Partnerships reshaping Asia's natural gas industry

Oil and Gas Practice
Prepared for the Asia Gas Partnership Summit organised by GAIL (India) Limited and FICCI
23–24 March 2012, New Delhi
Partnerships: Reshaping
Asia’s natural gas industry

March 2012
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Partnerships: Reshaping
Asia’s natural gas industry
Prepared for the Asia Gas Partnership Summit organised by GAIL (India) Limited and FICCI
23–24 March 2012, New Delhi

5
Partnerships: Reshaping Asia’s natural gas industry
Contents
Foreword                                      7
Acknowledgements                                  9
Executive Summary                                  11
Chapter 1: Asia’s central role in LNG         15
Chapter 2: India, the emerging gas hub             35
Chapter 3: Partnerships for sourcing, integration and sustainability              47

7
Global gas markets have evolved significantly over the last
decade. Asia has been at the forefront of this evolution,
registering a rapid growth in demand driven by economic
growth and increasing urbanisation in China, India, ASEAN
and the Middle East. Looking forward till 2030, natural gas
emerges as the preferred energy source, growing at the
fastest rate of 2.1 per cent amongst all fossil fuels. Asia
contributes to a sizable share of this growing demand for
gas.
Globally, gas reserves are abundant and means to access
them are rapidly evolving. Over the past decade, LNG has
grown to become an increasingly important constituent
of global gas markets, growing at 8 per cent per annum
over the ten year period between 2000 and 2010. While the
global financial crisis and the development of US shale gas
temporarily slowed growth, the world also witnessed an
unexpected spike in LNG demand last year, following the
Tsunami and ensuing nuclear power disaster in Japan.
Over the last few years, interregional patterns have been
volatile, driven by new and emerging sources of LNG.
Cargoes initially destined for the US market have been
diverted to Asia and Europe. Spot market sales have
increased to 20 per cent of global LNG trades in 2010,
compared to just 2 per cent a decade ago. A significant
amount of liquefaction capacity is under execution,
though it will take a few years to come on-stream. Mega
projects are under construction in Australia and Papua
New Guinea, and additional capacity is coming on-stream
in Africa. If non-FTA exports are allowed, North America
might potentially emerge as an important source of supply
of LNG. The gas price differential between North America
and Asia is already changing the dynamics of global
gas markets. The future of new planned and upcoming
LNG projects in the US and Canada will depend on the
regulatory environment and the economics of alternative
gas monetisation there.
Going forward, there seems to be more uncertainty in the
LNG market than a few years back. This is being caused
by major supply and demand shifts. The most visible factor
influencing demand growth in the near to medium term
comes from Europe, where continued economic weakness
and a possible spillover effect on the rest of the world could
reduce demand growth by a percentage point or even
more. Another factor that could have significant impact
on global LNG demand is the rise of unconventional gas
globally. Production of unconventional gas has already had
a transformational impact on the North American natural
gas market. It was quite unimaginable as recently as 4 years
back that the US and Canada would become completely
self sufficient and prices would fall to less than USD 4 per
MMBtu.
Further, trans-national pipeline projects in China, India and
Europe can loosen demand for LNG in these areas. In India,
TAPI can reduce LNG demand by 8 MTPA, and at prices
much lower than current Asian LNG prices. In China, four
large pipeline projects will significantly reduce China’s LNG
imports, even at the cost of under utilising its regasification
capacity.
In this uncertain environment, partnerships of various
forms and means are more relevant than ever. Particularly
for Asian countries, these partnerships could lead to
game-changing outcomes and ensure supply security
at reasonable prices, while for suppliers, they could be a
means to secure long-term demand and de-risk the future
of large projects. In fact, the contours of such partnerships
are already visible globally.
To discuss how global as well as Asian economies and
companies could partner with each other, GAIL (India)
Limited and the Federation of Indian Chambers of
Commerce and Industry (FICCI) requested McKinsey
& Company to conduct a detailed study of the global
gas market with an emphasis on Asia and India. As the
knowledge partner for the 7th Asia Gas Partnership
Summit, McKinsey conducted a detailed effort to develop
a perspective on the global gas market identifying the
opportunities for new partnerships to facilitate the future
growth of the industry in Asia and beyond.
We are thankful to McKinsey & Company for conducting
this extensive knowledge effort and bringing an insightful
perspective to this Summit. We hope that you will find this
document informative and useful for designing win-win
solutions and taking effective decisions in shaping the
future of Asian gas industry.
B.C. Tripathi
Chairman & Managing Director
GAIL (India) Limited
Dr. Rajiv Kumar
Secretary General
FICCI
Foreword

9
On behalf of McKinsey & Company, we would like to thank
Mr. B.C. Tripathi and Dr. Rajiv Kumar for providing us with
the opportunity to undertake this effort.
From GAIL, we would also like to thank Mr. Prabhat
Singh, Director – Marketing; Mr. S. Venkatraman,
Director – Business Development; Mr. Vivek Joshi,
Advisor – Corporate Communications; Mr. Rajeev Mathur,
ED – Marketing; Mr. R.Tewari, General Manager – Gas
Sourcing; Mr. Sanjib Datta, General Manager – Business
Development; Mr. A. Kaviraj, CEA to C & MD, Mr. S.
Basu, Sr. Manager – Marketing; Mr. Anurag Sharma,
S.O.(Marketing), Mr. Thivahar Bethune, S.O. –Marketing;
and Mr. Jignesh Vasavada, Manager – Corporate
Communications, for their time and support in sharing
information, as well as their thoughts on the report.
From FICCI, we would like to acknowledge Mr. Vivek Pandit,
Director – Energy & Defence and Aerospace, for his help
with coordination.
We are thankful to Mr. G. C Chaturvedi, Secretary; Mr.
Sudhir Bhargava, Additional Secretary; Mr. Vivek Kumar,
Joint Secretary (M); and Ms. Sushma Rath, Director (M) –
Ministry of Petroleum and Natural Gas.
This research drew extensively on McKinsey’s proprietary
global gas models and databases and on the cumulative
experience of its various international experts. The effort
would not have been possible without the dedicated efforts
of the McKinsey team consisting of Abhinav Singhal,
supported by Shobhit Aggarwal and Nirupam Anand, with
overall leadership from Mukund Sridhar, an Engagement
Manager in our Mumbai office. We would also like to
thank McKinsey’s global leadership for providing overall
direction to this knowledge effort – Mike Juden, a Senior
Expert based in our Houston office; Duncan van Bergen,
an Associate Principal based in our Singapore office;
Dieuwert Inia, a Partner based in our Amsterdam office;
Vishal Agarwal, an Engagement Manager based in our
Singapore office; Nick Harley, an Associate based in our
London office; Martin Prokosch, an Associate based in our
Oslo office; Shatetha Terdprisant, a Partner based in our
Bangkok office; Tomas Koch, a Director based in our Seoul
office; and Morten Jorgensen, a Partner based in our Oslo
office.
Finally, we would also like to acknowledge the efforts and
support of our communications team consisting of Tanya
Gulati, Vineeta Rai and Kulsum Merchant, our graphic
designer Joanne Willis, and our visual aids specialists
Nipun Gosain and J. Sathya Kumar.
Acknowledgements
Vipul Tuli
Director
McKinsey & Company
Amit Khera
Associate Principal
McKinsey & Company

