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October 6, 2010

Neil Beveridge, Ph.D. (Senior Analyst) • neil.beveridge@bernstein.com • +852-2918-5741


Angus Chan, CA • angus.chan@bernstein.com • +852-2918-5740

Bernstein Asia-Pac Energy: Global Gas Decoupling, the Rising


Marginal Cost of LNG and the Asian Gas Premium

10/5/2010 TTM EPS P/E


Closing Target Rel.
Ticker Rating CUR Price Price Perf. 2009A 2010E 2011E 2009A 2010E 2011E Yield
WPL.AU O AUD 44.48 55.00 -31.1% 2.71 1.53 3.95 16.4 29.1 11.3 2.5%
STO.AU O AUD 12.58 17.00 -34.3% 0.34 0.36 0.66 37.0 34.9 19.1 3.3%
OSH.AU O AUD 6.16 7.50 -19.3% 0.09 0.14 0.18 68.4 44.0 34.2 0.8%
857.HK O HKD 9.48 10.50 -8.9% 0.64 0.84 1.04 14.8 11.3 9.1 3.0%
PTR O USD 121.41 135.50 -1.8% 8.25 10.84 13.42 14.7 11.2 9.0 3.1%
RIL.IN M INR 1017.85 1160.00 -22.3% 53.40 68.60 81.40 19.1 14.8 12.5 0.6%
MXAPJ 453.67 23.63 31.02 35.63 19.2 14.6 12.7 2.7%
SPX 1137.03 61.70 83.42 95.36 18.4 13.6 11.9 2.0%

O – Outperform, M – Market-Perform, U – Underperform, N – Not Rated

Highlights

Asian gas prices are trading at a significant premium to other international markets. We believe this will
continue given the structural supply deficit and the rising marginal cost of LNG imports which will push
prices higher. Within the sector we favor low cost LNG exporters, domestic gas producers and quality CBM
players as a long term play.
 Natural gas prices in Asia are trading at a premium to the US in both regulated and unregulated
gas markets. The US is experiencing a glut in gas supply from shale gas drilling and relatively weak
demand growth has pushed gas prices to historic lows; Asian markets in contrast remain tight as demand
continues to grow rapidly with supply struggling to keep pace and the rising marginal cost of gas which
is pushing prices higher.
 To meet growing demand, LNG imports to Asia will grow strongly; Australia will be the main
beneficiary. Regas capacity in non-OECD Asia is set to more than double in the next 5 years which we
Asia-Pacific Oil & Gas

believe will benefit Australian LNG exporters. The decline in SE Asian LNG projects coupled with the
moratorium in new LNG projects in Qatar means that Australia will be the main supplier of incremental
LNG to the Pacific basin over the next decade.
 Australian LNG won’t be cheap however. Rising project costs will mean that the price linkage
between LNG and oil will remain firmly intact. Despite the current oversupply in LNG we believe that
the supply-demand balance will significantly tighten over the coming 3 years. Although some believe
that competition between projects could drive prices lower, the high marginal cost of Australian LNG
projects will require contract prices to be close to oil parity in order for projects to be developed
economically.
 The increase in the marginal cost of gas through LNG imports mean that regulated gas prices in
Asia will continue to rise. Although Indian (APM) gas prices doubled and Chinese wellhead gas prices
increased by 25% this year, domestic gas pricing remains at a significant discount to imported gas. We
believe that further price increases are required to accelerate the development of domestic gas production
which in the long run is preferable to imports.

See Disclosure Appendix of this publication for important disclosures and analyst certifications.
October 6, 2010

Neil Beveridge, Ph.D. (Senior Analyst) • neil.beveridge@bernstein.com • +852-2918-5741

 The main risks to our thesis is that unconventional gas makes a significant impact to the supply
demand balance in Asia in the near to medium term – but we think this is unlikely. While Asia has
significant CBM and Shale gas potential, development of these reserves will take time. The industry
structure in China and India is not the same as in the US where there are large numbers of small cap E&P
companies with unrestricted access. In Asia development is likely to be much slower given the
consolidated nature of the industry and access restrictions to foreign companies.
 Companies which will benefit from the rising marginal cost of gas are those which are lower down
the cost curve. These are low cost (high liquid) LNG exporters, domestic gas producers (which will
benefit from regulatory price increases) and quality small cap CBM producers. Within the Asian
gas sector our favorite picks are Oil Search, Woodside and Petrochina which we believe will enjoy strong
gas volume growth and benefit from the Asian gas premium.
Investment Conclusion

