Platt 2012 Top250 Insight

7/22/2019 Platt 2012 Top250 Insight

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www.platts.com November 2012

Platts JKM and LNGSpot Contractspage 30

Coal Weathersthe Stormpage 26

Exclusive

2012 PlattsTop 250 Global

EnergyCompany

Rankings

www.platts.com November 2012

2013 Asia Energy Outlook


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insight

November 2012 insight 1

Publishers Note

Guest Editors Note

Martin Daniel

Patsy Wurster

Welcome to the 2012Asia Energy Outlook issue of PlattsInsight. This issue, high-lighted by an assessment of the 2012 Platts Top 250 Global Energy CompanyRankingsTM by Ross McCracken, Platts editor of Energy Economist, showcasesAsias resilience in times of economic and political challenges.

In the following pages other distinguished Platts editors review some of thosechallenges and identify the most promising opportunities for shaping a newenergy landscape.

Platts Top 250 Global Energy Company RankingsTM ranks the worlds top energycompanies by financial performance, identifies whos up and whos down, who arethe fastest growing, and who are biggest upward movers from the previous year.The Rankings also provides a breakdown of the Top 250 by industry and regionwhile offering commentary on trends and movement within the list.

I hope you gain some new insight from this issue!Patsy Wurster

Publisher,Platts Insight

Ill blows the wind that profits nobody, wrote English author William Shake-speare in a particularly blood-stained scene from Henry VI, Pt. 3. And the senti-ment remains just as true 420 years later, in an economic landscape that bearsmore than a passing resemblance to Shakespeares depiction of a society and polityunder intense pressure.

Almost every loser has a countervailing winner, Shakespeare was saying. Andthe articles in this issue of PlattsInsightbear this out in their analysis of key devel-opments in the Asian and global energy markets.

Take Chinas willingness to take advantage of the opportunities thrown up bythe 2008 financial crisis and other global developments, in a story told from dif-ferent angles by Song Yen Ling and Henry Edwardes-Evans. The impact is alsoevident in Ross McCrackens analysis of the rise of Chinese and other Asian enter-prises within the ranks of the top 250 global energy companies

The devastating impact of the March 2011 disaster on Japans nuclear indus-try also resulted in opportunities with, for example, renewables securing a majorboost and a marked acceleration in the evolution of the Asian LNG market.

There are of course exceptions that prove the general rule. Thomas Hoguesgraphic analysis of the South China Sea disputes is a case in point, in a situationwhich has the potential to be a very ill wind indeed.

What these articles and the others carried here illustrate is that grasping marketopportunities is impossible without seeing the whole story and its consequencesand this is where Platts plays an important role day in, day out. We cant alwayspromise you Shakespearean prose, but we do promise insights and analysis worthyof the bard himself.

Martin DanielEditor,Platts Power in Asia


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insight November 2012

Inside

Authors

1 Publishers NotePatsy Wurster

1 Guest Editors NoteMartin Daniel

4 Europe: Chinas New BackyardHenry Edwardes-Evans

8 South China Sea: Best Case ScenarioThomas Hogue

12 Crossed Wires: Indias Power FailureMartin Daniel

20 Test Year for ChineseCoal-Based SNGRoss McCracken

26 Coal Weathers the StormJames OConnell

30 Platts JKM and LNG Spot ContractsHong Chou Hui

36 Japan Looks to RenewablesMartin Daniel

42 Chinas Quest for HydrocarbonsSong Yen Ling

50 Asia Gains Traction(Platts Top 250 Global EnergyCompany Rankings)Ross McCracken

Martin Daniel

Thomas Hogue Ross McCracken James OConnell Song Yen Ling

Henry Edwardes-Evans Hong Chou Hui


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Martin Daniel read Modern History at Oxford University. Afterresearch on economic history there, he joined the Economics Unit

of the then British Coal Corporation, following which he became

head of the Supply, Transport and Markets Group at IEA Coal

Research. He then worked at a UK energy media and consultancy

company until 2001 when he joined Platts, where he edits the

newsletter Power in Asia. He is an active naturalist, specializingin Asian forest birds.

Henry Edwardes-Evans has a bachelor of arts degree from OxfordUniversity, where he studied English Literature. As a trainee

journalist at Financial Times Business, he worked on a number of

energy-related publications before being appointed editor of EC

Energy Monthly in 1996. Henry launched and edited the FT news-

letter Power in East Europe, which subsequently became Platts

Energy in East Europe. In 2000, he took over editorship of FTs

flagship energy newsletter, Power in Europe, now Platts Power in

Europe, developing power plant trackers and managing three other

highly-regarded Platts newsletter titlesEnergy in East Europe,Power UK and Power in Asia.

Hong Chou Hui graduated from the National University of Singa-pore. He is a multiple-award winning news editor and analyst who

helped launch Platts spot LNG Japan Korea Marker benchmark in

2009. The JKM has grown into Asias leading spot LNG index. He

has developed further LNG price points for Asia, while overseeing

the start of Platts LNG market coverage in Europe.

Thomas Hogue is the associate editorial director for Asia, head-ing up and directing Platts oil and gas coverage for the region

since September 2010. His work in Asia as reporter and editor

has spanned nearly 20 years, during which time he has written

about oil and gas for Dow Jones and Bloomberg, covered general

business news for The Associated Press, and helped to launch

and lead the lifestyle desk for Indonesias English-language daily

Jakarta Globe. He holds an MA in mathematics from the University

of Oklahoma.

Ross McCracken, editor of Energy Economist, joined Platts in 1999to run the European and West African crude desk. He was previ-

ously an editor with an Oxford University-based political and eco-

nomic consultancy, and has taught in Poland and China. He holds

a masters degree in European studies from the London School of

Economics and his undergraduate degree is from the University of

East Anglia.

James OConnell, international coal managing editor, joined Platts

Metals in 2001, covering global precious metals trading. He joinedthe coal team in early 2007, leading reporters in Europe and Asia

producing news for the global coal, electrical and steel industries.

He previously worked for Irish broadcaster RTE. He holds a BA in

English and History and a Higher Diploma in Applied Communica-

tions from the National University of Ireland.

Song Yen Ling is Platts chief China correspondent covering up-stream and downstream oil, natural gas and energy policy. Based

in Singapore, she joined Platts in March 2012 after over six years

with Energy Intelligence, also writing about Chinas energy sector.

She has a degree in communications from Singapores Nanyang

Technological University.

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Chinese energy investors moved into

Europe in 2012, some seeking long-term asset plays in utility and networkoperations, others new markets forthermal power generation equipment.

Beyond the value of diversifying intowell-established European businesses,Chinese entrants are keen to benefitfrom Iberian utility positions in LatinAmerica and hydro/renewable portfo-lios that fit with their own. Then thereis the opportunity to gain fresh insightinto European research and develop-ment and benefit from the chronicneed for regulated infrastructure in-vestment.

In return, the Chinese bring much-needed cash, excellent ratings and theability to raise funds cheaply. Growthmay have slowed in their home marketbut cashflow has been strong comparedto that of European utilities facing de-mand destruction since 2008.

Political considerations may yet con-

strain Chinese incursions into Euro-pean energy interests. In August 2012both Spanish and UK authorities indi-cated that stakes sold in strategic as-sets would have to remain below cer-tain thresholds. And in one specialistboom market, solar PV, European sup-pliers are seeking anti-dumping mea-sures to stem the tide of Chinese pan-els. Nevertheless Chinese investmentalready committed in Europe is signif-icant and likely to engender goodwill

in economies where, frankly, beggarscannot be choosers.

Hydro Marriage

The China Three Gorges Corporation(CTG) set the ball rolling in December2011, defeating rival bids from E.ON ofGermany and Brazils Eletrobras andCEMIG to take a 21% stake in Energiasde Portugal, Portugals dominant powerutility.

The Chinese company agreed to payEur2.69 billion ($3.512 billion) for thestake, a premium of 53% on EDPs stockprice at the time, to become the groupslargest single shareholder.

Beyond the sale price, CTG is to in-vest Eur2 billion in stakes of between34% and 49% in 1.5 GW of EDPs re-newable energy capacityEur800 mil-lion in 2012 and the remainder by2015. EDP said 900 MW would be inplants already in operation and 600MW in ready-to-build projects. Mostof the investment is expected to bechannelled into EDPs wind power de-velopment pipeline in the US, Brazil

and Europe.Further, CTG has lined up a commit-

ment from an unnamed Chinese bankto provide EDP with up to Eur2 billionin long-term corporate debt with ma-turities of up to 20 years. EDP said thiswould cover its financing needs by anadditional two years, to mid-2015, andshould raise earnings per share from2012 onwards.

Finally, the Chinese group raisedthe possibility of a supply chain part-

nership between EDP and Goldwind,Chinas second largest wind turbine

China energy

Europe: Chinas

New BackyardHenry Edwardes-Evans, Managing Editor, Platts Power in Europe


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China energy

producer, potentially installing a pro-duction plant in Portugal with the ca-pacity to manufacture 800 turbines ayear.

But at heart the deal makes mostsense because of shared hydro exper-

tise. EDP is half way though an ambi-tious program to increase its installedcapacity by 42% to 7 GW through thedelivery of 2.1 GW of new hydro plant,but has had to delay some fringe proj-ects because of financial constraints.Those constraints may now be lifted.

