LNG Economics

7/29/2019 LNG Economics

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Suresh Mathur

October 21, 2011

LNG ECONOMICS


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LIQUEFIED NATURAL GAS (LNG)o LNG is a natural gas cooled to -162C

o Liquefaction reduces the volume of gas by approximately 600 times

o LNG is a cold, transparent, odorless, non-corrosive, non-toxic and has low viscosity.

o LNG is safer than other liquid fuels.

Fuel Calorific Value

(Kcal/Kg)

% Sulphur

Imported coal 6,000 0.5 - 1.2

LNG 11,500 0.1

Naphtha 11,200 0.15

Diesel 10,800 < 1.0

Fuel Oil 10.200 2.0


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LNG - A SAFE OPTION


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-

50.00

100.00

150.00

200.00

250.00

2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

Gas Demand (MMSCMD)

Power Fertilizer City Gas Petchem-Refinery Sponge Iron

2010-11 2011-12 2012-13 2013-14 2014-15 Basis

Power 87.71 149.11 185.52 212.73 243.34

Units planned

Fertilizer 49.39 57.48 68.08 68.08 68.08

Units planned

City Gas 13.70 17.53 22.44 28.72 36.76Trend

Petchem-Refinery 24.44 25.42 26.43 27.49 28.59

Trend

Sponge Iron 3.71 3.82 3.93 4.05 4.17Trend

Total 178.94 253.36 306.41 341.08 380.95

Source: Mercados Analysis.

PROJECTED DEMAND FOR GAS


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GAS PRICES IN INDIA

PRODUCER

LAND FALL

PRICE

MARKETING

MARGIN

CENTRAL

SALES TAX

TRANSMISSION

CHARGES SERVICE TAX TOTAL PRICE

US$/MMBTU (US$/MMBTU) 2% (US$) US$/ MMBTU 10.30% (US$) (US$/MMBTU)

ONGC/Oil APM

(including Royalty) 4.20 - 0.08 0.60 0.06 4.94

ONGC C Series

(including Royalty) 5.25 0.12 0.10 0.60 0.06 6.13

PMT 5.65 0.11 0.12 0.60 0.06 6.54

Other JVS (Ravva) 3.50 0.11 0.07 0.60 0.06 4.34

RLNG 8.70 0.17 0.17 0.60 0.06 9.70

Reliance KG6 4.20 0.14 0.09 1.80 0.19 6.42

However, presently Spot/ Shot Term RLNG Price at customer end is around US$17-18


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SOURCE: Indianpetro; DGH; Company annual reports; Expert interviews; McKinsey analysis

146185

46

185

35

185

77

185

4591

126

203

40

311

High Potentialdemand,2015

388

Price of $8-10 mmbtu

Medium Price of $11-12/ mmbtu

276

Price of $13-14/ mmbtu

59

171

Price of $16-17/ mmbtu

Low

25

19

230

2010 yearendconsumption

Gas demand and supply, 2015

Mmscmd, at customer gate prices

LARGE DEMAND BUT SENSITIVE TO PRICE

1 Based on estimated LNG supply of 8 mtpa in 2015 including RasGas (7.5 mtpa) and 1.5 mtpa from Gorgon LNG in 2015

21 3 4

Imports

Domestic supplies

Sectors withdemand

Industries CNGtransport

Refineries Industries

Powercogen

Peakingpowerplants

Baseloadpower

New fertilizerplants

Prices at Crude of $ 100/Bbl


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NATURAL GAS IN POWER SECTOR

Between 2011-12 & 2012-13 anadditional Gas based capacityaddition expected to be around12200 MW.

Role of LNG in Power Sector: Complementing domestic gas

usageIn peaking and merchant Power

99503,

(55%)

17706,

(10%)1199.75,

(1%)

38206,

(21%)

20162,

(11%)

4780,

(2%)

Coal

Gas

Oil

Hydro

Renewabl

e

Nuclear

Power Generation Capacity of 181558 MW)

As on August, 2011


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AVERAGE ELECTRICITY PRICE TO CONSUMERS

COUNTRY USD/KWH

Japan 0.22-.0.30

France 0.17-0.20

UK 0.23 -0.25

USA 0.10-0.11

India 0.06-0.08

China 0.08-0.11Brazil 0.11-0.15

Source : IEA & others


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ROLE OF LNG IN PEAKING POWER GENERATION

Presently, Indias LNG import capacity is around 13.5 MMTPA through its

two terminals & meeting approx. 20% of total gas supply.

A majority of power capacity addition is based on coal which has limited

flexibility for providing peaking power

LNG would also play a role in mitigating demand-supply gap for new

under construction combined cycle (base load) capacities.

Given that the LNG imports are unlikely to be in the price range suited

for base load power, R-LNG can serve as top up fuel for base load

plants thereby augmenting the PLF and providing solution for meeting

the PEAKING POWER DEMAND.


