LNG bunkering financing opportunities - ANAVE · LNG bunkering financing opportunities Explore...

Report

LNG bunkering financing

opportunities

Explore financing opportunities, assess and develop

financial mechanisms beyond the EU financial

framework aiming at supporting the deployment of

marine LNG technology

Client: European Commission

Reference: M&WPB3039-103-100R001D11

Revision: 11/Final

Date: 08 June 2016

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08 June 2016 CONTENTS M&WPB3039-103-100R001D11

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HASKONINGDHV UK LTD.

299 Pendoring Road

Building 1

Blackheath

Johannesburg

2195

Maritime & Aviation

VAT registration number: 792428892

+27 11 476 2279

+27 11 476 2579

[email protected]

royalhaskoningdhv.com/osc

T

F

E

W

Document title: LNG bunkering financing opportunities

Document short title: MOVE/D1/2013-451-1

Reference: M&WPB3039-103-100R001D11

Revision: 11/Final

Date: 08 June 2016

Project name: EU Report

Project number: PB3039-103-100

Author(s): David Bull, Pieter Meulendijk-de Mol, Michiel Nijboer

Drafted by: David Bull, Pieter Meulendijk-de Mol

Checked by: Michiel Nijboer

Date / initials:

Approved by:

Date / initials:

Classification

Restricted

Disclaimer

No part of these specifications/printed matter may be reproduced and/or published by print, photocopy, microfilm or by

any other means, without the prior written permission of HaskoningDHV UK Ltd.; nor may they be used, without such

permission, for any purposes other than that for which they were produced. HaskoningDHV UK Ltd. accepts no

responsibility or liability for these specifications/printed matter to any party other than the persons by whom it was

commissioned and as concluded under that Appointment. The quality management system of HaskoningDHV UK Ltd.

has been certified in accordance with ISO 9001, ISO 14001 and OHSAS 18001.

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Partners

Formed in 1985 as an independent economic consultancy

company, specialising in shipping economics and port

development.

Developed an unequalled database for trade, port and shipping

data.

Purchased by Royal Haskoning in 2011.

Operates as a highly successful standalone specialist unit, and

supports Royal HaskoningDHV projects.

Global experience covering all types of cargo and port/shipping

activities.

Provides valuable market/economic analysis for commercial and

financial viability of any project ahead.

The ISL - Institute of Shipping Economics and Logistics was

founded as a private non-profit foundation in Bremen in 1954.

ISL is combing tradition with modern science and has positioned

itself as one of Europe’s leading institutes in the area of

research, consulting and knowledge transfer in maritime logistics

Around 60 employees at the offices in Bremen and Bremerhaven

are working in interdisciplinary teams – having backgrounds in

economics, computer science, geography and engineering

Innovative ideas are developed into market solutions

characterised by practical applicability

MARINTEK is an independent, internationally leading non-profit

marine technology research company in the Norwegian SINTEF

Group, one of Europe’s largest independent research

organizations.

MARINTEK has a long tradition in European R&D cooperation and

we have participated in more than 60 EU-funded research

projects since the 4th Framework Program.

Of particular relevance for this project is recent work within the

field of Strategies and measures for reducing maritime CO2

emissions by Dr Lindstad.

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Disclaimer

“The information and views set out in the Report are those of the authors and do not

necessarily reflect the official opinion of the Commission. The Commission does not

guarantee the accuracy of the data included in this study. Neither the Commission nor any

person acting on the Commission’s behalf may be held responsible for the use which may be

made of the information contained therein.”

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Table of Contents

Partners iii

1 Overview of European shipping activity and forecast LNG-

fuelled vessels (Task 1) 19

1.1 Introduction 19

1.2 Overview of the European shipping markets 21

1.2.1 The Baltic 21

1.2.2 Northern Europe 22

1.2.3 Mediterranean 24

1.3 LNG as a bunker fuel 26

1.4 Future LNG-fuelled fleet 31

1.4.1 LNG-fuelled vessels in 2030 37

1.4.2 LNG vessels in Europe 42

1.5 LNG fuel price 45

2 Identification of typical capital and operating costs of LNG

bunkering facilities (Task 3) 49

2.1 Introduction 49

2.2 Options for supply & bunkering of LNG 51

2.2.1 Outline options considered 51

2.2.2 Initial options screening 52

2.3 Multi Criteria Assessment 54

2.3.1 Assessment of criteria 54

2.3.2 Options for delivery, storage and bunkering 55

2.3.3 Sizing of facilities 56

2.4 LNG bunkering infrastructure 57

2.4.1 Delivery option descriptions 57

2.4.2 Key assumptions for each delivery option 60

2.5 Establishing the CAPEX and OPEX of each bunkering scenario 65

2.6 Potential number of LNG-fueling terminals through to 2030 66

2.7 Potential capital costs for LNG-bunkering facilities through to 2030 67

3 Analysis of commercial expectations on returns on investments

and overview of interviews with stakeholders (Task 4) 69

3.1 Introduction 69

3.2 Industry Feed-back 69

3.3 Internal rate of return defined 71

3.3.1 Rate of return in this study 73

3.4 Results from interviews regarding IRR 73

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3.5 Additional questions & answers 75

3.6 Summary of comments 85

4 Development of a screening matrix for the main incentive for

installation of LNG bunkering facilities (Task 6) 89

4.1 Introduction 89

4.2 Screening indicators 89

4.3 Screening matrix weighted options 92

5 Identification and assessment of potential public financial

mechanisms (Task 2) 95

5.1 Business case for LNG as marine fuel 95

5.1.1 Two perspectives 95

5.1.2 Shipowners 96

5.1.3 Bunkering facility operators 96

5.2 Needs analysis: combining demand and supply 97

5.3 Financing gap analysis 100

5.3.1 Investment considerations 100

5.3.2 Criteria impacting the investment decision for LNG facilities 102

5.3.3 The financing gap 102

5.4 Identification and assessment of financial mechanisms 103

5.4.1 The EU structure of financial mechanisms 103

5.4.2 Existing financial programmes and products 105

5.5 Relevance of the mechanisms for the sector for LNG as marine fuel 106

5.6 An alternative solution: deferred equity 106

5.7 Recommendation for characteristics for a financial instrument for the sector for

LNG as marine fuel 108

6 Financial modelling of typical projects (Task 5) 110

6.1 Introduction 110

6.2 The Model 110

6.2.1 Objective of the financial model 110

6.2.2 Terminology 110

6.2.3 Model structure 112

6.3 Scenarios 114

6.4 Input and assumptions 114

6.4.1 CAPEX and OPEX 114

6.4.2 Storage Capacity, Flow Rates and Annual Volume Capacity 115

6.4.3 Market Price of LNG 116

6.4.4 Inflation Rate 118

6.4.5 Time and phasing 118

6.4.6 Taxation 118

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6.5 Capital structure (without public financial mechanisms) 119

6.5.1 Gearing 119

6.5.2 Financing facilities 119

6.5.3 Discount Rate 119

7 Determination of financial viability (Task 7) 121


7.2 Construction option examples 121

7.2.1 Introduction 121

7.2.2 Case 1: Truck-to-Ship – small capacity 121

7.2.3 Case 3: Shore-to-Ship – medium capacity 123

7.2.4 Case 6: Ship-to-Ship – large capacity 125

7.2.5 Financial viability for all scenarios (including sensitivity analysis) 127

8 Assessment of financial mechanisms and framework conditions

for implementing optimal mechanisms and financial incentives

(Task 8) 132


8.2 Modelling the financial mechanisms 132

8.3 Results 133

8.3.1 Guarantee on offtake 133

8.3.2 Senior debt by public sector lender (IFI) 136

8.3.3 Grant 138

8.3.4 Tax exemption 139

8.4 Conclusions from the examples 139

8.5 Framework conditions for implementing financial mechanisms 139

8.5.1 Supply side support 139

8.5.2 Flexible structure 140

8.5.3 Variable project size 140

8.5.4 Complementary to existing support measures 141

8.5.5 Address ‘time gap’ 141

8.5.6 Other conditions 141

8.6 Overall conclusions of this study 142

9 Validation of models and mechanisms (Task 9) 143

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Table of Tables

Figure 1-1 TEN-T Core Network Corridors .......................................................................... 20

Table 1-1 Selected Baltic Countries – Reported number of vessel calls ........................... 22

Table 1-2 Selected Northern European Countries – Reported number of vessel calls .... 23

Table 1-3 Selected Mediterranean Countries – Reported number of vessel calls ............ 25

Table 2-1 Initial screening of full list of options considered .............................................. 52

Table 2-2 Estimated requirement for LNG facilities ............................................................ 56

Table 4-1 Screening matrix via bunkering options ............................................................. 93

Table 5-1 Schematic overview of the sector for LNG as marine fuel ................................. 95

Table 5-2: Relevant findings from interviews on financing support .................................... 98

Table 5-3 Schematic overview of the resulting time gap between the two business cases

................................................................................................................................................ 100

Table 5-4 EU structure of financial mechanisms .............................................................. 104

Table 5-5 Overview characteristics existing EU financial programmes and products ... 105

Table 6-1 Terminology ........................................................................................................ 111

Table 6-2 Associated CAPEX & OPEX Inputs.................................................................... 115

Table 6-3 Costs in EUR millions, present value per January 2015 .................................. 115

Table 6-4 Storage Capacity, Flow Rate & Annual Volume Capacity for individual

Scenarios ............................................................................................................................... 116

Table 6-5 Characteristics of financial facilities in base case ........................................... 119

Table 7-1 Results scenario 1 .............................................................................................. 123



Table 7-4 Financial metrics for different scenarios. ‘DSCR’ refers to the average DSCR

during the operational period. .............................................................................................. 127

Table 8-1 Scenarios of financial mechanisms.................................................................. 132

Table 8-2 Characteristics – small shore-to-ship facility ................................................... 134

Table 8-3 Results scenario 2d (base case) ........................................................................ 134

Table 8-4 Results scenario 2d (no offtake in first two years of operation) ..................... 134

Table 8-5 Characteristics – large ship-to-ship facility ...................................................... 135

Table 8-6 Results scenario 6d (base case) ........................................................................ 135

Table 8-7 Results scenario 6d (with guarantees) .............................................................. 136

Table 8-8 Characteristics – medium shore-to-ship facility ............................................... 136

Table 8-9 Characteristics of financial facilities in base case ........................................... 137

Table 8-10 Results scenario 3c (base case) ...................................................................... 137

Table 8-11 Results scenario 3c (with IFI senior debt) ....................................................... 137

Table 8-12 Characteristics – large shore-to-ship facility .................................................. 138

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Table 8-13 Results scenario 4b (base case) ...................................................................... 138

Table 8-14 Results scenario 4b (with grant) ...................................................................... 139

Table 8-15 Framework conditions supply side support ................................................... 139

Table 8-16 Framework conditions flexible structure ........................................................ 140

Table 8-17 Framework conditions variable project size ................................................... 140

Table 8-18 Framework conditions existing support ......................................................... 141

Table 8-19 Framework conditions time gap ...................................................................... 141

Table 9-1 Schedule of meetings / interviews ..................................................................... 143

Table of Figures

Figure 2-1 LNG Bunkering Infrastructure Survey Results 2014 ......................................... 50

Figure 2-2 LNG Bunkering Infrastructure Survey Results 2014 ......................................... 51

Figure 2-3 LNG bunkering at the quay side via flexible hose ............................................ 58

Figure 2-4 Semi permanent LNG storage tanks, connected via fixed line below ground 59

Figure 2-5 Small-scale Liquefaction Plant ........................................................................... 59

Figure 2-6 Small-scale LNG vessel ...................................................................................... 60

Figure 2-7 LNG bunkering vessel......................................................................................... 60

Figure 2-8 Flow chart for road delivery LNG supply chain ................................................. 61

Figure 2-9 Flow chart for small / medium storage tank options ........................................ 62

Figure 2-10 Flow chart for Large-scale storage tank option 3a ......................................... 63

Figure 2-11 Flow chart for Large-scale storage tank option 3b ......................................... 64

Figure 2-12 Flow chart for ship-to-ship option .................................................................... 65

Figure 2-13 Low case – Capital costs for LNG bunkering facilities in Europe by year

(EUR million) ........................................................................................................................... 68

Figure 2-14 High case – Capital costs for LNG bunkering facilities in Europe by year

(EUR million) ........................................................................................................................... 68

Figure 3-1 European coverage of interviews and online survey........................................ 70

Figure 3-2 Shipping related sectors that provided feedback ............................................. 71

Figure 3-3 IRR cash flows stream (example) ....................................................................... 72

Figure 3-4 Estimated rates of return in the different areas of the infrastructure market . 72

Figure 6-1 Model Structure ................................................................................................. 113

Figure 7-1 Case 1: Truck-to-Ship – Cockpit – Small Capacity ......................................... 122

Figure 7-2 Case 1: Shore-to-Ship – Cockpit – Medium Capacity ..................................... 124

Figure 7-3 Case 1: Ship-to-Ship – Cockpit – Large Capacity ........................................... 126

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08 June 2016 LNG BUNKERING FINANCING OPPORTUNITIES M&WPB3039-103-100R001D11

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List of Acronyms

AHTS Anchor handling tug supply vessel

CAPEX Capital expenditure

CPI Consumer price index

DCF Discounted cash flow

DSCR Debt Service Cover Ratio

EBRD

European Bank for Reconstruction and

Development

ECA Emission control area

ECB European Central Bank

FSU Floating storage unit

HFO Heavy fuel oil

IFI International financial institution

IRR Internal rate of return

LNG Liquefied natural gas

m3 cubic metre

m3/hr cubic metre per hour

m3/year cubic metre per year

MDO Marine diesel oil

MGO Marine gas oil

mmbtu million British thermal units

NECA NOx emission control area

NPV Net present value

OPEX Operational expenditure

PPP Public-private partnerships

PSV Platform supply vessel

ROE Return on equity

Ro-Pax Roll-on/Roll-off Passenger ferry

Ro-Ro Roll-on Roll-off ferry

SECA Sulphur emission control area

TEN-T Trans-European Transport Network

WACC Weight average cost of capital

WPIC World Ports Climate Initiative

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Abstract

LNG fuelled vessels have become a major point of interest for both vessel owners and port

authorities in the last decade. The development of LNG bunkering infrastructure and the

general interest in adding LNG bunkering facilities has become a major discussion topic

within the shipping industry. This study forecasts the potential number of LNG-fuelled

vessels that could be operating in European waters in 15 years’ time. To be able to supply

the necessary LNG bunkering infrastructure, this study investigates the CAPEX and OPEX of

various bunkering facilities, from truck-to-ship, through shore-to-ship based alternatives to

ship-to-ship bunkering options. For different options of realisation of a bunkering facility,

business cases have been set up that have been assessed using a purpose-built financial

model. The most important financial metrics (IRR, NPV, ROE and DSCR) have been

calculated for different scenarios. Moreover, market analysis has been executed in which a

financing gap has been identified at the supply side of the marine LNG sector. Different

potentially relevant financial mechanisms have been identified that can help close this

financing gap. The effects of various financial mechanisms on the business cases were

analysed. It was found that a combination of financial mechanisms has most impact.

Moreover, characteristics were identified that a successful mechanism for this sector must

possess.

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Executive Summary

Introduction

This report investigates the business case for LNG as a marine fuel, from both the demand

and supply perspectives. After an overview of the relevant shipping sector and pricing

mechanism, different scenarios for LNG bunkering infrastructure are provided. Next, based

on market research, a needs analysis and a financing gap analysis were conducted. It is

established that a financing gap exists for the supply (infrastructure) side of the market. A

range of potential financial mechanisms that can help close the gaps are discussed, and with

the help of several examples, the impact on potential business cases is determined.

The LNG-fuelled fleet

The current main operating fleet accounts for over 102,000 vessels (end 2014) according to

IHS Fairplay, with approximately 3,000 vessels currently on order. Growth forecasts for the

main conventionally fuelled fleet sectors suggest that through to 2030, the overall fleet will

increase by 46% to approximately 150,000 vessels.

The uptake of LNG fuelled vessels is forecast to remain a relatively small proportion of the

main shipping sectors through to 2030. Some of the factors that will contribute to this are:

The fleet as a whole is relatively young – during the mid-2000’s there was a shipbuilding

boom in which most sectors rapidly expanded. This has meant that these vessels still

have a long trading life before they are in need of replacing.

The increased delivery rate of vessels through to 2010 has led to an overcapacity within

most fleet sectors. The net effect of this has been to decrease vessel earning capacities.

Reduced earning capacity has meant that shipowner have reduced the number of

speculative newbuilding orders – thus reducing the number of overall newbuilding orders.

The effect of this has been to reduce the fleet renewal schedule.

There is still uncertainty regarding the use of LNG as a fuel, as well as the apprehension

of ports/bunker suppliers to offer the fuel.

Uncertainty in LNG bunker prices.

Forecast for 2030

A forecast has been prepared for 2030. The forecast provides insight into the potential

number of vessels that will require LNG refueling facilities in Europe through to 2030. The

number of vessels forecast is:

In a Low Case scenario – a forecast fleet of 880 short-sea LNG fuelled vessels and 160

deep-sea vessels operating in Europe. Approximate total 1,040 vessels.

In a High Case scenario – approximately 1,300 short-sea vessels and 360 deep-sea

vessels operating in Europe. Approximate total 1,660 vessels.

Under certain assumptions, a forecast number of LNG-bunkering facilities were calculated.

The totals are:

Under the Low Case, a forecast 52 LNG-bunkering facilities will be required by 2030.

For the High Case, a forecast 136 LNG-bunkering facilities will be required by 2030.

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LNG bunkering infrastructure

There are several infrastructure options for bunkering LNG, from which four main options

were selected including their typical CAPEX and OPEX estimates. These are highlighted

below:

Option Delivery Option

Type of

bunkering Scale

CAPEX (EUR

million)

OPEX (EUR

million)

Option 1 Delivery by road

Bunker direct to

vessel 3.6 0.55

Option 2 Delivery by road

Bunker via storage

tank Small-scale 5.35 0.26

Delivery by road

Bunker via storage

tank Medium-scale 13.5 0.67

Option 3a

LNG Liquefaction at

port

Bunker via storage

tank 94.9 0.92

Option 3b

Delivery via LNG

carrier

Bunker via storage

tank 44.9 4.24

Option 4

Delivery via LNG

carrier 3,000m3 vessel 40.0 4.0

Delivery via LNG

carrier 6,000m3 vessel 70.0 7.0

Source: Ocean Shipping Consultants a company of Royal HaskoningDHV

The business case for LNG bunkering facilities

We observe that both the business case for the shipowners and for the LNG bunkering

facility operators are economically viable, but that they suffer from a traditional ‘chicken-

and-egg’ problem: the business case for the demand side (shipowners) is heavily reliant on

the business case for supply (facility operators) and vice versa.

From a series of interviews conducted within the context of this study, with both demand

and supply side private sector parties, it follows that the business case for shipowners is

relatively straightforward. Either shipowners do not make a positive investment decision for

LNG fuelled ships at all, as they deem the supply of LNG insufficient, or shipowners make a

positive investment decision, and are able to obtain finance for their investment via regular

routes. They indicate that no support from the EU is necessary to obtain finance at

commercial terms. Whether or not the shipowners are capable of financing ships, the

addition of LNG facilities does not impact the ships’ bankability. Rather, shipowners indicate

that the infrastructure (supply) side of the sector must be developed further. They are quite

literally waiting for a grid of bunkering facilities to be available before ordering new ships.

Therefore, the interviewed shipowners agree that the infrastructure development needs to

be assisted by the EU, rather than the shipowners themselves.

Bunkering facility operators are in agreement with the shipowners: they indicate that, if the

chicken-and-egg situation is to be solved, it is the infrastructure that needs financial

support. Availability of supply is clearly the kick-starter of the sector. If this is translated into

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a business case perspective, it means that LNG bunkering facilities will be built that will have

a very limited customer base for the first years of operations (unless there is a ‘home

customer’ for the facility, such as a ferry operator). For only if it is certain that the facilities

will become available, shipowners will make a positive investment decision to buy LNG

vessels. These first years of operations, having low revenue levels, have to be bridged. This

is essential to retain a viable business case for the bunkering facility operator.

The financing gap

We established that for LNG bunkering facilities in Europe suffers from a financing gap.

Without a ‘home customer’ (such as a ferry operator) or substantial guarantees regarding

the offtake of LNG, such facilities cannot be financed commercially at the moment. This is

mainly due to the uncertainty about offtake (demand), as indicated above. The uncertainty

is made worse by limited knowledge about LNG as a marine fuel at commercial banks and

the limited amount of due diligence that has been executed in this sector. This prevents

commercial banks from taking a view on the development of future market demand.

Whereas certain individual facilities could potentially be financed commercially (i.e. the ones

for which offtake has (largely) been guaranteed), the majority of facilities cannot get

funding. The financing gap calls therefore for public sector participation in this sector,

especially if it wants to ensure development of a grid (network) of LNG bunkering facilities.

It is clear that potential public involvement should focus on the (temporary) lack of demand

while demand builds up.

Relevance of existing EU financial mechanisms

EU financial mechanisms can potentially close the financing gap or make it smaller. Whereas

not all existing financial mechanisms may seem directly applicable to this sector, we believe

there are relevant comparisons to be made.

The instruments and products under the Connecting Europe Facility (CEF) can directly be

applied to the projects for LNG bunkering facilities (supply side). The successful project bond

(PBCE) and loan guarantee (LGTT), but also senior debt and other forms of guarantees,

could be used to support projects for new LNG bunkering facilities. Based on our discussions

with market parties, equity seems less likely an option, as the parties indicate there is no

obvious need for more equity, and in addition, the EIB’s preferred options are debt and/or

guarantees, as they could have a conflict of interest.

We acknowledge that the InnovFin is not directly applicable to the LNG as marine fuel

sector (the sector is no longer deemed to be innovative / new technology), we do use it to

show that the way this programme is structured means there is a solution for programmes

of projects that involve both low CAPEX and high CAPEX projects. This is the case for the

LNG as marine fuel sector too: e.g. truck-to-ship solutions typically have a low CAPEX

requirement, whereas large LNG storage facilities require a big investment. The InnovFin

structure is flexible in providing corporate finance or project finance solutions fitting the

scope of the project at hand, which is a useful characteristic.

The purpose of introducing the JESSICA programme (albeit that this was designed for a

different sector) lies in the fact that the programme is de-centrally managed (through

holding funds). In the LNG sector, we see that many countries have national schemes to

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assist projects financially. If the EU’s assistance to projects is at least well aligned with the

national incentives, this will help the sector select the most appropriate financing options.

The newly created European Fund for Strategic Investments (EFSI) is directly relevant

for the LNG as marine fuel sector. Not only does EFSI financing come on top of other forms

of European (financial) support, also the LNG bunkering sector fits both the EC’s

requirements as well as the targeted areas. Therefore, the EFSI programme is well suited to

provide additional support for this sector. This is beneficial as the risks that cannot be

covered by commercial banks in this sector are significant. EFSI indeed allows the EIB to

offer products that absorb more risk than current products and enable investment in projects

with a higher risk and high added value.

Recommendations for key characteristics for a financial mechanism for LNG as

marine fuel

As a summary, we list our recommendations for the key characteristics for a financial

mechanism for the sector for LNG as marine fuel.

From extensive discussions with private sector parties operating in this market, we derive

that the instrument should focus on the supply side infrastructure rather than ship

financing.

A suitable instrument should have the flexibility to offer a mix of (senior) debt,

guarantees and possibly project bonds, as well as potentially (deferred) equity.

The instrument must be flexible to finance both low and high CAPEX investments (and

provide solutions for both corporate finance and project finance).

The instrument must be able to be aligned with existing support measures by national

governments in the different member states.

The instrument must allow EFSI additional support for projects as the characteristics of

the sector are in line with EFSI’s targets.

The instrument should be able to bridge a time gap between the initial investment in new

infrastructure and the start of revenues for the project (when offtake starts). This time

gap is caused by the demand side waiting for the suppliers to move first.

The instrument should be available cross-member states so that it benefits a grid

(network) of LNG bunkering facilities.

Assessment of the impact of financial mechanisms

As part of this report, we show that projects in the sector for LNG as a marine fuel are

economically viable, but that a financing gap often exist. We explored the effects of potential

financial mechanisms to overcome this gap. From the examples worked out in this report, it

follows that guarantees, senior debt as well as grants (and tax exemption) all assist in

targeting the causes of the financing gap identified. As these financial products do this all in

a different way, it makes them excellent complimentary products as part of a wider financial

mechanism to be developed for the sector for LNG as marine fuel.

The table below shows a summarising list of criteria that a successful financial mechanism

for the LNG bunkering market must possess:

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Criterion # Description

01 Eligible assets: bunkering facilities (liquefaction, storage and bunkering systems)

02 Eligible parties: all private and public parties

03 Structures: flexible package of guarantees, equity, mezzanine and debt products

04 Type of financing: flexibility to interact with both corporate and project finance

05 Project size: variable (ranging e.g. from EUR 1 million up to several tens of

millions)

06 Alignment with other national and EU support measures (e.g. EFSI)

07 Terms to address time gap before capacity fully utilised


Several other considerations are important when designing the conditions for a financial

instrument, such as:

The applicability across EU Member States to promote the establishment of a widespread

marine LNG bunkering network: while EC policy and EIB instruments in itself will always

be drafted to apply in all Member States, national legislation could differ between states

and provide challenges for the financial instrument to be successfully implemented.

Provisions should be made for an exit of the EIB / EC when public support is no longer

required. Given that demand risk is the key risk for financing infrastructure, private

financiers are likely to become more and more comfortable with lending opportunities for

bunkering facilities as the market develops. At some point, the finance gap will decrease

and even cease to exist. The availability of the financial instrument should reflect this

development in order not to distort the functioning of the market.

Overall conclusions of this study

The market for LNG as a marine fuel has the potential to significantly develop over the

coming years towards and beyond 2030. We establish that, to kick-start this sector, the

financing gap that exists for the development of LNG bunkering facilities (supply side of the

market) should be narrowed. Whereas many of such bunkering facilities cannot be

completely commercially financed, public sector financial mechanisms are available to close

the financing gap.

The (EU’s) existing financial mechanisms set out in this report, as well as the financial

instruments and products contained herein, do already adhere to the criteria derived from

interviewing stakeholders. These mechanisms can be applied directly to the market for LNG

as a marine fuel (such as the CEF or EFSI mechanisms). There is no need for the

development of a completely new financial mechanism if the accessibility for LNF bunkering

projects is guaranteed. Alternatively, the existing mechanisms form a good basis for the

development of a financial mechanism geared specifically towards LNG as a bunkering fuel.

The financial instrument with the most substantial positive effect on LNG bunkering business

cases is a guarantee on offtake in early years of operations. However, we advise that a

suitable project-specific mix of financial products is selected for each project. Guarantees,

(senior) debt, (deferred) equity, grants and tax incentives are useful products for this

market.

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Report structure and methodology

This report is built up as follows:

Chapter 1 – Task 1 – Overview of European shipping activity and forecast

LNG-fuelled vessels – this section provides an overview of vessels operating within

the Baltic, Northern Europe and European Mediterranean waters. Each region is

investigated through the use of Eurostat data, which is analysed to highlight the most

active ports within each region in terms of reported number of vessel calls per year.

This highlights the number of vessels operating in European waters – which provides

the scale and future potential for vessels to switch to LNG as a fuel that call/operate

within Europe. This is followed by an investigation of the current LNG-fuelled fleet

and its orderbook – which has been complied by Ocean Shipping Consultants through

various industry sources and publication. Finally, the future LNG-fuelled fleet that

will call/operate within European waters is forecast - using a High and Low Case

Scenario for both short-sea and deep-sea fleets.

Chapter 2 – Task 3 – Identification of the typical capital and operating costs

of LNG bunkering facilities - this section outlines the various options for supplying

LNG as a vessel fuel, highlighting delivery, storage and bunkering options. A detailed

investigation in to the storage capacity of various options is highlighted, followed by

the various delivery options that can be utilised. The CAPEX and OPEX of various

bunkering options are investigated. The potential number of LNG-fueling terminals is

forecast utilising the forecast number of LNG-fuelled vessels operating within/to

Europe (see Chapter 1). Forecast calculations of the potential capital costs for LNG-

bunkering facilities through to 2030 are provided.

Chapter 3 – Task 4 – Analysis of commercial expectations of returns on

investments and overview of interviews with stakeholders - this tasks main

purpose is to identify the level of return on the investment that is expected by

various stakeholders – via the analysis of internal rate of return (IRR). Interviews

were undertaken via telephone and an online survey to establish acceptable IRR.

Additional questions to help understand the view on the LNG-bunkering and market

insight in to the financial aspects of investing in LNG bunkering were also

investigated.

Chapter 4 – Task 6 – Development of a screening matrix for the main

incentive for installation of LNG bunkering facilities – a matrix has been

developed that summarises certain characteristics of different types of LNG bunkering

facilities (as described in Task 3). The main bunkering options each have various

categories by which a project is assessed – each of which is given a score,

highlighting the potential difference in scale between the bunkering options and the

intended scale of both investments required and scale of potential subsidy required to

encourage market development.

Chapter 5 – Task 2 – Identification and assessment of potential public

financing mechanisms - Task 2 entails an analysis of the Business case for LNG as

R e s t r i c t e d


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a marine fuel from the perspective of both the ship owners and the bunkering facility

operators. Based on this analysis and a number of targeted interviews, a needs

analysis has been conducted. The conclusion is reached that the supply side needs

support to overcome the time gap. Task 2 explores the EU structure of financial

mechanisms for both existing and new programmes, as well as mechanisms from

other sectors. Next, the relevance of the mechanisms for the LNG as marine fuel

sector is described, and the chapter concludes with recommendations for

characteristics for a financial instrument.

