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    2012

    [LNG REPORT 2012]

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    III. LNG Shipping Fleets and Costs

    a. LNG Shipping Fleet & Vessels

    i. How many ships for a project?

    Determine

    AnnualLNG

    DemandLiquefaction Capacity

    Plant Availability

    Calculate

    No.

    Of

    CargoesShip Size

    Determine

    Ship

    Arrival

    frequencyPlanned Maintenance

    Calculate

    No.Of

    ShipsDestination Ports

    Trade Split

    Ship Journey Times

    Offload port delays

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    Determining No. of Ships for a Project

    EXAMPLE:

    DES project Nigeria to UK

    Liquefaction train = 4Mtpa

    - Equates to max daily production of 12,000 tonnes over 330 days annual operation

    Will consider use of 155,000cbm standard vessel sixe

    - A 155,000cbm vessel delivers 150,476cbm cargo

    Round trip takes 12.5 days

    How many ships

    ii. LNG Shipping

    1. Developing History

    The ship ever classified as liquefied gas carrier was Methane Pioneer in 1958

    Traditionally, LNG gas carriers were funded and built for single projects,

    balanced with 20-25 years take-or-pay sales contracts

    Japan and Korea created their own LNG ship building industries through

    imposed FOB supply imported using their own tankers

    China has recently begun to adopt similar thinking in developing contracts

    Malaysia policy was to export LNG only on ex-ship (CIF) basis and reserved

    all shipping for Malay flagged vessels

    India has recently done the same for imports. The LNG marine industry is growing and changing

    iii. The Modern LNG Fleet:

    1. Growth

    o 1998: it had taken 34 years to reach 100 vessels in service

    o 2006:200 vessels in service

    o 2008/9: wil l reach 300 vessels in service

    o Estimated 326 vessels needed in 2010

    o

    Potential dangers as all parties assume safety in the norm and thatrelevant skills will be available.

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    2. Modern LNG Fleet (by type) at 27 April 2012

    LNG Carrier Fleet By Type

    LNG CARRIER FLEET BY TYPE

    Type Delivered On Order Conversion Total

    Ship 363 70 0 433

    FPSO 0 1 0 1

    FSRU 7 6 1 14

    RV 7 0 0 7

    Total 377 77 1 455

    Source: Platou LNG

    The fleet has grown rapidly to meet the increases in trade rising from just under 5 mill ion TEU at

    the end of 2000 to 14.28 mill ion TEU at the end of March 2011.

    3. Development of World Container Fleet Capacity: 2000 to 2011

    (Million TEU End of Period)

    Source: Drewry

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    4. LNG Fleet Age Profile

    Global LNG Fleet by AGE, 2011 (Number of Carriers, % of Total)

    iv. World LNG Shipping:

    1. Sufficient ship building capacity to meet projected demand?

    Probably only about 15 world shipyards capable of building LNG tankers

    Only about 8 established shipyards currently build LNG tankers- 3 major yards in Japan

    - 3 in Korea

    - 2 in Europe

    - 1 now in China

    Plus:

    - 2 new yards in Japan

    - 2nd

    possibly in China

    - And, Russia, India & Poland soon?

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    2. LNG Orderbook , LNG fleet development and Forecast

    3. LNG Shipping Process

    4. Retirement and New Builds

    Due to increased safety and environmental controls there about 55 to 62 older

    tankers that wil l be retired up to 2014, as they become less commercially

    uneconomic

    - Some will be converted into FSRUs

    We are now seeing swelling orderbooks at the South Korean shipyards but the

    current orderbook of 56 vessels will not meet projected need

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    This is mostly driven by increasing Asian plants and demand

    - New Australian plants alone will need additional 40 to 45 vessels to 2015

    - New special vessels for Yamal LNG also

    5. Structure

    Contrary to the trend in more traditional shipping markets (e.g., oil tankers, bulk

    carriers), the O&G majors and state enterprises tend to be more directly

    involved in LNG shipping

    - 44% of fleets is owned by O&G majors and state enterprises

    Independent owners and international companies are re-emerging as significant

    players

    - Among private owners, 55% are South Korean or Japanese shipping

    corporate- About 33% of new order book is for independent ship-owners with around

    21% being Japanese and 24% being Korean.

