The COSTA Project - The Financials of LNG as Fuel

Dr. Panayotis Zacharioudakis Senior Researcher NTUA R&D Consultant OceanFinance COSTA Greek Member State Coordinator

SNAME seventh technical meeting

COSTA Project The Financials of LNG as Fuel

6 March 2014

Presentation Outline
Introduction The Perspective of LNG as Fuel COSTA Project @ a Glance Facts and Figures for LNG Financials Ports / Terminals Short Sea Shipping Transition to the LNG Era Conclusions
COSTA Project The Financials of LNG as Fuel

Introduction

LNG as Fuel Perspective

LNG Fuelled Vessels

COSTA Project The Financials of LNG as Fuel

Introduction

LNG as Fuel Perspective

LNG Industry Has an Excellent Safety Record
LNG has been Safely Delivered Across the Ocean for Over 40 years Over 45,000 LNG Carrier Voyages More than 100 Million Miles,

Without Major Accidents or Safety Problems either in Port or at Sea We should Follow a Mindful Approach for LNG as Fuel

An Accident Would Set Back the Planning for LNG as Fuel for Decades!!!

COSTA Project The Financials of LNG as Fuel

Introduction

LNG as Fuel Perspective

COSTA Project The Financials of LNG as Fuel

Introduction

LNG as Fuel Perspective

Sulphur Cap Regulations

COSTA Project The Financials of LNG as Fuel

Introduction

LNG as Fuel Perspective

EU Directives
COM(2013) 17. Clean Power for Transport: A European alternative fuels strategy: Union

strategic approach must build on a comprehensive mix of alternative fuels

COM(2013) 18. DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the deployment of alternative fuels infrastructure. All maritime and inland ports and roads of the TEN-T Core Network wil be equipped with LNG refuelling points. It also requires providing a sufficient number of CNG refuelling points.( by 31/12/2020)

COSTA Project The Financials of LNG as Fuel

Introduction

LNG as Fuel Perspective

The Use of LNG as Fuel Mainly Depends on:
LNG Spread over HFO and MGO Financial Feasibility of LNG-as-Fuel Projects:
Retrofitting Existing Ships New Buildings

Availability of a Critical Mass of LNG Bunkering Facilities

COSTA Project The Financials of LNG as Fuel

Introduction

LNG as Fuel Perspective

Interactions Between Shipping System, LNG Industry, National and European Institutions
Major Driving Factor for Ports and Ship Projects is LNG Spread National & EU Support is a Catalyst in Initiating & Promoting LNG Use. Simultaneously, Green Face of LNG Justifies National & EU Support. The Rest is a Chicken and Egg Situation: Supply point of View: Number of Available Facilities & Port Surcharge on LNG Price are Critical for LNG Vessel Projects Demand Point of View: Number of LNG Fuelled Vessels Influences Investment in LNG Facilities.

COSTA Project The Financials of LNG as Fuel

COSTA Project

@ a Glance
COSTA - EU Co-funded Project
COSTA Project CO2 Transport emissions Abatement by LNG (2012 2014). Development of an LNG adoption Masterplan in the Mediterranean Sea.

COSTA Project The Financials of LNG as Fuel

COSTA Project

MasterPlan
Howmuch? DemandAnalysis Where? SupplyAnalysis

Recommendation

How? TechnicalandLogistics Solutions

Decision Sustainabilityofthe solutions

COSTA Project The Financials of LNG as Fuel

COSTA Project

Continuation
COSTA Political Closure European Parliament, 19 02 2014 , Brussels
EU Foresees 2 Regional Projects (2014 - 2015)

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COSTA Project The Financials of LNG as Fuel

COSTA Project

Facts and Figures

LNG Bunkering in Med is a Niche Market but not a Blank Page anymore!
Results Based on a Comprehensive Model for Macro-Analysis Considering: Vessel Trends towards LNG as Fuel Critical Age Limit for Retrofitting Various types Orderbook and Future Deliveries Estimation on Refueling Quantities etc.

