Making Sense of the Current Global Energy Markets & Prices

for Crude Oil, Natural Gas & Coal

What does it mean for Myanmars Electric Power?
Sarah Fairhurst

The Lantau Group

1861
1865
1869
1873
1877
1881
1885
1889
1893
1897
1901
1905
1909
1913
1917
1921
1925
1929
1933
1937
1941
1945
1949
1953
1957
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
2013

Oil prices have always been volatile

Average Annual Crude Price, USD/bbl in 2013 money

140

120

100

80

60

40

20

1
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1979M01
1979M12
1980M11
1981M10
1982M09
1983M08
1984M07
1985M06
1986M05
1987M04
1988M03
1989M02
1990M01
1990M12
1991M11
1992M10
1993M09
1994M08
1995M07
1996M06
1997M05
1998M04
1999M03
2000M02
2001M01
2001M12
2002M11
2003M10
2004M09
2005M08
2006M07
2007M06
2008M05
2009M04
2010M03
2011M02
2012M01
2012M12
2013M11
2014M10

Other fuels may have a shorter history, but the messages are much the same
200

20

Nominal prices

Australian Coal ($/mt)

180
18

160
16

140
14

120
12

100
10

80
8

60
6

40
4

20
2

0
0

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Brent Crude ($/bbl)

Japanese LNG ($/mmbtu)

So understanding what drives prices is important

30

Example: Singapore Gas Prices are

linked to HSFO prices which are
linked to crude oil prices

25
PNG (Fuel oil-index)

Price, SGD/GJ

20
HSFO
15
10

5
0

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Coal

Price in 2014 real terms, USD/GJ

But not all fuel prices are linked

20
18
16
14
12
10
8
6
4
2
0
Note: Crude price:

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Crude Oil

Coal

1970 - 1987:Arab Light Crude prices ; 1988 - 2014: Brent price (historical Brent price only starts from May 1987)

And what is important is how decisions are made regarding what fuel to burn;
and in the electricity industry, what type of capacity to build
Taking Singapore as an example
The SRMC is the Short Run
Marginal Cost of a power station
This is approximately the same as
the fuel cost of a power station,
taking into account the efficiency of
the power station

210

SGD/MWh

190
170

PNG

150
130
110
90

70
In the 1990s, coal and piped natural
gas (PNG, coming from Indonesia
and Malaysia) had very similar
marginal fuel costs

50
30
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Coal

When making decisions about which plan to build, you also need to take into
account the capital cost of building the power station
Continuing the Singapore as an
example.

260

The SRMC showed before was

very similar between coal and
gas

210

But when you take into account

the cost of the plant, and
calculate the LRMC (the Long
Run Marginal Cost) of the power
stations
Then piped natural gas was a
clear winner at that time.

SGD/MWh

160
Coal-fired plant LRMC
110

60
LRMC of CCGTs withe PNG indexing to fuel oil

We will come back to what this

meant for Singapore shortly..
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Looking at the history of fuel prices in Asia.

COAL WINDOW

In the late 1970, oil prices shot up during the Iran crisis,
creating a coal window for Asian countries, most of
which had been using oil for power

Crude
Coal

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Almost all of Asia shifted away from oil after 1979

(Hong Kong was nearly 100% coal by 1988)
Almost everyone moved away from oil
Oil

Percent
100

Percent
100

80

80

60

60

40

40

20

20

0
1978

1980

1982

Hong Kong
Thailand
Indonesia

1984

1986

1988

Malaysia
Philippines

0
1978

With no indigenous fuels, Hong Kong moved

most aggressively towards coal
Coal
HONG KONG

1980

1982

Hong Kong
Thailand
Indonesia

1984

1986

1988

Malaysia
Philippines
Source: World Bank

Other countries with indigenous resources started to develop them (hydro, geothermal, etc)
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But Singapore stayed with oil through the 1980s, missing the first coal window,
later switching to gas-fired CCGT units as oil prices fell again
Singapores fuel mix of electricity generation (1971- 2012)
Uniquely in
Asia, SG sticks
with oil

100%

Coal Window 1

Other
Biomass
& other

Oil

90%
80%
70%

OIL

60%

GAS

50%

40%

Gas

30%
20%
10%
GAS MORE GAS

1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011

0%

(Gas Prices
are linked
to Oil)

Source: IEA (1971-2010), EMA website (2011 2012) and TLG analysis

Singapore enjoyed lower oil prices for many years during the between the late 1980s and early
2000s with a fuel mix 100% linked to HSFO prices
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But around 2005, a second Asian coal window opened and continues to this
day
COAL WINDOW #1

COAL WINDOW #2

Crude

Coal

But by missing the first coal window, Singapore entered the second window without any coal
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Many countries committed to gas when gas was expected to be cheaper

but, later, oil-linked gas prices increased materially
COAL WINDOW

COAL WINDOW
2006

1991

1997

Discovery of
Malampaya gas
field

NPC/FirstGen sign GSPAs

with SPEX/OXY

1992
Singapore first
gas unit
commissioned

Singapore
commits to
LNG imports

2001
Commission of
Malampaya

1995
Hong Kong
first gas unit
commissioned

As the price of oil increased, gas prices also increased

(due to oil-price linkages in gas pricing formulae)
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The outcome is that many countries in Asia have a diverse fuel mix
Coal plants were built during coal windows
Gas thermal or CCGT plants were built during gas windows
Other local resources were developed as and where they were available
Hydro in Laos, Cambodia, Philippines

