PLG BMO Shale Energy Presentation

1

Professional Logistics Group

Oil & Natural Gas: The Evolving Freight Transportation Impacts Prepared for

BMO Equity Research

January 14, 2013

»  Boutique consulting firm specializing in logistics, engineering, and supply chain §  Established in 2001 §  Over 80 clients and 200 engagements §  Significant shale development practice since 2010

»  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

»  Specializing in the logistics of §  Oil & gas §  Chemicals & plastics §  Wind energy & project cargo §  Bulk commodities (minerals, mining, agricultural) §  Industrial & consumer goods

About PLG Consulting

2

The Shale Development Gold Rush

»  Other recent energy “boom” events with major transportation impacts

3

»  Common characteristics §  New technology breakthroughs and/or dramatic market shifts §  Speed to market is paramount §  Rush of capital and new players §  Continuous change and evolution in both technology and markets §  Logistics and related infrastructure of greater importance in shale development, and

therefore a major platform for competition and strategy

Hydraulic Fracturing and Horizontal Drilling

4

Hydraulic Fracturing Equipment Staging Area

Source: JPTOnline.org

Frac Tanks/Fluid Storage

Chemical Trucks

Blender

Sand Storage Unit

Pump Trucks

Data Van

5

North American Shale Plays

6

Shale Driving Growth in Natural Gas and Crude Oil Production

»  1,762 rigs in operation as of January 4, 2013 »  Rush of capital into the industry »  700% increase in shale gas production since 2007 »  Domestic oil production at 14-year high (6.8MM bbl/d) »  “Unconventional” becomes “conventional” by 2015

7 Source: EIA 2012 Source: Baker Hughes 2013

GAS OIL THERMAL

Source: EIA 2012

Oct-‐2012 6820

3000 3500 4000 4500 5000 5500 6000 6500 7000 7500

Jan-‐98

Aug-‐98

Mar-‐99

Oct-‐99

May-‐00

Dec-‐00

Jul-‐0

1 Feb-‐02

Sep-‐02

Apr-‐03

Nov-‐03

Jun-‐04

Jan-‐05

Aug-‐05

Mar-‐06

Oct-‐06

May-‐07

Dec-‐07

Jul-‐0

8 Feb-‐09

Sep-‐09

Apr-‐10

Nov-‐10

Jun-‐11

Jan-‐12

Aug-‐12

Million Ba

rrels/Da

y

U.S. Monthly Crude Oil Produc@on

Chemical Feedstocks

Natural Gas & Petrochemical Supply Chain

Consumers

Petrochemicals

Aromatics Ammonia Many Others

Olefins

Ethylene Propylene Butylene

Polymers

Polybutadiene Polypropylene Polyethylene

Manufacturing Intermediates become

consumer and industrial products

Natural Gas

Power Generation

Industrial Use

Consumer Use

Petrochemical Processing Refined

Crude Products

Process

Product

Logistics Flow 8

NGLs

New “game changing” N.A. cost

advantage due to shale development

Potential Plastics Supply Chain

9

Gas Wells

Cracker Resin Plants

Lordstown Assembly

Plant

Component Manufacturing

0

500

1000

1500

2000

2500

$/To

n

HDPE Calculated Cost

Sources: CMAI, TopLine Analytics, and Alembic analysis, 2012

»  Low cost natural gas and NGLs with local processing would give this region a tremendous material and manufacturing cost advantage

»  Oversupply of ethane expected to continue indefinitely

Shale Gas Will Drive Steel Manufacturing Comeback in US

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»  Shale gas boom makes direct-reduced iron steel economical §  DRI plants viable with growth in shale gas §  Not new technology, but preferable with lower cost natural gas §  DRI process uses natural gas in place of coal to produce iron §  Cost of production 20% lower per ton

»  U.S. Jobs and International Investment §  Steel production in the U.S has shrunk 3.4% since 2008 –  Compare to 14% growth in steel production internationally

§  At least five new DRI steel plants being considered in the U.S. §  Both domestic and international firms investing in the technology §  Initial investments create up to 500 jobs and 150 permanent

employees

»  Reciprocal Growth

§  Increased demand for U.S. steel creates greater demand for U.S. gas §  Joint venture between Nucor Corp. and Encana Corp. commits $3

billion to development of new gas wells to support DRI plants §  DRI-derived steel of higher quality than that created from recycled

scrap, further driving demand

Shale Gas Development Impact on Fertilizer Market

»  Natural gas as ammonia feedstock for fertilizer §  Ammonia produced from cheap natural gas is used in fertilizers §  Reducing the cost of natural gas drives down ammonia and, by

extension, fertilizer costs §  Cheap U.S. natural gas means billions in investment for new

domestic fertilizer plants

»  Natural gas glut could be panacea for American farmer’s fertilizer needs §  Increased demand for corn, soybeans has driven fertilizer costs

higher §  Excess natural gas supply can be utilized to produce greater volumes

of fertilizer more economically

»  New technology helps reduce natural gas waste

§  Mobile ammonia plants being developed could allow ammonia (for use in fertilizer) to be produced at well heads

