Perspective Otto Waterlander

Robert Oushoorn
George Sarraf
Thomas Schlaak

An Unprecedented Market
How the Recession
Is Changing the
Global Gas Market
Contact Information

Abu Dhabi
Raed Kombargi Düsseldorf
Partner Thomas Schlaak
+971-2-699-2400 Principal
raed.kombargi@booz.com +49-211-3890-245
thomas.schlaak@booz.com

Amsterdam Houston
Otto Waterlander Andrew Steinhubl
Partner Partner
+31-20-504-1950 +1-713-650-4183
otto.waterlander@booz.com andrew.steinhubl@booz.com
 
Robert Oushoorn London
Principal Jake Melville
+31-20-504-1981 Partner
robert.oushoorn@booz.com +44-20-7393-3425
  jake.melville@booz.com
Arlington, VA  
Dan Gabaldon McLean, VA
Principal Eric Spiegel
+1-703-902-5890 Partner
dan.gabaldon@booz.com +1-703-902-3813
  eric.spiegel@booz.com
Beirut  
Ibrahim El-Husseini Munich
Partner Walter Wintersteller
+961-1-985-655 Partner
ibrahim.el-husseini@booz.com +49-89-54525-540
walter.wintersteller@booz.com
George Sarraf  
Principal Shanghai
+961-1-985-655 Nick Pennell
george.sarraf@booz.com Partner
+86-21-2327-9800
Dallas nick.pennell@booz.com
Christopher Click
Principal
+1-214-746-6543
chris.click@booz.com

Booz & Company

EXECUTIVE Because of the economic recession, for the first time in the
history of international gas markets significant demand
SUMMARY
destruction will occur in 2009 and perhaps also in 2010,
setting back the market by up to nine years. Combined with
the completion of gas export infrastructure projects currently
under way, the reduced demand could lead to an oversupply
in the market of 5 to 15 percent until well into the next decade.
In addition, large recent discoveries of unconventional gas
sources in the U.S. and the potentially shifting position of the
U.S. in world markets may add to the pressure. The implica-
tions for suppliers, buyers, and infrastructure companies
cannot be overstated. To reduce the risks of huge oversupply
and concomitant price pressure, large incumbent suppliers
have a strong incentive to manage supply through increased
cooperation. Buyers must review their assumptions to take
advantage of the current buyer’s market—e.g., by joining
together to access previously inaccessible sources of gas and
spread the risk. Infrastructure providers may need to rethink
their business models to take advantage of opportunities that
may arise from changing trade flows.

Booz & Company 1

The Recession’s Since international natural gas
markets began to develop in the
Impact 1960s, gas has been a tremendously
successful fuel, with sales growing
continuously at an average rate of
nearly 4 percent per annum between
1965 and 2007. Until a year or so
ago, before the current deep and
lengthy recession, most analysts
had predicted that through 2030,
world gas demand would grow at
about 2 percent a year, approximately
twice the growth rate of oil.
However, the economic downturn
upended even the most conservative
scenarios. Demand for industrial
goods in developed countries has
dropped precipitously, hitting energy-
intensive industries particularly hard.
Analysts project automobile manufac-
turing in Europe to fall by 25 percent
in 2009. Output in the chemical
industry, the basis of many industrial
value chains, is expected to drop
2 Booz & Company
at a similar rate, while output in the
steel industry, another large energy
consumer, is declining by 30 percent
or more in North America and the
European Union. History shows
that demand for natural gas closely
correlates with changes in industrial
output in developed countries. Thus,
with deeply negative forecasts for
industrial output in 2009, and
potentially 2010, gas demand will
be particularly hard-hit.
But other factors are at play as well.
Industry is only one of the major
consumers of natural gas; demand
for natural gas in power production
and domestic heating will also
influence the course of the market.
And the recession may not challenge
each region of the world in the same
way. To gauge the potential impact
of the current economic crisis on
worldwide gas supply and demand,
we analyzed two scenarios.
Scenario 1: Scenario 1 is a relatively optimistic
forecast built from outlooks published
The Agencies’ by a number of well-known agencies,
Consensus such as the U.S. Energy Information
Administration (EIA), the International
Energy Agency (IEA), and the Inter-
national Monetary Fund (IMF). In
this scenario, world gas demand will
fall by approximately 2 percent in
2009 (see Exhibit 1). Underlying this
assessment is the belief that whereas
developed economies will be badly
damaged by the crisis, emerging
economies will continue to generate
natural gas demand growth of 2
percent throughout the year. These
agencies believe that overall demand
for natural gas will begin to rise
again in 2010.

