LNG MARKETS PERSPECTIVE

January 2012

THE GENESIS OF LNG BUNKERS

A New Age of Ship Propulsion LNG Bunkers have been around for a few years, but confined to a niche in the Baltic and North Sea, particularly Norway. Is LNG about to establish its presence as a major maritime fuel? We believe the answer is yes, driven by the dual impacts of emerging legislation on exhaust gas emissions from ships and high oil prices. The move to gas in ships will be as important as was the move from coal to oil, bringing a time of significant change throughout the maritime sector and beyond.

LNG Markets Perspective is a periodic paper looking at key issues and events. Developments in the LNG market are discussed in more depth in our LNG Brief and quarterly LNG Markets Updates

CONVERGING FORCES FOR CHANGE

Major changes are occurring that will force a rethink of the way ships are fuelled. Two significant influences, increasingly stringent emission legislation and the price of fuel oil, have focussed attention on LNG as a cost effective and complete solution for bunker fuel. Over the last ten years the price of oil has moved from around $20/bbl to reach $120/bbl in mid 2011. In Singapore, the worlds largest bunkering port, the price of fuel oil has increased by 45 % in the last two years. This has had a major impact on shipping economics, with fuel now representing 50% or more of vessel operating costs. This has come during a period when shipping has benefitted from increased global trade and has grown at levels well above GDP, especially in Asia, but shipping is amongst the fastest growing emitters of greenhouse gases. In 2007 Northern Europe introduced Emission Control Areas (ECAs) restricting the emission of Nitrous Oxides, Sulphur Oxides, Particulate Matter and other greenhouse gases, such as Carbon Dioxide. The allowable amount of sulphur in fuel in an ECA is currently 1.0% and is to be lowered to 0.1% in January 2015. This year the whole of the North American coastline becomes an ECA and several other major markets are expected to follow. Existing bunker fuel grades cannot be used and switching from fuel oil to a low sulphur diesel fuel could increase a ship owners fuel cost by about 50%. In the US, LNG is currently about half the cost of fuel oil and, although this differential is lower in other parts of the world, LNG is available in most countries for less than the cost of fuel oil and considerably less than diesel. The economic solution will be to switch to LNG, creating a large new global market. There are few LNG fuelled vessels in service, but a full range of approved designs from barges to ultra large container vessels are offered. Major marine engine manufacturers all offer duel fuel or LNG fuelled engines. LNG fuelled vessels could cost up to 20% more than an equivalent oil fuelled vessel, but this premium could be offset by lower operating costs. Global availability of LNG has improved significantly over the last few years, while the missing element in the supply chain is the LNG bunker barge. The technology needed to provide a safe and efficient LNG bunker service exists today. By adopting LNG, shipowners should benefit from lower fuel and operating costs versus possible alternatives, whilst complying fully with all current and planned maritime emissions legislation. The Genesis of LNG Bunkers Page 1

TRI-ZEN International 30 Cecil Street Prudential Tower 15-00 Singapore 049712 Main: +65 6734 5550 www.tri-zen.com James Ashworth james.ashworth@trizen.com

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THE GLOBAL BUNKER MARKET
The global maritime bunker industry is estimated to be between 300-375 million tonnes and be worth around US$250 billion. On an energy equivalent basis, this is the same as 220275 million tonnes of LNG, as big as todays total global LNG production. The largest bunker suppliers are listed adjacent. The current bunker market is characterised by high volumes and low margins. Frequent quality issues are a challenge, especially with heavier residual bunker grades. Conventional bunkers derive from refined crude oil and fall into four broad categories. Residual fuels or Heavy Fuel Oil (HFO) include High Sulphur Fuel Oil (HSFO) <3.5% S and Low Sulphur Fuel Oil (LSFO) <1% S. A range of viscosities is available and heavier grades require heating prior to use. Distillate fuels include Marine Gas Oil (MGO) and Marine Diesel Oil (MDO). MDO can also be blended with residual elements. Distillate fuels do not require pre-heating. Liquid Natural Gas (LNG) is natural gas (~ 95% methane), chilled to around -162C, at which point it contracts by a factor of 600:1 to form a liquid. This makes it space efficient to transport or store. LNG is regasified before burning in engines or boilers.

