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© 2017 Gaffney, Cline & Associates. All rights reserved. Terms and conditions of use: by accepting this document, the recipient agrees that the document together with all information included therein is the confidential and proprietary property of
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Institution of Mechanical Engineers, London, Thursday 18th May 2017
Ryan PereiraPrincipal Commercial Manager – Global Gas & LNG
Mike WoodTechnical Director – Development Planning
[email protected] [email protected]
+447469140571 +447825171339
Value Creation: Gas to power –
via LNG import or domestic development?
2
© 2017 Gaffney, Cline & Associates. All Rights Reserved.
6th October 2015, we said there was too much gas (100+ years
worth of supply)…
… and the challenge was now local (many options)
and international (mainly LNG) monetisationSource: GCA analysis
Significant gas resource finds in last decade (non-exhaustive)
3
© 2017 Gaffney, Cline & Associates. All Rights Reserved.
As supply rose, global LNG prices fell, and new LNG project
FIDs became challenged given long run marginal costs…
Assuming current prices stay in the range $7-10/MMBtu during 2017 - 2020,
new FIDs on traditional land based solutions could be extremely challenged
$$$ REDUCTION
PROGRAMMES
Source: GCA analysis – Proprietary Global LNG Supply & Demand Model
4
© 2017 Gaffney, Cline & Associates. All Rights Reserved.
As we predicted… LNG supply projects stopped arriving like
London buses… but in the fight for global supremacy…
… could LNG provide the next geopolitical energy battleground?Source: GCA analysis
USALow cost, brownfield
Significant shale gas
China trade agreement
QatarProtecting market share
QG / RG merger
“Zero” cost, North field
AustraliaNew projects high cost
Profit “challenged”
Domestic gas price fears
RussiaPolitical battle
Significant gas
Competition in European
and Chinese markets
5
1. “Tidal wave” of US LNG exports arriving like a steam train
Will radically alter the global gas scene and likely to set global prices
2. Electrification of emerging economies (Africa, Asia, Latin America)
Represents the largest near to medium-term opportunity for gas demand growth
3. Lower LNG prices fuelling gas demand
Strong correlation between sub $10/MMBtu prices and new LNG buyers
4. Shift from large scale to “fit for purpose scale” projects
Mop up fragmented demand pockets at competitive prices, quicker and more flexibly
5. Buyer power pressuring traditional LNG contractual terms and pricing
More flexible global pricing mechanisms will emerge, based on gas-on-gas competition
© 2017 Gaffney, Cline & Associates. All Rights Reserved.
18th May 2017… Five trends we expect to drive gas and LNG
over the next 15-20 years
Gas is becoming the cheapest and most flexible form of energy supply
6
© 2017 Gaffney, Cline & Associates. All Rights Reserved.
1. USGC LNG is becoming a global price setter
At current prices can deliver LNG to West Africa at c. $7.5/MMBtu (plus regas)
2.00 3.00 4.00 5.00
HH Spot ($/MMBtu) 2.00 3.00 4.00 5.00
Energy cost (15% HH) 0.30 0.45 0.60 0.75
Tolling fee (fixed) 3.00 3.00 3.00 3.00
Shipping 1.00 1.00 1.00 1.00
Regas 1.50 1.50 1.50 1.50
Delivered LNG cost 6.30 7.45 8.60 9.75
Delivered gas cost 7.80 8.95 10.10 11.25
0.00
2.00
4.00
6.00
8.00
10.00
12.00
HH Spot ($/MMBtu)
Energy cost (15% HH)
Tolling fee (fixed)
Shipping
Regas
Delivered LNG cost
Delivered gas cost
Source: GCA analysis – indicative example
US LNG (FOB) = HH + fuel + liqn
US LNG (DES) = HH + fuel + liqn + shipping
US LNG (Delivered as gas) = HH + fuel + liqn + shipping + regas
115% HH + tolling fee
$1/MMBtu shipping (current freight rates)
$1.50/MMBtu regas (but could be lower)
US LNG (delivered to W.Africa) = $3.00 + $0.45 + $3.00 + $1.00 = $7.45
7
Simplistic example to compare US HH linked LNG to other oil indexed LNG
– Assume USGC LNG = 115% HH + $3/MMBtu tolling fee
– Assume simple 12% Oil linked + $0.50/MMBtu constant
Market appears to believe that c.300 Tcf US gas can be delivered @ c.$3/MMBtu
– HH future curve (as of May 2017) out 10 years
© 2017 Gaffney, Cline & Associates. All Rights Reserved.
