The New Global Gas Market Dynamic. Emmanuel Grand, FTI-CL Energy

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1 The New Global Gas Market Dynamic Emmanuel Grand, FTI-CL Energy May 2017

2 Contents I. Key uncertainties on gas demand II. Drivers of global LNG prices III. Conclusion 2

3 I. Key uncertainties on gas demand

4 The strength of environmental policies is the #1 uncertainty on gas demand Gas demand growth Coal Natural gas Renewables Strength of environmental policies 1 4

5 The access to emerging countries demand is the #2 uncertainty on gas demand Gas demand growth 2 Access to emerging countries demand Strength of environmental policies 5

6 The relative price of gas vs. coal is the #3 uncertainty on gas demand Gas demand growth Price of gas vs. coal 3 Strength of environmental policies 6

7 1 Strength of environmental policies Gas is a regulatory play Source: BP Energy Outlook 2017, p.84 7

8 1 Strength of environmental policies The gas optimum between too soft and too strong environmental policies is also visible in Europe CCGT gas consumption, 2030, Europe bcm FTI - Central case - EUR/t FTI - Central case - EUR/t ENTSOE - Strong renewable/medium demand Low CO 2 price High CO 2 price High renewables Source: FTI-CL Energy power market model, ENTSOE V3 supply combined with ENTSOE V2 demand 8

9 1 Strength of environmental policies Despite environmental advantages, gas is not well positioned for lobbying in consuming countries Some technical advantages over coal Electricity Generation polluants with gas emissions as a % of coal emissions 120% 100% 80% 60% 40% 20% 0% CO2 NOX SOX PM10 HG Coal Gas Low political footprint vs. other energies in consuming countries 2015, thousands of employees # of jobs in energy production, EU Natural gas Extraction of crude petroleum and natural gas x10 Crude petroleum 294 Mining of coal and lignite Source: Commission de coopération environnementale - Les émissions atmosphériques des centrales électriques nordaméricaines , p,42 Source: European Commission - EU pocketbook energy. Note: Breakdown between crude petroleum and natural gas taken from a 2010 study of Eurostat (Extraction of crude petroleum and natural gas statistics - NACE Rev. 2) 9

10 2 Access to emerging countries demand 84% of gas demand increase is expected to come from emerging countries, where political barriers could hinder expected growth A large demand growth to capture Breakdown of gas demand growth (IEA, ) Non-OECD - other, 24% OECD, 16% with significant political barriers Security of supply issue Main consumers (India, China ) net importers Limited appetite for further import dependency India, 9% Regulated price issue Historic low regulated price a barrier to import Hard to reform / High subsidy cost Middle- East, 24% China, 28% Non-OECD, 84% Source: World Energy Outlook 2016, Annex A, IEA Note: TPED, New policies scenario 10

11 2 Access to emerging countries demand As an example, Ghana s LNG imports are stuck in political issues Golar Tundra Case November 2015 May 2016 GOLAR LNG signed a 5-year deal with West African Gas Ltd (local company) to charter 170,000 cbm FSRU from Q in Tema FSRU arrival, operational set-up Since may 2016 October 2016 Delays to start up because of logistical issues and political wrangling Parliamentary delayed approval to gas sales contract but major onshore construction (connecting pipeline, jetty,..) not completed Source : LNG world news Current situation GOLAR is awaiting outsanding charter payments for the vessel, and started legal action against West African Gas Ltd 11

12 3 Price of gas vs. coal Coal has recently won over gas where it matters: Asia Infrastructure investment cost for a 1 GW power plant in Asia Coal and gas-fired power investment in Asian markets (2015) 2015 (USD) million billion High efficiency Subcritical 0 Gas Coal Source: International Energy Agency, World Energy Outlook 2016 presentation, 18 January 2017, p.19 12

13 3 Price of gas vs. coal Coal maintains a cost advantage over natural gas in Asia Levelised Cost of Electricity in China 2013 USD/MWh Natural gas -16% Coal Source: International Energy Agency, Projected Costs of Generating Electricity 2015 Edition, p.49 [7% discount rate] 13

14 3 Price of gas vs. coal However this could be reversed if gas becomes sustainably more competitive than coal (1/2) Europe OECD gas gross consumption Mcm 580, , , , , , , , , , Source : International Energy Agency, monthly gas statistics 14

15 3 Price of gas vs. coal However this could be reversed if gas becomes sustainably more competitive than coal (2/2) Average annual gas demand from power generation in compared to 2016, according to gas price levels [EU28 + NO + CH] ,773 1,697 1,601 KEY Top 6 countries: Change in consumption (TWh) ,501 1,399 1,313 1,233 1,138 1, Current Henry Hub forwards + variable transatlantic transport Netherlands Italy UK France Spain Germany Other Europe 2016 gas consumption 0 ( 200) Price /MWh Source: FTI-CL Energy analysis. Forwards as of February 2017 TTF in Winter 2006/2007 Current TTF forwards 15

16 3 Price of gas vs. coal The price of gas will be to a large extent defined by the LNG market Share of LNG in global long-distance gas trade (IEA) bcm bcm bcm Pipeline LNG 26% Pipeline LNG 42% Pipeline LNG 53% Source: International Energy Agency, World Energy Outlook 2016 presentation, 18 January 2017, p.10 16

17 II. Drivers of global LNG prices

18 The LNG market is reconfiguring 1 Demand: An increasing volatile world After decades of Take-Or-Pay contracts An increasingly volatile world 2 Supply: A bust for now Oversupply coming to the market Collapse of investments, likely to lead to boom and bust cycle 3 Industry structure: Taming the explosion of risks Shorter commitments and more flexible assets New risk bearing intermediaries 18