THE LNG MARKET

Gas has been the big story in energy over the past decade. With new unconventional gas discoveries being regularly announced and already 250 years of estimated supply, gas as a primary fuel is projected to continue growing. The fastest growing area has been LNG. Global liquefaction capacity has expanded rapidly from 167 million tonnes in 2005 to 280 million tonnes today. The diagram below shows the broad span of LNG infrastructure planned and in place, which is growing rapidly and would be well positioned to support the introduction of LNG bunkers. LNG Infrastructure 2011

However no new liquefaction capacity came on stream in 2011, while potential demand is projected to continue to grow well ahead of supply capability. Even in the most optimistic scenario for planned new production capacity, the future LNG supply balance will remain very tight. Insufficient new liquefaction capacity is coming on stream over the next several years. Based on what is under construction plus projects recently sanctioned, liquefaction capacity would reach only 340 million tonnes by 2018, whilst potential demand is expected to rise to more than 450 million tonnes, and that is without factoring in LNG bunker demand . Adoption of LNG in the maritime sector will drive the need for significant further LNG liquefaction capacity.

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WHY CONSIDER LNG BUNKERS?
The drivers are Emissions Compliance where watershed events are occurring and LNGs sustained Price Advantage vs other fuels

EMISSIONS COMPLIANCE
It is perhaps surprising that, given all the warnings, there remain those in the maritime community that appear to be sleepwalking their way into future emissions compliance problems in the dream that somehow, business as usual will prevail. It will not. Maritime emissions controls stem from the United Nations Framework Convention on Climate Change (UNFCCC) Kyoto Protocol in 1997, most recently updated at the COP17 meeting in Durban. Since Kyoto, we have seen the development and adoption of a range of national, trans-national and international legislation that is converging under the International Maritime Organisation (IMO) MARPOL Annex VI regulations. Since 2006, 136 countries, representing 98% of the world's shipping tonnage, are party to the Convention. The list of pollutants is long, but prime suspects are CO2, SOx, NOx and PM. Why is this important?

CARBON DIOXIDE (CO2)

CO2 is associated with global warming. CO2 abatement is possible only by burning less fuel or by burning different fuel. A range of energy efficiency measures have been introduced for shipping, including the Energy Efficiency Design Index (EEDI) for vessel design and the Ship Energy Efficiency Management Plan (SEEMP) for operations. The use of LNG as a fuel has the greatest impact, reducing CO2 emissions by around 29% when compared with oil.

SULPHUR OXIDES (SOX)

SOx combine with water to form acid rain. Under Annex VI, North European nations were granted a Sulphur Emissions Control Area (SECA) in 2005 with the North Sea and English Channel following in 2007. This limited ships from burning fuels with a sulphur level greater than 1.5%. In 2010, the SECAs were re-designated Emission Control Areas (ECAs), sulphur maximum dropped to 0.5% and new limits on NOx and PM introduced. Concurrently, in 2011 a global fuel sulphur cap of 3.5% replaced the previous limit of 4.5%. This was not an arduous requirement for shipping or the bunker supply industry as 3.5% sulphur fuel was widely available.

Marine fuels sulphur limits under MARPOL Annex VI

NITROGEN OXIDES (NOX)

NOx also combine with water to form damaging corrosive acids. This can damage the lungs and has been associated with asthma and heart disease. NOx is a major contributor to smog formation. NOx is reduced through the use of Selective Catalytic Reduction (SCR) technology, described previously. ECA NOx regulation in MARPOL Annex VI was applied retroactively by Tiers, based on functions of the age of build of the vessel and the engine speed. Tier I was for vessels built from 2000-2010, Tier II from 2011 and Tier III from 2016.

ECA NOx limits by engine power and date of build

PARTICULATE MATTER (PM)

PM is smoke or soot emanating from the ships exhaust. It is partially burned hydrocarbon material that includes condensed aromatic forms. These molecules include free radicals that can cause respiratory ailments and cancer. On ships, in addition to being a health hazard, PM causes stubborn oily acidic deposits causing corrosion to metal. Smaller particles (between 2m and 10m) can be caught by the wind and transported over great distances. Some deposit on and discolour glaciers and ice sheets and this has been associated with the promotion of accelerated ice melt.

SHIPPING WATERSHEDS
There are three watershed events due before the end of the decade, which will profoundly affect shipping operations. The first is in June 2012, when a new Environmental Control Area (ECA) will be declared 200nm around the North America coastline and the Hawaiian Islands. New ECAs are also under consideration, including Australia and New Zealand, Japan and South Korea, Pearl River in China and Dubai.

