Special Topic: Demolition & Conversion Introduction Global

McQuilling Partners, Inc.

McQuilling Services Marine Transport Advisors

Agenda

McQuilling Shipping Seminar Petrobras University, Rio de Janeiro, Brazil 8 October 2013

Introduction Global Outlook Tanker Market Gas & Chemicals Market Drybulk Market Special Topics

1

Special Topic: Demolition & Conversion

McQuilling Partners, Inc. Slide 2

Conversion

Exits from the Trading Fleet

Storage & Demolition

Demolition & Conversion

McQuilling Partners, Inc.


► Grounding, foundering, collision, fire, explosion

Loss

Temporary Floating Storage

Demolition

Conversion

► Trading or Operational Drivers: Contango oil market Iran (sanctions) Oily water Fuel oil trading

► Trading life assumptions ► Beach versus Afloat

► Offshore storage ► VLCC VLOC ► Heavylift

► Exits from the trading fleet balance additions and are primarily driven by economic obsolescence of older vessels ~ four categories of exits can be identified:

Slide 3



► Grounding, foundering, collision, fire, explosion

Loss


Conversion





Storage & Demolition Temporary Floating Storage

► Typically driven by trading or operational requirements or opportunities

► A contango market exists when the front month is trading at a discount to the future months

► By chartering a tanker for temporary floating storage, traders can profit by purchasing prompt crude oil at a lower price and selling it in the future at a higher price

► The pricing spread must be great enough to offset charter hire and other costs and still turn a profit Source: CME Group, Nymex


Storage & Demolition Temporary Floating Storage

► Temporary floating storage on tankers was widely employed during 2009 and 2010 when contango markets for crude and products were frequently observed:

► Floating storage has the effect of reducing tonnage supply by temporarily removing vessels from the trading fleet

► Temporary floating storage has also been used to buffer the effect of sanctions (Iran), to store production water from offshore fields and over longer periods, to establish fuel oil depots for bunkers sales

► These deployments typically require little to no modifications to the vessel

► Issues such as hull cleaning are important to consider in floating storage as an idle vessel will develop substantial marine growth on its hull, especially in warmer water

No. of Vsls. VLCC SUEZ LR2 LR1 2009 30 7 29 9 2010 40 10 49 17


Storage & Demolition Demolition (Ship Recycling)

► Ships purchased on the basis of their light displacement tonnage (LDT) are reduced in ship breaking yards and sent to steel re-rolling mills for reuse as raw material for production of steel

► Most of the other machinery and outfitting on board is also recycled

► Currently, the international ship demolition market is centered around the Indian subcontinent ~ 40 million tons of steel per year

► While a large number of tankers find their way to scrap yards in Pakistan and Bangladesh, Indian ship breaking yards attract mostly dry and general cargo vessels

► China is making inroads into this industry at present



► Front-to-back Demolition – beaching method – centered on Indian subcontinent

► Top-to-Bottom Demolition – Chinese yards, other yards

► “Green” Issues – IMO Hong Kong Convention / EU Legislation



IMO Hong Kong Convention (2009)

► Adoption: 15 May 2009; Entry into force: 24 months after ratification by 15 States

► Regulations in the new Convention cover: The design, construction, operation and preparation of ships so as to

facilitate safe and environmentally sound recycling; the operation of ship recycling facilities in a safe and environmentally sound manner; and the establishment of an appropriate enforcement mechanism for ship recycling, incorporating certification and reporting requirements

Ships to be sent for recycling will be required to carry an inventory of hazardous materials; Ships will be required to have an initial survey to verify the inventory of hazardous materials, renewal surveys during the life of the ship, and a final survey prior to recycling

Ship recycling yards will be required to provide a Ship Recycling Plan, to specify the manner in which each individual ship will be recycled, Parties will be required to take effective measures to ensure that ship recycling facilities under their jurisdiction comply with the Convention



EU Ship Recycling Legislation (2013)

► Sets new standards for European ship recycling facilities;

► Requires facilities that meet such standards to apply for inclusion in the European-approved list of ship recycling facilities;

► Obliges EU-flagged ships to be recycled in these approved facilities; and

► Enforces the requirement for EU-flagged ships to carry an on-board inventory of hazardous materials to enable safe dismantling


Storage & Demolition Demolition

► Scrap price averaged US $417/LDT during the period 2005 through present

► Scrap prices adjusted dramatically as a result of the financial crisis, rebounded, and have softened as more supply becomes available

► Scrap price by vessel class (US$ million):

AVE. VLCC SUEZ AFRA PANA MR2 LDT 42,000 25,000 17,000 14,000 10,000

US$/LDT 2005 397 16.7 9.9 6.7 5.6 4.0 2006 396 16.6 9.9 6.7 5.5 4.0 2007 492 20.7 12.3 8.4 6.9 4.9 2008 561 23.6 14.0 9.5 7.9 5.6 2009 304 12.8 7.6 5.2 4.3 3.0 2010 431 18.1 10.8 7.3 6.0 4.3 2011 503 21.1 12.6 8.6 7.0 5.0 2012 458 19.2 11.5 7.8 6.4 4.6 2013 431 18.1 10.8 7.3 6.0 4.3


Storage & Demolition Early Scrapping

► “Early scrapping” is being discussed around the industry at present, where vessels are scrapped before their third or fourth special survey

► The TCE’s required to produce a 10% return on investment for a 15-, 20-, or 25-year project do not vary significantly as compared to the overall variation observed in the market

VLCC


Conversion





Conversion FSO / FPSO

► At present, there are about 300 floating storage units deployed in the offshore oil and gas industry