11
Executive Summary
The global gas industry is going through uncertain times.
Factors like the threat of an economic slowdown, the
emergence of unconventional gas, potential cross border
pipelines and upcoming LNG capacity (in Australia,
potentially in the US and the emerging countries of Africa
and South America) increase risk for megaprojects that the
industry depends on, while those like a nuclear slowdown
and potential delays in projects could further tighten the
market. Amidst all this, Asia has emerged as the most
important, and potentially the predominant destination
for LNG imports in the future. The size of the Asian gas
markets, and in turn the global LNG market, will depend
upon emerging partnerships (supplier-buyer, supplier-
supplier and buyer-buyer). The eventual shape and
outcome of these partnerships will determine the future of
the industry.
Asia’s central role in LNG
McKinsey’s Global Energy Perspective, the product of a
two-year research effort on the global energy demand
and supply outlook for 2050, suggests that gas as a fuel
will increase in importance in the global energy basket.
LNG projections indicate a balance in global supply and
demand. However, this balance is quite uncertain due to
potential shifts in demand and supply.
As global energy demand grows, gas is expected to
grow further in importance
The overall global demand for energy is likely to continue
to grow at a compounded annual rate of 1.3 per cent
over the next 40 years. Gas as a fuel is expected to grow
significantly and at a faster rate than coal and liquids,
eventually constituting 20 per cent of the global energy
basket by 2050.
The bulk of this growth in gas demand will be led by
‘Emerging Asia’, including China, India and the rest of
South East Asia, which will account for about 35 per cent of
incremental global gas demand growth till 2020.
Global gas reserves are abundant, with the Middle East
leading the charts on the reserves to production ratio,
followed by Europe, and more reserves are being added
all the time. Therefore, availability is not a constraint to the
growth of the industry. LNG capacity, however, is a different
story.
Global LNG supply and demand is likely to be in
balance by 2020, but is subject to significant supply
and demand shifts
Judging by most projections, global LNG supply and
demand seem set to be in balance by 2020, with Asia being
the primary global buyer of LNG. While Europe is also a
gas deficit market, it is likely to meet its demand primarily
through pipeline supplies from the former Soviet Union and
North Africa, reducing its needs for LNG imports.
However, several potential shifts in demand and supply
contribute to significant uncertainty in the market. These
are discussed below.
ƒƒ LNG suppliers will try to protect the current price
setting mechanism (i.e., the linkage to crude) for a
variety of reasons. The global liquefaction market is
very concentrated (with the top 10 players holding two-
thirds of capacity) and will be disciplined about supply
additions. Buyers on the other hand, encouraged
by recent export contracts from North America, are
negotiating contracts with S-curve type terms.
ƒƒ The ripple effect of Fukushima is resulting in
the slowdown or cancellation of nuclear energy
programmes in Japan, Europe, and potentially in other
parts of Asia. The drop in nuclear energy production will
likely be supplanted by LNG – fully in Japan and partially
in the rest of the world – which would tighten the market.
ƒƒ Growth in unconventional gas supplies is another
softening factor. Several countries, including China,
India, Indonesia and South American countries, are
actively working to tap their unconventional resource
potential, driven by energy security concerns and
attractive economics. However, inadequate technical
expertise, land availability issues and execution
challenges could slow development of such projects.
ƒƒ China’s LNG demand is a significant influencing factor
as well. It is pursuing multiple options to achieve supply
security in gas, including increased unconventional
and deepwater exploration, cross border pipelines,
and LNG imports. If all these options are successful,
China’s proposed regasification capacity is likely to be
underutilised.
ƒƒ Gas prices in different regions of the world vary widely,
with the biggest difference being between the crude-
linked Asian prices and North American Henry Hub
prices, leading to an arbitrage opportunity. LNG exports

12
from North America to Asia are already viable at current
prices. This arbitrage opportunity has led to a number
of proposals to develop LNG export terminals on the
Pacific and Gulf Coasts of North America. However,
regulatory approval for exports is uncertain: so far, only
2 of 11 such proposed projects have received non-Free
Trade Agreement (FTA) permits, enabling exports to
countries in Asia with whom the US does not have an
FTA. Similarly, environmental and local community
approvals are an important factor for proposed
Canadian terminals to come on-stream.
ƒƒ There could also be additional availability of gas from
the growing spot market and from contracts between
western buyers and Middle Eastern suppliers that expire
in the 2015–2017 timeframe. If these come to the market
at the same time as new capacity coming on stream, the
supply market is likely to soften.
ƒƒ Multiple LNG facilities are under construction in
Australia, making it a likely candidate for being the
world’s biggest LNG supplier by 2018. However, three
of those plants, with a total panned capacity of 17 mtpa,
are still in the planning stage, and are susceptible to
rising costs.
As both buyers and suppliers pursue options to secure
volumes and offtake, multiple scenarios emerge
The outlook for LNG can be captured in three scenarios,
considering the various uncertainties discussed above.
In the first scenario, LNG markets remain tight, spurred
by strong economic growth, delays or cancellations of
cross-border pipelines and Australian and North American
projects, as well as slow development of unconventional
gas. In this scenario, overall volumes remain restricted. In
the second scenario, another global economic downturn,
rapid Asian resource development, shifts to alternative
fuels, larger North American exports and successful cross-
border pipeline projects could lead to a crash in the market
due to oversupply. This is a volatile scenario, where price
and supply shocks continue, and the buyers and sellers are
largely adversarial. The third scenario is a more balanced
industry, where a series of partnerships between buyers
and sellers leads to an expansion of volumes due to greater
stability and lower risk, but also at prices lower than current
Asian levels. Partnerships that could lead to such an
outcome are discussed in Chapter 3.
India, the emerging gas hub
Gas has been steadily been growing in importance in
India’s energy basket, supported by enabling regulations
from the government. Since India’s domestic supplies
are insufficient to meet demand, India will have to rely on
pipelines and LNG. While India’s gas infrastructure will
not be a constraint in market expansion, gas affordability
remains a major concern and could prevent large scale
unlocking of latent gas demand.
New regulations and push for cleaner energy is driving
demand for gas in India
In recent years, the Indian government has boosted the
growth of gas demand through enabling regulations for
new exploration and production, focusing on removing
infrastructure constraints and increasing prices.
Gas is also increasingly important as a carbon emission
abatement option for India, which is targeting voluntary
GHG intensity reduction of 20 to 25 per cent by 2020. Gas
based power is among the best options for a power-starved
economy, given its ease of implementation, short gestation
period and lower capital expenditure compared to other
options in the power sector.
Helped by both regulatory support and growth in demand,
gas is expected to be the fastest growing fuel in India’s
energy basket over the next 40 years.
India’s gas infrastructure is unlikely to be a constraint
for growth
LNG regasification capacity in India is likely to triple
between 2011 and 2017 (from 13.6 to 35 mtpa), with an
additional 15 mtpa of capacity in the planning stage.
Pipeline infrastructure is also not expected constrain
growth in gas demand. Carrying capacity is set to double
by 2017 from 330 mmscmd to 630 mmscmd, with another
240 mmscmd of additional capacity that could emerge
a year or two later. Overall, India’s trunk pipeline network
and its connectors will cover almost all demand hubs by
2017. Development of last mile pipeline infrastructure is
proceeding somewhat slower, but over 200 cities are
targeted for roll-out.
India’s demand potential can double between now
and 2017, but affordable LNG is critical to unlock latent
demand
We envisage three different gas demand scenarios by 2017.
First, a ‘base case’ where demand grows only at 6 per cent

