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ENERGY OUTLOOK OF THAILAND Piyasvasti Amranand Kasikorn Asset Management

ENERGY OUTLOOK OF THAILAND Piyasvasti Amranand Kasikorn Asset Management. Thai-Japanese Association Dusit Thani Hotel, Bangkok 30 August 2005. HIGH WORLD PRICE OF OIL HAS SEVERE IMPACT ON THAI ECONOMY WHETHER RETAIL PRICES ARE ADJUSTED OR NOT.

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ENERGY OUTLOOK OF THAILAND Piyasvasti Amranand Kasikorn Asset Management

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  1. ENERGY OUTLOOK OF THAILANDPiyasvasti AmranandKasikorn Asset Management Thai-Japanese Association Dusit Thani Hotel, Bangkok 30 August 2005

  2. HIGH WORLD PRICE OF OIL HAS SEVERE IMPACT ON THAI ECONOMY WHETHER RETAIL PRICES ARE ADJUSTED OR NOT The proportion of net commercial energy import (including use as raw materials) rose from 53.7% in 2000 to 59.4% in 2004

  3. SHORTAGE OF INFRASTRUCTURESERVICES IS DEVELOPING The reserve margin of the power system has fallen rapidly during the past two years as power demand has increased continuously. Natural gas pipeline has also reached full capacity. This has resulted in significant rise in fuel oil use in power generation

  4. SHORTAGE OF WATER IN THE EASTERN REGION ALSO RESULTS FROM INSUFFICIENT INVESTMENT Factories in Rayong

  5. THE CONSEQUENCES ARE ECONOMIC SLOW DOWN AND RE-EMERGENCE OF CURRENT ACCOUNT DEFICIT

  6. WHAT SHOULD WE DO? • Promote energy efficiency and allow energy prices to reflect their true economic costs • Encourage diversification of energy supplies and oil substitution in certain sectors • Promote the use of appropriate types of renewable energy • Prepare for new energy technology for the long term • Ensure sufficient investment in energy supplies in an efficient and cost effective manner to satisfy growing demand • Ensure efficient management of the energy sector: competition, deregulation and privatization • Ensure appropriate and sustainable financing of energy investment: long term savings from domestic sources

  7. THE WORLD STILL HAS PLENTY OF OIL BUT IT IS NOT BEING DEVELOPED FAST ENOUGH • World proved crude oil reserve (P1) is estimated to be around 1,051-1,266 billion barrels • If undiscovered oil and recoverable reserves from existing sources due to improvement in technology are included, total Ultimate Recoverable Resources should be around 2,628 billion barrels • 60 % of world oil reserve is located in 5 countries in the Middle East • Proportion of crude oil production by OPEC Middle Eastern countries is expected to increase from 29% in 2004 to 43% in 2030

  8. WORLD OIL DEMAND HAS BEEN INCREASING RAPIDLY PARTICULARLY USA AND CHINA • World oil consumption rose by 2.89 mbd in 2004 or3.6% • China’s oil demand rose by15.4% in 2004 accounting for30% of increase in world consumption • The rise in demand is due to rapid world economic growth • Although demand growth in 2005 has slowed down, it still increases by 1.58 mbd or 1.9%

  9. FALLING OPEC’S SPARE CAPACITY CAUSES OIL PRICE TO CONTINUOUSLY ESCALATE Any short term supply disruption could cause “price spike”

  10. SPECULATION ONLY PLAYS A SECONDARY ROLE IN OIL PRICE RISE • “Non-Commercial” consist of financial institutions, banks, insurance companies, mutual funds, private funds, pension funds and hedge funds • During the period March-October 2004, crude oil price rose from $37 per barrel to $55, but net long position of Non-Commercial traders significantly declined

  11. SPARE REFINING CAPACITY HAS ALSO SIGNIFICANTLY DECLINED AND NOT MUCH NEW CAPACITY IS EXPECTED IN NEXT 2 YEARS

  12. ESTIMATES OF OIL PRODUCTION PEAK VARIES FROM 2006 TO 2037 • 70% of current crude oil production is from fields which are at least 30 years old • 20% of current crude oil production comes from 14 major sources with average age of over 50 years • Oil production from many important fields have passed their peaks • New discoveries have declined and new discoveries during the past 20 years amount to less than half the level of consumption • Crude oil reserve estimates are exaggerated due to political reasons Source: Peaking of World Oil Production: Impacts, Mitigation &Risk Management โดย R.L. Hirsch et al and EIA