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The second watershed in 2015 will be the introduction of a new sulphur maximum of 0.1% inside ECAs. This will put marine diesel fuels into the same category as premium land transport fuels and will come with a significant price hike over HFO and current marine diesel variants. The third and arguably most far reaching watershed is due in 2020, when all marine fuels are set to come with sulphur maxima of 0.5%. The cost to refiners of producing compliant low sulphur residual HFO will be prohibitive and this will push shippers to the only available alternatives. These are discussed below in LNG Price Advantage. Emissions abatement is achieved through a complex mix of engine and vessel design and vessel routing and operation, but most importantly, the choice of fuel. The advantages of LNG in this area are given below. Emissions performance by fuel type
MARPOL Annex VI ECAs from mid 2012

Compared with HFO, per unit of energy, natural gas reduces NOx emissions by around 80%, SOx by virtually 100%, CO2 by around 29% and PM by 90%. This means that LNG fuelled vessels meet all current and currently planned emissions criteria.

LNG PRICE ADVANTAGE

With new conventional and unconventional (e.g. shale gas and coal bed methane) gas discoveries being announced both onshore and offshore on a regular basis and with already 250 years of estimated supply identified, LNG is projected to maintain its considerable price advantage and to grow in importance as a transportation fuel of choice.
LNG versus fuel oil & gasoil - NW Europe US$/MMBtu
25 20 15 10 5 0 25 20 15 10 5 0

LNG versus fuel oil/gasoil - Korea US$/MMBtu

Oct-09

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1% fuel oil NW

Gasoil

LNG

180 cst Fuel Oil

Gasoil

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Aug-11

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LNG

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There are regional energy price differences, as illustrated in the charts for NW Europe and Korea above. But the price advantage of LNG over HFO and especially over diesel remains consistent. Diesel is the market to watch here, as it is the only qualifying alternative to LNG to achieve sulphur levels post 2020. LNGs price advantage ranging from US$7-15/MMBtu shown above, is a significant attraction for ship operators facing pressure on earnings, or charterers seeking competitive rates. This translates into significant anticipated annualised cost savings of US$12-20 million for large container vessels and US$6-12 million for VLCCs.

WHAT ARE THE BARRIERS?

Cost, Capacity and Convenience

COST
Significant investment has been made in LNG infrastructure and this is continuing globally. Financing for LNG projects has been traditionally secured against long term supply contracts, typically Take or Pay, with gas distributors or power generators, however the amount of LNG traded on short term contracts has been increasing and now accounts for about 20% of supply globally. The market for LNG bunkers will be less predictable and thus more challenging as a basis for investment security. While the means exist for larger players to establish facilities and initiate a market, it could prove difficult for smaller players to secure financing until the LNG bunker market becomes established and understood. What is certain is that shipowners will not create a market by specifying LNG fuel for ocean going vessels without the assurance that there will be a global LNG bunker network in place to refuel them. Notwithstanding the challenge of investment, the drivers for LNG bunker adoption are strong. Options and solutions are available and these are discussed further in this publication. Assuming there is a market for LNG bunkers and infrastructure is in place, what further challenges and opportunities are there? For Bunker Service Providers Providing an LNG bunker service comes at a cost. The set up will vary from port to port and, whilst it might be necessary in certain circumstances to go for a large, sophisticated barges that could cost as much as US$100 million, there will be cases where smaller barges of 5,000, or 10,000 cu m capacity might be all that is needed.

