Integrated gas and electricity markets in Asia …some issues and observations Mike Thomas October 2008

1 Private and Confidential Objective Characterise the landscape, in broad terms, in which gas and electricity markets in Asia, would need to operate Look at the issue from the perspective of security of energy supply (Malaysia) Look at the issue from the perspective of investor (Singapore)

2 Private and Confidential Landscape Asia is diverse, economically, culturally, politically and geographically Independent, economic regulation is not common Infrastructure and economic development rather than investment optimisation Primary fuel resources are regionally abundant but generally concentrated End-user pricing is often regulated independently of costs and allocated risks Fuel supply security has been, and will remain, a major driver Markets-based approaches have pre-requisites for success, many of which are not yet present

3 Private and Confidential China’s challenge – relocating energy Source: SP Info Network, BP, CRA’s research Sichuan Basin 10Tcf East China Sea Basin Junggar Basin 2Tcf Qaidam Basin 3Tcf Ordos Basin 2Tcf Tarim Basin 13Tcf Major power consumption area Major hydropower resources Major wind field area Major coalfield area Major oil & gas fields Bohai Bay Basin 5Tcf Yinggehai Basin 6Tcf Songliao Basin 2Tcf Power flow direction - 82% of coal deposits in north & southwest, 67% hydropower in southwest - Over 70% energy consumption in central & coastal regions - Mismatch of major load center & fuel resource locations - Rely on major fuel delivery & power transmission networks - Power flow W  E, N  S

4 Private and Confidential China’s power generation-reference scenario (IEA, 2006) dated

5 Private and Confidential Elsewhere, in Asia, however, the story is very different Gas –Australia (LNG) –Indonesia (LNG and via pipe to Singapore –Malaysia (LNG and via pipe to Singapore) Coal –Australia –Indonesia –Vietnam Gas –Japan (AP LNG) –Singapore (ex Indonesia and Malaysia) –S. Korea (AP LNG) –Taiwan (AP LNG) Coal –Japan –Malaysia –Philippines –Singapore –S. Korea –Taiwan Import Gas or Steam Coal for Power Export Gas and Steam Coal for Power The many depend on the few…

6 Private and Confidential Gas is the major fuel source in three notable countries These countries are interconnected, electrically and via gas pipelines, but energy exchanges are contractual and predominately uni-directional –Singapore buys gas from Indonesia and Malaysia –Malaysia and Thailand jointly develop certain reserves in a Joint Development Area (JDA) Gas is a minority power sector fuel source (<30%) elsewhere in Asia

7 Private and Confidential Thailand / Malaysia / Singapore / Indonesia Malaysia is a net gas and oil exporter, but via Sabah, not Peninsular Malaysia –Peninsular-dedicated supplies are depleting / New reserves are smaller, more expensive –Growth in non-power sector demand has forced a cap on gas to the power sector –Imported coal is currently the main alternative fuel resource Singapore has no energy resources –Imports gas via pipelines from Malaysia and Indonesia –Malaysian source is depleting –Energy resource security is a vital economic development consideration –Plans to commission an LNG terminal in 2012 to enable LNG imports to supplement contracted piped gas supplies –Proposals to build coal-fired capacity have been raised

8 Private and Confidential Both power sectors are at a crossroads With limited domestic gas available, Malaysia can: –Import coal –Import LNG (from itself or globally) –Develop massive interconnection to Sarawak and develop large scale hydro resources –Develop nuclear power Singapore has an electricity market, but needs to ensure fuel supply security –LNG terminal offers supply sourcing flexibility/storage –Supplements connections with Malaysia/Thailand and Indonesia –Support LNG uptake by imposing PNG import moratorium –Completing with privatisation of gencos

9 Private and Confidential The steam coal export market is highly concentrated Actual (A); Projected (P) (millions of short tons)2005A2006A2007P2008P Australia China Indonesia Vietnam Approximate Regional Steam Coal Exports Percent Australia36%31%33% Percent Indonesia38%46% 48% Percent Australia + Indonesia74%77%79%81% Sources: Annual Energy Outlook 2008, Scenario aeo2008, d030208f, April 2008, DOE/EIA-0383(2008) Plenty of coal in the ground, but not many countries to buy it from…

10 Private and Confidential Pricing Coal prices have moved similarly to other fossil fuels

11 Private and Confidential With depleting peninsular reserves, Malaysia could utilise LNG Malaysia is a major Asia Pacific exporter of LNG, and so could always supply to itself But at what opportunity cost?

12 Private and Confidential Singapore is an emerging champion of LNG importation LNG Parity Pricing?PNG ONLY ??? Constrained imported gas; Increasing oil-based generation LNG available to top-up imported gas volumes and support new entry LNG+PNG Commissioning of LNG terminal End of existing imported gas contracts TIME 2012 Now

13 Private and Confidential Impact of oil pricing on electricity asset value in Singapore (2) With limited gas, increasing demand requires more oil-fired generation. Gas-fired combined cycle units capture rent LNG later displaces higher cost oil generation LNG High Oil Case Profitability

14 Private and Confidential Impact of oil pricing on electricity asset value in Singapore (1) If oil prices are lower, then pre-LNG rents vanish! Low Oil Case Profitability LNG

15 Private and Confidential Focusing on spreads….even if crude oil prices stay the same, spreads on crude products change HSFO pricing relationship Version A

16 Private and Confidential Focusing on spreads… HSFO pricing relationship Version B

17 Private and Confidential Summary China has the potential to benefit most from an integrated electricity and gas market, but has other challenges first… Uneven resource endowments elsewhere in Asia is beginning to spur interest in creative solutions LNG has selective, but important, prospective application in the power sector in Asia, particularly as smaller gas resources deplete The asset valuation and wealth transfer implications of gas/electricity integration are complex and easily overlooked Thailand/Malaysia/Singapore/Indonesia is an ideal corridor for gas/electricity sector development and trading, but net benefits are not yet sufficiently clear

18 Private and Confidential Mike Thomas Vice President CRA International 1902 A Tower Two Lippo Centre 89 Queensway Admiralty, Hong Kong