22 10 2012 - evolution of small-scale lng117

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The Evolution of Small-Scale LNG Markets

The View from Gazprom Export

Igor Maynitskiy

Head of the LNG DivisionGazprom Export

Small-Scale LNG Forum22-23 October 2012, Istanbul



Hello!

My name is Igor Maynitskiy and I am responsible for advancing the export of Gazprom’s Small Scale

LNG for developing markets.

Russia possesses immense natural gas reserves, the majority of which are managed by Gazprom. In

fact, Gazprom controls 16% of worldwide gas reserves (23 Trillion Cubic Feet ) - more than any other

company or country of gas.

Gazprom natural gas is used throughout the Russian Federation and exported globally as both

pipeline gas and liquefied natural gas (LNG).

LNG allows for the supply of growing markets, such as the transportation, marine bunkering, and

other off-grid applications. Accordingly, LNG is becoming more important to Gazprom.

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I would like to speak to you today about small scale LNG.

Generally, we view LNG as being of various size classes –

“Small Scale” plants are usually developed to serve certain specific markets and have a production

capacity of less than one half million tons per year.

“Mid Scale” and “Large Scale” Liquefaction (also referred to as base load liquefaction plants) have

progressively larger capacities and “efficiencies of scale”.

For decades, Gazprom and its affiliates have actively pursued opportunities to develop natural gas as

a fuel for the transportation sector and other SSLNG applications. The reasons for this are

significant…Small-scale LNG presents:

• The opportunity to create substantial new demand for gas from ships, trucks and off-grid

customers => global opportunity expected to be in the hundreds of MTPA

• The opportunity to capture market share in newer, high value niche markets where natural gas

has historically comprised a low portion of the fuel mix due to: – Lack of access to pipeline infrastructure; and/or

– Historic reliance on fuels such as diesel and fuel oil

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LNG has unlocked market potential in nearly all segments of the freight and transportation sector, including heavy-dutytrucks.

Until recently, in fact, there was broad consensus that global natural gas production was on the same trajectory as oil, just deferred a decade or two. Economies around the world, led by China, were expected to continue requiring greateramounts of energy to fuel their growth. Meanwhile, natural gas production in the West was thought to be in permanentdecline, leading to premature assumptions regarding the long-term dependence of developed nations on importedsources of fuel. However, with the advancement of unconventional gas, declining gas production is no longer the caseanymore.

Instead, natural gas is increasingly becoming the most plentiful, cost-effective, and environmentally friendly alternative

to conventional transportation fuels in marine bunkering, road transport, mining, and off-grid applications.

You may ask me a question why this revolution is taking place only now. What prevented natural gas from displacing oilproducts as a motor fuel in the past? There are simple reasons for this -

A major problem with using gas as transport fuel was its lower energy density. Even when compressed to around 200atmospheres (as CNG) , natural gas has only 25% of the energy content of diesel fuel. Add to this the greater weight of thepressurized tanks needed to contain the CNG, and the advantage of conventional liquid fuels becomes clear. In the past,the poor energy density of CNG limited the use of natural gas in the transportation sector to light duty vehicles and publicintercity transportation.

The solution to the density problem came from LNG. LNG has an energy density more than double that of CNG. Comparedwith diesel, the lower density of LNG is partly compensated for by a significantly higher calorific value on a weight-for-weight basis (54 MJ/kg for LNG against 46 MJ/kg for diesel fuel), resulting in an energy density roughly 60% of that of

diesel. With the possible exception of long-haul air flights, LNG has made nearly all transportation industry sectors viablefor natural gas penetration, from long-haul trucking to maritime shipping to heavy-duty trucks in the mining industry.

Of these, the bunker fuel and heavy-duty truck markets present the most important opportunities at present. Bothmarkets are large consumers of heavy fuel oil and distilled products and currently emit large quantities of traditionalpollutants such as SO2, NOx, particulates and CO2. The historically high price differential between natural gas/LNG and oilproducts, combined with growing restrictions on ship and vehicle emissions, have prompted a number of countries andcompanies to pursue LNG alternatives.

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LNG can compete favorably in the heating, commercial, and industrial sectors with conventional fuels

such as diesel and propane in areas not currently served by regional pipeline gas infrastructure.

Many examples exist.

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The International Maritime Organization has approved three global Emissions Control Areas (ECAs), with several more

proposed…

To comply with ECA limits, ship owners have three options:

1. Secure costly, low-sulphur Marine Gasoil

2. Install costly emissions abatement controls

3. Adopt LNG as ship fuel

By utilizing LNG, the Marine Sector benefits in several ways –

A. Natural gas is the only fuel which meets new ship emissions limits (without requiring scrubbers or SCRs)B. LNG offers fuel cost advantage and lower operating costs vs. traditional bunker fuels

C. Ship, engine and tank technology for LNG-fuelled ships are available and proven

Similarly, heavy duty trucking within the EU will be subject to stringent Euro VI emissions standards commencing in 2014.

By utilizing natural gas (with LNG being the preferred form due to its effective fuel density), compliance with emissions

standards are readily attainable.

To comply with these same Euro VI standards, diesel engines will require costly emissions treatment and equipment that

will increase the capital and operational costs of diesel powered trucks and buses.