Obtain Information for Major Hubs, Satellite Ports: LNG Demand per Site & Annum Infrastructure Investment Costs OPEX per Annum Projects Viability Required Bunkering Surcharge

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COSTA Project The Financials of LNG as Fuel

Facts & Figures

Ports / Terminals

Research Activities Market & Feasibility Studies:

Piraeus, Thessaloniki and Patra Quantify Fleet Profile & Potential Users in 2020 2030 Reveal Accordingly LNG Needs in each Port LNG Flow Simulation and Infrastructure Requirements Financial Modeling and Investment Evaluation Under Uncertainty Calculate Sweet - Break Even LNG Surcharge by Port

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COSTA Project The Financials of LNG as Fuel

Facts & Figures

Ports / Terminals

Market Survey:
Collect Statistical Data Port Authorities Statistic Agency

Construct Database- sea-web.com

Preliminary Classification based on Vessel Type Extended Classification based on Vessel Particulars: Capacity (e.g. Dwt, TEU, berths) Age Installed Horse Power (kW) Service Speed

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COSTA Project The Financials of LNG as Fuel

Facts & Figures

Ports / Terminals

LNG Demand Assessment:

Assumptions on Vessel Trends towards LNG as Fuel (e.g. Short Sea vs Deep Sea) Define Age Limit for Retrofitting (e.g Below 10 or 15 years) Estimate Refueling Quantities per Vessel Type & Route Select Appropriate Dual Fuel Installations (MAN, Wrtsil) Calculate Refueling Demand and Number of Refuelings on a Daily and Yearly Bases. Assess Seasonality Especially for Cruise and Ro-Pax Vessels

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COSTA Project The Financials of LNG as Fuel

Facts & Figures

Ports / Terminals

LNG Storage Tanks:

Distance from LNG Import Terminal is Critical Lease Space in Terminal for Bunkering Activities Offshore Installations, FSRU

LNG Refueling Means:

Assess Logistic Solution and Seek for Optimum Solution Ships & Terminal Operation Profile (Vessels sequence, arrivals profile etc.) Estimated Demand for LNG (per Vessel, Day, Year, High Low Season)

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COSTA Project The Financials of LNG as Fuel

Facts & Figures

Ports / Terminals

Piraeus:
Vehicles Carrier - Car Terminal 716 Port Calls / 202 Vessels 2.398 Port Calls / 302 Vessels 770 Port Calls / 110 Vessels 4.293 Port Calls / 31 Vessels Container Ship - Container Terminal Cruise Ship - Passenger Terminal Ro-Pax Ship - Passenger Terminal

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COSTA Project The Financials of LNG as Fuel

Intelligence in Shipping

Introduction

LNG as Fuel Perspective

If not In Piraeus then where?

18

COSTA Project The Financials of LNG as Fuel

Facts & Figures

Ports / Terminals

Piraeus (Container Vessels):

Three Classes: Class (0-1.999 TEU) Small Feeder Vessels Connecting Hubs with Small Ports Class (2.000-7.999 TEU) Feeder Vessels Connecting Hubs with Small Ports Operating in Larger Distances Class C (8.000+ TEU) Mother Vessels Performing Transcontinental Routes

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COSTA Project The Financials of LNG as Fuel

Intelligence in Shipping

Facts & Figures

Ports / Terminals
Piraeus is a Major Short & Deep Sea Hub Age Determines Retrofit Potential Size Determines LNG Demand

Piraeus:

Preprocessing Container Vessels:

20

COSTA Project The Financials of LNG as Fuel

Facts & Figures

Ports / Terminals

Piraeus:
Destination and Installed Power are also Critical for LNG Demand

Preprocessing RoPax Vessels:

Small Ro-Ro/Pax Number of Arrivals Average Installed Power [kW] Average Service Speed [ knots ] Average Age 1132 12.735,6 22,2 20,4

Large Ro-Ro/Pax 756 29.090,4 36,0 10,2

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COSTA Project The Financials of LNG as Fuel

Facts & Figures

Ports / Terminals

Piraeus:
Same Preprocessing Analysis for all Critical Vessel Types Calculating for Each vessel Category: Expected Number of Port Calls in 2020 & 2030 Average Refueling Quantity (m3) Expected Percentage of LNG Fuelled Vessels Expected Percentage of Vessels Refueling in Port Expected Number of Annual Refuelings Expected Annual Demand for LNG (m3)

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COSTA Project The Financials of LNG as Fuel

Facts & Figures

Ports / Terminals

Piraeus:LNG Demand for Indicative Vessel Categories ( 2018 2020 )

Ship type Expected annual No of calls 2020 Average LNG bunker delivery size (m3) 92 Share of fleet that bunker LNG 2020 [%] Share of total calls with Lng bunker operations [%] No of LNG bunker operations 2020 Annual LNG (m3) 2020 29018,90 40547,35

