GIIC 2016-Saurabh Jha, Principal Consultant (Oil & Gas advisory practice), PwC India

www.pwc.com

Gas Infrastructure India Conference 2016Frozen: Let it trade - Navigating the transformation of the global gas markets

Strictly Private and Confidential

22 July 2016

PwC

22 July 2016Strictly private and confidential

Navigating the transformation 3

Four Forces to Follow: Structural Changes in Gas Prices 8

Strategic Options 15

Agenda

2Gas Infrastructure India Conference 2016

Strategic OptionsFour Forces to Follow: Structural Changes in Gas PricesNavigating the transformation

Agenda

PwC


Navigating the transformation


Navigating the transformation 3


Agenda

PwC


The Oil & Gas sector faces a number of disruptions and discontinuities on multiple fronts over the next decade


How should we transform our

operating model?

What could this mean for our ability to win in our target

markets?

What are the disruptions

impacting business?

How are megatrends affecting the sector?

Customer behaviour

Competition Production service model

Distribution channels

Government and regulation

Disruption dynamics

Technological breakthroughs

Demographicchanges

Accelerating urbanization

Climate change and resource scarcity

Shifts in global economic power

Oil and gas company transformation

Purpose Business model

Operating model capabilities

HR model Financial Performance

‘Green’ demand stimulated by governments

Price volatility & investment challenges

Transition driven by consumers

Supply constraints triggeredby governments/geopolitics

Global Megatrends – Impact on the Oil & Gas Sector


Agenda

http://www.pwc.co.uk/en_UK/uk/issues/megatrends/issues/demographic-and-social-change.jhtml

http://www.pwc.com/gx/en/issues/megatrends/rapid-urbanisation-ian-powell.jhtml

http://www.pwc.co.uk/issues/megatrends/issues/climate-change-and-resource-scarcity.jhtml

http://www.pwc.com/gx/en/issues/megatrends/shift-in-global-economic-power-silas-yang.jhtml

PwC


Companies will need to consider this uncertainty and how the future of the sector may evolve


Four Possible ‘Future Perspectives’

Oil and gas sector evolves along current lines. Ongoing

price volatility presents investment challenges

Energy consumers, retail and commercial, drive the

transition to low carbon world and more efficient

energy system

Governments stimulate a broad and accelerated ‘green’

demand environment

Government actions and / or geopolitical events trigger

supply constraints

‘Green’ demand stimulated by governments

Supply constraint triggered by

governments/geopolitics

Transition driven by consumers

Price volatility & investment challenges

Source: PwC Analysis


Agenda

PwC


Global oil price developments have received significant attention recently


20

40

60

80

100

120

140

160

20132012201120102009200820072006 201720162014 2015

US$/bbl

+72%

48

Source: Bloomberg; Strategy& research

Brent Crude Daily Price January 2006 – July 2016


Agenda

PwC


However, a possible structural change in the market beyond the regional disruption are creating uncertainties for all stakeholders


-

5

10

15

20

25

01/01/2009 01/01/2010 01/01/2011 01/01/2012 01/01/2013 01/01/2014 01/01/2015 01/01/2016

US

D /

MM

Btu

US - Henry Hub NL - TTF GB - NBP JKM

Gas day ahead prices (2009 – 2016)

The nuclear reactor incident at Fukushima in March 2011 caused a surge in Japanese demand for natural gas

NBP and TTF prices spiked in February 2012 due to an exceptionally cold winter in Europe. Temperatures dropped to as low as -18ºC in the UK.

European gas prices reached a new record in March 2013, after one of Britain’s main import pipelines was temporarily shut down by a technical fault– not helped by persistently low temperatures putting upward pressure on demand.

The decline in Asian gas prices reflects the collapse in crude oil prices - on which they are based - during 2014-2015.

Source: Bloomberg; Platts; PwC analysis


Agenda

PwC


Four Forces to Follow: Structural Changes in Gas Prices


Four Forces to Follow: Structural Changes in Gas Prices 8


Agenda

PwC


Four forces (internal & external) will converge driving a structural change in gas prices and lead to higher volatility and risks


2. LNG Over Supply

1. Growing

Importance of Gas

as Transition Fuel

4. Growth of

Trading and LNG

Trading Hubs

3. ‘Lower for

Longer’ Oil Price

Source: PwC Strategy& research

Global

Gas Market


Agenda

PwC


On demand side, the thirst for natural gas is rising; in future the global energy demand growth will be driven by gas and zero carbon fuels


1. Growing

Importance of Gas

as Transition Fuel

• According to BP’s 2016 Energy Outlook, gas is the fastest-growing fossil fuel, with annual global consumption forecast to increase by 44 percent between 2014 and 2035 compared with only 20 percent for oil.

• Increase in demand in China to clean up its energy mix.

• Increase in economic growth, especially in Asia and Africa, will further boost the demand.