LNG Bunkers Storage and Distribution Infrastructure Analysis

At the high end, costing possible supply options shows that were the construction of a new large 3 million tonne per annum LNG storage terminal with latest technology, needed it could require a capital investment of up to US$1.5 billion. Again at the high end, 3 3 to service the equivalent 7.3 million m annual LNG volume, ship-to-ship bunkering via two large 25,000 m bunker barges might be assumed, costing up to US$100 million each. In this case amortising this investment over 15 years and assuming a 10% per annum finance cost would require around US$2.3/MMBtu for the storage terminal and US$0.3/MMBtu for the bunker barges. Thus the amortised supply cost for a large new terminal and sophisticated large barges could be up to US$2.6/MMBtu. However these costs could be less as significant LNG storage is already in place globally and where it is not there is the option to use floating LNG storage. The use of floating storage (LNG carriers) removes the high cost of a shore terminal. This drops the storage cost to around US$0.19/MMBtu for a berthed carrier and about US$0.12/MMBtu for an anchored carrier. With these modest into-ship charges, LNG would be competitive with HFO and have a significant cost advantage over diesel. This is sensitive to throughput and in practice the costs might be spread over time and in line with market growth. Infrastructure options are considered in some detail later. For Shipowners While LNG provides a cost-effective solution for ship owners to meet environmental demands, there are technical challenges to be met. LNG handling and containment systems are made from specialised alloys to withstand the very low temperatures and to very high standards of reliability as components such as tanks, pipes and machinery that are in continuous contact with LNG are effectively inaccessible whilst vessels are in service. The estimated cost for a LNG fuelled vessel compared with an equivalent oil fuelled vessel is around 20-25% greater. However this premium would reduce as LNG fuelled vessels become more widespread and economies of scale are achieved.

CAPACITY
Comparing energy density (adjacent table), LNG requires around 1.6 times the volume compared with oil fuels. Bunker tanks on a LNG fuelled vessel have to be bigger to provide the same operating range. Larger tanks can be difficult to fit into smaller vessels or can displace cargo volume. Additionally, LNG tanks have to be insulated to keep the contents cool adding more volume.

Energy Density Ratio for MDO and LNG

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Cylindrical and Bilobe IMO Type C LNG tanks

Conventional atmospheric LNG containment systems rely on thick insulation to keep the gas liquid at around -162C. This is impractical for LNG fuel tanks adding up to 4x the total volume. The solution has been to move to IMO Type C tanks. These can tolerate limited pressure build as 3 the LNG warms. They are double skinned cylinders (10-10,000 m ) or 3 bilobe tanks (100-20,000 m ), mounted internally or on deck, with the inner skin containing the LNG, separated from the outer skin by a vacuum space, sometimes filled with insulating material.

Source: TGE

Current designs operate up to around 5 bar and concepts are available with a design pressure up to 10 bar. New and more space efficient Membrane and Type C tank designs are under development for use with LNG bunkers.

CONVENIENCE
The conundrum for shipowners is that, today, there are few locations to fill a LNG fuelled vessel and these are all in North Europe. The conundrum for potential LNG bunker service providers is that there only relatively few LNG fuelled ships. So who blinks first? The answer is probably both and repeatedly. The use of LNG bunkers is established in Norway and is spreading to other parts of the Baltic. The next drive for LNG adoption will be the declaration of the North America ECA in June 2012. This is a much larger area and will affect a higher proportion of the worlds shipping.

WHAT ARE THE ALTERNATIVES TO LNG?

There are limited alternatives.

RESTRICT SERVICE AREA

Some will choose to operate vessels in parts of the world where emissions legislation is less onerous or where enforcement is perhaps less rigorous. Such areas will become fewer and, except for limited service vessels, this will become increasingly impractical.

RIGHT FUEL, RIGHT PLACE, RIGHT TIME

Burning ultra low sulphur diesel will meet emissions legislation, but it comes at a price 50-60% higher than LNG. Another option is to burn the right fuel in the right place, switching to low sulphur diesel when entering ECAs. But this creates new problems of segregated tankage and is reliant on the ship changing over to the right fuel at the right time. Fines for infractions can be heavy. Californias fine schedule is illustrated adjacent.

California non-compliant fuel fine schedule

EMISSIONS TREATMENT
Exhaust Gas Scrubber (EGS) technology is being considered to remove sulphur and particulate matter. It does work, but must also be operated in conjunction with Selective Catalytic Reduction (SCR) technology to neutralise NOx. SCR is the injection of ammonia or urea into hot exhaust gas over a catalyst (e.g. titanium dioxide). This converts the NOx back into component nitrogen and oxygen. There are issues with this approach.
Exhaust Gas Scrubber (EGS) schematic

Although EGS technology has been around for many years in land based power generation applications, it is untested over time in corrosive marine environments. The equipment is large and there may not be space available, especially on smaller vessels. Depending on the technology used, it may be necessary to store effluent, requiring dedicated tank space. And progressive ocean acidification could become a new environmental issue. But the biggest deterrent may be cost. Some EGS systems require injection of caustic soda. Ammonia and urea costs for SCR are in the region of US$600/mt. The stoichiometric treat rate is 1 mt ammonia/urea per mt of NOx produced. Burning diesel generates around 40kg of NOx per mt of fuel and HFO around 140kg. Operating EGS + SCR increases fuel consumption by around 3%. There are questions about future availability of ammonia and urea to meet demand if this solution was adopted widely. And there are questions about the required shipyard capacity for conversion of existing tonnage to fit EGS + SCR.

