Leveraging India’s Strengths to Ensure Energy Security

Leveraging India’s Strengths to Ensure Energy Security

CII Conference on Energy SecurityVipul Tuli, McKinsey & Company

October 31, 2003

This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organisation without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.

DLO-ZXR745-20031030(CII-EnergySecur)(VT)_7

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Today’s discussion

Energy security – What are our real challenges? Energy security – What are our real challenges?

Coal – India as a cost and technology leaderCoal – India as a cost and technology leader

Oil – Align multi-lateral interestsOil – Align multi-lateral interests

Nuclear – Expand execution capabilityNuclear – Expand execution capability

Gas – Exploit regional surplus to drive changes in global industry structureGas – Exploit regional surplus to drive changes in global industry structure

Need for an apex viewNeed for an apex view



3

India’s energy security challengesFuel mix for India, 2012

Per cent

56

1999

283mmtoe1

21

Coal

Oil

2012

Coal

Oil

Gas

NuclearHydro

Other renewables

337

42

25

15

1134

600mmtoe

• Oil only flexibility, need to create spare capacity in other fuels

• Lowering cost of energy and volatility as important as ensuring supply

• Adopt ‘position of strength’ mindset, exploiting global discontinuities

Source: Planning Commission Energy Policy Document


4

Gas demand and supply in year 2005bcm

Southern China- Guangdong and Pearl River Delta- CNOOC and BP will build a LNG terminal by 2005- CNOOC is also considering a pipeline from Hainan

IslandFujian province- CNOOC plans to build a 2m t/y LNG terminal at

Fujian by 2006/7

East China- Shanghai, Yangtze. River Delta

- PetroChina- 2400 km East West pipeline connecting gas from Tarim, Xijiang

- CNOOC is also considering LNG terminal

NorthEast- Shandong

- PetroChina has just completed a pipeline from Hebei supplying 1.05 bcm; up to 2-3 bcm by 2008

- CNOOC is also considering LNG to Shandong-Bohai Bay

Supply Demand

China’s initiatives to improve energy security

• Gas pipelines to fill supply-demand gap of pipeline gas

• New regulatory framework for foreign investments

• Encourages Chinese companies to set-up overseas O&G production

• Heavy investments in coal power generation and technology

• BP, Shell, Exxon Mobil investments

Source: Lit search; BP website


5

250

157

115

84

82

66

50

34

34

22

0.96

0.17

1.15

0.31

0.09

0.15

0.14

0.07

0.04

0.10

Coal: India must drive industry in technology, cost and powergen capacity

US

Russia

China

India

Australia

Germany

S Africa

Ukraine

Kazakhsta

n

Poland

Proved reserves at end 2002Billion tonnes

Coal as % of energy consumptionPer cent

• India and China can potentially drive coal industry

• India needs to create spare power generation capacity to utilise coal

• Companies like BHEL, Coal India Limited (CIL) and NTPC can / should make India a world leader in coal cost, technology, and powergen capacity

Source: BP Statistical Review, 2003; EIA

Coal consumption in 2002Billion tonnes

24

15

66

56

44

26

75

29

56

65


6

Oil: Flexible pricing/risk tailoring mechanisms to mitigate volatility risks

Source: Morgan Stanley; Merrill Lynch

Shell/Pemex-Deer Park Joint Venture Example

(Uplift $/Bb)JV pays NOC

NOC pays JV

Period

Crude priced at netback

Market price

Risk protection provided via netback limit

0.0

5.0

10.0

15.0

• Texaco/Saudi Aramco alliance to secure crude oil supply/products market (Dec 1988)

• Shell/Pemex alliance to finance refinery upgrade and secure crude oil/supply products market (Feb 1993)

• Petrogal/Saudi Aramaco alliance to secure crude oil supply/products market (June 1997)

Other examples

Netback holds


7

Gas: The region has massive reserves to fulfil any demand scenario

Source: BP Statistical Review 2001

As of 2000, trillion cubic meters

R/P=29.1R/P=24.8

0.300.65

1.37

R/P=49.3

2.310.39

2.05

1.26

R/P=52.3

R/P=32.0

R/P=40.6

R/P=33.5

IndiaIndia

AustraliaAustralia

IndonesiaIndonesia

MalaysiaMalaysiaBruneiBrunei

52.52

R/P>100

Middle EastMiddle East

56.70

R/P=79.6

RussiaRussia

ChinaChina

0.33 0.19

R/P=11.8

R/P=6.8

ThailandVietnam

• Substantial R/P’s with the existing reserve base ensure ample supply for decades

