Competing on Price:

Making LNG as a Bunker Fuel

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

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.
 Fearnley LNG – Company Overview
 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.

All information is given in good faith but without guarantee | 2

 Fearnley LNG – Company Overview

All information is given in good faith but without guarantee | 3

 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

• LNG vs Scrubber vs LSMGO

• Case Study: LNG Bunkering in Rotterdam
• Voyage Calculation – Fuel Comparison:
o LNG vs Scrubber vs LSMGO

• Conclusion
• When and how LNG does and does not
work
• Where we can bunker LNG today
• Where could we bunker LNG in 2020?

All information is given in good faith but without guarantee | 4

 Overview of Global LNG Prices

All information is given in good faith but without guarantee | 5

 Historical Global Oil, Gas & LNG Prices

140 25
Brent Crude (LHS)
120 vs HH, NBP and
Asia DES LNG 20

100 (RHS)

US$ per MMbtu

15
80
US$ per bbl

60
10

40

5
20

0 0

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

Source: EIA & Fearnley LNG

All information is given in good faith but without guarantee | 6

 Historical Oil, HFO and MGO

800 1200
HFO (LHS) and
700 MGO (RHS) in $ 1000
per metric tonne,
600
Brent (LHS) in $
800
500 per bbl

400 600

300
400

200

200
100

0 0
Oct-11

Oct-12

Oct-13

Oct-14

Oct-15

Oct-16
Apr-11

Apr-12

Apr-13

Apr-14

Jul-14

Apr-15

Apr-16
Jul-11

Jul-12

Jul-13

Jul-15

Jul-16
Jan-15
Jan-11

Jan-12

Jan-13

Jan-14

Jan-16

Jan-17
Singapore HFO ($/PMT) - LHS Brent Crude ($/BBL) - LHS MGO "Approximate" ($/PMT) - RHS

Sources: Fearnley LNG, EIA

All information is given in good faith but without guarantee | 7

 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)

All information is given in good faith but without guarantee | 8

 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

All information is given in good faith but without guarantee | 9

 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
All information is given in good faith but without guarantee | 10
 Forecasts: Brent & HH
$90.0 $8.0

$80.0
$7.0

$70.0
$6.0

$60.0
$5.0

per MMbtu
$50.0
per bbl

$4.0

$40.0

$3.0
$30.0

$2.0
$20.0

$1.0
$10.0

$0.0 $0.0
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

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

Sources: Fearnley LNG, EIA, Bloomberg, NYMEX

All information is given in good faith but without guarantee | 11

 Forecasts: Brent, HSFO, LSFO & MGO
$90.0 $800.0

$80.0
$700.0

$70.0
$600.0

$60.0

US$ per metric tonne

$500.0

$50.0
US$ per bbl

$400.0

$40.0

$300.0
$30.0

$200.0
$20.0

$100.0
$10.0

$0.0 $0.0
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

Sources: Fearnley LNG, EIA, Bloomberg, NYMEX

All information is given in good faith but without guarantee | 12

 Forecasts: European LNG Bunkers, HSFO, LSFO & MGO
$18.0
Comparison of forecast oil product prices
$16.0 vs forecast US LNG being sold as
bunkers DES Rotterdam (to Customer)
$14.0

$12.0

$10.0

$8.0

$6.0

$4.0

$2.0

$0.0
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

Sources: Fearnley LNG, EIA, Bloomberg, NYMEX

All information is given in good faith but without guarantee | 13

 CAPEX for LNG as a fuel

Source: www.naturalgasworld.com

All information is given in good faith but without guarantee | 14

 Vessel Assumptions

• The Capital Expenses (CAPEX) and Voyage Expenses (VOYEX) are based upon
a generic 8,500 TEU Container Ship. Particulars as follows:

8,500 TEU Container Ship

Trade
Speed
SFOC
Engine Capacity
Port Consumption
Bunker capacity
Voyage Duration
Voyages Per Year
Rotterdam to Shanghai // Shanghai to Rotterdam
23.5 Knots
200 tonnes per day
52,000 KW
10 tonnes per day
Voyage + 3 x Sea Days & 5 x Port days
30 days (20 days at Sea, 10 days Waiting / Idle)
12

