate if between $5 and 15.42 / MMBtu                    0.368         0.382     0.401        0.420    0.440
                                                                      Tax Rate if beyond 15.42 / MMBtu                            0.368         0.382     0.401        0.420    0.440
 • Producer net income of $187 billion                                Total ACES Taxes
                                                                      Total Royalties and Taxes
                                                                                                                                  3,155
                                                                                                                                  3,278
                                                                                                                                                3,455
                                                                                                                                                3,579
                                                                                                                                                          3,893
                                                                                                                                                          4,016
                                                                                                                                                                       4,371
                                                                                                                                                                       4,495
                                                                                                                                                                                4,891
                                                                                                                                                                                5,014

                                                                      Sum of Royalties and Taxes                                419,101

                                                                      Period (years from 2011)                                       10            11        12           13       14
                                                                      Discount Factor                                              0.61          0.58      0.56         0.53     0.51
                                                                      PV of Taxes and Royalties ($MMs)                            2,013         2,092     2,236        2,384    2,532

                                                                      NPV Taxes and Royalties 2021 - 2050 ($MMs)               $ 124,030

                                                                      Producer
                                                                      Revenues = 87.5% share * netback value ($MMs)               8,565         9,049     9,720       10,413   11,125
                                                                      Less ACES Taxes                                             3,155         3,455     3,893        4,371    4,891
                                                                      Post-tax netback to producer                                5,410         5,594     5,827        6,041    6,234

                                                                      Sum Producer Netback                                      187,551

                                                                      Period                                                         10            11        12           13       14
                                                                      Discount Factor                                              0.39          0.35      0.32         0.29     0.26
                                                                      PV                                                          2,086         1,961     1,857        1,750    1,642

                                                                      Producer NPV 2021 - 2050 ($MMs)                          $ 24,126


                                    Players who win LNG contracts first win the race to FID
            *WM NAGS price outlook to 2030 then 2.4% inflation; 14.85% indexation, avg. recourse rate $4.18 assumed to be flat                                       © Wood Mackenzie 21
            (annual increases in operational costs would be incrementally small). Model uses nominal figures and nominal discount rate.
                                                                                                                                                         Strategy with substance
            Assuming 5% nominal discount rate, NPV of taxes and royalties amounts to $124 billion.
www.woodmac.com

…The “worst case” scenario yields annual tax and royalty revenues of $0.4 to 6 billion
to the state, for a total of $75 billion over the 30-year life of the project*
                                                                         Model                                                          2021        2022      2023          2024     2025
                                                                         Nominal WTI oil price                                    $     75.00   $   76.80   $ 78.64 $       80.53 $ 82.46
                                                                         Asia DES Price                                                 10.34       12.01     12.30         12.59   12.89
 • Model at right depicts the “worst                                     Less Infl adj. Shipping Rate / MMBtu
                                                                         Less Pipe Transportation (will not vary significantly)
                                                                                                                                         0.59
                                                                                                                                         4.18
                                                                                                                                                     0.60
                                                                                                                                                     4.18
                                                                                                                                                               0.62
                                                                                                                                                               4.18
                                                                                                                                                                             0.63
                                                                                                                                                                             4.18
                                                                                                                                                                                     0.65
                                                                                                                                                                                     4.18
   case scenario in which prices are                                     Less Liquefaction                                               4.00        4.00      4.00          4.00    4.00
                                                                         = Wellhead Net Back Value / MMBtu                               1.57        3.23      3.50          3.78    4.07
   held flat at an inflation adjusted
                                                                         Daily production in millions of MMBtu                           2.7         2.7       2.7           2.7     2.7
   price of $75/bbl                                                      Annual production in millions of MMBtu                          986         986       986           986     986

                                                                         Taxes and Royalties
 • Producer net income of $131 billion                                   Alaska 12.5% share of production in MMBtu
                                                                         Alaska royalty = 12.5% share * Netback Value
                                                                                                                                          123
                                                                                                                                          194
                                                                                                                                                      123
                                                                                                                                                      398
                                                                                                                                                                123
                                                                                                                                                                431
                                                                                                                                                                              123
                                                                                                                                                                              466
                                                                                                                                                                                      123
                                                                                                                                                                                      501
                                                                         Remaining gas Taxable under ACES in MMBtu                        862         862       862           862     862
                                                                         Tax Rate to $5 / MMBtu                                          0.25        0.25      0.25          0.25    0.25
                                                                         Tax Rate between $5 and 15.42 / MMBtu                          0.168       0.207     0.214         0.221   0.228
                                                                         Tax Rate beyond 15.42 / MMBtu                                  0.168       0.207     0.214         0.221   0.228
                                                                         Total ACES Taxes                                                 228         577       646           720     799
                                                                         Total Royalties and Taxes                                        351         701       769           843     922

                                                                         Sum of Royalties and Taxes                                    74,939

                                                                         Period (years from 2011)                                          10          11        12            13      14
                                                                         Discount Factor                                                 0.61        0.58      0.56          0.53    0.51
                                                                         PV of Taxes and Royalties ($MMs)                                 215         410       428           447     466

                                                                         NPV Taxes and Royalties 2021 - 2050 ($MMs)               $ 21,617

                                                                         Producer
                                                                         Revenues = 87.5% share * netback value ($MMs)                  1,357       2,784     3,020         3,261   3,509
                                                                         Less ACES Taxes                                                  228         577       646           720     799
                                                                         Post-tax netback to producer                                   1,129       2,206     2,373         2,541   2,710

                                                                         Sum Producer Netback                                         131,018

                                                                         Period                                                            10          11        12            13      14
                                                                         Discount Factor                                                 0.39        0.35      0.32          0.29    0.26
                                                                         PV                                                               435         773       756           736     714

                                                                         Producer NPV 2021 - 2050 ($MMs)                          $ 13,217


                                     Players who win LNG contracts first win the race to FID
            2.4% inflation, 14.85% indexation, avg. recourse rate $4.18 assumed to be flat (annual increases in operational costs would                                 © Wood Mackenzie 22
            be incrementally small). Model uses nominal figures and nominal discount rate. Assuming 5% nominal discount rate,
                                                                                                                                                            Strategy with substance
            NPV of taxes and royalties amounts to $22 billion.
www.woodmac.com

Agenda



         1   Executive Summary


         2   Setting the Context: North American Natural Gas Markets & Scenarios


         3   Alaska LNG Export Competitiveness


             Appendix –LNG Pricing Details




                                                                                   © Wood Mackenzie 23

                                                                            Strategy with substance
www.woodmac.com




LNG Pricing Perspectives




                                  © Wood Mackenzie 24

                           Strategy with substance
www.woodmac.com

 Gas price ceilings differ by region – in Asia, the price ceiling is increasingly
 based on displacing oil products in the R/C/I sectors

