1. Be like Korea Gas: build an intercity pipeline grid to Inward end-use gas customers. Don’t be like Japan: don’t just sell LNG to coastal powerplants Presented at China’s Industry LNG Forum Beijing by 卜若柏 Robert Blohm KEEN Resources Asia Ltd. 亞洲金能源有限公司 http://www.blohm.cnc.net July 25-26, 2006

2. 1. China’s 3 northerly radial pipeline delivery systems & 10 proposed LNG locations to feed coastal power plants 2. Japan’s 24 LNG terminal locations feeding no intercity pipeline grid 3. Korea Gas’s 3 LNG terminal locations feeding Asia’s most advanced intercity pipeline grid 4. Europe’s 11 outlying LNG terminals serve a pre-existing robust diversified & ever-expanding pipeline grid 5. By 2015 LNG will become the US’s biggest imported form of natural gas as Canadian natural gas reserves mature 6. India is serving Inward demand and rural demand by a 12 000 km pipeline grid from coastal LNG terminals conveniently located in the main region of India’s traditional oil & gas wells. Contents 1

3. 2 SOURCE http://www.eia.doe.gov/oiaf/ieo/nat_gasboxfigure.html

4. 1. China’s 3 northerly radial pipeline delivery systems & 10 proposed LNG locations to feed coastal power plants  10 coastal locations for LNG gasification terminals may be too many. Their large number may contribute to risk and the difficulty of concluding supply contracts under current world market conditions may raise the cost of intercity pipeline grid network construction 3

5. 1. China’s 3 northerly radial pipeline delivery systems & 10 proposed LNG locations to feed coastal power plants (cont.d)  (cont.d) 10 coastal locations for LNG gasification terminals may be too many. Their large number detracts from price stability because:  Multiple potential customers linked by a pipeline drive up price;  Multiple suppliers linked by a pipeline drive down price 4

6. 1. China’s 3 northerly radial pipeline delivery systems & 10 proposed LNG locations to feed coastal power plants (cont.d)  Difficulty of LNG pricing: little linkage to oil and the need in China to create an arbitrage relationship with coal.  A gas pipeline grid enables any natural gas to be shipped to any customer and thereby facilitates natural gas trading to reduce the risk of contract over-supply or under-supply. 5

7. 1. China’s 3 northerly radial pipeline delivery systems & 10 proposed LNG locations to feed coastal power plants (cont.d)  China can have a national intercity gas pipeline grid that, as in North America, supports a robust natural gas trading market that provides an objective basis for pricing natural gas contracts and that complements and underlies the market for trading electricity and coal  Shanghai's potential as Asia's eventual natural- gas and oil trading capital. 6

8. 1. China’s 3 northerly radial pipeline delivery systems & 10 proposed LNG locations to feed coastal power plants (cont.d)  China also needs to coordinate natural gas pipeline development with electric-grid expansion by using market-based risk- management and incentives driven by locational pricing. 7

9. 1. China’s 3 northerly radial pipeline delivery systems & 10 proposed LNG locations to feed coastal power plants (cont.d)  3 contradictions: Electric reliability and cost may be compromised. China’s plan to have a single synchronous electricity grid, the world’s largest, cannot be achieved by over- reliance on long-distance power transmission without the support of a robust intercity gas grid that fuels a sufficient amount of distributed local electric generation proven necessary by the Great 2003 Northeast North American Blackout. 8

10. 1. China’s 3 northerly radial pipeline delivery systems & 10 proposed LNG locations to feed coastal power plants (cont.d)  3 contradictions (cont.d): Natural gas cannot be efficiently marketized differently than electricity.  China’s electric transmission was “functionally unbundled” from power generation at the end of 2002.  Eventually customers were to be functionally unbundled, creating electric transmission [ State Grid Corporation of China 国家电网公司 ] as a non-discriminatory service with a publicly-posted regulated tariff reflecting (locational) congestion cost.  “Functional unbundling” overcomes classical producer and economists’ bias toward production that surrogates distribution and “the trades” to production, in resistance to the modern concept of “services economy”. 9

11. 1. China’s 3 northerly radial pipeline delivery systems & 10 proposed LNG locations to feed coastal power plants (cont.d)  3 contradictions (cont.d): Natural gas cannot be efficiently marketized differently than electricity. (cont.d)  the Energy Ministry was abolished and replaced by the State Electricity Regulatory Commission [SERC 国家电力监管委员会 ] to oversee competitive market self-regulation of price negotiated directly between producers & customers set regulated transmission tariff.  Government announced that SERC is eventually to become State Energy Regulatory Commission [ SERC 国家能监管委员会 ]. This is consistent with identical oversight of the natural gas market and pipeline grid! 10

