EMERGING GAS DEMAND
Henan XU, CFA, ERP Energy Analyst June, 2016
• Coal-to-gas switching could partially reverse in the near term
• The industrial renaissance is contingent upon commodity and end-products prices
• Res/Comm demand faces competition from electric heating as well as efficiency gains
• Transportation demand shows potential yet won’t move the needle
• Emerging demand in emerging markets? Don’t be too optimistic
Power
0
5
10
15
20
25
30
Bcf
/d
Power
Industrial
0
5
10
15
20
25
30
Bcf
/d
Key Takeaways
2
Power
Industrial
ResComm
0
5
10
15
20
25
30
Bcf
/d
BENPOSIUM 2016
Source:Clean Fuels
POWER BURN
1
Power 39%
Industrial 30%
Rescomm 31%
0%
5%
10%
15%
20%
25%
30%
35%
Coal Market Share Gas Market Share
Generation Market Share Changes between 2020 and 2030
2020 2030
Can’t Switch Back under the Clean Power Plan
Source: Platts Bentek Source: EPA Regulatory Impact Analysis
BENPOSIUM 2016 4
020406080
100120140
Mill
ion
shor
t ton
Clean Power Plan Emissions Reduction
Reduction neededRetiring units' emission in 2015Reduction from 2015-2030
INDUSTRIAL DEMAND
2
Power 39%
Industrial 30%
Rescomm 31%
Gas Consumption by the Manufacturing Industry
BENPOSIUM 2016 6
Chemicals 39%
Petroleum and coal products
16%
Primary Metals
10%
Food 10%
Paper 7%
Nonmetallic Mineral Products
5%
Fabricated Metal Products
3%
Transportation Equipment 2%
Plastics and Rubber Products
2% Other 6%
15.7 Bcf/d in 2010; 84% of Total Industrial Gas Demand
Source: MECS 2010
Fertilizer; Methanol
Gas-to-liquids
Direct-reduced Iron
More than 4 Bcf/d of Industrial Feedstock Projects Tracked; Only 2 Bcf/d of Growth in the Forecast
0
0.2
0.4
0.6
0.8
1
1.2
1.4
2015 2016 2017 2018 2019 2020 2021
Bcf
/d
GTLDRIMethanolFertilizer
Source: Platts Bentek Industrial End-user Tracker
BENPOSIUM 2016 7
Nitrogen Fertilizers – Ammonia-based Products
BENPOSIUM 2016 8
Fertilizer Form % N Anhydrous Ammonia
Gas, applied as liquid from pressurized tank 82%
Urea Solid 46%
Urea-ammonium nitrate solutions
Liquid 28% - 32%
Source: Yara
50% -> Corn farming
50% of nitrogen consumption comes from imports
31 MMBtu gas /Metric ton of ammonia
Ammonia
Robust Margins for Fertilizer Producers
BENPOSIUM 2016 9
Source: CF Industries
Cash Margin for North American Producers
0100200300400500600700800900
1000
$/to
n of
Anh
ydro
us A
mm
onia
Retail Ammonia Price v.s. Gas Feedstock Costs
Illinois Anhydrous Ammonia PriceGas Feedstock Cost
What is Methanol Used for?
BENPOSIUM 2016 10
Source: Methanex
32 MMBtu/metric ton of Methanol
Methanol Margins Are Challenged
BENPOSIUM 2016 11
Source: Methanex
Returns are Challenged
0100200300400500600700800900
1000
1/20
05
8/20
06
3/20
08
10/2
009
5/20
11
12/2
012
7/20
14
3/20
16
$/M
etric
ton
of M
etha
nol
Methanol Price V.S. Gas Feedstock Costs
Methanol $/MTGas Feedstock Cost ($/Metric ton of Methanol)
What is Direct-reduced Iron Used for?
