China's gas market, Bradley Way, BNP Paribas - The Asset

Opportunities for Kazakh Companies in China’s Gas Market
Bradley Way
Corporate Finance – Energy & Utilities
BNP Paribas
Beijing, China
Mobile: +86 158 1011 3542
bradley.way@asia.bnpparibas.com

Contents
1
2
3
4
The Evolution of China’s natural gas market.
Key issues that will drive demand and impact pricing.
The supplier landscape is growing increasingly competitive – key issues driving this.
Opportunities and Strategies for Kazakhstan’s oil & gas companies.
21 September 2011
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Section
The Evolution of China’s natural gas market 1
21 September 2011 3

Key issues that will shape China’s Gas Market
Rapid growth in consumption
China’s natural gas market has grown from 40 bcm in 2004 to 109 bcm in 2010 – exceeding Japan to become the largest in gas
consumption in Asia. We expect this to continue, driven by industrial demand, the power sector, and gasification of some portions of
the auto fleet.
NOCs and IOCs
Chinese National Oil Companies (NOCs) are eager to learn exploration and development of unconventional gas, they want upstream
equity in LNG projects, and they want to be involved in the managing an LNG project from start to finish. International Oil Companies
(IOCs) have access to these areas, and are making offers. What brings IOCs to China for these deals IOCs are starting to see that
they need a foothold in China in order to market their LNG assets in Australia-Asia, and that unconventional gas in China could be
potentially quite large. These matching needs are bringing IOCs and China’s NOCs together, and increasing competition for sellers.
Policy is improving
…And this is enabling large scale buyers to emerge in the electrical power and automotive spaces. Policy support is underpinning the
emergence of a market outside of industrial and residential gas.
Timing is crucial for Kazakh
and Central Asian companies
Major changes in cost of supply, volume of supply, and the competitive landscape are now in motion. Neighbouring gas exporters need
to be financially and strategically equipped to seize opportunities.
21 September 2011
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China’s Gas Market: from small, to Asia’s largest, in just a few years
Gas Consumption 2004 (bcm) Asia market share
China 39.7 14%
India 31.9 12%
Indonesia 32.2 12%
Japan 77.0 28%
Malaysia 24.7 9%
South Korea 28.4 10%
Taiwan 10.2 4%
Thailand 29.9 11%
Total 274.0 100%
Gas Consumption 2010 (bcm) Asia market share
China 109.0 25%
India 61.9 14%
Indonesia 40.3 9%
Japan 94.5 21%
Malaysia 35.7 8%
South Korea 42.9 10%
Taiwan 14.1 3%
Thailand 45.1 10%
Total 443.5 100%
• China’s gas market started to see material growth in 2004,
when town-gas policy was promulgated, officially
forbidding coal from being burned in homes.
• The policy included a country-wide rollout plan for
connecting people’s homes to gas for cooking and hot
water, which is now in motion in 3rd and 4th tier cities.
• Residential gas alone has taken China’s market to over
100bcm pa, exceeding Japan in consumption. The
industrial sector is also gradually switching from liquid
fuels to natural gas for boilers and heat applications.
• Other large areas of consumption include gas-fired power
and gas in automobiles.
Source: BP statistical yearbook
21 September 2011
5