Chapter 6 – Task 5 – Financial modelling of typical projects – A financial model

has been constructed, which utilises CAPEX and OPEX data to establish the associated

costs of construction and operation of a dedicated LNG bunkering facility in Europe,

while also providing the potential revenues, NPV and IRR that could be generated

from such a facility. This chapter discusses the structure and working of the model,

and provides a detailed account of the underlying assumptions. A selection of three

different construction options for this LNG bunkering facility and the associated

CAPEX, OPEX, Revenues, NPV and IRR will be presented and described in detail so as

to provide a series of examples of the model in action.

Chapter 7 – Task 7 – Determination of financial viability - The scope of Task 7

is estimating the financial viability of LNG bunkering projects without any

involvement of public financing mechanisms. Using the financial model established in

Task 5 (described in Chapter 6), different examples have been tested for their

financial viability (measured in NPV, IRR, ROE and DSCR). The results of the financial

viability analysis are described in Chapter 7, following the structure of the examples

used.

Chapter 8 – Task 8 – Assessment of financial mechanisms and framework -

conditions for implementing optimal mechanisms and financial incentives - The effect

of selected financial mechanisms (discussed in Task 2) on the business cases

(discussed in Task 7) is analysed in Task 8. For this analysis, several good examples

have been selected, for which several scenarios are presented and described. From

these, conclusions on the financial instruments applied are drawn. Also, framework

conditions are defined that should be taken into account when implementing a

financial mechanism.

Chapter 9 – Task 9 – Validation of models and mechanisms - the analysis

carried out in other tasks has been validated as part of this project. The

(intermediate) conclusions and underlying assumptions have been discussed in a

number of targeted interviews with stakeholders, representing the financing

community, the demand and the supply side of the small-scale LNG market.

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1 Overview of European shipping activity and forecast

LNG-fuelled vessels (Task 1)

1.1 Introduction

LNG fuelled vessels have become a major point of interest for both vessel owners and port

authorities in the last decade. The development of LNG bunkering infrastructure and the

general interest in adding LNG bunkering facilities is now a major discussion topic within the

shipping industry.

The European Commission published a proposal for a Directive on the deployment of

alternative fuel infrastructure within the EU during 2013. The proposal highlighted that the

lack of such infrastructure and a lack of common technical specifications for the related

interface are barriers to the introduction of alternative fuels like LNG, hydrogen and

electricity.

The adoption of the proposal requires Member States to build LNG refueling facilities in all

maritime (and inland waterway) ports. In addition, LNG refueling facilities will also be

constructed along the motorway of the Trans-European Transport (TEN-T) 1 Core Network.

This proposal highlights a potential 139 maritime and inland ports to install an LNG refueling

point.

During September 2014, the EU proposal to build alternative refueling points across Europe

was adopted, meaning that Member States must set and make public their targets and

present their national policy framework by the end of 2016.

With regards to marine LNG – the adopted directive requires a minimum coverage to ensure

accessibility of LNG in the main maritime and inland ports. The core network is highlighted in

figure 1.1. The core network is to be completed by 2030.

The focus of this study is to investigate the potential funding and financing issues that

surround the introduction of LNG as a bunker fuel to European ports2. Introduction of new

technologies and innovation for the promotion of alternative fuels and energy efficient

maritime transport, including LNG is a priority for the development of the Trans-European

Transport Networks (TEN-T). This study will provide an analysis of potential or additional

private/public funding that could be accessed and mobilised to encourage that development.

Significant investments will be required for the introduction of LNG bunkering systems into

ports. The study will consider the (perceived) obstacles to the development of economically

viable LNG bunkering infrastructure and how or if these can be addressed. Are the necessary

infrastructure investments financially viable and therefore attractive to the private sector? Or

will the European Commission need to provide assistance? In this respect, it might be a

conclusion that financing is not a real issue for the development of LNG infrastructures.

Currently, the development of the price for LNG and the establishment of a coherent

1 Article 23 of the TEN- Guidelines (Regulation 1315/2003)

2 LNG for inland shipping is not part of this study.

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regulation framework have been identified as main obstacles for the further integration of

LNG fuel and LNG infrastructure in EU ports.

Figure 1-1 TEN-T Core Network Corridors

Source: European Commission

The main results of this study will be to inform the EU on the need and potential for public

support to improve the financial viability of investments in LNG bunkering infrastructure.

Hence, the study provides two core outputs, i.e. first a set of case studies that either

demonstrate financing structures for LNG infrastructure investment or that could be adapted

to the financing of LNG infrastructure investment (e.g. examples from other sectors than the

port sector). Secondly, based on this information, models and framework conditions will be

developed. This shall give the EC the possibility to assess the situation and consider possible

policy options and, at the same time, create awareness for potential investors (bunker

operators, port authorities, etc.) about funding opportunities – outside the TEN-T

programme.

There is already broad acceptance within the shipping industry that LNG is a viable

alternative as a marine fuel. At a time when environmental legislation has an unprecedented

impact on shipping, the conventional fuel prices have declined significantly, meaning that

the shift towards LNG has slowed. Despite this fact, LNG fuelled ships are already a small

part of the shipping industry, with potential for growth in light of longer-term trends. Already

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the trend has spread beyond LNG carriers to include container vessels, offshore support

vessels, tugs, ferries and tankers. It should be noted that there has been a slow-down in the

number of new LNG-fuelled vessels reported in recent months. As the LNG infrastructure

develops, it is not difficult to foresee that LNG fuelled vessels will be common to all types of

vessels and in all areas of the globe.

1.2 Overview of the European shipping markets

Europe has one of the highest concentrations of vessels and vessel movements in the world.

To highlight the potential for LNG as a fuel within the European Union, an outline of the

current situation of vessel movements is provided in the three main areas of:

The Baltic region

Northern Europe

Mediterranean

Within these regions, some of the most prominent ports have been investigated, highlighting

the number of reported vessel calls. The majority of these ports are also TEN-Ts core ports.

Also outlined are the main vessel types/commodities and an assumption of whether they are

short-sea or deep-sea trades into the EU. This will highlight the scale of potential for LNG as

a fuel within European waters.

1.2.1 The Baltic

Within the Baltic region there were over 500,000 recorded vessel movements (accounting

for approximately 3.6m Gross tonnage) during 2013, according to Eurostat. Of these vessel

calls, Denmark accounted for over 340,000. The majority of these were ferry calls between

Denmark and other Baltic and Northern European countries.

On a port basis, Helsinki has one of the highest numbers of vessel calls, with over 8,300

during 2013. The vast majority of these calls were from short-sea ferry/Ro-Ro vessels on

intra-Baltic routes. This is in contrast to Gothenburg, which has a greater mix of vessel calls,

ranging from deep-sea general cargo vessels, to containers carriers and oil tankers. There

are also several short-sea ferry/Ro-Pax routes from the port.

A number of ferry lines operate out of the port of Hirtshals in Denmark. This constitutes the

largest number of vessel calls for the port. These provide short-sea voyages to various ports

in Norway, Iceland and the Faroe Islands. There are also significant numbers of fishing

vessels and offshore vessel calls.

In Gdansk, the majority of vessel calls were made by deep-sea cargo vessels (coal,

container, oil), whilst approximately 25% of all vessel calls were by short-sea ferries. This

compares to Swinoujscie, where the majority of vessel calls were from ferry/Ro-Pax, with

cargo vessels such coal bulkers providing a minority proportion. In the future LNG vessels

will be calling and discharging at the port.

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There is significant short-sea activity within the Baltic area, with the majority of activity

stemming from inter- and intra-country ferry operations. Deep-sea activity is also

significant, although on a much smaller scale, when compared to the ferry movements.

Table 1-2 Selected Baltic Countries – Reported number of vessel calls

Port Country Area 2011 2012 2013 Comment

Helsinki Finland Baltic 8,890 8,937 8,345 Majority of vessels (over 80%) are short-sea

Ferries/Ro-Ro

Tallinn Estonia Baltic 7,192 7,223 6,861 Mix of deep-sea and short-sea traffic cross Baltic

ferries

Gothenburg Sweden Baltic 6,939 6,576 5,611 Mainly general cargo, tankers, containers, short-sea

Ro-Ro

Stockholm Sweden Baltic 5,012 5,093 4,863

Receives ocean-going container vessels. Mostly

containers/liquid bulk/Car carriers/Ro-Pax (short-

sea)

Swinoujscie Poland Baltic 4,784 4,999 4,793 Majority of vessels short-sea/Ro-Pax (future LNG

imports)

Klaipeda Lithuania Baltic 4,676 4,772 4,328 Majority of vessels short-sea ferries/Ro-Ro

Frederikshavn Denmark Baltic 3,910 3,874 3,724 Majority of vessels are short-sea ferry/Ro-

Pax/cruise vessels

Riga Latvia Baltic 3,851 3,895 3,708 50% vessel calls are short-sea dry bulk, 25% vessel

calls are short-sea ferries

Gdynia Poland Baltic 3,661 3,437 3,456 Over 50% of vessel calls are short-sea ferry/Ro-Pax

Gdansk Poland Baltic 3,066 2,917 2,744 25% vessel calls are ferries, 40% deep-sea cargo

vessels

Turku Finland Baltic 2,279 2,191 2,125 Majority of vessel calls is ferry traffic

Hirtshals Denmark Baltic 1,899 1,849 2,019

Approx. 50% of vessel calls are ferry/Ro-Pax types

(short-sea), but also fishing vessels, offshore

vessels

Source: Ocean Shipping Consultants a company of Royal HaskoningDHV / Eurostat

1.2.2 Northern Europe

Vessel calls in Northern Europe amounted to more than 300,000 (4.6m Gross tonnage)

during 2013 according to Eurostat. However, Eurostat does not include figures for Northern

France, but calls for Calais and Le Havre have been added to the Table below. Germany and

the UK recorded the largest number of vessel calls, with 118,000 and 115,000 respectively.

The ports of Calais and Dover provide cross-channel ferry operations, linking the UK to the

Continent. Approximately 80% of both port vessel calls are accounted for by ferries.

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Rotterdam is a truly international shipping hub, with a focus on deep-sea shipping. The port

receives a broad range of vessel types, which includes container ships, crude and product

tankers, bulk cargo carriers and LNG vessels, which load or discharge at the port. The port

also acts as a short-sea hub for the region.

The port of Aberdeen, whilst recording a significant number of vessel calls, can be contrasted

to Rotterdam, in that the majority of vessel calls are focused on supplying the North Sea

offshore oil and gas sector. These include PSVs, AHTS and Standby Safety vessels. The port

also offers ferry services to the Shetland and Orkney Isles.

The port of Bremerhaven and Southampton focus on container vessels, although in both

cases there are also significant numbers of car carrier calls. The focus in both ports is on

deep-sea traffic.

The port of Zeebrugge is focused on container and Ro-Ro/car carrier vessels. There are also

regular ferry and cruise vessel calls. In terms of trade, intra-European movements account

for approximately 56% of total imports/exports.

Table 1-3 Selected Northern European Countries – Reported number of vessel calls

Port Area 2011 2012 2013 Comment

Calais France Northern

Europe 26,868 25,524 30,360 80% of calls ferries between Dover-Calais

Rotterdam Netherlands Northern

Europe 21,915 20,237 19,637 The majority of vessels are deep-sea

Dover UK Northern

Europe 17,711 17,227 19,334 80% of calls ferries between Dover-Calais

Antwerp Belgium Northern

Europe 15,205 14,485 14,391 Mix of short & deep sea

Le Havre France Northern

Europe 11,228 12,034

Deep-sea focus (but with short-sea

oil/coal/minerals/container imports as well).

Southampton UK Northern

Europe 7,433 8,233 9,572

The majority of vessels will be deep-sea -

container/ car carrier / tankers

Hamburg Germany Northern


Aberdeen UK Northern

Europe 6,498 7,275 7,117

Mostly offshore support vessels, ferries to the

Islands

Zeebrugge Belgium Northern

Europe 7,575 7,105 6,909

Ferry, container - deep-sea and short-sea, roro,

car carrier, LNG

Rostock Germany Northern

Europe 6,741 6,638 6,388

50% ferry/Ro-Ro traffic, 25% bulk cargo (short-

sea)

Bremerhaven Germany Northern

Europe 5,533 6,389 6,286

Over 4000 container vessels/1500 PCC -

mostly deep-sea

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Amsterdam Netherlands Northern

Europe 4,009 4,013 5,190

Over half the vessels are under 10,000dwt

(assume short-sea), refined oil products, coal

and containers are the main commodities

Gent (Ghent) Belgium Northern

Europe 3,342 3,101 2,909

Mostly deep-sea traffic, although considerable

short-sea traffic from Russia/Sweden/Norway

Bilbao Spain Northern



The majority of Northern European ports have a focus on deep-sea trade, although there are

significant short-sea and intra-regional trades. Ports such as Dover, Calais, Zeebrugge and

Le Havre dominate the region in terms of short-sea ferry movements.

1.2.3 Mediterranean

Recorded vessel calls in European Mediterranean countries during 2013 were over 1.2 million

(5.6m Gross tonnage), according to Eurostat. This figure does not include French port

statistics, but figures for the port of Marseille/Fos have been added to the Table below. In

terms of country vessel calls, Greece recorded the most with over 460,000 during 2013. This

was followed by Italy with 411,000 calls. Both of these countries have significant ferry

operations without-lying islands and short-sea inter-regional routes.

The port of Messina (Sicily) has the largest number of reported vessel calls in the European

Mediterranean, with over 51,000 recorded calls during 2013. The majority of these calls are

from short-sea ferry traffic between the island and the mainland across the Strait of

Messina. The vessels include Ro-Ro ferries, hydrofoil ferries, ferries, and twin-hull ferries.

There is a similar picture at Piraeus in Greece, where the majority of vessel calls were made

by ferries/Ro-Ro/Ro-Pax vessels. These vessels operate between the mainland and the

islands. There was a large proportion of the vessels calling that undertake short-sea

movements particularly tanker and general cargo vessels.

Dubrovnik and Split have similar vessel movements to Messina and Piraeus. Ferry

movements account for the majority of calls at both ports. Dubrovnik is also a major

Mediterranean port destination for cruise ships.

The port of Algeciras is a major container hub, and as such has significant deep-sea

container vessel movements. In addition the port accommodates a significant number of

deep-sea tanker movements. There are also a number of ferry/Ro-Ro services from the port

to Morocco.

The port of Barcelona has significant inter-regional short-sea movements, with intra-

Spain/Italy/France/Algeria trades. There are also deep-sea container and dry bulk trades. In

addition, the port also imports LNG – which stems mostly from Algeria.

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Genoa has a high number of ferry connections – mostly to Corsica and Sardinia. There are

also a large number of container (on deep-sea rotation) and tanker calls from both deep-sea

and short-sea trades.

The port of Marseille/Fos is split, with a focus on Ferry/Ro-Ro vessels to Corsica/Sardinia and

Algeria operating out of Marseille and Fos handling the deep-sea container, bulk and tanker

(oil and LNG) operations.

The Mediterranean has a high proportion of short-sea ferry routes that connect the main

land to the many islands. There are also significant inter- and intra-trade movements

throughout the region utilising both short- and deep-sea movements.

Table 1-4 Selected Mediterranean Countries – Reported number of vessel calls

Port Area 2011 2012 2013 Comment

Messina Italy Mediterranean 67,635 62,830 51,215 Majority of vessel calls are local ferry

traffic

Algeciras Spain Mediterranean 28,441 25,597 21,222

Mostly deep-sea container vessels and

tankers. Also main ferry service to

Ceuta

Piraeus Greece Mediterranean 27,724 23,793 17,525 Over 13,000 domestic ferry movements

Marseille/Fos France Mediterranean 15,670 15,654

Marseille – main focus on ferry trades

to Corsica/Sardinia/N. Africa/ short-sea

container

Fos -Deep-sea focus (but with short-

sea oil/coal/minerals/container imports

as well).

Dubrovnik Croatia Mediterranean 15,295 15,663 15,002 Majority for local ferries to Elfiti,

Suourao, Mijet, and some cruise lines

Split Croatia Mediterranean 15,454 15,332 14,928 70% inter-island ferry traffic

Barcelona Spain Mediterranean 7,985 7,772 7,731

Significant intra-Spain

cargo/Italy/France/Algeria - container

trades mostly from deep-sea - dry bulk

40% from deep-sea

Valencia Spain Mediterranean 6,916 6,935 7,026

Deep-sea focused port - although 50%

containers - short-sea - crude and

product imports deep-sea

Genoa Italy Mediterranean 11,294 7,186 6,744

Large number of short-sea pax ferries -

but also deep-sea container

vessels/crude tankers

Ravenna Italy Mediterranean 3,218 4,197 4,122 Majority of vessel calls inter-regional

European trade

Trieste Italy Mediterranean 5,355 3,637 2,916 Majority container vessels - also coal

and oil imports


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To highlight the scale and the numbers of vessels operating in European waters, Appendix A

uses a vessel tracking platform that highlights the number of vessels recorded on a single

days (February 13th 2015) for the North Sea, Baltic and Mediterranean. The sectors

highlighted are:

Container vessels

Dry bulk carriers

Crude/product tankers

Passenger Ferries/Cruise vessels

Chemical carriers

LNG/LPG carriers

General cargo vessels

RO-RO

Car carriers

Offshore

It should be noted that the vessel information provides an overview of vessels operating in

the region on a particular day. This is a representative snap shot of the number of vessels

operating in European waters. This investigation into the number of vessels operating in

European waters showed that there were approximately 8,000 vessels.

Appendix A highlights the number of vessels in each area by sector. Within each sector

vessels that are moving, at anchor, moored or not moving are represented. This also

includes in-land vessels.

1.3 LNG as a bunker fuel

LNG as a bunker fuel has significant potential to alter the configuration of the existing vessel

fuel market. LNG is seen as a more environmentally friendly fuel than heavy and distillate

fuels. As such it can be used as one of the possible solutions to enable shipowners to

become environmentally compliant in Emission Control Areas (ECAs). However, it is

understood that the financial viability of LNG as a fuel needs to be considered and

investigated to ensure that its uptake is economical for both the vessel and its owner.

Developments in the past decade on the production of unconventional gas, particularly in the

United States, have created a boost in supply of natural gas. At the same time, gas demand

in other sectors (most notably power generation and industry) has been relatively low in

many parts of the world due to the economic recession. These developments have had a

major impact on regional price levels, trade movements and the supply/demand balance.

The past decade has also seen a continuing growth of the share of LNG in the supply of

natural gas. New liquefaction plants and regasification plants continue to come online,

adding to the overall strong development of the global LNG market.

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In addition to the abundant supply of gas, increased environmental awareness of ship-based

emissions has encouraged discussion and implementation of Emission Control Areas (ECAs),

where a specific stepwise approach to SOx emission reductions has been adopted. In this

context LNG as an alternative fuel for shipping has lower emissions of sulphur, NOX and PM

as well as other advantages when compared to vessels fitted with other abatement

technologies. The business cases for retrofits and newbuilds are very different however, with

a shipowner often led to choose between abatement methods as a function not only of

technical/operational factors but also remarkably on the basis of payback time calculations.

With the above into account, demand for LNG as a bunker fuel is forecast to increase

throughout the next decade and beyond. The following section highlights some of the main

vessel sectors that will benefit from LNG as a bunker fuel and examines the potential

number of LNG-fuelled vessels through to 2030.

Current Operating LNG-Fuelled Fleet

The current global fleet operating on LNG-bunkers amounts to 102 vessels (as of end-2015),

as shown in Figure 1.3. The fleet consists of the first vessel to utilise LNG as a fuel, the

2000-built ferry Glutra, to the recently delivered PSV, Stril Barents. The fleet also includes

seven inland barges that are operating in Northern Europe and three vessels that have been

converted to operate on LNG.

Figure 1.1 Glutra – 2000-built LNG-fuelled ferry

Figure 1.2 Stril Barents – 2015-built PSV

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The current fleet includes 25 ferries, 19 PSVs and a range of other vessel types as

highlighted in Figure 1.4. The majority of these vessels are operating in Northern Europe and

Norway. However, there are now several vessels that are operating in other regions. There

are two LNG-fuelled tugs operating in China. Also the 2015-built PSV, Harvey Energy is

operating in the Gulf of Mexico. The newly delivered ferry, F.A. Gauthier is operating in

Quebec.

Of the vessels that have been delivered so far in 2015, the Kvitbjorn Ro-Ro cargo vessel

became the first LNG-fuelled ship to undertake a long-haul voyage exclusively on LNG. The

voyage was from its shipyard in China to Norway, where the vessel will operate. The vessel

bunkered in Singapore, India and Spain on its way to Norway.

Figure 1-3 Current LNG-fuelled operating fleet (Number of vessels)

Source: Ocean Shipping Consultants a company of Royal HaskoningDHV/DNV GL/HHP/Other open market sources

0

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Conversions Vessel in operation

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Figure 1-4 Current LNG-fuelled operating fleet – vessel type (Number of vessels)


The current LNG-Fuelled Orderbook

The current orderbook for LNG-fuelled vessels contains approximately 160 units. There are

over 86 vessels scheduled to be delivered during the remainder 2016, with a further 33

vessels during 2017, as shown in Figure 1.5.

Of the current orderbook, over 30 vessels are container ships, as highlighted in Figure 1.6.

The largest order is for six container ships from UASC, of which five will by 15,000 TEU and

one will be 18,000 TEU. These vessels will be ‘LNG Ready’, meaning that they will need an

up-grade in the future to utilise LNG. These vessels have been ordered to eventually operate

on LNG, when there is sufficient LNG-bunkering infrastructure in place. MOL have also

ordered six 20,000 TEU container vessels, these vessels will also be ‘LNG ready’.

There are 20 product tankers on order. Of these Crowley Maritime have ordered six. These

tankers will be ‘LNG ready’ – and will have the fuel tanks mounted on deck.

There are 21 ferries on order. These newbuilds have a diverse range of propulsion systems –

ranging from pure LNG operations to dual-fuel, through to hybrid systems that utilise LNG

and battery propulsion.

There are 11 bunker vessels currently on order. These vessels have been ordered by Shell,

Mitsubishi/GDF Suez/NYK, Veka Deen LNG and Anthony Veder. The bunker vessels range

from 2,250-6,500m3

0

5

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15

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30

Figure 1-5 Current LNG-fuelled orderbook – by year of delivery (Number of vessels)


Figure 1-6 Current LNG-fuelled orderbook – by vessel type (Number of vessels)


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R e s t r i c t e d


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Vessel Conversions

There are only a few vessels that are either undergoing conversion or are scheduled to be

converted to operate on LNG. Tote, an American vessel owner, was the first to announce

that they would convert two ferries, the Midnight Sun and the North Star.

1.4 Future LNG-fuelled fleet

The current fleet of LNG-fuelled vessels is concentrated in niche or high-specification sectors,

such as offshore support vessels, ferries and Ro-Ro vessels. As mentioned previously, the

current newbuilds orderbook highlights that, in the longer-term, a wider range of vessel

types will be constructed, or converted, for the use of LNG as bunker fuel.

Short-sea vessels that spend the majority of their operating time in ECAs (and future ECAs)

are ideally placed to take advantage of LNG as a bunker fuel. In addition, the developing

bunkering market is forecast to enable larger long-haul vessels to utilise LNG as a fuel.

The North Sea and Baltic Sea already have a number of vessels that use LNG as a fuel. The

majority of these vessels operate on short-sea voyages. These include:

Glutra -2000-built ferry

Stril Pioneer – 2003-built PSV

Bergensfjord – 2006-built ferry

Korsfjord – 2011-built ferry

Viking Princess – 2012-built PSV

Viking Grace – 2013-built cruise ferry

Bergenfjord – 2014-built cruise ferry

Stril Barents – 2015-built PSV

Each of the main shipping sectors is considered in terms of their potential for future LNG-

fuelled vessels. Each of the vessel sectors has different operational profiles – which will

determine their applicability as an LNG-fuelled vessel. In addition, other factors are also

important, such as environmental compliance and fuel prices. It should be noted that the

life-cycle economics of a given ship design will never be replaced by only looking at the

operational profile aspects. Construction and maintenance costs also play an important role

when making the decision for an LNG-fuelled design. Nonetheless, only by looking at the

operational profile it is possible to understand how likely it is for LNG to work out as a fuel

for a given design. The main factors to take into consideration in this analysis are:

1. Type of voyages: It is important to distinguish whether the vessel will be engaged in

round-trip regular voyages or if a more irregular voyage pattern is followed as in the

case of “tramp shipping”.

2. Duration of voyages: The duration of the voyage might dictate, if long, that a large

storage capacity may be required with direct influence on the ships general arrangement,

in particular regarding the volume required for LNG storage tanks.

3. Type of Cargo: The type of cargo will influence the location of LNG fuel storage location.

It will also influence the net present value for a given project and the time for investment

pay-back, mostly influenced by the effect of different applied freight rates.

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4. Type of operations: Vessels operations may influence the risk & safety case for a given

design. Tug-boats and other special service vessels are work intensive platforms above

deck. Their main dimensions are also mostly influenced by operational requirements. For

both these reasons the location and design arrangement for LNG fuel systems may not

be always easy to draft. Simultaneous operations (SIMOP’s), during LNG bunkering can

be considered a subject where some uncertainty still subsists, thus affecting the

operational analysis study for a given design and, therefore, also its business case.

5. Bunkering: LNG fuel bunkering procedures are still being harmonised. Different LNG

bunkering guidelines have been issued from Classification Societies, SGMF amongst

others. More importantly ISO issued in January 2015 the Technical Specification ISO/TS

18683:2015 providing requirements and recommendations for operator and crew

competency training, for the roles and responsibilities of the ship crew and bunkering

personnel during LNG bunkering operations. Bunkering requirements, if influenced by

typical ship operations at berth, may therefore affect the decision to opt for LNG as fuel.

Highlighted below are the different vessel types and their operational profile/characteristics

and their potential for adoption of LNG as a bunker fuel.

Ferries/RO-PAX – there are significant numbers of short-sea ferries that operate in EU

waters. These vessels are ideally placed to utilise LNG as a bunker fuel. The majority of

the vessels trade on fixed routes which enables bunkering schedules to be tailored to suit

LNG bunkering. Furthermore, aspects such as sizing of the LNG fuel storage tank can be

optimized in order to avoid ageing of LNG. A RO-PAX optimized for a given route can

easily program the tanks to be filled at a minimum threshold close to minimum levels.

This has the potential to optimize the filling times during bunkering and also reduce the

likelihood of the roll-over of the LNG during bunkering, especially for larger tanks. From

an economic perspective, predictability of bunkering is likely to favour commercially

advantageous agreements with LNG bunker suppliers.

A possible problem that can be faced by RO-PAX operators is the simultaneous operations

of LNG bunkering and Embarkation/Disembarkation of passengers.

For ferries operating in Northern European waters, such as the North Sea and the Baltic,

LNG enables vessels to meet the strict ECA requirements. There is increased interest in

LNG for these vessels in the region, with many ship-owners investigating this option,

against other abatement methods such as scrubbers. Short-sea ferries are already

amongst some of the early adopters of LNG bunkers, as already highlighted with the

Viking Grace that trades between Stockholm (Sweden) and Turku (Finland). A more

recent order has been placed by Tallink in late-2014, who has ordered a new LNG-fuelled

ferry for its Tallin-Helsinki route (the vessel is named Megastar). There are several other

examples of LNG-fuelled Ro-Ro vessels that are operating in the Baltic and North Sea

region, such the Fjord Line vessels. This has stimulated interest from other owners to

investigate LNG-powered vessels.

Cross Channel and Mediterranean ferry operations, such as those that support Corsica,

Sardinia and Sicily, as well as the Greek Island trades, could also benefit from LNG fuelled

conversion/newbuilds, especially if LNG is cheaper than conventional fuels.

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Offshore (OSV/PSV/AHTS) – as with other vessel types, a major influence on the use of

LNG as a fuel will be where a vessel operates. Already there are a number of PSV vessels

utilising LNG as a bunker fuel in the North Sea.

The varying OSV operational modes represent a design challenge in order to achieve high

fuel efficiency. Full integration of the propulsion systems is needed to optimise the

performance of the thrusters and prime movers. Without having a regular operational

profile, OSVs have to rely on optimisation of fuel consumption by adoption of energy

efficiency strategies. The typical amount of time spent at sea will represent a major

design driver for LNG fuelled OSVs.

The offshore sector has had a major influence on the introduction of gas-fuelled vessels.

The cost benefits of utilising the fuel and the reduced emissions are strong positive

factors in this regard. In addition, LNG-fuelled offshore vessels have been shown to

operate satisfactorily in some of the most demanding North Sea weather conditions.

There is currently a high proportion of offshore vessels in the LNG-fuelled vessel

orderbook (approximately eight vessels), with future orders forecast to increase

significantly. This sector is currently at the fore-front of adopting gas-fuelled vessels.

Tugs – a major influence on the design of vessels will be the location of operation and

the type of work to be undertaken. The work intensive profile of the above deck typical

tug configuration will dictate the LNG fuel location. This will very likely need to be placed

below deck in order to favour structural protection. The size and autonomy of the tug will

be mostly influenced by the fact that LNG-fuelled tugs are able to operate in ports that

are within an ECA. Tugs now account for around three vessels within the LNG-fuelled

orderbook. This sector is one that is expected to significantly expand in the future within

the EU.

