lng business plan 20130220

8/10/2019 LNG Business Plan 20130220

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LIQUEFIED NATURAL GAS (LNG) Terminal

BUSINESS PLAN

2013 February


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CONTENT

Summary .......................................................................................... 3

LNG terminal project ........................................................................ 9

LNG terminal technology and infrastructure ...................................... 10

LNG terminal and marketing business model ..................................... 20

Business model of the LNG terminal....................................................................... 20

LNG import and marketing business model........................................................ 21

Project organization.......................................................................................................... 24

Implementation plan of the LNG terminal ......................................... 25

Project funding .............................................................................. 31

Need of funds for start-up of the LNG terminal business........................... 31Financing of the LNG terminal business (from 2015)................................... 34

LNG import and trade financing activities............................................................ 35

Cost and benefit analysis of the LNG terminal ................................ 36

Ensurance of alternative gas supply to Lithuania ............................... 37

Ensuring competitive pricing ........................................................... 38

Benefits of the LNG terminal ........................................................... 40

Benefits of the LNG terminal for the State.......................................................... 40

Benefits of the LNG terminal to consumers of natural gas ........................ 42

LNG terminal benefits to the company implementing the project......... 44

LNG supply market review............................................................................................ 45

LNG use for ship fuel (bunkering) the additional activity .................. 48

Possibilities of cooperation with Latvia and Estonia ............................ 49

SWOT analysis .............................................................................. 50


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Summary

The National Energy Strategy (further referred to as a Strategy) which was approved by the Seimas othe Republic of Lithuania on 26 June 2012 Resolution No. XI-2133 and on 18 January 2007 ResolutioNo. X-1046, defines the basic strategic provisions and their directions of implementation by 202where the main attention is focused on ensurance of energy security and in particular long-term naturgas supply. Today Lithuania is dependent on a single external supplier of imported natural gas. Teliminate the energy isolation in the gas sector and implement 20 October 2010 European Parliameand Council Regulation (EU) No. 994/2010 on gas supply security measures, Member States of thEuropean Union were obliged to comply with directive N-1 standard of infrastructure in securinalternative gas supply sources.

LNG terminal one of the key projects to ensure energy security, which creates the condition

for the emergence of the natural gas market, and brings economic benefits to the Statconsumers and the company executing the project.

The Law on Liquefied Natural Gas Terminal of the Republic of Lithuania dated 12 June 2012 (No. XI2053) establishes the general principles and requirements for the construction, operation andexploitation of a liquefied natural gas terminal in the Republic of Lithuania and forms a legal, financiaand organizational framework for the implementation of the project on a liquefied natural gas termina

Lithuania currently imports natural gas from the outer sole supplier of natural gas in accordanc

with the rules, pricing and terms of this supplier. Without possibility of choice, there is no gas

market. When the LNG terminal project is implemented, the Lithuanian natural gas customers

will get the opportunity not only to purchase natural gas from different suppliers, but also to

choose from new products: short-term gas supply contracts at market prices and new pricing

principles (i. e. without linking gas prices to oil prices).

The purpose of this business plan is to present the importance of LNG terminal project, econombenefits of natural gas to consumers, the company executing the project, the State and to providtechnical solutions and the principles of terminal business model.

LNG terminalthe project ensuring an alternative natural gas supply, which:

will help to resolve historically unfolding the problem of dependence of Lithuania on a singexternal supplier of gas from Russia (gas is supplied by one gas pipeline, which passes throug

Belarus); will reduce OAO Gazprom possibilities to use its dominant position and to exercise the ga

pricing policy, the price of gas imported to Lithuania is one of the highest in Europe ansignificantly exceeds the gas prices in international markets;

will create an opportunity for gas market participants to take part in the international gamarkets and thus to reduce the average price of imported natural gas;

will provide an opportunity to choose new market productsshort-term contracts with a pricinmechanism not linked to oil prices and take advantage of the global gas market opportunities;


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will provide alternative gas supply routes, by implementing European Union directive Nstandard of infrastructure, which will be launched on December 2014.

The main aims raised to the LNG terminal project are:

to start LNG terminal no later than 2014, December; to develop an alternative source of supply of natural gas;

to create an opportunity for Lithuania to self-sufficiently supply itself with natural gas needed meet the demand of the first necessity;

to create conditions for development of gas markets in Lithuania and the Baltic countries ancreate opportunities for short-term gas purchase contracts and open the option for pricing nlinked to the oil product price;

to provide an opportunity for Lithuania to participate in the international gas markets.

The maximum technical regasification capacity of the LNG terminal will be 4 bcm per year, which ca

be utilized as follows:1. when in 2013 SC Lietuvos dujos constructs the gas-main branch Jurbarkas Klaipda, th

terminal will supply up to 2 bcm gas into the system per year;

2. after replacement of gas-main branch Klaipda Kurnai,and increasing its diameter fro300 mm to 700 mm, the terminal will be capable to supply 4 bcm gas into the system per yeand, if necessary, will supply gas throughout the country (except for peak consumption winter periods).

LNG terminal type and size

Floating Storage and Regasification Unit - FSRU (170 thousand m

3

volume, with regasificatioequipment) was contracted on 2 March 2012 from Hoegh LNG, signing 10-year lease agreement withe purchase option.

FSRU type, as compared with the onshore terminal, has been chosen taking into account:

50 percent lower capital investment;

2 year-shorter period of the project implementation;

more flexible technology (FSRU can be moved to another location).

LNG terminal size of 170 thousand m3was chosen according to the following:

LNG supply costs due to economy of scale of a larger LNG terminal are lower over 40 percencompared to the smaller terminal;

the larger terminal ensures longer period (1020 days) of first necessity consumer needwithout LNG resupply;

Construction costs of LNG terminals differ only 1015 percent, depending on sizes.

The project business model

LNG terminal and its business will be held in the State-controlled company.


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Established LNG terminal infrastructure (FSRU, jetty infratsructure and gas pipelinconnecting the terminal to the gas grid) will be transferred to State-controlled natural gtransmission system operator and assigned to the natural gas infrastructure.

25 percent rule

Currently there is no competition in the Lithuanian natural gas market. Gas is bought from one suppliwith fixed terms and pricing. Natural gas supply contracts are concluded exclusively for long-term such way binding to the sole external supplier without leaving any options for an alternative. Therefor

when LNG infrastructure is created, it is also necessary to create regulatory environment thallows access to the global natural gas market opportunities;

topromote the efficient competitiveness of natural gas supply sourcesand to ensure LNterminals activity (i.e., LNG terminal technological capacity needed to continuously aneffectively meet the country's natural gas demand), imported natural gas quantity through th

LNG terminal must be at least 25 percent of total consumption of natural gas in the Republic oLithuania per year;

the 25 percent rule, in order to ensure competitive equality, will be applied equallyboth to thgas, supplied through the LNG terminal and through the pipelines;

25 percent rule shall prevent the current monopolist from concluding long-term contracts wisuppliers and delaying of gas market introduction into the country;

in order to protect the interests of gas consumers in Lithuania, the Government of the Republof Lithuania will establish through the LNG terminal and pipelines imported and in the internmarket of Republic of Lithuania consumed natural gas price cap;

when suppliers will get used to the new opportunities opened by LNG terminal and gas mark

is fully developed, the 25 percent rule will be withdrawn.


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Project economics

Supplying 2 bcm LNG (maximum throughput of the infrastructure from 2015) and taking into accouactual market prices of 2012 (National Balancing Point Exchange) Lithuanian consumers would sav

up to 0,4 bn. LTLper year;

Influence of all fixed business costs and investments into LNG terminal will amount to 23 percent (57 ct per m3) in the final price of natural gas tariff. After 10 years, when FSRU is redeemed, influence terminals costs will reduce by 50 percent;

Utilization of the LNG terminal for the needs of other Baltic countries, infrastructure costs woudecrease proportionally for consumers in Lithuania.

*(2011 average NBP + transportation costs)

Influence of all fixed business costs and investments into LNG terminal will amount to 23 percent (57 ct per m3) in the final price of natural gas tariff. After 10 years, when FSRU is redeemed, influence terminals costs will reduce by 50 percent;

Utilization of the LNG terminal for the needs of other Baltic countries, infrastructure costs woudecrease proportionally for consumers in Lithuania.

Project investments

Demand of LNG terminal project investments is estimated to be LTL 613 million. These investmenwill be made by SC Klaipdos Nafta and Klaipda State Seaport Authority using their own and/borrowed funds.

Investments of Klaipda State Seaport Authority will amount to LTL 160 million, and will be used foport dredging works and construction of jetty infrastructure.

