Strategic Natural Gas Markets

Transcription

1 Strategic Natural Gas Markets Kang Wu and Rami Shabaneh KAPSARC Presentation at the 8th GPCA Fertilizer Convention, The Ritz-Carlton Hotel, Bahrain, September 27-28, 2017

2 Agenda 1. Natural Gas Supply and Demand 2. New Gas Suppliers and Emerging Markets 3. Evolution of Natural Gas Pricing 4. Implications for Ammonia/Fertilizer 5. Summary 2

3 1. Natural Gas Supply and Demand Global natural gas production grew by more than 23 percent (or 675 bcm billion cubic meters) within the last decade due to growth in the US, Australia, and the Middle East. Currently, about 40 percent of global gas supply is used for power generation. Non-energy use (such as fertilizers) comprise 5% of global consumption. Within the last decade, LNG has been playing a bigger role in global gas trade. Although it was stalled for a few years between 2011 and 2015 due to the expansion of indigenous gas production and pipeline supply, the LNG supply growth picked up again in 2016 and so far this year and is set to expand continuously in period. Implications for ammonia production are huge. 3

4 Bcm 1. Natural Gas Supply and Demand (cont d) Global Natural Gas Supply by Region Asia Pacific North America S. & Cent. America Europe & Eurasia Middle East Africa Source: BP Statistical Review

5 bcm 1. Natural Gas Supply and Demand (cont d) Global Natural Gas Demand by Region CAGR: 1.8% CAGR: 2.8% Source: BP Statistical Review North America S. & Cent. America Europe & Eurasia Middle East Africa Asia Pacific 5

6 bcm 1. Natural Gas Supply and Demand (cont d) LNG Net Exports (+) or Imports (-) by Region North America Europe Asia Asia Pacific Latin America FSU Africa Middle East E 2017E 2018E 2019E 2020E Source: Nexant WGM (retrieved August 2017). 6

7 2. New Gas Suppliers and Emerging Markets New Natural Gas/LNG Suppliers The US: The emerging global LNG supplier. East Africa: Mozambique, Tanzania and others. Canada: Huge potential but facing challenges. Russia: Projects under construction and future potentials. Others: Traditional suppliers and new ones. 7

8 bcm 2. New Gas Suppliers and Emerging Markets (cont d) Significant LNG Capacity to Come Online but FIDs on New Projects Have Slowed 700 FID/Under construction Source: Nexant WGM. Asia Pacific Europe FSU North America Latin America Middle East Africa 8

9 2. New Gas Suppliers and Emerging Markets (cont d) Emerging Gas Markets East Asia: China is growing fast. Southeast Asia: Existing an new LNG importing countries. South Asia: India and Pakistan. East Africa: Growing domestic gas use. Middle East: Growing domestic gas use and emerging LNG use. Latin America: LNG imports. Others. 9

10 2. New Gas Suppliers and Emerging Markets (cont d) Emerging LNG Markets The oversupply of LNG on the other hand has spurred new demand centers Egypt Pakistan Jordan Bangladesh LNG imports has helped fertilizer output in Pakistan and Egypt more recently FSRUs are making it easy for countries to import LNG on demand China LNG imports rose by nearly 45% during the first seven months of

11 3. Evolution of Natural Gas Pricing Drop in oil prices has resulted in a drop in gas prices under oilindexed LNG contracts and a convergence in regional price benchmarks. The over supply of LNG, lower supply cost and muted oil prices may keep regional natural gas prices muted in the medium term. Regional differentials of gas prices continue to exist due to processing and transportation costs. The above developments have wide implications for the fertilizer industry. 11

12 $/MMBtu 3. Evolution of Natural Gas Pricing (cont d) Historical Regional Gas Prices NBP German border price Henry Hub Japan import price Brent Source: Bloomberg, IMF, EIA. 12

13 3. Evolution of Natural Gas Pricing (cont d) Wholesale Natural Gas Prices in 2014 ($/MMBtu) Wholesale Natural Gas Prices in 2016 ($/MMBtu) Current spot prices 13

14 4. Implications for Ammonia/Fertilizer Opportunities Potential growth of new natural gas supplies if policies are right. Oversupply of fossil energy leads to prolonged periods of low oil and gas prices, reducing the cash cost of ammonia production. Oversupply of LNG has helped India, Pakistan and Egypt with fertilizer production. Challenges The uncertainties of the future development for natural gas. Price reforms in developing countries, such as GCC nations. The impact of COP21. 14

15 Million tons 4. Implications for Ammonia/Fertilizer (cont d) Global Ammonia Production Capacity East Asia Eastern Europe and central Asia South Asia North America GCC Latin America Western Europe Africa Central Europe Other West Asia Oceania Source: GPCA, 2015 GCC Fertilizer Industry Indicators. 15

16 4. Implications for Ammonia/Fertilizer (cont d) Europe Russia European gas prices are made up of a mixture of spot pricing (western Europe) and oil-indexed contracts (central and eastern Europe). Convergence of regional gas prices and oil prices have flattened cost curve of nitrogen-based fertilizers European cash costs have improved Russian gas imports remains the cheapest source of supply for Europe. No gas price war yet! If gas price war occur, European gas consumers (including fertilizer) would benefit LNG Algeria, Libya Azerbaijan, Iran 16