Natural gas powered trucks operate at reduced noise levels in comparison to similar diesel trucks. In many cities,

authorities allow such natural gas trucks to operate within residential and congested areas that noisier (and noxious fume

producing) diesel trucks are prohibited from. In fact, the World Health Organization has recently declared diesel fumes tobe carcinagenic. Natural gas creates no such issues.

Off-grid customers also enjoy having the option of natural gas as a clean, cost-effective source of energy for comfort and

process heating, as well as for power production and other technical needs. We should all remember that natural gas

creates no spill hazard, such as leaking diesel fuel can. Further, consumers previously limited to only diesel or propane

can now enjoy the economic advantages derived from a the choice of a strongly competitive fuel such as natural gas.

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Let’s take a look at the projected demand for natural gas in transportation.

Major international consulting agencies and industry associations have provided their forecasts of the

oil-to-gas dash in transportation. The consensus among these varied organizations is that natural gas

is expected to capture significant market share from traditional petroleum-based fuels in both marine

and road transport – up to 33 MTPA (46 Bcma) from global LNG bunkering (see chart on the left) and

14 MTPA (20 Bcma) from LNG vehicles in Europe (right chart) by 2030.

In fact, this oil-to-gas dash, a major revolution in transportation, is taking place already.

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In the US and in Europe, already today, LNG-fuelled trucks help commercial operators decreasing theircost of operations and complying with European emission norms.

Only recently Gazprom in cooperation with a range of other European gas majors conducted the 6th Blue Corridor Rally – a tour of 6.800km throughout Europe just on natural gas – to demonstrate topolitics, governments, media, the public and customers, that natural gas as fuel has evolved to be areal alternative to constantly increasing petrol and diesel prices.

Gazprom actively shapes the market for LNG-fuelled city buses, e.g. currently in the Republic of

Poland, and the market for heavy duty road transport in Western Europe in cooperation withestablished automotive manufacturers, such as Mercedes Benz, IVECO, Volvo or MAN, by providingthe required refueling infrastructure.

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In conjunction with Pace Global, Gazprom has been working with its mining clients and miningequipment producers to advance and deliver heavy-duty natural gas engine technology. Our analysishas concluded that LNG sales are a credible alternative to diesel in the mining sector:

• On average an ore-carrying haul truck, loaded with 250-300 tonnes of ore, consumes as much as

€300,000 annually in natural gas.

• At present, over 7.5 billion liters of diesel are consumed by the 28,600 haul trucks (rated 100

ton+) utilized by the top 10 mining companies operating around the world.

• Hydraulic fracturing alone requires approximately 2.8 billion gallons of diesel per year to operatethe necessary pressure pumping equipment and drilling rigs. Because a single fracturing job can

require 7,800 gallons of diesel (at a cost of up to $5/gallon), substituting natural gas for diesel

could result in annual fuel savings of $1.3 million per rig.

• Such super high horsepower natural gas engine technology is becoming a reality for mining

equipment as well as rail applications.

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Many potential sources of LNG exist for Gazprom. Many such projects are under priority review.

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I’d like to conclude with the following takeaways (summarize bullet points on slide).

In short, several factors make LNG an increasingly competitive transport fuel. First and foremost, natural gashas the cleanest emissions profile compared with traditional petroleum-based fuels.In addition, LNG has proven to be a credible competitor from a total lifecycle cost of ownership, retail fuelprice, and fuel supply perspective for both the vehicle and bunkering markets. However, caveats do exist…

1. Firstly, while LNG is increasingly seen as a viable competitor to traditional fuels in transport marketsaround the world, there is a dire need to develop dedicated SSLNG infrastructure to serve these markets.

2. Secondly, my general observation has been that efforts by politicians and environmental alarmists to take

all fossil fuels off the table as a means of addressing the climate challenge problem blinds people toconsideration of actual , attainable options. It is a fact that greenhouse gas emissions reductions can beachieved by replacing traditional fossil fuels with other, cleaner fossil fuels. There are currently availablealternatives utilizing LNG that can significantly reduce emissions, while research and development planspromise to develop even better alternatives tomorrow.

My proposition to you today is that natural gas can, and will, take the place of petroleum fuels in a significantportion of the transportation sector. In fact, this oil-to-gas dash, a major revolution in transportation, isalready taking place.For these and many other reasons, I feel that natural gas is the next logical step in the ongoing transition tocleaner fuels. LNG can truly revolutionize the transport sector due to its many advantages, which we havediscussed, in part, today. But the process of promoting LNG as a transport fuel will undoubtedly, andunfortunately, be hampered by certain bureaucracy tendencies. Politicians – especially those in the EU – mustrelinquish their prejudices about natural gas. Currently, the European Commission (EC) is working on defining alist of so-called "Fuels of the Future“ that gives a clear preference to trucks with electric and hybrid engines,without paying sufficient attention to LNG. If this issue is not sufficiently resolved in favor of natural gas, thenstandards for LNG vehicles and refueling facilities will not be developed, and the utilization of LNG as motorfuel will follow a slow and complicated path.

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Gazprom’s vast natural gas resources and transportation network make it well-positioned to serve

growing SSLNG markets throughout Europe through its integrated supply chain. Gazprom intends to

play a major role in advancing LNG in major transportation markets. However, because the use of LNG

as transport fuel means essentially creating a market from scratch, this makes it essential that we

work with new partners from different sectors and help the EU politicians to realize the very real

benefits of natural gas.

I thank you for your attention.

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22 10 2012 - evolution of small-scale lng117

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