                               Asia gas demand growth 2010 - 2030

       35

                                                                                                 Historically, the desire for fuel
       30                                                                                        diversity and need for security of
                       27%
                                                                                                 supply (primarily in Japan) drove
                                                                 Power generation (2030)
       25                                                Hydro                                   relatively high regional gas prices
                                                          13%
                                               Nuclear                                           Moving forward, Wood Mackenzie
       20                                       10%
                                                                                                 sees oil substitution in the R&C and
bcfd




                                                   Gas
                       28%
                                                   4%
                                                                                                 Industrial sectors in China and India
       15
                                                   Oil
                                                                                    Coal
                                                                                                 as the primary force behind
                                                                                    70%
                                                   1%                                            maintaining premium pricing in the
       10                                                                                        Asian market
                       39%                                                                       It is however expected that in JKT a
       5                                                                                         premium will continue to be paid for
                                                                                           48%
                                                           54%                             28%   security of supply
       0                                                                                   21%
                       China                               India                           JKT

                                            Industrial   Power      R&C     Other



 Source: Wood Mackenzie Global Gas Tool, H2 2010

                                                                                                                           © Wood Mackenzie 25

                                                                                                                    Strategy with substance
www.woodmac.com

 While in Europe the gas price ceiling is “soft” and influenced by
 the economics of alternative forms of power generation

                                 Europe gas demand                                                                    Europe power generation screening curve
                                                                                                                250
            70                                Demand growth
                                                    3%
                                                 21%
            60                                                                                                                                                                              CCGT - $75/t CO2
                                                 14%      62%                                                   200


            50                                                                                                                                                                               Coal - $75/t CO2
                                                                                                                                                                                            CCGT - no carbon
                                                                                                                150
                                                                                                                                                                                                Nuclear -
            40




                                                                                                        $/MWh
                                                                                                                                                                                               $7,500/kw
     bcfd




                                                                                                                                                                                               Wind

            30                                                                                                                                                                              Coal - no carbon
                                                                                                                100                                                                          Nuclear -
                                                                                                                                                                                            $5,000/kw

            20
                                                                                                                                              At 12% slopes and $100/bbl oil, natural
                                                                                                                 50
                                                                                                                                                gas has significant competition in
            10
                                                                                                                                                   European generation markets

            0                                                                                                    0
                                2010                                       2030                                          50              75             100              125             175
                                                                                                                                                        $/bbl
                                    Industrial    Power      R&C      Other
Note: 12% discount rate, no taxes, levelized capital cost, Gas fired CCGT: LNG costs at 12% slope plus $0.8/mmbtu combined shipping and regas. $1,200/kw, 25 years useful life. 6,900 Btu/KWh, LHV heat
rate, 92.5% utilization, 1135 lbs/MWh of CO2 emissions; Coal: $3,750/kW, 30 years useful life. $4.25/mmbtu delivered, $9,275 btu/kWh heat rate, 92.5% utilization. 2250 lbs/MWh CO2 emissions; Nuclear: 30
years useful life, 92.5% utilization. No subsidies; Wind: $1,800/kw, 20 years useful life, 27.5% utilization, $25/MWh grid access. No subsidies

                                                                                                                                                                                     © Wood Mackenzie 26

                                                                                                                                                                        Strategy with substance
www.woodmac.com


Ultimately the markets develop a relative hierarchy by geography and tenor


              Short tenor markets                                              Long tenor markets

   • Remain thinly traded as                                                       • The premium price
     excess supply is limited                                                        market in the world is
     and will remain so                              Asia                            driven by growth in R/C/I
                                                                                     sectors in China & India




                                                                                                                      Supply Security Concerns
   • Used for portfolio                                                            • Soft ceiling moving to
     optimization but have                      Rest of Europe                       alternative fuel
     limited liquidity                                                               economics in generation
                                                                                     keeps pricing under Asia

   • NBP tied to both                                                              • Almost all contracts (in last
     European & NA pricing
                                                NW Europe/U.K
                                                                                     decade) are NBP linked


   • Large excess supply                                                           • Largely financial not
     keeps pricing modest &                     North America                        physical contracts
     physical tenors short



           Transport arbitrage defines regional price differences in spot and short-tenor transactions
           Transport arbitrage defines regional price differences in spot and short-tenor transactions
                               but has a decreasing influence as tenor increases
                               but has a decreasing influence as tenor increases

                                                                                                             © Wood Mackenzie 27

                                                                                                   Strategy with substance
www.woodmac.com

Long-tenor gas contracts will remain oil-indexed in geographies
that lack liquid, reliable gas indices as an alternative

 Requirements for Gas-Indexed Term Deals
 Requirements for Gas-Indexed Term Deals                     Rationale Behind Oil-Indexed Deals
                                                             Rationale Behind Oil-Indexed Deals
   A reputable index must exist that is deep and
   A reputable index must exist that is deep and           Historical comfort: sellers are largely long oil
                                                           Historical comfort: sellers are largely long oil
   difficult, if not impossible, to manipulate; e.g.:
   difficult, if not impossible, to manipulate; e.g.:      price risk and don’t mind more; sellers have
                                                           price risk and don’t mind more; sellers have
       • North America (HH et al)
       • North America (HH et al)                          done similar deals for years
                                                           done similar deals for years
      •
      •   The UK (NBP) and NW Europe
          The UK (NBP) and NW Europe                       Oil indices are deep and solid; manipulation risk
                                                            Oil indices are deep and solid; manipulation risk
      •
      •   Not the Rest of Europe, not Asia
          Not the Rest of Europe, not Asia                 is relatively low
                                                            is relatively low
                                                           Agency risk: no one has ever lost their job for
                                                            Agency risk: no one has ever lost their job for
   The index must reflect floor and ceiling
   The index must reflect floor and ceiling                doing an oil-indexed deal. Buyers, particularly
                                                            doing an oil-indexed deal. Buyers, particularly
   economics in the market in which it is used;
   economics in the market in which it is used;            certain Asian buyers, do not generally seek
                                                            certain Asian buyers, do not generally seek
   that is, to gain widespread acceptance the index
   that is, to gain widespread acceptance the index
   must serve a real economic purpose to buyers            innovation in LNG contract pricing terms
                                                            innovation in LNG contract pricing terms
   must serve a real economic purpose to buyers
   and sellers
   and sellers                                             For the most part, oil indexation does what it is
                                                           For the most part, oil indexation does what it is
      • HH makes obvious sense in NA (just as NBP
      • HH makes obvious sense in NA (just as NBP          supposed to do
                                                           supposed to do
          does in the UK) as the index is related to
           does in the UK) as the index is related to
          actual development costs and alternative
           actual development costs and alternative           •
                                                              •   For buyers with oil product alternatives, oil
                                                                   For buyers with oil product alternatives, oil
          fuel economics
           fuel economics                                         indexation at slopes less than oil-equivalent
                                                                   indexation at slopes less than oil-equivalent
      • But would there be significant demand for
      • But would there be significant demand for                 prices locks in economics
                                                                   prices locks in economics
          HH-indexed gas in Asia where the floor is oil
           HH-indexed gas in Asia where the floor is oil
          or fixed price linked and the ceiling is oil
           or fixed price linked and the ceiling is oil
          linked?
           linked?


