GlobalLNG JPM

Global Equity Research
13 January 2012
Global LNG
Full steam ahead, but cross-basin arbitrageurs beware Henry Hub price diffusion
European Oil & Gas Fred Lucas
AC
(44-20) 7155 6131 fred.lucas@jpmorgan.com J.P. Morgan Securities Ltd.

AC
Nitin Sharma
(44-20) 7155 6133 nitin.sharma@jpmorgan.com J.P. Morgan Securities Ltd.
Australian Oil & Gas Benjamin Wilson

AC
(61-2) 9220-1384 benjamin.x.wilson@jpmorgan.com J.P. Morgan Securities Australia Limited
Asian Oil & Gas Brynjar Eirik Bustnes, CFA

(852) 2800-8578 brynjar.e.bustnes@jpmorgan.com J.P. Morgan Securities (Asia Pacific) Limited
AC
Indian Oil & Gas Pradeep Mirchandani, CFA

AC
(91-22) 6157-3591 pradeep.a.mirchandani@jpmorgan.com J.P. Morgan India Private Limited
Russian Oil & Gas Nadia Kazakova, CFA

AC
(44-20) 7325-6373 nadia.kazakova@jpmorgan.com J.P. Morgan Securities Ltd.
North American Oil & Gas Joseph Allman, CFA

(1-212) 622-4864 joseph.d.allman@jpmorgan.com J.P. Morgan Securities LLC
AC
Katherine Lucas Minyard, CFA

(1-212) 622-6402 katherine.l.minyard@jpmorgan.com J.P. Morgan Securities LLC
Global Commodity Research Colin P. Fenton

(1-212) 834-5648 colin.p.fenton@jpmorgan.com JPMorgan Chase Bank NA
See page 245 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.morganmarkets.com
Fred Lucas (44-20) 7155 6131 fred.lucas@jpmorgan.com
Global Equity Research 13 January 2012
J.P. Morgans Global Oil & Gas Research Network

UK Integrateds Fred Lucas
(44-20) 7155 6131 fred.lucas@jpmorgan.com
Americas Exploration and Production Joseph Allman, CFA

(1-212) 622-4864 joseph.d.allman@jpmorgan.com
UK & European Oil Services & Equipment Andrew Dobbing

(44-20) 7155 6134 andrew.dobbing@jpmorgan.com
Jeanine Wai
(1-212) 622-6489 jeanine.wai@jpmorgan.com
Jessica Lee
(1-212) 622-9812 jessica.s.lee@jpmorgan.com
James Thompson
(44-20) 7325 9460 James.a.thompson1@jpmorgan.com
European Integrateds Nitin Sharma

(44-20) 7155 6133 nitin.sharma@jpmorgan.com
Americas Oil Services & Equipment J. David Anderson, PE, CFA

(1-212) 622-6684 jdavid.anderson@jpmorgan.com
Samantha Hoh, CFA

(1-212) 622-5248 samantha.k.hoh@jpmorgan.com
UK Exploration & Production Jessica Tadj-Saadat, CFA

(44-20) 7155 6636 jessica.saadat@jpmorgan.com
William S Thompson
(1-212) 622-9978 william.s.thompson@jpmorgan.com
Emerging Oils Russia Nadia Kazakova, CFA

(7-495) 937 7329 nadia.kazakova@jpmorgan.com
Americas Integrated Oils Katherine Lucas Minyard, CFA

(1-212) 622-6402 katherine.l.minyard@jpmorgan.com
Andrey Gromadin, CFA

(7-495) 967 1037 andrey.gromadin@jpmorgan.com
Igor Grinman
(1-212) 622-6596 igor.grinman@jpmorgan.com
Emerging Oils Asia Brynjar Bustnes

(852) 2800 8578 brynjar.e.bustnes@jpmorgan.com
Emerging Oils LatAm Caio Carvalhal

(55-11) 3048-3946 caio.m.carvalhal@jpmchase.com
Sophie Tan
(852) 2800 8578 sophie.lm.tan@jpmorgan.com
Felipe Dos Santos

(55-11) 4950-3796 felipe.dossantos@jpmorgan.com
Sukit Chawalitakul
(66-2) 684 2679 chawalitakul.sukit@jpmorgan.com
South African Oils Alex Comer

(44-20) 7325 1964 alex.r.comer@jpmorgan.com
Australian Oils Benjamin Wilson

(61-2) 9220 1384 benjamin.x.wilson@jpmorgan.com
Head of Global Commodity Research Colin Fenton

(1-212) 834-5648 colin.p.fenton@jpmorgan.com
Daniel Butcher
(61-2) 9220 1405 daniel.butcher@jpmorgan.com
Indian Oils Pradeep Mirchandani, CFA

(91-22) 6157 3591 pradeep.a.mirchandani@jpmorgan.com
Energy Strategy Oil Lawrence Eagles

(1-212) 834-8107
lawrence.e.eagles@jpmorgan.com
David G Martin
(44-20) 7777-0211 david.g.martin@jpmorgan.com
For Specialist Sales advice, please contact: Hamish Clegg

(44-20) 7325 0878 hamish.w.clegg@jpmorgan.com
Energy Strategy Gas Scott Speaker

(1-212) 834-3878
scott.c.speaker@jpmorgan.com
J.P. Morgan Global Oil & Gas Equity Coverage

UK Integrateds - Fred Lucas BG Group, BP, RD Shell A & B UK & European Oil Services & Equipment - Andrew Dobbing Aker Solutions, Amec, CGG Veritas, Petrofac, Saipem, Subsea 7, TGS Nopec, Technip, Tecnicas Reunidas James Thompson - Cape, Hunting, Lamprell, PGS European Integrateds - Nitin Sharma ENI, Essar Energy, Galp Energia, OMV, Repsol YPF, Statoil, TOTAL UK E & P - Jessica Tadj-Saadat, CFA Afren, Cairn Energy, Enquest, Genel Energy, Heritage Oil, Ophir Energy, Serica Energy, Soco, Tullow Oil Emerging Oils Russia - Nadia Kazakova, CFA C.A.T Oil, Eurasia Drilling Company, Gazprom, Gazprom Neft, HMS Group, MOL, Novatek, PKN Orlen, Rosneft, Surgutneftegaz, Surgutneftegaz Prefs Andrey Gromadin, CFA Alliance Oil Company, Bashneft, Bashneft (pref), Integra, Lotos, Lukoil, Tatneft, Tatneft Prefs, Tupras Emerging Oils Asia - Brynjar Bustnes CNOOC, China Oilfield Services Limited, Inpex Corporation, MIE Holdings, PetroChina, S-OIL Crop, SK Energy, Sinopec Emerging Oils Thailand Sukit Chawalitakul PTT, PTTEP, Thai Oil Australian Oils - Benjamin Wilson, Daniel Butcher AWE Limited, Beach Energy, Oil Search, ROC Oil, Santos, Woodside Petroleum Indian Oils - Pradeep Mirchandani, CFA BPCL, Cairn India Ltd., Essar Oil, GAIL, Gujarat Gas Gujarat State Petronet Ltd., HPCL, Indian Oil, Indrapastha Gas, Oil India Ltd., ONGC, Petronet LNG Ltd., Reliance Industries Ltd. South African Oils - Alex Comer Sasol Emerging Oils LatAm Caio Carvalhal Ecopetrol. Gran Tierra Energy, HRT, Lupatech, OGX, Petrobras, Pacific Rubiales, Tenaris USA Exploration & Production - Joseph Allman, CFA ATP Oil & Gas, Anadarko Petroleum, Apache Corp., Approach Resources, Atlas Energy, Berry Petroleum, Brigham Exploration, Cabot Oil & Gas, Carrizo Oil & Gas, Chesapeake Energy, Cobalt International Energy, Concho Resources, Continental Resources, Denbury Resources, Devon Energy, EOG Resources, EQT Corp., EXCO Resources, El Paso Corp., Goodrich Petroleum, McMoran Exploration, Newfield Exploration, Noble Energy, PDC Energy, Penn Virginia Corp., PetroQuest Energy, Pioneer Natural Resources, Plains E&P, QEP Resources, Quicksilver Resources, Range Resources Corp., SM Energy, SandRidge Energy, Southwestern Energy, Swift Energy, Ultra Petroleum, Venoco Inc., Whiting Petroleum Corp., Williams Companies USA Oil Services & Equipment - J.David Anderson, PE, CFA Baker Hughes, Cameron Intl, C&J Energy Services, Diamond Offshore, Dresser-Rand, DrilQuip, Ensco, Exterran Holdings, FMC Technologies, Halliburton, National Oilwell Varco, Noble Corp, Rowan Companies, Schlumberger, Transocean, Weatherford Inernational Integrateds - Katherine Lucas Minyard, CFA USA - Chevron, ConocoPhillips, Exxon Mobil, Hess, Marathon Oil, Murphy Oil, Occidental Petroleum Canada Baytex Energy, Canadian Natural Resources, Cenovus Energy, Husky Energy, MEG Energy, Nexen, Suncor Energy, Talisman Energy, Lone Pine Resources, Penn West Exploration
Table of Contents
One-minute, one-page synopsis .............................................6 Introduction global thematic research ................................7 Executive Summary .................................................................9 Global theme LNG demand growth....................................15 LNG market .............................................................................17 North American LNG export potential ..................................27 LNG pricing the Henry Hub threat......................................30 Global LNG supply & demand scenarios .............................37 Origin of LNG competitive advantages ................................50 Competitive ranking of LNG players.....................................55 Alternative strategies to play LNG theme ............................60 Company Profiles ...................................................................63 BG Group ................................................................................64 BP ............................................................................................80 RD Shell...................................................................................87 ENI ...........................................................................................96 Repsol YPF ...........................................................................100 Statoil ....................................................................................105 TOTAL ...................................................................................108 Chevron.................................................................................113 Exxon Mobil ..........................................................................117 Gazprom................................................................................121 Novatek .................................................................................130 Oil Search..............................................................................132 Santos ...................................................................................136 Woodside ..............................................................................141 Origin Energy........................................................................149 Inpex ......................................................................................151 Overview China LNG ............................................................158 CNOOC ..................................................................................165 PetroChina ............................................................................167 Sinopec .................................................................................168 Overview India LNG..............................................................169 Petronet LNG ........................................................................171
Appendices
Appendix I: LNG exporting countries .................................173 Appendix II: LNG export projects........................................175 Appendix III: LNG importing countries...............................178 Appendix IV: LNG shipping .................................................182 Appendix V: Floating LNG ...................................................187 Appendix VI: A brief history of LNG ...................................189 Appendix VII: Glossary of terms in LNG ............................190 Appendix VIII: Company financials.....................................208
Equity Ratings and Price Targets Company BG Group BP Royal Dutch Shell B ENI Repsol YPF Statoil TOTAL Chevron Corp Exxon Mobil Corp Gazprom Novatek Oil Search Santos Limited Woodside Petroleum Inpex Corporation CNOOC Sinopec Corp - H PetroChina Petronet LNG Ltd. Origin Energy Symbol BG.L BP.L RDSb.L ENI.MI REP.MC STL.OL TOTF.PA CVX XOM GAZP.RTS NVTKq.L OSH.AX STO.AX WPL.AX 1605.T 0883.HK 0386.HK 0857.HK PLNG.BO ORG.AX Mkt Cap ($ mn) 75,875.38 139,011.70 234,869.60 76,015.01 34,465.86 80,427.16 113,747.60 215,397.00 412,042.40 129,013.20 40,959.77 8,904.85 12,316.17 26,674.44 24,262.33 86,370.72 19,191.29 29,286.29 2,298.83 14,986.55 Price CCY GBp GBp GBp EUR EUR NOK EUR USD USD USD USD AUD AUD AUD JPY HKD HKD HKD INR AUD Rating Price 1,448 475 2,414 16.50 22.20 152.40 39.88 107.77 85.08 5.63 134.90 6.57 12.75 32.37 510,000 15.02 8.88 10.78 161.60 13.49 Cur OW OW N OW N UW OW UW UW N UW N OW UW OW UW OW UW N OW Prev n/c n/c n/c n/c n/c n/c N n/c n/c n/c n/c n/c n/c n/c n/c n/c n/c n/c n/c n/c Price Target Cur Prev 1,900 1,800 575 n/c 2,400 n/c 21.00 n/c 25.00 n/c 145.00 n/c 49.00 47.00 120.00 n/c 92.00 n/c 6.94 n/c 82.90 n/c 8.01 n/c 18.59 n/c 44.64 n/c 750,000 n/c 12.50 n/c 9.40 n/c 8.50 n/c 190.00 n/c 18.95 n/c
Source: Company data, Bloomberg, J.P.Morgan estimates. n/c = no change. All prices as of 11 Jan 12 except for OSH.AX [12 Jan 12] STO.AX [12 Jan 12] WPL.AX [12 Jan 12] 1605.T [12 Jan 12] 0883.HK [12 Jan 12] 0386.HK [12 Jan 12] 0857.HK [12 Jan 12] ORG.AX [12 Jan 12].
One-minute, one-page synopsis

Five big themes underwrite LNGenergy security, energy flexibility, energy infrastructure renewal, de-carbonization of GDP growth and a continued transition away from nuclear power
The Arab Spring and the Fukushima tragedy have only emboldened the script in favor of global LNG. Notwithstanding its relatively high cost, we believe that the case for LNG is underpinned by five very durable, investable and politically charged themes: (i) national energy supply security (ii) national energy supply flexibility (iii) national energy infrastructure renewal to improve system resilience to supplydemand shocks, stimulate investment and reduce unemployment (iv) the decarbonization of economic growth as a social imperative, so continuing the displacement of coal by natural gas (v) given rising popular opposition, a further slow down in nuclear power generation. These factors will continue to drive long term LNG contract agreements close enough to oil price parity to warrant the very large upfront capital investment that LNG export chains mandate. We acknowledge that the LNG market dynamics are complex and a clear understanding of the global supply-demand balance is very difficult given limited public disclosure on contract pricing and off-take flexibility. With this caveat, we believe that the global LNG market will remain tight for the next 2-3 years given a notable slow down in liquefaction capacity additions (2011-13E +27 MT pa, +9% versus 2008-10 +82 MT pa, +40%), high risks of further project delays and very resilient demand patterns, most notably in Asia Pacific, but also supported by an increasing number of new LNG importers in Europe, the Middle East and elsewhere. We estimate that the number of countries with LNG import capabilities will rise from 25 (90 import terminals) at end 2011 to 48 (160 terminals) by end 2015. Given the aforementioned themes and project delay risk, we have a bias to our BULL case set of assumptions - global demand reaches 368 MT by 2018E (2011E 249 MT), a 2011-18 CAGR of 6% (versus 2000-10 CAGR +8%). In the absence of meaningful domestic gas shale supplies, Chinese LNG demand surpasses 30 MT in 2016 (2011E 12 MT); Indian demand reaches 20 MT by 2015 (2011E 10 MT). On this basis, the LNG market will continue to tighten 2012 to 2014 and will be supply constrained from 2015 to 2017. Near term this is supportive of oil-indexed LNG contract pricing and supports meaningful regional price differentials 2012-14 which will provide suppliers with portfolio flexibility with profitable cargo diversion opportunities. However, a new pricing paradigm is emerging in the shape of Henry Hub indexed supply contracts for US gas sourced LNG exports. Given this and a meaningful deepening LNG market liquidity post-2014, this will likely elevate depressed US gas prices and lead to tighter regional gas price dispersion. This will mitigate cross-basin arbitrage opportunities thus reducing the strategic value of portfolio supply flexibility and re-promoting the importance of water-tight long term contracts. We continue to encourage investors to maintain / build exposure to names that are exposed to the global LNG theme. We review the LNG strategies, asset spreads and competitive positioning of 20 companies. From this, our top global IOC picks with Overweight recommendations are BG Group (PT 1900p - upside 31%), Inpex (PT Y750,000 upside 47%), Santos (PT A$18.6 upside 46%) and TOTAL (PT 49 upside 22%). Our note also lists alternative plays in Equipment & Services (given the potential for $1 trillion of capital investment 2012-18E), E&Ps (small companies do not easily survive long cycle LNG projects) and Shipping (we anticipate robust rates through to 2013 and play this through the ship builders and the ship owners).
LNG markets will stay tight 201214 as capacity growth slows, projects start late and new demand centers grow
Our BULL scenario is supportive of oil priced indexation for long term contracts and continued regional price arbitrage 2012-14
New Henry Hub priced & sourced exports in 2015+ and deeper market liquidity will then tighten regional price dispersion
We favor four IOCs - BG Group, Inpex, Santos and TOTAL and also cite alternatives in OFS, E&P and Shipping sectors to play LNG theme
Introduction global thematic research

This is the third of JPMs globally themed oil & gas research pieces. In these global notes we tackle important industry themes by linking a comprehensive top down (macro) view of specific parts of the industry value chain with a detailed bottom-up (company) analysis and cross-border competitive analysis.
Figure 1: Holistic approach to analyzing the global oil & gas sector
BG Group Chevron Woodside Santos TOTAL Statoil
x
MACRO Alpha skew
Oil market
Gas (LNG) market

x
Refining industry
COMPANY SPECIFIC - Alpha
Execution risk
Portfolio risk
Growth potential
Capital stewardship
x
Restructuring potential
Valuation anomaly
Source: J.P. Morgan.
As per the schematic above, by combining cross-border company comparison with a top-down industry value chain analysis, we aim to provide more detailed and holistic insights and a different perspective to conventional silo-bound company specific research. In our view, this provides investors with superior industry insights and stock selection advice.
Industry is redeploying capital upstream and raising exploration intensity
1. Global Upstream Upstream, the shape of things to come, (23 September 2010). In that note, we examined the IOC portfolio transition to the upstream via downstream divestments / upstream acquisitions and rising upstream capital reinvestment. We also set out various long term metrics that enable upstream performance to be more clearly understood by investors and companies to be ranked accordingly. 2. Global Downstream Refining a long and painful sunset for many, (8 September 2011). In that note, we examined the global capacity outlook in refining and drew some very bearish conclusions about refining margins and returns over the near and medium term. We also analyzed various metrics that enable downstream performance to be measured and more clearly understood by
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Refining is, and will remain, a bad industry for many years
BP
ENI
investors. We then ranked the developed market and emerging market IOCs and NOCs accordingly. We defined multiple ways to play this negative theme, via (long) positions in capacity enablers (EPC providers, software and hardware manufacturers) and (short) positions in the most challenged European refiners.
LNG demand trends are very firm, long term pricing is robust, but cross-basin price arbitrage
3. Global LNG Full steam ahead, but cross-basin arbitrageurs beware the Henry Hub S-curve, (13 January 2012). In this note, we examine the demand drivers, capacity growth outlook and pricing dynamics of global LNG. We discuss the hallmarks of a good LNG business and perform a competitive ranking of the world's leading, listed players in LNG. We review the exposures of key names and assess their competitive positioning in the global LNG hierarchy. We conclude that LNG is no longer a transition' fuel that reduces global carbon intensity, it is the destination fuel of choice that ensures this happens whilst facilitating multi-lateral energy relationships to develop. We anticipate that robust global demand for LNG will keep the market tight 2012-14. Thereafter, the onset of new LNG supplies from North America directly linked to a Henry Hub price index and overall deeper market liquidity (as the number and scale of LNG supply points increase we estimate potential for 118 MT pa of incremental capacity 2012-16 which is 42% of YE 2011 global capacity) will likely reduce regional price dispersion and volatility. This will ultimately constrain cross-basin arbitrage opportunities, most likely from 2015 onwards, although project delays may extend the arbitrage window.
Executive Summary
LNG infrastructure build out dovetails in to a number of global themes multi-lateral energy security, private sector investment and lower carbon economic growth
LNG infrastructure projects (liquefaction and re-gasification) rely on private sector investment and they create local employment. From an importers perspective, they diversify a countrys energy supplies / augment energy security whilst also ultimately reducing its carbon footprint. Furthermore, LNG re-gasification terminals (the import- enabling asset) may be built in 18-24 months; a cross-border gas pipeline may take over a decade to sanction and build. From the perspective of government, especially those fighting against high unemployment, large fiscal deficits, the threat of energy supply dislocations and rising environmental awareness, LNG infrastructure projects have many of the key desirable attributes. The Fukushima tragedy has just added impetus for governments to steer energy dependency away from nuclear. We believe that the after effects of Fukushima on global energy markets will be felt for years to come. Following the Arab Spring, we also see a world where energy flows will become more, not less, politicized and energy diversification will be ever more important. The Durban UN Climate Change Conference has helpfully defined the road map for negotiations on a comprehensive climate change agreement and lent clear support for investment in the low-carbon economy. The script for rapid growth in LNG has, in many respects, been written. In 2011, we estimate that there was approximately 291 MT of liquefaction capacity located in 18 countries and 27 plants (LNG export) and 565 MT of re-gasification (LNG import) capacity located in 25 countries and 90 terminals. Levels of regasification capacity will continue to exceed export capacity. We estimate that global aggregate re-gasification capacity will rise from 565 MT pa at end 2011 to 778 MT pa by end 2015 located in 48 countries and 160 terminals. This represents a capacity CAGR of 8%. Over the same period, we estimate that the aggregate liquefaction capacity will rise from 291 MT to 350 MT pa in 35 plants, a capacity CAGR of 5%. As such, we do not expect import capacity to be a constraint on LNG demand per say. However, the market may well remain supply constrained which enforces an element of demand latency not seen at other point in the hydrocarbon value chain. We model two simple BEAR and BULL global LNG supply/demand scenarios. Our BULL case assumes liquefaction projects due on stream 2013 onwards are delayed by 12-months and operate at 75% capacity in their first year whilst existing capacity operates at 95%. We also assume that gas shale does not meaningfully displace potential Chinese demand. Under this set of assumptions, global demand reaches 368 MT by 2018, a 2011-18 CAGR of 6%. Chinese demand surpasses 30 MT in 2016. The LNG market will continue to tighten 2012 to 2014 and will be supply constrained from 2015 to 2017. This is supportive of oil-indexed LNG contract pricing and should support meaningful regional price differentials which, in turn, will provide those LNG suppliers with portfolio flexibility with profitable cargo diversion opportunities. Given the aforementioned structural LNG demand drivers, we feel that this outcome will be closer to reality than our BEAR case which assumes that all new capacity is commissioned on schedule and operates at 85% in its first year whilst existing capacity operates at 100%. We assume that gas shale does displace LNG demand in China and Europe is in a deep recession in 2012 and only gradually emerges from there in 2013-14. Under this scenario, global demand only reaches 291 MT by 2018 (24% below our BULL case demand estimate) and Chinese demand only reaches 19
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LNG demand will not be constrained by import capacity
BULL case sees market tightening further in 2012 and demand constrained by supplies 2014-17
BEAR case will see liquefaction projects deferred 2014 onwards
MT in 2016. Levels of spare liquefaction capacity do not really change 2012-15 versus prior years but will rise substantially thereafter. However, if the world looks like it is heading in to this scenario, liquefaction projects which have not yet been sanctioned with an expected on stream date 2016-18 will almost certainly be deferred.
The dynamics of LNG are completely different to refining
Refining is an industry that is prone to cyclical capacity imbalances, most often surpluses, for a variety of reasons. Refining is dogged by a large, fragmented population of players (many hundreds) that includes many non-commercial NOCs. As our global note on refining cautioned, unwanted refining capacity growth across such a broad population of players is very likely to occur indeed, we estimate that two thirds of new refining capacity 2011-16 has a NOC sponsor behind it. Furthermore, new refineries are built without contracted off-take and thus must often marginalize higher cost / less efficient existing refineries to secure their place in the market. In contrast, LNG is blessed by a very small population of very rational IOCs (around 50-60) and a tiny population of disciplined NOCs (e.g. QPC- Qatar, Sonatrach Algeria, Petronas - Malaysia and ADNOC Abu Dhabi). Indeed, we estimate that in the seven year period 2012 to 2018, less than 5% (c.12 MT) of identified global capacity growth is NOC sponsored (in Algeria, Libya and potentially Iran). We believe that the risk of a maverick NOC pursuing a major LNG export project without firm long term off-take contracts has now passed the upfront capital and market risks are simply too high. LNG is, and will remain, a relative niche business given a number of entry barriers - high capital intensity, long project lead times and the need to discover and certify very substantial (at least 3-4 TCF) gas resources. Demand concentration in LNG is also quite unique, e.g. we estimate that Japan consumed 36% of global LNG (89 MT of 249 MT) in 2011. Country specific demand shocks, as occurred in Japan in 2011 as a result of Fukushima which drove Japans 30% Y-o-Y LNG demand growth, can transform the global supply-demand situation over night. Such a high impact, single demand shock could simply not occur in refining. Similarly, LNG supply shocks pose a more severe tail risk to market equilibrium. LNG capacity is very highly concentrated when compared to refining. For example, the worlds largest supplier, Qatar, has 77 MT of capacity which is approximately 27% of global capacity. All of Qatari LNG output transits via the Straits of Hormuz. Any blockade of this choke point, albeit temporary, would have a major impact on the global LNG market and cargo clearing prices in Europe and Asia Pacific. Capacity displacement does not occur in LNG new plants are typically built given firm demand for their incremental output. Provided equity project sponsors are pricesensitive, which we believe they are given rising capital costs and high levels of equity financing following the withdrawal of project finance capacity, new projects will only proceed with robust long-term pricing agreements and output that is largely bound up to long term firm buyers. The long term (20 years or more) contracting convention in LNG, completely absent from refining, is another support for sustained market equilibrium. We continue to monitor progress on no less than twelve green field LNG projects in Australia (Pluto, Gorgon, QC LNG, AP LNG, GLNG, Prelude, Wheatstone, Ichthys, Browse, Curtis LNG, Sunrise and Bonaparte) for evidence of robust long term demand at pricing close to oil price parity. So far, we estimate that over 60% of the aggregate capacity of these twelve projects (118 MT pa) already has firm contracts - we are confident that more long term contracts will follow at close to
LNG has fewer and more disciplined players
New LNG capacity is often contracted before it is built
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oil price parity. Sponsoring much of this incremental demand is, of course, Chinas continued integration in to global energy markets and its desire to develop multilateral energy relationships rather than become too dependent on any particular source e.g. piped gas which may be used as a geo-political influence. As a reminder, LNG offers a choice of multiple sources and added procurement flexibility that a conventional pipeline off-take agreement cannot provide. At the start of 2012, we therefore continue to encourage investors to raise their equity portfolio exposure to listed names with a meaningful position in the LNG segment. Amongst the integrated names, our top global picks to play the LNG theme are BG Group, Inpex, Santos and TOTAL. Our note also provides an extensive range of alternative LNG plays in the E&P, Equipment & Services and Shipping sectors around the world.
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Stock specific summary

For seven European names featured in this note, we highlight the key qualities and exposures to the LNG value chain (Tables 1 and 2).
Table 1: Stock summary LNG SWOT summary + segment profile / valuation of UK companies
Key Strengths / Opportunities BG Group Innovated contractual concept of flexible destination LNG cargoes and differentiated by taking on multiple supply purchase agreements to build a portfolio of low cost supply options. Operator of project that is front of queue of CBM to LNG projects in Australia successfully contracted output from first two trains at close to oil price parity; likely to add a third train at QC LNG. Subject to results of drilling campaign over next 6-months, potential to lead East Africa's first green field LNG project in Tanzania. Key Weaknesses Retains leased rights to excessive (idle) volume of US re-gasification (LNG import) capacity. Key Threats Advent of US LNG exports will almost certainly reduce regional price arbitrage 2015 onwards. Capacity, Earnings & Valuation Capacity Liquefaction: 7.2 MT pa operational, 7.9 MT pa under development Re-gasification: 23.7 MT pa (91% leased) Earnings - LNG represents around 30% of BG Groups 2011E earnings.
Late to realize the importance of a resource and liquefaction position in Asia Pacific had to buy its way in to the play (QGC and Pure Energy). Given pre-salt capital commitments and finite capabilities, will struggle to pursue another major LNG project in parallel with QC LNG Trains 1-2.
Other large players are replicating BG Groups portfolio strategy of buying its own LNG and using an array of supply contracts to optimize sales to different markets. Cost inflation, magnified by AUD/USD appreciation at QC LNG project could further trim NPV following adverse fiscal changes.
Valuation - We value BG Group's LNG business at around $22bn or 409 pence per share (but this figure depends on the apportionment of value for QC LNG). Ranks 4th in our 11 company competitor ranking. Capacity Liquefaction: 12.2 MT pa operational, 0.7 MT pa under development. Re-gasification: 6.8 MT pa (71% leased) Earnings - LNG represents around 10% of BPs 2011E earnings.
BP Acquired a strong position in Atlantic LNG (Trinidad) via Amoco which was expanded very cost effectively. Reasonable exposure to re-gasification capacity (57% of net liquefaction capacity).
Following years of purposefully avoiding large infrastructure projects, left without any identifiable, firm growth options post-Angola LNG (on stream H1 2012). Tangguh LNG contracted on a very low price to CNOOC (2.6 MT pa, $3.35 per mmbtu, capped at oil price equivalent of $38/bbl). Plant expansions in Indonesia have also proven problematic historically. No upstream supply position in Abu Dhabi to ADGAS.
Upstream portfolio lacks any clearly identifiable green field LNG growth option BP may look to remedy this via acquisition / alliance in order to establish more long-lived assets. Angola LNG may be obliged to sell in to the low priced US market.
Opportunity to supply Bontang LNG facility in Indonesia with coal bed methane could be a world first.
Valuation - We value BPs LNG business at $10bn or 33 pence per share. Given its upstream heritage and pedigree, BP is a bit of an also ran in global LNG - it ranks 8th in our 11 company competitor ranking. Rights to MLNG Dua (1.2 MT pa) and Tiga (1.0 MT pa) set to expire in 2015 and 2023 respectively. Capacity Liquefaction: 19.9 MT pa operational, 8.9 MT pa under development. Re-gasification: 14.9 MT pa (85% leased) Earnings - LNG represents around 10% of RD Shells 2011E earnings.
RD Shell Involved in LNG since industry conception in early 1960s, now has world's number one position with c. 20 MT pa net operational capacity of which over 50% is located in Asia Pacific. Global position with very strong development pipeline with potential to more than double liquefaction capacity by 2020. Pioneering development of world's first floating LNG project (Prelude FLNG) numerous potential applications of this on other stranded gas deposits.
Failed to really see and grasp the regional price arbitrage opportunity 90% of LNG volumes still sold under long term contract with limited destination flexibility (although most long term contract are set on robust oilprice indexed terms). No upstream supply position to two LNG plants in Oman or any real chance of securing upstream supplies (not involved in tight gas exploration in Oman). Certain project interests (Sunrise 33%, Browse 50% and Pluto LNG 90%) are held through 24.3% stake in Woodside which RD Shell is looking to exit.
At $3,000 to $3,500 per ton (before any cost escalation to budget), floating LNG is not low cost and may need more than one application to generate a robust return. GLNG is last in queue of 4 competing coal bed methane to LNG projects in Queensland, Australia at greatest risk of delays and cost inflation, in our view.
Valuation - we value RD Shell's LNG business at $50bn or just over 500 pence per share. Just pipped by Exxon Mobil, RD Shell ranks 2nd in our 11 company competitor ranking.
12
Table 2: Stock summary LNG SWOT summary + segment profile / valuation of European companies
Key Strengths / Opportunities ENI Strong presence in all the phases of LNG business - liquefaction, shipping, regas and marketing. ENI's first liquefaction plant was commissioned in 1977. Given the size of recent discovery in West Africa (Mozambique), ENI may lead a multi train (3+) LNG facility in the country. Key Weaknesses Portfolio is largely ex-growth with only one green field project (Angola LNG) on the company's near term agenda Lacks ambition of expanding into the higher margin gas arbitrage business. LNG strategy is focused on just the development of the company's equity gas resources via long term contracted off-take agreements. Limited liquefaction position in the higher demand growth Asia-pacific basin. LNG business has slipped in the company's list of strategic priorities. New leadership in Peru (led by President Humala) could impose higher taxes/adverse contractual changes on Peru LNG. Capex needs for the various upstream developments in Repsol YPF's portfolio means that it is unlikely LNG will reemerge as an axis of growth for this name. Key Threats LNG gas supplies are mostly routed into Italy/Europe weakening demand will likely have a negative impact on segmental earnings. ENI has a history of reliance on acquisitions to fuel its upstream growth ambitions Capacity, Earnings & Valuation Capacity Liquefaction: 5.7 MT pa operational, 0.7MT pa under development Re-gasification: 11.5MT (90% leased) Earnings - LNG represents around 7% of ENIs 2011E earnings.
Acquisition of Distrigas helped ENI diversify its LNG supply portfolio. Repsol YPF Repsol YPF's LNG business is focused on higher margin LNG marketing and trading. Repsol YPF has committed limited capex to this business stream. Stream JV with Gas Nat adds to the company's capacity for contract portfolio arbitrage and optimization.
Valuation - We value ENIs LNG business at 5bn. ENI ranks 9th in our 11 company competitor ranking. Capacity Liquefaction: 5.1 MT pa operational, no projects under development Re-gasification: 10 MT pa Earnings - LNG represents around 15% of Repsol YPFs 2011E earnings.
Both of the recent growth projects (Peru LNG and Canaport) are tied to very weak LNG demand in North America.
Valuation - We value Repsol YPFs LNG business at 2.5bn. It ranks 10th in our 11 company competitor ranking. Statoil Recent discoveries in Barents sea could likely activate Statoil's plans for expansion of its liquefaction capacity in Norway. Statoil is responsible for marketing the Norwegian state's share of Snohvit output - adding to its LNG volume flexibility. LNG business is largely based in OECD very low risk of contractual changes or supply disruption. TOTAL Long history in the LNG business was involved the first liquefaction plant in the world and now has c.19MT pa liquefaction capacity Global position with strong development pipeline with potential to deliver significant growth in liquefaction capacity through to 2020. Well regarded for its technical and project execution strength in LNG business. Statoil 's LNG assets have an Atlantic basin bias a common weakness amongst the euro names. Statoil's gas strategy remains focused on piped gas it therefore has a limited focus on the LNG business. Snohvit LNG has faced numerous technical issues since its commissioning which have caused undesirable, prolonged plant outages. Utilization rates for the Cove Point regas terminal are likely to remain very low over the next few years. Capacity Liquefaction: 1.4MT pa operational, no projects under development. Re-gasification: 7.7MT pa Earnings - LNG represents around 2% of Statoils 2011E earnings. Valuation - We value Statoils LNG business at NOK9.6bn or just NOK3 per share. Statoil ranks 11th in our 11 company competitor ranking. Growth pipeline is exposed to many capital intensive and technically challenging projects e.g. Yamal LNG and Shtokman LNG. TOTAL has a small equity stake (24%) in Ichthys but is forced to commit a high number of engineering staff to the project given the in-experience of the operator, Inpex. On-going political instability in Yemen is a potential threat for Yemen LNG operations. TOTAL is not averse to relying on its balance sheet to gain access to resources and projects. Capacity Liquefaction: 18.9MT pa operational, 2.7MT pa projects under development. Re-gasification: 16.8MT pa (59% leased). Earnings - LNG represents around 22% of TOTALs 2011E earnings.
Valuation - We value TOTALs LNG business at 18bn. TOTAL scores quite well and ranks 5th= in our 11 company competitor ranking, alongside Woodside.
13
As per Figure 2, we have scored the LNG portfolios and strategies of 11 of the 20 companies featured in this note using 11 key parameters. On this basis, Exxon Mobil and RD Shell are the outright global leaders with Chevron and BG Group not far behind.
Figure 2: Competitive ranking of top listed LNG players
Repsol YPF Woodside BG Group RD Shell Chevron TOTAL
Santos
1. Liquefaction scale
2. Plant vintage
3. Capacity location
4. LNG train size
5. Brownfield expansion potential
6. Greenfield growth potential
7. Plant operatorship
8. Integrated chain presence
9. Trading capability
10. Relevance of LNG to company
11. Quality of LNG disclosures
OVERALL SCORE (Max 44)
29 4th
21 8th
31 3rd
17 9th
33 1st
32 2nd
16 10th
23 x 7th
15 11th
Statoil
Exxon Mobil
ENI
BP
26 5th=
26 x 5th=
OVERALL RANK (1-11)

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Global theme LNG demand growth

LNG is becoming the worlds new gas super highway of choice
Connectivity between the worlds regional natural gas markets continues to increase, partly as a result of more large capacity pipeline interconnectors. However, crossborder gas transmission networks face increasing political opposition given the ever greater importance of energy security and the geopolitical risks that pipeline import dependency can generate. The new big gas links that join North America, Europe and Asia Pacific are being formed via the synchronized development of LNG regasification (import) terminals and liquefaction (export) facilities. These infrastructure nodes, connected by LNG transportation vessels, are fast becoming the new global gas super highways of choice of the 21st century.
Figure 3: Location, schedule and scale (MT pa) of new liquefaction capacity
4.3 4 1.5 5.3 8 9.2 17.5 5
30% global demand

10 18 5 20 9.2 3.7 2.6 12 4.8 6.7 5.6 22 5 3.5 10.5 1 1.5 4 23 7 2 5
9.6
(Trinidad)
15.3 5
60% global demand
3.7 4.4 2.7 4.4 5.2
6.6 5 62 8
3.3 3.3 44 1.5 2 3.8 19.4 9.3 23 4.3 20.9 38.6 19.6 7.8
(EG)
Existing facility 2011 start up 2012E start up 2013E start up 2014E start up 2015E start up 2016E start up 2017E start up 2018E start up
(Qatar)
Potential 10% CAGR capacity growth 2011-20
Approaching its 50th anniversary, we estimate that between 2012 and 2018 up to 287 MT of liquefaction capacity may be built this represents growth of almost 100% (given YE 2011 estimated capacity 291 MT pa) and a 7 year CAGR of 10%. Since the first liquefaction plant was commissioned in Algeria in 1964, this magnitude of growth is completely unprecedented in the history of the LNG industry (Figure 4). This period will see a number of world firsts - floating LNG (Australia), coal seam gas to LNG (Australia) and tight gas / gas shale to LNG (likely in Canada and the USA). This mirrors the changes in the upstream industry to non-conventional oil & gas and to the offshore (deeper waters, more complex sub-surface).
15
Figure 4: Global LNG export capacity additions by year (MT)

120 800
700 100
80
Unprecedented decade long growth in LNG capacity driven by: 1. Environment - society's preference for lower carbon fuels e.g. gas 2. Economics - carbon costing is spreading from OECD to non-OECD 3. Energy security - desire to diversify supply sources i.e. avoid pipelines 4. Geopolitics - some countries will not pipe gas to their neighbours 5. Gas costs - creation of new low cost supply sources e.g. CBM, gas shale 6. Nuclear risks - heightened popular opposition post-Fukushima ------> 7 year 2012-18 +287 MT pa could require $1 trillion investment
600
500
60
400
300 40 200 20 100
0 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 Capacity additions (MT pa) Cumulative capacity (MT pa) Cumulative liquefaction trains
Regional price dispersion will tighten
As the physical interconnection between regions deepens, in our view, it is inevitable, that regional spot gas prices will start to converge with the lowest (currently North America) rising and the highest (Asian LNG) falling, assuming (as we do) that North America will export increasing volumes of LNG from 2015 onwards. Presently, Henry Hub 1-month trades at just $3 per mmbtu, an oil price equivalent of less than $20 per barrel whilst LNG cargoes are being sold in Tokyo for $18 per mmbtu, an oil price equivalent of almost $110 per barrel. This extreme price difference will not survive when molecules of low cost gas from North America eventually reach Asian markets, most likely in 2015-16 and as the global market liquidity deepens (given the potential for 42% or 118 MT pa of incremental capacity 2012-16).
16
LNG market
Regional gas markets
LNG represented 9% of global gas consumption in 2010
We must first put the global LNG market in to clear context identifying its size and relative importance in todays global gas industry. Figure x shows the sizes of the regional gas markets in 2010 and, within each region, the percentage of consumption that was satisfied by LNG. Given a lack of inter-connecting pipelines, the world is essentially split in to three gas markets North America, Europe and Asia Pacific. North America (98%) and Europe (92%) rely primarily on regional gas production / piped gas. The more fragmented economies of Asia Pacific are much more dependent (31%) on LNG for their gas. In 2010, the world consumed 307 bcfpd of natural gas with a CAGR of 2.8% 200010. Of this figure, LNG consumption was approximately 29 bcfpd which was a 9% global market share; 91% of global gas is therefore either piped (21%) or consumed within the country of its production (70%). As per the insert chart in Figure 5, LNGs global gas market share has actually been relatively slow to rise it was 6% in 2000. Behind this average of 9% in 2010, the regional penetration of LNG is clearly very different just 2% of North America versus 31% of Asia Pacific which, alongside the Middle East, has experienced the highest rate of gas demand growth 2000-10 of 7%.
Figure 5: Global gas consumption 2010 - regional splits and LNG dependency
8% LNG 82 bcfpd 27% of world 1% CAGR 2% LNG
110 bcfpd 36% of world 2% CAGR 55 bcfpd 18% of world 7% CAGR 31% LNG
35 bcfpd 12% of world 7% CAGR 10 bcfpd 3% of world 6% CAGR 0% LNG 14 bcfpd 5% of world 4% CAGR 6% LNG GLOBAL GAS 2010 307 bcfpd 2% 2000-10 CAGR 9% LNG
2500 2000
1% LNG
3500
3000
1500
1000
500
0 2001
2002
2003
2004
2005 L NG
2006 Piped + domestic gas
2007
2008
2009
2010
Source: J.P. Morgan., BP Statistical Review of World Energy 2011
17
LNG demand profile

LNG demand growth has averaged 8% pa 2000-10
As per Figure 6, global LNG consumption has grown at a compound rate of 8% 2001-10 which is over 3x the rate of global gas consumption growth. Of note, even when global economic growth collapsed in 2008, global LNG consumption was flat, highlighting the comparatively resilient nature of LNG demand. We expect global LNG growth to have averaged approximately 15% in 2011, driven by accelerating Japanese consumption post-Fukushima and continued growth in Chinese LNG imports.
Figure 7: Global LNG consumption - by region & country
+15%
100% 90% 80%
Figure 6: Global LNG consumption - MT pa

250 2001-10 global demand CAGR +8% +23% 200 +7%
LNG demand MT pa
+12% 150 +13% +5% 100 +5% +6%
+7%
+0%
70% 60% 50% 40% 30%
50
20% 10%
0 2001
2002
2003
Asia
2004
Europe
2005
2006
2007
N America
2008
2009
2010
2011E
0% 2001
2002
2003
2004
Japan
2005
2006
Europe
2007
2008
2009
2010
2011E
S & C America
Middle East
Asia less Japan
Middle East
S & C America
N America
Source: BP 2011 Statistical Review of World Energy, J.P. Morgan.
Source: BP 2011 Statistical Review of World Energy, J.P. Morgan.
Global demand of LNG is very concentrated top ten countries consumed 87% in 2010
As per Figure 8, in 2010 Japanese consumption of LNG represented 31% of total global consumption. As a reminder of the concentration of LNG demand, the ten largest consumers of LNG represented 87% of global demand in 2010. We note that China was the seventh largest consumer of LNG, just eclipsing US demand in 2010.
Figure 8: Global LNG consumption by country - 2010 (MT)
80 70 60 50 40 32 30 20 10 0 20 14 11 10 9 9 9 68 100% 90% 80% 70% 60% 35 50% 40% 30% 20% 10% Others 0%
Japan
S.Korea Spain UK Taiwan France China USA 2010 LNG consumption (MT) Cumulative (RHA)
India
18
Chinese demand for imported LNG is a key swing variable
Chinas increasing integration to global energy markets will continue to impact regional and global supply-demand dynamics. We note that China is actually already the fourth largest consumer of gas in the world (Figure 9). The Chinese government now regards gas as cornerstone of its primary energy mix over the next decade given its availability (both domestically and via piped and LNG imports) and clean burning qualities when compared to coal. Presently, China imports approximately 15% of its gas requirement (2010 total gas consumption c.109 bcm). We believe that Chinese gas consumption is supply-constrained due to a lack of import infrastructure, either major import pipelines or re-gasification terminal capacity.
Figure 9: World's 10 largest gas consumers (2010 - bcm pa)
800 700 600 500 400 300 200 100 0 USA Russia Iran China Japan UK Canada Saudi Germany Arabia Italy
Source: BP 2011 Statistical Review of World Energy
Based on 2010 primary energy consumption, if the penetration of gas in Chinas primary energy diet increases by just 1% (from 4% to 5%), it will require an extra 27 bcm pa which is equivalent to 20 MT pa of LNG (Figure 10). On the same basis, if gas penetration of the primary energy diet of Brazil, India, South Korea and Japan rises by 1% in aggregate, that is equivalent to just 13 MT pa of LNG. So, China's appetite for gas, and more importantly imported LNG, is a key variable in the global LNG market. We believe that China will continue to nurture multi-lateral energy relationships rather than develop a dependency on any particular source country.
19
Figure 10: Global energy markets - gas penetration & rate of growth of gas demand (blob sizes correspond to size of countrys primary energy)
60%
Russia
50%
UK
40%
Saturated, slow growth gas markets USA
Gas as % of primary energy
30%
Spain
20%
Germany Japan S.Korea India Brazil
World's largest primary energy consumer - 2,432 mmboe China
10%
0% -5% 0% 5% 10% 15% 20% Growth in gas consumption 2000-10
LNG demand growth drivers

Our database on global LNG export projects enables us to present a 55+ year overview of LNG plant construction. As per Figure 4, the worlds first large scale liquefaction plant was commissioned in 1964 in Algeria. Global additions were infrequent and small until 1978-79, 1989 and 1999. There was then a nine year period (2002-10) of sustained capacity growth.
Wave of capacity growth is unprecedented in the 50 year history of LNG
Looking ahead, we forecast a decade of uninterrupted annual capacity growth. The pace and uninterrupted intensity of capacity growth is completely unprecedented in the 50 year history of the global LNG industry. We cite several key demand-related factors that underpin this capacity growth outlook. It is very important to note that LNG export capacity is not built on the basis of speculative demand. High capital intensity necessitates that capacity is built with water-tight off-take agreements that typically run for 20 or more years. So capacity is therefore locked up before it is built. This is in stark contrast to capacity additions in oil and refining where output is more typically sold in to a global spot market which thus risks free-flowing (uncontracted) product-on-product competition Environmental issues shaping regulatory & policy change Society is fast becoming more conscious of its environmental footprint and is accepting fuller responsibility for its consequences e.g. undesirable climate change and attendant human health issues. This is spurring the substitution of higher carbon
Policy bias continues to mitigate CO2 emissions
20
fuels, e.g. coal by lower carbon fuels such as natural gas. This trend is spreading from G20 countries to developing economies where CO2 emissions are escalating with industrialization. Table x shows the absolute and relative CO2 intensity of energy derived from oil, coal (carbon) and gas (LNG). LNGs CO2 footprint is 45% lower than coal's.
Table 3: The comparative emissions footprint of oil, coal and LNG
Carbon produced to generate 1 GJ energy (T) Molecular weight of Carbon Dioxide Atomic weight of Carbon CO2 produced to generate 1 GJ energy (T) Ratio if coal = 100
Oil 0.0187 44 12 0.0686 76
Coal 0.0247 0.0906 100
LNG 0.0135 0.0495 55
As per Figure 11, in 2007 (the last available accurate data for all countries featured) PR Chinas CO2 emissions (6.7 billion tons) over took the emissions from the USA, although the latter still bears the highest per capita emission rate (19.3 tons per person in that year). Chinas per capita emission rate was roughly half that of Japan in 2007, but four times that of India. Between 1997 and 2007, the aggregate CO2 emissions of the worlds top ten emitting countries increased 26%, a CAGR of 2.4% - a clear reminder that global economic (GDP) growth drives emissions. The two key action points from the recent Durban UN Climate Change Conference were to continue the Kyoto Protocol and to negotiate (the Durban Platform) a comprehensive climate change agreement that will be legally binding. This continues to support investment in the low-carbon economy.
Figure 11: Carbon dioxide emissions (billion MT)
8 7 6 5 4 3 2 1 0 11.4 9.9 1.3 17.7 10.7 4.4 6.6 Ukraine 5.1 19.3 CO2 emissions metric tons per persons
8.2
US
EU
China
Russia
Japan India 1997 2007
Canada S.Korea Mexico
Source: World Resources Institute
21
The environmental threat from CO2 emissions continues to bias government policy towards natural gas substitution. 1. US power and vehicles - A current example of regulation that is set to bolster demand for gas is the Cross State Air Pollution Rule (CSAPR), issued by the US Environmental Protection Agency (EPA). The CSAPR is forcing US utilities to convert from coal-fired power generation to gas-fired. Staying in the US, we also note the revival earlier in 2011 of the New Alternative Transportation to Give Americans Solutions Act (NAT GAS Act). This Act would provide federal incentives for the use of natural gas as a vehicle fuel, the purchase of natural gas fueled vehicles and the installation of natural gas vehicle refueling infrastructure. Presently, the US public can only buy one car powered by natural gas - the Honda Civic Natural Gas. Marine fuel The UN-backed global shipping regulator, the International Maritime Organization (IMO), is pushing for LNG to replace marine fuel oil. The 1% sulfur content limit in the North Sea, Baltic Sea and the English Channel will be cut to 0.1% from January 2015. The cost of low-sulfur bunker oil is now on a par with LNG. A total retrofit of a vessel to LNG propulsion is estimated to cost around 15m. In certain countries e.g. Norway, the conversion enables the vessel owner to qualify for lower NOX emission taxes. The combustion of LNG leads to lower carbon emissions and virtually no SO or particle emissions.
2.
Substitution of coal by gas in the electricity sector We share a fairly common view gas will continue to substitute for coal as more governments impose policies that place a direct cost on carbon emissions (via taxes, caps and subsidies for alternatives). When used for electricity, gas emits up to 45% less CO2 than coal. In its recent review (The Outlook for Energy A view to 2040), Exxon Mobil forecast that global electricity demand would be 80% higher in 2040 versus 2010. It expects the share of electricity generation from natural gas to rise from 20% to 30%. So, in effect, demand for gas for electricity generation is expected to rise by 170%. Exxon Mobil expects overall demand for natural gas to rise by more than 60% through to 2040 this is the highest rate of growth for any major energy source. In the absence of game-changing new technology, we suspect that the much higher cost of renewable alternatives (Figure 13) will keep these at the fringes of the global energy diet. Indeed, Exxon Mobil estimates that wind, solar and bio-fuels will represent just 4% of the world energy in 2040 (Figure 12).
22
Figure 12: Global primary energy mix outlook

700
Figure 13: Average cost of US electricity in 2030 (2011 cents)

27% 25% 5.0% 1.4% 0.3%
20 18
600
22%
500
2.2%
16
-0.2%
400
14
Much higher costs will continue to keep these renewable options at the margin of the global energy mix
GAS SHARE OF GLOBAL PRIMARY ENERGY 20%
21%
12
300
1.6%
10
$60 per T CO2
8 200
No CO2 cost
100
2010-40 CAGR 0.7%
2 0 1990 2000 Oil Gas Coal Nuclear 2010 Biomass / Waste Hydro 2025E Other Renewables 2040E
0 Coal Gas Nuclear Onshore wind Offshore wind Geothermal Solar PV Solar Thermal
Source: Exxon Mobil (The Outlook for Energy A view to 2040)
Source: Exxon Mobil (The Outlook for Energy A view to 2040)
Of course, the switch from coal to gas is not only driven by the cost of carbon. Gasfired stations may be permitted and built in less than 2 years versus 4-5 years for a coal-fired plant. Gas-fired power generation is also 50% more energy efficient than its coal equivalent. A new turbine powered by coal is 40% efficient so for every 100 units of primary energy that go in to the plant, only 40 units are converted in to usable electricity. Gas-fired turbines have a 60% efficiency rate. Finally, given a far smaller emissions footprint, gas-fired plants may also be located closer to demand centers. This reduces transmission line losses which may average 10% in OECD and as much as 15% in non-OECD.
Energy systems need greater redundancy to accommodate demand / supply shocks.infrastructure projects also create employment
Energy security For most governments of countries that carry energy deficits (i.e. must import energy in the form of oil, gas, coal etc), maximizing the security of supply at a reasonable price is more important than trying to minimize prices at the expense of increased supply risk. The nightmare of every government (and indeed the event that can trigger social unrest and changes to government) is when a country's energy supply systems fail and, quite literally 'the lights go out.' Following the Libyan oil & gas supply outages in 2011 and the Fukushima gas demand shock, we sense that governments want to develop more redundancy and flexibility in to their energy infrastructure systems. This is manifesting in an unprecedented pace of construction of new LNG re-gasification (import) terminals with their attendant choice of suppliers. Planning permission processes are also being accelerated e.g. in Italy, given the local employment benefits of these infrastructure projects. We believe that burgeoning population growth (7 billion now, to reach 9 billion by 2050 according to the UN), the accelerated growth in a global Middle Class and the shifting identity of the worlds energy creditors / debtors render energy security as one of the key and enduring investment themes of the 21st Century. Furthermore, we believe that LNG will play a key role in the global energy equation. Geopolitics It is clear to us that governments do not want to build a greater dependency on piped gas imports, especially when the source supplier(s) has proven itself unreliable. At the opening ceremony for the Nord Stream pipeline (8 November 2011), Europes Energy Commissioner (Gunther Oettinger) referred to Europes diversification strategy and its efforts to secure natural gas supplies from countries other than
23
Intra-sovereign trust is decreasing not increasing
Russia. The 1,224 km Nord Stream gas pipeline from Russia to Germany is a dual pipeline project capable of supplying 27 bcm of natural gas but this could increase to 55 bcm in September 2012 when the second line becomes operational. We also note that in 2008, the US government (via the US Trade and Development Agency) funded an $826,000 study in to a possible LNG import terminal in Lithuania; the USTDA funded a similar study in to a Romanian LNG terminal. Our view is that in so doing, the US is seeking to limit Russia's ability to use piped gas supplies as a source of geopolitical leverage and influence. The growth in US gas shale production has displaced the need for US LNG imports which has, in turn, provided other LNG buyers with greater choice. Indirectly, this has rendered it more difficult for countries such as Iran and Venezuela to promote their first green field LNG export projects, thus constraining their ability to use energy supplies as a geopolitical tool of influence.
Nuclear has lost popular support post-Fukushima - this has created space for LNG and renewables (wind)
Nuclear substitution by gas The Fukushima disaster (11 March 2011) led to a total of 14 nuclear reactors in Japan (6) and Germany (8) being closed. Following this and due to safety inspections, only 11 of Japans 54 nuclear reactors are currently operating (20% of 49.9 GW installed capacity). The Japanese government has recently published a report indicating that it will take 30 years or more to decommission the Fukushima Daiichi plant. In July, the Japanese government announced that all nuclear reactors will be required to submit to a stress test leading to further delays before reactors are allowed to reopen (reactors are typically shutdown for routine maintenance every 13 months). In addition, Fukushima triggered a review many countries which has already led some to initiate a phased withdrawal from nuclear. 1. Specifically, Germany and Switzerland decided to phase out nuclear power generation. Germany decided to close the countrys 17 nuclear power stations by 2022 rather than 2036. Mexico has put all new nuclear plant projects on hold and Thailand has cancelled its nuclear development program altogether. In its place, the Electricity Generating Authority of Thailand (EGAT) is planning to build a series of combined-cycle gas-fired power plants. The countrys 2010 power development plan was to build 2-5 1 GW nuclear stations with the first two operational by 2020. Taiwan, which generates 19% of its electricity from nuclear, has also decided not to extend the 40-year life-spans of its three existing plants. The 1,272 MW Jingshan facility is due for closure 2018-19; the 1,970 MW Guosheng plant by 2021-23 and the 1,903 MW Maanshan facility in 2024-25. A fourth facility will, however, be commissioned in 2016 (2,700 MW Lungmen). As a direct result, Taiwans Bureau of Energy estimates that the countrys LNG import needs could rise from 12 to 20 MT pa, which will require the construction of a third regasification terminal. In the US, the Nuclear Regulatory Commission (NRC) is also imposing additional regulations over the next five years - this has already led to a longer than normal spring maintenance season in 2011. In France, elections are now only four months away. The opposition Socialists may well push nuclear as a campaigning issue. Their position - scaling back the countrys nuclear portfolio to around 50 percent by 2025 - differs markedly from President Sarkozy, who supports an unabated nuclear program. The outcome could have major implications for the future of nuclear power in Europe as a whole.
2.
3.
4.
24
However, we note that PR China continues with its program to build twenty-seven new reactors. Brazils Electronuclear (owned by Electrobras) nascent nuclear program, driven to diversify the countrys fuel mix, also has tentative plans to add eight reactors to its base of two. So, it is fair to say that the growth in nuclear power capacity has not cancelled outright.
Figure 14: Nuclear power global consumption growth - 'three strikes and you are out'
300
250
200
Chernobyl 26 Apr 1986
Nuclear Consumption growth (TWh)
150
Three Mile Island 28 Mar 1979

100
Fukushima 11 Mar 2011
50
0 2007 2008 2009 2010 2011E 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
-50
-100 Middle East S. & Cent. America Africa Asia Pacific North America Europe & Eurasia Aggregate growth/(decline)
Source: J.P. Morgan, BP 2011 Statistical Review of World Energy.
Fukushima was the world's third, very high profile nuclear incident. As per Figure 14, global growth in nuclear energy consumption peaked in 1985. Since the Chernobyl accident, nuclear energy consumption has been on a clear downward pathway. Although Chernobyl did not deter the USA, Canada, Japan, France and the UK from nuclear power, some countries did respond to popular concerns e.g. Austria, Australia, Denmark, Italy, New Zealand, Norway and Sweden. We feel that Fukushima will accelerate the switch away from nuclear. The energy market after-shocks of Fukushima have reduced demand for Uranium this has had a dramatic impact on the price of Uranium. The price of Uranium has fallen from $70 per pound to just over $50/pound (Figure 15). The share price of Cameco Corp, one of the worlds largest producers of Uranium has also more than halved (Figure 16).
25
Figure 15: Uranium price - $ per pound

70 65 60 55 50 45 40 2010
Figure 16: Cameco share price (C$)

45 40 35 30 25 20 15 2010
2011
2011
26
Joseph Allman, CFA

(1-212) 622-4864 Joseph.d.allman@jpmorgan.com
North American LNG export potential

North America LNG exports nothing new
The United States has exported LNG from Kenai, Alaska, to Japan for 42 years, since 1969. The exports, which have averaged 1.1 MT pa (0.1 to 0.2 bcfpd) in recent years, appeared that they would stop in 2011 because the plant was no longer commercially competitive. Indeed, the plant was put in preservation mode in November. However, the operator ConocoPhillips recently reversed its decision to mothball the plant after signing new supply contracts with producers from Alaskas Cook Inlet Basin, and it plans to resume exports of around 1.9 MT pa in mid-2012. Apart from the existing Kenai terminal, it looks like North America (including the USA and Canada) is on the verge of exporting LNG from other plants, and in more substantial quantities, within the next five years. In North America, most of the announced liquefaction projects are facilities on the same site as existing or planned re-gasification terminals. Operators conceived of or constructed the re-gasification terminals at a time when it seemed that the USA would need increasing LNG imports. However, the shale gas revolution literally changed the gas market overnight. Bucking an earlier trend of annual natural gas production declines, US natural gas production grew from 49.5 bcfpd in 2005 to 59.1 bcfpd in 2010, and LNG imports decreased from 1.7 bcfpd to 1.2 bcfpd over the same period.
US has exported LNG from Alaska since 1969
Gas shale has transformed the potential for LNG exports
Proposed export facilities in Canada and US

Kitimat LNG is advantaged by location on west coast
In western Canada, a site previously planned for an LNG re-gasification terminal likely will be the site of the countrys first LNG liquefaction plant. The Kitimat facility, owned by Apache (40%), EOG (30%) and EnCana (30%), could begin operations as early as 2015 with Asia-Pacific as the target market. The owners expect completion of the FEED in early 2012 and an FID sometime in 2012. Planned capacity for Phase 1 is 5 MT pa (or close to 700 mmcfpd). Korea Gas Corp and Gas Natural SDG SA (Spain) have signed 20-year preliminary agreements to buy 40% and 30% of the exports, respectively. This plant offers a relatively short route to Asia (estimated 11 shipping days). Another benefit of this plant versus some other plants around the world is the connection to the North America natural gas grid. Whereas many stranded gas projects include an individual field or collection of discoveries, the owners of Kitimat are sizeable companies that have significant tested and producing natural gas resources in western Canada (primarily Horn River Basin shale) and massive additional back-up gas supplies throughout North America. Thus, there may be greater reliability and sustainability of supply with this project compared to others. Among other possible projects in western Canada, this project appears to have a firstmover advantage.
Sabine Pass is shaping up nicely
As for the US, Sabine Pass (Cameron Parish, Louisiana) has made progress towards potentially exporting LNG. The four trains at Sabine would export 4.5 MT pa each for a total of 18 MT pa. The Department of Energy (DOE) has approved 16 MT pa of exports from Sabine Pass. Cheniere Energy has signed three long-term Sale and Purchase Agreements (SPAs) with BG Group, Gas Natural Fenosa (Spain, Latin America), and GAIL (India). Each contract is for 3.5 MT pa (or around 500 mmcfpd).
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Table 4: Sabine Pass LNG contracts

Company BG Gas Natural Fenosa GAIL
Source: Company website
Train Volumes (Mtpa) 1 2 4 3.5 3.5 3.5
Period 20 years 10 year extension option 20 years 10 year extension option 20 years 10 year extension option
Planned Fixed Sales Charge Start Up (per MMBtu) 2015 2016 2017 $2.25 $2.49 $3.00
% of Henry Hub (NYMEX) 115% 115% 115%
Sabine Pass still requires FERC approval for its operation and construction, which Cheniere hopes to start in early 2012. The three SPAs are contingent upon, among other things, regulatory approval, Cheniere receiving financing, and the projects FID. If Cheniere is unable to satisfy these contingencies by the end of 2012 (BG Group, Gas Natural Fenosa) or mid-2013 (GAIL), either party could terminate the contracts. The $3.9bn, first two-train contract with the EPC contractor, Bechtel, also requires that Cheniere secure financing by March 31, 2012. Cheniere has significant debt obligations, so financing appears to be a real risk to the success of the Sabine Pass project.
Wait to see who will supply Sabine Pass
We are not aware of any contracts with customers to send their gas to Sabine Pass for export. If, for some reason, upstream suppliers are not comfortable with Chenieres credit or with signing long-term contracts for gas sales at 115% of Henry Hub, it could cause LNG exports to be lower than the planned liquefaction capacity. If gas producers can receive a premium to Henry Hub for an extended time, as long as they are comfortable with the size of their resources, they likely will take it. Thus, it probably is just a matter of time before we hear about supply agreements into Sabine Pass. However, given the depth and liquidity of the US gas market, the Sabine Pass liquefaction terminal may be unique if it does not require explicit resource dedication / reserve certification. Cheniere also announced that it plans to build a liquefaction plant on another site that it previously had planned for a re-gasification terminal. The Corpus Christi (TX) site could add an addition 13.5 MT pa of liquefaction capacity, with the Eagle Ford Shale as the primary source of the natural gas. We assume that, if this plant ever begins operations, it would not begin exporting LNG until the latter part of this decade at the earliest.
Other plants are at earlier stages
Other plants are seeking approval for LNG exports, but those plants are at earlier stages than Sabine Pass. In Table 5 we show those plants and the ones mentioned previously.
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Table 5: Proposed LNG export plants in North America

Proposed Terminal U.S Sabine Pass, Louisiana Freeport, Texas Lake Charles, Louisiana Cove Point, Maryland Coos Bay, Oregon Corpus Christi, Texas Cameron, Louisiana Canada Kitimat, Br. Columbia (BC) Douglas Island, BC Prince Rupert Islands, BC Export capacity (Mtpa) 18.0 13.5 15.0 7.5 9.0 13.5 12.7 Export license status1 Developer Expected Start-up
Secured unrestricted DOE, awaiting FERC Secured DOE (FTA2 only), awaiting FERC Secured DOE (FTA2 only) 2 Secured DOE (FTA only) 2 Secured DOE (FTA only) Pre-filing stage Filed with DOE (FTA2 only)
Cheniere Energy Conoco & multiple partners Southern Union & BG Dominion Fort Chicago & Energy Projects Development Cheniere Energy Sempra Energy Apache, EOG, Encana BC LNG Export Cooperative Shell
2015 NA NA NA NA NA NA 2015 NA NA
5.2 Secured NEB 1.9 Filed with NEB 7.5 NA
Notes: 1. Securing a DOE permit is the first step, next step is securing FERC approval for building infrastructure (in the U.S). 2. Countries with a Free Trade Agreement with the U.S are not significant importers and therefore an Unrestricted DOE license is important.
Source: FERC, Company websites
Key review underway

Outcome of DOE review, expected Q1 2012, is key
The DOE recently indicated that it would not issue any additional unrestricted export licenses before it completes a review of the impact of liquefaction projects on US markets. The review includes two studies that are in progress with expected completion in 1Q 2012. The main concern driving these studies appears to be the potential increase in domestic natural gas prices due to LNG exports, as LNG exporters can tap importing markets which typically pay a much higher gas price compared to the US. The first study is an analysis by the EIA on the effect of LNG exports on domestic natural gas prices. The second study by an external agency will evaluate the impact of LNG exports on the overall economy. Currently, most of the plants that we mentioned above have a license to export to countries that have a free trade agreement (FTA) with the US. However, this license is of limited practical use as the current FTA list includes only 15 countries and none is a major LNG importer. Of the planned US projects, only Sabine Pass has secured an unrestricted export license. Comments from a DOE official indicate the departments desire to honor the sanctity of the Sabine Pass contract. However, the law appears to allow the DOE to change any contract if, for example, it deems the arrangement a threat to energy security or if it finds a higher-priority use for the natural gas.
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Global Commodities Research Colin Fenton

(1-212) 834-5648 colin.p.fenton@jpmorgan.com
LNG pricing the Henry Hub threat

LNG Pricing Phase Shift Ahead?
Global shale gas revolution challenges the oil-linked price mechanism for LNG In 2011, the United States and Canada each granted permits for the commercial export of LNGthe first of their kind in North America. The granting of these licenses, plus several more permit applications in queue, gives renewed urgency to the longstanding questions of: how long can the cumbersome Asian oil-linked pricing formulas endure? what will replace them if pricing formulae change?
Jeff Brown
(65) 6882 2215 jeff.g.brown@jpmorgan.com
Any changes to Asian pricing are crucial
These are critical risks for the gas industry, as well as for fuel makers in the petroleum, coal, and alternative energy sectors. Asia buys over 60% of global LNG and almost every proposed project targets these high value oil linked markets. The potential rewards for success (and costs for failure) are enormous: the shale gas boom has opened a greater than $10 per mmbtu gap between 5-year forward Henry Hub prices and the price implied by recently agreed oil-linked LNG price formulas. The recent approval of an export license for Chenieres Sabine Pass terminal in Louisiana (with whom JP Morgan has a commercial arrangement), followed closely by three major supply purchasing agreements, including a large Asian buyer, has only underscored the latent appetite for this cheap resource.
Massive regional price spread sends a signal to Asian buyers
The prospect of a major new low-cost LNG supplier entering the market has emboldened some buyers and is worrying to potential suppliers at the high end of the cost curvenotably some of the Australian green field and expansion projects. On top of all of this, unseasonably warm winter in North America has significantly cut into US gas heating demand, forcing spot NYM natural gas below $3.00 per mmbtu (less than $20 per boe) to price levels that cannot be ignored by consumers paying the equivalent of $100, or more, per boe.
Figure 17: Henry Hub Forward Price versus Asian LNG Price Implied by Crude Forward Curve
$/MMBtu 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 Feb-12
Asian LNG Price US Natural Gas Futures
Dec-12
Oct-13
Aug-14
Jun-15
Apr-16
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Regional prices are already linked
Spot LNG is already closely linked to international gas prices Asian LNG is already linked to international gas markets in the spot market. Because Asia is typically short LNG, Atlantic Basin spot cargoes bound for Asia generally trade at the highest Atlantic Basin alternative (generally either the UK National Balancing Point, NBP, or a continental price) plus transport cost. If, as seen recently, the tanker market is very tight or Asia pulls all the available cargoes, Asian spot LNG prices can rise to oil prices on a heating equivalent basis. Because gas tends to be more efficient than oil in power generation, LNG prices can spike above oil prices, but these are typically short-lived. When LNG is tight, oil can be pulled into heating and power, displacing gas and effectively placing a ceiling on LNG prices. Going forward, a key challenge will be trying to anticipate what portion of the LNG trade migrates from long-term contracts to short-term contracts and opportunistic cash market transactions. For reference, DOE data show that upwards of 94% of Canadian gas pipeline flow into the US is in the spot market, or scheduled to be delivered within 12 months. As discussed elsewhere in this collaborative study, the trend toward greater international trade volumes in LNG, directed toward Asia, will likely prove durable, though we also believe the US and Canada may find themselves competing with other new suppliers far sooner than they might expect. Spot LNG will likely act to equalize gas prices across regions, just as movements in crude oil keep price spreads relatively narrow. Spot LNG trade already has an impact on liquid markets, like the UK, which have a well developed infrastructure for receiving LNG imports. Spot volumes are pushed to or pulled from the UK depending on NBP pricing relative to competing markets. But spot LNG trade accounts for only a small percentage of total global LNG trade (i.e., including contracts), and total global international trade in LNG supplies only about 10% of global gas consumption. So there are limits today on the extent to which spot LNG can balance global gas markets, particularly during seasonal spikes, which explains how the wide spreads between Henry Hub and Asian oil-linked LNG have been able to persist to date. Also, on a heating equivalent basis LNG is well over three times as expensive as oil to transport, and the LNG tanker market is relatively small and often tied to long-term contracts.
Figure 18: Asian LNG spot price versus Henry Hub, NBP, and oil price equivalent
$/MMBtu 30.0 25.0 20.0 15.0 10.0 5.0 0.0 2001
Spot LNG is the liquidity skin that may reduce price dispersion
Representative Asian LNG Price US Natural Gas (HH) UK NBP Crude Oil Equivalent
2003
2005
2007
2009
2011
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Long-term contracts are still oil linked but pricing formulas vary widely with cost trends
Historic pricing convention links LNG price to oil price
Asian long-term LNG contracts for deliveries over periods of up to 25 years, but typically for 15-to-20 years have historically been linked to crude oil prices. Generally, the pricing formula has a small fixed component plus a coefficient multiplied by crude price (by convention, usually the Japanese Customs Cleared Crude (JCC) price even for non-Japanese Asian buyers). Heretofore, the major structural shifts in the LNG marketand associated impacts on domestic gas marketshave been transmitted through changes to long-term contract pricing and terms. As buyers/sellers market expectations evolve, long-term contract terms typically change quickly, as witnessed several times over the past decade. Because long-term contracts underpin the viability and thus approval (or scuttling) of new gas projects and encourage buyers to build out receiving infrastructure and downstream industryall of which require a 3-to-5 year lead even small changes to market expectations can have a major impact on capex planning and thus future LNG business growth.
Figure 19: Basic LNG pricing formula
PLNG = A x PCrude Oil + B where: PLNG is the price of LNG in US$/MMBtu A is the slope indicating the crude linkage. Before 2003 the slope was typically .1485 PCrude Oil is the price of Japan Customs Cleared (JCC) crude oil in US$/barrel B is the constant which was often representative of transport cost, typically about US$0.60-0.90 *Note that there are numerous variations on the basic formula, such as S-curves," floors/ceilings, etc., but they are generally thought to follow the construct outlined above.
Prior to 2003, when Japanese and Korean buyers dominated the global LNG market, LNG was typically priced at about 85% of the benchmark international oil price. There were some variations, such as the introduction of S-curves that softened the oil linkage at high and low oil prices, but pricing terms were similar across contracts. Over the past decade, as competition among buyers and sellers has intensified and their relative negotiating power has ebbed and flowed, wider ranges in agreed-upon coefficients and other variations in pricing formulas have emerged.
Australian LNG projects have long set marginal cost
Most interestingly, although the contracts remain oil linked, the agreed pricing terms are generally set in the market by the full development costs of the marginal seller. This spot in the market has long been held by Australia, because: (1) it is a relatively high-cost construction venue, and (2) it has had numerous projects at various stages of development by international oil companies for decades. The long-standing 85% oil price linkage norm changed around 2002-to-2003 when projects in Trinidad demonstrated that LNG construction costs could be pushed to very low levels (about $200 per T) and major new projects in Qatar, Indonesia and Australia decided to look past slower-growing established markets in Japan and Korea and altered their pricing strategies to push into China and India, where they believed they had to compete with coal use. Oil linkages quickly dropped to about 30%, and some price ceilings fixed below $4 per mmbtu for 20-year contracts. The contracts prices were centered at around $22-to-$25/bbl crude. This price range may seem incredible today, but because the full development and delivery cost for Australian LNG projects was less than $3 per mmbtu at the time, the market was offered down to these levels through a tender process initiated by a major Chinese buyer. The example is a terrific illustration of the strategic position conferred by a prudent and forward-looking consumer hedging strategy.
EPC cost nadir and new target markets shifted pricing models
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History shows that pricing models can change quite quickly
The LNG market subsequently shifted again when oil prices began to ratchet upwards starting in late 2003, as Chinas inexorable energy appetite became apparent. The combination of demand pull and several unplanned outages (Hurricanes Katrina, Rita) eventually lifted US Henry Hub gas prices to a cyclical high above $15 per mmbtu and NBP prices briefly above the equivalent of $22 per mmbtu. In response to these prices, dozens of LNG receiving terminals were planned on both coasts in the US, Canada, and Mexico. Many market observers, including the US Energy Information Administration, projected that the US would quickly become one of the worlds largest LNG importers and eventually pass Japan to become the largest importer. Asian buyers were understandably concerned that North America would pull away Asian LNG and there was talk of LNG sellers possibly demanding Henry Hub based pricing from Asian buyers (demonstrating just how quickly the LNG market can change with shifts to large domestic gas markets, in this case the US). Meanwhile construction costs rose quickly as both upstream and downstream service providers were stretched. Over the 2005-2006 interval, linkage ratios with oil began to move higher even as oil prices rose, with new contracts surpassing the 50% threshold against higher mid-points for oil prices. In 2008, Chinese state oil companies moved aggressively to sign new LNG long term contracts just as an unprecedented wall of new Qatari supply was poised to surge into the market. Critically, Qatar was the only major incremental source of supply, and it held the line on pricing. Originally, much of the Qatari LNG was targeted at the Atlantic Basin, but by 2008 the rapid growth of shale gas in the US had altered market dynamics and Asia was a much tighter market, willing to pay high prices to fuel its strong growth. The Qatari LNG projects demanded, and signed, several contracts with roughly a 100% crude oil linkage. The LNG market was so tight and nervous about the prospects of China taking in all of the available LNG that longterm contract prices were bid up to oil parity. Since the Great Recession crude linkages have fallen back as numerous Australian LNG projects have raced to secure buyers and get to Final Investment Decision (FID). The Tohoku earthquake slowed the pullback from a tight crude linkage on the prospects for much higher Japanese LNG demand, but recently some long-term contracts are said to have a 80% crude linkage. Analysts and investors, in our view, have rightly questioned whether adequate returns in Australian LNG projects can be achieved at this level, introducing a new threat in the value proposition.
Qatari pricing discipline remains key
Recently oil price discounts of 15%+ have been taken
Will new supplies undercut pricing and threaten Australian LNG?