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The big challenge for the maritime sector is how to comply with evolving legislation against a backdrop of depressed charter rates and surplus tonnage in many sectors. The cost of retro-fitting EGS + SCR technology can be up to US$4 million. With charter rates, as low as US$5,000 per day for some classes of vessel, there is little investment justification to be found. And emissions are only part of the equation. There may also be additional retrofit cost required to meet new international ballast water treatment requirements. Paradoxically, a prolonged period of economic doldrums could be good for LNG, exacerbating the overhang in surplus tonnage and forcing acceleration in the early scrapping of redundant vessels. This would trigger a rush of new buildings to meet the demands of a future recovery and it can be expected that a proportion of these will be LNG fuelled, pushing the demand for LNG bunkers.

LNG BUNKERS INFRASTRUCTURE

All the technology needed to set up and operate a competent and safe LNG bunkering service is in place today. Most current LNG infrastructure is large scale, providing gas into domestic and industrial pipeline networks. The introduction of LNG bunkers presents a new opportunity with a wider potential scale of demand. Until now, LNG bunkers have been supplied into small vessels, such as fast ferries or work boats, using the Norwegian model. Delivery has been by truck to small tank farms at the bunkering port, or directly from truck into the vessel. But this will not work for large, ocean going vessels where the scale is much greater.

LNG BUNKER TERMINALS

Most current full scale LNG terminals are designed to serve a specific demand involving dedicated vessels. Most LNG import terminals are not currently engineered to reload ships and would require modification to do so. Terminal operators might likely be reluctant to increase the number of shipping operations substantially. There are also safety issues to address and large separation zones apply for routine LNG shipping operations and one answer lies in satellite terminals another likely solution will be the use of floating storage. Rotterdam has been the first port to act, setting up a new satellite terminal, capable of delivering LNG into barges and vessels and supplied from the recently opened Gate Terminal, 35 km away. Singapore has announced future plans for a third and smaller jetty to reload LNG into shuttle carriers at its import terminal sometime after its opening in 2013. Announcements for further proposed LNG bunker terminals also include the Yangtze River Port Fourchon (US), Trinidad and Tobago, Dubai, New York and Quebec. Bunker terminal supply scenarios are dependent on many factors. The main choices are LNG supply by truck, pipeline, or shuttle carrier from a full scale terminal. Small liquefaction plants, fed by pipeline gas, are possible and could be installed at the bunker terminal. But the economics of small liquefaction plants are highly scale dependent. At larger bunker ports, throughput volumes would eventually justify construction of full scale dedicated LNG bunkers import terminals, supplied directly from liquefaction plants with large LNG carriers. In such terminals, LNG import and bunker operations will need to be segregated. At smaller terminals LNG storage tanks will likely be vertical or horizontally mounted IMO Type C pressurised cylinders.

FLOATING STORAGE
An alternative to land based terminals, existing LNG carriers can also be berthed or anchored and used as Floating Storage and Offloading (FSO) vessels for LNG bunkers. This approach has a number of advantages over construction of shore terminals: good option, particularly if land availability and operating permits are a challenge investment costs are significantly lower delivery into service is faster it is highly scalable (adding or removing storage vessels is quick and easy) replenishment can be directly from liquefaction terminals by shuttle carriers or the FSO can refill at a production terminal in the latter case, a second carrier may be required, but costs of double handling of LNG are avoided

On the downside, service life with a floating facility will likely be more limited than with a shore base. Typically, 25 year old vessels are suitable with a 15 year life expectancy limited by hull corrosion. Floating facilities may be more susceptible to adverse weather away from sheltered locations. With high charter rates for LNG tonnage predicted to continue, vessel availability for FSO operation at reasonable cost could be limited.

