Leveraging India’s Strengths to Ensure Energy Security
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Transcript of Leveraging India’s Strengths to Ensure Energy Security
Leveraging India’s Strengths to Ensure Energy Security
CII Conference on Energy SecurityVipul Tuli, McKinsey & Company
October 31, 2003
This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organisation without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.
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Today’s discussion
Energy security – What are our real challenges? Energy security – What are our real challenges?
Coal – India as a cost and technology leaderCoal – India as a cost and technology leader
Oil – Align multi-lateral interestsOil – Align multi-lateral interests
Nuclear – Expand execution capabilityNuclear – Expand execution capability
Gas – Exploit regional surplus to drive changes in global industry structureGas – Exploit regional surplus to drive changes in global industry structure
Need for an apex viewNeed for an apex view
Energy security – What are our real challenges? Energy security – What are our real challenges?
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India’s energy security challengesFuel mix for India, 2012
Per cent
56
1999
283mmtoe1
21
Coal
Oil
2012
Coal
Oil
Gas
NuclearHydro
Other renewables
337
42
25
15
1134
600mmtoe
• Oil only flexibility, need to create spare capacity in other fuels
• Lowering cost of energy and volatility as important as ensuring supply
• Adopt ‘position of strength’ mindset, exploiting global discontinuities
Source: Planning Commission Energy Policy Document
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Gas demand and supply in year 2005bcm
Southern China- Guangdong and Pearl River Delta- CNOOC and BP will build a LNG terminal by 2005- CNOOC is also considering a pipeline from Hainan
IslandFujian province- CNOOC plans to build a 2m t/y LNG terminal at
Fujian by 2006/7
East China- Shanghai, Yangtze. River Delta
- PetroChina- 2400 km East West pipeline connecting gas from Tarim, Xijiang
- CNOOC is also considering LNG terminal
NorthEast- Shandong
- PetroChina has just completed a pipeline from Hebei supplying 1.05 bcm; up to 2-3 bcm by 2008
- CNOOC is also considering LNG to Shandong-Bohai Bay
Supply Demand
China’s initiatives to improve energy security
• Gas pipelines to fill supply-demand gap of pipeline gas
• New regulatory framework for foreign investments
• Encourages Chinese companies to set-up overseas O&G production
• Heavy investments in coal power generation and technology
• BP, Shell, Exxon Mobil investments
Source: Lit search; BP website
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250
157
115
84
82
66
50
34
34
22
0.96
0.17
1.15
0.31
0.09
0.15
0.14
0.07
0.04
0.10
Coal: India must drive industry in technology, cost and powergen capacity
US
Russia
China
India
Australia
Germany
S Africa
Ukraine
Kazakhsta
n
Poland
Proved reserves at end 2002Billion tonnes
Coal as % of energy consumptionPer cent
• India and China can potentially drive coal industry
• India needs to create spare power generation capacity to utilise coal
• Companies like BHEL, Coal India Limited (CIL) and NTPC can / should make India a world leader in coal cost, technology, and powergen capacity
Source: BP Statistical Review, 2003; EIA
Coal consumption in 2002Billion tonnes
24
15
66
56
44
26
75
29
56
65
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Oil: Flexible pricing/risk tailoring mechanisms to mitigate volatility risks
Source: Morgan Stanley; Merrill Lynch
Shell/Pemex-Deer Park Joint Venture Example
(Uplift $/Bb)JV pays NOC
NOC pays JV
Period
Crude priced at netback
Market price
Risk protection provided via netback limit
0.0
5.0
10.0
15.0
• Texaco/Saudi Aramco alliance to secure crude oil supply/products market (Dec 1988)
• Shell/Pemex alliance to finance refinery upgrade and secure crude oil/supply products market (Feb 1993)
• Petrogal/Saudi Aramaco alliance to secure crude oil supply/products market (June 1997)
Other examples
Netback holds