BENPOSIUM 2016 12
9.8 MMBtu/ton of DRI
Removal of oxygen; Lower temperature than blast furnace; reducing iron ore without melting it
Steel (Electric arc furnaces)
DRI Production Contingent upon Steel and Scrap Prices
BENPOSIUM 2016 13
0
50
100
150
200
250
0100200300400500600700800
1/20
13
3/20
13
5/20
13
7/20
13
9/20
13
11/2
013
1/20
14
3/20
14
5/20
14
7/20
14
9/20
14
11/2
014
1/20
15
3/20
15
5/20
15
7/20
15
9/20
15
11/2
015
1/20
16
3/20
16
5/20
16
MM
cf/d
$/sh
ort
ton
Nucor’s Gas Consumption at its DRI Plant V.S. Steel Prices
Nucor Scheduled Volume Steel (Flat Cold Rolled Coil CIF $/st)
Equipment failure
Maintenance and deliberately suspended production
Gas-to-liquids (GTL)
BENPOSIUM 2016 14
GTL Project Returns in Single Digit
BENPOSIUM 2016 15
Why We Sliced Industrial Demand Growth Potential by Half
BENPOSIUM 2016 16
Bullish Bearish
RES/COMM DEMAND
3
Power 39%
Industrial 30%
Rescomm 31%
Residential and Commercial Largely Driven by Weather
0
5
10
15
20
25
30
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Bcf
/d (G
as E
quiv
alen
t)
Energy Consumption in ResComm
Fuel Oil LPG Natural GasSource: EIA, Platts Bentek
BENPOSIUM 2016 18
Demand in remote and constrained
areas
Polar Vortex
Space Heating Market Shifts between 2010-2014
Fuel with Largest Market Share Gains in Space Heating Fuel with Largest Market Share Losses where Propane Gained Market Share
Yellow: Electric heat pump gained market share
Green: Propane replaced distillate fuel oil
Source: ICF
BENPOSIUM 2016 19
Efficiency Gains over the Past Few Years; Energy Usage Behavior Needs to Cross the Chasm
50
55
60
65
70
75
MM
Btu
/y
Total Energy Consumption per Capita
Commercial Residential Source: EIA, Platts Bentek
Crossing the Chasm
BENPOSIUM 2016 20
Vehicle Gas Consumption v.s. Alternative Fuel Prices
0
20
40
60
80
100
120
2010
2011
2012
2013
2014
2015
MM
cf/d
Natural Gas Vehicles Gas Consumption
OthersArizonaTexasNew YorkCalifornia
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
4/10
/00
7/22
/02
11/1
5/04
2/21
/07
10/2
/08
4/2/
2010
9/30
/201
13/
29/2
013
10/1
/201
4
$ pe
r Gas
olin
e G
allo
n Eq
uiva
lent
Retail Fuel Prices
GasolineCNGDiesel
Source: EIA, Alternative Fuels Data Center
BENPOSIUM 2016 21
Payback Period to Fleet Owners has Increased
BENPOSIUM 2016 22
LNG Powered Vessels Emerging
Source: Tri-Zen
BENPOSIUM 2016 23
• First LNG oil service vessel and bunkering terminal in Port Fourchon, Louisiana
• First LNG powered containership will operate between Jacksonville, Florida, and San Juan, Puerto Rico.
• First LNG-conversion-ready product tanker
So What?
BENPOSIUM 2016 24
5.4
2.1
2.3
1.0
12.2
3.6
7.7
0.9
Total
Industrial
Power Burn
ResComm
Demand Growth
2009-2015 2015-2021
Domestic demand growth will be slower
WHAT IS HINDERING CHINA’S GAS DEMAND?
