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| Slide 1
Introduction
Introduction June 11th, 2014
Innovative Financing Solutions
for Emissions Compliance
: Pace Ralli, Co-Founder
| Slide 2
Introduction
http://www.youtube.com/watch?v=OdctnPIR5kA
Ship owner
8 years
Regulation
Ship owner reaction to change…
| Slide 3
Introduction
Traditional investment is financially irrational
Risks of
Payback
Debt
Constraints
Split
Incentive
Capital
Efficiency
Ship owner faces several challenges
| Slide 4
Introduction
• Planning for compliance in an uncertain/early stage regulatory environment
• Regulatory risk of Coast Guard / classification societies
• Extension of the deadline for emissions compliance for ship owners
• Lack of enforcement that leads to widespread non-compliance
Regulatory
Risk
Technological
Risk
Market
Risk
• Increasing cost of gas feedstock; decrease of spread commodity spread
• Escalating costs of ship building for bunker barges due to increased demand
• Meeting increasing service level requirements with increased competition
• Bankruptcy of ship owner clients; lower demand due to market downturn
• Engineering design of bunker barge is flawed; transportation accident
• Ship conversion not feasible due to space requirements on board
• Uncertainty of cost of conversion equipment / engine / storage tanks
• Unforeseen events (e.g. weather/storms) that could impact production of LNG
General risks of emerging LNG market
| Slide 5
Introduction
Technology Risk: mitigate risk that the LNG
fueling technology will not work
Risk of Payback
Risk of LNG Supply: mitigate risk that the
LNG supply will not be available in time
Risk of LNG Bunkering: mitigate risk that
LNG bunker infrastructure will not be ready
Commodity Risk: mitigate risk that the
commodity spread could decrease
CME mitigates ship owner risk of payback
| Slide 6
Introduction
1. Background
2. Ship Owner Challenge
1. Emissions Compliance Service Agreement
Agenda
| Slide 7
Introduction
Ships facing increasing global regulation
| Slide 8
Introduction
Ships in ECA need solution by 2015
| Slide 9
Introduction
Three viable options for ECA compliance
Low Sulphur fuel (MGO)
LNG propulsion 1 3
Scrubber Installation
2
• Most ocean-going ships
currently use heavy fuel oil
(HFO) for propulsion, mainly
due to its lower cost. Small
amounts of Marine Diesel Oil
(MDO) is also used principally
by smaller ships such as high-
speed vessels and ferries.
• Both HFO and MDO contain
high sulphur content, usually
above 2% and are not available
with <0.1% sulphur content.
• Marine Gas Oil (MGO) is
currently the only distillate fuel
that can comply with this
regulation. MGO ($1100/mt)
currently trades at a premium of
~$400 per tonne to HFO
($650/mt), and is project to rise
to $1300-$1500/mt with
increased demand after 2015,
due to limited refinery capacity.
• Common exhaust cleaning
system similar to inert gas
systems in tankers.
• Working: Direct contact of HFO
exhaust with the “scrubbing
liquid” (sea water/ caustic
solution of sea water/fresh
water) causes sulphur
compounds to be absorbed into
a solution.
• Allows for the use of HFO and
MDO fuel within ECA limits.
• Average cost of scrubber
installation is between $[3m]
and $[10m] per vessel.
• Liquefied Natural Gas (LNG) is
natural gas converted to liquid
form for ease of storage and
transport which has no Sulphur
content.
• Marine Gas and Duel-fuel
engines\ currently available in
the market permit use of LNG
for marine propulsion.
• Current LNG ship propulsion
restricted to short sea shipping
in Norway and is not readily
available as a European
alternative.
• To the extent that it becomes
feasible, it is an additional
opportunity for CME given our
experience in the US market.
| Slide 10
Introduction
Environmental benefits are significant
Exhaust components
Compliance options
SOx NOx CO2 Particulate
matter
LNG 0 25 5700 ~0
HS Fuel + Scrubbers 5 175 7200 3.6
LS fuel 5 180 7200 5.6
Applicable for a typical general cargo ship 3300 kW installed
0
5 5
0
1
2
3
4
5
6
LNG HS Fuel +Scrubbers
LS fuel
in T
on
ne
s/y
ea
r
SO x
25
175 180
0
50
100
150
200
LNG HS Fuel +Scrubbers
LS fuel
in T
on
ne
s/y
ea
r
NO x
5700
7200 7200
0
2000
4000
6000
8000
LNG HS Fuel +Scrubbers
LS fuel
in T
on
ne
s/y
ea
r
CO2
0
3,6
5,6
0
1
2
3
4
5
6
LNG HS Fuel +Scrubbers
LS fuel
in T
on
ne
s/y
ea
r Particulate matter
Sources: LNG World, Bunker World
| Slide 11
Introduction
EIA Projections for Fuel Price Spread
Ultra Low Sulfur Diesel
Heavy Fuel Oil
NATURAL GAS
LNG provides 20-40% savings on annual fuel costs…
…and the spread is expected to increase after 2015.
| Slide 12
Introduction
Widespread LNG Conversion
& Scrubber Installation
Fuel Cost Spread Emissions Regulation
Ship Owners Need a Catalyst to Invest
Economic & regulatory forces for change
| Slide 13
Introduction
25%
savings
Adapting the building EE financing model
$1-5M
Projects
~5 year
payback
3rd Party
Funds
$5-$10M
Projects
~30%
savings
~2-5 yr
payback
3rd Party
Funds
| Slide 14
Introduction
1. Background
2. Ship Owner Challenge
1. Emissions Compliance Service Agreement
Agenda
| Slide 15
Introduction
Priorities as a Ship Owner
HIGHER CHARTER RATE
LOWER FUEL COSTS
ECA COMPLIANCE
Higher
Asset
Value
| Slide 16
Introduction
CFO focus on capital resource efficiency
Increases
income and
IRR with
customary
investments
Increases
cost-basis, not
revenue
producing
…capital will always flow to quicker payback projects.