Klaipdos Nafta investments*, LTL million 2012 2013 2014 Total

1. Project management and infrastructure testing (incl. costof LNG for testing purposes)

30 78 116 224

2. LNG terminal gas pipeline and gas metering station - 53 88 141

Lithuanian

consumption

(bcm)

Russian gas

price 2012

average

(LTL/1000 m3)

LNG price* with

transportation

and LNG

terminal costs

(LTL/1000 m3

)

Lithuanian

expenditures

on gas

(bn. LTL)

The current situation

By OAO Gazprom imported gas 3,0 1329 3,99

Alternative


Imported LNG gas 2,0 1130 2,26

Total 3,0 3,59

Ekonomic benefits (bn. Lt) 0,40


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design and construction

3. LNG terminal jetty suprastructure design and construction - 29 59 88

Total: 30 160 263 453

*according to project FEED prepared by the lead advisor Fluor

Project financing

investment inWorking Capital

bank guarantee for

gas supply

100m LTLKN cash

investment

credit facility from acommercial bank

KN guarantee/ oilterminal assetsand cash flows

LNG Terminaltrade accountsreceivable andinventories

Guarantees fromkey buyers

Guarantees fromexport creditagencies

Demand forfinancing and

guarantees

Potentialresources

Collateral

guarantee from a

commercial bank

$US 50 Mguarantee for theFSRU operating

lease

450m LTLInvestments in:

Projectmanagement

Gas pipelines

Jetty facilities

200m LTLcompensation ofinvestments via

gas tariff

(FY2013-2014)

Approved.


guarantees

Potentialresources

Collateral

250m LTLLoan from aninstitutional

(NIB, EIB, EBRD)

or commercialbank

(for 20-25 years)

LNG Terminal Infrastructure LNG Terminal Trading Activities

LNG Terminaltangible assets

200m LTL Stateguarantee

AB Klaipdos nafta (KN)

$US 50 Mcommercial bank

guarantee

Accounts

receivable from gastariff (from 2015)

Project investments are going to be finaced from the following sources:

LTL 250 million will be borrowed from Lithuanian and/or international financial institutions;

LTL 200 million will be natural gas consumers funds, i.e., revenue from the additioncomponent to the upper limit of the natural gas transmission tariff (the LNG terminal premiumin 2013 and in 2014 (funds from the LNG terminal premium collected from gas transmissiotariff in 2013 will amount to LTL 113,798 thousand).

The Company will also secure LTL 120 million overdraft facility for cashflow managemepurposes until long-term financing is secured in relation to the fact that cash inflow from LNterminal premium will come after 5 months from the relative investment period.

The financial resources of the Company during the project period could amount to about LT

100 million. The Company could allocate these funds towards financing the gas tradinactivities through LNG terminal.

Besides, the Company is going to address commercial banks for: (1) a bank guarantee in thamount of $ 50 million intended for securing the performance of the contract for the lease of thFSRU, (2) a bank guarantee intended for securing the performance of the gas supply contrac(3) a bank loan intended for formation of the working capital necessary for gas purchasing.

Also, seeking to secure proper performance of possible financial obligations to financiinstitutions, the Company has submitted an application to the Ministry of Energy of th


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Republic of Lithuania, asking it to address the Ministry of Finance of the Republic of Lithuanfor including a limit of State guarantee intended for financing loans for investments into thLNG terminal infrastructure (LTL 200 million), into the draft Law of the Republic of Lithuanon Approval of the Financial Indicators of the State Budget and Municipal Budgets for 201

The requested limit was included into State Budget of 2013.

Environmental Impact Assessment

Regional Environmental Protection Department of Klaipda by the Ministry of Environment of theRepublic of Lithuania on 22 October 2012 has granted development consent on construction andactivities of Liquefied Natural Gas Import Terminal and Related Objects of Infrastructure in thesouthern part of Klaipda State Seaport nearby Pigs back Island. The aforementioned consent finalisethe procedure of environmental impact assessment on LNG terminal project.

LNG terminal project implementation plan

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

FSRU

Jetty

Gas pipelines

Gas trading

FSRU lease

agreement

Legal environmentassurance

2011 2012 2013 2014 2015

LNG Terminalaunch

Finished In progressPerformed by third

parties

Construction of FSRU and delivery to the Port of Klaipda

Design and connection LNG Terminal to

the gas grid (EPC)

Construction of gas main Jurbarkas Klaipdaby Lietuvos dujos

Design and onstruction of jetty (EPC)

by Port of Klaipda and Klaipdos nafta

Port dredging by Port of Klaipda

Arrangement of LNG supply Testing and

commission-

ing works

Environmental Impact

Assessment (EIA)

Law on LNGTerminal

Territory planning and

construction permit

Pre-project study

Preparation of Project financing

structure and loan procurement

Process items

Project financing

Jetty EPC

tender

Pre-project studyPipeline EPC

tender

State

guarantee

Arrangement of NG

sales

Rules on gas

supply

diversification


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LNG terminal project


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LNG terminal technology and infrastructure

Basic function of LNG terminal is to receive and store LNG, to gasify and deliver it to the magistr

network. When choosing a terminal technology, two opportunities were evaluated: FSRU technologand onshore terminal. Executing the LNG project, FSRU technology was selected for the followinreasons:

50 percent lower capital investments;

2 year-shorter period of the project implementation;

more flexible technology (FSRU can be moved to another location or used as a LNG carrier).

In 2010 by decision of interdepartamental work groups, the most appropriate underlying location of thLNG terminal was chosenthe southern part of Klaipda seaport atKiaulsNugaros island.

LNG natural gas technical part of the terminal project includes:A. acquisition and delivery of FSRU with a regasification facility to the harbor of Klaipda, an

connection with the pipeline;B. upgrade of the harbor infrastructure for the LNG terminal (harbor dredging, jetty constructio

equipment installation);C. LNG gas pipeline connection with the gas pipeline (construction of 17 km high pressu

pipeline to the gas transmission system).

Figure No. 1a. The LNG terminal project components

Floating Storage andRegasification Unit (FSRU)

LNG storage capacity:170.000 m3

Regasification capacity:~11 mmcm/day

Leased from Hegh LNG for

10 years with a purchase

option

Gas pipelines

18 km long and 700 mm widegas pipeline that connects

FSRU to the gas grid;

Includes 3 km of horizontaldirectional drilling under the

lagoon

Jetty

Offshore jetty facilitylocated in the southern part of

the Port of Klaipda

Jetty

High pressure gas pipelines

High pressureloading arm

FSRULNG carrier

18 km Gas meteringstation


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Figure No. 1b. The LNG terminal project location

66

Baltic

sea

Pigs Back

island

Jetty and

FSRU

Gas pipeline


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A. FSRU with a regasification facility

FSRU is a LNG natural gas tanker with a built-regasification facility. Klaipedos Nafta signed 10-ye

FSRU lease with a purchase option agreement with Norwegian company Hoegh LNG on 2 Marc2012.

Figure No. 2. The main characteristics of FSRU

FSRU is designed to operate at the following scenarios:

continuous supply of gas to the gas transmission system;

at the same time to receive imported gas and to supply it into the gas-main;

at the same time to supply gas into the gas-main and to fill smaller tankers with LNG;

LNG import;

LNG export; trade, receiving/delivering LNG to other ports.

Parameters of FSRU

Comprehensive market analysis was made choosing FSRU. The main criteria for choosing a new shwere:

Small ships of 60.000 m3 storage capacity have limited availability in the market. The averagsize of floating gas carriers is 125 000150 000 m3. Distribution of ships depending on size:

up to 130 thousand m369 pcs.

130160 thousand m3249 pcs.

over 160 thousand m389 pcs.

The vast majority of old ships are MOSS type (spherical tanks) that are visually polluting thenvironment. When ships are constantly in the port, visual pollution is an important criterion selection.

The proposed small-capacity ships are 2030 years old. To convert them into the floatincontainer with a regasification facility is risky due to the technical condition (corrosioresistance).

Manufacturer of the FSRUHyundaiHeavy Industries;Date of manufacture2014.The main characteristics of FSRU:Length294 m, width46 m, draught12,6 m;Cargo tank170 000 m3(membrane

type).


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Converting old small-capacity ships, raises the problem of installation of regasification facilion board. Due to space constraints evaporators should be installed on the ground that wourequire additional investments and land plot.

Older ship design useful life is 30 years, when the new designs are 40 years.

Old ships are subject to greater LNG losses due to evaporation, which makes up 0.2 percent pday, while the new ships LNG loss is from 0.1 to 0.15 percent per day.

Ships external dimensions differnot as much compared to the storage capacity:

Table No. 1. Characteristic data of LNG ships

Dimensions \ shipsvolume

75.000 138.000 170.000

Name of a ship Cheikh El Mokrani Exelerate (2005) Hoegh LNG

Length of a ship, m 220 277 290

Width of a ship, m 23 43,5 46

Draught of a ship, m 9,8 11,5 11,6

Loss of gas, m3 150 215 250

The old ships due the old technology (used steam turbines) are less effective, i.e., consummore fuel and carry less cargo. In addition, the crew composition working on board is the sami.e., variable costs are proportionaly higher than that of new ships.

Increased volume makes FSRU more flexible for cargo acceptance, regasification, and LNtrade.

