IMPACT OF LNG AS ENERGY FUEL MIX FOR END USER

IMPACT OF LNG AS ENERGY FUEL MIX FOR END USER Planning Division TENAGA NASIONAL BERHAD WE VE GOT THE POWER - to serve, to deliver, to excel WE VE GOT THE POWER - to serve, to deliver, to excel

CONTENT INTRODUCTION OF GAS TO POWER SECTOR - BACKGROUND CURRENT ISSUES IN RELATION TO GAS SUPPLY TO POWER SECTOR FUTURE ENERGY MIX ECONOMIC IMPACT OF LNG TO END USER CUSTOMERS CONCLUSIONS WE VE GOT THE POWER - to serve, to deliver, to excel 2

NATURAL GAS WAS OFFICIALLY BROUGHT TO THE POWER SECTOR WITH THE INTRODUCTION OF FOUR FUEL POLICY, 1981 National Energy Policy, 1979 National Depletion Policy, 1980 Four-Fuel Policy, 1981 Five-Fuel Policy, late 90 s National Green Technology Policy 70 s Oil Crisis Oil Price Crunch 1970 1980 1990 2000 2009 1 2 3 The National Energy Policy (1979) was formulated to create an efficient, secure and environmentally sustainable supply of energy. Comprises three principle objectives. National Depletion Policy (1980) was intended to conserve the country s energy resources, particularly oil and natural gas Four-Fuel Policy (1981) Reduced dependence on oil as fuel for electricity generation Gas becoming primary fuel 4 5 Five-Fuel Policy (late 90 s) Renewable Energy and Energy Efficiency as the fifth fuel and to further diversify energy base and to create a sustainable energy future National Green Technology Policy To attain energy independence and promote efficient utilisation whilst conserving and minimising the impact to the environment 3

THE POLICY DRIVES THE FUEL MIX EVOLUTION FROM OIL DOMINANT TO GAS DOMINANT OVER A FEW DECADES 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Malaysia has been highly dependent on fossil fuels: Oil (1970s) Natural Gas (1990s to 2000s) Coal?? 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Oil Distillate Natural Gas Coal Hydro Hydro Coal Natural Gas Distillate Oil 0% 4

OVERDEPENDENCE ON GAS IS DEEMED RISKY AS THE POWER SECTOR WAS BADLY HIT BY GAS SHORTAGES IN RECENT YEARS Several breakdowns of gas infrastructure led to severe gas shortages to the power sector This is made worse by the fast depleting domestic gas fields The supply shortages of up to 26% adversely impact the power sector operationally and financially Annual Average: 1250 mmscfd - 10% Annual Average: 1122 mmscfd - 26% Annual Average: 1150 mmscfd - 12% Annual Average: 924 mmscfd Annual Average: 1012 mmscfd 6

WHICH LED TO A SMALL BUT SIGNIFICANT CAMEO OF EXPENSIVE DISTILLATE AND FUEL OIL IN PENINSULA S FUEL MIX MFO and distillate contributed to about 5% of fuel mix in 2011 and 2012 This translates into approximately RM 5.5 billion of additional system cost due to expensive price of MFO and distillate ( 5 to 6 times higher compared to local gas price) 7

THE FUTURE FUEL MIX MAY FURTHER CHANGE WITH THE DEPLETION OF INDIGENEOUS GAS AND MOVEMENT OF FUEL PRICES In the long run, the depletion of domestic fields can be made up by the importation of LNG However, the competitiveness of other fuels may affect the LNG s attractiveness Source: PETRONAS presentation Source: EIA_US Energy Prices 8

ON PURE ECONOMIC BASIS, THE FUEL MIX MIGHT HAVE A NEW BACKDROP IN FAVOR OF COAL Based on current market price, coal is too competitive for LNG Economic signals will guide the future fuel mix to swing from gas dominant to coal dominant LNG/ local gas is expected to play a different role in the future fuel mix 10