LNG BUNKER BARGES

Except for dedicated berths, such as ferry terminals, the use of barges instead of bunker berths is expected to be preferable for general operations, to avoid berth congestion and to allow bunkering at anchor during vessel downtime. There are no LNG bunker barges today. But ship-to-ship small LNG transfer operations have been carried out to test the concept and there are multiple conceptual LNG bunker barge designs. LNG bunker barges will need to be sophisticated, multi-functional vessels. Ships will still need diesel fuel to burn as a pilot in dual fuel engines, as reserve fuel and possibly for auxiliary machinery. So a comprehensive bunker service offering from a single vessel will need to carry and transfer both LNG and diesel. A number of bunker barge designs have 3 been proposed but most, so far, are all small (<1,400 m ). For large ocean going vessels, bunker barges will need to be larger, 3 perhaps up to 25,000 m or more, to allow multiple ships to be served by a single barge without having to make several hose connections and disconnections (increasing hazard), or forcing the barge to return frequently to the LNG storage depot or storage The Genesis of LNG Bunkers Page 7 Update January 2012

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vessel to replenish, losing time. For independent operation, LNG bunker barges will need to be highly manoeuvrable. Concept designs achieve this by generating electrical power to drive azimuth propulsion in combination with a bow thruster, allowing the vessel to move freely in any direction. Until now, small LNG transfer operations from truck or tank have been carried out via flexible cryogenic hose. Arguably, these are less sensitive to adverse swell or weather conditions for ship-to-ship transfer than rigid arm technology. However remains to be seen whether hoses or rigid arm technology become the standard for LNG transfer. Operational and safety standards in the LNG industry are high and this has underpinned an excellent safety record over the years. LNG bunkering will be no exception. The current absence of any standards or regulations on LNG bunkering is a challenge, but is being addressed, with the first meeting of an international working group held in June 2011. Interested parties included 20 societies, companies and individuals from Norway, Belgium, Brazil, Canada, China, France, Germany, Italy and the UK.
Conceptual LNG Bunker Supply Vessel Operations

Source: TGE

Service standards for LNG bunkering will need to be developed within the industry. Time to refuel a vessel becomes important if restrictions, such as bunkering location dependency or refuelling on passenger craft with passengers onboard interfere with normal 3 3 vessel operations. The largest post-Panamax container vessels have bunker tanks of around 7,600 m for HFO and 450 m for diesel. 3 If we assume maximum 7,000 m bunker delivery parcels, to deliver the equivalent energy content into the main fuel tank via LNG 3 will require about 11,500 m , too large for practical delivery by truck. It is also likely that most LNG bunkering will need to be carried out away from busy berths or by ship-to-ship transfer in anchorage points. The speed at which LNG can be transferred is determined to the rated pumping capacity and smallest pipeline, but unlike conventional liquid fuels, also by the ability and capacity to capture boil off gas (BOG) assuming venting is to be avoided. For terminal loading, this is not a problem. In ship-to-ship transfer, this can be achieved by compression and storage in a holding tank onboard the bunker barge, then delivered into the BOG return stream ashore during replenishment operations. Alternatively, small re-liquefaction plants could be installed onboard larger bunker barges to return BOG into the cargo tanks as LNG. BOG production is a function of many things including temperature of the receiving tank, degree of splashing and more. 3 Singapore, the worlds largest bunker port, specifies a minimum bunker transfer rate for bunker service providers of 800 m /h. 3 3 Based on an 11,500 m fill, at this rate it would take over 14 hours, with the maximum BOG generation around 10.5 m /h. Increasing 3 the transfer rate to, say, 2,000 m /h would shorten the bunkering time to just under 6 hours but will increase BOG generation to 3 around 21 m /h. LNG bunkering has another key difference from conventional oil bunkering. For safety, it is important that, after use, the LNG transfer lines are natural gas free and filled with inert gas. On large LNG carriers, inert gas generators are fitted. There are various designs, but all use exhaust gas from main engines, generator engines, or included burners that is scrubbed to remove sulphur and particulates and chilled and dried to remove moisture. The resulting oxygen depleted gas can then be fed to deck for use as inert gas. Inert gas generators can be large and, unless small versions are developed, depending on the inert gas demand, it may be more practical to load and store liquid nitrogen onboard in insulated tanks and use boil off nitrogen instead, for inert gas purging.

