Gas StorageAn opportunity to optimise

revenues for pipeline operatorsKai Eberspaecher, -Senior Associate, Advisian

11 October 2016

Recent Headlines

Soaring gas prices trigger fears of Tasmania-style energy crisis

Brisbane Spot gas prices Jan 2014 to May 2016, rolling 30 day average ($/GJ)

J F M A M J J A S O N D

Source: Citi, EnergyQuest

2016

2015

2014

6.00

5.00

4.00

3.00

2.00

1.00

Recent Headlines

East Coast gas supply to bring serious painThe big coal seam gas fields have

proved less prolific than first thought, leaving less excess gas available for the domestic market and contributing to a rise in domestic gas prices.

COAG reforms won't solve high gas pricesNew gas hubs won't bring down high gas

prices, says big industrial users. (Australian Financial Review 23 Aug 2016)

(Australian, 5 Sep 2016)

Is there an Opportunity for investment ?

Are the inevitable gas price increases and volatility here to stay?How robust is the business case around the investment in natural resources?

Is there an Opportunity for investment ?Supply decreases – additional sources curtailed (shale gas, other onshore developments) due to low oil priceDemand increases – East Coast LNG export exerts pressure, daily and seasonal volatility increase and become more pronounced

WTI Oil Price, Financial Times, September 16

Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul2012 2013 2014 2015 2016

80.0070.00

60.00

50.0040.00

30.00

90.00100.00

Market Principles Benefiting Gas Storage

System efficiency enhancement… insurance policy

Supply security enhancement as supply backup in case of emergency…. insurance policy

Daily volatility… price regulating mechanism

Seasonal volatility

… price regulating mechanism

Natural Gas Storage Options Overview• Short-term commercial

instruments • In Pipe Storage – Line Pack• Liquefaction and regasification• Underground storage • Regulatory supply management

Bubble size = relative capital cost

Linepack

CommercialInstruments

Liquefaction and Regasification

RegulatorySupply Management

Underground ReservoirStorage

Short Time horizon Long

Low

Com

plex

ityHi

gh

Linepack and Commercial OptionsShort-term commercial instruments

Advisian / 8

• Majority of capacities traded under Gas Transportation agreements and Gas Sales

• Agreements on bilateral basis• Re-directing gas volumes through

nominations is a service provided by pipeline operatorsIn Pipe Storage – Linepack

• Building linepack is to inject gas above the required delivery pressure leading to surplus inventory

• Surplus offers shipper opportunity for parking and pipeline banking mechanisms

• Linepack stored is usually available over hours to interested parties and pipeline operators charge a fee

Liquefied Natural Gas

LNG facilities have a business case where situations arise with significant short-term gas spikes in tight supply markets

Gas cooled significantly and

its pressure is reduced

Gas is then stored as a

liquid in cooled tanks

When required, it is re-gasified by

increasing its pressure by compressed and

injected into the pipeline

Limited storage capacity with high

operating costs due to refrigeration and

compression

Underground Reservoir Storage

A number of different options are available globally depending on the geological setting and proximity to potential markets.

Depleted hydrocarbon

reservoirs

SaltDomes

Aquifers

Underground reservoir storage falls into one of three categories:

Regulatory supply management • State or Federal government

introduce regulation limiting gas production

• Mechanisms are subsidies and production allocation to market participants

• Stipulating minimum storage requirements for a region or country usually as a function of supply from individual participants

Advisian / 11

• Full regulation: Australian Energy Regulator approves price and other terms as part of an access arrangement process. Allows asset owner to at least cost recovery.

• Light regulation: contractual terms are negotiated between the service provider and customer. Arbitration available.

Australian ContextThe majority of gas is traded between a buyer and a seller using long-term contracts. Certain regulations apply to setting gas prices applying mostly to small domestic users. Wholesale pricing is not regulated.Regulatory regime (*) for the transportation of gas provides for two forms of regulation based on a pipeline’s relative economic market power

Name Type OperatorBallera Gas Storage Facility

(Chookoo)Undergrou

nd Santos

Iona Gas Storage Facility Underground

Lochard Energy

Moomba Gas Storage Facility Underground Santos

Newstead Gas Storage Facility Underground

Origin Energy

Roma Underground Storage Facility

Underground GLNG

Silver Springs Gas Storage Facility Underground AGL

Mondarra Gas Storage Facility Underground APA

Dandenong LNG Storage Facility LNG APA

Newcastle LNG Storage Facility LNG AGL

(*) Natural Gas Law and Natural Gas Law Rules

Current Storage Facilities

Economic Considerations for Storage Operations

Profits = Revenue - Cost

• Exploit low frequency, high impact events like cold chill or a heat wave weather

• Exploit volatility, forecasting is key and understanding the duration of supply for electrical peaker plants (operating a day at a time)

• Provide insurance (at a premium) for large scale exporters like East Coast LNG plants

• Cost of supply – Buy low (and sell high) implies flexibility and agility

• Operating cost – LNG, Underground reservoir storage – increasing complexity (maintenance, reliability etc.)

• Capital cost – size matters e.g. tanks or reservoir storage

Revenue – Maximise

Cost – Minimise

Business Case ScenariosThree scenarios where demand exceeds baseload

123

Seasonal Volatility• Hot or cold weather increases demand• Likely solution is underground storage that

provides sufficient gas supply to cover the increased demand

System Utilisation for LNG plants• Outages create requirement to supply gas to LNG

facilities• Likely solution is underground storage that

provides sufficient gas supply to cover part or all of the shortfall

Emergency Supply of Peak Loads• Unexpected peak demand through unforeseen

circumstances• Likely solution LNG plant offering short-term supply

Are there opportunities?Enabling Framework is required• Create true trading hubs like

Henry Hub in the as pricing points enabling demand and supply to settle a wholesale gas price.

• Create diversity of gas supply through physical interconnection of gas markets like the Northern Gas Interconnector. Stranded gas can deliver alternate gas supply at potentially lower prices.

• Promote an open market approach with less regulation and more freedom for trading and investments.

Are there opportunities?Emerging Opportunities for pipeline operators• Identify underground

storage options near existing and future markets (considering capacity, injection and withdrawal rates)

• Identify potential peak / emergency supply options to cover for outages in key markets

• Identify upstream gas sources that can be integrated with pipeline operators (vertical integration)

DISCLAIMERThis presentation has been prepared by a representative of Advisian.The presentation contains the professional and personal opinions of the presenter, which are given in good faith. As such, opinions presented herein may not always necessarily reflect the position of Advisian as a whole, its officers or executive.Any forward-looking statements included in this presentation will involve subjective judgment and analysis and are subject to uncertainties, risks and contingencies—many of which are outside the control of, and may be unknown to, Advisian. Advisian and all associated entities and representatives make no representation or warranty as to the accuracy, reliability or completeness of information in this document and do not take responsibility for updating any information or correcting any error or omission that may become apparent after this document has been issued.To the extent permitted by law, Advisian and its officers, employees, related bodies and agents disclaim all liability—direct, indirect or consequential (and whether or not arising out of the negligence, default or lack of care of Advisian and/or any of its agents)—for any loss or damage suffered by a recipient or other persons arising out of, or in connection with, any use or reliance on this presentation or information.