institution of mechanical engineers, london, thursday 18 may … · 2017-05-24 · 5 1. “tidal...

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Institution of Mechanical Engineers, London, Thursday 18th May 2017

Ryan PereiraPrincipal Commercial Manager – Global Gas & LNG

Mike WoodTechnical Director – Development Planning

[email protected] [email protected]

+447469140571 +447825171339

Value Creation: Gas to power –

via LNG import or domestic development?

mailto:[email protected]

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© 2017 Gaffney, Cline & Associates. All Rights Reserved.

6th October 2015, we said there was too much gas (100+ years

worth of supply)…

… and the challenge was now local (many options)

and international (mainly LNG) monetisationSource: GCA analysis

Significant gas resource finds in last decade (non-exhaustive)

3


As supply rose, global LNG prices fell, and new LNG project

FIDs became challenged given long run marginal costs…

Assuming current prices stay in the range $7-10/MMBtu during 2017 - 2020,

new FIDs on traditional land based solutions could be extremely challenged

$$$ REDUCTION

PROGRAMMES

Source: GCA analysis – Proprietary Global LNG Supply & Demand Model

4


As we predicted… LNG supply projects stopped arriving like

London buses… but in the fight for global supremacy…

… could LNG provide the next geopolitical energy battleground?Source: GCA analysis

USALow cost, brownfield

Significant shale gas

China trade agreement

QatarProtecting market share

QG / RG merger

“Zero” cost, North field

AustraliaNew projects high cost

Profit “challenged”

Domestic gas price fears

RussiaPolitical battle

Significant gas

Competition in European

and Chinese markets

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1. “Tidal wave” of US LNG exports arriving like a steam train

Will radically alter the global gas scene and likely to set global prices

2. Electrification of emerging economies (Africa, Asia, Latin America)

Represents the largest near to medium-term opportunity for gas demand growth

3. Lower LNG prices fuelling gas demand

Strong correlation between sub $10/MMBtu prices and new LNG buyers

4. Shift from large scale to “fit for purpose scale” projects

Mop up fragmented demand pockets at competitive prices, quicker and more flexibly

5. Buyer power pressuring traditional LNG contractual terms and pricing

More flexible global pricing mechanisms will emerge, based on gas-on-gas competition


18th May 2017… Five trends we expect to drive gas and LNG

over the next 15-20 years

Gas is becoming the cheapest and most flexible form of energy supply

6


1. USGC LNG is becoming a global price setter

At current prices can deliver LNG to West Africa at c. $7.5/MMBtu (plus regas)

2.00 3.00 4.00 5.00

HH Spot ($/MMBtu) 2.00 3.00 4.00 5.00

Energy cost (15% HH) 0.30 0.45 0.60 0.75

Tolling fee (fixed) 3.00 3.00 3.00 3.00

Shipping 1.00 1.00 1.00 1.00

Regas 1.50 1.50 1.50 1.50

Delivered LNG cost 6.30 7.45 8.60 9.75

Delivered gas cost 7.80 8.95 10.10 11.25

0.00

2.00

4.00

6.00

8.00

10.00

12.00

HH Spot ($/MMBtu)

Energy cost (15% HH)

Tolling fee (fixed)

Shipping

Regas

Delivered LNG cost

Delivered gas cost

Source: GCA analysis – indicative example

US LNG (FOB) = HH + fuel + liqn

US LNG (DES) = HH + fuel + liqn + shipping

US LNG (Delivered as gas) = HH + fuel + liqn + shipping + regas

115% HH + tolling fee

$1/MMBtu shipping (current freight rates)

$1.50/MMBtu regas (but could be lower)

US LNG (delivered to W.Africa) = $3.00 + $0.45 + $3.00 + $1.00 = $7.45

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Simplistic example to compare US HH linked LNG to other oil indexed LNG

– Assume USGC LNG = 115% HH + $3/MMBtu tolling fee

– Assume simple 12% Oil linked + $0.50/MMBtu constant

Market appears to believe that c.300 Tcf US gas can be delivered @ c.$3/MMBtu

– HH future curve (as of May 2017) out 10 years


1. At what levels can US LNG outcompete oil indexed LNG?

US LNG priced off HH wins at most prices above $50 oil,

also less sensitive to geopolitical riskSource: GCA analysis – indicative example, simplistic without S-curve or cap/floor

-160%

-140%

-120%

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

40 50 60 70 80 90 100

US

LNG

Co

st V

ers

us

Oil

Lin

ked

LN

G

Oil price ($/Bbl) at various HH ($/MMBtu) price levels

2.0 2.5 3.0 3.5 4.0 4.5 5.0

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2. Substitution in power generation – can gas compete?

