ITEM 4.  INFORMATION ON THE COMPANY

A.  History and Development of the Company

Golar LNG Limited is a midstream LNG company engaged primarily in the transportation, regasification, liquefaction and trading of LNG.  We are engaged in the acquisition, ownership, operation and chartering of LNG carriers and FSRUs through our subsidiaries and affiliates and the development of LNG projects.  

We were incorporated as an exempted company under the Bermuda Companies Act of 1981 in the Islands of Bermuda on May 10, 2001 and maintain our principal executive headquarters at 2nd Floor, S.E. Pearman Building, 9 Par-la-Ville Road, Hamilton HM 11, Bermuda.  Our telephone number at that address is 1 (441) 295-4705.  Our principal administrative offices are located at One America Square, 17 Crosswall, London, United Kingdom and our telephone number at that address is +0 44 207 063 7900.

Our business was originally founded in 1946 as Gotaas-Larsen Shipping Corporation, or Gotaas-Larsen. Gotaas-Larsen entered the LNG shipping business in 1970 and in 1997 was acquired by Osprey Maritime Limited, or Osprey, then a Singapore listed publicly traded company.  In May 2001, World Shipholding Ltd., or World Shipholding, a company indirectly controlled by trusts established by John Fredriksen for the benefit of his immediate family, acquired Osprey, which was subsequently delisted from the Singapore Stock Exchange.  On May 21, 2001, we acquired the LNG shipping interests of Osprey and we listed on the Oslo Stock Exchange in July 2001 and traded under the symbol "GOL." We subsequently delisted from the Oslo Stock Exchange on August 30, 2012. We have been listed on Nasdaq since December 2002 and trade under the symbol "GLNG."

 

Our strategy to become a LNG floating solution provider began in 2002 when we undertook a study to consider the conversion of an existing LNG carrier into a FSRU and continued in 2004 with a similar study for the conversion of a LNG carrier into a floating power generation plant, or FPGP. In December 2005, Keppel of Singapore signed a contract with us for the first ever conversion of an existing LNG carrier into a FSRU, with the Golar Spirit and the Golar Winter, being our first firm FSRU charters in April 2007.

In June 2014, we closed a registered equity offering of 12,650,000 shares of our common stock, which included 1,650,000 common shares purchased pursuant to the Underwriters' option to purchase additional common shares. The issue price was $54.0 per share with total net proceeds of $661 million. A portion of the proceeds of the offering was used to fully fund initial milestone payments for the conversion of our LNG carrier, the Hilli , to a FLNGV.

In September 2014, we closed a secondary offering of 32,000,000 shares of our common stock, which included 4,173,913 common shares purchased pursuant to the Underwriters' option to purchase additional common shares, held by our previous principal shareholder, World Shipholding, at a price to the public of $58.50 per share. Following the offering, World Shipholding’s stake in us was reduced from 36% to 2%. We did not receive any proceeds from the sale of common shares by World Shipholding. As of December 31, 2014, World Shipholding owned 2% of our issued and outstanding common shares.

In line with our ambition to become an integrated LNG midstream asset provider, we are looking to invest in small scale LNG projects and have completed a Front End Engineering and Design, or FEED, study for the conversion of three of our oldest carriers into small to mid-scale floating liquefaction units. The FEED study supported our view that a conversion of an old LNG carrier into a FLNGV is viable and cost effective. In relation to this, we have entered into definitive documentation with Keppel, for the conversion of the LNG carriers, the  Hilli  and the Gimi, to FLNGVs, which became effective in July 2014 and December 2014, respectively. These are expected to be delivered late 2017.

Golar Partners

In September 2007, we formed Golar Partners under the laws of the Republic of the Marshall Islands as a wholly-owned subsidiary. Golar Partners was formed to own vessels with long-term charters typically five years or longer through wholly- owned subsidiaries in order to distribute the different risk profiles of the different vessel types of total fleet controlled or affiliated with Golar. Golar Operating LLC, or the General Partner, our wholly-owned subsidiary was also formed in September 2007 to act as the general partner of Golar Partners under the limited partnership agreement of Golar Partners, and under that agreement the General Partner received a 2% general partner interest and 100% of the IDRs in Golar Partners

In April 2011, we completed the IPO of Golar Partners. Golar Partners is listed on Nasdaq under the symbol "GMLP."