    - Now we are seeing independent Greek and Scandinavian companies

    entering LNG taner market with new builds.

    - O&G majors account for about 12%

    6. Shipowner process

    Ships can be owned by LNG sellers (directly or by special purpose company), or

    by buyers or independent third parties who charter vessels out to LNG buyers &

    sellers.

    Shipowner must consider several factor before ordering a new build LNG tanker

    - Financing (usually project financed via banks)

    - Shipyard quoted prices

    - Shipyard slot availability

    - Cargo containment system required

    - Standard or ice-class

    - Etc.

    Shipowner reviews all such specification with the classification societies (Lloyds,

    ABS, etc.), the shipyards and the equipment providers to allow yard selection,

    usually by competitive tender process.

    Shipowner generally has a supervision team onsite at the shipyard throughout

    the construction process to ensure that vessel is being build to agreed

    specification.

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    7. Vessel Safety

    Today, LNG tankers safely transport more than 220 million tons per year to

    ports around the world- One LNG tanker enters Tokyo Bay every 20 hours

    - One LNG cargo enters Boston harbor every week

    Outstanding safety records, but why?

    - Continuous improvement in ship technology & maintenance

    - Continuous improvement in ship safety equipment

    - Comprehensive safety procedures and training

    - Effective government regulation and international oversight

    SIGGTO Society of International Gas Tankers and Terminal Operators

    8. Vessel Design basics

    Double-hulled tankers/ gas carriers

    - From first one unlike oil tankers

    Traditionally driven by stem propulsion

    - Use of LNG Boil-off gas

    LNG cargo contained in protective, cryogenic tanks within inner hull

    - Broadly, 2 types of gas carrier vessel based on LNG tank design

    Enhanced equipment to support safe ship handling

    Sophisticated leakage detection equipment and emergency shutdown systems

    9. Containment and Boil-off Gas

    LNG is carried

    - As a boiling liquid at approx -160 centigrade

    - In non-pressurized tanks

    LNG cargo is boiling therefore it continually produces vapor (Boil-off Gas BOG)

    - Mostly used as propulsion fuel

    - Can be re-liquefied

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    Boil off Gas used as Propulsion Fuel

    Source:BrighthubEngineering

    Boil off Gas re-liquefaction

    Source: CNOOC Fujian LNG

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    10.Moss Containment

    LNG is stored in a numbers of self-supporting, aluminum spherical tanks fixed

    within the hull LNG cargo system is separate such that any contraction/ expansion is not passed

    to the tanker hull.

    11.Membrane Containment

    Standard tanker consists of 4 separate LNG holds

    Insulating material is applied to the ships inner hull

    Membrane applied to ensure liquid tightness

    Source: epd.gov.hk

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    12.Containment Design Advantages & Disadvantages

    Key selection issues

    Capacity/ fi lling l imits

    Weight

    Complexity of manufacture

    Cost

    Size/ terminal compatibility

    Self-Supporting Tanks

    Tank: Heavy rigid metallic.

    High material and Fabrication cost.

    Tank capacity: 125,000 m Ship tank material weight: 4,000 tons

    Insulation: Non-load bearing. Relatively cheap.

    Membrane Tanks

    Tank: Specialized light construction

    High material and fabrication cost

    Tank capacity: 125,000 m

    Ship tank material weight: 400 tons

    Insulation: Rigid load bearing over whole surface. Relatively expensive.

    Source: Shell Global Solutions

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    13.Current Fleet by Containment Design Type

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    14.What is Storage Tanker Roll-over?

    Natural convection causes circulation of the LNG within the storage tank, maintaining a uniform

    liquid composition. The addition of new liquid, however, can result in the formation of strata of slightlydifferent temperature and density within the LNG storage tank. "Rollover" refers to the rapid release of

    LNG vapors from a storage tank caused by stratification. The potential for rollover arise when two

    separated layers of different densities (due to different LNG compositions) exist in a storage tank.

