NGV Transportation
VOL. 28 | OCT - DES 2016 | USD 30
NGV
TRANSPORTATION MAGAZINE
FEATURES:
IS LNG A FEASIBLE ALTERNATIVE TO MARINE BUNKERS? WHY SOME TRADING AND SMART CONTRACTS DONT MAKE LNG HUBS YET SPECIAL REPORT:
AMID THE GLOOM-AND-DOOM, IRAN STORMS BACK INTO OIL & GAS MARKET EVENT & EXHIBITION:
CWC WORLD LNG & GAS SERIES 8th ASIA PACIFIC SUMMIT 2016
2016 2017 EVENT CALENDAR
28 – 29 NOV 2016
MANILA, PHILIPPINES WTE PHILIPPINES FORUM
30 – 01 DEC 2016
PORT OF SPAIN, TRINIDAD & TOBAGO CNG-NGV CARRIBEAN FORUM JAKARTA, INDONESIA GAS TO POWER FORUM
08 – 10 DEC 2016 11 – 12 JAN 2017
DUBAI, UAE NGV MIDDLE EAST FORUM
13 – 14 FEB 2017
MANILA, PHILIPPINES DECENTRALISED ENERGY & COMBINED HEAT & POWER (CHP) FORUM
01 – 02 MAR 2017
JAKARTA, INDONESIA SMALL LNG SHIPPING AND INFRASTRUCTURE FORUM JAKARTA, INDONESIA CNG-NGV INDONESIA FORUM JAKARTA, INDONESIA BIOGAS INDONESIA FORUM
14 – 15 MAR 2017 14 – 15 MAR 2017 27 – 28 APR 2017
MANILA, PHILIPPINES HYDRO PHILIPPINES
18 – 19 MAY 2017
SABAH, MALAYSIA BIOGAS ASIA PACIFIC FORUM HO CHI MINH, VIETNAM CNG / LPG VIETNAM FORUM
23 – 24 MAY 2017
29 – 30 JUN 2017
MANILA, PHILIPPINES GREEN BUILDINGS & ENERGY EFFICIENCY TECHNOLOGIES
06 – 07 JUL 2017
NAIROBI, KENYA BIOGAS AFRICA FORUM JOHANNESBURG, SOUTH AFRICA CNG-NGV AFRICA FORUM
11 – 12 JUL 2017 03 – 04 AUG 2017
MANILA, PHILIPPINES WTE PHILIPPINES FORUM
13 – 15 SEP 2017
BALI, INDONESIA LNG TRANSPORT, STORAGE, HANDLING INDONESIA CHINA BIOGAS CHINA FORUM
21 – 22 SEP 2017 09 – 10 OCT 2017 11 – 12 OCT 2017
15 – 16 NOV 2017
MANILA, PHILIPPINES BIOGAS PHILIPPINES FORUM MANILA, PHILIPPINES LNG SUPPLY, TRANSPORT, STORAGE PHILIPPINES JAKARTA, INDONESIA GAS TO POWER
For more information, please visit: www.alleventsgroup.com | www.cngngv.com | www.icesn.com www.lng-world.com | www.naturalgasglobal.com
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NGV TRANSPORTATION MAGAZINE
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LNG FORUM SERIES
ICESN
EDITOR’S TWO CENTS
Greetings all! We’ve arrived at the closing quarter of 2016. It has certainly been an interesting year so far, one rife with many ups and downs and increasing global turmoil. The gas markets have continued to undergo development however, even in the face of all the rising uncertainty. There continues to be a strong investment mind-set towards development of gas projects around the world. Many projects are still being pursued despite the low prices and the complicated future of an oversupplied energy market. It does show however, that there is still confidence in the industry and that we are indeed at the early beginnings of a golden age of gas. The current oversupplied market has given rise to some countries finding it a great time to buy gas in bulk on a discount. There’s been a rise for the need of storage and bunkering applications due to the current market conditions and many countries are beefing up their gas infrastructure to accommodate the need to have energy reserves in the form of LNG. We have some very intriguing articles for you in this issue, there’s a great study on whether or not LNG is a feasible alternative to marine bunkering, there’s an interesting perspective on Iran and their oil and gas future, a look at what actually constitutes an LNG hub and everything you needed to know about CWC’s 8th Asia Pacific LNG Summit in Singapore this September. We would like to wish you all the best for the remainder of the year and we hope that you are doing well in reaching your goals that you set for yourself all those months ago. We shall see you on the other side in 2017 and will be back again to provide you with the latest news, technological updates, industry insight and leading-edge research next year. Till then, take care, stay sharp and keep focused!
NGV
TRANSPORTATION MAGAZINE Published by:
NATURAL GAS GLOBAL
Managing Director Vincent Choy vincent@naturalgaslobal.com Chief Editor Rizal Rahman
rizal.rahman@naturalgasglobal.com
Editor Ryan Pasupathy
ryan@naturalgasglobal.com
Business Development Samuel Tan
samuel.tan@naturalgasglobal.com
Marketing Manager Sheryl Chia
sheryl@naturalgasglobal.com
Graphic Designer Puspo Aurum puspo@olifen.co.id
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Vol.28 Oct - Dec 2016 NGV Transportation
CONTENT
03 NEWS AROUND THE WORLD EDITOR’S TWO CENTS ANALYSIS OF NATIONAL POLICIES AND ITS IMPACT ON NGV GROWTH IN INDIA
01 39
FEATURES: IS LNG A FEASIBLE ALTERNATIVE TO MARINE BUNKERS?
27
15
SPECIAL REPORT: AMID THE GLOOM-AND-DOOM, IRAN STORMS BACK INTO OIL & GAS MARKET
EVENT& EXHIBITION:
CWC WORLD LNG & GAS SERIES 8th ASIA PACIFIC SUMMIT 2016
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20 33
2
FEATURE:
WHY SOME TRADING AND SMART CONTRACTS DONT MAKE LNG HUBS YET
NEWS AROUND THE WORLD
PAKISTAN
ARGENTINA
July 2016: World Bank Opposes State Monopoly Over LNG Import
Aug 2016: Gazprom Takes Qatari LNG Cargo to Argentina
The World Bank is questioning the Pakistan Government’s monopoly over its LNG imports and marketing and has recommended full involvement from the private sector so as to break control of state monopoly. Even though the state government has said that it would reduce its involvement in the energy product business, it has set up Pakistan LNG Terminal and Pakistan LNG Limited to take control of all Terminals, LNG import and marketing denying any share to the private sector. Currently the state owned companies have full control over LNG supplies and marketing in the country.
The Psykov vessel, which is on long-term charter to Russia’s Gazprom made a delivery to the Escobar Terminal in Argentina. The Escobar terminal can only receive partial cargoes because of shallow water restrictions. Few LNG cargoes destined for Argentina originate from Qatar because of the shipping distance between the two countries and also that there is normally shipments available from production sites closer to Argentina.
- The Express Tribune
BANGLADESH
- Hellenic Shipping News
July 2016: Excelerate Confirms Deal to Build Bangladesh’s First LNG Import Terminal
INDIA Aug 2016: LNG Price Slump Sends Indian Oil Corporation on Buying Binge
Excelerate Energy confirmed that Petrobangla and the government of Bangladesh have executed the Terminal Use Agreement (TUA) and the Implementation Agreement (IA) for the construction and operation of Bangladesh’s first LNG import terminal – Moheshkhali Floating LNG. The FLNG is to be situated offshore near Moshekali Islandin the Bay of Bengal will provide the necessary infrastructure required for Bangladesh to import natural gas when the terminal becomes operational in 2018. The project is a result of the collaboration between Petrobangla and IFC which provided and arranged the required financing for the Terminal.
Indian Oil Corp (IOC), India’s biggest refiner is boosting its LNG Business by increasing purchases to take advantage of low prices amid the current oversupply glut. IOC plans to buy two LNG shipments each month in the spot market from October onwards. This compares with the 9 spot cargoes that they purchased last year. IOC sold 1.93 million metric tonnes of natural gas for the year through to March 21 2016 which is 6.9% higher than the previous year.
