MISC Integrated Annual Report 2020

///// Sustainability / Financial Review / Business Review / Leadership / Governance /// MISC Berhad / Integrated Annual Report 2020 7 138 MISC Berhad / Integrated Annual Report 2020 7 139 /// Governance / Leadership / Business Review / Financial Review / Sustainability ///// Section Section LNG ASSET SOLUTIONS VICE PRESIDENT’S REMARKS ZAHID OSMAN Vice President, LNG Business 2020 has been an exceptional year for the LNG Business, especially considering the impacts of the COVID-19 pandemic and the new ways of working we had to adopt. Notwithstanding the difficult market environment and challenges posed by the pandemic, we were able to build on our success from the previous year, to grow and diversify our business by adding new asset classes and revenue streams. LNG Business remained the largest contributor to the Group in terms of profitability and cash generation, with our LNGC segment as the main revenue generator. The key impacts of the pandemic were predominantly focused on operational and new business growth perspectives. Operationally, we adapted new paradigms such as work from home (WFH) for our office-based employees. Seafarers spent longer periods on board vessels and had to comply with strict SOPs and quarantine requirements throughout the world. From a growth perspective, we had to adapt the way we secure new business deals by conducting discussions and contract negotiations online. We were able to successfully build trust with prospective clients and navigated this new landscape to secure contracts during the year despite challenges of having to conduct business development in a virtual setting. Significant milestones for the LNG Business in 2020 were the diversification of our portfolio through the addition of the very large ethane carrier (VLEC) and LNG bunkering vessel (LBV). In the current tough and competitive market landscape affecting LNGC segment, these new asset classes will strengthen the resilience of our business and ensuring a steady growth of secured revenue stream for the Group. We signed Memorandum of Agreements to purchase six new VLECs in July 2020, of which we have taken delivery of the first vessel, Seri Everest , in October 2020, and the second vessel, Seri Erlang , in January 2021. Concurrently, we entered Time Charter Party (TCP) agreements with Zhejiang Satellite Petrochemical Co. Ltd. (STL) for the six VLECs to operate in international waters. The entry into ethane transportation business is historic and strategic for MISC. Besides building our footprint in China, one of the fastest growing economies in the world, this move gives us an early mover advantage in this niche segment, considering that the manufacturing of ethane-based products has increased substantially over the last few years and expected to grow rapidly in the future. As there are only eight other VLECs currently operating globally, our move into this area promises us attractive returns on investment and secured revenue stream from the long- term contracts. You can read more on how our foray into the global ethane market will create significant value for MISC in the side bar accompanying this Business Review. We also partnered with Avenir LNG to form a joint venture company, Future Horizon (L) Pte. Ltd., to become the region’s first dual-purpose LBV commercial operator. The LBV, Avenir Advantage , can provide bunkering services to LNG-fuelled vessels across Malaysia, as well as transport smaller scale LNG cargo regionally. Avenir Advantage has been chartered by PETRONAS for a period of three years. Considering the imposition of new sulphur emission limitations by the IMO effective 1 January 2020, our move into the LBV space has strengthened the business’ value propositions in the marketplace. There has been a global shift towards cleaner fuel sources, of which LNG is viewed as a viable transitionary fuel towards industry decarbonisation. We are therefore well placed to capture burgeoning new opportunities in the horizon. Our spot and trading vessels have also enjoyed 100% utilisation in a depressing market with stiff competition. The decision that we took to secure multi- months charters with market-linked rates have enabled us to capture the upside value from movements in the market. On the technology front, we progressed with obtaining Approval In Principle (AIP) for technical solutions we have developed for our floating storage regasification unit (FSRU) design based on converted Puteri and Puteri Satu class vessels. As a new area of growth, this presents us with potentially new future revenue streams. This recognition is consistent with one of our key priorities for the year where we sought to maximise cash generation by sweating or creating new usage for our existing assets. The FSRU