Plg energy 101 v gb 102014 final

Logistics Engineering Supply Chain

Energy 101Production

Transportation Consumption

Prepared for:

CE 387 Annual RetreatGil Herman, Chair

October 16, 2014

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Boutique consulting firm with team members throughout North America Established in 2001

Over 90 clients and 250 engagements

Significant shale oil & gas 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

Investment strategy, due diligence, post-transaction

Industry verticals Energy

Bulk commodities

Manufactured goods

Financial investors

About PLG Consulting

ENERGY 101 – Production, Transportation, & Consumption

Partial Client List

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Hot Topics

“Energy Independence”

Fracking

Keystone XL Pipeline

“War on Coal”

Clean Energy

Crude by Rail

LNG Exports

Fuel Efficiency

Shale

Bakken

Tar Sands

Lac Megantic

Frac sand


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Two Primary Uses

Electricity Generation Transportation Fuels

Production, transportation, and consumption are unique for each


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US Electricity Production – Source Mix


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Health Risks

Health risks associated with living near coal-fired plants include:

Heart and lung disease Damage to the brain, eyes, skin, breathing

passages, kidneys, lungs, and nervous and respiratory systems

(US National Library of Medicine, April 2014)


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Forecast of Coal-Fired Capacity Reductions

Projected reduction of SO2 and NOx emissions from coal after implementation of EPA’s Mercury and Air Toxics Standards (MATS)

A shift to natural gas is predicted to occur because of “coal-fired capacity retirements”- Annual Energy Outlook 2014, EIA

Source: EIA, Annual Energy Outlook, May 7, 2014

Source: U.S. Energy Information Administration, 2014 Annual Energy Outlook


8

“Old” techniques increased productivity by 10-20%

increments (2011~2013)

• More well bores per well pad

• Zipper wells

• Longer lateral lengths

• Zone fracturing

“New” high intensity techniques producing 25-100%

productivity increases

• Inner “perf” distances reduced by half

• Large increases in stages per well – up to 80!

• Sand per lateral foot – 2X to 5X

• Slickwater technique enables higher sand intensity

• Some are reducing or eliminating ceramics

Despite additional cost for sand per well, NPVs are

increasing by up to $2MM per well; ROR up 40%

What is “Fracking?”

Source: Marathon, February 2014

Source: Whiting Petroleum, December Investor presentation


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Hydraulic Fracturing – Staging and Production


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Unconventional Energy Resources

US Shale (and Canadian) Western Canadian (WC) Oil Sands

Source: CAPP, About Oil Sands, June 2013

Innovative, new E&P technologies developed by

smaller entities has allowed additional hydrocarbon

production in new locations; each well <$10MM

“Mass production” methodologies developed to

lower costs

Challenges -> product variability and

volatility

Multi-billion dollar capital investments required by

a limited number of players to set up production

infrastructure

Open surface mining shifting to SAGD process will

harvest more bitumen over long term

Challenges -> distance to markets and

diluent

Source: EIA, May 2014


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Oil (bitumen) recovery uses two main methods

- mining and drilling (in situ)

20% of the Oil Sands reserves are close enough to the

surface to be mined using shovels and trucks (3% of oil

sands land area)

80% of the Oil Sands reserves will be recovered in situ by

drilling wells (97% of oil sands land area)

Steam Assisted Gravity Drainage (SAGD) is

most popular method

Two parallel wells are drilled

Upper well has high pressure steam continuously injected

Lower well recovers softened bitumen

Diluent is added to the bitumen (15~30%)

Diluent is very light oil or “condensate”

Enables the product to flow through pipelines and be

loaded into rail cars

Bitumen extraction has become profitable as

extraction technologies improved

Economical at ~ $ 45 - $ 65/bbl

Western Canada Oil Sands Production Processes

Mining

Source: www.epmag.com

Drilling - SAGD


http://www.google.ca/url?sa=i&source=images&cd=&cad=rja&docid=SOCF1ROQEWbOwM&tbnid=FvuCLxhilXUYwM:&ved=0CAgQjRw&url=http://www.ramp-alberta.org/resources/gallery.aspx?galleryimage=965&ei=x8DpUojHFsHcoASJqILoCg&psig=AFQjCNFcddyIwCP7qtRHI-D-Y2Pc4BnO1A&ust=1391137351412286