                                                                                                     © Wood Mackenzie 28

                                                                                             Strategy with substance
www.woodmac.com

But many of those “oil-indexed” deals will remain so in name only


      “Oil indexation” is just the beginning . . .                         . . . but not the end

    In reality “oil parity” indexation would appear to      As a result, a variety of mechanisms have and
    meet both buyer and seller needs only within a          will continue to emerge and evolve to shape the
    limited range of oil prices                             risk profile of the typical “oil indexed” contract;
       •   Development costs for LNG in Asia of around      e.g.:
           $9-$10/mmBtu FOB suggest the need for               •   Different slopes or constants
           floors around $60/bbl at 14.85% slopes              •   S-curves, even extreme examples, that better
       •   In Europe, even at more modest slopes (e.g.,            match the economic market reality of floor
           12%) as oil prices rise above roughly                   costs and ceiling alternative pricing
           $100/bbl other generation sources are               •   A variety of contract re-openers predicated
           increasingly advantaged                                 on certain oil prices or other triggers




Oil indexation will technically remain the standard in long-term gas contracting but additional mechanisms will
               be required to ensure that pricing remains within the relevant pricing boundaries

                                                                                                      © Wood Mackenzie 29

                                                                                              Strategy with substance
www.woodmac.com

Assumptions used in the tax and revenue discount model
Assumptions
Production                                           2.7 Bcf/d
                                     Conversion 0.000001
Shipping                                        $   0.59

Asia DES Price calculated as % of WTI:             14.85%

Base Case: 14.85% of real 2011 price
WM Price Case: April 2011 NAGS Price Outlook
NYMEX Forward Curve Case:

Transportation Cost Scenarios:
Low Negotiated                                 $    2.25
High Negotiated                                $    2.92
Low Recourse                                   $    3.64
High Recourse                                  $    4.72
Average Recourse                               $    4.18
Liquefaction                                   $    4.00
Base Royalty on Net Back Value                     12.5%
Taxable under ACES Law                             87.5%
Base ACES Royalty                                    25%
Incremental tax for each $ beyond 5                 2.4%
Incremental tax for each $ beyond 50% tax           0.6%
State of Alaska Nominal Discount Rate                 5%
WoodMac LT Inflation Rate Forecast                  2.4%
Producer Nominal Discount Rate                       10%

                                                                        © Wood Mackenzie 30

                                                                 Strategy with substance
www.woodmac.com

Wood Mackenzie Disclaimer




  This report has been prepared for AGPA by Wood Mackenzie, Inc. The report is intended for
  the benefit of AGPA and the use of its contents and conclusions by any third parties shall be
  done so without any liability on the part of Wood Mackenzie.


  The information upon which this report is based has either been supplied to us by AGPA or
  comes from our own experience, knowledge and databases. The opinions expressed in this
  report are those of Wood Mackenzie. They have been arrived at following careful
  consideration and enquiry but we do not guarantee their fairness, completeness or accuracy.
  The opinions, as of this date, are subject to change. We do not accept any liability for your
  reliance upon them.




                                                                                      © Wood Mackenzie 31

                                                                               Strategy with substance
www.woodmac.com




Global Contact Details              Global Offices
Europe        +44 (0)131 243 4400   Australia               Japan                          United Arab Emirates
Americas      +1 713 470 1600       Brazil                  Malaysia                       United Kingdom
Asia Pacific  +65 6518 0800         Canada                  Russia                         United States
Email         energy@woodmac.com    China                   Singapore
Website       www.woodmac.com       India                   South Korea




                                    Wood Mackenzie is the most comprehensive source of knowledge about the world’s energy and metals industries.
                                    We analyse and advise on every stage along the value chain - from discovery to delivery, and beyond - to provide
                                    clients with the commercial insight that makes them stronger. For more information visit: www.woodmac.com



                                                                                                                                                   © Wood Mackenzie 32

                                                                                                                                      Strategy with substance

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Alaskan LNG Exports Competitiveness Study by Wood Mackenzie

