Opportunities for Shipping LNG to the Caribbean

02.05.2023 [Presentation name / Author]1 © Wärtsilä INTERNAL

OPPORTUNITIES FOR SHIPPING LNG TO THE CARIBBEAN, VESSEL LNG BUSINESS CASE ECONOMICS

John Hatley PE LNG Initiatives ( MBA, MSE)

Americas VP Ship PowerWartsila North America, Inc.

Cell +1 281 221 [email protected]

© Wärtsilä INTERNAL

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?

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A “Commodity Play” on fuel energy costs seeking competitive advantage for market share.


Agenda

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What ? Fuel Price vs. CostEnergy

Why & How ? No. Am ECA & EmissionsOwner ChoicesAbatement: SCR, Scrubber, LNG

Business Case Cargo, Investor, Banker Views20K m3 LNG CarrierInvestment Returns

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

Conclusions Business Case Appendix


Agenda

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Quiz…. Fuel Price ?

a) HFO 290.83 $ / ton ….

b) MDO 314.68 $ / ton .…

c) LNG 363.01 $ / 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 290.83 $ / ton ….

b) MDO 314.68 $ / ton .…

c) LNG 363.01 $ / 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?

7.77 $ / million BTU



Reference Common Values that will vary…HFO 37,430 BTU/kg MDO 40,500 BTU/kg LNG 46,720 BTU/kg density 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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Works with high S HFO Low total lifecycle cost Use everywhere

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

Source: 2015 Exhaust Gas Cleaning Scrubbers Dec 2015 011415.pptx

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


No. Am. ECA Fuel Sulfur Limit

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Source:http://www.dnvusa.com/industry/maritime/publicationsanddownloads/publications/newsletters/technical_regulatory/2012/north_american_emission_control_area.asp

Fuel Sulfur 0.10 % limit commences 1 January 2015


North America ECA SOx & NOx

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Fuel Sulfur2012… 1% Limit2015… 0.1% Limit

IMO Category 3 2016… NOx Tier III


Decision Tree… New Build Vessel

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New Build

Diesel

HFO

LNG

Scrubber … Fuel Sulfur Compliance

LNG Compliance

ECA January 2016 multiple emission requirements; both fuel sulfur limits (2015) and engine emissions IMO Tier 3 requirements in effect.

New tier 3 IMO engine + after-treatment SCR

0.1% Sulfur… Fuel Compliance

New tier 3 IMO engine + after-treatment SCR + Scrubber

New tier 3 IMO engine + LNG cryogenics


New Build Attributes

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

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

Diesel + SCR

LNG

HFO + SCR + Scrubber


Wartsila NOx Reducer System

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Soot Blower

Air

Pump

Mixing Duct

Dosing Unit

NOR Reactor

Controls

Urea Tank

CompressedAir

Urea 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


2015 ECA + 2016 NOx Refit Existing Vessel 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

2 May 2023

ECA & EPA force timely choices existing retrofit vessels


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


LNG Demand

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Mostly small markets… total generating capacity exceeds 10 Giga Watts… = LNG ~17.2 mtpa… ~40 mm m3


Where’s the LNG fuel need?

Source: U.S. Energy Information Administration; ‘Net electricity consumption 2010’

Concentrated electrical power demand… top 3 countries consume more than half the region’s 10 Giga Watts.


The Route: Corpus Christi - Jamaica

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15% “ECA” Bound route, 2634 nm round trip, 0.5 days load/unload per port, 341 operating days per year

Source: http://www.sea-distances.org/

549 mW Utility Power: Demand 710K tons LNG @ 100%


Business Case Vessel

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2 vessels on route transport 600K tons LNG per year, satisfy 549 mW Utility Power @ 92% load ( maxima 100% demand 710k tons LNG /yr. )


Business Case Vessel

US Corporation, Foreign Flag

20,000 m3 LNG Carrier

New build

Design Speed 15.0 knots with margin

Installed power 7,980 HP ( 5,950 kW )

Major Class Society

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Speed provides 38 annual round trips, … competitive vessel size transport


Recall ?

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Then… 5 August 2014

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LS180 1% 636 $/mt… LSMGO 0.1% 971 $/mt… LNG 500 $/mt

Source: http://www.bunkerworld.com/prices/port/us/hou/


Cargo Owner Transport safely at optimal cost reliably

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Cargo owner with LNG captures significant emissions reductions 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.


ROCE Investment Criteria

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ROCE: reflects the company fundamental earning power.

Source: Robert Higgens, Analysis for Financial Management, 10 th Edition, pg 53-55.

• Return on Capital Employed (Return on Invested Capital, ROIC ) reflects the company fundamental earning power as it removes the distorting effects of leverage inherent with Return on Equity (ROE).

Shipping companies often target 12% ROCE



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

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Warren Buffett… World Famous InvestorEBITDA as equivalent to earnings for a company is tantamount to the Egyptian Pyramids: forever state of the art…with never a need to be replaced, improved or refurbished…


The Pyramids

• Earnings Before Interest Taxes Depreciation Amortization

EBITDA may overstate available cash flow… when used carefully and fully understood it may indicate what is available to pay bank debt and shareholders.

Often viewed as one of many economic indicators of company performance by financiers/investors/bankers.

Is often utilized when company has significant fixed assets.

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LNG fuel has strongest EBITDA… + $1.7 Million over HFO+ Scrubber and + $1.9 Million atop MDO.

Years

EBITDA

MDO Fuel

HFO + Scrubber

LNG Fuel



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.


The Pyramids

• Earnings Before Interest Taxes

EBIT = Revenue minus expenses, excluding tax & interest

EBIT may conservatively understate available cash flow… when used carefully and fully understood it may indicate what is available to pay bank debt and shareholders.

Often viewed as one of many economic indicators of company performance by financiers/investors/bankers.

EBIT nulls the effects of different capital structures and tax rates. EBIT was the precursor to EBITDA.

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Years

EBIT

Banker 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 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

© Wärtsilä INTERNAL Source: http://www.businessinsider.com/citi-saudi-arabia-wont-win-this-oil-standoff-2014-11 48 © 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

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

LS180 1% 139 $/mt… LSMGO 0.1% 333 $/mt…


LNG Price 08 February 2016

Fixed Liquefaction Charge 4.60 CAD $/ GJVariable Sumas Gas Basis + 3.00 CAD $/ GJTotal FOB LNG Price 7.60 CAD $/ GJ

conversion to million BTU x 1.05435 LNG FOB price 8.02 CAD $/ mm BTU

exchange rate x 0.72 USD $ / CAD $ Price LNG FOB 5.77 US $ / mm BTU

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Allow 2.00 US $/mmBTU transport = 7.77 or LNG 363 $/mt


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

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


Fuel Stress Test: 15% ECA

THEN 5 August 2014

14.17% @ LNG 500 $/mt 12.80% @ MDO 971 $/mt 12.44% @ HFO 636 $/mt

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Deviation

ROCE

NOW 28 January 2016

15.22% @ LNG 363 $/mt 17.87% @ MDO 333 $/mt17.23% @ HFO 139 $/mt

LNG robust despite steep crude drop; today choose MDO for best ROCE, but sustainable? Volatility returns MDO & HFO similar, least LNG but also provides shipper lowest emissions. Small % voyage ECA; MDO inside ECA & HFO outside superior.


Agenda

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





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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?

58 © Wärtsilä

A “Commodity Play” on fuel energy costs seeking competitive advantage for market share.


BUSINESS CASE DETAILSAPPENDIX

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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.


EBITDA

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EBIT

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Economy & Finance

Opportunities for Shipping LNG to the Caribbean