How the oil gas nexus is undergoing a structural shift and what this means to ship owners seeking competitive advantage to boost their bottom line. A business case for a Great Lakes self Unloader demonstrates from the cargo owner, vessel investor owner, and banker viewpoints alternatives on fuel for the Emission Control area, diesel, LNG, or HFO scrubber.

1. 1 © Wärtsilä
The Oil Gas Tipping Point
& Great Laker Business
Case Economics…
SNAME Great Lakes Section
Marriott Downtown Key Center
11 February 2016
Cleveland, OH
John Hatley PE
LNG Initiatives ( MBA, MSE)
Americas VP Ship Power
Wartsila North America, Inc.
Cell +1 281 221 4209
john.hatley@wartsila.com

2. XXXXXXXXXXXXXXXXXX
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Keys
Global Energy Policies, market gamesmanship ?
Future Ahead, structural shifts?
As a vessel owner, all I want to know
is the tipping point…
What fuel strategy do I choose to
to boost my bottom line?
2 © Wärtsilä
A “Commodity Play” on fuel
energy costs seeking competitive
advantage for market share.

3. Agenda
3 © 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
1000 Ft. Great Laker
Investment Returns
Oil Price Shock ! Business Case: Robust or Fragile?
Stress Test
Conclusions Business Case Appendix

4. Agenda
4 © 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
1000 Ft. Great Laker
Investment Returns
Oil Price Shock ! Business Case: Robust or Fragile?
Stress Test
Conclusions Business Case Appendix

5. Quiz…. Fuel Price ?
a) HFO 290.83 $ / ton ….
b) MDO 314.68 $ / ton .…
c) LNG 363.01 $ / ton ….
5 © Wärtsilä
Which is the lowest price ?

6. The Price Paid for what it Cost
6 © Wärtsilä
: 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

7. Quiz… Fuel Answer Key
a) HFO 290.83 $ / ton ….
b) MDO 314.68 $ / ton .…
c) LNG 363.01 $ / ton ….
7 © Wärtsilä
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
7.77 $ / million BTU
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

8. Agenda
8 © 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
1000 Ft. Great Laker
Investment Returns
Oil Price Shock ! Business Case: Robust or Fragile?
Stress Test
Conclusions Business Case Appendix

9. Emission Control Areas
9 © Wärtsilä

10. 2015 ECA 0.1% Sulfur
10 © Wärtsilä
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

11. How clean is Natural Gas compared to Diesel ?
DF Natural Gas
Engine
Diesel
Engine
0
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

12. No. Am. ECA Fuel Sulfur Limit
12 Wärtsilä
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

13. North America ECA SOx & NOx
13 © Wärtsilä
Fuel Sulfur
2012… 1% Limit
2015… 0.1% Limit
EPA Category 3
2016… NOx Tier III
& EPA Category 2
… NOx Tier 3, 4

14. Decision Tree… New Build Vessel
14 © Wärtsilä
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 (EPA Tier 3,4 )
requirements in effect, new builds and major conversions
require new engines plus compliance methods.
New tier EPA engine +
after-treatment SCR
0.1% Sulfur…
Fuel Compliance
New tier EPA engine +
after-treatment SCR
+ Scrubber
New tier EPA engine +
LNG cryogenics

15. 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

16. Wartsila NOx Reducer System
16 © Wärtsilä
Soot Blower
Air
Pump
Mixing Duct
Dosing Unit
NOR Reactor
Controls
Urea Tank
Compressed
Air
Urea Mixing & Injection

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

18. 18 © Wärtsilä
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

19. Decision Tree… Retrofit Existing Vessel
19 © Wärtsilä
Existing
Vessel
Diesel
HFO
LNG
Scrubber … Fuel
Sulfur Compliance
LNG
Compliance
ECA January 2016 multiple emission requirements; fuel sulfur
limits (2015) and engine emissions (EPA Tier 3,4 )
requirements in effect, however existing retrofits may avoid
major conversions & qualify without new tier engines or SCR.
New tier EPA engine +
after-treatment SCR
0.1% Sulfur…
Fuel Compliance
New tier EPA engine +
after-treatment SCR
+ Scrubber
New tier EPA engine +
LNG cryogenics

20. 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 LNG
Reduction: CO2, NOx, SOx, PM
3. HFO Alternative Compliance… install
scrubber for Sox + Selective Catalytic
Reduction for NOx
4. Abort the Port
30 March 2016
ECA & EPA force timely choices existing retrofit vessels

21. Agenda
21 © 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
1000 Ft. Great Laker
Investment Returns
Oil Price Shock ! Business Case: Robust or Fragile?
Stress Test
Conclusions Business Case Appendix

22. 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.
22 © Wärtsilä
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.

