The Oil Gas Tipping Point & Business Case Economics

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The Oil Gas Tipping Point & Business Case Economics…

LNG Fuel & RegulationsRenaissance Hotel4 February 2016Seattle, WA

John Hatley PE LNG Initiatives ( MBA, MSE)

Americas VP Ship PowerWartsila North America, Inc.

Cell +1 281 221 [email protected]

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Keys

Global Energy Policies, market gamesmanship ?

Future Ahead, structural shifts?

As a vessel owner, all I want to knowis the tipping point…

What fuel strategy do I choose to to boost my bottom line?

As an LNG supplier, I want to alsoknow the tipping point….for infrastructure investment positioning.

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Agenda

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What ? Fuel Price vs. CostEnergy

Why & How ? No. Am ECA & EmissionsOwner ChoicesSCR, Scrubber, LNG Abatement

Business Case Cargo, Investor, Banker Views185K BBL ATBInvestment Returns

Oil Price Shock ! Business Case: Robust or Fragile?Stress Test

Conclusions Tipping PointBusiness Case Appendix

Agenda

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Quiz…. Fuel Price ?

a) HFO 400.50 $ / ton ….

b) MDO 433.35 $ / ton .…

c) LNG 500.00 $ / ton ….

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Which is the lowest price ?

The Price Paid for what it Cost

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: the amount of money that you pay for something

: the price of something : the amount of money that is needed to pay for or buy something

Quiz… Fuel Answer Key

a) HFO 400.50 $ / ton ….

b) MDO 433.35 $ / ton .…

c) LNG 500.00 $ / ton ….

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Which is the lowest price ?

Key concept… purchase energy, not tons or gallons, which is the lowest cost per unit of energy?

10.70 $ / million BTU



Reference Common Values that will vary…HFO 37,430 BTU/kg MDO 40,500 BTU/kg LNG 46,720 BTU/kg 980 kg/ m3 850 kg/ m3 430 kg/ m3

Agenda

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Emission Control Areas

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2015 ECA 0.1% Sulfur

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Scrubber targets SOx, Selective Catalytic Reducer targets NOx, LNG targets CO2, NOx, PM, SOx.

How clean is Natural Gas compared to Diesel ?

DF Natural Gas Engine

DieselEngine

0

20

40

60

80

100

Emissionvalues [%]

CO2

NOx

SOx

Particulates

-25%

-85%

-99%

-99%

Gas = ULTRA CLEAN

LNG provides significant emission reductions compared to traditional diesel engines

North America ECA SOx & NOx

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Fuel Sulfur2012… 1% Limit2015… 0.1% Limit

EPA Category 3 2016… NOx Tier III & EPA Category 2 … NOx Tier 3, 4

2015 ECA + 2016 NOx Vessel Owner Choices

1. Consume compliant Low Sulfur Distillate… champagne fuel + Selective Catalytic Reduction for NOx

2. Switch to LNG fuel: safe, clean, abundant, affordable, & available natural gas LNGReduction: CO2, NOx, SOx, PM

3. HFO Alternative Compliance… install scrubber for Sox + Selective Catalytic Reduction for NOx

4. Abort the Port

3 May 2023

ECA and SECA mandates force timely newbuild choices…

+ SCR

+ SCR

Diesel + SCR LNG HFO + SCR + Scrubber

14 © Wärtsilä Source: Wartsila Moss White Paper: Exhaust Gas Cleaning: How to Choose the Correct Scrubber, Jennifer Ahlback, 2014.

Lots of baggage as systems require host support; chemicals, tanks, waste sludge, piping/pumps, controls/automation, soot blowers…

Wartsila NOx Reducer System

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Soot Blower

Air

Pump

Mixing Duct

Dosing Unit

NOR Reactor

Controls

Urea Tank

CompressedAir

Mixing & Injection

LNGPac System

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Source: http://www.wartsila.com/media/news/26-08-2014-wartsila-launches-new-technical-solution-for-fuel-gas-handling

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Exhaust Gas Fan

Alkali Feed Module

Bleed-Off Treatment

Process Tank

Alkali Storage Tank

CW Pump

Heat Exchgr

Scrubbing Water Pump

Exhaust Gas Analyzer

Sludge Tank

Water Measurement

Water Measurement

De- Plume Unit

Holding Tank

Agenda

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Cautionary Remarks

Each investment case requires careful analysis, inclusion, and weighing a broad variety of issues stemming from technical, financial, operational, regulatory, and other areas.

