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Deutsche Bank Markets Research
Australasia
Australia
Energy
Industry
Date
Australian LNG Sector
08 February 2012
Industry Update
John Hirjee Hugh Morgan Research Analyst (+61) 3 9270-4385 hugh.morgan@db.com
US LNG exports: from spectre to emerging reality

Sabine Pass contracting points to an appetite for US LNG With Cheniere's 16mmpta Sabine Pass LNG project requiring just six months to contract its entire output, we see clear appetite for US LNG exports. The contracts are priced relative to the US Henry Hub gas benchmark, implying lower pricing than Australian oil linked contracts. While we see competitive tensions, fully contracted and sanctioned Australian projects have limited exposure. In our view greenfield projects such as Browse are most at risk, and must progress contracting negotiations quickly before more US volumes enter the market and impact Australian project economics. An overview of US LNG export proposals The rise of shale gas production has seen a structural change in the US gas market. In the early 2000s, the US was short gas, driving high pricing and necessitating LNG imports to meet demand. However the market is now oversupplied, depressing pricing and driving proposals to export gas in the form of LNG. US LNG exports offer benefits to buyers: lower cost supply, diversity of supply, and potentially greater flexibility. However approval to export from the US DOE is critical given the political importance placed on energy security within the United States. We believe exports of US LNG will occur, but expect a moratorium may be placed on export volumes at some point, essentially capping the risk to proposed Australian LNG projects. Sabine Pass the leading US proposal Chenieres Sabine Pass LNG project is the leading proponent of planned US LNG exports. The project is currently operating as an under-utilised import terminal, having received its first cargoes in 2008. The 16mmpta export proposal is now fully contracted, and targeting first exports in 2015. Existing infrastructure at the Louisiana site including two LNG jetties, five storage tanks and pipelines will result in significantly lower capex intensity than Greenfield integrated LNG projects recently sanctioned in Australia. Impacts on Australian LNG projects new projects are at greater risk In our view existing and sanctioned Australian projects with long-term binding contracts are at less risk from competing US exports. Global LNG prices are far from homogenous, and the rise of a new supplier does not simply result in wholesale price resetting. However new projects, specifically high cost greenfield proposal such as Browse are at risk, and need to progress LNG contracting rapidly to ensure project economics are not undermined. Sector valuation and risks We value the Australian Energy sector using DCF analysis to estimate a Net Asset Value (NAV) using DB macro assumptions. In addition, we assess the NAV using the oil forward curve. We set our price targets by taking the midpoint of the two NAVs and add a risk-adjusted exploration potential. Sector risks include oil price volatility, production outages, and project delays.
Research Analyst (+61) 3 9270-4318 john.hirjee@db.com Andrew Lewandowski
Research Analyst (+61) 3 9270-4241 andrew.lewandowski@db.com
Top Picks Santos (STO.AX),AUD13.76 Oil Search (OSH.AX),AUD6.47 Companies Featured Woodside Petroleum (WPL.AX),AUD34.41 Buy 2010A 2011E 2012E P/E (x) 22.2 16.8 12.8 Div yield (%) 2.6 3.0 3.9 Price/book (x) 2.8 2.4 2.1 Origin Energy (ORG.AX),AUD13.35 Hold 2011A 2012E 2013E P/E (x) 22.6 16.6 17.1 Div yield (%) 3.1 3.7 3.7 Price/book (x) 1.4 1.1 1.0 Santos (STO.AX),AUD13.76 Buy 2010A 2011E 2012E P/E (x) 30.5 24.2 20.8 Div yield (%) 2.8 2.2 2.2 Price/book (x) 1.5 1.6 1.5 Oil Search (OSH.AX),AUD6.47 Buy 2010A 2011E 2012E P/E (x) 50.0 38.4 44.3 Div yield (%) 0.7 0.6 0.6 Price/book (x) 3.0 3.0 2.9 Buy Buy
________________________________________________________________________________________________________________ Deutsche Bank AG/Sydney All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 146/04/2011.
08 February 2012
Energy
An overview of US LNG export proposals

Overview
In the early to mid 2000s, the US was seen as a key market for LNG imports. A large and liquid market for natural gas, posted pricing, and declining indigenous gas production all favoured the import of LNG. A number of large-scale import terminals were sanctioned around this time, with an even longer list of proposed developments. LNG imports into the US reached 15.5mmt in 2007, making it the second largest LNG importer in the Atlantic Basin (behind Spain at 18.8mmt), and fourth largest globally (behind Japan, South Korea and Spain) that year. However, the rise of shale gas as an unconventional indigenous gas supply source in North America has materially changed the outlook for LNG in the US. By 2008 LNG imports had more than halved to 7.0mmt, and regasification terminal utilization rates fell from an average of over 50% (2000 to 2007) to barely 10% today. Figure 1: US LNG regas terminal utilisation rates
80%
In the early 2000s, the US was seen as a major LNG import market
Shale gas has since significantly displaced LNG imports
70%
60%
2000-2007 utilisation average
50%
40%
30%
20%
2008-2010 utilisation average

10%
0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Reproduced from Deutsche Banks The Australian LNG Handbook published 6 Sep 2011
In 2006, Wood Mackenzie estimated US LNG imports would reach 80mmtpa by 2014. However, current forecasts are for less than 10mmtpa. This dramatic decline in imports is as a direct result of the rise in shale gas production.
US LNG import forecasts have fallen by 80% as a result
Page 2
Deutsche Bank AG/Sydney
08 February 2012
Energy
Figure 2: US LNG import demand forecasts, 2006 vs 2011