23. 4 Viewpoints
23 © Wärtsilä
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

24. 4 Key Metrics
24 © Wärtsilä
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

25. The Route… Duluth to Gary
25 © Wärtsilä
100% “ECA” Bound route, 136 hour 1464 nm round trip includes
locking & maneuvers & 0.5 days load/unload per port, 269 operating
days per year, seasonal 59,800 tons taconite average load
Source: http://www.vesseldistance.com/

26. Business Case Vessel
US Corporation, US Flag, Jones Act
Great Lakes 1,000 Footer Self Unloader Bulker
Refit Existing Vessel in 2016 …
EPA Category 3 ( > 30 liters /cyl. ) Tier 3
74,000 Tons Capacity
Speed 14+ knots with margin, Twin Screw
Installed power 16,090 HP ( 12,000 kW )
Manning 20
Major Class Society
26 © Wärtsilä
Speed provides 47 annual round trips, … competitive
vessel size transports low cost freight
Source: https://en.wikipedia.org/wiki/MV_American_Century

27. Recall ?
27 © Wärtsilä

28. Then… 5 August 2014
28 Wärtsilä
LS180 1% 636 $/mt… LSMGO 0.1% 971 $/mt… LNG 500 $/mt
Source: http://www.bunkerworld.com/prices/port/us/hou/

29. Cargo Owner Transport safely at optimal cost reliably
29 © Wärtsilä
Cargo owner finds transport savings with LNG plus advantage
captures significant emissions reductions supporting green goals.

30. Cargo Owner Transport safely at optimal cost reliably
30 © Wärtsilä
Cargo owner finds 4 year charter transport savings with LNG, $2.8
million over diesel and $1.1 Million over HFO + scrubber,
competitive advantage LNG with lowest freight & least emissions.

31. Ship Owner A fair return capturing risks
31 © Wärtsilä
Compelling fuel payback for vessels running on LNG fuel;
an initial screening tool … not a good investment metric.

32. ROCE Investment Criteria
32 © Wärtsilä
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

33. Ship Owner A fair return capturing risks
33 © Wärtsilä
Investor finds LNG Competitive Advantage for return on
capital… LNG hurdle rate is highest & yet preserves cargo
owner millions transport savings and emission reduction.

34. 34 © Wärtsilä
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…

35. 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.
35 © Wärtsilä

36. 36 © Wärtsilä
LNG fuel has strongest EBITDA… + $3.6 Million over
HFO+ Scrubber and + $5.0 Million atop MDO.
Years
EBITDA
MDO Fuel
HFO +
Scrubber
LNG Fuel
Ship Owner A fair return capturing risks

37. Banker Are risks understood & I’m repaid !
37 © Wärtsilä
Banker finds debt cover is weakest on MDO fuel, favorably
stronger on alternatives, LNG is strongest.

38. 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.
38 © Wärtsilä

39. 39 © Wärtsilä
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

40. Agenda
40 © 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
1000 Ft. Great Laker
Investment Returns
Oil Price Shock ! Business Case: Robust or Fragile?
Stress Test
Conclusions Business Case Appendix

41. US #1 Shale Resources
41 © Wärtsilä
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

42. Shale Gas
42 © Wärtsilä

43. Shale Oil
43 © Wärtsilä

44. 28 November 2014
44 © Wärtsilä
Source: http://www.reuters.com/article/us-opec-meeting-
idUSKCN0JA0O320141128
Key OPEC Vienna
meeting sets stage for
market share battle.
Brent begins steep fall.

45. 5 January 2015
45 © Wärtsilä
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.