Considering that most of currently floating LNG carriers are of 140 000 m3 volume, thereforeis likely that carriers of similar size will be coming to Klaipda. Acquiring FSRU of lowvolume than the entering gas carrier, will raise a problem of gas carrier demurrage. Berthed

LNG ship-storage, a gas carrier will have to wait until FSRU containers will be able to take threst of the cargo. It may take several days and can be expensive, given that the cost chartering the ship is 115 000 US dollars per day or more.

Having larger FSRU may reduce transportation costs, because if FSRU has smaller tanks thanLNG carrier, additional lease costs will be incurred as LNG carrier would not be able to unloaall quantity of LNG.


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Source:Hoegh Ltd.

The supplier of FSRU was selected by public procurement, in which 3 major participants havparticipated, always competing in this type of projects, they are: Norwegian Hoegh LNG, Golar LNGand the American Exelerate. Hoegh LNG was selected due to attractive price and techniccharacteristics of FSRU.

Table No. 2. The main parameters of FSRU

The main parameters of the ship

170,000 m3volume

Increased volume of liquefied natural gas storage with a regasification facilitymakes it more flexible for cargo acceptance, LNG regasification and LNGtrading, in order to exploit favorable market conditions:

Liquefied natural gas storage with a regasification facility must be highthan incoming LNG carriers;

The cheapest way is to supply gas with 130,000 to 160,000 m3 capacittankers, which make up 61 percent of tankers in the world;

Compared to the lower capacity terminal (i.e. 90,000 m3) due teconomies of scale transportation costs to LNG terminal are smaller by 4percent;

FSRU prices vary slightly, depending on the size. For example, SC Klaipdosnafta offered in a public tender LNG storage capacity of 130,000170,000 m3with a regasification facility and offered lease prices were very close.

Regasificationcapacity

The maximum capacity is 4 bcm of natural gas per year.

The newly builtship

More efficient work, durability, and less pollution to the environment:

Less loss of gas and more efficient fuel consumption per year (70 ml

Figure No. 3. LNG transportation costs (in millions of LTL)


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LTL lower costs every year);

Built to work in northern conditions;

Estimated useful life 40 years, compared with up to 30-year usefuperiod of the old generation ships.

Security The new FSRU has installed the most modern security system that meets thestrictest safety requirements (SIGTTO).

It was decided to lease liquefied natural gas storage with a regasification facility rather than budirectly from the shipyard for the following reasons:

Table No. 3. Comparison of FSRU purchase and lease

Criteria Purchase Lease

Funds

Construction works of FSRU in theshipyard would cost about 250 mln.EUR. Therefore, it would require ahuge initial capital investment. TheCompany could not immediately paythe total amount, therefore, wouldrequire public funds. Funding for theproject would take additionally 1,5years.

Payments set out over 10 years,funded from the CompanysbusineState funds are not required.

Business risk

Since the moment of purchase of thefacility, the owner would assume therisk of equipment failure costs (in thecurrent caseHoegh LNG Ltd).

During 10-year lease period, all riskassociated with unforeseen costs forrepairs of facility shall be borne bythe ship owner (Hoegh LNG Ltd).

Ship design

Lithuania does not have theexperience in LNG ship design;employment of specialists would beexpensive (additionally 50 mln.EUR).

Hoegh has its own specialists whichhave designed flotilla of LNG shipsand 4 FSRUs.Service is included in the lease pric

Ship managementLithuania does not have theexperience to service FSRU.

Hoegh leased FSRU will be staffedwith a professional crew.During the term of lease the Compawill gain necessary experience.


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Time

Until the end of 2014, for theconstruction of LNG ships there are

no available shipyards.It would be possible to acquire oneonly after 2016.None of 11 potential manufacturershave offered a contract with shipsdelivery on December 2014.

Hoegh Ltd. has a contract with ashipyard in South Korea since 2009In the initial round of negotiations, suppliers of the FSRU offered only

the lease option, it is a standardpractice in this market, and thus, LNindustry is still considered as a newone. As a result the Company alsomanaged to get an offer with apurchase option at the end of the leaperiod.

B. Required changes to the harbor infrastructure

For safe entrance of LNG ships into the harbor of Klaipda up to to Kiauls nugaros island, it necessary to fully complete the planned inner harbor channel dredging works and additionally deepethe water area of LNG vessel in its turning basin area.

The harbor channel dredging is the responsibility of Klaipda State Seaport Authority (hereinaftreferred to as KSSA), Harbour dredging works have already been foreseen in the strategic planAccording to cooperation agreement signed on 5 July 2012 between Klaipdos naftaand KSSA, KSSis obligated to finish dredging works and transfer LNG terminal construction site until end of Jun2013, when the construction of jetty and pipeline starts. KSSA has successfuly finished port dredginworks tender, which also includes dredging of LNG terminal site, and has signed an agreement with thcontractor which had won the tender. KSSA started dredging works in February 2013.

KSSA will carry out navigational surveys and will prepare relevant changes for the rules of the harboNavigators and vessel traffic service operators will be trained in the use of new navigational systemrelated to the leading of LNG carriers up to the LNG terminal.

Next stage adaptation of the harbor infrastructure would be construction of the LNG terminal jettwhere the FSRU will be moored. The entering LNG carriers will be moored to the FSRU and LNwill be unloaded to the FSRU using transmission sleeves. The jetty infrastructure and suprastructuconsists of: high pressure platform, service platform, mooring landings, air bridges, observation tower

control rooms, fire protection equipment, technical service cranes, and high pressure gas transmissiosleeves as well as other necessary equipment.

In May 2012 LNG terminal jetty front-end engineering design was prepared. In August 2012 LNterminal jetty design and construction tender was launched. The contract with the tender winner expected to be signed in March 2013. Design works are scheduled to be performed until June 201construction worksuntil the III quarter of 2014.


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C. LNG terminal connection with the gas-main

Route length of the LNG terminalsconnecting gas pipeline with the gas transmission grid is about 1km, of which 3 km are under the Curonian Lagoon. The beginning of the route the northern side

Kiauls Nugara island, where parking plot of the FSRU is assigned. The LNG terminals pipelinconnection to the gas transmission grid will be near Daupar village, at the gas distribution statioDSS2 operated by Lietuvos Dujos. Diameter of the planned pipeline is 700 mm, capacity 11 mln. mper day, allowing the maximum capacity utilization of the LNG terminal.

In May 2012 LNG terminal pipeline front-end engineering design was prepared. In July 2012 LNterminal pipeline design and construction tender was launched. The tender winner was announced o21 December 2012a consortium between Kauno Dujotiekio Statyba and iauli dujotiekio statyba.


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Capacity of the LNG terminal

Capacity demand depends on three main criteria:

General countrys gas demand;

The needs of the most sensitive natural gas consumers;

Constraints of Lithuanian natural gas infrastructure (capacity of gas-mains).

Total demand for natural gas

Lithuania has a number of key gas-consuming sectors: households, energy, industry, and other. Most the natural gas is used in thermal energy production (from 0,5 to 2,2 bcm per year) and the industry thuses natural gas as a raw material, which has a continuous, low seasonal gas flow (about 0.71.5 bcper year).

Total demand of Lithuanias natural gas makes up around 3 bcm/year. Large and unique user, usinnatural gas for raw material needs, is SC Achema which consumes up to one third of the total countryamount.

Source:Department of Statistics

Ensuring of the first necessity supplyThe primary goal of the LNG terminal is to ensure the first necessity supply of natural gas tconsumers, i.e. public and domestic users, production of heat and industry, which must be ensureuninterrupted gas supply.

Consumers of the first necessity consume an average from 0.9 to 1.5 bcm per year. Monthconsumption varies greatly during the cold season consumption may be five times more than summer. The diagrams below show that Lithuanias natural gas consumption is characterized as higseasonality, especially excluding SC Achema (in Lithuania the highest recorded daily consumption onatural gas 18.2 bcm, i.e. instantaneous equivalent of almost 7 bcm per year of consumed gquantity).


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Source:Department of Statistics

LNG terminal will ensure that during the coldest winter the first necessity needs of consumers will bmet even in the disruption of supply from Russia.

Constraints of natural gas infrastructureLithuanian natural gas transmission infrastructure is adapted to supply gas in the east-west directio(through Belarus system of gas-mains), so without increasing the current capacity of the pipelines, thmaximum capacity to supply gas from the LNG terminal will reach around 2 bcm per year, because thsystem of gas-main is not sufficiently developed. Upgrading pipeline branch Klaipda-Kurnaiin thnorth, it would be possible to use the maximum capacity of the LNG terminal (up to 4 bcm per year).

Source: SAIC

Taking into account the above reviewed criteria, during the medium term 2 bcm capacity of the LNterminal per annum will ensure natural gas supply of the first necessity.


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2

LNG terminal and marketing business model

Business model of the LNG terminal

LNG terminal project is scheduled for completion on December 2014. Implementing the project, twindependent activities will be created:

1. LNG terminala part of gas supply infrastructure system, after the Project is implementewill be passed to the State-controlled transmission system operator;

2. LNG import and tradea share of gas trading and supply market remains to Klaipdos Naft

The basic functions of the LNG terminal:3. LNG storage, regasification and gas supply to the countrys gas-main networks;4.

