1. LNG Markets & Price Volatility
CONFIDENTIAL

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

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

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
CONFIDENTIAL

5. 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

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
CONFIDENTIAL

7. 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

8. 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

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
CONFIDENTIAL

10. 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

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

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. 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. 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

15. 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

16. 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

17. 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

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

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 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

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. 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. 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

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

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