The purpose of this exercise is to illustrate a Business Case example and how a few of many key considerations may be transcribed into financial modeling as an aide to decision making.

Readers are advised that neither the Author nor Wartsila nor it’s subsidiaries are responsible for any errors, omissions, or updates to this information contained herein or assumptions or derivations whatsoever.

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This presentation is no substitute for your good and responsible decision making. Please utilize prudence and caution when making investment decisions along with securing the advice and guidance of professionals.

4 Viewpoints

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SHIP OWNER

BANKER

PUBLIC

Transport safely at

optimal cost reliably

At fair return capturing

risks

Are risks understood

& I’m repaid !

Ultimate Environment

Safety

CARGO OWNER

4 Key Metrics

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SHIP OWNER

BANKER

PUBLIC

All In Charter

Freight rate $ / ton

Return on Investment:

ROIC, EBITDA, cash flows

EBIT, Times Burden Cover,

cash flows

Ultimate Environment

Safety

CARGO OWNER

The Route… Anacortes – San Pedro

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Emission Control Area100% “ECA” Bound route…1199 Nautical Miles coastwise loading/discharge ops 1 day / port359 operating days6 weather days Source: http://www.vesseldistance.com/

Business Case Vessel

Jones Act Articulated Tug Barge

New Build January 2016 … EPA Tier 3

185,000 BBL Capacity

Speed 11+ knots with margin, Twin Screw

Installed power 10,800 HP ( 8,000 kW )

Manning 14 & SOLAS Compliant

Major Class Society

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Speed provides 32 annual round trips from Anacortes to San Pedro… vessel size yields competitive low cost BBL delivery economics

Recall ?

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Then… 5 August 2014

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Recent Prices: LS180 1% 636 $/mt… LSMGO 0.1% 971 $/mtSource: http://www.bunkerworld.com/prices/port/us/hou/

Cargo Owner Transport safely at optimal cost reliably

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Cargo owner finds transport cost similar, but LNG advantage captures significant emissions savings supporting Green goals.

Ship Owner A fair return capturing risks

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Compelling fuel payback for vessels running on LNG fuel; an initial screening tool … not a good investment metric.

Ship Owner A fair return capturing risks

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Investor finds Competitive Advantage for return on capital… LNG hurdle rate is highest & yet preserves cargo owner emission reduction savings.

Banker Are risks understood & I’m repaid !

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Banker finds debt cover is weakest on MDO fuel, favorably stronger on alternatives, LNG is strongest.

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Years

EBITBanker Are risks understood & I’m repaid !

LNG has strongest EBIT… Depreciation 10 Year MACRS ½ Year Convention… Dry docking years 5,10,15,20

LNG Fuel

HFO + Scrubber

MDO Fuel

Agenda

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US #1 Shale Resources

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1,161 tcf gas & 120 billion barrels oil

Development rapid with technology advances in horizontal drilling, fracking, and computer seismic abilities.

In 5 years US became world’s largest producer of gas

Strong infrastructure & know how

Source:http://www.eia.gov/conference/2013/pdf/presentations/kuuskraa.pdf

Shale Gas

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Shale Oil

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28 November 2014

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Source: http://www.reuters.com/article/us-opec-meeting-idUSKCN0JA0O320141128

Key OPEC Vienna meeting sets stage for market share battle. Brent begins steep fall.

5 January 2015

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Source: http://www.forbes.com/sites/nathanvardi/2015/01/05/saudi-arabias-750-billion-bet-drives-brent-oil-below-54/

Exert Discipline in the Marketplace amongst OPEC and Non OPEC countries... Key focus on market share… oil prices plunging.

Discipline Target US or Russia ?

