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Lng Integrated Model

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Super majors have heavily invested in extraction and liquefaction projects; LNG shipping has received too little attention. Most of the players are developing gas extraction and liquefaction plants in …

Super majors have heavily invested in extraction and liquefaction projects; LNG shipping has received too little attention. Most of the players are developing gas extraction and liquefaction plants in key producing countries and regasification facilities in key consuming countries to secure gas reserves and gas distribution, especially to the Atlantic and Pacific Basin. Complex long terms contracts are also decreasing to give space to new short terms contracts in order to improve flexibility in distribution and allow benefits from market opportunities. The LNG demand is now getting higher than supply in targeted countries with extensive capacity of development.

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  • Announced capacity for 2015 is new 19 LNG project, up to 370 mtpa (500 bcm). Prospected capacity is 222 mtpa more (up to 500 mtpa – 665 bcm). First EPC Project developed as EPC leader by SAIPEM. Project location: Algeria/Arzew Capacity: 4.6 MTPA Value: 2.9 Billion Euros Idicative man hours: 20 mln
  • Example of owned by company: Sonatrac owning Hyproc, ENI owning LNG shipping Ship construction costs are still falling (thanks to considerable economies of scale) in spite of the increase in raw materials prices. The biggest technological improvements are concentrated in shipping While both regasification and liquefaction are now suffering an unexpected cost increase, shipping remains the key driver for LNG competitiveness Most of the shipping companies are not independent, being subsidiaries of a liquefaction or regasification company
  • Import facilities are 3 times less expensive than liquefaction 278 mtpa is the liquefaction capacity 2010 (araund 370 Bcm) Announced capacity for 2015 is new 19 LNG project, up to 370 mtpa (500 bcm). Prospected capacity is 222 mtpa more (up to 500 mtpa – 665 bcm). Despite the significant investments in liquefaction, the gap between regasification and liquefaction capacity is expected to grow remarkably, so that by 2020 the ratio between the two capacities could be 2:1 . This is also due to the observed tendency of the major gas distributors to integrate their activities upstream, up to the regasification plant
  • The International Energy Agency previsions state that starting from 2010 where LNG cover around 15% of the NG demand, LNG trade will gradually cover more than the 50% of the worldwide gas demand.
  • Winners will be those who are not only able to develop the upstream gas and liquefaction capacity, but can also connect gas supplies to emerging and premium markets – markets such as the east and west coasts of North America as well as, in the longer term, China and India.
  • The consuming countries in the LNG industry can be divided following their dependency on LNG import compared with their LNG consumption. Their estimated future capacity of development through LNG capacities will also be an indicator of market orientation.
  • LONG-TERM CONTRACTS : guarantee revenues and insure against the high-risk nature of constructing capital-intensive LNG terminals. SHORT-TERM CONTRACTS : contribute more flexibility, competitiveness, and efficiency. Changes in the business environment are driving the shifts in the balance of long-term and short-term contracting practices. The LNG sector predominantly trades under long-term contracts. Long-term contracts guarantee revenues and insure against the high-risk nature of constructing capital-intensive LNG terminals. LNG short-term trading is increasing. Short-term contracts can contribute more flexibility, competitiveness, and efficiency.
  • Large extent and to improve value creation along E&P and G&P segments where it already has a strong presence i.e. Angola project: one train dedicated to USA market with upstream and liquefaction owned facilities, shipping alternative long time charter agreement versus make option and rigassification contracted, in long term, with third parties.
  • Market coverage: Vessel limitation Sales growth opportunity: Vessel limitation Resource requirements: CAPEX Profitability: Transaction costs Minimize risks: Long term VS short term, Vessel limitation Feasibility: CAPEX, complexity of gas resources negoziation Differenntiation: Vessel limitation Based on the criteria used, looking at the various scenarios as a potential long term growing strategy, scenario 3 is the one that better match with our hypothesis on the possible future LNG market and trades. The model will have to concentrate on integration including shipping and EPC activities to increase revenues in LNG business. The next slides shown the business model idea, its implementation and the economic study.
