The Plight of Qld’s Domestic Gas Market – Prosperity or Doom? By Glen Gill M.D. of Innovative Energy Consulting Pty Ltd EUAA Qld Energy Forum, Brisbane April 19,

Disclaimer 2 April 2012 EUAA Qld Energy Forum IMPORTANT NOTICE : This presentation document was prepared by Innovative Energy Consulting Pty Ltd (“IEC”) for the 2012 EUAA Qld Energy Forum attendees and the information contained in it are based on information supplied by third parties and from sources believed to be reliable. No attempt has been made to verify the information and no representation is made as to its accuracy or completeness. Any forecasts and statements of opinions contained in this document or given during the presentation are views of IEC and others and are therefore subject to change and should not be regarded as predictions of future events. They are based on assumptions, uncertainties and contingencies. Actual future events may vary significantly from forecasts. This presentation speaks only as of the date it is given, and the views expressed are subject to change based upon a number of factors including market conditions. IEC has no obligation to tell EUAA Forum organisers or any attendees if an opinion changes or if IEC becomes aware of any change in the information or any inaccuracy in or omission from this presentation document. It is the responsibility of any and all recipients of this document to satisfy itself as to the accuracy of any and all data contained herein. IEC and the officers, directors, employees and agents of IEC do not accept any responsibility or liability (including in negligence) for this document or its contents. This does not apply to the extent that liability by law cannot be excluded.

Contents 1.How did we get here? 2.Challenging Producer Rhetoric 3.Alberta or Norway – which will it be for Qld? 3 April 2012 EUAA Qld Energy Forum

How did we get here? 4 April 2012 EUAA Qld Energy Forum

Eastern Australia’s Gas Industry  Pipeline sector rhetoric: – Light handed regulation or else no further investment will occur – No need for a level playing field – Infrastructure tolls are not a major cost component  Producing sector rhetoric; – Long term contracts with secret pricing clauses and take or pay – Gas to gas competition is unacceptable – Exxon resisted the construction of the Eastern Gas Pipeline by BHP/Duke – Incumbents trashed the CSG industry during its genesis – WA LNG players initially trashed the CSG to LNG aspirations – Warehousing gas reserves for possible export sales – LNG export parity pricing for domestic gas market  Gas reform initiatives have not resulted in abundant low cost clean energy in Australia  Large energy end users have not had any major victories 5 April 2012 EUAA Qld Energy Forum

Challenging the Rhetoric LNG Parity Pricing For The Domestic Market 6 April 2012 EUAA Qld Energy Forum

The Producer’s Dream - Convert Gas into Oil Gas Dumping Era Low oil prices resulted in LNG netbacks to wellhead that were much less than that received from WA’s domestic market – hence the $12 Billion flare comments by Woodside in the 1990’s Export Parity Pricing Era? 7 April 2012 EUAA Qld Energy Forum

Santos’ View of World Gas Trade Source: Santos April 2012 EUAA Qld Energy Forum

The Wisdom of the Day “the future gas price in the eastern and western markets is in transition toward a price linked to the international LNG price, and hence crude oil” Quote from Q NT submission to Commonwealth regarding draft EWP 9 April 2012 EUAA Qld Energy Forum

The Experts? 10 April 2012 EUAA Qld Energy Forum Expert price forecasts that ignore gas supply/demand fundamentals & discount the formulation of an integrated Australian energy policy that encourages onshore energy intensive industry given the surplus of energy supplies that exist in Australia Source: Dart Energy

Clean Energy Initiative  “It is important for Australia to have the lowest possible cost of energy as we move to a carbon constrained world” March, 2012 Clean Energy Finance Corporation report to Commonwealth Government  $10 billion dollar fund to invest in clean energy  Gas is clearly by far the cleanest fossil fuel and it will be a long time before we are weaned off fossil fuels; but all of the gas is earmarked for the export market unless parity pricing exists 11 April 2012 EUAA Qld Energy Forum

Reality Check 12 April 2012 EUAA Qld Energy Forum

Int’l Gas Union 2009 Survey 13 April 2012 EUAA Qld Energy Forum Source: IGU, Nexant

IGU 2009 World Gas Market Study  The survey was across all categories of gas trade: domestic production, pipeline imports & LNG imports;  The largest single gas price formation driver in 2009 was gas- on-gas competition at 36%;  Oil price escalation was the second most popular driver at 21%, but was largely attributed to pipeline imports and LNG imports into net importing countries;  The three price regulation categories totaled 35%, were split fairly equally and applied almost exclusively to domestic gas production. 14 April 2012 EUAA Qld Energy Forum

