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Oil and Gas Practice Prepared for the Asia Gas Partnership Summit organised by GAIL (India) Limited and FICCI 23–24 March 2012, New Delhi Partnerships: Reshaping Asia’s natural gas industry
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Partnerships reshaping Asia's natural gas industry

Sep 14, 2014

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Prepared for the Asia Gas Partnership Summit organized by GAIL (India) Limited and FICCI. An extensive report prepared by McKinsey & Company, Inc. focusing on "Asia's central role in LNG"
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Page 1: Partnerships reshaping Asia's natural gas industry

Oil and Gas Practice

Prepared for the Asia Gas Partnership Summit organised by GAIL (India) Limited and FICCI

23–24 March 2012, New Delhi

Partnerships: Reshaping Asia’s natural gas industry

Page 2: Partnerships reshaping Asia's natural gas industry

March 2012

McKinsey & Company, Inc.

Express Towers, 21st Floor, Nariman Point,

Mumbai – 400 021  INDIA

Design: New Media Australia

Pre-production and printing: Magnum Custom Publishing, New Delhi

This report is furnished to the recipient for information purposes only. Each recipient should conduct its own investigation and

analysis of any such information contained in this report. No recipient is entitled to rely on the work of McKinsey & Company,

Inc. contained in this report for any purpose. McKinsey & Company, Inc. makes no representations or warranties regarding the

accuracy or completeness of such information and expressly disclaims any and all liabilities based on such information or on

omissions therefrom. The recipient must not reproduce, disclose or distribute the information contained herein without the

express prior written consent of McKinsey & Company, Inc.

Page 3: Partnerships reshaping Asia's natural gas industry

Oil and Gas Practice

Partnerships: Reshaping Asia’s natural gas industry

Prepared for the Asia Gas Partnership Summit organised by GAIL (India) Limited and FICCI 23–24 March 2012, New Delhi

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5Oil and Gas Practice Partnerships: Reshaping Asia’s natural gas industry

Contents

Foreword                                                                         7

Acknowledgements                                                                 9

Executive Summary                                                                 11

Chapter 1: Asia’s central role in LNG                15

Chapter 2: India, the emerging gas hub                        35

Chapter 3: Partnerships for sourcing, integration and sustainability                         47

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7Oil and Gas Practice Partnerships: Reshaping Asia’s natural gas industry

Global gas markets have evolved significantly over the last decade. Asia has been at the forefront of this evolution, registering a rapid growth in demand driven by economic growth and increasing urbanisation in China, India, ASEAN and the Middle East. Looking forward till 2030, natural gas emerges as the preferred energy source, growing at the fastest rate of 2.1 per cent amongst all fossil fuels. Asia contributes to a sizable share of this growing demand for gas.

Globally, gas reserves are abundant and means to access them are rapidly evolving. Over the past decade, LNG has grown to become an increasingly important constituent of global gas markets, growing at 8 per cent per annum over the ten year period between 2000 and 2010. While the global financial crisis and the development of US shale gas temporarily slowed growth, the world also witnessed an unexpected spike in LNG demand last year, following the Tsunami and ensuing nuclear power disaster in Japan.

Over the last few years, interregional patterns have been volatile, driven by new and emerging sources of LNG. Cargoes initially destined for the US market have been diverted to Asia and Europe. Spot market sales have increased to 20 per cent of global LNG trades in 2010, compared to just 2 per cent a decade ago. A significant amount of liquefaction capacity is under execution, though it will take a few years to come on-stream. Mega projects are under construction in Australia and Papua New Guinea, and additional capacity is coming on-stream

in Africa. If non-FTA exports are allowed, North America might potentially emerge as an important source of supply of LNG. The gas price differential between North America and Asia is already changing the dynamics of global gas markets. The future of new planned and upcoming LNG projects in the US and Canada will depend on the regulatory environment and the economics of alternative gas monetisation there.

Going forward, there seems to be more uncertainty in the LNG market than a few years back. This is being caused by major supply and demand shifts. The most visible factor influencing demand growth in the near to medium term comes from Europe, where continued economic weakness and a possible spillover effect on the rest of the world could reduce demand growth by a percentage point or even more. Another factor that could have significant impact on global LNG demand is the rise of unconventional gas globally. Production of unconventional gas has already had a transformational impact on the North American natural gas market. It was quite unimaginable as recently as 4 years back that the US and Canada would become completely self sufficient and prices would fall to less than USD 4 per MMBtu.

Further, trans-national pipeline projects in China, India and Europe can loosen demand for LNG in these areas. In India, TAPI can reduce LNG demand by 8 MTPA, and at prices much lower than current Asian LNG prices. In China, four large pipeline projects will significantly reduce China’s LNG

imports, even at the cost of under utilising its regasification capacity.

In this uncertain environment, partnerships of various forms and means are more relevant than ever. Particularly for Asian countries, these partnerships could lead to game-changing outcomes and ensure supply security at reasonable prices, while for suppliers, they could be a means to secure long-term demand and de-risk the future of large projects. In fact, the contours of such partnerships are already visible globally.

To discuss how global as well as Asian economies and companies could partner with each other, GAIL (India) Limited and the Federation of Indian Chambers of Commerce and Industry (FICCI) requested McKinsey & Company to conduct a detailed study of the global gas market with an emphasis on Asia and India. As the knowledge partner for the 7th Asia Gas Partnership Summit, McKinsey conducted a detailed effort to develop a perspective on the global gas market identifying the opportunities for new partnerships to facilitate the future growth of the industry in Asia and beyond.

We are thankful to McKinsey & Company for conducting this extensive knowledge effort and bringing an insightful perspective to this Summit. We hope that you will find this document informative and useful for designing win-win solutions and taking effective decisions in shaping the future of Asian gas industry.

B.C. TripathiChairman & Managing DirectorGAIL (India) Limited

Dr. Rajiv KumarSecretary GeneralFICCI

Foreword

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9Oil and Gas Practice Partnerships: Reshaping Asia’s natural gas industry

On behalf of McKinsey & Company, we would like to thank Mr. B.C. Tripathi and Dr. Rajiv Kumar for providing us with the opportunity to undertake this effort.

From GAIL, we would also like to thank Mr. Prabhat Singh, Director – Marketing; Mr. S. Venkatraman, Director – Business Development; Mr. Vivek Joshi, Advisor – Corporate Communications; Mr. Rajeev Mathur, ED – Marketing; Mr. R.Tewari, General Manager – Gas Sourcing; Mr. Sanjib Datta, General Manager – Business Development; Mr. A. Kaviraj, CEA to C & MD, Mr. S. Basu, Sr. Manager – Marketing; Mr. Anurag Sharma, S.O.(Marketing), Mr. Thivahar Bethune, S.O. –Marketing; and Mr. Jignesh Vasavada, Manager – Corporate Communications, for their time and support in sharing information, as well as their thoughts on the report.

From FICCI, we would like to acknowledge Mr. Vivek Pandit, Director – Energy & Defence and Aerospace, for his help with coordination.

We are thankful to Mr. G. C Chaturvedi, Secretary; Mr. Sudhir Bhargava, Additional Secretary; Mr. Vivek Kumar, Joint Secretary (M); and Ms. Sushma Rath, Director (M) – Ministry of Petroleum and Natural Gas.

This research drew extensively on McKinsey’s proprietary global gas models and databases and on the cumulative experience of its various international experts. The effort would not have been possible without the dedicated efforts of the McKinsey team consisting of Abhinav Singhal, supported by Shobhit Aggarwal and Nirupam Anand, with overall leadership from Mukund Sridhar, an Engagement Manager in our Mumbai office. We would also like to thank McKinsey’s global leadership for providing overall direction to this knowledge effort – Mike Juden, a Senior Expert based in our Houston office; Duncan van Bergen, an Associate Principal based in our Singapore office; Dieuwert Inia, a Partner based in our Amsterdam office; Vishal Agarwal, an Engagement Manager based in our

Singapore office; Nick Harley, an Associate based in our London office; Martin Prokosch, an Associate based in our Oslo office; Shatetha Terdprisant, a Partner based in our Bangkok office; Tomas Koch, a Director based in our Seoul office; and Morten Jorgensen, a Partner based in our Oslo office.