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Unconventional Production Continues to Grow!Production and forecasts

Convergence of hydraulic fracturing and horizontal drilling in last five

years has led to rapid growth in U.S. shale crude, natural gas, NGL

production

Improved Oil Sands extraction processes have led to rapid growth in

Canadian production

Source: www.epmag.com

SAGDHorizontal Drilling

Source: Marathon, February 2014

Source: RBN Energy, June 2014

Evolving technology

Horizontal drilling in shale plays

More well bores per well pad

Optimal lateral lengths

Zone fracturing

Shorter, fatter fractures

Productivity gains continue!

Steam Assisted Gravity Drainage (SAGD) in Oil Sands

Two parallel wells are drilled

Upper well has high pressure steam injected

Lower well recovers softened bitumen

Improvements in this technology has made

bitumen extraction profitable

Source: CAPP Report, June 2014


http://www.google.ca/url?sa=i&source=images&cd=&cad=rja&docid=SOCF1ROQEWbOwM&tbnid=FvuCLxhilXUYwM:&ved=0CAgQjRw&url=http://www.ramp-alberta.org/resources/gallery.aspx?galleryimage=965&ei=x8DpUojHFsHcoASJqILoCg&psig=AFQjCNFcddyIwCP7qtRHI-D-Y2Pc4BnO1A&ust=1391137351412286

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Big Picture Impacts: “Energy Independence”

U.S. liquid fuel demand projected to slightly

decrease

Continued decrease in gasoline demand

U.S. projected to still be significant importer

Waterborne imports being displaced as shale

oil and oil sands production comes online

North America to get close to “Energy Independent” as

U.S. shale crude pushes out light crude imports and Oil

Sands crude pushes out heavy imports

Infrastructure built rapidly to help facilitate

new energy movements

Source: EIA Annual Energy Outlook Early Release, December 2013

U.S. Petroleum and Other Liquid Fuels Supply & Consumption

Source: Enbridge Investor Presentation, June 2014


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Remember this?


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U.S. energy officials considering easing

federal laws that prohibit exports of most

crude

Rising production of light oil / condensate that is not

well-matched to current U.S. refinery capacity

U.S. currently classifies condensate produced at well

crude oil and there is a possibility it be reclassified as

condensate which would allow for exports

Implications if export ban is lifted

Condensate would most likely be exported to Asia as

a petrochemical feedstock

Brent (international crude benchmark) and LLS prices

would most likely converge as they are both light

crude prices on water

Build out of new pipelines and terminals to export the

crude

Likely a decrease in U.S. refined products export

volumes and worse economics for U.S. refineries

Possibility of Lifting Crude Oil Export Ban

Source: RBN Energy, May 2014


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The “Re-Plumbing” of Hydrocarbons in North America

• Shift from coastal to mid-continent

supply points necessitated “re-

plumbing” the flow of carbon-based

energy in North America

Pipeline reversals, repurposing, new starts

Crude by rail comes of age – born in the Bakken

• Waterborne imports being displaced

as shale oil and oil sands production

comes online

• Infrastructure built rapidly to help

facilitate new energy movements

Source: Enbridge, April 2014

Oil Sands

Bakken

Eagle Ford

Permian

Marcellus

Source: EIA, PLG Analysis (Google Earth), April 2014


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Light/Sweet Crude Logistics

Sources: EIA, PLG analysis (Google Earth)