• 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

Source: www.Alphaliner.com, CMA CGM

All information is given in good faith but without guarantee | 15

 Conversion Costs for LNG Propulsion

• 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: • Negatives:
o Cheapest Fuel o Expensive conversion
o Compliant at source o Uncertainty of adequate
o Satisfies all existing and supply
known future Environmental o Pricing uncertainty with a
restrictions (“Future Proof”) less liquid fuel market
Source: DNVGL, MAN Diesel, Astrup Fearnleys

All information is given in good faith but without guarantee | 16

 Newbuild Costs for LNG Propulsion

• 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
TOTAL CAPEX $13 Million

• Positives (vs Conversion): • Negatives (vs Conversion):

o Reduction in cost of Parts as o Delay to market (subject to
sourced as part of Newbuild delivery from yard)
package
o Labour / Installation costs
absorbed in Newbuild process

Source: DNVGL, MAN Diesel, Astrup Fearnleys

All information is given in good faith but without guarantee | 17

 Alternative Options: Cost for Scrubbers

• 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)
TOTAL CAPEX $8 Million

• Positives: • Negatives:
o Retrofit possible / cheaper o Compliance regime Require
o Continued HFO usage 100% reliability
(lower potential fuel cost) o Bi-product disposal an extra
o Existing Engine and bunker burden
tank usage o Stability considerations
o Not “future proof”
Source: Wartsila, http://www.fathommaritimeintelligence.com, Astrup Fearnleys

All information is given in good faith but without guarantee | 18

 LNG vs Scrubber vs LSMGO

Source: www.worldmaritimenews.com

All information is given in good faith but without guarantee | 19

 Case Study: Bunkering in Rotterdam
Route Delivery Location/ Positioning Fee from
Load Port
Discharge Port
Redelivery Location/ Ballast Bonus to
NETHERLANDS Rotterdam Delivered Cost of LNG to the
NETHERLANDS Rotterdam
NETHERLANDS Rotterdam Customer Vessel
NETHERLANDS Rotterdam

Vessel LMG 7,500 cbm NB • In this EXAMPLE ONLY, the

supply of LNG to North West
Charter Rate ($) 23000 Europe (eg Rotterdam) is
Total Costs for Defined Route & BB (US$) 230068
based upon the forecast
US$/MMBtu 1.3561 landed price for US volumes
to be delivered into the
Parcel Size (m3) 7388
Parcel Size (%) 98.5 %
European terminal DES

Position Fee ($) - PLUS

Ballast Bonus ($) Round Trip
• The cost of the Terminal to
Energy Delivered (MMBtu) 169649
store & reload the product into
a Bunkering Vessel (~$0.5 /
Total Cost Breakdown
Charter Costs 161000
MMbtu) as well as their “in
HFO Bunker Cost 0 tank value” (+5% of NWE
MGO Bunker Cost 0
Port Costs 50000
DES)
Suez Cost 0
Panama Cost 0 PLUS
Armed Guards 0
Cool Down Cost 0 • The bunker vessel cost to
Positioning Fee 0
Ballast Bonus 0 deliver the product to the
LNG Consumption (US$) 5200 Customer Ex-ship (~$1.35 /
Total Cost 230068
Mmbtu) assuming a 7,500
cbm total parcel delivered per
Source: Fearnley LNG week (from 2020)

All information is given in good faith but without guarantee | 20

 8,500 TEU Container Ship EXAMPLE Calculation
Container Ship - LNG Container Ship - Container Ship - Container Ship - LNG
Newbuild MGO Scrubber 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 146.4 193.4 200.0 146.4
tonnes per day)
Scrubber Consumption (in
8
tonnes per day)
Idle / Port Consumption (in
10 10 10 10
tonnes per day)
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$) 13000000 0 8000000 28000000
Per 30 Day Voyage CAPEX cost 213699 0 131507 460274
(US$) - 5 Years
TOTAL VOYAGE COST - 5 2124909 2154656 1515017 2371484
Years Amortisation

RANKING 2 3 1 4
Source: Fearnley LNG

All information is given in good faith but without guarantee | 21

 Conclusion

Source: www.gCaptain.com

All information is given in good faith but without guarantee | 22

 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

All information is given in good faith but without guarantee | 23

 Where we can bunker LNG today

KEY
2017:

All information is given in good faith but without guarantee | 24

 Where could we bunker LNG in 2020?

KEY
2017:
2020+:

All information is given in good faith but without guarantee | 25

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.