Other services of the terminal: LNG fuel supply to small consumers (ship fuel, reserve fuel foboilers, small power plants).

The LNG terminal facility will complement and enrich the countrys current natural gas suppinfrastructure, creating opportunities for diversification of supply, reducing dependence on a singexternal supplier of natural gas, increasing the security of gas supply and fulfilling the EU directive N1 standard of infrastructure (assumptions for Lithuaniasself-sufficiency are dependant on natural grequired to meet the demand of the first need).

Natural gas suppliers in Lithuania will be able to get the best price by comparing prices in thinternational gas markets and OAO Gazprom prices.


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2

Figure No. 7a. Business model of the LNG terminal

For effective performance management and transparency of processes, activities are intended to bseparated. The above diagram illustrates the LNG terminal and the volume of trading activities anrelationships in between them.

LNG terminal operating costs are to be included in the gas transmission tariff. According to 20consumption volumes divided by the terminal operating costs would result in around 5 ct/m3additioncost for gas consumers. After 10 years, the terminal costs would fall 50 percent due to the repaifinancial obligations associated with financing of the project.

LNG import and marketing business model

For effective performance management and transparency of processes LNG import and trading activiwas separated from Klaipdos Nafta on 17 December 2012 by establishing a subsidiary LITGAS UABThe subsidiary will lease the LNG terminal infrastructure and will import LNG to the Lithuania

market and, if needed, to the bordering markets.

Taking into account the Lithuanian natural gas sector needs, a trade enterprise shall have the followinobjectives:

to reduce natural gas prices in Lithuania, participating in the international LNG markets;

ensure access for the Lithuanian gas customers to world markets and availability of short-terand long-term gas supply contracts without linking prices to oil product indexes.


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2

Figure No. 7b. Import and trade enterprise business model of the LNG terminal

LNG supply assurance

Only real import of LNG natural gas through the LNG terminal will create competitive conditions forOAO Gazprom to reduce the price for supplied natural gas to the Republic of Lithuania, or at least notto increase it. LNG supply model directly depends on the Company achieving its objectives:

Free capacities of the LNG terminal would be used for trade in the spot markets at an attractivLNG price and needs of natural gas customers. The LNG terminal will balance regasificatioquantities to customers through the use of Latvian Inukalns underground gas storagcapacities;

Having more favorable LNG prices that are lower than the Governmentsestablished price cain accordance with requirements of the 25 percent rule, LNG terminal would supply (compliance with the short or long term contracts) 0.60.7 bcm of LNG for the Lithuaniaconsumers.

25 percent rule

Currently, Lithuania does not have a natural gas market. Gas is bought from one supplier with fixeterms and pricing. Natural gas supply contracts are concluded exclusively for long-term in such wabinding to the sole external supplier without leaving any options for an alternative. Therefore:

as LNG infrastructure is created, it is also necessary to create regulatory environment thallows access to the global natural gas market opportunities;

to promote the efficient competitiveness of natural gas supply sources and to ensure LNterminals activity (i.e., LNG terminal technological capacity needed to continuously aneffectively meet the country's natural gas demand), imported natural gas quantity through thLNG terminal must be at least 25 percent of total consumption of natural gas in the Republic oLithuania per year;

the 25 percent rule, in order to ensure competitive equality, will be applied equally both to thgas, supplied through the LNG terminal and through the pipelines;


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25 percent rule shall prevent the current monopolist from concluding long-term contracts wisuppliers and delaying of gas market introduction into the country;

in order to protect the interests of gas consumers in Lithuania, the Government of the Republof Lithuania established a price cap of through the LNG terminal and pipelines imported and

the internal market of Republic of Lithuania consumed natural gas; when suppliers will get used to the new opportunities opened by LNG terminal and gas mark

is fully developed, the 25 percent rule will be withdrawn.

Currently Gazprom supplies all Lithuanian consumers with natural gas and in many cases has a longterm gas supply contracts. The largest gas user SC Achema has entered into a direct long-term contrawith OAO Gazprom. In order to maintain influence in the Lithuanian market, OAO Gazprom in thshort term can provide attractive offers to the major customers, and thereby prevent the LNG terminfrom entering the market.

Temporary mandatory 25 percent natural gas supply regulation through the LNG terminal (according25 percent binding supply mechanism would be also for the gas supplied through pipelines) would buseful to prevent OAO Gazprom from concluding long-term contracts with suppliers, thus, eliminatinany opportunity of LNG introduction to the Lithuanian natural gas market. This would alloconsumers to have access to the LNG markets, choosing their own long-term or short-term contractwhen it is beneficial. So, over time, when the Lithuanian consumers gain the experience to work wiLNG market opportunities and after the intensification of gas market relations, 25 percent temporarule will be withdrawn.

So, in order to ensure real alternative to natural gas supply, the Government of the Republic Lithuania on 29 February 2012 adopted a resolution no. 219 which approved minimal import quothrough LNG terminal of 25 percent from volume of annual domestic natural gas consumption f

natural gas suppliers in Lithuania.

On 12 June 2012 the Parliament of Lithuania adopted LNG Law. It states the general principles anrequirements for construction of LNG terminal in the territory of the Republic of Lithuania. Iactivities and operation are set forth at the highest legal level, as well as legal, financial anorganizational conditions for implementation of LNG terminal project have been created..

Business regulation

As well as infrastructure activities, LNG import and trading activities would be regulated by lawGovernment or, on behalf of it, the National Price and Energy Control Commission (NPECC) wou

determine a price cap. It would apply to through the LNG terminal imported and in the Lithuaniadomestic market consumed natural gas amount which must represent at least 25 percent of the totconsumption in the Republic of Lithuania per year. The controlling authority must also approve termand conditions for calculation and estimation of of the natural gas price cap.

When determining through the LNG terminal imported natural gas price cap, The Government of thRepublic of Lithuania will evaluate the optimal variant for the Republic of Lithuania, which wouresult in maximum benefit to the State and natural gas consumers.


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Project organization

The Government of the Republic of Lithuania on 21 July 2010 by Resolution No. 1097 approved thKlaipdos Nafta can begin development of the project of liquefied natural gas terminal. Klaipdos nafwas assigned due to the companys financial capacity to complete the preparatory works of the projeand the possibility of using the experience gained in managing the oil terminal in Klaipda.

Klaipdos Nafta is responsible for both infrastructure development for LNG as well as import and tradbusiness establishment.

It is planned to transfer LNG terminal activities with the assets, rights and obligations to the Statcontrolled gas transmission system operator. Klaipdos nafta could further develop LNG natural g

import and trading activities.

Figure No. 8. Project development scheme

Besides implementation of the LNG terminal project the Company was entrusted with total projecoordination including work coordination delegated to other bodies, which also includes KSSA.


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Implementation plan of the LNG terminal

Preparatory works of the LNG terminal:

On 30 June 2011 an agreement was signed with a leading adviser Fluor, which is involved the overall project implementation and will provide technical-engineering services, permprocurement assurance services, project implementation and management services; LNmarket and supply, business and financial advisory services.

The project was structured, concept of the project was prepared and key parameters wervalidated.

On 16 December 2011 assessment reports of the development plan and strategic environmentimpact assessment (SEIA) were prepared and approved. These confirm that the LNG terminproject complies with the provisions of National Energy Strategy. Performed SEIA confirmthat the project is feasible to implement in Klaipda Seaport.

Strategy of LNG supply and natural gas sale was prepared and presented. Study of navigation and mooring of FSRU and LNG carrier was completed.

List of key tasks completed related to LNG terminal:

26 April 2012 Marine and Pipeline FEED completed.

May-September

2012

Navigational analysis of LNG ships was completed and navigationalparameters of LNG ships in Klaipeda Port were determined, on the basis ofwhich Klaipeda State Seaport Authority shall execute amendments ofNavigation rules.

May 2012 LNG terminal project business plan was presented.

12 June 2012 Law on Liquefied Natural Gas Terminal was enacted by the Parlament.

JuneAugust 2012 Geological investigation for construction of LNG jetty and pipeline in thePort.

3 July 2012 Procurement for Natural Gas Pipeline System Engineering, Procurementand Construction (EPC) works was announced. On 21 December 2012 thewinner of the tender was announced.

5 July 2012 Signed a General Bilateral Cooperation agreement with Klaipeda StateSeaport Authority on construction of jetty of LNG terminal and dredgingworks of Port water area.

14 August 2012 AB Klaipdos nafta and Klaipeda State Seaport Authority signed anadditional agreement to General Bilateral Agreement on rules andconditions of investment and compensation of investement.


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24 August 2012 Procurement of LNG terminal project port Infrastructure (jetty) withsuprastructure (equipment) engineering and construction works wasannounced. On 10 December 2012 initial tender offers were received and

negotiations with tender participans started.

