Download - Competing on Price - Platts on Price: Making LNG as a Bunker Fuel Commercially Viable Platts 16th Annual LNG Conference –10th February, 2017 | 2 Fearnley LNG –Company Overview

IMPORTANT / DISCLAIMER: This presentation is prepared by Fearnley Securities, an Astrup Fearnley company.

For relevant definitions, methods, risks, disclosures on potential conflicts of interests etc. and disclaimers (including U.S. specific

disclaimers) please see www.fearnleysecurities.com. All research reports and investment recommendations should be reviewed in

conjunction with the information therein.

Competing on Price:Making LNG as a Bunker Fuel

Commercially Viable

Platts 16th Annual LNG Conference – 10th February, 2017

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Fearnley LNG – Company Overview

All information is given in good faith but without guarantee

350+ employees in the Astrup Fearnley Group. Fearnleys is one of the largest international ship broking

companies in the market today.

Company dates back to 1869. Fearnleys has been a leading full service ship brokerage house for

decades and has almost 150 years of shipping experience.

LNG Involvement since early 1970’s. Fearnleys contracted and chartered one of the first purpose built

LNG carriers which was built at the Moss/Rosenberg yards in Norway.

Extensive LNG Shipping Services. Fearnley LNG is active in: Vessel Contracting, Chartering, Sale &

Purchase, Ship Financing and LNG Advisory & Consulting.

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Fearnley LNG – Company Overview


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Contents


• Overview of Global LNG Prices

• Historical Gas & LNG Curves

• Indices (HH vs Oil Linked)

• Oil Products (HFO & MGO)

• Forward Curves / Forecasts

• CAPEX for LNG as a fuel

• Conversion Costs for existing vessels

• Newbuild Costs for LNG propulsion

• Alternative: Scrubbers

• Conclusion

• When and how LNG does and does not

work

• Where we can bunker LNG today

• Where could we bunker LNG in 2020?

• LNG vs Scrubber vs LSMGO

• Case Study: LNG Bunkering in Rotterdam

• Voyage Calculation – Fuel Comparison:

o LNG vs Scrubber vs LSMGO

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Overview of Global LNG Prices


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Historical Global Oil, Gas & LNG Prices


Source: EIA & Fearnley LNG

US

$ p

er

bb

l

US

$ p

er

MM

btu

0

5

10

15

20

25

0

20

40

60

80

100

120

140

Brent Weekly (LHS) HH (RHS) NBP (RHS) Asia DES LNG (RHS)

Brent Crude (LHS)

vs HH, NBP and

Asia DES LNG

(RHS)

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Historical Oil, HFO and MGO


Sources: Fearnley LNG, EIA

0

200

400

600

800

1000

1200

0

100

200

300

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Jan

-11

Apr-

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Jul-

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Oct-

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Jan

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Apr-

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Oct-

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Jan

-13

Apr-

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Jul-

13

Oct-

13

Jan

-14

Apr-

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Jul-

14

Oct-

14

Jan

-15

Apr-

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Jul-

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Jan

-16

Apr-

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Jul-

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Oct-

16

Jan

-17

Singapore HFO ($/PMT) - LHS Brent Crude ($/BBL) - LHS MGO "Approximate" ($/PMT) - RHS

HFO (LHS) and

MGO (RHS) in $

per metric tonne,

Brent (LHS) in $

per bbl

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LNG Indices: Oil Linked


• The original formula in the world of LNG pricing is based on oil linkage and, not

withstanding efforts in recent years to “break the link”, convenience dictates

that this index still has many years of life left in it

• The formula commences with the indexation (XX%) to Brent or JCC and in

recent short term tenders, this number has even fallen below 12% (from the

traditional 14.85% of previous term contracts)

P ($/MMbtu) = XX% x Brent / JCC ($/bbl) + Z

• In addition to the indexation (called the “slope”) there is also a constant value

(Z) that was traditionally added to cover shipping. This number is now often

where the trading occurs as some buyers have started to mandate the slope

itself in their short term tenders

• The convenience of dealing with the Oil Linked formula is that it provides a very

liquid market against which to hedge ones risks (for both buyers and sellers)

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LNG Indices: European Gas (NBP and TTF)


• The second pricing formula to consider involves a fixed link to a liquid European

Hub, plus a constant

• NBP (the UK’s National Balancing Point) has historically been the more liquid hub

in Europe and accordingly, it gained favour as the preeminent index for those

favouring a hub-linked pricing formula

P ($/MMbtu) = NBP / TTF ($/MMBtu) + Z

• As the hub link itself is fixed, all the negotiation takes place around the constant

and this is where the sellers need to make back their storage, reload, shipping

and opportunity costs

• Notwithstanding the head start that NBP was afforded, TTF (Title Transfer Facility)

located in the Netherlands now enjoys greater liquidity and being the pricing point

for reloads out of both GATE and Zeebrugge terminals, is the more natural

European index to consider going forward

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LNG Indices: Henry Hub


• Albeit the newest of our the three indexes examined today, Henry Hub is now one

of the most familiar formulas in the market

• It is essentially a cost plus formula based on the known costs of sourcing Natural

