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ROPAX FERRY BUSINESSCASE RETURNS & ENVIRONMENTALBENEFITS
13.6.2016 [Presentation name / Author]1
John Hatley PEGas Initiatives ( MBA, MSE )
Wartsila North AmericaCell 281 221 4209
[email protected]
Green Tech 2016Green MarineMapping Sustainable Future ShippingQuebec CityMay 30 – June 1
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Harvey Gulf International
13.6.2016 [Presentation name / Author]2
Harvey Energy… on Charter March 2015
Harvey Power… on Charter October 2015
Harvey Liberty… on Charter May 2016
3 vessels, 23+ months operations… >15,000 hours…
charters running on gas fuel, no downtime.
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24+ LNG Fuel Vessels contracted Wartsila for North America
13.6.2016 [Presentation name / Author]3
3 @ BC Ferries +2
2 @ Seaspan
2 @ TOTE
3 @ Society Quebec Ferries
6 @ Harvey Gulf
+ @ Owner 2 + X Merchant
Vessels
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Society for Gas as a Marine Fuel SGMF
13.6.2016 [Presentation name / Author]4
Membership value…join the 100+ companies promoting safety and best practices
Source: http://www.sgmf.info/about/welcome
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XXXXXXXXXXXXXXXXXXXXXXXX
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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 & improve sustainability?
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A “Commodity Play” on fuel energy costs
seeking competitive advantage for market
share.
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Agenda
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What ? Fuel Price vs. Cost
Energy
Why & How ? No. Am ECA & Emissions
Owner Choices
Abatement: SCR, Scrubber, LNG
Business Case Cargo, Investor, Banker Views
ROPAX Ferry
Investment Returns
Oil Price Shock ! Business Case: Robust or Fragile?
Stress Test
Conclusions Business Case Appendix
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Agenda
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What ? Fuel Price vs. Cost
Energy
Why & How ? No. Am ECA & Emissions
Owner Choices
Abatement: SCR, Scrubber, LNG
Business Case Cargo, Investor, Banker Views
ROPAX Ferry
Investment Returns
Oil Price Shock ! Business Case: Robust or Fragile?
Stress Test
Conclusions Business Case Appendix
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Quiz…. Fuel Price ?
a) HFO 412.87 $ CAD / ton ….
b) MDO 466.30 $ CAD / ton .…
c) LNG 514.85 $ CAD / ton ….
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Which is the lowest price ?
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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
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Quiz… Fuel Answer Key
a) HFO 412.47 $ CAD / ton ….
b) MDO 446.30 $ CAD / ton .…
c) LNG 514.85 $ CAD / 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?
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
11.02 $ CAD / mm BTU
11.02 $ CAD / mm BTU
11.02 $ CAD / mm BTU
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LNG Cost 08 February 2016
Fixed Liquefaction Charge 4.60 CAD $/ GJ
Variable Sumas Gas Basis + 3.00 CAD $/ GJ
Total FOB LNG Price 7.60 CAD $/ GJ
conversion to million BTU x 1.05435
LNG FOB price 8.02 CAD $/ mm BTU
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Allow 3.00 $/mmBTU transport = 11.02 CAD $ / mm BTU or LNG 515 CAD $ / ton
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Agenda
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What ? Fuel Price vs. Cost
Energy
Why & How ? No. Am ECA & Emissions
Owner Choices
Abatement: SCR, Scrubber, LNG
Business Case Cargo, Investor, Banker Views
ROPAX Ferry
Investment Returns
Oil Price Shock ! Business Case: Robust or Fragile?
Stress Test
Conclusions Business Case Appendix
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Emission Control Areas
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Sulphur ECA’s, more
coming soon.
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IMO MARPOL Annex VI NOX
13.6.2016 [Presentation name / Author]14
2016 Tier III
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No. Am. ECA Fuel Sulfur Limit
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Source:http://www.dnvusa.com/industry/maritime/publicationsanddownloads/publi
cations/newsletters/technical_regulatory/2012/north_american_emission_control_
area.asp
Fuel Sulfur 0.10 % limit commences 1 January 2015
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2015 ECA 0.1% Sulfur Fuel
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Works with high Sulfur HFO
Low total lifecycle cost
Use everywhere
Scrubber targets Sox……….. Selective Catalytic Reducer targets N0x………..