Despite a prevailing negative sentiment on global gas given the oversupply in capacity, Asia continues to be
the one bright spot with gas prices in Asia trading at a substantial premium to the US and European
markets. This should be good for Asian domestic producers and LNG exporters alike. While the surge in
unconventional gas drilling continues to sustain anomalously low gas prices in the US and European
markets mop up excess global LNG capacity; markets in Asia remain tight. Strong demand growth in China
and India, limitations in infrastructure capacity and misguided regulatory pricing policies means that supply
remains unable to keep pace with demand. In more mature markets of Japan and Korea, the decline of
traditional projects in SE Asia means that large gaps in long term supply need to be plugged over the
coming years with new supply.
A beneficiary of supply deficient Asian gas markets is Australia. Australia has large gas reserves but the
costs of development are high. In our view Australian LNG effectively sets the marginal gas price in Asia.
Given the enormous development costs, Australian LNG projects require pricing close to oil parity to be
economic. We therefore believe that the marginal price of gas in Asia will remain oil linked and at a
premium to other markets. Increases in gas import costs will further encourage the increase of regulated
domestic gas prices in China and India as governments attempt to stimulate domestic gas production over
imports. Although unconventional gas is a potential game changer, the above ground challenges in Asia
suggests that this is still some way off.
The beneficiary of continued high gas pricing in Asia are low cost LNG exporters, domestic producers in
China and India (which benefit from regulatory reform) and quality small cap companies developing coal
Asia-Pacific Oil & Gas

bed methane projects where pricing is unregulated. We favor E&P companies which have LNG projects
with high liquids content or are lower cost brown field developments such as PNG LNG and Pluto
expansion. Our top picks in Australia remain Woodside and Oil Search. We also believe that the Indian and
Chinese gas producers such as Reliance and Petrochina will benefit from further pricing reform, among
which we believe Petrochina offers best value at present.
Details

Over the past 10 years, the marginal cost of producing a barrel of crude has risen significantly from around
$20/bbl to between $70 -80/bbl. This has been driven by declining reserves and production per well as we
have reached the end of era of easy oil. Oil prices have responded to the increasing marginal cost of supply
and cycled around the marginal cost.
We believe the same phenomenon is happening with LNG. In the 1990's and early part of this decade the
LNG industry focused on the development of low cost 'easy' gas fields with relatively high liquids yields in
South East Asia and more recently in Qatar. Given the moratorium on new development of LNG in Qatar
and the decline of projects in SE Asia producers have been forced to develop projects in more remote places

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October 6, 2010

Neil Beveridge, Ph.D. (Senior Analyst) • neil.beveridge@bernstein.com • +852-2918-5741

such as Norway, Sakhalin and of course Australia. Australia has enormous gas resources but projects are
dry with little liquids content and have high development costs. Projects which have been developed
recently and new projects which have been proposed for FID over the coming years will have a marginal
cost which is close to oil parity (Exhibit 1). While we have seen a de-coupling between oil and gas prices
in North America, we do not believe that LNG prices can deviate significantly from oil given the high
marginal costs of production. This has important implications both globally and in Asia where we believe
that Australian LNG effectively sets the marginal cost of supply. In this call we examine the impact of the
rising marginal cost of LNG and why we believe that his could result in a premium in Asian gas prices over
the longer term.

Exhibit 1
The Rising Marginal Cost of Oil and LNG

Oil Price, Marginal Cost of Oil, Marginal Cost of LNG

120 0.145 has been used to convert


from $/mmbtu to $/bbl for LNG
projects
100

80
$/bbl

60

40

20

0
1990 1995 2000 2005 2010 2015

Marginal Cost of Global LNG Marginal Cost of Global Oil WTI

Source:

Divergence of Global Gas Markets

Global gas prices are diverging (Exhibit 2). While US gas prices hit record lows relative to oil (Exhibit 3),
gas prices in Asia continue to remain strong. Gas prices for imports to Japan are now $5/mmbtu higher than
Asia-Pacific Oil & Gas

spot prices in the US and Europe (Exhibit 4). In China, gas prices are also on the increase. After
government reform this year, average gas prices have been increased by 25% to $4.50/mmbtu at the well
head, which is higher than US spot. In India, the government doubled APM (administered price
mechanism) gas prices from $2.00 to $4.00/mmbtu. It has also allowed ONGC to charge $5.25/mmbtu for
new gas from offshore blocks which is higher than the $4.25/mmbtu price which has been set following the
D6 court ruling. Further moves upward in gas price in India seem inevitable.
Despite talk of a global gas market, gas markets remain highly regional given the transportation and storage
costs of gas which are much higher than for oil. Given that the interconnections are not in place to arbitrage
prices between markets, the differential in gas prices between Asia and the US will remain a function of
supply and demand in each of these markets. In the US, gas prices have been depressed by the surge of
drilling activity and supply of US shale gas plus the slow down in demand as a result of the financial crisis.

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October 6, 2010

Neil Beveridge, Ph.D. (Senior Analyst) • neil.beveridge@bernstein.com • +852-2918-5741

Exhibit 2
Gas Prices are starting to decouple between east and west

Oil, LNG and Spot Gas Prices in UK and US

25

20
$/mmbtu

15

10

0
Jan-00

Jul-00

Jan-01

Jul-01

Jan-02

Jul-02

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10
Japan LNG Import HH UK NBP WTI

Source: Bloomberg

Exhibit 3 Exhibit 4
Pricing discount to crude has never been as high for US Price premium of Asia markets over US markets remains
markets while Asia markets remain close to oil strong

Ratio of Gas to Oil Prices in US and Asia Japan Price Premium Realtive to US and UK

10
8
2 6
4
Gas/Oil Price

$/mmbtu

2
Asia-Pacific Oil & Gas

0
1 -2
-4
-6
-8
0 -10
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-00
Jan-01
Jan-02
Jan-03

Jan-04
Jan-05
Jan-06
Jan-07

Jan-08
Jan-09
Jan-10

US HH Japan Japan minus HH Japan minus UK NBP

Source: Bloomberg, Bernstein Est. Source: Bloomberg, Bernstein Est.