• Massive reserves in the Middle East and Russia will

– Ensure that there will be no shortage of potential projects chasing demand

– Create significant competition for Asian LNG suppliers

BangladeshBangladesh


8

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0 20 40 60 80 100 120

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0 20 40 60 80 100 120

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0 20 40 60 80 100 120

Historic prices3.86

Wide gap exists between historical price and LNG marginal cost going forward

*Marginal cost in year 2010 assuming straight line depreciation of capital cost over 20 years; ** Market shipping costSource: McKinsey; Petroleum Economist; CERA; team analysis

Marginal cost, delivered to Japan, 2010

USD/MMBtu

1.30

1.37 1.38 1.49** 1.52 1.521.70 1.74**

1.96

1.98

2.01 2.07 2.092.17

2.28

Projected 2010 LNG capacity, MTA

Shipping

Lique-faction

Produc-tion


9

35.7 35.3 35.3 35.3 32.2 27.3

9.0 5.8

21.0 21.010.8 10.8

10.810.8

10.810.4

13.1 12.7

12.7 12.712.7

12.7

12.712.7

10.2 10.1

10.1 10.110.1

0

00

9.2 9.2

9.2 9.29.2

9.2

9.2

0

6.2 5.9

5.9 5.95.9

5.9

5.9

5.9

3.6 3.6

3.6 3.63.6

3.6

3.6

3.6

2000 2002 2004 2006 2008 2010 2012 2014

Significant volumes of LNG will be up forgrabs in a highly competitive market

*Includes Japan, Korea, Taiwan, China, and India; ** Assumes 4 BCM/train

Source:World LNG source book 2001; Energy Information Administration; BP Statistical Review 2001

Forecasted imported natural gas demand*

103

Indonesia

Malaysia

Qatar

Oman

AustraliaBrunei

Abu Dhabi

123(2005)

172

99.1 98.087.8 87.8 85.0

69.7

51.3

38.5

Contracted volume, BCM, 2000-2014

102 BCM gap in 2010, representing ~26 trains** of LNG to be renegotiated or built

102 BCM gap in 2010, representing ~26 trains** of LNG to be renegotiated or built

193(2015)


10

Is the industry ripe for a massive price restructuring?

*Supply curve drawn on basis of border prices for India including 5% of customs duty on imported gas. Sales tax not considered in above values

Source: EIA; MoP&NG publications; McKinsey Global Gas Model; McKinsey analysis

ALL INDIA*

• Multiple new supply options to negotiate with

• China already driving prices down

• Potential for demand consolidation

$/mmbtu

0

1

2

3

4

5

6

0 25 50 75 100 125 150 175 200 225 250 275 300 325

ON

GC

B’d

esh

mmscmd

Demand

Price estimate

$2.75-3.50 /mmbtu

New

loca

l 2

Rel

ian

ce

Pri

vate

Mya

nm

ar

No

rth

-Eas

tPrice

Various LNG sources• Qatar• Oman• Yemen• Australia

• Iran• Egypt• UAE• SE Asia

2011-12: Projected gas demand-supply curve for India


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Nuclear Power Generation: India’s potential as a major player

77

75

58

50

44

38

29

3

1

1. France

Nuclear share in power generation, 2000

Per cent

• Nuclear power has massive growth potential

• Need to expand execution capability

**(17% of 212GW – capacity needed to meet peak demand by 2012 according to MOP presentation)Source: EIA; Planning Commission Energy Policy Document; Ministry Of Power

Nuclear power generation capacity

GW

3

36

Current Aspiration if India reaches global average of 17% in 2012**

2. Lithuania

3. Belgium

4. Slovakia

5. Ukraine

6. S.Korea

7. Japan

28. India

30. China::

Global average

17%


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Need for an apex body for Energy Security

PMO

Power Coal

Petro-leum & Natural Gas

Non- conven-tional energy

FinanceExternal affairs

RailwaysDeptt. of Atomic Energy

• Power PSUs

• JVs

• Private Cos.

Coal PSUs

O&G

• PSUs

• Private Cos.

• JVs

• PSUs

• MNCs

• JVs

• Govern-ment

• Non-govern-ment entities

Govern-ment

Govern-ment

Govern-ment

INDIA


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END OF PACK


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Gas – Exploit regional surplus to drive changes in global industry structure Gas – Exploit regional surplus to drive changes in global industry structure

The example of ChinaThe example of China




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Leveraging India’s Strengths to Ensure Energy Security