LNG targets CO2, NOx, PM, & SOx.
Source: 2015 Exhaust Gas Cleaning Scrubbers Dec 2015 011415.pptx
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Emissions, Environment, & Health
13.6.2016 [Presentation name / Author]17
CO2Carbon Dioxide
Greenhouse
Gas
NOxNitrogen Oxide
Ozone
SOxSulphur Oxide
Respiratory
PMParticulate
Matter
Carcinogen
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Watershed 12 December 2015
13.6.2016[Presentation name / Author]18
Paris COP21 nearly 200
nations adopt global pact to
fight climate change,
promise cuts to greenhouse
gas pollution with sanctions
for countries failing to
comply.
Source: http://www.cbc.ca/news/world/cop21-climate-change-talks-
saturday-announced-1.3362354
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22 April 2016 UN Secretary Signs Paris COP21
13.6.2016 [Presentation name / Author]19
Source: http://ec.europa.eu/clima/news/articles/news_2016042101_en.htm
UN Secretary signs world’s first
universal climate change
agreement by 195 countries of
Paris accord December 12, 2015.
Ratification now underway,
requires 55 countries signatures
constituting 55% of global
emissions for entry into force.
Source:
http://ec.europa.eu/clima/policies/international/negotiations/paris/index_en.htm
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22 April 2016 IMO MEPC London
IMO response to Paris
COP21 Accord. CO2
reduction data
collection system and
reporting to flag states
for all vessels above
5,000 GT. First step
toward additional CO2
reduction measures.
Source:
http://www.marinelog.com/index.php?option=com
_k2&view=item&id=10892:imos-mepc-makes-
progress-on-co2-measures&Itemid=227
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Emission Control Areas
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DF Natural Gas Engine Diesel Engine0
20
40
60
80
100
Emission
values [%]
CO2
NOx
SOx
Particulates
-25%
-85%
-99%
-99%
LNG provides
significant emission
reductions
compared to
traditional diesel
engines
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Why clean ?
13.6.2016 [Presentation name / Author]22
Methane
[CH4]
4:1
(400%)
Ethane
[C2H6]
6:2
(300%)
Propane
[C3H8]
8:3
(267%)
Butane
[C4H10]
10:4
(250%)
Natural gas… lowest carbon ratio = cleanest burning fuel
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North America ECA SOx & NOx
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Canada Fuel Sulfur
2012… 1% Limit
2015… 0.1% Limit*
*Fleet Averaging Program
IMO Newbuilds
2016… NOx Tier III
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Canada Fleet Sulphur Averaging Program
13.6.2016 [Presentation name / Author]24
Transport Canada issues a
Canadian Air Pollution
Certificate for vessels
following the regime to
average sulphur content of
fuel across the firm’s fleet
until 31 December 2020.
Afterward all vessels are to
comply with 0.1% sulphur
content by fuel or
approved alternative
compliance option.
