World Energy Outlook 2035: A focus on LNG supply and demand dynamics

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1 World Energy Outlook 2035: A focus on LNG supply and demand dynamics M.H. Siddiqui, Prescience, USA 1

2 Agenda The Energy Outlook in 2035 involving major landscape changes in supply, demand, fossil fuels, and the trends in renewable energy A methodology to compare costs of fossil fuels, nuclear, and renewable sources Demand growth in oil & gas, along with new oil recovery techniques and a simple approach to evaluate their marginal costs of production Natural gas as a capital intensive growth industry with snap shots of strengths, current and future trends, opportunities and challenges Summary of gas export market with what needs to be done to sustain LNG supply chain 2

3 Global Energy Changes & Challenges Changing of status from importers to net exporters the US & Brazil In 2017, the US will become largest producer of oil In 2020 and beyond, substantial increase from ME will be required The Shale Revolution in the US will Evolve in rest of the world slowly Major Challenges will remain CO2 emissions are rising with significant climate change risks Subsidies in ME and Asia are over $500 Billion Energy access limitation to 1.3 billion in Africa & India High oil prices High population growth 3

4 World needs more energy urgent challenge By 2050, there will be 9 Billion from 7 Billion now Equivalent to adding another China & India Continued urbanization for next 25 years 70 million/year to already crowded cities Global Energy demand will grow 15-20% between now and 2020 all from non-oecd By 2035, according to IEA s 2013 World Energy Outlook Additional supplies equal to twice the size of today s US energy system will be needed means spending of $40 trillion on global infrastructure By 2030, according to the UN Demand growth for water will increase by 30% and for food by 50% compared to today The world s water, energy, and food systems are closely linked 4

5 Global Energy Demand and Sources High demand growth in Asia, about 2/3 of global demand increase comes mainly from China & India China will be Engine of Global Growth by 2020 India will take over beyond 2020 because of its demographic factors MENA Energy consuming area 10 MMBD of oil consumption equivalent to China today Energy Sources Fossil Fuels supply 82% Renewables will rise Natural gas supply will rise faster compared to oil, and coal will drop 5

opportunity closing it is very important to act now Policies that address CO2 emissions also help mitigate water and food

6 Global Energy Challenge Climate Change Climate Change Off track Major problem for fragile equilibrium Temperature will rise to 3.6 C with the current mix CO2 Source: Non-OECD rising, China per capita emissions exceeding Europe in 2015 Window of opportunity closing it is very important to act now Policies that address CO2 emissions also help mitigate water and food stresses Governments to put a price on CO2 to promote low-carbon technology, energy efficiency, and to replace coal by natural gas 6

7 Global Energy Oil Demand Growth Demand Growth in Oil Growth in China, India, & ME; and decline in OECD From 86 MMBD in 2013 to 100 MMBD in 2025 Demand growth in heavy freight vehicles Diesel demand - about 1/3 growth from Asia Growth in Petrochemicals Plastic and Polymers Population factor Mega-projects in ME and Asia adding Hydrocarbon Value Chain deriving the benefits of integrating refineries with petrochemicals Shale oil production declines much faster than conventional oil 7

Global Energy Oil Demand Growth - 2035 Growth in Oil continued Substantial increase from ME is needed beyond 2020 - need to send right signals to invest and sustain capacity

efficiencies, to make heavy oil more mobile, modify interfacial tension, and to maximize ultimate oil recovery (from 25% to 70+%) Brazil with deep-water offshore exploration

8 Global Energy Oil Demand Growth Growth in Oil continued Substantial increase from ME is needed beyond need to send right signals to invest and sustain capacity Application of enhanced oil recovery techniques, such as, CO2 miscible flooding, polymer flooding, caustic flooding, steam flooding, in-situ combustion to increase the sweep efficiencies, to make heavy oil more mobile, modify interfacial tension, and to maximize ultimate oil recovery (from 25% to 70+%) Brazil with deep-water offshore exploration combined with Biofuel production will become 6th largest producer in 2015 after Saudi Arabia, USA, Russia, Canada, and Iraq How do we evaluate the cost of these additional oil recovery techniques? 8

9 Unit Technical Cost (UTC) Also referred to as Long-Run Marginal Cost (LRMC) The following formula is used to get $ XX/Barrel cost UTC = PV of Costs PV of Product Stream 9

10 Crude Oil Cost Curve Major New Projects - Canada & the US Major Oil Field projects cost of production U.S. & Canadian 'light, tight' oil midcycle costs plus assumed $5/bbl for initial land acquisition and infrastructure Source: Scotia Bank, Canada Moving from fossil fuels to renewables 10