  • 1. www.woodmac.com Alaskan LNG Exports Competitiveness Study Alaska Gasline Port Authority (AGPA) Final Report July 27, 2011 Strategy with substance
  • 2. www.woodmac.com Background As part of its interest in promoting a large volume pipeline from the North Slope to a 2.7 bcfd liquefaction facility in Valdez (and a lateral to serve south central Alaskan demand), AGPA has contracted Wood Mackenzie to evaluate the economic competitiveness of Alaskan LNG exports relative to other proposed liquefactions projects at various stages of development. With oil prices hovering today around $100 per barrel, and expected to remain at or around that level for an extended period of time, the Alaskan LNG export opportunity appears today to make economic sense. Typical Asian oil-indexed LNG pricing delivers product to regasification terminals at over $15 per mmBtu. On the other hand, Lower-48 and Canadian natural gas, if exported as LNG, could potentially be delivered to Asia at or around a cost of $10 per mmBtu, subject to various assumptions and costs. The purpose of this report is to help AGPA to develop an informed perspective as to the overall economic attractiveness of the proposed Valdez LNG export facility. Please note all future values throughout this study are given in nominal terms. © Wood Mackenzie 2 Strategy with substance
  • 3. www.woodmac.com Agenda 1 Executive Summary 2 Setting the Context: Asian LNG Markets 3 Alaska LNG Export Competitiveness Appendix – LNG Pricing Details © Wood Mackenzie 3 Strategy with substance
  • 4. www.woodmac.com Agenda 1 Executive Summary 2 Setting the Context: Asian LNG Markets 3 Alaska LNG Export Competitiveness Appendix – North American Gas Fundamentals & LNG Pricing Details © Wood Mackenzie 4 Strategy with substance
  • 5. www.woodmac.com From an economic perspective, Alaskan LNG exports are competitive, viable across scenarios, and could generate between $220 and $419 billion for Alaska* The numbers generally “work” for Alaskan LNG Alaskan LNG exports have a delivered cost structure below $10/MMBtu. exports when the global oil price is north of Given a range of infrastructure cost scenarios, oil prices projected $75/bbl oil and Asian firm contract pricing utilizing Woodmac’s April 2011 NAGS price outlook or the NYMEX reflects a 13%(+) oil indexation** (indexation for forward strip, and LNG - oil indexation pricing to Asia of 13 – 16%, firm contracts today is approximately 14.85%) Alaskan LNG could be priced DES between $18.00 - $46.00/MMBtu through 2050. Proposed Alaskan LNG exports have a Alaskan LNG would use assets that are producing gas for re-injection substantial cost advantage relative to possible (essentially limited to gathering, transport and processing costs) competing LNG supply projects Most competing Australian projects and proposed NA LNG exports yet to secure Final Investment Decision (FID) are expected to deliver LNG to Asia at costs of $10 - $12/MMBtu under current gas price assumptions Assuming start-up in 2021 and a project life of Royalties (12.5%) and state taxes (starting at 25% post-royalties) could 30 years, royalties (12.5%) and state taxes yield $2.4 to $24 billion per year. (starting at 25% post-royalties) could yield a total of between $220 and $419 billion* While we do not address them, there are a Economics are important, but commercial issues such as the scale of number of commercial challenges associated value chain requirements (pipes, storage, etc.), buyer risk tolerance, with all liquefaction projects financing arrangements, etc. are critical Taking all into account – basis, shipping, capital requirements – Alaska LNG export facilities can deliver LNG to Asia less Taking all into account – basis, shipping, capital requirements – Alaska LNG export facilities can deliver LNG to Asia less expensively than US Lower 48 or Canada and competitively vis-à-vis traditional Australian LNG sources expensively than US Lower 48 or Canada and competitively vis-à-vis traditional Australian LNG sources *Total undiscounted taxes and royalties values utilize nominal figures (2.4% inflation), 14.85% indexation, and avg. recourse © Wood Mackenzie 5 rate of $4.18. Assuming a nominal discount rate of 5%, the NPV of taxes and royalties is between $65 and 124 billion. Strategy with substance **Oil indexation price example: With an oil price of $100/bbl, “oil indexation” of 14.85% yields a gas price of $14.85/MMBtu
  • 6. www.woodmac.com Agenda 1 Executive Summary 2 Setting the Context: Asian LNG Markets 3 Alaska LNG Export Competitiveness Appendix – LNG Pricing Details © Wood Mackenzie 6 Strategy with substance
  • 7. www.woodmac.com China is a key driver of Pacific LNG demand growth, but traditional JKT (Japan, Korea, Taiwan) markets still account for most uncontracted demand Pacific/ME LNG Demand Uncontracted Demand, Selected Countries 35 13 30 11 25 9 20 7 bcfd bcfd 15 5 10 3 5 1 0 2008 2010 2012 2014 2016 2018 2020 -1 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Japan South Korea Taiwan India China Mexico West Chile Kuwait Japan South Korea Dubai Thailand Taiwan India Other Post-Fukushima Demand China Post-Fukushima Demand Source: Wood Mackenzie LNG Tool, Feb’11, Global Gas Service H1 ‘11 © Wood Mackenzie 7 Strategy with substance
  • 8. www.woodmac.com The Pacific Basin market is short of proximate LNG and a number of projects will compete for long-term supply requirements (including Alaska LNG) Pacific/ME Basin LNG supply vs demand 40 Buyer options for filling in the gap: 35 • Qatari ‘diversion volumes’ • Atlantic Basin/Other ME 30 ‘portfolio’ suppliers • Pre-FID projects 25 bcfd 20 15 Canada LNG Export potential 10 US LNG Export 5 potential 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Contracted LNG to Pacific Market Uncontracted Supply* (Existing & Under Construction) Uncontracted Pacific Supply (Pre-FID Potential) Demand Demand Post-Fukushima *Includes uncontracted supply from Pacific Basin and Middle East supply projects, but excluding ‘flexible’ Qatari volumes that are ‘allocated’ to the Atlantic Basin Source: Wood Mackenzie LNG Tool, Feb’11, Global Gas Service H1 ‘11 © Wood Mackenzie 8 Strategy with substance
  • 9. www.woodmac.com There is insufficient Atlantic portfolio LNG to bridge the gap and the market is tighter than it appears (since Fukushima) supporting current LNG prices Pacific Basin uncontracted LNG supply vs demand, including portfolio supplies 20 1. Demand is trending upwards 1. Demand is trending upwards 18 2. New supply is drifting out in time 2. New supply is drifting out in time 3. Operational uncertainty could 3. Operational uncertainty could 16 tighten the market further tighten the market further 14 12 1 bcfd 10 2 8 6 3 4 2 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Existing Uncontracted Supply* Under Construction Portfolio Players' Flexible LNG Availability Pre-FID Pacific Potential Uncontracted Demand Uncontracted Demand (Japan Sensitivity) *Includes uncontracted supply from Pacific Basin and Middle East supply projects, but excluding ‘flexible’ Qatari volumes that are ‘allocated’ to the Atlantic Basin Source: Wood Mackenzie LNG Tool, Feb’11, Global Gas Service H1 ‘11 © Wood Mackenzie 9 Strategy with substance