19 1 Demand The level of LNG demand will be determined by emerging countries credit risk and demand uncertainty, and its relative price vs. coal A Emerging countries: Credit risk issues and demand uncertainty B Switching countries: Relative price issues Source: Cheniere Analyst Day 2017, p.90 ; FTI analysis 19

20 1 A Demand Emerging countries New LNG demand from emerging countries carries demand volatility and higher credit risk Standard deviation of YoY change in gas consumption, [1] Non credit rated companies as % of buyers in new LNG contracts [2] 10% 9% x3/x4 40% 35% 36% 8% 7% 30% x4 6% 25% 5% 4% 8.9% 20% 15% 3% 2% 10% 9% 1% 2.8% 2.2% 5% 0% Natural Gas 0% Old First LNG cargo countries up to 2005 Middle First cargo LNG 2006 countries 2010 New First LNG cargo countries after Source: US EIA, International Energy Statistics, downloaded 30 December 2016; 2005 GIIGNL AR, page: 6; 2010 GIIGNL AR, page: 10; and, 2015 GIIGNL AR, page: Non-rated companies as % of buyers in LNG contracts starting each year. Source: 2016 GIIGNL Annual Report, page: 8-11; and Moody's. 20

21 1 B Demand Switching countries Europe has a large switching potential supported by import overcapacity Utilisation dropped from 60% to 40% since 2010 EU import capacity and net imports Utilisation factor 62% 56% 50% 46% 42% 45% 41% bcm Total net imports Total import capacity Source: IEA European gas flows database ( accessed 27/12/2016), ENTSOG Transmission Capacity Maps for 2010, 2011, 2012, 2013, 2014, 2015,

22 1 B Demand Switching countries European storage overcapacity further supports the region s global LNG balancing role Storage capacity and demand for storage products (Base 100% in 2009) 160% 140% 120% Demand for storage products (=Winter-Summer spread in consumption) Storage capacity +25% 100% 80% 60% -21% 40% 20% 0% Source: Eurostat monthly gross inland consumption of natural gas (accessed 27/12/2016), GSE Storage Map Databases 2009, 2010, 2011, 2012, 2013, 2014, 2015,

23 2 Supply An oversupply is coming to the market LNG liquefaction capacities %/year Possible delays in commissioning outside US 300 MPTA Qatar Indonesia Australia Algeria Malaysia Nigeria Trinidad Egypt Oman US Other countries Source: 2004 GIIGNL AR, page: 20-21; 2005 GIIGNL AR, page: 20-21; 2006 GIIGNL AR, page: 24-25; 2007 GIIGNL AR, page: 24-25; 2008 GIIGNL AR, page: 20-21; 2009 GIIGNL AR, page: 22-24; IGU World LNG Report 2010, page: 15; IGU World LNG Report 2012, page: 22; IGU World LNG Report 2013, page: 18; IGU World LNG Report 2014, page: 18; IGU World LNG Report 2015, page: 21; and, IGU World LNG Report 2016, page: 20 and

24 2 Supply Supply investments have collapsed, leading to likely boom and bust cycle LNG liquefaction terminals investment, according to IEA USD (2015) billion Australia Africa Middle East North America Russia Europe Others Source: International Energy Agency, World Energy Outlook 2016 presentation, 18 January 2017, p.9 24

25 3 Industry structure The industry is adapting to higher risks A Shorter commitments and more flexible assets Significant share of short-term deals, Reliance on tendering Putting assets on boats to increase flexibility B New risk bearing intermediaries Trading houses entering the LNG market, offering risk intermediation 25

26 3 A Industry Shorter commitments and more flexible assets Short-term deals have become significant and can be relied upon Significant share of short-term volumes Increasing reliance on short-term supplies/sales Development of tenders, : ~500 cargos bought via tender ~200 cargos sold via tender 26 Source: IGU 2016 World LNG Report, p.13 Source: Cheniere Analyst Day 2017, p.61

27 3 A Industry Shorter commitments and more flexible assets As an example, Pakistan has secured a significant LNG supply through straight tendering Pakistan gas market forecast Pakistan tender January 2017, 240 LNG cargoes tender secured, totalling 48 Bcf of gas (1.4 Bcm) Five-years tender of 60 cargoes 15-years tender of 180 cargoes Offers submitted on a DES basis Bank bond of $100,000 required for each bid Pricing : indexation to the 90-day average price of the Brent crude benchmark Source: PLATTS 27

28 3 A Industry Shorter commitments and more flexible assets The industry is moving its assets on boats Floating Regasification Capacity by Status and Number of Terminals, Golar Spirit FSRU Mtpa Total FSRU Cumulated receiving capacity in Mtpa Existing FSRU 28 Source: data from IGU 2016 World LNG Report, p.51

29 3 B Industry New risk bearing intermediaries Trading houses have entered the LNG market, offering intermediation between producers and risky buyers Trafigura volumes of trading of LNG In mmt Source: Trafigura Annual reports (2014, 2015 and 2016) 29

30 III. Conclusion

31 Gas demand growth will remain dependent on coal prices and national fuels policies Gas demand growth Price of gas vs. coal 3 2 Access to emerging countries demand Coal Natural gas Renewables Strength of environmental policies 1 31

32 Gas demand growth will remain dependent on coal prices and national fuels policies Gas demand growth Price of gas vs. coal 3 More liquidity and transparency to lead to more efficient pricing, based on Henry Hub Cost cutting not yet happening on a large scale 2 Access to emerging countries demand Helped by oversupply, industry adapting to new demand but inefficient downstream pricing Coal Natural gas Renewables 1 Strength of environmental policies A narrow path, likely to differ from country to country 32

33 Experts with Impact Emmanuel Grand