1. At what levels can US LNG outcompete oil indexed LNG?
US LNG priced off HH wins at most prices above $50 oil,
also less sensitive to geopolitical riskSource: GCA analysis – indicative example, simplistic without S-curve or cap/floor
-160%
-140%
-120%
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
40 50 60 70 80 90 100
US
LNG
Co
st V
ers
us
Oil
Lin
ked
LN
G
Oil price ($/Bbl) at various HH ($/MMBtu) price levels
2.0 2.5 3.0 3.5 4.0 4.5 5.0
8
© 2017 Gaffney, Cline & Associates. All Rights Reserved.
2. Substitution in power generation – can gas compete?
Gas to power does not have to be MASSIVE… could be medium or mini. Coal???
EconomicsInvestment costs
Price differentialLNG vs others
EnvironmentalCOP21
Source: GCA analysis – indicative example for small to mid volume industrial purchases
HH + fuel + liqn + shipping
Lagos retail price of diesel
$25/MMBtu @ today’s $50 oil
9
© 2017 Gaffney, Cline & Associates. All Rights Reserved.
3. Lower prices are fuelling LNG demand
GCA are advising on natural gas & LNG options in Africa, Asia and Latin AmericaSource: GCA analysis of estimated deal price vs duration
Above c.$12 buyers will only
commit to one or two cargoes
Price
$/MMBtu
# of LNG cargoes committed to
5
10
15
20
5 10 15
Reported transaction (multiple sources and proprietary data)
Typical breakeven
price for post 2010
greenfield LNG
Tipping point at around $10
Below c.$8 buyers will make
a volume commitment of
multiple cargoes
10
© 2017 Gaffney, Cline & Associates. All Rights Reserved.
3. Despite large gas finds, Africa is still looking to import LNG Current and future potential importers
– Egypt
– Ghana
– Ivory Coast
– Lagos state, Nigeria
– Benin
– Senegal
– Morocco
– Kenya
– South Africa
– Namibia
Significant other LNG importers also emerging:
– Thailand, Pakistan
– Vietnam, Bangladesh
– Sri Lanka, Myanmar
– Indonesia
– Caribbean islands
– Australia??!
In West Africa, there are several proposed FSRUs along the WAGP route!
> 1bcm/annum
< 1bcm/annum
Africa gas production (non exhaustive)
11
4. Small scale “fit for purpose” opportunities – ship
bunkering, transportation, FLNG, FSRU, FSRP
© 2017 Gaffney, Cline & Associates. All Rights Reserved.
Flexible midstream solutions are increasingly popular in emerging new markets
requiring smaller scale LNG (trading and “break bulk”) and “molecules to MW”
FloatingAligned with markets Transportation
Environmental
Tax advantages
Demand generation
Small scaleDesign of choice Fast track
Lower risk
Cost control
Redeployment
CreditRisk mitigation
Financial settlement
Distributed markets
Multiple offtakers
1. Large (up to 2010)
2. Mid (up to 2015)
3. Small/Micro (2016+)
Source: GCA analysis internet research, MODEC FSRP barge, GE gas solutions
12
Newer markets are requiring more creative and flexible solutions…
Resulting in a reduction in regas tariffs (far below assumed $1.50/MMBtu)
4. Economics – an indicative example highlighting the strong
emergence of “floating” solutions for new niche markets
© 2017 Gaffney, Cline & Associates. All Rights Reserved.
Standard onshoreimport
Mini onshoreimport
Mini importbarge
Converted FSRU Existing FSRUredeployed
FSU Sister ships Newbuild FSRU
USD
$/M
MB
TU
Regas tariff (@12% NPV)
Procurement (efficiency) / penalty
LNG procurement
Source: GCA analysis, GCA Proprietary Liquefaction and Regas Model
Offshore floating LNG import solutions becoming increasingly viable:
– Scalable over time
– Costs reducing / lower capex
– Shorter lead times
– Conversions / redeployments
– Flexibility
13
© 2017 Gaffney, Cline & Associates. All Rights Reserved.
5. Buyers are getting what buyers want…
… but could create opportunity for sellers with increased market liquiditySource: GCA analysis, internet research, corporate websites for logos
Lower prices (reduction in oil indexation %)
Destination free clauses (being challenged)
Take or pay flexibility
Shorter contract durations
Benefiting from upside and trading opportunities
– Kogas winter buyer
– CNOOC summer buyer
– JERA buys across both seasons
Smaller parcel sizes
Portfolio diversification
Novel pricing formulas
14
© 2017 Gaffney, Cline & Associates. All Rights Reserved.