  • 10. www.woodmac.com Agenda 1 Executive Summary 2 Setting the Context: Asian LNG Markets 3 Alaska LNG Export Competitiveness Appendix –LNG Pricing Details © Wood Mackenzie 10 Strategy with substance
  • 11. www.woodmac.com Australia will help fill the Pacific supply gap with over 7 bcfd of capacity on- stream or currently under construction… km 0 250 500 1,000 9 Ichthys DARWIN Prelude 8 Browse 7 Pluto (under cons.) NORTH W EST Arrow LNG Australian PacificIchthys LNG SHELF Northern Gladstone LNG Gorgon (under cons.) Territory Arrow LNG 6 Queensland Gladstone Wheatstone GLNG (under cons.) Scarborough QCLNG (under cons.) LNG 5 Browse bcfd AUSTRALIA Gorgon Exp. Western Australia 4 Pluto Wheatstone Brisbane Exp. Gorgon South Australia 3 Greater QCLNG Sunrise Perth New South Wales 2 Bonaparte GLNG NWS Sydney Darwin Exp. Prelude* AP LNG Pluto Exp. 1 Darwin Adelaide CANBERRA Scarborough Victoria Melbourne 0 Onstream Under Cons. Probable (FID within Proposed 12 Tasmania months) * Prelude took FID in mid May Source: Wood Mackenzie. As of May 2011. © Wood Mackenzie 11 Strategy with substance
  • 12. www.woodmac.com …and continues to dominate the global outlook for new LNG supply due to its large gas resource base and attractive investment climate ‘Potential’ LNG supply*: Australia and the rest of the world 45 Stable Co Regime Reliable 40 sts LNG 35 30 supplier 64% 25 Domestic bcfd Upstream Gas 20 Resource Quality 15 Demand 10 er 36% P artn 5 LNG ent Geopolitics 0 Ali gnm Price 1 3 5 7 9 1 3 5 1 1 1 1 1 2 2 2 20 20 20 20 20 20 20 20 Australia Rest of the world *Includes under construction, probable and proposed LNG capacity globally Source: Wood Mackenzie LNG Tool © Wood Mackenzie 12 Strategy with substance
  • 13. www.woodmac.com But rising costs are putting pressure on Australian project economics… Which sponsors are best placed to mitigate against cost over-runs and delays? Australian oil and gas upstream and DES cost stacks for Australian LNG projects liquefaction capital expenditure (base Capex)* 40 14.00 35 12.00 FID in 2010/11 10.00 2010 US$/mmbtu 30 2010 US$bn 8.00 25 6.00 20 4.00 15 2.00 10 - 5 G e s G Ic n o G e se hy on ud go ut LN LN LN w Pl ht st el or ro G C P at Pr G Q A B 0 he W 2007 2008 2009 2010 2011 2012 2013 Upstream Liquefaction Shipping to India * The analysis is taken from the February 2011 LNG Service Insight: ‘Might Rising Costs In Australia Propel North America LNG Exports’. Source: Wood Mackenzie CAT, LNG GEM, LNG Tool © Wood Mackenzie 13 Strategy with substance
  • 14. www.woodmac.com There may be headroom for a few North American LNG export projects Douglas Channel Energy Douglas Channel Energy Dominion has announced Dominion has announced AGPA is promoting a AGPA is promoting a Partnership project is a Partnership project is a plans to add export capacity plans to add export capacity potential “All Alaska” potential “All Alaska” proposed 0.9 mtpa barge proposed 0.9 mtpa barge at the Cove Point regas at the Cove Point regas pipeline and liquefaction pipeline and liquefaction facility near Kitimat facility near Kitimat facility facility project from Valdez project from Valdez Kitimat LNG is a Kitimat LNG is a proposed 5 mtpa facility proposed 5 mtpa facility BG and Southern Union BG and Southern Union (Apache/EOG/EnCana) (Apache/EOG/EnCana) Petronas and Progress Petronas and Progress have announced plans to have announced plans to fed with shale gas from fed with shale gas from Energy have signed a Energy have signed a add 2 bcfd of export add 2 bcfd of export Horn River // Montney Horn River Montney strategic partnership to strategic partnership to capacity at the Lake capacity at the Lake investigate an export investigate an export Charles regas facility Charles regas facility facility fed with Montney facility fed with Montney unconventional gas unconventional gas Cheniere is proposing to add 1.0 Cheniere is proposing to add 1.0 bcfd of export capacity at the bcfd of export capacity at the existing Sabine Pass LNG regas existing Sabine Pass LNG regas Shell/Mitsubishi (with Shell/Mitsubishi (with facility and has signed 6 non- facility and has signed 6 non- PetroChina, KOGAS and PetroChina, KOGAS and binding MOUs for capacity binding MOUs for capacity several Japanese several Japanese utilities) and Nexen/LNG utilities) and Nexen/LNG Japan are reportedly Japan are reportedly Macquarie/Freeport are Macquarie/Freeport are considering similar considering similar proposing to add 1.4 bcfd of proposing to add 1.4 bcfd of schemes in the BC area schemes in the BC area export capacity at the existing export capacity at the existing Freeport LNG regas facility Freeport LNG regas facility Source: Wood Mackenzie © Wood Mackenzie 14 Strategy with substance
  • 15. www.woodmac.com Access to currently re-injected gas upstream puts the Alaska LNG liquefaction project in an economically competitive position relative to others… ESTIMATE Key Assumptions Key Assumptions Greenfield Alaska LNG Cost Build Up •• All data from “Transcanada All data from “Transcanada 14.00 XOM Alaska Pipeline Project XOM Alaska Pipeline Project Open Season Notice, 2010, Open Season Notice, 2010, Valdez LNG Case” except Valdez LNG Case” except below items: 12.00 below items: •• Liquefaction: Liquefaction: •• CapEx: $1,200/ton; est. rate Currently re- CapEx: $1,200/ton; est. rate 10.00 covers CapEx, Opex, 12% covers CapEx, Opex, 12% injected gas (0.67) 0.59 8.50 nom. ROE. offsets higher 4.00 nom. ROE. 2011$/mmbtu •• Alaska LNG losses 9.65% pipeline costs Alaska LNG losses 9.65% 8.00 •• Shipping Assumptions: Shipping Assumptions: •• Ship: 155,000 m33 Ship: 155,000 m •• CapEx/ship: $200 million 6.00 CapEx/ship: $200 million 0.40 •• OpEx: $15,000/day; 2.33% OpEx: $15,000/day; 2.33% 1.70 annual escalation annual escalation 4.00 •• 8% ROE after tax 8% ROE after tax 2.22 •• LNG Processing Losses: LNG Processing Losses: estimated from AGIA NPV estimated from AGIA NPV 2.00 Report, Fig. 7.2 Report, Fig. 7.2 •• Liquids credit determined using 0.26 Liquids credit determined using $80/bbl netback price for LPG $80/bbl netback price for LPG 0.00 and volumes provided by AGPA and volumes provided by AGPA WH- Processing Transport LNG Losses Liquefaction Liquids Shipping Total (88,000 MMBtu/d; ~20,000 bpd) (88,000 MMBtu/d; ~20,000 bpd) Processing & Shrinkage credit Source: Wood Mackenzie © Wood Mackenzie 15 Strategy with substance