- Rigzone
- The Economic Times
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NEWS AROUND THE WORLD
CANADA
SWEDEN
Aug 2016: BP, ExxonMobil, ConocoPhillips ‘Quit’ Alaska LNG Project The Big 3 Oil Majors have told Canadian lawmakers that the proposal to pipe, liquefy and export North Slope natural gas in Alaska is not economic and that they do not want to continue moving forward as partners. They did however, say that they would sell their natural gas to the project if it ever came to fruition – which is currently more in doubt than ever. WSJ reported that Exxon will not invest in the next stage of the gas export terminal in Alaska and that it would work with its partners to sell its interest in the project to the state government. Conoco Phillips and BP have also indicated that as things continue to remain as they currently are, they are unlikely to move into the detailed engineering phase of the project. BP has said however, that they are not giving up on the project and that they instead need to change their focus to figure out how they can reduce the cost of supply to make the project competitive. - Marine Link
Sep 2016: First Ship-to-Ship LNG Bunkering Completed in Sweden Finnish LNG distributor Skangas is claiming the world’s first ship to ship bunkering of LNG in the use of LNG fuel in international shipping. The bunkering operation took place on September 3rd and involved the LNG tanker – MT Ternsund, which took fuel from the small scale LNG carrier Coal Energy. The operation was carried out at the entrance to the port of Gothenburg, Sweden. Prior to the operation, LNG fuel has been supplied on board ships by either truck or onshore terminals. - Oilprice.com
INDONESIA Sep 2016: Tangguh LNG Expansion Project
The Tangguh LNG Facility is located in Teluk Bintuni Regency in Papua Barat Province and is operated by BP Berau on behalf of the Tangguh
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production and sharing contract partners. FID was made by the operator in July of this year to expand the facility to increase LNG Production capacity.
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The plan has already been approved by the Indonesian government and production at the new facility is scheduled to commence in 2020. The partners in the production sharing contract are MI Berau (16.3%), CNOOC Muturi (13.9%), Nippon Oil Exploration (Berau, 12.23%), KG Berau Petroleum and KG Wiriagar Petroleum (10%), Indonesia Natural Gas Resources Muturi (7.35%), and Talisman Wiriagar Overseas (3.06%). BP Berau holds a 37.16% interest in the project, along with its Indonesian affiliates and acts as contractor to SKK Migas. - Hydrocarbons Technology
NEWS AROUND THE WORLD
AUSTRALIA Sep 2016: Woodside Buys BHP’s Scarborough LNG Stake in $US400m Deal
Woodside Petroleum’s US400 million entry into Scarborough LNG joint venture has reduced the likelihood of an expensive FLNG at the project from going ahead with gas from the remote development more likely to be piped back to existing LNG facilities.
Partners on the project, Exxon and BHP have won approval from the federal and Western Australian Governments to go ahead with initial wokrs on Scarborough on the understanding that it would be an FLNG project but the project has since become a low
priority for both companies and BHP’s decision to sell off half its stake to Woodside. Woodside will pay $US250 million upfront for a 25 per cent stake in the “WA-1-R” offshore permit and a 50 per cent stake in the “WA-62-R” permit. - Hellenic Shipping News
SRILANKA
JAPAN
Aug 2016: Sri Lankan Envoy Eyes LNG Imports From Qatar
Aug 2016: Japan’s Jera Plans 42 Percent Cut in Long-Term LNG Contracts by 2030
The Sri Lankan, Ambassador WM Karunadasa said that he is exploring the potential benefits of his country importing LNG from Qatar. “I plan to propose this during Sri Lankan President Maithripala Sirisena’s state visit to Qatar in the latter part of the year. My aim is to push for signing of more agreements, particularly in the energy sector,” added Ambassador WM Karunadasa. “We have close ties with Qatar, which we could strengthen further if we could import LNG from the state. There would be many benefits considering the proximity of our countries. From our end, we can export fresh fruits and vegetables to Qatar,” he said. Karunadasa also noted that LNG from Qatar could be imported through the Port of Colombo, which he said, is Sri Lanka’s “largest and busiest” port.
Japan’s Jera Co, the world’s biggest importer of LNG is planning to reduce the amount of gas it purchases under its long term contracts by 42% by 2030 from current levels. The company currently buys 34.5 mtpa of LNG under contracts that are 10 years or longer. JERA will take this step to prepare for the liberalization of the electric market in the country that has a murky outlook for LNG purchases by the country’s utility companies. Future LNG use will also probably be limited by nuclear power restarts and additional solar power plants. The decision to make these cuts puts some question marks over planned large scale LNG projects, of which many have stopped in their tracks as they rely on these long term contracts to gain financing.
- Gulf Times
- Reuters
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Vol.28 Oct - Dec 2016 NGV Transportation
NEWS AROUND THE WORLD
PHILIPPINES Aug 2016: PTT Remains Keen on $2B LNG Venture PTT Philippines Corp, subsidiary of Thai PTT Plc has said that it is still keen on building an LNG depot and port in the country that would cost up to USD 2 billion. PTT Philippines CEO, Sukanya Seriyothin said that the company is making sure that the project will be profitable and has already begun talks with the DOE as well as with governors of various provinces on the exact location of the terminal. “It won’t be just a terminal but a power plant. LNG storage alone cannot last. We should have a connectivity business as well,” Seriyothin explained. PTTPC’s parent company in Thailand, PTT Plc.. said it was talking to Filinvest Development Corp. and other firms for a possible partnership on the LNG venture. “We’re just saying that we can invest. We’re at the initial case study. The Philippines still lacks energy supply, that’s why we know the Philippines’ needs for power generation,” said Wisarn Chawalitanon , PTT vice president for international marketing. - Malaya Business Insight
Aug 2016: Government Eyes 200-MW LNG Plant for Power Reserve The Philippines Government is planning to build a 200 MW LNG plant to serve as an emergency source of power when the Luzon grid loses power supply due to unforseen outages. The DOE has initiated a study that will be conducted by Philippine National Oil Cp. (PNOC), which is their corporate arm. Department of Energy Secretary Alfonso Cusi said that the country is looking at its Batangas property as the location for the power plant which will complement incoming plants from the private sector. - Philstar.com
Vol.28 Oct - Dec NGV Transportation
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NEWS AROUND THE WORLD
ITALY Aug 2016: RasGas Delivers First LNG Cargo to Italy’s Toscana
RasGas has shipped its first LNG cargo to the FSRU; Toscana, located in Italy. The cargo, aboard RasGas’ Al Thakhira, was delivered on August 23, 2016. The receiver of the said cargo is a new customer for RasGas, DufEnergy Trading SA (DufEnergy), which is an international, multi-energy trading company based in Lugano, 3Switzerland. Since entering the LNG market in late 2012, DufEnergy has been successfully delivering a number of LNG cargos to its
customers, while diversifying its LNG supply portfolio. FSRU Toscana is one of Italy’s main regasification projects, and is located 22km off the Italian coast between Livorno and Pisa. The terminal is permanently anchored to the seabed through a mooring system, with a single point of rotation at the bow. This shipment – to a new customer at a new terminal – underlines RasGas’ positive growth path, and continues the company’s outstanding performance even in a period of
9
low energy prices. “RasGas looks forward to continuing our support of DufEnergy in meeting the growing demand in Italy – and throughout Europe – for cleaner energy in the form of LNG. The arrival of our LNG cargo at FSRU Toscana represents another positive development in RasGas’ global operations,” said Khalid Sultan R. Al Kuwari, RasGas’ Chief Marketing & Shipping Officer. - RasGas Press Release
Vol.28 Oct - Dec 2016 NGV Transportation
NEWS AROUND THE WORLD
EQUATORIAL GUINEA
CYPRUS
Sep 2016: Floating LNG Project Ready for Final Investment Decision
Sep 2016: Cyprus Latest to Declare LNG Bunkers the “Fuel of the Future”
Ophir Energy has made the announcement that it is making decent progress with its FLNG project in Equatorial Guinea and should be able to reach FID by the end of the year. They have said that despite the current low prices, the project still looks to offer ‘compelling returns’. Fortuna LNG is expected to receive its first gas by mid 2020. The project involves the use of a Moss LNG carrier operated and maintained by Golar LNG which is expected bring costs down and speed up the gas coming on-stream. - Offshore Post
Cryprus’ Minister of Transport, Marios Demetriades declared that LNG is the marine fuel of the future. He said that,” Up to recently, reference to LNG for shipping was only viewed as cargo on ships intended for shore use. Now we can confidently speak about LNG as the fuel of the future for ships as well,” He also added, “LNG is a potential solution for meeting the environmental requirement as its cleaner burning meets all current and future emission standards.” Demetriades says that feasibility studies on LNG as an alternative shipping fuel are valuable and encourage top marine, energy, and financial industry experts to come together for the development of an integrated LNG value chain and well-functioning and sustainable LNG market. - Ship & Bunker
THAILAND
TRINIDAD & TOBAGO
Aug 2016: Thailand Embarking on LNG Shopping Spree as Glut Cuts Prices
Sep 2016: Diesel Maxis Make Way for CNG Ones
An important step towads getting Maxis or MaxiThailand’s national oil company PTT Plc. Is finding favour in the current oversupplied market where prices have crashed and new long term contracts are few and far between. CEO of PTT Plc. Tevin Vongvanich hopes to quadruple import capacity and said that he plans to sign long term agreements with several suppliers by the end of the year aiming to double the country’s current import volumes. Tevin said, “We’re taking the opportunity of the buyer’s market situation of the LNG at this stage to secure a few more long-term contracts,” he said in an interview at his office in Bangkok. “It’s the sale time now for LNG, so we’re doing our shopping.”