12 September 2012 A request was submitted to the Ministry of Energy of the Republic ofLithuania to address the Ministry of Finances of the Republic of Lithuaniato include a State guarantee limit of LTL 200 million, intended for securityof loans for investment into LNG terminal infrastructure, into the Statebudget of 2013. On 20 December 2012 the Law of Approval of FinancialIndicators of State Budget and Municipalities Budget was adopted whichincluded the requested State guarantee limit.

September 2012 Land property for construction of gas metering station (GMS) waspurchased.

October 2012 LNG terminal Safety Report, version 1, was prepared which will besupplemented with solutions of basic design and will be submitted toauthorities for approval.

12 October 2012 Klaipeda State Seaport Authority announced procurement of port dredgingworks. On 21 December 2012 final tender offers were received.

22 October 2012 Regional Environmental Protection Department of Klaipda by theMinistry of Environment of the Republic of Lithuania has granteddevelopment consent on construction and activities of LNG terminal and

Related Objects of Infrastructure in the southern part of Klaipda StateSeaport nearby Pigs back Island. The consent finalised the procedure ofenvironmental impact assessment on LNG terminal project.

October 2012 AB Klaipdos nafta and AB Lietuvos dujos signed an agreement oninstallation of tie-in point for connection of LNG terminal to transmissiongrid.

November 2012 Main terms and conditions for connection of LNG terminal to transmissiongrid of AB Lietuvos dujos were approved.

9 November 2012 Procurement of Overdraft facilities was announced. On 21 December 2012initial tender offers were received.

9 November 2012 Procurement of financial services (long term loan and performanceguarantee) was announced. On 13 December 2012 applications of thesuppliers were received.

23 November 2012 Following the order of the European Commission, analysis of LNG supply


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to the Baltic region was prepared. It indicated that Lithuania selected thebest technological solution which corresponds to regional LNG terminalparameters with the lowest costs of the terminal construction and operation,in comparison to potential terminals of Latvia, Estonia and Finland.

December 2012 Concept of special plan of LNG terminal construction and SEIA wasapproved.

December 2012 Process of detailed planning regarding land property for GMS was started.

December 2012 A feasibility study was completed titled Analysis of quality changes ofnatural gas and estimation of suitable parameters for consumers intransmission system operated by SC Lietuvos Dujos.

17 December 2012 Established and registered a new subsidiary LITGAS UAB, which willengage in trade of LNG and supply of natural gas.

19 December 2012 Comfort letter regarding LNG terminal project was signed by the Ministerof Energy.

Planned LNG terminal works for 2013-2014:

To complete process of territory planning for LNG terminal infrastructure (special pladetailed plan and land servitudes)3rd quarter 2013;

To finalize negotiations with LNG suppliers and to sign long-term LNG supply agreement - 1quarter 2013;

To sign LNG sale agreements and to ensure sales of purchased LNG, in compliance with Rulfor Diversification of the Natural Gas Supply1st and 2nd quarters 2013;

Permission for construction works and approval for basic and detail designs of LNG terminpipeline and jetty3rd quarter 2013;

To start preparatory construction works and to start construction of LNG terminal jetty anpipeline3rd quarter 2013;

To complete construction of LNG terminal infrastructure3rd quarter 2014;

Arrival of FSRU, connection to gas pipeline and preparation for operation4th quarter 2014;

Commissioning and start-up works in Klaipda Seaport3rd quarter 2014;

To start LNG terminal operation in December 2014.


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Figure No. 9. LNG terminal project implementation plan

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

FSRU

Jetty

Gas pipelines

Gas trading

FSRU lease

agreement

Legal environmentassurance

2011 2012 2013 2014 2015

LNG Terminalaunch

Finished In progress

Performed by third

parties

Construction of FSRU and delivery to the Port of Klaipda

Design and connection LNG Terminal to

the gas grid (EPC)

Construction of gas main Jurbarkas Klaipda

by Lietuvos dujos

Design and onstruction of jetty (EPC)

by Port of Klaipda and Klaipdos nafta

Port dredging by Port of Klaipda

Arrangement of LNG supply Testing and

commission-

ing works

Environmental Impact

Assessment (EIA)

Law on LNG

Terminal

Territory planning andconstruction permit

Pre-project study

Preparation of Project financing

structure and loan procurement

Process items

Project financing

Jetty EPC

tender

Pre-project studyPipeline EPC

tender

State

guarantee

Arrangement of NG

sales

Rules on gas

supply

diversification

List of major legal acts governing the LNG terminal:

Date Legal Act Impact on LNGT project

15 February

2012

Resolution by the Government of theRepublic of Lithuania On Construction ofLiquefied Natural Gas Terminal (StateGazette, 2012, No 25-1166, No 83-4387)

The Government approved thatKlaipdosNafta would continue theimplementation of the LNG terminalproject in the Republic of Lithuania.

29 February

2012

Resolution by the Government of theRepublic of Lithuania On Ensurance ofObligatory Activity of Liquefied NaturalGas Terminal (State Gazette, 2012, No 29-1297).

The Government approved minimalimport quota through LNG terminalof 25 percent from volume of annualdomestic natural gas consumptionfor natural gas suppliers inLithuania.

26 June 2012 Resolution by the Parliament of theRepublic of Lithuania On Adoption of theNational Energy Independence Strategy(State Gazette, 2012, No 80-4149).

LNG terminal project is the strategicpriority project intended to ensurestability and diversification ofnatural gas supply, to reduce natural


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Date Legal Act Impact on LNGT project

gas prices, and to create natural gasmarket.

12 June 2012 Law on Liquefied Natural Gas Terminal

(State Gazette, 2012, No 68-3467).

General principles and requirements

for construction of LNG terminal inthe territory of the Republic ofLithuania, its activities andoperation are set forth at the highestlegal level, as well as legal, financialand organizational conditions forimplementation of LNG terminalproject have been created.

16 October

2012

Resolution by the Government of theRepublic of Lithuania On Adoption of theProcedure for Procurement of Liquefied

Natural Gas Delivered to the LiquefiedNatural Gas Terminal (State Gazette, 2012,No 122-6151).

Obligatory requirements applied toprocurement of LNG which isdelivered to LNG terminal. General

requirements of public procurementare not applied to LNGprocurement.

22 October

2012

Resolution by Klaipeda RegionEnvironmental Protection Department of theMinistry of Environment of the Republic ofLithuania No (4)-LV4-3270.

Resolution granted consent onconstruction and activities of LNGImport Terminal and relatedinfrastructure.

7 November

2012

Resolution by the Government of theRepublic of Lithuania On Approval of theRules of Diversification of the Natural GasSupply (State Gazette, 2012, No 132-

6708).

Procedures were set onimplementation of rules ofdiversification of syupply of naturalgas imported and consumed in

internal market of the Republic ofLithuania, including requirementsfor practical implementation of 25percent rule (obligatory requirementfor natural gas suppliers to ensureimport of natural gas through LNGterminal).

6 November

2012

Amendments by the Parliament of theRepublic of Lithuania on Forest Law No I-671

Amendments allow changing landuse purpose from forest land intoland of other usage, when it is setforth in special plans of projects of

extraordinary state importance.


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Changes of regulatory environment during the project implementation:

Date Legal Act Impact on LNGT Project

28

September

2012

Resolution by The National ControlCommission for Prices and Energy (NCC)

on Amendment of methodology forcalculation of cap prices for transmissionand distribution of natural gas(State Gazette, 2012, No 115-5856).

NCC approved calculationmethodology and inclusion of costs

of construction of LNG terminalinto the price (tariff) of transmissionof natural gas in the form of LNGterminal premium.

9 October

2012

Resolution by the NCC On Adoption ofRules on Administration of the FundsAllocated for Full or Partial Compensationof Costs of Construction and Operation ofthe Liquefied Natural Gas Terminal (StateGazette, 2012, No 118-5973).

NCC determined rules ofadministration of the funds collectedthrough natural gas transmissiontariff and required for compensationof costs of construction andoperation of the LNG terminal.

19 October

2012

Resolution by the NCC On Approval of the

Funds for the Year 2013 for Full or PartialCompensation of Costs of Construction andOperation of the LNG Terminal (StateGazette, 2012, No 123-6229).

NCC decided to compensate part of

costs of construction of LNGterminal for 2013 equal to LTL113,798. This amount will beincluded into price of natural gastransmission service as LNGterminal premium.

26 October

2012

Resolution by the NCC On Correction ofthe Cap Prices for Transmission andDistribution of Natural Gas by LietuvosDujos AB and Approval of theSupplementary and Integral Constituent

(Costs for the LNG Terminal) in the CapPrice for Transmission of Natural Gas forthe Year 2013 (State Gazette, 2012, No126-6375).

NCC approved LNG terminalpremiumsupplementary andintegral constituent in the cap priceof transmission of natural gas, forcompensation of costs of LNG

terminal construction in 2013 whichamounts to LTL 37.53 for 1000 m3(excl. VAT).