Cruise ships– as with ferries and Ro-Ro vessels, some cruise ships follow a regular

voyage pattern, with a number of vessels operating within the Baltic region. However,

depending on the operational profiles of the vessel, there can be extended periods

between ports. Whilst RO-PAX vessels tend to be more regular with regards to their

journey durations, cruise vessels will require the adoption of energy efficient technologies

in addition to a carefully studied LNG fuel consumption estimate in order to size LNG fuel

storage.

There is increasing awareness of environmental protection through more sustainable

forms of travel and holidaying. Increased numbers of passengers are participating in and

encouraging environmental tourism. The cruise industry is also an expanding market.

As owners and operators seek new initiatives to differentiate themselves from the

competition and reduce fuel costs, it is envisaged that gas-fuelled vessels (in this case

either newbuilds or retro-fitting of existing vessels) will enable new opportunities to both

owners and passengers. Vessels trading in and between ECAs could be a major growth

sector for the up-take of LNG as these can cover both Short- and Deep-sea routes.

Some operational aspects regarding LNG as fuel for cruise vessels remain under

development, especially those relating to bunkering operations, Embarkation

/disembarkation of passengers to/from the LNG fuelled cruise ship whilst bunkering, is an

aspect that needs to be addressed.

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Containerships – container vessels could benefit from LNG as a bunker fuel, especially if

the majority of their voyages are concentrated in ECAs, such as Northern Europe/Baltic.

However, a major concern for container vessels is the reduction of cargo space due to the

size of the required fuel tanks. This is also a concern for the larger deep-sea vessels. This

would be particularly relevant for short-sea shipping feeder container vessels, but also for

larger deep-sea trade.

However, the economics of potentially cheaper LNG fuel could be a defining motivation for

owners to reduce costs, thus markedly increasing demand for LNG as a bunker fuel in the

future.

Having “LNG-ready” ships can be one option to build now and decide on LNG fuel later.

The architecture of a containership favor’s modularity and it is possible to have the

adoption of LNG later during service life, provided the ship design and relevant fuel

system safety aspects are taken into consideration at early design stages.

The particular case of LNG fuelled containerships can be favoured by the predictability of

the operational profiles. Especially for larger containerships the ports visited and the

speeds kept throughout the journeys tend to be a constant. This can have a very positive

influence on the design of the potential LNG fuel storage system, but also on the

arrangement/tailoring of service framework contracts for LNG bunkering services.

Tankers (crude/product/chemical) – Tankers are ideally placed to benefit from the

use of LNG as a bunker fuel. The Bit Viking product tanker was converted to run on LNG

during 2011, with LNG fuel tanks placed on deck, having minimal impact on the internal

general arrangement and global cargo capacity of the vessel. Even in this very specific

application, it is possible to say that in general the above deck areas for tankers offer

potentially favourable locations for LNG fuel storage. This is however a design driver that

there are no significant practical limitations to this solution, meaning larger crude tankers

could also utilise this concept. Depending on the owners/operators requirements,

potentially this option could result in either the converting of current vessels or ordering

newbuilds for both Short- and Deep-sea vessels. From a naval architecture perspective,

the addition of above deck LNG-fuel tanks has potential to reduce conversion costs as

impact on general arrangement is minimum and, provided the right weight-volume

distribution/balance is achieved it is possible to optimize cargo capacity.

Bulk carriers – as with tankers, bulkers could benefit from LNG as a bunker fuel. There

is significant deck space where fuel tanks could be located, depending on the size and

design of the hatch coverings. As such, deck-based tanks could allow limited impact on

the cargo capacity of the vessel. Unlike Tankers however, bulk carriers tend to be rather

work intensive above deck areas, especially during crane loading/unloading (LO-LO)

operations. This would require external tanks to be provided with dedicated physical

protection measures.

This sector could benefit from future converted or newbuilding vessels.

Also as with tankers, given the fact that the majority of the fleet is not deployed on fixed

itineraries (unlike cruise ships, ferries etc.), the main restriction to LNG adoption might

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come from a limited infrastructure (i.e. insufficient number / spread of bunkering

locations).

Table 1-4 Vessel sectors and their potential for adoption of LNG as a bunker fuel

Vessel type Likely factors favouring LNG as fuel Challenges to the Adoption of LNG as fuel

RO-PAX

Predictable routes typically in short-sea shipping routes

Routes inside ECA

LNG availability/planning

Possibility of LNG fuel service framework contract

Risk & Safety aspects

Simultaneous operational restrictions during bunkering

Additional construction (and life-cycle) cost of LNG-fuelled newbuilding

Offshore

(OSV/PSV/

AHTS)

LNG availability

Typically based at a specific port, close to offshore operation areas. Possibility of LNG fuel service framework contract

Operational profile not constant, with multi-purpose mission profiles

Risk & Safety aspects if OSV has work intensive operational profile, with close contact operations

Tugs

Air emissions reduction

Operation inside port areas, under increasingly stricter environmental requirements

LNG availability (if port of operations has LNG bunkering facility)

Operational profile not constant, with multi-purpose mission profiles

Risk & Safety aspects – Tugs have typically work intensive above-deck areas

Space available for LNG fuel tanks is reduced, especially if protective design arrangement needs to be taken into consideration

Cruise Ships

Predictable routes, even if typically longer than RO-PAX

Time spent inside ECA’s

Public image for cruise ships with potential gains with environmental friendly image (“sustainable tourism”)

LNG availability if operational routes favoured with LNG prepared ports

Risk & Safety aspects

Simultaneous Operations possible restrictions during bunkering

Additional construction (and life-cycle) cost of LNG-fuelled newbuilding

Containerships

Predictable operational profiles (for both deep-sea and short-sea feeder vessels)

Modular general arrangement favouring LNG-ready solutions for later adoption of LNG fuel systems

Time spent inside ECA (especially for short-sea feeder container vessels)

Space taken by LNG fuel storage systems, which reduce marginally cargo capacity, for similar displacement ships

Required freight rate calculations highly sensitive to fuel price fluctuations

LNG fuel availability, for feeder containerships, if ports have no LNG bunkering facility

Tankers

Time spent inside ECA (especially for short-sea tankers)

Typical above-deck arrangement favouring installation of LNG storage tanks with minimum impact in cargo capacity

Environmental compliance, especially if operation inside ECA’s is envisaged

Operational profile can be less predictable than other types of ships, especially for short-sea tankers

Availability of LNG fuel can be reduced in ports dealing with other dangerous cargo (such as flammable liquid cargo)

Risk & Safety management for tankers

Bulk Carriers

Time spent inside ECA (especially for short-sea bulk carriers)

Typical above-deck arrangement likely to favour installation of LNG storage tanks with minimum impact in cargo capacity, depending on hatch arrangement.

Operational profile can be less predictable than other types of ships, especially for short-sea bulk carriers

Availability of LNG fuel can be reduced in ports dealing with other dangerous cargo

If cranes are installed, general arrangement

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Vessel type Likely factors favouring LNG as fuel Challenges to the Adoption of LNG as fuel

Environmental compliance, especially if operation inside ECA’s is envisaged

Particular interest for bulk carriers with self-unloading capability, since these are usually heavy polluters at berth during unloading operations

above deck can be made more complicated

Small domestic

ferries

Typically used for short distance canal or riverine crossings, spending all time within port areas in ECA’s. Reduction of air emissions is therefore a key benefit and driver

Public image of “greener” ferries, highly visible to populations

Predictable operational profile, as an advantage for possible LNG fuel service framework contract

Small riverine ferries are highly space-sensitive. LNG fuel systems take a considerable internal volume and affect therefore transport capacity

Risk & Safety aspects, depending on specific risk acceptance criteria

Inland shipping

Positive environmental benefits inland, contributing to improve the air emissions footprint along the inland waterways

Increased availability of LNG refueling points via important inland multi-modal nodes

Small inland vessels are highly space-sensitive. LNG fuel systems take a considerable internal volume and affect therefore transport capacity

Risk & Safety aspects, depending on specific risk acceptance criteria

Source: Ocean Shipping Consultants a company of Royal HaskoningDHV / EMSA

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1.4.1 LNG-fuelled vessels in 2030

There have been a number of studies that have forecast the growth in the LNG-fuelled fleet.

During 2011, the Danish Maritime Authority published a report highlighting that 1,000

vessels would be operating in the Northern European SECA region through to 2020.3 In

addition, DNV forecast that 1,000 LNG-fuelled newbuilds would be delivered through to

2020.4 This would account for approximately 35% of all newbuilds to be gas fuelled. Ocean

Shipping Consultants (a company of Royal HaskoningDHV) published a study highlighting the

growth in the LNG-fuelled vessel market.5 The Report forecast 1,250 LNG-fuelled vessels by

2025.

However, the newbuilding sector has not witnessed the significant increase in new-orders for

vessels in the last year as compared to the previous couple of years. Therefore it is

anticipated that the sector will still develop, albeit not at the rate and scale as recent

forecasts have suggested.

This study will highlight the future gas fuelled vessel market through to 2030.

To provide background into the forecast for the development of the LNG-fuelled fleet a

number of assumptions for the High and Low case are highlighted below.

High Case

Global Sulphur limits are introduced in 2020 – meaning that some vessel owners

will seek, amongst the possible abatement methods, alternative fuels to enable full

compliance. This will potentially benefit the up-take of LNG as a fuel.

Additional countries implement air emission standards – as air emissions

continue to rise, a switch to LNG fuel can dramatically reduce vessel emissions.

Additional Emission Control Areas (ECAs) – Additional ECAs, such as in the

Mediterranean and around Japan, would add the obligation for SOx limits lower than

the future global cap of 0.5%. The ‘High Case’ scenario reflects the effect of this

possibility, with an optimistic anticipation of additional stricter emissions at new

specified areas.

Development of alternative fuels/propulsion – under the high case, alternative

fuels to HFO and MGO will be developed to be utilised for marine propulsion. Of

these, LNG will be a significant alternative. Developments in the regulatory

framework of these alternative fuels, together with improved risk perception of their

utilisation as marine fuels, are expected to encourage their uptake.

Rising economic growth and Increase in Shipping Trade – brings increased

demand for shipping activity as national economies expand.

Rising oil/distillate fuel prices – oil/distillate fuel prices can be affected in many

ways, but mostly if demand rises, prices will traditionally follow, or if supply is

restrained, prices can also increase. Either of these scenarios could be positive for

LNG as a fuel.

3 North European LNG Infrastructure Project, 2011

4 Shipping 2020, 2012

5 LNG as a Bunker Fuel: Future Demand Prospects & Port Design Options

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Rising freight rates – this occurs as demand for vessels increases. This will occur

when today’s underutilised vessels are fully active. This usually implies that there is

growing economic activity in line with ‘High Case’ assumption of rising economic

growth.

Increase in newbuilding orders – increased vessel activity is usually a stimulus for

owners to order new or additional vessels. As such, these vessels could be ordered

with alternative fuels systems, such as LNG.

Additional research into LNG-fuelled vessels – as vessel demand rises, vessels

that can offer operating savings – such as those that can be operated on alternative

cleaner fuels (LNG) may have an advantage in the charter market. Key research

areas in LNG ship design, such as tank optimised integration, efficient engines, boil-

off gas consumption and cryogenic liquefaction are developed at a higher pace under

the ‘High Case’.

Harmonised LNG bunkering standards – this will encourage new entrants to

utilise LNG and complying with industry standards for bunkering. Harmonised LNG

bunkering guidance would help the uptake of LNG by addressing specifically the

safety/risk perception regarding LNG as fuel.

Enforcement Levels – The enforcement levels of environmental legislation, with the

application of dissuasive and effective penalties to those non-complying to air

emission regulations, are assumed under the High Case.

Low Case

Global Sulphur cap/limits delayed to 2025 – the review in 2018 allows the

deferring of stricter SOx global cap to 2025. This would have the potential impact of

delaying the investment in LNG-fuelled ships by several years.

No new ECAs – reduced economic or political determination to implement new

emission control areas. As such, this may limit the number of future LNG-fuelled

vessels to specific areas/regions that already have ECAs, leading the deep-sea trade

to opt for other compliancy strategies/technologies.

Development of alternative fuels/propulsion – alternative fuels that are either

cheaper or/and easier to handle compared to LNG may be developed and utilised.

Even though methanol has a limited regional availability this could be subject to

research and preferred against LNG for some cases. Additionally the development of

low-sulphur distillates, blends, and their increased availability, could lead to reduced

LSFO prices, with an impact on the adoption of LNG as an alternative fuel. These

developments are assumed in the ‘Low Case’.

Low economic growth – national and regional economies continue to remain at

either low or stagnant levels of activity.

Continued low fuel prices – low cost traditional fuels mean that vessel

owner/operators can utilise their vessels without investing in additional new fuel

systems. This is especially relevant if low-sulphur distillates prices are also made

available at lower prices.

Low freight rates – continued low vessel activity, with some vessels being laid-up.

Currently, the offshore and dry-bulk sectors are experiencing low freight rates. If the

tendency persists, with the low freight rates, the business case for LNG is very

difficult with expected pay back times for investment unsatisfactorily increased.

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Continued over-supply of vessels – as above, the offshore and dry-bulk sectors

have significant over-supply of vessels. This is forecast to continue in to the near-

term.

Limited up-take of LNG on long-haul vessels – with significant over-supply of

vessels, particularly in the long-haul sectors, vessel renewal will be limited. Thus

reducing the impact of new LNG-fuelled vessels in the medium-term.

No standard LNG bunkering regulations/procedures – The ‘Low Case’ reflects

uncertainty and lack of harmonization in LNG-bunkering. The adoption of LNG as an

alternative fuel, on the basis of this assumption, could be excluded in favour of other

compliance technologies/abatement methods.

Environmental Concerns – The GHG emission factor of LNG/methane (when

leaked) is much higher than CO2. In the ‘Low Case’ scenario this is a fact that could

affect the uptake of LNG as an alternative fuel for shipping.

It should be noted, that these assumptions are used to help forecast the future LNG-

fuelled fleet. Any changes to the assumptions could impact on the fleet’s development.

Figure 1-7 Assumptions for High Case LNG-fuelled fleet development


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Figure 1-8 Assumptions for Low Case LNG-fuelled fleet development


The current main operating fleet accounts for over 115,240 vessels (end-2015) according to

IHS Fairplay, with approximately 6,900 vessels currently on order. Growth forecasts for the

main conventionally fuelled fleet sectors suggest that through to 2030, the overall fleet will

increase by 46% to approximately 150,000 vessels.

Two scenarios have been forecast for the potential global growth in gas-fuelled vessels.

These are:

Low Case Scenario – It is expected that gas-fuelled vessels will increase from under 0.1%

(102 vessels end -2015) of the current fleet to approximately 1.0%6 by 2030. Overall the

LNG-fuelled fleet is forecast to increase to approximately 1,700 vessels by the end of the

study period.

High Case – As with the Low Case, gas-fuelled vessels will increase from their current

0.1% (102 vessels end-2015) of the current fleet to approximately 2.0% by 2030. Overall

the LNG-fuelled fleet is forecast to increase to approximately 2,515 vessels by 2030.

6 1% and 2% for the Low and High Case have been used, respectively, in line with our experience of typical market development in

this sector.

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Figure 1-9 Low and High Case Scenarios for LNG-Fuelled Fleet Development to 2030

(Number of vessels)


Figure 1.10 highlights the forecast through to 2020, to provide a more detailed outline

of the near-term development of the fleet.

Figure 1-10 Low and High Case Scenarios for LNG-Fuelled Fleet Development to 2020

(Number of vessels)


0

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The development of the LNG-fuelled fleet will be a mix of both short- and deep-sea vessels

in each of the shipping sectors outlined above. An example of this is the container fleet,

which services both the deep-sea trade routes, such as from Asia to Europe (hub), and the

short-sea coastal services (spoke). The uptake of LNG as a fuel will be determined by a

number of factors, as seen above, but will be most likely dominated by the trading patterns

of a vessel. If a vessel spends the majority of its time within an ECA or various ECAs (in the

future), there is a high potential for the vessel to utilise LNG.

In the short- to medium-term the short-sea vessels operating in ECA’s are forecast to take-

up LNG as a fuel in the first instance. Sectors such as the offshore, service vessels (tugs)

and short-sea ferries are highlighted to be the most likely vessels to utilise LNG.

Deep-sea vessels, which trade globally or on specific route or strings (in the case of

container vessels), are forecast to have a slower take up of LNG as a fuel. Whilst outside the

scope of this study, further implementations of ECAs in other regions, such as Asia,

potentially will influence the take-up of LNG on vessels that undertake long-haul voyages.

1.4.2 LNG vessels in Europe

Europe has been leading the way for the construction and utilization of LNG vessels and

there is increasing momentum behind the ordering of LNG-fuelled vessels. Ferries and

offshore support vessels have been the main focus. It should also be noted that there are

several barges that are operating in the river systems in northern Europe.

A global perspective on the current and future orderbook has been developed to enable a

focused analysis of the future European trading vessel fleet. The main shipping sectors were

outlined as:

Container

Dry bulk

Oil tankers

Passenger/ferry and cruise

Chemical carriers

LNG/LPG carriers

General cargo vessels

Car carriers/RORO

Offshore vessels

Other vessels

Each of the sectors was divided into Short-sea and Deep-sea, highlighting the potential

difference in the composition of the fleet operating in or trading too European waters.

For the Low Case short-sea fleet the forecast highlighted over 870 LNG-fuelled vessels

trading in European waters by 2030, as outlined in Figure 1.11. The ferry and offshore

sectors forecast to show growth.

R e s t r i c t e d


43

For the High Case short-sea fleet, the forecast outlined that over 1,280 would be

operating within European waters by the end of the study period. The ferry, offshore and

general cargo fleets are forecast to show an increase.

Of interest to the European Commission is the development of Deep-sea LNG-fuelled vessels

operating within and to Europe. As with the Short-sea investigation, the main shipping

sectors were outlined, with accompanying forecasts for their development.

Under the Low Case deep-sea fleet trading within Europe increases to approximately 168

vessels by 2030, as outlined in Figure 1.13. The container and dry bulk sectors are forecast

to develop the most LNG-fuelled vessels during this study period.

The High Case deep-sea fleet trading within Europe is forecast to increase to over 365

vessels. As with the Low-case scenario, the container and dry sectors are forecast to

dominate the growth with the gas fuelled fleet.

Figure 1-11 Low and High Case Scenarios for LNG-Fuelled Short-Sea Vessels in the EU to 2030

(Number of vessels)


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Figure 1-12 Low and High Case Scenarios for LNG-Fuelled Short-Sea Vessels in the EU to 2020

(Number of vessels)


Figure 1-13 Low and High Case Scenarios for LNG-Fuelled Deep-Sea Vessels in the EU to 2030

(Number of vessels)


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Figure 1-14 Low and High Case Scenarios for LNG-Fuelled Deep-Sea Vessels in the EU to 2020

(Number of vessels)


1.5 LNG fuel price

There are a number of reasons why LNG has risen to prominence as a potential bunker fuel.

These include:

Increasing fuel specification content of bunker fuels – the IMO tightened fuel

specifications for bunkers during 2008 in which all ships must reduce their sulphur dioxide

(SO2) and nitrogen oxides (NOx) emissions between 2015 and 2025 at the latest.

Rising number of Emission Control Areas (ECAs) – including the Baltic, North Sea

and now North America. Other areas are investigating establishing ECAs in the future.

Rise in bunker fuel costs between 2008-2014- as the cost of traditional bunker fuels

significantly increased during this time. Owners and operators sought ways to reduce

costs. Bunker fuels can represent up to a half of the overall costs of running a vessel.

However, during the second-half of 2014, bunker fuel prices dropped significantly – by

approximately 50% for HFO prices at Rotterdam, as shown in the Figure below.

Reducing operating costs – naval architects, owners and operators are continuously

seeking ways to reduce costs. New hull designs, coatings and propellers can reduce fuel

consumption. The potential to use an alternative fuel source and save money is now a

possibility.

0

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30

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Figure 1-15 Bunker Prices in Rotterdam

Source: Ocean Shipping Consultants a company of Royal HaskoningDHV/Bunkerworld

As with oil prices, landed LNG prices have also experienced a decline. These declines have

been more prominent in some parts of the world than others. Landed LNG prices in Japan

have fluctuated significantly in the past. Prices in March 2014 were estimated at EUR

18.75/mmbtu7, thereafter, prices declined throughout the year, to EUR 9.36/mmbtu during

January 2015 and declined further to EUR 5.18/mmbtu by January 2016. Similar decline was

reported in South America, with Brazilian landed LNG estimated at EUR 16.44/mmbtu during

March 2014, before declining to EUR 8.99/mmbtu during January 2015, declining further to

EUR 5.13/mmbtu by January 2016.

Northern European prices have also declined, but not to the same degree as other regions,

from EUR 9.26/mmbtu in March 2014 for delivery in Belgium, to EUR7.70/mmbtu during

January 2015, falling further to EUR 3.95/mmbtu by January 2016. This compares to landed

prices in Southern Europe (Spain) which have fluctuated between EUR 14.83/mmbtu in

March 2014 dropping to EUR 8.25/mmbtu by January 2015 and EUR 3.95/mmbtu during

January 2016.

Seasonality within the LNG market plays a key role in spot LNG prices. The winter season in

the Northern hemisphere corresponds to maximum demand in the region. Conversely

demand in the Southern hemisphere (Argentina and Brazil) peaks during the Northern

hemispheres summer (June & July).

Whereas the oil market is a global market with regional prices only differing as a result of

changes in quality, natural gas is a more fragmented market consisting of three distinct

regions: North-America, Europe and Asia. Particularly in North-America and Europe, gas

prices arise for gas-to-gas competition, weakening the traditionally strong link between gas

and oil prices. This raises the question what the benchmark for LNG pricing should be: the

7 $1=€0.94 20

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Jul 02, 2015

Se

p 0

2, 2

015

Nov 0

2, 20

15

Jan

02, 201

6

Ma

r 02

, 2016

IFO380 MGO

R e s t r i c t e d


47

global price for the substitute, oil products, or the regional price for the ‘feedstock’, natural

gas. Or in other words, who should take the price risk of oil prices relative to gas prices: the

buyer or the seller of marine LNG? For LNG to successfully develop as a bunker fuel it must

be competitive with established liquid fuels for a long period of time until the market is

mature. The main bunkering hubs of marine fuels in Rotterdam, Singapore, Fujairah and

Houston offer various grades of fuel with only marginal variation in prices. A pricing strategy

for marine LNG should take this into account and follow the market value of marine LNG

(directly or indirectly) rather than the cost-based approach with regional natural gas prices.

This will mean that globally there will be different margins for marine LNG suppliers and

margins can be negative for a certain period of time in a certain region. However, many

buyers will probably not be willing to take the (whole) price risk and will require at least

some degree/ form of oil price linkage in their sourcing of LNG bunker fuel. Therefore, it is

anticipated that LNG bunker fuels will be priced/pegged against a current liquid fuel – such

as HFO.

The remit of this study is to focus on the development of the LNG bunkering sector within

the EU. However, it should be noted that the potential price developments that are advanced

here, could be developed in other regions outside the EU.

As of January 1st 2015 new legal requirements applying in Emission Control Areas (ECA) in

Northern Europe (which includes the Baltic Sea, North Sea and English Channel) and North

America (200 nautical miles from the coast of the USA and Canada), have meant that the

maximum allowed content of sulphur in fuel burned on a vessel in an ECA is 0.1% sulphur,

down from the previous 1.0%. In order to comply with these new regulations in ECAs, vessel

operators must either burn MDO with a sulphur content of 0.1%, or install a scrubber

system to clean the emissions of HFO. Vessel owners and operators are still considering the

various options that are open to them to reduce their vessel emissions.

CSAV have recently stated that they will operate their vessels on MDO. They outlined that

the move to cleaner fuels will be expensive, with low sulphur MDO approximately US$300

per tonne more expensive than the old 1.0% sulphur fuels. In addition to these cost

increases, CSAV are also applying a container fuel surcharge on all their inter- and intra-

Americas and European trades.

Mediterranean Shipping Company (MSC) is also placing a surcharge of $165 per TEU

between Canada and the Baltic. This was followed by Maersk, which has put a surcharge of

$130 per TEU per container between the U.S. and Northern Europe. The Danish carrier will

also apply a $90 per TEU charge on its Mediterranean-North America Service.

A study by MARINTEK8 outlined that costs and emissions are a function of the abatement

options in maritime emission control areas. The results showed that there was no single

answer to the best abatement option, but rather the best option will be a function of engine

size, annual fuel consumption in an ECA and the possible future fuel prices. However, a low

oil price (such as during March 2015), favours the lowest cost option, which is MGO.

However, a high oil price makes the solution with a higher capex more attractive, such as

scrubbers and LNG. MARINTEK also suggest that the added complexity that might make the

8 Assessment of cost as a function of abatement options in maritime emission control areas, 2015

R e s t r i c t e d


48

MGO option more attractive is the debate about the postponement of the 2020 global

sulphur reduction to 2025. If this occurs, it means that the capex costs of sulphur abatement

options has to be earned back on fuel cost savings within the ECA which also favours MGO

compared to scrubbers or LNG.

Therefore, for LNG to be a viable bunkering fuel, MARINTEK indicates that the price has to

be lower than that of HFO to make it an attractive fuel for vessels.

Following these findings, Ocean Shipping Consultants a company of Royal HaskoningDHV will

base the future LNG prices on two options as the most likely scenarios. These are:

Option 1 – LNG priced at a 20% discount to HFO price per tonne

Option 2 – LNG priced at a 40% discount to HFO price per tonne

R e s t r i c t e d


49

2 Identification of typical capital and operating costs of

LNG bunkering facilities (Task 3)

2.1 Introduction

The concept of LNG propulsion for vessels is currently in the early stages of development on

a large commercial scale. With the adoption of the new IGF Code, in June 2015, by the

International Maritime Organisation, LNG as a fuel for shipping has been reinforced as a

technically viable long-term solution. It is anticipated that there will be a gradual adoption of

LNG as a fuel for vessels over the next 10-15 years due to the cost of investment for both

shipping operators and port authorities.

According to the World Ports Climate Initiative (WPCI) LNG bunkering for vessels is currently

possible at these ports:

Amsterdam - Netherlands

Rotterdam – Netherlands

Antwerp - Belgium

Zeebrugge - Belgium

Stockholm - Sweden

Helsinki - Finland

Turku - Finland

In addition, vessels can bunker LNG at several Norwegian ports including:

Floro

Bergen

Karmoy

Stavanger

Oslo

Fredrikstad

There are also approximately 20 future vessel bunkering terminals planned in Northern

Europe according to the WPCI. These include:

Bodo - Norway

Kristiansund – Norway

Mongstad - Norway

Lysekil – Sweden

Gothenburg – Sweden

Hirtshal – Denmark

Brunsbuttel – Germany

Bremerhaven – Germany

Wilhelmshaven – Germany

Amsterdam – Netherlands

Ghent – Belgium

Le Havre – France

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50

Aarhus – Denmark

Copenhagen – Denmark

Tallinn – Estonia

Lubek – Germany

Hamburg – Germany

Roscoff – France

Santander – Spain

Gijon – Spain

Ferrol – Spain

The rise in interest for LNG as a bunker fuel is highlighted in a recent survey by Lloyd’s

Register (LR). The company surveyed 22 ports, of which 15 were in Europe. The response

highlighted that 76% said that bunkering operations would commence in their ports in the

next 5 years.

The LR survey also inquired regarding the type of infrastructure each port was planning to

develop for the supply of LNG to the port. The chart below identifies that according to the LR

study, there is still a lot of uncertainty regarding the best method of supplying LNG to a

port.

Figure 2-1 LNG Bunkering Infrastructure Survey Results 2014

Source: Lloyds Register LNG Bunkering Infrastructure Survey 2014

The survey also established that land-based storage facilities were currently the most

popular option for the storage of LNG at a port.

Barges 26%

Trucks 16%

Pipelines 6%

Others 23%

Under consider-ation 29%

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Figure 2-2 LNG Bunkering Infrastructure Survey Results 2014

Source: Lloyds Register LNG Bunkering Infrastructure Survey 2014

2.2 Options for supply & bunkering of LNG

2.2.1 Outline options considered

The development of LNG bunkering stations is considered as to the necessary infrastructure

and options that are required. The following list of options highlights the three stages of the

process of delivery, storage and bunkering of LNG. This indicates the possible combinations

that could be considered and provides a list of preferred options.

Delivery of LNG to the Design Port

There are four main options for the supply of LNG to the design Port:

1 - By road (LNG road tanker);

2 – By rail (LNG ISO container);

3 - By sea (LNG barge or carrier);

4 - By pipeline (from Gas Network).

Storage of LNG

Storage of LNG at the design Port may be required to expand as demand increases. The type

of storage facility would be dependent on the delivery method.

1 - No storage;

2 - Fixed tank (onshore);

Land storage tanks 47% Under

consideration 48%

FSRU 5%

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3 – ISO tank;

4 – Floating storage (FSU).

Bunkering of LNG

There are a further three options for the bunkering of ships in the design Port as follows:

1 – Flexible hose;

2 – Fixed pipeline (long connection to berth from storage tank(s));

3 – On board (via ISO tank(s)).

2.2.2 Initial options screening

The initial options outlined above have been briefly assessed and have screened out options

deemed not suitable for application at the design Port. The results of the screening are given

in the Table below.

Table 2-1 Initial screening of full list of options considered

Options Description Feasibility Comments

1

A

a Transport by road – no storage –

bunkering close to ship via hose

Most common method from existing case

studies

b Transport by road –no storage– bunkering

via pipeline Bunker via manifold

c Transport by road –no storage– bunkering

on board

LNG is in cassettes or tank put on trailer and

connected onboard.