Australian LNG projects are clearly at the high end of the cost curve and may be thought of as marginal supply. So long as the perceived long-term demand for LNG exceeds the perceived long-term supply at an 80% crude oil linkage, currently planned but un-contracted Australian LNG still stands a high probability of eventually finding buyers and moving ahead. But if substantial volumes of lower cost LNG begin to push into Asia, the Australian projects at the high end of the cost curve are especially vulnerable.
US exports have a large, in-built cost advantage
In this context, it is important to remember that several proposed US LNG export projects have a unique cost advantage, in that they have already built out berthing and storage facilities in anticipation of LNG imports which never materialized. The United Sates has some 13.35 MT pa of LNG import capacity but only imported 9.2
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MT pa of LNG in 2010. Currently, there are four proposed projects for 6.6 bcfpd pa of liquefaction, one of which has already received required approvals and has signed gas sales agreements. Of course, these facilities require some modifications and gas liquefaction must be added, but reportedly these costs amount to some US$500-800 per T versus over US$3,000 per T in Australia. This wide cost differential easily overcomes the higher cost of shipping LNG from the USGC to Asia. It must also be noted that Qatar, the worlds largest LNG producer, poses a potential threat in that it sends over 30 MT pa of LNG into the Atlantic Basin which could be redirected into high priced sales in Asia. In the past, Qatar has chosen to push for high price coefficients and keeping the Asian market tight. Qatar now appears to be relaxing its pricing terms in acknowledgement of the new, if still evolving, realities.
US threat has pushed sellers to accept lower contract pricing
Overall, it appears that a hard push by North American projects, several of which involve Asian buyers, has already altered industrys long-term views on the availability of supply. This has, in turn, spurred Australian sellers to offer somewhat better terms to secure supply agreements before this threat escalates further. Clearly, the rise of alternative LNG suppliers is a significant challenge for Australian LNG operators, particularly as their costs continue to escalate. But it must be clarified that if some, or even all of the Australian projects, were to be displaced it would not necessarily mean that LNG prices would decline sharply because the next marginal seller is also high cost. For example, the full cost of LNG from Western Canada to Asia is very similar to Australia. Grassroots USGC projects are similarly high cost if transport costs are included.
All eyes on China gas shale.
The simple fact is LNG itself is expensive and at the high end of the natural gas cost curve. As such the biggest threat to all LNG projects, one which can dramatically alter the long-term LNG price outlook, is a sudden shift in the domestic gas supply outlook among major buyers. Based on the experience with US shale gas, the most obvious candidate to radically alter long-term supply expectations would be an acceleration of shale gas development in China and other major buyers. There is no question that China has substantial shale resources. In fact, the US Energy Information Agency estimates China has the largest shale reserves in the world, at 36.1 trillion cubic meters (tcm) of technically-recoverable reserves, or about 50% more than the US. Chinese industry pegs its shale gas reserves somewhat lower (26 tcm), but this figure is still larger than the US resource. The challenge for China is that while the US is generally developing shallow, broad marine basins, China has a mix of different structures, spread over a range of smaller basins, which are often deeper, presenting unique challenges and potentially higher cost. Because of below and above ground challenges, in the early stages costs are likely to exceed the US, although these can fall rapidly as infrastructure expands. Chinas ability to follow in the footsteps of US developments and technology is a major advantage in quickly closing the cost gap. Doubts about Chinas ability to get large-scale projects done quickly have repeatedly been proven wrong: overseas upstream acquisitions, LNG re-gasification/import terminals, and domestic pipeline expansions all lagged before China surprised observers with swift shifts in priorities and quickly ramped up development in these areas. Numerous drivers contributed to the changes, but three keys were: (1) a strong political push; (2) competition among the state majors; and (3) early foreign involvement.
China gas shale faces many challenges.
but Chinas ability to execute large projects is not in doubt
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Chinese government has ambitious shale output aspirations
Developments over the past few months further show political support aligning for shale gas. In August, the head of the National Energy Administration said Chinas powerful State Council was urging faster shale development. At a recent Shale Conference in Shanghai, a government official tasked with designing new plans for shale gas development said that China hopes to produce 60 to 80 billion cubic meters (bcm) per annum by 2020, following on an estimated 6 bcm by 2015. These are aggressive targets, given that they exceed announced company plans, but the official also discussed new subsidies for shale gas, wider participation by domestic and foreign companies and strong pressure on companies that win future tenders to aggressively explore and develop new plays. The key area to watch is Sichuan, where Chinas first horizontal shale gas well was completed. The region has among the most promising reserves, and perhaps more importantly, ample water which is necessary for fracking. The other major promising region, the Tarim Basin, is arid so water access presents challenges. Sichuan is also a major conventional gas-producing region, so necessary infrastructure is already in place. Early development efforts of the state majors and foreign companies are focused on the region, with Petrochina saying that 1 bcm of its targeted 1.5 bcm of shale gas output in 2015 will come from the region. Among the main challenges we see for Sichuan is the structural complexity, which we understand has presented some difficulties in the early stages of development.
Watch for news from the Sichuan and Tarim basins
Conclusion - prospects for gas-based pricing for Asian LNG

We expect gas-linked pricing to penetrate Asia
Given the rapid growth and increasing liquidity of the global LNG market, as well as the coming amplification of the shale gas phenomenon to global proportions, we think it is likely that gas-linked pricing will take-off in Asia. The market already sees several Asia spot LNG price quotes, including a Japan, Korea, Taiwan price marker from pricing agency Platts. Singapore aspires to become a regional LNG trading hub with the opening of a re-gasification terminal in 2013, which is also already slated for expansion. Singapore is already the regional pricing hub for oil products, so adding LNG to the fold makes sense, though Shanghai is also a major regional contender. Historically, Asian utilities were reluctant to link LNG prices to Henry Hub in the US or the UK National Balancing Point due to basis risk. Oil price linkages were more familiar and easier to explain to utility customers, particularly in Japan where oil still plays a substantial role in power generation during periods of peak demand. With that said, Asian utilities do eye each other closely. If one utility jumps to a new pricing system others are likely to try it, lest their competitive position becomes eroded. The state utilities also need to demonstrate that they are securing the best deals available in the market. We have seen several examples of this follow the leader behavior, including the widespread adoption of S-curves, as described above. In late 2010, the consensus among North American gas producers predicted that spot gas, trapped in the North American market, would trade in a $4.50 to $6.50 per mmbtu range (Henry Hub basis) through 2011 and 2012 before beginning to find support in 2013. We have disagreed with this price view, arguing that both the floor and ceiling of this range would likely be violated between 2011 and 2015, as novel pathways for clearing supply and demand emerged and as volatility picked up
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Utilities behavior can be herdlike.when one moves..
Simple arithmetic of US LNG exports reaching Asia are compelling
sharply for fundamental reasons. Cheniere estimates transportation costs from the US Gulf Coast to Asia are about $2.80 per mmbtu. Given that China and Japan are already paying $12 to $16 per mmbtu for LNG on a delivered basis, if the Sabine Pass option were available today, spot Henry Hub physical gas could be $6.13 to $9.61 per mmbtu today and still be competitively priced with oil-linked molecules in North Asia. The midpoint of the imputed range implies $7.87 per mmbtu. This is more than 2X the current spot price. The imputed range is also generally above the price level that many in industry believe will be the ceiling for the spot price for many years. But violation of that supposed ceiling at $6.50 is an outcome consistent with the economics of marginal cost and the wide dispersion in fuel prices (more than $80 per boe) waiting to be arbitraged. There is a ready analogue in the rail and truck investments that have been pursued in 2011 to narrow the Brent-WTI spread after its historic blow-out over $20 per bbl (historic norm is about $1.50 per bbl WTI above Brent). Rail shipments of petroleum and petroleum products in the US Midcontinent surged in 2011, according to the Association of American Railroads, as Bakken barrels moved toward the NYM delivery hub at Cushing, OK and onward to the Gulf Coast.
Henry Hub can price to Asian import costs, well above marginal cost of US marginal cost of production
Similarly, the potential for North American gas prices to reflect the marginal molecule in Asia consumption, rather than local production costs in a US basis, is reminiscent of the marginal cost economics that became so obvious in oil in 2008. That year, an oil sands producer in Canada or a deep water producer in the Western Gulf of Mexico or offshore Angola, who might have carried production costs somewhere between $50 and $65 per bbl, still received upwards of $140 per bbl on every barrel for a short period of time because at that instant the marginal molecule of global oil demand (driven by Asia) called upon the marginal molecule of supply (biofuels in Romania and the US) and every barrel in the world cleared off that marginal price.
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Global LNG supply & demand scenarios

We use our global database on LNG projects to forecast operational capacity as far out as 2020 (please see Appendix II). We run two simple global LNG supply-demand scenarios (a BULL and a BEAR case) and examine the potential supply deficit / surplus under each.
Re-gasification capacity sets a countrys limit to import LNG
In both scenarios, we are subject to the key boundary condition that LNG imports cannot exceed a countrys expected re-gasification capacity based on existing and planned import terminals. For many countries that will import LNG for the first time, we assume a modest build up in re-gasification terminal utilization i.e. LNG imports will remain a tactical, but secondary source of gas to existing piped gas imports and domestic supplies for most countries e.g. in Europe. However, we do assume that these import terminals will be built and partly used. For example, in Europe we assume 2015E-17E LNG demand of 4-9-14 MT pa respectively from countries that do not currently import LNG (a combination of Albania, Croatia, Cyprus, Estonia, Germany, Lithuania, Poland, Slovenia, Sweden and the Ukraine). In truth, this represents a very small fraction of their aggregate gas demand, currently sourced via import pipelines. We also assume that certain countries that currently import LNG, but which look set to export LNG (e.g. Canada and the USA) experience an accelerating decline in LNG imports as exports commence in 2015-16.
Fukushima really was a bomb in the LNG pond
Under both scenarios we assume that Japanese LNG consumption will remain unusually high 2011 and 2012, only then reducing in 2013 given the return of much of its nuclear generation capacity. We note that J.P. Morgans forecast for Japans 2011 demand (source - Tomohiro Jikihara, Japanese utility analyst) of 89 MT represents 30% Y-o-Y growth and an increment of 21 MT. To put this in to context, this is more than half of the global growth in LNG in 2010 (+40 MT). Under both scenarios, we also assume a loss of operating capacity of 2 MT pa 20112014 and 1 MT pa 2015-16 arising from the exhaustion of upstream gas supplies e.g. to Arun LNG (Indonesia original capacity 12.5 MT pa we note that BPMigas has recently confirmed that Indonesia will likely only export around 300 LNG cargoes in 2012 versus 367 in 2011 and 427 in 2010), Kenai LNG (USA original capacity 1.5 MT pa) and MLNG Tiga (Malaysia original capacity 7.4 MT pa). We acknowledge that such a long range demand forecast will be error prone given LNG demand can be dislocated by numerous variables other than the economy: (i) weather either very cold in the Northern Hemisphere or very hot in the Middle East (ii) the availability of hydro-electricity - we really cannot forecast local rainfall (iii) unexpected supply disruptions perhaps arising from domestic or import pipeline shut downs (iv) government policy changes - for example, the Spanish government passed a decree in Spring 2011 to incentivize the burning of coal; this has contributed to a likely 20% Y-o-Y decline in Spanish LNG imports. We note that during the seven year period 2005 to 2011, the global LNG system operated with almost 20% of theoretical spare capacity (based on 100% nameplate capacity of existing plants).
Some capacity retirement expected
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LNG SUPPLY-DEMAND BULL CASE
Table 6: LNG demand outlook (MT pa)

Europe Middle East / Africa China India Japan Rest of Asia Latin America North America Market share Europe Middle East / Africa China India Japan Rest of Asia Latin America North America YoY growth Europe Middle East / Africa China India Japan Rest of Asia Latin America North America Effective supply capacity Spare capacity 2005-2011 average
2005 35 0 0 4 56 29 1 13 138 25% 0% 0% 3% 40% 21% 0% 9% 100%
2006 42 0 1 6 60 32 1 13 154 27% 0% 0% 4% 39% 21% 0% 8% 100% 21% NM NM 32% 7% 11% 5% -2% 12% 182 18%
2007 39 0 3 7 65 33 1 18 165 24% 0% 2% 4% 39% 20% 0% 11% 100% -7% NM 287% 25% 9% 2% 13% 37% 7% 190 15%
2008 40 0 3 8 67 35 1 10 165 24% 0% 2% 5% 41% 21% 1% 6% 100% 4% NM 15% 8% 4% 7% 54% -44% 0% 198 20%
2009 50 1 6 9 63 34 2 13 177 28% 0% 3% 5% 35% 19% 1% 7% 100% 25% NM 72% 17% -7% -5% 94% 28% 7% 221 25%
2010 64 2 9 9 68 43 7 15 217 29% 1% 4% 4% 31% 20% 3% 7% 100% 27% 230% 68% -4% 9% 29% 181% 15% 23% 254 17%
2011E 68 3 11 9 89 48 9 12 249 27% 1% 5% 4% 36% 19% 3% 5% 100% 6% 40% 20% 7% 30% 11% 27% -18% 15% 273 10%
2012E 67 4 15 12 89 51 11 12 260 26% 1% 6% 5% 34% 20% 4% 5% 100% -3% 27% 30% 31% 0% 7% 32% -1% 5% 280 7%
2013E 68 4 18 16 75 56 13 11 262 26% 2% 7% 6% 29% 21% 5% 4% 100% 3% 12% 25% 31% -15% 9% 16% -5% 1% 280 7%
2014E 72 5 23 18 78 63 14 10 283 25% 2% 8% 6% 27% 22% 5% 4% 100% 6% 16% 25% 11% 3% 13% 11% -11% 8% 285 1%
2015E 78 7 27 20 80 70 18 9 308 25% 2% 9% 6% 26% 23% 6% 3% 100% 8% 47% 18% 11% 3% 10% 21% -13% 9% 295 -4%
2016E 86 9 31 22 82 75 20 8 331 26% 3% 9% 7% 25% 23% 6% 2% 100% 10% 17% 15% 11% 2% 8% 12% -11% 8% 318 -4%
2017E 94 9 34 24 83 78 22 7 352 27% 3% 10% 7% 24% 22% 6% 2% 100% 10% 9% 10% 10% 2% 4% 10% -7% 6% 367 4%
2018E 99 10 37 27 84 81 23 7 368 27% 3% 10% 7% 23% 22% 6% 2% 100% 5% 3% 10% 10% 1% 4% 7% -4% 4% 426 16%
170 24% 18%
Supply - We assume the start ups of all new liquefaction plants in 2013 and onwards are 12-months late and new plants only operate at 75% capacity in their first year of operation. We assume that all plants then run at 95% of capacity (which would vary through the year according to seasonal demand). Demand We assume (i) a European recession in 2012, but recovery in 2013 onwards (ii) domestic shale gas fails to materially displace LNG demand in China (as occurred in the US).
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Figure 20: BULL CASE - LNG effective supply / demand outlook (MT pa)
450 400
350
Market cover runs down 2011-16
300
250
10% 17% 25% 24% 18% 15% 20%
7%
7%
200
150
100
50
0 2005 2006 2007 2008 Europe India Latin America 2009 2010 2011 2012E 2013E China Rest of Asia Effective operating capacity 2014E 2015E 2016E 2017E 2018E Middle East / Africa Japan North America
As per Table 6, under this scenario global demand rises from just under 250 MT pa in 2011E and almost reaches 370 MT pa by 2018E, a potential demand CAGR of 6%. 2012E global demand grows 5% to 260 MT. Japanese demand holds at 89 MT pa in 2011 and 2012, declining to 75 MT in 2013 (2010 68 MT) as nuclear plants are re-commissioned. Chinese demand surpasses 30 MT pa in 2016 (2010 9 MT and 2011E 11 MT) and reaches 37 MT pa in 2018 (2010 9 MT and 2011E 11 MT). The Chinese government has estimated total Chinese gas demand of 300 bcm pa by 2020. If we assume 8% pa LNG demand growth 2019-2020, this would imply that 20% of Chinas gas needs could be supplied by LNG by 2020. This seems reasonable under a scenario where gas shale supplies are not the game-changer they were in the US gas market. The global supply / demand balance tightens 2012-17. There is a risk of zero spare capacity by 2014-15. As a result, global LNG demand may be supply constrained from 2015 to 2017. If we extrapolate 2018 demand at 4% pa for two years, we infer 2020 LNG demand at just over 400 MT. We suspect that this scenario (or something like it) may explain why China remains keen to contract long term supplies that are scheduled to commence in 2014-15, accepting oil price indexation for long term contract pricing.. Under this scenario, we expect regional gas price differentials to remain high for the next 2-3 years (until US LNG exports with a Henry Hub cost profile commence), offering low cost LNG suppliers with portfolio flexibility profitable opportunities to divert cargoes to an oil price indexed Asia Pacific market.
39
LNG SUPPLY-DEMAND BEAR CASE
Table 7: LNG demand outlook (MT pa)

Europe Middle East / Africa China India Japan Rest of Asia Latin America North America Market share Europe Middle East / Africa China India Japan Rest of Asia Latin America North America YoY growth Europe Middle East / Africa China India Japan Rest of Asia Latin America North America Effective supply capacity Spare capacity 2005-2011 average
2005 35 0 0 4 56 29 1 13 138 25% 0% 0% 3% 40% 21% 0% 9% 100%
2006 42 0 1 6 60 32 1 13 154 27% 0% 0% 4% 39% 21% 0% 8% 100% 21% NM NM 32% 7% 11% 5% -2% 12% 182 18%
2007 39 0 3 7 65 33 1 18 165 24% 0% 2% 4% 39% 20% 0% 11% 100% -7% NM 287% 25% 9% 2% 13% 37% 7% 190 15%
2008 40 0 3 8 67 35 1 10 165 24% 0% 2% 5% 41% 21% 1% 6% 100% 4% NM 15% 8% 4% 7% 54% -44% 0% 198 20%
2009 50 1 6 9 63 34 2 13 177 28% 0% 3% 5% 35% 19% 1% 7% 100% 25% NM 72% 17% -7% -5% 94% 28% 7% 221 25%
2010 64 2 9 9 68 43 7 15 217 29% 1% 4% 4% 31% 20% 3% 7% 100% 27% 230% 68% -4% 9% 29% 181% 15% 23% 254 17%
2011E 68 3 11 9 89 48 9 12 249 27% 1% 5% 4% 36% 19% 3% 5% 100% 6% 40% 20% 7% 30% 11% 27% -18% 15% 288 16%
2012E 61 4 13 11 80 49 10 11 239 25% 1% 6% 5% 33% 21% 4% 5% 100% -11% 17% 20% 15% -10% 2% 19% -8% -4% 295 24%
2013E 60 4 15 13 68 52 11 10 233 26% 2% 7% 5% 29% 22% 5% 4% 100% -2% 13% 15% 15% -15% 7% 8% -9% -2% 302 30%
2014E 62 5 17 13 69 59 12 8 245 25% 2% 7% 5% 28% 24% 5% 3% 100% 3% 18% 10% 5% 1% 12% 9% -16% 5% 313 28%
2015E 66 7 18 14 70 64 14 6 259 25% 3% 7% 5% 27% 25% 6% 2% 100% 6% 50% 5% 5% 1% 9% 20% -27% 6% 337 30%
2016E 72 8 19 15 71 68 16 5 273 26% 3% 7% 5% 26% 25% 6% 2% 100% 9% 18% 5% 5% 1% 6% 10% -18% 5% 390 43%
2017E 78 9 20 15 71 70 17 4 285 28% 3% 7% 5% 25% 24% 6% 2% 100% 9% 9% 5% 5% 1% 2% 7% -10% 4% 452 59%
2018E 81 9 21 16 72 71 18 4 291 28% 3% 7% 5% 25% 25% 6% 1% 100% 3% 3% 5% 5% 0% 3% 4% -4% 2% 552 89%
170 24% 19%
Supply - We assume all new liquefaction plants are commissioned on schedule and then operate at 85% capacity in their first year of operation. We assume existing plants run at 100% of capacity (this varies through the year according to seasonal demand). Demand We assume (i) a European recession in 2012 and a slow-paced recovery in 2013-14 (ii) reflecting a faster return of nuclear capacity, a 10% decline in Japans LNG consumption in 2012 from the record high of 89 MT in 2011, followed by a 15% decline in 2013 (iii) the onset of shale gas production starts to displace material volumes of potential LNG demand in China from 2013 onwards.
40
Figure 21: BEAR CASE - LNG supply / demand outlook (MT pa)
450 400
350
Market cover rises to 25-30%
300
30% 16% 24% 30% 28%
250
17% 25% 24% 18% 15% 20%
200
150
100
50
0 2005 2006 2007 2008 Europe India Latin America 2009 2010 2011 2012E 2013E China Rest of Asia Effective operating capacity 2014E 2015E 2016E 2017E 2018E Middle East / Africa Japan North America
As per Table 7, under this scenario, global demand rises from around 250 MT in 2011E and only reaches around 291 MT by 2018, a potential demand CAGR of just 2%. 2012E global demand declines 4% to 239 MT. Chinese demand only reaches 19 MT pa in 2016 (2010 9 MT pa and 2011E 11 MT and our Bull Case estimate of 30 MT). The markets spare supply capacity averages over 20% (higher than the average spare capacity 2005-2011 of around 19%) through to 2015 before rising substantially 2016-18. If the world looks like it is heading in to this scenario, projects which have not yet contracted off-take / been sanctioned with an on stream date 2016-18 will almost certainly be deferred as sponsors will struggle to contract off-take based on an acceptable long term pricing structure as LNG-on-LNG competition escalates. If we extrapolate 2018 demand at 2% pa for two years, we infer 2020 LNG demand at around 320 MT. This is more 24% below the implied demand figure under our BULL scenario in 2020 of just over 400 MT. Under this scenario, we would expect regional gas price dispersion to narrow as more LNG supply points emerge with material spare capacity. This scenario would thus be characterized by more limited opportunities for regional price arbitrage; the value of supply flexibility would thus be reduced.
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Why we might (well) be wrong

Long term forecasts are usually wrong for unexpected reasons
We have been researching the global energy sector for long enough to acknowledge that long term energy supply-demand forecasts are very often wrong for unexpected reasons - the unseen unknowns usually unhinge the most complicated spreadsheets. So, we do not apologize for presenting two extreme scenarios that show two very different market environments. To present a narrower bandwidth for the future would be too presumptuous, in our view. LNG sits within a complex energy matrix. As a result, demand for LNG can be disrupted, both positively and negatively, by very many factors other than the weather and the state of the global economy. Although the underlying drivers to the global LNG demand trends, that are in turn driving the liquefaction capacity growth, look to be very secure, we must consider potential dislocations that could jeopardize the tremendous pace of capital investment, especially as it relates to a number of preFID projects scheduled to be on stream 2016 onwards. We consider eight specific factors that could slow down either the pace of capacity growth or LNG demand. Capacity growth risks Project delays and cancellations - As per Figure 24, J.P. Morgans analysis of LNG projects 2000-2010 shows that 34% were delivered behind schedule (versus 66% on or ahead of schedule) and 38% are over budget (63% on or under budget). So, one might say the odds of late project completion is one in three. As per Figure 22, we note that looking beyond 2015, virtually all projects that are tentatively scheduled to be on stream 2016 to 2020 have yet to be sanctioned. Indeed, of the 710 MT pa that could be on stream by 2020, almost half (c.45% or 320 MT pa of capacity) has yet to be sanctioned. We have also witnessed very significant capital cost escalation for LNG projects (Figure 23) - from a low of $200 per ton, the current rate is typically over $3,000 per ton, a 15-fold increase. It is conceivable that project capital costs continue to escalate to a level where, even given a direct oil price to LNG price linkage, the economics of a project are so severely damaged that the project is cancelled.
As Warren Buffet wrote forecasts tell you little about the future, but a lot about the forecaster
Mega-infrastructure projects often fall behind schedule.and sometimes just never happen
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Figure 22: LNG capacity at risk (MT pa)

700
320 MT pa or 45% 2020E capacity yet to be sanctioned

650
600
550
500
Projects that are likely to slip or may not happen
450
400
Projects that are likely to slip
350
Projects that may slip
300
250 2010 2011 Operating capacity 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Projects under development Projects with defined FID timeline Projects without clear FID timeline
Figure 23: LNG project capital (EPC) costs - $ per ton of capacity
4000 3500 3000 2500
Figure 24: Global LNG project execution efficiency 2000-10

45% 40% 35% 37% 34% 29% 42% 38%
FID PENDING
UNDER DEVELOPMENT
30% 25%
2000 1500 1000 500 0
20% 15%
21%
PRODUCING
10% 5% 0% Ahead of schedule On schedule Behind schedule Under budget On budget Over budget
Source: J.P. Morgan. Source: J.P. Morgan.
Henry Hub S-curve could contaminate regional pricing
Price revocation / contamination as Henry Hub diffuses in to global LNG price structures Most, if not all, long term LNG sales and purchase agreements include windows for contract price re-openers. This can lead to modest changes to the long term price agreement. It is, as yet, unprecedented for a buyer to demand and secure a complete price renegotiation - but this could happen. The key risk, as we see have discussed in the section on LNG price risks, is global contract price contamination once Henry Hub based export price agreements proliferate. Indeed, we have already seen three such contracts signed by BG Group, Gas Natural and GAIL with Cheniere. Equally, buyers negotiating a contract for a green field project might insist
43
on a fusion of oil and US gas price linkage this could undermine the project economics and lead to a deferral / cancellation. At the very least, we expect lower priced Henry Hub based S-curves to reduce regional price dispersion and thus erode returns from regional LNG arbitrage trading. Another form of this risk can occur if a government revises the terms (sales price formula) of an LNG export sales contract. This has already occurred with BG Group in Egypt LNG.
LNG projects can create and threaten local employment
Politics The decision by a government to approve an LNG export scheme can be a very controversial one. Although the project will create employment, inward investment and ultimately taxes, it can also lead to higher domestic gas prices. This can threaten the efficiency of local industry e.g. steel, autos, fertilizers and petrochemicals which can in turn threaten employment, inward investment and tax receipts. So, governments must strike a balance between the two. 1. USA - It is conceivable that the US government, lobbied by some powerful domestic industry groups, will delay the development of an LNG export hub along the Gulf Coast. We note that four LNG export projects on the US Gulf Coast (Sabine Pass, Freeport, Lake Charles and Jordan Cove) could together export over 8 bcfpd - this is a meaningful 12% of total US gas consumption in 2010 (66 bcfpd). The US Department of Energy (DoE) is now conducting two studies (one via the US Energy Information Administration and the other via private consultancy) on the potential gas price impacts of these exports on the domestic natural gas market and on public interest in general. The conclusions of these two studies will likely determine whether any or all of the remaining four applications for export projects which total 55 MT pa (Freeport LNG - Texas, Lake Charles Lousiana, Cove Point LNG Maryland and Jordan Cove - Oregon), will be approved. Until these studies are concluded, no new LNG export licenses will be granted by the DoE. Trinidad & Tobago / EgyptBoth countries have stalled brown field expansion of existing LNG facilities (Egypt - ELNG Train 3, Damietta LNG Train 2 and Trinidad - ALNG Train X) in order to slow the depletion of gas resources and to prioritize domestic consumption. It seems very unlikely that populist policies post-Mubarak will see any LNG expansion in Egypt even if more gas is discovered (which is required to support a third train at ELNG) Qatar Qatar has a moratorium on any further development of its super giant North field in order to preserve its resources for future generations. This moratorium is to be reviewed in 2014.
2.
3.
Bond market may have to replace project finance
Project finance withdrawal Given the extreme capital intensity of liquefaction projects, participants have historically depended on project finance in order to limit the more expensive equity finance component. Such project finance has historically been secured through special purpose vehicles once upstream reserves have been fully certified and a long term LNG off-take agreement has been signed. The conventional sources of project finance loans have been the large commercial banks and government owned multi-lateral lenders (e.g. JBIC). Basle III (to apply from 2015) imposes a Net Stable Funding Requirement (NSFR). This will force banks to hold 10x more capital reserves and the capital reserves must cover the undrawn portion of the project finance facility. Sovereign downgrades have also made it more expensive for such banks to lend. This may lead to an increase in LNG related bond issuance. At present, we are only aware of the RasGas I and RasGas II-III bonds ($2.23bn face value rated A3 by Moodys). However, such bonds do not permit a staged drawdown and also require bi-annual interest payments before a project has started.
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Failure to prove up sufficient gas resources Woodside has had to delay Pluto Train 2 (WDS 90%) following disappointing drilling results (the Cadwallon-1 well, WA-434-P, only intersected a 27m column of hydrocarbons and was deemed subcommercial). Woodside plans another five wells to mid-2012 to prove up sufficient gas to progress a second train. There are numerous green field projects which have yet to clear the commercial gas reserve threshold (around 5 TCF for one train), e.g. Tanzania LNG (BG Group, Ophir Energy) and Kribi LNG (GDF Suez, Cameroon). In Table 8, we list the liquefaction export projects that are at above average risk of delay or failure because of government depletion controls, potential reserve threshold risks, economic sanctions, politics and vulnerable (sub-scale) sponsors. All have tentative start up years 2017-2020. The total capacity at risk is almost 187 MT pa (84% green field) which is spread across 43 trains (39 green field projects).
45
Table 8: LNG projects at risk

Country Project Gas depletion controls, domestic market prioritisation Egypt Damietta LNG T2 Trinidad ALNG Train X Potential reserve threshold risk Cameroon Kribi LNG Tanzania Tanzania LNG T1 Economic sanction risk Iran Pars LNG Iran LNG Persian LNG Political risk Australia / East Timor Sunrise FLNG Brazil Santos FLNG Canada Progress LNG Prince Rupert Georgia Azerbaijan LNG Indonesia Tangguh LNG T3 Nigeria Brass LNG OK LNG NLNG T8 USA Lake Charles LNG Cove Point LNG Cameron LNG Jordan Cove LNG Russia Yamal LNG Pechora LNG Venezuela Gran Mariscal de Ayacucho Vulnerable sponsor risk Australia South Australia LNG PNG Gulf LNG (PNG FLNG) TOTAL CAPACITY AT RISK
Capacity (MT pa) 4.8 5.0 3.5 6.6 10.0 10.0 16.2 3.6 2.7 7.4 8.0 5.0 3.8 10.0 12.6 8.5 15.0 7.8 12.0 9.0 15.0 2.6 4.7 1.0 2.0 186.8
Trains 1 1 1 1 2 2 3 1 1 2 2 1 1 2 4 1 3 2 3 2 3 1 1 1 1 43
Project type Brownfield Brownfield Greenfield Greenfield Greenfield Greenfield Greenfield Greenfield Greenfield Greenfield Greenfield Greenfield Brownfield Greenfield Greenfield Brownfield Greenfield Greenfield Greenfield Greenfield Greenfield Greenfield Greenfield Greenfield Greenfield
FID No No No (2013E) No No No No No No (2012E) No No No No (2014E) No (2012) No No No No No No Yes No No Yes No (2012)
Potential On stream 2018 2018 2018 2018 2018 2019 2020 2018 2018 2017-18 2017 TBC 2018 2018 2020 2019 2017 2020 2020 2020 2019 2020 2019 2017 2017
Gas shale revolution could recur in China, Poland, Argentina.
LNG demand growth risks Gas shale revolution in the US repeats elsewhere No one (as best we know) in the oil & gas industry fully anticipated the rapid pace of gas shale supply growth in the USA which now accounts for one third of total US gas production (close to zero in 2000 versus over 10 bcfpd in 2010). This unexpected source of low cost gas supply has left most of the countrys LNG import terminals running at very low utilization rates and has enforced the deferral / cancellation of all new import terminals / terminal expansions. Figure x shows the volume weighted (based on technically recoverable resources) average and range of estimated break even gas prices for the various US gas shale plays. We note that technology continues to evolve in the US gas shale, so the cost curve remains a dynamic one e.g. Schlumbergers HiWAY fracking technique can yield up to twice daily production versus standard slick water fracs. Further developments that could reduce costs include top-side water recycling, the use of Nitrogen or LPGs to fracture shale and the use of briny water from deep-source aquifer.
46
Figure 25: Break even price of various US gas shale sources

7.0
Figure 26: Break even price of potential non-US sources of gas shale
8.0 7.5
6.5
OTHERDEVONIAN (OHIO)
7.0 6.0 Break even price ($/mmbtu) Break even price ($/mmbtu)
MEXICO POLAND
CHINA
6.5
SWEDEN GERMANY AUSTRIA
5.5
ANTRIM HAYNESVILLE
MARCELLUS
6.0
5.0
WOODFORD BARNETT
5.5
4.5
EAGLE FORD FAYETTEVILLE
CANADA Montney
5.0
CANADA Horn River

4.5
4.0 0 20 40 60 80 100 120 140 160 180 200 Mean technically recoverable resources (TCF)
50
100
150
200
250
Mean technically recoverable resources (TCF)
Source: James A. Baker III Institute for Public Policy - Shale Gas and U.S. National Security (July 2011)
Source: James A. Baker III Institute for Public Policy - Shale Gas and U.S. National Security (July 2011)
Although we feel it will be at least 1-2 years before its potential is known, it is conceivable that China could rapidly unlock its gas shale potential which could quickly displace its need for incremental LNG imports. As per Figure x, the EIA estimates that China may hold 1,275 TCF of technically recoverable gas shale resources this is 19% of the EIA's estimated global gas shale resource and compares to 862 TCF in the USA (Figure 27). China has set a target to grow gas shale production to 15-30 bcm by 2020. In our view, the key challenges for the commercialization of Chinas gas shale resource include: a. Location - Unlike the US, we note that China's gas shale resource is spread across 150 basins, many of which are located a long way from demand centers. Some of these basins are located close to existing gas infrastructure, but face capacity bottlenecks. Other basins are remote from any infrastructure that would have to be installed. Drilling costs It is still very early days, but drilling costs (per the PetroChina / RD Shell alliance in the Fushun-Yongchuan block in Chengdu) are presently much higher than the US. This reflects both difficult terrain and deeper shale horizons. Some of Chinas potential gas shale is also thought to be clay rich which is typically associated with much lower well production rates. Water availability / environmental footprint Access to water is a problem given well fracturing needs. We also understand that a number of the shale plays contain high levels of inert gases that would have to be stripped out and contained. Regulated gas pricing Domestic gas prices are regulated at levels that are below the free market price of imported LNG. Prices may need to rise to incent risk-taking in gas shale. Figure x shows the range of estimated break even gas prices for gas shale from four basins (basin complexes) - Sichuan / Jianghan, Ordos, Tarim / Junggar / Tuja and Songliao - the volume weighted break even price is close to $7 per mmbtu.
b.
c.
d.
47
e.
No community of risk-taking independents The successful development of US gas shale relied, in many key respects, on the pioneering efforts of risk / reward seeking independent explorers that worked the play and encouraged effective technological changes in horizontal drilling and fracturing. China lacks an equivalent community of suitably incentivized risk-takers and is more obviously dependent on a few, much larger companies to mature its gas shale potential. At the very least, this could slow down the pace of the plays evolution.
Figure 27: Estimated technically recoverable gas shale resources (TCF)

1400
1200
1000
800
600
400
200
Technically Recoverable Shale gas resources (TCF)
* Romania, Hungary, Bulgaria
Source: EIA (March 2011). The EIAs estimates for China and the USA are much higher than those from the James A. Baker III Institute for Public Policy - Shale Gas and U.S. National Security (July 2011). Amongst other things, this reflects different views on most likely recovery factors.
Gazprom could blink, piped gas price concessions could follow.
LNG on piped gas competition This is not a new phenomenon. Since 2006, China and Russia have been negotiating the supply of 68 GM3 over 30 years via two proposed pipelines from Russia to China - one bringing gas from western Siberia to the existing West-East pipeline; the other to be supplied from East Siberia. Gazprom has not been prepared to yield on price and has seen some of its market taken by LNG imports and piped gas from Central Asia e.g. Turkmenistan. We note the recent agreement between Beijing and Ashgabat (Turkmenistan) to increase gas exports to China from 40 to 65 bcm pa (the original 30-year supply deal for 30 bcm pa was signed in 2006 and was increased to 40 bcm pa in 2008 with supplies commencing in 2009). If Gazprom yields on price to protect its market share, this could quickly displace some of China's potential need for imported LNG. As per the recent news confirming Gazproms willingness to refund certain buyers, we sense that Gazprom remains very keen to protect its export markets.
48
Diminution or an end to unsustainable domestic gas price subsidies Many countries still use a government owned central buyer of LNG to aggregate LNG imports. This entity then sells the gas on to industrial and commercial users at much lower prices, thus burdening the government with an effective subsidy bill for the imported LNG. A depreciating local currency magnifies the cost of this subsidy since imported LNG is US dollar denominated. 1. 2. In India, state owned producers of domestic gas sell gas at a regulated gas price of $4 2 per mmbtu. In Egypt, industrial end users pay as little as $1.25 per mmbtu. In the fiscal year 2011-12, natural gas subsidies cost the Egyptian government approximately $1.6bn, 10% of the country's total energy subsidy bill. In Argentina, YPF pays ENARSA (the countrys state owned buyer of gas) $3.5 per mmbtu for re-gasified volumes from its two LNG import terminals (Bahia Blanca and Escobar). In Taiwan, government owned CPC sells gas to Taipower at a government adjusted price of $13 per mmbtu whilst it pays as much as $18 per mmbtu for LNG imports. Taiwans budget deficit continues to undermine its currency which amplifies the scale of the gas subsidy since LNG imports are US dollar denominated. In May 2010, the Chinese government raised regulated domestic gas prices by 25%. Although provincial governments are allowed to adjust gas prices within a 10% range from the centrally mandated priced, in 2011 cargoes of LNG were purchased and imported via Fujian at double the price at which the gas was subsequently sold to end users. In June 2011, the Malaysian government raised gas prices from $3.55 to $4.55 per mmbtu for electricity generation and from $4.98 to $5.34 per mmbtu for industrial users. The government plans to increase gas prices by $1 per mmbtu every 6-months until December 2015.In the meantime, Petronas pays market rates for Malaysias imported gas. Earlier this month, parts of Bangkok (Thailand) were paralyzed as truckers and taxi drivers blocked off streets near to PTT HQ to protest the governments plan to steadily raise NGV (natural gas for vehicles) prices by Bt6/kg (from Bt8.5/kg), beginning 16th January. Despite these protests, the government insists that NGV prices must rise as overly cheap prices are distorting the entire energy market in Thailand, leading to excessive consumption and waste.
3.
4.
5.
6.
7.
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Origin of LNG competitive advantages

LNG has relatively high entry barriers
As per Figure 28, we believe that it is possible for the best in class players to derive very attractive returns from the LNG suite of businesses across multiple cycles provided they possess and sustain all the key competitive advantages that we cite for each of the four key streams (liquefaction, shipping, re-gasification and sales contracts see Appendix VII for a full glossary of terms).
Figure 28: Sources of competitive advantage on the LNG value chain
Companies that create gas chains and position on the best links in those chains generate very good returns
LIQUEFACTION PLANT Plant scale - > 5MT pa mega trains - potential for hub Location - close to source gas
ORIGINS OF LNG COMPETITIVE ADVANTAGE

KEY VALUE DRIVERS ------> GLOBAL CAPABILITY & POSITIONING <------REGASIFICATION TERMINAL Terminal scale - > 3MT pa Terminal design - multiple unloading berths for Q-Max Location - unconstrained shipping access Location - close to inland demand centres Pipeline connectivity - access to premium priced markets Storage capacity - maximise operational flexibility Output capacity profile - high baseload + peaking capability Operating costs - low fixed & variable costs Construction timing - in to cycle bottom Ownership - ideally leased via LT tolling agreement Leasing agreement - low fixed cost component Reloading capability - permissioned for export option SALES CONTRACTS Low cost, reliable sources - ideally 20 year contracts Long term offtake contract - at or close to oil price 6:1 parity - limited price re-openers - limited daily quantity tolerance range Destination flexibility - to enable exploitation of price differentials - supported by strong trading function Diversion rights - rights to high % price upside SHIPPING Vessel scale & design - Q-Max and Q-Flex, on board reliquefaction Vessel age - new, low boil off (0.15% per day) LNG fuel usage - captures LNG boil off, reduced emissions Ownership - leased rather than ow ned directly Financing - optimum levels of vessel finance Capacity coverage - ideally built in to bottom of dow ncycle
Location - close to key demand centres Location - politically stable environment - few environmental / land ow issues ner Location - low cost, accessible onshore setting Plant design - multiple loading berths for Q-Max Construction timing - in to cycle bottom Ownership - simple, aligned to upstream suppliers - participation of customers Financing - optimum levels of project finance Fiscal regime - low rate ring fence Asset integrity / reliability - maximize availability Storage capacity - maximise operational flexibility Source gas - low cost, reliable, long-liv resource ed
Terminal efficiency - NGL extraction, air vaporisation system Floating storage, regasification unit - cheaper and faster to build, movable
<--------------------------------------------------------- Be people --------------------------------------------------------> st - correctly incentivised for operational & HSE excellence <------------------------------------------------------ Be contractors -----------------------------------------------------> st - incentivised for operational excellence, adequately supervised w clear policies & procedures ith <-------------------------------------------------------- Portfolio optim ization -------------------------------------------------------> - co-ordinate utilization of all assets across demand cycle
------> HIGH RETURN, HIGH FREE CASH FLOW BUSINESS <------Source: J.P. Morgan.
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Integrated presence can secure the highest returns
Just as storage facilities and pipelines help to maximize the value of gas, so too does liquefaction by giving gas the reach to higher priced markets. However, we believe that the highest returns may be derived from players with appropriate levels of control / ownership of all key infrastructure i.e. export capacity, shipping capacity and import capacity since this infrastructure cluster enables and supports the development of a very high return trading function, especially given a portfolio of flexible LNG supply contracts. Companies that have evolved a presence and skills across the entire value chain are ideally placed to create new gas chains and extract maximum value there from.
Figure 29: Activity links on the LNG value chain - financial returns and capital intensity
High
High Returns Low Natural Gas production Liquefaction Shipping & Marketing Re-gasification terminals Delivery and Marketing
Capital intensity
Low
Liquefaction participation requires a big balance sheet and a long time horizon
In Figure 31, we depict the capital intensity and return volatility of the four key activities on the LNG value chain. LNGs relatively high levels of capital intensity have helped to limit the population of players, which is thus fortunately characterized by a comparatively small number of very rational and return-seeking players. This has certainly helped to protect the returns extracted from the LNG value chain. Liquefaction is by far the most capital intensive link on the value chain - a two train green field LNG project may now cost more than $20bn including the upstream supply and pipeline infrastructure. This typically limits participation therein to the larger IOCs and NOCs which have the balance sheet capacity for such large, long lead infrastructure projects. The returns from LNG liquefaction infrastructure (when acting as an isolated tolling facility) are typically reasonable, but not excessive (c.10%) and stable provided the plant is efficiently operated and maintains consistently good utilization rates (> 90%). With respect to liquefaction, adequate and reliable supplies of source gas, coupled to plant efficiency can make a very material difference to plant economics. As per Figure 30, a well run plant can reach close to 100% of nameplate operating capacity in a year without maintenance (which usually occurs every 2-3 years). However, a less well run plant suffering from unreliable, declining gas supplies may only achieve 30-40% utilization. The makes a very material difference to plant economics.
Liquefaction plants must have good uptime
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Figure 30: 2010 liquefaction plant utilization rates by country (%) *

100% 90%
Operating at capacity Ramping up
Production issues
80%
Declining gas supplies

70%
Ramping up
60%
50%
40%
Ramping up
30%
20%
10%
0%
Source: J.P. Morgan. * Utilization is defined as LNG exports divided by nameplate operating capacity
Scale of liquefaction train also matters
The world's average train capacity has almost trebled from the first trains (1 MT pa) to almost 3 MT pa. The largest LNG train now in operation is in Qatar (7.8 MT pa Qatargas II Trains IV and V and Ras Gas 3 Trains VI and VII). Until recently it was Train 4 of Atlantic LNG in Trinidad and Tobago with a production capacity of 5.2 MT pa. The capital cost of re-gasification terminals are substantially lower, often less than $1bn. Returns to the terminal owner may be more volatile. If the owner simply tolls for usage (i.e. does not take any price or spread risk), returns may be reasonable depending on utilization (see Appendix III). LNG vessels are relatively expensive to build ($200m to $300m) and returns there from will depend on the duration and terms of charter. Vessels left exposed to the spot market will typically generate volatile returns (see Appendix IV). LNG trading is not capital intensive per say, although it requires ancillary, enabling infrastructure. The nature of most LNG trade - typically hedged back to back means that the volatility of returns is quite low.
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Figure 31: LNG value chain - capital intensity versus volatility of returns
SHIPPING
High
Charter
Least desirable exposure
VOLATILITY OF RETURNS
Lease
Medium
REGASIFICATION
Regional arbitrage
TRADING
Low
Tolling model Train phasing
LIQUEFACTION
Most desirable exposure

Low
Medium
High
CAPITAL INTENSITY
Hard to lose money in LNG
As we depict in Figure 32, it is quite difficult, albeit never impossible, to lose a lot of money in LNG. In theory, an LNG vessel could run aground or be sabotaged, thus causing its cargo to leak. However, unlike a tanker oil spill, the LNG would quickly vaporize and (barring exceptional atmospheric conditions which have only once occurred in the USA see Appendix VI) disperse in to the atmosphere. So, the economic loss would be limited to the value of the cargo and vessel. Similarly, an LNG plant could experience a catastrophic explosion if the gas entering the plant and being processed prior to liquefaction encountered an ignition point. In the 50+ year history of liquefaction, this has only occurred once (in Algeria in 2004 see Appendix VI). The largest risk to LNG liquefaction returns is capital cost overruns and project delays - a combination of both can rapidly reduce project returns to an economic break-even. This is a very legitimate investor concern given already high unit capital costs (EPC > $3,000 per ton of annual capacity are more than 10x the cycle low just ten years ago) and the unprecedented scale of capacity growth over the next decade, especially in Australia where there are numerous projects competing for the same underlying resources (skilled and craft labor, steel, capacity for modules from a limited number of yards etc).
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Figure 32: LNG value chain - entry barriers versus potential for large losses
Least desirable exposure
High
POTENTIAL FOR LARGE LOSSES
Participation in all four areas can reduce risk and enhance overall returns
Medium
SHIPPING
LNG spill bears low environmental risk
LIQUEFACT ION
Risk of major industrial accident
Terminals have low fixed costs
TRADING
Bilateral OTC trading
Low
REGASIFICATION
Most desirable exposure

Low
Medium
High
ENTRY BARRIERS
LNG trading is a very difficult market to penetrate
The entry barriers to LNG trading are surprisingly high new entrants require more than just experienced traders and trading systems. They must have access to cargoes, but the market's liquidity is typically held captive by the LNG liquefaction owners / upstream suppliers who are understandably very reluctant to release volumes for traders to trade with. Traders must also have access to shipping, either via owned vessels or the charter market. Furthermore, certain ships can unload at certain terminals (e.g. many import terminals cannot accommodate Q-Max vessels). This can make it even more difficult to efficiently connect volumes to buyers. From an LNG buyers perspective, the trader must ideally have a track record of reliable delivery the buyer will not risk delivery failure. Since most LNG trading is arranged with back-to-back supply agreements, the trading party does not bear volume or price risk on execution the spread is locked in. So, we believe that the stock market ought to assign a higher than normal multiple (value) to LNG trading versus other lower quality trading functions in the oil & gas industry. However, companies with a material exposure to LNG trading need to better inform the market about this business. The entry barriers to re-gasification are lower given much lower capital intensity than export facilities and capital barriers may be side-stepped via long term capacity rental agreements. Given low fixed operating costs, even if left largely idle, an LNG terminal will not generate large losses.
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Competitive ranking of LNG players

Identity of listed players
Population of players in LNG much smaller than refining or E&P
As we have already noted, compared to upstream (thousands of players) and refining (many hundreds of players), there are comparatively few players in LNG it is an industry that has typically attracted some of the IOCs and some of the NOCs. This reflects relatively high entry barriers (high capital intensity, long lead times etc) and the need to discover very substantial gas resources (not a natural exploration priority for most small E&P companies). Consolidation also plays a role - smaller E&P companies that find themselves part of an LNG development are very often acquired before project sanction. This results in a relatively small number of players - Figure 33 highlights just over 50 of the key players including both IOCs and NOCs. This helps to induce robust capital discipline across the cycle which is further reinforced by the need to contract off-take before project sanction little or no LNG export capacity is therefore built on a speculative basis. There are many ways to categorize the listed players in the global LNG market. In Figure x, we split them according to market status and ambition and whether they are integrated (present in liquefaction, shipping and re-gasification) or not. This research note takes a detailed look at the LNG strategies, assets and global positioning of 20 of the 34 listed companies identified below. Unsurprisingly, perhaps, two of the worlds largest and oldest listed oil companies (Exxon Mobil and RD Shell) show clear dominance of the space LNG requires a large balance sheet and a long strategic wavelength, but ultimately rewards both very well.
Exxon Mobil and RD Shell stand out leaders
Figure 33: Nature of key players in the LNG space Listed IOCs, NOCs, DOMINANT E&PS, Utilities INCUMBENTS
INTEGRATED RD Shell Exxon Mobil
AGGRESSIVE GROWTH BG Group Chevron ConocoPhillips TOTAL
BIT PLAYERS BP GDF SUEZ ENI E.ON Gas Natural Kansai Electric KOGAS Mitsubishi Mitsui Repsol YPF RWE Statoil TEPCO Inpex Santos
NICHE PROJECTS Gazprom Novatek
NEW ENTRANTS CNOOC PetroChina Sinopec PTTEP
UPSTREAM or DOWNSTREAM ONLY
Woodside
GALP Marathon Oil Oil Search Origin Energy Petronet LNG Brunei NOC CIC Oman NOC
Anadarko Apache BHP Billiton Encana Talisman HQCEC Sonangol
Unlisted NOCs
QPC NNPC Sonatrach Petronas
ADNOC LNOC Petoro Pertamina
Source: J.P. Morgan. * HQCEC China Huanqiu Contracting & Engineering Corporation a subsidiary of CNPC. 55
A few NOCs also have a very big presence in LNG
Amongst the unlisted National Oil Companies, those with the largest LNG presence are QPC (Qatar), NNPC (Nigeria), Sonatrach (Algeria) and Petronas (Malaysia). Of these names, Petronas is the only NOC to have positioned itself in LNG projects in and outside its home country. However, this internationalization strategy is now being replicated by the three listed Chinese NOCs CNOOC, PetroChina and Sinopec. In many respects, they are replicating the entry strategy pursued by the Japanese utilities which contract for some of the LNG off-take and also take an equity position in the project. We expect to see more international alliances between NOCs and NOCs and IOCs, as per PetroChina with RD Shell in Australia, to enable new entrants to accelerate their growth in LNG. We note that ONGC of India has confirmed it is in discussions with Gazprom of Russia. The worlds largest NOC, Saudi Aramco, does not have any presence in LNG. Notwithstanding Saudi's need for more gas to supply burgeoning domestic industrial growth (e.g. plastics, cement and water desalination), we doubt Saudi Aramco will develop a presence in LNG (as a potential importer) given its ability to burn crude oil for power if required to do so.
Worlds largest NOC, Saudi Aramco, is unlikely to move in to LNG
Competitive positioning
It is difficult to perform a detailed competitive ranking of the companies featured in this note given limited disclosures by many of these companies on their LNG businesses. We note that only two companies (BG Group and Repsol YPF) actually report LNG as a separate segment, although RD Shell provides some additional disclosure on its Gas & Power business which largely comprises LNG (Gas & Power is reported as part of its upstream segment).
Limited disclosure constrains peer group analysis
Other oil & gas companies include LNG earnings in their reported upstream results and the non-upstream earnings may only be seen (and often not explicitly) with their once annual FAS 69 Supplementary Oil & Gas disclosures. So, the analyzable metrics are limited - we cannot measure margins or returns on capital and, for most companies, we have limited information on LNG purchase and supply contracts. We see little point in assessing the competitive positioning of new and niche players alongside the more established, larger players since by definition it will be weak. So, in order to give an idea of competitive standing of the better established players, we have scored eleven of the twenty companies that we feature in this note on the eleven metrics detailed below. Since each company can score a maximum of four on each metric, this gives a maximum score of forty-four. 1. Liquefaction scale We position the companies in to four simple categories based on their net liquefaction capacity: < 5 MT pa, 5-10 MT pa, 10-15 MT pa and >15 MT pa. As per Figure 34, the top three players (RD Shell, Exxon Mobil and TOTAL) look set to remain the top three by 2015. Of note, BPs looks set to slip to fifth place as it will be over-taken by BG Group. Chevron and Woodside jump up the ranking by 2015, moving in to sixth and seventh position respectively. So, a new set of leaders emerges later this decade.
11 key parameters to think about when looking at an LNG portfolio
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Figure 34: Net liquefaction capacity (MT pa)

35 30 25 20 15 10 5 0
RDS
XOM
TOT
BP
BG
ENI REP CVX 2011 2015E
WDS
STL
STOS
OS
2.
Liquefaction plant vintage Given the very high level of cost inflation since the LNG cost curve bottomed out in 2003 to 2006, plants that were built around this time have the advantage of a lower unit capital cost. Conversely, plants built in the period 2006 and beyond have experienced material cost inflation. So, we favor companies with a concentration of portfolio capacity built at or around the bottom of the EPC cost cycle specific to liquefaction. We also favor companies with older facilities even though they will likely have smaller train sizes, they will have exited project finance debt repayments and will thus be generating regular dividends to their owners (typically prevented if not constrained whilst project related debt repayments are underway). We are concerned that companies with a high growth dependency on CBM to LNG projects in Queensland (Australia) will experience both cost over-runs and project schedule delays. Liquefaction capacity location Given much stronger demand trends in Asia Pacific, we favor companies with a liquefaction location bias to Asia Pacific since they ought to be able to reach the key demand centers at lower cost. As second best, we favor North Africa (including the Middle East) as a location over the Atlantic Basin. We score companies based on the likely evolution of their capacity dispersion based on identified liquefaction developments. For a company to score above average, it must have more than half of its net capacity in Asia Pacific. Average train size Liquefaction facilities have fixed costs. Furthermore, there are scale economies to the construction of liquefaction trains. So, we favor companies which have above average unit train size (> 3 MT pa). As per Appendix II, the global average train size will continue to grow through this decade we estimate it will rise from 3.1 MT pa to 3.7 MT pa.
3.
4.
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5.
Brownfield expansion potential As we have discussed, brown field plant expansion can typically be achieved at attractive unit costs given existing facilities that do not have to be duplicated e.g. plant utilities, loading facilities and marine jetty. For example, BG Group estimates that the unit capital costs of a third train on QC LNG will be 40% lower than for Trains 1 and 2. So, we favor companies which have an embedded expansion option in their existing liquefaction plants given upstream resource cover, local government support and available land. Green field growth potential We favor companies with clearly identified liquefaction growth projects that will add materially to the operating base and LNG earnings base. So, we favor companies that have a high level of intrinsic organic growth potential when looking out to 2015. However, we restrain our score if we feel the growth projects are particularly challenging e.g. in the Russian Arctic. Plant operatorship We favor companies that have a senior position, as a result of a large if not dominant working interest, in the operating company of an LNG plant as opposed to small, minority working interests. Integrated chain presence As we have argued, we believe that the best returns from the LNG value chain may be achieved when a company has a full chain presence from upstream through liquefaction, shipping and re-gasification. However, we favor companies with an upstream / liquefaction bias as opposed to a re-gasification bias, especially if the outlook for latter is to be left largely idle. LNG trading capability Given very substantial regional natural gas (LNG) price differences, we favor companies with supply flexibility and ownership of / access to the enabling assets (access to shipping and a trading capability) that allows them to exploit cross-basis LNG price arbitrage as fully as possible with a proven track record of supplying LNG in to many (or all) of the worlds 25 importing countries. The ideal LNG portfolio has multiple customers and multiple supply points with in-built flexibility to supply from the optimum source.
6.
7.
8.
9.
10. Relevance of LNG to company - We position the companies in to four simple categories: < 5% 2012E group earnings from LNG sub-segment, 5-10%, 10-15% and >15%. This earnings exposure is typically positively correlated to LNG segment value exposure. 11. Quality of LNG segment disclosures Good levels of public disclosure are vital in order to permit an accurate analysis and valuation of the LNG exposure of a company. As we have cautioned, many companies simply fail to disclose enough about their LNG business to ensure a full and fair valuation of their LNG position. We favor companies that provide an explicit quarterly disclosure on LNG earnings (turnover, EBIT or post tax earnings), volumes and capital investment. Some companies e.g. BG Group provide very good and explicit disclosure on their LNG business. Other companies, such as BP provide far too little information on the performance of its LNG business, in our view. We cannot see any reason for BP not to improve its disclosure standards on this important segment.
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Figure 35 shows how we score and rank eleven of the twenty companies that are featured in this note that have a well developed presence in the LNG space. Our chosen categorization defines a leadership group comprising 5-6 companies. Exxon Mobil ranks first (33 of 44 points), out-scoring RD Shell (32 points) by just one point which in turn out-scores Chevron by one point (31 points). BG Group (29 points) ranks fourth and TOTAL (26 points) ranks a joint fifth with Woodside. This top tier is followed by a second tier of companies with smaller exposures to LNG this includes Santos, BP and the remaining European names.
Figure 35: Competitive ranking of top LNG players
Repsol YPF Woodside BG Group RD Shell Chevron
Santos
1. Liquefaction scale
2. Plant vintage
3. Capacity location
4. LNG train size
5. Brownfield expansion potential
6. Greenfield growth potential
7. Plant operatorship
8. Integrated chain presence
9. Trading capability
10. Relevance of LNG to company
11. Quality of LNG disclosures
OVERALL SCORE (Max 44)
29 4th
21 8th
31 3rd
17 9th
33 1st
32 2nd
16 10th
23 x 7th
15 11th
26 5th=
TOTAL
Statoil
Exxon Mobil
ENI
BP
26 x 5th=
OVERALL RANK (1-11)

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Alternative strategies to play LNG theme

Four broad ways to play the positive LNG theme
With the backdrop of our positive secular demand growth (as expressed in our bias to believe our BULL supply / demand scenario, as opposed to our BEAR scenario) and pricing outlook on LNG, there are many ways for stock market investors to take exposure to the global LNG market. Investors are not limited to an exposure to the equity owners of LNG export infrastructure. Investors can therefore choose where to play the economic value concentration upstream via project commercialization and subsequent LNG linked price realizations, downstream on the LNG chain or across the entire LNG value chain. As per Figure 36, we highlight four broad alternative investment categories, as clarified below. 1) ADVANTAGED PROJECT PORTFOLIO OWNERS - Focus on equity owners of LNG export projects.
Invest in large cap, LNG project portfolio owners
This is perhaps the most conventional route for LNG market exposure. The only problem with the majority of this specific set of companies is that LNG (earnings, project development news) is only a modest share price driver. Of the companies that we cite, we believe that the most leveraged to LNG are BG Group, RD Shell and Santos. TOTAL also has an above average exposure to LNG, although we are concerned that the news flow relating to its LNG development projects (GLNG Australia, Ichthys LNG Indonesia, Shtokman LNG and Yamal LNG Russia) may be challenging. 2) NICHE PROJECT EXPOSURE Invest in smaller names with a niche exposure to LNG project commercialization.
Invest in smaller cap names exposed to niche project developments
Within this category, we highlight three names: (i) Inpex this company has a 74.8% exposure to the Ichthys LNG project (Australia) and a 60% exposure to the Abadi Floating LNG project (Indonesia) (ii) Ophir Energy an early stage exploration company with exposure to two potential LNG projects, one in Tanzania (Greenfield) and the second in Equatorial Guinea (brown-field) (iii) Cove Energy another relatively early stage exploration company which an 8.5% working interest in the prolific Offshore Area 1 (Rovuma Basin), Mozambique. According to Anadarko, the operator of the block, discoveries thereon have already proved up over 10 TCF of prospective resources which is enough to support a two train LNG project. We very much doubt that the two smaller names (Ophir Energy and Cove Energy) will participate in their respective LNG developments. More likely, in our view, is that both companies will monetize their stakes or be taken over. Indeed, we note that the board of Cove Energy has recently put the company up for sale (5 January 2012 Company Formal Sale Process). 3) OILFIELD SERVICE & EQUIPMENT PROVIDERS Invest in the companies that help to design and build LNG export and import infrastructure. This strategy mirrors the one that we have recommended to play the build out in global refining capacity. In the case of LNG, there is actually far greater choice given a larger population of players with a more diversified set of segment exposures. As per Figure 36, we cite fifteen listed names (5 in each region) that have a material top line and profit exposure to the LNG construction wave. As we have already highlighted, over the seven year period 2012-18, there may be over 40 LNG export projects built. The aggregate new capacity totals 287 MT pa which is more than the
Invest in the capacity enablers
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global operational capacity at end 2010. If we simply assume an average EPC cost of $3,000-$3,500 per ton, this may require capital investment between $850billion and $1 trillion. In addition, as many as 80 new re-gasification terminals will be built. Given an average cost of $750m, this may require another $60bn of capital investment. So, LNG is a key driver of the industry's capital expenditure cycle that most equipment and service providers depend on. In Table 9, we list some of the key service names with a meaningful exposure to LNG capital investment.
Table 9: LNG value chain service & equipment providers
Facility layout & design Amec Chiyoda Clough Foster Wheeler KBR Maire Technimont Saipem Technip Worley Parsons Engineering Bechtel CB&I Chiyoda Clough Foster Wheeler JGC KBR Kellog Technip Worley Parsons Project Management Bechtel CB&I Chiyoda JGC KBR Kellog Foster Wheeler Saipem Technip Worley Parsons Liquefaction Air Products & Chemicals Chart Industries (cooling stacks) Linde Procurement & Construction Bechtel CB&I (+ civil engineering, processing plants) Clough (+ civils, import structures) Chiyoda Daewoo (modules) Samsung (modules) GE (turbines) Fluor Foster Wheeler Hyundai (modules) KBR (+ Storage, civils, marine facilities) Leighton Worley Parsons (+ storage and loading) Saipem (+ import terminals) Siemens (turbines, compressors) Technip (+ import terminals, marine transfer) Facility start up Clough Foster Wheeler Import pipelines Allseas Saipem Technip (Global Industries) Support services Cape (access, insulation) Kentz (electrical, hook-up)
4) LNG SHIPPING We sub-divide this category in to the LNG ship owners and the LNG ship builders.
Invest in the floating pipeline owners and builders
We estimate that the global LNG fleet is currently around 360 vessels. Some of the worlds largest LNG ship owners are private companies and thus out of conventional institutional reach. However, there are a few relatively small listed entities that own LNG ships. We name five in Europe Awilco LNG, Exmar NV, Golar LNG, Hoegh LNG and Wartsila OYJ (propulsion conversions). These names are a good way to play very robust and rising charter rates as the volume of traffic increases and the average distance rises between LNG sources and LNG demand centers. We expect LNG vessel day rates to remain firm through 2012 and in to 2013 (see Appendix IV). In addition, we name five listed Asian ship builders that are directly involved in the construction of new LNG vessels with yards in either South Korea or Singapore. The conditions and outlook for LNG shippers is a complete contrast to the situation facing oil tanker owners where freight rates have fallen below vessel operating costs. In mid-November, General Maritime (USA) filed for Chapter 11 bankruptcy protection, Frontline (Norway) announced a financial restructuring and Torm (Denmark) increased the size of its rights issue from $100m to $300m.
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Figure 36: Different ways to play the global LNG market via listed equities
EPC PROVIDERS North America Chicago Bridge & Iron [CBI US] FMC Technologies [FTI US] Fluor Corp [FLR US] Foster Wheeler [FWLT US] KBR [KBR US]
Europe Cape [CIU LN] Linde [LIN GR] Saipem [SPM IM] SBM Offshore [SBMO NA] Technip SA [TEC FP]
Asia Chiyoda Corp [6366 JP] Daelim Industrial Co. Ltd [000210 KS] GS E&C [006360 KS] JGC Corp [1963 JT] Worley Parsons Ltd [WOR AU]
SHIP / FSRU OWNERS / CONVERTERS Europe Awilco LNG [ALNG NO] Exmar NV [EXM BB] Golar LNG [GOL NO] Hoegh LNG [HLNG NO] Wartsila OYJ [WRT1V FH] Asia STX Pan Ocean [028670 KS]
(3) INDIRECT PLAY Strategy GLOBAL INVESTMENT THEME LNG demand growth
(4) INIDRECT PLAY Strategy

SHIP BUILDERS Asia Daewoo Shipbuilding & Marine [042660 KS] Hyundai Heavy Industries [009540 KS] Samsung Heavy Industries [010140 KS] Sembcorp Marine [SMM SP] STX Offshore & Shipbuilding [067250 KS]
(2) NICHE PROJECT Strategy
ADVANTAGED INTEGRATED PLAYERS USA Chevron [CVX US] Exxon Mobil [XOM US] Europe BG Group [BG/ LN] RD Shell [RDSB LN] TOTAL [FP FP] Asia Santos [STO AU] Woodside Petroleum [WPL AU]
NICHE PROJECT EXPOSURE Europe Cove Energy [COV LN] Flex LNG [FLNG NO] Ophir Energy [OPHR LN] North America CheniereEnergy [LNG US] InterOil [IOC US] LNG Energy [LNG CN] Asia Energy World Corp [EWC AU] Inpex [1605 JP] Liquefied Natural Gas Ltd [LNG AU] Medco Energi Internasional [MEDC IJ] Noble Group [NOBL SP] Oil Search [OSH AU] PetronetLNG [PLNG IN]
(1) REGIONAL WINNERS Strategy
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Company Profiles
Company Profiles
63
Fred Lucas
BG Group
Figure 37: BG Group - Location of LNG assets

6.0
(Brindisi LNG, Italy, 80%)
4.4
(Dragon LNG, UK, 50%)

17.3
(Lake Charles, 100%)

4.2 7.2
(Elba Island, 100%)

15.1
(Egypt, 36.75% ***)
(Trinidad & Tobago, 29.9% **)
(Quintero LNG, Chile, 0%) *

2.5
6.0
(Jurong Island, 0%)
8.5
(QC LNG, 93.8%)
Operational Liquef action capacity (MT pa) Liquef action capacity under development (MT pa) Operational Re-gasif ication capacity (MT pa) Re-gasif ication capacity under development (MT pa)
Source: J.P. Morgan. * BG Group owns 40% of GLNQ which owns and operates the 2.5 MT pa LNG import terminal in Quintero Bay, Chile it has a 21-year supply commitment of 1.7 MT pa to its three partners (ENAP, ENDESA and Metrogas S.A.). ** Effective average interest in Atlantic LNG Trains 1-4. *** Effective average interest in ELNG Trains 1-2.
LNG strategy assessment

Integrated gas chains at the heart of BG Group's strategy.this is differentiated to other IOCs
Notwithstanding BG Groups prolific success in the oil biased pre-salt play , offshore Brazil, finding gas and creating gas value chains remain at the very heart of BG Group's very successful strategy (Figure 38). BG Group's strategy is thus differentiated from the oil majors - it has a focus on both ends of the gas value chain and positions itself on the most desirable links. This has run as far downstream so as to include helping to develop a country's downstream market for gas e.g. in Brazil (ComGAS, Sao Paolo) and India (Gujarat and Mahanagar gas supply franchises). BG Group has long had a distinctive production bias to gas (Figure 51). This has led to an upstream portfolio with below average unit costs, but below average unit realizations. So, connecting low cost gas to high value markets has been and remains at the epicenter of BG Groups strategy. Via LNG, BG Group connects multiple markets (demand centers) to upstream gas resources and multiple sources of gas to markets.
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Figure 38: BG Group's strategy distinctive, but non-exclusive focus on gas
Global Gas Major
Connect gas to high-value markets

Build & access markets Serve customers
Secure competitively priced resources

Equity reserves Contracted resources
Skills to succeed across the gas chain

BG Group has proven itself to be the strategic innovator in global LNG.
If we exclude the experience of legacy British Gas which actually imported the first cargo of LNG in to the UK from Algeria in 1964 (the British Gas Council see Appendix VI), BG Group was actually a relatively late arrival to the LNG industry, participating in the construction of its first LNG project (Atlantic LNG) in the mid1990s. Hitherto, its gas exposure had been focused on upstream assets and piped gas. Fortunately, the period of its entry coincided with the bottom of the liquefaction cost curve. Indeed, BG Group's plants in Trinidad & Tobago (Atlantic LNG) and Egypt (Egypt LNG) registered the lowest unit capital costs of any liquefaction facility (Figure 39).
Figure 40: Pace of LNG project commercialization (Years)
FID PENDING
Figure 39: Liquefaction projects - unit capital costs ($ per Ton)

4000 3500 3000 2500
18 16 14 12
UNDER DEVELOPMENT
BG projects
2000 1500 1000 500 0
10 8 6
PRODUCING
4 2 0 Egypt LNG Atlantic LNG QC LNG LNG project to EPC contract RasGas Qatargas Nigeria
EPC award to first LNG
Relatively late arrival to LNG, but moved aggressively and efficiently
BG Group has also proven itself able to commercialize LNG projects faster than any other rival (Figure x). For example, QC LNG remains on track for first LNG within six years of BG Group's first move in to Australian coal bed methane in 2008 via an alliance with Queensland Gas Company (QGC). Given the typical long lead times for LNG projects, shortening (elongating) lead times really unlocks (erodes) project value. Its ability to compress LNG project cycle times has been helped by its ability to contract for off-take itself (so reducing often lengthy marketing timelines), as well as careful choice of service contractors.
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As with many things that it does, BG Group moved both decisively and very aggressively in to the LNG business, seeing its presence and capabilities therein as a plank of its global integrated gas strategy. Martin Houston spear-headed this particular growth axis within BG Group soon after it was separated from legacy British gas. He was recently appointed COO and is widely regarded by investors to be a leading contender to be BG Groups next CEO in 2013 when the incumbent, Sir Frank Chapman, has indicated he intends to retire from the board.
BG Group did not follow the entire LNG rule bookit appended some new rules
Understanding the dynamic nature of gas value chains, BG Group went on to very purposefully establish an exposure to every part of the LNG value chain starting with low cost upstream gas supplies, multiple LNG liquefaction facilities (owned), multiple LNG import terminals (leased), LNG ships (owned and chartered)and long / short term supply and off-take contracts (Figure 41).
Figure 41: BG Group - capturing value along the entire LNG value chain
PRODUCTION Low Cost Supply
LNG VALUE PROPOSITION LIQUEFACTION SHIPPING REGASIFICATION Midstream margin
MARKETS
Downstream Margins
Portfolio Optimisation & Leverage Swap & Arbitrage
Gas market foresight led BG Group to make some well timed contractual innovations which leveraged what is otherwise a relatively low return business. The LNG industry had a well established modus operandi in effect, a rule book as to how upstream producers and liquefaction owners were supposed to contract off-take. In many respects, the LNG industry was trapped by historic convention and conservatism - it was ripe for some innovative thinking. BG Group didnt tear up this rule book, but rather using its experience in gas marketing it inserted a few new pages. Indeed, BG Group has driven industry change in the LNG world and must be regarded as a strategic innovator in what was relatively static industry. In our view, BG Group may be fairly described as the Agent Provocateur of the LNG business. Strategic firsts Specifically, BG Group innovated in the following commercial areas:
BG Groups many firsts
1.
First to secure large and long term secure access to US import capacity - This move was originally intended to secure access for LNG exports from other countries to reach the US market, the worlds deepest and most liquid gas market, and thus secure then high US gas prices (when Henry Hub spot gas was $8+ per mmbtu). However, as the US gas price weakened, those same import rights gave BG Group assured market access for its contracted supplies which it could then divert to higher priced markets. So, BG Group used its re-gasification capacity rights as secure market access to anchor flexible destination third party supply contracts.
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first to recognize the value of supply flexibility
2.
First to purchase large volumes of LNG with diversionary rights The LNG industry was set up under a simple commercial model which was invariant for decades - fixed destination contracts. The seller of LNG was obliged (by contract) to supply that cargo to a pre-agreed import terminal over 20+ years. Dedicated LNG vessels ran these so-called milk runs with no ability to divert. Changes in either price or volumes were restricted and limited to informal negotiation between buyer and seller. Asian buyers of LNG prized the certainty of price and volume provided by these long term contracts. In many respects, BG Group used its experience of gas marketing (Figure 42) to pioneer the concept whereby the buyer of LNG negotiated the right to divert LNG cargoes to multiple markets at its discretion converting the historic concept of batch LNG supplies to something much more valuable. This choice allowed BG Group to divert cargo flows to the highest priced markets around the world. BG Group negotiated different price upside rent sharing agreements with each supplier. BG Group used its insights in to gas markets and its US re-gasification capacity rights (that ensured access to a deep market to place the LNG if it had to) to procure large volumes of LNG which it could then divert to the highest margin markets. Most of its competitors (owners of upstream resource and liquefaction capacity) continued to look to monetize their upstream resources via third party buyers under fixed destination contracts.
Figure 42: LNG supply and portfolio optimization
EVOLVING THE CONCEPT OF LNG (GAS) MARKETING
Marketing - Term sales - Customer interface - Projects - Business development

