Stephen Thompson, Poten & Partners: Monetising & commercialising Floating LNG

MONTH 2008

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CONFIDENTIAL

Monetizing and commercializing FLNG

Stephen Thompson

Poten & Partners

December 2013

MONTH 2009


CONFIDENTIAL

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December 2013 Page 1

Two basic business models, one key idea

1. FLNG to access difficult, remote reserves

2. FLNG to emulate FSRU success

• But really a one “Janus-faced” value proposition

Janus, Roman god of

beginnings and transitions

External:

COST

Internal:

COMPETENCY

Past Future

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Other, experimental business models may surprise

• Caribbean FLRSU, which may be first

FLNG capacity on stream, already

breaks the mould (putting it mildly) • Small Canadian independent Pacific Rubiales

will obtain barge from Exmar under a BOO

contract

• EPCIC contract to Wison Offshore & Marine

Ltd and constructed in Nantong, China

• Non-propelled barge equipped to make

~500,000 tons of LNG per annum or regasify

up to 3.1 MMt/y

• Onboard tank capacity of 14,000m3, to be

offloaded either to permanently-moored FSU

or shuttle tankers

• Jetty-moored and supplied with gas by

pipeline from the onshore La Creciente field,

Colombia

• Black & Veatch has been contracted for

topside liquefaction equipment and packages,

on-site commissioning and startup services

Artist’s view of Caribbean LNG facility (at bottom)

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Difficult, remote reserves

• Sub-economical size

• Far from shore / supporting infrastructure

• But is this really driving decision-making?

Shell’s Prelude

FLNG and

INPEX’s Ichthys

onshore project

have virtually

the same

location

Bonaparte

FLNG will be

located

relatively close

to shore and

adjacent to

Ichthys pipeline

Bonaparte

source fields

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From Shell’s website

• Moving the production and processing out to sea where the gas is found is a major

innovation that brings huge new energy resources within reach. It also helps to avoid the

potential environmental impact of constructing and operating a plant on land, including

laying pipelines to shore and building other infrastructure.

• We are surging ahead with the world’s first floating liquefied natural gas facility, Prelude

FLNG, off Australia’s north-west coast. We expect Prelude FLNG to be the first of many

FLNG projects. This approach makes it possible to unlock new natural gas resources,

including smaller, remote fields as well as large fields supported by several facilities.

• There are also plans to use our FLNG technology and expertise elsewhere.

Prelude = Janus?

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If FSRUs are such a great idea, why not FLNG?

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FSRU advantages and players

• FSRU advantages vs. onshore terminal • Faster

• Small onshore footprint (permitting, NIMBY)

• Less site-specific engineering

• Allows outsourcing to specialized firms

• Lower capital outlay

• Greater predictability

Three firms dominate FSRU segment

Companies are also pursuing other (unspecified) opportunities

FLNG projects with FSRU "triumvirate" sponsorsProject MMt/y Owner

Lavaca Bay LNG Export 4.0 Excelerate

BC LNG 0.8 Golar?

PNG FLNG 3.0 Hoegh

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In case you didn’t believe me

From Excelerate’s webpage Unlike any other floating liquefaction design,

the Evolution FLSO provides an effective

solution at minimal cost. It significantly

reduces, or even eliminates, the need for a

civil footprint. Because it is built in the

controlled environment of a shipyard, the

FLSO can be brought to market faster and

more efficiently, contributing to a higher

degree of quality on a tighter schedule. The

design integrates proven and/or tested

technology, minimizing the need for fixed

infrastructure while reducing environmental

impact. It is able to accommodate a broad

range of gas-quality specifications. Equally

important is that it can be delivered in

approximately 44 months from final

investment decision to first LNG. The FLSO

is expected to open new markets around the

world, utilizing environmentally friendly

technology while creating greater economic

upside – another innovative solution that

echoes this basic philosophy and is in

keeping with the Excelerate Energy tradition.