Finally, we would also like to acknowledge the efforts and support of our communications team consisting of Tanya Gulati, Vineeta Rai and Kulsum Merchant, our graphic designer Joanne Willis, and our visual aids specialists Nipun Gosain and J. Sathya Kumar.

Acknowledgements

Vipul TuliDirectorMcKinsey & Company

Amit KheraAssociate PrincipalMcKinsey & Company

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11Oil and Gas Practice Partnerships: Reshaping Asia’s natural gas industry

Executive Summary

The global gas industry is going through uncertain times. Factors like the threat of an economic slowdown, the emergence of unconventional gas, potential cross border pipelines and upcoming LNG capacity (in Australia, potentially in the US and the emerging countries of Africa and South America) increase risk for megaprojects that the industry depends on, while those like a nuclear slowdown and potential delays in projects could further tighten the market. Amidst all this, Asia has emerged as the most important, and potentially the predominant destination for LNG imports in the future. The size of the Asian gas markets, and in turn the global LNG market, will depend upon emerging partnerships (supplier-buyer, supplier-supplier and buyer-buyer). The eventual shape and outcome of these partnerships will determine the future of the industry.

Asia’s central role in LNG

McKinsey’s Global Energy Perspective, the product of a two-year research effort on the global energy demand and supply outlook for 2050, suggests that gas as a fuel will increase in importance in the global energy basket. LNG projections indicate a balance in global supply and demand. However, this balance is quite uncertain due to potential shifts in demand and supply.

As global energy demand grows, gas is expected to grow further in importance

The overall global demand for energy is likely to continue to grow at a compounded annual rate of 1.3 per cent over the next 40 years. Gas as a fuel is expected to grow

significantly and at a faster rate than coal and liquids, eventually constituting 20 per cent of the global energy basket by 2050.

The bulk of this growth in gas demand will be led by ‘Emerging Asia’, including China, India and the rest of South East Asia, which will account for about 35 per cent of incremental global gas demand growth till 2020.

Global gas reserves are abundant, with the Middle East leading the charts on the reserves to production ratio, followed by Europe, and more reserves are being added all the time. Therefore, availability is not a constraint to the growth of the industry. LNG capacity, however, is a different story.

Global LNG supply and demand is likely to be in balance by 2020, but is subject to significant supply and demand shifts

Judging by most projections, global LNG supply and demand seem set to be in balance by 2020, with Asia being the primary global buyer of LNG. While Europe is also a gas deficit market, it is likely to meet its demand primarily through pipeline supplies from the former Soviet Union and North Africa, reducing its needs for LNG imports.

However, several potential shifts in demand and supply contribute to significant uncertainty in the market. These are discussed below.

� LNG suppliers will try to protect the current price setting mechanism (i.e., the linkage to crude) for a variety of reasons. The global liquefaction market is

very concentrated (with the top 10 players holding two-thirds of capacity) and will be disciplined about supply additions. Buyers on the other hand, encouraged by recent export contracts from North America, are negotiating contracts with S-curve type terms.

� The ripple effect of Fukushima is resulting in the slowdown or cancellation of nuclear energy programmes in Japan, Europe, and potentially in other parts of Asia. The drop in nuclear energy production will likely be supplanted by LNG – fully in Japan and partially in the rest of the world – which would tighten the market.

� Growth in unconventional gas supplies is another softening factor. Several countries, including China, India, Indonesia and South American countries, are actively working to tap their unconventional resource potential, driven by energy security concerns and attractive economics. However, inadequate technical expertise, land availability issues and execution challenges could slow development of such projects.

� China’s LNG demand is a significant influencing factor as well. It is pursuing multiple options to achieve supply security in gas, including increased unconventional and deepwater exploration, cross border pipelines, and LNG imports. If all these options are successful, China’s proposed regasification capacity is likely to be underutilised.

� Gas prices in different regions of the world vary widely, with the biggest difference being between the crude-linked Asian prices and North American Henry Hub prices, leading to an arbitrage opportunity. LNG exports

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from North America to Asia are already viable at current prices. This arbitrage opportunity has led to a number of proposals to develop LNG export terminals on the Pacific and Gulf Coasts of North America. However, regulatory approval for exports is uncertain: so far, only 2 of 11 such proposed projects have received non-Free Trade Agreement (FTA) permits, enabling exports to countries in Asia with whom the US does not have an FTA. Similarly, environmental and local community approvals are an important factor for proposed Canadian terminals to come on-stream.

� There could also be additional availability of gas from the growing spot market and from contracts between western buyers and Middle Eastern suppliers that expire in the 2015–2017 timeframe. If these come to the market at the same time as new capacity coming on stream, the supply market is likely to soften.

� Multiple LNG facilities are under construction in Australia, making it a likely candidate for being the world’s biggest LNG supplier by 2018. However, three of those plants, with a total panned capacity of 17 mtpa, are still in the planning stage, and are susceptible to rising costs.

As both buyers and suppliers pursue options to secure volumes and offtake, multiple scenarios emerge

The outlook for LNG can be captured in three scenarios, considering the various uncertainties discussed above. In the first scenario, LNG markets remain tight, spurred by strong economic growth, delays or cancellations of cross-border pipelines and Australian and North American

projects, as well as slow development of unconventional gas. In this scenario, overall volumes remain restricted. In the second scenario, another global economic downturn, rapid Asian resource development, shifts to alternative fuels, larger North American exports and successful cross-border pipeline projects could lead to a crash in the market due to oversupply. This is a volatile scenario, where price and supply shocks continue, and the buyers and sellers are largely adversarial. The third scenario is a more balanced industry, where a series of partnerships between buyers and sellers leads to an expansion of volumes due to greater stability and lower risk, but also at prices lower than current Asian levels. Partnerships that could lead to such an outcome are discussed in Chapter 3.

India, the emerging gas hub

Gas has been steadily been growing in importance in India’s energy basket, supported by enabling regulations from the government. Since India’s domestic supplies are insufficient to meet demand, India will have to rely on pipelines and LNG. While India’s gas infrastructure will not be a constraint in market expansion, gas affordability remains a major concern and could prevent large scale unlocking of latent gas demand.

New regulations and push for cleaner energy is driving demand for gas in India

In recent years, the Indian government has boosted the growth of gas demand through enabling regulations for new exploration and production, focusing on removing infrastructure constraints and increasing prices.

Gas is also increasingly important as a carbon emission abatement option for India, which is targeting voluntary GHG intensity reduction of 20 to 25 per cent by 2020. Gas based power is among the best options for a power-starved economy, given its ease of implementation, short gestation period and lower capital expenditure compared to other options in the power sector.

Helped by both regulatory support and growth in demand, gas is expected to be the fastest growing fuel in India’s energy basket over the next 40 years.

India’s gas infrastructure is unlikely to be a constraint for growth

LNG regasification capacity in India is likely to triple between 2011 and 2017 (from 13.6 to 35 mtpa), with an additional 15 mtpa of capacity in the planning stage. Pipeline infrastructure is also not expected constrain growth in gas demand. Carrying capacity is set to double by 2017 from 330 mmscmd to 630 mmscmd, with another 240 mmscmd of additional capacity that could emerge a year or two later. Overall, India’s trunk pipeline network and its connectors will cover almost all demand hubs by 2017. Development of last mile pipeline infrastructure is proceeding somewhat slower, but over 200 cities are targeted for roll-out.