Exhibit 1
Gas Demand Destruction under “The Agencies’ Consensus” Scenario

GAS DEMAND DESTRUCTION IN 2009 (%)

2% 2% 2% 2%

0% 0%

-2% -2%

-3%

-4%

-5% OVERALL
IMPACT

-8%

Developed Countries Emerging Markets Total World Market

Power Generation
Industrial

Residential
Weighted Average

Source: IEA; EIA; IMF; Booz & Company analysis

Booz & Company 3

Scenario 2: This scenario is based on the tradi-
tional strong linkage between indus-
Industrial trial production and gas demand
in developed economies, and an equal
decline of gas use in power production,
which is also experiencing demand

Production and on discussions we have had with

major gas producers on actual offtake
developments in the last quarter of
2008 and early 2009. This forecast
predicts an 8 percent drop in world-
wide gas demand this year (see
Exhibit 2), which is substantially
more pessimistic than the Agencies’
Consensus scenario. This conclusion
is based on an expected decline of
17 percent in industrial gas demand
destruction due to the recession.
We assume that demand in emerging
economies will be down 3 percent,
with some local growth offset by
reduced demand for exports from
those countries. Although there have
been some indications recently that
major economies are not in free fall
anymore, under this scenario, demand
destruction will continue into 2010,
albeit at a slower pace.

Exhibit 2
Gas Demand Destruction under “Industrial Production” Scenario

GAS DEMAND DESTRUCTION IN 2009 (%)

0% 0% 0%

-3%

-4% -4%

-8%

-10%

OVERALL
-13% -13% IMPACT

-17% -17%

Developed Countries Emerging Markets Total World Market

Power Generation
Industrial

Residential
Weighted Average

Source: IEA; EIA; IMF; Booz & Company analysis

4 Booz & Company

A Market in Independent of which scenario proves
to be more accurate, a bleak picture
Oversupply is emerging. Worldwide demand for
natural gas will be set back by at
least two and perhaps as many as
nine years (see Exhibit 3).
In Booz & Company’s view, it may
take until after the middle of the
next decade for demand to reach the
level that prerecession assessments
had forecast for 2010. By that time,
structural demand destruction of
between 101 and 422 bcm (billion
cubic meters) will have been built up.
This calculation is based on the belief
that gas demand will at best enjoy a
growth rate of nearly 2 percent per

Exhibit 3
World Gas Demand 2006–2020 Under Different Scenarios

bcm
3,400 Prerecession
Outlook Agencies’
3,300 Consensus
Scenario
3,200

3,100

3,000
Industrial
2,900 Production
Scenario
2,800

2,700

2,600
9 years
2,500

2,400
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

GAS DEMAND DESTRUCTION (BCM)

2011 2015 2020

Agencies’ Consensus Scenario 95 101 110

Industrial Production Scenario 395 422 461

Source: IEA; Booz & Company analysis

Booz & Company 5

year once the recession is over, a
pre–economic crisis forecast that, by
and large, incorporated changes in gas
demand driven by environmental
considerations and energy efficiency
improvements. However, there is a
risk that when economic and gas
demand growth returns, it may be
lower than what we had become
accustomed to in periods of previous
normal economic growth. Indeed,
future economic growth may be
constrained in many of the major
economies by the large deficits that
have now been built up in an
attempt to reverse the recession
and stimulate growth.
On the supply side, because of the
magnitude of the demand uncertainty,
and the reduced access to project
financing, a substantial number of
new gas infrastructure development
projects have been canceled or delayed
until demand growth returns. Those
recently shelved included a large
liquefaction project in Russia, and
projects in Algeria, Nigeria, Australia,
and Egypt were put on hold pend-
ing final investment decision (FID),

