Goldman sachs industrial conference nov 12, 2014 t robinson

Logistics Engineering Supply Chain

Why Shale Gas Will Drive a U.S.

Manufacturing Revolution

Goldman Sachs Industrials Conference 2014

By Taylor RobinsonPLG Consulting President

Nov 12, 2014Boston, MA

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Boutique consulting firm with team members throughout North America

Established in 2001

Over 90 clients and 250 engagements

Significant shale development practice since 2010

Practice Areas Logistics

Engineering

Supply Chain

Consulting services Strategy & optimization

Assessments & best practice benchmarking

Logistics assets & infrastructure development

Supply Chain design & operations

Hazmat training, auditing & risk assessment

M&A/investments/private equity

Industry verticals Energy

Bulk commodities

Manufactured goods

Financial services

About PLG Consulting

Partial Client List

Why Shale Gas Will Drive a U.S. Manufacturing Revolution

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What is behind the North American energy revolution?

Resources• N.A. shale plays

• Western Canadian oil sands

Technologies examples• Hydraulic fracturing

• Horizontal drilling

• Steam Assisted Gravity Drainage (SAGD)

• Evolving exploration and production technologies

• Tremendous productivity gains drives cost reductions

• Logistics infrastructure “re-plumbing” in

progress

• Product abundance… overabundance

• Imports displaced… exports grow

• Recoverable resources grow…sustainability

• Globally competitive power and material cost structure

• Manufacturing industries grow/return to North America

Recoverable Resources &

Enabling Technologies

Continuous Improvement

Energy Revolution


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Shale Supply Chain and Downstream Impacts

Feedstock (Ethane)

Byproduct (Condensate)

Home Heating (Propane)

Other Fuels

Gasoline

Diesel

Gas

NGLs

Crude

Proppants

OCTG

Chemicals

Water

Cement

Generation

Process Feedstocks

All Manufacturing

Steel

Fertilizer (Ammonia)

Methanol

Chemicals

Petro-chemicals

Other Petroleum Products

Inputs Wellhead Direct

Output Thermal Fuels Raw Materials

Downstream Products

Jet Fuel

Availability of low cost hydrocarbons positively impact all the North American industrial economy


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Shale Gas Is Important To Competitive Power Costs

Natural gas is ~5X cheaper than oil on a BTU-basis

Innovation will convert more transportation

fuels and other energy requirements to

natural gas

US electricity prices are the lowest in the industrial world

US industries now have substantial power

cost advantage

Gas drives an increasing share of the US

electricity generation capacity

Will continue to displace coal due to stricter

environmental regulations on coal-fired

facilities

Natural gas is a cleaner burning fuel compared to other hydrocarbons

WTI & Henry Hub Natural Gas Energy Equivalent Pricing

Source: EIA, February 2014

~5X

Source: International Energy Agency, October 2013 *estimate


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Processing infrastructure being installed to

handle increased NGL supply

New facilities near shale plays

Domestic ethane supplies to quadruple by 2025

Exports of NGLs will continue to grow

NGLs are building blocks in chemical supply chain

US has shifted their petrochemical supply stream to >90%

ethane-based to leverage supply/cost advantage

Overabundance of NGLs Will Grow

Source: IHS Chemical, September 2013

Source: IHS Energy


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2008 2010 2012 2014 2016 2018 2020

Source: American Chemistry Council, February 2014

>$100B of Chemical Expansion Announced

Phase III – “Manufacturing”: Raw material cost driven

Phase I – Industries using gas as primary

feedstock have global cost competitiveness;

new US factories being built

Phase II – Downstream products require

significant processing facilities investment and

lead time

Phase III – US material cost advantage will

enable traditional manufacturing to return to

the North America as about 65% of the cost of

manufactured product is material cost

Shale Gas Phased Impact To NA Industrial Renaissance

Phase II - Downstream Products: Resins, Chemicals

Phase I - Gas & Power-intensive Industries: Steel, Fertilizer, Methanol


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Phase I - Steel, Methanol, & Fertilizer Manufacturing in US

Shale gas boom makes direct-reduced iron steel

economical

Gas strips oxygen from iron core to make high purity/quality

pellets – lower cost vs. scrap steel

$2B+ in new US projects announced

DRI-derived steel of higher quality than that scrap steel

U.S. methanol production – 10 projects announced

Methanol is used in numerous downstream chemical products

Captures price spread between low-cost natural gas and

methanol allowing move to higher value foreign markets

US currently represents 10% of the global market demand and

imports 89% of its supply

Natural gas is a feedstock for ammonia production

Represents ~70% of cash costs (CF Industries)

12MM mt new domestic manufacturing capacity announced

Imports will quickly be displaced

Source: IHS Energy, September 2013

Falling Gas Prices a Boon to DRI Production

Source: GE Capital presentation, November 2013


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Phase II - Low Cost NGLs Provides Significant Cost Advantages for Chemicals and Resins

US has a large structural cost advantage due to gas-based ethane for downstream products

Europe and Asia are tied to crude-based naptha as a feedstock for their

downstream processing

US production cost of ethylene is ~40% less than Europe and Asia

However, US ethylene cracker and processing capacity is tight and ethylene prices are inflated in the short term

Ethane cracker margins have been as high as 50-60 cents/lb

Additional cracker capacity expected in 2016/2017

Margins/prices will moderate as more capacity comes online

New US resin facilities also on the drawing board

Excess resin capacity will promote globally competitive prices and large

export increases

k to

ns k to

ns

Source: Townsend Solutions, December 2013

Source: Townsend Solutions , December 2013

30,000

40,000

50,000

2012 2013 2014 2015 2016 2017 2018 2019 2020

North America Ethylene Expansions

Actual Capacity Additional CapacitySource: Townsend Solutions , December 2013


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Over $120B of Chemical Investments Have Been Announced

US Gulf Coast will continue to process >80% of North

American NGLs & chemicals -increased product movement

and logistics required

Ethylene and Propylene

Ammonia and Derivatives

Methanol

Polymers and Resins

Chlor-alkali

Other


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Phase III - Material Cost Advantage Is Key Cost Driver to Future North American Manufacturing Growth

Materials normally accounts for 60-70% of manufacturing cost of goods sold (COGS)

Most product cost competition is won or lost here

Shale gas giving NA cost advantage for steel, plastics and chemicals

Total labor cost is ~20% of COGS for NA manufacturers

China labor cost in $ will continue to rise due to inflation and currency

appreciation

Mexico labor has increased competitiveness vs. China, will recapture

manufacturing share for medium/high labor manufacturing

Transportation & Logistics costs are in “Other” 15%

Asia/China has 5~10% cost disadvantage due to extra ~ 1 month shipping

lead time (major cash flow disadvantage)

Mexico has “near shore” advantage vs. Asia

Transportation costs continue to rise – proximity to market advantage

Energy cost is usually less than 5% for final manufacturer

However, energy costs are buried in raw material costs and transportation

and can be more substantial in energy-intensive products

US/Canada has a tremendous advantage vs. industrialized world

Mexico’s power costs will become more competitive with shale gas


Logistics Engineering Supply Chain

This presentation is available at:www.plgconsulting.com/categories/presentations

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Thank You !

For follow up questions and information, please contact:

Taylor Robinson, President+1 (508) 982-1319 / [email protected]

http://www.plgconsulting.com/categories/presenations

Goldman sachs industrial conference nov 12, 2014 t robinson

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