In contrast to the US demand for gas in Asia has been surging with supply struggling to keep up. Japan and
Korea LNG demand looks set to grow by 7% and 31% respectively this year. In China total gas demand
growth is likely to average 20% and in India we expect demand growth to be over 30%. This compares with

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October 6, 2010

Neil Beveridge, Ph.D. (Senior Analyst) • neil.beveridge@bernstein.com • +852-2918-5741

4% growth which is likely in the US. To meet growing demand needs, Asia needs increasing quantities of
imports. In traditional LNG markets of Japan and Korea the demand for LNG will be driven by the need to
backfill supply from mature fields such as Arun and Bontang where supply will continue to decline.

Exhibit 5 Exhibit 6
Japan requires significant LNG to backfill a decline in Korea has a bigger supply deficit problem which it needs
supply to address

Japan LNG Supply-Demand Korea LNG Supply-Demand

100 40
90 35
80
30
70
60 25
mtpa

mtpa
50 20
40 15
30
10
20
10 5

0 0
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020
Contracted Supply Demand Contracted Supply Demand

Source: Bernstein Est. Source: Bernstein Est.

Where new demand growth for LNG will be most strong is in emerging markets in Asia. In China, India
and other South East Asian markets such as Singapore, Thailand, Malaysia and Indonesia new regas
terminals projects being built. We expect regas capacity to double over the next 3 years to 70mtpa as new
capacity is brought on stream (Exhibit 7). Over the next 5 years we expect the Asia-Pacific region to be the
main consumer of global LNG which means that LNG pricing will be important in gas price setting in the
region.
Asia-Pacific Oil & Gas

5
October 6, 2010

Neil Beveridge, Ph.D. (Senior Analyst) • neil.beveridge@bernstein.com • +852-2918-5741

Exhibit 7
LNG regas volumes in non-OECD Asia will grow strongly

Growth In Regas Capacity in Non-OECD Asia

70

60

50

40
mtpa

30

20

10

0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

China India Other Asia

Source: Bernstein Est.

Exhibit 8
Asia Pacific Region Will Continue to be the Main Consumer for Global LNG

Global LNG Imports by Region

300

250

200
mtpa

150
Asia-Pacific Oil & Gas

100

50

0
2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

N. America Europe Asia-Pacific

Source: Bernstein Est, Bloomberg

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October 6, 2010

Neil Beveridge, Ph.D. (Senior Analyst) • neil.beveridge@bernstein.com • +852-2918-5741

Australia - The Marginal Gas Supplier in the Pacific Basin

Incremental supply of LNG can only come from one place in our view – Australia (Exhibit 9). With South
East Asia projects at the point of maturity (Arun, Bontang) and domestic demand for gas in Indonesia and
Malaysia picking up, export cargoes from this region are likely to decline. In Qatar there is a moratorium on
new supply, not to mention the shortage of gas within the region as evidenced by emirates of Kuwait and
Dubai which are starting to import LNG. While Nigeria, Venezuela and Russia also have potential to boost
exports we see a number of potential hurdles which makes it unlikely that we will see significant
incremental supply growth in the near future.
Given the lack of alternatives, Australia will be the main supplier of incremental LNG in our view.
Although Australia accounts for less than 10% of current LNG production it accounts for one third of
incremental new LNG and 50% of possible new LNG projects (on a capacity basis) which are under
consideration worldwide (Exhibit 10, Exhibit 11 and Exhibit 12).

Exhibit 9
Australia has the largest source of liquefaction capacity yet to be developed

Liquefaction Capacity by Country

140

120

100
(mtpa)

80

60

40

20

0
Malaysia

Norway
Egypt
Australia

Indonesia

Algeria

Venezuela

Angola

Canada

Peru
Qatar

PNG

EG
T&T
Nigeria

Russia

Oman

Yemen
Brunei

Abu Dhabi

Existing Capacity Under Construction Capacity Planned Capacity


Asia-Pacific Oil & Gas

Source: Bernstein Est.

7
October 6, 2010

Neil Beveridge, Ph.D. (Senior Analyst) • neil.beveridge@bernstein.com • +852-2918-5741

Exhibit 10 Exhibit 11 Exhibit 12


Australia has less than 10% of One third of capacity under More than 50% of planned projects
current capacity construction

Global LNG Capacity In Operation mtpa Global LNG Capacity In Construction mtpa Global LNG Capacity Planned mtpa
263mtpa 60mtpa 203mtpa

8%

33%

49%
51%

67%

92%

Australia Other Australia Other Australia Other

Source: Bernstein Est. Source: Bernstein Est. Source: Bernstein Est.

