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The Lantau Group
Who we are
Decisions Support Analysis
Asset Valuation
Strategy and Advanced Analytics
Competition, Markets, Regulation, Policy
Disputes
Market Analysis
Forward Thinking
Deeply experienced economic consulting firm to the energy sector based in Asia
The TLG team has
experience throughout
the Asia Pacific region
Office
Senior Advisors
Offerings:
• Deep, critical, and often provocative insights
• Ability to connect the dots between fuel markets and power
• Analysis-based recommendations
• Highly relevant international experience
• Accessible experts focussed on the region
1
The Lantau Group
Agenda / Content
Key takeaways
The kinked gas supply curve
Example from fuel to power simulation for Thailand
Wrap up
2
The Lantau Group
Key takeaways
• Gas pricing in most of South east Asia is in a bit of a mess. Imported LNG should be setting the
marginal price for gas, legacy domestic gas is generally lower in price, sometimes there is a
perceived ‘shortage’ of domestic gas, some kind of change to the way domestic gas is priced
seems likely.
• Pricing arrangements in most countries do not generally send the right signals to any
stakeholder. The gap between regulated and market based prices is large and daunting. And
gas is almost certainly being left in the ground that if extracted could increase value for many
countries.
• By simplifying pricing to new domestic gas resources and focusing on the endgame – a more
robust long-term transition to a gas market -- some gas producers might make more money (and
pay higher taxes), but the additional gas brought to market would displace expensive LNG
imports.
• In our simulation for Thailand we have suggested a half way comprise position with that would lift
the price of all uncontracted and yet to find domestic piped gas part of the way to the LNG price
and above existing gas price levels. Given a sufficient gas supply side response there is no
change in the average annual power price.
3
The Lantau Group
Agenda / Content
Key takeaways
The kinked gas supply curve
Example from fuel to power simulation for Thailand
Wrap up
4
The Lantau Group
Kinked gas supply curve
A kink arises at the point where there is no more domestic gas available at the acceptable domestic price.
Consequently, the country imports LNG to fill the gap to meet demand. Without access to the imported LNG price,
gas developers do not explore or develop domestic resources to the extent that they might otherwise. The result
is foregone value.
5
Imported LNG Price
Quantity of gas
US
D/m
mb
tu
Unseen
Domestic
Supply
Curve
Domestic Gas
Price
Imported
LNG
Domestic
Gas
Foregone Value
The Lantau Group
Contract by contract negotiation
Historical legacy contracts are shown as
steps.
Now, suppose that a single gas buyer seeks
to negotiate a contract with a new source of
domestic gas supply. Through diligent
negotiations, secures a contract from new
or enhanced existing field at a price lower
than the imported LNG price.
The value “X” is the amount “saved” for
consumers, who might otherwise have had
to pay a higher price to cover additional
imported LNG. This reflects a common
scenario in Asia.
Instead of moving directly to market-based
pricing (consistent with the economic law of
one price), effort is expended to negotiate
new domestic gas contracts on an individual
basis, attempting to get the lowest possible
price.
But, take a closer look and the foregone
value triangle is still there. 6
Supply
“X”
Pri
ce (
USD
MM
btu
)
Domestic Supply Curve
LNG Supply Curve Foregone
Value
Demand
Historical Contracts
Perceived Savings vs
LNG
New Domestic
Gas
Legacy Domestic Gas
LNG Import
The Lantau Group
Reference price solution
7
Area “Y” is the increase in cost paid by end users as a result of stopping the contract-by-contract negotiations process that would have yielded some additional contracts at some price lower than the reference price.
Area “X”, in contrast, is the savings to end users associated with gaining access to new domestic gas at a reference price below the LNG price.
If the hoped-for supply response is large enough, then end users can see savings, relative to the LNG alternative, due to area “X” being larger than area “Y”.
If the hoped-for domestic supply response to the reference price does not happen, then area “X” will be smaller than area “Y” and end user prices may increase somewhat. Even if this occurs, an appropriately designed tax or royalty system could claw back much of this rent, for the benefit of the wider economy.
The Lantau Group
What is the ideal reference price?
The ideal point depends on the objective.
The lowest end user prices are achieved
when the difference between “X” and “Y”
is greatest.
The greatest national benefit for a given
end user tariff level occurs when “X” and
“Y” perfectly offset each other.
The first step is to define the objective so
as to reduce the otherwise arbitrary
nature of the reference price concept.
The remaining steps include:
• comprehensively assessing available
supply information;
• conducting appropriate industry
consultation,
• developing and analysing scenarios;
• and possibly developing innovative
mechanisms to elicit insight into the
likely size of new supply response.