  • 16. www.woodmac.com …and it competes favorably with both proposed Australian and other North American export facilities which have yet to reach FID DES Cost Stack Comparison Alaska’s estimated cost allows it Alaska’s estimated cost allows it 14.00 to compete based on price to compete based on price 12.17 11.35 11.76 12.00 11.12 10.50 10.50 10.58 2011 US$/mmbtu 10.00 8.75 9.33 8.50 8.00 6.00 4.00 2.00 0.00 AP LNG GLNG Alaska Wheatstone Kitimat Pluto Ichthys Sabine Gorgon Browse FOB Breakeven Shipping to Asia Source: Wood Mackenzie © Wood Mackenzie 16 Strategy with substance
  • 17. www.woodmac.com Two pricing norms have emerged in recent long-term Pacific Basin deals Conventional LNG Coalbed Methane (CBM) LNG M Most recent deals are understood to have been Recent deals are understood to feature s- priced at 14.85% JCC, with additional deals for curves, reflecting the fact that CBM LNG is a pre-FID projects being negotiated at the same harder sale than conventional LNG level • Primary slope of ~14.5% JCC between the M Qatar is now also understood to be willing to kink points accept 14.85% JCC as a price from ‘established’ • Slopes of ~12% above and below the kink- Asian buyers points M Some evidence that buyers are seeking high s- Market rumours indicate that APLNG has gone curves in new deals in light of the current high beneath these levels oil price outlook • But exact pricing terms remain uncertain Lower (s-curve) prices, combined with non- price concessions (see next slide) are essential in order to sell CBM LNG into a market with limited appetite for the product Oil indexation will technically remain the standard in long-term gas contracting but additional mechanisms will be required to ensure that pricing remains within the relevant pricing boundaries © Wood Mackenzie 17 Strategy with substance
  • 18. www.woodmac.com We evaluated Alaskan LNG export economics based upon two primary long- term crude oil pricing scenarios WTI Oil Nominal Prices • The extended forward NYMEX strip from July 5, 2011 is treated as a $350.00 base case $300.00 • Combining the NYMEX strip scenario with a second scenario $250.00 Nominal $/BBL utilizing Woodmac’s April 2011 $200.00 Worst Case NAGS price outlook, we establish NYMEX Forw ard the range of likely NPVs $150.00 WoodMac • In a final test, we evaluated a “worst $100.00 case” scenario of an inflation adjusted oil price of $75 / bbl $50.00 throughout the projection period $- • Oil prices and oil price scenarios are 2020 2025 2030 2035 2040 2045 2050 viewed as fully disconnected from Year North American natural gas prices NYM EX fo rward strip data fro m July 5, 201 ; Wo o dmac data fro m A pril 201 NA GS outlo o k; all prices nominal 1 1 Source: CME.COM and Wood Mackenzie © Wood Mackenzie 18 Strategy with substance
  • 19. www.woodmac.com The Alaska LNG export project’s estimated cost is below typical LNG contract prices… Range of LNG Costs Delivered to Asia vs. Typical Contract Price Range Asian Long-term LNG contract price bands are Asian Long-term LNG contract price bands are expected to have slopes between 14% and 16% expected to have slopes between 14% and 16% 20.00 JCC within the analyzed oil price range JCC within the analyzed oil price range 18.00 16.00 2011 US$/mmbbtu 14.00 12.00 10.00 8.00 6.00 The Alaska LNG project’s estimated costs The Alaska LNG project’s estimated costs 4.00 are below this typical price range are below this typical price range 2.00 0.00 Australia US Gulf Cost Canada West Coast Alaska LNG LNG Contract Range LNG Cost Range AVG LNG Cost Players who win LNG contracts first win the race to FID © Wood Mackenzie 19 Strategy with substance
  • 20. www.woodmac.com …The NYMEX strip scenario (base case) yields annual tax and royalty revenues of $2 to 16 billion to the state, for a total of $220 billion over the 30-year life of the project* Model 2021 2022 2023 2024 2025 Nominal WTI oil price $ 109.56 $ 112.19 $ 114.88 $ 117.64 $ 120.46 Asia DES Price 16.86 17.26 17.68 18.10 18.54 Less Infl adj. Shipping Rate / MMBtu 0.59 0.60 0.62 0.63 0.65 • Model at right depicts the NYMEX Less Pipe Transportation (will not vary significantly) 4.18 4.18 4.18 4.18 4.18 strip base case utilizing Woodmac’s Less Liquefaction = Wellhead Net Back Value / MMBtu 4.00 8.09 4.00 8.48 4.00 8.88 4.00 9.29 4.00 9.71 2.4% inflation rate beyond NYMEX Daily production in millions of MMBtu 2.7 2.7 2.7 2.7 2.7 projected years. Annual production in millions of MMBtu 986 986 986 986 986 Taxes and Royalties Alaska 12.5% share of production in MMBtu 123 123 123 123 123 • Producer net income of $178 billion Alaska royalty = 12.5% share * Netback Value 997 1,045 1,094 1,145 1,196 Remaining gas Taxable under ACES in MMBtu 862 862 862 862 862 Tax Rate to $5 / MMBtu 0.25 0.25 0.25 0.25 0.25 Tax Rate between $5 and 15.42 / MMBtu 0.324 0.334 0.343 0.353 0.363 Tax Rate beyond 15.42 / MMBtu 0.324 0.334 0.343 0.353 0.363 Total ACES Taxes 2,263 2,440 2,629 2,829 3,041 Total Royalties and Taxes 2,386 2,564 2,752 2,952 3,164 Sum of Royalties and Taxes 220,101 Period (years from 2011) 10 11 12 13 14 Discount Factor 0.61 0.58 0.56 0.53 0.51 PV of Taxes and Royalties ($MMs) 1,465 1,499 1,532 1,565 1,598 NPV Taxes and Royalties 2021 - 2050 ($MMs) $ 65,021 Producer Revenues = 87.5% share * netback value ($MMs) 6,979 7,315 7,660 8,013 8,375 Less ACES Taxes 2,263 2,440 2,629 2,829 3,041 Post-tax netback to producer 4,716 4,875 5,031 5,184 5,334 Sum Producer Netback 178,278 Period 10 11 12 13 14 Discount Factor 0.39 0.35 0.32 0.29 0.26 PV 1,818 1,709 1,603 1,502 1,405 Producer NPV 2021 - 2050 ($MMs) $ 22,576 Players who win LNG contracts first win the race to FID *NYMEX strip to 2018 then 2.4% inflation;14.85% indexation, avg. recourse rate $4.18 assumed to be flat (annual increases in © Wood Mackenzie 20 operational costs would be incrementally small). Model uses nominal figures and nominal discount rate. Assuming 5% Strategy with substance nominal discount rate, NPV of taxes and royalties amounts to $65 billion.