  • Transcript

    • 1. Paolo Boi – E&P ( Eni Croatia - Inagip d.o.o.) Gabriele Cano’ – Saipem Giorgio Micheli – Saipem - Andrea Leone Piselli – Eniservizi LNG MARKET DEVELOPMENT: AN INTEGRATED BUSINESS MODEL
    • 2. PROJECT WORK LNG market development : an integrated business model Project Work Overview INDUSTRY OVERVIEW Presentation of LNG value chain. Review of all the stages of the LNG integrated chain in terms of actual status and future trends. MARKET ANALYSIS Analysis of Natural Gas market. Analysis of LNG market trends and trade. Study of contract environment (Long Term vs Spot opportunity). Target market ENI POSITIONING & STRATEGY Analysis of eni positioning in terms of current integration level (domestic market) according to the future trades orientation (worldwide market) RECOMMENDED SCENARIO Strategic analysis of three alternative models to match the industry and market orientation. FINANCIAL ANALYSIS Presentation of the economic results based on the implementation of the selected model. BUSINESS IDEA To develop a business concept based on the integration, in the LNG value chain, of the shipping activity with a dedicated fleet of LNG vessels to operate arbitrating among spot markets, thus making the most from the combination of all eni core competences (E&P, EPC, G&P).
    • 3. UPSTREAM Gas Reserves Natural Gas markets LIQUEFACTION SHIPPING REGASSIFICATION DISTRIBUTION
    • 4. % Uncommitted gas = 55% ( ~100 Tcm)
    • 5. Prospective Additions to LNG Liquefaction Capacity 2010-2014 Liquefaction Capex – New Developments and Expansion Projects Contractor Market Share Based on Installed Liquefaction Capacity
    • 6.   LNG tanker capacity allocation   LNG Carrier Fleet 2005-2014   Tankers contractual situation
    • 7. Capex on LNG Facilities by Type Difference between liquefaction and regasification world capacity (Bcm)
    • 8.  
    • 9. The Market: Natural Gas & LNG Trends World energy demand increases steadily; Fossil fuels remain dominant in 2035 with gas growing. In 2008 Natural Gas accounts for 24.1% of world energy use, the highest share on record. LNG trade will cover from 15% (Y2010) of the NG demand to 50% (Y2030) of the worldwide gas demand
    • 10. The Market: Emerging Countries North/Central America LNG Demand (BCM/Y) European LNG Demand (BCM/Y) Asia Pacific LNG Demand (BCM/Y) The market presents new emerging and premium markets as the east and west coasts of North America and, in the longer term, China and India Growing worldwide LNG demand
    • 11. The Market: LNG Market Segmentation Drivers: • Dependency on LNG import (LNG consumption / total gas consumptions) • LNG planned capacity Lower dependency on LNG import Higher dependency on LNG import Extensive capacity development
      • 1
      • Diversification of supply sources
      • Domestic production may decline
      • Interests in exporting LNG as a transit countries
      • US, UK, Mexico
      • 2
      • High potential
      • Dependency will continue to increase, if supplies remain the same, but it can be expected that the LNG dependency will be met with diversification of supply sources.
      • China, India, Brazil
      Moderate capacity development
      • 3
      • Saturated market or potential not recognized
      • France, Turkey
      • 4
      • Saturated market
      • Increase in LNG capacities only to an extent to meet demand increase.
