LNG ECONOMICS

Suresh Mathur October 21, 2011

LIQUEFIED NATURAL GAS (LNG)

o

LNG is a natural gas cooled to -162C

o Liquefaction reduces the volume of gas by approximately 600 times o LNG is a cold, transparent, odorless, non-corrosive, non-toxic and has low viscosity. o LNG is safer than other liquid fuels.

Fuel

Calorific Value (Kcal/Kg)

% Sulphur

Imported coal
LNG Naphtha

6,000
11,500 11,200

0.5 - 1.2
0.1 0.15

Diesel Fuel Oil

10,800 10.200

< 1.0 2.0

LNG - A SAFE OPTION

PROJECTED DEMAND FOR GAS

Gas Demand (MMSCMD)
250.00 200.00

150.00
100.00 50.00 -

2009-10
Power

2010-11
Fertilizer

2011-12
City Gas

2012-13
Petchem-Refinery

2013-14
Sponge Iron

2014-15

2010-11

2011-12

2012-13

2013-14

2014-15

Basis
Units planned

Power Fertilizer City Gas Petchem-Refinery Sponge Iron Total

87.71 49.39 13.70 24.44 3.71 178.94

Source: Mercados Analysis.

149.11 57.48 17.53 25.42 3.82 253.36

185.52 68.08 22.44 26.43 3.93 306.41

212.73 68.08 28.72 27.49 4.05 341.08

243.34 68.08 36.76 28.59 4.17 380.95

Units planned Trend Trend

Trend

GAS PRICES IN INDIA

PRODUCER

LAND FALL PRICE

MARKETING MARGIN

CENTRAL SALES TAX

TRANSMISSION CHARGES

SERVICE TAX

TOTAL PRICE

US$/MMBTU (US$/MMBTU)
ONGC/Oil APM (including Royalty) ONGC C Series (including Royalty) PMT Other JVS (Ravva)

2% (US$)

US$/ MMBTU

10.30% (US$) (US$/MMBTU)

4.20

0.08

0.60

0.06

4.94

5.25
5.65 3.50

0.12
0.11 0.11

0.10
0.12 0.07

0.60
0.60 0.60

0.06
0.06 0.06

6.13
6.54 4.34

RLNG

8.70
4.20

0.17
0.14

0.17
0.09

0.60
1.80

0.06
0.19

9.70
6.42

Reliance KG6

However, presently Spot/ Shot Term RLNG Price at customer end is around US$17-18

LARGE DEMAND BUT SENSITIVE TO PRICE

Gas demand and supply, 2015 Mmscmd, at customer gate prices 311
35 126 77 203

388 276

59 171 25 19 40

230
45

46

91

146

185

185

185

185

1
2010 year Price of $16- Low end 17/ mmbtu consumption

2
Price of $13- Medium 14/ mmbtu

3
Price of $11- High 12/ mmbtu

4
Price of $810 mmbtu Potential demand, 2015

Sectors with demand

Industries CNG transport

Refineries Industries Power cogen

Peaking power plants

Baseload power New fertilizer plants Imports

Prices at Crude of $ 100/Bbl

1 Based on estimated LNG supply of 8 mtpa in 2015 including RasGas (7.5 mtpa) and 1.5 mtpa from Gorgon LNG in 2015 SOURCE: Indianpetro; DGH; Company annual reports; Expert interviews; McKinsey analysis

Domestic supplies

NATURAL GAS IN POWER SECTOR

Power Generation Capacity of 181558 MW) Coal As on August, 2011 4780, (2%) 20162, (11%)
Gas

Between 2011-12 & 2012-13 an additional Gas based capacity addition expected to be around 12200 MW.
Role of LNG in Power Sector: Complementing domestic gas usage In peaking and merchant Power

Oil

38206, (21%)

99503, (55%)

Hydro

Renewabl e

1199.75, (1%)

17706, (10%)

Nuclear

AVERAGE ELECTRICITY PRICE TO CONSUMERS

COUNTRY USD/KWH

Japan France UK USA India China Brazil

0.22-.0.30 0.17-0.20 0.23 -0.25 0.10-0.11 0.06-0.08 0.08-0.11 0.11-0.15

Source : IEA & others

ROLE OF LNG IN PEAKING POWER GENERATION

Presently, Indias LNG import capacity is around 13.5 MMTPA through its

two terminals & meeting approx. 20% of total gas supply.

A majority of power capacity addition is based on coal which has limited

flexibility for providing peaking power

LNG would also play a role in mitigating demand-supply gap for new

under construction combined cycle (base load) capacities.

Given that the LNG imports are unlikely to be in the price range suited

for base load power, R-LNG can serve as top up fuel for base load plants thereby augmenting the PLF and providing solution for meeting

the PEAKING POWER DEMAND .