Strong RatingSpeaking at an investor day in May

2012, EDP executive board memberJoao Marques da Cruz underlined the

financial benefits of having CTG as akey shareholder. Last time CTG wentto the market was in March this yearfor seven billion Chinese yuan, thecoupon was 4.71%. The conclusion isvery strong financials, with access tolong term funds, he said.

The acquisition marks the begin-ning of the end of a period of massivedomestic investment by Chinese utili-ties, who can now use the huge cashflow generated to invest internation-ally, a Lisbon banker close to the EDP/CTG deal told Platts. EDP now has thefunding available not only to weatherthe medium-term financial storms thatwill hit Portugal, but also to invest inattractive international projects overthe long term.

The possibility of EDP buying backcontrol of renewables subsidiary EDP

Renovaveis remained a possibility,but not a priority for CTG, the Lisbonbanker said. Spains Iberdrola and EDFof France have already bought backtheir renewable spinoffs in an effort tolift their growth profile.

Three Gorges was seen as havingmade the best offer in terms of inde-pendence for EDPs strategy and the de-

leveraging of its balance sheet, accord-

ing to analysts at Banco BPI.Perhaps aware of political and pub-

lic perception issues that have arisenin Spain and the UK, CTG has soughtto portray its Portuguese investment aspurely commercial, supporting the cur-rent management and saying it wouldnot seek to increase its stake in EDP un-der a standstill clause in the acquisi-tion agreement.

This is not to say that the Chinesecompany is not an active partner inEDPs investment plans.

Under a joint steering committee andliaison office, the partners have alreadyset up five teams focused on partner-ship execution, co-investment, financ-ing, best practice and special initiatives.

In addition, CTG is looking at invest-ing and participating in EDPs VentureCapital system to develop technology

Plant Start up date Type MW Output (GWh) Output net of pumping (GWh)

Picote II 2011 Nov Repowering 246 239 239

Bemposta II 2011 Dec Repowering 191 134 134

Alqueva II 4Q 2012 Repowering, pumping 256 381 30

Ribeiradio 1H 2014 New plant 77 134 134

Baixo Sabor 2H 2014 New plant, pumping 171 405 230

Venda Nova III Mid-2015 Repowering, pumping 740 1,337 18

Salamonde II Mid-2015 Repowering, pumping 207 274 81

Foz Tua 2H 2015 New plant, pumping 251 585 275

Total n/a n/a 2,139 3,489 1,141

1. Energias de Portugals new hydro program.

Source: Energias de Portugal

Perhaps aware of political and public perception

issues that have arisen in Spain and the UK, CTG

has sought to portray its Portuguese investment

as purely commercial ....


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China energy

and innovation, as well as establishinga joint venture for operation and main-tenance.

Premium for REN StakeTwo months after CTGs deal with

EDP, State Grid Corporation of Chinatook a 25% in Portugals transmissionsystem operator Redes Energeticas Na-cionais (REN). The Oman Oil Corpora-tion took a further 15% in a deal thatvalued the 40% sold by the Portuguesestate at Eur592 million.

The Chinese group agreed to payEur2.9 a share for 25% of REN, valuingthe stake at Eur387 million, a 40% pre-

mium on the February 1, 2012 closingprice. State-owned Oman Oil offeredEur2.56 a share for 15% of the Portu-guese group, a premium of 23%.

Portugals treasury secretary MariaLuis Albuquerque said the higher pre-mium paid by State Grid reflected its fu-ture role as RENs principal industrialand strategic partner and the biggerstake it was acquiring.

This deal opens up China for RENand Portuguese suppliers and will pro-vide technical and financial muscle forthe group to develop in Africa and Bra-zil, a Lisbon-based analyst told Platts.In return, it will move State Grid fur-ther ahead with its international ex-pansion, with a bridgehead into Europe

and Africa.State Grid, Chinas biggest wires util-

ity, has guaranteed finance of Eur1 bil-lion, to be provided through the ChinaDevelopment Bank, to help refinanceRENs debt at competitive rates. ThePortuguese groups short-term refinanc-ing requirements to 2015 amount toabout Eur1.6 billion.

Its offer included large-scale com-mitments to support the expansion ofREN in Portugal and overseas. REN is

to become a strategic service providerto State Grid in Brazil, with an initial

project due to be launched in 2012.Joint ventures are also to be set up in

the former Portuguese colonies of An-gola and Mozambique. In addition, theChinese group has agreed to supportinvestment in a research center in Por-

tugal and to assist REN in opening upnew overseas markets, including China.State Grid is committed under the

deal to help REN build relationshipsin China, including an initial projectin 2012 related to renewable energy,for which REN will be the sole serviceprovider. It is also to help REN in se-curing new trans-European grid inter-connections.

International expansion is a key goalfor State Grid, which already owns

transmission assets in the Philippinesand Brazil. The group is looking at oth-er transmission companies in Europe,including stakes in Spains Red Electricaand Enagas, and Irelands Eirgrid.

Spain, however, is reported to havealready turned down two offers fromState Grid for a 20% stake in Red Elec-trica, the first at Eur35 ($43) per shareand the second at Eur43 per share. Un-der the company statutes of Red Electri-ca and its gas network counterpart Ena-gas, no individual shareholder with theexception of the Spanish state may holdmore than 10% of the company giventhe strategic nature of the business.

Franco-Sino Bid for HorizonTurning to opportunities in genera-

tion, the Chinese are again active inbidding for west European opportuni-ties. In July 2012 French nuclear en-gineering company Areva said it was

considering submitting a joint bid withChina Guangdong Nuclear Power Cor-poration for Horizon Nuclear Power,the UK development company beingsold by Germanys E.ON and RWE.

Also reported to have looked at Ho-rizon are Toshiba/Westinghouse andState Nuclear Power Technology Corpo-ration, its Chinese partner in AP1000technology transfer that is building thefirst AP1000s at Sanmen and Haiyang.

Horizon is developing proposals to build

two nuclear power plants at Wylfa in Ang-lesey and Oldbury in Gloucestershire.

Joint ventures are also to be set up

in the former Portuguese colonies of Angola

and Mozambique.


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China energy

Areva officials called CGNPC a cen-tral partner for France. The Chineseutility is building two EPR units atTaishan in Chinas Guangdong prov-ince, in a joint venture in which Frenchutility EDF has a 30% stake. The two

1,700-MW units are on target to be thefirst EPRs to start up, before those atOlkiluoto in Finland and Flamanvillein France.

EDF, which is building Flamanville-3,is co-applicant with Areva for GenericDesign Acceptance of the EPR design inthe UK, and plans to build four EPRsthere beginning with Hinkley PointC. At the time of writing a decision onthat project was scheduled before theend of 2012.

EDF and Areva are also working withCGNPC to develop a third-generation1,000-MW-class PWR for the Chinesemarket. CGNPC and EDF favor develop-ing the Chinese utilitys CPR1000 de-sign, derived from the three-loop PWRsin operation in France. Meanwhile Are-va has sought to promote the Atmea1PWR, also of around 1,000 MW, ithas developed with Japans MitsubishiHeavy Industries.

The UK government has made muchof the potential for specialist Chinesenuclear operators to foster competitionin the market. Department of Energyand Climate Change officials, however,were reported in August to have warnedthat a Chinese holding in Horizonwould be limited to a minority stakedue to public and political acceptanceissues. Going further, UK ConservativeMP Mark Pritchard, a member of theparliamentary joint national security

committee, said state-owned Chinesecompany involvement could createmajor security concerns.

East European ThermalMeanwhile the Balkans cash-

strapped utilities and governments arehoping to secure a share of the $10.5billion in credit lines that Chinese Pre-mier Wen Jiabao announced in April2012 would be available for investmentin infrastructure projects in Central

and Eastern Europe.The single biggest investment thus

far is a Eur1 billion, 500-MW plantthat the China Huadian EngineeringCompany will build at the site of theRovinari thermal complex in Romania,according to a July statement by thecountrys Ministry of Economy. The

China Huadian Corporation subsidiarywon a tender over a rival bid from Ja-pans Marubeni Corporation to buildthe project. The project will be the firstnew coal-fired power plant built in Ro-mania in the last 20 years.

Meanwhile Chinas Gezhouba GroupInternational Engineering is preparing

a feasibility study for construction oftwo coal-fired units totalling 350 MWin northern Montenegro, according tothe countrys Ministry of Economy.The Montenegrin government andpower company EPCG have defined themain parameters of the project, whilethe Chinese experts will structure theproject. If an agreement is reached onimplementation, the project proposalwill be submitted to Montenegros par-liament for final approval, the minis-try said.

Finally in neighboring Serbia, talksare underway with the China NationalMachinery and Equipment Import &Export Corporation (CMEC) regarding

construction of a new 350-MW unitat the Kostolac coal-fired complex andthe possible expansion of the feederDrmno coalfield in eastern Serbia. TPPKostolac is a subsidiary of the Serbianstate-owned power company EPS.

A preliminary agreement has beensigned and a final technical proposalfor the new unit could be forwarded tothe Serbian government for approvalbefore the end of 2012, TPP Kostolacsaid. Construction of the unit could

start as early as 2014 with commission-ing planned in 2018 or 2019.

