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DBS Asian Insights


DBS Group Research • August 2019

Natural Gas & LNG


Trends in Asia
The Volume Game is Strong
DBS Asian Insights
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Natural Gas & LNG


Trends in Asia
The Volume Game is Strong

Suvro SARKAR
suvro@dbs.com

Pei Hwa HO
peihwa@dbs.com

Patricia YEUNG
patricia_yeung@dbs.com

William SIMADIPUTRA
williamsima@dbs.com

QUAH He Wei
hewei@alliancedbs.com

Duladeth BIK
duladethb@th.dbs.com

Sabri HAZARIKA
Emkay Global Research

Singapore Research Team

Produced by:
Asian Insights Office • DBS Group Research

go.dbs.com/research
@dbsinsights
asianinsights@dbs.com

Wen Nan Tan Editor


Martin Tacchi Art Director
DBS Asian Insights
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04 Executive Summary

08 Natural Gas Demand Overview


Gas – An Important Part of Global Energy Demand
Global Energy Mix Forecasts
Global Natural Gas Demand Scenario
Key Risks to Demand Projections

24 Regional Gas Demand & Policy Highlights


China: Supportive Policy Environment
India: Renewed Growth Impetus
Indonesia: Commencement of Gas-fired Power
Plants
Vietnam: Emerging Demand Centre for LNG
Bangladesh: Emerging Demand Centre for LNG

59 LNG Supply Trends


Natural Gas Production Trends
Major Players in LNG Export Market

71 LNG Pricing Trends


Natural Gas Pricing Mechanism
What is the S-Curve Pricing Model?
Gas and LNG Prices Outlook
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Executive Summary
Natural gas demand In our earlier report on Energy Mix 2030, we had concluded that despite a clear shift towards
will be strongest renewables in the future energy mix, from 15% in 2016 to 22% in 2030, we believe overall
amongst fossil fuels demand for the three key fossil fuels – coal, oil, and natural gas – will not peak till 2030, but
as we transition to grow at varying rates. Natural gas is projected to be the fastest growing fossil fuel in future.
a cleaner energy Natural gas, which has seen the strongest demand growth of late (2.8% CAGR over 2000-
environment 2018), will continue to grow at around 2% CAGR to 2030 by our estimates, while demand
for coal and oil will grow at a much slower pace. Most of the top 15 energy consuming
countries are looking at growth in natural gas demand on a 2030 timeframe, mainly as an
intermediate substitute between clean energy and dirtier fuels.

Favourable demand The overall outlook on natural gas demand is highly favourable, against the backdrop of
drivers in place for robust economic growth in developing economies, mounting global natural gas supply
natural gas and supportive government policies. As natural gas prices fall, its cost competitiveness in
relation to other fuels, especially coal, rises as well, promoting fuel switching. This has driven
natural gas demand in Europe in the past, but the next chapter of growth will be in Asia –
the region is expected to account for more than 50% of incremental gas demand to 2030,
bolstered by expeditious growth in China and to a smaller extent, India and other countries
in South and South East Asia. Beyond Asia, the Middle East is another promising market
that is poised to drive the consumption of natural gas.

The growth prospects Natural gas consumption is a mix of domestic production, pipeline imports and LNG imports.
for Liquefied Natural The LNG trade currently accounts for around 11% of global natural gas consumption and
Gas (LNG) appears even growing. We expect global LNG trade to sustain a robust CAGR of around 9% in the
more encouraging next couple of years. This is underpinned by dwindling growth in inter-country pipeline
infrastructure, declining domestic gas production in regions with finite or no pipeline
capacity, and an increase in new markets with LNG regasification capabilities. And with the
IMO2020 fast approaching, we should slowly see greater LNG bunkering demand, as more
offshore vessels switch to the fuel.

Advent of LNG has LNG has enabled countries hampered by limited reserves or deficient indigenous gas
reshaped the global production to gain access to natural gas, when pipeline infrastructure is unfeasible or non-
consumption of natural existent. Unlike pipeline gas, LNG supply is highly flexible and not bounded by logistical
gas, especially in Asia- limitations (though some countries have destination clauses) and can be redirected according
Pacific to regional fluctuations in supply and demand. This quality enables LNG to be particularly
useful in meeting excess demand during the peak seasons. With a volume CAGR of 6.5%
over the past seventeen years, LNG has been the fastest growing fossil fuel, as improved
cost efficiencies on the back of technological advancements and pipeline constraints drove
more countries to embrace the fuel. The Asia-Pacific region, with limited domestic gas
resources and pipeline infrastructure, has been the biggest driver of the LNG trade.
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Fall in gas prices will be Average Henry Hub prices for natural gas in the US have come down to between US$2/
positive for natural gas mmbtu and US$3/mmbtu in the last 3 years, down from highs of around US$9/mmbtu back
and LNG demand in 2008, before the shale revolution. As domestic shale gas production surged in the US, the
fall in domestic spot prices has resulted in increased consumption in the US, and as the US
prepares to export more gas overseas, and even to Asia-Pacific, lower imported LNG prices
should also spur the growth of LNG consumption in major importing markets.

Unavailability of required infrastructure is the only risk to growing LNG trade of required
import and processing infrastructure for LNG in target countries would be the key
impediment for LNG growth in future. We will study the infrastructure requirements for
LNG in more detail in an upcoming report. On the other hand, cross-border pipeline gas
competes directly with LNG in meeting domestic natural gas demand. Thus, availability of
established cross-border gas pipelines would adversely influence LNG demand.

China is the single Chinese demand accounts for almost 40% of total incremental natural gas demand estimates,
largest driver of natural going forward. This is driven by China’s desire to combat domestic environmental pollution
gas and LNG demand levels. China has set a target for natural gas to account for 15% of its energy mix by 2030 (up
in the near to medium from 6-7% currently). The natural gas consumption CAGR in China was a robust 16% from
term 2005 to 2015. Although demand for natural gas slowed down with consumption of just 3%
and 8% in 2015 and 2016 respectively since the collapse of the oil price during 2014, gas
consumption rebounded substantially to double-digit after the Chinese government launched
more supportive policies to stimulate demand. In 2018, total gas consumption reached
282bcm, a growth of 18%. We expect the growth rate to sustain at low-teens for the coming
few years with total gas consumption reaching around 440bcm by 2022. Despite efforts to
increase local gas production and new gas pipelines from Russia, this will also translate into
healthy LNG demand growth trends in excess of 10% CAGR in the near term.

India natural gas India is another emerging driver of natural gas demand in the region. Natural gas demand
demand will rebound growth had slowed down to 2-3% in FY19 vs 6-7% in FY17-18; but we expect to see
over the next few years improvement in demand growth to around 9% CAGR over the next couple of years on
after a tepid FY19 the back of new supplies and demand from City Gas Distribution, refineries and industries.
Power sector demand would also improve on the back of low spot LNG prices. LNG demand
growth from India is likely to be in line with overall gas demand growth.

US exports are a The dramatic increase in US shale gas production and LNG liquefaction capacity enabled
disruptive force in the the country to swiftly climb the ranks to become a global LNG powerhouse, a remarkable
global LNG market feat considering that the US barely exported any LNG before 2016. The country exported
21mt of LNG in 2018, up 600% from 2016, with 6.7% of global market share. Similarly,
liquefaction capacity stood at 21.8mtpa in 2018, up significantly from 5.5mtpa in 2016,
with five LNG terminals turning operational during the period. With the consumption
boost by the global trend in shifting the energy mix towards natural gas to combat carbon
emission, US LNG exports are set show highest growth trends in near term among all
exporting countries.
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Global LNG supplies Despite strong LNG demand trends globally, not only in Asia-Pacific, but also in developed
overwhelm demand in markets like Europe which are seeing fuel switching in the power sector owing to record low
near term LNG prices, we believe LNG supply capacity will be higher than actual demand requirements
in the near term, with LNG supply capacity expected to grow at 11% CAGR over the next two
years compared to 9% CAGR in LNG demand. The supply surge will be driven primarily by the
US, followed closely by Russia, as more export terminals come on stream.

Spot pricing gaining According to data from the International Gas Union (IGU), the proportion of oil-linked LNG
momentum in LNG imports has fallen from about 80+% in 2005 to around 75% in 2016 to around 66% in 2018.
imports 2018, however, has shown the most significant change in LNG imports, driven by the continued
rise in Henry Hub benchmarked US LNG exports, but also by a general rise in spot LNG cargoes.
Despite the rise in LNG imports of around 5.5% in 2018 compared to 2017, oil-indexed LNG
imports actually fell in 2018, as gas-on-gas priced (benchmarked to spot gas indices) contract
cargoes and spot LNG cargoes rose in eminence. Spot LNG cargoes totalled some 126 bcm
in 2018 (30% out of total LNG imports of 416bcm), compared to 92 bcm in 2017 and just
70 bcm in 2016. This has been driven by Asian countries, parts of Europe and emerging LNG
importers. This makes expectations of spot Henry Hub prices important from the Asian context
as well, where there has been historically a dependence on oil price movements.

Henry Hub prices Typically, gas price forecasts for a country level depend on the following factors: i) overall GDP
should remain subdued growth and growth rate of gas consumption, ii) growth rate of domestic gas production, iii)
growth of net imports and iv) cost of domestic production. While natural gas demand in the
US has been holding up and expected to do so in the future as well, it is overwhelmed by the
rise in supply in recent years. With oil prices expected to remain above US$60/bbl, increase in
shale oil production will also boost associated gas production in the US. This means gas storage
levels at end of 2019 are expected to be higher than the number in 2018. Breakeven prices for
new gas fields in the US are also expected to remain below US$3/mmbtu. Hence, we believe
gas prices in 2019/20 will weaken from 2018 levels (around US$2.7-2.8/mmbtu compared to
US$3.1/mmbtu average in 2018).

Asian spot LNG For importing countries, in addition to earlier mentioned factors, prices need to take into
benchmarks should account liquefaction and shipping costs for LNG. But surging LNG supplies into Asia, especially
rebound from current from the US and Russia, among others, have resulted in spot LNG prices falling to levels of
trough, but will remain around US$4.5/mmbtu in June 2019, compared to an average of over US$9/mmbtu in 2018
lower than historical (more than 50% decline). Historically, spot LNG prices in Asia have been highly correlated to
levels international crude oil price levels owing to the high proportion of oil linked pricing contracts.
But with more gas-on-gas pricing (benchmarked to spot gas indices) coming in and price slopes
of oil linked contracts also declining to 11-12% range rather than historical 13-15% range,
prices have adjusted downwards. We believe Asian spot LNG prices will rebound from current
trough levels over the next two years to incentivise infrastructure builds in the region, but will
be still be lower on average than historical levels. Medium term supply pricing estimates into
Asia lead us to forecast Asian spot LNG prices to average around US$6-7/bbl on an annual basis
in the medium to long term.
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Trends and near term forecast of global LNG demand

(In million tonnes) 2016 2017 2018 2019F 2020F


Japan 83.3 84.5 83.2 81.2 79.6
South Korea 33.7 38.6 44.5 42.1 40.2
Taiwan 15.0 16.8 17.1 17.5 18.0
China 26.8 39.5 54.8 62.5 67.3
India 19.2 20.7 23.3 25.8 27.9
Rest of Asia 9.0 12.1 16.2 24.4 30.5
Europe 38.3 46.8 50.1 70.7 83.5
Rest of world 34.1 32.7 27.3 24.6 25.8

Global LNG Demand 259.4 291.7 316.6 348.8 372.8


Growth y-o-y 12.4% 8.5% 10.2% 6.9%
Source: International Gas Union, DBS Bank forecasts

Trends and near term forecast of global LNG supply

In million tonnes 2016 2017 2018 2019F 2020F


Qatar 78.7 76.7 78.7 79.0 79.0
Australia 43.8 56.4 68.6 78.5 80.9
United States 2.9 12.9 21.1 32.0 56.4
Russia 10.8 11.1 18.9 28.6 30.9
Rest of world 122.2 131.3 129.3 135.7 139.6

Global LNG Supply 258.3 288.4 316.5 353.9 386.7


Growth y-o-y 11.6% 9.8% 11.8% 9.3%

Source: International Gas Union, DBS Bank forecasts

LNG supply will overshadow demand in the near term, lowering prices and
boosting LNG demand in the medium term

Source: International Gas Union, DBS Bank forecasts


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Natural Gas Demand


Overview
Gas: An Important Part of Global Energy Demand
Growth in global GDP The world economy continues to grow, driven by increasing prosperity in the developing
will continue to boost world. Global GDP growth is projected to average around 3.25% p.a. to 2030, not too
demand for energy different from growth rates in the past two decades or so. Global output is partly supported
by population growth, with the world population increasing by around 1.2 billion to reach
nearly 8.5 billion people in 2030, a CAGR of just over 1%. But the main driver of economic
growth is increasing productivity (i.e. GDP per person), which accounts for the majority of
global expansion and is expected to lift more than 2.5 billion people out of the low income
group. The increasing prosperity of the developing world is a key force shaping economic
and energy trends over the next 25 years. Over 80% of the expansion in world output
is driven by emerging economies, with China and India accounting for over half of that
expansion. While African countries will likely account for nearly half of the increase in global
population, contribution to world GDP growth will be less than 10% as it continues to be
weighed down by weak productivity.

Growth rates will The expansion in global output and prosperity drives the growth in energy demand, with
however slow down, growth in energy consumption led by fast-growing developing economies. Global energy
compared to previous demand is forecast to grow at around 1.5% CAGR till 2030, as highlighted earlier, but this
decades is a slowdown from over 2% energy demand CAGR in the previous 20 years. The slowing
demand growth is largely due to deceleration in population growth trends, and better energy
efficiency – that is, energy intensity (units of energy used per unit of GDP) falling more quickly
than in the past. Global GDP is projected to grow by 3.25% till 2030, but the increase in
energy consumption is only 1.5%. The other key trend contributing to lower energy intensity
is increasing electrification of final end-user demand, especially in transport and heating.

The world’s energy The world’s energy intensity has been declining on average by 1.4% per year for the
system is highly last two decades. One of the main reasons for this is accelerating electrification of the
sensitive to changes in energy system, as electricity use is more efficient than burning fossil fuels directly with less
energy efficiency heat loss. This effect is accentuated by the move towards renewables – as solar and wind
generation capacity has insignificant associated energy losses. The efficiency trend will be
further boosted by the mainstreaming of electric vehicles, which typically consume less
energy compared to liquid fuel powered vehicles. There are lower efficiency improvements
in aviation, maritime and rail transport sectors as internal combustion engines are likely to
be the mainstay in these sectors in the medium to long term.
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Clear trend towards We expect global energy demand to increase at an average rate of about 1.5% p.a. from
renewables, but 2017-2030, which is premised on the back of a 3.25% p.a. growth in global GDP, offset
fossil fuel demand by improvements in energy efficiency (i.e. declines in energy intensity). Despite a clear shift
to continue growing towards renewables in the energy mix, from 15% in 2016 to 22% in 2030, we believe
nonetheless demand for the three key fossil fuels – coal, oil, and natural gas – will not peak till 2030,
albeit growing at differing rates. Natural gas demand will be strong and in 2030 is expected
to be c.33% higher than 2016’s level, by our estimates, while demand for coal and oil will
grow much slower.

Natural gas demand China is the single largest driver of natural gas demand through to 2030, accounting for
will be strongest almost 40% of total incremental natural gas demand in 2030 as compared to 2016 levels,
amongst fossil fuels, on our estimates. This is driven by China’s desire to combat domestic environmental pollution
driven by Chinese levels. China has set a target for natural gas to account for 15% of its energy mix by 2030
consumption (up from 6-7% currently). Notably, out of the top 15 energy consuming countries, 12 are
looking at growth in natural gas demand on a 2030 timeframe, mainly as an intermediate
substitute between clean energy and dirtier fuels.

Global Energy Mix Forecasts


Change in global energy mix – Change in China’s energy mix – Change in India’s energy mix –
2016 vs. 2030 (DBS expectations) 2016 vs. 2030 (DBS expectations) 2016 vs. 2030 (DBS expectations)

Source: BP data, Government data, DBS Bank forecasts


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Global Natural Gas Demand Scenario


What is the role of natural gas today?

