Presentation given by Roberta Luxbacher, director Europe, ExxonMobil Gas & Power Marketing
at 12th annual FLAME Conference.

Amsterdam
March 14, 2006

NOTE:This presentation includes forward-looking statements. Actual future conditions (including economic conditions, energy demand, and energy supply) could differ materially due to changes in technology, the development of new supply sources, political events, demographic changes, and other factors discussed herein (and in Item 1 of Exxon Mobil Corporation’s latest report on Form 10-K). This material is not to be reproduced without the permission of ExxonMobil International Ltd.

Good morning I’m please to have the opportunity to address this conference and share with you what we at ExxonMobil see as the exciting opportunities that exist for gas in Europe.

Over the next 20 minutes or so I will talk about how we see the global gas market developing as well as comment on some of the risks and challenges that need to be overcome to realise the future potential of the gas market in Europe.

I’ll start with an overview of my talk.

Europe in a global market

First of all, I’ll share our view on the supply and demand fundamentals for gas in Europe. Starting with projected global economic growth, we have developed a view to 2030 on how energy demand will grow. As you know, power generation is closely linked to economic growth, and is the main driver for gas demand growth.

With existing gas production declining in both Europe and North America, the growing requirement for gas imports to both continents will promote inter-regional LNG trade, creating a dynamic global gas market.

Recognising that there will be global competition for resources and investments. I will highlight the need for stakeholders and policy makers to maintain a long term vision to ensure a stable and effective market framework so that Europe can compete effectively.

Finally, looking at how the gas market is liberalising, I will focus on the role of policy makers to allow the market to function and to retain confidence in the power of competitive markets, even when prices are moving rapidly.

By the end I hope to convey to you that an open competitive market operating in a global context when combined with an attractive investment environment and stable predictable regulation provides the right framework to meet Europe’s gas supply needs in the global market.

Global power and competing fuels

As I mentioned, we start with the well publicised economic growth in developing economies, and consider what that growth means for power generation demand.

The left panel makes this point clearly. By 2030, we project that the total power generation outside Europe and North America to be over 60 per cent of the world’s total.

On the right is our projection of fuel inputs to power generation. Coal and gas today represent about two thirds of fuel inputs and by 2030 we expect their share to reach over 70 per cent.

As the demand for gas continues to grow in both the developed and undeveloped economies, we are now experiencing global competition for gas supplies.

This competition is growing as new LNG projects come on stream linking supply sources and the markets around the world, creating a dynamic global gas market.

If we now move on to look at Europe…

Europe supply and demand

As shown on this chart, Europe natural demand growth is expected to be about 1.2 per cent per year through 2030. We expect Europe local production to increase over the next few years driven by new projects in Norway, but then to peak towards the end of the decade. This combination of demand growth and indigenous supply decline creates a need for 57 GCFD or 570 BCM of new supplies.

Of these new supplies, we expect that up to 20 GCFD of new LNG (shown in turquoise) is needed in addition to that already announced. Most of this LNG is expected to come from the Middle East, North Africa, and West Africa.

Significant new supplies of Russian pipeline gas are also required. We expect this Russian gas to be from new developments in West Siberia (Yamal from 2012) and the Russian Barents Sea.

In summary, Europe is expected to increase its participation in the global gas market. Perhaps the most important aspect of the future gas market is the significant development in competition for securing new supplies and the resulting growth in inter-regional trade. It is in this environment that Europe finds itself competing to attract investment for the necessary new gas supplies.

Maintaining an effective market

In order for Europe to compete in a global market it is vital that an attractive investment environment is created and maintained. We are encouraged by the clear support in this regard by the Commission and many Member State governments.

As the European gas market transforms confidence is needed in the stability and predictability of the tax and regulatory regimes – unexpected changes will be viewed as increased project risk.

We support the European Commission’s efforts to balance a European open access regime with exemption processes designed to encourage new infrastructure investment. But we believe further steps are needed:
1) Care must be taken to avoid establishing incentive mechanisms that promote investment by incumbent monopolies which discriminate against new entrants
2) Regulations requiring investment in excess re-gas terminal capacity to provide mandated third party access also increase risks and reduce investment incentives
3) Providing effective permitting processes to ensure timely project development will also help lower risks and promote investment.

Laws and regulations that inhibit the operation of competitive markets will inevitably have unintended consequences. They will compromise Europe’s ability to attract imports from multiple sources and thereby undermine the key liberalisation objective – the development of a truly competitive marketplace with diversity of supply and interdependency.