13
per annum, constrained by high LNG prices and current
allocation policies. In the ‘upside’ case, if gas allocation
commitments can be made at USD 10 to 15 per MMBtu (at
the customer gate) and if peaking power demand can be
unlocked, demand can increase to 280 to 290 mmscmd.
There is further potential to increase demand to 330 to 340
mmscmd if supplies at USD 8 to USD 10 per MMBtu were
available, when demand from base load generation would
also kick in.
Three broad price segments exist in India’s gas market,
although the end user and geographic segments are many
more in number. First, there is liquid substitution demand,
mostly from industrial and city gas customers, whose
alternative cost is USD 14 to 18 per MMBtu at USD 90 per
bbl crude. The mid segment, comprising some industrial
and select power customers, has a switching cost of USD
10 to 14 per MMBtu. Finally, the controlled price segment,
which is the largest, comprises customers who have
preferential access to allocated domestic gas, as well as
the baseload power generation segment.
India’s current consumption of gas amounts to about
160 mmscmd, of which 110 mmscmd is met by domestic
production. Going forward, India can potentially access an
additional 70 to 100 mmscmd from alternative domestic
sources of gas by 2017, but will still need to rely on LNG
imports for the remaining demand.
While LNG demand in the rest of Asia (e.g., Thailand, Indonesia
and Singapore) is increasing, it is relatively fragmented. As
a result, India is set to become one of Asia’s most important
LNG destinations over the next 10 to 15 years.
Partnerships for sourcing, integration and
sustainability
Diverse partnerships are being established across
Asia. Many of these, if taken to their full potential,
could lead to game-changing outcomes for the
industry, including greater volumes and more stable,
affordable pricing.
Diverse partnerships are being established across
Asia
Several types of partnerships are emerging across Asia
as buyers and sellers position themselves for the future.
These include vertical integration, horizontal alliances, and
partnerships that seek to bring newer technology and skills
to Asia with a view to developing local resources. Each of
these partnerships will have a different effect on the LNG
market and price levels.
ƒƒ Traditional LNG contracts and related upstream and
infrastructure investments between buyers and sellers
are continuing.
ƒƒ Buyers are forging partnerships with countries with
emerging supply sources like Africa and Latin America.
They are also entering partnerships to secure LNG at
prices linked to Henry Hub from North America.
ƒƒ Several gas players are already entering partnerships to
integrate downstream into gas-based power, city gas
distribution and petrochemicals to create higher value
for their gas.
ƒƒ Gas-deficit countries are forming partnerships to ensure
execution of trans-national pipelines in order to reduce
dependence on LNG and lower their gas procurement
costs. These projects also assure gas producers a
stable monetisation of their resources.
ƒƒ Suppliers are also increasingly seeking partnerships
to de-risk deepwater and LNG megaprojects;
collaborative projects already outnumber standalone
developments in both LNG and deepwater.
ƒƒ Majors and large NOCs are increasingly investing in
acquisitions and partnerships in shale gas. Several
new market mechanisms are emerging. These include
trading platforms (to trade, swap and re-route cargoes),
buying groups (to aggregate regional demand, jointly
invest in upstream megaprojects and establish a
regional cooperation forum) and partnerships to
market gas.
ƒƒ Asian companies are partnering with majors and smaller
firms to access expertise for exploration, development
and production of deepwater, shale gas and CBM.
Successful partnerships here could unlock Asia’s
unconventional and deepwater resources.
Emerging partnerships could result in game-changing
outcomes
A variety of game-changing outcomes are possible for
the industry, if these partnerships are pursued to their full
potential. Some examples of this could include:

14
ƒƒ A regional pan-Asia gas grid eventually linking Central
Asia, Middle East, India, South East Asia and China.
ƒƒ Substantial downstream Asian investments in power,
CGD and petrochemicals by gas suppliers that help
realise the full value of the gas.
ƒƒ Upstream resource related mega integration
investments involving multiple liquefaction facilities,
multiple regas facilities, and a portfolio of related
long term and short term contracts to de-risk these
investments.
ƒƒ Creation of a unified Asian trading platform along with
the necessary price index, market making mechanisms
and sufficient depth, backed by buyers and sellers.
ƒƒ With partnerships to bring in new technical skills, an
unprecedented rise in unconventional and deepwater
production in Asia.
Five key questions will determine the extent and nature
of partnerships
The future of these emerging partnerships is heavily
dependent on the answers to a few key questions,
listed below.
ƒƒ At what pace will Asia be able to access technology and
develop its unconventional resources?
ƒƒ What will be the fate of cross-border pipelines? Will
countries cross geo-political barriers in the interest of
resource monetisation and energy security?
ƒƒ How much LNG will North America export? How much
LNG will Australia export, considering production
sustainability, pace of project development, and
economics?
ƒƒ To what extent will new LNG supply sources (e.g., Africa,
West Asia) emerge? Will India and China invest heavily in
making them happen?
ƒƒ What supplier-supplier, buyer-buyer, and buyer-supplier
partnerships and alliances will emerge?
  
The gas industry is prized for tremendous growth. The risk
and stability of the huge investments required, however,
depends on the outcome of several partnerships that are
being forged. These present tremendous opportunities for
all industry participants, but require them learn new skills
and ways of working.

Partnerships: Reshaping Asia’s natural gas industry 15
Chapter 1
Asia’s central role in LNG

17
Gas will grow faster than coal and liquids to 2050
1,231
1,567
1,665
1,593
2,236
3,0441,430
1,827
2,001
+1.3%
p.a.
Liquids
Coal
Natural
gas
Power
Other
2050
16,065
5,500
3,855
2030
12,888
4,770
2,489
2010
9,701
3,877
1,570
Million tonnes of oil equivalent (Mtoe)
SOURCE: McKinsey Global Energy Perspective 2050
40%
145%
91%
35%
42%
Growth
2010–2050
Final energy demand1
7
6
5 8
6
9
20
27
6
4
East Europe
& FSU3
Russia
Africa
South America North America
1
EU27 + 2
North East
Asia
India
Rest
of Asia2
China
Middle East
2010–2020, per cent
100% = ~900 billion cubic metres per annum (bcma)
1 Differs from primary demand due to exclusion of conversion losses in the power generation industry
2 Includes Southeast Asia, Australasia, Pakistan and Bangladesh
3 Former Soviet Union
~35 per cent of demand
growth till 2020 driven by
Emerging Asia
Incremental growth in gas demand
McKinsey’s Global Energy Perspective
– the result of a two year research on
the global energy demand and supply
outlook to 2050 – suggests that gas
demand will grow faster than coal and
liquids. The vast majority of the demand
growth in energy, 91 per cent, will be
fuelled by non-OECD markets, especially
China and India.

18
Global gas reserves are abundant
SOURCE: BP Statistical Review 2011
Global proven gas reserves, 2010
Trillion cubic feet (Tcf)
US273
Venezuela193
Canada61
12Argentina
103 Australia
108
Indonesia
85 Malaysia
99 China
1581 Russia
65 Kazakhstan
72 Norway
42 Netherlands
9UK
Nigeria187
UAE
Saudi Arabia
1046
894283
159
112
63
55
Algeria
Libya
Kuwait
Iraq
Iran
593365
164
WorldAsia PacificEuropeMiddle East
R/P ratio by region (years)
Qatar
213 51 India
29 Pakistan
Global gas reserves are abundant, with
the Middle East leading the charts on the
reserves-to-production ratio, followed
by Europe (especially Russia). While
this chart talks only about proven (“1P”)
reserves, vast parts of the world are
yet unexplored or are in early stages of
exploration.

19
0
100
200
300
400
500
600
Existing capacity
Under
construction
Planned (possible)
Speculative (unlikely)
North American volumes2
20202019201820172016201520142013201220112010
LNG supply and demand likely to be in balance
High case LNG demand
Economic downturn
(with effect similar to 2008 crisis)
Global LNG demand
1 Assuming 95 per cent utilisation. New projects coming on-stream deliver 25 per cent in the first year, ramping up to full production in the second year
2 Assumed North American builds by the end of 2020: Kitimat, Sabine, and one additional LNG export facility (assumed that these facilities will open
within 1 year of the last publicly announced opening date)
SOURCE: CEDIGAZ; BP; Gas Strategies; industry experts; McKinsey analysis
Speculative projects
(several without off-
take contracts)
unlikely to clear FID
gate in downturn
Global LNG supply1 and demand forecast
Million tonnes LNG per annum (mtpa)
In the 2020 timeframe, LNG supply and
demand seem set to be in balance. The
state of balance will be highly influenced
by the demand scenario. Given the
abundance of reserves, longer term LNG
project development will be determined
by the ability of new projects to secure
financial investment decisions (FIDs),
based on their ability to secure offtake.
The most speculative projects (including
North American volumes) are unlikely to
clear the FID gate in a downturn.