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POWER COST WITH VARIOUS FUELS


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LNG based power generation with integrated LNG Terminal:

No VAT on Natural Gas

No Marketing margin & pipeline tariff

Harnessing of cold energy to increase efficiency of power plant

High reliability and ability for generation of peaking power

Pricing a challenge , however can be mitigated through :

mix of domestic gas and RLNG

Targeting niche markets like liquid fuel replacement in industries, housing

societies etc.

Bilateral Agreements with quality Industrial power consumers

LNG UNIQUENESS OF INTEGRATED POWER PLANT


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NATURAL GAS IN FERTILIZER SECTOR

India is the 3rd largest fertilizer producer in the world.

Around 35% expansion of Fertilizer capacity expected over the next 3 years

Presently, India has 56 large size fertilizer plants. Natural gas on account of

clean & efficient source of energy becoming preferred feedstock for the

manufacturer of urea over other fuels.

Assured availability of gas a constraint for expediting conversion process.

With competition from Imported Urea, LNG to complement usage of

Domestic gas with some policy level changes expected to take place shortly

Demand

Period BCM MMSCMD

2011-12 21 57

2012-13 25 68


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NATURAL GAS IN CGD

Environmental concerns along with fuel economics driving force for CGD growth

CGD coverage expected to increase to over 200 cities by 2025

Current demand of Natural Gas for CGD is around 12 MMSCMD, expected to

grow to around 35- 40 MMSCMD by 2017

Rapid CGD pipeline infrastructure being laid


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NATURAL GAS IN INDUSTRY

Industrial sector consumers are ceramic, glass, automobiles and other

manufacturers for feed stock and fuel for captive power generation

Niche sector for LNG consumption expected to grow with GDP growth in the

country

Willingness to pay more for gas as compared to other sectors as liquid fuel is

costlier

Various new refineries and expansion like Panipat, Bina, Bhatinda, Paradeep

expected to come on-stream shortly

New Petroleum, Chemicals and Petrochemical Investment Regions (PCPIR)

policy aimed at developing India as a hub for Petchem and chemicals- leading

to incremental demand for LNG


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LNG PRICING

LNG pricing is most important in Sale PurchaseAgreements.

Success of contract largely revolves around thenegotiated LNG price for long term.

LNG price in Asia Pacific is largely linked with JCCcrude basket.

European buyers have LNG price linked with basket ofcrude products and gas.

New buyers prefer fixed price with minor variations


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EVOLVING LNG PRICING SCENARIO

In Ist Quarter of 2011, the short term prices which were hovering

at around 11% of crude have firmed up post-Japan Earthquakeand moving closer to long term prices at 14 -15%. of crude

The vessel charter rates have moved up from 60K /day in IstQuarter to around USD 90-100K/day.

Long term FOB prices for Asia-Pacific stable at 14-15% ofCrude.

Australian projects costs very high compared to Qatari projects -supported by high oil prices and slope.


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OTHER LNG INDEXATION FORMULAS

Floor & Ceiling - Two main LNG formulas adopted by Japanese areequations of straight line i.e. increase or decrease in LNG price isproportional to increase or decrease in Crude Oil or JCC Price.

LNG Sellers were concerned about very low LNG price and LNG Buyerswere concerned about very high LNG price. To alleviate their concern,

the concept of floor & ceiling was developed. LNG Price would remainsstatic below specified (floor price) and above specified (ceiling price).

S Curve This is another mechanism to take care of abnormal increaseor decrease in the LNG Price. In this concept the slope of the LNG priceequation is kept on lower side whenever, crude or JCC Price is reduced

or increased beyond specified levels.


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LNG CHOICEST FUEL OF FUTURE

With increasing gas demand supply gap with depleting indigenous suppliesIndia is undoubtedly emerging as a major LNG market of the future.

In Power generation , LNG fueled Gas Turbine yields a high thermal efficiency of55% as against 40% with Indian and 46% with imported coal.

LNG has highest calorific value in comparison with all other competing fuels andis the most Eco-friendly.

Since LNG is free from contaminants like Sulphur, Sodium and Vanadium, which

generate corrosive after combustion products, operating costs, are comparativelyone the lowest.

LNG being available in abundant quantities in the Mid East Countries, Malaysia,Indonesia and Western Australia, which involves fairly short shipping distances,

Additionally, LNG also provides several base stocks for the production ofNitrogenous and Phosphate fertilizers and petrochemical products which willreduce import dependency such as Ammonia, Methanol, MTBE, Formaldehydeand Methyl Methacrylate and Acetic Acid.

Considering various advantages of LNG, it make economic sense for theconsumers to pay even higher prices over other fuels


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THANKS

LNG Economics

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