• Importance of Natural Gas is growing as transition fuel and increase in demand would lead to increase in price of natural gas

• In most markets, a higher demand usually implies higher prices. However, the other three forces will probably more than offset the demand pressure

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1990 1995 2000 2005 2010 2014 2015 2020 2025 2030 2035

Projected Share of Primary Energy Demand by Type (till 2035 )

Oil Natural Gas Coal

Nuclear Energy Hydroelectricity Renewables

Source: BP Energy Outlook 2016, PwC Strategy& research


Agenda

PwC


The current LNG prices have slipped below the projected average exporters breakeven price of US$ 7.2 (excl. shipping)


5

4

6

7

420

1

0

9

13

10

8

12

14

15

400

11

3

2

200 38036040 320300280260240 5802001801601401201008060 220 340 560540520500480460440

Total 2025 LNG Production, mtpa

USD/mmbtu

Qatar

P/UD

South

America P/UDOthers

P/UD

Afr

ica

P/U

D

Russia

P/UD

Australia

P/UD

E. A

fric

a N

S

Australia

NS

Rest of Africa

NS

As

ia P

/UD

North America Ru

ss

ia N

S

Asia

NS

P/UD: Production/Under Development

NS: Not sanctioned yet

Average

Breakeven

Price

Global LNG Breakeven Price by Source (estimated 2025 production)

Source: Rystad Energy; PwC Strategy& analysis

2. LNG Over Supply


Agenda

PwC


Still, significant oversupply in the market is expected to create a supply glut and counter the effects of rising demand


2. LNG Over Supply

Source: PwC Strategy& analysis

• The global LNG market is about to become inundated with new suppliers. A wave of investment in LNG liquefaction capacity will see Australia surpass Qatar as the world’s largest LNG producer.

• Meanwhile, LNG exports from the U.S. are on the rise (the first cargo from the U.S.’s Sabine Pass in the Gulf of Mexico arrived in Brazil in March 2016). According to JPMorgan estimates, LNG capacity is set to grow at about 8 percent annually for the next few years while annual demand growth will top out at about 4 percent.

• A supply glut is thus forecast to continue and will exacerbate LNG commoditization. Oversupply will force sellers to seek alternative markets and share more risk with traders hoping to exploit arbitrage opportunities.

• Furthermore, some producers will likely cut prices to defend market hare against LNG imports.


Agenda

PwC


‘Lower for Longer’ oil prices may have a dampening effect in the gas prices


3. ‘Lower for

Longer’ Oil Price

Brent Crude Price Historic and Outlook Various Sources

Long-Term OutlookHistorical Evolution

0

20

40

60

80

100

120

140

160

180

200

220

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

US$/bbl

2040

2026

2024

2022

2020

2018

2038

2036

2034

2032

2030

2028

IEA Crude Import (real terms - current policies)

IEA Crude Import (real terms - new policies)

Rystad Energy

EIA Reference

Sources: EIA-AEO-Early 2016,IEA World Energy Outlook 2015; Rystad Energy; Strategy& research


Agenda

PwC


Increasing trading volumes on natural gas hubs could increase commoditization, reduce contractual risks and facilitate hedging


4. Growth of

Trading and LNG

Trading Hubs

• Happening in Europe and the United States as well as regions that did not previously have significant distribution centers.

• Singapore, for example, is positioning itself as an Asian LNG center, supporting global as well as local markets. Similarly, with METI’s LNG strategy published in 2016 will facilitate hub creation in Japan (probable location being Osaka)

• The presence of these hubs and the concomitant increase in available natural gas supplies have attracted new LNG buyers from as far away as the Middle East and North Africa — among them, Jordan, Pakistan, and Egypt.

• This evolution in global trading is producing more natural gas liquidity, price transparency, longer-term forward contracts, and gas-on-gas competition, which ultimately reduce contractual risk and facilitate hedging. In short, by globalizing the LNG market, these hubs could increase commoditization.

Source: PwC Strategy& analysis


Agenda

PwC


Strategic Options


Strategic Options 15


Agenda

PwC


No company in the gas value chain is insulated to these disruptions and use creative strategic options to counter


Buyers Other StakeholdersTradersSellers

LNG is transitioning to a buyer’s market

Must to develop trading capabilities.

Important to revise contracts and renegotiate prices.

Link prices to liquid spot gas markets instead of oil.

Go for purchasing partnerships.

Optimize portfolio by reducing exposure to oversupply and excess costs.

Optimization of portfolio is necessary.

Delay projects for which final investment decision has not been made.

Diversify portfolio by taking advantage of new entry points.

Indulging in price war under right circumstance may turn out to be profitable.

Resort to cost reduction across value chain.

Flexible strategies for different customers.

Strengthen trading capabilities.

Squeeze out margins from the counterparty risk the sellers may face.

Take advantage of the potential demand growth by buying or securing long-term assets.

Invest in upstream gas suppliers.

Charter or acquire LNG ships to generate production and shipping profits.

Includes midstream asset owners and governments.

Need to adjust to new gas market.

Government should address the challenge of balancing different policies regarding domestic market regulation, environment, and national energy security of supply.

Strategic Options and Needs for Players across the value chain


Agenda

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only. PricewaterhouseCoopers is not herein engaged in rendering legal, accounting, tax, or other

professional advice and services. Before making any decision or taking any action, you should consult a

competent professional advisor.

© 2016 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, “PwC” refers to

PricewaterhouseCoopers Private Limited (a limited liability company in India), which is a member firm of

PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

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GIIC 2016-Saurabh Jha, Principal Consultant (Oil & Gas advisory practice), PwC India

Presentations & Public Speaking

Transcript of GIIC 2016-Saurabh Jha, Principal Consultant (Oil & Gas advisory practice), PwC India