20
Asia will emerge as the primary LNG buyer globally
North America
Latin America
6
41
-2
136
178 149
869580
6557
15
SOURCE: McKinsey Global Gas Model (September 2011)
2010 2020 2030
1 Total indigenous supply minus total demand, region is net exporter (importer) if value is positive (negative)
2 EU27 + Norway and Switzerland
Regional gas production minus consumption1
mtpa
-60
-330
-210
-149
-223
-164
Western Europe2
8773
19
Oceania
North Africa
Russia, Eastern Europe
Middle East
35
145140
West/other Africa
Asia
74
255253
Asia is expected to emerge as the only
substantial net importer of LNG due
to the deficit between production and
consumption. While Western Europe
is also a deficit market, it has access to
gas routed via pipelines from the Former
Soviet Union and North Africa, reducing
the importance of LNG imports.

21
Multiple uncertainties could impact the LNG supply-demand balance
SOURCE: Gas Industries; Industry experts; McKinsey analysis
Uncertainty Impact on LNG supply market
Market structure 20–80 mtpa
Unconventional gas
20–40 mtpa
60–80 mtpa
Cross-border
pipelines
28–30 mtpa
LNG exports from
new sources
20 mtpa
Economic growth 20–30 mtpa
Unknown
factors
?
Nuclear slowdown 9–18 mtpa
Loosening
Loosening
?
Tightening
Tightening
Tightening Loosening
1
2
3
4
5
6
7
Change in supply/demand
Loosening
Multiple variables influence the global
LNG supply-demand equation. Supply
side variables include new sources
of gas (e.g., newer supply sources,
unconventional resources in North
America, Australia) and new means of
transportation (cross-border pipelines),
while demand side variables include
economic growth and the nuclear energy
supply slowdown.

22
Market structure will influence pricing mechanism
Description Main effects
▪ LNG is a very concentrated industry
▪ Players unlikely to add capacity rapidly without
firm market commitments
▪ Projects only sanctioned
if there is sufficient long-
term demand
Concentrated
supply market
▪ Oil indexed pricing mechanism continuing, but
uncertainties in terms following unconventional
gas boom in North America
▪ Re-introduction of S-
curve type mechanisms
into pricing
Negotiation for
long term LNG
prices
▪ All markets outside of US and UK are illiquid,
e.g., mainly based on long-term contracts
▪ Very challenging for players to raise capital for
speculative projects in illiquid markets
▪ Supply addition linked to
long-term contracts
▪ Speculative projects will
be cancelled in downturns
Illiquid LNG
growth markets
▪ Several megaprojects are technically
challenging, limiting standardisation potential
and adding pressure on timely completion
▪ Execution delays in new
projectsSupply chain
constraints
▪ For example, Qatar has over 25 per cent market
share for spot and short-term volumes
▪ Expected to continue to shift volumes between
Europe and Asia to balance prices
▪ Limiting factors on extent
of over-supply in the
Asian market
Middle East’s
role as a market
balancer
1
SOURCE: McKinsey analysis
As with most industries, market structure
will play an important role in determining
LNG price setting mechanisms. Several
factors, particularly the supplier industry
concentration and volume constraints
point to retention of traditional oil-
indexation. However, recent opening
up of suppliers from North America
and the slowdown in demand from
western markets seem to be resulting
in the re-introduction of contracts with
bounded terms.

23
LNG market structure is very concentrated globally
70
153
19535
92
115
Top 10
Others
All existing & under
construction2
310
2010
245
2000
105
1 Assuming 90 per cent utilisation
2 Includes all projects on-stream in 2011 or under construction
SOURCE: Gas Strategies; Press search; McKinsey analysis
Share of Top 10 66 63 63
X Per cent
Concentration of capacity ownership
Net equity share of capacity1 by producer, mtpa
1
LNG is a concentrated industry globally.
Ten key players control two-thirds of the
world’s liquefaction market. Industries
with this level of concentration tend
to have relatively disciplined capacity
addition.

24
8
25
20
40
21 49Middle case
9429Worst case
Japan Europe ROW
A global nuclear slowdown would add additional LNG
demand
2.5
Worst case
Middle case
0.3
8.9
14.5
8.4
0.2
18.1
1.1
Increase in LNG demand2
1 Middle case: Japan nuclear plans delayed by 5 years (e.g., 9 GW “lost” until 2020), 30 per cent of nuclear production replaced by gas fired plants(as
per current OECD gas production share)
Worst case: No new nuclear build at all at least until 2020, 100 per cent of new nuclear production will be replaced by gas fired plants
2 Assuming the following percentage of LNG in gas supply: 100 per cent for Japan, 20 per cent for Europe; 10 per cent for ROW
Nuclear power generation halted1
Gigawatt, 2020 mtpa, 2020
2
The ripple effect of Fukushima could
result in a cancellation or slowdown in
nuclear energy programmes in Japan,
Europe and potentially in other parts
of Asia. The drop in nuclear energy
production is likely to be supplanted by
LNG (fully in Japan and partially in the rest
of the world), leading to additional LNG
demand.

25
Shale gas
CBM
90
450388
Canada
US
Australia
China
Nigeria
Germany
7063
0
Indonesia
UkrainePoland Russia
40
1,500
280
UK
Venezuela
India
SOURCE: EIA report on World Shale Gas Resources 2011; Advanced Resources International; USGS; IHS;H-H Rodger;
Fox-Davis Capital; Wood MacKenzie; McKinsey analysis
Tight gas
500
860
200
2020
100 80
0
187
4042670
06
1,000
396280
80
20
100
1,000
1,275
110
011
260
130
100
020
250
Rest of World
1,100
3,250
600
Resource type
Middle East
Unconventional gas could significantly reduce
LNG demand in the longer term High Activity
Moderate Activity
Licensing & Test wells
Early Stage
Unconventional gas reserves, Tcf
3
Several countries (including China, India,
Indonesia and South American countries)
are actively initiating studies to explore
and quantify unconventional resource
potential, driven by energy security
concerns and attractive economics.
Success of these efforts could play a
major loosening role on the LNG market.
However, execution challenges and
land availability could lead to delays
in the development of unconventional
resources.

26
1 Actual utilisation initially limited to ~10bcm due to demand shortage in Western China and constraints on existing West–East domestic pipeline
2 Project currently on hold
3 Sakhalin–China pipe is confirmed and under construction
Planned or under construction
SOURCE: International Energy Agency; OGJ, Literature search; FACTS; McKinsey analysis
Sakhalin–China3
(7 mtpa, 2017 (est.))
Sino–Myanmar gas pipeline
(9 mtpa, end of 2013)
Central Asia–China
(22–29 mtpa, 2012)
Beijing
Urumqi
Harbin
Vladivostok
Khabarovsk
Tomsk
Astana
Mongolia
Kazakhstan
Uzbekistan
Russia
Nanning
Myanmar
Sakhalin
West Siberia–China2
(24 mtpa, >2015 tbc)
Uzbekistan–China gas
pipeline
(~7 mtpa, 2014 tbc)
Cross-border pipelines could diminish China’s need for
LNG imports
Secured LNG volumes
mtpa
20
29 29 28
9 9 9
8
2020 2025 20302015
2
2010
Regas capacity
mtpa
43 43 43 43
15
37 37 37
3
15 20
11
2010 25 2030
Contracted utilisation, %
72 47 92 6567
Potential NOC JV volumes1
Long-term contracts2
Potential Existing, approved and
under construction
Cross-border pipelines into China
4
(Capacity, Start date)
China is pursuing multiple options
to create energy security in gas.
These include: a) Increased domestic
unconventional and deepwater
exploration and development; b) Cross-
border pipelines; and c) LNG imports. If
all these options are successful, China’s
proposed regasification capacity is likely
to be underutilised.

