Global LNG outlook and

implications for Asia Pacific

MCKINSEY & COMPANY

6 February 2018

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company
is strictly prohibited
Key messages

Last Modified 2/6/2018 7:31 AM Malay Peninsula Standard Time

Global energy demand rising but rate of growth slows to a pace
1 not seen in the past 100 years

Electricity demand growing 4 times faster than all other fuels; more
2 than 80% of capacity additions in solar and wind, with China and India
contributing more than half

Gas demand growing steadily with LNG demand supply

Printed 2/5/2018 5:15 PM SE Asia Standard Time

3 balancing between 2022-25; South Asia, China and ASEAN drives
LNG demand growth but price sensitive

US volume as marginal price setter for Pacific LNG; technology

4 costs and severe competition bringing down liquefaction capex
<800 USD/tpa

Five distinct “need based” buyer segments emerging with

5 bespoke requirements

McKinsey & Company 2

 1 Global energy demand rises by one quarter over 2015-50, but the rate of
growth slows to a pace not seen in the past 100 years

Last Modified 2/6/2018 7:31 AM Malay Peninsula Standard Time

Global primary energy demand, Million terajoules
718

646
+26%
567
Unprecedented rise in 420
Western living
standards

Printed 2/5/2018 5:15 PM SE Asia Standard Time

Rapid
industrialization
in China

Expansion of global
and local transport,
Industrialization of Western
fuelled by coal and oil
economies; energy use still
largely biomass
102

43
27

1850 1900 1950 2000 15 30 2050

2.9
2.1
CAGR 1.7
% 0.9 0.9
0.5

SOURCE: McKinsey Energy Insights’ Global Energy Perspective, December 2017; IEA Energy Balances (Historical); Smil, V. (Historical) McKinsey & Company 3
 1 Developing Asia and Africa lead energy demand growth CAGR
>2% 0-0.5%
over 2015-50, while China peaks and OECD markets decline 0.5-2% <0%

Last Modified 2/6/2018 7:31 AM Malay Peninsula Standard Time

Primary energy demand by region, 2015-50, Million terajoules
2015 30 2050

OECD Americas OECD Europe

Other Asia
115 114 106
75 71 63
55 77
41

China
124 144 138

Printed 2/5/2018 5:15 PM SE Asia Standard Time

India

89
35 57

Rest of World
Africa OECD Asia Pacific
123 142
106
70
33 45 37 37 34

SOURCE: McKinsey Energy Insights’ Global Energy Perspective, December 2017 McKinsey & Company 4
 2 Electrification across key end uses i.e., buildings and road transport
driving growth in electricity demand

Last Modified 2/6/2018 7:31 AM Malay Peninsula Standard Time

Electrification1, Electricity as % of final energy demand Final energy demand, 2015=100 CAGR

Buildings ▪ Electricity-based 197 2.0%

200
43 services
Electricity
31 ▪ Gas to electric heat 180
pumps
160 4x

140
Transport ▪ Uptake of EVs 125
119

Printed 2/5/2018 5:15 PM SE Asia Standard Time

▪ Infrastructure availability 120 0.5%
20 and shared mobility 100 114 Other
100 fuels1
<1
80
2010 20 30 40 2050
Industry ▪ Electric heat pumps
▪ Electric / hybrid boilers
21 24

2015 2050
1 Buildings includes residential buildings in OECD Europe and OECD Americas; transport includes passenger cars, trucks, vans, buses, and 2&3 wheelers
1 Reflects Gas, Coal, Oil, Renewables
SOURCE: McKinsey Energy Insights’ Global Energy Perspective, December 2017 McKinsey & Company 5
 2 Globally, more than 80% of capacity additions will be in solar and wind,
with China and India contributing more than half

Last Modified 2/6/2018 7:31 AM Malay Peninsula Standard Time

Net global power generation capacity additions, 2015-50, GW
Solar PV Wind Gas Other