We entered into the following agreements with Golar Partners in connection with its IPO: (a) a management and administrative services agreement pursuant to which Golar Management, one of our wholly-owned subsidiaries, provides certain management administrative support services; (b) fleet management agreements pursuant to which certain commercial management and technical management services are provided by our affiliates including Golar Management and Golar Wilhelmsen; and (c) an omnibus agreement, or the Omnibus Agreement, governing, among other things when the Company and Golar Partners may compete against each other as well as rights of first offer on certain FSRUs and LNG carriers.

During the period from the IPO of Golar Partners in April 2011 until the time of its first AGM on December 13, 2012, we retained the sole power to appoint, remove and replace all members of Golar Partners' board of directors. Under the provisions of Golar Partners' partnership agreement, the General Partner, our wholly owned subsidiary, irrevocably delegated the authority to Golar Partners' board of directors to have the power to oversee and direct the operations of, manage and determine the strategies and policies of the Partnership. From the first AGM of Golar Partners, the majority of the board members became electable by common unitholders and accordingly, from this date we no longer retain the power to control the board directors of Golar Partners. As a result, from December 13, 2012, Golar Partners has been considered as an affiliate entity and not as our controlled subsidiary.

Since the IPO of Golar Partners, they have conducted four follow-on offerings, and we have sold a portion of our interests in Golar Partners in two secondary offerings. As of April 24, 2015, we own the following interests in Golar Partners: 1,668,096 common units, 15,949,831 subordinated units, the 2% general partner interest (through our ownership of the general partner) and all of the incentive distribution rights. The common, subordinated and general partner units amount to approximately 30% of Golar Partners total units in issue and this is expected to remain as a long-term holding.

Since the IPO of Golar Partners, we have sold equity interests in the following six vessels to Golar Partners, the Golar Freeze , the NR Satu , the Golar Grand, the Golar Maria , the Golar Igloo and more recently, the Golar Eskimo (in January 2015) for an aggregate value of $1.9 billion. As of April 24, 2015, Golar Partners had a fleet of ten vessels acquired from or contributed by us.

The majority of the proceeds received from the sales of these vessels to Golar Partners have been used to make installment payments under our newbuilding program. Furthermore, the sale of these assets has made Golar Partners a more profitable company which has resulted in increased distributions to unitholders of Golar Partners. As a major shareholder of Golar Partners and the beneficial owner of Golar Partners' IDRs, we have benefited from the increased distributions.

As of April 24, 2015, together with the fleet held by Golar Partners, we own and operate twenty-five vessels comprising of six FSRUs and nineteen LNG carriers, including our newly acquired vessel, Abuja and a 60% interest in the vessel-owning subsidiary that owns the Golar Mazo which is owned through a joint venture arrangement between Golar Partners and the Chinese Petroleum Corporation, the Taiwanese state-owned oil and gas company. One LNG carrier, the Hilli , is undergoing conversion into a FLNGV. The remaining vessels, except for the Gimi and the Gandria, are either on fixed or spot charters, available for employment or under construction (i.e. the Golar Tundra ). The Gimi and the Gandria are currently laid up for potential conversion to FLNGVs.

Vessel Operations - segment

Vessel acquisitions, disposals, conversions and other significant transactions

 

During the three years ended December 31, 2014, we invested $2.3 billion in our vessels, equipment, newbuildings and asset under development.

In November 2012, we sold our interests in the wholly-owned subsidiaries that lease and operate the LNG carrier, Golar Grand to Golar Partners for $265 million.

In November 2012, we entered into a five-year time charter agreement with LNG Shipping S.p.A. for our LNG carrier, the Golar Maria . In February 2013, we sold our equity interest in the company that owns and operates the Golar Maria to Golar Partners for $215 million, of which $127.9 million was paid in cash and the remainder was paid through the assumption of $89.5 million of the debt associated with the vessel and interest rate swap liability of $3.1 million plus purchase price adjustments of $5.5 million.

