MONTH 2008
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Impact of North American LNG on
Australian Projects
AUGUST 2014
Stephen Thompson
Manager, LNG & Gas, Asia Pacific
MONTH 2009
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Three key impacts of North American LNG
• New business and pricing models are forcing Australia to clarify its value proposition
• Price and volume focal points are causing Australian ventures to wrestle with regret
minimization
• Competition is imposing greater Australian capital discipline
MONTH 2009
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AUGUST 2014
New business and pricing models
Australia must clarify its value proposition
MONTH 2009
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Upstream: from lottery to factory
• Industry adopted new
business processes for
large numbers of wells
• Factory-like models used
to reduce time and cost in
multi-year programs • Well design was
standardized to avoid limit
engineering hours and
streamline supplier interface
• Pace set by external
constraint such as rig
availability and infrastructure
for gathering
• Companies achieved cost
reductions of up to 40%
and accelerated time to
production by 30%
Conventional gas life cycle
The unconventional gas “factory”
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Exploration risk has been largely eliminated
• The old calculus of exploration risk….
p(Source x Path x Reservoir x Trap x Timing) = p(Success)
90% x 90% x 90% x 90% x 90% = 59%
• …no longer applies
p(Source x Path x Reservoir x Trap x Timing) = p(Success)
Very large,
known
resource
beds
Risk eliminated: produce directly
from source rock
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UG development payback is necessarily short
• Shale gas production declines exponentially
• Short payback effectively de-risks drilling
• Near-term forecasts inherently more certain than long-term
• Financial hedging products readily available to cover much of production period
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AUGUST 2014
North American liquefaction has continued industry
trend toward unbundling of value chain
MONTH 2009
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A quarter of Asian SPAs signed in the last three years
are hub-linked
• Oil-link is forecast to remain the
dominant mechanism to price new long-
term contracts in Asia, amid increasing
presence of HH- linked volumes in Asian
markets
• Variety of pricing alternatives and supply
options with new and very different
business models is good for the industry
• Need to look hard at risk/reward profile of
alternative offers—no “$100 bills lying on
the sidewalk”
Long-term contracts into Asia
signed 2010-13 (Total 66 contracts)
Oil Linked 74%
HH, NBP,
JKM &
Hybrid
26%
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The LNG menu
• For the traditionalist • Oil-linked supply from a venture led by an
established sponsor
• For the adventurous • Henry-Hub indexed supply or tolling service
from a new player
• For those who can’t make up their
minds • Hybrid contracts from an aggregator
.
.
.
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Price and volume focal points
Australia wrestles with regret minimization
MONTH 2009
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• Focal point: A solution that works because it is obvious, not because it is right
• Game 1: If you and the person next to you choose the same square you win a prize.
Which square do you choose, and why?
• Corollary #1: he who controls the focal points (sometimes) drives the negotiations
Focal points in negotiations
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• Game 2: If you and the person next to you choose the same price you win a prize. Which
price do you choose, and why?
The pricing focal point
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• Game 3: I will show two slides taken from the US Department of Energy website. If you
and the person next to you choose the same number you win a prize. Which number do
you choose, and why?
• Corollary #2: the more politicized a negotiation is, the more focal points count
The volume focal point
MONTH 2009
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MONTH 2009
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• In schematic decision tree, optimal
decision is “buy” Australian LNG • Five “wins” vs. two “looses”
• Regret-minimizing decision is “do
nothing” • Zero possibility of a loss
Regret minimization
HIGHWIN
Oil Price
NOLOW
WIN
HH
availability
HIGH YES
HIGHTIE
Oil Price
HH PriceLOW
WIN
HIGHWIN
LOW Oil Price
NOLOW
WIN
BUYHH
availability
YESHIGH
LOOSE
Oil Price
LOWLOOSE
Purchase
Decision DO NOTHING$0
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Competition
Australia needs greater capital discipline
MONTH 2009
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0
50
100
150
200
250
300
350
400
450
500
2000 2005 2010 2015 2020 2025 2030
MMt/y
East Africa
North America
Australia
West Africa
Qatar
North Africa
Malaysia/Indonesia
Others
Total Demand
North America and East Africa compete for markets
• Australia and Qatar will provide close to 44% of the global supply by 2020 • Limited growth from both countries post 2020
• East Africa and North America near 116 MMt/y by 2030, gaining 26% of global market
Two markets account for almost all new supply from 2020-30
Projection Historical
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• Over the course of the new millennium,
Australian costs per unit of capacity have
increased by 300%-500%
• Investors aren’t buying it
Capital discipline was short-changed in rush to FID
LNG-weighted equity index vs S&P 500
MONTH 2009
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NATURAL GAS & LNG CONSULTING CONTACTS:
AMERICAS (NEW YORK)
Contact: Jim Briggs
Email: [email protected]
Tel: +1 212 230 2000
EUROPE, M. EAST, AFRICA
Contact: Graham Hartnell
Email: [email protected]
Tel: +44 20 3747 4820
ASIA PACIFIC
Contact: Stephen Thompson
Email: [email protected]
Tel: +61 8 6468 7942
AMERICAS (HOUSTON)
Contact: Daryl Houghton
Email: [email protected]
Tel: +1 917 2225 7636
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