IMO 2020 PRESENTATION TO INTERTANKO

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1 IMO 2020 PRESENTATION TO INTERTANKO PADDY RODGERS, CEO EURONAV NOVEMBER 2018

2 IMO 2020 ABOUT MORE THAN SCRUBBERS New trading routes Complex refiners = heavy, sour crudes; less complex consume lighter and sweeter grades. Storage & Logistics If 0.5m bpd excess HFO = 23 VLCC per Qtr Demand for tanker separation More crude runs Consensus is for m bpd of Additional crude runs required to make sufficient LSFO Slower steam Reduce speed by 1kph then reduce capacity by 8% then half for ballast leg = 4% or 31 VLCC Older ships leave fleet If 22.5/20/17.5 yr surveys = 100/75/50% scrap

3 DIFFERENT TRADING ROUTES POST 2020 Changing feed slates: The refiners who are more capable of processing lowquality crude oil into high-quality products should increasingly take in more heavy, sour crudes Less sophisticated refineries would consume lighter and sweeter (high quality) crude grades. Source HSBC July

4 STORAGE OPPORTUNITIES & LOGISTICS Volumes Bear Case Bull Case MARKET SIZE IMO 2020 HSFO Conversion Volumes MITIGATING FACTORS Estimated Non Compliance/Scrubber Penetration HSFO Volumes to be replaced HSFO REPLACEMENT Higher coking capacity, higher light sweet crude runs etc Remaining non compliant volumes Mid Point 0.5 STORAGE Estimated Global HSFO storage 94.0 AVAILABILITY Current HSFO Inventory 64.0 Remaining Land based HSFO Storage 30.0 Time it would take to fill land based storage 62days VLCCs Absorbed per Quarter until market clears 23 Source: Wells Fargo, IMO, UNCTAD, Company Filings o Logistics at Port should not be overlooked will be more artificial employment o Segregation of the barrel will need to be replicated through infrastructure o Likely congestion & delays thus reducing tanker fleet capacity 4

5 MORE CRUDE RUNS HSBC ESTIMATE Additional VLCC required each year based on Euronav Ton Miles map

6 No of VLCC facing survey before end of 2020 IMO 2020 COULD ENCOURAGE SLOW STEAMING & RECYCLING VLCCs have already slowed down Recycling pipeline though is growing

7 BUT THE FOCUS IS ON MONOCULAR AND ON SCRUBBERS WE HAVE CONCERNS

8 RISK #1 UPFRONT CAPITAL INVESTMENT WITH LIMITED VISIBILITY OF RETURN 8

9 SUCH UPFRONT INVESTMENT GOES AGAINST SUCCESSFUL POSITIONING IN SHIPPING Operational Leverage (volatility) Financial Leverage (high cost and cash out-flow) Wasting Assets 9

10 RISK #2 POLLUTION ISSUES Increased CO2 emissions Ocean Acidity likely increase Unknown cumulative impact increased SO2 Sea Buffering capacity reduced Scrubber vessels likely speed up 10

11 RISK #3 OPERATIONAL Safety & operational risks unknown Unproven application of technology in tanker environment Additional capex and opex Known risk of corrosion 11

12 RISK #4 LACK OF SCRUTINY OVER TECHNOLOGY Scrubber waste disposal never properly investigated No Valid or long term data available Cumulative impact on congested areas unknown Pipework & corrosion risk inadequately assessed or costed Future HFO bunker fuel quality and sulphur content 12

13 CLAREMAR ET AL: SHIP EMISSIONS AND THE USE OF CURRENT AIR CLEANING TECHNOLOGY CITATION: EARTH SYS. DYNAM., 8, , Open-loop scrubbers concentrate sulphur input along shipping lines, with enhanced potential for acidification, even if the atmospheric deposition is estimated to be low Acidification from a fleet with 100% scrubbers, using high-sulphur-content fuel, may reach the total deposition levels along the shipping lanes from the 1970s to 1990s Open-loop scrubbers will contribute significantly to the marine environment, u less medium-sulphur content distillates are used.