    

In March 2014, we sold our interest in the company that owns and operates the FSRU, Golar Igloo, to Golar Partners for $310 million, of which $156 million was paid in cash and the remainder was paid through the assumption of $161.3 million of debt associated with the vessel, plus the interest rate swap asset and other purchase price adjustments of $3.6 million and $3.7 million, respectively.

In October 2014, one of our consolidated subsidiaries sold the Golar Glacier to 1401 Limited, an ICBC special purpose vehcile. The purchase consideration for this sale reflected the market value of the vessel as of the delivery date which was valued at $204.0 million. Upon closing, we received $185.6 million, with the remaining balance to be deferred and netted off against the termination payment when we opt to buy back the vessel. This vessel was simultaneously chartered back over a period of 10 years. We have several options to repurchase the vessels during the charter periods with the earliest from the fifth year of the bareboat charter, and purchase options and obligations to purchase the assets at the end of the 10 years lease period.

On January 20, 2015, we completed our sale of our equity interests in the companies that own and operate the Golar Eskimo to Golar Partners for the price of $390.0 million for the vessel (including charter) less the assumed $162.8 million of bank debt plus other purchase price adjustments. Golar Partners financed the remaining purchase price by using $7.2 million cash on hand and the proceeds of a $220 million loan from us. The loan from us has a two year term with interest chargeable at LIBOR plus a blended margin of 2.84%.

In February 2015, we sold the LNG carrier, the Golar Viking , to PT Equinox for $135 million, of which $2 million was paid in cash and the remainder was paid through the assumption of $133 million of debt associated to the vessel.

    

In April 2015, we acquired the LNG carrier Abuja , for a consideration of $20 million.

    

As of April 24, 2015, we have taken delivery of twelve of the thirteen contracted newbuildings that we entered into contracts for in 2011. Accordingly, one FSRU remain to be delivered by the end of 2015.

Investments

During the three years ended December 31, 2014 and through April 24, 2015, we acquired and divested interests in a number of companies including:

In August 2012, we purchased 17,255 shares in GasLog for $0.2 million, a company established in Marshall Islands and listed in the New York Stock Exchange. The company is an owner, operator and manager of LNG carriers. In November 2013, we sold our interest in Gaslog.

In July 2008, we invested an initial sum of $22.0 million in a (50:50) Dutch Antilles incorporated joint venture named Bluewater Gandria N.V., or Bluewater Gandria, with Bluewater Energy Services B.V., or Bluewater, formed for the purposes of pursuing opportunities to develop offshore LNG FSRU projects.  The initial equity investment was used to acquire the 1977 built LNG carrier, the Gandria for conversion and use as a FSRU.  In January 2012, Bluewater Gandria became a wholly-owned subsidiary of the Company pursuant to our acquisition of the remaining 50% equity interest for $19.5 million.

In January 8, 2015, Golar announced its secondary offering of 7,170,000 common units, representing its limited partner interests in Golar Partners, at a price of $29.90 per unit. The net proceeds of the offering are to be used to fund a portion of the recently announced contract with Keppel to convert one of Golar’s first generation LNG carriers, the Gimi , into a floating natural gas liquefaction facility. As of April 25, 2015, we own the following interests in Golar Partners: 1,668,096 common units, 15,949,831 subordinated units, the 2% general partner interest (through our ownership of the general partner) and all of the incentive distribution rights. The common, subordinated and general partner units amount to approximately 30% of Golar Partners total units in issue and this is expected to remain as a long-term holding.

FLNG – segment

Hilli FLNGV conversion

On May 22, 2014, we entered into a contract with Keppel, or the Conversion Agreement, for the conversion of the 125,000 m3 LNG carrier the Hilli to a FLNGV. Keppel simultaneously entered into a sub-contract with the global engineering, construction and procurement company Black & Veatch, or B&V. We also entered into a Tripartite Direct Agreement with Keppel and B&V, which among other things ensures our ability to enforce all obligations under both the Conversion Agreement and the sub-contract. We expect the conversion will be completed and the FLNGV delivered in 2017, followed by mobilization to a project site for full commissioning. Once operational as an FLNGV, we expect the Hilli will have production capacity of between 2.2 to 2.8 million tonnes per year of LNG and on board storage of approximately 125,000 m3 of LNG. The total estimated conversion and vessel and site commissioning cost for the Hilli , including contingency, is approximately $1.3 billion.