An important step towads getting Maxis or MaxiTaxi drivers to switch to CNG has recently taken place with the disposal of diesel run Maxis. The state owned NGC CNG signed an MOU with the Association of Maxi Taxis of Trinidad and Tobago to offer a grant to maxi-taxi owners to dispose of their diesel vehicles and switch to CNG. To access the grant ($45,000 for a small maxi and $75,000 for a large maxi), owners have to destroy their old diesel powered maxi-taxis and procure new Original Equipment Manufactured (OEM) CNG maxi-taxis - Trinidad Express
- Bloomberg
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NEWS AROUND THE WORLD
CHINA Aug 2016: LNG Investments At Serious Risk If China Succeeds On Shale The spot prices for LNG have plunged in recent times, having fallen by more than 75% since 2014 highs - oversupply has met slumping demand. The global LNG oversupply could get much worse if China gets its way. China has been trying to develop shale gas for sevral years but has struggled because they have a very complex geology to deal with and there is a dearth of infrastructure in places where the payload is located and adding this to the poor availability of water in areas where it is needed have made developing these resources significantly more difficult. Through these problems however, China has set goals to
double their production within 5 years through Sinopec. The plan is to grow gas production to effectively mitigate whats happening in the oil side of the energy markets. If Sinopec proves successful, the result would be that the
country will no longer need as much imported LNG as the rest of the world has planned for. It could result in putting billion dollar investments at risk that intend to rely on China’s import of LNG. - Oilprice.com
FRANCE
Sep 2016: The First U.S. LNG Shipment To China Arrives
July 2016: Local LNG Struggling Despite $172 Billion in Investments
The first LNG shipment to China arrived in late August marking the official entry of US LNG into the Asian LNG market. The shipment was chartered by Royal Dutch Shell and came from Cheniere’s Sabine Pass LNG Facility in the Gulf of Mexico. The cargo was purchased by China National Offshore Corp as a part of a long term contract. It was delivered to Yantian Port. The cargo crossed the newly completed Panama Canal extension to reach its destination and was the first LNG tanker to do so. The recent extension has allowed larger ships that were previously unable to navigate through the pass.
French energy company Engie, is considering the future of its LNG business which has the potential to lead to reorganization or even a sale. Earlier this year, Engie set a target to sell USD 16.8 billion worth of assets including oil and gas exploration and production businesses due to low energy prices. The firm’s Global Energy Management and LNG division, has been experiencing lower volumes of gas sales and saw turnover fall 47% in the first half of the year and made a loss before interest, tax, depreciation and amortization of 39 million euros. It was reported that Engie planned to cut some 1150 jobs across various functions.
- Oilprice.com
- Reuters
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Vol.28 Oct - Dec 2016 NGV Transportation
NEWS AROUND THE WORLD
FINLAND Sep 2016: Wärtsilä Wins Nacos Platinum Systems Contract for Four New Cruise Ships
Wärtsilä has been awarded the contract to supply a broad range of integrated automation, navigation and dynamic positioning equipment, as well as the complete uninterruptable power systems (UPS) for four new cruise ships. Two of the vessels are being built at the Meyer Werft shipyard in Papenburg, Germany, while the other two vessels are to be built at Meyer Turku in Finland. The contract with Wärtsilä was signed in the second quarter of 2016.
Vol.28 Oct - Dec NGV Transportation
Wärtsilä’s Nacos Platinum series is complemented by an advanced integrated dynamic positioning system. Three compact workstations provide full access to the customised cruise software from the main bridge and from both bridge wings. Wärtsilä Nacos Valmatic Platinum is an integrated automation system that includes numerous individual systems handling power management, energy measuring, LNG plant control, the HVAC, cabin
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control, emergency shutdown, information management, safety management control, video walls and tactical tables, as well as an extended alarm system. The complete system is operated and controlled from a total of 24 work stations at different locations. In addition, the HVAC system has local control from 55 locations. - Wartsila Press Release
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FEATURE ARTICLE
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Vol.28 Oct - Dec NGV Transportation
14
FEATURE ARTICLE
IS LNG A
?
FEASIBLE ALTERNATIVE
TO MARINE BUNKERS
T
he future of LNG as marine bunker gains continuously the interest of business decisionmakers and regulators. The benefits of using LNG are only partially cleared; the burdens and difficulties are often exaggerated, while key elements towards the verdict of the market are missing thus increasing the uncertainty and delaying investments and projects. Briefly stated, LNG as a marine fuel is not a new idea;
boiled off gas is consumed on LNG-carrying ships since the early 70s. Regulation, technical maturity, and political reasons revived the interest on LNG. Ship operator resist to LNGfueled ships as they concern about the cost of bunkers, any changes in the employment of the ships and finally the impact on all other operations. The International Maritime Organisation (IMO) adopted Annex VI of the International Convention for the Prevention of Pollution from Ships (MARPOL)
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that sets limits for non-GHG such as sulphur oxides (SOx) and nitrogen oxides (NOx) emitted from the engines of ships and consequently impacts ship operations in the highseas as well as in Emissions Controlled Areas (ECA’s). This is the main instrument of the IMO that addresses nonGreen-House-Gases (nGHG). Europe and California, among other jurisdictions, introduced regional regulations, such as the
Vol.28 Oct - Dec 2016 NGV Transportation
FEATURE ARTICLE be consumed while inside an ECA. This solution complies with SOx regulations however, it also increases operational risks, especially for ships that frequently enter or operate within an ECA. Furthermore, selective catalytic reduction (SCR), exhaust gas recirculation (EGR), or relevant technology must be used for the abatement of NOx. 2. Add-on technology: operators can install an exhaust gas cleaning system (EGCS) that desulfurizes the exhaust gases. This option implies that HS-HFO can be consumed in all cases. As in the previous option, a relevant NOx abatement technology must also be installed. 3. LNG fuel: operators can use LNG as a marine fuel. LNG provides significant reductions in SOx and NOx emissions, which allows operators to comply with existing and proposed regulatory limits. Focusing on the LNG option, operators are not willing to switch to LNG or more expensive conventional marine fuels with reduced emissions profiles (e.g. MDO and MGO), and are unwilling to shift operational practices and technologies, due to the following key risks: 1. There is no market trend or commitment that indicates ships with reduced emissions profiles will attract more cargoes or be able to charge higher freight rates than their conventional competitors to increase revenues. Consequently, any increase of the cost elements will lead to deterioration in profit margins. 2. There are operational risks associated with the global availability of fuels, such as MGO and LNG. There are many concerns related to the availability of LNG-bunkering facilities, particularly the geographic and routing
CGTANK Figure 1: Timetable of expected regulatory evolution
Sulfur Directive 1999/32/EC, as amended by the EU Directives 2012/33/EC and 2005/33/EC and the California Air Resource Board (CARB) rules, that set even stricter limits than Annex VI; a typical gold-plating imitative that complicates further the problem! The issue of Green-House-Gases (GHG) such as carbon dioxide (CO2) is also intertwined, as there is a need to reduce the carbon footprint of the industry and the current technical measures do not suffice, therefore the Market-Based Measures (MBM) are currently discussed at the IMO. As a summary, Figure 1 is provided in order to tabulate the established limits and the corresponding implementation dates. Finally of equal importance are regional approaches and incentives not limited to the abatement of SOx and NOx. As such, many ports provide incentives for operations deemed to be beyond minimum compliance or peer performance standards. Some of these incentive regimes may even be related to the Environmental Ship Index (ESI), i.e. a measurement derived by the
Vol.28 Oct - Dec NGV Transportation
World Port Climate Initiative (WPCI) of the International Association of Port and Harbors (IAPH) that determines seagoing ships that outperform current emission standards and consequently special tariffs or scheme of benefits can be applied for the ships reducing their CO2 footprint. Examples include a rebate offered by the port of Hamburg, the award of a ‘Green Trophy’ by the port of Rotterdam, the adoption of simple concepts and ideas by Swedish ports and incentives introduced by Singapore such as the ‘Green Ship’, ‘Green Port’, and ‘Green Technologies’ programs where qualifying ships enjoy significant reduction of registration fees and tax burdens Given the current regulatory limits, operators effectively have three compliance options, which are categorized as follows: 1. Fuel switch: operators can install dual-fuel systems, which allow high-sulfur heavy fuel oil (HS-HFO) to be consumed when the ship is operating outside an ECA, and low-sulfur heavy fuel oil (LSHFO), marine diesel oil (MDO), or marine gasoil (MGO) to
16
TM