Source:https://www.tc.gc.ca/eng/marinesafety/bulletins-2013-
03-eng.htm
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Decision Tree… New Build IMO Vessel
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New
Build
Diesel
HFO
LNG
Scrubber … Fuel Sulfur
Compliance
LNG Compliance
North America ECA January 2016 multiple emission requirements; both fuel sulfur
limits (2015) and engine emissions requirements ( 2016 IMO Tier 3 ) in effect
New IMO Tier 3 engine
+ after-treatment… SCR, EGR 0.1% Sulfur… Fuel
Compliance
New IMO Tier 3 engine
+ after-treatment… SCR, EGR
+ Scrubber
New IMO Tier 3 engine
+ LNG cryogenics
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New Build Attributes
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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
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Wartsila NOx Selective Catalytic Reducer “SCR” System
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Soot Blower
Air
Pump
Mixing Duct
Dosing Unit
NOR Reactor
Controls
Urea Tank
Compressed
Air
Urea Mixing & Injection
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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
C Type
Cryogenic Tank
Cold Box
Bunker
Station
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De- Plume Unit
Bleed-Off
Treatment
Alkali Feed
Module
Holding Tank
Exhaust Gas Fan
Alkali Storage
Tank
Sludge
Tank
Water
Measurement
Exhaust Gas
Analyzer
Scrubbing Water
Pump
Heat
Exchanger
CW Pump
Water
Measurement
Process
Tank
Closed Loop Scrubber
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Venturi Inline
13.6.2016 [Presentation name / Author]30
Scrubber Types
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Scrubber References
13.6.2016 [Presentation name / Author]31
Merchant
Container vessels:
5 vessels, 8 scrubbers, 105 MW
Tankers:
2 vessels, 2 scrubbers, 5 MW
Ro-Ro:
21 vessels, 42 scrubbers, 411 MW
Bulker:
10 vessels, 10 scrubbers, 104 MW
LPG:
8 vessels, 15 scrubbers, 132 MW
Cruise and Ferry
Cruise:
23 vessels
45 scrubbers
1281 MW in total
Ro-Pax:
11 vessels
37 scrubbers
280 MW in total
Others
Trawler:
1 vessel 11 MW
81 installations… 160 scrubbers… > 2,300 Mw
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2015 ECA & 2016 N0x Owner Choices
Consume compliant Low Sulfur Distillate… champagne fuel + Selective Catalytic Reduction for N0x
Switch to LNG fuel: safe, clean, abundant, affordable, & available natural gas LNGReduction: CO2, N0x, SOx, PM
HFO Alternative Compliance… install scrubber for S0x + Selective Catalytic Reduction for N0x
Abort the Port
13 June 2016
ECA & IMO force timely owner choices
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Agenda
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What ? Fuel Price vs. Cost
Energy
Why & How ? No. Am ECA & Emissions
Owner Choices
Abatement: SCR, Scrubber, LNG
Business Case Cargo, Investor, Banker Views
ROPAX Ferry
Investment Returns
Oil Price Shock ! Business Case: Robust or Fragile?
Stress Test
Conclusions Business Case Appendix
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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.
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4 Viewpoints
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Ultimate
Environment
Safety
At fair return
capturing risks
PUBLIC
FERRY OWNER
BANKER
Transport safely
at optimal cost
reliably
VEHICLE DRIVER
Are risks
understood &
I’m repaid !
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4 Key Metrics
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Ultimate
Environment
Safety
Return on
Investment:
ROIC, EBITDA,
cash flows
PUBLIC
FERRY OWNER
All in Charter
Freight Rate
$ / unit
transported
VEHICLE DRIVER
EBIT, Times
Burden Cover,
cash flows
BANKER
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Business Case Vessel
37 © Wärtsilä
Canadian Corporation
ROPAX Capacity 700 passengers & 240 vehicles
New Build
North America ECA IMO Tier 3
Cruise Speed 16 knots ( 3 engines online, 1 standby )
Design 18 knots ( 4 engines online w/margin )
Electric Drive Twin Screw
Installed power 18,800 kW ( 25,200 HP )
Major Class Society
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The Route
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100% “ECA” Bound route, 580 nm round trip, 6 hour turnaround each port,
high season 6 months @ 2 day/RT, transition 5 months @ 3 day/RT, slow season
1 month @ 4 day/ RT, 16 knot schedule ( 18 knot max speed )… 148 RT/year
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Recall ?
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Recall ?
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Wartsila W31
13.6.2016 [Presentation name / Author]41
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W31 Diesel Electric
13.6.2016 [Presentation name / Author]42
SCR
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W31 LNG Electric
13.6.2016 [Presentation name / Author]43
LNG
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W31 HFO Electric
13.6.2016 [Presentation name / Author]44
Scrubber
SCR
HFO
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Exchange Rates
Then August 2014
$1 US = $1.09 CAD
Source: http://www.xe.com/currencycharts/?from=USD&to=CAD&view=5Y
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Then… 5 August 2014
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LS380 1% 693 $ CAD/mt… LSMGO 0.1% 1,058 $ CAD/mt… LNG 700 $ CAD/mt
Source: http://www.bunkerworld.com/prices/port/us/hou/
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Vehicle Driver Transport safely at optimal cost reliably
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Passenger and vehicles find competitive transport costs, plus LNG advantage
captures significant emissions reductions supporting green goals.
