ENERGY FORUM SUMMARY REPORT 20TH JUNE 2006
Civic Exchange Room 701 Hoseinee House 69 Wyndham Street Central, Hong Kong Tel: 2893-0213 Fax: 3105-9713 www.civic-exchange.org
Energy Forum Summary Report TABLE OF CONTENTS Background
Section 1: Expert Presentations (transcripts)
Richard Lancaster, Commercial Director CLP Power Hong Kong Limited
Summary of Hong Kongâ€™s existing and forecast energy capacity, consumption, fuels breakdown, environmental impacts, investment and policy drivers. Azfar Shaukat, Director, Oil & Gas Studies, Mott MacDonald Limited
Summary of Guangdongâ€™s existing and forecast energy capacity, consumption, fuels breakdown, environmental impacts, investment and policy drivers. Pat Roberts, Managing Consultant, Gas Strategies Consulting Ltd
Overview of local and international energy fuels pricing and market dynamics (including coal and LNG), long term supply issues and geopolitical considerations. Daniel Bradshaw, Consultant, Johnson Stokes & Master
Overview of local and international energy fuels transportation issues (including coal and LNG) including investment in infrastructure.
Section 2: Audience Question and Answer (transcripts) Moderated by Christine Loh, Chief Executive Officer, Civic Exchange
Civic Exchange is a non-profit public policy think-tank that helps improve policy and decision-making through research and analysis. The opinions expressed within this report represent those of the speakers and do not represent those of Civic Exchange. This summary report is based on transcripts recorded at the Energy Forum which was held on the morning of Tuesday 20th June 2006.
Energy Forum Summary Report BACKGROUND Civic Exchange is interested in the relationship between energy, air pollution and climate change. Energy, which is a critical driver of economic growth, is also a key driver of air pollution and climate change. In order to understand the issues which affect decisions on energy Civic Exchange invited experts to speak about these issues in the context of Hong Kong and Guangdong. The aim of this Energy Forum was to provide a background of local and regional energy issues including a summary of the current and future capacities, the mix of energy sources and their geopolitical and environmental implications, short and long term supply, transport, market and contract issues, investment considerations and policy drivers. Civic Exchange plans to organise further discussions on different aspects of energy in the future including areas such as efficiency and new technology.
Energy Forum Summary Report Section 1: EXPERT PRESENTATIONS (transcripts) Christine Loh, Chief Executive Officer, Civic Exchange I am the CEO of Civic Exchange, a non-profit public policy think-thank. We believe Hong Kong, which previously hasn't discussed much about energy issues, will probably take this matter more and more seriously as people talk about energy security and energy supplies. The idea today is the panel will give us a broad landscape understanding of the various issues about Hong Kongâ€™s energy supply.
Richard Lancaster, Commercial Director, CLP Power Hong Kong Limited My talk is about Hong Kong's energy challenges. Every time we pick up a newspaper these days energy is very high on the agenda and Hong Kong is no exception to that. Hong Kong also has energy challenges and these are as important to us in Hong Kong as they are to other economies or other countries around the world. We don't meet these challenges by chance or by good luck. They do require careful planning and they also require a long-term vision. I would like to give you some facts about Hong Kong's energy requirements. Firstly, if we look at Hong Kong's total energy requirement, it is higher than that of Denmark, New Zealand, Ireland or Peru. We actually consume a lot of energy in Hong Kong, with 7 million people here. We also are 100% dependent on our imported energy. On the right of this chart (slide 1) is the list of the highest net energy importers in the world. You can see that The Economist puts Hong Kong up there as number one, and only Hong Kong and Singapore are in the position of having to import 100% of all their energy needs. If you look down the list to Number 17 you will find Japan, which only needs to import 80% of its energy requirements. Hong Kong is an international finance centre, and about half our population either lives or work above the 15th floor of highrise buildings, so reliability of our energy supply is critical as well. Slide 1
Energy Forum Summary Report On Hong Kong's GDP per capita, a measure of the affordability of energy ranks the second highest in Asia, after Japan. We import a range of fuels and energy into Hong Kong but by far the biggest percentage of that, almost 70% of the energy we import, is fuel that is used for electricity generation. The other 33% is oil products, such as fuel oil, diesel, and the naphtha that is used to produce Towngas - essentially fuel that is used for transportation, for domestic heating and cooking, some industrial use, and some other small uses with the limited amount of industry that is still left in Hong Kong. Thus, fuel for electricity generation is by far the main source of energy that we need to import. For electricity generation we have a diverse mix of fuels. I am showing you CLP here. If I put CLP in the context of the previous chart (Slide 2), CLP's fuel is actually about 50% of Hong Kong's energy requirements. We have a mix of coal, natural gas, nuclear power and a very small amount of oil. Fuel diversity is extremely important if we are to have a reliable and secure supply of energy. Slide 2
Whenever dealing with international energy markets and dealing with the issues that are faced every day in bringing a supply of energy into Hong Kong, if there is any disruption or any problem with any one of those fuels we need to have other fuels there that can fill the gap. Diversity is a very sound strategy that is not only adopted here in Hong Kong but all over the world. The pie charts on the right here show the fuel mix for Japan and Europe, which are very well diversified. North America still has a very high dependence on coal but that is naturally found in North America. Mainland China is also very heavily dependent on coal. Mainland China is blessed with very large coal reserves and their challenge is how to diversify away from coal in a way that doesn't make them too dependent on imported energy. For China, the challenge is how to grow the nuclear and natural gas portion of their fuel mix. But, for Hong Kong, we do have a nicely balanced fuel mix. Let's look at how Hong Kong imports its energy.
Energy Forum Summary Report Firstly, coal and oil. Coal is imported in bulk by ship and the main sources of coal for Hong Kong are Indonesia, China, Australia and sometimes South Africa. Both coal and oil are easily transported and easily stored, and they can be easily sourced from very well established large, liquid markets. You can purchase coal or oil in any quantity you like. You can buy an entire ship load or you can buy a small quantity. The infrastructure for importing both and oil is well established and reliable. Nuclear power comes from the Daya Bay nuclear power station in Guangdong and imported through electricity power lines. The way that we contract for nuclear energy is under a long-term electricity off-take contract. The flexibility and the amount of nuclear energy that we import is largely set by the terms of that contract. Then we have natural gas. Natural gas comes in to us by pipeline from a single gas field in the Southern China Sea. Later this year we will start to see a small amount of natural gas coming in from the new LNG terminal in Guangdong province and some of that will be coming into Towngas and Hongkong Electric. Gas is more difficult to store and transport than either coal or oil. Therefore, the supply of gas needs to be secured under long-term take or pay contracts and the infrastructure needs to be dedicated to bring natural gas into a receiving country. Japan, Korea and Taiwan are all major users of natural gas and the way that they import their gas is as LNG. We are seeing that other economies in the region, Thailand, Singapore, Pakistan, and even New Zealand, are looking to LNG as a way of increasing the amount of gas in their supply portfolios. Now that we have seen how we bring fuel into Hong Kong, let's have a look at how well we are doing in that respect. First of all, our reliability is in excess of 99.99% (slide 3). We don't suffer black-outs, we don't even suffer brown-outs in Hong Kong, and we certainly haven't had instances where we have run out of fuel. We also have affordable energy. If you look at a comparison of electricity tariffs, the red bar on this chart (slide 3) shows CLP's electricity tariffs in comparison with other cities. Hong Kong does not have the most expensive electricity in the world and it is down there alongside some of the other cities - Shanghai, Shenzhen, Taipei, Jakarta and Kuala Lumpur. Slide 3
Energy Forum Summary Report The average expenditure on electricity in Hong Kong is only around 1% to 3% of average household expenditure. So, energy in Hong Kong, I would argue, would be considered affordable. The main concern we have when it comes to energy is the environmental performance. This graph (slide 3) shows CLP's total emissions of sulphur dioxide, nitrogen oxide and particulates going back to 1990. You can see from this chart that 1997 has been chosen [by the government] as the base year from which CLP has to make significant reductions in air emissions to achieve Hong Kongâ€™s 2010 emissions targets. By 1997, you can see we had already achieved major reductions. The challenge for us for the future is how to improve our environmental performance without compromising the high standards of reliability and in a cost-effective way that doesn't compromise affordability. Essentially, reliability and affordability are not issues for Hong Kong but the environmental impact is the main challenge that we are facing. Let's have a quick look at some of our options. We can source coal. It is less environmentally friendly than the other options, but we still see that coal has an important role for the foreseeable future in terms of providing a very flexible and reliable supply of fuel that can act as a back-up if there are problems with supplies in our other fuels. The environmental performance of coal can be improved further and with technology fitted to coal-fired power plants and by selecting very pure forms of coal we can reduce the environmental impact. Nuclear power is an option which we can't ignore. Nuclear power produces zero air emissions. It is a very clean source of power. I think in the longer term nuclear power will play a very important role in the energy mix of many countries around the world and we do need to keep nuclear in mind as a longer term option. Renewable energy is obviously a very clean source of energy but the constraints on land use in Hong Kong really limit the potential for renewable energy to a very small percentage of our fuel mix. It is not likely to be a very major component of our fuel mix for many years to come. Natural gas is the cleanest fossil fuel available and, in its liquefied form (LNG), is even cleaner than the natural gas. We believe that natural gas is the solution for the near term. It is the only viable solution that can bring about cleaner energy in Hong Kong in a quick time-frame. Given our options, we have come to the view that LNG is the only viable choice that will bring about quick improvements in air quality while still maintaining the high levels of reliability that we need in the time-frame for 2010 emissions reduction targets. Let's look at our options for gas. We have our current supply of gas coming from the South China Sea, and the obvious place to look for gas is China. This map (slide 4) shows in red circles the main gas reserves in China. A lot of those are located inland, to the very west of China. Hong Kong is a long way away from those main gas reserves. Essentially, the options for Hong Kong would be to look for offshore gas supplies.