Geothermal in the Philippines

Diverse fuel mixes are an outcome of making good decisions at various points in time,
not an end in themselves
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And not everyone makes Good Decisions

First, Singapore missed the coal window. Then In 2004, Singapore studied LNG and then
commissioned a terminal in 2013
Singapore
commits to
import LNG

PNG supply
disruption
and partial
blackout

EMA takes
over LNG
terminal

EMA appoints
PowerGas as
LNG terminal
developer

Terminal
begins
operation

Gencos
commit
to LNG
contracts

Meanwhilethe coal vs gas spread tripled.

2004

2005

2006

2007

EMA launches
LNG terminal
feasibility study

2008

Gas Act
amended

EMA limits
PNG imports

2009

Gas
market
formed

BG selected as
LNG Aggregator

2010

2011

Terminal
breaks
ground
EMA announces
LNG Vesting

2012

2013
Senoko
860 MW

2014
Tuas Sembcorp
406 MW 400 MW

Keppel GMR
840 MW 800 MW

CCGTs with new LNG

contracts come online

Singapore not only missed the second coal window, it actively ignored it!
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So where to now?
Oil prices have fallen
LNG prices have fallen
But Coal prices have also fallen!

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Brent has dropped by half from the high level in H1 2014

Crude production in Iraq and Russia are not disrupted
while Libya supply returned despite of political turmoil
ISIS attacked
Iraq

120

Saudi cut Oct

OSP priced

Libya ports
re-opened

1st sanction on
Russia

110

Saudi cut
Nov OSP
priced

Daily Brent price, USD/barrel

100

US airstrike
on Iraq
started

90

80

70

60

Price stabilized at
$100-110/barrel in
H1 2014 as Saudi
Arabia proactively
balanced the crude
market

50

40
Jan '14 Feb
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Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov Dec '14 Jan '15 Feb

Source: ICE, Reuters, GS Global Investment Research and TLG analysis

This is reflected in the spot price of LNG over the last 18 months
Daily JKM Spot Prices, $/MMBtu
25

20

15

10

0
8/14/13

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11/22/13

3/2/14

6/10/14

9/18/14

12/27/14

4/6/15

But LNG is not the only fuel to have changed price. Coal prices have also
softened gradually since early 2011
Coal and oil monthly prices (2000-Feb 2015)
US$/MT or bbl
180
160
140

Oil (Brent)

120
100
80

Coal
(Newcastle)

60
40
20
0

2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Source: World Bank; Macquarie

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In addition, we should not forget that the longer term has not changed as much
as the short term
Forward price curves in recent years have been quite consistent
US$/barrel

Brent forward curve

140

Dated Brent
($/barrel)

120

Forward price in
June 2014

100
15th September 2014
End 2009
future price

80

End 2008
future prices

60

31th October 2014

Forward price on
20th Feb 2014

2013 (historical)
2014 (historical)
2015 (forecast)
2016 (forecast)
2017 (forecast)
2018 (forecast)
2019 (forecast)
2020 (forecast)

40

20

0
2000 2001 2003 2004 2006 2007 2009 2011 2012 2014 2015 2017 2019 2020

Source: ICE

The market thinks that oil (and thus LNG) prices will rise again in the medium term
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109
99
55
65
70
75
80
80

How does the changing fuel price affect the economic use of LNG in Asia?
Philippine Example
As part of our Gas Master Plan Phase 1
analysis in October 2013, we modelled
the economic use of LNG in the WESM
and identified how much new plant
burning LNG was economic

Comparison of oil and coal price projections

US$/bbl or US$/mt (2013 prices)
140
120
100

At that time, expectations of future fuel

prices were quite different to those now,
particularly in the near-term

To see the impact of lower LNG prices,

we have re-run that analysis to see if the
outcome has changed

80

Oil (Oct 2013)

Coal (Oct 2013)

Oil (Mar 2015)

Coal (Mar 2015)

60
40
20
0

Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Source: World Bank; ICE; TLG analysis

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The results were remarkably consistent with the previous analysis there is
still a clear economic role for LNG in the power sector
Least-cost capacity expansion plan for
The economic new build of CCGT using these Luzon under expected assumptions
updated fuel price assumptions is still about
October 2013 fuel price outlook
600-800MW
Net MW
If the economic new build were built, these
plants would run mid-merit/peaking (varying
between 15%-35%) and consume c. 0.1-0.3
mmtpa of LNG
Existing gas-fired plant would also eventually
switch to LNG

