LNG Markets & Price Volatility CONFIDENTIAL

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

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

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 CONFIDENTIAL

Price determination over time (US market) 1 2 3 4 5 6 7 8 9 10 avr-99 avr-00 avr-01 avr-02 long-term trends Henry Hub – 5 yrs gas supply options economic growth political / environment $/mmbtu short-term (days) 5.00 5.20 5.40 5.60 5.80 6.00 6.20 6.40 6.60 6.80 7.00 02/03/03 02/08/03 02/13/03 02/18/03 02/23/03 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-01 août-02 déc-02 weather / temperature competing fuels / markets storage / interconnections industry confidence CONFIDENTIAL

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 CONFIDENTIAL

UK National Transmission System (NTS) and National Balancing Point (NBP) St. Fergus Teesside Easington Rough Theddlethorpe Bacton Barrow Burton Point 6300 km Pipelines Compressors Regulators Terminals LNG Terminal Projects Milford Heaven Isle of Grain 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) Future LNG imports Customers Entry Points Capacity Auctions NBP National Balancing Point LDZ Exit Points Capacity Booking Local Distribution Zones Capacity Trading Gas Trading CONFIDENTIAL

Recent price developments in the UK 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 ? Front Gas Year: GY2002-GY2004 17.00 18.00 19.00 20.00 21.00 22.00 23.00 24.00 25.00 26.00 IMPACT OF WAR & OIL TXU DEBACLE INTERCONNECTOR UNRELIABILITY & CONFUSION ENRON COLLAPSES 9-11 SHORT DERIVS, 40- 50P/th prompt, inc. OIL PX POST 9-11 GLOBAL ENERGY SLUMP SHORT DERIVATIVES, INCREASED DEMAND, COLDEST OCT SINCE 92, OFFSHORE RELIABILITY 2001 2002 2003 CONFIDENTIAL

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 CONFIDENTIAL

How do spot prices compare with LT contract prices ? 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 today’s spot prices (NBP or ZHUB) are above Long Term oil indexed contract prices LNG supply contracts must compete in this market -2.00 -1.50 -1.00 -0.50 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00 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 CONFIDENTIAL

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

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)

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)

Why developing a portfolio ? In today’s 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

How TOTAL portfolio aggregates flows & risks in Europe 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 accounting

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

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

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

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 contract’s 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

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

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

LNG competition (LNG vs. LT gas - FRANCE Zone North) Brent $/bbl $/MMBTU Pipe gas in North Zone $/MMBTU (high crack spread) LNG delivered in North Zone $/MMBTU Pipe gas in North Zone $/MMBTU (base case) Pipe gas in North Zone $/MMBTU (low crack spread) low crack high crack 1 BCM/y ~ 15,000 bl/d refining margin risk 15 20 25 30 35 40 BRENT ($/bl) CRACK market + (LNG < LT gas) - (LNG > LT gas) LNG vs. LT Natural Gas

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

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