  • 21. www.woodmac.com …The Woodmac scenario yields annual tax and royalty revenues of $3 to 24 billion to the state, for a total of $419 billion over the 30-year life of the project* Model 2021 2022 2023 2024 2025 Nominal WTI oil price $ 121.97 $ 125.75 $ 130.99 $ 136.40 $ 141.96 Asia DES Price 18.70 19.28 20.07 20.89 21.73 Less Infl adj. Shipping Rate / MMBtu 0.59 0.60 0.62 0.63 0.65 • Model at right depicts the Woodmac Less Pipe Transportation (will not vary significantly) 4.18 4.18 4.18 4.18 4.18 Less Liquefaction 4.00 4.00 4.00 4.00 4.00 scenario, which uses the NAGS = Wellhead Net Back Value / MMBtu 9.93 10.49 11.27 12.08 12.90 April 2011 oil price forecast through Daily production in millions of MMBtu 2.7 2.7 2.7 2.7 2.7 2030, followed by the 2030 price Annual production in millions of MMBtu 986 986 986 986 986 projected to 2050 using Woodmac’s Taxes and Royalties Alaska 12.5% share of production in MMBtu 123 123 123 123 123 long-term inflation rate of 2.4% (oil Alaska royalty = 12.5% share * Netback Value 1,224 1,293 1,389 1,488 1,589 Remaining gas Taxable under ACES in MMBtu 862 862 862 862 862 prices shown in nominal terms) Tax Rate if below $5 / MMBtu 0.25 0.25 0.25 0.25 0.25 Tax Rate if between $5 and 15.42 / MMBtu 0.368 0.382 0.401 0.420 0.440 Tax Rate if beyond 15.42 / MMBtu 0.368 0.382 0.401 0.420 0.440 • Producer net income of $187 billion Total ACES Taxes Total Royalties and Taxes 3,155 3,278 3,455 3,579 3,893 4,016 4,371 4,495 4,891 5,014 Sum of Royalties and Taxes 419,101 Period (years from 2011) 10 11 12 13 14 Discount Factor 0.61 0.58 0.56 0.53 0.51 PV of Taxes and Royalties ($MMs) 2,013 2,092 2,236 2,384 2,532 NPV Taxes and Royalties 2021 - 2050 ($MMs) $ 124,030 Producer Revenues = 87.5% share * netback value ($MMs) 8,565 9,049 9,720 10,413 11,125 Less ACES Taxes 3,155 3,455 3,893 4,371 4,891 Post-tax netback to producer 5,410 5,594 5,827 6,041 6,234 Sum Producer Netback 187,551 Period 10 11 12 13 14 Discount Factor 0.39 0.35 0.32 0.29 0.26 PV 2,086 1,961 1,857 1,750 1,642 Producer NPV 2021 - 2050 ($MMs) $ 24,126 Players who win LNG contracts first win the race to FID *WM NAGS price outlook to 2030 then 2.4% inflation; 14.85% indexation, avg. recourse rate $4.18 assumed to be flat © Wood Mackenzie 21 (annual increases in operational costs would be incrementally small). Model uses nominal figures and nominal discount rate. Strategy with substance Assuming 5% nominal discount rate, NPV of taxes and royalties amounts to $124 billion.
  • 22. www.woodmac.com …The “worst case” scenario yields annual tax and royalty revenues of $0.4 to 6 billion to the state, for a total of $75 billion over the 30-year life of the project* Model 2021 2022 2023 2024 2025 Nominal WTI oil price $ 75.00 $ 76.80 $ 78.64 $ 80.53 $ 82.46 Asia DES Price 10.34 12.01 12.30 12.59 12.89 • Model at right depicts the “worst Less Infl adj. Shipping Rate / MMBtu Less Pipe Transportation (will not vary significantly) 0.59 4.18 0.60 4.18 0.62 4.18 0.63 4.18 0.65 4.18 case scenario in which prices are Less Liquefaction 4.00 4.00 4.00 4.00 4.00 = Wellhead Net Back Value / MMBtu 1.57 3.23 3.50 3.78 4.07 held flat at an inflation adjusted Daily production in millions of MMBtu 2.7 2.7 2.7 2.7 2.7 price of $75/bbl Annual production in millions of MMBtu 986 986 986 986 986 Taxes and Royalties • Producer net income of $131 billion Alaska 12.5% share of production in MMBtu Alaska royalty = 12.5% share * Netback Value 123 194 123 398 123 431 123 466 123 501 Remaining gas Taxable under ACES in MMBtu 862 862 862 862 862 Tax Rate to $5 / MMBtu 0.25 0.25 0.25 0.25 0.25 Tax Rate between $5 and 15.42 / MMBtu 0.168 0.207 0.214 0.221 0.228 Tax Rate beyond 15.42 / MMBtu 0.168 0.207 0.214 0.221 0.228 Total ACES Taxes 228 577 646 720 799 Total Royalties and Taxes 351 701 769 843 922 Sum of Royalties and Taxes 74,939 Period (years from 2011) 10 11 12 13 14 Discount Factor 0.61 0.58 0.56 0.53 0.51 PV of Taxes and Royalties ($MMs) 215 410 428 447 466 NPV Taxes and Royalties 2021 - 2050 ($MMs) $ 21,617 Producer Revenues = 87.5% share * netback value ($MMs) 1,357 2,784 3,020 3,261 3,509 Less ACES Taxes 228 577 646 720 799 Post-tax netback to producer 1,129 2,206 2,373 2,541 2,710 Sum Producer Netback 131,018 Period 10 11 12 13 14 Discount Factor 0.39 0.35 0.32 0.29 0.26 PV 435 773 756 736 714 Producer NPV 2021 - 2050 ($MMs) $ 13,217 Players who win LNG contracts first win the race to FID 2.4% inflation, 14.85% indexation, avg. recourse rate $4.18 assumed to be flat (annual increases in operational costs would © Wood Mackenzie 22 be incrementally small). Model uses nominal figures and nominal discount rate. Assuming 5% nominal discount rate, Strategy with substance NPV of taxes and royalties amounts to $22 billion.
  • 23. www.woodmac.com Agenda 1 Executive Summary 2 Setting the Context: North American Natural Gas Markets & Scenarios 3 Alaska LNG Export Competitiveness Appendix –LNG Pricing Details © Wood Mackenzie 23 Strategy with substance
  • 24. www.woodmac.com LNG Pricing Perspectives © Wood Mackenzie 24 Strategy with substance
  • 25. www.woodmac.com Gas price ceilings differ by region – in Asia, the price ceiling is increasingly based on displacing oil products in the R/C/I sectors Asia gas demand growth 2010 - 2030 35 Historically, the desire for fuel 30 diversity and need for security of 27% supply (primarily in Japan) drove Power generation (2030) 25 Hydro relatively high regional gas prices 13% Nuclear Moving forward, Wood Mackenzie 20 10% sees oil substitution in the R&C and bcfd Gas 28% 4% Industrial sectors in China and India 15 Oil Coal as the primary force behind 70% 1% maintaining premium pricing in the 10 Asian market 39% It is however expected that in JKT a 5 premium will continue to be paid for 48% 54% 28% security of supply 0 21% China India JKT Industrial Power R&C Other Source: Wood Mackenzie Global Gas Tool, H2 2010 © Wood Mackenzie 25 Strategy with substance
  • 26. www.woodmac.com While in Europe the gas price ceiling is “soft” and influenced by the economics of alternative forms of power generation Europe gas demand Europe power generation screening curve 250 70 Demand growth 3% 21% 60 CCGT - $75/t CO2 14% 62% 200 50 Coal - $75/t CO2 CCGT - no carbon 150 Nuclear - 40 $/MWh $7,500/kw bcfd Wind 30 Coal - no carbon 100 Nuclear - $5,000/kw 20 At 12% slopes and $100/bbl oil, natural 50 gas has significant competition in 10 European generation markets 0 0 2010 2030 50 75 100 125 175 $/bbl Industrial Power R&C Other Note: 12% discount rate, no taxes, levelized capital cost, Gas fired CCGT: LNG costs at 12% slope plus $0.8/mmbtu combined shipping and regas. $1,200/kw, 25 years useful life. 6,900 Btu/KWh, LHV heat rate, 92.5% utilization, 1135 lbs/MWh of CO2 emissions; Coal: $3,750/kW, 30 years useful life. $4.25/mmbtu delivered, $9,275 btu/kWh heat rate, 92.5% utilization. 2250 lbs/MWh CO2 emissions; Nuclear: 30 years useful life, 92.5% utilization. No subsidies; Wind: $1,800/kw, 20 years useful life, 27.5% utilization, $25/MWh grid access. No subsidies © Wood Mackenzie 26 Strategy with substance