Natural gas is used across a multitude of sectors, but generally, natural gas is largely used
for the generation of electricity (most of which is generally utilised for cooling), heating
(space/water/industrial) purposes, and increasingly, as a feedstock for petrochemicals and
fertilisers. Within the transportation sector, natural gas is used as fuel for natural gas vehicles,
while liquefied natural gas or LNG is used as ship fuel for offshore vessels. Naturally, the
composition of natural gas usage diverges across geographic regions, because of uneven
resource endowment and different economic development status. The charts below
illustrate the differences in composition of natural gas demand in a developed country like
the US vs. a developing country like India.

India natural gas demand US natural gas demand


composition composition

Source: Ministry of Petroleum and Natural Gas, India Source: EIA


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Asia has been a key The consumption of natural gas has grown across all geographic regions, albeit at varying
driver of natural gas degrees, with significantly higher growth from emerging markets. Asia Pacific and the Middle
demand East, which were the fourth and fifth largest consuming regions respectively back in 2000
(accounting for 12% and 8% of global consumption then), are now the world’s second
and fourth largest consuming markets. On the contrary, while North America remained
the leader in natural gas consumption, its share of global consumption reduced to 26% in
2017 from 31% in 2000. Similarly, Europe’s significance to global natural gas demand has
also faded, with its share of global consumption falling to 14% in 2017 from 20% in 2000.

Breakdown of natural gas usage by region

Source: BP Plc (Note - Bcm: billion cubic metres)

Developing countries are now taking a bigger share of the natural gas demand pie

Source: BP Plc
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Drivers of natural gas and LNG demand growth

Natural gas consumption growth has varied considerably across geographies in the past.
The difference primarily reflects the contrast in economic growth rates and improvements in
energy efficiency between regions. Other factors include earlier and more rampant adoption
in developed markets, and more importantly, the proliferation of natural gas infrastructure.
Such infrastructure, which include long distance natural gas pipelines and LNG regasification
terminals, are crucial in providing supply to regions with inadequate domestic natural gas
production, like the Asia Pacific.

Advent of LNG is LNG has allowed countries hampered by limited reserves or deficient indigenous gas
reshaping global production to gain access to natural gas, when pipeline infrastructure is unfeasible or non-
consumption of natural existent. Unlike pipeline gas, LNG supply is highly flexible and not bounded by logistical
gas, especially in Asia- limitations (though some countries have destination clauses) and can be redirected according
Pacific to regional fluctuations in supply and demand. This quality enables LNG to be particularly
useful in meeting additional demand during peak seasons. With a volume CAGR of 6.5%
over the past seventeen years, LNG has been the fastest growing fossil fuel, as improved
cost efficiencies on the back of technological advancements and pipeline constraints has
driven more countries to embrace the fuel. The Asia-Pacific region, with limited domestic
gas resources and pipeline infrastructure, has been the biggest driver of the LNG trade, as
can be seen in the following charts.

LNG’s share of total natural gas supply has nearly doubled from 2000-17

Source: BP Plc
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Asia-Pacific region is by far the largest importer of LNG…

Source: International Gas Union

…contributing >80% of LNG demand growth in the past eight years

Source: International Gas Union


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Summary of factors driving natural gas demand


Driver Description Impact
Natural gas
Economic Similar to other fossil fuels, economic growth is a paramount driver of demand as
growth strong economic activity leads to greater energy consumption.
Energy Continued technological innovation will enable the same functions to be performed
efficiency with less energy.
Weather There are limited short-term alternatives to natural gas as a fuel for heating and
anomalies electricity generation (for cooling purposes) during peak demand periods. Thus,
there are often spikes in demand amid extreme weather patterns.
Fuel switching In the short-run, fuel switching often occurs based on changes in the marginal
cost of consumption, if substitution is practical or if excess capacity permits.
Otherwise, fuel switching could also occur if there are significant unplanned power
plant outages, or if the length of planned power plant outages exceeds initial
expectations.

Over a longer period, capacity constraints become less relevant (as new power plants
can be built), and instead, future expectations of overall cost competitiveness among
fuels, as measured by the levelised cost of energy and levelised avoided cost of
electricity, become more pertinent.
Changes in Growth in indigenous natural gas production has a positive correlation with
indigenous demand, provided it is meaningful enough to slash import dependency – a larger
natural gas proportion of cheaper domestic gas would moderate fuel costs and consequently
production spur the consumption of natural gas.
Gas pipeline The expansion of domestic gas transmission and distribution networks is crucial for
grid and promoting access to gas in households, and commercial and industrial buildings.
storage Similarly, gas storage is essential for managing seasonal fluctuations in gas demand.
infrastructure Hence, augmenting the underlying gas network would translate into higher
demand.
Constructive Governments around the world are increasingly implementing favourable policies
government to spur natural gas consumption. Policies include mandating the consumption of
policies natural gas in certain sectors, carbon pricing schemes, and even subsidies on the
production of natural gas.

Additional factors driving LNG demand
Driver Description Impact
Liquefied natural gas
Cross-country Cross-border pipeline gas compete directly with LNG in meeting domestic natural
gas pipeline gas demand. Thus, an increase in cross-border gas pipelines would adversely
development influence LNG demand.
Infrastructure Countries that are reliant on gas imports, but with low or no pipeline gas capacity
composition have no choice but to use LNG for natural gas consumption. Natural gas demand
in strategic growth in this category of countries will be more constructive in boosting LNG
growth demand.
centres
Development An increase in the number of countries with LNG receiving terminals will propel
of LNG demand for LNG. Additionally, innovative technology like the deployment of
receiving floating, storage and regasification units can reduce the time and capital required to
capabilities gain LNG receiving capabilities, and consequently encourage consumption.

Source: DBS Bank
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Weather plays an important part – gas demand tends to surge in winter, as seen in Japan’s historical LNG import
trends (LHS) and warm summers also lead to higher gas demand, albeit a smaller extent than winter (RHS)

Note: A heating degree day (HDD) is a measurement designed to quantify the demand for energy needed to heat a building.
It is the number of degrees that a day’s average temperature is below a certain temperature, say 65o Fahrenheit (18o
Celsius), which is the temperature below which buildings need to be heated. On the other hand, a cooling degree day (CDD)
is a measurement designed to quantify the demand for energy needed to cool buildings. It is the number of degrees that a
day’s average temperature is above a certain temperature, say 65o Fahrenheit (18o Celsius).
Source: Bloomberg Finance N.V., DBS Bank

Shifting between fuels is another driver – in the US, power generation demand has historically alternated
between coal and gas generation, depending on the spread between gas and coal prices

Note: % on the RHS index illustrates proportion of gas in total gas +coal fired generation; LHS index is a measure of difference
between gas prices and implied coal prices (spread) on a US$/mmbtu basis (US$ per one million British Thermal Units)
Source: EIA, DBS Bank
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Shifting between fuels is another driver – in Japan, incremental natural gas consumption is inversely
proportional to nuclear power generation

Note: million tonnes of oil equivalent


Source: BP Plc, DBS Bank

Policy initiatives are Despite being less capital intensive, natural gas is consistently more cost competitive than
important to grow coal mainly in countries with abundant gas supplies. Fuel cost continues to be a big hurdle in
demand for natural gas countries reliant on gas imports, even though global gas prices have decreased considerably
as it may not always be in recent years. However, gas is slowly catching up as more countries introduce carbon
competitive to coal on pricing policies to tip the balance against coal (gas produces 40%-60% less greenhouse
a LCOE basis emissions compared to coal, depending on the technology of the power plant).

What is the levelised cost of electricity?

According to the EIA, the levelised cost of electricity (LCOE) represents the average revenue
per unit of electricity generated that would be required to recover the costs of building and
operating a generating plant during an assumed financial life and duty cycle.

Key inputs include:


• Capital investment
• Financing costs
• Fuel cost
• Other fixed and variable O&M costs
• Carbon taxes
• State/federal tax credits and incentives
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More countries are adopting carbon pricing initiatives to restrict carbon emissions

Source: World Bank

Coal consumption in the UK plummeted after the introduction of carbon pricing in


2013; on the other hand, natural gas demand stayed resilient

Source: BP Plc

Fall in gas prices will be Average Henry Hub prices for natural gas in the US have come down to between US$2
positive for natural gas per one million British Thermal Units (mmbtu) and US$3/mmbtu in the last 3 years, down
and LNG demand from highs of around US$9/mmbtu back in 2008, before the shale revolution. As domestic
shale gas production surged in the US, the fall in domestic spot prices has resulted in
increased consumption in the US, and as the US prepares to export more gas overseas, and
even to Asia-Pacific, and lower imported LNG prices should also spur the growth of LNG
consumption in major importing markets.
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The shale revolution in the US drove domestic gas prices down substantially and
consequently led to higher consumption

Source: EIA, Bloomberg Finance N.V.

Availability or Cross-border pipeline gas competes directly with LNG in meeting domestic natural gas
unavailability of required demand. Thus, availability of established cross-border gas pipelines would directly influence
infrastructure also has LNG demand. On the other hand, lack of required import and processing infrastructure for
a big bearing on gas LNG in target countries would also be an impediment for LNG growth.
consumption trends
Availability of pipeline infrastructure for US gas imports has restricted LNG demand
growth in Mexico despite rising natural gas consumption

Source: BP Plc
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Growth in LNG demand has been more pronounced in countries with limited or no
pipeline infrastructure

Source: International Gas Union

How is demand for natural gas and LNG likely to change in


the long run?

Broadly speaking, the overall outlook on natural gas demand is highly favourable, against
the backdrop of robust economic growth in developing economies, mounting global
natural gas supply, and supportive government policies. Natural gas is projected to be the
fastest growing fossil fuel, with estimates among oil supermajors, leading consulting firms
and government agencies ranging between 1.5-2.0% in the next five to twenty years. Our
own forecast is at the higher end of this range, at around 2.0% CAGR to 2030. Historical
trends are likely to persist, as developed markets continue to take the back seat and give
way to emerging markets. Asia in particular, is the most crucial chapter to the growth
story – the region is expected to account for more than 50% of incremental gas demand
between 2017-2035, bolstered by strong growth in China and to a slightly smaller extent,
India. Beyond Asia, the Middle East is another promising market that is poised to raise its
consumption of natural gas.

LNG’s growth prospect We expect global demand of the fuel to sustain a robust CAGR of around 9% in the next
appears even more two years. This is underpinned by dwindling growth in inter-country pipeline infrastructure,
encouraging declining gas production in regions with finite or no pipeline capacity, and an increase in new
markets with LNG regasification capabilities. And with IMO2020 fast approaching, we should
slowly see greater LNG bunkering demand, as more offshore vessels switch to the fuel.
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Consensus natural gas demand growth at around 1.5-2.0% over next 15 years

Source: Various companies/ institutions as shown above


LNG import trends (select Asian importers account for almost 70% of total)

Source: International Gas Union

Global LNG demand projections and near term forecasts by geography

(In million tonnes) 2016 2017 2018 2019F 2020F


Japan 83.3 84.5 83.2 79.6 78.8
South Korea 33.7 38.6 44.5 42.1 40.2
Taiwan 15.0 16.8 17.1 17.5 18.0
China 26.8 39.5 54.8 62.5 67.3
India 19.2 20.7 23.3 24.5 26.7
Rest of Asia 9.0 12.1 16.2 20.3 25.4
Europe 38.3 46.8 50.1 75.8 85.3
Rest of world 34.1 32.7 27.3 28.7 30.1
Global LNG demand 259.4 291.7 316.6 351.0 371.8
Growth y-o-y 12.4% 8.5% 10.9% 5.9%
Source: International Gas Union, DBS Bank forecast
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LNG import demand drivers by country/region

Country Summary of critical demand drivers


China • Natural gas consumption has boomed in China with favourable government policies –
conversion of coal fired boilers, and rural coal-to-gas conversion for winter heating, in
addition to industrial and commercial use.
• Domestic supply growth not enough to meet demand growth, widening gap for imports;
future gas production targets also likely to fall behind schedule.
• Growth in China’s LNG demand will be moderated though by rising pipeline imports,
especially from Russia.
India • Massive expansion of City Gas Distribution sector with 136 areas auctioned in recent
bidding rounds; industrial-commercial piped gas demand will be met through imported
LNG
• Fall in spot LNG prices should revive interest from the power sector, significant demand
uptick possible if gas-fired power plants’ PLF improves to 50% from current 23% levels.
• RIL and ONGC’s KG deepwater assets to bring sizeable domestic gas supplies over next few
years, though timing of peak supplies could vary, and necessitate more LNG imports than
currently anticipated.
Japan • The resurgence of nuclear energy is anticipated to erode demand for gas-fired power
generation. However, the Nuclear Regulatory Authority’s (NRA) decision to not extend
deadlines for mandatory anti-terrorism measures could lead to the shutdown of several
operating nuclear reactors and delay the restart of others. This would bolster LNG demand
by around 1-2mtpa.
• Renewable power capacity, which has been growing rapidly owing to Feed-in-Tariffs (FiT) in
Japan, is also expected to displace gas-fired power generation.
• An ageing population and declining industrial activity should put a lid on gas demand
growth in the residential and industrial sectors.
Korea • Despite the government’s plans to boost natural gas consumption in the long-term, LNG
demand in the short run is likely to deteriorate, due to the addition of new nuclear and
coal-fired plants over the next few years.
• Residential and commercial gas demand should continue to climb on the back of enhanced
gas access, driven by the expansion of the domestic gas transmission and distribution
network.
Taiwan • Favourable prospects for LNG demand growth attributable to the government’s plans to
phase out nuclear power generation by 2025.
• However, LNG demand growth is constrained by its limited regasification capacity –
regasification utilization exceeded 120% in 2018.
Europe • LNG demand is primarily supported by the region’s subdued natural gas production, which
declined to a 25-year low in 2018.
• Additionally, concerns over the region’s over-dependency on pipeline gas from Russia will
likely spur a transition into LNG, given the region’s unutilized regasification capacity.
• Current European gas prices should drive demand for gas-fired power generation, as gas
prices have fallen close to the lower bound of the fuel-switching range, indicating that even
the less efficient gas plants are cheaper than the more advanced coal plants.

Source: DBS Bank
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Key Risks to Demand Projections


US-China trade war is the chief near-term risk

The risk of a protracted full-fledged trade war with multiple rounds of tariffs on a wider
array of imports seems more probable now than earlier, given the more hawkish rhetoric
from both sides, and sudden skirmishes on the technology front. In the event of an all-out
trade war, our economists expect that in 2020:

• China’s real GDP growth would fall to 5%

• US GDP growth would ease to 1%

• Global growth to weaken by 0.5-0.75ppt

This may have significant repercussions on global energy demand, especially since China is
anticipated to constitute for the majority of demand growth in our forecast period.

Faster than envisaged rise in renewable energy capacity


could erode natural gas’s market share in electricity
generation

After years of technological improvements, renewable fuel sources are now progressively
able to compete with fossil fuels on an equal footing and are projected to be consistently
more affordable by 2020, according to the International Renewable Energy Agency. While
natural gas is complementary to renewable fuel, which tends to be inherently unreliable
and an intermittent source of energy without further advancements in battery technology,
sustained advances in renewable energy will steadily diminish the significance of natural gas
in power generation. Additionally, the re-emergence of nuclear energy in certain countries
could also pose a threat to natural gas demand.
Global LCOE of renewable energy technologies has come down tremendously over the past 8 years

Source: International Renewable Energy Agency


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Rapid improvements in energy efficiency could curb demand

Although this trend will likely only materialise gradually over our forecast horizon, it should
not be overlooked, given the substantial enhancement in energy efficiency over the last
decade.