90 80 70 60
mmtpa
50 40 30 20 10 0 2000 2002 2004 2006

Actual
2008
2010
2006 Forecast
2012
2014
2011 Forecast
2016
2018
2020
Initially the impact of US shale gas was seen as a displacement of LNG, with volumes forced to seek alternative homes in Europe or the Pacific Basin. However, the next stage of development for shale gas in the US is the potential to export gas as LNG from North America. If LNG exports can be achieved using North American shale gas as a feedstock, this would represent not only a fundamental shift in natural gas flows in the US, but also a fundamental shift in how US policy makers view energy security in the US. In addition, this shift from net importer to potential net exporter could represent a very significant change in global LNG dynamics. We believe some US LNG projects will be successful, however their impact on the Pacific Basin LNG market could be limited in the near term as US policy makers cap energy exports.
US shale gas is now being considered for export as LNG
We think energy security concerns will cap total LNG exports
Why export US shale gas as LNG?

We believe there are a number of key reasons driving proposals to export shale gas from the US:
!
Utilisation of stranded infrastructure. A number of US Gulf Coast LNG import terminals were built during the last decade to receive LNG. However, the rise of shale gas as an indigenous gas source has seen these assets under-utilised. Conversion of import terminals into import/export would enable increased infrastructure utilization. Increase the value of existing reserves. Higher LNG netback pricing could enable existing gas resource owners to achieve better value from exports than selling into the domestic market. To encourage higher US gas prices by more closely aligning Henry Hub pricing to international gas prices. However we make the point that current proposals may struggle to remain economic should Henry Hub prices rise materially. An opportunity to develop integrated LNG positions for global LNG traders such as BG, Shell and Total.
Page 3
08 February 2012
Energy
Why purchase US shale gas as LNG?

Asian LNG buyers have recently shown a preference for conventional LNG supplies over Australian CSG-to-LNG projects. Large scale CSG production to support LNG production remains unproven, and while US shale gas production has increased materially in recent years, it too remains an unproven LNG feedstock. As a result, we would expect some similar concerns for buyers of US shale gas, however we do see a number of compelling reasons for Asian LNG buyers to consider US exports:
!
US LNG exports could offer cheaper and more flexible supply
Lower cost supply buyers from Chenieres proposed Sabine Pass project achieved lower pricing than alternative contracts recently signed in Australia. With pricing linked to the US Henry Hub gas price benchmark, US suppliers appear well placed to offer lower priced LNG. An option to produce if LNG buyers purchase liquefaction capacity rather than LNG cargoes, albeit an expensive option if not frequently utilised. One possible contract structure would see the buyer elect when LNG is produced. Easier access to LNG for smaller buyers seeking smaller or shorter term contracts given potentially greater production flexibility for US projects. LNG supply diversification as North America would provide a new source of LNG. We note buyers would likely only see diversification as a benefit if they have confidence in US exports being at least as reliable as existing suppliers. Index diversification if contracts are signed relative to the Henry Hub price rather than oil prices. Supply security given the size and liquidity of the US gas market. However legislative changes or materially higher US gas prices could create supply shocks for US exporters.
There are hurdles that need to be overcome

The export of LNG from the US faces a number of challenges. The most evident is the willingness of US policy makers to allow the wholesale export of energy, given the high level of focus placed upon energy security within America. While the US Department of Energy (DOE) has provided approval for Cheniere to export LNG from the Sabine Pass facility, the DOE can re-visit its approval if exports are proven to not be in the national interest. In our view, a more likely outcome is the DOE allowing a certain number of export projects before placing a moratorium on new export licenses. As a result, early movers such as Chenieres Sabine Pass are well placed, but later projects may find the export quota full. We discuss the economics of US LNG projects in the following section, however we see challenges if US gas prices increase. One of the key benefits of exporting US shale gas as LNG is to capture the arbitrage between current US and global gas prices. If US gas prices increase due to LNG exports closing this arbitrage, the economics of LNG exports could be undermined. Customer acceptance of US LNG remains to be proven in some regions. Australian CSG-to-LNG projects have taken considerable time to gain traction in signing offtake contracts with traditional LNG buyers, and we believe US exporters could face similar concerns. Given regulatory and supply challenges, we believe some buyers, such as Japanese LNG importers (so far absent from recent Sabine Pass contracting) may struggle to gain sufficient confidence to contract with US shale gas LNG exporters.
US LNG export proposals face numerous challenges
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08 February 2012
Energy
US gulf coast LNG exports to the Pacific Basin are reliant on the completion of works currently underway on the Panama Canal. At present, gulf coast exports must travel via Cape Horn to reach Asia, adversely impacting shipping economics. The expansion of the Panama Canal will significantly reduce the distance LNG tankers must travel to reach the Asia. If expansion work is delayed from the current 2014 completion schedule, US LNG proposals could be impacted.
Proposed US LNG export terminals