46. Discipline Target US or Russia ?
46 © Wärtsilä
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

47. Source: http://www.businessinsider.com/citi-saudi-arabia-wont-win-this-oil-standoff-2014-1147 © Wärtsilä
Profits negative…
Severe Pain
Profits squeezed…
Manageable Pain
45 $/BBL
Key Oil Production Cost
40$/BBL
Total Liquids Production
Brent Breakeven Price

48. 2014 Production
48 © Wärtsilä
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_cou
ntries_by_oil_production
http://www.eia.gov/beta/international/ra
nkings/#?prodact=53-1&cy=2014
Saudi Arabia
11.6 m BBL/day

49. Government Breakeven Budgets
49 © Wärtsilä
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.png
40 $/BBL

50. Brent Crude Oil Prices
50 © Wärtsilä
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.

51. What’s the impact of the steep fall in oil
prices !
Is competitive advantage of LNG robust
or fragile ?
51 © Wärtsilä

52. Recent … 28 January 2016
52 © Wärtsilä
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…

53. LNG Price 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
exchange rate x 0.72 USD $ / CAD $
Price LNG FOB 5.77 US $ / mm BTU
53 © Wärtsilä
Allow 2.00 US $/mmBTU transport = 7.77 or LNG 363 $/mt

54. Owner A fair return capturing risks of oil fall 28 Jan 2016
54 © Wärtsilä
LNG emissions and millions transport savings remains for shipper
but returns narrow for investor amidst oil glut steep price dive.

55. Fuel Stress Test: 100% ECA
THEN 5 August 2014
12.20% @ LNG 500 $/mt
4.34% @ MDO 971 $/mt
7.76% @ HFO 636 $/mt
55 © Wärtsilä
Deviation
ROCE
NOW 28 January 2016
13.94% @ LNG 363 $/mt
17.96% @ MDO 333 $/mt
18.15% @ HFO 139 $/mt
LNG robust despite steep crude drop; today choose HFO scrub
for best ROCE, but sustainable? Most volatile returns MDO, then
HFO, least LNG… holds cargo share with compelling emissions
+ transport savings. Overall HFO + Scrubber often 2nd place.

56. Agenda
56 © Wärtsilä
What ? Fuel Price vs. Cost
Energy
Why & How ? No. Am ECA & Emissions
Owner Choices
SCR, Scrubber, LNG Abatement
Business Case Cargo, Investor, Banker Views
185K BBL ATB
Investment Returns
Oil Price Shock ! Business Case: Robust or Fragile?
Stress Test
Conclusions Business Case Appendix

57. XXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXX
Keys
Global Energy Policies, market gamesmanship ?
Future Ahead, structural shifts?
As a vessel owner, all I want to know
is the tipping point…
What fuel strategy do I choose to
to boost my bottom line?
57 © Wärtsilä
A “Commodity Play” on fuel
energy costs seeking competitive
advantage for market share.

58. APPENDIX
Business Case Details
58 Wärtsilä

59. Financials
59 Wärtsilä

60. Key Values
60 Wärtsilä

61. Key Values
61 Wärtsilä

62. Fuel Attributes
62 © Wärtsilä
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.

63. EBITDA
63 © Wärtsilä

64. EBIT
64 © Wärtsilä

65. Weight Average Cost Capital WACC
65 © Wärtsilä
Source: http://www.investopedia.com/walkthrough/corporate-finance/5/cost-capital/wacc.aspx
WACC may be used as a hurdle rate against which to assess ROIC (ROCE) performance.

66. Cost of Capital - Divisional & Project Costs ( WACC cont. )
66 © Wärtsilä
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.

67. Net Present Value & Internal Rate of Return
67 © Wärtsilä
Source: http://www.investopedia.com/walkthrough/corporate-finance/5/cost-capital/wacc.aspx

68. Selection Guide Measures of Merit
68 © Wärtsilä
Source: Fundamentals Ship Design Economics,
Lecture Notes, Professor Harry Benford,
Revised June 1981

69. Measures of Merit ( continued )
69 © Wärtsilä
Source: Fundamentals Ship Design Economics,
Lecture Notes, Professor Harry Benford,
Revised June 1981

70. Measures of Merit ( continued )
70 © Wärtsilä
Source: Fundamentals Ship Design Economics,
Lecture Notes, Professor Harry Benford,
Revised June 1981