What is the Marginal Cost of Gas in Asia?

We believe that Australian LNG effectively defines the marginal cost of Asia given that it is the highest
cost supply of gas within the region. Globally, There is a large difference in the marginal cost of gas supply,
which we define at the FOB price required to generate a project 12% IRR (Exhibit 13). While oil
company's seek an integrated 15% IRR on major oil and gas developments, 12% IRR represents the low
end of the range at which companies would be willing to approve LNG projects. LNG within the Middle
East has the lowest marginal cost of supply given the large low cost gas fields and high liquids contents.
The Australian projects (marked in red) are at the high end of the cost scale given their high costs, remote
locations and lower liquids content.

Exhibit 13
Australian LNG projects have the highest cost of supply globally

FOB Gas Price to Yield 12% IRR

Sakhalin 2
12
Asia-Pacific Oil & Gas

Gorgon

10
PNG LNG
Pluto

8
QCLNG
US$/mmbtu

Snohvit
Kenai
North West Shelf

6
Angola LNG
Peru LNG
MLNG Dua
Yemen LNG
MLNG Satu
Brass LNG
Atlantic LNG 2&3

MLNG Tiga
Atlantic LNG 4

Brunei LNG

Tangguh

4
Qalhat LNG
Atlantic LNG 1

Damietta
Qatar Gas-3

ELNG 1

OLNG
ELNG 2
EG LNG

Darwin
Qatargas
Bontang
Qatargas-4

2
Arun
Adgas

0
- 20 40 60 80 100 120 140 160 180 200 220
Cumulative capacity, mmtpa

Source: Bernstein Est., Woodmac

8
October 6, 2010

Neil Beveridge, Ph.D. (Senior Analyst) • neil.beveridge@bernstein.com • +852-2918-5741

The marginal cost of LNG is not only dependent on project location. The marginal cost of LNG production
has been increasing over time (Exhibit 14). Prior to 2004 the FOB price of LNG project ranged from $2 to
$4/mmbtu. Over the past 5 years the marginal cost of LNG has increased substantially along with oil price.
The marginal cost of new LNG projects (mostly located in Australia) requires an $8 to $10/mmbtu FOB
price to deliver a 12% IRR. Assuming a typical LNG contract relationship with oil (0.145) this implies oil
prices of $55bbl to $70/bbl to deliver a break even return.

Exhibit 14
The marginal cost of LNG supply continues to rise with oil prices

Oil Price and LNG Marginal Cost of Supply

18 Oil price has been converted from $/bbl to


$/mmbtu be multiplying by 0.166
16

14

12
$/mmbtu

10

0
1975 1980 1985 1990 1995 2000 2005 2010 2015

LNG Marginal Costs (ex-Australia) WTI LNG Marginal Cost (Australia)

Source: Bernstein Est., Woodmac

Underlying the increase in the marginal cost of LNG is the increasing costs of developing new LNG
projects. Exhibit 15 lists a number of major LNG projects which have been developed, including their cost
and the estimated marginal cost of supply based on an integrated 12% project IRR.
Asia-Pacific Oil & Gas

9
October 6, 2010

Neil Beveridge, Ph.D. (Senior Analyst) • neil.beveridge@bernstein.com • +852-2918-5741

Exhibit 15
Capex, capacity, cost per ton and marginal cost of supply for existing LNG projects
MTPA USD $bn $/MTPA Marginal LNG
Project FID Start Up Capacity Total Total FOB $/mmbtu
Gorgon 2009 2014 15 37 2467 8.8
PNG LNG 2009 2014 6.7 15 2239 7.5
Angola LNG 2008 2012 5.2 9 1731 3.6
Pluto-1 2007 2011 4.8 10.5 2188 7.7
Pluto 1 2007 2011 4.8 10.5 2188 7.7
Peru LNG 2008 2010 4.45 3.8 854 3.4
Qatargas-2 2004 2009 15.6 8.1 519 1.5
Yemen LNG 2005 2009 6.8 4.5 662 2.9
Tangguh 2005 2009 7.6 5 658 2.6
Sakhalin 2 2004 2009 9.6 25 2604 11.2
NWS T5 2005 2008 4.8 7.9 1646 5.9
Snohvit 2003 2007 4.3 6.3 1465 6.1
ELNG 1 2003 2007 3.4 1.4 412 1.7
Darwin 2002 2006 3.4 2.7 794 2
NWS T4 2002 2004 4.3 7.8 1814 6.5
RasGas 1 1995 1999 6.6 3 455 1.5
NWS T1-3 1985 1989 7.7 8.3 1078 3.6
Assumes USD:AUD exchange rate of 1.15 for future projects
Estimated LNG FOB Prices required for 12% IRR on integrated project

Source: Bernstein Est.

Three factors have the greatest impact the marginal cost in our view. Overall project cost, liquid content of
the project and country taxation regime. While each of these factors plays a role in determining price, the
cost per ton has the largest impact on setting the overall marginal cost of LNG supply given the global
variation in project costs (Exhibit 16).