Small Container Ship

1355

39

60,00

314

Medium Container Ship Small Passenger Cruise Large Passenger Cruise Small Vehicles Carrier Large Passenger Ro-Ro Ship (Vehicles) Piraeus - Crete -Piraeus Small RO-PAX Piraeus - Cyclades Piraeus Large RO-PAX Piraeus - Cyclades Piraeus Large RO-PAX Piraeus - North Aegean - Piraeus Large RO-PAX Piraeus - Dodecanese Piraeus

697 292 478 395 708 1132 756 408 274

202 143 450 77 189 44 59 132 242

48 48 71 53 100 74 77 74 100

60,00 60,00 60,00 60,00 100,00 100,00 100,00 100,00 100,00

201 84 202 125 708 36630,06 836 34052,60 580 39749,70 300 66237,46 274 12053,30 91024,25 9618,18 133659,18

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COSTA Project The Financials of LNG as Fuel

Sm al lC
1000 1200 1400 200 400 600 800 0

Piraeus 2020:

on t ai ne rS hi p ax C re te Cy c la de s lad es

La rg e La rg e Ro P ax Pa xC yc Sm La rg e Pa ss La rg e al lR o Ro P

Facts & Figures

Ports / Terminals

24

en ge Ro rC P ru ax ise No rt h Ae ge Sm an al lC Sm ar Ca all rri Pa er s se La ng rg er e Ro Cr P ui ax se Do de ca ne se

COSTA Project The Financials of LNG as Fuel

Expected Number of Port Calls (2020)

La rg e Pa ss

Piraeus 2020:

100

200

300

400

500

Facts & Figures

La rg e Ro P en ge r Cr

Ports / Terminals

25

ui ax se Do de La ca rg ne e se Ro P Sm ax al C lP re as te La se rg n e ge Ro rC P ru ax i se No rth Sm Ae ge al lC an on ta in er Sm Sh ip al lC ar La rg Ca e rri Ro er P ax Sm Cy cla al lR de o s Pa xC yc la de s

Average Refueling Quan ty (m3)

COSTA Project The Financials of LNG as Fuel

Facts & Figures

Ports / Terminals

Piraeus 2020:
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
es e e od ec ax yc la de s an Cr et

Expected Percentage of Vessels Refueling in Port of Piraeus

rg e

La rg e

La

Ae all ge Ro an P ax La Cy rg cla e Pa de ss s en ge Sm rC all ru Pa ise ss en ge rC ru Sm ise al lC ar Sm Ca rri al lC er on ta in er Sh ip

26

ax C

xD

Ro

Ro P

La rg e

Ro P ax N

Ro P a

La r

ge

Sm

or th

COSTA Project The Financials of LNG as Fuel

Facts & Figures

Ports / Terminals

Piraeus (Base Scenario With EU CoFunding):

20,000 cm Storage Tank - Use of Near by LNG Import Terminal 1 bunker vessel 1.000 m3 5 LNG Tracks 50 m3 each

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COSTA Project The Financials of LNG as Fuel

Facts & Figures

Ports / Terminals
LNG Demand: 225,000 tons / 500,000 m3 per Annum (2020)

LNG Bunkering in Piraeus Terminal

Infrastructure Works (Supply)
Investment Cost 97 m Operating Cost 14 m per Annum

Bunkering Surcharge for 15 years PBP (Discounted Cash flows) No EU Funding: 170 per ton 75% EU: 97 per ton

Piraeus Terminal Infrastructure Cost

120 100 80 60 40 20 0

97 m

14 m
Investment Cost Annual Opera ngas Cost 28 COSTA Project The Financials of LNG Fuel

Facts & Figures

Ports / Terminals

Patra:
Ro-Pax Operations in Adriatic Sea Represent a Major Demand Driver Distance From Revithousa LNG Import Terminal Increase substantially Increases Cost Financial Analysis shows nitial Investment Exceeds 80 m (Need for LNG Storage) Annual Operating Cost for 2020 & 2030 Close to10 m A Surcharge of 250 per ton of LNG is sufficient for a Pay Back Period (discounted Cash flows) of 15 Years for the Investment of the Port

Thessaloniki:
Due to Vessel Types Calling at the Port Demand for LNG is Estimated to be Less than 10,000 ton per Year

Ports Should Seek for EU Support

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COSTA Project The Financials of LNG as Fuel