1,400
1,200
1,000
800
600
400
200
0

Committed

600-800MW

LNG remains a good fuel for mid-merit and

peaking operation but it is unlikely to be an
economic baseload fuel
20

Source: TLG analysis

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Ignores
passage
of time

Natural Gas

Coal
Oil
2013

Total demand for LNG in Luzons power

sector would exceed 0.6 mmtpa

Economic least-cost entry

15
17
19
21
23
February 2015 fuel price outlook

Net MW
Committed
Economic least-cost entry
1,400
1,200
600-800MW
1,000
800
600
400
200
0
13 14 15 16 17 18 19 20 21 22 23

Hydro
Geothermal
Wind
Biofuel

Solar

But other (Philippine specific) developments also affect the need for more gasfired capacity and ultimately more LNG demand
More gas fired capacity has been built
FirstGens San Gabriel phase 2 and Avion have since
achieved financing and are under construction

21

Least-cost capacity expansion plan for Luzon

under expected assumptions

October 2013 outlook

Net MW
Committed
Economic least-cost entry
They plan to eventually use Malampaya gas and
1,400
ultimately LNG
1,200
600-800MW
Changing the way Malampaya gas is used supports the 1,000
entry of more gas-fired capacity and ultimately more
800
LNG
600
Government policy is adding renewable to the 400
200
system
0
Significantly more solar and wind capacity appears likely
2013
15
17
19
21
23
in response to Government policies increasing total
available capacity
February 2015 outlook
Net MW
Committed
More intermittent generation may require more flexible
Economic least-cost entry
1,400
plant in the system to respond to times when solar and
1,200
wind are unavailable
1,000
500MW
400-600MW
800
Market interventions are reducing incentives
600
to build peaking capacity
400
Lower offer price cap and new secondary price
200
cap decrease the incentives to build new gas0
fired capacity
13 14 15 16 17 18 19 20 21 22 23

Source: TLG analysis

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Natural Gas

Coal
Oil
Hydro
Geothermal
Wind
Biofuel

Solar

In the Philippines, the message remains substantially the same as last year,
despite the large global changes in prices
We are still in a coal window albeit one with a smaller gap between the economic use of coal
and gas
LNG is economic in the Philippines for mid-merit operation
This conclusion holds for much of Asia
The lower capital costs of building CCGT mean that even high gas or LNG prices support the use of
gas/LNG for mid-merit and peaking operations
(In countries where there IS mid-merit or peaking, rather than everything we possess, all of the time!

The volume of LNG required is modest

Mid-merit and peaking operations do not require that much fuel

There remain challenges and issues in bringing LNG into the Philippines and incentivising the
market to build and burn the economic quantity of LNG
This conclusion also holds for much of Asia there are unique challenges, opportunities or issues in each
individual country

In Myanmar, the biggest issue may not be coal vs gas, but may be whether to move straight to distributed
renewable solutions

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So what does all this mean for Myanmar?

Myanmar has the advantage of having a blank slate right now
It has various fuel options available indigenous gas, indigenous or imported coal, hydro, other
renewable options etc.
There are advantages and disadvantages to using different fuels.. It just depends which
criteria is most important
Such criteria may include:
Overall cost
Short term (upfront) costs vs long term (operational) costs
Impact on foreign exchanges
Speed to build
What can be most easily financed
Geographical considerations

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The decisions need to take into account all the criteria

Across Asia, coal remains the cheaper baseload option while gas makes a very good flexible
resource for mid-merit loads
This point may be unimportant if there is only baseload or blackout!

Indigenous options save hard currency outflows and can be priced to be more stable
But using indigenous fuel (eg gas) gives up the option of exporting it for hard currency

Gas plants may be more expensive, but they are much faster to build
Is speed or cost more important?
How long are you locked into the higher costs for? (Rental options may help here)

Different parts of the country may require different solutions

For grid-connected generation, traditional larger thermal or hydro plants make more sense than
intermittent renewables
For remote areas, distributed renewable solutions such as solar or micro-hydro plus batteries may be a
much faster and cheaper way to electrify the population than building out a distribution network and
building large grid-connected power stations

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The best outcomes will come from making good decisions

Identifying clearly the overall goal, including timeframes and cost limitations
Reviewing ALL the options (including the less conventional ones such as newer technology)
Analysing the implications of each
Needs a clear analytical framework

And an understanding of how to do economic analysis

Making policy that supports the private sector and public sector to invest in the most appropriate
options
Continuing to review and update the assumptions and policy as the situation changes

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Thank You

Contact

Power

Utilities

Energy

Sarah Fairhurst [email protected]

Insight

By phone
+852 2521 5501 (office)

Rigour

Value

By mail
4602-4606 Tower 1, Metroplaza
223 Hing Fong Road,
Kwai Fong, Hong Kong

Online
www.lantaugroup.com

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We cover the Asia Pacific region

Electricity and gas pricing to multiple industrial facilities
Energy price projections

Generation opportunities (all fuel types)

Tariff benchmarking
Power sector review
Natural gas entry opportunity
Gas pricing and demand
Electricity and gas pricing to multiple sites
Energy price projections (electricity
and gas)

Regulatory developments
Tariff benchmarking and design

Policy and regulatory developments

Retail contracting and power price
projections
Generation opportunity development

Capacity contracting

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Energy price projections and impacts

End user price projections

Market design

Transmission development

Energy Market Review)

Energy policy issues

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