China 3,389
51%

India 2,767

USA 987

Printed 2/5/2018 5:15 PM SE Asia Standard Time

Europe 790

Rest of World 4,023

82%

Total 1 64% 18% 11% 11,956

Solar and wind generation grow 5-10 times faster than gas as renewables become cheaper than even
existing CCGTs by 2030 in some markets and is further catalyzed by fast-declining storage costs
.
SOURCE: McKinsey Energy Insights’ Global Energy Perspective, December 2017 McKinsey & Company 6
 3 Among fossil fuels, only gas demand expected to grow steadily
Global fossil fuel demand, Million TJ

Last Modified 2/6/2018 7:31 AM Malay Peninsula Standard Time

Fossil peak demand
(2035)
513 510
466

Oil peak demand Gas

(2037)

Printed 2/5/2018 5:15 PM SE Asia Standard Time

337

256
Coal peak demand Oil
(2028)

Coal

1980 2000 15 30 2050

SOURCE: McKinsey Energy Insights’ Global Energy Perspective, December 2017; IEA Energy Balances (Historical) McKinsey & Company 7
3 The LNG market will be oversupplied until 2022-25, but additional
investments are required longer term to meet demand

Last Modified 2/6/2018 7:31 AM Malay Peninsula Standard Time

Global LNG supply and demand to 2030, Million tonnes per annum (MTPA)

600 Unconstrained Under Construction Current Capacity

• The market will be long up to
Under Construction LNG Demand
2022 and potentially out to
500 2025 as demand cannot keep
up with new supply
120-150
mtpa
− Production from existing
400
liquefaction facilities is
generally flat

Printed 2/5/2018 5:15 PM SE Asia Standard Time

300 − ~90 mtpa of LNG supply is
under construction.

200
• By 2030, between 120 and
150 mtpa of new supply is
needed to meet demand
100 • New projects are expected to
take FID to fill this gap
0
2013 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

1 Onstream supply is based on bottom-up analysis of gas available for export after domestic demand is met 2 New liquefaction projects are expected to produce at 50% of capacity
in year one and 90% of capacity in the following years
3 Existing projects output is expected to decline as several LNG exporters are projected to experience feed-gas supply constraints
SOURCE: Energy Insights’ Global Gas Model McKinsey & Company 8
3 LNG’s increasing share in total delivered gas is supported by factors
shaping demand, supply and the relevant supporting infrastructure

Last Modified 2/6/2018 7:31 AM Malay Peninsula Standard Time

Factors driving an increasing share of LNG in international traded gas mix

Demand Supply Infrastructure

Location of
• Growth from countries • Uneven regional reserve • Opening of markets
with limited domestic Stranded depletion driving inter- previously deemed
domestic FSRUs
supply and reserves regional flows too risky / unstable
demand
constrained pipe • Faster to develop
imports than large-scale
onshore plants

Bangladesh Pakistan Mozambique Angola Egypt Argentina

• LNG imports as a • LNG supply growth in the • Deployment of

Planned Scalability of

Printed 2/5/2018 5:15 PM SE Asia Standard Time

Political political hedge to near term driven by smaller import
assets reduce dependence projects +130bcm capacity already regas capacity capacity to meet
under construction (post- domestic demand
FID) that will be online increases
by 2021

Poland Lithuania Australia US Turkey

• Ability to diversify Liquefaction • Lower new project

Diversification away from capex
technology
of supply monopolistic (FLNG) • Modular design
situations • New liquefaction
technology (FLNG)

Germany US Iran

SOURCE: Energy Insights by McKinsey, IHS Vantage McKinsey & Company 9

3 LNG contracting market has evolved significantly over the last 10 years

Last Modified 2/6/2018 7:31 AM Malay Peninsula Standard Time

LNG market ~10 years ago LNG market size today

~40% of future
Importing countries ~15 ~30 growth from 20 new
markets
Market
Market
size
size Quantity (MTPA) ~120 ~240
Market is moving
Long term trade (%) >90% ~70% towards increasing
spot/short-term contracts