Energy Forum Summary Report Slide 4
In the early 1990s when we first developed the Yacheng field, it was equivalent to a field in the middle of China of around 2.9 trillion cubic feet. That was the size of the Yacheng gas field when we first started taking gas from it. If you think in terms of a gas field that size that would be enough to supply our one power station at Black Point for about 20 years. If you consider that Black Point has been providing about a quarter of Hong Kong's total electricity since 1996, one field that size essentially provides a quarter of Hong Kong's electricity requirements for 20 years. The largest gas field in China, the Tarim Basin, has proved reserves of about 12 trillion cubic feet. To put that in context, if all of Hong Kong's electricity was provided by gas, that one field would just meet Hong Kong's requirements for about 20 years. China doesn't actually have very large gas reserves. About 1% of the world's gas reserves are found in China and most of those are onshore, a long way away from where we are in Hong Kong. Essentially, the map is not showing a very promising picture down where we are around Hong Kong. So far there has been very little gas found in our part of the region. That is why we have come to the view that LNG is the most viable option for us in the near term. LNG is essentially the same natural gas that is found in natural gas reserves. It is essentially the same natural gas cooled down to a very low temperature where it changes to a liquid and can be more easily transported. It is a very well-established industry that's been supplying natural gas to Japan, Korea and Taiwan for many, many years and we believe it is a very safe and reliable source of natural gas to meet our longterm energy needs. I will wrap up. The key points I would like to get across today are that energy is as important an issue for Hong Kong as anywhere else in this world and that fuel for electricity generation is the main energy requirement for Hong Kong. If we are to continue to have secure, affordable and environmentally friendly sources of energy, then we need to plan for that and we need to take steps now to make that available into the future. We do have reliable and affordable energy in Hong Kong but we do need to further improve the environmental impact and we believe that LNG is the most promising option for us to have more environmentally friendly energy in Hong Kong while still maintaining our high levels of reliability.
Energy Forum Summary Report Azfar Shaukat, Director, Oil & Gas Studies, Mott MacDonald Limited It is useful to look at the Chinese macro picture before we consider Guangdong. The primary energy consumption in China is forecast to grow 4.1% annually up to 2020. That is a significant increase and it is a huge amount of additional power and additional energy that is going to be required. As you can see from the chart (slide 5) coal, which is the light grey area, is forecast to continue to be predominant. China at the moment is the world's largest producer of coal at 2 billion tons a year. Even that is going to be insufficient by 2020, when over 3 billion tons per year are going to be required. Oil use is also scheduled to double. At the moment China clearly is making a dramatic demand on world oil production and the impact that that has had on oil prices - but, oil demand itself is going to double to 12.3 million barrels per day. Slide 5
What about natural gas? At the moment China's consumption is around 40 billion cubic metres per year. To give you a context, in the UK we are at around 100 billion cubic metres per year. China is forecast to treble its gas consumption by 2020 up to 120 billion. You can see in the 2020 picture (slide 5) that hydro and renewables will be relatively minor. Oil will have a relatively minor increase, only doubling, but in gas and in coal there will be huge additional demand. Natural gas represents around 2.5% to 3% of primary energy consumption in China at the moment (slide 6). The forecast, depending on who you believe, is going to be between 4% and 7% by 2020. Again, in bald figures that do not represent very much but, in terms of gas demand, that is a huge additional impact on infrastructure and on supply. Natural gas itself is required to meet the new targets for the Pearl River Delta in terms of air quality. You won't be surprised to know that 80% of the air pollution in Hong Kong comes from over the border. The emissions targets have already been agreed at Hong Kong and Guangdong province level. Those have to be met by some means and natural gas will help.
Energy Forum Summary Report However, if you look at the chart (slide 6) you will see that the red bar, which represents gas distribution investment, has the largest increase. What we are actually looking at is over the next 10 years, and every 10 years, investment in gas distribution in China will be doubling. Slide 6
Looking at Guangdong province (slide 7) - and Guangdong is China's economic engine, 10% of the whole of China's GDP is generated within Guangdong - the total installed power capacity is well in excess of 27,000 megawatts. There has been heavy demand from high population growth and booming industrial activity and that is forecast to continue. Slide 7
Energy Forum Summary Report Guangdong faces a few challenges. Firstly, there is the scarcity of resources. Ninety per cent of all fossil fuels are purchased from other provinces. You can see in the chart (slide 7) fossil fuels represent three quarters of Guangdong's energy mix, nuclear is 15%, and hydro plus others is 9%. You can see the impact and the dependency that Guangdong has on imports. Guangdong's power reliability is nowhere near that of Hong Kong. Even with the Three Gorges Dam and the new transmission line that has been connected from Three Gorges there have been power shortages and that is with current demand patterns. By 2009, Guangdong will receive 16% of the dam's entire output and, even then, power shortages are expected. In addition, there is a six-month strategic oil reserve project that is in two locations, Maoming and Zhanjiang, which is due in 2010. All these initiatives are to try to balance energy demand and supply. Looking at the natural gas infrastructure, Guangdong is distant from China's indigenous supplies (slide 8). It is quite a bit south of the West-East pipeline, so there is no direct benefit to Guangdong. There is a new LNG terminal which received its first gas last month at Shenzhen, 3.7 million tons per year, from the North West Shelf venture for 25 years. Slide 8
The plan is that Shenzhen will grow to 10 million tons per year. There is a 215 kilometre pipeline which goes from Shenzhen to Dongguan, Foshan and Guangzhou. That covers Phase One, which is due to be completed later this year. There is a further development which you can see in the map (slide 8) where Phase Two, which will be completed in 2009, will go to 6.2 million tons. Another 181 kilometres of pipeline will be required, and what you will then end up with is essentially a network connecting Zhuhai to Shenzhen and covering much of Guangzhou.
Energy Forum Summary Report There are other gas projects for Guangdong. It's worth noting that after Shenzhen the next project is also a CNOOC (China National Offshore Oil Corporation) project, which is Zhangzhou in Fujian province. Those two are the key LNG projects which are under construction. The Zhuhai project is a terminal which is under development potentially to supply, not just the Zhuhai area, but also potentially Macau. Phase One is talking about up to 3 million tons but the key there is that supply has not been secured yet. One of the issues that you may be aware of is that it is all very well building LNG reception facilities but the gas has to come from somewhere. With gas demand at unprecedented levels for the forecast future, the biggest difficulty any LNG reception facility faces is actually procuring gas at competitive prices. Phase two of Zhuhai will grow to 10 million tons and an additional terminal is planned at Shangtou for 2011, 2.5 million tons. The third terminal, which potentially could be in Ningbo, is also around the 2.5 million tons. So, there are lots of terminals planned. You may also be aware that the government of China stipulated that, apart from Guangdong which obviously has strategic reasons, every other province will be limited to one reception facility. Even so, there are challenges to getting hold of the gas competitively and also of the resources to construct. The other area that is of interest is in Panyu and Huizhou gas fields, which are offshore. Initial drilling has started at Panyu and the actual production is forecast to start later on this year. These fields could potentially provide 42 BCM, which is around a third of China's total demand in 2020, so they are going to be significant. There are plans to put a 365 kilometre pipeline sub-sea to the terminal in Zhuhai, so that can link in not just providing offshore gas but also with the LNG terminal. The intention is that these offshore fields will provide gas to Zhuhai, Zhongshan, and again potentially to Macau. It is worth looking at what this gas means to coal competition (slide 9). The bulk of China's power production is coal-fired, so how can gas be competitive? The Guangdong coal price is around 480 RMB per ton. What this means is that if the Guangdong gas price is under 1.5 RMB per cubic metre, then potentially gas can become more competitive. The east coast coal price is around 400 RMB per ton and there the potential competitive gas price is around 1.3 RMB. So, you can get a sense of the yardsticks by which coal and gas will have to compete. Slide 9
Energy Forum Summary Report It is worth looking at the future from a policy point of view. The government is keen to encourage foreign company involvement in the upstream and pipelines construction. This has now been approved. For the first time, international companies can invest and get involved in upstream projects in China and offshore and also in pipelines. The government is also keen to promote mechanisms, which enable natural gas to be pricecompetitive: Â„
Firstly, by introducing subsidies to gas suppliers [or allowing some level of passthrough of additional costs incurred purchasing fuel on the international markets];
Secondly, by preferential tax policies for the development and use of natural gas; and,
Thirdly, by reducing and possibly even exempting import and transit tariffs on gas.