4
Fun fact! US re-exported 6 Bcf of LNG to China in 2011 at $11/MMBtu
China’s Gas Market = 1/3 US’s Gas Market
BENPOSIUM 2016 26
0
5
10
15
20
25
30
35
40
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Bcf
/d
China's Gas Supply Mix: Actual and Forecast
Domestic - Conv Domestic - Unconv Import - LNG Import - Pipeline Target
Forecast
High Gas Prices Prevent Economic Switching in the Power Sector
BENPOSIUM 2016 27
Qin
ghai
Sha
anxi
Sic
huan
Inne
rmon
golia
(eas
t)
Cho
ngqi
ng
Hun
an
Inne
rmon
golia
(wes
t)
Gan
su
Hei
long
jiang
Jilin
Gui
zhou
Yun
nan
Hub
ei
Nin
gxia
Hen
an
Bei
jing
Anh
ui
Sha
nxi Fu
jian
Hai
nan
Gua
ngxi
Jian
gxi
Gua
ngdo
ng
Shan
dong
Liao
ning
Zhej
iang
Heb
ei (N
orth
)
Shan
ghai
Heb
ei (S
outh
)
Tian
jin
Jian
gsu
0
2
4
6
8
10
12
14
16
18
20
$/M
MB
tu
China City Gate vs LNG Import Prices
City Gate Price Traditional LT Price*
LNG Importing Regions Gas switching price (derived from coal on-grid price)
HH SRMC (2017) Delivered
Over Contracted in the Near Term
BENPOSIUM 2016 28
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Bcf
/d
China's LNG Imports
Contracted LNG LNG Import Regasification Capacity (FID'ed)
Key Takeaways
BENPOSIUM 2016 29
• 1-2 Bcf/d of gas-to-coal switching could happen in the near term
• GTL and methanol projects are at risk to be delayed; fertilizer projects are holding strong; potential development in the direct-reduced iron sector
• Minimum growth in Res/Comm demand; gas as a transportation fuel could grow to 0.7 Bcf/d by 2021 depending on oil prices
• Economic growth and price reforms are key to emerging market demand
5.4 Bcf/d Domestic Growth
7.4 Bcf/d of Exports Growth
How is it Made?
BENPOSIUM 2016 31
Natural gas to syngas Natural gas/Coal/Biomass + Steam + Oxygen -> syngas (CO, H2)
Syngas (+ other inputs) to products o Fischer Tropsch Process: → Diesel (C12H23), Jet Fuel (C12H26), Naphtha (C5-C12)... o Methanol Synthesis: Methanol → CH3OH o Haber–Bosch process: Ammonia (Fertilizer) + N2 → NH3
o Direct-reduced Iron + Fe2O3 → Fe + CO2.
The Existence of Substitutes Makes Demand Sensitive to Prices
Source: Platts Bentek
Compete with Oil and NGL
Compete with Anthracite Coal and Petroleum Coke
BENPOSIUM 2016 32
“Subdued Demand, Diminished Prospects” - IMF
BENPOSIUM 2016 33
0
200
400
600
800
1,000
1,200
1,400
1,600
1/20
008/
2000
3/20
0110
/200
15/
2002
12/2
002
7/20
032/
2004
9/20
044/
2005
11/2
005
6/20
061/
2007
8/20
073/
2008
10/2
008
5/20
0912
/200
97/
2010
2/20
119/
2011
4/20
1211
/201
26/
2013
1/20
148/
2014
3/20
1510
/201
55/
2016
USD
MSCI EM (EMERGING MARKETS) Standard (Large+Mid Cap)
Source: MSCI
Coal-to-Gas Switching
BENPOSIUM 2016 34
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
1/20
167/
2016
1/20
177/
2017
1/20
187/
2018
1/20
197/
2019
1/20
207/
2020
1/20
217/
2021
$/M
MB
tu
Henry Hub Dominion Chicago
0
5
10
15
20
25
1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
Bcf
/d
Gas Prices $/MMBtu
Southeast NortheastMidcon Market TexasMidcon Producing SouthwestRockies
Forecast
Actual Power Burn Trends above Weather Normalized in June
BENPOSIUM 2016 35
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
-5.0-4.0-3.0-2.0-1.00.01.02.03.04.05.0
1/20
104/
2010
7/20
1010
/201
01/
2011
4/20
117/
2011
10/2
011
1/20
124/
2012
7/20
1210
/201
21/
2013
4/20
137/
2013
10/2
013
1/20
144/
2014
7/20
1410
/201
41/
2015
4/20
157/
2015
10/2
015
1/20
164/
2016
$/M
MB
tu
Bcf
/d
Actual - Weather Normalized Power Burn Henry Hub
BENPOSIUM 2016 36