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LNG EXPORTS: SUPPLY TO OUTPACE DEMAND…FOR NOW SCOTTMADDEN, INC. | 23 Cheap natural gas could turn the United States into a major global gas supplier, but concerns remain. U.S. LNG Exports Set to Launch into a Bust Market Challenging Breakeven: Selected LNG Export Costs/Contracts vs. Recent Landed Prices $/MMBtu $/MMBtu • Beginning of an era: On Feb. 24, 2016, Cheniere shipped the first cargo of $7.54 $8 $7.21 Freight cost** U.S. (lower 48) domestically produced natural gas to international markets $6.12 O&M expense $5.42 $5.54 $6 • Increasing global supply: U.S. LNG export capacity of ~7.5 BCF/day is Gas lost for fuel $4.14 Maintenance cost expected online by year-end 2018, with more than triple that pending or in $4 ROI @ 10% pre-filing with FERC; Australia set to increase export capacity more than Gas*** $2 70% by 2020 to ~33 BCF/day Pipeline cost Liquefaction $0 • Amid decreasing global demand: Japanese and South Korean LNG Morgan Stanley LNG Morgan Stanley LNG Japan Landed LNG imports are down 14.4% and 4.7% respectively year-over-year from 2014 to Cost Estimates Cost Estimates European Landed (Henry Hub to Asia) (Henry Hub to Europe) 2015; forecast Chinese gas demand growth down 6.5% through 2020; EU LNG Cheniere’s Asian Cheniere’s gas consumption decreasing since 2010 Contracts European Contracts Sources: Cheniere; Japan METI; Energy Intelligence; Morgan Stanley • And competition: Large players like Qatar and Australia continue to be active in locking in LNG contracts with aggressive pricing, as many LNG Regional Natural Gas Price Benchmarks Used in Gas Trade contract prices are linked to stubbornly low oil prices* $18 • Leads to unfavorable price differentials: As an example of challenging $14 4 3 conditions, Cheniere has contracted 87% of its capacity with prices set at $10 5 1 115% of Henry Hub plus $2.25 fixed costs, mainly liquefaction. One analyst $6 6 estimates at March’s global LNG spot prices, at $1 freight to Europe and $2 2 $0 $3 to Asia, this pricing would have netted a $1.25/MMBtu loss in European 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 markets and an ~$2.95/MMBtu deficit in Asian markets Henry Hub Nat. Gas Spot Price Japan LNG Import Price EU Natural Gas Import Price • But there’s hope: Some observers say the current LNG glut will clear in the Source: World Energy Council 2020 to 2022 time frame. In addition, there are geopolitical considerations EVENTS AND TRENDS 1. U.S. shale gas boom begins involving competition, diversification of supply, and security (e.g., 2. Continued growth in U.S. shale gas supply; domestic supply glut unpredictable Russian supply) that can incentivize buyers to pay premiums leads to depressed prices; 20+ proposals submitted for LNG export terminals; economics drive coal to gas switching for U.S. LNG—the question is how much and for how long? 3. Fuel switching occurs due to flood of cheap coal on the market NOTES: *One analyst says that oil prices would need to rise to $50 to $55 per barrel to make oil-linked LNG prices “in the money” for U.S. LNG sellers; **Morgan Stanley Research estimate of $0.95 to Europe and $2.04 to Asia, and Cheniere range of $0.50 to $1.00 to Europe and $1.50 to $3.00 to Asia; ***Assumes HH at $1.99/MMBtu, construction cost at $1,000/mtpa and 40-year useful life, 10% ROI. 4. Asian demand growth dampens; oil price collapse followed by LNG natural gas price collapse 5. First Japanese nuclear reactor comes back online 6. Five LNG export terminals approved; 60+ million tons/year coming online through 2020