The third area, which again is fairly evolved and fairly innovative, is the demand for LNG import companies to have some sort of upstream equity. It has now become necessary for CNOOC, PetroChina and Sinopec to have some sort of upstream involvement. CNOOC are involved in the Australian North West Shelf venture but also Sinopec are now looking to sign, and I believe they already have signed, a long-term contract with Iran to provide guaranteed supplies for the future. The government is also looking to reduce risks facing domestic LNG development. It is an immature market in China and the model that is being looked at is the Japanese and Korean model, which is to focus on the large industrial users so you end up with a bankable base-load long into the future and then the urban pipeline network can gradually develop following on. Another area which has been a weakness is an effective regulatory agency. The government is keen to introduce one which can then balance the needs of investors and of consumers. I will close there. Thank you. Pat Roberts, Managing Consultant, Gas Strategies Consulting Ltd. I am going to talk to you today about international energy fuels and try to set it in the context of what is happening on a global basis, with three businesses: oil, coal and gas, and then I am going to specifically focus on gas and LNG. This is an interesting chart (slide 10), in the sense that we go back to the year 2002 and we look at the four major sources of energy, oil, coal and gas, (and within gas also LNG), if we set all of their demands at 100%, we can then look at the rate at which they are projected to grow over the next 20 years or so. Slide 10
Energy Forum Summary Report You will see that natural gas as a sector for energy consumption is forecast to grow at a faster rate than both oil and coal. Specifically, within natural gas, LNG is forecast to no less than triple its market consumption over the next 20 or so years. It is a formidable target of growth but it is one that is actually being achieved at the moment and natural gas is one of the most rapidly developing industries in the energy sector. To set it in context, oil has the largest consumption out of all of the energy sources, at about 3.8 billion tons per year, coal is about 2.9 billion tons, and gas is around 2.5 billion tons. Gas growth is being driven by it being a fuel of choice for power generation and most of the demand increases are for power generation around the world. From a quality point of view, you can see that if I compare coal and gas with each other with respect to sulphur oxides, nitrous oxides and carbon dioxide emissions (slide 11), gas is ahead of the field relative to coal. From a thermodynamic efficiency point of view as well, new cycle gas turbines can operate more efficiently in the conversion of gas to power. So, there is an engine here which is driving gas to power. Slide 11
Around the world there are three major consuming markets for gas. These are North America, Europe and Asia Pacific. If we look at the year 2000 and look now at LNG specifically, you can see that the predominant industry was focused around Asia Pacific, with around 70% of the world's consumption for LNG being focused in Asia, specifically around Japan and Korea (slide 12). By 2020, we will see Asia Pacific grow very significantly to about 50% of the total global demand at that point. You can see a very spectacular growth in the United States, which is the result not of necessarily a lot of new demand but the result of indigenous gas supply declining and the need for them to cover that gap with imports. The countries in the region of Asia Pacific that are currently consuming are Japan, Korea, Taiwan, and recently Guangdong has started importing gas into China, and India. But, there are a variety of other countries fast on the heels to try to develop LNG for themselves and these are countries such as Thailand, Singapore, Philippines, Pakistan and New Zealand.
Energy Forum Summary Report Slide 12
The demand growth is equally matched by supply growth. Around the world you can see here that the black stars are representing the actual production centres for LNG (slide 13). These are a variety of countries, I think there are about 13 or so operating stars at the moment, but there are a lot of prospects and those prospects could actually swell the global supply capability to around 400 million tons a year by 2020. You can see that for the Asia Pacific region there are a lot of potential supply sources around Australia, the Middle East, and also from Russia, Sakhalin. Slide 13
Energy Forum Summary Report I was also asked to touch on the issue of pricing, which is obviously absolutely key to the development of these markets. The three regional markets have up to date had three regional pricing regimes as well. In North America most of the gas is supplied by pipeline, indigenously produced, and the market prices are set by pipeline gas. Although LNG is expected to have a big growth spurt, it is expected that gas that will arrive by tanker will have to be priced off of the indigenous pipeline indices and, therefore, it will be a price-taker of the local markets. The most well-known gas index in the United States is called the Henry Hub index, and this is based on a location in Louisiana on the south coast which is a major transit point for gas. You will hear the Henry Hub price quoted in dollars per MMBtu. Across in Europe it is predominantly a pipeline market supplied from Russia, Norway, Holland, Germany, etc and the market prices are set by pipeline gas. LNG volumes are expected to grow at the rate at which receiving terminals are supported and developed in various countries. LNG volumes may reach up to a level of around 20% of gas consumed by the year 2015. The gas is tending to be sold on an oil or an oil products formula, which is historic, although there are some markets which have actually developed their own gas pricing index, and the UK and Belgium actually sell on a gas pricing index and the gas is freely traded around those points. Asia Pacific is different. The major reason is because there isn't a big pipeline market. Most of the gas which arrives in Asia Pacific arrives by tanker, by LNG. The market prices have historically been set by LNG's comparative value to other fuels, and this has been a fairly stable situation for the last 40 or so years. LNG is very different as well to the other two markets, in the sense that it is expected to be more than 80% of the gas consumed in the region by 2015 and, although new pipelines are expected to be developed, the major source of supply will come from LNG supply origins. Gas in the region is linked to a Japanese crude oil pricing formula - the JCC, which is the Japan customs cleared price - a cocktail of crude oils, and that sets the reference index for Asia. I have been asked to set in context some characteristics and comparisons of the coal, oil and LNG businesses. I use a spider diagram to illustrate the main characteristics and business models of each fuel and how they compare. Some of the important issues as to whether these fuels get developed or not and relates to whether they can meet environmental challenges. You saw from the previous slides that coal is not as good at meeting environmental challenges as gas, but in some countries you will find the bar is lowered so ostensibly coal can meet environmental challenges set locally - so coal does get developed because it is always a balance of economics and environmental issues. To illustrate, coal has been rated on a mid-way point on this chart (slide 14).
Energy Forum Summary Report Slide 14
The capital intensity of putting the supply chain together is another major issue about how these businesses develop. For coal, again I have set this at a mid-way point relative to the other fuels. Capital intensity is of real importance. On the long-term nature of contracts between buyers and sellers, for coal there are quite a lot of mid-term contracts. Contracts may last for three, five, seven or 10 years, but it is quite rare to have contracts that extend much beyond that. Thus, a medium ranking for the coal. Do the producers of coal have to synchronise their supply growth with the demand growth in the target markets that they are aiming at? The answer is relatively no, because there are such liquid markets for the sale of coal that they feel quite confident if they can put a business case together to develop supply growth, they can be quite confident that they will be able to sell. So, there is a low synchronisation requirement, high liquidity of markets and, consequently, a high number of industry players. That sets out for you a characteristic footprint of the coal business. Using the same parameters, here is my interpretations of the oil business. You will see it is relatively similar to coal, only the markets are even more liquid. There are a high number of players. The need to synchronise supply and demand growth is reduced, and it is better at meeting environmental challenges. I would like to focus now on LNG. The LNG footprint is quite different. LNG is a business which is skewed right over to the right-hand side of the diagram, it meets environmental challenges as one of the best fossil fuels for business development and power generation. But, it is hugely capital intensive and to put the supply chain together means there is a lot of up-front business risks to cover and, because there are a lot of investment risks to cover, long-term contracts are required. It is very typical in LNG to see contracts of 20 or 25 years duration.
Energy Forum Summary Report Because of the capital intensity and the need to have regular flows of income to service debts, there must be a synchronisation or a high degree of synchronisation of supply and demand growth. Every time a supplier looks at building a new chain he wants to know where that demand is going to be and how it is going to establish the supply chain. The markets aren't liquid, it is not freely traded, it is set very much into long-term groups, and the number of industry players is relatively quite low and it is relatively quite low because of the capital intensity and the high barriers to entry for competition. That is a summary which hopefully sets in context my views of the oil, coal and LNG businesses. For the last couple of slides I am going to hone in on this right-hand diagram and show you the supply chain. The LNG supply chain has over the last five or 10 years become bigger, in the sense that the supply origins have developed bigger and bigger trains to try to reduce the cost of supply per ton. The average big train now produces 8 million tons a year of gas. You can see in the first box (slide 15) I have tried to put in US billions of dollars the scale of investment that we are talking about to bring 8 million tons of gas per annum to market for about 20 to 25 years. Slide 15
You will see that there are three major components, the upstream production, the liquefaction and the shipping, and then the downstream receiving terminal and the sale to market. In these capital figures here I have excluded the cost of capital for power stations. I have actually talked about supply to the country of import. Nevertheless, it costs between US$4 and US$7 billion to bring 8 million tons of LNG per annum to market.
Energy Forum Summary Report The business models that go with the business in Asia are shown. The first one is that national oil companies, host governments and international oil companies who discover gas in a particular country will generally form a joint venture company and they will produce and they will market the LNG. They generally own all the assets in the chain right the way through to shipping, and they sell the gas delivered into the country. Buyers have to generally own or operate or lease the receiving terminal and they have to provide the long-term market, and that is a very typical delivered ex-ship business model that we see throughout Asia. Another model which is slightly different, a variation on the theme, is where the joint venture company sells the gas in the exporting country and the buyer provides his own shipping and he owns or leases that asset and again he owns and operates the receiving terminal and provides the market. These two business models have been the general framework for the whole development of LNG in Asia. There are some characteristics of this business that mean if you want to compete and you want to be an effective buyer you have to compete with all the other buyers out there to get a partnership with a producer. Producers are very careful in what they choose for their partners. I have put here three main characteristics of what they look for. (Price, obviously goes without saying that is very important to them, and generally is number one). If you look at the characteristics of the partnership qualities they look for, it is, first of all, that the buyer needs to have a robust market with a clear infrastructure. He needs to have the certainty of a receiving terminal, so that he can say there is a genuine supply chain that can be put together to import the gas into the market. A characteristic of success is also a stable regulatory regime in the country in which the gas will be imported, and investment grade qualities of the counter parties. Most of the buyers are major utilities and they need to be able to meet the fairly onerous obligations of the purchase contract. The producers will look for the integrity of the consumer's market and the extent to which LNG is supported in that country. The next thing the producer will look for is a long-term income stream. Some buyers will push to say "I only want a contract for a few years because I want to keep my options open". Sellers don't want to really engage with that. They want typically a commitment from a buyer for a 20 to 25 year contract and they want this in order to provide the annual income to service the debt for project financing. Buyers are committed to a concept which I haven't seen in my career in oil, which is called â€˜take or payâ€™, which means contractually you are required to take and receive the gas or, if you can't take and receive the gas, you have to pay for it anyway and you have then a right to take the gas at a later stage in the contract. So, that supplies the long-term income stream. Lastly, there is this enormous requirement to control the synchronisation of supply and demand and that is that buyers have to show a capability with sellers that they can fully execute agreements conditions precedent, "I may have a terminal and I may have a demand growth that meets a certain profile", are really not competitive at all. It is a requirement to fully execute agreements so that they can take these agreements to banks for project financing. The commercial start-up date has to be something that is credible and reliable as well because the long-term purchasing will need to be synchronised with a long-term supply date at which the producer is ready to bring onstream his LNG plant, and possibly their ships as well.