11 Renewable Sources Renewable energy comes from resources which are continually replenished such as: Sunlight, wind, rain, tides, waves, and geothermal heat. About 16% of global final energy consumption comes from renewable resources. About 10% of all energy comes from traditional biomass, mainly used for heating. About 3.4% from hydroelectricity. New renewables (small hydro, modern biomass, wind, solar, geothermal, and biofuels) account for another 3% and are growing very rapidly. The share of renewables in electricity generation is around 19%, with 16% of electricity coming from hydroelectricity and 3% from new renewables. 11

12 Drivers for Renewables Climate change and global warming concerns, coupled with high oil prices, and uncertainty of oil supplies Increasing government support, for renewable energy legislation, incentives and commercialization New government spending, regulation and policies with incentives According to a 2011 projection by the IEA, solar power generators may produce most of the world s electricity within 50 years, dramatically reducing the emissions of greenhouse gases that harm the environment. How do we compare the costs of different sources? 12

13 Calculating the Levelized Cost of Energy [LCOE] 13

14 Cost Comparison Of Energy Sources - LEC This compares the US average levelized electricity cost in dollars per kilowatt-hour for both nonrenewable and alternative fuels in new power plants, based on US EIA statistics and analysis from Annual Energy Outlook 2012 Each source is given for a different capacity factor The values in the table do not include any government incentives. They represent the actual cost to the society Hence, coal and natural gas are the most economic fuels Coal-based electricity can nearly double due to government imposed cost on CO2 emissions Photovoltaic systems can be three times more expensive than fossil-fuels but the prices are coming down Now lets move to Natural Gas 14

15 Natural Gas cleanest & vast energy Natural gas is a vital component of energy supply. It is one of the cleanest, safest, and most useful of all energy sources As a source of electricity, natural gas has a considerably lower CO2 footprint and a lower water footprint than coal, and is a more flexible partner of renewable electricity Across the world, there are vast reserves of gas, enough to last over 200 years at today s consumption levels 15

Global Energy Role of Natural Gas - 2035 Natural Gas LNG Reserves 187 TCM Gas demand growth - 2.7% per year since 2000; Strong LNG growth - 3 times faster - 7.

2035 the only fossil fuel growing (IEA) Natural gas growth 1.

16 Global Energy Role of Natural Gas Natural Gas LNG Reserves 187 TCM Gas demand growth - 2.7% per year since 2000; Strong LNG growth - 3 times faster - 7.6% De-carbonization of economic growth Rising popular opposition to nuclear power generation In the energy mix, natural gas share will increase from 21% in 2010 to 25% in 2035 the only fossil fuel growing (IEA) Natural gas growth 1.6% per year through 2035 twice that of oil LNG 5% to 6% per year through 2020; Chinese planned aggressive expansion, imports of LNG may quadruple European LNG demand is expected to grow as North Sea, declines, economy grows, and with environmental preferences and Kyoto Protocol commitments 16

Major Natural Gas Producers & Trade Flows Top Natural Gas Producers in Billion Cubic Meters World Factbook, 2012 1) United States 681 (20.2%), 2) Russia 670 (20.0%), 3) Iran 163 (4.

17 Major Natural Gas Producers & Trade Flows Top Natural Gas Producers in Billion Cubic Meters World Factbook, ) United States 681 (20.2%), 2) Russia 670 (20.0%), 3) Iran 163 (4.7%), 4) EU 162 (4.6%), 5) Canada 143 (4%), 6) Qatar 133 ( 3.7%), 7) China 117(3.1%), 8) Norway 114 (3.0%), 9) Saudi Arabia 92 (2.2%), 10) Algeria 82 (2%) Percentages are approximate Gas Trade Flows in M Tons 17

18 Natural Gas Transportation Costs Natural gas pipelines costs rise steeply Natural gas offshore pipeline become more expensive after 700 miles Natural gas onshore pipeline become more expensive after 2,200 miles The transportation costs of LNG starts at $2/MMBtu and remains less than $2.50/MMBtu up to 5000 miles of transportation For global natural gas trade, seaborne LNG transportation is the only way. 18

19 Natural Gas Price Differentials Disparity US $3.5 to 4.0 /MM BTU Europe $11-12 /MM BTU Japan $17-19 /MM BTU Impacts Post Shale Revolution Transportation Constraints Prices will narrow but some disparity will remain Liquefaction and Recompression - $6 /MMBTU 19

20 Widening of Panama Canal Seaborne LNG 20

Demand-Side Risks for LNG The principal risks for LNG demand growth Global uncertainties and regional economies Increasing gas-on-gas competition Global economics Unconventional and new supplies of

