Slide 1: Overview of Centrica Storage
Overview of Centrica Storage Analyst site visit 26th October 2006
Slide 2: Agenda
Agenda • Introduction to Centrica Storage • Achievements since Centrica acquisition • Rough’s place in the storage and wider gas market • Value of storage • Financial drivers • Opportunities • Wrap up 2
Slide 3: An introduction to Centrica Storage
An introduction to Centrica Storage • Centrica Storage Limited is a wholly owned subsidiary of Centrica plc • Centrica Storage is a ring-fenced part of Centrica plc, separated from the supply side legally, physically and financially (Chinese walls). Undertakings agreed with Secretary of State Decemb
Slide 4: A brief history of Rough
A brief history of Rough • October 1975 – Rough field, 18 miles off East Yorkshire coast originally developed to produce natural gas • 1983/1984 – Rough field converted to a storage facility • 1st October 1997 - BG Storage established as a standalone business (ringfenced for competition reasons) fol
Slide 5: Facilities overview
Facilities overview 47/3B Installed 1983 24 wells 24/7 Operation Hedon, near Hull Administration/engineering York ROUGH 29 km @ 36" 29 km @ 16" 47/8A AMETHYST Installed 1977 EASINGTON TERMINAL 0 10 20 km 6 wells 24/7 Operation Easington Terminal Rough gas processing Venture House, Staines Headquarte
Slide 6: Centrica Storage assets
Centrica Storage assets • Represents over 70% of UK storage and supplies 10% of UK peak winter demand York • Largest offshore gas storage facility in Western Europe (strategically 18”Inter-field important). CD Pipeline BP 1.25 Miles • 185 billion cubic feet BD 36” Submarine (bcf) cushion gas Pipelin
Slide 7: An exceptionally good storage reservoir
An exceptionally good storage reservoir Reservoir Characteristics Size and wells • Approx 10 x 3 km, 9,000 ft deep • Thickness from 80 to 117 ft • 30 wells in place Homogeneous high quality reservoir rock • Uniform properties allow consistent production / injection across the field. Cushion Gas prov
Slide 8: NRV – Net Reservoir
How the reservoir is made up 90 bcf Space 72 bcf SBU sales volume -28 bcf -31 bcf Cushion Gas sales 2005 185 bcf NRV – Net Reservoir recoverable reserves Cushion Gas Volume 185 bcf non- recoverable reserves -400 bcf 8
Slide 9: Achievements since acquisition
Achievements since acquisition Immediate priorities: • Cleared backlog (c37,000 man hours) of maintenance work from previous operators • Lifted HSE deferred prohibition notice • Restored manning and competence levels • Undertakings agreed following Competition Commission investigation – physical, le
Slide 10: …resulting in
…resulting in • Operational reliability nearly 100% in 2005 (compared to ~ 90% in 2000/1/2/3) • Maximum deliverability rate increased by 8% enabling sale of additional peak product last winter • 8A – 3B bypass • Improved sand monitoring and well control • Reperforation • Excellent injection performa
Slide 11: Focused on reducing risk and management of health, safety and environmental issues
Focused on reducing risk and management of health, safety and environmental issues… 12 month LTIFR (since 1 January 2004) Total Combined Maintenance Backlog Hours Trendlines, 2002-2006 12 60000 10 50000 Increase entirely due to 40000 LTI per million manhours 16 February 3B incident - Manhours 8 12 L
Slide 12: ….and operational availability
….and operational availability Availability on Demand Performance 99.9% 99.3% 98.9% 100% 96.1% 95.0% 95.3% 92.0% 90% Injection: Availability post recovery 98.9% Production: Recommences October 2006 80% 70% 60% 51.3% 50% 45.8% 40% 2003 2004 2005 2006 Production Injection Injection (Post Recovery) 12
Slide 13: P&L trend since acquisition
P&L trend since acquisition FY FY FY H1 2003 2004 2005 2006 Average SBU price (calendar year) 15.6 24.6 34.8 47.1 (pence) Turnover (£m) Standard SBUs 74 113 159 103 Extra space 3 8 19 13 Native gas sales 0 0 20 Gas sales 30 21 30 25 Other 22 22 25 12 Total 129 164 253 154 External turnover (£m) 83 1
Slide 14: Rough SBU Price History
Rough SBU Price History Rough SBU Price versus 2.55*(Q1-Summer) Spread 130 125 65.56 p/SBU 120 115 110 105 100 95 90 37.81 p/SBU 85 80 75 pence/SBU 70 65 60 55 50 23.14 p/SBU 28.46 p/SBU 45 40 35 9.90 p/SBU 13.87 p/SBU 20.76 p/SBU 30 25 20 15 10 5 0 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 J
Slide 15: Rough’s place in the storage and wider gas market
Rough’s place in the storage and wider gas market Average Injection - Sum m er 06 Deliverability National Grid National Grid Hole House LNG LNG 13% 40% 3% Humbly Grove 6% Hornsea Hole House 8% Rough 2% Rough 66% 35% Hafield Moor Humbly Grove Hornsea Hafield Moor 4% 6% 15% 2% Storage Capacity Nationa
Slide 16: UK gas storage – current picture
UK gas storage – current picture - still largely the old “British Gas” facilities - Rough dominates seasonal storage market 4000 LNG Partington LNG Glenmavis LNG Dynevor Arms 3500 LNG Avonmouth Hole House Farm Hornsea 3000 Humbly Grove Hatfield Moor Rough 2500 GWh 2000 1500 1000 500 0 1 16 31 46 61
Slide 17: UK gas storage – including all planned projects
UK gas storage – including all planned projects - Assumes all current / planned projects built - Rough remains the major part of seasonal storage 4000 Holford H165 LNG Partington LNG Glenmavis LNG Dynevor Arms 3500 LNG Avonmouth Fleetwood Hole House Farm 3000 Byley Aldborough Stublach 2500 Portland
Slide 18: Impact of “gas surpluses” - winter 2007/08