12. 1. China’s 3 northerly radial pipeline delivery systems & 10 proposed LNG locations to feed coastal power plants (cont.d)  3 contradictions (cont.d): 11th 5-year Plan promotes Inward economic development and Coal-Bed Methane (CBM) gas development.  The 11th 5-year Plan addresses China’s future as an Inward producer/manufacturing-economy and a coastal high- wage/high-cost consumer/services-economy. A national intercity gas pipeline network addresses getting LNG to the future (Inward) economy, not just to the past (Coastal) economy.  The 11th 5-year Plan aggressively promotes development of CBM to US production/consumption levels. Non-discriminatory interconnection of coal-companies’ pipelines to a national natural gas-pipeline grid is essential to achieving this. 11

13. 轮南 发展多气源 LNG 12 SOURCE: PetroChina Planning & Engineering Institute 中国石油规划总院

14. SOURCE http://www.iea.org/textbase/work/2005/LNGGasMarkets/session_5/1_Yugao_Xu.pdf 13

15. SOURCE http://www.iea.org/textbase/work/2005/LNGGasMarkets/session_5/1_Yugao_Xu.pdf 14

16. 2. Japan’s 24 LNG terminal locations feeding no intercity pipeline grid  Terminals owned by the large electric companies or top city-gas companies. Distribution: Over 2/3rds is to nearby electric power plants Only 24 % is Town Gas, ultimately to end-use customers Only 1.5 % is to industrial consumers  LNG provides 12% of Japan’s energy need and the world’s biggest LNG consumption 15

17. 2. Japan’s 24 LNG terminal locations feeding no intercity pipeline grid (cont.d)  LNG terminals are widely dispersed & disconnected. Consequently  Japan has very inefficient energy distribution systems  Japan’s near total lack of an internal gas transmission and distribution network is unique among gas consuming countries. LNG is used at adjacent power plants Gas is trucked through streets to substations of the big City Gas companies 16

18. 2. Japan’s 24 LNG terminal locations feeding no intercity pipeline grid (cont.d)  Consequently Japan has the world’s highest delivered prices for industrial and space-heating energy.  Japan’s overused and overbuilt electric transmission system: The exclusive means of distributing energy over distances. This adds enormous expense to stabilizing the electric system and is much costlier than a combined gas-pipeline grid and electricity grid. 17

19. 2. Japan’s 24 LNG terminal locations feeding no intercity pipeline grid (cont.d)  The Japan lesson: building LNG gasification terminals at too many locations has made a national pipeline grid uneconomic impaired the development of a gas trading market increased the risk and cost of any gas pipeline distribution systems, & strained the electric system. 18

20. 19 SOURCE http://www.energy.ca.gov/lng/documents/MAP_JAPAN_LNG_TERMINALS.PDF

21. 20 SOURCE http://www.eia.doe.gov/oiaf/analysispaper/global/figure_8.html

22. 3. Korea Gas’s 3 LNG terminal locations feeding Asia’s most advanced intercity pipeline grid  Feeding a robust 2579 km intercity pipeline grid more than half to end-use customers  residential (over half of the end-use demand)  commercial  industrial less than half to electric power plants  Providing 90 % of S. Korea’s natural gas and over 7% of S. Korea’s energy need  Serving the world’s fastest-growing LNG market & world’s 2nd-biggest LNG consumption equal to 36 % of Japan’s  Will China let Korea become the (North)east Asian natural gas pipeline and trading hub? 21

23. 22 SOURCE http://www.energy.ca.gov/lng/documents/MAP_SO_KOREA_LNG_TERMINALS.PDF

24. 23 SOURCE http://www.chathamhouse.org.uk/pdf/research/sdp/KPJan05.pdf

25. 4. Europe’s 11 outlying LNG terminals serve a pre-existing robust diversified & ever- expanding pipeline grid 24

26. 25 SOURCE http://www.energy.ca.gov/lng/documents/MAP_EUROPE_LNG_TERMINALS.PDF

27. 26 SOURCE http://www.eia.doe.gov/oiaf/analysispaper/global/figure_11.html

28. 27 SOURCE http://www.inogate.org/en/images/maps/gas_map_big.gif

29. 5. By 2015 LNG will become the US’s biggest imported form of natural gas as Canadian natural gas reserves mature  LNG feeds the nearly 300 000 miles of intercity pipeline grid operated by some 160 companies, & serving as the backbone of one of the world’s most liquid commodity markets with over 15 years of stable pricing history and some 10 000 participants  The LNG terminal locations of choice are Henry Hub and the outlying population concentrations in California and the Northeast 28

30. 29 SOURCE http://www.eia.doe.gov/oiaf/analysispaper/global/figure_15.html

31. 30 SOURCE http://www.irecusa.org/articles/static/1/binaries/Thornton%20ASES%202003-Version%202.pdf

32. 31 SOURCE http://www.energy.ca.gov/naturalgas/western_state_pipelines.html

33. 32 SOURCE http://www.pge.com/pipeline/about/system_maps/western_pipelines.shtml

34. 6. India is serving Inward demand and rural demand by a 12 000 km pipeline grid from coastal LNG terminals conveniently located in the main region of India’s traditional oil & gas wells. 33

35. 34 SOURCE http://www.mapsofindia.com/maps/oilandgasmaps/gaspipelines.htm