-
The Lantau Group
Making Sense of the Current Global Energy Markets &
Prices
for Crude Oil, Natural Gas & Coal
What does it mean for Myanmars Electric Power?
Sarah Fairhurst
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The Lantau Group
Oil prices have always been volatile
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20
40
60
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1861
1865
1869
1873
1877
1881
1885
1889
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1909
1913
1917
1921
1925
1929
1933
1937
1941
1945
1949
1953
1957
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
2013
Average Annual Crude Price, USD/bbl in 2013 money
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The Lantau Group
Other fuels may have a shorter history, but the messages are
much the same
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Brent Crude ($/bbl)
Australian Coal ($/mt)
Japanese LNG ($/mmbtu)
Nominal prices
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The Lantau Group
So understanding what drives prices is important
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0
5
10
15
20
25
30
Pri
ce, S
GD
/GJ
Coal
PNG (Fuel oil-index)
HSFO
Example: Singapore Gas Prices are
linked to HSFO prices which are
linked to crude oil prices
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The Lantau Group
But not all fuel prices are linked
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2
4
6
8
10
12
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20
Pri
ce in
2014 r
eal
term
s,
US
D/G
J
Note: Crude price: 1970 - 1987:Arab Light Crude prices ; 1988 -
2014: Brent price (historical Brent price only starts from May
1987)
Crude Oil
Coal
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The Lantau Group
And what is important is how decisions are made regarding what
fuel to burn;
and in the electricity industry, what type of capacity to
build
Taking Singapore as an example
The SRMC is the Short Run
Marginal Cost of a power station
This is approximately the same as
the fuel cost of a power station,
taking into account the efficiency of
the power station
In the 1990s, coal and piped natural
gas (PNG, coming from Indonesia
and Malaysia) had very similar
marginal fuel costs
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10
30
50
70
90
110
130
150
170
190
210
Coal
PNG
SGD/MWh
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The Lantau Group
When making decisions about which plan to build, you also need
to take into
account the capital cost of building the power station
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10
60
110
160
210
260
Coal-fired plant LRMC
LRMC of CCGTs withe PNG indexing to fuel oil
Continuing the Singapore as an
example.
The SRMC showed before was
very similar between coal and
gas
But when you take into account
the cost of the plant, and
calculate the LRMC (the Long
Run Marginal Cost) of the power
stations
Then piped natural gas was a
clear winner at that time.
SGD/MWh
We will come back to what this
meant for Singapore shortly..
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The Lantau Group
Looking at the history of fuel prices in Asia.
7
COAL WINDOW
In the late 1970, oil prices shot up during the Iran crisis,
creating a coal window for Asian countries, most of
which had been using oil for power
Crude
Coal
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The Lantau Group
Almost all of Asia shifted away from oil after 1979(Hong Kong
was nearly 100% coal by 1988)
Almost everyone moved away from oil With no indigenous fuels,
Hong Kong moved
most aggressively towards coal
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Source: World Bank
0
20
40
60
80
100
1978 1980 1982 1984 1986 1988
Hong Kong Malaysia
Thailand Philippines
Indonesia
Percent
0
20
40
60
80
100
1978 1980 1982 1984 1986 1988
Hong Kong Malaysia
Thailand Philippines
Indonesia
PercentOil Coal
HONG KONG
Other countries with indigenous resources started to develop
them (hydro, geothermal, etc)
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The Lantau Group
But Singapore stayed with oil through the 1980s, missing the
first coal window,
later switching to gas-fired CCGT units as oil prices fell
again
Source: IEA (1971-2010), EMA website (2011 2012) and TLG
analysis
Singapores fuel mix of electricity generation (1971- 2012)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
Gas
Oil
Biomass & other
Uniquely in
Asia, SG sticks
with oil
Coal Window 1
MORE GASGAS
(Gas Prices
are linked
to Oil)
GAS
OIL
Other
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Singapore enjoyed lower oil prices for many years during the
between the late 1980s and early
2000s with a fuel mix 100% linked to HSFO prices
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The Lantau Group
