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Potential for LNG Bunkering

Presented by Valery Nemov,

Gazprom Export

Courtesy of Pace Global Energy Services

Porto, September 13th, 2011

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Agenda

• Context and Market Overview

• Key Drivers and Major Challenges

• Commercial Opportunity

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Potential for LNG as Ship Fuel

New ship emissions limits in Europe and elsewhere will present ship owners with one of three options:

1. Secure low sulphur Marine Gasoil

• Increased refining costs could raise the cost of low sulphur fuels significantly

• Production of low sulphur fuels is likely insufficient to meet the surge in demand

2. Install exhaust scrubbers for sulphur and Selective Catalytic Reduction (“SCR”) for nitrogen dioxide (“NOx”) emissions

• High capital and operating costs of scrubbers

3. Adopt LNG as ship fuel

LNG is considered the more environmentally and commercially attractive option

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Key Drivers for the Development of an LNG Bunker Fuel Market

• Regulations on ship emissions

– Natural gas is the only fuel which meets new ship emissions limits (without requiring scrubbers or SCRs)

• Fuel pricing and maintenance costs

– LNG offers fuel cost advantage and lower operating costs* vs. traditional bunker fuels

• Technological advances in LNG bunkering

– Ship, engine and tank technology for LNG-fuelled ships are available and proven

Ship emissions limits in

Emission Control Areas

(“ECAs”)

Fuel pricing and sulphur-

abatement costs

Technological advances in

small-scale LNG

* When cost of installing SOx and NOx control technologies is considered.

http://www.imo.org/

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Key Driver #1: Opportunity to Reduce Environmental Impact from Maritime Traffic

• New IMO regulations on ship emissions in ECAs in 2015/2016 in Europe and elsewhere

– Sulphur limit in ECAs reduced to

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0

100

200

300

400

500

600

700

800

900

1,000

Fu

el P

ric

e (€

/me

tric

to

nn

e)

HFO 380 Great Belt

HFO 380 Rotterdam

MGO Great Belt

MGO Rotterdam

Key Driver #2: LNG Offers Significant Fuel Cost Advantage to Traditional Marine Fuels

• Rotterdam MGO trades at €651/tonne compared with HFO 380 (€436/tonne)

• Limits on refining capacity mean using 0.1% sulphur MGO could imply a cost increase of 70%-90% compared with HFO 380 (1.5%)

o This would entail a significant increase in ship costs

Note: Rotterdam prices are generally accepted as a base to price oil products in northern Europe. Spot prices are depicted as these represent physical delivery of the fuel and therefore limit the speculative aspects that can influence forward prices. Sources: Bloomberg, Bunker Index, Platts.

Average Monthly Bunker Fuel Prices

MGO

HFOAt €365/tonne, the spot

price for LNG is almost half the price of MGO

LNG

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Key Driver #3: Technological Advances Promote LNG as Bunker Fuel

•Ice-breakers, cruise ships, ferries, and military, coast guard and platform supply vessels are all currently running on LNG in Norway

Ship & Engine Design

•LNG “feeder” ships to supply satellite terminals

•Satellite terminals can be onshore or barge-based

•Refuelling at terminal via truck

•Ship-to-ship transfer via barge or tanker

Bunkering Process

•Development of new containment systems for storage on-board

•Boil-off gas handled by pressure increase, reliquefaction or dual fuel gas consumption

LNG Storage

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Major Challenges to Development of an LNG Bunkering Market

• Lack of infrastructure to serve growing market

– Small-scale LNG terminals, distribution networks, storage, LNG feeders and fleets of LNG-fuelled vessels are all required

• Ships running on HFO can be retrofitted with scrubbers and SCRs to lower sulphur and NOx emissions

– This is likely to be the main competitor to LNG

• Delivered LNG price must be competitive with MGO, MDO and HFO

• Lack of operational protocols in the LNG bunkering industry

• LNG ships require around 20% more in capital costs compared with traditional builds

• Retrofitting of ships to run on LNG is not expected to be competitive, due to the additional space required for LNG storage, so market is largely limited to “new builds” only

Key Risk Factors

The industry needs to work together to address these challenges

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LNG Bunkering Will Become Viable in Regions Implementing Strict Ship Emissions Standards

• Target markets feature high-density short-sea traffic and strict ship emissions standards

– Industry leaders in the marine power sector expect 10% of ships calling at ECAs will be running on LNG by 2015 - a 10x increase from today

• After the Baltic & North Sea region (ECA Zone 1), North America (ECA Zone 2), the Mediterranean (ECA Zone 3) and Singapore (ECA Zone 4) are considered potential future LNG bunkering markets

• Longer term, ocean-going vessels and inland water transport may be viable targets

Sources: FGE, EMC.

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THANK YOU FOR YOUR ATTENTION