LNG & LPG Shipping Fundamentals

June 2013

Jefferies LLC
Topics For Discussion
LNG Shipping:
What Is LNG And LNG Shipping?

LNG Shipping Charter Rates/Asset Values

LNG Shipping Demand Fundamentals

What About The US?

LNG Shipping Supply Fundamentals

LNG Shipping Supply/Demand Model

LPG Shipping:
What Is LPG and LPG Shipping?

LPG Shipping Charter Rates/Asset Values

LPG Shipping Demand Fundamentals

The US As A Potential Game Changer

LPG Shipping Supply Fundamentals

LPG Shipping Supply/Demand Model

What is LNG and LNG shipping?
Liquefied natural gas (LNG) provides a cost-effective means for
transporting natural gas overseas by super-cooling it to a liquid form,
reducing its volume by approximately 1/600th of its gaseous state. The
LNG shipping industry continues to grow rapidly with global demand for
LNG expected to increase by more than 50 percent by 2030.

Liquefaction Natural gas is super cooled to a liquid state at

approximately -260 degrees Fahrenheit at a liquefaction facility while
reducing the volume to 1/600th of its original volume allowing for
economic transportation.

Shipping LNG shipped from liquefaction facilities to import terminals

or FSRUs on specialized ships with containment systems to insulate the LNG
in its liquid form.

Regasification LNG is returned to its gaseous state either at a land

based regasification terminal or a floating storage and regasification unit
(FSRU) and delivered to end users via pipeline.

Economics Costs include liquefaction costs of ~$3.00/MMBTU,

shipping/fuel costs of ~$1.50-$3.50/MMBTU, and the cost of the gas at
~$4.00/MMBTU in a low cost region for a total delivered cost of ~$8.50-
$10.50/MMBTU relative to a market price of ~$12-$15/MMBTU in Europe
and Asia based on $100/barrel crude oil as gas in Europe and Asia is
typically priced at 11-15% of the price of crude on an energy equivalent
basis.
LNG Shipping Market Analysis Charter
Rates/Asset Values
Short-term LNG charter rates have risen since 2010 due to increased global liquefaction
capacity although short-term charter rates have softened in recent months due to a series of
"one off" disruptions.

Newbuilding orders for new LNG carriers have increased since the lows of 2008-2010 but
have failed to keep pace with anticipated LNG shipping demand growth due to difficult bank
financing conditions and limited LNG shipbuilding capacity.

Newbuilding asset values have remained essentially unchanged since 2009 at

approximately $200 million per vessel despite the increase in ordering that began in 2011 as
shipyards still struggle with the broader shipping industry.

LNG short term timecharter rates (138-145k cbm) LNG Newbuild Contracting And Prices
$'000 per day 000's CBMs $MM
180 4,800 $300
160
4,000 $250
140 Japanese earthquake
3,200 $200
120
100 2,400 $150

80 1,600 $100
60 800 $50
40
0 $0
20
0

LNG Contracting 147/160k CBM Newbuild Price

Source: Fearnleys Research, Jefferies estimates Source: Clarksons Research

LNG Shipping Market Analysis LNG
Shipping Demand Fundamentals
Natural gas demand in Asia expected to continue to strengthen

Low cost LNG producers at an advantage to meet increasing natural gas demand

Limited new liquefaction capacity scheduled to come online in 2013

Significant liquefaction capacity to come online in 2014/2015 timeframe

Every incremental 1 bcm per annum requires 1.5-2 LNG carriers to service

Development timelines will be key as delays are the single biggest risk to LNG shipping

Global LNG Project Status

Country Project Capacity (bcm) Online date
Global Liquefaction Capacity Additions (bcm)
Algeria Skikda new train 6.1 1Q13 50
Angola Angola LNG 7.1 3Q13
Australia Gorgon LNG 20.4 4Q14
40
Papua New Guinea PNG LNG 9 2014
Australia Queensland Curtis LNG 11.6 3Q14
Indonesia Donggi Sennoro LNG 2.7 2015 30
Australia Gladstone LNG 10.6 2015
USA Sabine Pass 22.7 2016/2018
Australia Australia Pacific LNG 6.1 2016 20

Australia Wheatstone LNG 12.1 2016

Australia Prelude LNG 4.9 2017
10
Australia Ichthvs LNG 11.4 2018
USA Freeport LNG 14.3 2018
Canada Kitimat 6.7 2018 0
2010 2011 2012 2013E 2014E 2015E
Total 145.7

Source: IEA, Waterborne Energy, Jefferies estimates

Source: IEA, Waterborne Energy, Jefferies estimates
LNG Shipping Market Analysis What
about the US?
The US has the potential to be a significant LNG exporter

Only 2 liquefaction projects have been approved so far (Sabine Pass and Freeport)

Additional approval decisions likely throughout 2013 and 2014; 10 already applied for FERC approval

Additional approvals would be very material to the LNG shipping market

Sabine Pass will require ~24 LNG carriers to service while Freeport will require ~14 LNG carriers to service