  13. DEVELOPMENT OF NEW SUPPLIES COULD TAKE MANY YEARS • New technologies have increased drilling success rate from 25% during 1971-76 to 40% at present • New sources of oil production include Deep Sea (Africa, Brazil, Gulf of Mexico), Russia, and Caspian region • There is also enormous potential in the Middle East: Saudi Arabia, Kuwait, UAE, Iraq, Iran. The main problem is lack of investment: very little investment and exploration activities over the past 10 years and reluctance to allow foreign investment

  14. REAL PRICE OF OIL IS STILL LOWER THAN LEVEL DURING 1979-85 • Price of Brent during period 1979-85 adjusted for inflation would be equivalent to oil price of $45-76 per barrel today. Thus one may not see any serious conservation effort until oil price reaches $70. • High oil price should eventually cause economic slow down thereby lowering oil consumption as well as encourage energy efficiency and oil substitution. The process could take many years

  15. THERE ARE STILL OTHER SOURCES OF PETROLEUM • Extra heavy crude, oil shale,tar sands, bitumen: estimated reserves of 7 trillion barrels with expected oil production of 3.8 mbd in 2010 and 10.1 mbd in 2030 (IEA) • LNG, Gas to Liquid – GTL (production to rise from 0.4 mbd in 2010 to 2.4 mbd in 2030) Source: BP

  16. COAL STILL HAS FUTURE DESPITE GLOBAL WARMING Source: BP Clean coal technology eg. Integrated Gasification Combined Cycle (IGCC), “Zero-Emission”(FutureGen)

  17. COST REFLECTIVE ENERGY PRICE IS THE BEST WAY OF CONSERVING ENERGY Diesel consumption during July-August 2005 fell by 5.7% from the same period of previous year

  18. DIESEL PRICE INCREASE SHOULD HAVE ONE TIME IMPACT ON CPI OVER 2-3 MONTH PERIOD AFTER PRICE ADJUSTMENT 1990 2005 • Oil price adjustment of 33.87% in September 1990 caused CPI during Q4 of 1990 to rise above normal level by 1.8% • Oil price adjustment during March-July 2005 is expected to increase CPI by 3% above normal level over 6 month period

  19. ALTHOUGH THE GOVERNMENT HAS CEASED SUBSIDISATION OF GASOLINE AND DIESEL PRICES, IT HAS RESORTED TO INTERVENTION THROUGH GOVERNMENT OWNED OIL COMPANIES

  20. COAL IS STILL THE MOST IMPORTANT SOURCE OF FUEL FOR POWER GENERATION IN THE WORLFD (THAILAND: 12-15%) Hydro อื่นๆ Others 1.6% 17.5% 1.6% Coal 38.1% Natural Gas 17.1% Nuclear Oil 17.2% 8.5%

  21. DEPENDENCE OF NATURAL GAS IN POWER GENERATION IN THAILAND IS VERY HIGH

  22. A LARGE PORTION OF ENERGY SOURCES FOR NEW CAPACITY IS UNSPECIFIED However, 70% of new capacity during the period 2005-2015 is expected to be natural gas fired and 20% from projects in neighboring countries. New sources of gas supply include LNG from 2011

  23. NUCLEAR IS AN OPTION WHICH SHOULD BE SERIOUSLY EXPLORED Use of Nuclear Energy Source: BP

  24. PROMOTE APPROPRIATE TYPE OF RENEWABLE ENERGY • Abolish RPS to separate renewable energy from IPP • Promote renewable energy through SPP and VSPP regulations, possibly with support from Energy Conservation Fund • Expected new capacity: 400 MW over next 5 years

  25. POWER DEMAND CONTINUES TO EXPAND AT 6-8% PER ANNUM:2004 GROWTH AT 7.75% AND GROWTH IN FIRST 7 MONTH OF 2005 AT 6.9% Source: EPPO