Complex supply chain requirements could stifle demand


growth

The LNG industry a is highly complicated and integrated value chain, comprising liquefaction,
shipping, regasification, storage and delivery to end-customers. A disruption to any part of
the equation could hinder demand growth. For example, repeated delays and hiccups in
regasification project developments have historically stifled LNG demand growth. Within
emerging regions, such projects are not only subjected to elevated regulatory uncertainty,
but also to considerable execution risks, as advanced technical capabilities and deep pockets
are a prerequisite for successful completion. In a similar vein, inadequate expansion of LNG
carrier capacity could prevent suppliers from reaching end consumers in a timely manner,
and consequently threaten LNG demand growth.
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Regional Gas Demand &


Policy Highlights
China: Supportive Policy Environment
With an objective to ‘Make the skies blue again’, China has embarked on various policies to
reduce the proportion of dirtier fuels in its energy mix, while boosting the usage of cleaner
fuels. In particular, as part of the 13th Five-Year Energy Development Plan issued in January
2017 by National Development and Reform Commission (NDRC) and National Energy
Administration (NEA), a mandatory target was introduced for the first time for coal, with the
aim of reducing its proportion to the energy mix to below 58% in 2020 (from about 62%
in 2016 and 60% in 2017, so China may very well overshoot the target if this trajectory
continues). Meanwhile, China plans on ramping up usage of natural gas to above 10% by
2020 and above 15% by 2030.

In terms of fossil fuel use, as state-owned enterprises (SOEs) dominate the production of fuels
in China, we can reasonably expect the high-level policy objectives to trickle down to the
company level, giving credence to the targets set.

Summary of China’s key energy mix targets from various papers released by the government

2020 2030 2050


Primary energy consumption (tonnes of coal 5bn 6bn
equivalent)
Non-fossil fuel proportion in energy mix >15% >20% >50%
Non-fossil fuel proportion in power >50%
generation activities
New Energy Demand Should mostly be met by
clean energy
Coal share of energy mix <58%
Natural gas share of energy mix >10% >15%
Energy consumption per unit of GDP Down 15% compared to
2015
Carbon emission per unit of GDP Down 18% compared to
2015
Energy self-sufficiency rate >80%

Source: NDRC
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Natural gas demand has enjoyed strong growth in China

Natural gas consumption CAGR was a robust 16% from 2005 to 2015. Although demand for
natural gas slowed down with consumption growing by just 3% and 8% in 2015 and 2016
respectively since the oil price collapse during 2014, gas consumption growth rebounded
substantially in the double-digits after the Chinese government launched more supportive
policies to stimulate demand. In 2018, total gas consumption grew 18% to reach 282 billion
cubic metres (bcm). We expect the growth rate to sustain at low-teens in the coming few
years with total gas consumption reaching around 440bcm by 2022.

Natural gas consumption in China

Source: CEIC, DBS Bank

Estimated breakdown of natural gas consumption

Source: CEIC, DBS Bank


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We reckon that the major growth driver was industrial sector in the past few years, thanks
to stable economic growth, ongoing urbanisation development and government’s push to
replace coal with gas. We estimate that gas consumption by the industrial and commercial
sectors to total gas consumption will climb from 47% in 2016 to 53% in 2022. While we
expect industrial sector to remain a major growth driver going forward, other sectors, such
as transportation, will also see higher gas penetration as government diversifies gas sources
with an increase in supply.

Demand for natural gas has accelerated since 2H2016 as the Chinese government started
to strictly enforce environmental regulations and issued favourable policies to stimulate
clean energy usage. The NDRC issued the 13th Five Year Plan (FYP) for natural gas, which
includes detailed targets for upstream, midstream and downstream segment of the value
chain. By the end of 2020, natural gas as a proportion of primary energy consumption is
targeted to increase from around 6% in 2015 to 10% in 2020. Moreover, the government
also targets to further increase the proportion to above 15% by 2030. We believe the
targets set are achievable given that the government is determined to boost clean energy
consumption in China.

The “Action Plan on Prevention and Control of Air Pollution” promulgated by the State
Council includes measures to reduce air pollution in China. One of the main targets is to
shut small coal-fired boilers (<10 tonnes/hour) in cities above prefecture-level by 2017 and
replace these with cleaner sources including natural gas. The strong action taken to shut
down or convert coal-fired boilers started in 2H2016, and strong volume growth of 15%
for gas sales volume was achieved in 2017.

After closing down the small sized boilers, the government started to tighten the policy to
shut down or convert coal-fired boilers between 10 steam tonnes/hour (t/h) to 35 steam t/h.
Core cities such as Tianjin and Shijiazhuang have already implemented the tighter policy.
According to the General Administration of Quality Supervision, Inspection and Quarantine
of the PRC, there were more than 460,000 industrial coal-fired boilers in the country in
2015. The proportion of small-medium industrial coal-fired boilers below 35 steam t/h
accounted for 91.7% of the total. Small industrial coal-fired boilers below 10t/h accounted
for 46%, indicating there are plenty of medium sized boilers between 10-35 steam t/h that
would need to be shut down or converted.

Conversion of industrial coal-fired boilers to gas is one of the major growth drivers of
natural gas consumption. The State Council targets to convert 189k steam t/h of industrial
coal-fired boilers by 2020, and this is expected to boost natural gas demand by 42bcm.
This accounts for >25% of the gas volume growth in China during 2015-2020 and is a key
task for the government to tackle in order to achieve its gas consumption target in FYP. The
central government will penalise local governments if they fail to meet the target. Thus,
in order to strengthen policy implementation, local governments have rolled out subsidies
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for industrial/commercial players to conduct the conversion. As a result, most targets to


eliminate coal boilers below 10 steam t/h by 2017 were met. Looking forward, we believe
the pace of coal-fired boilers conversion will continue. In fact, many provinces have issued
additional policies to eliminate coal boilers between 10-35 steam t/h.

Selective coal-boiler conversion subsidies


Province City Subsidy
Gansu Lanzhou • Rmb100,000 per steam tonne for coal boilers above 0.7MW
• Rmb100 per sqm for coal boilers below 0.7MW used by public facilities
(甘肃) (兰州) (such as hospitals, schools, local government buildings)
Henan • Conversion completed before Oct 2018: >Rmb60,000 per steam tonne
• Conversion completed after Oct 2018 but before Oct 2019 : >Rmb40,000
(河南) per steam tonne
Hebei • Disposal only: Rmb30,000 per steam tonne
(河北) • Replacement with clean energy: Rmb80,000 per steam tonne
Jiangsu Suqian • Rmb0.76 per cubic metre of gas consumption for two years
(江苏) (宿迁)
Jilin Changchun • Rmb20,000 per steam tonne for coal-boilers above 20 steam tonnes / hour
(吉林) (长春)
Shandong • Rmb 35,000 / MW for coal-boilers below 100MW
(山东)
Source: NDRC, DBS Bank

More natural gas for Winter heating is believed to be one of the main contributors to air pollution in China. The
winter heating as well Beijing-Tianjin-Hebei region will be the focus as rural residents currently use scattered coal
as a primary heat generation fuel. Scattered coal has the characteristics of low efficiency
and high pollution. The emission intensity of scattered coal is 17.5 times more than coal
used for electricity generation. As a result, rural households accounted for >70% of total
residential coal consumption.

Household coal consumption in China

Source: CEIC
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The Chinese Subsidy schemes have been introduced by local governments to subsidise gas usage and
government has issued installation costs. Given increasing environmental and health awareness, we believe the
multiple related policies subsidy schemes provide sufficient incentives to encourage natural gas usage, despite slightly
to tackle the use of higher costs for rural users. The subsidy scheme will last for three years to help users reduce
scattered coal for costs during the transition period. In addition, the formation of coal-free zones will help to
heating purposes prevent companies from selling and using coal, which should push up local coal prices, and
reduce the attractiveness of a possible switch back to coal. In 4Q2017, the government issued
the “Clean Winter Heating Plan for Northern China” (“北方地区冬季清洁取暖规划”). The
plan targets the clean energy heating rate to reach 70% by 2021, from c.17% in 2016. The
coal-to-gas conversion target for heating should boost gas demand by 23bcm from 2017-
2021 in the core “2+26” cities in Pan Hebei-Tianjin-Beijing area.
Selective rural incentives by local governments

Province City Subsidy


Beijing • 30% equipment cost subsidy - maximum of Rmb12,000 (villages <500
(北京) households) and Rmb24,000 (villages > 500 households)
Tianjin • Municipal Ministry of Finance provided total subsidies of Rmb320m
(天津)
Hebei Handan • Gas equipment: 70% cost subsidy with a maximum of Rmb 2,700
(邯郸) • Gas pipeline discounted installation fee of Rmb2,600
• Natural gas tariff (heating) subsidy: Rmb1 / m3 for maximum Rmb1,200
Hengshui • Installation subsidy: Rmb2,600
(衡水) • Natural gas tariff subsidy : Rmb1.5 / m3
Xingtai • Natural gas tariff subsidy: Rmb1 /m3 with a maximum of Rmb900
(邢台)
Shijiazhuang • Installation and equipment: Rmb3,900
(石家庄) • Natural gas tariff subsidy: Rmb1 / m3 with a maximum of Rmb900

Baoding & • Gas equipment: 70% cost subsidy with a maximum of Rmb 2,700
Langfang • Coal-forbidden zones will no longer adopt tier-pricing system
(保定&廊坊) • Natural gas tariff (heating) subsidy: Rmb1 / m3 for a maximum of 1,200 m3
• Gas pipeline connection subsidy Rmb4,000
Source: NDRC

Rural coal-to-gas conversion can greatly contribute to the increase in gas consumption as
coal consumption for rural households is higher than urban households due to the lack
of central heating systems. We estimate there are c.62m rural households in the Beijing-
Tianjin-Hebei areas, which could boost natural gas demand by 31.2bcm assuming 40%
convert to gas heating. We expect rural coal-to-gas conversion to account for >8% of
the increase in natural gas consumption during 2015-2020. Furthermore, we believe
the increasing formation and expansion of coal-free zones are part of the measures to
ensure that policies are successfully executed. The establishment of coal-free zones prevent
companies or residents from selling or using coal.
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Regulating operators for healthy development of gas sector

In Oct 2016, the NDRC issued a document on the trial implementation of natural gas pipeline
transmission pricing scheme. The return on asset for inter-provincial pipelines (long distance)
is set at 8% based on a minimum utilisation rate of 75%, which means that a utilisation rate
below 75% will have lower returns. The tariff mechanism is set for the pipeline company and
will be adjusted every three years. Local governments have started to limit the return on intra-
provincial (medium to short) pipeline transmission recently, by lowering the transmission fee.

In addition, the NDRC released regulatory guidance opinion on gas distribution prices in June
2016 to clarify its stance and removed industry concerns of a potential steep cut in distribution
margins. According to the guidance opinion, the return on attributable asset (ROA) for city
gas distribution business cannot exceed 7%. This will have a negative impact on projects with
high dollar margin and ROA >7%, though there are not many such projects with high returns.
The average ROA for major gas distributors in China ranges from 3-5%. Therefore, we do not
expect a significant impact on earnings growth for gas distributors.

Increasing focus on LNG as domestic gas supply hinges on shale

Increasing LNG imports Domestic production of natural gas has been up by ~7% each year in the past decade, compared
with just 4% in the US. However, the increase in gas supply is still not sufficient to satisfy the
robust demand which is growing at ~13% each year and the gap has been filled by imported
LNG and pipeline gas. In 2018, domestic production was responsible for only ~55% of total
supply while imported LNG and pipeline gas accounted for ~27% and 18% respectively.

We expect the imported LNG ratio will nudge up further in 2019 with rising demand for
natural gas in China. With Power of Siberia, a new natural gas pipeline from Russia to China,
coming onstream by the end of 2019, supply of piped gas will increase. Nevertheless, we
believe the percentage of imported LNG will account for c.30% of total supply in the next
few years, up from just 12% in 2011. As domestic production catches up over time, the
percentage of domestic supply to total supply should rise.
Declining percentage of domestic production with increasing reliance on imports to meet demand

Source: Wind, DBS Bank


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China domestic gas The oil and gas upstream sector in China is highly concentrated, and the gas market is no
production is highly exception. The big three - Petrochina, Sinopec and CNOOC - account for ~80% of domestic
concentrated gas production in China. This is much higher than the US, as the top three largest producers
in aggregate are only responsible for ~10% domestic supply.

Shale contribution is China produced ~155.1 bcm of gas domestically in 2018, of which 56% was by Petrochina,
picking up; growing 18% by Sinopec and 6% by CNOOC. The bulk of the of domestic gas production came from
importance as source conventional natural gas sources, which represent ~84% of total gas production. Shale gas
of gas supply in China is a relatively new source of supply that only came about in 2012 and has since grown to
account for ~8% share of domestic gas production and should remain the key growth driver
ahead. The remaining 8% of gas was from coalbed methane and synthetic natural gas.

Breakdown of gas production – by producer (2018) Breakdown of gas production – by product (2018)

Source: CEIC, DBS Bank Source: National Bureau of Statistics, NDRC

Breakdown of gas production

Source: National Bureau of Statistics, DBS Bank


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Ambitious targets for In the 13th Five Year Plan, China’s aim is to produce 30 bcm of shale gas a year by 2020,
shale gas production representing 59% CAGR from output of 11.8 bcm in 2018. This seems rather ambitious and
probably only around half of the target would be realised based on existing production plans
of key producers - CNPC (parent of Petrochina) and Sinopec - which play a leading role in
driving gas production growth in China. Looking beyond 2020, China has set a longer-term
goal of producing 80-100 bcm of shale gas in 2030, which implies 17-20% CAGR between
2018-2030.

CNPC has been aggressively expanding shale gas capacity, in line with the national policy of
exploiting shale reserves as a cleaner energy source to replace coal. It pumped 4.27 bcm of
shale gas (+40% yoy) in the southwestern province of Sichuan in 2018 and target to produce
12 bcm of shale gas annually by 2020, rising to 22 bcm of shale gas by 2025, and 42 bcm by
2030. Sinopec’s Fuling field in Chongqing in Southwest China is the largest single gas field
in China, producing ~6 bcm in 2018. It aims to lift its domestic shale gas production by two-
thirds to reach 10 bcm by 2020.

China has world’s China has the 10th largest natural gas reserves in the world (~5,440 bcm as of early 2018
largest shale gas based on EIA data) but the world’s largest for shale gas reserves (~1,000 bcm as of early
reserves, but extractions 2018 based on China Mineral Resource Report 2018), largely concentrated in Sichuan and
are geologically Chongqing. Currently, it is the third largest shale gas producer, after the US and Canada.
challenging
While shale is expected to be the main growth driver of domestic gas supply, it might be
challenging to repeat the shale gas boom in the US. Shale drilling in China faces hurdles as
shale formations are located in mountainous terrains, where infrastructure is non-existent,
well drilling costs are higher, regulatory support is limited and water supplies are scarce. Since
drilling began around 2010, many oil majors have quit due to poor prospects. The latest one
was BP who had reportedly exited two shale gas production sharing contracts with CNPC in
Sichuan province due to poor drilling results.

Hence, Chinese gas production plan will likely fall behind schedule and will continue to rely
heavily on gas imports to fill the gap in the near to medium term.

Lower gas price to stimulate demand

More measures to City gate price is currently regulated by the government but upward adjustment of 20%
lower gas price and negotiation between suppliers and users are allowed as government moves towards
marketisation of natural gas price. Deregulated sources of supply (offshore conventional gas,
unconventional gas and imported LNG) are not bound by this price regulation. After several
rounds of reduction in city gate prices, we reckon natural gas price is more competitive than
other alternative fuels, except coal. Nevertheless, we believe there is still room for natural gas
price to fall further.

For instance, the formation of a national pipeline company can increase connectivity between
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suppliers and buyers and lower transmission cost. Pipeline transmission fees is one of the
major cost components of gas distributors and is estimated to account for c.30% of the
selling price. Based on our calculations, a 15% reduction in intra-provincial tariffs will lead to
c. Rmb0.03-0.06 reduction in city-gate prices.

The formation of a national pipeline company will also allow a higher volume of transactions
to be traded on natural gas exchanges. Although natural gas transactions on the Shanghai
Petroleum and Natural Gas Exchange reached a record high at 60.46bcm last year, that
for LNG stood at just 4.5m cubic metres. With increase in supply in LNG and higher LNG
transaction volume being traded on the exchanges, we see there is potential for natural gas
prices to fall in the long term.