Exhibit 16
LNG project costs are the fundamental driver of the marginal cost of LNG supply

LNG Project Costs vs. Marginal Cost

12 Sakhalin 2
Asia-Pacific Oil & Gas

Marginal LNG Cost $/mmbtu

10 Gorgon
Pluto-1
8
Snohvit
PNG LNG
6

Peru LNG Angola LNG


4 Yemen LNG NWS T1-3
Tangguh
ELNG 1
2 Darwin LNG
Ras Gas
R2 = 0.8901
0
0 500 1000 1500 2000 2500 3000
Capex per Ton

Project Data Linear (Project Data)

Source: Bernstein Est.

10
October 6, 2010

Neil Beveridge, Ph.D. (Senior Analyst) • neil.beveridge@bernstein.com • +852-2918-5741

In recent years the price of developing a new LNG project in Australia and worldwide has increased
significantly. Liquefaction costs (which account for 30% to 40% over LNG project developments) have
increased from less that $400/ton to over close to $1000/ton for new liquefaction plants. Global upstream
costs continue to increase with 3 year average reserve replacement costs close to $15/boe (Exhibit 18).
Total integrated project costs have historically varied from less than $500/t to more than $2500/t.

Exhibit 17 Exhibit 18
LNG plant costs continue to increase …as do upstream cost

LNG Plant Liquifaction Costs Global Upstream F&D Costs

1600 30

1400
25
1200
20
1000

$/boe
$/mtpa

15
800

600 10

400
5

200
0 1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0
1990 1995 2000 2005 2010

Source: Corporate Reports Source: Bernstein Est.

With higher development costs, the marginal cost of LNG has to rise. In our view Australian LNG projects
need a minimum real gas price of $8-10/mmtbu and oil price of $60/bbl to $70/bbl deliver a minimum IRR
of 12%. Given the trend towards increasing costs, we believe that LNG prices will continue to rise.
Asia-Pacific Oil & Gas

11
October 6, 2010

Neil Beveridge, Ph.D. (Senior Analyst) • neil.beveridge@bernstein.com • +852-2918-5741

Exhibit 19
Oil price of close to $70/bbl is required for an LNG project with a marginal cost of $8-10/mmbtu

Oil Price Required for Breakeven LNG Price

$18
$16
LNG CIF Price ($/mmbtu)

$14
$12
$10
$8 Marginal Cost
$6
$4
$2
$0
0 10 20 30 40 50 60 70 80 90 100
JCC Price

Crude Recent Contracts (0.145 x Crude)

Source: Bernstein Est.

Marginal Cost of New LNG Project

So what is the marginal cost of the next wave of developments likely to be? A number of LNG projects are
likely to reach FID over the next 2 to 3 years (Exhibit 20). We have taken the most recent estimates for
capex and capacity to calculate the capex per ton and estimated the marginal cost of new LNG supply based
on a 12% IRR (Exhibit 21).

Exhibit 20
Capex, capacity, cost per ton and marginal cost of supply for planned LNG projects
MTPA USD $bn $/MTPA Marginal LNG
Project Company FID Start Up Capacity Total Total FOB $/mmbtu
PNG LNG T4 OSH, STO 2013 2018 3.3 5.5 1667 6.0
Browse WPL, RDS 2013 2018 12 35.0 2917 10.2
Asia-Pacific Oil & Gas

PNG LNG T3 OSH, STO 2013 2017 3.3 4.0 1212 4.5
Pluto 3 WPL 2012 2016 4.3 10.0 2326 8.1
Icthys INPEX 2011 2016 8.4 25.0 2976 10.7
Wheatstone CVX 2011 2017 8.6 21.0 2442 8.5
Pluto 2 WPL 2011 2015 4.3 9.0 2093 7.4
GLNG STO 2010 2014 7.2 15.0 2083 7.3
QCLNG BG 2010 2014 8.0 16.0 2000 7.1

Source: Bernstein Est.

Not surprisingly, we find that projects which are brown field expansions with high liquids content have the
lowest marginal cost of supply. Assuming gas reserves can be confirmed through further exploration and
appraisal drilling in 2011, expansion of the PNG LNG project looks likely to go ahead given the high
returns and low marginal costs. On current capex estimates, coal bed methane to LNG projects look to be
competitive versus dry gas projects in Western Australia, although capex estimates for green field CBM
projects remain uncertain and could be higher than we currently anticipate. Icthys and Browse have the
highest capex per ton and the highest marginal cost. We believe that an LNG price of $10/mmbtu which is
equivalent to an oil price of $70/bbl will be required to generate a marginal return on these projects. Given

12
October 6, 2010

Neil Beveridge, Ph.D. (Senior Analyst) • neil.beveridge@bernstein.com • +852-2918-5741

that companies will be seeking a higher IRR than 12% given the risks of cost overrun these projects look
fairly marginal even under current oil price assumptions.

Exhibit 21
Cost of Supply curve for new Australian LNG projects

Marginal Cost of Proposed Australian LNG Projects

12

oil parity at USD70/bbl


10

8
US$/mmbtu

Icthys
Browse
Wheatstone

Gorgon
Pluto T3
4
GLNG

Pluto T2
PNG LNG T4

QCLNG
PNG LNG T3

0
- 20 40 60
Cumulative capacity, mmtpa

Source: Bernstein Est.