Facts & Figures

Ports / Terminals

Genova 2020
initial Investment 85-105 m Annual Operating Cost exceeds 15 m A Surcharge of 110 per ton of LNG for a 15 years Pay Back Period initial Investment 80-105 m Annual Operating Cost for 2020 exceeds12 m A Surcharge of 150 per ton of LNG for a 15 years Pay Back Period initial Investment 30-50 m Annual Operating Cost for 2020 about 6 m A Surcharge of 250 per ton of LNG for a 15 years Pay Back Period initial Investment 30-50 m Annual Operating Cost for 2020 about 8 m A Surcharge of 150 per ton of LNG for a 15 years Pay Back Period
COSTA Project The Financials of LNG as Fuel

Napoli 2020

Ravenna 2020:

Venezia 2020:

Intelligence in Shipping

Poseidon-Med

Facts and Figures

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COSTA Project The Financials of LNG as Fuel

Facts & Figures

Short Sea Shipping

Research Activities Market & Feasibility Studies:

Various Ship Types Focused on Greek and Mediterranean Needs (100% ECA Operation) Quantify LNG as Fuel Retrofit Cost Financial Modeling and Investment Evaluation on 3 Alternatives LNG MGO HFO and Scrubbers

Calculate Pay Back Period and other Major Financial Criteria

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COSTA Project The Financials of LNG as Fuel

Facts & Figures

Short Sea Shipping

LNG Solution Comparison with other Alternative Fuels

Indicative Cost to Comply with Sulphur Cap Requirements (e.g. Large RoPax Vessel) MGO < 1 m Scrubber Approx. 5 m LNG Approx. 8 m

Consider also the: Alternative Fuels Spreads Reduction of the Specific Fuel Consumption with the Use of LNG (Save as you Sale) Various Technical Problems of Non-LNG Alternatives Economies of Scale will Decrease Retrofitting cost

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COSTA Project The Financials of LNG as Fuel

Facts & Figures

Short Sea Shipping

LNG Price Spread (e.g. Port of Piraeus)

LNG CIF price: 10 / Mmbtu 512 per ton LNG Bunker selling Price 609 per ton LNG - MGO Spread approx 111 per ton LNG HFO Spread approx -169 per ton
150 100 50 0 MGOLNG HFOLNG 50 100 150 200
440 LNG CIF LNG MGO HFO

Alterna ve Fuels Spread

111 MGOLNG HFOLNG

Alterna ve Fuels /ton

800 700 600 500 400 300 200 100 0 LNG CIF LNG MGO HFO 512 609 720

169

Surcharge: 97 per ton

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COSTA Project The Financials of LNG as Fuel

Facts & Figures

Short Sea Shipping

For 10 per MMbtu for LNG MGO-LNG Spread is 111 per ton

Aprox. 8 Years Pay Back For a RoPax

Spread MGO-LNG
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COSTA Project The Financials of LNG as Fuel

Facts & Figures

Short Sea Shipping

Aprox. 2 Years Pay Back For a RoPax

For 10 per MMbtu for LNG LNG-HFO Spread is 169 per ton

Spread LNG-HFO
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COSTA Project The Financials of LNG as Fuel

Transition to the LNG Era

Treats
High and/or Volatile LNG Price
Lead to Almost Zero LNG Fueled Orderbook in Future Make Retrofitting of Middle Aged Vessels not Feasible in Financial Terms Turn Existing LNG Fueled Projects to Toxic Investments

Sustainability
The Use of LNG as Fuel will Increase Demand and Sooner or Later the Price. Some Say that LNG Production Might not Meet Demand by 2030. Uncertainties on LNG Price and Spread are Present

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COSTA Project The Financials of LNG as Fuel

Transition to the LNG Era

Possibilities
Ability to Manage LNG Price and Spread
Political Means to Manage LNG & LSF Spread Use of Risk Management Tools. Risk Management can do very Little to Reduce Variability, but can be very Effective in Reducing Uncertainty for those Involved in Risk-Taking Decisions Know & Avoid Catastrophic Risks Impugn Greed For Profits Or Phobic Attitudes!!! Technocratic Criteria In Financing Establish Formal Procedures For Rating Corporate Performance and Investment Evaluation

Sustainable Financing is the Answer:

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COSTA Project The Financials of LNG as Fuel