Alternative fuel vs natural gas price

Source: CEIC, DBS Bank


Recent policies on city gas price and transmission fee

Date Policy
April 2015 • Unification of city gate price of incremental and existing volume for non-residential users
• Reduction of city gate price for incremental volume by Rmb0.44/m3
• Increase of city gate price of existing volume by Rmb0.04/m3
Nov 2015 • Reduction of the maximum city gate price for non-residential users by Rmb0.70/m3
• Replacement of ceiling city gate price with benchmark price set i.e. negotiation between
suppliers and buyers allowed
• Allowed upward adjustment of 20% in benchmark price
Aug 2016 • Installation and equipment: Rmb3,900
• Natural gas tariff subsidy: Rmb1 / m3 with a maximum of Rmb900
• Request all provincial governments to lower intra-provincial transmission fee
Sept 2017 • Reduction of benchmark city gate price for non-residential users by Rmb0.10/m3
May 2018 • Reduction of benchmark city gate price for non-residential users by Rmb0.10/m3
June 2018 • Unification of city gate price for residential and non-residential users
April 2019 • Reduction of intra-province transmission fee
• Reduction of benchmark city gate price for non-residential users by Rmb0.20/m3
Source: NDRC

Source: NDRC
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Natural gas price in China

City gate price

Medium
Long distance
-short distance End
Upstream ex- pipeline Distribution
pipeline selling
plant price transmission margin
transmission price
tariff
tariff

Source: NDRC, DBS Bank

Gas power plants The LCOE for gas power plants in China consists of 62% fuel cost, 7% capex, 17% O&M
will also be more cost, 7% finance cost and 7% tax. Therefore, the LCOE is largely dependent on the upstream
competitive natural gas price. Since the natural gas price in China is relatively high compared to some
international peers in the US and Europe, its LCOE is also comparatively higher.

Prior to the oil price decline in 2014 and city gas price cut in 2015, the LCOE of gas power
projects was much less competitive compared to coal-fired plants. The city gate price was
revised down by Rmb0.7/m3 in 2015 and another Rmb0.1/m3 in 2017, which has helped to
drive down LCOE by c.Rmb0.1 / kwh to c.Rmb0.76/kwh. As the Chinese government seeks to
lower gas price by cutting midstream transmission fees and restrict distribution margins, gas
price is expected to remain at a low level, which is positive for the sector.

LCOE of gas power plants – Global

Source: BNEF, DBS Bank


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Expansion of storage As shown in the following chart, LNG prices started to turn north after Chinese government’s
facilities to curtail gas stronger push to replace coal with gas in 2H2016 which led to higher demand. However,
price volatility robust demand, coupled with a temporary reduction in piped gas supply, caused LNG prices
to shoot up substantially to an unreasonable level during the peak season of 2017. Such a
huge volatility in LNG prices has highlighted that peak shaving of gas consumption remains
inadequate due to low gas storage capacity. In fact, China’s gas storage facilities accounted
for just 3% of total consumption in 2018, compared with the international level of 12-15%.
This weakness has caused instability in gas supply, and will negatively affect the long term
development of the gas sector.

LNG price (China)

Source: CEIC

In May 2018, the Chinese government issued an “Opinion on the acceleration on the
construction of natural gas storage facilities” (“关于加快储气设施建设和完善储气调峰辅助
服务市场机制的意见”). This document requests gas suppliers to have storage capability of at
least 10% of annual gas sales volume while city gas distributors to have at least 5% by 2020.

The first private company to operate gas storage facilities was Hong Kong & China Gas (3
HK). Its storage facilities are located in Jintan, Jiangsu and the first phase was operational in
1Q2018. CNPC’s gas storage facilities in Guxinzhuang, Heibei came on stream in September
2018. Coupled with storage facilities from Sinopec, there were at least 26 facilities with peak
shaving capability of 13bcm as of the end of 2018. These facilities, coupled with normalisation
in the supply of piped gas, had been successful in lowering LNG price volatility in 2018. We
expect less volatility in LNG prices going forward as more storage facilities are put in place.
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India: Renewed Growth Impetus


Natural gas demand growth slowed down to 2-3% in FY19 vs 6-7% in FY17-18; but to
recover going forward on the back of new supplies and demand from City Gas Distribution
(CGD), refineries and industries. Indian gas demand growth slowed down to 2-3% in FY19
on the back of flat domestic gas supplies and 5% increase in LNG volumes. Most major
domestic sources barring ONGC’s nominated blocks witnessed annual degrowth in output
due to natural decline. LNG volumes witnessed increase due to jump in imports at Hazira LNG
terminal while Dabhol saw reduction and Dahej and Kochi slightly up and down respectively.

Indian gas consumption and outlook

Source: Government data, Emkay Research

The demand growth came from city gas distribution (CGD) and other sectors while petchem
witnessed decline. LNG demand from refineries rose as Reliance Industries Limited (RIL)
took volumes for its Jamnagar gas cracker imported through Hazira terminal. Overall gas
consumption growth slowed down from 6-7% yoy in FY18 with deceleration in both domestic
supplies and LNG in FY19.

We expect FY20 to see improvement in demand growth to 7-8% on the back of a couple
of new fertilizer plants commissioning progressively while CGD is expected to maintain
its momentum with both existing areas growing and new areas adding up. Power sector
demand would also improve on the back of low spot LNG prices. Supply would be mostly LNG
driven with new terminals like Ennore, Mundra and Jaigarh ramping up and commissioning
while Dahej also expands by 17% and Kochi getting connected to Mangalore. We estimate
domestic gas output to rise by 2%.

In FY21, we believe demand would accelerate to double digit growth (10-11%) as GAIL’s key
eastern grid Jagdishpur Haldia Bokaro Dhamra pipeline (JHBDPL) further extends whereas RIL-
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BP’s KG-D6 satellite and ONGC’s KG-DWN-98/2 deepwater fields start producing and newly
opened LNG terminals ramp up.

Gas demand breakdown by sector (FY19) Gas demand breakdown by sector (FY21E)

Source: Government data, Emkay Research

We expect demand side to be met by higher consumption from CGD as 136 new geographical
areas recently auctioned by the Petroleum and Natural Gas Regulatory Board (PNGRB) starts
to operationalize. Besides refinery demand should also grow as BS VI implementation lift
hydrogen requirements on the back of capacity expansion. New fertilizer capacities would
further ramp up. We estimate the supply side to see 11% growth from domestic sources and
8% in LNG. New terminals like Jaigarh, Mundra and Ennore should be able to operate at 20-
30% capacity utilization while Kochi would see improvement to almost 30% utilization by
FY21 due to Mangalore access. Dahej is likely to remain above 100% while Hazira would fall
to 50% due to RIL’s volume going away due to petcoke gasifier commissioning by FY20-21.

Expect natural demand The gas demand in India is dependent on 5-6 key sectors namely fertilizer, power, CGD,
growth from most refineries, petrochemicals and other industries. Expansion of these sectors would lead to
sectors overall increase in gas consumption. Most of these sectors are able to hold on to their own
while fertilizer is also manned by a systematic subsidy mechanism which takes care of LNG
price volatility. Regulatory and policy support is limited to push towards expansion of capacity
and volume of these industries. However, power sector would require special assistance as in
the recent past, gas based power would cost 2-3x coal based power under a normalized LNG
pricing, though at current low spot LNG rates, the economics is much better and revival of
stranded and suboptimal power plants are being taken up by the Government.

Fertilizer sector demand Fertilizer capacity in the country is expected to increase with new plants like Matix Durgapur
should see some and revival of sick units in Ramagundam, Gorakhpur, Barauni and Sindri. All these together
growth from new units would amount to over 6mmtpa of additional fertilizer output and 4-4.5bcm of gas demand
per year. Besides these, extension of gas pipeline to Mangalore from Kochi LNG terminal and
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Ennore terminal’s commissioning would result in conversion of liquid fuel based units like
MCFL, MFL and SPIC to gas resulting in another ~1bcm of additional demand per year.

City Gas Distribution The CGD sector is a major area of growth as existing large markets like Delhi, and Gujarat are
(CGD) sector witnessing witnessing double digit volume growth while other smaller areas are also ramping up rapidly.
strong growth Besides these, 136 new areas have been auctioned off recently and we estimate total volume
potential of 22-25bcm cumulatively in 10 years.

CGD segmental volumes

Note: CNG – compressed natural gas used in vehicles, PNG – piped natural gas used in domestic, industrial, commercial purposes
Source: Government data, Emkay Research

CGD volume performance of top players

Note: GGL – Gujarat Gas Limited, IGL – Indraprastha Gas Limited, MGL – Mahanagar Gas Limited, andAGL – Adani Gas Limited
Source: Company data, Emkay Research
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The Central Government and regulator PNGRB have been proactive in the process of
allotment though local agency support in terms of statutory approvals is necessary to quickly
commercialize these areas. Ban on polluting industrial fuels like coal, coke and fuel oil by
courts, tribunals and Pollution Control Boards (PCBs) have also led to spike in demand in
areas like Delhi and Morbi and potentially more such orders can accelerate growth of CGD
volumes. Worsening pollution levels can lead to vehicles particularly public utilities compulsorily
mandated to convert to CNG as already implemented in Delhi by Courts, tribunals (NGT) and
EPCA/PCB.

Massive expansion in The CGD sector has witnessed rapid growth as policy and regulatory thrust increased in
CGD with 136 areas order to promote gas usage as an economical and clean fuel. The central as well as state
auctioned in recent governments and Court judgments have provided incentives such as:
bidding rounds
1. 100% cheap domestic gas allocated by Govt to vehicular Compressed Natural Gas (CNG)
and domestic Piped Natural Gas (PNG) sectors keeping costs low.

2. Taxation in CNG is much lower compared to 95% for petrol and 63% for diesel. Union
excise is 14.4% while state Value Added Tax (VAT) ranges from 0%-15%.

3. No marketing margin or retail pricing control. Mostly free from Government intervention
unlike petrol/diesel which see some possible interference during sensitive times like
elections.

4. Government has supported and pushed for new city/area allocation through PNGRB.
It has set a target to connect 10m households to PNG by CY20. It is also focusing in
development of gas grid by providing capital subsidy to pipeline networks in the east and
possibly other frontier areas.

5. Ban on polluting fuels like fuel oil and petcoke in Delhi NCR and coal in Morbi (Gujarat)
by National Green Tribunal has led to significant industrial conversion to gas, driving
volumes of players like Indraprastha Gas Limited (IGL) and Gujarat Gas. In Delhi, Courts
had already ordered all public and commercial vehicles to convert to CNG.

More incentives now Post appointment of new members at PNGRB, the regulator changed CGD bidding parameters
and provided more incentives and overhauls such as extending marketing exclusivity from
earlier 5 to 8+2 years, giving more weightage to experienced players, a work program
and physical target based bidding process, flooring network and CNG transport charge at
Rs30/mmbtu and Rs2/kg respectively with annual inflation based escalation and capping
Performance Bank Guarantee (PBG) at Rs500m. Subsequently, the 9th and 10th Round of
bidding was held last year and almost 136 geographical areas (GA) were allotted to various
entities including established players like IGL, Gujarat Gas and GAIL Gas along with new and
growing companies like Adani Gas, Torrent Gas, AG&P and the Oil Marketing Companies
(OMCs).
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CGD outlook post recent rounds of PNGRB bidding

Till CY17 In 9th Round In 10th Round By FY29E


Geographical Areas (Awarded) 91 86 50 227
Gas Consumed (bcm)** 8 40
Domestic 4 20
LNG 4 20
Area Coverage 11% 29% 18% 50%
Population Coverage 19% 24% 24% 70%
Domestic Customers (mn) (Target) 4.2 15.3 20.3
CNG Outlets (Target) 1349 3627 3578
Pipeline (mn km) (Target) 0.14 0.10 0.06

Source: Government data, Emkay Research; ** FY29E is Emkay estimate

Prior to PNGRB (before CY09), 35 CGD areas were allotted directly to players by the Government
while post PNGRB from CY09 till CY17, 56 areas were awarded out of 106 offered through
8 rounds of bidding. Before the formation of the current new Board, CGD sector in India
comprised 11% of country’s area and 19% of population totaling 91 areas mostly in northern
and western India with 4.2mn domestic PNG connections, 1,349 CNG outlets, 3.1mn CNG
vehicles, 26,000 commercial customers and 7,500 industrial users. The sector was consuming
around 8bcm of gas almost equally divided between CNG-domestic PNG for which domestic
gas is allocated and industrial-commercial PNG which is mostly LNG fed.

High incremental The 9th Round was launched in CY18 with 86 GAs on offer comprising 174 districts (18
growth in last two part districts) spread over 22 states and UTs. All areas were awarded with Adani, IOCL, BPCL
rounds of bidding and Torrent being major winners with double digit wins. The 10th Round was completed
towards the second half of FY19 with 50 GAs in 124 districts (12 part) spread over 14 states/
UTs. Major winners in this round were IOCL, HPCL, AG&P and Gujarat Gas. The latest two
rounds increased the area/population coverage to 53%/70% while targeting 36mn domestic
customers, 7,200 CNG outlets and 0.16mn km of steel/PE pipelines in the next 10 years.

Huge gas volume We see that even assuming a conservative 5% volume CAGR in existing 91 areas for next
growth potential from 10 years and building 0.5mmscmd/area volume in each of the 136 new areas by the 10th
CGD sector over next year of operation, CGD sector is estimated to consume around 40bcm of gas per year by
10 years end of next 10 years which is 5x of CY17 consumption level and represents 16% volume
CAGR over the next 10 years. Hence, new areas hold significant potential and as the latest
rounds have introduced penalties if physical targets are not met, entities are expected to
be aggressive in capex and growth plans.

PNGRB recently has released a concept paper as a roadmap to bring competition in


existing areas which are past their marketing exclusivity. While bringing competition is
prudent due to current entities operating as monopolies, we believe the process would
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take a couple of years as PNGRB has to be empowered first to fix third party network
and CNG transportation rates through a change in the Act, besides changing the gas
allocation policy to include new entrants in the cheap domestic gas supply mix. Further
data collection pertaining to pipeline capacity and financial parameters would also take
time. On the back of major barriers of entry like high land prices to set up CNG outlets,
PNG customers being inelastic and overall first mover advantage of the incumbent, it will
be challenging for a new entity to compete, though industrial PNG and bulk CNG (bus
depots, taxi fleet owners etc) segments may face price and value based competition as
no major distribution capex would be required. Even in retail CNG, there is threat from
players like OMCs especially PSUs who have let out part of their autofuel outlet sites to
CNG players. On the back of competition, long term growth outlook as well as margin
and pricing power could be threatened though it is difficult to estimate a financial impact.

Refineries sector will Currently 6 PSU refineries in western India use LNG for internal fuel requirements and
also help gas demand hydrogen production while private for them is uncertain due to internal projects like
petcoke gasification and coal based units which supplies cheaper energy. With expansion
of the eastern grid (JHBDPL) and Kochi Mangalore lines coupled with Ennore terminal,
refineries such as Barauni, Haldia, Paradip, Mangalore and Chennai would also get access
to gas thereby leading to higher demand. Even post this Vizag, Bhatinda, Bina and a
couple of northeastern refineries would still need to be added to the grid, hence further
uptick in gas consumption is likely from current levels of 7bcm per year.

Implementation of BS VI from April 1, 2019 would lead to higher gas requirement per
refinery as hydrogen production has to be raised for sulfur removal. Hence, current
adjusted run-rate (net of RIL and Nayara) of 0.18mmscmd gas requirement/mmtpa of
refining capacity would rise further. Most of the existing refineries have expansion plans
while a few grassroot refineries are also expected to come up before the mid of next
decade. Hence, gas demand from refineries would be boosted from the above drivers.
We estimate a 17% increase in gas demand from refineries in FY20 due to addition
of MRPL, CPCL and IOCL refineries to the grid though FY21 would see offset from RIL
as it commissions the petcoke gasification project, expected by 2HFY20. Refinery gas
economics depend on liquid fuel vs LNG pricing though in India due to pollution concern,
refinery gas usage is becoming less and less elastic to prices, particularly for the PSUs.