SHIPOWNERS
Ship design and engine options for owners considering LNG as a fuel have increased substantially over the past few years. The range of vessels covered now includes virtually every type. The largest marine engine manufacturers offer a range including single and dual fuel 2 and 4-stroke engine options and conversion kits for existing machines, providing the flexibility with dual fuel to switch seamlessly between gas and oil based fuels. Gas only propulsion is suitable for limited service, such as ferries and offshore support vessels, while dual fuel allows operators of wider service to hedge their bets on fuel supply.
Fuel system for a gas only LNG fuel system on a RO/RO vessel

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WHERE NEXT FOR LNG BUNKERS?
Eleven LNG fuelled vessels, that are not LNG carriers, have entered service in the past 2 years. Over the next 2-3 years, 48 such LNG fuelled vessels are scheduled to enter service. If 10% of the worlds shipping were fuelled by LNG by 2025 the LNG bunker market would be around 25 million tonnes. Given the current and projected shortfall in LNG production against demand, it is interesting to speculate how such new demand will be accommodated. It is also possible that LNG bunkers will, in future, start to compete with traditional LNG markets such as power generation. Today, Europe is still leading the demand for new LNG fuelled vessels, but notably, the list now also includes the USA, Brazil and China. What is driving these changes?

REGULATORY DRIVERS
The main driver for adoption of LNG as a fuel in ships is the need for environmental compliance. The pace of adoption over the next few years will be influenced to a large extent by the state of the global economy and its impact on the pace of legislation adoption. The declaration of an ECA of 200 nautical miles around the North America coastline in 2012 is of considerable importance, increasingly driving operators of vessels, obliged to spend much of their time within its constraints, towards LNG. Much is riding also on the introduction of a global sulphur cap on marine fuels of 0.5% in 2020, subject to review in 2018. If adopted and unless refiners pull a rabbit out of the hat, if EGS + SCR technology does not penetrate significantly, this will effectively spell the end of heavy fuel oil use in ships. Set against the high cost of the only alternative, diesel, LNG becomes an attractive choice. Another influencer will be the location and pace of growth in ECAs. No firm dates have yet been set beyond implementation of the North America ECA in June 2012, but the list of candidates is growing. Perhaps the most influential future ECA adoptions will be the Mediterranean, Straits of Malacca, and locations through which much of the worlds international shipping trade is obliged to pass.

GEOGRAPHY DRIVERS
Continued growth of LNG as the fuel of choice is expected for new buildings in all classes of vessels that operate in The Baltic, North Sea and English Channel. This will be predominantly work boats and fast ferries, but increasingly, larger coastal vessels such as tankers, smaller container vessels and large ferries. The introduction of the North American ECA will drive an accelerated adoption of LNG fuelled new buildings of Offshore Support Vessels (OSVs) and other work boats that burn diesel, for service in the US Gulf. As two of todays largest bunker ports, Rotterdams construction of a LNG bunker terminal and Singapores proposed capability are significant. Future LNG availability at such popular bunker destinations is bound to influence fuel choice.

CATEGORY DRIVERS
Conversion of existing vessels from oil to gas is a challenge in many cases. But any new vessel can be considered a candidate for LNG bunkers, perhaps hedged by dual-fuel capability. We have already seen work boats and fast ferries leading the way and this trend will continue. We also expect to see cruise ships as early adopters, as they spend a large part of their time in port or coastal waters which will be increasingly subject to tight emissions controls. Eco tourism has been able to command a premium and cruise lines offering green shipping have benefitted. A substantial part of the cruise industry is based in the USA and cruise ships tend to spend a lot of time in coastal waters and in port. The advent of the new North America ECA is an important development. For other classes of vessel, LNG bunkers would be adopted once emissions legislation adoption drives the changes. There will then emerge a two-tier charter market for vessels that can go anywhere and those that are forced to the margins of the oceans. In the finest maritime traditions, we may well see a last minute scramble to order new and compliant tonnage as shippers struggle to meet the growing demands of a growing and greener post-recession world.