27
Price differentials between markets are large and growing
0
5
10
15
20
25
US ( Henry Hub)
Europe (NBP UK)
Japan Crude Cocktail (JCC)
Asia (LNG import to Japan)
2000 20112001 2002 2003 2004 2005 2006 2007 2008 2009
1 3-month lag between JCC crude and LNG import to Japan
2010
SOURCE: Bloomberg; FACTS; ICIS; McKinsey analysis
R2=0.941
Price
USD per million metric British thermal unit (MMBtu)
5
Gas prices in different regions of the
world vary widely, and this variation has
been growing. Gas prices in Asia are set
by crude-linked LNG and are the highest
in the world. Prices in North America
are the lowest, especially following the
abundant production of unconventional
gas.

28
Exports from North America to Asia are viable
SOURCE: McKinsey analysis; Reuters
1 Capex and opex based on 30 per cent increase over brownfield costs (based on Cheniere–BG contract terms)
2 Capex and opex based on Cheniere–BG contract terms
3 Assumes JCC at USD 90/bbl, LNG contract slope of ~14 per cent and Asian transport cost of USD 1/MMBtu
0
20
40
60
80
100
120
140
0 121110987654321
JCC
USD/bbl
NA Gas price
USD/MMBtu
1413
Implied margin of USD 4 HH landed in Asia
USD/MMBtu
2.15
3.00
9.75
2.55
4.00
Total
cost
0.70
Ship-
ping
Opex
0.60
Capex
0.70
Henry
Hub
Asia
LNG3
13.00
Margin
0.70
Variance
JCC vs. HH-linked gas prices
USD/barrel (bbl), MMBtu
5
These regional price differences lead
to substantial arbitrage opportunities
across regions. Assuming that LNG from
the US is allowed to be exported to Asia,
the implied margin is in the range of USD
2.5–3 per MMBtu, making exports viable
when JCC is above USD 80 per bbl and
Henry Hub prices are below USD 6 per
MMBtu.

29
This arbitrage could potentially result in LNG supplies
coming into Asia from North America
1 Planned liquefaction capacity
2 Sabine Pass only terminal approved for exports to FTA and non-FTA countries
3 Kitimat undertaking FEED, FID expected in 2012
Proposed brownfield liquefaction
at existing regas terminal
Proposed greenfield
liquefaction terminal
Approved
(FTA license)
Applied
Not applied
Free Trade Agreement (FTA) and non-
FTA licenses, or
Canadian licenses
16.0
12.0
7.5
5.0
0.9
7.5
Facility Owner
Capacity
mtpa1
2
3
7.55
15.04
6
7
8
1
Freeport
Freeport LNG
Cameron
Sempra
Cove Point
Dominion
Lake Charles
BG
Kitimat LNG3
KM LNG
BC LNG
BC LNG Export Coop.
BC LNG
Shell Canada
Sabine Pass2
Cheniere
9.09 Jordan Cove
Jordan Cove Energy
13.511 Corpus Christi
Cheniere
7.510 Port Lavaca
Gulf Coast LNG
Export
license
2 3
5
4
6
7 8
1
9
11
10
Kitimat
signed HoA
with KOGAS
for 2 mtpa
▪ BG, Gas Natural
Fenosa, KOGAS
and GAIL to
purchase 18 mtpa
for 20 years
▪ Construction to
start in 2012, with
first deliveries in
2015–2016
SOURCE: FERC; Company announcements; industry articles; McKinsey analysis
2
41
3
5
2
41
Uncertainly around export
volumes to non-FTA countries
5
The current arbitrage in prices and
the shale boom have led to a number
of proposals to develop LNG export
terminals on the Pacific and Gulf Coasts;
however, only 2 out of 11 such projects
have received non-Free Trade Area
(FTA) export permits so far. Securing
a non-FTA permit is a key factor to
enable exports to countries in Asia with
whom the US does not have a free trade
agreement. Similarly, environmental
and local community approvals are an
important factor for proposed Canadian
terminals.

30
Spot market is also growing
SOURCE: GIIGN; ICIS HEREN; Merrill Lynch; CIBC; FACTS; McKinsey analysis
0
5
10
15
20
Jun-11 Aug-11 Oct-11 Nov-11Sep-11Jul-11May-11
Spain
Japan
India
Britain
+45%
Recent LNG spot prices
Delivered ex-ship (DES), 2 months ahead, USD/MMBtu
Spot and short-term share
increasing in Asia’s total imports
mtpa
100% =
Long-term
contracts
Spot and
short-term
contracts
2011
145
83%
17%
2010
132
86%
14%
2009
114
87%
13%
5
A price differential also exists in the
growing volumes of spot LNG, although
to a lesser extent.

31
Existing contracts will come up for renewal
53.2
4.2
Existing LT contracts
(excl. US and UK)
Production
capacity
80.0
8.3
Uncontracted, but
most likely renewed
LT US contracts
to be re-routed
14.3
LT UK contracts
potentially re-routed
Contract details and description
Contract size, mtpa
Qatar capacity allocation in
2015
mtpa
SOURCE: Gas Strategies; Industry experts; McKinsey analysis
▪ Asia: Japan (6), South Korea (6.9), Taiwan (3.0),
China (10), India (7.5)
▪ EU: Portugal/Spain (3.1), Italy (4.6),
Belgium (2.1), France (1.9), Poland (1)
▪ Others: Argentina (5), Mexico (0.7), Dubai (1.5)
▪ Japan (1.2, expiring 2013)
▪ Kuwait (1.6, expiring 2014)
▪ Spain (1.4, expiring 2013)
▪ ExxonMobil (10.4)
▪ Total (1.5)
▪ Centrica (2.4, expiring 2014, potentially renewed)
▪ Rest of Qatar volumes, currently supplied to
Japan, Taiwan, UK and India over and above
their long-term contracts
Not available Potentially available Likely to be available
Potential de-
bottlenecking
of trains could
unlock
additional 12–
15 mtpa of un-
contracted
capacity
5
Contracts between western buyers and
Middle Eastern suppliers that expire by
2015 will also need to be placed in Asian
markets to varying degrees. If these
come to the market around the same time
as new capacity coming on-stream, they
are likely to contribute to the softening of
the market.

32
SOURCE: Company announcements; Reuters; Gas Strategies; McKinsey analysis
Although higher cost, Australia will be an important source
Learning curve: Cost reduction phase EPC cost hike Future costs?
LNG Plant – Operating
LNG Plant – Under
construction
LNG Plant – Planned
Conventional
Coal Seam Gas
Map of Australian LNG projects
Historical evolution of capital cost of liquefaction projects, USD/tonne
Browse– 2018
8 mtpa
Pluto – 2012
8 mtpa
NW Shelf –
Existing
16 mtpa
Gorgon – 2016
15 mtpa
Wheatstone – 2017
9 mtpa
Prelude FLNG – 2017
4 mtpa
Bonaparte – 2018
2 mtpa
Ichthys – 2017
8 mtpa
Darwin – Existing
3 mtpa
Gladstone– 2015
8 mtpa
QC– 2015
8 mtpa
AP– 2016
10 mtpa
Arrow– 2018
7 mtpa
0
200
400
600
800
1000
1200
1400
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Start year
Cost
USD/tonne
5
Multiple LNG facilities are under
construction in Australia, making it a likely
candidate for being the world’s biggest
LNG supplier by 2018. However, three of
those plants (with approximately 17 mtpa
of capacity) are still in the planning stage
and subject to rising liquefaction and EPC
costs, which could potentially prevent
them from securing FID.