  26. POWER DEMAND IS RELATED TO GDP BUT RELATIONSHIP IS COMPLEX Electric energy demand and peak demand grew at 1.2x and 0.99x to GDP growth respectively during the last 10 years. Lower elasticity of peak demand is due to TOU pricing and DSM

  27. PEAK DEMAND IN 2011 SHOULD BE AROUND 30,000-32,000 MW Peak Demand (MW)

  28. DESPITE ECONOMIC SLOW DOWN RESERVE MARGIN OF THE POWER SYSTEM WILL DROP BELOW 15% BY 2006 • Reserve margin is falling faster than expected in PDP of February 2003 and will be below 15% in 2006 despite economic slow down as Peak Cut of 500 MW is unlikely to be achieved • Delay in new capacity in 2006-07 (BLCP, Gulf) could jeopardize power system reliability

  29. ENERGY SECTOR INVESTMENT OF 574 BILLION BAHT DURING 2005-8 Apart from these there are also investments in oil & gas exploration and production, gas separation plants, and refinery expansion as excess capacity will disappear within 2 years

  30. NEW POWER GENERATION CAPACITY OF 13,230 MW REQUIRED FOR 2011-15 • Existing IPPs include BLCP,Gulf, Union, Nam Theun 2, SPPs • EGAT’s power plants consist of Krabi, Lamthakong, Songkla and expansions of North Bkk, South Bkk, Bangpakong • New capacity includes RPS and projects outside Thailand • Lower demand growth than MEG could reduce capacity requirement in 2011 by up to 2,000 MW Source: EGAT PDP 2004

  31. PRIVATE SECTOR INVESTMENT: BEST WAY TO MEET FUTURE DEMAND GROWTH • Given that the government has no policy to promote consumer choice in the near future, competitive bidding for new generation capacity is the best way of meeting future demand growth in an efficient manner. • In order to have Commercial Operation Date by 2011, IPP solicitation should be issued in early 2006. PPAs should be signed in 2007-H2. • Clear and fair terms and conditions for next IPP solicitation are crucial for success of competitive bidding: role of EGAT (bidding in competition with IPPs and/or capacity set aside for EGAT etc.) and other state enterprises or subsidiaries, form of power purchase agreement, period and capacity to be solicited, type of fuel, Renewable Energy Portfolio Standard (RPS) • Allocation of 50% of new capacity to EGAT is simplistic with no clear rationale, and will affect competition in IPP bidding • IPP solicitation with long term power purchase agreement under single buyer model does not need an independent regulator. Existing framework with EPPO as the regulator is sufficient

  32. EGAT PRIVATIZATION: A SIMPLISTIC CONVERSION OF PUBLIC MONOPOLY INTO PRIVATE MONOPOLY • Enhanced Single Buyer (ESB) Structure of power supply industry with no unbundling between generation and transmission and allocation of 50% of new capacity to EGAT : competition on an unequal footing for new generation capacity and difficult to introduce other forms of competition at a later stage. • No independent regulatory body established under Act of Parliament. Only an interim regulator established with no power to regulate private companies. Regulating EGAT after privatization will be difficult. • No clear guidelines and regulations on base tariff, tariff adjustment mechanism (Ft), and cross subsidy yet. Credibility of regulator and implementation of Ft (no government intervention???). Valuation crucially depends on tariff. • Relationship with subsidiaries (EGCOMP, RATCH)

  33. CURRENT ACCOUNT DEFICIT WILL FALL IN H2-2005 BUT COULD RE-EMERGE IF INVESTMENT IN MEGA-PROJECTS PICK UP Household savings have been falling over the past 15 years. The level of savings must be raised to maintain current account balance

  34. INCREASES IN LONG TERM SAVING NOT ONLY PROVIDE LONG TERM FUNDS FOR MEGA-PROJECTS, IT WILL ALSO PROVIDE NEW FUNDS FOR EQUITY AND BOND MARKETS • Recent examples: 401 k-driven bull market in America during the 1990s, the dramatic bull market in Australia as a result of the compulsory super annuation system introduced in 1992, and Korea’s installment fund since 2004.

  35. ขอขอบพระคุณ www.kasikornasset.com โทร. 0-2276-2233 บริษัทจัดการลงทุน เพื่ออนาคตของคุณ

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