CONCLUSIONS
MARKETS AND LEGISLATION
The combination of tightening emissions legislation for ships, the price advantage gas has over oil and increasing gas availability makes LNG a realistic and prospective choice of fuel for new ships. The drivers for a large scale adoption of LNG as a fuel for ships are the introduction of the North America ECA in June 2012, the reduction of maximum fuel sulphur limits for use in ECAs to 0.1% in 2015 and the proposed global fuel sulphur cap of 0.5% in 2020. This is compounded by new emissions limits on CO2, NOx and Particulate Matter. The pace of LNG bunkers adoption will be governed by the evolution of environmental legislation and particularly, the location and introduction of new ECAs. This, in turn, will likely be influenced by the global economic climate.LNG Page 9 Update January 2012

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contracting norms in operation today are mainly based on long-term, fixed, take or pay terms. These are not well matched to the needs of an emergent LNG bunker market. While an increasing proportion of cargoes are being arranged on short term contracts, commercial models are likely to evolve to meet the demands of bunker markets. Refiners have indicated that the high cost of producing ultra low sulphur HFO is a deterrent and unlikely to be realised. HFO could potentially cease to be a viable mainstream marine fuel option beyond 2020. Adoption of ultra low sulphur diesel as a bunker fuel carries a substantial price premium over other fuels. Competition with the land transport market could raise issues over supply availability. The potential scale of the LNG bunker market is equivalent to the total LNG business today. Early entrants into LNG bunker supply will be able to secure strong positions, raising barriers to entry for others.

INFRASTRUCTURE AND TECHNOLOGY

The technology needed to provide a safe and efficient LNG bunker service exists today. Very few commercial organisations have the capability to self-fund a major LNG project. Uncertainties associated with a new market and possible new business model could make project financing a challenge. State intervention may be required to proceed to FID in some cases. The Catch 22 of few LNG bunker stations to serve few LNG fuelled vessels shows the beginnings of being eroded, with new LNG bunker terminals being announced and proposed and a quadrupling of order book for new LNG fuelled vessels. Indicated margins for LNG bunkers over low sulphur alternatives, provide for a viable business model and could improve profitability in the bunker delivery business. Floating storage is a feasible option, is markedly cheaper than a shore based installation, can be put into service within a few months (rather than years for shore plant) and may avoid complicated land acquisition and operating permits issues. However, service life is potentially limited, typically to around 15 years by vessel hull corrosion, tonnage is currently at a premium, possibly limiting availability and floating facilities may be more susceptible to the weather. A wide range of gas burning and dual fuel marine engine options is available and the list is growing. Continued use of oil will require the fitting of Exhaust Gas Scrubber (EGS) and Selective Catalytic Reduction (SCR) technology. This brings a number of technical and environmental challenges and potentially high associated running costs, making it questionable for wide scale adoption. By adopting LNG, shipowners should benefit from lower fuel and operating costs versus possible alternatives, whilst complying fully with all current and planned maritime emissions legislation. Unlike oil fuels, beyond vaporisation, LNG requires no pre-treatment such as filters, centrifuges and heaters, saving on equipment investment and operating costs. Clean burning gas significantly reduces the maintenance burden on engines, offering further cost and downtime reductions and improved reliability. Quality problems, routinely associated with oil based fuels, are not an issue with LNG. There are no LNG bunker barges today. Future demand will drive the opportunity for development of a new category of high technology and sophisticated, multifunctional vessels. Most LNG import terminals are not well suited to provide LNG bunker operations. This will drive the need for a network of new LNG terminals, either dedicated to bunkers at larger ports, or with dedicated bunker facilities. Regulations for LNG bunkering operations are in early stages of development and will need to be put in place quickly. Commercial norms and standards for LNG bunkering procedures need to be established, possibly including minimum Lower Heating Value (LHV) standards and the management of boil off gas.

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TRI-ZEN LNG PERSPECTIVE TRI-ZEN

We are energy consultants. Over the past ten years weve built a client base that includes global and national energy firms, global professional services businesses and investment banks. We provide the clear analysis and strategic input required by business leaders needing to make decisions, whether these relate to acquiring reserves, building liquefaction capacity or LNG receiving terminals, making purchase decisions or entering markets. TRI-ZEN brings industry knowledge and a range and depth of industry and management experience that is unique. We combine a broad functional focus with deep expertise in the energy industry. Our senior gas consultants have worked for leading companies in the business such as Shell, Mobil, BP and BG and collectively have more than 200 years of hands-on LNG knowledge and experience, with some at the most senior of levels. The range of services we offer includes: Strategy Identifying and developing opportunities Asset optimisation Sector studies Market studies Forecasting Commercial and technical studies and representation New market entry Detailed business cases Project finance, risk evaluation and project management Mergers & acquisitions (including farm-outs/farm-ins) Expert witness Organisational development

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