Energy Forum Summary Report Daniel Bradshaw, Consultant, Johnson Stokes & Master Shipping is actually totally crucial to providing Hong Kong's energy needs. You have heard this morning that we have got basically three essential ingredients in our energy sources to produce electricity. They are coal, nuclear power and natural gas. I am only going to talk about the transportation of coal and gas. Hong Kong Electric will buy natural gas from the Dapeng LNG Facility to cover about 15% of its generating needs. The balance of its needs is provided by coal. CLP uses more or less equivalent amounts of natural gas, coal and nuclear power. The Hainan gas reservoir from which CLP obtains gas has lower reserves than originally anticipated, so CLP is now looking at LNG as a prospective fuel. Gas from Hainan is delivered by pipeline, but LNG must be delivered by ship. Coal is shipped in dry bulk carriers of which there are 4 basic sizes. Capesizes carry 100,000 tons up to 300,000 tons. They are mainly used for iron ore and coal. There are 680 in the fleet and some 146 on order. Panamax bulkcarriers are the next size, which as the name indicates, is the maximum size able to transit the Panama Canal. These range from 60,000 DWT to 100,000 DWT and there are 1341 in the fleet and 238 on order. Handymax bulkcarriers are from 40,000 DWT to 50,000 DWT, with 1442 in the fleet and 242 on order. The smallest standard size is Handysize bulkcarriers which are from 10,000 DWT up to 40,000 DWT. There are 2752 handysizes in the worldâ€™s fleet and 182 on order. Coal for power generation is carried on Capesize, Panamax, Handymax or Handysize bulkcarriers and as demonstrated above, there are plenty of ships available now or on order. Bulkcarriers are essentially boxes with engines, propellers and accommodation at one end. There is a liquid and open market for such ships. They are usually fixed on time charterparty under which the owner receives charterhire, but the charterer pays for fuel or on voyage charterparties or COAs under which the owner pays for fuel and is paid freight at US Dollar rate (usually) per ton for the voyage. Both charterhire and freight rates vary considerably depending on the market. For example for a 70,000 DWT Panamax vessel carrying coal from Richards Bay to Rotterdam, the time charter equivalent of the freight rates was an average of US$34,000 per day in 2004, US$22,000 per day in 2005 and thus far in 2006, US$18,700 per day, with the TCE at the beginning of June 2006 around US$17,000 per day. Dry cargo ships can easily be obtained to move coal, with the end user paying for the use of such ship, according to the market conditions at the time the ship is fixed. On the other hand, LNG is industrial shipping. Nearly all LNG carriers are fixed on 20 to 25 year long term time charterparties to service a particular trade. Hire rates have in relative terms declined over the last 20 years, but nonetheless they are still based on recovery of the capital cost at a certain internal rate of return and on covering the operating costs. Rates recently for a 148,000m LNG carrier have been around US$70,000 per day for capital costs and about US$11,000 for operating costs. Such a ship will cost about US$235 million to build after all pre-delivery costs are added to the shipyard price of around US$217 million and will take between 30 and 36 months to build. LNG is 98% or more liquid methane, and is carried at -163Â°C. The cargo tanks need huge amounts of insulation because pressure and boil off keep the cargo liquid at that temperature. There are 170 ships of over 100,000m in existence and, remarkably, 134 new LNG carriers of such size on order. The large order book for LNG carriers is attributable to fashion, expansion of Qatar and other such projects, and new projects in places such as Egypt and the Yemen. Because of the large order book for LNG carriers and the heavy ordering of container ships that has taken place recently, slots for delivery before 2009 for new buildings of any kind of ship are hard to obtain.
Energy Forum Summary Report LNG projects require a long lead-in time. The Dapeng LNG terminal received its first precommissioning cargo a few weeks ago. Yet the State Council first selected Guangdong as a trial base for importing LNG in 1998. Approval for the Dapeng LNG project was given by the State Council at the end of 1999. Contracts for the purchase of LNG from the North West Shelf in Australia were executed in September 2002. Contracts for construction of the terminal, the LNG storage tank and pipeline were entered into at various times after September 2002. The contracts for 2 of the ships to be built for the project were concluded in August 2004 for delivery of the first such ship in early 2008. A third ship was ordered at the end of last year. The pre-commissioning cargoes and first commercial cargoes will be carried on ships supplied by Australia LNG (North West Shelf), until the Hudong built LNG carriers are ready for service. LNG Sale and Purchase Agreements usually provide for the purchase by the buyer on an ex ship or free on board basis of a specific quantity of LNG each year for a period of 20 to 25 years on a take or pay basis. The LNG agreement must be negotiated and agreed with buyers, well before development of the train and delivery and receiving terminals (let alone construction of the ships) can begin. Most LNG carriers are then contracted by the buyer or seller under a charterparty concluded several years before the ship is needed. The rate of hire under the charterparty gives the buyer, a MMBTU price for the LNG delivered, which is more or less consistent throughout the LNG agreement. Consistent does not mean the transportation cost is the same throughout the term of the LNG agreement, but it does mean the variable costs are limited and identified. By contrast, we have seen that there are large numbers of ships available at all times in the market in a range of sizes to carry coal to the end users. No lead-in time is needed to obtain ships. A coal fired power plant may take time to plan and construct, but ships for the carriage of coal can be obtained at short notice in the spot market at market rates. If a LNG terminal is to be built in Hong Kong to accommodate our desire for clean air and reliable electric power generation, then we must move quickly to set such a project in motion, because the objective of using LNG as the fuel will need 3 to 4 years or even longer to bring to fruition.
Section 2: AUDIENCE QUESTION AND ANSWER (transcripts) Forum Attendee: This one is for Richard. Can you tell us where the approvals process is for the LNG terminal that you want to build in Hong Kong and, if we don't have those approvals by the end of this year, could Hong Kong be facing a situation where there would be black-outs and we are all going to have to walk up the stairs to our offices and homes? Richard Lancaster: In order to have LNG available, from when you sign the contract you start getting deliveries in about four years. It needs four years to get the ships constructed, to get the terminal built, and also for the upstream side to be ready. If we want LNG early next decade, if we were to sign our contracts at the end of this year we could have LNG available early in 2011. The Yacheng gas supply will run out, depending on how fast we use that up. If we can have LNG available in 2011, we could use up our Yacheng gas supply at a faster rate and have that run out just after our LNG supply is available. If our approval is late, then we have to stretch out that Yacheng gas supply. We cannot afford to run out of gas, that would be disastrous, and we would have to stretch out our Yacheng gas supply. The impact of that would be that we would have to use a lot more coal in the next few years, which nobody wants. If the approval is delayed into the next decade and if it is delayed by some years, for example, then we will run very close to running out of Yacheng gas.
Energy Forum Summary Report There is critical urgency to secure the approvals as quickly as possible. We would like to see those approvals at the end of this year. What those approvals involve is approval for the financial commitment that we need to make for the LNG supply contract, the environmental impact approval for one of the two sites that we have been looking at, and also the approval for the granting of the land so that we can get on with constructing the receiving terminal. Christine Loh: Richard, do you think you have to sign, therefore, a contract to buy gas for 20 years? Is that what is necessary? Richard Lancaster: Yes. When we approach a supplier of LNG, anything other than a long-term contract is just not of interest. There are other competing buyers and, essentially, we have to be competitive with those other buyers. What that means is a long-term supply contract. Forum Attendee: I have a question regarding the discussions by the government recently on the Zhuhai LNG terminal. From the discussions earlier it looks like it will be more to supply Zhuhai and those areas, rather than Hong Kong, but the Hong Kong government seems to be thinking about this as being a viable replacement for CLP's proposal. Christine Loh: Perhaps I can ask Azfar to talk a little bit about the background of the Zhuhai terminal first. Azfar Shaukat: It is important to recognise that the Chinese government actually has plans for several LNG terminals which are in the pipeline. Two are under construction. The first one obviously has already been built in Shenzhen and the second one is going to be in Fujian. The third one you could potentially say is going to be the Zhangzhou terminal and maybe the fourth is Ningbo. So, Zhuhai is actually potentially number five. What we are looking at here is a terminal which is not imminent; it is not going to happen next year. I don't know whether that answers your question in terms of LNG terminal prioritisation. Christine Loh: Can you remind us as number five on the list what kind of time-frame might we be talking about? Azfar Shaukat: The Chinese government would be looking at around the 2009/2010 mark for Zhuhai. Realistically it may be a couple of years later than that. Approvals maybe given end of this decade and construction and completion the middle of the next one. Christine Loh: Richard, are you able to answer the second part of that question in terms of how you look at the possibility of the Zhuhai terminal as part of your supply chain? Richard Lancaster: One thing that I think has come out of these presentations is that just building a receiving terminal doesn't do anything for you, you must have a supply of LNG to come in, and the receiving terminal is essentially just a facility that you need to unload the LNG. When you go to a supplier of LNG, one of the first things he asks you is how are you going to unload this. If you cannot show him a solid plan that you can say with certainty you will have the receiving terminal built when the first deliveries are going to arrive he is just not interested in talking to you. What you have to do is show him that when you want LNG - and in our case early 2011 - you have to show him that by 2011 you will have a receiving terminal ready. What he looks for is how much work you have done already and whether you are at the late stages of environmental permitting, as he would expect you to be if you are going to meet that time-frame. He would look at how likely your site is, how much certainty there is. If you go along to him today and say "I am doing some feasibility studies and I might have a project there", he just won't be interested in you.