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Gas: The region has massive reserves to fulfil any demand scenario
Source: BP Statistical Review 2001
As of 2000, trillion cubic meters
R/P=29.1R/P=24.8
0.300.65
1.37
R/P=49.3
2.310.39
2.05
1.26
R/P=52.3
R/P=32.0
R/P=40.6
R/P=33.5
IndiaIndia
AustraliaAustralia
IndonesiaIndonesia
MalaysiaMalaysiaBruneiBrunei
52.52
R/P>100
Middle EastMiddle East
56.70
R/P=79.6
RussiaRussia
ChinaChina
0.33 0.19
R/P=11.8
R/P=6.8
ThailandVietnam
• Substantial R/P’s with the existing reserve base ensure ample supply for decades
• Massive reserves in the Middle East and Russia will
– Ensure that there will be no shortage of potential projects chasing demand
– Create significant competition for Asian LNG suppliers
BangladeshBangladesh
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0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0 20 40 60 80 100 120
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0 20 40 60 80 100 120
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0 20 40 60 80 100 120
Historic prices3.86
Wide gap exists between historical price and LNG marginal cost going forward
*Marginal cost in year 2010 assuming straight line depreciation of capital cost over 20 years; ** Market shipping costSource: McKinsey; Petroleum Economist; CERA; team analysis
Marginal cost, delivered to Japan, 2010
USD/MMBtu
1.30
1.37 1.38 1.49** 1.52 1.521.70 1.74**
1.96
1.98
2.01 2.07 2.092.17
2.28
Projected 2010 LNG capacity, MTA
Shipping
Lique-faction
Produc-tion
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35.7 35.3 35.3 35.3 32.2 27.3
9.0 5.8
21.0 21.010.8 10.8
10.810.8
10.810.4
13.1 12.7
12.7 12.712.7
12.7
12.712.7
10.2 10.1
10.1 10.110.1
0
00
9.2 9.2
9.2 9.29.2
9.2
9.2
0
6.2 5.9
5.9 5.95.9
5.9
5.9
5.9
3.6 3.6
3.6 3.63.6
3.6
3.6
3.6
2000 2002 2004 2006 2008 2010 2012 2014
Significant volumes of LNG will be up forgrabs in a highly competitive market
*Includes Japan, Korea, Taiwan, China, and India; ** Assumes 4 BCM/train
Source:World LNG source book 2001; Energy Information Administration; BP Statistical Review 2001
Forecasted imported natural gas demand*
103
Indonesia
Malaysia
Qatar
Oman
AustraliaBrunei
Abu Dhabi
123(2005)
172
99.1 98.087.8 87.8 85.0
69.7
51.3
38.5
Contracted volume, BCM, 2000-2014
102 BCM gap in 2010, representing ~26 trains** of LNG to be renegotiated or built
102 BCM gap in 2010, representing ~26 trains** of LNG to be renegotiated or built
193(2015)
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Is the industry ripe for a massive price restructuring?
*Supply curve drawn on basis of border prices for India including 5% of customs duty on imported gas. Sales tax not considered in above values
Source: EIA; MoP&NG publications; McKinsey Global Gas Model; McKinsey analysis
ALL INDIA*
• Multiple new supply options to negotiate with
• China already driving prices down
• Potential for demand consolidation
$/mmbtu
0
1
2
3
4
5
6
0 25 50 75 100 125 150 175 200 225 250 275 300 325
ON
GC
B’d
esh
mmscmd
Demand
Price estimate
$2.75-3.50 /mmbtu
New
loca
l 2
Rel
ian
ce
Pri
vate
Mya
nm
ar
No
rth
-Eas
tPrice
Various LNG sources• Qatar• Oman• Yemen• Australia
• Iran• Egypt• UAE• SE Asia
2011-12: Projected gas demand-supply curve for India
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Nuclear Power Generation: India’s potential as a major player
77
75
58
50
44
38
29
3
1
1. France
Nuclear share in power generation, 2000
Per cent
• Nuclear power has massive growth potential
• Need to expand execution capability
**(17% of 212GW – capacity needed to meet peak demand by 2012 according to MOP presentation)Source: EIA; Planning Commission Energy Policy Document; Ministry Of Power
Nuclear power generation capacity
GW
3
36
Current Aspiration if India reaches global average of 17% in 2012**
2. Lithuania
3. Belgium
4. Slovakia
5. Ukraine
6. S.Korea
7. Japan
28. India
30. China::
Global average
17%
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Need for an apex body for Energy Security
PMO
Power Coal
Petro-leum & Natural Gas
Non- conven-tional energy
FinanceExternal affairs
RailwaysDeptt. of Atomic Energy
• Power PSUs
• JVs
• Private Cos.