Petchem & other Demand from these sectors would keep growing as pipelines connect these industries
sectors will also drive to gas sources and on the back of favorable gas to alternate fuel economics. Ban on
demand polluting fuels can lead to jump in gas demand. Public sector OMCs are planning to
expand petchem capacities significantly with new units adjacent to refinery complexes
both in existing as well as part of new integrated green-field refineries (Barmer and West
Coast). These units are likely to use both naphtha and gas. GAIL has also announced a
new plant in Maharashtra, which like its existing unit in Pata, is expected to run on gas.
Further improving performance in plants like ONGC Petro-additions Limited (OpaL) and
ONGC Mangalore Petrochemicals Limited (OMPL) can also lead to higher gas off-take.
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Power sector demand The power sector is an option value for gas demand in the country. We note that 60 gas
is the wild card based power plants in India has 24.6 GW capacity. Many of these plants came up during
RIL’s first phase of KG-D6 development wherein initial estimates suggested 60-80mmscmd
(22-29bcm per year) of gas production. As KG-D6 ramped up from FY09 to FY11, power
sector’s gas consumption rose from 12-13bcm to over 25bcm. However, with KG-D6 field
witnessing natural decline post FY11 peak, power sector offtake also reduced drastically
back to the 10-11bcm levels as LNG prices were too high during this period, though some
support came later from the Power System Development Fund (PSDF) scheme in FY16-17,
and LNG demand from the sector went up slightly after that owing to peaking power
requirements and overall consumption stabilized at around 12bcm in FY18-19.

Gas consumption by Indian power sector

Source: Government data, Emkay Research

Gas power plants’ PLFs Currently based on our 60 listed plants (a few more we have excluded based on low
are low currently capacity, permanent closure and liquid fuel usage), gross capacity of 24.6 GW operated
at just 23% PLF in FY19 with over 20 plants (10 GW+) at 0-10% PLF. Gas consumed by all
these plants in FY19 was 10-11bcm. Of these, situation in South and particularly Andhra
Pradesh was worst with just 14% PLF while West (Gujarat, Maharashtra and Rajasthan)
was somewhat better at 22% but still weak. Most of these plants run the risk of becoming
Non Performing Assets (NPAs) and hence their revival is of utmost importance.

Revival not easy In FY16-17, the Power System Development Fund (PSDF) was set up to revive stranded and
suboptimal power plants so as to service their debt obligation while keeping ROEs at zero. The
PSDF pegged financial support of Rs75bn for FY16 and FY17 along with haircuts by central
and state governments through tax exemptions and reduction in transportation tariffs and
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marketing margins by pipeline companies and bulk gas marketers. The underlying intention
was that power cost to discoms would not be more than Rs4.7/3.39/kWh in case of stranded/
suboptimal (domestic gas) plants. However, the scheme ended at the end of FY17, as alternate
sources of power became cheaper, which led to discoms not signing PPAs and waivers not
being extended by certain states.

31 plants totaling 14.3 GW capacity were supported by the scheme with four phases of
auctions in May’2015/ Sep’2015/ Mar’2016/ Sep’2016, though actual gas drawn was much
lower at 5.5/7.8/4.6/3.4mmscmd and so was actual power units generated at 3.7/7.2/4.1/3.0
Billion units and actual subsidy paid at Rs5.0/7.9/(1.2)/2.2bn. With renewable energy becoming
cheaper, the case for promoting gas as clean energy also weakened.

Power cost versus LNG prices with and without incentives/exemptions

Price Buildup of Spot LNG for Power


Spot LNG Units Raw Incentivised
Import Price $/mmbtu 4.5 4.5
Currency Rs./$ 68.5 68.5
Import Price Rs./mmbtu 308 308
Regasification Charge Rs./mmbtu 49.3 49.3
Ex-Terminal Price Rs./mmbtu 358 358
Terminal State VAT % 15.0% 0.0%
Marketing Margin Rs./mmbtu 13.7 3.4
Pipeline Tariff Rs./mmbtu 34.0 17.0
Delivered Price Rs./mmbtu 459 378
Other Local Taxes % 0% 0%
Final Price to Customer $/mmbtu 6.7 5.5

Power Tariff Computation


Gas Based Plant-50% PLF Units Raw Incentivised
Delivered Gas Price $/mmbtu 6.7 5.5
Gas Price Rs./scm 18.2 15.0
Power Variable Cost Rs./kwh 3.1 2.6
Power Fixed Cost Rs./kwh 1.2 1.2
Total Power Tariff Rs./kwh 4.3 3.8
Price of Power Fixed Rs./kwh 4.0 4.0
Subsidy by Govt Rs./kwh 0.3 -0.2

Source: Emkay Research
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However, talks have restarted on reviving gas based power plants post a Standing Committee’s
report in January 2019 with Finance Minister also affirming the same in the latest Union
Budget. As per media reports, the Government is working on a Rs180bn subsidy scheme to
supply LNG at discounted rate to gas based power plants with different options like providing
subsidy to the gas aggregator or discoms directly. With spot LNG prices at USD4-5/mmbtu,
subsidy burden may actually be nil to very less, with or without incentives and exemptions and
fixed cost only covering interest servicing and O&M.

While upside negative risk from LNG prices exist, a proper mechanism can be used to pool the
same with domestic gas, especially when KG basin gas is coming in a couple of years. With
share of renewables in the grid going up, grid imbalances have become common, hence to
meet the shortfall quickly and also to cover peaking power requirements, gas based power
plants are a viable option. If the Government is able to secure long term LNG at a fixed
reasonable price, longer term viability of these plants would improve significantly.

Upside potential exists Against current 23% PLF requiring around 10-11bcm of gas, we estimate 50/75% PLF to
from power sector result in demand of gas from power sector to rise to 23bcm/35bcm per year. At 50% PLF,
south based power plants would require around 4+bcm of incremental gas, which can be
supplied by new KG basin deepwater assets of RIL-BP and ONGC at a cheaper rate due to
lower pipeline tariffs in the home state of Andhra Pradesh and neighboring Tamil Nadu.

Compared to coal, gas based power would remain costlier with potential LNG price volatility
a major risk factor, but we believe the Government may not be comparing the same going
forward and build a case for gas based power plants independently as a supplier to peaking
power demand and sudden demand from grid imbalances, besides attaining the objective of
not letting these massive existing investments turn into NPAs. The power sector can lead to
sizeable growth in gas demand and would be beneficial for pipeline operators (Gujarat State
Petronet, GAIL) and LNG players (Petronet LNG).

Gas supply trends in India

RIL and ONGC’s KG India’s domestic gas production is expected to grow significantly starting CY20 primarily from
deepwater assets to RIL-BP and ONGC’s deepwater assets in KG basin. RIL-BP is investing USD5bn to operationalize
bring sizeable domestic three projects in KG-D6 block where existing production has almost reached zero. 3tcf of gas
gas supplies over time resources are being developed and the company has guided almost 30mmscmd (11bcm per
year) of volumes at peak levels from them cumulatively by FY23 end. The first gas from R-Series
field is scheduled to start from mid Q2FY21 while the Satellites and MJ1 will successively
commission in the next 2 years. ONGC’s KG-DWN-98/2 (Cluster 2) is being developed at
USD4bn+ capex and a peak gas output of 15mmscmd (5.5bcm per year) is expected by FY22
with first gas likely to start from Q4FY20 and ramping up thereafter. ONGC has plans to
develop more deepwater clusters in KG.

Besides these two major assets, incremental 3-4mmscmd (1.0-1.5bcm per year) output
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is expected to come from Vedanta’s Rajasthan block in the next 1-2 years while Coal Bed
Methane (CBM) output should also grow. ONGC has guided growth in nominated blocks to
continue for 1-2 years as few recently developed assets ramp up. In total almost 50mmscmd
(~18bcm per year) of new domestic gas is expected to come in the next 3-4 years. In our
2-year forecast period, we build domestic gas supplies to increase from around 26bcm in
FY19 to around 31bcm in FY21 with average output of 5/3mmscmd (total 3bcm) from RIL-
BP/ONGC’s KG asset. However, by FY23, another 30mmscmd (11bcm per year) supplies can
come as the KG deepwaters ramp up though we believe actual numbers could be lower
than the guidance given, as peak output may get hit in different years.

But multiple new Among LNG terminals, FY19 saw Mundra and Ennore terminal get ready. While Ennore
terminals will also ramp was commercialized by the fiscal end, Mundra faced delays in signing of sub concession
up LNG volumes agreement with the port and clearance of terms between partners. Hence, the terminal is yet
to start commercial operations though same is expected soon. FY20 would see the 4mtpa
Jaigarh FSRU commercialize while Jafrabad would also start shortly thereafter by mid CY20.
Beyond this, in FY23-24, post Dabhol’s breakwater construction, effective capacity would
rise to 5mtpa and new terminals like Dhamra and Chhara would also get commissioned.

Against 39mtpa LNG capacity now, all these terminals and capacity expansions would
add another 24mtpa, thereby taking import capacity to 63-64mmtpa by CY23-24. We
expect new terminals to clock 20-30% utilization based on our demand projections though
Jafrabad has 90% of capacity being tied up. PLNG’s Dahej terminal is expected to continue
operating at 100%+ capacity utilization on the back of its strategic location, cheap tariff,
tied up capacity and overall LNG demand growth. We estimate Kochi terminal utilization to
rise from sub 10% to over 30% as Mangalore pipeline gets commissioned in a couple of
months and big customers like Mangalore Refinery and Petrochemicals (MRPL), Mangalore
Chemicals and Fertilisers (MCFL) and OMPL starts taking imported LNG.

Other than the above, a few more terminals are planned each in Kakinada, Gangavaram,
Kolkata and Krishnapatnam with 15-20mtpa combined capacity, though we believe
more clarity is awaited. Overall increase in country’s gas volume would benefit pipeline
companies like GAIL and Gujarat State Petronet Limited, which are essentially volume
driven utility businesses with regulated tariffs and tariff review recently being done.

Gas pricing in India

In India, domestic gas is mainly segregated into two heads namely APM and tough gas.
Deepwater-difficult gas APM is mostly for gas produced from nominated blocks which were directly allotted to
pricing premium to the NOCs in the past and located onshore or in shallow waters and hence are easier to
incentivize tough gas exploit. Although in CY14, the pricing was revised from earlier administered rate to a
production, while LNG formula, yet linkage to global supply hubs like Henry Hub, Russia and Canada has kept
pricing outlook looks the rates low. In fact, prices after rising once post implementation of the formula fell over
stable 50% in the ensuing periods before recovering to US$4/mmbtu (NCV) as of now.
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Domestic APM gas prices

Source: Government data, Bloomberg Finance L.P., Emkay Research

Domestic APM gas pricing formula (H1FY20)

$/mmbtu Qty (bcm) Price Overheads Net Gas Price


USA+Mexico 827 3.2 0.5 2.66
Canada 116 1.4 0.5 0.86
NBP Europe 682 8.1 0.5 7.56
Russia 425 0.8 0.5 0.25
Weight. Aver. 2050 3.69
On NCV basis - 11% markup 4.09

Source: Government data, Bloomberg Finance L.P., Emkay Research

The tough gas pricing is applicable for deepwater, high pressure-high temperature reservoirs
which are difficult to exploit and hence require remunerative rates. Essentially pricing and
marketing freedom is allowed though a ceiling is placed so that rates are not manipulated
and do not reach abnormal levels. However, with the ceiling linked to alternate fuels including
liquids, the price is substantially higher with current levels at USD10/mmbtu+. RIL-BP and
ONGC’s KG deepwater fields would get premium pricing and as per company guidance, may
charge USD5-6/mmbtu price based on current dynamics wherein LNG prices, particularly spot
LNG is in the USD4-5/mmbtu range.
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Tough (deepwater, HP-HT) gas pricing

Source: Government data, Bloomberg Finance L.P., Emkay Research


Tough gas pricing formula

$ FO/bbl Naphtha/bbl Coal/mt LNG


FOB 44.6 52.7 57.0 7.3
Freight 1.5 2.0 6.0 -
Import Charges 0.5 0.5 2.0 0.1
Landed Price 48.8 58.0 67.6 7.7
In $/mmbtu 8.6 11.4 2.7 7.7
Weight 40% 30% 30%

$/mmbtu
Weighted Average Price Of Alternate Fuels 7.7
FO Landed Price 8.6
LNG Landed Price 7.7
Implied Gas Price For HT/HT,DW-UDW 7.7
Price in NCV Basis (11% Markup) 8.5
Source: Government data, Bloomberg Finance L.P., Emkay Research

The Government has been proactive in introducing remunerative pricing for new and
suboptimal fields and pricing freedom has been accorded to new discoveries as well as
marginal fields being put on offer under new E&P regimes. We do not expect APM gas
pricing formula to change though there are calls to revise the same, yet with new gas
being difficult in nature, higher prices accorded to them would raise overall gas pricing in
the country. This will benefit E&P companies and can potentially lead to more discoveries,
which is positive, though certain sectors like CGD (CNG and domestic PNG), which have
benefitted from low APM gas prices, can see cost and margin pressure.
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Among other major sources, Panna Mukta in Gujarat offshore has fixed rate of USD5.7/
mmbtu though the field is under natural decline and in the coming decade may be
decommissioned as partners RIL and Shell are not renewing the contract post expiry
this fiscal. In northeast, a 40% gas subsidy is provided by the center. Other gas field,s
including CBM, are minor with formulae ranging from fixed rate and APM to free pricing.

LNG pricing in India is broadly divided into three types, oil linked term LNG, US Henry Hub
linked term LNG and spot LNG. Oil linked term LNG includes the flagship 8.5mtpa RasGas
and the 1.44mtpa Gorgon contracts while US Henry Hub linked LNG is the portion of
GAIL’s US contracts which is imported to India (50% of 5.8mtpa contracted volumes).
Spot LNG is based on Singapore regional benchmarks. Oil linked term LNG effective slope
is generally 13-14% of Brent (3-9 months trailing) while Henry Hub linked LNG has a
US$5.0/mbtu markup including liquefaction and shipping costs.

While oil linked LNG naturally adjusts itself to alternate liquid fuels like fuel oil and
naphtha, at times of sharp drop in oil prices, term LNG demand gets hit as pricing is at a
lag and continues to be expensive for a couple of months before adjusting to the trailing
oil price formula average. Overall current economics are stable though.

On the other hand, spot LNG had been quite volatile but in the last few years have
weakened and in the last 1 year has remained more muted on the back of rising supplies
and weaker demand in Northeast Asia (Japan, Korea, Taiwan). Current spot LNG prices of
USD4-5/mmbtu is at an all-time low range and expected to result in higher gas demand
from elastic customers like power plants, industries etc. On the back of polluting fuel bans
in NCR and Morbi, cheap spot LNG prices has led to significant demand growth from
these replacement customers. With PLNG’s Dahej terminal expanding by 2.5mtpa from
June 2019 and new terminals like Mundra still to operationalize and Ennore being off the
northern grid, Petronet LNG is expected to benefit from this higher gas demand. Shell
Hazira is also operating at ~90% capacity.

Issues and challenges in growth of natural gas and LNG


sector in India
The gas sector has witnessed incentives to develop and grow, though certain challenges
are there –

• Gas (LNG) price volatility – Being a price sensitive market, demand is elastic to
prices, particularly LNG. Currency volatility also impacts as gas is priced in USD. On
the other side, domestic gas pricing particularly for APM/nominate fields is considered
non remunerative which is constraining development of certain assets. Lack of clarity
on deepwater asset pricing until the premium was fixed also led to development
delays though same has been rectified now.
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• Infrastructure bottlenecks – While the gas grid is expanding, still central-eastern part is
getting connected only by now while south east and north east would take further time.
CGD development barring Delhi-NCR, Mumbai and Gujarat has also been slow due to
lack of major anchor load customers in non-metros, lack of policy and judicial support
and local administrative issues. Even LNG terminals are coming up slower than expected
with specific issues causing delays.

• Local issues – Pipeline laying has faced local protests against land acquisition causing
major project delays. Further local statutory approvals get stuck in red tapism.

• Limited government thrust – While Indian government is focused on the growth of


the sector, thrust compared to China is much less and more aggressive policies as seen in
case of latter is required if target of 15% share of gas in the primary energy basket is to
be achieved by CY30.

• Evolving regulations - Sector regulations are evolving and would require time to reach
mature stage. Regulations relating to capacity considered in pipeline tariff volume divisor
led to muted tariffs and earnings for underutilized pipelines though same was amended
to some extent. In CGD, PNGRB’s power to fix tariffs of the regulated business is yet to
be notified in the Act.