Wholesale Gas Price Comparison 15 April 2012 EUAA Qld Energy Forum Source: IGU, Nexant

2009 Wholesale Gas Price Derivation 16 April 2012 EUAA Qld Energy Forum Source: IGU, Nexant

Gas to Gas Competition  Only Canada, the US lower 48 & the UK have liquid GTG competition;  Always commences with the creation of a vibrant spot market (STTM) at a gas supply hub  Commenced in gas supply regions of the USA and Canada – Alberta since the discovery of gas in the 1950’s – GoM region of the US in the 1970’s – Spread to the rest of North America in the early 1990’s  Expands to downstream gas trading hubs over time 17 April 2012 EUAA Qld Energy Forum

European Gas Market in Transition  UK is leading the market liberalisation race to increased GTG;  Pressure from LNG imports and pipeline imports from Russia to maintain oil linked gas pricing;  Historical dominance of oil linked pricing & escalation is wanning;  Europe’s gas market fragmentation is also wanning 18 April 2012 EUAA Qld Energy Forum

Dynamics of Gas Market Development 19 April 2012 EUAA Qld Energy Forum

How Gas Markets Work  Net gas importing countries are forced to pay for imported gas based on replacement cost of liquid hydrocarbons; – Liquid hydrocarbons including LNG attract a price premium due to transportation & storage cost advantages related to its much higher energy density and liquid state  Net gas exporting countries have the benefit of getting high gas prices for exports and abundant low cost gas for their domestic markets 20 April 2012 EUAA Qld Energy Forum

Qld’s Future – Norway or Alberta? 21 April 2012 EUAA Qld Energy Forum

Which Model with Qld Select? Alberta, Canada Vibrant gas intensive industries value adding of resource within the province Exports from Alberta to the rest of Canada & to US markets are a privilege earned by first supplying low cost gas to Alberta gas demand Norway 95% of gas production exported to Europe Small domestic gas demand Maximise royalty received from gas production for Government coffers with little regard to the domestic gas industry 22 April 2012 EUAA Qld Energy Forum

Benchmarking Alberta, CanadaQld, Australia Population3.7 million4.6 million Gas industry commencement Early 1950’sEarly 1960’s Annual Gas Production4,125 PJ/a260 PJ/a Annual Gas Consumption 1,600 PJ/a215 PJ/a Gas PriceFloats daily and monthlyNegotiated & escalated R/P Ratio8 years (Canada) <10 years for past 2 decades 150 years (80 years for Australia) % of nations gas production 75%7.7% in 2011 but expected to grow substantially Gas Export PolicyAlberta top priority over exports to rest of Canada & to USA No State nor Federal policy in place 23 April 2012 EUAA Qld Energy Forum

Do Exports Really Add the Most Value? 24 April 2012 EUAA Qld Energy Forum Source: American Chemistry Council Except from Dow Chemical’s submission to EWP

Alberta Gas Demand 25 April 2012 EUAA Qld Energy Forum

Alberta Gas Price Differentials 26 April 2012 EUAA Qld Energy Forum

Alberta, Canada’s Gas Supply/Demand 27 April 2012 EUAA Qld Energy Forum Source: ERCB

Domestic Market Future Price Path 28 April 2012 EUAA Qld Energy Forum LNG Export Parity Pricing Oil-linked Gas Producers Dream Surplus Gas Resources become a curse to Domestic Market >$6/GJ Status Quo Negotiated prices CPI escalation long term GSA’s Little price discovery $4/GJ Major End Users Dream Responsible Resource Owner Liquid Wallumbilla gas hub STTM Price Discovery All GSA’s use floating STTM price $2 to 3/GJ & volatile Indicative Gas Plant Gate Price Either future scenario has price volatility

Thank-you 29 April 2012 EUAA Qld Energy Forum

Innovative Energy Consulting Pty Ltd 30April 2012 EUAA Qld Energy Forum Innovative Energy Consulting Pty Ltd ABN PO Box 1008, Maleny, Qld Australia Tel: Mobile: Managing Director – Glen W. Gill Glen has 30+ years of gas industry experience across the value chain in primarily North America and Australia. This experienced includes executive positions with a number of world leaders in the gas industry and many years providing consulting services to large end users of gas, large gas producers and midstream infrastructure owners/operators. Of particular relevance to this presentation is his experience leading gas trading and marketing operations with again some of the largest gas production and gas trading organizations worldwide. This experience involved immature rather dysfunctional gas markets as well as open, transparent and very liquid gas markets. Glen is now provides consulting services from his Sunshine Coast based office.