FEATURE ARTICLE restrictions associated with using LNG-fueled vessels (i.e. vessels can only serve specific markets and routes). 3. At present, there is no after-market for LNG-fueled ships. 4. There is regulatory uncertainty regarding not only the future limits for currently restricted emissions, but also the probable limits for known pollutants that are not yet restricted, such particulate matter (PM), which LNGfueled ships may or may not address Consequently, operators are faced with a very complicated dilemma: they have to move towards a new technical solution yet at the same time all technology options are full with uncertainties. In such difficult markets, the last thing owners envisage is more risks and ambiguities. Nevertheless, LNG as marine fuel should not be considered as such an abstruse and perplexing alternative. Any shift from HFO to any other bunker is justified by the price differential; the higher the benefits, i.e. the savings, from the alternative fuel the higher the probability to shift. Statistical analysis of the HFO versus LNG prices in Singapore suggests that there is a substantial potential of reduction of the bunker bill. In contrast to conventional bunkers, where the supply and energy content are relatively well known and understood, the supply of LNG is more complicated and the capacity required to store the same energy content is notably increased. Therefore, there is substantial ambiguity surrounding the pricing of LNG as a marine bunker. First, the various natural gas pricing mechanisms (e.g. hubbased, oil-indexed, bilateral monopoly, regulated, and
Figure 2: Relative comparison of LNG prices vs HFO prices in Singapore (1996-2014)
subsidized) that serve the needs and purposes of natural gas as an energy commodity (i.e. not as a marine bunker), combined with the unknown costs of distributing LNG to a ship, obscure the transparency of LNG pricing for marine bunkering purposes. Second, the quality of LNG as a natural gas mixture, which varies depending on the natural gas reservoir, production process, and liquefaction facility, determines its energy content, price, and usability as a marine fuel. Third, the liquefaction technology, i.e. transportation of natural gas (NG) to a liquefaction facility, refrigeration/liquefaction process, cryogenic storage facilities, and transportation from LNG storage to the ship determine the final price. Unfortunately, these costs are not publicly available, and the known hub-based and oilindexed prices do not include these costs. The most common approach to consider the price that marine operators will
17
pay for LNG fuel is the sum of either the Henry Hub (HH) natural gas, or the UK National Balancing Point (NBP) natural gas, or a European LNG import price, and an adjustment for bunkering. Figure 2 provides substantial evidence of the potential; all fuels are compared with HFO and various scenarios for the supply cost as reported by bunker-supplies are considered for the final price of LNG faced by the ship operator. In few words, given the above the circumstances, the price of LNG as fuel is merely demystified. In addition, LNG abates almost fully SOx and NOx, thus enabling operators to enter ECA and ports, where regional stricter rules apply, without uncontestable stumpers. Consequently the risk of future regulation, international or regional, is adequately mitigated. Nevertheless, the encouraging results and facts yielded from research and rational thinking are challenged and disputed when drafting the
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FEATURE ARTICLE financial plan of the project. There is substantial evidence that LNG-fueled ships are 10-15% more expensive than conventional ones. Considering operating expenses equal to the conventional ones, an assumption that shall be proven from the market, and considering the voyage expenses different, due to the price differential, it is the port dues and related fees that may deem the daily operation of the LNG-fuelled ship more lucrative than of the conventional one. Research yields a simple formula that estimates the discount port authorities should offer to LNG-ships ceteris paribus, in order to compete with the conventional ones on equal terms. This formula considers the higher capital expenses, the price differential and the port dues for the ships of that size. Hence, a local or regional policy, which reduces port dues for LNG-fueled ships (or punishes the conventional ones, as they pollute more), is requested. This regulatory acupuncture contradicts the practice of internationally applied limits, yet it seems necessary, as different ports and regions face different environmental and trade needs. Furthermore, the higher
original capital expenditure implies also lower returns or increased securities required for the financiers. Higher initial outlay demands higher freight rates to break-even with conventional ones, and there is no indication that LNGfuelled ships will earn them. Therefore financial engineering solutions should be put into practice, in order to attract investors. Manufacturers and technology providers might cover the exceeding part of the initial cost either as mere equity providers or through deferred payments after the delivery of the ship. In any case they should somehow undertake part of the
DR-ENG ORESTIS SCHINAS Schinas heads the Maritime Business School at the Hamburg School of Business Administration, since 2008. He possesses degrees in Engineering, Management and Finance and his research focuses on improving maritime decision-making. Therefore he has published papers in leading journals on LNG, bunker price forecasting, and ship finance and contributed in specialized topics, such as the extensive analysis of the Sulfur Directive, the extension of ECA, etc. Schinas has participated in many private projects involving financing and management of ships and ports as well as has offered his services as external expert to the IMO and the European Commission and other Administrations.
risk of the “showcase� projects otherwise the ship owners will not easily shift and opt for their technology. This financing gap could also be addressed through export credit schemes, yet this implies the support of States. There are already some export schemes in place but they should be further customized. All in all, LNG is a prominent alternative fuel for marine operators. Definitely, none expects LNG to fully replace HFO, but significant segments of the market, such as ships engaged in coastal trading or calling often ports might shift; a push from policymakers should be expected. Last but not least, LNG-fueled ships address also the need of reducing the carbon footprint better than conventional ones. In this regard the exposure of the owners to market-based measures (MBM), expected to be introduced around 2020, will be lower, and therefore the annual financial result will become more predictable. Anyway, why should somebody invest in ships and especially in LNG-fueled ones, unless he envisions a better market for them? NTM
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By Dr-Eng Orestis Schinas
SPECIAL REPORT
AMID THE GLOOM-AND-DOOM,
IRAN STORMS BACK INTO OIL & GAS MARKET
With the largest reserves of gas and the fourth largest reserves of oil worldwide, Iran is a potential pot of gold for oil & gas companies. Foreign private and national oil companies are looking to invest in the Islamic Republic, thanks to the landmark nuclear deal with the major powers and investment terms offered by the Iranian Government. With the new Iran Petroleum Contract (IPC), the Government is trying to increase the country’s attractiveness to foreign investment, in order to revive its oil & gas industry and boost lucrative exports. Effects of recent sanctions International sanctions have thwarted the development across Iran’s energy sector, especially upsetting upstream investment in both oil and natural gas projects. Iranian oil production has declined substantially, and natural gas production growth has been more sluggish than anticipated, despite its strong reserves base. The sanctions have resulted in a number of cancellations and suspension of upstream projects. The sanctions impeded Iran’s ability to sell crude oil and cut exports from a peak of 2.5 million b/d before 2011 to just over 1 million b/d in recent years. According to the International Monetary Fund (IMF), Iran’s oil and natural gas export revenue was $118 billion in the 2011 (ending March
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20, 2012). The IMF estimated that Iran’s oil and natural gas export revenue fell to $55 billion in 2014, which was a drop of 53% from 2011 and 2014. The revenue loss is attributed to the sharp decline in the volume of oil exports from 2011 to 2013. Iran is close to pre-sanction production level Iran’s oil production levels were relatively flat during its energy sanction period (2013-2015) and averaged around 3.2 million barrels per day (b/d). After sanctions were eased, Iranian
oil production rebounded much faster than anticipated as shown by the above chart. At present, Iran is roughly back to presanctions production levels of 4.14.2 million b/d. The oil production in the month of August 2016 was 3.6 million b/d. According to the Iranian Oil Minister Bijan Zanganeh, Iranian crude output would reach 4 million b/d by March 2017. JP Morgan bank’s analysts commented that the steep increase in production is possibly a part of condensate volumes being blended into the crude streams and an increase in gas injection
“The drop in prices won’t be a concern for us. It should be a concern for those who have replaced Iran’s market share”
- Bijan Zangeneh, Iranian Oil Minister
20
SPECIAL REPORT
Source: EIA, OPEC, Trading Economics and Jodi Data
into key oil fields as a part of Enhanced Oil Recovery (EOR) techniques. The oil production is forecasted to be 4.8 million b/d by end of this decade, provided that sufficient investment is poured in the oil industry. Iran is shipping out way more oil Given the world market is currently adequately supplied; Iran is offering favorable terms, such as credit windows and discounts in pricing to secure long term buyers. Iran restarted negotiations to win back its traditional customers in Europe and Asia and managed to gird many of them for resuming
purchase of Iran’s crude oil. Consequently, Iran doubled its oil exports from early 2016. It exported ~2.3 million b/d of crude oil in August 2016. The export strength has been driven by drawing down onshore stockpiles and increased production. Iran’s top destinations include China, India, Japan and South Korea. Asian oil importers have requested an increase in their oil purchase from Iran. Four major Asian buyers shipped in 1.6 million b/d of Iranian oil in July, which was 1 million b/d a year ago, a jump of 61%. The below table show Asia’s Iran crude imports in thousand b/d