Gimi FLNGV conversion

In December 2014, we entered into an agreement with Keppel for the conversion of the Gimi to a FLNGV. The agreement include certain cancellation provisions, which if exercised prior to November 2015, will allow for the termination of the contracts and the recovery of previous milestone payments, less a cancellation fee.

Investments and Shareholder agreements

Keppel Shareholder Agreement

In September 2014, our subsidiary, Golar GHK Lessors Limited, entered into a share sale and purchase agreement with KSI Production Pte Ltd (a subsidiary of Keppel Corporation Limited) pursuant to which Keppel purchased from Golar GHK Lessors Limited 10% of the shares in Golar Hilli Corporation, the owner of the Hilli . Golar GHK Lessors Limited and KSI Production Pte Ltd, together with Golar Hilli Corporation, have also entered into a shareholders' agreement which governs the relationship between Golar GHK Lessors Limited and KSI Production Pte Ltd with respect to the conduct of the business to be undertaken by Golar Hilli Corporation, which includes seeking opportunities, and entering into agreements, with respect to the deployment and use of the Hilli for natural gas liquefaction projects. Under the shareholder’s agreement, Golar appoints the majority of directors and certain strategic decisions are subject to shareholder consent. Golar Hilli Corporation Limited may call for cash from the shareholders for any future funding requirements and shareholders are required to contribute to such cash calls up to a defined cash call contribution cap (after which funding is discretionary but non-funding results in dilution of the shareholders' interest). As of December 31, 2014, total funding provided for the Hilli conversion project amounted to $324.7 million.

Black and Veatch Agreement

On November 13, 2014, we entered into a contract with Black & Veatch International, a wholly owned subsidiary of Black & Veatch Corporation to sell a 1% stake in the Golar Hilli Corporation.

Perenco Cameroon and Societe Nationale de Hydrocarbures

In December 2014, we entered into a Heads of Agreement (the "HOA") with Societe Nationale de Hydrocarbures ("SNH") and Perenco Cameroon ("Perenco") for the development of a floating liquefied natural gas export project (the "Project") located 20 km off the coast of Cameroon and utilizing our floating liquefaction technology (GoFLNG). The HOA is premised on the allocation of 500 billion cubic feet of natural gas reserves from offshore Kribi fields, which will be exported to global markets via the GoFLNG facility Hilli , currently under construction at the Keppel Shipyard in Singapore. We will provide the liquefaction facilities and services under a tolling agreement to SNH and Perenco as owners of the upstream joint venture who also intend to produce liquified petroleum gas or LPG's for the local market in association with the Project. It is anticipated that the allocated reserves will be produced at the rate of some 1.2 million tonnes of LNG per annum over an approximate eight year period.

LNG trading – segment

During 2010, Golar established a wholly owned subsidiary, Golar Commodities which positioned the company in the market for managing and trading LNG cargoes. Activities include structured services to outside customers, the buying and selling of physical cargoes as well as proprietary trading. During the third quarter of 2011 Golar determined that, due to unfavorable market conditions, Golar Commodities would wind down its trading activities until such time as opportunities in this sector improved. Golar Commodities did not enter into any trades during the years ended December 31, 2013 and 2012.

During the first quarter of 2014, we entered into a Purchase and Sales Agreement to buy and sell LNG cargo. The LNG cargo was acquired and subsequently sold on a delivered basis to Kuwait Petroleum Corporation to facilitate the commissioning of the Golar Igloo which entered in her long term charter with KNPC in March 2014.  The transaction was the first for the Company since 2011 when we scaled back our LNG trading activities.

