Myanmar Gas Utilization - CMT Myanmar Oil and Gas Summit Policy, demand, supply and pricing/neil Semple September 2013

Transcription

1 Myanmar Gas Utilization - CMT Myanmar Oil and Gas Summit Policy, demand, supply and pricing/neil Semple September 2013

2 Agenda / Content Introduction Gas shortage? Structure at present in Myanmar and suggested liberalization Suggested upstream changes Recoverable resources really that large already? Myanmar compared to Thailand supply and demand for gas Sub-sectors - transport and fertilizer How other countries have done and not done it Key takeaways 1

3 We at are experts in the economics of energy systems Seoul (TLG Korea) Asia Pacific Energy Experts Competition, Markets, Regulation Economic Consulting Testimony Hong Kong The founding partners of TLG first worked in the Asia Pacific region as part of Putnam, Hayes & Bartlett (PHB) and later with Charles River Associates Market Analysis Asset Valuation Business & Regulatory Strategy Office Presence

4 Our partners and principals have consulted for leaders throughout the region 3

5 Suggestions for Myanmar on getting gas to market Key Take-ways on Gas Utilization Separate regulator from sector players Improve data dissemination Let the price mechanism work if not now, then in five or ten years reality will catch up Offer subsidies directly to less advantaged via handouts Regulator will control gas assets But allow the private sector to invest and own and operate the assets Third party access is best implemented earlier rather than later 4

6 Agenda / Content Introduction Gas shortage? Structure at present in Myanmar and suggested liberalization Suggested upstream changes Recoverable resources really that large already? Myanmar compared to Thailand supply and demand for gas Sub-sectors - transport and fertilizer How other countries have done and not done it Key takeaways 5

7 Cost/Price (USD mmbtu) There s a gas supply shortage Rent Domestic Supply Curve Foregone Value Potential Domestic Supply Curve LNG Supply Demand Across many parts of the developing world and in Asia there is often the cry shortage of gas. But more often than not it is due to a breakdown in the pricing signals, or sometimes due to the incumbent monopoly blocking gas transportation. Or else a strong adverse reaction by the local government to lift local prices to encourage production. Supply Often we see dis-continuous price / cost curves all across Southeast Asia, with the exception of Singapore. But they are slowly disappearing. So how to avoid going up the same dead end alley and hampering gas utilization in Myanmar? 6

8 Agenda / Content Introduction Gas shortage? Structure at present in Myanmar and suggested liberalization Suggested upstream changes Recoverable resources really that large already? Myanmar compared to Thailand supply and demand for gas Sub-sectors - transport and fertilizer How other countries have done and not done it Key takeaways 7

9 Present and suggested simplified future structure Mixture of referee and player Ministry of Energy Myanmar Oil and Gas Enterprise Special status as National Oil Company but still best to be at arm s length from the regulator. Energy Planning Dept MOGE MPE MPPE Directly under President s Office or else Ministry of Finance, or Ministry of State-owned Enterprises (if there was one)? Hive off pipeline business and introduce third party access with postage stamp tariff. Myanmar Petrochemical Enterprise and Myanmar Petroleum Products Enterprise Already selling off assets. Should be at arm s length from the regulator-to-be. Ministry of Energy Either transfer to another Ministry or else invite in foreign partners, or sell off assets. Add in Regulator to Ministry of Energy Energy Planning Dept Energy Regulator (One stop shop) Would have upstream, midstream and downstream specialists, some of whom would transfer over from MOGE, MOEP. Would need Energy Industry Act or some other enabling legislation. 8 Capacity building at Regulator would probably be needed.

10 Agenda / Content Introduction Gas shortage? Structure at present in Myanmar and suggested liberalization Suggested upstream changes Recoverable resources really that large already? Myanmar compared to Thailand supply and demand for gas Sub-sectors - transport and fertilizer How other countries have done and not done it Key takeaways 9

11 Upstream correct incentives needed, especially for remote onshore The last set of fiscal terms were not particularly friendly towards on shore remote areas. Need to get companies drilling and especially in deeper likely high pressure areas onshore. Traditional years is probably not enough time for onshore remote areas. Finding gas onshore will lower the need for gas transmission build-out. Centralize data within MOE from seismic surveys. Make this available to all once any area is relinquished. Make all seismic available after five years have elapsed as in Australia, New Zealand and Norway. Pricing seems broadly aligned with market prices at the moment with domestic portion of Yadana, Shwe and Zawtika gas at 90% of ex-platform export prices. But a move to let domestic prices equal world prices in other words referenced to LNG markers might come later. And LNG prices are changing to have greater linkage into low cost Henry Hub and National Balancing Point instead of oil. The Myanmar Ministry of Energy announced an invitation for bids for the Myanmar Offshore Blocks First Bidding Round in April A total of 30 offshore areas were offered, 11 Shallow Water Blocks and 19 Deep Water Blocks. 10 Source: Myanmar Ministry of Energy