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Russia suffering double whammy:

Oil rich Ukraine and Black Sea burdened by politics under imposed sanctions as oil takes severe price slide…

Ruble plunges down 50% against USD

Source: http://online.wsj.com/articles/ruble-hits-new-low-as-oil-prices-drop-1417441184

Source: http://www.usnews.com/news/articles/2014/11/10/an-oil-price-cold-war-with-saudi-arabia-not-so-fast-experts-say

Source: http://www.businessinsider.com/ruble-plunging-again-2014-12p://online.wsj.com/articles/ruble-hits-new-low-as-oil-prices-drop-1417441184

1 December 2014

December 31, 2014

Source: http://www.businessinsider.com/citi-saudi-arabia-wont-win-this-oil-standoff-2014-11 40 © Wärtsilä

Profits negative… Severe Pain

Profits squeezed…Manageable Pain

45 $/BBL

Key Oil Production Cost

40$/BBL

Total Liquids Production

Brent Breakeven Price

2014 Production

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US vaults to 1st in production oil and other liquids

OPEC

OPEC

OPEC

OPEC

OPEC

OPEC

OPEC

OPEC

Source: ttps://en.wikipedia.org/wiki/List_of_countries_by_oil_production

http://www.eia.gov/beta/international/rankings/#?prodact=53-1&cy=2014

Saudi Arabia11.6 m BBL/day

https://en.wikipedia.org/wiki/List_of_countries_by_oil_production

https://en.wikipedia.org/wiki/List_of_countries_by_oil_production

Government Breakeven Budgets

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Severe shortfalls @ prices under 100$/BBL, present oil glut & soft prices challenge sustainability beyond short run

Source: https://alfinnextlevel.files.wordpress.com/2014/04/oil_breakeven_deutsche_bank_oct_14.png40 $/BBL

Brent Crude Oil Prices

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Source: http://www.nasdaq.com/markets/crude-oil-brent.aspx?timeframe=1y

THEN

NOW

Oil severe price 70% price drop past 18 months as abundant supplies face weak demand from China and stagnant EU.

What’s the impact of the steep fall in oil prices !

Is competitive advantage of LNG robust or fragile ?

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Recent … 28 January 2016

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Port Houston Delivered Price

LS380 1% Sulfur 139 $ / ton

LSMGO 0.1% Sulfur 333 $ / ton

Prices : LS380 139 $/mt… LSMGO 0.1% 333 $/mt

Source: http://www.kpibridgeoil.com/

Owner At fair return capturing risks of oil fall 28 Jan 2016

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LNG emissions savings remains for shipper but returns narrow for investor amidst oil glut steep price dive.

Fuel Stress Test: 100% ECA

THEN 5 August 2014

12.13% @ LNG 500 $/mt 7.70% @ MDO 971 $/mt 10.17% @ HFO 636 $/mt

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Deviation

ROCE

NOW 28 January 2016

12.77% @ LNG 400 $/mt 13.55% @ MDO 333 $/mt13.79% @ HFO 139 $/mt

LNG robust despite steep crude drop; today choose HFO scrub for best ROCE but not sustainable. Most volatile returns MDO, then HFO, least LNG… holds cargo share with compelling emissions savings. Overall HFO + Scrubber holds 2nd place.

Agenda

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Nice graph… but it Stress’s me out !

Look, as a vessel owner ( LNG supplier ) all I need to know which fuel strategy to maximize returns.

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So what’s the fuel price tipping point for 100% ECA operations?

Investor Tipping Point

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Tipping Pt $/ ton

LNG Basis $/ ton

Run LNG? No: MDO & HFO prices below tip point

Run MDO? No: HFO price below tip point

Run HFO & Scrub? Yes !

Tipping point shows when to switch fuel strategy as prices change, to maximize ship owner returns.

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Keys

Global Energy Policies, market gamesmanship ?

Future Ahead, structural shifts?

As a vessel owner, all I want to knowis the tipping point…

What fuel strategy do I choose to to boost my bottom line?

As an LNG supplier, I want to alsoknow the tipping point….for infrastructure investment positioning.

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APPENDIXBusiness Case Details

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Financials

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Key Values`

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Key Values

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Fuel Attributes

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Utilize fuels specific for regional case... As fuels widely vary, the historic dollars per ton or gallon is challenging to use as differing fuels host widely varying energy content, density, value... These values shown are generally representative.

EBIT

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EBITDA

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