Meanwhile Chinas Gezhouba Group

International Engineering is preparing a

feasibility study for construction of twocoal-fired units totalling 350 MW in

northern Montenegro ...


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If this were a B-grade thriller, a su-per villain would have stolen a nuclearbomb, fitted it on the end of a string ofpipe reaching far below the ocean floorin the South China Sea, and threatenedto blow up all the oil and gas there unlessthe six claimants to the area paid up bil-lions of dollars.

The usual cheap and unrealistic com-puter graphic would show the warheadgetting closer and closer to a two-tonedblob representing the oil and gas, and, ofcourse, if it were a really smart thriller,the villains devious plan never wouldhave been about blowing up the oil andthe gas anyway.

It would have been about driving upoil prices by creating an energy crisis,pushing countries toward greater use ofcoal or sowing even more distrust among

those claiming sovereignty over the seasand starting a war.

Unfortunately, this is not a second-tierHollywood movie, and an aging StevenSeagal wont be along to shut down thewarhead with seconds to spare and kickthe villains all about the place. What wehave instead is a situation thats just asdangerous and volatile and in which thecontenders for the prize seem ever readyto poke a finger in the eye of the other guy.

Thats how we get naval stand-offs over

atolls to the west of the Philippines, com-peting oil and gas licensing rounds off

the east coast of Vietnam, and duelingeditorials condemning the latest insultsto sovereignty.

Ostensibly, its all about territory andnational pride. But the surmise of mostobservers is that its also largely aboutthe oil and gas reserves that might beout thereespecially considering theenergy shortfalls expected over the com-ing years in the worlds fastest-growingeconomies.

Some estimates put the potential hy-drocarbon resources in the South ChinaSea at least as high as 200 billion barrelsof oil equivalentwith some Chineseestimates running higheralthoughdue to the lack of exploratory drillingthere are no estimates of proven oil orgas reserves. But the 200 billion boe fig-ure would be enough energy to fuel the

economies of Southeast Asia and Chinafor decades and, at a monetized valueof $100/barrel, represents a $20 trilliontreasure.

No wonder countries are loathe to giveup any fair claim to the riches.

The mostly hotly contested disputesover the last couple of years have beenbetween China and Vietnam, and be-tween China and the Philippines, al-though Brunei, Malaysia and Taiwan allstake claim to some of the island territo-

ries in the region as well.China itself claims sovereignty over

South China Sea

South China Sea:

Best Case ScenarioThomas Hogue, Associate Editorial Director for Asia, Platts

In the South China Sea, the best case scenario is for cool heads

and more of the same, because at least that means there hasnt

been an escalation beyond a war of words.


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South China Sea

as much as 80% of the South ChinaSea as outlined by its so-called nine-dashed line, which ropes in the Paraceland Spratly islands as well as island andshoals closer to the Philippines.

One strategy of the Southeast Asian

claimants, meanwhile, is to try to buddyup to the US to counter the weight andmight of China, and the other is to tryto use regional organizations such as theAssociation of Southeast Asian Nations(ASEAN) and Asia-Pacific Economic Co-operation (APEC) to face China on theissue collectively instead of individually.

Neither of those strategies has beenparticularly effective.

For one thing, while the US keeps call-ing for peace, cool heads and the easing

of tension in the region, the State Depart-ment also officially makes it clear that itdoesnt back any particular partys claims.

Now is the time for everyone tomake efforts to reduce the tensions andstrengthen diplomatic involvement forresolving these tensions, Secretary ofState Hillary Clinton said on September9 in Vladivostok, Russia, in a media brief-ing at the American consulate followingthe APEC-2012 Leaders Week meetings.Its not in the interests of any of theAsian countries, its certainly not in theinterest of the United States or the rest ofthe world to raise doubts and uncertain-ties about the stability and peace in theregion, she said, according to commentsposted on the State Department website.

Ironically, some of the most recentheated rhetoric has come out of theUS. Lawmakers there in mid-Septemberused harsh words in a hearing held bythe House Committee on Foreign Affairs

that focused on Chinas designs on theregion and its growing ability to intimi-date its smaller neighbors.

While the worlds attention wasturned to other crises, including Iransnuclear program and concerns over thefaltering Euro, China has upped theante, playing the role of a schoolyardbully towards its maritime neighbors,Committee Chairwoman Ileana Ros-Lehtinen, Republican-Florida, said in anopening statement.

Even that rough language was followedby the adoption of a bill expressing the

sense of the Congress that the US shouldstrongly support peaceful resolutionof maritime territorial disputes in theSouth China Sea, the Taiwan Strait, theEast China Sea, and the Yellow Sea andpledge continued efforts to facilitate a

collaborative, peaceful process to resolvethese disputes.The non-binding resolution also con-

demns the use of force by China andsupports the role of the US military todefend navigation and air space rightsin the area. But its clear that the US andother interested parties would like to seethe regional claimants work their way toa peaceful solution on all the disputes.

While China has stressed that it has noplans to disrupt shipping in the area and

is committed to free navigation throughthe disputed waters, its standard responseto any other claims in the South ChinaSea is that there is no questioning its sov-ereignty over the region or over other ar-eas that are in dispute with Japan.

The standard Chinese line is that thereis plentiful jurisprudential and his-torical evidence of Chinas sovereigntyover South China Sea islands and waters,as well as over the Diaoyu or Senkaku is-land that are in dispute between Chinaand Japan.

Members of ASEANmost of whomare not claimants to the seasare wor-ried not only that tension between Chinaand the other contending parties mightbreak out into war, but that things mightsimply escalate to the point where ship-ping lanes through the seas are affected.

Singapores Prime Minister Lee HsienLoong might have been speaking for allof ASEAN when he said in a pre-APEC

speech on September 6 at the CentralParty School in Beijing: Trade is thelifeblood of our economy. Our foreigntrade is three times our GDP. Freedomof navigation is therefore a fundamentalinterest, especially along our sea lanes ofcommunications.

He went on to say: Therefore theSouth China Sea is strategically impor-tant for our survival and development.However the South China Sea disputesplay out, freedom of navigation must be

maintained. Ships of many nations usethe South China Sea, so I am sure these


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0 insight November 2012

South China Sea

countries would share Singapores con-cern on this point.

Lee, however, was also clear that Singa-pore was not a claimant country, take(s)no sides in any of the territorial disputes,nor can (it) judge the merits of the vari-

ous claims.He was just as clear that ASEAN shouldremain unified in its dealings with Chinaon the issue. This did not happen in July2012 in Cambodia, when the group couldnot agree on the language for a joint state-ment on the development of a code ofconduct for the South China Sea.

For ASEAN not to address [the issue]would severely damage its credibility,Lee said. ASEAN must not take sideson the various claims, but it has to take

and state a position which is neutral, for-ward-looking, and encourages the peace-ful resolution of issues.

We also hope that ASEAN and Chinawill start talks on a Code of Conductsoon, Lee said.

China, however, has been adamantthat ASEAN and other regional organi-zations are not the proper forums fordealing with the territorial disputes. Itwants to deal with its counter-claimantson a bilateral basis instead of dealingwith any collective grouping, and fre-quently makes statements to that effect,as well as telling other countries that theterritorial issues are Chinas to work outwith its neighbors.

That was its clear response to ASEANin July, and also during the recently con-cluded APEC meetings, where Chinaspresident Hu Jintao declined to meetwith his Philippine counterpart, al-though Hu did meet with Vietnamese

president Truong Tan Sang.As we all know, since its inception in

1989, APEC is an organization to discusseconomic cooperation issues instead ofpolitical issues or territorial disputes,said La Yifa, director general of the De-partment of International Organizationsand Conferences, a division of ChinasForeign Ministry, in a press briefing dur-ing the APEC week in Vladivostok.

Nevertheless, some hope that econom-ic cooperation and integration such as

that advocated by APEC will eventuallylead countries toward peaceful resolu-

tions to regional territorial disputes, ifonly by putting a positive example be-fore the contending parties.

That was a point made on September8 in Vladivostok by Yutaka Yokoi, presssecretary for Japans Ministry of Foreign

Affairs. He said that APEC economicintegration might eventually makecountries realize that if you have anydispute, it will just hinder your [com-mercial] cooperation.

Asked if there was any concrete progressin this direction during the weeks meet-ings, he said: This is not easy, but we try.

On the other hand, Yutaka also dem-onstrated just how entrenched a positioncountries can outline for themselvesover some of the disputed territories. Ja-

pan is involved in three territorial dis-putes of its own, with China, Russia andSouth Korea.

Senkaku is an integral part of Japan,based on international law and historicfacts, he said, in response to a questionabout the dispute over the islands thatChina calls the Diaoyu islands.

The classic solution that observers liketo throw out as the most rational solutionto maritime disputes is that reached byMalaysia and Thailand over a disputedsection of the Gulf of Thailand, in whichthe two countries recognized the ter-ritorial claims as intractable and agreedto joint commercial development whileputting the question of sovereignty aside.

But, so far, none of the claimants inthe South China Sea or other East Asiawaters have seemed willing to acceptthat as an approach.

As Singapores Lee said in his speech:Sovereignty disputes are complex and

hard to resolve. No side can easily aban-don their claims without high politicalcosts. The many overlapping claims bymultiple claimants in the South ChinaSea are unlikely to be resolved any timesoon. Hence in Singapores view, the in-volved parties must manage the disputesresponsibly. All sides should avoid esca-lating tensions or precipitating confron-tations that will affect the internationalstanding of the region.