The one mitigating factor for these projects is the liquids content. Icthys has one of the highest liquids of
any LNG project and Browse is also thought to be relatively liquids rich compared to some of the other dry
gas developments which are taking place in Western Australia such as Pluto and Gorgon (Exhibit 22).
Taking the liquids benefit into account may mean that the gas price (FOB) required to generate an
integrated 12% IRR is likely to be slightly lower than we estimate here.
Asia-Pacific Oil & Gas

13
October 6, 2010

Neil Beveridge, Ph.D. (Senior Analyst) • neil.beveridge@bernstein.com • +852-2918-5741

Exhibit 22
Liquids content may mean that some projects have a lower breakeven price

3.5
Icthys
Discount to LNG Marginal Cost for Liquids

3.0
PNG
2.5
$/mmbtu

2.0
Browse
1.5

Pluto
Whatstone
1.0 Gorgon

QCLNG
GLNG
0.5

0.0
0 10 20 30 40 50
Condensate Gas Ratio (bbls/mmscf)

Source: Bernstein Est.

Conclusions

Our take-away from this analysis is that Australian LNG will play a major role not only in gas supply to
Asia but in price setting in Asia. Australian LNG is high cost and will require oil linked pricing to be
developed economically. As such, we expect that the marginal cost of gas in the region will remain linked
to oil prices. This will continue to put upwards pressure on gas prices in the region and result in gas prices
trading at a premium to the US and Europe. Competition between projects in Australia is unlikely to lead to
a decoupling to oil prices or substantial discounts as this would require developers to sell LNG at price
which did not deliver a marginal return on investment.
The key risk to this thesis is the development of unconventional gas which could be lower cost than LNG or
increased supply of low cost LNG from the Middle East. We think both are unlikely. While the potential for
unconventional gas in Asia is clear, above ground issues mean that development of unconventional gas is
likely to take much longer relative to the US.
Asia-Pacific Oil & Gas

The high marginal cost of gas in Asia will ultimately benefit companies which are lower cost and can take
advantage of higher Asian gas prices. These include low cost LNG suppliers who can develop projects
substantially below the marginal cost of supply. It will also benefit unregulated gas suppliers such as
offshore gas producers and onshore CBM companies in China and India where prices are unregulated.
Ultimately, we also believe that the high marginal cost of gas will benefit regulated gas producers in China
and India (Exhibit 23). While there are historical reasons to regulate the gas price, the policy is proving
counter productive and limiting rather than stimulating domestic supply. In India for example, offshore gas
discoveries are not being developed in a timely way on account of the gas price being too low ($4-
5/mmbtu) to allow economic development.
In China there are similar problems, where the wellhead gas price needs to be increased to accelerate the
development of domestic gas reserves. Given the cost of imports, we believe it makes sense that regulators
raise gas prices to encourage development of domestic gas. In China we expect gas prices to be raised by
10% per year over the next 5 years to incentivize the development of domestic gas over more expensive gas

14
October 6, 2010

Neil Beveridge, Ph.D. (Senior Analyst) • neil.beveridge@bernstein.com • +852-2918-5741

imports. In India we expect that offshore gas prices will be increased to $5-6/mmbtu in the next 12 months
to further encourage development offshore supply.

Exhibit 23
Domestic gas prices will have to increase in response to higher import prices

China City Gate and Well Head Gas Prices


12
price of LNG imports

10

City gate gas prices:


8 2009-15E CAGR 9%
$/mcf

6
Wellhead prices:
2009-15E CAGR 10%
4
City gate: 2000-09 CAGR of 9%

2
Wellheads: 2000-09 CAGR of 6%

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Domestic Gas (Citygate) Domestic Gas (Wellhead)

Source: Bernstein Est.


Asia-Pacific Oil & Gas

15
October 6, 2010

Neil Beveridge, Ph.D. (Senior Analyst) • neil.beveridge@bernstein.com • +852-2918-5741

Disclosure Appendix
Valuation Methodology

Within our E&P coverage, we value Woodside based on our 2011 cashflow per share estimates, to which
we apply a target price to cashflow multiple based on historical trading ranges and the expected recycle
ratio (the ratio of cashflow per barrel and the average F&D cost per barrel of reserves added). We have
found a strong correlation between the recycle ratio and forward P/CF multiples for international E&P
companies (Exhibit 24). Our price targets are also sanity checked against NAV based valuation (Exhibit
25), though we prefer the use of the use of the PCF valuation methodologies as it can be back-tested and
builds in fewer assumptions in today's more uncertain cost and commodity environment.