Competition is increasing – exporters need a foothold in the market
Confirmed import supply contracts
Import supply contracts under negotiation
Source Type Project / Route Buyer Start End
Total volume
booked to date
(bcm)
Australia LNG Gorgon PetroChina 2014 2034 3.1
Australia LNG Gorgon PetroChina 2014 2034 2.7
Australia LNG North West Shelf CNOOC 2006 2008 2.2
Australia LNG North West Shelf CNOOC 2008 2025 4.5
Australia LNG QCLNG CNOOC 2014 2034 4.9
Indonesia LNG Tangguh CNOOC 2009 2033 3.5
Malaysia LNG MLNG Dua Shanghai LNG 2009 2033 2.4
Malaysia LNG MLNG Tiga Shanghai LNG 2009 2033 1.7
Papua New
Guinea LNG PNG LNG Sinopec 2014 2034 2.7
Qatar LNG Qatargas-2 CNOOC 2009 2010 0.7
Qatar LNG Qatargas-3 CNOOC 2010 2034 2.7
Qatar LNG Qatargas-4 PetroChina 2011 2036 4.1
Yemen LNG Yemen LNG CNOOC 2010 2024 1.4
Turkmenistan
Piped
Turkmenistan -
China PetroChina 2010 2030 30.0
Myanmar Piped Myanmar - China PetroChina 2013 2040 7.0
Total capacity booked to date (bcm) 73.6
Total domestic production (bcm) 97.0
Total gas supply (bcm) 170.6
Source Type Project / Route Buyer Start End
Total
possible
volume (bcm) Agreement type
Australia LNG APLNG Sinopec 2011 20 yr 6.0 HoA
Australia LNG Wheatstone CNPC n/a n/a n/a MoU
Australia LNG ALNG CNPC n/a n/a 10.1 50% equity stake
Australia LNG Gladstone (LNGL) CNPC n/a n/a n/a 19.9% equity stake
Iran LNG Pars CNPC n/a n/a 4.2 Hoa
Kazakhstan
Piped Urikhtau
(Beyneu - Shymkent)
CNPC n/a n/a n/a Signed agreement
for JV with KMG
Qatar LNG Qatargas-3 CNOOC 2013 2037 4.1 Mou
Qatar LNG Qatargas-4 PetroChina 2014 2038 2.7 Mou
Russia Piped Altai (West Siberia) n/a 2017 30 yr 30.0 Under discussion
Russia Piped East Siberia - China n/a 2023 n/a n/a Planned
Russia Piped Pechora - China CNOOC 2015 n/a n/a MoU
Turkmenistan Piped Turkmenistan - China CNPC 2015 20.0 Under discussion
Total possible capacity (bcm) 77.1
Source: Companies, Wood Mackenzie
Source: Companies, Wood Mackenzie
• Many companies have stepped up their efforts to sell gas to China, who is responding with flexible contract terms, and getting infrastructure in
place on-time.
• The gas market is now entering a phase where securing new contracts with Chinese buyers is becoming very competitive.
21 September 2011
6

Potential size of China’s natural gas market
Latent Natural gas demand in China
Latent Natural Gas Demand in China
2010
(bcm)
Natural Gas Consumption (actual) 109.0
NDRC Estimate of Outstanding Town Gas Needs 30.0
Fuel Oil Consumption in The Manufacturing & Power Sectors 16.5
Diesel Consumption in the Manufacturing & Power Sectors 20.6
Latent Natural Gas Demand for Residential and Industrial 176.1
• As China’s natural gas supplies have fallen short of real demand, many
industrial entities are using high priced liquid fuels for heat applications.
Here we show a basic calculation of gas demand in China assuming
100% replacement of liquid fuels that are used in the industrial sector.
• This area of the economy is eager to switch fuels and represents a major
market for gas producers.
• Commercial and industrial gas prices are ~$20/mmbtu in some areas
of China. Prices are highest pricing in Guangdong, Fujian, and areas
around Shanghai reflecting not only consumers’ ability to pay but also the
margin that can be obtained depending on the seller’s cost of supply.
Source: CEIC, NDRC, BNP Paribas
• Several areas are now implementing large programs to replace fuel oil burning power plants with natural gas fired power plants. An
interesting example is Shenzhen’s 2006-2010 Emissions Reduction Work Statement which states clearly its promotion of oil-to-gas power
plant conversions.
• The priority is to ensure that gas requirements are met as gas supplies become available in all areas.
• In Shenzhen alone, five oil-fired plants have signed short-term LNG contracts in 2010.
• Shenzhen Gas Company has already allocated part of the volumes to receive via W-E II pipeline to several power plants on a long-term
basis.
• All of this shows tremendous commitment to gas fired power.
Source: CEIC, EIG, Wood Mackenzie, BNP Paribas
21 September 2011
7

Gas-fired peak shavers are becoming more common in urban areas
Load curves for typical electricity grid
High Summer demand day
(MWe)
(MWe)
9000
9000
8000
8000
High Winter demand day
• The NDRC has made several public statements
endorsing gas fired power as a means of
meeting peak demand in a low C02 fashion.
• Note that China is urbanizing rapidly, which is
driving a steeper load curve in the power sector
– gas fired power will be the most appropriate
means of meeting this. This is especially
important in areas with high temperatures.
7000
7000
6000
5000
6000
5000
Possible natural gas usage in power sector
4000
4000
China Power consumption in 2010
4,192
TWh
3000
3000
% of Power consumption fired by
Natural Gas
TWh
NG consumed
(bcm)
2000
2000
5% 210 44
10% 419 88
1000
1000
15% 629 132
0
2400 400 800 1200 16002000 2330
(hrs)
0
2400 400 800 12001600 20002330
(hrs)
20% 838 176
25% 1,048 220
Source:, BNP Paribas
21 September 2011
8