Energy Forum Summary Report For us, the way we would evaluate a receiving terminal, we must have absolute confidence that it is going to be ready. We have already done about three years work on this, so we can show the results of three years work and we can show a plan that would get us there, providing we have approvals by the end of this year. The timing is absolutely critical on these projects, to be able to show with certainty that you can construct a terminal in the time that it is required. Azfar Shaukat: I think it is also worth adding that, apart from the first two Chinese projects, no gas deals have been done for any of the others. Forum Attendee: I have two questions. With all the presentations here we all know how expensive and how long-term a commitment an LNG terminal represents. The question here is, is it suitable for Hong Kong? Is it needed for Hong Kong? Richard, in your three-year study have you looked at the alternatives to an LNG commitment, such as the projected supply surplus in some of the surrounding provinces around Guangdong? It is projected in the next couple of years to go as much as reducing the average operating hours of the large-scale coal-fired plants in China to about 4,000 hours a year, which is a little bit over 50% of the operating utilisation hours. At our plant in Yunnan alone, 600 megawatts of the 1,200 megawatts is shipping with a direct transmission line to the Guangdong market which can also reach Hong Kong. Do we have to look at the option of tapping those investments in power supply for Hong Kong instead of committing to another expensive option? The second part to the question is whether in your three-year study you have studied demand management? We all understand that the Hong Kong building block is by far not the most efficient in the world. Has the Hong Kong government or has one of the two utilities in Hong Kong really looked at the alternative of what some of the peak shaving or energy conservation would do, giving you maybe a couple more years to look at the decision, rather than have to do it by the end of this year? Richard Lancaster: I will answer those questions and maybe Azfar might like to make some comments about the supply and demand balance in China as well to round off the response to that. Your first question, Colin, was about alternatives. I think it is important to recognise that we have a 2,500 megawatt power station at Black Point. It has been part of our generation mix since 1996 and it has been burning natural gas for that time. 2,500 megawatts represents a big portion of our total generating capacity in Hong Kong. It is around a third of our total generating capacity in Hong Kong. We don't need to build new power stations. We have a very modern efficient power station that is operating to very high environmental standards and we don't need to build another one. All we need to do is to get a gas supply for it. It is a bit like having a car that we have been driving around, and if we are running out of fuel we don't go and buy a new car, we just buy some more fuel for the plant. So, when we are looking at alternatives we are looking at alternatives for fuel supply for that plant. As I showed you on the map of China, the gas reserves and the gas supplies in China are now far more competitive than they were back in the early 1990s when we contracted for Yacheng. Very little additional gas has been found in the South China Sea and what there is is now under heavy demand by not only the power industry but also petrochemical processes as well in the Zhuhai area and also in Hainan. Essentially, when we had looked at all the options we came to the conclusion that LNG was the only viable option that we had for Hong Kong. I think for the coastal areas of China, as we have seen from Azfar's presentation, LNG is seen as the solution for China's gas supply in the coastal regions as well.
Energy Forum Summary Report I think there was a question about peak shaving facilities and whether there are any opportunities that could be established to help us stretch out the timing for our replacement gas supply. Black Point consumes a huge amount of gas. It is a very large power station. It is actually one of the largest combined cycle power stations in the world. The requirements to keep Black Point running are very large. It consumes a lot of energy. Small scale opportunities would really only be keeping us going for a matter of weeks or months even. What we really need is a very large supply of gas that will keep us going in the longer term. Whilst we are always keen to get opportunities that can enable us to use more gas in the short term, we have to recognise the scale of the gas requirement for Black Point. Christine Loh: The reason for having a series of forums on these issues is so that over the next few months we can bring Hong Kongâ€™s knowledge up. People in the industry may wish to influence public policy and influence what we think is possible and not possible. We need to increase our own understanding to make a judgment. I am sure the people who are in the sector have very firm views about what is possible and what is not possible. With this kind of debate, we become better educated to make a judgment because that is important for Hong Kong going forward. I would like Azfar to add a view about general supply and demand and whether there are opportunities of what we call surplus power from less developed provinces that Hong Kong can tap from and the relative opportunities and risk of doing that. Azfar Shaukat: You saw from the presentation earlier that the main challenge for Guangdong is essentially all the energy has to be brought in, that all the fuel for power stations has to be brought in. China as a whole is way, way behind where it needs to be in terms of its actual acquisition or supply of sufficient gas. The nearest province to Hong Kong is actually facing huge problems of its own trying to match its supply and demand and that is going to continue into the future. Guangdong itself is going to face challenges not just on supplying sufficient gas but also in bringing in liquid fuels to be able to power its power stations. The challenge for Hong Kong then is how does it fit into the overall picture? I think it is probably fair to say that Guangdong will have enough on its plate trying to balance its own books without having to worry about Hong Kong and, therefore, I think to some extent Hong Kong needs to take an independent view. Forum Attendee: I have a couple of questions, one for Azfar and Richard and one for Daniel. I am confused on the LNG facilities. What Azfar was talking about was the CNOOC facilities as part of the NDRC plan for the whole of the country, but the one that we have been seeing gossip about in the papers here is the Sinopec proposal. Are we talking about two facilities and how do they sit alongside each other? The second question to Daniel is that I recall Richard noted the Fujian plant is taking fuel from Australia. It doesn't take delivery of the LNG ships until 2008. At the moment they are using ships essentially that are being loaned to them by the Australians. If that is an accurate summary of what was said up on the podium, then there seems to be, at least on an interim basis, a sort of spot market in the LNG ships, maybe only ad hoc, but nevertheless some element of spot. Does that means in terms of CLP's timetable to be able to get the whole supply chain functioning by 2010/2011 if there was delay in the building of the ships at least you could fill a gap with borrowed hardware? Azfar Shaukat: The reason why it is the CNOOC projects that are being talked about most or are under development most is because it has been almost an unwritten policy on the part of the Chinese government to promote CNOOC, and the reason for that is that CNOOC has had the smallest equity reserves, compared to PetroChina and Sinopec. 22
Energy Forum Summary Report So, the projects which are proceeding are CNOOC projects. The Sinopec project in Shandong, the Qingdao project, is potentially starting next year. Again - we don't know it is at the approval stage and potentially could start at the end of next year. As Richard and Pat have mentioned, projects for re-gasification are predicated on securing gas supplies. Those supplies essentially become dedicated to those reception facilities. That includes part of the liquefaction, it includes definitely the shipping, and obviously the re-gas facilities have to be dedicated. So, the options for having some sort of liquidity in assets and being able to transfer almost on a spot basis are very limited. At this point in time it is still dedicated long-term contracts and dedicated assets, but the situation is changing. For the first time recently, we found that every key aspect of the chain was actually built on a speculation basis. Previously nobody had ever built an LNG production facility on speculation, nobody had built an LNG carrier on speculation, and nobody had built a re-gas terminal on speculation. For the first time recently, all three elements in different projects actually happened and that indicates liquidity. Also, we are now finding that contracts which previously had clauses in them which said that they only had to go from A to B and could not be diverted, that condition is not a stipulation in many contracts. You have the possibility of diverting cargoes and/or taking advantage of some sort of arbitrage. Those are changes but I don't think those are going to have a material impact on the Chinese situation for at least another five years. Daniel Bradshaw: There is a spot market for LNG ships and I will talk about that first and then go back to the Australian supply to Dapeng. Korea has a much higher demand for LNG in the winter for heating purposes so they go into the spot market and take ships. The market rate if there are no ships available can be exceedingly high, it can be US$150,000 a day for a ship, which is quite serious, but in the summer you may find it easier to get a ship. It is a very small market. There are not very many ships. Secondly, so far as the supply from Australia to the Dapeng terminal is concerned - not Fujian, because that hasn't begun yet, Fujian is taking LNG from Papua province in Indonesia - the way in which that was done was the Australians agreed to provide ships to carry cargo until the Hudong built ships came on service. Effectively, the cargo we had the other day was actually a spot cargo because that was what they call precommissioning, cooling the terminal down and basically seeing that it is gas tight and so on. When the supplies begin and they ramp up - and they don't start in with 3.7 million tons a year, they start at 0.5 million tons and build up over a period of time - by the time the project is at full capacity then the Hudong ships should be available. In the meantime, the North West Shelf has ships or has some capacity to deliver and in fact as part of the deal to sell gas to Guangdong agreed that it would provide that shipping capacity. I hope that answers your questions. Christine Loh: Pat, how far down the line do you see that LNG actually has a much more liquid market? Is it sometime after 2020 or is it just too early for people to plan this into their supply chain planning? Pat Roberts: This is a question which has been asked a lot over the last few years because a lot of people would like to break into the LNG business without having to own a lot of assets but be able to be spot traders. The LNG business is characterised as quite a flat-footed business, capital intense, slow moving and with very, very high obligations on the participants. Nevertheless, what Azfar said is correct in part. At the fringes there are some projects which develop where they haven't sold all of the capacity entirely or they can produce above the nameplate capacity of the plant. There is a small amount, and we would say no more than 10% of the total industry, that can be traded on a shorter term basis. These are just imperfections really, that eventually synchronise out the supply and demand growth for the long term. In the future, in order to develop a spot market you have to go back to an oil market or a coal market and you have to say: 23