Resource Traders/

Printed 2/5/2018 5:15 PM SE Asia Standard Time

holders resellers

Resource
Buyer Tolling End-user
holders
plant
Market
model Portfolio
players
Upstream Mostly
integrated midstreamers and
projects utilities with At least six buyer
growing demand segments with
needs for gas different needs

McKinsey & Company 10

 3 China, South Asia, ASEAN to drive LNG demand growth to 2030

Last Modified 2/6/2018 7:31 AM Malay Peninsula Standard Time

LNG demand growth by region 2016-2030, Million tonnes per annum (MTPA)
2016-30
CAGR, %

Total 2016 demand 248

-2.1
North America1 2
5.6
Middle East 12
4.2
Latin America 12

Printed 2/5/2018 5:15 PM SE Asia Standard Time

0.7
Europe 4

South Asia2 57 11.0 ~95% of the

growth is
ASEAN 82 16.7
from China,
South Asia
China 72 10.2
and ASEAN

Japan, Korea & Taiwan 19 -1.2

Total 2030 demand 466 4.6

1 Includes US, Canada and Mexico

2 Includes Bangladesh, India and Pakistan

Source: McKinsey Energy Insights, McKinsey Global Gas Model

McKinsey & Company 11
3 LNG demand growth comes from price sensitive emerging markets
Incremental LNG

Last Modified 2/6/2018 7:31 AM Malay Peninsula Standard Time

LNG demand by country for recent demand by 2030,
and likely market entrants, bcm bcm Aspects influencing country’s willingness to pay

2016 365

China • Cross border pipeline available through

~100 bcm higher contracts utilization
Growth
149
• Long term renewables costs reduction
Giants and attractiveness

Printed 2/5/2018 5:15 PM SE Asia Standard Time

Recent
Entrants
137 India • Highly price sensitive gas demand
~50 bcm (e.g. competing with coal-fired generation
in the power sector)
Possible
72
Emerging
Pakistan • Active buyer, seeking the best deals
~45 bcm and expecting contracts renegotiation
Traditional
in case of favorable market conditions as
-32 evidenced by recent Qatar renegotiation
Markets
Banglades
h • Scale of potential purchases based on energy
2030 692 ~35 bcm demand growth rate give the country
negotiating power in buyers market

SOURCE: Energy Insights Global Gas Model, Energy Insights LNG Cost Curve McKinsey & Company 12
3 Gas hungry ASEAN expected to become a net importer in next 10 years

Last Modified 2/6/2018 7:31 AM Malay Peninsula Standard Time

Gas supply – demand balances by country, bcm

Potentially driving additional (spot) LNG flows

into the region as “demand + contracted export
> production + contracted import”
CAGR
2016-30
237 237 237 233
229 230
220 Existing Contracted
199 exports/imports1 4.0%
Myanmar
2.6%
Brunei

Printed 2/5/2018 5:15 PM SE Asia Standard Time

Vietnam 1.6%

Philippines 2.6%
Singapore 2.2%
Malaysia
0.9%
Thailand
0.1%
Indonesia
4.6%

Demand Supply Demand Supply Demand Supply Demand Supply

2016 2020 2025 2030

Gas
balance2 54 26 1 (35)

1 At 100% of contracted volume, including short-term deals and contracted domestic cargos in Indonesia and Malaysia; 2 Defined as indigenous production less
domestic consumption
SOURCE: Team analysis, Global Gas Model, IHS Vantage McKinsey & Company 13
4 US volumes are expected to be necessary to meet Pacific LNG
demand, effectively making the US the global marginal LNG supplier

Last Modified 2/6/2018 7:31 AM Malay Peninsula Standard Time

2022 the practical buildup of supply to fulfill Pacific demand1 , Bcm

Contracted DES2 Flexible Contract (FOB and spot)3

Deepdive to follow

Part of this US 83 demand will reach 341

volume will be • In 2022, Pacific LNG
bcm
needed in the demand will reach
Pacific • Excluding the US, the
348 bcm
47 total global LNG supply
-51 bcm • available
Excluding to the US,
Pacific
the
basin
total will be 301
global LNGbcm
297 thereby
supplycreating a 40
available to
28 bcm
the shortfall
Pacific basin will