§  Mobile plants capture natural gas that would otherwise be burned off §  Reducing fertilizer costs would help drive agricultural commodity

prices lower by reducing capital requirements for American farmers

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Shale Gas Development Impact on Fertilizer Market (continued)

»  Natural gas is a feedstock for ammonia production §  Ammonia produced from natural gas is used in fertilizer production §  Reducing the cost of natural gas drives down ammonia and, by

extension, fertilizer costs

»  Cheap U.S. natural gas means billions in investment for new domestic fertilizer plants, displacing imports –  Orascom’s Iowa Fertilizer Company new plant in Wever, Iowa –  CHS’ new plant in Spiritwood, North Dakota –  Ohio Valley Resources new plant in Spencer County, Indiana –  Yara’s new plant in Belle Plaine, Saskatchewan –  North Dakota Grain Growers Association’s new plant to be located

in the Williston Basin –  CF Industries’ expansions at Donaldsonville, Louisiana and Port

Neal, Iowa –  PotashCorp’s resumption of ammonia production at Geismar,

Louisiana –  Expected announcement from Agrium, with plant likely in either

Kentucky or Missouri

»  If announced plant constructions are completed, imports of nitrogen-produced fertilizers could be reduced to “near zero” by 2018

12

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

Correlation of Operating Rig Count with Sand and Crude Shipments

14 STCC 14413 (sand) and 13111 (petroleum) Data sources: US Rail Desktop, Baker Hughes

1,695

1,814

1,270

886 939

1,073

1,299

1,467

1,604 1,665 1,691

1,798 1,911

1,972 1,948 1,864

1,691

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

Ope

ra@n

g Onsho

re Rigs

Sand

Carload

s

Quarterly Data

OperaEng On Shore Rigs All Sand Carloads Petroleum Carloads

All Sand Handled by Railroad

15

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2008 2009 2010 2011 2012

Carlo

ads

Quarterly Data

BNSF

UP

NS

CN

CPRS

CSXT

KCS

STCC 14413 Source: US Rail Desktop

Sand Mining Overcapacity: New Reality

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»  Proppant processing and shipping activity in Western and West Central Wisconsin counties §  Chippewa §  Barron §  Trempealeau §  Jackson §  Monroe §  Crawford

»  New announced projects §  Superior Silica Sand – Clinton, WI

§  $35MM main line rehabilitation by CN

§  U.S. Silica – Sparta, WI §  Smart Sand – Oakdale, WI §  Pattison – Prairie du Chien, WI

»  Minnesota areas also active §  Southeastern border along Mississippi

River §  Western Twin Cities

»  Established Illinois companies seeing significant upturns in volumes and financial returns

Source: Federal Reserve Bank of Minneapolis, July 2012; PLG analysis

Changes in Rail Shipment Pricing Q3 2011 vs. Today - Sand

»  Since Q3 2011, have seen an overall rail price increase of 10 - 14% in public pricing (varies by corridor)

»  In the 600-1,300 mile range, rates vary from $0.045 - $0.074 per ton-mile for manifest shipments

»  Shippers who are willing to ship unit trains and make volume commitments have realized significant savings with longevity over public pricing

»  Western carriers are driving single line hauls to Eagle Ford via pricing differentials

»  Canadian and Eastern carriers are aggressively working to grow their

markets by providing very competitive pricing and securing sand originations §  CN/Superior Silica Sands – Poskin, WI

»  Major sand providers are establishing “in the play” transloading facilities to provide ready access to product §  U.S. Silica - East Liverpool, OH

17 Source: PLG analysis

Sand Railcar Market Conditions

»  New-build market has run its course §  Much smaller backlog –  3Q 2011: 10,000 cars, ten month wait –  Today: no significant wait

§  Significant drop off from ~14,000 new cars per year –  2013 closer to 2,000-3,000 new cars

§  No new spec building by lessors – all deal specific now §  Normalized pricing: older cars less expensive than new §  Some new cars going into storage

»  Lease market also post-peak §  Available inventory from multiple directions –  Lessors, builders, oversubscribed shippers

§  Existing 286K cars available now §  Cars with sub-optimal specs (grain, <286K, cement) are being

phased out of frac sand fleet §  Creditworthiness an important criteria

»  Long-term horizon §  Some signs of activity in cement market, may help offset

remaining surplus of sand cars §  Optimism in industry that sand car demand will strengthen in