Impact of “gas surpluses” - winter 2007/08 Theoretical Maximum Case All planned infrastructure built on time and utilised 100% • Additional projects significantly boost supply potential • Winter appears amply supplied CSL mid case Interconnectors, LNG terminals at 70% capacity, field gas at 90% of c
Slide 19: ….further ahead – winter 2010/11
….further ahead – winter 2010/11 Theoretical Maximum Case All projects are implemented on time and utilised 100% • Potential supply surpluses • This is reflected in the forward curve with 2010/11 being the “dip” in the curve • Too many short duration storage facilities • Unlikely all projects will b
Slide 20: Expected UKCS decline
Expected UKCS decline Beach Production decline - 2006 - 2012 vs Rough Production 300 Peak Beach Decline Rough Storage Deliverability - 42 mcm/d 250 "Size" 2006 Duration - 76 days 200 Beach Swing - 2006 mcm/d 150 100 2012 50 Beach Swing - 2012 - 1 12 23 34 45 56 67 78 89 100 111 122 133 144 155 166 1
Slide 21: Substitutes for long range storage (LRS)
Substitutes for long range storage (LRS) Competition to storage may come from a variety of sources Can European Storage compete against Rough? • European public supply Obligations (PSO’s) limit market access • Access to transportation capacity problematic • Major European markets need more storage b
Slide 22: Competitive Environment - Summary
Competitive Environment - Summary • UKCS indigenous gas remains today the major competitor to Rough in supplying seasonal swing but is in steep decline • Most new storage is relatively low volume and short duration and is not designed to compete directly with Rough • Most (all?) new import infrastru
Slide 23: Value of storage
Value of storage • Storage sold as “Standard Bundled Units” of injectability, space and deliverability • Rough intrinsic value driven by price spreads in the forward market • Volatility in spot and forward markets adds significant extrinsic value to holdings in Rough services • Trend in recent years
Slide 24: Rough – SBU pricing and intrinsic value
Rough – SBU pricing and intrinsic value Standard Bundled Unit (SBU) The Q1-Summer spread fits Withdrawal 1 kWh/day Purchases the shape of the SBU and provides a good hedge in Space 67 kWh forward markets. act ontr Injection 0.35 kWh/day rC t ac mme ntr Su 455m SBU’s sold Co Q1 1 SBU provides space e
Slide 25: Unlocking the extrinsic value
Unlocking the extrinsic value Good Rough Reliability from high availability of the asset to CSL and customers Customers able to reshape the CSL product or sell/buy unused capacity as firm or interruptible Extrinsic Customers able to buy/sell gas in store Ability to re-nominate withdrawal/injection w
Slide 26: Forward Curve Price Spread 2005/6
Forward Curve Price Spread 2005/6 Maximum Forward 25% - Different from and not a good predictor of spot/out-turn Price - Rough valued using forward price spreads and volatility not Central 50% absolute level of prices 50% - For Rough, low (or negative) prices in summer are as good 25% Minimum as hig
Slide 27: Volatility drives extrinsic storage value
Volatility drives extrinsic storage value - Low prices do not necessarily imply lower volatilities - Already evidence of high-volatility with low prices - Future risk of negative prices Volatility vs Spot Prices 500% 200.0000 450% 180.0000 400% 160.0000 350% 140.0000 300% 120.0000 Spot Price (p/th)
Slide 28: Market Value
Market Value • No direct market comparator for Rough : Other storage facilities are less transparent • Byley reportedly sold to Eon for £96m with a further £100m development cost required • Ongoing contractual terms are unknown • Byley space is 6 bcf compare to Rough’s 116 bcf • Simplistically, this
Slide 29: Financial drivers for Centrica Storage
Financial drivers for Centrica Storage • Revenue and profit trends • Detailed financials • Drivers of future SBU revenue 29
Slide 30: Revenue profit trends since acquisition
Revenue profit trends since acquisition • SBU remains the £m 2002 2003 2004 2005 main driver of profit, but other revenue SBU revenue 59 74 113 159 and costs impact • 2004 Operating profit 24 40 69 154 - higher revenue project expenditure Delta 35 34 44 5 on restoring facility - higher gas costs and
Slide 31: Detailed financials
Detailed financials £m 2002 2003 2004 2005 2006 H1 SBU revenue 59 74 113 159 107 Processing Income Mainly Amethyst 11 10 10 6 field limited remaining life Incremental Bundled Units 20 1 Gas Sales & fuel gas 30 23 30 25 Commodity, 11 11 13 2 Space 3 7 19 13 “one off” income 2 Total Revenue 89 129 164
Slide 32: Drivers of future SBU revenue
Drivers of future SBU revenue • Summer/Q1 forward price spreads and volatility - current forward curve - risk premium in forward curve and forward price spread behaviour - impact of summer surpluses and put option value • Multiplier of spread in SBU price increased from 2.3 to 2.5 between 2003/4 and
Slide 33: Opportunities
Opportunities • Now - restore and enhance Rough’s reliability and reputation and recover to 2005 levels • 2008/09 – 2009/10 - increase injection rates and further increase deliverability • 2008/09 – 2010/11 Use increased injection and deliverability to make additional cushion gas sales, creating mor
Slide 34: Wrap Up
Wrap Up • Centrica Storage has demonstrated its operational and commercial skills in storage through significant challenges • Rough is in a strong competitive position to meet growing market need for long duration seasonal storage • Uncertainties remain about the gas supply/demand position, particul