But around 2005, a second Asian coal window opened and continues
to this
day
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COAL WINDOW #2
Crude
Coal
COAL WINDOW #1
But by missing the first coal window, Singapore entered the
second window without any coal
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The Lantau Group
Many countries committed to gas when gas was expected to be
cheaper
but, later, oil-linked gas prices increased materially
11
COAL WINDOWCOAL WINDOW
1991 Discovery of
Malampaya gas
field
1997 NPC/FirstGen sign GSPAs
with SPEX/OXY
2001 Commission of
Malampaya
2006Singapore
commits to
LNG imports
1995 Hong Kong
first gas unit
commissioned
1992 Singapore first
gas unit
commissioned
As the price of oil increased, gas prices also increased
(due to oil-price linkages in gas pricing formulae)
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The Lantau Group
The outcome is that many countries in Asia have a diverse fuel
mix
Coal plants were built during coal windows
Gas thermal or CCGT plants were built during gas windows
Other local resources were developed as and where they were
available
Hydro in Laos, Cambodia, Philippines
Geothermal in the Philippines
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Diverse fuel mixes are an outcome of making good decisions at
various points in time,
not an end in themselves
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The Lantau Group
And not everyone makes Good DecisionsFirst, Singapore missed the
coal window. Then In 2004, Singapore studied LNG and then
commissioned a terminal in 2013
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
PNG supply
disruption
and partial
blackout
EMA launches
LNG terminal
feasibility study
Singapore
commits to
import LNG
EMA limits
PNG imports
Gas Act
amended
EMA appoints
PowerGas as
LNG terminal
developer
BG selected as
LNG Aggregator
Gas
market
formed
EMA takes
over LNG
terminal
EMA announces
LNG Vesting
Gencos
commit
to LNG
contracts
Terminal
breaks
ground
Terminal
begins
operation
CCGTs with new LNG
contracts come online
Keppel
840 MW
Senoko
860 MW
Tuas
406 MW
GMR
800 MW
Sembcorp
400 MW
Meanwhilethe coal vs gas spread tripled.
Singapore not only missed the second coal window, it actively
ignored it!
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The Lantau Group
So where to now?
Oil prices have fallen
LNG prices have fallen
But Coal prices have also fallen!
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The Lantau Group
40
50
60
70
80
90
100
110
120
Dail
y B
ren
t p
rice, U
SD
/barr
el
Jan '14 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec '14 Jan '15
Feb
Brent has dropped by half from the high level in H1 2014
15 Source: ICE, Reuters, GS Global Investment Research and TLG
analysis
ISIS attacked
Iraq
Price stabilized at
$100-110/barrel in
H1 2014 as Saudi
Arabia proactively
balanced the crude
market
Libya ports
re-opened
US air-
strike
on Iraq
started
1st sanction on
Russia
Saudi cut Oct
OSP priced
Saudi cut
Nov OSP
priced
Crude production in Iraq and Russia are not disrupted
while Libya supply returned despite of political turmoil
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The Lantau Group
This is reflected in the spot price of LNG over the last 18
months
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0
5
10
15
20
25
8/14/13 11/22/13 3/2/14 6/10/14 9/18/14 12/27/14 4/6/15
Daily JKM Spot Prices, $/MMBtu
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The Lantau Group
But LNG is not the only fuel to have changed price. Coal prices
have also
softened gradually since early 2011
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0
20
40
60
80
100
120
140
160
180
090807060504030201 1615141312112000 10
US$/MT or bbl
Source: World Bank; Macquarie
Oil (Brent)
Coal
(Newcastle)
Coal and oil monthly prices (2000-Feb 2015)
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The Lantau Group
0
20
40
60
80
100
120
140
2000 2001 2003 2004 2006 2007 2009 2011 2012 2014 2015 2017 2019
2020
End 2009 future price
US$/barrel
Forward price in June 2014
End 2008 future prices
15th September 2014
Forward price on 20th Feb 2014
31th October 2014
In addition, we should not forget that the longer term has not
changed as much
as the short term
Forward price curves in recent years have been quite
consistent
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Brent forward curve
Source: ICE
Dated Brent
($/barrel)
2013 (historical) 109
2014 (historical) 99
2015 (forecast) 55
2016 (forecast) 65
2017 (forecast) 70
2018 (forecast) 75
2019 (forecast) 80
2020 (forecast) 80
The market thinks that oil (and thus LNG) prices will rise again
in the medium term
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The Lantau Group
How does the changing fuel price affect the economic use of LNG
in Asia?
