Global Natural Gas Markets: Some Implications for Australia

Transcription

1 Global Natural Gas Markets: Some Implications for Australia Peter R Hartley George & Cynthia Mitchell Professor of Economics and Rice Scholar in Energy Studies, James A. Baker III Institute for Public Policy, Rice University BHP Billiton Chair in Energy and Resource Economics University of Western Australia Kenneth B Medlock III James A Baker III and Susan G Baker Fellow in Energy and Resource Economics, and Senior Director, Center for Energy Studies, James A Baker III Institute for Public Policy Adjunct Professor, Department of Economics Rice University

2 Outline of Talk Observations on world natural gas market developments based on the Rice World Gas Trade Model Comments on the prospects for North American LNG exports and what it might mean for world natural gas markets Determinants of the desirability of long-term contracts in natural gas markets Possible implications for Australia Some comments on domestic policies affecting the natural gas sector and Australian energy markets more generally

3 The Rice World Gas Trade Model (RWGTM)

4 RWGTM: overview RWGTM predicts regional prices, supplies and demands, and trade flows More than 290 demand, and 140 supply, nodes in most cases at sub-country level Total demand at each demand node is split into sectors (mainly power and other) Demand functions estimated econometrically and based on GDP growth, gas prices Underlying growth model assumes long run convergence of growth rates Supply includes CBM, shale and GTK and YTF conventional resources Costs estimated econometrically based on geological features and extended to ROW Costs of pipeline and LNG projects are estimated econometrically Use MarketBuilder software from Deloitte MarketPoint, Inc. Dynamic spatial and intertemporal equilibrium with timing of resource extraction determined by anticipated prices, capital costs of expansion, and O&M costs Backstop technologies fix the long run natural gas price The model is non-stochastic, but allows analysis of many different scenarios

5 Base case results: Demand

6 Base case results: Supply

7 Base case results: Global shale production

8 Base case results: LNG imports

9 Base case results: LNG exports

10 Base case results: LNG exports from Australia

11 Base case results: China

12 Base case results: Global marker prices

13 Some comments on North American LNG exports

14 The arbitrage opportunity Natural gas is currently effectively a non-traded good for the joint US and Canadian network Shale gas has lead to a large accumulation of inventory, which has a significant effect on natural gas prices in the short run Temporary increase in demand in Japan as a result of the March 11, 2011 tsunami and subsequent shut-down of almost all Japan s nuclear power plants The result has been a large gap between natural gas prices in the US and Japan Liquefaction trains are being built at regasification terminals on US Gulf coast The terminals will retain regasification and storage capability Widening of the Panama canal will allow large LNG ships to pass through, shortening the travel time to Asia Japanese importers are interested in financing liquefaction terminals on a tolling arrangement whereby the price of the gas itself is based on Henry Hub

15 $/mmbtu RICE UNIVERSITY Recent evolution of natural gas prices $25.00 $20.00 $15.00 $10.00 $5.00 Low Demand & Supply Growth Mar 11, Fukushima $- Feb 02, 2009 Mar 02, 2009 Apr 02, 2009 May 02, 2009 Jun 02, 2009 Jul 02, 2009 Aug 02, 2009 Sep 02, 2009 Oct 02, 2009 Nov 02, 2009 Dec 02, 2009 Jan 02, 2010 Feb 02, 2010 Mar 02, 2010 Apr 02, 2010 May 02, 2010 Jun 02, 2010 Jul 02, 2010 Aug 02, 2010 Sep 02, 2010 Oct 02, 2010 Nov 02, 2010 Dec 02, 2010 Jan 02, 2011 Feb 02, 2011 Mar 02, 2011 Apr 02, 2011 May 02, 2011 Jun 02, 2011 Jul 02, 2011 Aug 02, 2011 Sep 02, 2011 Oct 02, 2011 Nov 02, 2011 Dec 02, 2011 Jan 02, 2012 Feb 02, 2012 Mar 02, 2012 Apr 02, 2012 May 02, 2012 Jun 02, 2012 Jul 02, 2012 Henry Hub NBP JKM Brent

16 RICE UNIVERSITY Some issues Low US natural gas prices, combined with more regulations actual and threatened on coal plants, are already increasing the demand for natural gas Displacement of coal by natural gas is already leading to an indirect arbitrage of natural gas prices via substitution in Europe of US coal for natural gas Industrial demand for natural gas is also increasing in the US Direct use of natural gas in transportation is increasing, GTL has been proposed, and oil sands and ethanol are indirect uses of natural gas for transportation Drilling rigs and other E&P resources are focusing on more liquids rich plays at the expense of dry natural gas plays The North American supply curve for natural gas is relatively elastic, the Asian demand curve relatively inelastic US exports will reduce Asian prices more than raise North American ones How much would you charge for use of the canal if you were Panama? For the longer term, exports from Western Canada to Asia make more sense But Gulf coast facilities are ideally set up as arbitrageurs