Logistics - Gas scheduling - Volume balancing - Transportation mgt - Deal capture
Optimisation - Daily sales - Customer fulfillment - Market/volume risk mgt - Location/time arbitrage
.and the value of a portfolio of supply points
3.
First to invoke the concept of portfolio supply BG Group also pioneered the concept of a portfolio sales agreement wherein a buyer agreed to purchase a defined volume of LNG over a defined period as per a conventional LNG sales and purchase contract. The key difference is that BG Group committed to supply the LNG volumes from its portfolio of supply sources rather than a specific facility or contract (see Table 11 contracts with GSPC of India and Tokyo Gas). This enabled BG Group to retain overall supply flexibility and thus optimize its portfolios diversionary capabilities. First to use coal bed methane as a source for an LNG export project BG Group was the first of many non-Australian companies to move to aggregate upstream real estate rights in Australia specifically with coal bend methane to LNG supply potential. Although its somewhat ambitious attempt to acquire Origin Energy failed, it successfully acquired two other listed companies - QGC and Pure Energy. Of the four best defined projects that will liquefy and export gas from coal seams, BG Groups QC LNG project is now clearly in front of queue. Three competing projects in Queensland that are led by Santos,
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Likely to be first to supply and convert non-conventional gas to LNG
4.
ConocoPhillips and RD Shell follow in its wake. We believe that being first will give BG Group a cost and execution advantage over competing projects, although we expect all projects to run over budget (not least due to AUD/USD appreciation) and behind schedule (as most LNG projects do). 5. First to sign a long term purchase contract for LNG exports from the East Coast of the USA BG Group recently signed a 20 year supply agreement with Cheniere Energy Partners, L.P. (Cheniere) for 3.5 MT pa from the Sabine Pass facility in western Cameron Parish, Louisiana. BG Group will pay Cheniere a fixed take-or-pay fee of $2.25 per mmbtu to cover procurement, liquefaction and loading costs in Year 1. Thereafter 15% of this fee ($0.34 per mmbtu) escalates with inflation. A second flexible component will see BG Group pay 115% of the Henry Hub price. BG Group is responsible for shipping costs (spot rates currently around $1 per mmbtu to Europe and $3 per mmbtu to Asia although BG Group will have its own shipping capacity at below current spot rates) to source volumes from the US pipeline system. This gives BG Group another low cost source of LNG which is not yet dedicated to any particular market without exposing itself to the capital requirements of a liquefaction facility. As below, we note that Cheniere has since entered in to two further sale and purchase agreements. Sabine Liquefaction is developing a liquefaction project at the Sabine Pass LNG terminal that would include up to four liquefaction trains capable of producing 18 MT pa - it is targeting selling c.14 MT pa of the capacity under long-term SPAs. a. Gas Natural Aprovisionamientos, a subsidiary of Gas Natural Fenosa (GNF). Under the agreement, Gas Natural Fenosa (GNF) will purchase close to 500 MMcf/d of LNG from the Sabine Pass liquefaction facility for a period of 20 years, with an extension available for another 10 years. GNF will pay a take-or-pay tolling fee of $2.48 per mmbtu and the same flexible component as BG Group (115% Henry Hub). GAIL (India) Limited, a subsidiary of the Gas Authority of India. GAIL has agreed to purchase c.3.5 MT pa of LNG from train four. The SPA has a term of twenty years and an extension option up to ten years. Prior to the commencement of T4 operations (expected 2017), GAIL will purchase bridge volumes of 0.2 MT pa upon the commencement of T2 (expected 2016). GAIL will purchase LNG on an FOB basis for a purchase price indexed to the monthly Henry Hub price plus a fixed component of $3.00 per mmbtu. This is 33% higher than BG Groups equivalent deal which clearly benefited, once again, from its first mover status.
b.
Sabine Liquefaction is advancing towards making a final investment decision for the construction of first two trains (Phase 1). This means that 78% (7 MT pa) of the 9 MT pa capacity of Phase 1 has been contracted. Cheniere was granted an export license from the US DOE on 20 May 2011 for up to 15 MT pa without constraints on where the LNG is exported to. Strategic errors However, BG Groups pioneering and aggressive growth strategy in LNG has also included some strategic errors, as we highlight below. Fortunately, none have had very severe consequences for the profitability of its LNG franchise or the group. Furthermore, we believe that the risks that BG Group ultimately assumed were well worth taking, even with hindsight.
Rapid innovation also surfaced a number of strategic errors
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Strategic focus on Atlantic Basin rather than Asia Pacific was a mistake
Entry to Asia Pacific LNG market could have been much sooner Although BG Group attempted to enter Asia Pacific based LNG projects e.g. PNG LNG, it failed do so and thus failed to establish a resource / liquefaction presence in Asia Pacific. Instead, it focused on what it believed would be a higher growth LNG demand opportunity in the Atlantic Basin. In 2003 (BGs LNG Business 13 November 2003), BG Groups management described Asia Pacific as a mature region with a supply over-hang it expected Atlantic Basin LNG demand to triple by 2010 causing market tightness and real price tension. Reflecting this view, BG Group actually sold out its position in Tangguh LNG, Indonesia and promoted such projects as Pacific LNG to take gas from Bolivia through to an export terminal in Chile (which now imports LNG) and OK LNG (in September 2006, management indicated an FID for this four train 22 MT pa Nigerian green field project would occur in early 2007). As the LNG demand growth outlook in the Atlantic Basin slowed, primarily as a result of the advent of US gas shale which reduced that countrys need for LNG (see below) and as China entered the Asia Pacific demand picture, this strategy looked increasingly 'second best' to one that positioned BG Group on the ground in Asia Pacific. BG Groups LNG pricing thesis in the last decade was that Henry Hub would over-take oil price indexation in Asia it believed that Asia would cease to be the premium market for LNG and Henry Hub pricing would actually exceed oil indexed pricing. This bold LNG price outlook has essentially done a back-flip with BG Group now very keen to see its equity LNG off-take sold on an oil price link. To be fair, we must acknowledge that BG Group effectively 'globalized' its LNG business without investing in several capital intensive liquefaction centers via multiple customers and supply propositions. By 2011, it had sold to 22 of 23 LNG importing countries and purchased cargoes from 12 of 18 LNG exporting countries. US re-gasification capacity rights could have been much smaller, it joined (if not led) the industry gold rush - BG Groups decision to take on very significant US re-gasification capacity was based on a view that the US would have a rising need for imported LNG this proved totally incorrect following the surge in US gas shale production. In 2003, management showed US LNG demand forecasts ranging from over 40 to over 60 MT by 2010. In 2010, the US actually imported less than 9 MT of LNG. This has seen BG Groups leased capacity rights largely unused in 2011. Figure 45 shows the diminishing number of cargoes that BG Group has sold in to the US market as the US gas price has weakened. Fortunately, the fixed cost lease payments which BG Group must make to keep these facilities largely idle are small. We acknowledge, however, that secure access to the deep US gas market via these import terminals enabled BG Group to develop a very flexible portfolio which, in turn, has generated very strong earnings through cargo diversions. Italian re-gasification project has stalled BG Group initiated a new regasification terminal in Italy (the countrys first since 1971), with a view to import third party LNG from Damietta LNG in Egypt and to divert cargoes from Egypt LNG Train 2 directly to the Italian market. At the time, this was seen as a potentially attractive arbitrage play with the US market. In November 2003, BG Group management indicated that its Brindisi re-gasification terminal would be operational by mid-2007 with a capacity of 6 MT pa (BG Group to have 80% of the terminals capacity while the remainder will be subject to regulated third party access). In September 2006, BG pushed the start date back to 2009.
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Over-exposed to US regasification capacity which is now largely redundant
Italian re-gas project has been delayed 7-8 years
However, construction activities have been suspended since February 2007. The timing of first deliveries to the Brindisi terminal is dependent on how soon access to the site can be restored and resolution of the various outstanding legal matters. We note that the full Environmental Impact Assessment (EIA) which was completed in 2003 is still valid.
Late to US gas shale party.as were most other non-US companies
Like many others, BG Group was also late to spot the US gas shale opportunity - BG Group missed the US gas shale opportunity (as did almost every other non-US independent) and thus arrived late to the play via a joint venture with EXCO Resources in 2009, albeit as did most of its competitors. Although it was one of the first large players to move in to the Australian coal seam gas to LNG opportunity, arguably it could have done so sooner with an increased organic bias. Moving when it did necessitated acquisitions to muscle in to the play an earlier organic build up might have been done at lower cost. That said, the companies and assets that BG Group purchased have seen total 3P resources rise from c.5 TCF to over 20 TCF, so its acquired resources have since grown very materially. Locked in LNG sales volumes and prices in 2009 for 2010-12 - In order to protect a very important earning stream and to reassure the market about its sustainability in what (pre-Fukushima) looked like a potentially over-supplied LNG market when viewed back in 2009, BG Group locked in 80% of its LNG off-take at fixed or semi-fixed prices 2010-12. It thus left only 20% of its volumes with source, destination and pricing flexibility. Sales volumes were thus left substantially un-hedged in 2013 onwards based on their assessment that the market would tighten in 2013. Global demand strengthened dramatically during 2010 as the global economy recovered, rising by 23%. Fukushima then triggered a further acceleration in global demand growth in 2011 - we estimate to over 15%. So, management reduced its portfolio flexibility just when its value could have been maximized following the market dislocation caused by Fukushima. We must acknowledge, however, that BG Group has raised its 2011 LNG segment EBIT guidance three times (i) from $1.8bn to $2.0bn to $1.9bn to $2.2bn (ii) from the latter to the high end of the range of $1.9bn to $2.2bn (iii) from the latter to $2.4bn with its Q3 2011 results (announced 25 October 2011). We note that the EBIT upgrade from $1.9bn (mid-point of first guidance range) to $2.4bn is $0.5bn. If this increase is exclusively tied to superior margins on the 20% floating component of its portfolio only, this might imply that un-hedged, EBIT guidance could have reached over $4bn. As such, we believe that BG Group has given up very meaningful upside by its prior period hedging strategy this is apparent from Figure 46 which shows a notable decline in estimated EBIT per LNG cargo in 2010-11. With hindsight, management should have retained greater flexibility in order to exploit market dislocations. Fortunately, the hedging levels reduce in 2012 and, according to management BG Group will be substantially unhedged in 2013. We expect BG Group management to refresh its LNG EBIT guidance for 2012 and 2013 at its Annual Strategy Update on 7 February 2012.
Strategy always recognized potential for market dislocations, yet locked in high percentage of prices and volumes to certain buyers 2010-12
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Liquefaction assets
Legacy operating assets were built at very low cost at the bottom of the liquefaction EPC cost curve
As per Table 10, BG Group has interests in six operational LNG trains - four in Trinidad & Tobago (Atlantic LNG) and two in Egypt (Egypt LNG) with a total net capacity at end 2010 of 7.18 MT pa. This capacity is split 63% Atlantic Basin and 37% North Africa. The average capacity of BG Groups six operational trains is 3.7 MT pa. All of BG Groups liquefaction trains have operated very safely and reliably since their commissioning. Realistically, given robust government gas depletion controls and the prioritization of domestic gas uses (power, fertilizers and residential), we believe that it is presently unlikely that either Atlantic LNG or Egypt LNG will be able to add a fifth / third train respectively. We note that BG Group was discussing the concept of a fifth train (third train) with the government of Trinidad (Egypt) back in 2002. BG Group has contracted gas that could either be used to support a fifth train or backfill existing trains in Trinidad. However, it needs to discover more gas in Egypt to warrant a third train. So, BG Groups existing portfolio of liquefaction assets bears limited expansion options. With the exception of BG Groups first train (Train 1, Atlantic LNG) which operates as a merchant facility (i.e. it buys gas which BG Group does not produce and sells the LNG directly), BG Group supplies equity upstream gas to all of its liquefaction trains which act as tolling facilities. Also, with the exception of Train 1, Atlantic LNG, all of BG Groups LNG train interests operate under a tolling model i.e. charge the users a liquefaction tolling fee. This secures the invested capital therein with a reasonable rate of return.
No real expansion options given government policies in Egypt and Trinidad
Table 10: Liquefaction interests

Plant Trinidad & Tobago Train 1 Train 2 Train 3 Train 4 Egypt Train 1 Train 2 Start date 1999 2002 2003 2005 2005 2005 Gas Supply mmcfpd 520 560 560 800 565 565 BG Group equity supply No Yes Yes Yes Yes (50%) Yes (50%) Capacity MT pa 3.1 3.4 3.4 5.2 3.6 3.6 BG Group equity % 26.0 32.5 32.5 28.9 35.5 38.0 Net capacity MT pa 0.8 1.1 1.1 1.5 4.5 1.3 1.4 2.6 7.2 Plant type Merchant Tolling Tolling Tolling Tolling Tolling Off-take agreements GdF Suez 60%, Gas Natural 40% BG Group 50%, BP 50% BG Group 25%, BP 75% BG Group 28.89%, Others train partners 71.11% GDF Suez (100%) BG Group (100%)
Total operational capacity Firm development projects Australia QC LNG Train 1 2014 Train 2 2015 Total development capacity
700 700
Yes (95%) Yes (98.75%)
4.25 4.25
90.0 97.5
3.8 4.1 7.9
Tolling Tolling
Qunitero LNG, Singapore LNG Tokyo Gas, CNOOC for both trains
Conventional projects delayed, BG Group turned its strategic focus to coal bed methane in Australia
Ideally, BG Group would have added additional green field capacity sooner (in order to optimize contractor engagement and deployment of in-house project capabilities), but its participation in potential projects was either cancelled e.g. Bolivia (Pacific LNG) and Iran (Pars LNG) or experienced open-ended delays e.g. Olakola LNG (Nigeria). BG Group thus turned its strategic focus to coal seam gas in Australia given clearer political support and an easier business environment. Via a series of corporate acquisitions (QGC and Pure Energy, both in 2009) and subsequent asset acquisitions, BG Group took the leading position in the worlds emerging hub for coal seam gas to LNG projects in Queensland.
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Front of project queue in CSG to LNG, Queensland
BG Group now has two trains under construction in Queensland, Australia (QC LNG), with the first of these due to be commissioned in 2014 and the second in 2015. These two trains will raise the average capacity of its suite of trains from 3.7 to 3.9 MT pa and will be BG Groups 7th and 8th trains in just 12 years. Notwithstanding flooding in Queensland, which disrupted BG Groups land drilling campaign, BG Group remains confident that Train 1 will be commissioned in 2014. For now, this remains credible we note BG Groups differentiated track record of LNG project delivery. QC LNG is a great opportunity for BG Group to demonstrate that its track record reflected its core competencies rather than a benefit of the easier construction cycle / easier project types. A third train at QC LNG in Australia is also looking very likely, in our view, given the scale of estimated resources (last estimated by BG Group to be 3P resources of 21 TCF February 2011) and the progress that BG Group is making contracting the off-take from a third train. BG Group would like to sanction a third train within 18months of taking FID on the projects first phase. The CEO has indicated that a third train is unlikely to be sanctioned before H2 2012, but the ideal time is before the end of Q3 2012 to maximize project efficiency. We note that the site in Queensland has space for up to 5 trains with a total capacity of 20 MT pa. In order to sanction a third or fourth train, BG Group must convert more of its equity owned 3P resource to 2P and 1P. Alternatively, if not in addition, there is potential for acreage swaps with other companies and supply collaboration given other companies may have incentive to supply sooner to a third party export project. Indeed, BG Group (Walloons CSG) recently agreed such a gas supply agreement with Toyota Tsushu Corporation to take gas from ATP 651P for twenty years. So, in addition to the 7.97 MT pa under development, we also see potential for a third 4.25 MT pa train with BG Group owning 100%, which could be operational by 2016-7. QC LNG will be BG Groups first liquefaction position in Asia Pacific and to be located in an OECD country. It also looks very likely to be the worlds first liquefaction plant to be supplied from non-conventional coal seam gas (CSG); at least three other competing CSG to LNG projects will follow it.
Train 3 QC LNG continues to look very likely
Tanzania could be its next green field project
Subject to the outcome of its multi-well offshore drilling program (first well spud late December 2011 with results likely in Q1 2012), BG Group may also ultimately lead a green field LNG project in Tanzania. This could see BG Groups net liquefaction capacity exceed 20 MT pa by 2018. The average (gross) size of BG Groups operational liquefaction trains is 3.7 MT pa. If we include three trains at QC LNG (each 4.25 MT pa) and one train at Tanzania LNG (6.6 MT pa), its average train size increases to 4.2 MT pa. For now, at least, a 3 MT pa floating LNG solution in the Santos Basin (Brazil) looks unlikely in the near term with the gas more likely destined for the domestic market via pipeline. BG Group has indicated that the FLNG will be held in reserve as an additional flexibility to be deployed later. We believe that Petrobras must first define a master plan for Brazilian gas supplies which more clearly defines the role of domestic supplies and piped/LNG imports. This, in turn, will define the scope for regular LNG exports via an FLNG scheme in the Santos Basin. BG Group is pursuing one further potential liquefaction project. In July 2011, BG Group and Southern Union received US DoE approval to export up to 15 MT pa over a 25-year period to countries that have free trade agreements with the USA. Central to BG Groups strategy is the ability to source low cost gas (ideally at a small premium to Henry Hub) and sell it as LNG in Asia Pacific on an oil price index.
Santos FLNG looking less likely
One more option for US LNG exports
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1 TCF offshore Gaza could feed Nobles LNG export scheme
Finally, we note that BG Group retains title (90% to be reduced to 60% if the Consolidated Contractors Company and the Palestine Investment Fund exercise their participation options at development sanction) to, and is operator of, the offshore Gaza Marine license. Two discoveries were made in 2000 (Gaza Marine-1 and Gaza Marine-2) with contingent resources estimated to be 1 TCF. In 2007, BG Group ended gas sales negotiations with the Israeli government and, in 2008 it closed its office in Israel.
LNG supply sources & contractual commitments to supply

BG saw the value in portfolio optimization
In essence, BG Group was the first company to recognize that a set of LNG purchase agreements and another set of LNG sales agreements created a portfolio optimization business opportunity with a very different set of value drivers to a conventional LNG business. The enabling hardware required (or firm access thereto) was low cost shipping capacity and low cost import capacity. The enabling software was a very good understanding of the pricing dynamics in multiple markets and very strong relationships with many high quality downstream customers. As per Table 11, BG Group has a diversified set of long term supply sources, some from third parties (i.e. sourced from projects in which BG Group does not participate) and others from BG Group equity LNG projects (e.g. in Egypt and Trinidad). Including the recently announced agreement to purchase 3.5 MT pa from Sabine Pass (USA) with Cheniere Energy and assuming that Nigeria LNG Train 7 is eventually sanctioned, the aggregate supply sources may reach 27 MT (24.7 MT pa excluding NLNG Train 7). In addition to these volumes, BG Group may pick up short-lived supplies in the market it buys and sells spot LNG cargoes on an ad hoc basis. As such, BG Groups LNG supplies are not overly dependent on the performance any specific asset / source.
BG Group remains long LNG supplies
Table 11: BG Group - sources of contracted LNG and contractual supply obligations
Long term sources of LNG supply (purchase contracts) Atlantic LNG Trains 2-3 Egypt LNG Train 2 Equatorial Guinea Atlantic LNG Train 4 Nigeria LNG Trains 4-5 Queensland Curtis LNG Trains 1-2 Sabine Pass LNG * Nigeria LNG Train 7 Long term LNG supply commitments (sales contracts) Quintero LNG, Chile * Singapore GSPC, India CNOOC, China Chubu Electric Power Inc. Tokyo Gas Co., Ltd Firm supply (MT pa) 2.1 3.5 3.3 1.5 2.3 8.5 3.5 2.3 27.0 Supply (MT pa) Up to 1.7 Up to 3.0 Up to 2.5 3.6 Up to 0.4 1.2 Up to 12.4 S&P agreement start up Q4 2005 Q1 2006 Q4 2006 Q2 2007 Q3 2007 2014 TBC TBC Start up 2009 2013 2014 2014 2014 2015 Years 20 20 17 20 20 20 20 Years 21 20 20 20 21 20 Shipping FOB FOB FOB FOB CIF TBC CIF Source QC LNG LNG portfolio LNG portfolio QC LNG LNG portfolio QC LNG + LNG portfolio BG in LNG export project Yes Yes No Yes No Yes No No BG in LNG import project Yes Yes No No No No
Source: J.P. Morgan. * BG Groups supply contract in to Chile is on a US Henry Hub index (the higher of Henry Hub or Brent until end 2013 and then a pure Henry Hub link) which provides BG Group with an internal hedge if the Henry Hub price rises very significantly thus raising the cost of its LNG via its supply deal with Cheniere (Sabine Pass). Their agreement includes an option to extend by up to 10 years.
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We have not included QC LNG Train 3 volumes (4.3 MT pa) which are currently being marketed, but may be purchased in part or outright by BG Group. According to BG Groups management its firm supply volumes could reach 32 MT by 2017-18 and it sees a blue sky upside supply scenario with over 50 MT pa of supplies by the end of this decade. BG Group also has six contracts to supply LNG that total up to 12.4 MT pa four of these are specifically sourced from QC LNG, the other two may be supplied from anywhere within BG Groups supply portfolio. According to BG Groups management (February 2011 Strategy Update), 75% of its LNG sales contracts will be oil priced linked by 2015 (70% of total sales will be oil / oil price indexed versus 50% in 2010). As per Figure 49, BG Groups LNG portfolio remains long supply sources versus contracted supply obligations. This excludes potential new sources of supply, e.g. from Tanzania LNG that could start up 2018-19.
Supply portfolio leaves ample flexibility to reach highest priced markets
BG Group was the first LNG player to recognize and exploit the value of supply flexibility. Its supply configuration leaves BG Group effectively long LNG supplies that are not contracted to any specific destination. This is a key competitive advantage that leaves BG Group in a very strong position to continue to divert LNG cargoes to the highest priced markets given its ability to send cargoes to the US East Coast as the lowest priced market of last resort. BG Group, in common with all of its competitors, does not disclose details on its supply agreements - either to buy or sell LNG. However, we understand that all of its sales contracts to third parties are set close to oil price parity, whilst its LNG purchase contracts (with itself and third parties) are set closer to parity with a Henry Hub gas price index.
LNG re-gasification capacity

As per Table x, BG Group has 21.5 MT pa of LNG re-gasification capacity on the East Coast of the USA via its capacity rights to the Lake Charles and Elba Island LNG import facilities. Access via both these terminals (neither owned by BG Group) is an absolutely vital piece of enabling infrastructure access that has allowed BG Group to take on long term LNG supply sources which has, in turn, left it very well positioned to exploit regional price arbitrage by re-directing cargoes to premium priced markets. In 2008, the Energy Market Authority (EMA) of Singapore appointed BG Group as the aggregator of LNG demand for the Singapore market, hitherto a piped gas market only. BG Group is responsible for supplying up to 3 MT pa of LNG for up to 20 years with initial deliveries in 2013. As per Table 12, BG Group has agreed to supply up to 3 MT pa from its global portfolio of LNG sources. BG has also signed 15 gas sales contracts with various customers (primarily local utilities) in Singapore totaling 2.6 MT pa. BG Group will also look to aggregate and offer customers spot volumes.
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Table 12: BG Group - re-gasification terminal capacity rights

Terminal Lake Charles, USA Elba Island, USA * Dragon LNG, UK ** Quintero LNG, Chile *** Total operational capacity Expansions / developments Brindisi LNG, Italy Jurong Island, Singapore Total new capacity Start date Phase 1 Jan 2004 Phase 2 July 2006 Phase 3 Mar 2010 Jan 2004 - May 2007 July 2009 Jan 2011 TBC 2013 Re-gasification capacity MT pa 13.4 3.9 4.2 4.4 2.5 6.0 6.0 BG Group capacity rights / equity % 100 100 100 50 0 80 0 Net Capacity MT pa 13.4 3.9 4.2 2.2 0.0 23.7 4.8 0.0 4.8 Contract Leased Leased Leased Leased Owned Option to access Owned Aggregator role
Source: J.P. Morgan. * Of which 1.2 MT pa may be supplied by Marathon. Capacity reflects facilitys second expansion. ** Petronas owns the other 50% *** BG Group currently holds no capacity in the terminal but has the option to acquire capacity if needed to support BG Groups downstream market development. It is committed to supply 1.7 MT pa to its three partners ENAP, ENDESA and Metrogas.
LNG shipping assets

BG Group has a long history in LNG shipping having been involved in the development of both the prototype and the worlds first working LNG carriers. Its shipping activities are today directed towards meeting the needs of the groups LNG and crude oil trading. In essence, BG Groups LNG shipping strategy is designed to optimize the trade-off between operational flexibility and the after-tax cost of supplying LNG.
Rights to shipping were a key enabling asset for BGs LNG strategy
BG Group originally built out its shipping capacity via chartering when the LNG shipping market was short. Such secure access to shipping capacity filled an important infrastructure link that enabled BG Group to take on re-gasification capacity rights, to lock in long term supplies of LNG and to build a downstream customer base. BG Group has a core fleet of 13 LNG vessels. It owns four of these ships and, via a sale and leaseback arrangement, charters the remaining nine vessels (two under time charter and seven under bare boat charter contracts). BG Group also has a number of smaller and slightly older LNG vessels (2005-10) which it charters. At any time, BG Group has firm access to around twenty vessels four via direct ownership, nine under long term charter agreements and the balance via shorter term charter agreements subject to its needs and the market conditions. Management believes that as an LNG principle (i.e. a company with firm supply and off-take contracts), BG Group would have advantaged rights to yard capacity in Asia should it want to build more vessels. The average size of its core fleet of thirteen boats is 152,170 cubic meters or around 108,000 DWT - this is 38% larger than the global average vessel size (estimated to be around 78,500 DWT). BG Group does not own any of the much larger Q-Max or Q-Flex vessels and, having taken delivery of four vessels in 2010 it does not have any vessels under construction although it is finalizing a JV structure with CNOOC for the design and construction of two LNG vessels.
BG Group has done 9 sale and leasebacks it only owns four vessels
LNG portfolio valuation

Superior disclosure enables more rigorous analysis and valuation
BG Group is one of the very few companies to present an LNG EBIT and associated operational and financial information. Indeed, BG Group discloses more on its LNG business than any other company that is featured in this note. So, we cannot criticize
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its disclosure policies as we do for some other companies we can only commend BG Group for its disclosure leadership. Consequently, we are able to perform more meaningful analysis on BG Groups LNG business compared to all other companies featured in this note.
LNG negative free cash flow 2011 to 2015
BG Group is one of the few companies where it is possible (given differentiated disclosure policies on this business) and it makes sense to value its LNG business separately and, indeed, it is very important to do so, in our view. We can estimate a notional free cash flow from its LNG business (Table 13). However, we must make the following caveats about this analysis: (i) although we understand that LNG profits are channeled through relatively low tax rate jurisdictions, we do not know the effective tax rate on this stream (ii) we exclude working capital movements and interest payments (iii) actual cash flows from liquefaction projects are typically constrained until project finance debt has been repaid; until then there are dividend constraints (iv) BG Group does not give specific capital expenditure guidance for LNG it only guides for group capital expenditure (Feb 2011 guided to $21bn in 2011-12 with $10bn in 2011 assuming reference conditions which include USD/ 1.50 and USD/AUD 1.20). It does, however, report LNG capex when spent each quarter. With these caveats, this analysis underlines that a business which has recently (2007 to 2010) generated positive free cash flow will (2011 to 2013) quite likely generate negative free cash flow given BG Groups move back in to more capital intensive liquefaction in Australia. This shift has knock-on consequences for BG Group's free cash flow, which we also expect to be negative 2011 to 2014 given heavy capex commitments elsewhere in its upstream portfolio (e.g. the Brazilian pre-salt). We forecast that BG Group's gearing ratio will rise (Q3 2011 27%), which we expect will peak in 2013-14 at around 35% (ND/ND+E). In order to safeguard its single-A credit rating a stated priority of management - we expect BG Group will divest more nonstrategic assets.
Table 13: BG Group - LNG segment notional free cash flow (m)
m EBIT $m EBIT Tax rate Notional Tax Capex Depreciation Cash flow 2001 42 29 25% (7) 104 2 (80) 2002 12 8 25% (2) 117 4 (107) 2003 126 77 25% (19) 301 5 (238) 2004 182 99 25% (25) 417 13 (330) 2005 329 181 25% (45) 422 24 (262) 2006 643 352 25% (88) 496 38 (194) 2007 1,047 521 25% (130) 194 45 242 2008 2,983 1,585 25% (396) 273 56 972 2009 2,405 1,551 25% (388) 653 49 559 2010 2,449 1,583 25% (396) 1,200 95 83 2011E 2,460 1,525 25% (381) 1,518 107 (267) 2012E 2,674 1,743 25% (436) 2,000 112 (581) 2013E 3,342 2,178 25% (545) 2,000 117 (250) 2014E 3,830 2,496 30% (749) 1,750 267 264 2015E 4,974 3,242 35% (973) 1,750 417 936
Around $20bn, 13bn or 375 pence per share
We assign a relatively low value to BG Groups liquefaction assets in Egypt and Trinidad which, as we have discussed, act as tolling plants (with the exception of Train 1, Atlantic LNG). It is not yet clear how much of the value of QC LNG will be concentrated within the LNG factory gate versus Upstream and/or in Shipping & Marketing. We have, somewhat arbitrarily, assigned 55% of our total value for QC LNG to the LNG segment. At some point, we expect BG Group to clarify how the rent from this project may be apportioned. We assign a much higher value to BG Groups Shipping & Marketing stream. In our view, this stream is enabled by a shipping fleet, re-gasification terminal access rights and an advantaged LNG trading function. Rather than value each of these
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components separately, it is easier (and arguably more sensible) to value the Shipping & Marketing stream as a whole, recognizing that these underlying tangible and intangible assets support it. However, putting a definitive value on a flexible set of supply agreements is difficult.
Table 14: Valuation of BG Group's LNG franchise
Pence m per share 606 87 3.5 457 13 3,057 90 6.0 9,831 288 15.1 7.5 13,951 409 Source: J.P. Morgan. * enabled by capacity rights at LNG import terminals, ships (owned and chartered) + long term supply and sales contracts Infrastructure / capability Atlantic LNG Trains I-IV Egyptian LNG Trains I-II Queensland Curtis LNG I-III Shipping & Marketing + enabling assets & capabilities * We value the LNG franchise at 7.7bn or 225 pence per share Net capacity MT pa 4.5 2.6 8.0 Implied EV/EBITDA 2012E
As per Table 14, we value BG Groups LNG franchise at around 14bn or almost $21.4bn - this equates to around 409 pence per share, approximately 19% of our sum-ofthe-parts of around 19.6 per share. This compares to cumulative sunk investment (un-depreciated) by end 2011 of around 5.7bn. According to the company (December 2011), the sell-side range for the value of this stream runs from 200 pence to 760 pence with a mean around 400 pence. However, as above, analyst estimates vary depending how much of QC LNGs value is allocated to the upstream segment versus the LNG segment. The stream represents around 33% of our group EBIT forecast for 2012. This segment valuation equates to a 2012E segment EV/EBITDA multiple of 7.5x which we feel is conservative given the (i) durability of the stream (ii) the very low risk nature of price arbitrage trading profits (iii) its high free cash conversion characteristic given low taxes (the profit is realized in low tax rate jurisdictions e.g. the UK) and low capital requirements (with the exception of QC LNG, much of the necessary infrastructure has already been either built or leased) (iv) 2012E EBITDA is still suppressed by some out-of-the-money fixed price hedges relative to spot pricing (v) such a distinctive array of assets, skills and customer relationships. If we assume a 25% segment tax rate, the implied 2012E PER is around 10x. Again, we feel that this is relatively low, but putting an accurate boundary around the profits and cash flows of BG Groups LNG business is trickier given the blurred value boundaries around QC LNG.
Value is dominated by portfolio of low cost supply contracts which can reach highest priced markets
Clearly, the most valuable piece of the franchise is the capability to buy large volumes of reliable and low cost LNG (ideally priced off Henry Hub) and to sell it close to oil price parity. Figure 47 shows how BG Group's LNG realizations have achieved consistently large premiums over and above Henry Hub average quarterly prices. This profit is recorded in the LNG Shipping & Marketing sub-segment reported by BG Group. As above, it is enabled by BG Groups contractual architecture, its shipping capacity and re-gasification access rights and a very experienced trading function. Our valuation of this arbitrage profit stream assumes a compression in the margin over Henry Hub past-2015 when we assume North American LNG exports will grow and thus reduce regional LNG price dispersion.
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Figure 43: Liquefaction capacity - net (MT pa)

25
Figure 44: Sources of LNG and LT supply commitments (MT pa)

30
25
20
Possible
20
15
15
Under construction
10
10
5
5
0 99 00 01 02 03 04 05 06 07 08 09 10 11 12E 13E 14E 15E 16E 17E 18E Trinidad Trains 1-4 Egypt Trains 1-2 Australia Trains 1-3 Tanzania Train 1
0 05 06 ALNG T2-3 07 08 ELNG T2 09 EG 10 ALNG T4 11 12 NLNG T4-5 13 QC LNG 14 15 Sabine Pass 16 17 NLNG T7 18 19 20 Supply commitments
Figure 45: LNG cargoes sold by quarter

80 70 60 50 40 6 30 20 10 0 2003 Q3 2004 Q3 2005 Q3 2006 Q3 2007 Q3 2008 Q3 2009 Q3 2010 Q3 2011 Q3
USA RoW Henry Hub ($/mmbtu, RHA)
Figure 46: EBIT per LNG cargo by quarter (estimated, m)

14 12 10 10.0 9.0 8.0 7.0
EBIT per cargo m
2003 2004 2005 2006 2007 2008 2009 2010 2011e
124 118 117 182 231 227 222 215 211
6.0 5.0 4.0 3.0 2.0 1.0 0.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 CYCLE VOLUME WEIGHTED AVERAGE 4.0m per cargo
4 2 0
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Figure 47: LNG price realization by quarter ($/mmbtu)

20 18 16 Realisation premium protected by hedging in 2009-2011
Figure 48: LNG EBIT composition by quarter (m)

700 600
500
14 $/mmbtu 12 10 8
200 400
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e
29 8 77 99 181 352 521 1,585 1,551 1,583 1,515
300
6 4 2 0 2003
100
2004
2005
2006
Henry Hub
2007
2008
2009
2010
2011
(100) 2001 2002 2003 2004 2005 2006 Liquefaction 2007 2008 2009 2010 2011 Shipping & Marketing Business development
Average LNG cargo realisation
Figure 49: LNG portfolio balance

Liquefaction 25 20 15 10
Figure 50: BG Group - SOTP and share price premium / (discount)

2000 1800 1600 1400 1200 5 0 1000 800 600 Share price averaged 3% premium over long term NAV per share growth averaged 21% pa over long term 55% 45% 35% 25% 15% 5% (5)% (15)% (25)% (35)% (45)% 01 02 03 04 05 06 07 08 09 10 11
LT supply
MT
Re-gasification
400 200
2011
2015E
Core NAV (p share)
Share price premium / (discount) RHA
Figure 51: BG Group - oil versus gas production mix (%)

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2000
2001
2002
2003
2004
2005
2006
Oil Gas
2007
2008
2009
2010
2011e 2012e
79
Fred Lucas
BP
Figure 52: BP - Location of key LNG assets
(Isle of Grain, UK, 50%)
3.3
5.9
(Cove Point, USA, 33%)

7.4
(Rovigo, Italy, 13%) (Dapeng, China, 30%)

5.1 6.7
(Damietta Train 1, 0% **)

15.1
(Atlantic LNG, Trinidad & Tobago, 39%*)
7.1
7.6
(ADGAS, Abu Dhabi, 10%)
(Tangguh LNG, Indonesia, 37.2%)
5.2
(Angola LNG, 13.6%)
16.3
(NW Shelf, 16.7%)
Operational Liquefaction capacity (MT pa) Liquef action capacity under development (MT pa) Operational Re-gasif ication capacity (MT pa)
Source: J.P. Morgan. * Effective average working interest in Atlantic LNG Trains 1-4. ** BP has certain rights to supply gas in to Damietta LNG, but does not have any ownership of the facility.

According to BP, the creation of gas value chains is one of the three core drivers of upstream growth: 1. Deep water 2. Giant fields 3. Gas value chains
BP has neglected LNG for too long and may have to play catch up
BP has created some important, long-lived and high value gas value chains. Most recently as operator, BP has connected gas offshore Azerbaijan (Shah Deniz field) to downstream markets in Georgia, Turkey and eventually parts of Europe via the South Caucasus Pipeline (SCP). However, we feel that BP has somewhat neglected its LNG business and turned away from LNG related growth opportunities for too long. This occurred under the leadership of Sir John Browne who steered BP away from too many long lead, very capital projects, focusing more on higher return, quicker payback upstream projects, specifically oil related. Browne wanted to build one of the lowest cost and highest return upstream portfolios and LNG did not easily fit within that strategy. We are not critical of BPs reluctance to invest in liquefaction, per say - that is a low return tolling business. Rather, we regard as a weakness BPs inability to develop more, very profitable and long-lived integrated gas chains. As per Figure 53, RD Shell's first liquefaction position was operational five years before BP, but since the 1970s RD Shell has grown its LNG far more aggressively and now
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sits with a much fuller LNG growth pipeline than BP. We feel that this is a portfolio issue that BPs current CEO (Bob Dudley) may look to remedy through acquisition or strategic alliance.
Figure 53: BP versus RD Shell - net liquefaction capacity (MT pa)
25
20
15
10
72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
BP
RD Shell
BP does not have a head of Global LNG - LNG projects are managed by the upstream performance units in which they reside. However, there is a head of BPs LNG merchant trading business who sits within BPs global trading operation.
Looking to form two new potential gas (LNG) chains
We see the potential formation of two new gas (LNG) chains within BPs grasp, one in India and another one in Indonesia. India Via its upstream / downstream alliance with Reliance Industries Limited, BP is looking beyond its recently acquired upstream position, anchored in the Krishna Godavari Basin, in to a full presence across the entire Indian gas value chain. Realistically, this is a long term opportunity, but one where we expect the alliance to move downstream in to LNG re-gasification / imports, potentially supplied by BPs LNG portfolio. RIL already imports LNG cargoes via Petronet LNG and has been forced to import LNG via the Hazira terminal due to the unexpected decline in gas production from the KG-D6 gas complex. We note that BP and RIL have recently set up India Gas Solutions (IGS), a 50:50 JV to source gas globally, including LNG, and market it in India. We understand that OGS will be responsible for securing and marketing LNG to RILs existing customers, but RIL will continue to acquire LNG for its own requirements for the time being.
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Indonesia In the past two years, BP has been very obviously building its acreage position in Indonesia with a eye to supply gas to the Bontang LNG facility. On 30 November 2009, BP (via VICO, a 50:50 joint venture with ENI) signed a PSC to develop the Sanga-Sanga coal bed methane project in East Kalimantan. The PSC overlays the same acreage as the conventional PSC (BP 37.8%, ENI 37.8%) which supplies gas in to the Bontang LNG plant. Preliminary studies on the block suggest it has a CBM resource potential of 4 TCF (ENI now estimates 13 TCF). This ought to be a near term opportunity - given existing gas production infrastructure, development ought to be rapid. As such, BP may supply coal bed methane to an LNG plant before BG Group does so in Australia. In 2009, BP also acquired a 32% interest in the West Papua I and III PSCs from Chevron. In November 2010, BP was awarded 100% in the North Arafura PSD seismic operations are to start in 2012. In April 2011, BP was awarded another four CBM PSCs in Central Kalimantan - the Tanjung IV PSC is operated by Pertamina with 56% and BP 44%. The Kapuas I, II and III PSCs are operated by BP with 45%; Sugico owns 55%. On 21 November 2011, BP was awarded 100% of two offshore PSCs, West Aru I and II, in the Arafura Sea, Indonesia. As per Figure 54, it appears that BP has really only taken on a new LNG project once per decade since the 1970s. Actually, it is less than that since it acquired its LNG position in Trinidad via its merger with Amoco (1998) and its supply position to Bontang LNG in Indonesia via its acquisition of ARCO (1999, VICO 50%).
Tangguh is BPs only operated LNG project
BP has only actively pursued one green field LNG project as operator in its entire 102 year history - Tangguh LNG (Indonesia). BP is a minority partner in Angola LNG which is due on stream in 2012 and is operated by Chevron. As we have mentioned, BPs current management has a more pragmatic stance towards LNG and may look to raise BPs exposure to LNG. We believe that the quality of BP's portfolio would be enhanced with the addition of one or two more long-lived legacy LNG assets. Having pulled the plug on its $35bn Denali pipeline project with ConocoPhillips (to bring 4.5 bcfpd gas from the North Slope to Alberta launched 2008) in 2011, we wait to see if BP and others can create an alternative LNG export scheme using the same source gas. In theory, gas (North Slope holds at least 35 TCF) could be piped 800 miles from the North Slope to a liquefaction plant at Valdez. Realistically, this would not be on stream much before 2020. Alternatively, a pipeline could be built to supply ConocoPhillips' Kenai LNG plant which is likely to be mothballed otherwise.
Will Valdez LNG ever happen?
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Liquefaction assets
BP has interests in fourteen trains in four facilities
As per Table 15, BP has interests in fourteen operational LNG trains - four in Trinidad & Tobago (Atlantic LNG, as per BG Group operated by the JV), five in Australia (NW Shelf operated by Woodside), three in Abu Dhabi (ADGAS Das Island operated by the JV) and two in Indonesia (Tangguh LNG, Bintuni Bay of Papua Barat operated by BP) with a total net capacity at end 2010 of 12.2 MT pa. Of this, 5.5 MT pa (45%) is located in Asia Pacific with the balance in the Atlantic Basin (48%) and the Middle East (7%). So, BP only operates one facility - Tangguh LNG.
Table 15: BP - liquefaction interests

Plant Start date Trinidad & Tobago (Atlantic LNG) Train 1 1999 Train 2 2002 Train 3 2003 Train 4 2006 Australia (NW Shelf) * Train 1 Train 2 Train 3 Train 4 Train 5 Abu Dhabi (ADGAS) Train 1 Train 2 Train 3 1989 1989 1992 2004 2008 1977 1977 1994 413 63 2,496 Net gas supply (mmcfpd) 1,649 371 BP equity gas supply Yes (34.0%) Yes (42.5%) Yes (42.5%) Yes (37.8%) Yes (16.7%) Yes (16.7%) Yes (16.7%) Yes (16.7%) Yes (16.7%) No No No Yes (37.2%) Yes (37.2%) Capacity MT pa 3.1 3.4 3.4 5.2 2.5 2.5 2.5 4.4 4.4 2.3 2.3 2.5 3.8 3.8 BP equity % 34.0 42.5 42.5 37.8 16.7 16.7 16.7 16.7 16.7 10.0 10.0 10.0 37.2 37.2 Net capacity MT pa 1.1 1.4 1.4 2.0 5.9 0.4 0.4 0.4 0.7 0.7 2.7 0.2 0.2 0.3 0.7 1.4 1.4 2.8 0.0 12.2 0.7 0.7 Plant type Merchant Tolling Tolling Tolling Tolling Tolling Tolling Tolling Tolling Tolling Tolling Tolling Tolling Tolling Markets served US, Spain US, Spain US, Spain US, Dominican Republic Japan, China, Korea
Japan
Indonesia (Tangguh LNG) Train 1 2009 Train 2 2010 Egypt (Damietta) Train 1 2005 Total operating capacity Development projects Angola LNG 2012 Total development capacity
Mexico, China, Korea, Japan ***
Yes Yes (13.6%)
5.1 **3.2 5.2
0.0 13.6
Source: J.P. Morgan. * Train capacity is shown as it is today following upgrades ** Average capacity. *** Long term supply contracts with CNOOC (2.6 MT pa for 25 years) Posco (0.55 MT pa for 20 years), K-Power (0.6 MT pa for 20 years), Tohoku Electric (0.125 MT pa for 15 years) and Sempra (3.7 MT pa for 20 years).
The average capacity of BPs liquefaction trains is around 3.2 MT pa. With the exception of ADGAS (Abu Dhabi), BP supplies equity gas to all its equity owned liquefaction facilities. BP also has an equity supply agreement with Damietta LNG, but does not own any equity in the liquefaction plant (which is effectively owned 40% ENI, 40% Gas Natural and 20% EGAS). Similarly, BP has a supply contract to Bontang LNG, Indonesia.
No presence in CBM to LNG.but watch this space
BP does not yet have any exposure to LNG projects to be supplied from nonconventional gas, although as we have noted, coal bed methane from the Sanga Sanga CBM PSC could potentially be used as a supply source in Indonesia (to the Bontang LNG facility). We note that 2.5 bcfpd of BP equity gas was processed through a liquefaction plant in 2010 this represents almost 30% of its total gas output in 2010 (8,401 mmcfpd) and 11% of its total production in 2010 (3,822 kboepd).
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BPs LNG portfolio is going exgrowth
We see limited potential for the addition of further trains at any of its facilities given government gas depletion controls and priority given to domestic needs (Egypt and Trinidad), declining domestic gas reserves (Indonesia) and competing projects (Australia). BP only has one firm development project Angola LNG which is nearing completion and due on stream in early 2012. There is potential for a fourth train at ADGAS, but this has yet to be sanctioned by the operator, ADNOC. BP has also yet to confirm that the Tangguh LNG project has sufficient proven reserves to support a third train this requires an additional 5 TCF over the existing P1 reserve base of 14 TCF. Government officials have indicated that FID may be taken in 2013 with first production from a 3.8 MT pa train in 2018. This ex-growth feature of its LNG portfolio is clearly not a particular strong position. We believe that this reflects a long term historic strategic aversion to liquefaction projects and, more generally, LNG. We sense that BP may look to remedy this situation, perhaps by buying in to an LNG development or acquiring a company with rights therein.

BP's re-gasification capacity is 57% of its liquefaction capacity
As per Table 16, BP retains capacity rights to a total of 6.8 MT pa (around 905 mmcfpd) of LNG re-gasification capacity via four operational terminals in China (owned), Italy (leased), UK (leased, a 20-year contract is in place with BP/Sonatrach for this first phase of capacity to enable them to import LNG into the UK from other countries) and USA (leased). BP is the only foreign company to own a piece of a Chinese re-gasification terminal (30% Dapeng) this is its only part-owned facility.
Table 16: BP - re-gasification terminal rights

Re-gasification terminals China Dapeng Italy Rovigo UK Isle of Grain Phase 1 USA Cove Point Total operational capacity
Start date 2006 2009 2005 1976
Gross capacity MT pa 6.7 5.9 3.3 7.4
BP equity 30% 13% 50% 33%
Net capacity MT pa 2.0 0.7 1.7 2.4 6.8
Contract Owned Leased Leased Leased
BP is not involved in any new re-gasification projects. BP thus retains access to 6.8 MT pa of re-gasification capacity which equates to just 57% of its net operational liquefaction capacity.
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LNG shipping assets

BP does not own any of its LNG vessels
As per Table 17, BP has direct access to 8 modern LNG vessels (the oldest was delivered in Q4 2002) - 7 via operating leases and 1 via a time charter. The average size of these 8 vessels is 146,813 M3 or around 104,200 DWT - this is 33% larger than the global average vessel size (estimated to be around 78,500 DWT). In addition, some of BPs LNG joint ventures have their own dedicated LNG shipping fleets. The North West Shelf project has 7 dedicated ships with a combined capacity of c.900,000 M3. The ADGAS joint venture also has 7 dedicated ships with a combined capacity of around 960,000 M3. Tangguh LNG sells on an FOB basis to CNOOC (i.e. CNOOC provides its own ships). Tangguh LNG charters ships for other contracts that are on a delivered basis. Atlantic LNG also sells on an FOB basis. Angola LNG charters shipping capacity. BP does not own or have direct access to any of the much larger Q-Max or Q-Flex vessels.
Table 17: BP - LNG vessel portfolio

LNG vessels British Trader British Innovator British Merchant British Emerald British Ruby British Sapphire British Diamond Golar Arctic Total operational capacity Average capacity per vessel
Delivery date Q4 2002 Q1 2003 Q3 2003 Q3 2007 Q3 2008 Q3 2008 Q3 2008 Q1 2011
Capacity M3 138,000 138,000 138,000 155,000 155,000 155,000 155,000 140,500 1,174,500 146,813
Capacity T 97.9 97.9 97.9 110.0 110.0 110.0 110.0 99.7 833.5 104.2
Contract Leased Leased Leased Leased Leased Leased Leased Time charter

Around $8bn or just 26 pence per share
BP does not explicitly disclose the financial performance of its LNG business it is included in its upstream segment without incremental disclosure; nor does it disclose levels of invested capital or capital investment. In our view, this is not a very constructive disclosure stance and could be improved without compromising BPs competitive position in any way. However, it might draw attention to the fact that, alongside the LNG businesses of RD Shell and BG Group, BP's LNG business is significantly less profitable. However, we can estimate the earnings contribution from its LNG portfolio using BPs once annual supplementary information on oil and natural gas. This discloses the contribution from Midstream activities which includes LNG processing facilities and transportation. As per Table 18, we have assumed that given the size of BP's interests in liquefaction facilities that all LNG profits feature within associates (which are reported post-interest, tax and minorities). This would imply 2009-10 average earnings of around $776m. We anticipate higher earnings in 2012 once Angola LNG is commissioned and given the more favorable market environment more generally. If we assign a PER of 10x, this would imply an NPV of around $9.7bn or around 33 pence per share. This represents just 4% of our sum-of-the-parts of BP. This underlines BPs under-exposure to the LNG industry which, given the strategic importance assigned to integrated gas chains, is an issue that BPs management may seek to address.
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Table 18: BP - LNG portfolio valuation

2010 ($m) UK Rest of Europe US Rest of North America South America Africa Russia Rest of Asia Australasia Gains Underlying Implied LNG Tax Total post tax Total estimated LNG earnings 2010-09 average earnings 2012E earnings potential 2012E PER (x) Implied LNG valuation ($m) Pence per BP share % of BP SOTP Subsidiaries pretax earnings 23 42 -347 3 49 -26 4 -23 -13 -288 0 -288 0 0 0 721 776 969 10 9,694 33 4% Associates posttax earnings 0 4 27 238 199 63 255 518 0 1,304 0 1,304 721 721 2009 ($m) UK Rest of Europe US Rest of North America South America Africa Russia Rest of Asia Australasia LukArco divestment gain Underlying Implied LNG Tax Total post tax Total estimated LNG earnings Subsidiaries pre-tax earnings 925 17 719 833 17 -27 -37 518 -315 2,650 976 1,674 0 0 0 830 Associates posttax earnings 0 5 29 134 214 56 -113 611 0 936 0 936 830 830
Source: J.P. Morgan. BP 2010 Report & Accounts supplementary information on oil and natural gas
Figure 54: BP - liquefaction capacity (MT pa)

14
12
10
77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Abu Dhabi NW Shelf Trinidad Indonesia Angola
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Fred Lucas
RD Shell
Summary of key LNG assets
Figure 55: RD Shell - Location of key LNG assets
9.6 1.2
(Elba Island and Cove Point)

8.8 2.7
(Sakhalin LNG, 27.5%)
(Huelva and Barcelona, Spain)

2.2
(Costa Azul, Mexico)

7.2 3.7
(Hazira, India, 74%) (Dua and Tiga, Malaysia, 15%)
(Qalhat LNG, 11%)

21.6
(Oman LNG, 30%)

7.8
14.6
7.5
(Brunei LNG, 25%)
(Bonny LNG, Nigeria, 21.6%)
(Qatargas, Qatar, 30%) (NW Shelf, Australia, 20.7%)

16.3 31.8
(Pluto, Gorgon, Prelude, Wheatstone *)
Operational Liquef action capacity (MT pa) Liquef action capacity under development (MT pa) Operational Re-gasif ication capacity (MT pa)
Source: J.P. Morgan. * Pluto LNG Train 1 (4.3 MT pa, 21.9%), Gorgon LNG train 1-3 (15 MT pa, 25%), Prelude FLNG (3.6 MT pa, 100%), Wheatstone LNG Trains 1-3 (8.9 MT pa, 6.4%). ** With the exception of the Hazira re-gasification terminal (74% owned), RD Shell has import capacity rights via terminals in the US, Spain and Mexico that it does not own these capacity rights are shown.

Integrated gas chains are central to RD Shell's upstream strategy
RD Shell has a clearly defined upstream growth strategy with three central planks: Build resources Accelerate resource to value conversion Differentiation through integrated gas leadership, technology and partnerships. As per BP and BG Group, integrated gas chains are central to RD Shells upstream strategy. However, unlike BG Group, RD Shell has a more limited interest and presence in the downstream supply of gas to end users. As a result of its gas chain capabilities, RD Shell has long had a relatively high exposure to natural gas production. Indeed, as per Figure 59, 2010 was the first year when gas (51%) was more than half of group output. By 2015, we expect gas will represent 57% of group output. Within RD Shell, global LNG now falls under the International Upstream segment Malcolm Brinded has executive responsibility for this business. So, in common with BP, RD Shell does not have a dedicated individual who is responsible for global LNG.
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RD Shell is the global LNG supremo
RD Shell actually provided the technology for the worlds first liquefaction plant at Arzew, Algeria. As per Figure x, RD Shells position in global LNG is world leading which is clearly contrasted to BP's much smaller position. RD Shell has liquefaction capacity in the Atlantic Basin (Nigeria), the Middle East (Oman and Qatar), Russia (Sakhalin) and Asia Pacific (Australia, Brunei and Malaysia). Interestingly, both BP and RD Shell took their first respective exposures to LNG in the early-mid 1970s RD Shell in Brunei and BP in Abu Dhabi. Yet we estimate that by end 2011, RD Shell had net liquefaction capacity of almost 20 MT pa, 61% larger than BP's net capacity (12.2 MT pa). RD Shell also has the potential to more than double its net liquefaction capacity by 2020 (+8.9 MT pa projects underway and a further +19.2 MT pa potential projects). BPs LNG growth options are much more limited with only one development to add 0.7 MT pa or 6% net capacity in 2012 (Angola LNG). Strategic errors & unanswered questions It is quite tricky to fault RD Shells global LNG position it is the worlds number one with a distinctive global presence, first class reputation and proven project delivery capabilities.
RD Shell could have taken on more LNG supplies itself
We feel that RD Shell is somewhat over-exposed to the capital intensive, lower return end of the LNG value chain liquefaction. It is similarly over-exposed to refining. In our view, RD Shell has a tendency to want to build and own exposure to capital intensive processing assets and a reluctance to reduce that exposure when perhaps it could/should. Given the size of its balance sheet and its unrivalled experience in all aspects of the LNG industry, RD Shell could have penetrated the market for LNG arbitrage more aggressively had it taken on more equity / third party LNG flows directly, as BG Group did. Perhaps because it was unwilling to risk changing its reputation in the LNG industry or perhaps because it simply failed to see the opportunity, RD Shell missed this contractual innovation. Unlike BP and Exxon Mobil, RD Shell also has developed a distinctive strategic alternative for gas monetization - gas-to-liquids (GTL). GTL effectively competes with pipelines and LNG as a route to get stranded gas to market. LNG has historically been the preferred choice to GTL given LNGs lower capital intensity, simpler and more proven technology and robust LNG pricing gas resource owners have been able to contract for 20+ years at or very close to oil price parity. RD Shell has two operational GTL facilities both 100% owned (Bintulu, Malaysia, output capacity 14.7 kbpd and Pearl GTL, Qatar, output capacity 140 kbpd). Pearl GTL has cost over $18bn (more than three times its original budget of $5bn to $6bn) and taken several years to develop. Pearls first train was successfully commissioned in 2011 (originally scheduled for 2009) and its second train is currently being commissioned. It is debatable whether the source gas for Pearl GTL (1.6 bcfpd) might have been more wisely dedicated to another, lower cost LNG train in Qatar. From the perspective of a shareholder in RD Shell, the answer will depend on the premium prices realized for the GTL products and the operating performance of Pearl GTL. In the meantime, the Qataris continue to realize robust prices for their LNG exports, at or close to oil price parity. Like so many others, RD Shell was also caught out by the view that the US was set to become a major LNG importer. In 2003, it believed that Asian demand for LNG would slow, whilst North American demand would accelerate. Consequently, it took re-gasification capacity rights at Cove Point and Elba Island (Table 20). In 2003, it also planned an offshore re-gasification terminal in the Gulf of Mexico with a
RD Shell must prove that GTL is a valid / superior alternative to LNG
Joined the US re-gasification gold rush
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capacity of 7 MT pa. This facility was scheduled to start up in 2007, but was never built. RD Shell also took re-gasification capacity rights in Mexico via the Baja and Altamira terminals to supply both Mexico and the US it has recently sold its position in Altamira.
Regrettable move in to gas-fired power
Many IOCs including BG Group moved in to power as a means to monetize gas and then exited when they realized that the return uplift to their business was negative. RD Shell bulked up in power more than others, via InterGen, and was then slow to exit the business having taken major write-downs. InterGens power assets were targeted users of RD Shells gas (LNG) e.g. the La Rosita (1 GW) plant in Mexico via the Baja re-gasification terminal with LNG from Sakhalin-2. RD Shell was operator and the dominant owner (55%) of Sakhalin-2. This was RD Shells sixth and largest LNG project. In late December 2006, Gazprom announced that it would purchase 50% plus 1 share in Sakhalin Energy Investment Company (SEIC) for $7.45bn cash. This transaction closed in April 2007. At the time, we estimated that this stake had a market value in excess of $10bn (around $5 per boe for partly developed resources). This move evenly diluted the three western owners of SEIC (RD Shell 55%, Mitsui 25%, Mitsubishi 20%) by half, thus diluting RD Shells ownership to 27.5%. RD Shells project status was also changed to Technical Advisor. The move followed much negative publicity in Russia which focused on the projects environmental track record and cost over-runs. The original budget of around $10bn (defined March 2003) effectively doubled to $20bn which delayed tax payments to the Russian government since Sakhalin-2 was a Production Sharing Agreement (PSA). The PSA was signed in the 1990s under President Yeltsin and was one of just three PSAs signed by the Russian authorities with western companies. The projects start up was also delayed from 2007 to 2009. Clearly, it was controversial for Gazprom not to have been involved at all in Russias first and only LNG project. However, the original solution to address this issue (first announced July 2005 and originally expected to complete early 2006) was a swap of a 25% stake in Sakhalin for a 50% stake in the Zapolyarnoye Neocomian field in the Arctic. This would have helped to maintain RD Shells overall resource position in Russia and diversified its portfolio therein. Instead, RD Shell paid a price for this LNG projects delays and cost over-runs via material dilution at a price well below market value, in our view. However, in exchange, the Russian government approved the project's higher budget and cost recovery items and the PSA remained intact. Furthermore, since Gazprom took ownership in the project, Sakhalin LNG has run very efficiently. In our view, it is perhaps a shame that RD Shells 'alliance with Gazprom which was initiated in 1997 seems to have generated such little benefit or advantage to RD Shell. However, we are quite hopeful that a third train at Sakhalin will be sanctioned, perhaps in 2012-13. Sakhalain-2 was RD Shells first and only operated LNG project to experience major cost over-runs and delays. Between 1999 and 2003, it was partner in a total of 8 new LNG trains (Oman LNG T1-2, Nigeria LNG T1-3, Malaysia Tiga T1-2 and NWS T4). All of these trains were actually delivered under budget and/or ahead of schedule. RD Shell is now fourth in the queue of CBM-to-LNG projects in Queensland, Australia. Ahead of it are BG Group's QC LNG (T1-2 8.5 MT pa), Santoss Gladstone LNG (T1-2 7.8 MT pa) and ConocoPhillipss APLNG (T1-2, 9.0 MT pa). Given the number of competing LNG projects in Australia, we are concerned that RD Shells 50:50 project with PetroChina (Curtis Island LNG) will suffer from an over-heating of the Australian skilled and semi-skilled labor market
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RD Shell was heavily diluted in Sakhalin LNG
Could APLNG be RD Shells next Sakhalin-2?
and contract hardware at the top of an EPC cost cycle. RD Shell has yet to disclose a capital budget for this project, with sanction not expected before end 2013 and a start up in 2018, at the earliest. One of RD Shell's problems was that it arrived late to the CBM-to-LNG play. In common with other IOCs (BG Group, ConocoPhillips and TOTAL), RD Shell was obliged to buy in to the play, jointly acquiring Arrow Energy and, more recently, Bow Energy via an alliance with PetroChina.
Not too many dead leads, but might have missed the East African LNG opportunity.
With the exception of Sakhalin-2, RD Shell has a very good track record of defining an LNG growth opportunity and delivering the project efficiently. There are not too many historic examples of identified leads that failed to be commercialized. We would only cite Iran LNG (and Iran GTL Assaluyeh), Venezuela LNG and Olakola LNG (Nigeria). In contrast, there are not too many examples of green field opportunities that RD Shell has missed. As highlighted, it was a late arrival to the Australian CBM-to-LNG play. RD Shell may, however, have missed the opportunity to take a seat of influence at the East African LNG table - perhaps acquisitions could change that. Following the 10% placing in 2010, RD Shell has made it clear that it intends to exit its 24.3% position in Woodside (although it has not clarified the method of exit e.g. another market placing for cash or an asset swap with Woodside). Ideally in our view, RD Shell would have acquired Woodside to consolidate its position in Australian LNG. By exiting, it loses an indirect exposure to a number of LNG projects e.g. Pluto T1-2 (Woodside 90%), Sunrise LNG (Woodside 33.4%, a potential candidate to apply RD Shells Floating LNG technology), Browse LNG T13 (Woodside 50%) and the NW Shelf T1-5 (Woodside 16.7%). This will dilute RD Shells upstream project pipeline and will clearly reduce its overall exposure to LNG neither particularly desirable, in our view.
Farewell to Woodside.and its LNG exposure
Liquefaction assets
Almost 20 MT pa operating capacity spread across seven countries
RD Shells first liquefaction asset was commissioned in Brunei in 1972. Since then, it has developed an extremely impressive portfolio of liquefaction assets. RD Shell now has a total net operating capacity of approximately 19.7 MT pa which is spread across a total of seven countries (Australia, Brunei, Malaysia, Nigeria, Oman, Russia and Qatar), nine LNG plants (including two in Malaysia and two in Oman) and twenty-seven trains with an average capacity of 3.2 MT pa. This ranks RD Shell as the largest owner of liquefaction capacity of all the IOCs. RD Shells net liquefaction capacity is spread 51% in Asia Pacific, 24% Middle East and 25% in the Atlantic Basin. Its interests in the North West Shelf (Australia) are held directly (16.67%) and via its 24.3% stake in Woodside (which also owns 16.67%). Of note, RD Shell does not operate any one of these liquefaction plants or trains. Between 2012 and 2017, we count another four green field projects involving eight trains, including the worlds first floating LNG facility (Prelude FLNG) that are now underway which will add another 8.9 MT pa of net capacity. Over a decade since RD Shell first proposed FLNG to develop the Kudu gas field, offshore Namibia (a field that is still undeveloped and since its discovery in 1974 has seen seven operators RD Shell, Texaco, Chevron, Energy Africa, Petronas, Tullow and Gazprom), in July 2009, RD Shell awarded Samsung Heavy Industries and Technip the contract to design, build and install multiple FLNG facilities over a period up to 15 years. In May 2011, Shell announced the go ahead for the worlds
Four green field developments underway to add almost 9 MT pa
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first floating LNG (FLNG) facility. The vessel will process gas initially from seven subsea wells in the Prelude field in the Browse Basin and, in a second phase, from the Concerto field. Later in the project life, gas is also expected to come from the Crux field. Prelude FLNG will be the worlds first floating LNG facility and it will be RD Shells first 100% owned and operated liquefaction facility. A floating solution remains the preferred option for the Greater Sunrise LNG project that is located in the joint development area of the Timor Sea, but the government of East Timor wants an onshore liquefaction facility to be located in their country. RD Shell is also looking at floating LNG applications in Iraq and Indonesia (following its 30% acquisition in to the Abadi project the Masela field in the Arufura Sea - from Inpex). RD Shell has also expressed some interest in joining the Gulf LNG project, led by InterOil in Papua New Guinea. The acting petroleum secretary of PNG (Rendle Rimua) has said that RD Shell is the states preferred LNG operator.
Development options include another 20 MT pa
Looking beyond these projects, we see potential to add another 20 MT pa via six green field projects (Australia x3, Indonesia, Iraq and Nigeria) and five brown field projects (Australia, Nigeria and Russia) with a total of 16 trains. The addition of a third LNG train on Sakhalin Island is also looking more likely please refer to the section on Gazprom. By 2020, RD Shell could have more than 48.5 MT pa in a total of 56 liquefaction trains. This represents potential growth of +146% versus YE 2011 operational capacity and a potential capacity CAGR 2011-20 of 11%. In our view, this really underlines RD Shells potential to continue, if not extend its global leadership in global liquefaction. No other company has this scale, global footprint or density of identifiable growth opportunities.
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Table 19: RD Shell - liquefaction assets

Liquefaction plant Australia (NW Shelf) * Train 1 Train 2 Train 3 Train 4 Train 5 Brunei (Brunei LNG) Train 1 Train 2 Train 3 Train 4 Train 5 Malaysia Dua Train 1 Train 2 Train 3 Tiga Train 1 Train 2 Nigeria (Bonny LNG) Train 1 Train 2 Train 3 Train 4 Train 5 Train 6 Oman Oman LNG Train 1 Train 2 Qalhat LNG Train 1 Sakhalin (Sakhalin LNG) Train 1 Train 2 Qatar (Qatargas 4) Train 7 Total operational capacity Development projects underway Australia Pluto LNG Train 1 * Gorgon LNG Trains 1-3 Prelude FLNG Wheatstone LNG Trains 1-3 Total development capacity Potential developments Australia Pluto LNG Train 2 * Curtis Island LNG Trains 1-2 Browse LNG Trains 1-3 * Sunrise FLNG * Gorgon LNG Train 4 Indonesia Abadi FLNG Iraq - Khawr al-Amaya FLNG Nigeria Train 7 Train 8 Olakola LNG Russia - Sakhalin Train 3 Total development potential Start date 1989 1989 1992 2004 2008 1972 1972 1973 1974 1974 1995 1995 1995 2003 2003 1999 1999 2002 2005 2006 2007 2003 2004 2006 2009 2009 2011 RDS equity supply Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No No No Yes Yes Yes Gross capacity MT pa 2.5 2.5 2.5 4.4 4.4 1.5 1.5 1.5 1.5 1.5 2.6 2.6 2.6 3.4 3.4 3.2 3.2 3.2 4.0 4.0 4.0 3.6 3.6 3.7 4.8 4.8 7.8 3.2 4.3 15.0 3.6 8.9 RDS equity 20.7% 20.7% 20.7% 20.7% 20.7% 25.0% 25.0% 25.0% 25.0% 25.0% 15.0% 15.0% 15.0% 15.0% 15.0% 21.6% 21.6% 21.6% 21.6% 21.6% 21.6% 30.0% 30.0% 11.0% 27.5% 27.5% 30.0% Net capacity MT pa 0.5 0.5 0.5 0.9 0.9 3.4 0.4 0.4 0.4 0.4 0.4 1.9 0.4 0.4 0.4 0.5 0.5 2.2 0.7 0.7 0.7 0.9 0.9 0.9 4.7 1.1 1.1 0.4 2.5 1.3 1.3 2.6 2.3 19.7 0.9 3.8 3.6 0.6 8.9 0.9 4.0 2.5 1.2 1.3 0.8 2.0 1.3 2.2 2.5 1.4 22.5
2012 2016 2016 2017
No Yes Yes Yes
21.9% 25.0% 100.0% 6.4%
2015 2018 2017-18 2018 2017 2019 2017 2019 2020 2020 2016
No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
4.3 8.0 12.0 3.6 5.0 2.5 2.0 5.0 8.5 12.6 5.0
21.9% 50.0% 20.6% 34.7% 25.0% 30.0% 100.0% 25.6% 25.6% 19.5% 27.5%
Source: J.P. Morgan. * Includes stakes held directly and via 24.3% stake in Woodside Petroleum.
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RD Shells re-gasification capacity is 92% of its liquefaction capacity
As per Table 20, RD Shell has re-gasification capacity rights to total of 14.9 MT pa (c.2 bcfpd) via seven operational terminals in India (partly owned), Spain (leased), USA and Mexico (leased). This represents 76% of RD Shells net liquefaction capacity (19.7 MT pa at end 2011). Just 15% of its capacity is owned, the balance is leased under long term (20 year or more) lease agreements.
Table 20: RD Shell re-gasification capacity

Terminal name Hazira Altamira * Huelva Barcelona Cove Point Costa Azul Elba Island Elba Island expansion Total re-gasification capacity Location Gujarat, India Altamira, Mexico Huelva, Spain Barcelona, Spain Lusbu, Maryland, USA Baja, California, Mexico Elba Island, Georgia, USA Elba Island, Georgia, USA Start up 2005 2006 1988 1969 2003 2008 2006 2010 Capacity right period Owned 2010-34 2010-34 2003-23 2008-28 2006-36 2010-35 RD Shell capacity rights (MT pa) 2.2 0.3 0.9 1.8 2.7 2.8 4.2 14.9 RD Shell Ownership 74% Leased Leased Leased Leased Leased Leased
Source: J.P. Morgan. * In 2011, RD Shell (50%), TOTAL (25%) and Mitsui (25%) sold their ownership of Altamira to a 60:40 JV of Vopak and Enagas.
LNG shipping assets

RD Shell has interests in or manages around one quarter of the worlds LNG fleet
Shell actually started corporate life as a shipping company, bringing exotic sea shells and kerosene from the East to Europe in the late 1800s (in 1833 Marcus Samuel expanded from selling antiques to oriental shells). Today, the Shell Shipping organization (Shell International Trading & Shipping Company Limited) is based in London, with operations in Houston, the Hague, Singapore, Perth and Tokyo. Through joint ventures and direct ownership, RD Shell has interests in around a quarter of the worlds LNG vessels in operation. It currently manages more than 60 LNG carriers (Table 21). This includes around 30 vessels managed via its partnership with Nakilat Shipping (Qatar) Limited (a wholly owned subsidiary of Qatar Gas Transport Company Ltd or Nakilat) following an agreement at the end of 2006. The intention of this agreement is to develop Nakilats shipping expertise, so that operational management of the ships can be transferred to Nakilat 8-12 years after delivery of their last vessel.
Table 21: RD Shell - LNG vessel portfolio

LNG vessel class B - Class G - Class NLNG - Class NWS - Class Nakilat Q-Max & Q-Flex * Number of vessels 8 7 12 5 30 Average vessel capacity (cm) 75,000 130,000 135,000 130,000 Average vessel capacity (Tons) 53.2 92.3 95.8 92.3 Total capacity (Tons) 426 646 1150 461 Routes Brunei to Japan, S.Korea General Nigeria to NW Europe NW Shelf to Asia Managed on behalf of Nakilat (Qatar)
Source: J.P. Morgan. * Nakilat owns another 20 Q-category vessels via JVs.
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LNG is a very important component of RD Shells overall value and will remain a very important enabler for higher margin gas production growth. In our view, it is especially important for investors to appreciate the significant value of RD Shells LNG portfolio.
Tricky to value given limited financial disclosures on LNG business
RD Shell no longer explicitly discloses the performance of its global LNG business which is now included in its Upstream International segment. Some years ago, it used to provide an annual disclosure (in its annual strategy presentation) via a graph that broke out LNG earnings explicitly. However, one better than BP, RD Shell does disclose the performance of its Integrated Gas business each quarter - this incorporates LNG (including LNG marketing and trading) and Gas-to-Liquids operations. In addition, the associated upstream oil and gas production activities from projects where there are integrated fiscal and ownership structures across the value chain are also included in Integrated Gas. These include the Sakhalin II (Sakhalin LNG an integrated PSA) and North West Shelf projects that are on stream, Pearl GTL (Train 1 shipped its first cargo in June 2011 and Train 2 was commissioned in November 2011), Qatargas 4 (commissioned), Gorgon and Pluto (both under development) projects. Power generation and coal gasification activities are also included in Integrated Gas results. As per Figure 56, the percentage of group earnings sourced from Integrated Gas has increased from around 10% closer to 20% as RD Shell has increased its operational LNG capacity and LNG pricing has risen on a lagged relationship with the higher oil price. From Q4 2011 onwards, we also expect a fuller contribution from Pearl GTL as Train 1 completes a full quarter of revenue / profit generation and Train 2 is then fully commissioned during H1 2012.
We value LNG franchise at around $50bn or 5 per share
In the first 9-months of 2011, RD Shell reported post-tax earnings of $4.6bn from Integrated Gas. Our FY 2011E estimate is $6.6bn if we take 85% of the total (assuming 15% of this figure might be generated by non-LNG related activities), we measure an underlying post-tax contribution from LNG in 2011 of approximately $5.6bn. If we apply a multiple of 9x to this stream (90% of RD Shells LNG is sold under long term contracts with 80% oil price indexed on a 3-6 month lag so 2011 earnings are reflecting an oil price > $100 per barrel), we infer a potential equity valuation of just over $50bn. This represents just over 5 per share and just under 20% of our sum-of-the-parts value of around 26. This value captures some of the value of RD Shells stake in Woodside (current market value around $7bn) as well as some of the upstream reserve value of gas supplies in to liquefaction facilities (as above, Sakhalin LNG, North West Shelf and Qatargas 4). We note that in almost 6 years from 2006 to 2011, RD Shells cumulative capital expenditure in Integrated Gas & Power was $25.3bn, although much of this (c.$19bn) would have been dedicated to Pearl GTL (RD Shell 100%).
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Figure 56: RD Shell - Integrated Gas earnings ($m, % of group)

2500 30%
Figure 57: RD Shell - LNG sales by quarter (MT)

6.0
25% 2000
5.0
20% 1500
4.0
15%
3.0
1000 10%
2.0
500 5%
1.0
0 2004 2005 2006 2007 2008 2009 % of group earnings 2010 2011 Integrated Gas earnings
0%
0.0 2006 2007 2008 2009 2010 2011
Figure 58: RD Shell - Net liquefaction capacity and sales (MT pa)
50 45
Figure 59: RD Shell - production mix - oil versus gas

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2000 Notable shift to gas
40
35
30
25
20
15
10
0 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Brunei Australia Malaysia + Indonesia Nigeria Oman Russia Qatar Iraq LNG sales
01
02
03
04
05
06
07
Oil
08
Gas
09
2010 11e
12e
13e
14e
15e
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Nitin Sharma
ENI
Figure 60: ENI - Location of key LNG assets

(Zeebrugge, 56%)
3.2 2.5
(El Ferrol, 9.5%)

3.6
(Panigaglia, 50%)
(Cameron, 40%)
15.5 22
8.8
(Sagunto, 21.25%)
5.1
(Nigeria LNG T1-T6, 10.4%) (Brass LNG (FEED), 17%)

11.2 10
(Egypt, 40%)
(Pascagoula, capacity rights)
8.5
(Nigeria LNG T7-T8 (FEED), 10.4%)

22.2 3.7
(Bontang, 4%)
3.2
5.2
(Darwin plant, 11%)
(Angola LNG, 13.6%)
(Qalhat LNG, 3.5%)
Operational Liquef action capacity (Mt/y) Liquefaction capacity under construction(Mt/y) LNG project (FEED or under study) (Mt/y) Operational Re-gasif ication capacity (Bcm/y) Re-gasification under development (Bcm/y)
Source: J.P. Morgan
Strategy focused on development of the companys equity gas resources
ENI's strategy for its LNG business has been driven by two objectives optimum monetization of its equity gas (especially in Africa) and meeting the gas requirements of Italy given ENIs 'nation' status. We do not believe that ENI has an ambitious growth outlook for this business or intends to be a serious player in the LNG arbitrage market. This partly reflects ENIs origins as a pipeline company and its ownership of utility assets. ENI's LNG business resides within two business segments Upstream (Liquefaction assets) and Gas & Power (Re-gasification terminals and LNG vessels). Given the size of ENI's discoveries/gas resource base in Mozambique and Indonesia (CBM) the company's liquefaction capacity is likely to see significant growth over the medium term as the company looks to monetize these equity gas resources. However, we also concede that these potential developments are still many years off. We also believe that ENI's execution portfolio carries risk of delays both Nigeria LNG and Brass LNG have already been pushed back and we remain cautious on the delivery schedules of both these projects.
Recent discoveries should drive LNG growth
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Greater international focus and ambition in LNG arbitrage business needed to deliver growth
We believe that the weaker outlook for Italian gas demand means that ENI needs to increasingly focus on international markets to deliver growth in its gas marketing business - a process that was started by ENI's acquisition of Distrigaz in 2009 but needs to progress at a faster pace. We also believe that ENI needs to define a clearer growth strategy for its LNG arbitrage business. In our view, this is an obvious growth segment as the company looks to finalize its plans (likely divestment) for the non-core regulated businesses in Italy (SRG).
Liquefaction assets
ENI has interest in 10 trains in 5 countries
ENI's first liquefaction plant (Bontang LNG, Indonesia) was commissioned in 1977 so the company has been active in this business for more than three decades. But the relative growth in the company's LNG liquefaction portfolio has been limited in recent years no new projects have been commissioned in the last 5 years. In our view, this is a reflection of the company's reliance on piped gas imports from North Africa and Russia to supply its Gas Marketing business that is largely Europe focused. ENI now has a total net operating capacity of approximately 5.7 MT pa which is spread across five countries (Egypt, Indonesia, Nigeria, Oman and Australia). As per Table 22, these interests are (with the exception of Damietta LNG) typically small, minority interests. ENI's pipeline of liquefaction projects is not very strong - there is only one firm LNG development project in ENI's portfolio (Angola LNG). The project is nearing its completion and is expected on-stream in early 2012. The LNG output from the project was originally planned to go to the US East Coast (ENI has back up regasification capacity) but given a collapse in US LNG import needs, Angolan cargoes may well be shifted to Europe/Asia. ENI has potential developments of 3.1MT pa net in Nigeria Brass LNG and two additional trains in NLNG. Both of these projects are yet to be sanctioned. Given the history of delays in these projects, we believe that there is a risk of further slippages in both these projects.
Only one green field development on agenda
Mozambique holds early promise
Mamba South, Area 4 block is the biggest operated discovery to date by ENI which is already looking at a multi-train (> 3) LNG green field project. We expect this giant gas discovery to provide a much needed boost to ENI's LNG business. Furthermore, the presence of KOGAS (one of the biggest LNG buyers in the world) as a partner in the block is an obvious plus for the marketing aspect of this potential LNG development.
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Table 22: ENI - liquefaction interests

Liquefaction plant Egypt Damietta (Train 1) Indonesia Bontang (A-H) Nigeria (Bonny LNG) Train 1 Train 2 Train 3 Train 4 Train 5 Train 6 Oman Qalhat LNG (Train 1) Australia Darwin LNG Total operational capacity Development projects underway Angola Angola LNG Total development capacity Potential developments Nigeria Nigeria LNG (Train 7) Nigeria LNG (Train 8) Brass LNG Total development potential
Source: J.P. Morgan
Start date 2005 1977 1999 1999 2002 2005 2006 2007 2006 2006
ENI equity supply Yes (20%) Yes (8.4%) Yes (7%) Yes (7%) Yes (10%) Yes (7%) Yes (7%) Yes (7%) No Yes (11%)
Gross capacity MT pa 5.1 22.2 3.2 3.2 3.2 4 4 4 3.7 3.2
ENI equity 40.00% 4.00% 10.40% 10.40% 10.40% 10.40% 10.40% 10.40% 3.50% 11.00%
Net capacity MT pa 2.0 0.9 0.3 0.3 0.3 0.4 0.4 0.4 0.1 0.4 5.7 0.7 0.7 0.5 0.9 1.7 3.1
Plant type Tolling Merchant Merchant Merchant Merchant Merchant Merchant Merchant Merchant Merchant
ENI off-take (MT pa) 2.0 2.2 2.2
0.1 0.4
2012
Yes (13.6%)
5.2
13.60%
0.7
2019 2020 2018
Yes Yes Yes
5.0 8.5 10.0
10.40% 10.40% 17.00%

ENI's re-gasification capacity is significantly above its liquefaction capacity
As per Table 23, ENI has re-gasification capacity rights to a total of 11.5 bcm pa (8.5 MT pa) via five operational terminals in four countries (Italy, Spain, Belgium and USA) across two continents. This represents 149% of ENIs net liquefaction capacity (5.7 MT pa at end 2011). Just 10% of its re-gasification capacity is owned, the balance is leased under long term agreements. It is also clear that the majority of ENI's re-gas capacity is owned indirectly by the company via its stakes in Snam Rete Gas (SRG) and Union Fenosa Gas (UFG).
Table 23: ENI re-gasification terminal rights

Capacity right period 20y 10y 10y Owned, no expiry till 2027 30y Gross Capacity (Bcm pa) 15.5 3.6 8.8 2.5 3.2 11.2 ENI equity interest 40% 9.5% 21.3% 50.0% 56% 0% ENI capacity rights (Bcm pa) 6.2 0.3 1.9 1.25 1.8 11.5 5.7 5.7
Terminal name Cameron El Ferrol Sagunto Panigaglia Zeebrugge Total re-gasification capacity Expansions/developments Pascagoula Total new capacity
Source: J.P. Morgan
Location Louisiana, USA Spain Spain Italy Belgium USA
Start up 2009 2007 2006 1971 1987 2012
Ownership Through UFG Through UFG Indirect ownership via SRG
LNG shipping assets

ENI's owns a fleet of 4 LNG vessels
ENI manages its LNG shipping assets via a 100% subsidiary LNG Shipping. ENI owns four LNG carriers: LNG Portovenere and LNG Lerici, with a capacity of
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65,000 M3 each and LNG Palmaria and LNG Elba, with a capacity of 40,000 M3 each. These LNG carriers operate in the Mediterranean region; their LNG cargoes are usually loaded in Algeria and unloaded in Italy, Spain, and France.

