LNG Infrastructure in Philippines Sarah Fairhurst. The Lantau Group

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1 LNG Infrastructure in Philippines Sarah Fairhurst

2 What drives LNG Infrastructure? Economic Drivers The use of LNG is cheaper than some alternative fuel Environmental Drivers The use of LNG reduces emissions or other harmful outcomes Government Policy Government gives incentives or defines policy that makes LNG more attractive than other options 1

3 So what has changed on these in the past year? Economic Drivers Changes in the oil price are significant since the conference last year. Will this drive more LNG in Philippines? Advancement of new gas-fired projects (San Gabriel phase 2 & Avion) and coal fired projects have progressed Environmental Drivers Expansion of quotas for Renewable Energy No change in coal taxation; no overt moves to a carbon tax Government Policy No change Gas Master Plan, while completed, has not been published The rest of the presentation will focus mainly on economic drivers 2

4 Daily Brent price, USD/barrel Asian LNG prices are linked to oil prices. Brent has dropped by half from the high level in H1 214 Crude production in Iraq and Russia are not disrupted while Libya supply returned despite of political turmoil 12 ISIS attacked Iraq Libya ports re-opened Saudi cut Oct OSP priced st sanction on Russia Saudi cut Nov OSP priced Price stabilized at $1-11/barrel in H1 214 as Saudi Arabia proactively balanced the crude market US airstrike on Iraq started 4 Jan '14 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec '14 Jan '15 Feb 3 Source: ICE, Reuters, GS Global Investment Research and TLG analysis

5 This is reflected in the spot price of LNG over the last 18 months 25 Daily JKM Spot Prices, $/MMBtu Time period during which modelling for Gas Master Plan was carried out 8/14/13 11/22/13 3/2/14 6/1/14 9/18/14 12/27/14 4/6/15 4

6 But LNG is not the only fuel to have changed price. Coal prices have also softened gradually since early 211 Coal and oil monthly prices (2-Feb 215) US$/MT or bbl 18 Since the start of the Master Plan process Coal (Newcastle) Oil (Brent) Australian Coal Prices ($/Tonne) 2 Asian Spot LNG prices ($/MMBtu) Source: World Bank; Macquarie 5

7 In addition, we should not forget that the longer term has not changed as much as the short term Forward price curves in recent years have been quite consistent US$/barrel Brent forward curve End 29 future price End 28 future prices Forward price in June th September th October 214 Forward price on 2th Feb 214 Dated Brent ($/barrel) 213 (historical) (historical) (forecast) (forecast) (forecast) (forecast) (forecast) 8 22 (forecast) Source: ICE 6 The market thinks that oil (and thus LNG) prices will rise again in the medium term

8 How does the changing fuel price affect the economic use of LNG in Philippines? As part of our Gas Master Plan Phase 1 analysis in October 213, we modelled the economic use of LNG in the WESM and identified how much new plant burning LNG was economic At that time, expectations of future fuel prices were quite different to those now, particularly in the nearterm To see the impact of lower LNG prices, we have re-run that analysis to see if the outcome has changed Comparison of oil and coal price projections US$/bbl or US$/mt (213 prices) Oil (Oct 213) Coal (Oct 213) Oil (Mar 215) Coal (Mar 215) Source: World Bank; ICE; TLG analysis 7

9 The results are remarkably consistent with the previous analysis there is still a clear economic role for LNG in the power sector The economic new build of CCGT using these updated fuel price assumptions is still about 6-8MW If the economic new build were built, these plants would run mid-merit/peaking (varying between 15%-35%) and consume c mmtpa of LNG Existing gas-fired plant would also eventually switch to LNG Total demand for LNG in Luzon s power sector would exceed.6 mmtpa 8 LNG remains a good fuel for mid-merit and peaking operation but it is unlikely to be an economic baseload fuel Source: TLG analysis Least-cost capacity expansion plan for Luzon under expected assumptions October 213 fuel price outlook Net MW 1,4 Committed Economic least-cost entry 1,2 1, 6-8MW Net MW February 215 fuel price outlook 1,4 Committed Economic least-cost entry 1,2 1, 6-8MW Ignores passage of time Natural Gas Coal Oil Hydro Geothermal Wind Biofuel Solar

