Market analysis of global gas and LNG; Cairn India Limited

Abstract

LNG demand to double by end of decade which is expected to double from 220 MMtpa in 2010 to 415 MMtpa in 2020 majorly driven by Asia, Europe and new markets in Middle East and South East Asia • LNG market to remain tight from 2013 – 18- The market is expected to tighten fast post 2013 due to growing demand and slow capacity additions. Delay in upcoming liquefaction projects may result in the situation to remain tight for another 2-3 years. • Asia to account for 70% increase in global demand –mainly driven by China and India. Japan will lead to increased demand in the short term and also by new markets in South East Asia will add to the demand. • China to drive the global LNG demand – LNG demand for gas to grow by 400% in China from 9.5 MMtpa to 45 MMtpa. Close to 80 % of the LNG demand has already been contracted mainly with upcoming projects in Australia. • New markets in Asia and Middle East to play an important role- The demand for LNG is expected to rise in new markets in South East Asia like Malaysia, Thailand, Singapore and new markets in Middle East like U.A.E, Saudi Arabia and Kuwait. • Japanese demand uncertainty still persists- Demand in Japan is uncertain due to nuclear policy, demand to be high in the near term as all the reactors have been shut down for maintenance purpose which are likely to start by 2014 post which there may be modest growth in demand. • Environmental concern, shift from nuclear to be the major demand driver- there is a change in global fuel mix from coal to gas mainly due to environmental reasons. Natural Gas Vehicles (NGV) and LNG as a bunker fuel are likely to become more important post 2020. • Australia to overtake Qatar as a supplier but- these projects are getting delayed by 2- 3 years due to increasing costs, delays in getting environmental approvals etc. East Africa has potential to emerge as a major supplier - New supplies from various countries in Africa like Mozambique, Kenya, and Tanzania likely to add 25 MMtpa by 2020 and depending on the discoveries. It could even add 50 MMtpa i.e 75% capacity of Qatar. • U.S the wild card- U.S has proposed liquefaction capacity of 100 MMtpa and could emerge as the largest exporter post the government regulations which has been currently given to just one of the project in Sabine Pass. • LNG Demand to rise in Europe post 2015- demand to rise due to declining north sea production which supply piped gas to U.K, Germany etc and also shift away from nuclear as announced by Germany which will close down all its nuclear reactors post 2020. Also domestic production in U.K is declining due to which the import dependence is expected to rise by 25% and LNG demand by 11%. • Shipping market to remain tight – Shipping market to remain tight. Currently 70 ships are on order another 70 will be required to meet the growing demand till 2020. The tight market has led to increase in freight rates. Large numbers of ships are being ordered currently only 15% is available on merchant basis while only limited percentage of the new ships ordered is tied and close to 77 % is available on merchant basis. • Oil linkage to prevail in Asia due to reason of supply security as major consumers like Japan, Korea and Taiwan do not have other sources of supply and are completely dependent on LNG. • Shift from Oil indexed pricing to Hub based pricing in Continental Europe- The gap between hub prices and the oil linked prices of long term contracts in Continental Europe is widening as the market is currently oversupplied due to fall in demand due to recession. Also there is a shift in buyers from gas companies to power companies who want the best price and also buyer power is increasing due to multiple sources of supplies. • 2-3 major hubs could emerge in the future in Continental Europe- 10 new hubs have emerged in Continental Europe post 2000 among which TTF, ZEE, NCG , GPL are the major trading hubs but the gas trade which happens on this hub is 10% of trade in NBP. In future 2-3 major hubs may emerge by combining these Hubs. EGIX has the potential to become the benchmark index in Continental EuropeEuropean Energy Exchange (EEX) launched the EGIX( European Gas Index) in 2011 which is average of NCG and GPL the two hubs in Germany. Since Germany is the largest importer of gas in Europe and is centrally located EGIX could emerge as the index of the future • FLNG technology could be used to develop small gas reserves in Malaysia and U.A.E in South East Asia and East Africa as these regions have gas resources in the range of 1-3Tcf. The technology is still not proven for the Atlantic Ocean. • FLNG projects have low full life capex requirements and low opex requirements compared to other projects but they have high initial capex requirements and very low late life capex requirements compared to other projects. Overall they are at the lower end of the cost curve. • Large number of FSRU terminals are planned around Asia in South East Asian countries like India, Pakistan, U.A.E, Kuwait etc to meet the near term demand. The time required to construct an FSRU terminal is just 24 months compared to 40 months required by land based re-gasification terminal. Shell is a better technology provider for 3-4 MMtpa projects while Flex will be a better operator for 2MMtpa projects. • Gas to liquid is currently not a lucrative option as the – capex requirements for projects under construction have gone up by 2-3 times. Likely to profitable in areas with cheap gas available. • Shale likely to develop post 2020 – Currently China and Poland are the two locations where Shale gas is likely to develop in this decade • CBM projects are being developed in Eastern Australia and CBM is likely to play an important role in the domestic production of China also India is planning to ramp up its CBM production but still percentage share of CBM is likely to be very small..