Gas and Producing LNG in the US (XXX% x HH), Liquefaction & Terminal CAPEX

costs (Y), plus a realistic shipping cost (Z)

P ($/MMbtu) = XXX% x HH ($/MMBtu) + Y + Z

• Usually 115% of the Henry Hub price, plus ~$3/MMbtu for Liquefaction & Terminal

CAPEX costs, plus shipping based on realistic long term ship charter rates

(assumed $0.9/MMbtu for deliveries into North West Europe in my forecasts)

• The 1.15 factor derives from the requirement to burn approximately 15% of feed

gas as fuel to perform the liquefaction process but this is not rigorous

• Liquefaction (CAPEX) costs are a generic $3/MMBtu, although these can vary too

• In my fuel comparison chart, I have added $0.3/MMbtu for the FOB European

LNG price to account for terminal and reload costs out of Rotterdam

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Forecasts: Brent & HH


Sources: Fearnley LNG, EIA, Bloomberg, NYMEX

pe

r b

bl

pe

r M

Mb

tu

$0.0

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

$7.0

$8.0

$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

$80.0

$90.0

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Brent ($/BBL) - LHS HH ($/MMbtu) - RHS

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Forecasts: Brent, HSFO, LSFO & MGO



US

$ p

er

me

tric

to

nn

e

US

$ p

er

bb

l

$0.0

$100.0

$200.0

$300.0

$400.0

$500.0

$600.0

$700.0

$800.0

$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

$80.0

$90.0

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Brent ($/BBL) - LHS HSFO ($/MT) - RHS LSFO ($/MT) - RHS MGO ($/MT) - RHS

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Forecasts: European LNG Bunkers, HSFO, LSFO & MGO



$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

$14.0

$16.0

$18.0

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Delta between LNG & MGO (NWE) HH ($/MMbtu) - RHS

NWE LNG BUNKERS DES HSFO in $/MMbtu

LSFO in $/MMbtu MGO in $/MMbtu

Comparison of forecast oil product prices

vs forecast US LNG being sold as

bunkers DES Rotterdam (to Customer)

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CAPEX for LNG as a fuel


Source: www.naturalgasworld.com

http://www.naturalgasworld.com/

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Vessel Assumptions


Source: www.Alphaliner.com, CMA CGM

• The Capital Expenses (CAPEX) and Voyage Expenses (VOYEX) are based upon

a generic 8,500 TEU Container Ship. Particulars as follows:

• Note: The above particulars are not taken from a specific design but rather are an

EXAMPLE ONLY 8,500 TEU Container Ship based on various industry sources

8,500 TEU Container Ship

Trade Rotterdam to Shanghai // Shanghai to Rotterdam

Speed 23.5 Knots

SFOC 200 tonnes per day

Engine Capacity 52,000 KW

Port Consumption 10 tonnes per day

Bunker capacity Voyage + 3 x Sea Days & 5 x Port days

Voyage Duration 30 days (20 days at Sea, 10 days Waiting / Idle)

Voyages Per Year 12

http://www.alphaliner.com/

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Conversion Costs for LNG Propulsion


Source: DNVGL, MAN Diesel, Astrup Fearnleys

• The following outlines the estimated conversion costs associated with

retrofitting DF LNG propulsion to an existing 8,500 TEU Container Ship.

Costs

2 x 4,000 cbm Type C Tanks $8 Million

Engine Parts $5 Million

Docking & Off-Hire $5 Million

Installation & Piping $10 Million

TOTAL CAPEX $28 Million

• Positives:

o Cheapest Fuel

o Compliant at source

o Satisfies all existing and

known future Environmental

restrictions (“Future Proof”)

• Negatives:

o Expensive conversion

o Uncertainty of adequate

supply

o Pricing uncertainty with a

less liquid fuel market

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Newbuild Costs for LNG Propulsion


Source: DNVGL, MAN Diesel, Astrup Fearnleys

• The following illustrates the estimated Total additional CAPEX required for a DF

LNG propulsion system ABOVE that required for a conventional 8,500 TEU

Newbuild Container Ship

Costs

2 x 4,000 cbm Type C Tanks $8 Million

Engine Parts $2 Million

Piping $3 Million


• Positives (vs Conversion):

o Reduction in cost of Parts as

sourced as part of Newbuild

package

o Labour / Installation costs

absorbed in Newbuild process

• Negatives (vs Conversion):

o Delay to market (subject to

delivery from yard)

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Alternative Options: Cost for Scrubbers


Source: Wartsila, http://www.fathommaritimeintelligence.com, Astrup Fearnleys

• As a basis of comparison, a Wet Scrubber conversion has been considered

with the approximate characteristics and costs as illustrated below.