33
Industry conduct could result in different market scenarios
Potential buyer
responses
Potential supplier
responses
▪ Access Henry
Hub prices
▪ Access new LNG
sources
▪ Form buyer
groups
▪ Establish trading
platforms
▪ Cooperate to
make pipelines
happen
▪ Limit new LNG
capacity from
Australia
▪ Influence US to limit
non-FTA exports
▪ Slow development
of new LNG
sources via
technology control
Industry conduct
Scenario Description
 No downturn over next 10 years
 North American projects do not take off due
to regulatory issues
 Australian projects slow down due to rising
costs and technical challenges
 Unconventional gas growth in Asia is slow
due to technological/geological issues
 Cross-border pipelines are cancelled/slow
down due to geo-political issues
LNG
tightness1
 Economic downturn till 2015
 Export-dedicated capacity in North America
and Australia come on-stream
 Pipeline network from Myanmar and Central
Asia to India and China is commissioned
 Unconventional explodes in India and China
LNG
overhang3
Base
case2
 US government makes exceptions for non-
FTA export to Asia
 Planned projects in Australia are delayed
but completed
 Moderate momentum in China on
unconventional gas growth
 Pipelines to China are executed
The outlook for the LNG market and
consequently LNG prices can be
captured in three scenarios, depending
on demand side-variables like economic
growth and supply-side factors like
unconventional gas, North American
export volumes, Australian LNG volumes
and trans-national pipelines. Buyers
and suppliers are pursuing all available
options to secure volumes and offtake
respectively.

Chapter 2
India, the emerging gas hub

37
Regulatory changes have helped growth of the gas market in India
SOURCE: MoPNG, PNGRB, McKinsey analysis
▪ Open Acreage Licensing Policy (OALP) in lieu
of NELP – to enable bidding for any acreage
anytime, instead of for fixed blocks and at fixed
timeslots
▪ Policy for unconventional resources
▪ New Exploration Licensing Policy
(NELP I-VIII)
▪ Deregulation of LNG terminals
▪ 100 per cent FDI in upstream
▪ Removal of customs duty on LNG
UpstreamA
▪ Pipeline tariff fixation methodology for the
national gas grid
▪ Uniform postal tariff/uniform grid tariff to avoid
cascading effect
▪ Open access gas carriage
– Third party carriage allowed on pipelines
with mandated 25 per cent extra capacity
– Pipeline laying made competitive
–‘Infrastructure’ status for pipelines
MidstreamB
▪ Tax rationalisation/introduction of GST
▪ Declared Goods Status for natural gas
▪ Peaking power regulation to enable time of
day tariffs
▪ Evaluating national gas highways to promote
gas
▪ Arm’s length transactions between mid-
stream and downstream companies
▪ NELP gas allocation as per Gas Utilisation
policy
▪ Open access and private participation in
power generation and distribution
▪ Nutrient based subsidy, import parity pricing
and higher price allowance for fertiliser sector
▪ ‘Infrastructure’ status for city gas networks
Downstream
sectors
C
▪ Price pooling▪ Administered pricing mechanism (APM)
▪ Production sharing contracts (PSCs)
▪ Market price gas (MPG)
PricingD
Recent regulations
Potential regulations under discussion/
consideration
Government support in the form of
enabling regulation for new exploration
and production, increasing prices, and
infrastructure approvals, has helped the
growth of the gas industry in India.

38
Energy consumption in India to grow by 3 per cent
with natural gas growing the fastest at 4.5 per cent
SOURCE: McKinsey Global Energy Perspective 2050
149
339
527
221
271
312
182
19
3.0% p.a.
2050
1,592
370
113
2030
1,123
328
53
2010
488
175
88
57
+4.5%
+4.3%
+2.8%
+3.2%
+1.9%
Other
Petroleum products
Coal
Power
Gas
1 Differs from primary demand due to exclusion of the conversion losses in the power generation industry
CAGR
2010–2050
Final energy demand by fuel type1
Mtoe
Gas is expected to be the fastest growing
fuel in India’s energy basket over a 40
year horizon.

39
Driving gas consumption is among the most easily
implementable carbon abatement options for India
1 CO2e: Carbon dioxide equivalent
Abatement potential, 2020
Billion tons CO2e1 per year
0.4
0.4
0.3
0.2
0.1
Increased
services share
Productivity
increase
Clean power
Energy
efficiency
Agriculture/
forestry
Supercritical
coal plants
Policy and
technology exists
Renewable
power
High cost of power
generation
Gas based
power
Short gestation
period, low capex
T&D loss
reduction
Difficult to
implement across
large base
Nuclear
power
Supply, pilferage
and liability issues
Easy
Difficult
Clean power is a significant part of India’s
committed GHG intensity reduction
Gas-based power is easier to implement than
other measures in power sector
Abatement
measure
Ease of
implementation Rationale
India has announced a voluntary GHG
intensity reduction of 20–25 per cent
by 2020. This has lent significance to
gas based power generation as an
abatement option, given its ease of
implementation, short gestation period
and lower capex compared to other
options in power sector.

40
Pipeline and terminal infrastructure not expected to be a constraint
SOURCE: MoPNG, Planning Commission, McKinsey analysis
633
334
160
876
243
335
220
65
50
2011 2017E
LNG terminal capacity
mtpa
21
17
34
50
35
15
78
6
13.612.8
20111 2017E2
▪ Limited trunk pipeline bottlenecks; current regional bottlenecks being resolved
▪ Pipeline capacity adequate for 2017; regional constraints if latent demand realised
▪ LNG terminal capacity adequate; constrained if base power demand unlocks
Trunk pipeline capacity
mmscmd
Maximum potential upside in demand LNG demand in high case
LNG demand in potential case
Upside in gas demand Potentially delayed capacity LNG demand in medium case Planned LNG terminal capacity
Gas consumption Certain pipeline capacity Certain LNG terminal capacityLNG demand low case
1 Dahej 10, Hazira 3.6
2 Assumes Dahej 15, Hazira 10, Dahbol and Kochi at 5 each as ‘certain’; assumes 5 each in Ennore, Mundra and East Coast as ‘planned’ capacity
Pipeline capacity is almost set to
double by 2017 from 330 mmscmd
to 630 mmscmd, with 240 mmscmd
of capacity that is likely to be slightly
delayed. LNG regasification capacity is
likely triple between 2011 and 2017, with
an additional 15 mmscmd of capacity in
the planning stage (5 mmscmd each in
Ennore, Mundra and the East Coast).

41
India’s pipeline and terminal infrastructure (current as well as under
development) will cover almost all demand hubs
Delhi
Mumbai
2014+
2014+
Mundra
Dabhol Phase 1/21
Jamnagar
Hazira
Dahej
Chandigarh
2012
2017
2016+
2016+
2012
2013
2014+
Kolkata
Chennai
Bangalore
East Coast
Ennore
Kochi
Hyderabad
1 Dabhol Ph 1 is without break-water; Dabhol Ph 2 is with break-water
2 EOI: Expression of interest
SOURCE: PNGRB; Expert interviews; Literature searches; McKinsey analysis
x Expected completion
Planned
Under construction
Existing
LNG terminals
Early execution
Under construction
Under bidding/EOI2
Existing
DVPL–GREP upgrade
Pipelines
India’s trunk pipeline infrastructure will
be sufficient to reach most of its major
demand pockets.