And given recent events and state-

ments, thats likely the best that can behoped for in the foreseeable future.


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The grid failure that affected muchof India at the end of July 2012 was un-precedented in scale. More than half of

Indias 1.2 billion people were withoutelectricity after the northern regionalgrid collapsed on July 30, followed bythe failure of the eastern and northeast-ern grids the next day.

While unprecedented in scale, thefailure was not unprecedented in occur-rence. And while the immediate causesmay differ, power transmission failuresin India, the rest of Asia and beyond re-sult from the same underlying probleminsufficient transmission, generation orpower station feedstock capacity causedmore often than not by inadequate fund-ing and price signals in electricity mar-kets where prices reflect the priorities ofpoliticians rather than input costs.

BackgroundAn enquiry into the grid failures or-

dered by the power ministry and pub-lished in mid August found that that nosingle factor was responsible for grid dis-

turbances [but] identified several factorswhich led to the collapse of the powersystems on both the days. The fac-tors included weak inter-regional linksdue to multiple outages of transmissionlines, which effectively left the 400-kilo-volt Bina-Gwalior-Agra line as the onlyavailable line; overloading of this lineby unscheduled withdrawals by north-ern region utilities, while some westernutilities were under-drawing power; thefailure to stop this continuing by state-

level authorities; and the tripping of thelink and subsequent grid collapses.

The problem of unscheduled with-drawals is far from new with some In-dian states persistently drawing more

power from the grid than their alloca-tion, in spite of warnings from the re-gional load dispatch centers (RLDCs).The five RLDCs come under the Nation-al Load Dispatch Center and coordinatethe activities of the dispatch centers inindividual states.

On July 10 the countrys Central Elec-tricity Regulatory Commission had, at thebehest of the Northern RLDC, directedutilities in the northern states to stopoverdrawing power if frequency fell below49.5 Hertz. This came after June monthdata submitted by the Northern RLDCshowed that frequency fell below 49.5Hertz for 70% of the time on some days.

But data from the Northern RLDCshowed the excessive drawdown contin-ued after July 10 and up to the time ofthe outage.

This was not surprising. Local analystshave pointed out that the RLDCs lack in-dependence and fail to disconnect states

that draw excessive power from the grid,particularly if they are governed by rul-ing political parties or their allies.

The position of the RLDCs is furtherweakened by the fact that the main pen-alty for unscheduled withdrawals is tocharge a higher price for the power thannormal. However, the penalty chargescan be less than the cost of buying elec-tricity from the spot market.

While state indiscipline in power with-drawals from the grid may have been

the immediate cause of the grid failure,it merely reflected underlying problems

India

Crossed Wires:

Indias Power FailureMartin Daniel, Editor, Platts Power in Asia


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India

in the market. On the demand side thesecenter on the fact that Indian electricityconsumption consistently and substan-tially exceeds available supplies, espe-cially at peak periods.

The gap between peak demand and sup-

ply across India in the financial year end-ing March 31, 2012 was 11.1%, up fromthe 10.3% reported by the government-run Central Electricity Authority (CEA)for the previous financial year. The short-fall varied across India, with the southernand western regions seeing the highestdeficits at 15.6% and 13.8%, respectively,compared with a relatively modest gap of3.7% in the eastern region.

The shortfall at peak periods was par-alleled by the inability to meet electric-

ity demand overall. For the year endingMarch 2012 Indian electricity require-ments were 936.57 TWh, according tothe CEA, whereas the available supplieswere 8.5% lower at 857.24 TWh.

Moreover, the shortfalls exclude sig-nificant suppressed demand, since a largeproportion of the population does nothave access to grid electricity. About athird of Indias 246 million householdsdid not have access to grid electricity inMarch 2012, according to the latest cen-sus data, with the figure rising to 45% forthe 168 million rural households.

Conversely, existing electricity con-sumption is in some respects higherthan it should be. This reflects the factthat many customers get electricity atbelow cost and in cases for freewithagricultural consumers in some statesbeing notable in this regardunder asystem where retail electricity prices areset by state agencies and regulators rath-

er than by market mechanisms.

The below-cost provision of a largeproportion of electricity supplies meansthat some consumption is not economi-cally justified. The situation is exacer-bated by high technical and economiclosses in much of the country, with

losses resulting from aging and poorly-maintained wires networks being com-pounded by power theft.

The upshot is that sales revenue is in-sufficient for many state power distribu-tion and supply utilities to meet their op-erating, let alone financial costs, with thedebt burden of most utilities mountingfast. A late 2011 government-sponsoredreport on the utilities put their combinedlosses in the year to March 2011 at IndianRupee 277.6 billion ($5.2 billion). Worse

still, average costs and revenues were es-timated at the equivalent of $90/MWhand $70/MWh, respectively in the yearending March 2010, when average trans-mission and distribution losses were putat 27.15%.

Supply-Side IssuesNone of this means that the strong

recent and projected growth in Indianelectricity demand is unjustified. But thefinancial woes of the state power utili-tieswhich are the wholesale buyers andonward retailers of the great majority ofpower in Indiado have implications forthe electricity sectors ability to invest innew transmission and generation capaci-ty or pay the market rate for fuel suppliesfor fossil energy-fired generating plants.

R V Kanoria, the president of the Feder-ation of Indian Chambers of Commerceand Industry, has summarized the sup-ply-side issues as follows: While main-

taining grid discipline is important, we

Region Peak demandMW

Peak supplyMW

DeficitMW

Deficit%

RequirementTWh

AvailabliltyTWh

DeficitTWh

Deficit%

Northern 40,248 37,117 3,131 8 276 258 18 6

Western 42,352 36,509 5,843 14 290 257 33 11

Southern 38,121 32,188 5,933 16 260 237 23 9

Eastern 14,505 13,971 534 4 99 95 5 5

Northeastern 1,920 1,782 138 7 11 10 1 10

National 130,250 115,847 14,403 11 937 857 79 9

1. Indian electricity demand in year ending March 2012.

Source: Central Electricity Authority, India


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[must] ramp up capacity in the power sec-tor, he said after the grid failure, addingthat reforms that would help make coaland gas available as per the nations re-quirement must no longer be held back.

India has in fact added a substantial

amount of generating capacity in recentyears. In the year ending March 2012 arecord 26,250 megawatts (MW) was com-missioned, with grid-connected capacitynationwide now exceeding 200,000 MW.The capacity installed at the end of March2012 included 112,022 MW of coal,18,381 MW of gas and almost 1,200MWof oil-fired plant, as well as 38,990 MW ofhydroelectric, 24,503 MW of renewableand 4,780 MW of nuclear plant.

By region, western India hosted most

capacity at 64,394 MW, followed by thenorthern region with 53,925 MW and the

south with 52,740 MW. In terms of own-ership, private investors held 54,276 MWof the capacity installed at March 2012,while central government-owned enter-prises held 59,682 MW and state-ownedcompanies operated a further 85,919 MW.

The privately-owned capacity includes in-dependent power producer and merchantprojects, but not the 30,000 MW andmore of captive generating plant.

The impact of the recent increase incapacity can be seen from the CEAsanalysis of Indian electricity generationin June 2012, which at 76.31 TWh was8.1% higher than in June 2011an im-pressive year-on-year increase by Indianstandards. With hydroelectric outputdown 5.5% on year due to depleted dam

water levels against the background oflow rainfall, fossil-fueled generation rose

TWh % on year % of total

Coal 52.78 16.75 69.2

Lignite 2.69 18.58 3.5

Gas 6.26 -20.28 8.2

Liquid 0.01 -84.31 0.1

Diesel 0.16 -0.05 0.1

Nuclear 2.72 8.83 3.6

Hydro 11.23 -5.47 14.7

Imports 0.44 -29.68 0.6

Total 76.31 8.08 100

2. Indian power generation in June 2012.


Coal Lignite Gas Liquid Diesel Nuclear Hydro Imports

3. India power generation by fuel.



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11.37% from June 2011 to 61.91 TWh inJune 2012, within which coal and lig-nite-fired production was up more than17% on year at 55.47 TWh.

Fuel Supply Issues

However, while coal-fired generationwas well up on year it could have beenhigher, with the CEA noting that the 33million metric tons (mt) of available coalduring the month of June was only 82%of power plant requirements. The situa-tion for gas-fired plants was even worse,with national gas shortages meaning thatthe 6.26 TWh of output in June 2012 was20.28% lower than in June 2011.

This situation continued into July,with the CEA observing that just prior to

the grid failure more than a fifth of the180,361 MW of grid capacity that it moni-tors was not operating. While 12,433 MWwas closed for scheduled maintenance orother reasons on July 29, a further 27,032MW was offline because of forced outages.

Ashok Khurana, the director generalof the Association of Power Producers(APP), amplified the position by notingthat 35,000 MW of coal-fired plant wasworking at less than 40% of its designcapacity due to the lack of coal suppliesand more than 9,000 MW of gas-basedplantabout half the national totalwas idle because of the lack of gas. Ontop of that, he noted that firm fuel sup-ply agreements remain to be signed foranother 55,000 MW of plant which isscheduled to enter operation by 2015.