Costs

CAPEX $3 Million

Docking $2 Million

Installation $3 Million

Consumption ~8 tonnes per day (520 – 1560 kw for 52 MW Engine)


• Positives:

o Retrofit possible / cheaper

o Continued HFO usage

(lower potential fuel cost)

o Existing Engine and bunker

tank usage

• Negatives:

o Compliance regime Require

100% reliability

o Bi-product disposal an extra

burden

o Stability considerations

o Not “future proof”

http://www.fathommaritimeintelligence.com/

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LNG vs Scrubber vs LSMGO


Source: www.worldmaritimenews.com

http://www.worldmaritimenews.com/

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Case Study: Bunkering in Rotterdam


Source: Fearnley LNG

Delivered Cost of LNG to the

Customer Vessel

• In this EXAMPLE ONLY, the

supply of LNG to North West

Europe (eg Rotterdam) is

based upon the forecast

landed price for US volumes

to be delivered into the

European terminal DES

PLUS

• The cost of the Terminal to

store & reload the product into

a Bunkering Vessel (~$0.5 /

MMbtu) as well as their “in

tank value” (+5% of NWE

DES)

PLUS

• The bunker vessel cost to

deliver the product to the

Customer Ex-ship (~$1.35 /

Mmbtu) assuming a 7,500

cbm total parcel delivered per

week (from 2020)

Route Delivery Location/ Positioning Fee from NETHERLANDS Rotterdam

Load Port NETHERLANDS Rotterdam

Discharge Port NETHERLANDS RotterdamRedelivery Location/ Ballast Bonus to NETHERLANDS Rotterdam

Vessel LMG 7,500 cbm NB

Charter Rate ($) 23000

Total Costs for Defined Route & BB (US$) 230068US$/MMBtu 1.3561

Parcel Size (m3) 7388

Parcel Size (%) 98.5 %

Position Fee ($) -Ballast Bonus ($) Round Trip

Energy Delivered (MMBtu) 169649

Total Cost Breakdown

Charter Costs 161000HFO Bunker Cost 0

MGO Bunker Cost 0

Port Costs 50000Suez Cost 0

Panama Cost 0Armed Guards 0

Cool Down Cost 0

Positioning Fee 0Ballast Bonus 0

LNG Consumption (US$) 5200Total Cost 230068

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8,500 TEU Container Ship EXAMPLE Calculation


Source: Fearnley LNG

Container Ship - LNG

Newbuild

Container Ship -

MGO

Container Ship -

Scrubber

Container Ship - LNG

Conversion

Size 8,500 TEU 8,500 TEU 8,500 TEU 8,500 TEU

Speed 23.5 23.5 23.5 23.5

Main Engine Consumption (in

tonnes per day)146.4 193.4 200.0 146.4

Scrubber Consumption (in

tonnes per day)8

Idle / Port Consumption (in

tonnes per day)10 10 10 10

Load Antwerp Rotterdam Rotterdam Rotterdam

Discharge Shanghai Shanghai Shanghai Shanghai

Distance (nm) 10664 10664 10664 10664

Sea Days 19.85 19.85 19.85 19.85

Canal / Port days 5 5 5 5

Waiting Days 5 5 5 5

Fuel Consumed - tonnes 3006 3940 4229 3006

Fuel Consumed - m3 6637 4603 4290 6637

Fuel Consumed - US$ 1911210 2154656 1383510 1911210

CAPEX (US$) 13000000 0 8000000 28000000

Per 30 Day Voyage CAPEX cost

(US$) - 5 Years213699 0 131507 460274

TOTAL VOYAGE COST - 5

Years Amortisation2124909 2154656 1515017 2371484

RANKING 2 3 1 4

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Conclusion


Source: www.gCaptain.com

http://www.worldmaritimenews.com/

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When and how LNG does and does not work


• The most telling outcome of the voyage calculation is that in a 0.5% Sulphur

Cap World, doing nothing is the least favourable option

• Fuel forecasts are an imprecise science at best but even at today’s prices,

Bunkered LNG would trade at a discount of over $1 / MMbtu to MGO in North

West Europe, and this delta is forecast to grow through the mid to late 2020s

• LNG Conversions are not an especially promising option given the sizeable

CAPEX involved in procuring the bespoke kit for the project, coupled with the

time necessary to take the vessel out of service (loss of hire can be much more

significant than our calculation suggests)

• For existing vessels, LNG Scrubbers provide a very sound option and indeed

they even outperform a Newbuild LNG DF engine in voyage cost terms (basis

our forward pricing assumptions)

• For all new tonnage ordered from today onwards, however, a Newbuild DF

LNG Propulsion offers the most cost-effective long-term solution, especially

considering all existing, planned and potential IMO requirements

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Where we can bunker LNG today


KEY

2017:

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Where could we bunker LNG in 2020?


KEY

2017:

2020+:

IMPORTANT / DISCLAIMER: This presentation is prepared by Fearnley LNG, an Astrup Fearnley company.

For relevant definitions, methods, risks, disclosures on potential conflicts of interests etc. and disclaimers (including U.S. specific

disclaimers) please see www.fearnleys.no. All research reports and investment recommendations should be reviewed in conjunction

with the information therein.