17 MMscf/d 4. Implications for Ammonia/Fertilizer (cont d) LNG Plays a Big Role in Urea Production in India Low LNG Prices Encourage New Capacity Buildup Urea price ($/tonne) Capital recovery charges ($/tonne) Netback for fuel price ($/tonne) Efficiency of new plants (Mill Kcal/tonne of urea) Netback LNG price ($/MMBtu) /tonne urea production Prevailing LNG landed price ($/MMBtu) Fertlizer Power City Gas Industrial Misc. Iron/steel R-LNG consumption, July 2017 Domestic consumption, July 2017 Source: Infraline Energy (webinar September 2017) to to to to to to to to to 6 Current landed Urea imported prices are 250 to 275 $/tonne. 17

18 4. Implications for Ammonia/Fertilizer (cont d) Impact of Natural Gas on Ammonia Natural gas is the most important feedstock to ammonia production globally and makes up a large portion of the ammonia production cost. The oversupply of gas and LNG at present is welcomed by the fertilizer industry and opens up opportunities for marginal producers. However, any uncertainty over the natural gas sector development in the future will affect the fertilizer industry. European cash cost for nitrogen based fertilizer has improved. A ramp up in LNG production globally in the next two years may lead to a gas price competition in Europe driving prices further down (this depends on global demand for gas as well). 18

19 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 $/short ton $/MMBtu $/metric tonne $/MMBtu 4. Implications for Ammonia/Fertilizer (cont d) Natural Gas and Ammonium Spot Price Spreads NBP Ammonia - Western Europe Henry Hub Ammonia - US Gulf NOLA Source: KAPSARC, Bloomberg. 19

20 4. Implications for Ammonia/Fertilizer (cont d) Regional, National and Subnational Carbon Pricing Initiatives COP21: Uncertainties for Gas Parties stating in their Nationally Determined Contributions (NDC) that they are considering the use of carbon pricing covering 58% of global GHG emissions Not a lot of countries mention the use of gas to tackle climate change Renewable energy technology is witnessing dramatic cost declines Sentiment towards natural gas infrastructure is being tested (Nord Stream II) political and environmental influence Some countries considering to leapfrog to renewables, skipping the use of natural gas as a bridge fuel 20

21 $/MMBtu 4. Implications for Ammonia/Fertilizer (cont d) GCC Price Reforms 3.5 Various GCC Industrial Gas Prices KSA UAE Bahrain Oman 21

22 4. Implications for Ammonia/Fertilizer (cont d) The Future of Natural Gas Gas faces two issues: high prices and lack of political support. More expensive and therefore less politically acceptable than coal, especially when coal is domestic. It s a fossil fuel despite being cleaner than oil and coal. Gas does not get the same support as renewables. 22

23 5. Summary Natural gas supplies in general and LNG supplies in particular have grown fast in the past decade. New LNG supplies are growing out of North America, East Africa, Russia, and Elsewhere. New gas and LNG demand markets are emerging in East Asia, South East Asia, South Asia, the Middle East, Africa and Latin America. Prolonged period of low oil and gas prices is helping the fertilizer industry as new stimulus of the ammonia production. Oversupply of LNG has helped India, Pakistan and Egypt with fertilizer production. 23

24 5. Summary (cont d) Gas price competition in Europe as a result of rising global LNG supply will help the fertilizer industry. Meanwhile, price reforms in the GCC are increasing production costs there. Future of natural gas is uncertain due to a mixture of environmental regulation and fuel competition from coal and renewables. 24

25 Thank you for your attention!

26 Appendices 26

27 bcm Natural Gas Supply and Demand Global Demand of Natural Gas by Sector Power generation Res & Comm. Industrial Transport non-energy use Other transformations Energy industry own use and losses Source: Nexant WGM. 27

28 New Gas Suppliers and Emerging Markets Large Resources Found in East Africa Large gas resources have been discovered in Mozambique and Tanzania At least 188 tcf of proven and probable gas reserves They have attracted the investments of smaller players, IOCs, and many Asian companies These companies priority has been on LNG exports Yara sign MOU with Ministry of Mineral Resources an Energy to develop million tonne fertilizer plant (ammonia and urea) in Mozambique TPDC sign JV with Ferrostaal, Haldor Topsoe and Fauji Fertilzer Co. to build 3,800 t/d fertilizer plant in Southern Tanzania 28

29 Implications for Ammonia/Fertilizer India Taking Advantage of LNG Oversupply India started importing LNG in India got a boost in LNG imports after the drop in spot LNG prices Due to the drop in oil prices and surplus of spot LNG, buyers now have bargaining power - India has renegotiated several LNG contracts: Petronet renegotiated contract with Rasgas in 2015 (Qatar) Petronet renegotiated contract with Exxon Mobil Sept 2017 (Australia) GAIL seeking to renegotiate contract with Cheniere (US) India LNG Imports (Million Tonnes) Urea plant owners benefitted from drop in LNG prices with the new gas pricing schemes Source: India Ministry of Petroleum and Natural Gas. 29

30 Implications for Ammonia/Fertilizer (cont d) Challenges of Future of LNG Projects Lower oil prices and oversupply of spot LNG has limited CAPEX going into new large scale LNG projects. Tough environment has caused shelving and cancellation of numerous projects: Canada, Malaysia, etc. It s a buyers market at the moment, and buyers currently are demanding flexibility in contracts when it comes to pricing, lifting obligations, and destination clauses. From the supply side, new projects must have competitive edge (lower capex) to pass FID in current environment: Brownfield expansions/debottlenecking. FLNG (versus onshore liquefaction plants). building on sites where infrastructure such as substations and pipelines already in place versus building in remote areas (USGC is a good example of this where CAPEX is reduced compared to other regions), etc. FIDs are needed to plan for future demand. Green field projects average 4 to 5 years to build, while brown field average 3 years. But who is in best position to take FIDs depends on factors mentioned above and innovation in contracts. 30