EGAT: Capitalising on Thailand’s gas market liberalisation

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EGAT: Capitalising on Thailand’s gas market liberalisation

What does it take for Thailand to successfully complete its Gas Plan? What are the challenges that must be addressed? Can the country really become Southeast Asia’s LNG hub?

The Electricity Generating Authority of Thailand’s (EGAT) venture into LNG is highly anticipated although industry experts from the region acknowledge that it won’t be a smooth ride. The country’s current power development plan (PDP 2018-2037) projects power production from coal (12%), non-fossil fuels (35%), and natural gas (53%). The PDP is part of the Thailand Integrated Energy Blueprint, the national energy master plan, along with the Energy Efficiency Plan, Alternative Energy Development Plan, Oil Plan, and Gas Plan.

Focused on procuring LNG, developing related infrastructure, and supporting the LNG business liberalisation, the Gas Plan formed a core part of Episode 2 of Enlit Asia’s EGAT Series, with -esteemed speakers: Ranee Kositvanich, Deputy Governor (Fuel) at EGAT, Mangesh Patankar, Director for Gas and LNG Consulting at Wood Mackenzie, Paul Greening, Partner at Akin Grump Strauss Hauer & Feld LLP, Craig Henderson, Managing Consultant for Strategy and Transaction Services for Southeast Asia at Advisian, and Khairul Faizi Mohamad, Head of LNG Marketing for Southeast Asia, South Asia, and the Middle East at Petronas LNG Ltd.

The overarching plan

Presently, natural gas provides up to 70% of Thailand’s energy mix. Under the Gas Plan, EGAT will start to import LNG for its power plants by next year, as the major gas contract from Myanmar is set to expire in 2030 and LNG will be required to fill the deficit, replacing the piped gas from Myanmar, says Kositvanich. This plan is part of Thailand’s gas market liberalisation and seeks to ultimately push Thailand to become Southeast Asia’s LNG hub.

LNG market liberalisation will take place in three structured phases. The initial, successfully completed stage, was the testing of third party access to existing infrastructure whereby EGAT imported two LNG cargoes from PETRONAS, with the second arriving in April 2020. The second phase, currently ongoing, will have a divided structure in two pricing methods, the pool price and the market price, primarily due to the existing role of domestic gas in the Gulf of Thailand. By the third and final phase, EGAT is looking at a single price structure, specifically the market price, as there will be much more LNG proportion on the supply.

Moreover, the country expects to significantly increase its LNG demand from 6 MTPA (million tons per annum) to 26 MTPA by 2037. This domestic demand growth, Kositvanich believes, can support Thailand’s goal to be the region’s LNG hub combined with the opportunity to create new demand from countries like Cambodia, Laos, Myanmar, and Vietnam.

Exciting times for LNG

Faizi believes the Southeast Asian market will be “the next exciting place for LNG.” The region, for one, will have up to 37 million tons in demand, and Thailand is projected to be a 26-million-ton market very soon. This confidence is shared by Patankar, who observes a resilience in LNG demand despite 2020 being a roller coaster year for spot LNG prices. We’ve seen historic lows and numbers going above long term LNG prices due to the pandemic’s impact on the industry. Nonetheless, Wood Mackenzie forecasts positive LNG demand growth for this year, specifically at around 370 million tons, a 3% increase from last year. By 2030, Patankar shares, the demand will increase to around 560 million tons, with Southeast Asia responsible for a quarter of this growth and for more than 10% of the global demand.

The hope for LNG’s growth sees some roadblocks though, given the lack of, if not the absence of, FIDs (final investment decisions) on liquefaction projects happening this year due to the pandemic and the drop of oil prices over the past few years. FIDs, Patankar emphasises, are crucial to the LNG supply; hence, without these, we only have to rely on Qatar to meet the LNG demand. Should Qatar move to complete its 32 MTPA expansion, and this is a real possibility, Patankar believes we can have a balance until 2027 or 2028, welcome news for buyers like EGAT looking to lock in LNG in the short term.

Dealing with the challenges

Nonetheless, there are challenges that need to be overcome with regard to Thailand’s gas market liberalisation. Greening shares his thoughts from a legal perspective and highlights the concept of regulatory intervention as the main challenge. “There are efforts toward privatisation with PTT and EGAT and the move to open up competition for LNG imports, but something still needs to be done,” he says. The regulations still provide PTT with a dominant position as importer and trader, and the Thai government continues to regulate the price of gas, thereby restricting access to gas pipelines and transport of domestic and imported gas.

Several things that the national government can therefore focus on include having a proper market design around TPA and a strategic approach for unbundling infrastructure, separating out regulated gas transportation from commercial activities, establishing concepts like capacity allocation mechanisms, and creating a simple and as clear as possible tariff structure, Greening enumerates.

Another important concern that the global LNG market faces is the lack of consistent access to information. Transparency and the availability of data, Henderson emphasises, are crucial in giving confidence to market players. Greening likewise notes that information sharing will help prevent discrimination among shippers, encourage competition, and ensure efficient market operations.

LNG and renewables

With the energy transition across Southeast Asia gathering momentum despite the pandemic, the impact of renewable energy (RE) on LNG market development could not be ignored. Patankar suggests that renewables cannot really be considered a threat to LNG and believes that the combination of storage and RE is yet to realise its full potential. Faizi agrees, proposing that a new partnership in matching power demand could potentially be LNG plus RE, gas’s role as a flexible power source provides it significant advantages over coal.

While we wait for the full development of the renewables-plus-storage combination, which according to Patankar might not happen until 2030, LNG will get more demand and will stay as an essential source of baseload power especially for those who don’t use coal. Come 2030 or beyond, tables might turn and we’ll see a more competitive RE-storage combination and a reduced LNG demand.

Contracting terms

EGAT is looking “to go to the spot market first and not commit to long-term contractors as we are still a new shipper,” Kositvanich reveals. In line with the Gas Plan, the government has also made changes in LNG contracts, including a relaxed destination clause and lesser long-term contracts. Reduced contract durations will be a welcome change for the gas market liberalisation effort in the country, since financiers and project developers are looking at factors like market uncertainty when trying to achieve a financial close. Arrangements, however, will still follow tender processing, given that EGAT is state-owned.

Meanwhile, in the context of COVID-19, terms and conditions for LNG contracts have to include the issue of force majeure. It is important for buyers to know how to deal with disruptive events such as the pandemic as such inevitably affect market demand, as what we are currently witnessing. Hence, Greening expects buyers to be more keen on risk allocation, even trying to “push the risk up further the supply chain into the sellers.”

The LNG market may not be a completely familiar market for EGAT, yet the region’s energy sector, as well as the industry leaders, are confident that the utility’s ambition can be realised as long as concerns are properly addressed and opportunities are appropriately leveraged.

To listen to the full recording of this webinar, just click here.

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