Gas-Fired Power Capacity in Guangdong is growing rapidly
• 12 existing gas-fired power plants with a total installed capacity of 7,120 MW:
• Zhongshan Jiaming Power Co., Ltd (phase I): 2 x 125 = 250 MW (retrofitted from oil to gas)
• Zhongshan Jiaming Power Co., Ltd (phase II): 2 x 390 = 780 MW
• Huizhou Gas‐Fired Power Project (Phase I): 3 x 390 = 1,170 MW (source gas from Dapeng LNG)
• Shenzhen Meishi Power Plant: 2 x 180 = 360 MW (source gas from Dapeng LNG)
• Guangzhou Zhujiang Gas‐Fired Power Project (Phase I): 2 x 350 = 700 MW (source gas from Dapeng LNG)
• Shenzhen Dongbu Power Plant Gas‐Fired Power Project (Phase I): 3 x 350 = 1,050 MW (source gas from Dapeng LNG)
• Shenzhen Qianwan Power Plant Gas‐Fired Power Project (Phase I): 3 x 390 = 1,170 MW (source gas from Dapeng LNG)
• Dongguan Gaobu Power Plant Gas‐Fired Power Project: 2 x 180 = 360 MW
• Shenzhen Nanshan Gas‐Fired Power Plant: 350 MW
• Guangdong Yueliangwan Power Plant: 200 MW
• Zhuhai Hongwan Gas‐Fired Plant (Phase I): 2 x 185 = 370 MW
• Huizhou Fengda Gas‐Fired Power Plant (Phase I): 2 x 180 = 360 MW
• 3 gas‐fired power plants under construction, totalling 2,570 MW in capacity:
• Zhongshan Jiaming Power Co., Ltd.: 350 MW
• Guodian Zhongshan Gas‐Fired Power Project (Phase I): 3 x 350 = 1,050 MW
• Shenzhen Qianwan Power Plant: 3 x 390 = 1,170 MW
• 6 additional gas‐fired power plants are proposed with total capacity amounting to 10,010 MW:
• Zhongshan Jiaming Power Co., Ltd (Phase II): 2 x 350 = 700 MW
• Guodian Zhongshan Gas‐Fired Power Project (Phase II): 3 x 350 = 1,050 MW
• Huizhou Gas‐Fired Power Project (Phase II): 3 x 390 = 1,170 MW
• Shenzhen Dongbu Power Plant Gas‐Fired Power (Phase II): 6 x 350 = 2,100 MW
• Shenzhen Guangming Gas‐Fired Power Project: 6 x 390 = 2,340 MW
• Zhuhai Hongwan Gas‐Fired Plant (Phase I): 4 x 390 = 1,560 MW
• Huizhou Fengda Gas‐Fired Plant (Phase III): 3 x 390 = 1,170 MW
• Urban areas, especially those in
China’s South, will see more gas
fired power over the next few
years, contributing strongly to the
size of the gas market.
Source: FGE report, FGE Multi‐Client Study, Spring 2011
21 September 2011
9

Activities are in place to gasify large parts of the automobile fleet
中 海 油 LNG 加 注 站 / 卫 星 站 统 计
Shenzhen
Tianjin
Zhongshan
Location Station Name Date on-steam
Zhonshanyuan 21/12/2009
Bantian 30/4/2010
Songpingshan 1/4/2010
Yantian 29/7/2009
Gongming 23/7/2010
Hujiayuan 23/5/2010
Daliandao 15/10/2010
ORCA 车 ( 粤 CL1239) 1/8/2010
Chengnan 2/7/2010
Chendong 24/8/2010
Fushan 14/9/2010
全 年 LNG 销 售 量
( 单 位 : 吨 )
7,853.409
1,204.074
1,485.586
Jieyang Yujiao 6/12/2008 5,427.925
Huizhou
Dashuitang 10/5/2010
Henanan 31/8/2010
1,492.941
Zhuhai Shangchong 5/6/2010 186.724
Binzhou ORCA 车 ( 粤 CL1216) 5/8/2010 86.712
• Here are currently operational LNG
filling stations for trucks that
CNOOC operates.
• China’s NOCs are all actively trying
to build infrastructure for CNG and
LNG automobiles.
• This could be potentially profitable,
as there are no pump taxes on
CNG/LNG, while taxes on motor
gasoline and diesel are high.
• China’s NOCs are targeting
logistics companies to refill LNG
trucks at port locations, where LNG
arrives, and where a manufactured
goods cargo might be transferred
from truck to ship or visa versa.
• China’s NOCs have large scale
plans for this in industrial areas
throughout China.
Xianyou ORCA 车 ( 粤 CL1242) 4/11/2010 18.024
合 计 17,755.395
Source: CNOOC
21 September 2011
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IOCs are increasing their presence in China’s gas market
• IOCs and NOCs both see the potential for unconventional gas in China. Chinese companies are partnering with multiple IOCs for
developing CBM and shale gas. The partnerships often involve:
• Domestic shale / CBM exploration in China.
• The JV entity making an outgoing purchase of a 3rd party’s assets overseas.
• An transaction where the NOC purchases equity in Asian LNG assets owned by the IOC, in exchange for also purchasing off-take
from that asset.
• Below are estimates of production from unconventional gas in China’s key basins.
(mmcfd)
12,000
10,000
8,000
6,000
4,000
2,000
0
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029
Junggar CBM
Ordos CBM Qinshui CBM Sichuan Shale
Ordos Shale
Songliao Shale
Junggar Shale
21 September 2011
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How will China’s gas market look in the future
Turkmenistan -
Existing
Altai, Russia-
Proposed
Sakhalin,
Russia-
Proposed
Myanmar
Source: BNP Paribas
21 September 2011
12