B

a Transport by road – fixed tank – bunkering

close to ship via hose

High risk if permanent storage is close to

berthing area

b Transport by road –fixed tank– bunkering

via pipeline

Presume that fixed tank is in a safe location

away from berth

c Transport by road –fixed tank– bunkering

on board Not feasible

C

a Transport by road – movable tank –


Possible, but not considered to be economical to

use moveable tank.

b Transport by road –movable tank–

bunkering via pipeline


use moveable tank and a pipeline.

c Transport by road –movable tank–

bunkering on board

Cassettes are unloaded from truck using crane

(an alternative to 1Ac but with higher risk)

D

a Transport by road – FSU – bunkering


Could be carried out at the berth or a designated

area.

b Transport by road –FSU– bunkering via

pipeline

Only to be considered if space within the port is

limited.

c Transport by road –FSU– bunkering on

board Not feasible.

2 A a Transport by rail – no storage – bunkering


Not feasible as wagon will have limited mobility

within the port.

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b Transport by rail –no storage– bunkering

via pipeline Bunker via manifold

c Transport by rail –no storage– bunkering

on board Not feasible.

B

a Transport by rail – fixed tank (wagon) –


High risk if permanent storage is close to

berthing area

b Transport by rail –fixed tank (wagon) –


Presume that fixed tank is in a safe location

away from berth

c Transport by rail –fixed tank (wagon) –

bunkering on board Not feasible

C

a Transport by rail – movable tank –



use moveable tank.

b Transport by rail –movable tank–



use moveable tank.

c Transport by rail –movable tank–

bunkering on board

Cassettes are unloaded from train using crane

and transported on board (trailer or lifted).

D

a Transport by rail – FSU – bunkering close

to ship via hose

Not considered to be feasible, due to the

number of LNG transfers required.

b Transport by rail –FSU– bunkering via

pipeline

Only to be considered if space within the port is

limited.

c Transport by rail –FSU– bunkering on

board Not feasible.

3

A

a Transport by sea– no storage – bunkering


Only economical if all vessels bunkered during

the same visit, which is an unlikely scenario.

b Transport by sea –no storage– bunkering

via pipeline Not an economical solution.

c Transport by sea –no storage– bunkering

on board

B

a Transport by sea – fixed tank – bunkering


b Transport by sea –fixed tank– bunkering

via pipeline

Possible only if using a small LNG bunker

vessel.

c Transport by sea–fixed tank– bunkering

on board Not feasible.

C

a Transport by sea – movable tank –


Not practical to bunkering using moveable tanks

via flexible hose.

b Transport by sea –movable tank–


Not practical to bunkering using moveable tanks

via pipeline.

c Transport by sea –movable tank–

bunkering on board

Cassettes are unloaded from vessel using

crane

D

a Transport by sea – FSU – bunkering close

to ship via hose

Possible for ships to be fuelled at berth or at

dedicated FSU location.

b Transport by sea –FSU– bunkering via

pipeline

Not practical or economical to include an FSU

for land based bunkering.

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54

c Transport by sea –FSU– bunkering on

board Not feasible.

4

A

a Transport via gas network – no storage –

bunkering close to ship via hose Need of storage facilities and liquefaction plant

b Transport via gas network - no storage–

bunkering via pipeline Need of storage facilities and liquefaction plant

c Transport via gas network –no storage–

bunkering on board Need of storage facilities and liquefaction plant

B

a Transport via gas network – fixed tank –

bunkering close to ship via hose Not an economical solution.

b Transport via gas network –fixed tank–

bunkering via pipeline Liquefaction plant required on site.

c Transport via gas network –fixed tank–

bunkering on board Not feasible

C

a Transport via gas network – movable tank

– bunkering close to ship via hose

Not practical or economical to bunker via flexible

hose.

b Transport via gas network –movable tank–


Not practical or economical to include moveable

tanks with this option.

c Transport via gas network –movable tank–

bunkering on board

Not practical or economical to include moveable

tanks with this option.

D

a Transport via gas network – FSU –


Not economical to store in FSU with gas

delivered via pipeline.

b Transport via gas network – FSU –




c Transport via gas network – FSU –

bunkering on board



= economically/technically unviable


2.3 Multi Criteria Assessment

2.3.1 Assessment of criteria

The options discussed above are also affected by various other criteria. The criteria have

been derived from the key elements that will determine the preferred option(s), such as

technical feasibility, costs, and health and safety. The criteria assessed are listed below9:

Licensing and Permitting

Public acceptance

Permitting (including EIA, QRA and Safety)

International operational guidelines

Operational Impactions

Port operations

9 These criteria have been used in the establishment of the scenarios detailed in 2.3.2

R e s t r i c t e d


55

Vessel operations

Impact on public (roads)

Safety

Delivery to port

Storage

Bunkering

Cost

Capital Expenditure (CAPEX)

Delivery to port

Storage

Bunkering

Operational Expenditure (OPEX)

Delivery to port

Storage

Bunkering

Schedule

Permitting, consents and planning

Engineering and procurement

Construction

LNG Chain Feasibility

Sources of LNG/Gas

Access to LNG/Gas

Delivery to port

Storage

Bunkering

Complexity of operations

Flexibility to expand

2.3.2 Options for delivery, storage and bunkering

The following list outlines the potential delivery methods available to the LNG bunkering

sector. The main options can be divided into three categories; delivery by road, delivery by

sea and supply via pipeline.

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56

Delivery Option 1 - Delivery by Road

a) Tanker direct to ship

b) Tanker to remote location and bunker via fixed line

c) Tanker to remote buffer storage (onshore tank) and bunker via fixed line

d) Tanker to remote bunker barge (barge to ship bunkering)

Delivery Option 2 – Delivery by sea

a) Small-scale LNG carrier/LNG bunker vessel delivering LNG cargo to onshore tanks.

b) LNG bunker vessel delivering direct to ship (ship to ship bunkering)

Delivery Option 3 - Delivery by pipeline

a) Supply from natural gas network and liquefaction at port and bunker via fixed line.

Demand Scenarios

In addition, there are three LNG bunkering demand scenarios that have been calculated.

These scenarios provided estimated weekly LNG bunkering demand of:

Small-scale – 1,500m3

Medium-scale – 5,500m3

Large-scale – 7,500m3

2.3.3 Sizing of facilities

Delivery and Storage Capacity

The estimated demand for LNG can be used to determine the size of facilities required for

delivery and storage of LNG at the design Port. The Table below provides an indication of the

scale of LNG movements and storage facilities based on potential LNG bunkering demand.

Table 2-2 Estimated requirement for LNG facilities

Delivery Options Delivery Method Weekly Demand (m3)*

No. of weekly

deliveries

Truck to Ship Truck 1,500 27

Small-Scale Onshore Storage Truck 1,500 27

Small-Scale Onshore Storage Vessel 1,500 1

Medium-Scale Onshore Storage Vessel 5,500 2

Large-Scale Onshore Storage Liquefaction Plant 7,500 N. A.

Large-Scale Onshore Storage Vessel 7,500 1

Bunker Vessel (Ship-to-ship) Vessel 3,000 1

Bunker Vessel (Ship-to-ship) Vessel 6,000 2

*Weekly demand supplied by Northern European Ferry Operator with average bunkering trends of 400t/vessel/week. Conversion

factor of 0.5t of HFO to 1m3 of LNG


Low cost options such as tanker truck delivery and bullet storage tanks can be achieved

without construction of considerable infrastructure. With the delivery of LNG via tanker

trucks, on site storage is not essential, as trucks can deliver fuel as and when required.

R e s t r i c t e d


57

As demand increases, the number of trucks required would also increase. However, a tanker

truck and storage tank option would be feasible and could be a solution to increasing

demand. This option may also allow for efficiencies to be made in terms of delivery and

waiting time as storage tanks could be continuously filled without being reliant on ship

operations. It should be noted that facilities such as loading arms and pipelines would be

required for a small-scale onshore storage option.

For medium-larger weekly demands, alternative options for delivery and storage should be

considered. LNG carriers or LNG bunker vessels could supply directly from the source (e.g.

Rotterdam or Zeebrugge in Northern Europe) to onshore storage tanks. It may also be

possible to share a vessel with other ports and improve the economic justification.

A large storage facility may be required in the long-term, for example if weekly demand

exceeds 5,000m3. Large tanks however require significant investment as well as a constant

supply (i.e. via pipeline) in order to remain economical. There may also be a requirement for

an onsite liquefaction plant, if natural gas is supplied from the national gas network. A

transition plan and programme would be required as a facility of this size can take up to two

years to construct.

The recommended approach for the design of land–based storage could be to phase the

transition over three stages; short (0-5 years), medium (5-10years) and long term (10+

years). To begin with, a temporary or mobile supply of LNG would need to be provided for

the relatively few new or converted vessels in the short term. As demand increases,

additional storage and distribution mechanisms would need to be implemented in the

medium-term. In the long-term a more substantial facility would be required to supply the

anticipated volume of LNG on a daily basis. This approach would also be advantageous in

distributing capital expenditure over a period of time and decrease demand risk.

It should be mentioned, that if the bunker vessel option was chosen, then the overall

approach to the bunkering station would potentially alter, with limited or no land-based

storage facilities required.

Option Drawings

Various drawings have been produced to highlight the delivery and bunkering options in

more detail. These drawings show indicative layouts and berthing arrangements based on a

hypothetical design port. These drawings are presented in Appendix B.

2.4 LNG bunkering infrastructure

2.4.1 Delivery option descriptions

This section highlights the delivery and bunkering options that have been highlighted for the

study. There are four main options consisting of:

Option 1 – Delivery by road – bunker direct to vessel

Option 2 – Delivery by road – bunker via storage tank

Option 3a – LNG Liquefaction at port – bunker via storage tank

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Option 3b – Delivery via LNG carrier – bunker via storage tank

Option 4 – Delivery via LNG bunker vessel – bunker direct to vessel

Option 1: Delivery by road

Option 1: Tanker truck delivery directly to ship

This option is currently used throughout northern Europe at local ports and ferry terminals,

as seen along the west coast of Norway. It is the most common method for LNG bunkering,

due to the lack of infrastructure required and the flexibility of bunkering at remote locations.

Under this option LNG is transported by road using LNG road tankers. Bunkering takes place

via flexible hose between the road tanker and vessel on the quay side, as seen in Figure 2.3

below. In theory this bunkering operation could take place at any berth or at a dedicated

bunkering berth away from port operations. This option provides flexibility to minimise

disruption to ferry operations, but could disrupt the landside operations with the addition of

LNG road tankers into the port operations area. This option is highlighted in Drawing B 1.

Figure 2-3 LNG bunkering at the quay side via flexible hose

Option 2: LNG Road Tanker via Storage Tanks (Ship Bunkered via Fixed Pipeline)

Option 2: Tanker truck delivery to storage tanks

This option introduces onsite storage of LNG. Road tankers would discharge the fuel into an

LNG storage tank, or tanks depending on the required storage capacity. It is envisaged the

storage facility would be at a location remote from port operation, but within the port limits.

The fuel is delivered to the ships via a dedicated LNG pipeline. Again, it is envisage this

option would utilise a single pipeline to a dedicated refueling berth. This option has an

advantage over road tankers in that site storage of LNG means that the road tanker

deliveries do not have to coincide with vessel operator’s schedule. This also means that road

deliveries can be made during off peak times to minimise road and port traffic. This option is

highlighted in Drawing B 2.

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Figure 2-4 Semi permanent LNG storage tanks, connected via fixed line below ground

Option 3a: National Gas Network (Ships Bunkered via Fixed LNG Pipeline)

Option 3a: Liquefaction at the Port

This option is based on utilising the gas mains to supply gas to the port where it is converted

to LNG using a small liquefaction facility. The LNG would then be stored within the port using

storage facilities similar to that described in Option 2. It is envisage this option would utilise

a single pipeline to a dedicated refueling berth. This option has the benefit of removing the

need to transport the LNG by road or by sea, and avoiding the associated potential

disruption to port operations. This option is highlighted in Drawing B 3.

Figure 2-5 Small-scale Liquefaction Plant

Option 3b: LNG vessel via Storage Tanks (Ships Bunkered via Fixed LNG Pipeline)

Option 3b: LNG deliveries via vessel

This option is similar to option 2, whereby there is onsite storage of LNG. However, the LNG

is delivered via vessel to the storage tanks. It is envisaged the storage facility would be at a

location remote from port operation, but within the port limits. The fuel is delivered to the

ships via a dedicated LNG pipeline. Again, it is envisage this option would utilise a single

pipeline to a dedicated refueling berth. LNG can be sourced from an LNG terminal in the

R e s t r i c t e d


60

region. This option has advantages over the road tankers in that large quantities of LNG can

be delivered in a single visit – thus eliminating road tanker journeys to and from the port.

Figure 2-6 Small-scale LNG vessel

Option 4: Delivery by Sea

Option 4: LNG Bunker Vessel

This option would involve a dedicated LNG bunker vessel transporting LNG from a source

along the coast (such as Rotterdam, Zeebrugge in Northern Europe) to the design Port. The

bunker process could then be carried out by direct bunkering from the bunker vessel to the

ship. This option would minimise any disruption to the onshore operations in the port. This

option is highlighted in Drawing B 4.

Figure 2-7 LNG bunkering vessel

2.4.2 Key assumptions for each delivery option

Option 1: Delivery by road (Ships Bunkered direct)

It is assumed that the port will provide an existing quay/berth that has adequate availability

for bunkering operations.

It is also assumed that all the required permits have been arranged/provided for

bunkering operations.

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61

The LNG will be delivered via road truck(s) with an LNG carrying capacity of 55m3.

Average LNG volumes are forecast at approximately 1,500m3 per week.

Therefore the assumption is around 27 truck deliveries per week.

The life-span of each truck is estimated at 10 years.

The quay space for the refueling is anticipated to already exist within the port.


Flow rate is calculated to be approximately 35-50m3/hr.

Figure 2-8 Flow chart for road delivery LNG supply chain


Option 2: Delivery by LNG vessel via Small/Medium-scale Storage Tanks (Ship

Bunkered via Fixed Pipeline)



It is also assumed that all the required permits have been arranged/provided for bunkering

operations.

There are two scenarios for these options, which are:

Small-scale

Comprises 2x1,000m3 storage tanks.

100m of cryogenic pipes.

1xloading arm & support structure.

1xflexible hose or fixed manifold.



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Medium-scale

Comprising 6x1,000m3 storage tanks.






Figure 2-9 Flow chart for small / medium storage tank options


For both Small and Medium-scale options, it is assumed that the LNG will be delivered to the

storage tank via a small-scale LNG vessel.

Construction time for both options is anticipated at less than one year.

Option 3a: Delivery by National Gas Network (Ships Bunkered via Fixed LNG

Pipeline)




operations.

The LNG will be produced on-site via a small-scale liquefaction unit.

A large capacity (30,000m3) storage tank is included.

R e s t r i c t e d


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Construction time is estimated to take up to two years.

Figure 2-10 Flow chart for Large-scale storage tank option 3a


Option 3b: Delivery by LNG vessel via Large-scale Storage Tanks (Ships Bunkered

via Fixed LNG Pipeline)




operations.

A large capacity (30,000m3) storage tank is included.

The LNG will be delivered to the storage tank via a small-scale LNG carrier.




R e s t r i c t e d


64



Construction time is estimated to take up to two years.

Figure 2-11 Flow chart for Large-scale storage tank option 3b


Option 4: Delivery by Sea (Ships Bunkered Direct)

It is assumed that the port will allow the bunkering of LNG in the port boundaries.


operations.

This option will provide the direct bunkering of vessels via a dedicated bunker vessel.

There are two scenarios for this option, which are:

3,000m3 vessel – flow rate is calculated to be: approximately 300-1,000m3/hr.

6,000m3 vessel - flow rate is calculated to be: approximately 300-1,000m3/hr.

Vessel construction time would be less than one year. (However, this does not

include the negotiation and depends on shipyard berth availability).

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Figure 2-12 Flow chart for ship-to-ship option


2.5 Establishing the CAPEX and OPEX of each bunkering

scenario

Taking the above scenarios and their associated construction and operating costs a true

representation of the financial implications can be calculated. Appendix B highlights the

matrix for the Infrastructure, CAPEX and OPEX.

Option 1: Delivery by road (Ships Bunkered direct)

The CAPEX of providing the nine required trucks is estimated at EUR 3.6 million.

The OPEX of the trucks (including the drivers) is estimated at EUR 0.55 million per year.

Option 2: Delivery by LNG vessel via Small/Medium-scale Storage Tanks (Ship

Bunkered via Fixed Pipeline)

Small-scale

The CAPEX of providing the various required infrastructure is estimated at EUR 5.35 million.

The OPEX of small-scale facility is estimated at EUR 0.26 million per year.

Medium-scale

The CAPEX of providing the various required infrastructure is estimated at EUR 13.5 million


For both Small and Medium-scale options, it is assumed that the LNG will be delivered to the

onshore storage via a small-scale LNG carrier by a third party provider.

Option 3a: Delivery by National Gas Network (Ships Bunkered via Fixed LNG Pipeline)


– including a small-scale liquefaction plant.


R e s t r i c t e d


66

Option 3b: Delivery by LNG vessel via Large-scale Storage Tanks (Ships Bunkered via

Fixed LNG Pipeline)



Option 4: Delivery by Sea (Ships Bunkered Direct)

There are two scenarios for these options, which are:

1 vessel x 3,000m3

The CAPEX for a small-scale LNG bunker vessel is estimated at EUR 40.00 million.

The OPEX of LNG bunker vessel is estimated at EUR 4.00 million per year.

1 vessel x 6,000m3

The CAPEX for a small-scale LNG bunker vessel is estimated at EUR 70.00 million.

The OPEX of LNG bunker vessel is estimated at EUR 7.00 million per year.

2.6 Potential number of LNG-fueling terminals through to

2030

The forecast number of LNG-fuelled vessel fleet operating within European waters has been

outlined in 1.4.2. This forecast provides insight into the potential number of vessels that will

require LNG refueling facilities in Europe through to 2030. The number of vessels forecast

is:

For the Low Case scenario – a forecast fleet of 880 short-sea LNG fuelled vessels

and 160 deep-sea vessels operating in Europe. Approximate total 1,040 vessels.

Under the High Case scenario – approximately 1,300 short-sea vessels and 360

deep-sea vessels operating in Europe. Approximate total 1,660 vessels.

To calculate the number of marine LNG-bunkering facilities required for the Low and High

Case scenarios, several assumptions were required:

The bunkering capacity for each sector was estimated. This was broken down into

short-sea and deep-sea for each sector, such as container vessels, dry bulk carriers,

offshore support vessels etc.

An estimated frequency for bunkering was established, such as twice weekly, weekly

or monthly.

An annualised throughput of each of the bunkering facilities was calculated for:

Truck-to-ship = 78,000m3

Medium on-shore facility = 286,000m3

Large on-shore facility = 390,000m3

Ship-to-ship = 312,000m3

With these assumptions a forecast number of LNG-bunkering facilities could be calculated.

The totals were:

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Under the Low Case, a forecast 52 LNG-bunkering facilities will be required by 2030.

For the High Case, a forecast 136 LNG-bunkering facilities will be required by 2030.

It should be noted that for this study, the facilities that are under consideration are

marine orientated LNG-bunkering facilities and are not large-scale LNG storage facilities

connected to a national grid. In addition, the focus is on the maritime industry and has

not taken into account supplying trucks/local industries.

2.7 Potential capital costs for LNG-bunkering facilities

through to 2030

Taking the above estimated number of LNG-bunkering facilities required through to 2030,

total capital costs can be calculated. The individual capital costs for each facility are (also

see 3.5):

Truck-to-ship = EUR 3.6 million

Medium on-shore facility = EUR 13.5 million

Large on-shore facility = EUR 44.9 million

Ship-to-ship = EUR 70 million

The overall build-up and specific terminal selection by individual companies/ports is unclear

at this present time. However, it is forecast that the majority of core TEN-Ts ports will offer

LNG-bunkering facilities in the future. Therefore, a combination of the above facilities has

been used to calculate sufficient supply for the developing LNG bunkering market year-on-

year. Therefore the potential range of capital costs required are:

Low Case scenario – total nominal capital costs through to 2030 are estimated to be

approximately EUR 1.4 billion.

High Case scenario – total nominal capital costs through to 2030 are estimated to be

approximately EUR 3.6 billion.

The potential annual capital costs required for LNG-bunkering facilities to provide adequate

LNG bunkering provisions for the forecast LNG-fuelled vessels within Europe is highlighted in

Table 2.3.

Table 2.3 Forecast annual investment

Year Low Case (EUR million) High Case (EUR million)

2015 39 39

2016 162 190

2017 154 182

2018 122 102

2019 77 98

2020 74 94

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2025 74 296

2030 84 369


Figure 2.13 and 2.14 highlight the potential annual capital costs of establishing LNG

bunkering facilities within Europe.

Figure 2-13 Low case – Capital costs for LNG bunkering facilities in Europe by year (EUR million)


Figure 2-14 High case – Capital costs for LNG bunkering facilities in Europe by year (EUR million)


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3 Analysis of commercial expectations on returns on

investments and overview of interviews with

stakeholders (Task 4)

3.1 Introduction

The overall forecast CAPEX and OPEX of the various bunker supply options is highlighted in

Task 3. There the investment analysis of the main infrastructure, which includes tanks

(various sizes), additional equipment, bunker vessel and capacity of the various terminal

options is outlined.

This Task’s main purpose is to identify the level of return on the investment that is expected

by the various stakeholders and players in the sector for investing in LNG bunker

infrastructure. This will be undertaken via the analysis of internal rate of return (IRR)

through asking the main stakeholders about their views on anticipated returns.

In addition, other relevant questions that have helped build understanding and insight into

the future financing opportunities for the LNG-bunker market have been outlined.

3.2 Industry Feed-back

For this project we have interviewed a wide variety of companies and organisations to try to

gain a deeper insight into the financial aspect of the developing LNG bunkering sector within

Europe. A total of 70 telephone interviews were conducted. These interviews spanned across

the European Commission member states and included a variety of sectors that are involved

with LNG and the shipping market. The Figure below highlights the geographical spread of

those interviewed. In addition, an online survey was held to receive more feedback from the

shipping industry. There were over 40 responses to the online survey from across Europe.

Answers and opinions have been published from those who agreed to be identified.

The feedback received from interviews and the questionnaire was from a wide variety of

sectors within the shipping industry. These are shown in Figure 3.2.

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Figure 3-1 European coverage of interviews and online survey


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Figure 3-2 Shipping related sectors that provided feedback


3.3 Internal rate of return defined

For a clear understanding the definition of Internal Rate of Return10 is outlined here.

Internal Rate of Return (IRR) is a financial metric for cash flow analysis, for the use of

evaluating investments, capital acquisitions, projects and program proposals and various

business case scenarios.

IRR takes an investment view of expected financial results. This means, that it highlights the

magnitudes and timing of cash flow returns compared to cash flow costs.

IRR analysis begins with a cash flow stream, or an expected cash flow figure from the

investment. The expected cash flows for IRR might follow a similar pattern as shown below.

Here each bar represents the net of cash inflows and outflows. In the below example there is

initially a negative outflow turning to a net inflow after one year.

10

The specific difference between internal rate of return (IRR) and return on equity (ROE) is explained in chapters 6 and 7.

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Figure 3-3 IRR cash flows stream (example)

Source: DekaBank

The required rate of return will depend on the appetite of the investors to risk and their

alternative investment options, the feasible IRR for a project is determined a.o. by market

conditions, potential subsidies, and the overall profitability of the business venture.

Figure 3.4 from DekaBank highlights how higher risks are correlated with higher anticipated

returns. Projects that have state funding/government backing typically require demand

lower rates of return (6-10%), compared to speculative infrastructure investments (12-

14%+).

The actual yield would be dependent on the risk profile of the project, potential Government

guarantees, and the degree of regulation within the market.

Figure 3-4 Estimated rates of return in the different areas of the infrastructure market

Source: DekaBank

25 PFI/PPP Regulated Utilities Early Stage PFI/PPP

24

23 State projects Greenfield projects

22 On-going projects

21

20

19 No or low cash flow

18

17 Stable regulation

16

15

14

13

12

11

10

9

8

7 First class credit rating

6 Second class credit rating

5

4

Necessary

Infrastructure

Early Stage

Infrastructure

Unregulated

Infrastructure

Shortly before the

transition to

Nominal

yield %

Community

infrastructure

Low regulation or

regulation by

Infrastructure with

development risks

No or low cash flow

Infrastructure

investments

Limited known

scale of demand

PPP Programmes

dependent on

Minimum demand

and market risk

Government

guaranteed

Required business

service

Minimal demand

risk

Monopolistic

market structure

12-16%

14%+

6-8%

8-10%

9-12%

10-14%

11-15%

12%+

Category 6

8-10%

9-11%

10-13%

11-14%

Category 1 Category 2 Category 3 Category 4 Category 5

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IRR can be measured for the project as a whole, which is done pre-finance and pre-tax.

However, sometimes another term is used: Equity IRR. This term refers to the Return on

Equity (ROE) that investors (expect to) earn when investing in a project.

3.3.1 Rate of return in this study

IRR is an output parameter of financial analysis. It is one of the measures that indicate the

performance of a project. To be able to benchmark the outcomes of our financial analysis in

Tasks 7 and 8, we asked in the interviews what level of IRR / ROE the participants would

expect. Their answers have been used to compare the derived outcome metrics of the

financial analysis against.

3.4 Results from interviews regarding IRR

Various responses from the interviews regarding IRR are presented below. The responses

provide an individual view on the market and give insight into the potential return that

would be anticipated for such investment.

Could you indicate a bandwidth for the required rate of return on investment that

your company would expect on large, medium and small scale investments?

This is very much depending on the risk analysis. Generally, a range between 8% to

15% can be assumed, but for early-bird infrastructures or unregulated infrastructures

a range of 12-16 % is often required”.

UniCredit

For projects with a higher risk assessment a ROI of 12-15% and for projects with a

lower risk 10% and less are expected.

HSH Nordbank

It depends on the risk profile of course. If the project includes an overseeable risk such as

the requirement to provide the availability of a road only, without any dependencies on

maintenance/operations etc., the RoI could be 7 to 8 %. For other projects, this will be

higher, although it is difficult to set a standard maximum. A percentage of 12 % or 15

% can be used.

APG Asset Management

It depends on the profile of the investment. Risk assessment is very vital on all

investments that are port related. A sensible rate of return within 5-10% is an initial

approximation.

Hutchinson Ports UK

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Depending on the project and depending the on the market demand, IRR would normally

be acceptable at about 15%.

ABP

Figure 3-5 Interview Responses – rate of return on investment

Could you indicate a bandwidth for the required rate of return on investment that

your company would expect on large, medium and small scale investments?


However, it was suggested that a simple requirement for IRR and an appropriate band-width

for returns, might be a bit simplistic. Therefore:

It would seem that as this is a developing sector, then rates may be at the higher end

of the scale – it would reflect the risk that the finance company is taking. For instance

if Shell was underpinning a project with minimal technical risk (with a fairly standard

design) then this potentially would have a low rate of return – but if a project had 50%

met by Shell and 50% from the bunkering volumes of the project, this would therefore

not be a standard debt and would need another finance player to take the risk.

Ultimately the pricing of the debt will come down to – not that it is an LNG bunkering

project – but the type of risks that are left and who is under pinning them.

London based Financial Institution

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Not all the respondents were in a position to answer regarding IRR. The majority of the port

authorities suggested that they would not invest in port infrastructure; this would be left for

the developers to make the required investment decisions. Also, the majority of vessels

owners were unable to provide an answer on their views on IRR for investments in LNG

fuelled vessels.

In conclusion, we opted to compare the project’s ROE outcome to a target ROE of

approximately 15%. In other words, if the ROE on the project exceeds 15% (and the other

financial metrics are positive), we deem the project to be sufficiently profitable. This level of

ROE is in line with other sectors developing infrastructure.

3.5 Additional questions & answers

In addition to answering questions about rates of return on investments, we also asked

various others questions. Again the responses provide an individual view on the market and

market insight in to the financial aspects of investing in LNG bunkering.

In order for you organisation to finance an LNG bunkering terminal, what are the

key parameters in terms of technology/construction risks, regulatory/political

risks, operating/demand risks, and credit risk of borrowers? Which of these risks

has been the most important constraint in expanding your business activity in this

sector?

A variety of factors plays a role. Amongst others:

Project life time: it is often difficult to make the required returns on investment in a

short time, unless it is very clear how the investment will be sold for example. Short

project life times are not very common - project lifetimes of around 30 years are often

used.

Corporate social responsibility – APG always applies a check if a project proposal is

acceptable from an Environmental, Social and Governance (ESG) point of view. This

analysis is part of the due diligence process. APG however is not allowed by its clients

to offer ‘’discounts’’ on the required rates of return for projects with a strong ESG

profile.

Partners: APG partners with organizations with a good reputation only. This can be

commercial parties requesting a loan, likeminded investors, governmental

organisations, other banks (a.o. EIB) etc. APG always takes minority stakes.

Risk profile: the cashflow outlook should be stable in order to make a project proposal

acceptable to APG.

Participation of EIB: this is a partner with a good reputation. It does not form an extra

advantage to APG if EIB participates, but it helps to give the project a reputable

outlook.

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Participation of governmental organisations/ PPP structure in general: if their

participation enables the reduction in risk, this can be reflected in lower required rates

of return.

Safety is a general concern of APG but if this can be assured by a technical consultancy

firm, the specific LNG safety risks won’t be a showstopper for APG.