Printed 2/5/2018 5:15 PM SE Asia Standard Time

be 297 bcm thereby
• The US will have 82 bcm
252 creating a 51 bcm
of supply, of which 79
shortfall
bcm have the flexibility
• toUS
bevolumes
sent to the
willPacific
need
to flow to the Pacific
• US volumes will need
making it the global
to flow to the Pacific
marginal LNG supplier
making it the global
marginal LNG supplier

Pacific to Nigeria Rest of DES to Total US DES to 2022

Pacific Atlantic Atlantic excl US Atlantic Pacific
from US demand
1 The utilization of the liquefaction plant is based on historical rates and supply constraints, calculated on a country by country basis
2 DES = Delivery ex-ship
3 Flexible contract includes FOB and Spot
SOURCE: Energy Insights by McKinsey, Energy Insights LNGFlow, Cedigaz McKinsey & Company 14
 4 Liquefaction cost reduction is turning new project more economic

Last Modified 2/6/2018 7:31 AM Malay Peninsula Standard Time

LNG liquefaction capex, $/ton

USA under development1 USA exisiting2 ROW under development

Drivers behind lower liquefaction
capex for US plants
3,000
Bulk materials - steel
Between 2014 and 2016 steel
prices (HRC, USA)3 decreased by
2,500 almost 50%
EPC
80 mtpa of US under- Project sponsors have required
2,000 development capacity has EPC cost reduction and lump-sum
liquefaction capex EPC contracting

Printed 2/5/2018 5:15 PM SE Asia Standard Time

of below 800 USD/ton
1,500

Modular design
1,000 Further modularization of plant
equipment components, built-in
800
more productive workshops, reduces
construction cost
500

1 Only FEED, pre-FEED and projects planned by 2030 projects selected through screening process
2 Operational and under construction
3 HRC – hot rolled coil
SOURCE: Energy Insights by McKinsey, MetalMiner, investor reports, press search McKinsey & Company 15
 4 New LNG supply from the US and Australia changed LNG trade flow
patterns, and the additional Australian volumes were large enough to

Last Modified 2/6/2018 7:31 AM Malay Peninsula Standard Time

decrease the average tonne-mile demand in 2017 flow increase
2017 vs 2016 LNG flows1 above 1 bcm 1-3 4-6 7-9 >10 flow decrease
Bcm

• The shipping tonne-mile

demand decreased
because of:
‒ Large volumes of
Australian LNG

Printed 2/5/2018 5:15 PM SE Asia Standard Time

To North Asia displacing Middle
Eastern LNG to North
Asia
‒ US LNG displacing
European LNG to South
America
Shipping tonne-mile ‒ The widening of the
demand, billion tonne-miles Panama Canal allowing
shorter travel distances to
2,079 Asia
1,387

2016 2017
1 Cumulated January-November (inclusive) imports
SOURCE: Energy Insights by McKinsey, Energy Insights LNGFlow McKinsey & Company 16
4 Although long-term contracts were in place in 2017, flows diverged
from them mainly in North Asia and Europe

Last Modified 2/6/2018 7:31 AM Malay Peninsula Standard Time

DES contracted volumes1 and actual LNG flows2 in 2017, bcm
Contracted flows Trade flows
• LNG flows to
Africa Africa North Asia
32 Africa Africa
45
7
accounted for 154
bcm, significantly
above the
Americas Americas Americas contracted
Americas
4 21 21
30 volume of 68 bcm

Europe5 &
Europe5 & • Contracted
Europe5 & Europe5 & Norway
Norway Norway Norway 35
volumes from the
4 42 6 Middle East to
Iberia Europe were
16 underutilized and