While both fuels fall short of demand,there are significant differences betweenthe problems confronting the Indiancoal and gas supply sectors. On the

coal front, new mines being developedboth by state entities such as the centralgovernment-owned Coal India Limited(CIL) and by private investors on a cap-tive mining basis have been heavily de-layed or cancelled.

This is a result of changes to, and morestringent enforcement of, policies re-lated in particular to securing environ-mental approvals. Land and water avail-ability issues are also becoming acute forcoalmine developers.

As a result the annual output of CIL,one of the worlds largest coal miners, has

been stagnant against the background ofsurging demand. CILs output rose only1% to 435.8 million mt in the year toMarch 2012, following unchanged pro-duction the previous year.

The problem can be seen from the fact

that 34,373 MW of coal-fired capacity wascommissioned in India in the three yearsto March 2012. That amount of capacitywould require some 70 to 100 million mtof coal each year, whereas CIL added only32 million of annual production in totalover the same period.

CIL delivered 311 million mt of coal topower plants in the year ending March2012, about three-quarters of the elec-tricity generation sectors 417.56 millionmt of coal consumption for the year.

While CIL is targeting the delivery ofabout 36 million mt more in the yearending March 2013, this is well belowpotential requirements.

Private production of coal from re-sources dedicated to supplying specificgeneration projects on a captive basisis even worse placedwhile 57 blockshave been awarded to private power gen-erators since 2004, only one has startedproduction. Moreover, the award of theblocks faces legal and financial scrutinyfollowing the publication of an audit bythe Comptroller and Auditor Generalof India in August 2012, meaning thatpower plants with 18,300 MW of capac-ity face likely further delays.

On the domestic gas supply front, theshortages center on problems facing theKG-D6 block off the coast of AndhraPradesh state. Production from what wasexpected to be Indias biggest gas pros-pect by far had reached 61 million cubic

meters per day in 2010.But instead of then rising to 80 mil-

lion cu m/d by April 2012, as envisagedin the field development plan, produc-tion has fallen to about half this levelbecause of the geological complexity ofthe gas reservoir.

Moreover KG-D6s operator, the localReliance Industries Limited, has pro-jected that the fields production will fallfurther to 22 million cu m/d by 2014.This is less than the 32 million cu m/d

then allocated from the block to thepower sector alone.


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The collapse in KG-D6 production hasdragged down overall Indian gas pro-duction. In the year ending March 2012total gas output fell by 8.9% on year to47.549 billion cubic meters, or around130 million cu m/d.

The countrys gas-fired plants requireabout 82 million cu m/d of gas to run at90% capacity, but were getting less than53 million cu m/d in early 2012. And thepower ministry has said that availabilityis likely to drop to 28 million cu m/d inthe year ending March 2014, with theaverage load factor of Indias gas-firedplants having already fallen from 62.46%in June 2011 to 46.86% in June 2012.

Not only are many operating gas-firedplants working at a low load factor, but

much of the sizeable amount of plantunder construction has no committedgas in spite of having signed fuel supplyagreements. This has led to an effectivemoratorium on the approval of new gas-fired capacity, at least where based onindigenous gas supplies, with the powerministry seeing no approvals until atleast 2015 unless the situation changes.

Imports to the Rescue?The problems facing Indias domestic

gas and coal industries are multifariousand only partly reflect the fact that theysell their output to generators at regulat-ed and low prices. But the low domesticfeedstock prices do mean the financially-pressed power utilities are unwilling toreplace electricity generated from indig-enous supplies with that produced fromimported coal or liquefied natural gas,whose market-set prices were respectivelyabout double and triple those of indige-

nous supplies in mid 2012.CIL has thus been unwilling to accede

to government requests that it shouldimport coal to meet the shortfall in do-mestic supplies unless the onward salesare at international prices rather thanthe regulated prices paid by generators.It has been suggested that this could in-volve some form of pooling of domesticand imported coal prices to spread thecost of higher-priced imports across allpower producers.

But the generators argue that stateutilities would rather impose power cuts

than buy electricity at the higher pricesresulting from the use of imported coal.Evidencing this, the APP has pointed outthat distributors have not bought all theelectricity offered through the countryspower exchanges, which for much of

2012 has cost more than that suppliedunder long-term contract, in spite of theshortfall in national electricity supplies.

Generators with firm long-term fuelsupply contracts are also unwilling tolose their lower-priced supplies, arguingthat they receive fixed power sales tariffspredicated on the contract prices. Andseveral states, including West Bengal,Chhattisgarh, Haryana and Gujarat, saidin mid August that they would not paymore for power generated from domestic

and imported coal where priced partlyagainst international benchmarks.

The aversion to letting imports fill thewidening gap between coal and gas re-quirements and domestic fossil fuel sup-plies applies in spite of the fact that, interms of geography, India is one of thebest placed international energy import-ers. It is located between the Gulf andSoutheast Asian LNG exporters, amongothers, while it is well positioned to drawon thermal coal supplies from South Af-rica, Indonesia and elsewhere.

Resolving the fuel supply problems willbe essential if Indian electricity demandforecasts are to be met. The base case pro-jections in the CEAs National ElectricityPlan issued in early 2012 see peak demandreaching 199,540 MW and consumptionrising to 1,355 TWh in the year to March2017, before rising to 283,470 MW and1,905 TWh in the year to March 2022.

About 210,000 MW of new capacity is

planned to enter operation in India be-tween April 2012 and March 2022, ac-cording to the CEA, with 98,190 MWdue to be built in the five-year periodstarting April 2012. But because of themoratorium only 1,086 MW of new gas-fueled capacity is planned by March2017, with no new gas-fired additionsthereafter, whereas 66,600 MW of identi-fied coal-fired plant is planned by March2017, with a further 49,200 MW due tobe added by March 2022.

The projected additions to March 2017also include 18,500 MW of renewable,


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9,204 MW of hydroelectric and 2,800MW of nuclear plant, with private in-vestors expected to install about 50%of the total capacity and the overall in-vestment cost put at $120 billion. The109,700 MW of capacity tentatively

planned for installation from April 2017to March 2022 also includes 18,000 MWof nuclear, 12,000 MW of hydroelectricand 30,500 MW of renewable energy-based plant, with the latter including16,000 MW of solar and 11,000 MW ofwind turbine capacity.

The projections also assume that hy-droelectric power imported from neigh-boring Himalayan countries such asBhutan and Nepal will reach 1,200 MWby March 2017 and 8,040 MW by March

2022. In the high gas case they also as-sume, that if gas became available, a fur-ther 25,000 MW of identified gas-firedplant could be built by March 2017this would take gas supply requirementsthen to 188.4 million cubic meters perday compared with 98 million cu m/dayin the base case.

Given the emphasis on additionalcoal-fired plant, CEA has unsurprising-ly flagged up the fact that coal supplyissues are of particular concern. It hasprojected power station coal require-ments in the year ending March 2017 at842 million mt.

After taking into account the antici-pated output from CIL and other state-owned entities such as Singareni Collier-ies, as well as production from captivecoal blocks, CEA anticipates that 164million mt of imports will be needed tocover a shortfall in domestic supplies.

Moreover, this is in addition to the 54million mt of overseas coal needed forpower stations specifically designed torun on imported coal, giving an overallimport requirement of 218 million mt.

Recent TrendsWhether India will achieve its ambi-tious targets for capacity additions is amoot point. Power purchasers with poorcreditworthiness together with severepower station fueling issues do not offeran attractive framework for investmentin new generating capacity.

The problems are apparent from a Plattsanalysis of project activity throughoutAsia in the first half of 2012. This foundthat while there was significantly less ac-

tivity in Asia as a whole during the firstsix months of 2012 compared with thesame period of 2011, the difference wasmore than accounted for by plummetingactivity in the Indian market.

The analysis, which uses data fromthe project tracker published monthlyin Platts Power in Asia newsletter, isan aggregation of individual projectswhich are included in the tracker for aparticular period only when they passkey milestones in the project develop-ment pipeline (as opposed to the muchlarger number of total projects under de-velopment in Asia). The analysis foundthat just over 103,800 MW of capacityregistered a change in status throughoutAsia in the first half of 2012down 11%compared with the same period of 2011.

However, the fall in activity acrossAsia was more than accounted for bythe near-halving of Indian activity. At

20,000

40,000

60,000

80,000

100,000

120,000

1997-2002 2002-2007 2007-2012 2012-2017 2017-2022

MW

Coal Gas Diesel Nuclear Hydroelectric Renewables

4. Indian actual and planned capacity additions.



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19,558 MW, activity was down from the38,174 MW registered in the same peri-od of 2011, with reduced activity at allpoints in the project development pipe-line apart from that of capacity enteringoperation.

Thus almost no capacity was reportedto have started construction in Indiaduring the period, while the amount ofcapacity which was announced or se-cured government and company approv-als fell by more than a half and aboutfour-fifths, respectively. Meanwhilethe amount of Indian capacity signingequipment or engineering, procurementand construction (EPC) contracts wasdown on year by about a third in thefirst half of 2012.

India was not alone in registering adecline in activity with China, for in-stance, also showing significantly lessactivity in the first half of 2012 than inthe same period of 2011. However, therewere differences across the project de-velopment pipeline and between fuels,with the dearth of Indian gas-fired activ-ity not repeated in China.

