Possible commercialisation options for new gas discoveries. Simon Coates Concept Consulting 18 February 2015

Transcription

1 Possible commercialisation options for new gas discoveries Simon Coates Concept Consulting 18 February 2015

2 Introduction 2014 GIC Gas Supply / Demand study: NZ supply / demand most likely to remain balanced; but Major new gas discovery could significantly exceed existing demand This study considers what new demand opportunities may exist. In particular: Liquefied Natural Gas (LNG) New petrochemical production Gas as a transport fuel New gas-fired power generation; and Increased industrial, commercial and residential demand 2

3 Liquefied Natural Gas LNG has grown as a means of transporting stranded gas from... remote energy-rich regions, to large energy-poor economies (Particularly China) (Particularly Europe) Capital & energy intensive à only cost-effective when distances are too far for pipelines 3

4 Until recently, almost all LNG priced linked to oil LNG contracts typically priced close to an energy-equivalent basis with oil (e.g. the Japanese Crude Cocktail ) US$/mmbtu 4

5 The US shale gas revolution is changing LNG pricing Until 2008, gas prices strongly linked to oil prices US shale revolution has broken this linkage Some new US LNG projects priced on a Henry Hub + basis 5

6 The extent of US LNG developments will strongly influence world LNG prices Long-term LNG prices likely driven by supply & demand If significant new US developments à less requirement for higher cost LNG production elsewhere à lower LNG prices. (And vice versa) Source: McKinsey & Co Long-term LNG prices likely in range between US$11-14/mmbtu 2 to 3 times higher than current NZ gas prices! Likely lower short- to medium-term prices due to reduced Asian demand, and new supply coming on stream 6

7 Might NZ be a good option for LNG? Factors influencing LNG economics Generic to any gas field in the world Size. Economies of scale à minimum size could be 3-4,000 PJ (similar to Maui) Cost of producing raw gas. If high production costs (e.g. due to location or geology) à increase minimum scale Proportion of oil. If high proportion of oil à oil could largely pay for field production à reduce minimum gas scale Location specific LNG shipping costs. NZ has a relative advantage compared with US Gulf coast 1.5 US$/mmbtu cheaper Cost of liquefaction facility US Gulf has brownfield options and deep labour pool Greenfield Australian developments estimated to be 2-4 US$/mmbtu more expensive Same for NZ? 7

8 Floating LNG production may reduce cost disadvantage Floating LNG production increasingly seen as lower cost Built by specialist firms in lower labour cost regions (e.g.korea) Can be re-deployed at end of field life (also avoids decommissioning costs) Avoid cost of offshore platform and pipeline to shore However, some overseas governments see offshore production and exports as reducing potential benefit of gas. Have sought to boost local economy through: requiring on-shore LNG production; and/or reserving a proportion of gas to be brought onshore and sold domestically at artificially lower prices Might a similar approach be good for NZ? 8

9 A reservations policy or requiring on-shore development may prove to be self-defeating Netback from LNG sales likely between NZ$/GJ Domestic consumption would largely be petrochemicals (methanol or urea), or industrial process heat (e.g. for dairy) Gas prices achievable for such markets likely < 6 NZ$/GJ Majority of product exported overseas Would not appear rational to prevent gas being exported as LNG in order for it to be exported as petrochemicals or milk powder at a lower price A reservations policy, or requiring on-shore development, will make a gas field less profitable / more costly for a oil company This will increase the risk that the project does not proceed at all à no benefit to local economy 9

10 New Petrochemicals Methane and ethane have greatest potential to be stranded Heavier hydrocarbons (propane, butane, etc) can be readily extracted and sold overseas as liquids Ethane-based petrochem (i.e. ethylene and related feedstocks) doesn t appear practical in NZ: Too small a proportion of ethane to invest in stand-alone cracker; and Too distant to build pipeline to Marsden refinery Main petrochem options for methane (and ethane left in-stream): Methanol Ammonia Urea Synthetic fuel Addressed later 10

11 All three commodities are realistic for NZ Generally: Methane, ammonia, and urea are all mature international commodities Laws of supply & demand should mean no commodity will systematically earn a higher gas netback over long-term Commodity cycles may mean that one commodity may be relatively short for a few years à signal for new investment In New Zealand: Urea may have advantage due to local demand for product à avoided shipping costs 11

12 NZ Urea production has advantages relative to other Australasian petrochemical options Australasian NZ Urea advantage, relative to: Australian urea: lower gas prices NZ methanol prod n: avoided shipping costs: 2.50 NZ$/GJ if urea consumed in North Island 0.70 NZ$/GJ if urea exported to South Island or Australia 12

13 Willingness to pay for gas for urea (or methanol) driven by cost of alternative gas W. Coast Canada has similar shipping cost to Asia as NZ à Cost of competing gas = Alberta + pipeline costs ( 0.8 US$/mmbtu) 4 US$/mmbtu 5.3 NZ$/mmbtu Plus some of avoided shipping cost Likely some discount to this if purchaser takes on reserves risk particularly if sales linked to a single field 13

14 Gas-for-transport Significant international development of gas as a transport fuel Main drivers: Economic, for countries with stranded gas whose cost is lower than that of oil Environmental, predominantly for local air quality issues, not global warming. (Many gas-based fuels have higher CO 2 emissions than diesel or petrol) 14

15 In theory, large potential NZ market Total size of NZ fuel market 230 PJ/yr Market split between: Petrol, diesel, and fuel oil Light road, heavy road, stationery energy, marine Different characteristics and gas-for-transport implications 15