The following table summarises key US LNG export terminal proposals. In addition, there are a number of proposals to export Canadian shale gas in the form of LNG. The Sabine Pass proposal in Louisiana is the leading proposal (and discussed in detail in the next section), and the only project to date to receive approvals to export to non-FTA countries. Figure 3: Leading proposed US LNG export terminals
Project Sabine Pass Lake Charles Cove Point Sponsor Cheniere Energy BG Group Dominion Location Louisiana Louisiana Maryland Description Existing import terminal Existing import terminal Existing import terminal Capacity 16mmtpa 8mmtpa 4mmpta Status Export approved to all countries (Aug 11) Export approved to FTA countries (Jul 11) Export approved to FTA countries (Oct 11), application lodged for export to all countries (Oct 11) Application lodged with DOE Export approval to FTA countries (Oct 11) Application lodged with DOE
There are a number of proposed US LNG export projects
Freeport Jordan Cove Cameron Total
Freeport/Macquarie Fort Chicago/Energy Projects Sempra/ENI
Texas Oregon Louisiana
Existing import terminal Proposed import/export terminal Existing import terminal
7.5mmtpa 4.5mmtpa 12mmtpa 52mmpta
Source: Company announcements, DOE, Deutsche Bank
In our view, US LNG export projects would struggle to achieve sanction without approval to export to all countries. The list of LNG importing countries with US Free Trade Agreements (FTAs) is short, and dominated by South Korea. While South Korea is the worlds second largest LNG importer, in our view reliance on a single country (and effectively single buyer in KOGAS) for sales contracts would impede negotiating positions, and could quickly meet all of South Koreas LNG demand for unconventional sources. Figure 4: LNG importers with US FTAs
LNG importers with US FTAs Canada Chile Dominican Republic Mexico South Korea Total
Source: Company data, Wood Mackenzie, Deutsche Bank
2011 LNG imports (mmtpa) 2.9 3.3 0.7 2.8 34.5 44.2
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08 February 2012
Energy
A potential lull in US contracting?

Chenieres Sabine Pass LNG project is now fully contracted. As set out in Figure 3, Sabine Pass is the most advanced of the US LNG export proposals. The project received approvals to export to all countries in August 2011. As a result, it now is at least 6 months ahead of the next US project, implying there will be limited new contracts announced in the short-term. Indeed Cheniere believes Sabine Pass is at least 12 months ahead of the next most advanced proposal. We would therefore conclude Australian projects seeking new contracts may have a near-term window to progress negotiations with buyers prior to additional US projects receiving full export approvals and aggressively seeking offtake agreements.
Sabine Pass could be 12 months ahead of the next proposal
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08 February 2012
Energy
Sabine Pass: the leading proposal