Source: CNN, FT, OPEC, EIA and Iran’s MoP
21
for July 2015 and 2016. France’s giant Total signed a contract for buying 160 thousand b/d of crude oil from Iran. Furthermore, negotiations were held with Russia’s Lukoil and Spain’s Cepsa, ending in the signature of agreements. Greece’s Hellenic Petroleum also started receiving Iran’s crude oil. Iran is estimated to reap $21billion from oil exports this year if the country’s export averages 1.7 million b/d. Bye-bye to buyback, let’s welcome IPC The Iran’s Ministry of Petroleum (MoP) has approved new Iran Petroleum Contract (IPC) which is set to replace the prevailing buyback contracts (subject to approval by parliament) to attract International Oil Companies (IOCs) and service industries. In the buyback contracts, payback period is shorter than those of present production sharing agreements; typically between 5 to 7 years. Foreign companies are less authoritative on how to manage reservoir development and oil field production and all the power lies with Iranian state
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SPECIAL REPORT Asian Country
July-2015
July-2016
Year on Year %
China
575.7
566.2
-2%
India
215.4
523.1
143%
Japan
158.6
256.7
62%
South Korea
66.7
291.1
336%
Total
1,016.4
1,637.0
61%
capital investment is required for developing gas fields means Iran’s future as a major natural gas exporter is several years away. Currently, Iran contributes just 1% to the total global natural gas trade, with almost 93% of exports going to Turkey. Iran plans to broaden its gas exports to regional countries as well as to Europe and Asia. It is preparing to triple gas exports to Armenia and start exports to Georgia. It has already started holding talks with Turkey in order to increase the gas export. Further, Iran will start exporting 7 mcm/d of piped gas to Iraq starting from October this year. A second route to Basra will be opened in 2017, with volume eventually reaching 70 mcm/d. Discussions are underway with India to develop Chabahar-Gujarat undersea gas pipeline and Farzad-B gas field. It is also in an advanced stage of
Source: Reuters
owned companies. The IPC model will address much of this criticism. For instance, it will offer lengthier contract periods of 2025 years, allowing for much longer cost recovery after first production. The IPC model will allow establishment of a joint venture between Iranian and foreign companies for field exploration, appraisal and development. There will also be a provision to extend into EOR phases. On paper, this new model will bring reasonable distribution of reward and risk between the Iranian and international firms. Most importantly, technology transfer and the dissemination of technical know-how will start coming back into the country after decades of isolation. These structural reforms are necessary to modernize Iran’s ageing oil & gas infrastructure. The IPC is the framework for 49 upstream oil & gas contracts expected to be signed with foreign investors in coming months. Several shortfalls of the Iranian buybacks contracts are addressed, however, booking of reserves is still a red-line. Furthermore, it is imperative to note that dispute resolution mechanism under the IPC will be subject to the exclusive jurisdiction of the Iranian courts and many IOCs will prefer international arbitration. Getting gas out of Iran Nonetheless, international sanctions have also affected
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Iranian natural gas sector. But now Iran hopes to increase natural gas production and wants to make a splash on the international gas export market. Iran is ramping up production fast and is expected to produce about 250 bcm of gas by 2018. This additional supply will come from the South Pars gas field which Iran shares with Qatar and holds almost 40% of Iran’s proved natural gas reserves. Beyond 2018, there are already plans for many more phases of development, both at South Pars and other fields such as North Pars and Kish. However, huge
“Almost 78% of the Iranian crude oil made their way to four major Asian countries”
Buy Back Contracts
Iran Petroleum Contracts
Contract Duration
5 – 7 years
Fixed; based on production targets
Remuneration Structure
No specific incentives on enhanced oil recoveries
Maximum cost recovery capped at the beginning
Technology Incentives
Cost Recovery Methodology
20 – 25 years
Floating; based on market price & complexity price
Specific incentives to engage in enhanced oil recoveries
Cost recovery on annual approved investment
Overall, new IPC are more long term oriented and intend to provide greater incentives to operating companies for enhancement source: Secondary Research
22
SPECIAL REPORT “Iran
expects
to
attract
$10 billion by March 2017 by sealing three contracts based on IPC, Ali Kardor, MD, National Iranian Oil Company (NIOC)”
technical dialogues with Oman to pipe natural gas to the sultanate through the Persian Gulf. Iran is also looking for a contractor to resume building the Iran LNG project, which was half complete when it was stalled by western sanctions. With an already oversupplied LNG market, Iran’s goal to start LNG shipments by 2018 is dubious, post-2020 is somewhat realistic and may target China, India, Pakistan, Kuwait, and UAE for Iran’s gas. Iran: The new investment frontier Iran is looking to attract an eye-popping amount of $185200 billion of investment to its upstream and downstream sectors under a five-year development plan that is set to conclude in March 2021. Iran has 27 oil & gas reserves which it jointly shares with its neighbors such as Iraq and Qatar. The shared fields roughly account for 30% of the country’s gas reserves
as well as 20% of its oil reserves. Hence, the country’s priority is the development of the shared fields which includes South Azadegan oil field, offshore Farzad B gas field, phase 11 of the South Pars gas field and the South Pars oil layer. To complement the developments and expected investment of $85 billion in upstream sector, Iran has ambitious plans to revolutionize the downstream industry. To accommodate the current growing domestic demands, Iran has to rely on imports of higher value-added refined products, such as gasoline, jet fuel and diesel. Accordingly, Iran has devised a plan to increase its existing refining capacity from 1.86 million b/d to 3.20 million b/d by 2020. In order to cater to the growing demands, an investment of about $26 billion is required to upgrade the existing ten refineries and build five new refineries. There are also plans to boost output of the petrochemical industry by construction of around 70 petrochemical plants which would require an investment of $80 billion by 2025. Several of the above petrochemical projects have been confirmed, and others are undergoing negotiation. Haldor Topsoe, Danish catalyst and
process technology company is setting up an office in Iran and is planning a new methanol plant in Chabahar, southern Iran region. German chemical giant BASF and Linde, as well as Japan’s Mitsui Chemicals are also interested in investing in petrochemical facilities in Assaluyeh (southern Iran). This site is part of the Pars Special Economic Energy Zone (PSEEZ) which will reside a huge petrochemical complex, currently under development, close to one of the biggest gas fields in the world. Another, Danish Company, Novo Nordisk has committed to build a manufacturing plant in Iran. Furthermore, National Petroleum Company (NPC) is in talks with France’s Air Liquide to build a methanol-to-propylene plant in the country. This will place Iran in the league of major petrochemical suppliers and allow it to compete with countries like Saudi Arabia and India. Rejuvenation of the oil & gas industry in the aftermath of the nuclear deal will be Tehran’s prime priority in the short term which will lead to liberalization of trade and direct foreign investment. As a result, the Iranian economy may grow quickly, driven by exports of oil, gas, petrochemicals and
Iran: New investment destination Major Countries
Committed fresh investment for Iranian economy
Investment in oil & gas sector
Major Energy Companies
China
$50 billion
$21 billion
China National Petroleum Corporation (CNPC), Chinese National Offshore Oil Corporation (CNOOC) and Sinopec
South Korea
$25 billion
$5 billion
Korea Gas Corporation (KOGAS) and Daewoo Ship Building and Marine Engineering (DSME)
Russia
$18 billion
$6 billion
Lukoil
Italy
$18 billion
$8 billion
Sapiem and Eni
France
$15.5 billion
$2 billion
Total and Air Liquide
Japan
$10 billion
-
Inpex Corporation and Nippon
Note: These figures are based on announcements related to investments in 2015 & 2016.
23
Source: Secondary Research
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SPECIAL REPORT other manufactured goods. This will re-energize the oil & gas industry, thereby generating more growth synergies for other dominant industries in Iran including, marine & logistics, cement, and service. Game of barrel Iran is one of the world’s cheapest places to tap new oil fields and pump from existing wells. It costs around $12-13 to produce a barrel of crude oil. While the economics appear to be eye-catching, the margins have narrowed with crude oil price hovering around $47 a barrel when compared with those triple digit price in early 2014. The question now is - is the prize big enough? Low oil prices and narrow margins could one of the reasons why oil giants may shy away from investing in Iran. Much will depend on the contract terms offered by Tehran to international oil & gas companies. After international sanctions were implemented on Iran, oil states started a race to gain some of Iran’s share. A larger part of it went to Saudi Arabia which enjoyed a substantial surplus in production capacity. Now, Iran is pledging to ramp up production from existing fields, seeking to recoup its market share post-sanction. Consequently, Tehran has ruled out any production freeze at this stage, despite the glut and calls from other OPEC members to curb output as they struggle with lower oil export revenues.