16 Different gas-for-transport options Fuelling with natural gas Stored in low-temperature liquid (LNG) or compressed (CNG) form Fuel synthesised from natural gas Liquid at atmospheric temperature and pressure Methanol Dimethyl ether (DME) similar to LPG and diesel Methanol blend with petrol Synthetic diesel or petrol functionally the same as normal diesel or petrol Requires specialised fuel tanks and engines Requires specific fuel distribution infrastructure No specialised vehicles or fuel distribution infrastructure 16

17 The light transport fleet does not appear to offer a significant opportunity for commercialising new gas Although CNG is low cost: Not as low as EVs Suffers from Catch-22 for vehicles requiring specialist engines and fuel distribution Drivers won t buy CNG vehicles if concerned about re-fuelling range anxiety Suppliers won t invest in widespread refuelling infrastructure if not sure whether will have significant number of CNG vehicles Significant capital for synfuel plant makes it vulnerable to shifts in oil prices 17

18 Methanol blending may be a value opportunity for NZ Low methanol-petrol blends (<15%) can be used without problem for most cars manufactured after 1990 Presents an opportunity to avoid international oil imports. (Potentially $50- $100m per year if widespread uptake) However Currently car manufacturers state that methanol blends will invalidate warranties Significant hurdle. Only likely overcome if countries such as China continue to push methanol blends, forcing manufacturers to change position Won t result in increased demand for NZ gas Methanol would simply be diverted from existing methanol production 18

19 Specialised return-to-base options for heavy fleet (truck & bus) may be prospective LNG & DME potential options for dedicated heavy trucks (e.g. dairy or forestry) However, small-scale, technology-taker nature of NZ market may mean technologies will have to be more mature before adoption in NZ CNG buses could be good option. Although longer term, may suffer competition from battery electric buses Does not appear to be volume of heavy fleet traffic along major NZ corridors to support development of widespread LNG or DME re-fuelling Overall, quantity of gas from return-to-base options relatively small (< 5PJ/yr) 19

20 Power generation 2014 Supply / Demand study highlighted two key issues: Competition from new renewables Reduced electricity demand growth 20

21 What could a new CCGT afford to pay? Potential CO 2 prices may reduce price a CCGT could pay Low annual electricity demand growth ( 20% of 350 MW CCGT output) à Limited size of market (4 PJ/yr) New CCGT would initially suppress prices more than a smaller geothermal or wind scheme Reserves risk may further reduce the realised price for gas sales 21

22 New gas for direct use North Island direct use has been a modest but steady source of demand Energy for industrial, commercial, and residential customers 18% of NZ consumption For industrial process heat in particular, gas is clearly most cost effective fuel (except if have on-site biomass or geothermal) However, most of the opportunities for significant fuel switching to gas in the North Island have already been realised 22

23 What is possible size of market for any South Island gas finds? Estimated South Island consumption which could theoretically be met by gas 2/3 = dairy 1/3 meat processing & cement However competition from electricity will limit space & water heating opportunity capital replacement cycles would dictate timing of boiler replacement some loads may be too distant to build pipelines à Estimated maximum size of market is 20 PJ/yr after 20 years 23

24 Competition from coal and biomass would dictate the breakeven gas price Current CO 2 prices à breakeven gas price $3.50/GJ or less, if $/GJ pipeline costs greater than in North High CO 2 prices may result in $6-8/GJ breakeven gas price, capped by cost of biomass. 24

25 Summary Overall, NZ well positioned to commercialise significant new gas finds LNG and new petrochemical best options for significant gas finds Other options have some prospects, but limited in size Range in potential gas prices due to uncertainty over cost of alternatives Reserves risk may further impact on realised price à should compete favourably for exploration investment relative to other remote locations 25

26 Thank you! 26

27 Characteristics of different transport fuels 27

28 Production and distribution investment required for different gas-based fuels High investment requirement Moderate investment requirement Fuel type Low/no investment requirement LNG CNG Methanol Methanol blends DME Synfuels Production infrastructure required Distribution infrastructure requirements 28

29 Sensitivity of economics of methanol and synfuels to oil prices and NZ$ exchange rate Low ability Moderate ability Fuel type High ability LNG CNG Methanol Methanol blends DME Synfuels Sustainable fuel price advantage 29

30 Barriers affecting consumer uptake of natural gas-based vehicles High barrier Moderate barrier Low/no barrier Vehicle price premium Heavy Duty Vehicles Availability of vehicles Range/performance/utility/safety Behavioural changes Competition with other options Fuel type LNG CNG Methanol DME Synfuels Light Duty Vehicles Electric CNG High-% Methanol blends Low-% Methanol blends Synfuels Vehicle price premium Availability of vehicles Range/performance/utility/safety Behavioural changes Competition with other options 30

31 Summary of gas-for-transport development potential No development potential Unlikely to have development potential May have development potential Immediate development potential Fuel type LNG CNG Methanol DME Synfuels Transport type Light vehicles Heavy vehicles Buses Marine Rail Agriculture vehicles 31

32 New Zealand petroleum basins 32

33 Disclaimer The information and opinions expressed in this presentation are believed to be accurate and complete at the time of writing. However, Concept and its staff shall not, and do not, accept any liability for errors or omissions in this presentation or for any consequences of reliance on its content, conclusions or any material, correspondence of any form or discussions arising out of or associated with its preparation. 33