Integrated gas and electricity markets in Asia …some issues and observations

1. Integrated gas and electricity markets in Asia…some issues and observations Mike ThomasOctober 2008

2. 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) Private and Confidential

3. 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 Private and Confidential

4. - 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 Junggar Basin 2Tcf Songliao Basin 2Tcf Tarim Basin 13Tcf Ordos Basin 2Tcf Bohai Bay Basin 5Tcf Qaidam Basin 3Tcf East China Sea Basin Sichuan Basin 10Tcf Major wind field area Major oil & gas fields Major coalfield area Major hydropower resources Yinggehai Basin 6Tcf Major power consumption area Power flow direction Source: SP Info Network, BP, CRA’s research China’s challenge – relocating energy Private and Confidential

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

6. 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 Elsewhere, in Asia, however, the story is very different Export Gas and Steam Coal for Power Import Gas or Steam Coal for Power The many depend on the few… Private and Confidential

7. 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 Private and Confidential

8. 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 Private and Confidential

9. 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 Private and Confidential

10. The steam coal export market is highly concentrated Plenty of coal in the ground, but not many countries to buy it from… Private and Confidential

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

12. 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? Private and Confidential

13. Singapore is an emerging champion of LNG importation End of existing imported gas contracts Commissioning of LNG terminal Constrained imported gas;Increasing oil-basedgeneration LNG available totop-up importedgas volumes andsupport new entry ??? Now 2012 TIME PNG ONLY LNG+PNG LNG Parity Pricing? Private and Confidential

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

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

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

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

18. 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 Private and Confidential

19. Mike Thomas Vice President CRA International 1902 A Tower Two Lippo Centre 89 Queensway Admiralty, Hong Kong +852 9226 2513 Mthomas@crai.com Private and Confidential