Gas to power does not have to be MASSIVE… could be medium or mini. Coal???

EconomicsInvestment costs

Price differentialLNG vs others

EnvironmentalCOP21

Source: GCA analysis – indicative example for small to mid volume industrial purchases

HH + fuel + liqn + shipping

Lagos retail price of diesel

$25/MMBtu @ today’s $50 oil

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3. Lower prices are fuelling LNG demand

GCA are advising on natural gas & LNG options in Africa, Asia and Latin AmericaSource: GCA analysis of estimated deal price vs duration

Above c.$12 buyers will only

commit to one or two cargoes

Price

$/MMBtu

# of LNG cargoes committed to

5

10

15

20

5 10 15

Reported transaction (multiple sources and proprietary data)

Typical breakeven

price for post 2010

greenfield LNG

Tipping point at around $10

Below c.$8 buyers will make

a volume commitment of

multiple cargoes

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3. Despite large gas finds, Africa is still looking to import LNG Current and future potential importers

– Egypt

– Ghana

– Ivory Coast

– Lagos state, Nigeria

– Benin

– Senegal

– Morocco

– Kenya

– South Africa

– Namibia

Significant other LNG importers also emerging:

– Thailand, Pakistan

– Vietnam, Bangladesh

– Sri Lanka, Myanmar

– Indonesia

– Caribbean islands

– Australia??!

In West Africa, there are several proposed FSRUs along the WAGP route!

> 1bcm/annum

< 1bcm/annum

Africa gas production (non exhaustive)

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4. Small scale “fit for purpose” opportunities – ship

bunkering, transportation, FLNG, FSRU, FSRP


Flexible midstream solutions are increasingly popular in emerging new markets

requiring smaller scale LNG (trading and “break bulk”) and “molecules to MW”

FloatingAligned with markets Transportation

Environmental

Tax advantages

Demand generation

Small scaleDesign of choice Fast track

Lower risk

Cost control

Redeployment

CreditRisk mitigation

Financial settlement

Distributed markets

Multiple offtakers

1. Large (up to 2010)

2. Mid (up to 2015)

3. Small/Micro (2016+)

Source: GCA analysis internet research, MODEC FSRP barge, GE gas solutions

https://verocommunique.files.wordpress.com/2015/12/stack-lng-iso.jpg

https://verocommunique.files.wordpress.com/2015/12/stack-lng-iso.jpg

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Newer markets are requiring more creative and flexible solutions…

Resulting in a reduction in regas tariffs (far below assumed $1.50/MMBtu)

4. Economics – an indicative example highlighting the strong

emergence of “floating” solutions for new niche markets


Standard onshoreimport

Mini onshoreimport

Mini importbarge

Converted FSRU Existing FSRUredeployed

FSU Sister ships Newbuild FSRU

USD

$/M

MB

TU

Regas tariff (@12% NPV)

Procurement (efficiency) / penalty

LNG procurement

Source: GCA analysis, GCA Proprietary Liquefaction and Regas Model

Offshore floating LNG import solutions becoming increasingly viable:

– Scalable over time

– Costs reducing / lower capex

– Shorter lead times

– Conversions / redeployments

– Flexibility

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5. Buyers are getting what buyers want…

… but could create opportunity for sellers with increased market liquiditySource: GCA analysis, internet research, corporate websites for logos

Lower prices (reduction in oil indexation %)

Destination free clauses (being challenged)

Take or pay flexibility

Shorter contract durations

Benefiting from upside and trading opportunities

– Kogas winter buyer

– CNOOC summer buyer

– JERA buys across both seasons

Smaller parcel sizes

Portfolio diversification

Novel pricing formulas

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Result: LNG “glut” could end earlier than many forecast…

Source: GCA analysis – Proprietary Global LNG Supply & Demand Model

…likely that only the smaller scale, more nimble, low cost gas developments

will be better suited to meet any emerging demand growth from 2025+

5 91 1

-13-5

-22

-55 -57-69

-81-93

-121-134

-148-162

-176-191

-250

-200

-150

-100

-50

0

50

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035

LNG Supply Demand Balance (+ve = over supply in market) vs High Case Demand

LNG Supply Demand Balance (+ve = over supply in market) vs High Case Demand

Fuel substitutionGreater potential

FIDsDelayed

New demandUnderestimated

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Result: Gas developers may have to consider turning their

world upside down…

Source: www.harverstministry.org

… and reversing traditional thinking

Old World

1. Priority to export gas

2. Domestic use upside

3. Centralised power generation

4. Economies of scale

New World?

1. Priority for domestic use

2. Export gas upside

3. Distributed power

4. Smaller scale

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Wider benefits?Forex, pre payment

Capacity building?Workforce

Need for power?Developing countries

Competitive?

So why consider domestic gas development vs LNG imports?

Opens up stranded gas supply

Develops economies

Smaller scale?Niche fields / markets

More stable?Pricing

Focus today

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West African “stranded” gas – a snapshot example

±0 100 200 300 400Kilometers

0 500 1000 km

0 50 100 km

±

0 25 50 75 100Kilometers

Paon

Espoir C1-3

Hippo

B-3

Impala Kudu

Eland

NorthTano

EbonyWestTano South

TanoWawa

Beech

ParadiseHickoryNorth

Dzata

TanoFields

±

0 25 50 75 100Kilometers

Pelican

Fregate

Tiof

Tevet

Faucon

0 50 100 km

Banda

West AfricaMauritania / Senegal

Ivory Coast / Ghana

Source: Petroview, GCA analysis

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West African “stranded” gas

Source: Petroview, GCA analysis

1. http://www.clontarfenergy.com/app_user_files/file/Ghana-Tano-Basin-PresentationAGM.ppt

2. http://www.dana-petroleum.com/media/1420/dana_ar_2005.pdf

3. Espoir C1-3 is a separate discovery to the NE of the Espoir Field and development

CountryDiscovery

NameType Licence Operator

Discovery

Date

GIIP

(Bscf)

Cote D'Ivoire Paon Oil & Gas CI-103 Anadarko 14/06/2012 500.0

Cote D'Ivoire B-3 Gas & Condensate CI-101 Open 11/08/1982 100.0

Cote D'Ivoire Eland Gas CI-525 Vitol Group 18/08/1978 30.0

Cote D'Ivoire Hippo Gas CI-202 Vitol Group 28/01/2001 30.0

Cote D'Ivoire Kudu Gas CI-525 Vitol Group 31/07/1984 195.0

Cote D'Ivoire Espoir C1-3 Gas & Condensate Acajou Canadian Nat Res Ltd 21/07/1981 20.0

Cote D'Ivoire Impala Oil, Gas & Condensate CI-202 Vitol Group 09/04/1978 5.0

Ghana Paradise Oil & Gas DP Tano Cape Three Points Hess 07/06/2011 500.0

Ghana Dzata Gas & Condensate Cape Three Points Deep Lukoil 26/02/2010 500.0

Ghana Hickory North Gas & Condensate DP Tano Cape Three Points Hess 24/06/2012 240.0

Ghana Wawa Oil & Gas Deep Tano Tullow Oil 18/07/2012 200.0

Ghana South Tano Gas & Oil Shallow Tano Erin Energy Corp 01/03/1978 44.2 1

Ghana Beech Oil & Gas DP Tano Cape Three Points Hess 30/07/2012 100.0

Ghana North Tano Gas Shallow Tano Erin Energy Corp 24/04/1981 102.0 1

Ghana Ebony Gas & Condensate Shallow Tano Erin Energy Corp 20/11/2008 70.0

Ghana Western Tano Oil & Gas Shallow Tano Erin Energy Corp 09/03/2000 50.0

Mauritania Fregate Oil, Gas & Condensate C-7 KNOC 13/02/2014 680.0

Mauritania Banda Gas C-10 Open 25/09/2002 1200.0

Mauritania Pelican Gas C-7 Open 29/12/2003 400.0

Mauritania Tevet Oil & Gas C-10 Open 08/10/2004 250.0

Mauritania Faucon Oil & Gas C-1 Open 20/12/2005 200.0 2

Mauritania Tiof Oil & Gas C-10 Open 15/11/2003 50.0

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Gas development pricing

In order to compete with onshore US LNG exports, large scale deepwater gas

developments need to deliver treated gas to the local LNG plant at below

$4/MMBtu

Once these world scale developments are sanctioned, they will be able to offer a

low price gas stream for domestic gas to power in addition to LNG export

Smaller (less prolific well rates) offshore gas fields can require gas pricing in the

$8-10/MMBtu range to be commercially viable

– and are often unable to achieve an adequate Gas Sales Agreement

And yet there are an increasing number of countries considering LNG imports for

Power Generation

Will LNG import prices set a price ceiling for domestic gas production?