• Lack of intent and adverse economics in power sector – The power sector can be a
major gas driver though the Government has been shy in announcing any major measure
so far. Part of it is due to gas based power being much more expensive to coal based and
even renewables, but being a cleaner source and readily available as a peaking power
option, same needs to be pursued.

• Consumer behaviour – Indian consumers, particularly in case of CNG are not aggressive
in moving to CNG due to perception of low power in such engines besides lack of enough
outlets leading to long queues in filling up the tanks. Entities should try to decongest the
same through more outlet additions and overall perception also needs to change.

• Advent of Electric Vehicles (EVs) – EVs can turn out to be longer term threat especially
after recent Phase II of FAME scheme was launched which has targeted 1mn two wheelers
(2W are bikes, scooters), 0.5mn three wheelers (3W are autos etc), 55,000 four wheelers
(cars, SUVs etc) and 7,000 buses to operate on lithium ion batteries/other power trains
coupled with deployment of 5,000 electric buses with an earmarked expenditure of
Rs100bn. The Niti Aayog has also proposed full electric conversion of 3W by CY23 and
less than 150 CC 2W by CY25 coupled with only electric buses to be sold by CY30.

The Finance Minister in the recent Union Budget also emphasized on the EV plans and Govt
would launch an ICB to set up mega manufacturing plants in new sectors such as solar PV,
lithium batteries and solar electric charging infra. The Government also envisions India to
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become a global hub for EV manufacturing including solar storage batteries and charging
infra and have moved the GST council to reduce rate on EVs from 12% to 5% and also
provide income tax deduction of Rs1.5lakh on interest paid on loan taken to purchase
an EV with Rs2.5lakh benefit over loan period. We believe higher focus on EVs leads to a
perceived negative impact on the O&G sector as a whole especially when substantial capex
is committed in the sector with benefits and PBP accruing towards end of the next decade.
Concentrated markets like CGD areas face risk of rapid substitution though oil and gas
demand in India is still expected to grow at least for the next 10-15 years. Automobile
manufactures have also shown concern on Government’s EV aggression.

Indonesia:
Commencement of Gas-fired Power Plants
Indonesia’s robust economic growth outlook bodes well for energy consumption,
including LNG. However, demand growth is expected to be mainly focused in Java and
Sumatra (western part of Indonesia), where LNG consumption is currently limited by
supply availability. Thus, users are currently relying on diesel fuel and coal.

The key users of Indonesia’s gas production are power plants, fertiliser producers, and
manufacturers, whose fortunes are all tied to Indonesia’s GDP performance. Meanwhile,
the country’s manufacturing activities are strongly concentrated in the western part of
Indonesia, mainly in Java and Sumatra, due to its developed infrastructure and stronger
purchasing power.

Indonesia’s gas consumption breakdown (2018)

Source: SKK Migas, DBSVI

Power plants:
Upcoming gas-fired power plants to fuel demand growth

Indonesia’s LNG demand is set to grow at faster pace due to the commencement of gas-fired
power plants in 2018-2030. Approximately 25% of the 35GW new power plant capacity
stems from gas-fired power plants. Gas-fired power plants will gain prominence as part of the
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government’s efforts to promote cleaner energy, on top of renewable and geothermal power
plants. Moreover, gas-fired power plants are proven to be more reliable and scalable due to
gas supply availability vs. smaller-scale geothermal and renewable energy sources.

The 1,200MW Java 1 project with an integrated Floating Storage Regasification Unit (FSRU)
is now heading for financial close and will set the benchmark for an eco-friendly power plant
post 2020. A plant that recently commenced operations include the 880MW Java 2 Tanjung
Priok project. We estimate that there is 2.5GW-3GW of capacity from gas-fired power plants
in the construction stage currently.

The demand for gas-fired power plants historically has been subdued as there was more
widespread use of thermal coal and oil fuel, no thanks to gas supply issues affecting the
western part of Indonesia. Gas availability is relatively limited and it is hard to transport gas
due to the fragmented pipeline infrastructure.

Fertilisers: Stable and Besides power plants, the other demand driver of gas consumption in the country is the
steady demand fertiliser industry. The government is supportive of the fertiliser industry and recognises that
Indonesia gas is an important raw material for fertiliser manufacturing activities. However,
Indonesia’s fertiliser manufacturing revitalisation programme in 2010 had the unintended
result of dampening gas consumption, as seen in 2015-2017 CAGR of -2.53% and 2015-
2017 CAGR of -1.79% for urea gas consumption and ammonia gas consumption respectively
as disclosed by state-owned fertiliser company PT Pupuk Indonesia.

Gas consumption by fertiliser sector (MMBTU per ton)

Source: PT Pupuk Indonesia 2017 Annual Report, DBSVI


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Pupuk Indonesia’s fertiliser production was also relatively flat in 2013-2017 and volume
is expected to grow modestly in the next several years due to the current low commodity
price environment and ongoing competition from imported fertilisers, despite the uptrend
in fertiliser consumption in terms of kilogram per hectare in the past years – due to estate
yield intensification efforts to boost domestic crop productivity across the nation. Non-urea
fertilisers, where the manufacturing process does not involve gas to a large extent, also gained
traction as their volume reached 4.6m tonnes in 2017 (+15% y-o-y).

Household demand The Ministry of Energy and Mineral Resources (MEMR) initiated a household gas pipeline
still insignificant unless programme in 2017 that involved US$200m in some major cities around Indonesia. However,
there is a compulsory relative to PGAS’s total revenue, this revenue stream is still insignificant, constituting a mere
programme to have 0.4% of its FY18 revenue and covering only 220k customers. We have decided to remain
household gas pipelines conservative about this segment’s growth potential unless household gas pipelines are made
compulsory going forward.

Changing structure of domestic consumption and exports

Rising gas demand in Indonesia means that LNG and gas output will be redirected to the
domestic market. Export sales used to be the key revenue driver for LNG producers due to
project feasibility issues affecting local sales such as the need for proper infrastructure, as
well as the availability of ready buyers around Asia, mainly Japan and South Korea. On the
other hand, to bridge the demand-supply gap in west Indonesia, Indonesia needed to import
around 9 mtpa of LNG in 2017.

Domestic gas supply vs. export market (bcm)

Source: SKK Migas, DBSVI


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This means that infrastructure investment is more crucial than ever to ensure LNG can be
delivered to key buyers mainly in Java and Sumatra. With gas supply visibility for the next
decade, Indonesia should be able to plan and execute its infrastructure requirements –
encompassing pipeline, liquefaction, regasification, and power plant connection facilities for
central and east Indonesia. The supply blueprint below shows the targets to be achieved by
2030 – according to MEMR, this masterplan requires US$24.3bn of financing.

Indonesian gas pricing regulation:


Focus on end-user affordability
For any discussions on LNG-related investments, we need to look at the government’s
regulations on gas pricing, which we believe is more relevant for analysing demand, and for
investors, to determine gas pricing vis-à-vis their capital commitment for any LNG project.

The government regulates end-user gas prices to ensure that LNG is affordable as well as to
safeguard the interests of end users such as manufacturers and fertiliser producers so that
they can compete with imported goods. Moreover, a friendly gas price can also allow PLN to
withstand margin compression in the face of risks of electricity subsidy cuts.

PGAS’s gas price vs. LNG price (US$/MMBTU)

Source: Company, MEMR, DBSVI

For manufacturing While the cap for power plants can vary depending on energy consumption location and
companies (fertiliser, availability, there is a maximum cap of around US$9.75 per MMBTU. Power plant operators
petrochemical and can pass on the gas price escalation risk to PLN via a long term power purchase agreement
steel), the gas price is (RUPTL) which will take into consideration the input cost component when setting the electricy
capped at US$6 per price. The government gives priority to fertiliser and ceramic tile producers by providing more
MMBTU affordable gas prices to ensure their competitiveness vs imported products. The fertiliser
industry is considered as a strategic industry in Indonesia.
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The government via EMR Ministerial Regulation (Permen) No.58/2017 on Industrial End Users
Gas Pricing, the gas pricing level is set and monitored via distributors and traders’ profitability
levels. This regulation strives to ensure price and profit stability for traders and distributors by
eliminating the speculative activities of gas traders that do not have any ownership on the
infrastructure – the lack of which is one of the key reasons behind Indonesia’s uncompetitive
gas prices.

Gas distributors The regulation ensures that distributors with a pipeline utilisation rate of 60% earn enough
that own pipeline profits to cover their capital investments and running costs. So far, PGAS has been able to
infrastructure are cope with this situation and has maintained a healthy distribution margin of US$2.3-US$2.5
entitled to a maximum per MMBTU.
distribution margin
of 7% or a maximum Meanwhile, according to EMR Ministrial Regulation (Permen) No.6/2016 on Gas Allocation
project IRR of 11% Mechanism, upstream gas contractors should prioritise domestic market obligation (DMO), as
pricing is pretty much a business-to-business (B2B) affair that revolves around the operators’
long-term contracts with buyers such as gas traders. The upstream contractors’ work scope
is stipulated in the production sharing contract (PSC) with the Indonesian government.
Upstream gas pricing takes into account several factors such as required capital investment
and field characteristics. Hence, upstream gas selling price may vary between US$4 and US$7
per MMBTU on average across Indonesia.

Consolidation to The government got the consolidation wave moving by merging PGAS with Pertamina’s gas
achieve better gas subsidiary, Pertagas, last year. The rationale for the transaction is to eliminate the potential
pricing and availability for intense competition or even one of the gas distributors to gain monopolistic power – thus
allowing the country to achieve better natural gas pricing.

The rationale for the merger also goes beyond pricing – as PGAS has the potential to ramp
up its distribution volume target to above 900 MMSCFD, it may also source more gas from
Pertamina (as its new shareholder). Other potential synergies include giving Pertamina access
to midstream infrastructure, mainly PGAS’s comprehensive pipeline in the Java and Sumatra
regions, in view of the fact that Pertamina’s production may also be skewed towards gas, in
line with Indonesia’s oil and gas reserves profile.

Vietnam: Emerging Demand Centre for LNG


Bold plans to According to Vietnam’s 7th power development plan, the Government aspires to boost
boost natural gas natural gas consumption to 21bcm/year in 2035 from 9bcm/year in 2017 (4.5% CAGR).
consumption Power generation which currently accounts for around 80% of gas demand, will drive growth
in domestic gas consumption, as the Government intends to build 13,000MW of gas-fired
power plants within the next decade. On this front, the Nin Thuan provincial government and
Thailand’s Gulf Energy Development PCL recently announced their plan to invest US$7.8bn to
build four gas-fired plants (total capacity of around 6,000MW) and LNG importing facilities.
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Vietnam’s historical natural gas consumption

Source: BP Plc, DBS Bank

Vietnam natural gas demand composition (2016)

Source: PPIAF, DBS Bank

Ramping domestic Domestic production accounts for 100% of Vietnam’s natural gas supply currently, due to the
gas production is a absence of cross-border pipelines and LNG receiving capabilities. Following the discovery of
near-term priority; LNG several large gas reserves, the Government’s current primary objective is to augment domestic
imports to become gas production to meet rising demand. Additional supply from domestic fields should be
increasingly crucial as adequate until 2021-2022, but LNG imports will be required thereafter, amid declining
production peaks reserves. By 2035, LNG is expected to account for around 65% of total gas supply.
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Gas-fired power generation forecasts – will be a critical driver of natural gas demand in Vietnam

Source: PPIAF, DBS Bank

Growth in domestic gas production will eventually be insufficient to meet demand

30
Domestic Supplies
(P1 + P2 + 50% P3)
25

20
BCM/year

15

10
LNG Demand backfills declining
domestic gas supply
5
2016
2017
2018
2019
2020
2021

2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035

Base Demand Potential Demand LNG Demand P1 + P2 + 50% P3


Source: PPIAF

LNG projects are In the past, Vietnam was hesitant to commit to LNG terminals, however, we are now seeing
starting to move firmer indications that a few projects could be sanctioned soon. Lately, Novatek signed a
forward memorandum of understanding with Vietnam’s Ninh Thuan Provincial People’s Committee to
develop an integrated energy generating project, which includes the construction of a LNG
regasification terminal and new gas-fired plants in Vietnam - Novatek’s Chairman suggested
that the project could be realised in a relatively short period of time with the support of the
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province. Meanwhile, Petrolimex also announced its intention to expedite the construction of
an LNG terminal in the southern coastal province of Khan Hoa.

Robust pipeline of LNG There are currently around 36.8mtpa of projects in the pipeline, with the first project in Thi
terminals could drastically Vai expected to be ready as soon as 2020. However, there are still considerable challenges
increase Vietnam’s regarding financing as investors continue to be averse to investing capital in Vietnam, due to
regasification capacity, regulatory uncertainty, elevated execution risks and a track record of lengthy project delays.
but challenges abound
While there is uncertainty surrounding the country’s energy policies and governance, growth
In the long-term, in LNG demand should benefit from the rapid expansion of gas-fired capacity. As mentioned
Vietnam’s growing before, infrastructure investments are already starting to gain traction, and we expect to see
prominence in the LNG more private capital poured into LNG projects in the future as the regulatory framework and
market is inevitable mechanisms improve.

Bangladesh: Emerging Demand Centre for LNG


Natural gas is the Gas provides for more than half of Bangladesh’s power, making up around 60% of total
dominant fuel used in installed generation capacity of 15.9GW as of November 2018, according to data from
Bangladesh’s power the Bangladesh Power Development Board (BPDB). There is an unusually high dependence
generation capacity on diesel and furnace oil in Bangladesh as the Government has contracted rental and
peaking power plants running on diesel or fuel oil to meet the strong demand for power.
These costlier fuel types would be gradually replaced by majority gas-fired power plants
in future, in our opinion.

Breakdown of installed generation capacity (MW) by fuel type (as of June 2018)

Source: Bangladesh Power Development Board (BPDB)

Long term power Under the government’s ambitious long term power generation plan, the forecast is for
generation plan has more generation capacity to reach 24GW by 2021 and 40GW by 2030. Around 50% of power
room for coal but gas has will be generated from domestic and imported coal and 23% will come from gas /LNG
a big role too out of the total generation capacity 40GW in 2030. We doubt that coal-fired generation
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targets are achievable in Bangladesh given the lack of domestic coal, coal related supply
chain infrastructure including import terminals, and land to accommodate mega coal-
fired power plants.

10.7GW capacity Of this, gas-fired capacity scheduled to be commissioned is around 5.2GW, or roughly half the
scheduled to be capacity under construction. This will support gas demand trends in Bangladesh. The mega
completed over 2019-21 projects of around 1.9GW combined capacity scheduled for completion in 2021 are primarily
designed to be run on imported LNG, which shows the government’s support for LNG-backed
capacity in the longer term.

LNG fired mega projects planned for 2021

Name of Power Plant Capacity (MW) Expected Commissioning


Date
LNG based 750 MW CCPP 718 June 2021
(Reliance)
Meghnaghat 500 MW 583 June 2021
CCPP (Summit)
Meghnaghat 600 MW 600 Dec 2021
CCPP (Unique)
Source: Bangladesh Power Development Board (BPDB)

Domestic gas constraints The dominance of gas in Bangladesh’s power plant fuel mix is due to large onshore
fuel the need for LNG gas discoveries made in the 1960s and 1970s, which have supported the growth of
Bangladesh’s energy market by providing a cheap source of fuel over the years, with oil-
fired plants largely used for peaking requirements. However, there have been limited major
gas discoveries in recent years due to the financial constraints of state-owned oil & gas
company, Petrobangla, and low interest from international oil companies. Gas shortages
have grown, especially around Chittagong in the South after Sangu field’s closure.
Additionally, pipeline constraints is limiting the amount of gas reaching Chittagong.

The Government has made plans to diversify Bangladesh’s generation mix, as domestic
gas production could potentially decline in future. Since Bangladesh’s existing natural gas
network is well-established, LNG imports would be the logical way to go forward, in order
to ensure the continued availability of gas supply to Bangladesh’s power sector.