Almost no disclosure on the performance of ENIs LNG business
As highlighted before, ENI's gas value chain sits within different segments thus providing us with almost zero disclosure on the earnings contribution of its LNG business. Further, a number of its LNG liquefaction / re-gasification assets are owned via subsidiaries and associates making it even more complicated to assess the performance of this business. We estimate that ENI's LNG business generates approximately 500m of net income of which c.300m is the contribution of NLNG and Union Fenosa Gas (associate/subsidiary contributing the bulk of ENI's LNG earnings) with the remainder generated by LNG volume arbitrage/trade and a regulated return on re-gas assets in Italy (owned by SRG). If we apply a multiple of 10x to this stream (higher multiple given that our earnings estimate does not capture all of ENIs LNG exposure due to lack of disclosure), we infer a potential equity valuation of c. 5bn. This represents c. 1.4 per share and just under 5% of our sum-of-the-parts value of around 28.
Figure 62: ENI - LNG sales by plants (MT pa)
3 16
We value LNG franchise at around 5bn or 1.4 per share
Figure 61: ENI - Net Liquefaction capacity and sales (MT pa)
10.0 9.0 2.5 8.0 Possible
14
7.0 2 Liquefaction capacity (Mtpa) 6.0 Under Construction LNG sales (Mtpa)
12
10
5.0
1.5
4.0 1 3.0 4 0.5 1.0 2 6
2.0
0.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Egypt Indonesia Nigeria Oman Australia Angola LNG sales
0 2006 Italy Rest of Europe 2007 Extra European markets 2008 Bontang (Indonesia) 2009 PoinFortin (Trinidad & Tobago) Bonny (Nigeria) 2010 Darwin (Australia)
Source: J.P. Morgan
Source: J.P. Morgan
99
Nitin Sharma
Repsol YPF
Figure 63: Repsol YPF - Location of key LNG assets
(Bilbao, 25%)
2.7
(Sagunto, 6.5%)**
6.7 8 8
(Trieste, 30.8%)** (Taranto, 30.8%)**
10
3.6 5.1
(Canaport, 75%) (Reganosa, 2.8%)**

0.7
(Egypt, 12%)**
(EcoElectrica, 15%)**
15.2
(Atlantic LNG T1-T4, Effective Interest 23%*)

5
(Atlantic LNG T5, 22.5%)
3.7
(Qalhat LNG, 1.14%)**

4.4
(Peru LNG, 20%)
Operational Liquef action capacity (Mt/y) Liquefaction capacity under construction(Mt/y) LNG project (FEED or under study) (Mt/y) Operational Re-gasif ication capacity (Bcm/y) Re-gasification under development (Bcm/y)
(Escobar, 29%)**
* Repsol has 20%, 25%, 25% and 22.5% respectively in Atlantic T1, T2, T3, & T4 * * Indirect stake through Gas Natural (Repsol owns 30.8% in Gas Natural which owns 50% of UFG)
Focus on LNG business as a growth driver
Repsol YPF created an LNG division in its re-organization in 2007 a clear indication of its sharpened focus on this business stream as an important growth driver. Repsol YPFs strategy was to focus on its marketing strength whilst committing limited capital to the LNG business. Peru LNG is a case in point - Repsol YPF holds a 20% equity stake in the project, but is entitled to 100% of the plant off take. However, the company's ambitions for the LNG segment have since been scaled back for two key reasons: (i) a significant exposure to the Atlantic Basin meant that weakening LNG demand in North America has been a constraint on the company's original growth plans (ii) a strategy of capex avoidance for the LNG business has resulted in a portfolio that has effectively zero growth optionality in near/medium term. The profitability of and returns from both of its most recent growth projects in LNG (Peru LNG pricing of majority of long term supply volumes linked to Henry Hub and Canaport regas terminal suffers from low utilization) were directly linked to robust LNG demand in North America. Unsurprisingly, the prolific rise of US gas shale supplies and the negative consequence for US gas prices have been negative for the business. Repsol YPF does not have any foothold in the growing Asia Pacific LNG market.
but ambition since has been scaled back
Over-reliance on North American LNG demand was a strategic mistake
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Liquefaction assets
Repsol YPF legacy assets concentrated in Atlantic basin
As per Figure 63Figure 63, Repsol YPF has direct interests in five liquefaction trains and an in-direct interest (via Gas Natural) in two further trains with four trains in Trinidad and Tobago and one each in Peru, Oman and Egypt. The capacity is split 17% Peru, 70% Trinidad and Tobago, 12% Egypt and 1% Oman. The start up of Peru LNG has been an obvious plus for the operating performance of the division (Figure 66 and Figure 67). Repsol YPF does not have any new green field LNG projects in view. Persian LNG (Iran) - a green field project previously on its agenda has now fallen off the radar altogether. Repsol YPF has development potential of 1.1MT pa based on a fifth train at Atlantic LNG. However, the status of this project is 'still unconfirmed' and given the prevailing weak LNG demand in North America, the outlook for this project is looking challenged.
No new green field developments on agenda
Table 24: Repsol YPF - Liquefaction interests

Liquefaction plant Peru Peru LNG Trinidad & Tobago Atlantic LNG Train 1 Train 2 Train 3 Train 4 Egypt (through Gas Natural) Damietta (Train 1) Oman (through Gas Natural) Qalhat LNG (Train 1) Total operational capacity Potential developments Trinidad & Tobago Atlantic LNG Train 5 Total development potential
Source: J.P. Morgan
Start date 2010 1999 2002 2003 2005 2005 2006
Repsol equity supply Yes Yes Yes Yes Yes No No
Gross capacity MT pa 4.4 3 3.5 3.5 5.2 5.1 3.7
Repsol equity 20.00% 20.00% 25.00% 25.00% 22.20% 12.32% 1.14%
Net capacity MT pa 0.9 0.6 0.9 0.9 1.2 3.5 0.6 0.0 5.1 1.1 1.1
Plant type Merchant Merchant Merchant Merchant Merchant Tolling Merchant
2017
Yes
22.50%
Merchant
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Repsol YPF's re-gas capacity is 126% of its liquefaction capacity
As per its liquefaction capacity, Repsol YPF's re-gasification capacity is also concentrated in the Atlantic Basin. Its re-gas capacity represents 126% of its net liquefaction capacity (5.1 MT pa at end 2011).
Table 25: Repsol YPF re-gasification terminal rights

Terminal name Bilbao port Canaport EcoElectrica Sagunto Escobar Reganosa Total re-gasification capacity Expansions/developments Trieste Taranto Total new capacity
Source: J.P. Morgan
Location Spain Canada Puerto Rico Spain Argentina Spain Italy Italy
Start up 2003 2009 2000 2006 2011 2007 2014+ 2014+
Full Capacity (Bcm pa) 2.7 10 0.7 6.7 4.0 3.6 8.0 8.0
Repsol equity interest 25% 75% 15% 6.5% 29.1% 2.8% 30.8% 30.8%
Repsol capacity rights (Bcm pa) 0.7 7.5 0.1 0.4 1.2 0.1 10.0 2.5 2.5 4.9
Ownership Equity interest Equity interest Through Gas Natural Through Gas Natural Through YPF Through Gas Natural Through Gas Natural Through Gas Natural
LNG shipping assets

Repsol YPF's LNG shipping assets managed via JV with GasNat.
Repsol YPF's LNG shipping assets are managed via Stream, a 50/50 JV with Gas Natural. This JV manages c.17bcm pa of LNG volumes (around 296 cargoes pa) and has a fleet of 20 LNG vessels (2,719,000 M3) with vessel sizes ranging from 35,000 M3 to 173,800 M3 (Table 26). The LNG cargoes are sourced from Trinidad & Tobago, Qatar, Nigeria and Libya and delivered to Spain, France, USA, Mexico, Brazil, Argentina and Japan (Figure 64).
Figure 64: Repsol YPF LNG supply and delivery points
Source: Stream
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Table 26: Repsol YPF - LNG vessel portfolio

LNG vessel name Anabella SCF Arctic SCF Polar Norman Lady Catalunya Spirit Madrid Spirit Bilbao Knutsen C.Villalba Sestao Knutsen Iberica Knutsen Hispania Spirit Barcelona Knutsen Sevilla Knutsen Valencia Knutsen Ribera del Duero Knutsen Castillo de Santisteban STX Frontier Maersk Methane Trinity Arrow Golar Grand Total capacity
Source: J.P. Morgan, Stream
Vessel capacity (m3) 35,000 71,500 71,500 87,500 138,000 138,000 138,000 138,000 138,000 138,000 140,500 173,000 173,000 173,000 173,400 173,800 153,400 165,500 154,900 145,000 2,719,000
Comments Gas Natural chartered Gas Natural chartered Gas Natural chartered Gas Natural chartered Gas Natural chartered Repsol Chartered Repsol Chartered Gas Natural chartered Repsol Chartered Repsol Chartered Repsol Chartered Repsol Chartered Repsol Chartered Repsol Chartered Repsol Chartered Repsol Chartered Repsol Chartered Repsol Chartered - short term Repsol Chartered - short term Repsol Chartered - short term

Repsol YPF's creation of a stand alone LNG division in its re-organization in 2007 ensures that we have explicit disclosure on the financial performance of this business. This improvement in disclosure was a very positive step in our view and we believe it would be beneficial if the company went further to report the segmental tax and adjusted net earnings for LNG also.
We value LNG franchise at around 2.5bn or 2 per share
We estimate that LNG will contribute c. 350m of operating income in 2012 (250m operating earnings of Repsol YPF's LNG segment and c.100m contributed by LNG business of Gas Nat - net share of Repsol YPF). If we apply a multiple of 7x to this stream (low multiple given the above average exposure of the company's portfolio to the depressed North American market 75% of the Peru LNG volumes priced off Henry Hub), we infer a potential equity valuation of c. 2.5bn. This represents close to 2 per share and just under 7% of our sum-of-the-parts value of around 28.
103
Figure 65: Repsol YPF - Liquefaction capacity and sales (Net MTpa)
7 7
Figure 66: Repsol YPF - LNG sales by quarter (MT)

3
6 Possible 5
2.5
5 2
Liquefaction capacity (Mtpa)
LNG sales (Mtpa)
1.5
1 2 2
0.5
0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Angola Trinidad & Tobago Egypt (through G N) Oman (through G N) L NG sales (TBtu)
0 2007 2008 2009 LNG sales by quarter (Mt) 2010 2011
Source: J.P.Morgan
Figure 67: Repsol YPF - Adjusted operating income by quarter (M)

140 120
Figure 68: Repsol YPF - LNG cargoes sold and LNG volume(Tbtu)
120 400
100 350 100 80 80 # of cargoes 60 300 Repsol LNG Volumes (Tbtu)
60
250 40 40
200 20 20
0 2007 2008 2009 Adjusted operating income (M) 2010 2011
0 2008 2009 # of cargoes 2010 Repsol LNG Volumes (Tbtu) 2011E
150
Source: J.P.Morgan
Source: Company presentation, J.P.Morgan
104
Nitin Sharma
Statoil
Figure 69: Statoil - Location of key LNG assets

(Snohvit LNG, 33.53%)
4.2
7.5
(Shtokman (FEED), 24%)
10.9*
(Cove Point*, 0%)
Operational Liquefaction capacity (Mt/y) Liquefaction capacity under construction(Mt/y) LNG project (FEED or under study) (Mt/y) Operational Re-gasification capacity (Bcm/y)
* Statoil have a long term contract with the operator of Cove point with capacity rights of 10.9bcm/yr. Statoil does not have equity interest in the regasification terminal
Source: J.P. Morgan
Developing a world class LNG business has not been at the forefront of Statoil's corporate strategy given that a very high percentage of its upstream gas volumes are sold via pipeline in to Europe. The company's exposure to LNG business is limited to one liquefaction plant (Snohvit) located in Hammerfest, Norway and its capacity rights to the Cove point re-gasification terminal in the US. Statoil's LNG business sits within its Manufacturing, Processing and Renewable Energy segment.
Piped gas will remain the 'backbone' of Statoil...no major shift towards LNG is expected
Given its historic roots in piped gas and the dominant position that the company enjoys within Europe's gas markets, it is very unlikely that there will be any major shift in the company's approach towards LNG. It has, and will retain, a niche presence in LNG. However, it is clear that the focus of the company's small LNG business is shifting away from the US. In 2010, Statoil diverted 14 cargoes away from the US into Europe and Asia. Furthermore, Statoil has also significantly reduced its commitments relating to re-gas capacity at the Cove point terminal.
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Liquefaction assets
Snohvit Europe's first and only liquefaction plant
Snohvit LNG was commissioned in 1997 - it is the first and only LNG liquefaction plant in Europe. The project has experienced considerable technical issues since its commissioning. Numerous outages at this plant were related to leakages in the sea water heat exchangers. We believe that Snohvit could play a vital role in the company's plan to develop gas discoveries in the remote Barent sea. Statoil is currently evaluating an expansion plan for this project with natural gas feed stock from the Goliat field. Statoil is also responsible for marketing the Norwegian state's share of Snohvit output, therefore the company markets c.64% (net Statoil is 34%) of the total output from the project primarily to the USA (Cove Point) and Spain (sold to Iberdrola). Whilst we believe that Snohvit is a world class project, we also highlight its history of delays and operational issues. In our view, the reliability of this asset is still not beyond doubt although management is now confident on the reliability of the plant.
No green field developments on the agenda
Statoil does not have any green field projects on its near/medium term agenda (Table 27). The Shtokman gas and condensate field was discovered in 1988. This project has been on the drawing board for over 10 years. Shtokman is still pre-FID (Statoil stake 24%, TOTAL 25% and Gazprom 51%). Statoil acknowledges that the timeline of this project remains uncertain and final fiscal terms for the project are yet to be agreed. Recent press reports suggest that Statoil (and TOTAL) want significant fiscal support for the Shtokman project. Either way, it is clear that the end 2011 FID timeline has now slipped in to 2012, if not beyond. In our view, both international participants require 'water tight' and supportive fiscal arrangements (including tax concessions) before agreeing to sanction this project.
Table 27: Statoil - Liquefaction interests

Liquefaction plant Norway Snohvit Total operational capacity Potential developments Russia Shtokman LNG Total development potential
Source: J.P. Morgan
Start date 2007
Statoil equity supply Yes
Gross capacity MT pa 4.2
Statoil equity 33.53%
Net capacity MT pa 1.4 1.4 1.8 1.8
Plant type Merchant
2018
No
7.5
24.00%
Merchant

Negotiated significant reduction in the Cove point regas capacity
Statoil has two long-term capacity contracts (with Dominion Resources) for capacity rights at the Cove Point LNG re-gasification terminal in Maryland, USA. The first is for c.3.2 bcm pa (or one third of Cove Points capacity) and the second is for 100% of the Cove Point Expansion (CPX) capacity of approximately 7.7 bcm pa total regasification capacity of 10.9 bcm pa. This long-term capacity agreement was renegotiated in December 2010 we understand that the Cove Point expansion capacity contract term has been reduced from 18 to 10 years. We also believe that the utilization level of this terminal is particularly low as Statoil is diverting cargoes from Snohvit to Asia and Europe.
106
LNG shipping assets

Statoil charters a fleet of 4 LNG vessels
Statoil charters a fleet of four LNG vessels of which three are on long term charters (Arctic Discoverer, Arctic Princess and Arctic Voyager) and one is on a short term charter. We estimate that 65-70 cargoes of LNG per year are shipped from the Snohvit liquefaction plant.

LNG business resides within the MMR segment
Given the very small size of Statoil's LNG business, the company does not report this business as a separate segment - it resides within Statoil's Manufacturing, Processing and Renewable Energy segment. This means that assessing the financial performance of the company's LNG business is not straightforward due to lack of adequate disclosure. Our FY 2012E estimate for the LNG business operating income is Nkr1.2bn we expect more cargoes to be diverted to Europe/Asia and capacity at Cove point to remain under-utilized. If we apply a multiple of 8x to this stream, we infer a potential equity valuation of c.Nkr9.6bn. This represents just over Nkr 3 per share and just under 2% of our sum-of-the-parts value of around Nkr185.
We value LNG franchise at around Nkr9.6bn or Nkr3 per share
107
Nitin Sharma
TOTAL
Figure 70: TOTAL - Location of key LNG assets

7.5
(Shtokman (FEED), 25%)

15
4.2
(Yamal LNG, 20%)

21
(Snohvit LNG, 18.4%)

8.25
(South Hook, 8.35%)

10
(Dunkirk, Capacity rights)

5
(Fos Cavaou, 28.03%) (Sabine Pass, Capacity subscribed by Total - 10Bcm/y)

21.9 40 10
(Hazira, 26%)
9.9
(Adria, 27.36%)
(Qatargas 1, 10%)
7.8
(Nigeria LNG T1-T6, 15%)

6.7
(Altamira, , 25%)
(Brass LNG (FEED), 17%)

10 5.6 8.5
(Qatargas 2, Train 5 - 16.7%)
(Nigeria LNG T7 (FEED), 15%)
(Oman LNG, (Yemen LNG, 5.54%) 39.62%)

3.7
6.7
7.2
(Adgas, 5%)
22.2
(Bontang, 41.5%)
8.4
5.2
7.2
(Angola LNG, 13.6%)
(Qalhat LNG, 2.04%)
(GLNG, 27.5%)
(Ichthys LNG (FEED), 24%)
Operational Liquefaction capacity (Mt/y) Liquefaction capacity under construction(Mt/y) LNG project (FEED or under study) (Mt/y) Operational Re-gasification capacity (Bcm/y) Re-gasification under development (Bcm/y)
Source: J.P. Morgan

LNG is a key plank in TOTAL's growth strategy
TOTAL's strategy for its LNG business is driven primarily by the company's bullish outlook for global gas demand. TOTAL has aggressive investment plans for this subsegment and is looking to deliver 50% growth in its LNG volumes by end 2020. TOTAL plans to have a balanced exposure across the LNG value chain. TOTALs LNG business sits within its upstream business segment its disclosure on LNG on a standalone basis is limited. TOTAL has a long history in the LNG business it was the joint operator of the Arzew plant (Algeria), the first liquefaction plant in the world. A notable acceleration in TOTAL's LNG investment took place in 2000s, in particular in the second half of this decade. As per Figure 70Figure 70, TOTAL now has a very strong position on the global LNG stage - it has a well diversified presence. We estimate that by end 2011, TOTAL has net liquefaction capacity of almost 18.9 MT pa, growth of 47% relative to its 2005 base. TOTAL also has the potential to increase its net liquefaction capacity by more than 50% by 2020 based on 2.7 MT pa projects underway and a further 7.6 MT pa of potential projects.
TOTAL aims to be 'world leader in LNG' by 2030
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Project pipeline contains many capital intensive and technically challenging projects
TOTAL's growth pipeline has many capital intensive and challenging LNG projects, bearing high political and technical risks e.g, Yamal LNG, Shtokman LNG and Ichthys LNG. It is clear that TOTAL has emerged as a key LNG player on the global scene but we sense that the next leg of its growth will be more challenging with pressure on both timelines and costs risks that are all too common within the IOC landscape. We also believe that TOTAL has plans to expand its LNG arbitrage capture. Competing with BG Group in that space will be challenging, in our view.
Liquefaction assets
Almost 19 MT pa of net operating capacity spread across seven countries
TOTAL has an impressive portfolio of operational liquefaction assets its footprint expanded in Asia following the start up of the Qatar LNG 2 and Yemen LNG in 2010 (Table 28). The company has a net liquefaction operating capacity of 18.9MT spread across seven countries in three continents so bears a diversified geographical footprint which is likely to grow as projects in Australia (Ichthys LNG) and Russia (Shtokman LNG) come on-stream. Indeed, TOTAL ranks 3rd in the global ranking of the IOC liquefaction capacity. TOTALs net liquefaction capacity is located 49% in Asia Pacific (Indonesia), 30% Middle East (Abu Dhabi, Yemen, Qatar, Oman), 17% in Africa (Nigeria) and 4% in the Europe (Norway). We estimate that 2012-16, TOTAL will add 2.7mt of net capacity to its portfolio of LNG projects - from 2 projects under development (Angola LNG and GLNG, Australia). In particular, these include TOTAL's first LNG project (GLNG) using unconventional source gas (coal seam gas). In 2010, TOTAL acquired a 20% integrated position in this project (the upstream resources and the LNG project). TOTAL also committed to an off take contract of 1.5 MT pa from GLNG. Overall both projects show good momentum with Angola LNG very close to its scheduled start up in early 2012. Beyond 2016, we see potential to add another 7.6 MT pa via 3 green field projects (Australia, Nigeria, Russia) and 1 brown field project in (Nigeria). As such, by 2020, TOTAL could have a total of 29.2 MT pa in 12 liquefaction plants. This represents potential growth of +54% versus YE 2011 operational capacity and a capacity CAGR 2011-20 of almost 5%. TOTAL is obviously making good progress on its LNG growth agenda but we feel that delivery on budget and on time will remain the key challenges especially on the projects in the 'potential development' category (Table 28).
2 green field developments underway increase the capacity by 14%
Development options include another 7.6 MT pa
109
Table 28: TOTAL- liquefaction interests

Liquefaction plant Start date Yemen Yemen LNG 2009 Indonesia Bontang T1-T9 1977 Abu Dhabi (ADGAS) ADGAS 1977 Nigeria (Bonny LNG) Train 1 1999 Train 2 1999 Train 3 2002 Train 4 2005 Train 5 2006 Train 6 2007 Oman Oman LNG Train 1 2003 Train 2 2004 Qalhat LNG Train 1 2006 Qatar Qatargas 1 1999 Qatargas 2 (T5) 2010 Norway Snohvit 2007 Total operational capacity Development projects underway Angola Angola LNG 2012 Australia GLNG 2015 Total development capacity Potential developments Australia Ichthys LNG 2016-2017 Nigeria Nigeria LNG (Train 7) 2019 Nigeria LNG (Train 8) 2020 Brass LNG 2018 Russia Shtokman LNG 2018 Yamal LNG 2019 Total development potential
Source: J.P. Morgan
TOTAL equity supply No Yes No Yes Yes Yes Yes Yes Yes No No No Yes Yes
Gross capacity MT pa 6.7 22.2 5.6 3.2 3.2 3.2 4 4 4 3.6 3.6 3.7 9.9 7.8 4.2
TOTAL equity 39.62% 41.50% 5.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 5.54% 5.54% 2.04% 10.00% 16.70% 18.40%
Net capacity MT pa 2.7 9.2 0.3 0.5 0.5 0.5 0.6 0.6 0.6 3.2 0.2 0.2 0.1 0.5 1.0 1.3 2.3 0.8 18.9 0.7 2.0 2.7 2.0 0.8 1.3 1.7 1.9 3.0 10.6
Plant type Merchant Merchant Merchant Merchant Merchant Merchant Merchant Merchant Merchant Tolling Tolling Tolling Merchant Merchant Merchant
Yes Yes
5.2 7.2
13.60% 27.50%
Merchant Merchant
Yes Yes Yes Yes No No
8.4 5 8.5 10 7.5 15
24.00% 15.00% 15.00% 17.00% 25.00% 20.00%
Merchant Merchant Merchant Merchant Merchant

TOTAL's portfolio will become long LNG supplies given limited growth in re-gas capacity
As per Table 29, TOTAL has re-gasification capacity rights to a total of 17 bcm (12.6 MT) pa via five operational terminals in five countries across three continents. This represents 66% of TOTALs net liquefaction capacity (18.9 MT pa at end 2011). Just 41% of its capacity is owned with the balance leased under long term (20 year or more) lease agreements. It is clear that TOTAL's portfolio will become increasingly long liquefaction as new liquefaction assets come on-stream and given limited growth in re-gas capacity. This may position the company well to capture more LNG arbitrage opportunities.
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Table 29: TOTAL re-gasification terminal rights

Terminal name Location Hazira Gujarat, India Altamira * Altamira, Mexico Fos Cavaou France South Hook United Kingdom Sabine Pass U.S.A Total re-gasification capacity Expansions/developments Dunkerque LNG France Adria LNG Croatia Total new capacity
Source: J.P. Morgan
Start up 2005 2006 2009 2009 2008 (Phase 1) and 2009 (Phase 2) 2014 2017
Full Capacity (Bcm pa) 4 6.7 8.3 21 40 10-13 10
TOTAL equity interest 26% 0% 28% 8.4%
TOTAL capacity rights (Bcm pa) 1.04 1.7 2.3 1.8 10.0 16.8 2 2.7 4.7
0 27.36%

Limited financial disclosure
TOTAL does not explicitly disclose the performance of its global LNG business which is included in its upstream segment. However, in recent years the company has indicated the approximate contribution of this business to the overall upstream segment. We believe that management is increasingly aware of the need to demonstrate the value of its LNG business and is therefore looking to increase the disclosure on this sub-segment. We encourage any such move. In 2010 TOTAL indicated that the LNG business accounted for 20% of adjusted net earnings of its upstream segment or around 1.8bn. Our FY 2011E estimate for the upstream segment net income is around 9bn and we expect the LNG business contribution to increase to 25% or 2.3bn (9M 2011 contribution is 25%). If we apply a multiple of 8x to this stream, we infer a potential equity valuation of just over 18bn. This represents 8 per share and c. 14% of our sum-of-the-parts value of around 56/share. This value captures some of the value of TOTALs upstream reserve value of gas that feed in to its liquefaction facilities.
We value LNG franchise at around 18bn or 8 per share
111
Figure 71: TOTAL - Liquefaction capacity net (MT pa)

35 30
Figure 72:TOTAL - LNG sales by quarter (MT)

4 3.5
25
Possible
2.5 20 Under Construction 2 15 1.5
10 1
0.5
0 1999 2000 2001 2002 2003 2004 Indonesia 2005 2006 2007 2008 2009 Oman 2010 2011 2012 Norway 2013 2014 2015 Australia 2016 2017 2018 2019 2020 Yemen Abu Dhabi Nigeria Qatar Angola Russia
0 2007 2008 2009 LNG sales by quarter 2010 2011
Source: J.P. Morgan
Source: J.P. Morgan
Figure 73: TOTAL - LNG sales by plants (MT pa)

14
12
10
0 1998 1999 2000 2001 2002 2003 2004 Qatar (Qatargas I) 2005 2006 2007 Oman 2008 2009 2010 Yemen LNG Indonesia (Bontang) Nigeria (NLNG) Abu Dhabi (Adgas) Qatar (Qatargas II) Norway (Snohvit)
Source: J.P. Morgan
112

Chevron
Figure 74: Location of key LNG assets
(Sabine Pass, Capacity subscribed by Chevron 10.2Bcm/y)
40
(Delta Caribe , 10%)

4.7
12.6
(Olokola LNG, 20%)
(Browse, 16.7-20%)
12.0 16.3
5.2
(NW Shelf, 17%)

15.0
(Angola LNG, 36%)
(Gorgon LNG, 47%)
Operational liquefaction capacity (MT pa) Liquefaction under construction (MT pa) LNG project (FEED or under study) ( MT pa) Operational re-gasification capacity (bcm pa)
8.9
(Wheatstone, 74%)
LNG exposure is Australia focused
Chevrons LNG position is primarily focused on the Asia-Pacific region, with major Australian LNG developments at Wheatstone and Gorgon, both operated by Chevron, serving as the flagship projects. Chevron also has non-operated interests in the Browse Basin fields that will feed the Browse LNG development, and in the North West Shelf Venture, both of which are also in Australia. In West Africa, Chevron holds an interest in the Angola LNG project which is close to completion and in Olokola LNG in Nigeria which remains in concept stage.

LNG has long been a key strategic focus
Chevrons upstream strategy is to grow profitably in core areas and build new legacy positions by achieving world-class operational performance, maximizing and growing the base business, leading the industry in selection and execution of major capital projects, achieving superior exploration success, growing and developing equity gas resource base, and identifying, capturing and effectively incorporating new core upstream businesses. In our view, LNG development is a key component of this strategy, securing an outlet for Chevrons a large worldwide natural gas resource base and leveraging Chevrons skills in major capital projects execution.
113
Australian LNG developments commercialize largest natural gas resource base in the country. The dominant resources and projects in Chevrons LNG portfolio are in Australia, where the company holds more than 10% of its year-end 2010 net proved oil equivalent reserves, and 25% of its proved natural gas reserves. Chevrons current LNG production in Australia is close to 50 kboepd, all from the non-operated North West Shelf (NWS) Venture. However, we estimate this will increase another 420 kboepd once Gorgon and Wheatstone are fully operational, making the upcoming developments perhaps far more important than the existing production.
Only operational plant is NWS Venture
Chevrons currently-producing LNG operations in Australia are in the NWS Venture, Chevron holds a 16.7% interest in the project, which operates offshore fields to feed five LNG trains and a domestic gas plant. In 2010, NWS produced over 630 kboepd (106 kboepd net to Chevron), of which more than 70%, or 2.7 bcfpd, was natural gas (456 mmcfd net to Chevron). About 70% of the NWS natural gas, or half of the total production, was sold as LNG to utilities in Japan, South Korea, and China, and most of these sales were governed by long-term contracts. In 2009, Chevron sanctioned the Gorgon LNG project, in which it holds just over 47% interest and serves as operator. The ~$40bn Gorgon project is expected to commercialize 40 TCF of natural gas from the Jansz and Gorgon fields via liquefaction at a three-train, 15 MT pa facility on Barrow Island, off the northwest coast of Australia, and a domestic pipeline. First gas is expected in 2014E, and at last update, Chevron had agreements in place for the sale of more than 90% of its equity LNG under long-term contracts with crude oil-indexed pricing, with utilities in Japan and South Korea as primary clients. As of mid-2011, Chevron had awarded more than $25bn in contracts and the project was ~30% constructed. More recently, Chevron sanctioned the Wheatstone project. Chevron operates and holds a 73.6% interest in the onshore project, which includes an 8.9 MT pa liquefaction facility, a separate domestic natural gas facility, and related storage and transportation infrastructure. Chevron also operates and holds a 92% interest in the Iago and Wheatstone fields, which will provide 80% of full-capacity natural gas for the liquefaction facility. First volumes are currently scheduled for 2016E. As of project sanctioning, Chevron had contracted 60% of its equity LNG off-take, with an ultimate target of at least 80%, including the impact of selling down equity, which we estimate would be modest. Chevron estimates its net investment in Wheatstone would be in the range of $16bn to $22bn. West Africa LNG adds geographic diversity, but gas destinations may be less lucrative than Asia-Pacific. Chevron also holds a 36.4% interest in the Angola LNG project, a 5.2 MT pa LNG plant expected to begin operations in 2012E, as of most recent guidance. The facility is designed to process 1.1 bcfpd of natural gas, resulting in average daily sales of 670 mmcfd of re-gasified LNG and 63 kbpd of NGLs. The project is also expected to supply 125 mmcfd of natural gas for domestic use in Angola. Total investment is estimated at $9.0bn. At the time of the projects sanctioning, in late 2007, the LNG was scheduled to be delivered to the US, raising the potential for Henry Hub-based pricing if the gas cannot be sold in to another higher priced destination. Also in West Africa, Chevron holds a 19.5% interest in Olokola LNG in Nigeria. Although there is no timing for a final investment decision, the vision is for a multitrain liquefaction facility northwest of Escravos, east of Lagos along the Gulf of Guinea coast.
Gorgon LNG is well underway
Wheatstone LNG now following
Angola LNG on stream early 2012
114
Liquefaction assets
Big interests in big LNG projects
Upon completion of the Wheatstone project in 2016E, Chevron will hold 18.3 MT pa of net liquefaction capacity, largely concentrated in Australia and focused on sales to the Asia-Pacific market. Just over 10% of its capacity, the Angola LNG project, will be outside the Asia-Pacific region, consistent with the Asia-Pacific focus in the portfolio as a whole.
Table 30: Chevron - major liquefaction assets
Liquefaction plant Asia-Pacific North West Shelf Venture Gorgon Wheatstone West Africa Angola LNG Total capacity Potential developments Browse LNG Olokola LNG Plant Delta Caribe LNG Location Australia Nigeria Venezuela Interest 16.7-20% 20% 10% Location Australia Australia Australia Angola Start-up 1989 2014 2016 2012 Gross capacity (MT pa) 16.3 15.0 8.9 5.2 45.4 Chevron Interest 17% 47% 74% 36% 40% Net capacity (MT pa) 2.7 7.1 6.6 1.9 18.3
Comments Preliminary field development plan submitted in 2010 FID timing remains uncertain Declaration of commerciality accepted by Venezuela in 2010
Source: Company reports, industry sources, and J.P. Morgan.
Although there is also the potential for additional LNG projects, we are reluctant to factor projects not yet approved into our outlook. However, choosing among the potential developments, we would prioritize Browse LNG over projects in Venezuela and West Africa, given Chevron's proven familiarity with Australian LNG developments and the marketing of LNG into Asia, which we expect would be the logical target market for Browse LNG cargoes.
LNG re-gasification assets

Very small presence in US regasification
Chevrons primary presence in the LNG market is in the liquefaction of equity gas and the marketing of LNG cargoes, primarily into the Asia-Pacific market. However, we note that Chevron does have a small presence in re-gasification, having contracted capacity of 1 bcfpd at the third-party Sabine Pass re-gasification terminal in Louisiana. Given the pricing imbalance between international natural gas especially oil-linked pricingand North American natural gas, we expect Chevron to remain focused on its net long position in global LNG instead of its US domestic re-gasification presence.
LNG shipping assets

Consistent with its ownership interest in the NWS LNG project, CVX holds a onesixth interest in seven LNG tankers that transport LNG cargoes for the project.

At this point, Chevron reports its LNG operations as part of the international upstream segment. Chevron does not disclose realized prices for its NWS LNG, and has also not disclosed full commercial terms for its Gorgon and Wheatstone projects, although it has indicated that the long-term contracts for both projects are indexed to oil.
115
Estimated LNG value $17 per share
In valuing Chevrons LNG portfolio, we focus on four projects: NWS, Gorgon, Wheatstone and Angola LNG. We model oil-linked pricing for the three Asiafocused projects and Henry Hub-based realized pricing for Angola LNG. We assign no value to other future projects that are not yet approved, and we do not at this point assign any value to Chevrons contracted re-gasification capacity in the US. Overall, we estimate the remaining NPV of the four main LNG projects at just under $17 per share, accounting for 14% of our $120 per share price target. For NWS LNG, we assume shipments continue to the expiration of the current concession, through 2034E, and remain at current levels of roughly 320 mmcfpd net to Chevron. Given that the facility has been delivering LNG since 1989, we assume pricing is somewhat less favorable than the new contracts being signed in Asia Pacific. We base our revenues on a delivered LNG price of $7.2 per mcf, or 8% of our long-term $90/bbl oil price modeling assumption, and also assume net maintenance capex of about $30m pa (or $0.25 per mcf). Using these parameters, we would estimate free cash flow of $300-400m annually through 2034E, net to Chevron, with prices and costs escalating at 2% annually. On our estimates, this would result in a net NPV of $4.1bn, or just over $2 per share. For Gorgon and Wheatstone, we employ the same DCF model template, staggering the capex and production to adjust for the difference in timing of the two projects. Although we do not have specific LNG pricing for each contract from Chevron, we base our pricing on the broader industry curve provided by the company in recent presentations, which would suggest an LNG price of $14 per mcf at a long-term oil price of $90/bbl. For Gorgon, we model a forward NPV (excluding our estimate of capex spent through the end of 2011) of $40.4bn for the full project, and $19.1bn for Chevrons 47.3% interest. This corresponds to just over $9.5 per share. For Wheatstone, given that the project is recently sanctioned, we would estimate that 95% of the capital expenditures have not yet been spent, making the project less valuable in terms of forward NPV than Gorgon. We estimate a year-end 2011 NPV of $9.3bn for the project as a whole, or $6.9bn net to Chevron, corresponding to about $3.4 per share, though we note that our analysis does not include any net benefit to Chevron from future equity sell-downs. For Angola LNG, given that the start-up is expected in 2012E, we assume that the majority of the $9.0bn in capital expenditures will have been spent as of the end of 2011. We also assume pricing consistent with our outlook for North American LNG pricing, noting that cargoes delivered elsewhere could be a source of improved economics. Our model suggests that on a $6 per mcf natural gas price long-term, the Angola LNG project would generate $250m in free cash flow annually, net to Chevron, in the initial years of the project. Assuming a 25-year life and a 2% annual price and cost inflation factor, we estimate the remaining NPV of the Angola LNG project at $3.7bn net to Chevron, or about $1.8 per share.
116

Exxon Mobil
Figure 75: Exxon Mobil - Location of LNG assets
21
(South Hook, 24%)
9.9 8
21
(Adriatic, 69%)
(Qatargas 1 Trains1-3, 10%)

15.6
(Golden Pass terminal, 18%)
(Qatargas 2 - Trains 4-5 , 24%)

36.3
(RasGas- Trains 1-7, 29.5%*)
13.8
(PT Arun, 30%)
6.6
(Scarborough, 50%)
15.0
(PNG LNG, 33%)
(Gorgon, LNG, 25%)
Operational Liquef action capacity (MT pa) Liquefaction under construction(MT pa) LNG project (FEED or under study) (MT pa) Operational Re-gasif ication capacity (bcm pa)
Source: J.P. Morgan. * Average effective interest shown for RasGas Trains 1-7.
LNG portfolio centered in Qatar
ExxonMobils LNG portfolio is largely weighted toward liquefaction facilities in the Middle East, and more specifically a large aggregate position in 12 LNG trains in Qatar. Exxon Mobil also holds an interest in an LNG plant in Indonesia, and is participating in two major LNG projects currently under developmentGorgon in Australia and PNG LNG in Papua New Guinea. On the receiving end, Exxon Mobil has re-gasification capacity in three major terminals: South Hook LNG in Wales, Adriatic LNG in Italy, and Golden Pass LNG in Texas.

Strategy acknowledges the long term potential of gas
Exxon Mobils upstream strategy is to identify, evaluate, selectively pursue, and capture the highest-quality resource opportunities ahead of competition. Guided by a multi-decade view on the evolution on the energy supply-demand balance that suggests power generation is the single-largest driver of energy demand through 2040, Exxon Mobil sees natural gas as the fastest-growing major fuel over the next three decades. Additionally, with demand growth outstripping local production capacity in Asia-Pacific and Europe, Exxon Mobil sees LNG meeting 15% of global gas demand by 2040.
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Exxon Mobil has positioned itself accordingly in the LNG market, with a portfolio that is largely designed to commercialize large natural gas deposits as delivered LNG cargoes into the growing Asian market. Exxon Mobils currently-producing facilities in Qatar and its facilities under development in Australia and PNG also benefit from oil-linked pricing, providing balance in a global portfolio that also has a large North American natural gas resource position.
Qatar is the worlds largest LNG exporter
Qatar position dominates producing portfolio as Exxon Mobil commercializes vast non-associated gas resource. Exxon Mobil is partnered with Qatar Petroleum in the development of the North Field, commercializing in excess of 25 billion boe of non-associated natural gas. With the start-up in 2009 and 2010 of four new major 7.8 MT pa LNG projects (Qatargas 2 Trains 4 & 5, RasGas Trains 6 & 7), Exxon Mobil increased its net position in Middle East LNG to 15.5 MT pa of liquefaction capacity, accounting for nearly 80% of its current liquefaction capacity. Cargoes from Qatargas 1 supply LNG to Japan and Spain, while shipments from Qatargas 2 are primarily delivered to the South Hook LNG terminal in the UK. Cargoes from the seven RasGas trains are delivered to Europe, Asia, and the US.
Also has growth positions in Australia and PNG
Southeast Asia position expanding as Gorgon and PNG LNG join PT Arun LNG in Exxon Mobils portfolio. Outside the Middle East, Exxon Mobil is growing its LNG position in the Australia-Pacific region, participating in the Gorgon project and serving as operator of the PNG LNG project. When both projects are complete, Exxon Mobil will hold just over 10 MT pa of net liquefaction capacity in the region. As mentioned above, the Chevron operated Gorgon project, in which Exxon Mobil holds a 25% interest, is expected to commercialize 40 TCF of natural gas from the Jansz and Gorgon fields via liquefaction at a three-train, 15 MT pa facility. First gas is expected in 2014E, and Exxon Mobil has contracted its equity gas to Petrochina and Indias Petronet LNG. The PNG LNG project includes a 6.6 MT pa facility, and is expected to commercialize 9 TCF of natural gas over the life of the project. The project is estimated to cost $15bn for the first phase, with first LNG volumes expected in 2014. PNG LNG will provide a long-term LNG supply to four major customers in Asia: Chinese Petroleum Corporation, Taiwan; Osaka Gas Company Ltd; Tokyo Electric Power Company; and Unipec Asia Company Ltd, a subsidiary of Sinopec.
Liquefaction assets
Once Gorgon and PNG LNG are complete, expected during the middle of the decade, Exxon Mobil will hold 25.6 MT pa of net liquefaction capacity, 60% of which will be its current position in Qatar. The remainder will be in the Australia/Southeast Asia region, with LNG deliveries targeting the Asian market as well as the European market.
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Table 31: Exxon Mobil - liquefaction facilities

Gross capacity (MT pa) 9.9 15.6 6.6 4.7 4.7 4.7 7.8 7.8 13.8 15.0 6.6 97.2 Location Australia Interest 50% Exxon Mobil Interest 10% 24% 25% 30% 34% 30% 30% 30% 30% 25% 33% 26% Net capacity (MT pa) 1.0 3.7 1.7 1.4 1.6 1.4 2.3 2.3 4.1 3.8 2.2 25.6
Liquefaction plant Middle East QatarGas 1 (Trains 1-3) QatarGas 2 (Trains 4,5) RasGas Train 1,2 RasGas Train 3 RasGas Train 4 RasGas Train 5 RasGas Train 6 RasGas Train 7 Asia-Pacific PT Arun LNG plant Gorgon LNG PNG LNG Total capacity Potential developments Scarborough
Location Qatar Qatar Qatar Qatar Qatar Qatar Qatar Qatar Indonesia Australia Papua New Guinea
Start-up Various 2009 1999 2004 2005 2006 2009 2010 1978 2014 2014
Comments Development planning progressing
Source: Company reports, industry data, and J.P. Morgan.
LNG re-gasification assets

Modest re-gasification position
Exxon Mobils re-gasification assets are in Europe and the US. It holds an interest in three large LNG terminals, in the UK, Italy, and the US Gulf Coast. Given Exxon Mobils view that Europe will continue to need imported LNG, and the current pricing imbalance between European natural gas and North American natural gas, we would expect Exxon Mobil to focus on its European re-gasification facilities rather than its US facility in the near term.
Table 32: ExxonMobil - LNG re-gasification facilities
Re-gasification facility South Hook LNG terminal Adriatic LNG terminal Golden Pass terminal Total capacity
Source: Company reports and J.P. Morgan.
Location UK Italy US Gulf Coast
Start-up 2009 2009 2010
Gross capacity (mmcfpd) 2,000 775 2,000 4,775
Interest 24% 69% 18% 29%
Net capacity (mmcfpd) 480 535 352 1,367

As with Chevron, Exxon Mobils LNG operations are embedded in the international E&P segment results, and the company does not disclose pricing formulas or the specific economic details of its LNG projects. However, we believe we can approximate the remaining NPV of its LNG portfolio with a few key parameters. We focus on the liquefaction projects, as at this point, we view the re-gasification assets and other related LNG infrastructure as supporting the commercialization of the LNG, rather than as stand-alone commercial assets.
LNG estimated value $64bn to $75bn or $13.3 to $15.5 per share
We estimate the total value of the liquefaction portfolio is $64bn to $75bn, or $13.315.5 per share, heavily skewed to the currently-producing facilities in Qatar and Indonesia, and accounting for 14-17% of our $92 per share price target.
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First, we note that the majority of Exxon Mobils liquefaction capacity is up and running, with the successful start-up of the last four major LNG trains in Qatar in 2009 and 2010. As such, we would anticipate that 19.6 MT pa of net capacity, associated with Exxon Mobils interests in the Qatargas, RasGas, and PT Arun LNG projects, should require only maintenance capex, making these projects sources of cash for the rest of the corporate portfolio - for LNG-related investment, other investment opportunities, or returns to shareholders. Second, we would expect the majority of the LNG volumes from these projects to command oil-linked pricing, as the cargoes are primarily delivered to the Asian and European markets. Although the contracts are not necessarily as new as some of the more recently-signed contracts throughout the industry, and as such we do not necessarily believe they would receive pricing commensurate with what we have modeled for Gorgon and Wheatstone, we are comfortable modeling a long-term blended LNG price of $9-10.8 per mcf, or 10-12% of our long-term oil price of $90/bbl. We also assume net maintenance capex of just under $250m annually (or $0.25 per mcf). In the absence of specific fiscal terms, we estimate a net producer take of 50%. Using these parameters, we would estimate near-term annual free cash flow generation of just over $4.5bn, net to Exxon Mobil, with prices and costs escalating at 2% annually. Assuming another 25 years of operations, this analysis results in a net NPV of $47.8bn to $58.5bn, or $9.9-12.1 per share on blended pricing of 10-12% of the oil price. As a comparison, this would increase to a range of $11.5-14.2 per share on a 40% net government take assumption, and would drop to $8.2-10.0 per share on a 60% net government take. For Gorgon, we use a similar valuation method as that discussed in the Chevron section. We base our pricing on the broader industry curve shown in recent Chevron presentations, which would suggest an LNG price of $14 per mcf at a long-term oil price of $90/bbl. For Gorgon, we model a forward NPV (excluding our estimate of capex spent through the end of 2011) of $40.4bn for the full project, and $10.1bn for its 25% interest. This corresponds to $2.1 per share. Finally, for PNG LNG, we use a loftier pricing curve, similar to what we used for Gorgon, given what we believe are relatively newer contracts, as the project only received final approval in 2009. We have also used a long-term LNG price of $14 per mcf to correspond with $90/bbl long-term oil. We also estimate about 35% of the $15bn in capital investment would have already been spent as of year-end 2011, leaving just over $10bn in remaining capex between 2012E and project start-up in 2014E. At a government take level of 40%, we would estimate project free cash flow of a bit under $3bn annually once the project were up and running, or just below $1bn annually for Exxon Mobil on a 33% interest. We model a forward project NPV of $19.4bn, or $6.4bn net to Exxon Mobil, for $1.3 per share in value.
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Nadia Kazakova, CFA

(44-20) 7325-6373 nadia.kazakova@jpmorgan.com
Gazprom
Figure 76: Gazprom - summary of LNG assets (net capacity)

3.75
(Shtokman 1)
4.8 Cameron LNG, Lake Charles

4 1.2
(Sakhalin-2) (Sakhalin-2 train 3) Vladivostok LNG
1.2
Costa Azul, Mexico
2.5
Operational Liquef action capacity (Mt/y) Liquef action capacity under construction(Mt/y) LNG project (FEED or under study) (Mt/y) Operational Re-gasif ication capacity (Bcm/y)
Resource rich but technology poor
Gazprom has the largest gas reserves and gas production among listed oil & gas companies, but it has had little interest in LNG until very recently, preferring to stick to its core business of pipeline gas. We understand that the idea to enter the LNG markets only came to Gazprom's CEO Alexey Miller (appointed in 2001) after his visit to the World Gas Congress in Tokyo in 2003, where the LNG markets development was showcased. After Miller's return to Moscow, he instructed his management team to develop Gazprom's LNG strategy. The foray into LNG began with some one-off re-sale operations of LNG cargoes and swap operations with BP and GDF SUEZ in 2005-2006. At first, Gazprom seemed to be interested only in downstream (transportation to degasification) operations. Buying 50% plus 1 share of the RD Shell-operated Sakhalin-2 project in February 2007 gave Gazprom its first access to liquefaction capacity (50% of 9.6 MT pa), RD Shell-developed liquefaction technology of double-mixed refrigerant and direct contacts with some of the worlds largest end-users of LNG in the Asia Pacific region. At the moment, Sakhalin-2 LNG remains the only operational LNG project in Russia. There are plans for green field liquefaction capacity in the Arctic (Shtokman LNG), Pacific (Vladivostok LNG) and brown field expansion of Sakhalin-2 (Trains 3 and 4). Apart from the equity stake in Sakhlin-2, Gazprom set up a stand-alone LNG marketing subsidiary- Gazprom Global LNG (GG LNG). It is headquartered in London with regional offices in Singapore and Houston. GG LNG buys and sells
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Gazprom holds 50% plus 1 share in Sakhalin-2 project, operated by RD Shell
A separate subsidiary Gazprom Global LNG was set up to build a well-head to end user chain
LNG in single and multi-cargo deals. It has a long-term arrangement (2009-2028) to buy 1 MT pa of LNG from Sakhalin Energy. It charters LNG carriers and has arrangements to use re-gas capacity at the Costa Azul LNG terminal in Baja California, Mexico (100% owned by Sempra). GG LNG also structures complex deals with Gazprom affiliates involving pipeline gas, time swaps, options, and equity investments along the entire value chain from well-head to end user.

Gazprom's has a clear LNG manifesto - Strategy for LNG Production and Delivery which forms part of Gazproms overall strategy: Achieve LNG production levels of 76.5 MT pa by 2030, which could potentially amount to 14% of the global LNG market via new LNG production projects in Russia, participating in LNG projects abroad and purchasing LNG from independent projects and developing its own LNG marketing business. Target countries of the Asia-Pacific region and to a lesser extent countries of the Atlantic region and Europe as primary markets for sales of LNG in the mediumterm. Globalize company's presence on foreign markets, diversify supplies and consolidate position of Gazprom as an international energy company.
Liquefaction assets
RD Shell-built Sakhalin -2 remains the only operational LNG plant in Russia
The Sakhalin-2 liquefaction plant has 2 trains with total name plate capacity of 9.6 MT of LNG (2x 4.8 MT pa). Gazprom owns 50% plus 1 share (RD Shell (27.5% 1 share), Mitsui and Co. (12.5%) and Mitsubishi Corporation (10%)). The project (both upstream development and LNG operations) is operated under a PSA agreement that was signed in 1996. Gazprom purchased 50% plus 1 share in Sakhalin Energy for $7.45 bn in April 2007. The current book value (as of 2Q11) is RUB151.4 bn or $5.3 bn for the stake, valuing the entire operations (oil & gas upstream/mid-stream and LNG) at $10.6bn. The fall in book value is due to redemption of preference shares and dividends paid. The natural gas for liquefaction is produced at two offshore gas platforms - the Lunskoye-A platform (Lun-A) and Piltun-Astokhskoye-B platform (PA-B). They are linked to the LNG plant by 300 km of offshore and 1,600 km of onshore pipelines via an onshore processing facility and a booster station. The gas liquefaction process in the LNG plant uses RD Shell-licensed double mixed refrigerant (DMR), which was tailored for severe cold seasons in Sakhalin. The plant officially opened with a delay in February 2009. Sakhlin-2 has three purpose-built double-hulled LNG tankers, each with 145,000 M3 capacity. The carriers are on long-term charter and owned and operated by a RussoJapanese shipping consortium. An extra tanker was leased in Sep 2011 the 145,000 M3 Stena Blue Sky is on long-term charter from Stena Bulk. Sakhalin Energy produced 5.3 MT of LNG in 2009, 10 MT in 2010 and 5.5 MT in H1 2011. Around 98% of the annual LNG plant capacity is contracted on a long-term basis. About 65% of the overall LNG volume produced is supplied to Japan. The rest is supplied to South Korea, and other destinations including India, Kuwait, China, and Taiwan.
50% stake in Sakhalin -2 is valued at $5.3bn in Gazprom's books
Offshore gas platforms linked by 1,900 km of pipelines to liquefaction plant/export facilities in Prigorodnoye
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Table 33: Sakhalin-2 long-term supply contracts

Contract signed Nov-04 Jun-04 Jun-05 Oct-04 Feb-05 Jul-05 Apr-06 May-06 Aug-07 Mar-09 Apr-09 Apr-09 Jan-11 Contracts for the supply of LNG from Sakhalin-2 TEPCO Kysh Electric Power Company Toho Gas Shell Eastern Trading Ltd Tokyo Gas Korea Gas Corporation Hiroshima Gas Co.Ltd Thoku Electric Power Company Chbu Electric Power Company Osaka Gas Gazprom Global LNG (GG LNG) Shell Eastern Trading Ltd * Guharat State Petroleum Company (GSPC) Estimated total contracted Total capacity Capacity booked under long-term contracts Other contracts for LNG from unidentified sources GAIL Petronet Guharat State Petroleum Company (GSPC) Estimated total contracted MT pa 1.5 0.5 0.5 37 over 20 years 1.1 1.5 0.21 0.42 0.5 0.2 1.0 1.0 0.2 9.48 9.6 99% MT pa 2.5 2.5 2.5 7.5 Contract dates 2007-2029 2009-2027 2009-2027 2008-2027 2007-2031 2008-2028 2008-2028 2010-2030 2011-2026 2009-2028 2009-2028 2011-2012 Term FOB X-ship X-ship X-ship FOB FOB FOB FOB X-ship X-ship (?) X-ship X-ship Destination Japan Japan Japan Mexico (?) Japan South Korea Japan Japan Japan Japan Mexico (?) Mexico (?) India
Contract signed Jun-11 Jun-11 Jun-11
Contract dates 25 years 25 years 25 years
Term X-ship (?) X-ship (?) X-ship (?)
Destination India India India
Source: J.P. Morgan estimates, Bloomberg.
Sakhalin-2 expansion seems to be seriously considered- could precede Vladivostok LNG
The addition of an extra train to the existing LNG plant at Prigordnoye in Sakhalin appears to be the quickest and most economical way for Gazprom to add LNG capacity. The existing facilities have already allocated space for an extra train and it might be relatively easy to fit an extra 4.6 MT facility on to the existing LNG chain. Officially, the source of gas for the expansion would be existing gas reserves of Piltun-Astokhskoye & Lunskoye fields. However, additional gas reserves are required. Gazprom is currently developing the offshore Kirinskoye field. It is situated near to the Sakhalin-2 Lunskoye field and is part of Salkhalin-III Kirinski block. Gazprom has recently accelerated development of the Kirinskoye field and a larger Kirinski block. It uses sub-sea production trees, a manifold for an underwater production facility rather than floating production platforms cutting edge technology in Russia.
Kirinsky block fields could potentially supply gas to Sakhalin-2
First gas production at the Kirinskoye field is planned for Q4 2012. The nearby South Kirinskoye field could be launched in 2013. The annual gas production of the Kirinskoye field is estimated at 4.2 bcm (estimated gas reserves of 100-130 bcm). Output from the South Kirinskoye field (part of Kirinsky block) could be double that, given estimated gas reserves of 230 bcm (Source: Interfax). While both fields could be a source for Sakhalin-2 expansion, the current plan is to connect the Kirinskoye field to the Sakhalin-Khabarovsk-Vladivostok pipeline rather than to a much nearer Sakhalin-2 pipeline. In our view, if Sakhalin-2 explanation is approved as early as end 2011/early 2012, the Kirinskoye field/Kirinky block fields are the most obvious sources of gas. According to media reports (Bloomberg), RD Shell may offer Gazprom assets in Asia- possibly access to liquefaction capacity in Australia in exchange for a deal to expand Sakhalin-2. That could be a win-win situation for Gazprom: it would be able to sell Kirinskoye field gas at a much better margin than if sold domestically or eventually via Vladivostok LNG (unlikely to be launched before 2017). Gazprom might also get access to brand new liquefaction assets outside Russia. RD Shell would get additional equity liquefaction capacity at a fraction of the
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cost at a time when LNG prices in target markets (Japan, Korea and China) are very firm.
Gazprom Global LNG (GGLNG) orders 2 new LNG tankers and signs supply contracts with India
Another indication that Sakhalin-2 expansion might go ahead is the recent news that Gazprom Global LNG (GGLNG) ordered 2 new LNG tankers in July 2011. They will be built in South Korea and delivered in Q4 2013 and Q2 2014. Delivery dates are too early for Vladivostok LNG, but would be perfect to service Sakhalin-2 Train 3. We have also seen GGLNG signing MoUs with three Indian gas companies to supply up to 7.5 MT pa of LNG (2.5 MT each) for 25 years. The timing suggests that Gazprom is confident of having extra LNG available within the medium term again, pointing to Sakhalin-2 expansion being seriously considered. We would rate this project as the most likely to be implemented among all other Gazprom's projects (Vladivostok and Shtokman). Green field projects Vladivostok LNG. The plan is to build a 10 MT pa liquefaction plant on the Russian Pacific coast, in Perevoznoy Bay (south west from Vladivostok). The plant is to sit at the end of the yet-to-be constructed Yakutia-Khabarovsk-Vladivostok (Perevosnoy Bay) pipeline. The 2,035 km gas pipeline would feed from the giant Chayandinkoye oil and gas field in the Yakutia region. The 1.32 TCM gas /584 mmb oil field is under exploration - first commercial oil production is not expected before 2014 and first gas before 2016. The cost of the LNG plant is estimated by Gazprom to be $7bn (as of May 2011). Potentially, 70% of LNG output would go to Japan and 30% to South Korea.
LNG projects targeting Asian markets might be given priority
The East Siberian gas field developments are technically challenging
There are numerous technical challenges to the Chayandinskoye gas field development: high levels of helium, low reservoir pressure and hydrate formation in producing wells. The construction of the gas pipeline might start in 2012, but the recent cuts in Gazprom's capex budget for 2012 might indicate some delays in both field development and pipeline build-out. If Gazprom sticks to the current time-table, the LNG plant could be launched in 2016-2017. In our view, delays are extremely likely. Along with timing/technical issues, there are also environmental concerns. The area is currently sparsely populated and has a number of nature reserves. The construction of the second large gas pipeline and a large LNG plant in the region could be taxing.
Sakhalin gas could be fed into Vladivostok LNG
Potentially, there is an alternative scenario for Vladivostok LNG development, in our view. There is a newly launched 6 bcm gas pipeline from Sakhalin to Vladivostok (to be expanded to 30 bcm). The gas is fed from existing Sakhalin-1 fields with plans to link in Sakhalin-3 green fields. Under the current plan, the pipeline is to be extended 239 km to the Russia/North Korea border (at Khasan), and then across North Korea to South Korea. Perevoznoy Bay is effectively on the route of this extension and the pipe can potentially feed a future LNG plant (rather than take gas to Korea). It might speed up the construction of LNG liquefaction facilities. The final decision will depend on the outcome of political negotiations/pre-FEED studies. In April 2011, a consortium of Japanese companies and Gazprom agreed to conduct a pre-FEED for the construction of a liquefied natural gas (LNG) plant with production capacity of 10 MT pa, a preliminary feasibility study on the compressed natural gas (CNG) pilot project and a preliminary study on gas-chemical complex project. The study was to be completed by end 2011.
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Figure 77: East Siberia/Far East gas developments
Figure 78: Key facts for Vladivostok LNG

Summary: The plant is being planned in Vladivostok (Far East) based on gas production from East Siberia and Sakhalin Shareholders: Gazprom and foreign partners Capacity: based on preliminary estimates annual capacity could amount to 10mn tons annually Source of gas: Sakhalin1/Sakhalin-2 states share piped via SakhalinKhabarovsk-Vladivostok pipeline, East Siberian gas via Sakha-Yakutia-KhabarovskVladivostok pipeline Key market: Japan, Korea, China Timing: after 2017 Investments: $7 bn for LMG plant
Source: J.P. Morgan estimates.
Source: Gazprom. Note: SakhalinKhabarovsk-Vladivostok pipeline is now complete (6 bcm capacity)
On the drawing board for over 10 years and remains the least likely to take off the ground
Shtokman LNG. The Shtokman development has been on the drawing board for over 10 years and remains the least likely to take off the ground, in our view. The 3.9 tcm Shtokman gas field was discovered in 1988. It lies 555 km offshore to the east of Murmansk in the Barent Sea and is in 350m of water. The original idea was to develop the field and link it to 7.5 MT liquefaction facilities (onshore at Teriberka). LNG output was to be exported, primarily to the US. The field would also be connected by a pipeline into the Russian Unified Gas system for supplies to domestic and international customers (via the Nord Stream). The Shtokman development would require three stages. Stage one is the most complex and capital intensive stage. It would involve construction of one offshore platform (there is one for each phase), drilling of sub-sea wells and a 580-km subsea pipeline to the onshore facilities. The initial (stage 1) production capacity is planned at 23.7 bcm pa (for 25 years). The gas will be supplied to 7.5 MT LNG plant at Teribeka in Murmansk region as well as in to a 1.365-km Teribeika-Volkhov trunk pipeline. The new land pipeline would supply domestic customers in the Leningrad region as well as international buyers via Nord-Stream pipeline. The project would require 8 LNG tankers for the first stage of the operations.
During 1st stage of development, a 7.5 MT pa, one train LNG plant to be built
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Figure 79: Shtokman field development
Figure 80: Key facts

Summary: LNG plan is planned near Murmansk (Russian North ), FID expected 2010 Shareholders: Gazprom (51%), Total (25%), Statoil (24%) Capacity: 1st phase: LNG plant with capacity of 7.5mn tons. The second and the third trains are discussed with 7.5mn ton capacity each Source of gas: 1.9 tcm (12.5 bn boe) Shtokman gas field Key market: Europe, Asia Timing: Train 1 2017; trains 2,3 20182020(?) Investments: $28bn (1st stage) incl. $10.8bn for LNG plant and tankers. Total investment budget is $44bn incl. $17bn for LNG
Source: Gazprom
Total costs of the first stage of more than $20bn are to be shared proportionally by Stage-1 shareholders: Gazprom (51%), TOTAL (25%) and Statoil (24%). The second and the third stages will expand production capacity to 72 bcm and potentially to 95 bcm pa (for 50 years) and liquefaction capacity to 14.4 MT pa. Total cost of all three stages is estimated at up to $44 bn. Gazprom has postponed the Shtokman development a number of times and currently plans to put the field on stream in 2016 and to start LNG production in 2017. A final investment decision has been delayed from end 2011 to early 2012. The current book value of Shtokman Development AG (100%) is $1.157bn (as of end Q2 2011).
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Table 34: Projected cost of Shtokman development

Projected Shtokman costs, $bn Sea production complex LNG plant Onshore pipeline LNG tankers Total costs
Source: J.P. Morgan estimates, Argue FSU (as of May 09).
Stage 1 13.2 6.8 4.3 4.0 28.0
Stage 2-3 7.5 3.9 2.5 2.3 16.0
Notes Full well stream to shore, construction of 2 offshore platforms, drill 20 sub-sea wells, 580-km sub-sea pipeline to 7.5 MT pa LNG plant at Teribeika in Murmansk region Increase LNG capacity from 7.5 MT pa (stage 1) to 14.4 MT pa liquefaction at stage 2 and 3 1,365km, 1,400km onshore link to North European Gas Pipeline (NEGP) 8-12 LNG tankers with capacity of up to 250,000 mcm each First stage (23.7-25bcm of capacity with output maintained for 25 years) = $15bn, financed proportionally to stakes. Launch pipeline deliveries in 2013, LNG deliveries in 2014. All three phases could cost $43-44bn
Large scale project faces numerous challenges
The development of the offshore field and onshore facilities is a challenge, but the technical details have been mostly ironed out. The key element of the field development is subsea completion of wells, equipped with assembly, automatically regulated butterfly valves and hydrate inhibitor injection systems. The wells will be joined by subsea pipelines and manifolds. For the transportation of gas/gas condensate from the field, two-phase flow undersea pipelines are to be constructed. It would be the longest ever built, at 550 km, to shore over very uneven seabed. Onshore, the project envisages construction of an LNG Plant, LNG Storage, Sea Port and Gas Treatment Unit, all part of Port Transportation Technological Complex. The LNG is to be constructed in 3 stages: start-up (phase 1), expansion phases 2 and 3. Under the start-up phase, a single 7.5 MT pa train will be built, based on Propane pre-cooled Mixed Refrigeration Cycle (C3/MR). The plant would be operational 333 days pa.
Large scale project in a remote location, in harsh weather conditions
From a technical point of view, TOTAL cites the large scale of the project as one of the key challenges: the floating production unit would be one of the largest in the world, a unique subsea pipeline would need to be built and a mega-LNG plant to be constructed - all in a remote area, 550-km offshore in open sea with no near-by developments. The Shtokman field is an ice free area (occurring only once every 3-5 years), but the weather conditions are very harsh, equivalent to the northern part of the North Sea (strong winds, icing, 3-month long polar night). Ice drift and icebergs are one of the main concerns - the Shtokman floating production platform would be the first and the largest - to operate in ice conditions. The technical challenges might pale in comparison with the effect of the economic turbulence. Shtokman LNG cargoes were to be delivered to the US market. However, the surge of US gas shale production and the decline in US gas prices has killed these plans. European markets could be an option, but Russian LNG would compete with Russian piped gas, which is cheaper to produce and deliver. There might be a more complex option of swap operations with other LNG producers targeting Asian gas markets. However, the scale of the Shtokman development is probably too large for such swaps. In addition, the foreign shareholders in Shtokman consortium have effectively said that Shtokman is uneconomic under the current Russian tax regime. They are asking for concessions similar to those granted to Novatek's Yamal LNG project. They include zero production tax on gas and gas condensate for 12 years, zero export duty on produced LNG and gas condensate, state subsidies for the infrastructure development (estimated at approx. $13bn). The Russian government is considering a
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Low gas prices in the US made the economics questionable
Lack of tax breaks might delay FID and potentially bury the project
special tax regime for offshore developments (which would cover Shtokman), but indicated that no specific tax breaks would be granted before the Final Investment Decision (FID) is taken by the Shtokman partners. So, it becomes a "Catch-22" situation: a positive FID is unlikely without the tax breaks, while tax breaks could only be granted if FID has been made. The final investment decision was expected by end 2011, but has been delayed. There also have been media reports that TOTAL might be exiting Shtokman in order to focus on the Yamal LNG project, where it has 20% (Novatek 80%). The French company denied sending a letter to Shtokman partners which informed them of TOTAL's lack of interest in the Shtokman (source: RBC).
Re-gasification assets
Gazprom does not own any re-gas assets outright. It has made attempts to acquire interests in US re-gasification facilities, but these have been put on ice. At the moment, Gazprom via Gazprom Global LNG (GGLNG) has long-term regasification capacity at Sempras Costa Azul in West Mexico. It is about 1 MT pa and was effectively sub-leased from RD Shell in April 2009. The re-gas capacity was originally for Sakhalin -2 LNG volumes, but cargoes have been diverted away. GGLNG had a short-term agreement with Petronas at the Dragon terminal in Wales, but ended it after delivering a couple of cargoes. Gazprom has a multi-year contract for Cameron LNG re-gas terminal in the US Gulf, but this has not been used.
Table 35: Gazprom's re-gas exposure
Terminal name Rabaska Terminal Costa Azul LNG terminal Location Beauport, Quebec, Canada Baja California, Mexico Status Suspended (approval obtained) Shell made a subleasing deal for a quarter of capacity with Gazprom Global LNG. No cargoes arrived from Sakhalin so far. Delivered 2 cargoes in 2009 under cooperation agreement signed in Oct 09, but subsequently ended a short-term agreement with Petronas. Multi-year contract to deliver 2 cargoes a month from Jun 2010 at pre-determined price formlula. Not currently used. Capacity owners Gaz Mtro, Enbridge Inc. and Gaz de France Sempra LNG/RD Shell Dragon LNG (BG Group, 50%; Petronas, 50%) Sempra (100%) Capacity 500 mmcf/day (5 MT pa) 1,000 mmcf/day (10 MT pa) split 50/50 between Sempra LNG and RD Shell 6 billion cubic metres of LNG a year (operational from Sep 2009) 1.5 billion cubic feet per day of initial send out capacity (operational from July 2009)
Dragon LNG Cameron LNG terminal
Wales, UK Lake Charles, USA
Source: J.P. Morgan estimates, Company data
LNG shipping assets

Gazprom has a number of dedicated LNG tankers on long-term and short-term time charters. The company owns no tankers directly, the exposure is via Sakhalin Energy (4 LNG tankers on long-term charter) and also via 100%-owned subsidiary Gazprom Global LNG (GG LNG) which has a couple of ships on charter and has just ordered two ice 2 class LNG tankers for delivery in 2013-2014. Sakhalin Energy has dedicated chartered LNG carriers. Three double-hulled 145,000 M3 LNG tankers were specially built for Sakhalin Energy in Japan in 2008. They are owned and operated by Russo-Japanese consortia (with Sovcomflot on the Russian side) and are on long-term time lease with the Sakhalin Energy. In September 2011, Sakhalin Energy charted a 145,000 M3 LNG tanker the Stena Blue Sky (Dragon Ship) from Stena Bulk. Its first voyage with Sakhalin Energy LNG was to China.
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Gazprom Global LNG Limited (GGLNG), Gazprom's dedicated LNG marketing subsidiary, has separate arrangements for LNG tankers. GGLNG is marketing at least 1 MT of Sakhalin-2 LNG and has time charters on at least 2 LNG tankers. The subsidiary has also signed a contract with Sovcomflot (100% owned by the Russian state) to charter two 170,000 M3 vessels for 15 years. The tankers will be constructed in a South Korean shipyard and delivered in Q4 2013 and Q2 2014. We assume the tankers are charted to ship LNG produced at yet-to-be agreed on Train 3 of the Sakhalin-2 LNG complex.
Table 36: Gazprom LNG shipping assets
Name of subsidiary/associates Sakhalin Energy Sakhalin Energy Sakhalin Energy Gazprom Global LNG Limited (GGLNG) Gazprom Global LNG Limited (GGLNG) Sakhalin Energy Gazprom Global LNG Limited (GGLNG) Gazprom Global LNG Limited (GGLNG)
Contract Date Oct-07 Oct-07 Apr-08 Apr-09 Mar-10 Sep-11 Jul-11 Jul-11
LNG carrier Grand Elena Grand Aniva Grand Mereya Clean Power LNG ship "Neva River" (ex"Celestine River") Stena Blue Sky (Dragon Ship) Atlantic max type, ice 2 class Atlantic max type, ice 2 class
Status On 20-year charter with Sakhalin Energy. Owned by the consortium of Sovcomflot (40%) and Nippon Yusen Kabushiki Kaisha (NYK) (60%) companies. On 20-year charter with Sakhalin Energy. Owned by the consortium of Sovcomflot (40%) and Nippon Yusen Kabushiki Kaisha (NYK) (60%) companies. On long-term charter. Owned by the consortium of Prisco, Mitsui O.S.K. lines, Ltd (MOL) and Kawasaki Kisen Kaisha, Ltd (K Line). Mid-term time charter On term time charter from "K" Line LNG Shipping (UK) Limited (KLNG) Charted on long-term basis from Stena Bulk, renamed Dragon ship To be on 15-year charter. Will be constructed by South Korean shipyard STX Offshore & Shipbuilding, owned by Sovcomflot. Delivery in Q4 2013 To be on 15-year charter. Will be constructed by South Korean shipyard STX Offshore & Shipbuilding, owned by Sovcomflot. Delivery in Q2 2014
Capacity 147,000 m3, Moss-type, 1C iceclass vessels 147,000 m3, Moss-type, 1C iceclass vessels 145,000 m3, Moss-type
145,000 m3 170,000 m3 170,000 m3
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Nadia Kazakova, CFA

(44-20) 7325-6373 nadia.kazakova@jpmorgan.com
Novatek
Novatek is a Russian independent gas and liquids producer it does not have any LNG assets at the moment. In 2010-2011, the company purchased a license for 1.24 tcm South Tambeyskoye gas and gas condensate field from one of Novatek's major shareholders. In March 2011, TOTAL purchased 20% in the Yamal LNG development. Novatek stated that it would hold on to 51% of the project and 29% is to be sold to other investors. The development will go ahead only if additional shareholders are found. Novatek is in negotiations with the Qatari government on potential investments.
Figure 82: Key facts
Summary: The LNG plant to be built at Sabetta, natural gas come from Tambeyskoye group of fields Shareholders: Novatek (51%), Total (20%), yet-to-be found (29%) Capacity: Stage 1: 15 mn tons = 3 trains 5 mn tons each Source of gas: 1.24 tcm (8bn boe) South Tambei field, 1 tcm (6.6 bn boe) Timing: Novatek targets LNG plant commissioning in 4Q2016 Key markets: US Investments: $10-$20 bn by shareholders, $13 bn+ by the government Technological challenges: ice-class LNG carriers needed, the Kara sea is frozen 10 months a year
Novatek owns 51% stake, TOTAL holds 20% interest and 29% is yet to be sold
Figure 81: Yamal LNG development
Source: Novatek
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Total cost of Yamal LNG development is approx. $33bn, $20bn to be financed by shareholders and remainder by the Russian government
The total cost of the project is estimated by the Russian government to exceed RUB 1 trillion ($33bn). Yamal LNG shareholders plan to spend $18-20bn on the field development and LNG facility with the balance being financed by the Russian government (port, LNG vessels and ice-breakers fleet). The complete FEED study should be ready by year end 2012. The FID is expected by end 2012/early 2013. Planned launch of the first LNG train is in Q4 2016. A number of key issues are yet to be resolved. The Yamal LNG development plan envisages production of 25 bcm of gas and construction of a 15 MT LNG plant and export port facilities at Sabetta. The field development is relatively inexpensive: Novatek forecasts RUB10 bn / $3.3bn in capex with a launch planned for 2016. Construction of the LNG plant and the port facilities could prove to be more difficult and expensive. According to TOTALs presentation, the challenges include (1) four months of polar night with average temperatures below -20C (2) sea frozen for 270 days a year, leaving only 90 days for ice-free navigation. Ice breaker LNG tankers are required (3) 30km to be dredged in the mouth of Ob to allow for passage of LNG tankers (4) permafrost melting down 1-2 meters in summers, requiring special construction technologies.
The project relies heavily on state support
The Yamal LNG shareholders are relying on the Russian government to finance some of the facilities, including the port harbor, approach channel, seaway channel (including 30-km of dredging), ice protection construction and administrative facilities. The government is also expected to finance development and construction of LNG fleet and ice breakers (if required). The bigger challenge is transportation options for Yamal LNG cargoes. Novatek is looking at Europe, Asia and South America as potential target markets. However, there might be difficulties in shipping LNG all year around from the ice-bound Yamal. Novatek is looking at an option of trans-shipment of cargoes in Norway or direct routes to target markets. For either option, Novatek would most likely need a number of powerful and yet-to-be built ice-breakers in addition to ice class LNG tankers designed specifically for the project (they have maximum ice breaking abilities of over 2.3-2.4 meters on even ice). Even if the cost of transportation is effectively subsidized by the Russian state, the risks and costs of a year- round Arctic LNG route could prove to be prohibitive, in our view. Project economics are heavily reliant on government support and tax holidays. In addition to various technical challenges, Yamal LNG economics appear to rely heavily on tax concessions granted by the government. The project will be effectively tax-free (no production tax, export duty or property tax) for the first 12 years after the launch of LNG production (or until 250 bcm of natural gas and 12 MT of gas condensate is produced). The corporate income tax rate is then reduced from 20% to 15.5%. We estimate that the project is loss making excluding tax breaks at stage 1 of the development and over 60% of project's NPV is attributable to tax breaks for Stage 2 development.
Capex excl state financing 16,525 26,301
LNG transportation through Arctic all year around could be a challenge
Project economics rely heavily on tax breaks
Table 37: NPV calculations for Yamal LNG ($m)

Yamal LNG stages Stage 1: Full field development, all natural gas liquefied, condensate exported Stage 2: full field development, natural gas sold domestically at initial stage, liquefied at a later stage, all condensate exported
WACC 12.7% 12.7%
LNG price (Asia, 2016E) $9.4/mmbtu $9.4/mmbtu
Total NPV 354 4,052
NPV of tax breaks 938 2,465
NPV ex tax breaks -585 1,586
IRR (with tax breaks) 13% 22%
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Benjamin Wilson
(61-2) 9220-1384 benjamin.x.wilson@jpmorgan.com
Oil Search
Figure 83: Oil Search - summary of LNG assets (net capacity, MT pa shown)

Niche exposure to global LNG industry thematic
We have classified Oil Search as a niche type exposure to the global LNG industry thematic. The companys LNG exposure is confined to a 29% non-operating interest in the ExxonMobil led PNG LNG project located in the Southern Highlands and Port Moresby regions of Papua New Guinea. The 2 train, 6.6 MT pa integrated (gas supply and liquefaction) project was sanctioned in December 2009 and is scheduled for first LNG in 2014. Oil Search has a long history of oil exploration and production in PNG and with it, highly entrenched community and government relations. These relationships are a core company attribute and are valued by project operator Exxon Mobil.
PNG is an attractive new LNG province due to labor cost advantage and proximity to Asian customers
PNG is a new LNG province with the PNG LNG project set to be the first LNG project based in the resources-rich nation. US listed E&P Interoil is contemplating a second PNG sited project, Gulf LNG based on the Elk/Antelope gas discoveries. However, this project is significantly less mature than the in construction PNG LNG project. PNG has a number of attractions as an LNG province including: 1) proximity to North Asian and South East Asian customers, 2) supportive government with extensive experience in administering complex resources projects, 3) attractive fiscal
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environment (~2% well head royalty, 30% corporate tax and an advanced profits tax which is levied when project returns exceed an IRR of 17.5%), 4) low cost local labor pool and unrestricted capacity to imported labor, and 5) onshore location of gas resources (in PNG LNG case) which reduces capital intensity.
Project risks include land owner disputes, tribal rivalry and sovereign stability
Developing and operating a mega project in PNG is not without its risks of course. The current political situation of two leaders claiming rights to the office of Prime Minister highlights the attendant sovereign risk. Land owner disputes and tribal rivalry are issues that are ever present and managed by both the project operators and the central PNG government. However, we think the risk of nationalization of petroleum resources is extremely remote given the country's reliance on foreign aid and the importance of the PNG LNG project to the future of the PNG economy. The impact of the PNG LNG project on PNG is hard to overstate. We estimate the project will drive a 60-70% increase in 2010 level GDP when it reaches peak production in 2015. It is truly a nation building project.
Stick build as opposed to the increasingly popular modular developments
The PNG LNG development is a stick build process as opposed to the increasingly common modular approach. The decision made in the FEED process to opt for stick build was cost driven. Given the comparatively low labour costs of PNG nationals and the Philippines, Malaysian, Pakistan etc offshore workers, the additional on-site fabrication time associated with a stick build process is not nearly as burdensome in a cost sense as it would be in Australia for example (where modular developments tend to be favoured). Additionally, the ample site area (for lay down and construction facilities) and temperate weather (as opposed to Sakhalin in Russia for example) make the PNG LNG site ideal for a stick build. The stick build approach does, however, introduce an added degree of complexity and is the biggest risk to project schedule and budget in our view. The PNG LNG project sponsors recently announced a 5% increase to the project budget (now US$15.7bn versus US$15bn original budget) primarily driven by the stronger A$. Much of the early project civil works were denominated in A$. We model PNG LNG project capex of US$16.9bn - higher again than the recent revised guidance.
PNG LNG to comprise 85% of our group NAV
As Oil Searchs legacy oil assets in PNG wind down, commercialization of the companys sizeable gas resources takes on increasing importance. The foundation PNG LNG project and a risk weighted contribution from a third brown field train comprise ~85% of our company NAV currently making it the most leveraged LNG exposure in our Australian E&P coverage universe. The off-take contracts entered into by project operator Exxon Mobil are within 10% of oil parity meaning Oil Search also has a very strong linkage to JCC oil prices.
Liquefaction assets
Project IRR modeled at 18% in US$ terms, stronger than current green field proposals at 10-15%.
We think the PNG LNG project is one of the leading green field LNG developments in the Australia/PNG region. The projects onshore gas resource location and access to low cost labor combine to generate a cost base that is lower than new green field developments in Australia. In addition to the capital cost advantage, PNG has comparatively attractive fiscal terms and the PNG LNG project off-take contracts reflect near peak cycle slender discounts to oil parity. These factors combine to produce strong modeled project returns. We estimate an IRR of 18% in US$ terms
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and 21% in A$ terms. Such returns are higher than forecast returns for other green field LNG projects that are due to commence construction in coming years which have normalized to the 10-15% IRR range.
Third train highly likely
We think a third (and eventually fourth) train for the PNG LNG project is one of the most prospective brown field expansion opportunities in the region. There is significant gas resources located around the PNG LNG project area that could underpin a third train. The most immediate prospect is an extension to the Hides gas and condensate field which currently contributes ~5 TCF of the second train PNG LNG project dry gas resources of ~9 TCF. The PNG LNG project partners plan to drill the first Hides development well in 1H 2012 which will target the gas water contact point in the reservoir and determine how much additional gas resources may be contained in the field. The gas water contact has not previously been established by previous exploration wells. If it transpires that the Hides resource is sufficient to underpin a third train then the development case is relatively simple. Scope additions would include an expansion of the Hides gas conditioning plant, some compression and/or looping of the onshore pipeline and the liquefaction train itself. The foundation PNG LNG project LNG tanks and jetty are already sized for three trains. However, a fourth train may require an additional jetty to facilitate more frequent tanker loadings when operating at peak capacity. We estimate an IRR of 31% for a brown field third train expansion. The table below provides a summary description of the PNG LNG project.
Table 38: PNG LNG project description
Liquefaction trains LNG production capacity Project sanction date First LNG due Capex Operator Equity participants Total resources Gas supply Off-take contracts Primary EPC contractors 2 6.6 MT pa Dec 2009 2014 US$15.7bn (updated Dec 2011), budget at sanction US$15bn Exxon Mobil Exxon Mobil (33.2%), Oil Search (29.0%), PNG Government (16.8%), Santos (13.5%), Nippon Oil (4.7%), PNG Landowners (2.8%) ~9.1 TCF gas, ~225mmbbls liquids 982 mmscfpd Sinopec 2 MT pa, TEPCO 1.8 MT pa, Osaka Gas 1.5 MT pa, CPC Taiwan 1.2 MT pa Chiyoda/JGC (LNG plant), Saipem (offshore pipeline), CBI/Clough JV (hides gas plant), Spiecapag (onshore pipeline), McConnell Dowell/CCC JV (infrastructure), Clough/Curtain JV (early works), Jacobs (associated gas)
Estimate 31% IRR for Train 3 PNG LNG
Source: Company reports.