    Source: www.igu.org

    Note: ship tanks only fill from bottom

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    v. LNG Fleet

    1. Tank Roll-over?

    It has been generally considered that rollover in cargo tanks was not a majorissue, although cargoes with high nitrogen content are more prone

    However, an incident has been reported when a vessel with substantial LNG

    heel (~5400m) consolidated into only 2 tanks loaded a higher density LNG

    below the heel

    - Original cargo (& heel) was of lean LNG from an Atlantic Basin terminal

    - New cargo loaded was rich LNG reloaded from an SE Asian terminal

    - Important to remember that ship tanks only fill from bottom

    The first tank roll -over occurred 5 days after loading and second tank rolled a

    day later

    -Whilst there was reported rollover in both ship tanks causing a noticeablerise in tank pressure there was no uncontrolled BOG release

    2. IHI SPB Containment

    Special design prevents sloshing damage which can occur in membrane tanks

    Most expensive containment system

    Main potential is for Floating LNG Production and FSRU applications

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    3. LNG Tankers of various Types and Sizes

    Moss Type

    4 Tanks

    5 Tanks

    6 Tanks

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    Membrane

    Large

    Small

    3 Tank Moss

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    Other Types

    Pressurized

    Prismatic

    Conch

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    4. Standard Ship Size

    1970-2002

    130-140,000m

    Limitations

    - Japanese maximum displacement, 105,000 dwt

    - US maximum draft, 11.3 m.

    Conservative designs

    2002-2006

    140-153,000m

    Limitations

    - Japanese maximum displacement, 105,000 dwt

    - US maximum draft, 11.3 m.

    Optimized designs

    - Larger ships, same constraints

    5. Vessel Size has increased

    2007

    A new generation of LNG tankers arrived to transport the output of the

    large Middle East mega-train projects to long haul markets in USA and

    Asia

    1. To extend the reach of existing commercial ventures in other distant

    supply centers

    2. Fewer transits with reduced fuel costs

    Vessel Size for its economies of scale are critical for this new strategy to

    achieve equivalent or lower delivered cost

    - Increase from 138,000 to 220,000m vessel size can reduce cargo

    delivery costs by up to 45%

    54 Q-flex and Q-max vessels now operating equaling ~20% of global fleet

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    Growth in Capacity of LNG Carriers

    Source: Short History of Shipping, Peter G. Noble

    125,000m

    (MOSS)

    145,000m

    (MEMBRANE)

    200,000m

    (MEMBRANE)

    250,000m

    (MEMBRANE)

    LNG Cargo Tanks 4 4 5 5

    Length (overall) m 285 289 313 345

    Beam (m) 44 43.4 50 54

    Loaded Draft (m) 11 11.4 12 12

    Ballast Draft (m) 10 9.7 9.9 10.3

    Deadweight tonnes 69,000 72,000 100,000 120,000

    Displacement (loaded) tonnes 97,800 103,000 140,000 174,000

    Boil-off Rate % per day 0.15 0.15 0.14 0.13Max. Loading Rate (m/hr) 11,000 13,000 16,000+ 16,000+

    Manifold dia inches 16 16 20 20

    Propulsion Power MW 26 MW 27 31 34

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    Against Bigger ships

    Draft and its relationship with LOA & Beam size is the issue for Moss tankers

    - Must have loaded draft of 12 meters or less

    -Suez canal

    - Limited terminal access

    Terminal loading and unloading lines and arms limited typically to 10,500m/hr

    Commercial contracts require a turnaround of 24 hours so a 138,000-155,000 m

    LNG ship unloads in 12 hours

    A 216,000m ship takes 21 hours to unload

    Increasing size = increased design problems

    Regarding sloshing, particularly for Membrane tankers.

    Possibility to put in 5th

    tank per vessel but then cost goes up due to associated

    equipment

    The sloshing phenomena occur when the ship motions coincide with the natural

    frequency of the liquid motion in the tanks. The build-up of violent motion is due t

    frequency, not amplitude.