Philippine Example
As part of our Gas Master Plan Phase 1
analysis in October 2013, we modelled
the economic use of LNG in the WESM
and identified how much new plant
burning LNG was economic
At that time, expectations of future fuel
prices were quite different to those now,
particularly in the near-term
To see the impact of lower LNG prices,
we have re-run that analysis to see if the
outcome has changed
19
0
20
40
60
80
100
120
140
Q1
2014
Q1
2015
Q1
2013
Q1
2012
Q1
2016
Q1
2017
Q1
2018
Q1
2020
Q1
2021
Q1
2019
Q1
2022
US$/bbl or US$/mt (2013 prices)
Comparison of oil and coal price projections
Oil (Oct 2013)
Coal (Oct 2013) Oil (Mar 2015)
Coal (Mar 2015)
Source: World Bank; ICE; TLG analysis
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The Lantau Group
LNG remains a good fuel for mid-merit and
peaking operation but it is unlikely to be an
economic baseload fuel
The results were remarkably consistent with the previous
analysis there is
still a clear economic role for LNG in the power sector
The economic new build of CCGT using these
updated fuel price assumptions is still about
600-800MW
If the economic new build were built, these
plants would run mid-merit/peaking (varying
between 15%-35%) and consume c. 0.1-0.3
mmtpa of LNG
Existing gas-fired plant would also eventually
switch to LNG
Total demand for LNG in Luzons power
sector would exceed 0.6 mmtpa
20
Least-cost capacity expansion plan for
Luzon under expected assumptions
0
200
400
600
800
1,000
1,200
1,400
232118 20 2214 16 19171513
Net MW
October 2013 fuel price outlook
February 2015 fuel price outlook
Natural Gas
Biofuel
Wind
Geothermal
Hydro
Oil
Coal
Solar600-800MW
Economic least-cost entryCommitted
0
200
400
600
800
1,000
1,200
1,400
1917152013 2321
Net MWEconomic least-cost entryCommitted
600-800MW
Source: TLG analysis
Ignores
passage
of time
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The Lantau Group
But other (Philippine specific) developments also affect the
need for more gas-
fired capacity and ultimately more LNG demand
21
Least-cost capacity expansion plan for Luzon
under expected assumptions
0
200
400
600
800
1,000
1,200
1,400
1917152013 2321
Net MWEconomic least-cost entryCommitted
0
200
400
600
800
1,000
1,200
1,400
151413 2322212019181716
Net MW
October 2013 outlook
Natural Gas
Biofuel
Wind
Geothermal
Hydro
Oil
Coal
Solar
More gas fired capacity has been built
FirstGens San Gabriel phase 2 and Avion have since
achieved financing and are under construction
They plan to eventually use Malampaya gas and
ultimately LNG
Changing the way Malampaya gas is used supports the
entry of more gas-fired capacity and ultimately more
LNG
Government policy is adding renewable to the
system
Significantly more solar and wind capacity appears likely
in response to Government policies increasing total
available capacity
More intermittent generation may require more flexible
plant in the system to respond to times when solar and
wind are unavailable
Market interventions are reducing incentives
to build peaking capacity
Lower offer price cap and new secondary price
cap decrease the incentives to build new gas-
fired capacity
600-800MW
Economic least-cost entryCommitted
February 2015 outlook
400-600MW
Source: TLG analysis
500MW
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The Lantau Group
In the Philippines, the message remains substantially the same
as last year,
despite the large global changes in prices
We are still in a coal window albeit one with a smaller gap
between the economic use of coal
and gas
LNG is economic in the Philippines for mid-merit operation
This conclusion holds for much of Asia
The lower capital costs of building CCGT mean that even high gas
or LNG prices support the use of
gas/LNG for mid-merit and peaking operations
(In countries where there IS mid-merit or peaking, rather than
everything we possess, all of the time!