  • 27. www.woodmac.com Ultimately the markets develop a relative hierarchy by geography and tenor Short tenor markets Long tenor markets • Remain thinly traded as • The premium price excess supply is limited market in the world is and will remain so Asia driven by growth in R/C/I sectors in China & India Supply Security Concerns • Used for portfolio • Soft ceiling moving to optimization but have Rest of Europe alternative fuel limited liquidity economics in generation keeps pricing under Asia • NBP tied to both • Almost all contracts (in last European & NA pricing NW Europe/U.K decade) are NBP linked • Large excess supply • Largely financial not keeps pricing modest & North America physical contracts physical tenors short Transport arbitrage defines regional price differences in spot and short-tenor transactions Transport arbitrage defines regional price differences in spot and short-tenor transactions but has a decreasing influence as tenor increases but has a decreasing influence as tenor increases © Wood Mackenzie 27 Strategy with substance
  • 28. www.woodmac.com Long-tenor gas contracts will remain oil-indexed in geographies that lack liquid, reliable gas indices as an alternative Requirements for Gas-Indexed Term Deals Requirements for Gas-Indexed Term Deals Rationale Behind Oil-Indexed Deals Rationale Behind Oil-Indexed Deals A reputable index must exist that is deep and A reputable index must exist that is deep and Historical comfort: sellers are largely long oil Historical comfort: sellers are largely long oil difficult, if not impossible, to manipulate; e.g.: difficult, if not impossible, to manipulate; e.g.: price risk and don’t mind more; sellers have price risk and don’t mind more; sellers have • North America (HH et al) • North America (HH et al) done similar deals for years done similar deals for years • • The UK (NBP) and NW Europe The UK (NBP) and NW Europe Oil indices are deep and solid; manipulation risk Oil indices are deep and solid; manipulation risk • • Not the Rest of Europe, not Asia Not the Rest of Europe, not Asia is relatively low is relatively low Agency risk: no one has ever lost their job for Agency risk: no one has ever lost their job for The index must reflect floor and ceiling The index must reflect floor and ceiling doing an oil-indexed deal. Buyers, particularly doing an oil-indexed deal. Buyers, particularly economics in the market in which it is used; economics in the market in which it is used; certain Asian buyers, do not generally seek certain Asian buyers, do not generally seek that is, to gain widespread acceptance the index that is, to gain widespread acceptance the index must serve a real economic purpose to buyers innovation in LNG contract pricing terms innovation in LNG contract pricing terms must serve a real economic purpose to buyers and sellers and sellers For the most part, oil indexation does what it is For the most part, oil indexation does what it is • HH makes obvious sense in NA (just as NBP • HH makes obvious sense in NA (just as NBP supposed to do supposed to do does in the UK) as the index is related to does in the UK) as the index is related to actual development costs and alternative actual development costs and alternative • • For buyers with oil product alternatives, oil For buyers with oil product alternatives, oil fuel economics fuel economics indexation at slopes less than oil-equivalent indexation at slopes less than oil-equivalent • But would there be significant demand for • But would there be significant demand for prices locks in economics prices locks in economics HH-indexed gas in Asia where the floor is oil HH-indexed gas in Asia where the floor is oil or fixed price linked and the ceiling is oil or fixed price linked and the ceiling is oil linked? linked? © Wood Mackenzie 28 Strategy with substance
  • 29. www.woodmac.com But many of those “oil-indexed” deals will remain so in name only “Oil indexation” is just the beginning . . . . . . but not the end In reality “oil parity” indexation would appear to As a result, a variety of mechanisms have and meet both buyer and seller needs only within a will continue to emerge and evolve to shape the limited range of oil prices risk profile of the typical “oil indexed” contract; • Development costs for LNG in Asia of around e.g.: $9-$10/mmBtu FOB suggest the need for • Different slopes or constants floors around $60/bbl at 14.85% slopes • S-curves, even extreme examples, that better • In Europe, even at more modest slopes (e.g., match the economic market reality of floor 12%) as oil prices rise above roughly costs and ceiling alternative pricing $100/bbl other generation sources are • A variety of contract re-openers predicated increasingly advantaged on certain oil prices or other triggers Oil indexation will technically remain the standard in long-term gas contracting but additional mechanisms will be required to ensure that pricing remains within the relevant pricing boundaries © Wood Mackenzie 29 Strategy with substance
  • 30. www.woodmac.com Assumptions used in the tax and revenue discount model Assumptions Production 2.7 Bcf/d Conversion 0.000001 Shipping $ 0.59 Asia DES Price calculated as % of WTI: 14.85% Base Case: 14.85% of real 2011 price WM Price Case: April 2011 NAGS Price Outlook NYMEX Forward Curve Case: Transportation Cost Scenarios: Low Negotiated $ 2.25 High Negotiated $ 2.92 Low Recourse $ 3.64 High Recourse $ 4.72 Average Recourse $ 4.18 Liquefaction $ 4.00 Base Royalty on Net Back Value 12.5% Taxable under ACES Law 87.5% Base ACES Royalty 25% Incremental tax for each $ beyond 5 2.4% Incremental tax for each $ beyond 50% tax 0.6% State of Alaska Nominal Discount Rate 5% WoodMac LT Inflation Rate Forecast 2.4% Producer Nominal Discount Rate 10% © Wood Mackenzie 30 Strategy with substance
  • 31. www.woodmac.com Wood Mackenzie Disclaimer This report has been prepared for AGPA by Wood Mackenzie, Inc. The report is intended for the benefit of AGPA and the use of its contents and conclusions by any third parties shall be done so without any liability on the part of Wood Mackenzie. The information upon which this report is based has either been supplied to us by AGPA or comes from our own experience, knowledge and databases. The opinions expressed in this report are those of Wood Mackenzie. They have been arrived at following careful consideration and enquiry but we do not guarantee their fairness, completeness or accuracy. The opinions, as of this date, are subject to change. We do not accept any liability for your reliance upon them. © Wood Mackenzie 31 Strategy with substance
  • 32. www.woodmac.com Global Contact Details Global Offices Europe +44 (0)131 243 4400 Australia Japan United Arab Emirates Americas +1 713 470 1600 Brazil Malaysia United Kingdom Asia Pacific +65 6518 0800 Canada Russia United States Email energy@woodmac.com China Singapore Website www.woodmac.com India South Korea Wood Mackenzie is the most comprehensive source of knowledge about the world’s energy and metals industries. We analyse and advise on every stage along the value chain - from discovery to delivery, and beyond - to provide clients with the commercial insight that makes them stronger. For more information visit: www.woodmac.com © Wood Mackenzie 32 Strategy with substance