Post on 06-May-2015
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Professional Logistics Group
Shale Development in Argentina:
The Evolving Supply Chain
Prepared for
April 17, 2013 Buenos Aires, Argentina
» Boutique consulting firm specializing in logistics, engineering, and
supply chain
Established in 2001
Over 90 clients and 200 engagements
» Headquarters in Chicago USA, with team members throughout
the US and with “on the ground” experience in:
North America / Europe / South America / Asia / Middle East
» Consulting services
Strategy & optimization
Assessments & benchmarking
Transportation assets & infrastructure
Logistics operations
M&A/investments/private equity
» Key industry verticals:
Oil & gas
Chemicals & plastics
Wind energy & project cargo
Bulk commodities (minerals, mining, agricultural)
Industrial manufactured goods
Private equity
About PLG Consulting
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Argentina Resources vs. ROW
» Argentina has 774 Tcf of technically
recoverable shale gas
This is the world’s third largest assessed endowment,
behind only China (1,275 Tcf) and United States (862
Tcf)
» 2.5 billion barrels of proved oil reserves
» Potential for dramatic increases in
production through shale development
» Extensive existing energy infrastructure
South American Shale Gas Resources
Source: Americas Petrogas
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Neuquén Basin
» Neuquén Basin is focal point
for unconventional
development in Argentina
Most “tangible” shale play outside of
North America
Most productive basin (estimates)
– 260,000 bbls/day & 2.6 Bcf/day
» Gas potential
407 Tcf technically recoverable shale
gas
» Vaca Muerta liquid potential
800 MMbbls of potential recoverable
oil in Vaca Muerta Shale
Condensate in transition windows
Source: Americas Petrogas
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Vaca Muerta
Source: YPF
» In 2011, YPF announced a large discovery of shale oil in the Loma La
Lata field in the Neuquén basin in the Vaca Muerta shale formation “High quality crude in over-pressured conditions, and with high thickness….” - YPF
“Better prospect than US comparable basin….” - YPF
» Estimated size of which is to be believed 800 million barrels of
recoverable shale oil
Source: Americas Petrogas 2013Source: Azabache Energy Inc.
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Vaca Muerta vs. Bakken – Single Well
Lifetime Production Comparison
Estimated Ultimate Recovery
@ 25 years: 389,000 bbl
Estimated Ultimate Recovery
@ 25 years: 500,000 bbl
Vaca Muerta Horizontal Well (10 fracture stages)
Source: CAP IV SEN
Bakken Horizontal Well (28-32 fracture stages)
Source: J. Mason – Oil Production Potential of the North Dakota Bakken (2012)
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Investments in Argentina
Shale Development
» YPF push to develop Neuquén Basin
YPF’s plan is to spend $35 billion through 2017 to aggressively
develop Neuquén Basin
Plan to boost capital investments by 60 percent in 2013
Need to raise billions of dollars over next few years in order to
aggressively develop shale
» Chevron $1 billion deal with YPF for Vaca Muerta Deal for an estimated 100 wells over 1 year period
YPF transfer 50% interest in two oil fields in Vaca Muerta
May eventually expand to ~2,000 wells for ~$15 billion
» Bridas $1.5 billion deal with YPF for Vaca Muerta
Deal for an estimated 130 wells over 2 years
YPF transfer 50% of its rights in two oil fields in Vaca Muerta
Most of the development will involve shale oil, but there are also
plans for exploitation of wet gas
» Multinational E&P interest with fracking expertise
entering the market
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Resources and Experience Can Be
Applied in Argentina
» Expect far-ranging implications beyond oil and
gas
Energy
Transportation
Manufacturing
Balance of Trade
» Both opportunities and risks in global market
Fracking inputs
Well outputs and downstream products
» Outside resources will need to be imported
Experienced personnel
New rigs
Drilling supplies, including proppants
Key learnings from N.A. shale development experience
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The Shale Development
Revolution – Big Picture
New Technologies• Hydraulic Fracturing
• Horizontal Drilling
Continuous Evolution• Constant Change
• Rapid Change
Market Drivers• Supply & Demand