Around A$10bn or A$7.65 per share
Our Oil Search NAV is primarily comprised of its exposures to the PNG LNG foundation project and a potential third expansion train. The table below displays our Oil Search NAV on a scenario build up basis. We have shown three long term oil prices (US$70, US$90 and US$110/bbl Brent real prices), our base case in US$90/bbl real long term with 0.80US$/A$. Assuming our base case we value Oil Searchs exposure to the PNG LNG foundation project at A$7,805m or A$5.91 per share and a third expansion train at A$2,298m or A$1.74/shr. Note the valuations presented in the table below are on a 100% un-risked basis.
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Table 39: LNG contribution to Oil Search NAV

LT Brent oil (US$/bbl) LT A$/US$ Company Oil Search Valuation Scenario (un-risked projects included) Base Case: Oil business (excluding PNG LNG) + PNG LNG project + Third Train PNG LNG, 3tcf, 30% OSH share + Mananda 5 Development Share price (A$) 6.35 70 0.80 DCF (A$/shr) 0.95 5.07 6.29 6.38 90 0.80 DCF (A$/shr) 1.13 7.04 8.78 8.97 110 0.80 DCF (A$/shr) 1.31 8.88 11.14 11.45
Upside to DCF value -85% -20% -1% 0%
Upside to DCF value -82% 11% 38% 41%
Upside to DCF value -79% 40% 76% 80%
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Benjamin Wilson
Santos
Figure 84: Santos - summary of LNG assets (net capacity, MT pa shown)

Corporate strategy to transition from domestic gas pricing to oil linked pricing
Raising its equity LNG participation is central to Santos' corporate strategy of becoming a leading Australian and Asian energy player. Santos already has a strong presence in the East Coast Australian gas market by virtue of its long held Cooper Basin assets, however its ambition is to drive a transition to oil linked pricing by accessing Asian LNG markets. Santos aims to have 70% of its group production linked to oil pricing by 2015, only 30% of its 2011 production is currently oil linked. Santos has 11.4% in the ConocoPhillips operated Darwin LNG project which commenced LNG sales in 2006. Darwin LNG is situated in Australias Northern Territory and is fed by gas and condensate fields in jointly administered waters between Australia and East Timor. Santos is seeking to expand its LNG presence via two projects that are in development, 1) a non-operating 13.5% interest in the PNG LNG project and 2) a 30% operating interest in the Gladstone LNG project in Queensland, Australia. We have discussed the PNG LNG project at length in the section on Oil Search. Gladstone LNG is a CBM-to-LNG project very similar to the QC LNG project being developed by BG Group. Santoss GLNG project commenced development ~3 months after BG Group's project and is virtually fully contracted to Petronas and Kogas, both of whom are participants in the JV along with TOTAL.
Small interest in ConocoPhillips operated Darwin LNG
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Santos has a third potential development project, Bonaparte LNG, which is a Floating LNG concept to commercialize the Petrel, Tern and Frigate gas fields in the Timor Sea. Bonaparte LNG is a JV between GDF Suez (60% and operator) and Santos (40%). The aim is to develop a 2 MT pa FLNG project with FID targeted for 2014 and first LNG by 2018. Pre-FEED contracts with Granherne Ltd and DORIS Engineering were let in early 2011. As the FID target for Bonaparte LNG is quite distant we do not yet include a specific valuation for the project in our Santos group NAV calculation.
Santos has limited counterparty risk given its strong suite of offtake contracts
We have identified Santos as an advantaged LNG project portfolio owner within the sphere of Australian listed LNG exposures. Santos has a clear path to oil linked pricing through the GLNG and PNG LNG projects and is well positioned to supply the Asian basin market. Santos has sought to align itself with experienced operators, starting with ConocoPhillips in the Darwin LNG project, Exxon Mobil in the PNG LNG JV and TOTAL and Petronas in the GLNG JV. Santos has a strong set of offtake customers, predominantly Japanese and Korean buyers with Petronas also taking half of the GLNG output. Upon completion of PNG LNG and GLNG, Santos will have an equity interest of 3.6 TM pa of LNG capacity.
Liquefaction assets
The three tables below display the key characteristics of the operating Darwin LNG project and the in development PNG LNG and GLNG projects.
Table 40: Darwin LNG project description
Trains LNG production capacity Project commission date Capex Operator Equity participants Gas supply Off-take contracts
1 3.5 MT pa 2006 Phase 1 gas recycling US$1.8bn, Phase 2 LNG development US$1.2bn ConocoPhillips ConocoPhillips (57.2%), Santos (11.4%), Inpex (11.3%), ENI (11.0%), Tokyo Gas/TEPCO (9.2%) 541 mmscfpd Output sold to Tokyo Gas and TEPCO under a 17 year agreement
Table 41: PNG LNG project description

Trains LNG production capacity Project sanction date First LNG due Capex Operator Equity participants Total resources Gas supply Off-take contracts Primary EPC contractors 2 6.6 MT pa Dec 2009 2014 US$15.7bn (updated Dec 2011), budget at sanction US$15bn Exxon Mobil Exxon Mobil (33.2%), Oil Search (29.0%), PNG Government (16.8%), Santos (13.5%), Nippon Oil (4.7%), PNG Landowners (2.8%) ~9.1 TCF gas, ~225mmbbls liquids 982 mmscfpd Sinopec 2 MT pa, TEPCO 1.8 MT pa, Osaka Gas 1.5 MT pa, CPC Taiwan 1.2 MT pa Chiyoda/JGC (LNG plant), Saipem (offshore pipeline), CBI/Clough JV (hides gas plant), Spiecapag (onshore pipeline), McConnell Dowell/CCC JV (infrastructure), Clough/Curtain JV (early works), Jacobs (associated gas)
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Table 42: Gladstone LNG project description

Trains LNG production capacity Project sanction date First LNG due Capex Operator Equity participants Total resources Gas supply Off-take contracts Primary EPC contractors
2 7.8 MT pa Jan 2011 2015 US$16bn at sanction Santos Santos (30%), Petronas (27.5%), Total (27.5%), Kogas (15%) Coal seam gas 2P reserves as at Jan 2011 ~5tcf plus 0.75tcf gas supply contract from Santos conventional gas resources in Cooper Basin. EUR from project coal seam gas acreage ~9.9 TCF. 1,262 mmscfpd Petronas 3.5 MT pa, Kogas 3.5 MT pa Fluor (upstream gas development), Saipem (gas trunkline), Bechtel (liquefaction plant)
Gladstone LNG is a complex project which along with the three other Queensland CBM-to-LNG projects has assumed a high profile due to the community and landowner opposition to the development of the coal seam gas fields that will feed the project. The project's complexity is driven by two issues, 1) competition for skilled labor with other Australian LNG projects in development and 2) management of land owner and community opposition to large scale coal seam gas developments. GLNG competition for skilled labor One of the biggest challenges facing LNG developers in Australia is competition for skilled and semi-skilled labor to execute the projects. Australia is effectively a closed labor pool with limited ability to import workers from abroad. The sheer number of LNG projects in development combined with the multitude of minerals projects in train has created an environment of rampant wage cost escalation. The figure below highlights the number of LNG projects currently under construction in Australia seven currently (excluding PNG LNG). Santos has sought to insulate itself from labor cost escalation by agreeing to fixed price contracts with EPC providers where possible. On GLNG, the Bechtel and Saipem EPC contracts for delivery of the two train liquefaction plant on Curtis Island in Gladstone and the 42 inch main overland trunk-line are fixed price turnkey contracts. The EPC contract with Fluor for delivery of the upstream gas project is not fully fixed; rather the contract contains a fixed per unit schedule of rates e.g. fixed cost per km of infield pipeline, with variability around the number of units required. While a fixed price, turnkey contract does not necessarily guarantee that a project will not experience cost overruns, we believe Santos has taken every precaution possible to ensure a favorable outcome. Despite these measures taken by Santos to limit cost escalation we carry 8% cost overrun which gives a total budget of A$17.3bn versus the original budget of A$16bn.
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Figure 85: Australia, PNG, Timor Leste LNG projects
GLNG managing community and land owner opposition A large scale onshore gas development is new to populated regions of Eastern Australia. Historically most gas production for the East Coast has come from the offshore Gippsland Basin and the onshore Cooper Basin which is in a desert region. The areas in which Santos, BG Group, Origin/ConocoPhillips and RD Shell are proposing to develop their coal seam gas resources are in areas of Queensland that are used for irrigated cropping (in the case of BG Group and RD Shell) and low intensity grazing (Santos and Origin/ConocoPhillips). Petroleum and mineral resources rights in Australia are held by the relevant states, therefore the freehold land owner has no specific rights to the resources underlying their properties. This creates a fundamental mismatch of incentives in that landowners generally have no specific incentive to support gas developments on their property as by definition the only compensation required to be paid is for loss of economic value and other amenities. Landowners, environmental advocacy groups and ministers from state and federal governments have voiced concerns over the potential impact of large scale coal seam gas developments on local and regional aquifers, and on the above ground farming activities. Disposal of the large volumes of produced water is proving to be a major challenge for all CBM-to-LNG project sponsors.
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The issues associated with large scale CBM developments, particularly the interaction between water extraction and disposal and existing fresh water hydraulic systems, are complex and evolving. While there is broad political support at both state and federal level for the projects, the public opposition is difficult to ignore. Broadly speaking we believe that the Santos operated GLNG project and the Origin/ConocoPhillips APLNG project are less exposed than either the BG QC LNG project or the RD Shell/PetroChina project due to location of acreage being in less intensively farmed regions and coal seams sitting deeper which means less water production.

Around A$11.9bn or A$12.77 per share
The table below displays our Santos NAV on a scenario build up basis. We have shown three long term oil prices (US$70, US$90 and US$110/bbl Brent real prices), our base case in US$90/bbl real long term with 0.80US$/A$. Assuming our base case, we value Santos exposure to the Darwin LNG project at A$1,340m or A$1.44 per share (included in the Base Case category in the table below), its 13.5% interest in the PNG LNG foundation project at A$4,490 or A$4.81 per share, its 30% interest in GLNG at A$4,134 or A$4.43 per share and its interest in a third expansion train for PNG LNG at A$1,937m or A$2.08 per share. Note the valuations presented in the table below are on a 100% un-risked basis.
Table 43: LNG contribution to STO NAV

LT Brent oil (US$/bbl) LT A$/US$ Company STO Valuation Scenario (un-risked projects included) Base Case: Existing projects incl. GLNG equity sell down, capital raising, A$23/t carbon tax, excl. LNG + PNG LNG project + 2 train GLNG + Third Train PNG LNG Share price (A$) 12.65 70 0.80 DCF (A$/shr) 7.93 11.33 13.68 15.17 Upside to DCF value -37% -10% 8% 20% 90 0.80 DCF (A$/shr) 9.10 13.91 18.35 20.42 Upside to DCF value -28% 10% 45% 61% 110 0.80 DCF (A$/shr) 10.23 16.20 22.54 25.22 Upside to DCF value -19% 28% 78% 99%
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Benjamin Wilson
Woodside
Figure 86: Woodside - summary of LNG assets (net capacity, MT pa shown)

Clear strategy to maintain #1 position in Australian LNG
Woodside has a clear LNG strategy to maintain and build on its position as the number one LNG producer in Australia. With the forthcoming addition of the Pluto-1 project in March 2012 (WPLs total LNG net equity will increase to 6.6 MT pa), Woodsides position looks secure until 2015 at the earliest when Chevron's 15 MT pa (7.1 MT pa net Chevron) Gorgon project is due on line or BG Groups 8.5 MT pa QCLNG project (BG net equity 8 MT pa). As operator of the giant North West Shelf Venture (NWSV) in Western Australia, Woodside's history of LNG production dates back to commissioning of the first two 2.5 MT pa trains in 1989. Since then, Woodside and its JV partners (Chevron, RD Shell, BP, BHP and Mitsubishi/Mitsui) have added three further trains (the last in 2008) for a total operating capacity of 16.3 MT pa making the NWSV one of the largest single site LNG projects globally.
The sanctioning of Pluto-1 in 2007 signaled a more aggressive LNG growth strategy
Woodside is a high profile player in the Australian and broader Asian basin LNG industry. Its virtual sole risking of the Pluto green field LNG development in 2007 signaled Woodside's arrival as an aggressive, growth driven LNG player. At the time of project sanctioning, Woodside was aiming for the Pluto project to be the quickest development from gas discovery to LNG sales. Its ambition was not limited to Pluto1, at the time of project sanctioning in July 2007 Woodside commenced studies into a second and third Pluto expansion trains. Indeed, at one point former Woodside management articulated an aspirational goal for up to five Pluto trains.
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Woodside has also been seeking to mature two further green field LNG projects - the ~12 MT pa Browse LNG project in the Browse Basin in offshore northern Western Australia and the 4-5 MT pa Sunrise Floating LNG project in joint waters between Australia and East Timor.
Woodside LNG strategy characterized by project operatorship
Woodsides LNG strategy is characterized by a desire for operatorship. The company operates the NWSV and Pluto as well as the proposed Browse and Sunrise projects. As we have discussed previously in this note, LNG operatorship is an important hallmark of a strategically advantaged LNG player. Woodside has a strong history of LNG sales to Japanese, Korean and Chinese customers which is important when negotiating future LNG supply agreements. Despite these two considerable strengths, we have not identified Woodside as a strategically advantaged LNG project portfolio owner within the sphere of Australian listed LNG exposures. The Woodside LNG growth story has lost some of its luster in recent years. A total 15 months schedule deferral and 33% cost overrun for Pluto-1, now due in March 2012, has highlighted the difficulties associated with executing a large scale resources project in Australia. Furthermore, the prospect of Pluto expansion trains looks set to be reliant on third party gas as Woodside's efforts to discover equity gas to feed the brown field expansion have not been as successful as hoped. We also note that the Browse and Sunrise projects are struggling to make forward momentum towards FID while competing projects, mainly from much larger operators (e.g. Chevron, RD Shell, Exxon Mobil), have secured customers and entered construction.
Five competing LNG projects in Australia have moved into construction since Oct 2010
The charts below demonstrate the issues that Woodside has experienced over the past 12 months in maturing its projects. The first chart displays the current state of Australian/PNG projects (against contract commitments), specifically their development status and off-take arrangements and the second displays the same chart from October 2010. Some five projects have moved into construction and several more have secured off-take contracts. It is apparent that Woodsides projects have moved little over the same time frame.
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Figure 87: Australian/PNG LNG projects and off-take agreements - current

mtpa
In Construction
0.4
Pre FID
Pre FEED
16 14 12 10 8 6 4 2 0 0.55
0 0 0.8 0 0.2 4.3 5 0.2 5 2.1 5 0.08 9.5 4 3.3 4.25
Tokyo Gas TEPCO PowerGas PetroChina Kyushu Electric Toho
Kansai Electric PETRONAS Chubu Electric Petronet CPC Corp Total
Osaka Gas CNOOC GSCaltex Sempra Import Terminal Nippon Oil Not Contracted
Sinopec GNL Quintero Gujarat State Petroleum Corp KOGAS Inpex
Source: Company reports. 1 Browse: CPC Corp signed a preliminary key terms agreement with Woodside in 2007 for the Browse project. The other Browse KTA has lapsed. 2 Curtis Is. LNG: We expect that PetroChina will sign an off-take agreement for at least its equity share of the first 2 trains of Curtis Island LNG, ie 50% or 4.0 MT pa 3 BG's QCLNG Project has signed off-take agreements for ~10 MT pa. We expect the first two trains to be 8.5 MT pa with the remainder to be supplied by BG's global portfolio 4 BG's contract with Chubu Electric is for 120 cargoes. We estimate this could be between 0.4 MT pa and 0.8 MT pa, with the midpoint of 0.6 MT pa in the chart above 5 Ichthys: The Kogas contract with Ichthys has not been signed but was reportedly announced by the Korean Ministry 17 Aug 2011. The Japanese contracts are also yet to be finalized. 6 Prelude: it is unclear how much of the Osaka Gas contract and Kogas impending contract (announced by the Korean Ministry 17 Aug 2011) is firmly from Prelude as their combined size (0.8 MT pa Osaka and 3.64 MTpa Kogas) exceeds Prelude's capacity. Some may be RD Shell portfolio capacity.
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Figure 88: Australian/PNG LNG projects and off-take agreements October 2010
The NWSV remains a world class project and the Pluto project is on the verge of delivering cash flows. However, Woodsides strategic LNG advantage beyond these two projects is challenged in our view.
Liquefaction assets
Woodside has an operating interest in the five NWSV LNG trains for total net equity production capacity of 2.7 MT pa. The project description is displayed in the table below.
Table 44: North West Shelf Venture project description
Trains LNG production capacity Project commission date Operator Equity participants* Off-take contracts 5 16.3 MT pa T1 1989 (2.5 MT pa), T2 1989 (2.5 MT pa), T3 1992 (2.5 MT pa), T4 2004 (4.4 MT pa), T5 2008 (4.4 MT pa) Woodside Woodside (16.7%), Chevron (16.7%), BP (16.7%), RD Shell (16.7%), BHP (16.7%), Mitsubishi/Mitsui (16.7%) Original 25 year contracts signed in 1985 were with Japanese buyers Chubu Electric, Chugoku Electric, Kansai Electric, Kyushu Electric, Osaka Gas, Toho Gas, Tohoku Electric, TEPCO, Tokyo Gas and Shizuoka Gas. A 25 year contract for 3.3 MT pa was agreed with CNOOC in 2002. Kogas has been buying NWS LNG since 2003.
Source: Company reports. * CNOOC has a ~5.3% equity interest in gas resources but no equity interest in LNG infrastructure.
The Pluto-1 LNG project is due on line by March 2012. The project is described in the table below.
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Table 45: Pluto LNG project description

Trains LNG production capacity Project sanction date First LNG due Capex Operator Equity participants Total resources Gas supply Off-take contracts Primary EPC contractors
1 4.3 MT pa July 2007 March 2012 (updated July 2012), target at sanction end CY10 A$14.9bn (updated June 2011), cost estimate at project sanction A$11.2bn Woodside Woodside (90%), Tokyo Gas (5%), Kansai Electric (5%) 5.5 TCF gas, 83 mmbbls gas liquids 652 mmscfpd Tokyo Gas 1.9 MT pa, Kansai Electric 1.9 MT pa Foster Wheeler and WorleyParsons
The Pluto project has been hit by significant deferrals and cost overruns. To a certain extent the project has been a victim of changes to industrial relations laws which contributed to three separate strikes. While this industrial action was not related to Woodsides actions it is indicative of the challenges associated with executing large scale resources projects in Australia presently. The chart below highlights the impact of these cost overruns on Pluto-1 costs relative to peer projects.
Figure 89: LNG project EPC costs ($ per T)
4000 3500 3000 2500 2000 1500 1000 500 0
FID PENDING UNDER DEVELOPMENT
PRODUCING
On 17 June 2011, Pluto-1 suffered its third schedule & cost overrun (a further 6 months and A$900m).
Table 46: Pluto-1 capex increases over time
Pre-FID expenditure Post-FID capex estimate (27 July 2007) 1st revised cost over-run high estimate (20 Nov 2009) Total capex at Nov 2009 2nd revised cost over-run estimate (30 Nov 2010) Total capex at Nov 2010 3rd revised cost over-run estimate (17 June 2011) Total capex at June 2011
A$bn (100%) 0.8 11.2 1.1 13.1 0.9 14.0 0.9 14.9
A$m Cumulative increase capex 1.1 2.0 2.9
% Cumulative increase capex 11% 18% 26%
Mths Cumulative Increase time 7-8 mths ~14 mths
% cumulative Increase time ~17% ~34%
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Figure 90: Pluto-1 timetable key dates
Pluto expansion trains stalled by lack of resources
Pluto expansion trains Woodsides self imposed deadline for Pluto-2 FID of end CY 2011 under former management has been abandoned. For various reasons, we think FID is highly unlikely before the end of 2012. The most pressing factor is the delays to internal and external resource definition (including Woodside licence appraisal, an inability to reach terms with Hess for WA-390-P gas, and lack of news on the Scarborough/Thebe front). A further issue is the lack of gas sales contracts, particularly as a number of rival projects with similar start-up dates have recently been sanctioned, locking away customer demand. A third issue is funding, as the credit rating agencies have made quite clear that Woodsides BBB+/Baa1 rating band (it is on negative watch) would probably be downgraded if it took on another large funding requirement without 3+ months of successful operational history behind Pluto-1 (now due to start-up in Feb 2012). On 11 October 2011, Moodys re-affirmed the Baa1 (neg) rating, on the understanding that Woodside would adopt a less aggressive expansion timetable and reduce its equity interest in its projects.
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Browse large green field development
Browse LNG The Browse LNG project is a proposed green field project to commercialize large gas discoveries in the Browse Basin, situated north of the Greater Carnarvon basin in which NWSV gas resources are located. The project concept is for a 12 MT pa onshore processing facility located on the Kimberley Coast at James Price Point. The project equity ownership is as follows: Woodside (46%, operator), BP (17%), Chevron (17%), RD Shell (10%, BHP (17%). The Browse JV is the same as the NWSV with the exception of Mitsubishi/Mitsui who are in the NWSV, but are not in Browse. The Browse project faces a series of significant challenges. The proposed site location at James Price Point is an area of cultural and environmental significance. Woodside had reached an agreement with the traditional owners of James Price Point (as represented by the Kimberley Land Council) in May 2011. However, in December 2011 the Western Australia Supreme Court ruled that the State's move to compulsorily acquire land at James Price Point invalid. This is likely to result in further delays as Woodside seeks to clarify the notices of intention to acquire. In any case, Woodside announced in December 2011 that it is seeking an extension to the Browse retention licenses to allow an extension of the required FID date from mid CY 2012 into 1H CY 2013. This is a clear indication that Woodside is not ready to move forward with the Browse project. Aside from traditional owner opposition, we believe the Browse project is suffering from a lack of joint venture party alignment. We believe the Browse JV partners (excluding Woodside) would prefer to delay the commercialization of a Browse green field project and instead pipe the gas back to the NWSV in 2022+ to fill capacity on the five trains in place. The Browse project is technically complex, high cost and high in CO2 all of which combine to produce a very challenging project. Sunrise LNG The Sunrise project is a JV including Woodside (33.4% operator), ConocoPhillips (30%), RD Shell (26.6%) and Osaka Gas (10%). Sunrise is seeking to commercialize wet gas fields in joint waters between Australia and East Timor. The JV's preferred development concept for Sunrise is a Floating LNG solution. JV participant RD Shell is currently constructing the worlds first FLNG development on the Prelude resource in the Browse Basin. The economics of a FLNG project are strong, particularly given the condensate rich composition of the Sunrise gas resource. The issue with Sunrise lies in the East Timorese government requirement that the liquefaction component of the project be based onshore in East Timor. An onshore East Timor based liquefaction has not been considered by the Sunrise JV partners due to technical (deep trench to cross), commercial (+US$5bn cost) and sovereign risk issues. Both the Timor Leste government and the Australian government are required to approve the project concept in order for a development to proceed. Former Woodside management admitted it had reached an impasse on Sunrise. New Woodside management is attempting to broach the impasse. However, for now the project remains a stalemate.
Browse proposed site location is culturally and environmentally sensitive.
Sunrise project remains in stalemate
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LNG shipping assets

Woodside has a 1/6 interest in NWSSC which owns 7 vessels
th
Woodsides LNG shipping fleet interests are aligned with its ownership interest in the North West Shelf JV. Woodside has a 16.7% interest in the North West Shelf Shipping Service Company (NWSSSC) which own and operates a fleet of seven LNG carriers (Northwest Sanderling, Snipe, Shearwater, Sandpiper, Sea Eagle, Stormpetrel and Swan) dedicated to transporting NWSV LNG to North Asian customers and other destinations as spot sales dictate. Six of the NWSSSC vessels feature the older Moss Rosenberg technology. The 2004 addition of the Northwest Swan represents the first use within the Woodside fleet of the Membrane Containment System. The Northwest Swan is the largest in the fleet with a capacity of 135,500M3. The shipping arrangements for the Pluto project involve the foundation customers (Tokyo Gas and Kansai Electric) providing a vessel each and Woodside leasing a purpose built vessel (the Woodside Donaldson). As Woodsides shipping assets are dedicated to specific projects we believe that it has minimal merchant LNG shipping capacity.

The table below displays our Woodside NAV on a scenario build up basis. We have shown three long term oil prices (US$70, US$90 and US$110 per barrel Brent real prices). Our base case is US$90/bbl real long term with 0.80US$/A$. Woodsides leverage to LNG developments is strong. While Woodside's LNG related disclosure is strong relative to peers it is not so detailed at the cost line to derive a 100% accurate breakout of the LNG related assets of the NWSV. Note the NWSV also produces oil, LPG, condensate and domestic gas. For the purposes of this exercise we have pro-rated our NWSV NAV according to revenue contribution which is disclosed. Assuming our base case we value Woodsides exposure to the NWSV LNG project (only) at A$5,962m or A$7.52 per share (included in the Base Case category in the table below) and its 90% interest in the Pluto-1 foundation project at A$16,697m or A$21.05 per share. On this basis, Woodside is clearly a highly leveraged LNG play. We also carry value for projects that are yet to be sanctioned, including a Pluto-2 expansion train, Browse LNG and Sunrise LNG. As these projects are yet to be sanctioned and are yet to secure customers they warrant a high degree of risk weighting. We value a Pluto-2 train, assuming Woodside 90% equity interest, at A$6,488m or A$8.18 per share. We value a Browse development tied back to NWSV (the brown field option) at A$4,559m or A$5.75 per share. We value a Browse green field development at James Price Point at A$10,775m or A$13.58 per share. We value a Sunrise FLNG development at A$2,914m or A$3.67 per share. Note the valuations presented in the table below are on a 100% un-risked basis.
Table 47: LNG contribution to Woodside NAV
LT Brent oil (US$/bbl) LT A$/US$ Company WPL Valuation Scenario (unrisked projects included) Base Case: Existing projects + Pluto 1, Laverda oil 50%, incl A$23/t carbon tax + Pluto 2 assuming WPL 90% equity gas + Sunrise FLNG + either Browse tie-back to North West Shelf (Option 1) + or Browse greenfield at James Price Point (Option 2) Share price (A$) 31.30 70 0.80 DCF (A$/shr) 30.72 35.55 37.73 41.72 45.77 Upside to DCF value -2% 14% 21% 33% 46% 90 0.80 DCF (A$/shr) 35.80 43.98 47.65 53.40 61.23 Upside to DCF value 14% 40% 52% 71% 96% 110 0.80 DCF (A$/shr) 38.76 49.95 55.11 64.90 74.23 Upside to DCF value 24% 60% 76% 107% 137%
Source: J.P. Morgan estimates. 148
Jason Steed
(61-2) 9220-1551 jason.h.steed@jpmorgan.com
Origin Energy
Figure 91: Origin Energy - Summary of LNG assets (net capacity, MT pa shown)
3.8
(APLNG)
Operational Liquef action capacity Liquef action capacity under development Operational Re-gasif ication capacity
Source: J.P. Morgan. *Note: Liquefaction capacity under development will fall to 3.4 MT pa post recent agreement with Sinopec (12/12/11) going binding

Niche exposure to global LNG industry thematic
We have classified Origin Energy (Origin) as a niche exposure to the global LNG industry thematic. The companys only LNG exposure is via its 42.5% stake in the APLNG projected located in Queensland, Australia. We expect this stake to fall to 37.5% once the recently announced agreement with Sinopec moves to binding likely in Q1 2012. Gas for the APLNG project will be sourced from Coal Seam Gas (CSG) fields located across a wide area of the Queensland interior. APLNG holds the largest reserves and is the largest producer of CSG in Australia. It holds permits covering 17,000 km2 in the Bowen and Surat Basins in central southern Queensland. Origin began exploring for CSG in the mid 1990s. The company acquired its first CSG interests in the Peat field in 1996 and entered into its first long term CSG supply agreement in 1999 with BPs Bulwer Island Refinery. Origin continued to build its CSG interests by accumulating exploration interests and acquiring CSG interests from Transfield and Tri-Star Petroleum in 2002. In 2008, Origin sold 50% of its CSG assets to ConocoPhillips for an upfront payment of US$5.0bn, with additional payments due to the JV of A$1.15bn to carry Origins share of budgeted development and operating costs up to FID for Train 1. Following the sell-down to ConocoPhillips, the APLNG partners have made a number of significant steps towards realizing the value of the project. In particular, the following milestones were reached in 2011:
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Origin sold 50% of its CSG assets to ConocoPhillips in 2008
Feb-11: APLNG and Sinopec sign non-binding HoA for 4.3 MT pa LNG supply over 20 years and 15% equity interest. Jul-11: APLNG takes FID on first phase of two train project. Capex expectations set at US$14bn for first phase and at US$20bn for full two-train development. Nov-11: APLNG and Kansai Electric sign 20-year agreement for 1 MT pa. Dec-11: APLNG and Sinopec sign a non-binding HoA for further LNG supply and additional equity taking Sinopec to 25% ownership in APLNG. The recent HoA signed with Sinopec completed the marketing of APLNG's second train, with FID now expected to be taken in Q1 2012. Total capital expenditure for the two-train project is estimated to be US$20bn, which includes a contingency of US$2.5bn. This estimate covers the period from FID until the commencement of gas deliveries from Train 2 expected in early 2016. Origin will manage the upstream project, while ConocoPhillips will manage the overall downstream project. A JV between McConnell Dowell Constructors and Consolidated Contractors Australia has entered a fixed price pipeline construction contract.
Liquefaction assets APLNG project description

The table below sets out the key characteristics of the APLNG project.
Table 48: APLNG project description
Trains LNG production capacity Project sanction date First LNG due Capex Operator Current Equity participants Total resources Off-take contracts Primary EPC contractors
2 9.0 MT pa July 2011 2015 US$20bn ConocoPhillips Origin (42.5%), ConocoPhillips (42.5%), Sinopec (15%) 11,000 PJ 2P Sinopec (7.6 MTpa), Kansai (1.0 MT pa) MCJV (gas trunkline), Bechtel (liquefaction plant)

APLNG valued around A$5.2 per share
We value Origins business ex APLNG at $13.77, which is broadly in line with the current share price, and implies that APLNG is valued by the market at nil. Our current valuation of $18.95 per share assumes a two train project, but includes a risk weighting on train two (T2) of 50%. On a two train fully de-risked basis, we value Origin at $21 per share. Our $13.73 valuation of Origin's underlying business is based on an EV/EBITDA multiple of 8.0x, noting that AGK is currently trading at 8.3x EV/EBIDA and 8.1x EV/EBITDA on an Ex-Upstream basis. Our $18.95 June 2012 Target Price for Origin is based on a sum-of-parts valuation. We apply different costs of capital to each of the individual business units in an effort to appropriately reflect the risk profile of each segment. Our group post-tax WACC of 9.1% reflects a combination of the assumptions in the individual segments. The key figures that make up this discount rate are a post-tax cost of equity of 10.7% and a post-tax cost of debt of 5.3%. We apply a Beta of 1.1 within this calculation. The key downside risks to our valuation are: failure of the APLNG second train to reach FID; lower than forecast oil prices; lower than forecast electricity and gas retail tariffs; and lower than estimated wholesale electricity prices.
150
Brynjar Eirik Bustnes, CFA

(852) 2800-8578 brynjar.e.bustnes@jpmorgan.com
Inpex
As seen in Figure 93, Japan is the worlds largest LNG importer, comprising more than 30% of the global LNG trade. As Japan reduced dependence on oil and coal and consciously increased the use of gas, it helped to develop a parallel Indonesian supply LNG industry in the 1970s. Indeed, Inpex was one of the first foreign firms to enter Indonesia in the early days of Suharto regime in 1966 and became instrumental in the hydrocarbon discoveries in Kalimantan, for the Offshore Mahakam PSC (which ironically supplies the Bontang LNG plant whose supplies to Japan have been declining in face of higher domestic consumption in Indonesia and higher asking prices for the contracted LNG). As per Figure 93, Japan has built up a diversified set of LNG suppliers in 2008 it purchased LNG from 14 countries.
Figure 92: Suppliers of LNG to Japan
60 40 20 0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
USA Australia Nigeria Brunei Algeria Egypt UAE Qatar Norway Indonesia Oman Equatorial Guinea Malaysia FY Trinidad
Source: Natural Resources and Energy, J.P. Morgan
Although Inpex is the largest upstream company of Japan, the responsibility for LNG imports largely rests with the utilities- Kansai Electric Power, Chubu Electric, Kyushu Electric, Osaka Gas, Toho Gas, Tokyo Electric etc. In fact the two largest LNG export facilities in Indonesia- Bontang in East Kalimantan and Arun in Aceh province were constructed in the 1970s under long term supply contracts with Japanese utilities. However with Inpex building out two large scale LNG projects, it is expected to play an increasingly important role in securing Japans gas supplies.

Inpexs upstream strategy may be broadly defined as achieving a balanced diversified portfolio by acquiring projects differentiated by stages- exploration, development or production or contract types PSC, CA etc. As of June, 2011, Inpex operated 71 projects in 26 countries. Inpex is currently involved in 2 large scale LNG projects under development- Ichthys in Australia and Abadi in Indonesia. The two large gas fields were discovered in 2000. Ichthys is currently awaiting FID (expected by mid-January 2012) and Abadi is currently awaiting FEED - scheduled for H1 2012.
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Inpex has a clearly defined upstream growth strategy with three central tenets: 1.
Inpexs central strategy is to organically integrate overseas gas assets into its Japanese gas network
Growth build resources and acquire projects in various phases. Gas supply chain - link overseas gas resources with domestic Japanese market. Diversification out of conventional oil and gas into other forms of energy, including unconventional forms (recently acquired 40% interest in Nexens shale assets in Horn River in Canada).
2. 3.
Domestic gas business Central to Inpexs LNG strategy is building on an integrated domestic gas value supply chain which connects international gas assets to the domestic distribution network. Inpex has a leading gas distribution network, supplying industrial and residential users around the Tokyo Metropolitan region comprising over 1,400 kms of pipelines. Indeed, Teikoku Oil, which was fully integrated into Inpex in October 2008, had commissioned Japan's first long distance pipeline between Tokyo and Niigata Prefecture in 1962. Inpexs Minami-Nagaoka gas field is the largest gas field in Japan and (about 20 years in production) makes up approximately 40% of the total gas production in Japan. Inpex, along with Shizuoka Gas and Tokyo Gas feeds into the self-owned 1,400km trunk pipeline network that stretches across the Kanto-Koshinetsu region surrounding the Tokyo metropolitan area, supplying gas to city gas companies and industries along the pipeline. The companys annual sales volume in FY 2010 reached 1.7 bcm which is 3.5x compared to 15 years back in 1996 (0.5 bcm). The medium to long term domestic gas sales target through its own network is 2.5-3.0 bcm. For this, in May 2011, the company decided to construct Toyama line- extending from Itoigawa city, Niigata Prefecture to Toyama City, Toyama Prefecture. Inpex is currently building the Noetsu LNG receiving terminal in Joetsu City, Niigata Prefecture, with a re-gasification capacity of about 1.6 MT pa. Construction commenced in July 2009 and is expected to enter operation in 2014. Inpex plans to feed the gas from the Ichthys, Abadi and Minami-Nagaoka gas fields into this LNG terminal. Of the outstanding gas off-take contracts from Ichthys, Inpex and TOTAL have self-contracted 0.9 MT pa each of which Inpex has further agreed to purchase 0.2 MT pa from TOTAL, to feed 1.1 MT pa LNG through its Noetsu receiving terminal. The supplies to the Noetsu LNG terminal will feed the north side of the domestic network and supplies from the Sodeshi LNG terminal (of Shizuoka Gas with supplies from 2010 onwards) in the south, will result in largely improved capacity to supply the domestic market. Inpex will be the only Japanese company to have a complete natural gas value chain in place, from development and production through liquefaction, transport and re-gasification and supplying into pipelines. This helps Inpex not to be overexposed to any particular low return part of the gas value chain (like liquefaction and shipping) but be integrated through the cycle along with retaining capabilities and capacity to grow the high return upstream business.
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Figure 93: Inpex domestic gas business region
Figure 94: Inpex domestic pipeline network
Source: Company reports Source: Company reports
Overall growth closely tied in with LNG business growth
Inpex has a stated growth strategy of growing total production, up from about 400 kboped (about 45% gas) at present to 800-1,000 kboepd by 2020 (Figure 96). The growth is underpinned by 3 strategic long term projects which include the two LNG projects- Ichthys and Abadi (with the Kashagan oil project in Kazakhstan being the third one). The Ichthys and Abadi projects combined at peak production will add between 275-300 kboepd gas and liquid condensate combined to the base production.
Figure 95: Inpex production growth targets underpinned by 2 major LNG projects
Source: Company reports
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Liquefaction assets
Inpex has liquefaction plants under development which will increase its net operable capacity to almost 8x its present 1 MTpa capacity by 2017
Table 49: Inpex- summary of liquefaction assets

Liquefaction plant Darwin LNG Bontang LNG Train 1 Train 2 Train 3 Train 4 Train 5 Train 6 Train 7 Train 8 Tangguh LNG Train 1 Train 2 Current capacity Ichthys LNG Train 1 Train 2 Abadi FLNG Train 1 Planned capacity Vladivostok LNG Under study Start date 2006 1978 1978 1978 1983 1984 1986 1986 1986 2009 2009 2016-2017(e) 2016-2017(e) 2016-2017(e) Inpex equity supply 11.30% 30-35%* 30-35%* 30-35%* 30-35%* 30-35%* 30-35%* 30-35%* 30-35%* 6-9% 6-9% 74.8% 74.8% 31%# Gross capacity MT pa 3.3 2.6 2.6 2.6 2.6 2.7 2.7 2.7 3.0 3.8 3.8 4.2 4.2 2.5 10 Inpex equity 11.30% 0% 0% 0% 0% 0% 0% 0% 0% 7.79% 7.79% 74.8% 74.8% 31%# TBD Net capacity MT pa 0.37 0.30 0.30 1.0 3.14 3.14 0.78 7.1 TBD
Source: Company reports and J.P. Morgan estimates; *60-70% feed gas supply from 50-50 Inpex-TOTAL owned Offshore Mahakam fields; #Inpex Masela (51.93% Inpex corp. owned) has a 60% equity stake in the project
Tangguh LNG (7.6 MT pa capacity) Inpex owns 7.79% in the Tangguh LNG project through MI Berau, which owns 22.86% of which Inpex owns 44%, and remaining through KG Berau Petroleum. The BP led Tangguh LNG project involves the liquefaction of the gas from the Tangguh fields (estimated to be over 19 TCF). The project was commissioned in 2009 with first cargo loaded in July of that year. The first cargo was bound for POSCOs LNG re-gasification terminal in South Korea. Tangguh is Indonesias third largest LNG centre after Bontang and Arun. Gas from the offshore platforms is fed into pipelines to the two onshore liquefaction trains, each with a production capacity of 3.8 MT pa. Studies for a third train are underway.
All current operable and planned liquefaction capacity in the AsiaPacific region
The Tangguh LNG project has long term supply contracts in place to supply 2.6 MT pa to CNOOCs Fujian terminal in China (CNOOC also has a 13.9% interest in the Tangguh project) at $3.35 per mmbtu, capped at oil price equivalent of $38/bbl, 1.15 MT pa to K-Power and POSCO in South Korea and a flexible contract to supply up to 3.7 MT pa to Sempras LNG re-gasification terminal in Baja California, Mexico.
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Offshore Mahakam Block - Bontang LNG (21.6 MT pa capacity) Though Inpex does not have a direct equity interest in the Bontang LNG plant (Indonesia) it is a major stakeholder as it supplies LNG from its 50% owned giant Offshore Mahakam block in East Kalimantan. The block accounts for about two thirds of the gas feed for the Bontang LNG plant, which has supply contracts with Japanese LNG utilities. The plant has 8 trains and the capacity to produce 21.64 MT pa (the capacity was increased to 24.59 MT pa by increasing efficiency but declined subsequently due to gas feed supply issues). So far, over 10 TCF gas has been supplied to Japan, Korea and Taiwan. The plant has faced supply issues due to under-production at the gas fields of the three major feed providers (TOTAL/Inpex, VICO and Unocal (now Chevron)). Also it is understood that there are no penalties for non-performance from the plant which has non-incentivized additional investment required into the maintenance of the plant and has rather led to diversion of feed gas to the domestic fertilizer plants through Pertamina. Inpex and TOTAL plan to spend about $16.5bn over 2011-17 to develop the block and stem the natural production decline (Chevron has also raised its investment plans to increase production from the Kutei Basin). However since the Mahakam PSC expires 2017, the proposed investment may be conditional on securing an extension. (Indonesias state owned company PT Pertamina is understood to target a majority stake in the block after contract expiration and 100% stake by 2027). Darwin LNG (3.3 MT pa capacity) Inpex has an 11.3% equity ownership in the Darwin LNG and the Bayu-Undan Unit, which supplies feed gas into the plant. This project involves the transport of natural gas from the Bayu-Undan gas-condensate field in the Timor Sea via a 500km subsea pipeline to the LNG Plant in Darwin. It has been supplying 3 MT pa LNG to Japan since 2006 under long term contracts with Tokyo Gas (1 MT pa) and Tokyo Electric (2 MT pa). Indeed, this was the first LNG project where Tokyo Gas and TEPCO were not just buyers, but also equity holders of the project.
Two major green field developments underway to add almost 7.7 MT pa net operable liquefaction capacity
Figure 96: Abadi & Ichthys LNG
Ichthys LNG (8.4 MT pa capacity) Ichthys is the biggest of the planned projects (LNG and otherwise) in Inpexs development pipeline. The Ichthys project is a 74.8:24:1.2 JV between Inpex, TOTAL and Osaka Gas (recently acquired equity stakes with signing the gas off-take agreements) to produce gas, LNG and condensate from the Ichthys field in the Browse basin, offshore Western Australia. As per the project concept, the gas will undergo preliminary processing offshore to remove most of the condensate (to be stored in FPSO) and other raw liquids. The gas will then be sent to the onshore processing facility in Darwin (Northern Territory) by an 885 km pipeline. The Ichthys Project is expected to start up in late 2016 and will produce 8.4 MT pa of LNG (2 trains) and 1.6 MT pa of LPG, along with 100,000 bpd condensate at peak. All output gas has been contracted (with around 70% headed for Japan) and the project is currently awaiting FID.
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Table 50: Ichthys project overview

Ichthys Reserves Ownership Capacities Capex requirement Time line Natural Gas (TCF) 12.8 Inpex 74.8% LNG (MT pa) 8.4 Low end (US$B) 25 FEED 2010 Condensate (mn bbls) 527 TOTAL 24% Condensate (000 BOPD) 100 High end (US$B) 35 FID 2011 Total (mn BOE) 2,663 Osaka Gas 1.2% LPG (MT pa) 1.6 First shipment 2015
Source: Company data, J.P. Morgan estimates.
Abadi LNG (2.5 MT pa capacity) Abadi is the second big LNG project in Inpexs pipeline. The Masela Block is located approximately 800 km east of West Timor, Indonesia, and approximately 400 km north of Darwin, Northern Territory, Australia. According to the plan of development for the Abadi field approved by the Indonesian Government in December 2010, 2.5 MT pa of LNG will be produced from the Abadi field using Floating Liquefied Natural Gas (FLNG) technology and the production start up is currently expected in 2016-17. Inpex Masela is now preparing for the Front End Engineering and Design (FEED) in H1 2012. Inpex Masela, after recently farming out a 30% stake to RD Shell, has a 60% working interest in the field, with PT EMP Energi Mega holding the remaining working interest. Inpex owns a 51.93% working interest in Inpex Masela. Inpex Masela is further required to sell down another 10% of the project to an Indonesian nominated partner as part of the PSC terms. We believe RD Shells involvement in the project is a big positive due to its pioneering development of FLNG technology. Vladivostok LNG (10 MT pa capacity) A Japanese consortium comprising Inpex, Itochu, Japex, and Marubeni signed a preFEED joint study agreement with Gazprom for the natural gas utilization project in Vladivostok area in April 2011. The joint study consists of pre-FEED for construction of LNG plant (10 MT pa), feasibility study for CNG plant and a gaschemical complex. The joint study is scheduled for completion near end 2011. The study follows a preliminary feasibility study done by Japan's METI, Itochu, Japex and Gazprom from May 2009 to July 2010. For more details, please refer to the section on Gazprom.

Ichthys and Abadi LNG projects are the major value drivers for the LNG business
Inpex does not explicitly breakout the performance of its LNG business. However, we expect the primary value drivers for the business to be the two major LNG projects- Ichthys and Abadi. Ichthys: Inpex recently fulfilled the last milestone towards the FID (target January 2012), when it announced signing of SPAs for all gas off-take. However the capex level is still the missing item, which remains the key variable for FID. We build in a $25-35bn capex range into our DCF value and using $30bn as our base case, we get a $17.6bn project NPV, which yields US$6.6/BOE based on a reserve base at 12.8 TCF for natural gas and 527 million bbls for condensate. We use a long-term oil price of US$85/bbl and a WACC of 8% for the project. The full value of the project is about 27% of our estimated full value for Inpex. However considering the stake of the project, we only include 20% of the Inpex's share of Ichthys value into our JPY 750k PT. This is equivalent to 8.5% of our current PT.
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Abadi: Similar to Ichthys, we believe Abadi contains uncertainties, resulting in only a very small fraction of the project NPV currently being included in our PT (10%). We value Abadi based on a 20% discount to the EV/BOE valuation from Ichthys, which yields a full project value of $9.7 billion. The discount relative to Ichthys is due to some technical uncertainties and a later project start up. The 10% of project value we include is at a slight premium to the valuation obtained based on the 10% sale to Energi Mega Persada late 2009, when oil prices were below current levels. The sales price was $77.25m for the 10% stake, yielding an overall project value of $772.5m (compared with 100% of $9.7bn). We take a much simpler approach to the Abadi project due to less information regarding the project being available. By assuming similar capex levels (per unit reserve $11 per boe), WACC, and oil price, we take the EV per boe from the Ichthys project and apply a 20% discount due to these uncertainties. We justify this as Abadi is holding natural gas and condensate in similar proportions, while a possible more expensive offshore FLNG solution is being offset due to lack of a need for a long distance pipeline to onshore facilities. We include only 10% (or JPY10,000 per share) of Inpexs value in this project in our PT due to the many uncertainties around in the project being realized, which comprises around 1.3% of our PT. If include 100% of Inpex's value of this project, then it comprises around 9% the full value.
Table 51: Inpex value breakup: Ichthys + Abadi constitute 37% of the overall SOTP
(000 JPY) Base EV Net cash and equiv (Incl bonds/securities) Minority Interest Base equity value Ichthys Abadi Total Ichthys+Abadi as % of Total value
Source: Company data, J.P. Morgan estimates.
Total 1,813,000 968,374 117,494 2,663,880 1,163,544 379,129 4,206,552
JPY per share 496,000 265,000 32,000 729,000 318,000 104,000 1,151,000 37%
Percentage included 100% 80% 100% 100% 20% 10% 65%
PT JPY Per share 496,000 212,000 32,000 676,000 64,000 10,000 750,000 10%
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Overview China LNG

First LNG imports in 2006
Politically driven Chinese natural gas supplies have grown rapidly over the last five years since the first LNG import cargo arrived at the first import terminal (Guangdong Dapeng) in 2006. Higher domestic production, LNG and piped gas imports have all played a much bigger role in meeting Chinas growing energy needs. Natural gas demand comes from new residential and industrial demand, in addition to fuel oil for direct burning to produce power. LPG for residential use has also been partially replaced by natural gas, as gas prices have been kept lower than fuel oil and LPG prices to incentivize switching. Another source of future demand growth would be CNG in transportation to displace demand growth in gasoline. Anecdotally we've been hearing about shortages at CNG stations, especially in regions where CNG prices are less than half of gasoline-equivalent. The Chinese government adopted a number of laws and regulations that require provincial governments to increase the use of clean energy including natural gas to replace the use of coal in order to reduce air pollution. As such, local governments are politically motivated to increase their natural gas demand and related supply. A preferential value-added tax rate of 13% is also charged for natural gas, as compared to a 17% value-added tax rate for crude oil. The Ministry of Finance also granted a VAT rebate on losses (versus a reference price) from gas imports via pipeline and LNG terminals for 2010-20 as a form of subsidy. LNG versus piped gas imports LNG imports will complement additional volumes via the Central Asia pipeline from Turkmenistan into West-East pipeline 2 (WEP2). More LNG supply deals are being secured for the terminals currently under construction and expansion plans for existing terminals. Recently, there has been talk of the Chinese state importers trying to secure more Australian term contracts because they are more cost competitive. Spot LNG cargoes are also going to be a permanent feature to meet the swing in demand during winter. The total cost for PetroChina of obtaining additional piped gas supplies is likely to increase as the construction of a third West-East pipeline is necessary to deliver the gas to east China, where demand for gas is most concentrated and consumers are able to afford to pay higher gas prices than central and west China. Turkmen piped supplies are expected to be 15 BCM in 2011 and 30 BCM in 2012. The piped imports have been more expensive than the average cost of LNG imports, at an average cost of $9.9 per mmbtu compared to $8.4 per mmbtu in 10M 2011. Turkmenistan and China agreed in November to increase total supply to 65BCM pa by 2020.
Government policy is gasifying Chinas energy mix
More LNG supply deals to be signed.
even though they are more expensive than piped gas
Table 52: Natural gas supply sources by company for Jan-Nov 2011 - BCM
PetroChina Sinopec CNOOC & Others Total y/y %
Source: OGP, J.P. Morgan estimates.
Domestic output 67.8 13.3 12.3 93.4 10%
Piped gas import 12.7 12.7 336%
LNG import 1.08 13.5 14.6 29%
Total supply 81.6 13.3 25.8 120.7
y/y % 19% 19% 35% 22%
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Table 53: China's natural gas sources - BCM pa

Domestic production LNG Cross-border pipelines Total gas available
Source: J.P. Morgan estimates, Company data.
2010A 93.6 12.9 3.5 110
2011E 102 15 15 132
2012E 110 19 30 159
2013E 120 25 36 181
2015E 158 50 65 273
12th 5-Year Plan sets out to reduce CO2 emissions by 17%
In the proposal for the 12th Five Year Economic Plan, China wants to double the proportion of natural gas in its primary energy mix to exceed 8% and reduce carbon dioxide emissions by 17%. Gas demand, including Hong Kong and Macau which are dependent on China for gas supplies, would grow 18% YoY to around 130 BCM in 2011 and possibly to 250 BCM by 2015. Heavy industrial users have been encouraged to switch to natural gas from coal and fuel oil for power generation and transport fuel, while residential users have been encouraged to switch from LPG and coal-based gas. We expect these two segments to grow faster than supplies to fertilizers. The emerging trend of oil refineries switching to natural gas as fuel for furnaces and as petrochemical feedstock, to increase the oil-product yield, will also add to natural gas demand.
Figure 97: Natural gas consumption by segment since 1995 BCM pa
100 80 60 40 20 0 1995 2000 2005 2006 2007 2008 2009 Manufacture of Raw Chemical Materials and Chemical Products Extraction of Petroleum and Natural Gas Residential Consumption Processing of Petroleum, Coking, Processing of Nuclear Fuel Transport, Storage and Post Production and Distribution of Electric Power and Heat Power Others
Source: National Bureau of Statistics
Pricing Natural gas wellhead prices and gas pipeline tariffs are regulated in China. The existing pricing policy says producers are given room to raise wellhead prices by up to 10% for gas produced onshore. In contrast, prices for gas produced offshore are market-driven (but selling into regulated onshore market). The NDRC has the authority to set the wellhead prices and pipeline tariffs, while city gate prices are decided at the provincial levels. Imported gas is priced and sold within the same framework set by the NDRC for domestic gas production.
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To encourage higher domestic output and imports, we expect the policy direction in the long term to link prices with competing fuels and narrow the gap between domestic and imported gas prices. But prices are likely to be kept sufficiently low in the near term to encourage significant switching and hence grow demand (which we believe is currently the primary policy target). Natural gas prices are currently kept lower than prices for LPG and gasoline. For example; CNG used in transportation is priced at less than a 0.75 ratio to 90-RON gasoline. The share of natural gas for making chemicals and fertilizers has declined since 1995 by policy design. The long-term target is to displace LPG and coal-based gas by raising the proportion of residential demand. Gas in to power generation has also increased over the years. Previously, gas-fired generators were under-utilized due to a lack of gas supply. Gas-fired capacity is about 3% of total installed capacity.
Figure 98: Natural gas demand by segments since 1995 - % share
40% 35% 30% 25% 20% 15% 10% 5% 0% 1995 2000 2005 2006 Extraction of Petroleum and Natural Gas Manufacture of Raw Chemical Materials and Chemical Products Transport, Storage and Post Residential Consumption Production and Distribution of Electric Power and Heat Powe r
Source: National Bureau of Statistics
2007
2008
2009
Interest pricing reform underway
Natural gas pricing trial reform main impact is on Guangdong On 26 December, 2011, the NDRC launched a gas pricing trial reform for two south provinces Guangdong and Guangxi. The trial allows the gas suppliers to negotiate for better pricing with end-users within the maximum cap allowed. The maximum cap is calculated from 2010 prices of fuel oil and LPG, with a 10% discount. The cap in turn protects the consumers with a guaranteed price ceiling. The existing nationwide pricing mechanism sets natural gas prices on a cost-plus system, under which the NDRC sets the wellhead prices plus pipeline tariffs. The trial abolishes the cost-plus system by allowing gas suppliers to set their own wellhead and pipeline tariffs within the price caps. It is not known how long the trial may take before being implemented nationwide. These two provinces have been selected because of two reasons: (i) PetroChina's high-cost Turkmen imports via WEP2 will be supplied to Guangdong province this year, and 2) city gate prices are already the highest in China and the caps imposed are similar to existing prices, and hence the trial wont affect the consumers.
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Guangdongs gas supplies are mainly from CNOOC parents Guangdong Dapeng (8 bcn for Jan-Nov11) and offshore production (6-7 bcm). Demand for the province is around 12 bcm. The city gate price cap of Rmb2.74/M is much higher compared to the previous wellhead price of Rmb1.15/M. WEP2 pipeline tariffs to Guangdong are still being negotiated but industry sources say it will likely be closer to PetroChinas WEP tariff of Rmb0.84/M to Shanghai. Guangdong Dapeng's average LNG import cost was Rmb2/M during 11M 2011, while PetroChinas WEP2 import cost was Rmb2.1/M. PetroChina will likely cover the cost of imports from Turkmenistan, but it may not be highly profitable at the Rmb2.74/M maximum city gate price, if taking into consideration the long-distance pipeline tariffs of delivering from west China to Guangdong in south China. CNOOC parent does not see a threat to its LNG import volumes even with as much as 9 bcm of supply from WEP2 by 2013 (5BCM estimated for 2012). This is because it expects the additional supply to be absorbed by demand growth and replacing some LPG demand, and its average LNG import cost is likely to remain lower than PetroChina's Turkmen supplies. Guangxi province has a price cap of Rmb2.57/M and it consumes around 0.2 bcm.
LNG
LNG will play a key role
LNG imports are an important piece of the strategic drive to raise natural gas consumption as part of the broader theme of energy security for China. Policymakers want to develop domestic capability for the construction of the receiving terminals, shipping capacity and equity stakes if possible tied into long-term supply contracts.
Table 54: Existing terminals, import volumes and average costs

Operator CNOOC CNOOC CNOOC PetroChina PetroChina Name Dapeng Putian Yangshan Rudong Dalian Province Guangdong Fujian Shanghai Jiangsu Liaoning Capacity MT pa 6.7 2.6 3.0 3.5 3.0 Target 7.8 5.2 6.0 6.5 6.5 Operational date 2006 2008 2009 May 2011 Nov 2011 2010 imports 5.84 2.03 1.48 NIL NIL 2010 average cost (US$/mmbtu) 6.4 5.1 6.8 NIL NIL 11M 2011 imports 5.93 2.36 1.62 0.73 0.06 11M 2011 average cost (US$/mmbtu) 8.8 6.5 7.9 15.6 17.8
Source: General Administration of Customs; J.P. Morgan estimates, Bloomberg.
Table 55: Chinese equity participation in LNG liquefaction assets

CNOOC listco CNOOC listco CNOOC parent PetroChina Sinopec parent Source Australia Indonesia Australia Australia Australia Project Australia NWS Tangguh LNG QC LNG Arrow LNG APLNG Operator Woodside-led BP-led BG Group Shell-PetroChina Origin, ConocoPhillips Year 2006 2007 2014 2017 2015 Ends 2031 2032 2034 2035 Contract volume 3.7 2.6 3.6 4.0 7.6
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Figure 99: Utilization rates of re-gasification terminals - %

12 10 8 6 4 2 0 06A 07A 08A LNG import volume (mn ton) 09A 10A 11E Utilization rate (% - RHS) 90% 75% 60% 45% 30% 15% 0%
Source: General Administration of Customs, J.P. Morgan estimates.
Figure 100: LNG re-gasification terminal capacity versus actual imports and SPA/HOA volumes MT pa
50 40 30 20 10 0 06A 07A 08A 09A 10A 11E 12E 13E 14E 15E 16E 17E LNG import volume (mn ton)
Source: J.P. Morgan estimates, Company data, Bloomberg
Capacity (mn ton)
SPA & HOA (mn ton)
Figure 101: LNG imports by location since 2006 when first imports landed in China - MT pa
12 10 8 6 4 2 06A 07A Guangdong 08A Fujian 09A Shanghai Jiangsu 10A Dalian YTD11
Source: General Administration of Customs, J.P. Morgan estimates
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Figure 102: Average weighted LNG spot prices of Chinese imports for 2009-11- US$/mmbtu
20 16 12 8 4 0 Oct-08 Feb-09 May-09 Aug-09 Dec-09 Mar-10 Jun-10 Sep-10 Jan-11 Apr-11 Jul-11 Nov-11 Weighted average cost of spot cargoes (US$/mmBTU)
Source: General Administration of Customs, J.P. Morgan estimates.
Table 56: Re-gasification terminals under construction MT pa

Operator CNOOC CNOOC CNOOC Sinopec PetroChina CNOOC Name Ningbo Zhuhai Yuedong, Jieyang Qingdao Tangshan, Caofeidian Yangpu Province Zhejiang Guangdong Guangdong Shandong Hebei Hainan Capacity 3.0 3.5 2.0 3.0 3.5 2.0 Target 6.0 7.0 4.0 6.0 6.5 3.0 Year 2012 2013 2013 2013 2013 2014
Source: J.P. Morgan, Company data.
Table 57: Re-gasification terminals proposed MT pa

Operator Sinopec PetroChina PetroChina CNOOC CNOOC CNOOC CNOOC CNOOC Sinopec Sinopec Sinopec Sinopec Name Tieshan Shenzhen Jinxi Shenzhen Qinhuangdao Binhai Floating terminal Yingkou Wenzhou Tanggu Lianyungang Macau Province Guangxi Guangdong Liaoning Shenzhen Hebei Jiangsu Tianjin Liaoning Zhejiang Tianjin Jiangsu Guangdong Capacity 3.0 3.0 4.0 2.0 3.0 2.0 3.0 Target 5.0 4.1 4.0 3.0 6.0 Year 2015 2015 NA 2015 NA NA NA NA NA NA NA NA
Source: J.P. Morgan, Company data.
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Figure 103: Locations of China's LNG terminals in operation, under construction and planned
Source: Bloomberg.
Table 58: Ownership structure of CNOOC Group's terminals

Terminal Guangdong Dapeng Fujian Shanghai Zhejiang Ningbo Hainan Guangdong Zhuhai Guangdong Yuedong Shenzhen Shareholders CNOOC Gas & Power 33%, BP 15%, Shenzhen Gas 10%, Guangdong Yuedean 6%, Guangzhou Gas 6%, Shenzhen Energy 4%, Hong Kong Electric 3%, Hong Kong and China Gas 3%, Dongguan Fuel Industrial 2.5% and Foshan Gas 2.5% CNOOC Gas & Power 60%, Fujian Investment and Development 40% Shenergy 55%, CNOOC Gas & Power 45% CNOOC Gas & Power 51%, Zhejiang Province Energy 29%, Ningbo Power Development 20% CNOOC Gas & Power 65%, Hainan Provincial Development 35% CNOOC Gas & Power 25%, Guangdong Yuedean 30%, 45% split among Guangzhou Development City Gas, Guangdong Hong Kong Energy, Zhongshan Zhonghui, Jiangmen City Construction, Foshan City Gas Pipe, Zhuhai Economic Zone Power Development CNOOC Gas & Power CNOOC Gas & Power
Table 59: Ownership structure of PetroChina's terminals

Terminal Jiangsu Rudong Dalian Shareholders Kunlun Energy (PetroChina's subsidiary) 55%, Pacific Oil and Gas 35%, Jiangsu Guoxin 10% Kunlun Energy 75, Dalian Port 20%, Dalian City 5%
Table 60: Ownership structure of Sinopec's terminals

Terminal Qingdao Shareholders Sinopec 99%, Qingdao Port 1%
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CNOOC
CNOOC and its parent company are the biggest Chinese owners of LNG assets because they had first mover advantage. Gas sales contracts are mainly to its power plants located next to its re-gas terminals, city gas distributors, and small volumes for CNG in transportation and industrial users. There are plans for a pipeline to link all of its re-gasification terminals to improve the distribution of its LNG imports to its customers. CNOOC parent is the operator and holds the majority stakes in all three regasification terminals with a combined 12.7 MT pa capacity. CNOOC listco has equity stakes in the Northwest Shelf and Tangguh liquefaction projects.
Table 61: CNOOC's existing terminals and import costs

Re-gasification terminals Dapeng, Guangdong Putian, Fujian Yangshan, Shanghai Start date 2006 2008 2009 Gross capacity MT pa 6.7 3.0 3.0 2010 imports 5.84 2.03 1.48 2010 average cost 6.4 5.1 6.8 11M2011 imports 5.93 2.36 1.62 11M2011 average cost 8.8 6.5 7.9 Supply NWS, Qatar Tangguh MLNG
Table 62: CNOOC's terminals under construction

Re-gasification terminals Ningbo, Zhejiang Zhuhai, Guangdong Yuedong, Guangdong Yangpu, Hainan
Source: J.P. Morgan estimates, Company data. Table
Scheduled start date 2012 2013 2013 2014
Gross capacity MT pa 3.0 3.5 2.0 2.0
Table 63: CNOOC's planned terminals

Re-gasification terminals Shenzhen, Guangdong Qinhuangdao, Hebei Jiangsu Floating terminal, Tianjin Yingkou, Liaoning
Scheduled start date 2015 NA NA NA NA
Gross capacity MT pa 4.0 2.0 3.0 NA NA
Table 64: CNOOC's existing LNG contracts

Source Australia Malaysia Qatar Indonesia Flexible Project Australia NWS MLNG Tiga Qatargas 3 Tangguh LNG Portfolio Operator Woodside-led MLNG Qatargas BP-led Total Year 2006 2009 2009 2007 2010 Ends 2031 2034 2034 2032 2030 Volume 3.7 3.0 2.0 2.6 1.0 Equity stake Y Y
Table 65: CNOOC's future LNG supply contracts

Source Australia Qatar Unspecified Project Curtis LNG Qatargas 2 GDF Suez Operator BG Group Qatargas GDF Year 2014 2013 2013 Ends 2034 2038 2016 Volume 3.6 5.0 2.6 Equity stake Y (parent)
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Table 66: CNOOC's stakes in liquefaction assets

Liquefaction plant Australia NWS Tangguh LNG Curtis LNG
Start date 2004 2009 2014
Gross capacity MT pa 16.3 7.6 8.5
Equity 5.3% 13.9% 10.0%
We do not ascribe any specific value to CNOOCs LNG assets. Import terminals are held at parent level. Although two upstream equity stakes are held by listco their contribution to CNOOCs overall NPV is small.
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PetroChina
PetroChina is the largest Chinese natural gas supplier in terms of domestic production and imports. Each year, PetroChina signs gas sales agreements with customers subject to the plans specified by the government. For LNG, gas sales agreements are similar to its onshore gas sales, according to management. PetroChina has been importing LNG spot cargoes so far, because its term supply contracts are commencing after its first two re-gasification terminals are ready. The Jiangsu and Dalian terminals started operating in 2011 with a combined 6.5 MT pa capacity, while PetroChina's first contract with Qatar may only supply full volumes by 2013.
Table 67: PetroChina's re-gasification terminals in operation

Re-gasification terminals Rudong, Jiangsu Dalian, Liaoning
Start date May 2011 Nov 2011
Gross capacity MT pa 3.5 3.5
11M2011 imports 0.73 0.06
11M2011 average cost 15.6 17.8
Supply Qatar Qatar
Table 68: PetroChina's re-gasification terminals under construction

Re-gasification terminals Caofeidian, Hebei
Scheduled start date 2013
Table 69: PetroChina's planned re-gasification terminals

Re-gasification terminals Shenzhen, Guangdong Jinxi, Liaoning
Scheduled start date 2015 NIL
Gross capacity MT pa 3.0 NIL
Table 70: PetroChina's gas supply contracts

Source Qatar Qatar Australia Australia Project Qatargas 4 Qatargas 4 Gorgon LNG Gorgon LNG Operator Qatargas Qatargas Chevron, Exxon, Shell Chevron, Exxon, Shell Year 2012 2013 2014 2014 Ends 2037 2038 2034 2034 Volume 3.0 2.0 2.0 2.3 Equity stake
Table 71: PetroChina's liquefaction asset

Liquefaction plant Australia Arrow LNG
Start date 2017
Gross capacity MT pa 8 (first stage)
Equity 50%
Net capacity MT pa 4
We do not ascribe any specific value to PetroChinas LNG assets. Import terminals are actually held through a 50.5% owned listed subsidiary Kunlun Energy (135 HK) with overall NPV accruing to PetroChina relatively small. LNG supply contracts are however, as far as we understand, held by PetroChina.
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Sinopec
Sinopec's domestic natural gas production is mainly used to meet demand from its refining and chemical operations. It is likely that Sinopecs LNG imports will be used to serve its internal demand, to reduce consumption of oil products for power and heat generation and in turn to increase its refinery product yield. Sinopecs first LNG terminal Shandong will receive cargoes from PNG LNG, but the terminal is scheduled for 2013 completion, while Exxon Mobil and its partners are expected to start first deliveries from the project in 2014. Sinopecs only stake in liquefaction capacity is in APLNG this is held by its state parent Sinopec Group (initially 15%). Sinopec Group signed an agreement in December 2011 with ConocoPhillips and Origin Energy for another 10% in the 9 MT pa APLNG project in Queensland, Australia raising its total stake to 25%. In the same agreement, Sinopec will buy another 3.3 MT pa of LNG from 2015 for 20 years, bringing the total contracted volumes to 7.6 MT pa.
Table 72: Sinopec's re-gasification terminal under construction

Re-gasification terminals Qingdao, Shandong
Scheduled start date 2013
Supply PNG LNG
Table 73: Sinopec's planned re-gasification terminals

Re-gasification terminals Tieshan, Guangxi Tanggu, Tianjin Lianyun, Jiangsu Wenzhou, Zhejiang Macau
Scheduled start date 2015 NIL NIL NIL NIL
Gross capacity MT pa 3.0 NIL NIL 2.0 3
Table 74: Sinopec's LNG supply contracts

Source Australia Papua New Guinea
Project APLNG PNG LNG
Operator Origin, Conoco Exxon, Oil Search
Year 2015 2015
Ends 2035 2035
Volume 7.6 2.0
Equity stake Y (parent 25%)
Table 75: Sinopec's liquefaction asset

Liquefaction plant APLNG
Start date 2015
Gross capacity MT pa 9.0 (first two trains)
Equity 25% (parent)
We do not ascribe any specific value to Sinopecs LNG assets. Import terminals are held at listco level, while upstream equity stakes are held by its parent. In any event, contribution to Sinopecs overall NPV is relatively small.
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Overview India LNG

Supply / demand outlook
Indian gas demand remains supply constrained
Infrastructure and domestic gas supply constraints have historically limited gas usage in India. However, with increased gas availability with the discovery of gas off the east coast of the country (KG-D6 primarily), a significant build out of gas pipeline infrastructure has taken place. This has connected new demand centers to supply sources, and has spurred gas demand growth. Availability of gas at reasonable price points will also spur conversions from liquid to gaseous fuels.
Table 76: India gas demand-supply
Demand (mmscmd) Demand (bcm) Domestic supply (mmscmd) Domestic supply (bcm) LNG (mmscmd) LNG (bcm) Total Supply (mmscmd) Total Supply (bcm)
FY10 193.6 69.7 112.5 40.5 33.8 12.2 146.3 52.7
FY11 211.2 76.0 137.4 49.5 35.6 12.8 173.0 62.3
FY12E 222.0 79.9 132.9 47.8 46.8 16.8 179.7 64.7
FY13E 253.5 91.2 150.3 54.1 61.2 22.0 211.5 76.1
FY14E 269.2 96.9 166.3 59.9 67.5 24.3 233.8 84.2
FY15E 278.8 100.4 183.3 66.0 74.7 26.9 258.0 92.9
Incremental sources of domestic supply are concentrated in the medium term on the east coast of the country (mainly KG-D6), where we believe the RIL-BP JV will be able to work through the difficulties faced to reach a production rate of 90 mmcmpd. We also build in commencement of supplies from other GSPC / ONGC field developments. Demand growth is driven by new gas based power projects. However, while a much larger quantity of gas based power capacity is being constructed/planned in the country, our power/utilities team assumes a lower effective demand number from these, limited by domestic gas constraints. Fertilizer plants will continue to move from liquid to gaseous fuels. The growth of the city gas distribution (CGD) business will also stimulate demand growth. With demand exceeding supply and domestic gas sources unable to ramp up production to previously expected levels, we expect imports of LNG to remain robust, particularly to supply key sectors such as refining/steel/CGD, which are accorded a low priority for allocation of domestic gas.
domestic supplies stagnant
Domestic gas supplies are not ramping up as was earlier anticipated primarily due to a fall in production from the KG-D6 development, where the reservoir has proved to be more complex than expected. However, further studies are being carried out, and post the on-boarding of BP as a JV partner, RIL has submitted plans to develop other parts of the field to boost output. The bulk of state-owned ONGCs gas fields are mature, and the company is fighting hard to simply maintain output levels. While demand for LNG has been robust, import capacity increases will only occur in the next 12-18 months. PLNG will commission its Kochi terminal at the end of 2012, and it will raise capacity at its existing Dahej terminal with the completion of a second jetty in late 2013. GAIL expects to commission its west coast Dabhol
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LNG import capacity increases only in the next 12-18 months
terminal in by end Q1 2012. However this will initially operate only at 50-60% capacity on an annual basis, as a breakwater is yet to be constructed. As a result, LNG volume growth is likely to be muted over the near-term. This is reflected in our LNG import forecasts (Table 74).
Table 77: LNG import terminal projects in the pipeline
Project PLNG Kochi PLNG Dahej - jetty PLNG Dahej - expansion GAIL Dabhol
Timeline Sep 2012 Sep-Dec 2013 End 2016 Mar 2012
LNG prices are elevated
Spot LNG prices have continued to rise over the past few months these are now close to liquid fuel levels. This could begin to have an impact on demand from industrial users. In particular, we expect spot LNG prices to be firm in the winter, which could affect near-term industrial consumption growth.
Figure 104: R-LNG vs. liquid fuels (US$/mmbtu)
18.0 16.0 14.0 12.0 10.0 8.0 Naphtha
Source: Bloomberg, J.P. Morgan estimates
Fuel Oil
R-LNG
Rupee depreciation
Exacerbating the rise in LNG prices has been the recent depreciation in the INR (18% since August 2011) necessitating price hikes, which could also impact demand from industrial users.
Figure 105: INR exchange rate
55 52 49 46 43 Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Source: Bloomberg.
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Pradeep Mirchandani, CFA

(91-22) 6157-3591 pradeep.a.mirchandani@jpmorgan.com
Petronet LNG
Petronet LNG (PLNG) currently operates a 10 MT pa LNG terminal at Dahej on the western coast of India. This facility's capacity is to be ramped up in 2 steps - to 12.5 MT pa with the completion of a second jetty (expected in late 2013), with additional re-gasification facilities to be added later, raising capacity to 17.5 MT pa. PLNG is also constructing a new terminal at Kochi (5 MT pa) on the south-western coast. This facility is expected to be completed in Q4 2012.