India’s demand potential can double between now and 2017, but affordable LNG is critical to unlock latent demand

We envisage three different gas demand scenarios by 2017. First, a ‘base case’ where demand grows only at 6 per cent

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per annum, constrained by high LNG prices and current allocation policies. In the ‘upside’ case, if gas allocation commitments can be made at USD 10 to 15 per MMBtu (at the customer gate) and if peaking power demand can be unlocked, demand can increase to 280 to 290 mmscmd. There is further potential to increase demand to 330 to 340 mmscmd if supplies at USD 8 to USD 10 per MMBtu were available, when demand from base load generation would also kick in.

Three broad price segments exist in India’s gas market, although the end user and geographic segments are many more in number. First, there is liquid substitution demand, mostly from industrial and city gas customers, whose alternative cost is USD 14 to 18 per MMBtu at USD 90 per bbl crude. The mid segment, comprising some industrial and select power customers, has a switching cost of USD 10 to 14 per MMBtu. Finally, the controlled price segment, which is the largest, comprises customers who have preferential access to allocated domestic gas, as well as the baseload power generation segment.

India’s current consumption of gas amounts to about 160 mmscmd, of which 110 mmscmd is met by domestic production. Going forward, India can potentially access an additional 70 to 100 mmscmd from alternative domestic sources of gas by 2017, but will still need to rely on LNG imports for the remaining demand.

While LNG demand in the rest of Asia (e.g., Thailand, Indonesia and Singapore) is increasing, it is relatively fragmented. As a result, India is set to become one of Asia’s most important LNG destinations over the next 10 to 15 years.

Partnerships for sourcing, integration and sustainability

Diverse partnerships are being established across Asia. Many of these, if taken to their full potential, could lead to game-changing outcomes for the industry, including greater volumes and more stable, af fordable pricing.

Diverse partnerships are being established across Asia

Several types of partnerships are emerging across Asia as buyers and sellers position themselves for the future. These include vertical integration, horizontal alliances, and partnerships that seek to bring newer technology and skills to Asia with a view to developing local resources. Each of these partnerships will have a different effect on the LNG market and price levels.

� Traditional LNG contracts and related upstream and infrastructure investments between buyers and sellers are continuing.

� Buyers are forging partnerships with countries with emerging supply sources like Africa and Latin America. They are also entering partnerships to secure LNG at prices linked to Henry Hub from North America.

� Several gas players are already entering partnerships to integrate downstream into gas-based power, city gas distribution and petrochemicals to create higher value for their gas.

� Gas-deficit countries are forming partnerships to ensure execution of trans-national pipelines in order to reduce dependence on LNG and lower their gas procurement costs. These projects also assure gas producers a stable monetisation of their resources.

� Suppliers are also increasingly seeking partnerships to de-risk deepwater and LNG megaprojects; collaborative projects already outnumber standalone developments in both LNG and deepwater.

� Majors and large NOCs are increasingly investing in acquisitions and partnerships in shale gas. Several new market mechanisms are emerging. These include trading platforms (to trade, swap and re-route cargoes), buying groups (to aggregate regional demand, jointly invest in upstream megaprojects and establish a regional cooperation forum) and partnerships to market gas.

� Asian companies are partnering with majors and smaller firms to access expertise for exploration, development and production of deepwater, shale gas and CBM. Successful partnerships here could unlock Asia’s unconventional and deepwater resources.

Emerging partnerships could result in game-changing outcomes

A variety of game-changing outcomes are possible for the industry, if these partnerships are pursued to their full potential. Some examples of this could include:

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� A regional pan-Asia gas grid eventually linking Central Asia, Middle East, India, South East Asia and China.

� Substantial downstream Asian investments in power, CGD and petrochemicals by gas suppliers that help realise the full value of the gas.

� Upstream resource related mega integration investments involving multiple liquefaction facilities, multiple regas facilities, and a portfolio of related long term and short term contracts to de-risk these investments.

� Creation of a unified Asian trading platform along with the necessary price index, market making mechanisms and sufficient depth, backed by buyers and sellers.

� With partnerships to bring in new technical skills, an unprecedented rise in unconventional and deepwater production in Asia.

Five key questions will determine the extent and nature of partnerships

The future of these emerging partnerships is heavily dependent on the answers to a few key questions, listed below.

� At what pace will Asia be able to access technology and develop its unconventional resources?

� What will be the fate of cross-border pipelines? Will countries cross geo-political barriers in the interest of resource monetisation and energy security?

� How much LNG will North America export? How much LNG will Australia export, considering production sustainability, pace of project development, and economics?

� To what extent will new LNG supply sources (e.g., Africa, West Asia) emerge? Will India and China invest heavily in making them happen?

� What supplier-supplier, buyer-buyer, and buyer-supplier partnerships and alliances will emerge?

The gas industry is prized for tremendous growth. The risk and stability of the huge investments required, however, depends on the outcome of several partnerships that are being forged. These present tremendous opportunities for all industry participants, but require them learn new skills and ways of working.

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Oil and Gas Practice Partnerships: Reshaping Asia’s natural gas industry 15

Chapter 1

Asia’s central role in LNG

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17Oil and Gas Practice Partnerships: Reshaping Asia’s natural gas industry

Gas will grow faster than coal and liquids to 2050

1,2311,567

1,6651,593

2,236

3,0441,430

1,827

2,001+1.3%

p.a.

Liquids

Coal

Natural gas

Power

Other

2050

16,065

5,500

3,855

2030

12,888

4,770

2,489

2010

9,701

3,877

1,570

Million tonnes of oil equivalent (Mtoe)

SOURCE: McKinsey Global Energy Perspective 2050

40%

145%

91%

35%

42%

Growth 2010–2050

Final energy demand1

7

65 8

6

9

2027

6

4East Europe & FSU3

Russia Africa

South America North America

1

EU27 + 2

North East Asia

India

Rest of Asia2

China Middle East

2010–2020, per cent 100% = ~900 billion cubic metres per annum (bcma)

1 Differs from primary demand due to exclusion of conversion losses in the power generation industry 2 Includes Southeast Asia, Australasia, Pakistan and Bangladesh 3 Former Soviet Union

~35 per cent of demand growth till 2020 driven by

Emerging Asia

Incremental growth in gas demand

McKinsey’s Global Energy Perspective – the result of a two year research on the global energy demand and supply outlook to 2050 – suggests that gas demand will grow faster than coal and liquids. The vast majority of the demand growth in energy, 91 per cent, will be fuelled by non-OECD markets, especially China and India.

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Global gas reserves are abundant

SOURCE: BP Statistical Review 2011

Global proven gas reserves, 2010 Trillion cubic feet (Tcf)

US 273

Venezuela 193

Canada 61

12 Argentina

103 Australia

108 Indonesia

85 Malaysia

99 China

1581 Russia

65 Kazakhstan

72 Norway

42 Netherlands 9 UK

Nigeria 187 UAE Saudi Arabia

1046 894 283

159 112

63 55 Algeria

Libya

Kuwait Iraq Iran

593365164

World Asia Pacific Europe Middle East

R/P ratio by region (years)

Qatar

213 51 India 29 Pakistan

Global gas reserves are abundant, with the Middle East leading the charts on the reserves-to-production ratio, followed by Europe (especially Russia). While this chart talks only about proven (“1P”) reserves, vast parts of the world are yet unexplored or are in early stages of exploration.

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0

100

200

300

400

500

600

Existing capacity

Under construction

Planned (possible)

Speculative (unlikely)

North American volumes2

2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010

LNG supply and demand likely to be in balance

High case LNG demand

Economic downturn (with effect similar to 2008 crisis)

Global LNG demand

1 Assuming 95 per cent utilisation. New projects coming on-stream deliver 25 per cent in the first year, ramping up to full production in the second year 2 Assumed North American builds by the end of 2020: Kitimat, Sabine, and one additional LNG export facility (assumed that these facilities will open

within 1 year of the last publicly announced opening date)

SOURCE: CEDIGAZ; BP; Gas Strategies; industry experts; McKinsey analysis

Speculative projects (several without off-take contracts) unlikely to clear FID gate in downturn

Global LNG supply1 and demand forecast Million tonnes LNG per annum (mtpa)

In the 2020 timeframe, LNG supply and demand seem set to be in balance. The state of balance will be highly influenced by the demand scenario. Given the abundance of reserves, longer term LNG project development will be determined by the ability of new projects to secure financial investment decisions (FIDs), based on their ability to secure offtake. The most speculative projects (including North American volumes) are unlikely to clear the FID gate in a downturn.