Exhibit 24
Woodside price target

Company Currency RR 2009-11E SCB Target Fwd P/CF SCB 2011 CFPS SCB Price Target
Woodside AUD 270% 5.5 10.0 55.0

Source: Bernstein estimates

Exhibit 25
Woodside Net Asset Value
Woodside NAV Valuation At $80 (Real) Oil At $100 (Real) Oil
Equity Risk Risked NPV/ Risked NPV/
Country Field/Prospect (%) (%) Total NPV share share
M Boe $M AUD AUD
Corporate
Net Debt (3,633) (5.9) (5.9)
Central SG&A (534) (0.9) (0.9)

Fields in Production
Australia
NWS LNG 460 8,131 13.3 15.6
Domestic Oil 121 2,597 4.2 5.3
Domestic Gas 132 1,081 1.8 1.9
Algeria 15% 54 60 0.1 0.1
US* 10 291 0.5 0.9

Fields being developed


Asia-Pacific Oil & Gas

Australia Pluto 1 90% 784 12,433 20.3 21.5


NAV
Production 777 12,161 19.9 23.8
Development 784 12,433 20.3 21.5
Base NAV (incl. Corporate) 1,561 20,427 33.4 38.4

Upside
Pluto 2 75% 100% 654 5,692 9.3 13.6
Pluto 3 50% 100% 436 2,939 4.8 7.4
Browse 50% 1,167 2,333 3.8 3.8
Sunrise 33% 319 638 1.0 1.0
International** 500 0.8 0.8
Contingent Resources*** 375 749 1.2 1.2

Total NAV (Risked) 4,511 33,279 54.4 66.3

Source: Bernstein estimates

16
October 6, 2010

Neil Beveridge, Ph.D. (Senior Analyst) • neil.beveridge@bernstein.com • +852-2918-5741

For Santos and Oil Search, we believe an NAV approach is appropriate given a significant portion of theirs
values are attached to future LNG projects (PNG LNG for OSH, GLNG and PNG LNG for Santos). On this
basis, we set our price targets for Santos and Oil Search at AUD17.00 and AUD7.50 (Exhibit 26 and
Exhibit 27).

Exhibit 26
Santos Net Asset Value
Santos NAV Valuation At $80 (Real) Oil $100 (Real) Oil
Equity Risk Total Risked NPV per Risked NPV per
Country Field/Prospect (%) (%) Res. NPV share share
M Boe US$M AUD AUD
Corporate
Net Cash 371 0.5 0.5
Farm-out Proceeds (20% GLNG) 957 1.4 1.4
Central SG&A (609) -0.9 -0.9
Production
Australia
Eastern Australia
Cooper Basin 60-75% 274 2,238 3.3 3.9
Other E. Australia 53 318 0.5 0.5
Western Australia and NT
Bayu-Undan 11% 44 453 0.7 0.8
John Brookes 45% 71 414 0.6 0.6
Barrow Island 29% 12 166 0.2 0.3
Other WA and NT 38 313 0.5 0.6
Indonesia Maleo/ Oyong 15 78 0.1 0.1
Development
PNG PNG LNG 13.5% 220 2,743 4.0 5.3
Australia* 98 689 1.0 1.1
Indonesia Peluang/ Wortel 15 78 0.1 0.1
Vietnam Chim Sao/ Dua 38% 14 113 0.2 0.3

NAV
Production 508 3,980 5.9 6.8
Development 348 3,622 5.3 6.8
Contingent Resources 1074 702 1.0 1.0
Base NAV (incl. Net Cash) 1929 9,023 13.3 15.7
Upside
Asia-Pacific Oil & Gas

GLNG T1 40% 100% 538 1,837 2.7 3.7


GLNG T2 40% 25% 538 1,600 0.6 0.8
PNG LNG T3 13.5% 25% 138 952 0.4 0.5
Total NAV 3,144 13,412 17.0 20.7

* Includes Kipper, Reindeer, Henry, Halyard

Source: Bernstein estimates

17
October 6, 2010

Neil Beveridge, Ph.D. (Senior Analyst) • neil.beveridge@bernstein.com • +852-2918-5741

Exhibit 27
Oil Search Net Asset value
Oil Search NAV Valuation At $80 (Real) Oil $100 (Real) Oil
Equity Risk Total Risked NPV/ Risked NPV/
Country Field/Prospect (%) (%) Res. NPV share share
M Boe $M AUD AUD
Corporate
Net Cash 325 0.29 0.29
Central SG&A -182 -0.16 -0.16
Production
PNG
Kutubu Area 60% 21.6 525 0.46 0.55
Moran PDL 2 60% 12.2 137 0.12 0.15
Moran PDL 5 41% 10.4 145 0.13 0.15
Moran PDL 6 73% 0.3 13 0.01 0.01
Gobe PDL 3 36% 0.7 12 0.01 0.01
Gobe PDL 4 10% 0.3 6 0.01 0.01
Hides GTE Project 100% 9.8 39 0.03 0.04
SE Mananda 72% 0.8 35 0.03 0.04
Development
PNG PNG LNG T1&T2 29% 591.5 5,945 5.26 6.95

NAV
Production 56 911 0.81 0.96
Development 591 5,945 5.26 6.95
PNG exploration upside 579 289 0.26 0.26
International* (2C Resources) 125 150 0.13 0.13
Base NAV (incl. Net Cash) 1,351 7,438 6.58 8.42

Upside
PNG LNG Train 3 (2017) 29% 50% 296 2,019 0.89 1.22
PNG LNG Train 4 (2018) 29% 0% 296 1,613 - -

Total NAV 1,943 11,070 7.48 9.65

Source:
Asia-Pacific Oil & Gas

We value large cap integrated oil and gas companies by identifying the forward price to book multiples they
should trade at based on returns on equity, long term earnings growth expectations, dividend payout ratio
and cost of equity. Our starting point is that Fwd P/B = (ROE x PO) / (Ke – g), where is our estimates of
ROE for 2011, PO is the dividend payout ratio, Ke is the cost of equity, and g is the long term growth rates.
We set our price for PTR and RIL at HKD10.50 and INR1160 respectively (Exhibit 28).