Petronet is leading India's build out of LNG import capacity
PLNG is engaged in the business of sourcing LNG and providing re-gasification services, and is continuing to focus on this segment of the value chain, with capacity expansion at the existing Dahej terminal, and the construction of a new terminal at Kochi. Given the large mismatch between gas demand and supply in India, PLNG plays a key role bridging that gap by providing the necessary import capacity. While various LNG terminals are being planned across India (GAIL's 5 MT pa Dabhol terminal will start up in Q1 2012), PLNG remains the largest player. Given the projected rise in domestic gas demand, we believe that the build out of pipeline infrastructure and additional LNG import capacity are required. A key question is the sourcing of long-term gas supplies. At Dahej, PLNG has a long-term contract with RasGas of Qatar for 7.5 MT pa, and a 1.5 MT pa supply contract from Gorgon LNG, Australia to be delivered to its Kochi terminal. However, this leaves un-booked import capacity that so far has been partly filled by sourcing spot/medium -term LNG supplies. With the capacity expansion at Dahej and start-up of Kochi, PLNG would need to begin tying in additional long-term supplies. We note that there have been news reports of possible tie-ups with Russian suppliers and potential new agreements with Qatar.
Liquefaction assets
PLNG currently operates a single re-gasification terminal. It does not possess any liquefaction assets.

At present, PLNG has one operational LNG terminal at Dahej. The nameplate capacity for this terminal is 10 MT pa (currently operating at a rate of ~10.5 MT pa). A jetty that will raise capacity to 12.5 MT pa is under construction and expected to be completed in late 2013. The company is soon to decide whether additional regasification capacity of 5 MT should be added at this terminal. We note that construction would likely take around 42 months. A new LNG terminal is being constructed at Kochi, with a capacity of 5 MT pa. It is expected to be completed by the end of 2012.
171
LNG shipping assets

PLNG has a time charter arrangement with a consortium led by the Shipping Corporation of India for three LNG tankers. These are responsible for transporting the long-term quantity of gas contracted from RasGas (7.5 MT pa) to the Dahej terminal.

PLNG is exclusively an LNG company. We value PLNG using a DCF valuation, to arrive at our price target of Rs190 of which the Kochi terminal accounts for ~Rs32 per share. Key upside risks are a moderation in LNG prices and key downside risks are a road map to ramp up of domestic gas supplies.
FY12 17,227 (4,056) 3,898 (17,041) 28 3.0% 11.7% 94,065 67,881 161,946 20,936 141,010 750 188 FY13 21,338 (4,402) (3,441) (11,500) 1,995 FY14 26,131 (5,394) (2,470) (6,500) 11,767 FY15 32,184 (7,194) 7,241 (3,000) 29,231 Terminal cash flow (Mar-21)
Table 78: PLNG valuation

EBITDA Cash Tax Payable Working Capital changes Capex Adjusted free cash flow Terminal growth rate WACC DCF Valuation Net Present Value of explicit cash flows NPV of Terminal Value (Mar-21) Enterprise Value Less: Net Debt (Mar11) Equity Value No. Shares (millions) Per Share Equity Value
12,120
172
Appendix I: LNG exporting countries

Only 18 countries exported LNG in 2011
The following table lists the countries that can, or are expected to be able, to export LNG. At end 2011, there were only eighteen countries in the world with LNG export facilities no new countries joined this fairly elite group during 2011. By 2015, this number will have increased by only two to twenty (given first exports from Angola and Papua New Guinea). By the end of 2018, we expect the number of countries exporting LNG to reach twenty-eight although we have reservations about the ability of two countries Iran and Iraq to attract the necessary capital and expertise and deliver the projects. We have pushed Venezuela out to 2020 - industry historians may recall that in 1960 the British Gas Council proposed importing LNG from Venezuela to Canvey Island. Specific to Iran, we note that in 2010, the US Congress passed the Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA) - this allows the President to impose sanctions on any company that invests $20m or more in Iran's oil & gas sector. The US Treasury Department has also designated Iran and its central banks as a territory of primary money laundering concern a move designed to pressure all banks and companies not to deal with Iran's financial system. The threat of sanction has persuaded most major oil companies to sever all ties with Iran although many national oil companies still procure crude from Iran.
Table 79: LNG exporting countries
Producing 2009 (16) OECD LNG exporters Australia Norway USA (Alaska) Non-OECD LNG exporters Abu Dhabi Algeria Brunei Egypt Equatorial Guinea Indonesia Libya Nigeria Malaysia Oman Russia Trinidad & Tobago Qatar Peru Yemen Angola Papua New Guinea Iraq Brazil Cameroon East Timor Iran Mozambique Tanzania
Iran may fall off the list of potential supply points
2010 (18) 2011 (18) 2012E (19) 2013E (19) 2014E (20) 2015E (20) 2016E (21) 2017E (22) 2018E (28)
Canada -
More confident about East African LNG hub
We are more confident that both Mozambique and Tanzania will become a new East African LNG export hub this is ideally located to supply the west coast of India and Asia Pacific. Specific to Mozambique, ENI believes that it has discovered up to 22.5
173
TCF at its Mamba South-1 discovery in the Offshore Area, Rovuma Basin (ENI 70%, ENH 10%, KOGAS 10% and GALP 10%). Following the successful Barquentine-3 appraisal well (encountered more than 202m of natural gas pay), the separate consortium led by Anadarko (Area 1- Anadarko 36.5%, Mitsui 20%, ENH 15%, Bharat PetroResources 10%, Videocon 10% and Cove Energy 8.5%) now estimates recoverable resources to range from 15 to 30+ TCF with estimated 30 to 50+ TCF of gas in place in the Oligocene and Eocene reservoirs. This is the sixth successful penetration in the complex that includes Windjammer, Lagosta, Barquentine and Camarao discoveries (the WLBC gas complex Offshore Area 1). Anadarko now refers to a large scale LNG development to consist of at least 2 trains and with the flexibility to expand to 6 trains. The governments of both Mozambique and Tanzania are actively encouraging LNG developments in their country.
Table 80: Schedule for LNG project Final Investment Decision (FID)
2012 Brass LNG Browse LNG Ichthys LNG Kitimat LNG PNG FLNG Pluto LNG T2 Sabine Pass LNG Sengkang LNG Shtokman LNG
MT pa 10.0 12.0 8.4 5.3 2.0 4.3 9.0 1.5 7.5 60.0
On stream 2018 2017 2017 2016 2017 2015 2016 2015 2019
2013 Abadi FLNG Cash Maple FLNG Curtis Island LNG Kribi LNG Mozambique LNG Newcastle LNG Tanzania LNG
MT pa 2.5 2.0 8.0 3.5 10.0 1.0 6.6 33.6
On stream 2019 2017 2018 2018 2018 2017 2018
2014 Bonaparte LNG Colombia LNG Tangguh LNG T3
MT pa 2.0 1.0 3.8
On stream 2019 2020 2018
6.8
Israel could also join the club of LNG exporters - the US Geological Survey estimates 120 TCF of recoverable gas in the Levant Basin which straddles Lebanon and Palestine. Indeed, Noble Energy has talked about a 15 MT pa plant, potentially located in Cyprus, to process gas from its giant (> 10 TC) Leviathan gas discovery.
Supply points will remain heavily biased to non-OECD
As a reminder of the non-OECD bias of LNG supplies, twenty-four of the twentyeight countries that may export LNG by 2018 are not members of the OECD (Figure 109). We believe that this will continue to place a price and value premium on LNG that is sourced from countries within the OECD, e.g. North America and Australia.
Figure 106: LNG exporting countries
30
25
Non-OECD countries will continue to dominate global supply picture

20
15
10
0 2009 2010 2011E 2012E 2013E

OECD
2014E
Non-OECD
2015E
2016E
2017E
2018E
2019E
Source: J.P. Morgan. 174
Appendix II: LNG export projects

We maintain a global database on all liquefaction projects - sanctioned, pending sanction and those in concept stage (Table 78). As per Figure 110, following the substantial capacity additions in 2009 and 2010, we have already witnessed a dramatic slow down in capacity additions in 2011 which we expect will continue through to 2014. We then expect an acceleration in new capacity in 2015 through to 2018.
Figure 107: Liquefaction capacity - annual growth (MT pa)
120
100
Projects commencing 2016 -18 must be securing offtake201214 to ensure FID 2013-14
+23%
+13%
80
This could create more of a buyers' market in 2012-14 given LNG-on-LNG competition +17%
+15%
60
+8%
40
+17%
+13%
+9%
20
+7%
+6% +2%
+6% +3%
+3%
+3%
+4%
0 2005 2006 2007 2008 2009 2010 2011E

Atlantic Basin
2012E
2013E
2014E
Asia Pacific
2015E
2016E
2017E
2018E
2019E
2020E
Middle East
The impact on global liquefaction capacity is shown in Figure 111. This shows that capacity growth (2000-10 CAGR 7%) broadly matched demand growth in the last decade (2000-10 8%). However, it suggests that capacity growth could fall behind demand growth 2010-2016. Between 2011 and 2015, we forecast a capacity CAGR of 5%. Furthermore, this assumes that (i) there are no unexpected, material plant outages (ii) there is no lost capacity due to upstream resource depletion (iii) all new projects are efficiently commissioned on schedule. On balance, we therefore expect the market to continue to tighten.
175
Figure 108: Global liquefaction capacity (MT pa)

750 700 650 600 550 500 450 400 350 300 250 200 150 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Base
VERY LIKELY
POSSIBLE Capacity CAGR +15%
Capacity CAGR +6%
Capacity CAGR +7% Demand CAGR +8%
2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
New Capacity
As per Figure 112, the worlds average liquefaction train size will continue to rise. From a starting level of just over 1 MT pa, we estimate an average train size of 3.7 MT pa by 2020 based on a forecast total of 193 trains. This mirrors an equivalent trend in refining for ever larger refineries.
Figure 109: Number of LNG trains and global average capacity (MT pa, RHA)
200 4 180
3.5
160 3 140 2.5
120
100
80
1.5
60 1 40 0.5
20
0 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Cumulative liquefaction trains Average Train Size (MT pa, RHA)
176
Table 81: LNG capacity additions 2012-2020E

2012E Country Angola Australia Capacity b/f Trains / Additions Capacity c/f YoY growth Average train size Exporting countries 2015E Country Australia Project Angola LNG Pluto LNG T1 95 2 97 19 Project AP LNG T1 Darwin LNG T2 Gladstone T1 Gorgon LNG T2 Pluto LNG T2 QC LNG T1 Sengkang LNG PNG LNG T2 MT pa 4.5 1.0 3.9 5.0 4.3 4.3 1.5 3.3 MT pa 5.2 4.3 291.2 9.5 300.7 3% 3.1 2013E Country Algeria Capacity b/f Trains / Additions Capacity c/f YoY growth Average train size Exporting countries 2016E Country Abu Dhabi Australia Project GL3Z Arzew Skikda LNG 97 2 99 19 Project ADGAS T4 AP LNG T2 Fishermans Island Gladstone LNG T2 Gorgon LNG T3 Wheatstone LNG T1 Kitimat LNG T1 Senoro-Donggi LNG Marsa El Brega Sarawak FLNG Sakhalin LNG T3 Freeport LNG T1-2 Sabine Pass T1-2 MT pa 4.0 4.5 3.0 3.9 5.0 4.5 5.3 2.0 2.6 1.0 5.0 9.0 9.0 MT pa 4.7 4.5 300.7 9.2 309.9 3% 3.1 2014E Country Australia PNG Capacity b/f Trains / Additions Capacity c/f YoY growth Average train size Exporting countries 2017E Country Australia Project Gorgon LNG T1 QC LNG T1 PNG LNG T1 99 3 102 20 Project Prelude LNG Browse LNG T1 Cash Maple LNG Gorgon LNG T4 Ichthys LNG T1-2 Newcastle LNG QC LNG T3 Scarborough LNG S. Australia LNG Wheatstone T2 Prince Rupert T1-2 Khawr al-Amaya Progress FLNG PNG LNG T3 Gulf LNG Train 1 Gulf FLNG Lake Charles T1 125 19 144 22 Project Colombia LNG Persian LNG NLNG T8 OK LNG Pechora LNG Yamal LNG T2-3 Cove Point T1-2 Cameron LNG T1-3 Jordan LNG T1-2 GM de Ayacucho MT pa 1.0 16.2 8.5 12.6 2.6 10.0 7.8 12.0 9.0 4.7 MT pa 3.5 4.0 2.0 5.0 8.4 1.0 4.3 5.0 1.0 4.5 8.0 2.0 1.5 3.3 2.5 2.0 5.0 408.9 62.9 471.8 15% 3.3 MT pa 5.0 4.3 3.3 309.9 12.6 322.4 4% 3.2
Indonesia PNG
Canada Indonesia Libya Malaysia Russia USA
Canada Iraq Malaysia PNG USA Capacity b/f Trains / Additions Capacity c/f YoY growth Average train size Exporting countries 2020E Country Colombia Iran Nigeria Russia USA Venezuela
Capacity b/f Trains / Additions Capacity c/f YoY growth Average train size Exporting countries 2018E Country Australia Brazil Cameroon Canada Egypt Equatorial Guinea Indonesia Iran Mozambique Nigeria Norway Russia Tanzania Trinidad USA Capacity b/f Trains / Additions Capacity c/f YoY growth Average train size Exporting countries
102 8 110 20 Project Browse T2-3 Curtis Isl. T1-2 Sunrise FLNG Santos FLNG Kribi LNG BC LNG Progress LNG Damietta T2 Punta Eur T2 Tangguh T3 Pars LNG T1 Mozambique T1 Brass LNG T1 Snohvit LNG T2 Shtokman T1 Vladivostok T1-2 Tanzania T1 ALNG Train X L.Charles T2-3 144 23 167 28
322.4 27.8 350.2 9% 3.2 MT pa 8.0 8.0 3.6 2.7 3.5 1.8 7.4 4.8 4.4 3.8 5.0 5.0 5.0 4.3 7.5 10.0 6.6 5.0 10.0 471.8 106.4 578.2 23% 3.5
Capacity b/f Trains / Additions Capacity c/f YoY growth Average train size Exporting countries 2019E Country Australia Indonesia Iran Malaysia Mozambique Nigeria Russia
110 15 125 21 Project Bonaparte FLNG Abadi FLNG Pars LNG T2 Iran LNG T1-2 SK 205 FLNG Mozambique T2 Brass LNG T2 NLNG T7 Shtokman LNG T2 Yamal LNG T1
350.2 58.8 408.9 17% 3.3 MT pa 2.0 2.5 5.0 10.0 3.0 5.0 5.0 5.0 5.3 5.0
Capacity b/f Trains / Additions Capacity c/f YoY growth Average train size Exporting countries
167 11 178 28
578.2 47.8 626.0 8% 3.5
Capacity b/f Trains / Additions Capacity c/f YoY growth Average train size Exporting countries
178 15 193 30
626.0 84.4 710.4 13% 3.7
177
Appendix III: LNG importing countries

We also maintain a database on all LNG re-gasification terminals worldwide. This helps us to anticipate new sources of demand. By the end of 2011, we estimate that 25 countries will have operational re-gasification capacity, i.e. the ability to import LNG. During 2011, three countries commissioned their first LNG import terminals Dubai (FSRU), Netherlands (GATE LNG) and Thailand (Rayong LNG). Our database on re-gasification projects suggests that by end 2015, the number of countries with LNG import terminals will have almost doubled to 47 (Figure 113). This is an unprecedented pace of growth. As per Figure 114, we expect that the number of re-gasification terminals will increase from 90 at year end 2011 to as many as 159 terminals.
Figure 110: Number of countries with re-gasification terminals
50 45 40 120 35 30 25 20 15 40 10 5 0 2008 2009
Europe
Figure 111: Number of re-gasification terminals

160 140
100 80 60
20 0 2010 2011 2012E

N America
2013E
M East + Africa
2014E
Asia
2015E
2009
2010
Europe
2011
S & C America
2012E
N America
2013E
M East + Africa
2014E
Asia
2015E
S & C America
We estimate that global aggregate re-gasification capacity will rise from 565 MT pa at end 2011 to 777 MT pa by end 2015. This represents a re-gasification capacity CAGR of 8%.
Figure 112: Re-gasification capacity (MT pa)
90 80 900 850 2011-2015 CAGR +8% 800 750 700 650 600 550 500 450 2010
Europe
Annual additions MT pa
70 60 50 40 30 20 10 0 2011
S & C America
2012
N America
2013
M East + Africa
2014
Asia
2015
Cumulative
178
Cumulative MT pa
Of note, the number of theoretical supply point to import point connections will rise from 2,430 at end 2011 (90 multiplied by 27) to 5,600 at end 2015 (160 multiplied by 35), an increase of 130%. The embedded optionality of the global LNG system will thus rise very materially buyers will have more choice as indeed will sellers. A higher number of supply and import points ought to make it harder for any single supplier to control pricing. Furthermore, the market's deeper liquidity ought to provide some protection from potential demand or supply shocks.
Table 82: New LNG re-gasification terminals
Country Albania Argentina Bahamas Bahrain Bangladesh Brazil Canada Chile China Colombia Croatia Cyprus Dominican Republic Dubai Estonia France Germany Greece India Indonesia Ireland Israel Italy Jamaica Japan Kuwait Lithuania Malaysia Mexico Netherlands Pakistan Panama Philippines Poland Portugal Puerto Rico Singapore Slovenia South Africa South Korea Spain Sri Lanka Sweden Taiwan Thailand Turkey UK Uruguay Ukraine US Vietnam Total number of LNG import terminals
Source: J.P. Morgan. 179
2010 1 1 1 1 4
2011 1 2 1 1 1 1 1 1 8
2012E 2 3 1 1 1 1 1 1 1 13
2013E 3 2 1 1 1 1 2 1 1 1 1 1 1 1 18
2014E 1 1 1 1 2 1 1 1 3 1 1 1 1 1 1 1 1 21
2015E 1 1 2 1 4 3 2 1 1 1 1 1 1 21
Figure 113: LNG re-gasification terminals - 2011 to 2015E
5
31 (10)
2010 terminals 2011 addition 2012E addition 2013E addition 2014E addition 2015E addition
Floating storage and re-gasification units

So called FSRUs are becoming more popular as very practical alternatives to conventional onshore re-gasification terminals. They are purpose built LNG tankers with vaporization equipment. They can offer three specific advantages: 1. Easier permitting - since they do not require land requisition and site conversion. Local opposition to onshore sites can often slow down projects e.g. in Italy. Cheaper - since a vessel may cost $100m and the conversion may be done for only $50m; this compares to an onshore facility which (depending on its size and location) may cost $0.5bn to $1.0bn. Quicker to install - given the aforementioned features, an FSRU may be operational within 12-18 months whereas a conventional onshore terminal may take 3-4 years to build and commission.
2.
3.
Eight FSRUs are already operational in Argentina (2), Brazil (2), Chile (1), Dubai (1), Italy (1) and Kuwait (1). In Table 80, we list other venues for FSRUs. Exmar, Excelerate Energy, Golar LNG and Hoegh LNG are the worlds leading providers of FSRUs.
180
Table 83: Potential FSRU projects

Country EMEA Albania Germany Israel Italy Jordan Lithuania South Africa UK Asia Bangladesh Indonesia Malaysia Pakistan Vietnam Americas Brazil Mexico Jamaica Uruguay USA
Location Fiere Wilhelmshaven Ashkelon / Ashdod Livorno Senigallia Ancona Falconara Marittima Red Sea Klaipeda Port, Baltic Sea Mossel Bay Port Meridian Maiskhali Island West Java North Sumatra Malacca Straits Port Qasim Khalifa Point Vietnam TBC Lazaro Cardenas Port Esquivel or Kingston Harbour Rio De La Plata Port Dolphin
Project developers ASG Power, Gruppo Falcione Excelerate Energy, RWE, Nord-West Oelleitung TBC OLT Offshore GDF Suez, Hoegh LNG Api (Nova Energia) Ministry of Energy & Mineral Resources Klaipedos Nafat PetroSA Hoegh LNG PetroBangla Pertamina, PGN Pertamina, PGN Petronas Dana Gas Global Edison, Cavalier Energy PV Gas, DNV Utility consortium KMX de GNL Exmar, Petroleum Corp of Jamaica ANCAP, ENARSA, UTE Hoegh LNG
Capacity (GM3 pa) 8.0 5.1 4.0 1.5 5.0 1.5 1.0 1.0 1.0 8.0 5.0 1.5 1.5 5.0 1.5 4.0 TBC 2.5 5.1 2.3 TBC TBC
Start date 2015 2017 2014 2012 2015 2015 TBC 2014 2012 2013 2014 2013 2013 2012 2013 2013 2013 2014 2014 2014 2013 2013
181
Appendix IV: LNG shipping

LNG ships obviously enable LNG delivery from exporter to importer. Historically, this has been a Supply Point A to Demand Centre B fixed 'milk run. However, by unlocking ships from such fixed routes, this basic role of LNG ships has evolved to enable LNG suppliers to capture regional price arbitrage and to help optimize overall LNG portfolio returns. As such, LNG ships have become more valuable and strategically important assets.
Population of players
LNG shipping set for a couple of good years ahead
The first LNG carrier, the Methane Pioneer, transported a cargo of LNG from Lake Charles to Canvey Island in the UK in 1959. In the 54 years since then, the population of LNG shippers has remained relatively small and is dominated by liquefaction players that want to have control over the shipping process to their customers, typically via dedicated fleets. Another factor inhibiting population growth is the relatively high new build costs ($220m to $300m) - LNG shipping is a niche market which is dominated by a number of very large companies, some state-owned (Table 81).
Table 84: Owners and operators of LNG vessels

State entities ADNOC (National Gas Shipping) Gazprom Global LNG Petronas (MISC Bhd) Qatar (Nakilat) Sonatrach (BW Gas, Hyproc Shipping) Sovcomflo Utilities GDF SUEZ (Maran Gas Maritime) Gas Natural Kansai Electric Power Petronet LNG TEPCO (LNG Marine Transport) IOCs BG Group (Methane Services) BP (Shipping) Chevron (Shipping) ConocoPhillips ENI Exxon Mobil RD Shell (STASCO) Repsol YPF Statoil Conglomerates Hanjin Group Hyundai * Mitsui OSK Lines Listed shippers Awilco LNG Exmar * Golar LNG Hoegh LNG ** I.M. Skaugen (Norgas Carriers) STX Pan Ocean Private shippers Bluesky LNG (Taiwan Maritime Transport) Dynagas Knutsen OAS Shipping SK Shipping Stena Bulk
Source: J.P. Morgan.. * Also provide FSRU units.
Relatively small population of shippers
Most participants in liquefaction, public and private, also own LNG ships either directly or through joint ventures. However, there are also a number of pure shipping companies, many of which are listed. Listed utilities that import LNG also have shipping fleets. A number of commodity traders also lease vessels e.g. EGL Group, Vitol, Gunvor, Morgan Stanley and J.P. Morgan.
182
Figure 114: Global LNG shipping fleet - size distribution

160000 Global fleet 361 vessels, 28.4 MT DWT capacity Q-Max
140000
120000 Q-Flex 100000 Average 78,500 DWT
80000
60000
40000
20000
0 1 31 61 91 121 151 181 211 241 271 301 331 361
Source: J.P. Morgan. Q-Max vessels first entered the market in 2009. These vessels are 360m long and can carry 266,000 cubic meters of gas. Their size precludes them from berthing at most LNG re-gasification terminals.
Supply / demand dynamics

More long haul LNG expected as Atlantic Basin feeds Asia Pacific
Notwithstanding a relatively small and disciplined population of ship owners, the market is prone to imbalances and this leads to volatile freight rates. One cause of over-supply is when new ships that are dedicated to an export project are delivered on schedule, but the liquefaction facility that they are to serve is late to commission. This occurred in mid-2010 which pushed short term charter rates down to $30,000 per day. Charter rates for LNG vessels, sometimes referred to as floating gas pipelines, have surged from the lows of mid-2010 of c.$30,000 per day a level that is close to break-even for most tankers to over $125,000 per day for long term charter on Atlantic routes. Two factors have triggered a quadrupling of rates - a recovery in Asian LNG demand and the Fukushima disaster both have raised demand for long haul LNG. In just two years, the level of idle capacity has fallen from 30% of the global fleet to less than 10%. We count over 360 LNG vessels in operation and another 63 are currently on order.
Charter rates have quadrupled from 2010 lows
183
Figure 115: LNG shipping routes and current freight rates ($/mmbtu)
Trinidad to Zeebrugge, $1.3/MMBtu
Nigeria to Cove Point, $1.7/MMBtu
North Africa to Sines, $0.3/MMBtu
Middle east to Hazira, $0.5/MMBtu Australia to Tokyo, $1.2/MMBtu Middle east to Huelva, $2.0/MMBtu Australia to Hazira, $1.3/MMBtu
Nigeria to Montoir , $1.3/MMBtu
Middle east to Tokyo, $2.1/MMBtu
Trinidad to Quintero , $2.1/MMBtu Trinidad to Tokyo , $4.3/MMBtu
Figure 118 shows the current costs expressed in $ per mmbtu. The longest, most expensive route from Atlantic LNG to Tokyo is around $4.3 per mmbtu. Given a cost of LNG of around $6 per mmbtu, this route is still a viable one given recent clearing prices in Tokyo harbor over $17 per mmbtu. We see three important changes in the LNG shipping market that will impact charter rates in the medium term: (i) the expansion of the Panama Canal (ii) the development of ice-breaking LNG vessels (iii) efforts to raise fleet efficiency via cargo swaps and back haul cargoes.
Panama Canal expansion will reduce journey times to Asia
The $5.25bn expansion of the Panama Canal will enable LNG carriers to pass through it by Q4 2014. Only Q-size vessels will be unable to fit through the expanded canal. The toll for LNG vessels has yet to be agreed. Clearly, it will reduce the journey time for cargoes from the Atlantic Basin in to Asia Pacific. For example, a journey from Atlantic LNG (Trinidad) to Japan via the Suez Canal would take 11 days less via the Panama Canal. The design of new ice-breaking LNG vessels will also enable supplies of Russian Arctic LNG to reach Asian markets without sailing via the Suez Canal. Aker Arctic has completed the design and model testing of tankers that may be able to travel to Asia via Russias North Sea Route (NSR). These Arctic 7 vessels can travel at speeds up to 19.5 knots in clear water and 5.5 knots through ice that is 1.5m thick. As a result of relatively high temperatures in 2011, the NSR was open for a record of five months.
LNG ice-breakers may also open up a shorter route to Asia
184
Fleet utilization can rise as vessels are used more efficiently
Historically, LNG carriers were typically dedicated to a specific export project and tied to a specific route the so called milk run. However, just as we have seen innovation in LNG contracting (with a shift to greater destination flexibility), we are also seeing ships being used more tactically and commercially. This is leading to enhanced fleet efficiency which is necessary given average vessel utilization in 2011 was just 75% versus a peak of over 90% in 2004. Two initiatives that are leading to higher vessel utilization are: 1. Cargo swaps rather than two tankers crossing each other, buyers and sellers are coordinating more via cargo swaps. So, for example, if a seller has agreed to supply a cargo to Tokyo from West Africa and another seller has agreed to supply a European buyer from Peru, it may be possible for the two sellers to swap their obligations. Back haul cargoes rather than a ship returning empty to its liquefaction plant after unloading its cargo, it is possible for it to reload on route from another LNG facility and to empty that cargo at another re-gasification terminal.
2.
So, the global fleet may be used more efficiently and certain key routes (US and Russia to Asia) shortened. At the same time, the average size of LNG vessels is slowly increasing, more ships are expected to be delivered in 2013 and the start-up of several new sources of LNG supply in Australia in 2014-15 will also target Asia Pacific with a shorter haul thereto.
We expect LNG day rates to remain high through 2012
However, at roughly the same time, the advent of North American non-conventional gas as a source of LNG exports post-2015 means that there will be increased demand for long haul LNG shipping, if this source gas is to reach both the key demand centers in Asia Pacific and Europe. This will raise the fleets average ton per mile. On balance, these factors may mitigate further day rate inflation, although we would expect the LNG shipping market to remain tight throughout 2012 and in to early 2013.
Vessel specification
LNG cargoes worth $90m to $130m+
The largest LNG carrier is the Q-Max vessel (Figure 119). One Q-Max carrier brings enough energy for 70,000 homes for one year these are high density energy parcels. Assuming an LNG discharge volume of around 260,000 M3 from a Q-Max vessel (the worlds largest with a 7.5% heel), if the cargo sells for $10 (15) per mmbtu, it has a sales value between $90m and $130m. This compares to the world's largest Ultra Large Crude Carriers (ULCC) which carry cargoes of 0.55 MT - at $100 per barrel, such a large cargo has a market value of over $400m, four times the value of the largest LNG cargo.
185
Figure 116: LNG vessels - evolution since inception

SCF Arctic Specifications: Size 71,500 m3 DWT 40586 tons Built in 1969 Current owner SCF Group
Increasing size
Al Samriya Specifications: Size 261,700 m3 DWT 154940 tons Built in 2009 Current owner Qatar Gas (Nakilat)
The rise in LNG freight rates has been in stark contrast to the decline in oil tanker freight rates which have declined due to surplus vessel capacity. This has caused the share price of an LNG vessel owner e.g. Golar LNG to diverge (2011 correlation coefficient -0.88) markedly from an oil tanker owner, e.g. Frontline (Figure 120).
Figure 117: Share price of Golar LNG versus Frontline (NOK)
400
350
300
250
200
150
100
50
0 Golar LNG Frontline
186
Appendix V: Floating LNG

There are three key drivers to deploy liquefaction offshore: 1. 2. 3. A means to monetize fields that are very remote and which otherwise are a stranded resource. A means to reduce / avoid gas flaring and sub-optimal gas re-injection. An alternative to the conventional onshore solution where costs have increased and delays are very common.
Prelude FLNG marinised proven onshore technology for the first time
On 20 May 2011, RD Shell took the final investment decision on the Prelude Floating Liquefied Natural Gas (FLNG) Project in Australia. The project is 100% RD Shell and is the world's first FLNG facility. Shell Global Solutions (the groups in house R&D center) had spent over 12 years developing the technology for FLNG. The key challenges were sloshing-resistant containment systems, process topsides and offloading systems. Via a 15 year strategic partnership with Samsung and Technip, the vessel will be built in a South Korean shipyard. When on station in 2017, some 200km offshore Australia, it will recover c.3 TCF of gas from the Prelude field, discovered by RD Shell in 2007, over a 25 year period. Prelude should produce at least 5.3 MT pa of liquids, comprising 3.6 MT pa of LNG, 1.3 MT pa of condensate and 0.4 MT pa of liquefied petroleum gas.
Pros of FLNG outweigh the cons, but it is not cheap
Table 85: Floating LNG - pros and cons

Pros Construction occurs in a controlled environment (shipyard) this benefits safety, costs and schedule control risks. Removes need for offshore compression, dredging close to shore and jetty construction, onshore construction of roads, lay down areas and accommodation facilities. Reduced onshore impact avoids potentially lengthy and controversial land requisition. Less CO2 intensive than conventional onshore liquefaction RD Shells environmental impact statement for Prelude LNG estimates 15-20% lower. Cons Development model is not cheap RD Shell has indicated around $3,250 per ton (including upstream) this implied unit development costs of $23 per boe (assuming $11.5bn and 3 TCF). Higher operating and maintenance costs than onshore plants with limited expansion / de-bottlenecking options. Given untested model, LNG buyers may enforce a price discount and it may be more expensive (if not impossible) to secure project finance. Controversial for some countries if a nations gas resources are developed and exported with minimal local content and no inward fixed asset investment e.g. TimorLeste. Unclear whether extreme weather conditions (e.g. cyclones and typhoons in Asia) might require the vessel to be tugged away (we understand that Shells design is meant to stay on station during extreme weather).
Global stranded gas opportunity set is very big
RD Shell plans to deploy other FLNG vessels elsewhere around the world to develop otherwise stranded gas resources (a report by the Commonwealth Scientific and Industrial Research Organization estimated 140 TCF of stranded gas in Australia alone). Globally, stranded gas resources may total 1,275 TCF which is approximately 15% of global gas resources (Figure 121). We note that it has recently agreed to purchase a 30% stake in the Abadi field, offshore Indonesia from Inpex. Given resources of 9 TCF and 330 mmb condensate, this is tagged as a FLNG project, with capacity of 2.5 MT pa and 8.4 kbpd condensate.
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Figure 118: Distribution of gas resources by field size the potential addressable market for FLNG
4000 3500 3000 3922
Number of fields
2500 2000 1500 1000 500 0 < 0.1 TCF 0.1 - 0.25 TCF0.25 - 0.5 TCF 0.5 - 1.0 TCF 1 - 5 TCF 5 - 50 TCF 1043 719 347 337 73 4 50 - 100 TCF Onshore liquefaction Floating liquefaction potential
Recoverable gas reserves
12 potential FLNG projects including Prelude LNG
There are two main FLNG concepts small scale vessel based projects designed to handle gas from small fields and the large scale barge based concept designed for fields with gas reserves in excess of 3 TCF. As per Table 83, we count twelve potential FLNG projects, of which RD Shell is currently involved in four: in Australia (2), Indonesia (1) and Iraq (1). Including Prelude FLNG, these projects carry a total capacity of 30.4 MT pa.
Table 86: Potential FLNG projects

Country Australia Project Prelude LNG Bonaparte LNG Cash Maple FLNG Sunrise FLNG * Santos FLNG Abadi FLNG Khawr al-Amaya FLNG Sarawak FLNG SK 205 FLNG Progress FLNG Gulf FLNG TBC Project sponsors RD Shell 100% GDF Suez 60%, Santos 40% PTTEP (50%), PTT (50%) ** Woodside 33.44%, RD Shell 26.56%, ConocoPhillips 30.0%, Osaka Gas 10.0% Petrobras 51.1%, BG 16.3%, Repsol 16.3%, GALP 16.3% Inpex Masela 60%, RD Shell 30%, PT Energi Mega Persada 10% (PT EMP) RD Shell 50%, Mitsubishi 50% Petronas 100% Petronas 50%, Petrovietnam 50% * Mitsubishi, Peak Petroleum * Liquid Niguini Gas (InterOil 52.5% + Pacific LNG Operations 47.5%), Flex LNG ** Hoegh LNG, DSME, Petromin ** Project status Under development Under review FID 2014 Under review FID 2012 Under review Under review FID 2013 Under review FID 201314 Under review FID 201314 Under review FID 2012 Under review Under review Under review FID 2012 Under review Total potential capacity Capacity (MT pa) 3.5 2.0 3.6 3.6 2.7 2.5 2.0 1.0 3.0 1.5 2.0 3.0 30.4 On stream 2017 2019 2017 2018 2018 2019 2017 2016 2019 2017 2017 2019
Australia / East Timor Brazil Indonesia Iraq Malaysia Nigeria Papua New Guinea
Source: J.P. Morgan. * Part of the Greater Sunrise and Troubador fields lies in the Timor Seas Joint Development Area. ** Precise ownership rights yet to be confirmed.
Interestingly, RD Shell may not actually be the first company to produce LNG from the offshore if Petronas progresses its project offshore Sarawak as it has scheduled the FEED contract was awarded in February 2011 to Technip and DSME.
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Appendix VI: A brief history of LNG

Below, we list some key dates in the history of the LNG industry.the worlds first 1873 .German engineer Karl von Linde built the first compressor refrigeration machine. 1917 .LNG plant began operations in West Virginia, USA. 1941.commercial liquefaction plant was built in Cleveland, Ohio. 1944.major LNG incident - an LNG storage tank at a peak-shaving plant in Cleveland fails; LNG spills in to a sewer and an explosion kills 128 people. In 1979, an explosion at the Cove Point terminal (USA) kills one person. In 2004, explosions and fire destroy part of the liquefaction plant in Skikda, Algeria, killing 27 people. 1959.LNG tanker (Methane Pioneer) brings a cargo of LNG from Lake Charles, Louisiana to Canvey Island, UK. 1964.large scale liquefaction plant (Arzew GL4Z or Camel plant) began operations in Algeria, sourcing gas from the Hassi RMel field its first cargo was imported by the UK. 1969.LNG exports from the US to Asia when Kenai Peninsula LNG (Alaska) delivered its first cargo to Japan. 1974.when the US did not import a single LNG cargo (recurs in 1986). 1999.LNG plant in the Atlantic Basin was commissioned in Trinidad (Atlantic LNG). 2004.offshore re-gasification facility (Port Pelican - owned by Excelerate Energy) began operations in the Gulf of Mexico. 2010.coal bed methane to LNG project was sanctioned by BG Group in Queensland, Australia. 2011.floating liquefaction project, Prelude LNG, sanctioned by RD Shell for Prelude field, offshore Australia.
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Appendix VII: Glossary of terms in LNG

Liquefaction & re-gasification
Neither liquefaction nor re-gasification are complicated chemical processes they simply induce a phase change for methane (CH4) from gas to liquid and vice versa whilst also involving some purification of the source gas to meet the shippers / customers requirements. Figure 122 shows the key steps in liquefaction and Table x the key steps for re-gasification. LNG is produced for the purpose of efficient storage and transportation of natural gas. By converting natural gas to liquid by liquefaction process reduces its volume nearly 600 times (a 600:1 ratio). In a physical comparison, the same amount of natural gas held in a beach ball can be stored and transported in a table-tennis ball. This compression makes the shipping of LNG economic.
Figure 119: Liquefaction process
Gas specifications Related to upstream and transport facilities H2 S < 4 ppm Co2 < 50 ppm H2 O < 1 ppm Hg < 10 ng/m3 Higher Heating Value (Wobbe number)
Feed Gas
Fuel Gas distribution
Plant fuel Ship vapors
Gas Conditioning Sweetening Dehydration Mercaptan removal Mercury removal
Propane refrigerating system
Ethylene refrigerating system
Methane compressor
Vapour recovery
Liquefaction
LNG storage and loading
NGL stabilization
Marine facilities
NGL storage
LNG to ship
Acid gas: a gas that contains compounds, such as CO2, H2S, or mercaptans that can form an acid in solution with water. Aggregator: 1) acts on behalf of groups of producers to collect producer supplies and sell the gas in commingled blocks to end-users. Prior to deregulation, a limited number of aggregators operated. Aggregators do not take title to the gas but simply find markets and negotiate prices for pools of producers. An aggregator is also called core transport agent; 2) also a firm that bargains on behalf of a large group of consumers to achieve the lowest possible price for utilities such as electricity and gas. The firm aggregates or combines many smaller customers into one large customer for purposes of negotiation and then purchases the utility commodity on behalf of the group. Annual contract quantity: the annual delivery quantity contracted for during each contract year as specified in a gas sales or LNG contract.
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Annual delivery program (ADP): a key document for both the buyer and seller in determining how they will work together over the life of an LNG project to achieve the efficient delivery and receipt of LNG cargoes; normally agreed between the parties before the beginning of each contract year. For an ex-ship sale, the ADP deals with the dates on which the sellers LNG ships will deliver LNG to the buyers terminals. For a Free on board (FOB) sale, the ADP covers the dates of arrival of the buyers ships at the LNG plant. Whether the sale is ex-ship or FOB, the ADP provides a basis for decisions on how buyers and sellers will operate their facilities during the contract year covered. Usually, the procedures to be adopted to develop the ADP are agreed upon in the Sales and Purchase Agreement (SPA). Beach gas: natural gas transported through offshore pipelines to a number of gas gathering and processing terminals at or near a coastal region. Beach price: price applying to natural gas at landfall. Black start: the initial operation of a facility that begins with no utilities in service. British thermal unit (Btu): an energy unit; the quantity of heat necessary to raise the temperature of one pound-mass of water one degree Fahrenheit from 58.5F to 59.5F under a standard pressure of 30 inches of mercury at 32F. The following conversions would apply to gas that contains exactly 1,000 Btu/cf approximately true for most gas delivered in the US: 1 cubic foot (cf) = 1,000 Btu, 1 therm = 100 cf = 100,000 Btu mcf = 1 mmBtu 1 BCF = 1 trillion Btu, 1 TCF = 1 quad = 1 quadrillion Btu Bubble point: the temperature and pressure at which a liquid first begins to vaporize to gas. Calorific value: the quantity of heat produced by the complete combustion of a fuel. This can be measured dry or saturated with water vapor, net or gross. The general convention is dry and gross. City gas: treated and conditioned gas for consumer use. City-gate rate: the rate charged a distribution utility by its suppliers; refers to the cost of the natural gas at the point at which the distribution utility historically takes title to the natural gas (also called gate rate). City-gate station (city gate): the point or measuring station at which a gasdistribution utility physically receives gas from a pipeline or transmission company; the point at which the backbone transmission system connects to the distribution system. There is not necessarily a change of ownership at a city-gate station. Combined-cycle gas turbine (CCGT): this is the combination of simple gas turbines with a heat-recovery steam generator (HRSG) and a steam turbine in a power generation plant. Gas is combined with air and burned, with the expanded gas turning the blades of the gas turbines to power an electricity generator (the Brayton thermodynamic cycle). The hot exhaust gases are passed to the HRSG, in which water is converted to steam that is used in a single steam turbine to power another generator (the Rankine thermodynamic cycle). Also called combined cycle generation.
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Combined heat and power (CHP): the simultaneous generation of two forms of energy from a single fuel source. Electrical energy is produced through gas turbines and heat energy (steam) is produced through a heat-recovery steam generator. See Combined-cycle gas turbine. Common carrier: a facility obligated by law to provide service to all potential users without discrimination, with services to be prorated among users in the event capacity is not sufficient to meet all requests. In the US, interstate oil pipelines are common carriers, but interstate natural gas pipelines are not (they are open-access contract carriers). Company-used gas: natural gas consumed by a gas distribution or gas transmission company or the gas department of a combination utility, for example, fuel for compressor stations. Compressed natural gas (CNG): natural gas that has been compressed under high pressures (typically between 3,000 and 3,600 psi) and held in a container; expands when released for use as a fuel. Cryogenics: the production and application of low-temperature phenomena. The cryogenic temperature range is usually from 150C (238F) to absolute zero ( 273C, or 460F), the temperature at which molecular motion essentially ceases. A most important commercial application of cryogenic gas liquefaction techniques is the storage, transportation, and re-gasification of LNG. Dehydration: the removal of water from a fluid. Dehydrator: natural gas processing equipment that removes water vapor. Typically, glycol dehydration units are used to dry gas before it is sent to a gas transmission line. If the gas is to be sent to a cryogenic expander plant or LNG plant, then the gas is typically dehydrated using molecular sieves. Dew-point: the temperature, at a given pressure, at which a vapor will form a first drop of liquid on the subtraction of heat. Further cooling of the liquid at its dew point results in the condensation of part or all of the vapor as a liquid. Engineering, procurement and construction (EPC) contract: 1) a legal agreement setting out the terms for all activities required to build a facility to the point that it is ready to undergo preparations for operations as designed. 2) the final contracting phase in the development of the export portion of the LNG chain that defines the terms under which the detailed design, procurement, construction and commissioning of the facilities will be conducted. Greenfield LNG project development entails a wide variety of design, engineering, fabrication and construction work far beyond the capabilities of a single contractor. Therefore, an LNG project developer divides the work into a number of segments, each one being the subject of an EPC contract. For example, separate EPC contracts are executed for construction of onshore LNG plant and related infrastructure, for the offshore production facilities and for the pipeline from the offshore location to the plant site. Environmental-impact assessment (EIA): an assessment of the impact of an industrial installation or activity on the surrounding environment, conducted before work on that activity has commenced. The original baseline study, a key part of this process, describes the original conditions.
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Federal Energy Regulatory Commission (FERC): the chief energy regulatory body of the US government. FERC is responsible for regulating LNG facilities in the US. FERC is considered an independent regulatory agency responsible primarily to Congress, but is housed in the US Department of Energy. Feedstock gas (feedgas): dry gas used as raw material for LNG, petrochemicals and gas-to-liquids (GTL) plants. Flash point: the temperature under very specific conditions at which a combustible liquid will give off sufficient vapor to form a flammable mixture with air in a standardized vessel. It is related to the volatility of the liquid. Flash vapors: gas vapors released from a stream of natural gas liquids as a result of an increase in temperature, or a decrease in pressure. Front-end engineering and design (FEED) contract: 1) a legal agreement setting out the terms for all activities required to define the design of a facility to a level of definition necessary for the starting point of an engineering, procurement, and construction (EPC) contract; 2) generally, the second contracting phase for the development of the export facilities in the LNG chain which provides greater definition than the prior Conceptual design phase. In an LNG project, the most important function of the FEED contract is to provide the maximum possible definition for the work to be performed by the EPC contractor. This enables potential EPC contractors to submit bids on a lump-sum basis, with the least possibility that the contract cost will change through undefined work or through claims for unanticipated changes in the work. Clear definition of contract costs is important not only for cost control purposes, but also for purposes of project financing LNG project lenders will normally limit their lending commitment to a specific percentage of forecast project costs, and cost overruns will have to be covered by the borrowers equity investment. Fuel gas: a process stream internal to a facility that is used to provide energy for operating the facility. Fuel loss: a proportion of natural gas received by a pipeline or local distribution company that is retained to compensate for lost and unaccounted for natural gas. Gas processing: the separation of oil and gas, and the removal of impurities and NGLs from natural gas. Gas treatment: removal of impurities, such as sulphur compounds, carbon dioxide and water vapor from natural gas. Gas/condensate ratio: for a gas condensate reservoir, the ratio of gas to condensate is reported in cubic feet per barrel. The inverse ratio (condensate-gas ratio, CGR) is also used, and is reported in barrels per mmcf. Gas to liquids (GTL): a processing technology that converts natural gas into highvalue commodity liquid fuels and blending agents, petrochemicals feedstocks and chemicals by changing its chemical structure. GTL produces products that can be easily traded as commodities on world markets.
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Gas-to-oil ratio (GOR): the number of standard cubic feet of gas produced per barrel of crude oil or other hydrocarbon liquid. In some parts of the world, the units are cubic metres of gas per cubic metre of liquid produced. Gigajoule (GJ): a joule is an international unit of energy defined as the energy produced from one watt flowing for one second. A very small unit of energy, there are 3.6m joules in a kilowatt-hour. For gas, one gigajoule is equal to 960 cf under standard temperature and pressure conditions. Roughly, 1 gigajoule (Gj) = mcf; one terajoule (Tj) = 1 mmcf; one petajoule (Pj) = 1 BCF; one exajoule (Ej) = 1 TCF. Green field LNG facility: a new LNG facility constructed on a new site. Hub: a contractual point where buyers and sellers execute transactions for gas. Hubs can be notional or physical, trans-regional (one or more transmission system operators (TSOs)) or within-country (one TSO). Hubs generally consist of a Hub Services Agreement (operator) and Standard Trading Contract (trader). Examples of notional hubs are the National Balancing Point (NBP) in the UK and the Title Transfer Facility (TTF) in the Netherlands. Physical hubs include the Henry Hub in the US and the Zeebrugge Terminal (ZBT) in Belgium. See Market centre. Henry Hub: pipeline interchange near Erath, Louisiana, US, where a number of interstate and intrastate pipelines interconnect through a header system. It is the standard delivery point for the Nymex natural gas futures contract in the US, the benchmark gas price in the US Gulf. Liquefaction plant: facility which converts natural gas at ambient temperature and pressure to liquefied natural gas. Liquefied natural gas (LNG): an odorless, colorless non-corrosive and non-toxic product of natural gas consisting primarily of methane (CH4) that is in liquid form at near atmospheric pressure. LNG feed gas requirements to LNG plant: The amount of gas reserves required to economically support the development of an LNG liquefaction plant, allowing for gas lost in the process of production, liquefaction and transport of the LNG to endmarkets (typically 10-15%). LNG project characteristics: primary LNG project components are: 1) upstream development of long-term, natural gas supply for feed-gas to an LNG plant; 2) downstream development of liquefaction, storage and loading facilities; 3) marine transportation; and 4) further downstream, development of receiving terminals for regasification and pipeline transportation to market. LNG refrigerant (for liquefaction) cycles: natural gas liquefaction requires removal of sensible and latent heat over a wide temperature range using a refrigerant. The refrigerant may be part of the natural gas feed (an open-cycle process), or a separate fluid continuously re-circulated through the liquefier (a closed-cycle process). Three general types of refrigeration cycle are used: Cascade refrigerant cycle: feedstock natural gas is cooled, condensed and subcooled in heat exchange with propane, ethylene (or ethane) and finally methane in three discrete stages. The three refrigerant circuits generally have multistage
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refrigerant expansion and compression, each typically operating at three evaporationtemperature levels. After compression, propane is condensed with cooling water or air, ethylene is condensed with evaporating propane and methane is condensed with evaporating ethylene. Expander cycle: in its simplest form, process refrigeration in an expander cycle is provided by compression and expansion of a single-component gas stream. Highpressure cycle gas is cooled in counter-current heat exchange with returning coldcycle gas. The cycle gas is expanded through an expansion turbine, reducing its temperature to a lower temperature than would be given by expansion through a Joule-Thomson valve. Mixed-refrigerant cycle (MRC): uses a mixed refrigerant(s) instead of the multiple pure refrigerants in the cascade cycle. The mixture composition is specified so the liquid refrigerant evaporates over a temperature range similar to that of the natural gas being liquefied. A mixture of nitrogen and hydrocarbons (usually in the C1 to C5 range) is normally used to provide optimal refrigeration characteristics. MRC provides greater thermodynamic efficiency, lower power requirement and use of smaller machinery. LNG storage tanks: vessels that are specially constructed to contain LNG. The tanks are generally constructed of nickel steel (steel containing 9% nickel) to withstand cryogenic temperatures and are insulated to maintain the LNG at 161C. Some of the stored LNG boils off and the resulting vapor is used as fuel gas for the plant. There are three main designs of LNG storage tanks: single containment, double containment and full containment. The difference in these systems lies in the functionality of the secondary containment, when the primary containment is breached. For single containment, neither liquid nor vapor will be held by the secondary containment; for double containment, liquid will be contained and for full containment, liquid and vapor will be contained. LNG value chain: in planning, funding and executing an LNG project, each element of the complex chain that links the natural gas in the ground to the ultimate consumer (from the wellhead to the burner tip) is considered. The main links are natural gas production, liquefaction, shipping, receiving terminal (including re-gasification), distribution of the re-gasified LNG and, lastly, consumption of the gas. mmBtu: one million British thermal units. mcf, MCF, Mcf: a measurement of volume denoting one thousand cubic feet of natural gas. 1,000 cf of gas = 1.03 mmBtu (also, 1 kWh = 3,412 Btu). Methane (CH4): the simplest hydrocarbon and the main constituent of natural gas, it is also known as C1 in the carbon complexity chain. mmt/y, Mtpa: million tonnes a year/per annum. Natural gas liquids (NGLs): liquid hydrocarbons, such as ethane, propane, butane, pentane and natural gasoline, extracted from field gas.
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Natural-gas processing: 1) the purification of field gas at gas-processing plants (or gas plants), or the fractionation of mixed natural gas liquids (NGLs) to natural gas products to meet specifications for use as pipeline quality gas. Gas processing includes removing liquids, solids, and vapors, absorbing impurities and odorizing; 2) the process of separating NGLs by absorption, adsorption, refrigeration or cryogenics from a stream of natural gas. Project financing: most commonly used method to finance construction of industrial infrastructure, because of the nonrecourse (to project sponsors) nature of the debt financing supporting the project. Typically, the developer pledges the value of the plant and part or all of its expected revenues as collateral to secure financing from private lenders. In the event of financial distress, the debt holders have recourse only to the project assets in place at that time.
Figure 120: Re-gasification process
GAS LIQUID
Re-condenser
Boil off Compressor
LNG ship
Pipeline Compressor
Condenser Drum
LNG storage tanks

Vaporizers Pipeline
Re-gasification plant: a plant that accepts deliveries of liquefied natural gas and vaporizes it back to its gaseous form by applying heat so that the gas can be delivered into a pipeline system. Sea water is often used as a source of heat to vaporize the gas. Floating Storage & Re-gasification Unit (FSRU) This is an offshore based regasification unit which accepts LNG from an LNG carrier and offloads it via pipeline to shore. Send-out capacity: the volume of natural gas that can be converted by a liquefaction facility and subsequently shipped over a specified period of time. Separator: a vessel used to separate a multiphase mixture of fluids into its separate phases, for example, vapor, oil, water, solids. Shrinkage: the reduction in volume of wet natural gas caused by the removal of natural gas liquids, hydrogen sulphide, carbon dioxide, water vapor and other impurities from the gas
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Sour gas: natural gas that contains significant amounts of hydrogen sulphide (usually greater than 16 ppm) and possibly other sulphur compounds (mercaptans, carbonyl sulphide). Also called acid gas. Spot gas: natural gas that is available and purchased on a short-term basis and is furnished to customers on an as-available basis. Sweet gas: natural gas that contains such small amounts of hydrogen sulphide (and other sulphur compounds) and carbon dioxide that it can be transported or used without purifying, with no deleterious effect on piping and equipment. Treating plant: a facility that treats raw natural gas to remove undesirable impurities such as carbon dioxide, hydrogen sulphide and water vapor. Turnaround: a period of brisk activity at a plant or receiving terminal when processing units, or portions of them, are shut down either for scheduled maintenance or for the installation of new equipment and systems. Unconventional gas: natural gas that cannot be produced using existing technologies. Utilization factor: a ratio of the maximum demand of a system or part of a system to its rated capacity. Wet gas: a gas containing condensable hydrocarbons or other liquids. The term is subject to varying legal definitions as specified by applicable statutes. Natural gasoline, butane, pentane and other light hydrocarbons can be removed by chilling and pressure or extraction. Usually maximum allowable is 7 pounds/mmcf for water content and 0.02 gallons/mmcf for natural gasoline (also known as associated gas).
Shipping & Marketing

Natural gas liquefied as LNG is transported in an LNG Carrier (LNGC) - a ship specially designed to transport LNG. The LNG is stored in a special containment system and maintained at around 160C or -270F at around atmospheric pressure. LNGC cryogenic cargo tanks are functionally big thermos containers where the LNG remains boiling at a constant pressure for the duration of the voyage. Some gas is removed to prevent a build-up in pressure this is known as boil-off-gas or BOG and can be used as fuel for ship propulsion or re-liquefied and returned to the cargo. LNG can be transported by sea for any project market distance short, medium or long sea shipping. However, it is the most economic for transporting gas to market over long distances. Currently a common size LNGC has an average cargo space storage volume of around 140,000 M3 (cargo deadweight about 64,000 tons LNG). A smaller size LNGC may have a capacity as little as 1,100 M3 (500 tons). Large LNG Carriers (L-LNGCs) can now carry a cargo volume of 266,000 m3 (cargo deadweight about 122,000 tonnes LNG Q-Max class) to reduce delivery costs. Acquiring shipper: in the context of capacity release, a shipper who acquires firm capacity rights from a releasing shipper (also known as a replacement shipper). Admeasurement: the confirmed or official dimensions of an LNG ship.ATS)
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Arbitrage: the simultaneous purchase and sale of an asset in order to profit from a difference in the price, usually on different exchanges or marketplaces. Where appropriate infrastructure exists, LNG offers the opportunity for price arbitrage between different gas markets. Articles of agreement: the document containing all particulars relating to the terms of agreement between the Master of the LNG vessel and the crew. Average daily quantity (ADQ): the monthly contracted quantity of gas divided by the number of customers operating days in that month. Bare-boat charter: a charter in which the bare ship is chartered without crew; the charterer, for a stipulated sum takes over the vessel for a stated period of time with a minimum of restrictions; the charterer appoints the master and the crew and pays all running expenses. Beam: the width of a ship; also called breadth. Bill of lading (B/L): a document by which the Master of a ship acknowledges having received in good order and condition (or the reverse) certain specified goods consigned to him by some particular shipper, and binds himself to deliver them in similar condition, unless the perils of the sea, fire or enemies prevent him, to the consignees of the shippers at the point of destination on their paying him the stipulated freight. A bill of lading specifies the name of the master, the port and destination of the ship, the goods, the consignee, and the rate of freight; documentation legally demonstrating a cargo has been loaded. The bill of lading is signed by the Master of the ship and the contract supplier. Boatswain (Bosun): on an LNG vessel, tantamount to a foreman; directly supervises maintenance operations. Boil-off vapor: usually refers to the gases generated during the storage of volatile liquefied gases, such as LNG. LNG boils at slightly above 163C at atmospheric pressure and is loaded, transported and discharged at this temperature, which requires special materials, insulation and handling equipment to deal with the lowtemperature and the boil-off vapor (heat leakage keeps the cargo surface constantly boiling). On a typical voyage an estimated 0.1% - 0.25% of the cargo converts to gas each day, depending on the efficiency of the insulation and the roughness of the voyage. In a typical 20-day voyage, anywhere from 2% - 6% of the total volume of LNG originally loaded may therefore be lost. Normally an LNG tanker is powered by steam turbines with boilers. These boilers are dual fuel and can run on either methane or oil or a combination of both. The gas produced in boil off is traditionally diverted to the boilers and used as a fuel for the vessel. Before this gas is used in the boilers it must be warmed up to roughly 20C by using the gas heaters. The gas is either fed into the boiler by tank pressure or it is increased in pressure by the LD compressors. Break bulk: to commence discharge of cargo. Bulk cargo: any liquid or solid cargo loaded on to a vessel without packaging (for example, oil or LNG). Burner tip: the point at which natural gas is used as a fuel.
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Cargo: one standard cargo is 2.644 bcf or 0.0532 million tons of LNG. Cargo handling: the act of loading and discharging a cargo ship. Cargo loading: a typical cargo cycle starts with the tanks in a "gas free" condition (full of fresh air), which allows maintenance on the tank and pumps. Cargo cannot be loaded directly into the tank, as the presence of oxygen means would create explosive atmospheric conditions within the tank. Also, the temperature difference could cause damage to the tanks. 1. The tank must be inerted by using the inert gas plant, which burns diesel in air to remove the oxygen and replace it with carbon dioxide (CO2). This is blown into the tanks until it reaches below 4% oxygen and a dry atmosphere. This removes the risk of an explosive atmosphere in the tanks. The vessel goes into port to "gas-up" and "cool-down", as one still cannot load directly into the tank: The CO2 will freeze and damage the pumps and the cold shock could damage the tanks. Liquid LNG is brought onto the vessel and taken along the spray line to the main vaporizer which boils off the liquid into gas. This is then warmed up to roughly 20C in the gas heaters and then blown into the tanks to displace the "inert gas". This continues until all the CO2 is removed from the tanks. The inert gas is blown ashore via a pipe by large fans called "HD compressors". The vessel is then gassed up and warm. The tanks are still at ambient temperature and are full of methane. The next stage is cool-down. Liquid LNG is sprayed into the tanks via spray heads, which vaporizes and starts to cool the tank. The excess gas is blown ashore to be re-liquified or burned at a flare stack. Once the tanks reach about 140C the tanks are ready to load bulk. Bulk loading starts and liquid LNG is pumped from the storage tanks ashore into the vessel tanks. Displaced gas is blown ashore by the HD compressors. Loading continues until typically 98.5% full is reached. The vessel can now proceed to the discharge port.
2.
3.
4.
Cargo plan: a plan giving the quantities and description of the various grades carried in the ships cargo tanks, after the loading is completed. Cash-out: a procedure in which shippers are allowed to resolve imbalances by cash payments, in contrast to making up imbalances with gas volumes in-kind. Certificate of registry: a document specifying the nation registry of the vessel. Charter party: contractual agreement between a ship owner and a cargo owner, usually arranged by a broker, whereby a ship is chartered (hired) either for one voyage or a period of time. Charter rates: tariff applied for chartering tonnage in a particular trade. Charterer: the entity to whom is given the use of the whole of the carrying capacity of a ship for the transportation of cargo to a stated port for a specified time. See Time charter party
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Classification society: private organizations that arrange inspections and advise on the hull and machinery of a ship. Supervise vessels during their construction and afterwards, in respect to their seaworthiness, and places vessels in grades or classes according to the societys rules for each particular type. It is not compulsory by law that a ship owner has his vessel built according to the rules of any classification society. In practice, the difficulty in securing satisfactory insurance rates for an unclassed vessel makes it a commercial obligation. The major classification societies American Bureau of Shipping, Lloyds Register of Shipping, Det Norske Veritas, Bureau Veritas and Germanischer Lloyd have included the International Maritime Organization (IMO) LNG Gas Codes in their rules. Committed gas contract: a source specific natural gas sales contract that commits the seller to deliver natural gas, from specific described reserves or sources. Cost, insurance and freight (CIF): used in international trade statistics and sales contracts, transactions on CIF basis mean the purchase price includes all costs of moving the goods from the point of embarkation to their destination. With respect to LNG shipping, this means that the buyer purchases the gas at the point of vessel loading or during its transit to the receiving terminal, while the agreed price includes shipping charge and insurance for the load. Crude price parity: This relates to LNG contract pricing wherein parity is a crude indexed slop of 0.1724 (given a ratio of 5.8:1 gas:oil). So, an LNG price of $17.24 per mmbtu would represent parity with a crude price of $100 per barrel. A slope of 0.16 (0.15) thus corresponds to a crude price discount of 7.2% (13.0%). Japanese LNG contract prices are based on individual pricing formulae. Generally, Indonesian LNG prices are linked to ICP (Indonesian crude price) and other Asian LNG prices are linked to JCC (see later definition). There is a time lag between the movement of crude oil and LNG prices. Older contracts generally have a cap and a floor price (creating a so-called S-curve price profile), while more recent pricing schemes are more likely top drop this and instead offer a discount to crude parity, depending on the supply/demand environment at the time of signing the contracts. At the peak of the market in mid-2008, there was no discount. The generic pricing formula is: Price (LNG) = A (slope) * Index (ex JCC) + B (constant) A this determines the leverage to oil prices, the higher A, the higher the LNG price. B the residual constant which also takes in to account shipping and transportation costs. Cubic capacity: the volumetric measurement of the ships cargo compartments. Cubic feet a day (cf/d): at standard conditions, the number of cubic feet of natural gas produced from a well over a 24-hour period, normally an average figure from a longer period of time. Generally expressed as mcf/d = thousand cubic feet a day; mmcf/d = million cubic feet a day; bcf/d = billion cubic feet a day; or tcf/d = trillion cubic feet a day. Cubic foot (cf): The amount of gas required to fill a volume of 1 cubic foot under stated conditions of temperature, pressure and water vapor.
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Cubic meter (cm): unit of measurement for gas volume. The amount of gas required to fill the volume of one cubic meter. Custody transfer measuring system (CTMS): LNG ships are fitted with highaccuracy liquid-level, temperature and vapor-pressure measuring equipment. The cargo tanks are calibrated by an independent measurer so that the volume of cargo can be determined accurately. The CTMS is accepted by the buyer and the seller of the cargo as the basis for the quantity purchased or sold. Samples of the LNG cargo are taken ashore and analyzed to determine the cargos chemical composition from which the heating value can be calculated. The heating value is then multiplied by the volume loaded or discharged from the ship to obtain the British thermal unit (Btu) content of the delivered cargo, which is used as the basis for cargo invoices, import duties and fiscal accounting. Dead freight factor: percentage of a ships carrying capacity that is not utilized. Dead freight: space booked by shipper or charterer on a vessel, but not used. Deadweight tonnage (DWT): a measure of ship carrying capacity: 1) the number of metric tonnes (2,204.6 pounds) of cargo, stores and bunkers that a vessel can transport; 2) the difference in weight between a vessel when it is fully loaded and when it is empty (in general transportation terms, the net) measured by the water it displaces when submerged to the deep-load line. A vessels cargo is less than its DWT. Deliverability (LNG ships): one major aspect of LNG project planning consists of estimating the transportation capacity required, taking into account the time necessary for each function in the chain of events within a typical round voyage of an LNG carrier. A typical delivery calculation for a 137,500-cm LNG carrier might be as per Table 84.
Table 87: LNG vessel capacity calculation
One way distance (nautical miles) Ship service speed (knots) Ship service speed (mph) Sea days (round trip) Port days (round trip) Total voyage days Ship operating days per annum Ship capacity (cm) Less 7.5% heel (cm) Discharge quantity (cm) Annual deliverable quantity (cm) LNG specific gravity Annual vessel deliverability (ton) Per vessel per trip (ton) LNG export train operating capacity (million tons pa) Operating days per annum Daily output (tons) Requires 1 ship every - days
6,000 19 21.9 26.3 2 28.3 350 137,500 -10,313 147,813 1,827,050 0.45 822,173 66,516 5.0 330 15,152 4.4
A new technology next generation LNG carrier is about to be developed. This is a shallow draft High Speed LNG Carrier (HS-LNGC), capable of 60-75 knots service speed, three times the speed of a conventional LNGC of 19 knots. Given the same
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LNG cargo capacity with combination of speed and the same fuel consumption to that of a conventional LNGC of service speed 19 knots, effectively the HS-LNGC could reduce the number of ships in an LNG delivery system by two-thirds. For example, a three ship LNGC service could be reduced to one HS-LNGC thus giving both capital investment and overall cost savings in the shipping delivery component of the supply chain in an LNG contract. Demurrage: a fee, per day or per hour, agreed to be paid by the charterer or receiver of the cargo, for the detention of a vessel, loading or unloading, beyond the lay-time allowed in the charter party. Diversion: the flexible routing of LNG cargoes where gas suppliers will seek to move cargoes to markets. Diversion rights for sellers and buyers in LNG supply contracts create opportunities for physical arbitrage, depending on the correlation of such demand and price variations between regional markets. Draft: the depth of a ship in the water; vertical distance between the waterline and the keel, expressed in feet in the US, elsewhere in meters; also Draught. Dry (or lean) gas: 1) gas that has been treated to remove liquids and inert gases making it suitable for shipping in a pipeline; 2) natural gas from the well containing no water vapor that will liquefy at ambient temperature and pressure, i.e. the gas is water dry. Gas is usually priced on a dry basis. See Pipeline quality gas; 3) a gas whose water content has been reduced by dehydration or; 4) a gas containing little or no hydrocarbons that could be recovered as a liquid condensate. Emergency-shutdown systems (ESD): a system, usually independent of the main control system that is designed to safely shut down an operating system. For example, at ship-shore interface, LNG cargo transfer between ship and shore is accomplished by a series of shore-based articulated loading arms, usually three or four liquid arms and a single vapor arm. The configuration is similar at both the loading and discharge terminals. These arms have flexibility in three directions to allow for relative motion between ship and shore. If this allowable motion is exceeded, alarms sound on the ship and shore. Cargo transfer is automatically stopped, either by the shore pumps shutting down during loading, or the ships pumps shutting down during unloading. Enabling agreement: provides the general terms and conditions for the purchase, sale, or exchange of LNG, pipeline gas and electricity, but does not list specific contract details. End-users: the ultimate consumers of natural gas, including residential, commercial, industrial, wholesale, cogeneration and utility electricity-generation customers. Enriching: the process of increasing the heat content of natural gas by mixing it with a gas of higher Btu content. Ensign: flag carried by a ship to show her nationality. Escalator clause: a clause in a gas purchase or sale contract that permits adjustment of the contract price under specified conditions.
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Export-credit agencies (ECAs): government agencies whose mission is to facilitate the export sale of goods and services by providing credits that are more attractive than those available commercially and by providing security for credit and political risk that may not be available at an economic cost from private-sector finance sources. ECAs of the US, Europe and Japan have been consistent financing sources for LNG projects; includes Export-Import Banks of the US (USEXIM) and Japan Bank for International Cooperation (JBIC), the UKs Export Credit Guarantee Department (ECGD), Germanys Hermes, Frances Coface and Italys Sace. Ex-ship contract: in an LNG ex-ship contract, ownership of the LNG transfers to the buyer as the LNG is unloaded at the receiving terminal, payment is due at that time. See Cost, insurance and freight contract and Free on board contract Force Majeure: a term commonly used in contracts to describe an event or effect that cannot be reasonably controlled. This term essentially frees one or both parties from liability of obligation when an extraordinary event or circumstance prevents one or both parties from fulfilling their contractual obligations. Free-on-board (FOB) contract: in an LNG FOB contract, the buyer lifts the LNG from the liquefaction plant and is responsible for transporting the LNG to the receiving terminal. The buyer is responsible for the shipping, either owning the LNG ships or chartering them from a ship-owner. In a FOB contract, the seller requires assurance that the shipping protocols provide a safe and reliable off-take for the LNG to prevent disruption to the sales and purchase agreement (SPA). Freight: charge made for the transportation of a cargo. Fuel: The fuel that an LNG vessel runs on is dependent on many factors which include the length of the voyage, desire to carry a heel for cool down, price of oil versus price of LNG. There are three fuel modes available: Minimum boil off/max oil - In this mode tank pressures are kept high to reduce boil off to a minimum and the majority of energy comes from the fuel oil. This maximizes the amount of LNG delivered, but does allow tank temperatures to rise due to lack of evaporation. The high cargo temperatures can cause storage problems and offloading problems. Max boiloff / Minimum oil - In this mode the tank pressures are kept low and there is a greater boil-off, but still there is a large amount of fuel oil used. This decreases the amount of LNG delivered but the cargo will be delivered cold which many ports prefer. 100% Gas - Tank pressures are kept at a similar level to maximum boil off but this is not enough to supply all the boilers. To force increased supplies, a spray pump is started in one tank to supply liquid LNG to the forcing vaporizer - this tanks liquid LNG and turns it into a gas that is useable in the boilers. In this mode no fuel oil is used. Recent advances in technology have allowed re-liquefaction plants to be fitted to vessels, allowing the boil off to be re-liquefied and returned to the tanks. Because of this, the vessels' operators and builders have been able to contemplate the use of
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more efficient slow speed d (previously most LNG carriers have been steam turbine powered). Grounding: contact by a ship with the bottom while she is moored or anchored or under way. Harbor dues: various local charges against all seagoing vessels entering a harbour, to cover maintenance of channel depths, buoys, lights; not all harbours assess this charge. Heads of agreement (HOA): a preliminary agreement covering the outline terms for the sale and purchase of LNG or natural gas. Heat rate: the measure of efficiency in converting input fuel to electricity. Heat rate is expressed as the number of Btu of fuel (for example, natural gas) per kilowatt hour (Btu/kWh). Heat rate for power plants depends on the individual plant design, its operating conditions and its level of electricity output. The lower the heat rate the more efficient the plant is. Heating value: the amount of heat produced from the complete combustion of a unit quantity of fuel. There are two heating values: the gross (high) and the net (low) heating value. The gross value is that which is obtained when all of the products of combustion are cooled to standard conditions, and the latent heat of the water vapor formed is reclaimed. The net value is the gross value minus the latent heat of vaporization of the water. Heel: it is normal practice to keep onboard 5% to 10% of the cargo after discharge in one tank. This is referred to as the heel and this is used to cool down the remaining tanks that have no heel before loading. This must be done gradually otherwise one can cold shock the tanks if you load directly into warm tanks. Cool down can take roughly 36 hours on a Moss vessel so carrying a heel allows cool down to be done before the vessel reaches port giving a significant time saving. Indexing: tying the commodity price of natural gas in a contract to published prices of other commodities or price indices see Crude price parity. Japan Crude-Oil Cocktail (JCC): The Japanese Customs-cleared Crude or Crude Cocktail price is quoted by the Japanese finance ministry, it is designed to represent the average CIF price of all imported crude oil and raw oil in a specified trading period. It is usually quoted on a monthly basis. Knot: unit of speed in navigation, which is the rate of one nautical mile (6,080 feet or 1,852 metres) per hour. Lay-time: time allowed by the ship owner to the voyage charterer or bill of lading holder in which to load and/or discharge the cargo. It is expressed as a number of days or hours. LNG cargo-containment systems: the method of storing LNG during marine transport. One of four methods is normally employed: Self-Supporting Prismatic Type B (Conch/IHI), Dual Membrane (Gaz Transport), Single Membrane (Technigaz), and Self-Supporting Spherical Type B (Kvrner Moss).
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LNG markets: there are two primary LNG markets: (1) the Atlantic basin includes Belgium, France, Italy, Spain, Portugal, Greece, Turkey and the east coast of the US; (2) the Pacific basin includes India, Japan (worlds largest), South Korea, Taiwan, China and the west coast of the US. These two regions are often referred to as East and West of the Suez Canal. Net capacity (shipping): the number of tons of cargo that a vessel can carry when loaded in salt water to her summer freeboard marks (also called cargo-carrying capacity, cargo deadweight and useful deadweight). Offload (shipping): discharge of cargo from a ship. Price indexation: a practice whereby a contract price is linked to another, generally more liquid or less complex product price or economic indicator. This allows the resulting price to vary in accordance with another factor. Gas contract prices are often linked to major crude oil indices, derivative prices, such as certain fuel oil prices, or, less frequently, energy or economic growth indicators, such as a countrys GDP. Reloads Some re-gasification terminals are able and have regulatory permission to reverse the flow of LNG from a discharging vessel back on to the vessel, enabling a cargo to be diverted to another higher priced market. This has to be done with the permission of the original cargo vendor and can take up to 5 days for a conventional cargo (so requires two back-to-back loading slots). It is typically done to take advantage of arbitrage opportunities under contracts that do not allow this. Tariffs for reloading vary by country and terminal. Sales and purchase agreement (SPA): a definitive contract between a seller and buyer for the sale and purchase of a quantity of natural gas or LNG for delivery during a specified period at a specified price. Sales gas: natural gas treated and conditioned to meet gas purchaser specifications. Spot voyage: a charter for a particular vessel to move a single cargo between specified loading port(s) and discharge port(s) in the immediate future. Swing gas: natural gas bought on short notice to meet unexpected daily demands not covered under long-term contracts. Tail gas: the exhaust gas from any processing unit that is at a low pressure and is usually vented, treated for contaminant removal or combusted. Take-or-pay (TOP) clause: contract clause in a sales and purchase agreement (SPA) requiring a minimum quantity of natural gas to be paid for, whether or not delivery is accepted by the purchaser. TCF (trillion cubic feet): volume measurement of natural gas approximately equivalent to one Quad. Therm: a unit of heating value equal to 100,000 Btu, in common use in the UK; about 56 therms are derived by setting fire to a barrel of crude oil; one therm has around the same heat content as 100 cf of natural gas.
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Time charter: a form of charter party issued when an LNG vessel is chartered for an agreed period of time. A time charter party is the contract between owner and charterer, and identifies the salient characteristics of the ship and the obligations of the ship owner; specifically the ship owner provides a ship capable of the specified performance and operates the ship according to that performance standard set by the charterer. The charterer pays the owner for the hire of the vessel at an agreed rate. Tolling agreement: an agreement whereby one party owns (and bears the risks on) the inputs to and outputs from a process, as well as the rights to a portion of the process capacity (the tollee). Another party agrees to operate the process or facility and charges a tolling fee per unit of input that is transformed, or per unit of capacity to which rights are granted (the toller). Under an LNG liquefaction tolling agreement, one company sends a volume of feed gas to a liquefaction facility, wherein the gas is liquefied in return for a pre-established tolling charge. Tonne mile: a measurement used in the economics of transportation to designate 1 tonne being moved 1 mile; useful to the shipper because it includes the distance to move a commodity in the calculation. Tonnage: a shipping term referring to the total number of tonnes registered or carried or the ships carrying capacity. Tonne, metric: a metric tonne equals 1,000 kilograms or 2,204.6 pounds. The capacity of an LNG baseload plant is typically expressed in tonnes and the unit capital costs for producing LNG are expressed as $/tonne. Train (liquefaction): an independent unit for gas liquefaction. An LNG plant may comprise one or more trains. Transfer pricing: a transfer price is the amount of money that one unit of an organization charges for goods and services to another unit of an organization. Perhaps the most important aspect in this area is the Arms Length Principle regularly challenged by fiscal authorities, a common principle in International Accounting Standards to see that a transfer price has been calculated and agreed according to normal, fair, equitable, business principles. Ultimate customer: customer that purchases energy for consumption and not for resale. See End-user Wobbe Index: it represents a measure of the heat released when a gas is burned at a constant pressure, and is defined as the gross calorific value divided by the square root of the density of the gas relative to the density of air. Working gas: volume of natural gas expected to be cycled from a gas-storage facility. World-scale rates: a schedule of nominal freight rates against which tanker rates for all voyages, at all market levels, can be compared and readily judged.
Useful LNG related websites

We list the websites of companies with a material exposure to the LNG value chain.
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www.sempralng.com/Pages/About/Regas.htm, www.ogj.com, www.total.com, www.pwc.com, www.beg.utexas.edu, www.capeplc.com, www.linde.com, www.saipem.com, www.sbmoffshore.com, www.technip.com, www.cbi.com, www.fmctechnologies.com, www.fluor.com, www.fwc.com, www.kbr.com, www.chiyoda-corp.com/en, eng.daelim.co.kr, www.gsholdings.com/eng/, www.jgc.co.jp/en/index.html, www.worleyparsons.com, www.awilcolng.no, www.exmar.be, www.golar.com, www.hoeghlng.com, www.wartsila.com, , www.panocean.com, www.dsme.co.kr/en, www.shi.samsung.co.kr/eng, www.sembcorpmarine.com, www.stxons.com/service/eng/main.aspx, www.chevron.com, www.exxonmobil.com, www.bg-group.com, www.shell.com, www.total.com, www.santos.com, www.woodside.com.au/, www.cove-energy.com, www.flexlng.com, www.ophirenergy.com, www.cheniere.com/, www.interoil.com, www.lngenergyltd.com, www.energyworldcorp.com, www.inpex.co.jp/english/, www.lnglimited.com.au/, www.medcoenergi.com/, www.nobleenergyinc.com, www.oilsearch.com, www.petronetlng.com
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Appendix VIII: Company financials