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Asia will emerge as the primary LNG buyer globally

North America

Latin America

6

41

-2

136 178 149

869580

655715

SOURCE: McKinsey Global Gas Model (September 2011)

2010 2020 2030

1 Total indigenous supply minus total demand, region is net exporter (importer) if value is positive (negative) 2 EU27 + Norway and Switzerland

Regional gas production minus consumption1

mtpa

-60

-330 -210

-149 -223 -164

Western Europe2

877319

Oceania

North Africa

Russia, Eastern Europe

Middle East

35

145 140 West/other Africa

Asia

74

255 253

Asia is expected to emerge as the only substantial net importer of LNG due to the deficit between production and consumption. While Western Europe is also a deficit market, it has access to gas routed via pipelines from the Former Soviet Union and North Africa, reducing the importance of LNG imports.

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Multiple uncertainties could impact the LNG supply-demand balance

SOURCE: Gas Industries; Industry experts; McKinsey analysis

Uncertainty Impact on LNG supply market

Market structure 20–80 mtpa

Unconventional gas 20–40 mtpa 60–80 mtpa

Cross-border pipelines

28–30 mtpa

LNG exports from new sources

20 mtpa

Economic growth 20–30 mtpa

Unknown factors

?

Nuclear slowdown 9–18 mtpa

Loosening

Loosening

?

Tightening

Tightening

Tightening Loosening

1

2

3

4

5

6

7

Change in supply/demand

Loosening

Multiple variables influence the global LNG supply-demand equation. Supply side variables include new sources of gas (e.g., newer supply sources, unconventional resources in North America, Australia) and new means of transportation (cross-border pipelines), while demand side variables include economic growth and the nuclear energy supply slowdown.

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Market structure will influence pricing mechanism

Description Main effects

▪ LNG is a very concentrated industry ▪ Players unlikely to add capacity rapidly without

firm market commitments

▪ Projects only sanctioned if there is sufficient long-term demand

Concentrated supply market

▪ Oil indexed pricing mechanism continuing, but uncertainties in terms following unconventional gas boom in North America

▪ Re-introduction of S-curve type mechanisms into pricing

Negotiation for long term LNG prices

▪ All markets outside of US and UK are illiquid, e.g., mainly based on long-term contracts

▪ Very challenging for players to raise capital for speculative projects in illiquid markets

▪ Supply addition linked to long-term contracts

▪ Speculative projects will be cancelled in downturns

Illiquid LNG growth markets

▪ Several megaprojects are technically challenging, limiting standardisation potential and adding pressure on timely completion

▪ Execution delays in new projects Supply chain

constraints

▪ For example, Qatar has over 25 per cent market share for spot and short-term volumes

▪ Expected to continue to shift volumes between Europe and Asia to balance prices

▪ Limiting factors on extent of over-supply in the Asian market

Middle East’s role as a market balancer

1

SOURCE: McKinsey analysis

As with most industries, market structure will play an important role in determining LNG price setting mechanisms. Several factors, particularly the supplier industry concentration and volume constraints point to retention of traditional oil-indexation. However, recent opening up of suppliers from North America and the slowdown in demand from western markets seem to be resulting in the re-introduction of contracts with bounded terms.

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LNG market structure is very concentrated globally

70

15319535

92

115

Top 10

Others

All existing & under construction2

310

2010

245

2000

105

1 Assuming 90 per cent utilisation 2 Includes all projects on-stream in 2011 or under construction

SOURCE: Gas Strategies; Press search; McKinsey analysis

Share of Top 10 66 63 63

X Per cent

Concentration of capacity ownership Net equity share of capacity1 by producer, mtpa

1 LNG is a concentrated industry globally. Ten key players control two-thirds of the world’s liquefaction market. Industries with this level of concentration tend to have relatively disciplined capacity addition.

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24

8

25

20

40

21 49 Middle case

94 29 Worst case

Japan Europe ROW

A global nuclear slowdown would add additional LNG demand

2.5Worst case

Middle case 0.3

8.9

14.5

8.4 0.2

18.1 1.1

Increase in LNG demand2

SOURCE: McKinsey analysis

1 Middle case: Japan nuclear plans delayed by 5 years (e.g., 9 GW “lost” until 2020), 30 per cent of nuclear production replaced by gas fired plants(as per current OECD gas production share)

Worst case: No new nuclear build at all at least until 2020, 100 per cent of new nuclear production will be replaced by gas fired plants 2 Assuming the following percentage of LNG in gas supply: 100 per cent for Japan, 20 per cent for Europe; 10 per cent for ROW

Nuclear power generation halted1 Gigawatt, 2020 mtpa, 2020

2 The ripple effect of Fukushima could result in a cancellation or slowdown in nuclear energy programmes in Japan, Europe and potentially in other parts of Asia. The drop in nuclear energy production is likely to be supplanted by LNG (fully in Japan and partially in the rest of the world), leading to additional LNG demand.

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25Oil and Gas Practice Partnerships: Reshaping Asia’s natural gas industry

Shale gas CBM

90

450 388

Canada

US

Australia

China

Nigeria

Germany

70630

Indonesia

Ukraine Poland Russia

40

1,500

280

UK

Venezuela

India

SOURCE: EIA report on World Shale Gas Resources 2011; Advanced Resources International; USGS; IHS;H-H Rodger; Fox-Davis Capital; Wood MacKenzie; McKinsey analysis

Tight gas

500 860

200

2020 100 800

187 404267006

1,000

396 280

8020100

1,000 1,275

110

011

260

130100

020

250

Rest of World

1,100 3,250

600

Resource type

Middle East

Unconventional gas could significantly reduce LNG demand in the longer term High Activity

Moderate Activity Licensing & Test wells Early Stage

Unconventional gas reserves, Tcf

3 Several countries (including China, India, Indonesia and South American countries) are actively initiating studies to explore and quantify unconventional resource potential, driven by energy security concerns and attractive economics. Success of these efforts could play a major loosening role on the LNG market. However, execution challenges and land availability could lead to delays in the development of unconventional resources.

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26

1 Actual utilisation initially limited to ~10bcm due to demand shortage in Western China and constraints on existing West–East domestic pipeline 2 Project currently on hold 3 Sakhalin–China pipe is confirmed and under construction

Planned or under construction

SOURCE: International Energy Agency; OGJ, Literature search; FACTS; McKinsey analysis

Sakhalin–China3

(7 mtpa, 2017 (est.))

Sino–Myanmar gas pipeline (9 mtpa, end of 2013)

Central Asia–China (22–29 mtpa, 2012)

Beijing Urumqi

Harbin Vladivostok

Khabarovsk

Tomsk

Astana

Mongolia

Kazakhstan

Uzbekistan

Russia

Nanning

Myanmar

Sakhalin

West Siberia–China2

(24 mtpa, >2015 tbc)

Uzbekistan–China gas pipeline (~7 mtpa, 2014 tbc)

Cross-border pipelines could diminish China’s need for LNG imports

Secured LNG volumes mtpa

2029 29 28

9 9 9

8

2020 2025 2030 2015

2

2010

Regas capacity mtpa

43 43 43 43

1537 37 37

3

15 20

11

2010 25 2030

Contracted utilisation, %

72 47 92 65 67

Potential NOC JV volumes1

Long-term contracts2

Potential Existing, approved and under construction

Cross-border pipelines into China

4

(Capacity, Start date)

China is pursuing multiple options to create energy security in gas. These include: a) Increased domestic unconventional and deepwater exploration and development; b) Cross-border pipelines; and c) LNG imports. If all these options are successful, China’s proposed regasification capacity is likely to be underutilised.