17 Desirability of long term contracts in natural gas markets

18 Increasing spot and short-term contract LNG trades Million Metric Tons LNG Actual Total Trade Contracted Volume Actual S+ST 50 Note: S+ST is total trade under spot + short-term contracts (< 4 yrs) Source: International Group of Liquefied Natural Gas Importers (GIIGNL)

19 Japan LNG imports by source & type United Arab Emirates Australia Belgium Brunei Algeria Egypt Spain Equatorial Guinea Indonesia Malaysia Nigeria Norway Oman Peru Qatar Russia Trinidad and Tobago USA Yemen Year ZEUS INTEL DATA: Total Trade (mtpy) Short term and Spot Trade (mtpy, reexports < 0)

20 Japan LNG import prices relative to Brent aus l4.brent: 2007m10 / 2011m brn l5.brent: 2005m1 / 2011m idn l1.brent: 2004m11 / 2011m mys l4.brent: 2007m4 / 2011m qat l5.brent: 2008m1 / 2011m uae l4.brent: 2008m12 / 2011m

21 A model of long-term LNG contracts Aim of the model is to illustrate how market liquidity in particular affects the desirability of long-term contracts in the LNG industry Key idea: long term contracts make cash flows less volatile Increases contract bankability and allows increased leverage in project finance Debt reduces the cost of project finance, but the firms face a value at risk type of limitation on total debt (see appendix 2) On the other hand, contracts may lead to some trades that are ex-post inefficient As LNG market liquidity increases, the volatility of cash flows in the absence of a long-term contract declines, reducing the benefits of the contract

22 Representative investment projects 5 mtpa liquefaction plant, capital cost of $9.119 billion 18 CCGT power plants 400 MW capacity, operated at a 60% load factor Heat rate of 6.43 MMBTU/MWh Using EIA data, capital cost approximates $7.221 billion Fixed O&M of $ million Variable O&M (excluding fuel) of $3.11/MWh gives $ million/10 12 BTU Shipping costs S = $1.25/MMBTU Financial parameters All-equity return = 10%, bond yield = 5%, risk free rate = 3% Project life of 25 years, with straight line depreciation for tax purposes Corporate tax rate (τ) assumed to be 35% for all projects; annual fixed and variable O&M and fuel costs are fully deductible

23 Short-run demand and supply uncertainty p 20.0 Demand shocks slope = Supply shocks The demand shocks could result from plant outages or changes in other fuel prices or the demand for electricity Supply shocks could result from plant outages, weather shocks, strikes etc. slope = Shock distributions are symmetric beta with means zero and exponent q

24 Experiments with the model Examined the solutions for 43 different spot market price distributions (with p M = p X + ν with p X and ν symmetric beta distributed, uncorrelated) p X mean = $8.75 or $9.25 per mmbtu, with standard deviation = $0.82, $1.00 or $1.41 p M mean had 13 values from $11.19 $12.50, and p M standard deviation 18 values from $1.03 $1.71 Correlation between p X and p M averaged 0.75 and ranged from Probability that p M <p X +S averaged.023, ranged For some of the spot price distributions with low means and low standard deviations, the best incentive compatible contract and the spot market solutions gave a negative NPV for the exporter and hence would not be feasible

25 Key results Optimal contract price varies less than the means of spot price distributions Increased debt capacity under the contract (debt more than 30% higher) is a significant source of increased surplus relative to the non-contract outcomes Higher spot market price variability increases the differential in debt levels The benefits of extra debt exceed small trading inefficiencies under the contract A more liquid spot market, that is, decreases in the variability of spot prices, the mean and variability of the gap between prices, and increases in the probability that p M <p X +S, decreases the relative superiority of the contract solution Largest factor was the variability of spot prices, with others each about 1/3 the size Spot market trades under the contract solution increase with the probability that p M <p X +S and with declines in average spot prices, but decline as spot market variability declines Even so, the effect of the probability that p M <p X +S is more than 12 times as large as any other influence

26 Some implications for Australia The world LNG market is becoming more competitive and more liquid Sustainability of long-term contracts is under threat with demands for more flexibility to take advantage of spot market trading opportunities In this context, cost blowouts in Australian resource projects are a major issue A recent Wall Street Journal article reported estimates that the Gorgon project cost will exceed initial estimates by more than 16%, the BG Gladstone project by 36%, the Santos Gladstone project by almost 16% and the PNG LNG project by 21% The cost increases include consequences of less flexible labour markets While more offshore sourcing, exemplified in the extreme by the floating LNG facility, can help reduce costs, such developments are also expensive and meeting opposition Environmental concerns also are raising costs, which may be efficient if the concerns are legitimate, but a significant drag on efficient resource use if they are not