BG Group
Overweight
Company Data Price (p) Date Of Price Price Target (p) Price Target End Date 52-week Range (p) Mkt Cap ( bn) Shares O/S (mn) BG Group (BG.L;BG/ LN) FYE Dec 1,448 11 Jan 12 1,900 31 Dec 12 1,595 - 1,105 49.0 3,384 Adj. EPS FY (p) Revenue FY ( mn) Adj P/E FY EBITDA FY ( mn) EBITDA margin FY Pretax Profit Adjusted FY ( mn) Dividend (Net) FY (p) Net Yield FY 2010A 76.83 12,097 18.8 5,925 49.0% 4,415 13.7 0.9% 2011E
(Prev)
2011E
(Curr)
2012E
(Prev)
2012E
(Curr)
2013E
(Prev)
2013E
(Curr)
74.95 12,560 19.3 6,375 50.7% 4,744 15.0 1.0%
79.02 12,466 18.3 6,615 53.1% 4,996 15.0 1.0%
85.47 14,050 16.9 7,193 51.2% 5,260 16.5 1.1%
80.79 12,879 17.9 6,802 52.8% 4,976 16.5 1.1%
97.09 15,737 14.9 8,227 52.3% 5,922 18.2 1.3%
102.17 14,621 14.2 8,354 57.1% 6,233 18.2 1.3%
Source: Company data, Bloomberg, J.P. Morgan estimates.
BP
Overweight
Company Data Price (p) Date Of Price Price Target (p) Price Target End Date 52-week Range (p) Mkt Cap ( bn) Shares O/S (mn) 475 11 Jan 12 575 30 Jun 12 515 - 361 90.1 18,958 BP (BP.L;BP/ LN) FYE Dec Adj. EPS FY (p) Bloomberg EPS FY (p) EBIT FY ($ mn) Net Attributable Income FY ($ mn) Dividend (Net) FY (p) Net Yield FY Debt adjusted Cashflow FY ($ mn) EV/DACF FY 2010A 1.09 1.13 31,703 20,521 4.5 0.9% 29,226 5.4 2011E 1.18 1.14 35,376 22,375 17.9 3.8% 29,925 5.6 2012E 1.10 1.14 33,683 20,874 20.4 4.3% 37,382 4.3 2013E 1.05 1.20 32,138 19,855 22.3 4.7% 33,739 4.3 2014E 1.01 1.18 30,903 19,088 24.0 5.1% 33,287 4.3
Source: Company data, Bloomberg, J.P. Morgan estimates. NB: unit for EPS figures is .
Royal Dutch Shell B
Neutral
Company Data Price (p) Date Of Price Price Target (p) Price Target End Date 52-week Range (p) Mkt Cap ( bn) Shares O/S (mn) 2,414 11 Jan 12 2,400 30 Jun 12 2,498 - 1,768 152.2 6,308 Royal Dutch Shell B (RDSb.L;RDSB LN) FYE Dec 2010A Adj. EPS FY (p) 2.94 Bloomberg EPS FY (p) 3.08 Adj P/E FY 12.6 Dividend (Net) FY (p) 106.8 Net Yield FY 4.4% EBITDA FY ($ mn) 57,118 EBITDA margin FY 9.8% Net Attributable Income FY 18,073 ($ mn)
2011E 4.19 4.36 8.9 105.8 4.4% 70,230 11.0% 26,060
2012E 3.84 4.57 9.7 111.9 4.6% 69,915 10.8% 22,742
2013E 3.84 4.82 9.7 115.3 4.8% 71,251 11.0% 23,089
208
ENI
Overweight
Company Data Price () Date Of Price Price Target () Price Target End Date 52-week Range () Mkt Cap ( bn) Shares O/S (mn) 16.50 11 Jan 12 21.00 30 Jun 12 18.66 - 11.83 59.8 3,622 ENI (ENI.MI;ENI IM) FYE Dec Adj. EPS FY () Bloomberg EPS FY () Adj. EBIT FY ( mn) Pretax Profit Adjusted FY ( mn) Net Attributable Income FY ( mn) Adj P/E FY EV/DACF FY Div Yield FY 2010A 1.90 1.88 17,304 17,393 6,869 8.7 5.8 6.2% 2011E 2.03 2.06 18,495 18,995 7,357 8.1 4.8 6.5% 2012E 2.07 2.23 19,384 19,734 7,514 8.0 4.5 6.8% 2013E 2.33 2.44 20,847 21,197 8,451 7.1 4.2 7.1%
Repsol YPF
Neutral
Company Data Price () Date Of Price Price Target () Price Target End Date 52-week Range () Mkt Cap ( bn) Shares O/S (mn) 22.20 11 Jan 12 25.00 30 Jun 12 24.90 - 17.31 27.1 1,221 Repsol YPF (REP.MC;REP SM) FYE Dec Adj. EPS FY () Bloomberg EPS FY () Adj. EBIT FY ( mn) Pretax Profit Adjusted FY ( mn) Net Attributable Income FY ( mn) Adj P/E FY EV/DACF FY Div Yield FY 2010A 1.66 1.74 4,714 3,856 2,032 13.3 5.7 4.8% 2011E 1.82 1.82 4,922 4,157 2,224 12.2 5.5 5.3% 2012E 2.25 2.26 5,917 5,345 2,745 9.9 6.3 5.9%
Statoil
Underweight
Company Data Price (Nkr) Date Of Price Price Target (Nkr) Price Target End Date 52-week Range (Nkr) Mkt Cap (Nkr bn) Shares O/S (mn) 152.40 11 Jan 12 145.00 30 Jun 12 161.70 108.10 485.4 3,185 Statoil (STL.OL;STL NO) FYE Dec Adj. EPS FY (Nkr) Bloomberg EPS FY (Nkr) Adj. EBIT FY (Nkr mn) Pretax Profit Adjusted FY (Nkr mn) Net Attributable Income FY (Nkr mn) Adj P/E FY EV/DACF FY Div Yield FY 2010A 13.14 13.40 142,730 141,630 42,232 11.6 6.3 4.5% 2011E 15.68 15.77 179,331 179,331 49,844 9.7 5.4 4.8% 2012E 16.66 17.62 182,791 181,546 52,128 9.1 5.3 5.0%
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TOTAL
Overweight
Company Data Price () Date Of Price Price Target () Price Target End Date 52-week Range () Mkt Cap ( bn) Shares O/S (mn) TOTAL (TOTF.PA;FP FP) FYE Dec 39.88 11 Jan 12 49.00 31 Dec 12 44.55 - 29.40 89.5 2,245 Adj. EPS FY () Bloomberg EPS FY () Adj. EBIT FY ( mn) Pretax Profit Adjusted FY ( mn) Adj P/E FY Div Yield FY EV/DACF FY Dividend (Net) FY () 2010A 4.64 4.65 21,503 21,277 8.6 5.8% 5.4 2.28 2011E
(Prev)
2011E
(Curr)
2012E
(Prev)
2012E
(Curr)
5.28 25,309 25,036 7.6 6.4% 5.2 2.44
5.24 5.21 25,742 25,354 7.6 5.8% 5.3 2.28
4.97 23,791 23,534 8.0 6.7% 5.1 2.56
5.14 5.33 24,094 23,703 7.8 6.1% 4.8 2.39
Chevron Corp
Underweight
Company Data Price ($) Date Of Price 52-week Range ($) Mkt Cap ($ mn) Fiscal Year End Shares O/S (mn) Price Target ($) Price Target End Date 107.77 11 Jan 12 110.99 86.68 215,397.00 Dec 1,999 120.00 31 Dec 12 Chevron Corp (CVX;CVX US) FYE Dec EPS Reported ($) Q1 (Mar) Q2 (Jun) Q3 (Sep) Q4 (Dec) FY Bloomberg EPS FY ($) 2010A 2.46 2.58 2.06 2.49 9.53 9.32 2011E 3.17A 3.89A 3.44A 2.87 13.48 13.85 2012E 3.19 3.51 3.99 4.15 14.84 12.93 2013E 15.40 13.79
Source: Company data, Bloomberg, J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg consensus estimates.
Exxon Mobil Corp
Underweight
Company Data Price ($) Date Of Price 52-week Range ($) Mkt Cap ($ mn) Fiscal Year End Shares O/S (mn) Price Target ($) Price Target End Date 85.08 11 Jan 12 88.23 - 67.03 412,042.40 Dec 4,843 92.00 31 Dec 12 Exxon Mobil Corp (XOM;XOM US) FYE Dec 2010A EPS Reported ($) Q1 (Mar) 1.33 Q2 (Jun) 1.60 Q3 (Sep) 1.44 Q4 (Dec) 1.84 FY 6.22 Bloomberg EPS FY ($) 5.98 2011E 2.14A 2.17A 2.13A 1.89 8.34 8.53 2012E 2.08 2.08 2.30 2.53 8.99 8.37 2013E 10.90 9.12
Source: Company data, Bloomberg, J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg consensus estimates.
210
Gazprom
Neutral
Company Data Price ($) Date Of Price Price Target ($) Price Target End Date 52-week Range ($) Mkt Cap ($ bn) Shares O/S (mn) 5.63 11 Jan 12 6.94 31 Dec 12 8.77 - 4.40 129.0 22,915 OAO Gazprom (GAZP.RTS;GAZP RU) FYE Dec 2009A Adj. EPS FY ($) 1.16 Revenue FY ($ mn) 94,500 EBITDA FY ($ mn) 35,631 Net Attributable Income FY 26,650 ($ mn) Adj P/E FY 4.8 EV/EBITDA FY 4.0 EBITDA margin FY 37.7% Dividend (Gross) FY ($) 0.08
Source: Company data, Reuters, J.P. Morgan estimates.
2010A 1.32 118,449 44,529 30,284 4.3 3.2 37.6% 0.09
2011E 1.60 153,200 53,886 36,552 3.5 2.7 35.2% 0.15
2012E 1.59 153,805 56,272 36,549 3.5 2.5 36.6% 0.16
Novatek
Underweight
Company Data Price ($) Date Of Price Price Target ($) Price Target End Date 52-week Range ($) Mkt Cap ($ bn) Shares O/S (mn) 134.90 11 Jan 12 82.90 31 Dec 12 164.00 101.00 41.0 304 OAO Novatek (NVTKq.L;NVTK LI) FYE Dec 2009A Adj. EPS FY ($) 2.70 Revenue FY ($ mn) 2,834 EBITDA FY ($ mn) 1,233 Net Attributable Income FY 821 ($ mn) Adj P/E FY 49.9 EV/EBITDA FY 27.6 EBITDA margin FY 43.5% Dividend (Gross) FY ($) 0.09
Source: Company data, Reuters, J.P. Morgan estimates.
2010A 4.40 3,853 1,872 1,335 30.7 18.2 48.6% 0.13
2011E 5.96 5,539 2,814 1,809 22.6 12.1 50.8% 0.17
2012E 6.97 6,515 3,073 2,117 19.3 11.1 47.2% 0.20
Oil Search
Company Data 52-week range (A$) Market capitalisation (A$ bn) Market capitalisation ($ bn) Fiscal Year End Price (A$) Date Of Price Shares outstanding (mn) ASX100 ASX200-Res NTA/Sh^ ($) Net Debt^ ($ bn) 7.64 - 5.43 8.71 8.90 Dec 6.57 12 Jan 12 1,325.2 3,416.6 4,634.9 2.27 0.85 Oil Search Limited (Reuters: OSH.AX, Bloomberg: OSH AU) Year-end Dec (US$) FY09A FY10A FY11E Total Revenue ($ mn) 512.2 583.6 691.2 EBITDA ($ mn) 333.7 343.7 480.8 Net profit after tax ($ mn) 133.7 185.7 203.4 EPS (A$) 0.112 0.138 0.150 P/E (x) 58.6 47.6 43.8 Cash flow per share ($) 0.245 0.305 0.279 Dividend ($) 0.040 0.040 0.040 Net Yield (%) 0.6% 0.6% 0.6% Normalised* EPS (A$) 0.094 0.107 0.150 Normalised* EPS chg (%) -54.7% 13.9% 39.7% Normalised* P/E (x) 69.8 61.3 43.8
FY12E 716.1 474.4 191.6 0.140 46.9 0.249 0.040 0.6% 0.140 -6.5% 46.9
FY13E 716.7 490.3 200.0 0.145 45.2 0.354 0.050 0.8% 0.145 3.7% 45.2
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Santos Limited
Company Data 52-week range (A$) Market capitalisation (A$ bn) Market capitalisation ($ bn) Fiscal Year End Price (A$) Date Of Price Shares outstanding (mn) ASX100 ASX200-Res NTA/Sh^ (A$) Net Debt^ (A$ bn) 16.90 - 10.11 12.04 12.32 Dec 12.75 12 Jan 12 944.5 3,416.6 4,634.9 9.53 0.36 Santos Limited (Reuters: STO.AX, Bloomberg: STO AU) Year-end Dec (A$) FY09A FY10A FY11E Total Revenue (A$ mn) 2,249.0 2,337.0 2,615.5 EBITDA (A$ mn) 1,150.3 1,244.0 1,462.1 Net profit after tax (A$ mn) 432.3 500.0 1,015.5 EPS (A$) 0.549 0.593 1.153 P/E (x) 23.2 21.5 11.1 Cash flow per share (A$) 1.501 1.502 1.613 Dividend (A$) 0.420 0.370 0.300 Net Yield (%) 3.3% 2.9% 2.4% Normalised* EPS (A$) 0.319 0.446 0.575 Normalised* EPS chg (%) -63.2% 39.6% 29.0% Normalised* P/E (x) 39.9 28.6 22.2
FY12E 2,949.4 1,709.1 552.2 0.619 20.6 1.375 0.300 2.4% 0.619 7.6% 20.6
FY13E 3,159.0 2,084.0 804.1 0.895 14.2 1.566 0.300 2.4% 0.895 44.6% 14.2
Woodside Petroleum
Company Data 52-week range (A$) Market capitalisation (A$ bn) Market capitalisation ($ bn) Fiscal Year End Price (A$) Date Of Price Shares outstanding (mn) ASX100 ASX200-Res NTA/Sh^ ($) Net Debt^ ($ bn) 50.85 - 29.76 26.08 26.67 Dec 32.37 12 Jan 12 805.7 3,416.6 4,634.9 17.46 5.28 Woodside Petroleum Limited (Reuters: WPL.AX, Bloomberg: WPL AU) Year-end Dec (US$) FY09A FY10A FY11E FY12E Total Revenue ($ mn) 3,759.2 4,246.0 4,900.1 5,628.7 EBITDA ($ mn) 2,597.4 2,907.0 3,449.6 4,210.8 Net profit after tax ($ mn) 1,530.6 1,564.0 1,743.9 1,760.3 EPS ($) 2.176 2.023 2.198 2.157 P/E (x) 15.2 16.4 15.1 15.4 Cash flow per share ($) 1.982 2.722 3.447 3.535 Dividend ($) 0.950 1.050 1.120 1.080 Net Yield (%) 2.9% 3.2% 3.5% 3.3% Normalised* EPS ($) 1.588 1.820 2.206 2.157 Normalised* EPS chg (%) -29.2% 14.6% 21.2% -2.2% Normalised* P/E (x) 20.9 18.2 15.0 15.4
FY13E 6,703.3 5,063.1 2,215.3 2.677 12.4 4.420 1.330 4.1% 2.677 24.1% 12.4
Inpex Corporation
Company Data Price () Date Of Price GPS_AUTO_153_4 Market Cap ($ mn) Shares O/S (mn) 52-week Range () TOPIX DPS () Div Yield GPS_AUTO_1076052_ 510,000 12 Jan 12 24,262 3.66 674,000 425,500 727 6,000 1.2% Inpex Corporation (Reuters: 1605.T, Bloomberg: 1605 JT) in mn, year-end Mar FY10A FY11A FY12E Revenue ( bn) 840.4 943.1 1,141.9 Revenue growth (%) -21.9% 12.2% 21.1% Operating Profit ( bn) 461.7 529.7 666.1 Operating Profit growth (%) -30.4% 14.8% 25.7% Recurring Profit ( bn) 442.0 508.6 668.4 Recurring Profit growth (%) -28.3% 15.1% 31.4% Net Profit ( bn) 107 129 153 Net Profit growth (%) -26.1% 20.0% 19.1% EPS () 53,360 44,526 44,097 P/E (x) 9.6 11.5 11.6 EV/EBITDA (x) 3.1 2.5 2.0
FY13E 1,027.3 -10.0% 569.7 -14.5% 573.7 -14.2% 136 -11.1% 40,443 12.6 2.3
FY14E 1,029.6 0.2% 546.5 -4.1% 551.9 -3.8% 127 -6.5% 38,008 13.4 2.2
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CNOOC
Company Data Shares Outstanding (mn) GPS_AUTO_153_4 Market Cap ($ mn) Price (HK$) Date Of Price Free float (%) Avg Daily Volume (mn) Avg Daily Value (HK$ mn) Avg Daily Value ($ mn) HSCEI GPS_AUTO_1252_4 Fiscal Year End 44,669 86,371 15.02 12 Jan 12 33.6% 84 1,033 133 10,517 Dec CNOOC (Reuters: 0883.HK, Bloomberg: 883 HK) Rmb in mn, year-end Dec FY09A FY10A Revenue (Rmb mn) 105,195 183,053 Net Profit (Rmb mn) 29,244 54,410 EPS (Rmb) 0.65 1.22 DPS (Rmb) 0.35 0.39 Revenue Growth (%) (17%) 74% EPS Growth (%) (34%) 86% ROCE 22% 32% ROE 18% 28% P/E 18.7 10.0 P/BV 3.1 2.5 EV/EBITDA 9.1 5.1 Dividend Yield 2.9% 3.2%
FY11E 231,773 64,921 1.45 0.58 27% 19% 33% 29% 8.4 2.4 4.6 4.8%
FY12E 196,329 51,149 1.15 0.46 (15%) (21%) 24% 21% 10.7 2.2 5.4 3.8%
FY13E 188,782 47,507 1.06 0.53 (4%) (7%) 21% 18% 11.5 2.0 5.7 4.4%
Sinopec Corp - H
Company Data Shares Outstanding (mn) Market Cap (Rmb mn) Market Cap ($ mn) Price (HK$) Date Of Price Free float (%) Avg Daily Volume (mn) Avg Daily Value (HK$ mn) Avg Daily Value ($ mn) HSCEI GPS_AUTO_1252_4 Fiscal Year End 86,702 686,683 108,833 8.88 12 Jan 12 19.6% 205 1,098 141 10,517 Dec Sinopec Corp - H (Reuters: 0386.HK, Bloomberg: 386 HK) Rmb in mn, year-end Dec FY09A FY10A FY11E Revenue (Rmb mn) 1,345,052 1,913,182 2,617,829 Net Profit (Rmb mn) 61,760 71,800 78,130 EPS (Rmb) 0.71 0.83 0.90 DPS (Rmb) 0.18 0.21 0.23 Revenue Growth (%) (10%) 42% 37% EPS Growth (%) 117% 16% 9% ROCE 16% 19% 19% ROE 18% 18% 17% P/E 10.1 8.7 8.0 P/BV 1.7 1.5 1.3 EV/EBITDA 5.8 4.6 4.4 Dividend Yield 2.5% 2.9% 3.2%
FY12E 2,384,441 80,016 0.92 0.23 (9%) 2% 18% 16% 7.8 1.2 4.1 3.2%
FY13E 2,383,843 80,360 0.93 0.24 (0%) 0% 16% 14% 7.8 1.0 3.8 3.3%
PetroChina
Company Data Shares Outstanding (mn) Market Cap (Rmb mn) Market Cap ($ mn) Price (HK$) Date Of Price Free float (%) Avg Daily Volume (mn) Avg Daily Value (HK$ mn) Avg Daily Value ($ mn) HSCEI GPS_AUTO_1252_4 Fiscal Year End 183,021 1,844,852 292,143 10.78 12 Jan 12 13.3% 126 1,411 182 10,517 Dec PetroChina (Reuters: 0857.HK, Bloomberg: 857 HK) Rmb in mn, year-end Dec FY09A FY10A FY11E Revenue (Rmb mn) 1,019,275 1,465,415 1,418,941 Net Profit (Rmb mn) 103,387 139,992 135,037 EPS (Rmb) 0.56 0.76 0.74 DPS (Rmb) 0.27 0.29 0.33 Revenue Growth (%) (5%) 44% (3%) EPS Growth (%) (10%) 35% (4%) ROCE 14% 17% 15% ROE 13% 16% 14% P/E 15.5 11.5 11.9 P/BV 1.9 1.7 1.6 EV/EBITDA 7.4 6.0 5.9 Dividend Yield 3.1% 3.3% 3.8%
FY12E 1,336,341 136,387 0.75 0.34 (6%) 1% 13% 13% 11.8 1.5 5.8 3.8%
FY13E 1,342,447 135,422 0.74 0.33 0% (1%) 12% 12% 11.8 1.4 5.6 3.8%
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Petronet LNG Ltd.

Company Data Shares O/S (mn) GPS_AUTO_153_4 Market Cap ($ mn) Price (Rs) Date Of Price Free float (%) 3-mth trading value (Rs bn) 3-mth trading value ($ mn) 3-mth trading volume (mn) BSE30 GPS_AUTO_1252_4 Fiscal Year End 750 2,299 161.60 11 Jan 12 34.8% 0.08 1.50 0.31 16,165 Mar Petronet LNG Ltd. (Reuters: PLNG.BO, Bloomberg: PLNG IN) Rs in mn, year-end Mar FY09A FY10A FY11A Revenue (Rs mn) 84,287 106,029 131,057 Net Profit (Rs mn) 5,184 4,045 6,196 Asia EPS (Rs) 6.91 5.39 8.26 DPS (Rs) 1.75 1.75 2.00 Revenue growth (%) 28.6% 25.8% 23.6% EPS growth (%) 9.2% -22.0% 53.2% ROCE 21.4% 15.2% 19.4% ROE 28.8% 19.2% 25.2% P/E 23.4 30.0 19.6 EV/EBITDA 14.9 16.2 11.5 Dividend Yield 1.1% 1.1% 1.2%
FY12E 209,410 9,264 12.35 3.50 59.8% 49.5% 23.8% 31.0% 13.1 8.4 2.2%
FY13E 273,089 10,439 13.92 3.50 30.4% 12.7% 22.5% 28.4% 11.6 6.9 2.2%
Origin Energy
Company Data 52-week range (A$) Market capitalisation (A$ bn) Market capitalisation ($ bn) Fiscal Year End Price (A$) Date Of Price Shares outstanding (mn) ASX100 ASX200-Ind NTA/Sh^ (A$) Net Debt^ (A$ bn) Inst. Holdings 17.22 - 12.00 14.65 14.99 Jun 13.49 12 Jan 12 1,086.2 3,416.6 5,712.6 8.67 4.06 Origin Energy Limited (Reuters: ORG.AX, Bloomberg: ORG AU) Year-end Jun (A$) FY10A FY11A FY12E Total Revenue (A$ mn) 8,865.6 10,955.0 14,788.8 EBITDA (A$ mn) 1,304.0 1,782.0 2,399.5 EBIT (A$ mn) 895.4 1,194.0 1,767.2 Net profit after tax (A$ mn) 612.0 186.0 886.5 EPS (A$) 0.698 0.196 0.804 P/E (x) 19.3 68.9 16.8 Dividend (A$) 0.500 0.500 0.515 Net Yield (%) 3.7% 3.7% 3.8% Normalised* NPAT (A$ mn) 584.6 673.0 886.5 Normalised* EPS (A$) 0.666 0.733 0.804 Normalised* EPS chg (%) 10.1% 10.0% 9.8% Normalised* P/E (x) 20.2 18.4 16.8
FY13E 16,958.5 2,635.5 1,960.4 1,009.0 0.888 15.2 0.554 4.1% 1,009.0 0.888 10.4% 15.2
FY14E 17,506.1 2,736.8 2,059.8 1,045.7 0.920 14.7 0.581 4.3% 1,045.7 0.920 3.6% 14.7
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Valuation Methodology and Risks

BG Group (Overweight Price Target: 1,900p)
Valuation methodology: Our target price remains strongly connected to our core NAV. We roll forward our price target from 30 June to 31 December 2012 and base it on our revised core NAV of 1960p. It still implies a 4% discount to our core NAV. This is below BG Group's long run average premium of 3% to reflect practical multiple constraints on BG Groups share price. Risks to Our View: LNG contract pricing risk earnings power would be weakened if the contracting market moved away from oil price parity pricing (6:1 oil:gas ratio) since this could reduce the scope for LNG price arbitrage. Exploration risk persistent exploration failure would threaten BG Group's ability to replace its reserves efficiently and this could undermine its valuation relative to its larger peers. Project execution risk material delays to major projects e.g. QC LNG or the various phases in the pre-salt Brazil would damage confidence in management and project value. Asset performance weaker than expected natural gas demand, either as a result of sluggish economic growth or warmer than normal weather (during winter heating periods) could reduce BG Group gas field output. This could result in a 'production miss' or reduced volume growth expectations. Political risk unexpected, adverse fiscal changes e.g. in Kazakhstan could damage growth prospects and asset value therein.
BP (Overweight Price Target: 575p)

Valuation methodology: Our 575p Dec-11 price target for BP captures (i) the reinstatement of BP's dividend with its Q4 2011 results (ii) a positive resolution to the risk of gross negligence versus negligence, as per our Central Case Macondo Liability analysis (iii) further progress towards its $25bn - $30bn divestment target (iv) further evidence that BP's abilities to access new high potential exploration acreage (as per BP's alliance with RIL in the Krishna Godavari Basin, off the East Coast of India) is intact. Our price target still assumes a discount of around 30% to our sum-of-the-parts value of around 800 pence that is consistent with our Central Case and compares to BP's long run average discount of 26%.
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Risks to Our View : Macro factors As an integrated oil & gas company, BPs earnings and cash flow are naturally sensitive to oil and natural gas prices and refining margins. BP does not hedge any of these top line macro exposures. US dollar BP is US dollar long and has a US dollar-based dividend policy. Dollar weakness could erode BPs sterling dividend which is important given the dividend yield sensitivity of the UK market. Asset integrity / project execution Unexpected asset integrity issues eg field or refinery downtime, delays to projects and capital budget over-runs can damage perceptions of management quality and, ergo, BPs stock market valuation. Industrial accidents Unexpected industrial accidents involving BP assets could expose the company to loss of earnings, asset confiscation and potential litigation risk. Russian risk Via its 50% stake in TNK-BP, BP carries a significant production, reserve, cash flow and earnings exposure to assets in Russia. The perceived value of this asset is vulnerable to an escalation in Russian country risk and any signs of company-specific corporate governance problems. Gross Negligence - There is risk that BP will be found grossly negligent and thus face much higher overall Macondo related liabilities than our Central Case. Divestment program fails - Although it is a seller's market for upstream assets, there is a risk that this changes and BP fails to complete its $25bn to $30bn divestment program.
Royal Dutch Shell B (Neutral Price Target: 2,400p)

Valuation Methodology : We leave our SOTP at 2,650p: we apply our long-term oil price of $85/bbl (US natural gas price of $5.90/mmbtu) and RD Shells 2010 Form 20-F disclosures relating to upstream reserves, downstream assets and off balance sheet liabilities. We still believe that a 10% discount to our SOTP is appropriate and therefore keep our price target at 2,400p. However, we roll forward our target date from 31 December 2011 to 30 June 2012. Risks to Our View : Macro factors As an integrated oil & gas company which does not hedge prices or margins, RD Shells earnings and cash flow are naturally sensitive to oil and natural gas prices and refining margins. Industrial accidents Unexpected industrial accidents involving RD Shell assets could expose the company to loss of earnings, asset confiscation and potential litigation risk. Fiscal regimes Unexpected or adverse changes to the upstream fiscal regimes that apply to any of RD Shells key operating areas could reduce its value. Acquisition risk - RD Shell's balance sheet is strengthening fast as larger than expected divestments and a higher than expected oil price raise cash flow. A large acquisition could dilute returns and perceptions of capital controls. LNG pricing risk As one of the largest IOC producers of LNG, a prolonged period of LNG market over-capacity could dilute the returns from RD Shells LNG projects. This damage could prove more permanent if LNG's pricing relationship with the oil price is weakened.
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ENI (Overweight Price Target: 21.00)

Valuation Methodology : Our price target is derived from our SOTP valuation and is set at a 20% discount to our SOTP very close to average long term discount on this name. We expect this discount to narrow as ENIs asset structure becomes simpler. Risks to Our View : The main generic risks to our rating and price target come from crude oil or natural gas prices or refining margins significantly below/above our projections. Specifically for ENI, downside risks include a further decline in the natural gas demand in Italy which is likely to put pressure on the operating margin of the company.
Repsol YPF (Neutral Price Target: 25.00)

Valuation Methodology : We roll forward our price target of 25 from 31 December 2011 to 30 June 2012 which is derived from our SOTP valuation. Our price target is set at a c.12% discount to our SOTP, this is lower than the long-term average discount for Repsol YPF. We believe that near-term catalysts like YPF divestment, exploration results from Brazil, West Africa etc will help the stock's performance. Risks to Our View : The main generic risks to our rating and price target come from crude oil or natural gas prices or refining margins significantly below our projections. Specifically for Repsol, downside risks include a further weakness in the refining margins and possible disappointments in the company's ongoing exploration campaign - offshore Brazil, GoM and Venezuela.
Statoil (Underweight Price Target: Nkr145.00)

Valuation Methodology : We roll forward our price target from 31 December 2011 to 30 June 2012. Our price target of Nkr145 is derived from our SOTP valuation - no change to our key assumptions or our SOTP valuation. Our price target for the stock is set at a c.24% discount to our SOTP of NKr190 this is in-line with the 12 month average discount suffered by the stock. We still believe that a discount will prevail until Statoil shows a clearer, sustainable improvement in its upstream performance. Risks to Our View : The main generic risks come from crude oil or natural gas prices or refining margins significantly below our projections. For Statoil specifically, negative risks include any slippage to production targets resulting from higher core decline rates in Norwegian production or if lower crude prices prevent Statoil from sanctioning new projects. Positive risks include further success in the international portfolio, notably in the deepwater US Gulf and offshore Brazil. Changes in crude prices affect Statoils shares more than its peers given its greater upstream leverage.
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TOTAL (Overweight Price Target: 49.00)

Valuation Methodology : We increase our price target from 47 to December 2011 to 49 to December 2012 no change to our key assumptions or our SOTP valuation. Our price target for the stock is set at a 13% discount to our SOTP this is below the 12 month average discount suffered by this name as we expect the stock to re-rate helped by a much stronger production outlook and improvement in its exploration business. We also believe that the higher discount suffered by this name in 2011 was partly a reflection of the weaker equity markets. Risks to Our View : The following risks could prevent the stock from achieving our price target and rating. The main generic risks come from crude oil or natural gas prices or refining margins significantly below our projections. For Total specifically, negative risks could come from project slippage relative to the last guidance, but positive risks could come from better-than expected volume growth in 11-12.
Gazprom (Neutral Price Target: $6.94)

Valuation Methodology : Our PT (Dec-12E) for Gazprom is $6.94/share. We use a similar valuation approach for all oil and gas companies, which is based on a 50% weight of DCFbased fair value and 50% weight of value based on target (normalized) PER (15E). We calculate our target PER multiple by dividing the DCF-based (target) Market Cap by our estimated (normalized) earnings in 2012E. We calculate DCF fair value based on explicit financial forecasts until 2015 and discounted terminal value. We use 2.5% as the terminal value growth rate and a WACC of 12%. Risks to Our View : We believe the key risks that could keep our rating and target price from being achieved include the following: Long-term risks include increasing competition and falling gas prices in both domestic and international markets. Upside risk could come from faster than anticipated liberalization of the domestic gas prices and a sharp and sustainable increase in oil and gas prices internationally. Click here to enter text.
Novatek (Underweight Price Target: $82.90)

Valuation Methodology : We revise our PT (Dec-12) for Novatek from $91.1/share to $82.9/share on the back of higher output forecast and addition of NPV of purchased upstream assets into our valuations. We keep our valuation approach for all oil and gas companies, which is based on a 50% weight of DCF-based fair value and 50% weight of value based on target (normalized) PER (15E). We calculate the target PER multiple by dividing our DCF-based (target) Market Cap by our estimated (normalized) earnings in 2012E. (Effectively we assume that there is a 50% chance of next year's oil prices being normalized rather than the bottom of the cycle). Our new target PER 15E is 8.6x vs our previous target PER 13E of 11.4x.
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Risks to Our View : We believe the key risks that could keep our rating and target price from being achieved include the following: Lower than expected output growth if demand fails to recover, lower than expected increase in domestic gas prices, inability to re-finance debt, and exposure to fluctuations in oil prices. Upside risks include access to export markets before 2016, successful development of Yamal LNG, M&A activity.
Inpex (Overweight Price Target: JPY750,000)

Valuation Methodology Our JPY750,000 Dec-2012 PT is based on SOTP of DCF for base operation using US$85/bbl LT oil price and WACC of 8% at 100% (JPY476k), cash (JPY265k) at 80% (lots of cash rich undervalued companies in Japan), Ichthys (JPY318k) at 20% (reflecting the stage of the project) and Abadi (JPY104k) at 10% (to show its potential and existence). PT yields 17x FY11E EPS and 17x FY12E EPS. Risks to Our View Risks to our rating and PT are lower-than-expected oil price, higher than expected capex, operational delays or cost overruns.
CNOOC (Underweight Price Target HK$12.50)

Valuation Methodology Our PT is based on DCF (10.7% WACC and US$85/bbl LT oil price) with a 20% premium due to current oil price higher than DCF LT oil input. Risks to Our View Risks to our rating and PT are higher production, oil price and cost control relative to our expectations. Higher WFT threshold is also a risk to the upside, but may be offset by increased resource taxes (from 5% to 10%).
Sinopec Corp H (Overweight Price Target HK$9.40)

Valuation Methodology Our PT is based on 5x 2011E EV/EBITDA, similar to PetroChinas valuation at our PetroChina PT. Our PT implies an 8.6x 2012E P/E. Although we see a slight discount to peers as justified due to current high oil prices resulting in refining losses, Sinopec currently trades at 7x 2012E P/E, which we see as too low considering where peers are trading at. Risks to Our View Risks to our rating and PT for Sinopec include lower oil and/or NDRC cutting product prices below profitability levels and China relaxing credit earlier than expected.
PetroChina (Underweight Price Target HK$8.50)

Valuation Methodology PT is based on 10% premium to DCF value (US$85/bbl LT oil and 10.6% WACC) due to markets focus on PE and current oil prices higher than our LT oil price assumption. Risks to Our View Risks to rating and PT include higher oil prices, gas prices and NDRC following up with product prices.
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Chevron (Underweight Price Target $120.00)

Valuation Methodology We maintain our December 2012 price target of $120/share for CVX, implying 10% potential upside from current price levels. We base our target price primarily on DCF, based on our estimate of CVXs segment-level free cash flows discounted at a WACC of 7.8%. We determine upstream free cash flows based on the operating cash flows generated by the production outlook of the current commercial resource base, less the annual capital required to replace the produced resources. For other segments, we forecast ten years of free cash flows, then calculate a terminal value based on an inflation-adjusted growth in free cash flows thereafter. Risks to Rating and Price Target Active exploration portfolio Exploration activities are an important source of growth for CVX, which is particularly active in global deepwater, especially in the Gulf of Mexico and West Africa. Should CVXs exploration activities experience a prolonged successful streak, we believe investor sentiment could increase, causing CVX to outperform its peers. Downstream restructuring CVX has indicated that it is undertaking restructuring activities in its downstream segment, including the expected divestiture of refining assets. Should CVX's divestiture plan prove successful or result in offer prices that are above market expectations, we believe that CVX could outperform the peers. Industry consolidation activities As CVX is one of the larger global integrated oil companies, maintaining a healthy balance sheet and ample access to capital, we believe that CVX could use acquisitions as a mechanism for growth. Should CVX use its balance sheet to embark on large-scale acquisitions that are accretive, we believe that could increment investors appetite for CVX shares, causing it to outperform its peers.
Exxon (Underweight Price Target $92.00)

Valuation Methodology We maintain our December 2012 price target of $92/share for XOM, implying 7% potential upside from current price levels. We base our target price primarily on DCF, based on our estimate of XOMs segment-level free cash flows discounted at a WACC of 7.9%. We determine upstream free cash flows based on the operating cash flows generated by the production outlook of the current commercial resource base, less the annual capital required to replace the produced resources. For other segments, we forecast ten years of free cash flows, then calculate a terminal value based on an inflation-adjusted growth in free cash flows thereafter. Risks to Rating and Price Target North American natural gas exposure Following the mid-2011 acquisition of XTO, XOM is now the largest producer of natural gas in North America. Accordingly, if North American natural gas prices were to increase above current market expectations, we believe XOM could benefit from its exposure, resulting in the stock's outperforming the peers.
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High level of global downstream exposure With 6.3 mmbpd of refining capacity, XOM is the worlds largest refiner. Should refining margins strengthen, especially on unexpectedly high increases in global refined product demand, we believe XOMs downstream segment could exceed expectations, potentially causing XOM to outperform the peers. Active exploration portfolio XOM maintains a global portfolio of exploration activities in diverse regions such as Madagascar, Brazil, and the Arctic. Should XOMs exploration pipeline result in a string of successful prospects, especially in frontier plays, we believe investor sentiment on exploration as a growth mechanism for XOM could be boosted, causing XOM to outperform the peers. Industry consolidation activities As the largest of the US integrated oils, with a healthy balance sheet and ~3 billion shares held in treasury stock, we believe that one way in which XOM could grow is via large-scale acquisition. Should XOM use its balance sheet to embark on largescale acquisitions that were accretive or deemed to take place at a highly favorable price, we believe that XOM could outperform the peers.
Oil Search (Neutral Price Target A$8.01)

Valuation Methodology Our Jun-12 price target for OSH is A$8.01/share. We include full value for PNG LNG T1 & T2, and 50% of Train 3. We employ a WACC of 10% for OSH. Risks to Rating and Price Target The main upside and downside risks to our price target are favourable/unfavourable spot oil price movements, progress towards the companys highly material PNG LNG project, and exploration success to find gas for Train 3 and beyond.
Santos(Overweight Price Target A$18.59)

Valuation Methodology Our Jun-12 price target for STO is A$18.59/share. This reflects our DCF valuation inclusive of full value for PNG LNG T1&2, 80% of estimated value for GLNG T1&2, and 50% of estimated value of PNG LNG T3. We employ a WACC of 9% for STO. Risks to Rating and Price Target The main downside risks are the oil price and domestic gas prices, execution risk for GLNG build, and exploration success for PNG LNG Train 3.
Woodside Petroleum (Underweight Price Target A$44.64)

Valuation Methodology Our Jun-12 price target for WPL is A$44.64/share. This is based upon our sum of the parts DCF valuation. We apply a 50% risk weighting to a theoretical Laverda oil development, 50% risk weighting to Pluto-2 assuming 90% WPL equity gas and future Hess milestone payments, a 70% risk weighting for a Browse tie-back to NWS option (comparable to a 35% risk weighting on a standalone Browse at James Price
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Point development), and a 20% risk weighting to Sunrise. We employ a WACC of 9.0% for WPL. Risks to Rating and Price Target The main upside risks are the oil price, and progress toward key milestones for its LNG projects. In the near term, one of the most relevant upside risks is further exploration/appraisal success for WPLs planned Pluto-2 project, or to a lesser extent an agreement for third party gas supply into the project.
Origin Energy (Overweight Price Target A$18.95)

Valuation Methodology Our $18.95 June 2012 Target Price for ORG is based on a sum-of-parts valuation. We apply different costs of capital to each of the individual business units in an effort to appropriately reflect the risk profile of each segment. Our group post tax WACC of 9.2% reflects a combination of the assumptions in the individual segments. The key figures that make up this discount rate are a post-tax cost of equity of 10.7% and a post-tax cost of debt of 5.3%. We apply a Beta of 1.1 within this calculation Risks to Rating and Price Target The key downside risks to our valuation are: failure of the APLNG second train to reach FID; lower than forecast oil prices; lower than forecast electricity and gas retail tariffs; and lower than estimated wholesale electricity prices
222
BG Group: Summary of Financials

Profit and Loss Statement in millions, year end Dec Exploration & production LNG Transmission & Distribution Power Corporate & other Total Segmental EBIT Finance Costs Pre-Tax Income Less: Tax Tax Rate Minorities Adjusted Net Income Growth Avg. shares in issue (m) Adjusted EPS (pence) EPS growth(%) DPS (pence) DPS growth(%) FY09 2,087 1,551 426 158 -11 4,211 (144) 3,941 (1,708) 43.3% 96 FY10 2,431 1,583 460 63 -7 4,531 (116) 4,415 (1,722) 39.0% 96 FY11E 3,277 1,521 374 0 -5 5,168 (172) 4,996 (2,248) 45.0% 70 FY12E 3,066 1,735 408 0 -20 5,189 (213) 4,976 (2,165) 43.5% 66 Valuation, performance and production FY13E in millions, year end Dec FY09 3,902 Brent crude, $/bbl 62.67 2,171 US Gas, $/MMBtu 4.16 429 0 Valuation -30 Mkt Cap ( bn) 6,472 P/E adjusted P/CF (239) P/FCF 6,233 EV/DACF (2,680) CF Yield 43.0% FCF Yield 70 FCF yield ex-w/c Dividend Yield 3,483 Buyback Yield 26.8% Combined Yield 3,409.00 Ratios Net debt to equity 102.17 Net Debt to Capital Employed 26.5% ROE 18.2 ROCE 10.0% Production Group oil, kbopd Group gas, mmcfpd Group Total, kboepd Y/Y growth Cash flow statement FY13E in millions, year end Dec 35,612 Consolidated Net Income 9,411 DD&A 45,023 Cash Tax Payable Other items 1,004 Cash Earnings 5,410 Increase in working capital 6,415 Cash flow from Operations 51,437 Capex 10,366 Other investing cash flow 7,439 Cash Flow from Investing 17,805 Share Buybacks 5,456 Dividends (s/h & minorities) 3,777 Other cash flow from financing 9,232 Cash flow from Financing 27,037 Change in Net debt 70 Debt adjusted Cash Flow 24,400 Free cash flow 51,437 FCF ex-W/C Changes CFPS 14,026 38,427 FY10 80.34 4.38 FY11E 110.91 4.03 FY12E 95.00 4.10 FY13E 90.00 4.95
2,263 2,598 2,678 2,746 (26.2%) 14.8% 3.1% 2.5% 3,363.00 3,381.00 3,389.00 3,399.00 67.29 NM 12.3 9.9% 76.83 14.2% 13.7 10.7% 79.02 2.9% 15.0 10.0% 80.79 2.2% 16.5 9.9%
21.5 18.8 18.3 17.9 14.2 1.2 1.1 1.0 1.0 0.8 1029.8% 483.6% -355.1% -122.5% -153.0% 1419.0% 1272.9% 1289.5% 1302.0% 1112.6% 0.1% 0.1% 0.1% 0.1% 0.1% 1.7% 2.8% -1.6% -6.3% -4.7% 0.9% 1.9% -1.4% -4.8% -3.7% 0.9% 0.9% 1.0% 1.1% 1.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.9% 0.9% 1.0% 1.1% 1.3% 20.4% 17.1% 15.8% 23.5% 26.0% 20.7% 15.2% 19.1% 38.7% 28.0% 13.9% 15.0% 51.6% 34.1% 12.8% 11.9% 57.3% 36.5% 14.3% 12.1%
182 2,768 644 3.6% FY09 2,263 1,131 1,263 -17 4,640 (206) 4,846 (4,328) -798 -5,126 0 (407) 2,051 1,644 -306 3,640 426 632 1.4
174 2,831 646 0.3% FY10 2,598 1,394 1,234 -321 4,904 (450) 5,354 (5,451) 610 -4,841 0 (447) 2,526 2,079 912 4,197 912 1,362 1.5
165 2,890 647 0.2% FY11E 2,678 1,447 1,723 -72 5,776 (249) 6,024 (6,788) -18 -6,806 0 (477) 2,214 1,737 -3,034 4,387 (1,245) -996 1.7
184 3,098 700 8.2% FY12E 2,746 1,613 1,727 -131 5,954 (249) 6,204 (7,819) 257 -7,562 0 (534) 534 0 -3,619 4,634 (3,619) -3,370 1.8
237 3,344 794 13.4% FY13E 3,483 1,882 2,133 -154 7,343 (314) 7,657 (7,844) 0 -7,844 0 (588) 588 0 -2,907 5,697 (2,907) -2,593 2.2
Balance sheet in millions, year end Dec Tangible fixed assets Other non current assets Total non current assets Cash and cash equivalent Other current assets Total current assets Total assets Short term debt Other current liabilities Total current liabilities Long term debt Other non current liabilities Total non current liabilities Total liabilities Shareholders' equity Minorities Total Equity Total Liabilities and Shareholders Equity
FY09 13,460 7,610 21,070 693 4,519 5,212 26,282 717 4,431 5,148 3,111 3,638 6,749 11,897 96 14,385 26,282
FY10 18,103 7,732 25,835 1,622 4,760 6,383 32,218 806 4,886 5,692 5,410 4,024 9,434 15,126 96 17,092 32,218 4,466 21,558
FY11E 23,444 8,466 31,909 1,004 5,410 6,415 38,324 3,840 5,641 9,480 5,456 4,096 9,551 19,032 70 19,293 38,324 7,500 26,793
FY12E 29,650 8,976 38,625 1,004 5,410 6,415 45,040 7,459 6,844 14,303 5,456 3,777 9,232 23,535 66 21,505 45,040 11,119 32,624
Net debt/ (cash) 2,956 Capital Employed 17,341 Source: Company reports and J.P. Morgan estimates.
223
BP: Summary of Financials

Profit and Loss Statement $ in millions, year end Dec E&P R&M Other & Corporate Total Segmental EBIT Finance Costs Pre-Tax Income Less: Tax Tax Rate Minorities Adjusted Net Income Growth Avg. shares in issue (m) Adjusted EPS (cents) EPS growth(%) Adjusted EPS (pence) EPS growth(%) DPS (cents) DPS growth(%) DPS (pence) DPS growth(%) FY10 27,689 4,883 -869 31,703 (1,046) 30,657 (9,741) 31.8% 395 FY11E 29,885 7,169 -1,678 35,376 (907) 34,469 (11,711) 34.0% 383 FY12E 28,389 6,894 -1,600 33,683 FY13E 27,330 6,407 -1,600 32,138 FY14E 26,151 6,352 -1,600 30,903 (825) 30,078 (10,663) 34.5% 327 Valuation, performance and production $ in millions, year end Dec FY10 FY11E FY12E FY13E FY14E Brent crude, $/bbl 80.34 110.00 95.00 90.00 85.00 US Gas, $/MMBtu 4.38 4.43 5.40 5.90 5.90 Valuation Mkt Cap ($ bn) P/E adjusted P/CF P/FCF EV/DACF CF Yield FCF Yield FCF yield ex-w/c Dividend Yield Buyback Yield Combined Yield Ratios Net debt to equity Net Debt to Capital Employed ROE ROCE Production Group oil, kbopd Group gas, mmcfpd Group Total, kboepd Y/Y growth Cash flow statement $ in millions, year end Dec Consolidated Net Income DD&A Cash tax payable Other items Cash Earnings Change in working capital Cash flow from Operations
(920) (850) 32,763 31,288 (11,531) (11,093) 34.2% 34.5% 357 340
20,521 22,375 20,874 19,855 19,088 40.8% 9.0% (6.7%) (4.9%) (3.9%) 18,792.91 18,967.63 18,953.93 18,879.19 18,808.18 1.09 40.4% 70.5 41.9% 7.0 (87.5%) 4.5 (87.3%) 1.18 8.3% 73.5 4.3% 29.0 314.3% 17.9 299.5% 1.10 NM 68.8 -6.4% 32.8 12.9% 20.4 14.1% 1.05 NM 65.7 -4.5% 35.8 9.2% 22.3 9.2% 1.01 NM 63.4 -3.5% 38.5 7.7% 24.0 7.7%
6.5 4.5 13.0 5.4 22.0% 21.6% 5.8% 1.0% -0.1% 0.9%
6.2 4.6 -13.9 5.6 21.6% 0.8% 4.1% 4.0% -0.0% 3.9%
6.6 3.7 22.7 4.3 27.0% 12.8% 2.4% 4.5% 0.7% 5.2%
7.0 7.2 4.1 4.1 8.2 -1160.0 4.3 4.3 24.4% 24.2% 17.9% 5.9% 11.9% -0.2% 4.9% 5.3% 0.9% 0.9% 5.9% 6.3%
27.0% 21.2% 21.6% 16.9%
27.6% 21.6% 19.6% 15.3%
19.0% 16.0% 16.3% 13.6%
5.5% 5.2% 14.2% 13.3%
5.2% 4.9% 12.6% 11.8%
2,374 8,401 3,774 -4.4%
2,088 8,328 3,476 -7.9%
2,101 9,035 3,607 3.7%
2,034 9,101 3,551 -1.6%
1,993 9,481 3,573 0.6%
Balance sheet $ in millions, year end Dec Cash and cash equivalent Other current assets Current assets Tangible fixed assets Other non current assets Total non current assets Total assets Short term debt Other current liabilities Total current liabilities Long term debt Other non current liabilities Total non current liabilities Total liabilities Shareholders' equity Minorities Total Equity Total Liabilities and Shareholders Equity
FY10 18,556 15,530 96,853 110,163 15,538 175,409 272,262 14,626 22,924 83,879 30,710 61,782 92,492 176,371 904 95,891 272,262
FY11E 8,586 7,833 82,108 128,345 15,590 204,705 286,813 7,986 22,235 78,607 33,767 59,444 93,211 171,818 1,094 114,994 286,812 31,713 146,708
FY12E 14,680 8,803 92,419 136,335 15,590 214,470 306,889 7,016 26,384 84,286 33,767 59,444 93,211 177,497 1,451 129,392 306,889 24,649 154,041
FY13E 31,527 8,803 109,888 133,909 15,590 213,469 323,357 7,016 30,376 88,278 33,767 59,444 93,211 181,489 1,791 141,868 323,357 7,802 149,670
Net debt/ (cash) 25,864 Capital Employed 121,755 Source: Company reports and J.P. Morgan estimates.
FY14E FY10 FY11E FY12E FY13E FY14E 31,408 20,521 22,375 20,874 19,855 19,088 8,803 11,539 11,876 11,180 11,126 11,397 110,679 (6,610) (7,497) (7,382) (7,101) (6,826) 147,212 -3,240 -11,953 18,022 17,161 16,655 15,590 22,210 14,801 42,694 41,041 40,313 228,197 2,123 (15,636) 2,700 200 200 338,876 20,087 30,437 39,994 40,841 40,113 7,016 34,213 Capex (18,947) (19,146) (22,550) (24,050) (25,050) 92,115 Other investing cash flow 14,987 -10,236 3,030 15,000 0 Cash Flow from Investing -3,960 -29,382 -19,520 -9,050 -25,050 33,767 59,444 Share Buybacks 169 59 -977 -1,303 -1,303 93,211 Dividends (s/h & minorities) (2,627) (4,089) (5,770) (6,290) (6,802) 185,326 Other cash flow from financing 3,298 802 (250) (250) (250) Cash flow from Financing 840 -3,228 -6,998 -7,843 -8,356 2,118 Change in Net debt -297 5,849 -7,065 -16,847 119 153,550 338,876 Debt adjusted cash flow 29,226 29,925 37,382 33,739 33,287 Free cash flow 10,217 (9,970) 6,095 16,847 (119) 7,921 FCF ex-W/Capital Changes 8,094 5,666 3,395 16,647 -319 161,471 CFPS 1.2 0.8 2.3 2.2 2.1
224
Royal Dutch Shell B: Summary of Financials

Profit and Loss Statement $ in millions, year end Dec Exploration & Production Gas & Power Oil Products Chemicals OIS & Corporate Total Segmental EBIT Finance Costs Pre-Tax Income Less: Tax Tax Rate Minorities Adjusted Net Income Growth Avg. shares in issue (m) Adjusted EPS (cents) EPS growth(%) Adjusted EPS (pence) EPS growth(%) DPS (cents) DPS growth(%) DPS (pence) DPS growth(%) FY09 18,333 2,423 2,290 410 408 23,865 FY10 33,230 4,060 2,969 1,983 -719 41,523 FY11E 39,463 7,733 4,063 2,385 -649 52,995 FY12E 37,606 7,811 4,749 1,503 -643 51,026 Valuation, performance and production FY13E $ in millions, year end Dec FY09 36,979 Brent crude, $/bbl 62.67 7,811 US Gas, $/MMBtu 4.16 5,432 2,059 Valuation -636 Mkt Cap ($ bn) 51,644 P/E adjusted 19.8 P/CF 0.6 1,039 P/FCF -221.7% 52,683 EV/DACF 1023.6% (28,194) CF Yield 0.2% 53.5% FCF Yield 2.7% 361 FCF yield ex-w/c -1.6% Dividend Yield 5.5% 23,089 Buyback Yield 0.0% 1.5% Combined Yield 5.5% 6,290.33 Ratios 3.84 Net debt to equity 18.6% NM Net Debt to Capital Employed 15.7% 248.0 ROE 8.5% -0.1% ROCE 7.3% 181.7 0.0% Production 115.3 Group oil, kbopd 1,680 3.0% Group gas, mmcfpd 8,483 Group Total, kboepd 3,094 Y/Y growth -3.3% Cash flow statement FY13E $ in millions, year end Dec FY09 31,481 Consolidated Net Income 11,553 99,450 DD&A 14,458 130,931 Cash tax payable (9,243) 164,705 Other items 2,389 66,065 Cash Earnings 19,157 230,769 Change in working capital (2,331) 361,701 Cash flow from operations 21,488 (9,951) 107,769 Capex (27,838) 97,818 Other investing cash flow 1,604 Cash Flow from Investing Acitivites -26,234 (34,381) 116,864 Share Buybacks 0 72,532 Dividends (s/h & minorities) (10,526) 170,350 Other cash flow from financing 9,803 Cash flow from Financing -723 2,840 Change in Net debt 17,233 188,510 361,701 Debt adjusted cash flow 20,610 Free cash flow (5,469) 12,851 FCF ex-W/Capital Changes -3,138 201,361 CFPS 3.1 FY10 FY11E FY12E FY13E 80.34 110.00 95.00 90.00 4.38 4.43 5.40 5.90
1,664 (140) 84 1,185 25,529 41,383 53,079 52,211 (12,194) (23,117) (26,570) (27,938) 47.8% 55.9% 50.1% 53.5% 118 333 365 347 11,553 18,073 26,060 22,742 (59.3%) 56.4% 44.2% (12.7%) 6,128.90 6,139.28 6,245.33 6,230.33 1.89 NM 120.3 -50.0% 168.0 5.0% 106.3 14.5% 2.94 56.2% 190.4 58.3% 168.0 0.0% 106.8 0.5% 4.19 42.2% 259.3 36.2% 174.7 0.0% 105.8 (0.9%) 3.84 NM 248.3 -4.2% 181.7 3.0% 111.9 5.8%
12.6 8.9 9.7 9.7 0.4 0.3 0.3 0.3 326.1% 177.1% 226.6% 196.1% 792.6% 560.9% 482.3% 438.0% 0.2% 0.3% 0.3% 0.4% 7.3% 8.8% 8.5% 9.1% 5.0% 8.8% 3.8% 3.3% 5.5% 5.5% 5.8% 6.0% 0.0% 0.0% 0.0% 0.0% 5.5% 5.5% 5.8% 6.0%
20.9% 17.3% 12.2% 10.7%
15.0% 13.1% 15.9% 14.4%
10.9% 9.8% 12.9% 12.2%
6.8% 6.4% 12.2% 11.9%
1,709 9,305 3,259 5.4% FY10 18,073 15,595 (15,362) 3,115 21,421 (5,929) 27,350
1,701 1,700 1,738 9,391 10,867 11,111 3,266 3,511 3,590 0.2% 7.5% 2.3% FY11E 26,060 17,235 (18,959) 4,807 29,144 (10,191) 39,335 FY12E 22,742 18,889 (18,889) 18,881 41,623 (2,000) 43,623 FY13E 23,089 19,607 (19,607) 23,303 46,392 0 46,392
Balance sheet $ in millions, year end Dec Cash and cash equivalent Other current assets Total current assets Tangible fixed assets Other non current assets Total non current assets Total assets Short term debt Other current liabilities Total current liabilities Long term debt Other non current liabilities Total non current liabilities Total liabilities Shareholders' equity Minorities Total Equity Total Liabilities and Shareholders Equity
FY09 9,719 86,738 96,457 131,619 64,105 195,724 292,181 (4,171) 88,960 84,789
FY10 13,444 99,450 112,894 142,705 66,961 209,666 322,560 (9,951) 110,503 100,552
FY11E 19,693 99,450 119,143 145,809 65,152 210,961 330,104 (9,951) 101,470 91,519
FY12E 25,134 99,450 124,584 155,571 66,307 221,877 346,461 (9,951) 105,202 95,251
(25,399) (27,651) (27,241) (28,741) 3,427 5,770 0 0 -21,972 -21,881 -27,241 -28,741 0 0 0 0 (9,584) (10,151) (10,464) (10,778) 7,931 (325) (478) (526) -1,653 -10,476 -10,942 -11,304 5,574 -6,249 -5,440 -6,347 27,042 39,133 42,594 45,866 3,725 6,978 5,440 6,347 9,654 17,169 7,440 6,347 3.5 4.7 6.7 7.4
(30,862) (34,381) (34,381) (34,381) 104,290 116,560 116,864 116,864 69,257 72,228 72,532 72,532 154,046 172,780 164,051 167,783 1,704 1,767 2,132 2,479 136,431 148,013 163,922 176,199 292,181 322,560 330,105 346,461
Net debt/ (cash) 25,314 30,888 24,639 19,198 Capital Employed 161,745 178,901 188,560 195,398 Source: Company reports and J.P. Morgan estimates.
225
ENI: Summary of Financials

Profit and Loss Statement in millions, year end Dec Exploration & Production Gas & Power Refining & Marketing Chemicals Corporate & other Total Segmental EBIT Finance Costs Pre-Tax Income Less: Tax Tax Rate Minorities Adjusted Net Income Growth Avg. shares in issue (m) Adjusted EPS EPS growth(%) DPS DPS growth(%) FY09 9,484 3,683 -357 -426 528 12,912 149 13,061 7,049 54.0% 950 FY10 13,884 3,119 -171 -113 585 17,304 89 17,393 9,459 54.4% 1,065 FY11E 15,566 2,679 -342 -81 672 18,495 500 18,995 10,424 54.9% 1,214 FY12E 15,616 3,005 -239 -61 1,063 19,384 350 19,734 10,792 54.7% 1,427 FY13E 16,574 3,165 -152 20 1,239 20,847 350 21,197 11,201 52.8% 1,545 Valuation, performance and production in millions, year end Dec FY09 Brent crude, $/bbl 62.67 US Gas, $/MMBtu 4.16 Valuation Mkt Cap (bn) P/E adjusted P/CF P/FCF EV/DACF CF Yield FCF Yield FCF yield ex-w/c Dividend Yield Buyback Yield Combined Yield Ratios Net debt to equity Net Debt to Capital Employed ROE ROCE Production Group oil, kbopd Group gas, mmcfpd Group total, kboepd Y/Y growth Cash flow statement in millions, year end Dec Consolidated Net Income DD&A Cash tax payable Other items Cash Earnings Change in working capital Cash flow from Operations FY10 80.34 4.38 FY11E 110.00 4.43 FY12E 95.00 5.40 FY13E 90.00 5.90
5,062 6,869 7,357 7,514 8,451 (50.2%) 35.7% 7.1% 2.1% 12.5% 3,622.10 3,622.10 3,622.10 3,622.10 3,621.60 1.40 NM 1.00 (23.1%) 1.90 35.7% 1.00 0.0% 2.03 7.1% 1.04 4.0% 2.07 2.1% 1.09 5.0% 2.33 12.5% 1.15 5.0%
11.8 8.7 8.1 8.0 7.1 5.2 4.0 3.3 3.2 3.0 -18502.7% -98472.0% 4632.0% 10758.1% 3667.7% 7.3 5.8 4.8 4.5 4.2 19.1% 25.1% 30.0% 31.3% 33.4% 4.5% 6.9% 8.5% 7.6% 9.7% 2.7% 2.9% 2.2% 0.9% 2.7% 6.2% 6.2% 6.5% 6.8% 7.1% 0.0% 0.0% 0.0% 0.0% 0.0% 6.2% 6.2% 6.5% 6.8% 7.1% 45.8% 31.4% 10.1% 7.2% 46.9% 31.9% 12.3% 8.9% 41.0% 29.1% 12.1% 8.8% 37.0% 27.0% 11.4% 8.6% 31.7% 24.1% 11.8% 9.2%
1,007 4,374 1,796 0.4% FY09 5,062 9,811 7,049 -4,099 17,823 (1,901) 19,724 (13,695) 847 -12,848 0 (2,956) 4,224 1,268 4,662 11,117 (314) 1,587 -0.1
997 4,540 1,816 1.1% FY10 6,869 9,392 9,459 -3,949 21,771 (1,726) 23,497
896 3,900 1,600 -11.9% FY11E 7,357 9,340 10,424 714 27,834 0 27,834
969 4,094 1,708 6.7% FY12E 7,514 9,572 10,792 1,077 28,955 0 28,955
1,026 4,328 1,807 5.8% FY13E 8,451 9,754 22,402 -10,005 30,602 0 30,602
Balance sheet in millions, year end Dec Tangible fixed assets Other non current assets Total non current assets Cash and cash equivalent Total assets Short term debt Long term debt Total liabilities Shareholders' equity Minorities Total Equity Total Liabilities and Equity Net debt Capital Employed
FY09 63,287 16,676 79,963 1,625 73,339 137 24,800 23,038 3,978 50,301 73,339 23,038 73,339
FY10 67,133 20,058 87,191 1,549 81,847 115 27,783 26,119 4,522 55,728 81,847 26,119 81,847
FY11E 70,755 20,058 90,813 2,820 85,469 98 27,783 24,865 5,736 60,605 85,469 24,865 85,469
FY12E 75,296 20,058 95,354 3,360 90,010 98 27,783 24,325 7,164 65,685 90,010 24,325 90,010
FY13E 79,657 20,058 99,715 4,944 94,369
98 27,783 22,741 Capex Other investing cash flow 8,709 Cash Flow from Investing 71,628 Share Buybacks 94,369 Dividends (s/h & minorities) Other cash flow from financing 22,741 Cash flow from Financing 94,369 Change in Net debt Debt adjusted Cash Flow Free cash flow Free cash flow (ex-w/c) CFPS
(13,870) (14,462) 931 1,500 -12,939 -12,962 0 0 (4,099) (3,695) 2,285 0 -1,814 -3,695 3,081 14,605 (59) 1,667 -0.0 -1,254 17,411 1,254 1,254 0.3
(14,112) (14,115) 0 0 -14,112 -14,115 0 0 (3,861) (4,053) 0 1 -3,861 -4,052 -540 18,163 540 540 0.1 -1,584 19,401 1,584 1,584 0.4
Source: Company reports and J.P. Morgan estimates.
226
Repsol YPF: Summary of Financials

Profit and Loss Statement in millions, year end Dec Exploration & Production Refining & Marketing YPF Gas Natural LNG Corporate Total Segmental EBIT Finance Costs Pre-Tax Income Less: Tax Tax Rate Minorities Adjusted Net Income Growth Avg. shares in issue (m) Adjusted EPS EPS growth(%) DPS DPS growth(%) FY09 884 647 789 745 50 -354 2,761 (468) 2,293 832 36.3% 166 FY10 FY11E FY12E FY13E 1,473 1,661 2,007 1,922 977 808 1,230 1,752 1,625 1,578 1,834 1,927 849 933 939 961 127 259 253 279 -336 -316 -345 -349 4,714 4,922 5,917 6,491 (858) 3,856 1,561 40.5% 263 (765) 4,157 1,686 40.6% 247 2,224 9.5% (572) 5,345 2,296 42.9% 305 2,745 23.4% (571) 5,919 2,440 41.2% 348 3,132 14.1% Valuation, performance and production in millions, year end Dec FY09 Brent Crude, $/bbl 62.67 US Gas, $/MMBtu 3.66 Valuation Mkt Cap (bn) P/E adjusted P/CF P/FCF EV/DACF CF Yield FCF Yield FCF yield ex-w/c Dividend Yield Buyback Yield Combined Yield FY10 80.34 4.38 FY11E 110.00 4.43 FY12E 95.00 5.40 FY13E 90.00 5.90
1,295 2,032 (50.6%) 57.0%
20.9 4.9 -4225.8% 7.4 20.5% 4.9% -0.2% 3.9% 0.0% 3.9%
13.3 12.2 9.9 8.7 4.1 4.0 4.5 3.4 653.7% 6174.0% -1572.9% -91826.8% 5.7 5.5 6.3 4.9 24.4% 24.9% 22.5% 29.2% 18.7% 6.5% -1.2% 5.7% 17.5% 7.9% -3.6% 7.4% 4.8% 5.3% 5.9% 6.4% 0.0% 0.0% 0.0% -0.0% 4.8% 5.3% 5.9% 6.4%
Balance sheet in millions, year end Dec Tangible fixed assets Other non current assets Total non current assets Total Current assets Total assets
Short term debt Other current liabilities Total Current Liabilities Long term debt Other non current liabilities Total non current liabilities Total liabilities Shareholders' equity Minorities Total Equity Total Liabilities and Shareholders Equity
Ratios 1,221.00 1,221.00 1,221.00 1,221.00 1,221.00 Net debt to equity Net Debt to Capital Employed 1.06 1.66 1.82 2.25 2.57 ROE NM 57.0% 9.5% 23.4% 14.1% ROCE 0.85 1.05 1.16 1.27 1.40 Production (19.1%) 23.5% 10.0% 10.0% 10.0% Group oil, kbopd Group gas, mmcfpd Group Total, kboepd Y/Y growth Cash flow statement FY09 FY10 FY11E FY12E FY13E in millions, year end Dec 31,900 33,585 33,587 34,916 36,882 Consolidated Net Income 11,410 12,168 12,172 12,181 12,177 DD&A 43,310 45,753 45,759 47,097 49,059 Cash tax payable 14,773 21,878 23,049 21,329 21,299 Other items 58,083 67,631 68,821 68,429 70,358 Cash Earnings Change in working capital Cash flow from Operations 3,499 4,362 4,362 4,362 4,362 8,494 11,411 11,411 9,380 9,381 Capex 11,993 15,773 15,773 13,742 13,743 Other investing cash flow Cash Flow from Investing 15,411 14,940 14,940 14,940 14,941 9,288 10,932 10,932 10,932 10,932 Dividends (s/h & minorities) 24,699 25,872 25,872 25,872 25,873 Other cash flow from financing 36,692 41,645 41,645 39,614 39,616 Cash flow from Financing 1,440 21,391 58,083 1,846 25,986 67,631 10,958 35,098 2,093 27,176 68,821 10,194 35,276 2,398 28,815 68,429 11,913 38,330 2,746 30,742 70,358 11,945 39,941 Change in Net debt Debt adjusted Cash Flow Free cash flow FCF ex-W/Capital Changes CFPS
73.4% 45.4% 42.4% 31.2% 6.1% 7.8% 4.2% 5.8% 438 2,808 906 -4.8% 437 2,700 887 -2.1%
40.6% 28.9% 8.2% 6.3% 401 2,491 816 -8.0% FY11E 2,224 4,131 (1,602) -1,322 6,635 (1,693) 8,328 (6,500) 0 -3,476 (1,282) (765) -2,047 -764 6,726 438 2,131 0.4
45.1% 31.1% 9.5% 7.5% 422 2,367 817 0.1% FY12E 2,745 3,538 (2,181) -940 7,523 (733) 8,256 (5,240) 0 -5,240 (1,410) (572) -1,982 1,719 6,075 (1,719) -987 -1.4
42.7% 29.9% 10.2% 8.0% 427 2,298 809 -0.9% FY13E 3,132 3,516 (2,318) -774 8,191 (2,031) 10,222 (5,240) 0 -5,240 (1,552) (572) -2,123 31 7,904 (29) 2,002 -0.0
FY09 FY10 1,295 2,032 2,886 3,876 (1,168) (1,627) 770 106 6,119 7,641 (590) (590) 6,709 8,231 (9,003) (5,106) 56 -27 -7,854 -73 (1,935) (806) 4,440 (653) 2,505 -1,459 7,796 -3,696 5,541 (640) -50 -0.5 6,604 4,137 4,727 3.4
Net debt 14,654 Capital Employed 34,605 Source: Company reports and J.P. Morgan estimates.
227
Statoil: Summary of Financials

Profit and Loss Statement Nkr in millions, year end Dec Exploration & production* Natural Gas* Manufacturing & Marketing Fuel and Retail Marketing, Processing & Renewable energy Other Operations Total Segmental EBIT Finance Costs Pre-Tax Income Less: Tax Tax Rate Minorities Adjusted Net Income Growth Avg. shares in issue (m) FY09 FY10 FY11E FY12E FY13E 111,881 125,730 170,570 167,383 162,714 16,500 13,500 12,335 14,080 14,113 2,100 1,700 1,500 2,200 1,667 1,751 1,872 8,194 14,757 15,086 -1,100 -400 -1,100 -1,100 -1,100 130,881 142,730 179,331 182,791 178,573 (300) 129,081 92,286 70.7% (598) (1,100) 139,593 98,800 69.8% (598) 0 178,464 128,720 71.8% (767) (1,246) 180,595 128,613 70.8% (805) (1,245) 176,257 122,044 68.8% (861) Valuation, performance and production Nkr in millions, year end Dec FY09 Brent crude, $/bbl 62.67 US Gas, $/MMBtu 4.16 Valuation Mkt Cap (Nkr bn) P/E adjusted P/CF P/FCF EV/DACF CF Yield FCF Yield FCF yield ex-w/c Dividend Yield Buyback Yield Combined Yield FY10 80.34 4.38 FY11E 110.00 4.43 FY12E FY13E 95.00 90.00 5.40 5.90
37,697 42,232 49,844 52,128 54,423 (34.7%) 12.0% 18.0% 4.6% 4.4% 3,185.00 3,182.00 3,182.00 3,182.00 3,182.00 Ratios Net debt to equity Adjusted EPS (Nkr) 12.07 13.14 15.68 16.66 17.38 Net Debt to Capital Employed EPS growth(%) NM 8.8% 19.3% 6.3% 4.3% ROE DPS (Nkr) 6.00 6.24 6.55 6.88 7.22 ROCE DPS growth(%) (17.2%) 4.0% 5.0% 5.0% 5.0% Production Group oil, kbopd Group gas, mmcfpd Group Total, kboepd Y/Y growth Balance sheet Cash flow statement Nkr in millions, year end Dec FY09 FY10 FY11E FY12E FY13E Nkr in millions, year end Dec Cash and cash equivalent 24,723 30,337 37,535 20,345 6,072 Consolidated Net Income Other current assets 91,661 118,425 118,425 118,425 118,425 DD&A Current assets 116,384 148,762 155,960 138,770 124,497 Cash tax payable Net fixed assets 340,835 348,204 371,644 420,794 468,330 Other items Other non current assets 105,621 101,152 101,152 101,152 101,152 Cash Earnings Total non current assets 446,456 449,356 472,796 521,946 569,482 Change in working capital Total assets 562,840 643,008 673,646 705,606 738,869 Cash flow from operations Short term debt 8,150 11,730 11,730 11,730 11,730 Other current liabilities 103,655 124,405 117,969 111,538 105,436 Capex Total current liabilities 111,805 136,135 129,699 123,268 117,166 Other investing cash flow Cash Flow from Investing Acitivites Long term debt 95,962 99,797 99,797 99,797 99,797 Other non current liabilities 154,955 171,458 171,458 171,458 171,458 Share Buybacks Total non current liabilities 250,917 271,255 271,255 271,255 271,255 Dividends (s/h & minorities) Total liabilities 362,722 416,613 410,177 403,746 397,644 Other cash flow from financing Shareholders' equity Cash flow from Financing Minorities 1,799 6,853 6,853 6,853 6,853 Change in Net debt Total Equity 200,118 226,395 263,468 301,859 341,224 Total Liabilities and Shareholders Equity 562,840 643,008 673,646 705,606 738,869 Debt adjusted cash flow Free cash flow Net debt 75,267 69,681 62,483 79,673 93,946 FCF ex-W/Capital Changes Capital Employed 275,385 296,076 325,951 381,531 435,170 CFPS Source: Company reports and J.P. Morgan estimates.
12.6 11.6 9.7 9.1 6.2 5.6 4.9 4.6 7380.2% 8688.3% 6234.1% -2610.1% 7.0 6.3 5.4 5.3 16.3% 18.0% 20.6% 21.9% 6.8% 5.6% 6.2% 0.9% 2.6% 4.6% 3.0% -2.4% 4.4% 4.5% 4.8% 5.0% 0.1% 0.1% 0.0% 0.0% 4.4% 4.6% 4.8% 5.0%
8.8 4.4 5.2 22.8% 1.8% -1.8% 5.3% 0.0% 5.3%
37.6% 27.3% 18.8% 13.7%
30.8% 23.5% 18.7% 14.3%
23.7% 19.2% 18.9% 15.3%
26.4% 20.9% 17.3% 13.7%
27.5% 21.6% 15.9% 12.5%
1,061 4,440 1,801 2.8% FY09 37,697 46,290 100,773 -16,673 168,087 (5,687) 173,774
968 4,428 1,706 -5.3% FY10 42,232 45,246 93,266 -22,092 158,652 (15,429) 174,081
931 4,127 1,618 -5.1%
981 4,348 1,705 5.4%
978 4,562 1,739 2.0%
FY11E FY12E FY13E 49,844 52,128 54,423 41,754 46,337 47,950 122,284 123,428 117,186 -5,602 -6,781 -6,396 208,280 215,111 213,163 (6,436) (6,431) (6,102) 214,716 221,542 219,265
(75,150) (74,155) (88,865) (94,331) (94,331) -206 -2,063 23,605 0 0 -75,356 -76,218 -65,260 -94,331 -94,331 -343 -294 0 0 0 (23,085) (19,095) (19,974) (20,973) (22,022) 34,719 19,956 0 0 0 11,291 567 -19,974 -20,973 -22,022 29,304 -5,586 -7,198 17,190 14,274 73,001 6,085 11,772 1.9 80,815 5,164 20,593 1.6 92,432 98,114 102,079 7,197 (17,190) (14,274) 13,633 -10,759 -8,171 2.3 -5.4 -4.5
228
TOTAL: Summary of Financials