21 Demand-Side Risks for LNG The principal risks for LNG demand growth Global uncertainties and regional economies Increasing gas-on-gas competition Global economics Unconventional and new supplies of natural gas: shale gas, tight gas, and coal-bed methane By the turn of Century, the world was estimated to have only 50 to 60 years of gas remaining; Now, the estimated resource life has risen to 200+ years IEA estimates that unconventional gas will increase to about 25% of the world s gas supply by 2035, as compared to about 8% today 21

Demand-side Risks for LNG Planned, proposed new/expanded gas pipelines from Russia, the

southern/central Europe The Turkmenistan-Afghanistan-Pakistan-India [TAPI] pipeline expected

30-year contract providing China with 38 billion cubic meters of natural gas annually from

22 Demand-side Risks for LNG Planned, proposed new/expanded gas pipelines from Russia, the Caspian and/or Central Asia into Europe or Asia: The Nabucco or South Stream pipelines into southern/central Europe The Turkmenistan-Afghanistan-Pakistan-India [TAPI] pipeline expected 2017 Iran-Pakistan pipeline The new Russian pipeline into China-$400 Billion (Gazprom-CNPC), 30-year contract providing China with 38 billion cubic meters of natural gas annually from 2018 All these could negatively impact LNG demand markets in Europe or Asia Uncertainties and delays 22

LNG Liquefaction Capacity Growth First liquefaction Arzew Plant in Algeria in 1964 From 2000 to 2012 capacity more than doubled Qatar and early Australia developments 1 st surge of suppliers Algeria,

23 LNG Liquefaction Capacity Growth First liquefaction Arzew Plant in Algeria in 1964 From 2000 to 2012 capacity more than doubled Qatar and early Australia developments 1 st surge of suppliers Algeria, Malaysia, & Indonesia 60% of total LNG in nd surge of Suppliers Qatar and Australia rising from 20% in 2000 to 50% of total capacity in 2020 The 3 rd surge from many other countries will add more capacity (30%) involving smaller operators and lesser costs. 23

collectively with almost 50 mtpa of capacity In Offshore Mozambique, more than 110 tcf of gas in place is under development As export

24 LNG Liquefaction Capacity Growth The 4 th surge, 200 mtpa of US and Canadian LNG export capacity has been proposed Current 250 mtpa will grow to 350 mtpa by 2020 and to 500 mtpa by 2030 by EY sources In Western Canada, four LNG export projects have been proposed, collectively with almost 50 mtpa of capacity In Offshore Mozambique, more than 110 tcf of gas in place is under development As export license is required from the US DOE, several of these (16) have been approved for Free Trade countries Source: Total, Petroleum Economist, May,

LNG Capacity - The CAPEX challenge, US $Million/mtpa Initial LNG projects US $200 million/mtpa 2 nd wave projects incur costs, US $500-1,500 Million/mtpa LNG project proposals are growing faster than

25 LNG Capacity - The CAPEX challenge, US $Million/mtpa Initial LNG projects US $200 million/mtpa 2 nd wave projects incur costs, US $500-1,500 Million/mtpa LNG project proposals are growing faster than the industry s capabilities With bottlenecks and spiraling construction costs, existing LNG import infrastructure will have distinct cost advantages (US) Overall average costs over US $2,600 Million/mtpa, the new projects are over US $3000 million/mtpa Costs in Australia are impacted by inflation, currency shifts against US $ FID: Final Investment Decision Source: Earnest & Young 25

spills Methane Hydrates double the resources Cost effective Floating LNG Labor shortages

26 LNG Risks & Challenges Pricing Issues disparity and uncertainty Costs rising capital cost Price volatility supply / demand Political risk (US exports) Environmental opposition pipeline - spills Methane Hydrates double the resources Cost effective Floating LNG Labor shortages Emerging markets with uncertain fiscal regime Delays & cost overruns World LNG Map-2014 Petroleum Economist 26

27 Summary LNG is a growth industry and it will play a very important role About half of Industry s investments projects are in LNG By 2030 more than 500 million ton/year of proposed new LNG could come on line New projects need long-term supply deals to move forward Major resource-holders and demand holders need to collaborate and make long term commitments to build sustainable supply chain The cost of developing brownfield LNG sites in the US is low, future LNG deals must reflect the higher costs of developing greenfield projects By some analysts, projects with breakeven cost of $12 to $14/Million BTU needed to meet increased demand into the 2020 s US LNG could be delivered to North Asia for around $12/Million BTU based Henry Hub prices of about $5/Million BTU, if this goes higher, US exports will be less competitive Clearer energy policy, flexibility in contractual terms, reliable pricing approaches, and bench-marks are needed 27

28 Thank you for your attention End of Presentation 28

Impact of American Unconventional Oil and Gas Revolution

National University of Singapore Energy Studies Institute 18 May 215 Impact of American Unconventional Oil and Gas Revolution Edward C. Chow Senior Fellow Revenge of the Oil Price Cycle American Innovation: