22nd November 2018

Session 2:Gas demand growth beyond power generation

IEF-IGU Gas Ministerial

1

Key messages: Gas demand growth beyond power generation

Recent global gas demand growth has been concentrated in the power sector

• Growth in other sectors a potential missed opportunity – as a result gas is not gaining share in the energy mix

Looking forward, there is significant opportunity for greater gas demand growth outside of power

• The greatest opportunity for growth is in Asia...... but gas is challenged on cost competitiveness

• The industry and buildings sector hold most potential• Gas adoption in the transport sector is highly variable

by country given local fuel substitution economics

Policy incentives for gas adoption are key for accelerating gas demand growth outside of the power sector

• In China, mandated fuel boiler switching is driving rapid growth in industry and buildings

• In India, gas demand is most rapidly growing in the City Gas sector given regulated prices

Assess the opportunities for greater gas demand growth in industry, buildings, and the transport sector

Identify key barriers to the adoption of gas outside of the power sector

Discuss lessons learned from examples of successful fuel switching to gas and what governments can do to implement them

Key messages Session objectives

2

Agenda

Recent trends in gas demand

Opportunities outside of power generation

Country examples - India and China

Questions for discussion

3

Power sector driving the majority of recent global gas demand growth

327

0

100

200

300

400

500

TotalInudstry Buildings

BCM

Other1Power generation

-125

43

277

132

Africa Non-OECD Asia

Central & South America North America

OECD Europe

CIS

Middle East

OECD Asia

Net change in gas consumption, by sector and region (2010-16)

1. Other Energy Sector: covers the use of energy by transformation industries and the energy losses in converting primary energy into a form that can be used in the final consuming sectors. It includes losses by gas works, petroleum refineries, coal and gas transformation and liquefaction. It also includes energy used in coal mines, in oil and gas extraction and in electricity and heatSource: IEA, BCG analysis

CIS decline driven by energy sector

own use and district heating

4

Natural gas consumption growth has not yet achieved all growth expectations

2.5

1.0

1.5

2.0

0.0

0.5

0.9

OECD consumption

2.52.3

Non-OECD consumption2

Annual gas consumption growth rate (%)

1.8

0.9

Global consumption

1.6

Actual growth rate (2010-16)

IEA “Golden age of gas” scenario (2012)1

30

40

0

10

20

Share of global energy mix by fuel (%)

27.329.529.2

CoalGas

21.921.921.9

20142010 2016

1. 2010-2035 Period. 2. IEA WEO 2017, IEA Golden Age of Gas Report, BCG analysis

Gas consumption growing slower than anticipated in the "Golden Age of Gas" …

… And has not gained market share in the global energy mix

5

Agenda

Recent trends in gas demand

Opportunities outside of power generation

Country examples - India and China

Questions for discussion

6

Substantial gas demand growth projected outsidethe power sector

Regions Power Industry2 Buildings Other3 TotalNon-OECD Asia-Oceania 227 240 84 68 619 (38%)Middle East 116 77 88 38 318 (20%)North America 20 27 13 120 180 (11%)Africa 82 29 39 20 169 (10%)Latin America 34 42 9 22 107 (7%)OECD Asia-Oceania -3 36 24 18 75 (5%)CIS 0 19 16 26 61 (4%)Europe 34 -4 3 6 39 (2%)Global Bunkers - - - 50 50 (3%)

Total 510 (32%) 465 (29%) 275 (17%) 368 (23%) 1,619

Heat map – net additional gas consumption (2016-2040, bcm/yr)1

1. Chart represents net change in annual gas consumption between 2016 and 2040 2. Industry sector: includes fuel used within the manufacturing and construction industries. 3. Other Energy Sector: covers the use of energy by transformation industries and the energy losses in converting primary energy into a form that can be used in the final consuming sectors. It includes losses by gas works, petroleum refineries, coal and gas transformation and liquefaction. It also includes energy used in coal mines, in oil and gas extraction and in electricity and heatSource: IEA, WEO 2017, BCG analysis

Transportation included0-25 75-100 100-150 >15025-50<0 50-75

7

Domestic industries: Cost of gas is a key challengefor greater adoption

Coal-gas cost-indifference curve

Fuel oil-gas cost-indifference curve

Gasoil-gas cost–indifference curve

Note: Gas supply cost does not include logistics costs and taxes (supply cost only), assuming calorific value of US coal and average transportation and distribution costs (for gas) of a ‘Medium Corporation’ in Europe, assuming constant crack-spread vs Brent for gasoil and fuel oil; Source: IEA, EIA, BCG analysisDES: Delivered Ex Ship, TTF: Title Transfer Facility Netherlands, HH: Henry Hub U.S.

15

0

5

10

20

10020 6040 80

Gas supply price(USD/MMbtu)

5

0100

20

10

15

20 40 60 80 5030 6020 70

5

10040

20

80

10

0

15

90

DES Asia

TTF

HH

Coal cheaper

Natural gas cheaper

Natural gas cheaper

Fuel oilcheaper

Natural gas cheaper

Gasoilcheaper

Coal price (USD/tonne) Brent price (USD/boe)Brent price (USD/boe)

~2

8

2,400

2,800

1,600

800

2,000

1,200

0

400

UAE

1,7591,6901,687

New producer

in ME

1,337

2,290

Russia

1,973

BrazilBahrain India China

2,738

Total landed costs ($/tonne)

Qatar

1,676 NearestCompetitors

Export industries: Gas only competitive at very low costs

Primary Aluminium—landed cost into Europe (e.g., Germany)

OtherConversion Costs

Energy

Transport+ Duty

ProductionCapacity ('000 tons)

7401 17,7961,9374,1541,821586864 1,665

Country

1. Production start in 2013Note: cash cost excludes depreciation and interest. Average LME price for Primary Aluminum $2,100/tSource: Harbor Aluminum Industry Analysis and Outlook; BCG analysis

2.50 USD/MMbtu

GCC countries

9

Buildings sector: Gas penetration greatest in regions with longstanding access to gas infrastructure

Note: Only includes urban share of buildings sector; estimated for cities based on share of urbanization and urban share of energy use by region Source: IEA, BCG analysis

100

80

60

0

0

100

20

20 8040 60

40

24

AfricaNon-OECD Asia (ex. China)

2015 est. share of urban buildings energy consumption by source (%)

Middle East

2015 est. share of total urban buildings energy consumption by region (%)

OECD AmericasCIS OECD Europe

45

China

13

53

OECD Asia-OceaniaNon-OECD Americas

4

2

47

103

13

410

4215

8

26

63

60

22

22

413

24

5

42

19

10

46

77

16

34

4549

617

22

67

Natural gas

Electricity

Biomass

Oil

Coal

Other

10

In developed markets, improving end user efficiency creating challenges for gas utilities

Source: American Gas Association, BCG analysis

Gas consumption per customer is declining (US example)…

... Creating a negative feedback loop for gas cost competitiveness

20021996 1998 2004 2014201220082006 2016

70

60

600

500

400

100

90

80

30020102000

Commercial consumption(MMBtu/customer/y)

Residential consumption(MMBtu/customer/y)

Declining consumption per customer

Gas becomes more relatively

expensive

LDCaggregate demand declines

LDC unit costs

increase

Customer costs

increase

CommercialResidential

LDC: Local Distribution Company (Utility)

11

Transport sector: Adoption of CNG varies significantly by country depending on fuel substitution economics

Country

CNG vehicle price premium vs.

gasoline

Natural gas-gasoline fuel

spread

CNG vehicle share of total vehicle parc

Payback period for compact car

Argentina$1,500 ~3.8 USD/gge ~24% ~1 year

Brazil$1,500 ~2.1 USD/gge ~5% ~1.5 years

Italy$3,000 ~5.9 USD/gge ~2% ~1 year

USA$8,000+ ~1.4 USD/gge 0.05% ~13 years

Note: Payback period analysis based on CNG purchase price premium and annual fuel expense only. Data are to be intended as indicative due to the fragmented nature of data sources.gge: gasoline gallon equivalentSource: International Energy Agency, NGVA Europe, NGV Communications Group, external research, BCG analysis

12

Agenda

Recent trends in gas demand

Opportunities outside of power generation

Country examples - India and China

Questions for discussion

13

China and India will be the critical drivers of global gas consumption growth

51106171

318

199

128400

61294181101

0

5,500

5,000

4,500

4,000

Middle East

Other Asia

IndiaChinaE. Europe / CIS

Other Asia

Annual gas consumption (BCM)

-16

EuropeOther Americas

US2016 consumption

Japan 2040

5,305

BunkersLatin America

Africa

3,635 Africa

Middle East

Asia

Europe/CIS

Americas

Global total

Bunkers

Projected gas consumption growth to 2040

OECD Non-OECD

China & India: 32% of global

growth

Source: IEA 2017 New Policy Scenario, BCG analysis

14

China: Multiple policy measures driving rapid growth of gas across sectors

Source: CEDIGAZ data (Terminals and Plants), IEA data (Natural gas balance), analyst reports, BCG analysis

Multiple government policies supporting gas Consumption growth across sectors

Coal boiler conversations to gas• Target conversation of 200k coal boiler units to

natural gas to meet local pollution targets

New residential connections• Target to increase penetration from 35% to 85%,

adding >120m new connections

Incentives for CNG/LNG for transport• Discounts provided on prices in gas price formula• Gas consumption of cars targeted to more than

double from 2014 to 2020

5 year plan target gas capacity• Targeting 44GW of new gas-fired capacity …• … Though also targeting 200GW of new coal

capacity

0

50

100

150

200

250

20162011

China consumption (BCM)