Exhibit 28
Summary of price targets
Summary of price targets 2011E
Company Cur Ke Payout Ratio LT Growth rates 2011E ROE 2011E BVPS x P/B = Price Target
PTR HKD 8.5% 45% 4% 17.2% 6.1 1.7 10.5
RIL INR 8.5% 20% 7% 16.0% 540.6 2.1 1160

Source:

18
October 6, 2010

Neil Beveridge, Ph.D. (Senior Analyst) • neil.beveridge@bernstein.com • +852-2918-5741

Risks

Woodside: Risks to our Woodside price target include a decline in oil price as given the high correlation
and beta with oil or delays in the construction of Pluto 1. Upside risk will be a major discovery in the
Carnarvon basin over the next 6 months which transforms their ability to deliver the Pluto 2 LNG project.
Santos: Risks to our Santos price target include a significant change in oil prices given the high correlation
and beta with oil or delays to its GLNG project where we expect FID at the end of 2010 due to failure to
securing LNG offtake agreements. The possibility of cost overruns on this project also represents a possible
risk.
Oil Search: Risks to our Oil Search price target include a decline in oil prices given the high correlation and
beta with oil, or failure to progress their PNG LNG project in a timely way due to political or social unrest,
for which a significant amount of value is already embedded within the share price. Given the position of
XOM in the project we believe that cost overruns and delays will be avoided.
PetroChina: downside risks to our PetroChina price target include a decline in oil prices given the high
correlation and beta with oil, accelerated production decline at Daqing oil field and larger than expected
losses in their refining division as a result of government fuel price subsidies. The introduction of resource
tax is a further downside risk. Better than expected refining margins and domestic gas prices as a result of
policy changes represent an upside risk to our price target.
Reliance: Risks to our Reliance price target include a decline in oil prices given the high correlation and
beta with oil and operational problems relating to Reliance as it ramps up Dhirubhai which result in a
significantly lower than expected production output. Sustained weakness in refining and petrochemical
margins could be a further downside risk if economic recovery is slower than expected and demand growth
remains weak.
Asia-Pacific Oil & Gas

19
SRO REQUIRED DISCLOSURES
 References to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, and Sanford C. Bernstein, a unit of
AllianceBernstein Hong Kong Limited, collectively.
 Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration,
productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or contributions to, generating
investment banking revenues.
 Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for stocks listed on the
U.S. and Canadian exchanges, versus the MSCI Pan Europe Index for stocks listed on the European exchanges (except for Russian
companies), versus the MSCI Emerging Markets Index for Russian companies and stocks listed on emerging markets exchanges outside
of the Asia Pacific region, and versus the MSCI Asia Pacific ex-Japan Index for stocks listed on the Asian (ex-Japan) exchanges - unless
otherwise specified. We have three categories of ratings:
Outperform: Stock will outpace the market index by more than 15 pp in the year ahead.
Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead.
Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead.
Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily.
 As of 09/28/2010, Bernstein's ratings were distributed as follows: Outperform - 45.0% (1.7% banking clients) ; Market-Perform - 47.8%
(1.0% banking clients); Underperform - 7.2% (0.0% banking clients); Not Rated - 0.0% (0.0% banking clients). The numbers in parentheses
represent the percentage of companies in each category to whom Bernstein provided investment banking services within the last twelve
(12) months.
 Neil Beveridge maintains a long position in BP PLC (BP).
 Accounts over which Bernstein and/or their affiliates exercise investment discretion own more than 1% of the outstanding common stock of
the following companies STO.AU / Santos Ltd, OSH.AU / Oil Search Ltd.
 In the next three (3) months, Bernstein or an affiliate expects to receive or intends to seek compensation for investment banking services
from WPL.AU / Woodside Petroleum Ltd, STO.AU / Santos Ltd, OSH.AU / Oil Search Ltd, 857.HK / PetroChina Co Ltd, PTR / PetroChina
Co Ltd, RIL.IN / Reliance Industries Ltd.
12-Month Rating History as of 10/04/2010
Ticker Rating Changes
857.HK O (IC) 06/29/09
OSH.AU O (IC) 06/29/09
PTR O (IC) 06/29/09
RIL.IN M (RC) 04/27/10 O (IC) 06/29/09
STO.AU O (RC) 07/12/10 M (RC) 04/09/10 O (IC) 06/29/09
WPL.AU O (RC) 11/17/09 M (IC) 06/29/09

Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated


Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change
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