12 Agenda / Content Introduction Gas shortage? Structure at present in Myanmar and suggested liberalization Suggested upstream changes Recoverable resources really that large already? Myanmar compared to Thailand supply and demand for gas Sub-sectors - transport and fertilizer How other countries have done and not done it Key takeaways 11

13 Tcf Recoverable gas resources really this large? Recoverable gas resources Near term and long term gas supplies Yadana Yetagun Zawtika Shwe M3, M4, M11 Proven Remaining Source: Myanmar Oil and Gas Enterprise Probable and Possible Offshore Most of the proven remaining gas is contracted to Thailand and China. But some requirement for domestic sales. Yadana is supposed to ramp up to supply 200 mmcfd to Yangon for the domestic market. Shwe 50 mmcfd rising to 100 mmcfd for the domestic market. Zawtika 30 mmcfd rising to 60 (or 100?) mmcfd to the domestic market Probable and Possible uncontracted would amount to 4,000 mmcfd over 30 years, which perhaps indicates some level of optimism in probable and possible recoverable resources if not then no need for second bidding round to rush to find gas. 12

14 Agenda / Content Introduction Gas shortage? Structure at present in Myanmar and suggested liberalization Suggested upstream changes Recoverable resources really that large already? Myanmar compared to Thailand supply and demand for gas Sub-sectors - transport and fertilizer How other countries have done and not done it Key takeaways 13

15 mmcfd mmcfd The scale of the problem ahead Myanmar compared to Thailand gas supply 6,000 6,000 5,000 5,000 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1, Onshore Yadana Shwe Zawtika Source: blend of IEA, EIA and Myanmar Ministry of Energy North_Contracted Gulf of Thailand_Contracted Northeast_Uncontracted Myanmar_Uncontracted Gulf of Thailand_Yet-to-find LNG_Qatar Northeast_Contracted Myanmar_Contracted Gulf of Thailand_Uncontracted Northeast_Yet-to-find LNG_Spot LNG_Uncontracted 14

16 mmcfd mmcfd Scale of the problem Myanmar gas demand compared to Thailand 6,000 6,000 5,000 5,000 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1, C2+ Industry NGV Power C2+ Industry NGV Power Source: blend of IEA, EIA and Myanmar Ministry of Energy 15

17 mmcfd mmcfd Myanmar - first pass on gas demand supply Supply Demand Onshore Yadana Shwe Zawtika C2+ Industry NGV Power Source: blend of IEA, EIA and Myanmar Ministry of Energy Source: blend of IEA, EIA and Myanmar Ministry of Energy 16

18 Agenda / Content Introduction Gas shortage? Structure at present in Myanmar and suggested liberalization Suggested upstream changes Recoverable resources really that large already? Myanmar compared to Thailand supply and demand for gas Sub-sectors - transport and fertilizer How other countries have done and not done it Key takeaways 17

19 USD mmbtu Gas in transport no need for subsidies if competing fuels at world prices Petrol Savings CNG Equipment Gas 18 Source: Myanmar Oil and Gas Enterprise High Level NGV Conversion Economics Petrol Real Levelised Retail Petrol USD/mmbtu 30.0 Calorific Value of Petrol btu/litre 33,000 Real Levelised Petrol USD/litre 1.0 NGV Levelised NGV USD/mmbtu 19.0 Calorific Value of NGV btu/kilogramme 50,000 Levelised NGV USD/kilogram me 1.0 Fuel Saving Petrol less NGV USD/mmbtu 11.0 Petrol less NGV USD/litre 0.4 Breakeven Calculation Fuel Use in Kilometres/litre 14 Saving USD/kilometre 0.03 Average Cost to Convert Car to NGV (USD) 1,500 Breakeven kilometres 58,000 Source : TLG