B.      Business Overview

Together with our affiliate, Golar Partners, we are a leading independent owner and operator of LNG carriers and FSRUs.  Collectively, our fleet is comprised of nineteen LNG carriers and six FSRUs.  As of April 24, 2015, we have one remaining newbuilding commitment for the construction of an FSRU, with a scheduled delivery at the end of 2015, and agreements for the conversion of two LNG carriers, the Hilli and Gimi , to FLNGVs, with estimated deliveries by 2017 through to early 2018. Our vessels provide and have provided LNG shipping, storage and regasification services to leading players in the LNG industry including BG Group, ENI, Petrobras, Dubai Supply Authority, Pertamina and many others. Our business is focused on providing highly reliable, safe and cost efficient LNG shipping and FSRU operations.  We are seeking to further develop our business in other midstream areas of the LNG supply chain with particular emphasis on innovative floating liquefaction solutions.

We intend to leverage on our relationships with existing customers and continue to develop relationships with other industry players. Our goal is to earn higher margins through maintaining strong service-based relationships combined with flexible and innovative LNG shipping and FSRU solutions. We believe our customers place their confidence in our shipping, storage and regasification services based on the reliable and safe way we conduct our LNG carrier and FSRU operations.

In line with our ambition to become an integrated LNG midstream asset provider, we are looking to invest in small scale LNG projects and have completed a FEED study for the conversion of three of our oldest carriers into small to mid-scale floating liquefaction units. The FEED study supported our view that conversion of an old LNG carrier into a FLNGV is viable and cost effective. In relation to this, we have entered into definitive contracts with Singapore’s Keppel for the conversion of the LNG carriers the  Hilli and the Gimi to FLNGVs, which became effective in July and December 2014, respectively.  These developments are complementary to our existing core business, namely shipping and provision of FSRUs, and so we remain firmly committed to growing our fleet by way of our newbuild assets referred to above.

As well as growing our core business and pursuing new opportunities along our value chain, we also offer commercial and technical management services for Golar Partners’ fleet. As of April 24, 2015, Golar Partners’ fleet included six FSRUs and four LNG carriers (which are included within the combined fleet of twenty-five described vessels above). Pursuant to a Golar Partners’ partnership agreement, it reimburses us for all of the operating costs in connection with the management of their fleet. In addition, we also receive a management fee equal to 5% of our costs and expenses incurred in connection with the provision of these services. These management fees were eliminated until December 13, 2012 when Golar Partners was deconsolidated.

We intend to maintain our relationship with Golar Partners and pursue mutually beneficial opportunities that we believe will include the sale of assets to Golar Partners to provide support for our LNG projects as well as to further our growth.

Our Business Strategy

                Our primary business objective is to grow our business and to provide significant returns to our shareholders. Golar’s strategic intent is to become a fully integrated LNG mid-stream services provider covering floating LNG liquefaction (GoFLNG), LNG shipping and floating LNG regasification. We aim to meet this objective by executing the following strategies:

▪       Pursuit of strategic and mutually beneficial opportunities with Golar Partners to date and since Golar Partners' IPO in April 2011, we have successfully sold six vessels in exchange for cash of approximately $1.9 billion which in part enables us to finance our newbuilding program as well as pursue other growth opportunities. 

▪       Increased dividend income from our investment - Since Golar Partners' IPO, the quarterly dividend distributions of Golar Partners have increased from $0.385 pro-rated per unit to $0.5625 per unit for the quarter ended December 31, 2014.  This represents a 46% increase since the IPO.  Golar Partners' long-term charters, provide stable cash flows which allows Golar Partners to meet its quarterly distributions obligations to its unit holders, including us. As of April 24, 2015, we have a 30% interest (including our 2% general partner interest) in Golar Partners and hold 100% of Golar Partner's IDRs.

However, we can provide no assurance that we will be able to implement our business strategies described above.  For further discussion of the risks that we face, please read "Item 3. Key Information- D. Risk Factors".

The Natural Gas Industry

Predominantly used to generate electricity and as a heating source, natural gas is one of the "big three" fossil fuels that make up the vast majority of world energy consumption. As a cleaner burning fuel than both oil and coal, natural gas has become an increasingly attractive fuel source in the last decade.