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27Oil and Gas Practice Partnerships: Reshaping Asia’s natural gas industry

Price differentials between markets are large and growing

0

5

10

15

20

25

US ( Henry Hub)

Europe (NBP UK)

Japan Crude Cocktail (JCC)

Asia (LNG import to Japan)

2000 2011 2001 2002 2003 2004 2005 2006 2007 2008 2009

1 3-month lag between JCC crude and LNG import to Japan

2010

SOURCE: Bloomberg; FACTS; ICIS; McKinsey analysis

R2=0.941

Price

USD per million metric British thermal unit (MMBtu)

5 Gas prices in different regions of the world vary widely, and this variation has been growing. Gas prices in Asia are set by crude-linked LNG and are the highest in the world. Prices in North America are the lowest, especially following the abundant production of unconventional gas.

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28

Exports from North America to Asia are viable

SOURCE: McKinsey analysis; Reuters

1 Capex and opex based on 30 per cent increase over brownfield costs (based on Cheniere–BG contract terms) 2 Capex and opex based on Cheniere–BG contract terms 3 Assumes JCC at USD 90/bbl, LNG contract slope of ~14 per cent and Asian transport cost of USD 1/MMBtu

0

20

40

60

80

100

120

140

0 12 11 10 9 8 7 6 5 4 3 2 1

JCC USD/bbl

NA Gas price USD/MMBtu

14 13

Implied margin of USD 4 HH landed in Asia USD/MMBtu

2.15

3.00

9.75

2.55

4.00

Total cost

0.70

Ship- ping

Opex

0.60

Capex

0.70

Henry Hub

Asia LNG3

13.00

Margin

0.70

Variance

JCC vs. HH-linked gas prices USD/barrel (bbl), MMBtu

5 These regional price differences lead to substantial arbitrage opportunities across regions. Assuming that LNG from the US is allowed to be exported to Asia, the implied margin is in the range of USD 2.5–3 per MMBtu, making exports viable when JCC is above USD 80 per bbl and Henry Hub prices are below USD 6 per MMBtu.

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29Oil and Gas Practice Partnerships: Reshaping Asia’s natural gas industry

This arbitrage could potentially result in LNG supplies coming into Asia from North America

1 Planned liquefaction capacity 2 Sabine Pass only terminal approved for exports to FTA and non-FTA countries 3 Kitimat undertaking FEED, FID expected in 2012

Proposed brownfield liquefaction at existing regas terminal

Proposed greenfield liquefaction terminal

Approved (FTA license)

Applied

Not applied

Free Trade Agreement (FTA) and non- FTA licenses, or Canadian licenses

16.0

12.0

7.5

5.0

0.9

7.5

Facility Owner Capacity mtpa1

2

3

7.5 5

15.0 4

6

7

8

1

Freeport Freeport LNG Cameron Sempra

Cove Point Dominion

Lake Charles BG

Kitimat LNG3 KM LNG

BC LNG

BC LNG Export Coop.

BC LNG Shell Canada

Sabine Pass2

Cheniere

9.0 9 Jordan Cove Jordan Cove Energy

13.5 11 Corpus Christi Cheniere

7.5 10 Port Lavaca Gulf Coast LNG

Export license

2 3

5

4

6 7 8

1

9

11 10

Kitimat signed HoA with KOGAS for 2 mtpa

▪ BG, Gas Natural Fenosa, KOGAS and GAIL to purchase 18 mtpa for 20 years

▪ Construction to start in 2012, with first deliveries in 2015–2016

SOURCE: FERC; Company announcements; industry articles; McKinsey analysis

2 4 1 3

5

2 4 1

Uncertainly around export volumes to non-FTA countries

5 The current arbitrage in prices and the shale boom have led to a number of proposals to develop LNG export terminals on the Pacific and Gulf Coasts; however, only 2 out of 11 such projects have received non-Free Trade Area (FTA) export permits so far. Securing a non-FTA permit is a key factor to enable exports to countries in Asia with whom the US does not have a free trade agreement. Similarly, environmental and local community approvals are an important factor for proposed Canadian terminals.

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30

Spot market is also growing

SOURCE: GIIGN; ICIS HEREN; Merrill Lynch; CIBC; FACTS; McKinsey analysis

0

5

10

15

20

Jun-11 Aug-11 Oct-11 Nov-11 Sep-11 Jul-11 May-11

Spain

Japan

India

Britain

+45%

Recent LNG spot prices Delivered ex-ship (DES), 2 months ahead, USD/MMBtu

Spot and short-term share increasing in Asia’s total imports mtpa

100% =

Long-term contracts

Spot and short-term contracts

2011

145

83%

17%

2010

132

86%

14%

2009

114

87%

13%

5 A price differential also exists in the growing volumes of spot LNG, although to a lesser extent.

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31Oil and Gas Practice Partnerships: Reshaping Asia’s natural gas industry

Existing contracts will come up for renewal

53.2

4.2

Existing LT contracts (excl. US and UK)

Production capacity 80.0

8.3

Uncontracted, but most likely renewed

LT US contracts to be re-routed

14.3 LT UK contracts potentially re-routed

Contract details and description Contract size, mtpa

Qatar capacity allocation in 2015 mtpa

SOURCE: Gas Strategies; Industry experts; McKinsey analysis

▪ Asia: Japan (6), South Korea (6.9), Taiwan (3.0), China (10), India (7.5)

▪ EU: Portugal/Spain (3.1), Italy (4.6), Belgium (2.1), France (1.9), Poland (1)

▪ Others: Argentina (5), Mexico (0.7), Dubai (1.5)

▪ Japan (1.2, expiring 2013) ▪ Kuwait (1.6, expiring 2014) ▪ Spain (1.4, expiring 2013)

▪ ExxonMobil (10.4) ▪ Total (1.5) ▪ Centrica (2.4, expiring 2014, potentially renewed)

▪ Rest of Qatar volumes, currently supplied to Japan, Taiwan, UK and India over and above their long-term contracts

Not available Potentially available Likely to be available

Potential de-bottlenecking of trains could unlock additional 12–15 mtpa of un-contracted capacity

5 Contracts between western buyers and Middle Eastern suppliers that expire by 2015 will also need to be placed in Asian markets to varying degrees. If these come to the market around the same time as new capacity coming on-stream, they are likely to contribute to the softening of the market.

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32

SOURCE: Company announcements; Reuters; Gas Strategies; McKinsey analysis

Although higher cost, Australia will be an important source

Learning curve: Cost reduction phase EPC cost hike Future costs?

LNG Plant – Operating LNG Plant – Under construction

LNG Plant – Planned

Conventional Coal Seam Gas

Map of Australian LNG projects

Historical evolution of capital cost of liquefaction projects, USD/tonne

Browse– 2018 8 mtpa

Pluto – 2012 8 mtpa

NW Shelf – Existing 16 mtpa

Gorgon – 2016 15 mtpa

Wheatstone – 2017 9 mtpa

Prelude FLNG – 2017 4 mtpa

Bonaparte – 2018 2 mtpa

Ichthys – 2017 8 mtpa

Darwin – Existing 3 mtpa

Gladstone– 2015 8 mtpa QC– 2015 8 mtpa AP– 2016 10 mtpa Arrow– 2018 7 mtpa

0

200

400

600

800

1000

1200

1400

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Start year

Cos

t U

SD

/tonn

e

5 Multiple LNG facilities are under construction in Australia, making it a likely candidate for being the world’s biggest LNG supplier by 2018. However, three of those plants (with approximately 17 mtpa of capacity) are still in the planning stage and subject to rising liquefaction and EPC costs, which could potentially prevent them from securing FID.