Exhibit 4
Global Supply Demand Overview 2008–2015

3,200

Gas sources
3,000
5%–15% surplus Production from current fields and infrastructure
Conventional pipeline
2,800
LNG
Unconventional
2,600 Demand in Agencies’ Consensus Scenario

Demand in Industrial Production Scenario

2,400

200

0
2008 2009 2010 2011 2012 2013 2014 2015

Maximum Surplus
269 444 410 423 407 383 338
(bcm)

Source: IEA, Navigant Consulting, Oil & Gas Journal, Booz & Company global gas model, Booz & Company analysis

6 Booz & Company

now not expected for a few years. If
we assume that all projects currently
pre-FID are put on hold for the fore-
seeable future, then the world-wide
natural gas supply–demand
balance should face a surplus of 5 to
15 percent. This surplus, expected
to continue until well into the next
decade (see Exhibit 4, page 6), will
be driven in part by additional lique-
Booz & Company
faction plants, export pipelines,
and increased production of gas
from unconventional sources in
North America. The recent huge
discoveries of unconventional gas
reserves in the U.S. may add to the
pressure of an oversupplied world
market. Indeed, up to now expecta-
tions were that the U.S. would become
more and more dependent on LNG
Even if only projects that already
have a final investment decision are
completed, a situation of oversupply
develops that may last until well
into the next decade.
(liquefied natural gas) imports to
meet its demand for gas, partially
providing the basis for a number of
gas liquefaction projects around the
world. If, however, the U.S. becomes
self-sufficient in its gas supply, as
some analysts now predict, the risk
of oversupply in other regions may be
increased even further.
7
Navigating The global gas market has rapidly
shifted from favoring sellers to
the Difficult favoring buyers. And because the
Landscape speed of this change is unprecedented,
we may well see similarly unprec-
edented reactions from market partici-
pants. The large incumbent exporters,
such as Russia, Qatar, Norway, and
Algeria, are faced with a stark choice:
Either compete head-on with each
other and with smaller companies
for market share while demand falls,
or sit out the storm, accept the volume
and revenue loss, reduce production,
and strive to maintain prices and
pricing structures. The implications
of head-to-head competition are
unappealing; they include severely
depressed price levels of some dura-
tion and altered contract structures
and buyer behavior in the longer
term, with gas prices potentially
decoupling from oil prices.
The second option—sitting out the
storm—therefore appears more
appealing. However, it is unlikely
that players will want to shoulder
the burden of reducing sales volume
alone. Therefore the anticipated over-
supply may trigger increased coor-
dination among the large exporters
to manage world gas supply. The 10
8 Booz & Company
largest gas exporters,
which control some 80 percent of
worldwide gas supply and are led
by the large national oil companies
(NOCs), such as Gazprom (Russia),
Qatargas (Qatar), Statoil (Norway),
and Sonatrach (Algeria), have incen-
tives to do so given their large market
shares. In addition, a structure already
exists in which the large producers
meet and discuss market developments:
the Gas Exporting Countries Forum
(GECF). The international oil compa-
nies (IOCs), with their limited equity
shares in national gas production, are
not in a position to greatly influence
decisions by the NOCs, and have little
choice but to follow along. A further
reason to expect the large NOCs
to lead the management of global
supply is the entry of a group of new
producers into the market in the next
few years that have motivations and
strategic concerns potentially quite
different from those of the large
incumbent suppliers. For instance, by
2015, smaller players like Angola and
Peru are expected to have started their
export programs. With no established
positions to defend or lose, these
new players may well be unwilling to
initiate or even agree to production
reductions.
 Today’s global natural gas market
Implications environment is highly uncertain.
and Yet with careful consideration,
sellers and buyers may find that
Opportunities the current situation can also
provide interesting opportunities
for carving out advantageous
positions (see Exhibits 5 and 6).
National Oil Companies (NOCs)
With lower-than-expected produc-
tion and revenue, project profitability
may be at risk for NOCs. In addition,
buyers will seek to renegotiate
contracts, thus putting prices and
pricing structures at risk. NOCs
should assess the implications of
reducing production and bring their