Light/Sweet

Heavy/Sour

Pacific Northwest Refiners

California Refiners

2,525kbpd

PADD VDemand

Midwest Refiners

3,375kbpd

PADD II Demand

East Coast Refiners

PADD I Demand1,075kbpd

LA Gulf Coast Refiners

TX Gulf Coast Refiners

PADD III Demand

8,150kbpd

Bakken

Eagle Ford

Permian

ANS

Brent

Brent

Rail

Pipeline

Marine


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Sources: EIA, PLG analysis (Google Earth)

Light/Sweet

Heavy/Sour

Pacific Northwest Refiners

California Refiners

2,525kbpd

PADD VDemand

Midwest Refiners

3,375kbpdPADD II Demand

LA Gulf Coast Refiners

TX Gulf Coast Refiners

PADD III Demand

8,150kbpd

Oil SandsHeavy/Sour Crude Logistics

Rail

Pipeline

Marine

Mexican Maya


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Changing Energy Flows in North America: Pipelines

Western Canada crude oil pipelines

All proposed Oil Sands pipelines are under intense scrutiny and subject to

court challenges

Pipeline capacity will not match anticipated production because of

pipeline delays and producers have adopted crude by rail as a risk

mitigation

Pipelines likely built in medium term (~ 2018 operational)

Trans Mountain Express

Alberta Clipper

Keystone XL

Pipelines likely delayed long term (2019 and beyond)

Northern Gateway

Energy East

US crude oil pipelines

Large pipeline build to Texas Gulf Coast from Permian

Pipeline capacity out of Bakken continuing to increase

Pipeline build-out from Guernsey, WY in progress

New patterns in natural gas supply and demand

Repurposing and retirement of some existing pipelines

New pipelines being built to transport gas out of Marcellus

Existing gas pipelines are being made bi-directional to allow flow towards

Gulf Coast (not away), particularly for LNG exportSource: Enbridge, April 2014

Natural Gas Movements

Source: CAPP, June 2014


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Changing Energy Flows in North America: Crude by Rail

Three phases of crude by rail phenomenon in

North America

2009-2011

CBR developed from the Bakken to bridge the gap until pipelines

are built

First unit train shipment in Dec. 2009

Destination market: Cushing, OK WTI trading hub

2011-2013

Ascendancy of trading as main growth driver in CBR

WTI-Brent-LLS differentials become all important

St. James, LA LLS hub becomes most attractive destination

Coastal refineries begin rail receipt infrastructure build-out

Tank car market overheats, becomes main growth constraint

2013-current

CBR from Bakken assumes long-term structural role in crude oil

market

Bakken CBR transitioning to east and west coast markets; LLS

and WTI converge as Permian and Eagle Ford growth floods

USGC

Canadian CBR build-out begins; tank car market reorienting to

coiled/insulated car types (~2/3 of CBR fleet order backlog)

0

200

400

600

800

1,000

1,200

Mbbl/d ND Crude Production and Rail Transport

ND Production Crude by RailSource: North Dakota Pipeline Authority, PLG Analysis, May 2014

Source: PLG CBR Forecast (www.CBRforecast.com), May 2014

Bakken & Oil Sands Base Case Takeaway (kbpd)


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Crude By Rail

Source: BusinessWeek


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Correlation of Operating Rig Count with Sand and Crude Carloads Handled

STCC 14413 (sand) and 13111 (petroleum) Source: US Rail Desktop, Baker Hughes, Surface Transportation Board, PLG Analysis, March 2014

0

500

1,000

1,500

2,000

2,500

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

2007 Avg. 2008 Avg. 2009 2010 2011 2012 2013

Op

era

tin

g O

nsh

ore

Rig

s

Ca

rlo

ad

s H

an

dle

d

Operating On Shore Rigs

All Sand Carloads

Petroleum Carloads


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Crude by Rail Regulations and Safety

Rail industry has a strong safety record, but optics of CBR

accidents are overwhelming any positive statistics

Industry, media, government focus on tank car design

Canada announced three year phase-out of non-CPC-1232 cars in April 2014

New USDOT and PHMSA regulations expected early 2015

Railroad operating practices, maintenance equally important

Railroad operating rule changes on hazmat train handling

Increased scrutiny, insurance requirements

May have consequences in CBR freight rates

Increased product testing, documentation and traceability (FRA

directive)

