The Evolution of Small-Scale LNG Markets

The Evolution of Small-Scale LNG Markets The View from Gazprom Export Igor Maynitskiy Head of the LNG Division Gazprom Export Small-Scale LNG Forum 22-23 October 2012, Istanbul

Hello! My name is Igor Maynitskiy and I am responsible for advancing the export of Gazprom s Small Scale LNG for developing markets. Russia possesses immense natural gas reserves, the majority of which are managed by Gazprom. In fact, Gazprom controls 16% of worldwide gas reserves (23 Trillion Cubic Feet ) - more than any other company or country of gas. Gazprom natural gas is used throughout the Russian Federation and exported globally as both pipeline gas and liquefied natural gas (LNG). LNG allows for the supply of growing markets, such as the transportation, marine bunkering, and other off-grid applications. Accordingly, LNG is becoming more important to Gazprom. 2

I would like to speak to you today about small scale LNG. Generally, we view LNG as being of various size classes Small Scale plants are usually developed to serve certain specific markets and have a production capacity of less than one half million tons per year. Mid Scale and Large Scale Liquefaction (also referred to as base load liquefaction plants) have progressively larger capacities and efficiencies of scale. For decades, Gazprom and its affiliates have actively pursued opportunities to develop natural gas as a fuel for the transportation sector and other SSLNG applications. The reasons for this are significant Small-scale LNG presents: The opportunity to create substantial new demand for gas from ships, trucks and off-grid customers => global opportunity expected to be in the hundreds of MTPA The opportunity to capture market share in newer, high value niche markets where natural gas has historically comprised a low portion of the fuel mix due to: Lack of access to pipeline infrastructure; and/or Historic reliance on fuels such as diesel and fuel oil 3

LNG has unlocked market potential in nearly all segments of the freight and transportation sector, including heavy-duty trucks. Until recently, in fact, there was broad consensus that global natural gas production was on the same trajectory as oil, just deferred a decade or two. Economies around the world, led by China, were expected to continue requiring greater amounts of energy to fuel their growth. Meanwhile, natural gas production in the West was thought to be in permanent decline, leading to premature assumptions regarding the long-term dependence of developed nations on imported sources of fuel. However, with the advancement of unconventional gas, declining gas production is no longer the case anymore. Instead, natural gas is increasingly becoming the most plentiful, cost-effective, and environmentally friendly alternative to conventional transportation fuels in marine bunkering, road transport, mining, and off-grid applications. You may ask me a question why this revolution is taking place only now. What prevented natural gas from displacing oil products as a motor fuel in the past? There are simple reasons for this - A major problem with using gas as transport fuel was its lower energy density. Even when compressed to around 200 atmospheres (as CNG), natural gas has only 25% of the energy content of diesel fuel. Add to this the greater weight of the pressurized tanks needed to contain the CNG, and the advantage of conventional liquid fuels becomes clear. In the past, the poor energy density of CNG limited the use of natural gas in the transportation sector to light duty vehicles and public intercity transportation. The solution to the density problem came from LNG. LNG has an energy density more than double that of CNG. Compared with diesel, the lower density of LNG is partly compensated for by a significantly higher calorific value on a weight-forweight basis (54 MJ/kg for LNG against 46 MJ/kg for diesel fuel), resulting in an energy density roughly 60% of that of diesel. With the possible exception of long-haul air flights, LNG has made nearly all transportation industry sectors viable for natural gas penetration, from long-haul trucking to maritime shipping to heavy-duty trucks in the mining industry. Of these, the bunker fuel and heavy-duty truck markets present the most important opportunities at present. Both markets are large consumers of heavy fuel oil and distilled products and currently emit large quantities of traditional pollutants such as SO 2, NO x, particulates and CO 2. The historically high price differential between natural gas/lng and oil products, combined with growing restrictions on ship and vehicle emissions, have prompted a number of countries and companies to pursue LNG alternatives. 4

LNG can compete favorably in the heating, commercial, and industrial sectors with conventional fuels such as diesel and propane in areas not currently served by regional pipeline gas infrastructure. Many examples exist. 5

The International Maritime Organization has approved three global Emissions Control Areas (ECAs), with several more proposed To comply with ECA limits, ship owners have three options: 1. Secure costly, low-sulphur Marine Gasoil 2. Install costly emissions abatement controls 3. Adopt LNG as ship fuel By utilizing LNG, the Marine Sector benefits in several ways A. Natural gas is the only fuel which meets new ship emissions limits (without requiring scrubbers or SCRs) B. LNG offers fuel cost advantage and lower operating costs vs. traditional bunker fuels C. Ship, engine and tank technology for LNG-fuelled ships are available and proven Similarly, heavy duty trucking within the EU will be subject to stringent Euro VI emissions standards commencing in 2014. By utilizing natural gas (with LNG being the preferred form due to its effective fuel density), compliance with emissions standards are readily attainable. To comply with these same Euro VI standards, diesel engines will require costly emissions treatment and equipment that will increase the capital and operational costs of diesel powered trucks and buses. Natural gas powered trucks operate at reduced noise levels in comparison to similar diesel trucks. In many cities, authorities allow such natural gas trucks to operate within residential and congested areas that noisier (and noxious fume producing) diesel trucks are prohibited from. In fact, the World Health Organization has recently declared diesel fumes to be carcinagenic. Natural gas creates no such issues. Off-grid customers also enjoy having the option of natural gas as a clean, cost-effective source of energy for comfort and process heating, as well as for power production and other technical needs. We should all remember that natural gas creates no spill hazard, such as leaking diesel fuel can. Further, consumers previously limited to only diesel or propane can now enjoy the economic advantages derived from a the choice of a strongly competitive fuel such as natural gas. 6

