The need for a European gas index

1. The need for a European gas index 14th Nov 2008 Dominique Venet Executive VP Gas

2. Background : Global gas supply environment • High uncertainty regarding future European gas demand • Increasing concerns over ability to develop new long term pipeline gas and LNG gas supplies • Sufficient global gas reserves exist, but difficulties have arisen in trying to produce and bring gas to market • Rising costs of raw materials • Scarcity of relevant engineering expertise • Abundance of revenues in producing companies and their desire to preserve financial security of future generations • Asia attracting LNG spot cargoes at the expense of Europe • Global financial crisis – players to face difficulties in raising financing for investments NWE Regional Gas Initiative

3. Not having a market reflective gas price poses huge uncertainties in the face of investments of this magnitude…..…a European gas index is critical to enable these investments to be made! The IEA’s WEO 2006 estimated 2.4 $ Trillion of investment needed in Europe’s energy market from 2005 to 2030 NWE Regional Gas Initiative

4. Why does Europe need a gas index? • The European gas market is almost as large as the US market, but unlike the US, no liquid European gas index exists 620 bcm/yr 520 bcm/yr • Europe is a leader in the global economy • The €uro is becoming an international reference But Europe has no gas index! Continental gas prices are determined by oil indexation and/or other gas market prices unreflective of Europe’s real gas supply/demand position, size of its economy … NWE Regional Gas Initiative

5. Current European “so-called-hubs” • Very poor market depth on the continental hubs • Little physical volumes transit on hubs with regard to overall gas demand • Poor Liquidity on the continental hubs • Very low churn ratios while Henry Hub churn ratio reaches 100 Churn rate 10 to 13 ~ 3 ~ 3 4 to 5 2.5 to 3 • % of European demand physically exchanged at European Hubs • Zeebrugge 2% • TTF 3% • NBP 13% Sources: huberator, GTS, APX, EDF, BP Statistical Review NWE Regional Gas Initiative

6. Rationale for oil indexation is dissappearing • Correlation resulting from production - not valid anymore • Gas is no longer only an oil production by-product as most new large gas discoveries are non-associated gas fields • Correlation resulting from fuel switching - not valid anymore • CCGTs now have a key role in electric generation • Stringent environmental standards have pushed end-user energy consumption away from new oil burning equipments • Oil products increasingly reserved for transportation and chemical industry • Correlation resulting from the lack of an alternative index …..now is the right time for creating a European Gas Index NWE Regional Gas Initiative

7. A European gas index is in the interest of all stakeholders Incumbents : benefit from a deep market to manage long term contracts (e.g. vs climatic parameters) Consumers : benefit from improved competition. European gas demand fundamentals reflected New entrants : improved sourcing capabilities Producers : benefit from stable fundamentals of European economy and can provide €uro hedge NWE Regional Gas Initiative

8. Benefits of a European Index: Producing Countries • Energy producing countries often have considerable imports from EU, which provides an associated currency exchange rate risk • Receiving gas revenues based on a €uro price could provide a natural hedge to mitigate against this currency exchange rate risk Source: Eurostat NWE Regional Gas Initiative

9. Benefits of a European Index: Consuming Countries A European index (€uros based) that reflects stability of European market will make Europe increasingly attractive to producers thereby increasing “Security of Supply” for Europe NWE Regional Gas Initiative

10. NBP TTF Zeebrugge PEG PEG PEG PEG PEG PEG PEG PEG PEG PEG PSV PSV Market Market zone zone Market Market Market Market zone zone zone zone Market Market Market zone Market Market zone zone zone zone Market zone What changes are required for a European gas index to emerge? • Efficient access to transit capacities • “use it or lose it” rules • harmonization of access rules throughout Europe • transparent and efficient open seasons for new capacities • Access to efficient flexibility tools ?? This is 100% within the hands of European stakeholders NWE Regional Gas Initiative

11. Summary • European hubs prices are still far from representing the continental market • A reliable liquid European gas index is in the interest of all stakeholders • Efficient access to transit capacities and flexibility tools are in the hand for European stakeholders NWE Regional Gas Initiative