POWER COST WITH VARIOUS FUELS

LNG UNIQUENESS OF INTEGRATED POWER PLANT

LNG based power generation with integrated LNG Terminal: No VAT on Natural Gas No Marketing margin & pipeline tariff Harnessing of cold energy to increase efficiency of power plant High reliability and ability for generation of peaking power Pricing a challenge , however can be mitigated through : mix of domestic gas and RLNG Targeting niche markets like liquid fuel replacement in industries, housing societies etc. Bilateral Agreements with quality Industrial power consumers

NATURAL GAS IN FERTILIZER SECTOR

Demand

Period

BCM

MMSCMD

2011-12 2012-13

21 25

57 68

India is the 3rd largest fertilizer producer in the world.

Around 35% expansion of Fertilizer capacity expected over the next 3 years Presently, India has 56 large size fertilizer plants. Natural gas on account of

clean & efficient source of energy becoming preferred feedstock for the manufacturer of urea over other fuels.
Assured availability of gas a constraint for expediting conversion process.
With competition from Imported Urea, LNG to complement usage of

Domestic gas with some policy level changes expected to take place shortly

NATURAL GAS IN CGD

Environmental concerns along with fuel economics driving force for CGD growth CGD coverage expected to increase to over 200 cities by 2025 Current demand of Natural Gas for CGD is around 12 MMSCMD, expected to

grow to around 35- 40 MMSCMD by 2017

Rapid CGD pipeline infrastructure being laid

NATURAL GAS IN INDUSTRY

Industrial sector consumers are ceramic, glass, automobiles and other

manufacturers for feed stock and fuel for captive power generation
Niche sector for LNG consumption expected to grow with GDP growth in the

country
Willingness to pay more for gas as compared to other sectors as liquid fuel is

costlier
Various new refineries and expansion like Panipat, Bina, Bhatinda, Paradeep

expected to come on-stream shortly

New Petroleum, Chemicals and Petrochemical Investment Regions (PCPIR)

policy aimed at developing India as a hub for Petchem and chemicals- leading
to incremental demand for LNG

LNG PRICING
LNG

pricing is most important in Sale Purchase Agreements. Success of contract largely revolves around the negotiated LNG price for long term. LNG price in Asia Pacific is largely linked with JCC crude basket. European buyers have LNG price linked with basket of crude products and gas. New buyers prefer fixed price with minor variations

EVOLVING LNG PRICING SCENARIO

In Ist Quarter of 2011, the short term prices which were hovering at around 11% of crude have firmed up post-Japan Earthquake and moving closer to long term prices at 14 -15%. of crude
The vessel charter rates have moved up from 60K /day in Ist Quarter to around USD 90-100K/day.

Long term FOB prices for Asia-Pacific stable at 14-15% of Crude.

Australian projects costs very high compared to Qatari projects supported by high oil prices and slope.

OTHER LNG INDEXATION FORMULAS

Floor & Ceiling - Two main LNG formulas adopted by Japanese are

equations of straight line i.e. increase or decrease in LNG price is proportional to increase or decrease in Crude Oil or JCC Price.
LNG Sellers were concerned about very low LNG price and LNG Buyers

were concerned about very high LNG price. To alleviate their concern, the concept of floor & ceiling was developed. LNG Price would remains static below specified (floor price) and above specified (ceiling price).
S Curve This is another mechanism to take care of abnormal increase

or decrease in the LNG Price. In this concept the slope of the LNG price equation is kept on lower side whenever, crude or JCC Price is reduced or increased beyond specified levels.

LNG CHOICEST FUEL OF FUTURE

With increasing gas demand supply gap with depleting indigenous supplies

India is undoubtedly emerging as a major LNG market of the future.

In Power generation , LNG fueled Gas Turbine yields a high thermal efficiency of

55% as against 40% with Indian and 46% with imported coal.
LNG has highest calorific value in comparison with all other competing fuels and

is the most Eco-friendly.

Since LNG is free from contaminants like Sulphur, Sodium and Vanadium, which

generate corrosive after combustion products, operating costs, are comparatively one the lowest.
LNG being available in abundant quantities in the Mid East Countries, Malaysia,

Indonesia and Western Australia, which involves fairly short shipping distances,
Additionally, LNG also provides several base stocks for the production of

Nitrogenous and Phosphate fertilizers and petrochemical products which will reduce import dependency such as Ammonia, Methanol, MTBE, Formaldehyde and Methyl Methacrylate and Acetic Acid. Considering various advantages of LNG, it make economic sense for the consumers to pay even higher prices over other fuels

THANKS