MISC Annual Report 2019

ZAHID OSMAN Vice President, LNG Business 2019 was an exceptionally successful year for LNG Business as we achieved significant milestones that aligned with MISC’s strategic priorities of diversifying its business ventures, expanding its third party portfolios as well as broadening its revenue sources Management Discussion & Analysis 2019 was an exceptionally successful year for LNG Business as we achieved significant milestones that aligned with MISC’s strategic priorities of diversifying its business ventures, expanding its third- party portfolios as well as broadening its revenue sources. The gas and LNG markets continue to evolve and expand. The market is becoming more competitive with a high number of new entrants, contract periods becoming shorter and customers demanding very competitive charter rates. The spot and short-term markets are expanding, and seasonal fluctuations will remain as a permanent fixture. Currently, spot and short-term markets account for about 32% of global LNG trade. That number is expected to grow bigger in the near term. The increasing numbers of flexible LNG contracts and the emergence of portfolio players are driving such growth. Notwithstanding such growth, 90% of our current LNG assets are on secured long-term charters. This provides a steady stream of secured cash flow to fund our operations and MISC’s growth agenda. Compared to a year ago, gas continues to be the preferred partner to renewable energy while dominating the growth in the fossil fuel segment. LNG demand is expected to grow between 2% and 5% annually in the next 10 to 15 years. To meet that rapidly growing demand, we anticipate global LNG liquefaction capacity to grow by more than 50% between now and 2025. That is equivalent to about 200 million metric tonne per annum (MMtpa) of new capacity. To support these new volumes coming into the markets, industry analysts estimate that about 150 new LNG vessels will be required. Furthermore, Asia will continue to attract the biggest share of new LNG demand due to its economic growth and lack of gas infrastructure. During 2019, key milestones were achieved by MISC on the expansion of MISC’s third-party LNG business with the signing of long-term charter contracts for two LNG carriers with SeaRiver Maritime L.L.C (a wholly-owned subsidiary of Exxon Mobil Corporation) and the formation of a joint venture partnership with Mitsubishi Corporation and Nippon Yusen Kabushiki Kaisha (NYK) to co-own two newbuild LNG vessels mainly for the LNG Canada project. In addition to the above, we have made a major breakthrough in broadening our revenue sources through non-conventional LNG solutions when we secured a time charter contract with PETRONAS in collaboration with Avenir LNG for their first LNG bunkering operations in the region. This is a momentous achievement considering that LNG business segment’s focus in the past has always been in conventional LNG shipping. 2019 saw us achieving the highest utilisation of our trading vessels in the short-term market. The innovative pricing structure that we have in place on these vessels has enabled us to capture the upside in value when market was high in the fourth quarter of 2019. In parallel, we have made continuous effort to enlarge our market presence by participating in pre-qualification and tenders for conventional LNG shipping and non-conventional LNG-based asset solutions. We are also collaborating with one of the world’s largest power plant equipment producers to develop our LNG-to-power (L2P) solutions as well as conducting front-end engineering studies jointly with our partners to develop the bespoke LNG-based floating power solutions that will provide cleaner and competitive power to meet the world’s growing demand for cleaner power. The strength and success of our achievements lies in our ability to capitalise on the technical know-how and operational expertise that we have accumulated over the decades. Our solid track record and over three decades of experience have developed the competitive edge against other global industry players in the market and solidifies our position as one of the most reputable players in the LNG shipping industry. In our effort to sustain and grow the business further, we have determined three strategic priorities. We will focus on three key areas: 1. Sustaining our cash generation; 2. Grow our asset portfolio, both in conventional shipping and unconventional solutions; and 3. Create new markets and develop new solutions. On sustaining and strengthening our cash generation, the focus would be on utilisation of our trading vessels, sweating existing assets through finding alternative usage and optimising the cost structure. Growing our asset portfolio is through investment in conventional shipping and non-conventional LNG asset-based solutions like LNG bunkering vessel, FSRU, and small to mid-sized LNG vessel. We are pursuing opportunities to grow the business in the small to mid-sized LNG vessels in Asia Pacific especially for the China market as the demand for small-size vessels is on the rise due to the physical limitations at the terminals. There are tremendous opportunities in the non-conventional LNG solutions as a result of a stronger push for cleaner energy and environmental concerns by society and regulators. Our effort in pursuing opportunities in L2P, LNG bunkering vessels and new gas carriers matches the needs for more infrastructure that support delivery of cleaner energy. Our last strategic priority will involve tapping into our market expertise and technical know-how to innovate and commercialise solutions that will enable MISC to penetrate new markets and generate additional revenue streams. At the end of the day, we aim to have a more balanced asset portfolio between conventional LNG shipping and non- conventional solutions that add resilience to our secured income base. Furthermore, the introduction of new LNG vessels will help us to high-grade our asset portfolio. For 2020, we will continue to build on the foundation of the success that we have secured in 2019. Our people are motivated, proactive and results driven. We will continue to strengthen their competencies in all areas especially business development and technology maturation. There are many opportunities that we are pursuing and new technological solutions that we are considering. In supporting this, it is crucial for us to have the ability to make fast decisions on the opportunity. With the calculated risk taken, we will be able to learn fast from the hurdles that we have encountered and move on to the next one swiftly. In addition to strengthening key competencies, we intend to improve the way we assess and evaluate opportunities and business risks by simplifying the process and shortening the duration required without compromising the quality of our risk assessment. We hope to learn and incorporate lessons learnt and best practices into our next opportunities. As the energy requirements of a rapidly changing world continue to transform and present new challenges to the global energy supply chain, we strongly believe that there are various opportunities possible for MISC to support its aspiration for a sustainable future in the LNG shipping industry. ZAHID OSMAN Vice President, LNG Business LNG Asset Solutions V I C E P R E S I D E N T ’ S R E M A R K S 91 90 OUR BUSINESS PERFORMANCE MISC BERHAD PEOPLE. PASSION. POSSIBILITIES ANNUAL REPORT 2019