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Domestic gas resources

Major Gas to LNG projects can deliver a sidestream of DMO gas at lower prices

– provided that they are competitive with US “Henry Hub” LNG and achieve FID

Large gas field developments need to achieve sub $4/MMBtu

to compete with US LNG – could be delayed until LNG demand / pricing increases

FLNG

Gas

Field

300 MMscfd

250 MMscfd

50 MMscfd

(DMO) to

Power

Gas Treatment

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Gas to power – competition

Assuming that LNG sellers would be interested in supplying small volumes, a

LNG delivered price of $7.50/MMBtu, with $ 1.50 for regas, gives a total of

$9/MMBtu

HFO fuel cost is the equivalent of about $10/MMBtu (at $50 oil) so LNG imports

are attractive in comparison

For smaller scale power, or peak supply plants LPG imports could also be an

attractive option at circa $ 6/MMBtu

Power price at $ 8/MMBtu of gas is in the order of $ 0.10 per kWh,

which is bearable for commercial consumption

22


Gas to power – pricing

As an example, consider a state owned, 200 MW power station fuelled by gas

from LNG, with a 70% load factor

– Gas demand in the region of 30 MMscfd

– Imported small cargo LNG at $9/MMBtu

– Annual gas purchase cost in the region of $ 100 MM

Expenditure on fuel imports comes from foreign currency account / balance of

trade

No price security – driven by international LNG market – with potential to increase

Development of domestic gas resources,

where possible can have significant benefits

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Smaller gas fields

The host government effectively pays the equivalent of $4/MMBtu over 20 years

Smaller gas fields can deliver gas at the same price as imported LNG

– at about $8-10/MMBtu

Host government gets back > 50% of this in the form of taxes / profit share

– so gas price is equivalent to $4-5/MMBtu over 20 years

0 5 10 15 200

2

4

6

8

Co

st

$/M

MB

tu

Years

State Take

Contractor

Take

Additional benefits of domestic gas

production:

– International investment

– Lower impact on balance of trade /

forex

– Domestic content / employment

– Price protection built into GSA –

escalation usually in the order of 2%

per annum

– MIGA insurance for gas payments

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Is domestic gas competitive against LNG imports?

Once host country benefits are taken into account, even relatively high cost

domestic gas developments are competitive against LNG in the mid to long term

0

2

4

6

8

10

12

US LNG (delivered) US LNG (as gas) Domestic onshore (low cost) Domestic offshore (mid cost) Domestic offshore (high cost) Domestic net cost (high cost)

Co

st (

$/M

MB

tu)

Imported LNG vs Domestic Gas Development ($/MMBtu)

Host country

benefits

Gas and LNG development is now much more complex than in the past

– Resource development needs to be matched with evolution of fragmented demand

– Driving a need for a much more co-ordinated gas master plan and field development

plan (particularly in Africa, Asia and Latin America)

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Development of smaller “stranded” resources is attractive + Benefit from PSA profit share – balance of trade

+ Internationally funded

+ Increased domestic content

+ Gas price security

Larger, deep water domestic developments NPV attractive

but in current LNG market / price environment, will they achieve FID ?

Conclusions: domestic development, LNG imports or both?

GCA consider both – “right location, right drivers”

Ultimately the lowest cost solution should triumph

The current low LNG price provides a gas to power

opportunity at acceptable power pricing, but:- No price security

- High demand on foreign currency

- No domestic content

Lo

wer c

ost

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Our gas group supports clients across the gas value chain

on a range of technical, commercial, and strategic issues

Assisting Resource Developers

Gas Monetisation, Master Plans, Regulatory and License Support

Asset Valuation, Project Economics and Financing, Fiscal Terms

Strategy, Market Analysis, Opportunity Identification and Screening

Risk Identification, Quantification, Management, and Review

Acquisitions and Divestitures, Buyer and Seller Due Diligence

Assisting Gas Buyers / Users

Gaffney, Cline & Associates Gas & LNG Services

Markets

and

Pricing

Upstream

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Delivery

infrastructureGSA/SPA

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Utilisation


institution of mechanical engineers, london, thursday 18 may … · 2017-05-24 · 5 1. “tidal...

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