• Customers
• Price
• Logistics
Hydraulic Fracturing and
Horizontal Drilling
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Hydraulic Fracturing
Equipment Staging Area
Source: JPTOnline.org
Frac Tanks/Fluid Storage
Chemical Trucks
Blender
Sand Storage
Unit
Pump Trucks
Data Van
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Shale Development Supply Chain
and Downstream Impacts
Feedstock (Ethane)
Byproduct (Condensate)
Home Heating (Propane)
Other Fuels
Other Fuels
Gasoline
Inputs >> Wellhead >> Direct Output >> Thermal >> Fuels >> Raw Materials >> Downstream Products
Gas
NGLs
Crude
Proppants
OCTG
Chemicals
Water
Cement
Generation
Process Feedstocks
All Manufacturing
Steel
Fertilizer (Ammonia)
Methanol
Chemicals
Petroleum Products
Petrochemicals
Hydraulic Fracturing Materials
Inputs and Logistics – Per Well
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Materials
Chemicals
Clean Water/
Cement
Proppants
OCTG (Pipe)
Source to
Transloading
2
Local source
40
5
Transloading to
Wellhead Site
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~1,000
160
20
47 Total
Railcars
~1,200 Total
Truckloads
Oil/Gas/NGLs
Truck, Rail,
Pipeline
Waste Water
~500 Total
Truckloads
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Proppants Demand
Source: Azabache Energy Inc.
Vaca Muerta: Proppants and Water Demand» Shale development in Argentina just in
very early stages
» Demand for imported proppants will
increase significantly
» Optimal logistics model for proppants
and water will have to be “invented”
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Proppants Supply
and Logistics
» Need to import proppants Proppants are currently imported from Brazil and USA,
companies are looking at China
Curimbaba out of Brazil has a very large deposit of high-grade
bauxite which is used to make ceramic proppants
The USA has large deposits of high quality frac sand and
experience with USA’s shale plays
China also has numerous ceramic proppant producers
» Logistics challenges for proppants Neuquén basin is located in remote desert
Proppants coming from Brazil can take up to 45 days to arrive
on site via rail and trucks on unpaved roads
» Despite challenges, a range of options exist for
both natural sand and ceramics Global market trends that Argentina shale plays can take
advantage of in both supply and logistics
Existing transportation infrastructure in Argentina
Over time, logistics models will evolve and innovate
Processed Sand Total
Delivered Cost
Source: PLG analysis 16
» Benchmark cost (US) with well-executed performance
Example unit train movement from Wisconsin to Texas
with total delivered cost of approx. $180/ton
Logistics drives ~60% of total delivered sand cost
» Potential for significant cost add-ons
caused by strategic and tactical issues
Sub-optimal logistics network design or
infrastructure
Poor planning and/or execution
Uncompetitive sand price
Poor sand quality
» N.A. logistics model for proppants has
evolved to reduce costs, improve
efficiency
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Innovation Case Study:
Ceramic Proppants from China
Origin
Export
Import
Destination
» Ceramic vs. natural sand decision driven by
technology, cost (yield)
» Phase one innovation optimizes logistics of
existing containerized supply chain
Route and terminal changes
Use of boxcars
Net payload improvements
Natural flow of containers exploited
45% cost reduction impact
» Phase two innovation converts to breakbulk
Additional 12% cost reduction impact
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Break Bulk Logistics Flow
Origin Port of Export Loading
Ocean Transport Port of Entry Destination
Origin
Export
Import
Destination
N. A. Correlation of Operating Rig
Count with Sand and Crude
Shipments
19STCC 14413 (sand) and 13111 (petroleum) Data sources: US Rail Desktop, Baker Hughes
1,695
1,814
1,270
886939
1,073
1,299
1,467
1,6041,6651,691
1,798
1,9111,9721,9481,965
1,864
1,7631,762
0
500
1000
1500
2000
2500
0
20,000
40,000
60,000
80,000
100,000
120,000
2007 Avg. 2008 Avg. 2009 2010 2011 2012 2013
Op
era
tin
g O
ns
ho
re R
igs
Sa
nd
Ca
rlo
ad
s
Quarterly Data
Operating On Shore Rigs
All Sand Carloads
Petroleum Carloads
U.S. Sand Mining
Overcapacity: New Reality
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» Growth in Wisconsin sand
mining industry has slowed
60 mine/processing operations