Project summary
The Sabine Pass LNG regasification terminal in Louisiana on the Gulf of Mexico was completed in 2008 to import LNG into the US. The plant has a nominal regasification capacity of 30.2mmtpa, but has never operated even close to this capacity. There are two import contracts with Total and Chevron totaling c.15mmpta, however these agreements cover rights to plant capacity and are not a commitment to actually utilize the facility. In mid-2010, plant owner Cheniere announced a proposal to convert Sabine Pass from an import terminal to an import/export terminal by adding liquefaction capabilities. The proposal has developed rapidly since this announcement, including a doubling of proposed capacity to 4 trains and 16mmtpa, offtake contracts across the entire output, and US regulatory approvals to export to any LNG importing nations. With existing infrastructure including a two berth jetty, 5 LNG storage tanks and pipeline connection to the gulf coast grid, conversion to an import/export terminal will primarily involve the construction of four liquefaction trains, and an additional storage tank, significantly lowering project capital costs. The project plans to purchase gas from the US grid, using the existing Creole Trail pipeline to transport gas to the liquefaction plant. We understand the liquefaction project will involve works to allow bi-directional flow on the pipeline. As a result, the development has no upstream elements, nor dedicated gas reserves. Figure 5: Sabine Pass LNG - key facts
Project JV Capacity Upstream Location N/A Downstream Location Cameron Parish, Louisiana Initial reserves Capex FID N/A US$9bn-US$10bn Train 1&2 2012 Train 3&4 - 2013 Key timelines First LNG Train 1 2015 Train 2 2106 Train 3 2017 Train 4 - 2018
Sabine Pass was completed in 2008 as an LNG import terminal
Cheniere Energy Partners 100%
16mmtpa 4 trains
Source: Company data, Deutsche Bank
The project is targeting FID on the first phase (Trains 1&2) in 2012, and on the second phase (Trains 3&4) in 2013. Cheniere believe first LNG can be achieved in 2015. As a result, Sabine Pass is set to become the first LNG export terminal in the US Lower 48, and the first LNG import/export terminal anywhere globally.
The project is now targeting a 16mmpta export capability
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08 February 2012
Energy
Project history
Figure 6: Sabine Pass LNG history
Dec-03 Mar-05 Apr-08 Oct-09 Jun-10 Aug-10 Sep-10 May-11 Oct-11 Nov-11 Nov-11 Dec-11 Jan-12 Jan-12 2012 2013 2015/16 2017/18 Cheniere Energy Partners submit an application to construction an LNG import terminal at Sabine Pass in Louisiana Construction commences on the initial c.19.6mmtpa Sabine Pass LNG regasification facility Sabine Pass receives its first LNG cargo The facility is expanded to 30.2mmpta of LNG import capacity Cheniere announces a proposal to add LNG liquefaction capacity to the facility Cheniere lodges applications for LNG export approvals Permission to export to FTA countries granted by the US DOE Permission to export to non-FTA countries granted to Sabine Pass Cheniere signs 20 year SPA with BG Group for 3.5mmpta from Train 1 Project signs an EPC contract with Bechtel to construct the facility Cheniere signs 20 year SPA with Gas Natural Fenosa for 3.5mmpta from Train 2 Cheniere signs 20 year SPA with GAIL for 3.5mmpta from Train 4 Cheniere signs 20 year SPA with KOGAS for 3.5mmpta from Train 3 Cheniere signs a second 20 year agreement with BG Group for c.2.0mmtpa, representing the balance of uncontracted volumes from Trains 1-4 FID target for Trains 1 and 2 FID target for Trains 3 and 4 First LNG from Trains 1 and 2 First LNG from Trains 3 and 4
Source: Company announcements, Deutsche Bank
Commercial structure
The Sabine Pass LNG facility is 100% owned by Cheniere Energy Partners, a company majority owned by Cheniere Energy Inc listed on the New York Stock Exchange (LNG.US). The project includes the Creole Trail gas pipeline, linking the facility into the US gas grid. The project plans to purchase natural gas from the US grid, as a result Cheniere and the Sabine Pass LNG project do not own any upstream gas reserves or production infrastructure. LNG offtakers BG Group, Gas Natural Fenosa, GAIL and KOGAS hold no equity in the liquefaction facility or Creole Train pipeline. Figure 7: Sabine Pass LNG structure
Upstream Pipeline & LNG Plant LNG Buyers
Sabine Pass is owned by Cheniere Energy Partners
Gas sourced from US grid
Cheniere Energy Partners 100%
BG Group Gas Natural Fenosa GAIL KOGAS
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08 February 2012
Energy
LNG marketing
The proposed four train Sabine Pass LNG facility is fully contracted. The project holds four 3.5mmpta 20 year contracts assigned to each of the trains with BG Group (Train 1), Gas Natural Fenosa (Train 2), KOGAS (Train 3), and GAIL (Train 4). In addition, BG has signed a second agreement for a notional 2mmtpa over the remaining capacity across the four trains. With the plant not planned to operate at full capacity during summer months, the additional BG contract is unlikely to reach 2mmt each year. Figure 8: Sabine Pass LNG contracting position
18.0 16.0 14.0 12.0
All four proposed trains are fully contracted
mmtpa
10.0 8.0 6.0 4.0 2.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
BG Group KOGAS
Gas Natural Fenosa BG Group additional
GAIL Nameplate Capacity
All contracts are on a FOB basis, with the LNG customer responsible for providing shipping and paying for transportation costs.
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08 February 2012
Energy
Project capex
Cheniere has provided capex guidance for the project of US$4.5-$5.0bn for each of the two phases of the project. Based on total plant capacity of 16mmtpa, company guidance implies a capex intensity of US$563$625/t. On face value, this range implies Sabine Pass would be one of the lowest cost LNG projects ever constructed. Figure 9: LNG project total capex intensity
4,500 4,000 2020 2015 2010 2005 2000 2,500 1995 2,000 1990 1,500 1,000 500 0 1985 1980 1975 1970
Lower capex intensity given no upstream infrastructure
Capex Intensity (US$m/mmtpa)
3,500 3,000
However, given Sabine Pass does not involve any upstream infrastructure (or upstream returns), a more meaningful basis of comparison is the capital intensity of downstream plants only. On this basis, we estimate Sabine Pass is comparable to Australian projects Darwin and the North West Shelf, constructed prior to the recent wave of new projects and associated cost inflation. As a result, we believe the lower capex intensity of Sabine Pass reflects a more favourable cost environment in the US relative to Australia. Figure 10: LNG project liquefaction plant capex intensity
2,500 2020 2015 2,000 2010 2005 1,500 2000 1995 1,000 1990 1985 500 1980 1975 0 1970
Capex Intensity (US$m/mmtpa)
Ichthys Wheatstone Gorgon Prelude Pluto-1 Snohvit Sakhalin-2 PNG LNG Browse QCLNG APLNG GLNG Sunrise DS LNG North West Shelf Atlantic LNG 1 Bontang Egypt LNG Darwin MLNG Satu Damietta Peru EG LNG Tangguh Arun Qatargas-4 ADGAS Yemen LNG RasGas I RL3 Qatargas-3 Sabine Pass Qatargas-1 Qatargas-2 RasGas II
Capex Intensity
Commission Date
Prelude
APLNG
Peru
Yemen LNG
Sabine Pass
North West Shelf
Sakhalin-2
PNG LNG
RasGas II
Snohvit
EG LNG
Pluto-1
QCLNG
Ichthys
ADGAS
RasGas I
Sunrise
Gorgon
GLNG
RL3
Wheatstone
Atlantic LNG 1
Downstream Plant Capex Intensity
Commission Date
Page 10
MLNG Satu
Browse
Darwin
Egypt LNG
DS LNG
Qatargas-4
Qatargas-1
Qatargas-3
Qatargas-2
Damietta
Commission Date
Commission Date
08 February 2012
Energy
LNG pricing
Sabine Pass LNG contracts are priced relative to the benchmark Henry Hub US gas price. Cheniere will charge a 15% margin on the price of gas sourced for liquefaction, plus a fixed capacity charge ranging from US$2.25/mmbtu for the initial BG deal to US$3.00/mmbtu for the GAIL agreement. Figure 11: Cheniere LNG pricing scenarios
Spot HH scenario (US$/mmbtu) Henry Hub 15% margin Capacity charge Shipping Delivered cost Implied JCC slope @ US$100/bbl oil
Contracts priced relative to US gas prices, not oil
Cheniere scenario (US$/mmbtu) 4.00 0.60 2.50 2.80 9.90 9.9%
DB HH forecast scenario (US$/mmbtu) 5.40 0.81 2.50 2.80 11.51 11.5%
2.63 0.39 2.50 2.80 8.32 8.3%
The contracts are priced FOB, as a result customers are responsible for shipping costs. Cheniere has estimated shipping costs to Asia of US$2.80/mmbtu, assuming access to the Pacific Ocean via the Panama Canal. Shipping costs to Europe are estimated at US$1.00/mmbtu. The Panama Canal is not currently large enough to support LNG tankers. Even relatively modest sized modern tankers, such as those owned and operated by the North West Shelf project are too wide for locks on the canal. However, the Panama Canal Authority is currently undertaking an upgrade of the Canal, due for completion by 2014. Upon completion, the Canal will be able to support tankers up to the size of Q-Flex vessels. Figure 12: Panama Canal vessel capacity vs various LNG tanker sizes
Panamax Description LNG Capacity Length Beam Draught 290m 32m 12m 366m 49m 15m Current Panama Canal maximum New Panamax Expanded Panama Canal maximum Northwest Sandpiper NWS tanker 128,000m3 272m 47m 11m Woodside Donaldson Pluto-1 tanker 165,500m3 286m 44m 11m Q-Flex Qatari tanker 210,000m3 312m 49m 12m Q-Max Qatari mega-tanker 266,000m3 345m 54m 12m
Source: Panama Canal Authority, Woodside Petroleum, Qatar Petroleum, Deutsche Bank
If the Panama Canal were not available to LNG shipping from the Gulf of Mexico to Asia, we estimate the longer route around Cape Horn would add US$0.80US$1.00/mmbtu to shipping costs. As a result, any delay to current expansion works on the Panama Canal is a potential downside risk to the Sabine Pass and other proposed US LNG export projects. However we expect the Panama Canal fee will be priced just below the cost of voyage around Cape Horn so the economics wont differ greatly. The shipping time, and thus fuel costs, however will differ in our view.
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08 February 2012
Energy
The potential impact on Australian LNG export