According to the most EIA International Energy Outlook (2013), worldwide energy consumption is projected to increase by 56% from 2010 to 2040, with total energy demand in non-OECD countries increasing by 90%, compared with an increase of 17% in OECD countries. Natural gas consumption worldwide is forecast to increase by 64%, from 113 trillion cubic feet (or Tcf) in 2010 to 185 Tcf in 2040. Reduced emphasis placed on nuclear power which previously played a more prominent role in Japan and South Korea’s planned energy mix or its subsequent phasing out in other countries such as Germany together with a concerted effort by China to address domestic coal induced air quality issues over the coming years will see natural gas feature more prominently as the substitution fuel of choice. The lower carbon intensity of natural gas relative to coal and oil makes it an attractive fuel for industrial and electric power sectors for environmental reasons.

Countries that have natural gas in excess of the indigenous supply must either import natural gas through a pipeline or, alternatively, in the form of LNG aboard ships. LNG is natural gas that has been converted into its liquid state through a cooling process, which allows for efficient transportation by sea. Upon arrival at its destination, LNG is returned to its gaseous state by either an FSRU or land based regasification facilities for distribution to consumers through pipelines.

Natural gas is an abundant fuel source, with the EIA estimating that, as of January 1, 2013, worldwide proved natural gas reserves were 6,793 Tcf having grown by 39% over the past 20 years.  Almost three-quarters of the world's natural gas reserves are located in the Middle East and Eurasia.  Russia, Iran and Qatar accounted for 55% of the world's natural gas reserves as of January 1, 2013, and the United States, the fifth largest holder of natural gas reserves, will see an increase in production growth from 21.2 tcf in 2010 to 33.1 tcf in 2040.  Production in the Australia/New Zealand region is forecast to increase from 1.9tcf in 2010 to 6.7tcf in 2040 with most originating from Australia and much of this coming to market over the next 4-5 years.  More recently, sizeable new discoveries have been made on the east coast of Africa in countries including Mozambique, Tanzania and Kenya.

The EIA predicts a substantial increase in the production of "unconventional" natural gas, including tight gas, shale gas and coalbed methane. Shale gas production is now underway outside the US (Canada) and is slated to commence elsewhere including China, Australia, Mexico, Argentina, Britain and other parts of OECD Europe. Although reserves of unconventional natural gas are unknown, a 2013 EIA report on relatively near term technically recoverable shale gas indicates 7,299tcf of estimated risked recoverable resource. This estimate is 10% higher than that included in their 2011 report. Interestingly, the resource estimate for China is 13% lower than the 2011 expectation as a result of a downward revision to reserves in one particular basin. Much of the resource in this basin is deeper than what is currently considered to be commercially recoverable. Future advances in drilling technology have the potential to reverse this.

Although the growth in production of unconventional domestic natural gas has resulted in a reduced rate of growth in LNG demand in the U.S., the long-term impact of shale gas and other unconventional natural gas production on the global LNG trade is unclear. Substantial increases in the extraction of US shale gas in 2008-9 initially suppressed demand for US bound LNG and therefore shipping. Between 2010 and 2014 a number of cargoes were redirected from the US to the Far East which increased LNG ton miles and demand for LNG shipping. Ton miles will fall as Australian volumes which have more proximate off-takers begin to deliver in 2015. The recent grant of non-FTA export permits in respect of six US projects representing around 70 million tons of LNG per year does however raise the prospect of significant additional volumes being exported out of the US. As most of these exports will be transported on an LNG carrier to more distant markets we can expect ton miles to increase toward the end of this decade.

 

Liquefied Natural Gas

Overview

The need to transport natural gas over long distances across oceans led to the development of the international LNG trade. The first shipments were made on a trial basis in 1959 between the United States and the United Kingdom, while 1964 saw the start of the first commercial-scale LNG project to ship LNG from Algeria to the United Kingdom. LNG shipping provides a cost-effective and safe means for transporting natural gas overseas. The LNG is transported overseas in specially built tanks on double-hulled ships to a receiving terminal, where it is offloaded and stored in heavily insulated tanks. In regasification facilities at the receiving terminal, the LNG is returned to its gaseous state (or regasified) and then carried by pipeline for distribution to natural gas customers.

The following diagram displays the flow of natural gas and LNG from production to regasification.

LNG Supply Chain

The LNG supply chain involves the following components:

Gas Field Production and Pipeline: Natural gas is produced and transported via pipeline to natural gas liquefaction facilities located along the coast of the producing country. The advent of floating liquefaction will in some cases see the gas transported to a marine based liquefaction facility.