APG does invest money in this type of projects but is not actively involved in any

management/operating roles. For APG, it is therefore valuable if a commercial party is

involved that will run the asset. Furthermore, for APG it is important that future cash-

flows can be guaranteed as much as possible. It is therefore an advantage if long-term

contracts with future clients are in place.

APG usually participates in projects with loans > EUR 100million. EUR 50-100million loans

do take place but are less common.

APG Asset Management

Basically the funds have to come either from the TSOs or from public grants, especially at

the beginning, when the demand is at an early stage.

Repsol

We normally need commercial contracts in place to make the investment happen and in

the case of LNG there is interest. From aspect of Vopak it is relatively easy to secure

project financing as long as long term contracts with credible customers are in place.

Vopak

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Figure 3-6 Interview Responses – constraints on expanding LNG bunkering

In order for you organisation to finance an LNG bunkering terminal, what are the

key parameters in terms of technology/construction risks, regulatory/political

risks, operating/demand risks, and credit risk of borrowers? Which of these risks

has been the most important constraint in expanding your business activity in this

sector?


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For the construction of an LNG bunkering facility, would you consider sharing the

financial risk with:

- Private/Public financing

- An established bunker supplier

- Shipping company

- A port

- Other

The response to this question highlights that Private/Public financing was the most popular

option of risk sharing for project finance, as outlined in the figure below highlights. This

was followed by those wanting to share risk with an established bunker supplier.

Figure 3-7 For the construction of an LNG bunkering facility, would you consider sharing the financial risk with:


Some of the other replies included:

For higher investments the involvement of at least one LNG-supplying company, that

will operate or supply the facility, seems necessary.

Port of Zeebrugge

Any combination of the above would be appropriate depending on the circumstances.

The grant aid or tax breaks that may be offered as well as the end user would dictate

how the installation would be funded.

Port of Cork

Other (please specify)

Another port

Shipping company

An established bunker supplier

Private/Public financing

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

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LNG refueling service is a port commercial service that should be provided by private

initiative through private funding.

Puertos del Estado

Port of Stockholm do not make any investments when it comes to bunkering facilities,

either for LNG or for conventional fuels. Investments are made by the shipowners and

gas supplier. The role of the port is as a facilitator, giving permits for bunkering and

make space available for bunkering facilities.

Port of Stockholm

Do you think that the development of LNG bunkering facilities requires financial or

regulatory support from the European Commission? If yes, in what way?

The answers to this question were varied, with some of the most interesting highlighted

below.

Any public entity interested in promoting the LNG as a bunker fuel, especially in non-

ECA regions, should consider transversal policies covering both financial and regulatory

measures.

Repsol

Yes, financial support is needed; ports might not be able to build such infrastructure on

their own.

However, it can be a difficult situation creating an unfair competitive advantage for the

port receiving the financial support. It also depends on the amount being invested and

whether there is good reason to invest in terms of port traffic and potential revenue.

Since Valencia (like all other Spanish ports) is state-owned, the right financial balance has

to be struck for all the ports. Investments like these have to be state approved and in my

opinion should also be at least partly financed.

Regarding the regulatory framework, it has to be clear and unified for all the

Mediterranean area (for example, in the Baltic the situation is the same for all ports).

There is competition with North Africa ports which do not have the same regulations and

vessels calling at these ports are not obligated to use low Sulphur fuels.

Valencia Port

Yes, EU Commission can support pilot projects financially.

Funding programs for new technology are already in place but should be more easily

accessible.

EU should be more engaged in rule making on international level for handling, bunkering

and using LNG as fuel.

TUI Cruises

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However, not all those interviewed desired financial or regulatory support. Such as:

Support is needed because the development of these facilities is a very slow process at

the moment because of the high cost of the infrastructure. It must be left to the market

forces to decide. If there is an availability of EU funding, there is a danger that people will

start to use EU funding to try to get a return.

Stena Bulk

There are already regulatory frameworks for LNG terminals and infrastructure. There are

a lot of guidelines on LNG and LNG fuelled vessels and that is going to increase further.

In terms of the financial aspects, it is not considered a good way to go because if these

investments are subsidized or financed by the government organizations, the long term

viability of those investments may raise questions. The funding has to come from within

the industry itself and it’s not a good idea to rely on the financial backing from the

government organisations.

UECC

Figure 3-8 Interview Responses – LNG bunkering facilities require financial or regulatory support?

Do you think that the development of LNG bunkering facilities requires financial or

regulatory support from the European Commission? If yes, in what way?


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What kind of incentives at Member State or EU level are you aware of that facilitate

LNG bunkering?

Various answers to this question are presented below.

The EC TEN-T / CEF programmes offer financial support for the development of LNG

infrastructure.

From a ports perspective, various ports around Europe apply on a voluntary basis

environmentally differentiated port infrastructure charges to reward greener vessels. In

doing so, ports use schemes such as the Environmental Ship Index (ESI), the Green

Award and others. The main principle here is to reward vessels that go beyond

complying with legislation on their environmental performance. Vessels sailing on LNG

fall under this category and are rewarded with reduced port fees. Obviously, the scale

of application of such schemes is a key factor for really achieving a change of

behaviour here. In any case though, any investment of shipowners on LNG vessels

needs a business case in its own right. In its Green Guide; towards excellence on port

environmental management and sustainability, ESPO encourages ports to consider

applying environmentally differentiated port charges. ESPO stresses though that this

needs to be done on a voluntary basis.

ESPO

The Port of Rotterdam highlighted their incentives:

PoR runs incentive schemes (developed via WPCI, environmental ship index for air

quality (ESI)) – PoR gives discounts to clean vessels. The discount on port dues has

been increased for LNG recently (clean fuels 10% gross/5% net; LNG even higher

discount: 20%gross/10% net) via the Environmental ship index. For inland shipping:

related to green-awards, discount on port dues.

Port of Rotterdam

On the infrastructure side – Finland is developing a string of small-scale terminals – this

may assist in bringing total delivery costs down for LNG in Finland. But, in view of the

focus on industrial customers, this may only be marginal.

For the shipping side only TEN-T (CEF) – this seems to be the only option for vessels. This

provided co-funding for a part of the building costs – but you would need a liner service

between nominated core and comprehensive ports.

There is also Horizon 2020, which is essentially focussing on R&D and innovation, and of

limited use for rolling out LNG-fuelled vessels.

Whilst terminal operators get help/support – how does that filter down to vessel

owners/operators and a more competitive LNG price?

Spliethoff

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Figure 3-9 Interview Responses – what kind of incentives are you aware of?

What kind of incentives at Member State or EU level are you aware of that facilitate

LNG bunkering?


We asked the question below to find out what the general feeling was towards the

development of LNG bunkering and whether the various parties interviewed had suggestions

that they would like to share with the European Commission.

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What would be your recommendations to the EU or to Member States in order to

support the development of the LNG supply chain?

Various responses to this question are given below.

Other recommendations include:

Implementation of realistic fines coupled with reward mechanisms

Tax incentives for those that use LNG

Reduced port fees and seaway fares for LNG users

Following the Norwegian NOx fund example

Active support by the port authorities (This can be achieved by participating in LNG

bunker vessels and by stimulating in port service providers (like tugs, ferries etc.) to

switch to LNG.

Faster permitting processes to be facilitated

Bunkering via trucks should be allowed during the initial phase

VOPAK

The port of Dover is experiencing significant growth in its core ferry traffic. In the last

2 years there has been 20% growth (10% each year – which is significant). The port is

also anticipating between 6-16% additional growth due to the introduction of the

SECA. This means that the long routes – North Sea, Western Channel routes to the

continent will experience a modal shift – as it is cheaper to transit through Dover.

The port is experiencing general economic growth with a general rise in freight

throughput and likely more traffic in the future due to the SECA.

Anything that helps the port have the capacity, services and facilities that keeps the

traffic moving would be a positive move – as the port will see more traffic due to the

Commissions SECA regulations. Therefore Dover (and Calais) needs to be recognised

as key ports and optimised.

If the EU is going to introduce things such as a SECA, this will have certain

ramifications for ports (such as Dover) and they (the EU) need to support the ports in

providing services such as LNG bunking that enables vessels to trade in the SECA.

Port of Dover

As a cruise company – we need global LNG bunkering opportunities – not just

infrastructure in a single region.

There are concerns with loading/passenger embarkation and parallel LNG bunkering

which need to be clarified.

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The EU could really help to support the research in to LNG bunkering - such as the

Hummel barge – this is a pilot project – this along with other pilot projects like it could

be used to help the public perception of LNG.

Also the regulations/safety procedures need to be developed to enable further growth

of the sector.

Overall, the public perception of LNG needs to increase/ improve. Especially as a cruise

line, the passengers need to be and feel safe.

TUI Cruises

Figure 3-10 Interview Responses – recommendations to the EU?

What would be your recommendations to the EU or to Member States in order to

support the development of the LNG supply chain?


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In addition to the telephone interviews undertaken – an online survey was also put together

to reach additional stake-holders. The results of which are highlighted in Appendix D.

3.6 Summary of comments

The table below highlights some of the outcomes and themes from the respondents of the

interviews.

Table 3.1 Overview of interview feedback

Key views Concerns

Banks & Financial

Institutions

Public funding is seen as

an advantage for a project

Expected return on

projects around 15%

Loss guarantees could be

provided

Involvement of the EIB is

seen as a positive

Projects need reliable

demand forecast to

provide stable project cash

flow and economic viability

Concerns over regulatory,

legal and technical issues

Bunker Suppliers

LNG as a fuel seen as a

growth market

Funding is required to help

develop the bunkering

market (i.e. incentives)

Long-term contracts are

needed to fund investment

Projects should be funded

via own capital and bank

loans/joint ventures

There is a trend to move

away from big terminals to

scalable projects.

Representative

Organisations

Financial support required

to build market

LNG seen as good solution

for marine fuels

All LNG-bunkering options

are necessary to make

LNG as convenient as

possible

Concern about

guaranteeing volumes of

LNG

MS having different safety

regulations

LNG difficult to handle

Large investment required

Port Authorities

The majority of ports are

interested in the

development of LNG-

bunkering

LNG seen as an option for

short-sea trades

Financial support should

be given to shipowners

Public support helps

reduce project financial

risk

Current market conditions

mean it’s difficult to

develop LNG-

infrastructure without

subsidies

Difficulty with city

planners to gain approval

for LNG bunkering

facilities

Fixed infrastructure

appropriate for trucks/

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There should also be

funding for bunkering

infrastructure

In general ports do not

invest in LNG

infrastructure – but

several port have

established financial

incentives for shipowners

to switch to cleaner fuels –

i.e. LNG

cars, bunker vessel more

suited to sea-going

vessels

There needs to be unified

regulatory framework,

esp. for Southern

European countries

LNG bunker terminals

seen as a private business

– with no MS/EU funding

Port Operators

They are following the

trends within the market

and see LNG as a fuel for

the future

Both regulation and

financial support should be

available

Shipowners

All owners interviewed are

investigating or have

already ordered LNG-

fuelled newbuilds

Bunker vessels seem the

most appropriate system

for refueling

Financial support from the

EU is considered

necessary

IRR stated between 6-

12%

Not seen as an option for

some owners with deep-

sea vessels/trades

Over capacity of current

shipping sectors limits

near-term investment in

LNG-fuelled vessels

Increased regional

/international supply

necessary to promote fleet

growth

Safety aspects of refueling

are a priority

Owns don’t want to

deviate to fixed terminal

for refueling

Concerns about difficulty

of securing funding for

newbuilds from EU

Engine Manufacturers

Have invested in LNG

engines and gas handling

equipment

Believes that usage of

LNG will increase in the

future

Suggest that financial

support is needed until

the market is fully

developed


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From the various interviews undertaken, it would seem that there are a number of common

themes that run through each discussion. These are outlined below:

The financing of an LNG bunker project is deemed relatively straightforward. This does

not seem to be a major concern for those interviewed.

A more pressing issue is the need to harmonise the regulation framework across the EU.

There are also concerns over current and future demand for LNG bunkers, and how

rapidly (or slowly) the market will develop in Europe.

There also needs to be a more coherent transport policy from member states and the EU.

Support from the EU should focus on the infrastructure (the supply side of the market)

rather than on shipowners.

Overall, for the market to develop there needs to be some form of financial assistance

from the EU. Without this, the respondents suggest that development of this sector will

be very slow.

Typical return on equity on a LNG bunkering project would be around 15%. This value has

been used as a benchmark in the financial analysis undertaken in Tasks 7 and 8.

Risks identified by the interviewees are included in the table. It is also indicated whether

these risks can be covered by financial support or regulatory attention.

Table 3-2 Risks identified in the interviews

Risk identified

Possibility to

cover by financial

support?

Possibility to cover

by regulatory

attention?

Uncertainty of future cash flows; unstable

demand

Shipowners may avoid rules if not strictly

enforced

LNG as ship fuel may be perceived as

immature technology by some banks

Being sole or junior lender is risky

Market for LNG as ship fuel only establishes

without good alternatives

EIB involvement shows political will but also

competition

Low interest rates may limit usefulness of

traditional EIB funding

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EU wide long-term policy is crucial

Global adoption of regulations and standards

is essential

TEN-T and CEF are administrative burden


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4 Development of a screening matrix for the main

incentive for installation of LNG bunkering facilities

(Task 6)

4.1 Introduction

A matrix has been developed that summarises various characteristics of different types of

LNG bunkering facilities as described in Task 3. This matrix provides insight into how the

main bunkering options compare to each other in terms of the various categories by which a

project is assessed. The matrix provides a multi-criteria analysis. Each option of the LNG-

bunkering facility is scored out of four, with the highest score being the best of each option.

In addition, a weighted score (out of a total of 100%) is provided, to highlight the more

critical options that could influential which type of LNG bunkering facility is constructed.

From the various bunkering optional that have been outlined in Section 2 – the bunkering

scenarios within the screening matrix will be:

Option 1: Delivery by road (ships bunkered direct) – Truck-to-ship

Option 2: Delivery by LNG vessel via Small/Medium-scale storage tanks – Ships bunkered

via fixed pipeline

Option 3a: Delivery by LNG vessel via liquefaction unit and large capacity storage tank

Option 4: Delivery by Sea – 3,000m3/6,000m3 bunker vessel

The screening process highlights the potential difference in scale between the bunkering

options, and the intended scale of both investments required and scale of potential subsidy

required to encourage market development. An example of this is the required CAPEX for a

project. For the truck-to-ship option, the required investment is very small. Conversely, the

Shore-to-ship (Option 2) is capital intensive.

4.2 Screening indicators

Ease of construction at port

There are no major requirements for construction at the port the bunkering vessel option;

therefore it scores 4 in the screening matrix. There may be limited requirements for some

construction for the Truck-to-ship option, therefore it score 3. Both the shore-to-ship options

require additional equipment to be constructed on site. It is assumed that the site has

received planning permission and construction can commence without delay. Shore-to-ship

(Option 1) includes the siting of bullet tanks and cryogenic pipes. Therefore this option

scores a 2 in the screening matrix. The Shore-to-ship (Option 2) includes a small-scale

liquefaction unit and a large storage tank and therefore scores a 1 in the matrix.

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Construction time

There is no construction needed for the ship-to-ship option, there for this scores 4 within the

matrix. With the Truck-to-ship option, there is very limited construction needed for

bunkering to commence. Therefore this option scores three in the screening matrix. For the

Shore-to-ship (Option 1) it is assumed that all the relevant planning permission,

procurement of equipment, and contracts have been agreed before construction

commences. Overall construction time is estimated to be less than a year. Therefore this

option scores 2 in the screening matrix. The Shore-to-ship (Option 2) – which includes a

small-scale liquefaction plant and large storage tank, is estimated to take up to two years to

fully build-out. Therefore this option receives a score of 1.

Required additional port infrastructure

The bunkering vessel does not need additional infrastructure for bunkering operations.

Therefore this scores 4 in the screening matrix. Similarly, for the Truck-to-ship bunkering

operation, there is little requirements for additional infrastructure needed on the shore side.

Therefore this scores 3. For the two shore-to-ship options, it is assumed that an existing

berth would be utilised, with only marginal adjustments to the berth to fit the required

equipment. Therefore these options both score 1 each in the matrix.

Required equipment – shore side

The bunkering vessel will need limited additional equipment for bunkering operations, as the

vessel will already have the required equipment on-board. Therefore this also scores 4 in the

screening matrix. Similarly, for the Truck-to-ship bunkering operation, there will be limited

additional equipment required on the quayside. The trucks delivering the LNG would have

the required hoses for the bunkering procedure. Therefore this scores 3 in the matrix. For

both options equipment for marking a safety zone around the bunkering vessel would be

required on the quay. For the Shore-to-ship (Option 1), investment would need to be made

in storage tanks, cryogenic pipes, hoses, loading arm and fixed manifold. This option scores

2 in the screening matrix. For the Shore-to-ship (Option 2), there would be a doubling of

equipment, with two loading arms and flexible hoses and manifolds. This option would also

include a small-scale liquefaction unit as well as a large capacity storage tank. These last

two items significantly increase the required list of equipment (as well of the overall cost).

Therefore this option scores a 1 within the matrix.

Access to market

Each of the land-based options have a ‘pull’ effect on the market – meaning that if an LNG

bunkering facility is offered, potentially vessels would call at and utilise the facility. However,

vessels would have to make a dedicated voyage to the facility for bunkering. Therefore both

Options 1&2 receive scores of 2 and 1 respectively in the screening matrix. The Truck-to-

ship option allows bunkering whilst the vessel is along-side, assuming there is access for the

truck. However, there may be requirements that loading and unloading of the vessel may be

restricted whilst bunkering occurs. Therefore this option is given 3 in the screening matrix.

The bunker vessel is also mobile and able to move to where the vessel requiring bunkering

is located. This is a positive advantage as it means that vessels that may be operating in the

region could be bunkered without making a dedicated movement to a land-based bunkering

terminal. Therefore this option is given 4 in the screening matrix.

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Number of market entrants

The Truck-to-ship scenario enables the majority of ports to offer access to LNG bunkering

via trucks at an available (or designated) quay. As highlighted in Task 3, there are a number

of ports that have bunkering capabilities – the majority of which have truck-to-ship

operations. This means that whilst cost of entry to LNG bunkering is low for the truck-to-ship

option, it also means that competition between ports is high; therefore this scores a rating

of 4 in the screening matrix. Correspondingly, the more investment and infrastructure

required within a port, the higher the cost of entry becomes. This means that there are a

lower number of ports providing shore-to-ship bunkering infrastructure (Options 1&2), with

a corresponding rating of 3 and 2 respectively in the screening matrix. For the Ship-to-ship

option it is possible that one bunker vessel could supply several ports, meaning that

competition between ports would be low – depending on the distance between the ports.

This scenario gains a rating of 1 in the screening matrix.

Required area

For the bunker vessel servicing the requirements of a port, it is anticipated that no land is

required – assuming that the vessel can bunker whilst alongside, therefore this scores 4 in

the screening matrix. (This assumes that the bunker vessel is loaded at a different port and

that the vessel does not need to moor alongside in-between bunkering operations.) The

space required for the Truck-to-ship option is limited to a zoned-off area when the vessel is

bunkering. This compares to the land-based shore-to-ship options, which require large

dedicated areas for the storage tanks, pipes, flexible hose/fixed manifold, liquefaction plant

and storage tanks. If the port has limited space, then these options may mean significant

planning of resources are required. Therefore these options are scored 2 and 1 respectively.

Overall cost

The cost of the Truck-to-ship options is very limited indeed for the port authority. The main

investment will stem from the LNG suppliers. Compared with the other options, this is the

cheapest option for LNG bunkering and therefore scores 4 in the screening matrix. For the

Shore-to-ship (Option 1), there is major investment required, in furniture, loading arm,

flexible hose and storage tanks. However, the costs of the Shore-to-ship (Option 2) and the

Ship-to-ship option are considerably higher, leading to much higher scores with both these

options having a rating of 2 and 1 receptively in the screening matrix.

CAPEX & OPEX

The least cost option is the Truck-to-ship option, which requires an empty quay and the

purchase of the trucks, plus drivers, therefore this options is seen as the most accessible for

those providing LNG as a fuel. Therefore this scores 4 in screening matrix. The Shore-to-ship

(Option 1) requires more capital investment and increased annual operating costs, compared

to the truck option and rates a 3. The Shore-to-ship (Option 2) and Ship-to-ship options are

significantly more capital intensive than the other options. In this respect, they are also

more expensive to operate. Therefore both these options have a rating of 2 and 1

receptively in the screening matrix.

Annual throughput & annual capacity

The Shore-to-ship (Option 2) with its largescale storage tanks, and the Ship-to-ship option

have similar annual capacity, therefore they rank the highest within the matrix. Shore-to-

ship (Option 1) has limited annual capacity. However, calculations highlight that the truck-

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to-ship option has the smallest annual capacity; therefore it has a rating of 1 in the

screening matrix.

Possibility to expand capacity

The possibility of expansion for each bunkering option is also considered. Here the Truck-to-

ship option is limited due to its reliance on road haulage. The only way to increase capacity

is to either increase utilisation of the existing trucks or purchase additional vehicles.

However, more trucks calling at the berth will mean increased volumes of traffic throughput

for the port. Therefore, there is limited ability to increase capacity within this option. For the

Shore-to-ship (Option 1), additional storage tanks can be added to increase capacity of the

facility. These can be added relatively easy, although potentially there is a limit to the

number of tanks that can be sited for this option. For the larger Shore-to-ship (Option 2)

where a liquefaction plant and a large storage tank are constructed, the ability to increase

capacity would be limited. As additional liquefaction capacity and storage capacity would

need to be developed. There is no limited possibility to expand the capacity of the bunker

vessel (utilising the vessel 24/7), meaning that this scores a 2 in the screening matrix.

Overall results

The initial screening matrix outlines that the ship-to-ship option has the highest score

followed by the truck-to-ship. This is followed by the shore-to-ship (Option 1) with the

shore-to-ship (Option 2) resulting in the lowest score.

4.3 Screening matrix weighted options

The scores from the screening matrix are multiplied against each options weighting (which

have been assigned as to their influence on each LNG bunkering facility).

The weighted screening matrix highlights that the Truck-to-ship option has the highest

score, highlighting the ease of overall access to the LNG bunker sector. This provides a quick

and easy(ier) option to supply LNG bunkers to the maritime sector. It is also the bunkering

option that is the most cost effective in terms of initiating LNG bunkering within a port.

At the other end of the scale, is the Shore-to-ship (Option 2). This bunkering facility is the

most technically challenging, it demands a high overall costs, it requires the most

equipment, and a long concession. However, it has the largest annual throughput and

annual capacity. Overall the score for this bunkering option highlights that it has significant

potential to provide LNG to the bunkering sector, although this comes at a cost with regards

to high CAPEX and OPEX.

The Shore-to-ship (Option 1) scores between the Truck-to-ship and the Ship-to-ship bunking

options. This option is ideal for vessels that are on regular voyages, such as ferries or

offshore vessels. It is relatively easy to construct and also has some scope for expanding its

capacity/throughput.

The Ship-to-ship option provides a flexible bunkering opportunity; however, this comes at a

cost. There are high associated CAPEX and OPEX and overall costs, as well as potential for

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the need for a high IRR. However, this is countered by a high annual throughput and annual

capacity as well as a low level of competition.

Under the weighted screening the ship-to-ship option has the third highest score. However,

it should be noted that the ship-to-ship LNG bunkering option will provide a similar

experience to the current refueling experience. Ship-to-ship bunkering allows a vessel to

refuel when it is berthed in port, without having to move to another location to fuel. This

reduces the time and financial implications of refueling.

In addition, there are a number of LNG bunkering vessels either currently on order or

waiting FID and final agreement/contracts. As the LNG bunkering market develops, bunker

vessels, at least initially, will be able to service not only different berths within a port, but

also different ports. A moveable asset is seen as a desirable option as the LNG bunker

market establishes itself.

Whilst it is still unclear as to the direction and development of LNG-bunkering facilities, it is

anticipated that bunker vessel will be a major growth sector within the industry.

Table 4-1 Screening matrix via bunkering options

Truck-to-

ship

Shore-to-ship

(Option 1)

Shore-to-ship

(Option 2)

Ship-to-ship

Ease of construction at port 3 2 1 4

Construction time 3 2 1 4

Required additional infrastructure 3 2 1 4

Required equipment - shore side 3 2 1 4

Access to market 3 2 1 4

Number of market entrants 4 3 2 1

Required area 3 2 1 4

Overall cost 4 3 1 2

CAPEX 4 3 1 2

OPEX 4 3 1 2

Annual throughput 1 2 4 3

Annual capacity 1 2 4 3

Possibility to expand capacity 1 4 3 2

Total 37 32 22 39

Source: Ocean Shipping Consultants a company of Royal HaskoningDHV / ISL / Marintek

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Table 4-2 Screening matrix weighted options

Weighting Truck-to-

ship

Shore-to-ship

(Option 1)

Shore-to-ship

(Option 2)

Ship-to-ship

Ease of construction at port 3% 0.1 0.1 0.0 0.1

Construction time 3% 0.1 0.1 0.0 0.1

Required additional infrastructure 5% 0.2 0.1 0.1 0.2

Required equipment - shore side 5% 0.2 0.1 0.1 0.2

Access to market 4% 0.1 0.1 0.0 0.2

Number of market entrants 10% 0.4 0.3 0.2 0.1

Required area 4% 0.1 0.1 0.0 0.2

Overall cost 15% 0.6 0.5 0.2 0.3

CAPEX 15% 0.6 0.5 0.2 0.3

OPEX 15% 0.6 0.5 0.2 0.3

Annual throughput 8% 0.1 0.2 0.3 0.2

Annual capacity 8% 0.1 0.2 0.3 0.2

Possibility to expand capacity 5% 0.1 0.2 0.2 0.1

Total 100% 3.1 2.7 1.7 2.5

Source: Ocean Shipping Consultants a company of Royal HaskoningDHV / ISL / Marintek

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5 Identification and assessment of potential public

financial mechanisms (Task 2)

5.1 Business case for LNG as marine fuel

5.1.1 Two perspectives

The business case for LNG as marine fuel must mainly be looked at from two different

perspectives, related to demand and supply in the sector. This is illustrated in the Figure

below.

Table 5-1 Schematic overview of the sector for LNG as marine fuel


Firstly, there is a business case for the shipowners who will either invest in new LNG fuelled

vessels or have their existing fleet converted to operate on LNG. Secondly, there needs to be

a business case for the operators of LNG bunkering facilities who will create the supply.

Other parties, such as landside infrastructure providers (usually ports), commodity suppliers,

or regulators, shape the investment environment and therefore indirectly exert influence on

risks in the marine LNG sector, but they do not play a direct role in the trade-off between

supply and demand. Therefore, their perspectives are not driving this business case for LNG

as marine fuel. We will therefore focus on the perspectives for shipowners and bunker

facility operators.

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5.1.2 Shipowners

The first perspective is that of the ship owner, who is faced with the decision to invest in

LNG technology. This investment decision is based on an assessment of several factors:

Generally, for shipowners, the reasons to invest in LNG fuelled vessels are twofold:

o To enter the Emission Control Areas (ECAs) in Europe and the USA /

compliance with (future) regulation.

o Having a long-term view on prices for LNG being lower than for marine oils

(HFO / MGO).

There must be sufficient supply of LNG through bunkering facilities in the areas in

which the ship owner operates. Without certainty about supply (both quantity and

price), they will not invest in new LNG fuelled vessels. Vessel operators vary in terms

of predictability/ flexibility of routes, meaning some operators require only one or two

bunkering facilities (e.g. ferries) whereas others (e.g. cruise operators) require a

widespread network of bunkering facilities.

The price of LNG is a major factor for shipowners in determining whether to invest.

Especially the relative price difference between marine fuel oil and LNG and the

expectations regarding the long-term price differential are of great importance.

The ship owner will choose from proven technology, as this is readily available in the

market at the moment.

In terms of political risk, the ship owner has to rely on the continuation of the ECAs,

and even expanding, as well as that no policy implications against LNG as marine fuel

are undertaken in the future.

If the points as outlined here can be solved sufficiently well, LNG as fuel for shipping can

materialize in economically viable business cases. Summarising, we see the following major

risks that the shipowners are facing, which may prevent them from making a positive

investment decision:

1. Guarantee of supply of LNG bunkering facilities (sufficient facilities in a grid of

locations).

2. Energy price differential between LNG and marine oil fuels.

5.1.3 Bunkering facility operators

The operators of LNG bunkering facilities face a different investment decision. In this study,

we look at four different bunkering facilities (for which the investment decision is similar due

to similarities in the business model, albeit that the capital expenditure involved differs

hugely between the different facilities)11:

Truck to ship facility

Ship to ship facility

Small shore storage tank facility

Large shore storage tank facility

The investment decision of operators is based on an assessment of several factors. These

include:

11

These options are further explained in Task 3.Although minor differences may exist between different types of bunkering facilities in terms of type and degree of risks, these differences are much less relevant than the risks they have in common, as discussed in this paragraph for bunkering facilities in general.

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Availability of LNG is not likely to impede investments in LNG bunkering facilities. The

UK and Spain are Europe’s main importing countries of LNG, and many other

countries (such as The Netherlands, Belgium and France) have facilities to import

LNG as well12. In the absence of (nearby) LNG regasification terminals, natural gas

can be sourced on a trading hub or through bilateral contracts and liquefied at the

bunkering facility.

The main risk is the offtake risk: the operator would not make a positive investment

decision if the offtake is uncertain. In other words, the operator’s business model

depends on sufficient LNG fuelled vessels being available in the market, and beyond

that, his capacity to enter into longer term offtake contracts with shipowners.

The price level of LNG is less relevant to the bunkering facility operator than for the

ship owner, as the operator earns a premium on the commodity price, transferring all

price risk to the ship owner.