proposed June 2011 – June 2012
Four (4) proposed June 2012 –
January 2013
» Decline in sand pricing
» Excess supply and
processing capacity
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Proppant Sourcing and
Logistics Options
From USA
From China
From
Brazil
» Multiple sourcing options
Ceramic from Brazil
Ceramic from China
Natural sand and ceramic from US
» Viable port, liner service to Bahia Blanca
Existing container and breakbulk service
Dry bulk vessels would require significant investments
Storage and handling systems
Tank trucks
» Existing rail infrastructure
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Representative Transportation Costs –
Proppants to Bahia Blanca Port
~$55/mt
~$140/mt
~$110/mt
~$10/mt~$90/mt
~$100/mt
Ceramic via container
Natural sand or ceramics via break bulk
Natural sand or ceramics via container
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» Estimated 25% excess capacity end of 2012
Declining rig count
Move from gas plays to liquid rich plays has caused an oversupply of pumping capacity since liquid
plays typically require lower pumping capacities
Improved efficiencies of frac operations
Overbuild of pumping capacity
Overcapacity of Pumping HHP
in the USA
Source: Baker Hughes Source: Baker Hughes
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» Capacity outlook
“Without a meaningful jump in rig count, it’s going to take
several quarters to chew through the excess horsepower
capacity” - Baker Hughes CEO, March 19, 2013
In December 2012, Halliburton estimates that countries outside
North America hold more than 80% of the world’s shale gas
reserves but under 20% of the pressure pumping capacity that is
required to extract it
» Pricing pressure
The decline in natural gas drilling and influx of equipment into
the industry has resulted in pricing pressure for hydraulic
fracturing services which is expected to persist through 2013
Pricing pressure has been seen in all USA basins
» Opportunity for redeployment of equipment and
trained personnel to international shale plays
Overcapacity of Pumping HHP
in the USA (continued)
Shale Play Product
Flows Outbound
» Natural Gas
Majority via pipelines, some trucks
» Natural Gas Liquids (NGLs)
Requires processing (fractionation)
3-9 gallons/MCF (thousand cubic feet)
– Ethane 63%
– Propane 22%
– Butane 8%
– Pentane 5%
– Other 2%
– Condensate (liquid hydrocarbons)
» Crude Oil
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Potential Shale Development
Impact on Domestic Fuel Supply
» Over 50% of electricity generation in Argentina is fueled by natural gas
» Despite major proven reserves, Argentina is net importer of natural gas
Fuel imports in 2011 were $9.4 billion
Local demand in Argentina and large Government of Argentina focus to reverse energy sector’s recent decline
– Last November, Argentina announced wellhead prices would rise to $7.50/MMBtu for “new gas” from wellhead average of about $2.5/MMBtu
in the Neuquén Basin
Government is looking to become net fuel exporter
Prospects for Natural
Gas Exports
» Global market conditions
represent significant long-
term demand for LNG Asia, Europe primary markets
» Opportunity for Argentina if
US continues to restrict
exports
27Source: Waterborne Energy Inc. Data in $US/MMBtuSource: Total
Source: Total
Shale Development
NGL Impacts
» “Wet gas” sources identified in Neuqin Basin
» NGLs fractionation facilities proximal to production “Y-grade” must be separated into purified products
» Abundant supplies have sparked chemical industry
renaissance in US Ethane is “cracked” to make ethylene, the most basic building
block in the chemicals supply chain
USA is now the low-cost producer of ethylene-based chemicals due
to abundant supplies of ethane from shale plays (up to 60% raw
materials cost advantage)
Over $15B in new announced ethylene expansions will come on-
line over the next five years, increasing capacity by 33% (11
MMmt)
Up to 40% of new chemical production will be exported
» Similar opportunity exists for Argentina’s already
significant chemical industry
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0
500
1000
1500
2000
2500
$/T
on
HDPE Calculated Cost
Sources: CMAI, TopLine Analytics, and Alembic analysis,
2012
Natural Gas & Petrochemical
Downstream Products
Feedstock/
Intermediary
Finished
Products
Natural Gas,
OIl
Ethane,
Naphtha, etc.