42
SOURCE: Indianpetro; DGH; Company annual reports; Expert interviews; McKinsey analysis
220
163
Potential
330–340
Additional
demand at USD
8–10/MMBtu at
customer gate1
45–55
Upside case
280–290
Addition if gas is
committed at
USD 10–15/
MMBtu at
customer gate
(some volume is
also dependent
on peaking power
regulations)
60–70
Base case
Demand at
“as-is”
policies
and prices
2011
consumption
Gas demand and supply, 2017
mmscmd
India’s demand for gas could amount to 340 mmscmd in 2017
6%
10%
13%
ESTIMATE
1 At current coal and fertiliser pricing. Will change depending on power and fertiliser policy reforms
We envisage three different gas demand
scenarios by 2017. First, a ‘base case’
where demand grows only at 6 per cent
per annum, constrained by current
allocation policies and high LNG prices.
In the upside case, if gas allocation
commitments can be made at USD 10
to 15 per MMBtu (at the customer gate)
and if peaking power demand can be
unleashed, demand would increase to
280 to 290 mmscmd. There is further
potential to increase demand to 330 to
340 mmscmd if supplies at USD 8 to USD
10 were available, when demand from
baseload generation would also kick in.

43
40200
8.08.18.2
10.8
12.0
240
13.3
14.1
15.0
15.916.3
17.2
18.7
22.3
340320300280260220200180160
13.0
1401201008060
SOURCE: Planning commission; MoPNG; Infraline; DGH; McKinsey analysis
Three broad price segments exist ESTIMATE for
USD 90/BBL CASE
1 Assumes that all non-allocated demand could switch to gas at ability to pay
2 Switching costs have been calculated against the current (alternative) fuel that is being used by the respective players
3 At current coal and fertiliser pricing. Will change depending on power and fertiliser policy reforms
Fertiliser
(Naphtha based)
IGD (Fuel) Power
(Peaking) Power CCGT Fertiliser
(gas based)CGD
Power
(Naphtha
switching)
Refining
(Naphtha
conversion)
IGD
(Captive
power)
Power
(CCHP)
Petrochem
Fertiliser
(FO based) Refining (FO
conversion)
Steel
Customer’s ability to pay1 (red line denotes switching cost2 based on allocation policies/competing fuels)
USD per MMBtu at customer gate
Demand
mmscmd
Segment 1:
~60 mmscmd,
can afford gas at
USD 14+/MMBtu
Segment 2: ~60–70
mmscmd, can afford
gas between USD
10–14/MMBtu Segment 3: ~150–
160 mmscmd, can
afford gas between
USD 6–10/MMBtu3
Three broad price segments exist in
India’s gas market, although the end
user and geographic segments are
many more in number. First, there is
liquid substitution demand, mostly from
industrial and city gas customers, whose
alternative cost is USD 14 to 18 per
mmbtu at USD 90 per bbl crude. The mid
segment, comprising some industrial and
select power customers, has a switching
cost of USD 10 to 14 per mmbtu. Finally,
the controlled price segment, which is the
largest, comprises customers who have
preferential access to allocated domestic
gas, as well as the baseload power
generation segment.

44
Current domestic gas supply is insufficient, necessitating imports
27
21
163
115
51
TotalSpot LNGCon-
tracted
LNG
DomesticOther JV
3
RIL KG
42
PMT
12
OIL
7
ONGC
Gas supply from various sources, 2011
mmscmd
SOURCE: DGH; MoPNG; McKinsey analysis
Domestic sources
India’s current supply of gas amounts to
160 mmscmd, of which 110 mmscmd is
met by domestic production. This implies
a clear volume shortfall in the market.

45
Additional sources of gas are coming up, but LNG imports will still be
necessary to meet demand
Potential supply 2017
mmscmd
Potential landed price
USD/MMBtuSource
Domestic conventional
and deepwater
60–100 7–9
Shale gas 0–21 6–9
TAPI 30 10–15
LNG – spot + contracted 15–20 16–18
CBM/Marginal fields 10–30 7–9
LNG – HH linked 10–15 11–13
Total 125–200
1 India’s shale policy to be finalised only by 2013; unlikely that large-scale shale gas production would occur by 2017
India can access an additional 70–100
mmscmd from alternative domestic
sources of gas by 2017, but will still
need to rely on LNG for the balance 35
mmscmd.

46
India can become one of Asia’s most important LNG markets
SOURCE: Gas Industries; GIIGNL; Datamonitor; MoPNG; McKinsey analysis
High case: 75% capacity utilisation
Low case: 50% capacity utilisation
LNG imports
mtpa
1 Rest of Asia includes Thailand, Malaysia, Singapore, Vietnam, Indonesia, Philippines, Bangladesh and Pakistan
4027110
+14% p.a.
202520152010
Rest of Asia1
86837671
+1% p.a.
202520152010
Japan
34333233
+0.1% p.a.
202520152010
South Korea
17151311
+3% p.a.
202520152010
Taiwan
179
+13% p.a.
2025
5325
8
2010
37
25 12 35
15
18
20
India
564533
9
20
+13% p.a.
2025152010
China
While LNG demand in the Rest of Asia
(e.g., Thailand, Indonesia, Vietnam) is
increasing, it is relatively fragmented.
As a result, India is set to become one of
Asia’s most important LNG destinations
over the next 10 to 15 years.

Chapter 3
Partnerships for sourcing, integration and
sustainability

49
Diverse partnerships are being established across Asia
Vertical
integration
Horizontal
integration
Typeofpartnership
Bringing
technical
skills into Asia
Traditional LNG
sourcing
Henry Hub LNG
sourcing
Downstream
integration
Cross border
pipelines
Joint project
development
Shale acreage
consolidation
Buying groups
Trading platforms
Shale gas/CBM
Deepwater
OFSE–developer
New LNG supply
sources
A
B
F
C
D
E
G
Tightening effect No change/Unclear Loosening effect
Impact on Asian LNG market
Diverse forms of partnerships are
emerging across Asia as buyers and
sellers position themselves for the future.
These include vertical integration – both
forward and backward – as well as
horizontal alliances, and partnerships
that seek to bring newer technology and
skills to Asia with a view to developing
local resources. Each of these
partnerships will have a different effect on
the LNG market and price levels.

50
2
3
3
4
4
5
7
7
10
10
13
15
16
19
21
24
37
77
Colombia
Brazil
Mozambique
Canada
Angola
PNG
US
Libya
Equatorial Guinea
Peru
Norway
UAE
Yemen
Brunei
Russia
Oman
Egypt
Trinidad
Algeria
Australia
Nigeria
Malaysia
Indonesia
Qatar
2010 2020
2
4
5
5
16
7
7
5
32
10
22
9
4
3
8
6
37
20
26
146
49
25
51
90
Partnerships could help tap new LNG sources in Africa and
Latin America and access HH prices from North America
Current and future liquefaction capacity by country, mtpa
Existing
Under construction
Planned
Speculative
SOURCE: Gas strategies; Press clippings; Industry experts
A
New LNG
sources from
Africa, Latin
America and
North America
To tap LNG, buyers could potentially
forge partnerships with countries in
emerging regions like Africa and Latin
America; they could also strike deals
to secure LNG at HH prices from North
America.

51
Partnerships for downstream integration
SOURCE: Press search; McKinsey analysis
ILLUSTRATIVE
▪ Petronas and BASF cooperating on USD 1.67 billion worth
of petrochemical projects in Malaysia
Petro-chemical
products
3
City gas
distribution
2
Gas based
power
generation
1
B
Examples of opportunities
▪ GAIL has JVs in India for CGD, like Mahanagar Gas with BG
for Mumbai, and Indraprastha Gas with BPCL for Delhi
▪ Presence in Egypt through stakes in Fayum Gas and Natgas,
stake in China Gas Holding to pursue CNG opportunities
▪ ONGC - IL&FS - Government of Tripura partnership for
setting up a 726.6 MW CCGT power project in Tripura
▪ CNOOC - China Southern Power Grid partnership to build five
gas-based power plants in Guangdong, Fujian, Hainan and
Zhejiang provinces with installed capacity 2210 MW
▪ Sinopec has tied up with BP and SK Group to jointly build a
USD 1.1 billion petrochemical complex in China
▪ Downstream petchem projects open for equity participation
in India (e.g., GAIL’s future projects)
▪ Potential partnerships in India available (e.g. Ratnagiri
Phase 2 power generation plant)
▪ Over 200 new urban CGD opportunities
potentially available in India
▪ USD 50 bn+
investments
planned in
downstream
infrastructure
in India
▪ What
partnerships
can be formed
to tap this
opportunity?
Several gas players (especially in
emerging markets) have partnered with
players from developed markets to
venture into downstream sectors like
gas-based power, city gas distribution
utilities and petrochemicals.