20 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 USD tonne Fertilizer best to import from countries with low gas prices Ammonia plants, produce 90 percent of the fertilizer used worldwide, and none have broken ground in the U.S. in more than 20 years. Urea price But in the next three to five years, that could change. Fourteen ammonia plants proposed in the U.S., with nearly 12 million tonnes of new capacity expected. Several older plants are also being re-commissioned and upgraded This boom is driven by low prices for natural gas, the main ingredient in ammonia production Urea prices never recovered to anywhere near 2008 levels, whereas oil and to a extent LNG have recovered to some extent. Source: World Bank 19

21 Agenda / Content Introduction Gas shortage? Structure at present in Myanmar and suggested liberalization Suggested upstream changes Recoverable resources really that large already? Myanmar compared to Thailand supply and demand for gas Sub-sectors - transport and fertilizer How other countries have done and not done it Key takeaways 20

22 USD bn Indonesia - PLN s revenues and subsidies PLN Revenues from sales and subsidy The huge fuel subsidy to PLN under the Public Service Obligation keeps PLN in the black at the bottom line. IDR tn Revenues from Pow er Subsidy USD bn Revenues from Pow er Subsidy FX 9, , , , , PLN Revenues from sales and subsidy USD bn A direct formal subsidy mechanism like this would be one option for Ministry of Electric Power and hence the knock on effect would be greater ability to pay for higher priced gas. We do not see it as a wise use of billions of USD per year Best to set power at prices that allow the generator and distributor to make money and offer handouts direct to disadvantaged sectors. Revenues from Power Subsidy Source: PLN 21

23 USD mmbtu Indonesia - gas prices and supply Java delivered gas contract prices to power Java delivered gas contract prices to industry Source: Indonesia Ministry of Energy and Mineral Resources, and TLG estimates Energy and Mineral Resources Minister Jero Wacik in May 2012 substantially raised numerous upstream gas prices. He said that the new higher prices were expected to become a reference, which will help the oil and gas upstream firms to review the economies of their oil and gas prospects and their already found reserves. Based on the new price, it is expected that those previously considered as not economic will be potential for development. That means the sustainability of gas supply will be more secured, he added. In addition government revenues will be lifted by hundreds of millions of dollars per year. Downstream prices broadly followed suit shortly after. 22

24 Indonesia product subsidies hard habit to break USD 21 bn on fuel subsidies and USD 9.4bn to the state power company. Which is roughly 20% of national budget and in danger of pushing the national deficit over 3%. The government spends more on subsidies than it does on social programs and capital expenditures. Energy and Mineral Resources Minister announcement in June 2013 that the government has increased the prices of subsidized premium gasoline from Rp 4,500 to Rp 6,500 per liter (USD 0.60) and diesel fuel from Rp 4,000 to Rp 5,500 per liter (USD 0.5). Source: New York Times Coupled with this is a hand out program to those actually in need that live close to the poverty line. But some complain that those funds do not reach them. Is facing down the mob part of Myanmar s energy plan? 23

25 Malaysia - subsidy habits are hard to break (Stalled?) Plan to Move to Market Prices for Domestic Gas in Malaysia We would say this is more akin to a move to a cost pass through mechanism such as has functioned quite well in Thailand for many years. Petronas at the very least wants recover what it pays for upstream for gas, and any transportation, by charging an average price to the end users to whom it on sells the gas. So as we understand it at present this is not a move such that the marginal price, in this case LNG, sets the price for all other gas supplies. Back in the early 2000s Petronas with upstream gas prices of the order of USD2 mmbtu was providing an annual gas subsidy of about USD300m a year but as fuel oil and hence gas prices have risen this subsidy between 1997 and 2011 amounted to USD43bn. This has risen to close to USD3bn in Petronas needs funds to develop deep, high pressure, high C02 fields offshore Peninsular Malaysia. It will spend close to USD5bn on the North Malay Basin initiative. Gas Price MYR mmbtu Gas Price USD mmbtu 24

26 China new city gate gas pricing methodology P NaturalGas = Discount Factor # x (W Fuel Oil x P FuelOil x H NaturalGas* + W LPG x P LPG x H NaturalGas* ) x (1 x VAT) H FuelOil* H LPG* W = Weighting of fuel oil is 40% and LPG is 60% # = Discount factor set at 90% for Shanghai * = Heating values for fuel oil, LPG and natural gas are 10,000kcal/kg, 12,000kcal/kg and 8,000kcal/m3 H= Heating value P= Prices in Shanghai for fuel oil and LPG City Gas Prices for incremental gas differ by provinces by subtracting gas transmission costs from the Shanghai City Gas Price. But it looks to us like there is some also element of fine tuning due to political influences. 25

