Project Background

To respond to the guiding opinions of China's Ministry of Transport on accelerating the LNG utilization in waterborne industry, and the conception of environmental protection and energy conservation, The Group is expanding its business to the LNG Utilization Conversion on Vessels in mainland China, which means to convert waterborne vessels to adopt LNG utilization so as to partly replace traditional diesel fuel.

Vessel after LNG Utilization Conversion

Compared with diesel fuel, LNG is much more environmentally-friendly and brings more economical benefits for vessel owners. After conversion, LNG will be used as fuel for those converted vessels. The nitrogen oxide can be reduced by 85% to 90%; the carbon dioxide can be reduced by 15% to 20%, and sulfur emission can be completely eliminated. Statistical data shows that it can save about 15% cost for those LNG utilization converted vessels.

Technology Introduction of LNG Utilization Conversion on Vessels

LNG Utilization Conversion on Vessels

The Vessel LNG Utilization Conversion technology is a hybrid power technology of diesel and LNG developed by the Group's partner Zhongyou Yingtai Natural Gas Limited Liability Company. It is an energy saving and emission reduction technology with high-tech content and remarkable economic benefits. It has been approved for pilot operation by the national transportation and maritime sector and received consistent praises from specialists and scholars.

The main technical equipments for Vessel LNG Utilization Conversion include:

1.Gas storage and supply system

Mainly including LNG storage tank, carburetor, gas supply
pipe and so on.

2.Mix combustion control system

Mainly including ECU, air-track, injection valve and so on.

3.Fire protection and safety system

Mainly including combustible gas probe, fire control cabinet, axial flow explosion-proof fan and so on.

The mixed combustion system of Vessel LNG Utilization Conversion can control the flow of diesel oil and LNG through the microcontroller so as to adjust the ratio of diesel oil and LNG mixture, and then deliver to the engine, which can switch fuel from pure diesel oil to diesel oil-LNG. The computer control unit can be used by the users to monitor and control the system. Tthe technology can be applied to the vessels by technicians with basic engineering knowledge.

Policy Support

China Ministry of Finance and the Ministry of Transport made a joint publication about the interim measures of management of special funds for energy saving and emission reduction in transportation on 20th of June in 2011. According to the interim measures, installation of energy saving and emission reduction system on public transport vehicles and vessels can be possibly qualified for subsidies, which is initially no more than 20% of the installation cost. It is estimated that the subsidy for each converted vessel might be 50,000 RMB to 100, 000RMB.

Regarding the government support policies of LNG spread, China Ministry of Transport released Guiding Opinions on Accelerating the LNG Utilization in Waterborne Industry on 25th of July in 2013, and pointed out that:

Primary Tasks:

1. Research and formulate relevant incentive policies and measures to support LNG utilization in waterborne industry.

2. Speed up the study and formulation of the layout planning of the LNG filling stations.

3. Implement the inland river demonstration project of LNG powered vessels, and the pilot demonstration project of LNG utilization in vessels at sea and ports.

Guarantee Measures:

1. Funding support: Use the special funds of energy saving and emission reduction and the funds of vessel standardization to provide support for the pilot demonstration project and actively seek relevant national special funding support.

2.Technical support: Take full use of the advantages of suppliers, port and vessel enterprises and scientific research institutions, and carry out scientific and technological activities to overcome major technical difficulties.

3. Publicity and guidance: Carry out extensive promotional activities of LNG utilization in waterborne industry.

Geographic Location

The main target market of the Vessel LNG Utilization Conversion project of China Oil Gangran Energy Group is located in Ganjiang river basin in Jiangxi Province of China, which is in the southeast of China, west of Hunan Province and south of Guangdong Province. Before Ganjiang River, the main river in Jiangxi Province, flows into Yangtze River, it flows through Jiangxi Province from south to north, and is the seventh largest tributary of Yangtze River. Yangtze River, as the longest river in China, flows through southwest, middle and east of China and empties into East Ocean of China. Therefore, Ganjiang River provides a main trade route between cities in Jiangxi Province and Shanghai.

The bold blue lines in the figure is Jiangxi Ganjiang River Basin

According to China's maritime authority, up to 2013, there are about 3,000 vessels registered in Jiangxi Province and about 15 vessel yards within the Ganjiang River. Although there might be some other industry participants engaged in vessel power conversion business, none of them has started business within Ganjiang River yet. As this conversion business is still an emerging and niche market, and there is no other competitor within the Ganjiang River, therefore the Group believes that most vessels in Ganjiang River still use diesel oil as fuels.

Market Potential

By 2011, China has been the fourth largest country of natural gas consumption, and its natural gas production has been tripled compared with the past decade. According to China's "12th Five-Year Plan", the central government has set a target of reducing the emission of carbon dioxide and greenhouse gas. It is estimated that China's natural gas consumption will reach 230 billion cubic meters as of 2015. The government has been devoted to the infrastructure constructions of natural gas supply. Regarding the natural gas, the coordination and construction of natural gas pipes and LNG stations have obtained explicit attention.

According to the Group's market investigation: (a) A lot of vessel companies have set trade routes of regular trip between Nanchang and Shanghai. Nanchang is the capital of Jiangxi Province and the largest port of Ganjiang River as well; while Shanghai is China's largest import and export hub and has the world's busiest port; (b) A round trip between Nanchang and Shanghai is estimated to consume 9,000 standard cubic meters of LNG; (c) It is estimated that there might be 13 round trips between Nanchang and Shanghai for every vessel per year.

Accordingly, the Group estimates that after conversion, every vessel may only consume 120, 000 standard cubic meters of LNG every year. Up to 2013, there have been more than 3,000 vessels registered in Jiangxi Province, so the potential market is vast.

Business Model

See the following diagram for the Vessel LNG Utilization Conversion business model of China Oil Gangran Energy Group:

Brief Introduction to the Business Model Process

1. Zhongyou Yingtai: Inject cashes and vessel conversion technologies into the joint venture company, Jiangxi China Oil Gangran Energy Technology Company.

2. Jiangxi China Oil Gangran: Provide technologies and funds to promote the vessel owners to convert the fuel of vessels from traditional diesel oil into LNG. As one condition of the conversion agreement, the owners shall sign an exclusive LNG-purchase agreement with the Zhongyou Yingtai to purchase LNG fuels for the converted vessels.

3. Zhongyou Yingtai: Provide fuel to the converted vessels as the only LNG supplier. Every vessel is estimated to consume 120, 000 standard cubic meters of LNG every year.

4. As one condition, Zhongyou Yingtai shall pay 0.35 RMB (equivalent to 0.44 HK Dollar) to Jiangxi China Oil Gangran for every standard cubic meter of LNG provided to the converted vessels.

Primary Estimation of Investment Returns
Project Anticipatory Data (RMB)
Estimated vessels to be converted every year 450-700 vessels, about 15%-23.3% of the market share of conversion business in Jiangxi Province
Expected annual income
(from the LNG sales revenue-sharing of Zhongyou
Yingtai, 0.35 RMB per standard cubic meter)
18.9 million - 29.4 million
Estimated investment return period 2.4 years - 3.7 years
Extension Project

China Oil Gangran Energy Group makes full use of existing resources. The targeted conversion vessels have very wide activity ranges, thus provide good conditions for vessel-advertising business, which is a potential business that the Group plans to further develop.

Vessel-advertising Mimetic Diagram