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33Oil and Gas Practice Partnerships: Reshaping Asia’s natural gas industry

Industry conduct could result in different market scenarios

Potential buyer responses

Potential supplier responses

▪ Access Henry Hub prices

▪ Access new LNG sources

▪ Form buyer groups

▪ Establish trading platforms

▪ Cooperate to make pipelines happen

▪ Limit new LNG capacity from Australia

▪ Influence US to limit non-FTA exports

▪ Slow development of new LNG sources via technology control

Industry conduct Scenario Description

No downturn over next 10 years North American projects do not take off due

to regulatory issues Australian projects slow down due to rising

costs and technical challenges Unconventional gas growth in Asia is slow

due to technological/geological issues Cross-border pipelines are cancelled/slow

down due to geo-political issues

LNG tightness 1

Economic downturn till 2015 Export-dedicated capacity in North America

and Australia come on-stream Pipeline network from Myanmar and Central

Asia to India and China is commissioned Unconventional explodes in India and China

LNG overhang 3

Base case 2

US government makes exceptions for non-FTA export to Asia

Planned projects in Australia are delayed but completed

Moderate momentum in China on unconventional gas growth

Pipelines to China are executed

SOURCE: McKinsey analysis

The outlook for the LNG market and consequently LNG prices can be captured in three scenarios, depending on demand side-variables like economic growth and supply-side factors like unconventional gas, North American export volumes, Australian LNG volumes and trans-national pipelines. Buyers and suppliers are pursuing all available options to secure volumes and offtake respectively.

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Oil and Gas Practice Partnerships: Reshaping Asia’s natural gas industry 35

Chapter 2

India, the emerging gas hub

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37Oil and Gas Practice Partnerships: Reshaping Asia’s natural gas industry

Regulatory changes have helped growth of the gas market in India

SOURCE: MoPNG, PNGRB, McKinsey analysis

▪ Open Acreage Licensing Policy (OALP) in lieu of NELP – to enable bidding for any acreage anytime, instead of for fixed blocks and at fixed timeslots

▪ Policy for unconventional resources

▪ New Exploration Licensing Policy (NELP I-VIII)

▪ Deregulation of LNG terminals ▪ 100 per cent FDI in upstream ▪ Removal of customs duty on LNG

Upstream A

▪ Pipeline tariff fixation methodology for the national gas grid

▪ Uniform postal tariff/uniform grid tariff to avoid cascading effect

▪ Open access gas carriage – Third party carriage allowed on pipelines

with mandated 25 per cent extra capacity – Pipeline laying made competitive

– ‘Infrastructure’ status for pipelines

Midstream B

▪ Tax rationalisation/introduction of GST ▪ Declared Goods Status for natural gas ▪ Peaking power regulation to enable time of

day tariffs ▪ Evaluating national gas highways to promote

gas

▪ Arm’s length transactions between mid-stream and downstream companies

▪ NELP gas allocation as per Gas Utilisation policy

▪ Open access and private participation in power generation and distribution

▪ Nutrient based subsidy, import parity pricing and higher price allowance for fertiliser sector

▪ ‘Infrastructure’ status for city gas networks

Downstream sectors C

▪ Price pooling ▪ Administered pricing mechanism (APM) ▪ Production sharing contracts (PSCs) ▪ Market price gas (MPG)

Pricing D

Recent regulations Potential regulations under discussion/ consideration

Government support in the form of enabling regulation for new exploration and production, increasing prices, and infrastructure approvals, has helped the growth of the gas industry in India.

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38

Energy consumption in India to grow by 3 per cent with natural gas growing the fastest at 4.5 per cent

SOURCE: McKinsey Global Energy Perspective 2050

149

339527

221

271

312

182

19

3.0% p.a.

2050

1,592

370

113

2030

1,123

328

53

2010

488

175

88 57

+4.5%

+4.3%

+2.8%

+3.2%

+1.9%

Other

Petroleum products

Coal

Power

Gas

1 Differs from primary demand due to exclusion of the conversion losses in the power generation industry

CAGR 2010–2050

Final energy demand by fuel type1 Mtoe

Gas is expected to be the fastest growing fuel in India’s energy basket over a 40 year horizon.

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39Oil and Gas Practice Partnerships: Reshaping Asia’s natural gas industry

Driving gas consumption is among the most easily implementable carbon abatement options for India

1 CO2e: Carbon dioxide equivalent

SOURCE: McKinsey analysis

Abatement potential, 2020 Billion tons CO2e1 per year

0.4

0.4

0.3

0.2

0.1

Increased services share

Productivity increase

Clean power

Energy efficiency

Agriculture/ forestry

Supercritical coal plants

Policy and technology exists

Renewable power

High cost of power generation

Gas based power

Short gestation period, low capex

T&D loss reduction

Difficult to implement across large base

Nuclear power

Supply, pilferage and liability issues

Easy

Difficult

Clean power is a significant part of India’s committed GHG intensity reduction

Gas-based power is easier to implement than other measures in power sector Abatement measure

Ease of implementation Rationale

India has announced a voluntary GHG intensity reduction of 20–25 per cent by 2020. This has lent significance to gas based power generation as an abatement option, given its ease of implementation, short gestation period and lower capex compared to other options in power sector.

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40

Pipeline and terminal infrastructure not expected to be a constraint

SOURCE: MoPNG, Planning Commission, McKinsey analysis

633334

160

876

243

335

220

65 50

2011 2017E

LNG terminal capacity mtpa

21

17

3450

35

15

78

6 13.6 12.8

20111 2017E2

▪ Limited trunk pipeline bottlenecks; current regional bottlenecks being resolved ▪ Pipeline capacity adequate for 2017; regional constraints if latent demand realised ▪ LNG terminal capacity adequate; constrained if base power demand unlocks

Trunk pipeline capacity mmscmd

Maximum potential upside in demand LNG demand in high case LNG demand in potential case

Upside in gas demand Potentially delayed capacity LNG demand in medium case Planned LNG terminal capacity Gas consumption Certain pipeline capacity Certain LNG terminal capacity LNG demand low case

1 Dahej 10, Hazira 3.6 2 Assumes Dahej 15, Hazira 10, Dahbol and Kochi at 5 each as ‘certain’; assumes 5 each in Ennore, Mundra and East Coast as ‘planned’ capacity

Pipeline capacity is almost set to double by 2017 from 330 mmscmd to 630 mmscmd, with 240 mmscmd of capacity that is likely to be slightly delayed. LNG regasification capacity is likely triple between 2011 and 2017, with an additional 15 mmscmd of capacity in the planning stage (5 mmscmd each in Ennore, Mundra and the East Coast).

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41Oil and Gas Practice Partnerships: Reshaping Asia’s natural gas industry

India’s pipeline and terminal infrastructure (current as well as under development) will cover almost all demand hubs

Delhi

Mumbai

2014+

2014+

Mundra

Dabhol Phase 1/21

Jamnagar Hazira Dahej

Chandigarh

2012

2017

2016+

2016+

2012

2013

2014+

Kolkata

Chennai

Bangalore

East Coast

Ennore

Kochi

Hyderabad

1 Dabhol Ph 1 is without break-water; Dabhol Ph 2 is with break-water 2 EOI: Expression of interest

SOURCE: PNGRB; Expert interviews; Literature searches; McKinsey analysis

x Expected completion

Planned

Under construction Existing

LNG terminals

Early execution Under construction

Under bidding/EOI2

Existing DVPL–GREP upgrade

Pipelines

India’s trunk pipeline infrastructure will be sufficient to reach most of its major demand pockets.