Existing projects will largely be unaffected
In our view, LNG exports from US projects are unlikely to have a material impact on existing and sanctioned projects in Australia. The nature of project sanctions in Australia dictates output must effectively be fully contracted prior to FID in order to achieve financing and Board sign-off. As a result, with contract volumes and prices already determined, existing and sanctioned Australian projects face limited risk from additional volumes and potentially lower pricing from the US. Longer term, we do believe there may be some impact to existing projects. LNG contracts are generally subject to price re-opener clauses (typically 5-8 years). If LNG exports from the US start to materially impact regional LNG prices, there could be increased pressure on Australian sellers during price renegotiations however we would note:
!
Existing and sanctioned projects are fully contracted little impact from new US sources
Price re-openers do not generally result in significant material changes to pricing terms. Specifically, it is highly unlikely Australian LNG contracts would be renegotiated from oil-linked pricing to Henry Hub-linked pricing during reopener negations. The LNG contract market is already far from price homogenous. Historically, existing contracts have not been re-priced to reflect changes in pricing trends. This is most evident in the NWS-CNOOC contract that is materially lower than all other NWS contracts. As a result, we do not believe existing Australian contracts will be re-priced lower simply due to cheaper US contracts being announced.
Proposed projects are at greater risk

We believe Australian projects currently seeking offtake contracts are at significantly greater risk from US LNG exports. The speed with which Cheniere signed contracts from Sabine Pass points to a robust level of interest in lower cost US LNG in our view. We note Sabine Pass received full export approvals in August 2011, and succeeded in contracting all 16mmpta over the following 6 months. This is in stark contrast to, for example, the GLNG project in Australia where the timeframe between first and final contracts was over 18months. Greenfield projects are at greatest risk, but there are limited new projects following recent sanctions Following a number of recent project sanctions in Australasia (15 trains since 2009), the list of new projects seeking development has reduced significantly. Indeed we believe the fully contracted APLNG Train 2 project is likely to be the only new FID in Australia during 2012. In our view the project most likely to be affected by the spectre of US LNG exports is Woodsides Browse project. The project is high cost, and at 12mmpta has the largest volume to contract of the remaining greenfield projects.
Page 12 Deutsche Bank AG/Sydney Proposed projects competing for new customers are most at risk
08 February 2012
Energy
Brownfield expansion projects are better placed A number of potential project expansions including a third train at PNG LNG, second train at Pluto, and fourth train at Gorgon could all be forced to compete with US LNG exports. However, in our view project expansions are better placed to compete given:
!
Project expansions come from a greater position of negotiating strength
Project expansions can benefit from significant synergies, resulting in improved economics. As a result, brownfield expansions can withstand lower pricing relative to new greenfield proposals. Expansion projects have existing relationships with buyers, aiding negotiating positioning. Some projects seeking expansion have already demonstrated reliable operations, reducing supply security uncertainty for prospective buyers. Buyers choosing higher cost Australian LNG over US LNG for certainty of supply reasons would likely favour expansion projects.
A potential near-term window of opportunity However as we noted earlier in this report, we believe there may be a 6-12 month lull in new contracting from the US as projects seek approvals for full export to all countries from the DOE. As a result, we see a near-term window of opportunity for projects to progress LNG contracting discussions without needing to directly compete with potentially cheaper US LNG exports. Woodside recently confirmed it is in discussions with potential LNG buyers regarding Browse, in our view these discussions could benefit from the window of lower US contracting activity. However, if Browse offtake negotiations are delayed, the project faces increased risk from US LNG exporters.
Potential 12 month lull in US contracting
Unlikely to represent a quantum shift in Pacific Basin LNG supply and pricing yet
Current US LNG export proposals total 52mmtpa. While this is a significant volume if all proposals are successfully sanctioned, US export volumes would remain below both Australia and Qatar on a total country basis. However in our view the greater risk is the US DOE limits total export licenses to proposed projects to ensure exports do not materially impact US gas prices. We envisage a scenario under which the DOE allows limited exports (say 20-30mmpta), but then places a moratorium on new developments to allow time for the impacts of initial developments to be understood. Clearly if this scenario unfolds more advanced US projects are better placed. In our view an additional 20-30mmpta of US LNG exports is unlikely to materially impact global LNG supply/demand, noting these volumes will likely be sold into both the Atlantic and Pacific Basin markets. At present we estimate demand will exceed the current Pacific Basin contracted position by 50-85mmpta over 2015-2020, implying additional volumes are needed in the region. Additionally, while US LNG is priced relative to Henry Hub, and thus cheaper than current oil-linked contracts, we do not believe a 20-30mmpta scenario is sufficient to materially impact Pacific Basin pricing, noting this represents around 10% of total basin demand.
If the DOE limits total exports, US LNG unlikely to represent a quantum shift in pricing
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08 February 2012
Energy
What if the worst happens?