The technology risk for the operator is small, as the technology is readily available in

the market and is deemed proven.

Necessary landside infrastructure is usually provided by the port, in return for a fee

(included in the land lease / rent agreement). This is therefore no great risk to the

project.

If the points as outlined here can be resolved sufficiently well, then this is an economically

viable business case. Summarising, we see the following major risk the operators of LNG

bunkering facilities are facing, which may prevent them from making a positive investment

decision:

1. Uncertainty about offtake agreements with sufficiently large client base.

5.2 Needs analysis: combining demand and supply

We observe that both the business case for the shipowners and for the LNG bunkering

facility operators are economically viable, but that they suffer from a traditional ‘chicken-

and-egg’ problem: the business case for the demand side (shipowners) is heavily reliant on

the business case for supply (facility operators) and vice versa.

From our interviews with both demand and supply side private sector parties, it follows that

the business case for shipowners is relatively straightforward. Either shipowners do not

make a positive investment decision for LNG fuelled ships at all, as they deem the supply of

LNG insufficient, or shipowners make a positive investment decision, and are able to obtain

finance for their investment via regular routes. They indicate that no support from the EU is

necessary to obtain finance at commercial terms. Whether or not the shipowners are capable

of financing ships, the addition of LNG facilities does not impact the ships’ bankability.

Rather, shipowners indicate that the infrastructure (supply) side of the sector must be

developed further. They are quite literally waiting for a grid of bunkering facilities to be

available first before considering to ordering new LNG fuelled ships (notwithstanding other

considerations in their investment decision). Therefore, shipowners agree that the

infrastructure development needs to be assisted by the EU, rather than the shipowners

themselves. Table 5-9 highlights the relevant findings from 5 interviews carried out as part

of the validation task (Task 9). All 5 interviewees represent large, professional organisations

12

The website of Gas Infrastructure Europe provides an overview of existing and under construction infrastructure for LNG: http://www.gie.eu/index.php/maps-data/lng-map

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with a deep experience in their line of business. All interviewees support the conclusions

drawn here.

Table 5-2: Relevant findings from interviews on financing support

Type of organisation View on the need for financing support

Port operator

Support from EU should be aimed at facilities; there is an egg

and hen problem. To kick-start the market, facilities should be

widely available. If supply is created, demand will follow. Any

potential EU investment / financial assistance should go to

supply infrastructure instead of ship owners, since most added

value can be reached in improving the infrastructure network.

Ferry operator

Agrees with the statements made by the Port. “In financing the

ships, no specific issues were stumbled upon. The project had already

been commercially financed, after which the existence of EIB funding

was discovered by the project. The project has since been refinanced

by the EIB at more favourable terms.”

Financial institution

This bank is involved in the financing of vessels, not so much in LNG

infrastructure. Key to unlocking the LNG as marine fuel sector lies in

infrastructure, this is the element that needs to come first. Ships won’t

be ordered speculatively. The bank has looked at this type of projects

in the past. Some parties will take demand risk that will be reduced

over time. Demand will follow supply.

Cruise operator

When the company compared the total costs of ownership of a LNG

vessel with a HFO vessel, the company ultimately decided not to

invest. The main reason for that decision is the unavailability of a well-

developed supply chain of marine LNG around the world. Asked

whether there are any obstacles/ gaps in the availability of private

financing for LNG vessels, the company representative replied that this

is not likely; its competitor recently bought new LNG vessels and they

work with the same lenders. Using LNG means losing some cabins

(since tanks are bigger). However, with a good explanation for

investors/ financiers, all in all, investors and financiers do not deny

investments in vessels based on the fact that they use LNG as a fuel.

In the company representative’s view, the availability (supply) of marine

LNG would have to improve for the market to develop. Focus of

support by the EU on the demand side (in the form of loans at attractive

conditions) would help, but is far from necessary. Availability (supply) of

marine LNG is the showstopper. LNG is quite an attractive option for an

owner of vessels, also taking into account the (capital and operational)

costs of exhaust gas treatment. If the EC wants to move the market of

marine LNG forward, investments should focus on the infrastructure

side.

Ship owner (transporting RoRo

goods short-sea)

While LNG was certainly a topic in the discussions with financiers, this

did not render the investment in LNG fuelled vessels difficult to finance.

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The company’s representative is not aware of any gaps in the private

financing of infrastructure either. He stresses that implementing marine

LNG is a matter of jointly developing a collaborative project with

partners on the demand and on the supply side, so both develop

simultaneously. In that way, uncertainty in the business case is

minimised. In his view, stimulation of the supply side of the market will

cause demand to follow.


This view is supported by the minutes from a meeting13 of the ESSF sub-group on funding

for LNG-fuelled vessels, stating that “Shipowners can encounter some difficulties in

accessing banking resources [red: in general, not aggravated by the decision to implement

LNG facilities].” “Moreover, those [financial] instruments can promote the deployment of

LNG infrastructure in ports.”

Bunkering facility operators are in agreement with the shipowners: they indicate that, if the

chicken-and-egg situation is to be solved, it is the infrastructure that needs financial

support. Availability of supply is clearly the kick-starter of the sector. If this is translated into

a business case perspective, it means that LNG bunkering facilities will be built that will have

a very limited customer base for the first years of operations (unless there is a ‘home

customer’ for the facility, such as a ferry operator). For only if it is certain that the facilities

will become available, shipowners will make a positive investment decision to buy LNG

vessels. These first years of operations, having low revenue levels, have to be bridged. This

is essential to retain a viable business case for the bunkering facility operator. The figure

below illustrates this time gap during which the facility operator has a very low level of

revenues.

One way to bypass this problem is to use an integrated project approach towards the

development of the sector. This means that demand and supply are developed

simultaneously; the bunker facility operator and the vessel operator discuss the timeline,

volumes, capacities, terms and conditions etc. and reach a mutual commitment that enables

both sides to take a positive investment decision. Lead times of the LNG powered vessels

and bunkering facilities would then ideally be aligned to avoid or at least minimise the

aforementioned time gap. The vessel owner may even decide to participate financially in the

facility, thus gaining more control over his supply chain of fuel and strengthening the

business case for the facility (although potential conflicts of interest may arise as well).

Several parties have indicated that if the EU wishes to accelerate the development of marine

LNG, it could consider contributing to a network of bunkering facilities and thereby improve

the availability and removing the most important barrier to investing in LNG powered ships.

This approach can be taken even further by adding demand sectors for LNG other than

marine use, such as heavy-duty trucks or buses and inland water vessels. If for instance a

long-term offtake contract with the owner of a fleet of long-haul trucks can be closed then

the offtake risk for the terminal is significantly reduced. As the onshore LNG refueling

infrastructure develops further, the truck fleet owners will become less dependent on the

LNG port-facility they helped to launch and vice versa.

13

On 29 October 2014

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Table 5-3 Schematic overview of the resulting time gap between the two business cases


For this approach to be feasible, a necessary precondition is that one or more shipowners

can commit themselves to bunkering their ship(s) at one (or a limited number of) specific

facility or facilities. This will only apply to those shipowners that operate regionally.

However, some portion of the capacity not being contracted at the completion of the facility

means that this capacity is available to the market, which contributes to a grid of LNG

bunkering facilities and enhances the availability of marine LNG. This is an approach that is

similar to the ‘anchor fleet’ approach that has been successfully applied for CNG as fuel for

road transport14.

Notwithstanding this bypass to the problem, it is recognised that this solution will not be

applicable in all situations, meaning that the time gap will remain. Potential financing

mechanisms looking to promote LNG as a marine fuel should focus on this issue.

5.3 Financing gap analysis

5.3.1 Investment considerations

In general, investors and financiers use the following set of assessment criteria when making

investment considerations. In the next paragraph, we will describe the criteria that financiers

indicate will impact their decision to invest in LNG bunkering facilities (and to a lesser

extent, vessels).

Asset type: Assets are often specialised and should have an economic life well beyond the

term of the debt.

14

As described in e.g. “Natural Gas as a Transportation Fuel: Models for Developing Fueling Infrastructure”, American Gas Foundation, September 2012.

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Term: The term of financing facilities should be commensurate with the economic life of the

asset, and the project structure should encourage subsequent refinancing either in the bank

or capital markets.

Performance risk: An investor is exposed to the performance risks involved in the design,

construction and operation of the project. Suitable contractual protections, qualified and

competent counterparties and independent technical advice should be sought to ensure

adequate comfort.

Issuer financial covenants: Financial covenants, in which the issuer undertakes to comply

with certain ratios, act as a proxy measure of the issuer’s ability to service and repay its

debt and, if measured in a consistent way, can be an effective 'early warning system' which

allows investors to assess deteriorations in the risk attached to the credit quality of the

issuer and to the debt. Well-designed and appropriate financial covenants can also provide

timely performance indicators for investors.

It is however difficult to design a finite list of appropriate financial covenants as the terms

may vary considerably depending on the circumstances, including the nature of the issuer’s

business, its credit quality and the scope of financial covenants in existing bank loan and

other debt documentation (although the starting point for financial covenants will usually be

the scope of any financial covenants in the issuer’s existing bank loan and other debt

documentation, if any). Key ratios in project finance include the Debt Service Coverage Ratio

(DSCR), Loan Life Coverage Ratio (LLCR), Project Life Coverage Ratio (PLCR) and Debt to

Equity ratio.

Third Parties: Where third parties have significant obligations to the project company, their

credit standing is an important part of the credit application for the project. Third parties

may include corporate entities, banks and insurance companies.

Environmental Risk: Environmental issues may materialise due to the intrinsic nature of

project finance transactions and sector environmental risk profiles. Most investors have

adopted the ‘Equator Principles’ which seek to provide a framework for assessing and

managing social and environmental risks, in line with international best practice.

Documentation: Rights and obligations of the various parties must be clearly set out to

avoid the risk of lengthy litigation at a later stage. In respect of PFI/PPP projects the powers

of the public sector body to enter into contracts with the project company needs to be

investigated. Other issues include the transaction structure, security, step-in rights, events

of default and compensation on termination.

Interest Rates and Currency Risk: Changes in interest and currency exchange rates may

materially affect the project company cashflow. A hedging strategy should be established

and described in the credit application.

Insurance: Insurance is required by the SPV to allow for, inter alia, reinstatement of

assets, loss of earnings and third party liabilities.

Tax: With the exception of corporation tax, the project company should not be exposed to

changes in tax.

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5.3.2 Criteria impacting the investment decision for LNG facilities

In interviews with financiers (and operators) we have established that the most important

factors that influence the decision whether or not to finance LNG facilities (and to a lesser

extent, vessels) are the following:

Project performance risk due to lack of demand

Financiers confirm that to kick-start the sector, investment in LNG bunkering

facilities, rather than vessels, is necessary. Without the infrastructure in place,

vessels will not be ordered speculatively. Thus, the infrastructure must be realised

first. Financiers want the offtake to be contracted up-front before they will enter into

the project. In terms of a threshold (i.e. an offtake level above which financiers are

willing to lend to the project), the following information was provided to us:

o a minimum offtake level of 50% to 60% of the total offtake; and / or

o offtake that guarantees a debt service cover ratio (DSCR) of 1.0 (i.e. 100%).

With respect to the latter, banks normally demand the project to be able to have

substantially higher cover ratios to service debt (for example 1.15), but considering

the limited age of the sector for LNG as marine fuel, a cover of 1.0 would be

acceptable. Commercial banks would potentially be willing to ‘take a market view’ on

the remainder of the offtake (i.e. that would not have to be contracted up-front).

Legislation

As mentioned in Section 1, new EU rules have been adopted during September 2014

to ensure the build-up of alternative refueling points across the EU. However, there is

still some ambiguity as to the rules/legislations/guidelines for this sector. There are

concerns that the bunkering methods utilised may differ between countries. This is a

worry for both operators and financiers. It does not create a financing gap, but it

does add to the severity of it. Transparent legislation that is common between the

member states is important for LNG bunkering projects to be financed, especially

related to realising a network of such facilities throughout Europe. It is understood

that this is a new industry and processes and procedures need time to be worked out

and ratified by the various stakeholders involved.

Technology

The parties we have interviewed differ in their statements about the technology:

some say that the technology is not new anymore, which enables commercial

financiers to lend to projects. However, others suggest the technology is still a factor

that must be considered in the investment decision, albeit that the impact on the

financing gap of this criterion is smaller than the previously stated criteria.

5.3.3 The financing gap

There clearly exists a financing gap for LNG bunkering facilities in Europe. Without a ‘home

customer’ (such as a ferry operator) or substantial guarantees regarding the offtake of LNG,

such facilities cannot be financed commercially at the moment. This is mainly due to the

uncertainty about offtake (demand), as indicated above. The uncertainty is made worse by

limited knowledge about LNG as a marine fuel at commercial banks and the limited amount

of due diligence that has been executed in this sector. This prevents commercial banks from

taking a view on the development of future market demand.

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Whereas certain individual facilities could potentially be financed commercially (i.e. the ones

for which offtake has (largely) been guaranteed), the majority of facilities are less likely to

achieve this. The financing gap calls therefore for public sector participation in this sector,

especially if it wants to ensure development of a grid (network) of LNG bunkering facilities.

It is clear that potential public involvement should focus on the (temporary) lack of demand

as explained in the previous points (time gap).

5.4 Identification and assessment of financial mechanisms

5.4.1 The EU structure of financial mechanisms

For the definition of financial mechanisms as used by the European Union, we draw upon

REGULATION (EU, EURATOM) No 966/2012 OF THE EUROPEAN PARLIAMENT AND OF THE

COUNCIL of 25 October 2012 on the financial rules applicable to the general budget of the

Union and repealing Council Regulation (EC, Euratom) No 1605/200, which reads:

(39) For reasons of legal certainty, the scope of grants and financial instruments should be

clarified. A more detailed definition of the specific conditions applicable to grants, on the one

hand, and to financial instruments, on the other, should also contribute to maximising the

impact of those two types of financial support.

(40) The grant rules applicable to entities specifically established for the purpose of an

action should be adjusted so as to facilitate access to Union funding and management of

grants by applicants and beneficiaries having decided to work together within a partnership

or grouping constituted in accordance with relevant national law, in particular where the

legal form chosen offers a solid and reliable cooperation environment. In addition, in the

light of the limited financial risks for the Union and the need to avoid adding a layer of

contractual requirements to existing structural arrangements, entities affiliated to a

beneficiary through permanent capital or legal links should be entitled to declare eligible

costs without having to comply with all the obligations of a beneficiary.

Moreover, we understand that a three-level structure applies to EU financial mechanisms as

outlined in the figure below. The first level contains a set of financial mechanisms, namely

financial instruments (such as equity, debt and guarantees), investment grants and

economic incentives (such as tax exemption).

The second level of the structure considers the deployment of the mechanisms: this can

either be done by the Member States, or, in case of the financial instruments, by a financial

institution. We understand that the EIB deploys most financial instruments, alongside certain

other selected financial institutions. The EIB can either invest directly in projects, or does so

via intermediary financial institutions.

The third level of the structure is formed by financial programmes and products that are

developed and marketed (as well as administered) by the financial institutions as explained

under level 2. Financial programmes usually hold a range of financial products. Financial

products must be understood as ‘financial facilities’ that are additional sources of investment

or guarantees.

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Table 5-4 EU structure of financial mechanisms

Source: EIB interview July 2015, and “The Connecting Europe Facility & its Financial instruments, catalysts for infrastructure

financing”, presentation by Matthieu Bertrand, Unit Connecting Europe – Infrastructure Investment strategies, DG Mobility and

Transport, European Commission, at CEF Workshop in NL, Ede, 29th October 2014.

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5.4.2 Existing financial programmes and products

A full description of Existing financial mechanisms is included in Appendix F, including charts

on their individual working. Below, a table is presented containing the main characteristics,

while the next paragraph describes their relevance for this study.

Table 5-5 Overview characteristics existing EU financial programmes and products

Financial programme Products Main characteristics

Connecting Europe

Facility (CEF)

Project Bond Credit

Enhancement (PBCE)

Centralised programme

Geared towards transport,

energy and communication

sectors

Finances mainly infrastructure

(not vessels)

Risk-sharing with private

sector

Most products catalysers for

private sector investment

Loan Guarantee for TEN-T

projects (LGTT)

Senior debt

Guarantees

Equity (e.g. via Marguerite

Fund)

InnovFin

Lending (debt)

Equity

Guarantees


Geared towards multiple

sectors, including transport and

energy

Well geared towards medium-

and small sized investments /

businesses

JESSICA

Lending (debt)

Equity

Guarantees

Decentralised programme,

consisting of a fund structure

Geared towards urban

development sector

Risk-sharing with private

sector

European Fund for

Strategic Investments

(Juncker Plan)

Lending (debt)

Equity

Guarantees


Must come on top of existing

facilities

Also applicable for medium-

and small-scale investments /

businesses

Range of sectors and eligibility

criteria defined

Acts as catalyser for private

sector investment

Source: EIB and EC websites

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5.5 Relevance of the mechanisms for the sector for LNG as

marine fuel

Here, we elaborate on the relevance of the mechanisms described above for projects relating

to LNG as marine fuel. Whereas not all programmes and products described may seem

directly applicable to this sector, we believe there are relevant comparisons to be made.

The instruments and products under the Connecting Europe Facility (CEF) can directly be

applied to the projects for LNG bunkering facilities (supply side). The successful project bond

(PBCE) and loan guarantee (LGTT), but also senior debt and other forms of guarantees,

could be used to support projects for new LNG bunkering facilities. Based on our discussions

with market parties, equity seems less likely an option, as the parties indicate there is no

obvious need for more equity, and in addition, the EIB’s preferred options are debt and/or

guarantees, as providing equity could give rise to a conflict of interest.

We acknowledge that the InnovFin is not directly applicable to the LNG as marine fuel

sector (the sector is no longer deemed to be innovative / new technology), we do use it to

show that the way this programme is structured means there is a solution for programmes

of projects that involve both low CAPEX and high CAPEX projects. This is the case for the

LNG as marine fuel sector too: e.g. truck-to-ship solutions typically have a low CAPEX

requirement, whereas large LNG storage facilities require a big investment. The InnovFin

structure is flexible in providing corporate finance or project finance solutions fitting the

scope of the project at hand, which is a useful characteristic.

The purpose of introducing the JESSICA programme here (albeit that this was designed for

a different sector) lies in the fact that the programme is de-centrally managed (through

holding funds). In the LNG sector, we see that many countries have national schemes to

assist projects financially. If the EU’s assistance to projects is at least well aligned with the

national incentives, this will help the sector select the most appropriate financing options.

The newly created European Fund for Strategic Investments (EFSI) is directly relevant

for the LNG as marine fuel sector. Not only does EFSI financing come on top of other forms

of European (financial) support, also the LNG bunkering sector fits both the EC’s

requirements as well as the targeted areas. Therefore, the EFSI programme is well suited to

provide additional support for this sector. This is beneficial as the risks that cannot be

covered by commercial banks in this sector are significant. EFSI indeed allows the EIB to

offer products that absorb more risk than current products and enable investment in projects

with a higher risk and high added value.

5.6 An alternative solution: deferred equity

As we have established, one of the most pressing issues in financing bunkering facilities for

LNG is bridging the time gap between making the capital investment for the facility and the

sufficient availability of demand (and revenues). A similar gap also had to be bridged in

another project, in a different sector. We believe an interesting lesson can be learnt from

this experience. The box below elaborates on the solution for this project.

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The project

The Reliance Rail consortium was the winning bidder to supply the Sydney

Metropolitan area with 78 new trains. The consortium was responsible for designing,

manufacturing, testing and commissioning the trains. The finance was highly

leveraged (gearing 94%); most of the debt was held by bondholders plus $357

million in senior debt; bonds were guaranteed by two monoline insurers, giving the

project a AAA credit rating.

What went wrong

Initially problems arose with the design and manufacture of the trains. In particular,

during the design development stage, the independent certifier was not certifying the

contractor’s completion of tasks. As a result, by 2011, the first trains were being

delivered over a year late. This resulted in large losses for Reliance Rail and the

contractors.

In addition, the global financial crisis had a significant impact on Reliance Rail’s

financing, especially given the project’s high leverage. The insurers were wiped out,

which affected the project’s credit rating; by 2012 the debt had non-investment, or

junk, status.

The global financial crisis also led to a rapid increase in bank loan margins. As a

result, financing Reliance Rail’s drawdown facility—established pre-crisis with low

margins—would have meant the banks would have lost money. The banks saw an

opportunity to withdraw the facility in what they considered to be Reliance Rail’s

insolvency, on the basis that it wouldn’t be able to repay or refinance its debt when it

became due in 2018. This would deter the directors of Reliance Rail from drawing

down the debt as they could be held personally liable for any debts incurred while the

company was insolvent. Instead, the banks wanted the government to guarantee the

$357 million senior debt or take over financing the debt itself.

The solution

The New South Wales Treasury was concerned that this risk around the bank debt

funding could unravel the whole PPP structure, forcing state government to take the

$357 million in bank debt onto its balance sheet. However, if this risk could be dealt

with, the trains would be operational by 2018 and Reliance Rail would have regular

cash flows from which to service its debt when it actually became due.

Instead of providing a guarantee, the New South Wales Government provided

deferred equity of $175 million over six years (due in 2018), conditional, among

other things, on the delivery of the rest of the trains. This plan was designed to

ensure there would be enough equity to refinance the debt in 2018, so that Reliance

Rail’s solvency could not be in dispute and Reliance Rail could draw down the $357

million of senior debt without delay. In return for the deferred equity, the

government obtained a call option to acquire the entire equity of the consortium for a

nominal sum.

This solution maintained the structure of the PPP and forced Reliance Rail to address

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its management and manufacturing issues. Following the deferred equity

arrangement, many of the practical problems with manufacturing the trains were

resolved, and delivery rates began to improve. The final trains were delivered in

2014. As a result, the project will be able to generate a reliable payment stream

going forward, from which it can service its debt and deliver double-digit returns. This

means the government should have no difficulty in selling its deferred equity in

Reliance Rail in 2018, potentially at a profit, without ever having to provide the $175

million.

Obviously, the case of Reliance Rail is a different one from the case for LNG as a marine fuel,

one difference being the guaranteed off-take of the trains (once delivered). However, there

is also a striking similarity: a time gap between investment and revenue generation has to

be bridged, and the risk associated with this time gap is not acceptable for commercial

banks. In the case of LNG bunkering facilities, it is demand risk due to the uncertainty about

LNG demand taking off, in the case illustrated above it is the operational / technical risk of a

satisfactory delivery of the trains. In both cases, the government provides a safety net for

what the market perceives as the key risk in the project.

Providing a direct guarantee would have cost the NSW government $357 (on-balance sheet),

whereas the deferred equity option provided the consortium with sufficient guarantees to

draw down the necessary senior debt. Moreover, the public sector party gained a stake in

the company, providing it with a return when the project started to become profitable.

We understand that the EIB is hesitant to provide equity to projects in which they also

participate as a lender. However, in certain circumstances, in which a project can almost be

financed commercially, but needs additional reassurances to bridge the initial period of low

revenues, the provision of deferred equity (as shown in this example) can be an option.

5.7 Recommendation for characteristics for a financial

instrument for the sector for LNG as marine fuel

Summarising, we list our recommendations for the key characteristics for a financial

instrument for the sector for LNG as marine fuel.

From extensive discussions with private sector parties operating in this market, we

derive that the instrument should focus on the supply side infrastructure rather than

ship financing. These discussions included shipowners who highlighted that whether a

vessel had LNG capabilities or not, it did not impact on the ships’ bankability.

A suitable instrument should have the flexibility to offer a mix of (senior) debt,

guarantees and possibly project bonds, as well as potentially (deferred) equity.

The instrument must be flexible to finance both low and high CAPEX investments

(and provide solutions for both corporate finance and project finance).

The instrument must be able to be aligned with existing support measures by

national governments in the different member states.

The instrument must allow EFSI additional support for projects as the characteristics

of the sector are in line with EFSI’s targets.

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The instrument should be able to bridge a time gap between the initial investment in

new infrastructure and the start of revenues for the project (when offtake starts).

This time gap is caused by the demand side waiting for the suppliers to move first15.

The instrument should be available cross-member states so that it benefits a grid

(network) of LNG bunkering facilities.

15

While admittedly there are several factors influencing a ship owner’s decision towards LNG, the availability of bunkering fac ilities is the main concern. The time gap refers specifically to the dynamics of what happens when infrastructure becomes available: there is a delay between the moment when ship owners become aware that infrastructure is improving by the (planned) construction of one or more bunkering facilities and the time when then they actually have an LNG fuelled vessel operational. This assumes that other factors are positive towards an investment decision for LNG, but those other factors do not specifically influence the existence or duration of the time gap. It’s likely that LNG bunkering facilities wouldn’t even be built if other factors render the business case for ship owners to use LNG unfavourable.

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6 Financial modelling of typical projects (Task 5)

6.1 Introduction

In order to assess the impact that different financial instruments can have on the financial

performance and bankability of marine LNG projects, a financial model has been

constructed. In this section an overview of the model will be presented. The model utilises

CAPEX and OPEX data to establish the associated costs of construction and operation of a

dedicated LNG bunkering facility in Europe, while also providing the potential revenues, and

financial outcome metrics that could be generated from such a facility.

To provide a robust analysis of the workings of the model, its structure and working will be

explained as well as a detailed account of the underlying assumptions that underpin the

model’s working. In the next section, a selection of three different construction options for a

LNG bunkering facility and the associated financial metrics will be presented and described in

detail so as to provide a series of examples of the model in action.

6.2 The Model

6.2.1 Objective of the financial model

The objective of the LNG bunkering facility model is to determine the economic and financial

viability of a potential LNG bunkering facility and to assess how this can potentially be

improved by deploying different types of financial instruments. This model will be based on

capital expenditure and operational expenditure estimates, we well as an indication of the

level of revenues such a facility could generate. It also includes a forecasted representation

of future demand for LNG bunkering within the European market as well as providing an

overview of the number of vessels that could potentially call at the design port. Based on an

assumed financial structure, the project’s resulting NPV, IRR and other financial metrics will

be determined.

6.2.2 Terminology

The model uses DCF (discounted cash flow) analysis. A DCF analysis is a method of valuing a

project using the financial concepts of “time value of money” and utilises estimated and

discounted future cash flows to provide an estimated present value for the project. Two of

the most crucial indicators that arise from a DCF analysis that are considered essential for

determining the profitability of a project are the Net Present Value (NPV) and the Internal

Rate of Return (IRR) (apart from the ROE as explained before). These indicators are

calculated using the net discounted cash flows of the project. The initial NPV and IRR for this

task were calculated using pre-tax and pre-financing cash flows.

Net Present Value (NPV)

Net present value is defined as the sum of the present value of all incoming and outgoing

cash flows over a period of time. In financial theory the time value of money dictates that

time has an impact on the value of cash flows making future cash flows less valuable over

time, i.e. a cash flow today is more valuable than an identical cash flow tomorrow. Due to

this phenomenon cash flows are discounted back to a present value using a discount factor

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known as the discount rate. The discount rate is often pegged to the weighted average cost

of capital of the firm or project in question and this will be further discussed later in this

section.

Internal Rate of Return (IRR)

The internal rate of return is an indicator most often used in financial models concerning

capital budgeting. It is used to measure and compare the profitability of investments and

can be thought of as an annualised effective compounded return rate that makes the net

present value equal zero. It can also be defined as the discount rate that makes the present

value of all future cash flows equal to the initial investment i.e., the rate that makes the

investment in the project break even. An investment should only be undertaken if the IRR is

greater than the established cost of capital for a project. It should be noted that in

comparison, NPV is considered an indicator of value or magnitude of an investment and the

two indicators are intrinsically linked. An IRR that is less than the cost of capital will also

coincide with a negative NPV and vice versa.

Return on Equity (ROE)

A measure of a company’s or project’s profitability; ROE reveals how much profit a company

generates with the money shareholders have invested.

Debt Service Cover Ratio (DSCR)

In corporate and project finance, it is the amount of cash flow available to meet annual

interest and principal payments on debt, including sinking fund payments. In general, it is

calculated by: DSCR = Net Operating Income / Total Debt Service

A DSCR of less than 1 would mean a negative cash flow. A DSCR of less than 1, say .95,

would mean that there is only enough net operating income to cover 95% of annual debt

payments.

Amounts in financial models can be expressed in different terms that have been defined in a

financial economic context. These different terms can be distinguished in the financial model,

as shown in the table below.

Table 6-1 Terminology

Type of amounts Explanation

Real Amounts excluding escalation / inflation / indexation.

Nominal Amounts including escalation / inflation / indexation.

Present Value (PV) Value at one point in time of one or more cash flows, taking into account the time value of

money (discount factor).

Net Present Value (NPV) Net amount of costs and revenues (balance) at one point in time, taking into account the

time value of money (discount factor).

Internal Rate of Return (IRR) The rate of return (discount rate) that sets NPV to zero; indicator of profitability of a project.

Return on Equity (ROE) A measure of a company’s or project’s profitability; ROE reveals how much profit a

company generates with the money shareholders have invested.

Debt Service Cover Ratio

(DSCR)

In corporate and project finance, it is the amount of cash flow available to meet annual

interest and principal payments on debt, including sinking fund payments.

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6.2.3 Model structure

The structure of the model is depicted in the figure below. The model can be broken down

into four modules, each consisting of a series of blocks that represents an Excel worksheet in

the model. The four modules are (sheet title in parenthesis & quotations):

Input – Includes all possible construction and operation scenarios (“Scenario”) as well as

forecasted demand scenarios (DEMAND). All essential inputs and assumptions for the

construction and operation such as CAPEX and OPEX for the terminal are included

(“INPUT” & “ASSUMP”).