Strong, competitive markets are based on the principles of freedom to participate in the market and freedom to negotiate appropriate market solutions.

Europe liquidity development

Now, I’d like to look at the status of market liberalisation in Europe..

In the centre you see what we believe to be the key indicators for liquidity development. The first three, Volume to Trade, Buyers and Sellers and Access to Infrastructure, we see as fundamental. The second three we see as liquidity accelerators.

On the right you will see that most of the indicators are showing an increasing trend, supporting our view that the market is developing and that the existing regulatory framework is appropriate.

The challenge on the regulatory side, as we all know, is to ensure that the requirements of the 2nd Gas Directive are fully and effectively implemented. Although we see the need for progress, care must be taken when introducing new actions that are intended to accelerate liquidity to ensure that the investment environment is not inadvertently affected.

Take for example access to infrastructure. Development of secondary markets is important, nevertheless, gas suppliers need assurance that their gas will have access to the market through the life of their project. Restricting capacity reservations or contract durations to the short term does not allow this. Instead it potentially undermines the sanctity of existing contracts and increases risk, stifling the large investments required to develop new competitive gas resources.

Overall we see that the European gas market is developing on the right track – we need to stay on course!

Multiple factors impact gas prices

This chart highlights the multiple factors impacting gas prices. All these factors, and this is not an exhaustive list, are legitimate influencers of price and will impact the market to different degrees over different time periods. All of this will lead to price movements and, of course, volatility.

Freely moving prices provide the signals necessary to balance supply and demand and ultimately facilitate the development of a strong liquid market.

As we examine this picture more closely however, and keeping in mind the long term nature of gas markets, there are really four key factors that I’d like to focus on.

Fundamental price setting factors are few

Those four factors are shown here.

I have talked about supply, and demand, and infrastructure access.

The fourth factor we see, shown here on the right, is Competing Energy. The natural gas market remains subject to the effects of potential for substitution. Multiple end users and multiple suppliers seek to optimise their own cost and risk of energy supply. In doing this the end-users make choices, sometimes short-term choices, sometimes longer-term choices, among the competing fuels available for their particular application.

Gas and Oil are substitutable energy sources in the majority of applications in the long term. Because of this connection the price of oil is a significant factor impacting gas prices.

Often we hear that the prevalence of oil-indexation in long-term gas supply contracts in Continental Europe is the reason for higher gas prices seen recently. The inference is that in the absence of these contracts and the direct contractual link to oil, gas prices would no longer be influenced by oil prices. We believe that this hypothesis is fundamentally incorrect.

Gas prices related to alternative fuels

Gas prices will track oil prices even in the absence of a contractual link. This can clearly be seen when looking at the deep liquid US gas market where the prices of competing oil products impact gas prices in both the short and longer term. This is in a market where gas is predominantly contracted on a gas index basis.

In this chart the natural gas price at Henry Hub in the US (shown in red) is charted over the last ten years against the prices of Distillate and Low Sulphur Fuel Oil (both competing energy commodities) in the US Gulf Coast.

US gas prices have generally traded in a band that is competitive with Low Sulphur Fuel Oil and capped by Distillate prices.

We expect that as European liquidity increases, more and more buyers and sellers may opt to contract using a gas index, but even in the absence of oil indexed gas contracts, we believe that gas prices will continue to be influenced by oil prices.

In conclusion

So now, let me summarise.

A well developed and competitive market will respond to supply and demand imbalances in a timely and cost efficient way. Healthy competition in an open marketplace will ensure Europe benefits with globally competitive gas prices.

In addition, such a marketplace will respond to Europe’s growing import dependency by developing cost effective and timely supply projects which increase diversity and security of supply. (In Europe we are fortunate that 70 per cent of global gas reserves lie within economic transportation distance of the market. More supplies can be attracted if we can maintain a framework that encourages investments in infrastructure, such as LNG terminals, that enables timely permitting and approvals, and allows for long-term capacity reservations.)

We believe that governments and regulators must ensure the three market framework fundamentals exist:
1) a beneficial investment environment
2) light-handed stable regulation, and,
3) an open and competitive marketplace.

The energy market is capital intensive and complex. The pace of change in the market may not always meet expectations. Short-term measures to manipulate one portion of it can have unintended consequences elsewhere. Over-regulation can be counterproductive, and hence it is better to rely on market forces.

Finally, I hope I have demonstrated that a competitive market when combined with an attractive investment environment and stable predictable regulation provides the right framework to meet Europe’s gas supply needs in the global market. We are on the track, we need to stay the course!

Thank you for listening to our views.