Energy Forum Summary Report "What characteristics do they have?" They generally have liquidity in the assets. There is some redundancy in shipping, that someone has invested in shipping speculatively on the view that he believes that he can make a business model work or someone has invested speculatively in a re-gasification terminal and they believe that by having that terminal they can attract supply. But, someone has to take a very big risk and up until now there hasn't been the appetite to take those merchant risks. If you look at any of the work done by the researchers in LNG, they are predicting a level of around 10% of the total volume may be sold on less than a long-term contract, but even the gas that is sold on short-term contracts still requires a very detailed individual contract to negotiate. Forum Attendee: As a background and to be educated on this, what are the major sources of gas right now in terms of around the world, where are the main fields, the main countries, the main players and, when I think of Iran as a main player, the problems with international politics? What is the prognosis on supply for the next five to 10 years? Pat Roberts: The largest LNG producer up until last year, and exporter, was Indonesia and this was one of the older LNG suppliers who had developed various trains and was exporting somewhere around 23 or 24 million tons a year of gas. Last year something new appeared on the horizon which will change the LNG business quite considerably. Qatar eclipsed Indonesia and produced 25.5 million tons of export volumes. Qatar is going to swell up to around 77 or 80 million tons a year by 2010, and there has been a very conscientious, dedicated program to increase capacity there. If you look at the geographical setting of Qatar, by scaling up their operations and reducing the cost per ton they are in a perfect position geographically to move the gas west or east and there are significant plans and lots of deals have been done to move Qatari gas to North America, Europe and Asia. In our region as well here in Asia Pacific, Australia is seen as a very credible developmental source of LNG. At the moment you have the North West Shelf with four trains of gas operational, which I think is around 16 or 17 million ton. That is going to swell to a fifth train. Then there is the Great Gorgon project which is on the slate, and there are other Woodside projects and BHP projects. Sakhalin in Russia is another one which potentially can be used to develop three or four trains of LNG. Iran is sharing the North Pars field with Qatar, but very slow relatively to develop an LNG business. Analysts believe that subject to the political settlement in Iran that there will probably be two trains of LNG available by 2015. Forum Attendee: I have two questions, one for Richard and one for Pat. For Pat first You talk about the two possibilities of investment because of the capital intensified facilities. Basically, I see it as one because what you are talking about is that the risk is too big so you need the government's commitment, no matter whether financial or policy. Either the government would directly participate in investing or you ask the government to make some policy commitment so that you reduce the risk. In a sense, it is government involvement anyway. If I push it to the extreme, if we think that LNG is the way to go for Hong Kong, for the entirety of Hong Kong, why doesn't the government build a terminal itself and supply to all the other operators, not only CLP? Does that possibility exist and what do you think about that possibility? The second question is to Richard. Again, if we see LNG is the way to go for Hong Kong, if you want to persuade Hong Kong people, not just the government, what sort of benefits would individuals, laymen like myself, get from building the LNG terminal and consuming a large piece of sea? At the moment it is a sea area and it becomes a land area, it is more reclamation. Especially financially, what sort of benefits can an individual get out of your plan? Pat Roberts: Your question basically says: can you get the government to build, own and operate the terminal in essentially an entrepreneurial-type fashion? I have been thinking over the last minute or two, can I think of any government anywhere in the 24
Energy Forum Summary Report world that has ever taken on that type of challenge and at the moment I am still drawing a blank. Governments tend to want to promote the idea of energy security, diversity and support. LNG terminals are for utilities or oil companies, to take a financial risk on, I haven't seen a government that has said that they are prepared to enter into the supply chain as such. They tend to want to promote free markets and they tend to want to have regulatory systems that help promote free markets, but with the caveat of energy security for the country coming first. I doubt that a government would want to build and operate a terminal. In fact in the industry there hasn't as yet, to my knowledge, been a need for a government to step in and do that. The expertise has definitely sat elsewhere in the business chain and there has been no end of people volunteering to do that. What they want is the government will give them a stable regime in which to operate. Christine Loh: What you are saying is what people are looking for is a stable and predictable regulatory regime so that different commercial operators can decide to what extent they want to invest in these various types of infrastructure? Pat Roberts: Yes. Christine Loh: Azfar, is there anything you can add? In terms of the Chinese facilities, they are effectively state-owned, aren't they? Azfar Shaukat: They are not necessarily state-owned, they are owned by state oil companies, but those oil companies themselves are going to have a reducing state level of involvement as time goes on. While Pat was talking, I can't think of a single regasification terminal anywhere in the world which is not private. They have all been developed by private money. Christine Loh: I know there are many analysts here who write about Sinopec, CNOOC, PetroChem and so on. As some of these state-owned or state-controlled companies start to float a larger proportion of their shares in the market, I presume one of the considerations is the commercial viability of these types of investments. Anyway, it is beyond me to go on about this but if there are any of those financial analysts here who want to add a perspective to this, we welcome you to do so. Richard, do you want to answer the second part of the question? Richard Lancaster: Yes, the second part of the question was in relation to the benefits that the community in Hong Kong can enjoy if we have an LNG receiving terminal in Hong Kong. What is important is that we have the infrastructure to enable us to have clean fuel, LNG, for the longer term. Environmentally, we have been enjoying natural gas as a significant part of our energy mix for the last 10 years. For consumers in Kowloon and New Territories, the cost of that gas has been in their electricity bills for 10 years. We are looking at replacing the gas and if we are to use, for example, the same amount of gas that we have been using in the past, then it will not have a big impact on electricity bills. If we need to have more natural gas, and the reason that we would choose to have more natural gas would be to get environmental improvements by replacing coal with natural gas, then to get those additional benefits will have an impact on electricity tariffs but that should well be manageable. The main benefit we can expect in Hong Kong is that once we have developed the infrastructure, if we want more natural gas in future because of growing electricity demand as our population increases, we don't need to build more infrastructure, we don't need more pipelines. All we need to do is to bring in ships more frequently. We build the infrastructure once, we set aside a piece of land, it is not a large piece of land, we make sure that we have managed the environmental impact very carefully, we have managed the safety impact very carefully, and what we have is then a very valuable piece of infrastructure that will enable us to use gas more as we progress through the next decade. Christine Loh: Richard, is there any possibility of CLP having some kind of arrangement with one of these terminals in China so we don't need to build one here at all? What are the reasons for that not being considered? Azfar, you can also give us a perspective. 25
Energy Forum Summary Report Richard Lancaster: We looked very carefully at all possible alternatives and we came to an early conclusion that having an LNG receiving facility in Hong Kong was far better, and there were a number of reasons for that. Azfar has highlighted the plans for LNG receiving terminals in China. A couple of years ago if you looked at a map of China there were LNG receiving terminals dotted all up the coast of China and these were all going to come on-line by 2008 or 2009. We are now recognising, even if they start today, they are not going to have an LNG supply until 2011 at the earliest. The timing for these projects is highly uncertain. We have an urgent need to have a replacement gas supply. If we want to have gas in 2011, we really have to be starting work early next year. We recognised three years ago to get a project through the approvals stage across two jurisdictions was going to take a lot longer than doing it in one jurisdiction. In other words, we could do this a lot faster if it was contained within Hong Kong. A second reason is the one I outlined earlier about the flexibility. The benefit that we get from an LNG receiving terminal is flexibility. We can bring in more cargoes of LNG as we need more gas in future. If we operate outside of Hong Kong, energy infrastructure in China is really considered to be a state infrastructure, so what we would need to do is to work within the confines of the NDRC planning. We would need to be working alongside state-owned enterprises and that would mean that we don't necessarily have the flexibility that we need, we would have some constraints on the ability to access the terminal. So, we would have less flexibility if this is done outside Hong Kong. The third reason is economic. The further your receiving terminal is from your power plant, the longer the pipeline is. Essentially, once you take your receiving terminal further and further away from Black Point, the cost of the facility increases. Azfar Shaukat: Flexibility is the key word here. As I mentioned earlier, there is a potential there could be supply shortages if Hong Kong is actually lower down on the merit order as far as Guangdong is concerned in terms of supply. It is also worth noting that in a project in Europe - a re-gasification facility with two power stations right next to it â€“ where there was a separation of about 30 kilometres between the projects, and the critical factor was the gas supply pipelines. For a variety of reasons, environmental factors and so on, that was the pinch point and nobody actually realised that the economic viability of the whole project didn't depend on the power stations or the re-gas terminal, but the pipelines were critical. So, I think you have a potential weak point there. Christine Loh: I think there was a question at the back? Forum Attendee: I have two questions. Firstly, what happens to supply and price if Iranian gas is just removed from the equation? Secondly, obviously there's been a loss of momentum in Chinese LNG. Does the panel expect that to change? Christine Loh: Pat, do you want to take the question on Iran? Pat Roberts: Yes. Iran poses an interesting dynamic here because it could produce 10 million tons of LNG into the total supply mix for the LNG business. If it is taken out of the equation, the question is what impact that might have on the price. Currently, there is so much uncertainty over the rate of development of lots of other fields that one school of thought is that if Iranian gas looks uncertain or is delayed, then other gas developments will be brought forward to balance that. I have seen certainly in the eight years I have been involved in LNG, you have projects similar to Iran in some respects that you think have got so much capability of delivering and yet they fail to do that. A very typical one here is Venezuela, so close to the United States market, the necessary gas reserves, and yet no real development momentum to get the project going. You say, "What happens if Venezuela doesn't happen?", and the answer is that other projects come in to fill the gap. The main school of thought I think is that what will happen if Iran doesn't develop LNG is 26
