How Thailand’s new Erawan & Bongkot gas price affects energy cost

Thailand’s Department of Mineral Fuels (DMF) announced at end last year (Dec 2018) that state-owned PTT Exploration & Production (PTTEP) won bidding for both concessions – Erawan and Bongkot – beating bids made by Chevron. PTTEP will remain the operator of Bongkot field, and replace Chevron for Erawan. The current Bongkot license will expire in 2023, and the Erawan license will expire in 2022.

PTTEP’s ambition to win the competition is reflected through its low gas price constant value (Pc) of $3.57/mmbtu (116 baht/mmbtu) proposed for both concessions. It is very interesting to have a look at how this new gas price will affect Thailand’s overall natural gas price in the supply chain.

First, let’s have a look at the price formula for the 2018 bidding round. Basically, the Current Gas Price (Pr) or gas sale price of any given period is determined by Constant Value of Gas Price (Pc) and the Multiplier (M) which reflects the crude oil price. The rest of the terms in the price formula will serve as adjustment for Producer Price Index (PPI), exchange rate (I), Producer Price Index for Oil Field Machinery (OM), Dubai crude oil price (DB).

For Erawan & Bongkot bidding, bidders were to propose gas price constant value (Pc) which will be used to determine gas sale price (Pr) for the entire concession period. As mentioned, PTTEP won the bidding offering gas price constant value (Pc) of $3.57/mmbtu (116 baht/mmbtu). Is this Pc=$3.57/mmbtu considered low? How low? And how will gas from Erawan & Bongkot fields affect the nation’s overall natural gas supply chain? Next, let’s have a brief look at Thailand’s natural gas supply chain.

The supply

Domestic gas has been the largest source of natural gas for Thailand in which Erawan and Bongkot are the two largest fields supplying more than half of the total domestic gas. It should be noted that the proportion of domestic, Myanmar, LNG supplies varies. The supply from domestic gas and Myanmar imports trends downwards due to depletion, which makes the country depends on LNG imports to meet the demand. Price-wise, domestic gas is the cheapest, Myanmar more expensive, LNG the most expensive.

The distribution

PTT plays a major role operating (if not controlling) the distribution of Thai natural gas. Note that the Third Party Access (TPA) is there in the policy but so far there is not yet a case implemented. An important term in Thai natural gas supply chain is “Pool 2” which is the blended gas from all sources, hence the price. As the prices for Myanmar and LNG imports are much higher than domestic gas, the Pool 2 price is driven by the proportion of imported gas. Pool 2 price is marked up by pipeline tariffs for distribution to the end consumption.

The consumption

Majority of the natural gas is used to generate electricity. Also, natural gas is the major fuel type for overall electricity generation. Thailand’s power sector depends heavily on natural gas. That is, if natural gas price goes up, the electricity cost goes up, and vice versa.

Now putting the pieces together, we can see that if going forward Thailand is short of domestic gas which is cheap and needs to depends on imports, mainly LNG, which are more expensive, the cost of energy of many sectors especially electricity will rise. DMF and government might as well hope that the Erawan & Bongkot bidding provide more affordable gas to be blended with more expensive imports, and thus help lower electricity cost that would otherwise rise more in the future.

The future relies on many factors e.g. amount of gas that can be extracted domestically, the price of the contracted LNG, energy conservation, new electricity generation capacity from other fuel types, and also global oil price.

In order to get some granularity of how much new Erawan & Bongkot price might affect the overall supply chain, let’s simulate retrospectively by introducing new Erawan & Bongkot price to the historical market environments (approximately past 5 years).

The past 5 years includes the time where oil price was high (above $100/bbl) and down low (less than $40/bbl). During this time, blended domestic gas price and Myanmar gas price fluctuated accordingly. LNG fluctuated as a blended result of spot price and contracted price. The proportion also fluctuated. During this period, Erawan & Bongkot gas accounted between 41-52% of total gas supply, Myanmar gas 8-22%, and LNG 0-14%.

Given these market situations, the new Erawan & Bongkot gas price would have made domestic gas price 18-25% lower, Pool 2 gas price 8-16% lower, or 7-15% lower if included pipeline mark-up costs.

Is this good enough?

According to Thailand’s Power Development Plan (PDP) and Gas Plan 2015, Thailand will still need natural gas to fuel its economy and keep the lights on. At the same time, domestic gas reserves will decline and force the country to depend on imported LNG. The proportion of imported LNG is expected to increase more than the price offset from Erawan & Bongkot fields. Thus, the cost of energy (also electricity) will likely increase. Note that a new PDP (and presumably a new Gas Plan) is on its way but this fundamental will likely be the same.

The pursuit for affordable energy still goes on. In fact, it never ends.