A price war has started between the oil nations. Saudi Arabia and Iran are offering discounts to the buyers, signaling that both oil states have no plans to back down. Both the oil nations are entangled in a web of trouble, which may lead to a heavier gravity force on the multi-year low oil prices. Steady oil production growth is also expected from Iraq and Russia. Although, OPEC countries meeting held in Algiers recently agreed to cut output to 32.5 to 33 million b/d from around 33.5 million b/d. However, OPEC didn’t reveal the details of the plan leaving no final agreement date, new production quotas for member countries and periods of the cut. This is expected to be made clear in OPEC November meeting. On the one hand, this deal could balance the market to an extent where the oil price will rise, but on the other hand it could also lead to a surge in non-OPEC oil production, putting pressure again on oil prices. Taking all these factors into consideration, any addition to supply without an equivalent increase in demand will result in a softer market and will delay the true oil price recovery anytime soon. True, plenty of challenges ahead Sanctions relief paved the way for Iran’s re-entry into the world oil & gas market. Iranian President and his oil minister,
PRIYANK SRIVASTAVA
Priyank Srivastava, is working as a Consultant in Oil & Gas Practice at Protiviti Middle East, a global consulting firm that helps companies solve problems in finance, technology, operations, governance, risk and internal audit. His role’s contribute in the planning and executing of business process and performance improvement reviews for oil & gas companies within the GCC region.
have come up with a master plan to persuade international companies to invest in its ailing hydrocarbon industry by offering them more lucrative contracts. However, several barriers to entry remain for investors, notably, the US continues to enforce bilateral sanctions against Iran and engaging in financial transactions with the financial institutions of Iran is still prohibited. Accordingly, foreign banks are adopting an alert approach to process Iranian payments. Under the Joint Comprehensive Plan of Action (JCPOA), Iran’s nuclear-related activities will also be monitored for the period of next 15 years with the potential for sanctions being re-imposed if the Government do not comply with the nuclear agreement. ‘Snapback’ or the automatic re-imposition of sanctions is the biggest fear of investors. As a result, Western and Asian companies continue to be cautious dealing with Iran, fetching fewer deals than anticipated. With oil & gas companies cutting spending due to the current climate of flat oil prices and surplus production, many companies may not be interested in investing in the country. From the political angle, Iran is about to enter into an election cycle; if President Hassan Rouhani is not re-elected then there is no guarantee that his successor will remain on the path of energy reform. Hardliners are also opposing the IPC framework, citing that, it is offering too much control of Iranian oil & gas assets to foreign companies. It is again a challenging task to satiate both, the hardliners and the IOCs. Iran has a cumbersome past, hence, difficult to make predictions. But being optimistic here, Iran is bracing itself to re-enter in the oil & gas industry with a reinvigorated force. NTM
Vol.28 Oct - Dec NGV Transportation
24
By Priyank Srivastava
Advancing Indonesia’s Gas & LNG Industry Day 1 Tuesday 17 January 2017 OPENING PLENARY Day 2 Wednesday 18 January 2017 COMMERCIAL Day 2 Wednesday 18 January 2017 TECHNICAL Day 3 Thursday 19 January 2017 CLOSING PANEL
Key stakeholders represented at GIS 2017 include:
EARLY BIRD RAT ENDS E SOON !
PT Pertamina (Persero), Perusahaan Gas Negara (PGN) & PetroRaya Resource will be discussing on the map of opportunities for the gas & LNG value chain Indonesia Infrastructure Finance, PwC Consulting Indonesia, PT Pertagas Niaga, Poten & Partners Australia Pty Ltd & Société Générale will touch on developing LNG infrastructure in Indonesia, what are the investment opportunities Perusahaan Listrik Negara (PLN) & Wood Mackenzie will give market updates on PLN’s 35,000MW Program SKK Migas, The Energy Contract Company Ltd & Singapore Exchange (SGX) will share what’s driving Indonesia’s push to transition to gas as an energy resource – gas pricing and gas aggregator update Osaka Gas Singapore Pte. Ltd. & K&L Gates LLP will deliberate on aligning key stakeholders to support gas sector growth Sampe L. Purba Vice President of Gas Commercialization SKK Migas
Didik Sasongko Vice President LNG Pertamina (Persero), PT
Kusdi Widodo General Manager LNG PT Pertagas Niaga (Subsidary of Pertamina)
Adi Munandir Division Head, Strategic Management Perusahaan Gas Negara
Rama Panjaitan Vice President, Investment Indonesia Infrastructure Finance
Chairani Rachmatullah Head of Oil & Gas Division Perusahaan Listrik Negara (PLN), PT
Yales Vivadinar, Managing Director, PetroRaya Resources
Edi Saputra Senior Expert – Gas & Power Wood Mackenzie
To register as a conference delegate, please contact Spica Gaite at info@gasindosummit.com, call +65 6422 1476 or visit www.gasindosummit.com/ngvtransportation_1
Hear from Outstanding Speakers & Leadership Panels The world’s strongest speaker line-up in 2017 arrives in Japan:
Patrick Pouyanne Chairman & Chief Executive Officer Total
Ryan M. Lance Chairman & Chief Executive Officer ConocoPhillips
Peter Coleman Chief Executive Officer & Managing Director Woodside Energy
Maarten Wetselaar Integrated Gas & New Energies Director Royal Dutch Shell
Michael K. Wirth Executive Vice President Midstream & Development Chevron
Robert S. Franklin President Gas & Power Marketing ExxonMobil
Khalid bin Khalifa Al-Thani Chief Executive Officer Qatargas
Charif Souki Chairman Tellurian Investments Inc.
Shogo Shibuya President & Chief Executive Officer Chiyoda Corporation
Jack A. Fusco President & Chief Executive Cheniere Energy Inc.
Mary Hemmingsen Global Head of LNG KPMG
Nobuo Tanaka Chairman Japan Gastech Consortium former Executive Director International Energy Agency
Organised by:
An unmissable opportunity to hear thought-leading perspectives on the global gas and LNG value chain. Find out more on www.gastechevent.com/ngvtransportation3
FEATURE ARTICLE
WHY SOME
TRADING AND SMART CONTRACTS DON’T MAKE LNG HUBS YET
E
veryone who has touched upon trading - as the term is understood today - very quickly falls victim to the impression that this casino is the real economy. And that indices, charts, KPI’s and financial market performance is all that matters. It does not take long and the virtual world has you in its clutches. Losing touch with reality is just a logical next step which means that forgetting the basics of the basics is not a totally alien thing to you anymore. Why do I say this? Ever since I joined the LNG roadshow, the first LNG hub seemed to be just around the corner and somehow - they did not spring into existence yet. Not really at the least. For more than 15 years some of the biggest players in the industry tried to make LNG a true commodity and lots of phony successes have been announced just to disintegrate into what all those announcements always were hot air. But now, the core
ingredients for the first real LNG hub are mixed up - quite inadvertently so - and in a region of the world where nobody expected it to spring up. No matter what you do in LNG - you won’t be able to ignore what happens in North Western Europe for long. Japanese utilities and South American buyers, portfolio players and Middle Eastern producers, Australian Megaprojects and US shale gas drillers. They all will have their eyes fixed on the European sink as
27
it will provide balance to the market. And considering how jagged the LNG marketplace is going to be for the next decade or so, balance providers will be priceless. What are we learning from all this? Despite all the banter, efforts, hype and strongarming by other wannabe LNG hubs, it’s not the smart contracts that make a hub but rather the physical ability to swallow LNG and spew it back into the market that really whips the cream. And none of the
Vol.28 Oct - Dec 2016 NGV Transportation
FEATURE ARTICLE
wannabes ever had that capability. Let’s take a peek at two of the more famous would be contenders. Qatar had a strong claim for becoming the first LNG hub. They are still in the big boys club even as Aborigine LNG makes a big splash this year and they thought that a combination of big volumes without a destination straightjacket, a large fleet of super large vessels, a geostrategic position between Asia and the Atlantic markets and some smart contracting on top of an integrated facility will win them the day. The problem is that Qatar still produces LNG at nameplate capacity or something similar to that. Their tanks are their only claim to flexibility and no matter how big they are, they will have to evacuate rather quickly into vessels as otherwise, they bust tank tops and facilities will have to curb production if tanks
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are not emptied. They cannot take LNG out of the market or give it back at will as their operational production profile dictates their output and not the needs of the markets. Another example is Singapore that wants to leverage their strategic position, brand new LNG regasification terminal and flexible terminal scheme on top of some smart contracting is supposed to win them the crown. But Singapore is even more constrained than Qatar is. Put one cargo too much into the terminal and they must call it quits quicker than a drop of water evaporates on the surface of the sun. How many cargos could the terminal make available for backloading if such is required at short notice? Possibly not even one. LNG is very much a physical market. This means that most done-deals actually correspond to some real LNG that exists somewhere. Years
28
ago I asked the question if LNG was a commodity. I denied it this status at the time as it was unclear how anyone - who does not have contingent capacity available over the entire chain - would unwind a cargo in distress. Crude cargos can be unwound at any time and no matter where the physical oil is located at any time as there is plenty of spare capacity on the world market to swallow and produce one more cargo. This can be repeated almost at will as the market is gigantic. It will only drive prices up and down but the flow of oil would not quiver. LNG is still too small and unimportant yet to have such overcapacity built up although those things start to change very slowly. Not Qatar, not Singapore nor any lesser wannabe would bring even a bit of flexibility to players in distress. Let’s compare this with some gas hubs. In the US, Henry Hub reigns supreme and what defines Henry Hub? The ability
FEATURE ARTICLE