Oil chemistry varies by well/pad

Concerns with extremely low flash and boiling points

Bakken terminals at varying levels of compliance

Multiple risk assessment initiatives underway


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Bakken Crude Higher Volatility


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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

Imp

act

ye

ars

20102011

20122013

20162018


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Manufacturing: Natural Gas Feedstock

Source: RBN Energy, January 2014

0

10

20

30

40

50

60

70

80

0

500

1,000

1,500

2,000

2,500

U.S. Rig Count with Natural Gas Production

Gas Oil U.S. Natural Gas Production

rigs Bcf/d

Source: Baker Hughes, EIA, PLG Analysis, June 2014

Gas production has increased over past five years with a significantly lower gas rig count

Drilling productivity continues to increase production per well

and lower costs

Abundant US gas recoverable reserves

US gas cost competitiveness is sustainable

Supply will overwhelm demand as prices approach $5

US government and capital constraints will likely limit LNG

export to protect US from world gas market price

Shale gas boom makes direct-reduced iron steel

economical

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

pellets – lower cost vs. scrap steel

U.S. methanol production – 10 projects announced

Natural gas is a feedstock for ammonia production

~70% of cash costs (CF Industries)

12MM mt new domestic manufacturing capacity announced

However, headwinds include EPC, labor, capital constraints


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Manufacturing: Long-Term Raw Materials Advantage

Source: LyondellBasell, June 2014

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

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

downstream processing

Currently US ethylene cracker capacity is tight

Ethylene prices are inflated in short term but additional capacity expected

in 2016/2017 which will moderate prices

Materials typically account for 60-70% of manufacturing cost of goods sold (COGS)

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

Transportation & logistics costs are in “Other” 15%

Energy cost is usually less than 5% for final manufacturer but energy costs

also buried in raw material costs and transportation


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Initially a political/policy battle between domestic

industrial users and producers

FERC approved LNG export terminals

Cheniere Energy’s Sabine Pass LNG in Sabine, LA (under construction)

Sempra Energy’s Cameron LNG in Hackberry, LA (approved 6/19/2014)

There are 13 other US potential export terminals along

with 3 Canadian proposed sites and 10 other Canadian

potential sites

LNG Export Opportunity

Supply Sources

Oil PricesDestination

Markets

Capital

Source: Waterborne Energy from FERC presentation, April 2014

Source: Enbridge, April 2014


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Hydraulic Fracturing Materials Inputs and Logistics Involved

Materials

Chemicals

Clean Water/Cement

Frac Sand

OCTG (Pipe)

Source to Transloading

2

Local source

25 ~ 100

5

Transloading to

Wellhead Site

8

~1,000

100 ~400

20

~1,200 Total Truckloads

Oil/Gas/NGLs

Truck, Rail, Pipeline

Waste Water

~500 Total Truckloads

35~100+ Railcars

1 Unit train of sand=100 railcars=10,000 tons=20,000,000 pounds


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Frac Sand Deposit Locations

Most desired sand comes from WI, MN,

IL

MO has momentum

More interest in OK recently

Recent new mine

announcements in WI, IL, MO


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Sand Mines


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Frac Sand Handled by Railroads

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Ca

rlo

ad

s

Quarterly Data

UP

BNSF

NS

CN

CSXT

CPRS

KCS

STCC 14413 Source: US Rail Desktop

Load data suggests ~30% growth in past two quarters alone


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Major Sand Shipping Flows

Vectora terminals and barge routes


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Barging Sand - IL to US Gulf Coast


Logistics Engineering Supply Chain

This presentation is available at:http://plgconsulting.com/category/presentations/

-

Thank You !

For follow up questions and information, please contact:

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

Plg energy 101 v gb 102014 final

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Transcript of Plg energy 101 v gb 102014 final