creating new demand for gas

Creating newdemand for gasAndy BroganEY Global Oil & GasTransactions LeaderErnst & Young LLP, UK

Creating New Demand for Gas

Global gas demand is projected to decelerate to 1.3%–2% CAGR during 2015–2040 vs.2.3% CAGR in the last 25 years.

Competition from coal and renewables is limiting growth in power generation, theanchor segment for gas use.

The global LNG market is oversupplied and is not expected to rebalanceuntil the mid-2020s.

LNG prices are at record-low levels due to oversupplied global market anddepressed oil prices.

Lack of policy support in many countries has rendered gas use unviable.

Strong need to develop new applications of gas

1

2

5

3

4


Various factors, including availability, affordability and statepolicy, drive gas use

1

AvailabilityThe shale gas revolutionin the US boosted gasavailability acrossindustries.

3 5 7

AwarenessCustomer awarenessabout economic andenvironmental benefits ofgas and new applicationsin their industry willpromote gas use.

2Switching costsRecently, low LNG priceshave stoked demand andbrought new importers(e.g., Pakistan, Jordan)to the market.

4Carbon pricingIntroduction of carbonpricing in some countries(e.g., the UK’s powergeneration) has helpedcoal-to-gas switching.

6

Government policyFavorable governmentpolicies will encouragegas use even inemergent segments(e.g., LNG transportationin China).

InfrastructureAvailability ofinfrastructure to importand distribute gas coulddrive consumption growthin many emergingcountries.

Ease of operationsGas became a preferredfuel in many applicationsdue to its versatility,efficiency, dispatchability,and quick response time.


Challenges and risks limiting gas demand growth in powergeneration

According to the IEA, the global demand for electricitywill likely grow at

compared to 2.3% CAGR in the 1990–2014 period.

during the 2014–2040 period

1.3% CAGR

LCOE^ (US$/MWh) for projects completed in 2015Sluggish growth in power demand

Gas is uncompetitive with coal (specially in Asia) andsome renewables despite low prices.

Growing competition from alternative fuels

^LCOE = Levelized cost of electricity; * CCGT = Combined Cycle Gas TurbineSource: EY analysis of IEA data

IndiaCritical coal1Hydro2Gas CCGT*3

ChinaCritical coal1Geothermal2Gas CCGT*3

EUGeothermal1Gas CCGT*2Critical coal3

Geothermal1Gas CCGT*2Critical coal3

US


Challenges and risks limiting gas demand growth in powergeneration

► Gas-fired power plants require more, sophisticatedand capital intensive infrastructure, thancoal-fired ones.

► In many countries, infrastructure to import and deliverLNG to a gas-fired power plant may cost more thanthe plant itself.

Lack of infrastructure to deliver gas

► Regulatory support (subsidy, tax credits and projectfunding) is accelerating adoption.

► Total installations are expected to grow by

► The cost of Li-ion batteries will likely decline by morethan 47% CAGR during the same period.

during the 2016–2021 period.

44% CAGR

Substantial improvements in battery storage


Strong prospects across other sectors: industrial

► Growth more likely in gas-rich regions withaffordable prices.

► Transition to consumer-led growth(outside the US).

► Gas demand will be more confined toindustries that require high heat thatelectricity cannot deliver (e.g., steelproduction).

► Lack of transportation and distributioninfrastructure.

► Versatile roles of gas — feedstock, fuel forheating and power generation.

► Increased availability of low-cost shale gasin the US transforming gas-based chemicalsproduction globally:► More than 100 million metric tons of new shale

gas-based chemical production to be addedby 2025.

► The US projected to transition from a major netimporter of methanol to a major exporterby 2018.

IndustrialCompeting

fuels/feedstock:coal, electricity,

refined oil products

Key drivers Challenges/Risks


Strong prospects across other sectors: transport

► Lack of refueling infrastructure► Competition from alternatives (e.g.,

scrubbers and premium low-sulfur fuel oil) tolimit sulfur emissions in marine transport

► Prolonged low oil prices eroding economicviability of gas as a transport fuel

► Rapid improvements in battery technology

► Emergent LNG transport markets such asmedium and heavy duty road transport,and marine

► IMO regulation to limit sulfur emissions to0.5% by 2020, down from 3.5% currently

► Stringent anti-pollution measures drivingCNG and LNG use in transportation(e.g., China, India)

TransportCompeting fuels:

Refined oil products,electricity

Key drivers Challenges/Risks


Need to walk the extra mile to fully realize the demandpotential of growing markets

Nascent marketsEstablished markets Rapid-growth markets

► Partner with local industry for R&D androll out of new gas applications beyondconventional ones.

► Integrate downward: set up liaisingoffices, collaborate with local gasplayers and utilities.

► Lower costs to remain competitive.

► Play a greater role in developing gasinfrastructure.

► Use low-cost, mobile infrastructure(e.g. FSRUs, LNG trucks and mobilerefuelling units).

► Partner beyond core sector to deliverpackaged and customized solutions.

► Start with pilot projects to improve gassupply and develop market.

► Use JVs/alliances to share capital andmitigate risk.

Despite low stand-alone returns, downstreamoperations help secure gas placement andactively push gas volumes downstream,thereby improving overall returns.


Alternative sources and creative solutions could helpovercome financing challenges

Federal/State government

Infrastructure funds/investment trusts

Regional development banks

FSRU providers

Consuming sectors

Domestic NOC

Oil majors

Foreign governments, NOCs or banksSponsorsof gasinfrastructure

New sponsors made viablethrough small, low-cost andintegrated projects.


For more information on all of EY’s oil and gasinsight visitey.com/oilandgas


Andy Brogan

Author biography

EY Global Oil & Gas Transactions LeaderErnst & Young LLP, UK

Andy Brogan is the Global Oil & Gas Transactions Leader for Ernst & YoungLLP, the UK EY member firm. Andy has been with the member firm for 28years and has advised oil and gas companies on a variety of public andprivate transactions covering both upstream and downstream operations inmore than 30 countries.

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