What should Kazakhstan’s energy companies be aware of:
• IOCs are re-entering China with a more honed focus. IOCs see that they can both book reserves in the unconventional space, and
hopefully leverage a closer relationship with China’s NOCs to find a market for their Asia/Australia LNG projects.
• China’s gas market is becoming diversified – 14+ re-gasification terminals, shale gas, coalbed methane (CBM), domestic
conventional gas, piped imports from Myanmar, Central Asia, and Russia. Pipeline connectivity is improving dramatically, especially
in Southern China.
• Unconventional gas – Connectivity into the national pipeline system will not be difficult – reserves are located nearby large trunk
lines. Driven by NOC – IOC partnerships, as well as several independent companies in the space, unconventional gas could
potentially play a major role in China’s gas market.
• Competition is intensifying. It is important to have a solid strategy in place, and the finances to execute. Kazakhstan’s energy
companies have access to advisory and financing options in Hong Kong. Markets here have a comparably small amount of listed oil
and gas producers, for which there is significant investor appetite. China’s energy consumption, and the existing infrastructure and
economic integration between the two countries are what underpin the appeal to equity markets. BNP Paribas believes that this is
an opportune time for Kazakh companies to work closely with advisors on strategic and financial options.
21 September 2011 13

Hong Kong Investors Have a Strong Appetite for Energy Equities
Oil & Gas Producers - US vs. Hong Kong / China
Listed
Country
Company type
No. of
companies
USA Oil & Gas - Integrated 7
Oil & Gas - E&P 62
Hong Kong / Oil & Gas - Integrated 2
China
Oil & Gas - E&P 1
2010 Oil
production
(kbd)
7,513 9.2%
4,071 5.0%
Source: Bloomberg (as of September 22, 2011), BP Statistical Review 2011
Inflows into Local markets Run at Record Levels
(US$ bn)
900
800
700
600
500
400
300
200
100
0
594 581
125 137
260
88
122
61
47
825 834
214 202
183 230
86
85
337 343 317
2008 2009 2010 2011
% share in
world
2010 Oil
consumption
(kbd)
Latin America
19,148
Local markets - Europe
Africa / Middle East
Local markets - Asia
% share in
world
21.9%
9,057 10.4%
• On the top left is a brief comparison of energy
production and consumption, versus its
presence in capital markets.
• While China’s GDP / market capitalisation
ratio is smaller than other markets, this is
especially evident in energy.
• China is a very large energy producer and
consumer, but with only a small amount
options for equity investors.
• The combination of these issues has left
Hong Kong investors with a large appetite for
energy investments, but few options.
• On the left hand side, fund flow data shows
that even after the financial crisis, inflows into
Asia remain strong. Hong Kong still remains
the key vehicle for investing in equities in
China and ex-Japan Asia.
• We believe that these issues create
opportune conditions for Kazakh companies
to seek capital in Hong Kong.
Source: Faznet
21 September 2011 14

Thank You
Bradley Way
Corporate Finance – Energy & Utilities
BNP Paribas
Beijing, China
Mobile: +86 158 1011 3542
bradley.way@asia.bnpparibas.com
21 September 2011
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