Exhibit 5
Implications and Potential Considerations for Sellers

Sellers IMPLICATIONS POTENTIAL CONSIDERATIONS

- Production and export volumes are lower than planned with corresponding
lower revenue
- Project profitability is at risk
- New NOCs are still entering the playing field
- Prerecession price levels come under pressure; oil indexation at risk
- Importers/buyers will seek opportunities to renegotiate contractual terms
NOC
- Assess potential for and impact of lower production, both
economic impact and competitive position versus established and
effect on emerging exporters
- Assess company-specific demand scenario and revisit project portfolio
to bring it in line with this new outlook, for both pre- and post-FID projects
- Aggressively take advantage of reverse capital expenditures inflation:

leverage the inevitable oversupply in contractors, rigs, and materials

- Seek to improve netbacks through transport route optimization by
introducing geographic swaps
- Look for opportunities to secure captive demand through expanded
downstream plays, gas to power, etc.
- Expand capabilities—e.g., via acquisition of specialized IOCs
or contractors

- IOCs face similar implications as NOCs as part of joint ventures - Position for and respond to likely NOCs-induced supply reductions,
- High-tech projects with high development and marginal costs could including reducing costs to improve local competitive position
become uneconomic - Accelerate building of cross-market capabilities to optimize sources
IOC

- Highly leveraged IOCs become more exposed and possibly vulnerable and netbacks and increase relevance
to takeover - Assess which assets/operations might become most distressed and
- Geopolitical issues may restrict playing field pursue acquisition possibilities

Source: Booz & Company analysis

Booz & Company 9

project portfolios in line with new International Oil Companies (IOCs) across the globe. They could optimize
forecasts. Opportunities will arise portfolio benefits by accelerating the
in aggressively taking advantage of For the IOCs, many of the implica- building of cross-market connections
lower costs for contractor services and tions and opportunities are similar and capabilities.
materials due to oversupply in those to those faced by the NOCs, because
markets. Furthermore, this can be the they are usually part of joint ventures. Importers/Utilities
moment to initiate geographic swaps Simply put, they should be poised for
with other players to optimize logis- NOC-induced supply restrictions and Demand destruction leads to reduced
tics costs, to assess integration down- cost reductions. They need to cut costs revenues, especially for those com-
stream to secure captive demand, and and manage working capital closely. panies with large exposure to the
to expand capabilities by taking over The opportunity for IOCs may lie industrial segment. Players that are in
specialized companies whose value in the fact that they typically have a long-term take-or-pay (TOP) contracts
has dropped. portfolio of stakes in different plays may experience problems in fulfilling

Exhibit 6
Implications and Potential Considerations for Buyers

Buyers IMPLICATIONS POTENTIAL CONSIDERATIONS

- The changed market offers opportunities to diversify imports and/or - Assess potential to reduce offtake from suppliers under long-term
access gas as we move away from a supplier’s market contracts, while ensuring not to jeopardize long-term security of supply
Importers/Utilities

- Demand destruction results in less revenue, especially in OECD
countries and the industrial segment
- Importers faced with TOP obligations have less room to maneuver within
the context of their long-term contractual obligations
- Noncaptive customers—e.g., large industrials and power generators—will
try to benefit by seeking lower-priced gas
- Take advantage of opportunities to rebuild the gas portfolio by
identifying and pursuing long-term portfolio changes now:
- Reconsider gas suppliers
- Assess vertical integration, including upstream
- Expand market presence to create arbitrage potential
- Consider changes to partner with other importers to enlarge oppor-
tunities and ability to consume risk, and to increase bargaining power