In this respect the analysis found anotable difference at the Asia-wide lev-el between activity in the first halvesof 2011 and 2012in the latter pe-

riod much more gas-fired capacity waspredicated on the use of imports, or im-ports in combination with indigenousgas supplies, than on domestic suppliesalone. Across Asia, about 47% of thegas-fired capacity had been predicated

on the sole use of indigenous suppliesin the first half of 2011, whereas the fig-ure dropped to 22% in the same periodof 2012.

A similar Asia-wide trend was appar-ent for coal, with more generators ap-pearing to seek multiple sources of fuelfor their projects. But India was againan exception to the rule, with slumpingIndian activity one of the main reasonswhy there was a reduction in the overallamount of activity in the coal-fired gen-

erating sector and especially in plantspredicated solely on domestic supplies.

Across Asia, the amount of coal-firedcapacity changing status throughoutthe project development pipeline fellfrom 61,371 MW in the first half of2011 to 57,265 MW in the same periodof 2012, according to the Platts analy-sis. However, the fall was more thanaccounted for by a reduction in theamount of announced capacity, whichdropped from 14,100 MW in the firsthalf of 2011 to 8,480 MW in the same

Announced Approved Contract signed Construction Operation Total

Coal - domestic 12500 10450 11018 6440 3760 44168

Coal -imported 1600 2600 8388 1400 960 14948

Coal - both 0 800 135 1320 0 2255

Oil 370 150 505 100 560 1685

Gas - local 0 3412 4018 806 1132 9368

Gas - LNG 1900 700 1013 570 0 4183

Gas - either 1600 1422 2966 510 0 6498

Oil/gas 150 0 0 560 0 710

Hydro 0 3399 5362 5253 1030 15044

Nuclear 3590 2000 0 0 0 5590

Wind 806 809 2536 1026 700 5877

Solar 2040 352 229 735 0 3356

CSP 200 0 0 0 0 200

Geothermal 302 455 171 0 0 928

Other 50 0 0 0 0 50

Total 25108 26549 36341 18720 8142 114860

5. Asian projects changing status in the first half of 2011 by fuel, MW.

Source: Platts


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India


period of 2012, with the drop in Indianactivity again prominent.

The analysis thus indicates that oncurrent trends India could fail to meetits ambitious program for adding gen-erating capacity during the coming de-

cade. With limited potential for addinghydroelectric, renewable and nuclearplant, it will be reliant on building morefossil-fueled capacity.

This effectively means building muchmore coal-fired capacity, unless themoratorium on gas-fired capacity islifted. But with the indigenous coal andgas industries both facing problems,and an aversion on cost grounds to theuse of imported fossil energy, buildingand fueling the capacity will be a big

ask, unless there is a thoroughgoingprogram of market liberalization andprice reform.

ConclusionsMajor grid failures can have a pivotal

impact on electricity markets. Blackoutsare unpopular with voters and investors,and have on occasion led to major shiftsin national electricity policies. Witnessthe severe blackouts in Malaysia in theearly 1990s, which led to the shift frommonopoly state electricity provision to

the generation of a large part of electricityby independent power producer plants.

Whether the July 2012 outages willhave a similar transformative impact onIndias electricity sector remains to beseen. Ownership of Indian electricity

and energy assets is divided between na-tional, regional and state entities, withtheir operation being less than seam-less as a result of the plethora of agen-cies and companies existing even at thesame level.

Reform of the sector would thus re-quire root and branch restructuring forwhich the political will and, perhapsmore pertinently, parliamentary supportremains unclear. And the track recordis not promising since, while India has

enacted sweeping energy market reformsover the past two decades, implementa-tion of many of the measures has beenpatchy at best.

At root, though, the outcome will de-pend on popular support for the mea-sures and there is certainly consider-able public outrage over the grid failurewhich will result in some form of action.But how effective the actions are willdepend primarily on whether the samepublic is willing to pay an economicprice for its power.

Announced Approved Contract signed Construction Operation Total

Coal - domestic 3580 2835 7370 0 4875 18660

Coal -imported 3500 11298 6820 0 800 22418

Coal - either 1400 5732 4940 1200 2915 16187

Oil 0 306 0 0 0 306

Gas - domestic 500 1900 1537 0 550 4487

Gas - imported 2376 0 6000 0 251 8627

Gas - either 450 4514 2587 0 0 7551

Oil/gas 450 0 800 0 339 1589

Hydro 9954 1300 1740 0 901 13895

Nuclear 0 0 0 2800 650 3450

Wind 1000 829 377 420 1028 3654

Solar 470 266 968 5 387 2096

CSP 0 0 250 0 0 250

Geothermal 5 440 0 130 0 575

Other 0 0 60 0 0 60

Total 23685 29420 33449 4555 12696 103805

6. Asia power trends in the first half of 2012, MW.

Source: Platts


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While Chinas shale gas prospectshave grabbed the headlines recently,less attention has been paid to the coun-trys efforts in coal gasification. Coal isChinas number one hydrocarbon re-source and the Chinese coal industry isthe largest in the world. Further exploit-ing the countrys reserves, particularlycoals unsuitable for power generationor inaccessible with traditional miningtechniques, provides China with an ad-

ditional means of offsetting its growingimport dependency on oil and gas.

The syngas produced by coal gasifica-tion is versatile. It can be used as a directburn energy source for power and heat,or be upgraded to Synthetic Natural Gasthat can be fed into existing natural gaspipelines. It can also be used to makechemicals and via Fischer-Tropsch pro-cesses into liquid fuels.

There is also an environmental angle.Coal gasification allows pre-combustion

separation of carbon dioxide from thesyngas, which is cheaper than current

methods of post-combustion separationfrom power plant flue gas. As a result,coal gasification reduces the overall costof Carbon Capture, Storage. However,for coal gasification to be classified aslow carbon it must be combined withCCS, an as yet unproven and economi-cally challenging process.

Supply ContributionAccording to data from the state-

owned China National Petroleum Cor-poration, Chinas annual gas demand isexpected to rise to 350 Bcm by 2020 and550 Bcm by 2030 from 130 Bcm in 2011.Other forecasts suggest demand couldtop 400 Bcm by 2020, while estimatesmade by the National Development andReform Commissions Energy ResearchInstitute last year put the 2020 figurelower at 270-330 Bcm.

China has contracted for imports ofCentral Asian pipeline gas to rise to 65

Bcm/yr by the end of the decade and ex-pects to receive a further 12 Bcm/yr from

China energy

Test Year for Chinese

Coal-Based SNGRoss McCracken, Editor, Platts Energy Economist

Coal-based Synthetic Natural Gas production in China may be

on the brink of a step-change in the industrys development.

New projects coming on-stream this year promise the start ofcommercial scale production, moving the sector away from its

traditional base in chemicals. SNG could provide a significant

contribution to the countrys gas supply, one that may outstrip

shale gas in both quantity and timing.


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China energy

Myanmar by pipeline. Domestic outputis expected to double between 2009 and2020, with unconventional gas sourcesplaying a key role. Based on the NDRCfigureswhich are at the conservativeend of the spectrumLNG should be

able to fill the gap between expected sup-ply and demand in 2020.It is unclear where SNG sits within

this framework. CNPC does not appearto take SNG production into account,focusing instead on conventional gas,tight gas, shale gas and coalbed meth-ane. US bank JP Morgan provides a mod-el which assumes Chinese gas demand of400 Bcm in 2020, but specifically omitsSNG production, owing to the technical,economic and infrastructural risks as-

sociated with the sectors development.However, the bank does see a potentiallysignificant additional contribution toChinas domestic gas supply from SNG,one currently not incorporated withinthe banks models.

Existing GasificationChina already produces significant

amounts of coal gas, but the syngas pro-duced is used almost entirely in the chem-icals industry. Of total installed capacity,66 of 69 gasification facilities are directedtowards syngas for chemicals production,representing 95% of syngas output bynameplate capacity, according to the Gas-ification Technologies Council database.

The predominant gasification feedstockis coal, which accounts for 55 projectsor 89% of syngas output capacity. Theremainder is made up primarily of pe-troleum residues, where there has been

a marked slowdown in new projects, thelast being built in 2009 and the one be-fore that in 2003. However, 2012 shouldmark a new direction for the gasificationsector in China, with the start up of twoprojects designed to produce upgraded gas

that can be put into natural gas pipelines.JP Morgans research lists 15 coal gas-ification projects under construction inChina through to 2016. If first phasecompletion is achieved under the time-tables described, total SNG output wouldreach 21.24 Bcm/yr of pipeline qual-ity gas by 2016. If full target capacityis reached, coal gasification could sup-ply 89-96 Bcm/yr, not far short of 25%of total gas demand in 2020. Accordingto the World Clean Coal Week confer-

ence total projects under construction,planned and proposed amount to some150 Bcm/yr gas, although many of theseprojects are unlikely to be realized.

The first two commercial coal gasifica-tion projects are Qinghua Coal Groupsproject in Yili, Xinjiang. First phase ca-pacity is 1.38 Bcm/yr, rising eventually tofull potential capacity of 5.5 Bcm/yr, al-though the timeline for future expansionis unclear. The second project is XinjiangGuanghuis 0.5 Bcm/yr capacity plant,also in Xinjiang. Four more projects areslated for completion in 2013, two in In-ner Mongolia and two more in Xinjiang.Combined, these represent first-phase ca-pacity of an additional 7.36 Bcm/yr, withscope for expansion to 22 Bcm/yr.