| Slide 17
Introduction
• 40,000 dwt dry bulk carrier
• MDO = $1050 /mt = $23 /mmBtu = ~$8.1m fuel cost
• ULSD = $1300 /mt = $29 /mmBtu = ~$10.3m fuel cost
• LNG = $650 /mt = $14 /mmBtu = ~$5.1m fuel cost
• LNG conversion
• ~$10m estimate
• 2-3 year payback
LNG Pilot – Great Lakes Trader
| Slide 18
Introduction
FCSA STRUCTURE
The Vessel will be outfitted with the following major items:
1. LNG bunkering manifold
2. LNG bunker filling line
3. LNG storage tank (300 cubic meters)
4. LNG vaporization system
5. LNG tank venting system
6. LNG tank pressure and level monitoring system
7. Gas pressure control system
8. Top end engine conversion to accept gas on the intake
9. Gas manifold to each bank of the engine
10. Double wall piping
11. Secondary wall air sweeping system with gas detection
12. Gas ventilation system
13. Engine room gas detection system
14. Exhaust gas rupture disc system
15. Engine load monitoring and control system
16. Lube oil tank batch system
17. Oil sump gas detection system
18. Oil vent gas detection system
19. Upgrade to the IAS system to encompass the additional systems
20. Vent mist separator system for each engine
Outfitted per ABS & USCG guidelines
| Slide 19
Introduction
Option 3: refinance entire vessel including conversion
Option 1: self-finance using ship owner’s own capital
Option 4: utilize third-party funds to cover conversion cost
Option 2: raise additional debt for conversion cost only
Options to finance LNG conversion
| Slide 20
Introduction
1. Background
2. Ship Owner Challenge
3. Emissions Compliance Service Agreement
Agenda
| Slide 21
Introduction
NEXT STEPS
Value Proposition
Clean Marine Energy offers a
proprietary financial mechanism
called the Emissions Compliance
Service Agreement (ECSA) to
eliminate the barrier of large upfront
capital requirements of LNG
conversion or installing scrubber
technology on to existing vessels.
| Slide 22
Introduction
FCSA STRUCTURE
20
15
Fuel cost before Jan 1st, 2015
HFO
An
nu
al F
ue
l C
ost
$14 mmBtu
$23 mmBtu
$25 mmBtu MDO
LSMGO
| Slide 23
Introduction
FCSA STRUCTURE
20
15
Fuel cost after Jan 1st, 2015
HFO
Immediate
40% increase
An
nu
al F
ue
l C
ost
MDO
LSMGO
$14 mmBtu
$23 mmBtu
$25 mmBtu
Future
LSMGO $29 mmBtu
| Slide 24
Introduction
FCSA STRUCTURE
20
15
LSMGO
Fuel cost after increase in LSMGO
HFO
An
nu
al F
ue
l C
ost
Eventual
80% increase MDO
$14 mmBtu
$23 mmBtu
$25 mmBtu
Future
LSMGO $29 mmBtu
| Slide 25
Introduction
FCSA STRUCTURE
0 1 2 3 4 5 6 7 8 9 10 Year
LSMGO
• ECSA is a capital efficiency solution that leverages 3rd party capital to fund capex
investments without adding to the ship owner’s cost-basis, by transitioning capex to opex
Fuel Cost with ECSA
LNG
Con
ve
rsio
n
ECSA
• Ship owner pays no upfront
capital for ECA compliance
• Fuel payer continues to pay
what they would have paid
anyway, with some immediate
shared savings during ECSA
• After the ECSA term, the ship
benefits from 100% of the fuel
cost savings for the remaining
life of the asset
• Compliance becomes a NPV
positive activity with no capital
requirement… ship owner can
use it’s capital for other more
accretive investments
An
nu
al F
ue
l C
ost
| Slide 26
Introduction
CME financing mechanism
Bunker
Barge
Clean
Marine Energy
Bunker
Supplier
Fuel
payment Bunker
payment
Project & fuel
management
SPV
Delivered
Fuel
Shipowner
Emissions
Compliance
Service
Agreement (ECSA) Equipment
supplier
Upfront
cost
Fuel cost +
Fixed premium
Premium is to be fixed at the contract signing being a proportion of the difference
between ULSD and actual LNG cost
Adapted from a proven model that has been adapted from the real estate sector
Conversion
equipment
| Slide 27
Introduction
Competitive benefits for ship owners
A holistic solution for compliance
A simple and flexible structure with standardised arrangements and documents
Ships run on low cost fuel. They will therefore either be more competitive or ship owner can take surplus benefit from lower costs
Provides greater fuel certainty - protecting themselves from future rising costs of low sulphur compared to high sulphur fuel
No upfront costs to them and therefore no need to find additional finance
No need to expensively rearrange their current finance arrangements, and could be off balance sheet altogether
Costs are directly paid from the financial benefit they receive with risks transferred
| Slide 28
Introduction
LNG Supply
Infrastructure
Conversion
Technology
LNG
Distribution
Eliminate barriers to ship owner action
| Slide 29
Introduction
Start with the ‘low-hanging fruit’ with technological feasibility & quick payback
Mission to fund 50 ships in five years