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Vehicle Owner Transport safely at optimal cost reliably
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LNG advantage captures significant CO2 emissions reductions supporting green
goals… LNG is ≈ 34% below HFO & ≈ 25% below diesel.
CO2 gm/
unit mile
25% 34%
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Ferry Owner A fair return capturing risks
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Compelling fuel payback for LNG an initial screening tool … not a good investment metric.
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ROCE Investment Criteria
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ROCE: reflects the company fundamental earning power.
Source: Robert Higgens, Analysis for Financial Management, 10th 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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Ferry Owner A fair return capturing risks
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Investor finds LNG Competitive Advantage for return on capital… LNG hurdle rate
is highest & yet preserves passenger substantial emission reductions.
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Xxx
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Warren Buffett… World Famous Investor
EBITDA 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…
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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… + $2.8 Million over HFO+ Scrubber
and + $4.6 Million atop MDO.
Years
EBITDA
MDO Fuel
HFO +
Scrubber
LNG Fuel
Ferry Owner A fair return capturing risks
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Banker Are risks understood & I’m repaid !
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Banker finds debt cover is weakest on MDO fuel, LNG is strongest.
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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.
56 © Wärtsilä
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Years
EBIT
MDO Fuel
HFO +
Scrubber
LNG Fuel
Banker Are the risks understood and I’m repaid !
LNG has strongest EBIT… Depreciation Canada 25 years straight line, loan
retires year 10… Dry docking years 5,10,15,20
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Agenda
58 © Wärtsilä
What ? Fuel Price vs. Cost
Energy
Why & How ? No. Am ECA & Emissions
Owner Choices
Abatement: SCR, Scrubber, LNG
Business Case Cargo, Investor, Banker Views
ROPAX Ferry
Investment Returns
Oil Price Shock ! Business Case: Robust or Fragile?
Stress Test
Conclusions Business Case Appendix
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Global Recoverable Shale Gas Resource
13 June 2016
Top 5 hold over half of world’s
shale gas resource
tcfSource: http://www.eia.gov/conference/2013/pdf/presentations/kuuskraa.pdf
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Canada #5 Shale Gas Resource
573 tcf gas & 8.8 billion barrels oil
British Columbia…Gas favorable, commercial production, market challenges
Alberta/ Saskatchewan…Gas massive area & modest concentration, activity starting
Eastern Canada…Gas development moving slowly
13 June 2016
Source:http://www.eia.gov/conference/2013/pdf/presentations/kuuskraa.pdf
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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.
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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.
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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
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Source: http://www.businessinsider.com/citi-saudi-arabia-wont-win-this-oil-standoff-2014-11
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Profits negative…
Severe Pain
Profits squeezed…
Manageable Pain
Key Oil Production Cost
40 $/BBL
Brent Breakeven Price
Total Production
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Saudi Arabia
11.6 m BBL/day
Canada jumps to #4
2014 Production
65 © Wärtsilä
US vaults to 1st in
production oil and
other liquids
OPEC
OPEC
OPEC
OPEC
OPEC
OPEC
OPEC
Source:
ttps://en.wikipedia.org/wiki/List_of_countri
es_by_oil_production
http://www.eia.gov/beta/international/ranki
ngs/#?prodact=53-1&cy=2014OPEC
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Government Breakeven Budgets
66 © Wärtsilä
Source:
https://alfinnextlevel.files.w
ordpress.com/2014/04/oil_
breakeven_deutsche_bank
_oct_14.png
40 $/BBL
Severe shortfalls @ prices under 100$/BBL, present oil glut & soft prices challenge
sustainability beyond short run
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Brent Crude Oil Prices
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Source: http://www.nasdaq.com/markets/crude-oil-brent.aspx?timeframe=1y
THEN
NOW
Oil severe 60% price drop
past 20 months as
abundant supplies face
weak demand from China
and stagnant EU.