Although it is hard to assess the timingof project completion, as many of theproposed projects lack approvals, as wellas likely operational levels, there have

25

50

75

20112007200319991995199119871983

Gas Petroleum Coal

1. Number of Chinese gasification projects by feedstock (cumulative).

Source: Gasification Technologies Council


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China energy

been some concrete developments in ad-dition to the two plants expected to startup this year. The China Power Invest-ment Corporations 2-6 Bcm/yr projectin Yili, for example, which is expectedto produce first SNG in 2015, has eight

coal gasifiers on order from Siemens En-ergy. Each gasifier uses up to 2,000 tonsof coal a day.

TransportationA notable aspect of these projects is

the high level of involvement in theSNG upstream of coal and power com-panies rather than Chinas traditionaloil and gas producers. However, Chinasbig state oil and gas companies do have acrucial role to play. Producing potential-

ly large volumes of SNG in Inner Mongo-lia and Xinjiangareas far from Chinasdemand centersmeans the gas has tobe piped long distances to consumers.Neither the coal nor power companiesinvolved have the capacity to build thenecessary pipelines.

Sinopec announced last year that itwould invest in two pipelines with to-tal transmission capacity of 30 Bcm/yrto transport coal-based synthetic gas toChinas eastern coast. The first will be7,373 kilometers long and link Xinjiangwith Guangdong and Zhejiang provinc-es. The expected cost is over Yuan 130billion ($20.4 billion), including fivetrunk lines. The second pipeline will alsostart in Xinjiang and run to Shandongand Jiangsu provinces, spanning over4,463 km. The pipelines are expected tobe operational by 2015.

Sinopec said that the longer pipeline

would serve 13 provinces and municipali-ties including Gansu, Ningxia, Shaanxi,Shandong, Jiangxi, Zhejiang, Guangdongand Fujian, while the second pipe will passthrough seven major areas, including He-han, Anhui, Tianjin, Jiangsu and Beijing.

Sinopec signed a deal with the Xinji-ang government and nine local compa-niesincluding state power companyHuanengin December to procure syn-thetic gas for the pipelines. Of the 15projects listed by JP Morgan that are ex-pected to complete by 2016, seven are inXinjiang, with one each in Shanxi andGansu, which could be connected to thelonger of Sinopecs two proposed pipes.Sinopec is also interested in SNG produc-tion itself and has a project in Xinjiang

which is slated to start up in 2015thesame schedule as for the pipelinewithcapacity of 8.0 Bcm/yr.

Sinopecs Xinjiang SNG pipelineproject was reported by local media tohave been submitted to the NDRC forapproval in August 2011. The pipelineappears to have first been proposed in2009, but no mention is made of it inthe groups 2011 annual report as acompany priority. It is not clear wheth-er it forms part of the blueprint for thenatural gas sector under the 12th FiveYear Plan, which was submitted for ap-proval by the NDRC to the State Coun-cil in May, but has yet to be publiclyreleased. SNG production comes underthe chemical coal sector in the 12thFive Year Plan, which was released inMarch. It only mentioned that syngasfrom coal should be developed but didnot specify any output targets.

25

50

75

20112007200319991995199119871983

Motor fuels Gaseous Fuels Chemicals

2. Number of Chinese gasification projects by product (cumulative).

Source: Gasification Technologies Council


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China energy

Supply CompetitionMedia reports give the impression that

there is some competition between Sino-pec and CNPC in Xinjiang to secure SNGvolumes. Xinjiang has traditionally beenthe preserve of CNPC. The companys

subsidiary PetroChina built the West-East pipelines that take Central Asianimports and Xinjiangs own productionto Chinas east.

The first West-East pipeline has capacityof 12 Bcm/yr and runs 3,843 km from thewestern Tarim Basin in Xinjiang to Shang-hai. It started operations in 2003. The 30Bcm/yr Second West-East pipeline bringsin Turkmen gas. It was fully commis-sioned in May, when the link to Shenzhencity in southern Guangdong province was

launched. It was built at a cost of Yuan142.2 billion, with a total length, includ-ing trunk lines, of 8,704 km and is alreadysaid to be operating close to capacity.

The third line is expected to cost Yuan116 billion, according to The China Secu-rities Journal. The new pipeline will linkwith the Central Asia-China gas pipelinenetwork and start in Horgos in westernXinjiang province on the border withKazakhstanthe same start point as theSecond West-East pipeline. It will passthrough 10 provinces. The main trunk

line will be more than 5,000 km long,according to CNPC.

Construction of the third West-Eastpipeline may provide capacity for SNG tobe taken east. CNPC signed frameworkagreements with local state-owned and

private companies to secure funding forthe 30 Bcm/yr Third West-East pipelineend-May. The company said then thatconstruction would begin within a year,with commercial operations targeted tobegin in 2015.

According to a report in July fromInter-fax, quoting a company source, the King-ho Energy Group will start trial outputfrom its coal-to-gas project in Xinjiangthis year before moving to the produc-tion phase in 2013. The project has even-

tual capacity of 5.5 Bcm/yr. The reportsaid key equipment for the first phase ofthe project has been installed. Accordingto the report, CNPCs West-East gas pipe-line network will take the output. Otherlocal media sources say 14 coal-to-gasprojects were started in 2011 in Xinjiang.

The China National Offshore Oil Com-pany also has an interest in coal gasifica-tion, both upstream production and intransportation. Local media have report-ed that the company wants to build a 30Bcm/yr capacity pipeline to take SNG from

Operator Location First phase (Bcm/yr) Target (Bcm/yr) Year of first phase

Qinghua Yili, Xinjiang 1.38 5.50 2012

Xinjiang Guanghui Xinjiang 0.50 0.50 2012

Datang Inner Mongolia 1.40 4.00 2013

Xinwen Yili, Xinjiang 2.00 10.00 2013

Huineng Ordos, Inner Mongolia na 2.00 2013Huaneng Zhundong, Xinjiang 4.00 6.00 2013

Shenhua Ordos, Inner Mongolia na 2.00 2015

Sinopec Xinjiang na 8.00 2015

Guodian Ulanhot, Inner Mongolia 2.00 10.00 2014

Xinjiang Guanghui Fuwen, Xinjiang 4.00 4.00 2015

Datang Fuxin ,Liaoning na 4.00 2016

China Power Investment Corp Yili, Xinjiang 2.00 6.00 2015

CNOOC New Energy Investment Shanxi 4.00 6 to 15 2015

Gansu Hongshengqi Gansu na 4.00 2015

Sichuan Petrochemical/Linde Sichuan na 15.00 MOU

3. Coal gasification projectsunder construction and proposed.

Source: Company data, JP Morgan


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China energy

Inner Mongolia to more central and east-ern demand centers. CNOOC New EnergyInvestment has plans for a first phase coal-to-gas project with capacity of 4.0 Bcm/yrin Shanxi, a province south of Inner Mon-golia, starting up in 2015.

Comparison with ShaleBased on the projects outlined by JP

Morgan, SNG output from coal gasifica-tion could outstrip the contribution ofshale gas to Chinese gas supply in theperiod to 2020. According to CEO ChrisFaulkner of US independent BreitlingOil and Gas, Chinas shale gas targets areover ambitious, owing to the size of theinvestments required and infrastructuralconstraints such as pipeline connections

and water supply and disposal. Theseconcerns have also been highlighted byofficials from Chinas state-owned oiland gas companies.

Beijing is targeting annual output of6.5 Bcm/yr of shale gas output by end-2015, although state oil companies Pet-roChina and Sinopec have only outlinedoutput targets of less than half that.Sinopecs target of 2 Bcm includes shale,coalbed methane and tight gas.

Investment capital is also likely to bea constraint. Despite a number of coop-eration agreements with International OilCompanies, Chinas Ministry of Land andResources, which controls the countrysshale acreage, launched its first bid roundlast year, with only a handful of local state-related companies allowed to participate.

Of the four areas offered, only two at-tracted bids, and those were awardedto Sinopec and Henan Provincial CoalSeam Gas Development and Utilization

Co. A second round is expected this year,but participation is again expected to belimited to domestic companies.

Speaking at the Shale Gas World confer-ence in Singapore in July, Faulkner said,Theres a massive gap between the activ-ity in the country and full-scale develop-ment Thats why I really dont thinkChina is going to get anywhere by 2015or 2020, for that matter. Its going to be a2022, 2025 play for them The pace atwhich China is moving is not going to al-

low it to create the amount of productionit needs by 2015.

Complementary TechnologiesChinas initial push for SNG produc-

tion is based on traditional coal min-ing, with the innovative phase comingin the gasification and methanizationthat produces syngas and then upgrades

it to SNG. The advantages include themore efficient extraction of coals energyvalue, the potential use of poorer qualitycoals and the prevention of pollution indensely-populated areas.

Piping gas produced in Xinjiang or In-ner Mongolia to eastern and southerndemand centres saves on rail and trucktransport of coal to power stations in thoseareas. However, any SNG produced is aslikely to displace oil products as much asdirect coal burn because Chinas expects

a rapid increase in city gas consumptionover the next decade and is putting theinfrastructure in place to facilitate this.