Energy Forum Summary Report that Iran may still develop pipeline gas and start to supply the region, notably India perhaps, and other gas will just simply be brought through the pipeline faster in development. Christine Loh: Azfar, the question on whether Chinese LNG has lost momentum? Azfar Shaukat: It is really going to depend on the ease with which contracts have been negotiated. If the Chinese projects can secure competitive gas, and we can predicate the new development projects against firm supplies, then I think the momentum will continue. The reality is China doesn't really have any viable alternatives to LNG. If they want large volumes of gas, then there are some sort of cross-national pipelines that could be built and those have lots of political implications. Domestic production is not far off the peak. It is not going to be able to produce very much more without huge amounts of investment. The reality is that the LNG market or the LNG re-gasification projects have to continue the momentum. Christine Loh: Can I ask for clarification here? To what extent will China have to remove state subsidies or remove price control for them to be able to source gas from different parts of the world? They are not able to source gas from Australia because they can't pay the price. Is that because they have controlled price at the domestic end? Azfar Shaukat: The reality is that the LNG market has fundamentally shifted to a suppliers' market. Suppliers are dictating the terms and you have to pay whatever they are asking for. Christine Loh: What I am trying to say is the Chinese cannot compete on price because they have price control in China, is that a reason? Why can't they pay more for gas? Why are the Chinese not able to compete? When we know that they have this in their plans and it is critical for China to get more gas, why are they not able to pay more? Azfar Shaukat: It is not just the Chinese who are not able to pay. There is a ceiling purchase price that you need to buy at before power generation become uncompetitive because then you are buying gas at such a high price that you can't actually produce energy competitively enough to supply the market. They have to purchase below that ceiling. China isn't the only country in this position. There are lots of other potential buyers who are also in exactly the same predicament, where they can't buy the gas cheaply enough to be able to generate from it. [Post forum additional comment: My understanding is that the Chinese government recognizes the need to reform natural gas pricing and regulation if it is to support the take-up of gas and reduce energy consumption. There are plans for costs of fuel purchases, bought on international markets, to be passed through to end consumers in China. As has been seen twice this year already, refined fuels prices have been raised to reflect the increase in crude prices but at a slower rate than crude. I expect this lag to affect gas prices also.] Pat Roberts: I think there is also the issue of is it can't compete or is it won't compete. The LNG business is fragile. It tips between a buyers' and sellers' market. As Azfar just said, currently the perception is that it is sellers' market, yet a few years ago when the Guangdong deal was done it was most definitely a buyers' market. There is a delicate balance between a buyers' and sellers' market. You have the Chinese, who have the potential to buy a lot of gas, 15 or 20 million tons a year of gas and so, very interesting for LNG projects, but they have not been willing to commit to buy at today's prices. There will be a timing issue there. What I think the Chinese companies have seen in the last two years is that with this great big attraction of suddenly sending a lot of gas to North America from the Middle East producers, and even sometimes the prices have been high enough to move Asian gas across to the US markets, that they are now not going to 27
Energy Forum Summary Report simply be operating in a totally insulated environment, they are going to be subject to the competition of other markets too. Forum Attendee: Does OPEC operate at the same level of coordination on the price of gas as it does on oil products? Pat Roberts: No. Christine Loh: OPEC is not relevant, is that what you are saying, Pat? Pat Roberts: There hasn't been any similar effect in gas as there is in oil for pricing and levels of production. The gas development has really happened quite independently. So, no, not to date. Forum Attendee: Is it coming? Pat Roberts: I doubt it. When I look at the individual motives of the countries in developing supply sources, I doubt it. Forum Attendee: Pat raised the issue about the capital intensive nature of the LNG business. CLP's project will cost around US$600 million. At the end of the day, who will pay that bill? The second question is the government is negotiating with the power companies about the future regulatory arrangement to replace the scheme of control. Richard, do you see that the negotiation will complicate the approval process of this LNG terminal? Richard Lancaster: Pat showed the capital investment required right through the supply chain, and I think what Pat highlighted was that the major part of that investment is in the upstream side, the development in the gas field, the liquefaction plant and the ships. The receiving terminal, which is what we need in Hong Kong, is a relatively small part of that whole supply chain. It is still a significant investment but, compared to the rest of the supply chain, it is much smaller. Essentially, whatever investment is needed right throughout that whole supply chain that gets factored into the price of the gas and then translated into electricity tariffs. There is no free ride in any of this. Somebody has to pay, and that is the people that are consuming the gas. The complexity around the scheme of control negotiations is what Pat presented as the view of LNG supply from a producer of LNG is one that is very relevant to us. Hong Kong is essentially competing with other buyers of LNG. We are out there competing against Japan, Korea, Taiwan, Singapore and Thailand, and we are going to the same suppliers and we need to present Hong Kong as an attractive buyer. What the suppliers look at is exactly what Pat put on that slide. The very first question they will ask is "Where is your receiving terminal? How can you show me that it is going to be built?" The certainty that we have around that is very important. Also, they look far beyond your credit rating as a private company. When you look at the total value of the LNG supply contract, the volume of LNG over 20 years is a commitment well in excess of US$10 billion. When CLP, or any other buyer of LNG goes out to the market, your credit rating as a company is only part of the picture. It is good to have a strong credit rating but you also need to show right through your supply chain how your business is regulated and how you can assure the gas supplier that you will be able to produce the electricity and be able to sell that electricity for 20 years in order to pay for this huge commitment. The scheme of control and the certainty around that is also critical in order for us to be able to sign an LNG supply contract. Christine Loh: A question at the back? Forum Attendee: This is really for Richard but if anybody else on the panel would like to comment that would be great. Sorry to move it away a bit from the LNG discussion 28
Energy Forum Summary Report which has been the main focus for today and on to nuclear, but you mentioned earlier that nuclear energy is growing in China and is expected to grow globally. I am wondering what your concerns are on nuclear waste issues, whether this is a focus for CLP or a concern at all and if there is research and development happening in this area? Richard Lancaster: When I said I expect nuclear to grow, I think in a lot of countries nuclear power is seen as a major way that greenhouse gas emissions can be managed. With all the work that is done on renewable energy and carbon dioxide capture and sequestration, there is no magic solution to this. In order to manage greenhouse gas emissions a lot of things need to be done and nuclear power is going to be part of that solution. A lot of countries have had a cooling-off period with nuclear power for some time. In some countries it's been taken off the agenda. We are now getting to the stage in some countries where older plants need to be decommissioned and what do we do with those plants and how do we do that? These and other issues such as nuclear waste management will all have to be solved but I can see that in the longer term nuclear power does need to be part of the energy mix of many countries in order for us to manage the greenhouse gas emissions. Forum Attendee: The Yacheng field obviously has depleted much quicker than people expected. I remember at the end of the 90s in the UK they were saying the North Sea would be providing increasing amounts of gas and oil till well into the end of the first decade of the 21st century, and it peaked the next year, a decade early. The idea of peak oil is increasingly being discussed. Most major producers have peaked and those that I haven't most people don't believe them anyway. Is there a question about peak gas? Rather than maybe just peak LNG, is peak gas an issue like peak oil? I guess that is a question for Pat or Azfar. Azfar Shaukat: The critical question I think isn't so much whether there is peak oil or peak gas but a question of what people are prepared to pay for it. If people will pay, then you can still have oil production going into 2050. In the UK we were looking to have self-sufficiency in gas up until 2015, and that is not going to happen because as of last year we became a net importer for the first time. We potentially were going to be a net importer of oil round about the same time (2005) but, because of technological advances, that has now been pushed back to 2009 and possibly even further. I think technology has a role to play in furthering into the future the time at which resources become uncompetitive. [Post-forum comment: It is worth noting that at present rates of consumption and with current proven reserves oil will last about 40 years and gas 70 years. However, additional reserves are always being found so the effect is to always push the â€œendâ€? date into the future] One thing that we need to understand is that new gas fields are going to become much more fragmented. They will be smaller, they will be further away, they could be in deep water, and they will be in much more difficult places to get hold of, so they will be more expensive. If the market is prepared to pay, then there will still be gas long into the future. Forum Attendee: Can I follow up a little on Christine's point? As Richard said, someone has to pay for the gas. If China has, and I think Christine was alluding to this, subsidies on the electricity rates that the consumers pay, has anyone figured out where is the tipping point and how much those subsidies need to come down in order to give the state buyers of these LNG contracts that are going into many, many years confidence that they can afford and that their consumers can pay for LNG? And, that has implications for alternate fuels, clean fuels, cleaner diesel and things like that. Has anyone done a study on where those subsidies need to come up to or decrease in this context?
Energy Forum Summary Report Pat Roberts: I haven't seen anything specific in that area but there may well be some analysts here who could answer that question better than I. What was published a few years ago was how much pent-up demand there would be in China if the delivered price of the gas was about half what it is today internationally. They were saying that at these levels China has got a huge appetite for buying gas. I think that the market has moved on considerably and, you are absolutely right, at the end of the day you have to be able to make the chain viable and you can do that by reducing the subsidies. Another technique that has been used as well is the Chinese companies trying to buy an equity stake in the upstream, so that when they become purchasers of gas from the downstream they simultaneously get a 10% or 15% equity stake in the upstream, so that if commodity prices stay strong they get a return that way too. You can imagine that giving away some of the equity in your LNG project when commodity prices are forecast to be strong is something that producers find more and more difficult to do. Forum Attendee: I have a question for Richard. You talked about the need for independence on the supply side of the model for Hong Kong and it is pretty clear where you are coming from, and in terms of the demand side you talked about the need for regulatory security, so to speak. I wondered if you could talk a bit more about your demand projections? Over the last few years CLP has been selling a lot of its surplus capacity into China. My question is really two-fold. First, do your demand projections include China as a market? Second, ultimately I think it is fairly clear that the Hong Kong and Guangdong energy markets will be integrated, particularly on the power side. Do you have a timetable or are you broadcasting any point when that sort of phase begins and how does that affect your demand projections? Richard Lancaster: In terms of supply to the mainland, we don't factor that in when we are planning new investments or new commitments. We basically provide for Hong Kong. If we have any spare capacity and if there is a request from mainland China we can provide power to them. With our fuel situation we have a mix of nuclear, coal and natural gas. We have the nuclear off-take which is governed by the terms of our off-take contract. We have a gas supply which has constraints built into the contractual terms of our gas supply. If we need to do a little bit more, the only fuel that we have available is coal. With the switch to LNG, what LNG represents is more flexibility on the gas side. If we need more natural gas, we can bring in extra cargoes and that provides more natural gas. That means in future, gas would be able to take up that extra swing that we might need. In terms of planning for the future, once we have built the LNG receiving terminal, greater gas supply is enabled through the amount of LNG that we contract in the market. As we progress to the next decade, we see that we would like to pick up more of our future electricity demand with gas, rather than coal, and we would like to be able to use our Black Point power station more fully on gas, which would also displace coal. I think with all of that, any future demand for power supply to China that would be over and above what our normal planning would be, we hope to be able to do that with gas, rather than coal. Christine Loh: Richard, the Hong Kong scheme of control does not allow you to plan for anybody else except Hong Kong's needs. Obviously whatever quantity that you sell to China is based on your spare capacity and you have no real contract with the Chinese, you sell when they ask you to, is that right? Richard Lancaster: contract.