HOWEVER, OVERDEPENDENCE ON ONE FUEL SOURCE IS NO LONGER SUSTAINABLE FOR THE COUNTRY Coal is 100% import with more than 60% comes from Indonesia (current) Overdependence on coal may pose fuel supply risks as it is sensitive to weather condition, policy changes in supplier countries, competition from other economies, etc. In addition, it may also expose the country to environmental risks due to carbon emission 1. Indonesia 2010 12.4 mil tonnes 2011 13.9 mil tonnes 2012 12.8 mil tonnes 2. Australia 2010 2.5 mil tonnes 2011 3.8 mil tonnes 2012 3.5 mil tonnes 3. South Africa 2010 2.0 mil tonnes 2011 1.47 mil tonnes 2012 3.0 mil tonnes 11

POLICY INTERVENTION MAY PROVIDE TWIST AND TURN IN THE LIGHT OF SECURITY AND SUSTAINABILITY MyPower has proposed for the utilization of 7 Security Metrics to address fuel mix and energy security issues as follows: ES3 with HHI (Herfindahl-Hirschman Index) for fuel mix is aimed to diversify the future fuel mix with the target HHI value of not more than 0.5 by year 2020 and not more than 0.4 by 2025. HHI value reflects the diversity level of a system (the lower the value the better more diversified) 12

TAKING HHI GUIDELINE INTO CONSIDERATION, GAS/LNG MAY HAVE AN IMPORTANT ROLE TO PLAY IN THE FUTURE FUEL MIX Gas/LNG may help to diversify the fuel mix which indirectly helps to maintain and improve the security level of energy industry LNG may also provide a cheaper alternative to distillate and MFO in the event of domestic gas supply shortages 13

CONTENT INTRODUCTION OF GAS TO POWER SECTOR - BACKGROUND CURRENT ISSUES IN RELATION GAS SUPPLY TO POWER SECTOR FUTURE ENERGY MIX ECONOMIC IMPACT OF LNG TO END USER CUSTOMERS CONCLUSIONS WE VE GOT THE POWER - to serve, to deliver, to excel 14

AT THE SAME TIME, MALAYSIAN ECONOMY MUST BE READY TO PAY THE PRICE OF ENERGY SECURITY RM 1/mmbtu of gas price increase will result into more than RM 400 million additional gas cost a year RM 1/mmbtu of gas price increase will also translate into 0.534 sen/kwh increase in electricity tariff RM Millions 7,000.00 Average Tariff (sen/kwh) 50.00 6,800.00 6,600.00 6,400.00 RM400 million additional gas cost 45.00 40.00 35.00 30.00 6,200.00 25.00 6,000.00 RM13.70 Gas Price RM14.70 20.00 RM 13.70 RM 20.00 RM 40.00 Gas Price 15

CONCLUSIONS LNG plays an important role to complement the depleting indigenous gas fields and aging gas infrastructure LNG can also be a cheaper alternative to distillate and MFO The demand for LNG in power sector is very much dependent on fuel prices and government directive LNG may help to diversify the future fuel mix which is important to maintain and improve the energy security level The economy must be ready to pay the price of improved energy security that LNG may bring 17

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CURRENTLY, THE POWER SECTOR IS NOT VERY FAR OFF FROM THE ENVISIONED LEVEL OF FUEL DIVERSITY HHI Target for Malaysia: < 0.5 by 2020 < 0.4 by 2025 Source: MyPower & Frontier Economics WE VE GOT THE POWER - to serve, to deliver, to excel 19

LNG AND OTHER NATURAL GAS OPTIONS Future gas could be from shale, tight sand gas, coal bed methane or conventional non associated/ associated fields PETRONAS has signed for coal bed methane gas from Australia to supply the Peninsular Gas is still expected to be one of the contributor for the future 48 shale basins in 38 nations However, there is growing evidence that the extraction and use of shale gas results in the release of more greenhouse gases than conventional natural gas, and may lead to emissions greater than those of oil or coal Source: US EIA 20