From most recent Golar investor presentation

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Two business models refer to two broadly different

opportunity sets

Trekkies

• Larger reserves

• More difficult feedgas

• More challenging sites

• Bigger vessels

• More sophisticated

liquefaction technology

• Resource-holder driven

FSRU aficionados

• Smaller reserves/pipeline

• Easier feedgas

• Near-shore/dockside

• Smaller vessels

• Simpler liquefaction

technology

• Facility-provider driven

Disputed middle

Business models gravitate toward different resources

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Optimal size may be in the disputed middle

• Economies of scale should apply to liquefaction facilities on deck and ship hull, but may not

apply to structural elements supporting the topside facilities

• Higher liquefaction efficiency for larger FLNG unit, but more deck space required

• But huge variation between facilities is possible:

Facility size will be a compromise

Length Width Capacity

(meters) (meters) (MMt/y)

Scarborough 495 75 6-7

Prelude 488 74 3.6

P/S 99% 99% 55%

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Cost and competence

From Trunkline, Woodside’s in-house magazine Woodside has been at the vanguard of many significant

developments in the Australian oil and gas industry… and we

continue to seek innovation in a range of areas. So it’s quite fitting

that we find ourselves once again at the forefront as floating LNG

(FLNG) technology emerges as a potential “game changer” for the

industry. Steve Rogers, Woodside’s senior vice president Browse,

says FLNG is the next step in the evolution of hydrocarbon

production. “It has the potential to be a game changer in the oil and

gas industry,” Steve says. “We have the right people, plan and

resources in place… Th[e] development concept will use the same

FLNG technology pioneered by Shell and applied in the construction

of its Prelude FLNG facility which is set to become the world’s first

FLNG facility.

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But Janus may be hallucinating

• On cost + Eliminates pipeline

+ Eliminates separate offshore

processing

+ Much work done in controlled, lower-

cost environment of shipyard

• On competence • How relevant are existing skills, e.g., from FSRUs to FLNG?

• How long will it take, and how much will it cost, to develop the new innovations and capabilities needed to

successfully execute projects?

– Design

– Construction

– Operation

• How easily can these skills be migrated between projects?

• Will portable know-how remain with the first movers or leak out to followers?

− Additional cost for vessel movement

− Additional cost for tight design

− Potential performance

issues/downtime

− Maintenance and repair complications

− Higher operating expenses

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A range of future scenarios are viable

• Onshore plant marginal cost • Gorgon

• APLNG

• APLNG x 85%

• Offshore plant experience curves • High/None

• Medium/Small

• Low/Large

PENDING

Captures market from onshore,

pushes down industry marginal cost Flops

Competitive at margin after first few units

Niche play at best

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Other stakeholders have different drivers

• Floating LNG transfers some of

the economic benefit during

construction from the host

country, where the resources

are located, to the country

where the facility is built • Korea for Prelude and Sarawak

• China for Pacific Rubiales

• Not every one is happy with

this, e.g., • Timor Leste has vehemently

opposed development of Sunrise as

an FLNG project, insisting on a

greenfield plant on East Timor

• West Australian premier Colin

Barnett has threatened to block

development of Browse as an FLNG

project after onshore construction at

James Price Point fell through

Australian Maritime Workers Union protests FLNG WA parliament, June 2013

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Government industrial policy is ascendant

• Commercial lenders’ share of has dropped from almost three quarters since 2010 to less

than half, while ECAs have increased their share from a fifth to around half

• Shift toward ECAs is consistent with post-GFC damage to money-center banks, as well as

“national champion” style capitalism

• Financing for Caribbean FLRSU will come from IFC and China and US EXIM banks • IFC is lead and is also making an equity investment

Project finance disbursements to Oil & Gas sector

Project with both ECAs/DFAs and commercial banks

Source: Baker & McKenzie

ECA league tables

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Summary

• Two basic models • FLNG to access difficult, remote reserves

• FLNG to emulate FSRU success

Other, experimental models may surprise

• A “Janus-faced” value proposition • External: Cost

• Internal: Competency

• The two models have broadly different opportunity sets • Optimal size may be in the disputed middle

• Cost and competency advantages may be elusive • FLNG could turn out to be an industry champion, a flop, or somewhere in between

• If it succeeds, it is not clear that FLNG providers will make long-term economic profits

• A contest is brewing between resource-holder and facility-provider governments • Outcomes where both lose are possible

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LNG & NATURAL GAS CONSULTING CONTACTS:

AMERICAS

NEW YORK

Jim Briggs

[email protected]

Tel: +1 212 230 2000

EUROPE, MIDDLE EAST, AFRICA

LONDON

Graham Hartnell

[email protected]

Tel: +44 207 493 7272

ASIA PACIFIC

PERTH

Stephen Thompson

[email protected]

Tel: +61 8 6468 7942

AMERICAS

HOUSTON

Daryl Houghton

[email protected]

Tel: +1 917 225 7636