We do sell under a contract. Any commercial transaction has a
Christine Loh: Yes, but it is not like they say that they want to buy from you for 10 years. Richard Lancaster: We have no obligation to supply mainland China. Our obligation is to the Hong Kong government under our scheme of control and that covers supply to consumers in Hong Kong. Under an approved arrangement with the Hong Kong 30
Energy Forum Summary Report government, if there are requests from China to supply electricity we can make those available from whatever spare capacity we have, but we do not build anything in Hong Kong in order to supply mainland China. Christine Loh: Can you even predict how much you are going to sell to China from year to year, or do they literally call you up and say "I am going to need power next week", and for how many days, and you turn it on and that is it? Richard Lancaster: Sometimes it is a matter of hours that we get, but we certainly have no basis on which to plan more than a few months ahead with any confidence. Forum Attendee: Why not? Why can't you go into Guangdong and find out? It strikes me that this is a wonderful opportunity for your company to go into the mainland and be a supplier, or a challenge. I am sure the government is going to be thrilled about it. But, that would be a strategy for Hong Kong to play a major role, or trying to start to play some role, if you are supplying natural LNG and cleaning up the coal that they are using in small plants. You could go into Guangdong and make some predictions in terms of the construction of local power plants and estimate what their demand versus their supply is likely to be and make some predictions about that and then say to the Hong Kong government that there is going to be a time they are going to ask for more and we want to be in a position to supply them more and supply them cleaner energy, rather than have them go and use coal. If they can't clean up there, maybe we can clean up there for them. Richard Lancaster: What you are suggesting is what we actually do as part of the overall CLP Group. When we look at investments in China we look at those as completely separate investments. We have invested very heavily in the renewable sector, for example, in recent years, with wind farms particularly in the north of China in Shandong. We do have a number of projects that we have taken forward in mainland China but we do look at those as a separate business proposition. I think what is important for our business in Hong Kong is we have the obligations with the Hong Kong government, we have a contract with the Hong Kong government to supply Hong Kong, and we must make sure that the Hong Kong consumers are looked after first and foremost and any spare capacity that we might have we are called upon to supply to mainland China. Quite often, it might be a very short-term problem. It might be because they have equipment that has been taken down for maintenance and they can't meet all their supply so they call on us. In many respects, we are the supplier of last resort. When they have absolutely nothing else to fall back on they come along to us and say "Can you help out?" Christine Loh: We will take a few more questions. Forum Attendee: I have a question about the feasibility of buying gas from the Guangdong LNG Phase Two. You have been working on this for three years. Have you already discussed with them the possibility of doing it? I don't know how big the scale would be, but would it make sense for you to work together with the Guangdong power companies to increase your bargaining power when you go out to buy your gas? Richard Lancaster: That is a very good question. A few years ago when we first started on this a very obvious place to look is an LNG receiving terminal which is under construction right nearby. We need to look at the structure of the Guangdong terminal. There are essentially 11 companies which have banded together to build a facility in order to supply themselves with gas. Two of those companies are, CNOOC and BP, who are gas producers. The other nine are buyers of LNG. They have built a facility to meet their requirements for the next decade.
Energy Forum Summary Report When we look at the volume for Black Point it is almost equivalent to the entire first phase volume for Guangdong, so what we would represent is a very major part of the capacity. Obviously, when you go along to say "Is there any spare capacity for me and can I take a large percentage of your capacity?", the answer comes back that: "We need this for our requirements for the future, we have built this for ourselves and we need to reserve this capacity for us in the future". When you look at development since then, in terms of Phase Two, whilst some construction work is going ahead in the terminal for Phase Two, there has not been an LNG supply to go along with that. There isn't a supply of LNG for Phase Two as yet. Christine Loh: Two more questions - one at the back? Forum Attendee: I have two questions, and one is for Pat. I am not an expert in the LNG business but it seems to me that 2,000 megawatts is not necessary yet to meet the minimum economic scale for a world class or most low cost LNG terminals. If you can help me clarify that, I would appreciate it. Secondly, I have a question regarding the Hong Kong scheme of control as it stands now and, more importantly, as it might look into the future. How would the sales of power into China be treated in the scheme of control? Are they being calculated or treated as profit to the investor or are they being treated as profits generated for the ratepayer and, therefore, extra utilisation? In making a sale to China, less expenses, would that become the shareholders' or how would the formula be balanced? Maybe either Richard or Christine can clarify that please? Christine Loh: Pat, would you like to talk about the size of the terminal? Pat Roberts: For the 2,500 megawatts at Black Point, I think we will be looking at around 2.6 million tons a year of gas requirement. There are a lot of re-gasification terminals built around the world that certainly can be built to transit much higher volumes than that. Having said that, there are a lot of terminals as well which are being built for around the 2 million, 2.5 million and 3 million ton capacities as well. I would say that in this particular case the LNG terminal can be built fit for purpose for the business requirements and then it is relatively straightforward and relatively simple to build additional tank capacity, so that as the business may develop in the future and you want to go higher than the 2.6 million tons, you can do so at relatively low cost. Christine Loh: Richard, I presume you have a view, right? Why don't you build a smaller terminal? Why build such a large terminal, I think that is the question? Richard Lancaster: We need to build a terminal to meet the requirements of Black Point. If we are to run Black Point at a high level of utilisation, as Pat said, it would require about 2.6 million tons per annum of LNG. Building the storage tanks is necessary to manage your inventory but, if you need to put more LNG through that terminal, you don't need to build more tanks. If I use the analogy of this glass of water, with one glass of water I can drink a lot if I drink quickly or I can drink a little amount if I drink slowly. You don't need to build more tanks to increase the amount of LNG that you bring through the terminal. What you do need to do is to add more equipment that will warm up the LNG faster, and that is relatively inexpensive. Having built the basic infrastructure with two tanks, you can use that facility to meet quite a wide range of throughput. Basically, we need to build a facility that is matched to the size of Black Point and we need to allow for some growth in the future, which we foresee. I think your second question, Colin, was in relation to how the sales to mainland China are treated under the scheme of control. There is a very simple answer to that. The profit from those sales mostly goes to the electricity consumers. Eighty per cent of the profits from those sales to China go to the electricity consumers. That has largely been
Energy Forum Summary Report in the last few years, for example, in some of the rebates that CLP has given each year. Only 20% of those profits go back to the shareholders of CLP. Forum Attendee: Can I quickly clarify Richard's answer? That means that on top of the return you already earn on the investment, by selling to China you are making another extra 20% profit on the investment you already made on behalf of serving Hong Kong anyway? Am I correct in that clarification? It is 80/20 sharing, which is very nice, but you earn 20% extra profit. Christine Loh: Can I ask, is that a problem? Forum Attendee: I am not suggesting it is a problem. I just want to clarify the situation for the public to know. Christine Loh: I am trying to understand whether that should be forbidden. I'm just trying to understand the context of the outcome, because it is out in the public a lot. Forum Attendee: It encourages the investor to overbuild, at the ratepayers' expense. Does Hong Kong have a regulatory body, like a planning board, to make the wisdom call whether the projected demand justifies X per cent of reserve capacity to be built? Does that regulatory body have the expertise to approve that? Right now I understand that in Hong Kong the Legislative Council does that. Christine Loh: No, that is not correct. It is made by the government. Forum Attendee: Or somebody in some government department? Christine Loh: We have a member of the government (Economic Development and Labour Bureau) here. Can you clarify for us, the EDLB, the capacity issue or not? EDLB Representative: I will try. As far as I know, CLP has the sole responsibility to supply to Hong Kong's consumers. Whenever they have surplus they may try to sell to China, but their sole responsibility is to make sure that people in Hong Kong have a stable and reliable electricity supply in Hong Kong. Betty Yuen (CLP): Can I help clarify? I think there was a bit of confusion. The arrangement is CLP cannot build or invest in any generator or any infrastructure facility other than for Hong Kong. But, like any power system, you must have a reserve capacity, just like you have a spare tyre in your car. The typical reserve margin we have is around 25% to 35% and last year CLP's reserve margin was 28%, so we are well within the international normal range of reserve. You must have reserve; otherwise, if any unit goes down you run into black-out. That reserve is what we use to supply China. That is why the supply to China is what we call interruptible. In case Hong Kong has a requirement, we will interrupt China and put the supply back to Hong Kong. For that reserve, say, 28% reserve, yes, CLP has made an investment and earned a return under the scheme of control. We don't earn another 20% on top of that investment. The 20% that Richard talked about was the profit arising from China sales. What constitutes a profit arising from China sales? We sell a unit of kilowatt hours to Guangdong and we receive a price and, for discussion's sake, we get 70 cents. Then what is the profit? There are a few elements. The infrastructure fixed costs are already paid for by Hong Kong people. But, what is the profit? The profit is less the fuel costs that we have to use and also the marginal and end costs in order to generate. There is a profit element which is really the difference between the price we receive and the fuel costs and the marginal and the end, and that is 20% going to CLP. We are not talking about big dollars here. The lion's share of it goes to the Hong Kong customer, 80%. We don't earn another extra 20% on the investment.
Energy Forum Summary Report Christine Loh: Colin, I am sure if you are interested in the calculation Betty is probably able to give you all the possible numbers that you would want. Do you want a final word? Richard Lancaster: Just a final word to clarify, as there may have been some confusion in relation to the LNG terminal. The size of the LNG terminal which we have proposed is very similar to the one in Guangdong, for example, a similar volume, essentially two storage tanks, pretty much the same size as Guangdong, a jetty, a similar area of land. That is basically the bare minimum that you need to supply the volume of gas that we would look at for about a 2,500 megawatt power station such as Black Point. Christine Loh: Thank you very much for spending the morning with us.
Copies of this report can be found at: www.civic-exchange.org 34