Other technologies complement theexpansion of coal gasification. Foreigncompanies involved in UndergroundCoal Gasification, for example, ap-pear to be migrating from their homepatches, where resistance to coal-relat-ed technologies is stronger and envi-ronmental controls more stringent, tojurisdictions in Asia.

Australias Linc Energy, a leader inthe UCG sector, recently agreed a jointventure with GCL Projects, a subsidiaryof Hong Kong-based Golden ConcordHoldings, to build its first multi-gasifierproject in China. Linc offers integratedUCG to Gas-to-Liquids technology toproduce transport fuels from coal.

Another Australian firm, Cougar En-ergy, is also reported to be in talks withlocal Chinese partners to use its UCG

technology on prospective coal areas inInner Mongolia. Focusing on UCG forpower generation, Cougar is currentlyinvolved in site selection for a UCG proj-ect in the Wu Ni Te coal basin. Cougarsaw its Kingaroy UCG pilot project inAustralia shut down in July 2010 on en-vironmental grounds that it is still con-testing in court.

In July last year, at a UK-China sum-mit, a $1.5 billion partnership was an-nounced between UK UCG developer

Seamwell International and the state-owned China Energy Conservation and


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China energy

Environmental Protection Group to de-velop a 1,000 MW UCG project in Chinaon the Yi He coal field in Inner Mongo-lia. If built, the project would be the larg-est of its kind.

UCG involves the combustion of coal

underground to produce syngas. It avoidsthe need both for traditional miningand an above ground gasification plant,but is struggling to prove itself on envi-ronmental and operational grounds. If itcan be made to work reliably at scale, itcould hugely extend the exploitable coalresource. Given Chinas vast coal reserves,UCG could represent a second develop-ment phase to complement current ef-forts in SNG production that, in theoryat least, could create a new industry on

a scale commensurate with existing con-ventional gas production.

The second complementary technol-ogy is Carbon Capture and Storage. Ow-ing in part to its heavy coal use, Chinasgreenhouse gas emissions are rising fast.As a developing country, China is notbound by any emissions reduction tar-gets other than those it sets itself. Coalgasification is often portrayed as a cleancoal technology, but its main claim inthis area is its efficiency and its sepa-ration of CO

2pre combustion, which

makes it easier to capture and store CO2.

Without CCS, it represents a means ofextending coal use rather than loweringits carbon impact. It may produce cleanburning gas, but the CO

2is emitted ear-

lier on in the process.China has a number of CCS projects, but

as in Europe and the United States, com-mercial deployment remains at least a de-cade away. For projects such as the Seam-

well joint venture or that announced withUS company CoalTek last year for a cleancoal processing facility in Inner Mongo-lia, the focus is on energy production andthe efficient use of coal rather than cap-turing and storing CO

2.

According to an MIT report on oneof the most advanced projects, Shen-huas Direct Coal Liquefaction Produc-tion Line at Ordos, Inner Mongolia, CO

2

liquefaction in preparation for storage,as well as some pilot storage, has been

achieved, but full-scale operation is notexpected until 2020 at a cost of $1.46

billion. Similarly, the Tianjin GreenGencoal gasification plant is behind sched-ule and is only the first of three phases,the last being a CCS project, which isscheduled for 2015-2020.

Two projects announced in 2011 were

also based on CCS enabling projectsrather than CCS itself. Alstom Power inJuly last year said it was in discussionwith China Datang Power to build a350 MW Oxyfuel plant in Daqing, Hei-longjiang, Chinas historic center of oilproduction. The plan is to use CO

2for

enhanced oil recovery.A second project under discussion was

a partial post-combustion capture proj-ect for a proposed 1,000 MW plant inDongying, Shandong, near the Shengli

oil field. At the time, Climate ChangeMinister Xie Zhenhua noted that costeffective uses for CO

2were essential and

that anything beyond that would requireinternational finance.

As a result, coal-based SNG productioncan be seen from two viewpoints. First,as a means for China to exploit more ful-ly its coal resource and thus ultimately touse more coal and make more emissions.Second, as a preliminary stage on theroad to creating a genuinely low carbonprocess for the use of coal, which in itsinitial phase makes some emission gainsthrough using coal more efficiently.

Clearly, as in other countries, othermotivations ride alongside environmen-tal concerns. China needs energy to de-velop and economic development is akey priority. It also wishes to reduce itsgrowing dependence on imported oiland gas. As a domestic resource, SNGallows it to do both by substituting for

imported gas and oil products in heatingand cooking.

Based on the projects under construc-tion, the next 18 months are likely todemonstrate whether coal-based SNGcan deliver commercial scale quantitiesof pipeline quality gas. If they do, andthe oil and gas companies are sufficientlyconfident to move ahead with their am-bitious pipeline proposals, there is a realpossibility that SNG will make as big, ifnot a larger, contribution to Chinese gas

supply than shale gas out to 2020, andpossibly beyond.


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But as we enter the final stretch of2012 news of a far more depressing na-ture is dominating the headlinescol-lapsing demand, rising costs and addi-tional taxes find the industry in a stateof turmoil. Add to this the decliningreliability of long established bench-marks as liquidity shifts to lower calo-rific value (CV) or off-spec marketsand the winds of change have twistedinto a Category 5 hurricane.

Its not all doom and gloom. 2012 hasseen the launch of several assessmentsthat underpin the new lower CV mar-kets, buyers are increasingly happy that

after several years of runaway pricesthe tables have turned in their direc-tion and, as the fourth quarter gets un-der way, market sentiment is turning alittle more positive, looking forward toan increase in Chinese consumer buy-ing and a more stable Indian Rupee.Maybe it is time to downgrade thatstorm to a Category 4?

The changing trade flows in recentyears have been well documented. Eu-rope had long been the destination of

a majority of thermal coal from SouthAfrica, or Richards Bay to be more pre-

cise. But India, China and Korea nowdominate this market.

This year has seen the trend of ex-ports from Richards Bay to Asia accen-tuate with an interesting anglemoreand more of the tonnage is not standardspecification 6,000 kilocalories per ki-logram net as received (NAR) material.There has been a huge increase in theoff-spec marketmaterial with a valueof 5700 kcal/kg NAR or even lower.

Some sources suggest that this nowaccounts for between 40% and 50% ofthe total. And when you consider thatthis is a 65-70 million metric ton an-

nual export business, this represents asignificant amount of coal that is underrepresented in the pricing market.

Much of this specific product is find-ing its way to India which has beenquietly active and possibly one of thestronger drivers of the lower calorificvalue markets.

2012 also saw a huge surge behindan off-spec Australian productFOBNewcastle 5500 NAR or the higher-ash Newcastle coal that has complete-

ly taken over in the spot market fromthe traditional 6000 NAR benchmark.

coal

Coal Weathers

the StormJames OConnell, Senior Managing Editor, Platts Coal

What a difference a year makes. This time last year the coal

industry was on a highChina and India were voracious

consumers of the fuel and even up to February 2012 themarket was characterized by traditionally high spot prices.


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coal

With thermal coal exports of around110 million mt, and with Japan takingmore than 50 million mt of the stan-dard grade, the off-spec market consti-tutes the greater majority of the mostliquid high quality coal market in Asia.

With Japan buying almost exclusive-ly on an annual or term contract ba-sis, the change has left the traditionalbenchmark spot market devoid of bothcustomers and liquidity. The new New-castle 5500 NAR market is most activeand favored by Chinese, Korean andTaiwanese buyers.

The other lower calorific value marketthat bloomed in 2012 is for Indonesiancoal with an FOB value of 4200 grossas received (GAR). The market has been

growing steadily in recent years, andas higher quality material gets suckedup into contracts liquidity has shifteddown to 5000 GAR and lower material.

As long ago as 2010, Platts was askedby major industry players to launch a3,600 GAR Indonesia marker, but thetransparency and liquidity in this seg-ment was, and remains, too opaquefor truly accurate pricing. The marketat the 4200 GAR level has, however,matured significantly in the last 12months and Platts has been publishingpricing at this level since mid-2012.

Another change blowing in the windis the huge increase in United States

thermal coal exports. These have hit a20-year high.

The high quality US coal comes ata price in the international marketshigh sulfur. With the US coal-fired pow-er generation industry in what is popu-

larly described as terminal decline, USproducers have actively sought exportmarkets and discovered that Europelikes their product.

The US miners have also turned toAsia and to their delight China hasalso enthusiastically embraced thespecifications. Employing their exper-tise at blending coal varieties they dis-covered that high calorific value, highsulfur US coal and low calorific value,low sulfur Indonesian coal are good

boiler buddies.Since the end of the first quarter of

2012, end users have been spoiled forchoice in terms of coal origin. Withthe US, Colombia, South Africa, Indo-nesia and Australia all competing forthe same few buyers, something hadto give.

Just as strained relations and defaultsoccurred at the top of the market, whenthe floor fell out of the price boom therelative newcomers to the internationalseaborne coal tradethe Chinesewere quick to spot an opportunity toknock a few more dollars off the price.A trickle of defaults turned into a tor-

($/mt)

65

75

85

95

105

24-Sep11-Sep29-Aug15-Aug02-Aug20-Jul09-Jul26-Jun

KalimantanRichards Bay Newcastle 6300 Newcastle 5500CIF ARA

1. Daily coal price trends (physical).

Source: Pl

Platt 2012 Top250 Insight

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