to exchange gas at a place where huge storage capacities and the crossing of multiple pipelines allow for all kinds of flexi deals. HH is able to absorb gas when it’s not needed and supply gas, when it’s needed. Same holds true for TTF - to a lesser degree for NBP as storage is paltry in the UK. A hub, any hub, is not defined by the volume of product flowing through it but rather by the services it is able to provide to a meaningful segment of the market. Tunisia
is the most important gas transit country for Algerian pipeline gas to Europe as Transmed runs through it. Volumes are very large - is Tunisia a gas hub though? The services it can provide to this stream of gas are virtually nil, though. Gas that goes into Tunisia leaves Tunisia as is - no value added. No hub here then. Let’s look at Turkey as another one. Turkey is a significant market in itself and would be a major user of gas that went through its territory
29
but they cannot provide balance to the vagaries of the market downstream of Turkey (South Eastern Europe) and/or the baseload volume balancing stability, producers would find valuable. As much as they would like to pretend that they would be a hub, they would only take what they get from one side, slap a fee on top and resell as is. A hub alters the product it trades from something less valuable into something more valuable. I will deliver you baseload gas for 1 year on an even delivery profile with 100% Take or Pay is not a premium product. I will give you gas exactly when you need it and as much as you need every day - provided you pay for it - is vanilla. Ukraine, for that matter, would theoretically provide the fundamentals for a very interesting hub for Russian gas into Europe as it is a big market in itself and it provides plenty and deep storage capacity allowing the structuring of gas deliveries into major European markets. Stored summer gas from Ukraine will be worth more when delivered at peak use in winter than simple baseload summer gas delivered if the market needs it or not. Strictly speaking, Ukraine is not a gas hub and the very difficult political situation with Russia makes it even less so but it could have been a meaningful hub. Too bad. Let’s come back to LNG and let’s start with clearing up some misconceptions about an imagined future LNG hub: Misconception 1: An LNG hub can just exist where there is a lot of LNG! Volume is not important, the ability to absorb unwanted cargos or to produce balancing
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FEATURE ARTICLE LNG to a short market is. This would have to be a place that can absorb any number of cargos at short or no notice without meaningfully affecting the stability of the system and that could also backload LNG while contractual obligations are being covered with pipeline gas. Misconception 2: Only a very large supplier can be the LNG hub as his volumes dictate the market! The larger the supplier is, the more dependent he will be on sink markets in those times of oversupply. Let’s not forget that scarcity is a very unnatural state in any market and just because the planet was short of LNG for close to a decade does not mean that this rationale has been reversed. A volume LNG producer without a performing LNG sink is a lame duck. Misconception 3: An LNG hub needs a place where a lot of spot trading occurs and some smart contracts! Trading is always the consequence of imbalances in any markets as there will always be those trying to benefit from those imbalances. It’s a natural consequence and will happen automatically as long as it’s not actively suppressed by some monopolistic legislation. Smart contracts will follow suit when the money flows - that also is a natural consequence. Both are not conditions for hubs. Misconception 4: Just breaking the long term contract is enough to create a hub! Long term contracts are initially instruments of securing debt in project finance agreements. It’s just one method. European gas hubs thrived in spite of the gas market being permeated by long-term contracts. Those long-term contracts start to unravel when a real market
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RUDOLF HUBER
Rudolf is an entrepreneur and consultant active in the “methane based fuels and energy” industry. He is the founder of countless initiatives all with the aim to promote a methane based economy and affordable environmental protection. He is a professional business developer and negotiator who is involved in all aspects of the LNG business. He is also very actively promoting green technologies that work well with methane based technologies. Rudolf has helped secure first Regasification capacity for his former employer EconGas at the GATE terminal in 2007 and holds a Masters degree in Commercial and Taxation law from the Jean Monnet faculty in Paris. He also runs a number of blogs, among them www.lng.guru and www.lng.jetzt.
comes into existence but this is not an overnight affair. Neither is it useful to artificially speed the process as the long term contracts are not the culprits. Stiff destination clauses would be, but one can take out destination clauses and leave the delicate fabric of the longterm contract in place. Big energy projects cost multiple billions to get into existence and it takes many years to negotiate whatever holds up for commercial balance at a given time. Trust me, you don’t want to mess with those arrangements once the deal is bagged as this opens a can of worms. There is more but I think the point has been made. Real hubs are no fancy creation of a Wall Street banker. Singapore is the first in the line of hopefuls for the first real LNG hub and it must disappoint as except for some smart contracting and some financial gimmicks, it cannot provide balance to the tormented LNG world. But there is one region that can. North Western Europe. In
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one of my blog posts, I write about the first LNG Market Maker and why it will emerge in North Western Europe. This region alone has all the necessary ingredients in place to bring balance to a horribly unbalanced market and that’s what LNG really needs. Not some artificial go between. North Western Europe is the door to one of the biggest integrated gas markets of the planet, has plenty of pipeline gas and capacity to counter any LNG shortage, provides copious storage and interconnection option in order to move the gas or give it commercial structure, provides plenty of unused LNG terminal capacity and can backload if needed - for a fee of course. The Asian market still looks enticing to LNG project developers - but it hardly matters in terms of innovation. The real crazy stuff will happen in Europe. NTM
By Rudolf Huber
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EVENT & EXHIBITION
CWC WORLD LNG & GAS SERIES
8TH ASIA PACIFIC SUMMIT
Singapore | 21 – 22 September 2016
T
he 8th Asia Pacific CWC LNG event kicked off in Singapore this September. Following the opening remarks by Pat Roberts from LNG Worldwide and Lee Ark Boon from IE Singapore, the keynote speeches were then given by government officials; H.E Gabriel Mbaga Obiang Lima from Equatorial Guinea, Hon. Nixon Duban from Papua New
Guinea, Governor Bill Walker from Alaska and IGN Wiratama Puja from Indonesia. All the ministers gave details on the investment opportunities that exist in their respective countries. Keynote Speeches All four of the ministers were excited to tell the delegates about their interesting projects that are in the development phase and also the current benefits of
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investing in these projects. The key takeaway was that there are huge investment opportunities for companies to work on these projects; Alaska LNG, PNG LNG, Indonesian LNG and the oil and gas licensing round for exploration projects off the coast of Equatorial Guinea (Douala Basin, Rio Muni Basin, Niger Delta Complex). Keynote address was given by Singapore’s very own Seah Moon Ming, CEO of Pavilion Energy
Vol.28 Oct - Dec 2016 NGV Transportation
EVENT & EXHIBITION
who gave an overall outlook on the long term fundamentals of LNG as we coast into the ‘Golden Age of Gas’. He reinforces the fact that he believes Singapore’s geographical location makes it ideal to become an intermediary hub for LNG and that there is a bright future in the country for LNG bunkering. He stressed though, that this is all only possible with regional cooperation from other nations and that only by fostering and developing these relationships can it truly be a success. One of the interesting keynotes was by Russia’s gas giant; Gazprom on their upcoming Sakhalin Stage 3 project. It was outlined as being a new source of supply for North East Asia, Japan and Korea predominantly as well as for China and Taiwan. The expansion of the project
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would see the addition of a 3rd train (4.8 mtpa) added that would startup by 2020. It was cautioned that the long term demand was uncertain. LNG in a Global Business Environment There were also very insightful panel discussions which focused on the challenges and dynamics of LNG in the global business environment. This panel had the biggest LNG players; ExxonMobil, Shell, ENGIE and Cheniere LNG heads offering their insight into the market. The general consensus of the panel was that the outlook for future prices of LNG is good despite the current large number of layoffs and reduction in projects and also that the prospects for emerging LNG markets such as Pakistan and Jordan among others look bright. There was
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also a lot to look forward to in China, the Middle East and the vast African continent. It was felt that with increase in contract flexibility as the industry becomes more mature will lead to further growth and increased price competitivity. A rare opportunity exists in low prices in an oversupplied market is present now and it is not likely to remain this way forever. Absorbing Supply and Stimulating Demand Another one of the panels discussed the supply dynamics of LNG, assessing where new long term LNG demand would come from and when it would be needed. Speakers were from JERA, METI, Petronet and H Energy. Japanese speakers identified that Japan will still need LNG despite the forthcoming nuclear restarts
EVENT & EXHIBITION and they will still maintain LNG as part of their diversified portfolio. India’s Petronet also made clear that there is a growing energy deficit in the country that is growing by some 7% each year and that with their inadequate supply of domestic gas, they would need to increase LNG as an essential part of the fuel mix to 20% from its current levels of 7% by 2025. The supply and demand gap for Indian gas is huge and will only continue to grow. It was cautioned however, that the key issue here would be the price of gas. The country has already secured numerous long term contracts for the coming 20 years with LNG from the US, the UK, Russia, Japan and Australia. Commercial Creativity of buyers and Sellers PNG’s Kumul Petroleum also gave their insight in addition to the Minister’s address on the potential of the PNG LNG project and more. A key feature of the PNG LNG project was its close proximity to Asian LNG markets that have been