Printed 2/5/2018 5:15 PM SE Asia Standard Time

Iberia diverted to the
Middle East 22
Middle East Middle East rest of the world
79 104
12
• Most of the LNG
Middle East flows from
2
Oceania,
North Asia4 especially the new
Oceania Oceania LNG volumes from
154
33 North Asia4 70
Australia were
68
contracted and
traded to North
South Asia3 South Asia3 South Asia3 South Asia3
Asia and China
37 58 40
15

Russia China Russia China

3 12 39
23

1 Includes only delivered-ex-ship (DES) contracts, pro-rated 2 Cumulated January-November (inclusive) imports
3 South Asia includes every Asian country except Japan, Korea, Taiwan and China
4 North Asia includes Japan, South Korea and Taiwan 5 Europe includes EU28 excluding Spain and Portugal plus Turkey, Ukraine, Switzerland, Albania, Belarus, Iceland and Macedonia

SOURCE: Energy Insights LNGFlow, Cedigaz McKinsey & Company 17

 5 The LNG market is becoming increasingly liquid and complex with
5 distinct “need-based” buyer segments

Last Modified 2/6/2018 7:31 AM Malay Peninsula Standard Time

Cluster Contract preferences and key buying factors Buyer sample

▪ Tend to buy LNG ST/MT (5-9 yrs) with lower preference on LT

Time bridge filler
Seeks LNG for seasonal
▪ Price taker, focused on indexation and volume flexibility
/ bridging volume

▪ Buy LNG MT/LT, to displace oil and other fuels

Fuel switcher
Seeks LNG to fuel
▪ Price conscious, value destination flexibility and infrastructure
support
growing gas penetration

Gas shortage filler ▪ Buy LNG MT/LT in large volumes

▪

Printed 2/5/2018 5:15 PM SE Asia Standard Time

Seeks LNG to fill supply Reliability is key, Price taker
– demand gap in ▪ Buyers value infrastructural support
penetrated growing
market

▪ Buy LNG ST/MT/LT as core component of a flattening / declining

Portfolio risk manager
Seeks LNG diver-
sification in penetrated
flattening market
energy balance.
▪ Price taker but try to diversify portfolio to manage security risk
▪ Contracted volumes vary and flexibility is valued

▪ Buy LNG LT as often has captive demand

Midstream by-passer
▪ Very price conscious, look for deal to lower dependency
Seeks LNG to bypass
an established ▪ Reliability is not valued
midstreamer

SOURCE: McKinsey LNG Buyer Survey 2016-2017 ; team analysis McKinsey & Company 18
 5 Asian buyers do expect to follow traditional contract elements
Global LNG buyer preferences , % of respondents ; Total sample size= 46

Last Modified 2/6/2018 7:31 AM Malay Peninsula Standard Time

Preferences JKT Buyers Other Asia Buyers Non- Asian buyers

Contract length :
> 5 years

Contract size :
< 1.5 MTPA

Indexation :
Gas/hybrid

Printed 2/5/2018 5:15 PM SE Asia Standard Time

preference

Delivery mechanism:
DES preference

Contracting
mechanism:
Bilateral preference

Regasification:
FSRU preference

SOURCE: McKinsey energy insights LNG buyer survey 2016-2017 McKinsey & Company 19
Implications / questions for you to consider

Last Modified 2/6/2018 7:31 AM Malay Peninsula Standard Time

What are the big disruptors to LNG demand e.g.,
1 aggressive renewables, delayed nuclear startup in
Japan?

What could be long term marginal LNG costs to Asia

2 Pac from the US ?

Printed 2/5/2018 5:15 PM SE Asia Standard Time

How would the buying behavior of emerging LNG
3 hotspots evolve e.g., China, Bangladesh, India etc.,?

What would be the strategies adopted by LNG

4 sellers and traders e.g., LNG solutions, stimulate
demand, flexible contracts, options etc.,

McKinsey & Company 20

Last Modified 2/6/2018 7:31 AM Malay Peninsula Standard Time Printed 2/5/2018 5:15 PM SE Asia Standard Time
McKinsey & Company 21
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