Operational Calculations – Includes all calculations for the operations of the LNG

facility on an annual basis (“OPS”). These operational calculations include such things as

volume of throughput at the facility, the number of trucks utilised, equipment

requirements for both initial acquisition and for replacement, etc.

Financial Calculations – Includes the calculations for the capital expenditures

(“CAPEX”), operating expenses (“OPEX”) and revenues (“REV”) for the selected

construction scenario. Utilises data from both the Input and Operational Calculations

module.

Model Output – Includes the calculations for the general cash flows of the facility (“CF”)

including the net present value (NPV) and the internal rate of return (IRR) for the project.

Also, the final numbers for the facility demand, capacity, and throughput as well as the

final cash flow numbers for CAPEX, OPEX and revenues are outputted to a summary page

(“Output”).

These four modules feed into the “Cockpit” of the model. From the cockpit, users have the

ability to manipulate several underlying assumptions of the model as well as select the

different building options and market-demand scenarios. Also, the cockpit has an embedded

sensitivity analysis where variations to throughput volume, tariff rates, CAPEX, OPEX, and

market share can be adjusted. The cockpit acts as the overall output sheet for the model. All

the key data figures from the Financial Calculations and Model Output modules are outputted

here and auto-update themselves whenever new selections and assumptions are made.

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Figure 6-1 Model Structure

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6.3 Scenarios

For the purposes of this study six possible main scenarios for the construction of an LNG

bunkering facility were utilised to create this model (see Section 2). These scenarios range

in physical size, annual volume capacities and construction cost. The following is a

breakdown of the six scenarios that are utilised in the model:

Option 1: Delivery by road (ship bunkered direct) - Truck-to-Ship – A low

capacity, low volume option that would only likely be selected due to the relatively

ease and speed at which this option could be set-up

Option 2: Delivery by LNG vessels (small-scale) Shore-to-Ship – A small

capacity, small volume option where a shore-based bunkering terminal would be

constructed

Option 2: Delivery by LNG vessels (medium-scale) Shore-to-Ship - A medium

capacity, medium volume option where a shore-based bunkering terminal would be

constructed

Option 3a: Delivery by National Gas Network (large) Shore-to-Ship – A large

capacity, large annual volume option where a shored-based terminal would be

constructed; this option includes the addition of a liquefaction plant

Option 4: Delivery by sea - (1 vessel x 3,000m3) Ship-to-Ship – A dedicated

bunkering vessel is constructed with a medium capacity and medium annual volume

Option 4: Delivery by sea (1 vessel x 6,000m3) Ship-to-Ship – A large capacity,

large volume option where a dedicated bunkering vessel is constructed to supply LNG

to those vessels that require larger bunkering volumes

6.4 Input and assumptions

6.4.1 CAPEX and OPEX

The main CAPEX and OPEX items relate to building material requirements and their

associated costs and life cycles. Like the annual volume capacities mentioned above, the

data for materials, building costs and life cycles was obtained from the technological studies

performed in Task 3. It should be noted here that the associated costs include both the

initial capital expenditure to build the facilities as well as the associated maintenance,

operational and renewal costs for all materials required for each of the differing scenario

designs. Renewal costs are those costs associated with the repurchase of a CAPEX item once

it has reached the end of its lifecycle and hence required replacement. An overview of the

CAPEX and OPEX inputs for the materials to build each of the scenarios is presented in the

table below. Table 6.3 shows the total CAPEX estimates for the different scenarios.

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Table 6-2 Associated CAPEX & OPEX Inputs


Table 6-3 Costs in EUR millions, present value per January 2015

Case 1 Case 2 Case 3 Case 4 Case 5 Case 6

Truck to Ship:

Small Capacity

Shore to Ship:

Small Capacity

Shore to Ship:

Medium

Capacity

Shore to Ship:

Large Capacity

Ship to Ship:

Medium

Capacity

Ship to Ship:

Large Capacity

CAPEX 7.3 9.0 20.5 97.0 40.0 70

Source: Ocean Shipping Consultants, a company of Royal HaskoningDHV

6.4.2 Storage Capacity, Flow Rates and Annual Volume Capacity

Utilising data for storage capacities and fuel flow rates taken from the technical reports

carried out in Task 3, an estimation of the annual volume capacity for each scenario was

calculated. As mentioned before the model is structured on an annual basis and so it is vital

to have an annual volume capacity as this will be of most importance when being compared

to the estimated market demand for LNG within the European Union. The following is a brief

description of what these three inputs are:

Storage Capacity: the maximum static volume that the facility can hold at any one

time; calculated in cubic metres (m³)

Flow Rate: this is the rate at which each facility can refuel a vessel with LNG; calculated

as cubic metres per hour (m³/hr)

Annual Volume Capacity: this is the estimated amount of LNG a facility can expect to

provide in a single year, given its static storage capacity and flow rate; calculated as cubic

metres per year (m³/year)

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The following table provides a breakdown of the storage capacity, flow rates and annual

volume capacity for each of the scenarios investigated in this study:

Table 6-4 Storage Capacity, Flow Rate & Annual Volume Capacity for individual Scenarios

Storage Capacity Flow Rate Annual Volume Capacity

Case 1: Truck-to-Ship (Small) 55m3 / truck 150m

3 / hr 200,750m

3 / yr

Case 2: Shore-to-Ship (Small) 2,000m3 150m

3 / hr 730,000m

3 / yr

Case 3: Shore-to-Ship (Medium) 6,000m3 330m

3 / hr 1,450,000m

3 / yr

Case 4: Shore to Ship (Large) 30,000m3 1,000m

3 / hr 4,300,000m

3 / yr

Case 5: Ship-to-Ship (Medium) 3,000m3 330m

3 / hr 1,300,000m

3 / yr

Case 6: Ship-to-Ship (Large) 6,000m3 1,000m

3 / hr 4,300,000m

3 / yr


As is derived from the table the storage capacity of the truck-to-ship is based upon a per

truck basis. The truck-to-ship scenario assumes that approximately 10 trucks each with a

55m³ storage capacity will be operating at the design facility. For the shore-to-ship

scenarios storage capacities is provided LNG bullets tanks. And, for the ship-to-ship

scenarios the bunkering vessel itself provides the storage with the varying storage capacity

sizes between medium and large actually being dictated by an increase in the size of vessel

employed.

As mentioned previously, the annual volume capacities are estimated using the storage

capacity and flow rate data. Estimation of the annual volume capacity was assumed to be

done on the basis of the facilities operating on a 24/7 basis and operating in such a way that

there was no simultaneous refilling of the storage tanks while the facility is refueling a

vessel. Moreover, market demand is often the most important driver for the volume

capacities.

6.4.3 Market Price of LNG

Currently LNG as a bunker fuel has a limited market. As such there is still much variation in

its pricing with no clear indication of a preferred pricing method. Currently the pricing

mechanism for LNG is often pegged to a conventional bunker fuel or the price is estimated

using the natural gas pricing mechanism of million British thermal units (mmbtu). Taking

into account market research into the LNG shipping sector as well as consultation with active

members within the LNG shipping and bunker market, an LNG pricing mechanism of pegging

the price of LNG to that of an existing bunker fuel was chosen. Often the price of LNG as a

bunker fuel is pegged to that of heavy fuel oil (HFO). Consultations with members from the

LNG shipping and bunkering market have indicated that the price of LNG is often discounted

at 15%-20% to the price of HFO. In light of these market consultations the pricing

mechanism for LNG within the model will be pegged against HFO.

LNG Price within the Model and Variables

The pricing mechanism for LNG as a bunker fuel utilised in the model is pegged against

heavy fuel oil (HFO). LNG fuel prices will be pegged against HFO prices in Rotterdam.

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The price of HFO is intrinsically linked to that of crude oil prices, which over the past several

months has seen a rapid decline in price. Plunging prices have seen the price of HFO in

Rotterdam fall to below $500/metric ton in mid-March 2015, down from a high of over

$900/metric ton in June of 2014. The current volatility of crude oil prices has led to much

widespread speculation on the future price of bunker fuels. Short term forecasts on the

future price of crude oil appear to change on a daily basis with no clear consensus of

whether that price will be above or below the current level. The only consensus among the

market place is that the price of oil in the long run will increase from its current low prices.

How long before prices rebound to levels previous to the crash in oil prices is open to

speculation, but experts indicate that current price levels can be expected to be maintained

into 2016 before any significant increase can be expected.

In order to accommodate the potential volatility in future price levels for HFO a series of

prices ranging from $300 per metric tonne to $1,000 per metric tonne are provided in a

drop-down list in $100 instalments to provide a robust analysis of how the facilities would

operate within a low price and high price setting. These prices were chosen to represent two

particular aspects of the current price for HFO and are as follows:

$300/metric ton – This low price level assumes the price of oil is to remain at or possible

slightly decrease from its current level, but generally assumes that low oil prices are to be

maintained for longer periods than expected.

$1,000/metric ton – This high end price level assumes that the price of oil will return to

higher levels that were prevalent prior to the collapse in the price oil witnessed in mid-

2104.

As previously mentioned the price of LNG is often pegged to HFO at a discount of 15%-20%.

To accommodate this in the model a drop down list providing a selection of five different

discount levels to be user-selected was incorporated into the cockpit of the model. The five

discount levels to choose from include 10%, 0%, -20%, -30% and -40% (with the negative

numbers representing a discount to the HFO price). Even though market specialist attested

to current price discounts of LNG to HFO of 15%-20%, discounts of 30% and 40% were also

included in the model as means to forecast the potential drop in the relative costs of supply

for LNG compared to HFO in light of advancements in shale gas extraction technology and

the growing supply of shale gas out of America.

LNG Price Mark-Up and LNG price charged by the facility

The above mentioned process results in having a base LNG price expressed in terms of

EUR/m³. This price is assumed to be the expected price that the facility would have to pay to

purchase its supply of LNG. As such this price will be applied when calculating the operating

costs (OPEX) of the facility for obtaining its LNG supply. However, as a means to receive

revenues from operations, it is assumed that the facility will sell the LNG at a competitively

marked-up price. On initial trials of the model it has been found that the optimum mark-up

fluctuates between 2%–10% with those facilities with relatively lower CAPEX and OPEX

costs requiring a lower mark-up to achieve the same sort of return as those facilities with

larger associated CAPEX and OPEX costs.

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6.4.4 Inflation Rate

Inflation is the change in price levels and is often measured with an inflation rate that is

usually attached to the movement or changes within a price index, often the consumer price

index (CPI). The rate is the percentage rate of change of the price index over time. Within

the United Kingdom the Retail Price Index is often used as it is considered broader than the

CPI, containing a larger basket of goods and services. Other commonly utilised price indices

are the producer price indices (PPI), commodity price indices and core price indices.

The inflation rate utilised in this model is based upon the European Central Banks (ECB)

inflation forecasts. At the time of writing this report the ECB calculated current inflation rate

as 0.3% with projections for the inflation rate to increase to 1.1%, 1.5% and 1.8% over the

next year, two year and five year periods respectively. For the purposes of this model the

consultants decided upon applying an inflation rate of 1.8%.

6.4.5 Time and phasing

The time / phasing assumptions include the length of construction, length of operations, and

therefore the life of the project. This includes the start and stop time for each of these. The

model has been built to operate on an annual basis and as such all the timing options in the

model will operate on a year to year basis.

Having consulted with the Royal HaskoningDHV engineers, it was determined that for all

building options within this model, construction would be accomplished within one to two

years. Furthermore, it has been assumed that pre-construction studies and delays would be

minimal and has therefore resulted in there being zero time being allowed between the start

of the project and the start of construction. Owing to relatively simplistic parameters for

each building option, it is assumed that there will be zero phasing on construction and that

completion of construction will result in immediate commencement of operations.

Currently the model is being operated under the assumption that the facility will be

operational for 25 years. Length of operation is completely the choice of the user; it should

be kept in mind that the longer the operation the more profitable the facility. Although, it

should also be noted that longer operation will result in increased CAPEX and OPEX,

especially as CAPEX items wear out and inevitably require replacement.

6.4.6 Taxation

In the model, two types of taxation are relevant: VAT and Corporate Tax.

VAT has been assumed to be 0% in the model, as the cost estimates for both CAPEX and

OPEX exclude VAT.

Corporate tax levels differ throughout Europe’s Member States. They vary from 20% to 26%

currently. As the model considers hypothetical projects, the relevant corporate tax rate

cannot be established. Therefore, an average rate of 23% has been assumed.

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6.5 Capital structure (without public financial mechanisms)

6.5.1 Gearing

Generally, the capital structure of the project consists of equity and debt. Equity is capital

brought in by investors who take ownership of the project (company), whereas debt consists

of loans taken out by the (project) company. Typically, debt providers require lower returns

than equity providers, so having a high proportion of the project’s need for funding financed

by debt, makes the project more financially feasible. This is also called ‘gearing ’.16 In

project finance, gearing levels of between 65% and 90% are typical. In the base case, a

gearing level of 70%17 has been assumed for this project.

6.5.2 Financing facilities

In the base case, a simple financial structure consisting of two facilities has been assumed:

equity and senior debt. The table below shows the main characteristics for both facilities.

Table 6-5 Characteristics of financial facilities in base case

Financing facility Characteristics Explanation

Equity Tranche 30% of funding requirement

Return on equity (ROE) dependent

on results (target minimum = 15%).

Drawdown period is equal to construction period.

Redemption of equity (including any dividend) takes place as

soon as the project’s cash flows allow this (typically after the debt

has been repaid).

Senior Debt

(Commercial)

70% of funding requirement

Interest rate = 5.5% 18

Grace period = 5 years

It is assumed that the total debt for the project (in the Base Case

totalling approximately 70% of the funding requirement) is

provided by commercial banks.

Drawdown during construction period; redemption during

operations period.


6.5.3 Discount Rate

By definition the discount rate refers to the interest rate that is used in a discounted cash

flow (DCF) analysis to determine the present value of future cash flows. Thus, the discount

rate is the interest rate that is used in calculating the NPV for this model. In a DCF analysis

the discount rate should not only take into account the time value of money, as described in

the definition of NPV earlier, but also any risk or uncertainty of the future cash flows; the

greater the risk or uncertainty of these future cash flows the greater the discount rate. In

DCF evaluations of projects, the weighted average cost of capital (WACC) is the minimum

level at which the discount rate should be established. WACC can be defined as the rate that

a company is expected to pay on average to all its security holders to finance its assets. It is

commonly referred to as the “cost of capital” and it represents the minimum return that a

project must earn on an existing asset base to satisfy its creditors, owners, and/or other

providers of capital, or they might invest elsewhere.

16

Gearing can also be referred to as the debt-to-capital ratio. 17

This gearing level is based on expert judgment by Royal HaskoningDHV and on other similar infrastructure developments. 18

The interest rate of the Senior Debt Commercial is built up as a Swap Base Rate (2.75%), plus a Credit Margin (200 basis points) and a Swap Margin (75 basis points).

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For the purpose of this model the discount rate to be utilised will actually be a representation

of the “cost of capital” for this model. This “cost of capital” will be calculated as the Weight

Average Cost of Capital (WACC) which takes into account the cost of equity plus the cost of

debt. For the purposes of this task, the cost of equity is assumed to be set at 15% while the

cost of debt is set at a senior debt interest rate of 5.5%. These costs carry a weighting of

30% and 70% respectively, as explained earlier. With these costs and the associated

weighting of the estimated WACC is 8.35%.

This is approximately close to the weighted average cost of capital for the shipbuilding and

maritime industrial sector as composed by Aswath Damodaran, a Professor of Finance at the

Stern School of Business at New York University (NYU) who specialises in corporate finance

and equity valuation. Professor Damodaran has an extensive reputation within this field with

both his own data results and its sources being highly credible. As of January 2015 the

calculated weighted average cost of capital for the shipbuilding and maritime sector as

composed by Damodaran was 7.87%.

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7 Determination of financial viability (Task 7)

7.1 Introduction

The scope of Task 7 is focused on estimating the financial viability of LNG bunkering projects

without any involvement of public financing mechanisms. Therefore, the next paragraphs

follow a structure of introducing different examples for which the financial viability has been

tested using the financial model. The financial viability is tested against four main financial

metrics:

Net Present Value (NPV)

Internal Rate of Return (IRR)

Return on Equity (ROE)

Debt Service Cover Ratio (DSCR)

7.2 Construction option examples

7.2.1 Introduction

In this section a selection of three of the possible six possible main scenarios are presented

to provide an example as to the workings and robustness of the model. Further in this

chapter, the results for all six scenarios, including a sensitivity analysis, will be provided. The

example scenarios are:

Truck-to-Ship – A low capacity, low volume option that would only likely be selected due

to the relatively ease and speed at which this option could be set-up

Shore–to-Ship – A medium capacity, medium volume option where a land-based

terminal would be constructed

Ship-to-Ship – A large capacity, large volume option where a dedicated bunkering vessel

is constructed to supply LNG to those vessels that require it

7.2.2 Case 1: Truck-to-Ship – small capacity

Case 1 looks at the establishment of LNG bunkering facility that will bunker vessels through

the direct hook-up of LNG carrying trucks to vessels requiring LNG bunkering. This case

represents what is considered a low volume / low capacity case as the rate at which trucks

can supply vessels with LNG is limited and thus limits the overall capacity of this type of

facility to a minimal amount. The annual capacity of throughput for this particular terminal is

quite low compared to the other scenarios.

The figure below provides a screenshot of the cockpit page of the model highlighting the

CAPEX, OPEX, Revenues, NPV and IRR for Case 1. The following are several key points

regarding the inputs, assumptions and output for this case:

The model has been set for a project/construction start of 2016 with a concession start

for 2017 (assuming a 1-year construction period).

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As mentioned earlier, the discount rate and inflation rate have been set to 8.35% and

1.8%, respectively.

LNG price – Revenues for the terminal are based upon a percentage mark-up of total cost

of LNG.

Currently there is no official pricing mechanism for LNG bunkers, but for the purposes

of this study the price of LNG has been pegged to that of HFO, but with a 20%

discount.

Providing a conservative outlook the price for the example has been set $400 per

metric ton.

Currently the mark-up percentage for this sample has been set at 7%.

Figure 7-1 Case 1: Truck-to-Ship – Cockpit – Small Capacity


Vessel Scenarios – As the foundation for an estimated market demand a high/low outlook

for the number of vessels operating within Europe annually has been developed; to

provide a conservative output for this scenario the low option has been selected.

An additional option for choosing whether the vessels are operating on a short-sea or

deep-sea basis is possible and both have been selected.

Traffic Scenario – Utilising the vessel outlook a market demand is forecast based on the

type of vessel, how many of that type are active in the region, the fuel capacity of that

type of vessel and the expected number of calls that vessel would make at an LNG

bunkering facility.

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Traffic scenarios can be selected for low, medium, high and each represents a

prospective market share capture for the design port; the respective market shares are

20%, 40% & 60%.

For the current example the medium (or 40% market share) traffic scenario has been

selected.

Results – Truck-to-Ship - small capacity

Table 7-1 Results scenario 1

NPV IRR ROE Average DSCR

Scenario 1 –

Truck to Ship –

small capacity

EUR 5.7 million 20% 15% 4.77


It can be seen from the output that for this particular case the model returns an NPV of EUR

5.7 million with an IRR of 20%. The relatively strong IRR against the discount rate (at

8.37%) indicates a healthy operating profitability. This is also reflected in the return on

equity (ROE) of 15%. The average DSCR19 of the project is 4.77, indicating that in most

years, the debt service can be met comfortably (if demand builds up according to the

predicted pattern).

7.2.3 Case 3: Shore-to-Ship – medium capacity

Case 3 looks at the establishment of a shore-based facility set up with 6 “bullet” storage

tanks of 1,000m3 allowing for a more continuous refueling of the vessels that call. This case

represents what is considered a medium volume, medium capacity case as the bullet tanks

allow for greater and more continuous capacity over Case 1 (truck-to-ship) though

considerably less than the large volume/large capacity cases.

The following Figure provides an overview of the cockpit highlighting the CAPEX, OPEX,

Revenues, NPV and IRR for Case 3. The following are several key points regarding the

inputs, assumptions and output for this case:


for 2017 (assuming a 1-year construction period after consulting our technical advisors

for the project.

As mentioned above, the discount rate and inflation rate have been set to 8.35% and

1.8%, respectively.


of LNG.



19

A more detailed discussion on DSCR is included in Task 8.It is especially relevant to focus on the DSCR is early years of operations when assessing the effect of financial mechanisms.

R e s t r i c t e d


124

discount as current research has indicated that to be the general pricing mechanism

that many LNG bunker suppliers are unofficially following.


metric ton.

Currently the mark-up percentage for the model has been set 5%.

Figure 7-2 Case 1: Shore-to-Ship – Cockpit – Medium Capacity



for the number of vessels operating within Europe annually has been developed; to

provide a conservative output for this scenario the low option has been selected.


deep-sea basis is possible with the selection for both (All) having been selected.

Traffic Scenario – Utilising the vessel outlook a market demand is forecast based off the



bunkering facility.



20%, 40% & 60%.


selected.

Main Assumptions Overview

Start of Project 2016 [year] Mio EU€

Start of Construction 2016 [year] CAPEX 20.2 [EU€ 2015]

Start of Concession 2017 [year] OPEX 1,703.6 [EU€ 2015]

Years of Operation 25 [years ] REVENUES 1,774.1 [EU€ 2015]

General Surcharges - [%] NPV (8.35 % ) 50.3 [EU€ 2015]

Contingencies Surcharges - [%] IRR 29%

NPV Shareholders (8.35 % ) 28.2

Discount Rate 8.4% [%] ROE 17.1%

Inflation (EU) 1.8% [%]

Labour cost escalation 2.8% [%] Overview Per Terminal

Energy Cost Escalation 3.8% [%]

REVENUES CAPEX OPEX TOTAL

HFO Price (Rotterdam) → 400 [US$/Tonne] Mio EU€ PV (8.35 % ) PV (8.35 % ) PV (8.35 % ) PV (8.35 % )

Exchange Rate 0.91 [EU€/US$] LNG Terminal 1,774.1 100% 20.2 1,703.6 50.3

LNG Price Discount/Premium → -20% ←Conversion (LNG) 2.2 [m3/Tonne] TOTAL 1,774.1 20.2 1,703.6 50.3

LNG Price 132.4 [EU€/m3]

LNG Terminal Mark-Up 5% [%] Overview Per Year

Charged LNG Price at Terminal 138.98

Year (mio EU€) 2016 2017 2018 2019 2020 2026 2036

CAPEX 14.45 0 0 0 0 0.2 0.0

Additional Financia l Assumptions OPEX 0 63.9 81.6 93.1 131.9 174.4 254.3

REVENUES 0.0 64.9 84.0 96.7 137.3 181.8 265.5

Year Grant/Subsidy becomes available 2016 [year]

↓ ↓ Total 14.5 128.8 165.7 189.8 269.2 356.4 519.8

Grant Amount Yes 0.0 [M EU€]

↑ ↑ 0.0 [M EU€] Number of Potential Vessel Calls (Demand to Call at the Terminal)

Sens i ti tivi ty Analys is Year (mio EU€) 2016 2017 2018 2019 2020 2026 2036

Container 0 54 90 93 108 197 272

Volume sensitivity - [%] Dry Bulk 0 172 198 202 242 205 212

Tariff Sensitivity - [%] Oil Tanks (inc Prod) 0 31 35 36 49 47 50

CAPEX Sensitivity - [%] Pax & Cruise 0 218 244 249 261 478 614

OPEX Sensitivity - [%] Chem 0 33 38 53 56 46 34

Market Share Sensitivity - [%] LPG/LNG 0 33 47 93 127 117 127

Gen Cargo 0 119 133 137 200 174 187

Car Carriers/RoRo 0 35 59 73 104 106 115

Vessel Scenarios Offshore 0 184 309 420 610 560 612

↓ ↓ ↓ Other Vessels 0 806 783 811 767 1099 1637

Vessel Activi ty Scenario Euro LNG Vessels Outlook - Low 1

↑ ↑ ↑ Total - 1,685 1,936 2,167 2,524 3,029 3,860

↓ ↓ ↓

Vessel Activi ty Type Al l 1 Number of Actual Vessel Calls (Based on Terminal Capacity)

↑ ↑ ↑

Traffic Scenario Year (mio EU€) 2016 2017 2018 2019 2020 2026 2036

↓ ↓ ↓ ↓ ↓ Container 0 53 90 92 107 196 272

LNG included: Yes Medium Scenario Traffic Scenario 2 Dry Bulk 0 171 197 201 241 205 211

Marine Services included: Yes ↑ ↑ ↑ Dry Bulk 0 29 34 35 48 45 49

↑ ↑ Oil Tanks (inc Prod) 0 216 243 248 260 477 613

Option Summary Oil Tanks (inc Prod) 0 32 37 53 55 46 32

↓ ↓ ↓ Pax & Cruise 0 32 46 92 126 116 126

Option number [option number] 3 Pax & Cruise 0 118 133 136 199 172 186

↑ ↑ ↑ Chem 0 34 57 72 104 104 114

Storage Tanks - Bul lets (Smal l Volume) no [included yes/no] Chem 0 183 308 420 609 560 612

Storage Tanks - Bul lets (Medium Volume) yes [included yes/no] LPG/LNG 0 806 782 810 766 1098 1636

Storage Tanks - Large no [included yes/no]

Pipes (Cryogenic) - Smal l Volume no [included yes/no] Total - 1,676 1,927 2,157 2,515 3,019 3,852

Pipes (Cryogenic) - Medium Volume yes [included yes/no]

Pipes (Cryogenic) - Large Volume no [included yes/no]

Loading Arm + Support Structure (Smal l + Medium) yes [included yes/no] CAPEX

Loading Arm + Support Structure (Large) no [included yes/no]

Flexible Hose or Fixed Manifold (Smal l & Medium) yes [included yes/no] CAPEX Initial CAPEX CAPEX (I&R) PV(CAPEX)

Flexible Hose or Fixed Manifold (Large) no [included yes/no] Mio US$ Phase 1 TOTAL TOTAL TOTAL

Liquefaction Plant no [included yes/no] Storage Tanks - Bullets (Small Volume) 0.0 0.0 0.0 0.0

Dedicated Bunkering Vessel (Smal l & Medium) no [included yes/no] Storage Tanks - Bullets (Medium Volume) 12.0 12.0 27.7 16.7

Dedicated Bunkering Vessel (Large) no [included yes/no] Storage Tanks - Large 0.0 0.0 0.0 0.0

Pipes (Cryogenic) - Small Volume 0.0 0.0 0.0 0.0

Pipes (Cryogenic) - Medium Volume 0.3 0.3 0.3 0.3

Pipes (Cryogenic) - Large Volume 0.0 0.0 0.0 0.0

Loading Arm + Support Structure (Small + Medium) 2.0 2.0 4.6 2.8

Loading Arm + Support Structure (Large) 0.0 0.0 0.0 0.0

Flexible Hose or Fixed Manifold (Small & Medium) 0.2 0.2 0.7 0.4

Flexible Hose or Fixed Manifold (Large) 0.0 0.0 0.0 0.0

Liquefaction Plant 0.0 0.0 0.0 0.0

Dedicated Bunkering Vessel (Small & Medium) 0.0 0.0 0.0 0.0

Dedicated Bunkering Vessel (Large) 0.0 0.0 0.0 0.0

Equipment LNG Terminal 0.0 0.0 0.0 0.0

TOTAL 14.5 14.5 33.3 20.2

OPEX

Total

Mio US$

LNG Terminal 8.9 0.0 1,689.6 - 3.5 1.6 - 1,703.6

TOTAL 8.9 0.0 1,689.6 - 3.5 1.6 - 1,703.6

Revenues

Mio US$ Terminal Handling LNG Total

LNG TERMINAL 1,774.1 1,774.1

GRANT / SUBSIDY - -

TOTAL 1,774.1 1,774.1

Case 3: Shore to Ship: Medium Capaci ty

Mainten. &

RepairOther (Payments)Energy Labour Insur. OtherLNG Supply

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125

Results – Shore-to-ship – medium capacity



Scenario 3 –

Shore to Ship –

medium capacity

EUR 50.3 29% 17% 8.77


It can be seen from the output that that for this particular case the model returns an NPV

EUR 50.3 million with an IRR of 29%. The relatively strong IRR against the discount rate

indicates a significant operating profitability. This is also reflected in the return on equity

(ROE) of 17%. The average DSCR of the project is 8.77, indicating that in most years, the

debt service can be met comfortably (if demand builds up according to the predicted

pattern).

7.2.4 Case 6: Ship-to-Ship – large capacity

In Case 6 a shore based facility is done away with and replaced with the construction of a

dedicated bunkering vessel. The vessel would operate within the design port area. Case 6 is

being used as an example of a large volume/large capacity option. Also, it is providing a

further robust overview of the model by three distinctly different kinds of options – truck-to-

ship, shore-to-ship and ship-to-ship. The table below provides an insight into the volume

capabilities of this option.

The overview of the cockpit for Case 6 can be found in the figure below which highlights the

CAPEX, OPEX, Revenues, NPV and IRR. The following are several key points regarding the

inputs assumptions and out for this case:


for 2017 (assuming a 1-year construction period after consulting our technical advisors

for the project).

As mention above the discount rate and inflation rate have been set to 8.35% and 1.8%,

respectively.


of LNG;



discount as current research has indicated that to be the general pricing mechanism

that many LNG bunker suppliers are unofficially following;


metric ton;

Currently the mark-up percentage for the model has been set 5%.