solution will open up new potential for MISC and create additional value proposition to our customers. The past year has proven beyond a shadow of a doubt that our employees are our key strength. They have the right mindset to overcome challenging circumstances to continue delivering on all fronts. Our workforce has demonstrated their operational excellence capabilities in managing assets and superior stakeholder management, that further strengthened MISC’s reputation in the market as a safe and prudent owner operator of vessels. This was proven with the recognition by the Japan Federation of Pilots’ Association in June 2020 whereby Seri Amanah was awarded the Best Quality Ship Award 2019. Having built on a strong growth momentum, we are in a sweet spot to drive our future growth. Our five-year strategic plan centres on building a more resilient business by generating diverse revenue streams to maintain the LNG Business as a key cash generator for MISC. This will require us to have a diverse client portfolio and asset class. Besides obtaining STL as a client in 2020, we had already made inroads into obtaining new clients in 2019 by securing a 15-year charter contract with SeaRiver Maritime LLC (SRM) a wholly owned affiliate of ExxonMobil Corporation for two LNGCs and an 18-year charter contract with Diamond Gas International (DGI), a wholly owned subsidiary of Mitsubishi Corporation (MC), via a joint venture with Nippon Yusen Kabushiki Kaisha (NYK) and MC for two LNGCs. The MISC Sustainability Strategy 2021-2025 is a key focus area for the year ahead, and the LNG Business is charting out sustainability plans that will align and contribute towards the greater MISC Group sustainability agenda. MISC being a member of the ‘Getting to Zero Coalition’ with the aim of developing zero-emission vessels by 2030, we believe we can play a key role by promulgating progressive views and actions, and leverage on sustainability to offer value-added propositions to our customers. Our immediate priorities for 2021 are to focus on excellent delivery and execution of the major contracts we have secured. These include delivering the remainder of the four newbuild VLEC vessels to STL to commence the TCP, as well as the execution of the LBV charter with PETRONAS. We will also be focusing on our ongoing newbuild projects, namely the two LNGCs for SRM and two LNGCs for DGI which are currently under construction at the Korean shipyards. Our venture into the LBV and VLEC space represents new diversified revenue streams for the LNG Business which we intend to deliver on. As for the conventional LNGC potentials, we plan to be selective in pursuing opportunities that support our strategic objectives, bearing in mind the continuity of challenges and competition in the market. We are confident that our stellar track record, coupled with prudent and focused strategic approach and customer centric mindset, will enable us to deliver our aspiration and meet our clients’ expectations. ZAHID OSMAN Vice President, LNG Business MARKET REVIEW In 2020, market activities were muted due to the low LNG prices prior to the winter months and the COVID-19 pandemic. International and local lockdowns led to a reduction in global energy demand, as industries either shutdown or curtailed their activities. The drastic drop in Brent crude oil prices significantly impacted the energy sector especially oil and gas players who mitigated against this by either cancelling or deferring LNG projects. However, demand for gas remained relatively steady despite the oversupply of LNG in the market since 2018. The low price and abundant supply of LNG accelerated the evolution of LNG industry trends especially the growth of spot market and addition of new LNG players/markets. The continued growth of intermediaries as buyers in the LNG value chain led to further industry fragmentation. LNG spot prices remained volatile as global supply chains were disrupted by the pandemic. In 2020, the average spot charter rates were USD69,300 per day for two-stroke gas injection (GI) vessels, USD58,800 per day for tri-fuel diesel electric (TFDE) vessels and USD43,800 per day for modern steam vessels. There was higher demand for cleaner sources of energy such as LNG, driven by government policies centred on combating the effects of climate change. A new wave of LNG suppliers has been entering the market, predominantly from the US, Russia, the Middle East and East Africa. In the medium term, the increased supply of LNG coupled with green energy policies adopted by governments and more competitive LNG prices compared to fuel oil, have and will continue to spur the development of LNG bunkering and LNG-to-Power(L2P) initiatives and further strengthen the position of LNG as a transition fuel for this decade.