      • Japan, Korea
    • 12. The Market (how): Contract Environment Spot & short term LNG exports Spot & short term LNG imports Changes in the business environment are driving the shifts in the balance of long-term and short-term contracting practices Forecasted 13% to 20 % Market share in next 5 years EXPORTS TRENDS SHORT TERM CONTRACT: AFRICA IMPORT OPPORTUNITY SHORT TERM CONTRACT: ASIA LONG TERM CONTRACT: AMERICA Flexibility of contract portfolio to surf market demand
    • 13. The Market: Trades Where and How * Woodmac North/Central America LNG Demand (BCM/Y) European LNG Demand (BCM/Y) Asia Pacific LNG Demand (BCM/Y) Long Term import Contract Short Term import Contract Export USA China India
    • 14. The Positioning Of Eni: Gas Market and LNG Industry Presence on the LNG value chain Mainly focused on Italian and European Market Room for improvement…
      • Eni is vertically integrated along the LNG Value Chain
      • Eni has a relatively low geographic presence in the LNG Market
      Eni’s sales are mostly related to European Market
    • 15.
      • Eni’s level of vertical integration allows to run operations efficiently in the long term contract agreement.
      • Eni can concentrate its investment and development in E&P projects in the areas with great exploration and production potential and improve its liquefaction capacities in key supplying countries.
    • 16.
      • Eni could sub-contract its shipping activities to one or more third parties for LNG exportation
      • The integration along the chain is achieved by managing the suppliers of the shipping service
    • 17. The expansion of Eni into a worldwide LNG market with the ability to trade both in the long and spot markets
    • 18. Criterion / Scenarios 1 2 3 Focus on specific activities Sub-contract shipping activities Develop shipping business 1. Market coverage ++ ++ +++ 2. Sales growth opportunities +++ ++ +++ 3. Resource requirements + +++ ++ 4. Profitability +++ ++ +++ 5. Minimize risks - + ++ 6. Feasibility - +++ ++ 7. Offers differentiation ++ ++ +++ Average score + ++ +++
    • 19. G&P competence Liquefaction Shipping Regasificaction Selling Gas Reserves G&P competences R&M Competence Upstream Integrate Merchant Model Upstream E&P competence EPC Saipem competence Regasificaction Selling Third parties Natural Gas Market LPG OIL or Condensate Shipping Third parties Description
      • The Model
        • The level of integration proposed in the model is from the upstream to the shipping contracting regasification to third parties
        • The Upstream unit, the LNG plant and ships fleet are part of the initial investment and are supposed to be constructed using the Company in-house competence
      • Alternative model:
        • Market is defined up to Regasification plant or final users (in-house market);
        • Shipping to the LNG markets could be left to a third part fully controlled by eni;
        • The Opportunity:
          • The upstream can create the opportunity to develop a local Refining and Marketing advantages.
      Natural Gas markets The Integration The Opportunity Alternative for the “Domestic European” Market Local Consuption Eni Share + Third Party Equity
    • 20.
      • Upstream
        • Gas Blocks Development Wells and Facilities
      • Liquefaction:
        • 1st 5,2 MMTPA LNG Liquefaction Train and common plant facilities
        • 2nd 5,2 MMTPA LNG Liquefaction Train
      • Shipping :
        • 4 + 5 LNG 220.000 cm Ships Fleet – USA Market/ Spot Market
      • Regassification :
        • Third party Regassification terminal
      • Pro Forma Income Statement and Balance Sheet for the whole life of the LNG project with 3 different project scenarios:
        • • 1st LNG Train USA – 2nd LNG Train China
        • • 1st LNG Train USA – 2nd LNG Train India
        • • 1st LNG Train USA – 2nd LNG Train Spain
      PROJECT CONSISTENCY I.S. – B.S. D.C.F & Ratios Profitability Ratios Cash Flow Analisys Income Statement Financial Debt Sovency Ratios Balance Sheet
    • 21.