8
The Lantau Group
Agenda / Content
Key takeaways
The kinked gas supply curve
Example from fuel to power simulation for Thailand
Wrap up
9
The Lantau Group
Thailand simulation
10
• In the following slides we outline
– a base case of business as usual with a very kinked gas supply curve
– and a modified gas pricing scenario in which there is a domestic supply response to a higher price for all
piped uncontracted and yet to find gas
• In the modified gas pricing scenario we illustrate the supply side response needed so that “Y” the
extra cost of local gas is equal to “X”, the savings from displacing LNG.
• What are the outcomes?
The Lantau Group
Thailand generation by fuel type in both cases
11
• This is based on new build in Power Development Plan 2010-revision3 but generation dispatch comes from our fuel-to-power optimisation program QUAFU.
• Large rise in imports of hydro from Laos.
• Generation is dominated by gas but the percentage eases from 67% to 57% of total by 2030.
• Domestic lignite (Mae Moh plant) holds at present generation levels.
• Generation from imported coal fired plant gradually rises.
• Imports using lignite-fired plants in Laos rise.
• Renewables mainly wind and solar on the upswing through the forecast period.
• Nuclear comes on line by 2026.
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TWh
Domestic Hydro Import Hydro Gas Domestic Lignite
Imported Coal Import Lignite Renewables Nuclear
The Lantau Group
Possible future Thailand domestic gas price formulas and prices
Existing Typical Gulf of Thailand Gas Contracts
Current Price in
THB per mmbtu *
Current Producer Price Index
Starting Producer Price Index +
Current FX
Starting FX *
Current Machinery Index
Starting Machinery Index
Current Fuel Oil Price
Starting Fuel Oil Price +
30% *
20% * 45% * Constant * 5% +
Starting Price in
THB per mmbtu =
Future Domestic Thailand Gas Contracts?
Price in
THB per mmbtu = Current FX *
USD Brent per barrel
0.12 *
• We have used a slope of 0.12 times Brent in our simulation. The actual slope would be the matter
for debate.
• The suggested modified gas pricing formula for uncontracted and yet to find gas would result in a
lift to real ex-platform prices of the order of USD 4.0 mmbtu, raising these from the current
average of USD 8.5 mmbtu to USD 12.5 mmbtu.
12
The Lantau Group
Malaysia gas pricing reform – the disruptive influence of LNG?
• Power Sector
– Supply of up to 1,000 mmcfd at regulated
prices. Threshold will be reviewed every three
years by PETRONAS starting in 2016
– Supply above this threshold will be at the new
gas pricing mechanism
• Non-power sector
– Current contracted volumes at regulated price
– All new contracts will be at the new gas price
mechanism
13
Discount
factor
Ex-
Bintulu
FOB x
+
Shipping
Regas
Pipeline
Transmis
sion
Delivered
price to
customers
15% to power,
10% non-power
New gas price mechanism Application
The Lantau Group
The Peninsular Malaysia supply response
• The North Malay basin is a project led by
PETRONAS and Hess to commercialise gas
from PM301, PM302, PM325 and PM326b.
• These blocks contain gas that is deep, high
pressure and high in C02 and therefore
expensive to produce.
• Approximately US$ 5.2bn will be spent to
monetize 1.7 Tcf of gas. Production will ramp up
from 100 mmcfd to 250-300 mmcfd by 2020.
• We believe that PETRONAS would not have
embarked on extracting this expensive gas
except for the on going gas pricing reform in
Malaysia.
• This pricing reform has the general aim of pricing
all new supplies of gas (piped or LNG) at prices
linked to the ex-plant LNG price at PETRONAS’s
Bintulu liquefaction plant in Sarawak.
14
North Malay basin acreage
Source: Hess
The Lantau Group
Indonesia – LNG the disruptive influence for gas pricing?
• Nusantara Regas (Pertamina and PGN) lease
FSRU and are the counterparty for LNG from
Bontang plant.
• 11.75 mmtpa supplied by TOTAL over period
of 11 years. Declining from 1.4 mmtpa in
2012 to 0.75 mmtpa in 2022.
• Price formula is 11% slope of Indonesian
Crude Oil price.
• So at USD 100 per barrel this is USD11 per
mmbtu at the Floating Storage Regas Unit.
• Just under double the price of any existing
gas supply contract for piped gas to
power.
15
Nusantara Regas FSRU Java Bay Gas Linkage to Oil
The Lantau Group
In Thailand what is the local supply response needed to make Y=X?
• Total extra supplies of domestic piped gas
from the Gulf of Thailand, MT JDA, onshore
Thailand and imports from Myanmar that
would be needed to be attracted by a higher
domestic gas price in order to back out
sufficient quantities of imported LNG yet keep
the average gas price to power unchanged is
shown in blue.