Result: LNG “glut” could end earlier than many forecast…
Source: GCA analysis – Proprietary Global LNG Supply & Demand Model
…likely that only the smaller scale, more nimble, low cost gas developments
will be better suited to meet any emerging demand growth from 2025+
5 91 1
-13-5
-22
-55 -57-69
-81-93
-121-134
-148-162
-176-191
-250
-200
-150
-100
-50
0
50
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035
LNG Supply Demand Balance (+ve = over supply in market) vs High Case Demand
LNG Supply Demand Balance (+ve = over supply in market) vs High Case Demand
Fuel substitutionGreater potential
FIDsDelayed
New demandUnderestimated
15
© 2017 Gaffney, Cline & Associates. All Rights Reserved.
Result: Gas developers may have to consider turning their
world upside down…
Source: www.harverstministry.org
… and reversing traditional thinking
Old World
1. Priority to export gas
2. Domestic use upside
3. Centralised power generation
4. Economies of scale
New World?
1. Priority for domestic use
2. Export gas upside
3. Distributed power
4. Smaller scale
16
© 2017 Gaffney, Cline & Associates. All Rights Reserved.
Wider benefits?Forex, pre payment
Capacity building?Workforce
Need for power?Developing countries
Competitive?
So why consider domestic gas development vs LNG imports?
Opens up stranded gas supply
Develops economies
Smaller scale?Niche fields / markets
More stable?Pricing
Focus today
17
© 2017 Gaffney, Cline & Associates. All Rights Reserved.
West African “stranded” gas – a snapshot example
±0 100 200 300 400Kilometers
0 500 1000 km
0 50 100 km
±
0 25 50 75 100Kilometers
Paon
Espoir C1-3
Hippo
B-3
Impala Kudu
Eland
NorthTano
EbonyWestTano South
TanoWawa
Beech
ParadiseHickoryNorth
Dzata
TanoFields
±
0 25 50 75 100Kilometers
Pelican
Fregate
Tiof
Tevet
Faucon
0 50 100 km
Banda
West AfricaMauritania / Senegal
Ivory Coast / Ghana
Source: Petroview, GCA analysis
18
© 2017 Gaffney, Cline & Associates. All Rights Reserved.
West African “stranded” gas
Source: Petroview, GCA analysis
1. http://www.clontarfenergy.com/app_user_files/file/Ghana-Tano-Basin-PresentationAGM.ppt
2. http://www.dana-petroleum.com/media/1420/dana_ar_2005.pdf
3. Espoir C1-3 is a separate discovery to the NE of the Espoir Field and development
CountryDiscovery
NameType Licence Operator
Discovery
Date
GIIP
(Bscf)
Cote D'Ivoire Paon Oil & Gas CI-103 Anadarko 14/06/2012 500.0
Cote D'Ivoire B-3 Gas & Condensate CI-101 Open 11/08/1982 100.0
Cote D'Ivoire Eland Gas CI-525 Vitol Group 18/08/1978 30.0
Cote D'Ivoire Hippo Gas CI-202 Vitol Group 28/01/2001 30.0
Cote D'Ivoire Kudu Gas CI-525 Vitol Group 31/07/1984 195.0
Cote D'Ivoire Espoir C1-3 Gas & Condensate Acajou Canadian Nat Res Ltd 21/07/1981 20.0
Cote D'Ivoire Impala Oil, Gas & Condensate CI-202 Vitol Group 09/04/1978 5.0
Ghana Paradise Oil & Gas DP Tano Cape Three Points Hess 07/06/2011 500.0
Ghana Dzata Gas & Condensate Cape Three Points Deep Lukoil 26/02/2010 500.0
Ghana Hickory North Gas & Condensate DP Tano Cape Three Points Hess 24/06/2012 240.0
Ghana Wawa Oil & Gas Deep Tano Tullow Oil 18/07/2012 200.0
Ghana South Tano Gas & Oil Shallow Tano Erin Energy Corp 01/03/1978 44.2 1
Ghana Beech Oil & Gas DP Tano Cape Three Points Hess 30/07/2012 100.0
Ghana North Tano Gas Shallow Tano Erin Energy Corp 24/04/1981 102.0 1
Ghana Ebony Gas & Condensate Shallow Tano Erin Energy Corp 20/11/2008 70.0
Ghana Western Tano Oil & Gas Shallow Tano Erin Energy Corp 09/03/2000 50.0
Mauritania Fregate Oil, Gas & Condensate C-7 KNOC 13/02/2014 680.0
Mauritania Banda Gas C-10 Open 25/09/2002 1200.0
Mauritania Pelican Gas C-7 Open 29/12/2003 400.0
Mauritania Tevet Oil & Gas C-10 Open 08/10/2004 250.0
Mauritania Faucon Oil & Gas C-1 Open 20/12/2005 200.0 2
Mauritania Tiof Oil & Gas C-10 Open 15/11/2003 50.0
19
© 2017 Gaffney, Cline & Associates. All Rights Reserved.