The Government made Petrobangla set up a wholly-owned subsidiary, Rupantorito Prakritik Gas Company Ltd
LNG imports a key (RPGCL), to be responsible for LNG procurement. FSRUs had been initially favoured
priority in Bangladesh as an interim measure due to the shorter lead-time to commissioning
compared to land-based terminals, but adverse weather conditions have led to a shift
towards more land-based terminal plans of late. The first FSRU in Moheshkhali was
completed and commissioned in August 2018. Details of all the planned LNG imports
infrastructure are on the next page.
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The Moheshkhali FSRU, with capacity 4 million metric tonnes per annum (mmtpa), was
the first to be completed. The Government signed an agreement in 2016 with US-based
Excelerate Energy to provide the FSRU. For this FSRU, RPGCL relied on government-to-
government relationships for LNG procurement. A 15-year LNG import contract for 2.5 mtpa
was finalised with RasGas, a Qatari LNG producer, in July 2017, forming the baseload supply
into Bangladesh.

The second FSRU project is operated by Summit Power Group. The second FSRU project,
led by Summit Power, the largest Independent Power Producer (IPP) in Bangladesh, began
commercial operations in April 2019, with cargo from Qatar. Also located on Moheshkhali,
the 4 mtpa FSRU will also be provided by Excelerate Energy on a 15-year charter contract.
The FSRU is currently not operating at maximum capacity since land-based pipelines from the
coastal city of Chattogram to the capital Dhaka are yet to be completed.

Further growth in LNG The Government has recently cancelled a couple of LNG terminal projects, including one FSRU
projects may be slow proposal from India’s Reliance Power and a FSU/ fixed jetty proposal from Malaysia’s Petronas-
though led consortium, as it struggles to operate the first FSRU at Moheshkhali. These developments
are disappointing, though there are plans for more land-based LNG terminals, and talks
are progressing with Petronet LNG of India, and a subsidiary of China National Petroleum
Corporation (CNPC). Overall, we believe growth of LNG imports into Bangladesh may be slow
to take off owing to infrastructure constraints, and could reach around 7mtpa over the next
4-5 years from almost nil in 2018.

LNG regasification terminals in Bangladesh

Terminal Status (Expected) Capacity


Operations start (mmcfd/ mtpa)
Moheshkhali FSRU Completed August 2018 500 / 3.8
Summit Power FSRU Completed 2019 500 / 3.8
Source: Rupantorito Prakritik Gas Company Ltd (RPGCL)
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LNG Supply Trends


Natural Gas Production Trends
Conventional gas In the past seventeen years, global natural gas production largely moved in sync with
production growth is global natural gas consumption. Regionally, almost all major continents achieved healthy
slowing, but offset by production growth – Europe was the sole outlier, struggling to arrest an unrelenting
shale gas decline that started from 2004. On the resource front, global conventional gas production
has been shrinking since 2010.

However, the super-charged production growth of unconventional gas, mainly driven by


the meteoric rise of shale gas in the US, has more than offset the trend. More recently,
global LNG trade flows reverted to a strong growth trajectory from 2016 after stalling
between 2013 to 2015, owing to significant demand growth in China and emergence of
new importing markets.

Natural gas production breakdown by region – the Shale revolution helped North America to overcome sluggish
production growth between 2000-2010

Source: BP Plc
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Growth in unconventional gas (read: shale gas) production mitigated flatline conventional gas production in
this decade

Source: BP Plc, International Gas Union, DBS Bank

Major Players in LNG Export Market

LNG export market is dominated by a few players, with the top 5 exporters constituting 66% of exports in 2018

Source: International Gas Union


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Growth in LNG exports in recent years has primarily come from the US and Australia... and Russia in 2018

Source: International Gas Union

Qatar
Largest LNG exporter Despite ceding market share to countries like Australia and the US in recent years, the Middle
Eastern country still holds the mantle as the world’s largest LNG exporter, exporting 78.7mt
of LNG in 2018, representing 24.9% of global exports. LNG exports have been quite flat in
the past eight years, as Qatar’s liquefaction capacity remained unchanged from 2011, after
Qatargas completed its fourth LNG mega-train. This may soon change, as Qatar recently left
the OPEC alliance to focus on natural gas. The country plans to build four new liquefaction
trains at the Qatargas project to expand its LNG production capacity to 110mtpa by 2024
from 77mtpa currently.

Qatar’s historical gas production and LNG exports

Source: BP Plc, DBS Bank


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Low production Apart from owning one of the largest proved natural gas reserves in the world (24.9 trillion
cost is key cubic metres (tcm), 13% of global total), Qatar also has several distinct advantages against
other LNG exporters. The Middle Eastern country has cutting edge LNG infrastructure and one
of the lowest gas breakeven costs (US$2.00/mmbtu) in the world, and is strategically located
between Asia and Europe (which helps reduce transportation costs). Rystad Energy estimates
that, including transport costs to Asia, Qatar’s breakeven cost for LNG exports stands at
US$5.6/mmbtu, comfortably below the US$7.5-US$9.1/mmbtu for US exports.

Qatar’s LNG export composition

Source: International Gas Union

Australia
Coming in at a close second to Qatar, Australia delivered 68.6mt of LNG in 2018, accounting
Australian LNG for 21.7% of global exports. The country’s LNG exports has surged in the past five years,
exports has seen surpassing competitors like Indonesia and Malaysia, as a series of new LNG trains came
the biggest surge onstream during the period. Not long ago, the country surpassed Qatar’s liquefaction capacity,
of late when the first train in the Ichthys project became operational in December last year. After
repeatedly raising forecasts, the Australian Government now expects to lift exports to 79mt
(+15% y-o-y) in 2019 to surpass Qatar.
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Australia’s historical gas production and LNG exports

Source: Australia Petroleum Statistics, BP Plc, IGU

Further growth will However, we believe that any lead over Qatar will be transitory at best, owing to several
be tempered headwinds. On the supply front, Australia is anticipated to face a gas shortage from 2024,
according to the Australian Energy Market Operator - there is a dire need to ramp up the
development of new gas reserves, but environmental concerns and stringent approval
requirements are impeding the development of the upstream sector. At the same time,
Australia also needs to broaden domestic pipeline connections to feed demand centres in
Melbourne, Sydney and Adelaide from productive fields in Queensland to temper the decline
in mature fields in Victoria.

Australia’s LNG export composition

Source: International Gas Union


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USA
Excess supply of Thanks to higher efficiency in hydraulic fracturing and horizontal drilling technologies,
natural gas which make it possible to extract gas from shale formations, US natural gas supplies remains
abundant and cheap. US has one of the largest lowest cost gas resources in the world. In fact,
proven reserves in the US were already up 5% last year to 341 trillion cubic feet, a 60% jump
since 2006. According to CIA World Factbook 2017, US ranks as the fourth in proven natural
gas reserves, following Russia, Iran and Qatar. Thus, production growth is expected to sustain
and continually outpace demand in the foreseeable future in the US.

Shale gas has been Shale gas production as a percentage of total US natural gas production has grown from 24%
a key driver of the total in 2010 to almost 70% of the total in 2018, on the back of an astonishing 20%
CAGR over that period. Over the same period, conventional gas production fell at a CAGR of
6.7%, so overall US gas production has grown at a CAGR of 4.9% over 2010-18.

US domestic Over the period under consideration, US domestic gas consumption has grown at a CAGR of
consumption 2.8% during 2010-2018, which is roughly in line with overall GDP growth trends. Given the
growth has been gap between supply and demand growth, and limited options for pipeline exports, growing
slower LNG exports is the natural outcome.

US’s natural gas production has outstripped domestic gas consumption needs in recent years

bcm 2010 2011 2012 2013 2014 2015 2016 2017 2018
US dry natural gas 634 681 716 724 779 815 804 827 927
production
Conventional gas 483 454 422 401 398 384 322 300 278
Shale gas 151 226 294 323 381 431 482 526 649
Shale % of total 24% 33% 41% 45% 49% 53% 60% 64% 70%

US domestic gas 682 693 723 741 753 771 777 768 848
consumption
Surplus/(deficit) -48 -12 -7 -17 26 43 27 59 79

Source: EIA, DBS Bank
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Gap between US natural gas production and domestic gas consumption has
widened in recent years

Source: EIA, DBS Bank

Already a top 5 The dramatic increase in US shale gas production and LNG liquefaction capacity has enabled
exporter after only the country to swiftly climb the ranks to become a global LNG powerhouse, a remarkable feat
3 years of LNG considering that the US barely exported any LNG before 2016. The country exported 21mt of
exports LNG in 2018, up 600% from 2016, with 6.7% of global market share. Similarly, liquefaction
capacity stood at 21.8mtpa in 2018, up significantly from 5.5mtpa in 2016, with five LNG
terminals becoming operational during the period.

With the consumption boost from the global trend in shifting the energy mix towards natural
gas to combat carbon emissions, US LNG exports are set to show highest growth trends in the
near term among all exporting countries.

US’s historical gas production and LNG exports

Source: EIA, International Gas Union


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Two massive waves of LNG liquefaction capacity will come onstream in the next five years,
radically boosting the US’s liquefaction capacity by 32.2% CAGR to 124.4mtpa in 2018-2024.
While US’s liquefaction capacity would be larger than Qatar’s by then, stiff competition from
the Middle Eastern titan and Russia could quash its ambition of dominating the market. In
contrast to the latter countries, the US is located significantly further from vital growth centres
in Asia, which are expected to account for the bulk of LNG demand growth. This translates
into markedly higher LNG shipping costs and tilts the landed cost of LNG in favour of Russia
and Qatar. New sanctions proposed by the US, which includes prohibiting the financing of any
global energy project supported by Russia, could delay new inter-country gas pipeline export
links and shift demand in the region to LNG.

US’s historical and projected liquefaction capacity

Source: International Gas Union, DBS Bank

Escalating trade To recap, China’s insatiable demand for LNG is a game changer, and certainly the most
tensions with important piece of the puzzle, as the country is projected to drive around 40% of total
China may have incremental gas demand. China’s move to increase the current 10% tariff on LNG imports
ramifications on from the US to 25%, will place US LNG firmly out of the money, crippling demand for US LNG
future demand in China and putting a dampener on LNG contracting activity between the two countries.
growth for US LNG Hence, proposed US projects that have yet to secure offtake counterparties will have to look
elsewhere or delay the final investment decisions or FIDs. US’s LNG exports to China has
already plummeted following the onset of trade salvos exchanged last year and will remain
elusive should the trade war drag on.
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US’s LNG export composition

Source: International Gas Union, DBS Bank

Russia
From pipeline LNG exports from Russia climbed considerably to 18.9mt in 2018 (+70% y-o-y), up from
exports to LNG the usual range of 10-11mt/year, as two trains in the Yamal LNG project began operations,
expanding liquefaction capacity to 21.8mtpa from 10.8mtpa. Russia aims to be produce
100mtpa of LNG by 2030, to be on par with the US, Qatar and Australia, with development in
the Arctic pivotal to its goals. Not only is production in the icy region vastly cheaper at US$0.1/
mmbtu, with lower energy requirements for chilling, exporters can also capitalise on shorter
distances via the Northern Sea Route to reduce shipping costs to Asia.

Russia’s historical gas production and LNG exports

Source: BP Plc, IGU, DBS Bank


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Liquefaction capacity of 28mtpa is scheduled to commence operations in the next five years,
which will help diversify Russia’s exports away from traditional pipeline exports to Europe. This
comes on the back of mounting concerns in Europe regarding the region’s over-dependence
on Russia, and the US’s push to boycott Russia.

Russia’s historical and projected liquefaction capacity

Source: International Gas Union

Russia could potentially fill the void left by the US to meet China’s LNG requirements, as the
two countries forge an energy alliance to oppose a common enemy. There are already signs
of increased cooperation between the two countries:

1. Lately, the Chinese have been investing in a series of Russian LNG projects like Yamal LNG
and Artic LNG.

2. The Power of Siberia (38bcm/year) and Sakhalin (8bcm/year) cross-border pipelines are
slated to come onstream later in the year and in 2020 respectively.

3. The two countries are currently finalising details on the Power of Siberia ll (30bcm/year)
cross-border pipeline.
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Russia’s LNG export composition

Source: International Gas Union

Other noteworthy LNG exporters


Malaysia

At third place, Malaysia exported 24.5mt of LNG in 2018, constituting 7.7% of exports
worldwide. Growth in exports have been modest over the past seven years, owing to natural
gas supply shortages in demand centers in Peninsular Malaysia. Over the past three years,
Malaysia’s liquefaction capacity increased by 19%, with the addition of 1 LNG train in 2016
and the world’s first floating natural gas liquefaction plant in 2017.

Nigeria

Nigeria continued to be the fifth largest LNG exporter in 2018, exporting 20.5mt of LNG
(6.5% of global LNG exports). Despite robust domestic natural gas production growth, export
growth in the past seven years has been mixed, attributable to a culmination of political and
security issues, and supply outages which adversely affected LNG liquefaction utilisation. Like
Qatar, Nigeria has not made any additions to its LNG liquefaction capacity in the past seven
years. LNG exports from the country should continue to be near current levels, until Train 7
commences operation in 2024-2025.
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Advent of other new exporters


Country Description
Mozambique The African nation should begin exporting LNG when its first
LNG train, Coral South FLNG (3.4MTPA) becomes operational in
2022. Currently, the country has another 12.8mtpa of projects
under in the front-end engineering and design (FEED) phase,
which could come onstream as soon as 2023. Upon completion,
Mozambique’s LNG liquefaction nameplate capacity will be
16.2mtpa, on par with Russia’s capacity in 2018.

Canada Despite being one of the largest natural gas producers in the
world (4th in 2017), Canada has been slow to join the LNG
exporting bandwagon. This however, is primed to change as
Canada currently has 26.1 mtpa of LNG liquefaction capacity
scheduled to come onstream over the next six years. The First
LNG delivery to other nations should begin in 2023, when the
Goldboro LNG and Woodfibre LNG trains become active.

Source: International Gas Union, DBS Bank

Trends and near term forecast of global LNG supplies

In million tonnes 2016 2017 2018 2019F 2020F


Qatar 78.7 76.7 78.7 79.0 79.0
Australia 43.8 56.4 68.6 78.5 80.9
United States 2.9 12.9 21.1 32.0 56.4
Russia 10.8 11.1 18.9 28.6 30.9
Rest of world 122.2 131.3 129.3 135.7 139.6
Total supply 258.3 288.4 316.5 353.9 386.7
Y-o-Y Growth 11.6% 9.8% 11.8% 9.3%
Source: International Gas Union, DBS Bank (forecasts)
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LNG Pricing Trends


Natural Gas Pricing Mechanism
Natural gas market Though natural gas and oil share many characteristics (both are: hydrocarbons, found and
is very different produced using similar methods and equipment, and often produced simultaneously), there
from oil markets is a difference in the way they are sold and priced. Oil is sold by volume or weight, typically
barrels or tons whereas natural gas is sold by unit of energy, the most common being British
Thermal Units (Btu).

Natural gas, when produced from the reservoir, contains majority methane plus various other
hydrocarbons and some impurities. Natural gas liquids (NGLs), a term that includes ethane,
propane, butane, and condensates, are composed of longer chains of carbon molecules than
methane, and thus, on a per unit volume, they burn hotter than methane. If sufficient quantities
of NGLs exist in the natural gas, it is often more economic for the field operator to remove the
NGLs from the natural gas flow for direct sale.

NGLs are used to produce various petrochemical products, to be blended with crude oil to
make more valuable products, and can also be combusted directly. Liquefied Petroleum Gas
(LPG) is a subsector of NGL containing propane and butane, used for domestic cooking gas
as well as transport fuel in many countries. NGL prices tend to track crude oil prices and thus
are much more valuable sold separately than sold with the majority methane natural gas flow.
Since NGLs are easier to transport than methane (which requires either a pipeline, or expensive
compression or liquefaction transformation), NGL prices are more influenced by global prices.