In our view the worst case scenario albeit remote in our view is for all Pacific Basin LNG prices to reset from oil-linked pricing to US export pricing based on US gas prices. This would involve dissolving current binding pricing terms, and replacing with Henry Hub pricing. The following chart plots US LNG pricing (based on Chenieres contracts from Sabine Pass) against breakeven costs for regional LNG projects. Figure 13: LNG project break-even costs and US LNG export pricing
LNG breakeven price to achieve 12% IRR (US$/mmbtu)
12
US LNG export price (HH US$5.40/mmbtu)
10
US LNG export price (HH US$4.00/mmbtu) US LNG export price (HH US$2.63/mmbtu)
0
Sakhalin-2 Pluto-1 Browse Wheatstone GLNG APLNG QCLNG DS LNG Gorgon Ichthys Sunrise Prelude PNG LNG North West Shelf Yemen LNG MLNG Dua Tangguh MLNG Satu MLNG Tiga OLNG Darwin Brunei LNG Qatargas-1 Qalhat LNG Bontang Arun ADGAS Qatargas-2 Qatargas-3 Qatargas-4 RasGas I RasGas II RL3
Operational
Under construction
Proposed
The current (1 Feb 2012) spot Henry Hub gas price in the US is US$2.63/mmbtu, implying a Sabine Pass delivered price into Asia of US$8.30/mmbtu (or 8.3% JCC slope at US$100/bbl oil). Based on our DB 2015 Henry Hub forecast of US$5.40/mmbtu, the implied delivered price into Asia is US$11.50/mmbtu (or 11.5% JCC slope at US$100/bbl oil). At the lower end of this range, a number of Australian projects currently under construction would not achieve a 12% rate of return. Most at risk are Pluto-1, Wheatstone, and the CSG-to-LNG projects. In addition, we believe the Browse project would be uneconomic, making sanction highly problematic. At the higher end of the range, while economics would be adversely affected, all Australia projects continue to more than cover their costs of capital. As a result, we would conclude that US gas prices would need to remain at their current depressed levels for at least 25 years, and directly affect binding Australian contract pricing in order to Australian projects to become uneconomic, a highly unlikely scenario in our view.
Page 14 Deutsche Bank AG/Sydney
08 February 2012
Energy
Appendix 1
Important Disclosures Additional information available upon request
Disclosure checklist Company Woodside Petroleum Origin Energy Santos Oil Search Ticker WPL.AX ORG.AX STO.AX OSH.AX Recent price* 34.41 (AUD) 7 Feb 12 13.35 (AUD) 7 Feb 12 13.76 (AUD) 7 Feb 12 6.47 (AUD) 7 Feb 12 Disclosure 14,17 1,7,14,17 7,14,17
*Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies
Important Disclosures Required by U.S. Regulators

Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes. 1. 7. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.
14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year.
Important Disclosures Required by Non-U.S. Regulators

Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes. 1. 7. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.
17. Deutsche Bank and or/its affiliate(s) has a significant Non-Equity financial interest (this can include Bonds, Convertible Bonds, Credit Derivatives and Traded Loans) where the aggregate net exposure to the following issuer(s), or issuer(s) group, is more than 25m Euros. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. John Hirjee
Page 15
08 February 2012
Energy
Historical recommendations and target price: Woodside Petroleum (WPL.AX)

(as of 2/7/2012)
60.00
Previous Recommendations
2 3 1819 20 21 13 16 7 14 1 15 22 23 24 25 26 27
50.00
4 5 6 7
10 11
12
Security Price
40.00
28
29 30
32 31
Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating Current Recommendations Buy Hold Sell Not Rated Suspended Rating
*New Recommendation Structure as of September 9,2002
30.00
20.00
10.00
0.00 Feb 10 May 10 Aug 10 Nov 10 Feb 11 May 11 Aug 11 Nov 11
Date
1. 2. 3. 4. 5. 6. 7. 8. 9. 24/02/2010: 31/03/2010: 23/04/2010: 14/05/2010: 04/06/2010: 10/06/2010: 30/06/2010: 23/07/2010: 18/08/2010: Hold, Target Price Change AUD49.70 Hold, Target Price Change AUD48.25 Hold, Target Price Change AUD48.00 Hold, Target Price Change AUD48.65 Hold, Target Price Change AUD48.70 Upgrade to Buy, Target Price Change AUD52.15 Buy, Target Price Change AUD52.20 Buy, Target Price Change AUD52.10 Buy, Target Price Change AUD54.15 Buy, Target Price Change AUD53.30 Buy, Target Price Change AUD53.55 Buy, Target Price Change AUD52.10 Buy, Target Price Change AUD52.70 Buy, Target Price Change AUD52.50 Buy, Target Price Change AUD52.60 Buy, Target Price Change AUD52.90 17. 04/03/2011: 18. 01/04/2011: 19. 19/04/2011: 20. 05/05/2011: 21. 19/05/2011: 22. 17/06/2011: 23. 06/07/2011: 24. 19/07/2011: 25. 17/08/2011: 26. 02/09/2011: 27. 30/09/2011: 28. 21/10/2011: 29. 25/11/2011: 30. 09/12/2011: 31. 16/01/2012: 32. 19/01/2012: Buy, Target Price Change AUD56.35 Buy, Target Price Change AUD59.45 Buy, Target Price Change AUD58.90 Buy, Target Price Change AUD59.15 Buy, Target Price Change AUD55.55 Buy, Target Price Change AUD50.80 Buy, Target Price Change AUD51.90 Buy, Target Price Change AUD50.80 Buy, Target Price Change AUD52.90 Buy, Target Price Change AUD52.80 Buy, Target Price Change AUD48.80 Buy, Target Price Change AUD48.55 Buy, Target Price Change AUD43.85 Buy, Target Price Change AUD44.65 Buy, Target Price Change AUD44.25 Buy, Target Price Change AUD44.45
10. 01/10/2010: 11. 22/10/2010: 12. 30/11/2010: 13. 18/01/2011: 14. 21/01/2011: 15. 28/01/2011: 16. 21/02/2011:
Page 16
08 February 2012
Energy
Historical recommendations and target price: Origin Energy (ORG.AX)