    Increasing size = new propulsion systems

    Increasing size is driving consideration of new more complex and efficient

    propulsion methods (away from single screw, steam turbines)

    - Single screw slow speed diesel

    - Twin screw, lean burn diesel electric

    -

    Twin screw, diesel electric coupled with re-liquefaction units to limit boil-off- 4 stroke diesels using boil-off gas as a dual fuel

    - Gas turbines

    Choice of propulsion system is highly correlated to

    - Commercial drivers (fuel saving vs. maintenance)

    - Type of trade (point-to-point, short voyage, long distance voyage or merchant)

    - Experience of shipping company

    6. Changing propulsion trends:

    Environmental pressures on LNG carriers

    FUEL NOx SOx CO2

    Steam Turbine HFO + LNG 200 2,400 180,00

    Low Speed Diesel + re-liquefaction HFO 3,950 1,800 120,00

    Dual fuel electric LNG only 240 0 100,00

    Gas turbines and COGES LNG only 850 0 108,00

    Note: Emissions shown in tones/ year/ ship Source: ALSTOM

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    In 2003, with exception of 3 very small vessels, ALL were steam turbine

    driven, burning combinations of BOG and Heavy Fuel Oil (HFO).

    Now, around 40% of new vessels on order are for diesel (Diesel Fuel Diesel

    Electric) driven ships

    - DFDE vessels cannot burn BOG/ HFO fuel combination

    - New Q-flex and Q-max vessels now use slow speed engines burning HFO

    only

    Gas turbine units have fuel efficiency of 38-40% compared with 28% for

    steam turbines

    - Plus, would use light gas instead of heavy bunker oil as fuel.

    Qatars Nakilat is reported to be considering changing all its 45 tankers

    (including Q-flex and Q-max) to run only on LNG gas fuel Should they decide to go ahead with this plan the tankers will be converted

    during 2012 to 2015

    Shipping brokers and analysts say the refit programs and consequent idling

    of Qatari tonnage wil l push day-rates on LNG carriers even higher as they

    wil l have to charter in other tankers to cover during refit period.

    Other design development

    New advanced containment designs for both Moss and Membrane tank

    carriers

    On-board re-liquefaction facilities for cargo retention on new Qatari vessels

    7. Vessel size has also decreased

    Coral Methane

    The first Polish built LNG carrier was launched on may 7, 2008, at Gdansk

    based Stoczina Polnocna SA (Northern Shipyard), member of REMONTOWA

    Group

    - Diesel/ gas electric driven

    - Can carry a variety of gas cargoes; liquefied natural gas (LNG), liquefied

    petroleum gases (LPG) or ethylene

    - Ice class 1B

    - Cargo capacity 7,500m

    - Length over all 117.80m; breadth 18.60 m; draught 7.15 m

    8. Technological Change

    Cold Weather needs

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    More severe weather conditions ice and waves

    - Sakhalin winter-ising the vessels

    - Snohvit/Shtokman/ Barents Sea artic-ising the vessels

    Requires greater thickness (ice) and more cryogenic steels for hulls

    Requires strengthened propellers, and protection

    Ice-class

    Sovcomflot

    - Energy shipping company

    - One of most modern and youngest world fleet

    - Specialist in ice-class vessel and extreme cold operations

    - Took delivery of 2 tankers at end of 2007 ex Japan for Sakhalin 2 project

    to travel to Japan & elsewhere on 20 year charter

    145,000m

    Moss containment

    Ice-class

    Russia

    - Reported that Russia will requi re 30 LNG tankers by 2020 to transport

    ~25Mtpa from existing and new export plants

    Shtokman LNG wil l need 12 new vessels

    Yamal LNG wil l need 12 new vessels; new design for large-scale,

    year around Arctic export .. Very large, ice-class with Moss

    tanks

    Others will need ~6 new vessels

    - Many, if not all, of these vessels to be built by Russian United

    Shipbui lding Yards agreements with Korean shipyard and with French

    Technip for technology transfer

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    9. LNG Transfer at Sea

    Two vessels moored together

    LNG transferred using flexible hoses (6,000 m/h)

    Benign conditions required

    Allows maximization of Exelerate Energy, Energy Bridge vessels

    Ataris testing transfer from their Q-flex & Q-max vessels to smaller tankers

    Maximization of Exelerate Energy business model

    The Problem.