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What’s the impact of the steep fall in oil prices !
Is competitive advantage of LNG robust or fragile ?
68 © Wärtsilä
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Exchange Rate 31 May 2016
Now
$1 US = $1.31 CAD
Then August 2014
$1 US = $1.09 CAD
Source: http://www.xe.com/currencycharts/?from=USD&to=CAD&view=5Y
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Recent Fuel Prices 30 May 2016
Montreal
IFO 380@ 332 $ CAD
MGO@ 763 $ CAD
LNG@ 515 $ CAD
Note: Exchange Rate$1 US = $1.31 CAD
Source: http://shipandbunker.com/prices/am
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Ferry Owner A fair return capturing risks of oil fall 30 May 2016
71 © Wärtsilä
LNG maintains strong investment returns, but HFO+SCR+Scrubber yields highest rates
amidst steep oil dive… Diesel + SCR remains 3rd place.
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Stress Test & Return On Capital Robustness or Fragility
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Deviation
ROCE
Ships are long term multi-decade
investments while fuel prices
fluctuate short term.
LNG provides superior returns
versus steeper slopes of higher
volatility traditional fuels.
LNG Win Win: emissions reduction & long term superior investment returns over many price
scenarios compared to traditional fuels. Strong HFO scrubber returns yield 2nd place
overall… most volatile is MGO.
Tier 3 IMO 100% ECA
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Fuel Stress Test: Tier 3 IMO 100% ECA
THEN 5 August 2014
13.64% @ LNG 700 $ CAD/mt
11.95% @ MDO 1,058 $ CAD/mt
12.50% @ HFO 693 $ CAD/mt
73 © Wärtsilä
Deviation
ROCE
NOW 30 May 2016
14.39% @ LNG 515 $/mt
13.39% @ MDO 763 $/mt
14.51% @ HFO 332 $/mt
Today HFO Scrubber is highest return on Capital Employed with steep bunkers drop.
LNG holds 2nd place as robust investment today’s market; MDO remains lowest returns.
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Why Volatile ?
13.6.2016 [Presentation name / Author]74
Changes to LNG underlying commodity variable costs have far less impact than Diesel.
Source: Pivotal LNG, An AGL Resources Company
Source:
https://i.ytimg.com/vi/8BVDiBNJwLY/h
qdefault.jpg
Source:
https://c1.staticflickr.com/1/220/50384011
1_e3b8a10f17_z.jpg?zz=1
LNG Diesel
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Agenda
75 © Wärtsilä
What ? Fuel Price vs. Cost
Energy
Why & How ? No. Am ECA & Emissions
Owner Choices
Abatement: SCR, Scrubber, LNG
Business Case Cargo, Investor, Banker Views
ROPAX Ferry
Investment Returns
Oil Price Shock ! Business Case: Robust or Fragile?
Stress Test
Conclusions Business Case Appendix
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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 fuels host widely varying
energy content and density values. Numbers shown are representative.
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EBITDA
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EBIT
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Weight Average Cost Capital WACC
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Source: http://www.investopedia.com/walkthrough/corporate-
finance/5/cost-capital/wacc.aspx
WACC may be used as a hurdle rate for NPV or to
assess ROIC (ROCE) performance.
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Cost of Capital - Divisional & Project Costs ( WACC cont. )
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Source: http://www.investopedia.com/walkthrough/corporate-
finance/5/cost-capital/wacc.aspx
WACC must be adjusted up or
down to properly reflect project
risks that differ from those of the
overall firm.
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Net Present Value & Internal Rate of Return
85 © Wärtsilä
Source: http://www.investopedia.com/walkthrough/corporate-
finance/5/cost-capital/wacc.aspx
IRR = discount rate that makes
NPV equal zero.
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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 & improve sustainability?
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A “Commodity Play” on fuel energy costs
seeking competitive advantage for market
share.