27 China new policy on city gate prices West Siberia to China East Siberia China US$/mmbtu Note: City gate prices for incremental gas supplies under the new pricing mechanism, USD/mmbtu

28 India domestic gas pricing policy break-through Natural Gas New pricing policy Close to 30 percent of India s gas needs are met by imports compared to zero in Of course gas demand has risen threefold since then, but the level of imported of LNG has been more than would have been the case if higher domestic gas prices were allowed. Licensing rounds such as New Exploration Licensing Policy did not get a large response from foreign companies. June Rangarajan Committee recommendations on Production Sharing Contract (PSC) mechanism in petroleum industry First, the netback price of Indian LNG term imports (excluding spot imports) at the wellhead of the exporting countries will be estimated. The second method of searching for a competitive price for India will be to take the weighted average of pricing prevailing at trading points of transactions therefore, the hubs or balancing points of the major markets of continents. For this, (a) the hub price at the Henry Hub in the US (for North America), (b) the price at the National Balancing Point of the UK (for Europe), and (c) the netback price at the sources of supply for Japan will be taken. Finally, the simple average of the prices arrived at through the aforementioned two methods will be taken. Such an overall average of global prices, derived on the basis of netback and hub/balancing point principles, will be taken as the economically appropriate estimate of the arm s length competitive prices applicable for India. August ONGC set for spending spree India s Oil & Natural Gas Corporation plans to spend over USD$3 billion over the next few years off the country s west coast. ONGC is trying to reverse declining production which it will be incentivised to do by higher sales prices. September Partners win approval for D6 plan of development India s Reliance Industries and its partners have won approval for a USD3.2 billion development plan for the D6 deepwater block in the gas-rich Krishna Godavari basin. The field development plan forecasts gas production of 450 to 500 mmcfd for a period of over ten years. These were discoveries waiting for declaration of commerciality for a long time. 27

29 Cost/Price (USD MMBtu) Vietnam no domestic non-associated gas contract signed since last decade PVN Rent Demand Non associated gas & LNG Supply Foregone Value Domestic Supply Curve The most extreme example of the vicious cycle of gas supply constraints. There have been several gas sales agreements with PSC holders and PVN on associated gas, but the PSC holder makes the money on the oil. Several IOCs have exited Vietnam as some kind of glass ceiling in pricing or thinking was reached on domestic gas. BP exited and ConocoPhillips from their blocks 5/2 and 5/3. Chevron was on the cusp of an agreement for B&52 block gas in late 2012 but has since scaled back staff as negotiations stalled. Supply Lack of implementation of a fuel pass-through mechanism at Electricity Vietnam may make PVN reluctant to sign up for USD 10 mmbtu gas. 28

30 Thailand - energy sector structure Ministry of Energy Department of Mineral Fuels Energy Regulatory Commission Energy Policy and Planning Office Dept. of Energy Development and Efficiency PTT* PTT E&P and other private sector E&P companies Electricity Generating Authority of Thailand* & IPPs Provincial and Metropolitan Electricity Authorities* Note * - most shares or equity held by Ministry of Finance Other decision making bodies are the: National Energy Policy Council Committee on Energy Policy Administration Load Forecast Sub-Committee 29

31 Thailand where things broadly work quite well Gas price formula framework provides some upside incentive Fuel pass through mechanism to power tariffs This passes on unavoidable changes in costs of fuel to the end users. The National Energy Policy Committee chaired by the Prime Minister approves changes once every four months usually. 30

32 Agenda / Content Introduction Gas shortage? Structure at present in Myanmar and suggested liberalization Suggested upstream changes Recoverable resources really that large already? Myanmar compared to Thailand supply and demand for gas Sub-sectors - transport and fertilizer How other countries have done and not done it Key takeaways 31

33 Suggestions for Myanmar on getting gas to market Key Take-ways on Gas Utilization Separate regulator from sector players. Improve data dissemination. Let the price mechanism work if not now, then in five or ten years reality will catch up. Offer subsidies directly to less advantaged via handouts. Regulator will control gas assets. But allow the private sector to invest and own and operate the assets. Third party access is best implemented earlier rather than later. 32

34 Contact Us For more information please contact us: Power Utilities Energy Insight Rigour Value By Direct Communications By phone (office) By mail Tower 1, Metroplaza 223 Hing Fong Road, Kwai Fong, Hong Kong Online 33