    - Tugs: Much smaller than LNG carriers. Work beam on to waves

    10.Tandem Unloading

    LNG (un)loading at wave heights up to 5.5 m (18ft)

    Considerable design work performed by individual companies and through JIPs

    - Model testing completed

    - Products commercially available

    - Needs a project to develop further

    LNG tankers would need modification so would have to be dedicated to a

    specific trade

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    11.Hoses

    Considerable work being done in the industry to develop and commercialize

    large diameter cryogenic LNG hoses for (un)loading- Designs focusing on (un)loading in wave heights of 4.5-5.5 m

    - Floating and sub-surface versions being developed from aerial hoses

    12.LNG Shipping Experienced personnel a serious challenge

    Number of officer on a LNG carrier

    Deck officers = 5 ( including Cargo)

    Engineering= 5 (including Cargo)

    Total Off icers = 10

    Estimate of new required officers to meet shipbuild

    143 x 10 x 2.5 = 3,575

    Senior officers = 2,145 (60%)

    Junior Officers = 1,430

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    b. LNG Shipping Logistics & Costs

    i. Basic Commercial Models

    Free on Board (FOB)

    - Title to the LNG cargo transfer to buyer at loading and buyer has responsibility for

    shipping

    Cargo, Insurance & Freight (CIF)

    - Title of LNG cargo can transfer during the voyage (high seas) or delivery and the

    seller is responsible for shipping; complex liabilities as buyer is responsible for cargo

    but sel ler responsible for shipping.

    Delivered Ex-ship (DES)

    - Title transfers on unloading and seller has responsibility for shipping

    ii. Control of Shipping

    For LNG sellers, control of LNG shipping is a core value chain issue to ensure loading

    schedules are tuned to production activities

    - Shutting in or slowing LNG liquefaction needs to be avoided.

    Controlof shipping does not necessarily require ownership or operation both short

    and long term charters provide sufficient controls

    -Having the ability to tune an FOB ship loading schedule and the heelmanagement of vessels provides sufficient control in most cases

    - This tuning facili ty does however require some contractual changes to the

    apportionment o shipping & commercial l iabilities.

    iii. Long Term LNG Charter Contracts

    Traditionally:

    Newbui ld vessels constructed to meet the requirements of a specific project

    Long duration charter period (typically 15-25 years)

    Fixed or relatively fixed hire

    iv. Risks to Owner and Charterer

    Owner

    - Technical/ Operating Risk

    - Non-performance by the charterer

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    Charterer

    - Technical/ Operating Risk

    - Non-performance by the owner

    -Market risk

    v. LNG Charter Terms

    The owner is responsible for the operation, maintenance and performance of the vessel

    The technical operating/ breakdown risk is shared between owner and operator

    - Of hire and exceptions provisions typically excuse charterer from paying hire but

    owner not obliged to provide alternative vessel or pay damage

    - If repeated/ serious failure to perform owners obligations, charterer may have right

    to replace vessel operator or take vessel under a bare-boat charter

    vi. Allocation of Costs or Who Pays for What

    Type of Charter Shipowner Ship Charterer

    Spot or single voyage Capital, operating, voyage None

    Consecutive voyage Capital, operating, voyage None

    Contract of affreightment Capital, operating, voyage None

    Period of Time Charter Capital, operating Voyage

    Demise or bareboat Capital Operating, voyage

    Source: Drewry Maritime Research

    Allocation of costs depends on the nature of the shipping contract The shipowner aims for a minimum charter hire rate, at which costs (including an allowance for

    a target %age rate of return on investment capital) wil l equate to revenues.

    - This minimum rate differs according to the type of charter contract employed, because the

    owners costs differ according to the type of charter contract employed

    vii. Basic Economics

    Breakdown as:

    Capital Costs (fixed costs): purchase of vessel consist of ship owner equity plus bank

    financing interest

    Operating Costs (variable non-trading): vessel costs unrelated to trading consist of

    crew, insurance, repair & maintenance, stores, spares, lubes, etc.

    Voyage Costs (variable trading):directly related to trade consist of bunker fuel, port

    & canal costs.

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    viii. New Build Capital Costs

    LNG tankers are the worlds second most costly merchant vessels after very large

    cruise l iners- Similar degrees of sophistication to build process

    LNG tankers are by far the most expensive type of cargo vessel, costing two to thre

    times the price of an oil tanker of similar tonnage.