21 December

2012

Resolution by the NCC On Approval ofRequirements for Rules of Use of the LNGterminal (State Gazette, 2012, No 154-7972).

NCC approved requirements forrules of use of LNG terminal.Klaipdos Nafta has prepared andapproved these rules on 31 January2013.


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Project funding

Need of funds for start-up of the LNG terminal business

During the project implementation, the largest investments are as follows:

Lease (acquisition) of the floating LNG storage with a regasification facility;

Harbor dredging, jetty construction and preparation of jetty facilities;

Construction of the pipeline linking the terminal with the gas-main;

Preparatory design, obtaining permits, project management and other work

Total investment demand before the start-up of the LNG terminal is about LTL 613 million..

FSRUwith a regasification facility is the largest investment of the project. It will be leased, eliminatinthe need for additional funds from financial institutions or the State budget. According to thagreement, the lessor of FSRU will take on infrastructure operations risks and provide supervisioservices. This is especially important for Lithuania, which does not have that type of equipmemaintenance experience..

Below is a comparison of contract terms of similar transactions concluded in recent years.


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Figure No. 11. Prices for a lease of FSRUs on the market

Until the start-up of the LNG terminal at the end of 2014, Klaipdos Nafta will perform preparatoworks: project organization and obtaining the necessary permits, LNG terminal connection with thgas-main, construction of jetty facilities and start-up works (total LTL 453 million). Start-up workinclude testing of LNG terminal infrastructure which will require first supply of LNG amounting LTL 120 million. Most likely part of costs will be recovered on sale of used LNG, however fopurposes of simplification, it is assumed no costs will be recovered.

Table No. 4. Klaipdos nafta investments for the LNG terminal project

Klaipdos Nafta investments*, LTL million 2012 2013 2014 Total

1. Project management and infrastructure testing (incl. costof LNG for testing purposes)

30 78 116 224

2. LNG terminal gas pipeline and gas metering stationdesign and construction

- 53 88 141

3. LNG terminal jetty suprastructure design and construction - 29 59 88

Total: 30 160 263 453

Source: project FEED prepared by the lead advisor Fluor

Jetty infrastructure construction and harbor dredging works are entrusted1 to Klaipda State SeapoAuthority, which is required to adapt existing and build new infrastructure objects in Klaipda harbo(total funds needed LTL 160 million). KSSA will finance their investments from own and borrowfunds.

12012-02-15 Resolution of The Government of Lithuania on LNG Terminal Construction


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Financing capability of the LNG terminal by Klaipdos nafta

In order to compensate the said investments, the Company is going to raise funds from the followinsources:

a)

about LTL 250 million would be funds borrowed from Lithuanian and/or international financiinstitutions (international financial institutions require State guarantee);

b) about LTL 200 million would be natural gas consumers funds, i.e. revenue from the additionand integral component to the upper limit of the natural gas transmission price (the LNterminal extra) in 2013 and in 2014 (the LNG terminal extra funds collected from gtransmission tariff in 2013 would amount to LTL 113,798 thousand).

The National Control Commission for Prices and Energy (hereinafter, the Commission, NPECC) its meeting of 19 October 2012 approved a draft of the investments planned by the Company into thliquefied natural gas terminal, installation of its infrastructure and connection. Preliminarily, by 201these investments will amount to approximately LTL 453 million.

The Company will also secure LTL 120 million overdraft facility for cashflow management purposuntil long-term financing is secured in relation to the fact that cash inflow from LNG terminal premiuwill come after 5 months from the relative investment period.

Besides, the Company is going to address commercial banks for: (1) a bank guarantee2in the amount $ 50 million intended for securing the performance of the contract for the lease of the FSRU, (2) a banguarantee intended for securing the performance of the gas supply contract, (3) a bank loan intendefor formation of the working capital necessary for gas purchasing.

The financial resources of the Company during the project period could amount to about LTL 10million. The Company could allocate these funds towards financing the gas trading activities througLNG terminal.

Also, seeking to secure proper performance of possible financial obligations to financial institutionthe Company has submitted an application to the Ministry of Energy of the Republic of Lithuaniasking it to address the Ministry of Finance of the Republic of Lithuania for including a limit of Staguarantee intended for financing loans for investments into the LNG terminal infrastructure (LTL 20million), into the draft Law of the Republic of Lithuania on Approval of the Financial Indicators of thState Budget and Municipal Budgets for 2013. The requested limit was included into State Budget 2013.

The Company notes that all the data given in this notification are preliminary and planned, but not yfinal, and may change during the implementation of the project (if the project will be implementable).

2According to 2012-03-02 agreement between Klaipdos Nafta and Hoegh LNG on acquisition of LNG FSRU


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Table No. 5. LNG terminal project financing scheme

investment inWorking Capital

bank guarantee forgas supply

100m LTLKN cash

investment

credit facility from a

commercial bank

KN guarantee/ oilterminal assetsand cash flows

LNG Terminaltrade accountsreceivable and

inventories

Guarantees fromkey buyers

Guarantees fromexport credit

agencies


guarantees

Potentialresources

Collateral

guarantee from acommercial bank

$US 50 Mguarantee for theFSRU operating

lease

450m LTLInvestments in: Project

management

Gas pipelines Jetty facilities

200m LTLcompensation ofinvestments via

gas tariff

(FY2013-2014)

Approved.


guarantees

Potentialresources

Collateral

250m LTLLoan from aninstitutional

(NIB, EIB, EBRD)or commercial

bank(for 20-25 years)

LNG Terminal Infrastructure LNG Terminal Trading Activities

LNG Terminaltangible assets

200m LTL Stateguarantee

AB Klaipdos nafta (KN)

$US 50 Mcommercial bank

guarantee

Accountsreceivable from gastariff (from 2015)

Financing of the LNG terminal business (from 2015)

Selected purchase method of the Floating Storage and Reregasification Unit (FSRU) is an operatinlease agreement with a purchase option after 10 years (2025) to purchase for its residual value , set ithe time charterer party agreement.

FSRU operating lease costs and other fixed LNG terminal operation costs will be financed from thnatural gas tariff, controlled by the NPECC. The redemption amount of the FSRU will be financed bfinancial institutions as the LNG terminal operator would have an established track record of operatiowhich would allow borrowing the required amount by plegung the FSRU.


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Figure No. 12.LNG terminal income / expenses (mln. LTL)

LNG import and trade financing activities

The gas trading company and its profit will bee regulated by the State Price and Energy ContrCommission, setting fixed income margins. LNG supply revenues and expenses will directly depend oLNG import volume. The main financing need for the LNG trading company will be necessaguarantees to LNG suppliers as well as financing of working capital. It is planned that the LNG tradincompany will be able to pledge purchased LNG resources and accounts receivable from sales of LNto satisfy its financial needs.

LNG terminal income / expenses (mln. LTL) Income

RedeemedFSRU

CompletelyacquiredFSRU

Lease of FSRULease of servicing

Other costs (fuel, deterioration)

Operating costs of FSRU


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Cost and benefit analysis of the LNG

terminal


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Ensurance of alternative gas supply to Lithuania

Oil, oil products and natural gas in equal proportions amount to 70 percent of total primary energresources consumed in the country. Unfortunately, no alternative gas supply channel was establishover Lithuanias independence period. The oil terminal BtingsNafta is a very good example of hothe State can solve the supply security issue, and the relevance of the alternative source of supplwhen supply by the main channel is interrupted.

It is expected that natural gas at least 20 years will be among the main primary energy sources. In 202consumption of natural gas will amount to 1.63.7 billion cubic meters (furtherbcm) per year.

It is forecasted that to meet the demand of the first necessity in 2020 will require 0.91.5 bcm of ga

Demand of the first necessity involves supply of gas to domestic consumers, heat production, publinstitutions, and companies, for which loss of supply of gas would mean the suspension of activities.

The largest gas supplier in Lithuania is SC Lietuvos dujos which on 16 December 1999 entered into aagreement with OAO Gazprom valid until 31 December 2015 to supply natural gas to the Republic Lithuania. SC Lietuvos dujos sells natural gas to both domestic and non-household customers, anoccupies about 70 percent of retail gas market. The second largest supplier is JSC Dujotekana, whiccontrols the remaining 30 percent of gas supply market. It has signed a long-term gas supply contrawith OAO Gazprom until the end of 2012.

Source: Department of Statistics, LEI Source: Department of Statistics


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Ensuring competitive pricingLithuania is facing not only the natural gas supply problem in Lithuania imported natural gas pricare significantly higher than in neighboring EU countries. Lithuania, buying gas from a single extern

supplier and consuming just 0.6 percent of total gas extracted by OAO Gazprom, does not have serious negotiating position to reduce the price of gas. In 2012 imported natural gas prices comparewith the German gas import prices were on average 15 percent higher.