Transition to the LNG Era

Possibilities
By 2020:
Hopefully Economy will Recover Starting a New Shipping / Shipbuilding Cycle Economies of scale and widespread of LNG would reduce Equipment Cost There is Time to Solve all Technical Issues and Train an adequate Number of Skilled Seafarers

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COSTA Project The Financials of LNG as Fuel

Conclusions

Towards the LNG Era in East Med

LNG is the Dominant Scenario Among the Alternative Fuels

Mandatory Regulations in 2020: Directive for LNG Bunkering Stations @ Core Ports (Supply) Low Sulphur Cap in Med (Demand)

EU Member States Approval (Spain, Portugal, Greece, Italy, Cyprus etc)

Transfer and Adapt Know-How from the Baltic / Singapore in Technical, Regulatory and Safety Issues

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COSTA Project The Financials of LNG as Fuel

Conclusions

Towards the LNG Era in East Med

Infrastructure Works: Huge Investment Costs EU Co-Funding Portfolio (TEN-T, Regional & Cohesion Funds, EIB, Innovative Financial Instruments - PPP)

Vessels Retrofitting: High Initial Cost

Private & Public Sector Financial Problems in S. Europe

Lack of EU Supportive Measures (only Pilot Actions) But Positive Cash-flows

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COSTA Project The Financials of LNG as Fuel

Conclusions

Towards the LNG Era in East Med

Ports & Vessels Are Expected to Voluntary Shift to LNG as Fuel due to Significant Benefits (prior to 2020)

LNG as Fuel will have Enormous Side Benefits: LNG Bunkering Services Infrastructure Construction Ship & Terminal Equipment Shipbuilding & Retrofitting Services Synergies with Mainland Energy & Transportation Sectors

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COSTA Project The Financials of LNG as Fuel

Conclusions

Importance for the Greek State

Greece-Special Characteristics:
Greek Archipelago Requires Ways to Access through Sea a Large Number of Remote Islands Greek Authorities Must Ensure Uninterrupted Accessibility and Sustainability of a Large Coastal Shipping Network Current Economic Conditions Have Reduced Demand: the System is One Step before Collapse Both Aegean and Ionion Archipelaga Are Sensitive Ecosystems Whose Main Characteristic is a Pristine Environment LNG Represents a Win-Win and Sustainable Solution: Lower Operating Cost and Lower Environmental Cost Initial Infrastructure Cost is Forbidding

But:

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COSTA Project The Financials of LNG as Fuel

Conclusions

Importance for the Greek State

Greek Terminals Expect (from the Transition to LNG in Shipping):
Increased Revenues Improved Environmental Conditions in the Port Area (Including Reduced Noise) Compliance to Newer Directives and Regulations Maintain Competitiveness and Ensure Survival Ability to Serve LNG Fueled Vessels in the Near Future

Despite:
High Initial Investment Cost for Infrastructure

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COSTA Project The Financials of LNG as Fuel

Conclusions

Importance for the Greek State

Greek Ship-Owners Expectations (from the Transition to LNG in Shipping):
Compliance with EU and IMO Regulations Stay in touch with Near Future Dominant Scenario Decreased Fuel Consumption Expected Positive Cash Flows PBP No More than 8 years in 90% Ability to Provide Shipping Services to the ECA Areas (Seasonal Adjustment) Improve Corporate Good Will and Eco- Friendly Profile by Using Green Fuel Take Advantage of LNG Combustion for Reduced Noise Emissions

Greek Financial Institutions Expectations:

Reduce Shipping Portfolio Risk Finance Sustainable Projects

Despite:
High Initial Investment Cost for Retrofits and New Buildings
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COSTA Project The Financials of LNG as Fuel

Recommendations

Towards the LNG Era in Greece

Consider the Comprehensive Network Especially in Area with Significant Geostrategic Role

Help Organize an Efficient Market for Natural Gas to Ensure Availability at Reasonable Prices

Reassess EU Incentives. Not only for the LNG Supply (Infrastructure Works) but also for Demand (Vessels) . Markets are Always Demand

Driven

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COSTA Project The Financials of LNG as Fuel

Recommendations

Towards the LNG Era in Greece

Provide Supportive Measures for Solutions to the Financial Obstacles (such as Innovative Financial Instruments, Pan-European Accreditation Mechanisms to Reveal Best and Viable Projects

Undertake Extended Focused Studies in Each Affected Region

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COSTA Project The Financials of LNG as Fuel

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COSTA Project The Financials of LNG as Fuel