The volume of LNG required is modest
Mid-merit and peaking operations do not require that much
fuel
There remain challenges and issues in bringing LNG into the
Philippines and incentivising the
market to build and burn the economic quantity of LNG
This conclusion also holds for much of Asia there are unique
challenges, opportunities or issues in each
individual country
In Myanmar, the biggest issue may not be coal vs gas, but may be
whether to move straight to distributed
renewable solutions
22
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The Lantau Group
So what does all this mean for Myanmar?
Myanmar has the advantage of having a blank slate right now
It has various fuel options available indigenous gas, indigenous
or imported coal, hydro, other
renewable options etc.
There are advantages and disadvantages to using different
fuels.. It just depends which
criteria is most important
Such criteria may include:
Overall cost
Short term (upfront) costs vs long term (operational) costs
Impact on foreign exchanges
Speed to build
What can be most easily financed
Geographical considerations
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The Lantau Group
The decisions need to take into account all the criteria
Across Asia, coal remains the cheaper baseload option while gas
makes a very good flexible
resource for mid-merit loads
This point may be unimportant if there is only baseload or
blackout!
Indigenous options save hard currency outflows and can be priced
to be more stable
But using indigenous fuel (eg gas) gives up the option of
exporting it for hard currency
Gas plants may be more expensive, but they are much faster to
build
Is speed or cost more important?
How long are you locked into the higher costs for? (Rental
options may help here)
Different parts of the country may require different
solutions
For grid-connected generation, traditional larger thermal or
hydro plants make more sense than
intermittent renewables
For remote areas, distributed renewable solutions such as solar
or micro-hydro plus batteries may be a
much faster and cheaper way to electrify the population than
building out a distribution network and
building large grid-connected power stations
24
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The Lantau Group
The best outcomes will come from making good decisions
Identifying clearly the overall goal, including timeframes and
cost limitations
Reviewing ALL the options (including the less conventional ones
such as newer technology)
Analysing the implications of each
Needs a clear analytical framework
And an understanding of how to do economic analysis
Making policy that supports the private sector and public sector
to invest in the most appropriate
options
Continuing to review and update the assumptions and policy as
the situation changes
25
-
The Lantau Group
Thank You
26
Contact
Sarah Fairhurst [email protected]
By phone+852 2521 5501 (office)
By mail4602-4606 Tower 1, Metroplaza
223 Hing Fong Road,
Kwai Fong, Hong Kong
Onlinewww.lantaugroup.com
Rigour
Value
Insight
EnergyPower Utilities
mailto:[email protected]://www.lantaugroup.com/
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The Lantau Group
We cover the Asia Pacific region
27
End user price projections
Transmission development
Energy policy issues
Electricity and gas pricing to multiple industrial
facilities
Generation opportunities (all fuel types)
Policy and regulatory developments
Retail contracting and power price
projections
Generation opportunity development
Capacity contracting
Energy price projections and impacts
Market design
Energy Market Review)
Power sector review
Gas pricing and demand
Electricity and gas pricing to multiple sites
Energy price projections
Tariff benchmarking
Natural gas entry opportunity
Energy price projections (electricity
and gas)
Regulatory developments
Tariff benchmarking and design