(as of 2/7/2012)
20.00 18.00 16.00 14.00
1 2 3 4 6 7 8 5 9 10 11 12 20 13 14 1819 21 16 1517
22 23 24 25 26
27 28 29
32 31 30
Security Price
12.00 10.00 8.00 6.00 4.00 2.00 0.00 Feb 10 May 10 Aug 10 Nov 10 Feb 11 May 11 Aug 11 Nov 11
Date
1. 2. 3. 4. 5. 6. 7. 8. 9. 25/02/2010: 31/03/2010: 30/04/2010: 10/06/2010: 30/06/2010: 12/07/2010: 30/07/2010: 24/08/2010: 01/10/2010: Buy, Target Price Change AUD21.00 Buy, Target Price Change AUD20.85 Buy, Target Price Change AUD21.05 Downgrade to Hold, Target Price Change AUD16.45 Hold, Target Price Change AUD16.50 Hold, Target Price Change AUD16.40 Hold, Target Price Change AUD16.55 Hold, Target Price Change AUD16.50 Hold, Target Price Change AUD16.40 Hold, Target Price Change AUD16.70 Hold, Target Price Change AUD17.60 Hold, Target Price Change AUD16.80 Hold, Target Price Change AUD16.60 Hold, Target Price Change AUD16.20 Hold, Target Price Change AUD16.65 Hold, Target Price Change AUD17.15 17. 15/03/2011: 18. 01/04/2011: 19. 21/04/2011: 20. 29/04/2011: 21. 19/05/2011: 22. 06/07/2011: 23. 28/07/2011: 24. 29/07/2011: 25. 23/08/2011: 26. 30/09/2011: 27. 18/11/2011: 28. 09/12/2011: 29. 12/12/2011: 30. 16/01/2012: 31. 23/01/2012: 32. 31/01/2012: Hold, Target Price Change AUD16.40 Hold, Target Price Change AUD16.75 Hold, Target Price Change AUD17.65 Hold, Target Price Change AUD17.60 Hold, Target Price Change AUD16.60 Hold, Target Price Change AUD16.85 Hold, Target Price Change AUD17.15 Hold, Target Price Change AUD17.10 Hold, Target Price Change AUD15.90 Hold, Target Price Change AUD15.55 Hold, Target Price Change AUD15.75 Hold, Target Price Change AUD15.90 Hold, Target Price Change AUD16.70 Hold, Target Price Change AUD16.60 Hold, Target Price Change AUD16.85 Hold, Target Price Change AUD16.75
10. 27/10/2010: 11. 15/12/2010: 12. 18/01/2011: 13. 31/01/2011: 14. 24/02/2011: 15. 25/02/2011: 16. 04/03/2011:
Page 17
08 February 2012
Energy
Historical recommendations and target price: Santos (STO.AX)

(as of 2/7/2012)
18.00 16.00
2 1 3 4 5 11 10 12 6 7 89 13 14 16 15 17 18 21 20 19
14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 Feb 10 May 10
Security Price
Aug 10
Nov 10
Feb 11
May 11
Aug 11
Nov 11
Date
1. 2. 3. 4. 5. 6. 7. 8. 9. 18/02/2010: 31/03/2010: 22/04/2010: 10/06/2010: 30/06/2010: 22/07/2010: 09/08/2010: 26/08/2010: 09/09/2010: Buy, Target Price Change AUD18.50 Buy, Target Price Change AUD18.20 Buy, Target Price Change AUD18.15 Buy, Target Price Change AUD16.75 Buy, Target Price Change AUD16.85 Buy, Target Price Change AUD16.95 Buy, Target Price Change AUD17.00 Buy, Target Price Change AUD17.30 No Recommendation, AUD17.30 Upgrade to Buy, Target Price Change AUD18.35 Buy, Target Price Change AUD19.80 12. 20/04/2011: 13. 19/05/2011: 14. 23/06/2011: 15. 06/07/2011: 16. 18/07/2011: 17. 18/11/2011: 18. 09/12/2011: 19. 13/01/2012: 20. 16/01/2012: 21. 19/01/2012: Buy, Target Price Change AUD19.60 Buy, Target Price Change AUD17.95 Buy, Target Price Change AUD17.75 Buy, Target Price Change AUD18.40 No Recommendation, AUD18.40 Upgrade to Buy, Target Price Change AUD17.70 Buy, Target Price Change AUD18.15 Buy, Target Price Change AUD18.20 Buy, Target Price Change AUD18.25 Buy, Target Price Change AUD18.00
10. 10/03/2011: 11. 01/04/2011:
Page 18
08 February 2012
Energy
Historical recommendations and target price: Oil Search (OSH.AX)