Transportation The large majority of traded natural gas is transported by pipeline, with the remaining flows
difficulties means prices (LNG) happening through liquefaction, shipping and regasification. Simplistically, there are two
are set locally rather types of gas pricing contracts between producers and consumers – one to one and many to
than globally many. The broad features of these are tabulated below.
Broad types of natural gas markets
Type of contract Factors affecting gas price
Single producer – • Negotiated price
single buyer • Seller will aim to sell at a desired margin above costs
• Buyer will pay a price that is profitable for his project
• Price of other fuels such as coal or oil may be taken into account
Many sellers – • Traded price
many buyers (grid) • Influenced by overall supply and demand
• Demand could be either residential or industrial
• If majorly residential, influenced by seasonality – cold weather or hot weather could
increase prices depending on whether gas is being used for heating or cooling
• Disruptions in supply owing to weather conditions or geopolitical issues or
otherwise will increase prices
Source: DBS Bank
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Global gas market can Given the difficulties of transportation mentioned earlier, gas prices are often set locally and
be separated into few prices can vary widely around the world, both in absolute terms and degree of volatility. Most
large groupings by price local or regional gas markets fall somewhere in between the simplistic extremes mentioned in
formation characteristic the above table. We categorise the key categories below.

Regional categorisation of natural gas markets by price formation

Type of market Applicable Regions Features


Liberal markets/ US, UK, Canada • Most developed trading markets for gas, with gas competing with gas and
Gas-on-gas not oil, unlike oil-price linked gas contracts found in some other markets
competition • Henry Hub in the US and National Balancing Point (NBP) hub price in the UK
are established spot benchmarks
• Northwestern Europe has also been shifting to this model of late
• Large number of buyers and sellers competing without government
intervention
• Extensive pipeline and storage systems allow for futures contracts
• US LNG export prices may also be linked to Henry Hub prices rather than oil
linked formulas
Indexation to oil/ Japan, Korea, • Traditional LNG markets of North Asia and some emerging markets like
Oil price escalation Taiwan China and India
contracts • Limited domestic production and pipeline access means imported LNG is
king in these markets
• Characterised by long-term contracts
• Japan came up with S-Curve concept (see details on next page) to get a
discount to oil prices if oil prices went too high but ensured a minimum
guarantee price to exporters
• This model allowed long-term contracts and financing arrangements to
facilitate multi-billion dollar investments in the LNG chain
• Availability of US LNG may in future could disrupt this model
Indexation to Continental Europe, • Midway between fully liberalised market and oil indexation
energy substitutes SE Asia • Limited gas grid and storage facilities, but evolving towards a more
developed market
• But most gas remains priced relative to other energy sources such as oil
products, coal, or even electricity; formula in place for majority of long-
term contracts
• The linkage to other fuels is formulated such that gas is usually sold
at a discount to other fuels, as a legacy measure by gas producers to
incentivise a switch from other fuels
Bilateral monopoly Parts of Former • The price is determined by bilateral discussions and agreements between
Soviet Union and a large seller and a large buyer, with the price being fixed for a period
Middle East of time – typically one year
• Arrangement is often at the Government or state-owned company level
• Single dominant buyer or seller on at least one side of the transaction
Regulated markets Middle East, Russia, • In some regions, the gas markets are relatively immature and largely
Africa controlled by the government
• Gas prices may be nationally set, and all supply is pooled
• Usually, the price is determined, or approved, formally by a regulatory
authority, or possibly a Ministry, to cover the “cost of service”, including
recovery of investment and a reasonable rate of return

Source: International Gas Union, DBS Bank
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Domestic production North America, primarily the US, with its booming shale gas production and liberalised
sales equally dominated markets, dominates the share of liberalised domestic market sales. Oil indexed domestic
by liberalised gas and pricing markets include a few countries in the Asia-Pacific like Thailand, Indonesia, Vietnam,
regulated markets Philippines, Malaysia etc, but pricing reforms are underway in some of these countries. The
major regulated domestic pricing markets includes countries in the Middle East, Latin America,
Africa and former Soviet Bloc countries.

LNG imports still LNG imports, which constitute around 11% of total world natural gas consumption, is still
dominated by long term dominated by oil- linked contracts, mostly by Asian countries like Japan, Korea, Taiwan, and
oil-linked contracts to a lower extent, China, India and a few European countries. These are mostly long term
contracts. Imports into developed European gas markets of the UK, Netherlands and Belgium
is based on benchmark gas prices, and increasingly, all spot and short term cargoes into Asian
markets are also being priced on a gas-on-gas basis.

What is the S-Curve Pricing Model?


Representative S-curve gas price contract

Source: DBS Bank

The horizontal axis represents the benchmark oil price. The vertical axis represents the
contracted LNG price. The middle section of the line is the range where changes in the oil price
have a direct impact on LNG prices. The slope of the line determines the relationship between
the two prices. If the slope is 16.7%, LNG prices are equal, on an energy equivalent basis, to
crude oil. Slopes less than 16.7% imply that LNG is sold at a discount to oil, and slopes greater
than 16.7%, though rare, imply that LNG will sell at a premium price to oil. The chart above
represents a 14% slope.

The lower slope sections below and above the ‘kink points’ in the line are the ‘S’ curve legs. If
these sections are horizontal, they would be ‘floor ‘and ‘ceiling’ prices where the LNG prices
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are flat and no longer linked to oil prices. The floor prices protect the LNG seller – the seller is
guaranteed a certain minimum price irrespective if the oil prices drop below the kink-point. The
ceiling price, on the other hand, protects the LNG buyer, who is guaranteed a maximum price
for the LNG, even if oil prices rise over the defined kink-point. The ‘S’ curve model has been
followed by most of the LNG contracts to Japan, Korea and Taiwan. This model allowed long-
term contracts and financing arrangements that facilitated investments in LNG chain.

The following is a typical S-curve pricing formula: Price of LNG = (A × Price of Crude Oil) + B,
where A is the slope linking oil and gas prices (where 16.7% indicates energy equivalent parity
between oil and gas prices); and B is a constant added to reflect fixed costs, often related to
shipping costs from LNG plant to importing port. This formula would usually also include kink
points, the upper and lower limits where the slope flattens, thereby decreasing the impact that
further oil price changes have on the LNG price.

In the 1970s to 2000 period, the usual slope in most contracts was in the 14% range, implying
a large LNG price discount. As the markets tightened in the period between 2006 and 2008,
the slope increased to 16% and in some cases, exceeded the 16.7% threshold. The slope for
new LNG contracts signed in 2011 and later has continued to decline and has even reached
the 11-12% range.

Trend towards more During periods of high oil prices, oil-linked gas contract prices rise more rapidly than what
short term non-indexed the supply-demand fundamentals in the gas market suggest, and hence, gas buyers have
gas cargoes will increasingly been getting warier of entering such contracts. The link to oil prices has traditionally
accelerate benefited the big oil majors and traditional gas exporting countries like Russia, Norway and
Qatar. But much to their disappointment, more LNG buyers are waking up to the fact that the
link is artificial and increasingly irrelevant. Gas in power generation is mostly used in power
stations that do not have the ability to burn oil as a substitute fuel. Moreover, most forecasts
point to relatively low gas prices and relatively higher oil prices for the foreseeable future. Thus,
the link to oil markets has been weakening and more trading companies are selling short-term
cargoes at negotiated prices with no direct relationship to oil or oil product prices and the entry
of US LNG into traditional LNG markets in Europe and Asia will further cement this trend.

% of oil linked imports has been decreasing over time


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% of market linked pricing of total gas consumption is up

Note:
1. Imports include pipeline and LNG imports
2. OPE refers to Oil Price Escalation pricing, GOG refers to Gas-on-gas pricing, and BIM refers to Bilateral Monopoly pricing
3. “Market” pricing includes OPE, GOG and BIM pricing, all other regulated pricing falls under “Regulated” category
Source: International Gas Union

Recent long term contract pricing trends show more gas-on-gas pricing contracts rather than outright oil indexation

Date Project Seller Buyer(s) Pricing Destination Volume Length of


signed benchmark (MTPA) contract
(years)
May-19 Mozambique Anadarko JERA and NBP or TTF Japan and 1.6 17
LNG T1 CPC Corp Taiwan
Apr-19 Global portfolio Shell Tokyo Gas Partly Japan 0.5 10
indexed to
coal
Apr-19 Driftwood LNG Tellurian TOTAL JKM China 2.5 15
Apr-19 Rio Grande LNG NextDecade Shell 3/4 of Multiple 2.0 20
volume
indexed to
Brent, 1/4
to Henry
Hub
Dec-18 Port Arthur LNG Sempra PGNIG Henry Hub Poland 2.0 20
Dec-18 Sabine Pass LNG Cheniere Petronas 115% Indonesia 1.1 20
T6 Henry Hub
+ ~US$3/
mmBtu
Dec-18 Driftwood LNG Tellurian Vitol JKM Multiple 1.5 15
Source: Various press reports, compiled by DBS Bank

Spot pricing gaining According to data from the International Gas Union (IGU), the proportion of oil linked LNG
momentum in LNG imports has fallen from about 80+% in 2005 to around 75% in 2016 to around 66% in 2018.
imports 2018, however, has shown the most significant change in LNG imports, driven by the continued
rise in Henry Hub priced US LNG exports as well as a general rise in spot LNG cargoes. Despite
the rise in LNG imports by around 5.5% in 2018 compared to 2017, oil indexed LNG imports
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actually fell in 2018, as gas-on-gas priced cargoes and spot LNG cargoes rose in terms of
proportion. Spot LNG cargoes totalled some 126 bcm in 2018 (30% out of total LNG imports
of 416bcm), compared to 92 bcm in 2017 and just 70 bcm in 2016. This has been driven by
Asian countries, parts of Europe and emerging LNG importers. This makes expectations of spot
Henry Hub prices important from the Asian context as well, where there has been historically a
dependence on oil price movements.

Spot prices – Henry Hub: spot gas prices well in sync with oil prices till 2008 but
delinked thereafter

Source: Bloomberg Finance L.P., DBS Bank

Spot gas prices in the US The correlation between gas and oil prices in the US seem to have held up quite well until 2008,
have delinked from oil when the global financial crisis caused a sharp fall in commodity prices and eventually this led
over time to a delinking in US oil and gas prices, especially as the shale gas revolution caused a sharp rise
in domestic gas supplies in US from 2010 onwards, thereby depressing gas prices. Since 2014
onwards, the relationship between WTI oil prices and Henry Hub gas prices has dissolved even
further and in the last 2-3 years, there seems to be negative correlation at times as the demand-
supply factors are quite different for the two fuels. Also, Henry Hub prices are reflective of US
domestic market dynamics primarily, whereas WTI oil prices reflect global fundamentals of oil
plus certain local considerations.

As a result, Henry Hub prices did not move in tandem with movements in other gas pricing
benchmarks in Europe and Asia, namely the UK NBP price and Japan Korea market (JKM)
pricing, which is used as a benchmark price for spot LNG deliveries in South East Asia. Typically,
because of the costs involved in transporting and if necessary, liquefying and shipping natural
gas to European and Asian markets, a premium to US Henry Hub prices can be expected. But
with the advent of US LNG exports, we are seeing more convergence in these indices. The
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European and Asian benchmark indices have been approaching all-time lows recently owing
to a combination of seasonality and increasing gas supplies.

Henry Hub prices lower than UK NBP and Japan Korea prices in the past but prices
are converging now

Source: Bloomberg Finance L.P., DBS Bank

Gas and LNG Prices Outlook


Bearish on Henry Hub Typically, gas price forecasts for a country level depend on the following factors: i) overall GDP
prices growth and growth rate of gas consumption, ii) growth rate of domestic gas production, iii)
growth of net imports, and iv) cost of domestic production. While natural gas demand in the
US has been holding up and expected to do so in the future as well, it is overwhelmed by the
rise in supply in recent years. With oil prices expected to remain above US$60/bbl, an increase
in shale oil production will also boost associated gas production in the US. This means that gas
storage levels at end of 2019 are expected to be higher than 2018. Breakeven prices for new
gas fields in the US are also expected to remain below US$3/mmbtu. Hence, we believe gas
prices in 2019/20 will weaken from 2018 levels.

Henry Hub price trend and forecast

US$/mmbtu 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019F 2020F
Henry Hub 8.8 3.9 4.2 4.0 2.8 3.7 4.2 2.5 2.6 3.0 3.1 2.8 2.7
Source: Bloomberg Finance L.P. (historicals), DBS Bank (forecasts)
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Gap between US supply and demand is only expected to widen in coming years

Source: EIA (historicals), DBS Bank (forecasts)

Gas storage levels in the US also expected to remain elevated

Source: EIA

Asian spot LNG For importing countries, in addition to earlier mentioned factors, prices need to take into account
benchmarks should liquefaction and shipping costs for LNG. But surging LNG supplies into Asia, especially from
rebound from current the US and Russia among others, have resulted in spot LNG prices falling to levels of around
trough US$4.5/mmbtu in June 2019, compared to an average of over US$9/mmbtu in 2018 (more
than 50% decline). Historically, spot LNG prices in Asia are highly correlated to international
crude oil price levels owing to the high proportion of oil linked pricing contracts. But with more
gas-on-gas pricing coming in and price slopes of oil linked contracts also declining to the 11-
12% range rather than historical 13-15% range, prices have adjusted downwards.
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Spot LNG prices in Asia have crashed in 2019 and delinked from Brent crude oil price

Source: Bloomberg Finance L.P., DBS Bank

Asian LNG and Dubai Brent relationship

JKM (US$/mmbtu) Dubai Brent (US$/ Implied slope


bbl)
2008 13.0 92.3 14%
2009 9.2 63.2 15%
2010 10.6 77.9 14%
2011 14.1 107.2 13%
2012 16.1 108.8 15%
2013 15.7 105.8 15%
2014 12.0 95.0 13%
2015 7.3 50.4 15%
2016 5.6 42.1 13%
2017 7.6 53.7 14%
2018 9.7 69.1 14%
YTD 2019 5.5 65.8 8%
Source: Bloomberg Finance L.P., DBS Bank

But lower than historical We believe Asian spot LNG prices will rebound from current trough levels over the next two
levels years to incentivise infrastructure builds in the region, but will be still be lower on average
than historical levels. Medium term supply pricing estimates into Asia (see table below) lead
us to forecast Asian spot LNG prices to average around US$6-7/bbl on an annual basis in the
medium to long term.
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Future LNG supplies into Asia – project competitiveness analysis

LNG Project Competitiveness in US$/mmBtu


(Japan, Korea, Taiwan and China) 2025
Gas Supply Liquefaction Shipping Total
Qatar 2.0 1.7 1.1 4.8
Russia 0.5 4.5 0.5 5.5
Nigeria 2.6 1.9 2.4 7.0
US GoM (New) 2.3 2.3 2.6 7.1
Western Canada 2.5 3.5 1.1 7.2
Mozambique 2.5 3.8 1.5 7.9
US GOM (Existing) 3.5 3.1 2.6 9.2

LNG Project Competitiveness in US$/mmBtu
(Pakistan, Bangladesh, India) 2025

Gas Supply Liquefaction Shipping Total


Qatar 2.0 1.7 0.5 4.2
Nigeria 1.8 1.9 1.8 5.5
Mozambique 1.7 3.8 0.8 6.4
Russia 0.5 4.5 1.4 6.4
US GOM (New) 2.3 2.3 2.7 7.2
Western Canada 1.7 3.5 2.1 7.3
US GOM (Existing) 3.5 3.1 2.6 9.2
Source: The Oxford Institute of Energy Studies, University of Oxford
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Disclaimers and Important Notices

The information herein is published by DBS Bank Ltd


(the “Company”). It is based on information obtained
from sources believed to be reliable, but the Company
does not make any representation or warranty, express
or implied, as to its accuracy, completeness, timeliness
or correctness for any particular purpose. Opinions
expressed are subject to change without notice. Any
recommendation contained herein does not have
regard to the specific investment objectives, financial
situation and the particular needs of any specific
addressee.

The information herein is published for the information


of addressees only and is not to be taken in substitution
for the exercise of judgement by addressees, who
should obtain separate legal or financial advice. The
Company, or any of its related companies or any
individuals connected with the group accepts no
liability for any direct, special, indirect, consequential,
incidental damages or any other loss or damages of
any kind arising from any use of the information herein
(including any error, omission or misstatement herein,
negligent or otherwise) or further communication
thereof, even if the Company or any other person has
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The information herein is not to be construed as an offer


or a solicitation of an offer to buy or sell any securities,
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