10 Taking into account the passage of time, other developments also affect the need for more gas-fired capacity and ultimately more LNG demand 9 Option to use Malampaya gas supports more gas-fired capacity As anticipated but not then certain, FirstGen s San Gabriel phase 2 and Avion have since achieved financing and are under construction They plan to eventually use Malampaya gas and ultimately LNG Changing the way Malampaya gas is used supports the entry of more gas-fired capacity and ultimately more LNG Additional renewable impacts on system Significantly more solar and wind capacity appears likely in response to Government policies increasing total available capacity More intermittent generation may require more flexible plant in the system to respond to times when solar and wind are unavailable Reduced incentives to build peaking capacity Lower offer price cap and new secondary price cap decrease the incentives to build new gasfired capacity Source: TLG analysis Least-cost capacity expansion plan for Luzon under expected assumptions Net MW October 213 outlook 1,4 Committed Economic least-cost entry 1,2 1, 6-8MW Net MW 1,4 1,2 1, February 215 outlook Committed Economic least-cost entry 5MW 4-6MW Natural Gas Coal Oil Hydro Geothermal Wind Biofuel Solar

11 Key factors that could affect economics of LNG remain uncertain Malampaya supplies after expiry of current GSPAs and SC38 Quantities Pricing Degree of flexibility WESM offer price cap, secondary price cap and other market interventions Provide lower incentives for investors by seemingly reducing ability to make required returns on investment We are already seeing various potential investors pulling out of the market Regulatory framework for contracting with power offtakers ERC rules still under development Uncertainty over long-term direction of retail market (no gentailers?) Demand growth Economic expectations falling below Government targets? 1

12 The good news is that new LNG supplies should push down spot LNG prices in Asia. 3.6 Mtpa PNG T1 3.6 Mtpa PNG T2 9 Mtpa Sabine Pass LNG train 1 and 2 from US 2.1 Mtpa Indonesia Donggi-Senoro 5 Mtpa Australia Gorgon T1 5 Mtpa Gorgon T Mtpa Australia (Curtis) T1 9 Mtpa Sabine Pass LNG train 3 and Mtpa Curtis T2 5 Mtpa GorgonT3 7.8 Mtpa Australia Gladstone T1,2 4.5 Mtpa Australia APLNG T = coal seam gas projects 11

13 the bad news is that lower oil and LNG prices mean that some projects have now been delayed or cancelled For example: Petronas has delayed making a final investment decision on plans to export liquefied natural gas from British Columbia BG Group said it was delaying a decision on the Louisiana LNG project Shell has cancelled plans for the Arrow LNG project in Queensland, Australia Woodside has delayed the investment decision on the Browse floating LNG project off Western Australia. The Chevron-operated Gorgon project in Western Australia is also running late. Cost over runs are also plaguing Australian LNG projects, making new projects less certain Most of these cite low LNG prices as the cause of the delay or cancellation 12

14 In summary, the message remains substantially the same as last year, despite the large global changes in prices LNG is economic in the Philippines for mid-merit operation The volume of LNG required is modest There remain challenges in bringing LNG into the Philippines and incentivising the market to build and burn the economic quantity of LNG 13

15 Thank You Power Utilities Energy Contact Sarah Fairhurst Insight Rigour Value By phone (office) By mail Tower 1, Metroplaza 223 Hing Fong Road, Kwai Fong, Hong Kong Online 14

16 We cover the Asia Pacific region Electricity and gas pricing to multiple industrial facilities Energy price projections Tariff benchmarking Natural gas entry opportunity Energy price projections (electricity and gas) Regulatory developments Tariff benchmarking and design Generation opportunities (all fuel types) Power sector review Gas pricing and demand Electricity and gas pricing to multiple sites Policy and regulatory developments Retail contracting and power price projections Generation opportunity development Capacity contracting Energy price projections and impacts Market design Energy Market Review) End user price projections Transmission development Energy policy issues 15