US LNG Projects Under DOE Review

Project Capacity (bcf/d) Status Online date
Sabine Pass 2.2 Approved 2016
Freeport LNG 2.8 Partial Approval 2018
Lake Charles 2.0 Under Review
Dominion Cove 1.0 Under Review
Cameron LNG 1.7 Under Review
Jordon Cove Energy 1.2 Under Review
LNG Dev. Co. - Oregon LNG 1.3 Under Review
Corpus Christi 1.8 Under Review
Excelerate IQ Solutions 1.4 Under Review
Carib Energy 0.0 Under Review
Gulf Coast LNG 2.8 Under Review
Southern LNG - Elba Island 0.5 Under Review
Gulf LNG (Miss) 1.5 Under Review
CE FLNG 1.1 Under Review
Golden Pass 2.6 Under Review
Main Pass 3.2 Under Review
Waller Point LNG 0.2 Under Review
Pangea LNG 1.1 Under Review
Magnolia LNG 0.5 Under Review
Total 28.94

Source: IEA, Waterborne Energy, Jefferies estimates

LNG Shipping Market Analysis LNG
Shipping Supply Fundamentals
LNG carrier current orderbook/fleet ratio remains below average levels at ~28.5% of
existing fleet

Speculative ordering remains limited due to significant capital requirements, limited

bank financing availability, and technical expertise required

Relatively few shipyards possess technical know-how to build an LNG ship; existing
newbuilding orders placed at only 8 shipyards.

China has yet to get up the learning curving on building LNG ships with just 1yard
building ships and at a higher cost than South Korean builders.

LNG Fleet/Orderbook Trends Builders Of Current LNG Orderbook

M itsubishi Kawasaki H.I.,
MM cbm Hudong H.I., 5.1% 2 .6%
60 120%
Zhonghua,
50 100% 6.6% Sam sung H.I.,
33.2 %
40 80%
Hyundai
30 60% Sam ho, 8.2 %
20 40% STX
10 20% Shipbuild.,
8.0%
0 0%

Hyundai H.I.,
16.0% Daewoo,
Fleet Orderbook/Fleet 2 0.3%

Source: Clarksons Research Source: Clarksons

LNG Shipping Market Analysis LNG
Shipping Supply/Demand Model
Shipping Supply/Demand Fundamentals (000 cbm)

2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E
LNG Liquefaction Capacity (MMcm) 240,000 255,000 265,000 325,000 360,000 375,000 380,900 394,100 435,100 448,400
LNG Trade Growth (MMcm) 220,000 240,000 240,000 250,000 300,000 325,000 318,500 354,690 391,590 403,560
Liquefaction Utilization 92% 94% 91% 77% 83% 87% 84% 90% 90% 90%
LNG Trade Growth (MMcm) 20,000 - 10,000 50,000 25,000 (6,500) 36,190 36,900 11,970

Additional LNG Carriers Required 23 - 11 57 29 (7) 38 38 12

LNG Fleet 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E
Beginning balance 22,794.6 26,791.5 31,558.4 40,264.5 47,211.5 51,516.9 53,124.4 53,196.1 56,402.9 60,498.2
Deliveries 3,996.9 4,796.3 9,119.0 7,211.1 4,433.8 1,832.7 323.1 3,356.8 4,245.4 4,711.1
Demolition/Losses/Removals - 29.4 412.9 264.1 128.4 225.2 251.4 150.0 150.0 150.0
Ending Balance 26,791.5 31,558.4 40,264.5 47,211.5 51,516.9 53,124.4 53,196.1 56,402.9 60,498.2 65,059.3
Fleet Growth 3,996.9 4,766.9 8,706.1 6,947.0 4,305.4 1,607.5 71.7 3,206.8 4,095.4 4,561.1
% Change 17.5% 17.8% 27.6% 17.3% 9.1% 3.1% 0.1% 6.0% 7.3% 7.5%

Additional LNG Vessels Delivered 33 60 48 30 11 0 20 26 29

Vessel (Shortage)/Surplus 10 60 36 (28) (18) 7 (18) (13) 16

What is LPG and LPG shipping?
Liquefied petroleum gas (LPG) includes propane, butane, butadiene,
isopropane, propylene, and vinyl chloride monomer, which are all by-
products of the production of oil and natural gas. LPGs have a variety
of uses including as a cooking/heating fuel, refinery feedstock,
automotive power, and numerous other plastics and chemicals
applications.

Fractionation Raw natural gas is processed to remove acid gases,

after which a liquid stream is extracted, which is then fractionated to
produce propane and butane along with other LPG products.
Alternatively, LPGs are produced as a by-product of the crude oil
refining process, which accounts for about 40% of LPG production.

Shipping LPG is shipped in liquid form to keep the volume small

and facilitate handling using either pressurized or refrigerated ships
to keep the gas in liquid form.