- Value in LNG supply chain may be shifting from “volume” plays - Actively broker “buyers” and “sellers” to secure pre-FID investments by
Infrastructure Companies

seeking baseload positions to “access” plays seeking multiple positions
- The changing market dynamics may result in inertia with customers before
they decide on future course of actions
- Reduced access to project financing, higher financing costs, and less
clarity on project timing puts projects at risk
segmenting and reevaluating each group
- Assess the upside potential of alternative business models for gas
infrastructure in the future:
- Will the throughput model continue to dominate?
- Is an access model based on optionality feasible?
- Aggressively take advantage to reverse capital expenditures inflation:
leverage the inevitable oversupply in contractors and materials
- Reposition projects to better align with marketplaces and trading
hubs

Source: Booz & Company analysis

10 Booz & Company

their minimum offtake obligations.
Opportunities will arise to renegoti-
ate prices and other contract condi-
tions, and chances will appear to take
advantage of increased supply on spot
markets. Nevertheless, buyers should
be cautious not to damage long-
term relationships with NOCs; they
will need these alliances in the long
term. This may also be a good time
to rebuild gas supply portfolios—for
example, by partnering with other
importers to access new sources of gas
Booz & Company
and share risk, or by entering existing
upstream plays, taking advantage of
the current lower valuations.
Infrastructure Companies
Clearly, for infrastructure players the
main risks are in reduced project prof-
itability and reduced access to project
financing. Also, customers who might
otherwise be candidates for adding
LNG capacity or other pipeline assets
will tend to delay making decisions
The unprecedented circumstances
in the international gas market
may also offer unprecedented
opportunities for all types of players
along the gas value chain.
on projects. Infrastructure compa-
nies should be aware that the value
in LNG projects may shift from
“volume” plays, in which a company
seeks baseload positions, to “access”
plays, in which the value resides in
a company’s available capacity in
multiple locations and opportunities
for optimizing arbitrage. At any rate,
infrastructure companies should take
advantage of falling prices for materi-
als, labor, and construction services to
push project costs down.
11
Conclusion Today’s world’s gas market is at an
unprecedented juncture. The world-
wide economic downturn—set off by
the credit crunch—has the potential
to profoundly change the behavior of
market participants, prices, and pric-
ing structures. To a large extent, the
change that the market will experience
depends on supply decisions made
by large NOCs. Also, developments
in the production of unconventional
gas in the U.S. based on the recent
huge reserves discoveries will play a
12
crucial role, with a potentially shift-
ing position of the US in the global
supply/demand balance adding to the
situation of oversupply. Yet all play-
ers along the value chain—suppliers,
buyers, and infrastructure compa-
nies—need to carefully assess the
current new dynamics: Those players
who fully understand the implications
of the current market conditions and
the opportunities they may offer can
emerge from this crisis stronger than
they went into it.
Booz & Company
About the Authors
Otto Waterlander is a partner
with Booz & Company based in
Amsterdam. He is the leader
of our global natural gas
practice and specializes in
strategy-based transformation
for global clients along the
energy value chain.
Robert Oushoorn is a
principal with Booz & Company
in Amsterdam. He specializes
in strategy development for
clients along the natural gas
value chain, including pro-
ducers, midstream players,
infrastructure companies,
and utilities.
Booz & Company
George Sarraf is a principal
with Booz & Company based
in Beirut. He advises our energy
and utility clients in the Middle
East on strategy development,
organizational design, and
transformation programs.
Thomas Schlaak is a principal
with Booz & Company based
in Düsseldorf. He specializes
in strategy development and
organizational design for
clients in the energy sector,
with a focus on gas producers
and utilities.
13
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