• It needs quite a substantial supply side
response from the gas producers. Basically
they need to displace much of the
uncontracted LNG through to 2022 and then
lift production from uncontracted and yet to
find gas from 2,000 bbtud to the 3,000 bbtud
level through to 2030.
16
0
500
1,000
1,500
2,000
2,500
3,000
3,5002
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bb
tud
Response Business as usual
The Lantau Group
Thailand gas supply forecasts
17
Business as usual With supply side response
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2,000
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7,000
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bb
tud
North_Contracted Northeast_Contracted
Gulf of Thailand_Contracted Myanmar_Contracted
Northeast_Uncontracted Gulf of Thailand_Uncontracted
Myanmar_Uncontracted Northeast_Yet-to-find
Gulf of Thailand_Yet-to-find LNG_Spot
LNG_Qatar LNG_Uncontracted
Thailand/JDA
uncontracted and
yet to find 8.5
Tcf
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2,000
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5,000
6,000
7,000
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bb
tud
North_Contracted Northeast_Contracted
Gulf of Thailand_Contracted Myanmar_Contracted
Northeast_Uncontracted Gulf of Thailand_Uncontracted
Myanmar_Uncontracted Northeast_Yet-to-find
Gulf of Thailand_Yet-to-find LNG_Spot
LNG_Qatar LNG_Uncontracted
Thailand/JDA
uncontracted &
yet to find 6 Tcf
The Lantau Group
Real average weighted delivered price for all gas to power
• The average weighted real delivered gas
price to power includes Gulf of Thailand,
onshore Thailand, MT JDA, Myanmar and
LNG imports.
• The general trend eases in real terms the
next few years due to the decline in the
forward Brent price. But then rises as new
piped gas priced with a link to Brent is
contracted for, and/or as supplies of LNG rise.
– The blue line is the business-as-usual average
delivered gas price in which virtually all of the
rise in the gas price is the result of a very large
influx of expensive imported LNG.
– The red line shows the average weighted
delivered gas price in which the modified new
domestic price formula sets a higher price for
local gas and induces a supply response, and
also the presence of lesser amounts of extra
LNG in the fuel mix.
18
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
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USD
mm
btu
Base Response
The Lantau Group
Average real end user power price
• Initially fuel costs per MWh fall in real terms due to a
forecast fall in Brent and therefore contracted gas
prices. Also there is a greater amount of coal and
renewables in the generation mix which have lower,
or zero fuel costs when compared to gas fired
plants. But fuel costs start to rise by 2017, by which
the date we expect uncontracted gas to make it to
market with prices linked to Brent and due to the
effect of LNG imports as well.
• We forecast a gradual rise in real levelised capex
per MWh to reflect the greater amount of power that
we expect to come from new-build combined cycle
gas turbines, imported hydro, wind, solar and latterly
nuclear.
• Other items such as power transmission and
distribution are not expected to increase in real
terms.
• By the end of the forecast period we project that the
average annual real end user power tariff will have
risen by 30% in real terms which is much less than
the real rise in the average gas price to power over
the projected horizon of close to 45%.
19
• Real price rises to USD 140 MWh by 2030
Broadly the same end user power price in
business as usual and supply side response
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USD
MW
h
Fuel Capital Power transmission and distribution
The Lantau Group
Agenda / Content
Key takeaways
The kinked gas supply curve
Example from fuel to power simulation for Thailand
Wrap up
20
The Lantau Group
Wrap up – everyone is a winner?
• Pricing arrangements in most Southeast Asia countries are not generally sending the right
signals to any stakeholder. The gap between regulated and market based prices is large and
daunting. And gas is almost certainly being left in the ground that could be extracted and
increase value for many countries.
• By simplifying pricing to new domestic gas resources and focusing on the endgame – a more
robust long-term transition to a gas market -- some gas producers might make more money (and
pay higher taxes), but the additional gas brought to market would displace expensive LNG.
• In our simulation for Thailand we have suggested a half way comprise position with that would lift
the price of uncontracted and yet to find domestic piped gas part of the way to the LNG price but
above existing domestic gas price levels set by contact by contract negotiation.
• Given a sufficient supply side response there is no change in the average annual power price.
Domestic fiscal take is higher. More local business is generated for domestic fabrication yards.
• The result can be a win/win.
• We would welcome your views.
21
The Lantau Group
Thank you
For more information please contact us:
By email
Direct Communications
By phone +852 2521 5501 (office)
+66 81 821 9801 (mobile)
By mail 4602-4606 Tower 1, Metroplaza
223 Hing Fong Road,
Kwai Fong, Hong Kong
Online www.lantaugroup.com
Rigour
Value
Insight
Energy Power Utilities
22