209

135

Industry

Power generationOther Buildings

Transport

15

Coal to gas boiler switching in the north drove strong demand growth in 2017

2017 was the target compliance year for Chinese PM2.5 emissions targets

Northern cities critical to meeting targets • "2+26 policy" launched in 2017 targeting

Beijing, Tianjin, and 26 other Northern cities

• Aim to reduce PM2.5 emissions by 15% to meet 2017 targets

Focus on switching coal boiler use and rationalizing inefficient industries• Direct mandates to switch fuel use

enforced on a local level• Industry capacity cut among less efficient

plants (e.g. steel, aluminum)

Source: China NDRC, Press reports, BCG analysis

Clean air policies focused on coal to gas switching in industry & buildings...

... Resulted in dramatic gas consumption growth

0

50

100

150

200

250

192

2013

174

2012

154

2011

135

China natural gas consumption (BCM) ~ 16%

+9.1%

2017

242

2016

209

2015

193

2014

Domestic supply

Pipeline imports

LNG imports

16

Continued potential for high gas demand growthin industry & buildings sectors

Industry & buildings are key drivers of localized pollution in China...

... Driven by a high share of coal consumption

68

45

15

37

20

100

0

40

60

80

Emissions by sector in 2015 (%)

PM2.5

40

NOx

4

SO2

Industry

Buildings

Power

Transport

Other

Source: IEA, BCG analysis

1,500

1,000

500

0

Energy demand by sector in 2015 (Mtoe)

Buildings

450

Industry

1,260

Coal

Oil

Gas

Electricity

Other

Coal: 55% of industry demand & 20% of buildings demand

17

CNG and PNG attractive than alternate fuels Domestic gas competitive to all industrial fuels

India: Regulated pricing structure provides incentives for city gas adoption...

30.0

25.0

20.0

15.0

10.0

5.0

0.0

Maximum gas price for substitution ($ / MMBTU)3

10.0

15.0

Domestic LPG

(Subsidized)

11.6

Domestic LPG (Non-subsidized)

16.7

Commercial LPG

19.5

Transport (Diesel)

19.5

Transport (Petrol)

26.4

5.0

0.0

15.0

10.0

Maximum gas price for substitution ($ / MMBTU)3

2.9

6.3

10.4

Ind. Heating (Lignite)

2.5

Ind. Heating

(Domestic Coal)

3.9

Ind. Heating

(Imported Coal)

5.4

Ind. Heating

(Fuel Oil)

10.211.7

7.6

Fertilizer (Naphtha)

12.2

Petchem (Naphtha)

RLNG(high)2

Domestic gas price

RLNG (low)2

Domestic gas price ceiling

1. CNG and PNG prices based on average end customer prices from analyst reports. Domestic gas price based on $2.89/MMBTU MoPNG mandate + ~$1.5 taxes and transmission charges. 2. RLNG (low) price based on $10.2 / MMBTU total price (including tariffs and margin) + 2% CST. RLNG (high) price based on $10.2 / MMBTU total price + 15% Gujarat VAT on interstate sales. 3. Maximum gas price for substitution ($/ MMBTU) calculated as break-even point for gas usage with respect to the alternate fuel currently used, actual propensity may be lower. Source: MoPNG, Bloomberg

CNG1

PNG1

18

... As a result, city gas sector projected to be a key demand growth driver

0

20

40

60

80

100

BCM

+4%

SpongeIron/Steel

Industrial

CGD

Petchem/Refineries/Internal Cons.

Fertilisers

Power Sector

2029-30

84

2028-29

80

2027-28

76

2026-27

7367

2023-24

65

2022-23

62

2021-22

60

2020-21

58

2019-20

56

2018-19

54

2017-18

52

2025-26

2024-25

70

India gas consumption forecast by sector

Source: Ministry of Petroleum and Natural Gas, BCG analysis

0.5%

1%

5%

9%

7%

4%

CAGR(2016-2030)

19

Agenda

Recent trends in gas demand

Opportunities outside of power generation

Country examples - India and China

Questions for discussion

20

Questions for discussion

Opportunities for greater gas demand growth in industry, buildings, and transport sectors• What sectors provide the greatest opportunity for gas demand growth? • What will it take to accelerate gas demand growth in Asia? • How can industry make the case for gas in non-power sectors?

Key barriers to adoption of gas outside the power sector• How can gas become more cost competitive? • How can governments and industry facilitate gas infrastructure investment outside of

power? • What is needed to convince businesses and consumers to switch to gas?

Lessons learned from examples of fuel switching • What are effective means of advocating gas to governments and the public, outside the

power sector? • Can the experience of Chinese coal boiler switching be replicated elsewhere?• What should the role of regulated prices and/or government incentives (standards,

fiscal measures) be for facilitating fuel switching?

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