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LNG Markets & Price Volatility. 2 Price determination in gas markets The portfolio approach Management of price risks Concluding remarks LNG Markets and.

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Presentation on theme: "LNG Markets & Price Volatility. 2 Price determination in gas markets The portfolio approach Management of price risks Concluding remarks LNG Markets and."— Presentation transcript:

1 LNG Markets & Price Volatility

2 2 Price determination in gas markets The portfolio approach Management of price risks Concluding remarks LNG Markets and Price Volatility

3 3 Price determination in gas markets The portfolio approach Management of price risks Concluding remarks LNG Markets and Price Volatility

4 4 Price determination LNG markets are not isolated : LNG prices depend ultimately on regional gas markets Long-term gas price drivers : marginal cost of supplying markets pattern of demand growth : generation, domestic, GDP government policies : conservation, supply security... Short-term gas price drivers : day-to-day uncertainty on local supply/demand balance: gas production & transportation, weather, power generation… availability of tools : storage, flexibility, fuel switching,... positioning of each market participant

5 5 Price determination over time (US market) weather / temperature competing fuels / markets storage / interconnections industry confidence avr-99avr-00avr-01avr-02 long-term trends Henry Hub – 5 yrs gas supply options economic growth political / environment $/mmbtu short-term (days) /03/0302/08/0302/13/0302/18/0302/23/03 Prompt Month Nymex weather / temperature local market balance Henry Hub – 1 yr seasonal 1,50 2,00 2,50 3,00 3,50 4,00 4,50 déc-01avr-02août-02déc-02

6 6 Price formation in UK gas market The National Transmission System (NTS) and the National Balancing Point (NBP) any licensed shipper can buy and sell gas in the high pressure network (NTS) under the Network Code within the NTS, natural gas is exchanged at a virtual trading hub (NBP) capacity must be booked or purchased through auctions to enter into and exit from the NBP NBP price is the immediately negotiable value for a given delivery period (day-, week-, month-ahead…) Most UK gas is traded at fixed price at the NBP

7 7 Customers Entry Points Capacity Auctions NBP National Balancing Point LDZ Exit Points Capacity Booking Local Distribution Zones Capacity Trading Gas Trading Capacity Trading UK National Transmission System (NTS) and National Balancing Point (NBP) Demand: VLDMC (Very Large Daily Metered Customers) DM (Daily Metered sites) NDM (Non-daily metered sites) NBP sales Storage (injection) Interconnector Supply: Production fields NBP purchases Storage (off take) Interconnector Future LNG imports

8 8 Spot UK gas prices remain high and above 2001 highs Gas Year 2004 is assessed at ~ 24.6 p/th (12.5 /MWH ~ 4.5 $/MMBTU) How do spot gas prices compare with long term contract prices ? Recent price developments in the UK

9 9 Price formation in Continental Europe Over 90% of continental demand is imported from Russia, Algeria and Norway long-term natural gas compete with LNG imports crude oil and oil products indexation interact with spot gas emergence of continental spot trading hubs (Zeebrugge) Dynamic linkage UK / Europe (Interconnector) Growing distortion between long-term horizon of supplies, and short-term horizon of demand : most customers make competitive supply tenders every year Market players must constantly balance portfolio

10 10 Continental European gas prices remain oil driven Spot prices are influenced by short term supply/demand distortions (UK switch to import) Contrary to recent history todays spot prices (NBP or ZHUB) are above Long Term oil indexed contract prices LNG supply contracts must compete in this market May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 P/TH GY03 CAL04 GY04 CAL05 3 p/th ~ 1.5 /MWh 0.5 $/MMBTU How do spot prices compare with LT contract prices ?