2013

18

Processed Sand Total Delivered Cost

Source: PLG analysis 19

»  Benchmark cost 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 -  Manifest service (rail) -  Multi-carrier vs. single line haul (rail) -  Equipment/driver shortages

§  Poor planning and/or execution -  Rail and/or truck demurrage costs –  Performance penalties

§  Uncompetitive sand price §  Poor sand quality

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%

»  Crude Oil §  Bakken play as a model §  Surging Permian and Eagle Ford development §  Strong potential for Utica play (currently 2-3 years

behind Bakken)

20

0

100000

200000

300000

400000

500000

600000

1952 1962 1972 1982 1992 2002 2012

Bar

rels

Per

Day

Year

Bakken Oil Production - History

Source– North Dakota Industrial Commission July 2012 North Dakota Department of Mineral Resources July 2012

First outbound unit train shipment December, 2009

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~682,000 BPD October 2012

Bakken Oil Production - Forecast

Source: North Dakota Oil and Gas Division May 2012

Today

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»  Bakken oil is a light, sweet crude with low sulfur content and low viscosity §  Requires less downstream processing

§  Equal in quality to benchmark WTI

§  Higher gas, jet, and distillate yield than peer crudes

»  Already a “game changer” in global oil market §  Bakken and WTI trading at ~$20/bbl less than Brent

§  Increased unit train receiving capacity (St. James, LA, Pt. Arthur, TX, Cushing, OK, Albany, NY, Philadelphia, Bakersfield, CA, St. John, NB, Anacortes, WA, Ferndale, WA) coming on line to displace waterborne crudes

§  Some analysts forecasting Canada and US crude oil self-sufficiency and prices well below global levels by 2017

23

Bakken vs. Peer Crude Oils

Source: RBN Energy 2012

Source: EIA 2012

»  Change in past 14 months §  November 2011:

–  2012 Bakken discount vs. WTI have ranged from $8-12 bbl

–  Undervalued due to logistics constraints “stranding” the oil

§  January 2013:

–  Bakken vs. WTI near even to ~$4 discount due to improved logistics

»  Significant expansion of crude by rail terminal capacities in 2011- 2012

»  Crude by rail now a major market factor »  Tank car availability/lead time - major short

term entry barrier

§  Current order backlog runs to 2Q 2014

§  Major purchases by oil majors and midstream companies

§  Extremely tight market with very high lease rates

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Bakken Crude No Longer “Stranded” Due to Logistics

Bpd = Barrels per Day

Crude by Rail Share

ND Production (bpd)

Crude by Rail (bpd)

Dec. 2010 15% 273,800 41,070

Dec. 2011 23% 470,290 108,167

June 2012 40% 610,000 244,000

August 2012 48% 635,127 317,564

October 2012 50% 682,393 341,197

Source: North Dakota Industrial Commission, PLG analysis

Crude Oil by Rail Volume Growth

25

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

2008 2009 2010 2011 2012

Carlo

ads

Quarterly Data

BNSF

UP

CPRS

CN

CSXT

KCS

NS

Source - US Rail Desktop

Facility Location Loading Capacity (Barrels per Day)

Rail Carrier

Musket Corp Dore 60,000 BNSF Savage Services Trenton 60,000 BNSF Red River Supply Williston 10,000 BNSF

Hess Oil Tioga 60,000 BNSF Plains All American Manitou 65,000 BNSF

Bakken Transload (Plains) Ross 10,000 (65k Q2 2013) BNSF EOG Stanley 65,000 BNSF

Basin Transload Zap 20,000 BNSF Bakken Oil Express Dickinson 100,000 BNSF

Enserco Gascoyne 10,000 BNSF Rangeland Epping 65,000 BNSF Enbridge Berthold 10,000 (70k Q2 2013) BNSF

Great Northern Fryburg 65,000 BNSF

BNSF Total Capacity 600,000

Global Stampede 60,000 CP Dakota Plains New Town 40,000 CP

US Development Van Hook 35,000 CP

CP Rail Total Capacity 135,000

Total Crude by Rail Capacity 735,000

(Existing and planned by December 2012)

Crude Oil by Rail – North Dakota Terminals

Source: PLG analysis 26

North Dakota Class I Railroads and Crude Oil Terminals

27

Shale Related Rail Traffic Still Small Relative to Coal Volumes

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Sand

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2008 2009

2010 2011

2012

Carlo

ads

Quarterly Data

Rail Shipments: Coal, Sand & Crude

Sand

Crude

Coal

Source: US Rail Desktop

Crude Oil Pipelines – Existing and Future

Source – CAPP Report 2011 29

30 Bpd = Barrels per Day

Bakken Area Outbound Pipelines

Current Capacity ( Q1 2013) - 440,000 bpd

Announced pipeline capacity expansions

Company Project BBL's/day Expected in Name Capacity service date

Enbridge Berthold Expansion 145,000 1Q 2013 Sandpiper 225,000 2015

Plains All American Bakken North 50,000 1Q 2013

Saddle Butte High Prairie 150,000 1Q 2014

Oneok Partners Bakken Express 200,000 2015

Trans Canada Bakken Marketlink 100,000 2015 Keystone XL 830,000 2015?