forecasted to have increasing demand in the coming years. Another important factor making the project stand out was that the project boasts very cost competitive LNG compared to Australian and American LNG. The NOC is also actively searching for partners that can develop its upstream, midstream and downstream oil and gas businesses in the coming years. Poten & Partners also gave a presentation on the structural changes in the current LNG markets today. It was explained that contract volumes and durations are falling because a transition between long term contracts and a more fragmented market is taking place. It was their view that though there will be more contracts overall, despite a wave of contract expirations, they will be for smaller volumes and for shorter terms. It was emphasized that there is a growing mismatch between long term contracts and the current evolving market as long term buying but short term selling which has resulted in wider
35
variety of pricing mechanisms with more flexible terms. This all comes at a time where there is a huge influx of LNG trading going on with much more to come, flexibility will be granted by the spot market if suppliers are not willing to offer it. SIA Energy also gave an interesting presentation on the outlook from China’s point of view with the arrival of what they’ve called ‘tier-2’ LNG players or non-NOC players. It was their view that the dramatic slowdown in 2015 is a bottleneck and not a supply glut as many others see the current situation. SIA Energy see it as a temporary issue and see solving the problem through cutting back slightly on their current gas source supply. There are numerous local tier-2 LNG companies that are currently entering the Chinese market across the value chain; from new grid and power plant operators to all sorts of other upstream players. The major upper hand that these tier-2 players have over the NOCs is that they are very close to end users, as the
Vol.28 Oct - Dec 2016 NGV Transportation
EVENT & EXHIBITION
companies are all somewhat involved in the value chain already and thus are able to offer pre-established distribution channels at high affordability. This offers superior market security for buyers that the NOCs can’t offer. New Market Applications for LNG GTT also gave some perspective on the future of LNG in Asia. It was pointed out that there are huge incentives for LNG fueled vessels across the globe as many nations move towards initiatives supporting the use and propagation of using LNG as a marine fuel. Many countries offer a wide number of port related discounts and fuel incentives. Switching to LNG, depending on the type of vessel port and location can see savings from 800,000 to 2.6 million dollars. This combined with the increase in emission controls really make it a necessity to shift with the industry towards an LNG fueled future. Woodside further elaborated on the future of LNG as a marine fuel saying that it has become a necessary task that the marine industry continues to adopt LNG as a
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marine fuel to meet and prepare themselves for regulation changes that are being presented to them. A presentation on smallscale LNG was given by Galway group. It was made apparent that despite the current softer oil price environment having reduced the appeal for small scale LNG, several factors suggest that the outlook for the industry is still robust. It was explained that three factors; a reduction in exploration will slowly drive oil prices up in coming years, the supply glut will force LNG suppliers to support small scale LNG as they will need somewhere to send all the gas and that there is keen interest from several large infrastructure funds and private equity firms to invest money into small scale LNG. Indexes and Pricing There were also discussions on the types of index and pricing formula as well as two separate discussions on LNG Trading exchange which covered issues such as the evolution of LNG prices and which index would future prices now be tied to and further discussion on the
36
evolution of LNG contracting. The first of the discussions featured representatives from Berkeley Research Group, Uniper Global Commodities, King & Spalding and ChinaGas SK LNG Trading Company. Other topics included discussion on the SliNG, the recently developed Asian spot LNG index in Singapore and what else needs to be done to create a viable Asian LNG trading hub. Representatives from the Singapore Mercantile Exchange, Japan OTC Exchange, Singapore Exchange and S&P Global Platts discussed these topics. There was another discussion on trading that featured panelists from BP, RWE Supply & Trading, Glencore Singapore and Tulett Prebon who discussed on what the changes were in the trading and short term spot market. They looked at how trading efficiency could be improved and optimized while at the same time effectively managing risk. Till Next Year CWC World LNG & Gas 8th Asia Pacific Summit 2016 was extremely insightful in updating the delegates on the various regional developments in LNG around the world from a plethora of perspectives. With key decision makers from both private sector, government and government linked majors, the event was a proper melting pot for ideas and discussion, which is exactly what the industry needs to continue to experience in the current evolving market landscape. The LNG industry is in a transition phase right now and there is much uncertainty looking ahead – it is through events like these that the industry can grow and evolve together for the better of everyone involved. NTM
By Ryan Pasupathy
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ANALYSIS OF NATIONAL POLICIES AND ITS IMPACTS ON
T
he 2nd largest population in the world – India, currently has 1.8 million NGVs in the country which is supported by 903 filling stations. Around 90% of the NGV population is limited to the states of Gujarat, Maharashtra and Delhi. CNG conversion kits cost around Rps. 60,000 (USD 902). CNG price in India varies according to state and are priced per kg. The first real motion for NGVs in India began in the 90s. A campaign was started to improve local air quality and this resulted in the Government looking for greener alternatives. The switch over to CNG was later mandated in 1995 and resulted in formation The Environmental Pollution (Prevention and Control) Authority’ (EPCA). In 2001, the EPCA recommended the use of CNG among users and
NGV GROWTH IN INDIA paved way for India’s first large scale CNG program. In the last few years the numbers have risen spectacularly and we are at an inflection point in India’s NGV journey. Let’s see what exactly the Government has been up to and what they’ve been doing to stride forward as they have so far. Smart Policies The Indian Government has come up with numerous interesting policies to aid their NGV growth and development with some very clever policies. They decided to be very areacentric in their approach by introducing zone specific policies. Most of their policies were targeted at Delhi. The National Green Tribunal in 2015, issued a mandate to ban 10 years old diesel vehicle in Delhi and NCR (national capital region). They also further implemented VAT subsidies
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on purchase of new vehicles in lieu of phasing out old diesel light commercial vehicles. The Delhi government has taken the decision to phase out 15-year-old diesel light commercial vehicles (LCVs). This is complemented by a fiscal incentive scheme that has been prepared to encourage voluntary phase out the vehicles that are less than 13 years old. To enable this transition, the Delhi government announced a subsidy scheme. The subsidy is equivalent to VAT (12.5 per cent) that will be provided on purchase of new LCVs. There was also no VAT on sale of CNG fuel for automotive consumption. This enabled the price differential between CNG and Diesel to continue thereby making conversions economically viable. The Pimpri Chinchwad Municipal Corporation (PCMC) in India has approved
Vol.28 Oct - Dec 2016 NGV Transportation
There is also a lack of required infrastructure for fuel supply and the manufacturers to upgrade their technology to enact unified standards across India. A major impediment for development of Inter-city NGV market has been the lack of refilling infrastructure along major highways. This has resulted in long waiting queues at CNG refilling stations reducing the convenience aspect of the fuel.
Figure 1: Stratas Advisors, Increased Conversion to Natural Gas Vehicles in Asia, 2016
a Rps. 12,000 subsidy for each auto-rickshaw owner who wishes to install a CNG conversion kit. The standing committee of PCMC approved the resolution to give a onetime grant of Rps. 15,000 to old and new auto-rickshaws for installing CNG kit and for making a provision of Rps. 50 million in the 2013-14 annual budget. A provision of Rps. 12 million was made in the 201415 annual budget. Because of high costs of conversion, the Delhi Government offered a 4% interest subsidy to the vehicle owners. There was also the implementation of the ‘Clean Bus Transportation Programme’ which introduced mandatory
Vol.28 Oct - Dec NGV Transportation
addition to the CNG bus fleet to hit 10,000 buses.In addition to this there was also a levying of an Air Ambience fee of Rps. 25/ KL on sale of diesel. This is an attempt to neutralize the revenue loss from CNG subsidy. Current Challenges The biggest barrier to progress in India is the delay in establishing future vehicle emission standards. Many regions have permanent government bodies that periodically revise and recommend emission standards. There is also currently no effective compliance and enforcement program in place to ensure that regulations for new and in-use vehicles are effectively implemented.
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Future Plans Where does India go from here though? The Government says that it has plans to see the development of new LNG terminals (Ennore, Kakinada, Gangavaram) that will likely provide re-gasified LNG for the NGV market. In the end, India is probably only in the beginning of their NGV story as there is still much more room for growth. Many localities in India are not being targeted or optimized and this is very good news for the industry there. India’s recent success can be attributed to the due to price differential with conventional fuels. This paired with more intelligently designed policies by the Government and strict regulated enforcement measures will only continue to allow the NGV industry in India to prosper. By ensuring that it is simply cheaper to use CNG over the long run, the commercial passenger service industry is going to favour the fuel that makes them the most money. Their interest has resulted in the superior growth that the country has seen in its NGV fleet over the past few years and will likely continue to do so. NTM
By Ryan Pasupathy
NGV
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