Profit and Loss Statement in millions, year end Dec Exploration & production Refining & marketing Chemicals Corporate & other Total Segmental EBIT FY09 FY10 FY11E FY12E FY13E 13,885 19,003 23,453 22,252 24,891 1,173 1,518 1,324 1,113 1,354 314 1,124 1,161 1,130 1,206 290 -143 -195 -400 -400 15,663 21,503 25,742 24,094 27,051 Valuation, performance and production in millions, year end Dec FY09 Brent crude, $/bbl 62.67 US Gas, $/MMBtu 4.16 FY10 80.34 4.38 FY11E 110.00 4.43 FY12E 95.00 5.40 FY13E 90.00 5.90
Valuation Mkt Cap (bn) P/E adjusted 11.5 8.6 7.6 7.8 6.8 Finance Costs (264) (226) (389) (391) (362) P/CF 7.0 4.7 4.6 4.2 3.8 Pre-Tax Income 15,399 21,277 25,354 23,703 26,689 P/FCF -13414.7% 3127.1% 28949.7% 57047.0% 597721.5% Less: Tax (7,436) (10,755) (13,733) (12,605) (13,999) EV/DACF 8.0 5.4 5.3 4.8 4.3 Tax Rate 48.3% 50.5% 54.2% 53.2% 52.5% CF Yield 14.3% 21.2% 21.8% 23.7% 26.0% Minorities (178) (234) (250) (250) (200) FCF Yield 5.0% 9.0% 6.1% 6.2% 6.4% FCF yield ex-w/c 3.0% 3.7% 0.3% -0.2% -0.1% Adjusted Net Income 7,785 10,288 11,371 10,848 12,490 Dividend Yield 5.8% 5.8% 5.8% 6.1% 6.4% Growth (44.1%) 32.2% 10.5% (4.6%) 15.1% Buyback Yield -0.0% -0.1% 0.0% 0.0% 0.0% Combined Yield 5.7% 5.7% 5.8% 6.1% 6.4% Avg. shares in issue (m) 2,217.00 2,217.00 2,217.00 2,217.00 2,217.00 Ratios Adjusted EPS 3.48 4.64 5.24 5.14 5.88 Net debt to equity 25.3% 21.3% 20.2% 16.5% 14.4% EPS growth(%) NM 33.4% 13.0% NM 14.4% Net Debt to Capital Employed 21.6% 18.7% 17.9% 14.8% 13.3% DPS 2.28 2.28 2.28 2.39 2.51 ROE 14.8% 17.0% 17.0% 14.8% 15.5% DPS growth(%) 0.0% 0.0% 0.0% 5.0% 5.0% ROCE 12.4% 14.7% 14.7% 13.1% 14.1% Production Group oil, kbopd 1,381 1,339 1,242 1,292 1,401 Group gas, mmcfpd 4,923 5,674 6,147 6,357 6,212 Group Total, kboepd 2,260 2,352 2,340 2,427 2,510 Y/Y growth -2.6% 4.1% -0.5% 3.7% 3.4% Balance sheet Cash flow statement in millions, year end Dec FY09 FY10 FY11E FY12E FY13E in millions, year end Dec FY09 FY10 FY11E FY12E FY13E Tangible fixed assets 51,590 54,964 62,203 70,605 78,348 Consolidated Net Income 7,785 10,288 11,371 10,848 12,490 Other non current assets 26,406 30,548 30,899 28,973 28,974 DD&A 6,291 6,413 6,978 8,627 9,287 Total non current assets 77,996 85,512 93,102 99,578 107,321 Cash Tax Payable 7,700 10,980 14,121 12,996 14,361 Other items -5,032 1,296 502 1,389 940 Cash and cash equivalent 11,662 14,489 14,794 14,949 14,964 Cash Earnings 16,744 28,977 32,973 33,860 37,078 Other current assets 38,095 42,447 42,447 36,660 34,730 Change in working capital (3,316) (496) 1 299 100 Total Current assets 49,757 56,936 57,241 51,609 49,694 Cash flow from Operations 20,060 29,473 32,972 33,560 36,978 Total assets 127,753 143,718 150,342 151,186 157,014 Capex (11,711) (12,278) (14,217) (17,029) (17,029) Short term debt 6,994 9,653 9,653 8,337 7,898 Other investing cash flow -922 -735 0 0 0 Other current liabilities 27,411 30,597 30,598 26,426 25,035 Cash Flow from Investing -10,268 -11,957 -13,490 -15,102 -17,029 Total Current Liabilities 34,405 40,250 40,251 34,763 32,933 Share Buybacks 22 49 0 0 0 Long term debt 19,437 20,783 20,783 20,783 20,783 Dividends (s/h & minorities) (5,086) (5,098) (5,055) (5,307) (5,573) Other non current liabilities 20,369 21,216 21,216 21,216 21,216 Cash flow from Financing -2,868 -3,348 -5,055 -5,307 -5,573 Total non current liabilities 39,806 41,999 41,999 41,999 41,999 Change in Net debt 2,895 -535 741 -1,471 -454 Total liabilities 74,211 82,249 82,250 76,762 74,932 Shareholders' equity Debt adjusted Cash Flow 12,624 18,719 19,239 20,955 22,979 Minorities 987 857 1,107 1,357 1,557 Free cash flow (659) 2,827 305 155 15 Total Equity 52,552 60,414 66,980 73,061 80,518 FCF ex-W/C Changes 2,657 3,323 304 -144 -85 Total Liabilities and Shareholders Equity 127,753 143,718 150,342 151,186 157,013 CFPS -0.3 1.3 0.1 0.1 0.0 Net debt 13,566 13,031 13,772 12,301 11,847 Capital Employed 62,891 69,782 77,098 83,057 88,863 Source: Company reports and J.P. Morgan estimates.
229
Chevron Corp: Summary of Financials

Income Statement - Annual
Revenues Cost of products sold Gross profit SG&A DD&A Other operating expenses Operating Income Net interest income / (expense) Other Pretax income Taxes Tax rate (%) Reported net income Non-recurring items, disc ops Adjusted net income Average diluted shares outstanding EPS EPS growth rate (%) Dividend per share EBITDA Production (kboepd) WTI crude price ($/bbl) Henry Hub natural gas price ($/mcf)
FY10A FY11E FY12E FY13E

204,928 116,467 88,461 4,767 13,063 38,546 32,085 (30) 0 32,055 12,919 40.3% 19,136 337 18,799 2,007 9.53 80.6% 2.84 46,315 2,761 79.50 4.40 17,070 31,771 48,841 104,504 31,424 184,769 213,125 107,206 105,919 4,815 12,257 39,544 49,304 (239) 0 49,065 22,079 45.0% 26,986 0 26,986 2,002 13.48 41.4% 3.09 63,352 2,696 95.06 4.03 19,607 31,771 51,378 119,079 31,424 201,881 221,650 110,248 111,402 4,863 13,006 40,127 53,407 (182) 0 53,225 23,951 45.0% 29,274 0 29,274 1,973 14.84 10.1% 3.18 68,409 2,729 107.38 4.10 24,832 31,771 56,603 135,034 31,424 223,061 230,516 116,435 114,081 4,911 13,303 40,472 55,394 (138) 0 55,257 24,865 45.0% 30,391 0 30,391 1,973 15.40 3.8% 3.28 70,658 2,770 118.00 4.75 34,219 31,771 65,990 150,776 31,424 248,190
Segment-level earnings - Quarterly

E&P R&M Chemicals Other Segment-level earnings
1Q11A 2Q11A 3Q11A 4Q11E

6,093A 660A 0A 0A 6,753A 6,845A 1,138A 0A 0A 7,983A 5,897A 1,338A 0A 0A 7,235A 5,535 479 0 0 6,014
Corporate & other Taxes Operating earnings Reported Earning Average diluted shares outstanding Operating EPS EPS growth rate (%) Dividend per share Production (kboepd) production growth (y/y)
(378)A 6,375A 6,211A 2,009A 3.17A 29.2%A -
(170)A 7,813A 7,732A 2,009A
(355)A 6,880A 7,829A 1,999A
(300) 5,714 5,714 1,991 2.87 15.4% 2,731 (2.0%)
3.89A 3.44A 51.0%A 67.1%A -
2,759A 2,694A 2,599A (0.9%)A (1.9%)A (5.1%)A
WTI crude price ($/bbl) Henry Hub natural gas price ($/mcf)
94.24A 102.57A 4.20A 4.38A
89.59A 4.06A
93.82 3.49
Balance Sheet and Cash Flow Data

Cash and cash equivalents Other current assets Total current assets Net PP&E Other assets Total assets Total debt Total liabilities Minority interests Preferred stock Shareholders' equity Net Income DD&A Deferred taxes Other Cash earnings Change in working capital Cash flow from operations Capex Dividends Share buybacks (net) Change in debt Change in preferred stock Other uses of cash Change in cash Free cash flow
Ratio Analysis
Valuation P/E (adjusted) P/CF Enterprise value/EBITDA EV/DACF Ratios Net debt/equity Net debt/capital Net coverage ratio ROE ROCE Yield and cash returns CFPS CF yield FCF yield Dividend yield Dividend payout ratio Buyback yield Total cash returns (%)

11.3 6.9 4.0 5.9 8.0 5.3 2.9 4.6 7.3 4.9 2.7 4.2 7.0 4.7 2.6 4.1
11,476 10,376 10,343 10,302 78,958 78,520 79,206 79,911 0 0 0 0 105,811 123,361 143,855 168,279 19,136 26,986 29,274 30,391 13,063 12,257 13,006 13,303 559 662 719 746 (1,475) 638 739 44,433 31,283 40,543 43,737 45,179 76 0 0 0 31,359 40,543 43,737 45,179 (19,612) (26,000) (29,700) (29,784) (5,674) (6,186) (6,279) (6,468) (306) (3,250) (2,500) 500 882 (1,100) (33) (41) (1,305) (1,470) (0) (0) 5,344 2,537 5,225 9,387 10,366 13,073 14,037 15,395
(5.3%) (5.6%) 2.5 19.0% 19.7% 15.62 16.4% 2.5% 2.6% 29.8% 0.1% 3.1%
(7.5%) (10.1%) (14.2%) (8.1%) (11.2%) (16.6%) 4.0 4.1 4.2 23.6% 21.9% 19.5% 25.4% 24.2% 22.3% 20.25 21.4% 3.6% 2.9% 22.9% 1.5% 5.0% 22.17 23.4% 4.1% 2.9% 21.4% 1.1% 4.6% 22.90 24.2% 4.8% 3.0% 21.3% 0.2% 3.1%
Mkt Cap (current) () Enterprise Value (current)

Note: $ in millions (except per-share data).Fiscal year ends Dec
230
Exxon Mobil Corp: Summary of Financials

Income Statement - Annual
Revenues Cost of products sold Gross profit SG&A DD&A Other operating expenses Operating Income Net interest income / (expense) Other Pretax income Taxes Tax rate (%) Reported net income Non-recurring items, disc ops Adjusted net income Average diluted shares outstanding EPS EPS growth rate (%) Dividend per share EBITDA Production (kboepd) WTI crude price ($/bbl) Henry Hub natural gas price ($/mcf)

383,221 197,959 185,262 14,683 14,760 102,601 53,218 (154) (105) 52,959 21,561 40.7% 30,460 30,460 4,897 6.22 55.3% 1.74 67,978 4,447 79.50 4.40 8,455 50,529 58,984 199,548 43,978 302,510 466,118 254,020 212,098 14,683 16,801 109,110 71,504 (421) (311) 70,772 30,078 42.5% 40,694 40,694 4,877 8.34 1.85 88,305 4,564 95.06 4.03 8,455 50,529 58,984 214,292 43,978 317,254 505,184 283,687 221,497 14,683 17,344 114,306 75,164 (502) (371) 74,292 31,574 42.5% 42,718 42,718 4,749 8.99 1.88 92,508 4,538 107.38 4.10 20,894 50,529 71,423 229,494 43,978 344,894 547,276 306,065 241,210 14,683 17,167 118,861 90,500 (261) (193) 90,046 38,270 42.5% 51,776 51,776 4,749 10.90 1.97 107,667 4,543 118.00 4.75 48,087 50,529 98,616 244,874 43,978 387,468
Segment-level earnings - Quarterly

E&P R&M Chemicals Other Segment-level earnings
1Q11A 2Q11A 3Q11A 4Q11E

8,675A 8,541A 8,394A 1,099A 1,356A 1,579A 1,516A 1,321A 1,003A 0A 0A 0A 11,290A 11,218A 10,976A 8,547 (63) 1,250 0 9,734
Corporate & other Taxes Operating earnings Reported Earning Average diluted shares outstanding Operating EPS EPS growth rate (%) Dividend per share Production (kboepd) production growth (y/y)
(640)A (538)A (646)A 10,650A 10,680A 10,330A 10,650A 10,680A 10,330A 2.14A 61.1%A 0.44A 4,820A 10.5%A 2.17A 36.0%A 0.47A 2.13A 47.7%A 0.47A
(700) 9,034 9,034 1.89 2.8% 0.47 4,759 (4.2%)
4,396A 4,282A 10.0%A (3.8%)A
WTI crude price ($/bbl) Henry Hub natural gas price ($/mcf)
94.24A 102.57A 4.20A 4.38A
89.59A 4.06A
93.82 3.49
Balance Sheet and Cash Flow Data

Cash and cash equivalents Other current assets Total current assets Net PP&E Other assets Total assets Total debt Total liabilities Minority interests Preferred stock Shareholders' equity Net Income DD&A Deferred taxes Other Cash earnings Change in working capital Cash flow from operations Capex Dividends Share buybacks (net) Change in debt Change in preferred stock Other uses of cash Change in cash Free cash flow
Ratio Analysis
Valuation P/E (adjusted) P/CF Enterprise value/EBITDA EV/DACF Ratios Net debt/equity Net debt/capital Net coverage ratio ROE ROCE Yield and cash returns CFPS CF yield FCF yield Dividend yield Dividend payout ratio Buyback yield Total cash returns (%)

13.7 8.7 5.4 7.6 10.2 7.1 4.1 6.3 9.5 6.6 3.9 5.7 7.8 5.8 3.4 4.6
15,014 17,358 14,537 13,836 155,671 158,918 157,044 157,491 5,840 5,840 5,840 5,840 146,839 158,336 187,850 229,977 30,460 40,694 42,718 51,776 14,760 16,801 17,344 17,167 (1,135) 902 947 1,148 (145) 0 0 68,943 43,940 58,397 61,009 70,091 3,845 0 0 0 47,785 58,397 61,009 70,091 (26,871) (31,545) (32,546) (32,547) (8,498) (9,022) (8,929) (9,375) (12,050) (19,900) (4,000) 0 (6,210) 2,344 (2,821) (701) 2,976 (275) (275) (9,650) (2,868) 0 12,439 27,193 23,890 26,577 28,188 37,269
31.6% 23.0% 3.6 20.7% 17.9% 9.76 12.1% 4.3% 2.1% 28.0% (3.1%) 5.7%
30.8% 22.6% 4.3 25.7% 21.9% 11.97 16.2% 4.9% 2.2% 22.2% (5.0%) 8.1%
17.8% 13.8% 4.3 22.7% 21.4% 12.85 17.4% 5.5% 2.2% 20.9% (1.0%) 3.6%
2.4% 2.0% 5.3 22.5% 24.5% 14.76 20.0% 7.9% 2.3% 18.1% 0.0% 2.6%
Mkt Cap (current) () Enterprise Value (current)

Note: $ in millions (except per-share data).Fiscal year ends Dec
231
Gazprom: Summary of Financials

Profit and Loss Statement Cash flow statement $ in millions, year end Dec FY10 FY11E FY12E FY13E FY14E $ in millions, year end Dec Revenues 118,449 153,200 153,805 140,273 144,393 EBIT % change Y/Y 25.3% 29.3% 0.4% -8.8% 2.9% Depreciation & amortisation Gross Margin (%) 48.8% 45.8% 46.5% 43.1% 41.3% Change in working capital/Other EBITDA 44,529 53,886 56,272 44,518 43,156 Taxes % change Y/Y 25.0% 21.0% 4.4% -20.9% -3.1% Cash flow from operations EBITDA Margin 37.6% 35.2% 36.6% 31.7% 29.9% EBIT 36,503 43,301 41,452 28,418 25,554 Capex % change Y/Y 27.5% 18.6% -4.3% -31.4% -10.1% Disposal/(Purchase)/Other EBIT Margin 30.8% 28.3% 27.0% 20.3% 17.7% Net Interest Net Interest (596) (473) (225) (103) (265) Free cash flow Earnings before tax 39,128 46,669 47,211 32,881 29,953 % change Y/Y 18.5% 19.3% 1.2% -30.3% -8.9% Equity raised/repaid Tax (7,873) (8,989) (9,435) (6,811) (6,233) Debt Raised/repaid as a % of EBT 21.6% 20.8% 22.8% 24.0% 24.4% Other Net Income (Reported) 30,284 36,552 36,549 25,263 23,013 Dividends paid % change Y/Y 13.6% 20.7% -0.0% -30.9% -8.9% Beginning cash Shares Outstanding 22,915.31 22,915.31 22,915.31 22,915.31 22,915.31 Ending cash EPS (reported) 1.32 1.60 1.59 1.10 1.00 DPS % change Y/Y 13.6% 20.7% (0.0%) (30.9%) (8.9%) Balance sheet Ratio Analysis $ in millions, year end Dec FY10 FY11E FY12E FY13E FY14E $ in millions, year end Dec Cash and cash equivalents 14,434 18,139 16,988 4,099 (9,830) EBITDA margin Accounts receivable 24,819 32,323 32,570 29,801 30,725 Operating margin Inventories 10,667 14,761 14,711 13,258 13,672 Net profit margin Others 11,182 14,462 14,565 13,336 13,745 SG&A/Sales Current assets 61,103 79,686 78,835 60,494 48,312 Sales per share growth LT investments 36,890 72,612 53,264 51,222 50,645 EPS growth Net fixed assets 179,665 200,518 208,502 227,879 242,366 Total assets 302,453 356,835 382,120 389,465 398,139 ROE ROCE Liabilities ST loans 6,256 11,269 13,954 12,654 8,599 Production (mboe/day) Payables 26,860 35,584 34,767 35,014 37,375 Production oil (mbpd) Others 0 1,568 1,467 1,268 1,309 Production gas (mboe/day) Total current liabilities 33,116 48,421 50,188 48,936 47,283 Refining throughput (mbpd) Long term debt 36,821 38,252 23,975 6,333 (7,298) Other liabilities 18,469 18,622 18,674 18,865 19,099 Interest coverage (x) Total liabilities 88,405 105,296 92,837 74,134 59,083 Net debt to equity Shareholders' equity 204,662 240,741 277,290 302,553 325,566 Net debt BVPS 9 11 12 13 14 Net debt/EBITDA (ny) Source: Company reports and J.P. Morgan estimates. FY10 36,503 8,025 11,425 (7,873) 48,081 FY11E 43,301 10,585 2,010 (8,989) 46,907 FY12E 41,452 14,821 4,440 (9,435) 51,278 FY13E FY14E 28,418 25,554 16,099 17,603 10,280 6,048 (6,811) (6,233) 47,987 42,971
(34,333) (41,688) (33,989) (34,710) (32,889) (252) (4,910) (5,038) (5,384) (5,040) (596) (473) (225) (103) (265) 12,899 (164) 12,025 7,790 4,777 (15) 0 -4,063 6,463 (1,815) (762) (1,783) (2,101) 8,224 14,515 14,515 18,139 0.09 0.15 0 -7,352 (2,479) (3,457) 18,139 16,988 0.16 0 0 -15,196 -14,079 (1,903) (1,744) (3,762) (3,003) 16,988 4,099 4,099 -9,830 0.13 0.11
FY10 FY11E FY12E FY13E FY14E 37.6% 35.2% 36.6% 31.7% 29.9% 30.8% 28.3% 27.0% 20.3% 17.7% 25.6% 23.9% 23.8% 18.0% 15.9% 11.3% 10.6% 9.9% 11.3% 11.4% 13.9% 13.6% 14.8% 14.6% 9,459 1,232 8,227 758 12.7% 20.7% 15.2% 15.8% 9,650 1,256 8,394 830 12.4% 13.9% (0.0%) (30.9%) 13.2% 15.4% 9,431 1,260 8,171 839 8.3% 10.6% 9,493 1,306 8,187 781 13.9% (8.9%) 7.1% 9.5% 9,582 1,304 8,279 781
61.2 91.6 184.2 276.1 96.3 13.4% 12.5% 7.2% 4.7% 3.3% 28,643 31,382 20,941 14,887 11,131 0.5 0.6 0.5 0.3 0.2
232
Novatek: Summary of Financials

Profit and Loss Statement $ in millions, year end Dec Revenues % change Y/Y Gross Margin (%) EBITDA % change Y/Y EBITDA Margin EBIT % change Y/Y EBIT Margin Net Interest Earnings before tax % change Y/Y Tax as a % of EBT Net Income (Reported) % change Y/Y Shares Outstanding EPS (reported) % change Y/Y Balance sheet $ in millions, year end Dec Cash and cash equivalents Accounts receivable Inventories Others Current assets LT investments Net fixed assets Total assets Cash flow statement FY10 FY11E FY12E FY13E FY14E $ in millions, year end Dec 3,853 5,539 6,515 7,246 8,487 EBIT 36.0% 43.7% 17.6% 11.2% 17.1% Depreciation & amortisation 55.0% 56.5% 52.9% 49.8% 52.1% Change in working capital/Other 1,872 2,814 3,073 3,268 4,066 Taxes 51.9% 50.4% 9.2% 6.3% 24.4% Cash flow from operations 48.6% 50.8% 47.2% 45.1% 47.9% 1,654 2,515 2,730 2,874 3,613 Capex 56.6% 52.0% 8.6% 5.3% 25.7% Disposal/(Purchase)/Other 42.9% 45.4% 41.9% 39.7% 42.6% Net Interest 39 (94) 6 11 40 Free cash flow 1,682 2,305 2,678 2,827 3,596 64.3% 37.0% 16.2% 5.6% 27.2% Equity raised/repaid (356) (484) (547) (577) (731) Debt Raised/repaid 21.2% 21.0% 20.4% 20.4% 20.3% Other 1,335 1,809 2,117 2,236 2,847 Dividends paid 62.6% 35.6% 17.0% 5.6% 27.3% Beginning cash 303.63 303.63 303.63 303.63 303.63 Ending cash 4.40 5.96 6.97 7.36 9.38 DPS 62.6% 35.6% 17.0% 5.6% 27.3% Ratio Analysis FY10 FY11E FY12E FY13E FY14E $ in millions, year end Dec 335 976 493 1,589 3,534 EBITDA margin 284 408 480 534 625 Operating margin 61 88 103 115 135 Net profit margin 288 414 486 541 634 SG&A/Sales 968 1,885 1,563 2,779 4,927 Sales per share growth 2,293 2,200 2,200 2,200 2,200 EPS growth 6,077 6,738 8,089 8,852 9,188 9,339 10,823 11,851 13,831 16,315 ROE ROCE 932 1,565 223 2,720 879 422 4,021 7,708 28 604 604 Production (mboe/day) 1,807 2,015 Production oil (mbpd) 224 256 Production gas (mboe/day) 2,635 2,874 Refining throughput (mbpd) 1,207 1,207 422 422 Interest coverage (x) 4,264 4,503 Net debt to equity 9,308 11,413 Net debt 33 40 Net debt/EBITDA (ny) FY10 FY11E FY12E FY13E FY14E 1,654 2,515 2,730 2,874 3,613 218 300 343 394 453 (139) 124 177 125 39 (356) (484) (547) (577) (731) 1,377 2,454 2,703 2,816 3,374 (2,267) (1,851) (1,697) (1,159) 39 (94) 0 0 39 (94) 6 11 (811) 416 1,012 1,668 0 1,116 (10) (323) 347 337 0.13 0 431 0 (463) 337 976 0.17 0 -985 0 (573) 976 493 0.20 0 0 0 (636) 493 1,589 0.22 (791) 0 40 2,623 0 0 0 (742) 1,589 3,534 0.27
FY10 FY11E FY12E FY13E FY14E 48.6% 50.8% 47.2% 45.1% 47.9% 42.9% 45.4% 41.9% 39.7% 42.6% 34.6% 32.7% 32.5% 30.9% 33.5% 6.4% 5.7% 5.8% 4.7% 4.2% 36.0% 62.6% 27.7% 17.0% 751 84 667 (42.0) 36.9% 2,030 0.7 43.7% 35.6% 29.4% 18.8% 993 94 805 95 17.6% 17.0% 27.5% 20.7% 1,061 100 862 99 11.2% 5.6% 24.0% 18.9% 1,127 107 922 98 17.1% 27.3% 24.9% 20.4% 1,199 114 987 98
Liabilities ST loans 824 395 Payables 933 1,250 Others 125 203 Total current liabilities 1,057 1,848 Long term debt 1,542 2,402 Other liabilities 422 422 Total liabilities 3,020 4,672 Shareholders' equity 4,818 6,164 BVPS 18 23 Source: Company reports and J.P. Morgan estimates.
26.8 (458.2) (251.0) (89.7) 26.6% 15.7% 2.2% -14.2% 1,821 1,318 222 -1,723 0.6 0.4 0.1 (0.4)
233
Inpex Corporation: Summary of Financials

Income Statement in millions, year end Mar Revenues % change Y/Y EBITDA % change Y/Y EBIT % change Y/Y EBIT Margin Net Interest Earnings before tax % change Y/Y Tax as % of EBT Net income (reported) % change Y/Y Shares outstanding EPS (reported) % change Y/Y FY10 840,427 (21.9%) 554,434 -26.9% 462 NM 54.9% 3,079 442,027 -28.3% -325,126 73.6% 107 -26.1% 2 53,360 (25.7%) FY11 943,080 12.2% 693,171 25.0% 530 14.8% 56.2% -561 508,587 15.1% -368,696 72.5% 129 20.0% 4 44,526 (16.6%) FY12E 1,141,900 21.1% 826,866 19.3% 666 25.7% 58.3% -260 668,372 31.4% -498,072 74.5% 153 19.1% 4 44,097 (1.0%) FY13E 1,027,300 (10.0%) 711,879 -13.9% 570 NM 55.5% 1,373 573,655 -14.2% -423,355 73.8% 136 -11.1% 4 40,443 (8.3%) FY14E 1,029,600 0.2% 692,753 -2.7% 547 NM 53.1% 2,834 551,916 -3.8% -410,516 74.4% 127 -6.5% 4 38,008 (6.0%) Cash flow statement in millions, year end Mar EBIT Depr. & amortization Change in working capital Taxes Cash flow from operations Capex Disposal/(purchase) Net Interest Other Free cash flow Equity raised/(repaid) Debt raised/(repaid) Other Dividends paid Beginning cash Ending cash DPS Ratio Analysis in millions, year end Mar EBITDA margin Operating margin Net margin FY10 FY11 FY12E FY13E FY14E 462 530 666 570 547 92,766 163,429 160,816 142,179 146,253 -325126 -368696 -498072 -423355 -410516 241,373 274,093 335,808 307,758 298,828 -274,000 -285,000 -249,750 -232,750 -202,750 3,079 -561 -260 1,373 2,834 22,188 -546,563 25,000 0 0 99,081 33,195 0 0 0 -17,184 504,434 0 0 0 -12,960 -18,270 -21,923 -21,923 -21,923 162,845 216,395 182,025 271,161 324,247 221,343 178,284 271,161 324,247 398,402 5,500 5,000 6,000 6,000 6,000 FY10 66.0% 54.9% 12.8% FY11 73.5% 56.2% 13.7% FY12E 72.4% 58.3% 13.4% FY13E 69.3% 55.5% 13.3% FY14E 67.3% 53.1% 12.4%
Balance sheet in millions, year end Mar Cash and cash equivalents Accounts receivable Inventories Others Current assets
FY10 216,395 131,525 12,322 19,952 492,855
FY11 182,025 152,423 12,137 9,077 492,932
FY12E 271,161 184,557 13,534 9,100 615,621
FY13E 324,247 166,035 12,893 9,100 649,545
FY14E 398,402 166,407 13,796 9,100 724,975
LT investments 923,624 1,558,474 1,535,567 1,589,434 1,636,446 Net fixed assets 358,094 379,863 357,413 328,415 301,914 Total Assets 2,013,778 2,680,379 2,841,041 2,963,785 3,091,207 Liabilities Short-term loans 4,872 4,441 4,441 4,441 4,441 Payables 97,812 106,750 119,034 113,401 121,345 Others 125,221 143,537 143,537 143,537 143,537 Total current liabilities 227,905 254,728 267,012 261,379 269,323 Long-term debt 235,511 268,706 268,706 268,706 268,706 Other liabilities 59,759 59,562 59,562 59,562 59,562 Total Liabilities 523,175 582,996 595,280 589,647 597,591 Shareholders' equity 1,379,975 2,012,281 2,143,658 2,258,036 2,363,513 BVPS 585,129.39 550,405.09 586,371.92 617,658.51 646,510.60 Source: Company reports and J.P. Morgan estimates.
Sales per share growth Sales growth Net profit growth EPS growth Interest coverage (x) Net debt to equity Sales/assets Assets/equity ROE ROCE
(21.9%) (27.6%) 21.1% (10.0%) (21.9%) 12.2% 21.1% (10.0%) -26.1% 20.0% 19.1% -11.1% (25.7%) (16.6%) (1.0%) (8.3%) - 1,235.38 3,180.54 -6.4% 0.44 1.41 8.0% 30.0% -2.3% 0.40 1.50 7.6% 27.1% -6.3% 0.41 1.67 7.4% 28.3% -8.3% 0.35 1.31 6.2% 23.0%
0.2% 0.2% -6.5% (6.0%) -11.1% 0.34 1.31 5.5% 21.2%
234
CNOOC: Summary of Financials

Income Statement Rmb in millions, year end Dec Revenues % change Y/Y EBITDA % change Y/Y EBIT % change Y/Y EBIT Margin Net Interest Earnings before tax % change Y/Y Tax as % of EBT Net income (reported) % change Y/Y Shares outstanding EPS (reported) % change Y/Y Cash flow statement FY09 FY10 FY11E FY12E FY13E Rmb in millions, year end Dec 105,195 183,053 231,773 196,329 188,782 EBIT (17%) 74% 27% (15%) (4%) Depr. & amortization 56,026 99,092 112,203 94,834 90,419 Change in working capital (11%) 77% 13% (15%) (5%) Taxes 40,083 71,405 85,105 66,693 61,696 Cash flow from operations (26%) 78% 19% (22%) (7%) 38% 39% 37% 34% 33% Capex 104 -518 -518 -583 -565 Disposal/(purchase) 40,580 72,650 86,685 68,296 63,433 Net Interest (30%) 79% 19% (21%) (7%) Other -11,336 -18,240 -21,764 -17,147 -15,926 Free cash flow 27.9% 25.1% 25.1% 25.1% 25.1% 29,244 54,410 64,921 51,149 47,507 Equity raised/(repaid) (34%) 86% 19% (21%) (7%) Debt raised/(repaid) 44,669 44,669 44,669 44,669 44,669 Other 0.65 1.22 1.45 1.15 1.06 Dividends paid (34%) 86% 19% (21%) (7%) Beginning cash Ending cash DPS Balance sheet Ratio Analysis Rmb in millions, year end Dec FY09 FY10 FY11E FY12E FY13E Rmb in millions, year end Dec Cash and cash equivalents 52,067 70,487 65,730 67,046 65,154 EBITDA margin Accounts receivable 13,116 20,235 25,620 21,702 20,868 Operating margin Inventories 3,146 4,076 5,161 4,372 4,204 Net margin Others 2,542 5,855 5,855 5,855 5,855 Current assets 70,871 100,653 102,367 98,975 96,081 Sales per share growth LT investments 4,847 10,485 10,780 11,164 11,663 Sales growth Net fixed assets 166,550 215,353 245,075 264,294 286,156 Net profit growth Total Assets 242,268 326,490 358,222 374,433 393,900 EPS growth Liabilities Interest coverage (x) Short-term loans 122 21,631 21,631 21,631 21,631 Payables 15,608 18,550 26,873 23,627 23,306 Net debt to equity Others 30,920 47,779 64,250 57,825 57,190 Sales/assets Total current liabilities 31,042 69,410 85,881 79,456 78,820 Assets/equity Long-term debt 18,570 11,716 11,716 11,716 11,716 ROE Other liabilities 18,721 29,149 29,149 29,149 29,149 ROCE Total Liabilities 68,333 110,275 126,746 120,321 119,685 Shareholders' equity 173,936 215,766 231,027 253,663 273,765 BVPS 3.89 4.83 5.17 5.68 6.13 Source: Company reports and J.P. Morgan estimates. FY09 40,083 15,943 1,706 -8761 49,480 FY10 FY11E 71,405 85,105 27,687 27,098 -33 10,000 -18240 -21764 81,109 100,729 FY12E 66,693 28,142 -1,718 -17147 76,194 FY13E 61,696 28,722 367 -15926 75,102
-42,417 -31,947 104 -518 7,063 49,162
-49,748 -47,361 -50,584 -518 -583 -565 50,981 28,834 24,518
0 0 0 0 0 4,812 13,575 -4,304 -4,304 -4,304 -15,693 -14,390 -21,737 -23,214 -22,107 19,762 22,615 39,571 34,815 36,131 22,676 41,024 34,815 36,131 34,238 0.35 0.39 0.58 0.46 0.53 FY09 53% 38% 28% FY10 54% 39% 30% FY11E 48% 37% 28% FY12E 48% 34% 26% FY13E 48% 33% 25%
(17%) (17%) (34%) (34%) (19%) 0.47 1.25 18% 22%
74% 74% 86% 86% 191.23 (17%) 0.64 1.28 28% 32%
27% 27% 19% 19% 216.53 (14%) 0.68 1.27 29% 33%
(15%) (15%) (21%) (21%) 162.63 (13%) 0.54 1.48 21% 24%
(4%) (4%) (7%) (7%) 159.99 (12%) 0.49 1.44 18% 21%
235
Sinopec Corp - H: Summary of Financials

Income Statement Rmb in millions, year end Dec Revenues % change Y/Y EBITDA % change Y/Y EBIT % change Y/Y EBIT Margin Net Interest Earnings before tax % change Y/Y Tax as % of EBT Net income (reported) % change Y/Y Shares outstanding EPS (reported) % change Y/Y Cash flow statement FY09 FY10 FY11E FY12E FY13E Rmb in millions, year end Dec 1,345,052 1,913,182 2,617,829 2,384,441 2,383,843 EBIT (10%) 42% 37% (9%) (0%) Depr. & amortization 134,918 164,227 175,864 184,076 184,849 Change in working capital 86% 22% 7% 5% 0% Taxes 84,431 105,004 113,936 119,089 117,781 Cash flow from operations 221% 24% 9% 5% (1%) 3% 3% 2% 3% 2% Capex -7,105 -7,312 -10,466 -10,614 -8,782 Disposal/(purchase) 80,568 103,693 103,443 113,091 113,673 Net Interest 264% 29% (0%) 9% 1% Other -16,084 -25,689 -25,627 -28,017 -28,161 Free cash flow 20.0% 24.8% 24.8% 24.8% 24.8% 61,760 71,800 78,130 80,016 80,360 Equity raised/(repaid) 117% 16% 9% 2% 0% Debt raised/(repaid) 86,702 86,702 86,702 86,702 86,702 Other 0.71 0.83 0.90 0.92 0.93 Dividends paid 117% 16% 9% 2% 0% Beginning cash Ending cash DPS Balance sheet Ratio Analysis Rmb in millions, year end Dec FY09 FY10 FY11E FY12E FY13E Rmb in millions, year end Dec Cash and cash equivalents 8,750 17,008 9,243 25,171 94,657 EBITDA margin Accounts receivable 26,592 43,093 58,965 53,708 53,694 Operating margin Inventories 141,611 156,546 214,204 195,107 195,058 Net margin Others 23,091 42,450 58,085 52,906 52,893 Current assets 201,280 260,229 341,628 328,024 397,434 Sales per share growth LT investments - Sales growth Net fixed assets 584,968 630,299 682,021 730,686 726,125 Net profit growth Total Assets 877,842 995,154 1,128,248 1,167,924 1,237,448 EPS growth Liabilities Interest coverage (x) Short-term loans 58,898 17,019 17,019 17,019 17,019 Payables 97,749 132,528 165,007 151,056 150,774 Net debt to equity Others 156,772 186,859 224,472 208,316 207,989 Sales/assets Total current liabilities 313,419 336,406 406,498 376,391 375,782 Assets/equity Long-term debt 108,828 136,465 141,465 146,465 151,465 ROE Other liabilities 56,742 71,915 71,915 71,915 71,915 ROCE Total Liabilities 478,989 544,786 619,878 594,771 599,162 Shareholders' equity 375,661 419,047 477,364 537,088 597,070 BVPS 4.33 4.83 5.51 6.19 6.89 Source: Company reports and J.P. Morgan estimates. FY09 84,431 50,487 15,571 -4027 152,075 FY10 FY11E FY12E FY13E 105,004 113,936 119,089 117,781 59,223 61,929 64,987 67,069 -1,109 -19,072 -574 -533 -25689 -25627 -28017 -28161 170,333 128,368 152,923 155,827
-112,875 -97,637 -121,320 -121,703 -70,963 594 16,126 0 0 0 -7,105 -7,312 -10,466 -10,614 -8,782 39,200 72,696 7,048 31,220 84,864 -4,116 11,687 5,000 -13,559 -16,391 -19,813 7,008 8,728 17,008 8,750 17,004 9,243 0.18 0.21 0.23 FY09 5% 3% 2% FY10 4% 3% 2% FY11E 3% 2% 1% 5,000 5,000 -20,292 -20,379 9,243 25,171 25,171 94,657 0.23 0.24 FY12E 4% 3% 2% FY13E 4% 2% 2%
(10%) (10%) 117% 117% 18.99 42% 3.25 2.22 18% 16%
42% 42% 16% 16% 22.46 32% 4.09 2.23 18% 19%
37% 37% 9% 9% 16.80 31% 4.93 2.36 17% 19%
(9%) (9%) 2% 2% 17.34 26% 4.15 2.17 16% 18%
(0%) (0%) 0% 0% 21.05 12% 3.96 2.07 14% 16%
236
PetroChina: Summary of Financials

Income Statement Rmb in millions, year end Dec Revenues % change Y/Y EBITDA % change Y/Y EBIT % change Y/Y EBIT Margin Net Interest Earnings before tax % change Y/Y Tax as % of EBT Net income (reported) % change Y/Y Shares outstanding EPS (reported) % change Y/Y Cash flow statement FY09 FY10 FY11E FY12E FY13E Rmb in millions, year end Dec 1,019,275 1,465,415 1,418,941 1,336,341 1,342,447 EBIT (5%) 44% (3%) (6%) 0% Depr. & amortization 235,703 300,986 318,664 334,378 341,866 Change in working capital (7%) 28% 6% 5% 2% Taxes 143,444 187,777 189,234 186,780 181,129 Cash flow from operations (10%) 31% 1% (1%) (3%) 14% 13% 13% 14% 13% Capex -3,813 -4,338 -8,621 -9,703 -6,772 Disposal/(purchase) 140,032 189,305 189,941 186,930 184,761 Net Interest (14%) 35% 0% (2%) (1%) Other -33,473 -38,513 -39,888 -39,255 -38,800 Free cash flow 23.9% 20.3% 21.0% 21.0% 21.0% 103,387 139,992 135,037 136,387 135,422 Equity raised/(repaid) (10%) 35% (4%) 1% (1%) Debt raised/(repaid) 183,021 183,021 183,021 183,021 183,021 Other 0.56 0.76 0.74 0.75 0.74 Dividends paid (10%) 35% (4%) 1% (1%) Beginning cash Ending cash DPS Balance sheet Ratio Analysis Rmb in millions, year end Dec FY09 FY10 FY11E FY12E FY13E Rmb in millions, year end Dec Cash and cash equivalents 86,925 45,709 28,394 12,160 24,741 EBITDA margin Accounts receivable 33,053 50,960 49,344 46,471 46,684 Operating margin Inventories 114,781 134,888 130,610 123,007 123,569 Net margin Others 59,624 54,835 53,192 50,270 50,486 Current assets 294,383 286,392 261,540 231,909 245,480 Sales per share growth LT investments - Sales growth Net fixed assets 1,075,467 1,238,599 1,429,169 1,569,871 1,622,448 Net profit growth Total Assets 1,450,288 1,656,487 1,822,205 1,933,276 1,999,423 EPS growth Liabilities Interest coverage (x) Short-term loans 148,851 102,268 102,268 102,268 82,268 Payables 204,739 270,191 261,622 246,392 247,518 Net debt to equity Others 34,963 57,277 57,277 57,277 57,277 Sales/assets Total current liabilities 388,553 429,736 421,167 405,937 387,063 Assets/equity Long-term debt 85,471 131,352 216,352 256,352 256,352 ROE Other liabilities 68,563 85,270 85,270 85,270 85,270 ROCE Total Liabilities 542,587 646,358 722,789 747,559 728,685 Shareholders' equity 847,223 938,926 1,013,196 1,088,209 1,162,691 BVPS 4.63 5.13 5.54 5.95 6.35 Source: Company reports and J.P. Morgan estimates. FY09 FY10 FY11E FY12E FY13E 143,444 187,777 189,234 186,780 181,129 92,259 113,209 129,430 147,598 160,737 37,833 31,741 -1,031 -1,833 136 -16412 -26169 -39888 -39255 -38800 258,159 306,348 278,452 293,440 306,834 -277,518 -265,571 -320,000 -288,300 -213,313 -3,813 -4,338 -8,621 -9,703 -6,772 -19,359 40,777 -41,548 5,140 93,521 0 0 0 0 0 77,401 52,656 85,000 40,000 0 49,037 -35,320 0 0 -20,000 -50,092 -53,198 -60,767 -61,374 -60,940 33,150 86,925 45,709 28,394 12,160 86,925 45,709 28,394 12,160 24,741 0.27 0.29 0.33 0.34 0.33 FY09 23% 14% 10% FY10 21% 13% 10% FY11E 22% 13% 10% FY12E 25% 14% 10% FY13E 25% 13% 10%
(5%) (5%) (10%) (10%) 61.82 17% 0.77 1.56 13% 14%
44% 44% 35% 35% 69.38 20% 0.94 1.66 16% 17%
(3%) (3%) (4%) (4%) 36.96 29% 0.82 1.72 14% 15%
(6%) (6%) 1% 1% 34.46 32% 0.71 1.78 13% 13%
0% 0% (1%) (1%) 50.48 27% 0.68 1.72 12% 12%
237
Petronet LNG Ltd.: Summary of Financials

Income Statement Rs in millions, year end Mar Revenues % change Y/Y Gross Margin EBITDA % change Y/Y EBITDA Margin EBIT % change Y/Y EBIT Margin Net Interest Earnings before tax % change Y/Y Tax as % of EBT Net income (reported) % change Y/Y Shares outstanding EPS (reported) % change Y/Y Balance sheet Rs in millions, year end Mar Cash and cash equivalents Accounts receivable Inventories Others Current assets Cash flow statement FY10 FY11 FY12E FY13E FY14E Rs in millions, year end Mar 106,029 131,057 209,410 273,089 336,878 EBIT 25.8% 23.6% 59.8% 30.4% 23.4% Depr. & amortization 8.9% 10.0% 9.1% 8.6% 8.4% Change in working capital 8,465 12,163 17,227 21,338 26,131 Taxes -6.1% 43.7% 41.6% 23.9% 22.5% Others 8.0% 9.3% 8.2% 7.8% 7.8% Cash flow from operations 6,856 10,316 15,379 17,519 22,313 NM 50.5% 49.1% 13.9% 27.4% Capex 6.5% 7.9% 7.3% 6.4% 6.6% Disposal/(purchase) -1,612 -1,649 -2,160 -2,605 -3,938 Free cash flow 5,995 9,064 13,953 15,721 19,263 -22.6% 51.2% 53.9% 12.7% 22.5% Equity raised/(repaid) -1,950 -2,868 -4,688 -5,282 -6,472 Debt raised/(repaid) 32.5% 31.6% 33.6% 33.6% 33.6% Other 4,045 6,196 9,264 10,439 12,791 Dividends paid -22.0% 53.2% 49.5% 12.7% 22.5% Beginning cash 750 750 750 750 750 Ending cash 5.39 8.26 12.35 13.92 17.05 DPS (22.0%) 53.2% 49.5% 12.7% 22.5% Ratio Analysis FY10 FY11 FY12E FY13E FY14E Rs in millions, year end Mar 3,405 1,540 1,255 4,758 5,849 EBITDA margin 5,035 8,472 10,327 13,467 16,613 Operating margin 2,223 2,480 5,164 9,352 13,844 Net margin 1,554 1,383 1,450 1,520 1,593 12,216 13,875 18,195 29,098 37,900 Sales per share growth LT investments - Sales growth Net fixed assets 42,012 49,053 64,246 71,928 74,609 Net profit growth Total Assets 50,609 62,443 74,766 90,524 98,177 EPS growth Liabilities Interest coverage (x) Short-term loans - Net debt to total capital Payables - Net debt to equity Others - Sales/assets Total current liabilities 9,006 12,134 20,489 24,596 29,837 Assets/equity Long-term debt 24,998 32,161 37,500 45,000 42,500 ROE Other liabilities 3,262 3,480 4,261 5,142 6,220 ROCE Total Liabilities 28,260 35,641 41,761 50,142 48,720 Shareholders' equity 22,349 26,802 33,005 40,383 49,456 BVPS 29.80 35.74 44.01 53.84 65.94 Source: Company reports and J.P. Morgan estimates. FY10 FY11 FY12E FY13E FY14E 6,856 10,316 15,379 17,519 22,313 1,609 1,847 1,848 3,819 3,819 2,791 -395 3,749 -3,292 -2,470 -1410 -2650 -3907 -4402 -5394 2,391 2,858 3,483 3,713 3,938 8,985 7,866 19,126 11,846 15,218 -10,461 -8,887 -17,041 -11,500 -6,500 -1,476 -1,022 2,085 346 8,718 -0 -0 2,181 7,163 -2,391 -2,858 -1,606 -1,939 6,578 3,405 3,405 1,540 1.75 2.00 5,339 -3,483 1,540 1,255 3.50 7,500 -2,500 -3,713 -3,938 1,255 4,758 4,758 5,849 3.50 4.25
FY10 8.0% 6.5% 3.8%
FY11 FY12E FY13E FY14E 9.3% 8.2% 7.8% 7.8% 7.9% 7.3% 6.4% 6.6% 4.7% 4.4% 3.8% 3.8%
25.8% 25.8% -22.0% (22.0%) 5.25 36.0% 72.5% 2.21 2.49 19.2% 15.2%
23.6% 23.6% 53.2% 53.2% 7.38 35.7% 70.8% 2.32 2.72 25.2% 19.4%
59.8% 59.8% 49.5% 49.5% 7.98 36.2% 71.0% 3.05 2.27 31.0% 23.8%
30.4% 30.4% 12.7% 12.7% 8.19 33.6% 64.8% 3.30 2.24 28.4% 22.5%
23.4% 23.4% 22.5% 22.5% 6.64 23.8% 42.8% 3.57 1.99 28.5% 25.2%
238
Origin Energy: Summary of Financials

A$ in millions, year end Jun Income Statement Total Revenue Revenue Growth Y/Y EBITDA Depreciation & Amortisation EBIT Net Interest Pre-Tax Profit Tax Minority Interests Preference Dividends NPAT before Abnormals NPAT after Abnormals Normalised NPAT # Shares Outstanding FY10 FY11 FY12E FY13E FY14E Balance Sheet 8,865.6 10,955.0 14,788.8 16,958.5 17,506.1 Cash & Bills 6.6% 23.6% 35.0% 14.7% 3.2% Debtors 1,304.0 1,782.0 2,399.5 2,635.5 2,736.8 Investments -408.6 -588.0 -632.3 -675.1 -677.0 Inventories 895.4 1,194.0 1,767.2 1,960.4 2,059.8 Other Current Assets -12.8 -143.0 -345.2 -359.5 -382.8 Current Assets 882.6 1,051.0 1,421.9 1,600.9 1,677.0 Receivables -232.0 -316.0 -455.0 -504.3 -528.3 Investments -66.0 -62.0 -80.4 -87.6 -103.0 Inventories 0.0 0.0 0.0 0.0 0.0 PP&E 584.6 673.0 886.5 1,009.0 1,045.7 Goodwill 612.0 186.0 886.5 1,009.0 1,045.7 Other Intangibles 584.6 673.0 886.5 1,009.0 1,045.7 Pension Fund Assets 878.5 1,061.8 1,102.3 1,136.2 1,136.2 Future Income Tax Benefits Other Non Current Assets Cash Flow Statement FY10 FY11 FY12E FY13E FY14E Non Current Assets EBIT 895.4 1,194.0 1,767.2 1,960.4 2,059.8 Total Assets Depreciation & Amortisation 408.6 588.0 632.3 675.1 677.0 Creditors Net Interest (Paid)/Recd -165.0 -308.0 -345.2 -359.5 -382.8 Current Borrowings Tax (Paid) -791.6 -274.0 -385.5 -479.7 -516.3 Current Lease Liabilities Inc/(Dec) in Provisions - Current Provisions (Inc)/Dec in Working Capital 0.0 - Other Current Liabilities Other Operating Items 561.6 201.0 208.3 314.1 358.0 Current Liabilities Operating Cash Flow 909.0 1,401.0 1,877.0 2,110.5 2,195.8 Non Current Creditors Gross Capex -3,440.0 -4,758.0 -2,805.7 -2,468.8 -2,435.0 Non Current Borrowings Sale of Fixed Assets 0.0 - Non Current Lease Liabilities Net Capex -3,440.0 -4,758.0 -2,805.7 -2,468.8 -2,435.0 Non Current Provisions Net Acquisitions -1.0 - Pension Fund Liabilities Other Investing Items 7.0 0.0 0.0 0.0 0.0 Deferred Income Tax Liability Investing Cash Flow -3,441.0 -4,758.0 -2,805.7 -2,468.8 -2,435.0 Other Non Current Liabilities Equity Issued 13.0 2,385.0 546.8 457.7 0.0 Non Current Liabilities Dividends Paid -409.0 -408.0 0.0 -152.6 -660.5 Total Liabilities Inc/(Dec) in Borrowings -143.0 1,597.0 0.0 0.0 0.0 Total Ordinary Equity Other Financing Items 0.0 -308.0 -345.2 -359.5 -382.8 Outside Equity Interests Financing Cash Flow -539.0 3,266.0 201.6 -54.3 -1,043.3 Other Equity Net Cash Flow -3,071.0 -91.0 -727.1 -412.6 -1,282.5 Total Equity Net Debt / (Net Debt + Equity) Per Share Data A$ FY10 FY11 FY12E FY13E FY14E Valuation Metrics Reported EPS 0.698 0.196 0.804 0.888 0.920 Reported P/E Normalised EPS 0.666 0.733 0.804 0.888 0.920 Normalised P/E DPS 0.50 0.50 0.52 0.55 0.58 Net Yield NTA 9.74 7.55 8.67 9.66 10.09 Price to Book EV/EBITDA Source: Company reports and J.P. Morgan estimates. FY10 823.0 1,381.0 177.0 657.0 3,038.0 0.0 5,395.0 9,168.0 2,599.0 197.0 88.0 1,349.0 18,796.0 21,834.0 1,205.0 113.0 161.0 405.0 1,884.0 65.0 3,373.0 360.0 0.0 901.0 3,813.0 8,512.0 10,396.0 10,249.0 1,189.0 11,438.0 18.9% FY10 19.3 20.2 3.7% 1.0 13.3 FY11 728.0 2,159.0 263.0 711.0 3,861.0 0.0 5,470.0 10,313.0 5,138.0 295.0 0.0 1,563.0 22,779.0 26,640.0 2,020.0 595.0 275.0 2,219.0 5,109.0 412.0 4,193.0 533.0 901.0 1,976.0 8,015.0 13,124.0 12,232.0 1,284.0 13,516.0 15.2% FY11 68.9 18.4 3.7% 1.0 9.6 FY12E 728.0 2,180.1 273.1 711.0 3,892.2 0.0 5,470.0 11,365.6 5,433.0 0.0 0.0 1,539.0 23,807.6 27,699.9 1,983.8 595.0 275.0 2,219.0 5,072.8 412.0 4,920.1 533.0 901.0 855.3 7,621.4 12,694.2 13,665.3 1,364.4 15,029.7 21.3% FY12E 16.8 16.8 3.8% 1.0 7.8 FY13E 728.0 2,195.5 284.4 711.0 3,918.9 0.0 5,470.0 12,288.1 5,433.0 0.0 0.0 1,539.0 24,730.1 28,649.0 1,989.7 595.0 275.0 2,219.0 5,078.7 412.0 5,332.7 533.0 901.0 -15.8 7,162.9 12,241.6 14,979.4 1,452.0 16,431.5 22.6% FY13E 15.2 15.2 4.1% 0.9 7.4 FY14E 728.0 2,202.9 289.4 711.0 3,931.3 0.0 5,470.0 14,046.1 5,433.0 0.0 0.0 1,539.0 26,488.1 30,419.4 1,989.3 595.0 275.0 2,219.0 5,078.3 412.0 6,615.2 533.0 901.0 -15.8 8,445.4 13,523.7 15,364.7 1,555.0 16,919.7 23.5% FY14E 14.7 14.7 4.3% 0.9 7.3
239
Oil Search Limited

Neutral Profit & Loss Statement
(US$ millions) Total revenue Production costs Royalties Corporate & other costs Total Costs EBITDAX Exploration write-off EBITDA Depreciation & amortisation EBIT Net Interest Expense Pre-Tax Profit Tax Significant items (after tax) Reported NPAT NPAT (pre-sig items) EBITDAX margin (%) Effective tax rate (%) EPS reported (Acps) EPS pre-sig items (Acps) DPS (UScps) Payout ratio (%) Franking (%) CY09A 512 (86) (8) (8) (103) 409 (76) 334 (105) 228 (3) 225 (113) 21 134 112 79.9% 50.0% 14.5 12.2 4 42% 0% CY10A 584 (87) (10) (11) (109) 475 (131) 344 (50) 294 (1) 293 (149) 41 186 144 81.4% 50.8% 15.3 11.9 4 36% 0% CY11E 689 (92) (12) (28) (132) 557 (78) 479 (49) 430 2 432 (230) 202 202 80.8% 53.2% 14.8 14.8 4 26% 0% CY12E 701 (94) (13) (23) (130) 571 (111) 460 (49) 411 5 416 (232) 184 184 81.4% 55.7% 13.8 13.8 4 29% 0% CY13E 717 (94) (14) (23) (131) 586 (95) 490 (47) 443 (2) 441 (241) 200 200 81.7% 54.7% 14.3 14.3 5 34% 0%
Y/E Dec Production

(million BOE) Kutubu Moran SE Gobe Gobe Main SE Mananda Hides GTE PNG LNG 6.6mtpa Nabrajah entitlement Egypt Area A East Ras Qatara Total Liquids production Gas production % liquids
M'cap: A$7439m
CY09A 3.9 2.5 0.4 0.1 0.2 1.1 8.1 7.2 0.9 89% CY10A 3.6 2.6 0.3 0.1 0.1 1.0 7.7 6.8 0.9 88%
Price: A$6.57
CY11E 2.9 2.2 0.2 0.0 0.0 1.1 6.5 5.6 1.0 85% CY12E 2.9 2.4 0.2 0.0 1.1 6.6 5.6 1.0 85% CY13E 2.8 2.3 0.1 0.0 1.1 6.3 5.4 1.0 85%
Key Commodity Price Assumptions

Aust dollar (US$) WTI Oil price US$/bbl WTI Oil price A$/bbl CY09A 0.792 61.8 78.0 65.2 81.6 CY10A 0.921 79.5 86.4 83.8 91.0 CY11E 1.033 95.1 92.0 118.5 114.7 CY12E 1.003 107.3 107.0 118.1 117.8 CY13E 1.040 118.0 113.5 126.1 121.3
Tapis Oil Price US$/bbl

Tapis Oil Price A$/bbl
Financial Ratios
PE reported (x) PE normalised (x) EV/EBITDAX (x) P/GCFPS (x) Dividend yield (%) ROE (%) ROIC (%) Gearing (ND/(ND+E), %) Interest cover CY09A 45.4 54.0 17.0 21.2 0.8% 4.3% 8.6% -50.5% 68.6 CY10A 42.8 55.1 17.0 19.8 0.7% 5.2% 5.8% -33.5% 355.8 CY11E 44.5 44.5 16.3 24.3 0.6% 6.7% 5.2% -98.7% (180.8) CY12E 47.8 47.8 15.4 27.2 0.6% 5.8% 3.3% -52.6% (86.8) CY13E 46.0 46.0 15.6 19.3 0.7% 5.9% 3.1% -13.5% 226.3
Cashflow Statement
(US$ millions) Net op cash flow Capex & Exploration Asset Sales Other investing cash flows Dividends Debt Repayment Debt Proceeds Equity funding Other financing cash flows Net cashflow GCFPS (cps) Free cashflow FCF/share (cps) CY09A 284 (470) 88 (50) 900 1 753 30.9 (185.6) (16.0) CY10A 398 (1,358) (0) (34) 931 38 (0) (24) 33.1 (959.7) (73.5) CY11E 368 (1,559) (0) (0) 848 6 (0) (337) 27.0 (1,190.6) (90.2) CY12E 322 (1,790) 959 (509) 24.2 (1,467.8) (110.4) CY13E 474 (1,231) 870 113 34.0 (757.0) (56.5)
NPV Valuation at 10% WACC

at Jun-11, LT US$90/bb l & 0.8US$/A$ Kutubu SE Gobe Gobe Main Moran Hides GTE SE Mananda LNG 6.6mtpa, 10tcf Corporate Exploration PNG LNG Train 3 (risked @50%) Mananda-5 development (risked @ 50%) Net (Debt)/Cash Group NPV Valuation prem/(disc) to share price A$m 779 19 3 480 66 0 7,663 (18) 253 1,146 130 (89) 10,432 A$ 0.59 0.01 0.00 0.36 0.05 0.00 5.80 (0.01) 0.19 0.87 0.10 (0.07) 7.90 20.2% % 9% 0% 0% 5% 1% 0% 85%
Balance Sheet
(US$ millions) CY09A CY10A Current assets 1,461 1,416 PP&E 714 2,383 Exploration & Evaluation 808 282 Other non current assets 94 207 Total assets 3,077 4,289 Total liabilities 484 1,490 Shareholder funds 2,593 2,798 Total debt 930 Cash 1,288 1,264 Net debt (1,288) (334) Operational working capital (36) (72) Ave diluted shares (m) 1,159 1,307 Source: J.P. Morgan Estimates and Company data CY11E 1,218 3,741 374 202 5,534 2,525 3,009 1,778 926 851 (147) 1,320 CY12E 731 5,307 437 202 6,678 3,484 3,193 2,737 418 2,319 (125) 1,330 CY13E 713 6,340 492 202 7,748 4,354 3,393 3,607 531 3,076 (256) 1,339
240
Overweight
Santos Limited
CY09A 2,181 68 2,249 (530) (117) (91) (61) (10) (87) (897) 1,352 (202) 1,150 (619) 531 (13) 518 (185) (78) 177 432 255 246 60.1% 35.7% 54.7 31.8 42 132% 100% CY10A 2,228 109 2,337 (540) (162) (95) (51) (22) (94) (964) 1,373 (129) 1,244 (600) 644 7 651 (224) (51) 124 500 376 376 58.7% 34.4% 59.1 44.4 37 83% 100% CY11E 2,527 83 2,611 (556) (250) (98) (52) 42 (100) (1,014) 1,597 (139) 1,458 (598) 859 34 893 (282) (108) 509 1,012 504 504 61.2% 31.6% 114.6 57.0 30 53% 100%
Y/E Dec
Shares: 932.5m
M'cap: A$11889m
Price: A$12.75
Profit & Loss Statement (A$ millions) Sales revenue Other revenue Total revenue Production costs Gas purchase costs Pipeline tariffs Royalties, excise Movt in stock SG&A operating expense Other Total Operating Costs EBITDAX Exploration write-off EBITDA Depreciation & amortisation EBIT Net Interest Expense Pre-Tax Profit Corporate Tax PRRT post tax Significant items (after tax) Reported NPAT NPAT (pre-sig items) NPAT (pre-sig, post prefs) EBITDAX margin (%) Effective tax rate (%) EPS reported post prefs (cps) EPS pre-sig post prefs (cps) DPS (cps) Payout ratio (%) Franking (%) Cashflow Statement (A$ millions) Net op cash flow Acquisitions Exploration & Evaluation Capex Asset Sales Other investing cash flows Dividends Debt Proceeds/(Repayment) Equity funding Other financing cash flows Net cashflow GCFPS (cps) Free cashflow FCF/share (cps) Balance Sheet (A$ millions) Current assets Exploration & Development Propert, Plant & Eqp. Other non current assets Total assets Total liabilities Shareholder funds Total debt Cash Net debt Operational working capital Ave diluted shares (m) Production by Product (million BOE) Gas Oil Condensate LPG LNG Total
CY12E 3,005 65 3,070 (557) (330) (77) (54) (101) (1,119) 1,951 (129) 1,821 (628) 1,193 1,193 (391) (184) 618 618 618 63.5% 32.8% 69.0 69.0 30 43% 100%
CY13E 3,119 66 3,185 (540) (196) (83) (54) (104) (976) 2,209 (99) 2,109 (639) 1,470 1,470 (466) (184) 820 820 820 69.3% 31.7% 90.9 90.9 30 33% 100%
Production Volumes CY09A (million BOE) Cooper 19.5 Surat/Denison (incl GLNG) 5.6 Amadeus 2.0 Otway 3.5 John Brookes/East Spar 7.9 Jabiru/Challis and Legendre 0.4 Mutineer/Exeter 1.0 Thevenard 0.3 Barrow 0.6 Stag 1.6 Bayu-Undan (DLNG) 5.0 Indonesia (Oyong/Wortel/Maleo) 5.8 SE Gobe (PNG) 0.1 Vietnam Bangladesh 1.0 Reindeer Greater East Spar Kipper PNG LNG Total 54.2 Key Commodity Price Assumptions CY09A Aust dollar (US$) 0.792 WTI Oil (US$/bbl) 61.8 Tapis Oil (US$/bbl) 65.2 East Coast gas (A$/Gj) 3.80 West Coast gas (A$/Gj) 4.29 LNG price (Bayu, US$/t fob) 234 LPG price (A$/kt) 676 Financial Ratios PE reported (x) PE normalised (x) EV/EBITDAX (x) P/GCFPS (x) Dividend yield (%) ROE (%) ROIC (%) Gearing (ND/(ND+E), %) Interest cover CY09A 23.2 40.1 8.6 8.5 3.3% 6.2% 6.6% -6.5% 40.9
CY10A 16.0 6.0 0.4 3.3 8.6 0.3 0.6 0.3 0.6 1.4 4.5 7.2 0.1 0.7 49.9
CY11E 16.5 4.4 0.3 3.5 8.3 0.7 0.2 0.5 1.7 4.6 6.6 0.1 0.4 0.6 0.0 0.2 48.5
CY12E 15.6 5.4 0.2 3.6 8.9 0.9 0.2 0.5 1.5 4.3 5.2 0.1 2.1 0.2 3.1 0.8 52.5
CY13E 16.1 5.8 0.2 3.4 8.9 0.2 0.2 0.5 1.3 4.7 5.3 0.1 1.7 6.8 1.7 3.4 60.0
CY10A 0.921 79.5 83.8 4.48 4.36 277 820
CY11E 1.033 95.1 118.5 4.42 4.62 459 893
CY12E 1.003 107.3 118.1 4.63 4.72 460 909
CY13E 1.040 118.0 126.1 4.72 4.81 491 935
CY09A 1,155 (380) (98) (1,285) 12 (660) (297) (1,868) 3,003 1,116 698 150.1 (227.9) (29.6)
CY10A 1,267 (4) (156) (1,544) 693 (316) 1,596 490 60 2,086 150.2 (433.0) (51.3)
CY11E 1,421 (43) (249) (3,135) 424 163 (79) 246 4 (1,248) 161.3 (1,962.6) (222.8)
CY12E 1,241 (225) (3,435) (187) 174 (2,432) 139.0 (2,419.2) (270.9)
CY13E 1,472 (125) (1,843) (189) 181 (505) 163.6 (496.7) (55.2)
CY10A 21.5 28.7 8.5 8.5 2.9% 6.6% 7.8% -18.0% (92.0)
CY11E 11.1 22.4 7.3 7.9 2.4% 11.9% 11.5% 4.1% n/c
CY12E 18.4 18.5 6.0 9.2 2.4% 6.9% 5.2% 25.0% n/c
CY13E 14.0 14.0 5.3 7.8 2.4% 8.6% 6.2% 27.7% n/c
CY09A 3,519 923 6,517 402 11,361 4,394 6,967 1,813 2,240 (427) 481 769
CY10A 5,271 962 6,914 622 13,769 6,166 7,603 3,157 4,319 (1,162) 166 843
CY11E 4,594 1,062 8,760 499 14,915 6,443 8,471 3,408 3,046 362 577 881
CY12E 2,237 1,964 10,761 499 15,462 6,560 8,902 3,582 614 2,968 711 881
CY13E 1,655 2,292 11,663 499 16,108 6,575 9,533 3,763 109 3,654 798 881
CY09A 38.0 8.4 3.0 2.0 2.8 54.2
CY10A 36.3 6.5 2.7 1.8 2.6 49.9
CY11E 34.4 6.9 2.7 1.8 2.7 48.5
CY12E 37.6 8.3 2.5 1.5 2.6 52.5
CY13E 45.2 7.0 3.3 1.7 2.9 60.0
Source: J.P. Morgan Estimates and Company Data
DCF Valuation at 9% cashflows from Jul-11, LT US$90/bbl & 0.8US$/A$ Cooper Basin (excl shale gas) Surat/Denison excl GLNG Amadeus Otway John Brookes Jabiru/Challis/Legendre Mutineer/Exeter Thevenard Barrow Stag Bayu-Undan Kipper SE Gobe (PNG) Oyong / Wortel (Indonesia) Maleo (Indonesia) Reindeer Greater East Spar Vietnam PNG LNG GLNG (risked) Other Corp & Unallocated Pre-FID projects incl PNGLNG T3 (risked) Exploration Gunnedah CSG (80% of PEL238 etc) Bonaparte LNG (40% interest) Asset sale proceeds (net) Asset EV Net Debt Equity value Equity valuation prem/(disc) to share price
A$m 1,406 261 55 248 670 90 32 278 278 1,351 347 17 150 66 949 313 607 4,418 3,217 (80) (634) 1,052 360 708 163 491 16,814 390 17,204
A$ 1.51 0.28 0.06 0.27 0.72 0.10 0.03 0.30 0.30 1.45 0.37 0.02 0.16 0.07 1.02 0.34 0.65 4.74 3.45 (0.09) (0.68) 1.13 0.39 0.76 0.17 0.53 18.03 0.42 18.45 44.7%
241
Woodside Petroleum Limited

Underweight Profit & Loss Statement (US$ millions) Sales revenue Other revenue Total revenue Production costs Royalties & Excise Other Costs EBITDAX Exploration write-off EBITDA Depreciation & amortisation EBIT Net Interest Expense Pre-Tax Profit PRRT pre-tax (post08) Corporate Tax Significant items (after tax) Minority interests Reported NPAT NPAT (pre-sig items) EBITDA margin (%) Effective tax rate (%) EPS reported (Acps) EPS pre-sig items (Acps) DPS (UScps) Payout ratio (%) Franking (%) Cashflow Statement (US$ millions) Net op cash flow Acquisitions Capex & Exploration Asset Sales Other investing cash flows Dividends Debt Repayment Debt Proceeds Equity funding Other financing cash flows Net cashflow GCFPS (cps) Free cashflow FCF/share (cps) Balance Sheet (US$ millions) Current assets Oil & Gas Properties Exploration & Evaluation Other non current assets Total assets Total liabilities Shareholder funds Total debt Cash Net debt Operational working capital Ave diluted shares (m) Y/E Dec Shares: 793.2m Production Volumes (million BOE) NWSJV Laminaria Legendre Ohanet Mutineer/Exeter US GoM Chinguetti entitlement Otway Enfield Neptune Stybarrow Vincent Pluto-1 Total M'cap: A$25253m Price: A$32.37
CY09A 3,722 37 3,759 (477) (275) (156) 2,850 (252) 2,601 (856) 1,745 (12) 1,733 (79) (537) 414 1,531 1,117 1,395 69.2% 31.0% 274.8 198.3 94 55% 100%
CY10A 4,193 53 4,246 (459) (419) (132) 3,236 (329) 2,907 (749) 2,158 18 2,176 (165) (602) 157 (2) 1,564 1,407 1,539 68.5% 27.7% 221.4 199.2 105 58% 100%
CY11E 4,824 60 4,885 (467) (488) (141) 3,789 (353) 3,436 (570) 2,865 (92) 2,773 (195) (835) (6) 1,737 1,744 1,879 70.3% 30.1% 212.0 212.7 112 51% 100%
CY12E 5,451 62 5,513 (547) (441) (133) 4,392 (273) 4,119 (748) 3,371 (344) 3,027 (478) (845) 1,703 1,703 1,713 74.7% 27.9% 207.4 207.4 104 50% 100%
CY13E 6,645 63 6,708 (718) (509) (139) 5,341 (273) 5,069 (963) 4,106 (302) 3,804 (528) (1,058) 2,218 2,218 2,031 75.6% 27.8% 257.8 257.8 134 50% 100%
CY09A 50.9 3.6 2.3 0.2 1.9 4.6 6.3 1.3 5.7 4.0 80.9
CY10A 51.8 2.3 2.3 0.1 1.3 0.9 5.7 0.9 2.1 5.1 72.7
CY11E 46.8 1.6 1.8 0.2 0.3 4.2 0.8 4.1 4.3 63.9
CY12E 45.4 1.2 0.1 3.5 0.7 3.4 5.1 17.0 76.5
CY13E 48.2 0.4 2.7 0.6 2.7 4.4 34.9 93.9
Key Commodity Price Assumptions CY09A Aust dollar (US$) 0.792 Brent Oil price US$/bbl 62.1 Brent Oil price A$/bbl 78.4 WTI Oil price US$/bbl 61.8 WTI Oil price A$/bbl 78.0 Domestic gas price (A$/Gj) 4.28 LNG price (US$/t) 325 Financial Ratios PE reported (x) PE normalised (x) EV/EBITDAX (x) P/GCFPS (x) Dividend yield (%) ROE (%) ROIC (%) Gearing (ND/(ND+E), %) Interest cover CY09A 11.8 16.3 13.2 11.8 3.7% 13.4% 9.6% 28.7% 135.6
CY10A 0.921 80.2 87.2 79.5 86.4 3.71 515
CY11E 1.033 111.8 108.2 95.1 92.0 4.24 597
CY12E 1.003 112.5 112.2 107.3 107.0 3.95 553
CY13E 1.040 121.3 116.6 118.0 113.5 4.03 557
CY09A 1,531 (4,755) 1 14 (291) 2,810 1,353 291 953 218 (3,225) (458.5)
CY10A 2,104 (3,649) 742 (547) (42) 1,078 119 (195) 272 (1,545) (199.9)
CY11E 2,729 (4,118) 43 (1) (291) 1,236 8 (394) 344 (1,389) (175.1)
CY12E 2,821 (1,806) 200 1,215 346 1,015 124.3
CY13E 3,658 (2,431) (782) (721) (276) 442 1,227 148.3
CY10A 14.6 16.3 10.0 10.9 3.5% 12.3% 9.0% 25.3% (118.7)
CY11E 15.3 15.2 7.6 9.7 3.3% 13.1% 9.4% 28.2% 26.6
CY12E 15.6 15.6 6.8 9.4 3.2% 10.6% 8.5% 22.0% 7.8
CY13E 12.6 12.6 5.4 7.6 4.0% 11.8% 9.4% 18.7% 7.9
CY09A 2,419 13,857 1,158 319 17,753 8,485 9,268 4,939 1,207 3,732 (574) 703
CY10A 1,579 16,517 1,801 299 20,196 8,510 11,686 4,915 963 3,952 (677) 773
CY11E 1,272 19,512 2,097 309 23,190 9,703 13,487 5,870 579 5,291 (449) 793
CY12E 2,606 19,479 2,188 309 24,582 9,391 15,190 6,070 1,793 4,277 372 816
CY13E 2,406 20,926 2,279 309 25,920 9,293 16,626 5,349 1,517 3,832 74 827
NPV Valuation at 9% cashflows from Jul-11, LT US$90/bbl & 0.8US$/A$ NWSJV ex-oil Cossack oil Laminaria Ohanet Enfield Mut/Exeter Neptune US GoM Stybarrow Vincent Pluto-1 Group & Unallocated Other Fields / Projects (risked) Exploration Asset sale proceeds Other Value & Investments Net Debt Group NPV Share price prem/(disc) to NPV
A$m 11,471 589 150 10 673 18 116 (10) 438 1,531 16,650 (295) 6,905 700 617 (4,209) 35,353
A$ 14.46 0.74 0.19 0.01 0.85 0.02 0.15 (0.01) 0.55 1.93 20.99 (0.37) 8.71 0.88 0.78 (5.31) 44.57 -27%
% 36% 2% 0% 0% 2% 0% 0% 0% 1% 5% 53%
Source: J.P. Morgan Estimates and Company data
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Important Disclosures
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Wilson, Benjamin: AWE Limited (AWE.AX), Beach Energy Ltd. (BPT.AX), BlueScope Steel (BSL.AX), Oil Search (OSH.AX), OneSteel Limited (OST.AX), ROC Oil Company Limited (ROC.AX), Santos Limited (STO.AX), Sims Metal Management Ltd (SGM.AX), Woodside Petroleum (WPL.AX) Bustnes, Brynjar Eirik: CNOOC (0883.HK), China BlueChemical Ltd (3983.HK), China Oilfield Services Limited (2883.HK), Inpex Corporation (1605.T), MIE Holdings Corporation (1555.HK), PetroChina (0857.HK), S-Oil Corp (010950.KS), SK Innovation Co Ltd (096770.KS), Sinopec Corp - H (0386.HK) Mirchandani, Pradeep: Bharat Petroleum Corporation (BPCL) (BPCL.BO), Cairn India Limited (CAIL.BO), Essar Oil Ltd. (ESRO.BO), Gas Authority of India Limited (GAIL.BO), Gujarat Gas Ltd (GGAS.BO), Gujarat State Petronet Ltd. (GSPT.BO), Hindustan Petroleum Corporation (HPCL) (HPCL.BO), Indian Oil Corporation (IOC.BO), Indraprastha Gas (IGAS.BO), Oil India Ltd. (OILI.BO), Oil and Natural Gas Corporation (ONGC.BO), Petronet LNG Ltd. (PLNG.BO), Reliance Industries Ltd (RELI.BO) Kazakova, Nadia Y: C.A.T. Oil (O2C.F), Eurasia Drilling Company (EDCLq.L), Gazprom (GAZP.RTS), HMS Group (HMSGq.L), MOL (MOLB.BU), Novatek (NVTKq.L), PKN ORLEN (PKNA.WA), Rosneft (ROSNq.L), Surgutneftegaz (SNGS.RTS), Surgutneftegaz Prefs (SNGS_p.RTS) Minyard, Katherine L: Baytex Energy (BTE.TO), Canadian Natural Resources (CNQ.TO), Cenovus Energy (CVE.TO), Chevron Corp (CVX), ConocoPhillips (COP), Exxon Mobil Corp (XOM), Hess (HES), Husky Energy (HSE.TO), Lone Pine Resources (LPR), MEG Energy (MEG.TO), Marathon Oil (MRO), Murphy Oil (MUR), Nexen (NXY.TO), Occidental Petroleum (OXY), Penn West Exploration (PWT.TO), Suncor Energy (SU.TO), Talisman Energy (TLM.TO) J.P. Morgan Equity Research Ratings Distribution, as of January 6, 2012
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(44-20) 7155 6131 fred.lucas@jpmorgan.com J.P. Morgan Securities Ltd.

(44-20) 7155 6133 nitin.sharma@jpmorgan.com J.P. Morgan Securities Ltd.

Australian Oil & Gas Benjamin Wilson

(61-2) 9220-1384 benjamin.x.wilson@jpmorgan.com J.P. Morgan Securities Australia Limited

Asian Oil & Gas Brynjar Eirik Bustnes, CFA

Indian Oil & Gas Pradeep Mirchandani, CFA

(91-22) 6157-3591 pradeep.a.mirchandani@jpmorgan.com J.P. Morgan India Private Limited

Russian Oil & Gas Nadia Kazakova, CFA

(44-20) 7325-6373 nadia.kazakova@jpmorgan.com J.P. Morgan Securities Ltd.

North American Oil & Gas Joseph Allman, CFA

Katherine Lucas Minyard, CFA

Global Commodity Research Colin P. Fenton

Fred Lucas (44-20) 7155 6131 fred.lucas@jpmorgan.com

Global Equity Research 13 January 2012

J.P. Morgans Global Oil & Gas Research Network

Americas Exploration and Production Joseph Allman, CFA

UK & European Oil Services & Equipment Andrew Dobbing

European Integrateds Nitin Sharma

Americas Oil Services & Equipment J. David Anderson, PE, CFA

Samantha Hoh, CFA

UK Exploration & Production Jessica Tadj-Saadat, CFA

Emerging Oils Russia Nadia Kazakova, CFA

Americas Integrated Oils Katherine Lucas Minyard, CFA

Andrey Gromadin, CFA

Emerging Oils Asia Brynjar Bustnes

Emerging Oils LatAm Caio Carvalhal

Felipe Dos Santos

South African Oils Alex Comer

Australian Oils Benjamin Wilson

Head of Global Commodity Research Colin Fenton

Indian Oils Pradeep Mirchandani, CFA

Energy Strategy Oil Lawrence Eagles

For Specialist Sales advice, please contact: Hamish Clegg

Energy Strategy Gas Scott Speaker

Fred Lucas (44-20) 7155 6131 fred.lucas@jpmorgan.com

Global Equity Research 13 January 2012

J.P. Morgan Global Oil & Gas Equity Coverage

Fred Lucas (44-20) 7155 6131 fred.lucas@jpmorgan.com

Global Equity Research 13 January 2012

Fred Lucas (44-20) 7155 6131 fred.lucas@jpmorgan.com

Global Equity Research 13 January 2012

Fred Lucas (44-20) 7155 6131 fred.lucas@jpmorgan.com

Global Equity Research 13 January 2012

One-minute, one-page synopsis

Fred Lucas (44-20) 7155 6131 fred.lucas@jpmorgan.com

Global Equity Research 13 January 2012

Introduction global thematic research

MACRO Alpha skew

Gas (LNG) market

COMPANY SPECIFIC - Alpha

Source: J.P. Morgan.

Fred Lucas (44-20) 7155 6131 fred.lucas@jpmorgan.com

Global Equity Research 13 January 2012

Fred Lucas (44-20) 7155 6131 fred.lucas@jpmorgan.com

Global Equity Research 13 January 2012

LNG demand will not be constrained by import capacity

BEAR case will see liquefaction projects deferred 2014 onwards

Fred Lucas (44-20) 7155 6131 fred.lucas@jpmorgan.com

Global Equity Research 13 January 2012

LNG has fewer and more disciplined players

New LNG capacity is often contracted before it is built