Figure No. 15 Gazprom prices at Lithuanian vs German boarder

Source:Regulator, Index Mundi

Theoretically, all the Baltic countries are subject to the same gas price formula, but Latvia and Estonihaving a stronger negotiating position with OAO Gazprom (Latvia concerning Inukalns UndergrounGas Storage, Estonia concerning the availability to use local fuel shale), have better natural gprices. Meanwhile Lithuania, in the absence of real alternatives, pays more than its neighbors.

When implementing LNG terminal project, the following objectives will be achieved:

Provided access to the international gas markets the opportunity to purchase natural gfor the best gas prices and to develop the gas exchange in Lithuania and the Baltic region;

Diversification of supply consumers would have the opportunity to purchase natural g

from several alternative sources. The lack of alternative supply sources and natural gas prilinking to oil or oil products prices results in higher prices than gas prices linked to gas indexeA map of of gas prices in Europe is provided below for comparison.


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Figure No. 16. Average wholesale gas prices (H1 2012)

Source:DG Ener


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Benefits of the LNG terminal

Benefits of the LNG terminal for the State

Economic

The biggest economic benefit of the LNG terminal for the State is expected to be lower natural gprices for the Lithuanian people and companies. The LNG terminal can ensure a lower price in twways: direct import of cheaper natural gas, or acting as a negotiating leverage to lower the Russianatural gas prices. Evaluation of the actual LNG prices for 2012, the LNG terminal benefits Lithuania would reach 0.4 bn. LTL per year.To assess the economic benefits of the LNG terminal, two scenarios of natural gas supply through thLNG terminal are compared:

1. In Lithuania LNG terminal law will be governing the mandatory use of alternative gas suppup to 25 percent of the general national gas consumption. Adjustable minimum quantity

LNG import would consist of up to 25 percent of the general national gas consumption Lithuania. LNG price used for comparison is 2012 average NBP (National Balancing PoinUK) index price.

2. According to the planned 2014 gas grid infrastructure, the LNG terminal could supply 6 mlm3per day, which is theoretically up to 2 bcm per year (2/3 of the total demand of natural gas Lithuania).

Calculated financial results of the possible scenarios:A. Terminal operates at a minimum mode (25 percent = 0.75 bcm):

1. 25 percent of natural gas is imported through the LNG terminal at NBP prices;2. 75 percent of natural gas is imported from Russia under the existing supply contract prices

Economic benefits150 mln. LTL/year.

Figure No. 17. Economic benefits of the LNG terminal,annual capacity 0,75 bcm/yearLithuanian

consumption

(bcm)

Russian gas

price 2012

average

(LTL/1000 m3)

LNG price* with

transportation

and LNG

terminal costs

(LTL/1000 m3)

Lithuanian

expenditures

on gas

(bn. LTL)



Alternative

By OAO Gazprom imported gas 2,25 1329 2,99Imported LNG gas 0,75 1130 0,85

Total 3,0 3,84

Ekonomic benefits (bn. LTL) 0,15

*(2012 average NBP + plus transportation costs)


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A. Terminal operates at a maximum mode within the existing gas network capacity (~2 bcm):

1. 2/3 of natural gas is imported through the LNG terminal at NBP prices;2. 1/3 of natural gas is imported from Russia under the existing supply contract prices

Economic benefits400 mln. LTL/year.

Figure No. 18. Economic benefits of LNG terminal, annual capacity about 2 bcm/year

*(2012 average NBP + plus transportation costs)

Figure No. 19. Potential economic benefits of the LNG terminal due to decreased prices for gas

Variable costs of LNG terminal mainly consist of LNG fuel used to produce liquefied natural gtransforming them into the gaseous form (in the reregasification process).

In addition, about 1020 percent (60120 mln. LTL) of LNG project will be carried out by thLithuanian contractors and project-related service providers, which will boost the growth of thLithuanian economy.

Lithuanian

consumption

(bcm)

Russian gas

price 2012

average

(LTL/1000 m3)

LNG price* with

transportation

and LNG

terminal costs

(LTL/1000 m3)

Lithuanian

expenditures

on gas

(bn. LTL)



Alternative

By OAO Gazprom imported gas 1,0 1329 1,33Imported LNG gas 2,0 1130 2,26

Total 3,0 3,59

Ekonomic benefits (bn. Lt) 0,40


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Ensurance of natural gas supply securityThe project of the LNG terminal will help to solve historically unfolding problem of Lithuaniadependance from a single source of gas supply from Russia, (gas supplied from the only gas-mai

which passes through Belarus). In case of disruption of one of the natural gas supply sourc(analogous to the oil supply from pipeline Druzhba and Btingsoil terminal model), Lithuania whave access to natural gas through an alternative natural gas source in the country and ensure istability for the industry.

Social benefitsImplementation of project of the LNG terminal, will create a direct benefit to the city of Klaipeda: thintroduction of further 50100 work places in construction and during operation of the LNG terminal.

Benefits of the LNG terminal to consumers of natural gas

The LNG terminal will allow Lithuania to participate in global natural gas markets. In recent years, thrapidly growing volume of LNG supply, LNG prices in the international exchanges are more attractivthan those provided in long-term supply contracts of OAO Gazprom. The ability to gain gas in thinternational gas exchanges would reduce the cost of gas for consumers in Lithuania.

Lithuanias prices for natural gas purchased from OAO Gazprom are derived from the price formularelated to oil products, so the price of gas purchased directly correlates with global oil prices and constantly rising.

The natural gas pricing model has been used in Europe in 19802005, when the market was dominateby long-term gas supply contracts (twenty years or more) and almost no alternatives were present.

addition, until 2002 oil prices were relatively stable (compared to the period after 2002). It met both thnatural gas suppliers, as well as natural gas consumers.

Due to the rising prices of oil and oil products, gas delivered under long-term oil-related contracbecame uncompetitive in the market, which appeared as an alternative supply of natural gas in the LNform. Over the past 5 years LNG global trade has increased by about two-times.

Along with LNG, development of natural gas spot market transactions began to take shape in thsector. Spot pricing models were developed according to demand-supply principle when price is set the short period under the prevailing market prices.

During the past decade, natural gas exchanges were formed (NBP, TTF, Zeebrugge, Henry Hubwhich trade both in LNG and piped gas, and they have formed significantly lower natural gas pricthan piped natural gas prices.


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Picture No. 20. Prices of import and gas markets indexes (2010-2012 LTL/1000 m3)

Source: Index Mundi, gas markets

Further growth in crude oil and oil product prices, according to the pricing principles applied by OAGazprom, in natural gas valuation (i.e. linking with the prices of oil products) is not cost-effectivalternative to Lithuania.

Henry Hub is the index of natural gas trading in the USA. Discovery of shale gas resources antechnology of their extraction reduced natural gas prices in the USA, as shown in the picture abovUSA is implementing LNG terminal construction projects which will allow it to export liquefienatural gas to Europe and other continents.

If it would be possibile to buy gas from Great Britain (NBP index), Netherlands (TTF) or USA (HenHub) markets, or buy long-term contracts, where natural gas price is linked to the stock exchangprices, natural gas prices in Lithuania could fall by 20 percent or more.

Figure No. 21. Tentative price of gas import

Source: Index Mundi, gas markets


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LNG terminal benefits to the company implementing the project

The Government of the Republic of Lithuania on 21 July 2010 by Resolution No. 1097 on the NaturGas Terminal Development agreed that the company Klaipdosnafta will begin to develop liquefinatural gas terminal project. Klaipdos nafta, implementing the LNG terminal project receives:

the possibility to diversify activities;

by investing in profitable project, ensure long-term returns to shareholders.

LNG terminal project is recognized as important to the State and thus it facilitates the development the project:

The National energy strategy approved by the Seimas of the Republic of Lithuania on 26 Jun2012 Resolution No. XI-2133 and on 18 January 2007 Resolution No. X-1046.

On 25 February 2009 LNG terminal project approved by the Government in the Programme fo20082012.

On 23 June 2010 an interdepartmental working group was established, which drew up proposafor the LNG terminal construction site, technology, and possible funding solutions.

On 21 July 2010 the Government of Lithuania adopted resolution on LNG Terminal ProjectDevelopment which states that KlaipdosNafta will start implementing LNG terminal project.

General Meeting of of Shareholders of Klaipdos nafta (72.32 percent of the Company sharare owned by the Lithuanian Ministry of Energy) on 26 August 2010 agreed to carry oupreparatory work on the project and implement an investment project for construction of thLNG terminal.

On 11 May 2011 interdepartmental government commission was established headed by thPrime Minister for the LNG terminal project implementation supervision.

By the Government Resolution No. 871 of 13 July 2011, LNG terminal project is recognized aa major economic project of the State.

The Government of the Republic of Lithuania adopted Resolution No. 175 of 7 February 201on the Government of the Republic of Lithuania on 27 December 2007 No. 1442 Resolution the National Energy Strategy Implementation Plan for 20082012 supplement, by whicliquefied natural gas (furtherLNG) terminal project has been included in the National EnergStrategy Implementation Plan of 20082012 and further to be approved for 2012-2016.