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42

SOURCE: Indianpetro; DGH; Company annual reports; Expert interviews; McKinsey analysis

220

163

Potential

330–340

Additional demand at USD 8–10/MMBtu at customer gate1

45–55

Upside case

280–290

Addition if gas is committed at USD 10–15/ MMBtu at customer gate (some volume is also dependent on peaking power regulations)

60–70

Base case Demand at “as-is” policies and prices

2011 consumption

Gas demand and supply, 2017 mmscmd

India’s demand for gas could amount to 340 mmscmd in 2017

6% 10%

13%

ESTIMATE

1 At current coal and fertiliser pricing. Will change depending on power and fertiliser policy reforms

We envisage three different gas demand scenarios by 2017. First, a ‘base case’ where demand grows only at 6 per cent per annum, constrained by current allocation policies and high LNG prices. In the upside case, if gas allocation commitments can be made at USD 10 to 15 per MMBtu (at the customer gate) and if peaking power demand can be unleashed, demand would increase to 280 to 290 mmscmd. There is further potential to increase demand to 330 to 340 mmscmd if supplies at USD 8 to USD 10 were available, when demand from baseload generation would also kick in.

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43Oil and Gas Practice Partnerships: Reshaping Asia’s natural gas industry

40 20 0

8.0 8.1 8.2

10.8 12.0

240

13.3 14.1 15.0

15.9 16.3 17.2

18.7

22.3

340 320 300 280 260 220 200 180 160

13.0

140 120 100 80 60

SOURCE: Planning commission; MoPNG; Infraline; DGH; McKinsey analysis

Three broad price segments exist ESTIMATE for USD 90/BBL CASE

1 Assumes that all non-allocated demand could switch to gas at ability to pay 2 Switching costs have been calculated against the current (alternative) fuel that is being used by the respective players 3 At current coal and fertiliser pricing. Will change depending on power and fertiliser policy reforms

Fertiliser (Naphtha based)

IGD (Fuel) Power (Peaking) Power CCGT Fertiliser

(gas based) CGD

Power (Naphtha switching)

Refining (Naphtha conversion)

IGD (Captive power)

Power (CCHP)

Petrochem Fertiliser (FO based) Refining (FO

conversion)

Steel

Customer’s ability to pay1 (red line denotes switching cost2 based on allocation policies/competing fuels)

USD per MMBtu at customer gate

Demand mmscmd

Segment 1: ~60 mmscmd, can afford gas at USD 14+/MMBtu

Segment 2: ~60–70 mmscmd, can afford gas between USD 10–14/MMBtu Segment 3: ~150–

160 mmscmd, can afford gas between USD 6–10/MMBtu3

Three broad price segments exist in India’s gas market, although the end user and geographic segments are many more in number. First, there is liquid substitution demand, mostly from industrial and city gas customers, whose alternative cost is USD 14 to 18 per MMBtu at USD 90 per bbl crude. The mid segment, comprising some industrial and select power customers, has a switching cost of USD 10 to 14 per MMBtu. Finally, the controlled price segment, which is the largest, comprises customers who have preferential access to allocated domestic gas, as well as the baseload power generation segment.

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44

Current domestic gas supply is insufficient, necessitating imports

27

21

163

115

51

Total Spot LNG Con- tracted LNG

Domestic Other JV

3

RIL KG

42

PMT

12

OIL

7

ONGC

Gas supply from various sources, 2011 mmscmd

SOURCE: DGH; MoPNG; McKinsey analysis

Domestic sources

India’s current supply of gas amounts to 160 mmscmd, of which 110 mmscmd is met by domestic production. This implies a clear volume shortfall in the market.

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45Oil and Gas Practice Partnerships: Reshaping Asia’s natural gas industry

Additional sources of gas are coming up, but LNG imports will still be necessary to meet demand

SOURCE: McKinsey analysis

Potential supply 2017 mmscmd

Potential landed price USD/MMBtu Source

Domestic conventional and deepwater

60–100 7–9

Shale gas 0–21 6–9

TAPI 30 10–15

LNG – spot + contracted 15–20 16–18

CBM/Marginal fields 10–30 7–9

LNG – HH linked 10–15 11–13

Total 125–200

1 India’s shale policy to be finalised only by 2013; unlikely that large-scale shale gas production would occur by 2017

India can access an additional 70–100 mmscmd from alternative domestic sources of gas by 2017, but will still need to rely on LNG for the balance 35 mmscmd.

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46

India can become one of Asia’s most important LNG markets

SOURCE: Gas Industries; GIIGNL; Datamonitor; MoPNG; McKinsey analysis

High case: 75% capacity utilisation Low case: 50% capacity utilisation

LNG imports mtpa

1 Rest of Asia includes Thailand, Malaysia, Singapore, Vietnam, Indonesia, Philippines, Bangladesh and Pakistan

4027110

+14% p.a.

2025 20 15 2010

Rest of Asia1

86837671

+1% p.a.

2025 20 15 2010

Japan

34333233

+0.1% p.a.

2025 20 15 2010

South Korea

17151311

+3% p.a.

2025 20 15 2010

Taiwan

179

+13% p.a.

2025

53 25 8

2010

37 25 12 35

15

18

20

India

5645339

20

+13% p.a.

2025 15 2010

China

While LNG demand in the Rest of Asia (e.g., Thailand, Indonesia, Vietnam) is increasing, it is relatively fragmented. As a result, India is set to become one of Asia’s most important LNG destinations over the next 10 to 15 years.

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Oil and Gas Practice Partnerships: Reshaping Asia’s natural gas industry 47

Chapter 3

Partnerships for sourcing, integration and sustainability

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49Oil and Gas Practice Partnerships: Reshaping Asia’s natural gas industry

Diverse partnerships are being established across Asia

Vertical integration

Horizontal integration

Type

of p

artn

ersh

ip

Bringing technical skills into Asia

Traditional LNG sourcing

Henry Hub LNG sourcing

Downstream integration

Cross border pipelines

Joint project development

Shale acreage consolidation

Buying groups

Trading platforms

Shale gas/CBM

Deepwater

OFSE–developer

New LNG supply sources

SOURCE: McKinsey analysis

A B

F

C

D

E

G

Tightening effect No change/Unclear Loosening effect

Impact on Asian LNG market

Diverse forms of partnerships are emerging across Asia as buyers and sellers position themselves for the future. These include vertical integration – both forward and backward – as well as horizontal alliances, and partnerships that seek to bring newer technology and skills to Asia with a view to developing local resources. Each of these partnerships will have a different effect on the LNG market and price levels.

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50

233445771010131516192124

3777

Colombia Brazil Mozambique Canada Angola PNG US Libya Equatorial Guinea Peru Norway UAE Yemen Brunei Russia Oman Egypt Trinidad Algeria Australia Nigeria Malaysia Indonesia Qatar

2010 2020

2

4 5 5

16

7 7

5

32 10

22

9 4

3

8 6

37

20 26

146 49

25 51

90

Partnerships could help tap new LNG sources in Africa and Latin America and access HH prices from North America Current and future liquefaction capacity by country, mtpa

Existing

Under construction

Planned

Speculative

SOURCE: Gas strategies; Press clippings; Industry experts

A

New LNG sources from Africa, Latin America and

North America

To tap LNG, buyers could potentially forge partnerships with countries in emerging regions like Africa and Latin America; they could also strike deals to secure LNG at HH prices from North America.