Liquefaction Plant and Storage: Natural gas is cooled to a temperature of minus 260 degrees Fahrenheit, transforming the gas into a liquid, which reduces its volume to approximately 1/600th of its volume in a gaseous state. The reduced volume facilitates economical storage and transportation by ship over long distances, enabling countries with limited natural gas reserves or limited access to long-distance transmission pipelines to meet their demand for natural gas.

Shipping: LNG is loaded onto specially designed, double-hulled LNG carriers and transported overseas from the liquefaction facility to the receiving terminal.

Regasification: At the regasification facility (either onshore or aboard specialized LNG carriers), the LNG is returned to its gaseous state, or regasified.

Storage, Distribution and Marketing: Once regasified, the natural gas is stored in specially designed facilities or transported to natural gas consumers and end-use markets via pipelines.

The basic costs of producing, liquefying, transporting and regasifying LNG are much higher than in an equivalent oil supply chain. This high unit cost of supply has, in the recent past, led to the pursuit of ever-larger land based facilities in order to achieve improved economies of scale. In many recent cases, even these large projects have cost substantially more than anticipated. To address the escalating costs, a handful of oil majors and independents including Golar have developed new and more cost competitive floating liquefaction solutions across a spectrum of project sizes. Many previously uneconomic pockets of gas can now be monetized and this will add to reserves and further underpin the long term attractiveness of gas. Golar’s solution (GoFLNG), which focusses on the liquefaction of clean, lean pipeline quality gas is expected to be one of the cheapest liquefaction alternatives in today’s market. As such, it represents one of the few solutions that can withstand the substantial drop in an oil and LNG prices seen since October 2014. GoFLNG will allow smaller resource holders, developers and customers to enter the LNG business and occupy a legitimate space alongside the largest resource holders, major oil companies and world-scale LNG buyers. For the established LNG industry participants, the prospect of GoFLNG’s lower unit costs and risks provide an important and compelling alternative to the traditional giant land based projects especially in this current energy price environment.

According to Poten and Partners ("Poten"), LNG Liquefaction delivered to market was 103 million tonnes per annum in 2000.  This increased to 247 million tonnes by 2014.  An unusually large number of unscheduled plant disruptions, force majeures and the early termination of export activities from Egypt due to insufficient feedgas together with feedgas limitations elsewhere prevented many export facilities from producing at, or in some cases, even near their nameplate capacity in 2012 and 2013. This resulted in global LNG trade dropping for the first time since 1980.  Liquefaction delivered did however resume its growth trajectory in 2014 following the successful start-up of new export facilities in Papua New Guinea and the first of several new Australian projects commencing operations. Approximately 116 million tonnes of new capacity is slated to come into operation between 2015 and 2018. Poten and Partners expect that this additional capacity will require around 199 additional LNG carriers for transportation.  The LNG carrier order book when added to the current surplus of carriers on the water is insufficient to timely meet this vessel requirement.

The LNG Fleet

As of the end of March 2015, the world LNG carrier fleet consisted of 430 LNG carriers (including 21 FSRUs and 17 vessels less than 18,000m3). By the end of March 2015, there were orders for 162 new LNG carriers (including 7 FSRUs, 4 vessels less than 18,000m3 and 5 floating production, storage and offloading ("FPSO")) units , the majority of which will be delivered between now and 2016.

The order book now defines the next generation of tradeable tonnage in regards to size and propulsion. The current ”standard” size for LNG carriers is approximately 166,000 cbm, up from 125,000 cbm during the 1970s, while propulsion preference has shifted from a steam turbine to the more efficient Dual/Trifuel Disesel Electric (D/TFDE) or M-type, Electronically-controlled Gas Injection (MEGI) systems.

While there are a number of different types of LNG vessel and "containment system," there are two dominant containment systems in use today:

Illustrations of these systems are included below:

Of the vessels currently trading and on order, approximately 74% employ the Membrane containment system, 24% employ the Moss system and the remaining 2% employ other systems. Most newbuilds (85%) on order employ the membrane containment system because it most efficiently utilizes the entire volume of a ship's hull. In general, the construction period for an LNG carrier is approximately 28-34 months.