(as of 2/7/2012)
8.00 7.00
7 2 3 1 4 5 6
13 9 11 10 12
14 16 15 17 18 19 20 21 22
6.00
Security Price
5.00 4.00 3.00 2.00 1.00 0.00 Feb 10 May 10 Aug 10 Nov 10 Feb 11 May 11 Aug 11 Nov 11
Date
1. 2. 3. 4. 5. 6. 7. 8. 9. 23/02/2010: 31/03/2010: 27/04/2010: 30/06/2010: 24/08/2010: 01/10/2010: 26/10/2010: 30/11/2010: 18/01/2011: Buy, Target Price Change AUD6.50 Buy, Target Price Change AUD6.40 Buy, Target Price Change AUD7.15 Buy, Target Price Change AUD7.00 Buy, Target Price Change AUD7.25 Buy, Target Price Change AUD7.20 Buy, Target Price Change AUD7.30 Buy, Target Price Change AUD7.80 Buy, Target Price Change AUD7.95 Buy, Target Price Change AUD7.85 Buy, Target Price Change AUD8.10 12. 04/03/2011: 13. 01/04/2011: 14. 19/05/2011: 15. 23/06/2011: 16. 06/07/2011: 17. 23/08/2011: 18. 30/09/2011: 19. 25/10/2011: 20. 05/12/2011: 21. 09/12/2011: 22. 16/01/2012: Buy, Target Price Change AUD8.80 Buy, Target Price Change AUD9.25 Buy, Target Price Change AUD8.70 Buy, Target Price Change AUD8.40 Buy, Target Price Change AUD8.75 Buy, Target Price Change AUD9.35 Buy, Target Price Change AUD8.15 Buy, Target Price Change AUD8.20 Buy, Target Price Change AUD8.25 Buy, Target Price Change AUD8.45 Buy, Target Price Change AUD8.50
10. 25/01/2011: 11. 22/02/2011:
Equity rating key Buy: Based on a current 12- month view of total shareholder return (TSR = percentage change in share price from current price to projected target price plus projected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes: 1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period
Equity rating dispersion and banking relationships

120 100 80 60 40 20 0
47 %
49 %
23 %
24 % 3% % 13
Buy
Com paniesCovered
H old
Sell
Cos. w/ BankingRelationship
AustraliaUniverse
Page 19
08 February 2012
Energy
Regulatory Disclosures 1. Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.
2. Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.
3. Country-Specific Disclosures
Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://www.globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan, Japan Securities Investment Advisers Association. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless Japan is specifically designated in the name of the entity. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation.
Page 20

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Deutsche Bank Markets Research

Australian LNG Sector

US LNG exports: from spectre to emerging reality

Research Analyst (+61) 3 9270-4318 john.hirjee@db.com Andrew Lewandowski

Research Analyst (+61) 3 9270-4241 andrew.lewandowski@db.com

Deutsche Bank Markets Research

Australian LNG Sector

An overview of US LNG export proposals

Shale gas has since significantly displaced LNG imports

2000-2007 utilisation average

2008-2010 utilisation average

US LNG import forecasts have fallen by 80% as a result

Deutsche Bank AG/Sydney

Deutsche Bank Markets Research

Australian LNG Sector

Figure 2: US LNG import demand forecasts, 2006 vs 2011

50 40 30 20 10 0 2000 2002 2004 2006

US shale gas is now being considered for export as LNG

We think energy security concerns will cap total LNG exports

Why export US shale gas as LNG?

Deutsche Bank AG/Sydney

Deutsche Bank Markets Research

Australian LNG Sector

Why purchase US shale gas as LNG?

US LNG exports could offer cheaper and more flexible supply

There are hurdles that need to be overcome

Deutsche Bank AG/Sydney

Deutsche Bank Markets Research

Australian LNG Sector

Proposed US LNG export terminals

There are a number of proposed US LNG export projects

Freeport Jordan Cove Cameron Total

Freeport/Macquarie Fort Chicago/Energy Projects Sempra/ENI

Texas Oregon Louisiana

Existing import terminal Proposed import/export terminal Existing import terminal

7.5mmtpa 4.5mmtpa 12mmtpa 52mmpta

Source: Company announcements, DOE, Deutsche Bank

Deutsche Bank AG/Sydney

Deutsche Bank Markets Research

Australian LNG Sector

A potential lull in US contracting?

Deutsche Bank AG/Sydney

Deutsche Bank Markets Research

Australian LNG Sector

Sabine Pass: the leading proposal

Sabine Pass was completed in 2008 as an LNG import terminal

Cheniere Energy Partners 100%

Source: Company data, Deutsche Bank

The project is now targeting a 16mmpta export capability

Deutsche Bank AG/Sydney

Deutsche Bank Markets Research

Australian LNG Sector

Source: Company announcements, Deutsche Bank

Sabine Pass is owned by Cheniere Energy Partners

Gas sourced from US grid

Cheniere Energy Partners 100%

BG Group Gas Natural Fenosa GAIL KOGAS

Source: Company data, Deutsche Bank

Deutsche Bank AG/Sydney

Deutsche Bank Markets Research

Australian LNG Sector

All four proposed trains are fully contracted

Gas Natural Fenosa BG Group additional

GAIL Nameplate Capacity