The Government of the Republic of Lithuania adopted Resolution Nr. 199 on 15 February 20on Liquefied Natural Gas Terminal Construction supporing the Company plans to continuLNG terminal project. The Government Resolution instructed the Ministry of Energy to initiathe General Meeting of Shareholders for amendment of the Companys Articles of Associatiothat one of the Companys objectives would be the LNG terminal construction ancommissioning, cost effective and efficient operation of the LNG terminal and (or) isubsequent transfer to the Republic of Lithuania controlled natural gas transmission systeoperator.

Law on Liquefied Natural Gas terminal of the Republic of Lithuania approved on 12 June 201No XI-2053.


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On 26 June 2012 the Parliament of the Republic of Lithuania passed resolution on Adoption the National Energy Independence Strategy which sets main Lithuanian energy sector aims antheir implementation measures until 2020 as well as development guidelines until 2030 an2050. LNG terminal project was established as the strategic priority project intended to ensu

stability and diversification of natural gas supply and to reduce natural gas prices as well create natural gas market.

LNG terminal and LNG supply activity will be regulated by the State, so the Company will be providwith a stable income.

LNG supply market review

Natural gas currently is the fastest-developing energy resource. Natural gas demand growth determined by several factors. First, natural gas is friendlier to environment fuel than oil. Seconnatural gas supply is more stable. Third, the application of natural gas liquefaction technology h

become economically attractive for transportation of natural gas from regions where huge gas reservwere discovered and export of which has not been implemented due to lack of pipeline infrastructure,

During the past five years, global LNG trade increased about two times, significantly increasinnumber of market participants, LNG trading is carried out around the world. Top LNG gas demand in Asia-Pacific Ocean region, where it is consumed about 60 percent of all produced LNG (2010). Thlargest LNG exporterQatar, in 2010 exported about 79 bcm of LNG.

Source:EconGas

Because of its advantages (fast, flexible, independent from the surrounding countries), LNG import anexport infrastructure is being developed rapidly. Currently, around the world, more than 46 export an45 import terminal projects are being carried out. As a result, the LNG market continues to grorapidly.

Meanwhile, ground pipeline projects while in development, are mostly in internal markets. Crosborder gas pipeline projects are often subject to political risks and are usualy delayed (i.e. NabuccSouth Stream).

Fi ure No. 22. Chan es in LNG flow


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Supply-demand balance

Currently LNG demand exceeds supply. This was mostly influenced by the increased flows to Asicaused by several factors: the natural gas consumption growth in the Indian and Chinese markets (themarkets are limited in the gas pipeline infrastructure), Japans fuel balance changes after the incident Fukushima (closed nuclear power plants, nuclear energy was replaced by natural gas). CurrentlJapans consumption consists of over 40 percent of all Asia LNG demand.

However, the situation will return to normal after new gas liquefaction terminals are built:

It is planned that in 2015 Australian export capacity will exceed 80 bcm. Australia will be abto meet growing Asian demand and LNG supply trends will be redistributed positively to thEuropean region.

Due to effective shale gas extraction technology USA is planning to replace existing impo

terminals with export. USA is planning that terminal capacity will exceed 100 bcm. This changwill have a direct impact on trade in the Atlantic basin and is likely to reduce LNG priceCurrently, USA prices (Henry Hub) are the lowest LNG prices in the world.

In the 510 year term, new gas liquefaction terminals are planned in Africa, Canada, USA anRussia. After the launch of all planned gas liquefaction terminals, LNG supply will jump to 53bcm/year (from the current 251 (88 percent).

Therefore, long-term projections indicate that supply will exceed demand and may reduce the prices LNG.

Figure No. 23. Projection of natural gas distributrion for 20122020 years

Source:Poten&Partners


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LNG pricing

LNG global market pricing system is not uniform. LNG prices reflect the countrys consumerregional market situation. In the Atlantic, Caribbean and European markets LNG price is usual

associated with the Brent oil price or partly with oil products (gasoline, fuel oil) prices. In recent yearmore often contracts of natural gas supply are concluded applying price formula linked to the gindexes.

Figure 24. Differences in the LNG prices according to the region

Source:FERC, Regulator

The gas indexes are formed in the gas exchange centers (hub). The main gas exchange centers, whiccould be used to link gas supply price for Lithuania:

NBP (National Balancing Point called)Great Britain

TTF (Title Transfer Facility)Netherlands

HH (Henry HubUSA)

An important factor is transportation costs in the LNG supply price formula. Depending on the countror transshipment terminal, from which LNG is supplied, transportation costs can vary up to two times


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Table No. 6. LNG transportation costs, LTL/1000 m3

LTL/1000

Central AsiaNorth

AmerivaNigeria

The Fsr

EastTrinidad

North Eats

AsiaAustralia

North

Europe

Greece (Revithoussa) 149 51 155 224 158 310 239 133

Italy (Rovigo) 170 56 161 245 163 331 259 139

Spain(Huelva) 192 26 111 268 112 354 285 89

Portugal (Sines) 196 29 111 272 110 359 289 85

Holland (Roterdamas) 227 59 141 302 131 392 321 54

Belgium (Zeebruge) 227 59 141 302 131 392 321 54

France (Montoir) 217 50 131 293 123 380 308 69

Great Britain(Isle of Grain) 227 59 140 302 130 391 321 54

USA (Cove Point) 291 122 166 368 69 456 383 127

USA (Sabine Pass) 330 158 192 378 78 537 487 173

Transportation cost

Source:Icis Heren

LNG use for ship fuel (bunkering)the additional activity

Starting from 2015 due to stricter environmental requirements, ships in the Baltic and North Seas havto use low sulfur fuel. One of the alternative fuel will be LNG containing no sulfur combinationEstablishing LNG terminal bunkering business is considered a commercially attractive actividesigned to ensure a stable income.

Guiding principles of bunkering: LNG terminal in Klaipda harbor fills up smaller bunkering vesse(size up to 20,000 m3), which can fill a ship with LNG fuel and service smaller LNG terminals in thBaltic countries.

Starting from 2015 in Klaipda harbor ships could be offered a supply of 66,000 tons of sulfur free fua year, which amounts to 140,000 m3of LNG that would increase the utilisation of the LNG terminabout 10 percent.

Small LNG tanks can be installed near ports or electric or gas distribution stations. Such LNcontainers can be serviced according to the diagram below. Small LNG storages are from 10 000 m340,000 m3of natural gas capacity, accordingly, they can accommodate from 6 mln. m3 to 24 mln. mStart of usage of LNG in the Baltic countries, gives possibility to replace backup fuels (fuel oil or shaoil) with cleaner LNG fuel. LNG creogenic container with a volume of 10,000 m3, could suppVilnius boiler (50 MW) with gas up to 50 days.


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Possibilities of cooperation with Latvia and Estonia

The problem of gas supply security is of interest not only to Lithuania but also to other Baltic stateTogether with Latvia and Estonia, all three countries are not connected to the gas infrastructure anform the so-called energy island in which the total annual consumption reaches 5.9 bcm per yeaLatvia has a limited natural gas supply security due to Inukalns underground gas storage facility in thcentral territory of Latvia, and Estonia as an alternative could use domestically excavated shalLithuania, however, in this respect is the most vulnerable.

One obvious area where Lithuania could cooperate with Latvia is Inukalns underground natural gstorage in Latvia. In the event of a favorable situation in the global gas markets, LNG could bpurchased at low prices, stored in Inukalns and used when needed. Thus, the Lithuanian LNG terminwould acquire operational flexibility and would allow even better use of the international mark

opportunities.

In order LNG terminal in Lithuania to become a regional project, the general consensus of the Baltstates is necessary. If in Lithuania, Latvia and Estonia gas-main system development was completeLNG terminal in Klaipda as an alternative source would ensure gas supply to all three Baltcountries.

Figure No. 25. Scheme of regional ensurance of natural gas supply


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SWOT analysis

Table No. 7. SWOT analysis

Strengths Weaknesses

The selected flexible technical solution min/maxregasification from 1.5 to 11 mln. m3/day,respectively, from 0.6 to 4 bcm/year.

Purchased FSRU is one of the most economical ofthis type of facility: 170 thousand m3 tanks, the latestLNG vapor collection equipment (to 0.12 percent,older ship losses up to 0.2 percent), and combinedopen-loop evaporation system that enables to savefuel, installed boiler economizers additionally recoverheat energy from exhaust gases.

Technology (FSRU) is mobile and can changelocation, if necessary.

Technology (FSRU) allows use of a FSRU as a tanker. Sufficient expertise and financial resources toimplement LNG project.

LNG terminal increases the reliability of gas supplysystem due to an additional source of supply.

In 2014 with future pipeline capacity it will ensure theneeds of gas consumers even after the termination ofgas supply from Russia.

Gas pipeline constraints: existing gas pipenetwork1 mln. m3/day, 0.5 bcm/year. Afterconstruction of gas-main Jurbarkas - Klaipda

6 mln. m3/

lng business plan 20130220

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