Total New Pipelines: 1,500,000 NEW pipeline capacity expected operational:

2013 195,000 2014 150,000 2015 325,000 TBD (K XL) 830,000

Source: PLG analysis, North Dakota Governors Pipeline Summit 2012 – presentation materials 30

Bakken Express ‘postponed’ November 30, 2012 due to lack of

subscription

Bakken Production vs. Outbound Logistics: 2012–2014 Projection

Year

ND Production Forecast (Bpd)

Pipeline Capacity*

Rail Terminal Capacity

Rail Carrier Capacity

ND Refinery Consumption

Total Outbound &

Refinery Capacity

Excess Logistics Capacity

2012 700,000 440,000 730,000 1,200,000 60,000 1,230,000 530,000

2013 790,000 635,000 800,000 1,300,000 60,000 1,495,000 705,000

2014 860,000 785,000 850,000 1,350,000 60,000 1,695,000 835,000 Source: PLG Analysis

31

* Excludes Keystone XL Bpd = Barrels per Day

Crude Oil by Rail vs. Pipeline

»  Current pipeline options ~ 30-45% lower cost vs. rail

»  Near-term offsetting rail advantages:

§  Site permitting, construction is much quicker and easier

§  Much lower capital cost and scalable

§  Shorter contracts

§  Transit to destination - 5-7 days via unit train vs. 30+ days via pipeline (between Bakken and US Gulf Coast)

§  Origin and destination flexibility/opportunistic to new market niches

»  Long-term challenges that will affect rail volumes and margins:

§  Pipeline expansions

§  Bakken-WTI price equilibrium

§  Any significant narrowing of price differential between Brent and WTI

$6.50

$11.50 $10.50

$14.70

$-‐

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

Pipeline to Cushing

Rail to Cushing

Pipeline to Pt Arthur

Rail to Pt Arthur

Dol

lars

Per

Bar

rel

Source: PLG analysis

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Crude Oil Logistics – Near Term Outlook

»  Logistics capacity exceeds production and will continue to keep pace in future

»  Crude by rail cost premium of .5x – 2.0x is not currently deterring volume moves

»  Crude by rail is a key outbound logistics mode near-term; pipeline share of outbound Bakken production will grow annually and volume will settle out by direction (rail: east-west; pipeline: north-south)

»  Expected Seaway pipeline 250,000 bpd expansion in 1st quarter 2013 will relieve much Cushing congestion and likely will put additional pressure on railroad pricing to compete with expanded pipeline economics and availability

»  No pipelines are likely to replace rail in the Bakken supply chain to the East and West coasts

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Looking Ahead: Key Questions for Oil & Gas Supply Chain

»  Shale play dynamics §  Influenced by supply/demand market fluctuations §  Crude vs. dry gas vs. NGL §  Potential environmental concerns

»  Where are the destinations for further processing? §  Crude oil refineries – sweet vs. sour processing §  NGL fractionation §  Petrochemical manufacturing investments §  Increased CNG demand §  Crude, NGL, and LNG exports

»  Will transportation services, assets, and infrastructure continue to meet demand? §  Pipeline locations and capacity §  Road and rail infrastructure §  Waterway availability §  Fleet assets §  Terminals and storage

34 Source: Waterborne Energy Inc. Data in $US/MMBtu

16RBN�Energy�– 2012�

NGL�and�Natural�Gas�Pipelines

Mariner�West

ATEX

Mariner�East

?BlueGrass?

Nexus

Dawn

Source: RBN Energy, LLC

Thank You! For follow up questions and information, please contact:

Taylor Robinson, President

+1-508-982-1319 / [email protected]

Graham Brisben, CEO +1-708-386-0700 / [email protected]

Jean Arndt, Vice President


Jeff Dowdell, Senior Consultant +1-732-995-6696 / [email protected]

Gordon Heisler, Senior Consultant


Jeff Rasmussen, Senior Consultant +1-317-379-5715 / [email protected]

This presentation is available at: WWW.PROLOGISTICSGROUP.COM

Professional Logistics Group

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PLG BMO Shale Energy Presentation

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