Coal PSUs
O&G
• PSUs
• Private Cos.
• JVs
• PSUs
• MNCs
• JVs
• Govern-ment
• Non-govern-ment entities
Govern-ment
Govern-ment
Govern-ment
INDIA
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END OF PACK
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Today’s discussion
Coal – India as a cost and technology leaderCoal – India as a cost and technology leader
Oil – Align multi-lateral interestsOil – Align multi-lateral interests
Nuclear – Expand execution capabilityNuclear – Expand execution capability
Gas – Exploit regional surplus to drive changes in global industry structure Gas – Exploit regional surplus to drive changes in global industry structure
The example of ChinaThe example of China
Energy security – What are our real challenges? Energy security – What are our real challenges?
Coal – India as a cost and technology leaderCoal – India as a cost and technology leader
DLO-ZXR745-20031030(CII-EnergySecur)(VT)_7
15
Today’s discussion
Coal – India as a cost and technology leaderCoal – India as a cost and technology leader
Oil – Align multi-lateral interestsOil – Align multi-lateral interests
Nuclear – Expand execution capabilityNuclear – Expand execution capability
Gas – Exploit regional surplus to drive changes in global industry structure Gas – Exploit regional surplus to drive changes in global industry structure
The example of ChinaThe example of China
Energy security – What are our real challenges? Energy security – What are our real challenges?
Oil – Align multi-lateral interestsOil – Align multi-lateral interests
DLO-ZXR745-20031030(CII-EnergySecur)(VT)_7
16
Today’s discussion
Coal – India as a cost and technology leaderCoal – India as a cost and technology leader
Oil – Align multi-lateral interestsOil – Align multi-lateral interests
Nuclear – Expand execution capabilityNuclear – Expand execution capability
Gas – Exploit regional surplus to drive changes in global industry structure Gas – Exploit regional surplus to drive changes in global industry structure
The example of ChinaThe example of China
Energy security – What are our real challenges? Energy security – What are our real challenges?
Nuclear – Expand execution capabilityNuclear – Expand execution capability
DLO-ZXR745-20031030(CII-EnergySecur)(VT)_7
17
Today’s discussion
Coal – India as a cost and technology leaderCoal – India as a cost and technology leader
Oil – Align multi-lateral interestsOil – Align multi-lateral interests
Nuclear – Expand execution capabilityNuclear – Expand execution capability
Gas – Exploit regional surplus to drive changes in global industry structure Gas – Exploit regional surplus to drive changes in global industry structure
The example of ChinaThe example of China
Energy security – What are our real challenges? Energy security – What are our real challenges?
Gas – Exploit regional surplus to drive changes in global industry structure Gas – Exploit regional surplus to drive changes in global industry structure
DLO-ZXR745-20031030(CII-EnergySecur)(VT)_7
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Today’s discussion
Coal – India as a cost and technology leaderCoal – India as a cost and technology leader
Oil – Align multi-lateral interestsOil – Align multi-lateral interests
Nuclear – Expand execution capabilityNuclear – Expand execution capability
Gas – Exploit regional surplus to drive changes in global industry structure Gas – Exploit regional surplus to drive changes in global industry structure
The example of ChinaThe example of China
Energy security – What are our real challenges? Energy security – What are our real challenges?
The example of ChinaThe example of China