    New LNG tanker average capital cost is ~$200-300million for Q-flex and Q-max

    vessels and ~$180-190 mil lion for 155,000m

    - Steel costs have risen rapidly over recent years

    - New technologies

    - New propulsion systems

    ix. ECONOMICS

    1. Newbuild Prices

    Newbuilding Price (Conventional LNGC)

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    Note: More than x2 cost of equivalent sized Oil tanker which carries 4 to 5 times as much energy.

    2. Operating Costs

    LNG shipping costs are largely determined by daily charter rate

    There are no set rates for LNG tankers as there are for Oil tankers

    - Charter rates vary widely from ~$27,000-$150,000 per day

    Average long-term charter rate is seen as $55,000-$65,000 per day

    Short-term (spot) charter rates vary with market

    Conventional LNGC Short Term Charter Rate Projection

    Spot & short-term charter rates (2006-Present)

    Ship trading costs vary widely and are largely depend on voyage distance

    - Voyage length is often is of key importance because the main voyage cost item,

    beside port dues and canal tolls, is fuel or boil off (using part of the LNG cargo)

    to propel the ship.

    New ship technologies are helping to bring costs down and make previously

    uneconomical projects viable

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    3. Fleet Utilization

    Utilization of LNG Fleet

    Source: ConocoPhilips

    LNG tanker market is currently very tight with many players searching the world for

    tankers for short-term charter

    -Many spot tankers now being used for Japan

    - Qatar looking for tanker over next years?

    Market is forecast to remain tight for the next few years

    Where are we

    Estimates are about 14% of fleet (maximum) is available at any time for Spot

    Market activity up to 1 year

    Spot charter rates differ between Atlantic and Asia

    Current spot charter rate increasing with rates doubling in second half of 2010

    reaching ~$60,000/day in winter 2010 period and now to ~$125,000/ day in late

    2011

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    LNG Spot Charter Rates

    Source: Teekay Corporation

    4. Voyage Costs

    Voyage Cost Circulation from:

    - Market rates

    - Operating costs of ship

    - Voyage days

    - Waiting days

    - Port days

    -Mileage

    - Fuel prices

    - Speed & consumption of fuel

    - Canal, port and terminal fees

    To get:

    - Total cost of voyage

    - LNG shipping rate

    5. Main Engine Bunker Fuel Prices

    Volatility of this main fuel price leads to necessity for contractual coverage (price

    hedging) of this.

    Market price vary wi th geography and are quoted monthly at Rotterdam, Houston,

    Middle East and Singapore

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    6. Additional Voyage Charges

    Port Charges ($ 000) [for loading and discharging] Trinidad/ Lake Charles 100

    Ras Laffan/ Japan 200

    Algeria 82 102

    Port Fontin 46

    Spain 91 110

    Lake Charles 31

    Bonny Island 291

    Oman Qalhat ~80

    Canal Charges About 10% of LNG trade transits though canals, nearly all via Suez at

    present

    Suez

    - Conisderable number of Middle East cargoes coming to Atlantic Basic

    - Charge can be up to 20cents/MMBtu

    - Canal Authority offers 35% rebate + cargo incentive up to 15% for volumes

    over 2Mtpa to encourage LNG vessels?

    Panama

    - Can only take LNG tankers that are 100,000m or smaller

    - This

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    This wil l allow LNG tankers up to 170,000m passage

    - Potential to open up new routes linking Atlantic and Pacific and possibility a

    further 10% of LNG trade

    2. Shipping Rates

    LNG tankers ply their trade around the world but there are commercial limits

    - The voyage costs are critical

    The LNG shipping rate is a major variable cost in the LNG chain which can make

    supply routes either profitable or commercially impossible.

    Shipping Rates vary with journey mileage:

    Estimated LNG Shipping Costs Alaska Asia Pacific

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    Estimated LNG Charter Rates and New Build Orders

    Note: Rates must be based on a particular size of tanker at a specific charter rate in $000 per day

    3. Netback Pricing

    Simple method (from oil markets) to track and compare the return & profitability of

    a particular trade

    Netting off the price back to the supply source value

    - Deducing regas costs and shipping costs from the market sale price gives a FOB

    netback

    - Further deducting the liquefaction cost and feed-gas price gives an upstream

    netback value to the producer (often involves JVs at this upstream level)