11 11 Price determination in gas markets The portfolio approach Management of price risks Concluding remarks LNG Markets and Price Volatility

12 12 The global market LNG is the only physical link between world gas markets LNG participates in the global equilibrium of gas prices direct influence is however difficult to demonstrate conversely flows of LNG are directly influenced by variations in regional gas prices, leading to arbitrage opportunities Aspiring leading market players will need to balance the right mix of gas and LNG supplies secure access to logistics assets (regas terminals, pipes, ships) access end-user markets be active in most gas and LNG markets develop sophisticated risk management expertise (hedging)

13 13 Integrated Oil Companies as LNG buyers IOCs have been traditional players in upstream markets and LNG liquefaction IOCs are becoming purchasers of LNG leverage their gas reserves and allow for faster launch of upstream project by securing outlets IOCs are developing a strong marketing base, with direct access to end-user markets credit worthiness expertise in technical, commercial and financial matters, as well as risk management (Oil, Gas, Power, FOREX)

14 14 Why developing a portfolio ? In todays complex environment, back-to-back deals will become exceptional Market players hold a set of purchase and sale commitments that cannot fully match Portfolio manage sum of purchase and sale commitments, and adjust base load and swing supplies to demand manage time horizon discrepancies aggregate risks using a unique rule book take advantage of correlations between price formulas minimize cost of commercial operations and logistics

15 15 LNG is a long term business (15 yrs +) Trading is perceived as a short term activity (1 day +) Retail & Marketing are medium term businesses (1 yr +) Portfolio management conciliates these different time horizons Trading Marketing UK Marketing SPAIN Production UK Production Norway LNG & Gas contracts Marketing FRANCE Spot market share commercial margin credit worthiness issues balancing risk LT absolute price risk production performance issues short to medium term price risk transportation & capacity risk supply / demand adequation oil vs. natural gas FOREX exposure accrual accounting FAS 133 compliance mark to market accountingaccrual accounting How TOTAL portfolio aggregates flows & risks in Europe

16 16 UK 6.7 BCM 20% I&C NWE 1 BCM As of 2004, TOTAL end-user European demand amounts to 17 BCM/y FRANCE 8 BCM 17% market share TOTAL European Gas Marketing Assets Leading supplier to I&C market 1/3 Equity in FOS 2 terminal 4 th marketer in Spain SPAIN 1.3 BCM 6% market share Cross-border pipeline project

17 17 The Gas & LNG portfolio of TOTAL in the Atlantic basin France & NWE Gas marketing Norway Gas supply France Gas supply Spain Gas marketing UK Gas marketing US Gas marketing Mexico Gas marketing Mid East LNG supply Nigeria LNG supply Algeria Gas supply Algeria LNG supply Netherlands Gas supply US Gas supply LNG arbitrage Norway LNG supply UK Gas supply The building blocks of a worldwide portfolio are progressively put in place

18 18 Price determination in gas markets The portfolio approach Management of price risks Concluding remarks LNG Markets and Price Volatility

19 19 The best hedge ? The right formula ! A right price formula initially LNG price formula must be representative of the fair value of gas in the target market versus alternative competing supplies (gas or LNG) A right price formula during contracts life long term take-or-pay and price reviews are linked price review mechanism is of utmost importance to guarantee that the contract will remain balanced LNG price formula must remain representative of gas prices

20 20 The representation of risks Mark-to-market flows & risks are recorded when commitment is taken exposure can then be evaluated and categorized against set of references, driven by market standards contracts are said to be marked to the market examples of such references: Henry Hub in the US, NBP in the UK, oil-indexed prices in Continental Europe At portfolio level, mark-to-market exposure of all contracts, LNG as well as pipeline gas, can be aggregated identification of overall risk implementation of appropriate hedging strategy

21 21 Risk management in LNG markets Risk management over long-term horizon the right formula price review mechanism Risk management over mid-term horizon adequation between expected import flow and market market risks are evaluated when the annual delivery programme is known buyer can decide to take hedging and corrective action for exchange rates, oil vs. gas, crude vs. products Risk-management over short-term horizon day-to-day adjustment to schedules and actual physical flows

22 22 LNG competition (LNG vs. LT gas - FRANCE Zone North)

23 23 Price determination in gas markets The portfolio approach Management of price risks Concluding remarks LNG Markets and Price Volatility

24 24 Concluding remarks LNG markets have achieved a maturity comparable to gas markets in North West Europe and North America For IOCs acting as buyers, LNG purchases are now an integral part of their global gas portfolio supplying their marketing affiliates Mastering the technicalities of markets is a key part of the commercial expertise required to be a successful player in LNG markets


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