Gas development pricing
In order to compete with onshore US LNG exports, large scale deepwater gas
developments need to deliver treated gas to the local LNG plant at below
$4/MMBtu
Once these world scale developments are sanctioned, they will be able to offer a
low price gas stream for domestic gas to power in addition to LNG export
Smaller (less prolific well rates) offshore gas fields can require gas pricing in the
$8-10/MMBtu range to be commercially viable
– and are often unable to achieve an adequate Gas Sales Agreement
And yet there are an increasing number of countries considering LNG imports for
Power Generation
Will LNG import prices set a price ceiling for domestic gas production?
20
© 2017 Gaffney, Cline & Associates. All Rights Reserved.
Domestic gas resources
Major Gas to LNG projects can deliver a sidestream of DMO gas at lower prices
– provided that they are competitive with US “Henry Hub” LNG and achieve FID
Large gas field developments need to achieve sub $4/MMBtu
to compete with US LNG – could be delayed until LNG demand / pricing increases
FLNG
Gas
Field
300 MMscfd
250 MMscfd
50 MMscfd
(DMO) to
Power
Gas Treatment
21
© 2017 Gaffney, Cline & Associates. All Rights Reserved.
Gas to power – competition
Assuming that LNG sellers would be interested in supplying small volumes, a
LNG delivered price of $7.50/MMBtu, with $ 1.50 for regas, gives a total of
$9/MMBtu
HFO fuel cost is the equivalent of about $10/MMBtu (at $50 oil) so LNG imports
are attractive in comparison
For smaller scale power, or peak supply plants LPG imports could also be an
attractive option at circa $ 6/MMBtu
Power price at $ 8/MMBtu of gas is in the order of $ 0.10 per kWh,
which is bearable for commercial consumption
22
© 2017 Gaffney, Cline & Associates. All Rights Reserved.
Gas to power – pricing
As an example, consider a state owned, 200 MW power station fuelled by gas
from LNG, with a 70% load factor
– Gas demand in the region of 30 MMscfd
– Imported small cargo LNG at $9/MMBtu
– Annual gas purchase cost in the region of $ 100 MM
Expenditure on fuel imports comes from foreign currency account / balance of
trade
No price security – driven by international LNG market – with potential to increase
Development of domestic gas resources,
where possible can have significant benefits
23
© 2017 Gaffney, Cline & Associates. All Rights Reserved.
Smaller gas fields
The host government effectively pays the equivalent of $4/MMBtu over 20 years
Smaller gas fields can deliver gas at the same price as imported LNG
– at about $8-10/MMBtu
Host government gets back > 50% of this in the form of taxes / profit share
– so gas price is equivalent to $4-5/MMBtu over 20 years
0 5 10 15 200
2
4
6
8
Co
st
$/M
MB
tu
Years
State Take
Contractor
Take
Additional benefits of domestic gas
production:
– International investment
– Lower impact on balance of trade /
forex
– Domestic content / employment
– Price protection built into GSA –
escalation usually in the order of 2%
per annum
– MIGA insurance for gas payments
24
© 2017 Gaffney, Cline & Associates. All Rights Reserved.
Is domestic gas competitive against LNG imports?
Once host country benefits are taken into account, even relatively high cost
domestic gas developments are competitive against LNG in the mid to long term
0
2
4
6
8
10
12
US LNG (delivered) US LNG (as gas) Domestic onshore (low cost) Domestic offshore (mid cost) Domestic offshore (high cost) Domestic net cost (high cost)
Co
st (
$/M
MB
tu)
Imported LNG vs Domestic Gas Development ($/MMBtu)
Host country
benefits
Gas and LNG development is now much more complex than in the past
– Resource development needs to be matched with evolution of fragmented demand
– Driving a need for a much more co-ordinated gas master plan and field development
plan (particularly in Africa, Asia and Latin America)
25
© 2016 Gaffney, Cline & Associates. All Rights Reserved.
Development of smaller “stranded” resources is attractive + Benefit from PSA profit share – balance of trade
+ Internationally funded
+ Increased domestic content
+ Gas price security
Larger, deep water domestic developments NPV attractive
but in current LNG market / price environment, will they achieve FID ?
Conclusions: domestic development, LNG imports or both?
GCA consider both – “right location, right drivers”
Ultimately the lowest cost solution should triumph
The current low LNG price provides a gas to power
opportunity at acceptable power pricing, but:- No price security
- High demand on foreign currency
- No domestic content
Lo
wer c
ost
26
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