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126


for the number of vessels operating within Europe annually has been developed; for this

particular case a high vessel scenario is used as the capacity capabilities of this option

indicates more beneficial use when significant amounts of demand are existent.


deep-sea basis is possible with the selection for both (All) having been selected.

Traffic Scenario – Utilising the vessel outlook a market demand is forecast based off the



bunkering facility.



20%, 40% & 60%.


selected.

Figure 7-3 Case 1: Ship-to-Ship – Cockpit – Large Capacity


Results – Ship-to-Ship – Large capacity



Scenario 6 – Ship

to Ship – large

capacity

EUR 36.5million 11% 13% 3.89


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127

It can be seen from the output that that for this particular case the model returns an NPV

EUR 36.5 million with an IRR of 11%. The return on equity (ROE) is 13%, which is relatively

low, considering the risks surrounding the business case. Notwithstanding, this case is

economically a sound business case. The average DSCR of the project is 3.89, but in the first

years of operations, the DSCR is too low (0.0 in both years). This indicates that even though

the project if profitable in the long run, the debt service cannot be met in the first years of

operation, due to a lack of sufficient demand. As stated under Task 2, this is an area that

can be covered by introducing a (public) financial mechanism. The effect of this is further

explored in Task 8.

7.2.5 Financial viability for all scenarios (including sensitivity

analysis)

The table below contains an overview of the associated financial metrics for a range of

project scenarios. This table helps provide an insight into the financial viability of each of the

building options at certain price levels. The effects of both the level of the HFO price and

several other factors are explored including LNG mark-up, vessel scenario and the LNG price

discount.

Several general trends can be seen from the table. First is that the results are generally

better when the model is run at a 20% discount (of LNG prices to HFO). Also, as expected

those cases run with a high vessel scenario and thus operating in a strong market

environment also enjoyed better outcomes. Those cases with a relatively high CAPEX and

OPEX show negative results when HFO prices are low, specifically scenarios 4 and 6

indicated negative NPVs in certain scenarios when HFO was assumed to be $400. This

indicated that those larger, more expensive facilities will require both a more substantial

market environment to operate in and also a higher level of oil prices.

All calculations presented here assume that the demand for LNG as a marine fuel is available

according to the forecast made. In other words, the financing gap due to insufficient demand

offtake20 has not been included in these calculations yet. This will be presented as part of

Task 8. Even without the potential lack of demand, in certain scenarios, such as in scenario

6d, whereas the average DSCR may be 7.03, the DSCR in the early years of operations are

actually insufficient, which is an indication of a financing gap. Whereas the project may be

economically viable (the NPV is positive, both IRR and ROE are acceptable), DSCR remains

too low to obtain commercial finance. This can be addressed by introducing public financial

instruments, as suggested in Task 2 and further elaborated upon in Task 8.

Table 7-4 Financial metrics for different scenarios. ‘DSCR’ refers to the average DSCR during the operational

period.

20

Here, two effects should be distinguished: the first one being lack of demand to cover debt service for the first years of operations, the second one being the general uncertainty around the anticipated increase in demand over time.

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HFO Price

LNG Price (m3)

Scenario Fuel Delivery CapacityTraffic

Scenario

Vessel

Scenario

LNG Price

DiscountLNG Mark-up NPV IRR ROE DSCR NPV IRR ROE DSCR NPV IRR ROE DSCR NPV IRR ROE DSCR

[ € mln ] [ % ] [ % ] [ factor ] [ € mln ] [ % ] [ % ] [ factor ] [ € mln ] [ % ] [ % ] [ factor ] [ € mln ] [ % ] [ % ] [ factor ]

1a Truck to Ship Small Medium Low 20% 10% 15.5 40% 17% 8.85 31.8 71% 20% 15.61 48.1 103% 21% 22.37 64.4 135% 22% 29.13

1b Truck to Ship Small Medium High 20% 10% 15.5 40% 17% 8.85 31.8 71% 20% 15.61 48.1 103% 21% 22.37 64.4 135% 22% 29.13

1c Truck to Ship Small Medium Low 40% 10% 7.3 24% 16% 5.46 19.6 48% 18% 10.54 31.8 71% 20% 15.61 44.0 95% 21% 20.68

1d Truck to Ship Small Medium High 40% 10% 7.3 24% 16% 5.46 19.6 48% 18% 10.54 31.8 71% 20% 15.61 44.0 95% 21% 20.68

2a Shore to Ship Small Medium Low 20% 5% 40.5 51% 18% 12.87 68.7 76% 21% 20.40 96.9 102% 22% 27.93 125.0 126% 23% 35.46

2b Shore to Ship Small Medium High 20% 5% 43.4 64% 18% 13.29 73.1 101% 21% 21.03 102.7 138% 22% 28.77 132.4 176% 23% 36.51

2c Shore to Ship Small Medium Low 40% 5% 26.4 38% 17% 9.11 47.5 57% 19% 14.75 68.7 76% 21% 20.40 89.8 95% 22% 26.05

2d Shore to Ship Small Medium High 40% 5% 28.6 46% 17% 9.42 50.8 73% 19% 15.22 73.1 101% 21% 21.03 95.3 129% 22% 26.83

3a Shore to Ship Medium Medium Low 20% 5% 50.3 29% 17% 8.77 92.5 43% 19% 14.20 134.8 55% 21% 19.63 177.0 67% 22% 25.06

3b Shore to Ship Medium Medium High 20% 5% 75.9 44% 18% 10.95 131.0 65% 20% 17.46 186.0 85% 21% 23.98 241.1 105% 22% 30.49

3c Shore to Ship Medium Medium Low 40% 5% 29.2 22% 15% 6.04 60.8 33% 18% 10.13 92.5 43% 19% 14.20 124.2 52% 20% 18.28

3d Shore to Ship Medium Medium High 40% 5% 48.4 33% 16% 7.69 89.7 50% 18% 12.58 131.0 65% 20% 17.46 172.3 80% 21% 22.35

4a Shore to Ship Large Medium Low 20% 10% -68.8 1% 6% 0.93 15.7 10% 11% 2.65 100.2 15% 14% 4.33 184.8 21% 15% 6.00

4b Shore to Ship Large Medium High 20% 10% 188.2 18% 16% 6.86 401.2 27% 18% 11.47 614.2 35% 20% 16.05 827.2 42% 21% 20.63

4c Shore to Ship Large Medium Low 40% 10% -111.0 -7% -1% -0.02 -47.7 4% 8% 1.38 15.7 10% 11% 2.65 79.1 14% 13% 3.91

4d Shore to Ship Large Medium High 40% 10% 81.7 13% 14% 4.54 241.4 21% 17% 8.02 401.2 27% 18% 11.47 560.9 33% 20% 14.91

5a Ship to Ship Medium Medium Low 20% 5% -17.9 4% 7% 1.47 23.8 13% 12% 3.42 65.6 19% 14% 5.35 107.3 24% 16% 7.27

5b Ship to Ship Medium Medium High 20% 5% -0.9 8% 8% 1.98 49.4 18% 13% 4.14 99.7 27% 15% 6.27 150.0 35% 16% 8.41

5c Ship to Ship Medium Medium Low 40% 5% -38.8 -2% 1% 0.42 -7.5 7% 9% 1.96 23.8 13% 12% 3.42 55.2 17% 14% 4.87

5d Ship to Ship Medium Medium High 40% 5% -26.0 1% 1% 0.85 11.7 11% 10% 2.52 49.4 18% 13% 4.14 87.1 25% 14% 5.74

6a Ship to Ship Large Medium Low 20% 10% -7.5 8% 10% 2.17 77.0 16% 14% 4.46 161.6 22% 16% 6.72 246.1 28% 17% 8.97

6b Ship to Ship Large Medium High 20% 10% 249.5 25% 18% 10.16 462.5 35% 20% 16.38 675.5 45% 22% 22.59 888.5 54% 23% 28.79

6c Ship to Ship Large Medium Low 40% 10% -49.7 2% 6% 0.99 13.7 10% 11% 2.74 77.0 16% 14% 4.46 140.4 21% 15% 6.16

6d Ship to Ship Large Medium High 40% 10% 143.0 19% 16% 7.03 302.7 27% 18% 11.71 462.5 35% 20% 16.38 622.2 42% 21% 21.04

$ 1000

€ 414

$ 400

€ 166Scenarios

$ 600

€ 248

$ 800

€ 331

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8 Assessment of financial mechanisms and framework

conditions for implementing optimal mechanisms and

financial incentives (Task 8)

8.1 Introduction

In Task 7, the financial viability for projects in the sector for LNG as a marine fuel was

shown, excluding the potential financial mechanisms that have been explored in Task 2. The

effect of such financial mechanisms on several of those business cases is explored in Task 8.

Here, it is important to take several good examples, rather than attempting to provide a

complete overview of all possible scenarios, as there are too many different conceivable

variants. Moreover, as assumptions for average projects are used, it is more useful to obtain

a bandwidth for the results using well-chosen examples (scenarios). Real-life projects will all

have their own individual characteristics, after all, which will determine what solution is

optimal for them.

Below, several scenarios are presented and described. From these, conclusions on the

financial instruments applied will be drawn. Also, a review is provided describing

considerations around framework conditions that should be taken into account when

implementing a financial mechanism.

8.2 Modelling the financial mechanisms

As explained in Task 2, several financial mechanisms are proposed for this project. The main

characteristics of mechanisms (and their underlying instruments and products) have already

been described earlier in this report. Due to their characteristics, not all the financial

mechanisms can be assessed using the project based financial model. For example, the

financial mechanisms that are suitable for a programme of projects rather than a single

project cannot be assessed here. Therefore, a sub-set is made of (certain aspects of)

financial instruments that can be implemented for a single project. The table below shows

this sub set and a description of the scenarios that have been taken into account.

Table 8-1 Scenarios of financial mechanisms

No. Financing mechanism Assumptions for scenario in

financial model

Description

1 Guarantee on offtake a. Full offtake guarantee for first 3

years of operation

b. Offtake guarantee to reach

DSCR of 1.12 in the first years

A form of guarantee will be introduced that

guarantees (a portion of) the offtake of the facility

for the first years of operation. This approach will

be applied to a case that is in principal

economically viable, but has a financing gap.

Multiple variants will be explored.

2 Senior Debt by public

sector party (IFI)

50% of total debt


It is assumed that the total debt for the project (in

the Base Case totalling approximately 70% of the

funding requirement) is provided by both

21

The interest rate of the Senior Debt IFI is built up as a Swap Base Rate (2.75%), plus a Credit Margin (100 basis points) and a Swap Margin (75 basis points). It is assumed that the credit margin of international financial institutions is 100 basis points lower than commercial Senior Debt.

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commercial banks and international financial

institutions (IFIs), on a 50% / 50% basis.

It is assumed that the credit margin of international

financial institutions is 100 basis points lower than

commercial debt.

Drawdown during construction period; redemption

during operations period.

3 Grant Grant worth 50% of the CAPEX is

available to the project in 2016.

The grant is tax-exempt, and will not

be escalated.

It is assumed that a grant will be made available to

the project, worth 50% of the case’s CAPEX, in the

construction period, lowering the project’s funding

requirement.

4 Tax exemption Corporate tax is lowered or different

depreciation scheme allowed

Interaction with other measures.


8.3 Results

The scenarios as identified above have been applied to different project business cases in

order to show a relatively broad spectrum of outcomes. Below, the business cases are

described, as well as the way the financial instrument has been applied. The results per case

are also discussed.

8.3.1 Guarantee on offtake

An important characteristic of potential financial mechanisms is that they provide a

guarantee against lack of demand for LNG as marine fuel in the first years of operation of

the supply facility. In Task 2, this has been labelled the ‘time gap’ between investment in the

facility and the development of the demand in the market (i.e. sufficient customers who

have received LNG fuelled vessels). This time gap (before there is a clear offtake of demand)

causes projects to have difficulty obtaining commercial finance: there is a financing gap. This

financing gap can be overcome by different financial mechanisms as set out in Task 2.

Common financial products in such mechanisms are guarantees. In this specific sector,

guarantees should focus on demand.

In this example, the effects of guarantees on two business cases for supply facilities are

explored.

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Business case: Small shore-to-ship facility

This case has the following characteristics:

Table 8-2 Characteristics – small shore-to-ship facility

Input Metric Value of metric

Fuel delivery Shore-to-ship (scenario 2d)

Capacity Small

Traffic scenario Medium

Vessel scenario High

LNG price discount 40%

LNG Mark-up 5%

HFO price $ 400 / EUR 166


The outcomes without applying guarantees are as follows:

Table 8-3 Results scenario 2d (base case)


Scenario 2d – Shore to

Ship – small capacity EUR 28.6 million 46% 17% 9.42


From these outcomes, it follows that this is an economically viable case: the NPV is positive,

the IRR is much higher than the discount rate, and the return on equity is a healthy 17%.

Moreover, the average DSCR is high, also in early years (in the first two years of operation,

the DSCR is 9.15 and 9.79, respectively). Based on these metrics, this business case should

be able to obtain commercial finance easily.

However, if the demand in the first two years does not build up as expected, but lacks

completely (due to the time gap described above), the picture is different. If no offtake is

realised in the first two years, the resulting metrics are:

Table 8-4 Results scenario 2d (no offtake in first two years of operation)


Scenario 2d – Shore to

Ship – small capacity EUR 22.0 million 26% 17% 8.34


The effect on the business case is substantial: the NPV drops from EUR 28.6 million to EUR

22.0 million and the IRR from 46% to 26%. However, we see that the case is still

economically viable: ROE stays healthy over the lifetime of the project, and the average

DSCR is still quite high. However, the DSCR in the first two years of operation drops to 0, as

there are no revenues in those years. If there is a probability that demand (and therefore,

revenues) are indeed absent in those years, the business case may have great difficulties in

obtaining commercial finance, as commercial banks are generally not able to accept this risk

level.

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The effect of the guarantee is clear: if there is no guarantee, the business case cannot be

financed, even though it is economically viable in the longer run/ overall project period. The

potential costs of the guarantee for its provider can also be estimated. If the guarantee has

to be called upon for the full two years, the costs are high: EUR 156 million of revenues

have to be covered in that case. We draw attention to the fact that providing guarantees to

many projects may prove to be a costly strategy. If the market builds up slowly, it is likely

to affect many supply facilities at the same time. If a public sector finance provider (such as

the EIB) has guaranteed a part of the demand in early years for many projects, these

projects may call upon the guarantee at the same time. The costs could then easily rocket

into multiple billions of euros.

To mitigate the risk of spiralling costs, the height of the guarantee can be capped. To

minimise the public sector exposure, only the minimum acceptable DSCR should be covered.

We assume that a minimum acceptable level for a DSCR in this sector is 1.12. With a goal-

seek approach, the financial model can be used to determine the level of revenues needed to

reach a DSCR of 1.12 in the first two years of operation. The revenue needed is EUR 36

million in each of these first two years, totalling EUR 72 million. This is less than half of the

full revenues, which means an effective saving for the public sector financier if the guarantee

is called upon.

Business case: Large ship-to-ship facility


Table 8-5 Characteristics – large ship-to-ship facility


Fuel delivery Ship-to-ship (scenario 6d)

Capacity Large




LNG Mark-up 10%



The outcomes without applying guarantees are as follows:

Table 8-6 Results scenario 6d (base case)


Scenario 6d – Ship to

Ship – large capacity EUR 143 million 19% 16% 7.03



the IRR is higher than the discount rate, and the return on equity is 16%. However, even

though the average DSCR is at an acceptable level (above 7), the DSCR in the first two

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years of operation is much lower (0.0 and 0.74, respectively). Due to the DSCR being too

low in the first years, it will probably not be possible to obtain finance for this business case

at commercial terms, even though it is economically viable.

To solve this issue, a guarantee could be introduced, which brings the DSCR to an

acceptable level. We assume that a minimum acceptable level for a DSCR in this sector is

1.1222. With the same goal-seek approach, we determine that the level of revenues needed

to obtain a DSCR of 1.12 is EUR 135 million and EUR 138 million for the two years,

respectively, totalling EUR 273 million (in the original situation, the revenue in these years

totalled EUR 204 million, too little to obtain a positive DSCR).

Thus, providing a guarantee improves the business case financially and reduces the

financing gap, as is also shown in the table below.

Table 8-7 Results scenario 6d (with guarantees)


Scenario 6d – Ship to



8.3.2 Senior debt by public sector lender (IFI)

A second potential product of financial instruments we determine the effects of is senior

debt. Of course, senior debt is often provided to projects by commercial lenders. However,

business cases can benefit if a part of the senior debt is provided by a public sector lender,

such as an International Financial Institution (IFI). In this example, we explore the effect if

50% of the senior debt is provided against attractive terms and conditions.

Business case: Medium shore-to-ship facility


Table 8-8 Characteristics – medium shore-to-ship facility


Fuel delivery Shore-to-ship (scenario 3c)

Capacity Medium


Vessel scenario Low


LNG Mark-up 5%



22

Expert judgment by Royal HaskoningDHV, based on commonly used values in infrastructure projects in Europe.

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The financial structure in the base case (without public senior debt) is as follows:

Table 8-9 Characteristics of financial facilities in base case

Financing facility Characteristics Explanation

Equity Tranche 30% of funding requirement

Return on equity (ROE) dependent

on results (target minimum = 15%).

Drawdown period is equal to construction period.

Redemption of equity (including any dividend) takes place as

soon as the project’s cash flows allow this (typically after the debt

has been repaid).

Senior Debt

(Commercial)

70% of funding requirement



It is assumed that the total debt for the project (in the Base Case

totalling approximately 70% of the funding requirement) is

provided by commercial banks.

Drawdown during construction period; redemption during

operations period.


The outcomes without applying public senior debt are as follows:

Table 8-10 Results scenario 3c (base case)


Scenario 3c – Shore to

Ship – medium capacity EUR 29.2 million 22% 15% 6.04




though the average DSCR is at an acceptable level (above 6), the DSCR in the first year of

operation is much lower (0.56). Due to the DSCR being too low in the first year, it will

probably not be possible to obtain finance for this business case at commercial terms, even

though it is economically viable.

We introduce a public sector senior debt facility, which has similar characteristics to the

commercial senior debt, albeit that the interest rate equals 4.5% instead of 5.5%. The effect

if 50% of senior debt is borrowed against these conditions is shown in the table below.

Table 8-11 Results scenario 3c (with IFI senior debt)


Scenario 3c – Shore to

Ship – medium capacity EUR 30.9 million 22% 16% 6.25


The financial metrics of the business case improve slightly, but the DSCR in the first year

only improves to 0.62. We have determined the level of the interest rate at which the DSCR

in the first year would be 1.12. The solution for this specific business case is 0.02%. In other

words, 50% of the senior debt should be provided almost free of charge (interest rate close

to zero) for the financing gap to disappear. We realise that this is not feasible. However, this

example does show that senior debt at attractive terms and conditions can be a useful

23

The interest rate of the Senior Debt Commercial is built up as a Swap Base Rate (2.75%), plus a Credit Margin (200 basis points) and a Swap Margin (75 basis points).

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ingredient (product) in the toolbox of a successful financial mechanism for the sector for LNG

as marine fuel.

A combination of cheaper senior debt and a guarantee may also work as a good solution. In

this example, providing 50% senior debt at 4.5% interest as well as a guarantee worth

EUR 4 million also improves the business sufficiently to eliminate the financing gap.

8.3.3 Grant

Even though grants are not part of the innovative financing mechanisms that have been

listed under Task 2, they often form part of a financial solution for projects in this sector. A

grant can be provided at different levels, be it a Member State or EU level. The scenario

below explores the effect of a grant worth 50% of the capital expenditure.

Business case: Large shore-to-ship facility


Table 8-12 Characteristics – large shore-to-ship facility


Fuel delivery Shore-to-ship (scenario 4b)

Capacity Large




LNG Mark-up 10%

HFO price $ 400 / € 166


The outcomes without applying a grant are as follows:

Table 8-13 Results scenario 4b (base case)


Scenario 4b – Shore to





though the average DSCR is at an acceptable level (above 6), the DSCR in the first two

years of operation is much lower (0.00 and 0.78, respectively). Due to the DSCR being too

low in the first years, it will probably not be possible to obtain finance for this business case

at commercial terms, even though it is economically viable.

Introducing a grant worth 50% of the CAPEX (50% of EUR 100 million equals EUR 50

million) spread over the first two years of operation closes the financing gap. The DSCR is

acceptable throughout and the financial metrics of the projects improve generally.

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Table 8-14 Results scenario 4b (with grant)


Scenario 4b – Shore to



8.3.4 Tax exemption

Tax exemptions are not part of the financing mechanisms listed under Task 2. However,

they must be taken into account as many Member States have programmes to support the

LNG sector, which sometimes contain tax exemption measures. The effect of tax exemption

is useful for the sector for LNG as marine fuel, as it would increase annual revenues for the

project, causing it to have more cash available for debt service. However, this measure is

especially effective on the demand side (vessel operators) and from our market research it

followed that they do not need public participation to get their projects financed. Moreover,

tax exemption is a very costly (and complex) measure.

8.4 Conclusions from the examples

From the examples worked out above, it follows that guarantees, cheaper senior debt as

well as grants (and tax exemption) all assist in targeting the causes of the financing gap

identified in Task 2. As these financial products do this in a different way, this makes them

excellent complimentary products as part of a wider financial mechanism to be developed for

the sector for LNG as marine fuel.

8.5 Framework conditions for implementing financial

mechanisms

This section builds upon the recommendations for the key characteristics for a financial

mechanism for the marine LNG sector, as laid out Task 2, and for which examples have been

shown above. It will further address the conditions for such framework to be implemented in

the European Union.

8.5.1 Supply side support

Our research indicates that financial instruments, striving to accelerate the market for

marine LNG, should be aimed towards the supply side of the market. This means that assets

eligible for application of the instrument should include landside structures, such as

liquefaction, storage and bunkering systems for marine LNG. Any party investing in this type

of assets should in principle be able to successfully apply for the instrument, notwithstanding

existing regulation on state aid, distortion of competition, etc.

Table 8-15 Framework conditions supply side support


01 Eligible assets: bunkering facilities (liquefaction, storage and bunkering systems)

02 Eligible parties: all private and public parties


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8.5.2 Flexible structure

The available sources of financing are likely to differ from project to project, depending on

the project’s sponsor and partners and their funds as well as their preferred risk profile. The

deployment of public means should be optimised by filling the gap in private financing, in the

most suitable form for the project at hand. This is more helpful in accelerating the market

development than making only one type of financing available to the market. However, this

is not to say that the instrument should cover all risks the parties involved in a certain

transaction are not willing to bear. The key lies in optimally fine-tuning the instrument’s

characteristics such, that it addresses the key risks the companies face causing them to be

unable to obtain private finance, while staying away from all other risks associated with the

business.

In addition, the different types of projects and sponsors will also mean that the instrument

should be able to interact with both corporate and project (limited-recourse) finance. When

a utility company, such as a TSO24 for natural gas, is the sponsor, it is likely that the project

is small in comparison to the company’s balance sheet and the utility will probably be able to

finance at lower costs on its balance sheet rather than opt for project finance.

Table 8-16 Framework conditions flexible structure


03 Structures: flexible package of guarantees, equity, mezzanine and debt products

04 Type of financing: flexibility to interact with both corporate and project finance


8.5.3 Variable project size

Accelerating the market requires most of all a well-developed grid of bunkering facilities;

small-scale facilities contribute to this key success factor as much as large-scale facilities do.

While capital expenditures for LNG bunkering facilities, depending on design and capacity,

can vary between several million Euros to over 100 million Euros, the fundamental issues

that the sponsors face in terms of financing is similar. This means that the financial

instrument should be flexible to accommodate different project sizes.

Table 8-17 Framework conditions variable project size


05 Project size: variable (ranging e.g. from EUR 1 million up to several tens of

millions)


24

Transmission System Operator

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8.5.4 Complementary to existing support measures

Several EU Member States already have support measures in place to encourage

development of small-scale LNG. These include regulatory measures, subsidies, tax

incentives, financing facilities and covenants or voluntary agreements between government

and the (small-scale) LNG sector or shipping industry. For many types of measures, conflicts

are unlikely to arise, but it is worth noting that these measures should be taken into account

when designing the financial instruments.

By its definition, the EFSI is meant to be complementary to other financial instruments. Any

financial instrument aimed at the accelerated development of marine LNG infrastructure,

should reflect this and make use of / be aligned with EFSI to make sure that these two

support mechanisms are complementary rather than mutually exclusive.

Table 8-18 Framework conditions existing support


06 Alignment with other national and EU support measures (e.g. EFSI)


8.5.5 Address ‘time gap’

We have concluded that LNG bunkering facilities are likely to face a ‘time gap’ due to the

fact that investment in infrastructure will precede demand. Utilisation rates of capacity will

grow over time, but in many cases it will take several years for the (local or regional) marine

LNG market to develop. This means that the financial mechanism must be able to

accommodate this time gap by offering guarantees or specific terms such as longer grace

periods.

Table 8-19 Framework conditions time gap


07 Terms to address time gap before capacity fully utilised


8.5.6 Other conditions

Several other considerations are important when designing the conditions for a financial

instrument, such as:

- The applicability across EU Member States to promote the establishment of a

widespread marine LNG bunkering network: while EC policy and EIB instruments in

itself will always be drafted to apply in all Member States, national legislation could

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differ between states and provide challenges for the financial instrument to be

successfully implemented.

- Provisions should be made for an exit of the EIB / EC when public support is no

longer required. Given that demand risk is the key risk for financing infrastructure,

private financiers are likely to become more and more comfortable with lending

opportunities for bunkering facilities as the market develops. At some point, the

finance gap will decrease and even cease to exist. The availability of the financial

instrument should reflect this development in order not to distort the functioning of

the market.

8.6 Overall conclusions of this study

The market for LNG as a marine fuel has the potential to significantly develop over the

coming years towards and beyond 2030. We establish that, to kick-start this sector, the

financing gap that exists for the development of LNG bunkering facilities (supply side of the

market) should be narrowed. Whereas many of such bunkering facilities cannot be

completely commercially financed, public sector financial mechanisms are available to close

the financing gap.

The (EU’s) existing financial mechanisms set out in this report, as well as the financial

instruments and products contained herein, do already adhere to the criteria derived from

interviewing stakeholders. These mechanisms can be applied directly to the market for LNG

as a marine fuel (such as the CEF or EFSI mechanisms). There is no need for the

development of a completely new financial mechanism if the accessibility for LNF bunkering

projects is guaranteed. Alternatively, the existing mechanisms form a good basis for the

development of a financial mechanism geared specifically towards LNG as a bunkering fuel.

The financial instrument with the most substantial positive effect on LNG bunkering business

cases is a guarantee on offtake in early years of operations. However, we advise that a

suitable project-specific mix of financial products is selected for each project. Guarantees,

(senior) debt, (deferred) equity, grants and tax incentives are useful products for this

market.

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9 Validation of models and mechanisms (Task 9)

The validation of our market analysis, assumptions, financial mechanisms and models were

undertaken in a workshop as well as in follow-up interviews with certain interviewees. The

outcomes of these interviews have been taken into account in (re)drafting this report. The

schedule of the meetings is shown below.

Table 9-1 Schedule of meetings / interviews

Additional interviewees Type of interviewee

European Investment Bank Financier (public), manager of European financial

mechanisms.

Port of Hirtshals Port operator, part owner of LNG storage facility.

TUI Cruise line, ordered two LNG fuelled vessels.

UECC Vessel operator, operates two LNG fuelled vessels.

Fjord Line Vessel operator, operates two LNG fuelled vessels.

London based financial institution Financier (private), active in LNG as marine fuel market.


The minutes of the workshops are provided in Appendix E.

The topics covered in these workshops / interviews are the validation of models and

mechanisms concerning:

- Potential size of LNG bunkering facility

- Typical IRR and investors’ expectations

- Typical financial model

- Financial viability

- Best potential financial instruments.

R e s t r i c t e d

08 June 2016 M&WPB3039-103-100R001D11

144

References

1 Overview of European shipping activity and forecast

LNG-fuelled vessels (Task 1)

2 - Article 23 of the TEN- Guidelines (Regulation 1315/2003)

3 - Danish Maritime Authority, 2011, North European LNG Infrastructure Project: A

Feasibility study for an LNG filling station infrastructure and test of recommendation

4 - DNV, 2010, Shipping 2020

5 - Ocean Shipping Consultants a company of Royal HaskoningDHV, 2013, LNG as a Bunker

Fuel: Future Demand Prospects & Port Design Options

8 - MARINTEK, UECC, NTNU, 2015, Assessment of cost as a function of abatement option in

maritime emission control areas

5 Identification and assessment of potential public

financial mechanisms (Task 2)

12 - www.gie.eu/index.php/maps-data/lng-map

14 - “Natural Gas as a Transportation Fuel: Models for Developing Fueling Infrastructure”,

American Gas Foundation, September 2012

With its headquarters in Amersfoort, The Netherlands, Royal

HaskoningDHV is an independent, international project management,

engineering and consultancy service provider. Ranking globally in the

top 10 of independently owned, nonlisted companies and top 40

overall, the Company’s 6,500 staff provide services across the world

from more than 100 offices in over 35 countries.

Our connections

Innovation is a collaborative process, which is why Royal

HaskoningDHV works in association with clients, project partners,

universities, government agencies, NGOs and many other

organisations to develop and introduce new ways of living and

working to enhance society together, now and in the future.

Memberships

Royal HaskoningDHV is a member of the recognised engineering and

environmental bodies in those countries where it has a permanent

office base.

All Royal HaskoningDHV consultants, architects and engineers are

members of their individual branch organisations in their various

countries.

royalhaskoningdhv.com/osc

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