Seasonality

Historically, LNG trade, and therefore charter rates, increased in the winter months and eased in the summer months as demand for LNG for heating in the Northern Hemisphere rose in colder weather and fell in warmer weather. In general, the tanker industry including the LNG vessel industry, has become less dependent on the seasonal transport of LNG than a decade ago. The advent of FSRUs has opened up new markets and uses for LNG, spreading consumption more evenly over the year. There is a higher seasonal demand during the summer months due to energy requirements for air conditioning in some markets or reduced availability of hydro power in others and a pronounced higher seasonal demand during the winter months for heating in other markets.

Floating LNG Regasification

Floating LNG Storage and Regasification Vessels

Floating LNG storage and regasification vessels are commonly known as FSRUs. The figure below depicts a typical FSRU.

    

The FSRU regasification process involves the vaporization of LNG and pressurising and injection of the natural gas directly into a pipeline. In order to regasify LNG, FSRUs are equipped with vaporizer systems that can operate in an open-loop mode, a closed-loop mode, or in both modes. In the open-loop mode, seawater is pumped through the system to provide the heat necessary to convert the LNG to the vapor phase. In the closed-loop system, a natural gas-fired boiler is used to heat water that is circulated in a closed-loop through the vaporizer and a steam heater to convert the LNG to the vapor phase. In general, FSRUs can be divided into four subcategories:

        

Our business model to date has been focused on FSRUs that are permanently moored offshore or near shore and provide continuous regasification service.

Demand for Floating LNG Regasification Facilities

The long-term outlook for global natural gas supply and demand has stimulated growth in LNG production and trade, which is expected to drive a necessary expansion of regasification infrastructure. While worldwide regasification capacity still exceeds worldwide liquefaction capacity, a large portion of the existing global regasification capacity is concentrated in a few markets such as Japan, Korea, Taiwan, and the U.S. Gulf Coast. There remains a significant demand for regasification infrastructure in growing economies in Asia, Middle-East and Central/South America. We believe that the advantages of FSRUs compared to onshore facilities, as detailed in the paragraphs below, make them highly competitive in these markets. In the Middle East, Caribbean and South America almost all new regasification projects utilise an FSRU. FSRUs are also beginning to penetrate Asian markets led by Golar Partners' NR Satu in Jakarta, Indonesia and a variety of projects in India and South East Asia.

Floating LNG regasification projects first emerged as a solution to the difficulties and protracted process of obtaining permits to build shore-based LNG reception facilities (especially along the North American coasts). Due to their offshore location, FSRU facilities are significantly less likely than onshore facilities to be met with resistance in local communities, which is especially important in the case of a facility that is intended to serve a highly populated area where there is a high demand for natural gas. As a result, it is typically easier and faster for FSRUs to obtain necessary permits than for comparable onshore facilities. More recently, cost and time have become the main drivers behind the growing interest in the various types of floating LNG regasification

projects. FSRU projects can typically be completed in less time (2 to 3 years compared to 4 or more years for land based projects) and at a significantly lower cost (20-50% less) than land based alternatives.

In addition, FSRUs offer a more flexible solution than land based terminals. They can be used as an LNG carrier, a regasification shuttle vessel or permanently moored as an FSRU. FSRUs can be used on a seasonal basis, as a short-term (1-2 years) regasification solution or as a long-term solution for up to 40 years. FSRUs offer a fast track regasification solution for markets that need immediate access to LNG supply. FSRUs can also be utilized as bridging solutions until a land-based terminal is constructed. In this way. FSRUs are both a replacement for, and complement to, land-based regasification alternatives.

Floating LNG Regasification Vessel Fleet Size and Ownership

Compared to onshore terminals, the floating LNG regasification industry is fairly young. There are only a limited number of companies, including Golar as well as Exmar, Excelerate Energy, and Hoegh LNG that are operating FSRU terminals for LNG importers around the world. Golar was the first company to enter into an agreement for the long-term employment of an FSRU based on the conversion of an existing LNG carrier.

Competition - LNG Carriers and FSRUs