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51Oil and Gas Practice Partnerships: Reshaping Asia’s natural gas industry

Partnerships for downstream integration

SOURCE: Press search; McKinsey analysis

ILLUSTRATIVE

▪ Petronas and BASF cooperating on USD 1.67 billion worth of petrochemical projects in Malaysia

Petro-chemical products 3

City gas distribution 2

Gas based power generation

1

B Examples of opportunities

▪ GAIL has JVs in India for CGD, like Mahanagar Gas with BG for Mumbai, and Indraprastha Gas with BPCL for Delhi

▪ Presence in Egypt through stakes in Fayum Gas and Natgas, stake in China Gas Holding to pursue CNG opportunities

▪ ONGC - IL&FS - Government of Tripura partnership for setting up a 726.6 MW CCGT power project in Tripura

▪ CNOOC - China Southern Power Grid partnership to build five gas-based power plants in Guangdong, Fujian, Hainan and Zhejiang provinces with installed capacity 2210 MW

▪ Sinopec has tied up with BP and SK Group to jointly build a USD 1.1 billion petrochemical complex in China

▪ Downstream petchem projects open for equity participation in India (e.g., GAIL’s future projects)

▪ Potential partnerships in India available (e.g. Ratnagiri Phase 2 power generation plant)

▪ Over 200 new urban CGD opportunities potentially available in India

▪ USD 50 bn+ investments planned in downstream infrastructure in India

▪ What partnerships can be formed to tap this opportunity?

Several gas players (especially in emerging markets) have partnered with players from developed markets to venture into downstream sectors like gas-based power, city gas distribution utilities and petrochemicals.

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52

Partnerships that help realise cross-border pipelines will affect LNG demand

Cross border gas pipe planned or under construction

▪ Multiple pipelines into China

▪ TAPI pipeline being negotiated into India

Sakhalin–China3

(7 mtpa, 2017 (est.)) Central Asia–China1

(22–29 mtpa, 2012 onwards)

West Siberia–China2

(24 mtpa, >2015 tbc)

Sino–Myanmar gas pipeline (9 mtpa, end of

2013) Uzbekistan–China gas pipeline (~7 mtpa, 2014 est.)

TAPI–India (~7 mtpa, 2017 est.)

Kazakhstan

Astana

Gedaim Horgos Xinjiang

Sakhalin

Vladivostok

Uzbekistan

Nanning

Burma

Turkmenistan Dauletabad Afghanistan

Pakistan

India

Fazilka

Arakan

Urengoy

Kyaukphyu

1 Actual capacity utilisation initially limited to ~10 bcm due to demand shortage in Western China and constraints on existing West–East domestic pipeline 2 Project currently on hold 3 Sakhalin–China pipe is confirmed and under construction

SOURCE: International Energy Agency; OGJ, literature search; FACTS

Russia

China

Mongolia

C

Trans-national pipelines in Asia

(Capacity, Start date)

Gas-deficit countries could form partnerships to ensure speedy execution of trans-national pipelines in order to reduce dependence on LNG and lower their gas procurement costs. On the other side of the spectrum, gas producers are assured of a stable way to monetise their resources.

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53Oil and Gas Practice Partnerships: Reshaping Asia’s natural gas industry

Joint project development partnerships are increasingly the norm in LNG and deepwater

21

11

9

100

48

Total

Deepwater

Enhanced recovery 10

LNG

Heavy oil

Conventional 47

63

91

90

89

63

142 -67% 435

1,064 +22% 875

238 -28% 333

344 +27% 270

Standalone

In-cooperation

SOURCE: IHS Herold Projects Database (January 2010); press search

-58% 443 1,049

Number of collaborative projects

Avg. project reserves MMBOE

Projects by type Per cent of total

D LNG and deepwater exploration and development projects are two examples of segments where partnerships outweigh standalone development. This is driven by the need for niche expertise as well as the need to de-risk projects, given their highly capital intensive nature.

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Both buyers and sellers can consolidate via partnerships

SOURCE: Press research; Platts; Reuters

E

Description

Trading platforms

Trading desks to enable: ▪ Spot trading and re-routing of

cargoes ▪ Swapping of cargoes with other

buyers to optimise for shipping ▪ Swapping LNG for gas (e.g.,

between East Coast and West Coast of India)

Buying groups

▪ Potential to aggregate regional demand

▪ Joint investments in upstream megaprojects

▪ Regional forum for cooperation

Marketing and trading partnerships

F

Upstream partnerships

Shell – East Resources Appalachia

Chevron – Atlas Energy Marcellus

ExxonMobil – XTO Energy, Petrohawk

Marcellus, Fayetteville

CNOOC – Chesapeake Eagle Ford

Total – Chesapeake Utica, Barnett

Sinopec – Devon 5 different regions

Recent investments Region

GAIL – Carrizo Eagle Ford Marketing partnerships

Opportunities for suppliers to enter markets for trading and gas marketing

As majors and large NOCs are increasingly investing in acquisitions and partnerships in shale gas, buyers and sellers can consolidate through multiple means, such as trading platforms, buying groups and marketing partnerships.

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55Oil and Gas Practice Partnerships: Reshaping Asia’s natural gas industry

Partnerships to develop Asian resources G

▪ RIL–BP partnership for India offshore ▪ PTT–Total partnership for Indonesia ▪ Pertamina partnerships with Chevron, ExxonMobil and

Statoil ▪ Petronas–Total partnership in Malaysia

Deepwater ▪ Subsea

development ▪ Deepwater drilling ▪ Reservoir

management

▪ RIL partnerships with Pioneer, Carizzo and Chevron ▪ GAIL partnership with Carizzo ▪ PetroChina–Shell partnership for Fushui Yongchuan,

Sichuan ▪ Sinopec–BP partnership for Guizhou and Jiangsu ▪ Sinochem–Hess global partnership ▪ Petrochina–Total partnership for Inner Mongolia ▪ Mitsubishi–Encana partnership

Shale gas ▪ Hydro fracking ▪ Lean drilling ▪ Well productivity

management

▪ BP and Exxon in Indonesia ▪ Chevron, Far-East and many others in China

Coal Bed Methane

▪ Lean drilling ▪ Well productivity

management

Area of partnership Description Select examples

Asian countries are increasingly forging partnerships to access niche expertise in exploration, development and production across deepwater, shale gas and CBM. Successful partnerships here could unlock Asia’s unconventional and deepwater resources.

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56

Could the emerging partnerships lead to game changing outcomes?

Henry Hub LNG sourcing LNG from new supply sources

Cross-border pipelines

Buying groups

Shale gas/CBM

Deepwater

Trading platforms

Vertical integration

Horizontal alliances

Bringing new technical skills to Asia

Partnerships Potential eventual outcomes

Asian gas grid, eventually linking Central Asia, Middle East, India, South East Asia and China?

▪ Emergence of Africa and LatAm as major supply sources? ▪ Change in structure of the concentrated LNG supply industry?

New price setting mechanism for LNG in Asia?

▪ Greater volume and price coordination between the largest Asian LNG buyers?

▪ Regional forum for cooperation?

Material volumes from deepwater and a flourishing Asian deepwater industry?

▪ Asian gas price index de-linked from crude? ▪ Asian gas trading hub to enable financial and physical

liquidity?

Unprecedented scale of unconventional production in China, Australia, Indonesia and India?

Joint project development

Cross-equity holdings in liquefaction and regas in order to de-risk megaprojects?

Traditional LNG Greater stability and certainty for megaproject volumes?

Downstream integration

Increased downstream investments from upstream companies in order to derive full value from gas

A wide range of partnerships can be forged (supplier-supplier, buyer-buyer and supplier-buyer), leading to several potentially game-changing outcomes for sourcing, integration and sustainability of the Asian gas industry.

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57Oil and Gas Practice Partnerships: Reshaping Asia’s natural gas industry

Five questions will determine the future of the industry and influence the nature of partnerships

1 At what pace will Asia be able to access technology and develop its unconventional resources?

2 What will be the fate of cross-border pipelines? Will countries cross geo-political barriers in the interest of resource monetisation and energy security?

3 How much LNG will North America export? How much LNG will Australia export, considering production sustainability, pace of project development, and economics?

5 What supplier-supplier, buyer-buyer, and buyer-supplier partnerships and alliances will emerge?

4 To what extent will new LNG supply sources (e.g., Africa, West Asia) emerge? Will India and China invest heavily in making them happen?

Answers to the five key questions will have a profound impact on the evolution of industry structure, conduct of players, industry performance and pricing behavior.

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