1

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

3

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

4

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

5

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.

6

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)

7

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

8

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

9

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

10

Hydraulic Fracturing

Equipment Staging Area

Source: JPTOnline.org

Frac Tanks/Fluid Storage

Chemical Trucks

Blender

Sand Storage

Unit

Pump Trucks

Data Van

11

12

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

13

Materials

Chemicals

Clean Water/

Cement

Proppants

OCTG (Pipe)

Source to

Transloading

2

Local source

40

5

Transloading to

Wellhead Site

8

~1,000

160

20

47 Total

Railcars

~1,200 Total

Truckloads

Oil/Gas/NGLs

Truck, Rail,

Pipeline

Waste Water

~500 Total

Truckloads

14

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”

15

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

17

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

18

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

20

» 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

21

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

22

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

23

» 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

24

» 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

25

26

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

28

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

31

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

32

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

33