Let s take a look at the projected demand for natural gas in transportation. Major international consulting agencies and industry associations have provided their forecasts of the oil-to-gas dash in transportation. The consensus among these varied organizations is that natural gas is expected to capture significant market share from traditional petroleum-based fuels in both marine and road transport up to 33 MTPA (46 Bcma) from global LNG bunkering (see chart on the left) and 14 MTPA (20 Bcma) from LNG vehicles in Europe (right chart) by 2030. In fact, this oil-to-gas dash, a major revolution in transportation, is taking place already. 7

In the US and in Europe, already today, LNG-fuelled trucks help commercial operators decreasing their cost of operations and complying with European emission norms. Only recently Gazprom in cooperation with a range of other European gas majors conducted the 6 th Blue Corridor Rally a tour of 6.800km throughout Europe just on natural gas to demonstrate to politics, governments, media, the public and customers, that natural gas as fuel has evolved to be a real alternative to constantly increasing petrol and diesel prices. Gazprom actively shapes the market for LNG-fuelled city buses, e.g. currently in the Republic of Poland, and the market for heavy duty road transport in Western Europe in cooperation with established automotive manufacturers, such as Mercedes Benz, IVECO, Volvo or MAN, by providing the required refueling infrastructure. 8

In conjunction with Pace Global, Gazprom has been working with its mining clients and mining equipment producers to advance and deliver heavy-duty natural gas engine technology. Our analysis has concluded that LNG sales are a credible alternative to diesel in the mining sector: On average an ore-carrying haul truck, loaded with 250-300 tonnes of ore, consumes as much as 300,000 annually in natural gas. At present, over 7.5 billion liters of diesel are consumed by the 28,600 haul trucks (rated 100 ton+) utilized by the top 10 mining companies operating around the world. Hydraulic fracturing alone requires approximately 2.8 billion gallons of diesel per year to operate the necessary pressure pumping equipment and drilling rigs. Because a single fracturing job can require 7,800 gallons of diesel (at a cost of up to $5/gallon), substituting natural gas for diesel could result in annual fuel savings of $1.3 million per rig. Such super high horsepower natural gas engine technology is becoming a reality for mining equipment as well as rail applications. 9

Many potential sources of LNG exist for Gazprom. Many such projects are under priority review. 10

I d like to conclude with the following takeaways (summarize bullet points on slide). In short, several factors make LNG an increasingly competitive transport fuel. First and foremost, natural gas has the cleanest emissions profile compared with traditional petroleum-based fuels. In addition, LNG has proven to be a credible competitor from a total lifecycle cost of ownership, retail fuel price, and fuel supply perspective for both the vehicle and bunkering markets. However, caveats do exist 1. Firstly, while LNG is increasingly seen as a viable competitor to traditional fuels in transport markets around the world, there is a dire need to develop dedicated SSLNG infrastructure to serve these markets. 2. Secondly, my general observation has been that efforts by politicians and environmental alarmists to take all fossil fuels off the table as a means of addressing the climate challenge problem blinds people to consideration of actual, attainable options. It is a fact that greenhouse gas emissions reductions can be achieved by replacing traditional fossil fuels with other, cleaner fossil fuels. There are currently available alternatives utilizing LNG that can significantly reduce emissions, while research and development plans promise to develop even better alternatives tomorrow. My proposition to you today is that natural gas can, and will, take the place of petroleum fuels in a significant portion of the transportation sector. In fact, this oil-to-gas dash, a major revolution in transportation, is already taking place. For these and many other reasons, I feel that natural gas is the next logical step in the ongoing transition to cleaner fuels. LNG can truly revolutionize the transport sector due to its many advantages, which we have discussed, in part, today. But the process of promoting LNG as a transport fuel will undoubtedly, and unfortunately, be hampered by certain bureaucracy tendencies. Politicians especially those in the EU must relinquish their prejudices about natural gas. Currently, the European Commission (EC) is working on defining a list of so-called "Fuels of the Future that gives a clear preference to trucks with electric and hybrid engines, without paying sufficient attention to LNG. If this issue is not sufficiently resolved in favor of natural gas, then standards for LNG vehicles and refueling facilities will not be developed, and the utilization of LNG as motor fuel will follow a slow and complicated path. 11

Gazprom s vast natural gas resources and transportation network make it well-positioned to serve growing SSLNG markets throughout Europe through its integrated supply chain. Gazprom intends to play a major role in advancing LNG in major transportation markets. However, because the use of LNG as transport fuel means essentially creating a market from scratch, this makes it essential that we work with new partners from different sectors and help the EU politicians to realize the very real benefits of natural gas. I thank you for your attention. 12