      • Analisys carried out considering the following Cash Flows:
        • Incremental
        • Operative
        • After Tax
      • The results of the economic evaluation is positive for all the scenarios and shows the following trend:
      • 1 st LNG Train USA – 2 nd LNG Train India
      • 1 st LNG Train USA – 2 nd LNG Train Spain
      1st LNG Train USA – 2nd LNG Train China
    • 22. ROI: I ncreasing trend throughout the years due to the Increase of Operating Income generated by the structure of the gas price scenario. ROA: D ecreasing trend through the years due to the Increase of Total Assets generated by the Cash in Bank. PROFITABILITY
    • 23. DEBT INDEX (D/E): D ecreasing trend due to the fact that constant cash flows generated by the project allow repaying the Debt after few years of plant operation. COVERING RATIO (EQUITY/NET FIXED ASSETS): U p and down trend due to the fact that while the Initial Equity is constant throughout the years, the Net Fixed Assets during first years after plant start up increase at a rate greater than the UOP depreciation rate and therefore the covering ratio decreases. INTEREST COVERAGE RATIO (INTEREST/EBITDA): D ecreasing trend due to the fact that the positive cash flow generation allows the reimbursement of Debt few years after plant start up. SOLVENCY
    • 24.
      • Sensitivities applied on a deterministic approach to the 3 target markets served with the 2 nd LNG Train;
      • 1 st LNG Train USA – 2 nd LNG Train China
      • 1 st LNG Train USA – 2 nd LNG Train India
      • 1 st LNG Train USA – 2 nd LNG Train Spain
      • On each combination of the three target markets, several conditions have been tested:
      • Price Of Gas & Condensates -15%
      • CAPEX +15%
      • Combination of the above
      SENSITIVITIES ON NPV SENSITIVITIES ON IRR
    • 25. Conclusions Project Work Objective: Sustainability of a business concept based on the integration, in the LNG value chain, of the shipping activity with a dedicated fleet of LNG vessels to operate arbitrating among spot markets, thus making the most from the combination of all eni core competences (E&P, EPC, G&P). The selected model is sustainable from a financial point of view as the finantial indicators are aligned with eni figures for LNG project.
    • 26. Thank you
    • 27. G&P competence Project objectives: base case evaluated Liquefaction Shipping Regasificaction Selling Gas Reserves G&P conpetences R&M Competence Upstream Integrate Merchant Model Upstream E&P competence EPC Saipem competence Regasificaction Selling Third parties Natural Gas Market LPG OIL or Condensate Shipping Third parties ENI Share Description
      • The level of integration proposed in the Base Case is from the very upstream to the transportation of relevant quantity of liquefied gas to the market, living regasification and storage service to third parties.
      • Market could be up to Regas plant (third storage regasification and distribution operators) or final users (in-house market).
      • The Upstream unit and the LNG plant are part of the initial investment and are supposed to be constructed using the Company in-house engineering and construction capabilities.
      • This case can be called “Upstream Integrate Merchant Model”.
      Natural Gas markets The Integration The Opportunity Alternative for the “Domestic European” Market Local Consuption
    • 28. W.A.C.C. CALCULATION The table below shows the project economics in terms of cumulated present value of Cash Flows for the three different target markets compared with the evolution of the WA.C.C. during the project full life;
      • 1 st LNG Train USA – 2 nd LNG Train India
      • 1 st LNG Train USA – 2 nd LNG Train Spain
      • 1st LNG Train USA – 2nd LNG Train China
      Costo dell'Equity Market risk premium 6,00% Beta Levered 0,88 Costo del Debito Company risk premium 5,26% Risk free rate 4,32% Country Risk Premium 1,75% X + Costo dell'equity 9,58% Costo del debito 4,35% Tax rate 35,0% Costo del debito post tax 2,85% 95,24% 4,76% WACC adj arrotondato 11,01 % + WACC 9,26% + Cost Of Equity Market risk premium 6,00% Beta Levered 0,88 Cost Of Debt Company risk premium 5,26% Risk free rate 4,32% Country Risk Premium 1,75% X + Cost Of Equity 9,58% Cost Of Debt 4,35% Tax rate 35,0% Cost Of Debt post tax 2,85% 95,24% 4,76% WACC adj 11,01 % + WACC 9,26% +