52
Partnerships that help realise cross-border pipelines
will affect LNG demand
Cross border gas pipe
planned or under construction
▪ Multiple
pipelines into
China
▪ TAPI pipeline
being
negotiated
into India
Sakhalin–China3
(7 mtpa, 2017 (est.))
Central Asia–China1
(22–29 mtpa, 2012
onwards)
West Siberia–China2
(24 mtpa, >2015 tbc)
Sino–Myanmar
gas pipeline
(9 mtpa, end of
2013)
Uzbekistan–China
gas pipeline
(~7 mtpa, 2014 est.)
TAPI–India
(~7 mtpa, 2017 est.)
Kazakhstan
Astana
Gedaim
Horgos
Xinjiang
Sakhalin
Vladivostok
Uzbekistan
Nanning
Burma
Turkmenistan
Dauletabad
Afghanistan
Pakistan
India
Fazilka
Arakan
Urengoy
Kyaukphyu
1 Actual capacity utilisation initially limited to ~10 bcm due to demand shortage in Western China and constraints on existing West–East domestic pipeline
2 Project currently on hold
3 Sakhalin–China pipe is confirmed and under construction
SOURCE: International Energy Agency; OGJ, literature search; FACTS
Russia
China
Mongolia
C
Trans-national pipelines in Asia
(Capacity, Start date)
Gas-deficit countries could form
partnerships to ensure speedy execution
of trans-national pipelines in order
to reduce dependence on LNG and
lower their gas procurement costs.
On the other side of the spectrum, gas
producers are assured of a stable way to
monetise their resources.

53
Joint project development partnerships are
increasingly the norm in LNG and deepwater
21
11
9
100
48
Total
Deepwater
Enhanced
recovery
10
LNG
Heavy oil
Conventional 47
63
91
90
89
63
142 -67%
435
1,064
+22%875
238 -28%
333
344
+27%270
Standalone
In-cooperation
SOURCE: IHS Herold Projects Database (January 2010); press search
-58%443
1,049
Number of
collaborative
projects
Avg. project reserves
MMBOE
Projects by type
Per cent of total
D
LNG and deepwater exploration and
development projects are two examples
of segments where partnerships
outweigh standalone development. This
is driven by the need for niche expertise
as well as the need to de-risk projects,
given their highly capital intensive nature.

54
Both buyers and sellers can consolidate via partnerships
SOURCE: Press research; Platts; Reuters
E
Description
Trading
platforms
Trading desks to enable:
▪ Spot trading and re-routing of
cargoes
▪ Swapping of cargoes with other
buyers to optimise for shipping
▪ Swapping LNG for gas (e.g.,
between East Coast and West
Coast of India)
Buying
groups
▪ Potential to aggregate regional
demand
▪ Joint investments in upstream
megaprojects
▪ Regional forum for cooperation
Marketing and trading partnerships
F
Upstream partnerships
Shell – East Resources Appalachia
Chevron – Atlas Energy Marcellus
ExxonMobil –
XTO Energy, Petrohawk
Marcellus,
Fayetteville
CNOOC – Chesapeake Eagle Ford
Total – Chesapeake Utica, Barnett
Sinopec – Devon 5 different
regions
Recent investments Region
GAIL – Carrizo Eagle Ford Marketing
partnerships
Opportunities for suppliers to enter
markets for trading and gas
marketing
As majors and large NOCs are
increasingly investing in acquisitions and
partnerships in shale gas, buyers and
sellers can consolidate through multiple
means, such as trading platforms, buying
groups and marketing partnerships.

55
Partnerships to develop Asian resourcesG
▪ RIL–BP partnership for India offshore
▪ PTT–Total partnership for Indonesia
▪ Pertamina partnerships with Chevron, ExxonMobil and
Statoil
▪ Petronas–Total partnership in Malaysia
Deepwater
▪ Subsea
development
▪ Deepwater drilling
▪ Reservoir
management
▪ RIL partnerships with Pioneer, Carizzo and Chevron
▪ GAIL partnership with Carizzo
▪ PetroChina–Shell partnership for Fushui Yongchuan,
Sichuan
▪ Sinopec–BP partnership for Guizhou and Jiangsu
▪ Sinochem–Hess global partnership
▪ Petrochina–Total partnership for Inner Mongolia
▪ Mitsubishi–Encana partnership
Shale gas
▪ Hydro fracking
▪ Lean drilling
▪ Well productivity
management
▪ BP and Exxon in Indonesia
▪ Chevron, Far-East and many others in China
Coal Bed
Methane
▪ Lean drilling
▪ Well productivity
management
Area of
partnership Description Select examples
Asian countries are increasingly forging
partnerships to access niche expertise
in exploration, development and
production across deepwater, shale gas
and CBM. Successful partnerships here
could unlock Asia’s unconventional and
deepwater resources.

56
Could the emerging partnerships lead to game changing outcomes?
Henry Hub LNG
sourcing
LNG from new
supply sources
Cross-border
pipelines
Buying groups
Shale gas/CBM
Deepwater
Trading platforms
Vertical
integration
Horizontal
alliances
Bringing new
technical
skills to Asia
Partnerships Potential eventual outcomes
Asian gas grid, eventually linking Central Asia, Middle
East, India, South East Asia and China?
▪ Emergence of Africa and LatAm as major supply sources?
▪ Change in structure of the concentrated LNG supply industry?
New price setting mechanism for LNG in Asia?
▪ Greater volume and price coordination between
the largest Asian LNG buyers?
▪ Regional forum for cooperation?
Material volumes from deepwater and a flourishing Asian
deepwater industry?
▪ Asian gas price index de-linked from crude?
▪ Asian gas trading hub to enable financial and physical
liquidity?
Unprecedented scale of unconventional production in
China, Australia, Indonesia and India?
Joint project
development
Cross-equity holdings in liquefaction and regas in
order to de-risk megaprojects?
Traditional LNG Greater stability and certainty for megaproject volumes?
Downstream
integration
Increased downstream investments from upstream
companies in order to derive full value from gas
A wide range of partnerships can be
forged (supplier-supplier, buyer-buyer
and supplier-buyer), leading to several
potentially game-changing outcomes for
sourcing, integration and sustainability of
the Asian gas industry.

57
Five questions will determine the future of the industry and influence the
nature of partnerships
1
At what pace will Asia be able to access technology and develop its
unconventional resources?
2
What will be the fate of cross-border pipelines? Will countries cross
geo-political barriers in the interest of resource monetisation and
energy security?
3
How much LNG will North America export? How much LNG will
Australia export, considering production sustainability, pace of project
development, and economics?
5
What supplier-supplier, buyer-buyer, and buyer-supplier partnerships
and alliances will emerge?
4
To what extent will new LNG supply sources (e.g., Africa, West Asia)
emerge? Will India and China invest heavily in making them happen?
Answers to the five key questions will
have a profound impact on the evolution
of industry structure, conduct of players,
industry performance and pricing
behavior.

Partnerships reshaping Asia's natural gas industry

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