The Economic Aspect: Gas prices today and going forward, wholesale and impact on retail prices for LNG as a bunkering fuel Small-scale LNG distribution for coastal and short-sea shipping Denmark May 2014 Karen Sund, Sund Energy
Full-picture perspective Sund Energy helps navigate into the energy future Energy In the small-scale LNG area, clients include: Sellers Buyers Infrastructure co Economics Environment Learning between countries, industries, energies, technologies and more Typical assistance: Strategy and business model Market analysis LNG negotiations Investor support, partner search by understanding the full picture of stakeholders Page 2
LNG as marine fuel could take-off in Nordic waters LNG as marine is starting to take off Three environmental drivers But economic potential is key! LNG as marine fuel kick-starting a virtuous circle for self-reinforcing growth Over 50 LNG-fuelled ships in traffic In addition to LNG carriers About 50 more to be delivered during 2014-2016 Potential for 1000 ships in traffic globally by 2020 No longer a very small, niche market More than just ferries in Norway More than just micro-scale Increasingly more and larger users, bringing new logistic challenges More investors and sellers Potential for rivers, too! Fjord Line s new LNG-ferries Illustration: Sund Energy Source: Fjord Line, 2013 Page 3
Current forward curves do not price in MARPOL rules Overall, HFO is currently the marine fuel of choice, at least until 2015 But to become IMO-compliant, SOx scrubbers need to be installed Scrubbers are currently difficult to get in large enough volumes, and expensive Cost reductions and better logistics expected in the near future DFDS opted for scrubbers MGO could be an easy fix to SOx emissions, but is expensive and scarce Expect even higher prices with sudden demand spike when ship owners need to find a quick fix to their SOx emissions Low value chain costs could make it competitive on the long-run, if refineries see attractive margins in producing more NB: Difference between wholesale and retail prices is still significant for LNG, very small for oil-based fuels Source: Montel/ Metanopoly, January 2014 Page 4
Price of gas/ LNG essential, but many diverse drivers Investors TSO Private Government Infrastructure Supply and storage (and bottlenecks) Trading activity Balancing Hedging Supply Gas price Demand Geopolitics SoS + Reduced vulnerability (overall) Energy policy Voters NGO s Investors Alternative energy to gas, Relative prices, incentives Economic condition (recession/growth) balance of trade Page 5
Good timing: More LNG available - commoditising Major gas trade movements in 2012 (bcm) LNG trade stable in 2013 Source: BP Statistical Review of World Energy, June 2013 Page 6
There is much spare capacity in Europe s terminals million m 3 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 South Hook LNG flows at selected European LNG terminals (2013 utilisation 19%) Isle of Grain Zeebrugge (LNG) Dragon LNG Montoir de Bretagne Capacity 2013 LNG flows Huelva Bilbao Sagunto Cartagena Murgardos Gate Data: IEA, GLE LNG, 2014 and many dedicated small-scale terminals planned Page 7 Source: Gas Infrastructure Europe (GIE), GLE LNG Map, July 2013; New study to be released soon
Many see a tight global LNG market. Is it, really? Much new LNG coming on reducing fears of shortage More supply than strictly needed - compete on price (not source) Lower prices good for demand, but how low can the producers go? Deliveries to Europe: Spill-over from higher priced markets? Selling LNG to Europe for spot markets (competing with coal) show low demand for oil-link LNG Loose LNG adds to global oversupply and price harmonisation LNG makes gas more like oil Source: IGU World LNG Report, 2014 Page 8
$/mmbtu $/mmbtu $/mmbtu We see falling wholes sale prices in Europe and Asia 18 16 14 12 10 8 Historical gas prices 18 16 14 12 10 Forward curves today 6 4 2 0 8 6 4 2 - Today s spread is too large to sustain with much LNG Japan and Europe could well be lower in the future: $7-10/mmbtu US Henry Hub German import price European spot (NBP) Japan LNG US could be higher (artificially low now) 18 16 14 12 10 8 6 4 2 0 Asian LNG (JKM) US Henry Hub TTF NBP Forecast US Henry Hub German import price European spot (NBP) Japan LNG Page 9
How to purchase affordable small-scale LNG? LNG can be the cheapest available marine fuel on the spot markets But value chain costs are higher for LNG than for oil-based products LNG could maintain a comfortable edge against IMO-compliant HFO and MGO Several cost elements add up to the hub/ liquefaction plant FOB price Port fees to pick up LNG from the receiving terminal (or liquefaction plant) LNG tank-ship fees for transportation to small-scale receiving terminal LNG storage in the port/ cost of bunkering Possibly cost for further transportation by truck, and perhaps onwards by local pipeline to final user With more competition, value chain costs will be lower More similar retail and wholesale prices Competitiveness of LNG as marine fuel Source: Elengy, 2013 Page 10
What do you prefer? A cost-plus model linked to gas Several cost elements add up to the hub/ liquefaction plant FOB price Port fees to pick up LNG from the receiving terminal (or liquefaction plant) LNG carrier fees for transportation to small-scale receiving terminal LNG storage in the port/ cost of bunkering operation Possibly cost for further transportation by truck, and perhaps onwards by local pipeline to final user Illustration of LNG price to storage tank in port/ bunkering Max price Margin Storage/ Bunkering LNG ship transportation Port fees 2-5 /MWh, depending on solution, size, degree of utilisation. Lower with smaller shipments, which increases transport cost and risk 2-10 /MWh, depending on ship size, location of «origin» LNG terminal, degree of utilisation, etc. Lowest with more competition/ own ship if used enough Port fee at LNG pick-up point: 1-3 /MWh, depending on the port, ship size, etc. TTF 19-26 /MWh depending on demand/supply forward curve Page 11
$/mmbtu or a price linked to oil? For many this is more comfortable, as the movements are known Often ship owners assume competition will be on oil or oil-linked gas That makes a simple MGO x% feel less risky What will the oil price be? Crude has been more volatile last few years Could fall to $50/bl or increase to $150 (again) MGO at a margin room to grow if market tightens Partly depending on solutions ship owners choose to avoid emissions HFO at a discount + scrubbers How long viable, in light of future emission restrictions on climate? 25 20 Illustrative bunker prices NB: LNG and MGO have different energy content and efficiency rates 1 ton LNG 1 ton MGO 15 10 5 - MGO fwd TTF fwd LNG @ MGO-10% 25% LNG @ TTF+100% 25% Page 12
We are happy to discuss further! We offer strategic and commercial advice + partner selection Small and large buyers, governments, TSOs, producers Gas, electricity, environment and more Workshops Selected recent work Sourcing strategy and gas contract (re)negotiations in Nordics/ Baltics Small-scale LNG value chain and market potential analysis Karen Sund +47 917 86 928 karen@sundenergy.com Meltzersgate 4 N-0257 Oslo Norway Page 13