Ethylene
Miscellaneous
Vinyl Acetate
Linear
Alcohols
Ethyl
Benzene
Ethylene
Oxide
Ethylene
Dichloride
High Density
Polyethylene
Low-Density
Polyethylene
Adhesives, coatings, textile/
paper. finishing, flooring
Detergents
Styrene
Ethylene
Glycol
Vinyl Chloride
House wares, crates,
drums, food containers,
bottles.
Food packaging, film,
trash bags, diapers, toys
PVC
Antifreeze
Fibers
PET
Miscellaneous
Polystyrene
SAN
SBR
Latex
Miscellaneous
Medical gloves,
carpeting,
coatings
Tire, hose
Instrument lenses,
house wares
Insulation, cups
Siding, windows,
frames, pipe, medical
tubing
Pantyhose,
carpets, clothing
Bottles, film
Potential Shale Development Benefits
for Argentina’s Chemical Industry
» Chemicals already an
important industry in
Argentina, but
challenged with raw
materials supply
» New feedstocks from
shale development
may help reverse
chemicals trade deficit
» Argentina could have
advantaged position in
Latin America vs. US
chemical exports
» Potential for expanded
trade with Europe and
Asia
30Source: HSBCSource: HSBC
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Shale Development Impact on
Crude Oil Market Dynamics
» Similar to natural gas,
shale development
represents opportunity for
increased exports and
trade balance impact
» Argentina will be
advantaged by continued
US restrictions on crude
exports, particularly for
shale peer light/sweet
grades
» However, expect added
competition from Brent
sources
» Neuquén Basin sits on or
near conventional plays
already supported by
existing infrastructure 31
Source: YPF
Source: BG Group
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Conclusions
» Argentina still in early stages of shale development – expect rapid and
continuous change
» Sourcing and logistics model for large-scale fracking still needs to be
designed and implemented
Water
Proppants
HHP/rigs
» Like the technology and markets themselves, logistics will evolve and
reduce costs, improve efficiency over time
» Fortunately, a viable logistics infrastructure already exists in Argentina
» Global market conditions in logistics and sourcing can work to Argentina’s
advantage
Proppants
HHP
Primary outputs
Downstream products
» Opportunity and benefits can extend well beyond oil and gas
» Leverage learning, experience, and resources of other shale plays
“I wouldn't rule out that 2013 is going to
be a painful year for us from the point of
view of getting hold of equipment, from
the point of view of getting the people ...
but when you're growing it's a pain that
you willingly tolerate.”
-YPF President Miguel Galuccio
Source: YPF
New Technologies• Hydraulic Fracturing
• Horizontal Drilling
Continuous Evolution
• Constant Change
• Rapid Change
Market Drivers• Supply & Demand
• Customers
• Price
• Logistics
Thank You!For follow up questions and information, please contact:
Taylor Robinson, President
+1-508-982-1319 / trobinson@prologisticsgroup.com
Graham Brisben, CEO
+1-708-386-0700 / gbrisben@prologisticsgroup.com
Jean Arndt, Vice President
+1-630-505-0273 / jarndt@prologisticsgroup.com
Jay Olberding, Analyst
+1-636-399-5628 / jolberding@prologisticsgroup.com
This presentation is available at:
WWW.PROLOGISTICSGROUP.COM
Professional Logistics Group
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