14 DANISH MINISTRY OF THE ENVIRONMENT ASSESSMENT OF POSSIBLE IMPACTS OF SCRUBBER WATER DISCHARGES ON T HE MARINE ENVIRONMENT ENVIRONMENT PROJECT NO. 1431, 2012 Once the scrubbing process has gained control over the pollutants transferred from the exhaust gas to the was water, when if ever is it acceptable to completely discharge this fraction? Gregory et al. (2010) put it this way: An effective wash water treatment plant is therefore required that is capable ofremoving both particles and oil

15 DANISH MINISTRY OF THE ENVIRONMENT ASSESSMENT OF POSSIBLE IMPACTS OF SCRUBBER WATER DISCHARGES ON T HE MARINE ENVIRONMENT ENVIRONMENT PROJECT NO. 1431, 2012 Increase water flow to dilute Optional

16 DANISH MINISTRY OF THE ENVIRONMENT ASSESSMENT OF POSSIBLE IMPACTS OF SCRUBBER WATER DISCHARGES ON T HE MARINE ENVIRONMENT ENVIRONMENT PROJECT NO. 1431, 2012 Increase water flow to dilute

17 RISK #5 FUTURE REGULATION Court of public opinion yet to be tested Risk of port or flag state action Increasing application of CSR standards by investors or banks or customers 17

18 KEY ISSUES

19 DEBATE BEEN POORLY FOCUSED AND MONOCULAR IMO debate so far focused on one chart Conveniently ignoring key issues o MGO being used as proxy for compliant fuel = irrelevant o NOT going to be diesel led solution o Vast majority of analysis been desk top driven o Numerous vested interests driving monocular focus on scrubber economics o Irrational and intense scrubber promotion with focus on need to be ready on Jan or else! 19

20 Source: Bernstein, Citi REFINERY REFINERS ARE INCENTIVIZED TO REDUCE AS MUCH AS POSSIBLE ITS HFO OUTPUT Product Use 2018 Demand mbpd Current Prices $bbl LPG Commercial fuel BRENT Naphtha Petrochemical 6 91 Gasoline Automotive fuel Jet Fuel Aviation fuel 7 93 Kerosene Commercial heating Diesel Automotive fuel Residual Fuel Oil Ship bunker fuel 7 59 Asphalt Highway/Roof

21 TOMORROW S BUNKER POOLS WILL BE DIFFERENT FROM TODAYS HFO bunker pool today Compliant bunker fuel pool HFO Resid bunker pool o Likely to see increased commitment by Oil majors to professionalise compliant bunker market o Refiners will focus lower sulphur output on this pool o Potential for further contamination issues o This pool will be degraded & become more sulphurous o No limit on sulphur content has implications for scrubber capability 21

22 IMO 2020 WILL SHAKE UP THE OIL BARREL BY ITS SULPHUR CONTENT 22

23 COMPLIANCE, ENFORCEMENT & REGULATION GOING FORWARD? Reputation & Customer structure in large tanker sector underpins high compliance but uncertainty surrounds future regulatory and enforcement regime 23

24 CYCLE FUNDAMENTALS ARE STRONG FOR 2019 IT COULD BE A BANNER YEAR Oil Demand Robust for Winter 2018/19 IEA forecast 1.4 mbpd But $80 crude & Trump unhelpful Supply of Oil Saudi & Russia increasing output Iran situation negative for lower oil price but positive tankers Ton Miles USA export growth is sustainable New routes from IMO disruption to start in 19 Vessel Supply Recycling taken 48 VLCC equivalents from fleet Sustained delivery in 19 a headwind Financing & Regulation Finance remains restricted No VLCC orders since May 24

25 OUR POSITION AND OUTLOOK

26 EURONAV & IMO 2020 = POSITIVE FOR TANKER MARKET; SCRUBBER STANCE SET Euronav view on scrubbers New trading routes Complex refiners will take more heavy, sour crudes; less complex consume lighter and sweeter grades. Storage If 0.5m bpd excess HFO = 23 VLCC per Qtr Demand for tanker separation More crude runs Consensus is for m bpd of Additional crude runs required to make sufficient LSFO Will be sufficient compliant fuel at competitive price Upfront capital investment with very low visibility of return Pollution risks, enforcement and operational concerns Euronav standpoint on 2020 As proven stewards of capital want to see concerns robustly tested before any investment Insurance will be to invest in fuel spread with certainty 26

27 VLCC rates $ per day New build VLCC $m COUNTER CYCLICAL INVESTING IS WHAT EURONAV DOES 120,000 Maersk Gener , , , , , VLCC rates New Build VLCC $m Source: Clarksons 27

28 WHAT DO EURONAV BELIEVE SHOULD HAPPEN BETWEEN NOW AND 1 JAN 2020? FUTURE REGULATORY RISKS, CSR & ENFORCEMENT ISSUES EXPLORED INCREASED SCRUTINY, ANALYSIS & RESEARCH INTO SCRUBBERS OPERATIONAL ISSUES MORE ROBUSTLY CHALLENGED POLLUTION RISKS PROPERLY INVESTIGATED SCRUBBER TECHNOLOGY & FUTURE COMPLIANCE WIDELY DEBATED 28