Distribution LPG is distributed for end use via either a pipeline

for areas that have the infrastructure or via tankers/canisters where
infrastructure is less developed. It is the ability to distribute LPG in
small quantities in remote areas that makes LPG a particularly
attractive cooking/heating fuel in emerging market countries.
LPG Shipping Market Analysis
Charter Rates/Asset Values
LPG shipping charter rates have been increasing YTD as a result of robust demand
growth for LPG products in emerging markets and increased LPG supplies available for
shipping which has outpaced LPG shipping fleet growth

Newbuilding orders for new LPG tankers have remained minimal due to difficult bank
financing conditions and limited LPG shipbuilding capacity

Newbuilding asset values have remained fairly flat on a $/cgt basis and represent
attractive opportunities to earn attractive returns given the recent upward trajectory of LPG
shipping charter rates

LPG 12-month Time Charter Rates LPG Newbuild Contracting And Prices
$'000 per month 000's CBMs $/cgt
2,000 $4,800

$300
1,500 $3,600

$200 1,000 $2,400

500 $1,200
$100

0 $0

Semi-R ef 3.2k CBM Pressurized 3.5k CBM trading West

Pressurized 3.5k CBM trading East LPG Contracting LPG 22-24,000 cbm $/cgt

Source: Clarksons Research Source: Clarksons Research

LPG Shipping Market Analysis LPG
Shipping Demand Fundamentals
LPGs have a wide variety of applications with use as a cooking/heating fuel in emerging
markets being the most prevalent

Asian demand dominates the trade

The majority of LPG production is sourced from the Middle East with LPG being a by-
product of oil and gas production

Middle East LPG production expected to grow 9% per annum in 2013 and 2014, which
should allow the region to continue to satisfy demand growth

Global LPG Demand Major LPG Trades In Tonne Miles

refinery other Other Routes
3% 1% NA>Europe 2 1%
2%
auto
NA>SA/
10%
Carribean
2%
industrial residential- M iddle
10% commercial East>Asia
51% 64%

Australia>Asia
3%
chemical Africa>Asia
25% 4% Africa>Europe
4%

Source: Purvin & Gertz Inc. Source: IHS Global Insight, Danish Ship Finance
LPG Shipping Market Analysis The US
As A Potential Game Changer
LPG exports represent an attractive opportunity for US producers to profitably make use
of immense shale gas reserves

US Coast Guard confirmed in June 2012 that pressurized vessel owners would be able to
load propane in the US making the export of LPGs much easier than the export of LNG which
is mired in regulatory red tape

US propane/propylene production has surged along with natural gas production over
the past couple of years

Increasing US LPG export capacity enabling increasing LPG production to be shipped

from the US in increasing quantities NOW
US Propane and Propylene production US Propane and Propylene Exports
1500 250

1400
200
1300
150
1200

1100 100

1000
50
900
0

Weekly U.S. Refiner, Blender, and Gas Plant Net Production of Propane and Propylene
(Thousand Barrels per Day) Weekly U.S. Exports of Propane and Propylene (Thousand Barrels per Day)

Source: EIA Source: EIA

LPG Shipping Market Analysis LPG
Shipping Supply Fundamentals
Orderbook/Fleet ratio remains at modest levels of 14-15% despite attractive outlook

Speculative ordering remains limited due to limited availability of capital and the
technical know-how to be a competitor in the LPG shipping space

Relatively few shipyards possess the technical know-how/desire to build LPG carriers;
existing newbuilding orders for small pressurized carriers placed at only 11 shipyards

LPG shipbuilding is a niche, high value segment historically dominated by Japanese

builders with limited emerging competition from China

LPG Fleet/Orderbook Trends LPG Pressurized Orderbook Builders

'000 cbm
25,000 60% South Korea
18% Brazil
20,000 50% 2 7%
40%
15,000
30% Netherlands
10,000 9%
20%
5,000 10%

0 0%
Japan China
37% 9%

,000 Cu. M. Orderbook/Fleet

Source: Clarksons Research Source: Clarksons Research

LPG Shipping Market Analysis LPG
Shipping Supply/Demand Model
Shipping Supply/Demand Fundamentals (000 cbm)

LPG Fleet 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E
Beginning balance 14,463.9 15,137.4 15,868.3 17,941.9 18,693.1 19,331.9 19,618.2 19,946.8 21,258.8 22,539.8
Deliveries 944.9 1,431.7 2,860.7 1,725.9 1,315.5 678.1 409.7 1,462.0 1,431.0 741.0
Demolition/Losses/Removals 271.4 700.9 787.0 974.7 676.8 391.8 81.1 150.0 150.0 200.0
Ending Balance 15,137.4 15,868.3 17,941.9 18,693.1 19,331.9 19,618.2 19,946.8 21,258.8 22,539.8 23,080.8
Fleet Growth 673.5 730.9 2,073.6 751.2 638.8 286.3 328.6 1,312.0 1,281.0 541.0
% Change 4.7% 4.8% 13.1% 4.2% 3.4% 1.5% 1.7% 6.6% 6.0% 2.4%

LPG Seaborne Demand Growth 4.0% -18.0% -2.0% 13.0% 10.0% 8.0% 8.0% 8.0%
LPG Fleet Growth 13.1% 4.2% 3.4% 1.5% 1.7% 6.6% 6.0% 2.4%
(% Undersupplied)/Oversupplied 9.1% 22.2% 5.4% (11.5%) (8.3%) (1.4%) (2.0%) (5.6%)

Source: Clarksons Research, IHS Global Insight, Danish Ship Finance, Jefferies estimates