27 Some other energy policy issues Other policies affecting energy use recently implemented in Australia: CO2 tax Regulations promoting the use of renewables in electricity generation Regulations aimed at improving electricity network resilience to peak demand shocks Penalizing coal and promoting renewables may both raise domestic gas demand However, renewables promote open cycle turbines rather than CCGT, resulting in higher costs than could otherwise be achieved Forgoing low cost coal (especially lignite that cannot be exported) is also cheap resources into expensive energy revisited Transmission upgrades may also be partly the result of increased use of renewables: intermittency, off-peak output, remote locations, low capacity factors These costs represent a significant drag on the economy to the extent that they unnecessarily raise electricity costs and tax Australia s comparative advantages Like the mining tax, they also adversely affect expectations for stable and predictable policies affecting the energy sector

28 Concluding Remarks As a premium fuel, natural gas demand generally grows faster than output Asia is the largest source of growing demand Gas prices steadily rise as a result of depletion and, around 2035 in our simulations, other energy sources become competitive and dampen gas demand growth Supply grows fastest in Russia, Middle East and Asia, but Asian imports still rise LNG trade links prices around the world and increases arbitrage possibilities LNG imports grow most in Europe & Asia Middle East and later, Russia, become key arbitrageurs of European/Asian prices More liquid markets will reduce the advantages of long-term contracts and lead to demands for more flexibility to exploit arbitrage opportunities High costs, competition from the Middle East and Russia, and Chinese production from shale limits growth of Australian LNG exports Australia cannot rest on a belief that its resource endowments alone will ensure it a bright future it is easy to destroy opportunities through bad policies

29 Appendix 1: More details on the RWGTM

30 The RWGTM: Demand Over 290 regions North America (residential, commercial, power gen & industrial) Natural gas demand functions estimated using longitudinal state and provincial data National panel used for rest of world (power gen, direct use, EOR) Natural gas share of total energy increases with income, reflecting natural gas as a premium fuel, but declines as its relative price increases The price elasticity decreases as the natural gas share of TPE supply increases Population growth: the UN median case projection to 2050 Economic growth is based on IMF forecasts and then an estimated conditional growth convergence model At low levels of GDP per capita, convergence is to a representative take-off path Above the take-off level, convergence is to US per capita GDP growth

31 The RWGTM: Demand (cont.) Examples of growth forecasts (GDP per capita in $2005 PPP) China 16% forecast 14% 12% 10% 8% 6% 4% 2% 0% -2% % 6% 4% 2% 0% -2% -4% USA forecast -6%

32 Economic development and energy demand Time series of per capita energy demand versus per capita GDP for 67 countries Energy use increases with GDP, but both structural and technical change reduce the rate of increase as economic development continues Also estimate the change in the composition of TPER with economic growth

33 The RWGTM: Supply Over 140 supply regions Natural gas resources include conventional, CBM and shale Conventional deposits are split into in three categories: proved reserves (updated 2006 Oil & Gas Journal estimates) growth in known reserves (P-50 USGS estimates and NPC estimates) undiscovered resource (P-50 USGS estimates and NPC estimates) North American cost estimates were econometrically related to play-level geological characteristics and applied globally to generate costs for all regions Long run costs increase with depletion Short run adjustment costs limit the rush to drill phenomenon We allow technological change to reduce mining costs longer term and in regions with no history of oil & gas development also in the short term The required return on investment varies by region and type of project (using ICRG and World Bank data)

34 The RWGTM: Transport infrastructure Detailed pipeline transportation network Pipelines are aggregated into corridors where appropriate, with the model choosing utilization levels for current capacity and new pipeline links when profitable Capital costs are based on an analysis of over 100 pipeline projects relating project cost to various factors Tariffs are based on posted data, where available, and rate-of-return recovery LNG is modeled as a point-to-point network where initial LNG route capacities are calibrated to 2010 flows Swaps are allowed to occur, but shipping capacity must be added in order to implement them LNG shipping rates based on lease rates and voyage time

35 Alternative technologies The model is solved for market equilibrium in each year, and equilibrium price paths, out to a horizon where the backstop technologies set the gas price In regions with substantial coal, we allow demand for electricity generation to be lost to IGCC at a (real 2010) gas price of $6/mmbtu from 2010 However, IGCC is not much used before 2025 We also allow for unspecified new technologies to displace natural gas demand from 2020 at a (real 2010) gas price of $7/mmbtu The unspecified backstop is not much used until after 2035

36 Appendix 2: Benefits and costs of leverage Denote the after-tax cash flow for particular values of demand (ε) and supply (ξ) shocks, and export net-back (p X ) and import (p M ) spot prices, by C(ε, ξ, p X, p M ) Let the total amount of debt finance be B with after-tax interest cost r B (1 τ)b We then require Pr[C(ε, ξ, p X, p M ) < 0.1B + r B (1 τ)b] = 0.05 We contrast trade under contract with spot market trade: 1. Based on full information about demand and supply shocks and variable O&M costs in addition to current spot market prices 2. Based on partial information, namely prevailing spot market prices only