► The majority (about two-thirds) of these are Floating Production, Storage and Offtake units (FPSO)

► Existing storage units for gas (Floating Storage Regasification Unit - FSRU, and Floating Liquefied Natural Gas - FLNG) are currently few (8 in total), but this technology is becoming more popular

► The primary deployment locations for offshore storage units are West Africa, Latin America and South East Asia, these regions collectively representing about 58% of the total existing and on-order fleet



► The majority of offshore units deployed in the oil sector are greater than 75,000 Dwt; About 60% of all units are VLCC or Suezmax size

► As offshore oil and gas exploration moves further from the coast into deeper water, floating offshore storage units will be the preferred and in many cases only feasible alternative



► The oldest FPSO afloat is the 45,000 deadweight, 1959-built Petrobras 34 (ex Presidente Prudente de Moraes), which has been converted several times for different offshore service in its lifetime

► The largest storage unit is a 600,000 deadweight, 440,000 m3 FLNG planned for delivery in 2016 to Shell for deployment offshore Australia


Conversion FPSO – New Construction

► Korean yards have produced the majority of new construction FPSOs with 39% market share

► Chinese yards represent a 24% and growing share of the market

► China is gaining experience in both hull fabrications and topsides construction & integration


Conversion FPSO - Conversion

► Two-thirds of the conversion market for FPSOs is held by yards in Singapore

► Top yards are Keppel, Jurong, Sembawang


Conversion FPSO – Lease/Own

► Three companies dominate the lease market for FPSOs; they are BW Offshore, SBM Offshore and Modec, collectively representing over 50% market share

► Several smaller companies are active or becoming active in the lease market; they include Bluewater, AP Möeller Group, Bumi Armada, Fred Olsen & Company Hoegh & Company, Teekay Corporation and others

► The primary major oil companies involved in FPSO ownership and operation are: BP, Chevron, China National Offshore Oil Corporation, Exxon, Petrobras, Woodside Petroleum

Buni Armada

5%

Saipem SpA5%

Sevan Marine

5%

EMAS Offshore

4%

Maersk4%

Teekay4%

Bluewater6%

Modec, Inc.15%

SBM Offshore

18%

BW Offshore

18%

Others16%


FLNG

Slide 21

► Two units will be delivered in the end of 2014 with storage capacity of 14,000 and 220,000 m³ respectively

► One unit of 177,000 m³ storage capacity will be delivered in the first semester of 2015

► One unit of 231,500 m³ will be delivered in the end of 2016

Source: McQuilling Brasil

4

28

Delivery Proposed


FSRU

► Note: Cumulative number of ships since 2004

► Five conversions till 2014

Source: McQuilling Brasil

-

2

4

6

8

10

12

14

16

18

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

No

of V

esse

ls

Newbuild

Conversion


FSRU

► GDF SUEZ 15-year BOOT (Build, Own, Operate and Transfer) contract with Gas Sayago S.A. for LNG storage and regasification services located in the Punta Sayago area, close to Montevideo, Uruguay

► The offshore terminal, GNL del Plata, will comprise a Floating Storage and Regasification Unit (FSRU) and a jetty, protected by a 1.5 km breakwater

GDF SUEZ Uruguay's First LNG Import Terminal

► The world's largest FSRU would be built at South Korea’s Daewoo Shipbuilding & Marine Engineering and chartered for 20 years

► The FSRU will be 345m-long, have a 55m beam, and a storage capacity of 263,000 m³; It will have a regasification capacity of 540M ft³ per day

► DSME is to complete the FSRU by September 2016, with service to begin in November 2016 after delivery and commissioning at Montevideo, Uruguay’s capital.


Outlook

FPSO Cidade de São Paulo (Sapinhoá Pilot) FPSO Cidade de Itajaí (Baúna) FPSO Cidade de Paraty (Lula NE Pilot) FPSO P-63 (Papa-Terra) FPSO P-58 (Nord Parque das Baleias)

FPSO P-62 (Roncador Project Module IV) FPSO Cidade de Ilhabela (Sapinhoá Norte) FPSO Cidade de Mangaratiba (Iracema Sul)

N/B P-66 (Lula Sul ) N/B P-67 (Lula Norte) Conv P-74 (Franco 1) Conv P-75 (Franco SW)

N/B P-68 (Lula Ext. Sul ) N/B P-69 (Lula Oeste) N/B P-70 (Iara Horst) Conv P-76 (Franco Sul) Conv P-77 (Franco NW)

N/B P-72 (NE de Tupi) N/B P-71 (Iara NW) N/B P-73 (Entorno de Iara)

2013

2014

2015

2016

2017

2018

Petrobras Planned FPSO Deployments 2013-2018 (20):

5 3 0 4 5 3 Source: Petrobras Business Plan


Outlook

► 31 new construction offshore storage installations on order:

► 19 FPSO

► 5 FSRU

► 4 FLNG

► 3 FSO

► Huge FSRU potential worldwide

Source: Höegh LNG

► 49 firm plan installations anticipated (32 FPSO / 17 FSO)

► 230 probable, possible or alternative plan FPSO/FSO projects

World


McQuilling Partners, Inc. Ocean House ~ 1035 Stewart Avenue ~ Garden City, New York 11530 Tel: +1.516.227.5700 ~ Fax: +1.516.745.6198 ~ Email: [email protected]

www.mcquilling.com

►Spot, period and asset brokerage ►FFA trading ►Management consulting ►Business development ►Ship finance advisory ►Marine logistics analysis ►Market research ► Information technology applications ►Ship construction & repair advisory ►Personnel training

Thank You!


McQuilling

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Special Topic: Demolition & Conversion Introduction Global